Sheppard Mullin Financial Institutions Law Blog

The Federal Reserve Board on July 23 proposed significant changes to Regulation Z, the Truth in Lending Act regulation, including new consumer protections for receiving home mortgages and home equity lines of credit. These changes include a prohibition of payments to a mortgage broker or loan officer that are based on the loan's interest rate or other terms (often referred to as "yield spread premiums" or "overages"), and a prohibition of a mortgage broker or loan officer "steering" consumers to transactions that are not in the consumer's best interest in order to increase the mortgage broker's or loan officer's compensation. The Board maintains that consumers rely on the professional expertise of brokers and other loan originators and expect they will act fairly. These expectations, however, are not met when the consumer is steered into a more expensive loan. As a result, the Board's proposal went beyond disclosure revisions and suggested these substantive protections. However, the proposal stopped short of imposing on the originator a fiduciary duty to the customer. Such a responsibility would require that the originator find the “best” loan to meet a consumer's requirements. The proposal only prohibits the originator from steering a customer to a more expensive or risky loan to increase the originator's own fees, but does not require the extra step of requiring the originator to seek out the best available loan product.

Section 3500.5(b)(7) of Regulation X states that a bona fide transfer of a loan obligation in the secondary market is not covered by the Real Estate Settlement Procedures Act (RESPA). That section goes on to state that "in determining what constitutes a bona fide transfer, HUD will consider the real source of funding and the real interest of the funding lender."

In a memorandum opinion, a United States District Court for the Northern District of Alabama has held that a real estate broker that charges its customers a percentage based commission and a separate administrative brokerage commission of $149 that is not shared with its sales agents violates Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), because the additional $149 fee was not for services actually performed. JRHBW Realty, Inc. (d/b/a RealtySouth) split its real estate brokerage charge into two components, and showed them on separate lines of the HUD-1 Settlement Statement. The District Court held that the $149 portion of the charge (the administrative brokerage commission) was in essence charged for the same services for which RealtySouth charged its percentage based commission, and therefore was not charged for "services actually performed," and was an unearned fee that violated Section 8(b) of RESPA.

On June 29, 2009, Governor Schwarzenegger signed into law California's Electronic Discovery Act, which is effective immediately. All discovery propounded or responded to must now comply with the new law. These rules are very similar to the recent revisions to the Federal Rules of Civil Procedure, and bring California in line with the federal e-discovery standards.