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Thursday, January 31, 2019

False and Misleading Representations

QUESTION
We are a mid-sized bank in the Northwest. Last year, we were cited for misleading representations in collecting debts. Now we just learned that we are being scheduled for another regulatory examination and this problem is sure to come up again. What “misleading representations” are prohibited in collecting a debt?

ANSWER
Regulators are perennially active in evaluating a financial institution’s compliance with the Fair Debt Collection Practices Act (FDCPA). The use of the phrase “misleading representations” – sometimes written as “false and misleading representations” – is meant to be a catch-all phrase for courts to sanction false, deceptive, or misleading conduct that does not fit into the many specific prohibitions. The FTC Act refers to this conduct as “deceptive acts or practices.”

Under the FDCPA, there are sixteen specific false or misleading representations that are prohibited in connection with the collection of a debt. I will provide a brief outline here, cautioning you also to work with a competent compliance professional to understand how best to proceed in being prepared for the forthcoming examination.

To make this outline as helpful as possible, I am also going to assume that you are the debt collector. For purposes of this answer, I will be paraphrasing Section 1692e of the FDCPA. [15 USC §§ 1692e(1)-(16)]

Sixteen False and Misleading Representations

1)Falsely represent or imply that you are vouched for, bonded by, or affiliated with the United States or any state, including the use of any badge, uniform or facsimile thereof;
2)Give a false representation of:
a.The character, amount or legal status of any debt, or
b.Any services rendered or compensation that may be lawfully received by you (or any debt collector) for the collection of a debt;
3)Give false representation or implication that you are an attorney or that any communication is from an attorney;
4)Falsely represent or imply that nonpayment of any debt will result in the arrest or imprisonment of any person or seizure, garnishment, attachment, or sale of any property or wages, unless such action is lawful and you intend to take such action;
5)Threaten to take any action that cannot be legally taken or that is not intended to be taken;
6)Falsely represent or imply that a sale, referral, or other transfer of any interest in a debt would cause the consumer to:
a.Lose any claim or defense to payment of the debt, or
b.Become subject to any practice prohibited by the FDCPA;
7)Give false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer;
8)Communicate or threaten to communicate to any person credit information that is known or that should be known to be false, including the failure to communicate that a disputed debt is disputed;
9)Use or distribute any written communication that simulates or is falsely represented to be a document authorized, issued, or approved by any court, official, or agency of the United States or any state, or that creates a false impression as to its source, authorization or approval;
10)Use any false representation of deceptive means to collect or attempt to collect any debt or obtain information concerning a consumer;
11)Failure to disclose that you are attempting to collect a debt and that any information obtained will be used for that purpose, such disclosure being required in the initial written communication with the consumer and even if the initial communication with the consumer is oral - and, in addition, failure to disclose in subsequent communications that the communication is from you, as debt collector [viz., the disclosure requirements do not apply to a formal pleading made in connection with a legal action];
12)Falsely represent or imply that accounts have been turned over to innocent purchasers for value;
13)Give false representation or implication that documents are legal process;
14)Use any business, company, or organization name other than the true name of your business, company, or organization;
15)Falsely represent or imply that documents are not legal process forms or do not require action by the consumer; and,
16)Give false representation or implication that you, as debt collector, operate or are employed by a consumer reporting  agency (as defined in the Fair Credit Report Act).

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, January 24, 2019

Fair Lending Violations

QUESTION
We are a large savings bank. I am the bank’s Chief Compliance Officer. Recently, we received notice of a regulatory examination for fair lending, which will surely by based on ECOA and Regulation B. Since you work with clients on examination readiness, I thought it would be a good idea to contact you. Do you have any idea what types of fair lending violations the regulators may report?

ANSWER
While I do not have a crystal ball, I would be glad to share the types of violations that regulators often cite in their findings. Enforcement actions are never taken lightly by regulators, so if your financial institution does get cited, it may portend a somewhat pervasive aspect of the way you do business. Many financial institutions, such as non-bank mortgage lenders and mortgage brokers, come not only under federal but may also come under state statutory frameworks with respect to examination and enforcement involving violations of fair lending rules.

When an agency determines that a financial institution has a possible discrimination issue, the agency is required to refer the issue to the Department of Justice (DOJ). For instance, by my count, in 2017 the Federal Financial Institutions Examination Council (FFIEC) agencies, including the Consumer Financial Protection Bureau (CFPB), referred a total of 11 Equal Credit Opportunity Act (ECOA) matters involving discrimination in violation of the ECOA to the DOJ. The Federal Deposit Insurance Corporation (FDIC) referred four matters to the DOJ involving discrimination in credit transactions on the prohibited bases of age, marital status, sex, and national origin. The Federal Reserve referred three matters to the DOJ involving discrimination in credit transactions on the prohibited basis of marital status. The National Credit Union Administration (NCUA) referred two matters to the DOJ involving discrimination in credit transactions on the prohibited bases of marital status, receipt of public assistance income, and sex. The CFPB referred two matters to the DOJ involving discrimination in mortgage servicing on the prohibited basis of the receipt of public assistance income, and discrimination in credit card account management, installment lending, and mortgage servicing on the prohibited bases of national origin and race.

Generally, regulators focus on three primary areas of interest:
  1. Redlining:whether lenders intentionally discouraged prospective applicants in minority neighborhoods from applying for credit;
  2. Mortgage and student loan servicing: whether some borrowers who were behind on their mortgage or student loan payments may have been negatively impacted in their ability to work out a new solution with the servicer because of their race, ethnicity, sex, or age; and,
  3. Small business lending: whether institutions are complying with the congressional mandate to not discriminate on a prohibited basis in small business lending.

Although the list of possible violations would be extensive, I would note that the following violations happen quite a lot and, to that extent, may help you to evaluate your legal and regulatory exposure. I am providing the federal statutes that would likely be cited by regulators.

Here is a brief list of some potential ECOA and Regulation B violations.

  • Prohibited basis in a credit transaction. [12 CFR § 1002.4(a)]
  • Improperly inquiring about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction. [12 CFR § 1002.5(b)]
  • Improperly requiring the signature of an applicant’s spouse or other person if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested; improperly imposing requirements on an additional party that the creditor is prohibited from imposing on an applicant. [12 CFR § 1002.7(d)(1), (d)(6)]
  • Failure to provide notice to the applicant 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer, or adverse action on the application; failure to provide appropriate notice to the applicant 30 days after taking adverse action on an incomplete application; failure to provide sufficient information in an adverse action notification, including the specific reasons for the action taken. [12 CFR § 1002.9(a)(1), (a)(1)(i), (a)(2), (b), (b)(2), (c)(1)(i)]
  • Failure to preserve records of actions taken on an application or of incompleteness. [12 CFR § 1002.12(b)(1)]
  • Failure to request information on an application regarding an applicant’s ethnicity, race, sex, marital status, and age, or to note, to the extent possible, the ethnicity, race, and sex of an applicant on the basis of visual observation or surname if not provided by the applicant. [12 CFR § 1002.13(a)(1)(i), (b)]
  • Failure to routinely provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling, and/or failure to provide an applicant with a copy of an appraisal report upon an applicant’s written request. [12 CFR § 1002.14(a), (a)(2)]
Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, January 17, 2019

Rate Lock Fee Disclosures: Expiration Challenges

QUESTION
We just completed an OCC examination. In the exit interview, we were asked about how we treat rate lock fees if the rate lock expires due to the way we processed the loan. What are the challenges that we could face if there is a rate lock expiration due to us causing the delay in closing?

ANSWER
This is an important question and touches not only on regulatory guidelines but also on case law, which, in many instances, is extensive. The regulatory rules may seem straight-forward; however, this is an area of quite a lot of litigious battles. One recent case serves to highlight the nuances involved.

First, let’s acknowledge the statutory framework. The Truth-in-Lending Act (TILA) and its implementing Regulation Z require creditors to disclose various charges for residential mortgage loans, including the finance charge and the aggregate amount of fees paid to the mortgage originator in connection with the loan, the amount of those fees directly paid by the consumer, and any additional amount received by the originator from the creditor. So, compliance with this requirement means the rate lock fee disclosure should encompass a reliable response to the information requirements.

But, to give you a sense of the nuances, let’s now turn to case law. Here is but one example. A federal district court in California recently considered a borrower’s claim that TILA required more detail than the creditor had provided him regarding a rate lock fee. The case I will briefly discuss is Muniz v. Wells Fargo [Muniz v. Wells Fargo & Co., 2018 U.S. Dist. (N.D. Cal. May 14, 2018)].

Muniz found a home and applied for a mortgage loan with Wells Fargo. Wells Fargo provided a Loan Estimate that quoted an interest rate of 5.875% with a rate lock by which it “commit[ed] to fund [Muniz’s] loan at [the] stated interest rate if the home purchase and loan close[d]” by August 7, 2017.

The rate lock agreement stated:

“This pricing is valid until the Expiration Date of Rate Lock shown above. If loan does not close and funds disbursed on or before the expiration date, your loan will be re-priced and this may result in pricing increases. However, at the option of [Wells Fargo], you may be permitted to keep your rate the same by paying an extension fee to extend the rate lock.”

Muniz claimed that he diligently provided all the information the bank requested, but the process was allegedly fraught with delays caused by the bank, such as communications issues between the bank and an appraiser who apparently was out of the country.

On August 8, 2017, the day the rate lock expired, the bank issued an updated Closing Disclosure that included a $287.50 fee for “Borrower Paid Rate Lock Extension,” which Muniz paid.

Here’s where the situation broke into the realm of litigation.

Muniz sued, asserting that Wells Fargo had violated TILA by failing to disclose it “would charge borrowers finance charges/fees to extend the rate lock period in cases of bank-caused delay.” His complaint contained information showing that Wells Fargo had disclosed the existence and amount of the rate lock extension fee, including a screenshot of closing documents showing a $287.50 charge for “Rate Lock Extension” and disclosing that “at the option of [Wells Fargo], you may be permitted to keep your rate the same by paying an extension fee.” Muniz’s complaint centered on his view that he had read the disclosure to impose an extension fee only if his actions caused a delay, not if the bank’s own behavior postponed closing.

But the court dismissed the claim, holding that TILA required nothing more in the way of disclosure. The disclosure was consistent with language contained in sample forms published by the CFPB as part of Regulation Z, the use of which sufficed to satisfy TILA’s disclosure requirements, notwithstanding that Muniz pointed to a 9th Circuit opinion which had stated that a meaningful disclosure must “anticipat[e] any reasonable questions which consumers might have.” However, the court referred to the model “Credit Sale Sample” form in Regulation Z, Appendix H-10, which required “nothing more than numerical disclosures for ‘Finance Charge’ and ‘Total of Payments.’” Thus, the court found Muniz's reliance to be misplaced.

Why did the court not accept the theory that the disclosure must “anticipate” any reasonable questions from the consumer? Because, read in context, there is no mandate to extrapolate to a generalized proposition that disclosures beyond those identified in TILA are required, but rather that the required disclosures must be clearly expressed.

Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group

Thursday, January 10, 2019

Individual Loan Originator Compensation and Borrower Paid Transactions

QUESTION
As a mortgage broker, our company pays the loan originator the same, irrespective of whether it is a lender paid or borrower paid transaction. However, we are hearing that we may be able to pay the loan originator differently on borrower paid transactions, which would allow us to be more competitive. So, can we vary compensation based upon lender paid versus borrower paid?

ANSWER
A conservative approach is that you cannot vary individual loan originator compensation based upon whether it is borrower paid or lender paid. However, in reliance on commentary to Regulation Z, some brokers and lenders are assuming a more aggressive approach and permitting an individual loan originator’s compensation on borrower paid loans to be based on the amount of compensation paid directly by the consumer to the brokerage company. For example, the individual loan originator earns 200 bps on lender paid transactions and 70% of compensation received by broker on borrower paid. To date, we have not seen any commentary from a regulator saying this practice is not permissible.  However, you need to check with your lenders as some will not permit a variation in compensation based upon borrower paid or lender paid.  

Here are some citations to consider.

12 CFR 1026.36(d)(2)(i)(C)
If a loan originator organization receives compensation directly from a consumer in connection with a transaction, the loan originator organization may pay compensation to an individual loan originator, and the individual loan originator may receive compensation from the loan originator organization, subject to paragraph (d)(1) of this section.

Official Commentary 36(d)(1)-2 [emphasis added]
“2. Compensation that is or is not based on a term of a transaction or a proxy for a term of a transaction. Section 1026.36(d)(1) does not prohibit compensating a loan originator differently on different transactions, provided the difference is not based on a term of a transaction or a proxy for a term of a transaction. The rule prohibits compensation to a loan originator for a transaction based on, among other things, that transaction's interest rate, annual percentage rate, collateral type (e.g., condominium, cooperative, detached home, or manufactured housing), or the existence of a prepayment penalty. The rule also prohibits compensation to a loan originator that is based on any factor that is a proxy for a term of a transaction. Compensation paid to a loan originator organization directly by a consumer in a transaction is not prohibited by §1026.36(d)(1) simply because that compensation itself is a term of the transaction. Nonetheless, that compensation may not be based on any other term of the transaction or a proxy for any other term of the transaction. In addition, in a transaction where a loan originator organization is paid compensation directly by a consumer, compensation paid by the loan originator organization to individual loan originators is not prohibited by §1026.36(d)(1) simply because it is based on the amount of compensation paid directly by the consumer to the loan originator organization but the compensation to the individual loan originator may not be based on any other term of the transaction or proxy for any other term of the transaction.”

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

Thursday, January 3, 2019

Credit Report Information requested by Consumers

QUESTION
Our regulator just cited us for not providing the required information about their credit reports to our applicants upon request. We were going by the disclosure features of our loan origination system as well as our policy documents. But, when we investigated, the problem seems to be that our credit report agency is the culprit, since they did not provide the information to the applicants upon request. What is the required information that applicants should be getting from the credit report agency when they request it?

ANSWER
Disclosure requirements have expanded considerably under the Fair Credit Report Act (FCRA) revisions made by the Consumer Credit Reporting Reform Act of 1996 and the FACT Act of 2003 (FACTA). So, I can see how it may be hard sometimes to keep up with them. Under Section 609(a) of the FCRA, every consumer reporting agency (CRA) must, upon request and proper identification of any consumer, disclose to the consumer:

1.All information in the consumer’s file at the time of the request. However, the CRA is not required to disclose to a consumer any information concerning credit scores or any other risk scores or predictors relating to the consumer.

2.The sources of the information. But the sources of information acquired solely for use in preparing an investigative consumer report and actually used for no other purpose need not be disclosed.

3.(A) Identification of each person (including each end-user identified that procured a consumer report: [§ 607(e)(1); § 1681e] that
(i)for employment purposes, during the 2-year period preceding the date on which the request is made; or
(ii)for any other purpose, during the 1-year period preceding the date on which the request is made.
(B)An identification of a person under subparagraph (A) must include
(i)the name of the person or, if applicable, the trade name (written in full) under which such person conducts business; and
(ii)upon request of the consumer, the address and telephone number of the person.

4.The dates, original payees, and amounts of any checks upon which any adverse characterization of the consumer, included in the file at the time of the disclosure is based.

5.A record of all inquiries received by the agency during the 1-year period preceding the request that identified the consumer in connection with a credit or insurance transaction that was not initiated by the consumer. 

6.If the consumer requests the credit file and not the credit score, then a statement that the consumer may request and obtain a credit score must be issued. I should mention that this requirement stems from FACTA, which added a provision that requires consumer reporting agencies to make available to consumers upon request (for a reasonable fee set by the Federal Trade Commission) the consumer’s current or most recently calculated credit score, as well as the range of scores possible, the top four factors that negatively affected the score, the date the score was created, and the name of the company providing the underlying file or score. [§ 609(f)]

For a more technical understanding, your compliance personnel should review Section 609(a), as it tells what consumer reporting agencies must disclose to consumers, upon request and proper identification. Tell them to read Section 609 in conjunction with the FCRA § 610 [15 USC § 1681h], which gives the conditions of disclosure, and the FCRA § 612 [15 USC § 1681j], which gives the charges for disclosure.

Jonathan Foxx
Managing Director
Lenders Compliance Group