Re-disclosure due to Rate Lock

QUESTION

We understand that a revised disclosure must be sent to the consumer when there are certain revisions. However, are we required to send a revised LE for a rate lock when the interest rate and terms remains the same? And if the loan is not initially locked, are we prohibited from adding any origination fees if they were not initially disclosed?

ANSWER

The regulation is not entirely clear on whether a revised disclosure is required when a rate is locked at the same rate that was originally disclosed. §1026.19(e)(3)(iv)(D) states:

"[N]o later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under paragraph [1026](e)(1)(i) of this section to the consumer with the revised interest rate, the points disclosed pursuant to § 1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms."

One can infer this language presumes that a rate-lock in and of itself is a revision requiring re-disclosure. However, the regulation is silent as to whether revised disclosures need to be provided if there is a rate lock that does not change the initially disclosed terms. Given the current state of the enforcement environment on the state and federal levels, it is probably prudent to re-disclose even when your rate lock does not change terms.

As to the addition of origination charges when the loan is locked, whatever charge is changed cannot be used for purposes of resetting a good faith tolerance. Only revised disclosures that are produced pursuant to one of the §1026.19(e)(3)(iv) triggering events allow a lender to reset the tolerance for purposes of determining good faith. Therefore, if a lender sends a revised disclosure because of a rate lock – a triggering event pursuant to §1026.19(e)(3)(iv) – and it adds new origination fees to the disclosures, then the revised disclosures could be used to calculate some good faith tolerances, but not others.

Section 1026.17(c)(2)(i) provides that disclosures may be estimated based on the best information reasonably available to the creditor at the time the disclosures are made. That requires the creditor, acting in good faith, to exercise due diligence in obtaining information. [Comment 17(c)(2)(i)-1]

If a creditor adds an origination fee that is unrelated to the rate lock, then that unrelated fee cannot be used to reset the base tolerances. Whether fees are changed or added due to a rate lock or other reason, creditors should always establish a documented defensible position supporting such changes and have policies in place ensuring that any changes adhere to their good faith obligations for all estimates to be based on the best information reasonably available to the creditor at the time the initial disclosures are made.

Michael Goldhirsh

Executive Director/Vendors Compliance Group 

Director/Legal & Regulatory Compliance - Lenders Compliance Group

Subleasing Office Space

QUESTION

We are a lender with some concerns regarding our office sharing arrangements. One of our branches shares space with a realtor, another subleases from a certified public accountant, and still another subleases from a real estate appraiser. Each branch has an individual locked office with shared access to conference room and break areas. Are these arrangements permissible?

ANSWER

Provided the lender is paying the fair market value for the space pursuant to a written lease agreement, each of the scenarios is permissible. The appraiser and realtor landlord arrangement raises greater concern as both of them are also settlement service providers; but again, such arrangements are not prohibited as long as there are no payments for referrals and the rent charge is the actual fair market value for the spaces and services provided that a non-settlement service provider would pay.

Section 8 of RESPA prohibits the giving or accepting of a “thing of value” to another person for the referral of settlement business. RESPA defines “thing of value” to include “lease or rental payments based in whole or in part on the amount of business referred”. RESPA does permit payments for goods or for services actually performed. Thus, the question is whether the lender is leasing space at a higher than market rate in exchange for referral of business from the realtor or appraiser. 

The rental payment must reflect the general market value for the spaced leased. If you are leasing at a higher than market rent, there will be a presumption that the rental payments represent disguised referral fees. You cannot arbitrarily assign the fair market value: you need to make sure it is researched and well documented. In determining the fair market value of rental space, one must look at what a non-settlement service provider would pay for the same amount of space and services rendered in the same or a comparable building as opposed to what a settlement service provider would pay for the space and services.

The value of a referral cannot be considered in determining whether there is a reasonable relationship between the rental payments and the facilities and services provided. The value may include an appropriate proportion of the cost for office services actually provided to the tenant, such as secretarial services, utilities, and office equipment. If the rental payments exceed the fair market value of the space and services provided, the excess amount will be considered as payment for the referral of business in violation of Section 8.

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Denials under HMDA

QUESTION

We realize there are reasons for denials under HMDA. However, how many reasons for denial are we allowed? Also, what are the categories for denials?

ANSWER

For HMDA purposes, a financial institution may elect to report the reason it denied a loan. It may report up to three reasons for denial. [12 CFR § 203.4(c)]

To understand the categories for denials, it is best to base the denial reasons specified in the model Adverse Action Notice (i.e., Regulation B notice) for the denial reasons under HMDA. The model form for Adverse Action is Form C-1 in Appendix C to Regulation B, the implementing regulation of the Equal Credit Opportunity Act.

It is possible to extrapolate the denial categories into more precise reasons. The following table provides the adverse action notice denial reason and its corresponding HMDA denial reason. [12 CFR Part 203, Appendix A]

Adverse Action Notice Denial Reason	HMDA Denial Reason
Income insufficient for amount of credit requested. Excessive obligations in relation to income.	Debt-to-Income ratio.
Temporary or irregular employment. Length of employment.	Employment history.
Insufficient number of credit references provided. Unacceptable type of credit references provided. No credit file. Limited credit experience. Poor credit performance with financial institution. Delinquent past or present credit obligations with others. Garnishment or attachment. Foreclosure or repossession. Collection action or judgment. Bankruptcy.	Credit history.
Value or type of collateral not sufficient.	Collateral.
Unable to verify credit references. Unable to verify employment. Unable to verify income. Unable to verify residence.	Unverifiable information.
Credit application incomplete.	Credit application incomplete.
Length of residence. Temporary residence. Other reasons specified on notice.	Other.

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Affiliated Business Arrangements and Marketing Services Agreements

Question

What are the differences between an Affiliated Business Arrangement (“ABA”) and a Marketing Services Agreement (“MSA”)?

Answer

There are significant differences between MSAs and ABAs. These differences relate to ownership, structure and permissible referral activities.

An ABA involves two are more entities that are under common ownership or control. An example of an ABA would be a real estate brokerage company having an ownership interest in a title company. On the other hand, a MSA involves a marketing relationship between two unrelated parties. An example of a MSA would be a lender entering into a marketing relationship with an unrelated real estate brokerage company. The parties involved in MSAs usually do not have common ownership or control.

Under a properly structured ABA, the two commonly owned or controlled entities may refer settlement business to each other. The Real Estate Settlement Procedures Act (“RESPA”) states that settlement service providers can legally refer business under an ABA relationship. Section 8 of  RESPA and Section 3500.14 of Regulation X define ABAs as arrangements in which: (1) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of the settlement service; and (2) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. [ 24 CFR 3500.14]

In order to properly structure an ABA relationship under RESPA, the affiliated companies must: (1) disclose the nature of the affiliated relationship to the consumer at or prior to the referral, (2) not require that the consumer use the referred service provider, and (3) not give any consideration or item of value in exchange for the arrangement, except for the fair market value of the goods, facilities or services actually furnished. 

Under a MSA relationship, the two unaffiliated entities absolutely cannot have an agreement to refer settlement business to each other. Rather, a settlement service provider, such as a mortgage company, may enter into a MSA with an unaffiliated settlement service provider, such as a real estate brokerage company, to perform general marketing services in exchange for a fee. Fees paid under a MSA must be based on the fair market value of the advertising and marketing services provided and cannot be based on volume of business.

Unlike ABAs, MSAs do not have an explicit statutory basis. Furthermore, and notwithstanding that RESPA permits “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,” [12 U.S.C. 2607(c)(2)] the Consumer Financial Protection Bureau (“CFPB”) has cautioned against the use of MSAs and specifically indicated they cannot be established to circumvent RESPA’s general prohibition on the payment and acceptance of kickbacks and referral fees. [CFPB Compliance Bulletin 2015-05]

Given the CFPB’s position, a MSA should only be entered into after careful evaluation of the risks and rewards associated therewith. A MSA relationship must be properly structured so as not to appear to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. The marketing services to be performed under a MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.

Neil Garfinkel

Executive Director/Realty Compliance Group

Director/Legal & Regulatory Compliance 

Lenders Compliance Group