RESPA - CFPB Takes Action Against Settlement Service Providers
Application Of Chapter 13 Anti-Modification Provision
Credit Union Expansion of Business Lending
Certain Deposits Not an Avoidable “Transfer” in Bankruptcy
DOJ Fair Lending Consent Order
Can Banks Dispute Their FDIC CAMELS Ratings?
It is time to reconsider all arrangements between or among settlement service providers. On January 31, 2017, the Consumer Financial Protection Bureau (CFPB) made public four related enforcement actions, all based on the anti-kickback rule of the Real Estate Settlement Procedures Act (RESPA). In the principal order, the CFPB imposed a $3.5 million civil penalty against a mortgage lender that, according to the consent order, entered into hundreds of arrangements that resulted in referrals of settlement service business in violation of RESPA. Simply stated, RESPA's anti-kickback rule, codified at 12 USC §2607 and implemented by 12 CFR §1024.14, prohibits giving or receiving anything of value for the referral of residential real property settlement service business. "Settlement service business" is very broadly defined – including all aspects of residential mortgage lending, real estate brokering, title insuring, loan settlement and closing, appraising and more – effectively covering all activities related to the origination, processing, underwriting, closing and funding of most 1-4 family home loans. In addition to the principal order against a mortgage lender, the CFPB entered consent orders with two realtors and a mortgage loan servicer. The orders described RESPA violations based on marketing services agreements, lead generation agreements, desk rental agreements, referrals for loan preapprovals and co-marketing arrangements. Of particular note, the CFPB described a RESPA violation as an arrangement where one settlement service provider (for example, a mortgage lender) subsidizes a portion of another service provider's (for example, a realtor's) online advertising expense in return for promoting the subsidizer's business. Violating RESPA's anti-kickback rule can not only lead to significant administrative and civil penalties, but violations can also lead to private causes of action claiming treble damages and criminal penalties. Creativity in developing business arrangements between and among settlement service providers is never recommended. Please contact Marjorie Corwin if you would like to discuss these CFPB developments in greater detail.
In a Chapter 13 bankruptcy case, §1322(b)(2) of the Bankruptcy Code protects a residential lender from having its under-secured deed of trust (or mortgage) modified if the lender is secured only by a deed of trust on the debtor's principal residence (and certain "incidental" property). If the lender also holds other collateral, such as a lien on personal property, then the Bankruptcy Code's anti-modification provision is inapplicable, and an under-secured deed of trust may be divided into secured and unsecured claims by the Chapter 13 debtor's plan. In a recent decision, the United States Court of Appeals for the 4th Circuit considered whether funds escrowed for insurance and taxes, insurance proceeds or miscellaneous proceeds constituted additional collateral, thus removing the protections of §1322(b)(2), or constituted "incidental" property, which entitles the lender to the anti-modification protections. The debtor's argument that escrow funds, insurance proceeds and miscellaneous proceeds constituted additional collateral under §1322 (b)(2) was dismissed by the Bankruptcy and district courts. Affirming on appeal, the 4th Circuit noted that Bankruptcy Code §101(13A)(A) defines "debtor's principal residence" to include "incidental property." Moreover, "incidental property" with respect to a debtor's principal residence is defined under §101(27B) to include "escrow funds" or "insurance proceeds." The Court further noted that under the Fannie Mae/Freddie Mac form deed of trust before it, the lender was not granted an additional lien in escrow funds, insurance proceeds or miscellaneous proceeds. Finally, the Court observed that were it to accept the debtor's position, then the anti-modification protections under §1322(b)(2) would be "eviscerated" since virtually every residential deed of trust or mortgage contains provisions that are similar to the provisions in the deed of trust that was the subject of the appeal. This case supports the common lending practice of applying escrowed funds (for taxes, insurance, etc.) to amounts owed to a lender in default situations. Please contact Lawrence Coppel with questions about this topic.
In March of 2016, the National Credit Union Administration (NCUA) published a final rule intended to modernize its member business loan (MBL) rules. The final rule shifted the NCUA's prior, very restrictive approach to MBLs, to broad principles intended to provide greater flexibility and autonomy for federal credit unions and federally-insured state credit unions to provide business loans to its members. Before this change, credit unions were not permitted to make any MBL that would cause the total amount of all MBLs to exceed the lesser of 1.75 times the credit union's net worth or 1.75 times the minimum net worth under the Federal Credit Union Act (FCU Act) for the credit union to remain well capitalized. The NCUA's final rule became effective on January 1, 2017 and permits credit unions to purchase business loans or participations in business loan pools outside of the 1.75 asset/net worth caps if the loans were originated by other lenders (including other credit unions) and are not to members of the purchasing credit union. Prior to the final rule's effective date, the Independent Community Bankers Association (ICBA) filed suit in the United States District Court for the Eastern District of Virginia, challenging the NCUA's authority to implement the final rule. The lawsuit contended that the final rule violated the provisions of the FCU Act and furthered the unfair competitive advantage that tax-exempt credit unions have over banks. The ICBA's suit was dismissed on January 24, 2017, leaving the NCUA's final rule intact. Expanded credit union business lending activities are likely. Please contact Christopher Rahl for questions concerning this topic.
Under §101(54) of the Bankruptcy Code, a "transfer" includes any "mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with … (i) property; or (ii) an interest in property." The definition is important because only a "transfer" of a debtor's interest in property can be avoided by a bankruptcy trustee as a fraudulent transfer or preference. While a deposit in a bank account may literally be a mode of "parting with" property, the United States Court of Appeals for the 4th Circuit recently held that a deposit into an unrestricted bank account is not a "transfer" under the Bankruptcy Code and thus rejected a trustee's fraudulent transfer claim against a bank. Disregarding contrary authority from other jurisdictions, the court ruled that "when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business, he has not transferred those funds to the bank that operates the account. When the debtor is still free to access those funds at will, the requisite 'disposing of' or 'parting with' property has not occurred; there has not been a 'transfer' within the meaning of §101(54)." The court also noted that it expressed no opinion as to whether other types of deposits, such as deposits to restricted accounts, would constitute transfers under the Bankruptcy Code. Please contact Lawrence Coppel with questions about this topic.
On January 18, 2017, a major bank entered into a consent order regarding alleged fair lending violations. The consent order is the result of an investigation by the United States Department of Justice (DOJ) into the bank's wholesale mortgage purchase activities from 2006 through 2009. The DOJ faulted the bank for allowing mortgage brokers to exercise pricing discretion that the DOJ alleged resulted in certain minority borrowers obtaining loans at higher interest rates than non-minority borrowers. The consent order is interesting in that it notes that the DOJ's data modeling "projected" that certain minority borrowers obtained higher interest rates, but no specific pricing differences were cited. The bank was faulted for not monitoring its purchased mortgage loans to identify the "projected" pricing disparities and take corrective action. The bank agreed to pay just over $54 million, the majority of which is to be used to make refunds to impacted borrowers (and a $55,000 civil penalty). While the consent order covers conduct from 2006 through 2009, it is a reminder to all lenders who purchase loans to be mindful of fair lending responsibilities – especially where third parties have pricing discretion. Please contact Christopher Rahl to discuss this topic.
The United States 7th Circuit Court of Appeals may have created a window of opportunity for banks to challenge their Federal Deposit Insurance Corporation (FDIC) "CAMELS" ratings in court. The FDIC reviews each supervised bank's capital, asset quality, management, earnings, liquidity and sensitivity (CAMELS) using the Uniform Financial Institutions Rating System. Ratings, which range from 1 to 5 (5 being the lowest), impact the premiums banks must pay for FDIC deposit insurance. In the recent 7th Circuit case, a bank filed a complaint in district court alleging that their 4 rating was arbitrary and capricious. The district court agreed with the FDIC's argument that the agency has sole discretion over CAMELS ratings, and the federal Administrative Procedure Act (APA) does not give federal courts authority to hear such cases. As a result, the district court dismissed the complaint for lack of jurisdiction. On appeal, the 7th Circuit decided the case should not have been dismissed, and the lower court in fact may have had jurisdiction if the lower court had found that certain facts existed. The 7th Circuit did not decide whether the rating was arbitrary and capricious, but instead vacated and remanded the case instructing the district court to explore: (1) whether the rating was a final action; and (2) whether the bank exhausted all appeal remedies the FDIC makes available internally. The 7th Circuit held that indeed it may be restricted in reviewing minimum requirements for capital (because federal banking laws give the FDIC authority to set minimum standards for CAMELS' capital component), but there are no other statutes that restrict federal courts from reviewing the other CAMEL components. While it is not definite that banks may question their CAMELS ratings in all circumstances, this case opens a window of opportunity that banks may be able to use federal courts to dispute the FDIC's rating process. Please contact Andrew Bulgin for questions concerning this topic.