Category Archives: Loan Origination

House Passes Mortgage Choice Act Proposing Amendment to Qualified Mortgage Rule

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By:      Michael Meehan

On June 9, 2014, the United States House of Representatives passed the Mortgage Choice Act of 2014, which, among other things, revises the definition of “points and fees” under the Truth in Lending Act’s qualified mortgage rule to exempt both affiliated and unaffiliated title fees.

Under the Dodd-Frank Act, a qualified mortgage may not have points and fees that exceed three percent (3%) of the loan amount. “Points and fees” is a defined term in the statute, which currently encompasses fees paid to affiliated title companies (those companies with which the lender has an affiliated business arrangement) but not unaffiliated title companies. According to the Act’s proponents, Representatives Bill Huizenga (R-Mich) and Gregory Meeks (D-NY), the current definition precludes many affiliated loans from meeting the qualified mortgage rule’s points and fees threshold, further restricting consumer access to mortgage credit, or at a minimum, increasing the cost of such credit. The Act amends the definition under the rule to also exclude affiliated title fees, which its proponents believe will result in a greater number of qualified mortgage loans and expanded credit opportunities for low and moderate income homebuyers.

The Act has been widely supported by financial services and housing trades, including the Mortgage Bankers Association, National Association of Federal Credit Unions, National Association of Home Builders, and the National Association of Realtors. However, opponents of the Act, such as the Center for Responsible Lending and Consumer Federation of America, worry that the amendment will allow lenders to charge excessive title fees to affiliated entities while remaining within the protections that the qualified mortgage rule affords.

The Act passed the House by unanimous vote and awaits a determination in the Senate. If passed, the Act instructs the Consumer Financial Protection Bureau to finalize regulations implementing the new definition within 90 days.

 

CFPB Takes Action on RESPA Disclosure Rules Concerning Affiliated Business Arrangements

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By: Shane Biffar

On May 24, 2014, the CFPB entered a Consent Order with RealtySouth, the largest mortgage brokerage firm in Alabama, which requires the company to pay $500,000 for alleged inadequate disclosures related to its affiliated business arrangements (“ABA Disclosures”).

As a general rule, Section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”) prohibits giving or accepting a “fee, kickback, or thing of value” pursuant to an agreement or understanding to refer business to real estate settlement services for a federally related mortgage loan. However, RESPA Section 8(c)(4) provides a “safe harbor” which permits certain affiliated business arrangements as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charges generally made by the provider to which the person is referred (ABA Disclosure) is provided, (2) the consumer is not required to use the affiliated business, and (3) the only “thing of value” received from the arrangement is a return on the ownership interest.

In the case of RealtySouth, the company was charged with violating the above RESPA provisions in connection with title insurance and title examination referrals made to its affiliate, TitleSouth Closing Center, which provides real estate closing services. The CFPB found that RealtySouth’s referrals failed to comply with the safe harbor provision for two reasons. First, the CFPB found that the written disclosures contained in RealtySouth’s ABA disclosure forms failed to comply with the ABA Disclosure requirements as set forth in Appendix D of the implementing regulation, 12 CFR 1024. Second, the CFPB found that RealtySouth’s referral process, as evidenced by both the instructions given to its agents and the format of its purchase contracts, violated Section 8(a) of RESPA by giving a “thing of value” in connection with the affiliated business arrangement.

With respect to the written disclosures, RealtySouth’s disclosure form allegedly failed to comply with RESPA because the disclosure language was not set apart, but rather buried in a section of text that also made marketing claims about the company’s prices. RealtySouth apparently immediately changed its ABA disclosure form when advised of the Bureau’s concerns.

Perhaps more significant are the Bureau’s findings regarding RealtySouth’s ABA referral process. The Bureau concluded that RealtySouth’s form purchase contracts violated Section 8(a) of RESPA by giving and receiving a “thing of value” pursuant to an agreement or understanding that RealtySouth refer settlement services to TitleSouth. Specifically, the Bureau noted that RealtySouth’s form purchase contracts either explicitly directed or suggested that title and closing services be conducted by its affiliate, TitleSouth. By referring consumers to TitleSouth in this manner, the Bureau found that RealtySouth “affirmatively influenc[ed] the selection of TitleSouth” which amounts to a prohibited exchange of a “thing of value” under the Section 8(a). This aspect of the decision is significant because the CFPB is interpreting the act of affirmatively influencing the selection of an affiliate to constitute an exchange of a “thing of value” in violation of Section 8(a). The definition of “thing of value” as set forth in the implementing regulation, 12 CFR 1024.14(d), would not necessarily lead to this conclusion.  

In addition to taking issue with RealtySouth’s ABA disclosures and form purchase contracts, the Bureau also found a “pattern and practice” of RealtySouth encouraging its agents, and in certain instances requiring them, to use RealtySouth’s family of mortgage settlement services, in particular, TitleSouth.

In resolution of this matter, the recently entered Consent Order requires RealtySouth to ensure that its disclosures comply with RESPA and ensure that its training materials emphasize that its agents cannot require the use of TitleSouth affiliates. However, based on the Consent Order, the Bureau appears to be taking the position that mortgage brokers should do more than simply provide the required disclosures and “not require the use of the affiliated business.” Indeed, the Bureau appears to be on the lookout for any referral process that may mislead a consumer regarding his right to shop around when pursuing settlement services. With this in mind, it may be prudent for mortgage brokers to ensure that their ABA referral process highlights the consumer’s right to choose and does not undermine or detract from the required RESPA disclosures.

Texas Federal Court in Walker Deals Another Blow to Consumer Plaintiffs

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By Joshua A. Huber

A.   Introduction

In 1997, the Texas Constitution was amended to allow home equity loans.[i] The purpose of the amendment was “to expand the types of liens for loans that a lender, with the homeowner’s consent, could place against the homestead.”[ii]Article XVI, section 50(a)(6), of the Texas Constitution establishes the terms and conditions a home-equity lender must satisfy to make a valid loan.[iii] Section 50(a)(6) further prescribes a “Draconian consequence” for noncompliance—loss of the right of forced sale and forfeiture of all principal and interest.[iv]

B.  Priester: Four-Year Statute of Limitations Applies.

Given the myriad technical requirements of section 50(a)(6)[v] and the prospect of the Texas Constitution’s sever forfeiture remedy, Texas consumers have for years attempted to evade foreclosure of home equity loans by filing lawsuits alleging violations of section 50(a)(6). One of the strongest defenses to 50(a)(6) claims had historically been the application of Texas’ residual four-year statute of limitations,[vi] which the federal courts had consistently applied to bar borrower claims.[vii] However, the Southern District of Texas’ opinion in Smith v. JPMorgan Chase Bank, Nat’l Ass’n, created a split within the Fifth Circuit. In Smith, the Court conducted an in-depth analysis of 50(a)(6) and found that non-conforming loans are void ab initio, as opposed to merely voidable,[viii] and that no statute of limitations applies to claims that a home-equity loan, and the lien securing it, are absolutely void.[ix]

In 2013, the Fifth Circuit issued its opinion in Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667 (5th Cir. 2013), resolving the conflict created by Smith and dealing a death blow to the vast majority of would-be 50(a)(6) plaintiffs. In Priester, the Fifth Circuit determined that the cure provision contained in Section 50(a)(6)(Q) rendered nonconforming home-equity loans merely voidable, as opposed to void.[x] The Court went on to hold that Texas’ residual four (4) year limitations period[xi] applies to alleged constitutional infirmities under section 50(a)(6), and that the statutory period begins to run at the closing of the loan.[xii] A Texas intermediate appellate court has since adopted the Priester analysis.[xiii]

C.  Walker: Tex. R. Civ. P. 736 Does Not Extend Statute of Limitations.

Over the past year or so, Texas consumer plaintiffs have attempted several procedural maneuvers to overcome the roadblock to 50(a)(6) claims. One of the most recent incarnations was foreclosed in Walker v. Citimortgage, Inc., No. H-13-03111, 2014 WL 67245, at *3-5 (S.D. Tex. Jan. 8, 2014). In Walker, Citimortgage initiated a judicial foreclosure proceeding pursuant to Texas Rule of Civil Procedure 736.[xiv] Rule 736 is a special procedure that provides for expedited foreclosure of home-equity loans and does not permit counterclaims to be filed.[xv] However, a proceeding under Rule 736 is automatically stayed and dismissed if the borrower, among other things, files a separate, original proceeding in a court of competent jurisdiction challenging the origination, servicing or enforcement of the loan.[xvi] Walker filed a separate action alleging constitutional infirmities under section 50(a)(6), resulting in the dismissal of Citimortgage’s expedited foreclosure under Rule 736. Walker then argued that the four (4) year limitations period was inapplicable to his constitutional claims because Rule 736.11 grants an express right to file a separate action challenging the validity of the loan. The Court declined to adopt Walker’s argument, noting “[t]his rule gives individuals who are defendants in TRCP 736 foreclosure cases the right to bring a separate claim contesting the origination, servicing, or enforcement of the loan agreement. It does not extend the statute of limitations for these types of claims . . . .”[xvii]

Different variations of this argument are currently working their way through Texas courts. In the pending case Puga v. Bank of America, N.A., the plaintiffs have argued that Rule 736’s prohibition on “counterclaims” justifies treating the borrowers as “counter-plaintiffs” in their separate, original action, thereby implicating the limitations extending provision of Tex. Civ. Prac. & Rem. Code Ann. § 16.069(a).[xviii] The Court has yet to rule on this theory, but a decision in Puga may provide further insight regarding whether Texas borrowers will gain any ground in their fight for a limitations-free shot at home-equity loan forfeiture.

[i]     Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000).

[ii]     Id.

[iii]    Tex. Const. art. XVI, § 50(a)(6)(B).

[iv]    Finance Com’n of Texas v. Norwood, 418 S.W.3d 566, 572 (Tex. 2013).

[v]     Tex. Const. art. XVI, § 50(a)(6)(A)–(Q).

[vi]    See Tex. Civ. Prac. & Rem. Code Ann. § 16.051.

[vii]   See, e.g., Reagan v. U.S. Bank Nat’l Ass’n, No. H-10-2478, 2011 WL 472984, at *3-4 (S.D. Tex. Oct. 6, 2011); In re Ortegon, 398 B.R. 431, 440 (Bankr. W.D. Tex. 2008); Hannaway v. Deutsche Bank Nat’l Trust Co., No. A-10-CV-714-LY, 2011 WL 891669, at *3-5 (W.D. Tex. Mar. 11, 2011); Williams v. Deutsche Bank Nat’l Trust Co., No. A-10-CV-711-LY, 2011 WL 891645, at *3-4 (W.D. Tex. Mar. 11, 2011).

[viii]   Smith v. JPMorgan Chase Bank, Nat’l Ass’n, 825 F.Supp.2d 859, 861 (S.D. Tex. 2011).

[ix]    Id. at 868.

[x]     Priester v. JP Morgan Chase Bank, N.A., 708 F.3d 667, 674 (5th Cir. 2013) (stating “a ‘void’ lien could not be ‘voided’ by future action.”).

[xi]    See Tex. Civ. Prac. & Rem. Code Ann. § 16.051.

[xii]   Priester, 708 F.3d at 674-676.

[xiii]   Williams v. Wachovia Mortg. Corp., 407 S.W.3d 391, 396 (Tex. App.—Dallas 2013, pet. denied).

[xiv]   Walker, 2014 WL 67245, at *1.

[xv]    Tex. R. Civ. P. 736.5(d).

[xvi] Id. at 736.11.

[xvii] Walker, 2014 WL 67245, at *1 (emphasis in original).

[xviii]       See, e.g., Puga v. Bank of Am., N.A., No. 3:13-cv-04414-M-BN (N.D. Tex. 2013).