RESPA/TILA INTEGRATION – PART II: CLOSING DISCLOSURE AND ACTION PLAN - INCLUDES CLOSING DISCLOSURE TABLE

WHITE PAPER

Jonathan Foxx [*]

This second White Paper of a four-part series will introduce and treat the numerous features of the Closing Disclosure. In the first part, I discussed the mission of the RESPA/TILA Integration and the Loan Estimate. The third part will be a detailed analysis of the Loan Estimate. The fourth part will provide an in depth scrutiny of the Closing Disclosure.

Accompanying this article is a Closing Disclosure Table that may be used for certain itemized categories and action requirements. The table outlines the types of areas of interest in many of the routine requirements of the Closing Disclosure process. Rather than a before-and-after, comparative analysis, the Closing Disclosure Table provides the requirements with the compliance effective date of August 1, 2015.

In the other articles of the two remaining White Papers, I will provide charts, tables, form specimens, and annotations for applicable categories and action requirements relating to the RESPA-TILA Integration. In the third part of this four-part series on RESPA-TILA Integration, I will provide a deep dive, line by line outline of the Loan Estimate. The fourth part will provide a thorough analysis of the Closing Disclosure.

The full series, and accompanying charts, tables, and form specimens, first appeared in the October 2014 edition of National Mortgage Professional Magazine.

As I indicated in Part I, brand new disclosures have a compliance effective date of August 1, 2015 – a combined set, as in a new disclosure at the commencement of the loan origination and a new disclosure at its closing: these are, respectively, the Loan Estimate and the Closing Disclosure.[i]

The new set has been dubbed “RESPA-TILA Integration,” since the consolidation requirements reflect the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directed the Bureau to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5.[ii] For the balance of this article, I will refer to these provisions as the “RESPA-TILA Rule” or (“Rule”). The Bureau often refers to these provisions as the “TILA-RESPA Integrated Disclosure Rule.” Additionally, I will refer to the consolidated disclosures as “Integrated Disclosures.”

The Rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or chattel-dwelling loans, such as mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The provisions also do not apply to loans made by persons who are not considered “creditors,” where such persons make five or fewer mortgages in a year. However, certain types of loans that are currently subject to TILA but not RESPA are subject to the Rule’s Integrated Disclosure requirements, including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes. So, creditors originating these types of mortgages must continue to use, as applicable, the Good Faith Estimate (“GFE”) GFE, Truth in Lending Disclosure (“TIL”), and HUD-1 Settlement Statement (“HUD-1”) disclosures required under current law.

There is also a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers. These creditors are exempt from the requirement to provide the RESPA settlement cost booklet, GFE, HUD-1, and application servicing disclosure statement requirements, and, thus, exempt from the requirements to provide a Loan Estimate, Closing Disclosure, and Special Information Booklet for these loans.

I would also like to answer the question about whether or not creditors may use the Integrated Disclosure on loans not covered by the Rule but subject to RESPA and TILA. The answer is that using the Integrated Disclosures for such purposes is not prohibited on loans that are not covered by RESPA and TILA (i.e., mortgages associated with housing assistance loan programs for low- and moderate-income consumers). But a creditor cannot use the new Integrated Disclosure forms instead of the GFE, TIL and HUD-1 forms for transactions, such as reverse mortgages, that are covered by RESPA and TILA that require those disclosures.

Also, to repeat my statement from Part I, it should be emphasized that the Rule can be encapsulated, as follows:

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.[iii] (Emphases in original.)

The new Integrated Disclosures must be provided by a creditor or mortgage broker that receives an application from a consumer for a closed-end credit transaction secured by real property on or after August 1, 2015. But creditors will still be required to use the GFE, TIL, and HUD-1 forms for applications received prior to August 1, 2015.

Operationally speaking, as the applications received prior to August 1, 2015 are consummated, withdrawn, or cancelled, the use of the GFE, TIL, and HUD-1 forms will no longer be used for most mortgage loans.[iv]

Four General Requirements

If the loan requires a Loan Estimate, creditors must also provide the Closing Disclosure, to be received by the consumer no later than three business days before consummation of the loan.[v] [vi]

A practical way to view the Closing Disclosure is as a consolidation of the HUD-1 and the final TIL disclosure, containing additional elements. There are four rudimentary requirements of the Closing Disclosure.

Requirement 1: The Closing Disclosure generally must contain the actual terms and costs of the transaction.[vii]

·       Creditors may estimate disclosures using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made.

·       Creditors must act in good faith and use due diligence in obtaining the information.  The creditor normally may rely on the representations of other parties in obtaining the information, including, for example, the settlement agent.

·       Creditors are required to provide corrected disclosures containing the actual terms of the transaction at or before consummation.[viii]

         

Requirement 2: The Closing Disclosure must be in writing and contain the information prescribed in § 1026.38, the section of Regulation Z that outlines the content of disclosures for certain mortgage transactions (i.e., Closing Disclosure). Creditors must disclose only the specific information set forth in § 1026.38(a)-(s), as shown in the Bureau’s form (viz., Appendix H-25, the “Mortgage Loan Transaction Closing Disclosure—Model Form”).[ix] The specific information referred to covers a section-by-section analysis of the Closing Disclosure’s content requirements.

Requirement 3: If the actual terms or costs of the transaction change prior to consummation, creditors must provide a corrected disclosure that contains the actual terms of the transaction and complies with other requirements[x], such as the timing requirements, as well as the requirements for providing corrected disclosures due to subsequent changes.[xi]

         

Requirement 4: There is a new three-day waiting period; that is, if a creditor provides a corrected disclosure, it may also be required to provide the consumer with an additional three-business-day waiting period prior to consummation.[xii] (I will elaborate further on this feature below. See also the Table that accompanies this article.)

Page by Page

The Closing Disclosure is an extensive, five-page document with numerous fields, containing information disclosed in the Loan Estimate form, as well as additional information.

It may be categorically organized, as follows:

RESPA/TILA Integration - Part I: Overview and Loan Estimate (Includes Loan Estimate Table)

RESPA/TILA Integration – Part I: Overview and Loan Estimate

   Jonathan Foxx [*]

 WHITE PAPER

This first of a four-part series will introduce the RESPA/TILA Integration and treat the numerous features of the Loan Estimate. In the second part of the series, I will detail the features of the Closing Disclosure. The third part will be a detailed analysis of the Loan Estimate. The fourth part will provide an in depth scrutiny of the Closing Disclosure.

Accompanying this article is a Loan Estimate Table that may be used for certain itemized categories and action requirements. The table outlines the types of areas of interest in many of the routine requirements of the Loan Estimate process. In reviewing the table, notice how many of these categories in some respects reflect the pre-August 2015 disclosure process. Rather than a before-and-after, comparative analysis, the Loan Estimate Table provides the requirements of the post-August 2015 Rule itself.

Two Download Locations

 White Paper and Loan Estimate Table. (One Download, Two Documents.)

White Paper and Loan Estimate Table. (Two Downloads, Two Documents.)

In the other articles of this four-part series, I will provide charts, tables, form specimens, and annotations for applicable categories and action requirements relating to the RESPA-TILA Integration. The full series, and accompanying charts, tables, and form specimens, will also appear in National Mortgage Professional Magazine, commencing October 2014. 

Discussion

Let’s admit at the outset that having to explain to loan applicants the fees and boxes and pages of the Good Faith Estimate (GFE) is not for the faint of heart. The Truth in Lending Disclosure (TIL) remains a conundrum without peer: difficult to explain to a consumer in just a few words; inscrutable even to loan officers; and, blisteringly enigmatic often even to lenders. Both disclosures are somewhat archaic, examples of good intentions gone to the shadowy realm of Unintended Consequences.

Notwithstanding the foregoing debacle, there is the infamous HUD-1 Settlement Statement (HUD-1), infamous for its myriad codes, infamous for codes that should correlate or sometimes seem not to correlate to the GFE itself, infamous for mapping challenges to the loan origination system, and infamous for irksome consternation about where, what, and how to show certain fees!

A consumer’s distrust of the lender seems to increase with the duration of the explanation provided by the mortgage loan originator. If it takes more than a sentence or two to explain a disclosure’s contents, many consumers are already hesitating, wondering if there’s something they’re not being told! So, is there a way to provide a new kind of consumer disclosure that replaces the overly-encrusted, superannuated, periodically reconditioned, creaky, decades’ old twosome and settlement documents that have dominated the origination of residential mortgage loans for an entire generation of mortgage loan originators?

Into this maelstrom of implacable confusion steps the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The debate as to whether we need to replace the GFE, TIL, and settlement disclosures, into an overall, encompassing disclosure, is over and done. Behind us now are the many analyses, heat maps, comment periods, public outreach, focus groups, committee reviews, Interagency evaluations, extensive consumer and industry research, association position papers, quantitative studies, speeches, public relations, announcements, and presentations. Before us unfolds on August 1, 2015 a brand new set of disclosures – a combined set, as in new disclosure at the commencement of the loan origination and new disclosure at its closing – the former to be called Loan Estimate and the latter to be called Closing Disclosure.[i]

The new set has been dubbed “RESPA-TILA Integration,” since the consolidation requirements reflect the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directed the Bureau to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5.[ii] For the balance of this article, I will refer to these provisions as the “RESPA-TILA Rule” or (“Rule”). Additionally, I will refer to the consolidated disclosures as “Integrated Disclosures.”

The Rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or chattel-dwelling loans, such as mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The provisions also do not apply to loans made by persons who are not considered “creditors,” where such persons make five or fewer mortgages in a year. However, certain types of loans that are currently subject to TILA but not RESPA are subject to the Rule’s Integrated Disclosure requirements, including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes. So, creditors originating these types of mortgages must continue to use, as applicable, the GFE, TIL, and HUD-1 disclosures required under current law.

There is also a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers. These creditors are exempt from the requirement to provide the RESPA settlement cost booklet, GFE, HUD-1, and application servicing disclosure statement requirements, and, thus, exempt from the requirements to provide a Loan Estimate, Closing Disclosure, and Special Information Booklet for these loans.

The RESPA/TILA Rule

I am sure that the question will be asked whether creditors may use the Integrated Disclosure on loans not covered by the Rule but subject to RESPA and TILA. The short answer is that using the Integrated Disclosures for such purposes is not prohibited on loans that are not covered by RESPA and TILA (i.e., mortgages associated with housing assistance loan programs for low- and moderate-income consumers). A creditor cannot use the new Integrated Disclosure forms instead of the GFE, TIL and HUD-1 forms for transactions that are covered by RESPA and TILA that require those disclosures (i.e., reverse mortgages).

With its usual flair for brevity, the Bureau’s proposal in July 2012 is a mere 1,099 pages.[iii] In November 2013, the final rule was issued, reaching the gargantuan proportions of 1,888 pages.[iv] Some of the seemingly boundless verbiage has thankfully been distilled to a 91 page guide, entitled TILA-RESPA Integrated Disclosure Rule, Small Entity Compliance Guide (“Guide”).[v] The most recent update to the Guide was issued in September 2014. The Guide touches on many features of the Rule and the implementation of the new disclosures; however, a thorough reading of the final rule is needed in order to comprehend the scope, application, and breadth of the Rule in effectuating its provisions. [vi] [vii] [viii]

Much of the Rule can be encapsulated in a single sentence, leaving aside all the details, as set forth by the Bureau:

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.[ix] (Emphases in original)

As in all consumer disclosure regulations, the compliance effective date and the operational recognition of that date are critical timing points. The new Integrated Disclosures must be provided by a creditor or mortgage broker that receives an application from a consumer for a closed-end credit transaction secured by real property on or after August 1, 2015. But creditors will still be required to use the GFE, TIL, and HUD-1 forms for applications received prior to August 1, 2015.

Operationally speaking, as the applications received prior to August 1, 2015 are consummated, withdrawn, or cancelled, the use of the GFE, TIL, and HUD-1 forms will no longer be used for most mortgage loans.[x]

But from a process perspective, this timing can get complicated quickly. Various restrictions take effect on the calendar date August 1, 2015, regardless of whether an application has been received on that date. For instance, take note of these restrictions:

TILA versus TILA: Rescission by Notice or Lawsuit

Commentary and Analysis

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Here’s something to ponder on:

“Whether the Truth in Lending Act entitles homeowners to rescind their mortgage commitment by notifying the lender in writing within the period specified by the statute, or whether the homeowner must file a lawsuit to make the rescission effective.”[1]

The foregoing ponderable – ably condensed into a single contemplation by the American Civil Liberties Union in announcing its amicus brief – is expected to be adjudicated by the US Supreme Court in its next term. The ACLU’s amicus brief is in favor of written notification.

Before we get started, it should be noted that the ACLU is hardly alone in offering an amicus brief favoring written notification: Attorney General of New York, Eric T. Schneiderman, has announced that he is leading a coalition of more than 25 states in filing an amicus brief urging the U.S. Supreme Court “to uphold consumer rescission rights under the federal Truth in Lending Act (TILA).”[2]

Indeed, in addition to the private litigants, the United States as well as several organizations have filed an amicus brief in favor of written notification, such as the American Association of Retired Persons, National Consumer Law Center, National Association of Consumer Advocates, and the Center for Responsible Lending.

Given the immense legal implications, especially with respect to the loan flow process from point of sale through portfolio and securitization, I would urge a familiarity with the positions taken by both parties to the litigation.

Would you like to venture a guess on the outcome?

For the time being, while we explore this case, please put on hold whatever you know, thought you knew, or assumed regarding rescission. You might find your view challenged by the contours of this lawsuit.

So, let’s ponder this issue that is flaring up from the Truth in Lending Act (“TILA” or “Act")!

Throughout this article, I will refer to the subject case as “Jesinoski v. Countrywide” or just “Jesinoski.”[3]

The Big Question

Jesinoski v. Countrywide cites Section 1635 of TILA to present the foundation upon which the deliberations are to proceed.[4] In that section, it states that a borrower “shall have the right to rescind the transaction until midnight of the third business day following … the delivery of the information and rescission forms required under this section … by notifying the creditor

… of his intention to do so.”[5] (My emphasis.) With regards to the timeframe available to the borrower, the well-known three year time frame is cited, to wit, a time limit “for [the] exercise of [this] right,” providing that the borrower’s “right of rescission shall expire three years after the date of consummation of the transaction” even if the “disclosures required … have not been delivered.”[6]

Now comes the question that logically follows from the phrase emphasized above – “notifying the creditor” – insofar as, by operation of law, what shall constitute acceptable notification. As posed in Jesinoski:

“Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?”[7]

In other words, within three years of consummation of the loan transaction, is “notification” met where the borrower has provided written notification to the creditor, thereby exercising the right of rescission, or only where the borrower brings a lawsuit against the creditor?

Please note that several Circuit Courts have considered the question in related litigation, with differing decisions, such cases brought by plaintiff’s with certain claims somewhat similar to Jesinoski, as the litigation has steadily moved up the chain of command until it has arrived at the US Supreme Court.[8] [9]

Staking Out the Position

This battle goes all the back to 2007, when the Jesinoskis claimed that they did not receive complete disclosures on the home they had refinanced. They refinanced their home mortgage with Countrywide Home Loans, Inc., but, it is claimed, Countrywide failed to furnish them all the information and disclosures required by the Act. TILA creates a “right to rescind” the loan transaction within “three business days” of the delivery of all the required disclosures, and a borrower exercises that right simply “by notifying the creditor.”[10]

Furthermore, the Act provides that the rescission right “shall expire three years” after the closing of the transaction, even if all the required disclosures have not been delivered.[11] 

But when the Jesinoskis sought to exercise their rescission right by sending their creditors a written notice, within the three year timeframe, the creditors refused to honor their right to rescind.

Thus followed the lawsuit, as the Jesinoskis brought an individual suit to enforce the rescission. Their suit was in line with similar suits filed by other parties. The First, Sixth, Eighth, Ninth, and Tenth Circuit Courts refused to recognize that these plaintiffs had validly rescinded their mortgage. Regarding the Jesinoskis, the court held that the Act required the Jesinoskis to file a lawsuit to rescind. But, in such similar cases, the Third, Fourth, and Eleventh Circuits held that written notification is all that was required. Battle lines drawn, the case moved to its perch at the US Supreme Court.

The Three Year Gauntlet

Stepping through the rescission timeframe toward the three year mark, this is a brief outline of how TILA[12] sets forth the obligations of borrower and creditor:

1.     A borrower who secures the loan with a principal dwelling “shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section … whichever is later” by notifying the creditor of the intention to do so.[13]

This means that the borrower has an unconditional right to rescind for business three days after the consummation of the transaction and, as a remedy for a creditor’s violation of the Act’s disclosure requirements, extends that right to rescind until three days following the ultimate delivery of the required disclosures.

2.     A borrower’s exercise of the right to rescind “sets in motion a series of automatic steps to unwind the transaction,”[14] imposing obligations on both the creditor and the borrower. When a borrower “exercises his right to rescind, he is not liable for any finance or other charge, and any security interest given by the borrower becomes void upon such a rescission.”[15]

3.     Following the borrower giving notice to rescind, and within 20 days after receipt of a notice of rescission, the creditor must return to the borrower any money or property given as … down payment … and “shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”[16]

4.     The borrower’s time limit for exercising the right of rescission is three years from the transaction’s consummation,[17] even if a creditor never delivers the disclosures required by the Act.[18] [19] [20]

What Constitutes a Written Notice?

Regulation Z specifically states the procedural features of a written notice with respect to the borrower’s notification requirement for exercising a right of rescission, and I quote:

“To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business.”[21]

Pretty clear, yes? What is there to dispute about the foregoing words? Not so fast!

Consumer Complaint Database and Public Narratives

Lou Holtz, the renowned football coach, is reported to have quipped “Never tell your problems to anyone...20% don't care and the other 80% are glad you have them.” Leaving aside the pleasure of Schadenfreude when competitors get their comeuppance, lingering in the shadows is our own fear that we just might be the next recipient of some imputation of blame! Indeed, lest we fall into the downward drift of reputation risk, the general modus operandi has been to resolve controversial issues affecting consumer complaints as quickly as possible. So, we are usually able to avoid hanging out our dirty laundry to dry in the acidic air of public opinion. Until now!

Before I jump into the deep pool of consumer complaint machinations of the Consumer Financial Protection Bureau (“Bureau”), I would like to offer a definition of a word. That word is “allegation.” Here’s my definition of an “allegation”, liberated from its legalistic moorings: ‘An accusation that someone has done something illegal or wrong, which may be true or may be false, typically made without proof, or sufficient proof, and eventually may or may not lead to somebody being found innocent or guilty of doing something illegal or wrong.’ Please keep my definition in mind as we explore together the Bureau’s new Proposed Policy Statement regarding consumer complaints, issued on July 16, 2014.[i]

For some time we have known about the Bureau’s “Consumer Complaint Database” (“Database”). The Bureau’s new proposal would expand the “public-facing database” to include “unstructured consumer complaint narrative data” (“Narratives”). The Bureau promises that only those Narratives for which an opt-in consumer consent has been obtained and a “robust personal information scrubbing standard and methodology” applied would be subject to disclosure. The expansion, therefore, supplements and extends the Bureau’s existing Policy Statements that established the Database.[ii]

The Database actually had the Narratives feature associated with it from the start. The Bureau planned to include Narratives from as far back as the original announcement of the Database on December 8, 2011, when it notified the public about its plans to disclose certain data about the credit card complaints that consumers submitted to the Bureau.[iii] Its final policy statement was issued on June 22, 2012.[iv] At the time that this policy became official, it also announced its plans to disclose data from consumer complaints about financial products and services other than credit cards.[v] Finally, the Bureau rendered its final policy statement for these other financial products and services on March 25, 2013.[vi] In effect, the July 16, 2014 supplements the Bureau’s existing Policy Statements.

Here is the timeline:

·       Credit Card Complaints:

o   December 8, 2011: “December 2011 Proposed Policy Statement”

o   June 22, 2012: “June 2012 Policy Statement”

·       Financial products and services other than credit cards:

o   June 22, 2012: “June 2012 Proposed Policy Statement”

o   March 25, 2013: “March 2013 Policy Statement”

·       Supplement to credit card and financial products and services other than credit cards:

o   July 16, 2014: “July 2014 Proposed Policy Statement”[vii]

It should be noted that the June 2012 Proposed Policy Statement did not propose the inclusion of public Narratives in the Database. The volume of comments in response to including the such Narratives was “significant”: there were consumer, civil rights, and open government groups, supporting disclosure “on the grounds that disclosing narratives would provide consumers with more useful information on which to base financial decisions and would allow reviewers to assess the validity of the complaints; and privacy groups wanted an opt-in, because of concerns about the risk of publishing “non-identifiable” data; but trade and financial industry groups “nearly uniformly” opposed the disclosure of consumer complaint narratives.[viii] 

Responding to these comments, the Bureau noted in the March 2013 Policy Statement that it would not post public Narratives to the Consumer Complaint Database – at least not until it could assess whether there were “practical ways” to disclose narrative data submitted by consumers without undermining consumer privacy.[ix] The stage was now set to determine how and when to expand the policy to include these Narratives.

AREAS OF INTEREST

The Bureau believes that there are three areas of interest that need to be considered in order to implement its plan to include the Narratives: (1) the direct and indirect benefits to consumers, (2) the benefit to the Bureau, and (3) the advancement of open government principles. Permit me to provide a synopsis of each of these vectors.

Direct Benefits to Consumers: Consumers may share their experience with other consumers.

Complainants would be able to provide information they deem useful to others who may be considering doing business with a particular financial institution. Or, the Narrative would be a means of letting others know about a company, offering and experiencing similar situations, thereby letting them “know that they are not alone.”[x] The Bureau contends that the public is not served if it only discloses the non-narrative portions of the complaint. It seems to me that the Bureau is crossing into the realm of the Confidence Fairy[xi] when it opines that “some consumers may choose to submit a complaint only if they will have the opportunity to share their story and other consumers may overcome their reticence to submit a complaint by reading the experiences of others.”[xii] The Bureau believes that this direct benefit may expand the number of complaints submitted to the Bureau, thereby improving the value of the Database.

Indirect Benefits to Consumers: The marketplace will be more responsive to consumers, because the effect of the Narratives will be to influence consumer purchasing decisions. The Bureau claims that research shows that “consumer word of mouth (which includes consumer reviews and complaints) is a reliable signal of product quality that consumers consult and act upon when making purchasing decisions.”[xiii] While the Bureau does not provide such research, it is a rudimentary premise of economic theory that, through their purchases, consumers signal competitive information to market participants. However, the device of a Database with Narratives is not itself the market. As the eminent semanticist, Alfred Korzybski, said, "the map is not the territory."[xiv] Or, as mathematician Eric Temple Bell said, "the map is not the thing mapped."[xv] The signal is not coming from within the market itself but mysteriously from a contrived database. This is what I would call the “Angie’s List Fallacy,” the notion that a list of pros and cons about vendors can substantially move the overall pricing and enhance customer service across a huge market. The theory seems wonderful; the practice does not deliver. Yet, the Bureau believe that the Narratives will be “responsive to the effect word of mouth can have on sales, adjust prices to match product quality and improve customer service in order to remain competitive.”[xvi] The Confidence Fairy reappears, when the Bureau asserts the indirect benefits of the “powerful first person voice of the consumer talking about their (sic) experience,” and the “ability for local stakeholders to highlight consumer experiences in their community,” and empowerment provided “by encouraging similarly situated consumers to speak up and be heard.”[xvii]

Given the direct and indirect benefits to the consumer, the Bureau seems to have arrived at the following algorithm: the aforementioned increase in benefits and utility leads to an increase in consumer contacts, which leads to a positive effect on Bureau operations, which leads to a “critical mass” of complaint data being achieved and exceeded, which leads to the representativeness of Bureau complaint data increasing. The July 2014 Proposed Policy Statement provides no information in support of effectiveness of this process nor does it offer how the “critical mass” will be sliced and diced, except to claim that the “complaint data” will be used by the Bureau’s Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking.

Benefits to the Bureau: The Bureau sees itself as a vehicle to open and transparent government. As such, it takes the position that the expansion of the Database is needed in order to “further establishing itself as a leader in the realm of open government and open data.”[xviii] In support of this mission, it mentions the “Open Government Directive,” issued on December 8, 2009 by the Office of Management and Budget (“OMB”), which requires agencies to “take prompt steps to expand access to information by making it available online.”[xix] The Bureau indulges in a bit of spin when it asserts that “agencies have historically withheld data from the public due to privacy and cost controls, (but) with new technology comes new opportunities for openness without significant increases to privacy risk and costs.”[xx] I think it is fair to observe that agencies have withheld data from the public for numerous reasons, though the least of which seem to have been due to “privacy and cost controls.”

Advancement of Open Government Principles: In developing its thesis, the Bureau provides a list of agencies that are seeking to be more open and transparent, such as the Department of Health and Human Services, the Federal Trade Commission, and projects like HealthData.gov and Regulations.gov. These efforts are rooted in the OMB’s call for a “presumption of openness” standard.[xxi]

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.

·    The firm must not advise customers to stop communicating with their lender or servicer.

Under the Rule, it's illegal to tell people they shouldn't communicate with their lender or servicer.

·    The firm must disclose key information to its customers if it forwards an offer of mortgage relief from a lender or servicer.

It must give the customer a written notice from the lender or servicer describing all material differences between the terms of the offer and the customer's current loan.

The firm must also tell its customers that if the lender or servicer's offer isn't acceptable to them, they don't have to pay the firm’s fee.

·       The firm must not misrepresent its services.

Under the Rule, it's illegal to make claims that are false, misleading, or unsubstantiated.

Pertinently, the Bureau also alleges that some of the defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally prohibits deceptive practices in the consumer financial market.

Now compare the foregoing requirements under the Rule with the illegal practices alleged in the complaints:

·       Collecting fees before obtaining a loan modification: Companies cannot legally accept payment for helping to obtain a mortgage modification for a consumer before the consumer has a modification agreement in place with their lender. All of these companies charged consumers advance fees without having first obtained modifications for them, which was not only illegal but also caused significant harm to consumers who often paid thousands of dollars without ever receiving a modification. The Bureau alleges that, after pocketing illegal fees from one distressed homeowner after another, defendants typically stopped returning consumers’ phone calls and emails.

·       Inflating success rates and likelihood of obtaining a modification: The firms’ marketing materials misrepresented the likelihood that they would help consumers save substantial sums in mortgage payments. Ultimately, many consumers who paid these companies advance fees did not receive a mortgage modification and ended up worse off than they began.

·       Duping consumers into thinking they would receive legal representation: All of these companies engaged in a particularly egregious scam where the perpetrators used their status as attorneys to dupe consumers into thinking they would receive legal representation when many consumers never spoke with an attorney or had their case reviewed by one.

·       Making false promises about loan modifications to consumers: During meetings, some consumers were misled into believing that they were eligible for a loan modification. Other consumers were promised that they would receive relief within a few months. In the end, many consumers learned that the defendants had not contacted their lenders or obtained any meaningful relief for them. Ultimately, homeowners across the country lost thousands of dollars and suffered significant economic injury, including losing their homes.

Just to break this down a little further. Let’s see what each of these defendants are alleged to have done, starting with the same order stated in the agencies’ announcement.

First up is Clausen & Cobb Management Company, Inc. and Siringoringo Law Firm. The Bureau’s complaint is against three individuals, Stephen Siringoringo, Alfred Clausen, Joshua Cobb, and a corporation, Clausen & Cobb Management Company, Inc. (CCMC), for allegedly charging homeowners illegal advance fees for mortgage loan modifications. Their operation charged initial fees ranging from $1,995 to $3,500, in addition to monthly fees of $495, to thousands of California homeowners in distress. The complaint alleges that Clausen, Cobb, and CCMC managed, staffed, and supported the deceptive loan modification operations of Stephen Siringoringo’s southern California law firm. The State Bar of California initially referred the misconduct to the Bureau.[v]