Alston & Bird Consumer Finance Blog

Mortgage Loans

Appraisal Reform Act of 2019 Would Impact TRID

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A&B Abstract: 

If enacted, the recently introduced Appraisal Reform Act of 2019 would amend RESPA to require the disclosure of the appraisal management fee separate from the appraisal fee on the loan estimate (LE) and closing disclosure (CD).  This could impose an additional burden on lenders and appraisal management companies (AMCs).

 Background

 The LE provides disclosures intended to be helpful to consumers in understanding the mortgage loan transaction.  By contrast, the CD must provide the actual costs of the transaction.  As amended by the Dodd Frank Act, Section 4(c) of RESPA permits the optional disclosure of the appraisal management fee separate from the appraisal fee.  However, it does not require separate itemization on the LE and CD.  HR 3619, the Appraisal Reform Act of 2019, would make such disclosure mandatory.  The measure, which Rep. William Lacy Clay (MO) is sponsoring, was introduced in the House on July 5, 2019 and referred to the House Financial Services Committee on the same date.

Impact on Current Law

AMCs facilitate more than two-thirds of all appraisals, according to estimates.  For closed-end forward mortgage transactions, TRID  requires a creditor to provide the consumer with a good faith estimate of the credit costs and transaction terms no later than the third business day after receiving the application.  For certain unaffiliated charges for which the consumer is not allowed to shop (such as appraisal fees), the creditor must not charge the consumer more than the amount disclosed on the LE unless there is a valid changed circumstance. These are “zero tolerance” fees, meaning that the creditor must reimburse the consumer for the amount by which the actual charge exceeds the amount disclosed on the LE.

For purposes of providing a revised estimate and resetting the tolerance, a “changed circumstance” is:

  • an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
  • information specific to the consumer or transaction that the creditor relied upon when providing the disclosure and that was inaccurate or changed after the disclosures were provided; or
  • new information specific to the consumer or transaction that the creditor did not rely when providing the disclosure.

Absent a valid changed circumstance, a creditor cannot adjust the amount of the appraisal management fee three days after the application is provided even if it determines that additional work is required.

Takeaway

HR 3919 is worth watching as it would in effect lock in the appraisal management fee at time of application.

Connecticut Officially Becomes an Attorney Closing State

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A&B Abstract:

Effective October 1, 2019 only Connecticut licensed attorneys can conduct real estate closings in the state for certain mortgage loan transactions.

Real Estate Closings

The process of closing a loan generally involves four core functions:

  • transferring title to the buyer;
  • transmitting payment to the seller (usually through an escrow agent);
  • discharging any outstanding liens on the property; and
  • creating a lien on the property in favor of the buyer’s lender.

In a mortgage transaction, the “closing agent” is the person responsible for coordinating the activities of various parties involved in the transaction.  Several states – whether by case law or bar opinion – hold that it is the unauthorized practice of law for someone other than a duly licensed attorney in the relevant jurisdiction to conduct real estate closings.

Impact of New Connecticut Law

Historically, no explicit authority has held that only an attorney may act as a closing agent in Connecticut.  However, as a general matter, almost all loans in Connecticut are closed by an attorney.  Connecticut Senate Bill 320 (Public Act No. 19-88) has codified that long-standing practice.  As a result, as of October 1, 2019, only a duly licensed Connecticut attorney in good standing may conduct real estate closings.

The measure defines “real estate closing” as a closing for:

  • a mortgage loan transaction, other than a home equity line of credit transaction or any other loan transaction that does not involve the issuance of a lender’s or mortgagee’s policy of title insurance in connection with such transaction, to be secured by real property in Connecticut, or
  • any transaction wherein consideration is paid by a party to such transaction to effectuate a change in the ownership of real property in Connecticut.

A violation of the new requirement constitutes a Class D felony, punishable by a $5,000 penalty or five years in jail.

Takeaway

Lenders should ensure that only a Connecticut licensed attorney conducts the closing on any first- or second lien mortgage loan, other than a home equity line of credit, that require the issuance of title insurance.

Maine Creates Mortgage Servicer Duty of Good Faith

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Maine is joining the ranks of states whose requirements for mortgage servicers may exceed those of the CFPB’s Mortgage Servicing Rules.  Effective September 19, Senate Paper 415 (2019 Me. Laws 363) creates a mortgage servicer duty of “good faith,” meaning honesty in fact, and the observance of reasonable commercial standards of fair dealing.  This duty applies to the servicing of a residential mortgage (including in any related foreclosure action).  Further, the measure applies the duty to existing provisions of Maine law relating to the conduct of foreclosure mediation, permitting a court to impose sanctions on a servicer who fails to participate in good faith in mediation.

What Activities Are Covered?

“Servicing,” for purposes of the new requirement, means any combination of:

  • receiving a periodic payment from an obligor under the terms of an obligation, including an amount received for an escrow account;
  • making or advancing payments to the owner of an obligation on account of an amount due from the obligor under a mortgage servicing loan document or a servicing contract;
  • making a payment to the obligor under a home equity conversion mortgage or reverse mortgage;
  • evaluating the obligor for, or communicating with the obligor with respect to, loss mitigation;
  • collecting funds from a homeowner for deposit into, and making payments out of, an escrow account; and
  • taking any other action with respect to an obligation that affects the obligor’s payment or performance of the obligation or that relates to enforcement of the obligation.)

What Entities Are Covered?

While the duty of good faith applies broadly, certain entities are exempt.  For purposes of the new requirement, a “mortgage servicer” is a person responsible for:

  • receiving scheduled periodic payments from an obligor pursuant to the terms of a mortgage, including amounts for escrow accounts;
  • making or advancing payments to the owner of the loan or other third parties with respect to amounts received from the obligor pursuant to a loan servicing contract; and
  • evaluating obligors for loss mitigation or loan modification options.

The term includes a person that holds, owns, or originates a mortgage loan obligation if the person also services the obligation.  However, among others, the term does not include a “supervised financial organization,” a “financial institution holding company,” a “credit union service organization,” or a subsidiary of any such entity.  Accordingly, for purposes of the good faith requirement, the term is limited to non-depository entities (i.e., state-licensed servicers).

Penalties

The measure creates substantial penalties for a servicer’s failure to act in good faith.  A violation in connection with a foreclosure action may be remedied by dismissal or stay of the action, or by the imposition of other sanctions that the court deems appropriate for so long as the violation continues.  For violations more generally, an injured homeowner or obligor may recover actual damages and the costs and attorney’s fees incurred in bringing such an action.  Additionally, statutory damages of up to $15,000 are available if the servicer has engaged in a pattern or practice of violating the duty of good faith.  The measure further prohibits a servicer from charging a loan owner for, or adding to the amount of the obligation, any attorney’s fees or other costs incurred as the result of its violation of the duty of good faith.

NYDFS Proposes Overhaul to Mortgage Loan Servicer Business Conduct Rules

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The New York Department of Financial Services has proposed significant changes to the mortgage servicer business conduct rules found in Part 419 of the Superintendent’s Regulations.  The proposed changes represent the first major changes to Part 419 since its adoption nearly 10 years ago.  Some of the significant proposed changes to Part 419 include:

  • Adding new provisions governing affiliated business arrangements, which would include a requirement that such relationships be negotiated at market rate, restrictions on certain kick-backs and a requirement to provide borrowers with a written disclosure of the relationship;
  • Restricting a servicer from charging a property valuation fee to a borrower more than once in a 12-month period;
  • Broadening a servicer’s duty of fair dealing to include ability to repay requirements for loan modifications and that a servicer consider foreclosure alternatives;
  • Broadening the protections available to delinquent borrowers and borrowers seeking loss mitigation assistance to more closely align with the CFPB’s Mortgage Servicing Rules, including a requirement that acknowledgment notices be delivered more quickly than under the current rules and providing borrowers with additional time to accept or reject a loss mitigation offer; and
  • Detailed third party vendor management requirements, which would require a servicer to maintain policies and procedures overseeing third party providers generally and more specific requirements for overseeing counsel and trustees of foreclosure proceedings.

Our June 20 client advisory provides greater detail on the proposed changes to Part 419.  In the meantime, we note that the deadline for comment on the proposal is June 29, 2019.  Mortgage servicers should take this opportunity to review the proposed changes to Part 419 against their current operations to determine the impact these rules would have if adopted in their current form.

Alston & Bird Publishes Article in “Mortgage Compliance Magazine” Addressing Key Debt Collection Challenges Raised Under the Fair Debt Collection Practices Act as a Major Focus for Industry in 2019

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In February 2019, Alston & Bird Partner Nanci Weissgold and Senior Associate Anoush Garakani, wrote an article published in “Mortgage Compliance Magazine,” in anticipation of the Consumer Financial Protection Bureau’s (“CFPB”) recent Proposed Rule implementing the FDCPA.  The article brings to the attention of the mortgage servicing industry the complex issues faced when applying the Fair Debt Collection Practices Act (“FDCPA”) to modern debt collection practices and the labyrinth of additional requirements created by state collection agency laws.

The article explores updates on recent court cases addressing the scope of the federal FDCPA as well as a refresher on state collection agency laws.  The article highlights the inconsistent state collection agency laws across the country and discusses several important questions that mortgage servicers should consider in applying these laws to their mortgage servicing activities.

The article can be found here on our website.