On March 21, in a suit brought by borrowers who had paid overnight delivery fees at closing, the U.S. District Court for the Central District of California held that the overnight delivery services provided by certain delivery companies to a parent company of various escrow companies were “settlement services” under RESPA and concluded that borrowers had pleaded facts sufficient to establish that defendant parent company may have violated RESPA by accepting marketing fees from certain delivery companies in exchange for “referring”—via its escrow subsidiaries—overnight delivery business to those delivery companies. Henson v. Fidelity Nat’l Fin. Inc., No. 14-cv-01240, slip op. (C.D. Cal. Mar. 21, 2014). In this case, the defendant parent company’s allegedly required its escrow subsidiaries to use certain delivery companies in connection with loan closings. Defendant parent company, in turn, allegedly received a marketing fee from those delivery companies based on the volume of business it sent to the delivery companies through its escrow subsidiaries. On the parent company’s motion to dismiss, the court held that the overnight delivery service was a “settlement service” under RESPA given that Regulation X specifically lists a “delivery” as a settlement service if provided in connection with a real estate settlement. The court further held that a “referral” under RESPA need not be linked to particular transactions and thus that a RESPA violation could occur where a master agreement required subsidiaries to use certain delivery service providers in exchange for a marketing fee received by a parent company. However, the court agreed with the defendant that the borrowers failed to adequately plead either a split of an unearned fee or that defendant did not perform any service in exchange for the marketing fee it received. Thus the court denied, in part, and granted, in part, the defendant’s motion to dismiss.
On April 17, the CFPB issued a guide to completing the disclosure forms required by its November 2013 TILA-RESPA integrated disclosures rule, which generally applies to transactions for which a creditor or broker receives an application on or after August 1, 2015. The guide provides instructions for completing the Loan Estimate and Closing Disclosure and highlights common situations that may arise when completing the forms. The CFPB states in addition to serving as a resource to creditors, the guide also may assist settlement service providers, software providers, and other service providers. The disclosure forms guide follows the release last month of a small entity compliance guide, which summarizes the rule and highlights issues that small creditors, and their partners or service providers, might find helpful to consider when implementing the rule.
On February 24, the CFPB announced that a nonbank mortgage lender agreed to pay an $83,000 penalty to resolve violations of RESPA’s Section 8. The lender primarily offers loss-mitigation refinance mortgage loans to distressed borrowers. According to the consent order, after the lender ceased obtaining funding for its loans from two subsidiaries of a hedge fund, the lender continued to split loss-mitigation and origination fees with the subsidiaries on 83 additional loans originated over an eight-month period, even though neither subsidiary provided financing or any other service in any of those transactions.
The lender self-reported the violation, admitted liability, and provided information related to the conduct of others, which the CFPB stated has facilitated other enforcement investigations. In addition, the consent order requires the lender make its “officers, employees, representatives, and agents” available for interviews and testimony, and to produce all non-privileged documents requested by the CFPB, “in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Bureau or to which the Bureau is a party.” The company also cannot apply for a tax deduction or credit for the penalty, and cannot seek indemnification from any source. The CFPB indicated that the lender’s self-reporting and cooperation, which were consistent with the Bureau’s Responsible Business Conduct bulletin, played a part in mitigating the penalty.
This consent order is another public action the CFPB has taken under RESPA’s Section 8, although this action appears to be the first under Section 8(b) of RESPA, which prohibits fee-splitting and the payment and receipt of unearned fees. The CFPB has previously enforced Section 8(a), which prohibits referral fees and kickbacks, most recently in the case of a mortgage company that allegedly made inflated rental payments in exchange for mortgage referrals. The Bureau’s Section 8(b) action emphasizes the CFPB’s commitment to enforcing all of the aspects of Section 8, particularly against nonbank lenders.
CFPB Director Richard Cordray summed up the CFPB’s RESPA enforcement stance, stating: “These types of illegal payments can harm consumers by driving up the costs of mortgage settlements. The Bureau will use its enforcement authority to ensure that these types of practices are halted. We will, however, also continue to take into account the self-reporting and cooperation of companies in determining how to resolve such matters.”
On January 16, in the CFPB’s first settlement of 2014, the agency ordered a non-depository mortgage lender and its former owner to pay $81,076 for violating section 8 of the Real Estate Settlement Procedures Act (RESPA). The lender and its former owner—who currently serves as the company’s president—allegedly provided illegal kickbacks to a bank in exchange for loan referrals, disguised as inflated lease payments for renting office space within the bank. RESPA prohibits, among other things, the receipt or payment of kickbacks for settlement referrals involving federally-related mortgages. The consent order requires the company and its president to forfeit all proceeds from the allegedly unlawfully referred business—a total of $27,076 in origination fees related to 20 loans—and pay a $54,000 civil penalty.
The action extends two of the CFPB’s most recently-active enforcement patterns: RESPA section 8 and individuals. The CFPB press release announcing the action warns that the Bureau will “continue to enforce RESPA’s anti-kickback provisions” and “take action against schemes that steer consumers to lenders through unscrupulous and illegal business practices.”
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.”
On January 2, the CFPB issued a request for information about “key consumer ‘pain points’ associated with mortgage closing and how those pain points might be addressed by market innovations and technology.” The request includes 17 specific questions about the closing process, common errors at closing, the role of “other parties” at closing, and closing documents. The CFPB stated that the request is part of the next phase of its Know Before You Owe initiative in which the CFPB will “encourage interventions that increase consumer knowledge, understanding, and confidence at closing.” In particular, the CFPB seeks to promote “the development of a more streamlined, efficient, and educational closing process as the mortgage industry increases its usage of technology, electronic signatures, and paperless processes.” The CFPB first announced this initiative in November 2013 in conjunction with the release of the final rule combining mortgage disclosures under TILA and RESPA. Responses to the request are due by February 7, 2014.
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
On November 26, the U.S. Court of Appeals for the Sixth Circuit held that mortgage servicers are exempted from TILA liability, despite recent amendments to the statute. Marais v. Chase Home Fin. LLC, No. 12-4248, 2013 WL 6170977 (6th Cir. Nov. 26, 2013). A borrower had alleged that her servicer violated TILA by failing to properly respond to her written request for information regarding her loan. The Sixth Circuit rejected the borrower’s argument that amendments to TILA as part of the Helping Families Save Their Homes Act of 2009 created a cause of action against mere servicers, and held that servicers who are not creditors or creditor assignees are expressly exempt from TILA liability. The court, however, held that the servicer could be liable under RESPA for damages caused by its purported deficient response to the borrower’s request for information.
On November 20, 2013, the CFPB finalized its long-awaited rule combining the mortgage disclosures consumers receive under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board (“FRB”) and the U.S. Department of Housing and Urban Development (“HUD”). In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) transferred authority over TILA and RESPA to the Bureau and directed the Bureau to create “rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws.” Congress did not, however, amend TILA and RESPA provisions governing timing, responsibility, and liability for the disclosures, leaving it to the Bureau to resolve the inconsistencies. The final rule generally applies to covered transactions for which the creditor or mortgage broker receives an application on or after August 1, 2015.
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Joseph J. Reilly, (202) 349-7965
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Benjamin K. Olson, (202) 349-7924
- Jonathan W. Cannon, (310) 424-3903
- Brandy A. Hood, (202) 461-2911
**Update – The CFPB has now released the final rule and related materials, available here.**
Later today, as anticipated, the CFPB will release its final rule combining the TILA and RESPA mortgage disclosure forms and rules. We will review the final forms and rule, monitor the related field hearing, and prepare a preliminary Special Alert followed by a more detailed summary.
The final rule and forms follow two years of drafting, testing, and revision by the Bureau. According to the Bureau, its testing demonstrates that the new forms significantly improve the ability of consumers with a variety of experience levels and loan types to answer questions about their loans, compare competing loans, and compare estimated and final loan terms and costs.
The text of the final rule will not be available until later today. However, we are able to make several preliminary observations based on our review of the materials made available thus far, perhaps most importantly that industry will have until August 1, 2015 to make the changes to systems and training necessary to implement the new forms, which is longer than anticipated. Additional observations follow. Read more…
On November 15, the CFPB announced a settlement with a mortgage insurer accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA. The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders’ captive reinsurers, but over time ceded increasingly large percentages of its premiums—up to 40% for each referral—in exchange for lenders’ continued referral of customers.
The proposed consent order requires the company to pay $100,000 in penalties and subjects the company to regular and mandatory compliance reporting and monitoring for a period of four years. In addition, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims.
On November 8, the CFPB issued an interpretive rule setting forth instructions for lenders on how to comply with the homeownership counseling list requirements set forth in the High-Cost Mortgage and Homeownership Counseling Amendments to TILA and the Homeownership Counseling Amendments to RESPA, which are scheduled to take effect on January 10, 2014. In addition, the CFPB released its homeownership counseling list generation tool to help lenders produce a list that complies with RESPA requirements. Read more…
On October 30, the CFPB filed an amicus brief in Edwards v. First American, a long-running case concerning the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) that is currently pending in the U.S. Court of Appeals for the Ninth Circuit. The case revolves around allegations that the defendant-title insurer purchased interests in title insurance agencies in order to secure referrals of insurance business from those agencies. The consumer-plaintiffs alleged that these arrangements constituted illegal kickback agreements under Section 8 of RESPA, even though they did not suffer any actual damages. Read more…
On November 1, the CFPB announced a field hearing on “Know Before You Owe: Mortgages,” to be held on Wednesday, November 20 at 11 a.m. EST in Boston. In conjunction with the hearing, the Bureau is expected to release its long-awaited final rule combining the Good Faith Estimate and HUD-1 with the mortgage disclosures under the Truth in Lending Act.
The CFPB has stated that the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. The final rule, which was originally expected in October, will not only replace the forms that consumers receive during the mortgage origination process but will also fundamentally alter the regulations governing the preparation and provision of – and liability for – those disclosures. As a result, lenders, settlement agents, and service providers will be required to make extensive changes to their systems, compliance programs, and contractual relationships.
In September, BuckleySandler hosted a webinar covering the key issues in this rulemaking and discussing what industry can do to start preparing now. The webinar featured a discussion between BuckleySandler’s Ben Olson, the former Deputy Assistant Director of the CFPB’s Office of Regulations who led the CFPB’s development of the proposed mortgage disclosure rule and forms, and Jeff Naimon, who has spent years assisting the industry with the existing forms. Please contact Jeff or Ben for a copy of the webinar materials or with any questions about the expected rule.
On October 24, the CFPB announced the filing of a lawsuit against a Kentucky law firm and its principals for allegedly violating Section 8 of RESPA by operating a network of affiliated companies in order to pay “kickbacks” for referrals of mortgage settlement business. The CFPB claims, among other things, that from 2006 until 2011 the law firm established nine joint ventures (JVs) with owners and managers of real estate and mortgage brokerage companies. According to the CFPB, when a JV partner or an agent or employee of the JV made an initial referral of closing or other settlement services to the law firm, the law firm arranged for the title insurance for the underlying transaction to be issued through the co-owned JV in exchange for the settlement business. The parties subsequently split profits generated by the JVs as a result of the title insurance referrals, the CFPB alleges. The CFPB is seeking to enjoin the defendants from the alleged activity, and disgorgement of all income, revenue, proceeds, or profits received in connection with settlement services provided as a result of or in connection with a referral made in violation of RESPA. Read more…