Category: Real Estate

One Day Left to Share Your Comments about the Closing Process with the Consumer Financial Protection Bureau (CFPB)!

McBrayer NEW logo 1-10-13

 

On January 3, the Consumer Financial Protection Bureau (“CFPB”) issued a notice and request for information in the Federal Register regarding the real estate closing process. Specifically, the CFPB is interested in knowing the consumer “pain points” associated with mortgage closing and how those pain points might be addressed by market innovations and technology.

The bureau wants input from consumers, mortgage lenders, housing attorneys, settlement closing agents, real estate agents, fair lending and consumer advocates – basically anyone and everyone with closing experience. This is your chance to share your perspective, whether good or bad, and help the closing process to be a smoother and more consumer friendly one for your future purchase, sale or refinance. The information collected during the comment period will be used to help the CFPB come up with future improvement initiatives. This is part of the larger “Know Before You Owe” project, which is intended to help consumers understand and navigate the home-buying process.

The CFPB has made it easy to share information by listing seventeen specific questions they would like responses to, including:

1. What are common problems or issues consumers face at closing? What parts of the closing process do consumers find confusing or overwhelming?

2. Are there specific parts of the closing process that borrowers find particularly helpful?

3. What do consumers remember about closing as related to the overall mortgage/home-buying process? What do consumers remember about closing?

4. How long does the closing process usually take? Do borrowers feel that the time at the closing table was an appropriate amount of time? Is it too long? Too short? Just right?

5. How empowered do consumers seem to feel at closing? Did they come to closing with questions? Did they review the forms beforehand? Did they know that they can request their documents in advance? Did they negotiate?

6. What, if anything, have you found helps consumers understand the terms of the loan?

7. What are some common errors you have seen at closing? How are these errors detected, if at all? Tell us about errors that were detected after closing.

8. What changes, diverging from what was originally presented at closing, often surprise consumers at closing? How do consumers react to changes at closing?

9. How, if at all, do consumers typically seek advice during closing? In person? By phone? Online?

10. Where and to whom do consumers turn for advice during closing? Whom do they typically trust?

11. What documents do borrowers usually remember seeing? What documents they remember signing?

12. What documents do consumers find particularly confusing?

13. What resources do borrowers use to define unfamiliar terms of the loan?

14. What, if anything, would you change about the closing process to make it a better experience for consumers?

15. What questions should consumers ask at closing? What are the most important pieces of information/documents for them to review?

16. What is the single most important question a consumer should ask at closing?

17. What is the single most important thing a consumer should do before coming to the closing table?

You can submit answers to these questions, along with your own additional comments, online by visiting this webpage:  http://www.regulations.gov. But time is of the essence! The comment period closes tomorrow, February 7th. Hurry and let your opinions be known!

 

Article by:

Brittany C. MacGregor

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Prospective Waivers of the Fair Market Value Defense Held Invalid in Arizona Court

Lewis Roca Rothgerber

In an opinion issued last week, the Arizona Court of Appeals held that commercial borrowers and guarantors ‎cannot prospectively waive their right to limit their damages in a deficiency action on the basis of the fair market value of property ‎sold through a trustee’s sale, potentially impacting any loan agreements that provide for such ‎waivers.‎ The holding does not affect most residential loans, for which lenders are generally precluded from recovering deficiencies.

Background

A.R.S. § 33-814(A) provides that borrowers, and by extension guarantors, are entitled to a credit ‎on the underlying debt for the greater of the trustee’s sale price or the fair market value of the ‎trust property at the time of the sale, as determined by the court at a priority hearing. The ‎purpose of these provisions is to protect borrowers from inequities that may result if the property ‎is sold below market value. In an effort to avoid litigation, lenders sometimes include language ‎in loan documents stating that borrowers and guarantors waive the ability to seek a determination ‎of market value.‎

The Arizona Court of Appeals Abolishes Prospective Waivers of the Fair Market Value Defense

A prospective waiver of a fair market defense hearing was at issue in CSA 13-101 Loop, LLC v. ‎Loop 101, LLC., No. 1 CA-CV 12-0167, 2013 WL 4824461 (Ariz. App. Sept. 10, 2013). In that ‎case, a lender made a $15.6 million loan, which was secured by a deed of trust. In the note and ‎guaranty, the borrower and guarantors waived “the benefits of any statutory provision limiting ‎the right of [lender] to recover a deficiency,” including the benefits of A.R.S. § 33-814. Even ‎more specific, the deed of trust stated that the sales price at the trustee’s sale would conclusively ‎establish the fair market value of the property and that the borrower and guarantors waived their ‎ability to seek a fair market value determination.‎

Following a default, the lender initiated a trustee’s sale, at which the lender’s assignee purchased ‎the property with a credit bid of $6.15 million. At the time, about $11.2 million remained due on ‎the note. The lender’s assignee then brought a deficiency action against the borrower and ‎guarantors for the difference. The borrower and guarantors counterclaimed, asserting that the ‎credit bid was unreasonably low. The court denied a motion to dismiss the counterclaims, ‎holding the borrower and guarantors were entitled to a fair market value hearing ‎notwithstanding the written agreements to the contrary. ‎

The Court of Appeals affirmed, holding that the deed of trust statutes impliedly prohibit ‎prospective waivers of fair market value hearings. The court relied on the purpose of the deed of ‎trust statutes, the comprehensiveness of the protections, and the legislative history, which the ‎court stated was to protect borrowers from the unfairness that results if a property is sold at a ‎trustee’s sale below its market value. According to the court, allowing parties to prospectively ‎waive the protection of a fair market value hearing would effectively undo the statutory scheme ‎and undermine an important purpose of the deed of trust statutes.‎

Conclusion

Arizona’s appellate courts have shown increased interest of late in foreclosure-related cases. ‎Earlier this summer, Division One of the Arizona Court of Appeals abolished prospective ‎waivers by borrowers of the residential anti-deficiency protections under A.R.S. § 33-814(G) based on public ‎policy grounds. Parkway Bank & Trust Co. v. Zivkovic, 232 Ariz. 286, 304 P.3d 1109 (App. ‎‎2013). In another decision out last week, Division Two of the Arizona Court of Appeals, citing ‎Parkway Bank, declined to consider whether a guarantor can waive same the protections of A.R.S. § ‎‎33-814. First Credit Union v. Courtney, No. 2 CA-CV 2013-0005, slip op. (Ariz. App. Sept. 12, ‎‎2013). Lewis Roca Rothgerber continues to monitor the developments in this evolving area.‎

Lenders, borrowers, and guarantors should consider how these recent decisions affect their ‎existing and prospective lending relationships.

Article by:

Of:

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

Michael Best Logo

 

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

Michael Best Logo

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.

Article By:

 of

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

Altro Levy Logo

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.

Article By:

 of

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.

Article By:

 of

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.

Article By:

 of

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.

Article By:

 of

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:

Barnes & Thornburg

 

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