Consumers in Foreclosure: Kick’em when they're Down!

On July 23, 2014, the Consumer Financial Protection Bureau (“Bureau”) and the Federal Trade Commission (“FTC”) jointly issued an announcement, entitled “CFPB, FTC and States Announce Sweep Against Foreclosure Relief Scammers” (“Announcement”).[i]

It seems that the perps (aka “perpetrators”) are out in full force, using deception and false promises to “collect more than $25 million in illegal fees from distressed homeowners.”[ii]

The Bureau and the FTC were joined, as well, by 15 states (collectively, the “agencies”), letting the world know about their collective “sweep against foreclosure relief scammers that used deceptive marketing tactics to rip off distressed homeowners across the country.” The Bureau is filing three lawsuits against the perps, those companies and individuals that allegedly collected more than $25 million in illegal advance fees for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages. The CFPB seeks compensation for victims, civil fines, and injunctions against the scammers. The FTC is filing 6 lawsuits of their own, and the states are taking 32 actions.

The first lawsuit names Clausen & Cobb Management Company and its owners Alfred Clausen and Joshua Cobb, as well as Stephen Siringoringo and his Siringoringo Law Firm. The second lawsuit is against The Mortgage Law Group, LLP, the Consumer First Legal Group, LLC, and attorneys Thomas Macey, Jeffrey Aleman, Jason Searns, and Harold Stafford. The third lawsuit is against the Hoffman Law Group, its operators, Michael Harper, Benn Wilcox, and attorney Marc Hoffman, and its affiliated companies, Nationwide Management Solutions, Legal Intake Solutions, File Intake Solutions, and BM Marketing Group.

Here’s the allegation, in brief: the scammers used deceptive marketing to persuade thousands of consumers to pay millions in illegal, upfront fees for promised mortgage modifications. Each of the scammers was a law firm or was associated with one. It is further alleged that the defendants disguised their “false promises of foreclosure relief for struggling homeowners with claims that they were performing legal work.”[iii] The plaintiffs assert that these tactics are used by foreclosure relief scams to attract victims, add credibility to their schemes, or exploit certain legal exemptions for the practice of law.

The applicable Regulation that is cited is Regulation O, previously known as the Mortgage Assistance Relief Services (MARS) Rule. The FTC actually provides a guide on this rule, called “Mortgage Assistance Relief Services Rule: A Compliance Guide for Business” (“Guide”).[iv] Generally, this Regulation bans mortgage assistance relief service providers from requesting or receiving payment from consumers for mortgage modifications before a consumer has signed a mortgage modification agreement from their lender. The Regulation also prohibits deceptive statements and requires certain disclosures when companies market mortgage assistance relief services.

Some highlights of the Guide are worth noting: 

• It's illegal to charge upfront fees.

The foreclosure relief firm can't collect money from a customer unless it delivers – and the customer agrees to – a written offer of mortgage relief from the customer's lender or servicer.

• The foreclosure relief firm must clearly and prominently disclose certain information before it signs people up for your services.

It must tell customers upfront key information about its services, including:

o   the total cost,

o   that they can stop using the firm’s services at any time,

o   that the firm is not associated with the government or their lender, and

o   that their lender may not agree to change the terms of their mortgage.

• If the firm advises someone not to pay his or her mortgage, it must clearly and prominently disclose the negative consequences that could result.

It must warn customers that failure to pay could result in the loss of their home or damage to their credit rating.

Webinar: New Year, New Rules

Brokers Compliance Group is the Exclusive Compliance Provider of the National Association of Mortgage Brokers (NAMB) and an affiliate of Lenders Compliance Group.

In cooperation with NAMB, we will be providing a quarterly webinar series in 2014.

Each webinar will be devoted to an intense review of important regulatory compliance matters.

• If you are a client of the Lenders Compliance Group of companies, you are entitled to register for FREE.
• Each attendee must individually register.
• NAMB members receive special pricing.
• Non-members of NAMB and non-clients of ours may also register for a small fee.

Our first webinar in the series will be presented on January 30, 2014, at 2PM-EST. Because space is filling up quickly, due to announcements by NAMB and media organizations, we suggest you register as soon as possible.

We are pleased to offer this webinar to our valued clients and colleagues!

Regards,

Jonathan Foxx
President & Managing Director

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WEBINAR OVERVIEW

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DESCRIPTION

New Year, New Rules - Understanding and Implementing

Thursday, January 30, 2014 at 2PM-EST

Webinar Topics:

• How do the Ability-to-Repay (ATR) requirements affect my business?

• Qualified Mortgage (QM) and the inconsistent impact on lenders, brokers, and mortgage loan originators

• Obstacles and opportunities in Loan Officer Compensation amendments

• Lending in the new HOEPA requirements

• Appraisals: Latest rules affecting ECOA and Higher-Priced Mortgage Loans

In this 90-minute session, we'll discuss the regulatory compliance requirements that you need to implement right away.

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The Hedgehog and the Fox: A Regulatory Parable

The 7^th century BCE Greek lyric poet, Archilochus, observed: "the fox knows many things, but the hedgehog knows one big thing.”[i] Twenty-two centuries later, Erasmus transliterated Archilochus’s dictum by precisely rendering it into the Latin aphorism: “multa novit vulpes, verum echinus unum magnum.”[ii] When it comes to these two ways of thinking and acting, things didn’t change much between the 7^th century BCE and the 16^th century CE, when Erasmus penned his elucidation.

Isaiah Berlin, the British political philosopher, whose life span stretched nearly the whole 20^th century,[iii] wrote a well-known essay in 1953, inspired by Archilochus’s apothegm. It was entitled “The Hedgehog and the Fox: An Essay on Tolstoy's View of History.”[iv]

Of Berlin’s essay, Arnold Toynbee, one of the great historians of our time, wrote:

“This fragment of verse by the Greek poet Archilochus describes the central thesis of Isaiah Berlin's masterly essay on Tolstoy, in which he underlines a fundamental distinction between those people (foxes) who are fascinated by the infinite variety of things and those (hedgehogs) who relate everything to a central, all embracing system.”[v]

Since its inception, it seemed clear to me that the Consumer Financial Protection Bureau (the “Bureau”) is a hedgehog. It tends to view the world through the lens of a single defining idea: consumer financial protection. In accordance with this idea, the Bureau exercises this vision through a single, predominant, and coherent framework of regulations. As a hedgehog, the Bureau stays focused on this one foundational principle and repeatedly, unvaryingly, and rigidly seeks to implement that overriding proposition by applying the same methods and solutions, usually to the exclusion of other possible remedies.

This predilection is not simply a matter of judgment or style. Hedgehogs actually have one grand theory which they seek to extend into many domains, furthering their rule through a fervent belief in the guiding principle. They express their views with confidence; assurance; coolness; obstinacy; unrelenting drive; generally rigid adherence to an impliable mission; unwavering obedience and devotion to a regnant objective; a proclivity to roll results up into an aggregate value; and, a tendency to express themselves with such idiomatic phrases as “mission critical,” “the ends justify the means,” “by and large,” “ball-park figure,” “jack-of-all-trades,” “grand strategy,” “seeing the larger picture,” and “the system is the solution.” Usually, hedgehogs have a unique vision that gives rise to the ability to notice complex circumstances and discern the underlying patterns. In effect, their reach exceeds their grasp. Examples of hedgehogs are Plato, Dante, Proust and Nietzsche.

Residential lenders and originators (the “RMLOs”) are, as a group, foxes - they draw on a wide variety of experiences and do not believe for a second that the world can be boiled down to a single idea, evinced through an all-embracing framework, howsoever cogent it appears to be.

Foxes are skeptical about grand theories. They are constrained in their forecasts, and adaptive to actual events. They tend to be more accurate in their predictions than hedgehogs, since they are more agile in assigning probabilities to their expectations. While hedgehogs see the larger picture, thereby missing opportunities, foxes notice each and every pixel contributing to it, and thus quickly find opportunities. Because the fox is acutely aware of each part of the whole, it devises complex strategies to gain an advantage on the hedgehog. Often, it succeeds in its plans due to this advantage.

The kinds of idiomatic expressions that foxes use are “zero in on something,” “devil's in the details,” “under construction,” “mixed feelings,” “barking up the wrong tree,” “at this stage,” “first in class”, “trying something new,” and “let’s get another pair of eyes on this matter.” Foxes are centrifugal: they pursue divergent ends and usually possess a sense of reality, which keeps them from designing a logistical framework that purports to contain all possibilities. They instinctively know that complexity does not conduce to a unitary structure. Although foxes may have a broad vision and much agility in complex interactions, often their grasp exceeds their reach. Examples of foxes are Montaigne, Balzac, Goethe and Shakespeare.

Foxes pursue many ends at the same time, with much energy and cunning. They see the world in all its complexity. Hedgehogs simplify a complex world into a basic principle or concept that unifies and guides everything. Foxes tend to be scattered, diffused, and inconsistent. For hedgehogs, the world is reductive; that is, all challenges and dilemmas are reduced to simple hedgehog ideas, and anything that does not correlate to the hedgehog idea is without relevance. Hedgehogs see what is essential and ignore the rest.

Generally, the fox’s style is often deprived of rigorous models, specific goals, and global metrics. Foxes learn incrementally, over many iterations of experience. The foxy RMLO has a succinct advantage in swaying the hedgehog Bureau, because it nimbly responds to new information, constantly reconfiguring its market knowledge in reaction to changing circumstances. Such vital information leads to greater performance and the ability to provide solutions that open up new ways for the Bureau to fine tune its single overarching vision.

The Bureau has set compliance effective dates in January 2014 for many new rules that will affect RMLOs. As these rules go into effect, we enter the New Year noting a rather obvious example of the hedgehog’s vision and the fox’s hastening to fulfill it. Their relationship is bound by the unwavering path of the Bureau and the serpentine path of the RMLO. The Bureau’s grand vision presents a broad plan of action that must be implemented. In complying with the Bureau’s rules, the RMLO must bestir itself to be particularly attuned to working with the minutiae of details that are a part of the practical experience of actually originating and servicing residential mortgage loans.

In 2014, here are three questions to keep in mind about the relationship between the Bureau and the RMLO:

1) How prepared is your financial institution to comply with the Bureau’s expectations?

2) Are you ready to implement the Bureau’s complex requirements?

3) Does your company act like the visionary hedgehog or the nimble fox?

Foxes are cunning and have the advantage of knowing how reality works, poking holes in the hedgehog’s grand scheme of things, even as the many spindled hedgehog rolls into a big bulky ball. But beware of that ball! The hedgehog and the fox have learned never to underestimate each other. Although the fox is clever, swift, skilled in action, and knows many tricks, the hedgehog knows one big decisive trick: it can roll itself into a ball of sharp and painful spikes! 

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Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Brokers Compliance Group

National Mortgage Professional Magazine - December 2013

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[i] Archilochos (c. 680–c. 645 BC) was a Greek lyric poet from the island of Paros in the Archaic period.

[ii] Adagia, ("Erasmus") Desiderius Erasmus Roterodamus (October 27, 1466-July 12, 1536), Paris, 1500, from Robert Bland, Proverbs, Chiefly Taken from the Adagia of Erasmus, with Explanations; and Further Illustrated by Corresponding Examples from the Spanish, Italian, French & English Languages, Volumes 1-2, London, 1814

[iii] Sir Isaiah Berlin, (June 6, 1909-November 5, 1997), British social and political theorist, philosopher and historian of ideas.

[iv] Berlin, Isaiah, The Hedgehog and the Fox: An Essay on Tolstoy's View of History, Weidenfeld & Nicolson, London, 1953.

[v] Idem

The Mini-Correspondent Channel: Pros and Cons

Several years ago, our firm, Lenders Compliance Group, provided unique guidance to the mortgage division of a bank.* The bank wished to build a special origination platform for its mortgage brokers. At that time, the prevailing regulations required disclosure of the Yield Spread Premium (YSP), and the bank wanted to give their Third Party Originators (TPOs) an opportunity to close in their own name, with their own funds, and, among other things, by-pass disclosure of the YSP. In building the platform for the bank, many features were needed to implement these relationships in accordance with federal and state law, as well as safety and soundness metrics. This all took place at a time when a 3% fee cap on broker revenue was not even a glimmer in the eyes of legislators or regulators, and Elizabeth Warren[i] had yet to promote the creation of the Consumer Financial Protection Bureau (CFPB).

As Shakespeare wrote in The Tempest, “What’s past is prologue.”

Since the early part of this year, many lenders are building a new origination channel. The proximate cause for the new channel is found in the Final Rule pertaining to the Ability-to-Repay guidelines and the requirements of a Qualified Mortgage (Rule).[ii]

The new channel is meant specifically for brokers who hope to by-pass a 3% cap on loan amounts above $100,000, the new CFPB requirement that substantially and principally affects broker TPOs.[iii] The loans covered by the Rule are first lien and junior lien mortgage loans that are closed-end mortgage loans secured by a dwelling, including home purchase, refinance and home equity loans. (Excluded loans are HELOCs; Timeshares; Reverses; Bridges with a term of 12 months or less and loans to purchase a new dwelling where the consumer plans to sell another dwelling within 12 months; Vacant Lot loans; Loan Modifications not subject to the "refinancing" provisions under TILA; and Business Loans.)[iv]

In particular, many brokers usually seek to charge fees between 2% and 3% per loan transaction; however, as of January 10, 2014,[v] any excess above 3% in total points and fees virtually guarantees that such loans, originated by brokers, will not be eligible for treatment as a Qualified Mortgage (QM). The result of the Final Rule and specifically the 3% cap is to create an incentive for many brokers to morph into a new kind of correspondent, termed the “Mini-Correspondent.” The new origination channel developed by some wholesale lenders is aptly called the “Mini-Correspondent Channel.”

One of us, Jonathan Foxx, has written extensively – both in magazine articles and newsletters – about the Ability-to-Repay guidelines (ATR), the Qualified Mortgage, and the Non-Qualified Mortgage (viz., which he has titled the “NQM”). For additional details and guidance, please read those publications.[vi]

In this article, we are going to explore two interrelated issues. First, we will discuss the 3% cap, its implementation and placement within the QM framework, and the way it affects the originations of the mortgage broker. To do that, we will provide the QM framework into which the 3% cap is situated. Secondly, we will discuss the structure of and certain requirements relating to a mini-correspondent TPO. Bear in mind that this new type of TPO is taking place in a dynamic regulatory environment and loan origination market; therefore, aspects of our observations may change, due to a regulatory response, or other material factors, that pertain to originating loans through this new channel. 

Two Classes of Qualified Mortgages

Essentially, the Rule creates two types of QMs, one of which provides a safe harbor from liability and another which does not provide a safe harbor, but does offer a rebuttable presumption of compliance with the Rule. Obviously, the former is preferred, though the latter is not without its merits.

The safe harbor is only available if the creditor complies with all aspects of the Rule, including, at minimum, all the ATR guidelines, and where the Annual Percentage Rate (APR) on a first lien loan must be within 1.5 percentage points of the “average prime offer rate” (APOR) as of the date the interest rate is set (viz., the APR on a junior lien must be within 3.5 percentage points of the APOR).[vii] If the APR threshold is exceeded, the creditor has a rebuttable presumption of compliance.

The distinction between the safe harbor and rebuttable presumption is very significant. With the safe harbor, a lender obtains a conclusive presumption of compliance and may refute a claim that it violated the Rule, such as not complying with the ATR guidelines. But if the lender obtains only a rebuttable presumption of compliance, a claim can be litigated on the basis of a creditor not making a “reasonable” and “good faith” determination of the borrower’s ability to repay, irrespective of a lender’s complying fully with various aspects of the Rule, such as the ATR guidelines.

The ATR test promulgated by the Rule consists of eight factors. Neither the safe harbor nor the rebuttable presumption is available to a lender solely because a loan is underwritten to the ATR test’s guidelines. The ATR factors require the lender to underwrite and verify (1) current or reasonably expected income or assets, other than the value of the dwelling, (2) current employment status (viz., if the creditor is relying on employment income), (3) monthly payment, (4) monthly payment on any “simultaneous loan” of which the creditor is (or should be) aware, (5) mortgage-related obligations, (6) current debt obligations (including alimony, palimony, and child support), (7) monthly Debt-to-Income (DTI) ratio or residual income, and (8) borrower credit history. It should be noted that the ATR test itself does not place limits on points and fees. 

Qualified Mortgage and the 3% Cap

As mentioned above, a QM with an APR that does not exceed the APOR thresholds receives a safe harbor from liability (i.e., compliance with the ATR guidelines). If the APOR thresholds are exceeded, this means that the loan is a higher-priced QM, and, as such, receives the rebuttable presumption of compliance. In effect, the two classes of QM constitute a prime and non-prime market, with the prime entitled to safe harbor and the non-prime entitled to a rebuttable presumption.[viii]

But there are several challenges that a lender must overcome in order to use the safe harbor defense, one of which is the 3% cap. The Rule excludes from the points and fees 3% cap any compensation paid, per transaction, by a mortgage broker to an employee of the mortgage broker and compensation paid by a creditor to its loan officers. Compensation paid by a creditor to a loan originator other than an employee of the creditor (i.e., paid to a broker by a creditor on a lender paid transaction) is included in the 3% cap along with other upfront charges paid by the consumer to the creditor or its affiliates.[ix] Furthermore, the 3% cap includes certain fees paid to affiliates, mortgage originator compensation paid directly or indirectly by the consumer, and amounts imposed by secondary market investors and passed through to borrowers to compensate for credit risk. When these "points and fees" are factored into the loan origination costs, many loans will exceed the 3% limit.[x] 

Revolving Door Regulators

Senator yesterday. Lobbyist today.

Representative yesterday. CEO today.

Cabinet level appointee yesterday. Bank Chairperson today.

Government Agency Director yesterday. Law firm senior partner today.

CFPB Regulator yesterday. Competitor today.

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IN THIS ARTICLE

The Inside-Outside Gambit

The Four Horsemen

A Business Model for Former Regulators

Partners in Business

Making a Market in Non-QM

Timeline

What did they know, and when did they know it?

Extinguishing the Fire

Library

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The Inside-Outside Gambit

There are many forms of corruption. Perhaps the most pernicious is where an elected or duly appointed representative of the citizenry leaves office to use the sloughed off position for financial gain in the private sector.

Let's set up a definition for such (mostly unregulated) behavior. I will give it a phrase: "inside-outside gambits."

What is an inside-outside gambit? It is the use of information obtained in the course of a former governmental position by an official for financial gain, directly or indirectly, soon or immediately after leaving government employment in that position. Such information includes contacts with decision-makers in the government; providing information about proprietary conversations leading up to the promulgating of laws, rules, and regulations; access to insiders and knowledge of their views; navigating the systemic and organizational structure; non-public facts regarding the governmental plans or condition that could provide a financial advantage. Note that I use the phrase "inside-outside," not "insider trading."

I am not talking about a situation where there is the illegal trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the subject company (such trading being illegal).

However, the effect of “inside-outside gambit” and “insider trading” is practically the same: these strategies lead to an unfair, usually economic, advantage.

A basic concept of law is that an injury must be sustained by a plaintiff. Broadly speaking, no injury, no case.

So who is harmed when an equity trader uses inside information for personal financial benefit? The public, of course. Certainly, that part of the public that invests in the stock market, relying on rules, regulations, and laws to be impartially applied, with equal access to all. And who is harmed when a former government official uses inside information for personal financial benefit almost immediately after being employed in the government position. Of course, the public. Certainly, that part of the public that relies on rules, regulations, and laws to be impartially applied, with equal access to all.

How about when regulators in the most powerful agency that regulates the origination of residential mortgage loans, the Consumer Financial Protection Bureau (CFPB), leave that agency and start a mortgage company soon after leaving the CFPB, to compete or partner with mortgage companies?

When Thomas Jefferson advocated that legislators should have term limits in order to prompt the return to private life in order to live under the rules they promulgated, somehow I don't think this is what he had in mind.

In a letter of 1776, Jefferson wrote:

[His] "reason for fixing them [elected representatives] in office for a term of years rather than for life was that they might have an idea that they were at a certain period to return into the mass of the people and become the governed instead of the governor, which might still keep alive that regard to the public good that otherwise they might perhaps be induced by their independence to forget."

In other words, Jefferson viewed public service as a privilege. He fully expected government officials to return to private life and live under the laws they passed. I quite doubt that he viewed such a return to be a means for an ex-official’s self-enrichment, by utilizing public service to exploit – or even appear to exploit - the very laws promulgated by the ex-official.

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The Four Horsemen

On July 31, 2013, the House Committee on Oversight and Government Reform and the House Committee on Financial Services sent an eight page Congressional letter (Letter) to Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB). Signed by a bi-partisan group of Representatives, it expressed concern about the recent departure from the CFPB of four high level officials. The Letter forms the basis of further inquiries by the Committees. Noting a news report, the Representatives indicated it appears that certain officials "have left the CFPB in order to profit from rules they helped create."

Who are these individuals? What were their former CFPB positions?

First, there is Raj Date, former Deputy Director of the CFPB, who left the CFPB on January 31, 2013, shortly after a whole set of Final Rules were issued. (Of course, he gave the unimaginatively standard reason: to spend more time with this family.) Yet a month and a half later he incorporated an "advisory and investment firm,"Fenway Summer LLC" (Fenway), which focuses "on those borrowers who do not meet the standards for 'qualified mortgages' as set by the CFPB under rules." If you would like to know more about this new firm, you can visit its website at http://www.fenwaysummer.com. (Website)

The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.

It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]

For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.

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IN THIS ARTICLE

 Hearings and Adjudications

Scope of Legal Remedies

Blowing the Whistle on Violations

Policy Statement and Whistleblower Protection

Locking Horns with the Department of Labor

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Hearings and Adjudications

On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]

Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]

Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:

Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and

“… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.”

Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.

Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.

Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]

Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.

When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.

Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

Scope of Legal Remedies

The CFPB has extensive authorities to not only investigate violations of federal consumer protection laws but also implement broad enforcement relief.

Consider this list, which I do not assert to be comprehensive. These legal remedies are held to be “without limitation:”

• Rescission or reformation of contracts
• Refund of money
• Disgorgement and refund of various types of assets
• Return of real property
• Restitution
• Disgorgement or compensation for unjust enrichment
• Payment of damages or other monetary relief
• Public notification regarding the violation (including the costs of notification)
• Limits on the activities or functions of the person
• Civil monetary penalties

Indeed, Dodd-Frank authorizes the court in a court action, or the CFPB in an administrative proceeding, to grant “any appropriate legal or equitable relief with respect to a violation of federal consumer financial law, including a violation of a rule or order prescribed under a federal consumer financial law.”[x]

Loan Originator Compensation: New Rules

On January 24, 2013, as the last of the Final Rules of the Consumer Financial Protection Bureau (CFPB) rolled out, I offered an outline of all of them, entitled "CFPB's Gang of Seven (Final Rules)".

I listed them in order of issuance, as follows:

1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation

Having come through the last two months responding to numerous questions about these Final Rules, I have been able to cobble together some of the most salient questions, regulatory features, and concerns that our clients have expressed about them. And when I have spoken to the media types, it seems that they also have a set of questions and interests that are not being fully addressed in the current dialogue. Of abiding interest is the change relating to loan originator compensation. 

With that in mind, I want to provide a brief outline of some loan originator compensation issues, offering additional details garnered from two months in the trenches working through these regulatory issues on behalf of our clients. From time to time, I will have more to discuss about many regulatory changes anticipated in 2013 and 2014. I am going to conduct this review topic by topic, rather than just as specific regulations subject to a final rulemaking. 

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IN THIS ARTICLE

Terms and Conditions
Retirement Plans
Factors and Proxies
Dual Compensation
Non-loan Originations Services
Points and Fees
Loan Originator Qualifications
Mandatory Arbitration Clause
Single Premium Insurance
Record Retention Requirements

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Terms and Conditions

By now, there is nary a residential mortgage lender or originator that does not know that, under Regulation Z, loan originator compensation is prohibited from being based upon the terms and conditions of a mortgage loan transaction. 

The CFPB has provided new nomenclature for the terminology "transaction terms and conditions," without much changing the prohibition and certain exceptions to the standing rule. The new terminology is "term of a transaction," but now with the clarified meaning that term of a transaction means to include "any right or obligation of the parties to a credit transaction." 

The usual cast of regulatory prohibitions continue in force. For instance, loan originator compensation is still prohibited from being based on such things as the interest rate of a loan, or upon the inclusion of additional fees or charges for products or services provided by other parties to the transaction. 

And the usual cast of regulatory identifiers of a term of a transaction continue in force. Thus, fees or charges are a term of the transaction if they must be disclosed in the Good Faith Estimate (GFE) or HUD-1 or HUD-1A Settlement Statement (HUD-1). That obviously means to include loan originator or creditor fees or charges for the credit transaction or for a product or service provided by the loan originator or creditor that is related to the extension of credit; and it also means those fees or charges of other parties for any product or service required by the lender as a condition of the extension of credit. Keep in mind, however, that just because a fee or charge is stated on the HUD-1 does not in itself make the fee or charge a term of the transaction.

One rather controversial area involves the off-setting of compensation due to increased costs. The standing rule has provided that loan originator compensation is prohibited from being reduced in response to a change in the transaction terms. This has caused lenders all manner of frustration, not to mention loss of revenues and diminished profits. Yet, the new rule would allow compensation to be reduced in order to offset unexpected increases to estimated settlement costs, otherwise known as "unforeseen circumstances." What is a circumstance that is unforeseen? The imagination reels! But since the CFPB has offered no formal guidance to delineate very specifically what may or may not be an unexpected event, the lender must be extremely careful not to enter these dark waters too briskly.

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Retirement Plans

Profits may be used toward contributions to tax advantaged retirement plans. The important feature is to ensure that such contributions are not be based on the terms of the individual loan originator’s transactions. Non-deferred, profit based compensation plans - such as bonus pools and profit-sharing plans - is permissible. However, any such payments (1) must ensure that compensation is not directly or indirectly based on the terms of the individual loan originator’s transactions, and (2) either the compensation under the plan does not exceed 10 percent of the loan originator’s total compensation for the applicable period or the loan originator was an originator for no more than 10 transactions during the preceding 12 months. 

Whatever the choice, the entity involved must ensure that payments do not include bonuses, awards, trips, or other 'incentive' products or services.

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Factors and Proxies

Although the standing rule provides that loan originator compensation may not be dependent upon a factor that is a “proxy” for what would otherwise be considered a term of a loan transaction, there is clarification now that a factor is a term of a loan transaction “proxy” if it meets these two criteria: (1) the factor varies with a transaction term over a significant number of transactions, and (2) the loan originator, directly or indirectly, has the ability to add, reduce, or change the factor when originating the loan or credit.

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Dual Compensation

There is no change to the prohibition against dual compensation. As by now everyone knows, a loan originator may not be compensated by both the creditor and the consumer. However, mortgage brokers are permitted to pay commissions to their employees and contract agents, provided that these commissions are not based upon the term of a transaction.

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Non-loan Originations Services

Any amounts received by an origination entity or mortgage broker entity - that is, a lender or brokerage - or its affiliates for activities that are not related to loan originations are not deemed to be compensation. This means that compensation does not include a payment received by such an entity (or its affiliate) for bona fide and reasonable charges for services it performs that are not related to loan originations, and by a lender or brokerage for bona fide and reasonable charges for services that are not loan origination activities when those amounts are not retained by the loan originator but are paid to the lender or its affiliate, or the brokerage or its affiliate.

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Points and Fees

The CFPB initially proposed a rule in August 2012 that set forth an exemption for the upfront points and fees prohibition. This weird creature of a loan product was called the "zero-zero alternative." If the borrower qualified for it, the lender had to offer it as an alternative loan product.

Lenders opposed the zero-zero and the CFPB then provided a complete exemption, under which a lender may impose points and fees on a consumer where the lender pays compensation to a loan originator - as long as the consumer does not also pay a loan originator.

But is this exemption the unequivocal law of the land? Not really! The CFPB actually reserved to itself the right to amend the exemption after it has conducted additional research on this matter.

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Loan Originator Qualifications

The SAFE Act, Dodd-Frank, and applicable state law govern all mortgage loan originating entities to make certain that their loan originator employees and agents are either appropriately licensed or registered. Banks and certain nonprofit entities are required to ensure that their registered loan originators meet character and background standards essentially similar to those established under the SAFE Act for licensed loan originators. 

Therefore, registered loan originators are subject to the same rules regarding criminal background checks, credit reporting, and Nationwide Mortgage Licensing System and Registry (NMLS) checks as licensed loan originators. Registered loan originators must receive training on federal and state law requirements that apply to loan origination activities.

The CFPB provides more parameters for the thresholds pertaining to  background checks, such as when a criminal conviction will disqualify an individual from being a loan originator and when a criminal background or credit check is mandatory.

There is a clarification to where the loan originator's NMLS unique identifier is to be included on loan documents, such as the requirement for it to be placed on the credit application, note, or loan contract, and security instrument. The unique identifier, however, does not have to be stated on the HUD-1 or Truth in Lending Act (TILA) disclosures.

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Mandatory Arbitration Clause

 

Effective June 1, 2013, there is a prohibition against any loan contract or other agreement related to a consumer residential mortgage or home equity transaction from including or requiring mandatory arbitration of disputes. This prohibition does permit the parties to agree to arbitration once a dispute commences. 

Specifically prohibited are contract or loan agreement provisions that would bar or limit a consumer from seeking relief in court for any claimed violation of federal law, and interpretations of provisions of loan documents which would bar a consumer from bringing a claim in court in connection with any alleged violation of federal law.

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Single Premium Insurance

Premiums or fees for credit life insurance and similar products may not be financed in connection with a consumer credit transaction secured by a dwelling. Credit insurance may only be paid on a monthly basis.

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Record Retention Requirements

As with nearly all regulatory mandates, it is important to retain records. Given the ability to keep documents in an electronic format, many (but not all) records can be kept permanently in that format. Nevertheless, the CFPB has directed residential mortgage lenders and originators to maintain records related to loan originator compensation for a period of at least three years after the date of the compensation payment. Documents to retain would surely include, but not be limited to, compensation agreements with loan originators as well as all payments made to the loan originators.

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Library

Loan Originator Compensation

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*Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

CFPB's Company Portal for Consumer Complaints

In September 2011, the Consumer Financial Protection Bureau (CFPB) issued its Company Portal Manual (Manual). The Manual gave instructions on the use of the special access portal, known as the Company Portal (Portal). The Portal allows financial institutions to view and respond to complaints in the CFPB consumer complaint database. At that time, the Portal was enabled to take consumer complaints about credit cards and provider resources for distressed homeowners.*

Since the inception of the Portal, my firm has responded to numerous requests from clients to help them navigate its rather labyrinthine pathways. Thus, we have obtained considerable experience in guiding our clients from point of contact with the CFPB to point of resolution. In most instances, resolution of the complaint was achieved. While the CFPB continues to acquire statistics about the nature of the complaints, we also have become familiar with how best to respond to the complaints and have kept our own database.

When I cite statistics in this article, the time frame that I am writing about is July 21, 2011 to June 1, 2012. More recent statistics have not yet been officially announced by the CFPB. However, it is known that this database is updated on a daily basis. Retroactive data is expected shortly.

I would like you to become more familiar with the Portal and learn how to set up your access to it. Of course, in a magazine column, I can only offer a generic (rather than a detailed) description. I encourage you to explore the Portal, download the most recent Manual – I give the hyperlinks below - and, most importantly, draft and implement complaint management procedures for using it. Regulators will surely expect as much!

Statistics

By this point, the CFPB has staffed a Consumer Response team. The Consumer Response team, or “Consumer Response” as it has become known, began taking consumer complaints about credit cards on July 21, 2011; it began handling mortgage complaints on December 1, 2011; and it began accepting complaints about bank products and services, private student loans, and other consumer loans on March 1, 2012. Over the next year, the CFPB expects to handle consumer complaints on all products and services under its authority.

According to the CFPB, between July 21, 2011, and June 1, 2012, the CFPB received approximately 45,630 consumer complaints, including approximately:

• 16,840 credit card complaints,
• 19,250 mortgage complaints,
• 6,490 bank products and services complaints, and
• 1,270 private student loan complaints.

Approximately 44 percent of all complaints were submitted through the CFPB’s website and 11 percent via telephone calls. In the same period, referrals from other regulators and agencies accounted for 39 percent of all complaints received. (The rest were submitted by mail, email, and fax.)

Furthermore, the CFPB has notified the public that more than 37,120 complaints (81 percent) of complaints received as of June 1, 2012, have been sent by Consumer Response to companies for review and response. The remaining complaints have been referred to other regulatory agencies (9 percent), found to be incomplete (4 percent), or are pending with the consumer or the CFPB (6 percent).

Companies have already responded to approximately 33,000 complaints or 89 percent of the complaints sent to them for response.

Common Complaints

In a June 2012 report, the CFPB stated that the most common type of mortgage complaint is about problems consumers have when they are unable to pay, such as issues related to loan modifications, collection, or foreclosure. The example given was where a "consumer confusion persists around the process and requirements for obtaining loan modifications and refinancing, especially regarding document submission timeframes, payment trial periods, allocation of payments, treatment of income in eligibility calculations, and credit bureau reporting during the evaluation period."

The "shelf life" of documents provided as part of the loan modification process was cited as of particular concern to consumers. The CFPB asserts: "though consumers must provide documents within short time periods and income documentation generally remains valid for up to 60 days, lengthy evaluation periods can result in consumers having to resubmit documentation - sometimes more than once. This seems to contribute to consumer fatigue and frustration with these processes."

Other common types of mortgage complaints are those about making payments, such as issues related to loan servicing, payments, or escrow accounts. Here, the example given is where "consumers express confusion about whether making timely trial period payments will guarantee placement into a permanent modification. Issues related to applying for the loan, such as the application, the originator, or the mortgage broker, are also amongst the most common type of mortgage complaints."

In the CFPB's view, "consumers filing complaints about problems when they are unable to pay generally appear to be driven by a desire to seek agreement with their companies on foreclosure alternatives."

Screening Process

This is a generic outline of the Consumer Response process:

1) Consumer Response screens all complaints submitted by consumers based on several criteria, such as whether the criteria include the complaint falling within the CFPB’s primary enforcement authority, whether the complaint is complete, or whether it is a duplicate of a prior submission by the same consumer.

2) Screened complaints are then sent via a secure web portal to the appropriate company. If appropriate, the complaint is posted to the Portal within approximately three days of receipt, along with a request for a response within 15 calendar days.

3) The company reviews the information, communicates with the consumer (as needed), and determines what action to take in response. If additional communications are required between the consumer, the company and/or the CFPB, these can occur offline or through the Portal.

CFPB and FTC: Warning Letters - Misleading Advertisements

The Consumer Financial Protection Bureau (CFPB), in coordination with the Federal Trade Commission (FTC), has issued warning letters to twelve mortgage lenders and mortgage brokers advising them to remove or revise misleading advertisements. The warnings concern advertisements that target veterans, seniors, and other consumers.*

Additionally, the CFPB announced that it has begun formal investigations of six companies believed to have committed more serious violations of the law.

After reviewing hundreds of mortgage advertisements, the FTC staff has also sent warning letters to twenty companies, warning them that their ads may be deceptive. The FTC sent its warning letters to real estate agents, home builders, and lead generators, urging them to review their advertisements for compliance with the Mortgage Acts and Practices Advertising Rule and the FTC Act.

The collaboration between the CFPB and the FTC are characterized as a "sweep" - a review conducted by these agencies of about 800 "randomly selected mortgage-related ads across the country, including ads for mortgage loans, refinancing, and reverse mortgages." The agencies looked at ads in newspapers, on the Internet, and from mail solicitations, and advertisements that were the subject of consumer complaints.

I really can't emphasize enough how important it is to control all the advertising your firm publishes - and I mean advertisements in any media. Just adopting a policy and procedure is insufficient.

In my view, several components must be included in advertising compliance:

a formally adopted policy and procedure;

an advertising manual that is signed for and attested to by the employee;

checklists, model forms, ad formats, and authorizations;

an easy reference guide for employees;

periodic training;

and auditing.

If you are not implementing at least these risk management practices, you are certainly falling short of the controls you need to manage the regulatory challenges posed in advertising of mortgage loan products.

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IN THIS ARTICLE

The Sweep
The Rule
The Warning
The Remedy

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The Sweep

The following problems were identified by the sweep:

Potential misrepresentations about government affiliation.
For example, some of the ads for mortgage products contained official-looking seals or logos, or have other characteristics that may be interpreted by consumers as indicating a government affiliation (i.e., advertisements containing statements, images, symbols, and abbreviations suggesting that an advertiser is affiliated with a government agency).

Potentially inaccurate information about interest rates. For example, some ads promoted low rates that may have misled consumers about the terms of the product actually offered. These are advertisements offering a very low “fixed” mortgage rate, without discussing significant loan terms (i.e., advertisements “guaranteeing” approval and offering very low monthly payments, without discussing significant conditions on these offers).

Potentially misleading statements concerning the costs of reverse mortgages. For example, some ads for reverse mortgage products claimed that a consumer will have no payments in connection with the product, even though consumers with a reverse mortgage are commonly required to continue to make monthly or other periodic tax or insurance payments, and may risk default if the payments aren’t made.

Potential misrepresentations about the amount of cash or credit available to a consumer. For example, some ads contained a mock check and/or suggested that a consumer has been pre-approved to receive a certain amount of money in connection with refinancing their mortgage or taking out a reverse mortgage, when a number of additional steps would customarily need to be completed before the consumer would qualify for the loan.

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The Rule

The Mortgage Acts and Practices Advertising Rule ("MAP-AD Rule" or "MAP Rule"), known as Regulation N since rulemaking authority for it transferred from the FTC to the CFPB, is applied to advertising compliance relating to mortgage loan products. (We have discussed the MAP Rule previously. See, for instance, our September 2, 2011 newsletter, FTC: Adopts Mortgage Advertising Rule.)

The MAP Rule prohibits material misrepresentations in advertising or any other commercial communication regarding consumer mortgages. The FTC and the CFPB share enforcement authority over non-bank mortgage advertisers such as mortgage lenders, brokers, servicers, and advertising agencies. Mortgage advertisers that violate the MAP Rule may be required to pay civil penalties. HUD mortgagees may be subject to additional sanctions by the Mortgagee Review Board.

The MAP Rule was issued as a Final Rule by the FTC on July 22, 2011 (the day after the CFPB received its enumerated authorities) and given the compliance effective date of August 19, 2011. On July 21, 2011, the Commission’s rulemaking authority for the MAP Rule transferred to the CFPB, but the FTC, the CFPB, and the states all have authority to enforce the MAP Rule.

Loan Originator Compensation: Past is Prologue - Part I

In the economic sphere an act, a habit, an institution, a law
produces not only one effect, but a series of effects.
Of these effects, the first alone is immediate;
it appears simultaneously with its cause; it is seen.
The other effects emerge only subsequently; they are not seen;
we are fortunate if we foresee them.
What Is Seen and What Is Not Seen[i]
Frédéric Bastiat

Since April 6, 2011, mortgage loan originators (MLOs) have struggled to comply with the many requirements imposed on them by the MLO compensation provisions of the Truth in Lending Act (TILA),[ii] as amended by Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). That date was the compliance effective date.[iii] Prior to that date, however, there were considerable and persistent efforts made to postpone its implementation.

I tracked the burgeoning protests and litigation in a series of articles[iv] and newsletters.[v] Associations resisted these TILA revisions on behalf of their membership. The National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP) sued the Federal Reserve Board of Governors (FRB). Amicus briefs were filed. Many members of Congress, from both sides of the aisle, also protested aspects of the new MLO compensation requirements. All for naught!*

April 6, 2011 arrived. Resistance was futile!

The FRB had issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions, but further guidance came to a virtual full stop on January 26, 2011, when the FRB issued its Compliance Guide for Small Entities on Loan Originator Compensation and Steering.[vi] After that, the FRB offered some conference calls, a webinar – which ostensibly cleared up some confusion, while causing other confusion – and provided occasional updates of the oral, rather than the written, official variety.

In the meantime, the Consumer Financial Protection Bureau (CFPB) received its “enumerated authorities” on July 21, 2011. From that date forward, the CFPB was in charge of promulgating and administering these compensation guidelines.

And on October 6, 2011 - exactly six months to the day when the rule became effective - the first examination guidelines for loan originator compensation were promulgated.[vii] In the State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule, issued by the Multi-State Mortgage Committee (MMC),[viii] we were given a pretty good idea of the direction that federal and state regulators would be taking in their regulatory examinations for loan originator compensation.[ix]

For the most part, my firm’s clients were prepared for implementation of the compensation rule, but we spent hundreds of hours preparing them for it, consisting of many conferences and meetings, which included very comprehensive reviews of employment agreements, compensation plans, disclosures, policies and procedures, and many other details, both logistical and systemic.

Inevitably, I felt mortgage loan originators needed more information than was readily available. So, we consolidated our knowledgebase and offered the FAQs Outline - Loan Originator Compensation, a compendium of questions and answers about the MLO compensation requirements, first published on March 21, 2011 with 142 FAQs and 35 pages. About a year later, after 20 updates, the FAQs Outline was up to 450 FAQs and 147 pages![x]

In this article, the first in a two-part series, I will consider the recent CFPB proposal, issued on August 17, 2012, which contains certain proposed rules governing mortgage loan originations, especially relating to the MLO compensation guidelines in Regulation Z, the implementing regulation of TILA. Comments for this proposal are due by October 16, 2012.[xi]

In the second part of this series, I will explore these proposals in considerable depth, specifically their clarification of and expansion on existing regulations governing MLO compensation and qualifications.

The CFPB does plan to implement new laws, including a restriction on the payment of upfront discount points, origination points, and fees on most mortgage loan transactions. For this reason, I will conclude this article with a brief, generic outline of certain proposals. To some extent, these new proposals exemplify the hurly-burly, roller-coaster ride we’ve been jaunting about on, in the on-going, elusive quest to implement the MLO compensation rule.

Small Business Review Panel

There is only one difference between a bad economist and a good one:
the bad economist confines himself to the visible effect;
the good economist takes into account both the effect that can be seen
and those effects that must be foreseen.
What Is Seen and What Is Not Seen[xii]
Frédéric Bastiat

The CFPB is required to certify that a proposed rule will not have a significant, adverse, economic impact on a substantial number of small entities.[xiii] The Small Business Regulatory Enforcement Fairness Act (SBREFA) provides the basis for a review, inasmuch as, among other things, “small businesses bear a disproportionate share of regulatory costs and burdens.”[xiv] In order to comply with this requirement, the CFPB convened and chaired a Small Business Review Panel to consider the impact of the proposal and obtain feedback from representatives of the small entities that would be subject to the rule. When preparing the proposed rule and an initial regulatory flexibility analysis, the CFPB is expected to consider this panel’s findings.

The panel consisted of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[xv] On the panel were so-called small entity representatives (SERs), individuals who represent the business entities that would be subject to the CFPB’s proposal.[xvi] On July 11, 2012, the panel issued its report.[xvii]

Here are certain, salient topics that were reviewed by the panel:

• Payment of Discount Points
• Payment of Origination Points and Fees in Creditor-Paid Compensation
• Payment of Origination Points and Fees in Brokerage-Paid Compensation
• MLO Retirement Plans, Profit-Sharing, and Bonuses
• Pricing Concessions and Point Banks
• MLO Qualification and Training Requirements

Let us now consider the panel’s suggestions, concerns, resolutions, and recommendations.