Get your questions answered on a variety of mortgage industry issues including QM, CFPB, closing disclosures, cybersecurity, lender risk and more.

QM

Does an indemnification agreement remove a loan’s QM status?

That’s a question that HUD has specifically addressed. The existence of an indemnification agreement doesn’t per se remove QM status. But indemnification demands or resolution of a demand that relates to the underlying eligibility of the loan and satisfaction of underwriting requirements could indicate that the loan didn’t have qualified mortgage status in the first place.

Answered By: Melissa Klimkiewicz

CFPB

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

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

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

What do you see as the biggest challenges for wholesale lenders in implementing TRID?

TRID presents a number of challenges to everyone: this rule really affects every party to a real estate transaction, from the mortgage broker to the real estate broker to the settlement agent to the creditor. That’s what makes TRID different than a lot of the other rules that the CFPB has issued. The Ability-to-Repay/QM rule is essentially a creditor rule. The loan originator rule is very focused on originators and how they are compensated. Servicing rule is focused on servicers. This rule basically affects everyone.

There is a range of challenges that go from technical details about populating the form to fundamental business process questions, which I think tend to be the most challenging operationally. These questions require lenders to rethink how to structure everything from application intake processes, to adapting to more complicated rules regarding tolerances, to new timing requirements for the LE and CD, and various other issues.

For wholesale lenders, what I think is the most challenging is the front end application intake to Loan Estimate stage. Instead of designing your own application intake process that you’re in control of, you can train your people around and you can very closely monitor, you are outsourcing that function to a third party. You will not be able to control the application flow on your own system; nor will you know exactly when the application has been submitted each time.

You also won’t be generating the Loan Estimate yourself and making sure the estimates are good and reliable, based on the best information you have. Rather, for each application you’re going to be turning that over to third parties and different third parties at that.

So the biggest challenge is how to manage that process. How to make sure that your third party LOs are taking applications in a manner that is acceptable to you, your investors, and to the regulators. How to make sure you know that they are actually complying with the timing requirements and producing the Loan Estimates on time, and that the estimates they are providing are good and based on the same information that you would use—because you’re ultimately going to have to honor the estimate they’ve given and will be liable for the disclosures that they’ve given.

Those are challenges, but there are different ways of dealing with them. One is to closely monitor who you’re doing business with. Another way is to mitigate your risk somewhat and take more of the responsibility yourself as the wholesaler. You could accomplish this by letting the broker take the application, but as soon as the broker has an application, sending it to you and generating your own Loan Estimate. That’s one approach some people in the industry are doing and there’s nothing wrong with that.

But you basically need to have realtime information if that’s what you’re going to do, because you’re still going to be on that 3-day clock that starts when the broker has received the application. In other words, you still will need to produce an estimate within the same time frame that the broker would have, so any lag in information flow could be a challenge for you.

The alternative is allowing the broker to provide the Loan Estimate for you. The rule does allow some flexibility for brokers to just take applications and generate Loan Estimates without a specific creditor in mind and leave the creditor’s name blank. That’s something you can do, but again, there’s more risk on your end doing business that way because it’s harder to monitor whether or not the estimates were really made according to what estimates and terms you would use if you are just taking an estimate a broker provided that wasn’t even really done with you in mind.

There are different ways of attacking that issue but the biggest challenge is really getting from application to Loan Estimate in a compliant manner and making sure the estimates you’ve been given and running with are reliable and good.

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

Answered By: Andy Arculin

Is there any chance the CFPB will delay the August 1 implementation date?

I think this question came up every time I did a panel on behalf of the CFPB. The answer I always gave was a firm “no,” and that directive came from up high. I think Rich Cordray has said the same thing several times when he’s been out speaking as well. And, to give a little flavor to this, the thinking at the CFPB has always been that yes, they do appreciate TILA-RESPA is a massive implementation effort.

I’ve heard it described as five times of all of Title 14 and I don’t think that’s wrong. The CFPB gets that. But the prevailing viewpoint has always been that normally a year is enough time to implement a new rule, even a big one. The CFPB gave 18 months for TRID and even started the 18 month clock after Title 14 had taken effect.

So basically, they gave the industry time to finish up all of the last round of rules and then gave an additional six months to do TILA-RESPA. The Bureau has always viewed that as more than enough time, and I would not expect that they will delay the effective date, no matter how many times they’re asked.

There have been discussions of some alternatives. One idea that’s been kicked around is delayed enforcement of the final rule, or basically, a good-faith compliance standard for examinations and enforcement where the CFPB will say they’re not going to come after everyone for technical violations of the rule.

That may well be where they ultimately land, but the caution that I always give is the concept of private liability. If the Bureau were to do that, if the Bureau were to say, we’re not going to start examining you for X number of months, and when we do, we’re only looking for good-faith compliance. In the meantime, our enforcement people aren’t going to come after you unless you’re doing something willful or knowledgeable. That’s all well and good from the CFPB. But there’s still the possibility that someone files a civil lawsuit and you just go before a court and you’re litigating in court over a TILA violation.

I think the Bureau would have to do something formal – something through an amendment of the rule – or there would have to be some kind of legislative act in order to stop that from happening. I don’t mean to say that I think people are going to start filing lawsuits on day one, but it’s possible, there’s exposure there, there’s risk.

And if anyone is banking on the Bureau not coming after them as a green light for non-compliance, they would still be at risk of someone filing a civil lawsuit. And I think that would be the worst-case scenario: someone files a TILA lawsuit and you’re not complying with TILA and then you lose a case in court. I think that’s probably worse than getting dinged by an examiner.

So I always caution people that that question is still going to be out there regardless of what the Bureau does, unless the Bureau does what I think they’ve been very clear that they won’t, and that’s delay the effective date. So, moral of the story is that there’s no choice but to be ready by August 1.

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

Answered By: Andy Arculin

Can you address guidance, or a lack thereof, regarding one-time-close construction programs and the closing disclosure specifically?

The CFPB put out examples of several different types of transactions and did not put out any examples of single-close construction-to-permanent loans. There are some challenges I’m aware of for completing the form. The projected payment table can be hard to do for a single-close construction-to-permanent loan. However, the Bureau has always had a view that even for a loan that’s only technically closed once, a construction-to-permanent loan can be disclosed as two separate transactions for disclosure purposes. I think some people don’t like that and it’s a practical challenge.

But the construction phase technically can be disclosed as one transaction and the permanent phase as another, and that eliminates a lot of the problems. That’s basically where the Bureau left it–the Bureau has never come out and given an example of how to do the projected payments table or anything else with the single-close construction-to-permanent disclosed as one transaction.

I think there’s a belief, right or wrong—maybe wrong—that the market would basically elect to do two disclosures. And that’s why in the May webinar the Bureau was talking about 12 C.F.R. 1026.17(c)(6), which is old news (it explains a construction-to-permanent loan can be disclosed as two transactions). Of course, that doesn’t make it any easier for people who want to do one disclosure. They certainly are allowed to, it’s just a matter of figuring it out.

Answered By: Andy Arculin

Please clarify your comments on the property tax tolerance category. Which is the correct category?

Under the rule, tolerances are actually structured differently than they were under Reg X. Reg X, which implemented the previous disclosures, the GFE and the HUD-1, basically carved out charges and placed them in the zero percent, 10 percent categories. Whereas TRID makes the zero percent category the default category, and basically then carves things out of the zero percent category into the 10 percent category, or the category of charges that are not subject to a specific tolerance, the no tolerance category.

And a lot of typical charges are included in that no tolerance category, like the escrows, and the prepaid interest and such, but unfortunately, one such charge that was left out expressly are the pre-paid property taxes. So, pre-paid property taxes are not expressly carved out into any particular category, the 10 percent or no tolerance, and so arguably, they’ve then fallen under zero percent tolerance under the plain language reading of the rule.

The CFPB has clarified in informal guidance though, and they’ve given this guidance out in public settings such as MBA’s regulatory conference and such, so they’ve stated this to many hundreds of people.

In their view, prepaid property taxes are not subject to zero percent tolerance because they are not charges that are required by the creditor, they are property taxes that are required by the government entity in which the property is located, and they have to be paid regardless of whether the borrower is taking out a loan or not, and so in their view it’s not a charge that’s subject to tolerance.

There actually is an element of the no tolerance category, which is, charges not required by the creditor. So there is some support for that interpretation, and so some lenders have been following that, I think reasonable interpretation of the Bureau, but some lenders and investors decided to take a more conservative route and apply zero percent tolerance to it.

[Note from Richard Horn: the CFPB formally stated its interpretation in a Federal Register notice it published on February 10, 2016.]

Answered By: Richard Horn

How should we, a title company, handle the situations where the lender is directing us to prepare the CD in a way that we know is incorrect?

This is a great question, it’s something that unfortunately is not described in the preamble of the rule, it’s not something that’s in any of the regulatory provisions, and it’s something that is really of concern to settlement agents. Because there are a lot of misunderstandings about how to comply with TRID and actually there are probably a lot of cases where a settlement agent might understand the way the rule is intended, might understand the correct way to comply with the rule, and the lender might have a misunderstanding about it.

But the lender might still require under their closing instructions for the disclosure to be disclosed incorrectly because of their misunderstanding and the question then comes up, is the settlement agent subject to potential administrative liability for that violation.

Hopefully that’s something that the CFPB does, at some point in the future, provide some guidance on for settlement agents. I know the HUD FAQ’s previously did talk about some agents’ responsibility with respect to tolerance violations for the GFE and the HUD-1 and so there is some precedent for a regulatory agency giving some guidance about these types of situations where the lender might have a violation that the settlement agent is really just a part of because they are following the lender’s instructions.

I think the best thing for settlement agents to do is to document that they informed the lender of their interpretation and that the lender decided to still follow through with the lender’s interpretation, and then keep that in their own file. Because if there is any potential administrative liability I think that would probably be taken into account by an examiner.

Answered By: Richard Horn

Closing Disclosure

If the LE must be provided based on incomplete information, what should I do when a change increases an estimated cost?

Similar to the current GFE and TIL requirements, the LE must provide a “good faith estimate” of the terms and charges associated with the transaction.[1] The core requirement here is that you must “exercise due diligence” to obtain “the best information reasonably available . . . at the time the estimate is provided.”[2]

Fortunately, you generally may rely on the representations of the parties and service providers.[3] However, your systems must be able to track these representations and tie them to the estimates provided on the LE because the TRID rule requires you to maintain records demonstrating compliance with these requirements.[4]

Even if an estimate was based on the best information reasonably available, additional restrictions on increasing the estimated charges apply. Specifically, unless an exception applies:

  • You cannot charge more than the amount on the LE for lender fees, broker fees, transfer taxes, affiliate fees, and third-party fees if the consumer could not shop for the service (“zero tolerance” category);[5] and
  • You are limited to an aggregate increase of 10% for the total amount of recording fees and third-party fees for the services for which the consumer is permitted to shop (“10% tolerance” category).[6]

While at first blush these may seem like the familiar “tolerances” adopted by HUD under RESPA in 2010, they differ in several important respects. Most notably, affiliate fees have been moved to the zero tolerance category, so you must disclose the exact cost ultimately charged to the consumer for all fees paid to an affiliate, unless a permitted exception applies.

Furthermore, the rule expands liability to include a private right of action for violations of the tolerance requirements because the Bureau’s “good faith” requirement relies on TILA as well as RESPA.[7]

When the limitations or tolerances apply, the amount actually paid by the consumer at closing can only exceed the amount on the LE if a “changed circumstance” or other exception applies (a “permitted exception”), and a revised LE is issued within three business days of “receiving information sufficient to establish that” the exception applies.[8]

The TRID rule specifically requires you to maintain proof of the reasons justifying each cost increase.[9] This means that, for each increase, you must document:

  • The information demonstrating that the increase falls within one of the permitted exceptions;
  • When you learned of that information;
  • That the increase is solely attributable to the exception; and
  • That a revised disclosure was provided within the applicable time period.[10]

As with tracking the application information, your systems must also be able to track and store the cost information coming from various sources (the borrower, the settlement agent, appraisers, and other service providers), determine when a permitted cost increase has occurred, and issue a revised disclosure by the applicable deadline.

This can be especially complicated when, for example, multiple changed circumstances cause multiple increases of less than 10% in charges that fall within the 10% tolerance category. The TRID rule provides that the 10% tolerance does not reset until there has been an aggregate increase of 10% or more and a revised LE has been provided within three business days of receiving information establishing that increase.[11] However, the CFPB’s forms do not include a total for the charges in the 10% tolerance category, so you must track this separately.

Consider the following scenario, which is adapted from an example provided by the CFPB in the TRID rule:[12]

  • The estimated fees for the pest inspection and title services on your initial LE are subject to the 10% tolerance category.
  • After the initial LE is provided, you receive information that a permitted exception caused the pest inspection fee to increase by 5% of the total amount of charges in the 10% tolerance category. Because the increase is less than 10%, you are permitted – but not required – to provide a revised LE informing the consumer of the increase. Regardless, this increase does not reset the 10% tolerance category and this LE will be disregarded when determining compliance.
  • Three weeks later, on a Monday, you receive information that another permitted exception has caused the title fees to increase by 6% of the total amount of charges in the 10% tolerance category. Because there has now been an aggregate increase of more than 10%, you must provide a revised LE within three business days (i.e., by Thursday) if you want to pass the 11% increase on to the consumer. If you do so, this revised LE will be used to assess compliance.

This example shows that determining compliance goes beyond tracking each individual cost increase. To accurately determine whether you have complied with the TRID rule, you must be able to maintain a running tally of cost increases with documentation of the permissible exception justifying each increase so that you know when a revised LE must be provided.

[1] 12 C.F.R. § 1026.19(e)(1)(i).

[2] 12 C.F.R. § 1026.17(c)(2)(i); cmt. 17(c)(2)(i)-1.

[3] Cmt. 17(c)(2)(i)-1 (stating that lenders “might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees”).

[4] Cmt. 19(e)(3)(iv)-3 (stating that lenders “must retain records demonstrating compliance with the requirements” to provide the LE).

[5] 12 C.F.R. § 1026.19(e)(3)(i); Cmt. 19(e)(3)(i)-1.

[6] 12 C.F.R. § 1026.19(e)(3)(ii).

[7] See 78 Fed. Reg. 79730, 79799 (Dec. 31, 2013).

[8] 12 C.F.R. § 1026.19(e)(4)(i). If charges increase because the interest rate was not locked when the LE was provided, and you enter into a rate lock agreement with the borrower, the revised LE must be provided on the date the interest rate was locked. 12 C.F.R. § 1026.19(e)(3)(iv)(D). The Bureau has proposed to relax this requirement so that the revised LE need not be provided until the next business day after the rate is locked. See, e.g., 79 Fed. Reg. 64336, 64344 (Oct. 29, 2014) (hereinafter “Proposed Amendment”).

[9] Cmt. 19(e)(3)(iv)-3.

[10] Cmt. 19(e)(3)(iv)-3.

[11] 12 C.F.R. § 1026.19(e)(3)(iv)(A); cmts. 19(e)(3)(iv)(A)-1.ii and 19(e)(4)(1)-1.ii.

[12] Cmt. 19(e)(4)(i)-1.ii.

Answered By: Ben Olson

What is my responsibility with respect to the new Closing Disclosure (“CD”) (which replaces the HUD-1/HUD-1A and final TIL disclosure)?

Under the TRID rule, responsibility for the information currently disclosed on the HUD-1 or HUD-1A shifts from the settlement agent to you.[1] You must disclose the costs associated with the transaction that are actually charged to the borrower on the CD, and you must provide this disclosure sooner than previously required—it must be received by the borrower at least three business days prior to closing.[2] You may delegate completion of the form to a settlement agent, but you ultimately retain the liability if the settlement agent gets it wrong.[3]

Notably, liability for these disclosures has also expanded. The Dodd-Frank Act expanded TILA to require that, for residential mortgage loans, you disclose “the aggregate amount of settlement charges for all settlement services provided in connection with the loan, the amount of charges that are included in the loan and the amount of such charges the borrower must pay at closing, . . . and the aggregate amount of other fees or required payments in connection with the loan.”[4]

Because there is no accuracy tolerance for the aggregate settlement charge, you must accurately disclose each individual settlement charge to avoid liability under TILA for stating an inaccurate total. If you inaccurately disclose the charges, then borrowers may bring a private right of action against you for violating TILA.

Most lenders will continue to rely heavily on settlement agents in preparing the CD, and the TRID rule expressly condones this practice.[5] However, careful coordination and communication are required to ensure the disclosure is accurately and timely made.

[1] Cmt. 19(f)(1)(v)-3.

[2] 12 C.F.R. § 1026.19(f)(1).

[3] 12 C.F.R. § 1026.19(f)(1)(v); cmt. 19(f)(1)(v)-3.

[4] 15 U.S.C. § 1638(a)(17).

[5] See comment 19(f)(1)(i)-2.i.B (“Assume that . . . the creditor obtained information about the terms of the consumer’s transaction from the settlement agent regarding the amounts disclosed under § 1026.38(j) and (k). The creditor has exercised due diligence in obtaining the information about the costs under § 1026.38(j) and (k) for purposes of the “reasonably available” standard in connection with such disclosures under § 1026.38(j) and (k).”); 78 Fed. Reg. at 79868 (“The final rule clarifies that, with respect to the Closing Disclosure provided three business days before consummation, creditors may provide disclosures based on the best information reasonably available and may rely on information provided by settlement agents.”).

Answered By: Ben Olson

Do we have to re-disclose when adding a borrower to the loan application?

No. That may be an event where you want to re-disclose, but the obligation to re-disclose under the rule only occurs when you have an amount that has increased beyond tolerance due to a changed circumstance or other exception and you need to re-disclose within 3 days in order to pass that charge on to the consumer and reset the tolerance. Other changes do not mandate redisclosure of the Loan Estimate although you are always free to provide, voluntarily, a revised loan estimate or closing disclosure.

[In a follow up question, a listener asked whether every borrower needs to receive a Loan Estimate and, if so, whether a new Loan Estimate should be issued when a borrower is added.  In situations involving multiple borrowers, the long-standing rule in 12 C.F.R. 1026.17(d) continues to apply: “If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation.”  In the TRID rule, the CFPB revised comment 17(d)-2 to state:

When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to either one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under § 1026.23, although the disclosures required under § 1026.19(b) need only be provided to the consumer who expresses an interest in a variable-rate loan program.

When two consumers are joint obligors with primary liability on an obligation, the early disclosures required by § 1026.19(a), (e), or (g), as applicable, may be provided to any one of them. In rescindable transactions, the disclosures required by § 1026.19(f) must be given separately to each consumer who has the right to rescind under § 1026.23. In transactions that are not rescindable, the disclosures required by § 1026.19(f) may be provided to any consumer with primary liability on the obligation. See §§ 1026.2(a)(11), 1026.17(b), 1026.19(a), 1026.19(f), and 1026.23(b).

Therefore, as long as the new borrower does not become the sole principal obligor, it appears that it is permissible to wait and provide both borrowers with the Closing Disclosure.  However, there is no question that the safest approach would be to provide a new Loan Estimate to both borrowers when the new borrower is added, as long as your system can put that Loan Estimate aside when checking the tolerances, as discussed below.]

Something important to note there, this comes back to your systems and processes. If you choose to voluntarily provide a Loan Estimate when not required by the rule, that Loan Estimate must be disregarded when evaluating compliance with the tolerance requirements.

Here is an example of where that really matters: you have the 10% aggregate tolerance bucket, which applies to the total amount of all the different fees that make up that bucket. Did those fees go up by 10% or not? If they did, you need a valid changed circumstance or other exception. This is something the Bureau has clarified that was unclear under HUD’s rule. Well, not unclear — HUD ultimately came out differently on that point.

In any event, under the Bureau’s rule, if you have a changed circumstance that causes a charge in the 10% bucket to go up by less than 10%, that does not allow you to reset the 10% tolerance even though it’s a valid changed circumstance and even though, if this were a zero tolerance fee, you could reset. What the Bureau said is the cumulative changes need to push you over 10% before you get to reset. That doesn’t mean you lose the ability to pass that increase on to the consumer — it just means that you have to disclose 3 days from the date on which the changed circumstances push you over 10%.

So the question comes up that today many lenders will push out a new GFE if say something goes up by 4%. Can lenders continue to do that with the Loan Estimate? Yes, there is nothing prohibiting you from doing that but your system has to know that the voluntary Loan Estimate does not reset the tolerance. So when you’re calculating compliance with the 10% bucket, you need to be looking back past that voluntary Loan Estimate. You need to ignore that Loan Estimate when making the calculations.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

The final rule requires that disclosures be provided before consummation of the transaction. How is this defined and what all must be included in this disclosure?

The requirement is that the borrower receives the Closing Disclosure 3 business days prior to consummation, which can be different than closing. Consummation is the date the borrower becomes legally obligated to the transaction and that is usually going to be the date they sign the note; however, in escrow closing states, you may have circumstances where the borrower is not actually legally obligated until funding occurs.

In those circumstances, you may, depending on how many days are between the date the consumer signs and the actual funding date, the consumer could be receiving the final Closing Disclosure on the date they sit down with you to sign the note. That could be the first Closing Disclosure they see. You have to look to your state law on that particular point.

In terms of what you’re giving them, you’re giving them a Closing Disclosure that provides all of the information that we walked through – all five pages — based on the best information reasonably available to the creditor through the exercise of due diligence. The rule makes clear that the due diligence obligation means getting information from the settlement agent, realtor, and service provider.

You do have an obligation to seek this information out. You can delegate that. The settlement agent can perform the same functions it does today when collecting this information, but do so on behalf of the creditor, pursuant to an agreement between the creditor and settlement agent.

That will be the new normal under this rule. The question is, of course, do those three days mean essentially you’ll close before you close? Will it add 3 days on to the end of the process? Or is this something that can be accomplished within the existing timeline? I think the general assumption seems to be that it will make closings take longer than they do today, but we simply don’t know yet.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

What are your thoughts on situations where the APR goes down by 1/8 or more from the last disclosure? Would the CD need to be re-disclosed and a waiting period be observed?

Short answer is no. The way this rule works is, and you sort of have to walk a Byzantine maze to get there, there is buried within the depths of Regulation Z a carve out for circumstances in which the APR goes down as a result of the finance charge. This is an important point: If you simply get the APR wrong — in other words, you overdisclosed it — not because you overdisclosed the finance charge used to calculate the APR, but literally you made a mathematical error, then in theory that could cause redisclosure and an additional 3 day waiting period.

I’m sure that has happened, but I personally have not seen it happen. A far more common circumstance is where you’ve accidentally included something in the finance charge that shouldn’t have been in there and then when you take it out, the APR goes down. Or you disclosed the correct finance charge but then it simply goes down on the loan, which sometimes happens. In either case, that will not trigger a 3 day waiting period.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

What should a creditor do if a loan has been pulled from a previous creditor due to a longer-term time and is submitted to the new one? To add complexity, what if the previous lender’s fees were lower and an appraisal has already been ordered? Would the new creditor have to match fees and use a previous creditor’s loan number, or would the consumer be committed to using the first creditor with a longer term time and potentially miss the closing date?

There’s nothing in the rule that says creditors can’t do that. But there are some tricks and traps along the way I think that are embedded in this question. One being, at a very high level, will your investor buy the loan? That’s always going to be question one. And wherever there’s doubt, the answer may be no. These could be portfolio loans and it may not matter. But one thing to always think about is what the secondary market will do and what sort of controls are they going to have in place. That’s a big threshold question for a lot of loans.

Assuming that’s not an issue, then it becomes a regulatory question as to what happens when a loan ID has been assigned. That’s something that is in the rules. The Bureau has given some flexibility as to when brokers can avoid putting a loan ID on a loan when they don’t know who the creditor is going to be. This was a big question that came up very early in the implementation process that the brokers and wholesalers were very concerned about.

There’s this provision, 1026.37(a)(12) if I’m not mistaken, which is the Loan Estimate disclosure rule that says the loan ID determined by the creditor has to go on the Loan Estimate and then it has to track basically through the Closing Disclosure. And there doesn’t seem to be a way to change that once it’s there.

The first big question we had is if the broker is generating the Loan Estimate and this has to be a creditor’s ID, what if the broker can’t get it? The Bureau said in that instance, that it’s acceptable if the best information reasonably available doesn’t provide the loan ID because you don’t know who the creditor is going to be, then it can be blank, and it can be later filled in by the creditor.

The same goes for the creditor’s name. If the creditor’s name is not known, the broker can leave it blank and issue a Loan Estimate. Once a Loan Estimate has been done in a creditor’s name, with the creditor’s loan ID, it’s a little less clear how, or if, that can change under the rules.

One way to read the rule is you can say nothing prohibits you from issuing a revised Loan Estimate correcting information that has changed or is wrong. You wouldn’t have a changed circumstance event necessarily, where you’re re-disclosing estimates here; you’d be re-disclosing information. And I don’t think there’s anything in the rule that specifically says you’re not allowed to do that because you had a change in creditor.

The alternative, of course, would be that creditor A denies the loan or the consumer withdraws and then applies with creditor B. That may be a cleaner way to do it, but the rule doesn’t seem to foreclose either. Your investors may read the rule more conservatively and say that it does, but in my reading of the rule, it doesn’t specifically say no.

As far as estimates go, I think that’s where it would get trickier. If a broker has provided estimates and you don’t have a changed circumstance or other event that changes that specific estimate, then I think creditor B is still going to have to live with it. Whether or not there’s a valid change of circumstance or a borrower-requested change, anything like that that would allow you to re-disclose the estimate and reduce it, that’s always going to be fact-specific and it’s going to depend on what has changed and why and how you can document it.

You will always have a record retention requirement where you have to show evidence of compliance. If you have a change event you’ll have to make note of it and you’ll have to explain it. And it has to be tied to a specific charge.

Answered By: Andy Arculin

The new rules require that a Loan Estimate is sent to the consumer no later than the third business day after the consumer’s application is received, regardless of whether a broker or lender takes that application. What options do wholesalers have for producing the Loan Estimate in this tight window, when a third-party loan originator is taking the application?

Wholesalers can do really one of two (or if you count blank Loan Estimates, three) things. One would be you trust the broker to generate the Loan Estimate on your behalf. And you make sure that they’re doing it in a manner that’s compliant with the rules and they’re also producing estimates that you’re going to be willing to guarantee. That’s one way to do it.

Another way to do it, which I have heard, is having a tight enough information flow so when your broker takes an application, as soon as that application is completed, you know about it. And you’re producing the Loan Estimate, you—meaning the wholesaler—you’re producing the Loan Estimate in your own name, with your own estimates rather than trusting a broker to do that. That’s another option.

If there’s any type of lag in information time that may cost you a day—remember you’re only going to have three business days, so you have a tighter window to do it. You can’t receive a package and then start your clock three from when you receive the package. It’s going to be three days from when the broker took the application. But if you have a way that your systems are synced up or your information is being shared, and you know exactly when that happens, another option you have is to produce the Loan Estimate yourself.

Answered By: Andy Arculin

Is it required to show a broker’s commission on the new forms?

This depends on how the broker is being paid. The answer ultimately is yes, but it depends on how the broker’s being paid and which form you’re talking about. If the consumer is paying the broker directly, then the broker comp is shown both in the Loan Estimate and the Closing Disclosure as an origination charge. That’s specifically mentioned in the rules to origination charges, which are section 1026.37(f)(1).

If what you’re talking about is creditor-paid broker compensation—like you have in points and fees today for creditor-paid LO compensation—that will not go on the Loan Estimate. Consumer testing showed that it was confusing and consumers thought this was a charge they were going to be paying, so it was not actually included on the Loan Estimate.

However, it is still on the Closing Disclosure as a paid by others charge. There is a regulatory provision there (38(f), if I’m not mistaken), which tells you where to put it on the Closing Disclosure. Essentially, this number should be exactly what you’re including in points and fees for creditor-paid compensation and it goes only on the Closing Disclosure. Consumer-paid goes on both and it’s an origination charge.

Answered By: Andy Arculin

Are the sellers’ charges going to be shown on the borrower’s CD?

The settlement agent is required to provide the sellers’ charges to the seller on a Closing Disclosure. That’s a requirement under the rule. So the settlement agent still has a role in the transaction; they are still required to provide the closing disclosure to the seller.

There are also provisions for the borrower’s Closing Disclosure that would require some of the sellers’ charges to be shown. For example, the prorations between the two parties will be the same, so some of those prorations will be shown on the borrower’s side of the disclosure. Also, the seller credit will be shown on both disclosures.

With respect to other charges that aren’t necessarily required to be disclosed on the borrower’s disclosure, TRID does not address whether those charges can or can’t be put on the borrower’s Closing Disclosure. It would come down to state law to see whether there are privacy restrictions on settlement agents or creditors from sharing the information about the borrower’s and the seller’s transactions between the parties.

A lot of settlement agents commented that the sample Closing Disclosures in the proposed TRID rule had information from both the borrower and the seller on them and they said there were state law privacy restrictions on sharing such information between the parties.

In response to that, the final rule allows the separation of the borrowers’ and sellers’ information in two ways. The creditor and the settlement agent can take the standard Closing Disclosure and put blanks for the borrower’s or seller’s information on the disclosure to the other party.

The rule also provides for a seller-only version of the Closing Disclosure that only includes the information on the closing disclosure that pertains to the seller, so it deletes the borrower’s columns from the closing-cost details and it deletes the borrower’s summaries of transactions table. So there are two options that settlement agents and creditors have to separate the borrower’s and seller’s information.

To sum it up, the rule would require some of the seller’s information to appear on the borrower’s disclosure, but there’s no requirement under the rule that says “yes” or “no” that it has to or cannot be disclosed on the borrower’s Closing Disclosure. It would come down to state law privacy requirements.

Answered By: Richard Horn

What would be the specific business day in the case of a holiday falling on a Sunday, but the observed holiday is the following Monday?

The definition of a holiday is very specific under the rule. I know it cites a particular statute for those holidays, but I don’t know if it describes what happens between the actual holiday and the observed day.

One thing I’ll mention about that is in this rule, we tried not to change some of the underlying compliance requirements. The specific definition of business day doesn’t change between the current rules and this rule; the same holidays are used. Whatever you’re doing for the current specific definition of business day would apply to the TRID rule.

Same thing with APR tolerance for the revised closing disclosure. That currently applies to the Final TIL. Whatever you’re doing for the Final TIL, if you’ve looked at the compliance issues surrounding your APR tolerance of the Final TIL and already decided you’re compliant with the requirements under MDIA for that, then you should be within compliance with that provision under TRID as well.

Answered By: Richard Horn

What is the “black hole” timeline for resetting tolerances on the CD?

Comment 19(e)(4)(ii)-1 is not as clearly worded as some would like. There are a lot of different interpretations out there about what the timeframe is for providing revised estimates on the closing disclosure.

Generally, my interpretation is that if you have a changed circumstance that you get information about six business days or less before consummation, then you can disclose the revised estimate that results from that changed circumstance on the Closing Disclosure and use it to rebaseline your tolerance calculation. Using the interpretation I just mentioned, if you provide the Loan Estimate early—ten days before closing—and then received information about a changed circumstance eight days before closing, then because that is earlier than the six business days or less I just mentioned, that changed circumstance would fall into the “black hole” and not be able to be used for changed circumstances.

A similar thing would happen if closing were delayed. Let’s say closing is delayed two weeks, then for a period of time until you get back within that window of six business days before closing, changed circumstances would also fall into the “black hole” and not be able to be used for revised estimates.

Answered By: Richard Horn

How close does a real estate agent’s cost estimate have to be to the CD?

The real estate agent or broker’s cost estimate does not have to match the CD. The CD and Loan Estimate are tied. There’s no legal requirement in regards to the CD. I think that certainly when you get to that cash to close number that there you want to be sure that you’re going to be close to that. If you’re doing it for the seller you want to be conservative, and if they make more money that’s great. If it’s the borrower, again you want to be conservative, you probably want to show the cost is going to be a little bit more, then it’s cheaper, but there’s no legal tie between those documents.

Answered By: Charles Cain

By law you are to retain the CD for five years. What happens in year six?

The closing disclosure is currently required because it has non-public information on it that is a five year from the date of closing retention. The question is what happens if in year six suddenly there is an issue where you need to provide it? Well then you’re legal obligation to have it is gone at the end of that fifth year. So if you’re in year six you legally do not have to have that closing disclosure retained. You can destroy it five years and a day after closing.

Answered By: Charles Cain

We’ve heard that some lenders are providing the CD earlier in the process when they don’t have the final numbers, effectively preparing it immediately upon receiving the title insurance binder. Is this meeting the intent of the rule? What are the repercussions of doing this?

We’re seeing some of that, not wide scale but we are seeing it. I think it really kind of violates the intent, because some lenders are just trying to get something out, to try to get the clock running to get to a closing date, but then I don’t know that they’re really putting forth the effort necessary to make the numbers right on it. I think that’s going to be a problem for them if they don’t get the results.

Answered By: Brent Laliberte

How should we (Title Co.) handle the situations where the lender is directing us to prepare the CD in a way that we know is incorrect?

We’ve actually seen this some, where you know the lender will do theirs and then we’ll do ours and we try to reconcile them and they’re just off, and I think the occasions where we’ve had that, if anything I think they’ve usually deferred to ours. It hasn’t been wide scale, I’d say just probably a handful of situations, but I think you’ve got to document and keep copies of whatever you have.

Because clearly, if you read a lot of these closing instructions now, they’re trying to shift as much blame and liability and responsibility to us (Title) as they can so we need to make certain that we do the best job we can and try to be in conformity with what the rule provides for, but at the end of the day it is their form so with their form, we need to do an adequate job of protecting ourselves, and our own interests.

Answered By: Brent Laliberte

Can you please reiterate that it is the settlement agent’s responsibility under TRID to provide the seller’s CD? As a lender this is so problematic that title companies and such do not, under their obligation under the rule.

Richard Horn: I was going to reiterate that, it is a requirement under the rule under 19(f)(4), for the settlement agent to provide the seller’s CD.

Brent Laliberte: I can tell you, we haven’t had any issues with that, that’s been going pretty smoothly, the bigger issue that we’ve had is, the Realtors are trying to get us to release that seller’s CD or that buyer’s CD to them, and that’s when we just tell them that’s obviously that’s a lender form, that we have no authority to release.

What we’ve been seeing lately is some kind of homebrewed authorizations, ‘Hey look, my client said it’s okay to give me this,’ look, that’s not good enough for me, I need to comply with the rule, I need to give it to the consumer, and if you want to get it from the consumer, you need to get it from the consumer, but absent written authorization from the lender allowing us to release the CD to the Realtor, we’re not even touching that, but getting it to the seller is not a problem for us.

Richard Horn: I’ll reiterate that this is why it’s so important for lenders, where they have the ability to do so, to really pay attention to the settlement agents that they are doing business with. Imposing some type of reasonable requirement, like, third party certification of compliance with ALTA’s best practices or other even more advanced certifications.

Because there is a great deal of potential liability with these TRID disclosures that actually could be caused by a settlement agent not complying with TRID, providing inaccurate information, or not following the closing instructions. Making sure that you are dealing with settlement agents that actually have the proper compliance management systems, and proper certifications, could be helpful in reducing the risk of that liability.

Is there a cure if the settlement agent did not have the buyer’s CD executed at consummation?

A signed CD not being required is one thing, clearly, you want to make every opportunity to get it, and should it be that you don’t have it, I guess you can live with that, but you don’t want to run afoul of all who’s going to buy the paper. And I think you need to minimize those possibilities of not having the signatures, even though it may not be required. I mean what’s the best way to authenticate that it was actually done and presented and explained to the consumer than to have their signature on there.

Answered By: Brent Laliberte

We’ve heard that some lenders are providing the CD earlier in the process when they don’t have the final numbers, effectively preparing it immediately upon receiving the title insurance binder. Is this meeting the intent of the rule? What are the repercussions of doing this?

That’s a great question and I think this is one that touches upon the black hole because under the most common reading of comment 19(e)(4)(ii)-1, a lender can only use changed circumstances disclosed on the CD for tolerance purposes if they learned of those changed circumstances 6 business days or fewer before consummation, closing.

If the lender then provides the CD too early, let’s say 2 weeks before closing, they could result, in about a week, (the time period before that 6 business day window under comment 19(e)(4)(ii)-1) that period, falling into the black hole where any changed circumstances that come up they wouldn’t be able to then use for tolerance purposes. So basically by providing the CD too early they are creating their own black hole.

I think that’s one of the reasons why that comment creates that disincentive, to prevent providing the CD too early. The CD is meant to be a final disclosure, it actually says that on the top of page 1, it says this is a final statement. And by providing it too early, it really could confuse the borrower because it says its the final numbers, and then there would be a significant amount of changes from let’s say two weeks before closing, and so that’s one of the reasons why I think that comment does create that disincentive because it doesn’t want the CD provided too early.

So, aside from a tolerance issue, I think there could be potential UDAAP issues because it could also be confusing and unfair to borrowers to tell them that this is going to be the actual number, and then at closing essentially is when the next corrected CD technically has to be provided to the consumer, give them a cash to close that’s much greater, so there could be some real UDAAP issues there as well to be concerned about.

Answered By: Richard Horn

Can a numerical value on a CD (Fee value omission) be deemed to be a non-numerical clerical error if the LE reflects the accurate value and the omission on the value on the CD is a result of a bona-fide technical error (data mapping)? See section-by-section analysis stating “The Bureau does not believe the fact that a charge was disclosed in a different manner to a consumer before an incorrect disclosure was provided is material for purposes of classifying a clerical error.”

So, the way that I usually read the preamble is if there’s a sentence in the preamble, I check whether it’s responding to a public comment that was received. For many of the sections in the preamble, there’s a long list of each comment that was received, or a long description of each comment that was received to that particular revision.

When I led the rule the reason why that was important to me to include was because I wanted the responses, and the description of the reasons why the CFPB did what it did, to be responsive to the public comments that were received. I wanted that all to be in one document. And so sometimes, it’s important not to just read a sentence in isolation in the preamble, especially a sentence like that and to go see what type of comment it was responding to, and so I would want to look at that first before providing an official answer.

But I would think that, considering that what we are talking about a numerical disclosure, that that would not qualify as a violation that’s curable under that section, although it could be curable under TILA section 130(c) as I mentioned, which is a defense to liability, a defense to civil liability, for violations that were really unintentional bona fide clerical errors.

Answered By: Richard Horn

What is the potential liability or ramifications for providing a different CD to the seller than has been shared with the buyer? Meaning, if the lender delivers the CD to the buyer but the settlement agent delivers the CD to the seller, what if they are not the same document?

That’s actually allowed, under the rule there is a provision that, I think it was a response to a lot of public comments that were citing state privacy requirements for the borrower’s and seller’s information, allows lenders and settlement agents to separate the borrower’s and seller’s information onto two different CDs, so the borrower doesn’t get the seller’s and the seller doesn’t get the borrower’s private information.

Now, some numbers actually do have to be the same between the two different disclosures, so, for example, the proration, or the seller credit, those are things that will be on both the borrower’s and the seller’s forms.

If that information is the same between the borrower’s and the seller’s CD there is no violation from providing the rest of the information separately, but if that information that will actually have to be the same on both the borrower’s and seller’s CD is actually different, if they don’t reconcile, that is a potential disclosure violation, on the borrower’s CD or the seller’s CD, because one of those numbers is likely inaccurate.

So, for example, if the seller is providing a $5,000 dollar lump sum credit, and on the seller’s CD it shows that $5,000 lump sum credit but on the borrower’s CD it shows a $4,000 lump sum credit, that would be a violation on the borrower’s CD that would actually be easily identifiable by an examiner or somebody looking at the loan file because the number would be different on the seller’s CD as well as probably the settlement agent’s settlement statement.

Answered By: Richard Horn

What if the settlement agent did not have the buyer’s CD executed at consummation?

So, actually, there is no technical requirement under TRID that the CD be signed. You can actually leave the signature line off of the CD. There’s a provision that makes the signature line optional for the borrowers.

But it’s a good idea to have it executed because it provides additional documentation that you are following the requirements, especially, for example, the initial CD that has to be received three business days before consummation. It’s good to get some kind of confirmation, either electronic signature or wet signature, that the borrower received it, or some other form of confirmation.

Then at closing, if anything changes after that initial CD is provided, there’s actually a requirement to provide a corrected CD at or before consummation and so, it could be helpful to have the borrower sign that corrected CD at consummation just to provide additional documentation that you provided it at or before consummation.

The borrower’s signature can be helpful in that regard and then also, keep in mind that there could be investor requirements that require these documents to be executed. And sometimes, it’s actually more important what the investor requires than what the rule requires because the investors are who are going to purchase the loan. And so, it’s very important to pay attention to what their guidelines say.

Answered By: Richard Horn

Cybersecurity

I’m a small business that only processes a few credit card transactions a month. Do I need a firewall or will I not be PCI Compliant?

You want to protect your customer’s credit card data. Your firewall is the 1st line of defense on your network, no matter what type of internet services you are using.

Some services from your local cable company or telephone company will come with a “Bundle” which will include a firewall/router combo. That’s fine for basic office usage and protection, however, when you are running a business, and you are taking credit cards, you are going to want to actually login to the firewall and make sure the settings line up with what your processor requires.

They will have a check for things like making sure that the firewall has a rule that denies ANY traffic using ANY service to ANY resource on your LAN. That rule means that all traffic is blocked from entering your business network. That rule also means that you need to have other specific rules in place for other items on your network that may need to have communications open, those rules will be based off the application, resource, and port.

You will also need to develop some Policies and Procedures and training to completely wrap the processes. That way you have documentation on what you have done, what is in place, and what you will do to make sure things are secure for your business. Please see http://pcidsscompliance.net for a wealth of information regarding this topic.

I cannot afford the $59.99 yearly subscription for anti-virus software, so what am I supposed to do?

You really, really need to just go online and download and install a free antivirus program. Check with your internet service provider (ISP) to see if they offer free versions of antivirus software along with your internet service. Most of the larger ISP’s do offer a free subscription just for using their internet services.

If you login to your online account, check to see if there’s something called “Data Tools” and see if the antivirus software download link is there for you to install. If they do not offer that as part of your service, that does NOT mean that you do not install antivirus software. Not having antivirus software running on your computer is just asking for trouble and will most likely end up costing you money in the long run with repairs due to virus/malware infections and the like.

There is an article by PC Magazine that lists the best free antivirus solutions for 2015 and they have 98 different packages available. Some offer more features than others. Some offer more ads than others. Nonetheless, the link to the page is here, (http://www.pcmag.com/article2/0,2817,2388652,00.asp ) and you need to simply do some research and pick the one that you think will fit your needs best. I would recommend a product that also includes Malware scanning and removal. Lots of the antivirus programs out there offer this as a feature.

My office still has Windows XP Professional running on three of the computers. Is this risky, I would rather not spend the money to upgrade if I don’t have to.

You need to unplug them from your network ASAP please. After 12 years of running great, XP came to an End of Life April 8th of 2014. That means for the most part, there are no updates being sent out from Microsoft to keep your systems patched as vulnerabilities are found.

If you are a large shop, you have options of purchasing support and tailoring things to your needs a bit more. But for the smaller shop, it’s more fiscally prudent to upgrade. Realistically you’re looking at spending $199 to upgrade from Windows XP to a newer version.

However, you can get a brand new desktop running Windows 8.1 for not much more than that. Amazon, Best Buy, and even stores like WalMart have desktops in the $200-$300 range that are all built with the newest technologies, hardware and software.

If you think about it, the current desktop computer that you have is at least 5 years old, more likely closer to 7 or more. That’s the time that we look to possibly purchase new cars, we cycle through our cell phones every year or two…so why would we not make another investment in our company that will last for many more years to come?

I don’t have time to purchase and setup a proper backup for my computers and one of the computers is acting like a server. Money is tight so my options would be limited anyway, but time is even tighter. What should I do?

The easy button would be to purchase and setup an online backup solution like Carbonite (www.carbonite.com) or Mozy (www.mozy.com), there are others also, a link to reviews from PC Magazine is here http://www.pcmag.com/article2/0,2817,2288745,00.asp.

The simpler way, without costing too much upfront would be to go and purchase an external USB hard drive. Base the size off the total amount of storage that you need to backup, and then go with the largest drive you can afford. Plug that drive into your “server” or desktop and then simply setup Windows Backup, which is a built in backup solution in the Windows Operating system.

That solution will allow you to do a bear metal restore onto a new computer if you need to. It will also allow you to select the files and folder locations that you want to backup, how many copies of the backups to keep, and for how long. This basic solution is much better than doing nothing at all. A guide to setting up windows backup can be found here. http://windows.microsoft.com/en-us/windows/back-up-files#1TC=windows-7

HMDA

Does the final TRID rule definition of application trigger HMDA reporting?

Short answer is no. The Bureau received a lot of comment from the industry requesting that the Bureau create one common definition of application that would apply across HMDA, ECOA, TILA, and RESPA. The Bureau ultimately decided that, while it created a uniform definition of application for TILA and RESPA (which existed beforehand), HMDA and ECOA serve different purposes so the definitions of application under HMDA and ECOA remain unchanged under this rule.

Notably, when the Bureau proposed its amendments to HMDA, it disclaimed any intent to bring that definition of application in line with TILA-RESPA, but instead stated that the HMDA definition would continue serving its own separate purpose.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

RESPA

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

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

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

Lender Risk

In conducting due diligence on a supplier/vendor, at what point is the line drawn between accepting the way the supplier/vendor conducts themselves to prescribing how they should do it? By prescribing, are you accepting risk and liability unnecessarily?

As far as the regulator is concerned, the supervised entity has the liability and responsibility. Indemnification provisions within a contract – if you specifically direct your vendor to do something a certain way because you believe that is in compliance with an applicable law and it just turns out the regulator has a different view – at some point down the line it may be more difficult to invoke that indemnification provision if you’re the source of the [legal] interpretation.

That’s certainly a risk and something you should take into account. But of all the risks at play here, I think that, if you see something in the way your vendor is handling whatever the task might be that you’re concerned creates a compliance issue, the obligation on you is to make sure it’s being done correctly. If that means you’re directing your vendor and taking on yourself the risk that you’re wrong, I think that’s what’s expected of you under all the guidance.

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

Answered By: Ben Olson

Do you believe that there will be a flood of lawsuits after October 3rd? Assuming not, why do you think secondary market purchasers are going to be so risk averse?

I don’t think there’s going to be a flood of lawsuits right after October 3rd. I think the market will probably look a lot like it does today, which is generally a performing market. People don’t tend to file lawsuits for TILA disclosure violations when they’re happy with their loan. That’s a given. There haven’t been a whole lot of them recently.

But if there’s a point in time where loans are not performing as well, I think you would see more. Before I went to the CFPB, I worked with another firm in Washington D.C. and I did a lot of litigation in this space, most of it class-action litigation on issues like TILA and RESPA. Class-action lawyers are not necessarily out there defending someone who is going through a foreclosure.

In a lot of cases—and this may just be my jaded viewpoint shining through—they are looking for a payday and looking to basically file a lawsuit, find a class rep, find a violation that can be tried on a class-wide basis and file a lawsuit. There are limitations on TILA that make TILA less common than something like RESPA Section 8, where you get three times the amount of the settlement service for each kickback. Here you have a million dollar cap plus fees and costs.

But in my opinion, something like the co-op issue is a good example, where you have an entire class of transactions that is either covered or it’s not, and the market has gone in a certain direction because they think that’s what the bureau wants them to do, even though if you really looked at state law, it may say a cooperative share is personal property, not real property; therefore, it’s not covered. I could see someone filing a class-action on that theory, saying that there’s a violation of the TILA disclosure rules because they used the wrong form and trying it on a class-wide basis, and maybe even winning. I think there’s a risk of lawsuits like that.

There’s also just the general risk of liability. In other context, if there’s a market downturn, lawsuits like that may gain traction. I think we all hope the market doesn’t take a turn for the worse, but it could. If you’re an investor who’s planning on holding this loan for X number of years, you don’t have a crystal ball and you’re not willing to take on the risk. You simply don’t want someone else’s problem to become yours.

Answered By: Andy Arculin

If Title Companies aren’t motivated to reduce the risk they bring to the transaction, what can we as lenders do, other than ask for assurances in writing, that they assume liability for their own actions?

Well, I would hope that those title agents that don’t realize the seriousness of this are looking for alternate work, because obviously the lenders need to find people that understand the value in this.

I could tell you that all the good title companies that we run across have taken this serious for quite a number of years, and I think the lenders are going to search and seek those out and make sure that all the good ones are properly trained, have all the best practices, have the SOC 1 certifications, SOC 2, whatever it may be, vendor management to make sure that they’re identifying who they’re doing business with and what they’re doing to protect all the data and information that we have.

I think that’s something that’s going to weed itself out. If a title company doesn’t realize by now, and really if they haven’t started by now to realize how important all this is, I don’t that know the lenders can afford to do business with them, so that’s when the title companies got to step it up and make sure that they are being compliant.

Answered By: Brent Laliberte

Are there any protections against civil liability for lenders who are making a good faith effort to comply with TRID regulations?

The good faith period that the CFPB and other regulatory agencies have provided does not affect whether lenders or investors have civil or assignee liability. It only affects administrative liability, so potential for violations that are cited by the regulatory agency. Civil liability is completely unaffected by these administrative good faith periods because civil liability basically accrues from the statute and regulation themselves, and those are in effect in the CFR, and so regardless of what the CFPB says about taking into account good faith, a borrower can still sue under the statute or regulations that’s on the books.

Actually, I think I should add, that’s why it would be helpful, and why there was a push in Congress to have a hold harmless period added to TILA for the implementation of TRID. It didn’t get anywhere in Congress, but perhaps, you know, there could be some movement on that later on, or perhaps there could be some limit to the rule to provide such a period in the regulation itself.

These are all things that I think a lot of folks in the industry are thinking about. But for now, there is no protection from civil liability for good faith efforts.

Answered By: Richard Horn

Has there been any success in negotiating a materiality standard with regard to breaches of reps and warrants, especially as to TRID matters?

There have been some successes in negotiating a materiality standard. Typically, where I’ve seen it most successfully done is by including the materiality standard in the repurchase demand section, or the remedy section. It’s always helpful to have materiality in the actual rep and warrant also, but it helps and it’s important to have materiality language in the remedy section. I don’t have any specific examples of this being done in connection with TRID issues or liability, other than what we discussed earlier in the presentation which is the “substantial compliance with law” language being a concern of the rating agencies. So “material compliance with law” would be similarly concerning to the rating agencies. I would suggest trying to limit the liability in the remedy section, as opposed to in the rep and warrant section.

Answered By: Amanda Raines Lawrence

Settlement agents are using the new ALTA settlement statement with the final CD. It would seem that this disclosure would fall under TILA (any other disclosure). Should investors be checking settlement (disbursement of funds) with the final CD?

Section 131(e) of the Truth in Lending Act (TILA) states that an assignee (purchaser) of a consumer credit transaction secured by real property is liable if a violation that carries a private right of action is “apparent on the face of the disclosure statement,” which can be determined by comparing the disclosure statement to a “disclosure of disbursement,” among other documents.  Therefore, if the ALTA settlement statement is used to disclose the disbursement of funds, an investor may wish to compare that statement to the items on the Closing Disclosure that carry a private right of action, such as the aggregate settlement charges disclosed under section 128(a)(17) of TILA.

Answered By: Amanda Raines Lawrence

Regarding the HUD OIG audit of HUD’s indemnification recovery process, what were HUD OIG’s conclusions?

The HUD OIG concluded that HUD had not been doing an adequate job of recovering for losses when indemnification agreements were in place. Specifically, it found that there had been recoverable losses on hundreds of loans included in the review, and although enforceable indemnification agreements were in place, HUD had not taken action to collect the losses pursuant to those agreements. Ultimately, HUD OIG recommended that HUD improve its processes around this, and HUD agreed with the OIG’s recommendations and indicated that it would be initiating billing processes where appropriate, and changing its processes to prevent recurrence of this issue.

Answered By: Melissa Klimkiewicz

Loan Estimate

In the wholesale environment, if a loan is denied or it’s drawn from lender A and the broker submits the LE with Lender A on it to Lender B, is there any issue with Lender B accepting the LE that has Lender A’s information on it?

Implementing the TRID rule is as much about improving the way you and your systems manage information as it is about providing the new forms. This is because the TRID rule uses the existing mortgage disclosure framework you are familiar with, but enhances and tightens those requirements so that compliance can only be achieved if you have the ability to collect, track, and analyze the information you receive during the origination process. That begins with determining when you have received an “application.”

As is the case today with the GFE and initial TIL disclosure, you must provide the LE no more than three business days after you receive an “application.”[1] Unlike the current rules, however, you will no longer have the right to gather all the information you need before providing an estimate.

Instead, under the TRID rule, you will generally be considered to have received an “application” – and the three-business day clock will start running – once the consumer has submitted these six pieces of information for the purpose of obtaining an extension of credit:

  1. The consumer’s name;
  2. The consumer’s income;
  3. The consumer’s social security number to obtain a credit report;
  4. The property address;
  5. An estimate of the value of the property; and
  6. The mortgage loan amount sought.[2]

Although the Bureau has said that you may attempt to sequence the collection of information so that you receive everything you need to provide an LE before the submission of the last of the six items, Bureau staff has also advised that you cannot refuse to accept any of the six items.[3]

This means that you must be able to track and document what information you have received and when you received it. Furthermore, if you work with brokers, you must also be able to document what information the broker received and when the broker received it because you retain responsibility and liability for providing a compliant LE.[4] Accordingly, you may want to ensure that you have sufficient time during the three day period to review any LE the broker prepares before the broker provides it to the consumer.

[1] 12 C.F.R. § 1026.19(e)(1)(iii).

[2] 12 C.F.R. § 1026.2(a)(3)(ii).

[3] Cmt. 2(a)(3)-1; BuckleySandler Unofficial Transcript of Aug. 26, 2014 CFPB Webinar (“Transcript”) at 11, available at http://www.buckleysandler.com/uploads/1082/doc/TILA-RESPA_Integrated_Disclosures_8-26-2014_Transcription.pdf (stating that “the Bureau has never endorsed refusal of any of the six elements by a creditor because it would like additional information”).

[4] 12 C.F.R. § 1026.19(e)(1)(ii); cmt. 19(e)(1)(ii)-2.

Answered By: Ben Olson

With regards to the information that triggers an “application”, can we request additional information before, say the SSN, or do all six pieces of application information need to be solicited at one time? What are the exact triggers?

The exact triggers are the six pieces of listed information. But can you collect or ask for additional pieces of information? The answer is absolutely yes, you can. The Bureau has said you can ask for as much additional information as you want. Again, not documents, but information. However, you cannot refuse to accept the six pieces of information if that’s all the borrower wants to give you.

The Bureau has provided some guidance on online applications that is useful in thinking about what this means. Anybody who has filled out an online application form has had the experience where there are certain fields you have to fill out. They usually have little red asterisks next to them and, when you try to click submit or move to the next screen, it won’t let you proceed until you fill them out.

Instead, the system is going to kick you back and make you fill out those fields. The way this works if this were a mortgage application — and this is guidance that the Bureau has provided — it is fine to ask the borrower for 20 pieces of information in addition to the six, but when it comes time for the borrower to move to the next screen, you cannot kick it back to them for failing to fill out any field except the six required items.

So that’s the balance you have to strike: you can engineer this process so that the overwhelming majority of time, you will be able to get this information from the borrower and you will know everything you need to know. However, there will be circumstances — whether you’ve got a borrower who’s working as a tester and is actually going to refuse to give you anything other than the six items or whatever else it might be – for which you do need to plan and build a process to be able to handle.

The question that comes up a lot: Because loan product is not one of the six pieces of information, what do you do if the borrower gives you the six things but doesn’t say if they want an ARM or a fixed, a 15 or a 30 year loan?

The Bureau’s responded to that question by saying the best information reasonably available is the standard and that’s what you comply with. You are not required to give the borrower a Loan Estimate for every product that you offer, but instead it might be reasonable to say that, if your most common product is a 30 year fixed or a 5 year ARM, then in the absence of direction from the borrower about what they want, you are going to give them a Loan Estimate based on that product.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

Is over estimation of LEC’s acceptable?

There are new tolerances that come into effect with the new rules. The way the rules are designed is very similar to what you have for the RESPA GFE. There is a good faith standard, meaning you (or the broker on your behalf) have to provide the consumer with good faith estimates, based on the best information reasonably available for any settlement charges.

Then there are tolerance rules that are going to be in place for those charges. There is an expanded category of zero tolerance charges, meaning that, under the rules, if what the consumer ultimately pays is higher than what was on the estimate, then the estimate was deemed to not be in “good faith” and you must cure a tolerance violation unless there was a changed circumstance or other event that allows you to redisclose it.

There’s another category called the 10% category where you’ve permitted shopping for a service and it’s not being paid to an affiliate of the creditor or broker. This also is very similar to what you have under RESPA. Then there are other types of charges, like prepaid interest that are not subject to tolerance at all. But generally the baseline for “good faith” is that you did not charge more than you stated on the estimate.

However, I wouldn’t bank on the fact that “good faith” relies on charging the consumer more than the estimate as a license to intentionally overestimate. There are business reasons and legal reasons why you still wouldn’t want to do that. The business reasons are obvious: you’re probably putting yourself at a competitive disadvantage if you are overestimating fees and making the loan look more expensive than it is. That’s a practical concern.

The legal concern is that, even though the good faith standard turns on charging the consumer more than the estimate, there also is still a best information reasonably available standard. This means each disclosure that is made has to be made according to the best information reasonably available.

So if what you or your third party LO is doing is intentionally inflating estimates to get around potential tolerance violations, then those disclosures wouldn’t be made according to the best information reasonably available. Even though they may end up protecting you from a tolerance violation, you still could still violate TILA.

Answered By: Andy Arculin

Is there a problem with a broker generating Loan Estimates when they are unsure who the creditor is going to be?

The rules don’t get that specific. The standard is best information reasonably available. The hook to issuing a Loan Estimate without a creditor’s name on it, meaning a broker is issuing a Loan Estimate and isn’t actually putting the name and address of the creditor on the form is that, despite using reasonable diligence to determine who the creditor will be, the broker is unable to determine who the creditor is going to be prior to issuing the Loan Estimate. In other words, the best information reasonably available does not include the name of the creditor; therefore, the creditor’s name can be blank.

Answered By: Andy Arculin

The new application definition eliminates some of the flexibility that wholesalers and the third party originators/brokers have today in determining when an application has been submitted. Are there still ways that information collection can be controlled?

Yes, there are, but there are some limitations. Recall the “catch-all” element, which exists under RESPA. This is basically anything else (in addition to the six elements) that the creditor requires to complete an application.

This catch-all element is going to be gone on August 1st so the new definition for an application triggering the Loan Estimate is going to be six specific pieces of information: the consumer’s name, income, social security number (as the rule is written it says social security number for purposes of retaining a credit report), the property address, the estimated property value, and the estimated loan amount. Those are the six.

That’s it and once those six elements have been submitted by the consumer for purposes of obtaining credit—meaning they’re not just on file somewhere, but the consumer has actually submitted them to a broker or a creditor for the purposes of getting an extension of credit—the application has been submitted and the clock is ticking.

However, the preamble sections on the new definition of application in the final rule (if you want a regulatory cite that’s section 2(a)(6) of Regulation Z) discuss at length the flexibility that creditors or brokers have in controlling or sequencing the collection of information.

For example, the sixth element collected in a lot of cases is going to be something sensitive like the social security number, and may be saved for the end while other useful information or necessary information like date of birth and mailing address (which aren’t in the 6 elements), as well as information like the product type, can be captured first.

The catch, however, is implied in the preamble and was clarified later by the CFPB’s webinar: the creditor or broker is not permitted to refuse to proceed with the application collection if the consumer has provided all six elements and wants to submit the application. There’s a reason for this.

Despite all this talk about flexibility, which I think usually works because people want to get a loan and they will willingly give information as the information collection goes, one of the main policy objectives of the rule is making it easier and quicker for consumers to get estimates and shop between them.

The Bureau felt strongly that removing the creditor-specific or “catchall” application element would mean that the consumers can get Loan Estimates from different creditors based on the same universe of information, and that would greatly facilitate shopping. That was the theory. This means sequencing is allowed, but in the CFPB’s view there is a caveat—and in your case, that is a caveat you are going to be entrusting to third party brokers.

As for what you need to do to make sure brokers are complying with the rule, section 19(e)(1) has a section titled “Mortgage Broker,” and makes clear what the minimum expectations are going to be: the creditor is expected to maintain communications with the brokers to ensure the broker’s acting in place of the creditor.

In other words you do have responsibilities for making sure that the broker is doing this correctly. Policies and procedures will govern how information is collected, how scripts are designed, how people are trained if you’re doing face to face sales, and there’s also some specific guidance about online application systems as well if that’s the way your brokers are taking applications.

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

Answered By: Andy Arculin

Under the new rules, do brokers have to issue an LE for a specific creditor when they get the application, or can they shop the loan or application around to different creditors?

The rule specifically contemplates that brokers may not know who the creditor is going to be, as long as they’ve made a reasonable effort to determine who the creditor will be. If they don’t know that when they’re making the Loan Estimate, they can issue a blank estimate and then shop it to creditors.

There’s flexibility in the rule for doing that. I think where this gets challenging is appetite to actually run with a loan that was made by a broker without a specific creditor in mind. That’s something people in wholesale lending might be skittish about or might not, depending on who the broker is and what your relationships are.

And also, of course, secondary market investors—whether they would actually take a loan where a broker made the estimate with a blank name on it and then a creditor later picked it up. Generally, I think if you’re the creditor, the risk you have is that the estimates aren’t any good and you can’t change them. That’s probably your biggest risk. But if you’re willing to live with that, then that’s something you can certainly do.

Answered By: Andy Arculin

In the wholesale environment, if a loan is denied or it’s drawn from lender A and the broker submits the LE with Lender A on it to Lender B, is there any issue with Lender B accepting the LE that has Lender A’s information on it?

The rule doesn’t get into that level of specificity; there are things the rule’s silent on and doesn’t tell lenders how to operationalize it. This is one of them.

Technically, under the rule, the only time a revised Loan Estimate is required to be provided is if the lender wants to use a revised charge for purposes of the tolerances requirements.

Generally, even though there might not be a requirement to provide a revised Loan Estimate, in a situation where a lender did take a Loan Estimate from a broker that had a previous lender’s name on it, it would probably be a good idea to provide a revised Loan Estimate with the revised lender’s name on the Loan Estimate, just for consumer understanding purposes. I don’t think the rule would prohibit a lender from taking such a Loan Estimate, but just operationalizing that may be tricky. I understand some lenders are saying they wouldn’t take a loan that was previously submitted to another lender.

Once you get to the Closing Disclosure stage, you’re going to have to put the accurate lender’s name on that.

Answered By: Richard Horn

As an add-on to that question, as long as the fees are honored, would there be an issue?

If they honor that Loan Estimate and the only change literally is the lender’s name, I don’t see that being a problem with the rule. But I think it would probably be a good idea to send a revised Loan Estimate, at least with the change in the lender’s name.

Answered By: Richard Horn

What about the Intent to Proceed period of time; if a borrower does not provide intent within ten days, can a new loan estimate be disclosed?

That’s called the Loan Estimate “expiring” under the rule. That means if you provide a Loan Estimate and the borrower doesn’t respond with the Intent to Proceed within ten business days under that provision, then that would be a valid reason for revising that Loan Estimate. So you would provide a new Loan Estimate with different charges and that would be okay.

Answered By: Richard Horn

Marketing Compliance

In regards to illegal marketing agreements, who can we ask to find out if our arrangement would be considered illegal?

You would need to retain compliance counsel because this is an ever changing picture as to what is deemed successful by the Bureau. Many of these things that were thought to be just fine four or five years ago are no longer acceptable. So you need to hire an attorney.

Answered By: Charles Cain

Some organizations like MBA have basically told its members that MSA’s are disliked by the CFPB so you should just avoid them. Do you agree?

I agree that that’s what the MBA says. I think each individual organization needs to make their own risk assessment to determine whether an MSA is something they can properly manage. I certainly identified the challenges that there are in management of these compliance risks, not just in terms of what your agreement is and what your compliance structure is, but also that you can control at all levels of your organization, that the agreement really is just for advertising and marketing and not as a means to get around the referral fee prohibition. That’s a challenge today, but I think it’s possible.

Answered By: Brian Levy

Can a lender work with realtors to market each other’s clients without any compensation exchanging hands?

It’s a tricky question, and the reason I think it’s tricky, is the question, “is there a thing of value going back and forth for a referral?” And a thing of value could be non-monetary; it doesn’t have to be cash or cash equivalent. So, there can’t be a thing of value being paid, or being provided in return for a referral. In the example provided, I don’t know what they are doing for each other, and if that is in return for referrals. It may simply be a matter of two people marketing each other and not having an agreement about referrals. Theoretically that’s okay, but again, you’re going to have a tough time proving that you don’t have an agreement regarding referrals.

Answered By: Brian Levy

Are marketing materials the only place you should look for UDAAP violations?

No. There’s operational issues that you can have in UDAAP, how you process something, how you service something, all of that can be subject to UDAAP. There’s only so much that I can talk about in one presentation but UDAAP is much broader than just your marketing.

Answered By: Brian Levy

NPPI

Is Vendor Management interaction (contract information, licenses, insurance documents billing etc.) subject to NPPI rules for lenders?

The NPPI rules are going to apply to your vendors handling of your information in the same way they would apply to you. The extent your vendors are collecting or using NPPI about your customers, then it needs to be subject to all the same controls and protections as if you were doing it yourself.

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

Answered By: Ben Olson

Secondary Market

There was a recent article that pointed to investor concern related to TRID liability. How will TRID affect the secondary market?

The secondary market is going to be concerned about any compliance issue, whether it’s TRID related or the ones that I talked about. To the extent that there becomes more either litigation or regulatory actions around TRID, I think you’ll see the secondary market take notice. I don’t think TRID is going to be a yawner from a compliance perspective, but we have a little bit of a window here to see what happens. Stay tuned, however, I don’t think TRID is going to be without incident and we are already seeing some casualties.

Answered By: Brian Levy

TRID

Are there examples of best practices in Vendor Risk Management that you can share with us?

Well, beyond what we’ve discussed in the context of this session, here are some broad examples: Complaints are one of the biggest points of emphasis, particularly for the Bureau, right now in examinations. Anybody who you allow to interact with your customers needs to be monitored.

You also need to be looking at their scripts. A lot of issues that were alleged in the ancillary product cases arose out of the fact that that the scripts were inadequate for collecting consent or they weren’t being followed.

So if you have a vendor who is interacting with your customers over the phone, they should be doing their own monitoring but you should have the ability to also listen in to a sample of calls, so you can verify that the scripts you put the effort into reviewing for compliance with the law are in fact being followed and aren’t being undermined in the sales process.

Another recommendation for a best practice is having your shop in order. By that I mean knowing who all your relationships are with and having ready access to the agreements and other information about those relationships. When you’re disorganized, in my experience, the regulators just start to assume there is increased risk of non-compliance, whereas if everything is clean and organized and you can show you are hitting all of the expected marks, that allow them to check the box and move on.

You can, by investing the effort up front, put yourself in a position to make the actual examinations that much smoother or – in the inevitable event that an issue does arise – to be able to demonstrate that you did everything you could up front to prevent it. That way, if it is necessary to remediate harm to a consumer, you can go ahead and do that but not be penalized by the regulator for a failure to prevent the action in advance.

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

Answered By: Ben Olson

How available does all this data have to be? Immediate reports to satisfy examinations’ requests or what are the different ways they can request information?

I have not seen an expectation of immediate availability unless it is true account level information. If you’ve outsourced some sort of servicing, for example, you are expected to have on demand access to how your customers are being serviced, but in most areas it is sufficient to have monthly, or even quarterly, or in some cases annually, access to the information through reports.

The key though is that it is not enough to get the information; you have to be able to document that it is received, it is reviewed, and is acted on as appropriate. If these reports are coming in and they are just being stuck in a file unread, that presents a lot of risks because there may be things in those reports that you need to act on or there may be glaring holes in those reports that you need to spot and follow up on.

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

Answered By: Ben Olson

How are the regulators viewing real world situations in which organizations that would like to terminate a contract with a vendor due to poor security practices but are unable to because of the iron clad contract signed with these large organizations where there may not be many alternatives to serve their customer base?

This has happened. There are no sort of public pronouncements by regulators on this sort of subject for reasons that make a fair degree of sense. If a contractual requirement was sufficient to overcome a regulatory expectation then everyone would put that in their contract. So the regulators are never going to admit that that is an acceptable outcome.

[Note: The CFPB confirmed this position in its January 27, 2015 bulletin on the treatment of confidential supervisory information. See CFPB Bulletin 2015-1 (available at http://files.consumerfinance.gov/f/201501_cfpb_compliance-bulletin_treatment-of-confidential-supervisory-information.pdf).]

That said, I have personally had conversations and have seen this in other examinations where this has come up and the regulator did not take action. What was important in those cases was being able to document to the regulator that the supervised entity had done everything it could to bring the vendor in line.

That doesn’t mean you actually have to sue your vendor if you believe they are not complying with the contract or the law. The Bureau’s basically said no to that question.

Now whether in this specific case the contract is really is all that iron clad isn’t clear. You’re going to want to be very sure of that and be very sure that you put the vendor on notice about the issue and that you requested that they remedy it. Essentially, I would just keep requesting over and over. The vendor may get sick of you, but it also sounds like they are not providing the level of service you need.

The agreement doesn’t last forever so you’re going to have to start exploring as soon as possible ways to get yourself in a position where you’re working with a vendor who doesn’t raise these concerns.

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

Answered By: Ben Olson

Regarding miscellaneous fees such as: appraisal fees, tax service fees, etc., we often don’t know what fee will be. Can we over-estimate the fee and then lower the amount without a new disclosure?

I get this question a lot and the Bureau got it a lot at the time they were putting the rule together. What the Bureau said in response was to point back to the obligation that I know I keep harping on, but it is the answer to many of these questions: the obligation to disclose based on the best information reasonably available at the time the estimate is provided.

The Bureau has said that deliberately “padding” or overdisclosing is not disclosing the best information reasonably available. Instead, you should be looking to your own experience in that particular jurisdiction as to what things typically cost or to the settlement agent or the realtor or other parties that have information that allows you to provide a good faith estimate. But deliberately highballing it, in addition to creating a competitive issue, could put you out of compliance.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

Is the lender required to provide a list of providers, i.e. title companies?

Yes, there is a requirement — as is the case today — to provide a list of settlement service providers. It’s an important point when you’re talking about the tolerances. The zero tolerance bucket applies to services where the borrower dictates both the service and the service provider. Those are zero tolerance fees.

The 10% tolerance applies when you have a lender-required service but the borrower has the ability to choose the service provider. If the borrower actually does choose the service provider, then the fee for that service goes in the “no tolerance” bucket (in other words, the category of things to which tolerances do not apply).

So what distinguishes services the consumer can choose from services they cannot choose? Well, first you have to provide a list of settlement service providers for services the borrower can choose. There is a model form for this in the rule. It’s not fancy, but headings match the format of the Loan Estimate.

With that form, you must identify at least one available provider for each service for which the borrower is permitted to shop. And you must allow the borrower to choose someone who is not on the list. If you give them a closed list — and by that I mean they can pick anybody they want as long as it’s somebody on your list — then that is not considered allowing them to shop and the zero tolerance rule still applies.

Instead, you need to give them both the opportunity to choose somebody on your list, but also the opportunity to go out and choose somebody of their own, subject to reasonable requirements. For example, you can require appraisers be properly licensed and so on and so forth. But this requirement was designed to create an incentive to allow consumers to shop.

So yes, there is a requirement to provide a list of settlement service providers and the provision of that list is very important in terms of how you calculate your tolerances. You’re going to need to have names on hand to populate that list, track who was on the list that you provided to the borrower, and then track who they actually chose because that’s going to dictate which tolerance bucket the fee goes into.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

What if it’s a purchase and the buyer doesn’t decide the service provider, i.e. the title company?

You have to have a title company and the creditor of course has to give the borrower the opportunity to choose that company. If the borrower does not choose, then presumably they’ve taken the creditors’ default option on the list of settlement service providers. If the consumer was not permitted to choose an unlisted title company, the title fees would be subject to zero tolerance assuming the creditor requires a title search and everything else to insure that it has good title.

However, before I set the world on fire, let me amend that to say that it depends on whether the creditor gave the borrower the opportunity to shop. So if the creditor gave the borrower the opportunity to shop for title services, which they are required to do, and to go off of the list of settlement service providers and the borrower simply failed to do so, that would be in the 10% bucket category, not zero percent tolerance. As long as the borrower is given the opportunity to shop off of the list, 10% tolerance applies.

Note: This transcript has been edited from the February 2015 TRID webinar for clarity and completeness.

Answered By: Ben Olson

In a wholesale transaction how can a lender validate when a third party originator has gathered 6 pieces of information that constitutes an application?

There is not really a way I can think of that you can go in on a case-by-case basis—if there is that would be great for you. But you should have at least some protocols in place for managing the third parties that you’re doing business with.

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

Answered By: Andy Arculin

How do the new tolerance rules work? What charges are subject to zero tolerance? How does a creditor know when a service provider is an affiliate of the broker?

A good way to think about this is these are now Regulation Z (Reg Z) rules. So for the affiliate question, a lot of people are used to thinking of affiliated business arrangements under RESPA. For Reg Z, this is going to be affiliates like you think about them for points and fees, for other purposes in Reg Z. It’s a Bank Holding Company Act definition, which is basically a control test—it’s set forth in the Bank Holding Company Act, but the same control test you would use for determining whether or not someone is an affiliate for points and fees purposes.

As for what tolerance buckets specific charges go into, a good way to think about this rule is that everything is zero tolerance unless excepted. So the baseline, and this is a change from RESPA, the baseline is now zero tolerance. The way this works in terms of rule architecture is you have a good-faith standard. If you charge more than the estimate then you violated good-faith unless there’s an exception.

The good news is there are a lot of exceptions. There’s the 10% category of charges, which is any charge where you have allowed the consumer to shop (but the consumer doesn’t shop) and the charges are not being paid through an affiliate of the broker or the creditor. And recording fees—those are in the 10% category. There’s also a whole slew of charges that are included in the unlimited tolerance category, meaning these charges can vary as long as the estimates were made on the best information reasonably available (you always have that minimal standard).

For these charges, what is actually paid at consummation can be higher than what’s estimated. These charges are things like prepaid interest, property insurance premiums, escrowed amounts, charges for non-required services, such as owner’s title not required by the creditor (the Bureau clarified this), or charges where the consumer actually did shop.

Under the rules shopping means you gave the consumer a list of service providers, and the consumer said, you know, I think for my title insurance I’m not going to go with your recommended provider, I’m going to go with my uncle, who’s in the title insurance business, and does that. That charge will not be subject to any tolerance at all.

So there is a slew of exceptions. What’s left is basically the origination charges, charges paid to the creditor, charges paid to the broker, charges paid to affiliates of the creditor and the broker, and transfer taxes. So basically you have a set list of types of charges that are in the commentary to 19(e)(3), which tells you fees paid to the creditor, the broker, or affiliates of either. Required services where shopping is not permitted is one that I left out.

So if the creditor is requiring you to pay for a service and also picking your service provider and not allowing you to shop, that’s subject to zero tolerance. And then transfer taxes as well.

Answered By: Andy Arculin

As far as collecting information goes, are you saying that it’s okay for a creditor to restrict consumers from providing all six pieces to allow time to collect additional information?

That’s something the bureau has given guidance about; that would not be permitted under the bureau’s informal guidance. The bureau has said lenders cannot prevent consumers from giving them information or refuse information from consumers until they get all six items. For example, you can’t tell a consumer, “You’re not allowed to submit anything else to me until I get your assets.” That would be requiring additional information, essentially bringing back the seventh “catch all” item, and would be a violation of the rule.

Answered By: Richard Horn

With TRID delayed until October now, do you think that the CFPB will again consider an informal “grace period?”

TRID being delayed until October was due to what the bureau described as delays in software updates for lenders. As I think more about what the bureau’s trying to do, I think its goal is to allow more time for the industry to test the software. I think their announcement about a “good faith” period is separate from this delay in the effective date, although that doesn’t prevent them from taking up the issue in a final rule delaying the effective date and hopefully providing more guidance about what the good faith period means.

Some of the areas where they could provide more guidance are the length of the good faith period—they didn’t really define how long that would last—and they didn’t define what “good faith” meant. So those are two areas where they could provide more guidance.

I think they would have provided a good faith grace period even if they didn’t put out the announcement, because that’s what they did for the Title 14 rules. When QM and HOEPA and all the other Title 14 rules came into effect, they put out a very similar statement saying they were going to provide a period where they were sensitive to good faith efforts to comply. But hopefully they’ll address some of the questions about it in the final rule delaying the effective date.

Answered By: Richard Horn

If the borrower is pre-qualified and looking at multiple houses, do they have to have multiple applications?

No, and in fact if they are pre-qualified for a loan amount they can fill out as many applications as they choose to. If they want to go to four different lenders they can do that. If they are looking at multiple properties the pre-qualification should tell them if they’re qualified to buy the property in question or if their credit would be enough to get a loan for it. But there shouldn’t be a necessity to gather more than one loan application. Nothing in this rule requires borrowers or debtors to go out and shop. In fact, the Bureau was stunned to find out in their own data inquiry that about 65% of all borrowers never went to more than one lender. That was big news to them. So there is no obligation to do it, but it certainly is an option for the borrower.

Answered By: Charles Cain

How can you know if someone is a producing manager or non-producing?

The definition of loan originator is very broad in the L.O. Comp Rule. And while the Rule seems to try to offer some flexibility for a manager to step in every once in a blue moon and have a conversation with a consumer, maybe while a loan officer is on vacation or to deal with an escalating complaint or something like that, the limit is very small. It’s ten per year. Just about any communication with a consumer about a loan is likely to fall within that broad definition, so really I think the job description is really important as well.

The limit of ten is really to allow you to have what is really a non-producing manager, somebody that doesn’t have their own book of business, that doesn’t hold themselves out as an originator, and is just purely a business manager of a mortgage company. It’s just to make sure that they don’t accidentally get dragged into the LO Compensation Rule on their compensation, because they really aren’t dealing with consumers.

If you’re pressing to try and keep somebody from having ten, because they actually do hold themselves out, it doesn’t matter. You’re holding yourself out as an originator, your name is out there, you’re going to be viewed as an originator. Each one of those situations needs to be examined individually but my advice is, if you’ve got somebody that you’re trying to push them below ten, you’re going to have a hard time doing it.

Answered By: Brian Levy

As a lender, how are we supposed to produce 100% TRID compliant loans?

With the amount of detail that has to be double-checked and triple-checked it is a challenge, but it can be done. First, understand that you can’t do it alone, so it requires everybody to work together in a collaborative manner. Lenders also need to understand the importance of working with title companies, understanding what their responsibilities are and I think that’s very important.

Technology also plays a role and the right technology can really help make things easier. In general, you can automate the ability to detect issues, or you can get people to just stare and compare. However, It’s important that you give the right people the right tools in order to really make their jobs easier, they can automate and compare the nuances of the pieces of data that have to be checked.

So, to produce compliant loans in today’s regulatory environment, it starts with identifying everyone who is involved in the transaction and knowing that they are supposed to be there. Then, getting consensus from those individuals on the proper pieces of information. Finally, making sure that there’s a really good audit trail in place so that when there are questions or the defense has to be made, you are able to go back and prove that you’ve done the things you’re supposed to do.

Answered By: Wes Miller

FHA’s TRID guidance stating that: “…SFH is announcing that it will not include technical TRID compliance as an element of its routine quality control reviews.” This expires on April 16, 2016. Do you have insight on this, e.g., will FHA publish additional guidance, or will FHA start to include TRID compliance as part of QC reviews?

We don’t have any further intelligence on whether or not FHA is going to start to include TRID compliance as part of QC reviews on April 16. My suspicion is when FHA issued this guidance, it may have thought six months would be a sufficient amount of time for implementation.

And what we have seen through the reviews and percentages we’re getting from QC vendors and what’s been going on in the marketplace, perhaps companies aren’t adjusting as quickly as FHA thought they would. It’s possible, but we’re not aware of any guidance or rumblings from FHA saying they are going to somehow extend this period.

The only thing I would note which is not FHA specific, is that Fannie Mae put out guidance in February, which I’m not sure if people picked up on or not, because it really related to enforcement of violations of the with compliance of law rep and warrant and wasn’t TRID specific.

But if you haven’t seen it, you should look. It’s section A3-201 of the Seller Guide, which was updated on February 23. It talks about how Fannie can enforce a remedy for all lender violations applicable to federal, state, and local laws that have a material impact on Fannie.

So, we have yet to see, given that this has been in place for approximately a month, what if anything it means in connection with prior guidance that said Fannie wouldn’t really look into TRID compliance issues other than making sure you were using the right form and making sure nothing you were doing would somehow impact their ability to enforce the mortgage or note. But it’s something to be aware and on the lookout for.

Answered By: Amanda Raines Lawrence

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Vendor Management

When it comes to assessing the risk of a closing agent, would it make sense to have minimum standards? Also how would the regulator view a one person closing agent shop vs. a large closing agent handling closings in multiple states?

One of the ongoing concerns about all of the enhanced regulatory requirements is that they place a burden to the point of exclusion on smaller shops.

You reach a point where there’s simply too much for one entity to do and while the Bureau has put in place certain limited carve outs (there are certain small creditor exemptions in the mortgage servicing and origination rules), the general requirement is that everyone is expected to follow the law and there are no exceptions for small guys, notwithstanding the fact that there is serious public debate about whether the problems in the mortgage industry and real estate industries were caused by the smaller actors.

The amount of required oversight would depend on the volume that the one-person shop is handling. However, while it’s sort of silly for a one-person shop to have all of these policies and procedures, I think it’s going to be expected to have them if they’re closing a significant number of loans. They’re going to be expected to comply with the law like anyone else.

Answered By: Ben Olson

In regards to policies and procedures, related to compliance training, is a bank responsible to provide the training to the vendor, or is the bank responsible to understand the training the vendor gives to their employees?

I believe it’s the latter. It is not that the bank is responsible for getting into the business of training its vendors, although I think that’s certainly permissible. At the end of the day, the vendor training needs to be sufficient, just as the bank needs to train its own employees. It’s sufficient to review the vendor’s training of its own employees to ensure that it covers all the correct bases. I don’t see anything in the guidance requiring otherwise.

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

Answered By: Ben Olson

Do criminal background checks need to be performed on all vendors, whether critical or non-critical?

The critical/non-critical distinction is not baked into all of this guidance as it is in other areas. What we really fall back on is what is the nature of the services being provided by the vendor and what background checks would be required if this was your employee performing this function in house. The person who delivers your printer paper, if they’re not being let into a part of the building where there is access to sensitive consumer information, they are not going to be subject to the same levels of scrutiny as if you are outsourcing payment processing or loan origination functions, where there is a real possibility of misuse of confidential information. There is no clear line. Try to follow this rule: If this is your employee would they need a criminal background check?

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

Answered By: Ben Olson

If our bank acts as a correspondent lender for residential mortgages, do we have to be concerned with vendor management since we only collect information from the buyer and do not work with any vendors?

That’s an interesting question. My first reaction is that it is unusual in my experience for a correspondent lender’s functions to be quite so limited. Obviously, if that really is the sole extent of the correspondent’s action, I would advise to take a look at the Bureau’s guidance on mini-correspondents and ensure you are on the right side of the line and that you are the lender and not functioning as the broker in the eyes of the law. [Note: The CFPB’s policy guidance on mini-correspondents is available at http://files.consumerfinance.gov/f/201407_cfpb_guidance_mini-correspondent-lenders.pdf.]

To answer more directly, when originating a mortgage you are going to have some interaction with venders such as appraisers and settlement agents. I have not come across an instance where the correspondent lender is that divorced from all the activities, but I want to know more about this situation. If it really was limited to that degree, I’d have some concerns about who truly is the lender here.

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

Answered By: Ben Olson

We have not heard anything from our regulator in our last exam regarding this issue, is this something that is more concentrated with certain regulators and/or geography or is this something we need to be concerned about as a small community bank?

This is something we hear a lot. Obviously, if your regulator has not raised this issue with you, that is a good thing. It is hopefully indicative of the fact that they don’t have a specific concern about your compliance management system in this area.

The difficulty with this is that you can’t wait until it becomes an issue because then it’s probably too late. We’re sensitive to the idea that resources are inherently limited and you want to focus your priorities accordingly. The guidance is out there and on its face it applies to everyone. Your regulator is unlikely, at least in my experience, to take as a response: “You haven’t raised this with us before.” You are expected to know both the law and the applicable supervisory guidance.

I guess what I’d have to say in response to that question is that past results are no indication of future returns. It may be that your regulator will never raise it, but chances are they will and you want to be prepared to respond if and when that happens.

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

Answered By: Ben Olson