Liability Under TILA, RESPA & Consumer Protection Acts
STATUTORY LIABILITY OF REAL ESTATE TITLE AGENTS
1. The Truth-in-Lending Act (TILA)
a. In General
The Truth-in-Lending Act ("TILA"), Title I of the Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq., was enacted to promote the informed use of consumer credit by requiring disclosures to consumers about its terms and costs. Generally, TILA applies to each individual or business that offers or extends credit when: (1) the credit is offered or extended to consumers; (2) the credit is subject to a finance charge or is payable by a written agreement in more than four installments; (3) the credit is primarily for personal, family or household purposes; and (4) the loan balance equals or exceeds $25,000.00 or is secured by an interest in real property or a dwelling.
As envisioned, TILA was intended to enable a borrower to compare the cost of a cash versus credit transaction and to discover the difference in the cost of credit among different lenders. The regulation requires a maximum interest rate to be stated in any variable rate contract secured by the borrower's dwelling, imposes limitations on home equity plans that are subject to the requirements of certain sections of the Act, and requires a maximum interest that may apply during the term of a mortgage loan. TILA also establishes disclosure standards for advertisements that refer to certain credit terms.
In addition to financial disclosure, TILA provides borrowers with substantive rights in connection with certain types of credit transactions to which it relates, including a right of rescission in certain real estate lending transactions. While TILA also regulates certain credit card practices and provides a means for resolution of credit billing disputes, our discussion will be limited to those provisions of TILA that relate specifically to the mortgage lending process, namely: (1) Early and Final Regulation Z Disclosure Requirements (Part B); (2) Right of Rescission (Part B); and (3) TILA’s Enforcement Provisions.
b. TILA’s Disclosure Requirements
TILA requires lenders to make certain "material disclosures" on loans subject to the Real Estate Settlement Procedures Act (RESPA) within three business days after their receipt of a written application. This early disclosure statement is partially based on the initial information provided by the consumer.
The term "material disclosures" means the disclosure of the annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, the due dates or periods of payments scheduled to repay the indebtedness, and the disclosures required by Section 1639(a) of this title.
A final disclosure statement is provided at the time of loan closing. The disclosure is required to be in a specific format. While the "annual percentage rate" and the "finance charge" are to be disclosed more conspicuously than other terms, the Disclosure typically includes much information concerning the lender, the loan and its terms.
c. Right of Rescission
Under TILA, a consumer has the right of rescission as to certain transactions. In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership is or will be subject to the security interest has the right to rescind the transaction.
Lenders are required to deliver two copies of the notice of the right to rescind and one copy of the disclosure statement to each consumer entitled to rescind. The notice:
- must be on a separate document that identifies the rescission period on the transaction; and
- must clearly and conspicuously disclose
- the retention or acquisition of a security interest in the consumer's principal dwelling;
- the consumer's right to rescind the transaction; and
- how the consumer may exercise the right to rescind with a form for that purpose, designating the address of the lender's place of business.
In order to exercise the right to rescind, the consumer must notify the creditor of the rescission by mail, telegram or other written means of communication. Notice is considered given when mailed, filed for telegraphic transmission or, sent by other means, when delivered to the lender's designated place of business. The consumer may exercise the right to rescind (1) until midnight of the third business day following consummation of the transaction; (2) delivery of the notice of right to rescind; or (3) delivery of all "material disclosures", whichever occurs last. When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective for all consumers.
When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer will no longer be liable for any amount, including any finance charge. Within 20 calendar days after receipt of a notice of rescission, the lender is required to: (1) return any money or property that was given to anyone in connection with the transaction and (2) must take any action necessary to reflect the termination of the security interest. If the lender has delivered any money or property, the consumer may retain possession until the lender has complied with the above.
However, the consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To modify or waive the right, the consumer must give the lender a dated written statement that describes the emergency, specifically modifies or waives the right to rescind and bears the signature of all of the consumers entitled to rescind. Printed forms for this purpose are prohibited.
d. TILA’s Enforcement Provisions
(1) Civil Remedies
Any consumer harmed by a violation of TILA may bring a civil suit against the lender. Generally, TILA provides for the following civil remedies: (1) actual damages; (2) damages twice the amount of any finance charge in connection with the transaction; (3) damages not less than $200 or greater than $2,000; and (4) Reasonable Attorney Fees. 15 U.S.C. § 1640(a).
(2) Correction of Errors
A lender or assignee has no criminal, administrative, or civil liability under TILA for any failure to comply with its requirements, if within sixty days after discovering an error, whether pursuant to a final written examination report, or a notice issued by a federal agency under section 1607(e)(1) that the annual percentage rate or finance charge was inaccurately disclosed to the borrower, or through the lender’s or assignee’s own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the lender or the assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower. 15 U.S.C. § 1640(b).
(3) Defenses: Unintentional Violations; Bona Fide Errors
A lender or assignee may not be held liable in any action for inadequate disclosure or defect in the right of recision if the lender or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programing, and printing errors. However, an error of legal judgment with respect to a person's TILA obligations is not considered a bona fide error.
2. The Real Estate and Settlement Procedures Act (RESPA)
a. In General
The Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 1261 et seq. is a consumer protection statute, first passed in 1974. RESPA was enacted in order to (1) help consumers become better shoppers for settlement services and (2) eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. To accomplish these ends, RESPA requires that borrowers receive disclosures at various times. In addition, RESPA prohibits certain practices that increase the cost of settlement services. It also prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
(1) What transactions are covered and not covered under RESPA?
Transactions which involve a "federally related mortgage loan" fall under RESPA and must comply with those rules. As a practical matter, "federally related mortgage loans" include virtually all loans which are secured by a lien on residential property, regardless of lien position. Examples include a refinance, equity lines of credit, reverse mortgages, and home improvement loans. Any transaction that does not involve a "federally related mortgage loan," such as a cash sale or a loan primarily for business or agricultural purposes is exempt from RESPA. [For a full definition of "federally related mortgage loan," see 12 U.S.C. § 2602(1) and 24 C.F.R. 3500.2].
(2) What is a "title company"?
Under RESPA, the term "‘title company’ means any institution which is qualified to issue title insurance, directly or through its agents, and also refers to any duly authorized agent of a title company." 12 U.S.C. § 2602(4).
(3) What Are "Settlement Services"?
RESPA defines "settlement services" broadly. The term "includes any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement." 12 U.S.C. § 2602(3).
b. RESPA Disclosures
(1) Disclosure At The Time Of Loan Application: Good Faith Estimate of Settlement Costs
When borrowers apply for a mortgage loan, RESPA requires mortgage brokers and/or lenders to give the borrowers:
- a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only).
- a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE.
- a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. This Statement also provides information about complaint resolution.
- Unless the borrower’s loan application is turned down within three days, a lender must mail these documents to the borrowers if they did not receive them at the time of their application.
(2) Disclosures Before Settlement (Closing) Occurs
(a) Disclosure of Controlled/Affiliated Business Arrangements
Whenever a settlement service provider involved in a RESPA-covered transaction refers the borrower to a provider with whom the referring party has an ownership or other beneficial interest, a Controlled Business Arrangement (CBA) Disclosure is required. 12 U.S.C. § 2607(c)(4).
The referring party must give the CBA Disclosure to the borrower at or prior to the time of referral. The Disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider's charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.
(b) HUD-1 Settlement Statement
RESPA permits the borrower to request a copy of the HUD-1 Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
(3) Disclosure After Settlement: Annual Escrow Statement
Loan servicers must deliver to borrowers an Annual Escrow Statement once a year which summarizes all escrow account payments during the past year. If the loan servicer sells or assigns the servicing right to a borrower’s loan to another loan servicer, the loan servicer must notify the borrower of the same in accordance with the statute.
c. RESPA’s Prohibition Against "Kickbacks" and Unearned Fees
(1) "Kickbacks" and Unearned Fees
RESPA prohibits anyone from giving or accepting a fee, kickback or any "thing of value" in exchange for referrals of settlement service business involving a "federally related mortgage loan." 12 U.S.C. § 2607(a). In addition, RESPA prohibits fee splitting and receiving unearned fees for settlement services not actually performed. 12 U.S.C. § 2607(b).
(a) "Thing of Value"
The term "thing of value" includes any payment, advance, funds, loan, service, or other consideration. 12 U.S.C. § 2602(2).
While prohibiting kickbacks, fee splitting, and unearned fees, RESPA does not prohibit:
- the payment of a fee to attorneys at law for services actually rendered; or
- the payment of a fee by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; or
- the payment of a fee by a lender to its duly appointed agent for services actually performed in the making of a loan; or
- the payment of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; or
- the payment to a Controlled Business Arrangement provided:
* the CBA Disclosure is made; and
* the borrower is not required to use any particular provider of settlement services;and
* the only thing of value that is received from the arrangement, other than the payments permitted, is a return on the ownership interest or franchise relationship.
12 U.S.C. § 2607(c).
Appendix B to Part 3500 of 24 C.F.R. XX contains several illustrations which provide additional guidance on the meaning and coverage of RESPA’s prohibition against kickbacks and unearned fees. Five examples are provided here:
1. Facts: A, a provider of settlement services, provides settlement services at abnormally low rates or at no charge at all to B, a builder, in connection with a subdivision being developed by B. B agrees to refer purchasers of the completed homes in the subdivision to A for the purchase of settlement services in connection with the sale of individual lots by B.
Comments: The rendering of services by A to B at little or no charge constitutes a thing of value given by A to B in return for the referral of settlement services business and both A and B are in violation of section 8 of RESPA.
2. Facts: B, a lender, encourages persons who receive federally-related mortgage loans from it to employ A, an attorney, to perform title searches and related settlement services in connection with their transaction. B and A have an understanding that in return for the referral of this business A provides legal services to B or B's officers or employees at abnormally low rates or for no charge.
Comments: Both A and B are in violation of section 8 of RESPA. Similarly, if an attorney gives a portion of his or her fees to another attorney, a lender, a real estate broker or any other provider of settlement services, who had referred prospective clients to the attorney, section 8 would be violated by both persons.
3. Facts: A, a real estate broker, obtains all necessary licenses under state law to act as a title insurance agent. A refers individuals who are purchasing homes in transactions in which A participates as a broker to B, an unaffiliated title company, for the purchase of title insurance services. A performs minimal, if any, title services in connection with the issuance of the title insurance policy (such as placing an application with the title company). B pays a commission to A (or A retains a portion of the title insurance premium) for the transactions or alternatively B receives a portion of the premium paid directly from the purchaser.
Comments: The payment of a commission or portion of the title insurance premium by B to A, or receipt of a portion of the payment for title insurance under circumstances where no substantial services are being performed by A is a violation of section 8 of RESPA. It makes no difference whether the payment comes from B or the purchaser. The amount of the payment must bear a reasonable relationship to the services rendered. Here A really is being compensated for a referral of business to B.
* * *
6. Facts: A, a credit reporting company, places a facsimile transmission machine (FAX) in the office of B, a mortgage lender, so that B can easily transmit requests for credit reports and A can respond. A supplies the FAX machine at no cost or at a reduced rental rate based on the number of credit reports ordered.
Comments: Either situation violates section 8 of RESPA. The FAX machine is a thing of value that A provides in exchange for the referral of business from B. Copying machines, computer terminals, printers, or other like items which have general use to the recipient and which are given in exchange for referrals of business also violate RESPA.
7. Facts: A, a real estate broker, refers title business to B, a company that is a licensed title agent for C, a title insurance company. A owns more than 1% of B. B performs the title search and examination, makes determinations of insurability, issues the commitment, clears underwriting objections, and issues a policy of title insurance on behalf of C, for which C pays B a commission. B pays annual dividends to its owners, including A, based on the relative amount of business each of its owners refers to B.
Comments: The facts involve an affiliated business arrangement. The payments of a commission by C to B is not a violation of section 8 of RESPA if the amount of the commission constitutes reasonable compensation for the services performed by B for C. The payment of a dividend or the giving of any other thing of value by B to A that is based on the amount of business referred to B by A does not meet the affiliated business agreement exemption provisions and such actions violate section 8. Similarly, if the amount of stock held by A in B (or, if B were a partnership, the distribution of partnership profits by B to A) varies based on the amount of business referred or expected to be referred, or if B retained any funds for subsequent distribution to A where such funds were generally in proportion to the amount of business A referred to B relative to the amount referred by other owners such arrangements would violate section 8. The exemption for controlled business arrangements would not be available because the payments here would not be considered returns on ownership interests. Further, the required disclosure of the affiliated business arrangement and estimated charges have not been provided.
(3) Enforcement and Penalties
Violations of RESPA’s anti-kickback, referral fees and unearned fees provisions are subject to criminal and civil penalties. In a criminal case, a settlement agent who violates Section 2607 may be fined up to $10,000 and imprisoned up to one year. In a private law suit, a settlement agent who violates this Section may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.
The statute does enumerate one defense to the failure to provide the CBA Disclosure. If the failure to provide the Disclosure was not intentional and resulted from a bona fide error, notwithstanding maintenance of procedures that are reasonably adapted to avoid such error, that person is not liable under the Act.
c. RESPA’s Prohibition Against Seller-Required Title Insurance
RESPA also prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. 12 U.S.C. § 2608(a).
d. Enforcement and Penalties
Violations of RESPA’s anti-kickback, referral fees and unearned fees provisions are subject to criminal and civil penalties. In a criminal case, a settlement agent who violates Section 2607 may be fined up to $10,000 and imprisoned up to one year. 12 U.S.C. § 2607(d)(1). In a private law suit, any person who violates this Section may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. 12 U.S.C. § 2607(d)(2).
Buyers may sue a seller who violates the provision prohibiting seller-required title insurance for an amount equal to three times all charges made for the title insurance. 12 U.S.C. § 2608(b).
3. The Home Ownership and Equity Protection Act of 1994 (HOEPA)
a. In General
The Home Ownership and Equity Protection Act of 1994 (HOEPA or the Act) amended TILA by adding Section 129 of TILA, 15 U.S.C. § 1639, and has been implemented by Sections 226.31 and 226.32 of Regulation Z. 12 C.F.R. §§ 226.31 and 226.32. HOEPA was implemented to specifically curb the predatory lending practices of certain sub-prime lenders. Generally, the Act provides added protections to borrowers who obtain more high-cost loans in the sub-prime market.
HOEPA applies where "the total point and fees payable by the consumer at or before the closing will exceed the greater of -- (i) 8 percent of the total loan amount; or (ii) $400." 15 U.S.C. § 1602 (aa)(1)(B). Generally, points and fees include all items included in the finance charge, all compensation paid to mortgage brokers, and all enumerated section 1605(e) charges.
If the total points and fees exceed the greater of 8 percent or $400, section 1604 of the Act requires additional disclosures. These specific HOEPA disclosures are enumerated in section 1639(a)-(b) of TILA. Where inadequate disclosure occurs, the borrower has the right of recision. 15 U.S.C. § 1635.
b. An Example of an Inadvertent Violation of HOEPA
As with TILA, the vast majority of HOEPA violations by title agents are technical, unintentional violations. Although a mortgage broker agreement between a borrower and a mortgage broker will sometimes reflect a greater amount, sub-prime lenders will sometimes reduce broker fee on a high cost, refinance loan so that the total points and fees do not exceed 8% of the loan. While a borrower may nevertheless agree to pay the mortgage broker the fee due him under the mortgage broker agreement from the loan proceeds, the payment of such a fee transforms the loan into a HOEPA loan. If the borrower later defaults and seeks the protection of the bankruptcy court, the borrower may seek to rescind the loan based on the lack of HOEPA disclosures.
4. The Maryland Consumer Protection Act
While one must be careful in conducting all transactions, you must exercise particular care when dealing with the settlement of residential real estate. Responding to "mounting concern over the increase of deceptive practices in connection with sales of merchandise, real property, and services and the extension of credit," the Maryland General Assembly found "that existing laws are inadequate, poorly coordinated and not widely known or adequately enforced." Md. Code Ann., Comm. Law §§ 13-101, et seq. Naming a wide variety of deceptive trade practices in many type of consumer transactions, the CPA expressly prohibits "[d]eception, fraud, false pretense, false premise, misrepresentation, or knowing concealment, suppression, or omission of any material fact with the intent that a consumer rely on the same in connection with ... [t]he promotion or sale of ... consumer realty." Id. § 13-301(9). Those who violate this law may be subject to fines, criminal prosecution, liability for damages in a lawsuit and even for the payment of the consumer’s attorney’s fees.