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Thursday, October 31, 2019

Payoff Statements - Foreclosure Conundrum

QUESTION
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?

ANSWER
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


QUESTION
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?

ANSWER
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

Thursday, October 17, 2019

Demographic Monitoring under HMDA

QUESTION
We are a lender subject to HMDA reporting requirements. We need some clarification regarding reporting government monitoring information, particularly when the applicant checks more than one category for race and/or ethnicity or does not check anything at all. Do we report all categories? Just one category? If the applicant does not check anything, do we report based on observation or surname?

ANSWER
“Government Monitoring Information” is now referred to as “demographic information” of the applicant, as it was thought that consumers would be reluctant to complete a form referencing government monitoring information. In 2015, the Consumer Financial Protection Bureau amended Regulation C, the implementing regulation of the Home Mortgage Disclosure Act, to expand the reporting categories of race and ethnicity to allow for more detailed categories.

Previously, ethnicity was reported as either “Hispanic or Latino” or “not Hispanic or Latino.” The foregoing are now referred to as “aggregated ethnic categories.” In addition to the aggregate categories, there are now five subcategories under the aggregate category “Hispanic or Latino” – “Mexican,” “Puerto Rican,” “Cuban,” and “Other Hispanic or Latino.” With regard to the latter subcategory, there is a free text form in which the applicant may provide a Hispanic or Latino ethnicity not listed in the standard subcategory.

As the creditor, you must report every aggregate ethnicity category selected by the applicant. If the applicant selected both “Hispanic or Latino” and “not Hispanic or Latino,” you must report both. Additionally, you must report every ethnic subcategory selected by the applicant. However, you must not report more than a total of five aggregate ethnic categories and subcategories. If the applicant selected more than five, you must report the aggregate categories selected and any three subcategories selected. In this scenario, it is the lender’s choice as to which selected subcategories will be reported. 

The reporting categories for race have also been expanded.

There are five aggregate categories: “American Indian or Alaska Native,” “Asian,” “Black or African American,” “Native Hawaiian or Other Pacific Islander,” and “White.”  “Asian” has seven subcategories, which include “Asian Indian,” “Chinese,” “Filipino,” “Japanese,” “Korean,” “Vietnamese,” and “Other Asian.”  With respect to the latter subcategory, there is a free text form in which the applicant may provide an Asian race not listed in the standard subcategory. “Native Hawaiian or Other Pacific Islander” includes four subcategories; “Native Hawaiian,” “Guamanian or Chamorro,” “Samoan,” and “Other Pacific Islander” with the latter category again including a free text form. Additionally, the “American Indian or Alaskan Native” aggregate category includes a free text form in which the applicant can provide a particular American Indian or Alaska Native enrolled or principal tribe.

Similar to the reporting of ethnicity data, as the creditor, you must report every aggregate race category selected by the applicant. Additionally, you must report every subcategory selected by the applicant provided that the total number of aggregate and subcategories reported do not exceed five. If the total exceeds five, it is in your discretion as the lender as to which subcategories to report. For example, if the applicant selects “Asian,” “White,” “Chinese,” “Vietnamese,” “Filipino,” and “Korean,” the lender must report “Asian” and “White” and then choose three of the four subcategories to report.

In the event the applicant does not provide the ethnicity and race information and the application was  by mail, telephone, or the internet or other electronic medium which does not allow the lender to see the applicant, the lender does not need to make an additional request for the information and should leave the data fields blank. In the event the application was taken in person or was submitted via an electronic medium that allowed the lender to see the applicant, the lender must note the monitoring information on the basis of visual observation or surname. 

Note that if the lender is collecting information based upon visual observation or surname, the lender may only select from the aggregate ethnicity and race categories. If the applicant checks the “I do not wish to provide this information” box on an application taken by mail or the internet or, with respect to a telephone application, orally states that he or she does not wish to provide the required information, as the lender, you should report “information not provided by applicant in mail, internet or telephone application”. 

If the applicant provides some, but not all, of the demographic monitoring information, as the lender, you should only report selected by the applicant, even if the applicant has also selected the “I do not wish to provide this information box.” 

If an applicant who did not provide the demographic information began the application by telephone or mail and then later completes it by meeting with a loan officer in person, the loan officer should collect the information based on observation or surname.

Concerning guarantors, no demographic monitoring information should be collected. With respect to co-applicants, the demographic monitoring information for the co-applicant should be collected. If there is more than one co-applicant, the lender should only collect the first co-applicant’s information.

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

Thursday, October 10, 2019

Delivering Closing Disclosures before Loan is Approved to Close


QUESTION
Good afternoon! I have loan officers inquiring about the possibility of sending out Closing Disclosures (CDs) prior to loan approval from underwriting. They feel this helps them retain borrowers through closing and motivates borrowers to cooperate in providing any remaining documents needed. We have always taken the stance of not sending until CDs until final underwriting approval because we do not want to mislead borrowers into believing their loan has been approved when it has not. However, I do not want to put my loan officers at a disadvantage. Any guidance you could provide us on this issue would be welcome.

ANSWER
Your concerns about misleading the borrower into thinking that their transaction is about to close or that they can’t “bail out” are well founded. But, even more significantly, there are fundamental risk management issues associated with implementing such a procedure.  In that regard, while it may be legally permissible to issue the CD before a “clear to close,” there are a host of operational issues that need to be considered before implementing such a procedure.

These issues arise out of the complexity of the interrelationships between early and final disclosures under the TILA-RESPA Integrated Disclosure Rule (“TRID”), as well as the relatively rigid time frames under that Rule with respect to what must be disclosed and when, not to mention the time frames of the underlying real estate transaction in a purchase money loan situation.

Before going forward, these need to be carefully considered and “vetted” in terms of their overall impact on compliance management systems. A lot more is involved than simply giving borrower a disclosure saying that receipt of Closing Disclosures does not necessarily mean that their loan has been approved! 

1. As a general matter, it is important to remember that the TRID disclosure rules are extremely complex and interdependent and are set up based on the model that CDs are normally not going to be issued until after “clear to close.” Altering that model “pushes the envelope” on applicable compliance rules and consumer expectations and therefore definitely increases the risk that consumers may be misled. That doesn’t mean it can’t be done, it just means that additional care must be taken to make sure that consumers are not misled in any way.

2. It is axiomatic that results of underwriting may necessitate changes in the loan product or interest rate. Such changes may require not only a revised CD but also a delay in consummation of the transaction to permit the required 3 day waiting period to elapse.

Thus, Reg. Z 1026.19(f)(2)(ii) provides: 

“(ii) Changes before consummation requiring a new waiting period. If one of the following disclosures provided under paragraph (f)(1)(i) of this section becomes inaccurate in the following manner before consummation, the creditor shall ensure that the consumer receives corrected disclosures containing all changed terms in accordance with the requirements of paragraph (f)(1)(ii)(A) of this section:
(A) The annual percentage rate disclosed under § 1026.38(o)(4) becomes inaccurate, as defined in § 1026.22.
(B) The loan product is changed, causing the information disclosed under § 1026.38(a)(5)(iii) to become inaccurate.
(C) A prepayment penalty is added, causing the statement regarding a prepayment penalty required under § 1026.38(b) to become inaccurate.” (Emphasis added.)

Therefore, issuing CDs before underwriting approval may greatly increase the frequency with which revised CDs need to be given and, by creating the necessity of a new three (3) day waiting period, may impact closing timelines of underlying real estate transactions in purchase money loan situations.

3. Issuance of the CD cuts off a lender’s ability to issue a revised Loan Estimate (“LE”). Thus, issuing the CD before “clear to close” means that you may not be able to issue a revised LE to reflect any increased loan costs that come up during underwriting, thereby exposing you company to greater risk of penalties for incorrect initial disclosures. This of course has to be balanced against any benefit achieved from avoiding borrower “fall out” by issuance of the early CD.  

Some lenders who do issue “early” CDs attempt to address this situation by creating specialized “Early CD Request Procedures” that nail down fees and costs early in the process, closely coordinate settlement dates, time frames and charges with settlement agents in both purchase and refi situations, and establish a series of conditional loan approvals closely linked to the underwriting process which make it virtually certain that any loan that does qualify for an early CD will in fact be approved by underwriting without changes. Such procedures need to be carefully integrated into the company’s entire origination, disclosure, and training operations so that loans on the “early CD track” do not get mixed up with other loans on a more traditional time schedule. 

4. Careful consideration also needs to be given to the kinds of transactions in which such procedures would be adopted. Obviously, the disclosures associated with adjustable rate loan transactions are going to be much more complex and time sensitive than those for simple fixed rate transactions.

5. Finally, detailed attention needs to be given to whether the transaction in question is a purchase loan or a refinance. Purchase transactions usually have much tighter time frame requirements that can be impacted by additional waiting periods resulting from the necessity of issuing a revised CD.  Since changing closing dates in purchase transactions can create havoc for both buyers and sellers – and their brokers – procedures and expectations need to be worked out with settlement agents to make sure that there are no ugly last minute surprises created by erroneous “Early” CDs.  

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

Thursday, October 3, 2019

The Meaning of “Unfair” in UDAAP

QUESTION
I am General Counsel for our bank. In the last few years, I have attended several conferences and breakout sessions about UDAAP. It seems to me that Unfair, Deceptive, or Abusive Acts or Practices is so broad that it doesn’t take much to trigger a nasty allegation. 

The word “unfair” is particularly onerous. I’ve gone through a lot of material, such as case law and many regulations, and I still can’t offer a standard to give our employees in their training. 

I heard Jonathan Foxx speak a few years ago on UDAAP, and I’m writing to find out if he ever came up with a simple formula for understanding “unfair” in relation to UDAAP. So I ask, is there a simple way to define the word “unfair” in UDAAP?

ANSWER
Thank you for this question. Many people struggle with UDAAP readiness. Yes, I have spoken on UDAAP. Recently, I have been particularly interested in UDAAP in connection with Elder Financial Abuse. In any event, UDAAP is exceedingly broad.

Many professionals are caught up in the minutiae of UDAAP, which is one of the reasons why my firm offers a mini-audit for determining if a financial institution’s UDAAP compliance is weak or strong. 

It is called the UDAAP Tune-up!™ (See sidebar or contact me.)

Maybe you were in the audience when I spoke about UDAAP to a group of bankers, asking them to tell me what comes to their mind when they think of the word “unfair.” Here’s a list of their responses: biased, discriminatory, dishonest, illegal, false, misleading, prejudiced, immoral, partisan, shameful, unjust, unreasonable, bigoted, cheating, crooked, fraudulent, lying, sneaky, swindling, unscrupulous, disreputable, culpable, injurious, petty, vicious, cruel, vile, and wicked.

Quite a list! And we were just getting started that day!

But in banking we need a more dispassionate definition to use when the purpose is to train employees. A serviceable definition of what “unfair” means might be a good way to sensitize the affected personnel. They need to remember three criteria! You can get the “unfair” concept onto a one-page handout for training. Take my outline and format it for your use!

Briefly, an act or practice is “unfair” if:

1) It causes or is likely to cause substantial injury to consumers;

2) The injury is not reasonably avoidable by consumers; and

3) The injury is not outweighed by countervailing benefits to consumers or the competition.

If you want descriptions to go with these criteria, I am providing here a modestly reconfigured outline of useful descriptions provided by Dodd-Frank. [Dodd-Frank Act, Title X, Subtitle C, Sec. 1036; PL 111-203 (July 21, 2010)]

Substantial Injury
·       A substantial injury usually involves monetary harm.
o   Monetary harm includes, for example, costs or fees paid by consumers as a result of an unfair practice.
·       An act or practice that causes a small amount of harm to a large number of people may amount to substantial injury.
·       Actual injury is not required in every case. A significant risk of concrete harm is also sufficient.
o   An injury must involve a significant risk of concrete harm.
o   Trivial or speculative injuries usually are insufficient, and emotional damages ordinarily will not amount to an unfair practice.
·       In certain circumstances, such as unreasonable debt collection harassment, emotional impacts may amount to or contribute to substantial injury.

Reasonable Avoidance
·       Consumers must not be reasonably able to avoid the injury.
·       If the consumer’s ability to effectively make decisions is impaired, the consumer cannot reasonably avoid the injury.
o   For instance, withholding material price information about a product or service would prevent the consumer from making an informed decision.
o   Instances of undue influence or coercion in purchasing unwanted products or services would be further examples of unfair practices.
o   Consumers cannot avoid injury if they are coerced into purchasing unwanted products or services or if a transaction occurs without their knowledge or consent.
·       A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision making.
o   For example, not having access to important information could prevent a consumer from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory.
o   Also, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.