“Woke” Policies in Mortgage Banking

QUESTION 

There was a big argument in a sales meeting last week. The loan officers got into a verbal fight over the use of the word “woke.” After the meeting, the whole company was talking about it. HR and Compliance got involved. I’m not sure what will happen next. But there is a lot of hate churning up in the company. This has never happened before. We were all friends, but now everyone is taking sides. All over the word “woke.” 

During the sales meeting, they discussed expanding into a mostly minority area. One of the loan officers got up and said he refuses to go into that area and is sick and tired of these “woke” policies that make him do deals with people based on their being minorities. Another loan officer got up and said he agreed and none of the loan officers should be forced to abide by these “woke” rules. 

The loan officers said they were not being racist or discriminatory. They just said they don’t feel safe and that loans from that area don’t close. There was a lot of pushback. Most loan officers disagreed, saying they never feel threatened, and most of their loans do close. There was a big shouting match. The sales manager ended the meeting, and everyone left, but they continued shouting at each other in the parking lot. 

I know this is a touchy subject. But you have taken on controversial subjects many times. I hope you can help to shed some light on the situation we’re in. I want things to go back to normal. 

Is there really a “woke” policy that forces loan officers to take applications in minority areas? 

COMPLIANCE SOLUTION 

ECOA Tune-up 

ANSWER 

Several benign words have come into the American idiom that morphed into a malignant meaning, and “woke” is one of those words. A few years ago, it meant being aware or well-informed politically or culturally. I believe it first entered the Oxford English Dictionary in 2017. 

“WOKE” 

The word “woke” was derived from Black culture. I believe it goes back to the 1940s. To be “woke” or to “stay woke” meant to wake up in the sense of being alert to social justice and preserving African American rights. Recently, the term has had negative overtones, especially in the context of demeaning the politics relating to the left-of-center, a kind of weaponizing by right-of-center and far-right politicians as a way to denigrate left-of-center politics. 

Because right-of-center politicians have adopted “woke” from Black culture, sociologically speaking, it is a form of “cultural appropriation,” although I’ve heard it described as “cultural theft.” Cultural appropriation happens when a majority group adopts elements of a minority group in an exploitative, disrespectful, and stereotypical way.[i] So, if “woke” is used in such a manner, it is inherently a racist term. 

Not all cultural appropriation is intrinsically wrong when there is proper attribution and respectful use of the cultural artifact, keeping honestly to its use and meaning. People who use the term to disparage are not necessarily racist, but if used improperly – lacking attribution, not using it respectfully, being dishonest in use and meaning – it is a proxy for taboo words that are more explicitly racist. 

“WOKE” POLICIES 

Thus, in your specific scenario, when a loan officer says a policy is “woke,” they may be using it disparagingly, generalizing left-of-center policies, which they deem unacceptable to their right-of-center and far-right politics. Their use of the word doesn’t make them racists. They may simply be identifying a left-of-center policy they do not want to accept. However, it could also be a proxy for socially unacceptable racist lingo. 

There are no “woke” policies in mortgage banking. The regulations that financial institutions follow are extensively vetted over generations and many federal and state administrations. A mountain of litigation determines the legal interpretation of the applicable statutes. The rules are often refined to respond to economic demands and ensure appropriate consumer protection, such as the protection afforded through fair lending prohibitions relating to a protected class. 

PROTECTED CLASS 

I have heard grumbling over the years about “protected classes.” These are the categories of groups that are legally protected. I have listened to complaining for and against age as a protected class. From time to time, someone moans about allowing protected class status for sexual and transgender orientation. 

A CEO I spoke to a few years ago felt that political affiliation should never be a protected class. His view was that he is legally allowed to discriminate against an at-will employee or candidate as a direct result of their political beliefs or activities. He held that First Amendment protections do not apply to private employment. He need not fear. Title VII of the Civil Rights Act of 1964 does not deem political affiliation to be a protected class. Public employees have a few more rights regarding political activity protections, but these rights are not absolute. 

GOING ROGUE 

Your loan officers who refuse to work in minority areas are walking on thin ice. The sales manager may choose to assign them elsewhere, but this is a very litigious terrain. There are two primary acts relating to protected classes. I fail to see that either of them falls into the black hole of being “woke”— unless “woke” means acts whose goal is to allow consumers to be treated fairly in the marketplace. 

If loan officers object to treating consumers fairly, maybe they should find another line of work. Lenders strive mightily to build a strong and upstanding reputation. They don’t need some rogue loan officers undermining their reputation or putting them at regulatory risk. 

In any event, I suggest you retain competent counsel to ensure that a decision to withhold loan origination personnel from a minority area would not violate the law, especially the two following acts. 

REGULATIONS 

The Fair Housing Act (FHAct), among its list of illegal, discriminatory practices, includes this example of lending discrimination:

 

Providing a different customer service experience to mortgage applicants depending on their race, color, religion, sex (including gender identity and sexual orientation), familial status, national origin or disability.[ii] [My emphasis.] 

A different “service experience” would be discrimination in approvals and denials, loan terms, advertising, mortgage broker and other loan originator services, property appraisals, mortgage servicing, loan modification assistance, and homeowners insurance. 

Be advised: anyone can file a complaint with the Department of Housing and Urban Development (HUD), which administers and enforces the FHAct. Once the complaint is filed, the Office of Fair Housing and Equal Opportunity (FHEO) immediately opens an investigation to enforce applicable policies and laws. And, I can assure you, a complaint may be filed if a member of a minority community believes your firm is deliberately curtailing or shutting down access to loans in their area. 

The Equal Credit Opportunity Act (ECOA), taken together with the FHAct, covers a wide spectrum of anti-discrimination protections. For instance, the ECOA prohibits discrimination in any aspect of a credit transaction. Prohibitions consist of discrimination based on race or color, religion, national origin, sex, marital status, age (provided the applicant can legally contract), applicant’s receipt of income derived from any public assistance program, or the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act.[iii] 

Under both the ECOA and the FHAct, it is illegal for a lender to discriminate on a prohibited basis in a residential real estate-related transaction. And, among other things, under one or both of these acts, a lender may not:

 

·       Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards.

 

·       Discourage or selectively encourage applicants concerning inquiries about or applications for credit. 

BUZZSAWS 

Without more information than you provided, it seems your loan officers – and, by extension, your company – risk running straight into the buzzsaw of a prohibited factor! Indeed, to go further, a lender may not discriminate on a prohibited basis because the present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where the property to be financed is located. Deliberately avoiding minority communities with respect to originating loans substantially increases legal and regulatory risk. 

If your firm were to pull back from or shut down originations in a minority area, it could trigger disparate treatment violations. All it takes for an illegal disparate treatment allegation to be set in motion is the establishment either by statements revealing that a lender explicitly considered prohibited factors (overt evidence) or by differences in treatment that are not fully explained by legitimate, nondiscriminatory factors (comparative evidence).[iv] 

Indeed, when a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants but disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a disparate impact. 

Your scenario manages to trigger all three types of lending discrimination: overt evidence of disparate treatment, comparative evidence of disparate treatment, and evidence of disparate impact. Here’s how. 

First, there is overt evidence of disparate treatment because, as described above, your firm would be openly discriminating on a prohibited basis. 

Secondly, there is comparative evidence of disparate treatment because your firm would treat a credit applicant differently based on one of the prohibited bases. It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in the treatment itself. 

Third, there is a disparate impact because your firm would apply a racially or otherwise neutral policy or practice equally to all credit applicants, disproportionately excluding or burdening persons on a prohibited basis. 

REDLINING 

A final word about redlining, a form of disparate treatment that your loan officers seem to be suggesting. Your firm may be exposing itself to a redlining allegation if it provides unequal access to credit or unequal terms of credit because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining is a double-whammy: it often violates both the FHAct and the ECOA. 

Hopefully, your loan officers will worry less about “woke” policies and more about not violating fair lending laws. If your firm treats similar applicants differently based on a prohibited factor, it must explain the difference in treatment. If the explanation is not found to be credible, a supervision and enforcement agency may find that your financial institution discriminated.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] See What Is Cultural Appropriation?, Encyclopedia Britannica, December 2023

[ii] Fair Lending: Learn the Fact, Fair Lending Guide, U.S. Department of Housing and Urban Development

[iii] § 1002.5(b), Title 12, Chapter X, Part 1002

[iv] Consumer Compliance Examination Manual, March 2021, IV. Fair Lending – Fair Lending Laws and Regulations, Federal Deposit Insurance Corporation

Endorsements and Testimonials

QUESTION 

Our banking department called us out for publishing testimonials that our loan officers use. We were contacted by an examiner who said they had checked out some of the testimonials and endorsements and found that some were either bogus or misleading. 

First of all, I didn’t know a banking department could go so far as to check out the veracity of testimonials. 

Secondly, our loan officers are honest and get their business from referrals, but the banking department makes them look like they were intentionally making up bogus testimonials. 

Thirdly, the loan officers have hundreds of endorsements and testimonials. I don’t see how we can verify every one of them. 

I think the department is way out of line! It feels like they are harassing us. I would like to know your opinion about this kind of advertising. Endorsements and testimonials are a big part of our marketing strategy. 

What are some guidelines for endorsements and testimonials?

COMPLIANCE SOLUTION 

Policies and Procedures: Advertising Compliance 

ANSWER 

Endorsements and testimonial advertising are an important and valuable part of overall marketing. Of course, scrutinizing advertisements is an inherent responsibility of banking departments. As consumer advocacy agencies, they must ensure that the public is properly informed of a loan product or service. 

Many interlocking regulations have a substantive impact on advertising compliance because contact with the public by means of advertising is one of the most prevalent ways a financial institution can encourage consumers to use its services. 

The banking department is not “way out of line.” It monitors your loan flow process from the earliest advertisement that leads to an application, thence to underwriting, loan closing, and beyond. If you believe verifying the testimonials is too big a task, don’t publish them! A banking department will want to see that you documented a validity review of a testimonial or endorsement. 

Most loan officers are certainly honest. They are the lifeblood of mortgage banking. Everyone works together to ensure the consumer has a good experience. However, loan officers are on the front lines, most working on commission; they bring in the loans and the ones who financially suffer the most when sales slow or loans don’t close for some reason. There is no reason for them to be defensive when a banking department finds errors in their testimonials. But you need to watch out for a “pattern or practice” of bogus endorsements and misleading testimonials. 

So, let’s focus on the nature of endorsements and testimonials and not get all huffed up in righteous indignation. I will offer some thoughts on this subject and suggest you share them with your loan officers. Contact me here if you need advertising compliance. We have a team devoted solely to advertising and marketing compliance. 

DEFINITION 

As you probably know, I like to get a definition in place for a cogent discussion. 

Here’s how I define endorsements and testimonials:[i] 

Endorsements and testimonials are any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. 

RULES OF THE ROAD 

There are certain indisputable rules of the road that you must apply. For this article, I use the terms endorsement and testimonial interchangeably. These are the four most important rules to follow. 

1.     Honesty 

Endorsements must reflect the endorser's honest opinions, findings, beliefs, or experiences. Furthermore, an endorsement may not convey any express or implied representation[ii] that would be deceptive if made directly by the advertiser. 

2.  Context 

Although the endorsement does not need to be the exact words of the endorser – unless the endorser requests it - the endorsement may not be presented out of context or reworded to distort in any way the endorser’s opinion or experience with the product. 

3.  Bona Fide User 

When the advertisement represents that the endorser uses the endorsed loan product or service, the endorser must have been a bona fide user of it at the time[iii] the endorsement was given. 

4.  Full Disclosure 

Advertisers are subject to liability for false or unsubstantiated statements made through endorsements or for failing to disclose material connections between themselves and their endorsers.[iv] (Be careful here! Endorsers may be liable for statements made in the course of their endorsements.) 

GUIDELINES FOR ENDORSEMENT TYPES 

Generally, three types of endorsements are encountered in mortgage banking: consumer, expert, and organization. I will provide a brief overview of each. 

Consumer Endorsements 

For the most part, there are three types of consumer endorsements.[v] Here’s a brief outline. 

1.     A consumer endorsement about the performance of an advertised product or service will be interpreted as representing that the product or service is effective for the purpose depicted in the advertisement. 

2.     An advertisement containing an endorsement relating the consumer’s experience on a central or key attribute of the product or service will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use.

 

3.     Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should utilize actual consumers in audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.

 

Expert Endorsements

 

There are two primary guidelines involving expert endorsements,[vi] as follows:

 

1.     If an advertisement represents, directly or indirectly (viz., by implication), that the endorser is an expert concerning the endorsement, the endorser’s qualifications must state factually the endorser has the requisite expertise with respect to the endorsement.

 

2.     Although the expert may, in endorsing a loan product, take into account factors not within their expertise, the endorsement must be supported by an actual exercise of that expertise in evaluating the product’s features or characteristics to the extent to which they have relevant knowledge and expertise,[vii] and which are relevant to an ordinary consumer’s use of or experience with the product and, importantly, are available to the ordinary consumer.

 

Organization Endorsements 

Endorsements from organizations can be tricky. There is one essential guideline. 

1.     Organization endorsements, especially expert ones, represent the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of subjective factors that vary from individual to individual.

 

This is the tricky part because an organization’s endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being an expert, then, in conjunction with a proper exercise of its expertise in evaluating the product,[viii] it must utilize an expert or experts recognized as such by the organization or standards previously adopted by the organization and suitable for judging the relevant merits of such products. 

MATERIAL DISCLOSURE 

A few words about material disclosure. If there’s a connection between the endorser and the seller of the advertised loan product or service that might materially affect the weight or credibility of the endorsement – for instance, where the audience does not reasonably expect the connection – such connection must be fully disclosed. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 16 CFR Part 255, § 255.0(b): “…including verbal statements, demonstrations, or depictions of the name, signature, likeness, or other identifying personal characteristics of an individual or the name or seal of an organization.” For the purpose of this article, I refer the reader to Guides Concerning the Use of Endorsements and Testimonials in Advertising, Federal Trade Commission, 16 CFR Part 255.

[ii] §§ 255.2(a) and (b) regarding substantiation of representations conveyed by consumer endorsements.

[iii] § 255.1(b) regarding the “good reason to believe” requirement.

[iv] § 255.5

[v] § 255.2

[vi] § 255.3

[vii] See § 255.1(d) regarding the liability of endorsers.

[viii] Ibid

Steering Practices in Comparison Platforms

QUESTION 

A few months ago, you wrote about the regulatory challenges associated with comparison platforms. It was eye-opening to us. Because of your guidance, we revised our relationship with a comparison platform. Thank you! 

But I must write you about a recent problem with the comparison platform. The platform offers placement for our loan products because of financial inducement, making the listing likely to be seen by the consumer. The preferred placement has many more features, such as requiring fewer clicks to access product information or increasing the likelihood that a consumer will consider or select our listing. We paid extra for the placement to be "featured." We also found that the platform was even putting itself in the digital comparison versus our listing. 

Our Compliance Officer believes that we have become entangled in a steering scenario. She has met with management to get them to cancel the arrangement with the platform altogether. They are reluctant to cancel because they think she is exaggerating the risk. They get a lot of business from the leads generated from the comparison platform. 

I would like your view. You are always direct and abide by legal and regulatory guidelines. 

Do digital comparison platforms or lead generators cause potential regulatory violations by preferencing products or services based on financial or other benefits to the platform operator?

COMPLIANCE SOLUTION

Policies and Procedures

ANSWER 

Yes. The comparison platform may violate the prohibition on abusive acts or practices if they distort the shopping experience by steering consumers to certain products or services based on adjusted remuneration to the operator. And, to be clear, this is steering. If steering is implemented, it violates the Consumer Financial Protection Act (CFPA). 

Similarly, lead generators can violate the prohibition on abusive practices if they steer consumers to one participating financial services provider instead of another based on compensation received. It is often the case that consumers rely on a digital comparison platform or a lead generator to act in their interests. Unfortunately, however, it is also the case that platforms and lead generators may take unreasonable advantage of consumers by giving preferential treatment to their own or other products or services through steering or enhanced product placement for financial or other benefits. This way leads to UDAAP violations. 

My article, Pitfalls of Mortgage Comparison Platforms, focused on RESPA Section 8 violations triggered by referrals from rate comparison platforms. I noted the Consumer Financial Protection Bureau (CFPB) maintains that operators of online comparison platforms receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value. 

Another article I published, RESPA Section 8 Triggers on Mortgage Comparison Platforms, focused on several circumstances where digital mortgage comparison-shopping platforms may violate RESPA. 

For a wider view, you can read my article, Digital Mortgage Comparison Platforms, where I stated, among other things, that the CFPB appears to suggest RESPA may be violated even where every lender pays the same compensation to the platform operator, if the information provided has the effect of steering a consumer to a particular lender. 

You may want to read the aforementioned articles in the context of my response to your question about preferencing products and services on a digital comparison platform. Your use of the verb "preferencing" is correct because the CFPB uses this word to flag steering! 

At its core, preferencing involves compensation arrangements associated with digital comparison platforms.[i] Loan product providers pay some platforms on a fee-per-action basis (i.e., by receiving fees per click, per application, per conversion, per offer, or per sale). Often, the platform may allow firms to bid against each other for advantageous placement by paying "bounties," which target consumers fitting certain consumer characteristics or aimed at meeting certain volume goals. 

Lead generators sell consumer information to lenders. Sometimes, they provide this service without contacting the consumer. But, regulatory concerns grow when these entities collect data directly from consumers by advertising websites that present themselves as helping consumers get a loan or connect with lenders. There has been plenty of litigation in this area, such as in Federal Trade Commission v ITMedia Solutions, LLC.[ii] The complaint alleged that the lead generator "unlawfully used a 'loan application' form to collect consumers' information by deceptively presenting itself as connecting consumers with lenders.”[iii] 

If you want a basic guideline, here it is:

You must protect and facilitate the consumers' ability to effectively compare and choose among options for consumer financial products or services. If you are not doing so or involving yourself in arrangements that contravene this guideline, you are exposing yourself to regulatory violations. 

Indeed, this guideline is a foundational, statutory objective of the CFPB.[iv] Consider it a mandate. The CFPA legislative history states that an important purpose of the CFPB is to ensure that "a consumer can shop and compare products based on quality, price, and convenience without having to worry about getting trapped by the fine print into an abusive deal."[v] 

As I noted above, unreasonable advantage is tantamount to a threshold issue implicating UDAAP.[vi] So, let's describe this concept in the context of digital comparison platforms and lead generators:

These entities leverage consumer reliance to take unreasonable advantage of consumers where they preference particular providers or products over others in exchange for financial or other benefits to the operator, as opposed to making presentations or lead distribution decisions using other factors not relating to the platform operator's or lead generator's relative compensation from different providers, including where consumers put reasonable reliance on the entity to act in accordance with consumers' interest.[vii] 

The phrase "reasonable reliance" and "consumers' interest" can mean many things. Litigation often turns on the interpretation of these terms. However, a growing body of federal agency guidelines and case law has pretty much determined their regulatory parameters. Once a comparison platform or lead generator puts itself into a position to assist people in selecting a provider, the door opens to consumer reliance. The entities’ representations and communications can be explicit or implicit. 

For instance, reasonable consumer reliance may exist when a platform or lead generator assumes the role of acting on consumers' behalf or helping them select products or services based on consumers' interests.[viii] If you visit digital comparison platforms, you may see that some of them "match" consumers to specific products and services, whether done by automated algorithms, artificial intelligence, or curated recommendations. 

Some lead generators promote themselves as intermediaries between themselves and well-known financial institutions. That in itself can engender consumer reliance[ix] because their real, market-enterprising role may be hidden by presenting themselves as a tool for consumers to connect with trusted lenders or receive the best available terms for a consumer financial product or service. This means of contact with the public, given the consumer's individual circumstances, may lead the consumer to reasonably rely on the entity to act in the consumer's interests.[x] 

Here's a brief explanation of how a comparison platform or lead generator explicitly or implicitly engenders consumer reliance:

If a comparison platform or lead generator explicitly or implicitly holds out its services as presenting information based on a consumer's interests, it may be reasonable for the consumer to rely on the service to respond accordingly. 

I have seen comparison platforms openly stating that their service is "objective!" Now, that may be so, or it may not, but the service certainly claims it to be so – and that is sufficient for explicitly engendering consumer reliance. 

In fact, even if the platform does not openly state its service is objective, it may use certain words or phrases that implicitly engender consumer reliance, such as using the word "expertise" in helping consumers evaluate options; describing their service as providing "research-based" rankings of options for consumers; stating that they will "help you today" to "achieve your financial goals"; purporting to match consumers with the "best" or "right" offers; claiming to "put consumers first;" or providing a "one stop shop" claiming all the information consumers need to make informed selections among potential providers.[xi] 

To expand on the aforementioned "consumers’ interest” stated in my description of unreasonable advantage, comparison platforms and lead generators may adjust their presentations of consumer products and services based on fees or other benefits that are not in a consumer’s interest. These adjustments occurring in digital comparison platforms and lead generators are a form of steering. There is a significant body of law, federal agency guidelines, and consumer disclosure regulations that have concluded consumers’ interests are not served when consumers are steered toward more expensive or less favorable products, and would be the case when those products are offered by digital comparison platforms and lead generators (or their affiliates) where those products generate more revenue for these entities.[xii]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Preferencing and Steering Practices by Digital Intermediaries for Consumer Financial Products or Services, Intermediaries for Consumer Financial Products or Services, Consumer Financial Protection Circular 2024–01, Consumer Financial Projection Bureau, 12 CFR Part X, FR: Vol. 89, No. 49, March 12, 2024 (Rules and Regulations 17706-17709)

[ii] Federal Trade Commission v. ITMedia Solutions LLC et al., FTC Matter/File Number 1523225, Civil Action Number 2:16-cv-09483, C.D. Cal. January 5, 2022 (Complaint and Order)

[iii] Idem

[iv] Under the CFPA, a central purpose of the CFPB is to promote ‘‘fair, transparent, and competitive’’ markets. See 12 USC 5511(a).

[v] S. Rep. No. 111–176, at 11, 229 (2010).

[vi] There are violation triggers in many other prongs of the abusive prohibition, such as under 12 U.S.C. 5531(d), 12 U.S.C. 5531 and 5536(a)(1)(B)’s prohibitions against unfair or deceptive acts or practices, or other Federal, State, or local laws.

[vii] See 12 U.S.C. 5531(d)(2)(C), and generally, Policy Statement on Abusive Acts or Practices, April 3, 2023, Consumer Financial Protection Bureau

[viii] Idem

[ix] See CFPA § 2031 (d)(2)(C)

[x] Op. cit. i., Reasonable Reliance, at 17708

[xi] Op. cit. ii

[xii] See, i.e., FTC v. Blue Global, LLC, No. 2:17–cv–2117, D. Ariz. July 3, 2017. Blue Global collected loan applications and promised to match consumers with loans that had the best interest rates, finance charges, and repayment periods when, in fact, they indiscriminately sold leads.

Executor’s Access to Digital Account

QUESTION 

I am the General Counsel of a large Western mortgage lender. I am writing on behalf of myself and our Chief Compliance Officer. We have received notice from an executor of a borrower’s estate. The executor wants access to our digital portal. The executor’s purpose is to review the decedent’s account, assets, and liabilities. 

A careful reading of estate-related documents and reviewing the power of attorney show that the borrower did not grant the executor specific authority to access a digital portal. We do not want costly litigation. It is our view that we cannot give the executor access to the digital assets of the deceased borrower’s account. 

We could use some guidance on applicable regulatory requirements in two ways: 

• Broadly, what is the regulatory landscape for an executor being denied access to loan records after a borrower’s death? 

• In particular, is there any regulatory requirement or case law that applies to denying an executor’s access to a digital portal if such access is not specifically granted in a will or power of attorney? 

COMPLIANCE SOLUTION

Policies and Procedures

ANSWER 

Your questions touch on several regulatory and legal issues, including “successor in interest” as well as the nexus between estate law and regulatory requirements. 

In October 2016, the Consumer Financial Protection Bureau (CFPB) amended Regulation Z, effective April 19, 2018, to apply to “successor in interest” all of the January 2013 Mortgage Servicing Rule provisions, including the payment processing requirements, once a servicer has a "confirmed successor in interest." 

The Truth-in-Lending Act’s Regulation Z defines “successor in interest” to mean 

… a person to whom an ownership interest in a dwelling securing a closed-end consumer credit transaction is transferred from a consumer, provided that the transfer is: 

(1) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; 

(2) a transfer to a relative resulting from the death of the consumer; 

(3) a transfer where the spouse or children of the consumer become an owner of the property; 

(4) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the consumer becomes an owner of the property; or 

(5) a transfer into an inter vivos trust in which the consumer is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.[i] 

Regulation Z[ii] defines “confirmed successor in interest” as a “successor in interest” once a servicer has confirmed the "successor in interest" identity and ownership interest in the dwelling. 

Regulation Z and Regulation X (the regulation implementing the Real Estate Settlement Procedures Act, RESPA), both affected by the 2013 Mortgage Servicing Rule provisions, work together to address the criteria for the "confirmed successor in interest." 

Regulation X offers guidance on how to confirm a "successor in interest." In general, a mortgage loan servicer must respond to a written request indicating that the person making the request may be a "successor in interest" by providing a written description of the documents the servicer reasonably requires to confirm the person’s identity and ownership interest. 

Further, Regulation X requires mortgage loan servicers to maintain policies and procedures reasonably designed to ensure that the servicer can, upon receiving notice of the death of a borrower or any transfer of the property securing a loan, promptly facilitate communication with any potential or "confirmed successor(s) in interest."[iii] 

The definitions of “successor in interest” and “confirmed successor in interest” are important because Regulation Z defines the term “consumer” (viz., RESPA similarly defines the term “borrower”) to include a "confirmed successor in interest" for purposes of various (but not all) of its provisions, including its requirements regarding escrow account closing notices, ARM adjustment notices, crediting of payments, late charge pyramiding, payoff statements, mortgage transfer disclosures, and periodic statements. 

In general, a loan servicer is not required to provide notices to a "confirmed successor in interest" if it is already providing the same disclosure to another consumer on the account. For example, a loan servicer is not required to provide a periodic statement for a mortgage loan to a "confirmed successor in interest" if the servicer provides the same periodic statement to another consumer. 

What you should note here is that both the Regulation X and Regulation Z definitions of “successor in interest” are limited to transferees who receive ownership in property that secures closed-end credit, because Regulation X[iv] defines “mortgage loan” for purposes of its servicing provisions to exclude open-end lines of credit, while the Regulation Z[v] definition refers to closed-end consumer credit transactions. 

To be clear, transferees of properties that secure open-end credit are entitled to protections as borrowers under Regulation X and consumers under Regulation Z if they assume the loan obligation under state law or are otherwise liable for the mortgage loan obligation.[vi] 

Regulation X offers an option for servicers to provide an initial explanatory notice and acknowledgment form to “confirmed successor(s) in interest” who have not assumed the mortgage loan obligation and are not otherwise liable for it. The notice must explain that the servicer has confirmed the "successor in interest" identity and ownership interest and that the “confirmed successor in interest” is not liable unless and until the “confirmed successor in interest” assumes the mortgage loan obligation under state law. 

The notice must also explain that the “successor in interest” may be entitled to receive certain notices and communications about the mortgage loan if the servicer is not providing them to another “successor in interest” or consumer on the account. The notice must indicate that the "confirmed successor in interest" has to return the acknowledgment to receive servicing notices under the Mortgage Servicing Rule ("Rule").

Regulation X[vii] and Regulation Z[viii] relieve servicers that send this optional notice and an acknowledgment form from certain obligations set forth in the Rule, including notice requirements and the requirement to engage in live contacts with the "confirmed successor in interest." 

In effect, the Rule suspends these obligations until the “confirmed successor in interest” provides the servicer an executed acknowledgment indicating a desire to receive the notices or assumes the mortgage loan obligation under state law. 

Your question about an executor’s access to a deceased borrower's digital account seems similar to a case considered by a federal district court in Maryland. The case, Holland v. Signal Financial Credit Union, involved a TILA periodic statement claim filed by the executor of a borrower’s estate.[ix] 

Here’s a brief outline of the case. Evelyn Holland was diagnosed with Alzheimer’s disease in March 2013, after which she asked William Holland, her first cousin, “to accept her power of attorney to manage her financial affairs, and to act as eventual estate Executor.” He agreed. Evelyn died in July 2022. William was the sole heir of the decedent's estate. He alleged that Signal Financial Credit Union had blocked his digital access to Evelyn’s accounts, including her home equity line of credit (HELOC). 

William sued. He alleged that the credit union’s refusal to grant him digital access violated the Maryland Fiduciary Access to Digital Assets Act and TILA. The court granted summary judgment to the credit union. 

According to the court, the credit union did not violate the Maryland statute because William testified that he was not granted authority to access digital assets either in Evelyn’s power of attorney or will nor did he ever make a written request for access as required by the statute. 

Regulation Z and TILA only required periodic statements to the “consumer,” defined as the person to whom the loan was made or any “confirmed successor in interest.” The TILA claim failed because Evelyn was the only consumer on the HELOC, and no “confirmed successor in interest” had been designated. 

It is undisputed that William never requested digital access to Evelyn's HELOC accounts. And even if he had requested such access, the court found that TILA and its implementing Regulation Z do not require that digital access be granted to anyone other than the person who took out the loan. 

William failed to allege actual damages from the purported TILA violations, which left him without standing.[x]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] § 1026.2(a)(27)(i)

[ii] § 1026.2(a)(27)(ii)

[iii] The provision makes clear that servicers do not need to search for a potential "successor in interest" if the servicer has not received actual notice of their existence.

[iv] § 1024.31

[v] Op. cit. 1

[vi] For example, see Regulation Z § 1026.20(f) and Regulation Z Comments 2(a)(11)-4.

[vii] § 1024.32(c)

[viii] §§ 1026.20(f), 1026.39(f), and 1026.41(g)

[ix] Holland v. Signal Financial Credit Union, D. Md. Jan. 16, 2024

[x] The court did not point out that Regulation Z’s “confirmed successor in interest” provisions do not apply to open-end credit (i.e., HELOCs) unless the “successor in interest” assumes the loan obligation.