Self-Police, Self-Report, Remediate, and Cooperate

QUESTION
In our recent state banking examination report, we were asked to continually evaluate our compliance with mortgage banking requirements. They said we are “responsible for business conduct, including self-policing, self-reporting, remediation, and cooperation.”

Frankly, I must admit that we do not “self-assess,” as our compliance manager calls it. We rely on outside internal auditors, compliance’s regular review of department functions, and management reviews of various reports, such as quality control reports for originations and servicing.

But we do not self-police ourselves at all. Never did! We don’t have guidelines to follow for self-policing. Hopefully, you can help us with suggestions and guidelines.

What do we have to do to self-police? 

What are suggested guidelines we can provide in a hand-out to our employees?

ANSWER
Although you are finding out about self-policing now, banking departments long ago expected “self-assessment” to be a feature of proper regulatory compliance. Nearly all supervising compliance personnel are aware of this requirement. Or they should be!

The phrase you noted, “responsible business conduct,” goes all the way back to 2013, when the CFPB issued a directive to its supervised institutions to ensure “self-policing, self-reporting, remediation, and cooperation.”[i] I will treat each of these factors separately.

In its bulletin, the CFPB offered assurance that its described “responsible conduct” may favorably affect the ultimate resolution of a CFPB enforcement investigation. It also warned that vigorous, consistent enforcement of the law and the imposition of appropriate sanctions are essential in promoting the agency’s commitment to the best interests of consumers.

Conduct can be so egregious or the harm so great that no amount of cooperation or other mitigating actions could justify a decision not to bring an enforcement action.

To quote the Bureau:

 “In short, the fact that a party may argue it has satisfied some or all of the elements set forth in this guidance will not foreclose the Bureau from bringing any enforcement action or seeking any remedy if it believes such a course is necessary and appropriate.”

Before I get to suggestions for self-policing guidelines, an enforcement action against Wells Fargo and JPMorgan Chase would demonstrate how the CFPB applies the self-policing expectation.

On January 22, 2015, the CFPB brought an enforcement action against Wells Fargo and JPMorgan Chase that stemmed from its expectations regarding “responsible conduct.” The CFPB and the Maryland Attorney General announced consent orders regarding the two firms’ alleged involvement in a Marketing Services Scheme with Genuine Title.[ii]

According to the CFPB, Genuine Title provided substantial marketing services to loan officers of the lenders. For example, Genuine Title purchased marketing leads – data on consumers likely to refinance their mortgage loans – from a third-party vendor and provided the leads to loan officers at Wells Fargo and Chase.

For some loan officers, Genuine Title not only analyzed and purchased leads from a third-party vendor but also paid the costs of producing and mailing marketing letters. The loan officers did not pay for the full cost of the leads, marketing, printing, and processing of the marketing materials, or mailing. In return, the loan officers referred real estate closings to Genuine Title. According to the CFPB, these arrangements violated RESPA § 8(a) and Dodd-Frank Act § 1036, as well as the Maryland Consumer Protection Act.

At the time, Maryland’s Attorney General Brian Frosh said:

 “Homeowners were steered toward this title company, not because they were the best or most affordable, but because they were providing kickbacks to loan officers who referred consumers to them.”

“This type of quid pro quo arrangement is illegal, and it’s unfair to other businesses that play by the rules.”[iii]

The CFPB alleged that, despite the fact that Wells Fargo had multiple warnings of the illegal arrangements between its loan officers and Genuine Title, including a lawsuit explicitly alleging the existence of the agreements, the bank failed to take action to stop the practices and did not have an adequate system in place to identify the violations. The proposed consent order would require Wells Fargo to pay $10.8 million in redress and $24 million in civil penalties.

The CFPB also alleged that at least six Chase loan officers in three different branches in Maryland, Virginia, and New York were involved in the scheme. The loan officers referred settlement business to Genuine Title on almost 200 loans. The CFPB claimed that Chase did not have an adequate system in place to ensure its loan officers were complying with RESPA. Under the proposed consent order, Chase would pay about $300,000 in redress and $600,000 in civil penalties.

According to the CFPB, several loan officers at a third financial institution also participated in the scheme with Genuine Title. While Wells Fargo and JPMorgan Chase had not identified or addressed the conduct, the third financial institution had self-identified the practices and fired the loan officers involved. The institution also had cooperated with the CFPB’s investigation and self-initiated a remediation plan. The CFPB resolved its investigation of that institution without an enforcement action, consistent with the agency’s “Bulletin on Responsible Business Conduct.”

Now to outline and paraphrase the factors provided by the CFPB.[iv]

Self-policing

- What is the nature of the violation or potential violation, and how did it arise?

o Was the conduct pervasive or an isolated act?

o How long did it last?

o Was the conduct significant to the party’s profitability or business model?

- How was the violation or potential violation detected, and who uncovered it?

o What compliance procedures or self-policing mechanisms were in place to prevent, identify, or limit the conduct that occurred and preserve relevant information?

o In what ways, if any, were the party’s self-policing mechanisms particularly noteworthy and effective?

- If the party’s self-policing functions have previously been the subject of supervisory examination by the Bureau or other regulators, what have been the results of such examination?

o How, if at all, has the party changed its self-policing following such examination?

o If the party’s self-policing functions have not previously been the subject of supervisory examination, how do those functions measure up to customary supervisory expectations?

- If the party is a business entity, what was the “tone at the top” of the business about compliance?

o Was there a culture of compliance®?[v]

o How high up in the chain of command did people know of or participate in the conduct at issue?

o Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct or deficiencies in compliance procedures?

Self-reporting 

- Did the party completely and effectively disclose the existence of the conduct to the Bureau, to other regulators, and, if applicable, to self-regulators?

o Did affected consumers receive appropriate information related to the violations or potential violations within a reasonable period of time?

- Did the party report the conduct promptly to the Bureau?

o If it delayed, what justification, if any, existed for the delay?

o How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its investigation, or the interests of affected consumers?

- Did the party proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example, due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, consumer complaints or actions, or the conduct of a Bureau investigation?

Remediation

- What steps did the party take upon learning of the misconduct?

o Did it immediately stop the misconduct?

o How long after the misconduct was uncovered did it take to implement an effective response?

- If the party is a business, were there any consequences imposed on the individuals responsible for the misconduct?

- Did the party take prompt and effective steps to preserve information, identify the extent of the harm to consumers, and appropriately recompense those adversely affected?

o In situations where the harm caused by the violation goes beyond the amounts the victims may have paid to the party, did the party identify and implement additional ways to completely redress the harm?

- What assurances are there that the misconduct is unlikely to recur?

o By the time of the resolution of the Bureau matter, did the party improve internal controls and procedures designed to prevent and detect a recurrence of such violations?

o Similarly, have the party’s business practices, policies, and procedures changed to remove harmful incentives and encourage proper compliance?

Cooperation 

- Did the party cooperate promptly and completely with the Bureau and other appropriate regulatory and law enforcement bodies?

o Was that cooperation present throughout the course of the investigation?

o Did the actor identify any additional related misconduct likely to have occurred?

- Did the party take proper steps to develop the truth quickly and completely and to fully share its findings with the Bureau?

o Did it undertake a thorough review of the nature, extent, origins, and consequences of the misconduct and related behavior?

o Who conducted the review, and did they have a vested interest or bias in the outcome? Were scope limitations placed on the review?

o If so, why and what were they?

- Did the party promptly make available to the Bureau the results of its review and provide sufficient documentation reflecting its response to the situation?

o Did it provide evidence with sufficient precision and completeness to facilitate, among other things, enforcement actions against others who violated the law?

o Did the party produce a complete and thorough written report detailing the findings of its review?

o Did it voluntarily disclose material information not directly requested by the Bureau or that otherwise might not have been uncovered?

o If the party is a business, did it direct its employees to cooperate with the Bureau and make reasonable efforts to secure such cooperation?

So, hopefully, you can recognize how responsible business conduct is critical to meeting the banking department’s expectations.

Finally, you requested a set of brief suggestions that could be handed out to affected personnel at the company. Here are a few that are consistent with the foregoing outline. 

Suggested Guidelines for a Hand-out 

- Keep up the “tone at the top” about compliance and be sure it trickles down, never turning a blind eye toward even suspected misconduct or compliance deficiencies.

- Emphasize profitability through compliance, not profitability on the margins of compliance.

- Nurture mutual respect for agency examiners, and treat them as critical members of the financial institution’s team to share a commitment to the institution’s success.

- Conduct regular, persistent self-examinations aimed at early detection of potential violations and prompt elimination of violations.

- Quickly focus on any potential violation and determine whether an actual violation occurred.

- If an actual violation occurs:

o Determine the scope of persons affected and realistically assess any harm, including additional related misconduct that might have occurred.

o Promptly notify the primary regulator (“self-report”).

o Resolve the matter with the affected customer(s) quickly, fairly, and forthrightly.

o Be careful to include oversight by persons without a vested interest or bias in the outcome.

o Take any necessary steps to improve internal controls and procedures so it does not recur.

- Take appropriate action regarding the individuals responsible for any violation. Analyze why they behaved the way they did and remove any improper incentives that may have motivated them.

- Thoroughly document each investigation.

- Do not neglect challenges that have been the subject of a previous supervisory examination, but focus on them to be sure they do not reappear.

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

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[i] ‘‘Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation, “ Bulletin 2013-6, June 25, 2013, Consumer Financial Protection Bureau

[ii] “CFPB Takes Action Against Wells Fargo and JPMorgan Chase for Illegal Mortgage Kickbacks,” Press Release, January 22, 2015, Consumer Financial Protection Bureau

[iii] Idem

[iv] Op. Cit. i

[v] “Culture of Compliance” is a registered trademark of Lenders Compliance Group, Inc.

Social Media Influencers

QUESTION
Our marketing department has hooked up with a social media influencer. 

We are a mortgage lender, and I am the Compliance Manager. I am concerned about social media in particular, let alone getting involved with an influencer. My CEO seems all gung-ho about it, but I’m trying to get some guardrails into place. Hey, we’re not promoting cakes and cooking tips on Tik Tok around here! 

This situation touches on several regulations, as you know. I think I’ve adequately addressed the regulatory issues. But what about all the rest? 

I need strong, practical, actionable guardrails beyond the regulations. 

What guardrails can I require of social media influencers? 

ANSWER
You are correct: a social media influencer relationship is going to cause a host of regulatory concerns. Don’t for a minute think that the regulators are not watching for such social media arrangements. The plethora of potential regulatory violations is mind-blowing. I realize that you have the regulations covered, but I am going to offer some suggestions that will help you with the regulatory risks. 

I will answer your question from the angle of the Federal Trade Commission (FTC), whose input and guidance you might not have considered. The FTC has provided a set of guidelines[i] (or, to use your expression, “guardrails”) for arrangements with social media influencers. However, I will broaden the guidance to ensure you focus on specific aspects of this relationship. 

First, I like to begin with a definition. For the purposes of explication in this article, I define a social media influencer as persons and entities (“influencer”) that use social media to suggest,  recommend, promote, or endorse products and services offered by another person or entity. 

Let me be clear, several federal and state laws affect advertising by mortgage lenders and brokers. The most important are the Truth-in-Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) and similar unfair and deceptive trade practice statutes adopted by the various states. But there are other applicable statutes. Also to be considered are the Mortgage Advertising Practices (MAP) regulations originally published by the FTC, then republished in December 2011 by the CFPB. 

Secondly, I will define the term “advertising.”  For purposes of this article, advertising includes any appeal or solicitation a mortgage lender or broker makes to existing or potential customers, whether consumers, real estate firms, brokers, builders, or developers.[ii] It includes, but is not limited to: 

- Newspaper and magazine advertisements,

- Television and radio spots,

- Social media advertising and promotions (i.e., endorsements),

- Telemarketing scripts,

- Brochures,

- Direct mail letters,

- Messages printed on monthly statements,

- Leaflets, and

- Handouts distributed at training sessions, meetings, and conventions.

Generally, “advertising” does not include customized letters tailored to customers who already have applied for or selected the product or service being promoted in the letter, such as commitment letters, decline or turndown letters, counteroffers, notices of incomplete application, and responses to inquiries or complaints.[iii] 

Pens, cups, hats, key chains, and similar promotional items also need not be considered “advertising” if they merely contain the company name or logo and it is impractical to apply standard rules and policies to them.[iv] 

As I’ve counseled many times, lenders should adopt strict policies and controls over advertising materials prepared in their name or by their employees or agents to ensure that advertising complies with the sometimes complicated rules contained in the statutes and regulations. Financial institutions should require all advertising material and marketing campaigns to be reviewed and approved by a compliance professional before publication. 

Our firm has a robust practice in advertising compliance. Click Here for more information if you want to consider our support for advertising compliance. 

Just a historical note: according to the CFPB, examiners in 2014 and 2015 found that social media advertising at several lenders had escaped monitoring or compliance review, resulting in loan originators creating their own content advertising the length of payment, amount of payments, number of payments, and finance charges, without providing required disclosures in violation of Regulation Z (Truth-in-Lending). The institutions agreed to appropriate corrective actions. Now, there is a binge on social media influencers to contend with. Be careful! 

With the foregoing in mind, the following set of bullets should be included in your policy and procedures for social media influencer relationships. By "policy and procedures," I mean that appropriate due diligence requirements should include social media, advertising, and marketing.

- The influencer should clearly and conspicuously indicate the relationship between the influencer and the other party, such as an affiliate (viz., “we’re affiliated companies owned by the same parent company”).  

- If the other person or entity gives the influencer a benefit in return for mentioning its products and services, the influencer should mention that benefit (viz., “we receive compensation from [the other firm] in return for mentioning its products and services”). A “benefit” feature, if not properly structured, may well be a violation of RESPA Section 8. Watch out! 

- The influencer should treat tags, likes, pins, and similar ways of showing the influencer likes a product or service as endorsements that require disclosures. 

- The influencer should place each disclosure so it’s hard to miss. A disclosure should appear along with the endorsement message and should not appear only if the viewer must click more to reach it. 

- The influencer should not mix the disclosure with a group of hashtags or links, although the disclosure could include a hashtag such as #ad or #sponsored. 

- If an endorsement appears in a picture on platforms like Snapchat, Instagram Stories, Facebook, Tik Tok, or Twitter, the disclosure should be superimposed over the picture in a way that ensures viewers have time to notice and read it. 

- If the endorsement appears in a video, a disclosure should appear both in audio and video as part of the video and not just in a description uploaded with the video and not only in words superimposed on a video. 

- If the endorsement is made in a live stream, the disclosure should be repeated periodically so viewers who see only part of the stream will get the disclosure. 

- Disclosures should use unambiguous and straightforward language, without vague or confusing terms such as uncommon abbreviations or shorthand. 

- A disclosure should be in the same language as the endorsement. 

- An influencer should not assume that a platform’s disclosure tool is sufficient; instead, it should only consider using that tool in addition to the influencer’s own good disclosure. 

- An endorsement should be honest and truthful. For instance, an influencer should not mention experience with a product the influencer has not tried, say the product is terrific if the influencer thinks it’s terrible, or make up a claim requiring proof the influencer does not have.

- The influencer should ensure its disclosures are properly implemented and not rely on someone else to make them.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Disclosures 101 for Social Media Influencers (November 2019)

[ii] Federal Reserve Regulation Z, 12 CFR § 1026.2(a)(2) and its staff commentary

[iii] Regulation Z Staff Commentary, 1026.2(a)(2)-1(ii)

[iv] Cf. 12 CFR § 328.3(c)(10)

Vaccination Status of Employment Candidates

QUESTION
If you recall, I wrote you last year during the early part of the COVID-19 pandemic. Your guidance was terrific. We purchased your Business Continuity Plan, which provides a pandemic component. 

Now, it looks like the pandemic is getting worse. Our management has a policy for remote work, so most of us are sheltering in place, as needed. We go to the office two days a week. Most of us are vaccinated, too. 

But – and this is a big but! – some new hires are refusing to wear masks (let alone getting vaccinated). 

Our management requests the wearing of masks, but some of these newly hired individuals refuse and, to make matters worse, a few of them are essential to working in the office versus working remotely.

And almost all of them have admitted to being unvaccinated. 

Employees are now refusing to sit in the same room with these unmasked people. Management is confused about how to ensure our safety under these circumstances. 

So, now people will not show up at the office if management does not have a policy to protect us from unmasked and unvaccinated people – especially these new hires. 

Our management is now planning to hire a large number of employees and is actively interviewing them. These candidates may or may not support the mask and vaccination rules. We are very concerned. 

Is there something we can say or do under these circumstances? 

Can we ask candidates to wear masks and get vaccinated before they are hired? 

What can we do to avoid hiring people who insist on being unmasked and unvaccinated?

ANSWER
I understand your concerns. I think most of us do! 

Let’s be blunt: people who are “vaccine hesitant” and “against taking the vaccine” are both “anti-vaxxers.” Even when the FDA approved a vaccine, many people remained anti-vaxxers. I realize that some people are misinformed about the vaccine. Hopefully, they will act not only for themselves and their families but also for their community's benefit. 

Newly hired people who are anti-vaxxers and anti-maskers pose a significant health risk to other employees.

Our Business Continuity Plan – Checklist and Workbook does indeed include the Pandemic Response. And it’s free! Most companies then go on to the low cost purchase of our Business Continuity Plan. 

You can request information about them HERE. 

As to people being against wearing a mask, this shows that (1) they don’t understand the purpose of wearing the mask, (2) they understand the purpose and do not believe the facts, or (3) they understand the purpose and believe the facts but don’t care. When people don’t understand, they misunderstand. Then, they become the prey of unscrupulous elements in society. 

To paraphrase Jonathan Swift, you can’t reason a man out of what he never reasoned himself into! Or, as Sydney Smith once said,  “What has not been reasoned in, cannot be reasoned out.” 

To some extent, a company acts as a microcosm of the larger community environment. Management can set a standard for workplace safety, or it will eventually be compelled to do so. A company's management does not necessarily need regulatory compliance; it only needs to see that its employees are not showing up in an unsafe work environment. 

Just as there are laws against a hostile workplace, there are also regulatory mandates – such as those promulgated by OSHA – against an unsafe or hazardous workplace. 

My suggestions should be reviewed with your company’s human resources department and an attorney with expertise in labor and employment law. The recommendations may touch on employment law (state and federal), HIPPA, OSHA, ADA, EEOC laws, and so forth. 

All of these considerations reach very complex areas of the law. Consequently, you should consult with counsel to proceed carefully in effectuating any guidance concerning my suggestions. You should be guided by counsel with appropriate expertise. I am going to offer a few broad suggestions. Carrying them out requires considerable legal scrutiny.

Since your question involves candidates for hire, I will make some suggestions for your management to consider, assuming the candidates will be at-will employees.  

I will focus my remarks on the candidates for hire. 

The company may put a checkbox on the employment application that asks if the prospective employee has been vaccinated. There should be a statement that accommodation is available for bona fide religious or medical reasons, with documentation in support thereof. Checking the box certainly should not cause exclusion from employment consideration. 

However, take note, some states and localities limit what an employer can ask about vaccination status. Indeed, some states prohibit an employer from asking anything about vaccination.

A qualified candidate should comply with the company’s vaccination requirements. A written policy regarding workplace safety should include pandemic safeguards, such as a requirement to be masked and vaccinated. The policy should clearly state where and under what conditions these safety measures must be implemented. The policy should be given to all employees.

According to a company's written policy, consider that the employment offer may be made contingent on proof of vaccination. Treat the contingency in the same way that a background and credit check are completed before formal approval. Because the offer letter contains a set of contingency requirements, it may avoid the candidate alleging that rejection was based an unwillingness to get vaccinated.

If the candidate does not pass a background check, credit check, and vaccination check, there may be a basis for withdrawing the offer of employment.  

A company may have a policy that requires wearing a mask. But the candidate may reject that policy. I think such a response from a candidate should be disqualifying. But who should discuss that policy with the candidate? Certainly not the hiring manager! That is the job of human resources. 

Hiring managers should be trained in what can or cannot be discussed with a candidate. Discussing vaccination status is best left to human resources to vet the candidate after the hiring interview. The hiring manager should not discuss it. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director
Lenders Compliance Group

Home Equity Line of Credit: QWR Controversy

QUESTION
One of our loan products is the Home Equity Line of Credit. We received a complaint from a borrower, and we were about to treat it as a QWR.

But our General Counsel got involved and said we do not have to reply to treat their complaint as a QWR because RESPA says home equity loans are excluded.

Somehow, this does not make sense to me. I would like your view.

Are we required to treat complaints as a QWR on a Home Equity Line of Credit?

ANSWER
The response is going to be a bit convoluted. My answer is one that I think you can show your General Counsel. If he wants to talk about it, ask him to contact me

Let’s first outline some basics. The RESPA statute generally provides that its requirements apply to “federally related mortgage loans.” This term includes almost every loan secured by a lien on residential real property in the United States designed principally for one-to-four family occupancy. The term includes loans secured by first or secondary liens.

Like TILA, RESPA specifically exempts certain types of loans, such as business purpose loans, loans secured by 25 acres or more (viz., not including loans subject to the Truth-in-Lending and RESPA integrated disclosures provisions, or TRID Rule), loans secured by vacant land, and a few other limited exemptions.

Regulation X, which implements RESPA, also generally applies to “federally related mortgage loans.” But Regulation X includes exceptions. For instance, Subpart C of Regulation X, which contains most of the regulation’s servicing provisions, generally applies to “mortgage loans” rather than “federally related mortgage loans.” The regulation defines a “mortgage loan” to exclude the home equity line of credit.

Indeed, there has been litigation on just this exclusion.

In Herrmann v. Wells Fargo Bank, a federal district court in Virginia did not appreciate this distinction, so much so that it found the exclusion of home equity lines of credit invalid because the exclusion conflicts with the RESPA statute.[i] The court is not alone; actually, it relied on two earlier court opinions.

Here’s the fact pattern.

· In December 2006, the Herrmanns obtained a home equity line of credit from Wachovia, secured by a deed of trust on the Herrmann’s residence.

· In 2011, Wells Fargo began to service the loan.

· After Wells Fargo took over servicing, the Herrmanns claimed that they “became frustrated with their inability to understand the monthly statements and how their payments were being applied to their account.”

· In December 2017, they requested a payoff amount.

· Wells Fargo demanded $85,159.97.

· The Herrmanns paid that amount, but believed the amount should be less than $84,000.

· In January 2018, the Herrmanns began sending multiple written requests inquiring about the payment. The Herrmanns believe their letters constitute Qualified Written Requests (“QWRs”) under RESPA.

· Wells Fargo sent 13 letters between January 2018 and November 2019 in response to the QWRs, but the Herrmanns found that each letter failed to resolve their dispute.

· The Herrmanns eventually hired an accountant to interpret the conflicting information they had received from Wells Fargo. The accountant determined that the actual payoff amount was far less than what Wells Fargo had demanded.

· On December 10, 2019, the Herrmanns sued, alleging violations of RESPA § 6 for Wells Fargo’s failure to respond to the QWRs properly.

· Wells Fargo filed a motion for judgment on the pleadings, contending that the RESPA claims fail because RESPA does not apply to home equity lines of credit, and Wells Fargo had fully satisfied its RESPA obligations by providing at least 13 detailed responses.

Now, let’s consider the court’s view. 

The district court denied the motion as to the RESPA claims. The court began its analysis by noting that RESPA generally applies to “federally related mortgage loans,” a term that includes subordinate loans such as home equity lines of credit.

The court then stated that Regulation X provides that

... a “[m]ortgage loan means any federally related mortgage loan, as that term is defined in § 1024.2 subject to the exemptions in § 1024.5(b), but does not include open-end lines of credit (home equity plans).”

The court added,

“Thus, Regulation X appears to narrow the definition of a mortgage loan under RESPA to exclude home equity loans.”

As I noted, the court turned to two court decisions cited by the Herrmanns.

The first case, Hawkins-El v. First American Funding, LLC,[ii] held that RESPA applied to a plaintiff’s home equity line of credit. In Hawkins, the court reasoned that RESPA’s implementing regulations, which provide that the qualified written request provision does not include subordinate lien loans directly conflicts with the language in RESPA that includes subordinated liens in its borrower inquiry provisions. The court found the regulation and statute incompatible and applied RESPA’s more inclusive language “because an administrative agency’s regulation is ineffective to the extent it conflicts with its parent statute.”

The second case, Cortez v. Keystone Bank, Inc.,[iii] also held that RESPA applies to home equity lines of credit for the same reason as Hawkins-El.

Although the U.S. Court of Appeals for the 4th Circuit had not yet addressed the issue, the Herrmann court found Hawkins-El and Cortez persuasive. Those cases had dealt with an earlier version of Regulation X, but the same issue persisted in the current version. The court concluded that Congress’s definition of a “federally regulated mortgage” loan under RESPA includes home equity loans and provides home equity borrowers access to the QWR provisions under RESPA:

“Regulation X conflicts with this definition by excluding home equity loan borrowers from the protections of the RESPA. Therefore, the court will rely on the language of the statute and find that the Herrmanns [sic] claim regarding their home equity is proper under RESPA.”

The court then found that the Herrmanns had adequately alleged that Wells Fargo had failed to reasonably investigate their account dispute in response to their QWRs, by (1) stating that Wells Fargo had provided “inconsistent and inaccurate explanations,” (2) Wells Fargo had admitted that some of its earlier QWR responses were inaccurate, and (3) Wells Fargo had “claimed that it was unable to determine if it had provided inconsistent information to the [Herrmanns].” Accordingly, the court denied Wells Fargo’s motion.

Now, let’s put all of these decisions together to discuss complaints and other servicing inquiries involving a Home Equity Line of Credit.

RESPA § 6(e)(1)(A) [12 U.S.C. 2605] states

“If any servicer of a federally related mortgage loan receives a qualified written request from the borrower (or an agent of the borrower) for information relating to the servicing of such loan, the servicer shall provide a written response acknowledging receipt of the correspondence within 5 days.”

By applying this requirement to “mortgage loans” rather than “federally related mortgage loans” in Regulation X, did the CFPB act inconsistently with RESPA?

On the face of RESPA § 6, yes.

But let’s look at the CFPB's view:

“Section 19(a) of RESPA authorizes the Bureau (and formerly directed the Department of Housing and Urban Development (HUD)) to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of RESPA.”[iv] [My emphasis.] 

What "classes of transactions" might be considered? 

When the CFPB amended Regulation X in 2013, it explained why it was excluding home equity lines of credit from coverage by Subpart C and pivoted on RESPA § 19(a) in doing so. The CFPB also said it was concerned that certain provisions of Regulation Z (Truth-in-Lending) would substantially overlap with the servicer obligations that would be set forth in Subpart C, including, for example, billing error resolution procedures.[v]

For this and other reasons, the CFPB concluded:

“[T]he Bureau believes it is necessary and appropriate to achieve the purposes of RESPA to maintain the current exemption, which HUD originally adopted as 24 CFR 3500.21 nearly 20 years ago. Accordingly, this exemption is authorized under section 19(a) of RESPA.”[vi] [My emphasis.]

The Herrmann, Hawkins-El, and Cortez courts apparently overlooked this history. Perhaps, they might have reached the same conclusion if they had considered the historical record.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

_____________________________________________
[i] Herrmann v. Wells Fargo Bank, 2021 U.S. Dist. (W.D. Va. Mar. 29, 2021)
[ii] Hawkins-El v. First American Funding, LLC, 891 F. Supp. 2d 402 (E.D.N.Y. 2012)
[iii] Cortez v. Keystone Bank, Inc., 2000 U.S. Dist. (E.D. Pa. May 2, 2000)
[iv] RESPA and Regulation X, Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), Bureau of Consumer Financial Regulation, Final Rule, Official Interpretations, 2/14/13, 78 FR 10695, II. C. See also 12 U.S.C. 2617(a). 

[v] See 12 CFR 1026.13, Billing Error Resolution

[vi] Op. cit. iv, Other Exemptions, Section 1024.30, Scope. See also 12 CFR 1024.