Thursday, December 26, 2019

Internal Audit - Pitfalls

The last few months have been an upsetting time for our bank. We recently were criticized by our regulator for a deficient internal audit. We were accused of being understaffed and undereducated. They said we did not follow our own standard procedures, did not conduct a timely audit, and they said that our directors and officers could be liable for negligence and breach of fiduciary duties. The head of our internal audit department quit, and two of her staff were fired. Now, we are being left to pick up the pieces and get ready for another regulatory review.

We feel unprepared for it and would like you to come in and do an internal audit for us, as the regulator would like an independent internal audit. We plan to retain your firm. 

In the meantime, I want to share this experience and ask you to provide some guidelines to follow in the future. We do not want to go through anything like this mess ever again.

So, what are some pitfalls that we need to be watching out for in an internal audit?

It probably does not assuage your sense of concern, but I will let you know a little-known fact: many banks are ill-prepared for complying with the regulatory requirements of an internal audit. It takes quite a lot for a regulator to make a convincing case that a bank’s directors and officers are liable for negligence and breach of fiduciary duties. 

Usually, the regulator will undertake a supervisory examination of the bank to ensure it has a credible case. Sometimes a federal agency will retain an independent banking consultant to evaluate the legal and regulatory issues that may be subject to potential administrative action.

I suggest you contact us for the internal audit engagement soon.

Time is not on your side! HERE is the contact link.
Regulators take the position that internal audits are a primary control for proactively identifying and remediating internal control weaknesses, including weaknesses relating to loan underwriting and credit administration.
We often see a host of issues that need remediation as a result of an internal audit. Occasionally, find repeated deficiencies, where the financial institution ignored findings or left them in an unresolved status. These become red flags to examiners when they conduct a regulatory review.
As to the pitfalls, the list is more like a litany of potential deficiency issues. If I set out to compile such a list, I could probably mention literally hundreds of possible pitfalls. That said, I would like to give you some pragmatic takeaways to prepare your institution for an internal audit. Here are but a few suggestions.
  • Internal auditors should not be charged with both audit and operational responsibilities in several areas, which diminishes their respective independence. Management may be held to a governance violation for allowing this kind of administrative defect.
  • Auditors should always have the necessary knowledge and training to conduct certain audits effectively.
  • Audit risk analysis and planning must ensure that the audit’s scope covers the range of criteria commensurate with risk. For instance, the rapid growth of a loan product, origination channel, or servicing platform is inherently prone to higher risk.
  • In general, audits should be performed on time and concluded within reasonable timeframes.
  • An internal audit should be scoured for a scope that is not sufficiently broad or deep enough to ensure reliable findings.
  • Audit reports should provide at least a description of the scope of work performed, a determination of the underlying causes, a judgment about the significance of the findings, and conclusions regarding the severity and pervasiveness of findings.
  • Importantly, a bank’s internal audit department must be tracking exceptions identified by outside entities, including recommendations made by regulators and other third parties, to ensure that such exceptions are appropriately corrected or scheduled for corrective action.
  • Furthermore, I highly recommend that banks develop and implement (1) a comprehensive corporate-wide risk assessment program, (2) enhance their audit exception tracking, (3) better monitor corrective action plans, 4) revise its internal audit policies, and (5) fortify the oversight of the Audit Committee.

Jonathan Foxx Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, December 19, 2019

Employee Surveillance

I am the Assistant General Counsel for a large mortgage lender. We are licensed in all states and have several origination platforms. Your weekly FAQs are often used as topics of discussion in our compliance meetings. Thank you for providing this fine service!

Recently, we undertook a review of the expectation of privacy relating to our employees, especially those working in our online and call platforms. I know that you are one of the few compliance companies that provide Call Calibration reviews, so you may know the ins-and-outs of employee privacy.

We want to add a brief outline to our employee privacy policy, supported by case law, that sets forth our guidelines.

In general, what is a reasonable expectation of privacy for employees?

In particular, given our extensive branch structure and multiple platforms, what are some protected employee privacy interests with respect to an employee’s physical person and electronic locations?

Thank you for reading our FAQs and using them in your compliance commitments. Your questions require an extensive response; however, due to the constraints of the FAQ format, I will only provide a brief response. Hopefully, my response will help to contribute to your deliberations. Given the implications of your inquiry, I will write more about this subject from time to time.

Yes, we provide Call Calibration reviews, which is the tracking and compliance evaluation of calls. We offer quality assurance Call Calibration in various settings, such as between online platforms and consumers, telemarketing initiatives, and call center marketing. We also provide a Call Center Manual and a plan for Call Calibration Methodologies. To receive a presentation for Call Calibration, Click Here.

Let’s be clear, privacy is, to some extent, the “right to be left alone.” That said, no one living in our society today can be left entirely alone. It is important to balance the interest of society and that of the individual using some objective standard to determine whether an intrusion on privacy is actionable.

Maybe “intrusion” seems like a harsh word. Some people would find any intrusion to be objectionable even if it is not outrageous to a person of ordinary sensibilities.[i] Many courts have found that persistent attempts to interview and photograph a plaintiff, soliciting sex under non-aggravated circumstances, using harsh names and insulting gestures, are intrusions that may invoke a feeling of being highly offensive to a reasonable person, but may not be actionable under an “intrusion upon seclusion cause of action.” In general, courts have held that conduct that is merely offensive, insensitive or intrusive is non-actionable if it does not involve outrageously unreasonable conduct. Defining the word “outrageous” is what lawsuits are supposed to determine.

You likely know about the tort of intrusion, which could be brought against those parties who assist in, cooperate in, instigate, command, encourage, ratify, condone, aid, assist or advise in the intrusion.[ii] This might infer that a systems operator or network service provider could also be liable under the tort of intrusion because these may furnish the means and opportunities for the intrusion and have some knowledge or intention to cooperate in that manner.

Obviously, this is not the place to discuss the extensive features and elaborations of the tort of intrusion, but a majority of the applicable cases require that the defendant must have acted with knowledge or the intention to create the tortious intrusion. Most case law has recognized that the intrusion tort does not depend upon any publicity given to the person whose interest is ‘invaded’ or to his or her affairs but consists solely of an intentional interference with his or her interest in solitude or seclusion. It is may not be necessary that the defendant has disclosed the fact of the interference or the contents of any information contained in any of the communications. However, in some cases, the invasion of privacy may not have occurred unless the information was disclosed to a third party and that the disclosure represents the invasion of privacy.

You mention “physical person” and “electronic locations.” Cases dealing with the tort of intrusion have determined that it is not necessary for there to have been a trespass or physical intrusion. This view is true in cases of the installation of wiretaps or monitoring devices that do not involve an actual trespass onto the plaintiff’s property, or in cases of publicity that brings the plaintiff into a position of having many strangers intrude into the life of the plaintiff or concerning telephone or mail collection tactics. In most cases, there has not been a physical intrusion or trespass though there is an intrusion for purposes of this tort on the privacy of the plaintiff.

Thursday, December 12, 2019

Acting as Buyer’s Real Estate Agent and Attorney

We have a loan officer who has a relationship with a real estate attorney from whom the loan officer receives referrals. 

The attorney is also a newly licensed realtor who intends to act both as the realtor and an attorney on a transaction. 

Is that permissible? It seems like a conflict to me. 

As the loan officer will be receiving referrals from the attorney, the presumption is that the attorney will be representing buyers in real estate transactions both as a real estate agent and attorney.

Several state bar associations, including the Connecticut, Massachusetts, and New York State Bar Associations, have opined on this issue.[*]

Assuming the attorney is being compensated as a real estate agent by the seller in an amount equal to a percentage of the sales price and receipt of such compensation is conditioned on the transaction closing, the short answer is no, the individual cannot act in a dual capacity of real estate agent and attorney.

An individual functioning as both the buyer’s attorney and real estate agent in a residential real estate transaction raises the issue of the existence of a conflict of interest and the individual’s ability to adequately represent the buyer in both capacities. The role of the buyer’s real estate agent is to guide the buyer through the preliminary process of purchasing a property, including ascertaining the type of property and location that suits the buyer’s needs, responding to questions regarding a listing, showing the buyer the properties, and presenting and negotiating the purchase price. Typically, the buyer’s real estate agent is paid by the seller.

The seller enters a listing agreement with seller’s real estate broker which sets forth the commission, typically a percentage of the purchase price and contingent upon the transaction actually closing. That commission is usually split between the buyer’s and seller’s real estate brokers, with a portion going to the agents themselves. Thus, both buyer’s and seller’s real estate agents have an interest in not only having the transaction closed (otherwise they do not get paid) but also in having the sales price at the highest amount possible so they can maximize their commission.

The buyer’s attorney works with the buyer’s real estate agent to bring the transaction to closing. Typically, the attorney will prepare and negotiate the purchase contract or in some states, review and revise the broker prepared contract; review the title commitment to ensure there are no title defects; review the term of the mortgage and the purchase agreement to ensure the documents reflect the buyer’s wants and needs; prepare closing documents; and, attend the closing. Throughout this process, it is incumbent upon the attorney to zealously represent the buyer’s interests.

Therein lies a personal conflict of interest for the real estate agent/lawyer. As the real estate agent, not only is the individual interested in the highest purchase price but also in closing the transaction; otherwise, he will not get paid. By contrast, the buyer’s lawyer’s role is to protect the buyer’s interests, which in some circumstances may include renegotiating a lower purchase price due to inspection issues or even advising the client that it is in his best interest to walk away from the deal even though doing so may preclude the real estate agent from receiving a commission.

Most, if not all, states’ Rules of Professional Conduct prohibit an attorney from entering a “business transaction” with a client unless certain conditions are satisfied, including that the transaction is fair and reasonable, that the client has been advised in writing to consider the desirability of seeking the advice of other legal counsel, and that the client has provided informed consent to the representation in writing. However, many states’ bar associations and state court opinions have opined that the personal conflict of interest of an individual acting in the dual capacity of a buyer’s real estate agent and lawyer is not one that may be waived by the parties; it is essentially “non-consentable by the client” and thus an individual may not act as both the buyer’s attorney and buyer’s real estate agent in the transaction.[†]

Note that the foregoing analysis only applies in situations wherein the real estate agent/lawyer is receiving a commission paid by the seller. It may be permissible for the individual to act in a dual capacity in other circumstances such as if - in his capacity as a real estate agent – he is being paid a flat fee regardless of whether the closing transaction is being paid by the buyer.

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

[*] Connecticut Bar Association Informal Opinion 15-03/Dual Role as Real Estate Attorney and Real Estate Agent in the Same Transaction, February 18, 2015; Massachusetts Bar Association Opinion 82-4, April 1982; New York State Bar Association Committee on Professional Ethics Opinion 1117/Conflicts of Interest; Serving as Lawyer and Broker in Same Real Estate Transaction, April 4, 2017; Oregon State Bar Association Formal Opinion 2006-176/Conflicts of Interest: Lawyer Functioning in Multiple Roles in Client’s Real Estate Transaction, September 2016
[†] New York State Bar Association Committee on Professional Ethics Opinion 1117/Conflicts of Interest at 6.

Thursday, December 5, 2019

Joint Marketing “Vouchers” – Split of Buyer Incentive

One of our loan officers wants to participate in a joint marketing program with a realtor in which the two of them hand out “vouchers” bearing both of their pictures and contact information and offering $500 off closing costs “courtesy of” the LO, the realtor, and our mortgage company to employees of certain school districts that are highly regarded in our area. Do you see any potential problems with this kind of marketing?

I think you right to be concerned about these vouchers, for a number of reasons, including possible violations of RESPA, Fair Lending laws, and the provisions of the Dodd-Frank Act prohibiting Unfair, Deceptive, and Abusive Acts and Practices (UDAAP) (as well as similar state laws).

1. RESPA Sections 8(a) and 8(b)
Joint marketing pieces like this are problematic in and of themselves because they can often be characterized as mutual endorsements and hence, as implied mutual referrals. Both the realtor and the loan officer are providing “settlement services” as that term is defined in RESPA’s implementing Regulation X (12 CFR 1024.2). So RESPA Section 8 is applicable to both of them. If either party pays more than their fair share of making or distributing the advertisement, that differential itself could potentially be characterized as the payment of a thing of value for purposes of obtaining the referral of a settlement service.

In that regard, all three elements of a RESPA Section 8(a) violation would appear to be present:

  • The payment or receipt of a “thing of value”
  • Pursuant to an agreement or understanding
  • For referral of “settlement service” business involving a federally related mortgage loan.   

Adding the monetary inducement of “$500 off closing costs” makes the vouchers even more problematic. While offering a financial inducement directly to a prospective borrower is probably not itself a RESPA Section 8(a) violation, splitting the cost of that financial inducement may violate RESPA Section 8(b) which prohibits not only “referral fees,” but also “splits” of any charge “made or received” for the rendering of a settlement service on a federally related mortgage loan “other than for services actually performed.”

The applicable language in Regulation X (12 CFR §1024.14) reads as follows:

 (c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.

Here, splitting the cost of the $500 borrower inducement would appear to fall squarely within the above prohibition, since no services performed by either the LO, the lender or the real estate broker with respect to each other are identified.

2. Possible Fair Lending/ Discriminatory Impact/redlining
Federal regulators have encouraged mortgage lenders to be careful about advertising patterns or practices that a reasonable person would believe indicate the existence possible discrimination against members of protected classes (i.e., disparate impact). By offering the vouchers only to employees of elite schools, you may be engaging in exactly that kind of prohibited pattern or practice. This means that if you were to go forward with this voucher program, it would need to be carefully drawn to make sure that no protected class of persons is excluded from access to participation, either intentionally or statistically.

3. Possible UDAAP Violation 
Discriminatory practices are inherently UDAAP violations. But there are also potential UDAAP issues if the vouchers ARE offered to everyone equally, but some prospective borrowers are led to believe that the incentive is offered only to them because of their special status as employees of one of the elite schools. That is deceptive on its face and invites further regulatory scrutiny and/or enforcement action. 

In short, if your company wants to offer buyer incentives such as discounts off closing costs, it may be best to offer the incentives to all prospective borrowers on your own and not attempt to also incorporate such efforts into a joint marketing campaign with another settlement service provider. Otherwise, the potential for regulatory violations tends to multiply exponentially.

Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Wednesday, November 27, 2019

TRID Rule Concerns

Our compliance and sales heads met as a group and put together a few questions for you. We are a non-bank lender in all states. We met to discuss TRID and draft replies to questions we have been getting from our loan officers. We plan to publish the answers soon and will gladly give you attribution. Here are our questions. 
Does Section 109(a) of the EGRRCPA affect the timing for consummating a transaction if we are required to provide a corrected Closing Disclosure under the TRID Rule? 
If there is a change to the disclosed terms after we provide the initial Closing Disclosure, are we required to ensure that the consumer receives a corrected Closing Disclosure at least three business days before consummation? 
Are we required to ensure that a consumer receives a corrected Closing Disclosure at least three business days before consummation if the APR decreases (i.e., the previously disclosed APR is overstated)? 
Should we use a model form for a safe harbor if the model form does not reflect the TRID Rule change that was finalized in 2017?
Thank you for your questions. Bringing compliance and sales staff together to discuss regulatory issues is a good idea. There was a time, years ago, when compliance and sales had a tense relationship. These days, though, compliance and sales are cemented together. Most loan officers want to do what is legally required to originate loans, while also ensuring that they have the support of management to earn strong and vibrant income.

Your questions are reminiscent of the CFPB’s FAQs issued earlier this year. Here’s a brief response to your questions from the creditor’s perspective.

Does Section 109(a) of the EGRRCPA affect the timing for consummating a transaction if we are required to provide a corrected Closing Disclosure under the TRID Rule?

The short answer is, No. The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) Section 109(a) of the EGRRCPA did not change the timing for consummating transactions if you, as the creditor, are required to provide a corrected Closing Disclosure under the TRID Rule. Section 109(a), entitled No Wait for Lower Mortgage Rates, amends section 129(b) of TILA. TILA section 129(b) governs when certain disclosures must be provided for high-cost mortgages as well as the waiting periods for consummating a transaction after you have provided those high-cost mortgage disclosures. However, according to the CFPB, the disclosure and waiting period requirements for mortgage loans are stated in section 128 of TILA and, therefore, since the EGRRCPA did not amend section 128, the exception does not apply to all mortgage but only high-cost loans.

If there is a change to the disclosed terms after we provide the initial Closing Disclosure, are we required to ensure that the consumer receives a corrected Closing Disclosure at least three business days before consummation?

You do not need a new disclosure and a new waiting period for most changes in terms. However, if the change results in one of the three situations listed below, then you must issue corrected disclosures and provide another waiting period:
  • The change in terms results in the annual percentage rate (APR) becoming inaccurate;
  • The loan product information required to be disclosed under the TRID Rule has become inaccurate; or
  • A prepayment penalty previously undisclosed was added to the loan contract. 

Are we required to ensure that a consumer receives a corrected Closing Disclosure at least three business days before consummation if the APR decreases (i.e., the previously disclosed APR is overstated)?

If the overstated APR is accurate under Regulation Z, you must provide a corrected Closing Disclosure, but you are permitted to provide it at or before consummation without a new three-business-day waiting period. If the overstated APR is inaccurate under Regulation Z, you must ensure that the consumer receives a corrected Closing Disclosure at least three business days before the loan’s consummation.

Should we use a model form for a safe harbor if the model form does not reflect the TRID Rule change that was finalized in 2017?

To the extent that the appropriate model form is properly completed with accurate content, the safe harbor is met. The safe harbor applies even if the model form does not reflect the changes to the regulatory text and commentary that were finalized in 2017. Please note, the CFPB did not update the model forms to reflect the 2017 amendments, so it is allowing for a safe harbor as long as the form is completed accurately.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, November 21, 2019

Monitoring the Servicer

We are a credit union in the mid-west. Recently, our annual review of our servicer found some regulatory violations. In particular, we found that the servicer did not process some transfer data relating to loss mitigation data in a timely and accurate manner. Everything was corrected. However, the situation put our relationship with the consumers at risk. It also may lead to our regulator getting involved. Our concern is about whether we should stay with this servicer now, even if it did correct the errors. What exposure do we have to regulatory action due to the servicer’s failure to process the transfer of data?

If your financial institution uses a servicer, it should be conducting an annual review. If you don’t know how this is done, you can always retain a firm such as ours to effectuate a comprehensive evaluation. Regulators expect the annual review to be conducted and its findings made available during an examination. If you are not conducting an annual audit of the servicer, you are going to come under intense regulatory scrutiny.

At a minimum, regulators require that a financial institution (or any subservicer or third-party originator it uses) comply with all federal, state, and local laws (i.e., statutes, regulations, ordinances, directives, codes, administrative rules and orders that have the effect of law, and judicial rulings and opinions) that apply to any of its origination, selling, or servicing practices, including laws and regulations on consumer credit, equal credit opportunity and truth-in-lending, and borrower privacy; use of any licensed technology; other business practices that may have a material effect on the investor or consumer; and ensure that appraisals conform to the appraiser independence rules.

As to exposure, I will offer an illustration of what can happen. Recently, the CFPB announced a settlement with BSI Financial Services (BSI), a mortgage servicer headquartered in Irving, Texas. BSI Financial Services is the operating name for Servis One, Inc. BSI services approximately 48,600 loans with an aggregate unpaid principal balance of approximately $8.5 billion. The CFPB found that BSI violated the Consumer Financial Protection Act of 2010 (CFPA), the Real Estate Settlement Procedures Act (Regulation X), and the Truth in Lending Act. [CFPB, Administrative Proceeding, In the Matter of Servis One, Inc., d/b/a BSI Financial Services (5/29/19)]

To explain briefly, under the terms of the consent order, BSI must, among other provisions, pay a civil money penalty of $200,000 and pay restitution estimated to be at least $36,500. It must also establish and maintain a comprehensive data integrity program to ensure the accuracy, integrity, and completeness of the data for loans that it services and implement an information technology plan to ensure that BSI’s systems are appropriate given the nature, size, complexity, and scope of BSI’s operations.

So, what happened? The servicer failed to acquire or transfer loss mitigation data and certain other information.

During the period subject to review, BSI did not review loan data provided by prior servicers for accuracy and completeness before putting the loans on its system. The servicer also did not transfer to its system loss mitigation information from prior servicers in a fully automated manner. Therefore, some consumers who had loan modifications in process or were engaged in pending loss mitigation when the servicing was transferred had incomplete information in their files, and in some cases, their permanent loan modifications were not honored by BSI.

In other instances, BSI failed to evaluate consumers’ pending loss mitigation applications for loan modifications or failed to offer permanent loan modifications upon consumers’ completion of loan modifications in process.

Furthermore, because BSI did not transfer all of the servicing information correctly in its system, including payments made by consumers, some consumers whose loans were transferred out of BSI’s system experienced delays in obtaining loss mitigation with their new servicers and accrued unnecessary interest and fees.

Let’s look at the violations that were triggered.

Violations of Regulation X

Regulation X requires servicers to maintain policies and procedures that are “reasonably designed to ensure that the servicer can:

(i)   As a transferor servicer, timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer’s obligations to the owner or assignee of the mortgage loan and applicable law; and
(ii)  As a transferee servicer, identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer.

These policies and procedures must be designed to ensure that the servicer can identify documents and information that a borrower is required to submit to complete a loss mitigation application. But BSI did not fully complete its review of loss mitigation information from prior servicers for accuracy and completeness prior to boarding loans. Moreover, it was BSI’s practice not to review the loan files it received from prior servicers to ensure that necessary information was not missing prior to boarding loans. For loans with pending loss mitigation activity, there were instances in which BSI was also unable to identify information that those borrowers were required to submit to complete their loss mitigation applications without contacting the prior servicer or borrower.

Thursday, November 14, 2019

Private Right of Action under the PTFA

I have subscribed to your weekly FAQ for many years. It must be a labor of love, but I’m sure you and your colleagues enjoy offering your guidance in such a forthright way! I am an Assistant General Counsel for a bank with a servicing department. My question concerns the Protecting Tenants at Foreclosure Act. Our attorneys follow the required eviction process. My understanding is that there is no private right of action under this Act.

My question is, can you provide some history and reach of the Act?

Also, is there a private right of action under the PTFA?

Thank you for your kind words. Our FAQ is a labor of love – one that we happily embrace!    

The Protecting Tenants at Foreclosure Act of 2009 (PTFA) protects tenants from immediate eviction by persons or entities that become owners of residential property through the foreclosure process in relation to a “federally related mortgage loan.” The terminology “federally related mortgage loan” is defined by the Real Estate Settlement Procedures Act (RESPA) as any loan secured by a lien on one-family to four-family residential real property, including cooperatives and condominiums.

Under the PTFA, the immediate successor in interest at foreclosure must:

  • Provide bona fide tenants with at least 90 days’ notice prior to eviction.
  • Allow bona fide tenants with leases to occupy the property until the end of the lease term, except the lease can be terminated on 90 days’ notice if the unit is sold to a purchaser who will occupy the property.
For some history, the original PTFA was enacted during a period when unprecedented numbers of foreclosures were occurring across the country. Tenants with leases often become collateral victims in addition to homeowners when foreclosures occur and are forced to vacate their leased homes – often with minimal notice. The PTFA attempts to ensure that tenants receive notice of foreclosure and are not abruptly displaced.

A lease or tenancy is bona fide if the tenant is not the mortgagor or the parent, spouse, or child of the mortgagor, the lease or tenancy is the result of an arm’s length transaction, and the lease or tenancy requires rent that:

(1) is not substantially lower than fair market rent; or
(2) is reduced or subsidized due to a federal, state, or local subsidy.

The law does not cover tenants facing eviction in a non-foreclosed property, tenants with a fraudulent lease, tenants who enter into lease agreements after a foreclosure sale, or homeowners in foreclosure.

The PTFA appears to contain a significant flaw, at least from the tenant’s point of view, considering how a federal district court in Hawaii recently ruled. [Kaauamo v. Legacy Development, LLC, 2019 U.S. Dist. (D. Haw. Apr. 12, 2019)]

Briefly, here’s the case. Wells Fargo foreclosed on real property located in Maui, Hawaii. In the Spring of 2018, Wells Fargo sold the property to Legacy Development. According to Kaauamo, she had been a lessee of the property for five years, leasing it from her aunts, who had owned the property before the foreclosure. She claimed that she was a bona fide tenant within the meaning of the PTFA and that she had the right to live on the property until the lease expired in 2030. She also alleged that Legacy violated the PTFA by not giving her 90 days’ notice prior to eviction. Legacy had retained Maui Process Services (“MPS”) and its employee, Williams, to assist with evicting Kaauamo.

Kaauamo sued Legacy and MPS pro se, claiming violations of the PTFA, among other claims. MPS and Legacy separately filed motions to dismiss, asserting that Kaauamo had failed to state a PTFA claim because her lease was void and because she was not a bona fide tenant within the meaning of the PTFA.

But the court dismissed the action, holding that Kaauamo had no right to bring it. The U.S. Court of Appeals for the 9th Circuit had held that Congress did not create a private right of action to enforce the PTFA. [Logan v. U.S. Bank Nat. Ass’n, 722 F.3d 1163 (9th Cir. 2013)]

The 9th Circuit in the Logan case – reportedly one of first impression in the U.S. Courts of Appeal – had viewed its role as one of determining, as set forth by the U.S. Supreme Court, whether the PTFA, either explicitly or by implication, evinces a Congressional intent to create a private right of action.

The parties acknowledged that the statute does not explicitly create a private cause of action because nothing in its text references the availability of any action to enforce its provisions, describes a forum in which an enforcement suit may be brought, or identifies a plaintiff for whom a forum is available. Accordingly, the court had to determine whether it could imply any private right of action from the statute’s language, structure, context, and legislative history.

The 9th Circuit found nothing in the language and structure of the PTFA to reflect a clear and unambiguous intent to create a private right of action. Thus, in the court’s view,

“[t]he difficulty for Logan is that the PTFA focuses on the ‘immediate successor in interest’ in the property—in other words, the regulated party. [The PTFA] is framed in terms of the obligations imposed on the regulated party…, while the ‘bona fide tenant’ is referenced only as an object of that obligation. Statutes containing general proscriptions of activities or focusing on the regulated party rather than the class of beneficiaries whose welfare Congress intended to further ‘do not indicate an intent to provide for private rights of action.’”

Furthermore, the PTFA did not place Logan into a class for whose “especial” benefit the statute was enacted. An “especial” beneficiary is not simply one who would benefit from the Act, otherwise, the victim of any crime would be an especial beneficiary of the criminal statute’s proscription. The conferral of benefits, such as the right to 90 days’ notice to vacate and the right to continue occupying the premises until the end of the remaining lease term, is not enough. The PTFA’s focus on the parties regulated rather than the individuals ultimately benefited weighed against implication of a private right of action.

The court rejected Logan’s argument that the title of the statute evinced sufficient Congressional intent to create a federal right in favor of tenants of foreclosed properties. Though a title can be used to resolve ambiguity, it cannot control the plain meaning of a statute.

Thursday, November 7, 2019

Transitioning Loan Officer Licensing

We are a mortgage lender that is hiring a large group of loan officers from a bank. The transition includes handling their licensing requirements. Of course, the loan officers want to continue to take applications, but their state licensing has been taking a lot of time and causing a lot of concerns. We need to know how to handle this licensing issue so that our new loan officers can get to work. What can we do to transfer the loan officers from their bank registration to become licensed loan officers?

Your question comes at an opportune time. I’m going to give you a new acronym – as if the mortgage community needs yet another acronym. 

Here it goes: “EGRRCPA!” 

I have not met anyone yet who has figured out how to provide a phonetic rendering, but maybe some pronunciation will gain traction eventually.

EGRRCPA stands for the Economic Growth, Regulatory Relief, and Consumer Protection Act. Let’s keep the acronym “EGRRCPA” for the sake of this brief response. It became law on May 24, 2018.

Section 106 of the EGRRCPA is designed to reduce the barriers for mortgage loan originators (“MLOs”) who are licensed in one state to temporarily work in another state while waiting for licensing approval in the new state, and, for our purposes, specifically also grants MLOs a grace period to complete the necessary licensing, when they move from a depository institution (where loan officers do not need to be state licensed) to a nondepository institution (where they do need to be state licensed). The EGRRCPA amended the SAFE Act (viz., Secure and Fair Enforcement for Mortgage Licensing Act). Fortuitously, apropos the timeliness of your question, these amendments are effective in just a few days, on November 24, 2019.

The CFPB published frequently asked questions and answers about these changes. In any event, the CFPB takes the position that these questions and answers are not meant to be a substitute for Regulation G (SAFE Act – Residential MLOs) and Regulation H (SAFE Act – State Compliance and Bureau Registration).

My response is necessarily limited, but we do offer the SAFE Tune-up, which is an inexpensive mini-audit that provides substantive guidance in handling SAFE compliance. Order the SAFE Tune-up HERE.

I am glad to provide a short and sweet audit checklist for general compliance with the SAFE Act, which you can use in your compliance self-assessments. Request the checklist HERE and we’ll send you a copy!

Let’s turn our attention to the EGRRCPA and the transitioning of MLOs.

For the purpose of providing a response to your question, there are two categories of loan officers that pertain under the SAFE act: state-licensed loan originators and loan originators with temporary authority. 
  • State-licensed loan originators are individuals who are not employees of a covered financial institution (in general, employees of non-depository institutions). These MLOs must obtain and annually maintain a valid loan originator license from a state and obtain registration with the NMLSR system, which generally is accomplished through the licensing process. Since state law implements the SAFE Act’s requirement to obtain a loan originator license in a state, these individuals should check with their state to determine the full set of state law requirements for obtaining a loan originator license. 
  • Loan originators with temporary authority, as of November 24, 2019, are certain MLOs who have temporary authority to act as loan originators in a state for a limited period while applying for a state loan originator license in that state. But not all loan originators are eligible for temporary authority: temporary authority applies to loan originators who were previously registered or state-licensed for a certain period before applying for a new state license. Additionally, loan originators are eligible for temporary authority only if they have applied for a license in the new state, employed by a state-licensed mortgage company in the new state, and satisfy certain criminal and professional history requirements described in the SAFE Act.

Beginning on November 24, 2019, an MLO who satisfies the Loan Originator with Temporary Authority eligibility criteria may act as a loan originator in a state where the loan originator has submitted an application for a state loan originator license, regardless of whether the state has amended its SAFE Act implementing law to reflect the EGRRCPA amendments. Be sure to implement fine-tuned, onboarding procedures to ensure compliance with the individual MLO’s filing requirements!

With respect to the state transitional licensing availability under SAFE, in 2012 the CFPB issued Bulletin 2012-05 on state transitional licenses in response to several inquiries it received regarding whether states may, consistent with the SAFE Act, permit a level of state reciprocity when granting state loan originator licenses. The Bureau explained that, under Regulation H, “a state must require and find, at a minimum, that an individual” has met certain standards before granting an individual a state loan originator license. 

However, the Bureau opined that where a state is considering a licensing application from an individual who already holds a valid loan originator license from another state, the regulation does not limit the extent to which a new state may consider or rely upon the prior state’s findings when determining an individual’s eligibility under its particular licensing laws. The Bulletin also noted that the individual needs to meet a net worth or surety bond requirements, or pay into a state fund, as required by the state.

Provided that the individual meets the requirements, and the state accepts that the loan originator meets all of the applicable standards, the SAFE Act permits transitional licensing in this limited sense.

Thursday, October 31, 2019

Payoff Statements - Foreclosure Conundrum

Thank you for these weekly mortgage FAQs. We use them in sales, operations, and compliance meetings. We even include them in our company newsletter. Now, we finally have a question of our own.

We had an audit of our timing to respond to payoff statements. The audit was conducted by an independent compliance firm, such as yours, and they found that there were several instances where we did not respond in a timely manner.

It is our understanding that we have seven business days to respond to a request for a payoff statement. So, admittedly, there were a few times we missed the deadline. But one of those missed deadlines involved a foreclosure. 

The attorneys delayed in sending us their request, but we responded within seven business days. In our view, the auditor’s finding should be removed. 

What is considered a reasonable time to respond to a payoff statement request in such a situation?

I appreciate your kind words. Thank you for sharing our FAQs with your staff!

To begin, it is important to provide the guideline to follow for being responsive to a payoff statement request. With respect to consumer credit secured by a consumer’s dwelling – whether or not the dwelling is the consumer’s “principal dwelling” – Regulation Z states that a creditor, assignee, or servicer that currently owns the loan or servicing rights must provide an accurate statement (as of the date issued) of the total outstanding balance required to pay the obligation in full as of a specified date. This “payoff statement” must be sent within a reasonable time, not more than seven business days, after receiving a written request from the consumer or someone acting on behalf of the consumer. [Regulation Z (TILA) § 1026.36(c)(3)]

The scenario you describe includes a foreclosure. A recent case by the federal district court in Ohio may be enlightening. [Larkins v. Fifth Third Mortgage Co., 2019 U.S. Dist., S.D. Ohio Apr. 22, 2019] Keep the various notification and response dates in mind, as I describe the litigation.

Here are some of the salient facts in this case. 
  • The Larkins faced foreclosure after default on their home mortgage loan, but they received an offer to purchase their home and needed a payoff quote by April 30, 2017 to prevent the offer from expiring.
  • Because of the pending foreclosure action, their counsel sent an April 19 email payoff request to the creditor’s foreclosure counsel, Bennett, rather than directly to the loan servicer.
  • Bennett emailed back that she would request a payoff from the creditor.
  • On April 24, the creditor received Bennett’s request for a payoff quote. 
  • On April 28, the creditor generated the quote and sent it to Bennett. 
  • On May 4, after receiving clarifying information she had requested about the quote, Bennett both mailed and emailed the quote to the attorney of record for the Larkins.
  • Then, on May 15, Larkins’ foreclosure counsel asserted in an email to the creditor’s foreclosure counsel that the creditor had failed to furnish a payoff quote. The creditor’s counsel responded the next day, re-sending the quote and noting that it had been sent on May 4.

The Larkins sued the creditor, alleging that it had violated TILA by failing to provide an accurate payoff balance within seven business days after receiving a written request. The court granted summary judgment for the creditor.

Now, follow the reasoning: the creditor had responded within the 7-day period. 
  • In compliance with TILA, on April 24 (a Monday), the creditor had received the request for a payoff balance from Bennett, on behalf of the Larkins.
  • On Friday, April 28, the creditor had generated the payoff balance and on May 1, sent a payoff quote to Bennett, which Bennett received on Monday, May 1. This means the creditor had sent the payoff statement within five business days after receiving the request on behalf of the borrower.

By the way, neither the Larkins nor any evidence suggested that the payoff balance was inaccurate at the time the creditor sent it. Being “not more than seven business days,” this behavior complied with TILA and Regulation Z.

In an attempt to salvage their claim, the Larkins argued that agency principles should apply to qualify the bank’s foreclosure counsel as a “creditor” subject to the payoff statement requirements. But TILA clearly limits this requirement to “creditors,” the definition of which, in both TILA and Regulation Z, does not include agents. (It is worth noting, as did the court, that (in contrast) other provisions of TILA do include agents, for example, TILA’s definition of “card issuer.”) The court showed that there was no agency involved. Indeed, the lender’s foreclosure counsel did not have access to the lender’s internal systems or the information necessary to generate a payoff quote. In sum, while the creditor’s agreement to allow foreclosure counsel to represent it in foreclosure proceedings might qualify the counsel as agent for certain purposes, that agreement did not extend to payoff requests.

The court noted that Regulation Z supported its decision because the regulation provides that
“[w]hen a creditor, assignee, or servicer, as applicable, is not able to provide the statement within seven business days of such a request because the loan is in bankruptcy or foreclosure…the payoff statement must be provided within a reasonable time.” [Regulation Z § 1026.36(c)(3)]
Thus, even if the creditor were deemed to have received the payoff request on April 19 (the day the Larkins’ counsel sent the email payoff request to the creditor’s foreclosure counsel), the creditor had provided the payoff statement on May 4 (the 11th business day following). Under the circumstances of this case, the period of eleven business days was a “reasonable time” to provide the statement.

Thursday, October 24, 2019

FDCPA: Proposed Amendments

I have been reading about the CFPB’s proposed revisions to the FDCPA. As our bank’s General Counsel and Compliance Manager, I am updating our policies for the proposed revisions. There seem to be several areas in particular that were subject to the amendment, but other areas are kept virtually intact. My review would go a lot smoother if you could provide some insight into the specific amendments relating to communications. What are some of the salient changes in the FDCPA involving communications and notices?

Thank you for your question. The CFPB is active in FDCPA examination and enforcement. On May 21, 2019, the CFPB proposed amending Regulation F, the implementing regulation of the Fair Debt Collection Practices Act (FDCPA), to prescribe the rule governing the activities of debt collectors. The rule would address (1) communications in connection with debt collection; (2) interpret and apply prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection; and (3) clarify requirements for certain debt collection consumer disclosures. [84 FR 23274 (May 21, 2019)]

The proposed rule would restate the FDCPA’s substantive provisions largely in the order they appear in the statute, sometimes without interpretation. Perhaps, the intent may be to enable a reader to consult only the regulation to view all relevant definitions and substantive provisions.

Regarding communications, the proposed rule would: 
  • Define a new term, limited content message, to identify what information a debt collector must and may include in a message left for a consumer (with the inclusion of no other information permitted) for the message to be deemed not to be a communication under the FDCPA. This definition would allow a debt collector to leave a message for a consumer without communicating, as defined by the FDCPA, with a person other than the consumer.
  • Clarify the times and places at which a debt collector may communicate with a consumer, including by clarifying that a consumer need not use specific words to assert that at time or place is inconvenient for debt collection communications.
  • Clarify that a consumer may restrict the media through which a debt collector communicates by designating a particular medium, such as email, as one that cannot be used for debt collection communications.
  • Clarify that, subject to certain exceptions, a debt collector is prohibited from placing a telephone call to a person more than 7 times within a 7-day period or within 7 days after engaging in a telephone conversation with the person.
  • Clarify that newer communication technologies, such as emails and text messages, may be used in debt collection, with certain limitations to protect consumer privacy and to prevent harassment or abuse, false or misleading representations, or unfair practices. For example, the CFPB proposes to require that a debt collector’s emails and text messages include instructions for a consumer to opt out of receiving further emails or text messages. 

The FDCPA requires a debt collector to send a written notice to a consumer, within 5 days of the initial communication, containing certain information about the debt and actions the consumer may take in response, unless the information was provided in the initial communication or the consumer has paid the debt. The proposal would include the following provisions regarding the information a debt collector must include at the outset of debt collection, including, if applicable, in a validation notice:

Debt collectors must provide information about the debt and the consumer’s rights with respect to the debt, including prompts that a consumer may use to dispute the debt, request information about the original creditor, or take other actions. The rule would allow a debt collector to include specified optional information.

Also, the rule will include a model validation notice a debt collector could use to comply with the FDCPA and the rule’s disclosure requirements. 
  • Among other items worth noting, the rule would:
  • Clarify the steps a debt collector must take to electronically provide the validation notice and other required disclosures.
  • Include a safe harbor if a debt collector complied with certain steps when delivering the validation notice within the body of an email that was the debt collector’s initial communication with the consumer.
  • Prohibit a debt collector from suing or threatening to sue a consumer to collect a time-barred debt.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group