CFPB Announces Another Consent Order Settling Alleged Violations Of RESPA Section 8

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1 Financial Services Update June 27, 2014 HIGHLIGHTS Federal Regulatory Developments CFPB Announces Another Consent Order Settling Alleged Violations Of RESPA Section 8 Settlement Between FTC And Pennsylvania Homebuilder Regarding Charges Of Deceptive Mortgage Advertising SunTrust Mortgage Subject Of Filings By CFPB, DOJ, HUD, And State Attorneys General Totaling $968 Million For Alleged Servicing Issues FHA Releases A Mortgagee Letter Reminding HECM Mortgagees Of FHA s Prohibition On Misleading Or Deceptive Advertisements And Restricting A Mortgagor s Freedom To Choose A HECM FHA Releases A Mortgagee Letter That Makes Several HECM Policy Changes And Limits The Insurability Of Fixed Interest Rate Products Under The HECM Program HUD Issues New Guidelines To Protect HECM Non-Borrowing Spouses Litigation Developments TILA Rescission Defeated By Borrowers Failure To Tender Loan Proceeds 1

2 SUMMARIES Federal Regulatory Developments CFPB Announces Another Consent Order Settling Alleged Violations Of RESPA Section 8 The CFPB recently announced a consent order settling alleged violations of Section 8 of the Real Estate Settlement Procedures Act ( RESPA ). Under the consent order, Stonebridge Title Services agrees to pay $30,000 to resolve allegations of kickbacks and unearned fees. In announcing the consent order, the second Section 8 settlement in about as many weeks, Director Richard Cordray stated that the CFPB will continue to take action against companies that seek to attract consumers through illegal schemes. Stonebridge is a title services company based in New Jersey. In the consent order, the CFPB alleges that the company paid commissions to more than twenty independent salespeople for referring title insurance business to Stonebridge. The commissions were up to 40% of the title insurance premiums that Stonebridge itself received from consumers. RESPA generally permits paying commissions for referrals, if the recipient is an employee of the company that is paying for the referral. See 12 C.F.R (g)(1)(vii). RESPA also permits a title company to pay its duly appointed agent or contractor for services actually performed. See 12 C.F.R (g)(1)(ii). In Stonebridge s case, the company treated the salespeople as employees for tax purposes, providing them with W-2 tax forms. Nevertheless, the CFPB alleges in the consent order that the salespeople acted as independent contractors and Stonebridge did not have the right or power to control the manner and means by which the salespeople performed their duties. (The CFPB does not elaborate on the underlying facts that led to this conclusion.) The CFPB also alleges that the salespeople did not perform any title services for consumers and did not provide any non-referral services for Stonebridge. Under the consent order, Stonebridge agrees to, among other things, cease paying for title insurance referrals and retain records demonstrating compliance with the consent order. Interestingly, the consent order also prohibits Stonebridge from paying its employees any fee or thing of value contingent on the referral of title insurance business or other settlement services, including under existing contracts or agreements, notwithstanding the employee exception that is generally available under RESPA. As noted, Stonebridge must also pay a $30,000 fine. The consent order notes that, although the alleged conduct involved a significant number of transactions, the CFPB set the amount of the fine in part based on Stonebridge s ability to pay while remaining a viable business. 2

3 The CFPB s announcement regarding the consent order and a link to the consent order itself are available online at: Settlement Between FTC And Pennsylvania Homebuilder Regarding Charges Of Deceptive Mortgage Advertising The Federal Trade Commission (FTC) and a Pennsylvania homebuilder and its affiliates recently stipulated to the entry of a Stipulated Order for Permanent Injunction and Civil Penalty Judgment to resolve a series of charges alleged against the defendants that they disseminated deceptive commercial communications regarding mortgage credit products in violation of Section 5 of the Federal Trade Commission Act (15 U.S.C. 45), the Mortgage Acts and Practices Advertising Rule (MAP Rule) (16 C.F.R. Part 321), and Regulation N (12 C.F.R. Part 1014) and that they failed to include required disclosures and meet other requirements in mortgage loan advertisements in violation of the Truth in Lending Act (TILA) (15 U.S.C j) and its implementing Regulation Z (12 C.F.R. Part 1026). The defendants neither admitted nor denied any of the allegations in the complaint. As a result of the Stipulated Order, the defendants have incurred jointly and severally a $650,000 civil penalty, have been permanently restrained and enjoined from certain misrepresentations and disclosure failures in mortgage credit product advertising, and are subject to certain compliance reporting and recordkeeping obligations in connection with the order. The original complaint identified, for example, defendants commercial communications on websites and in newspapers and direct mail that may have: (i) prominently included language such as ZIP. ZERO. NADA., $0 Money Down, and $0 For Paid Closing Costs, for programs and financing that allegedly required minimum deposits, funding fees, annual fees, and other charges; and (ii) prominently stated a monthly payment amount but allegedly failed to disclose adequately material restrictions applying to the offer. As a result of the Stipulated Order, the defendants generally are prohibited from engaging in the following activities, among others: Misrepresenting any term of any mortgage credit product, including, for example, the interest charged; the annual percentage rate (APR); the existence, nature, or amount of fees or costs to the consumers associated with the product; the terms, amounts, payments, or other requirements relating to taxes or insurance associated with the product; any prepayment penalties; and the existence, number, amount, or timing of any minimum or required payments; Misrepresenting any material fact concerning any mortgage credit product; Misrepresenting any fact material to consumers regarding the sale of homes and related products and services, including total costs; any material restrictions, limitations, or conditions; or any material aspect of the performance, efficacy, nature, or central characteristics (such as that consumers will pay $0 money down to purchase a home or for a mortgage loan, that consumers will receive 100% financing to purchase a home or through a mortgage loan, and that consumers will pay no closing costs to purchase a home or for a mortgage loan); 3

4 Representing a periodic payment amount, and failing to adequately disclose when applicable: (i) that the loan requires qualifying and financing through the USDA s Rural Development Loan Program or other financing program, as applicable, in which credit and income limits apply; (ii) that a good faith deposit is required at contract signing, and the amount or percentage of that deposit; (iii) that guaranty and annual fees or other fees are required, and the amount or percentage of those fees, for the financing and are to be paid at settlement or during the loan, as applicable; and (iv) the APR for the advertised financing; Advertising credit terms other than those terms that actually are or will be arranged or offered by the creditor; Advertising a payment amount without adequately disclosing the terms of repayment, the APR, and if the APR may be increased after consummation. The FTC s press release regarding this matter can be found at: The Complaint for Civil Penalties, Injunctive, and Other Equitable Relief can be found at: The Stipulated Order for Permanent Injunction and Civil Penalty Judgment can be found at: SunTrust Mortgage Subject Of Filings By CFPB, DOJ, HUD, And State Attorneys General Totaling $968 Million For Alleged Servicing Issues On June 17, 2014, the Consumer Financial Protection Bureau (CFPB), along with the Department of Justice (DOJ), the Department of Housing and Urban Development (HUD), and attorneys general in 49 states and the District of Columbia (collectively, the Regulators ), filed a proposed consent order in the U.S. District Court for the District of Columbia totaling $968 million from SunTrust Mortgage, Inc. (SunTrust) resulting from allegations that SunTrust engaged in systemic mortgage servicing and origination misconduct. First, the complaint alleges serious violations in connection with the company s origination of FHA loans. SunTrust admits that it originated and underwrote FHAinsured mortgages that failed to meet FHA requirements. In addition, SunTrust did not carry out an effective quality control program to catch origination errors and failed to self-report on non-compliant loans that it did identify. As a result, SunTrust is required to pay $418 million to resolve the DOJ s charges that SunTrust violated the False Claims Act by originating and underwriting the non-compliant loans. Second, the complaint also alleged unfair and deceptive practices which occurred in SunTrust s loan servicing and foreclosure procedures. Among other things, the compliant states that SunTrust failed to timely and accurately apply payments made by 4

5 borrowers, failed to maintain accurate account statements, and provided false or misleading information in response to borrower complaints. The complaint also accuses SunTrust of improper acts and practices in the course of its conduct, management, and oversight of loss mitigation and loan modifications. Specifically, SunTrust allegedly failed to properly process borrowers applications for loan modifications, failed to assign adequate staff resources with sufficient training to handle the demand from distressed borrowers, and failed to provide truthful information regarding the reasons for denial of loan modifications. The Regulators claim that the harm suffered by SunTrust s consumers due to its illegal servicing practices included: payment of improper fees and charges, unreasonable delays and expenses to obtain loss mitigation relief, improper denial of loss mitigation relief, and loss of homes due to improper, unlawful, or undocumented foreclosures. As a result, while SunTrust admits no wrongdoing, the proposed order obligates SunTrust to pay $500 million in relief to borrowers who are at risk of default or underwater on their mortgages. In addition to the penalties and relief amount described above, SunTrust would be required to: refund $40 million to consumers whose loans were serviced by SunTrust and who lost their homes due to foreclosure between January 1, 2008 and December 31, 2013; and pay $10 million to the federal government to cover losses it caused to the Federal Housing Administration, Department of Veterans Affairs, and the Rural Housing Service. Furthermore, SunTrust would be required to implement significant changes in how they service mortgage loans, conduct foreclosures, and ensure the accuracy of information provided in federal bankruptcy court. More specific information regarding the allegations and related consequences can be found in the complaint and proposed consent order. The CFPB s release on the proposed order, the Regulators complaint, and the proposed consent order can be viewed at: The DOJ s release on the matter can be found at: FHA Releases A Mortgagee Letter Reminding HECM Mortgagees Of FHA s Prohibition On Misleading Or Deceptive Advertisements And Restricting A Mortgagor s Freedom To Choose A HECM On June 18, 2014, the Federal Housing Administration (FHA) released a Mortgagee Letter (ML ) reminding Home Equity Conversion Mortgage (HECM) mortgagees of FHA s requirements prohibiting misleading or deceptive advertising and clarifying that the prohibition extends to misleading or deceptive descriptions of FHA HECM programs. 5

6 ML also reminds HECM mortgagees of the full extent of a mortgagor s choice in selecting a HECM program and FHA s prohibition on restricting such choice. In addition, pursuant to ML , all advertisements or marketing materials used in connection with the HECM program for the purpose of describing and illustrating to the public the types of loan products offered by the mortgagee must include a disclaimer that clearly informs the public that such materials are not from the U.S. Department of Housing and Urban Development (HUD) or FHA and the document was not approved by HUD or a government agency. This disclaimer must be displayed in a conspicuous location. As provided in ML , failure to follow HUD/FHA requirements as outlined in ML may result in sanctions, including civil money penalties or administrative action against any person, party, company, firm, partnership or business, including non-fha-approved institutions and individuals. Note that the requirements stated in ML are effective as of June 18, The full text of ML can be found at: FHA Releases A Mortgagee Letter That Makes Several HECM Policy Changes And Limits The Insurability Of Fixed Interest Rate Products Under The HECM Program On June 18, 2014, the Federal Housing Administration (FHA) released a Mortgagee Letter (ML ), under the authority granted to U.S. Department of Housing and Urban Development (HUD) in Sections 202(a) and 255(c) of the National Housing Act and in the Reverse Mortgage Stabilization Act of 2013 to amend the FHA Home Equity Conversion Mortgage (HECM) program, that makes several policy changes to the HECM program and limits the insurability of fixed interest rate mortgages under the HECM program to mortgages with the Single Disbursement Lump Sum payment option. As stated in ML , the HECM fixed-rate product changes eliminate potential hedging and interest-rate risk associated with post-closing future draw features on fixedrate HECMs. These changes also align FHA s policy with the previously announced Ginnie Mae (GNMA) policy that made fixed-rate HECMs with future draws ineligible for GNMA-guaranteed HMBS securities. See GNMA APM (April 1, 2014); see also GNMA APM (May 30, 2014). The HECM policy changes made by ML include, but are not limited to: Limiting FHA insurance to fixed-rate HECMs that: 1) provide for a single, full draw to be made at loan closing; and 2) do not provide for future advances to the mortgagor under any circumstances; Eliminating the availability of the Single Disbursement Lump Sum payment option for adjustable interest-rate HECMs; Changes to unused Repair Set-aside funds for fixed-rate HECMs; 6

7 FHA Connection updates; and Removing the requirement to use a HECM Second Security Instrument and HECM Second Note for fixed interest rate HECMs. In addition, ML provides two sets of revised Model Fixed Interest Rate HECM Loan Documents. The first set of documents is for HECMs with FHA Case Numbers assigned on or before August 3, 2014, which mortgagees may use to update fixed interest rate loan documents for new mortgages and pending mortgages that did not close prior to the effective date of ML The second set of documents is for HECMs with FHA Case Numbers assigned on or after the effective date of FHA Mortgagee Letter (ML ), which mortgagees must begin using on or after the effective date of ML (August 4, 2014). The policy changes made by ML are effective as follows: Policy Description Limitations on Fixed Interest Rate HECMs Limitations on Adjustable Interest Rate HECMs Unused Repair Set-Aside Funds FHA Connection Updates Effective Date HECMs with FHA Case Numbers assigned on or after June 25, 2014 HECMs with FHA Case Numbers assigned on or after June 25, 2014 HECMs with FHA Case Numbers assigned on or after June 25, 2014 HECMs with FHA Case Numbers assigned on or after June 25, 2014 Loan Documents Mortgagees may use the first set of Model Fixed Interest Rate HECM Loan Documents for HECMS with FHA Case Numbers assigned on or before August 3, 2014, to update fixed interest rate loan documents for new mortgages and pending mortgages that did not close prior to the effective date of ML Mortgagees must begin using the second set of Model Fixed Interest Rate HECM Loan Documents for HECMs with FHA Case Numbers assigned on or after the effective date of ML (August 4, 2014). FHA will allow pipeline fixed rate future draw HECMs to close if certain requirements are met. When a mortgagee has initiated the origination of a fixed interest rate traditional or refinance HECM transaction that allows the mortgagor to access the loan proceeds after loan closing, but did not close on or before the effective date of ML , the mortgagee must ensure the following requirements are met for the mortgage to be eligible for FHA insurance: 1) the FHA Case Number is requested on or before July 2, 2014; 2) HUD systems will reflect the mortgagor s payment option of either Term, Tenure, Line of Credit, Modified Term or Modified Tenure; 3) all other HECM program and property eligibility requirements are met; and 4) loan closing is completed on or before September 30, We note, however, that the release of ML leaves 7

8 some uncertainty regarding the effective date for certain fixed rate traditional and refinance HECM transactions that are in the pipeline. For example, although on the first page of ML it states that the effective date for the limitations on these pipeline fixed interest rate HECMs is June 25, 2014, on page 8 of ML it states that the FHA Case Number must be requested on or before July 2, With that said, until HUD provides further clarification on this issue, for HECM mortgagees that currently offer fixed rate HECM products with future draws, it appears that it would be prudent to cease offering such products prior to June 25, In addition, as stated in ML , [c]urrently, FHA only permits a mortgagee to order a purchase transaction FHA Case Number in FHA Connection for a mortgage on a property that has been issued a Certificate of Occupancy and the required HECM counseling has been completed. To avoid any negative impact on a HECM mortgagor who had previously entered into a bona fide sales contract and made an earnest money deposit on a property before the effective date of ML , FHA will allow HECM mortgagees to request a purchase transaction FHA Case Number with a fixed interest rate where: 1) the mortgagee requests the FHA Case Number on or before July 2, 2014; 2) the mortgagee obtains a copy of the mortgagor s bona fide sales contract and evidence of the earnest money deposit that were executed and paid by the mortgagor before June 18, 2014; 3) HUD s systems will reflect the mortgagor s payment options of either Term, Tenure, Line of Credit, Modified Term or Modified Tenure; 4) the required HECM counseling will be completed prior to the date of loan closing; 5) the Certificate of Occupancy will be issued prior to the date of loan closing; and 6) these mortgages comply with existing FHA Case Number expiration requirements. The full text of ML can be found at: HUD Issues New Guidelines To Protect HECM Non-Borrowing Spouses On April 25, 2014, the United States Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML ), which prospectively adds certain protections for Non-Borrowing Spouses under the Federal Housing Administration s (FHA) Home Equity Conversion Mortgage (HECM) program. Specifically, effective for case numbers assigned on or after August 4, 2014, ML implements an alternative interpretation of Subsection 255(j) of the National Housing Act, under which a Non-Borrowing Spouse will be able to remain in the home that secures the HECM loan following a borrower s death, provided that the Non-Borrowing Spouse was married to the borrower at the time of the loan's closing and such spousal status was disclosed at that time. ML prevents the home from being sold during the remainder of the Non- Borrowing Spouse s lifetime, so long as the Non-Borrowing Spouse continues to meet certain requirements under the HECM loan. The new guidelines will allow Non- 8

9 Borrowing Spouses to defer payment on the HECM loan and continue to occupy the home after the mortgagor passes away (the Deferral Period). Generally, ML amends the regulations and requirements concerning due and payable status for HECM loans where there is a Non-Borrowing Spouse at the time of a HECM loan s closing. Because ML applies prospectively only (as of its effective date of August 4, 2014), it will have no effect upon HECM loans closed prior to that date. ML takes the position, with respect to such already closed HECM loans (and HECM loans closed between now and the effective date), that FHA has no authority to alter these existing legally binding loan contracts. Among other things, ML requires, within 90 days of the death of the last surviving HECM mortgagor, that a Non-Borrowing Spouse establish legal ownership or another ongoing legal right to remain in the home. The Non-Borrowing Spouse must also undertake responsibility for meeting all of the HECM mortgagor's responsibilities described in the applicable loan documents. If the Non-Borrowing Spouse does not meet these responsibilities, the HECM loan will immediately become due and payable, without the need for the servicer to obtain HUD approval. ML also clarifies that HECM loans are not assumable during the deferral period (and thus otherwise available proceeds under the HECM loan generally will not be available to the Non-Borrowing Spouse during the Deferral Period). It also clarifies that the HECM loan will continue to accrue interest during the Deferral Period, and that the loan generally may continue to be assigned to HUD after the mortgagor s death if the loan balance reaches 98% of the Maximum Claim Amount. Finally, ML imposes new and ongoing responsibilities on HECM originators, counselors, and servicers specifically related to spouse certifications and changes to Principal Limits. Mortgagees must obtain certain certifications from the Non-Borrowing Spouse within 30 days of receiving notice of the last surviving mortgagor s death, and then no less than annually for the remainder of the Deferral Period. Additionally, when a Non-Borrowing Spouse is identified at the HECM loan s closing, the mortgagee must base the Principal Limit on the age of the youngest mortgagor or Non-Borrowing Spouse. Mortgagees will be required to use new Factor Tables that HUD plans to release prior to August 4, HUD requested public comments on ML , with the comment period closing on June 2, The full text of ML is available at: 9

10 Litigation Developments TILA Rescission Defeated By Borrowers Failure To Tender Loan Proceeds The Court of Appeals for the Seven Circuit recently confirmed that a borrower s right to rescission under the Truth in Lending Act (TILA) is not unconditional, and that a district court has the discretion to condition the rescission process on the borrower s repayment of the loan proceeds. In so holding, the Seventh Circuit joins several other circuit courts which have held that, even in the face of a TILA violation, a borrower s inability to tender before the lender s performance may defeat the rescission remedy. Under a plain reading of TILA, once a borrower exercises his or her right of rescission, the creditor s security interest becomes void, the creditor has 20 days to return all interest and other money paid by the borrower, and only then, after the creditor has performed, is the borrower required to repay the loan proceeds. 15 U.S.C. 1635(b). TILA and its implementing regulation, however, also provide that a court may alter the order in which the parties are required to perform, as long as it does not impede the borrower s substantive right to rescind. In Iroanyah v. Bank of America, the plaintiffs sought both damages and rescission under TILA for disclosure statement violations that occurred at closing. The district court agreed that the plaintiffs were entitled to rescission under TILA s extended three-year right of rescission, but altered the order of performance by requiring that the plaintiffs first tender the loan proceeds within 90 days. The court denied their claim for statutory damages that were related to the disclosure violation, because the applicable one-year statute of limitations had run. Nevertheless, plaintiffs were awarded statutory damages and some of their attorneys fees, because the defendants failed to respond to the rescission notice. When the plaintiffs failed to tender the loan proceeds within the 90- day period, judgment was entered for the defendants on the rescission claim. On appeal, the plaintiffs argued that their rescission remedy was fully unconditional and did not depend on their ability to fulfill their tender obligation, because the district court had concluded that they were entitled to rescission under TILA. The Seventh Circuit disagreed, noting that rescission is an equitable remedy involving mutual obligations and the borrower s tender obligation is inherently part of rescission, not an occasional effect of it. The Court also rejected the plaintiffs challenge to the district court s disapproval of their proposed 26-year, interest-free installment plan as wholly unreasonable and found that the 90-day tender period allowed by the district court was within the court s discretion. Finally, the plaintiffs were unsuccessful in their challenge to the district court s determination that they were not entitled to the full amount of their attorneys fees, because they did not prevail on all of their claims. As explained by the Seventh Circuit: In the context of a fee-shifting statute like TILA, when a party has success on some grounds, but not others, a court has discretion to reduce the [amount of attorneys fees] accordingly. 10

11 The Seventh Circuit s decision is consistent with the First, Fourth, Eighth and Ninth Circuits, all of which have held that a borrower s inability to tender repayment of loan proceeds can defeat entitlement to rescission. Weiner Brodsky Kider PC regularly handles TILA rescission claims and related litigation in courts around the country. This Financial Services Update is for general information purposes only and is not in any way intended, nor shall it be construed, as legal advice, legal opinion or any other advice on any specific facts or circumstances. No person or entity ( Person ) should act or refrain from acting upon this information without seeking professional advice. No Person may rely on this information or its applicability to any specific circumstances. The information in this Financial Services Update is in no instance to be taken as an indication of completeness, applicability to a particular situation, or an indication of future developments or results. 11

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