For parties who wish to communicate quickly but indirectly, no other medium is as efficient or effective as email. But emails can have unintended consequences, specifically by forming an unintentional and potentially binding contract.

Fundamental elements of a contract

Under Oregon law, as in most states, a contract is formed only if the parties involved have a “meeting of the minds” on the essential terms. This simple phrase means that the parties have reached a consensus on the necessary elements of the transaction, such as quantity, price, volume, etc. There are other required elements to a contract, but without a basic meeting of the minds, there is no consensus and thus no contract.

Electronic transaction laws

In 2000, Congress recognized that electronic communication was well on its way to becoming the most common method of business communication. Lawmakers realized that agreements were being formed over the Internet and through e-mails. In order to facilitate transactions electronically and to maintain orderly transaction of business across state lines, the Electronic Signatures in Global and National Commerce Act (ESIGN) was passed.

ESIGN provides that a transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form, or because an electronic record or electronic signature was used in its formation. ESIGN specifically pre-empts state laws that are inconsistent with it, and exempts certain contracts or records from its coverage, such as wills, trusts and matters of family law.

Oregon statutes

Most states, including Oregon, have followed the federal government. In 2001, the Oregon Legislature enacted ORS Chapter 84, more commonly known as the Oregon Uniform Electronic Transactions Act (OUETA). Like ESIGN, which served as a general model, OUETA seeks to validate transactions that are conducted primarily in an electronic format.

OUETA does not purport to supersede ESIGN; it attempts to facilitate electronic transactions by providing specific guidelines for how such transactions and agreements can be formed under Oregon law. For example, OUETA applies only to transactions in which the parties have agreed ahead of time to be bound by the provisions of this act.

Like its federal counterpart, OUETA does not apply to certain agreements, regardless of the parties’ intent, such as wills, trusts, codicils or other agreements that are required by another statute to be in a specific form.

Clarity

The single most important precaution any business should take, in the face of laws such as ESIGN and OUETA, is to be very clear when communicating with customers or market partners. Otherwise, emails could easily create unintended consequences.

For example:

Buyer: Do you still have those rubber boots I just purchased from you? Lots of clients are asking for them. I would love to have another order like the one you just filled. Can you help?

Seller: Sure, we still have lots. I can have them out to you right away.

Buyer: Thanks for the info.

It is difficult to tell whether the buyer and seller intended to form an agreement or were merely exchanging information. But if one of them were to take the position that the emails constituted an agreement, one could argue, compellingly, for either result (yes, there is an agreement; no, there is no agreement).

What is certain, however, is that if either the buyer or the seller pursues the issue, the cost of resolving this dispute will reduce everyone’s profits and damage business relations.

When composing emails or responding to them, it is very important to consider whether they could be viewed as having formed a contract. Policies and practices emphasizing the use of qualifiers or disclaimers in emails can prevent the creation of an unintentional agreement.

For example, phrases such as “subject to review by client” or “not binding until deposit is received” or even “contingent upon receipt of a fully executed written agreement” demonstrate an intent not to be bound.

Conversely, one-word responses such as “agreed,” “correct” or “accepted” should be avoided because these words can be viewed as demonstrating acceptance, especially when emails contain essential terms and comply with ESIGN or OUETA.

Because email communication is now the norm, parties must be especially aware of the potential for unintended consequences and be vigilant to prevent them.

Hafez Daraee is a shareholder in Jordan Ramis PC and a member of its Dirt Law practice group. He has provided legal advice and litigation services in the Pacific Northwest for more than 17 years. Contact him at 503-598-5579 or at hafez.daraee@jordanramis.com.

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Many mortgage banks still struggling to find ground in the new economy are considering shifting their businesses to an FDIC bank platform. Such a move has its advantages – with regard to multifamily housing financing, for example – but also comes with additional regulatory responsibilities that may seem foreign to businesses accustomed to operating more nimbly.

A traditional mortgage bank is a state-licensed entity that makes mortgage loans directly to consumers. The difference between a mortgage bank and a mortgage broker is that the mortgage bank funds loans with its own capital while a mortgage broker brings borrowers and lenders together and acts more as a go-between than as the final decision maker.

Generally, a mortgage bank funds a consumer’s loan under its own name and from funds in its pre-established warehouse line of credit until the loan can be sold to an investor such as Fannie Mae or Freddie Mac. When the loan is sold to the investor, the mortgage bank repays the funds taken from its warehouse line of credit. With respect to applicable laws, a mortgage bank is typically regulated by a state agency tasked with regulating mortgage banks and mortgage brokers.

Like mortgage banks, a state or federally chartered bank (an FDIC bank) can originate consumer mortgage loans. However, because an FDIC bank does accept deposits from individuals and businesses and can access the Federal Reserve System, the cost of funds from which loans are made is lower. And unlike mortgage banks, an FDIC bank can choose to keep the loan (service it) and create loan products based on criteria and lending guidelines not available to a mortgage bank.

Because mortgage banks are almost exclusively engaged in the business of originating residential mortgage loans (purchase and refinance loans), the residential housing crash, with the resulting economic turmoil, has hampered businesses that are almost exclusively dependent on that market. In response to our economic climate, mortgage banks have either gone out of business or sought affiliation/consolidation with FDIC banks because they are better able to manage turbulence in the housing market for the following reasons.

1. FDIC banks have access to funds with very low interest rates. For example, FDIC banks can borrow money from each other at the “Fed Fund Rate” – the interest rate at which FDIC banks and other depository institutions lend money to each other.

For the past year, the Fed Fund Rate has been 0.25 percent (one-quarter of 1 percent). FDIC banks also can borrow money directly from a Federal Reserve Bank (the Federal Discount Rate). For the past year, the Federal Discount Rate has been 0.75 percent (three-quarters of 1 percent).

2. FDIC banks are not subject to state mortgage lender laws. FDIC banks are typically supervised by the Office of the Comptroller of the Currency, which is an agency within the U.S. Treasury Department, pursuant to the National Bank Act.

While the level of scrutiny leveled by the OCC is substantially more intense, FDIC banks are generally exempt from state-imposed mortgage-loan originator licensing requirements. This allows FDIC banks to hire loan originators who might not otherwise be able to obtain state licensing because of bankruptcy filings or other non-financially related criminal histories (DUII convictions, assault charges, etc.).

3. FDIC banks can choose to service their own products. Mortgage banks generally are contractually precluded by covenants in their warehouse line agreements from servicing loans closed with warehouse funds. In addition, the interest rate on funds borrowed from the warehouse facility is high enough that they quickly render a loan unprofitable.

FDIC banks, however, not only service their own products but also have the flexibility to change loan terms, employ different lending guidelines, forebear from enforcement, and generally make any business decisions with respect to specific loans that make business sense to the bank.

4. FDIC banks can create products that suit their customers’ needs. Perhaps the most important distinction between an FDIC bank and a mortgage bank is that an FDIC bank can create loan products to serve market demands, while a mortgage bank can offer only programs created by investors who purchase loans from the mortgage bank.

Nowhere is this example more visible than in the multifamily lending arena. FDIC banks can, for example, create a construction loan product suited specifically for multifamily projects coupled with permanent financing products that do not require high prepurchase or occupancy requirements.

Joining forces with an FDIC bank is not without pitfalls however. For example, careful thought should be given to the transition in order to compartmentalize liabilities in each respective entity and to avoid successor liability concerns.

And mortgage bankers moving to an FDIC bank platform should be aware that financial regulations on the FDIC side are substantially more complicated and more closely scrutinized by regulators. Care must be taken to avoid any tendency to work “fast and loose” when the OCC is regulating an entity.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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In January 2010, Oregon joined a growing list of states that have enacted false claims acts modeled after the federal one, which was first enacted during the Civil War.

The Oregon False Claims Act imposes civil penalties against contractors who submit false or fraudulent claims for payment on Oregon public works projects. Although Oregon’s act is similar to the federal act, there are some important differences.

No private right of action

Unlike its federal counterpart, the Oregon False Claims Act can be enforced only by the Oregon attorney general. This is perhaps the biggest difference between the two acts. Under the federal act, individuals may bring civil actions against contractors on behalf of the government (a qui tam action). To bring a qui tam action, an individual must first tender the action to the federal agency, and if the agency declines to prosecute the claim, the individual can continue with the action on behalf of the federal government. If successful, the individual may be entitled to receive up to 25 percent of the proceeds from the action and attorney fees and costs incurred.

Liability – personal and entity

In Oregon, both the entity and any individual associated with that entity can be held liable for violating the act. Under the federal act, liability can be imposed only against either the entity or the individual.

Nonexclusive

A person accused of violating the Oregon act can be concurrently liable under various other theories as well. Under the federal act, there are limitations to the type of action that can be brought concurrently with a False Claims Act claim.

Criminal penalties

The Oregon False Claims Act does not impose criminal sanctions. But conduct violating Oregon law, independent of the act, can form the basis for an independent criminal action. The point is that Oregon does not have the equivalent of what is commonly known under the federal act as the Criminal False Claims Act (18 USC 287).

Attorney fees and costs

If the state were to successfully prove that the Oregon False Claims Act was violated, the court could award attorney fees and costs to the state. A defendant successful in defending a claim, however, is entitled to recover attorney fees and costs only if it can show that the state had no objectively reasonable basis for the claim. Under the federal act, the prevailing defendant is entitled to recover attorney fees and costs, but does not need to show that the government had no an objectively reasonable basis for the claim.

Damages

Damages under the Oregon act are less severe than under the federal act but could actually amount to more because damages can be imposed against the responsible individual and the company concurrently.

A party who violates the Oregon act may be liable for a penalty of $10,000 or twice the amount of damages incurred for each violation – whichever is greater. If a court finds that an individual acted inappropriately on behalf of a corporation, the court can impose a penalty on each, independent of the other. Under the federal act, the court can impose a statutory penalty not less than $5,000 or more than $10,000, plus three times the amount of damage sustained by the government.

The Oregon False Claims Act can result in penalties that could easily cripple, if not destroy, even the most financially stable companies. Given the magnitude of the risk, it is critical for contractors to discuss their quality assurance procedures with their legal counsel in order to make sure billing practices do not run afoul of the law.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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Integrated project delivery has been the topic of much discussion over the past several years. Despite being heralded as revolutionary, IPD has not become the gold standard; it remains only a great idea that is used sparingly.

IPD can be enhanced when building information modeling software is used to construct a project in a virtual environment, but there are limitations.

First, none of the BIM programs fully integrates with any of the others. In other words, contractors may purchase multiple copies of BIM software from different manufacturers, and invest significant time and labor in order to use all the features of the BIM software, and then learn that other job participants may not be using the same program.

Second, the software lacks data for building-performance calculations. BIM software can model how a building will perform after it is fully constructed. But it can’t show how key components will perform. For example, how will the “R” value of a window change over time as reflective UV filters wear down? And how will a change in the “R” value affect energy consumption over time? These questions are critical, especially when a project is expected to meet Leadership in Energy and Environmental Design certification requirements.

As technologically innovative as IPD and its components are, the contractual relationship turns this delivery method into a head-scratcher. IPD relies on the parties embracing the notion that “the good of the project is more important than the good of the individual.” This is completely foreign to the construction industry. Construction contracts do not, as a rule, force parties to focus on what is best for the project. Indeed, lawyers spend hours crafting documents that carefully shift responsibility in nearly every imaginable situation onto someone or something else!

Until the construction industry accepts IPD and its notion that “a rising tide lifts all boats,” this method of project delivery will not become the industry standard.

IPD has been compared to “lean contracting” and even to “partnering.” These comparisons are inaccurate, and until the construction industry accepts the differences between these concepts, hybrid relationships will continue to hinder the evolution of IPD.

Lean contracting tries to increase profitability by creating scheduling efficiencies and by managing waste, but it does not focus on the constructability of the project. By the time such concepts are incorporated, the project is well on its way and cannot be modified without great expense.

Partnering is more like IPD but falls far short of the sort of contractual commitment IPD requires. Partnering attempts to create financial incentives for the participants via contractually managed sharing of risks and rewards. Like lean contracting, partnering does not cast a net wide enough for inefficiencies to be addressed effectively or cheaply during the design phase.

Most contractors believe that IPD is suitable only for “vertical” construction. This is why all true IPD projects to date have been hospitals or health-care facilities.

But any project can be constructed using the IPD approach. The reason why IPD is not used in horizontal projects (such as bridges and roads) has more to do with public contracting laws than with the concept of project delivery. It is impossible to implement IPD when the law requires an award to the lowest bidder.

IPD requires early collaboration, impossible when the participants are unknown until after the project has been awarded.  One way to incorporate IPD into the public construction arena is to implement more design-bid-build projects, but most public agencies view them as inefficient and expensive, compared to the traditional lowest bidder approach.

IPD is gaining a foothold, but more slowly than it should. Until contractors believe they will be more efficient and more profitable by using IPD, they are unlikely to take chances and bet on IPD.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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To stay competitive in a constantly evolving, data-saturated marketplace, businesses must not only make vast amounts of data available electronically, but also update the data quickly and effectively.

So it is no surprise that businesses have started using social networks such as blogs, Twitter and Facebook. But these new forms of communication have caused significant problems when businesses end up in legal disputes. Put simply, most businesses’ information-management policies are not updated to account for electronic information needed when disputes go to litigation or arbitration. In litigation, courts view electronically-generated and stored information as essentially equivalent to information on paper. Courts expect businesses to preserve such information and be able to produce it as required by pertinent rules.

The deep inadequacy of business management of such electronic information became clear earlier this summer with the results of a June survey performed by a leading forensic center on the effect of social networking. While two-thirds of businesses worry about e-discovery risks posed by data contained within social networks, 25 percent say they are not prepared to address related electronic information discovery requests, and 33 percent think they are only partially prepared. Moreover, only 9 percent of companies surveyed think they are well prepared for such discovery requests. And the situation is probably worse than even these numbers suggest, because businesses that think they are adequately prepared often find out that they are not.

Additionally, 55 percent of the companies surveyed said they had senior executives with some level of commitment to managing electronic information correctly, but those same companies responded that there was a substantial lack of understanding among junior executives and mid-level managers. This survey also found that for management of electronic information, communication between in-house legal and information technology teams was poor.

Recent cases have proved that a failure to locate and produce pertinent electronic information related to a dispute in an accurate, complete and timely manner can result in harsh, court-imposed sanctions ranging from substantial monetary fines to the dismissal of a claim or a case with prejudice, or a default judgment against a defendant.

In order to mitigate risks, businesses must tailor specific policies that take into account the fact that data generated for social networks may have to be accounted for later. Businesses must ensure that these policies are implemented carefully, and should:

• Know where both internal and external (Facebook, MySpace, Twitter, etc.) electronic information is stored and how to access it with a high degree of accuracy.
• Know the cost – time, expense and resources – to respond accurately and timely to any e-discovery request.
• Educate employees so that they understand that social networks are not fully secure or fully private.

Businesses sometimes believe that if information is stored on third-party computers, such as those owned by Facebook, then they will not be required to obtain or produce that data. Recent cases have made it clear that is not the case. If the information contained on third-party servers is relevant, then courts will presume that the responding party is obligated to produce all such information within the discovery process.

In order to avoid this trap, businesses should create policies that address how social networks can be used for business purposes.

Dangers and demands created by uploading data onto social networks are not exclusive to businesses. They can pertain to any person or entity that gets involved in a legal dispute. For example, in the context of employment claims, especially when emotional distress is part of a litigant’s claim, courts have held that an employee’s posts on social networks can be a source of evidence.

Social networks provide a useful and legitimate vehicle for expanding market share, but it is incumbent on businesses to fully understand how social networks operate so that if a dispute requires access to data stored by these entities, the business will not be caught off guard.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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On April 5, the Department of Housing and Urban Development issued its long-awaited responses to certain questions asked frequently by those in the mortgage industry.

Where does transfer tax go on the GFE?

HUD‘s new Good Faith Estimate form has caused great confusion. Settlement charges typically paid by the borrower must now be included in a GFE even if another party will pay them. HUD considers recordation tax, intangible taxes, excise taxes, document stamps, deed, and mortgage stamps to fall under the definition of transfer tax.

In March, HUD advised that if state law attributes all the transfer taxes to the seller, then nothing can be disclosed in Block 8 of the new GFE; if state law attributes some of the transfer taxes to the buyer, then the GFE must disclose that portion in Block 8.

HUD reversed course on this disclosure in its April release. The new rule is that the GFE must disclose the amount the buyer is likely to pay in Block 8. If this amount is governed by state law or if state law is unclear or does not attribute transfer tax to seller or buyer, then the amount disclosed on the GFE is governed by common practice in the locale of the property. HUD’s conclusion is that the GFE need disclose only the amount of transfer tax that the buyer is likely to pay.

Can a loan originator request verification without a GFE?

In January, HUD advised that a loan originator could not ask a consumer to provide verification documents or an authorization permitting the loan originator to verify employment, income or deposits, without first providing the consumer with a GFE. HUD’s position created a problem for buyers who had not yet identified a property to purchase but had requested prequalification letters from their loan originators.

In April, HUD clarified its position: If a loan originator is missing one of the elements required for a loan application, such as a property address, and is not required to provide a GFE, the originator may verify information for which the consumer voluntarily provides documentation. HUD’s new approach should assist loan originators with the preapproval/prequalification process.

Will HUD’s formal guidance on prequalifications and preapprovals match its informal guidelines?

In April, HUD answered the following two questions, which were designed to resolve the ambiguity between its formal and informal guidelines as related to prequalification/preapproval letters: First, is a loan originator required to provide a GFE without a property address? And second, does the Real Estate Settlement Procedures Act prevent a loan originator from verifying information on an application for a preapproval?

HUD defines a preapproval as a document issued by the lender stating that the buyer qualifies for a specific loan amount. A preapproval is intended to assist a consumer who is shopping for a house by enabling the consumer to enter into a transaction without a financing contingency. But HUD explained that a preapproval can never replace a GFE, and if the property address is known, a GFE should be issued.

HUD’s position is that a GFE will allow the consumer to shop for a loan, not just a house. But is a GFE still required if the buyer has chosen a property but has not yet entered into a contract? HUD believes that because the buyer has a property identified, the rules requiring a GFE are triggered.

As for the second question, HUD stated that “RESPA regulations do not apply to preapprovals.” HUD is legally correct, but this position is practically misleading. RESPA does not contain any provisions addressing how or when preapprovals are issued. RESPA does, however, affect what a loan originator may or may not do before a GFE is issued, which in turn affects the preapproval process. Unfortunately, HUD’s recent release did not entirely close the loop on this issue.

To what extent is a yield spread premium to be included in Block 1 of the GFE?

HUD uses the term “yield spread premium” to refer to the entire credit provided by the lender for the interest rate, not just the compensation paid by the lender to the broker based on the rate. HUD explains that the portion of the credit for the rate chosen that is being paid to the broker must be included in Block 1 of the GFE, together with all other lender and broker compensation, and the entire credit for the rate chosen must be included in Block 2 of the GFE.

Loan originators must recognize that HUD’s approach to disclosure of yield spread premiums on GFE is a significant departure from past practices.

HUD recognizes that these new rules are complicated and represent changes in practice for the industry. HUD also recognizes that applying these new rules remains a work in progress, so input from the industry will be a requirement on an ongoing basis as well.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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Electronic documents come and go. An e-mail is received. An e-mail is deleted.

But if there is – or even may be – a lawsuit in your future, failure to preserve electronic documents now could have devastating consequences.

Six years ago, U.S. District Court Judge Schira Scheindlin of New York handed down the first of her opinions in a series of cases that have come to be known as the Zubulake decisions. These decisions are becoming a national model for discovery of electronically stored information.

Recently, in University of Montreal Pension Plan et al v. Banc of America Securities LLC et al, an opinion that Scheindlin dubbed, “Zubulake Revisited: Six Years Later,” she reemphasized the strong duties of parties (and potential parties) in litigation to locate and preserve electronic documents, and she articulated an approach for deciding how severely a party would be punished for ignoring those duties.

Gathering and preserving electronic documents

Scheindlin concluded that because plaintiffs’ counsel had begun investigating the background issues related to the case at least two years before the lawsuit was filed, counsel’s failure to issue a written “litigation hold” letter to its own client constituted gross negligence because that failure was likely to result in the destruction of relevant information. A “litigation hold” letter is an admonition from an attorney to the client (and sometimes to opposing counsel) that all electronic documents (e-mails, Word documents, electronic spreadsheets, and the like) that could be pertinent to a lawsuit must be preserved. Scheindlin made it clear that if the attorney does not issue such a letter timely and the client does not preserve the documents, both may be in serious trouble.

Scheindlin’s decision follows an emerging pattern in federal and state courts. Parties that fail to identify and preserve electronic documents, even before a lawsuit is filed, can be sanctioned. Sanctions can include monetary fines, exclusion from evidence of electronic documents produced late, and even a judgment by default against the failing party.

Consequences associated with failing to preserve documents

Judge Scheindlin concluded that if a party fails in its duty to preserve electronic documents, the appropriate sanction should: 1, deter the parties from engaging in destruction of electronic documents; 2, hold responsible the party that wrongfully created the risk that documents would be destroyed; and 3, restore the prejudiced party to the same position it would have been in absent the wrongful destruction of evidence by the opposing party.

The court stated that it should always impose the “least harsh sanction that can provide an adequate remedy” and articulated the choices from least to most harsh as “further discovery, cost-shifting, fines, special jury instructions, preclusion, and entry of default judgment and dismissal.”

It has become clear beyond doubt in recent years that in the view of the courts, there is no difference between a paper memo in a file and an e-mail electronically stored in a computer in-box. To the extent that documents could pertain to future or existing litigation, they must be preserved. If they are not, the courts will not be forgiving, and the consequences will be potentially devastating to the claim, the litigants and their attorneys.

Companies should have clear policies for document retention and destruction, as well as procedures designed to safeguard such information. The initial investment necessary to create policies and safeguards is inconsequential compared to the costs resulting from failure to protect electronic information.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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Good news: The U.S. Department of Housing and Urban Development and the U.S. Department of Veterans Affairs have issued several new rules that will help loosen the tight credit markets.

1. Waiver of flipping restrictions
On Jan. 15, HUD announced a one-year waiver of the resale rules applicable to Federal Housing Administration-insured loans. FHA’s anti-flipping rules do not allow FHA-insured loans to be used to purchase a home if a seller acquired a title within 90 days of the date of sale.

To qualify for this waiver, the sale of the property must be an arm’s-length transaction with no commonality interest between buyer, seller or other parties participating in the sale transaction. If the new price exceeds the initial price by 20 percent or more, additional conditions must be satisfied, such as proof of the seller’s legitimate renovations or repairs that support the increase in value; if no such work has been performed, the appraiser must provide an appropriate explanation of the increase in property value.

2. New rules designed to help consumers better compare settlement costs
The most significant changes to the Real Estate Settlement Procedures Act have modified the manner in which settlement charges are disclosed on the new good faith estimate forms. As of Jan. 1, 2010, HUD’s new GFE form must be used in all residential mortgages.

HUD recently clarified the level of change it will tolerate on the new GFE. Depending on the type of settlement service, the charges quoted on the GFE fall into three categories: charges that cannot change on the GFE (HUD calls these “first bucket” charges); charges that can increase up to 10 percent on the GFE (“second bucket” charges); and charges that can change without regard to the amount stated on the GFE (“third bucket”). The loan origination fee would be a first bucket charge. Appraisal fees would be a second bucket charge. Daily interest fluctuation would be a third-bucket charge.

The intent of the new GFE is to disclose all charges in a simpler form so that the consumer can make an appropriate comparison of services provided by a variety of lenders. The estimates on the new GFE must be good for 10 business days and must be fully disclosed on the new HUD-1 settlement statement forms.

3. Disclosure of real estate broker commissions under RESPA
On Jan. 22, HUD’s general counsel issued a clarification of how real estate broker commission fees are to be disclosed on the HUD-1 settlement statement. RESPA now allows Realtors to charge a flat fee or a percentage fee, as long as: (a), the fee is disclosed in the listing or buyer’s broker agreement; (b), the fee charged on the HUD-1 form is equal to what was disclosed; and (c), the fee disclosed on line 700 of the HUD-1 is disclosed as part of the commission.

HUD goes on to state that RESPA does not prescribe how commissions should be distributed between the listing and seller brokers; therefore the division of compensation is negotiable.

4. New rules addressing the disclosure of VA origination fees on the new GFE
A qualifying borrower may be charged up to a 1-percent loan origination fee on VA loans, together with certain other allowable charges. But the new GFE form lumps all origination fees and other allowed charges into one category called “our origination charge.” The VA’s new circular explains how to properly identify these charges on the GFE when the origination fee, together with other allowable fees, exceeds 1 percent of the loan amount.

Two options are available: The lender can itemize the charges in section 800 of the HUD-1 settlement statement, or the lender can issue a separate origination statement, to be signed and dated by the borrower, indicating the purpose of the charges and the amount. If a lender chooses the second option, the HUD-1 should not be separately itemized.

While the VA is encouraging lenders to comply with its new rule immediately, lenders are not required to comply with this new rule until May 1.

Lenders are no longer required to issue an interest rate and discount disclosure statement for VA-guaranteed loans if the new GFE and HUD-1 have been used. But in all cases the GFE and HUD-1, as well as copies of any invoices for all third-party service providers, must be maintained in the file and submitted to the VA if a file is selected for review.

The residential mortgage lending community was hit hard when the housing bubble burst in 2008. HUD and the VA, however, are taking steps to help the market recover. Any questions should be directed to a legal representative.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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Exposure to lead-based paint is harmful to everyone, but especially children. Because lead affects a child’s brain and developing nervous system, it can weaken cognitive functions and cause behavior problems and learning disabilities. Lead is most commonly found in dust, soil and paint chips, and is especially problematic because its presence cannot be detected by the naked eye. Prior to the 1978 ban, harmful lead-based paints were used in more than 38 million homes across the country.

In response to the magnitude of this problem, the Environmental Protection Agency in 2008 updated its rules to prevent poisoning from lead-based paint. These new rules immediately changed the certification requirement for businesses providing abatement services. Next year, EPA’s revised rules will directly impact contractors.

Beginning in April 2010, federal law will require all contractors performing renovation, repair or painting projects that disturb lead-based paint in homes, child-care facilities or schools built prior to 1978 to be certified and to follow specific work practices to prevent lead contamination.

These new federal laws will apply if the project affects more than 6 square feet of interior space or more than 20 square feet of exterior space. It is the EPA’s intent to target homes, schools and commercial buildings where children are present. Children are considered to be “present” if any child under age 6 visits the same facility on two different days a week, for at least three hours each day or six hours each week, or 60 hours per year.

Most of the EPA’s rules regarding lead-based paint focus on work-site practices. For example:

1.Abatement services can be performed only by certified firms that employ certified employees.

2.For interior work:

• All items within the work space must be either removed or covered with impervious material and sealed in order to eliminate contamination;
• All ducts and other heating/ventilating openings must be sealed with impervious coverings; and
• Rugs and other floor coverings must be sealed with impervious coverings.

3.For exterior work:

• Dust from the work area must be contained;
• All ground areas within the work site must be covered by impervious material;
• High-speed equipment such as sanders and grinders can be used only if all exhaust air passes through an HEPA filter first; and
• Heat or flame cannot be used to remove lead-based paint.

The EPA’s rules, however, do not apply if:

• The facility has been inspected by a certified inspector who has determined that the lead content present does not exceed EPA guidelines;
• The facility has been tested using an EPA-certified test kit and the tests indicate that the lead present does not exceed EPA guidelines; or
• If an emergency (very narrowly defined by the rules) exists.

Because lead is presumed to be present if the structure was built before 1978, it is up to contractors working on older buildings to either satisfy the EPA requirements or claim one of the three exemptions. Otherwise, contractors may be subject to agency action and civil penalties of up to $25,000 per incident.

The new EPA-certification requirements are added to the state licensing requirements. If a contractor’s business includes renovation or remodeling of older homes and commercial buildings, it should take immediate steps to become EPA-certified. Processing of an application will require approximately 90 days.

Contractors must jump numerous hurdles in today’s environmentally-conscious arena. Working on older structures will become more complex, more time-consuming and more expensive after April 2010. Those intending to bid on any home, child-care facility, or school project that was initially built prior to 1978, should factor the extra cost of compliance into the bid.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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In July, the Federal Reserve Board of Governors published proposed rules that could make sweeping changes to the closed-end residential loan and dwelling-secured, open-end credit plan rules of the Truth in Lending Act. These proposed rules focus on changes to the disclosures given at all stages of the lending process.

Closed-end residential loan disclosures

The board proposes five changes:

Two new publications will replace the current consumer handbook on adjustable rate mortgages. They will be required before the earlier of either submission of an application or payment of a nonrefundable fee. The adjustable rate mortgage program disclosure will still be required, but its format will change to a question-and-answer format with a related table.

Within three business days after the application, the creditor must provide a new APR disclosure that includes charges imposed by third parties, even if the provider is selected by the consumer. The term “finance charge” is to be replaced by “interest and settlement charges.” The APR must be disclosed in 16-point type and in close proximity to a graph comparing the APR to the Home Ownership and Equity Protection Act average (a prime offer rate to borrowers with excellent credit.) And a new form, “Key questions about risk,” must be presented as a table, to better define key terms.

Two alternatives are proposed for disclosures required three days prior to closing. The first would require a final TILA form three days before consummation even if the earlier TILA disclosure was accurate. The second alternative requires the creditors to redisclose the TILA information but requires a three-day wait to close only if the APR exceeds the application’s range of rates or if an adjustable rate feature is added.

After closing, the proposed new rules require at least 60 days before a payment is due if the ARM rate adjustment affects the payment. In the case of a negatively amortized loan, the waiting period would be 15 days. Also, the creditors must give a borrower at least 45 days’ notice before force-placing insurance.

Finally, the board is considering rules that prohibit yield spread premiums to brokers and overages to employees. Moreover, creditors could no longer be compensated based on credit terms or conditions.

Dwelling-secured,   open-end credit plan

Currently required disclosures under Regulation Z will be replaced with transaction-specific disclosures, given within three days of the application.

The account-opening disclosure is changed to include certain costs and terms to be listed in a table. Interests and fees are renamed “finance charges and other charges.”

The change-in-term notices must be provided 45 days in advance of the change in current terms, instead of the current 15 days. Also, some changes must be presented in a table format.

The board’s proposed rules would limit a creditor’s ability to suspend or to terminate a home equity line of credit. For example, a creditor would be prohibited from such termination for nonpayment unless the payment was more than 30 days past due. The board also is considering a new “safe harbor” for suspensions based on a “significant” decline in property values. If the combined loan-to-value ratio at origination was 90 percent or greater, a decline of 5 percent would be considered significant. And a creditor could not consider late payment or nonpayment as an adverse mark on a credit report. The board also is considering rules requiring suspension to include additional information regarding a consumer’s right to request reinstatement.

The board’s proposal is sweeping and significant. The board has requested that comments in support of or in opposition be submitted before Nov. 27.

Hafez Daraee is an attorney in Jordan Schrader Ramis’ Dirt Law and business-law practice groups. Contact him at 503-598-5579 or at hafez.daraee@jordanschrader.com.

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