Friday, November 27, 2020

Who owns the loan?

We came under an audit by our regulator a few months ago. Today we received their report.

The report shows a few issues that we’ll need to resolve. One of them involves the Notice of Loan Ownership. We were cited for failing to disclose the Transfer of Loan Ownership. 

Since we are now redrafting our policies and procedures, we want to know about the responsibility to issue this disclosure. 

Who is responsible for this disclosure, the company transferring the loan or the company receiving the loan?


Sometimes an action that seems intuitively correct is wrong as it relates to the law, Best Practices, and regulatory requirements. If I were to put your question to a large group of people, many of them would say that the transferring company is responsible, and many will say that the receiving company is responsible.

Section 131(g) of the Helping Families Save Their Homes Act, which was enacted in 2009, amended the Truth-in-Lending Act (TILA) to require a “creditor” who acquires a mortgage loan to disclose that fact to the borrower not more than 30 days after the date on which the loan is sold or otherwise transferred or assigned to a third party. In my view, the statute abuses the term “creditor” because TILA ascribes a specific meaning to that word. TILA defines “creditor” to mean a person who regularly extends consumer credit that is subject to a finance charge or is payable by a written agreement in more than four installments (not including a down payment) and to whom the obligation is initially payable, either on the face of the note or contract or by agreement if there is no note or contract.

The situation contemplated by § 131(g), to wit, the acquisition of a mortgage loan, attempts to impose a disclosure obligation on someone to whom the obligation is not initially payable, that is, on someone who subsequently acquires an already originated loan and does not meet TILA’s definition of creditor.

Regulation Z, implementing § 131(g), does not make the same mistake. It specifically provides, in Comment 39(a)(1)-1, that “the fact that a person purchases or acquires mortgage loans and provides the disclosures under this section does not by itself make that person a ‘creditor’ as defined in the regulation.” Indeed, the Federal Reserve Board (FRB), and later, the CFPB, concluded that Congress did not intend the word “creditor” to have the same meaning as “creditor” under TILA and Regulation Z. I know; a bit confusing!

To give effect to the legislative purpose, the agencies construed it to refer to the owner of the debt following the sale, transfer, or assignment, without regard to whether that party would be a “creditor” for other purposes under TILA or Regulation Z; hence, the regulation uses the term “covered person” instead of “creditor” in its provision implementing TILA § 131(g).

Although § 131(g) became effective immediately upon enactment, the FRB chose to adopt interim regulations to implement the section, so parties subject to the TILA disclosure requirement would have prompt guidance on how to interpret and comply with the statutory requirements already in effect. To allow time for operational changes, the FRB made compliance with the Regulation Z change optional until January 19, 2010. That did not mean noncompliance with the statutory requirement would necessarily go unpunished until January 19, 2010, although perhaps one could argue that the FRB’s delayed compliance date was an exercise of its authority under TILA to provide for adjustments to the statutory requirements.

In any event, the delayed compliance date meant that noncompliance with any requirement in the regulation that extended beyond the minimum required by the statute could not be punished unless it occurred on or after January 19, 2010.

This requirement must not be confused with the requirements of the Real Estate Settlement Procedures Act (RESPA) regarding mortgage servicing transfers. Under Regulation X, the implementing regulation of RESPA, consumers must be notified when their mortgage loan servicer has changed. In contrast, § 131(g) was intended to provide consumers with information about the identities of the owners of their mortgage loans, partly so they know whom they may contact if they want to exercise a right to rescind the loan. The provision was not intended to require a notice when a transaction does not involve a change in the ownership of the physical note, such as when the note holder issues mortgage-backed securities but does not transfer legal title to the loan.

In reviewing recent court decisions as they relate to the scope of TILA § 131(g) and its implementing provisions in Regulation Z § 1026.39, certain observations can be construed. One case provides insight into the treatment of TILA § 131(g).

The illustrative case is Kornea v. Fannie Mae,[i] in which a federal district court in Pennsylvania considered a consumer’s complaint that Fannie Mae had failed to disclose information about the ownership of his mortgage loan, in violation of § 131(g).

Kornea alleged that in June 2012 he received a letter from Chase, his loan servicer, explaining that his loan had been “sold into a public security managed by Fannie Mae” and that Chase was “authorized by the security to handle any related concerns” on its behalf. The letter provided the investor’s address, but not its name.

About seven years later, in May 2019, Kornea called Fannie Mae, seeking the loan holder’s identity. He was told the information could not be given to him over the phone. He then sent a registered letter to Fannie Mae requesting the owner’s name, address, and phone number. Fannie Mae did not respond. He sent a second letter, and again Fannie Mae did not answer. He sent a letter to Chase asking for the same information, to which Chase responded that Kornea’s loan could “be transferred between investors over its life, but its current investor [wa]s Fannie Mae.”

In October 2019, Kornea sued Fannie Mae under § 131(g)[ii]; however, the state court dismissed the claim as time-barred, though it allowed Kornea to file an amended complaint, in which he added Chase as a defendant. Chase removed the case to federal court.

The federal district court also dismissed the claim against Fannie Mae as time-barred, holding that claims under § 131(g) are subject to a 1-year limitation on actions. Because Kornea learned about the sale of his loan into a Fannie Mae security on June 19, 2012, his claim against Fannie Mae expired a year later, in 2013.

The court then turned to another TILA subsection, § 131(f)(2), because Kornea’s complaint included a claim against Chase under that subsection. That section requires a servicer, upon written request by a consumer obligor, to provide the obligor with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.

TILA has a civil liability section[iii] that addresses a consumer’s right to sue for TILA violations. The section specifies that “any creditor who fails to comply with any requirement imposed under this part, including any requirement under § 125, subsection (f) or (g) of § 131, or part D or E of this subchapter” is liable. Accordingly, the creditor, not the servicer – unless, of course, the servicer also is the creditor or an assignee of the creditor – might be liable for violations of this requirement.

Kornea alleged only that Chase was the servicer of his loan, not that Chase was a “servicer-assignee.” As a result, according to the court, Kornea had not alleged “enough facts to show that Chase had any obligation to provide the information Section [131(f)(2)] requires.” The court continued, “And even if he had, Chase met TILA’s obligations in its June 3, 2019 letter responding to Kornea’s request for information by providing ‘the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.’”

From the foregoing matter, we can derive helpful guidance. Section 131(f)(2) seems quite clear that the servicer of a mortgage loan, whether a “servicer-assignee” or not, has an obligation to comply with its disclosure requirement. That subsection expressly refers to RESPA for the definition of a “servicer” as “the person responsible for servicing of a loan (including the person who makes or holds a loan if such person also services the loan).”

This definition does not incorporate the additional requirement that the servicer be an assignee, a fact various courts have overlooked.[iv] Chase appears to meet that definition. However, the court is right that Chase apparently satisfied its disclosure obligation and that TILA imposes liability for failure to meet that disclosure obligation only on the “creditor” of the loan, not the servicer (unless the servicer also meets the definition of creditor).

Thus, it may seem appropriate that if only servicers can violate TILA § 131(f)(2), Congress must have intended to create a cause of action for failing to comply with that section, whether it be against the servicer or the creditor with liability for the servicer’s failure.

To avoid rendering the subsection meaningless, some judges have applied agency principles to make the loan owner liable for violations by its servicer.[v]

And other courts have assumed liability without devoting attention to the distinction between a disclosure obligation under § 131(f)(2) and liability under § 130(a).[vi] 

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

[i] Kornea v. Fannie Mae, 2020 U.S. Dist. (E.D. Pa. Oct. 6, 2020)
[ii] 15 U.S.C. § 1641(g)
[iii] TILA § 130(a)
[iv] Including the U.S. Court of Appeals for the 9th Circuit in Gale v. First Franklin Loan Services, 701 F.3d 1240 (9th Cir. 2012).
[v] See, for instance, Montano v. Wells Fargo Bank, 2012 U.S. Dist. (S.D. Fla. Oct. 23, 2012); Galeano v. Fed. Home Loan Mortg. Corp., 2012 U.S. Dist. (S.D. Fla. Aug. 21, 2012); Kissinger v. Wells Fargo Bank, 888 F. Supp. 2d 1309 (S.D. Fla. 2012).
[vi] See Sam v. American Home Mortgage Servicing, 2010 U.S. Dist. (E.D. Cal. Mar. 3, 2010); Stephenson v. Chase Home Finance LLC, 2011 U.S. Dist. (S.D. Cal. May 23, 2011); and Erickson v. PNC Mortgage, 2011 U.S. Dist. (D. Nev. May 6, 2011).

Thursday, November 19, 2020

Housing Counseling Agency: RESPA Section 8

We ran into a problem with our banking department. They claimed that we violated RESPA when we paid a fee, equal to the borrower’s fee, to a Housing Counseling Agency. The HCA refers borrowers to us. We are being cited for a violation of RESPA Section 8. This seems unfair to the borrower, since the money is being paid to the agency on behalf of the borrower.

Is it permissible to pay a Housing Counseling Agency a fee that is commensurate with the HCA fee it charges the borrower?

There are myriad convoluted ways that Section 8 of RESPA may get triggered. Referrals are one of the booby traps of relationships between the parties to a loan transaction.

I suppose there is a workaround for your scenario, such as directly reimbursing the borrower (rather than the Housing Counseling Agency, or “HCA”) for payments the borrower makes to the HCA. But I would venture that you have already thought of that possibility. However, my hunch is that you want to continue the current relationship with the HCA, which is probably why you’re asking the question in the first place.

Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) prohibits the transfer of a thing of value pursuant to an understanding that business will be referred to any person:

“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

Thus, as a general proposition, no participant in a loan transaction covered by RESPA may pay anyone else for referring business to them. That said, the CFPB has provided some guidance that could – emphasis on the word “could” – possibly support a way to tiptoe past the booby trap, based on a similar scenario on which it opined recently. 

Keep in mind, however, that a “similarity” does not mean the “same” – it just means that there are overt facts that show similarity, though each scenario has to be understood not only within its context but also, on its own, to ensure it is entirely in compliance with RESPA.

On September 10, 2019, the CFPB issued a No-Action Letter Template in response to HUD’s request for a No-Action Letter regarding lender participation in its Housing Counseling Program.[i] The CFPB stated that it intended to grant applications from mortgage lenders for No-Action Letters based on its No-Action Letter Template, which specified the certifications applications should contain.

Then, on January 10, 2020, the CFPB issued a No-Action Letter (“Letter”) in response to an application filed by Bank of America using the No-Action Letter Template.[ii] The bank's request stated that it operated a “Connect to Own” program in which it entered into arrangements with HCAs that participated in HUD’s Housing Counseling Program for funding housing counseling services to consumers subject to specified conditions.

The request confirmed that the terms of the bank’s existing Housing Counseling Funding Agreements were formalized in memoranda of understanding (“MOUs”) between the bank and the participating counseling agencies, that (a) these MOUs and the bank’s related practices were compliant with applicable HUD requirements, and (b) any future housing counseling funding agreements would be formalized in MOUs between the bank and the participating housing counseling agencies, and (c) that those MOUs and the bank’s related practices would comply with the applicable HUD requirements.

The CFPB’s Letter to the Bank of America approved the bank’s request. The Letter stated that, unless or until terminated by the CFPB, the CFPB would not make supervisory findings, or bring a supervisory action against the bank under RESPA § 8 or Regulation X § 1024.14, or its authority to prevent unfair, deceptive, or abusive acts or practices, for including and adhering to a provision in the MOUs for conditioning the bank’s payment for the housing counseling services on the consumer applying for a loan with the bank – and here’s the “tiptoe past the booby trap!” – with respect to which the bank received proof of completion of housing counseling services from the participating counseling agency, even if that provision or the parties’ adherence to it could be construed as a referral under RESPA. Importantly (and dispositively), the Letter provided that the housing counseling services' payment level must not exceed a level commensurate with the services provided, and was reasonable and customary for the area.

My recommendation is to have the subject scenario further evaluated for compliance by a competent compliance professional. You can send them my answer. The specific facts and circumstances in this scenario must be scrutinized for compliance with applicable law. Several procedural, policy, and disclosure requirements need to be reviewed to avoid an allegation of violating RESPA Section 8. 

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

[i] No-Action Letter to HUD, CFPB (Sept. 10, 2019),
[ii] No-Action Letter to Bank of America, CFPB (Jan. 10, 2020),

Friday, November 13, 2020

Living Trusts: Rescission

We have several loans involving living trusts. One of them came to our attention because the borrower wants to rescind the loan we made to a living trust that he set up for his nephew's benefit. We made this loan just two days ago for improvements of a large patio and other structures.

But this was a loan to our borrower, not the nephew.

So, may we refuse to rescind by claiming the loan was to a trust and, therefore, not a consumer loan?


This question's resolution may be found in Regulation Z, Comment 3(a)-10, which provides that credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.

Expressly noted in the section for Trusts for Tax or Estate Planning Purposes:

In some instances, a creditor may extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both). Consumers sometimes place their assets in trust, with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates.

During their lifetimes, however, such consumers may continue to use the assets and/or income of such trusts as their property. A creditor extending credit to finance the acquisition of, for example, a consumer’s dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust.

Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.

We don’t know categorically about a living trust, but it sounds as though it’s the sort of trust contemplated in Regulation Z, Comment 3(a)-10. I say this because the U.S. Court of Appeals for the 9th Circuit recently considered a similar situation.[i]

Here’s what happened.

As trustee of the Lou Ross Easter trust, Gilliam obtained a loan from Levine to finance repairs to a residential property that was the main asset of the trust. The property was the security for the loan. The borrower’s sister, Lou, had created the trust for the benefit of Lou’s daughter. After Lou died, Gilliam became the trustee. Gilliam obtained the loan to make repairs to the property, so her niece, as the sole beneficiary of the trust, could continue to reside there.

But Gilliam sued Levine for rescission and damages, alleging that Levine had violated TILA by failing to disclose the payment schedule accurately. Levine argued that the loan was not a consumer credit transaction because the trust property securing the loan was not the borrower’s primary residence, even though it was her niece's residence.

And here’s the decision, in brief: The district court dismissed the complaint, finding that the loan was not a consumer credit transaction. The district court mentioned the Regulation Z Commentary as the source for determining whether a transaction is for business purposes under RESPA, but did not mention Comment 3(a)-10.

Levine appealed, and, on appeal, Levine asserted that, as a general rule, a trust does not qualify as a natural person under TILA and cannot be a party to a consumer credit transaction, subject only to a limited exception when the loan is to finance the residence of the trustee.

Then, the 9th Circuit reversed. It held that Gilliam sufficiently alleged that the loan was obtained for a consumer purpose. It decided that Comment 3(a)-10 provides that a loan for “personal, family, or household purposes” of the beneficiary of this type of trust is a consumer credit transaction. The Comment explains that “[r]egardless of the capacity…in which the loan documents are executed,” trusts should be considered natural persons under TILA, so long as the transaction was obtained for a consumer purpose because “in substance (if not form) consumer credit is being extended.”

Thus, the lender’s argument attempted to draw an artificial distinction between a loan obtained for the benefit of the trustee alone and a loan obtained to benefit trust beneficiaries.

According to the 9th Circuit, the issue was one “of first impression under federal and state regulation of consumer credit transactions.” 

Worth mentioning is that, in addition to TILA, Gilliam included claims under California’s Rosenthal Act and RESPA. Finding the definitions of consumer credit transaction identical under TILA and the Rosenthal Act, and that RESPA’s definition required only that the transaction be for a consumer purpose, the 9th Circuit concluded that transactions such as this one should be regarded as consumer credit transactions under all three statutes. 

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

[i] References: Gilliam v. Levine, 955 F.3d 1117 (9th Cir. Apr. 14, 2020)

Thursday, November 5, 2020

Climate Change: Business Continuity Challenges

We have been using your Disaster Recovery and Business Continuity Plan. It covers everything we need. Recently, our meetings have been focused on climate change and its effects on our company. Being in California, most of us in our company have come to realize that climate change is causing business interruptions for us.

I head up our compliance team, and we use your Business Continuity Checklist in connection with the Disaster Recovery and Business Continuity Plan in developing our infrastructure strategies. This is definitely the best checklist we have found to work with.

Although the Plan covers the various ways to protect our company in the case of a disaster or business disruption, we were wondering, would you provide a new section in the Checklist that is devoted to climate change?

What a great question! The Business Continuity Plan Checklist & Workbook (Includes COVID-19 Pandemic Response) was first published on March 16, 2020, and Update # 7 was published on May 26, 2020, consisting of 208 pages. The Checklist is complimentary, principally because I felt that it is obscene to charge people for it in the middle of a pandemic. Our company does not put profit over people. 

It is a good idea to combine the use of the Checklist with our Disaster Recovery and Business Continuity Plan, Includes Pandemic Response. By doing so, you are strengthening your due diligence review, ensuring that the Plan reflects your business model and compliance needs, and establishing an internal self-assessment process. All good!

Since May, we have been waiting for a stimulus bill to pass, and that is why the Checklist has not been updated. There have been developments other than the stimulus bill, of course, but that bill is important to keeping employees financially able to survive and companies economically capable of survival. Unfortunately, the House sent the bill to the Senate where it found a reluctant response and tedious negotiations. Indeed, even in the midst of a pandemic and extreme hardships, the Senate put off working on the bill.

Given your request, we are publishing today Update # 8 of the Checklist, providing a new section on climate change. In the future, I may update it again for other developments since May as well as any dispositive results regarding the stimulus bill. So, I suggest you download now the free Update # 8 version of the Checklist, which contains the new climate change section. 

To get the free Checklist, click here.

To order the Plan, click here.

Banking departments have taken it upon themselves to consider the risks of climate change with respect to events that could cause severe interruption of financial activities. I have no doubt that these actions will eventually be extrapolated into examination and enforcement.

A very good model has recently been provided by the NYS Department of Financial Services. On October 29, the NYSDFS issued a letter to state-regulated financial institutions, which provides background information for, and outlines the NYSDFS’s expectations, regarding climate change risk.[i] The department outlines the various physical and transition risks that are brought about by climate change. According to the letter, the types of assets that can be at risk due to weather events are mortgage loans, commercial real estate loans, agricultural loans, and derivatives portfolios.

In addition, the letter highlights that climate change could “negatively impact the balance sheets of regulated non-depositories through adverse impact on the businesses of their customers, including their loss of income, as well as any devalued investments due to physical or transition risks.”

It is important to note that the letter outlines the NYSDFS’s “expectation(s)” with respect to regulated organizations and regulated non-depositories, including incorporating financial risk from climate change into governance frameworks and risk management processes, and suggests that non-depositories develop strategic plans for the effects of climate change.

In banking department parlance, the word “expectation” does not mean assumes, forecasts, intends, predicts, promises, views, supposes, or hopes – it means one thing and one thing only: obligation

Do not wait for an examination to punch holes in your risk prevention efforts with respect to climate change!

So, let me set forth the essential features of the NYSDFS’s guidelines. If you are one of the 1,500 banking and financial institutions regulated by the NYSDFS, take heed. And if you are not regulated by the NYSDFS, also take heed, because it is very likely your state’s banking department will follow a similar course.

The department includes the expectations for all regulated organizations as well as the expectations for regulated non-depositories.

Expectations: All Regulated Organizations

1. Integrate the financial risks from climate change into the governance frameworks, risk management processes, and business strategies.

a. For example, regulated organizations should designate a board member, a committee of the board (or an equivalent function), as well as a senior management function, as accountable for the organization’s assessment and management of the financial risks from climate change.

b. This should include an enterprise-wide risk assessment to evaluate climate change and its impacts on risk factors, such as credit risk, market risk, liquidity risk, operational risk, reputational risk, and strategy risk; and

2. Develop the approach to climate-related financial risk disclosure and consider engaging with the Task Force for Climate-related Financial Disclosures[ii] framework and other established initiatives when doing so.

If you are not familiar with the Task Force, referred to by its acronym TCFD, it is an important initiative of the Financial Stability Board. The TCFD has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes. To do so, it provides guidance with respect to governance, strategy, risk management, and metrics and targets.

Expectations: All Regulated Non-Depositories

Conduct a risk assessment of the physical and transition risks of climate change, whether directly impacting them, or indirectly due to the disruptive consequences of climate change in the communities they serve and on their customers, such as business disruptions, out-migrations, loss of income, and higher default rates, supply chain disruptions, and changes in investor and consumer sentiments, and start developing strategic plans, including an outline of such risks, the impact on their balance sheets, and steps to be taken to mitigate such risks.

The NYSDFS letter ends with these words from Linda Lacewell, Superintendent:

"The challenge ahead is great, but we know from experience that together we can meet it. Mitigating the financial risks from climate change is a critical component of creating a stronger industry and a healthier and safer world for ourselves, our families, and future generations. There is no more time to wait. Let’s get to work."

I wholeheartedly agree! Let’s get started. 

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

[i] Climate Change and Financial Risks, Letter, New York State Department of Financial Services, 10.29.20
[ii] Task Force for Climate-related Financial Disclosures