- Hello, my name is Erica Minchella. I practice law in suburb of Chicago, Illinois, and my practice is concentrated in real estate transactions and litigation. My practice pretty much was defined by what happened in 2008 with the crash of the economy that was really based on what happened in the real estate market. I had watched a transaction proceed forward in 2006 for a client who was trying to pull out her equity in a condominium. She had two friends purchase the condo from her for what I thought was an exorbitant amount. She was able to get the equity out of the property, but within months the economy crashed, she was unable to continue making the payments to the friends who had made the purchase and allowed her to continue living there. They weren't able to make the mortgage payments and wound up in default. The woman who had closed on the transaction wound up with capital gains liability. And when I was sitting at the closing, watching what was happening, I know that my view of the transaction was, this is crazy, how are we doing this? Why are we doing this? My job was simply to handle the sale transaction and not advise anybody on what the future might be regarding that transaction, no one was interested in my thoughts about that, they wanted to cash out, which was so easy to do in 2007. But I know that my entire view of the transaction, was that this just should not be happening. Fast forward to 2008, I actually moved my office April 1st, of 2008, and I referred to it as my own personal April Fool's joke 'cause at the time I was just doing real estate transactions, and there were none to be had, my phone did not ring, no one wanted me to represent them in a real estate transaction. So I started doing foreclosure defense work and I started doing short sales. And I developed my practice to revolve around whether the economy was good or bad, I would have business going forward. In 2008, when this crash happened, it became very apparent that the type of lending that had been going on in the 2005, '06, '07 period with loans that we referred to as liar loans, if somebody could fog a mirror, they could get a loan, loans that were negatively amortizing, that the situation was unsustainable. And when it became clear that the transactions were not sustainable and that the loans were not sustainable, the Congress got involved in a number of different ways. One of those being the Dodd-Frank Act, which created the Consumer Financial Protection Bureau or what I will refer to throughout the rest of this conversation as the CFPB. As a transactional lawyer, when we first started looking at some of the changes that the CFPB had required, the creation of the Closing Disclosure, the CD, I looked at that as another layer of government control and an attempt to explain the closing process through documents that I couldn't explain to my clients. I always had found that the HUD-1 that the way the figures had been set up in the HUD-1 made sense and were easily explainable to the client. When I looked at the CD, I found it difficult to explain, it didn't flow in the way that I thought would be easy for a buyer to understand, for a borrower to understand. And so my approach to closings was to look at the bottom line on the CD and look at the bottom line on the HUD-1 or master statement or whatever they wanted to call the document at that point, make sure that the bottom line was the same and would explain the transaction through the HUD-1 or master statement rather than through the CD. I pretty much left the explanation of the CD to the lender because it really was their liability. They were the ones who had to provide their document, three days prior to a closing, they had to make sure that their figures were essentially correct and were at least higher than what they anticipated the closing to be rather than lower. I didn't appreciate at that time, what the CFPB was going to be doing to help borrowers. I didn't see the overall protections that the CFPB was trying to give consumers, generally. And now years later, about 10 years later, in retrospect, I see that the CFPB really did have a plan for how to make sure that consumers were better protected in the uneven negotiations that they had with lenders. The purpose of this course, of this discussion, is going to be about the CFPB news from 2021, '22 that have impacted real estate. There are about five areas of impact. We're gonna talk about an announcement about the Fair Credit Reporting Act and it's non-preemption of state laws. The prosecution of discriminatory lending practices against a lender in the Northeast. We're gonna talk about the director's attitude toward the clarification of rules and regulations. We're gonna talk about the explanation of the rule pertaining to the transition away from LIBOR for determining rates on adjustable loans, and most recently, the CFPB has had a letter written to them by 103 consumer organizations about 10 or 11 of which are residential organizations or organizations that deal with residential issues about the unequal bargaining or resolution issue that occurs when loan documentation requires arbitration, mandatory arbitration instead of allowing a consumer to go to court to resolve their issues. So that's gonna be the discussion that we're going to have today. First of all, let me give you a little bit of history about the CFPB. It was authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in 2010. It occurred after the crash that happened in 2008, 2009. The purpose of the CFPB has been to protect consumers from financial predators, criminals, and opportunists. For the real estate market, it's forced lenders to be more transparent in their lending practices, clarifying loan costs, which is how we view the Closing Disclosure and reigning in some abusive practices like the liar loans. One of the major issues that I see is the separation between the lender and the appraiser. The lender can no longer have in-house appraiser who appraises the property at whatever the contract price is or whatever the lender asks them to appraise it at, that separation between the lender and the appraiser has been a major change in the way the CFPB has guided real estate transactions. We're also no longer seeing secret seconds. And the way transactions have to proceed are on a far more transparent and protected basis for the borrower. And the CFPB is an independent agency, we will talk about that a little bit more later on. Some of the directors of the CFPB have included Elizabeth Warren, she was the original director, although there was a different name for it at the time that she started running the agency. Richard Cordray was a director who had been there for some time and eventually left to run for governor of Ohio, which I believe he did not accomplish. Mick Mulvaney was a director of the CFPB, and I believe that was at the same time that he was the general counsel for President Trump, he was doing both jobs simultaneously. The current Director is Rohit Chopra and he seems to be very consumer-based in this. There certainly are concerns that the agency can vary in its approach based on who was running it. And we'll talk more about that later on, or we'll talk about it right now. There was a Supreme Court challenge to the CFPB recently, Seila Law versus CFPB challenged the right of the CFPB to exist. The Supreme Court allowed the CFPB to stand, but now allows that any director that is named is subject to removal at the will of the president. So the approach that is used by the CFPB can very much reflect the attitudes of the president at the time that a director is chosen. Each new administration can directly influence the regulatory and enforcement focus of the CFPB because the directors may now be replaced at will. Our first topic is gonna be about the Fair Credit Reporting Act or FCRA. Generally, it is not considered to be preempted by state laws. In fact, the current director has issued a statement that he believes that it is important, that state laws that restrict further what can be reported by credit reporting agencies will not be preempted by the CFPB, as long as those laws are more restrictive, not less restrictive. It's important to understand this because when a state forbids reporting agencies from including information about medical debts, evictions, arrest records, rental arrears, and a consumer report, that can be very important for a consumer's ability to go and rent a property again, to not be deemed to be a delinquent payer, because their medical bills may be late. And that could be strictly based on the insurance payments that should be made to the medical provider. It can be based on a personal injury suit that might cover those expenses. So not allowing those expenses to be deemed to be a debt that is reportable on a credit report can be pretty significant for the state. One of the things we've seen since COVID, at least in Illinois, is a hiding of court records regarding evictions. Makes it very difficult for an attorney, who's trying to represent somebody in one of these proceedings to be able to look at court records, unless they go down to the courthouse to look at the documentation. But because these records aren't reported, I have represented landlords in the past. And one of the things that I've done before drafting a lease on behalf of a landlord is to check an eviction record. I wanna make sure that my client is well protected against somebody who has repeated evictions on their record. But in Cook County now, the entirety of the eviction records are now sealed, whether it's commercial or residential. And so it has become very difficult to handle these kinds cases without going to the courthouse, they're not available online. Neither the docket itself, the list of proceedings in the case, nor the actual records for the proceeding. So the fact that Illinois has chosen to seal these records means that it will not be reported on credit reports and people who are dealing with debtors, who don't have those records available to them, and won't be reported on credit reports may be something of a disadvantage in terms of knowing that borrowers or that tenants situation. But the point being that FCRA doesn't control what the state is allowed to do. I of course have some mixed feelings on this, because it really depends on which side you are representing. And there are sometimes small building landlords who working with a tenant who doesn't see the importance of paying their rent on a regular basis can be a real problem, because you have so little way of knowing, that you have a problem tenant. You may be looking at the tenant's credit score in order to make that determination. You may have, the landlord may have a minimum credit score that they will accept, but knowing whether somebody is a habitual, non rent payer can be an issue as well. COVID had some interesting impact on tenants. I know of one story where the tenants chose not to pay their rent. It was a very prospective-informed decision. They used whatever funds were available from the state to let the landlord be paid. But they knew that they would not be pursued for the rent, and they made the choice not to make the payments and eventually moved outta state because they had saved enough money to afford to move to another state, they had the money now to move, they found jobs elsewhere, and the landlord was just left with whatever they were able to garner from state or county payments. To me, that seems rather unfair to the landlord. I know that the tenants felt that they were justified in their nonpayment and were able to move on to a different life for themselves, but there are probably many instances of that same situation that tenants were able to take advantage of. And again, there's nothing that will appear on their credit record because of that nonpayment. So when they start their life over again in another state, all that will appear, will be the information that pertains to their credit score on other bills. The next issue I wanna talk about is the fact that today, in 2022, in fact, in July of this year, the CFPB and Department of Justice announced an enforcement action on red line loans. I thought we were well past that for any lender, but it's not the case. Trident Mortgage Company was accused of and settled with CFPB and DOJ regarding the handling of loans with illegal redlining. The settlement itself provided that there would be 18.4 million paid to a loan subsidy program, that 4 million would be paid to the CFPB's Victim Relief Fund. And that 2 million would be payable to an advertising program aimed at minorities who had been redlined. The intent of the subsidy program is to increase nondiscriminatory access to credit. The Trident is now required to offer loans to all qualified applicants on a more affordable basis for purchases in minority and majority neighborhoods. This settlement and this talk were prepared before a number of increases in interest rates, I don't know what impact the increase in interest rates and therefore mortgage rates will have on this settlement. We may not see more of the real impact until interest rates start coming back down again. The loan subsidies are also supposed to include closing cost assistance, down payment assistance, payment of mortgage insurance premiums, which can be very costly for new homeowners, and to assure that the lender has at least four offices located in majority/minority neighborhoods. The way that they found that Trident had been acting in a manner that showed that they were redlining, was that the offices that they had were mostly in neighborhoods where majority, the majority of the owners were White, middle class, the majority minority areas were Black and Latino and other minorities had very few offices at all, they were not manned. The advertising was directed not only at the type of borrower they wanted to see, but also that they were directed in such a way as to discourage people who were not the type of people who they wanted to lend to. The victims relief fund created a civil penalty fund for payments, for consumers who are identified as having been harmed by a violation and where civil penalties have been imposed, that they would not otherwise get compensation, but for the relief fund. The advertising program required Trident to spend two million to fund advertising for the purpose of generating applications in the redlined areas, as well as to take other steps, to make sure that majority minority areas were addressed in the Philadelphia area. It's unclear what credit needs might be referring to, for a mortgage company outside of application of mortgages, but the CFPB may well issue something that clarifies that. Because Rohit Chopra has indicated that he wants to make sure that rules that the CFPB issues and the regulations that help define those rules are clarified in a way that make it much more difficult for lenders to skirt the rules. He felt that the way that the rules had been issued previously was so complicated that it really gave lenders an opportunity to interpret the rules. And he wanted to make sure that those interpretations were contained better. He wanted to make sure that the rules were simplified to a way that they couldn't be subject to interpretation. He felt that large law firms and larger lenders were taking advantage of the complexity of the way the rules were written, so as to interpret them to address any ambiguity in favor of the lender, rather than in favor of the consumer. He was hoping that by making the rules very simply stated that those kinds of attorneys couldn't address the ambiguities quite as effectively, that it would wind up in favor of the borrower instead of the lender, because there wasn't as much room for interpretation. For those of us who were handling real estate transactions before the Closing Disclosure statements were required, can remember that there was behavior that was allowed, was seen like secret seconds, and a lack of clarity as to what costs would be, that were pretty consistent with the manner in which a real estate transaction would proceed forward. In Illinois, we generally recommend that attorneys attend the closing and represent a borrower at closing so that the documentation and the costs are clear, but in many states, the title company is handling that aspect of the proceeding. The lender is handling the explanation of costs, and the borrower is dependent on parties who may not be able to clearly articulate for the borrower, maybe for their own best interest, rather than the best interest of the borrower, what the documentation means. I often tell my clients when we are going through a closing package, that there are going to be documents that will repeat many of the things that we've talked about and seen in the mortgage. And my position is is that those documents, those single standing documents are there to make sure that the borrower has seen this particular issue put in front of them instead of a 13 page mortgage that has individual paragraphs that they may or may not have paid attention to. So for instance, the mortgage itself requires that the borrower take occupancy of the property. And unless the lender has acknowledged the fact that the borrower will not be taking possession of the property, because they are an investor, there is a separate document independent of the mortgage saying, "I, as the borrower am agreeing that I am taking occupancy of the property within 60 days of the closing." There's generally another document regarding insurance explaining whet the minimum insurance requirements are. Well, it's in the mortgage, but it's also a separate document and on and on like that. And my position has always been that it is for the lender to assure that the borrower has seen that this is a requirement of their mortgage, even though they've just signed a 13 page mortgage. The Closing Disclosure is really intended to make sure that the borrower has a good breakdown as to what the costs are, and that that breakdown has been given to them at least three days prior to the closing, so that they can ask any questions that they have about the costs of their transaction. So while the original intent of the CFPB rules was to prevent the bad behavior that was allowed in the lending environment prior to 2008, the enforcement of the rules became so draconian and expensive that it caused sort of paralysis initially. And closings often got stalled, I know in my attorney review letter, very often, we would have language in there that if there was anything that delayed the closing, because the Closing Disclosure hadn't been provided, that would not be deemed a default under the contract. And the closing date not occurring because of a disclosure issue was not a breach of the contract, and we could still find another closing date. And that was pretty consistent for about two years after the CD requirements came into being. So now, rather than having draconian responses to the rules that are now in front of us for consumer lending, the point is that we will have guidance that's issued in a manner that strengthens the ability to comply, as opposed to making ambiguities that will allow lenders to find some way around what the rules are. The rules will be simplified, the explanations will allow everyone to understand what the law and the policy priorities are. It will prevent strategic and intentional misunderstandings or plausible deniability. The intent is to close loopholes and entities will be incentivized to better serve consumers instead of spending resources, seeking ways around the rules that have been provided. The hope is that will promote clarity and simplicity amongst all the enforcement agencies as well. The priority will focus on implementing congressional directives that have up until now been ignored and including consumer access to financial records, quality control standards, and regulations pertaining to property assessment, clean energy, or PACE financing. PACE is a really interesting finance scheme. It's intended to be a way of financing solar energy. It was particularly used in California, there have been some articles about it, and in my notes, I've provided you with some references regarding PACE, because what happened with PACE is that solar energy providers, people who were selling solar panels were helping homeowners get financing for PACE through a system that allowed the county to then assess real estate taxes, which included the financing for PACE, that incentive for PACE in the real estate taxes and bumped up people's tax liability to a point that the homes became unaffordable. So while PACE was intended to be a means for improving the ability for homeowners to get solar energy into their homes, it wound up being a system whereby that liability became part of the priority debt that was placed against homes. And people started losing their homes over the PACE liability that they had taken on. And because the debt was primary to the mortgage, if it wasn't paid, the house could be taken back by the county and the house would be lost to the homeowner and they still owe the debt on the mortgage. I don't know whether there has been any resolution on that, I do know that there have been some expose on how that program just really didn't work for the benefit of homeowners. So part of the clarification of the regulations is to address the PACE programs as well. The rules are also intended to assist in exploring ways to streamline modifications and seasoning provisions for refinances. When a homeowner becomes delinquent, very often before they go into foreclosure, the ability to refinance can be critical, but if the title hasn't been in their names long enough, because there's been some other way that the property was titled, it can delay the ability to get financing, there can be a six month delay in the ability to get financing. And the ability to get that financing may be stopped all together because of the fact that the requirement for title being in their names for six months may take longer than what it will take for a lender to proceed forward with a foreclosure, thus preventing the homeowner from being able to move forward with financing. So the intention of the enforcement of the rules is going to be, and clarification of the rules is gonna be important in that respect as well. The CFPB is also gonna be issuing advisory opinions in a way that should help clarify the interpretation of rules again, to prevent creative interpretations and to allow clarification for lenders, so that borrowers are not taken advantage of. One of the more recent issues facing Chopra has been an explanation of how there will be a transition away from LIBOR. You may recall that there was some controversy over the fact that LIBOR was being used in a criminal rate setting, conspiracy, which implicated large international banks with regards to how the LIBOR rates were set. And that it assisted those banks in their financial situation. And once it was identified as a problem, there was a decision that we would no longer use LIBOR as the benchmark for how rates would be determined. LIBOR rate setting is important for adjustable rate mortgages in particular. And with the increase in the interest rates, it's going to be pretty critical that some homeowners use adjustable rate mortgages in order to be able to make their properties more affordable. Very often adjustable rate mortgages are lower interest rates, but they also afford the homeowner the opportunity to refinance when rates decrease so that the property becomes affordable going forward instead of being stuck in a 30 year mortgage indefinitely. So the rate structure, how we're going to use any kind of rating manner is going to be pretty critical. So the CFPB has issued a rule establishing how creditors must select a replacement index for the existing LIBOR-linked consumer loans, and that will occur after April 1st or has occurred as of April 1st of this year. It is not the intent of this program to explain what the replacement indices are, but only to let you know that there is an obligation to replace LIBOR as the index for determining interest rates and that it has been established in order to help creditors determine what index they are going to choose going forward so that there is a method to replace LIBOR. One more issue came up after I had written my outline initially, and that was with regards to addressing the critical need for action regarding forced arbitration or mandatory arbitration. In my outline, I said that there were 51 organizations. I actually believe that I counted that there were 103 organizations that have written a letter, have signed off on a letter to the CFPB, asking it to exercise control over the provisions in consumer contracts, forcing mandatory arbitration. Those can occur in any kind of consumer contract. We are seeing them in some real estate contracts as well, which is why I've included this issue in this presentation. The reason why not requiring arbitration is so important is first of all, because so small, a number of consumers actually go to arbitration. The numbers in terms of approval of consumer side, requests for a determination under arbitration is very small. Only 600 in the time that the CFPB has been in existence, only 600 consumers have filed for arbitration with claims over a thousand dollars, of 1,060 claims filed over two years, consumers have only prevailed in 78 cases, and they recovered less than $400,000 in awards. Arbitrators appear to be biased toward corporations and not toward consumers, so that the manner in which consumers have any advantage with forced arbitration is so small that it is not generally worth the time, effort and cost of proceeding forward with arbitration, if you are a consumer. There are a number of community services and housing services that have signed on to ask that the CFPB look at this issue and make sure that consumers are treated fairly in their contracting with lenders and not being forced into mandatory arbitration in order to resolve issues with the lenders. While the CFPB really was intended to stop some of the abuses against consumers in the manner in which they were treated, especially in the mortgage process, we are seeing that the CFPB has become very proactive in numerous consumer transactions. Most importantly, within the mortgage industry, we are seeing that clarification of the financial obligations that a borrower is undertaking is forced to be clarified by the lender, if it is not, the lender can be penalized for not properly disclosing and the penalties are severe. So generally in all of the transactions I had seen since the institution of the Closing Disclosure, lenders are absolutely making sure that their disclosures are correct, and the disclosure generally will indicate that there is more money due than is actually due so that the borrower comes out having less at stake than what they are told to begin with. The Closing Disclosure has to be issued early on in the process so that the borrower has the ability to look at costs. I very often will go through those costs with clients when they think that there's so much money they're gonna need to come up with for a closing, that the closing will never be affordable. We actually are able to go through some of those costs and move the anticipated costs into a more accurate costs so that we know that the closing will be affordable for the homeowner. And it's critical that they have that information far enough in advance of the transaction, both so that they have their funds available, and so that they know that this is a transaction, that they will be able to afford going forward. So the institution of the Closing Disclosure, the requirements that the CFPB has created given the directives that they have had from Congress have really made a difference to many consumers in the real estate transaction. It really is astounding to me in this day and age that we are looking at any lender who has been identified as blatantly redlining, as we saw with the accusations against end settlement with Trident. It was very clear if you read the manner in which the CFPB and DOJ discovered the manner in which Trident had been singling out, the type of borrowers they wanted and avoiding the borrowers that they didn't want, it was pretty shocking. And the penalties, I think are commensurate with the amount of issue that there was in this situation. If you watch the news, you will see that there have been numerous cases against Wells Fargo for breaches of their responsibility against consumers. There have been situations where they have opened up accounts that they weren't supposed to open. The recording of customers that was done without consent and a settlement of 500 million that was agreed to by Wells Fargo to settle GAP insurance fees. I questioned a group of my colleagues over why that wouldn't have any impact on Wells Fargo and the response was it was pocket change. So my guess is that the situation with Trident isn't very much different when they look at the value that they are able to get from choosing which borrowers they wanna do business with, the penalties that are assessed for avoiding the borrowers they don't wanna do business with, is pocket change for them. Fortunately, we do have the CFPB to monitor this kind of behavior, we have the Department of Justice to assist in assessing penalties, and the CFPB has had some real value in the real estate world in making sure that consumers are protected. I would expect that we're going to see more CFPB oversight on modifications that are offered or failed to be offered in light of the forbearances that were granted during the COVID shutdown. And that we will understand better going forward, what those obligations will be in light of the fact that HAM no longer guides, the manner in which lenders are required to provide modifications. The CFPB did issue a requirement that lenders who had given forbearances were required to provide not necessarily modifications, but loss mitigation options for homeowners who couldn't come up with the money that they had not paid on their mortgage during the forbearance periods. If you recall, the forbearances were originally for six months, then extended to 12 months, and then extended to 18 months. Some lenders agreed to extend to 24 months, but when the forbearance periods ended, there was no guidance as to what the requirement would be. In order to stop lenders from going immediately to foreclosure the CFPB did issue requirements that lenders attempt loss mitigation efforts, and that had to be provided, and that would be a basis for dismissing the foreclosure, if it was not provided as an option before the foreclosure was filed. It is encouraging that the CFPB recognizes that their rules to date may have been very convoluted and ambiguous and provided opportunities for interpretation, and that was not their intention. Their intention has always been to provide protection for consumers, and that if lenders have found ways around the rules that have been promulgated, that it really is important for the rules to be clarified so that there really is no question as to the manner in which interpretation can be made so that we're sure that the protection is for consumers and not for lenders. I usually like to approach my presentations from the perspective of what practical advice I can give practitioners regarding the area of law in which I practice, which is transactions and litigation. And I think that the CFPB has provided guidance in both the transaction and litigation areas in order to make sure that consumers have better protection. I think that by understanding what the Closing Disclosure is intended to do, whether as practitioners, we can explain it to our clients in the way that the CFPB felt was more clarifying than the HUD-1. I think that the point of the CD is important for the borrowers to know . And it's important for them to be able to understand, the figures regarding their transaction and to understand what their obligations are going to be going forward. The fact that the documentation repeats much of what is in the mortgage, is to my way of thinking very much to the benefit of the borrower in that there is clarification repetition of the most salient parts of the mortgage. Even in the mortgage, the idea that the default under the mortgage will have certain actions that will be taken, and the repetition about the ability for the lender to obtain insurance, if the mortgage payments aren't being made, and the homeowner has escrowed insurance payments and the insurance isn't being paid. I think too, the fact that the CFPB is in existence, especially now in the post or mostly post-COVID era is important in terms of assuring that homeowners have had opportunity to look into loss mitigation options beyond just modifications, that they have the right to attempt a short sale, or a deed in lieu of foreclosure, or a consent foreclosure options beyond just modifying are available to them, that that is provided to them before they are facing down the barrel of the foreclosure gun. And very often that timeframe in delaying the foreclosure can be the difference between someone being able to get financing, to take them out of the loan that they have been with and allowing them to go forward with an option to refinance without a foreclosure on their record can be pretty critical. But it is right now, the CFPB, that has provided that grace period and allowed homeowners to be able to have some options beyond just having a foreclosure, be the only remedy that the lender can look at. If I have discussed an issue that you would like more clarification on, I encourage you to reach out to me. Generally, the best way to reach me is by email, I try and respond within 24 hours, and I really would look forward to your questions or concerns about any of the issues that I've raised regarding the CFPB. As I indicated, I thought that the CFPB was going to really make transactions difficult and instead, what it's done is really protected consumers in the real estate transaction and assured that we have a better opportunity to watch the way that a consumer can proceed forward in a transaction. I think if we can remove arbitration from any real estate issues and allow people to proceed forward with litigation, if that's what's appropriate, will make a huge difference going forward for homeowners and property owners. So I encourage you to reach out to me, if you have any questions, thank you for listening to me, I have enjoyed this opportunity. Thank you.