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Thursday, August 31, 2017

Mortgagee Review Board – Notice and Hearing

QUESTION
We have been told by our Executive Management that we are being reviewed by HUD’s Mortgagee Review Board. Based on their description, it all sounds kind of scary! What some of us want to know is what this Board does? What happens there? And what kinds of actions can they take against us?

ANSWER
The Mortgagee Review Board (“MRB” or “Board”) goes all the way back to the 1970s. It was established by the Department of Housing and Urban Development Reform Act of 1989 (“Act”). By statute, the Board has certain powers and procedures. [Pub. L. No. 101-235, 103 Stat. 1987 (1989). Section 142 of the Act made the MRB a statutorily authorized entity.] 

The Board is empowered to initiate the issuance of a letter of reprimand, the probation, suspension or withdrawal of any mortgagee found to be engaging in activities in violation of Federal Housing Administration requirements or the nondiscrimination requirements of the Equal Credit Opportunity Act [15 USC 1691 et seq.], the Fair Housing Act [42 USC 3601 et seq.], or Executive Order 11063.

The MRB consists of the Assistant Secretary of Housing - Federal Housing Commissioner the General Counsel of the Department the President of the Government National Mortgage Association the Assistant Secretary for Administration the Assistant Secretary for Fair Housing Enforcement (in cases involving violations of nondiscrimination requirements) and the Chief Financial Officer of the Department or their designees. [12 USC § 1708(c)(2)]

The Board’s powers are extensive. It can initiate administrative actions against mortgagees and lenders; indeed, it is able to exercise all of HUD’s vast functions with respect to administrative actions against such entities. 

In addition to a host of such actions, the MRB can also impose civil monetary penalties. [24 CFR § 25.2(b); 12 USC § 1735f-14] 

The Board issues a written notice to the mortgagee at least 30 days prior to taking any action against the mortgagee. The mortgagee must reply in writing to the Board within 30 days. But if the mortgagee fails to reply during such period, the Board may make a determination without considering any comments of the mortgagee. So, timing is crucial and every day counts! [12 USC § 1708(c)(4)(A)] Within 30 days of receiving the notice, if the mortgagee requests a hearing, the Board holds a hearing on the record regarding the violations within 30 days of receiving the request. But if a mortgagee fails to request a hearing within that 30-day period, the right of the mortgagee to a hearing is considered waived. [12 USC § 1708(c)(4)(B)]

In any case in which the notification of the Board does not result in a hearing (including any settlement by the Board and a mortgagee), any information regarding the nature of the violation and the resolution of the action is available to the public. [12 USC § 1708(c)(4)(C)]

The MRB can take swift action, even pre-emptive action. For instance, it can issue a Cease and Desist Order. Upon the Board’s requests, if HUD determines that there is reasonable cause to believe that a mortgagee is violating, has violated, or is about to violate, a law, rule or regulation or any condition imposed in writing by HUD or the Board, and that such violation could result in significant cost to the Federal Government or the public, HUD’s Secretary may issue a temporary order requiring the mortgagee to cease and desist from any such violation and to take affirmative action to prevent such violation or a continuation of such violation pending completion of proceedings of the Board with respect to such violation. [12 USC § 1708(c)(6)]

Administrative actions run the gamut from a letter of reprimand, to probation, to suspension, or withdrawal – the last of which means total termination of FHA-approved mortgagee or lender status. Even the effects of a letter of reprimand or probation can be devastating to a financial institution’s relationships with investors, warehouse banks, many other third parties, and various service providers. 

Suspension in itself is often a precursor to a doomed outcome because it prohibits a mortgagee or lender from originating any FHA-insured mortgage loans during the period of the suspension. Under such circumstances as a suspension, many financial institutions lose their loan originators to competitors. A withdrawal is difficult to overcome because it terminates a lender’s approved status. Only after complying with a very extensive set of reapplication procedures can a lender be reinstated. [12 USC § 1708(c)(3)(A-D)]

Often, settlement agreements are entered into involving the kinds of issues that are dispositive in a potential change of status. [12 USC § 1735f-14(f); 12 USC § 1708(c)(3)(E)] However, the MRB can also impose civil monetary penalties, which is currently set to $9,468 per violation/per day – and each day that a violation continues constitutes a separate violation! [24 CFR § 30.35(c)(1); 24 CFR § 30.35(b)] 

At present, civil monetary penalties are limited to $1,893,610 for all violations committed during any one-year period. And if the violation involves a failure to engage in certain loss mitigation requirements, the penalty is three times (sic) the amount of the total mortgage insurance benefits claimed by the mortgagee with respect to any mortgage for which the mortgagee failed to engage in such loss mitigation actions.

Most financial institutions could not weather such a financial beating! It is possible to appeal an administrative action or civil monetary penalty within HUD, by means of the mortgagee requesting a hearing before an Administrative Law Judge. 

There is a list of violations that create grounds for administrative actions. This list is set forth at 24 CFR 25.6 ("Violations creating grounds for Administrative Action"). It is an extensive list, covering many violations, too many to mention in this answer. But suffice it to say that the list covers numerous violations of any statute, regulation, or other requirement pertaining to the FHA-insured mortgage loan program. HUD publishes its Administrative Actions periodically in the Federal Register.

Hopefully, your Executive Management has retained competent risk management support, such as we provide at Lenders Compliance Group, as well as experienced legal counsel familiar with how to handle such engagements. The appropriate and responsible managerial response to receiving a notice from the Mortgagee Review Board should be a triune strategy, involving the collaborative efforts of the financial institution, the risk management firm, and the legal team.

Jonathan Foxx
Managing Director
Lenders Compliance Group


Thursday, August 24, 2017

Promoting a Charity Event

QUESTION
We are a mortgage lender with several branch offices. 

One of our branch managers would like to send an email promoting a local charity event to all of her current and past clients, as well as the charity’s flyer promoting the event. 

The event is a 5k run/walk to raise awareness and funds for cystic fibrosis research and has nothing to do with company business. 

Are such mailings permissible? 

ANSWER
Essentially, the lender would be sending the charity’s marketing materials to the lender’s customers, which is not prohibited by the Gramm Leach Bliley Act and its implementing regulation, Regulation P. 

However, if an individual’s response to the flyer would reveal to the charity that the individual is a customer of the lender, there would be an inadvertent disclosure by the lender of non-public personal information (NPI) in violation of the Act. 

For example, let’s assume the charity wanted to track the effectiveness of its marketing efforts and includes a reference code only attributable to the lender on the flyer, which also served as the event registration form. 

Thus, when an individual uses the form to register, the lender has disclosed NPI to the charity, that is, the individual is the lender’s customer. In order to comply with the Act, the lender would have had to either disclose in its initial and annual privacy statement that it shares customer’s NPI with "nonfinancial institutions, such as charitable organizations" and provide the customer with a reasonable opportunity to opt out of such sharing or obtain the customer’s consent to such arrangements.

Joyce Wilkins Pollison, Esq.
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Friday, August 18, 2017

Recording Fees under Know Before You Owe

QUESTION
We had a loan where the borrower shopped for the title company and did not use the company we had listed on the service provider list. Our provider does not charge us a separate recording fee, it is included in the “settlement fee” they charge. 

In this instance, however, the title company selected by the borrower separately added to their charges the “recording fee” from the county recorder’s office. We were not notified of this within 3 days of receiving their contract and did not redisclose. We now have a tolerance cure that we are having to pay at closing.

Do you have any suggestions about how to avoid this in the future? 

ANSWER
There are several parts of your question and part of the problem arises from the fact that your usual settlement service provider does not separately break out the fees paid to the county recorder’s office – fees that are assessed by and paid to a government authority to record and index the mortgage or deed of trust (rather than a fee payable to the title company for facilitating the recordation of documents).

The Integrated RESPA/TILA Disclosure Rule (“Know Before You Owe”) requires that these fees be broken out and separately disclosed. The pertinent part of Reg. Z (12 CFR 1026.37) provides:

“For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section…” (Emphasis added.)  12 CFR 1026.19(e) provides in pertinent part: “In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.” (Emphasis added.) 

Section 1026.37(g) provides:

“(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g) (1) through (6) of this section.
(1) Taxes and other government fees. Under the subheading “Taxes and Other Government Fees, “the amounts to be paid to State and local governments for taxes and other government fees, and the subtotal of all such amounts, as follows:
(i) On the first line, the sum of all recording fees and other government fees and taxes, except for transfer taxes paid by the consumer and disclosed pursuant to paragraph (g)(1)(ii) of this section, labeled “Recording Fees and Other Taxes.” [In the CFPB Guidebook, the illustration used for the type of “government fees” referred to in this section is “recording fees.” (See section E of illustration below)] (Emphasis added.)

Thus, the “recording fee” should not be lumped into the title settlement fee, but rather listed separately in Section E of the Loan Estimate. Recognizing this requirement will alert you to clarify the charges of any settlement service provider when a separate “recording fee” is not identified in their charges.

However, you must still determine whether the “recording fees” being charged are the fees assessed by and paid to a government authority to record and index the mortgage or deed of trust, or a fee payable to the title company for facilitating the recordation of documents. The former are subject to a 10% tolerance, but the latter, if the title company is selected by the borrower, are not: 

Thus, with respect to fees paid to a governmental entity, 12 CFR § 1026.19(e)(3)(i-ii) provides:

(3) Good faith determination for estimates of closing costs—(i) General rule. An estimated closing cost disclosed pursuant to paragraph (e) of this section is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under paragraph (e)(1)(i) of this section, except as otherwise provided in paragraphs (e)(3)(ii) through (iv) of this section.
(ii) Limited increases permitted for certain charges. An estimate of a charge for a third-party service or a recording fee is in good faith if:
(A) The aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under paragraph (e)(1)(i) of this section by more than 10 percent;
(B) The charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and
(C) The creditor permits the consumer to shop for the third-party service, consistent with paragraph (e)(1)(vi) of this section.
                          (Emphasis added.)

Thursday, August 10, 2017

Determining the Escrow Amount

QUESTION
As a mortgage servicer, we are always making decisions about how the payment amount for escrow account items are determined. So, for us, the question is this: how are payment amount items determined in escrow accounts? Also, how do we determine the escrow amount for new construction?

ANSWER
Determining the payment amount for an escrow account is a critical mortgage servicer function. A servicer must estimate the amount of the escrow account items to be disbursed. If the servicer knows the charge for an escrow item in the next escrow account computation year, the servicer must use that amount.

Furthermore, if a charge for an escrow item is unknown to the servicer, the servicer may base the estimate of the charge on the preceding year’s charge, or the preceding year’s charge as modified by an amount not exceeding the most recent year’s change in the national Consumer Price Index for all urban consumers, which is known as the CPI. [24 CFR § 3500.17(c)(7)]

In cases of unassessed new construction, the servicer may base the estimate of property taxes and assessments on the assessment of comparable residential property in the market area. [24 CFR § 3500.17(c)(7)]

With respect to determining the amounts that will be paid from the escrow account during the escrow account computation year, the servicer must use disbursement dates that will pay items in a timely manner, which is considered to be on or before the deadline to avoid a penalty. [24 CFR § 3500.17(k)(1)]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, August 3, 2017

COPPA Compliance – Website Violations

QUESTION
We were just cited by our regulator for violations of COPPA. The violation stemmed from our online website, which we use for originating mortgages. Really, we were not even aware that this was a problem! I see from your website that you do website reviews and you probably would have picked up on the COPPA violation. Please tell us, what is COPPA? Also, what are some requirements?

ANSWER
“COPPA” stands for Children’s Online Privacy Protection Act. It regulates websites that collect personal information from children under the age of thirteen. COPPA is monitored through the Federal Trade Commission’s regulations. [15 USC § 6501, et sequi; 16 CFR Part 312]

The purpose of COPPA is to increase privacy protection for children’s information obtained online. Subject websites must post privacy notices and adopt procedures to protect the confidentiality and security of the information. There is an element of parental control, too, in that COPPA provides that parents should have control over what kinds of information websites can collect from their children. It follows then, that any website that targets children under age thirteen or, for that matter, any general website that collects personal information from children under age thirteen, is required to comply with COPPA. [15 USC § 6501(1); 16 CFR § 312.2]

Examples of personal information are a child’s name, address, email address, telephone number, Social Security number, or other identifying information. [15 USC § 6501(8)]

One overlooked item often involves getting parental consent, which must be “verifiable” parental consent. This means that a website operator must take steps before personal information is collected from a child under the age of thirteen, such as notifying the parent of the operator’s’ information practices and obtaining the parent’s consent to those practices.

Requirements involving the collecting of personal information from children include (1) providing privacy notices, and (2) obtaining verifiable parental consent before collecting, using or disclosing children’s personal information (with some exceptions).

With respect to the privacy notice, it must state the types of information collected from children under the age of thirteen, how the information is used, and the website operator’s information disclosure procedures pertaining to the website. [15 USC § 6502(b)(1)(A)] If a parent requests, the operator must inform the parents of the information collected from the child and give the parents the opportunity to refuse additional collection of the child’s information. [See Industry and Financial Markets Association v Garfield, 469 F. Supplement 2nd 25 (D. CT); also, 15 USC § 6502(b)(1)(B)]

Your best bet is to have your website fully reviewed by competent risk management professionals, such as Lenders Compliance Group. Website compliance is a critical review component of mortgage banking. The exposure of a bank or nonbank to legal and regulatory violations due to website violations is very high and the website needs great care in structure, disclosure, and use in order to reduce such risks.

Jonathan Foxx
Managing Director
Lenders Compliance Group