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1 Timely Changes Impacting Financial Institutions July 14, 2015 Slide 2 2 Christopher K. Loftus (319) 896-4081 cloftus@simmonsperrine.com Graham R. Carl (319) 896-4061 gcarl@simmonsperrine.com Todays Presenter(s): Slide 3 3 Mortgage Reform Continued: A Review of the New TILA- RESPA Integrated Disclosure (TRID) Iowas Garnishment Statute and the Recent Changes Following the Gemini Decision Lender Liability Continued: Bankruptcy and Receivership Concerns Agenda: CLE Notice: This webinar is an accredited program under the regulations of the Iowa Supreme Court Commission on Continuing Legal Education. This program will provide a maximum of 1 hour of regular credit toward the mandatory continuing legal education requirements established by Rules 41.3 and 42.2. This webinar is also approved for 1 hour of Federal continuing legal education. [Activity # 191933] Slide 4 4 Mortgage Reform Continued: A Review of the New TILA-RESPA Integrated Disclosure (TRID) Presenter Name: Christopher K. Loftus 4 Slide 5 5 How Did We Get Here? Loose underwriting standards. Failure to verify income. Homeowners borrowing more than they should. Lenders allowing them to do so. 5 Slide 6 6 The Dodd-Frank Act Financial Reform Creation of CFPB 2014 Mortgage Rules Integration of TILA / RESPA Disclosures 6 Slide 7 7 2014 Mortgage Rules Escrow Account Rule Ability-to-Repay / Qualified Mortgage (QM) Rule HOEPA Rule Mortgage Servicing Rule Loan Originator Compensation Rule ECOA Valuations & TILA HPML Appraisals 7 Slide 8 8 2015: Its Not Over 8 Slide 9 9 Overview of the TILA-RESPA Rule Effective October 3, 2015 Applies to All Closed-End Mortgages Informs Consumer of the Cost of the Mortgage Use Clear Language For Consumer to Locate Key Information 9 Slide 10 10 Effective Date Applications received on or after October 3, 2015. GFE, HUD-1, TILA forms for all applications received up until October 2 nd. Other restrictions effective October 3 rd : Imposing fees before delivery of Loan Estimate Providing estimates of fees and costs before Loan Estimate Requiring additional documentation verifying application 10 Slide 11 11 Coverage Closed-end loans secured by a dwelling. Construction loans now included. Excludes: HELOCs Reverse mortgages Chattel-dwelling loans (e.g., mobile homes) Excluded loans will continue to use old forms. 11 Slide 12 12 Loan Estimate Disclosure Replaces RESPA GFE and initial TIL disclosure. Must be delivered within three (3) days of receipt of application. Used for all federally related mortgage loans. Good faith estimate of credit costs and transaction terms. General information, loan terms, projected payments, and costs at closing. Additional information about the loan. 12 Slide 13 13 Slide 14 14 Slide 15 15 Slide 16 16 Delivery of the Loan Estimate Delivered three (3) business days after application Seven (7) business days before consummation Can be waived for bona-fide personal financial emergency Mail or hand delivery Mortgage broker can deliver on behalf of creditor Receipt of Application Six pieces of information Creditor to provide a good faith estimate of costs if unavailable 16 Slide 17 17 Good Faith Requirements and Tolerances Creditors may charge more than Loan Estimate Permitted by TRID Within tolerance levels Changed circumstances Creditors may charge excess fees without any tolerance Prepaid interest; property insurance premiums; amounts placed in escrow Services in which the consumer is permitted to shop Charges paid to third-party service providers for services not required by creditor 17 Slide 18 18 Good Faith Requirements and Tolerances (cont) Ten Percent (10%) Cumulative Tolerance Recording Fees Charges for Third-Party Services (not paid to creditor / shopped by consumer) Zero Tolerance (more than the amount disclosed) Fees Paid to Creditor, Mortgage Broker, or Affiliate Fees to a Third-Party where Consumer is not allowed to shop Transfer Taxes Refund to Consumer if Thresholds Exceeded at Closing 18 Slide 19 19 Revisions and Corrections to Loan Estimates Changes to a Loan Estimate Changed circumstance leading to increase in settlement charges. Changed circumstance leading to consumers eligibility. Requested changes to loan terms by consumer. Rate not locked. Consumers intent to proceed more than 10 days after delivery of Loan Estimate. Creditor permitted to provide a revised Loan Estimate 19 Slide 20 20 Timing for Revisions to Loan Estimate Revised Loan Estimate must be delivered within 3 business days after receiving new information. Restrictions Revised Loan Estimate must be delivered before Closing Disclosure Four (4) business days prior to consummation (7 days if mailed / electronically) 20 Slide 21 21 Closing Disclosures Replaces the HUD-1 and the final TIL Disclosure. Must be provided to consumer three (3) business days before closing. If Closing Disclosure changes, creditor must provide revised disclosure and a new 3-day waiting period applies. Required to be used for all federally related mortgage loans. 21 Slide 22 22 Slide 23 23 Slide 24 24 Slide 25 25 Slide 26 26 Slide 27 27 Delivery of Closing Disclosure Must be delivered three (3) business days before consummation. Hand delivery Mailed or E-mailed (must add additional 3 business days) Settlement agent can provide disclosure to buyer. Settlement agent must provide disclosure to seller. Copy of buyers disclosure if it has sellers information. Separate disclosure containing only sellers information. Must be provided on or before consummation. Consummation = when consumer becomes obligated. 27 Slide 28 28 Revisions and Corrections to Closing Disclosures Changes Requiring New Disclosure APR inaccurate Loan product changes Prepayment penalty is added 3 business days required Changes Not Requiring New Disclosure Any other change not falling into the 3 categories above No new waiting period Changes After Consummation New disclosure if change within 30 days Must be provided within 30 days 28 Slide 29 29 Additional Requirements and Prohibitions Limitation on Fees Creditor cannot charge fees until provides loan estimate and receives consumers intent to proceed. E.g., application and appraisal fees, underwriting fees. Creditor can charge a reasonable fee to obtain credit report. Effective August 1 st regardless of when application is received. 29 Slide 30 30 Iowas Garnishment Statute and the Recent Changes Following the Gemini Decision Presenter Name: Christopher K. Loftus 30 Slide 31 31 Iowas Garnishment Rules Effective July 1st Phil New v. Gemini Capital Group, 859 F.Supp.2d 990 (S.D. Iowa 2012) In Gemini, a debtor raised a claim under 42 U.S.C. Section 1983 stating that the debt collector and its law firm violated the his 14 th Amendment due process rights by not providing sufficient notice when garnishing the debtors bank account. Under the former Iowa Code Section 642.14, a debtor was only provided 10 days written notice before the funds were condemned, instead of notice at the time of the garnishment of a debtors asset. 31 Slide 32 32 Iowas Garnishment Rules Effective July 1 st (cont) The Gemini Court held Iowas prior version of the garnishment statute was unconstitutional as it failed to provide sufficient notice of due process to judgment debtors. Specifically, the statute failed to provide the debtor with expedient notice of the garnishment proceeding which would allow the debtor to assert exemption claims to the assets being seized at a hearing before the court. 32 Slide 33 33 2014 Legislative Changes In response to the Gemini decision, the Iowa Legislature in 2014 revised the garnishment statute to include Iowa Code 642.14A. This section requires the sheriff was required to serve notice upon the debtor within seven (7) days of serving the garnishment upon a garnishee. The 642.14A Notice informs the debtor of their right to claim the property as exempt from execution or garnishment, and their right to be heard in court. Further, the 642.14A Notice advised the debtor that if they failed to file a timely motion, the debtor would lose their rights. 33 Slide 34 34 2015 Legislative Changes Additional changes went into effect on July 1, 2015 For garnishments other than wages, judgment creditors, and not the sheriff, are now required to serve the Section 642.14A Notice on the debtor within seven (7) business days of the sheriff filing the garnishees answers with the Clerk of Court. As before, service can be completed by certified mail and regular U.S. Mail, or through personal service. Unlike before, service does not need to be made upon the debtors attorney in addition to the debtor. 34 Slide 35 35 2015 Legislative Changes (cont) The Iowa Legislature added Iowa Code 642.14B for wage garnsihments, which now expressly requires the employer to deliver the Section 642.14A Notice to the debtor/employee. Service is completed through mail, electronic means, or personal service. In answering the sheriffs interrogatories, the employer will state whether it delivered the 642.14A Notice to the debtor/ employee. 35 Slide 36 36 Lender Liability Continued: Bankruptcy and Receivership Concerns Presenter Name: Graham R. Carl 36 Slide 37 37 Bankruptcy Issues Equitable Subordination Section 510(c) of the Bankruptcy Code If the lender engages in fraud or other grossly inequitable conduct that results in harm the Borrower or third parties it could have its claim equitably subordinated to the claims of other creditors. (1) The claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Act. Example: Bergquist v. First National Bank (In re American Lumber Co.), 5 B.R. 470 (D. Minn. 1980) 37 Slide 38 38 Bankruptcy Issues Preference Claims Section 547 of the Bankruptcy Code A lender can be held liable under section 547 of the Bankruptcy Code if it receives payment from a borrower within 90 days of a bankruptcy filing (or a year if it is deemed to be an insider). The definition of preference and the defenses to preference payments are in section 547 of the Bankruptcy Code. Subtopic 2. Example: Sarachek v. Luana Savings Bank 38 Slide 39 39 Bankruptcy Issues Fraudulent Conveyances Sections 544 and 548 of the Bankruptcy Code Lender may be liable for payments received within two years of borrowers declaring bankruptcy if lender accepted payments made to defraud other creditors. Badges of Fraud- Things the court looks at to determine if conveyance is fraudulent. (1) actual or threatened litigation against the debtor; (2) a transfer of all or substantially all of the debtor's property; (3) insolvency on the part of the debtor; (4) a special relationship between the debtor and the transferee; and (5) retention of the property by the debtor after the transfer. In re Houston, 385 B.R. 268, 271-72 (Bankr. N.D. Iowa 2008) 39 Slide 40 40 Statutory Liability Withholding taxes A lender may be directly liable if they are the responsible party 26 USC 6672 For smaller banks look at level of control over debtor Failure to withhold must be willful Lender may also be indirectly liable payroll taxes where either: The lender directly pays the employers employees, or; The lender releases funds to the employer with actual notice or knowledge that the employer will not or cannot make timely payment of the payroll taxes. 26 USC 3505 Lender is secondarily liable, so the lender only pays if the primary responsible party is unable to pay. Bellus v. U.S., N.D.Cal.1995, 198 B.R. 792 40 Slide 41 41 Statutory Liability Securities Law Violations Section 20(a) of the Exchange Act: Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable (including to the Commission in any action brought under paragraph (1) or (3) of section 78u(d) of this title), unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. 78t Again, may be an issue where lender controls the daily affairs of debtor. Example: lender takes control of brokerage firm selling unlicensed securities. Lender may be liable for knowingly providing substantial assistance to a party it knew to be violating securities law. 41 Slide 42 42 Statutory Liability CERCLA CERCLA is the Comprehensive Environmental Response, Compensation, and Liability Act. The owner or operator is responsible for the disposal of hazardous substances There is a specific exception for a lender that, without participating in the management of a vessel or facility, holds indicia of ownership primarily to protect the security interest of the person in the vessel or facility. Like liability under the Exchange Act, the level of control exerted by the lender is the key determination 42 Slide 43 43 Statutory Liability Violation of Fair Labor Standards Act The FLSA makes it illegal to sell goods that are made in the US by workers making less than minimum wage, which are known as hot goods. Lender may be liable for selling hot goods Example: borrower defaults and lender forecloses on lien on inventory. If the workers were not paid while making the inventory then it is illegal for lender to sell those goods. 43 Slide 44 44 Statutory Liability WARN Act WARN act requires that certain employers warn employees about closing manufacturing plants. A Lender may be responsible for unpaid wages under the WARN Act. Only when a lender becomes so entangled with its borrower that it has assumed responsibility for the overall management of the borrower's business will the degree of control necessary to support employer responsibility under WARN be achieved. Adams v. Erwin Weller Co., 87 F.3d 269, 272 (8th Cir. 1996 ) 44 Slide 45 45 Christopher K. Loftus (319) 896-4081 cloftus@simmonsperrine.com Graham R. Carl (319) 896-4061 gcarl@simmonsperrine.com Questions? Slide 46 46 Disclaimer: This presentation is designed and intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired. 46