1. Per Diem Interest Workshop:. Complying with CA Rules on
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

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

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

5. 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

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

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

8. Request Disclosure 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

9. Exception to the rule Request Disclosure
Borrower affirmatively requests disbursement on a Monday or day after Bank Holiday
and
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;
Borrower signs before funds placed in escrow

10. Sample Disclosure Statement

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

12. Exercise #1 Finding the Data Points

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

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

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

16. The Devil’s in the Details
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

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

18. 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

19. (Residential Mortgage Lending Act)
Acceptable Evidence
Financial Code 50204(o)
(Residential Mortgage Lending Act)
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 , or
by other evidence in the loan file that is acceptable to the Commissioner of the Department of Business Oversight (“DBO”)

20. 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., )

21. Other Acceptable Evidence
Release No. 58-FS
(August 2007, updated May 2017)
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
Identifying name and telephone number of settlement agent

22. Other Acceptable Evidence – Written or Electronic Records
2007 Guidance
Pre- TRID: Final Certified HUD-1
2017 Guidance
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)

23. 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

24. Exercise #2 Evidentiary Issues

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

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

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

28. Recent Enforcement Actions
Nationstar Mortgage/Mr. Cooper
Overcharged borrowers
Failed to properly investigate complaints
$9.2 million settlement

29. Recent Enforcement Actions
AmWest Funding Corp.
Overcharged per diem interest
Improperly prepared disclosures

30. Recent Enforcement Actions
PrimeLending
CRMLA licensee overcharged per diem interest
Failed to keep proper loan records
$1.3 million plus refunds and 10% interest

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

32. Exercise #3 Spot the Violation

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

34. Best Practices for Compliance
Promptly retrieve compliant settlement statement from closing agent
Pre-funding and post-funding QCs should include Per Diem
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
Evidence EVERYTHING in the file

35. Best Practices for Reconciliation
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)
Identify root causes if you are catching true mistakes and fix them

36. Best Practices for Exams
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
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

37. Best Practices for Responses to Examination Reports
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

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

39. Takeaways 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
In an examination
Get it right the first time: make sure you give the examiner the proper documents
Engage legal