Mortgage Lending Legal and Regulatory Highlights

by LeClairRyan

CFPB Warns Financial Institutions of Inadequate Fair Lending Policies and Procedures for Documenting Credit Exceptions

In its spring edition of Supervisory Highlights, the CFPB cautions financial institutions of the increased risk of a fair lending violation for failing to maintain adequate policies and procedures to document exceptions to established credit standards. A typical credit exception arises when an institution does not apply its credit standards to a consumer who has a competing loan offer from another institution. The CFPB's report states that credit exceptions are appropriate when based on a "legitimate justification," but that it important to have in place a system to document and oversee such decisions to avoid fair lending risks under the Equal Credit Opportunity Act.

The CFPB's report indicates that an institution's fair lending policies and procedures should:

  • 1. specifically define the circumstances under which the institution will make a credit exception (e.g., to meet the rate in a competing offer);
  • 2. document the reasons for each exception, such that the documentation is "at a minimum" sufficient to effectively monitor compliance with the exceptions policy;
  • 3. contain records retention requirements that correspond with the records retention obligations under Regulation B;
  • 4. ensure regular monitoring of compliance with the policies and procedures;
  • 5. provide for compliance audits;
  • 6. facilitate corrective action for noncompliance with the policies and procedures;
  • 7. provide for training; and
  • 8. provide for management and/or board oversight.

Given that fair lending enforcement remains a top priority of the Department of Justice, the CFPB, and the federal banking agencies, financial institutions should ensure that they have, and adhere to, adequate policies and procedures in order to avoid a problem. Importantly, the federal agencies continue to follow the "disparate impact" doctrine in fair lending enforcement. Under such doctrine, discrimination may be shown when an institution's practice has a disproportionately negative impact on a protected class, even though the institution had no intent to discriminate and the practice appears neutral on its face, unless the institution's practice meets a legitimate business need that cannot be achieved as well by means that are less disparate in their impact. Hence, it is important for an institution to have the policies and procedures described above in order to document the institution's practice of meeting a legitimate business need for credit exceptions under certain circumstances.

CFPB Continues Aggressive RESPA Enforcement by Targeting Salesperson Referrals
On June 12th the CFPB announced that it had ordered a New Jersey title company to pay a fine of $30,000 for paying illegal kickbacks for referrals. The title company paid commissions to more than twenty independent salespeople who referred title insurance to the title company. According to the order, these practices violated Section 8 of RESPA, which prohibits kickbacks and unearned fees in connection with real estate transactions.

The title company recruited salespeople who had or could develop relationships with entities, such as law firms, that were a source of potential business for the title company. A salesperson would receive a commission of up to 40% of the premium on each title insurance order placed by a firm referred by the salesperson to the title company. Importantly, paying commissions for referrals is allowed under RESPA where the recipient of the payment is an employee of the company that is paying the commission. In this case, however, even though the salespeople received W-2 forms from the title company, the title company did not have the right to control the manner by which the salespeople performed their duties. Accordingly, the CFPB found that the salespeople were not "employees" of the title company, but rather independent contractors, such that the "employee" referral payment exception under RESPA did not apply.

The two takeaways:

  • 1. In general, given the continued focus on RESPA, financial institutions would be well-served to carefully review their real estate-related arrangements to ensure full compliance with the law; and
  • 2. More particularly, companies paying individuals for referrals in connection with real estate transactions based on the "employee" referral exception should ensure that those individuals are properly classified as employees and not independent contractors.

CFPB Proposal Would Provide Post-Closing Cure for Points-and-Fees Standard under the Ability-to-Repay Rule
Under the Ability-to-Repay Rule, in order for a mortgage loan to meet the "qualified mortgage" requirements, total points and fees generally cannot exceed three percent of the loan principal. The CFPB has recognized, however, that often lenders make what they think is a qualified mortgage only to discover afterwards that total points and fees exceeded the three percent cap. A proposed rule change announced by the CFPB on April 30th would provide a limited, post-consummation cure method for loans that are originated in the good faith expectation of qualified mortgage status but that actually exceed the three percent threshold on points and fees. Under the proposal, a lender could cure the problem by refunding the excess amount to the consumer within 120 days after the loan is made. The lender must maintain and follow procedures for reviewing loans and providing refunds in order to take advantage of this provision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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