What’s in a word? “Lender” Defined

QUESTION
Last week, we watched a presentation from a top business management company. The theme was about the challenges that mortgage lenders face these days.

As a large mortgage lender, we found the presentation interesting. However, it occurred to us that they gave this big presentation and did not define the word “lender” in their slides.

So, we looked at the mortgage regulations and found that the definition varied, depending on the regulation. After talking about it, we decided to ask you for a general, working definition that we could use.

What is a generic definition of a “lender?”

ANSWER
This is a good question. You did not mention if the regulations you looked at were state or federal. And that is important. In any event, I think the essence of your question is meant to pertain to both state and federal banking laws. Our firm is always using definitions as they are defined in a specific statute. We deal with consumer credit compliance all the time and know the importance of statutory and regulatory definitions.

My guess is that you had the federal mortgage regulations in mind. So, I will give you a bird’s eye view based on the federal regulations and how they may extend to state law. Sometimes we can determine what a mortgage lender is by describing what it is not. That may seem counterintuitive, but it really isn’t. You’d be surprised how much litigation pivots on a judicial interpretation of what is or is not meant by a single word!

A recent case shows the importance of the term “lender” as it is used in state and federal law. The case is Kemp v. Nationstar Mortgage Association, which was litigated in Maryland’s Court of Special Appeals.[i] First, I will provide a brief outline of the case. Then, I’ll offer a few observations.

Kemp obtained a mortgage loan from Countrywide, which assigned the loan to Fannie Mae. Unfortunately, in 2017 Kemp fell behind on her payments, and her loan servicer, Seterus, declared the loan in default. Kemp had learned that Seterus charged her $180 for twelve property inspections it ordered after she defaulted. In November 2017, Seterus offered, and Kemp accepted, a loan modification, which rolled several of the property inspection fees into the loan balance.

In December 2017, Kemp sued Seterus and Fannie Mae on behalf of herself and a class, alleging that Seterus had violated § 12-121 of Maryland’s Commercial Law, which prohibits a “lender” from imposing a property inspection fee “in connection with a loan secured by residential property.”

The trial court dismissed the complaint, holding that Seterus and Fannie Mae were not “lenders” and that § 12-121 did not prohibit them from charging inspection fees.

The Court of Special Appeals reversed. The view here was that the trial court’s interpretive construction would defeat the broader statutory purpose and lead to absurd results. This is because § 12-121 applied to assignees. Maryland’s General Assembly, the court held, did not intend for the section’s broad prohibition against property inspection fees to apply only to the originator of the loan and, even more to the point, to allow assignees of the loan or their agents to charge the very fees the originators could not.

Now for some observations.

Both lenders and borrowers should be careful when considering the reach of a decision, such as in the case I’ve cited above. As I inferred, the meaning of a term such as “lender” may change from one statutory provision or framework to another. For instance, in the case of Bishop v. Carrington Mortgage Services, LLC,[ii] a federal district court considered a claim by borrowers that their mortgage loan servicer, which handled servicing for an assignee of the borrowers’ loan, had improperly charged them a $5 fee to make their payments online, in violation of several state statutes and the Federal Debt Collection Practices Act (FDCPA). In Bishop, the federal court apparently chose to discount Kemp, which was a state court decision.

Let’s drill down a bit.

In November 2005, Alexander took out a residential mortgage loan from America’s Wholesale Lender to buy a home. She entered into a deed of trust that included this language:

“In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or Applicable Law.”

Alexander’s Note required her “to make all payments under this Note in the form of cash, check or money order” and to make those payments at a specified post office box or “at a different place if required by the Note Holder.”

Seven years later, in 2012, Alexander’s Note was assigned to The Bank of New York Mellon, as trustee for the certificate holders of the CWABS, Inc., Asset-Backed Certificates, Series 2005-13, which I’ll call “CWABS.” In August 2013, CWABS retained Carrington Mortgage Services to service Alexander’s loan.

When Alexander made her monthly payments, Carrington Mortgage offered her options with respect to the payment method. She chose to make her payments online to Carrington Mortgage, each time incurring a $5 processing fee, rather than to send a check or money order and not incur a processing fee. Alexander sued Carrington Mortgage on behalf of herself and a purported class, alleging that the practice of charging a $5 “convenience fee” violated various Maryland statutes, most notably for our purposes Maryland Commercial Law § 12-105(d).

According to the court, § 12-105 limits the fees a “lender” may charge. Under Maryland law, a “lender” means “a licensee or person who makes a loan subject to this subtitle.” A “lender” does not include a subsequent assignee of the loan or the loan servicer. The court cited Flournoy v. Rushmore Loan Management Services, LLC,[iii] a federal court decision that Kemp had disavowed.

In Bishop, the court mentioned Kemp this way:

“While Plaintiffs argue that the recent Maryland Court of Special Appeals’ decision in Kemp v. Nationstar Mortgage Association supports finding that Carrington was a lender, that decision specifically applied to Section 12-121 of Maryland's Commercial Law Code, finding that ‘§ 12-121 is not limited to the originators of loans.’…. This holding does not extend to Section 12-105(d), which still requires that the lender be the originator of the loan.”

I know it seems convoluted, but, according to the court, this left no question that Carrington was not the originator of the loan, so Alexander’s claim under § 12-105(d) failed. The court discounted Kemp simply because Kemp dealt with a different provision, to wit, § 12-121, without addressing the “broader statutory purpose” cited by Kemp.

How another court will consider the question is anyone’s guess. A decision might depend on whether the action is filed in a state court or a federal district court. But, I hope you can see how the word “lender” is determined as defined by a statute.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

______________________________________  
[i] 248 Md. 1, 239 A.3d 798, Md. App. (Ct. Spec. App. 2020)
[ii] Bishop v. Carrington Mortgage Services, LLC, 2020 U.S. Dist. (D. Md. Dec. 11, 2020)
[iii] Flournoy v. Rushmore Loan Management Services, LLC, 2020 U.S. Dist. (D. Md. Mar. 17, 2020)

Who owns the loan?

QUESTION
We came under an audit by our regulator a few months ago. Today we received their report.

The report shows a few issues that we’ll need to resolve. One of them involves the Notice of Loan Ownership. We were cited for failing to disclose the Transfer of Loan Ownership. 

Since we are now redrafting our policies and procedures, we want to know about the responsibility to issue this disclosure. 

Who is responsible for this disclosure, the company transferring the loan or the company receiving the loan?

ANSWER
Sometimes an action that seems intuitively correct is wrong as it relates to the law, Best Practices, and regulatory requirements. If I were to put your question to a large group of people, many of them would say that the transferring company is responsible, and many will say that the receiving company is responsible.

Section 131(g) of the Helping Families Save Their Homes Act, which was enacted in 2009, amended the Truth-in-Lending Act (TILA) to require a “creditor” who acquires a mortgage loan to disclose that fact to the borrower not more than 30 days after the date on which the loan is sold or otherwise transferred or assigned to a third party. In my view, the statute abuses the term “creditor” because TILA ascribes a specific meaning to that word. TILA defines “creditor” to mean a person who regularly extends consumer credit that is subject to a finance charge or is payable by a written agreement in more than four installments (not including a down payment) and to whom the obligation is initially payable, either on the face of the note or contract or by agreement if there is no note or contract.

The situation contemplated by § 131(g), to wit, the acquisition of a mortgage loan, attempts to impose a disclosure obligation on someone to whom the obligation is not initially payable, that is, on someone who subsequently acquires an already originated loan and does not meet TILA’s definition of creditor.

Regulation Z, implementing § 131(g), does not make the same mistake. It specifically provides, in Comment 39(a)(1)-1, that “the fact that a person purchases or acquires mortgage loans and provides the disclosures under this section does not by itself make that person a ‘creditor’ as defined in the regulation.” Indeed, the Federal Reserve Board (FRB), and later, the CFPB, concluded that Congress did not intend the word “creditor” to have the same meaning as “creditor” under TILA and Regulation Z. I know; a bit confusing!

To give effect to the legislative purpose, the agencies construed it to refer to the owner of the debt following the sale, transfer, or assignment, without regard to whether that party would be a “creditor” for other purposes under TILA or Regulation Z; hence, the regulation uses the term “covered person” instead of “creditor” in its provision implementing TILA § 131(g).

Although § 131(g) became effective immediately upon enactment, the FRB chose to adopt interim regulations to implement the section, so parties subject to the TILA disclosure requirement would have prompt guidance on how to interpret and comply with the statutory requirements already in effect. To allow time for operational changes, the FRB made compliance with the Regulation Z change optional until January 19, 2010. That did not mean noncompliance with the statutory requirement would necessarily go unpunished until January 19, 2010, although perhaps one could argue that the FRB’s delayed compliance date was an exercise of its authority under TILA to provide for adjustments to the statutory requirements.

In any event, the delayed compliance date meant that noncompliance with any requirement in the regulation that extended beyond the minimum required by the statute could not be punished unless it occurred on or after January 19, 2010.

This requirement must not be confused with the requirements of the Real Estate Settlement Procedures Act (RESPA) regarding mortgage servicing transfers. Under Regulation X, the implementing regulation of RESPA, consumers must be notified when their mortgage loan servicer has changed. In contrast, § 131(g) was intended to provide consumers with information about the identities of the owners of their mortgage loans, partly so they know whom they may contact if they want to exercise a right to rescind the loan. The provision was not intended to require a notice when a transaction does not involve a change in the ownership of the physical note, such as when the note holder issues mortgage-backed securities but does not transfer legal title to the loan.

In reviewing recent court decisions as they relate to the scope of TILA § 131(g) and its implementing provisions in Regulation Z § 1026.39, certain observations can be construed. One case provides insight into the treatment of TILA § 131(g).

The illustrative case is Kornea v. Fannie Mae,[i] in which a federal district court in Pennsylvania considered a consumer’s complaint that Fannie Mae had failed to disclose information about the ownership of his mortgage loan, in violation of § 131(g).

Kornea alleged that in June 2012 he received a letter from Chase, his loan servicer, explaining that his loan had been “sold into a public security managed by Fannie Mae” and that Chase was “authorized by the security to handle any related concerns” on its behalf. The letter provided the investor’s address, but not its name.

About seven years later, in May 2019, Kornea called Fannie Mae, seeking the loan holder’s identity. He was told the information could not be given to him over the phone. He then sent a registered letter to Fannie Mae requesting the owner’s name, address, and phone number. Fannie Mae did not respond. He sent a second letter, and again Fannie Mae did not answer. He sent a letter to Chase asking for the same information, to which Chase responded that Kornea’s loan could “be transferred between investors over its life, but its current investor [wa]s Fannie Mae.”

In October 2019, Kornea sued Fannie Mae under § 131(g)[ii]; however, the state court dismissed the claim as time-barred, though it allowed Kornea to file an amended complaint, in which he added Chase as a defendant. Chase removed the case to federal court.

The federal district court also dismissed the claim against Fannie Mae as time-barred, holding that claims under § 131(g) are subject to a 1-year limitation on actions. Because Kornea learned about the sale of his loan into a Fannie Mae security on June 19, 2012, his claim against Fannie Mae expired a year later, in 2013.

The court then turned to another TILA subsection, § 131(f)(2), because Kornea’s complaint included a claim against Chase under that subsection. That section requires a servicer, upon written request by a consumer obligor, to provide the obligor with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.

TILA has a civil liability section[iii] that addresses a consumer’s right to sue for TILA violations. The section specifies that “any creditor who fails to comply with any requirement imposed under this part, including any requirement under § 125, subsection (f) or (g) of § 131, or part D or E of this subchapter” is liable. Accordingly, the creditor, not the servicer – unless, of course, the servicer also is the creditor or an assignee of the creditor – might be liable for violations of this requirement.

Kornea alleged only that Chase was the servicer of his loan, not that Chase was a “servicer-assignee.” As a result, according to the court, Kornea had not alleged “enough facts to show that Chase had any obligation to provide the information Section [131(f)(2)] requires.” The court continued, “And even if he had, Chase met TILA’s obligations in its June 3, 2019 letter responding to Kornea’s request for information by providing ‘the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.’”

From the foregoing matter, we can derive helpful guidance. Section 131(f)(2) seems quite clear that the servicer of a mortgage loan, whether a “servicer-assignee” or not, has an obligation to comply with its disclosure requirement. That subsection expressly refers to RESPA for the definition of a “servicer” as “the person responsible for servicing of a loan (including the person who makes or holds a loan if such person also services the loan).”

This definition does not incorporate the additional requirement that the servicer be an assignee, a fact various courts have overlooked.[iv] Chase appears to meet that definition. However, the court is right that Chase apparently satisfied its disclosure obligation and that TILA imposes liability for failure to meet that disclosure obligation only on the “creditor” of the loan, not the servicer (unless the servicer also meets the definition of creditor).

Thus, it may seem appropriate that if only servicers can violate TILA § 131(f)(2), Congress must have intended to create a cause of action for failing to comply with that section, whether it be against the servicer or the creditor with liability for the servicer’s failure.

To avoid rendering the subsection meaningless, some judges have applied agency principles to make the loan owner liable for violations by its servicer.[v]

And other courts have assumed liability without devoting attention to the distinction between a disclosure obligation under § 131(f)(2) and liability under § 130(a).[vi] 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

_______________________________________
[i] Kornea v. Fannie Mae, 2020 U.S. Dist. (E.D. Pa. Oct. 6, 2020)
[ii] 15 U.S.C. § 1641(g)
[iii] TILA § 130(a)
[iv] Including the U.S. Court of Appeals for the 9th Circuit in Gale v. First Franklin Loan Services, 701 F.3d 1240 (9th Cir. 2012).
[v] See, for instance, Montano v. Wells Fargo Bank, 2012 U.S. Dist. (S.D. Fla. Oct. 23, 2012); Galeano v. Fed. Home Loan Mortg. Corp., 2012 U.S. Dist. (S.D. Fla. Aug. 21, 2012); Kissinger v. Wells Fargo Bank, 888 F. Supp. 2d 1309 (S.D. Fla. 2012).
[vi] See Sam v. American Home Mortgage Servicing, 2010 U.S. Dist. (E.D. Cal. Mar. 3, 2010); Stephenson v. Chase Home Finance LLC, 2011 U.S. Dist. (S.D. Cal. May 23, 2011); and Erickson v. PNC Mortgage, 2011 U.S. Dist. (D. Nev. May 6, 2011).

Notification of Mortgage Transfer Disclosure

QUESTION

We recently sold a portfolio of mortgage loans to a third party. We believe the third party is a “covered person” as defined by the statute. What we want to know is who must notify the borrower if the loan is sold to a third party? Also, when does the third party have to provide the mortgage transfer disclosure?

ANSWER

A “covered person” is a person who acquires more than one mortgage loan in a twelve-month period and becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through purchase, assignment or other transfer. [75 FR 58489, 58501, codified at 12 CFR § 226.39(a)(1)]

However, a servicer is not treated as the owner of an obligation if the servicer holds title to the loan, or title is assigned to the servicer, solely for the administrative convenience of the servicer in servicing the obligation. [75 FR 58489, 58501, codified at 12 CFR § 226.39(a)(1)]

Unless there is an exception, a covered person must provide a notice to the consumer when the covered person becomes the owner of an existing home-equity plan or mortgage loan by acquiring legal title to the debt obligation, whether through purchase, assignment or other transfer. [75 FR 58489, 58501, codified at 12 CFR §§ 226.39(a), 226.39(b)]

For the purposes of the transfer obligations, a mortgage loan is any open-end or closed-end consumer credit transaction that is secured by the principal dwelling of a consumer. [75 FR 58489, 58501, 58502, codified at 12 CFR § 226.39(a)(2); 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.39(a)(2)-1]

With respect to when a covered person must provide the mortgage transfer disclosure, unless an exception applies, a covered person must provide this disclosure on or before the thirtieth calendar day following the date of transfer. [75 FR 58489, 58501, codified at 12 CFR § 226.39(b)]

As to determining a date of transfer, this date is at the option of the covered person, as either the date of acquisition of the mortgage loan recognized in the books of the acquiring party, or the date of transfer of the mortgage loan recognized in the books of the transferring party. [75 FR 58489, 58501, codified at 12 CFR § 226.39(b)(2)]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group