RESPA Violations: Inconsistent Enforcement

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 

Servicing Tune-up® 

Servicing Compliance 

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., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[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

Defining a Finance Charge

QUESTION 

We had asked our loan officers to tell us what areas in originating loans seem most complicated to them. Then, we compiled their answers. 

Many things confused them about TILA. They had a decent understanding of consummation and timeliness. However, they were unable to make sense of the finance charge. 

In the 2021 year-end meeting, we decided to contact you. 

What goes into making a finance charge? 

ANSWER 

The finance charge has baffled loan officers and consumers virtually from its inception. There is so much case law and disputes and settlements relating to the finance charge that one would need a detailed map to navigate through the iterations, zooming in and out of the ever-circuitous fractals. I will respond within the limits of this space, so whereas brevity is the soul of wit, for now, it will suffice as no more than a teaser. If there is an ongoing concern, I think you might want to do some training on finance charges. Use a reliable trainer or us. 

Let’s get consummation and timeliness out of the way, as they, along with the finance charge, are three essential concepts that underlie Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA). 

We can define consummation to mean the time when a consumer becomes contractually obligated on a credit transaction. This definition is critical because Regulation Z requires all closed-end credit disclosures to be made to the consumer before consummation. A creditor should not require a consumer to sign and return a commitment letter or other binding loan contract for a closed-end consumer credit transaction unless: (1) timely TILA disclosures have been provided before the document was signed, or (2) the document has been carefully drafted to avoid obligating the consumer to complete the loan transaction. 

With respect to timeliness, while TILA disclosures must be in a form the consumer can keep, the TILA-related disclosures typically are given when the form, such as a note (or retail installment contract), containing the disclosures (on its face) is handed to the consumer to be read and then signed (certainly, before consummation – that is, before the consumer is in any manner obligated on the transaction). Regulation Z states: “The disclosures need not be given any particular time before consummation.”[i] 

But, special timing rules do apply to the integrated disclosures required by TILA and the Real Estate Settlement Procedures Act (RESPA) (viz., Loan Estimates and Closing Disclosures), high-cost mortgage (HCM) disclosures, variable-rate transactions secured by the consumer’s principal dwelling with a term greater than one year, and private education loans. A creditor should not simply show a copy of the disclosures to the consumer before the consumer signs and becomes obligated,[ii] given specific performance requirements: 

“The disclosure requirement is satisfied if the creditor gives a copy of the document containing the unexecuted credit contract and disclosures to the consumer to read and sign; and the consumer receives a copy to keep at the time the consumer becomes obligated. It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing."[iii] 

Now, let’s move on to the finance charge. 

As a generic approach to understanding the finance charge, a recent case in the federal district court in Connecticut helps to set us off on the discussion. It not only defined consummation and timeliness but also provided a good definition of a finance charge. In Sparano v. JLO Auto,[iv] the court noted the specific – some might even say “peculiar” – rules regarding the term “finance charge.” Regulation Z defines “finance charge” as “the cost of consumer credit as a dollar amount.” The term includes[v] 

“…  any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.”[vi] 

I have given you a broad starting point. So, now I would like to offer a response directed at your loan officers, those individuals who need practical advice more than cringe-worthy legal theory. I will provide a categorized outline of the types of concerns that often befuddle and confound loan officers. 

Dollar Amount 

The finance charge is the cost of consumer credit as a dollar amount.[vii] This is not often recognized. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the lender as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. 

To determine whether an item is a finance charge, a lender should compare the credit transaction in question with a similar cash transaction. For instance, taxes or registration fees paid by both cash and credit customers are not finance charges. However, inspection and handling fees for the staged disbursement of construction loan proceeds are finance charges. Charges absorbed by a lender as a cost of doing business are not finance charges, even though the lender may consider the costs in determining the interest rate to be charged or the cash price of the property or service sold. Thus, a discount imposed on a credit obligation when a seller-creditor assigns it to another party is not a finance charge as long as the discount is not separately imposed on the consumer.[viii]

Revising Closing Disclosures

QUESTION
Our banking department wrote us up for not complying with the timeline requirements for the revised Closing Disclosure. 

Our view was that providing a corrected Closing Disclosure extends the period a consumer may rescind a loan or take action for a TILA violation. That view came from our attorney. He now agrees with the banking department. 

We want a straight answer to our question to find out who is right. 

Does providing a corrected Closing Disclosure extend the period when a consumer may rescind a loan or take an action for a TILA violation?

ANSWER
Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), generally[i] requires a Loan Estimate (LE) and then a Closing Disclosure (CD) for residential mortgage loans. The creditor is responsible for ensuring that the consumer receives the CD no later than three business days before consummation and that the CD meets TILA’s content, delivery, and timing requirements. 

If the CD becomes inaccurate before consummation, the creditor must provide corrected disclosures reflecting any changed terms, so the consumer receives a corrected CD at or before consummation. 

If the creditor makes any of three significant changes between the time the CD is given and consummation, the creditor must provide a new CD and an additional 3-business-day waiting period before consummation. 

The three changes are: 

(1) the disclosed APR becomes inaccurate, specifically, it is more than 1/8 of one percent (1/4 % for a loan with irregular payments or periods) above or below the actual APR;

(2) the loan product is changed, causing the loan product disclosed on the first page of the CD to become inaccurate; or 

(3) a prepayment penalty is added, causing the prepayment penalty statement in the Loan Terms table on the first page of the CD to become inaccurate. Less significant changes can be disclosed on a revised CD received by the consumer at or before consummation without delaying the closing. 

Clerical errors discovered after consummation are subject to redisclosure. No later than 60 calendar days after consummation, a creditor must provide a revised CD to correct non-numerical clerical errors and document refunds for tolerance violations. 

What is a clerical error? An error is “clerical” if it does not affect a numerical disclosure and does not affect the timing, delivery, or other requirements for the CD. 

During the 30-day period after consummation, if an event causes the CD to become inaccurate and the inaccuracy results in a change to an amount actually paid by the consumer from that disclosed, the creditor must deliver or place in the mail a corrected CD no later than 30 days after receiving information sufficient to establish that the event has occurred. 

A creditor is not required to provide a corrected CD (or a refund) for any per diem interest disclosure considered accurate under Regulation Z § 1026.17(c)(2)(i), that is, if the CD were based on the best information reasonably available at the time it was provided, even if the amount actually paid by the consumer differed from the amount disclosed.[ii] 

Having set forth some of the basics, I will answer your question about whether giving a corrected CD extends the period during which a consumer may rescind a loan or bring an action for a TILA violation? 

A recent case decided in a Hawaiian federal district court offers a resolution to your question. 

In Mathias v. HomeStreet Bank, Inc.,[iii] Mathias took out a $276,250 mortgage loan in 2009 with HomeStreet Kapolei to purchase a lot. On March 1, 2018, Mathias signed a 30-year note and mortgage with HomeStreet Bank to refinance the earlier loan. 

On April 18, 2018, HomeStreet Bank provided a revised CD that updated certain loan terms, including changing the closing date from March 1 to March 2. 

On March 22, 2021, Mathias sued to rescind the 2018 loan. He contended that the 3-year period for rescinding his loan because of TILA violations started running on April 18, 2018, the day he was given a revised CD. 

Not so, said the court, because his claim was time-barred since his right to rescind had expired before he filed his lawsuit. The parties did not dispute that Mathias had executed the loan – at the latest – on March 2, 2018. Accordingly, the right to rescind had expired several weeks before Mathias filed his lawsuit on March 22, 2021. 

The plain language of the TILA statute makes clear that the time period for exercising rescission does not restart if a creditor provides disclosures after the loan has been consummated, to wit, the statute states that “[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction … .” 

So what is the takeaway from the Mathias case? 

Clearly, Mathias did not notify the creditor in writing of his intent to rescind until he filed the complaint to begin his court action. Had he done so before March 2, 2018, his suit most likely would have been timely. The U.S. Supreme Court, in Jesinoski v. Countrywide Home Loans, Inc.,[iv] held that a borrower need not file suit within the 3-year period so long as the borrower notified the creditor of their intent to rescind within the 3-year period. 

TILA states explicitly that a borrower “shall have the right to rescind … by notifying the creditor, in accordance with regulations of [the CFPB], of his intention to do so.” Regulation Z § 1026.23(a)(2) allows the consumer to exercise the right to rescind “by mail, telegram or other means of written communication” and provides that “[n]otice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor’s designated place of business.” TILA does not also require the consumer to sue within three years. 

Granted, if an action is filed after the 3-year period, an issue may arise as to how much time is allowed for filing. Some courts have applied the 1-year limitation on actions contained in TILA § 130(e). As the CFPB suggested in amicus curiae briefs filed in numerous actions, others may apply borrowing doctrines to find an analogous limitation on actions.[v] 

Mathias included a TILA claim for statutory damages—for failing to notify him of his right to cancel. The court also found this claim time-barred by TILA’s 1-year limitation on actions for statutory damages, which ran from the date of the occurrence of the disclosure violation (i.e., the date of closing).

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

_______________________________

[i] TILA-RESPA Integrated Disclosure (TRID) rule: loans not covered by TRID are home-equity lines of credit, reverse mortgages, mortgages secured by a mobile home or dwelling not attached to land, no-interest second mortgage made for down payment assistance, energy efficiency or foreclosure avoidance, and loans made by a creditor who makes five or fewer mortgages in a year.
[ii] Regulation Z Comment 19(f)(2)(iii)-2
[iii] Mathias v. HomeStreet Bank, Inc., 2021 U.S. Dist. (D. Haw. June 21, 2021), and after amended complaint.
[iv] Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015),
[v] For instance, example, in Hoang v. Bank of America, 910 F.3d 1096 (9th Cir. 2018), the 9th Circuit applied what it found to be the most analogous state law statute of limitation - Washington State’s 6-year statute of limitation under general contract law for a written agreement, and in Mitchell v. Deutsche Bank Nat’l Trust Co., 714 Fed. Appx. 739 (9th Cir. 2018), the 9th Circuit applied the State of California’s 4-year statute of limitation for rescission of a contract. This question was not before the Supreme Court in Jesinoski, and that Court has not yet addressed the issue.

Accurate and Reasonable Disclosures

QUESTION

You may feel that our question is unusual. Still, we think it involves concerns that many people have relating to disclosures, particularly how to determine if a disclosure is accurate or inaccurate.

In my experience, this issue comes up a lot. We use document vendors, but we are relying too much on them for accuracy. We found this out the hard way when a regulator found that one of the TILA disclosures was inaccurate and unreasonable.

The idea of accuracy makes sense, but this notion of reasonableness seems pretty subjective to us.

So, we want to know what is considered reasonable in TILA disclosures?

ANSWER

Your question is not as unusual as you may think. Our compliance professionals are often presented with providing guidance on disclosure compliance. We consider several factors, one of which is the reasonableness of the disclosures.

Regulation Z[i] includes several rules regarding disclosures, including the basis on which disclosures must be given, the use of estimates, and the treatment of irregularities.

Here’s a good rule of thumb for you to follow when reviewing a disclosure: it must reflect the terms of the legal obligation between the parties.

For example, suppose a borrower executes an unsecured note that provides for the total debt to be due five years from the date of the loan. In that case, disclosures must be based on the 5-year term, even if the borrower might informally promise to make monthly or quarterly payments of accrued interest. In other words, disclosures must reflect the credit terms to which the parties are legally bound at the outset of the transaction.

Furthermore, under Regulation Z[ii], if any information necessary for an accurate TILA disclosure is unknown to the creditor, the creditor must make the disclosure based on the best information reasonably available and state that the disclosure is an estimate. This provision provides that disclosures may be estimated if the exact information is unknown at the time the disclosures are made. The provision is based on a section of TILA[iii] that authorizes the CFPB to provide by regulation that any portion of the information TILA requires to be disclosed may be given in the form of estimates when the provider of the information is not in a position to know exact information.

Under Regulation Z, a creditor has no liability for an inaccurate disclosure if the necessary information is not reasonably available by the time of consummation. However, even if a disclosure is validly marked as an estimate before consummation, the creditor may still be required to redisclose when more accurate information becomes available by the time of consummation.[iv]

The estimates must be made in good faith, based on the best information reasonably available, and designated as estimates in the segregated disclosures. Under Regulation Z, as to open-end credit[v] and closed-end credit[vi], creditors are required to make disclosures based on the “best information reasonably available” and to state that the disclosure is an estimate when “any information necessary for an accurate disclosure is unknown.”

A case involving a military veteran illustrates the juncture of “best information reasonably available” and when “any information necessary for an accurate disclosure is unknown.” Let’s check it out.

In Pennsylvania, a federal district court recently examined these requirements in light of a lender’s disclosure of property taxes based on an expected exemption for a borrower.[vii] In some states, such as Pennsylvania, a military veteran may be exempted from paying local property taxes under certain circumstances.

Nelson, a retired, 100-percent disabled military veteran, obtained a home mortgage loan from Acre Mortgage. Under a state program, veterans classified as 100-percent disabled could be exempted from paying local property taxes so long as their income fell below a statutory maximum. Although officials made determinations regarding the income-eligibility criteria with the state veterans’ commission, county veterans' offices handled applications for the exemption.

In her loan application, Nelson disclosed a monthly income of $7,086.83, including $1,510 in social security disability benefits, $2,906.83 in non-educational veterans’ benefits, and $2,670 in military pension benefits. She did not disclose any other income, and, at closing, she signed a statement acknowledging the income information to be true and correct.

In conducting its due diligence before closing, Acre Mortgage consulted the county officials to confirm that property taxes could be excluded. Based on Nelson's income information to Acre Mortgage, county officials informed Acre Mortgage that Nelson should be eligible for the property tax exemption. Nelson also had previously spoken with county officials.

One or two days before closing, Acre Mortgage again contacted county officials to confirm Nelson’s eligibility for the tax exemption, and the county informed Acre Mortgage that, based on the income information submitted to the lender, she was eligible, but that the exemption could not be formally granted until Nelson had title to the property. Accordingly, Acre Mortgage excluded property taxes from the loan disclosures and closing documents.

In December 2015, after closing, Nelson applied for the veteran property tax exemption. In February 2016, the state veterans’ commission notified her that she was not eligible for an exemption because she received educational benefits that increased her income above the statutory maximum for eligibility.

Nelson completed a graduate degree program in May 2016 and then no longer received educational veterans’ benefits. Her income fell below the statutory maximum, and in 2017 she was granted the tax-exempt status.

She sued Acre Mortgage, including TILA violations among other claims. She claimed that Acre Mortgage had provided disclosures on the wrong forms (by failing to use the Loan Estimate and Closing Disclosure and instead using Good Faith Estimate and other forms that had preceded the implementation of the Loan Estimate and Closing Disclosure), failed to disclose local property taxes, and failed to make a reasonable and good faith determination of her ability to repay the loan.

The court dismissed her TILA claims. Evidence showed that Nelson had failed to disclose her educational veterans’ benefits as income and further indicated that Acre Mortgage had relied on the representations of both Nelson and county officials regarding her eligibility for the disabled veterans’ property tax exemption. Evidence also showed that Acre Mortgage had acted in good faith and exercised due diligence in seeking to determine whether property taxes could be excluded from her estimated monthly payment and other mortgage loan disclosures.

In addition, evidence showed that Acre Mortgage had based the TILA disclosures on the best information reasonably available at the time the disclosures were provided and had clearly stated that the disclosures were estimates.

Finally, evidence showed that the ability-to-repay determination was based on the best information reasonably available at the time of loan consummation. No reasonable jury could have returned a verdict in favor of Nelson with respect to whether Acre Mortgage had made a reasonable and good faith determination of ability to repay or whether Acre Mortgage had adequately disclosed Nelson’s local property tax obligations or estimated monthly payments.

The court also held that Acre Mortgage had used the proper disclosure forms, as the TRID disclosure forms (viz., Loan Estimate and Closing Disclosure) were not required until after Nelson submitted her loan application.

TRID disclosure requirements took effect for applications received on or after October 3, 2015, but Acre Mortgage received Nelson’s application on September 24, 2015.

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

Lenders Compliance Group

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[i] § 1026.17(c)
[ii] § 1026.17(c)(2)
[iii] TILA § 121(c), 15 U.S.C. § 1631(c)
[iv] As set forth in Regulation Z § 1026.17(f), see “early disclosures when a subsequent event renders them inaccurate.”
[v] §§ 1026.5(c)
[vi] 1026.17(c)(2)
[vii] Nelson v. Acre Mortgage & Finance, Inc., 2020 U.S. Dist. (M.D. Pa. Sept. 25, 2020)

Criminal Liability in TILA

QUESTION
I am the General Counsel of a small bank in the Midwest. 

Bank lawyers typically focus on the civil liability provisions of TILA. However, I think we have a blind spot when it comes to criminal liability. 

I am catching up on criminal liability with respect to TILA violations. I hope you can start me off in the right direction. 

How can criminal liability arise in violations of TILA?

ANSWER
It may be worthwhile to consider criminal liability in viewing violations of the Truth in Lending Act (TILA).

TILA § 112 specifies:

“Whoever willfully and knowingly (1) gives false or inaccurate information or fails to provide information which he is required to disclose under the provisions of [TILA] or any regulation issued thereunder, (2) uses any chart or table authorized by the Consumer Financial Protection Bureau (CFPB) under section 1606 of this title in such a manner as to consistently understate the annual percentage rate determined under section 1606(a)(1)(A) of [TILA], or (3) otherwise fails to comply with any requirement imposed [by TILA], shall be fined not more than $5,000 or imprisoned not more than one year, or both.” (My emphasis.)

It is worth noting that this TILA provision rarely sees the light of day, but it is available. A case comes to mind where the U.S. Court of Appeals for the 2nd Circuit affirmed its use against a payday lender. The case is United States v. Moseley. Let’s use this case as a learning tool toward understanding the application of criminal liability to a TILA violation. [United States v. Moseley, 2020 U.S. App. (2nd Cir. Nov. 3, 2020)]

For about ten years, Moseley ran a payday loan business, using several domestic and foreign loan entities, including entities in Nevada, the Federation of St. Kitts and Nevis (“Nevis”), and New Zealand, where no usury statutes existed. Moseley and his employees administered the enterprise solely from offices located in Kansas City, Missouri.

In 2014, the CFPB shut the business down on the basis of the illegalities that became the subject of Moseley’s prosecution.

Moseley’s business had offered small-dollar, short-term, unsecured loans in amounts up to $500. The business charged “fees” that functioned as interest payments. Using the Internet, Moseley’s business directly credited the borrower’s bank account with the loan principal by using the borrower’s private banking information. 

For each “loan period,” Moseley charged a $30 fee for each $100 of the borrower’s total loan amount. The business automatically deducted these fees from the borrower’s bank account and credited them to Moseley’s entity at the end of the first loan period.

Unlike the debited fees, repayment would not automatically occur. Unless the borrower affirmatively acted to pay off the principal by the end of the 2-week loan term, the loan would be “refinanced,” (sic) and the term automatically extended. 

For each extension, an additional equal fee would be debited against the borrower’s account and credited to Moseley’s business. Consequently, absent an affirmative act by the borrower to pay off the principal, Moseley would continue debiting the account each 2-week period, and the result could, and on occasion did lead to total finance charges of $780 on the original $100 loan, in effect an approximate yearly interest rate of 780%, none of which would be credited toward repayment of principal.

As if that wasn’t bad enough, Moseley took his scheme further by actually implementing a separate scheme that almost certainly reduced his chances for acquittal. A potential borrower searching for short-term cash would enter personal information online in a “lead generator” website maintained by a third party hired by Moseley’s business. The “lead generator” website was one in which a potential customer could express an interest in a loan but was not provided loan terms and was not actually agreeing to receive a loan. Upon receiving an expression of interest, the lead generator would forward the prospective borrower’s information to Moseley’s business.

I think you can guess where this scheme was going!

Moseley would then have his employees attempt to contact the potential borrower by phone and try to obtain borrower approval for making a loan. If phone contact was made, the employee would explain the loan’s terms to the borrower, who could then accept or decline a loan offer. If the potential borrower did not answer the phone, the employee would leave a voicemail message about the offer, and the loan would be approved and made anyway, even absent the borrower’s consent.

How was that possible?

It was possible because individuals provided banking information at the get-go, in their inquiry to the lead generator, without having established a business relationship or entered into an agreement. Moseley’s business would then deposit the loan principal into the borrower’s account and begin deducting fees as described above.

In testimony at trial, one of Moseley’s employees estimated that the business never made direct contract with about 70 percent of eventual borrowers. Although all borrowers eventually received loan documents by email, the e-signatures on those documents were falsified. 

Also at trial, Moseley tried to show that borrowers “e-signed” the agreements when they inquired about loans. The government introduced substantial evidence to the contrary, from which, according to the court, the jury could have concluded that those borrowers whom Moseley’s staff did not contact by phone had no notice of loan terms and had no opportunity to accept or reject those terms before the related credits and debits began.

In an attempt to avoid state criminal usury caps, Moseley incorporated entities offshore and edited the online loan agreements to include a “choice of law” provision specifying that the law of one of the three jurisdictions (Nevada, Nevis, or New Zealand) governed the transaction. A "choice of law" or "governing law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if they live in (or the agreement is signed in) a different state.

The disclosures in Moseley’s loan documentation included a box labeled “Total of Payments,” described as the “amount you will have paid after you have made the scheduled payment.” The figure displayed in this box was the sum of the loan principal and a single “fee.” The Total of Payments disclosure did not indicate that no repayment of the principal was actually “scheduled” to occur, nor did it indicate that indefinitely recurring finance charges were “scheduled” to occur. Rather, text in fine print below the disclosure box advised that the single payment of loan principal and a single finance charge whose sum it displayed would become “scheduled” only if the borrower signed a specified separate form and “fax[ed] it back to our office at least three business days before your loan is due.” As a result, the Total of Payments disclosure was inaccurate for any borrower who did not affirmatively and timely act by sending a facsimile to pay off the loan principal.

Here's where we enter the realm of criminal liability. A jury convicted Moseley of violating the Racketeer Influenced and Corrupt Organizations Act (RICO) and TILA § 112. The district court sentenced Moseley primarily to 120 months in prison and ordered him to forfeit $49 million.

The 2nd Circuit affirmed. After affirming the RICO conviction, the 2nd Circuit agreed that the jury also had sufficient basis to find that Moseley “willfully and knowingly…[gave] false or inaccurate information or fail[ed] to provide information which he [was] required to disclose [by TILA].”

The Total of Payments disclosure included just one finance charge in addition to the loan principal amount, notwithstanding Moseley’s knowledge and intention that, unless the borrower acted, the total he or she would pay would amount to much more than a single finance charge, and that the Total of Payments had no upper limit at all (except that Moseley’s business generally and arbitrarily viewed a loan as repaid after 40 or 45 charges).

TILA-compliant disclosures must reveal the total of payments under the payment schedule set at the time of loan disbursement, not under an illusory payment schedule achievable only after the borrower undertakes steps described in the fine print.

I would also suggest that the jury rationally could have found that it was inaccurate and misleading for Moseley’s Total of Payments to show disclosure of just the loan principal plus one finance charge, especially in view of the fact that no such payment was actually scheduled. The court noted that the fact that the total of payments amount could be difficult to predict, and would vary from borrower to borrower, did not exempt Moseley from the obligation to disclose the potentially limitless “scheduled” amount.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

Title Insurance Disclosure on the LE and CD

QUESTION

Title insurance disclosure is a challenge for our organization. For the most part, we believe we have a good understanding of how to disclose. But there are a few areas where we could use some clarification. Our interest is how to disclose title insurance on the LE and the CD. 

Thank you for the FAQ. It is the only FAQ like it in the country, and we really appreciate it.

Here are the questions that we have put together for you to answer on the weekly FAQ. I hope you can respond soon. 

For lender’s title insurance, how should we disclose the premium on the LE?

For owner’s title insurance, how do we disclose if the lender does not require it?

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

ANSWER

Thank you for your kind words. We have been providing the FAQ for many years and look forward to continuing our commitment to bringing such information to the mortgage community.

Let’s start with your first question and take it from there!

For lender’s title insurance, how should we disclose the premium on the LE?

Lender’s title insurance is disclosed as the amount of the premium on the Loan Estimate (“LE”). The amount may be disclosed as Title - Premium for Lender’s Coverage (or any similar language as long as it clearly indicates the amount of the premium disclosed and that the premium is for lender’s title insurance coverage). 

On the Closing Disclosure (“CD”), the cost of lender’s title insurance is disclosed in the Loan Costs Table under either Services Borrower Did Not Shop For or Services Borrower Did Shop For, depending on whether the consumer did or did not shop for the lender’s title insurance, and with a similar label.[i]

For owner’s title insurance, how do we disclose if the lender does not require it?

As you may know, in most cases the lender does not require the consumer to obtain owner’s title insurance. Nevertheless, if the consumer obtains owner’s title insurance and the creditor does not require it, the cost of owner’s title insurance is disclosed in Closing Cost Details in the Other Costs Table on the LE and CD. Generally, the amount disclosed for owner’s title insurance is based on the owner’s policy rate. 

For the LE, the cost disclosed for the owner’s title insurance policy is not based on any enhanced title insurance policy rate - where "enhanced" provides additional coverage and may increase the amount of coverage as the property appreciates - unless the creditor knows (or has reason to believe at the time the creditor is issuing the LE) that an enhanced owner’s title insurance policy will be purchased, such as if it is required by the real estate sales contract. In any event, when the consumer purchases owner’s title insurance and it is not required by the creditor, this fact is noted on the LE and CD through the use of the term “optional.” 

If the seller pays for the owner’s title insurance, the “optional” description is not required on the CD.[ii]

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Let’s define the terms. Title companies often offer a different rate, called a single or simultaneous rate, if a consumer purchases both lender’s and owner’s title insurance from the same company, rather than purchasing each policy from separate companies.

There is a formulaic way to assist lenders in disclosing the required rates consistently, that is, in a way that does not depend on (1) whether the consumer purchases lender’s and owner’s title insurance policies individually, (2) obtains the policies from the same company and gets the simultaneous rate, or (3) buys only the required lender’s title insurance.

Note: If the consumer obtains only the required lender’s title insurance policy and no owner’s title insurance policy, the use of this formula by the creditor is not necessary.

Here’s a formulaic outline for the premium of an owner's title insurance policy for which there is a simultaneous issuance of a lender's and an owner's policy, and then disclosed on the LE and CD:

Step 1: Determine the full owner’s policy premium.

Step 2: Add this amount to the simultaneous premium for the lender’s policy.

Step 3: Now subtract out the full lender’s premium.

Note: The premium disclosed for the lender’s title insurance policy is the full lender’s premium, not the discounted, or simultaneous, rate.[iii]

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

The answer to this question requires a brief preamble. There may be a difference between the cost of owner’s title insurance disclosed and the disclosed seller’s credit, if the purchase and sales contract between the consumer and seller indicates that both lender’s and owner’s title insurance will be purchased from the same company and the seller will pay the full owner’s policy premium rate (as opposed to a discounted rate).

I realize that’s a mouthful! So, to put this succinctly, assuming the scenario, given the disclosure formula for the owner’s title insurance cost when there is a simultaneous rate for lender’s title insurance, there may be excess seller’s credit beyond the disclosed cost of owner’s title insurance.

Because the seller’s credit may be in excess of the owner’s disclosed title insurance cost, the disclosed amount of the seller credit left over after application to the owner’s title insurance cost may be disclosed in three different ways on the CD:

1. Shown as a credit towards the amount of the lender’s premium or any other title insurance costs for premiums or endorsements in the Loan Costs Table or Other Costs Table;[iv] or

2. Added to and shown in aggregate with other seller credits in the Summaries of Transactions tables as a general Seller Credit;[v] or

3. Disclosed as a standalone seller credit on another blank line in the Summaries of Transactions tables.[vi]

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

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[i] See 12 CFR § 1026.37(f)(2) and (f)(3); Comment 37(f)(2)-4; 12 CFR § 1026.38(f)(2) and (f)(3); and Comments 38(f)(2)-1 and 37(f)(2)-3

[ii] 12 CFR §§ 1026.37(g)(4) and 38(g)(4); Comment 37(g)(4)-1; 12 CFR §§ 1026.37(g)(4)(ii) and 38(g)(4)(ii); Comments 37(g)(4)-1, -3, and 38(g)(4)-2; Comment 38(g)(4)-2; 12 CFR §§ 1026.37(f)(2); 37(f)(3); and 38(f)(2) and 38(f)(3)

[iii] Comments 37(g)(4)-2 and 38(g)(4)-2

[iv] 12 CFR §§ 1026.38(f) and (g)

[v] 12 CFR § 1026.38(k)(2)(vii)

[vi] 12 CFR § 1026.38(k)(2)(viii)