Six months have elapsed since the Consumer Financial Protection Bureau’s (“Bureau”) July 21, 2011 launch, during which “consumer financial protection” was consolidated from 7 federal agencies into the Bureau charged with protecting consumers and increasing financial transactions’ transparency.
Following a controversial director appointment, the Bureau implemented a federal “nonbank,” supervision program for mortgage companies, payday lenders, and private education lenders, released a “Supervision and Examination Manual” of banks, thrifts, and credit unions with assets exceeding $10 billion, and launched an interactive website and a Facebook page.
Bureau’s Creation and Powers
Created by Title X of the Consumer Financial Protection Act of 2010 (“Dodd-Frank Act”), the Bureau is an independent agency under the Federal Reserve System charged with protecting consumers and increasing financial transactions’ transparency.
The Dodd-Frank Act provides the Bureau with broad regulatory and rulemaking authority under numerous existing federal consumer protection laws along with the power to enact new regulations and take enforcement and supervisory actions regarding consumer financial products and the entities that deal in them, i.e., banks, financial institutions, mortgage companies, payday lenders, and private education lenders.
The Bureau embodies the consolidation of “consumer financial protection’s” from 7 federal agencies into 1 agency comprised of 6 divisions: Consumer Education and Engagement; Supervision, Enforcement, Fair Lending, and Equal Opportunity; Research, Markets, and Regulations; General Counsel; External Affairs; and Chief Operating Officer.
The Bureau regulates "consumer financial products and services" encompassing:
•extending credit and servicing loans, including mortgages;
•extending or brokering leases of personal or real property;
•providing real estate settlement services;
•engaging in deposit-taking activities;
•transmitting or exchanging funds;
•acting as a custodian of funds or any financial instrument for use by or on behalf of a customer;
•selling, providing, or issuing stored value or payment instruments;
•check cashing, check collection, or check guaranty services;
•providing payments or other financial data processing products or services;
•collecting, analyzing, maintaining, or providing consumer report information or other account information; and
•collecting debt, including foreclosing on property.
“Bureau Director” Appointed
Although it appeared that Harvard Professor Elizabeth Warren, the Bureau’s purported “architect”, would be appointed, “polarization” issues caused President Obama to nominate Richard Cordray as the Bureau’s initial director.
As Ohio’s former Attorney General, Cordray pursued claims against the consumer financial services industry including “unfair or deceptive acts or practices law” violation actions against mortgage servicers.
After 44 Republican senators indicated that they would not approve any nomination until the Dodd-Frank Act was modified to dilute the Bureau and its director’s powers, and the Senate voted down the nomination in December 2011, President Obama seated Cordray as the Bureau’s director using his executive authority.
Director Corday’s first official act was implementing a federal non-depository, or “nonbank” supervision program, defined as any company providing “consumer financial products or services but does not have a bank, thrift, or credit union charter”.
Under the new program, the Bureau will oversee nonbank business in particular markets including regulating mortgage companies, payday lenders, and private education lenders.
Additionally, the Bureau may supervise “larger participants” in the “consumer financial services industry” including debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit, and money transmitting.
Bureau issues “Supervision and Examination Manual 1.0” and Launches Web Page
In October 2011, the Bureau released version 1.0 of its Supervision and Examination Manual (“Manual”), a guide to its supervision of banks, thrifts, and credit unions with assets exceeding $10 billion and tool for examining consumer products and services providers other than depository institutions.
The Manual incorporates Federal Financial Institutions Examination Council developed procedures (including its Uniform Interagency Consumer Compliance Rating System) and provides “mortgage servicing industry” “examination procedures”.
The Bureau also launched a colorful, interactive and user friendly website (www.consumerfinance.gov) and Facebook page, which has about 13,000 “likes.”
“Attorney Client Privilege” Waiver
Although federal law provides that a federally chartered institution furnishing attorney-client privileged materials to a “Federal banking agency” during an examination does not waive the privilege, the Bureau is not a statutorily defined “Federal banking agency”. 12 U.S.C. §1828(x)(1).
Rather than skip receiving privileged materials or adding itself to the “Federal banking agency’s” definition, the Bureau concluded that it is a “Federal banking agency” arguing that because it inherited supervisory authority from the other federal banking regulators, it also inherited access to privileged materials and the attorney client privilege protection.
Unfortunately because the Bureau only inherited partial supervisory authority from the federal banking agencies, the privilege may not apply to the banks’ production and rendering the produced information vulnerable to discovery in litigation or a Freedom of Information Act request.
Wednesday, February 29, 2012
Tuesday, January 31, 2012
PA Upholds Taxing Principal and Interest Discharged in Foreclosure
Mortgage lenders have a new friend, Pennsylvania’s Department of Revenue.
In last month’s Marshall v. Commonwealth, --- A.3d ---, 2012 WL 8704 (Pa. Cmwlth. 2012) opinion, the Commonwealth Court ruled that principal and unpaid interest discharged in a property’s foreclosure is subject to Pennsylvania’s personal income tax (“PIT”).
Pennsylvania’s PIT taxes each dollar of income at 3.07% for both residents (applying to all income received in a taxable year) and nonresidents (applying only to income from sources within the Commonwealth).
The Marshall dispute stemmed from the Department requiring a nonresident and limited partnership investor to pay PIT on his share of $2.6 billion of accrued and unpaid interest that was discharged in the foreclosure of the partnership’s apartment building.
The partnership had financed $308 million of the building’s purchase price with a “nonrecourse purchase money mortgage note”, the only remedy for nonpayment of which was foreclosure.
After determining that his distributive share of the $2.6 billion of unpaid interest was $3.9 million and that the partnership used $121.6 million to offset income that would have been subject to PIT, the Department assessed plaintiff $165,000.
In upholding the assessment, the Commonwealth Court cited the CIR v. Tufts, 461 U.S. 300 (1983) holding that when a lender forecloses on property securing a nonrecourse loan, the full amount of the nonrecourse obligation is subject to federal income tax.
Beyond spanking an out-of-state tax scofflaw, the Marshall v. Commonwealth ruling imposes consequences on commercial real estate investors skipping out on loans.
Because unpaid accrued interest is now deemed a gain following the taxable event of a foreclosure, an incentive exists for commercial borrowers not to default upon mortgage loans.
Further, because the Marshall v. Commonwealth ruling reaches through a partnership and across to state lines to assess a Texas investor’s gain, shifty investments hiding behind the shell of a fishy partnership will now enjoy less protection.
In last month’s Marshall v. Commonwealth, --- A.3d ---, 2012 WL 8704 (Pa. Cmwlth. 2012) opinion, the Commonwealth Court ruled that principal and unpaid interest discharged in a property’s foreclosure is subject to Pennsylvania’s personal income tax (“PIT”).
Pennsylvania’s PIT taxes each dollar of income at 3.07% for both residents (applying to all income received in a taxable year) and nonresidents (applying only to income from sources within the Commonwealth).
The Marshall dispute stemmed from the Department requiring a nonresident and limited partnership investor to pay PIT on his share of $2.6 billion of accrued and unpaid interest that was discharged in the foreclosure of the partnership’s apartment building.
The partnership had financed $308 million of the building’s purchase price with a “nonrecourse purchase money mortgage note”, the only remedy for nonpayment of which was foreclosure.
After determining that his distributive share of the $2.6 billion of unpaid interest was $3.9 million and that the partnership used $121.6 million to offset income that would have been subject to PIT, the Department assessed plaintiff $165,000.
In upholding the assessment, the Commonwealth Court cited the CIR v. Tufts, 461 U.S. 300 (1983) holding that when a lender forecloses on property securing a nonrecourse loan, the full amount of the nonrecourse obligation is subject to federal income tax.
Beyond spanking an out-of-state tax scofflaw, the Marshall v. Commonwealth ruling imposes consequences on commercial real estate investors skipping out on loans.
Because unpaid accrued interest is now deemed a gain following the taxable event of a foreclosure, an incentive exists for commercial borrowers not to default upon mortgage loans.
Further, because the Marshall v. Commonwealth ruling reaches through a partnership and across to state lines to assess a Texas investor’s gain, shifty investments hiding behind the shell of a fishy partnership will now enjoy less protection.
Wednesday, December 21, 2011
2011 Amherst Bowl
Years ago I put together a father son Thanksgiving football game hoping to fill those empty morning hours and hang out with my son.
I succeeded beyond my wildest dreams.
Celebrating its 8th year, the tournament, christened "The Amherst Bowl", has swollen to 127 players spanning 6 football fields and 12 teams playing 5 continuous football games in authentic AFC or NFC team jerseys.
The trash talk begins on Labor Day and echoes through our Township’s lunchrooms and playing fields with kids wearing prior years’ jerseys like badges of glory.
During Thanksgiving’s wet early morning hours, we map out and line the fields and set up tables overflowing cakes, hot chocolate and coffee.
The horde shows up at around 8:00 a.m. eager to learn the team to which to they’ve been assigned, whom their teammates will be, and how gloriously muddy the fields are.
Shirts are distributed, rules are explained, and at 9:00 a.m. the carnage begins.
During the ensuing rigidly timed five games, fathers put their middle-aged bodies at risk, re-live their youth and play football with their sons.
Throughout the morning used soccer gear is collected by "Heads Up Soccer" which transports and distributes it to impoverished third world youth.
Additionally, monies raised are donated to "Katie at the Bat" http://www.katieatthebatteam.org/ (improving inner-city youths’ lives through athletics, literacy, nutrition and health, and the arts), "Adam Spandorfer Memorial Fund" http://www.adamsfield.org/ (raising monies for Variety Club Camp at which children with disabilities can play baseball), and Hope with Heart http://hopewithheart.com/ (providing a summer camp and building a community for children with moderate to severe heart problems).
Although, at the Tournament’s end, some need help getting off of the field, that evening’s Thanksgiving tables are abuzz with boasts of heroic plays, grudges revisited, and glorious victories.
Until next year, when we do it bigger and better.
Thursday, March 31, 2011
Regulator’s Burdensome Foreclosure Abuse Investigation Resolution “Proposal”
To resolve ongoing foreclosure abuse investigations, federal regulators and 50 state attorneys general recently proposed settlement terms to the 5 largest mortgage servicers ("Proposal").
The Proposal requires modification eligibility based on valuation formulas, bars simultaneous foreclosing and modifying of a residential mortgage, requires independent “modification denial” reviews, and sets forth requirements for foreclosure affidavits and internal policies to ensure settlement compliance.
The Proposal also creates significant oversight authority in the Consumer Financial Protection Bureau ("Bureau") including enforcing compliance with the Proposal’s terms, receiving information regarding servicers' loan modification policies and activities, and providing input into each servicers' Proposal compliance procedures.
Expands Modification Options and Independent Review of Modification Denials
Loss mitigation programs presently are voluntary either through independent agreements or federal initiatives like the Home Affordability Modification Program ("HAMP").
The Proposal requires servicers to offer some form of loss mitigation based on loan's "net present value" ("NPV") as defined by servicer and used in creating a “modification determination standard” of whether modification will lead to a greater NPV than foreclosure.
Further, even where not mandated by NPV or HAMP, servicers must consider loan modifications including reducing “principal” in "appropriate circumstances to provide for sustainable modifications”, offering "performance-based reductions" in lieu of principal forbearance, and forgiving 1/3 of forborne amount for borrowers complying with modification terms over a 3 year period.
The proposal also requires independent review of denied modifications through an ombudsman reviewing servicers’ files and basis for modification denial.
The Bureau will oversee loan modifications and independent review process including reviewing servicers’ modification files and NPV formula.
Bar on Dual Tracking
The Proposal eliminates "dual tracking", i.e., simultaneously foreclosing upon, and attempting to modify, a residential mortgage.
The Proposal also halts initiating a foreclosure - - or filing a motion for relief from, objecting to Chapter 13 plan confirmation in, or moving to dismiss a bankruptcy case - - while a good faith modification evaluation proceeds or restarting foreclosure activity before applicant receives a “written loss mitigation denial notice”.
This dual tracking prohibition and loan modification requirement imposes duties on servicers including providing adequate staffing and systems for tracking documents, a "single point of contact" including "email address and direct toll-free telephone number with a voicemail box”, a “designated employee” responsible for handling all loss mitigation communications, and “electronic documentation” of every foreclosure, loan modification, bankruptcy, or other servicing file action including all communications with the borrower.
Servicers must cease all collection efforts while borrowers apply for modification or make timely trial modification payments and all “judicial foreclosure state” servicers must submit an affidavit detailing their loss mitigation efforts and the results.
Enhanced Foreclosure Documentation Required
In response to "robo-signing" allegations, the Proposal increases foreclosure documentation requirements.
Affidavits must include a detailed description of affiant's basis of personal knowledge and employers must implement "standards for qualifications, training, and supervision" which, along with training materials, videotaped copies of standard training sessions, and related operational manuals shall be made available to both the attorneys general and the Bureau.
The Proposal requires servicers to conduct independent audits regarding the accuracy of their financial systems’ “mortgage information”, audit the accuracy of the information contained in foreclosure affidavits, and provide audits results to the attorneys general and Bureau.
Bureau’s Compliance, Monitoring, and Enforcement Authority
The Bureau will monitor servicers' compliance efforts and enforcement of the agreement.
The Proposal provides that servicers must adopt "enhanced" corporate governance procedures to monitor agreement compliance and provide the attorneys general and Bureau with "regular state-specific data reports” on agreement compliance with loan modification efforts and “remedial actions" including foreclosure actions court orders.
Additionally, the attorneys general and Bureau may select, and receive regular reports from, independent third parties monitoring servicers' agreement compliance and have input on servicers' procedures for resolving borrower “noncompliance with agreement” complaints.
Further, because the Proposal states that material agreement violation constitutes an “unfair and deceptive trade practice” and “duty of good faith and fair dealing” breach, the Bureau could enforce agreements through Dodd-Frank’s “prohibiting unfair and deceptive trade practices” authority.
The Proposal requires modification eligibility based on valuation formulas, bars simultaneous foreclosing and modifying of a residential mortgage, requires independent “modification denial” reviews, and sets forth requirements for foreclosure affidavits and internal policies to ensure settlement compliance.
The Proposal also creates significant oversight authority in the Consumer Financial Protection Bureau ("Bureau") including enforcing compliance with the Proposal’s terms, receiving information regarding servicers' loan modification policies and activities, and providing input into each servicers' Proposal compliance procedures.
Expands Modification Options and Independent Review of Modification Denials
Loss mitigation programs presently are voluntary either through independent agreements or federal initiatives like the Home Affordability Modification Program ("HAMP").
The Proposal requires servicers to offer some form of loss mitigation based on loan's "net present value" ("NPV") as defined by servicer and used in creating a “modification determination standard” of whether modification will lead to a greater NPV than foreclosure.
Further, even where not mandated by NPV or HAMP, servicers must consider loan modifications including reducing “principal” in "appropriate circumstances to provide for sustainable modifications”, offering "performance-based reductions" in lieu of principal forbearance, and forgiving 1/3 of forborne amount for borrowers complying with modification terms over a 3 year period.
The proposal also requires independent review of denied modifications through an ombudsman reviewing servicers’ files and basis for modification denial.
The Bureau will oversee loan modifications and independent review process including reviewing servicers’ modification files and NPV formula.
Bar on Dual Tracking
The Proposal eliminates "dual tracking", i.e., simultaneously foreclosing upon, and attempting to modify, a residential mortgage.
The Proposal also halts initiating a foreclosure - - or filing a motion for relief from, objecting to Chapter 13 plan confirmation in, or moving to dismiss a bankruptcy case - - while a good faith modification evaluation proceeds or restarting foreclosure activity before applicant receives a “written loss mitigation denial notice”.
This dual tracking prohibition and loan modification requirement imposes duties on servicers including providing adequate staffing and systems for tracking documents, a "single point of contact" including "email address and direct toll-free telephone number with a voicemail box”, a “designated employee” responsible for handling all loss mitigation communications, and “electronic documentation” of every foreclosure, loan modification, bankruptcy, or other servicing file action including all communications with the borrower.
Servicers must cease all collection efforts while borrowers apply for modification or make timely trial modification payments and all “judicial foreclosure state” servicers must submit an affidavit detailing their loss mitigation efforts and the results.
Enhanced Foreclosure Documentation Required
In response to "robo-signing" allegations, the Proposal increases foreclosure documentation requirements.
Affidavits must include a detailed description of affiant's basis of personal knowledge and employers must implement "standards for qualifications, training, and supervision" which, along with training materials, videotaped copies of standard training sessions, and related operational manuals shall be made available to both the attorneys general and the Bureau.
The Proposal requires servicers to conduct independent audits regarding the accuracy of their financial systems’ “mortgage information”, audit the accuracy of the information contained in foreclosure affidavits, and provide audits results to the attorneys general and Bureau.
Bureau’s Compliance, Monitoring, and Enforcement Authority
The Bureau will monitor servicers' compliance efforts and enforcement of the agreement.
The Proposal provides that servicers must adopt "enhanced" corporate governance procedures to monitor agreement compliance and provide the attorneys general and Bureau with "regular state-specific data reports” on agreement compliance with loan modification efforts and “remedial actions" including foreclosure actions court orders.
Additionally, the attorneys general and Bureau may select, and receive regular reports from, independent third parties monitoring servicers' agreement compliance and have input on servicers' procedures for resolving borrower “noncompliance with agreement” complaints.
Further, because the Proposal states that material agreement violation constitutes an “unfair and deceptive trade practice” and “duty of good faith and fair dealing” breach, the Bureau could enforce agreements through Dodd-Frank’s “prohibiting unfair and deceptive trade practices” authority.
Thursday, February 24, 2011
New Jersey Courts Require Original Note and Endorsements in Mortgage Lending Proceedings
New Jersey courts keep putting the screws to mortgage lenders in bankruptcies and foreclosures.
The recent In re Kemp, 440 B.R. 624 (Bkrtcy D.N.J. 2010) and Bank of New York v. Raftogianis, 10 A.3d 236 (N.J. Super. Ch. 2010) opinions refused to let a “securitized” mortgage proof of claim or foreclosure proceed without demonstrable possession of the note at “filing” or satisfying New Jersey’s Uniform Commercial Code (“UCC”) requirements.
In re Kemp involved a Countrywide Home Loans securitized mortgage loan, i.e., pooled with other mortgages into a trust consisting of mortgage loans and proceeds, that was sold to the Bank of New York as trustee. Although the pooling agreement stated that the note would be transferred with an appropriate endorsement, neither the transfer nor endorsement occurred.
After borrower filed for Chapter 13 bankruptcy, Countrywide filed a proof of claim acting as Bank of New York’s servicer but did not locate the note until trial and the endorsement, via execution of an “allonge” that is supposed to be affixed to the note, did not occur until several weeks before trial.
The In re Kemp court disallowed the proof of claim ruling that the note could not be enforced because UCC-required possession and endorsement were lacking and, while reflecting ownership, the recorded mortgage assignment did not transfer enforcement rights because the note memorializing the underlying debt was not transferred or endorsed to the Bank of New York when the mortgage was assigned.
Similarly, Bank of New York v. Raftogianis also involved a securitized mortgage loan winding up in the Bank of New York as trustee’s hands.
After the borrower defaulted, the bank filed the foreclosure and moved for summary judgment, but did not present the original note until oral argument and arguing that New Jersey Rule of Court Rule 4:34-3 allowed a case to continue by the original party following a transfer of interest.
In denying summary judgment, the Raftogianis Court held that Rule 4:34-3 did not apply in actions involving negotiable instruments like mortgage notes where plaintiffs should be able to establish possession of the note at the complaint’s filing or face dismissal.
After holding that the bank failed to prove it had the original note at the case’s filing and refusing a presumption of “possession at filing” based on bank’s ability to produce the note at trial, the Bank of New York v. Raftogianis court dismissed the foreclosure without prejudice specifying that the re-filed complaint must contain a certification confirming possession of the original note as of re-filing date and stating note’s physical location and name of entity in possession.
Both opinions reflect the increasing level of scrutiny to which mortgage lender are being subjected in New Jersey proceedings and the decreasing level playing field in which banks must defend their interests.
The recent In re Kemp, 440 B.R. 624 (Bkrtcy D.N.J. 2010) and Bank of New York v. Raftogianis, 10 A.3d 236 (N.J. Super. Ch. 2010) opinions refused to let a “securitized” mortgage proof of claim or foreclosure proceed without demonstrable possession of the note at “filing” or satisfying New Jersey’s Uniform Commercial Code (“UCC”) requirements.
In re Kemp involved a Countrywide Home Loans securitized mortgage loan, i.e., pooled with other mortgages into a trust consisting of mortgage loans and proceeds, that was sold to the Bank of New York as trustee. Although the pooling agreement stated that the note would be transferred with an appropriate endorsement, neither the transfer nor endorsement occurred.
After borrower filed for Chapter 13 bankruptcy, Countrywide filed a proof of claim acting as Bank of New York’s servicer but did not locate the note until trial and the endorsement, via execution of an “allonge” that is supposed to be affixed to the note, did not occur until several weeks before trial.
The In re Kemp court disallowed the proof of claim ruling that the note could not be enforced because UCC-required possession and endorsement were lacking and, while reflecting ownership, the recorded mortgage assignment did not transfer enforcement rights because the note memorializing the underlying debt was not transferred or endorsed to the Bank of New York when the mortgage was assigned.
Similarly, Bank of New York v. Raftogianis also involved a securitized mortgage loan winding up in the Bank of New York as trustee’s hands.
After the borrower defaulted, the bank filed the foreclosure and moved for summary judgment, but did not present the original note until oral argument and arguing that New Jersey Rule of Court Rule 4:34-3 allowed a case to continue by the original party following a transfer of interest.
In denying summary judgment, the Raftogianis Court held that Rule 4:34-3 did not apply in actions involving negotiable instruments like mortgage notes where plaintiffs should be able to establish possession of the note at the complaint’s filing or face dismissal.
After holding that the bank failed to prove it had the original note at the case’s filing and refusing a presumption of “possession at filing” based on bank’s ability to produce the note at trial, the Bank of New York v. Raftogianis court dismissed the foreclosure without prejudice specifying that the re-filed complaint must contain a certification confirming possession of the original note as of re-filing date and stating note’s physical location and name of entity in possession.
Both opinions reflect the increasing level of scrutiny to which mortgage lender are being subjected in New Jersey proceedings and the decreasing level playing field in which banks must defend their interests.
Tuesday, October 26, 2010
Yield Spread Premiums Not Governed by TILA
In its September 20, 2010 Opinion, the Third Circuit Court of Appeals affirmed the trial court’s holding that yield spread premiums do not form Truth-in-Lending Act, 15U.S.C. §1601, et seq. (“TILA”) “finance charges” nor inclusion in the annual percentage rate (“APR”) calculation. Abbott v. Washington Mutual. Finance, Inc., 2008 WL 756069 (E.D. Pa. 2008).
By way of background, Barbara Abbott borrowed $130,000 from loan originator Loan City, Inc. (“Loan City”) in a loan brokered by Priority Mortgage Group (“Loan”), the HUD 1 for which notes that Loan City paid Priority a $1596.60 “yield spread premium”, i.e., monies lenders pay mortgage brokers outside of the distribution of loan proceeds for originating a loan at an interest rate higher than the lender’s minimum.
Ms. Abbott filed a Complaint demanding TILA rescission for failing to disclose or include the $1,596.40 yield spread premium as a “finance charge” or as part of Truth in Lending Disclosure Statement’s APR.
Following a bench trial, the trial court entered judgment for the lender ruling that because the lender - - and not Ms. Abbott - - paid the $1,596.40 Yield Spread Premium, TILA disclosure was not required. 2008 WL 756069, *2.
Ms. Abbott appealed arguing that the Yield Spread Premium required disclosure beyond being set forth on HUD 1 and inclusion in finance charge calculation.
Yield Spread Premium Requires No Separate Disclosure Nor Finance Charge Inclusion
TILA, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq., requires creditors making loans secured by borrowers’ principal dwelling to provide "material disclosures" including “annual percentage rate”, “finance charge”, and “amount financed”. In re Community Bank of Northern Virginia, 418 F.3d 277, 304-305 (3d Cir. 2005); 12 C.F.R. §226.23. Both TILA and Regulation Z expressly excludes “bona fide”, “reasonable” and “real-estate related fees from the finance charge’s computation. Davis v. Deutsche Bank Nat. Trust Co., 2007 WL 3342398, at *4-5 (E.D. Pa. 2007) citing 15 U.S.C. §1605 (e) and 12 C.F.R. §226.4( c)(7)(1).
“Yield spread premiums” are defined as a bonus paid to a broker when it originates a loan at an interest rate higher than the minimum interest rate approved by the lender for a particular loan. Escher v. Decision One Mortg. Co., LLC, 2009 WL 3127753, *4 (E.D.Pa. 2009). As long as it is disclosed on the HUD-1, and because it is already included in the disclosed interest rate, TILA and its implementing regulations do not require lenders to disclose yield spread premiums as part of a loan's finance charge or explain its impact on the interest rate. Id., *4. District Courts have uniformly held that a yield spread premium need not be separately disclosed or included as a pre-paid finance charge because it is already included in the interest rate and should not be double counted. Id., *4-*5.
Charge Was a Yield Spread Premium and Disclosed on the HUD 1
Yield spread premiums are monies lenders pay mortgage brokers outside of the distribution of loan proceeds calculated by multiplying the loan’s principal amount by the “above par value”, i.e., the percentage amount above par for which the loan’s originator can sell the loan. The “yield spread” - - or amount above par that Loan City was able to sell the Loan - - was 1.228%. The 1.228% yield spread multiplied by the Loan’s $130,000 principal equals the $1,596.40 yield spread premium that Loan City paid to Priority.
Although on January 28, 2003, Ms. Abbott “locked in” at the 6% interest rate, on that day Loan City was offering rates between 5.625% and 6.375% and between January and February 2003 interest rates between 5% and 6.75%. Thus, because Ms. Abbott was eligible for a rate of interest as low as 5% (“Approved Minimum”), 6% was not her Approved Minimum.
Because Priority originated this Loan at an interest rate higher than Loan City’s minimum rate, i.e., Ms. Abbott’s 5% Approved Minimum, Loan City paid it a $1596.60 yield spread premium outside of the loan’s proceeds.
Mortgage Reform and Anti-Predatory Lending Act
Although the Third Circuit adopted in whole the trial court’s analysis, the recently enacted Mortgage Reform and Anti-Predatory Lending Act prohibits yield spread premiums payment for referral of a loan to a lender at a higher than par interest rate.
However, the Act but does not bar pre-enactment yield spread premiums or payments passed on to third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.
By way of background, Barbara Abbott borrowed $130,000 from loan originator Loan City, Inc. (“Loan City”) in a loan brokered by Priority Mortgage Group (“Loan”), the HUD 1 for which notes that Loan City paid Priority a $1596.60 “yield spread premium”, i.e., monies lenders pay mortgage brokers outside of the distribution of loan proceeds for originating a loan at an interest rate higher than the lender’s minimum.
Ms. Abbott filed a Complaint demanding TILA rescission for failing to disclose or include the $1,596.40 yield spread premium as a “finance charge” or as part of Truth in Lending Disclosure Statement’s APR.
Following a bench trial, the trial court entered judgment for the lender ruling that because the lender - - and not Ms. Abbott - - paid the $1,596.40 Yield Spread Premium, TILA disclosure was not required. 2008 WL 756069, *2.
Ms. Abbott appealed arguing that the Yield Spread Premium required disclosure beyond being set forth on HUD 1 and inclusion in finance charge calculation.
Yield Spread Premium Requires No Separate Disclosure Nor Finance Charge Inclusion
TILA, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq., requires creditors making loans secured by borrowers’ principal dwelling to provide "material disclosures" including “annual percentage rate”, “finance charge”, and “amount financed”. In re Community Bank of Northern Virginia, 418 F.3d 277, 304-305 (3d Cir. 2005); 12 C.F.R. §226.23. Both TILA and Regulation Z expressly excludes “bona fide”, “reasonable” and “real-estate related fees from the finance charge’s computation. Davis v. Deutsche Bank Nat. Trust Co., 2007 WL 3342398, at *4-5 (E.D. Pa. 2007) citing 15 U.S.C. §1605 (e) and 12 C.F.R. §226.4( c)(7)(1).
“Yield spread premiums” are defined as a bonus paid to a broker when it originates a loan at an interest rate higher than the minimum interest rate approved by the lender for a particular loan. Escher v. Decision One Mortg. Co., LLC, 2009 WL 3127753, *4 (E.D.Pa. 2009). As long as it is disclosed on the HUD-1, and because it is already included in the disclosed interest rate, TILA and its implementing regulations do not require lenders to disclose yield spread premiums as part of a loan's finance charge or explain its impact on the interest rate. Id., *4. District Courts have uniformly held that a yield spread premium need not be separately disclosed or included as a pre-paid finance charge because it is already included in the interest rate and should not be double counted. Id., *4-*5.
Charge Was a Yield Spread Premium and Disclosed on the HUD 1
Yield spread premiums are monies lenders pay mortgage brokers outside of the distribution of loan proceeds calculated by multiplying the loan’s principal amount by the “above par value”, i.e., the percentage amount above par for which the loan’s originator can sell the loan. The “yield spread” - - or amount above par that Loan City was able to sell the Loan - - was 1.228%. The 1.228% yield spread multiplied by the Loan’s $130,000 principal equals the $1,596.40 yield spread premium that Loan City paid to Priority.
Although on January 28, 2003, Ms. Abbott “locked in” at the 6% interest rate, on that day Loan City was offering rates between 5.625% and 6.375% and between January and February 2003 interest rates between 5% and 6.75%. Thus, because Ms. Abbott was eligible for a rate of interest as low as 5% (“Approved Minimum”), 6% was not her Approved Minimum.
Because Priority originated this Loan at an interest rate higher than Loan City’s minimum rate, i.e., Ms. Abbott’s 5% Approved Minimum, Loan City paid it a $1596.60 yield spread premium outside of the loan’s proceeds.
Mortgage Reform and Anti-Predatory Lending Act
Although the Third Circuit adopted in whole the trial court’s analysis, the recently enacted Mortgage Reform and Anti-Predatory Lending Act prohibits yield spread premiums payment for referral of a loan to a lender at a higher than par interest rate.
However, the Act but does not bar pre-enactment yield spread premiums or payments passed on to third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.
Thursday, September 2, 2010
Mortgage Reform and Anti-Predatory Lending Act
The Federal Reserve recently issued a final rulemaking regarding Title XIV of the Dodd-Frank Act ("Act") prescribing new residential mortgage loan standards, creating stringent consumer protections, and greatly increasing loan originators’ underwriting burdens.
Beyond creating incentives for lenders to only offer prime quality "vanilla" loan products, the Act and its regulations will reduce credit availability to the non-prime lending sector.
Increased Underwriting Requirements
The Act amends the Truth-in-Lending Act’s ("TILA") "mortgage originator” definition to any person, who for direct or indirect compensation, takes a residential mortgage loan application, assists a consumer in obtaining or applying to obtain a residential mortgage loan or offers or negotiates terms of a residential loan.
Excluded from the definition are persons performing "purely administrative or clerical tasks" or solely real estate brokerage activities if properly licensed, and persons making 3 or fewer fully amortized purchase money loans in any 12 month period where borrower has a reasonable ability to repay loan.
Section XIV’s core is a TILA amendment mandating that consumers be offered loans reasonably reflecting their ability to repay, that are understandable and not unfair, deceptive or abusive, and requiring originators be appropriately licensed and adhere to Secured and Fair Enforcement for Mortgage Licensing Act of 2008 requirements.
“Steering” Prohibition
The Act prohibits mortgage lenders and brokers from giving or receiving compensation that varies with loan terms (other than principal amount) and payment of yield spread premiums for referral of a loan to a lender at a higher than par interest rate but does not bar payment to lenders ultimately passed on third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.
The Act directs the newly created Bureau of Consumer Financial Protection ("Bureau") to prescribe regulations prohibiting mortgage originators from steering consumers to a residential mortgage loan that they lack a reasonable ability to repay, has predatory characteristics or effects (i.e., equity stripping, excessive fees or abusive terms), is a non-qualified mortgage when consumer was eligible for a qualified mortgage, or have abusive or unfair lending impact promoting disparities among consumers of equal credit worthiness of different race, ethnicity, gender or assets.
Further, the Act prohibits mortgage originators from mischaracterizing consumer credit history or residential mortgage loans available to consumer, mischaracterizing appraised value of property securing credit extension, and discouraging consumer from seeking a loan secured by their principal dwelling from another originator if unable to suggest, offer or recommend to consumer a loan that is not more expensive than a loan for which the consumer qualifies.
“Duty of Care” and “Steering” Violations Liability
Mortgage originators violating duty of care and steering provisions are subject to TILA liability up to the greater of actual damages or 3 times the total of compensation earned by mortgage, plus litigation costs including reasonable attorney's fees.
The Act increases TILA violations statutory civil liability from current $100 – $1,000 for individual actions to $200 – $2,000 and class actions from current $500,000 to $1,000,000.
Further, the statute of limitations for bringing steering and ability to pay provisions claims is expanded from 1 to 3 years.
Additionally, borrowers may assert a defense to foreclosures brought by creditor or assignees if creditor violated anti-steering and ability to repay provisions.
Regulation Promulgation
The Act authorizes the Bureau to promulgate regulations prohibiting:
○abusive, unfair, deceptive, predatory acts or practices necessary or proper to ensure that responsible, affordable mortgage credit remains available; and
○creditors from making residential loans unless they make a reasonable and good faith determination based on verified information that, at the time loan is consummated, consumer has a reasonable ability to repay loan, according to its terms, all applicable taxes and insurance (including mortgage guarantee insurance), and assessments.
In determining “ability to repay a residential mortgage loan”, creditor must consider credit history, current income, expected income consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or residual income consumer will have after paying non-mortgage debt and other mortgage-related obligations, employment status, and other financial resources other than consumer's equity in property securing loan’s repayment.
Safe Harbor and Rebuttable Presumption
Creditors and their assignees are subject to a rebuttable presumption of “repayment ability” compliance if originated loan is a “qualified mortgage” defined as any residential mortgage loan with no negative amortization or balloon payments, verified and documented income and financial resources, loan’s underwriting process is based on a payment schedule fully amortizing loan over loan’s term (or, if adjustable rate loan, underwriting process based on maximum rate permitted for first 5 years) taking into account taxes and insurance, complies with all Federal Reserve debt-to-income ratios pronouncements, total points and fees do not exceed 3 percent of total loan amount and term not exceeding 30 years.
HOEPA Expansion
The Act expands the primary federal anti-predatory lending law Home Ownership and Equity Protection Act’s ("HOEPA") scope currently applying to loan refinances with points and fees exceeding 8% of the "total loan amount" or $592.
The Act increases HOEPA coverage to purchase money loans and home equity lines of credits and creates a new APR test based on an undefined "average prime offer rate" instead of currently used yield on a Treasury Security of comparable maturity to the loan term. Under this new test, first lien loans either not secured by personal property or in amounts of $50,000 or greater will be subject to HOEPA if APR at consummation exceeds average prime offer rate by 6.5 percentage points and for subordinate lien loans if APR at consummation exceeds average prime offer rate by 8.5 percentage points.
The Act creates a new HOEPA threshold triggered if total points and fees, other than bona fide third party charges exceed in a transaction of $20,000 or more, 5 percent of "total transaction amount" or, if less than $20,000, lesser of 8% of the "total transaction amount" or $1,000.
The Act provides that a creditor or assignee, when acting in good faith, may correct a HOEPA violation if:
○within 30 days of loan’s closing and prior to institution of any action, it notifies consumer, makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute; or
○within 60 days of creditor's discovery or receipt of notification of an unintentional violation or bona fide error, it notifies consumer and makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute.
Beyond creating incentives for lenders to only offer prime quality "vanilla" loan products, the Act and its regulations will reduce credit availability to the non-prime lending sector.
Increased Underwriting Requirements
The Act amends the Truth-in-Lending Act’s ("TILA") "mortgage originator” definition to any person, who for direct or indirect compensation, takes a residential mortgage loan application, assists a consumer in obtaining or applying to obtain a residential mortgage loan or offers or negotiates terms of a residential loan.
Excluded from the definition are persons performing "purely administrative or clerical tasks" or solely real estate brokerage activities if properly licensed, and persons making 3 or fewer fully amortized purchase money loans in any 12 month period where borrower has a reasonable ability to repay loan.
Section XIV’s core is a TILA amendment mandating that consumers be offered loans reasonably reflecting their ability to repay, that are understandable and not unfair, deceptive or abusive, and requiring originators be appropriately licensed and adhere to Secured and Fair Enforcement for Mortgage Licensing Act of 2008 requirements.
“Steering” Prohibition
The Act prohibits mortgage lenders and brokers from giving or receiving compensation that varies with loan terms (other than principal amount) and payment of yield spread premiums for referral of a loan to a lender at a higher than par interest rate but does not bar payment to lenders ultimately passed on third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.
The Act directs the newly created Bureau of Consumer Financial Protection ("Bureau") to prescribe regulations prohibiting mortgage originators from steering consumers to a residential mortgage loan that they lack a reasonable ability to repay, has predatory characteristics or effects (i.e., equity stripping, excessive fees or abusive terms), is a non-qualified mortgage when consumer was eligible for a qualified mortgage, or have abusive or unfair lending impact promoting disparities among consumers of equal credit worthiness of different race, ethnicity, gender or assets.
Further, the Act prohibits mortgage originators from mischaracterizing consumer credit history or residential mortgage loans available to consumer, mischaracterizing appraised value of property securing credit extension, and discouraging consumer from seeking a loan secured by their principal dwelling from another originator if unable to suggest, offer or recommend to consumer a loan that is not more expensive than a loan for which the consumer qualifies.
“Duty of Care” and “Steering” Violations Liability
Mortgage originators violating duty of care and steering provisions are subject to TILA liability up to the greater of actual damages or 3 times the total of compensation earned by mortgage, plus litigation costs including reasonable attorney's fees.
The Act increases TILA violations statutory civil liability from current $100 – $1,000 for individual actions to $200 – $2,000 and class actions from current $500,000 to $1,000,000.
Further, the statute of limitations for bringing steering and ability to pay provisions claims is expanded from 1 to 3 years.
Additionally, borrowers may assert a defense to foreclosures brought by creditor or assignees if creditor violated anti-steering and ability to repay provisions.
Regulation Promulgation
The Act authorizes the Bureau to promulgate regulations prohibiting:
○abusive, unfair, deceptive, predatory acts or practices necessary or proper to ensure that responsible, affordable mortgage credit remains available; and
○creditors from making residential loans unless they make a reasonable and good faith determination based on verified information that, at the time loan is consummated, consumer has a reasonable ability to repay loan, according to its terms, all applicable taxes and insurance (including mortgage guarantee insurance), and assessments.
In determining “ability to repay a residential mortgage loan”, creditor must consider credit history, current income, expected income consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or residual income consumer will have after paying non-mortgage debt and other mortgage-related obligations, employment status, and other financial resources other than consumer's equity in property securing loan’s repayment.
Safe Harbor and Rebuttable Presumption
Creditors and their assignees are subject to a rebuttable presumption of “repayment ability” compliance if originated loan is a “qualified mortgage” defined as any residential mortgage loan with no negative amortization or balloon payments, verified and documented income and financial resources, loan’s underwriting process is based on a payment schedule fully amortizing loan over loan’s term (or, if adjustable rate loan, underwriting process based on maximum rate permitted for first 5 years) taking into account taxes and insurance, complies with all Federal Reserve debt-to-income ratios pronouncements, total points and fees do not exceed 3 percent of total loan amount and term not exceeding 30 years.
HOEPA Expansion
The Act expands the primary federal anti-predatory lending law Home Ownership and Equity Protection Act’s ("HOEPA") scope currently applying to loan refinances with points and fees exceeding 8% of the "total loan amount" or $592.
The Act increases HOEPA coverage to purchase money loans and home equity lines of credits and creates a new APR test based on an undefined "average prime offer rate" instead of currently used yield on a Treasury Security of comparable maturity to the loan term. Under this new test, first lien loans either not secured by personal property or in amounts of $50,000 or greater will be subject to HOEPA if APR at consummation exceeds average prime offer rate by 6.5 percentage points and for subordinate lien loans if APR at consummation exceeds average prime offer rate by 8.5 percentage points.
The Act creates a new HOEPA threshold triggered if total points and fees, other than bona fide third party charges exceed in a transaction of $20,000 or more, 5 percent of "total transaction amount" or, if less than $20,000, lesser of 8% of the "total transaction amount" or $1,000.
The Act provides that a creditor or assignee, when acting in good faith, may correct a HOEPA violation if:
○within 30 days of loan’s closing and prior to institution of any action, it notifies consumer, makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute; or
○within 60 days of creditor's discovery or receipt of notification of an unintentional violation or bona fide error, it notifies consumer and makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute.
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