Consumer Financial Services Alert - May 28, 2013 May 28, 2013
In This Issue

CFPB Takes Enforcement Action Against Homebuilder

Based on a referral from the FDIC, the CFPB announced that it issued a stipulation and consent order against a homebuilder alleging violations of the Real Estate Settlement Procedures Act. The consent order prohibits the homebuilder from providing real estate settlement services in the future, except for the sale of homes, and requires the surrender of money the CFPB alleges represents kickbacks in violation of RESPA. According to the CFPB, the homebuilder entered two separate arrangements creating entities to perform mortgage origination services. One entity was created by the homebuilder and a state-chartered bank. The other entity was created by the homebuilder and a mortgage lender. Under each arrangement, the homebuilder referred customers to the mortgage origination entities, which the CFPB asserted were sham entities designed for the homebuilder to receive kickbacks for referring customers to the state-chartered bank and the mortgage lender. In particular, the CFPB alleged the mortgage origination entity created with the state-chartered bank had no office space, performed services only when business was referred by the homebuilder and all origination work was completed by employees of the state-chartered bank. The homebuilder then received distributions from that entity based on his ownership interest. The CFPB also alleged that with the arrangement with the mortgage lender, the mortgage lender financed all mortgages originated by the mortgage origination entity and the homebuilder received a payment pursuant to a service agreement meant to compensate the homebuilder for referring customers to that entity.

The CFPB determined that the distributions and service agreement payment violated section 8 of RESPA, which generally prohibits kickbacks, fees or thing of value in exchange for referring customers for settlement services involving federally related mortgage loans. In addition, the CFPB determined the arrangement with the state-chartered bank did not qualify for the affiliated business "safe harbor" in RESPA because the mortgage origination entity created with the state-chartered bank was not a bona fide settlement service provider. Instead, the CFPB noted the mortgage origination entity "was a sham controlled business as described in U.S. Department of Housing and Urban Development Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (June 7, 1996)."

CFPB Finalizes Rule Clarifying Escrow Requirements

In the first of a series of planned issuances to clarify and provide additional guidance about the mortgage rules issued in January (see January 22, 2013 Alert), the CFPB announced that it finalized a proposal clarifying and making technical amendments to the escrows rule, which becomes effective June 1, 2013. In line with the proposal issued in April (see April 16, 2013 Alert), the final rule keeps in place protections for higher-priced mortgage loans until other similar provisions—which provide expanded protections for consumers—become effective in January 2013 to avoid a six-month period when those protections do not apply. The escrows rule and the other mortgage rules issued by the CFPB exempt small creditors that meet certain conditions operating in predominantly rural and underserved counties, from some of its requirements. The final rule clarifies how to determine whether a county is considered "rural" or "underserved" for purposes of applying this exemption. Although previously stating that it would, the CFPB noted it was never its intention to designate or determine which counties are "rural" and "underserved"; rather the CFPB intended to require creditors to make determinations of "rural" or "underserved" status and for the CFPB to publish an annual list of counties that creditors may rely upon as a safe harbor. The final rule clarifies that these determinations are to be made based on currently applicable urban influence codes, which are established by the USDA’s Economic Research Service (for "rural") or based on HMDA data (for "underserved").

CFPB Finalizes List of Rural and Underserved Counties

In conjunction with the finalization of the escrows rule, the CFPB announced that it finalized the list of rural and underserved counties for use in the second half of 2013. The list is identical to the preliminary list issued in March 2013 (see March 19, 2013 Alert). The designation creates exemptions from various rules that are effective in June 2013 and January 2014 for certain creditors. In particular, under the escrows rule, higher-priced mortgage loans made by small creditors in predominantly rural or underserved counties are exempt from the 5-year escrow account requirement that goes into effect on June 1, 2013. According to the CFPB, for purposes of applying the exemption under the escrows rule, creditors may rely on the list as a safe harbor to determine whether a county is "rural" or "underserved" for loans made from June 1, 2013 through December 31, 2013. In addition, small creditors meeting certain conditions and operating in predominantly rural or underserved counties are also exempt from certain requirements in the ability-to-repay rule and qualified mortgage standard (see January 10, 2013 Alert), the rule on appraisals for higher-priced mortgage loans (see January 22, 2013 Alert), and the HOEPA rule; all of which are effective in January 2014. The CFPB also noted that the final list for 2014 could be different due to changes in a county’s rural versus non-rural status based on 2010 census information.

CFPB and State Regulators Create Coordination Framework

The CFPB and the Conference of State Bank Supervisors on behalf of state regulators, announced the creation of a framework, based on a 2011 joint memorandum and the CFPB’s statement of intent (see December 11, 2012 Alert), to help with the coordination and collaboration of supervision and enforcement activities. The framework provides, among other things, processes to coordinate corrective actions taken against subject entities, schedule examinations, and the resolution of differences concerning supervision of entities or entities identified for examination.

CFPB Issues Guidance Bulletin on Qualified Written Test under the SAFE Act

The CFPB issued a guidance bulletin in response to questions about whether states may use the uniform state test developed by the Nationwide Mortgage Licensing System and Registry as part of a qualified written test under the SAFE Act. The SAFE Act requires state-licensed mortgage loan originators to pass a qualified written test, which must be developed by the NMLSR and must adequately measure knowledge and comprehension of certain subject areas (including state laws and regulations). The guidance clarifies that this requirement may be met through the use of a compliant uniform state test or a separate test for each state covering particular laws and regulations of that state, in addition to a national test component developed by the NMLSR, so long as all of the requirements for qualified test are satisfied.

Eleventh Circuit Rejects Class Action Alleging Violations of TILA

The United States Court of Appeals for the Eleventh Circuit affirmed a lower court’s dismissal of a class action alleging violations of the Truth in Lending Act. Plaintiff, a borrower, filed a class action alleging that defendant, a loan servicer, violated TILA by failing to provide notice of a transfer in ownership when it received a mortgage assignment from MERS.

In affirming the lower court’s ruling, the Eleventh Circuit noted that based on the plain language of TILA, the disclosure obligation "is only triggered when ownership of the ‘mortgage loan’ or ‘debt’ itself is transferred, not when the instrument securing the debt (that is, the mortgage) is transferred." The Eleventh Circuit rejected plaintiff’s argument that under Alabama law, the transfer of a mortgage also transfers the obligation the mortgage secures unless the parties agree otherwise because of the administrative convenience exception under TILA. The "administrative convenience" exception is triggered if the servicer was assigned the obligation "solely for the administrative convenience of the servicer in servicing the obligation." The Eleventh Circuit found that such an exception existed because the assignment to the servicer was solely for the purpose of allowing the servicer to conduct foreclosure proceedings on behalf of the beneficial owner of the debt. Of import, the Eleventh Circuit allowed defendant to invoke the "administrative convenience" exception even though it was the loan owner who benefited from the convenience, because, according to the Eleventh Circuit, a contrary ruling would render the exception "a nullity."

Mortgage Settlement Monitor Releases Snapshot on Consumer Relief

The monitor for the National Mortgage Settlement releasedfactsheet of consumer relief from the settlement. The factsheet, which is based on information provided by the five banks party to the National Mortgage Settlement, provides highlights of consumer relief received between March 2012 and March 2013. According to the information provided by the banks, over 600,000 borrowers benefited from some type of relief totaling more than $50 billion. The monitor plans to release a report after testing of the data provided by the banks is complete.