FEDERAL CFPB VIOLATIONS IN YOUR FORMS
Post Date: 2/28/2014
DID YOU HEAR THAT OMINOUS GONG?
IT RANG OUT AT 12:01 AM JANUARY 10, 2014, WHEN THE LAST ECONOMIC RULES FOR THE "NEW ORDER" WENT COMPLETELY INTO EFFECT IN THE U.S. AND THE COURSE OF YOUR FINANCIAL AND PROFESSIONAL LIFE AND YOUR EXPECTATIONS FOR PROSPERITY MAY HAVE CHANGED RADICALLY AND FOREVER!
IT WAS AT THAT MOMENT THAT THE LAST OF THE DODD-FRANK ACT AND THE SUPER FEDERAL CONSUMER FINANCIAL PROTECTION BUREAU RULES TWISTED THE KEY TO LOCK THE "AMERICAN DREAM OF YESTERYEAR" INTO A GOVERNMENTAL GUANTANAMO AND SET THE U.S. ON A FRIGHTENING COURSE TO "OZ" – AN UNTESTED EXPERIMENT IN ECONOMIC SOCIALISM
PART I OF III: THE MYTH THAT BROKERS ARE "EXEMPT" FROM THE NEW ORDER, WHAT IS REGULATED, THE NEW SELLER-CARRIES, THE NEW BAN ON ARBITRATION AND RELEASE OF CONSUMER RIGHTS CLAUSES AND SOME PROOFS IN THE PUDDING
BY: J. ROBERT ECKLEY
Real Estate, Brokerage, Agency and Banking Attorney
CALIFORNIA – ARIZONA – WASHINGTON - OREGON
© 2014, ECKLEY & ASSOCIATES, P.C.
February 1, 2014
THIS MONTHLY PUBLICATION IS ABSOLUTELY FREE AT NO COST TO YOU!
(Recommended Reading for All Real State, Mortgage, Title and Escrow Licensees, Regulators and Those Who Use Real Estate or Mortgage Forms as Most are Now in Violation) – This is FEDERAL LAW and applies in ALL STATES – PRINT THIS AND KEEP AS A HANDBOOK.
INTRODUCTION: TOWARDS OZ
For most of us, the last ten years have been financial hell in this country.Our "new normal" is a world festooned with almost hourly news stories of yet more failures, closures, layoffs, crises, calamities, bankruptcies, defaults, duplicities, depredations and disasters. For the employed, the unemployed, the poor, aged, disabled, the vets, laborers, blue collar, business owners, professionals--in general for most of the broad-based lower and middle classes that used to exist in the U.S. and worked in it as the Land of Hope, the "99 percenters" who are now collapsing downward to poverty numbers and levels last historically seen in the 1930's (and even exceeding them)—it has been the very worst catharses of their lives. It is a more than a shame that this once bountiful and prosperous land--where upward mobility was a reliable product of sustained work, intelligence and incentive--languishes now as a dispirited, directionless financial wreck. The fact is: This malaise has now prompted many of us to get up every morning dreading but expecting the negative drop of yet another economic shoe. And every day we are rarely wrong.
THE DODD FRANK ACT AND THE CONSUMER FINANCIAL PROTECTION BUREAU:
The Dodd Frank Act (”DFA”) and its “brainchild,” the new omnipotent Consumer Financial Protection Bureau (“CFPB”) may be those shoes. Put modestly, these laws and the central authority that runs them are now in more centralized control of the United States, its economy, you, your family, your customers and clients and the actual dime-by-dime economics of their lives and you and your family’s everyday lives than ever before in history, unless one uses police states as an example. What you do, how you will do it, likely where you live to do it, whether you or your kids can go to college, how much money you and they will make and have, where you and they will need to spend most of it to satisfy debts and taxes, whether your business will be permitted, how large of home you will buy, how much credit you will be permitted to have and what you will pay for it, what you will be permitted to invest in and whom you will be able to do business with and on what terms even with your own money—all of this and more will be a product of economics which are dictated by these laws, rules and a singular governmental bureau. And there is no voting on the edicts. The agencies and the bureau are put under the control of the executive branch of the government and are not subject to Congressional input or veto nor subject to your vote or even advance disclosure. They are simply edicts issued centrally and having instant effect from Washington D.C. to your living room. And with the penalties as harsh as they are for failing to bow when they enter, they are to be spontaneously obeyed.
Well, now, that has your attention, yes? And, no, it’s not a nightmare from which you will awake. It’s a permanent Elmstreet. The big question now is more likely “has our leadership become Jason?”
Here’s what happened. Though government is not telling you, the civilized financial world actually did end in 2008 and it has not recovered since. Instead, in the U.S., it gave up on capitalism and economic democracy—thinking the greed and freedom of it leads inevitably to such crashes--and so the U.S. changed its theory of government to a more socialistic northern European model. The rest of what we are getting is smoke and mirrors to disguise the coup.
This was no “Recession.” This was and is a CRASH. And we are still on the precipice yet as there has been NO RECOVERY. Recently, as required by disclosure laws, records from the Federal Reserve meetings for that period were released. In them, incoming Federal Reserve Chairman Yellen is quoted in the written transcripts as saying that the U.S. is in an economic “witches brew” in which the “downward trajectory of U.S. economic data is hair raising” and federal reserve efforts had been of no effect as all “market conditions are taking a ghastly turn for the worse” and if the U.S. stayed on course with its traditional economic models there would be a “global meltdown.” Past Federal Chairman Bernanke was alarmed in that meeting that “all markets are not performing” and that new and “extreme measures” were needed. The head of the Fed—the most powerful financial agency in the world and which we were told “had the bull firmly by the horns”--conceded in that closed meeting they he was no longer “..quite sure what is going to happen tomorrow” anymore.
So the governmental headed for the Final Solution—two words with a terrible world history and certainly somewhat that catastrophic as they were used here by the hundreds of millions and possibly, because of how U.S. economics affects the world, possibly billions of people whose lives have been changed by them. The U.S. went to centrism and socialism. In that same Federal Reserve meeting, above, Chairman Bernanke went on to say the agency was now “crossing lines” and “..going to places we have never gone before…”. And they did and now we are there.
So let’s Recount: Passing the “Provisional Rules” to be guided by the edicts of a Central Dictate for “economic efficiency” as an “interim measure” to pull the country out of “global meltdown” in which the highest official “is not quite sure what is going to happen tomorrow” without resort to “extraordinary controls” (“crossing lines”) has a snappy sound to it. But with the emergency passage of the DFA and the creation of the CFPB without any sundown clause it is obvious that all of this Matrix and its masters are intended to be guiding all of our financial affairs….forever. We are “going to places we have never been before”. Well, is that not pretty much the usual epidemiology of a coup: Emergency suspensions of rights and the implementation of dictates for the “greater good” of “bringing order in the crises” that of necessity must “cross lines and go to new places”. And then just never go away. And grow more and more restrictive as time passes. Oz.
MY COMING SERIES OF ARTICLES:
Ok. I know. Too much politics. Those who know me understand that I really do tend to see all "law" as varnished politics and all politics as veneered economic grab-fests. The law is for the most part made by power groups with enough money (equaling clout) to do so and is often designed to either protect a power group from liability for those harmed by its acts (losing money) or to maximize a power group's financial gains (making money). A few compassionate laws get through, but many times only because some politician thought it might get them more power or some dedicated few took the barbs and arrows for years to get something good and decent in the books, usually tattering them in the process. A lot of people try to paint over those facts with a lot of fluff, flair and high-minded speeches about the "forge of public consensus". But it is not true that most of it is about the Big Boys getting the megabucks and the rest of us getting the bill?
THIS "PART I" ARTICLE
So with that background this is Part I of a three-Part series of articles on the Coup of 2010 (the DFA/CFPB) and the New Regime. I will add a lot about law, but also a little bit about politics to explain it as in this case it really is ALL about politics. This part, Part I, discusses the CFPB jurisdiction over real state licensees, mortgage brokers and banks, escrows and title companies. In most cases, these Federal laws supersede state laws to the contrary. The articles series starts out by covering the jurisdiction of these maga-agencies over these professions, as there appears to be some question about that out there.
ARE REAL ESTATE LICENSEES "EXEMPT" FROM DFA/CFPB RULES AS THE INDUSTRY LOBBIES ARE SAYING? GOOD GRIEF, NO!:
The real estate industry is spreading the myth that real estate licensees are expressly exempt from the new DFA/CFPB rules and that self-serving contention is FALSE. They point to Section 1027 of the DFA in pertinent part where it provides: “... (b) Exclusion for real estate brokerage activities...(1) Real estate brokerage activities excluded..” from jurisdiction. Unfortunately, that is usually where the quotes stop and there is much, much more in the statutes and rules. Sounds pretty clear, right? Licensees are OUT?
Don’t buy that. A few paragraphs later the same Section goes on to state: “... (2) [notwithstanding paragraph (b) (1) above].. (t)he Bureau may exercise rulemaking, supervisory, enforcement, or other authority under this title with respect to a person described in paragraph (1) when such person is- (A) engaged in an activity of offering or providing any consumer financial product or service, except that the Bureau may exercise such authority only with respect to that activity; or (B) otherwise subject to any enumerated consumer law or any law for which authorities are transferred under subtitle F or H, but the Bureau may exercise such authority only with respect to that law. The act incorporates just about every consumer protection law every state as, including all federal consumer law. So the absurd gist of this is “we will not regulate your licensure, but we will regulate your acts.” Notably, every real estate licensure law in the country makes violation of federal or state mortgage, real estate or consumer laws part of the licensure, so a violation is still a state licensure ding.
Thus, although this subsection of 1027 is titled “exclusion for real estate brokerage activities,” Congress made the end-run around the real estate broker community even more forcefully later in the statute when it elaborated that the “exclusion” [sic] DOES NOT limit the CFPB from exercising rulemaking, supervisory, and rule enforcement over real estate agents or brokers where they offer anyconsumer financial product or service or act in violation of any consumer law that has been transferred to the CFPB for enforcement (and the CFPB has been transferred most of them). Senate Report 111-176 makes that clear when it provides the following insight to section 1027: real estate brokerage activities are covered and are under CFPB jurisdiction to the extent that a real estate broker is engaged in the offering of a consumer financial product or service or is otherwise subject to any enumerated consumer law or any transferred authority. The Senate Report is a simple restatement of the DFA’s language and implies that the DFA means what it says: real estate agents and brokers fall under CFPB power but that the CFPB was not created specifically become the agency dedicated to regulating real estate brokers or agents. Presumably state agencies that license and promulgate their own rules are still primarily (but along with CFPB jurisdiction not the agency exclusively) tasked with the direct general regulation of their licensees.
A good example: Associated business arrangements between real estate brokers and mortgage brokers are expressly under the jurisdiction and enforcement power by the CFPB because the regulating agencies are now consolidated under CFPB control. HUD and RESPA enforcement are assigned by the DFA to the CFPB and RESPA specifically recites that it applies to all persons provided “settlement services” and specifically enumerates “real estate brokers.” See some of the additional comments about what real estate licensees can lawfully do under the SAFE Act commentary, below.
Now the reality check: The real estate broker representative associations lost the battle to exempt themselves from the CFPB. That was not surprising considering that these new laws were the most “steam-rolled” Congressional juggernaut in recent history. But perhaps embarrassed, the licensed real estate industry has published dis-information that the lobbies “won an exemption for the brokers.” They did accomplish some things good for the brokers and even consumers, but they did not, however, accomplish an “exemption of anything even near it”. Real estate licensees are under the rules and must, then, know and heed the rules. As Federal laws, these apply in ALL STATES.
THE MEGA-JURISDICTION OF THE DFA AND THE CFPB:
For this and all three articles to come, this background information is important. Then we get on to the juicier things like seller-carries, the ban on arbitration clauses and clauses in which the consumer “signs off” and “waives” all of his or her consumer rights and the nasty, nasty new “Federal No-No” called “committing UDAAP”. Sounds like some kind of lewd act? To the CFPB, it is one of the financially MOST lewd and you, your firm and your accomplices will be CRUCIFIED for it. I will leave that Nasty in suspense until the end of this article.
More now to the DFA and CFPB for that background: The Dodd-Frank Act (the “DFA” July 21, 2010, signed into law by President Obama on July 21, 2010) and the Rules of the new Consumer Financial Protection Bureau (the “CFPB,” created by DFA) are nothing less than a revolution in banking and social policy. The DFA restructures the oversight of financial regulation, creates a new “Super Bureau” in the unregulated hands of the Executive Branch of U.S. government called the Consumer Financial Protection Bureau (“CFPB”), assigns to it all of the major consumer law enforcement agencies, grants the CFPB co-jurisdiction to make and enforce most of the consumer protection provisions of the Federal Trade Commission (“FTC”) and for the FTC to be able to co-enforce the CFPB regulations and even state consumer laws. The DFA also contains massive regulations and standards as to how the entire banking, credit and financing, securities, insurance and other systemic components and regulation is and will be administered, how the entire financial chain will be capitalized and underwritten, how the financial system with be operated and overseen, sanctioned and coordinated. It also provides significant amendments to the Truth in Lending Act (“TILA”), Housing and Urban Development Administration (“HUD”) management and Rules, including changes to the Real Estate Settlement and Procedure Act (“RESPA”) operational rules, to name just a few powerful changes in the way the American financial system works. RESPA and other consumer law and agency controls gives the CFPB jurisdiction over title and escrow companies and other settlement services, including attorneys and real estate brokers and all services tied by affiliated marketing agreements of any kind affected consumer transactions.
New market-protective laws like UDAP and UDAAP (see below) give it jurisdiction over ANYONE (not just certain professions) who violate those and other laws or even who act “unfairly…or abusively..or deceptively” in the delivery of a consumer product or service.
The CFPB’s jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, all settlement procedures, foreclosure relief services, debt collectors and other financial companies; through the consolidation in it of the other agencies, it also controls HUD, the FDIC, SAFE and federal securities acts. It was designed to consolidate employees and responsibilities from as wide a number of federal regulatory bodies as possible, including the Federal Reserve, the Federal Trade Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration and even the Comptroller of the Currency. Overall the enforcement of 14 important financial regulatory agencies and financial laws were assigned to it and it appears to have been granted the enforcement of ANY consumer protection laws, state or federal.
The CFPB is an independent unit located inside and funded by the United States Federal Reserve, with interim affiliation with the U.S. Treasury Department. It writes and enforces rules for financial institutions, examines both bank and non-bank financial institutions, monitors and reports on markets, as well as collects and tracks consumer complaints and prosecutes them or refers them to other agencies to prosecute them, such as other federal agencies, local state regulatory agencies, the local AG’s offices, the U.S. Department of Justice and the state and federal revenue services.
The CFPB was given the power to operate by Rulemaking (as opposed to congressional oversight and legislation) placing this massive and pervasive control of the entire American financial system effectively under the directives of the U.S. President. This is a revolutionary change, placing a historically-unprecedented amount of direct financial control of the country in the hands of the executive branch of government.
THE DFA/CFPB/FTC JURISDICTIONAL COMBINATION HAS BECOME A JUGGERNAUT: IT IS A REGULATORY, FISCAL AND FINANCIAL POLICY-SETTER AND ENFORCER WITHOUT PRECEDENT SINCE THE LAPSE OF THE NATIONAL EMERGENCY WAR POWERS ACTS (GIVING THE FED ABSOLUTE CONTROL OF THE ECONOMY AND THOSE IN IT) OF WORLD WAR II. THE REACH OF IT AFFECTS CONSUMERS AND BUSINESS, BANKING, WALL STREET AND MAIN STREET, ALIKE.
Since this article is going to talk about “seller-carried” finance, the reader needs to hear about one more applicable law. It’s the SAFE Act, part of the CFPB’s jurisdiction.
THE SAFE ACT
On July 30, 2008, President Bush signed into law the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). SAFE requires licensing or registration of Mortgage Loan Originators (“MLOs”). This agency and authorities have also been granted to the CFPB. Under SAFE, MLO laws will now apply to seller financing in real estate sale transactions and it outlines permitted and prohibited acts of all participants in that process (seller, buyers, real estate and mortgage brokers, banks, title and escrow companies, et al.), except to the extent the transaction or act is expressly exempted. The SAFE Act targets for regulation Mortgage Loan Originators and brokers but also includes in it private parties who sell more than a given number of properties on given terms in private financing transactions, treating them as (and requiring them to be or to use) MLOs in their consumer transactions. The rules therefore target not just mortgage brokers and originators, but also seller-carry consumers and their seller-carry loans. As will be seen, there are some forms of seller-carries it does not cover as they are outside of the CFPB jurisdiction.
By the regulation of SAFE, standards of practice for real estate licensees are set by regulating real estate transactions at the stage where they originate--in their hands at the instant of first client or customer contact, through pre-transactional counseling given to them and then at the first transactional negotiations and paperwork. The law identifies an accumulation point of services or types of transactions in which the real estate licensee and parties must involve yet a second licensed professional, i.e. a Mortgage Loan Originator (the “MLO” in these parlances).
Licensing of “loan originators” under state laws enacted pursuant to the SAFE Act and meeting minimum federal requirements has been historically required for other more conventional transactions for many years. The new rules, going for the most part into effect January 10, 2014, extend coverage to seller-carried transactions in ways that are new and pervasive, as noted below.
There is an exception in the SAFE Act for real estate licensees doing normal licensee work. Real estate licensees engaged solely in “real estate brokerage activities” as defined by their licensure laws and engaged in normal loan-related activities incident to selling and buying real estate and not charging a fee for the loan services are not considered to be acting as MLOs needing SAFE licensure. For instance, the referral of a buyer to a lender to apply for credit in a home purchase or to a seller who will carry contract in the ordinary course of business is not loan origination. Loan origination for a fee is not, however, one of those exempt brokerage activities. See relevant state licensure law and also see 12 CFR Section 1026.36. This DOES NOT MEAN REAL ESTATE LICENSEES ARE EXEMPT FROM THE CFPB JURISDICTION. See above.
Since sometimes the distinction between “real estate broker activity” and “MLO activity” can be obscure, the CFPB has provided guidance clarifying that compensation paid by a creditor or loan originator to a real estate broker/agent does not transform a real estate brokerage activity into a loan originator activity. See RESPA. (Do note that some of what is SAFE-excluded activity, below, might still be included in the scope of STATE MLO licensure, so check both statutes.)
The CFPB explains:
- A person paid solely for real estate brokerage activities by a loan originator or creditor is not covered by the definition of loan originator.
- When a real estate broker/agent sells a property owned by a creditor (such as an REO), the commission does not turn the real estate brokerage activity into a loan originator activity.
But care is needed. CFPB also notes:
- Even if State law provides that loan origination activities are eligible real estate brokerage activities, the real estate broker/agent is nevertheless considered to be a loan originator under the final rule if engaged in loan originator activities as defined under the final rule—federal law superseding state law.
- A broker/agent is a loan originator when paid for performing creditor, mortgage broker, or consumer credit referral activities.
- If a broker affiliated with a creditor pays an agent for origination activities, such as for taking the consumer’s credit application and performing other functions related to origination of the loan, the agent is a loan originator.
PREVAILING CONSUMER RIGHTS IN THE EVENT OF A CONFLICT BETWEEN STATE AND FEDERAL RIGHTS
Many states have adopted their own versions of the above acts, though, if there is any variance, the federal acts prevail over state law. The sole exclusion to that general rule of federal pre-eminence is set out in the DFA. It indicates that if a consumer protection law of the state and federal acts conflicts, the MORE FAVORABLE LAW TO THE CONSUMER prevails. California adopted most of the DFA (particularly the insurance and securities portions) by SB 1216, signed into law October 2, 2012. Arizona has adopted the mortgage licensing portions in 2010-2011. California and several other states have adopted their own more aggressive state RESPA laws. All of the states have their own licensure laws for mortgage, real estate, banking and other activities and all have a matrix of consumer laws in place.
ALL ABOUT SELLER-CARRIES UNDER CFPB/SAFE
I have written a lot about this in prior articles. Go to www.eckleylaw.com for them and do note that some are dated and one is only to use the latest dates as accurate. As the laws were forming, the rules changed over time so earlier articles were superseded by later ones.
The most important point is the seller-carries—where the seller carries back the financing paper on the sale of the property rather than the bank—are regulated both under the CFPB and specifically SAFE.
NEW RULES FOR SELLER-CARRIES IN A NUTSHELL: The new rules will govern seller-carried residential finance using a trust deed, mortgage, land sale agreement, land trust agreement or like financing tool where a purchaser’s title of any kind is vested in the buyer and the buyer intends to use the property as a personal home and not as investment or business property. The rules require that some due diligence steps are taken by almost all of the professionals in the transactional chain to assure compliance—in some cases that the creditworthiness of the buyer is determined and that the credit information is put before the seller so that the seller and his or her advisers can make a well-based and reasoned decision to extend a loan to the buyer--and the rule goes on then to limit the terms of the loan the seller can demand, depending upon how many properties the seller has sold in any 12 month period (looking back and forward). For most “mom and pop” one-time-only home sellers, there are “some” exclusions from these rules for them and the professional transactional participants.
Before one concludes that this is an “onerous development” in the law, one ought to consider the fact that assuring the borrower is creditworthy and assuring that the seller and seller’s qualified advisers knowledgeably weigh the borrower’s ability to repay and consider sound terms for the financing has ALWAYS BEEN THE RIGHT PROTOCOL for seller-carried transactions. IT HAS LONG BEEN A REAL ESTATE AGENT’S DUTY TO SEE TO IT THAT THIS HAPPENS (THOUGH NOT NECESSARILY TO CONDUCT ALL OF THE REQUIRED DUE DILGENCE)! WARNING CAVEAT: ITS IS NOT THE AGENT’S DUTY OR EVEN THE AGENT’S “RIGHT” TO GATHER CREDIT OR MAKE CREDIT RECOMMENDATIONS OR DETERMINATIONS. IT IS INSTEAD THE AGENT’S DUTY TO ASSURE THE SELLER AND BUYER GET THAT INFORMATION FROM COMPETENT THIRD-PARTY SOURCES. PASSING A CREDIT OPINION TENDS TO MAKE THE AGENT A “GUARANTOR” FOR THE DEAL AND IN SOME CASES NOW VIOLATES THE NEW RULES AND EVEN FAIR CREDIT ACTS—A VERY RISKY SPOT TO BE IN!
A WARNING: THERE IS STRONG AND AUTHORITATIVE LEGAL ANALYSES THAT SUGGEST THAT CAR’s (California) and AAR’S (Arizona) AND OAR’s (Oregon) NEW SELLER-CARRY ADDENDUMS OR PROVISIONS DO NOT ACCURATELY RECITE OR COMPLY WITH THE CFPB/SAFE RULES! CONTINUE TO USE A COMPETENT ATTORNEY WELL-VERSED ON THESE AND RIGHT UP FRONT ON YOUR DEALS BEFORE CONSUMMATING IT THROUGH THOSE FORMS. MOST ATTORNEYS IN THIS AREA OF PRACTICE HAVE THEIR OWN COMPLIANCE FORMS!
THREE-STEP LITMUS TESTS IN SELLER-FINANCING ANALYSES AFTER JANUARY 10, 2014
Since January 10, 2014, there will be three tests required for the consumers, licensees and other entities to consider in the “listing-to-sale-to-buying-to-financing-to-closing process.” All in this chain are responsible to know them and apply them and not to participate in a transaction or an act that violates them. For the discussion, below, of this basic 3-test list, all of these entities—seller and buyer, real estate licensee, real estate brokerage, Mortgage Loan Originator or mortgage broker, any lender, title insurer and escrow company and all managing or participating persons and assignees—will be collectively referred to as “Transactional Participants.” If there is an exception for the seller-carry regulatory coverage, the exception from those rules (remembering, of course, that all Transactional Participants may have other rules that apply to them) is good for all Transaction Participants. If there is not an exception, then compliance by each Transactional Participant is the burden of all Transactional Participants.
FIRST TEST: Is the transaction a “consumer transaction?” If it is not, the seller is outside of the rest of the tests and outside of the SAFE Act and the CFPB and the consumer analyses for seller-carried finance is over. Whether or not the proposed transaction is a “consumer transaction” is a critical “first test” as most commentators are mis-quoting or mis-interpreting it. The CFPB does not cover seller carries where the buyer is buying for business or investment purposes and will not himself or have a member of his immediate family occupy the property as a dwelling or residence wholly or partially. The Transactional Participants need to assure that it is not mis-stated and that the correct rule is followed as a matter of appropriate advice, disclosure and professional practice.
SAFE does NOT state that it applies to all seller-carries or all transactions in which a residence (1 to 4 units) is sold or to all sellers or all sellers over 3 properties a year or all transactions in which the buyer is an individual, though these are commonly explained by commentators as the threshold. Those analyses are WRONG. SAFE specifically states that it applies ONLY to CERTAIN mortgage transactions. A “mortgage transaction” means a credit or loan transaction that is or will be (1) used by the debtor primarily for personal, family, or household purposes and (2) is secured by a mortgage or equivalent consensual security interest on (3) a dwelling (4) or residential real estate. THE UPSHOT? If this is a commercial, non-“consumer” transaction, i.e. the buyer is buying for investment or business purposes and not for personal family occupancy in whole or in part, now or later, SAFE does not cover the transaction and the rest of the tests do not apply and the Transactional Participants then need only comply with other laws governing commercial deals.
There are other exemptions, as well, based upon what is being sold. Transactions for purely agricultural land, for example are exempt. Some types of buyers or entity-buyers may be exempt. See an attorney if you aren’t sure of the “true nature” of what is being sold and to whom as far as SAFE exemption. Here are a few more:
CLARIFICATION OF SEVERAL OTHER EXEMPT TRANSACTIONS OF PROPERTIES
- Assumptions of underlying conventional loans are not covered by either Act.
- Loans that are not sales or part of sales
- Sales and loans that closed at a time that pre-dated the effective dates are not covered by the Acts, (though current refinances or resales of those might be)
- Use of any possession-transferring or equity-transferring instrument that is absolute and without post-transfer debt, such as a deed or a transfer by gift or devise.
- Foreign transactions (foreign property);
- Private use of licensed private mortgage broker: The one safe harbor for those who want a general “safe pass” in the deal that meets both SAFE and DFA rules or for those who are bumping directly into the SAFE/DFA regulations or for those who have used up their “3 transactional freebies,”. Associating the MLO – this seems to bless the deal entirely.
Assuming that under the first test above, one continues to remain inside the Safe Act and CFPB regulations as a governed transaction, then one goes to the second test.
SECOND TEST: This test looks at the transaction financing instrument and asks “is the installment purchase agreement to be used with a consumer party covered by SAFE/CFPB?” (And only because there is so much confusion on this specific question) “as to the financing instrument, is something like a land sale contract exempt? Is a bare lot on which a dwelling is to be built exempt?”
Discussion: Some financing methods and land types are inside or outside of SAFE/CFPB coverage though they may not look like it, above. Generally, the SAFE/CFPB does apply to sellers if even if they don’t directly “lend” purchase money funds, but merely carry back installment-paid paper, generally to be considered as a purchase debt repaid in 3 or more installments (over 2 or more calendar years under IRS rules for installment treatment on gains). And it can even apply to bare lots on which a home is intended to be built. The definition of the type of paper and what it is secured by to be under the new rules is specifically addressed in HUD’s Final Rule (and HUD is now under the CFPB). The below is from SAFE:
A “residential mortgage loan” includes an installment sales contract. “Residential mortgage loans,” as defined by section 1503(8) of the SAFE Act, refers to typical financing mechanisms such as mortgages and deeds of trusts. But in addition, the SAFE Act definition also includes “other equivalent consensual security interest on a dwelling (as the term ‘dwelling’ is defined by section 103(v) of TILA) or residential real estate upon which is constructed or intended to be constructed a dwelling,”) which has the potential for including a broad range of other financing mechanisms. For the purpose of this rule, “equivalent consensual security interests” specifically include installment sales contracts, consistent with the treatment by many states of such contracts in the same manner as mortgages and purchase money mortgages offered by sellers of residential real estate." Installment sales contracts are varying called “land sale contracts,” “contracts for deed,” and other names, but they are all the same. They are widely used for seller-carries because they contain both the language for a sale (critical sale terms, conditions, property disclosures and disclaimers and the like which just finance language does not contain) and the language of finance (“I owe yous”) whereas most trust deed and mortgages contain only the language for finance.
More Points on Use of Installment Contracts: In many states installment sale contracts are STATUTORY and a non-judicial foreclosure on them is conducted like that on a trust deed and a judicial one is exactly like one on a mortgage. The "equitable title" argument fails to avoid the CFPB. The "security interest" could be the retention of a "lien secured by possession of legal title until performance is complete,” very similar to a financed vehicle title. And if it was true that an equitable holder had “no color of any title” at all, the casualty insurers would not insure it, title insurers would not insure it and liens through a creditor's bill could not attach to and execute on it and no homestead exemption would apply to it, where such exemptions are otherwise available. Moreover, most title insurers will not insure foreclosure of an installment sale agreement unless all third-party lienors who arise by, through or under the buyer’s “equitable title” are also joined, the same way as required for a “legal title” in which buyer has deed, such as in the case of a mortgage or trust deed in a lien-theory state.
Paperwork Exceptions: Interestingly, this definition does not appear to cover a lease/option (one in which a buyer’s duty to buy and an amortization satisfying the price is NOT non-contingent or consummated until the lease expires or the option is exercised) though it likely applies to a lease/purchase as in that case a buyer’s duty to buy and an amortization of the price takes place during the executor period of the agreement. Also, the purchase of a bare lot which is not intended to have a dwelling built on it would be excluded. As has already been noted, if the lien is not for purchase (merely a lien for a cash loan, like a business loan or line of credit), or the collateral is not the regulated type (not residential land or dwelling) or the buyer is not buying for personal, family or household purposes, the SAFE/CFPB rules for seller-carries do not apply, anyway.
Documentation Caveat: Is a preliminary agreement to purchase, such as those commonly published by Realtor Associations, varyingly called “Residential Sale Agreements,” “Residential Resale Agreements,” “Earnest Money Agreements” or other titles an “exempt transaction or document” under the SAFE/CFPB rules? Short Answer: No. If the parties and terms meet the above, they must comply. Particularly the “Seller Finance” sections, whether inside the agreement or as an addendum! Do all now currently comply? No! Despite what many trade Associations and spokespersons may be saying about SAFE/CFPB application and their own documents, many do not comply and the “my association said it was okay and even drafted the non-compliant papers defense” is no defense at all to the SAFE/CFPB Rules. Transactional Participants are best advised to have their own attorneys review ALL of the transactional documents, whether or not they originated with the Participant.
THIRD TEST: Assuming that after the above tests, the transaction is still SAFE/CFPB-regulated, which regulatory rule of three applies? Is it: (1) The “single-sale-per-any-12-month-period” rule, or (2) the “more-than-one-but-less-than-four-sales-per-any-12-month-period” rule, or (3) the “four-or-more-sales-in- any 12 month-period” rule?
Now, is this is a CONSUMER TRANSACTION as defined, above, one goes to the next analyses. Is an MLO needed under SAFE? What terms can be offered on the loan under SAFE and the CFPB?"Do you need an MLO? The questions:
THE ONE PROPERTY PER 12-MONTH PERIOD MLO EXCLUSION
This is the most flexible and covers those who sell only 1 property in a 12-month period. To be exempt from needing an MLO, one must meet the following criteria:
- The financing has a repayment schedule that does not result in negative amortization. A balloon mortgage is permitted. (NAR sought relief from the prohibition against balloon mortgages.)
- The financing has a fixed interest rate or an adjustable interest rate. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for US. Treasury securities or LIBOR. CFPB’s Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. (This is the same requirement as applies for the 3-property exclusion.)
If a seller sells one property using the less restrictive exclusion rules of a 1-property sale, above, then that seller is unable to sell another within 12 months of the first sale without sanctions, as the first sale then count and the 2-sales per 12 month period would not qualify for the more astringent standards of the “more-than-one-sale-every 12 months” exclusion. Thus, if the seller sells under the 1-property rule, above, the single-sale exclusion, then seeks to sell a second property, the safest course would be to wait for the expiration of 12 months after consummation of the first sale before selling the second property.
The only other option for the seller if there was any doubt which exclusion to use would be to routinely quality even a 1-property sale under the 3-sale exclusion, since in that case the second sale and even third sale is always permissible inside the 12 months and none of those would then invalidate the first sale’s compliance. Though the CFPB made minor changes to the statute, such as the one property exclusion noted above and not requiring proof of documentation of a borrower’s ability to repay, the Bureau determined to not eliminate the criteria in the seller financing exclusion as defined in the Dodd-Frank Act. Accordingly, credit verifications and ability-to-pay evaluations should continue to be made.
BOTTOM LINE: If one does not meet the above criterion in type of seller or buyer or number of sales or wishes to negotiate different terms than the above, he must use an MLO. Note that it does not mean the loan is prohibited. It means an MLO is needed unless the seller IS an MLO.
THE THREE-PROPERITES PER 12-MONTH PERIOD MLO EXCLUSION:
To be excluded from the definition of loan originator using the 2 - 3 property exclusion and to be excused from being required to engage an MLO, one must meet all of the following criteria:
- The financing is fully amortizing (no balloon mortgages or negative amortization).
- The seller determines in good faith that the consumer (buyer) has a reasonable ability to repay. The regulation does not require documentation of the determination, which significantly eases the regulatory burden, though CFPB points out it may be a good idea in the case questions arise whether the seller made the determination. CFPB’s Official Interpretations of the regulation provide guidance on how a seller could make the determination that the buyer has a reasonable ability to repay. This could include considering earnings as evidenced by payroll or earning statements, W-2s, etc.; other income from a federal, state, or local agency providing benefits and entitlements; and/or income earned from assets (such as financial assets or rental property). The value of the dwelling may not be considered as evidence of the buyer’s ability to repay. The seller may rely on copies of tax returns.
- The financing has a fixed interest rate or an adjustable interest rate that is adjustable after 5 or more years. If it has an adjustable rate, it must have reasonable annual and lifetime limits on rate increases and provide for the rate to be determined by the addition of a margin to an index rate based on a widely available index such as indices for U.S. Treasury securities or LIBOR. CFPB’s Official Interpretations note that an annual rate increase of up to 2 percentage points is reasonable. A lifetime cap of 6 percentage points, subject to a minimum floor and maximum ceiling up to any applicable usury limit, is reasonable. These “safe harbors” are not mandatory, but sellers would be wise to adopt them.
In any of the above cases, the seller should verify the borrower’s ability to replay (see below) and when an MLO is used, that is essentially what the MLO does. In cases where the seller’s terms do not meet the “safe harbors” of the above, they are prohibited unless an MLO is involved. Recall that when an MLO is needed, the acts do not say that the seller needs to be the MLO. It is just that an MLO must be engaged to assist in the transaction in the limited manner set forth, below.
BOTTOM LINE: Again, if one does not meet the above criterion in type of seller or buyer or number of sales or wishes to negotiate different terms than the above, he must use an MLO. Note that it does not mean the loan is prohibited. It means an MLO is needed unless the seller IS an MLO. It also would likely not apply if the BUYER was an MLO, the SAFE is silent on that.
USING THE MLO AS JUST THE PRACTICAL THING TO DO
Obviously, the other option is to engage an MLO to qualify the transaction. The MLO review always qualifies the transaction under the CFPB. Note: Though the MLO involvement "qualifies" the transaction as compliant, the MLO is not required to guaranty or pass a binding opinion on the likely performance of the borrower.
WHAT DO MLOS HAVE TO DO WHEN ENGAGED?
The MLO in the seller-carry is required to simply develop and accumulate accurately all of the personal, financial and credit data upon the borrower that would be the case in a conventional loan and provide it to the seller as the "lender" in the transaction. The data does not have to include a property appraisal unless the transactional terms the parties have arrived at call for it. In any event, unless the MLO has contracted otherwise with the seller, the MLO does not elect to make the loan or dictate loan terms (unless they violate the consumer laws)—the seller makes that decision. The MLO will assist with a Good Faith Estimate ("GFE") where required and will generate a Truth-in-Lending Statement ("TIL") where required and will assist escrow with the new HUD-1s the CFPB/HUD requires (which now must explain variations between any estimated loan rates and transaction cost and the actual, final transaction rates and costs and give the borrower a 3-day review period prior to closing escrow—some of these HUD compliances have been postponed recently to August, 2015, but it is best to comply now as a matter of pure disclosure law). Escrows and real estate licensees SHOULD NOT act as MLOs and develop this paperwork as in most states they are not licensed for it as part of their other professional or operational real estate sales licenses. Escrow cannot draft this documentation nor can they give the required written disclosures the real estate broker must give by Commissioner's Rules in a real estate seller-carry transaction.
DRAFTING THE PURCHASE COMITMENTS, DRAFTING THE FINANCING DOCUMENTS:
In most states, MLOs, escrow companies and real estate brokers are NOT authorized to draft the actual closing financing documentation. These should be done by the SELLER's attorneys, as in private transactions the seller is the lender and entitled to make the loan on his terms using his approved paperwork. It can also be done by a transactional management Service that has licensed attorneys preparing the paperwork and some even have an MLO and title and escrow companies that know how to property close these.
WHO CAN DO THESE FROM BEGINNING TO END?
The law firm of Eckley & Associates, P.C. (www.eckleylaw.com or nationwide toll-free call 1-800-999-4LAW) is one of those who can assist with the entire transaction, including the original purchase commitment, the correct addendums, counseling of the broker and parties, the MLO review and closing at a qualified escrow company. It’s assistance starts from the broker and runs to the closing.
STATE LICENSURE LAW
Compliance with SAFE/CFPB is not all that is needed. According to the Regulators of all states, the real estate licensee also has the usual disclosure duties in addition to those set out by the CFPB rules and other licensure rules and those generally are to (1) explain the risks of seller finance to the parties (seller and buyer) and (2) explain the risk of "wraps" if the seller-carry is one; and (3) explain alternatives to the seller-carry in the event the parties may wish instead to pursue that avenue.
The Home Owners Equity Protection Act ("HOEPA") applies to terms of the seller-carry. So Note: If the seller is considered a "creditor" under TILA because the seller makes 2 or 3 high cost loans under HOEPA, the seller is automatically considered to be a "loan originator" for purposes of the loan originator qualification requirements in 12 CFR section 1026.36(f) and (g) and any other rules applicable to creditors under TILA. This is true even if one is exempt from the definition of loan originator under the 1 to 3-property exclusion. Check with an expert to avoid providing seller financing subject to HOEPA, which imposes many more limits and requirements.
Even if the seller is excluded from requiring a license as an MLO or the intervention of one, the transaction would still be subject to the rule prohibiting anyone from paying a loan originator compensation based on the terms (such as interest rates) of the transaction (e.g., higher MLO payments for loans with higher interest rates). This would occur if a seller financer engages an MLO to assist with setting up the financing for the seller financing but does not apply if there is no MLO required and used in the deal. In addition, the CFPB limits on mandatory arbitration would also apply, i.e. the contract or other agreement for any credit transaction, including any seller financing, may not require arbitration or other non-judicial procedures to resolve disputes. Sale agreements popular with Forms Committees for many Realtor® organizations that provide for mandatory arbitration in a consumer transaction (a listing, offer, counter, acceptance, buyer broker agreement) might actually violate the new CFPB prohibition against such clauses—one needs to check with the counsel for the Associations issuing forms like that. After a dispute arises, however, the parties may agree on their own as a result of subsequent negotiation to use arbitration or other non-judicial procedure, but it can no longer be boilerplate without options to opt out of that option in the original commitment. There are more rules, but this shows why it is best to have an attorney draft the transactional financing paperwork.
FOCUS: ABILITY-TO-PAY DUE DILIGENCE:
As was noted above, for either conventional, VA and GSE loans or for qualifying under seller-carries where the rules require an MLO, the borrowers "ability to pay" is a significant part of the required loan or transactional due-diligence. Moreover, whether or not the rules make an ability to repay analyses mandatory, it is the correct practice to do so in every seller-carry as a matter of appropriate practice. It must be remembered that compliance with the bare rules of the CFPB, but engineering a bad deal for ones customer of client can still result in professional or licensure claims. The borrower qualification in underwriting for seller carries is as noted above LESS onerous than for the traditional third-party mortgage lending under the QM. Here is the what is required for third-party lending (less documentation and verification for seller-carries).
For traditional third-party mortgage loans:
- These rules will take effect January 10, 2014
- The rules require mortgage lenders and, where applicable in seller-carries, either the seller or the MLO to verify a borrower's "ability to repay" the debt with substantive documentation. Lenders (and seller-carries where examining the ability to repay is required) must consider and confirm the following eight factors in assessing the borrower's ability to repay:
> (1) Current income or assets;
> (2) Current employment status;
> (3) Credit history;
> (4) The monthly payment for the mortgage;
> (5) The monthly payments on any other loans associated with the property;
> (6) The monthly payment for other mortgage-related obligations (e.g., insurance, PMI, property taxes, HOA, etc.);
> (7) Other debt obligations (car loans, student loans, credit card payments, etc.); and
> (8) The net monthly debt-to-income ratio the borrower will have (PITI and the above other recurrent debts).
- MLO/LMB FEES: There are fee limits which probably will apply to MLO or Licensed Mortgage Broker (“LMB”) charges in either scenario, traditional loans or seller-carries (though it is doubtful that seller-carries should bear these kind of fees, since no money is being generated and the MLO due-diligence and liability is substantially less).
- THE QM STANDARDS: Though these underwriting standards are NOT APPLICABLE to seller-carries, they can be used as a “the Gold Standard” if the seller wishes only to extend “gilt-edged” loan to the borrower. The conventional rules applicable to the new QM mortgages limit any points and fees payable to loan brokers (not banks) to 3 percent of the loan amount, and limit the borrower's mortgage payments to 43% of the borrower's income. These rules may restrict conventional mortgage lending and therefore make home ownership more difficult on third-party loans, making the arguments for seller-carried ones all the stronger. For seller-carries, these limits do not apply, but exceeding them risks other claims, such as HOPEA (see above) issues or UDAAP claims (see below).
- DOWN PAYMENTS: The debate in Washington is continuing as to the amount of federally required minimum down payments. Other regulators (including the Federal Reserve, FDIC, HUD, USDA, VA, FHFA, etc.) may issue rules later establishing minimum requirements for down payments on traditional third-party home mortgages. Proposed down payment requirements have ranged from as low as 5% to as high as 30%.. FHA remains at 3.5% and its other standards (ability to repay formulas) seem to remain outside of the rigid QM, but now with vastly increased PMI premiums. Seller-carries have no such down payments minimums.
DUE-ON-SALE CLAUSES: "WRAPS"
GENERALLY: Many properties have an underlying encumbrance which purports to restrict all or certain kinds of transfers. Arizona and California law had long histories conceptually AGAINST the restrictions against transfer that the so-called due-on-sale clauses represented. S seller-carry is often a "WRAP," meaning that the seller keeps his proper mortgage or trust deed with the Bank intact and sells his property to the buyer for an amount that amortizes both the pre-existing Bank debt and also any amount over that due to the seller. These are tricky deals to handle and the licensee will always need legal help to decide which can be done, to adequately advise the principals of any financial risks in what they are doing and to handle the paperwork and to set up a full collection escrow (all seller-carries should have a full collection escrow). Due on sale clauses, WRAPS and other matters will be discussed in future PART II and PART III articles to this series. The DREs of 70% of the states, including California, Oregon, Washington and Arizona, have held that it is not unethical or a violation of licensure rules to "wrap" an underlying loan without lender consent. Instead they have held that it is unethical and a violation of licensure law to FAIL TO DISCLOSE IN ADVANCE THE RISKS AND LIABILITIES OF THIS IN WRITING TO THE PARTIES.
MORE CFPB LIABILITY ISSUES:
The above material on seller-carries is unique and timely. It is the product of hours of research and of watching the DFA and CFPB unfold, on top of another 37 years of real estate, banking, agency and regulatory law practice by Yours Truly. At a mere 14,000 total pages of laws, rules and subrules to glean it from, it also probably reveals that I am a man with no Social Life.
This informational part of this article could be closed at this point, but there are a few more Hot CFPB Topics that should be covered to protect those out there in the trenches in the interim between this article and the ones to come. They are the these subjects, which apply to consumer transactions: (1) the BAN on mandatory arbitration clauses and “you-can-malpractice-and-lie-to-me-as-you-wish-and-I-hold-you-harmless-in-advance clauses; (2) UDAAP liability for “rotten stunts” against consumers and perhaps even against “kind-of-rotten” stunts; then (3) how all of this stacks up against current forms in current use by the various selected state Realtor® Associations.
Here we go:
MANDATORY ARBITRATION CLAUSES PROHIBITED BY CFPB WAIVER OF CONSUMER CLAIMS PROHIBITED BY CFPB
During the 1990’s the commercial world discovered and fell in love with mandatory arbitration clauses. There were two reasons for this “love affair,” one was sounder reasoning, the other was “darkly motivated.” The sounder thinking was that civil litigation through the courts was becoming slow, contentious and expensive and Arbitration would sidestep that. The “darker motives” were to bar the usually weaker side from access to justice and to write the arbitration rules to favor the stronger side and, for the most part, create a private “Kangaroo Court” to predate upon the weaker side with impunity. Most arbitration clauses also had language in which the consumer waived consumer claims and rights they would otherwise have by law.
Both sides received flak. The “more reasonable” thinkers found that arbitration as not cheaper, shorter or less contentious. The “dark side” was lambasted by lobbies for consumer and user groups for “attempting to subvert justice.” For the most part, the “dark side” won. Its lobbies even passed the Federal Arbitration Act which courts (lazy ones who hated full trial calendars) decided superseded state law in some states which prohibited or limited arbitrations. That long “trash and burn” by the dark side trail ended for consumers with DFA/CFPB.
In the Dodd-Frank Act, Congress diverged from the general policy of favoring arbitration as expressed in the Federal Arbitration Act. In section 1414 of the Act, Congress expressly prohibited the inclusion of arbitration clauses in most residential mortgage loan contracts. In section 921, Congress gave the Securities and Exchange Commission authority to prohibit or restrict use of such clauses for certain disputes, if it finds that doing so would be in the public interest and for the protection of investors. And then in section 1028, Congress expressly addressed the applicability of pre-dispute arbitration clauses “in connection with the offering or providing of consumer financial products or services.” And prohibited it in any initial commitment agreements for a consumer product or service, like real estate, mortgages, escrow services and probably home inspections.
So here is what the new law says and it goes even further. If even indicates that a “waiver of claims” a consumer might otherwise have is also barred and unenforceable in such an agreement!
Mortgage Reform and Anti-Predatory Lending Act (TITLE 14 of DFA)
‘‘(1) IN GENERAL.—No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling
any claims arising out of the transaction.
‘‘(2) POST-CONTROVERSY AGREEMENTS.—Subject to paragraph (3), paragraph (1) shall not be construed as limiting the right of the consumer and the creditor or any assignee to agree to arbitration or any other nonjudicial procedure as the method for resolving any controversy at any time after a dispute or claim under the transaction arises.
‘‘(3) NO WAIVER OF STATUTORY CAUSE OF ACTION.—No provision
of any residential mortgage loan or of any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, and no other agreement between the consumer and the creditor relating to the residential mortgage loan or extension of credit referred to in paragraph (1), shall be applied or interpreted so as to bar a consumer from bringing an action in an appropriate district court of the United States, or any other court of competent jurisdiction, pursuant to section 130 or any other provision of law, for damages or other relief in connection with any alleged violation of this section, any other provision of this title, or any other Federal law.
Notably, the CFPB now encompasses all state and federal law and makes it all “FEDERAL LAW” as section (3), above incorporates.
This now bring into question every clause in every residential sale document in the U.S. which attempts to mandate Arbitration and/or waive or limit the damages and remedies available in consumer transactions to sellers, buyers, brokers, escrow or inspector duties or other consumer rights. Not only are they unenforceable, now THEY ACTUALLY VIOLATE CONSUMER LAW IN AND OF THEMSLEVES BY EVEN BEING THERE IN THE FIRST PLACE! All Realtor organizations, especially, need to IMMEDIATELY review and revise their forms looking specifically for (1) mandatory arbitration clauses (void and prohibited from even being there) and (2) boilerplate blanket disclaimers of consumer rights or the sellers’ or brokers’ or inspectors’ duties to comply with consumer law or the CFPB rules (void and unlawful).
Let’s turn to the next whammy:
UDAAP LIABILITY UNDER THE CFPB
As noted, above, the CFPB has oversight of the real estate sales, mortgage brokerage and title insurance industry through its authority under the Dodd-Frank Act and the various agencies and laws that have been merged into the control of the CFPB, including RESPA, TILA and HUD. The CFPB has the power directly or through the agencies and laws it operates to penalize a firm or person for what it believes are “abusive practices.” Title X (and by the CFPB’s ability to enforce it through other agencies and forces) of the DFA says it is unlawful for anyone who provides a consumer financial product or service to engage in unfair, deceptive or abusive acts or practices (“UDAAP”).
Title X defines an “unfair act or practice” as an act that : “A) causes or is likely to cause substantial injury to consumers, which is not reasonable avoidable by consumers and B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”
An “abusive act or practice” is one that takes unreasonable advantage of: “A) a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service; B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or serve; or C) the reasonable reliance by the consumer on a covered person to act in the interest of the consumer.”
Example: RESPA says that it is illegal to split a settlement service fee when a service is not performed. Under Freeman v Quicken Loans Inc. (No. 10-1042), the U.S. Supreme Court held that the charge for the settlement service must be divided between two more persons in order for there to be a violation. So, say a single settlement service provider charged a fee but did not provide an actual service or perhaps provided the service but marked up the fee, under Freeman there wouldn’t be a RESPA violation. There could, however, be a UDAAP violation if the CFPB considered the provider’s actions to be unfair or deceptive.
If the CFPB of FTC decides to file a lawsuit for a UDAAP violation, it has the authority to administer significant penalties which include:
- Refund of money or the return of real property;
- Disgorgement or compensation for unjust enrichment;
- Payment of damages;
- Public notification regarding the violation;
- Limits on the activities or function of the individual or company; and
- Civil money penalties.
The civil money penalties that the CFPB or FTC can impose are substantial, including:
- $5,000 each day for a violation of the consumer protection statutes;
- $25,000 each day if the violation is reckless; and
- $1 million per day for any violation that is committed knowingly.
The CFPB Guidebook for the Regulators states that in every audit or complaint on ANY violation of ANY rule by ANYONE and for anyone who FURTHERED the violation in some way, the VERY FIRST review ought to be for a UDAAP violation. This means that all in the chain from real estate licensee to mortgage broker to title and escrow (and even the parties to the deal if they made a UDAPP violation) can be co-liable.
OK. Now to a few of the Realtor® forms that are out there, applying these rules
THE REALTOR® FORMS
Those from the Arizona Association of Realtors ® (“AAR” ®).
There is a sad story here. I was in contact with AAR® President Susan Fluke in October, 2013, and was told that a forms committee was working on these to meet the January 10, 2014 CFPB deadline. She left in November and was a great President. I asked her in October if I could help since I have been working on these for years to get ready. She said I could and sent my letter of offer to AAR General Counsel Mr. Scott Drucker (a bright, good attorney but I worry about what his “marching instructions” must be and any decision of his to follow bad and thoroughly political ones). I also wrote directly to him and was ignored on both accounts. Suddenly, in late 2013 I was told by my “moles” in the Association that the forms were out and on ZIP, available for use. I pulled those down and found them worse than deficient under the CFPB/SAFE rules. I wrote to Mr. Ducker and the AAR® CEO and expressed alarm and offered to help and noted my concerns. The main legal concern was that these were written up with little regard to whether the transaction was a CONSUMER transaction, which is predicate for the CFPB application. My GREATEST concern was that anyone would be permitted to use an unlawful form. I was particularly concerned that all of the release language in the form would be a violation of the CFPB ban on the same. It also contained disclaimers of compliance with law or with the CFPB (above) which are themselves CFPB violations and collectively could be a UDAAP violation (above). I was heavily rebuffed in a response letter. I will not go into other things said which were just plain false in fact, as that has no relevance here. I said, then, that I would go public with my criticism and gave the approximate date of this Newsletter would come out swinging.
A few days before this Newsletter was going to come out and get circulated, again with no notice, AAR® secretly pulled its forms (as I had suggested much earlier) and issued new ones (without beta as far as I can tell and without any instructor training to teach any of them) which for the most part followed ALL of my criticisms, except two. I am waiting for my “thank you, Jim, and we realized that your input had merit and decided to make a change” letter. I suspect I will still be waiting for it when the last earthly trumpet sounds.
This instant “pound sand” attitude is the one I always get at AAR® (there are other stories). I offer well-researched and well-intentioned suggestions from an Old Dog that was in practice before most of the AAR® attorneys and executives were born and certainly before they ever showed up on the scene and AAR’s ® spontaneous contempt every time I do is alarming.
So, AAR®: Now what happens to those persons who used the OLD, illegal forms which are, themselves, a likely violation, when I was telling you the whole time they were wrong and suggested pulling them and vetting them further? And like my little 6 year old sister used to do, we do you keep putting your hands over your ears drowning out competent input by shouting “I cannot HEAR you!” righ over the top of it? I wonder: Shall I send AAR® a bill for the work I gave them? Or a demand for indemnity for those people who used that poisoned form? Or a CFPB complaint? Well, I am more loyal to The Cause than that. Suffice it that this ongoing skullduggery is revealed here.
Examination is now made of the current new AAR® seller-carry addendum. It still has big issues: (1) it requires the transaction “go hard” with checked terms that may, themselves, already violate the CFPB and HOEPA rules the moment they are checked and completed and signed; (2) it attempts to disclaim responsibility to generate a CFPB-compliant document at the time of a binding commitment by the parties (3) it gives no leadership at all on how to make lawful, enforceable transaction on the paperwork provided; (4) it attempts to push down to MLOs the duty to “put the deal together,” which is “professional real estate activity” for which they are not licensed (and if they were, why should the real estate agent get any commission then?); and, for the greatest part (5) it attempts to waive consumer laws and consumer protections and (6) it still fails to make a CLEAR distinction between a “consumer transaction” subject to the CFPB (which covers a “consumer product or service” rendered to a consumer borrower/buyer) and one entered into by a buyer for business or investment purposes and not as a person who himself or any member of his family will occupy the property and which is not for purposes of “personal, family or household use” and (7) it does not fully explain the risks the broker must reveal in seller financing and (8) the foregoing violations are probably UDAAP violations and, if so, surely a violation of licensure laws.
This time, I admit, the AAR® form series got The Legal Message and it even used better language and formatting. But the disclosure inadequacies and the UDAAP issues, above, are enough to sink it at the dock. It’s still too ambiguous as to what one is to do with it—it needs work to be a usable form which a licensee could easily comprehend how to use and use effectively (if the law on it was right). Ok, guys. Closer to the bat than Strike One. But no banana. Streeeeerike TWO!
I do have a suggested form we use in the thousands of transactions in seller-carries that my firm has done.
I have not commented on any AAR® document with mandatory Arbitration because at least the Residential Resale Agreement makes arbitration optional. But the way I read the CFPB, even that arbitration clause should probably be removed entirely. The CFPB makes even mentioning preliminarily a waiver of a right by trial it a sort of “third rail” and a violation of the CFPB rules per se.
THOSE FROM THE CALIFORNIA ASSOCIATION OF REALTORS® ("CAR"®)
As worrisome as I think AAR's® documents are, CAR's® are more so. CAR® took a very good seller-carry addendum that it has had for years and after the CFPB date simply attached a fourth page to it suggesting for the most part that people should sort of "watch out for the CFPB" and know and kinda like "obey the new rules" and it generally discusses them in two short paragraphs. I doubt that anyone could figure out how to comply with this document or the rules. It is pretty much a document headed "map" but with nothing on it. It has ALL of the above-enumerated 7 issues as AAR's® does and more.
CAR's Residential Resale Agreement and a lot of related documents also have MANDATORY ARBITRATION CLAUSES in them and also a lot of DISCLAIMERS and WAIVERS of consumer rights which are the duty of the licensees to protect. That won't fly. It violates the CFPB to even HAVE those clauses there, let alone try to enforce them. One thing is a cinch: The CFPB is going to be the new gold for plaintiff's lawyers in California if it does not get this show on the road and write I good addendum and amend the other transactional documents!
THOSE FROM THE OREGON ASSOCIATION OF REALTORS® ("OAR")
Oregon—usually the home of careful legal work--has strangely opted to ignore SAFE and the CFPB in its most critical Realtor® forms. It also has some rather unique legislation respecting MLOs and seller-carries, but it is not of an ilk that forgives having usable Member forms. Some of the Oregon legal thinkers like Phil Querin, have published some very excellent materials suggesting how to comply which are entirely consistent with this article, but the local forms committee apparently took none of it to the drafting table. The new Earnest Money Agreement is a little like the fourth page of the CAR® addendum. It suggests that there is something like the DFA/CFPB/SAFE out there and suggest people should sort of really read it and comply with it and maybe get a lawyer. End of the documentation. Huh? To beg the question entirely is poor leadership. OAR® needs to engage someone like Phil to draft compliant seller carry addendums.
OTHER STATE ORGANIZATIONS
The DFA, CFPB and SAFE are here to stay. The penalties for violating them are so severe that no professional association can ignore the member duty to get a forms committee assembled, engage a knowledgeable lawyer in regulatory matters (that’s different than your brother’s divorce lawyer), and then get some compliant drafting done and beta-vetted! At the very least, they also need to vet what they already have for other CFPB violations (which are rampant)!
The legal points above are fairly clearly expressed now. I want to wrap this up with more of the politics behind what is clearly a revolution in this country.
As you have probably already guessed, I consider the feeble efforts of government to fix what is broken as little more than abortive puffs of smoke, leading nowhere, and for the most part it is a government still in denial about what caused the Crash: Government and its hands-off, incestuous relationship with Big Money. That’s what broke us and it is ridiculous to think that is what can fix us, but that is the approach that seems at play. Instead of prosecuting the Bad Boys who got us here, it has covered their bets with our chips. It has paid Everest-sized wads of our tax money to those who lost our savings and investments; it kept on discredited bureaucrats to repair the damages created by their own defective policies and graft and it kept corrupt executives in the industries that failed because of them; it continued “recovery” programs that went nowhere in the futile and practically insane hope that an endless repeating of failure would get a different result; it routed trillions of dollars of taxpayer monies not to the vast numbers of citizens who were being destroyed by the Crash and could have recovered from it by a direct aid such as a direct write-down of their mortgages, but instead sent it to the banks and the immensely wealthy 1 percenters who caused it under the same failed “trickle down” economic and management theory that prompted the Crash in the first place.
From the outside, it all seems almost some kind of….madness. It has at least been a breath-taking spectacle of greed and stupidity leaving most Americans watching it speechless: Here are our politicians, stoked up on black bags full of money from the 1 percenters or choked up with some kind of cult-like mantra about “..needing to control the ‘Little People’ who are too feeble to know what is good for them in the market (and even in the bedroom)..”, running amok to forge what astoundingly appears to be nothing less or more noble than the formation of a new American Monarchy. It’s a new social order in which the middle class is crammed back to the bottom and where a job, any job, doing whatever is being asked for whatever is being paid in fear of losing it forever (and to hell with the union) is unquestioned. It will be humiliating to a lot of highly-skilled labor and professionals to be sweeping floors, but it will beat begging on the corner. Maybe.
And not surprisingly, the only “trickling” in this kind of regime has not been down to us, but into the coffers of the same Bad Boys and fellow political travelers who got us here. The only difference this time is that the “trickle” has turned into gargantuan amounts of riches never dreamed of before by even the darkest crook among them. The wealth-transfer from bottom to top is currently estimated at about $14 trillion and climbing. That’s while you have been cut back to half-time work and your family is eating beans and hoping to be able to make its next car payment.
The New American Aristocracy will be a permanent marriage of convenience between the 1-percenters and government. The 99-percenters (that’s you, me and just about everyone we know including your doctor and lawyer) will be the New Serfs.
What we have seen in a mere decade is a wealth and power shift from most of the country to a very small elite part of it and in magnitudes of amounts and might that dwarfs the size and dynamics of any takeover or victor’s ransacking in the history of the world. It’s an oligarchic coup of monumental proportions—all for the first time in the history of the planet without a single shot being fired. Yet.
As in all outrages like this and as we saw throughout Europe from 1917 to the 1940’s when the elitists of any ilk subjugate the people this much for this long and by their Marie Antoinette-like excesses of greed and disdain for the common man, revolution was inevitably fomented: The Robespierres and Madame DeFarges—actually or metaphorically--are usually never that far behind the inevitable social and political explosion generated by the atrocities of the rich and pompous (see Charles Dickens’, “A Tale of Two Cities”).
The DFA, CFPB and the approximately 32 agencies it moved in 14,000 pages of regulations, rules, interlocking directorates, and massively centralized power were all put here allegedly to prevent financial meltdown……for the Big Interests. But the new political paradigm it designed has every chance not only of failing that objective, but, even if it succeeds, doing so only by creating and accelerating a social and cultural meltdown that could be far more serious for this country in the longer run.
See you next issue.
AND WHEN IT’S TIME TO DO THAT SELLER-CARRY OR TO DEVELOP THE “CFPB COMPLIANCE AND DISCLOSURE PACKAGE” FOR YOUR REAL ESTATE, MORTGAGE, TITLE OR ESCROW PRACTICE OR CLIENTS, CALL:
ECKLEY & ASSOCIATES, P.C.
ABOUT THE AUTHOR/SPEAKER:
J. ROBERT ECKLEY is a multi-state real estate, agency, construction and banking attorney, successful litigator, popular writer, educator and national speaker with an immense personal and professional involvement in forefront issues over the past four decades. He has established precedent at the Supreme Court and co-founded transactional laws, rules and forms that guide practitioners today. He has been named in the prestigious The Marquis’s Honor List of “Who’s Who in American Law.” He was a real estate licensee for three decades, 5 years of which were with the Beverly Hills Board of Realtors®, 10 with the Phoenix, Scottsdale and Portland Associations of Realtors®, and is now an affiliate member of the North San Diego County Association of Realtors®. He was named to numerous Commissioner's Advisory Committees, He was a Director for 3 years of the Central Valley Chapter of Oregon Escrow Council, has been a 15-year Member of the American Society of Certified Fraud Examiners and is a 20-year member of the International Association of Financial Planners. He has received a host of leadership and instructor awards, is a CCIM Affiliate®, testified in Congress against the due-on-sale clauses in 1982, received a perfect auditor’s score an keynote speaker and educator for the Las Vegas annual convention of the National Association of Realtors®, successfully fought against anti-consumer trends in state and federal in state and federal courts, fought against all and defended a half dozen state and nationally chartered banks and thrifts, and has received leadership awards and honors from the late former California Governor and then U.S. President Ronald Reagan and former Arizona Governor and Secretary of U.S. Homeland Security Janet Napolitano, to cover just a few of the miles he has gone. In July, 2011, he was appointed by the Arizona Commissioner of Real Estate to serve a 2-year term on the state Commissioner’s Advisory Committee and was renamed in 2013. He was recently named to the prestigious International Bar Association in London, England. He is a member of the Arizona Bar Association, the Oregon Bar Association, the U.S. District Court bars of various jurisdictions, Beverly Hills Bar Association and Los Angeles County Bar Association in California. He has put together, written up or advised on just short of 4,000 transactions. He is a “been there, done that” type who is often as entertaining as he is practical and enlightening! See more at eckleylaw.com or call (602) 952-1177. If you want to be on his “Counselor’s Corner” monthly hotline e-mail to firstname.lastname@example.org or call toll-free 1-800-999-4LAW and ask for the help you need or to get on the hotline.