Dec. 2: CRA CFPB lawsuit news; NAR report on home buyers; compliance & regulatory tidbits; Panama drought = inflation

Tom Petty sang, with the help of Stevie Nicks in this version, “I’m learning to fly, but I ain’t got wings. Comin’ down, is the hardest thing…” Our industry has certainly been “coming down” since the heady years of 20/21, primarily due to millions and millions of potential refi candidates being crammed into two years, and then interest rates heading higher in the Fed’s efforts to cap inflation. But the Fed can’t control all inflation. A drought in Panama has forced the Panama Canal to drastically cut the number of transits it can facilitate per day, down to 24 from the typical 34 transits per day, with a forecasted drop to 18 transits per day by February. That’s because it takes 200 million gallons of water for each ship to transit the canal, and Lake Gatun is getting low. This month a group of shipping companies is going to switch up routes for a number of services connecting China, Taiwan and South Korea to the U.S. East Coast and Gulf Coast. Rather than going through the Panama Canal, they’ll go through the Suez in Egypt or around Africa’s Cape of Good Hope to connect the East and Gulf coasts to Asia. That’ll add seven days of travel to East Coast ports and 10 days to Gulf Coast ports. You can add that to the cost of goods!

If you think mortgage competition is hard…

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Due to the size of the company and the scope of its business and menu, any tiny change that McDonald’s makes to its products is a massive logistical and supply chain leap. Recently the company’s announcement that it has made over 50 tweaks to its burgers as part of a revamp of its offerings. Micky D’s is attempting to shore up its offerings in light of the increasing competition from the fast-casual burger joints (think Smashburger, Shake Shack, and Five Guys) that specifically pursue the angle of quality to their burgers rather than the uniform efficiency of a McDonald’s burger. McDonald’s is ranked 13th among U.S. chains when it comes to how often recent customers describe their burgers as “desirable” according to market researcher Technomic, with just 28 percent of recent customers indicating they “crave” McDonald’s. Leading the list is somehow White Castle, which 72 percent of recent customers said they craved. Go figure.

Compliance and regulations

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MQMR released a FAQ on Anti-Steering Loan Disclosure and under what circumstances it is required to be provided to an applicant. An Anti-Steering Disclosure is required when a licensed mortgage broker originates a loan and will be compensated by the lender. The Anti-Steering Disclosure is not required on retail loan transactions or where the consumer pays the mortgage broker’s compensation. The loan originator must obtain loan options from a significant number of the creditors (generally three or more) with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include: 1. The loan with the lowest interest rate, 2. The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first seven years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation, and 3. The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees).

Lenders Compliance Group recently published a piece on posting the HMDA Notice on a website. Financial institutions are required to post several different kinds of public notices on their premises. One type of required notice announces compliance with certain regulations. For example, the rules requiring highly visible Equal Housing Lender posters are well known. According to these requirements, the HMDA notice must be posted in an institution’s main office and each branch office. Because a website is neither a main office nor a branch, it would seem that these notices would not be required on a website. This interpretation of the rules also seems to be the view of the regulatory agencies. In the publication entitled Federal Financial Institutions Examination Council Guidance on Electronic Financial Services and Consumer Compliance, the agencies discuss the various compliance regulations and their applicability to Internet banking. The publication does not mention HMDA notices at all. Although the HMDA Notice may not be required, financial institution management may consider including it as a precaution or providing internet consumers with the same information available to customers in the institution’s lobby.

Lenders Compliance Group recently wrote on material interference in a UDAAP lawsuit. There are many litigious access points to allege UDAAP violations, given that many regulatory frameworks are implicated. The first abusive act or practice that takes unreasonable advantage of consumers, gaps in understanding, concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” Material interference may be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding. Acts or omissions may be material interference. Material interference may include actions or omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference can take numerous forms, such as “buried disclosures,” physical or digital interference, “overshadowing,” and various other means of manipulating consumers’ understanding. Material interference includes a process of overshadowing, which is the prominent placement of certain content that interferes with the comprehension of other content, including terms and conditions. Read on for more.

Lenders Compliance Group recently published a Compliance FAQ on the meaning of “creditor” and assignee liability. Regulation Z, the implementing regulation of TILA, defines the term “creditor” to mean: “A person (a) who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and (b) to whom the obligation is initially payable, either on the face of the note or contract, or by agreement where there is no note or contract.” Unless the potential defendant is a “creditor” as defined in Regulation Z, such TILA claims generally cannot successfully be brought against the potential defendant. It should also be mentioned that any consumer who has the right to rescind (i.e., right to cancel) a transaction under TILA may rescind the transaction as against any assignee of the obligation. To be classified as an “assignee,” the assignment must be voluntary on the part of the creditor. The assignee in an assignment for the benefit of creditors would not be coverable under TILA. As pointed out by the court, the definition of “creditor” plays an important role here: the creditor is the one to whom the obligation is initially payable on the face of the contract. Accordingly, as this court concluded, the seller in a credit sale contract assigned to a financial institution would be the “creditor,” while the financial institution would be the “assignee” under TILA.

MQMR recently wrote a compliance hot topic on Section 314(b) of the USA PATRIOT Act, which permits, but does not require, financial institutions (including residential mortgage loan originators subject to the Bank Secrecy Act) to share information with one another in order to better identify and report potential money laundering or terrorist financing. FinCEN previously advised that information sharing is critical to identifying, reporting, and preventing financial crime. As such, FinCEN strongly encourages financial institutions to participate in its voluntary Section 314(b) information sharing program. FinCEN previously published a 314(b) Fact Sheet. The Fact Sheet outlines some of the benefits of information sharing, which include, but are not limited to, helping a financial institution enhance its compliance with anti-money laundering (AML) requirements by alerting other participating financial institutions to customers of whose suspicious activities they may not have been previously aware and facilitating efficient SAR reporting decisions by obtaining a more complete picture of potential suspicious activity.

 

The Fact Sheet also provides important clarifications, including explaining that a financial institution may share information relating to activities that it suspects may involve possible terrorist financing or money laundering. A financial institution does not need to have concluded that the activity is suspicious, not need to have specific information that the activity directly relates to proceeds of a specified unlawful activity. Further, a financial institution may share information even if the activities do not constitute a “transaction.”  This can include an attempted transaction, or an attempt to induce others to engage in a transaction. This allows financial institutions to avail themselves of Section 314(b) information sharing to address incidents of fraud or cybercrime. It is important to note that section 314(b) does not authorize a financial institution to share a SAR or to disclose the existence or nonexistence of a SAR. If a financial institution shares information under section 314(b) about the subject of a prepared or filed SAR, the information shared should be limited to underlying transaction and customer information. To participate in information sharing under Section 314(b), a financial institution must follow certain procedures as outlined in the Fact Sheet.

Several federal agencies recently announced annual adjustments to various regulatory thresholds involving, among other things, higher-priced mortgage loans (HPMLs), HOEPA loans, and qualified mortgages (QMs). These are effective 1/1.

Lenders Compliance Group recently wrote on if payments for referrals from rate comparison websites are a violation of RESPA and the guardrails to comply with RESPA. Three prongs are associated with evaluating if a platform receives a prohibited referral fee, and these are triggered when the platform non-neutrally uses or presents information about one or more settlement service providers, in a way that has the effect of steering the consumer to use (or affirmatively influences the selection of) those settlement service providers, constituting referral activity, and in exchange for a payment or other thing of value that is, at least in part, for that referral activity. The CFPB maintains that operators of online comparison platforms receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value. RESPA prohibits payments under an agreement for referrals of settlement-service business. The CFPB says digital platform operators make a referral when they “non-neutrally” use or present information that steers a consumer to a settlement service provider or otherwise influences the consumer’s selection. Neutral presentations and similar fees are critical to avoiding allegations of steering consumers to providers paying the highest fees to the platform operator. Read on for more.

Weiner Brodsky Kider PC reports that, “The U.S. District Court for the Northern District of Illinois recently dismissed a credit reporting agency’s (CRA’s) counterclaim against the CFPB in which the CRA asserted it was entitled to relief in the amount of a $5 million residual redress payment it previously paid the CFPB under a 2017 Consent Order.

“The 2017 Consent Order required the CRA to set aside nearly $14 million to redress affected consumers, $5 million of which was ultimately required to be transferred to the CFPB for distribution to the U.S. Treasury (the “residual redress payment”).  The CFPB now alleges that the CRA violated the 2017 Consent Order’s forward-looking conduct provisions and seeks monetary relief for those alleged violations.

“In its counterclaim, the CRA argued that it is entitled to recoup the $5 million residual redress payment and put it toward any judgment the CFPB obtains in this lawsuit for violations that occurred prior to the Consent Order’s effective date.  In the alternative, the CRA asserted a right to a setoff of the same amount. The CFPB moved to dismiss the counterclaim, stating that, although its complaint references activity occurring prior to the Consent Order’s effective date, it is not seeking relief related to that activity. The court granted the CFPB’s motion on that basis, dismissing the CRA’s counterclaim.”

Who is buying and selling houses?

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When not battling class action lawsuits, the National Association of Realtors found that a typical home buyer’s annual household income climbed to a record high of $107,000 in the wake of rising home prices and mortgage rates in its 2023 Profile of Home Buyers and Sellers Report. Buyer income’s annual increase of 22 percent is the largest on record, from $88,000 in 2022 report. Down payments also jumped to the highest percentages in two decades as the typical down payments for first-time (8 percent) and repeat (19 percent) buyers were the highest since 1997 and 2005, respectively.

“Given the erosion of housing affordability due to higher home prices and mortgage rates, the household income for those who successfully purchased homes jumped by nearly $20,000 and topped six figures for only the second time in our records,” said Jessica Lautz, NAR deputy chief economist and vice president of research. “In a still-competitive housing market, more well-off home buyers were able to have their bids accepted by offering larger down payments and even by paying cash.” First-time buyers made up 32 percent of all home buyers, up from last year’s historic low of 26 percent, but still below the average of 38 percent since 1981. Eighty-nine percent of both buyers and sellers used a real estate agent or broker, up from 86 percent and 87 percent last year, respectively.

Speaking of the NAR (why do people leave “the” off of the front?), Chief Economist Lawrence Yun forecasts existing home sales will rise by 15 percent next year and mortgage rates will be between 6-7 percent by the spring of 2024. Yun analyzed the current state of the U.S. residential real estate market and shared his 2024 outlook during the recent Residential Economic Issues and Trends Forum at 2023 NAR NXT, The Realtor® Experience.

We all know that high mortgage rates and low inventory have dominated 2023. Yun said that when the “dust settles,” home sales will likely decline by 18 percent in 2023, compounding a 17% reduction last year.

Why would rates go down and sales up? There are some worrying signs in the economy, per Dr. Yun. The first being that business spending is essentially flat. The second is that goods inventory is rising, meaning products are being produced but not getting sold. “We cannot keep adding to the shelves,” said Yun. “Just like in housing, businesses have to borrow money, and business spending is down because it’s more expensive to borrow.”

Yun also addressed jobs, stating, “We are on the positive side of jobs data, but each passing month shows diminishing strength. Based on the trendline, employment could become negative.

He also said the consumer price index (CPI) is much calmer, indicating that the Federal Reserve should adjust its monetary tightening posture. “The 10-year Treasury yield is at 4.4%, which historically means mortgage rates could be at 6.4%, but they are much higher,” said Yun. “The bond market is forcing the Fed to pivot.”

“Lack of inventory is providing the support for high prices, but it’s also making it super difficult for first-time buyers to enter the housing market.”

Yun stated, “I believe we’ve already reached the peak in terms of interest rates.”

Here’s a Chevy ad. If you like Hallmark Christmas movies, and have five minutes, this is making the rounds. (Predictable, but tissues may be required.)

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Rob Chrisman