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Mortgage Fraud is on the Rise – Look for These Issues

As housing professionals navigate regulatory changes and accelerated tech adoption, wire and title fraud risk factors in mortgage and real estate closings increased almost 90% in the last quarter. According to an analysis by MISMO-certified wire and title fraud prevention Fintech FundingShield, wire and title fraud risk factors in mortgage and real estate closings saw an increase of 87.79% overall across all transaction types in Q1 2021. These risk factors increased from 19.02% in Q4 2020 to 35.75% in Q1 2021.

FundingShield noted that a variety of risk factors could be contributing to these numbers – for example, compliance issues and an increase in transaction data errors. In fact, the report found that 58% of loans that had at least one issue contained multiple errors per transaction.

Other risk factors included problems such as invalid representations by closing agents, invalid/expired licensing, invalid/unregistered title documents, transactions not booked in title insurers’ systems and unauthorized practice of law (UPL violation risk). Wiring and bank account issues such as wire fraud attempts, altered wire account information, compromised bank accounts, and merged and/or closed or otherwise inactive bank accounts also played a part in the increased risk to wire fraud and funding control issues.

Regulatory changes and challenges

Contributing to the risk of wire and title fraud were significant challenges in the regulatory and risk areas for lenders during the first quarter of the year. Updated regulations and an eye toward tighter enforcement have raised new potential for compliance issues – and changes can also provide opportunities for bad actors to insert themselves into the process.

On March 1, 2021, the use of the new Uniform Residential Loan Application (URLA) became mandatory, per Fannie Mae and Freddie Mac, after the impact of the coronavirus delayed last year’s planned implementation. Lenders could begin using the new URLA form, which includes 48 new data points, on Jan. 1, 2021, but it became mandatory after March 1.

In order to use the updated URLA as mandated, lenders needed to ensure that the new form was supported by their tech stack. Otherwise, implementation could potentially disrupt the origination process and lead to errors contributing to fraud risk. These workflow changes required resources from lenders to ensure compliance, which could potentially have taken resources from other risk management areas.

The first quarter of 2021 also saw a changeover in leadership as the Biden administration entered the White House. President Biden appointed FTC Commissioner Rohit Chopra to lead the Consumer Financial Protection Bureau, signaling for many that the administration could be preparing to return the CFPB to a more stringent watchdog status.

A more active approach to enforcement means lenders are likely preparing to work even harder to ensure compliance, while keeping an eye out for any regulatory changes. FundingShield has cited numerous lenders reaching out to discuss closing agent compliance strategies, given indications that third-party service provider oversight as well as the impacts of wire fraud on the industry are top of mind for regulators.

Lingering effects of COVID-19

COVID-19 has continued to have an impact on fraud risks as well, necessitating an extremely accelerated adoption of technology. While this has enabled business continuity, the disruption in normal workflows could have caused errors or created opportunities for fraudsters to step in.

Additionally, ongoing forbearance concerns and CARES Act impacts have created an environment in which criminals may take advantage of confused or concerned borrowers to commit fraud, such as identity theft, intercepting payments and email compromise.

eClosing complications

The increased acceptance and use of eClosing platforms have also contributed to the growth of wire and title fraud risk, FundingShield states in its report. According to an American Land Title Association survey of major vendors working in the remote online notarization space, the adoption of RON skyrocketed 547% in 2020 alone, in part due to more states passing permanent RON legislation as well as the need for virtual closings during the pandemic.

While eClosings have proven invaluable for health and safety and enable a faster closing cycle, these platforms and their integrated partners do not always prioritize wire and title fraud risk management and prevention. Additionally, increased closing cycle speed can create vulnerabilities in the process if data is not being actively verified on a real-time basis, providing live information to help lenders mitigate fraud.

“Third-party oversight of wire and title fraud risk is currently lacking in eClosing workflows, and until they integrate with wire and title fraud prevention fintech solutions, these risks will continue to grow,” FundingShield CEO Ike Suri said. “We are swamped with integration exercises with eClosing partners seeking to protect and secure the journey.”


Given the above challenges as well as the continued stress placed on insurance and risk markets due to COVID-19, it’s evident that preventative solutions for wire and title fraud are necessary. Lenders should work not only to educate and inform borrowers about the risks of fraud but should ensure that their technology helps prevent and manage those risks as well.

To read FundingShield’s full Wire and Title Fraud Index for Q1 2021, click here. For historical quarterly reports or further information reach


Agressive Compliance Enforcement is Here

State Notifications Deemed to Trigger DFS Reporting of Non-material Breaches

Two successive Consent Orders have demonstrated the seriousness of non-compliance with New York’s Department of Financial Services financial regulations.  While not surprising given the relatively egregious facts of the two cases, DFS’s unprecedented interpretation of the ‘other’ reporting prong of DFS Part 500.17(a) – any notice to another regulatory authority even if the incident is not material – creates a potential hidden standard for the timing of reporting such incidents.

In March 2021, the New York State Department of Financial Services (“DFS”) entered into a consent order with Residential Mortgage Services (“Residential”), a mortgage loan service company based in Maine, which required Residential to pay a $1.5 million penalty for violating DFS’s cybersecurity regulation, as well as undertake certain remedial measures.

Residential’s cybersecurity event, defined by the regulation as “any act or attempt, successful or unsuccessful, to gain unauthorized access to, disrupt or misuse an Information System”, occurred when an employee responded to a phishing email with the false appearance of a signature of a business partner.  Although this act compromised the employee’s credentials, Residential also required a multi-factor authentication process, which typically acts as a safety net in security protocols.  Unfortunately for Residential, the employee then compounded the initial compromise by subsequently successively authenticating four fraudulent multi-factor authentication requests, after business hours, simply by tapping her phone.  On the following day, prompted by yet another fraudulent attempted authentication request, the employee notified Residential’s IT department of the compromise.  In response however, after it determined that the compromise was limited to the employee’s email, Residential did not undertake any further investigation, despite the employee’s access and use of sensitive personal identifiable financial information of Residential’s customers.  Further, Residential did not report the compromise to individuals whose personal data was potentially compromised by the hacker’s access to the email account.

Months later, Residential Mortgage Services’ Chief Information Security Officer (“CISO”) certified to DFS that Residential was in compliance with DFS cyber-security regulations.  It is not clear whether the CISO was aware of the incident, or conducted any due diligence within Residential before making the certification.  As part of a routine audit, DFS discovered certain compliance issues, undertook a more in-depth review of Residential, and ultimately uncovered the incident.

The compliance breakdowns within Residential in connection with the incident were many, presumably leading to the significant penalty to which Residential agreed:

1) Inadequate training of employees on standard security protocols;

2) Failure to implement an incident response process;

3) Failure to investigate the likely compromise of personal financial information;

4) Failure to report the likely compromise of personal financial information under state notification statutes;

5) Failure to report the incident to NYDFS (which DFS implicitly asserted is required even if the incident was not ‘material’ under DFS regulations, so long as another supervisory authority was or should have been notified); and

6) Failure to undertake appropriate due diligence before certifying compliance with DFS requirements.

Particularly worthy of note is the position by DFS that even if there was no “reasonable likelihood of materially harming any material part of the normal operation(s) of the covered entity” notice to DFS nevertheless was required because notice was required to be given “to any government body, self-regulatory agency or any other supervisory body”, specifically via state breach notification laws.

In another Consent Order entered just a few days later involving National Securities Corporation (NSC), DFS imposed a penalty of $3 million, for violations similar to those found in Residential, including improper certification of compliance notwithstanding knowledge of security shortcoming evidenced by breaches, further complicated by NSC’s failure even to implement adequate security measures, including full Multi-Factor Authentication (MFA).

As with Residential, DFS asserted that any notifications by NSC that would have been required to state authorities automatically required notifications to DFS, again implying that the materiality standard otherwise required to trigger reporting to DFS is no longer relevant.  Particularly noteworthy in the NSC order is the express reference to the 72-hour notification deadline, which DFS seemed to assert was triggered as soon as NSC became aware that state regulatory authorities had to be notified under state breach notification laws, essentially eliminating any requirement of materiality.

The potential consequences of the DFS interpretation could be quite significant for those entities regulated by DFS that experience an incident reportable to any state regulatory authority (which is required by a majority of the state breach notification laws, with varying triggering thresholds), or potentially the FDIC.  While virtually no state  requires notification sooner than “reasonably practicable”, and a few states require notification within 30 days (other than Vermont under certain circumstances, which demands 14 days), the interpretation advanced by DFS in the Residential and NSC Consent Orders, if applied in similar circumstances to other DFS-regulated entities experiencing breaches that would not otherwise be characterized as material by DFS, could have the perverse effect of substituting the DFS 72 hour deadline as the de facto default standard for all states that require notification to state authorities.1

Companies subject to the new DFS regulations or in related industries should pay particular attention to these developments for several reasons.  This enforcement was a matter of first impression and demonstrates the potential consequences of overlooking parallel notifications to DFS whenever state regulators are notified, and that incorrect DFS certifications by CISOs will be sanctioned severely.  Further, the regulation has served as a model for other regulators who are interested in a more prescriptive approach.  Following the enactment of DFS’s regulations, both the U.S. Federal Trade Commission and National Association of Insurance Commissioners have looked to the regulation as model for their own regulations, and that others are likely to follow.

1 Notice to DFS may be submitted confidentially; under 23 NYCRR 500.18, information provided is subject to exemptions from disclosure under Baking law, insurance law, financial services law, public officers law and other applicable law.  Nevertheless, a data controller subject to DFS could find itself in the unenviable position of having to file a protective notice to DFS within 72 hours of discovering a breach that could be reportable to any state regulatory authority under state law, but before having the opportunity to investigate the incident to assess its full consequences, or perhaps even its ultimate reportability if it is determined that there is no likely risk of harm to the data subject.  There are likely to be other significant derivative consequences if such protective notifications are deemed required, that any impacted entity will also have to take into account.


CFPB Focuses on Mortgage Servicing

On 5 April 2021, the Consumer Financial Protection Bureau (CFPB) solicited comments on proposed amendments to Regulation X,[1] which amendments are intended to assist mortgage borrowers impacted by the COVID-19 pandemic.[2] Though the proposal to extend the current foreclosure moratorium to January 2022 is gaining the headlines, it is important to note that the proposed amendments, if adopted, once again require modification to servicers’ existing loss mitigation programs in order to “maximize the likelihood that borrowers exiting forbearances have sufficient time to complete a loss mitigation application.”[3]

The CFPB’s proposed amendments represent the latest attempt to provide relief to residential mortgage borrowers. In March 2020, the Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act) sought to provide immediate relief to mortgage borrowers impacted by the COVID-19 pandemic. Pursuant to the CARES Act, servicers of federally-backed residential mortgage loans were required to provide homeowners impacted by COVID-19 with payment forbearance for up to 180 days and, if necessary, extend the forbearance period for another 180 days. As anticipated, numerous borrowers entered into forbearance plans and obtained extensions of the plans. Further, in June 2020, the CFPB amended Regulation X in response to the wave of forbearances to address certain streamline modification procedures introduced by Fannie Mae and Freddie Mac. Now, the CFPB is once again proposing to amend Regulation X. Although many servicers are already working with their borrowers on post-forbearance options, the CFPB’s latest proposed amendments are aimed at preventing an anticipated wave of “avoidable” foreclosures and ensuring that servicers provide any borrower facing post-forbearance foreclosure with a range of options to remain in the home.[4] If the amendments are adopted, we expect that the CFPB will use its supervisory and enforcement powers to further those objectives.

First and foremost, the CFPB’s proposal warns mortgage servicers that the industry must be prepared to adequately assist borrowers with forbearance periods that will end in the near term by taking steps to keep those borrowers in their homes. Specifically, the proposed amendment seeks to (1) codify the definition of a “COVID-19-related hardship,” (2) modify early intervention requirements to provide COVID-19-impacted borrowers with additional information regarding loss mitigation options, (3) allow servicers to use incomplete information to make determinations on certain streamlined loan modification products, and (4) implement a foreclosure review period that would generally prohibit servicers from issuing the first notice or filing on foreclosure proceedings before 1 January 2022.[5] Responding to the urgency of the situation, the CFPB seeks comments regarding the impact of the proposed changes on an expedited basis.[6] The comment period runs until 10 May 2021, with an effective date of 31 August 2021.[7]

Below, we discuss the proposed amendments and their rationale and highlight the circumstances where the CFPB expects mortgage servicers to take all necessary steps to ensure that borrowers are fully aware of loss mitigation opportunities to avoid foreclosure. 

Codifying the Definition of “COVID-19-Related Hardship”

The CFPB seeks to codify the term “COVID-19-related hardship,” which includes “a financial hardship due, directly or indirectly, to the COVID-19 emergency as defined in the Coronavirus Economic Stabilization Act, section 4022(a)(1) (15 U.S.C. 9056(a)(1)).”[8] While an immediate focus of the CARES Act was on mortgage payment forbearance, once implemented as part of the proposed amendment to Regulation X, the broad definition of a “COVID-19-related hardship” will also have an expansive application to loss mitigation and foreclosure generally. The absence of a sunset provision indicates that claims for COVID-19-related hardships may last significantly longer than the COVID-19 emergency itself. Regardless, the term’s broad scope signals that the CFPB is focused not only on borrowers who are already in forbearance programs, but also on borrowers who are currently delinquent but not yet in an active loss mitigation or forbearance program.

Changes to the Early Intervention Obligation

In its current iteration, Regulation X requires servicers to attempt to make live contact with the borrower no later than the 36th day of delinquency and specifies the steps that servicers must take when discussing loss mitigation options.[9] The CFPB proposes to modify the early intervention mandates to temporarily require servicers who make live contact to identify whether the borrower’s account is in a forbearance plan.[10] If the borrower is not in a forbearance plan, the servicer must expressly ask whether the borrower is experiencing a COVID-19-related hardship and provide information about available programs to assist the borrower, and the steps the borrower must take to benefit from those programs.[11] If the borrower is already in a forbearance plan, then during the last live contact before the end of the plan period, the servicer must provide the borrower with the date on which the forbearance plan ends, details regarding available loss mitigation options available to the borrower, and the steps needed for the borrower to obtain additional loss mitigation assistance.[12] 

In seeking comments on this section, the CFPB acknowledges the uncertainty around the level of detail that servicers must provide to borrowers regarding loss mitigation options. The CFPB seeks input on whether servicers should provide a list of all possible loss mitigation options or only those applicable based on the type of forbearance program the borrower had previously entered.[13] Nevertheless, the CFPB’s comments make clear that it is imperative that borrowers, particularly those already in forbearance programs, receive sufficient and timely information so that those borrowers do not shift from forbearance directly to foreclosure without sufficient notice of their options and the opportunity to avail themselves of those options.[14] Given the uncertainty regarding the level of detail that must be provided, servicers will need to be flexible and consider how to adjust their processes to ensure that their customer service representatives provide the requisite level of detail during live contact sessions.

Use of Incomplete Application for Loss Mitigation Analysis

Currently, servicers cannot make a loss mitigation offer to a borrower based on an incomplete application unless permitted by the exceptions set forth in Regulation X.[15] In the summer of 2020, the CFPB enacted Section 1024.41(c)(v) to allow for limited review of incomplete applications as it relates to the deferral of forborne payments.[16] The CFPB now proposes to add another exception that authorizes servicers to issue loan modifications based on incomplete applications where the borrower meets the following criteria:

(1) the loan modification extends the term of the loan no more than 480 months and does not cause an increase in the required principal and interest payment;

(2) any amounts that are deferred until refinance, sale, or maturity do not accrue interest; the servicer does not charge a fee for the modification; and the servicer waives all late charges, penalties, stop payment fees, or similar charges upon acceptance of the modification;

(3) the loan modification is made available to borrowers experiencing a COVID-19-related hardship; and

(4) either the borrower’s acceptance of the loan modification or acceptance of the loan modification through satisfaction of a trial plan must resolve any preexisting delinquency.[17]

If the borrower accepts a loan modification based on the above criteria, the servicer is not obligated to comply with the requirements to provide notice of receipt and review a loan modification application as set forth in other sections of Regulation X. The proposed regulations, however, would require a servicer to immediately resume loss mitigation efforts if the borrower fails to fulfill the trial plan requirements or if the borrower requests additional assistance.[18] 

In explaining the newly-proposed amendments, the CFPB notes that the COVID-19 pandemic presented an extraordinary circumstance and that borrowers suffering from the pandemic’s social and financial impacts may not be able to complete full applications.[19] The proposed amendments state that many of the streamlined modifications use simplified application procedures and do not require complete loss mitigation applications.[20] In allowing certain modifications to proceed without requiring complete applications, the CFPB recognizes that servicers need flexibility to efficiently evaluate loan modification options and ensure that the servicers can devote their resources accordingly. The CFPB believes that if servicers can avoid having to track down additional information and grant an investor-approved modification based on streamlined information, servicers can then refocus efforts to continue loss mitigation outreach to impacted borrowers.[21]

These proposed amendments are not without risk. Servicers will need to continue to closely scrutinize how they can implement the loss mitigation provisions without running into some of the same litigation issues arising out of the Home Affordable Modification Program (HAMP) established in 2008. Although successful in providing loan modifications to numerous borrowers, servicers’ HAMP efforts led to a host of litigation, ranging from individual lawsuits to class actions in state and federal courts throughout the country, as well as challenges in bankruptcy courts through adversary proceedings and objections to servicers’ claims and payment change notices.[22] Litigation focused on loss mitigation is likely to mimic HAMP related litigation, and could include disputes regarding the affordability of modifications offered at the end of the forbearance period, the terms of the modifications (including trial plan terms and payments), the servicer’s and investor’s decision to not offer certain loss mitigation options, and the impact of unpaid escrow amounts owed on payments following a modification. If the CFPB enacts the proposed amendments, servicers should take care that they continue to document all aspects of the loss mitigation process and provide a clear explanation to borrowers regarding the type and terms of any loan modification offered following forbearance to minimize the risks of a HAMP-like litigation wave in 2022 and beyond. 

Implementation of Special COVID-19 Emergency Pre-Foreclosure Review Requirements 

In response to the COVID-19 pandemic, foreclosure moratoriums were implemented by state executive orders, federal agency decisions, and investor mandates. As the COVID-19 emergency begins to wane, certain jurisdictions and investors are positioning to relax foreclosure moratoriums. In the absence of any foreclosure moratorium, a servicer is ordinarily prohibited from issuing the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process, unless: (a) the account is more than 120 days past due, (b) the foreclosure is based on a violation of the due-at-sale clause, or (c) the servicer is joining a foreclosure brought by a superior or subordinate lienholder.[23]

With the proposed amendments, the CFPB seeks to add a new paragraph (3) to Section 1024.41(f), requiring a servicer to wait until after 31 December 2021 to issue the first notice or filing.[24] As proposed, a servicer can only proceed with the first notice before 31 December 2021 if the first notice is as a result of (a) a violation of the due-at-sale clause, or (b) the servicer joining a foreclosure brought by another lienholder.[25] The CFPB’s stated goal in limiting the first notice or filing is to ensure that every borrower has the ability to understand and take advantage of all suitable loss mitigation options prior to foreclosure.[26] The CFPB is concerned that borrowers and servicers may need additional time to provide meaningful opportunities to evaluate foreclosure avoidance options.[27] In fact, under the proposed regulations, a servicer’s failure to timely attend to loss mitigation could result in violations of Regulation X.[28] Although the operational enhancements adopted in the wake of the 2008 financial crisis placed servicers in a better position to handle a high volume of defaulted accounts, and although many servicers have already adapted to the new rules and guidance following the enactment of the CARES Act, the CFPB nevertheless believes that servicers have faced, and will face, significant challenges in responding to fast-changing circumstances such that additional regulation is warranted.[29]

Additionally, the CFPB seeks to clarify whether servicers should be permitted to foreclose in situations where the borrower fails to respond to outreach efforts. Specifically, the CFPB is considering exemptions that would allow servicers to make the first foreclosure notice or filing before 31 December 2021 if (1) the servicer has completed a loss mitigation review and the borrower is not eligible for any program, or (2) the servicer has made certain efforts to contact the borrower and the borrower has not responded (“potential foreclosure exemptions”).[30] To the extent that servicers support the potential foreclosure exemptions and wish to begin foreclosure efforts prior to 31 December 2021, servicers must ensure that sufficient documentation exists to support the potential foreclosure exemption and to limit risk associated with challenges as to whether an account meets the potential foreclosure exemption criteria.


If implemented, the CFPB’s proposed changes to Regulation X will mandate how servicers must evaluate loan modification applications and foreclosures in the near term, and how servicers must handle their early intervention live contact attempts. Servicers should consider whether the CFPB’s expectations clash with the reality of business operations and begin to prepare now for the influx of loss mitigation requests that will likely occur in the coming months. If nothing else, the proposed amendments signal that the CFPB expects that servicers must provide any borrower experiencing a COVID-19-related hardship with the opportunity to participate in loss mitigation efforts. Similarly, servicers can expect that compliance with the new rules will be a priority for the CFPB moving forward. Perhaps most importantly, servicers must recognize that failure to comply with the proposed amendments, if enacted, could result in adverse CFPB actions, individual and class action litigation by borrowers in state, federal, and bankruptcy courts, and other negative consequences.


Beware ! CFPB Initiates “REDLINING” Enforcement Action Against Mortgage Lender

A&B ABstract:

Recently, the Consumer Financial Protection Bureau (“CFPB”) brought its first ever redlining case against a non-depository institution. While the CFPB has yet to issue guidance regarding how it would evaluate a non-bank lender’s activities for potential redlining, the CFPB’s allegations in this case provide some insight to mortgage lenders regarding compliance expectations.


On July 15, 2020, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender engaged in the redlining of African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) in violation of the Equal Credit Opportunity Act (“ECOA”) and, in turn, the Consumer Financial Protection Act (“CFPA”).

The complaint does not assert any claims under the Fair Housing Act (“FHA”), as that fair lending statute is enforced by the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”). Typically, “redlining” refers to a specific form of discrimination whereby the lender provides unequal access to, or unequal terms of, credit because of the prohibited basis characteristics of the residents of the area in which the loan applicant resides or in which the residential property to be mortgaged is located.

The Complaint

According to the complaint, during the January 1, 2014 to December 31, 2017 time period, Townstone “engaged in unlawful redlining and acts or practices directed at prospective applicants that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago MSA.” In support of this claim, the CFPB asserts that Townstone’s weekly marketing radio shows and podcasts included statements about African Americans and predominantly African-American neighborhoods (using terms such as “scary” and “jungle”) that would discourage African-American prospective applicants from applying to Townstone for mortgage loans.

Lack of Direct Marketing

Apart from the allegations regarding Townstone’s radio shows and podcasts, the complaint does not point to any intentional conduct or effort by Townstone to discriminate against African Americans or African-American neighborhoods. Rather, the complaint arrives at a general conclusion that Townstone “made no effort to market directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target any marketing toward African-Americans and did not employ an African-American loan officer among its 17 loan officers in the Chicago MSA. As a result, Townstone received few applications from African-Americans and only a handful of applications from residents of majority African-American neighborhoods.

However, with respect to the allegation that Townstone did not specifically target any marketing toward African-Americans, the CFPB concedes that Townstone generated 90% of its applications from radio advertising on an AM radio station that “reached the entire Chicago MSA” and thus included residents of majority African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ any African-American loan officers, it is unclear how the CFPB expects that the race of a particular loan officer would have increased the number of applications from members from the same racial group, since Townstone’s business model relied upon leads received through radio advertising rather than referrals.


HUD and DOJ brought early redlining cases under a disparate treatment theory of discrimination, which requires evidence of a lender’s discriminatory motive or intent. More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s failure to market to, and infiltrate, geographic areas that have a strong minority presence.

Data Support

As further support for its claim against Townstone, the CFPB cites to data comparing the loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of the loan applications received by Townstone were from African Americans, the average among peer lenders was 9.8%. Similarly, only between 1.4% and 2.3% of Townstone’s loan applications came from majority African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In further support of its claim, the CFPB argues that African Americans make up approximately 30% of the population of Chicago, though fails to note the Chicago MSA’s African-American population of approximately 16%.

Given this data, the complaint asserts that Townstone acted to meet the credit needs of majority-white neighborhoods in the Chicago MSA while avoiding the credit needs of majority African-American neighborhoods. As a result, the CFPB alleges that Townstone thereby discouraged prospective applicants from applying to Townstone for mortgage loans in those neighborhoods.

Townstone’s Response

In response to the allegations, Townstone has published a fact sheet defending itself against the CFPB’s claim and noting its efforts to “reach as broad a geographic area as possible” by considering legitimate, non-discriminatory factors such as signal strength, and referencing other marketing measures specifically targeted at the African-American community. Further, Townstone has hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.


The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even though they are not subject to Community Reinvestment Act requirements regarding meeting the needs of an entire assessment area. Further, the complaint reminds lenders that their performance – measured primarily by number of loan applications received – will be compared against that of other lenders with similar size and loan origination volume. As such, lenders seeking to mitigate fair lending risk should evaluate the geographic distribution of their lending activity to determine whether, during a particular time period, they were significantly less likely to take loan applications from minority areas than non-minority areas.

CFPB’s Pursuit of Redlining Claim

More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim absent the traditional allegation that the lender sought to draw a “red line” around a particular demographic group or geographic area. Townstone’s radio advertising was not restricted to a particular demographic group or geographic area, nor could Townstone have altered the radio signals somehow to include or exclude particular groups or geographic areas. Further, Townstone had no control over the demographics of the AM radio station’s audience or that of particular radio shows.

Rather than alleging a traditional claim of redlining (i.e., actively avoiding a particular demographic group or geographic area), the CFPB seeks to hold Townstone liable for failing to conduct affirmative outreach and marketing to African-Americans. For example, the CFPB points out that Townstone had no African-American loan officers. Yet a lender’s failure to perform affirmative outreach to certain demographic groups or geographic areas, including by hiring loan officers of a particular demographic group, does not constitute redlining – nor are such actions required by ECOA.

The only allegation that Townstone redlined, in the traditional sense, is that its employees made statements that may have been intended to discourage African-American consumers from seeking a loan from Townstone. It is unclear whether these statements were intended to be commercial speech or merely ad hoc commentary regarding local current events.

ECOA Claim

Finally, it is worth noting that ECOA prohibits a creditor from discriminating against any “applicant,” which Regulation B clarifies to include prospective applicants. While the complaint alleges that Townstone discriminated against both prospective applicants and applicants, the CFPB makes no claim that Townstone’s actions had any effect on consumers who already had applied for a loan.

Ultimately, the complaint appears to signal the CFPB’s return to more aggressive and creative redlining enforcement under ECOA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid regulatory risk.


What is a “Seasoned” QM Loan

Lenders approve qualified mortgages (QM), knowing Fannie or Freddie will buy them – but they could buy “seasoned QM loans” if lenders hold them for a period of time.

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking (NPRM) to create a new category of “seasoned qualified “mortgages. CFPB says the new loan category should encourage innovation and help ensure access to responsible affordability in the mortgage credit market.

A seasoned loan under the proposal is held by lenders for a while. During that time, the buyers prove that they can handle it and, under the proposed lending criteria, Fannie Mae or Freddie Mac will then buy the loan, just as it does now for qualified mortgages (QM). CFPB is calling them a Seasoned QM. In general, the new loan category would lower the risk for banks to approve less qualified borrowers.

Seasoned QMs under the proposal would have to be first-lien, fixed-rate transactions that have met certain performance requirements over a 36-month seasoning period. They’d have to be held in the lender’s portfolio during the seasoning period, comply with general restrictions on product features and points and fees, and meet some underwriting requirements.

To be a Seasoned QM, the proposal also requires the creditor to consider and verify the consumer’s debt-to-income ratio (DTI) or residual income at origination.

To become a Seasoned QM, a loan could have no more than two 30-day delinquencies and no delinquencies of 60 or more days at the end of the seasoning period. A disaster or pandemic-related national emergency, under certain conditions, would not necessarily disqualify a loan from becoming a Seasoned QM if the consumer receives a temporary payment accommodation.

“Today’s proposal continues the (CFPB’s) work to encourage safe and responsible innovation in the mortgage origination market,” says CFPB Director Kathleen L. Kraninger. “Our goal through our very deliberative rulemaking process is to protect, promote and preserve the financial well-being of American consumers, while at the same time offering access to responsible, affordable mortgage credit.”

The announcement follows two NPRMs from June. The first proposes to amend the General QM definition in Regulation Z to replace the debt-to-income limit with a price-based approach.

The second NPRM proposes to amend Regulation Z to extend a temporary QM definition known as the Government-Sponsored Enterprise Patch to expire upon the effective date of the final rule proposed in the first NPRM.


Your Marketing and CFPB’s Latest Warnings

The Consumer Financial Protection Bureau issued consent orders against Sovereign Lending Group Inc. and Prime Choice Funding Inc. The bureau found that the companies mailed consumers advertisements for VA-guaranteed mortgages that contained false, misleading, and inaccurate statements or lacked required disclosures

According to a CFPB announcement, the consent order against Sovereign requires it to pay a civil penalty of $460,000. The consent order against Prime Choice requires Prime Choice to pay a civil penalty of $645,000.

The bureau found that Sovereign and Prime disseminated advertisements that contained false, misleading, and inaccurate statements or that failed to include required disclosures. For example, Sovereign and Prime Choice advertisements misrepresented the credit terms of the advertised mortgage loan by stating credit terms that the company was not actually prepared to offer to the consumer.

Sovereign and Prime Choice advertisements misleadingly described an advertised introductory interest rate as a “fixed” rate, when in fact the rate was adjustable and could increase over time. Sovereign and Prime Choice advertisements also created the false impression that they were affiliated with the government by using words, phrases, images, or designs that are associated with the VA or the Internal Revenue Service.

Sovereign is a California corporation that is licensed as a mortgage broker or lender in about 44 states and the District of Columbia. Prime Choice is a California corporation that is licensed as a mortgage broker or lender in about 35 states and the District of Columbia. Both companies offer and provide mortgage loans guaranteed by the U.S. Department of Veterans Affairs. Their principal means of advertising VA-guaranteed loans is through direct-mail advertisements sent primarily to United States military servicemembers and veterans.

The actions stem from a bureau sweep of investigations of multiple mortgage companies that use deceptive mailers to advertise VA-guaranteed mortgages. The bureau commenced this sweep in response to concerns about potentially unlawful advertising in the market that the Department of Veterans Affairs identified.

The bureau also found that both Sovereign and Prime Choice advertisements used the name of the consumer’s lender in a misleading way by not adequately disclosing their own names and the fact that they were not associated with, or acting on behalf of, the consumer’s current lender, as required by Regulation Z. Sovereign advertisements made false claims about consumer’s existing loans, and falsely implied that the consumer could address these problems by obtaining a loan from Sovereign.

Sovereign and Prime Choice advertisements also failed to properly disclose, when required by Regulation Z, credit terms for the advertised mortgage, such as the consumer’s repayment obligations over the full term of the loan and the period during which certain interest rates would apply. Further, Prime Choice advertisements created the false impression that they contained a property assessment as well as misleading comparisons between hypothetical credit terms and the terms of the advertised product.

The consent orders also impose injunctive relief to prevent future violations, including requiring the companies to bolster their compliance functions by designating an advertising compliance official who must review their mortgage advertisements for compliance with mortgage advertising laws prior to their use; prohibiting misrepresentations similar to those identified by the Bureau; and requiring the companies to comply with certain enhanced disclosure requirements to prevent them from making future misrepresentations.

By consenting to the orders, neither Sovereign or Prime Choice admit or deny any of the findings of fact or conclusions of law, except that they the facts necessary to establish the Bureau’s jurisdiction over them and the subject matter of this action.


Latest Regulatory Changes to DTI Requirements under QM Standards

The Consumer Financial Protection Bureau announced Monday two notices of proposed rulemaking surrounding what’s commonly known as the QM Patch. One of those rulemakings would remove the debt-to-income requirement from qualified mortgages.

Back in January, CFPB Director Kathy Kraninger sent a letter to several prominent members of Congress, saying the bureau has decided to propose an amendment to the QM Rule that would “move away” from DTI as a factor in mortgage underwriting.

Specifically, Kraninger said at the time that the CFPB has decided to shift from the DTI standard and move to an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average prime offer rate for a comparable transaction.)”

Now, Kraninger is following through on that plan.

In the first notice of proposed rulemaking, the bureau wants to amend the qualified mortgage definition in Regulation Z to replace the DTI limit with a price-based approach, saying it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.

For eligibility for QM status under the General QM definition, the bureau is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers. The NPRM also proposes that lenders take into account a consumer’s income, debt and DTI ratio or residual income and verify the consumer’s income and debts.

The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them money. This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.

But Fannie Mae and Freddie Mac are not bound to this requirement, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie Mae or Freddie Mac are allowed to exceed to the 43% DTI ratio.

“The GSE patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” Kraninger said. “The bureau is proposing to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch.”

The QM Patch is due to expire in January 2021, and last year the CFPB moved to officially do away with the QM Patch on its stated expiration date, however the second notice of proposed rulemaking from the CFPB Monday would move that date to ensure a smooth transition.

The bureau proposed to amend Regulation Z to extend the QM Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z.

“The bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM,” the CFPB stated.

This could come as welcome news to the housing industry, which has long been calling for an end to the QM Patch.

“America’s Realtors applaud the CFPB’s action to provide a temporary QM patch extension, and commend the bureau and Director Kraninger for acting on behalf of our nation’s consumers and homebuyers at a time when market stability is so critical,” National Association of Realtors President Vince Malta said. “Perhaps most importantly, we appreciate the Bureau’s decision to eliminate a hard DTI standard, and we look forward to more closely examining the proposed replacements and their impact on homebuyers over the coming months.”


The Latest Regulations on Remote Online Notarization

On July 25, 2000, the first paperless real estate transaction took place in Broward County in Florida. That transaction involved a home purchase and financing and took less than five minutes to record. Immediately, recorded documents were returned to the settlement agent via email and images of the documents were available on the county’s website.

Two decades later and despite the threat of the novel coronavirus pandemic, many real estate transactions are still being conducted the old-fashioned, high-contact way. Home buyers, sellers and real estate agents meet at the settlement attorney’s office at the same time, provide government-issued photo identification and sign legally binding documents under oath before a notary public. The notary then signs those documents and affixes a seal on dozens of separate legal documents. The live notarization requirement has, until recently, prevented end-to-end digital transactions, but that rule is rapidly evolving.

More options for finding a notary during the pandemic

The coronavirus has forced county recording clerks, mortgage lenders and the title insurance industry to expedite rules to permit remote online notarization (RON) closings under strict guidelines. RON closings no longer require the signer and the notary to be in the same room — they could be anywhere on the planet. Home buyers, sellers, lenders, real estate agents and settlement attorneys no longer need to gather in the same room. Buyers and sellers can take more time to review and sign settlement documents. Another benefit is that the actual closing document signing is recorded using encrypted, tamper-evident, audio and video technology. This record will then be stored and retrievable in electronic format for at least seven years.

As of mid-June, 26 states allow RON closings, including Virginia. The District and Maryland allow RON closings on a temporary, emergency basis. According to Diane Tomb, chief executive of the American Land Title Association (ALTA), nearly 30 percent of title and settlement companies are offering some type of digital closing to meet social distancing requirements. This is up from 17 percent of companies offering digital closings in 2019.

In March, the Senate and House introduced bills to authorize all U.S. notaries to perform RON. The bills would require that RON notaries use tamper-evident technologies, prevent fraud by using multifactor authentication for identity proofing, and make and retain audiovisual recordings of the transaction. It would allow signers outside the United States, such as military personnel, to securely notarize documents. It would also permit states to customize their own statutes and to recognize RON between states. The National Association of Realtors, the Mortgage Bankers Association and ALTA all support the bills. “Protecting consumers remains the title insurance industry’s top priority,” Tomb said.

Despite this regulatory groundswell, unless all parties agree, closings cannot be conducted using RON. To help lenders make decisions about allowing RON, the Mortgage Industry Standards Maintenance Organization created standards to certify technology providers that use consistent and best practices to secure confidential data. “Expanding the availability of RON is a priority” for the standards organization, said its president, Mike Fratantoni.

The National Notary Association identifies seven technology providers who are servicing the burgeoning RON industry. RON laws require tamper-evident technology, meaning that the settlement is recorded by an encrypted audiovisual record, where the notary and the signers can see, hear and communicate with each other in real time.

A notary’s main role is to identify the signers. With RON, signers must correctly answer computer-based questions about their life, credit or financial history. Signers scan credentials, and the technology provider analyzes if a credential is counterfeit, altered or expired. The notary must view the signer’s credential on camera and compare the information and image on that credential to the signer’s visual appearance, just as a face-to-face notary would examine a signer’s physical driver’s license.

Fannie Mae and Freddie Mac, which buy more than 40 percent of residential mortgage loans, have modified their single-family seller guidelines to permit RON closings in 43 states. Freddie Mac has specific temporary regulations regarding RON for closing documents, powers of attorney and electronic promissory notes.

Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law LLC in Washington. He is an active real estate attorney, investor, landlord, lender and settlement attorney. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact him at,,, or call 301-417-4144.


Important Upcoming Changes to REG Z

On June 4 the Consumer Financial Protection Bureau (CFPB) issued proposals to address issues arising from the required transition away from the London Interbank Offered Rate (LIBOR) scheduled for the end of 2021. LIBOR has been widely used as a benchmark in consumer financial products such as adjustable rate mortgage loans, home equity lines of credit (HELOCs), student loans and credit cards. The CFPB released a more than 200 page rulemaking proposal calling for changes to its truth-in-lending regulations relating to the LIBOR transition. The CFPB also simultaneously issued guidance in the form of Frequently Asked Questions (FAQ) This blog will emphasize the proposal’s and the FAQ’s impact on adjustable rate mortgage loans and HELOCs.

Adjustable rate mortgage loans

Under Regulation Z as currently written, if the existing index used to calculate a mortgage loan’s interest rate is replaced and the new index is not a “comparable index,” the index change may constitute a refinancing. The proposed rule would provide an example of an index that is a “comparable index” to LIBOR – an index based on the Secured Overnight Financing Rate. This index has been endorsed by the Alternative Reference Rates Committee, a public-private LIBOR transition working group in the United States. It is worth noting that not everyone favors this index as a replacement for LIBOR, as some say it is subject to rate spikes that have not been historically present in LIBOR.

The CFPB is proposing a revamped Consumer Handbook on Adjustable Rate Mortgages, commonly known as the CHARM booklet. The proposed new CHARM booklet would remove all references to LIBOR and reduce the number of pages by half.

Per the FAQ, the proposed changes will affect ARM loan program origination disclosures for some loan programs, as the new index and formula used to calculate the interest rate will need to be identified, the explanation as to how the interest rate and payment will be determined will need to be modified, and rules relating to changes in the index or interest rate, such as an explanation of interest rate limitations, may need to be modified. The historical example and initial and maximum examples will also need to be modified. If the new index has not been in existence for fifteen years (the term of the historical example), then the proposal would require the historical example to cover the period in which the new index has been in existence.

The LIBOR transition is not expected to trigger ARM interest rate adjustment notices, because those notices are only required in connection with a monthly payment change. If the servicer chooses to notify the borrower of the pending index replacement when delivering an ARM interest rate adjustment notice, the servicer is prohibited from adding additional information to the notice, but may include a separate statement with the notice advising of the impending change in the index. The servicer may, however, add information to the monthly periodic statement delivered to the borrower, as long as the added information does not “overwhelm or obscure” the required disclosures.

The FAQ also advises that creditors offering adjustable rate mortgage loans must determine that the replacement index complies with the requirements of Regulation D, the rules for alternative mortgage transactions. Regulation D requires that if an index is used in connection with the calculation of the interest rate, the index used for closed-end mortgages must be readily available and verifiable by the borrower and beyond the control of the creditor. Hopefully the final amendment to Regulation Z will make clear that any index recommended as a replacement index in Regulation Z will satisfy the requirements of Regulation D.


The proposed rule would amend the open-end change-in-terms notice provisions to ensure that for the LIBOR transition, creditors are required to include in the change-in-terms notice the replacement index and any adjusted margin, regardless of whether the margin is being reduced or increased. The proposal would allow creditors to optionally comply with this provision between the issuance of the final rule and the provision effective date, October 1, 2021.

In order to change the index for HELOC accounts, the current rule requires that a) the original index be no longer available, and b) the replacement index meet certain requirements. The proposed rule would add a LIBOR-specific provision that would allow the LIBOR transition to occur on or after March 15, 2021 (instead of using the no longer available standard).

Additionally, the proposed LIBOR-specific provisions would retain similar replacement index requirements to the current rule, including that the replacement index has historical fluctuations that are substantially similar and that the new rate selected is substantially similar. The proposed rule would identify December 31, 2020 as the date used for selecting the index values for the LIBOR index and the replacement index to compare the rates, rather than using the rates on the date that the original index becomes unavailable. The proposed rule identifies two example replacement indices for LIBOR that meet the proposed exception requirements – the prime rate published in The Wall Street Journal, and a spread-adjusted version of the Secured Overnight Financing Rate recommended by the Alternative Reference Rates Committee. While the prime rate is currently significantly higher than LIBOR, existing law requires the interest rate resulting from the use of a replacement index to have an annual percentage rate that is substantially similar to the APR with the old index, so replacing LIBOR with the prime rate could well result in the HELOC’s margin being substantially decreased.

Per the FAQ, the proposed changes will affect ARM loan program origination disclosures for some loan programs for HELOCs. Regulation Z generally requires that creditors provide certain disclosures about the plan at the time consumers are provided a HELOC application. Like other loan origination disclosures required by Regulation Z, the requirements include disclosures, as applicable, about the security interest, payment terms, variable rate information, fees and other key plan terms. Some of these disclosures may need to be revised. The disclosure is also required to include a historical example. Based on a $10,000 extension of credit, illustrating how the annual percentage rate and payments would have been affected by index value changes over the last fifteen years. This example will also need to be modified. If the new index has not been in existence for fifteen years (the term of the historical example), then the proposal would require the historical example to cover the period in which the new index has been in existence.

The CFPB will be accepting comments on the proposed rule through August 4.


TRID Consierations in a COVID World

To help make things easier on both mortgage lenders and borrowers during this time of crisis, the Consumer Financial Protection Bureau (CFPB) is loosening some of its regulations under the TILA-RESPA Integrated Disclosures (TRID) rule.

The goal of the new “interpretive rule,” the bureau explains, is to make it “easier for consumers with urgent financial needs to obtain access to mortgage credit more quickly in the middle of the COVID-19 pandemic.”

“The bureau concludes in this interpretive rule that if a consumer determines that his or her need to obtain funds due to the COVID-19 pandemic 1) necessitates consummating the credit transaction before the end of the TRID Rule waiting periods or 2) must be met before the end of the Regulation Z Rescission Rules waiting period, then the consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions, subject to the applicable procedures set forth in the TRID Rule and Regulation Z Rescission Rules,” the interpretive rule states.

“The bureau also concludes in this interpretive rule that the COVID-19 pandemic is a ‘changed circumstance’ for purposes of certain TRID rule provisions, allowing creditors to use revised estimates reflecting changes in settlement charges for purposes of determining good faith. This interpretive rule will help expedite consumers’ access to credit under the TRID rule and Regulation Z Rescission Rules.”

“The steps we are taking today will help consumers facing financial emergencies obtain access to mortgage credit faster,” says Kathleen L. Kraninger, director of the CFPB, in a statement. “The pandemic is resulting in consumers facing various challenges, and our temporary and targeted solutions are intended to ensure that consumers receive the credit they need in a timely manner.”

The CFPB says rule change will “also reduce regulatory uncertainty and allow creditors to focus their resources on meeting consumers’ needs.”


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