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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.

Mortgage Lending: 8.6.3 Charging the Wrong Rate

There has been extensive litigation over claims that homeowners were wrongly charged the higher rate for a new title insurance policy rather than the discounted re-issue or refinancing rate that is normally available to eligible homeowners under most rate plans.565 The difference in price may be hundreds of dollars but will depend on the size of the mortgage and the value of the property.

Mortgage Lending: 8.6.4 Title Insurance Steering and Remedies

In addition to RESPA’s general prohibition on referral fees and fee splitting, Congress specifically prohibited anyone selling property that will be purchased with a mortgage subject to RESPA from directly or indirectly requiring the buyer to obtain title insurance from a particular title company, regardless of whether any referral fees are paid.580 This restriction applies only to sellers and not to lenders.

Mortgage Lending: 8.7 Flood Insurance

The Flood Disaster Protection Act of 1973595 generally prohibits federally regulated lenders from making, increasing, extending, or renewing mortgages that will be secured by buildings subject to flooding—unless the building is covered by flood insurance.596 Flood insurance is also required for flood-prone buildings if an owner of the building receives federal disaster relief funds.597 The Act applies to financial institutions regulated by th

Mortgage Lending: 8.8 Credit Insurance and Debt Cancellation Products

Credit insurance and debt cancellation products have been particularly lucrative for many types of creditors, including mortgage lenders. Like mortgage insurance, the borrower pays a fee for credit insurance or debt cancellation in addition to any other charges associated with the loan. But credit insurance and debt cancellation should otherwise be distinguished from mortgage insurance.

Mortgage Lending: 14.7.1 Outline of Section 1823(e)

Eight years after the D’Oench decision, Congress enacted the Federal Deposit Insurance Act of 1950 (FDIA). The new law included a section, 12 U.S.C. § 1823(e), which added a new dimension to the limited immunity afforded by the equitable estoppel doctrine created in D’Oench. Section 1823(e) was reenacted in substantially similar language as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)501 in response to the dramatic series of bank and thrift failures in the 1980s.