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Tag Archives: TILA

CFPB Proposes Amendments to New Final Ability-to-Repay Rule, Solicits Comment on Calculating Loan Originator Compensation

Posted by Jennifer M. Keas on Posted in Bureau of Consumer Financial Protection; Consumer Financial Protection Act; Consumer Financial Protection Agency; Consumer Financial Protection Bureau; Truth in Lending Act; Uncategorized

On January 10, 2013, the CFPB issued its final ability-to-repay rule (Rule), which implements Dodd-Frank mortgage reforms requiring creditors to make a reasonable and good faith determination that a consumer will have a reasonable ability to repay the loan according to its terms. Failure to comply with these requirements may give rise to various damages under TILA, and consumers also may assert an ability-to-repay violation as a defense to a foreclosure action. There is no time limit on the use of this defense (although there is a cap on the recoupment or setoff of finance charge and fees), which applies against assignees of the loan in addition to the original creditor.

Loans that meet the criteria to be a “qualified mortgage” (“QM”) are entitled to either safe harbor or a rebuttable presumption of compliance with the ability-to-repay requirements.

Qualified mortgage criteria prohibit certain risky features and practices such as negative amortization. A loan also cannot be a QM unless the consumer has a total debt-to-income ratio of less than or equal to 43 percent (although the CFPB has provided a temporary QM definition softening the debt-to-income ratio). In addition, the transaction’s total “points and fees,” cannot exceed specified thresholds. For a loan of $100,000 or more, the QM threshold is 3% of the total loan amount. 

Many in the industry are currently examining the loans they make loans to assess what percentage are expected to exceed the 3% threshold when the Rule becomes effective on January 10, 2014. The element of loan originator compensation remains an important — and unresolved — factor in this analysis.

Loan originator compensation as an element of “points and fees”

Under the Ability-to-Repay Rule, points and fees includes, among other things, all compensation paid directly or indirectly by a consumer or creditor to a loan originator that can be attributed to that transaction at the time the interest rate is set.” A “loan originator” includes mortgage broker firms and individual employees hired by either brokers or creditors, but generally excludes creditors themselves. 

Before the CFPB issued the final Rule, many in the industry commented that including all loan originator compensation in points and fees makes little sense.  Commenters pointed out that as a practical matter, compensation paid to individual employee originators is already included in the cost of the loan in the form of origination fees or as part of the interest rate.  Furthermore, including loan originator compensation in points and fees will often result in “double-counting.”  For example, points and fees include mortgage broker fees, including fees paid directly to the broker or the lender for delivery to the broker.  But also included is compensation paid to individual loan originators (i.e., loan officers who are employed by mortgage brokerage firms) to the extent their compensation can be attributed to the transaction at the time the interest rate is set.  Similarly, money collected by a creditor in up-front charges from consumers (which is already counted toward the points and fees thresholds as items in the finance charge) would be counted a second time as loan originator compensation if the creditor passed it on to its employee loan officer.

The CFPB proposes amendments on this issue

The CFPB is still considering exactly how it should require the inclusion of loan originator compensation under the Ability-to-Repay Rule.  The agency has expressed its belief that Congress did intend the Dodd-Frank statute to literally require that loan originator compensation be treated as “additive” to the other elements of points and fees.  Nonetheless, the CFPB is not convinced that “an automatic literal reading of the statute in all cases would be in the best interest of either consumers or industry…”  In particular, the CFPB does not believe that it is necessary or appropriate to count the same payment between a consumer and a mortgage broker firm twice, simply because it is both part of the finance charge and loan originator compensation. 

Therefore, concurrent with the final Ability-to-Repay Rule, the CFPB issued proposed amendments to the Rule that would provide that loan originator compensation is not necessarily always counted against the QM points and fees threshold if it is already counted elsewhere in points and fees.

  • The CFPB proposes a new comment that would provide that mortgage broker fees already included in the points and fees as items included in the finance charge need not be counted again as loan originator compensation. 
  • Another proposed comment would clarify that compensation paid by a mortgage broker to its individual loan originator employee is not loan originator compensation.
  • With regard to the creditor context, the CFPB has proposed two alternatives. 
    • The first alternative would enshrine double-counting by creditors, specifying that a creditor must include compensation paid by a consumer or creditor to a loan originator in points and fees in addition to any fees or charges paid by the consumer to the creditor.  
    • Under the second alternative, the CFPB would permit all consumer payments of up-front fees and points to offset creditor payments to the loan originator.  This alternative would provide that a creditor should reduce the amount of loan originator compensation included in the points and fees calculation by any amount paid by the consumer to the creditor and included in the points and fees calculation as part of the finance charge. For example, if the consumer paid a creditor a $3,000 origination fee and creditor paid the loan originator $1,500 in compensation attributed to the transaction, points and fees would include the $3,000 origination fee but not the $1,500 in loan originator compensation.  However, if the consumer paid the creditor a $1,000 origination fee and the creditor paid the loan originator $1,500 in compensation, then the points and fees would include the $1,000 origination fee as well as $500 of the loan originator compensation.

Comments on these important issues are due by February 25, 2013.  A link for submitting comments to the CFPB may be found here.

CFPB Issues Final Rules Amending Regulation X and Regulation Z

Posted by Jennifer N. Toussaint on Posted in Bureau of Consumer Financial Protection; Real Estate Settlement Procedures Act; Truth in Lending Act

Today, the CFPB issued final rules amending Regulation X (Real Estate Settlement Procedures Act (“RESPA”)) and Regulation Z (Truth in Lending Act (“TILA”)). The amendments focus on mortgage servicing requirements and servicer obligations, and largely track the CFPB’s proposed rules issued August 10, 2012. The CFPB’s announcement of the final rules includes the preamble, regulatory text and official interpretations of the final rules. The final rules and supporting documentation have not yet been published in the Federal Register.

The stated goal of the rules are to provide better disclosure to consumers of their mortgage loan obligations and to provide better information and assistance with available options to consumers having difficulties meeting their mortgage loan obligations. As with the proposed rules, the two final rules are set forth in different notices titled “2013 RESPA Servicing Final Rule” and “2013 TILA Servicing Final Rule.” The Major Topics covered in each are listed below:

The Regulation Z amendments cover:

  • Periodic Billing Statements;
  • Interest Rate Adjustment Notices; and
  • Prompt Payment Crediting and Payoff Statements.

The Regulation X amendments cover:

  • Force-Placed Insurance;
  • Error Resolution and Information Requests;
  • General Servicing Policies, Procedures and Requirements;
  • Early Intervention With Delinquent Borrowers;
  • Continuity of Contact With Delinquent Borrowers; and
  • Loss Mitigation Procedures.

The final rules (and supporting material) span 753 pages and will take effect on January 10, 2014. Prior to the effective date, mortgage loan servicers should take the time to review their business practices and implement any necessary changes. We will continue to post more detailed analysis and commentary regarding the amendments as the full scope of the final rules is assessed.

Final Rule Issued on Ability-to-Repay/Qualified Mortgages

Posted by Jennifer M. Keas on Posted in Consumer Financial Protection Bureau; Truth in Lending Act; Uncategorized

The Consumer Financial Protection Bureau (CFPB) issued its final ability to repay rule (Rule) on January 10, 2013. The Rule implements ability-to-repay provisions of the Dodd-Frank Act, which imposed strict underwriting standards upon lenders to ensure that prospective buyers have the ability to repay their mortgages. A failure to comply with these requirements will constitute a violation of the Truth In Lending Act (TILA) and subject the lender to significant penalties and possible rescission of the loan. However, loans that meet the definition of what has been termed a “qualified mortgage” (QM) are either exempt from these ability to pay requirements if the loans are viewed as prime, or will give rise to a rebuttable presumption of compliance if they are higher cost loans.

Qualified Mortgages and Treatment of Smaller Loans

In general, the Rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total debt-to-income ratio that is less than or equal to 43 percent. In order for a mortgage to be a qualified mortgage, the loan in essence must not contain certain undesirable terms or features such as negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Additionally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount for loans of $100,000 or more.

The Rule provides that points and fees retained by the affiliate of a creditor — such as the title insurance fees charged by an title agent or company that is affiliated with the lender — must be counted toward the 3% points and fees limit for QM, even though the same (or higher) fees of an unaffiliated company would not be counted toward this limit. This means that some lenders will be discouraged or prevented from using their affiliated title companies in many transactions because doing so may cause them to go over the 3% limit whereas if they used an independent title company, the fees would not count and they could avoid the risk of making a non-QM loan.

The CFPB raised the small loan exemption from $75,000 to $100,000. Under the Rule, the revised points and fees limits for smaller loans are a mix of percentage and flat dollar limits, as follows:

  • For a loan amount greater than or equal to $60,000 but less than $100,000, $3,000;
  • For a loan amount greater than or equal to $20,000 but less than $60,000, 5 percent of the total loan amount;
  • For a loan amount greater than or equal to $12,500 but less than $20,000, $1,000 of the total loan amount;
  • For a loan amount of less than $12,500, 8 percent of the total loan amount.

 According to the CFPB, it intended its revised points and fees limits for loans under $100,000 to include more transactions in the exemption for smaller loans, which it believes will allow creditors making such loans a reasonable opportunity to recover their costs through points and fees and still originate qualified mortgages. The CFPB chose not to enlarge the exemption for smaller loans. It noted that in 2011, slightly under 21% of first-lien home mortgages were below $100,000 and another 22% were between $100,000 and $150,000. “Thus, increasing the threshold to $150,000 would more than double the number of loans entitled to an exception to the congressionally-established points and fees cap and would capture over 40 percent of the market,” which the CFPB believed “would be an overly expansive construction of the term ‘smaller loans’ for the purpose of the exception to the general rule capping points and fees for qualified mortgages at three percent.”  

The effective date of the Rule is January 10, 2014, one year from the date of issuance. Under the Rule, all points and fees limits will be indexed for inflation. The CFPB declined to adopt a tolerance that would allow creditors to exceed the points and fees limits by small amounts.

Safe Harbor or Rebuttable Presumption?

With respect to the issue of what legal protection a QM will provide against a challenge based upon a violation of the ability to repay requirement — i.e., a safe harbor or a rebuttable presumption — the CFPB split the baby. The Rule distinguishes between two types of QMs based on the mortgage’s Annual Percentage Rate (APR) relative to the Average Prime Offer Rate (APOR). For loans that exceed APOR by a specified amount — loans denominated as “higher-priced mortgage loans” — the Rule provides a rebuttable presumption. In that instance, although the lender will be presumed to have determined that the borrower had an ability to repay the loan, the consumer can challenge that presumption by making certain showings. For all other loans, i.e., loans that are not “higher-priced,” the Rule will afford the creditor a safe harbor, which in essence provides the lender with an exemption from the ability to repay rules and accords far more protection than the rebuttable presumption.

Temporary Alternative QM Definition

Because the CFPB viewed implementation of its 43 percent debt-to-income ratio threshold as potentially harsh, it opted to provide a “temporary alternative” definition as a substitute for the general qualified mortgage definition. The temporary definition will apply to loans that meet the prohibitions on certain risky loan features (e.g., negative amortization and interest only features) and the limitations on points and fees and are eligible for purchase or guarantee by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or eligible to be insured or guaranteed by certain federal agencies such as the U.S. Department of Housing and Urban Development and the Department of Veterans Affairs.

Looking Forward

In the days to come, lender and brokers — particularly those with affiliated settlement service providers — will be examining the intricacies of the “points and fees” test and assessing what percentage of the loans they are making would run afoul of the 3% test under the Rule and at what loan amount. Legislative and business solutions (such as the possible use of no cost loans) will likely be fully explored during the coming year.

At the same time it issued the final QM Rule, the CFPB has released proposed amendments to the Rule that would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers, make exceptions for certain homeownership stabilization programs, and provide QM status for certain loans made and held in portfolio by small creditors. The proposed amendments also seek comment on how to calculate loan origination compensation under the QM points and fees test.

TILA Does Not Require a Loan Servicer to Identify the Loan’s Owner

Posted by Patrick Wong on Posted in Mortgage Foreclosures; Real Estate Settlement Procedures Act; Truth in Lending Act

The Ninth Circuit recently sided with a loan servicer who was sued by a borrower for failing to provide him with the loan owner’s information. In Gale v. First Franklin Loan Services et al., 686 F.3d 1055 (9th Cir. 2012), amended, 2012 U.S. App. LEXIS 18545 (9th Cir. Aug. 31, 2012), the Ninth Circuit held that a loan servicer is not required under the Truth in Lending Act (TILA) to disclose the owner of the loan obligation to the borrower even at the borrower’s request. The only exception is when the loan servicer is also the assignee-owner of the loan. 

The Plaintiff borrower in the case was Richard Gale. In November 2006, he refinanced his home mortgage loan with Franklin Loan Services (“First Franklin”). At the time, First Franklin was both the creditor and servicer of the loan. In June 2008, Gale lost his job, and consequently, he fell behind his mortgage payments. Seeking to renegotiate his loan, Gale sent a letter to First Franklin explaining his situation and offering solutions. In his letter, Gale also asked First Franklin for the identity of the “true owner” of his loan. First Franklin did not respond to Gale’s letter. Ultimately, Gale’s home was foreclosed when he continued to fall behind his mortgage payments. Gale subsequently sued First Franklin and others for violation of TILA, among others. The trial court dismissed the TILA claim, and the Ninth Circuit affirmed.

As it concerns the alleged violation of TILA, the issue before the Ninth Circuit was the last sentence of TILA, 15 U.S.C. section 1641(f)(2), which states, “Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name address, and telephone number of the owner of the obligation or the master servicer of the obligation.” The Court acknowledged that at first read, this sentence seems to apply to all creditors or servicers, but the Court ultimately rejected such a sweeping interpretation of the law. Instead, the Court noted that section 1641 does not apply to servicers in general, but only to “purchasers or assignees of mortgages.” Furthermore, the Court also held the section did not apply to an assignee merely for administrative convenience, as opposed to an assignee-owner of the loan obligation. As First Franklin was the original lender and merely the servicer, the Court held that the section did not apply to it. In reaching its conclusion, the Court examined section 1641 “as a whole before focusing on paragraph (f)(2)” and found that, contrary to what section 1641(f)(2)’s text may suggest, section 1641 is limited in scope to a servicer who is “an assignee of such obligation…” The Court also noted that the section further excluded an assignee “solely for the administrative convenience of the servicer in servicing the obligation.” The Court concluded that subsection (f) must be read “in keeping with the theme of § 1641 as a whole…” 

The Gale decision does not necessarily foreclose any relief to borrowers who find themselves in the same situation as Gale. As the Ninth Circuit pointed out, the 2010 amendment to the Real Estate Settlement Procedures Act (RESPA) required that all servicers must respond to a borrower’s request for information, although such requirement only applies prospectively from 2010. There may also be state law requirements that are broader than those required under TILA. For example, beginning January 1, 2013, California’s so-called Homeowners’ Bill of Rights comes into effect, which defines a “mortgage servicer” much more broadly than TILA’s section 1641. Thus, it is critical that owners of mortgage loans, lenders, and loan servicers are aware of the various other federal and state laws that may or may not require the same sets of obligations.

Ninth Circuit Making Retroactive Application of TILA Regulations?

Posted by Samantha Powers on Posted in Truth in Lending Act

Pursuant to revisions to Regulation Z, effective July 1, 2010, a creditor cannot use the term “fixed” to describe an annual percentage rate (APR) “unless the creditor also specifies a time period that the rate will be fixed and the rate will not increase during that period, or if no such time period is provided, the rate will not increase while the plan is open.” 12 C.F.R. § 226.5(a)(2)(iii). While this new regulation cannot be applied retroactively in form, the United States Court of Appeals for the Ninth Circuit recently issued a decision (Rubio v. Capital One Bank) that constitutes a retroactive application in effect, despite the court’s express denial of doing same.

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Fourth Circuit: TILA “Consumer Credit Transaction” Means Closed Transactions

Posted by Martin J. Bishop on Posted in Truth in Lending Act

A-B-C. A-Always, B-Be, C-Closing. Always be closing, always be closing.

Blake, Glengarry, Glen Ross.

In David Mamet’s masterpiece, Glengarry, Glen Ross, a group of sad sack real estate salesmen are forced into a myopic focus on closing the deal by their overbearing, egomaniacal leader, Blake. Now that the the Fourth Circuit Court of Appeals has ruled that borrowers who elect not to go through with their loans before closing are not entitled to recission under the Truth in Lending Act (“TILA”), however, buyers may be the ones who need to focus on closing, at least those who might want to seek certain remedies under TILA.

In Weintraub v. Quicken Loans, Inc., the Weintraubs applied for a 30- year, fixed rate loan from Quicken Loans to refinance their townhouse. Quicken Loans provided the Weintraubs with a “Good Faith Estimate” and an “Interest Rate Disclosure (Not Locked) and Deposit Agreement.” The latter document disclosed that the interest rate was not locked and that the Weintraubs were required to pay a $500 deposit to Quicken Loans for out-of-pocket expenses. Mr. Weintraub signed the documents and paid the $500 deposit. Quicken Loans subsequently conditionally approved the loan, subject to a satisfactory home appraisal.

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Third Circuit Joins Other Circuits, Holding That A Plaintiff Must Prove Detrimental Reliance To Recover Actual Damages For TILA Disclosure Violation

Posted by Martin J. Bishop on Posted in Truth in Lending Act

In Vallies v. Sky Bank, the Third Circuit joined the First, Fifth, Eighth, Ninth, and Eleventh Circuits, holding that the Truth in Lending Act (“TILA”) requires plaintiffs to prove actual damages sustained as the result of a disclosure violation.

Plaintiff Vallies entered into a loan and security agreement with the defendant Sky Bank, which financed an automobile and a debt cancellation insurance premium, among other things, for Vallies. The insurance premium was not included in the ”finance charge,” as TILA requires, and was lumped in with a general service contract charge, rather than being itemized as a separate item. The parties settled Vallies’ statutory damages claim under TILA. The District Court subsequently certified a class for settlement purposes and approved a settlement, which did not cover Vallies’ actual damages under 15 U.S.C. § 1640(a)(1). Sky Bank moved for summary judgment, arguing that Vallies cannot recover actual damages under TILA because Vallies did not plead, and could not prove, actual reliance. The District Court granted summary judgment in favor of Sky Bank.

On appeal, Vallies acknowledged that the vast majority of available authority on the issue of detrimental reliance was against him, but argued that “the weight of that authority is wrong.” The Third Circuit disagreed, issuing a 31-page opinion (found here).
 

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Home Equity Line of Credit Reduction Cases on the Rise

Posted by Thomas R. Mikrut on Posted in Truth in Lending Act

There have been a number of lawsuits throughout the country this past year arguing that lenders have unlawfully suspended or reduced home equity lines of credit (“HELOCs”). Although the theory underlying these cases find its genesis in the recent declines in the real estate market, one court has already permitted a claim to proceed.

Under the Truth in Lending Act (“TILA”) and Regulation Z, a creditor may suspend or reduce a HELOC if “the value of the consumer’s principal dwelling which secures any outstanding balance is significantly less than the original appraisal value of the dwelling.” 15 USC 1647(c)(2)(B). The Commentary to Regulation Z provides that what constitutes a “significant decline” will “vary according to individual circumstances.” Commentary, cmt. 5b(f)(3)(vi)(6). The Commentary then states that there has been a significant decline ”if the value of the dwelling declines such that the initial difference between the credit limit and the available equity (based on the property’s appraised value for purposes of the plan) is reduced by fifty percent . . . .” The Commentary provides an example of a fifty percent decline:

For example, assume that a house with a first mortgage of $50,000 is appraised at $100,000 and the credit limit is $30,000. The difference between the credit limit and the available equity is $20,000, half of which is $10,000. The creditor could prohibit further advances or reduce the credit limit if the value of the property declines from $100,000 to $90,000.

Creditors, however, are not required to obtain an appraisal before suspending credit. Therefore, many creditors are using automated valuation models (“AVMs”) to assess whether a significant decline has occurred.
 

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Seventh Circuit Rejects Argument That TILA Was Violated By Coupling A Service Contract Or Extended Warranty With A Financing Agreement

Posted by Martin J. Bishop on Posted in Truth in Lending Act

The Seventh Circuit has affirmed the dismissal of a Truth in Lending Act (“TILA”) claim in Sales v. Urankar, et al. In Sales, the plaintiff alleged that he entered into a retail installment contract for the purchase of truck that violated TILA because it was conditioned on the plaintiff’s agreement to a service contract or extended warranty. The district court dismissed the complaint.

In the Seventh Circuit, the plaintiff relied on cases involving financing conditioned on the inclusion of insurance products or service contracts which were alleged to have violated TILA because the products and contracts were not included as part of the finance charges in the TILA disclosures. The Seventh Circuit, however, rejected the plaintiff’s analogy to that line of cases, finding that the plaintiff failed to “identify any information required by TILA that defendants failed to disclose.”

The Seventh Circuit designated the Sales decision as a “Nonprecedential Decision.” Pursuant to Federal Rule of Appellate Procedure 32.1, however, federal courts may not prohibit citation to this or other similarly designated decisions.

First Circuit Affirms Dismissal Of TILA Claim Based On End-Of-Month APR Increase; Circuit Split Remains

Posted by Martin J. Bishop on Posted in Truth in Lending Act

The First Circuit Court of Appeals has affirmed the District Court of Massachusetts dismissal of a putative class action raising claims under the Truth in Lending Act (TILA) and Massachusetts unfair or deceptive trade practices law. In Shaner v. Chase Bank USA, NA, the named plaintiff (Shaner) claimed that, as a result of her own default, Chase twice increased her annual percentage rate (APR) at the beginning of the billing cycles without notice prior to the first date the APR was applied. The notice was on Shaner’s billing statement, was consistent with Chase’s credit card agreement with Shaner, and stated that “[t]he new APR and promotional rate expiration reflected on this statement is a result of a late payment on your account.”

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Third Circuit Sidesteps Strict Liaiblity Argument For “Excessive” Title Insurance Fees Under TILA

Posted by Martin J. Bishop on Posted in Truth in Lending Act

Yesterday, in In re Madera, the United States Court of Appeals for the Third Circuit rejected the appellants claim that the Truth in Lending Act (“TILA”) requires lenders to disclose title insurance fees if the amount charged is higher than the prevailing rates set forth in the Manual of Title Insurance Rating Bureau of Pennsylvania (“TIRBOP Manual”), finding that the appellants had failed to raise an issue of fact on summary judgment.

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