Articles Posted in RESPA: YIELD SPREAD PREMIUM

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On October 30, 2013, the Office of the Comptroller of the Currency “OCC” issued a bulletin on “Risk Management Guidance” which will have wide ranging implications for all vendors of national banks and federal savings associations. The bulletin provides new guidance for assessing and managing compliance risks associated with third-party relationships. A 3rd party relationship is any business arrangement between a banks and another entity, by contract or otherwise.

3rd party relationships include activities that involve outsourced products and services, use of independent consultants, networking arrangements, merchant payment processing services, services provided by affiliates and subsidiaries, joint ventures, and other business arrangements where the bank has an ongoing relationship or may have responsibility for the associated records. Affiliate relationships are also subject to sections 23A and 23B of the Federal Reserve Act (12 USC 371c and 12 USC 371c-1) as implemented in Regulation W (12 CFR 223). Third-party relationships generally do not include customer relationships.

The OCC stated that it “expects a bank to practice effective risk management regardless of whether the bank performs the activity internally or through a third party. A bank’s use of 3rd parties does not diminish the responsibility of its board of directors and senior management to ensure that the activity is performed in a safe and sound manner and in compliance with applicable laws.”

The OCC released the bulletin in response to the on-going concern that banks were continuing to increase the number and complexity of third party relationships with both foreign and domestic 3rd parties. Specifically they highlighted:
(1) outsourcing entire bank functions to third parties, such as tax, legal, audit, or information technology operations;
(2) outsourcing lines of business or products;
(3) relying on a single third party to perform multiple activities, often to such an extent that the third party becomes an integral component of the bank’s operations;
(4) working with third parties that engage directly with customers;
(5) contracting with third parties that subcontract activities to other foreign and domestic providers;
(6) contracting with third parties whose employees, facilities, and subcontractors may be geographically concentrated; and (7) working with a third party to address deficiencies in bank operations or compliance with laws or regulations.

The OCC is concerned that the quality of risk management over third-party relationships may not be keeping pace with the level of risk and complexity of these relationships. The OCC has identified instances in which bank management has:
(1) failed to properly assess and understand the risks and direct and indirect costs involved in third-party relationships.
(2) failed to perform adequate due diligence and ongoing monitoring of third-party relationships.
(3) entered into contracts without assessing the adequacy of a third party’s risk management practices.
(4) entered into contracts that incentivize a third party to take risks that are detrimental to the bank or its customers, in order to maximize the third party’s revenues.
(5) engaged in informal third-party relationships without contracts in place.

These examples represent trends whose associated risks reinforce the need for banks to maintain effective risk management practices over third-party relationships.
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The 8th Circuit Court of Appeals overturned a district court decision in the Charvat v. Mutual First Federal Credit Union case. The case involved a violation of the Electronic Fund Transfer Act (“EFTA”) 15 U.S.C. §1693 where the Charvat’s made several ATM withdrawals from two Nebraska banks. The 8th Circuit stated “The EFTA requires ATM operators to provide two forms of notice, one “on or at” the ATM machine and another on-screen during the ATM transaction, if the bank operators charged a ATM transaction fee. The ATM machines in question failed to provide the required notice disclosure on the “on ATM machine” and this was the basis for the class action.

The 8th Circuit held that “[D]ecisions by this Court and the Supreme Court indicate that an informational injury alone is sufficient to confer standing, even without an additional economic or other injury.” The 8th Circuit further stated that Charvat identified a variety of instances where the denial of a statutory right to receive information was sufficient to establish standing and cited to the Fed. Election Comm’n v. Akins case and more importantly the Dryden v. Lou Budke’s Arrow Fin. Co. which was a Truth-In-Lending Act case.

The citing of the Dryden case is particularly important because the 8th Circuit said ” “f [borrower] proved that the disclosure provisions of [TILA] and Regulation Z were violated in connection with the January 26 transaction, [lender] is liable for statutory damages.”).” The 8th Circuit said the EFTA creates a right to a particular form of notice before an ATM transaction fee could be levied. If that notice was not provided and a fee was nonetheless charged, an injury occurred, and the statutory damages are directly related to the consumer’s injury.”

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The Consumer Financial Protection Bureau “CFPB” and the United States Department of Justice “DOJ” formally entered into an Memorandum of Understanding Agreement “MOU” pursuant to Section 1054(d)(2)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act which mandated the two agencies to establish an agreement between themselves to help prevent enforcement conflicts and help streamline fair lending law litigation under Federal law. The MOU involves Federal fair lending laws such as the Equal Credit Opportunity Act, Home Mortgage Disclosure Act, and Truth In Lending Act.

The MOU outlined three key areas for this cooperative agreement:

1. Information sharing and confidentiality issues: the agencies will be sharing information in matters that the CFPB refers to the Justice Department, in joint investigations under the ECOA, and in order to coordinate fair lending enforcement. The MOU establishes strict confidentiality protections for this shared information.

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The Consumer Financial Protection Bureau “CFPB” released the “Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act” (Regulation Z) proposed rule today. The CFPB is asking the public to comment on the rule on or before November 6, 2012 with the exception of 12 CFR 1026.1(c) and 1024.4 in which comments are due on or before September 7, 2012. The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to issue proposed rules and forms that combine certain disclosures that consumers recieve in connection with applying for and closing on a mortgage loan under the TILA and RESPA. The CFPB has proposed to amend Regulation X (RESPA) and Regulation Z (TILA) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property.

To read a copy of this proposed rule please click the link below. Warning the document is 1099 pages so becareful before hitting the print button on your computer!
http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0028-0001
If you care to comment on the proposed rule the comment form can be accessed by clicking the link below:
http://www.regulations.gov/#!submitComment;D=CFPB-2012-0028-0001 Continue reading

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On April 13, 2012 the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2012-03 titled “Service Providers”. The CFPB stated that it expects supervised banks and nonbanks to oversee their business relationships with their 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.

The term “Service Provider” is 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. Section 5481(26)). A “Service Provider” may or may not be affiliated with the person to which it provides services.”

The Consumer Financial Protection Bureau in its bulletin states that the CFPB “recognizes that the use of service providers is often an appropriate business decision for supervised banks and nonbanks. Supervised banks and nonbanks may outsource certain functions to service providers due to resource constraints, use service providers to develop and market additional products or services, or rely on expertise from service providers that would not otherwise be available without significant investment.”

The CFPB’s bulletin expresses concerns about the lack of liability by the lender to the consumer for third party behavior. “The mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility of complying with Federal consumer financial law to avoid consumer harm. A “service provider” that is unfamiliar with the legal requirements applicable to the products or services being offered, or that does not make efforts to implement those requirements carefully and effectively, or that exhibits weak internal controls, can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship.” The Consumer Financial Protection Bureau states that “depending on the circumstances, legal responsibility may lie with the supervised bank or nonbank as well as with the supervised service provider.”

In short the CFPB now expects supervised banks and nonbanks to make sure the service providers comply with the law. The CFPB by issuance of this bulletin has effectively put the entire real estate industry on notice that if they want to do business in the future they had better make sure their internal controls are in place otherwise the supervised bank or nonbank will cease doing business with you.
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The Consumer Financial Protection Bureau “CFPB” announced plans today to implement an early warning enforcement action plan (“the Early Warning Notice“) which would allow those under investigation the ability to respond to the CFPB. The CFPB Bulletin 2011-04 (Enforcement) announced the first in a series of periodic bulletins the CFPB will release which are aimed at providing information about the policies and priorities of the CFBP’s Bureau of Enforcement.

“Before the Office of Enforcement recommends that the Bureau commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject’s potential violations and may offer the subject the opportunity to submit a written statement in response. The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.”

It is important to note that if the subject(s) of an investigation is asked to provide the Bureau of Enforcement a response statement and the subject prepares and submits the response statement under oath to the Bureau the response may be discoverable by third parties.

The Early Warning Notice also allows any person involved in an investigation to voluntarily submit a written statement at any point during an investigation.
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Reporter Avi Salzman with Barron’s is reporting that Bank of America may file for bankruptcy protection for it’s Countrywide subsidiary if litigation costs from Countrywide threaten Bank of America. Bank of America is the parent company of Countrywide but it is a separate legal entity. If Bank of America (NYSE: BAC) decides to declare bankruptcy it would only affect the Countrywide division not the entire company.

If Bank of America does file for bankruptcy protection for Countrywide it could have a material impact on on-going litigation involving RESPA, TILA, and other legal actions across the United States involving Countrywide. The purchase by Bank of America is widely viewed as one of the worst acquisition decisions in corporate American history.

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The United States Department of Treasury has hired Richard Cordray to lead the Enforcement Division of the Consumer Financial Protection Bureau (CFPB) which was created under the Dodd-Frank Bill. Richard Cordray was elected as the Ohio Attorney General in 2008. Cordray has filed numerous lawsuits during his tenure as the Ohio Attorney General, most notably against AIG, Marsh & McLennan, Bank of America, and Merrill Lynch which resulted in more than 2.5 billion dollars in settlements.

Given Cordray’s history it appears that he will be focusing on federal preemption of nationally chartered banks and the problems state regulators have had with their inability to enforce laws. The doctrine of preemption was used by the Office of Comptroller of the Currency as a way to stop states from enforcing rules and regulations against nationally chartered banks. He has pledged to jointly work with state attorney generals while at the CFPB in his investigations which could significantly hamper nationally chartered banks argument of federal preemption against state laws. Cordray and The American Bankers Association have opposing stances on the bank preemption issue. The underlying premise is that nationally chartered banks who engage in abusive and fraudulent tactics better be prepared for an onslaught of litigation and penalties when the enforcement team starts working with the states.

Richard Cordray’s reputation is that of a staunch advocate for consumer rights against financial services companies who break the law. Cordray is responsible for selecting the enforcement team and preparing for the exercise of enforcement powers. RESPA enforcement under Cordray appears to be a priority based on his past history and Section 6 of RESPA is a prime target for future regulatory enforcement action by the CFPB.

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The National Association of Realtors (NAR) and the Department of Housing and Urban Development (HUD) collaborated to produce a series of videos on YouTube.com which are geared at educating future home buyers on the real estate buying process. The joint effort was unveiled at the National Association of Realtors 2010 National Conference in New Orleans last week.

The first 10 minute video “Shopping for your home” features HUD associate deputy assistant secretary Teresa Baker Payne explaining the home buying process.

The second 12 minute video “Shopping for your loan” features HUD deputy assistant secretary for FHA Vicki Bott explaining what home buyers need to look for when shopping for their mortgage loan and includes a consumer friendly approach to the Good Faith Estimate “GFE.”

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The Consumer Financial Protection Bureau which will oversee the Real Estate Settlement Procedures Act (RESPA) now has a decision maker to help set up the CFPB. President Obama announced today the appointment of Harvard Professor Elizabeth Warren to implement policies and procedures to protect consumers from financial products. Ms. Warren who is widely known as the person who developed the idea for the CFPB will also be responsible for helping select a director to head up the CFPB.

Warren is considered a strong consumer advocate and her ideology has some in the financial services industry concerned. The concern reached a fevered pitch over the last two months with Republicans and the financial services industry pledged to hold up her confirmation in the Senate. Obama’s move of not appointed her to the CFBP but rather giving Warren supervisory authority of the CFPB without going through a senate confirmation process stunned her critics.

It remains to be seen how Warren will tackle the enforcement of RESPA in the near future but I suspect that we will see a huge increase in both funding and manpower in the RESPA enforcement arena.

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