What ramifications to vendor management do we see in regards to the Wells Fargo fine in the news recently?

The Wells Fargo and Chase actions generated a lot of attention. But in a way, they aren’t “new” news in the sense that RESPA Section 8 enforcement has been the Bureau’s focus. If you just look at the number of cases brought by the Bureau as a percentage of all its public cases, it’s close to a quarter of all their public enforcement actions. So the Bureau has been making enforcement in this area a priority.

Putting aside the particular facts of the Wells Fargo and Chase actions, I look at these as a reminder that regulators are going to be looking closely at all your relationships. Vendor management is one aspect of that but they are looking very much at compliance with specific consumer protection laws including the section 8 prohibitions on certain types of payments involving settlement services. What you need to know for all the people you are doing business with is whether your agreements with those individuals or entities are compliant with existing law and assuming they are, are you adhering to those agreements? Some of the other actions brought by the Bureau in this area have been very focused on whether the services that are called for in the agreement with the third party are actually being performed].

Note: This transcript has been edited from the January 2015 vendor management webinar for clarity and completeness.

Answered By: Ben Olson

What is the fine for CAN SPAM act per occurrence?

Each separate email in violation of the CAN-SPAM Act is subject to penalties of up to $16,000.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

Are loan originators and title companies allowed to share the expense of marketing materials?

Generally yes, but subject to the following restrictions under RESPA: any marketing, advertising, or promotional products done between a loan originator and a title company must split the cost between the parties. The shared expenses must be a proportional split to the amount of space each person has on the ad or marketing piece and it be the fair market value. For example: if the loan officer and title company both share an marketing flyer where they both occupy 50% of the space on the flyer then they each would be required to pay their respective 50% of the total cost of the flyer. If the loan officer only occupies one quarter of a page then the split allocation of expenses the loan officer would be responsible for is 25% and the title company must pay the remaining 75%.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

Can you expand on why a live transfer is one to stay away from?

Online lead generation companies where the lead generation company has spoken directly with the consumer and then transfers the “Live Handoff” over to the Lender or Loan Officer (especially if the Lead Generation company is not licensed under the Safe Act in their respective state) is a huge concern for regulators in today’s regulatory environment. The regulators have indicated many of these companies are nothing more than unlicensed “mortgage brokers” who are operating in violation of the Loan Officer Compensation Rule that went into effect on Jan. 1, 2014 because the lead generation company is soliciting consumer information for loan products without a license. The CFPB has publicly stated they are concerned with this type of lead generation marketing tactic because consumers are prone to give out sensitive personal and financial information. Additionally the CFPB has stated that “live transfers” confuse consumers into thinking they are dealing directly with a lender when in fact they are not. In addition to Loan Officer Compensation issues there are a myriad of other compliance headaches (Fair Lending Act, UDAAP, Fair Housing Act, Telephone Consumer Protection Act, Telemarketing Sales Rule, privacy issues, CAN Spam Act, etc.) which make these types of “Live transfer” lead generation companies fertile grounds for regulatory enforcement action.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

How do you recommend identifying fair value for a lender to have a banner ad on a realty website, given that their website is a standard platform for their business?

I would strongly recommend that a third party valuation company be hired to assign the value for your banner ad on the real estate agent’s website. There are CPA firms or website valuation companies than can provide you with a statistical valuation for a banner on a particular website.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

Is the CFPB only targeting title agents or also underwriters?

The CFPB is an equal opportunity enforcement operation. They do not care how small or large you are as evidenced by Borders & Borders (three person law firm in Kentucky) or Wells Fargo. The CFPB has only publicly announced title agents thus far such as Stonebridge Title in New Jersey, TitleSouth in Alabama, and Borders & Borders in Kentucky. They have not yet announced any enforcement actions involving title insurers but I am sure at least one title insurer will find itself in a CFPB enforcement action.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

In your opinion, will the CFPB be going after the lead providers or also the company that bought the lead?

In my opinion the CFPB/FTC will target both the lead providers and the company that bought the lead. The CFPB has expanded UDAAP recently to include those who provided “Substantial Assistance” to a settlement service provider in connection with a mortgage transaction.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

Why can major lenders recommend at a corporate level, what title company to use, but loan officers can’t suggest different companies to borrowers?

The lenders at the corporate level have 3rd party vendor management oversight compliance concerns so presumably the title company they selected passed their compliance and audit requirements to be on their recommended list. Section 1026.19)(e)(1)(vi)(A) permits creditors to impose reasonable requirements regarding the qualifications of the provider (i.e. title company). For example, the creditor may require that a settlement agent chosen by the consumer must have a SSAE 16 SOC 1 Type 1 Certification from a qualified CPA firm. If a creditor does not permit a consumer to shop for purposes of 1026.19(e)(1)(vi) if the creditor requires the consumer to choose a provider from a list provided by the creditor. Section 1026.19(e)(1)(vi)(C) provides that the creditor must identify settlement service providers that are available to the consumer. A creditor does not comply with the identification requirement in § 1026.19(e)(1)(vi)(C) unless it provides sufficient information to allow the consumer to contact the provider, such as the name under which the provider does business and the provider’s address and telephone number. Similarly, a creditor does not comply with the availability requirement in § 1026.19(e)(1)(vi)(C) if it provides a written list consisting of only settlement service providers that are no longer in business or that do not provide services where the consumer or property is located.

Please clarify that investor loans are exempt from RESPA/TILA, ie. Non-primary dwelling loans.

3500.5: Coverage of RESPA (04/01/97)
(a) Applicability. RESPA and this part apply to all federally related mortgage loans, except for the exemptions provided in paragraph (b) of this section.
(b) Exemptions.
(2) Business purpose loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by Regulation Z, 12 CFR 226.3(a)(1). Persons may rely on Regulation Z in determining whether the exemption applies.
Supplement I, 226.3: Exempt Transactions (01/01/93)
3(a) Business, commercial, agricultural, or organizational credit.
1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.
3. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in.
Reg. Z specifically identifies non-owner occupied rental property as being for a business purpose, therefore exempt.

Note: This transcript has been edited from the March 2015 RESPA Section 8 webinar for clarity and completeness.

Answered By: Marx Sterbcow

We have a program that pays $25 to every person who sends us a referral is this illegal? They aren’t settlement service providers though.

Yes this would be a violation of RESPA Section 8(a) because the statute states that anyone who refers settlement service business. It does not limit illegal kickbacks or referral arrangements to only settlement service providers. In fact I represented a client in a RESPA enforcement action for just this type of program.

Answered By: Marx Sterbcow

The title company we use posts photos of the buyers at the closing table on their Facebook page after the closing. Is this okay?

In today’s environment the general rule of thumb is not to participate in this type of activity because some are concerned this could be a violation of NPI especially when the name of the buyer and/or seller is displayed on the social media website as buying or selling a house.

Answered By: Marx Sterbcow

The rule only permits originators to redisclose a Loan Estimate for changed circumstance subject to the 10% tolerance. If the borrower requested a change which increases charges by 9% and another fee was underestimated by 5% this creates a 10% tolerance violation. Had the borrower not requested the original change circumstance, the tolerance would not have been violated. Is this really the intent of 10% tolerance?

First I would point out that it is correct that there’s a 10% tolerance bucket, and it’s similar to what you have under RESPA today. The way the rule works is those charges can increase up to 10% without any type of tolerance violation. You can go to closing and if the sum of those charges has increased by 9.5%, you charge the consumer 9.5% more and there’s no tolerance violation. That much is easy. Where this rule really gets tricky is when you get into re-disclosure and re-baselining in this category, especially when you have changes to charges that are within this 10% tolerance bucket at different times. Changed circumstances is one category of events that allows you to redisclose. There are changed circumstances affecting settlement charges and affecting eligibility. Then there are other types of changes—borrower requested changes just being one of them—but also rate lock related changes, expiration and so on. There a tie to the 10% category for changed circumstances affecting settlement charges which is very clear and eligibility which is less clear (but supported by commentary to the rule). In both of those instances if you’re relying on changed circumstances as an event that allows you to re-disclose a charge, then it is correct that the rule says you can only re-disclose and reset your baseline when the sum has exceeded 10%. If you’ve got four different changed circumstances each of which bring the total up, lets say 3% and you don’t hit the 10% tolerance until the 4th one, you can’t reset your baseline until that happens, if the reasons for the increase are changed circumstances. [Note: the rule does allow information redisclosures to be provided to the consumer when there are change events that do not give rise to a rebaseline].

However, borrower requested changes, which are also mentioned in this question, are not tied to the 10% category. If you actually look at the rule, it’s section 19(e)(3)(iv), which is where these timing mechanisms are that’s where you’ll find these change events. The changed circumstances do depend on the 10% category and do require an aggregate increase in order to re-baseline, but borrower requested changes do not. So a borrower, could request a change that causes the 10% category charges to go up by 5% and in that instance the charges could be re-disclosed and the baseline reset because it’s not changed circumstances. If you look at the mechanics of the rule, the first two categories directly reference and incorporate the 10% bucket, the borrower requested change category does not.

This transcript has been edited from the May 2015 round table discussion for clarity and completeness.

Answered By: Andy Arculin

The way I look at it, we (the lender) already are responsible for everything. How does TRID increase our liability with both regulators and investors in addition to what we have today?

Right, the lender is technically responsible for everything today. There are a couple of ways this complicates things. One, the liability risk is a lot more substantial. There are a lot of confusing aspects to the RESPA GFE rules that I think everyone got comfortable enough with, but the threat of a private lawsuit really just wasn’t there. An example is the 10% tolerance in Reg X—I don’t know if anyone ever really fully understood how it’s supposed to work, and HUD never explained it. But everyone started doing it a certain way and it wasn’t something that was subject to private liability where a court could really come in and undermine what they’d done. Now everything’s under Regulation Z and potentially carries with it TILA liability. That is a pretty big change. The TILA disclosures have always had liability, but today’s TILA disclosures really aren’t that complicated. These are a lot more complicated. The lender also is legally considered the party doing the disclosures, even in a broker transaction. The lender can’t take a package from a broker and consider that receipt of the application. If a lender is doing work with a broker, the broker is presumed to be acting on behalf of the lender, making a disclosure in the lender’s shoes. These changes haven’t necessarily increased responsibility that much, but they’ve increased exposure. In general, these are just harder forms. They’re a lot more detailed, a lot more technical. And now everything is potentially subject to scrutiny, whereas before RESPA and the GFE rules weren’t tightly enforced and there was no private right.

Answered By: Andy Arculin

Can a secondary market purchaser be sued for anything I as a lender—or one of my vendors—get wrong?

I think this is really something that has to be explored by courts. The easy answer is no. The violation has to be apparent on the face of the disclosure, which I tried to talk about earlier. What does that mean for the TILA disclosures? It typically means you can look at the documents that were received with the assignment and the disclosure and discover that there’s a violation. The finance charge was done wrong, it was understated, and therefore you’re liable as the assignee, because you should have caught it in your QC. That’s fairly straightforward. But with RESPA there was no liability, either for lenders or for assignees, other than just enforcement against lenders. So what happens now? These new disclosures all have a private right of action, or presumably do. There are some questions that will need to be litigated about where private rights exist and where they don’t, but I think you can probably assume for now that a violation of basically anything on the disclosure form will at least give someone an opportunity to file a lawsuit that could potentially carry liability. The question is really what violations will become apparent on the face of the disclosure? In the past, if you look at case law about TILA assignee liability, issues like timing have been dismissed. Courts have said you can’t determine whether or not the disclosure was given within the timing requirement based on the face of the disclosure; therefore, there won’t be any assignee liability for timing violation. But I think it’s less clear here, not because assignees are supposed to have a crystal ball, but there are disclosures that say the date issued is X, and it’s supposed to be the date the disclosure was delivered or placed in the mail. For the closing disclosure, it’s supposed to be when it was provided to the consumer. It’s questionable whether the court may change its tune on issues like that. Other things like the RESPA tolerances have never really fully been explored by courts because the issues never come up. There’s been TILA disclosure and TILA tolerances but not RESPA tolerances, meaning you’ve made a disclosure of an estimated settlement service and violated the good faith standard because you charged the consumer more than the estimate and you didn’t refund the money back. With those types of issues, it’s really unclear what courts are going to do. The CFPB didn’t even tell us whether there were prior rights of action within the rule, let alone address those types of questions. To be fair, I don’t think they really could have. Those are statutory questions courts will have to hash out. It will probably be years before courts of appeals have gotten those types of issues and decided them. Even then, they may not agree.

Answered By: Andy Arculin

How does the CFPB’s position that “the contract is a thing of value” work?

In PHH, what Director Cordray said, that the Bureau has asserted, is that the opportunity to participate in a profit-making venture, or to receive payments of some sort, even if you don’t actually receive it, is a thing of value in and of itself. That’s their position. I haven’t seen it applied to anything in particular, because I don’t think they needed that point to control in order to reach the conclusions they have. Nevertheless, it raises some very interesting questions around traditional concepts of consideration in legal agreements. In law school we learned that an agreement has to have consideration in order to be enforceable, well, they’re suggesting that the mere opportunity to participate in an agreement has value in and of itself, in the absence of consideration. That’s throwing out a couple hundred years of common law. I don’t know if that’s going to be upheld. It also raises all kinds of problems for other types of permissible RESPA structures like affiliated business arrangements. The argument would suggest that while the affiliated business arrangement might be compliant, that the opportunity to participate in an affiliated business arrangement, is somehow a payment for a referral, is a separate thing of value. I don’t think that was their intent, but we are still left to wonder what that might mean.

Answered By: Brian Levy

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