On July 1, the OCC, the Federal Reserve Board, the FDIC, the NCUA, and the Conference of State Bank Supervisors issued interagency guidance on home equity lines of credit (HELOCs) nearing their end-of-draw periods. The guidance states that as HELOCs transition from their draw periods to full repayment, some borrowers may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values. As such, the guidance describes the following “core operating principles” that the regulators believe should govern oversight of HELOCs nearing their end-of-draw periods: (i) prudent underwriting for renewals, extensions, and rewrites; (ii) compliance with existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies; (iii) use of well-structured and sustainable modification terms; (iv) appropriate accounting, reporting, and disclosure of troubled debt restructurings; and (v) appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation processes. The guidance also outlines numerous risk management expectations, and states that institutions with a significant volume of HELOCs, portfolio acquisitions, or exposures with higher-risk characteristics should have comprehensive systems and procedures to monitor and assess their portfolios, while less-sophisticated processes may be sufficient for community banks and credit unions with small portfolios, few acquisitions, or exposures with lower-risk characteristics.
Ninth Circuit Holds Plaintiffs Not Required To Plead Tender Or Ability To Tender To Support TILA Rescission Claim
On July 16, the U.S. Court of Appeals for the Ninth Circuit held that an allegation of tender or ability to tender is not required to support a TILA rescission claim. Merritt v. Countrywide Fin. Corp., No. 17678, 2014 WL 3451299 (9th Cir. Jul. 16, 2014). In this case, two borrowers filed an action against their mortgage lender more than three years after origination of the loan and a concurrent home equity line of credit, claiming the lender failed to provide completed disclosures. The district court dismissed the borrowers’ claim for rescission under TILA because the borrowers did not tender the value of their HELOC to the lender before filing suit, and dismissed their RESPA Section 8 claims as time-barred.
On appeal, the court criticized the district court’s application of the Ninth Circuit’s holding in Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) that courts may at the summary judgment stage require an obligor to provide evidence of ability to tender. Instead, the appellate court held that borrowers can state a TILA rescission claim without pleading tender, or that they have the ability to tender the value of their loan. The court further held that a district court may only require tender before rescission at the summary judgment stage, and only on a case-by-case basis once the creditor has established a potentially viable defense. The Ninth Circuit also applied the equitable tolling doctrine to suspend the one-year limitations period applicable to the borrower’s RESPA claims and remanded to the district court the question of whether the borrowers had a reasonable opportunity to discover the violations earlier. The court declined to address two “complex” issues of first impression: (i) whether markups for services provided by a third party are actionable under RESPA § 8(b); and (ii) whether an inflated appraisal qualifies as a “thing of value” under RESPA § 8(a).
On January 31, the Texas Supreme Court released a January 24 supplemental opinion clarifying a June 2013 opinion in which it invalidated state regulations that (i) defined “interest” with regard to home equity loans to exclude lender-retained fees, and (ii) would have allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2014 WL 349790 (Tex. Jan. 24, 2013). The Texas Bankers Association sought clarification as to whether interest paid at closing falls outside the definition of interest, noting (i) that interest can be paid at closing for part of a payment period, calculated per diem, until the regular payment date, and (ii) that a borrower may pay discount points at closing to lower the interest rate for the term of the loan. In its supplemental opinion, the court held that per diem interest is still interest, even if prepaid, and that legitimate or “bona fide” discount points to lower the loan interest rate are, in effect, a substitute for interest. The court further explained that true discount points are not fees “necessary to originate, evaluate, maintain, record, insure, or service,” but are an option available to the borrower and thus are not subject to the three percent cap. The court also reaffirmed its holding requiring borrowers to be present at closing. It rejected the bankers’ argument that requiring a power of attorney, like other closing documents, to be executed “at the office of the lender, an attorney at law, or a title company” can be a hardship on certain borrowers for whom such locations are not readily accessible, explaining that such hardships are a public policy issue that should be addressed by the framers and ratifiers of the state Constitution.
On January 10, 2014, the CFPB published a notice in the Federal Register that three mortgage publications lenders are required to provide to borrowers have been revised to reflect certain mortgage rules that went into effect on that date. These publications, which are available on the CFPB’s “Learn More” web page, are: (i) the What You Should Know About Home Equity Lines of Credit (HELOC) Brochure; (ii) the Consumer Handbook on Adjustable-Rate Mortgages (CHARM) Booklet; and (iii) the Shopping for Your Home Loan: Settlement Cost Booklet (sometimes called the RESPA Booklet).
- HELOC Brochure – The CFPB states that this brochure was revised to add a reference to the requirement that lenders must provide borrowers with a list of housing counselors in their area, CFPB contact information, and updates to other Federal agency contact information. It also adds CFPB resources for consumers, including information about how consumers can submit a complaint to the Bureau, a link to the Bureau’s online ‘‘Ask CFPB’’ tool to find answers to questions about mortgages and other financial topics, and a link to an online tool to find local HUD-approved housing counseling agencies.
- CHARM Booklet – According to the CFPB, these revisions: (i) remove references to certain fees and product types that are no longer permitted, such as prepayment penalties on adjustable-rate mortgages; (ii) add information about the lender’s obligation to consider the borrower’s ability to repay the loan, provide disclosure of interest rate adjustments, and ensure a borrower has received homeownership counseling before making a negative amortization loan; and (iii) add CFPB contact information and resources for consumers and updates to other federal agency contact information.
- RESPA Booklet – The CFPB explains that this booklet was revised to also add contact information and consumer resources, along with information about new servicing protections for borrowers, including servicer obligations to: (i) respond promptly to consumer requests for information and notices of errors; (ii) provide mortgage payoff statements and monthly billing information; and (iii) contact delinquent consumers regarding options to avoid foreclosure.
The notices states that “[t]hose who provide these publications may, at their option, immediately begin using the revised HELOC Brochure, CHARM Booklet, or Settlement Cost Booklet, or suitable substitutes to comply with the requirements in Regulations X and Z. The Bureau understands, however, that some may wish to use their existing stock of publications. Therefore, those who provide these publications may use earlier versions of these publications until existing supplies are exhausted. When reprinting these publications, the most recent version should be used.”
Texas Supreme Court Holding Requires Lender-Retained Fees To Be Factored into Home Equity Loan Fee Cap
On June 21, the Texas Supreme Court invalidated state regulations that defined “interest” with regard to home equity loans to exclude lender-retained fees and allowed home equity loan closings through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2013 WL 3119481 (Tex. Jun. 21, 2013). The state constitution caps home equity loan fees at three percent of principal, but excludes “interest” from the definition of “fees.” The Texas Supreme Court held that a state regulation that defined “interest” for the purpose of home equity lending by referencing a state code definition that excludes lender-retained fees effectively rendered the constitutional fee cap meaningless by giving the state legislature authority to modify the cap. The legislature’s broader definition of interest was designed to prohibit usury, a function inversely related to the constitutional cap for home equity loans, the court explained. The court held that the constitutional definition of interest means the amount determined by multiplying the loan principal by the interest rate, and therefore does not include lender-retained fees. The court also invalidated a regulation that allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent, reasoning that a constitutional provision designed to prohibit the coercive closing of a home equity loan at the owner’s home requires that execution of consent or a power of attorney must occur at one of the locations specified in the provision – the office of the lender, an attorney, or a title company. Finally, the court upheld a regulation that created a rebuttable presumption that a specific home equity loan consumer disclosure required by the state constitution is received three days after it is mailed.
On March 15, the U.S. District Court for the Northern District of California approved a lender’s settlement with a class of borrowers who claimed that the bank suspended or reduced borrower home equity lines of credit (HELOCs) in violation of the Truth in Lending Act and California’s Unfair Competition Law. In Re Citibank HELOC Reduction Litig., No. 09-350 (N.D. Cal. Aug. 31, 2012). The borrowers claimed that the bank improperly utilized computerized automated valuation models (AVMs) as the basis for suspending or decreasing customer HELOCs because of the decline in the value of the underlying property. The complaint also charged that customers were injured because (i) the annual fee to maintain the HELOC was not adjusted to account for the decreased limit, and (ii) the borrowers’ credit ratings were damaged as a result of the reduced credit limit. The named plaintiff also alleged injury because he was forced to obtain a replacement home equity line, which resulted in payment of an early termination fee on the old HELOC and additional costs related to the new HELOC. Under the agreement, class members will have a right to request reinstatement of their HELOC accounts, the bank will expand the information contained in credit-line reduction notices based on collateral deterioration, and customers who incurred an early closure release fee when closing the account subsequent to the suspension or reduction may make a claim for the cash payment of $120. The court reduced the incentive payments owed to the six named plaintiffs by $1,000 each, but approved the proposed $1.2 million in attorneys’ fees.
On August 31, a lender preliminarily settled with a class of borrowers who claimed that the bank suspended or reduced borrower home equity lines of credit (HELOCs) in violation of the Truth in Lending Act and California’s Unfair Competition Law. In Re Citibank HELOC Reduction Litig., No. 09-350 (N.D. Cal. Aug. 31, 2012). The borrowers claimed that the bank improperly utilized computerized automated valuation models (AVMs) as the basis for suspending or decreasing customer HELOCs because of the decline in the value of the underlying property. The complaint also charged that customers were injured because (i) the annual fee to maintain the HELOC was not adjusted to account for the decreased limit, and (ii) the borrowers’ credit ratings were damaged as a result of the reduced credit limit. The named plaintiff also alleged injury because he was forced to obtain a replacement home equity line, which resulted in payment of an early termination fee on the old HELOC and additional costs related to the new HELOC. Under the agreement, class members will have a right to request reinstatement of their HELOC accounts, the bank will expand the information contained in credit-line reduction notices based on collateral deterioration, and customers who incurred an early closure release fee when closing the account subsequent to the suspension or reduction may make a claim for the cash payment of $120.