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Federal Deception Law: 6.3.6.1.1 What calls constitute telemarketing?

The FCC regulation allows autodialed and prerecorded calls to cell phones only with the recipient’s prior express written consent if the call constitutes telemarketing or introduces an advertisement.331 The regulation defines “advertisement” as “any material advertising the commercial availability or quality of any property, goods, or services.”332 A text message that leads the recipient to an advertisement “introduces” that advertisement.

Consumer Arbitration Agreements: 8.8.2.1 Overview

One approach when a term in an arbitration agreement is found to be unenforceable is to sever that term and enforce the rest of the agreement. The agreement may even include a term indicating that unenforceable terms should be severed—a so-called “severance” clause or provision. Note the distinction between a severance clause in the arbitration agreement and one in the agreement as a whole that could be interpreted as severing the arbitration requirement from the rest of the agreement if any aspect of the arbitration clause is found unenforceable.

Consumer Arbitration Agreements: 8.8.2.2.1 Introduction

Courts often cite to a federal preference in favor of arbitration when severing illegal terms from an arbitration agreement instead of invalidating the whole agreement.464 There are two issues with this justification. First, in Morgan v.

Consumer Arbitration Agreements: 8.8.4 Savings Provisions

Many arbitration clauses include provisions that appear to be unconscionable, but also include a proviso limiting the clause’s application to “the extent permitted by law.” Drafters may seek to accomplish the same thing by providing that the arbitrator can apply different arbitration terms for good reason.

Mortgage Lending: 8.2.4.2 When the Broker Is the Lender’s Agent

Practitioners seeking to establish that a mortgage broker is the lender’s agent must carefully develop the facts showing the extent of the broker’s authority. A principal’s right to control how the broker conducts business is important.55 An express delegation of authority also carries with it implied authority to do those other things reasonably necessary to carry out the main activity authorized.56

Mortgage Lending: 8.2.4.4 State Statutes Regarding the Broker’s Relationship with Borrowers

Twenty states and Puerto Rico have adopted statutes defining a mortgage broker’s duty to residential borrowers. As summarized below, the majority impose a duty of good faith and fair dealing on mortgage brokers. Several expressly impose a fiduciary duty, using the term “fiduciary,” though in one state (Vermont) the duty is particularly narrow. Several other states declare that the broker is the borrower’s agent or define duties that are similar to those of a fiduciary.

Mortgage Lending: 8.3.3 Problems with Broker Compensation

Yield spread premiums and other forms of compensation based on loan terms are problematic because the payment distorts the broker’s incentives, is not transparent to the consumer, is often a source of gouging, and can facilitate discrimination.128 Though mortgage brokers market themselves as helpful to borrowers, these forms of compensation encourage brokers to steer borrowers to riskier and more expensive loans.129 Brokers and industry often argue that borrowers want the yield spread premiu

Mortgage Lending: 8.3.4.2.1 Definition of loan originator

Closed-end loans that are secured by dwellings other than timeshares and that are based on applications received on or after April 6, 2011, are subject to TILA’s limits on loan originator compensation, as amended effective January 10, 2014.157 Regulation Z’s definition of “loan originator” is lengthy and detailed.158 Generally, anyone acting as a traditional loan officer or mortgage broker will probably meet the definition of loan originator.

Mortgage Lending: 8.3.4.2.2 Regulation Z’s rules on mortgage originator compensation

Regulation Z generally prohibits payments to a loan originator that are based on the terms or conditions of the transaction. This rule also prohibits compensation based on a factor that is a proxy for a transaction’s terms or conditions, such as a credit score or the debt-to-income ratio. While the definition of compensation is broad—including money, merchandise, services, and trips—there are notable exceptions. The biggest exception is the amount borrowed.

Mortgage Lending: 8.3.4.3 Issues of Loan Officer Compensation

While mortgage broker compensation incentives have been widely criticized for encouraging the origination of many unaffordable loans, there is also evidence that loan officer incentives pose the same risk to consumers.162 Loan officers employed by retail lenders have a number of important similarities to mortgage brokers. And, for that reason, they are also considered “loan originators” under the Truth in Lending Act and the SAFE Act.163

Mortgage Lending: 8.3.4.5 Yield Spread Premiums: Practice Issues

Figuring out whether a yield spread premium (YSP) has been paid to a broker under the old disclosure rules196 can be tricky. While the premium must be disclosed on the HUD-1 settlement statement, the description can be quite cryptic. For example, some settlement statements will list “(P.O.C. ysp—$1,500).”

Mortgage Lending: 8.4.3 Lead Generation

It is necessary to distinguish between paying for “leads,” which is legal, and paying for referrals, which is not. A lead is information about a prospective customer: name, contact information, and often other details. When someone pays for leads, they often purchase a list (or database) of names. The purchaser will then market their product or service to the people on the list.

Mortgage Lending: 8.4.5 Safe Harbor from Ban on Referral Fees and Kickbacks

Section 2607(c) and section 1024.14(g) of Regulation X provide a list of activities that do not violate the ban on kickbacks and referral fees.278 The list includes payments to attorneys for services actually rendered279 or by a title company to its duly appointed agent for services actually performed in the issuance of a title insurance policy;280 payments by a lender to its duly appointed agent for services actually performed in the making

Mortgage Lending: 8.4.6.1.3 Use of settlement service provider must be voluntary

With two exceptions described below, an affiliated business arrangement must not require the customer being referred to use any particular settlement service provider.321 “Required use” means that the person must both use a particular provider and pay a charge for that service. But offering a discount for purchase of a package of settlement services is not “requiring use” as long as purchase of the package is not required.322

Mortgage Lending: 8.4.6.1.4 Limits on referrer’s compensation

The only thing of value the referrer may receive from an affiliated business arrangement—other than payments specified elsewhere in RESPA section 2607(c)—“is a return on the ownership interest or franchise relationship in the arrangement.”327 That is, the referrer cannot be paid for the specific referral or even the total amount of business referred, but can only can receive compensation as a share of profits from the overall business activity of the settlement service provider.

Mortgage Lending: 8.4.6.2 Sham Settlement Service Providers Utilizing Affiliated Business Arrangement Provisions

There is no shortage of schemes seeking to take advantage of RESPA’s affiliated business arrangement rule by labeling as dividends revenues that are really referral fees. Consider, for example, a lender (or any other settlement service provider) and a realtor (or any other entity referring consumers to a settlement service provider). The two entities could try to set up an affiliated company that is a mere shell with no staff.

Mortgage Lending: 8.4.6.3 Consequences of Failure to Meet Affiliated Business Arrangement Requirements

An unresolved question is whether RESPA’s affiliated business arrangement provisions are affirmative requirements for an affiliated business arrangement or merely conditions for being exempt from section 2607(a) and (b). Courts are divided as to whether a non-complying affiliated business arrangement inherently violates RESPA,350 or whether the affiliated business arrangement instead just loses its exemption from section 2607(a) and (b).

Mortgage Lending: 8.4.7 Home Warranties

Referral fees for home warranties are another area with the potential for abuse. Home warranties are contracts under which the warrantor agrees to replace or repair home appliances and systems. They are often marketed and sold in the context of a home purchase or mortgage refinancing.365 The cost of the warranty is imposed at the mortgage closing. Warranty vendors often pay real estate agents a fee to encourage them to market and recommend warranties to home buyers.366

Mortgage Lending: 8.4.9 Splitting Charges

Section 8(b) of RESPA (12 U.S.C. § 2607(b)) and section 1024.14(c) of Regulation X state that: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service . . . other than for services actually performed.” This practice has been variously described as fee-splitting, fee-padding, a markup, an overcharge, and duplicative or unearned fees. But merely overcharging and keeping the money does not violate RESPA.