FEB 21, 2014

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Compliance Matters

New CFPB Disclosure Booklets

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Correction: An earlier version of this post inaccurately stated that Mary McCulley, who won a mortgage fraud lawsuit against U.S. Bank, had been convicted of pulling a gun on someone. She was acquitted of the charge. McCulley did plead guilty to impersonating a federal employee, but not to "impersonating an FBI agent," as the post stated (and the plea was entered in September, not October). Lastly, the Bozeman Daily Chronicle article cited for the information was published on Feb. 10, not Feb. 12. 

 CFPB REQUIRES YOU TO GIVE THE CONSUMER THREE NEW INFORMATION BOOKLETS

FACTS

The Consumer Financial Protection Bureau has issued a notice about the availability of three revised consumer publications, including the consumer information brochure and two booklets required under RESPA and/or TILA. These disclosures are required when a consumer applies for home equity lines of credit, an adjustable-rate mortgage loan, and/or purchase money financing.
The revised publications are titled:

What You Should Know About Home Equity Lines of Credit

The Consumer Handbook on Adjustable-Rate Mortgages

Shopping for Your Home Loan: Settlement Cost Booklet

The revised consumer publications are available for download at the CFPB’s website

MORAL

Make certain you give out the correct ones.

RESPA AND TILA DISCLOSURE TO BE COMBINED INTO ONE DOCUMENT EFFECTIVE AUG. 1, 2015

FACTS

CFPB has released a 1,888-page document to explain the final rule (makes it easy for any mortgage broker or lender to read, right?) to combine mortgage disclosures required under the Real Estate Settlement Procedures Act and the Truth in Lending Act. The new rule goes into effect Aug. 1, 2015 for the new Loan Estimate and Closing Disclosure forms. 

MORAL

Read it. Learn it. And know it before Aug. 1, 2015! Did you notice that to make the reading easier on the consumer the final statement now has five pages instead of three? Nothing like chopping down more trees and giving people reasons for getting glasses to read with. Does anyone want to borrow mine?  Or do you already have your Excedrin for the Excedrin headache!

LENDER OR ANY SUBSEQUENT ASSIGNEE CAN FORCE BORROWER TO INCREASE THE FLOOD INSURANCE ABOVE THE LOAN AMOUNT AND PLACE FORCED INSURANCE IF BORROWER REFUSES TO INCREASE IT

FACTS

A lender may require a borrower who has a federally-insured mortgage to obtain more flood insurance than the amount required under federal law.

In this case Feaz had obtained a mortgage loan that was guaranteed by the Federal Housing Administration. Feaz’s mortgage contained the following covenant, which is required by federal law for all FHA-guaranteed mortgages:

Fire, Flood and Other Hazard Insurance. The borrower shall insure all improvements on the property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which lender requires insurance. This insurance shall be maintained in the amounts and for the periods the lender requires. The borrower shall also insure all improvements on the property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary.

When Feaz originally obtained her loan, she obtained insurance in an amount greater than her loan’s principal balance but less than her home’s replacement value.  Feaz’s loan was subsequently assigned to Wells Fargo Bank, N.A. Wells Fargo did not require Feaz to increase her flood insurance coverage when it initially acquired her mortgage.  However, four years later, Wells Fargo sent her a letter entitled “Flood Insurance Coverage Deficiency Notification” in which it instructed Feaz to substantially increase her flood insurance coverage. When Feaz failed to comply, Wells Fargo obtained force-placed flood insurance for her home.

Feaz sued Wells Fargo, alleging that it had breached the mortgage by requiring her to obtain more flood insurance than that required by federal law. Feaz argued that the standard-form covenant acted as a ceiling on the amount of flood insurance Wells Fargo could require her to obtain.  She also brought claims for breach of the duty of good faith and fair dealing and breach of fiduciary duty. Wells Fargo moved to dismiss the complaint, arguing that the standard-form covenant acted as a floor, and not a ceiling, on flood insurance.  The United States District Court for the Southern District Alabama had held in favor of Wells Fargo, dismissing Feaz’s complaint. Faez appealed.

The Eleventh Circuit held that the standard-form covenant unambiguously makes the federally-required flood insurance amount the minimum a borrower must have, not the maximum. Eleventh Circuit noted that the standard-form covenant allows a lender to set the required insurance for “any” hazards, including floods. The sentence regarding the federal requirement, the court noted, imposes a “a separate and independent requirement that the borrower maintain the federally required minimum amount of flood insurance in addition to—not in lieu of—what the lender requires.” This interpretation, the court noted, is consistent with the provision in the mortgage that allows the lender to do whatever is necessary to protect the value of the property.

HUD regulation governing federally-subsidized flood insurance requires borrowers in “special flood hazard” areas to obtain flood insurance in an amount “at least equal to either the outstanding balance of the mortgage…or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less.” The words “at least,” the court noted, are consistent with a lender being permitted to require more insurance than HUD requires.

When a borrower defaults on an FHA-guaranteed mortgage, the lender conveys the mortgage to the FHA and collects on the guarantee. However, the FHA prohibits lenders from collecting until it repairs the damage or deducts the cost of repair from insurance benefits. If insurance were limited to the amount required by HUD regulations, a lender may have to pay more for repair than it could collect in insurance benefits. This would likely make many lenders reluctant to offer FHA-insured mortgages in high-risk flood areas.

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