Thursday, May 30, 2019

Payment Shock Notices

Recently, we increased the property taxes of a large number of borrowers. This was done in response to their real estate taxes going up, and we had to collect the additional taxes. One of the borrowers complained to the banking department. The department then sent an examiner to our office and cited us for not voluntarily notifying borrowers of the payment shock. This doesn’t sit right with us. After all, he said it was a voluntary notice. How is it that we should be hit with the banking department telling us to do something that is voluntary?

There are many aspects of mortgage banking that are voluntary. Often, these come under the rubric of “Best Practices.” Payment shock notices are in the Best Practices category. As to the banking department’s position, keep in mind that a banking department, ideally, is a consumer advocacy agency. It wants consumers protected, and Best Practices are part of the means toward protection.

A payment shock notice is a voluntary notice that a lender or servicer may provide to a borrower to alert the borrower to the potential for a substantial increase in the property taxes for a home. For instance, take the case of new construction. A newly constructed home may have its first year’s property taxes based on the unimproved value or only the improved value. However, there can be a substantial increase in property taxes once the taxes are fully based on the improved value.

I think what you should think about – and, if acceptable, included in your policies and procedures – is implementing the Best Practices approach that accounts for payment shock. I understand your concern about having to be admonished by the banking department for not issuing a voluntary notice. But this is a long-settled matter under the Real Estate Settlement Procedures Act (RESPA).

Indeed, this issue goes back to 1998, when HUD issued a final rule embracing the need for a payment shock notice, provided voluntarily by the issuer. It reasoned at the time that this practice should be adopted to ensure that “consumers are informed of the payment shock problem and given an opportunity to avoid it.” [63 FR 3214, 3233, 3237-3238 (1998)]

HUD’s view consists of two basic premises:
  1. Notifying borrowers in advance and providing an opportunity to make voluntary payments ahead of schedule to avoid payment shock; and,
  2. Offering consumers extended repayment plans, even beyond those required under RESPA, to make up substantial shortages associated with payment shock. [Idem]

These two premises reflect the actual practices that lenders and servicers had been implementing for a long time – even before the final rule was issued back in 1998. Such practices continue today. The payment shock notice does not need a government requirement to be actionable, since widespread implementation is obviously in the best interests of consumers, lenders, and servicers.

Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group

Thursday, May 23, 2019

ACH Transactions: Disclosure Requirements

In revising our EFT policy, we want to be sure we have sections for all the areas involving ACH transactions. Also, we want to begin the policy with the types of information that must be disclosed to a consumer or financial institution. What are the areas involving ACH transactions? Also, what types of information must be disclosed?

The Electronic Fund Transfer Act (EFTA) establishes the rights, liabilities, and responsibilities of consumers and financial institutions as they relate to electronic fund transfers. Its implementing regulation is Regulation E, which is updated and enforced by the Consumer Financial Protection Bureau (CFPB). An automated clearing house or ACH transaction takes place in an electronic network for financial transactions, such as credit transfers and direct debits.

Certain ACH transactions fall under Regulation E’s definition of “electronic fund transfers.”

The ACH transactions that are subject to Regulation E are:
  • Prearranged payments and deposits (PPD);
  • Point-of-purchase entries (POP);
  • Accounts receivable entries (ARC);
  • Internet-initiated/mobile entries (WEB);
  • Telephone transfer entries (TEL);
  • Machine transfer entries (MTE);
  • Point-of-sale (POS);
  • Shared network transaction (SHR); and,
  • Consumer-to-consumer or consumer-to-business international ACH transactions (IAT).

It should be noted, though, that Regulation E covers many types of electronic fund transfers, not just ACH transactions. Other types of electronic fund transfers addressed in Regulation E include telephone transfers (non-ACH), transfers made at point-of-sale terminals (non-ACH), automated teller machine (ATM) transfers, and debit card transfers. This section focuses on Regulation E as it applies to ACH transactions.

Generally, the rule or regulation that provides the greatest protection to the consumer is the one that takes precedent. In cases where there is an overlap between Regulation E and the ACH Rules, a comparison is usually made to provide clarification as to how each one applies and to indicate which one takes precedence.

With respect to the types of information that mandate disclosure, certain information must be disclosed to consumers by their financial institutions prior to the first ACH debit or credit transaction that ever posts to the consumers’ accounts. The information may be provided in a document along with other disclosure information that must be supplied to the consumer, or it may be provided as a separate document. I’ve seen both methods in active use.

The receiving depository financial institution, or RDFI, is the financial institution qualified to receive ACH entries. These institutions are required to abide by the NACHA Rules, the rules of the National Automated Clearing House Association. The RDFI interlinks the receiver's account with the card association network.

The RDFI has no way of knowing when an ACH debit or credit might be received, so our clients' ACH policies usually state that it is best to give consumers this information at the time they open an account.

At a minimum, the RDFI must provide the following information:
  • A summary of the consumer’s liability when unauthorized ACH transactions are posted to his or her account;
  • A contact phone number and/or address for reporting unauthorized transactions that appear on the account;
  • A definition of “business days” for the financial institution;
  • What types of transfers are allowed and whether there are limitations on either the dollar amount of the transfers or the number of transfers;
  • Fees that may be charged for ACH transactions;
  • Summary of the consumer’s right to receive receipts and periodic statements;
  • Summary of the consumer’s right to place a stop payment on an ACH transaction and the procedure the consumer must follow to place the stop payment;
  • The financial institution’s liability if it fails to stop payment or fails to make a certain transfer; and,
  • The error resolution process the financial institution will follow when an unauthorized ACH transaction is reported. Note: The error resolution process needs to be provided not only initially, but also annually unless it is printed on every periodic statement.
Consider reviewing the appendices to Regulation E for the model forms and disclosures that financial institutions may use to assist them with compliance.

Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group

Thursday, May 16, 2019

Mortgage Contract Ambiguity

I am the General Counsel of a mortgage lender with a large regional presence. We rely primarily on Fannie’s and Freddie’s uniform documentation, whether we hold loans or sell them to the GSEs. I am hearing that some lenders are actually questioning the reliability of that documentation. I have not been able to find out much as to what is going on. But I would like to know more. Can we still depend on the reliability of GSE documentation?

In my estimation, you may be picking up some vibes from a recent case that claimed there is ambiguity in the GSEs’ mortgage contract with respect to the payment of taxes. Many, if not most, mortgage lenders often use uniform documentation drafted by the Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie). They use such documentation even if they do not currently plan to sell their loans to Fannie or Freddie. The predicate is that it’s fair to assume the uniform agreements have borne the test of time and many critical eyes - as well as survived many a litigation challenge.

Yet questions do arise, from time to time, and I think a case in the U.S. Court of Appeals for the 5th Circuit may be at the core of your concern, since the Court recently found ambiguities in the language of a uniform deed of trust. Although the document was a Texas document, the paragraphs at issue appear in uniform documents for other states. The case I cite is Wease v. Ocwen Loan Servicing. [Wease v. Ocwen Loan Servicing, 2019 U.S. App. 5th Cir. Feb. 13, 2019]

Here’s a brief overview. I’ll the end with my observation.

Wease executed a home equity note secured by a deed of trust. An addendum to the deed of trust, the Escrow Waiver Agreement, provided that the lender would “elect[] not to collect monthly escrow deposits to pay real estate taxes subject to the condition that “[a]ll real estate taxes are paid when due, and evidence is furnished to Lender at that time.”

The agreement warned the following:
“In the event Borrower fails to comply with [the] above condition[], Lender has the right and Borrower agrees to pay sufficient funds to establish a fully funded escrow account and to have the monthly payment adjusted to include a monthly escrow deposit. This action is an election not to collect escrows at this time and should not be deemed a waiver of Lender’s right to do so at some future date.”
Section 9 of the deed of trust provided that Wease’s “fail[ure] to perform the covenants and agreements contained in” the deed of trust permitted the lender to “do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument.” 
Section 3 of the deed of trust provided: “If Borrower is obligated to pay Escrow Items directly, pursuant to a waiver, and Borrower fails to pay the amount due for an Escrow Item, Lender may exercise its rights under Section 9 and pay such amount….”
Keep the foregoing sections in mind, as we proceed.

In April 2010, Ocwen, the loan servicer, sent Wease a letter advising him that an examination of past due property taxes had revealed that Wease was delinquent on his taxes for 2009. The letter asked Wease to pay the taxes within 30 days of the letter or to forward proof of payment.

Wease did not pay the 2009 taxes until June 30, 2010.

On December 16, 2010, without prior notice, Ocwen paid Wease’s 2010 property taxes.

Thursday, May 9, 2019

“Reasonable Diligence”


We are a mortgage servicer that was recently gone through an extensive state regulatory examination. Unfortunately, we were cited for not exercising “reasonable diligence” in obtaining documents and information to complete a loss mitigation application. This seems to be a gray area, from what we’ve been told by our own general counsel. But I really want to know more. What is “reasonable diligence” in connection with loss mitigation reviews?

It may seem like a ‘gray area’, given the wording of this terminology. To be sure, the actions that would satisfy this requirement depend on the facts and circumstances at hand. Regulation X gives the following scenario: 
“[R]easonable diligence might include promptly contacting the applicant to obtain the missing information; or, if the servicer has offered a short-term payment forbearance program based upon an evaluation of an incomplete application, actions like notifying the borrower about the option to complete the application to receive a full evaluation and, if necessary, contacting the borrower near the end of the forbearance period and prior to the end of the forbearance period to determine if the borrower wishes to complete the application and proceed with a full evaluation.” [Regulation X, 12 C.F.R. § 1024.41(b)(1); Comment 41(b)(1)-4.i-iii] 
Obviously, it is critical for mortgage loan servicers to ensure that their troubled customers know what information they need to provide and when to provide it. The CFPB has taken note. In the winter edition of the CFPB’s Supervisory Highlights, there is a section about servicers that did not meet the Regulation X “reasonable diligence” requirements. For example, some servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation. The short-term payment forbearance programs deferred some or all of the borrower’s past due payments to the end of the loan, thereby extending its maturity. [84 Federal Register 9762 (March 18, 2019)]

However, the servicers did not notify the borrowers that the short-term payment forbearance programs were based on an incomplete application evaluation. Near the end of the forbearance periods, the servicers did not contact the borrowers as to whether they wished to complete the applications to receive a full loss mitigation evaluation. As a result, examiners found that the servicers had violated Regulation X requirements to exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application.

In response to these findings, the servicers used enhanced processes, such as a centralized queue, to track borrowers receiving short-term forbearance programs and subsequently notify them that additional loss mitigation options may be available and that they could apply for options over the phone or in writing.

But I would like to expand this response by citing a recent decision by the U.S. Court of Appeals for the 3rd Circuit, which offers some comfort to lenders that find themselves in trouble for violating a Regulation X requirement. Here’s the story.

In 2014, a serious car accident and financial hardship caused the Bukowskis to fall behind on their home mortgage loan payments. In April 2015, they applied to Wells Fargo Bank for a HAMP loan modification. In September, Wells Fargo sent them a 3-month trial period plan (TPP) stating that they would qualify for a permanent HAMP modification if they made 3 timely payments and returned a subordination agreement. The TPP did not mention any requirement to make deferred principal, lump sum, or balloon payments, consistent with the HAMP guidelines that prohibited those payments. [Bukowski v. Wells Fargo Bank, 2018 U.S. App. (3d Cir. Dec. 13, 2018)]

Thursday, May 2, 2019

Out-of-State MLOs & Temporary Originating Authority

We are hearing that some states have enacted legislation to allow for “transitional licensing” of out of state mortgage loan originators. Can you please enlighten us on this topic?

This issue has actually been debated for several years. In 2012, in response to state regulators’ concerns as to whether states may, consistent with the Secure and Fair Enforcement for Licensing Act of 2008 (SAFE Act), permit transitional licensing of mortgage loan originators (”MLOs”), the CFPB stated that states may recognize the licenses of other states and grant transitional licenses to out of state licensed loan originators. However, the CFPB declared that similar authority for registered MLOs did not exist, opining that Regulation H prohibits unlicensed individuals from engaging in the business of a loan originator. Thus, as employees of depository or other federally regulated institutions are “registered” as opposed to “licensed” MLOs, states may not grant such individuals transitional licenses. [CFPB Bulletin 2012-5]

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) enacted in 2018, strived to level the playing field between licensed and registered mortgage loan originators (“MLO”). The Act amended the SAFE act to allow both registered and licensed out of state loan originators to transition their employment to a new employer and still have the ability to act as a loan originator without any “down time”. The intent is to permit qualified MLOs to earn income by originating loans while completing the testing and pre-licensure requirements. The law mandates that states implement transitional authority by November 24, 2019.

Under the Act, a qualified MLO is granted “temporary authority” when moving from a depository lender to a state licensed mortgage company or when a state licensed MLO seeks licensure in another state. The transitioning MLO must be employed and sponsored by a state licensed mortgage company. The individual has temporary authority to act for a period of 120 from submission of the MLO’s application together with required background check information through NMLS to complete the process to become a licensed MLO in that state. 

For more information on this topic, see the "NMLS FAQs" at NMLS FAQs. (PDF)

If you need full licensing or mortgage compliance support, please email us HERE.

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