Per Diem Interest Workshop Complying with CA Rules

Per Diem Interest Workshop: Complying with CA Rules on “Interest Per Day” Keeps DBO Penalties Away Fredrick S. Levin Susanna K. Sedrak March 23, 2018

Outline n What is Per Diem? • Exercise #1 • Exercise #2 n Why do we care? • Exercise #3 n Best practices n Takeaway points 2

What is Per Diem? Why Do We Care? Best Practices What Is Per Diem? Takeaway Points

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Know the Rule Civil Code Section 2948. 5(a) For … • Promissory notes • Secured by a mortgage or deed of trust on real property of up to 4 residential dwelling units The rule is … • A borrower cannot be required to pay interest for more than 1 day prior to the disbursement of loan proceeds 5

What data points you need to know in order to figure out if a loan is compliant 1. Per diem interest charge (e. g. , $50/day) 2. Total amount of prepaid interest charged 3. Date of disbursement 6

Example 1: Disbursement on a Friday Fri, March 23: Disbursement Date March 1 n n Per Diem Interest: $50/day Disbursement Date: March 23 How Many Days of Interest can be charged? • 10 days (March 22 -March 31) Thurs, March 22: Interest can begin to accrue n March 31 Is there a violation if: • $450 interest charged? • $500? • $550? 7

Exception to the rule Interest may commence to accrue on the business day immediately preceding the day of disbursement if “both” of the following occur: Request Disclosure 8

Exception to the rule Request n Borrower affirmatively requests disbursement on a Monday or day after Bank Holiday and n Lender agrees to the request Disclosure § Written Disclosure to the borrower that states: Amount of additional interest; and the additional per diem interest charge could be avoided by disbursing the loan proceeds on a day immediately following a business day; and § Borrower signs before funds placed in escrow 9

Sample Disclosure Statement 10

Example 2: Disbursement on a Monday under the exception Mon, March 23: Disbursement Date March 1 n n Per Diem Interest: $50/day Disbursement Date: March 23 How Many Days of Interest can be charged? • 12 days (March 20 -March 31) Fri, March 20: Interest can begin to accrue n March 31 Is there a violation if: • $450 interest charged? • $500? • $550? • $600? • $650? 11

Exercise #1 Finding the Data Points

What is Per Diem? Why Do We Care? Best Practices Takeaway Points

The Usual Suspects n Of all of the DBO reports of examinations that we have reviewed over the last 5 years, nearly 90% included per diem interest violations. n This has cost individual companies millions of dollars 14

Potentially Severe Consequences n Demand for Self-Audit or “look back” of all loan files – can be very expensive. n Repeat violations lead to referral for enforcement n Enforcement leads to an even deeper dive into all aspects of lending business Reciprocal Reporting n 15

The Devil’s in the Details n n Compliance is harder than you think, and the DBO is tougher than you can imagine Most common problems • No documentation to prove disclosure was made • DBO provided with the wrong documents • Consistent failure to comply in a variety of ways § Could be evidence of a systemic problem 16

Details, Details n How are terms like “disbursement date” defined? n What evidence is acceptable to show compliance? 17

Disbursement Date Definition Release No. 58 -FS (August 2007, updated May 2017) The date on which the majority of loan proceeds are disbursed to: • the borrower, OR • a third party on behalf of the borrower, OR • the licensee to satisfy an existing obligation of the borrower 18

Acceptable Evidence Financial Code 50204(o) (Residential Mortgage Lending Act) n Compliance with the per diem interest statute may be evidenced by either: • A certification executed by the licensee, at no cost to the borrower, pursuant to Civil Procedure section 2015. 5, or • by other evidence in the loan file that is acceptable to the Commissioner of the Department of Business Oversight (“DBO”) 19

Other Acceptable Evidence Release No. 58 -FS (August 2007, updated May 2017) Certification Other Evidence Written or electronic records (e. g. , Final HUD-1) Contemporaneous written or electronic record memorializing oral communications (e. g. , email) 20

Other Acceptable Evidence Release No. 58 -FS (August 2007, updated May 2017) n n Written or electronic records • Verifying disbursement date • Identifying the name of the settlement agent • Identifying business address of settlement agent Contemporaneous written or electronic records memorializing oral communications • Verifying disbursement date • Identifying name and telephone number of settlement agent 21

Other Acceptable Evidence – Written or Electronic Records 2007 Guidance n Pre- TRID: Final Certified HUD-1 2017 Guidance n n ALTA (or non-ALTA) Settlement Statement if… • Prepared by settlement agent • Identifies the date on which it was prepared • Identifies disbursement date • Preparation date is not before disbursement date • Identifies the settlement agent who prepared it TRID Closing Disclosure with… • Corroborating evidence (e. g. , Disbursement ledger or wire transfer confirmation) 22

Acceptable evidence does not mean conclusive proof • Just because you submit “acceptable” evidence does not necessarily mean that you have “proven” compliance. • The DBO can always request additional information if the Commissioner believes that compliance is uncertain or unclear • Acceptable evidence questionable where the disbursement of loan funds was post TRID but prior to the May 3, 2017 effective date of Commissioner’s Revised Release No. 58 -FS 23

Exercise #2 Evidentiary Issues

What is Per Diem? Why Do We Care? Best Practices Why Do We Care: Penalties Takeaway Points

Penalties n Civil Penalty n If willfully charged, contracted for, or received… • Not to exceed $2500 for each violation • Refund the excess interest • With Interest at the rate of 10 percent per annum 26

Penalties n If repeat violations… • Not to exceed $25, 000 • Each violation or failure to comply is a separate and distinct violation n Other • Letter to borrower admitting wrongdoing • Quarterly, external audits 27

Recent Enforcement Actions n Nationstar Mortgage/Mr. Cooper • Overcharged borrowers • Failed to properly investigate complaints • $9. 2 million settlement 28

Recent Enforcement Actions n Am. West Funding Corp. • Overcharged per diem interest • Improperly prepared disclosures 29

Recent Enforcement Actions n Prime. Lending • CRMLA licensee overcharged per diem interest • Failed to keep proper loan records • $1. 3 million plus refunds and 10% interest 30

Lessons Learned n Don’t overcharge n Check disclosure language Keep records Investigate any and all consumer complaints n n • Discipline and consistency 31

Exercise #3 Spot the Violation

What is Per Diem? Why Do We Care? Best Practices Takeaway Points

Best Practices for Compliance n n n Promptly retrieve compliant settlement statement from closing agent Pre-funding and post-funding QCs should include Per Diem Interest Disclosure • Provide disclosures for all loans • Allow borrower to make an affirmative election (check a box) • Disclose the total per diem, not just a single day (DO NOT LEAVE BLANK), but disclose single day too, if feasible • Borrower Signature n Evidence EVERYTHING in the file 34

Best Practices for Reconciliation n Identify and collect disbursement date for each California Loan Identify violations Refund any excess collected within 30 days of disbursement • This number is not in the statute • Some people will add the 10% interest, even for self- discovered issues (especially if discovered/refunded more than 30 days after closing) n Identify root causes if you are catching true mistakes and fix them 35

Best Practices for Exams n n n Get it right the first time Make sure loan files are in order Provide regulator with proper documents the first time • There may be 2 or 3 different versions of each disclosure. Make it easy to identify the right one n n Be responsive to the regulator’s requests Single point of contact to avoid providing different information When in doubt, talk to Legal Keep conversations formal and written 36

Best Practices for Responses to Examination Reports n n n Talk to legal Keep responses clear and simple Don’t respond with the same documents that have already been sent unless the examiner cited something incorrectly 37

What is Per Diem? Why Do We Care? Takeaway Points Best Practices Takeaway Points

Takeaways n n Know the rule Get the process right before you get examined Have a QC process in place to identify errors Fix it when you get it wrong, before you get examined • Correct errors (reimburse) and identify root causes n In an examination • Get it right the first time: make sure you give the examiner the proper documents n Engage legal 39