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Prospect Mortgage reached a settlement today with the U.S. Department of Housing and Urban Development (HUD) over Prospect’s use of the Series Limited Liability Company “aka Series LLC” joint venture business model. The terms of the settlement are not yet available but we will update the Respa Lawyer Blog as soon as HUD releases that information.

This is the second major settlement enforcement action in the last two days by HUD’s RESPA division which moves over to the Consumer Financial Protection Bureau on July 21, 2011. It is highly possible that other settlement actions may be announced by HUD prior to the July 21, 2011 due to stronger monetary penalties under the CFPB.

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The United States Department of Housing and Urban Development “HUD” announced a settlement with Fidelity National Financial (NYSE: FNF) in the amount of $4.5 million dollars for HUD’s contention that Fidelity violated the Real Estate Settlement Procedures Act “RESPA” when it paid real estate brokers and other settlement service providers illegal kickbacks and improper referral fees for referring business through an “Application Service Provider Agreement.” The Application Service Provider Agreement provided real estate brokers and other settlement service providers with access to Fidelity’s TransactionPoint closing software. TransactionPoint allowed real estate brokers and others to select real estate settlement service providers for a particular real estate transaction. The real estate brokerages would then enter into Sub-License Agreements with subsidiaries of Fidelity to enable Fidelity’s subsidiaries to be listed in TransactionPoint as a provider of settlement services.

The settlement said Fidelity’s subsidiaries would then in turn compensate the real estate brokerages a fee for each referral of real estate. Re-insider.com was the first to break this story and has extensive coverage on the topic for those who wish to learn more. It is important to note that HUD’s Settlement Agreement only applies to Fidelity and not to the real estate brokerages who recieved the kickbacks and illegal referrals fees so it is possible that more settlements will be announced as it pertains to those companies who recieved the kickbacks and improper referral fees.

The settlement can be viewed by clicking this link: FIDELITY SECTION 8 RESPA SETTLEMENT

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The United States Supreme Court granted First American Financial Corporation’s Writ of Certiorari it filed in the Denise P. Edwards et al. v. First American Financial Corporation, et al. RESPA class action lawsuit today (June 20, 2011). The Supreme Court will now decide whether a plaintiff has standing to sue, on behalf of a nationwide class, when a plaintiff asserts that a real estate company violated the Real Estate Settlement Procedures Act of 1974 (RESPA) without showing the RESPA violation affected the services rendered.

The Edwards lawsuit accuses First American and others of operating an illegal kickback scheme which violated Section 8 of RESPA. The Supreme Court decision will focus strictly on Question 2 presented in the Writ of Certiorari. The issue presented in Question 2 is whether the a privte purchaser of real estate has standing to sue under Article III, Sec. 2 of the United States Constitution.

The case is First American Financial v. Edwards, 10-708.
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The US Department of Housing and Urban Development’s (HUD) Real Estate Settlement Procedures Act (RESPA) Division released its latest RESPA ROUNDUP newsletter (Volume 5, April 2011). The newsletter asks and answers one question each on HUD-1 Line 803 tolerance violations, credit report charges, what happens if a loan originator fails to issue a Good Faith Estimate “GFE”, and clarifies 4506-T “Tax Transcript Fees” disclosure.

Question #1. HUD-1 Line 803 tolerance violation

“Does zero tolerance for HUD-1 Line 803 (see “adjusted origination charges”; 24 CFR § 3500.7(e)(1)(iii)) mean that loan originators must double the cure of a tolerance violation of Line 801 or Line 802 because each tolerance violation on those Lines also results in an increase in the Adjusted Origination Charge on Line 803?

No. Correcting a Line 801 or Line 802 tolerance violation will serve to correct a tolerance violation that stems from the calculation of Line 803.

Loan originators should carefully monitor their own charges to avoid tolerance violations. However, if the loan originator fails to correct Line 801, 802 or consequently Line 803 tolerance violations before settlement, the loan originator can effectuate a cure within 30 days by listing and describing a credit in either the 200 Series on Page 1 or in a blank line in the 800 Series on Page 2. Whether the cure is shown in the 200 Series or 800 Series, the settlement agent should include a notation of P.O.C.(lender), to indicate that the lender has made a payment of a specified amount to correct a potential tolerance violation.

Whether the cure is shown in the 200 Series on Page 1 or the 800 Series on Page 2, a cure to correct a tolerance violation on Lines 801 and/or 802 will serve to correct the tolerance violation on Line 803.

After the revised HUD-1 has been prepared by the settlement agent, the settlement agent must provide the revised HUD-1 to the borrower and lender, and, as appropriate, to the seller.”

Question #2. Credit Report Charges

“The regulations provide that the only charge that a loan originator may impose on a potential borrower before issuing a GFE is a charge limited to the cost of a credit report (see 24 CFR §§ 3500.7(a)(4) and (b)(4) “…the [loan originator] may, at its option, charge a fee limited to the cost of a credit report”). Only after a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE may the loan originator collect fees beyond the cost of a credit report.

For example, if the loan originator’s cost for a credit report is an $8.75 charge from a third party, the total amount that the loan originator can charge the borrower before the GFE is issued is $8.75. In this case, the actual charge of the credit report listed on Line 805 of the HUD-1 is $8.75.

Alternatively, pursuant to 24 CFR § 3500.8(b)(2), the loan originator’s cost for a credit report may also be calculated, charged, and disclosed on the GFE and HUD-1 as an average charge, as long as all of the requirements in 24 CFR § 3500.8(b)(2) are met. This section provides, in part: “The average charge for a settlement service shall be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider on behalf of borrowers and sellers for a particular class of transactions involving federally related mortgage loans….””

Question #2: What if the Loan Originator fails to issue a Good Faith Estimate “GFE”?

If a loan originator fails to deliver a GFE in clear violation of 24 CFR § 3500.7(a) and (b), the loan originator will have significant potential tolerance violations at settlement. See RESPA § 3500.7(e).

Where the loan originator has not provided the consumer with a GFE, when completing the HUD-1 comparison chart the loan originator’s instructions to the settlement agent must indicate that the settlement agent must fill in the GFE columns with $0 and the HUD-1 columns with the actual charges from Page 2 of the HUD-1. If this results in one or more tolerance violations, the loan originator may cure the tolerance violation(s) by reimbursing the borrower the amount by which the tolerance was exceeded at settlement or within 30 calendar days after settlement.

As with other compliance areas, loan originators should adopt policies and procedures to ensure that GFEs are delivered timely, in accordance with the requirements of RESPA.

Question #4: 4506-T “Tax Transcript Fees”

The fee for obtaining a tax transcript using IRS Form 4506-T, “Request for Transcript of Tax Return” is an administrative charge that is part of processing and underwriting that should be disclosed as part of Block 1, “Our Origination Charge,” on the GFE regardless of whether the charge is paid to a third party or directly to the IRS.
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The Federal Deposit Insurance Corporation, US Securities & Exchange Commission, Federal Reserve System, Federal Housing Finance Agency, and Department of Housing and Urban Development unveiled their new risk retention proposal today. The QRM proposal would mandate that banks maintain at least five (5%) percent of the risk of mortgage securities they package.

The proposed QRM rule is already controversial because of concerns the rule will further eliminate competition in the mortgage industry, drive up consumer costs, and slow housing sales even further. The controversy isn’t expected to die either because of language in the proposal that prohibits real estate agents and brokers from donating or “Gifting” part of their commission to borrowers at the transaction. Under the proposal the real estate agents and/or brokers would need to adjust the sales price downward if they want to provide a “Gift” to a borrower for a transaction. The Gift language prohibition could trigger disclosure issues in connection with a loan. (See page 198 of 233) of QRM proposal.

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On March 9, 2011, Saul Ewing, LLP; Herman, Herman, Katz & Cotlar, and Sterbcow Law Group LLC, filed a lawsuit on behalf of the National Association of Mortgage Brokers (NAMB) against the Board of Governors Of The Federal Reserve System; Honorable Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System; and Sandra F. Braunstein, Director,Division of Consumer Affairs, Board of Governors of the Federal Reserve System, seeking temporary and preliminary restraints to delay the April 1, 2011 implementation of the loan originator compensation rule under the Truth-in-Lending Act.

The lawsuit, (Case 1:11-cv-00506-RLW) filed in the U.S. District Court for the District of Columbia, is based on the rule prohibiting mortgage brokers from paying their loan officers commissions from fees paid by the consumer, which will cause irreparable harm to small businesses. NAMB is seeking the Federal Reserve Board to avoid the effects of its rule by withdrawing this section of the rule and allowing the Consumer Financial Protection Board to perform its mandated responsibilities in this area.
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The Federal Reserve Board (“FRB”) introduction of the Loan Officer Compensation Rule in August 2010 is moving closer to it’s projected April 1, 2011 implementation date. The FRB recently announced they would delay the implementation of three other proposed rules related to mortgage disclosures but the loan officer compensation rule was not included in the delay.

The problem that the Small Business Administration, National Association of Mortgage Brokers (NAMB), and others have with the Loan Officer Compensation Rule is the language included in the rule harms mortgage companies who do not have a warehouse line unfairly.

The controversial language in question:

“Payments by persons other than consumer. If any loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling: (i) No loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; (Federal Register, Volume 75, No. 185, pg 58534, (d)(2).)

The result of this language is that mortgage brokerage firms who do not fund their own loans Will have to pay their employees a salary or hourly rate when a consumer pays their own loan fees. A loan originator for a mortgage brokerage company would not be able to be compensated for the origination of the loan. The loan originator would only be entitled to a set salary or hourly wage.

A consumer will only be allowed to pay compensation to the actual mortgage broker or mortgage brokerage company. The new language also declares that a mortgage broker company is now defined as a loan originator under the new FRB rule. What this means is that because the mortgage brokerage company received compensation for the loan directly from the consumer that “no loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction.” The only way a employee non-broker loan officer can be compensated is by a set salary or hourly rate now.

What this means is that once a consumer pays compensation directly to the mortgage broker that the money is not allowed to be transferred to the loan officer who originated or produced the loan. The LO Rule only allows one defined loan originator to receive the compensation.
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The 6th Circuit Court of Appeals in Cincinnati, Ohio approved a motion by the United States Attorney General allowing it to intervene on behalf of the plaintiffs in a RESPA class action lawsuit involving kickbacks. The Federal 6th Circuit Court of Appeal will hear the case in early Spring.

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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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On November 23, 2010, the Office of General Counsel’s Helen Kanovsky with the Department of Housing and Urban Development “HUD” responded to public comments HUD received on the “Home Warranty Companies’ Payments to Real Estate Brokers and Agents” Interpretive Rule it published on June 25, 2010. HUD’s response was very clear that the interpretive RESPA rule they issued in June did not need to be changed. However, HUD did provide some clarification to the public by providing additional guidance relating to matters covered in the interpretive rule and from the public’s comments. HUD’s answered seven questions as listed below:
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