Dodd-Frank: Your Questions Answered

Q: Is an escrow fee a prohibited payment to loan originators (MLB/MLO) in connection with a consumer credit transaction secured by a dwelling?

A: It is our opinion, the phrase “…consumer credit transaction secured by a dwelling …” means a federally related residential mortgage loan transaction, i.e., a loan secured by 1 to 4 residential units, whether the principal residence of the borrower; whether for the purpose of purchasing, refinancing, or further encumbering the security property; and when the proceeds of the loan are used for personal, family, or household purposes, therefore the limitations of Dodd-Frank apply.

Q: What if the MLB/MLO requires the use of a broker exempt escrow as a condition of the loan transaction?

A: In this case, the payment for such services would be prohibited pursuant to 226.36(d).

Further, the escrow fee when retained by the MLB/MLO would be included in the finance charge pursuant to 12 CFR 226.4(a)(1). Excluded from the finance charge are fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents (assuming they are bona fide and reasonable). See 12 CFR 226.4(c)(7).

Q: Are there further restrictions on the Principal Residence Status?

A: The principal residence status requires the TILA disclosure, the right to rescind if other than a purchase money mortgage, and the “high cost” and “higher cost-priced” limitations imposed under federal and state law. See 12 CFR 226 et seq. and Financial Code Sections 4970 et seq. and 4995 et seq.

Q: What are the MLB/MLO obligations?

A: The MLB/MLO is obligated to disclose and obtain consent to the agency relationships in the loan transaction and to the dual agency established as an escrow holder, i.e., acting as an agent for the lender/creditor and for the borrower/consumer. See Business and Professions Code Section 10176(d); Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal. 4th 705, 711, Civil Code Sections 2079.13 et seq., 2297, 2923.1 and Financial Code Section 17004.

The MLB/MLO should consider whether the liability and added fiduciary responsibilities when performing as the escrow holder are adequately compensated by the imposition of bona fide and reasonable fees, i.e., fees that are reasonably earned. Further, no additional escrow or sub-escrow fee may be charged by any other third party. See 10 CCR, Chapter 6, Section 2843.

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