Alston & Bird Consumer Finance Blog

TRID

Carter State Funeral is not a “Legal Public Holiday” for Purposes of Certain Regulation Z Disclosure Requirements

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What Happened?

President Biden has proclaimed January 9, 2025, a federal holiday for the state funeral of former President Jimmy Carter; as a result, Federal government agencies and departments will be closed that day.  Is this federal holiday proclaimed by executive order a “legal public holiday” for purposes of certain disclosure timing requirements of Regulation Z?

Why is it Important?

Under the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID), generally, the creditor is responsible for ensuring that it delivers or places in the mail the loan estimate (LE) no later than the third business day after receiving the consumer’s application. Further, a creditor must ensure that the consumer receives the closing disclosure (CD) at least three business days before consummation of the transaction. In addition, for certain refinancings, Regulation Z permits the consumer to rescind (cancel) the transaction within three business days after consummation.

For purposes of providing the LE, a business day is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions. However, the term “business day” is defined differently for other purposes, such as counting days to ensure the consumer receives the CD on time and the consumer’s exercise of the right to rescind the transaction. For these purposes, “business day” means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. § 6103(a): New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

What to do Now?

Because the Carter state funeral on January 9, 2025, is not a “legal public holiday” within the meaning of 5 U.S.C. § 6103(a), it is a business day for counting days to ensure the consumer receives the CD on time and for the consumer’s exercise of the right to rescind the transaction.  Further, January 9, 2025, is also a business day for purposes of providing the LE as long as the creditor’s offices are open to the public for carrying out substantially all of its business functions.

Correspondent Lending on the Rise: Increasing Gains Point to Increasing Risk

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A&B Abstract:

According to a recent edition of Inside Mortgage Finance, correspondent lending is the only lending channel that posted gains in Q3 2023. While it is always nice to see gains, it should also serve as a reminder to take a fresh look at your risk management program to ensure it is calibrated to address the unique risks of correspondent lending.

To level set, we define a correspondent lender as one who performs the activities necessary to originate a mortgage loan, i.e., takes and processes applications, provides required disclosures, and often, but not always, underwrites loans and makes the final credit decision. The correspondent lender closes loans in its name, funds the loans (often through a warehouse line of credit), and sells them to an investor by prior agreement.

The risk that correspondent misconduct poses to an investor falls broadly into three categories:  legal risk, reputational risk, and credit risk. Legal risk refers to the risk that the investor will be subject to legal claims based on the misconduct of the correspondent, or that the correspondent misconduct somehow will impair the investor’s rights under the loan agreements. Reputational risk refers to the risk of damage to the company’s reputation among investors, regulators, the public at large, counterparties, etc. Credit risk refers to the risk that correspondents will fail to conform to the investor’s underwriting guidelines or credit standards. We include fraud within this category.

In this post, we provide, in our assessment, an overview of the types of claims that pose the greatest legal risks, as well as best practices to mitigate such risks.

Theories of Liability on Assignees

The following laws and/or legal theories, in our assessment, pose the greatest risk of either vicarious liability or economic risk to assignees for the misconduct of correspondents:

  • Holder in Due Course:  Under the Uniform Commercial Code, if an assignee or “holder” of a mortgage loan rises to the level of a Holder in Due Course, it can enforce the borrower’s obligations notwithstanding certain defenses to repayment or claims in recoupment that the borrower may have against the original payee. If Holder in Due Course status is never attained or is lost, the purchaser of a mortgage loan will be subject to certain defenses to payment and claims in recoupment that the mortgagor may have against the original payee.
  • Truth-in-Lending Act (TILA): An assignee may be exposed to civil liability for a TILA violation that is apparent on the face of the disclosure statement.  In addition, for certain violations of TILA, a consumer may have an extended right to rescind a loan for up to three years from consummation. The consumer may exercise this right against an assignee. Moreover, amendments to TILA pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) expand the liability of assignees in connection with certain TILA violations, including violations relating to the TILA-RESPA Integrated Disclosure or TILA’s ability to repay, loan originator compensation, and anti-steering provisions.
  • Home Ownership and Equity Protection Act (“HOEPA”) / Section 32 “High Cost” Loans: Subject to certain exceptions, an assignee of a HOEPA loan is subject to all claims and defenses with respect to the mortgage that the consumer could assert against the original creditor.
  • Equal Credit Opportunity Act (“ECOA”): ECOA’s broad definition of “creditor” may place liability on assignees for the statute’s anti-discrimination and disclosure requirements where the assignee “regularly participates” in the credit decision.
  • State and Local Anti-Predatory Lending Laws: A number of states have passed anti-predatory lending laws that contain assignee liability provisions similar to those found in HOEPA with triggers that may differ from HOEPA. An assignee of a loan covered by such a state law will be subject to certain claims and defenses with respect to the mortgage that the consumer could assert against the original creditor.
  • Aiding and Abetting: Under the common law theory of aiding and abetting, loan purchasers and other parties can be held responsible for the acts of the lender that originated the loan, particularly if they (i) knew that the originating lender was engaged in “predatory” practices, and (ii) gave substantial assistance or encouragement to the originating lender. The Dodd-Frank Act also imposes aiding and abetting liability.
  • State and Federal Defenses to Foreclosure: Certain state laws expressly provide that a violation of the law may be asserted by a borrower as a defense against foreclosure, either as a bar to foreclosure or as a claim for recoupment or setoff. In addition, courts may invoke UDAP or UDAAP statutes or equitable remedies to prevent an originator or assignee from foreclosing on a loan that the court views as abusive or unfair.  Finally, as noted above, violations of TILA’s ability to repay, loan originator compensation, and anti-steering provisions may also be raised defensively to delay or prevent foreclosure.
  • State Licensing and Usury Laws: Certain state laws provide for the impairment of the mortgage loan if the originating lender was not properly licensed or the loan exceeded state usury limits.
  • Challenges to Ownership: Plaintiffs are increasingly raising concerns about investors’ or servicers’ authority to foreclose when the investor cannot produce original loan documents or otherwise verify ownership of the loan, although this risk is lessened when an investor acquires the loan directly from the original creditor.

The list above reflects the laws and legal theories that are most commonly used to impose liability on assignees and/or that we believe will be of increasing prominence going forward. There are other federal and state laws that might also expose assignees to liability, either expressly or by implication. There are also claims against an assignee based on the assignee’s own misconduct in connection with the origination of the loan. An example of a direct claim against an assignee related to loan origination would be a claim under fair lending laws that the underwriting criteria that the assignee established and provided to its correspondents violated fair lending laws. Of course, there are plenty of other risks that the assignee may need to manage, such as the risk of loss from fraud perpetrated against the assignee by borrowers or correspondents; the risk of correspondents’ non-compliance with the investor’s underwriting criteria; or the risk of liability from servicing violations.

Best Practices to Mitigate Correspondent Lending Risk

A financial institution should consider adopting the following best practices to mitigate against the legal, reputational, and credit risks presented by correspondent lending relationships, to the extent the institution has not done so already:

  • Ensure that its compliance management system reflects the legal and regulatory requirements relevant to correspondent lending activity and the risks presented by correspondent lending relationships, that the company has in place monitoring, testing, and audit processes commensurate with such risks, and that the company’s compliance training includes material relevant to the management of correspondent lending relationships and their associated risks.
  • Prepare written policies and procedures that explain comprehensively the steps the company takes to minimize the risk that it will be subjected to liability for violations by correspondents.
  • Conduct due diligence reviews to ensure that correspondents are properly licensed, particularly in those states in which the failure to be licensed could impair the enforceability of the loan.
  • Conduct company-level due diligence reviews of correspondents to assess whether the correspondent is willing and able to comply with applicable laws and avoid engaging in practices that might be considered predatory. This might involve reviewing the company’s policies and procedures, examination reports prepared by regulators (to the extent that such reports are not confidential), repurchase demands made against the correspondent, internal quality control reports, complaints received from consumers and regulators, and information about litigation in which the company is involved.
  • Interview correspondents regarding their policies and procedures designed to prevent predatory sales tactics and other predatory lending practices.
  • Question correspondents regarding the measures they use to oversee and monitor the brokers with whom they do business.
  • Perform loan-level reviews to ensure that loans (1) do not exceed HOEPA and state/local high cost loan law thresholds, (2) exceed state usury limits (particularly in states in which the failure to comply can impair the enforceability of the loan), (3) either are not covered by state or local anti-predatory lending laws or comply with the applicable restrictions under those laws, (4) comply with state usury restrictions, and (5) do not contain other illegal terms or predatory features.

Takeaway

With correspondent lending volume on the rise, now is a good time to review and possibly refresh your risk management approach to ensure it is commensurate with the risks presented by correspondent lending relationships.

Assumptions on the Rise: Are You Ready for Mortgage Assumptions?

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A&B ABstract:

Mortgage assumptions – where a buyer assumes the existing mortgage loan of a seller – have fluctuated in popularity since the 1980s. However, inflation and the high interest rate environment, coupled with an observable shift to a buyer’s market, are raising the prospect that assumable mortgages – especially those with historically low interest rates – are likely to become a selling point for potential sellers. Statements by the real estate broker industry, U.S. Department of Housing and Urban Development (HUD), and former Ginnie Mae officials, to name a few, corroborate this hunch. Ultimately, given these rumblings, it appears that lenders, and more so mortgage servicers, will need to prepare for a potential increase in mortgage assumption volume. Below are several key considerations with respect to mortgage assumptions.

Servicer Capabilities

Servicers generally will need to diligently evaluate the assuming buyer’s creditworthiness. In certain cases, servicers may need to offer and service home equity lines of credit (HELOCs) and second liens to support the cost difference between the amount of the loan to be assumed and the cost of the property. Further, as servicers will likely have to evaluate the assuming consumer’s credit eligibility in connection with the processing of most mortgage assumptions, such activities may give rise to additional state mortgage lender and/or loan originator licensing obligations. While the federal SAFE Mortgage Licensing Act and its implementing Regulation G and H generally do not consider mortgage loan origination activity to encompass a servicer’s activities in connection with the processing of a loan modification, when the borrower is reasonably likely to default, there is no such exemption for mortgage assumptions. Moreover, states that license mortgage loan origination activities may vary as to whether a license is required to process an assumption.

 Investor Restrictions

Even if a buyer is deemed creditworthy to assume the seller’s mortgage payments, the agency or investor backing the seller’s mortgage loan must approve the assumption. Most government-backed mortgage loans, such as those guaranteed or insured by the Federal Housing Administration (FHA), U.S. Department of Veteran Affairs (VA), and U.S. Department of Agriculture (USDA) are assumable, provided specific requirements are met.  On the other hand, conventional mortgages (i.e., loans meeting the requirements for purchase by Fannie Mae and Freddie Mac (the “GSEs”)) may be more difficult to assume.

It is important to note that the requirements for processing and/or approving an assumption vary from agency to agency and among the GSEs. By way of example:

  • FHA loans are assumable if the buyer meets certain credit requirements, according to FHA guidelines. Buyers who assume FHA mortgages pay off the remaining balance at the current rate, and the lender releases the seller from the loan.
  • VA mortgage assumption guidelines are similar to FHA, with some notable differences. The VA or the VA-approved lender must evaluate the creditworthiness of the buyer, who generally must also pay a VA funding fee of 0.5% of the loan balance as of the transfer date. Unlike new loans, buyers can’t finance the funding fee when assuming a loan, it must be paid in cash at the time of transfer. Moreover, the only way the seller can have their VA entitlement restored would be to have the home assumed by a fellow eligible active-duty service member, reservist, veteran, or eligible surviving spouse.
  • USDA permits loan assumptions but operates differently from FHA-insured or VA-guaranteed loans. For example, according to USDA guidelines, when most buyers assume a USDA loan, the lender will generally issue new terms, which may include a new rate.
  • Fannie Mae and Freddie Mac may permit an assumption under certain circumstances. For example, Fannie Mae may permit the assumption of certain first-lien adjustable-rate mortgage (ARMs) loans that have not been converted to a fixed-rate-mortgage loan.

Due-on-Sale Clauses

Many conventional mortgages today contain “due-on-sale” clauses that authorize a lender, at its option, to declare due and payable sums secured by the lender’s security interest if all or any part of the property, or an interest therein, securing the loan is sold or transferred without the lender’s prior written consent. However, the Garn-St. Germain Depository Institutions Act prohibits a lender from exercising its option pursuant to a due-on-sale clause in connection with certain exempt transfers or dispositions, including, among others: (1) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (2) a transfer to a relative resulting from the death of a borrower; (3) a transfer where the spouse or children of the borrower become an owner of the property; and (4) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property. 12 U.S.C. § 1701j–3(d).

Fees

Whether an assumption fee can be charged, and the amount of such fee, will depend on many factors including application of the Garn-St. Germain Act, the CFPB mortgage servicing rules, investor and agency guidelines, and state laws. Further, the Fair Debt Collection Practices Act (FDCPA) may impact whether a servicer may assess and collect an assumption fee. While most states neither expressly permit nor prohibit assumption fees, several other states, such as Idaho and Michigan, explicitly recognize and permit assumption fees in limited cases (e.g., only where the fee is included in the purchase contract or other agreement). Other states may regulate the amount of an assumption fee. For example, Colorado law limits assumption fees to one-half of 1% of the outstanding principal mortgage amount.

General Federal Consumer Financial Compliance

Assumption transactions also raise compliance considerations under federal consumer financial laws. Under TILA and Regulation Z, an assumption occurs if the transaction meets the following elements: (1) includes the creditor’s express acceptance of the new consumer as a primary obligor; (2) includes the creditor’s express acceptance in a written agreement; and (3) is a “residential mortgage transaction” as to the new consumer. 12 C.F.R. § 1026.20(b). A “residential mortgage transaction” is a transaction: (a) in which a security interest is created or retained in the new consumer’s principal dwelling; and (b) which finances the acquisition or initial construction of the new consumer’s principal dwelling. 12 C.F.R. 1026.2(a)(24). If the transaction is an assumption under Regulation Z (12 C.F.R. § 1026.20(b)), then, as noted by the CFPB in its TILA-RESPA Factsheet, creditors must provide a Loan Estimate and Closing Disclosure, unless the transaction is otherwise exempt. Moreover, the assumption transaction may also trigger requirements under Regulation Z’s loan originator compensation and ability-to-repay rules.

With respect to RESPA and Regulation X, however, assumptions are exempt unless the mortgage instruments require lender approval for the assumption and the lender approves the assumption. Specifically, Regulation X expressly exempts from its coverage any “assumption in which the lender does not have the right expressly to approve a subsequent person as the borrower on an existing federally related mortgage loan.” 12 C.F.R. § 1024.5(b)(5). By way of example, the Fannie/Freddie Uniform Security Instrument provides that:

Subject to the provisions of Section 18, any Successor in Interest of Borrower who assumes Borrower’s obligations under this Security Instrument in writing, and is approved by Lender, shall obtain all of Borrower’s rights and obligations under this Security Instrument.  Borrower shall not be released from Borrower’s obligations and liability under this Security Instrument unless Lender agrees to such release in writing.  The covenants and agreements of this Security Instrument shall bind (except as provided in Section 20) and benefit successors of Lender.

Finally, with respect to the CFPB’s Mortgage Servicing Rules, if a successor in interest assumes a mortgage loan obligation under state law or is otherwise liable on the mortgage loan obligation, the protections that the consumer enjoys under Regulation X go beyond the protections that apply to a confirmed successor in interest. 12 C.F.R. § 1024.30(d).

Takeaway

The processing of mortgage assumptions involves many of the same regulatory considerations as originating a new loan. However, because of varying requirements under agency and investor guidelines, there are several unique aspects to processing assumptions, which may pose challenges for servicers that do not regularly engage in mortgage origination. The economic climate appears to be ripe for an uptick in mortgage loan assumption activity. Accordingly, servicers should ensure their compliance management systems are prepared to manage the associated compliance risks.

Alston & Bird Adds Consumer Finance Partner Aldys London in Washington, D.C.

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Alston & Bird has strengthened and expanded its capabilities for advising companies on state and federal consumer finance regulatory compliance issues with the addition of partner Aldys London in the firm’s Washington, D.C. office. Her clients include mortgage companies, consumer finance and FinTech companies, secondary market investors, real estate companies, home builders, insurance companies, banks, and other financial institutions and settlement service providers.

“It’s a pleasure to welcome Aldys, who brings deep experience and a sterling reputation for counseling consumer financial service entities as they navigate complex regulatory issues, including licensing, the intersection of state and federal regulatory compliance, and key approvals for transactions,” said Nanci Weissgold, Alston & Bird partner and co-chair of the firm’s Financial Services & Products Group. “With our shared emphasis on collaboration and excellent service, we are confident that she will successfully draw on our firm’s vast resources and expertise to benefit her clients.”

London provides advice on state licensing for mortgage lenders and related service providers, mortgage brokers, FinTech companies, lead generators, servicers, debt collectors, and investors. She is well versed in federal registration and licensing requirements imposed by the SAFE Act, as well as state laws and regulations concerning fees, disclosures, loan documentation, interest rates, privacy, advertising, data breach, and telemarketing.  Her practice also covers seeking and maintaining approvals from state and federal agencies and GSEs.  She is adept at federal laws governing real estate mortgage transactions, including preemption, privacy, fair lending and consumer protection.

In addition, London assists a variety of consumer financial services companies in obtaining regulatory approvals for complex acquisitions, mergers, and asset transfer transactions. She performs due diligence reviews for proposed acquisitions and IPOs, reviews and prepares policies and procedures, conducts regulatory compliance audits of financial institutions, and assists with structuring and developing compliance and training programs. She also assists clients with responses to regulatory audits and investigations by state and federal regulators.

“Clients rely on Aldys’ sound counsel because of her technical rigor and thorough understanding of the consumer finance market,” said Stephen Ornstein, Alston & Bird partner and co-leader of the firm’s Consumer Financial Services Team. “Her legal skills, combined with her excellent business sense and ability to develop strong relationships, make her a valuable asset to our firm and our clients.”

Alston & Bird’s Consumer Financial Services Team focuses on the regulation of consumer credit and real estate, with a broad emphasis on origination, servicing, and secondary mortgage market transactions. This team addresses the compliance challenges of major Wall Street financial institutions, federal- and state-chartered depository institutions, hedge funds, private equity funds, national mortgage lenders and servicers, mortgage insurers, due diligence companies, ancillary service providers, and others.

Second Juneteenth Holiday Raises Tricky Compliance Issues

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A&B Abstract

The second observance of the Juneteenth National Independence Day (Juneteenth) holiday is Monday, June 20, 2022.  President Biden signed legislation making Juneteenth National Independence Day a federal national holiday last year. Because the fixed date holiday falls on a Sunday, the second observance of Juneteenth raises tricky compliance issues for the timing of certain disclosures provided in connection with residential mortgage transactions.

Background

Under the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID), generally, the creditor is responsible for ensuring that it delivers or places in the mail the loan estimate (LE) no later than the third business day after receiving the consumer’s application. Further, creditors must ensure that the consumer receives the closing disclosure (CD) at least three business days before consummation of the transaction. In addition, for certain refinancings, Regulation Z permits the consumer to rescind (cancel) the transaction within three business days after consummation.

For purposes of providing the LE, a business day is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions. However, the term “business day” is defined differently for other purposes, such as counting days to ensure the consumer receives the CD on time and the consumer’s exercise of the right to rescind the transaction. For these purposes, “business day” means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a): New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Juneteenth, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

Last year, Juneteen fell on a Saturday which created confusion due to President Biden signing the holiday into law only earlier two days on June 17, 2021.  Notably, Comment 2(a)(6)-2 of the Official Staff Commentary to Regulation Z indicates that when one of the federal holidays (July 4, for example) falls on a Saturday, federal offices and other entities might observe the holiday on the preceding Friday (July 3). In these cases, the observed holiday (in the example, July 3) is a business day. Following that logic, in 2021, the observed Juneteenth holiday (Friday, June 18) was a “business day” and the actual stated holiday (Saturday, June 19) was the “holiday” for purposes of the CD and right of rescission waiting periods.

Nevertheless, to address some of the confusion created by the hasty promulgation of the new holiday, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rulemaking on August 5, 2021, indicating, for purposes of the 2021 Juneteenth holiday, that “for rescission of closed-end mortgages and TILA-RESPA Integrated Disclosures, whether June 19, 2021, counts as a business day or federal holiday depends on when the relevant time period began. If the relevant time period began on or before June 17, 2021, then June 19 was a business day; after June 17, 2021, then June 19 was a federal holiday.”

The Official Staff Commentary does not address a scenario when the actual federal holiday falls on a Sunday but is observed on a Monday.  According to the Bankers Online website, the Consumer Financial Protection Bureau has indicated that, when a fixed-date holiday falls on Sunday but is observed on Monday, the observed holiday (for example, Independence Day observed on Monday, July 5, 2021, or Juneteenth observed on June 20, 2022) is a business day in cases where the more precise rule applies.

Takeaway

For residential mortgage transactions that are anticipated to close in the coming week, it is essential that creditors treat the actual Juneteenth holiday (June 19) as a federal holiday for purposes of the timing requirements of providing the CD (with the observed holiday of Monday, June 20 being treated as a “business day”) and allowing sufficient time to elapse for the borrower’s right to rescind the transaction.  Further, if a creditor’s offices are open to the public for carrying out substantially all of its business functions on the observed Juneteenth holiday (June 20), June 20 should be included as a business day for purposes of providing the LE.