Source: https://www.rskcompliance.com/2017/04/
Timestamp: 2019-04-24 13:48:10+00:00

Document:
The Bank originates a mortgage loan and sells it but retains servicing. Is this considered a service transfer under Regulation X?
If the Bank sells loans to investors after origination, with the servicing to be done by the purchasing entity, would this be considered a transfer under Regulation X?
Under Regulation X, if the Bank sells a mortgage loan it originates but retains servicing, this is not considered to be a service transfer. If the Bank sells a mortgage loan to an investor, however, and the servicing will be handled by the purchaser, this will be a mortgage servicing transfer for the purposes of the regulation. In either case, the transfer of title will require the purchaser to notify the consumer of the transfer.
Under Regulation X, which implements the Real Estate Settlement Procedures Act (“RESPA”), “servicing” means receiving any scheduled periodic payments from a borrower pursuant to the terms of any federally related mortgage loan. This includes amounts for escrow accounts, and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in this section, servicing includes making payments to the borrower. 12 CFR §1024.2.
Regulation X requires a lender to provide an applicant with a servicing disclosure statement within three business days of an applicant and a notice of transfer of loan servicing at least 15 days prior to the effective date of the transfer. 12 CFR §1024.33(a),(b)(3).
With respect to the first question, if the Bank sells the loan but retains the servicing (i.e., if the borrower is required to continue making scheduled periodic payments to the Bank, including escrow payments), no transfer of servicing has taken place and no notice of transfer of loan servicing needs to be given.
The requirement of Regulation X for the lender to provide a servicing disclosure statement only pertains to reverse mortgages. 12 CFR §1024.33(a). For loans subject to the TILA-RESPA Integrated Disclosure rules, the intent of the lender to service the loan must be disclosed in the Loan Estimate, which is provided within three business days of receiving the application. 12 CFR §1026.37(m)(6).
As to the second question, if the Bank sells the loan and the servicing will be done by the purchaser (i.e., if the borrower is required to make scheduled periodic payments to the purchaser, including escrow payments) then a transfer of servicing has taken place and a notice of transfer of loan servicing must be given.
These questions are concerned with the applicability of the mortgage servicing transfer requirements of Regulation X. Regulation Z also has requirements regarding transfers of ownership, but these must be fulfilled by the purchaser of the mortgage.
Under Regulation Z, when closed-end consumer credit secured by a dwelling or real property or open-end consumer credit secured by the principal dwelling of a consumer is sold or assigned, the person who obtains legal title to the debt obligation must mail or deliver the required disclosures concerning the transfer before the 30th calendar day following the date of transfer. 12 CFR §1026.39(a),(b).
In the situations posed by both questions, the purchase or assignment of legal title to the obligation will require the purchaser to notify the consumer, whether or not the servicing of the loan is being done by the purchaser.
The son of a director of the Bank has requested a loan from the Bank which will be secured by his residence, and which will be used to pay off the loan from the director. The residence had been purchased by the son with the loan from the director. What are the Regulation O implications?
The loan from the Bank to the son of the director is subject to an exception from the tangible economic benefit rule, provided that the loan from the director to the son bore a reasonable relationship to the value of the property purchased.
An “insider” for Regulation O purposes is an executive officer, director, or principal shareholder of a financial institution or any related interest of such a person. A “related interest” is a company or political campaign controlled by that person. 12 CFR §215.2(h), (n).
Limitations on the total amount of credit extended to the insider, as per 12 U.S.C. 84. (i.e., 15 percent of a bank's unimpaired capital and surplus. A bank may lend an additional 10 percent of its unimpaired capital and surplus if the loan is secured by “readily marketable collateral” [e.g., listed securities and gold bullion]. Loans secured by deposits with the bank or by obligations of the United States may be made in an unlimited amount). 12 CFR §215.4(a)(1), (b), (d).
The director would be an insider of the Bank, but the son of the director would not be considered a related interest of the director, as he is not a company or political campaign controlled by the director.
In this case, the director would ordinarily be considered the recipient of the loan under the tangible economic benefit rule, if the son transferred the proceeds of the loan to him. There is an exception to the rule, however, by which an extension of credit is not considered made to an insider if the proceeds of the extension of credit are used in a bona fide transaction to acquire property, goods, or services. 12 CFR 215.3(f)(2).
It is our opinion that the exception to the tangible economic benefit rule should apply in this case regardless of the manner in which the son retired the original loan from the director. The exception requires that an extension of credit be used in a bona fide transaction to acquire property, goods, or services in order to prevent transactions from qualifying for the exception when the borrower from the bank serves merely as a nominee for the insider. This would occur if the borrower from the bank transferred the proceeds of the bank loan to the insider without adequate consideration. In this case, in the absence of any evidence that the amount of the original loan from the director (which the loan from the bank was used to repay) was inflated beyond the actual and reasonable construction costs for the son's house, the Board's concern that the exception to the tangible economic benefit rule not be used to shield nominee loans would be satisfied.
The Federal Reserve Board further noted that the transaction would be identical, in terms of the economic relationships established among the parties and the credit risk assumed, if the director had sold the son's note to the bank without recourse. The sale or discount of a promissory note to a bank, without recourse to the transferor of the note, is treated under Section 215.3(b)(7) of Regulation O as the purchase of an asset by the bank and not as an extension of credit to the transferor. Federal Reserve Board, Legal Interpretations, December 10, 1998.
When applying this ruling in this instance, the Bank should determine whether the loan from the director to his son bore a reasonable relationship to the value of the property acquired by the son. If it does, then the loan to the son by the Bank, the proceeds of which would be used to pay off the loan to the director, would be analogous to a loan for the purchase of the residence. The Bank should document this fact in its minutes, along with the terms and conditions of the loan.
Given that the determination of whether this exception to the tangible economic benefit rule is applicable rests on a question of fact, we believe that the better practice would be to treat the presentation of the loan as one which is potentially to the benefit of the director. As such, the director should excuse himself from the meeting and take no part in the discussion or decision by the Board. The minutes of the Board meeting should also reflect this.
A commercial loan for $4.9 million is to be made for the purchase of 100 condominium units. Does this trigger the Regulation B requirement to provide a notice of the right to receive an appraisal on all 100 units?
The creditor does not have to notify the applicant of the applicant’s right to receive copies of the appraisals, since the condominium is not a dwelling for the purposes of the regulatory requirement.
Under Regulation B, a “creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.” 12 CFR §1002.14(a)(1). The term “dwelling” means a residential structure that contains one-to-four units, whether or not the structure is attached to real property. It includes, but is not limited to, an individual cooperative or condominium unit. 12 CFR §1002.14(b)(2).
With respect to the example raised by a creditor and two national creditor associations—three four-unit buildings operated as a 12-unit apartment complex, the text of the rule makes clear that a four-unit residential building would be a dwelling, but a 12-unit apartment complex is not. Thus a transaction secured by a four-unit residential building would be covered by the rule, but a transaction secured by the entire 12-unit apartment complex would not be. Because this question can be analyzed in a straightforward manner by reference to the text of the rule, the Bureau does not believe that further commentary is needed for this to be apparent. Similarly, the definition of 'dwelling' refers to the example of an 'individual condominium or cooperative unit,' but not to a cooperative building as a whole, even though such a building may contain several individual units. 78 Federal Register 7215 (January 18, 2014), 7236, footnote 79.
As such, an apartment building with four units would be covered by the appraisal rule, but one with more than four units would not. A condominium building with multiple units would be analogous to an apartment building.
No. Pursuant to Section 1002.14(b)(2), the ECOA Appraisal rule applies to any credit facility involving a dwelling, which means a residential structure that contains one to four units, whether or not that structure is attached to real property. This language is crafted in the singular and is intended to exclude applications involving multifamily dwellings or inventories of homes. If more than one dwelling secures a credit facility, the credit facility is exempt from the rule.
In this case, a condominium with 100 units would not be “a dwelling” for the purposes of the regulatory requirement, since it is secured by more than four residential units. Thus, the requirement to provide a copy of the appraisal or to notify the applicant of the applicant’s right to such an appraisal would not apply.

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