MBA LEGAL ISSUES AND REGULATORY COMPLIANCE

MAY, 2010

RECENT TRENDS IN RESPA AND FAIR

LENDING

ENFORCEMENT AND LITIGATION

Mindi C. Robinson Slaten & OConnor, PC [email protected]

Brief RESPA Overview

The Real Estate Settlement procedures Act was enacted in 1974. 12 U.S.C. 2601-2617. HUD promulgated Regulation X to implement RESPA. 24 CFR 3500. Statement of Policy 2001-1 (Clarifying 1999-1) HUD issued this opinion to give guidance in pending yield spread premium cases brought under Section 8(a) and also to give guidance under 8(b). In 2008, HUD made significant amendments to RESPA which, on among other things, revised the GFE and HUD-1. Compliance with most of these changes is required by January 1, 2010.
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Purpose of RESPA

To enhance transparency of the costs associated with real estate closings Help consumers shop more effectively for settlement services Guard against unnecessarily high settlement costs by eliminating kickbacks and referral fees. RESPA is not a rate-setting statute

RESPA Reform
Effective Dates

January 16, 2009

Servicing Disclosure Statement (section 6) Average charge Technical changes

January 1, 2010
New GFE New HUD-1/1A Tolerances Everything else HUD will exercise restraint in enforcement for the first 120 days.

Litigation trends TBD.

Litigation Involving Failure to Provide GFE or HUD-1

RESPA requires a Good Faith Estimate (GFE) and HUD-1 Statement Courts have held that RESPA, and the corresponding regulations, do not create an express cause of action for failure to provide a GFE or HUD-1. Collins v. FMHA, 105 F. 3d 1366 (11th Cir. 1997); Marshall-Ford v. Wells Fargo, 2009 U.S. Dist. LEXIS 77795 (E.D. Mich. 2009); Morrison v. Brookstone Mortgage Co., 415 F. supp. 2d 801 (S.D. Ohio 2005); and Johnson v. Equity Title & Escrow Co., 476 F. Supp. 2d 873 (W.D. Tenn. 2002);
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Liability for Improper Disclosures

Even with no private right of action for borrowers Regulators enforce RESPA disclosure requirements. Borrowers have been able to incorporate their otherwise barred RESPA claims through state consumer protection laws. Pierce v. NovaStar Mortgage, Inc., 2007 U.S. Dist. LEXIS 18336 (W.D. Wash. March 15, 2007). Settlement $3.3 million to consumers; $1.8 million in attorneys fees. Violation of RESPA and the Washington consumer Loan Act. GFE must disclose YSP. GFE either did not mention YSPs or provided a range of costs (starting with 0%) and a dollar amount of $0 or no actual percentage or dollar amount.
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RESPA Qualified Written Requests (QWR)

RESPA Section 6 (12 U.S.C. 2605) Requires disclosure of transfer of loan servicing within prescribed time periods [not more than 15 days after the effective date of the transfer. Imposes duties on servicer upon receipt of a Qualified Written Request. Acknowledge receipt within 20 days Take Action within 60 days A borrower may recover statutory and actual damages if the loan servicer fails to take the necessary steps. 12 U.S.C. 2605

 NOTE: Canned QWRs are proliferating. RESPA defines QWR as including a statement of the reasons for the borrowers belief that the account is in error. Allowing borrowers to allege error without justification would encourage frivolous requests for documents at great expense. Pettie v. Saxon Mortgage, 2009 U.S. Dist. LEXIS 41496 (W.D. Wash. 2009).

RESPA Recent Developments in Section 8 Litigation and Enforcement

Section 8 Section 8(a) No person can give or receive a thing of value for a referral Section 8(b) Deals with fee splitting, mark-ups and overcharges Section 8 (c)- Exceptions from Section 8 violations

Penalties Criminal Civil Standing Plaintiff does not have to suffer an overcharge personally. Edwards v. First American Corp., 517 F. Supp.2d 1199 (C.D. Cal. Oct. 11, 2007). Plaintiff does not have to receive an injury-in-fact. Carter v. Welles10 Bowen Realty, Inc., et al, 2009 WL 151319 (6th Cir. January 23, 2009). Actual damages (including emotional distress). Carter v. Countrywide Home Loans, 2009 WL 1010851 (E.D. Va. Apr. 14, 2009). Amount equal to three times the amount of the charge paid for the service. Split over whether treble is 3 X total payment or 3 X resultant overcharge. Alston v. Countrywide, 585 f 3RD 753 (3RD. Cir. 2009). Fine up to $10,000 Imprisonment up to one year

RESPA 8(a) Recent Pitfalls

8(a) Prohibits kickbacks or referral fees.
Paying for marketing expenses Ohio class action - $900,000 settlement Sham service and rental agreements Connecticut - $700,000 settlement HUD - $150,000 settlement Gifts/Promotions Pay higher commissions HUD - $250,000 settlement Opportunity to win luxury car/vacations HUD - $48,000 settlement HUD - $71,500 settlement Tickets to sporting events and concerts HUD/FDIC - $150,000 settlement Printing, gifts, travel, and entertainment California Department of Insurance - $345,000 plus $20,000 in attorney fees

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RESPA 8(a) Recent Favorable Decisions for Lenders

Price v. Landsafe Credit, Inc. and Countrywide Home Loans, Inc., 2006 WL 3791391 (S.D. Ga. Dec. 22, 2006) Flat $35 credit report fee for credit reports Only paid when loans closed Not a violation of Section 8(a) Potential borrowers creditworthiness is a necessary overhead business expense Can pass expense to creditworthy borrowers $35 fee is reasonable Krupa v. Landsafe, Inc., 514 F. 3d 1153 (11th Cir., Jan. 22, 2008). Landsafes charge of $25 to Countrywide for each credit report, whether the loan closed or not was not a violation of Section 8(a) because there was no agreement for the referral of business. MERS registration fee is not a prohibited kickback. Knighton v. MERSCORP, 304 F. Appx 285 (5th Cir. 2008)

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Section 8(a) YSP

Yield Spread Premium (YSP) HUD YSP not per se violation of RESPA. Statement of Policy 2001-1, 60 Fed. Reg. 53052 (Oct. 18, 2001) and Statement of Policy 1991-1 64 Fed. Reg. 10080 (March 1, 1999). 2 step test to determine if YSP violates RESPA Were services actually performed? (SOP Core Services) Was total broker compensation reasonable in light of services performed? CULPEPPER IV Culpepper v. Irwin Mortgage Corp., 491 F.3d 1260 (11th Cir. 2007) Payment of YSP for delivering above par rate loans did not violate Section 8(a) No evidence that YSPs paid in connection with the loans were unreasonable 13 Decertified class

8(A) Post Culpepper

Pena v. Freedom Mortgage Team, Inc., 2007 U.S. Dist. LEXIS 79817 (N.D. Ill. 2007) holding that Culpepper does not insulate Defendants and looks at YSP reasonableness on a case by case basis. Yu v. Utah Financial, Inc., 2008 WL 3381485 (N.D. Cal., 2008) denying motion to dismiss claim THAT YSPs were excessive kickbacks, where alleged that fees bore no relation to services performed. Stetler v. Greenpoint Mortgage Funding, 2008 WL 192405 (E.D. Cal. 2008) dismissing action because YSP was payment for numerous services actually rendered. YSP cases turn on individualized assessment of reasonableness., and are not appropriate for class treatment. Busby v. JRHBW Realty, 513 F. 3d 1314 (11th 14 Cir. 2008).

Section 8 Core Services Concept

SOP: 64 Fed. Reg.10080
Taking info and filling application, Analyzing income/debtprequalifying Educating & advising Ordering VOE/VODS Order loan verifications Order appraisals Order inspections Assist w/credit problems Contact w/borrower, Realtor, etc. Order legal docs Flood Zone Issues Participate in loan closing

Perform at least 5
items to be paid for originating
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Fee Splitting Under RESPA 8(b)

Section 8(b) Deals with fee splitting, mark-ups, overcharges Section 8(b) RESPA prohibits a person from giving or accepting a share of a fee in connection with a settlement service other than for services actually performed. Section 8(b) is an anti-kickback provision, and does not apply to every overcharge for settlement service. Rather, it applies only when there is a referral fee or when a portion or percentage of the overcharge is kicked back to or split with a third party. Section 8(b) Covers fees charged in exchange for no services whatsoever.

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8(b) Fee Splits

Fee Split When 2 or more parties split a fee, which for any portion of services is unearned. HUDs position Illegal under RESPA. 2001 Statement of Policy Courts Position Agree with HUD

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RESPA-8(b) Markups
Markups When one settlement provider marks-up the cost of the services performed or goods provided by another settlement services provider without providing additional, actual, necessary, and distinct settlement services, goods, or facilities to justify the additional charge. HUDs position Illegal under RESPA. 2001 Statement Policy. Courts Positions Split Not actionable (4th, 7th, 8th Circuits) Actionable (2nd, 3rd, 11th Circuits)

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RESPA-8(b) Overcharges Work Performed

Overcharge with work performed One settlement provider charges the consumer a fee where the fee is in excess of the reasonable value of goods or facilities provided or the services actually performed. Ex: Charging $250 for a processing fee that was only worth $50 HUDs Position Illegal under RESPA. 2001 Settlement of Policy. Courts Position Have not agreed with HUD, stating that RESPA is not a price control statute.

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RESPA-8(b) Overcharges No Work

Overcharge With No Work Performed One service provider charges a borrower a fee for no services, or for which nominal or duplicative work is performed. HUDs Position Illegal under RESPA. 2001 Statement of Policy Courts Positions - The majority of courts have agreed with HUD Busby v. JRHBW Realty, Inc., 2009 U.S. Dist. LEXIS 41720 (N.D. Ala. 2009). Borrower was charged an Administrative Brokerage Commission Fee (ABC Fee) of $149 when services were not performed. Court found fee was for overhead, which did not benefit the borrower. Judgment entered in favor of class members.
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RESPA- Statute of Limitations

For violations relating to servicing of mortgage loans, administration of escrow accounts, and QWRs, the action must be brought within three years of the occurrence of the violation. Violations of 8(a) and 8(b) must be brought within one year of the violation.

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Tolling of Statute of Limitations

Borrowers allege the statute of limitations are subject to equitable tolling. Borrower usually alleges defendant has fraudulently concealed the RESPA disclosures. Courts perform a case by case basis analysis and narrowly apply. Usually dismissed because Borrower must show it exercised due diligence.

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FAIR LENDING ENFORCEMENT AND LITIGATION

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Fair Lending Laws

Equal Credit Opportunity Act (ECOA) 15 U.S.C. 1691-1691f. Prohibits creditors from discriminating against credit applicants on the basis or race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or exercise or rights under the Consumer Credit Protection Act. ECOAs implementing regulation is Regulation B of the Board of Governors of the Federal Reserve System. 12 C.F.R. part 202. Fair Housing Act (FHA) 42 U.S.C. 3601, et seq. Prohibits discrimination in residential credit transactions based on race, color, national origin, religion, sex, familial status, or disability. FHAs implementing regulation is the Fair Housing Act Regulations of the Department of Housing and Urban Development. 24 C.F.R. Part 100 24

Equal Credit Opportunity Act (ECOA) and Regulation B

Notice Requirement A creditor must notify an applicant of the action taken within: 30 days after receiving a completed application of the creditors approval, counteroffer or adverse action on the application 30 days of taking adverse action on an incomplete application (unless it provides a notice of incompleteness) 90 days after notifying the applicant of a counteroffer and the applicant does not accept

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Equal Credit Opportunity Act 9ecoa and Regulation B

Prohibits discrimination on a prohibited basis A creditor may not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction Includes underwriting, terms of credit and servicing A creditor may not discourage applicants or prospective applicants from making or pursuing an application Includes advertising and marketing Creditors must follow rules regarding requests for information and evaluation of applications

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 New FDIC FOCUS ON ECOA: Credit Report Fees (Cal. Bankers Association - March 1, 2010) FDIC position All joint applicants entitled to credit report
parity, not just couples married, unmarried, domestic partners, or otherwise

Privacy concerns i.e., unrelated business partners FDIC position - Co-applicants do not have privacy expectation among themselves No written guidance from FDIC on its position

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Federal Enforcement

Banking regulators are facing increasing pressure from all fronts to act, are anxious to demonstrate responsiveness to such concerns, and are pursuing leads they may not have in the past. Examination themes: HMDA pricing inquiries becoming routine and permanent; Lenders allowing discretion in underwriting and/or pricing loans present the easiest target (in part because the prevailing view is loan officers/brokers cannot be trusted to exercise discretion); Statistical analyses drive inquiries; With tightening of credit market, likely return to concerns about credit availability, not just pricing

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Federal Enforcement of Fair Lending

OVERVIEW:
DOJ, FTC, and bank regulatory agencies enforce fair lending. DOJ In November 2008, the United States settled with a bank for $185,000 to compensate African American borrowers who were charged higher interest rates on manufactured home loans than white borrowers. Bank must also implement procedures to prevent discrimination. In December 2008, the FTC settled within Gateway Funding, Inc. Gateway gave loan officers discretion to charge additional fees without oversight or monitoring of potentially discriminatory practices. FTC found that the African American and Hispanics were charged more. Judgment of $2.9 million (majority suspended due to inability to pay). In April 2009, the FDIC entered a cease and desist order requiring a bank to pay $950,000 in restitution, $50,000 in legal fees, and implement an extensive monitoring system, compliance policies and training due to a finding of a pattern and practice of discrimination under ECOA and FHA.
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FTC

FDIC

Federal Enforcement

March 4, 2010

AIG Federal Savings Bank and Wilmington Finance settled claim that they discriminated against black borrowers by allowing wholesale mortgage brokers to charge high direct broker fees to black borrowers First time DOJ has held lenders responsible for alleged discriminatory activities of affiliated brokers.

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State Enforcement of Fair Lending

States also enforce fair lending laws. In 2006, Attorney General of New York settled with Countrywide in which Countrywide agreed to invest $3 million dollars in a consumer education program, compensate overcharged minority borrowers and have an independent monitor. AG alleged Countrywides loan policies and practices discriminated on the basis of race and national origin and required African American and Hispanic borrowers to pay more for retail and wholesale loan products.

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Discretionary pricing Challenges

Plaintiffs have brought class actions under FHA and ECOA challenging lenders discretionary pricing models that have resulted in higher rates for African American and Hispanic borrowers. Lopez, et al. v. Long Beach Mortgage, et. al., 1:08CV-10279 (D.C. Mass. 2008). Claims discretionary pricing policy authorizes unchecked, subjective surcharge of additional points and fees to an otherwise objective riskbased pricing rate. Cites HMDA data. Numerous single actions Courts focus on claimants use of statistical data as well as corporate policies to show disparate impact. 32

State Enforcement Discretionary Pricing

NYAG Settlement with Consumer One and HCI Mortgage (January 2009) Following an investigation of two mortgage brokerage companies, the NYAG alleged that Black and Latino borrowers were charged higher fees than similarlysituated White borrowers. In January 2009, the Parties entered into a settlement that requires Consumer One and HCI to: Pay $665,000 in restitution; Adopt a standard fee schedule that will be disclosed to borrowers and must be followed unless exceptional circumstances exist; Internally monitor and analyze fees to ensure fair and equal treatment for Black and Latino borrowers; and, Provide detailed compliance reports to the AGs office.
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Fair Lending Litigation

NAACP has filed suits against more than a dozen lenders alleging African American home buyers were more likely to be saddled with alternative, nonprime loans than white borrowers with comparable credit scores and income. See NAACP v. Wells Fargo, Ameriquest, et al.

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City Enforcement of Fair Lending

Baltimore Baltimore filed FHA action in 2008 against Wells Fargo alleging the lender had targeted African American neighborhoods for predatory residential mortgage loans with discriminatory terms. Baltimore is claiming that the lenders practices have resulted in high foreclosure rates and vacant properties, which has cost Baltimore millions of dollars in lost tax revenue, police costs, administrative costs and social programs. Complaint dismissed as too broad, but recently amended to identify specific expenses incurred as a result of WF foreclosures (inspections, condemnations, and increased police and fire costs) Memphis April 7, 2010 City of Memphis v. Wells Fargo (W.D. Tenn.) (adds claim for violation of TN consumer Protection Laws).

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MORTGAGE SERVICING

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Enforcement Mortgage Servicing

Current economic crisis has elevated concern about propriety of servicing practices especially for loans in default. Foreclosure alternatives transition from a favor the investor does for the borrower into borrower right. Default fees, especially ability to identify and justify each servicing fee. Data integrity and effect on consumer communications, bankruptcy and foreclosure filings. Many standards for regulatory enforcement are unwritten and/or vague, giving regulators wide latitude in initiating investigations. Servicing remains a top enforcement priority for FTC. Although origination based claims have been primary focus, many complaints and enforcement actions now include allegations of improper servicing (payment misapplication, unauthorized fees, etc).
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Mortgage Servicing
Unfair and deceptive trade practices in connection with default-related activities (particularly modifications) likely to get increasing attention by federal and state regulators in the months ahead. Claims (lawsuits and administrative complaints) alleging discrimination in context of foreclosure avoidance efforts (modifications, short sales, DIL) escalating. Coordinated efforts across federal and state governments targeting loan modification fraud and foreclosure rescue scams

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Mindi Robinson Slaten & OConnor, PC 105 Tallapoosa Street, Suite 101 Montgomery, Alabama 36104 (334) 396-8882 [email protected]
Alabama, Florida, Georgia, Mississippi, South Carolina, Tennessee

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