Richard Horn
Legal PLLC

Consumer Finance Regulation Blog

Client Update – Potential CFPB Changes and Issues for 2017

December 20, 2016

Clients and Friends,

I wanted to write and share some of my thoughts on recent events affecting our industry, now that we’ve had some time to reflect on the election’s potential effects on the CFPB. Please download this Client Update that I wrote to summarize some possible changes to the CFPB’s structure and activities. I included a brief summary of the pertinent provisions of the proposed Financial CHOICE Act, which may provide a blueprint for legislation by the next Congress. I also addressed the CFPB’s Fall 2016 regulatory agenda, the CFPB’s recent enforcement actions against three reverse mortgage lenders for deceptive advertising, and the CFPB’s 2017 fair lending priorities.

Please let me know if you would like to discuss or have any questions.

Wishing you a wonderful holiday season. I look forward to working together in the new year.

DC Circuit PHH Decision

October 17, 2016

Clients and Friends,

The U.S. Court of Appeals for the D.C. Circuit issued its decision in PHH v. CFPB on October 11, 2016. The court, in a strongly worded opinion, held that the CFPB was wrong in its interpretation of RESPA, due process, and the applicable statute of limitations, calling the CFPB’s various arguments “absurd,” “nonsensical,” “strained,” “deeply unsettling,” and “alarming.” The court also called the CFPB’s lack of due process a violation of “Rule of Law 101.” Significantly, the court also held that the CFPB’s structure was unconstitutional, because it was an independent agency with a single director who could only be removed by the President for cause. The court allowed the CFPB to continue to operate as an “executive agency,” but held that going forward the President is able to remove the Director at will.

The court described the CFPB’s structure as a threat to individual liberties and likened the CFPB to a “wolf.” After the court’s strong words for the CFPB’s interpretations, the wolf should be limping away with its tail between its legs. But the CFPB will likely request an en banc review by the court, and the case most likely will ultimately be appealed to the Supreme Court by one of the parties. This is just the beginning, and whether this opinion will stand remains to be seen. It may not be time to start revising your marketing services agreements just yet.

It is worth noting one significant effect of this decision for current subjects of CFPB administrative enforcement actions or civil investigative demands. For those institutions, the court’s rejection of the CFPB’s argument that its administrative enforcement actions are not subject to any statute of limitations should warrant attention, as it could be raised to limit the actionable violations in such proceedings.

Another question is whether the CFPB will be more careful about the limits of its authority after this opinion. Remember that recently, in April 2016, the CFPB had one of its civil investigative demands issued to a college accreditation company rejected by the U.S. District Court for the District of Columbia, because it was outside the CFPB’s statutory authority. In that decision, the court stated that, “[a]lthough it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow head long into fields not clearly ceded to them by Congress.” Will the CFPB take this advice?

I have summarized the court’s opinion in a document for you, and provided some of my thoughts on the current and future effects of the decision. You can download the document here.

Please let me know if you have any questions, or if I can provide any assistance in understanding the repercussions of this opinion.

CFPB TRID Proposal Summary

August 11, 2016

Clients and Friends,

The CFPB issued its long-awaited proposed rule to amend TRID on July 29, 2016. The proposal was intended to “formalize guidance in the rule, and provide greater clarity and certainty.” The press release is available at: http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-updates-know-you-owe-mortgage-disclosure-rule

The proposal is available on the CFPB’s website at: http://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendments-federal-mortgage-disclosure-requirements-under-truth-lending-act-regulation-z/

As a general matter, this proposal addresses many of the difficult compliance issues in the rule. It does not, however, address major policy issues such as the disclosure of title insurance, cures, or liability. But it is apparent that the CFPB put a great deal of work into this proposal, and thoughtfully considered much of the input from the public regarding compliance with the rule. The CFPB also explained the proposed changes and its reasoning for the changes in the preamble in a clear and concise manner, which is very helpful. As with any proposed rule, there are issues that the public may want to comment on to provide further input, especially considering the detailed nature of the proposed changes. But the CFPB’s effort and the quality of its proposal should be commended.

Please click here to download my summary of the proposal along with some of my thoughts on a few of the issues in the proposal. I organized the summary by subject area. I hope this summary provides a helpful starting point for your review of the proposal. Please let me know if I can be of any assistance in understanding the proposal or preparing a comment letter for your organization.

CFPB Publishes LE and CD Annotated for TILA

May 12, 2016

Clients and Friends,

The CFPB announced in an email today that it has published on its website versions of the Loan Estimate (LE) and Closing Disclosure (CD) that are annotated with the sections of chapter 2 (Part B) of TILA that the CFPB says were “referenced in the Integrated Mortgage Disclosure final rule.” This is important information because, as you may already know, provisions of the rule that are implemented under authority in Part B of TILA will most likely be subject to civil liability under TILA section 130. In addition, the particular provisions of Part B that were relied on by the CFPB will determine whether statutory damages are available to plaintiffs.

Please note that the CFPB stated that these annotated forms contain the “citations…referenced in the preamble of the [final rule],” and the CFPB appears to have cited more than the statutory provisions that it expressly relied on in the preamble of the final rule. The CFPB appears to cite literally any statutory provision that was “referenced” in the preamble, which may indicate an intent to expand the statutory authority for the forms from what was relied on in the final rule, and to increase the potential liability under TRID.

For example, the annotated LE cites TILA section 128(b)(2)(C)(ii) for the Product disclosure under section 1026.37(a)(10), but the preamble for this provision only notes the existence of this statutory provision and does not include the provision in the statutory authority that was expressly relied on for the Product disclosure. This is also the case for the AIR Table under section 1026.37(j), for which the annotated LE cites TILA section 128(b)(2)(C)(ii), but the preamble only notes the existence of that provision and does not expressly rely on it as authority. In addition, significantly, page 2 of the annotated LE and CD both cite TILA section 128(a)(17) for the entirety of the Closing Cost Details.

For these reasons, these annotated disclosures will be important documents to review and understand to fully analyze the potential liability under TRID. For my clients, if I have already provided you with an analysis of the liability under TRID, please let me know if you would like to discuss updating it to reflect the CFPB’s annotated disclosures. For my other clients and friends, please let me know if you would like an analysis of the liability under TRID.

You can access the versions of the LE and CD at http://files.consumerfinance.gov/f/documents/201605_cfpb_loan-estimate-with-truth-in-lending-act-disclosure-citations.pdf and http://files.consumerfinance.gov/f/documents/201605_cfpb_closing-disclosure-with-truth-in-lending-act-disclosure-citations.pdf.

Please let me know if you have any questions.

VA Circular on TRID

April 18, 2016

Clients and Friends,

The Department of Veterans Affairs (VA) on April 11, 2016 issued Circular 26-16-11, in which the VA explains how it expects the Closing Disclosure (CD) under the TILA-RESPA Integrated Disclosure rule (TRID) to be itemized.

The Circular also discusses the allowable charges on VA loans, as set forth under 38 C.F.R. § 36.4313, including the 1% additional charge. The Circular states that the CD must be completed accurately for the VA to determine that a loan complied with the fee restrictions.

The Circular presents two examples of a completed CD, which appear to show that VA requires lender and seller credits to be itemized to count against the 1% additional charge allowed. The first completed CD contains what it appears the VA intended to be a general Lender Credit, for which the VA states that, “the charges were still made to the borrower and the lender’s credit was not able to be itemized.” Please note that in its example, the VA placed the general Lender Credit under the “Paid by Others” column. However, this is not the correct placement under the TRID rule. Under the TRID rule, a general Lender Credit is disclosed under § 1026.38(h)(3) and “designated borrower-paid at closing.”

The second completed CD contains “itemized credits in the Seller-Paid and Paid by Others columns rather than charging the Veteran.” The Circular appears to state that this complies with the 1% limit. The Circular states that additional itemization of credits is not required by the VA as long as the charges to the borrower do not exceed the 1% limit. However, please note that additional itemization of credits may be required under the TRID rule, if they are provided for specific charges under the terms of the legal obligation.

The Circular also states that the VA requires a final borrower-signed copy of the CD on all loans. The Circular can be accessed at: http://www.benefits.va.gov/HOMELOANS/documents/circulars/26_16_11.pdf.

Please let me know if you have any questions.

CFPB Webinar on TRID FAQs

April 18, 2016

Clients and Friends,

The Consumer Financial Protection Bureau (CFPB) conducted a webinar on April 12, 2016, in which it addressed frequently asked questions about the TILA-RESPA Integrated Disclosure rule (TRID). This was the first webinar since the effective date of TRID in which the CFPB answered general questions about the rule, and for that reason it was an important webinar. The CFPB did conduct a webinar about TRID in March 2016, but that webinar was focused only on construction lending issues.

This webinar provided some useful information, but it did not address all of the issues the industry has raised to the CFPB about the rule, such as the Black Hole, or the known issues with the Calculating Cash to Close table

A link to the archived recording of the webinar is available at: https://www.webcaster4.com/Webcast/Page/577/13784.

In addition, the CFPB posts links to the recordings of its TRID webinars, as well as an “index” of questions and answers from its webinars at this link: http://www.consumerfinance.gov/regulatory-implementation/tila-respa/

I’ve drafted a list of the questions, concise versions of the CFPB’s answers (including quotations as appropriate), and some of my thoughts on several of the CFPB’s answers. Please let me know if you’d like a copy.

CFPB on Construction Lending under TRID

March 1, 2016

Clients and Friends,

The Consumer Financial Protection Bureau (CFPB) conducted a webinar on March 1, 2016, in which it addressed questions about how to disclose construction loans under the TILA-RESPA Integrated Disclosure rule (TRID). This was the first webinar since the effective date of TRID and the first guidance from the CFPB specifically addressing construction lending since the rule was issued in November 2013.

The webinar provided basic guidance on how to complete the TRID disclosures for a construction-to-permanent transaction as two separate transactions, or as one single combined transaction. The CFPB did not present any sample disclosure forms. Instead, the CFPB described the regulatory requirements verbally.

The CFPB posts links to the recordings of its TRID webinars, as well as an “index” of questions and answers from its webinars at this link: http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/tila-respa-disclosure-rule//

I have drafted a list of the questions, concise versions of the CFPB’s answers (including quotations as appropriate), and some of my thoughts on several of the CFPB’s answers. Please let me know if you’d like a copy of this document.

CFPB Notice on Prepaid Property Taxes

February 9, 2016

Clients and Friends,

I am writing to inform you that the CFPB will be publishing a Federal Register notice tomorrow, February 10, 2016, to confirm that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are not subject to the 0% tolerance category.

Some in the industry have taken a conservative view that these prepaid charges are subject to the 0% category, because 0% is the default category and the rule did not specifically place them in the 10% or “no tolerance” categories under section 1026.19(e)(3)(ii) or (iii). In support, they also cited a sentence in the preamble of the December 2013 Final Rule that said these charges are subject to tolerances. But the CFPB has stated in informal guidance that prepaid property taxes are subject to the “no tolerance” category, because they are charges “not required by the creditor” under 1026.19(e)(iii)(E). And I have also mentioned to some of you that the sentence of the preamble was missing a “not” and was actually intended to state that these charges are not subject to tolerances.

In this Federal Register notice, the CFPB confirmed its informal guidance and corrects this sentence of the preamble. Specifically, the CFPB’s notice states that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are considered “charges paid for third-party services not required by the creditor” under 1026.19(e)(3)(iii)(E). Accordingly, they are not subject to the 0% or 10% category. And the notice acknowledges that the sentence in the December 2013 Final Rule’s preamble that said such charges “are subject to tolerances” was missing a “not” due to a typographical error. The CFPB’s notice formally corrects this sentence of the preamble to read “are not subject to tolerances.”

You can access the pre-publication version of this notice

In this Federal Register notice, the CFPB confirmed its informal guidance and corrects this sentence of the preamble. Specifically, the CFPB’s notice states that prepaid property taxes, homeowner’s association dues, condominium fees, and cooperative fees are considered “charges paid for third-party services not required by the creditor” under 1026.19(e)(3)(iii)(E). Accordingly, they are not subject to the 0% or 10% category. And the notice acknowledges that the sentence in the December 2013 Final Rule’s preamble that said such charges “are subject to tolerances” was missing a “not” due to a typographical error. The CFPB’s notice formally corrects this sentence of the preamble to read “are not subject to tolerances.”

You can access the pre-publication version of this notice here. It will be published and effective tomorrow, February 10, 2016.

Also, I want to let you know that the CFPB announced a webinar on disclosing construction loans under TRID, which will be on March 1 at 2pm Eastern. Here’s the link to register.

Please let me know if you have any questions.

CFPB Construction Loan TRID Fact Sheet

January 13, 2016

Clients and Friends,

I am writing to let you know that yesterday the CFPB issued a “fact sheet” regarding construction loans under TRID. You can find it here: http://files.consumerfinance.gov/f/201601_cfpb_know-before-you-owe-mortgage-disclosures-and-construction-loans.pdf

This fact sheet does not provide any new information regarding completion of the TRID disclosures for construction loans. It restates the applicability of TRID to construction loans, and the provisions of TRID and existing Regulation Z that are particular to construction loans. The only interesting part is this line at the end:

“The Bureau is considering additional guidance to facilitate compliance with the Know Before You Owe mortgage disclosure rule, including possibly a webinar on construction loan disclosures.”

I believe it is likely the CFPB will issue additional construction loan guidance in a webinar at some point in the future, because it is unlikely they would make such a statement without a plan in place to provide this guidance. Unfortunately, they did not address the timeframe for this guidance in the fact sheet. And the fact sheet does not state whether this guidance will include additional sample disclosures, which has been one of the major requests of industry.

Although there is confusion about completing the TRID disclosures for construction loans, it is certainly possible to disclose construction and construction-to-permanent transactions under TRID. I have assisted a number of lenders with this already. If you would like any assistance, please let me know.

The CFPB’s Letter about TRID Liability

January 4, 2016

Clients and Friends,

Happy New Year!  I hope you had a great holiday.  This holiday break, through the hard work of our friends at MBA, we received a gift from the CFPB.  In response to a letter from the MBA, on December 29, 2015, the CFPB provided a letter to the MBA that outlines the CFPB’s beliefs regarding cures and liability under TRID.  The letter also commits to engaging in a “robust dialogue” with the MBA and its members.

This letter may be very helpful to the industry, including the secondary market.  However, I wanted to share several concerns that I have with you, which relate to the informal nature of the letter, as well as its potentially inaccurate or misleading statements regarding cures and liability.  I’ve summarized the letter and my concerns below.

Summary of the Letter.  The CFPB’s letter generally provides the industry, especially the secondary market, with its assurances that liability under TRID is limited for minor, technical violations, and that lenders “in many cases” can cure violations on the Loan Estimate using the Closing Disclosure.  The CFPB made the following points in its letter:

  1. The CFPB and other regulators will be focused on corrective and diagnostic, rather than punitive, examinations in the first few months.
  2. The GSEs and FHA will not conduct routine post-purchase file reviews for technical compliance, and not exercise contractual remedies for noncompliance with TRID for a period of time.
  3. Statutory damages, “consistent with existing Truth in Lending Act (TILA) principles,” would be assessed based on the final Closing Disclosure and not on the Loan Estimate, “meaning that a corrected closing disclosure could, in many cases, forestall any such private liability.”
  4. Recognizes the general cure provision under TILA section 130(b) and the “exception from liability” under TILA section 130(c) for unintentional, bona fide errors.
  5. There is no general assignee liability under TILA unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.
  6. TILA limits statutory damages apply to a closed set of disclosures under section 130(a).
  7. Formatting errors “and the like” are “unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure” of one of the disclosures that gives rise to statutory damages.
  8. The closed set of disclosures that give rise to statutory damages “do not include either the RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and the Total Interest Percentage.”
  9. The CFPB believes that the risk of private liability to investors for “good-faith formatting errors and the like” is “negligible.”
  10. The CFPB believes that if investors reject loans for formatting and other minor errors, they would be rejecting loans for reasons other than the potential liability under TRID.  The CFPB believes this may be an “overreaction” and its “assessment is that these concerns will dissipate as the industry gains experience” with the rule.

Concerns Regarding the Informal Format of the Letter.  The CFPB issued these statements regarding cures and liability under TRID in the form of an informal letter.  While this letter may weigh on the side of being helpful, it is uncertain how much deference, if any, a court would give to such an informal letter.  Even Director Cordray in a recent administrative proceeding described a letter issued by HUD regarding RESPA that HUD similarly did not publish in the Federal Register as “not in such a form as to be binding on any adjudicator.”  It would have been more helpful if the CFPB issued these statements in the form of an interpretive rule or a formal policy statement published in the Federal Register, or better yet, as amendments to the rule or its commentary.

Concerns Regarding Liability for the Loan Estimate.  The CFPB staked out a position that statutory damages under TILA section 130(a) would not apply to the Loan Estimate, which it says is based on “existing TILA principles.”  However, there are a few problems with this statement.

First, the CFPB does not provide any analysis backing up its conclusion.  Determining which liability under TILA applies is the purview of the courts.  When commenters asked the CFPB to specify which statutory liability applied to different provisions under TRID, the CFPB responded that courts can use the statutory authority described in the section-by-section analysis to determine liability.  In addition, there is some case law supporting the opposite position: that liability, including statutory damages, can apply to the initial TILA disclosures.

Second, previously under Regulation Z, the initial TIL was only an early version of the final TIL.  However, under TRID, the LE requirements are separate and distinct disclosure requirements from the CD, and contain several different disclosures, such as the In 5 Years disclosure.  And TILA appears to look to the CFPB’s regulations for the early disclosures, requiring them to be made “in accordance with regulations of the Bureau.”  Also, the Dodd-Frank Act added the integrated disclosure requirement to TILA.  Although the CFPB points to “existing TILA principles,” it is uncertain how courts will apply such TILA principles to the new disclosure requirements.  In addition, considering the CFPB’s stated goal for the Loan Estimate to aid consumer shopping, courts may find that Loan Estimate violations cannot be cured by a later Closing Disclosure, because the harm at the shopping stage cannot be cured by a later accurate disclosure.

In sum, it is uncertain how much a court would rely on the CFPB’s conclusory statement in the letter.  Courts have decades of their own precedent to rely on, and the preamble of the rule essentially directs courts to use the section-by-section analysis to come to a conclusion regarding liability.  And with entirely new regulatory requirements, it is uncertain how courts will assign statutory damages.  In light of this, arguably, it would have been more helpful if the CFPB, rather than providing a conclusory statement of uncertain value regarding how courts may apply liability under TILA, clarified how it believes lenders can cure violations of the Loan Estimate requirements in practice under TILA section 130(b).

Concerns Regarding Statutory Damages for New Dodd-Frank Act Disclosures.  Although the CFPB alleges in its letter that statutory damages will not apply to the new Dodd-Frank Act disclosures, this is not a completely accurate statement.  TILA limits the disclosures under TILA section 128 that are subject to statutory damages.  But some courts have interpreted this limitation not to apply to disclosure requirements under other statutory sections of TILA.  And the TRID rule contains new Dodd-Frank Act disclosures that were added to other sections of TILA, such as the Liability after Foreclosure disclosure and the Escrow Account disclosure.  While the CFPB refers to the Total Cash to Close and the Total Interest Percentage as examples, which were added by the Dodd-Frank Act to TILA section 128, it fails to account for the Dodd-Frank Act disclosures that were added to other sections of TILA.  Such disclosures may very well be subject to statutory liability.

Concerns Regarding Confusing Statements.  The CFPB’s letter does not provide the most accurate descriptions of TILA civil liability.  For example, the CFPB stated that formatting errors are “unlikely to give rise to private liability” unless it interferes with the clear and conspicuous disclosure of one of the disclosures that gives rise to statutory damages.  However, the CFPB’s statements may be misleading.  If statutory damages do not apply to a violation, then the borrower can still sue for his or her “actual damages” and attorney fees and costs.   The CFPB appears to be making an argument that if statutory damages do not apply, it is unlikely that a lawsuit would be successful for “actual damages.”  However, this ignores the fact that such a violation could still be the subject a lawsuit for “actual damages,” especially with untested new disclosure requirements, which would result in costs to defend such actions.

In addition, the CFPB described the bona fide error defense under TILA section 130(c) as an “exception from liability.”  However, this provision is best described as a defense to liability.  And this is not an easy defense to make in court, as it requires a lender to show that the error must be unintentional and clerical in nature, and that the lender regularly maintained procedures designed to avoid and prevent the error.  It is slightly misleading to characterize this as an exception, rather than a defense that must be shown in court.

Further, the CFPB describes the statutory damages provision throughout the letter as “statutory and class action damages.”  However, this is not an entirely accurate description of statutory damages under TILA, because the statutory damages provision under TILA section 130(a) provides for statutory damages for both individual and class action lawsuits.  It does not itself limit class action lawsuits to those provisions that are subject to statutory damages.

Conclusion.  It may be helpful to have this letter, and it definitely gives an insight into how the CFPB currently views liability under TRID.  For example, it may be helpful in administrative proceedings or regulatory examinations to have this letter, because it essentially describes formatting and other minor errors as immaterial.  In addition, there is the chance that courts may rely on the letter when analyzing the new regulatory disclosure regime.

But unfortunately the letter makes uncertain conclusions about how courts may determine liability under TILA without providing any analysis or acknowledgment of TRID’s new regulatory structure.  In addition, the letter is in a format that may not receive much deference, if any, from the courts, or the CFPB in the future.  In addition, there are potentially inaccurate and misleading statements in the letter of which you should be aware.  In spite of these shortcomings, this letter is a great first step in what will hopefully be a “robust dialogue” with the CFPB.  Hopefully, the continuing dialogue with MBA and other trade associations will convince the CFPB to provide such a statement in a formal document upon which industry can rely with greater certainty.

Please let me know if have any questions, or if you’d like any assistance with understanding the potential liability and cures available under TRID.