Reprinted with permission of Blank Rome Comisky & McCauley LLP "Consumer Lending/Retail Banking Update." Blank Rome is a national law firm with offices in Pennsylvania, New Jersey, Delaware, Maryland, Washington, DC and Florida and its Consumer Financial Services/Retail Banking Group provides advice and counsel to mortgage companies, banks, thrifts, real estate professionals and all others involved in residential mortgage finance and other areas of the law. For further information, contact the Group's chairman, Paul H. Schieber at 215/569-5567 or schieber@blankrome.com.  http://www.blankrome.com/

On April 3, 1998, the Federal Reserve Board issued a final rule implementing changes to the model forms for notices of adverse action under Regulation B and the Fair Credit Reporting Act. The amendments are in response to 1996 amendments to the Fair Credit Reporting Act which were effective September 30, 1997.

When adverse action is taken against a consumer based upon information from a consumer reporting agency, FCRA now requires the following additional disclosures, which have been incorporated into the model forms of adverse action notice under ECOA: (a) a telephone number for the consumer reporting agency (toll-free if the agency compiles and maintains files on consumers nationwide); (b) a statement that the consumer reporting agency did not make the decision to take the adverse action and cannot state the reason why the action was taken; (c) a statement of the consumer's right to a free copy of their credit report from the consumer reporting agency, if a request is made within 60 days of receipt of the adverse action notice; and (d) a statement of the consumer's right to dispute with the consumer reporting agency the accuracy or completeness of the credit report.

The Board also considered issuing guidance on the type of notice required where adverse action is taken based on a consumer report received from a creditor's affiliate. However, after reviewing the comments to this proposal, the Board has decided that the issue would be more appropriately addressed in an interpretation of FCRA. Accordingly, the Board and the Federal Trade Commission anticipate that they will issue jointly for public comment a proposed interpretation of FCRA designed to clarify the disclosures that are necessary when adverse action is taken based upon a consumer report obtained from an affiliate.

In the interim, institutions may provide either the consumer reporting agency or third party notices for adverse actions based on a consumer report received from an affiliate. Finally, the timing requirement has been clarified for adverse action notification based on information from an affiliate that is based on neither a consumer report nor the affiliate’s own experience. Under the Fed’s final rule, a consumer may obtain the adverse information if it makes a written request within sixty days of receipt of an adverse action notice.

The Pennsylvania Insurance Department has published new regulations expanding the current credit insurance regulations to cover credit involuntary/voluntary unemployment insurance, and to amend the rate adjustment procedure. The rules will apply to life insurance companies, and casualty insurance companies marketing credit life, accident and health, and unemployment insurance in Pennsylvania.

Among the new provisions governing unemployment insurance, are the following:

Michigan Court Holds that a Yield Spread Premium Must be Disclosed as a Finance Charge

In a rather disturbing decision from Michigan, a federal district court has held that a lender's payment to brokers of a "yield spread premium" must be identified as a finance charge in the TILA disclosures provided to borrowers.

In Noel v. Fleet Finance, Judge Gilmore of the Eastern District of Michigan held that a yield spread premium paid by Fleet to various brokers for procuring loans of a certain interest rate was a charge "payable directly or indirectly by the consumer" and, therefore, should have been disclosed as a finance charge. Using rather circuitous reasoning, the court disregarded the then-existing Commentary to Reg. Z which specifically provided that a yield spread premium which is already included in the finance charge as interest should not be double-counted as a separate finance charge. The court found the Commentary inapplicable; it held that the brokers were not actually brokers, but instead were "creditors" because the brokers tablefunded the loans. The court also noted that while the Commentary indicated that interest and a yield spread premium should not be double-counted, "it does not appear to require that the double-counting be avoided by a non-disclosure of the yield spread premium."

The court's reasoning ignores the fact that the purpose of the TILA disclosures is to identify for borrowers the actual cost of credit. If, as the court found, both the interest and a yield spread premium need be disclosed as a finance charge, the finance charge could never accurately reflect the actual cost of credit in such a circumstance.

This decision should serve as a reminder to those in the lending community that courts may disregard what the lending industry interprets as clear guidance from the Federal Reserve Board on Reg. Z and TILA issues.

No one disputes that RESPA prohibits receiving excess, referral, or unearned fees in all "federally related mortgage loans", but that RESPA's coverage does not extend to secondary market transactions involving a bona fide transfer of a loan. It has long been recognized that HUD will look to the true source of the funds to determine whether a loan is, in fact, a secondary market transaction. Therefore, a table-funded loan closing in the broker's name with a contemporaneous advance of the loan funds from a lender and assignment of the loan to that lender, is not a secondary market transaction, and is subject to RESPA's provisions.

But the dissent in Chandler v. Norwest Bank Minnesota, N.A., a 2-1 decision from the Eighth Circuit (March 3, 1998), has suggested expanding the coverage of RESPA to include those transactions in which a commitment to buy the loan post-closing is entered into before the closing regardless of the true source of the funds at closing.

The Chandlers had closed a loan with Custom Mortgage, Inc. to refinance their mortgage, which loan included a 2% "loan origination fee" and a 3% "loan discount fee". The funds for the loan were obtained by Custom through its pre-existing line of credit with CoreStates Bank. The loan was subsequently purchased by Equicon Corporation under a Purchase and Sale Agreement among Equicon, Norwest Bank Minnesota, N.A., and Custom, and later repurchased by Access Financial Lending Trust, each time held in trust with Norwest, as trustee. The Chandlers claimed that the Agreement demonstrated that Norwest as trustee, was the true source of the funds. The majority held that even though an agreement existed to purchase mortgage loans, including the Chandler's, the loan was funded by Custom's funds borrowed under a line of credit, and sold three days later to Equicon, with the purchase price paid by Equicon used by Custom to repay its balance to CoreStates. In fact, the Eighth Circuit affirmed the District Court's imposition of Rule 11 sanctions against the Chandlers' counsel, stating that it produced no evidence that Norwest was involved in the transaction; that Custom table-funded the transaction; or that Norwest paid Custom excess, referral, or unearned fees.

A strong dissent written by Judge Gibson, however, may pave the way for future plaintiffs. Judge Gibson pointed out that not only was there a pre-existing Purchase and Sale Agreement, but there was also a corresponding agreement between Custom and Equicon in place before the Chandler's loan closed, by which Equicon would transfer funds to Custom's CoreStates account to cover the loan amount shortly after the Chandler's loan closed. This, argued Judge Gibson, is not the type of bona fide secondary market transaction contemplated by RESPA. To be bona fide, the mortgage lender makes and finances loans from its own funds, holding the loans for varying periods of time with the option to sell, usually on the "open market". The loan in question, however, was transferred in a "preordained procedure", with Custom's full knowledge that it would be transferred in a matter of days. Such a transaction, he argued, is a "sham", and a "pure circumvention...purposely designed to avoid coverage under RESPA".

For now, a lender's best practices are still to conform to RESPA's current rules and policies. But, will the Chandler dissent signal a new wave of litigation?