Thursday, January 30, 2020

Estimating Monthly Escrow Payments

We have a rather unusual question regarding monthly escrow payments.

As a result of an internal audit, we found out that we had procedural issues with the estimated escrow payments, in that there were inaccuracies which the borrower would not learn about until after the closing, maybe much later.

So, we would like to know what is our risk exposure when the monthly escrow payment estimate is inaccurate until after closing?

The answer is more complicated than it may seem. We will take a brief Regulatory Tour of the so-called Escrow Rule. Then, we’ll discuss what is involved in Estimating Escrows. After that, we'll check out a Case that may provide further understanding. And we'll finish it off with an Observation

A Regulatory Tour

TILA’s section 129D was added by Dodd-Frank. Generally, the section requires a creditor to establish an escrow account for a consumer credit transaction secured by a first lien on the consumer’s principal dwelling if one of four conditions pertains:
1) federal or state law requires an escrow account;
(2) the loan is made, guaranteed or insured by a state or federal governmental lending or insuring agency;
(3) the loan is not a jumbo mortgage and its APR will not exceed 1.5% plus the average prime offer rate (APOR) or the loan is a jumbo mortgage and its APR exceeds 2.5% plus the APOR; or
(4) a regulation requires an escrow account. TILA § 129D makes clear that it does not prohibit the establishment of escrow accounts for other transactions on terms mutually agreeable to the parties, at the discretion of the lender or servicer in accordance with contractual terms, or pursuant to flood insurance requirements.
Section 129D also requires the creditor to disclose for a mortgage loan secured by a first lien on the principal dwelling of a consumer 
"the estimated monthly amount payable to be escrowed for taxes, hazard insurance (including flood insurance, if applicable), as well as any other required periodic payments or premiums on the property unless a new escrow or impound account is established." 
In 2013, the CFPB implemented TILA’s section 129D in its "Escrow Rule," which generally amended Regulation Z’s section 1026.35(b) to replace and expand the existing higher-priced mortgage loan (HPML) escrow requirement for first-lien HPMLs. Regulation Z limits the general escrow requirement to first-lien HPMLs.

Regulation Z addresses escrow disclosures in sections 1026.37 and 1026.38, which specify the information that must appear on Loan Estimates and Closing Disclosures. Mortgage lenders required to use the CFPB’s integrated disclosure forms (Loan Estimates and Closing Disclosures) must provide the same disclosures when they require escrows, whether or not a loan is an HPML.

Among other things, Regulation Z’s sections 1026.37 and 1026.38 require Loan Estimates and Closing Disclosures to address escrowed amounts. Section 1026.37(c), regarding Loan Estimates, requires a Projected Payments table to include "an estimate of taxes, insurance, and assessments and the payments to be made with escrow account funds." 

More specifically, section 1026.37(c)(2)(iii) requires disclosure of "[t]he amount payable into an escrow account to pay some or all of the charges described in paragraph (c)(4)(ii) (i.e., 'mortgage-related obligations')." Mortgage-related obligations are, among other things, property taxes; premiums and similar charges required by the creditor; fees and special assessments imposed by a condominium, cooperative, or homeowners association; ground rent; and leasehold payments, as applicable, labeled 'Escrow,' together with a statement that the amount disclosed can increase over time.

Section 1026.38 requires the Closing Disclosure to include a similar disclosure in a Projected Payments table. Section 1026.38(c) explains that estimated escrow payments may be determined under the escrow account analysis described in RESPA’s Regulation X section 1024.17 or in the manner set forth in Regulation Z’s section 1026.37(c)(5). 

Section 1026.37(c)(5) states that estimated property taxes and homeowner’s insurance must reflect "the taxable assessed value of the real property or cooperative unit securing the transaction…, including the value of any improvements on the property or to be constructed on the property, if known, whether or not such construction will be financed from the proceeds of the transaction, for property taxes" and the replacement costs of the property during the initial year after the transaction for property insurance.

Estimating Escrows

Regulation Z’s section 1026.31(d)(2) allows the use of estimates whenever information for an accurate disclosure is unknown to the creditor, provided the disclosure is clearly identified as an estimate. Each estimate must be made in good faith on the basis of the best information available.

Thursday, January 23, 2020

Intrusion Detection Terms

We are going through a state banking department audit of our cybersecurity policies and procedures. This is the first time we have had to deal with this kind of audit. Apparently, these cybersecurity audits are becoming more frequent. 

A while back, you discussed your CyberTune-up. If only we had contacted you, we’d be much better off now! As it is, we’re now scrambling to satisfy the regulators. One thing they’re asking about is something called “intrusion detection terms.” 

Can you provide a list of these terms?

Thank you for mentioning our Cyber Tune-up. As far as I know, we are the only compliance firm offering this cost-effective and relatively quick review of a financial institution’s cybersecurity structure. Please contact me for a copy of the presentation. Let's talk!

In the meantime, let me tell you if you think the mortgage world is habituated to acronyms, in the immortal words of Al Jolson, “you ain’t heard nothin’ yet!”

Here’s our list of terms relating to intrusion detection. Given the proliferation of acronyms in cyberspace, this list is certainly serviceable, though it’s unlikely to be comprehensive.

Intrusion Detection Terms

acknowledgement flag
common vulnerability enumeration
distributed denial-of-service attacks
don’t fragment flag
dynamic host configuration
defensive information warfare
demilitarized zone
domain name service
database of vulnerabilities, exploits, and signatures
events of interest
scan flag
false negative
false positive
file transfer protocol
Global Incident Analysis Center
Internet address number authority
Internet control message protocol
intrusion detection system
intrusion detection working group
Internet protocol
initial sequence number
Internet service provider
media access controller
maximum transmission unit
network address translation
scans flag
request for comments
remote procedure call
System Administration, Networking, and Security
simple network management protocol
transmission control protocol
transmission control protocol/Internet protocol
tribe flood network
time-to-live flag
user datagram protocol

I’m going to bet you have not heard of some of these terms! But your policy and procedures should set them forth in an itemized format (like the one I have provided above) and, where detected, the various ways in which the financial institution is ready to respond.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, January 16, 2020

Loan Officer Transfers: Screening and Training Requirements

Our General Counsel has put a brake on letting new transferring loan officers originate loans until they first have screening and training completed. Now our sales department is in an uproar about this decision.

I am in the sales group and we met with the General Counsel and the Compliance Manager, but they would not budge. They say we have to get the screening and training out of the way first even if we are transferring our licenses.

This is causing a massive slow down, as we just brought on a large group of LOs who are stuck in this “Screening and Training” limbo.

So, we want to know, do we have to jump over yet another hurdle and go through this procedure to originate loans, even when we already have our licenses in the transfer process?

I will gladly shed light on the issue. Dodd-Frank added Truth-in-Lending Act § 129B(b)(1), which imposed new requirements for loan originators, including the requirement for them to be qualified. The CFPB implemented this requirement in Regulation Z § 1026.36(f)(3), which generally requires a loan originator organization that employs an individual loan originator who is not licensed and is not required to be licensed to: 
(1) complete certain screenings (i.e., criminal background, credit report, and background information from the NMLSR) of that individual before permitting the individual to act as a loan originator on a consumer credit transaction secured by a dwelling; and 
(2) provide periodic training.
The CFPB considered the SAFE Act’s preexisting screening and training requirements when it added these requirements. The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP Act) of 2018, which became effective on November 24, 2019, permits certain individuals who previously were registered or state-licensed for at least one year pursuant to the SAFE Act to act as a loan originator in a state if they have applied for a loan originator license in the state. 

Eligible loan originators include those who are employed by a state-licensed mortgage company, have applied for a license in a new state, were previously registered or licensed in a different state for at least one year before applying for the new license, and satisfy certain criminal and adverse professional history criteria.

But, please relax. Assuming the LOs are qualified, they may act as loan originators under the temporary authority given them by the EGRRCP Act, while the new state processes their license applications.

Here’s where your General Counsel and Compliance Manager should explore the issue in more depth. The issue arises because Regulation Z imposes screening and training requirements on loan originator organizations for 
“each of its individual loan originator employees who [1] is not required to be licensed and [2] is not licensed as a loan originator….”
This language, which the CFPB adopted before the EGRRCP Act existed, seems ambiguous regarding whether the individual loan originators it references include loan originators with temporary authority under the EGRRCP Act.

Although the language may be ambiguous, the CFPB believes the most appropriate interpretation of Regulation Z is that it does not refer to a loan originator with temporary authority, because a loan originator with temporary authority does not satisfy the first condition in Regulation Z § 1026.36(f)(3), to wit, “is not required to be licensed.” A loan originator with temporary authority is not an “individual loan originator employee who is not required to be licensed….” He or she is an employee who is required to be licensed, although the employee can act as a loan originator while seeking the required license.

It should be emphasized, however, that your compliance department must conduct due diligence that confirms that a transferring loan officer in fact meets the requirements for acting with temporary authority rather than simply relying on the LO’s word.

The CFPB issued its interpretation as an interpretive rule, published in the Federal Register, so Truth-in-Lending Act § 130(f) offers a safe harbor to loan originator organizations that act in conformity with the interpretive rule. The CFPB plans to incorporate the interpretive rule into Regulation Z. [See 84 Federal Register 63791 (Nov. 19, 2019)]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, January 9, 2020

Wrongful Death of Mortgage Borrower

We were hit with a wrongful death claim after we foreclosed. Our bank, which is located in California, goes out of its way to try to help our borrowers in their time of distress; nevertheless, there comes a point where we have to foreclose. After we foreclosed, the borrower died and her son, who lived with her in the property, alleged that we caused his mother’s death because of the way we treated her during the foreclosure and eviction process. But we believe we bent over backward to help the borrower transition through the foreclosure and eviction requirements. We genuinely regret that the borrower died, but we do not think there’s anything we did (or did not do) to cause it. Can you shed some light on how we should view our situation in terms of our obligations under the circumstances?

I would need many more facts to go on than you have provided to offer a response to your specific situation. However, broadly speaking, there are some thoughts I would like you to consider.

As a general rule, a lender does not owe a duty of care to a borrower if the lender’s involvement in a loan transaction does not exceed the scope of its conventional role as a lender of money. However, if a borrower dies after alleged mistreatment by a lender, the borrower’s heirs may find a reason to question this general rule. I am reminded of a case recently adjudicated by the U.S. Court of Appeals for the 9th Circuit recently considered such a challenge. [Noble v. Wells Fargo Bank, 2019 U.S. App. (9th Cir. May 29, 2019)]

A daughter, Noble, and her mother, Kilgore, lived in a condominium owned by Kilgore. The condominium was subject to a mortgage held by Wells Fargo Bank. Kilgore suffered from various health issues and fell behind on her mortgage payments. The bank foreclosed, took title to the property, and evicted Kilgore and Noble.

During the eviction, a bank agent allowed Noble and Kilgore additional time in the property to pack their belongings, after which the agent returned and directed them to vacate the premises and remove their belongings. Kilgore’s health deteriorated and she died about five months later.

The bank had a policy of offering financial assistance to occupants of foreclosed properties in exchange for their voluntary surrender of the property, but the bank had not offered any financial assistance to Noble or Kilgore prior to their eviction. This suggests the bank did not follow its financial assistance policy and acted in a way that caused a substantial increase in stress to the borrower, which led to her death.

Noble sued the bank for the wrongful death of Kilgore, negligent infliction of emotional distress, and intentional infliction of emotional distress. To support her case, Noble asserted two wrongful or negligent acts: the failure of the bank to offer financial assistance and the agent’s conduct in removing Kilgore from the home.

The district court granted summary judgment for Wells Fargo. The 9th Circuit affirmed.

The bank had no obligation to offer financial assistance to Kilgore and had conferred a benefit upon her by allowing her extra time to pack her belongings. Noble had presented no evidence that the agent had touched Kilgore or her belongings. The parties agreed that the agent had simply told Kilgore it was time to leave. Noble also did not explain how this conduct amounted to a wrongful or negligent act. The bank’s conduct did not rise to the standard required to support a claim of intentional infliction of emotional distress that was so “extreme as to exceed all bounds of that [conduct] usually tolerated in a civilized community.”

California’s wrongful death statute (the statute in this case) allows the child of a decedent to assert a cause of action for the death of a person caused by the wrongful act or neglect of another. The statute defines “wrongful act” as any kind of tortious act, including acts of negligence and acts of intentional or willful misconduct. Accordingly, Noble needed to allege a wrongful or negligent act, which she failed to do.

The way to understand this ruling is to see that there were at least three factors that needed to establish intentional infliction of emotional distress in this instance which, given the court’s decision, Noble needed to show: (1) extreme and outrageous conduct by the bank with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) Noble’s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the outrageous conduct.

Briefly put, I think the bank might have avoided litigation altogether if it had followed its own policy, which presumably would have removed its actions from even being considered in the realm of what might be construed as 'outrageous.'

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, January 2, 2020

Disclosure of Rate Lock Extension Fee

We received a complaint from a borrower who said that we were not entitled to charge her a rate lock extension fee. 

We disclosed that the rate lock expired on a certain date and we disclosed the fee when the borrower chose to continue to closing. But the borrower then said the rate lock expiration was our fault, not theirs. 

They say that it expired because we took too long to get things in order, so they shouldn’t have to pay. 

Did we comply with Regulation Z?

Given your scenario, Yes, you complied with Regulation Z.

Regulation Z [Comment 19(e)(3)(iv)-2] advises that if a consumer requests a rate lock extension, then the revised disclosures given by the creditor should reflect any new rate lock extension fee, but the fee may be no more than the rate lock extension fee charged by the creditor in its usual course of business and other charges unrelated to the rate lock extension may not change. 

Please take note: state law might address whether a rate lock extension fee is appropriate in this instance or a rate lock agreement may provide details.

Perhaps a recent decision of a federal district court in California may offer support to your situation.

In 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 committed to close Muniz’s loan at the stated interest rate if the home purchase and loan closed by August 7, 2017.

The rate lock agreement stated: 
“This pricing is valid until the Expiration Date of Rate Lock shown above. If [the] loan does not close and funds [are not] 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 bank-caused delays bogged down the process. Sound familiar?

On August 8, 2017, the bank issued an updated closing disclosure that included a $287.50 fee for “Borrower Paid Rate Lock Extension,” which Muniz paid. He sued, asserting that Wells Fargo 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 included 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.”

The court dismissed the case: TILA required "nothing more," and the disclosure was consistent with language contained in CFPB sample forms, the use of which sufficed to satisfy TILA’s disclosure requirements.

The court referred to the model “Credit Sale Sample” form in Regulation Z Appendix H-10 as an example of Regulation Z “requiring nothing more than numerical disclosures for ‘Finance Charge’ and ‘Total of Payments.’” By the way, the court might also have considered referring to the model forms for mortgage loan disclosures, such as the Loan Estimate sample form in Appendix H-24(B).

Jonathan Foxx
Chairman & Managing Director
Lenders Compliance Group