June 30: Letters on state credit & privacy law changes, fraud, borrower rebates, Zillow and the CFPB/BCFP

Halfway through 2018, and legal & regulatory developments have become a part of residential lending just as much as lead generation or investor credit guideline changes. (In fact, a current piece on the STRATMOR website is, “With Regulations, Be Careful What You Wish For.”) Let’s jump in.

Common law is the unwritten laws of fairness and justice that can still govern certain legal decisions in our courts today. A young attorney wrote, “Somehow, in my 3 years in law school, I was not taught about the Hawaiian common law known as Aloha Spirit. Whereas common law dates back to Europe in the Middle Ages and after, Hawai’i officially passed Aloha Spirit in 1986. Still, it’s essentially the law to do things ‘the Hawaiian way. Cooperation. Harmony. Unity. You get the idea. The fact that it’s virtually impossible to enforce is beside the point. It stands for a way of life and, according to the article, it still acts as a social justice enforcement against politicians and celebrities. Living Aloha means living in respect and love for others.  Many days it doesn’t feel that simple, but maybe it can be that simple.”


On Monday, news broke that the CFPB/BCFP announced it had dropped its RESPA investigation into Zillow. Attorney Brian Levy had this to say about it. “For the past several years the industry has been bracing itself for a consent order from the CFPB involving Zillow, many claimed a consent order was ‘imminent.’ Zillow itself announced in 2017 that it was engaging in settlement discussions with the Bureau about concerns over its Premier Agent (co-marketing) program, but that was prior to Richard Cordray’s departure as Director. Some commenters in the industry really jumped the gun, claiming that Zillow was ‘illegal’ and told Zillow users they did so at their own peril. By Zillow’s own admission, the Bureau thought something Zillow was doing raised a RESPA concern and as a RESPA lawyer I was frequently asked to speculate about those concerns.

“But, now we are unlikely to ever know for sure exactly what CFPB thought was problematic or what their investigation revealed factually. This again highlights why former Director Cordray’s emphasis on regulation by enforcement was so misguided. Just as the reasons for settlement in a consent order are never transparent, so too, dropping such a highly public investigation without explanation is hard to read. It leaves the industry wondering whether Zillow was ‘doing it right’ all along or whether the CFPB couldn’t prove its case or simply changed its mind about the nature of the alleged concern(s) or the interpretation of RESPA. The investigation is confidential and enforcement agencies generally do not announce anything about their reasons for declining to prosecute someone (former FBI Director Comey is one notable exception).”

Brian wrapped up with, “So, while the folks at Zillow are surely popping the champagne, unfortunately Monday’s announcement doesn’t tell the rest of the industry anything new about RESPA’s application to web marketing programs or co-marketing generally.”

Borrower rebates

“Rob, how is it that Redfin is able to offer its buyers a rebate after closing on a loan? The buyer gets a check from Redfin. I remember years ago Zip Realty was doing the same thing and got spanked for it along with their lending partner Bank of America. I believe that what Redfin is doing is offering an inducement to purchase by an interested party that is not being disclosed as part of the transaction. The listing agent can offer a credit at closing to pay for actual closing costs, however anything above that is considered a reduction is sales price and it must be disclosed. Zip Realty got away with it for years. Is Redfin big enough to catch the eye of the regulator yet or am I missing something here?

“Unlike builders, where they reduce the sales price by the inducement to purchase and is fully disclosed, in the Redfin scenario (and like Zip Realty prior to), Redfin is not disclosing the inducement to purchase in the contract or on the closing disclosure. The ‘kickback’ is given a few weeks after closing outside the transaction. I do think that there is some document signed by the buyer and the Redfin agent that the ‘rebate / kickback / inducement’ will come about 2 weeks after closing from the corporate offices. This agreement is outside the purchase contract and not disclosed although clearly a part of this transaction.”

A noted mortgage attorney weighed in. “I’m not familiar with Redfin’s disclosures (or Zip’s), but the rebate described is not a RESPA issue unless someone else (other than the consumer) is getting a thing of value in return for the referral. This rebate/discount given to the consumer sounds like a straight up disclosure question which is answered by TRID and applicable state disclosure laws. Of course, the underwriters/appraisers responsible for the lender’s valuation assessment would also need to be apprised of the rebate as part of the borrower’s obligations to provide truthful information to the lender when submitting their application.”


Remember fraud? It has plagued our industry. People in residential lending for less than ten years probably need to be reminded of what can happen, costing companies and individuals millions of dollars.

For example, in 1995, Norwest, Countrywide, and GE were victims to a massive fraud scheme. Norwest was hit for $30MM, Countrywide for $40MM, and I don’t recall GE. All the loans were in SoCal, and the scam features at certain attributes in common. The perpetrator was in cahoots with the appraiser who would represent an empty lot, or a one unit SFR, as a 4-unit, FHA eligible property. They were in cahoots with the title agent, who did the same. Straw buyers/borrowers were found. The lender processed to the maximum FHA dollar amount for a 4 unit property. The lender sold at high MBS Coupons – and this was before Wall Street figured out true prepayment activity, and price compression was nominal. Every price handle was 104 or above so the lender maxed out the property profile AND the secondary transaction. The perpetrator did a few tests with investors to see if any of the systems caught them, and then opened the flood gates until the very last moment, at which point they took their money and themselves to some place like the Philippines.”

Colorado, New York, and California

On June 27, the Colorado and New York Attorneys General led a coalition of 21 state Attorneys General in a letter to congressional leaders opposing HR 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and HR 4439 (“Modernizing Credit Opportunities Act”), which would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC. Buckley Sandler writes, “Specifically, H.R. 3299 and H.R. 4439 would codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party. The letter argues that the legislation “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and it was not Congress’ intention to authorize these arrangements with the creation of the National Bank Act.”

Mitch Tanenbaum writes, “The Colorado Governor signed CO HB 1128 on May 29thHB 1128 is a new privacy and cybersecurity law for all businesses who have clients in Colorado, no matter where they are located. It goes into effect on September 1. While the law exempts businesses that are regulated under GLBA from many of its provisions, there is one aspect where it specifically preempts GLBA and that is in breach notification.

“Colorado now has the strictest breach notification law in country. All companies who do business in Colorado will have to notify victims within 30 days, must notify the AG if the breach affects more than 500 people and notify the CRAs if it affects more than 1,000 people. Unlike Vermont, there are no extensions to this timeline. In addition, the AG can file criminal charges if requested to do so by either the local DA or the Governor. If you do not have a documented and trained incident response program in place, meeting that deadline will be difficult.

“The second legal item is for companies doing business in CaliforniaThe Consumer Right to Privacy initiative has been submitted to the Attorney General for creating a title for this November’s ballot. The initiative collected more than twice the number of signatures needed to get on the ballot, which indicates the level of interest in the subject. The purpose of this initiative is to give California residents rights like the ones that EU residents have as part of the General Data Protection Regulation (GDPR) that went into effect in Europe last month.

“Specifically, some of the rights in the initiate are:

The right to know what information businesses have collected about them and their children

The right to know if the business has sold the information or disclosed it for business purposes and to whom

Requires businesses to disclose if they sell a consumer’s information and allows consumers to tell businesses to stop

Prevents a business from denying, changing or charging more for a service if a resident asks if they sell their information or tells them to stop selling that information

Requires businesses to safeguard that information and holds them accountable in case of a breach where the business did not take reasonable steps to protect that information

The last item is likely to be the source of many lawsuits trying to define ‘reasonable.’ Even if you think what you are doing is reasonable, will a jury think so?

“Assuming this initiative is approved by the voters in November, businesses will need to create processes to document what information they collect, who they share it with, even if it is based on a request that a client made and respond to consumer’s requests for information. This includes people who, for example, visited a web site and filled out a contact form or mini-app, but never applied for a loan.

“These are just two moves to increase the liability to businesses who do not implement best commercial security practices. (For companies who need assistance in doing that, they can contact me for assistance.) We are definitely living in interesting times and between the hackers becoming more sophisticated, businesses putting more data online and the laws making the consequences more severe, the pressure is on businesses to increase their efforts on cybersecurity.  Prevention is way cheaper than reacting after a breach.

(Thank you to George H. for this one.)

A cowboy named Bud was overseeing his herd in a remote mountainous pasture in Montana when suddenly a brand-new 2018 BMW advanced toward him out of a cloud of dust. The driver, a fellow named Cliff in a Brioni suit, Gucci shoes, Ray-Ban sunglasses and YSL tie, leaned out the window and asked the cowboy, “If I tell you exactly how many cows and calves you have in your herd, will you give me a calf?”

Bud looks at the man, who obviously from out of town, then looks at his peacefully grazing herd and calmly answers, “Sure, why not?”

Cliff parks his car, whips out his Dell notebook computer, connects it to his Apple iPhone, and surfs to a NASA page on the Internet, where he calls up a GPS satellite to get an exact fix on his location which he then feeds to another NASA satellite that scans the area in an ultra-high-resolution photo.

Cliff then opens the digital photo in Adobe Photoshop and exports it to an image processing facility in Hamburg, Germany.

Within seconds, he receives an email on his Apple iPad that the image has been processed and the data stored. He then accesses an MS-SQL database through an ODBC connected Excel spreadsheet with email on his Galaxy S5 and, after a few minutes, receives a response.

Finally, he prints out a full-color, 150-page report on his hi-tech, miniaturized HP LaserJet printer, turns to the cowboy and says, “You have exactly 1,586 cows and calves.”

“That’s right. Well, I guess you can take one of my calves,” says Bud.

He watches the man select one of the animals and looks on with amusement as the young man stuffs it into the trunk of his car.

Then Bud says to the young man, “Hey, if I can tell you exactly what your business is, will you give that animal back to me?”

Cliff thinks about it for a second and then says, “Okay, why not?”

“You’re a Congressman for the U.S. Government”, says Bud.

“Wow! That’s correct,” says Cliff, but how did you guess that?”

“No guessing required.” answered the cowboy. “You showed up here even though nobody called you; you want to get paid for an answer I already knew, to a question I never asked. You used millions of dollars’ worth of equipment trying to show me how much smarter than me you are, and you don’t know sh*t about how working people make a living – or about cows, for that matter. This is a herd of sheep. Now…give me back my dog.


Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “With Regulations, Be Careful What You Wish For.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman