WASHINGTON, D.C. -- The U.S. Supreme Court heard arguments on Nov. 28 on whether a property owner suffered an injury in fact under the Real Estate Settlement Procedures Act (RESPA) when she bought title insurance from a company that allegedly paid kickbacks to get business from title insurance agents in Ohio (First American Financial Corp. v. Denise P. Edwards, No. 10-708, U.S. Sup.). 

(Transcript.  Document #85-111223-001T.)

Denise P. Edwards sued First American Financial Corp. in the U.S. District Court for the Central District of California.  She alleged that First American violated RESPA's anti-kickback provision by entering into exclusivity agreements with thousands of title insurance agencies that are authorized to sell First American title insurance policies.  Under RESPA's remedies, Edwards seeks treble damages for the $455 cost of her title insurance. 

The District Court denied First American's motion to dismiss for lack of standing.  On appeal, the Ninth Circuit U.S. Court of Appeals affirmed. 

Questions Presented 

The Supreme Court agreed to hear two questions:  whether the Ninth Circuit erred in holding that Edwards has standing to sue under RESPA when she does not claim that the violation affected the price, quality or other characteristic of the settlement services, and whether Edwards has standing to sue under Article III, Section 2, of the U.S. Constitution when she does not have an injury in fact.

 Justice Stephen G. Breyer questioned whether Edwards was suing because she was exposed to a transaction that Congress "said was harmful."  Aaron M. Panner of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, arguing for First American, said no, because Edwards paid the only rate for title insurance that is available under Ohio state law. 

Justice Ruth Bader Ginsburg said Edwards' claim "does seem to fit the bill of restitution, unjust enrichment cases, where the plaintiff doesn't have to prove any harm, she just gets back what the defendant should not have received."  Panner said Edwards is not "worse off" because there is no allegation that the insurance was lacking. 

'Prearranged, Tied Product' 

Justice Sonia Sotomayor said Panner seems to be arguing that "Congress can't ever presume damages or injury, that even in those cases plaintiff has to come in and prove that they would have paid less."  She continued:  "So what more does this plaintiff have to allege other than, if I had been told that this was a prearranged, tied product between the mortgage and the title company, but that I had a right to get an untied product even at the same price, and I would have exercised that right if I had known - would that be enough?" 

Panner said that is not what Edwards is alleging.  He said a "violation of the statutory right does not create an injury for constitutional purposes." 

Justice Breyer told Panner "there is no doubt that the plaintiff here suffered the harm that Congress sought to forbid.  That harm was being engaged in a transaction where the title insurance company was not chosen on the merits, but partly in terms of a kickback."  He asked what was unconstitutional about that. 

Panner said there was no injury in fact under Article III "and Congress cannot create that injury legislatively." 

Trust Violation? 

Justice Antonin Scalia asked if Congress could create a trust relationship between title insurance agents and property purchasers that would constitute an Article III injury in fact.  "If you become a trustee by contract you get one result, but if you are a trustee by government decree so that you must be a trustee, contract or not, somehow the situation changes?" he asked.  

Justice Elena Kagan said Panner's argument that there is a difference depending on the source of the law is "very much inconsistent with our case law."  She said her reading of Edwards' complaint is that she doesn't have to prove injury because "there's been a judgment made that these kinds of practices tend to decrease service and tend to increase price and therefore I don't have to prove those matters.  And that's the exact same judgment that is made in the trust cases, for example." 

Panner said that Congress could broaden the law to require enforcement of violations by the executive branch.  "But what Congress cannot do is to dictate in advance that a particular practice has cause injury to a particular plaintiff." 

'Duty Of Loyalty' 

Jeffrey A. Lamken of MoloLamken LLP in Washington, arguing for Edwards, said that breaches of a duty of loyalty by taking kickbacks have been a part of common law for which a plaintiff can sue without showing an economic harm. 

Justice Scalia told Lamken:  "There is no duty of loyalty owned here."  The justice added:  "I'm not even sure it's proper to call it a kickback.  It's a commission." 

Lamken told Justice Scalia that Congress gave consumers a right to "freedom from a particular conflict of interest, and that is the kickbacks that undermine their incentive to serve your best interest, that undermine their incentive to choose the insurer that provides the best quality and the best service." 

Justice Samuel A. Alito Jr. said he doesn't see a fiduciary relationship and doesn't see where a duty of loyalty comes from.  He added that he does not see an injury in fact. 

Permit Private Suits? 

Justice Scalia told Lamken:  "The issue isn't whether Congress can achieve that result [of legal protection].  It's whether they can achieve it by permitting private suits." 

Chief Justice John G. Roberts Jr. questioned whether Edwards suffered an injury in fact or an injury in law.  He said he thinks it is the latter. 

The chief justice also told Lamken that Edwards claim of "potential value" "sounds to me like possible future injury." 

'Circular' 

Justice Anthony M. Kennedy told Lamken, "[i]t's circular for you to say that he was denied something that he is entitled to.  The question is whether there is an injury.  The Constitution requires an injury." 

Appearing on behalf of the federal government, Assistant Solicitor General Anthony A. Yang of the U.S. Department of Justice in Washington, told the court:  "When an individual has a statutory right to a kickback-free referral in a financial transaction, she participates in a particular financial transaction in which her right is violated and she pays money for the service unlawfully referred, she has sustained an Article III injury in fact based on, as this Court in its repeatedly explained test, an invasion of a legally protected interest." 

The new consumer finance regulator has proposed simplified mortgage disclosure forms, aiming to ensure that borrowers receive clear and easy-to-understand information about home loans when they apply for credit.

The Consumer Financial Protection Bureau released two alternative mortgage disclosure forms, each taking only the front and back of a sheet of paper. The forms would combine and replace the current two-page Truth in Lending Act disclosure and the three-page good faith estimate required under the Real Estate Settlement Procedures Act, or RESPA. The bureau, created by last year's Dodd-Frank financial reform law, will test the prototypes and incorporate feedback through September. It's calling the effort the "Know Before You Owe" project.

"A home loan is the biggest financial commitment most Americans will make in a lifetime," says Elizabeth Warren, who runs the bureau. "With a clear, simple form, consumers can better answer two basic questions: Can I afford this mortgage? And, can I get a better deal somewhere else? That's good for American families and the markets they depend on."

The prototypes emphasize the monthly loan payment, interest rate, potential cautions and other loan features.

Under Dodd-Frank, the bureau must propose new rules for simplified mortgage forms before July 2012. Staff started drafting the prototypes "quickly out of the gate" in consultation with federal regulators who have been working on streamlining the forms for years, Warren says.

The agency expects five rounds of evaluation and revision, with consumer testing in five cities and input from the industry, before the forms are finalized this fall. Then, the bureau will publish proposed regulations and a draft model form to solicit more comment and run quantitative tests before the rules are final.

Financial industry executives praise the move. "We think it's a great step," says Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. "If everybody fully understands the product ... both the consumer and the lender win."

The Mortgage Bankers Association's more guarded response notes that the industry spent significant money 18 months ago on RESPA changes -- costs borne by consumers.

"Making mortgages easier to understand for prospective borrowers has been a long-term priority for the mortgage industry and we are pleased to see the initial prototypes take a step in that direction," MBA President David H. Stevens said in a statement, noting the challenge of "trying to strike the right balance between simplification and providing as much information as possible to help borrowers make the most informed choices."

Alex J. Pollock, a resident fellow at American Enterprise Institute who proposed a one-page form in 2007, notes the average mortgage closing form is 80 to 85 pages, which could be boiled down. He says the proposed forms don't include the ratio of debt to income, a key factor in whether individuals can afford a loan.

"The real object of this is not to give someone a piece of paper that they passively consume but to get them to actively think about the borrowing commitment," Pollock says.

Even as Warren prepares the new consumer bureau to assume regulatory power July 21, Wall Street lobbyists and their Republican allies in Congress seek to curb the bureau's power. Pending House legislation would replace the director position with a five-member bipartisan commission and make it easer for other regulators to overturn CFPB rules. President Barack Obama is expected to appoint Warren as director during an upcoming congressional recess, given that 44 Republican senators have pledged to block any director nomination.

"This is all part of a unified campaign to weaken and delegitimize the agency," says David Arkush, director of Public Citizen's Congress Watch division, which supports the bureau and Warren as director. "If you had some basic consumer protections in the financial services arena, there's a really good chance the housing bubble wouldn't have gotten as large as it got and you wouldn't have had so many predatory lending and mortgage abuses."

x x x x

With interest rates on U.S. Treasuries continuing to fall and a new study showing continuing declines in home prices nationally, mortgage rates edged slightly lower this week.

The benchmark fixed-rate 30-year mortgage dipped by 2 basis points, averaging 4.75 percent in the latest Bankrate weekly survey. A basis point is one-hundredth of 1 percentage point.

Another popular home loan product, the 15-year fixed-rate mortgage, made an identical decline, falling 2 basis points to an average of 3.93 percent. With 30-year jumbo mortgages, or generally those for more than $417,000, the average rate was 5.21 percent, off by a single basis point.

With adjustable-rate mortgages, the 5/1 ARM was 3.45 percent, off 3 basis points.

(Distributed by Scripps Howard News Service. Reach Katherine Reynolds Lewis at editors(at)bankrate.com.)

REAL ESTATE WATCHMust credit bankrate.com

The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders.

The bureau expects to award a contract to develop the form by the end of the month, making it one of the first projects of the new agency, according to a bidding document given to vendors in November and reviewed by Bloomberg News.

More concise disclosure is one of the main stated goals of Elizabeth Warren, the Obama administration adviser charged with setting up the agency established by the Dodd-Frank Act. Simpler forms that can be directly compared may make the market less lucrative for lenders such as Bank of America Corporation, Wells Fargo & Company, JP Morgan Chase & Co. and Citigroup Inc.

“If buyers are better informed and understand the financial commitments they are entering into, they will be better able to make comparisons among lenders and the market will be more competitive,” said Alex Pollock, a former banker who is a resident fellow at the American Enterprise Institute. “In competitive markets, profit margins are -- and should be -- driven down to the level of the cost of capital.”

Academic studies have shown that comparison shopping aided by the emergence of the Internet helped cut prices for consumer products including term life insurance in the 1990s. That squeezed profits, said Edward Graves, an associate professor of insurance at The American College in Bryn Mawr, Pennsylvania.

Lost Margins

“When you see what’s gone on in terms of prices, the insurers have lost a lot of margin in this product,” Graves said in an interview.

Bob Davis, an executive vice president at the American Bankers Association, said short disclosure forms might not simplify the process as much as Warren suggests, because of the “interconnected requirements” imposed by federal law.

“It’s not so simple as creating two pieces of paper,” Davis said in an interview. Bankers agree with Warren’s “starting point,” he said.

Warren has said she would like to see a standard document of one or two pages to replace about 80 percent of the mortgage disclosures mandated by the Truth In Lending Act and the Real Estate Settlement Procedures Act. The current “pile of papers” confuses consumers and is costly to business, Warren has said.

Smaller community banks might become more competitive with Wall Street if new regulations succeed in reducing costs, Davis added. “The compliance process lends itself to certain scale and big technology solutions,” Davis said.

Mortgage Unit Head

Along with the credit-card division, the new bureau’s mortgage unit may have the most immediate impact on consumer financial services. A candidate to run the mortgage section is Patricia McCoy, a University of Connecticut law professor who has been working with Warren part-time, according to a person briefed on the matter who spoke on condition of anonymity because the matter isn’t public.

McCoy, 56, is a former corporate litigator who was a partner at Mayer, Brown & Platt during the savings and loan crisis in the early 1990s. Based in Washington, she represented bank auditors and examined residential loans and underwriting standards. She co-wrote a book published this month on the subprime lending crash.

The contract to create a new disclosure form was advertised to selected vendors in November by the Bureau of Public Debt at the Treasury Department, where the consumer bureau is housed until it becomes an independent entity in July. It calls for firms to bid on providing “support services to assist with the design of a model disclosure form, including assessment of the form through consumer testing and revisions to the form resulting from the testing and public comments,” according to the copy obtained by Bloomberg News.

January Contract

Bids had to be in by Dec. 14, and the contract will be awarded before the end of January, according to the proposal document. The vendor must complete the work by Jan. 15, 2012 or a year after the contract is awarded, whichever is earlier.

Dodd-Frank requires the bureau to propose regulations on mortgage disclosures for public comment by July 21, 2012. The bidding document indicates that the bureau intends to move more quickly, saying its goal is to issue proposed regulations “as soon after” July 21, 2011, “as possible.”

The bid request also emphasizes the role of field tests in the bureau’s decision-making, a point Warren raised at a Dec. 6 symposium at Treasury, according to one attendee, Ira Rheingold, executive director of the National Association of Consumer Advocates.

Warren told the audience that “we’re going to be data- driven. We’re going to test things, and figure out what people respond to,” Rheingold said in an interview.

‘Asking a Lot’

Not everyone studying the mortgage industry believes that simpler forms will translate into more comparison shopping by borrowers.

“It’s asking a lot for a piece of paper to change actual consumer behavior,” John Kozup, an associate professor of marketing at Villanova University and director of the Villanova Center for Marketing and Public Policy Research, said in an interview. “It could be a decision aid but that is it.”

Kozup, who also attended the Dec. 6 symposium, said that by the time applicants get a mortgage pre-approval and find a house, they “have a psychological commitment to a certain bank or broker, and no kind of disclosure is going to change that.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

We are still handling OTI the same way we did it when the new RESPA rules went into effect in January because I was waiting for more clarification - or something - from HUD. This is what we do (which I believe follows instructions in the FAQ):
A) Always put OTI on the GFE for home purchase loans.
B) Put OTI in the borrower’s column on the HUD-1.
C) Show a credit for OTI in the 200 Series and a charge to the seller in the 500 series.
D) The comparison chart contains amounts in the GFE and HUD column for OTI.

Our Software vendor seems to be making changes to comply with the RESPA Roundup which says:
“If the consumer did not purchase a service that was listed on the GFE (usually owner’s title) there should be nothing entered in that line on Page 2 of the HUD-1 and the estimate of the charge should not appear on the comparison chart on Page 3 of the HUD-1.”

1) Is the “consumer” in this case our borrower or does it mean any consumer (seller) associated with the loan?
2) Is HUD saying to show the OTI in the Seller’s column of the HUD-1?
3) Does HUD still expect us to put the OTI on the GFE for a purchase?

We usually pay for the flood determination rather than passing the fee to the consumer. We handle it basically the same way we do the OTI.
•Does this also fall off of the comparison chart now?

What I want to ask is Why? Why? Why? But I know it’s pointless so I won’t.

Taken from the Banker Online Blog.

The following is an exerpt of a letter from a list of trade associations encouraging Tim Geithner, Ben Bernanke, and Shaun Donovan to consider combining some of the forms that need to be executed in the mortgage process.  Read the entire letter here

The undersigned trade associations, representing the real estate finance industry, appreciate the Board's and HUD's efforts to improve disclosures to mortgage borrowers under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). At this point, however, Special Advisor to the President Elizabeth Warren and Treasury staff have begun discussions internally and with stakeholders to combine the two disclosures into a single, integrated disclosure, and we understand that effort will be a first priority of the new Bureau of Consumer Financial Protection (Bureau). Every segment of the financial services industry shares the objective of doing something "exceptional" to improve the mortgage disclosure process for consumers and we fully support this important work. Both disclosures are provided to borrowers throughout the mortgage process and integrating them will greatly increase transparency and consumer understanding of the mortgage transaction. Notwithstanding, it is important to recognize that this vital initiative is being undertaken in the midst of a surfeit of proposed and final regulations that require fundamental changes to the mortgage finance business model and a generation of systems which support it.

Read the entire letter at scribd.com