QUESTION
I am the General Counsel and Compliance Officer of a mortgage lender in the Northeast. We originate retail and wholesale loans and are licensed in all states and territories. Recently, we had a multistate banking audit. The audit found that some of our Third-Party Originators (TPOs) had violated RESPA.
After conducting a servicing quality control audit, we have decided to sue several TPOs for causing these RESPA violations. The problem we’re having is that RESPA does not address its enforcement consistently or comprehensively. It provides specific penalties in some sections but fails to mention remedies for violations in other sections.
I want some guidance in navigating RESPA’s maze to determine where a private right of action is available and where it isn’t. In particular, I need some advice on how the TRID rule affected RESPA enforcement and private causes of action.
COMPLIANCE SOLUTIONS
Servicing Quality Control Audits
ANSWER
The Dodd-Frank Wall Street Reform (Dodd-Frank) and Consumer Protection Act (CPA) may have altered your scenario somewhat. Although courts generally have failed to examine this issue thoroughly, it is important to note that courts have given Chevron deference to the CFPB’s analysis of the topic. However, that approach may be about to change in light of Chevron's demise,[i] which I will discuss a bit below.
If you’re using outside counsel for this litigation, be sure to retain a firm that has extensive experience in such matters. You can contact me here to discuss a referral.
I will give you a brief overview with an emphasis on the TILA-RESPA Disclosure Integration Rule (TRID Rule). Let’s first talk history!
RESPA PENALTIES
The Real Estate Settlement Procedures Act (RESPA) contains penalty provisions for Section 6, which deals with mortgage servicing and escrow administration);[ii] Section 8, which prohibits kickbacks and unearned fees);[iii] Section 9, which deals with title companies;[iv] and the escrow statement requirements of Section 10.[v]
RESPA does not include penalties for violations of other sections, such as Section 4 (HUD-1 Settlement Statements), Section 5 (Special Information Booklets and Good Faith Estimates), Section 10 (Limitations on Escrow Accounts), and Section 12 (Fees for Preparation of Truth-in-Lending or Settlement Statements). However, the absence of RESPA penalty provisions may no longer afford defendants the comfort it once did.
RESPA’s HANDOFF TO TILA
The TRID Rule, adopted in November 2013, and effective October 3, 2015, introduced another twist to RESPA enforcement. As just stated, RESPA does not provide private rights of action for violations of Sections 4 and 5, the sections regarding Good Faith Estimates and Settlement Statements. The TRID Rule extrapolated some of the RESPA Section 4 and 5 requirements that had previously appeared in Regulation X (implementing RESPA) over to Regulation Z (implementing TILA, the Truth in Lending Act).
A HISTORY LESSON
This transmogrification of RESPA Sections 4 and 5 had the effect of expanding RESPA liability by bringing those provisions into the purview of the TILA – and TILA provides for a private right of action. You might think of it as legal and regulatory prestidigitation!
Now, there was considerable pushback to this switcheroo. One of the biggest gripes was that the TRID Rule would invite consumers to bring lawsuits seeking TILA remedies for RESPA violations. The upshot of this concern was to have the Consumer Financial Protection Bureau (CFPB or Bureau) specify which provisions of Regulation Z, as affected by the TRID Rule, relate to TILA requirements and which relate to RESPA requirements.[vi]
The CFPB awkwardly responded in this way:
“While the final regulations and official interpretations do not specify which provisions relate to TILA requirements and which relate to RESPA requirements, the section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provision.”
And, having side-stepped a formal resolution, the
“… detailed discussions of the statutory authority for each of the integrated disclosure provisions [in the section-by-section analysis] provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.”
Obviously, this was hardly a satisfying response. Nevertheless, industry participants implemented the TRID Rule while still expressing considerable concern about the CFPB's choice to fit the changes into Regulation Z. The apprehension stemmed from the fact that TILA and Regulation Z impose substantial liability for disclosure violations, compared to the general lack of liability under RESPA and its implementing Regulation X.
THE CFPB’S SOLOMONIC DECISION
The CFPB chose to exclude most closed-end consumer credit transactions secured by real property, other than reverse mortgages, from the early disclosure requirements of Regulation Z[vii] and the standard closed-end disclosure requirements of Regulation Z.[viii] In place of those requirements, the CFPB’s TRID Rule created three sets of provisions for the partially-excluded loans:
1. Loan Estimate.
2. Closing Disclosure.
3. Special Information Booklet.
This partial exclusion of TRID Rule transactions from certain Regulation
Z provisions leaves the rest of Regulation Z in effect for those transactions,
as previously applied.[ix]
Conversely, the CFPB fit the TRID changes into the RESPA regime by excluding the loans covered by the TRID Rule from five provisions of RESPA Regulation X:
· Special Information Booklet. Regulation X § 1024.6. For loans subject to the TRID Rule, Regulation Z § 1026.19(g) imposes the same Special Information Booklet requirement.
· Good Faith Estimate. Regulation X § 1024.7. For loans subject to the TRID Rule, Regulation Z § 1026.19(e) imposes the Loan Estimate requirement.
· HUD-1/1A Settlement Statement. Regulation X § 1024.8. For loans subject to the TRID Rule, Regulation Z § 1026.19(f) imposes the Closing Disclosure requirement.
· HUD-1/1A Administration. Regulation X § 1024.10, one day advance inspection of HUD-1/1A Settlement Statement, delivery, and recordkeeping requirements. For loans subject to the TRID Rule, Regulation Z §§ 1026.19(e) and (f) impose corresponding requirements for Loan Estimates and Closing Disclosures.
· Servicing Transfer Application Disclosure. Regulation X § 1024.33(a). For loans subject to the TRID Rule, Regulation Z § 1026.37(m)(6) requires a corresponding disclosure on page three of the Loan Estimate.
In general, the TRID Rule leaves these provisions of Regulation X in place for the loans not subject to TRID, that is, reverse mortgages and the few federally related mortgage loans made by creditors not subject to Regulation Z (i.e., lenders who make five or fewer mortgage loans per calendar year secured by dwellings, unless they make more than one High Cost Mortgage (HCM)). All of the other provisions of Regulation X remain in place for federally related mortgage loans, including those subject to the TRID Rule.
GOOD LUCK WITH THAT!
A careful consideration of the CFPB’s detailed discussion in its section-by-section analysis of the TRID Rule suggests that the agency’s response can be summarized as follows:
Bona Fortuna in separating disclosure liability between TILA and RESPA!
Take a deep breath and consider this off-the-cuff outline of the TRID disclosures in the context of the statutory framework for each disclosure item through the lens of the following cascade:
1.
Any prior implementation of that requirement,
2.
The CFPB’s research into the effectiveness of that
disclosure from both a consumer and industry perspective,
3.
The Bureau’s alteration (if applicable) of the
statutory requirement or previous regulatory implementation of the requirement
to respond to its research,
4.
The Bureau’s agency’s reasons for implementing that
disclosure as part of TILA-RESPA disclosure integration, and
5. The statutory support for including the final version of the disclosure.
And that’s just for starters!
In most cases, the ultimate statutory support rested on a specific requirement stated in TILA, RESPA, and/or the Dodd-Frank Act, bolstered by the regulatory flexibility offered in TILA § 105(a) (sometimes also § 105(f)), RESPA § 19(a), and Dodd-Frank Act §§ 1032(a) and 1405(b).
The CFPB relied on regulatory flexibility given by these provisions because the agency found it necessary to reconcile differences between the RESPA and TILA statutes and between sometimes differing provisions within the TILA statute itself. The agency also found it appropriate to alter many of the statutory requirements (and even discard some) based on conclusions drawn from its research. Consequently, many resulting disclosure items are not derived solely from one statute or the other but from one or more statutory starting points and the broad rulemaking authority given to the CFPB by TILA, RESPA, and the Dodd-Frank Act. Obviously, unraveling the final result to separate a RESPA claim from a TILA claim can be a challenging task.
So far, most courts have taken the CFPB at its word and relied on its
analysis of the TRID Rule (and the 2013 RESPA and TILA Mortgage Servicing Rule)
to determine whether a private right of action is available for a regulatory
violation. But there has been litigation.[x]
And now, after the U.S. Supreme Court’s overruling of the Chevron deference,[xi]
I think we’re likely to see courts dive more deeply into this issue.
OBSERVATIONS
As suggested above, the U.S. Supreme Court’s overruling of Chevron deference may require courts to ignore the CFPB’s stated “intentions” and look more closely at the underlying statutory provisions.[xii]
Conceivably, borrowers might add Dodd-Frank Act claims to their RESPA claims. That is, they might claim that violations of RESPA violate the Dodd-Frank Act. Section 1055 of the Dodd-Frank Act offers the possibility of substantially higher penalties than those specified by RESPA – ranging from $5,000 per day for any violation to $1 million per day for a “knowing violation” (adjusted annually to reflect inflation). Whether an enforcement agency must seek Dodd-Frank penalties or may be obtained by consumers in private actions is an open question courts may someday decide.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] Loper Bright Enterprises v. Raimondo,
144 S. Ct. 2244 (2024)
[ii] 12 USC §§ 2605(d) and 2614
[iii] 12 USC §§ 2607(d) and 2614
[iv] 12 USC §§ 2608(b) and 2614
[v] 12 USC §§ 2609(d)
[vi] Indeed, a rather convoluted view
suggested that the CFPB should implement the TILA disclosure requirements in
Regulation Z and the RESPA disclosure requirements in Regulation X in order to
discourage litigation invoking TILA’s liability scheme for RESPA violations.
[vii] Regulation Z § 1026.19(a)
[viii] Regulation Z § 1026.18
[ix] For example, the Consumer Handbook on Adjustable Rate Mortgages
(CHARM) Booklet and ARM Program Disclosure requirements of Regulation Z §
1026.19(b) continue to apply as they did prior to the TRID Rule.
[x] A recent decision by a federal district court in Texas illustrates this issue. Bassett v. PHH Mortgage, 2024 U.S. Dist. (S.D. Tex. June 27, 2024) (magistrate recommendation), approved and case dismissed by 2024 U.S. Dist. (July 16, 2024). Note: This litigation determined, in particular, that 12 U.S.C. §§ 2605(f) and 2614 do not create private causes of action, nor does RESPA provide private causes of action for violations of Regulation X §§ 1024.35 and 1024.39. As support, the court cited several other decisions within its district. The court acknowledged that Regulation X § 1024.41, “unlike the other RESPA provisions at issue…expressly provides for a private right of action.”
[xi] Op. cit. i
[xii] Op. cit. x
