December 2017 OBA Legal Briefs

Managing risk in mobile deposits

This article has been removed due to an error. You may access the revised article in the January 2018 OBA Legal Briefs.

The statement exemption for charged-off loans

By John S. Burnett

Making sure you qualify

One of the amendments to Regulation Z that was made in the October 16, 2016, final rule amending the Bureau’s Servicing Rules was the addition, effective October 19, 2017, of the exemption in new paragraph 1026.41(e)(6) from the § 1026.41 periodic statement requirements. That new exemption applies to charged-off loans, but only under specific conditions.

There are four criteria for the exemption, all included in subparagraph (e)(6)(i) –

1. The servicer must have charged off the loan in accordance with loan-loss provisions
2. The servicer will not charge any additional fees on the account
3. The servicer will not charge any additional interest on the account
4. The servicer provides, within 30 days of the charge-off or within 30 days of the most recent periodic statement a final periodic statement with the special notice requirements (as applicable) included in subparagraph (e)(6)(i)(B).

All four criteria must be met to qualify for the exemption.

Several banks have contacted me to ask about the requirement that no additional interest be charged. They wanted to know whether that meant that no interest over-and-above the contract rate can be added, or that the servicer must stop charging any interest on the account. Some lenders, for example, will deduct accrued and unpaid interest from any payment a consumer makes on a charged-off loan before applying any remaining payment amount to the principal balance of the charge-off.

In the discussion of the amendment in the prefatory text that accompanied the publication of the rule in the Federal Register, the Bureau wrote, “The Bureau also understood, however, that, even after charge-off, a servicer may pass along various fees to the consumer, such as attorney’s fees, court costs, filing fees, garnishment fees, property maintenance fees, taxes, insurance, and fees for maintaining the lien. In the proposal, the Bureau explained that, where a servicer continues to charge a consumer fees and interest, the periodic statement may provide significant value to the consumer. An important role of the periodic statement is to document fees and charges to the consumer; as long as such charges may be assessed, the consumer is entitled to receive a periodic statement. In advance of the proposal, the Bureau considered concerns expressed about circumstances in which periodic statements should not be required and acknowledged that some circumstances could make providing a periodic statement more complicated. However, such circumstances are often precisely when a consumer most needs the periodic statement.” [Emphasis added. To see that text in the context of the Federal Register document, click on https://www.federalregister.gov/d/2016-18901/p-1640, or go to page 72326 of the October 19, 2016, Federal Register]

To confirm the Bureau’s view of the question, I spoke with an attorney at the agency in early November. He advised that the Bureau intended that the periodic statement exemption would not be available if any interest (or other fee) is added to the amount owed by the consumer on the loan after it has been charged off.

The attorney read me the language quoted above from the prefatory text as the evidence of the Bureau’s intention concerning the meaning of the text in § 1026.41(e)(6).

The caveat, then, is to ensure that your bank is not adding interest or fees to the charged-off principal of a mortgage loan that’s subject to § 1026.41 before it stops sending periodic statements on the loan account.

Don’t sweat the HUD-SCRA expiration

By Andy Zavoina

The HUD-92070 is a form you likely refer to as the HUD-SCRA notice. This notice has caused a LOT of confusion over the years. Its expiration date is coming soon, but more on that in a moment. First, why do you send this notice, to whom, and when?

In November 2006, The Department of Housing and Urban Development released Mortgagee Letter 2006-28. It outlined certain requirements to provide borrowers protected under the Servicemembers Civil Relief Act with a notice on resolving mortgage debt issues. In particular, this notice is required to:

• Be sent to all homeowners who are in default on a residential mortgage;
• Include the toll-free military one-source number to call if servicemembers or their dependents require further assistance (1-800-342-9647); and
• Be sent within 45 days from the date a missed payment was due, unless the homeowner pays the overdue amount before the expiration of the 45-day period.

While many in the industry refer to this as an SCRA notice, it is not sent to only those borrowers who you know are currently SCRA-protected. This notice should be sent to all homeowners whether they are in the service or not, when they are in default. It is impossible for you to know if your borrowers are protected under the SCRA because, as an example, they enlisted in the service yesterday.

Confusion has arisen because of the expiration dates on the forms, rapid changes to the content by HUD, and the form’s expiration dates often pass without a new version being made available and it can take weeks or longer to be told “continue using the old form” or being told nothing. The HUD version has also had typographical errors which could be embarrassing to a bank sending the form. At one-time HUD had an incorrect telephone number on the form that banks were required to deliver, later it removed the international telephone number that was provided for counseling and replaced it with a web address. It also referred to “servicemenbers.” Some of these changes happened within days of one another. But a different problem that has been dealt with in the past is ready to repeat itself.

Section 3953 of the SCRA states that a court may stay proceedings involving mortgages and trust deeds if the action is filed while the person is in military and within 90 days after their service. Sale, foreclosure or seizure of property isn’t valid except with a court order if made during military service or within 90 days thereafter.

The “90 days” was temporarily replaced by “9 months” by Sec. 2203(a) of the Housing and Economic Recovery Act of 2008, effective from July 30, 2008 through December 31, 2010. On December 29, 2010, the president signed into law the “Helping Heroes Keep Their Homes Act of 2010,” which extended the HERA provision through December 31, 2012.

It was amended again by Pub.L. 112-154 eff. February 2, 2013 to read “one year” through December 31, 2014. This was extended again with S.3008, known as the Foreclosure Relief and Extension for Servicemembers Act of 2014 and while it technically expired at the end of 2015, the 90-day protection period was in effect through the end of March so no foreclosures were going to happen during that period in which the amended law sunsetted. It is important to note that the 9-months was to revert to 90-days when that amendment expired.

In March 2016 protections were extended through 2017 so it was now “one-year” again for foreclosure protections. A question is, the amendment expired, and 9-months was now 90-days again. If the current amendment expires, does the period revert to 9-months, or 90-days which was in fact the period which existed at the time of the newest amendment?

For now, this extended one-year period is set to expire at the end of 2017. The HUD-92070 is also set to expire at the end of this year. The form refers to the extended one-year period, so it is tied to the SCRA. If it referred to “the period allowed for in the SCRA…” the form wouldn’t require change, but it is designed to inform the servicemember and it states the actual period of protection. If the form were revised as of January 1, 2018, to be correct it must refer to a 90-day foreclosure protection period or perhaps a 9-month foreclosure protection period (that is a question that requires an answer), assuming a new extended period does not become law before then.

What is expected is that just before the year end, or (based on history) after the new year but before foreclosures would occur, the one-year foreclosure protection period will again be extended by Congress. The HUD-92070 will be correct and either the form will be revised with just a new expiration date or users will be told to continue to use the form past the expiration date.

My recommendation is that based on this expectation of renewal you should continue to send the form as you have been. This appears to be the most likely outcome as there has been no move in Congress to take away any servicemember protections. How fast the amendment would happen is a wild guess as Congress could attach this to an end-of-year bill or complete it in the first quarter of 2018 as it did in 2016. While the form may be misleading and even incorrect if the protection period is not extended, the purpose of the form is to direct a delinquent covered borrower to credit counseling. It will still do that. In the event the period is reduced, the bank should work with counsel and clearly identify the law current at the time, and ensure the borrower is aware of the protection period they have and the foreclosure time line you expect to follow. We will continue to watch for new legislative actions and for a form update and will make OBA members aware of any change.

HMDA notices

By Andy Zavoina

If you are a HMDA reporter you have a lobby notice posted informing the public about the availability of your HMDA data for 2016 and prior years. That notice should remain in place and the bank should be prepared to meet any requests for information until the retention period has expired. Currently the modified Loan Application Register is available for three years and the disclosure statement the FFIEC provides is available for five years. This means your current HMDA signage will remain in place until 2022 (the 2016 data was received by the bank in 2017 and five years requires retention until 2022).

Beginning in 2018 there is a new notice required. This new notice says that the HMDA data is compiled and available from the CFPB, online. Here are a couple takeaways on this. First, your bank will no longer receive these reports and provide them to anyone from the public requesting a copy. And second, so the person making a request does not leave empty-handed, there is a new requirement that the bank provide them with a written notice explaining that your modified Loan Application Register may be obtained on the CFPB’s web site at www.consumerfinance.gov/hmda.

The suggested, but not mandatory text of the notice is as follows:

The HMDA data about our residential mortgage lending are available online for review. The data show geographic distribution of loans and applications; ethnicity, race, sex, age, and income of applicants and borrowers; and information about loan approvals and denials. These data are available online at the Consumer Financial Protection Bureau’s Web site (www.consumerfinance.gov/hmda). HMDA data for many other financial institutions are also available at this Web site.

This notice works with requests made in your bank as well as being the new posted notice. As to posting, § 1003.5(b) states: No later than three business days after receiving notice from the FFIEC that a financial institution’s disclosure statement is available, the financial institution shall make available to the public upon request at its home office, and each branch office physically located in each MSA and each MD, a written notice that clearly conveys that the institution’s disclosure statement may be obtained on the Bureau’s Web site at www.consumerfinance.gov/hmda.

This indicates to me that you could post the new notice now or anytime up until three business days after receiving your notice that the data are available. While the online reports are not yet available, I do not see any claim that it is misleading, and you could indicate this applies to 2017 data forward as the text suggested is not mandatory and could be edited so long as the intent of the message is properly conveyed. Doing this posting now simply gets the task done and you will not have to worry about it, especially if you have many branches. You will need to train staff on making a written notice available to the public. And yes, you will, until 2022, have two different HMDA notices posted.

“Abundance of caution”

By Pauli Loeffler

We get a lot of questions about loans secured by real estate taken as collateral in an “abundance of caution.” There seems to a general misunderstanding of what this term REALLY means as far as regulatory compliance. “Abundance of caution” applies when the bank would make the loan without the land as collateral either as an unsecured loan or using other collateral that is non-real estate. When real estate is taken in an abundance of caution, it is not a “get out of jail free” card for compliance. It does one thing and one thing only: The bank does not have to obtain an appraisal or evaluation of the real estate. You will still have to obtain a flood determination (unless it is raw land), comply with Reg Z if it is a consumer loan (TRID, and QM/ATR, HPML, etc. if applicable), and possibly Reg C (HMDA) and Reg X (RESPA).

“Legalese” for non-lawyers – Part II

By Pauli Loeffler

Last month, I provided a variety of legal terms to help bankers understand various documents received from their customers. I indicated a large number of “legalese” words come from Latin. Okay, I admit that knowing Latin is about as useful in everyday life as knowing the quadratic equation is useful for balancing a check book, but since English did import a huge number of words from old French, and French is one of five or so Romance languages derived from Latin, this “dead” language does still influence our Germanic language. Although no one really “speaks” Latin, the knowledge of Latin is useful even for some non-legal terms. For instance, the prescription written by your doctor is in Latin, or rather abbreviations of Latin. For instance, a prescription is an “Rx,” the abbreviation for the Latin word “recipe”; “P.O.” doesn’t mean the doctor is peeved at you; it is the abbreviation of “per os,” which means to take the medicine “by mouth”; and “PRN” is the abbreviation for “pro re nata,” which means “as needed.”

Just as the pharmacist must know Latin terms to properly fill your prescription, knowing a bit of Latin can help bankers grapple with some of the arcane terms encountered in legal documents.

Ante. This common Latin word is probably one you already know if you have ever played poker or black jack. It means “before”; when used in a legal opinion or document, it refers to a term or discussion earlier in the writing. This term is often combined with another word with or without a hyphen, as in “antecedent” (from the Latin verb “cedere” which means “go”) and “antebellum” (“bellum” means “war”).

Bona fide. This is another Latin term you probably know. It means “good faith” and implies good intention regardless of outcome.

Caveat. This word means “may he beware,” a warning. The phrase “caveat emptor” means “let the buyer beware.”

A Codicil is an addition or supplement that explains, modifies, or revokes a Will or part of a Will. It finds its roots in the Latin word codicillus.

Common law. This is judge-made, judicial precedent as opposed to written statutes and regulations (lex scripta in Latin). Some statutes are merely a codification of existing common law while others are enacted to modify common law. Latin has not one but two different terms, jus commune and lex communis, both of which in English mean “common law,” although jus is translated as “right.” Yes, I know this is a difference without a distinction, but you can use it to impress your friends or drive away unwanted admirers at parties. Both Latin terms refer to common doctrine and principles of civil law that underlie all aspects of the legal system. This is just as confusing to a lawyer as it is to a layman.

Et al. This is an abbreviation of two Latin words: “et” (and) plus “alii” (others). The most common place you will encounter this phrase is in the caption to a pleading filed in a legal action with reference to other parties, such as “John Brown, Jane Brown, Brown Family Trust, Joshua Smith, et al., Defendants.” When it comes to a subpoena served on the bank for a customer’s records, you will want to know if the customer is one of the “and others” since different rules with apply depending upon whether the customer is a party to the action or not.

Inter. This Latin word means “between” or “among.” Bankers are probably familiar with inter vivos which means “between the living.” It refers to a gift or other non-sale transfer between living parties, as opposed to a transfer under a Will. See also, “Testamentary trust” discussed in the November 2017 OBA Legal Briefs. You may also have encountered the term inter alia which means “among others” in a list of powers granted, items referenced, or people in attendance. Another term is interlocutory order which is a provisional decree or judgment during the course of a legal action but before final decree of judgment. [RANT: The correct spelling of the word “judgment,” whether used in the legal context of otherwise does NOT have an “e” after the “g,” despite Planet Fitness Gyms’ trademark on the phrase “Judgement Free Zone.”]

Intra vires and ultra vires. The word vires means “powers.” When an act is intra vires, it is within the legal authority granted the person, and the act is legally binding. It applies to entities such as corporations, LLCs, etc. as well as attorneys in fact, guardians, custodians, rep payees, etc. and contractually binds the entity or the person represented. When an act is ultra vires, it is beyond the legal powers granted and without authority. This is why you must have and read the documents, obtain minutes, and resolutions for entities, court orders for guardians, personal representatives, etc. as well as powers of attorney.

Jurat. You probably know what this is but not what the legal term is. It means “(he) swears,” and appears at the end of an affidavit stating that the party who signed it affirms upon oath the truth of the information before a notary or other empowered official.

Lis pendens. Literally, this Latin phrase translates to “suit pending” and refers to a document recorded to give notice of claim against real property owned by one of the litigants affected by the lawsuit. Pendente lite is the adverbial form of lis pendens and used in court orders that provide relief until the final judgment is rendered.

Per curiam. This is a decision by a multi-judge panel where the decision is authored by the court itself rather than naming the individuals supporting the decision being the authors.

Pro hac vice. An attorney not admitted to practice in the jurisdiction where the action is pending can be admitted by the court pro hac vice (for this occasion), solely to participate in the specific action before the court.

Per capita and per stirpes. You’ll run across these Latin terms in Wills, trusts and court orders. Per capita means distribution is made “by head.” If an estate is distributed per capita, all the living members of an identified group will receive an equal share of the decedent’s estate. For instance, Adam dies naming Betty, Charles, and David as his heirs under his Will with his entire estate to be distributed per capita. Charles predeceases Adam. The estate will be divided equally between Betty and David, and Charles’ heirs will receive nothing. Per stirpes means distribution “by branch” and is more commonly known as by right of representation. Adam’s Will leaves his entire estate to Betty, Charles, and David. Charles predeceases Adam leaving two children, Enid and Fred. Betty and David will each get 1/3 of the estate and Enid and Fred will each get 1/6 (one half of Charles’ share).