QUESTION
In our compliance meeting, there was an extensive discussion about the “six pieces of information” that constitute an application. I know this is a TRID rule, but there are a few issues with this rule.
We originate loans and use a subservicer. One issue for us is that sometimes we do not have the property address immediately, but we have everything else. We do not have a pre-approval program, and we’re careful to meet the six pieces of information for the application requirement
But that brings up the debate as to how disclosure is provided for the property address in the first place. Eventually, we obviously get the property address, and our disclosures are updated accordingly.
Is there an explanation for how timing the disclosure of the property address is important?
How does the timing of the disclosure of a property address impact our originating and servicing loans?
ANSWER
As you likely know, in November 2013 the CFPB for the first time included a definition of “application” in Regulation Z as part of its TILA-RESPA Integrated Disclosures Rule (TRID Rule). Before then, Regulation Z had incorporated the definitions in Regulation X into its Good Faith Estimate requirements.
The definition it included in 2013 states that for purposes of Loan Estimates, Closing Disclosures, and Special Information Booklets, an “application” consists of the submission of six pieces of information:
(1) the consumer’s name,
(2) the consumer’s income,
(3) the consumer’s social security number to obtain a credit
report,
(4) the property address,
(5) an estimate of the value of the property, and
(6) the requested mortgage loan amount.
In developing a response to your question, I would like to approach it by discussing a recent decision of the U.S. Court of Appeals for the 3d Circuit, which specifically considered the timing of disclosure in relation to information involving the property address. The case is Nelson v. Acre Mortgage & Financial Inc.[i]
Nelson, a retired, disabled military veteran, contracted with Classic Quality Homes to buy a house and used Acre Mortgage to obtain a mortgage loan. Nelson sued Acre, alleging that it violated TILA and RESPA by failing to disclose all material terms, improperly representing that Nelson would not have to pay property taxes, failing to make a reasonable and good faith determination of Nelson’s ability to repay, and failing to provide notice of the transfer of servicing rights to The Money Source, the servicer of the loan.
The argument centered on a failure-to-disclose claim related to Acre’s alleged use of outdated documents.
Let’s check the timeline. The CFPB’s revision of the regulations governing mortgage loan disclosures had an effective date of October 3, 2015. Nelson alleged that Acre improperly used the pre-October 3 disclosure forms for an application she made after that date.
Acre moved for summary judgment, citing depositions of (1) Nelson, (2) an Acre owner, and (3) a Classic employee, along with documents including an application and disclosure forms Nelson had signed. The district court granted the motion because it found that no reasonable jury could return a verdict for Nelson on her TILA and RESPA claims.
Not so fast, said the 3rd Circuit court!
The 3d Circuit vacated the judgment, concluding that Acre failed to meet its initial burden to show no genuine dispute as to any material fact. While Acre had provided testimony and documents to support its own version of the events, those materials did not foreclose a reasonable jury from crediting Nelson’s contrary testimony instead and finding Acre liable.
Now, let’s apply Regulation Z.
According to Regulation Z,[ii] the October 3 disclosure forms apply only when “the creditor or mortgage broker receives an application on or after October 3, 2015.” Acre argued that it had properly used the pre-October 3 forms because the record showed it had received the 6 items constituting Nelson’s “application” on September 24, 2015.
Acre claimed that:
(1) an Acre employee testified that Classic initially referred
Nelson to Acre in September regarding a mortgage loan for a newly constructed
home;
(2) after speaking to Nelson by phone, Acre began preparing an
application;
(3) Classic and Nelson later agreed she would instead purchase a
refurbished home and Acre restarted the application process, again by phone;
(4) after Acre prepared the second application, Nelson came to the
office in person;
(5) a loan application form included an attestation by Acre’s loan
originator that she had collected the information supporting the second
application by phone on September 24;
(6) a Good Faith Estimate reflected September 24; and
(7) disclosure forms contained Nelson’s signature and a September 24 date.
However, Nelson argued that the September 24 phone call never occurred and that Acre deliberately backdated her application to avoid the new disclosure requirements. At her deposition, she testified that Classic had not suggested the refurbished home to her until October and that she first contacted Acre after that. Therefore, this meant that Acre could not have received the “application” until then because Acre lacked the fourth item required to constitute an “application”—the property address. She also testified that, at Acre’s request, she had backdated various documents to September 24.The 3d Circuit found that the inconsistencies in testimony and exhibits would allow a reasonable jury to accept portions of each party’s evidence, such as finding that Nelson and Acre had interacted in September, but only concerning the newly constructed property. The originator had signed her attestation on the loan application form at the November closing.
Nothing in the record foreclosed Nelson’s testimony that she had signed the other documents with a September 24 date in October at Acre’s request. And even Acre’s representative admitted that the forms were not signed in person on September 24; indeed, Acre did not present evidence of how or when they were signed. Viewing the evidence in the light most favorable to Nelson, a reasonable jury could credit her testimony and find that Acre had not received an “application” until after October 3.
So what are some takeaways?
There is an earlier phase of this case. The district court dismissed the borrower’s claim that the creditor had violated TILA by basing its disclosures on an expected property tax exemption offered to Pennsylvania military veterans.[iii]
Although I won’t get into a description of the prior case, the district court had dismissed the claim because it found that the lender had reasonably relied on the representations of both the borrower and county officials regarding her eligibility for the disabled veterans’ property tax exemption, had (A) acted in good faith. (B) exercised due diligence in determining whether property taxes could be excluded from her estimated monthly payment and other mortgage loan disclosures, and (C) had based the TILA disclosures on the best information reasonably available at the time the disclosures were provided while clearly stating that the disclosures were estimates.
On this appeal, the 3d Circuit considered Nelson’s claim that Acre had misled her regarding property taxes and had not properly investigated Nelson’s ability to repay. Regulation Z includes ability to repay (ATR) provisions that require evaluating a mortgage borrower’s ability to repay. Acre claimed that it had not included the property taxes in Nelson’s estimated monthly payments based on her own representations and failure to disclose her education benefits.
At her deposition, Nelson testified that she in fact had disclosed her education benefits to an Acre employee who told her she should not include those benefits because they were not permanent income. Nelson also denied that she had consulted with the county regarding the tax exemption before her closing or told Acre that she had done so. Viewing this evidence in the light most favorable to Nelson, the 3d Circuit found that a reasonable jury could accept Nelson’s testimony, disbelieve Acre’s contrary evidence, and find that Acre had provided faulty TILA disclosures by misleading Nelson and inadequately investigating her ability to repay.
Please note, I mentioned there was a servicing component to this litigation. Another issue related to whether or not Acre had provided Nelson with the notice of mortgage servicing transfer required by RESPA and Regulation X. Acre said it had properly provided the notice, pointing to a servicing disclosure statement dated September 24 and signed by Nelson, which did not include the details of the transfer or the name of the transferee servicer.
Acre also produced a notice of servicing transfer dated November 9 advising that Acre would transfer the mortgage servicing to Money Source, the servicer, but this document was not signed, and Acre offered no evidence of delivery or receipt. On the other hand, Nelson testified that she had never received the servicing transfer notice and did not learn about Money Source until after closing. Again, the 3d Circuit concluded that Acre had failed to show a lack of genuine dispute as to the material fact of disclosure, so a reasonable jury could find in favor of Nelson.
Thus, Acre failed to fully document its compliance with TILA and RESPA. Among other relevant information, it should have included the property address of the refurbished property in its files prior to October 3, along with acknowledgments of receipt of the Good Faith Estimate and other application documents by Nelson. It should have fully documented its discussions and investigation regarding the veterans’ property exemption and its analysis of her ability to repay. Finally, it should have obtained Nelson’s signature and acknowledgment on the notice of servicing transfer provided at closing. These multiple failures blocked the entry of summary judgment.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
Lenders Compliance Group
[i] Nelson v. Acre Mortgage & Financial Inc., 2022 U.S. App. (3d Cir. Jan. 12, 2022)
[ii] 12 CFR Part 1026, Comment 1(d)(5)-1
