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
