Thursday, June 28, 2018

TRID 2.0: Determining Accuracy of “Total of Payments”

The 2017 amendments (“TRID 2.0”) to the TILA-RESPA Integrated Disclosure Rule (“TRID”) include tolerances for the “Total of Payments” calculation on the Closing Disclosure (“CD”), which mirror the tolerances applicable to determining the accuracy of the Finance Charge. It is unclear to me what I should be comparing the “Total of Payments” to in order to determine accuracy. On the Loan Estimate (“LE”), the total of payments is based on five years as opposed to amortization over the life of the loan as it is on the CD. So, for the purpose of calculating tolerance, should we be running a five year test with respect to the CD and comparing that calculation to the “In 5 Years” calculation on the LE? 

In discussing statutory tolerances for Total of Payments, you need to distinguish between the 1026.19(e)(3) good faith analysis for closing costs and the separate and independent statutory tolerances afforded for the accuracy of the Total of Payments disclosure, similar to those provided for the Finance Charge calculation. There is no comparison between the “In 5 Years” section on the LE to the “Total of Payments” section on the CD. In fact, analyzing the proposed amendment, the Consumer Financial Protection Bureau (the “Bureau”) noted that the two calculations do not include the same information, as the information available to the creditor at the time the CD issues differs from that available at the time the LE issued. [Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act, Section by Section Analysis, p. 352] Rather, the tolerances with respect to the Total of Payments relate to the accuracy of the calculation. 

The Bureau revised § 1026.38(o)(1) to specifically provide that “the disclosed total of payments shall be treated as accurate if the amount disclosed as the total of payments: (i) is understated by no more than $100; or (ii) is greater than the amount required to be disclosed”. [Ibid. at 346]

One of the driving forces behind the amendment was the statutory consequences for misdisclosing the Total of Payments. A misdisclosure of the Total of Payments can give rise to civil liability which may result in an award of actual damages, statutory damages (individual and class action), costs and attorney’s fees. [15 U.S.C. § 1640] Moreover, a misdisclosure of the Total of Payments can result in an extended right of rescission, which generally runs for three years after the date of consummation of the transaction, and if exercised, terminates the creditor’s security interest in the property and eliminates the consumer’s obligation to pay any finance charge (even if already accrued) or any other costs incident to the loan. [Ibid. at 350; See also 12 C.F.R. § 1026.23]

The Truth in Lending Act authorizes the Bureau to “adopt tolerances necessary to facilitate compliance with the statute, provided such tolerances are narrow enough to prevent misleading disclosures or disclosures that circumvent the purposes of the statute”. In its analysis, the Bureau stated its belief that the Total of Payments accuracy tolerances, which are identical to the finance charge tolerances, “are sufficiently narrow to prevent these tolerances from resulting in misleading disclosures or disclosures that circumvent the purposes of TILA”. [Ibid. at 352-353]

One further note, several trade groups supported the clarification regarding tolerances for the accuracy of the Total of Payments disclosure, stating that the approach will “positively impact secondary market execution by affording investors comfort that minor inaccuracies do not raise liability concerns”. [Ibid. at 346]

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, June 21, 2018

Deductions from Loan Officer Compensation

Can we deduct from our loan officers’ compensation the cost of marketing materials, such as the per- account fees of an outside customer relationship manager (CRM) to stay in touch with past clients and referral partners?

While it is theoretically possible to deduct marketing expenses from loan officer compensation in certain limited circumstances, attempting to do that in practice is fraught with legal and compliance risk.  

As a starting point, because loan officer compensation rules consist primarily of various prohibitions, determination of whether any loan officer compensation plan is "compliant" is a fact-specific and “situationally dependent” exercise that requires evaluation of the plan as a whole.

Secondly, there are many federal and state labor law requirements that must be considered. For example, the federal Fair Labor Standards Act (FLSA), and most state labor laws, prohibit any deduction from the pay of non-exempt employees (most mortgage loan officers) that is not specifically authorized by statute or regulation and that reduces the employee’s compensation below the applicable statutory minimum wage[i] or reduces the non-exempt employee’s overtime compensation in any amount. An employee must always receive at least the minimum wage and must be paid any earned overtime. Whether and how the deduction arrangement is documented in the LO's compensation agreement is also critical. Under most state laws, if the employee’s consent to the deduction is not specifically documented in advance in a written agreement, the deduction normally cannot occur. And if not structured properly, even authorization for such deductions in a written employment agreement can be problematic because employee compensation, once paid, normally cannot be reduced.

Thirdly, any such deduction would have to "pass muster" under both the Loan Officer Compensation Rules of Regulation Z of the Truth in Lending Act (TILA), and the Fair Lending laws. In that regard, Regulation Z prohibits basing a loan originator's compensation on "any of the transaction's terms or conditions" or the “terms of multiple transactions,” or on a “proxy” for such terms. The Dodd-Frank Act codifies that prohibition. Under Reg. Z, a "term of a transaction" is defined as "any right or obligation of the parties to a credit transaction." This means, for example, that a mortgage loan originator employee (LO) cannot receive compensation based on the interest rate of the loan or on the fact that the LO "steered" the customer to use a particular vendor in the transaction. 

The key language is found in Section 1026.36(d) of Reg. Z, as follows:
              (d) Prohibited payments to loan originators.
(1) Payments based on a term of a transaction.
(i) Except as provided in paragraph (d)(1)(iii) or (iv) of this section, in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators. If a loan originator's compensation is based in whole or in part on a factor that is a proxy for a term of a transaction, the loan originator's compensation is based on a term of a transaction. A factor that is not itself a term of a transaction is a proxy for a term of the transaction if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. (Emphasis added.)
Based on the emboldened definition above, a “proxy analysis” is required to evaluate whether deductions for marketing expenses (or other expenses) amount to a “factor” that “consistently varies with [a] term of the transaction (or series of transactions) over a “significant number of transactions” where the originator “has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.” This, in turn, could necessitate evaluation of whether the marketing expenses deducted are the same for every transaction and every loan type and interest rate, or vary statistically depending on the terms of the loan. If the deduction in any way incentivizes the loan officer (qualitatively or statistically) to “steer” consumers into or away from loans with certain terms, there is a potential TILA LO Comp issue.  And, in the same manner, there could also be a Fair Lending” issue if application of the deduction results in a pattern of loan origination that has a disparate impact on a protected class of borrowers.[ii]

Finally, if your company originates FHA loans, the proposed deduction might constitute a violation of HUD rules requiring that all operating expenses be paid by the mortgagee. 

HUD Handbook 4001.1(I)(A)(6)(g)(ii) provides that: “The Mortgagee must pay all of its own operating expenses, including the expenses of its home office and any branch offices where it conducts FHA business. The Mortgagee must maintain all accounts for operating expenses in its name.” (Emphasis added.)  Section 4001.1(I)(A)(4)(d)(i) of the HUD Handbook also provides: “The Mortgagee must not engage an existing, legally separate mortgage company or broker to function as the Mortgagee’s branch office or DBA name or to conduct FHA activities using the Mortgagee’s FHA approval.” 

While there appears to be no HUD prohibition on employees voluntarily reducing their basic rate of compensation across the board because management’s expenses have increased, that would need to be documented in the LO’s employment agreement and, again, could not result in the compensation dropping below applicable minimum wage and overtime pay requirements.

Michael Pfeifer 
Director/Legal & Regulatory Compliance 
Lenders Compliance Group

[i] The federal minimum wage is currently $7.25 per hour. Some state minimum wage requirements are higher.
[ii] Under the 2018 revisions to the Official Staff Interpretations of Reg. Z §1026.36(d)(1), a loan originator is permitted to decrease its compensation under very limited circumstances involving unforeseen increases in settlement costs. But those circumstances do not apply here. The applicable commentary reads: “Permitted decreases in loan originator compensation. Notwithstanding comment 36(d)(1)-5, §1026.36(d)(1) does not prohibit a loan originator from decreasing its compensation to defray the cost, in whole or part, of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer pursuant to section 5(c) of RESPA or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5(c) of RESPA. For purposes of comment 36(d)(1)-7, an increase in an actual settlement cost over an estimated settlement cost or a cost not disclosed is unforeseen if the increase occurs even though the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate.”

Thursday, June 14, 2018

HMDA Error Violations

We know that there are civil monetary penalties and potential administrative sanctions for HMDA violations. However, really, all violations can’t be equal! Are all reporting errors violations?

Certain HMDA reporting errors are not violations of HMDA.

In particular, there are these three defenses:

1. An error in compiling or recording loan data is not a violation of HMDA if the error was unintentional and occurred despite the maintenance of procedures reasonably adapted to avoid such errors.

2. An incorrect entry for a census tract number is deemed a bona fide error and is not a violation of HMDA provided the institution maintains procedures reasonably adapted to avoid such an error.

3. If an institution makes a good faith error to record all data concerning covered transactions fully and accurately within thirty days after the end of each quarter, and some data are nevertheless inaccurate or incomplete, the error or omission is not a violation of HMDA if the institution corrects or completes the information prior to submitting the Loan Application Register (LAR).

It is important to note that, while it is common for institutions to use third party vendors to provide information on the property location for HMDA reporting purposes, the institution is responsible for ensuring that the information reported is accurate. 
[12 CFR § 203.6(b); 12 CFR Part 203, Supplement I § 203.6(b)] 

Jonathan Foxx 
Managing Director 
Lenders Compliance Group

Thursday, June 7, 2018

Credit Score Disclosures

I have a kind of nuanced question. A borrower asked our loan officer to explain the borrower’s credit score. Is the loan officer required to explain the credit score?

Also, we are a wholesale lender and one of our mortgage brokers is asking us about the credit score disclosure obligation. They want to know who issues it. If there is a mortgage broker and a mortgage lender on a deal, should each of them provide the credit score disclosure to the borrower?

With respect to an obligation to explain the credit score information to a consumer, there is no such requirement. The obligation of a person who makes or arranges a loan and is subject to the credit score disclosure requirements is limited to solely providing a copy of the credit score information that was received from the consumer reporting agency, and the person does not have to explain the information or disclose any information other than the credit score and the key factors pertaining to the credit score. [15 USC §§ 1681g(g)(1)(E), (F)]

Regarding the issuance of the credit disclosure in a wholesale transaction, a person subject to the credit score disclosure requirements is not obligated to provide a disclosure when another person has made the required disclosure to the consumer for the loan transaction. Furthermore, a person does not have to provide more than one disclosure per loan transaction. [15 USC §§ 1681g(g)(1)(E)] However, it is advisable that mortgage brokers and mortgage lenders coordinate who will provide the disclosure to a consumer. 

Jonathan Foxx
Managing Director
Lenders Compliance Group