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.