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?
ANSWER
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]
ANSWER
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).
[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).
