Construction to Permanent Disclosures

Jonathan Foxx

Managing Director

Recently, we have seen an uptick in inquiries from some of our clients, colleagues, and requests from media, regarding disclosures for construction to permanent loans. In the inquiries, the specific facts dictated our responses. However, we can point out that Regulation Z permits a creditor to disclose the construction phase and permanent phase of a residential construction loan either as one transaction or as separate transactions. This aspect of the disclosure process seems to cause some confusion, so I would like to dispel with some of the more salient concerns expressed by lenders involved in originating these loan products.

What is the basic structure of construction to permanent mortgage loan transactions?

For the most part, they have two distinct phases that make them similar to two separate transactions. First, the construction period usually involves several disbursements of funds, at times and in amounts often unknown at the beginning of the period. The consumer generally pays only accrued interest until construction is completed. Second, unless the obligation is paid at the time the construction is completed, the loan converts to permanent financing in which the loan amount is amortized just as in a standard mortgage transaction.

So far, so good!

But on July 7, 2017, the CFPB amended Regulation Z to clarify that, for construction-permanent financing transactions, the creditor is required to disclose a Loan Estimate only for the transaction for which it received an application. So, for instance, if the creditor receives an application for construction financing only, the creditor is only required to provide a Loan Estimate for the construction transaction. If the creditor receives applications for separate construction and permanent financing transactions at the same time, then the creditor must provide the Loan Estimate disclosures as either a combined disclosure or separately for each phase of the transaction.

Therefore, the special disclosure rule permits the creditor to give either (A) one combined disclosure for both the construction financing and the permanent financing or (B) a separate set of disclosures for the two phases. The rule is applicable whether the consumer was initially obligated to accept construction only or for both construction and permanent financing. But, if the consumer is obligated on both phases and the creditor chooses to give two sets of disclosures, both sets must be given to the consumer initially, because both transactions would be consummated at that time.

Another issue that seems to perplex construction-permanent loan originators is the allocation of fees.

The following outline may help to clarify the fee allocation structure involved in this loan product. When using this special disclosure rule to disclose as multiple transactions, must allocate fees and charges between the construction and permanent phases of the transaction.

Here is a set of basic fee allocation structures:

• If a creditor discloses a construction-permanent loan as multiple transactions, the creditor must allocate to the construction transaction finance charges and points and fees that would not be imposed but for the construction financing. An example would be where a creditor must include inspection and handling fees for the staged disbursement of construction loan proceeds in the disclosures for the construction phase (viz., not in the disclosures for the permanent phase).
• If a creditor charges separate amounts for finance charges and points and fees for the construction phase and the permanent phase, the creditor must allocate the amounts to the phase for which they are charged.
• If a creditor charges an origination fee for construction financing only but charges a higher origination fee for construction-permanent financing, the creditor must allocate the difference between the two to the permanent phase.
• The creditor must allocate to the permanent financing all other finance charges and points and fees.
• The creditor may allocate in any manner it chooses any fees and charges not used to compute the finance charge or points and fees. Thus, a creditor may allocate in any manner it chooses a reasonable appraisal fee paid to an independent, third-party appraiser. 

There is also this important nuance: if the construction phase consists of a series of advances under an agreement to extend credit up to a certain amount, Regulation Z provides some disclosure flexibility. In this particular case, the creditor may disclose the construction phase as one or more than one transaction – so, it may disclose each advance as a separate transaction or all of the advances as one transaction – and also disclose the permanent financing as a separate transaction.

Preparing these disclosures is a complicated task, suitable only for compliance professionals. If you need assistance regarding construction to permanent finance transactions, with respect to reviewing your policies, procedures, disclosures, and loan flow process, please contact or email us. There is no initial consultation fee. We're glad to help!

Legal Entity Identifiers and HMDA 2018: Questions and Answers

Jonathan Foxx
Managing Director

The Legal Entity Identifier (“LEI”) is a unique 20-character code that identifies distinct legal entities which engage in financial transactions. The LEI is a global standard, designed to be non-proprietary data that is freely accessible to all. Many financial institutions have not obtained a Legal Entity Identifier (LEI).

A financial institution must provide with the following information in its HMDA submission on or after January 1, 2018:

 i.  Its name;

ii.  The calendar year the data submission covers pursuant to paragraph (a)(1)(i) of this section or calendar quarter and year the data submission covers pursuant to paragraph (a)(1)(ii) of this section;

iii. The name and contact information of a person who may be contacted with questions about the institution's submission;

iv.  Its appropriate Federal agency;

v.  The total number of entries contained in the submission;

vi.  Its Federal Taxpayer Identification number; and

vii. Its Legal Entity Identifier (LEI) as described in § 1003.4(a)(1)(i)(A)

[Emphasis added. See 5(a)(3)(vii)—Legal Entity Identifier (LEI)]

For purposes of the submission requirement, “appropriate Federal agency” means the appropriate agency for the financial institution as determined pursuant to § 304(h)(2) of the Home Mortgage Disclosure Act [12 U.S.C. 2803(h)(2)] or a financial institution subject to the Consumer Financial Protection Bureau's (“Bureau”) supervisory authority under § 1025(a) of the Consumer Financial Protection Act of 2010 [12 U.S.C. 5515(a)].

If your financial institution needs an LEI, the GMEI Utility is endorsed by the Global LEI Foundation and also has a search function. There are some frequently asked questions on their website and we provide below a few highlights derived from that resource.

-     Who can register the financial institution? You must currently be an employee of the financial institution you are registering and also authorized by the financial institution to register for an LEI. Alternatively, financial institutions may use a third party through an assisted registration process. The person registering the financial institution will need a user account, which may be created here.

-     What information is needed to register? The basic information listed in the ISO 17422, such as the financial institution’s legal name, registered address, headquarters address, legal form, and so forth.

-    What is the cost? The GMEI Utility charges $200 for each registration request plus a $19 surcharge. To maintain and keep the LEI registration active, the fee for each registration is $100 plus a $19 surcharge. For more information, visit the FAQs specific to payment.

Once payment is processed, the GMEI will validate the financial institution using public sources. Once this process is complete, it takes about three business days for an LEI to be issued in the GMEI database. Overall, the GMEI Utility’s FAQs state that most requests are “cleared” within three to five business days.

It is advisable to review the CFPB’s HMDA implementation webpage for more information.

Frequently Asked Questions

Q: Why do we need an LEI?

A: The Bureau has taken the position that an LEI could improve the ability to identify a financial institution reporting data and correlate it to its corporate configuration. In addition, the Bureau has stated that “facilitating identification of a financial institution's corporate family could help data users identify possible discriminatory lending patterns and assist in identifying market activity and risks by related companies.” By facilitating identification, this requirement apparently is also meant to help data users identify whether financial institutions are serving the housing needs of their communities. [§ 1003.5(a)(3)]

Q: Should we be getting our LEI as soon as possible? Can we get an LEI before we have to start using it, or do we have to use it as soon as we obtain it?

A: We recommend that you obtain your LEI by the first or second quarter of 2017. There is no reason to delay. We don’t anticipate the price to change. However, you must have an LEI for all loans submitted for HMDA on or after January 1, 2018.

Q: Do you anticipate the Uniform Loan Identifier ("ULI") to be calculated by Loan Origination Systems?

A: We do anticipate that many LOSs will offer to provide this number. However, it is very possible that they may leave this to the vendor collecting your HMDA data. Some concern has been raised about commercial or consumer systems needing such a programming solution. It is our understanding that the Bureau is evaluating this requirement with respect to a compliance effective date for calculating and verifying the ULI and ensuring it has not been previously used.

Production Incentives: Protecting the Consumer, plus Compliance Checklist for Production Incentives

Jonathan Foxx
Managing Director

Production incentives have been around since the dawn of modern capitalism. They are not going anywhere. Incentives have been called sales incentives, sales bonuses, compensation bonuses, and take into account any additional remuneration that tends to be transactionally based. All such incentives can be grouped into business objectives where a transaction may be tied to certain benchmarks, met by employees or service providers, the achievement of which leads to an increase in wage or reward for the party achieving the stated goal. For the sake of discussion, let’s call forms of such economic inducement, collectively, as “incentives.”

Typical incentives include cross-selling, where sales or referrals of new products or services are pitched to existing consumers; sales of products or services to new customers; sales at higher prices where pricing discretion exists; quotas for customer calls completed; and collections benchmarks.

Some of these incentives are very complex in the way they are achieved and applied, whether optionally or required. The incentive challenge is one of the usual conundrums arising when money and capital formation meet: the opportunity for harm to the consumer. Obviously, incentives offer a way to further enhance revenue for the seller of services and products. Indeed, in our market economy, an incentive can reveal the economic interest of market participants in a particular service or product, which is extrapolated from consumers’ responses to the offerings. Like so much in finance, incentives are not inherently good or bad, but how they are applied makes them so!

The Consumer Financial Protection Bureau (“Bureau”) has decided to weigh in with guidance on production incentives. I am going to provide my reading of the Bureau’s most recent bulletin on this topic, entitled “Detecting and Preventing Consumer Harm from Production Incentives” (Bulletin 2016-03, November 28, 2016, hereinafter “Bulletin”). It is an interesting read, because it endeavors not only to compile guidance that the Bureau had provided in other contexts but also draws on the Bureau’s supervisory and enforcement experience in which incentives contributed to substantial consumer harm. Importantly, the Bulletin offers some actions that supervised entities should take to mitigate risks posed by incentives.

This White Paper article is an adjunct to an earlier published web article (December 2016), with further elaboration herein, plus now including a "Compliance Checklist for Production Incentives," which provides some helpful guidelines to creating production incentive plans. The full White Paper, Article, and Compliance Checklist may be downloaded from our firm's website at LendersComplianceGroup.com. 

RISKS

The most obvious risk of incentives to the consumer is a sales program that includes an enhanced economic motivation for employees or service providers to pursue overly aggressive marketing, sales, servicing, or collections tactics. These kinds of incentives are and always have been features of sales tactics that do not meet regulatory scrutiny. Consequently, it is the case that the Bureau has taken enforcement action against financial institutions that have expected or required employees to open accounts or enroll consumers in services without consent or where employees or service providers have misled consumers into purchasing products the consumers did not want, were unaware would harm them financially, or came with an unexpected ongoing periodic fee.

One or more regulatory violations may be triggered as a result of such incentives. To name but a few of the more salient regulatory frameworks that can be violated, impermissible incentives can cause violations of unfair, deceptive, and/or abusive acts or practices (UDAAP) (Dodd-Frank Act, §§ 1031 & 1036(a), codified at 12 USC §§ 5531 & 5536(a), the Electronic Fund Transfer Act (EFTA), as implemented by Regulation E (15 USC § 1693 et seq.; 12 CFR Part 1005); the Fair Credit Reporting Act, as implemented by Regulation V (15 USC § 1681-1681x; 12 CFR Part 1022); the Truth in Lending Act (TILA), as implemented by Regulation Z (15 USC § 1601 et seq.; 12 CFR Part 1026); and the Fair Debt Collection Practices Act (15 USC § 1692-1692p). And to this the Bureau itself notes that violations can stir up public enforcement, supervisory actions, private litigation, reputational harm, and potential alienation of existing and future customers.

Although not meant to be comprehensive, here are some impermissible incentives that surely trigger regulatory violations:

• Opening Accounts: sales goals that encourage employees, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent, which may result in improperly incurred fees, improper collections activities, and/or negative effects on consumer credit scores;
• Benchmarks: sales benchmarks that encourage employees or service providers to market a product deceptively to consumers who may not benefit from or even qualify for it;
• Terms or Conditions: paying compensation based on the terms or conditions of transactions (such as interest rate) that encourages employees or service providers to overcharge consumers, to place them in less favorable products than they qualify for, or to sell them more credit or services than they had requested or needed;
• Tiered Compensation: paying more compensation for some types of transactions than for others that were or could have been offered to meet consumer needs, which could lead employees or service providers to steer consumers to transactions not in their interests; and 
• Quotas: unrealistic quotas to sign consumers up for financial services may incentivize employees to achieve this result without actual consent or by means of deception.

CFPB's Compliance Bulletin and Policy Guidance 2016-02 - Service Providers: Questions and Answers

Jonathan Foxx

Managing Director

Lenders Compliance Group

On Wednesday, October 26, 2016, the CFPB issued updated guidance on service providers, based on its previous issuance of April 13, 2012, titled CFPB Bulletin 2012-03, Subject: Service Providers (“Bulletin”), that had been published in the Federal Register. The Bulletin is a statement of policy that articulates considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority. This new issuance is published in the Federal Register and is titled Compliance Bulletin and Policy Guidance 2016-02, Service Providers (“Guidance”).

Click HERE for a copy of the Guidance and the Bulletin.

Essentially, this updated guidance provides additional clarifications regarding how supervised entities are to manage their risk management program for service providers. It is meant to clarify that “the depth and formality of the risk management program for service providers” may vary depending upon the service being performed (i.e., the service provider’s size, scope, complexity, importance and potential for consumer harm) and the performance of the service provider in carrying out its activities in compliance with Federal consumer financial laws and regulations. 

Much of the guidance is a reiteration of the Bulletin, with a reminder that “while due diligence does not provide a shield against liability for actions by the service provider, it could help reduce the risk that the service provider will commit violations for which the supervised bank or nonbank may be liable.” This reiterating of the Bulletin seems to have been made necessary because, although other CFPB Bulletins were published in the Federal Register, it appears that the Bureau did not previously publish Bulletin 2012-03 when it was issued.

I have said all along how important it is to work with an outsource due diligence company, if a financial institution is not going to adequately equip and staff an in-house evaluation function, which means ensuring the presence of competent risk management professionals and the required research tools. This is why we established VendorsCompliance Group as the an outsource evaluator that would be far more than a compilation service. 

These compilation services that hold themselves out as evaluators for vendor management purposes are just putting together and providing a compilation rating. That is simply insufficient, viewed from the standpoint of effective due diligence. Vendors Compliance Group does not merely compile information and documentation, which is only a first step, but also it actually evaluates and risk rates service providers by means of hands-on reviews conducted by risk management professionals using state of the art research methodologies. The evaluator actually is often personally in contact with the bank or nonbank to ensure that there is a strong and steady flow of transaction information. 

When Vendors Compliance Group risk rates a service provider, the supervised bank or nonbank can be sure that it is a rigorously derived, vendor compliance risk rating, provided by a due diligence methodology which stands up to regulatory scrutiny.

Let’s review some basics, as set forth in the Guidance. 

I am going to frame this outline in the form of Questions and Answers for the sake of ensuring a broad understanding of the Bureau’s expectations with respect to service provider evaluations. I will use the Guidance as the source document.

Q: Why is a service provider evaluation necessary?

A: The Bureau expects supervised banks and nonbanks to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm. 

Q: What is the governing statute for the definition of a Federal consumer financial law?

A: Section 1002(14) of the Dodd- Frank Act (12 U.S.C. 5481(14)).

Q: What institutions are expected to evaluate their service providers?

A: Supervised banks and nonbanks, as follows:

• Large insured depository institutions, large insured credit unions, and their affiliates (12 U.S.C. 5515); and
• Certain non-depository consumer financial services companies (12 U.S.C. 5514). 

Q: What service providers are expected to be evaluated?

A: The following supervised entities are to be evaluated:

• Service providers to supervised banks and nonbanks (12 U.S.C. 5515, 5514); and
• Service providers to a substantial number of small insured depository institutions or small insured credit unions (12 U.S.C. 5516).

Q: Specifically, how is the term “service provider” defined by the Bureau?

A: “Service provider” is generally defined in Section 1002(26) of the Dodd-Frank Act as ‘‘any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.’’ (12 U.S.C. 5481(26)) A service provider may or may not be affiliated with the person to which it provides services.

Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

Cases and Regulations: 2016 Predictions

I have noticed that there has been a spate of articles in the last few months about the regulatory events of 2015. Indeed, the highest profile event was the implementation of the rules governing TILA-RESPA Integration Disclosure (“TRID”). Looking back at history is important; after all, “what’s past is prologue,”[i] as Shakespeare’s insight offers in The Tempest. Or is it? Can our vision be so blurred by the emoluments of the past that we lose sight of the recompense awaiting us in the future?

Enjoy'd no sooner but despised straight,

Past reason hunted, and no sooner had

Past reason hated, as a swallow'd bait

On purpose laid to make the taker mad;

Mad in pursuit and in possession so;

Had, having, and in quest to have, extreme.

Thus said Shakespeare in Sonnet 129, pouting how past sentiments can beguile future attractions in inscrutable ways, focused on consuming demands, whipped from one extreme to another, passionately meeting the madness of a gripping mission. Having gone through 2015’s glut of objections, tests, threats, claims, confrontations, defiances, demurs, provocations, remonstrances, ultimatums, impositions, exigencies, and importunities, perhaps now we should set our zealous pursuit of adaptation and expediency to the dispatch that is likely awaiting us in 2016.

I propose to discuss two categories that, though separate in purpose and determinate qualities, are each intrinsic to the way residential mortgage lenders and originators, as well as other financial service entities involved in extending credit through consumer loan products, will be responsive to the regulatory compliance environment in the year ahead: cases and regulations. Each often is rooted in the past, though usually springs to a trajectory into the future. Instead of traveling down Memory Lane, let’s take a modest excursion through the imminent happenings soon to come. In briefly discussing these cases and regulations, I hope to further stimulate public policy debates.

Cases

Both the U.S. Supreme Court and the Second Circuit will be prominent in deciding cases affecting the origination of mortgages in 2016. Also, the D.C. Circuit and the D.C. district court will adjudicate pertinent cases. The range of consequences is considerable, from cases that could make it more difficult to consummate secondary market transactions to cases further limiting class actions. I believe the following five cases should be on a watch list.

PHH Corp. et al. v. Consumer Financial Protection Bureau[ii]

I have been following this case since its inception. In its recent iteration, on November 5, 2015 the Consumer Financial Protection Bureau (“Bureau”) stated in a brief filed with the D.C. Circuit that its $109 million disgorgement order against PHH Corp. in a mortgage reinsurance kickback case met all statutory requirements and should be allowed to stand in order to keep other companies from engaging in similar schemes.

The Bureau contends that PHH incorrectly interpreted the Real Estate Settlement Procedures Act (“RESPA”) in its appeal of the $109 million disgorgement order. The Bureau and its Director, Richard Cordray, contend that they were correct in levying the foregoing penalty, which, they claim, serves as a necessary deterrent to other firms that might consider engaging in kickback schemes.

To quote the Bureau itself:

“Eliminating kickbacks is a primary goal of RESPA. If PHH is permitted to keep the fruits of its kickback scheme merely because it claims it believed its scheme was legal, this will encourage others to take advantage of areas of statutory uncertainty.”

Further, the Bureau contests PHH’s claims that the agency’s ‘single-director structure,’ as opposed to ‘multimember-commission leadership,’ and funding through the Federal Reserve rather than the congressional appropriations process, violate the U.S. Constitution.

To refresh the history of this matter, the Bureau had filed administrative claims against PHH in January 2014, alleging that when PHH originated mortgages, the financial institution referred consumers to mortgage insurers with which it had relationships. In exchange for this referral, the agency claimed, these insurers purchased reinsurance from PHH’s subsidiaries, and PHH took the reinsurance fees as kickbacks.

The Bureau contended that PHH also charged more money for loans to consumers who did not buy mortgage insurance from one of its supposed kickback partners and, in general, charged consumers additional percentage points on their loans.

HMDA Highlights

HMDA Highlights

Last month I published an article on the changes coming in Regulation C,[1] the implementing regulation of the Home Mortgage Disclosure Act.[2] The article can be viewed here and downloaded here or here.

I would like to highlight a few of the salient features for you.

Essentially, HMDA serves three purposes: (1) it provides public and public officials with information to help determine whether financial institutions are serving the housing needs of the localities in which they are located and to assist public officials in their determination of where to distribute public sector investments to improve the private investment environment; (2) it requires the reporting of racial characteristics, gender, and income information on applicants; and (3) it identifies possible discriminatory lending patterns and enforcing anti-discrimination statutes. 

In 2010, the Dodd-Frank Act amended HMDA to expand the scope of information compiled, maintained and reported. In August 2014, the CFPB proposed amending Regulation C to implement the Dodd-Frank changes.

The CFPB chose not to adopt several data points specified in the Dodd-Frank Act and included a few on its own. Take the following summary listing of the changes made by the CFPB’s October 2015 Regulation C amendments (hereinafter, “Rule”) as a tool to be used along with my article and the CFPB’s own promulgated guides and issuances regarding the HMDA changes.

Institutional Coverage

Although it is not required by the Dodd-Frank Act, the CFPB nevertheless adopted uniform loan-volume thresholds for depository and non-depository institutions, which require an institution to report data if it originated in each of the two preceding calendar years at least 25 closed-end mortgage loans or at least 100 open-end lines of credit, assuming the institution meets the other criteria for coverage.

Institutions that meet only the closed-end threshold are not required to report open-end lending, and institutions that meet only the open-end threshold need not report closed-end lending.

The regulation retains the other coverage criteria for depository institutions, which require reporting by depository institutions that satisfy an asset-size threshold ($44 million in 2015), have a branch or home office in an MSA on the preceding December 31, originated at least one first-lien home purchase loan or refinancing secured by a one- to four-unit dwelling in the previous calendar year, and satisfy a “federally-related” test (i.e., the institution is federally insured or regulated or the loan previously mentioned was insured, guaranteed, or supplemented by a federal agency or intended for sale to FNMA or FHLMC).

For non-depository institutions, the above loan-volume threshold test replaces the current loan-volume or loan-amount test and Regulation C retains the criterion that the institution must have a branch or home office in an MSA on the preceding December 31.

Transactional Coverage

Also not required by the Dodd-Frank Act, the Rule adopts a dwelling-secured standard for reporting all loans or lines of credit for personal, family, or household purposes, whether the purpose of the loan is to finance the property serving as security or another property. Accordingly, the amendments discard the purpose test that previously required the reporting of home improvement loans, whether or not dwelling-secured. Among other things, this makes the reporting of dwelling-secured consumer open-end credit mandatory (no longer optional).

Most commercial-purpose transactions are subject to Regulation C reporting only if they are for the purpose of home purchase, home improvement, or refinancing (i.e., the Rule retains Regulation C’s traditional purpose test only for commercial-purpose transactions). The regulation does not apply to home improvement loans not secured by a dwelling, or agricultural-purpose loans/lines of credit. The regulation now uses the term “covered loans” as a shorthand term to refer to the universe of loans covered by HMDA.

·         The CFPB specifically noted that Regulation C does not require the reporting of loan modifications. There are two exceptions for which HMDA reporting is required because they represent new debt obligations in substance if not in form:[3] (1) assumptions, including successor-in-interest transactions (this differs from CFPB interpretations under TILA Regulation Z); and (2) New York consolidation, extension, and modification agreements (CEMAs) used in place of refinancings (this only refers to CEMAs made under § 255 of the New York Tax Law). The CFPB recognized that its determination that these New York CEMAs must be reported departs from past FRB guidance that they did not need to be reported. The CFPB noted that this Regulation C definition of the term “modification” differs from that of Regulation B, which defines it to include the granting of credit in any form, including the renewal of credit and the continuance of existing credit in some circumstances.

·         The amendments revise the definition of “dwelling.” Briefly put, the definition includes primary residences, second homes, investment properties (homes), multifamily properties, and manufactured home communities (whether or not any individual homes also secure the loan). The term excludes recreational vehicle parks, recreational vehicles, and pre-1976 mobile homes. The regulation retains the existing discretion for financial institutions to determine the primary use for multifamily properties (such as mixed-used properties with five or more individual dwelling units). Properties that provide long-term housing with related services such as a combined medical care component are reportable, while properties that provide medical care are not (consistent with the exclusion of hospitals).

Recess Appointment Gambit

By Jonathan Foxx

President & Managing Director

Some people just won’t take No for an answer!

The most recent fool’s errand is offered thanks to the irrepressible, litigious efforts of the State National Bank of Big Spring, Texas, and two advocacy groups, conservative think tank Competitive Enterprise Institute and the 60 Plus Association.

In State National Bank of Big Spring et al. v. Geithner et al. (U.S. District Court, DC, Case 1:12-cv-01032), the plaintiff seeks to disabuse the Consumer Financial Protection Bureau (“Bureau”) of its constitutionality.

Here is one of the lawsuits that started droning high and mighty soon after the Bureau received its enumerated authorities in the summer of 2011.

The bank sued in June 2012, arguing that the Bureau has an inordinate amount of power because (1) the Bureau’s director can't be removed at will, and (2) the agency's funding is routed around the congressional appropriations process.

A little over a year later, in August 2013, the case was booted, only to be resuscitated in July 2015 by the D.C. Circuit, since the appeals court found the bank has standing to challenge the Bureau’s constitutionality – based on the fact that the Bureau regulated the remittance market, which is the bank’s business. That said, there had been no enforcement action.

Lacking an enforcement action to protest, maybe the bank just wanted to get out in front of the problem before it started!

The bank went forward with a summary judgment challenge in November 2015.

In any event, about the 2012 suit’s allegation: the claim is that the law creating the Bureau, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is unconstitutional. The bank claimed the president's inability to remove the Bureau’s director without good cause violates the separation of powers doctrine, a claim, the Bureau argues, that ignores Supreme Court precedent.

This gambit has been pushed hither and yon for some time. For instance, right from the start there has been a challenge to the recess appointment of Richard Cordray to be the Bureau's first director. President Barack Obama used a recess appointment to put Mr. Cordray in charge of the Bureau, albeit only after mostly Republican senators refused to vote on his nomination. Their opposition was based on the structure and congressional oversight of the Bureau, not really at all based on Mr. Cordray’s credentials.

But Conservatives have long held that the recess appointment violated the Constitution, engendering the recess appointment itself by keeping the Congress technically open by holding a series of pro forma sessions, gaveling in sessions for minutes or seconds, in order to meet the lowest bar for being open for business.

So, we’re back in court!

Now, the Bureau has asked a Washington, D.C., federal court for summary judgment. Filing last Friday, the Bureau asserts that the bank’s challenge to the Bureau's constitutionality can't get around long-standing precedent supporting legislators' authority to create independent agencies.

Here’s two of the pivotal quotes:

“SNB’s arguments that Title X violates constitutional separation-of-powers principles rest on policy arguments with no support in the constitutional text or judicial precedent.” 

“The challenged provisions of Title X – considered either individually or collectively – are consistent with Articles I and II of the Constitution, as they have been interpreted and applied by the Supreme Court.”

The Bureau argues that the Supreme Court had ruled in 1935, in Humphrey’s Executor v. United States, that Congress has the authority to create independent agencies with overseers appointed by the president who can only be removed for good cause.

Thus, asserts the Bureau, the authority is grounded in the establishment of the Federal Communications Commission, which was at issue in that case, or any of several other federal agencies, including the Securities and Exchange Commission, that are considered to have been created under the same authority.

Given precedent, the Bureau’s view is that, whether or not the Bureau is headed by a single, appointed director or several commissioners (or multiple directors or a phalanx of overseers), is entirely irrelevant and nugatory. In defending the single appointee, the Bureau’s brief states: “If anything, it should be easier for the president to hold accountable a single officer than several.” 

Furthermore, the Bureau stated that the foregoing argument didn't appear in the bank's complaint and that it can't raise the claim now in its own motion for summary judgment filed in early November. Indeed, it is argued that the bank was not harmed by the rules approved by Director Cordray, and, in cases where the bank claims it was harmed, invalidating them would not serve to correct the injuries alleged by the bank.

From a regulatory perspective, the Bureau is correct with respect to the validity of rules approved by the Bureau’s director. Even if the court were to consider the validity of rules approved by Director Cordray during his recess appointment, the D.C. Circuit has upheld such rules when later ratified by an agency.

I think you can see how this Hatfields and McCoys battle can get very complicated.

I expect this species of litigation to find its way into the dustbin of history.

Still, as Alexander Pope said, "Hope springs eternal in the human breast."

Home Mortgage Disclosure Act – Big Changes on the Way!

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

“It’s just a way to keep the PhD’s employed in Washington, DC!” Such was the statement that a CEO of a regional mortgage banker said to me recently about the new changes to the Home Mortgage Disclosure Act, known by its acronym HMDA. “More statistics that go nowhere and tell us nothing,” he said, “and more ways to interfere in our loan origination process.” I grant that the regulatory burdens these days are demanding, but I was surprised by the sense of futility in those remarks.

Over the years, in fact, HMDA data has played a very useful role in identifying fair lending concerns, helping financial institutions to avoid disparate impact and disparate treatment violations. It certainly is important to mortgage lenders and originators in their obligation to ensure a level market to all consumers, without the impediment of discriminatory practices by bad actors. Perhaps another way to make sense of the Bureau’s amendments to HMDA is to recognize that a primary reason for those changes is to create a better tool for rectifying adverse fair lending patterns.

At the core of the revisions undertaken by the Consumer Financial Protection Bureau (“Bureau”) is the commitment to consumer protection laws generally, and, by enhancing the metrics of HMDA data collection, the commitment in particular to strengthening fair lending standards. What better way to understand fair lending than through a deep analysis of the HMDA Loan Application Register or “HMDA-LAR.” The fact is, the new changes to HMDA will derive over 250 million data points from financial institutions related to mortgage loan applications and originations in 2018.

The amendments to existing HMDA requirements, effectuated through HMDA’s implementing Regulation C, will be spread over four effective dates between January 1, 2017, and January 1, 2020.[i] However, the key date that contains most of the amendments, will be the compliance effective date of January 1, 2018. On that effective date, financial institutions will be required to collect HMDA data for applications they receive and loans they originate on or after January 1, 2018.[ii] [iii]

Certain changes will be new to non-banks, though familiar to depository institutions. For instance, beginning in 2018, non-banks will be required to record HMDA data internally within 30 days of the end of the quarter in which final action was taken. Regulation C has not previously required quarterly recording for non-banks, so this will be a new undertaking for non-depository institutions.[iv]

I am going to provide an outline of four HMDA-related areas that the Bureau revised in its update to Regulation C, promulgated through its issuance of the Final Rule (“Rule”) on October 15, 2015.

These changes to Regulation C affect the following guidelines:

1. Covered institutions (financial institutions required to collect and report HMDA data);
2. Covered transactions (transaction types and applications);
3. Loan-level data (transaction data to collect and report on); and
4. Reporting and disclosure (method and frequency of data reporting and public access to that data). 

Covered Institutions

The Rule provides guidelines to both depository and non-depository institutions. Both of these institution types are covered if, among other things, they originated at least 25 covered closed-end mortgage loans or 100 covered open-end lines of credit in each of the previous two calendar years. This standard is called a “uniform loan volume threshold,” and is part of the new evaluation process to determine if an institution is required to collect and report HMDA data. Regulation C eliminates the existing origination volume and asset size criteria and replaces them with the “uniform loan volume threshold.”

The standard will have the most impact on non-depository institutions, sweeping up many non-bank creditors into Regulation C compliance. This is due to the fact that the Rule actually removes the current coverage requirement that, in the preceding calendar year, a non-depository institution should have originated home purchase loans (including refinancings) equaling: (A) at least 10 percent of the institution’s origination volume in dollars, or (B) at least $25 million.

Comparatively, the Rule removes the current coverage requirement for a non-depository institution; to wit, (a) have total assets of more than $10 million as of the preceding December 31, or (b) have originated at least 100 home purchase loans (including refinancings) in the preceding calendar year. Furthermore, currently a non-depository institution must satisfy at least one prong (either (a) or (b) above) or both of these coverage criteria in order to be covered. Consequently, the removal of the foregoing thresholds for non-depository institutions will increase the number of non-depository institutions required to collect and report data.

Yet, the Rule will actually decrease the number of depository institutions covered, because it adds the uniform loan volume threshold to the existing coverage criteria for those institutions. The Bureau estimates that the new coverage criteria will exclude from coverage approximately 1400 depository institutions that are currently covered by the rule and include about 450 non-depository institutions that are not currently covered by the rule. Clearly, the Bureau is casting a wide net in order to apprehend the largest, reliable data set possible!