Category: Real Estate

Consumer Financial Protection Bureau Issues New Rule Regarding Consumer Mortgage Transaction Forms

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On November 20, 2013 the Consumer Financial Protection Bureau (CFPB) issued a rule that will simplify and improve disclosure forms for consumer mortgage transactions. This rule implements the Dodd-Frank Act’s directive to integrate mortgage loan disclosures required by the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The two new disclosures are the Loan Estimate, which must be given three business days after application, and the Closing Disclosure, which must be given three business days before closing.

The Loan Estimate form replaces two current federal forms, the Good Faith Estimate designed by the U.S. Department of Housing (HUD) under RESPA and the “early” Truth in Lending disclosure required by TILA. The Closing Disclosure form replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth in Lending disclosure designed by the Federal Reserve Board under TILA.

These new rules apply to most closed-end consumer mortgages. They do not apply to home equity lines of credit, reverse mortgages or mortgages secured by mobile homes or by dwellings not attached to real property. To assist lenders, the final rule and official interpretations contain detailed instructions as to how these forms should be completed.

To permit time for lenders to come into compliance, the final rule will be effective on August 1, 2015.

Article by:

Jon G. Furlow

Of:

Michael Best & Friedrich LLP

Lessons Learned about Real Estate Lending in this Last Recession

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We all know real estate, and especially real estate lending, was heavily affected by the recession. Now that banks are starting to lend again, what can we learn from those bad years to set us on a better course for the future?

1. Real estate lending in the last cycle. We learned problem loans arose principally on loans with high loan to value ratios, or based on projections that were too optimistic, or in geographic markets where the lender did not have good market knowledge, and especially where the bank became more of a joint venturer with the developer. Smaller community banks especially felt more pressure to help home grown companies expand.

2. Problems exposed in the recession and recovery.

  • Appraisal methodology. Through the hard lessons of foreclosure and bankruptcy we learned more acutely about appraisal methodology, and the weaknesses of this methodology in troubled times became transparent. We learned that, although appraisers are not supposed to take “forced sales” into account in calculating fair market value, when the market is thin, “forced sales” may be the only comparables.
  • Exercise of developer’s rights. We also learned a developer’s decisions can have a drastic impact on a lenders’ ability to recover collateral, and on holding costs during workout or foreclosure. This was especially clear in cases where a condominium developer suddenly expanded the condominium into future phases, even when units were not selling, thus creating many separate tax key numbers with separate real estate tax bills, separate condominium association assessments, and no means of reversing that decision except with unanimous or near-unanimous consent of all condo unit owners and their lenders.
  • Interstate Land Sale Act. Condo unit buyers attempting to cancel contracts to purchase condos whose value had fallen, started using the long-dormant Interstate Land Sale Act as a weapon, with increased liability to developers.
  • Priority of municipality’s rights under development agreements. The Baylake Bank case in Wisconsin highlighted the ability to challenge the priority of charges and obligations contained in municipal development agreements.
  • Drastic impacts to condominium and homeowners’ associations’ budgets. Failure of even a small percentage of condo unit owners or homeowners to pay their assessments resulted in grave difficulties in that association’s ability to function.
  • Foreclosing on less than all needed assets of a project. Lenders foreclosing on projects discovered they lacked the ability to make needed changes in the project to facilitate its resale and needed to negotiate with their delinquent borrowers to secure Declarant rights reserved in condo declarations, permits issued only in the borrower’s name, and necessary easements.

3. Reaction to market risks. In response to these risks exposed in the recession, parties in the real estate market took action.

  • Title insurance changes. In reaction to the sudden increase in title claims, title companies not only increased their fees substantially, but also reversed their practice of deleting the “creditor’s rights” exception in their policies.
  • Secondary mortgage market changes. In response to liability claims, Fannie Mae, Freddie Mac, the Department of Veterans Affairs and others modified their requirements for purchase of loans from primary lenders, which changed requirements for condominium declarations and strongly encouraged phasing of projects.
  • Lending changes. Lenders are now under more scrutiny and stiffer governmental oversight on all real estate loans.

Those of us who are involved in the commercial real estate world hope we are starting on a new cycle of expansion. However the “hangover” of this recession will require us to change our documents and practices for success in this new period.

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Is a Limited Liability Company (LLC) good for Canadians buying in the U.S.?

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If you are Canadian, the answer to that question is: it depends.

People purchasing real estate in the U.S. are faced with different challenges depending on whether they plan on using the property personally or renting it. In this article, we will address the latter issue and its different implications.

A Tax Efficient Structure

There are two main issues to be considered when renting property in the U.S.; income tax and liability. Because rental properties generate income, it is necessary to determine the most tax efficient structure in which to hold the property. On the other hand, because a third party (most likely a tenant) will be using the property, it is essential to create a structure that also offers creditor protection to protect against potential civil liability claims from such third party. A limited liability company (LLC) provides both those elements.

In the U.S., an LLC allows a purchaser to benefit from the low individual tax rates and therefore avoid the higher corporate tax rates inherent to owning property in a corporation. A corporation is an independent taxpayer and is taxed at a higher rate. However, an LLC is not an independent taxpayer but rather a “flow through” entity, which means that its revenue is taxed in the hands of its owner. Therefore, if the owner is an individual, the LLC’s revenue is taxed at the low individual rate.

Creditor Protection

Although one of the main goals of tax planning is to minimize tax, the main advantage of the LLC is creditor protection. When owning property in your personal name, you are exposed to liability claims from creditors such as a tenant who may have suffered injuries on your property while renting it. Should a judgement be rendered against you finding you liable for the injuries, the creditor could seek execution of this judgment not only against your U.S. property but also against the rest of your assets. However, when owning property in an LLC, only the assets in your LLC (i.e. your U.S. property) are within reach of the creditor.

The Issue for Canadian Buyers

After reading this, you may be thinking an LLC is the best solution for your U.S. real estate purchase. Unfortunately this structure can be disastrous for Canadian residents due to double taxation. Under the Canada-U.S. Tax Treaty, a Canadian resident is granted foreign tax credits for any tax paid to the Internal Revenue Service (“IRS”). Those credits can be used to offset the tax owed to the Canada Revenue Agency (“CRA”) on the same revenue or capital gain. Although the IRS considers the LLC as a flow through entity and taxes only the owner personally, the CRA does not recognize the flow through nature of the LLC but rather considers it a separate taxpayer, therefore creating a mismatch on said foreign tax credits. In this type of situation, the CRA will tax the owner of the property on the full amount of the revenue or capital gain and will not allow the use of any foreign tax credits for what was paid to the IRS. This is the known and dreaded double taxation. The owner of the property will pay taxes twice on the same revenue or capital gain, once in the U.S. and once in Canada. Depending on the values and amounts involved, Canadian residents can be required to pay in excess of 70% of taxes on their property income or capital gain due to double taxation. In extreme circumstances, this rate can even climb up to 80%.

That being said, even though LLCs should be avoided in the above-described situation, LLCs can be a valuable tool in a carefully planned structure. As general partner of a Limited Partnership for example. When used in such a structure, an LLC can help provide an extra layer of creditor protection to a Canadian resident while creating very limited tax consequences.

As you probably realised by now, the way you own property in the U.S. is crucial and putting your asset(s) in the wrong structure can lead to very unpleasant surprises. Always talk to a cross-border legal advisor before making any decisions in order to make sure you are aware of all the tax implications.

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Imperfect Fit: Abercrombie Store Threatens Location In Tailored-Clothing Mecca Savile Row

Womble Carlyle

We’ve all heard the various means of describing the inappropriate place for an otherwise benign thing, rendering the otherwise benign thing a hazard or a liability or just plain offensive.  In 1855, the author Robert De Valcourt referred to, “An awkward man in society is like a bull in a china shop, always doing mischief.”  Robert De Valcourt, The Illustrated Manners Book: A Manual of Good Behavior and Polite Accomplishments (1855).  In 1926, Justice Sutherland opined, “A nuisance may be merely a right thing in the wrong place — like a pig in the parlor instead of the barnyard.”  Village of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926).

Village of Euclid, of course, upheld the constitutionality of the zoning concept, a replacement of single purposes ordinances and private litigation for land use management.  See David Owens, Land Use Law In North Carolina (2d ed. 2011).

bull china shop retail real estate land use

“Late Ming dynasty, kaolin and pottery stone foundation, cobalt firing enamelling with Arabic lettering.  If only I could find a well-tailored suit and some skinny jeans to go with this vase.” 

Well, the “pig” or the “bull” in one particular instance is anticipated to be an Abercrombie and Fitch children’s store in the heart of London.

The “china shop” or the “parlor”?  Well, that may be Savile Row, legendary collection of fine British tailors and suitmaker to the rich and famous.  Consider this quote from Mark Henderson, chairman of “heritage tailor Gieves & Hawkes”, reported by CNBC about objection to the Abercrombie store:

“Opening a kids store on Savile Row is a somewhat bizarre thing to do. It’s a fairly narrow street, it’s got its own atmosphere to it.  It’s just fundamentally a mistake from Abercrombie – they don’t get everything right.”

We don’t purport to know the land use laws in London, we’ll leave that to the Ealing Common Land Use Barrister blog, but it’s always interesting to see just how common and universal land use issues can be.

It’s also interesting to see how different motives underpin all land use issues.  For example, one might assume the “hubub” over the Abercrombie store is a degradation of the historical nature of the narrow street, as Mr. Henderson alludes.  Well, maybe the distaste is different for another, even another from a seemingly similar perspective.  Consider this worry about “higher rents”, from John Hitchcock of “bespoke tailor Anderson & Sheppard” (man, I love the British):

“One or two of the tailors are concerned it might put the rents up, and it will do, I suppose.  There’s only so much rent we can pay. Our costs are already high as we make every suit by hand – unlike the big chains which don’t make their products on the premises.”

The Lesson of the Day

Land use decisions are nuanced legally but they are also very nuanced politically.  In this one space, one street within one small universe of British tailors, we have two very distinct motives for refusing the Abercrombie store.  Yes, both are opposed to the store, but each is opposed for a different reason, which means a political salve must address, at least, two distinct concerns.

One must fully and fairly understand the forces against which one is working, before success is at hand.  I think Sun Tzu, the Zhou Dynasty Land Use Litigator, said that.

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Recent Consumer Financial Protection Bureau (CFPB) Developments

Rules Creating Exemptions to the ATR Rule Finalized

The Consumer Financial Protection Bureau (CFPB) recently finalized rules that modified and created specific exemptions to the CFPB’s Ability-to-Repay Rule. The rules have three main effects.

  1. They exempt certain community development lenders and nonprofits—specifically those that lend only to low- and moderate-income consumers, and make 200 or fewer such loans per year—from the ATR Rule.
  2. They facilitate lending by community banks and credit unions that have less than $2 billion in assets, and make 500 or fewer first lien mortgages per year.
  3. They no longer require that compensation paid by a broker or lender to a loan originator counts towards the Dodd-Frank points and fees limits.

These changes to the ATR Rule will take effect on January 10, 2014.

Effective Date of Prohibitions on Financing Credit Insurance Premiums Delayed

The CFPB has delayed the effective date of a regulation prohibiting creditors from financing credit insurance premiums secured by a dwelling. The regulation, previously effective June 1, 2013, has been delayed until January 10, 2014. The CFPB wanted to clarify how the rule applied to transactions other than those where a lump-sum premium was added to the loan amount at closing.

CFBP Seeking Comments on Possible Revisions to the Civil Penalty Rule

The CFPB is seeking comments on possible revisions to the Consumer Financial Civil Penalty Fund Rule. The CFBP uses this fund, established by the Dodd-Frank Act, to deposit civil penalties obtained in judicial or administrative actions under federal consumer financial laws. The fund can be used to pay victims of violations of federal consumer financial laws, or, if victims cannot be found, to educate consumers and provide financial literacy programs. The rule articulates the CFPB’s interpretations of what kind of victim payments are appropriate and how to otherwise allocate the funds. Comments are due on July 8, 2013.

White Paper Concerning Overdraft Practice Concerns Published

The CFPB published a white paper concerning overdraft practice concerns and institutional practices. The paper finds that a large portion of consumer checking account revenue continues to come from overdraft fees. Furthermore, those consumers who choose, let alone use, overdraft coverage have higher costs and a higher chance of having their checking accounts involuntary closed. No action, other than further research, is currently planned.

CFPB Launches New Mortgage Rule Implementation Page

The new mortgage rule implementation page is part of an effort to help lenders comply with the Dodd-Frank Act reforms and CFPB rules. Debtors and potential debtors can find potentially useful information, including quick reference charts, video guides, manuals, etc.—related to the new 2013 mortgage rules. While the CFPB’s intention for the site is to help understand the rules, the materials are not a substitute for the rules themselves.

Ryan C. Fairchild, summer law clerk at Poyner Spruill, co-authored this article.

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Considerations For International Clients Who Intend to Buy A Home In the U.S.

Sheppard Mullin 2012

International buyers invested $82.5 billion in U.S. residential real estate (4.8% of total U.S. sales) according to the most recent survey conducted by the National Association of Realtors for the 12 month period ending with March 2012. According to that survey, the top states in the U.S. for international buyers were Florida, California, Arizona and Texas. That survey also finds that the top-five international buyers were from Canada, China, Mexico, India, and the United Kingdom and that Brazil also remains a major source of purchasers. Homes are bought in the U.S. for investment, vacation-use, temporary use for professional, educational (which could include providing a home to a child who is pursuing his or her education in the U.S.), and a myriad of other reasons.

U.S. home buying and ownership, without proper planning, can have unexpected and unintended consequences. Many international clients are not aware that ownership of a U.S. home triggers U.S. estate tax on death and a gift of the property during lifetime triggers U.S. gift tax. U.S. estate and gift tax is imposed at a rate of 40%. An individual who is neither a U.S. citizen nor domiciled in the U.S. can shelter only $60,000 of U.S. situs assets on death (i.e. assets located or deemed to be located within the U.S.). In terms of gifting, an individual who is neither a U.S. citizen nor domiciled in the U.S. can make annual exclusion gifts of $14,000 per year to anyone and can currently pass $143,000 per year to a spouse who is not a U.S. citizen free of gift tax. That is in contrast to the $5,250,000 that a U.S. citizen or domiciliary can pass free of estate tax on death or by gift during lifetime as well as unlimited transfers to a U.S. citizen spouse.

To avoid triggering U.S. estate tax on death, many international clients are counseled to take title to the home in a foreign “blocker” corporation which, if respected, is not subject to U.S. estate tax on death. This form of title has the added advantage of providing anonymity and liability protector to the shareholder . Owning a home in a foreign corporation triggers other more immediate tax concerns such as application of the corporate tax rate (up to 35%) in lieu of the preferential long-term capital gains rates on sale (up to 20%), possible imputed rental income for use of corporate property by the shareholder, loss of step-up in the income basis of the home on the death of the owner (the basis of the stock in the corporation would be adjusted but the inside basis—the home itself would not be entitled to a basis adjustment), and loss of the ability to avoid the home being reassessed for California real property tax purposes on transfer from parent to a child. In addition, a U.S. person who will inherit shares in a corporation that will either become a Controlled Foreign Corporation (CFC) or a passive foreign investment company (PFIC) faces numerous special compliance obligations and substantive tax issues as a result of the ownership of those shares. There are many other ways to take title, such as through a LLC or a trust and each option should be explored in depth to achieve the client’s objectives to the maximum extent possible. Consideration should also be given to planning aimed at avoiding a public court proceeding that would be necessary to convey title to the beneficiaries of an international client who dies holding title directly to a U.S. home.

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Not so Fast at the Eden Roc

The National Law Review recently published an article, Not so Fast at the Eden Roc, written by Nelson F. Migdal with Greenberg Traurig, LLP:

GT Law

 

Within hours of the appeals court’s ruling [Marriott International v Eden Roc 3-26-2013.pdf], there have been announcements about the demise of the long-term hotel management agreement and the hotel owner’s inviolate right to terminate (revoke) management agreements “at-will.”  But the wiser course might be to not speak too soon, but, rather, to ponder the consequences.  Remember that Judge Schweitzer’s prior ruling on October 26, 2012 granted Marriott’s request for a preliminary injunction to prevent the hotel owner from removing the hotel operator in another of a series of “midnight raids,” where the hotel owner sweeps in and removes the hotel operator.  The hotel operator at the Eden Roc chose to stand its ground, and the injunction order maintained the status quo.  In many situations, the parties are able to resolve their dispute, either on their own or with the assistance of a mediator.  In fact, the Judge urged the parties to do just that.

The parties were not able to resolve their differences, and on March 26, 2013, a New York appeals court vacated Judge Schweitzer’s injunction.  This is not a sweeping and staggering new law. Citing the 1991 Woolley case, the order merely confirms that a principal may freely remove its agent and terminate the agency relationship “at-will” (absent the presence of a “coupled interest” as part of the contract; see the attached link to our prior piece on the Turnberry decision).  (To this extent, I disagree with the appellate court’s dicta that the agreement in question is not an agency agreement; in fact it is). The order further confirms that certain contracts that have the characteristics of a personal services contract cannot be enforced by means of an injunction.  It is also not news that if a hotel owner desires to terminate its management agreement with the hotel operator in this manner, that the hotel owner may be answerable in damages to the hotel operator.  Some blog posts within the last 24 hours make reference to the recent Fairmont Hotels & Resorts termination at the Turnberry Resort.  Very few of those blog posts complete the factual story and note that the hotel owner ultimately paid Fairmont damages reported to be roughly $19,000,000, representing the approximate present value of expected future management fees. Depending on the performance of the hotel, an Owner’s summary revocation of a hotel management agreement could be akin to selling “puts”; you get to own the stock, but do you really want to own it that cost?

So, let’s just be more judicious here.  Hotel owners and hotel operators actually do talk with each other more often than not, and do enter into legally binding agreements for management of the owner’s hotel.  I will continue to advocate for good faith negotiation over litigation, and monitor the complete story, including the fact that terminating the hotel management agreement may grant an owner its wish to regain the hotel, but that will come at a price, and then, the next step is that the hotel owner will need to replace the removed hotel operator with yet another hotel operator – which hotel owners realize can add a significant expense for the owner.

©2013 Greenberg Traurig, LLP

Recent Consumer Financial Protection Bureau “CFPB” Mortgage Rules to Absorb and Implement

Barnes & Thornburg LLP‘s Financial Institutions Practice Group recently had an article, Recent Consumer Financial Protection Bureau “CFPB” Mortgage Rules to Absorb and Implement, featured in The National Law Review:

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January 2013 was a very busy month for the Consumer Financial Protection Bureau in promulgating rules relating to consumer mortgage lending. The CFPB promulgated seven rules pertaining to consumer mortgage lending during January 2013:

  • Ability to Repay (ATR) and Qualified Mortgage (QM) Standards under TILA/Regulation Z
  • Escrow Requirements for Higher-Priced Mortgages Under TILA/Regulation Z
  • High-Cost Mortgage and Homeownership Counseling Amendments to TILA/Regulation Z and Homeownership Counseling Amendments to RESPA/Regulation X
  • RESPA/Regulation X and TILA/Regulation Z Mortgage Servicing
  • Appraisals for Higher-Priced Mortgage Loans (issued jointly with other agencies)
  • Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under ECOA/Regulation B
  • Loan Originator Compensation Requirements Under TILA/Regulation Z

    With so many new CFPB rules, there is much to be learned and absorbed by loan originators, mortgage brokers, mortgage lenders, and mortgage servicers between now and the dates on which such rules will go into effect. With the exception of the High-Cost Mortgage and Homeownership Counseling Amendments to TILA/Regulation Z, the Homeownership Counseling Amendments to RESPA/Regulation X and the Escrow Requirements for Higher-Priced Mortgages rule, which will go into effect on June 1, 2013, and certain limited provisions contained in the Loan Originator Compensation rule, which will also go into effect on June 1, 2013, all of these rules have effective dates in January 2014, one year after their respective promulgation dates.

    Although each of these rules is important and poses certain compliance challenges, we will summarize in this Alert two of the most significant rules (largely due to their very widespread applicability and their overall complexity).  These are (1) the ATR and QM Standards rule; and (2) the Loan Originator Compensation rule.

    ATR and QM Standards

    The ATR and QM Standards rule, together with accompanying preamble, explanations and commentary, is over 800 pages long. The rule, among other things, implements a Dodd-Frank Act amendment to TILA requiring a consumer mortgage creditor, before originating a mortgage loan, to consider the borrower’s ability to repay.  The new rule allows a creditor to satisfy this requirement by: (1) satisfying the general ATR standards, which would require the creditor to consider eight different and discrete factors relating to the borrower’s ability to repay (generally using reasonably reliable third-party records to verify the information considered); (2) refinancing a “non-standard mortgage” into a “standard mortgage”; (3) originating a “rural balloon-payment QM” if, but only if, the creditor qualifies under a rigorous standard under which few creditors would qualify (creditors must have less than $2 billion in assets, must originate no more than 500 first-lien mortgages, and must originate at least 50 percent of the first-lien mortgages in counties that are rural or underserved); or (4) originating a QM.

    The advantage of meeting the QM standards is that, in general, the creditor will obtain an irrebuttable presumption of the borrower’s ability to repay the mortgage, which would block most lawsuits.  However, if the mortgage is a “higher-priced mortgage,” the creditor obtains only a rebuttable presumption of the borrower’s ability to repay the mortgage, which makes such loans more easily challenged in court.  A “higher-priced mortgage” is one which is priced 1.5 percentage points higher than a comparable loan in Freddie Mac’s Primary Mortgage Market Survey. This distinction will likely make “higher-priced mortgages,” or so-called subprime loans, less available.  In this regard, some pundits have predicted that, in the future, only mortgages meeting the QM standards and that are not “higher-priced mortgages” or “high-cost mortgages” will be generally available.

    To qualify as a QM the mortgage loan must satisfy the following standards:

    • provide for regular periodic payments that are substantially equal (except for ARMs and step-rate loans) that do not result in negative amortization or allow the borrower to defer repayment of principal, or result in a balloon payment (except for balloon-payment QMs);
    • have a term no greater than 30 years;
    • have total points and fees that do not exceed the permitted percentage of the loan amount (which is generally three percent (3%), subject to a few exceptions and refinements);
    • be underwritten taking into account the monthly payment and any mortgage related obligations, using the maximum interest rate that may apply during the first five years and periodic payments that will repay either (i) the outstanding principal and interest over the remaining term of the loan after the interest rate adjusts to the five-year maximum or (ii) the loan amount over the loan term;
    • for which the creditor considers and verifies the income or assets, and current debt, alimony, and child support obligations; and
    • for which the consumer’s debt-to-income ratio does not exceed forty-three percent (43%) when the loan is consummated.

    Notwithstanding these stringent QM standards, on a temporary basis, and for a period not to exceed a maximum of seven years, the CFPB created a second category of QMs that meet some, but not all, of the general QM standards. Simply stated, to qualify under this second category, the loan must meet the general product feature prerequisites for a QM and also satisfy the underwriting standards for purchase, guaranty, or insurance (as applicable) of either (i) the GSEs, as long as they operate under Federal conservatorship or receivership, or (ii) HUD, the VA, the USDA, or the Rural Housing Service.

    This rule also implements a provision of the Dodd-Frank Act that prohibits prepayment penalties, except for certain fixed-rate QMs where the penalty meets certain restrictions and the creditor offered the consumer an alternative mortgage loan without the penalty.

    Loan Originator Compensation

    In connection with the CFPB’s new Loan Originator Compensation rule, the CFPB published over 500 pages of background and prefatory material, explanations, and commentary. In this rule, the CFPB both expands and clarifies existing provisions in Regulation Z regulating loan originator compensation.  Many, if not most, of the provisions in the final rule have substantially identical counterparts in current Regulation Z § 1026.36(d) and the related Official Staff Commentary.

    However, the final rule has expanded treatment regarding the prohibited use of “proxies” for a term of a transaction in awarding loan originator compensation.  In this regard, the final rule clarifies the definition of a proxy as a factor that consistently varies with a transaction over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transactions.

    While retaining current Regulation Z’s general prohibition against subsequent downward adjustments to a loan originator’s compensation based upon changes in the transaction terms (e.g., to match or better the terms of a competitor), the final rule, unlike current Regulation Z, allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs.

    Although the final rule generally prohibits loan originator compensation based upon the profitability of a transaction or a pool of transactions, it makes certain limited exceptions to this general rule with respect to various kinds of tax-advantaged retirement plans and other profit-sharing plans.  In this regard, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans and to provide bonuses and contributions to other plans that do not exceed 10 percent of the individual loan originator’s total compensation (but employers can elect whether or not to include contributions to tax-advantaged retirement plans in the “total compensation” calculations).

    Regulation Z currently provides that, where a loan originator receives compensation directly from a consumer in connection with a covered mortgage loan, no loan originator may receive compensation from another person in connection with the same transaction.  The Official Staff Commentary to current Regulation Z indicates, however, that this prohibition does not prohibit the employer of a loan originator from paying such loan originator a salary or an hourly wage in that instance.  As a pleasant surprise, the final rule permits mortgage brokers to pay their employees or independent contractors a commission on the particular mortgage loan, so long as the commission is not based upon the terms of such mortgage loan.

    The CFPB has elected not to issue a rule implementing a provision of the Dodd-Frank Act prohibiting consumers from paying upfront points or fees on a transaction if the loan originator’s compensation is paid by a person other than the consumer (either to the creditor’s own employee or to a mortgage broker).  Instead, the CFPB elected to grant a temporary exemption from this prohibition while it explores the potential effects of such a prohibition.

    The final rule also contains some provisions unrelated to loan originator compensation.  Specifically, in furtherance of other provisions in the Dodd-Frank Act, the final rule (1) prohibits mandatory arbitration clauses in connection with both residential mortgage loans and HELOCS; (2) prohibits the application or interpretation of provisions in residential mortgage loans and HELOCS and related agreements that would have the effect of barring claims in a court in connection with an alleged violation of Federal law; and (3) prohibits the financing of any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling (but allows for credit insurance to be paid on a monthly basis).  These are the only provisions of the final rule which have a June 1, 2013, effective date.

    Other provisions in the final rule address (1) the additional obligations imposed on depository institutions in ensuring that their loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards and are properly trained; and (2) expanded recordkeeping requirements pertaining to loan originator compensation applicable to both creditors and mortgage brokers.

    Recess Appointment of Richard Cordray

    The Jan. 25, 2013 decision of the D.C. Circuit Court of Appeals invalidating recess appointments to the National Labor Relations Board, calls into question the recess appointment of Richard Cordray as head of the CFPB.  What impact this potentially invalid appointment will have on the CFPB regulations promulgated in January 2013 is undetermined at this time.

© 2013 BARNES & THORNBURG LLP

2013 ADA Pool Lift Compliance Deadline: Has Your Business Complied?

The National Law Review recently published an article by Tara L. Tedrow with Lowndes, Drosdick, Doster, Kantor & Reed, P.A. regarding, Pool Lifts:

Lowndes_logo

January 31, 2013 marks the date for compliance with the Americans with Disabilities Act (“ADA”) Standards for Accessible Design related to installing fixed pool lifts for swimming pools, wading pools and spas.  Though the Department of Justice (“DOJ”) previously changed its hard deadline for compliance with the installation requirements from March 15, 2012 to January 31, 2013, entities covered by Title III of the ADA should not rely on any more extensions.  If complying with the new ADA requirements fell off your to-do list, it’s time to start planning.

Here are a few questions to ask yourself when understanding how these rules could affect you:

Are you a Title III entity?

Whether you even have to worry about the fixed pool lift requirements depends on whether you are a Title III entity.  Title III prohibits discrimination on the basis of disability by places of public accommodation, including many private businesses, and places with accessibility requirements on such businesses.  Title III entities are businesses such as a hotel and motel, health club, recreation center, public country club or other business that has swimming pools, wading pools and spas.  If you fall under that category, the 2010 Standards apply.

What is this pool lift requirement? 

The 2010 Standards require that newly constructed or altered swimming pools, wading pools, and spas have an accessible means of entrance and exit to pools for those people with disabilities.  However, providing accessibility is conditioned on whether providing access through a fixed lift is “readily achievable.”  The technical specifications for when a means of entry is accessible are available on the DOJ website. Other requirements, based on pool size, include providing a certain number of accessible means of entry and exit, which are outlined in Section 242 of the Standards.  However, businesses should consider the differences in application of the rules depending on whether the pool is new or altered, or whether the swimming pool was in existence before the effective date of the new rule.  Full compliance may not be required for existing facilities; Section 242 and 1009 of the 2010 Standards outline such exceptions.

What exactly is a “fixed pool lift”?

A fixed lift is one that is attached to the pool deck or apron in some fashion.  Conversely, a non-fixed lift is not attached in any way.  Many businesses with pools have purchased or own portable (i.e. non-fixed) pool lifts.  If that portable lift is attached to the pool deck, then it could be considered a fixed lift and compliant under the rules.  Thus, owners of a portable lift may be able to comply with the ADA requirements by affixing lifts to the pool deck or apron.  Moreover, owners of such portable lifts will be required to affix the lifts as a means of compliance if it is readily achievable.  This exception for certain non-fixed lifts stemmed from confusion over the new regulations, spurring the DOJ to grant exceptions to certain entities that purchased an otherwise compliant non-fixed lift before March 15, 2012.  Those exceptions apply only if the non-fixed lifts comply with the 2010 Standards and if the owners keep the portable lifts in position for use at the pool and operational during all times that the pool is open to guests.

What is the “readily achievable” standard?

The ADA does not require providing access to existing pools through a fixed lift if it is not “readily achievable,” meaning that providing access is easily accomplishable without much difficulty or expense.  The DOJ has specified that this standard is a flexible, case by case analysis, so that the ADA requirements are not unduly burdensome.  However, businesses cannot simply claim that installing a fixed pool lift is not readily achievable.  Rather, factors such as the nature and cost, the overall financial resources of the site and the effect on expenses and resources are all considered and evaluated when determining the application of the standard. Though for some businesses immediate compliance may seem impossible because of issues such as the backorder on pool lifts, it is not a valid excuse for non-compliance.  Businesses are still required to comply with the 2010 Standards through other means, as specified in the Standards.

Should I shut my pool down if I haven’t complied?

If accessibility is not readily achievable, businesses should develop plans for providing access into the pool when it becomes readily achievable in the future.  Businesses that are worried about their current status of compliance should consult with legal counsel or call the ADA Information Line to speak with an ADA Specialist regarding any further questions.

Though compliance to the pool lift requirements may seem onerous, it is necessary to prevent legal and financial liability on the part of a Title III covered business.  These requirements also potentially affect tax breaks under the IRS Code, insurance coverage, ongoing maintenance and accessibility obligations and staff training requirements, all of which are even more of a reason to take compliance seriously.

© Lowndes, Drosdick, Doster, Kantor & Reed, PA

Who Controls a Cottage if it is Transferred to an LLC?

An article by Christopher J. Caldwell and Laura E. Radle with Varnum LLP regarding Cottage Ownership and Control was published recently in The National Law Review:

Varnum LLP

 

Who controls a cottage after it is transferred to a limited liability company (“LLC”)?  Will an owner or co-owner lose control over the decisions related to the cottage if it is transferred to an LLC?

Well, it depends on how the LLC is structured.  If the LLC is structured as a member-managed LLC, all of the co-owners (who are now called “members”) will be involved with each and every decision related to the ownership and management of the LLC.  However, if the LLC is manager-managed, a manager will make many of the decisions related to the ownership and management of the LLC.

For owners who want to maintain a large degree of control over a cottage, he or she can do this by acting as the manager of the LLC.  It should be noted, however, that if other family members are given membership interests in the cottage, those family members might still have a say in certain decisions related to the cottage (for example, perhaps a majority or super-majority of the members can remove the manager).  The provisions of the Operating Agreement will determine how much say the members of the LLC will have in decisions related to the ownership and management of the cottage.

Although it may be difficult for an owner to cede some or all of the control over the decisions related to a cottage, in some cases, ceding control is beneficial because it allows the next generation to learn about and understand the intricacies of managing the cottage.  In other cases, however, the owner might want to retain control with an iron fist.  If so, the owner should act as the manager of the LLC and provisions should be included in the Operating Agreement to restrict the ability of the members to make various decisions (including the ability to remove the owner as the manager).

As we have stated before, each family is unique.  Therefore, a cottage plan must be tailored to fit a family’s specific needs and desires.

© 2012 Varnum LLP