CFPB and FTC Warn Mortgage Companies about Potentially Misleading Advertisements

On November 19, the CFPB announced that it issued warning letters to about a dozen nonbank mortgage lenders and brokers regarding advertisements targeted towards older Americans and veterans that may violate the Mortgage Acts and Practices Advertising Rule (MAP Rule). The CFPB claims that certain companies’ ads may (i) make misrepresentations about government affiliation, (ii) provide inaccurate information about interest rates, (iii) make misleading statements about the costs of reverse mortgages, or (iv) misrepresent the amount of cash or credit available to a consumer. The letters do not make any determinations as to whether the ads at issue violate the law, and the letters provide the companies an opportunity to review and remedy any potential violations. However, the CFPB announcement also notes that the Bureau has initiated formal investigations of six companies for “serious violations of the law.” At the same time, the FTC announced that it sent letters to twenty real estate agents, home builders, and lead generators warning that certain advertisements may similarly violate the MAP Rule or section 5 of the FTC Act. The FTC also acknowledged that it has opened nonpublic investigations of other advertisers that may have violated federal law. This coordinated CFPB/FTC action resulted from a review of about 800 randomly selected mortgage-related ads from across the country, including ads for mortgage loans, refinancing, and reverse mortgages. BuckleySandler is representing one of the companies being investigated by the FTC in connection with this review.

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Residential Mortgage-Backed Securities Working Group Announces Several New Cases

On November 20, New York Attorney General Eric Schneiderman, one of the Co-Chairs of the federal-state Residential Mortgage-Backed Securities (RMBS) Working Group, announced a new case filed in the New York State Supreme Court alleging Martin Act violations by a securities firm and several of its affiliates in connection with the offering of RMBS. The complaint charges that the firms made fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors and deceived investors regarding the care with which the firms evaluated the quality of loans included in certain RMBS offerings. The suit claims that investors suffered cumulative losses over $11 billion on RMBS sponsored and underwritten in 2006 and 2007. The DOJ’s Financial Fraud Enforcement Task Force, of which the RMBS Working Group is a part, noted the significant federal-state coordination that led to the filing, including the “significant” contributions of the FHFA’s Inspector General, as well as assistance from the SEC and Assistant U.S. Attorneys from across the country.

On November 16 the SEC announced that it had obtained more than $400 million from two firms alleged to have misled investors in RMBS. In cases coordinated with the RMBS Working Group, the SEC charged that both firms failed to fully disclose their bulk settlement practices, which involved retaining cash from the settlement of claims against mortgage loan originators for problem loans that the firms had sold into RMBS trusts, and which they no longer actually owned. The SEC also claimed, among other things, that one of the firms misstated information concerning the delinquency status of loans that served as collateral for an RMBS offering it had underwritten, while the second firm allegedly applied different quality review procedures for loans that it sought to put back to originators and instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them.

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POSTED IN: Federal Issues, Securities

Federal District Court Dismisses Virginia State Law Claims in FHFA RMBS Suit

On November 19, the U.S. District Court for the Southern District of New York held that the FHFA’s state-law claims against a financial institution with regard to the offering of certain residential mortgage-backed securities (RMBS) could not survive because, unlike federal law, the state law does not apply to the “offering” of securities. Fed. Housing Fin. Agency v. Barclays Bank PLC, No. 11-6190, slip op. (S.D.N.Y. Nov. 19, 2012). The case is one of sixteen in which the FHFA alleges as conservator for Fannie Mae and Freddie Mac that billions of dollars of RMBS purchased by Fannie Mae and Freddie Mac were based on offering documents that contained materially false statements and omissions. In prior rulings in this series of cases the court generally has denied the financial institutions’ motions to dismiss, with the lead case currently pending on appeal to the Second Circuit. The instant case, however, presented a unique issue with regard to the FHFA’s state law claims. As the court explained, the federal Securities Act’s private liability provisions apply to any person who “offers or sells” a security and broadly defines “offer,” while the Virginia Securities Act “omits the term ‘offer’ from its otherwise identical private liability provision.” The court determined that through inaction, Virginia “has purposefully sought to ensure that the scope of private liability under its statutes is more limited than that under federal law” and its law does not apply to the offering of securities, only the sale. The court dismissed the FHFA’s state law claims but allowed all other claims to proceed based on the reasoning presented in prior decisions.

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POSTED IN: Courts, Securities

CFPB and Federal Reserve Board Increase Thresholds for Exempt Consumer Credit and Lease Transactions

On November 20, the CFPB and the Federal Reserve Board announced that, effective January 1, 2013, dollar thresholds in Regulation Z (TILA) and Regulation M (Consumer Leasing Act) for exempt consumer credit and lease transactions will increase to reflect the annual percentage increase in the consumer price index as of June 1, 2012. Transactions at or below the thresholds are subject to the protections of the regulations. Based on the adjustments, the TILA and Consumer Leasing Act protections generally will apply to consumer credit transactions and consumer leases of $53,000 or less in 2013. Mortgage transactions and private student loans remain subject to TILA regardless of the amount of the loan. While the CFPB has rulemaking authority under TILA and the Consumer Leasing Act, the Federal Reserve Board retains authority to issue rules for certain motor vehicle dealers. In addition to the joint adjustment, the CFPB separately adjusted the dollar amount that triggers additional protections for certain home mortgages under the Home Ownership and Equity Protection Act (HOEPA). Consistent with the increase in the consumer price index, the 2013 dollar amount of the HOEPA fee trigger will be $625.

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OCC Notifies Banks of Civil Money Penalty Inflation Adjustments and New Flood Insurance Penalties

On November 20, the OCC issued Bulletin 2012-38 to advise national banks and federal savings associations about a recent OCC rule that adjusted the maximum civil money penalties (CMPs) for inflation and implemented higher flood insurance CMPs. The OCC rule revises the penalty tables that identify the statutes that provide the OCC with CMP authority, describe the different tiers of penalties provided in each statute, and set out the maximum penalty the OCC may impose pursuant to each statutory provision. The rule also implements the Biggert-Waters Flood Insurance Reform Act, which was signed into law on July 6, 2012 as part of a broad transportation bill. That Act increased the maximum CMP per flood insurance violation and removed the annual cap on flood insurance penalties assessed against a single lender in a calendar year.  Effective December 6, 2012, any regulated lending institution that is found to have a pattern or practice of committing flood insurance violations will be assessed a civil penalty not to exceed $2,000 per violation, with no calendar year limit on such penalties.

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National Mortgage Settlement Monitor Issues Progress Report

On November 19, Joseph Smith, Jr., the Monitor of the national mortgage settlement, released a report on the consumer relief activities of the five banks that are parties to the settlement. Between March 1, 2012 and September 30, 2012, those banks extended more than $26 billion in relief to more than 300,000 borrowers. The relief provided by the banks, discussed in detail in the report  includes (i) first and second lien modifications, (ii) enhanced borrower transitional funds, (iii) facilitation of short sales, (iv) deficiency waivers, (v) forbearance for unemployed borrowers, (vi) anti-blight activities, (vii) benefits for members of the armed services and (viii) refinancing programs. The report also provides an update regarding the status of implementation of the mortgage servicing standards required by the settlement, noting that as of September 25, 2012, the Monitor and the banks had agreed to a series of work plans that will guide reviews of each banks’ compliance with the new standards.

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OCC Issues Bulletin Regarding Extended SCRA Protections

On November 19, the OCC issued Bulletin 2012-37, which advises all national banks and federal savings associations of the extension of certain servicemember protections afforded by the Servicemembers Civil Relief Act (SCRA). Currently, SCRA grants an individual protection from foreclosure during the period of active duty and for nine months thereafter, a benefit that was due to expire at the end of 2012. The Bulletin notes that the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, which was enacted in August 2012, provides that (i) SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013, (ii) beginning February 2, 2013, the mortgage foreclosure protection will extend to one full year after the period of active duty, and (iii) on January 1, 2015, SCRA’s expanded foreclosure protection will sunset, and the protection period will revert to the period of active duty service plus 90 days.

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Iowa Supreme Court Opens Door to Potential Servicer Liability for Flood Hazard Disclosure Failures

On November 16, the Iowa Supreme Court held that a mortgage servicer may be liable to borrowers for failing to disclose information it acquired about the borrowers’ flood hazard risks. Bagelmann v. First Nat’l Bank, No. 11-1484, 2012 WL 5642039 (Iowa Nov. 16, 2012). After their home flooded, the borrowers sued their mortgage lender and servicer and alleged that at the time of origination and two years later during a refinance transaction, the lender incorrectly informed them that the property was not in a special flood hazard area and that no flood insurance was required. According to the borrowers, several years later the servicer was advised that the property was in a special flood hazard area and failed to inform the borrowers prior to their property flooding. The Iowa Supreme Court affirmed the district court’s holdings that (i) the borrowers cannot use the requirements of the National Flood Insurance Act as a basis for a state-law claim, (ii) the lender and servicer did not breach a contract with the borrowers, and (iii) the borrowers do not have a viable negligent misrepresentation claim. However, the Supreme Court determined that the borrowers provided evidence from which a fact finder could infer that the servicer knew prior to the flood that the property was in a flood zone and that prior representations to the contrary were incorrect. Therefore, the court reversed the grant of summary judgment to the servicer and remanded the case for further consideration of a possible claim based on Restatement (Second) of Torts section 551(2) against their servicer.  The court also affirmed the lower court’s grant of summary judgment to the lender on the grounds that the lender no longer had a banking relationship with the borrowers.

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FinCEN, FDIC, and DOJ Announce Coordinated Anti-Money Laundering Enforcement Action and Settlement

On November 19, FinCEN and the FDIC announced that a state bank agreed to pay a $15 million civil money penalty to resolve the bank’s “history of noncompliance” with Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements, including recent allegations that the bank failed to implement an effective BSA/AML Compliance Program with reasonable internal controls. Specifically, the federal agencies alleged that the bank failed to adequately oversee third-party payment processor relationships and related products and services. The payment also resolves parallel civil claims by the DOJ that the bank violated the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) by originating withdrawal transactions on behalf of fraudulent merchants and causing money to be taken from the bank accounts of consumer victims. Concurrent with the federal action, the Delaware Office of State Bank Commissioner terminated the bank’s state charter.

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Freddie Mac Announces Standard Deed-in-Lieu of Foreclosure

On November 15, Freddie Mac announced the new Freddie Mac Standard Deed-in-Lieu of Foreclosure (DIL), which is designed to serve as a workout option for borrowers for whom neither a home retention alternative to foreclosure nor a Freddie Mac Standard Short Sale is a workable solution. As described in Freddie Mac Bulletin 2012-27, effective for new DIL evaluations conducted on or after March 1, 2013, mortgage servicers will have delegated authority to approve a DIL that meets all Freddie Mac requirements for eligible borrowers who: (i) are 90 or more days delinquent, (ii) are current or less than 90 days delinquent but meet certain hardship criteria, or (iii) do not have an eligible hardship but were previously discharged from the debt obligations in a Chapter 7 bankruptcy. Also effective for new DIL evaluations conducted on or after March 1, 2013, Freddie Mac will offer mortgage servicers a $1,500 incentive for each DIL completed in accordance with Freddie Mac requirements, an increase from the current $275 incentive. Further, effective immediately, mortgage servicers have the authority to postpone any foreclosure sale for mortgages that are more than 12 months delinquent without obtaining Freddie Mac’s prior approval, provided the servicers have determined that doing so will protect Freddie Mac’s interests. The new Standard DIL was developed as part of the Servicing Alignment Initiative and completed under the direction of the Federal Housing Finance Agency.

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Fannie Mae Announces Numerous Selling Policy Changes

Recently, Fannie Mae issued Selling Guide Announcement SEL-2012-13, which updates numerous selling requirements, all of which took effect immediately. The changes clarify (i) the rights of mortgage sellers during the loan pooling, certification, and acquisition processes, (ii) that acceptance of a redelivered mortgage loan is at the sole and absolute discretion of Fannie Mae, (iii) that a lender seeking to obtain a pool purchase contract must first be evaluated by Fannie Mae, and (iv) several Guide topics regarding Fannie Mae’s delayed financing policy. Other announced changes relate to, among other things (i) premium recapture, (ii) refinances that include the financing of real estate taxes, (iii) depository accounts, (iv) reserves, and (v) HUD-1 signature requirements.

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OCC Extends Compliance Date for Lending Limits Rule

On November 14, the OCC issued Bulletin 2012-36 to extend until April 1, 2013 the deadline for covered institutions to comply with the OCC’s lending limit rule. In June 2012 the OCC implemented a Dodd-Frank Act requirement that the OCC’s existing lending limit rule apply to certain credit exposures arising from derivative transactions and securities financing transactions, and originally allowed national banks and savings association until January 1, 2013 to comply.

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State Law Update: Massachusetts Proposes Loan Servicing and Debt Collection Rules, Announces Public Hearing

Recently, the Massachusetts Division of Banks issued proposed amendments to the state’s rules governing the conduct of debt collectors and loan servicers. The proposed rule would (i) prohibit third-party mortgage servicers from initiating a foreclosure when an application for a loan modification is in process, (ii) require that servicers ensure that a creditor has the right to foreclose and that any foreclosure-related documents are properly prepared and executed based on personal knowledge, and (iii) mandate that third-party servicers provide a single point of contact for a borrower, follow detailed loan modification procedures, and communicate with borrowers in a timely manner under the new regulations. The amendments also would, amongst other changes, (i) amend the definition of “debt collector” to include active debt buyers, (ii) clarify the definition of net worth for debt collectors, (iii) expand the limitations on contact with a consumer by a debt collector to include cellular telephone and text messaging and (iv) expand the number of significant events of a debt collector and third party loan servicer which must be reported. The Division will host a public meeting about the proposed amendments on November 29, 2012, and will accept written comments through December 6, 2012.

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CFPB Delays Implementation of Certain Mortgage Disclosure Requirements

On November 16, the CFPB announced that it is providing a temporary exemption from the  mortgage disclosure requirements in title XIV of the Dodd-Frank Act, including new disclosures regarding (i) cancellation of escrow accounts, (ii) a consumer’s liability for debt payment after foreclosure, and (iii) the creditor’s policy for accepting partial payment. The Federal Reserve Board proposed a rule in March 2011 to implement these requirements, but did not finalize the rule prior to July 21, 2011, when authority transferred to the CFPB.  Subsequently, the CFPB issued a proposal to integrate the TILA and RESPA disclosures and create new disclosure forms, which, as proposed, include many of the additional disclosures required by title XIV. In light of the overlap in the two rulemakings, and given that the title XIV requirements are required by statute to take effect on January 21, 2013, the CFPB effectively agreed to delay the compliance date pending completion of the TILA/RESPA disclosures proposal.

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POSTED IN: Federal Issues, Mortgages

Federal Banking Regulators Launch Next Round of Stress Testing

On November 15, the Federal Reserve Board, the OCC, and the FDIC released the macroeconomic and financial market scenarios to be used in annual stress tests conducted by covered institutions pursuant to rules the regulators finalized last month. The economic scenarios are the same for each regulator and their covered institutions and include baseline, adverse, and severely adverse scenarios with variables that reflect, among other things, economic activity, unemployment, exchange rates, prices, incomes, and interest rates. The baseline scenario represents expectations of private-sector forecasters, while the adverse and severely adverse scenarios present hypothetical conditions designed to assess the strength and resilience of financial institutions, as well as their ability to continue to meet the credit needs of households and businesses in stressful economic and financial environments. The Federal Reserve Board also published a proposed policy statement and the OCC issued interim guidance to describe how those agencies will develop and distribute stress test scenarios in future years. Comments are due on the Federal Reserve Board policy statement by February 15, 2013, and on the OCC interim guidance within 60 days after publication in the Federal Register. Finally, last week, the Federal Reserve Board issued instructions and guidelines for covered institutions, including timelines for submissions. In a shift from prior years, the Federal Reserve Board will provide covered firms an opportunity to adjust planned capital distributions based on the stress test results before the Federal Reserve Board makes a final decision on their capital adequacy.

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