On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.
On July 14, the CFPB sued a Georgia-based law firm and its three principal partners for allegedly using high-volume litigation tactics to collect millions of dollars from consumers who may not actually have owed the debts or may not have owed the debts in the amounts claimed. The suit relates to the firm’s attempts to collect, directly or indirectly, consumer credit-card debts on behalf of both credit-card issuers and debt buyers that purchase portfolios of defaulted credit-card debts. The CFPB alleges the defendants violated the FDCPA and engaged in unfair and deceptive practices by: (i) serving consumers with deceptive court filings generated by automated processes and the work of non-attorney staff, without any meaningful involvement of attorneys; and (ii) introducing faulty or unsubstantiated evidence through sworn statements even though some signers could not have known the details they were attesting to. The CFPB is seeking to permanently enjoin the firm from engaging in the alleged activity, restitution to borrowers, disgorgement, civil money penalties, and damages and other monetary relief.
On July 17, the FHFA Office of Inspector General (OIG) published a report on risks to Fannie Mae and Freddie Mac (the Enterprises) related to purchasing mortgages from smaller lenders and nonbank mortgage companies. The report states such lenders present elevated risk in the following areas: (i) counterparty credit risk—smaller lenders and nonbank lenders may have relatively limited financial capacity, and the latter are not subject to federal safety and soundness oversight; (ii) operational risk—smaller or nonbank lenders may lack the sophisticated systems and expertise necessary to manage high volumes of mortgage sales to the Enterprises; and (iii) reputational risk—the report cites as an example an institution that was sanctioned by state regulators for engaging in allegedly abusive lending practices. The report notes that in 2014 the FHFA’s Division of Enterprise Regulation’s plans to focus on Fannie Mae’s and Freddie Mac’s controls for smaller and nonbank sellers, which will include assessments of the Enterprise’s mortgage loan delivery limits and lender eligibility standards and assessment of the counterparty approval process and counterparty credit risk resulting from cash window originations. The report also notes FHFA guidance to the Enterprises last year on contingency planning for high-risk or high-volume counterparties, and states that the FHFA plans to issue additional guidance on counterparty risk management. Specifically, the Division of Supervision Policy and Support plans to issue an advisory bulletin focusing on risk management and the approval process for seller counterparties. The OIG did not make any recommendations to supplement the FHFA’s planned activities.
On July 10, HUD issued Mortgagee Letter 2014-15, which updates requirements for pre-foreclosure sales (PFS) and deeds-in-lieu (DIL) of foreclosure for all mortgagees servicing FHA single-family mortgages. The letter explains that if none of FHA’s loss mitigation home retention options are available or appropriate, the mortgagee must evaluate the borrower for a non-home retention option, with mortgagors in default or at imminent risk of default being evaluated first for a PFS transaction before being evaluated for a DIL transaction. The letter details eligibility and documentation requirements for standard PFS, streamlined PFS, and DILs, as well as rules for calculating cash reserve contributions for standard PFS transactions. Further, the letter advises mortgagees that they may, under certain conditions, approve a servicemember for a streamlined PFS or DIL without verifying hardship or obtaining a complete mortgagor workout packet. The letter also addresses numerous other topics, including: (i) requirements for real estate agents and brokers participating in PFS transactions; (ii) an initial listing period requirement for PFS transactions; (iii) updated sample language for the PFS Addendum; (iv) validation requirements for appraisals; (v) the criteria under which the HUD will permit non-arms-length PFS transactions; and (vi) minimum marketing period for all PFS transactions.
On July 15, Freddie Mac issued Bulletin 2014-14, which announced a new automated settlement process for mortgage modification settlements. Effective December 1, 2014, servicers must submit the required settlement data for a modification of a conventional first lien Freddie Mac-owned or guaranteed mortgage via the new “Loan Modification Settlement” screen in Workout Prospector. Servicers may begin doing so on or after August 25, 2014. In addition, the Freddie Mac is amending mortgage modification signature requirements to provide that a servicer and any borrowers can agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note, as otherwise authorized by Freddie Mac, without obtaining the co-signer’s signature or consent on the condition that the Security Instrument that was signed by the co-signer contained a provision allowing for such action. The bulletin also, among other things, (i) updates transfer of ownership and assumption requirements; (ii) revises certain requirements for mortgages insured by the FHA or guaranteed by the VA or Rural Housing Service; and (iii) adds several new expense codes related to attorney fees and costs and updates certain attorney fees and costs reimbursement requirements.
On July 15, Fannie Mae and Freddie Mac announced the availability of additional documentation to support the mortgage industry with the implementation of the Uniform Closing Dataset (UCD), the common industry dataset that supports the CFPB’s closing disclosure. The documents provide information to supplement the MISMO mapping document released in March 2014. Fannie Mae and Freddie Mac intend to collect the UCD from lenders in the future, but have not yet determined the method or timeline for that data collection.
On July 14, the OMB’s Office of Information and Regulatory Affairs (OIRA) concluded its review of a long-awaited FinCEN proposal to establish customer due diligence requirements for financial institutions, sending the rule back to FinCEN. In its spring 2014 rulemaking agenda, Treasury updated the timeline for the rule to indicate it could be proposed in July with a 60 day comment period. OIRA’s public records do not provide information about what, if any, changes OIRA sought or required prior to FinCEN finalizing the proposal. The public portion of the FinCEN rulemaking has been ongoing since February 2012 when FinCEN released an advance notice of proposed rulemaking to solicit comment on potential requirements for financial institutions to (i) conduct initial due diligence and verify customer identities at the time of account opening; (ii) understand the purpose and intended nature of the account; (iii) identify and verify all customers’ beneficial owners; and (iv) monitor the customer relationship and conduct additional due diligence as needed. FinCEN subsequently held a series of roundtable meetings, summaries of which it later published.
On July 17, FinCEN named FBME Bank Ltd., formerly known as the Federal Bank of the Middle East, as a foreign financial institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act. As detailed in a notice of finding, FinCEN asserts that the bank attracts illicit finance businesses by soliciting high-risk customers and promoting its weak AML controls. FinCEN explains that the bank changed its country of incorporation numerous times, partly due to its inability to adhere to regulatory requirements, and has established itself with a nominal headquarters in Tanzania. However, according to FinCEN, it transacts over 90 percent of its global banking business through branches in Cyprus and has taken active steps to evade oversight by the Cypriot regulatory authorities in the recent past. FinCEN is proposing a rule that, once final, will prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for FBME, and for other foreign banks being used to process transactions involving FBME. The proposal also would require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against processing any transactions involving FBME. Comments on the proposed rule are due 60 days after publication in the Federal Register.
On July 15, the Department of Education’s Office of Inspector General (OIG) published a report on its audit of the Department’s Federal Student Aid (FSA) office, which revealed that the FSA has failed to effectively: (i) monitor borrower complaints against private collection agencies (PCAs) and ensure that corrective action is taken; (ii) ensure PCAs are abiding by federal debt collection laws and the related terms of their contracts; and (iii) consider borrower complaints in its evaluation and compensation of PCAs. The audit covered the period October 1, 2009, through September 30, 2012. The OIG recommended that FSA, among other things, (i) enforce the contract requirement that PCAs submit all complaints to FSA and establish procedures that include ensuring PCAs take corrective action; and (ii) require relevant staff to monitor, review, and evaluate the PCA deliverables and reconcile the management/fiscal reports with recorded complaints. The FSA concurred with the findings and most of the recommendations and stated that it has taken a number of steps over the past two years to strengthen its PCA oversight efforts. The FSA further stated that it has planned additional improvements that will further enhance its ability to effectively oversee PCA’s interactions with defaulted borrowers.
Yesterday, in advance of a field hearing being held today on consumer complaints, the CFPB released a proposal to expand the amount of information that will be included in the Consumer Complaint Database to include certain consumer complaint narratives, along with any response to the complaint submitted by the identified financial institution. The CFPB already collects the narrative information as part of the complaint intake process, but to date has not published narratives over privacy concerns it believes it now has addressed. The CFPB describes the proposed change as a natural extension of a policy designed to “provide consumers with timely and understandable information about consumer financial products and services, and improve the functioning, transparency, and efficiency of markets for such products and services.” The CFPB will accept comments on the proposal for 30 days following publication in the Federal Register. Read more…
On July 3, the DOJ announced the resolution of a multi-agency criminal investigation into the way a large mortgage company administered the federal Home Affordable Modification Program (HAMP). According to a Restitution and Remediation Agreement released by the company’s parent bank, the company agreed to pay up to $320 million to resolve allegations that it made misrepresentations and omissions about (i) how long it would take to make HAMP qualification decisions; (ii) the duration of HAMP trial periods; and (iii) how borrowers would be treated during those trial periods. In exchange for the monetary payments and other corrective actions by the company, the government agreed not to prosecute the company for crimes related to the alleged conduct. The investigation was conducted by the U.S. Attorney for the Western District of Virginia, as well as the FHFA Inspector General—which has authority to oversee Fannie Mae’s and Freddie Mac’s HAMP programs—and the Special Inspector General for TARP—which has responsibility for the Treasury Department HAMP program and jurisdiction over financial institutions that received TARP funds. This criminal action comes in the wake of a DOJ Inspector General report that was critical of the Justice Department’s mortgage fraud enforcement efforts, and which numerous members of Congress used to push DOJ to more vigorously pursue alleged mortgage-related violations. In announcing the action, the U.S. Attorney acknowledged that other HAMP-related investigations are under way, and that more cases may be coming.
On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor’s debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank.
On July 1, the U.S. Attorney for the Southern District of New York announced that a large bank agreed to pay $10 million to resolve allegations that prior to 2011 it violated the False Claims Act and FIRREA by failing to oversee the reasonableness of foreclosure-related charges it submitted to the FHA and Fannie Mae for reimbursement, contrary to program requirements and the bank’s certifications that it had done so. The government intervened in a whistleblower suit claiming that, notwithstanding FHA program requirements and the bank’s annual FHA certifications, prior to 2011, the bank failed to create or maintain an adequate FHA quality control program to review the fees and charges submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to FHA for reimbursement. The government also claimed that the bank failed to create or maintain Fannie Mae audit and control systems sufficient to ensure that the fees and expenses submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to Fannie Mae for reimbursement, were reasonable, customary, or necessary. In addition to the monetary settlement, the bank was required to admit to the allegations and agreed to remain compliant with all rules applicable to servicers of mortgage loans insured by FHA and to servicers of loans held or securitized by Fannie Mae and Freddie Mac.
On July 1, HUD announced a conciliation agreement with a California mortgage lender, pursuant to which the lender will pay $48,000 to resolve allegations that it violated the Fair Housing Act when it denied or delayed mortgage loans to women because they were on maternity leave. Under the Fair Housing Act, it is unlawful to discriminate in the terms, conditions, or privileges associated with the sale of a dwelling on the basis of sex, including denying a mortgage loan or mortgage insurance because a woman is pregnant or on family leave. After a married couple complained to HUD that the lender denied their refinancing application because the wife was on maternity leave, HUD commenced an investigation that revealed the lender also allegedly denied four other applicants who were on maternity leave, or delayed their applications until after the women returned to work. The agreement requires the company to pay $20,000 to the couple that filed the complaint, and $7,000 to each of the other four applicants identified by HUD. The company no longer originates mortgages, but agreed to provide annual fair lending training to employees and management staff should it resume its mortgage operation. In a similar action last month, HUD required a Utah credit union to pay $25,000 to resolve allegations that the credit union discriminated against prospective borrowers on maternity leave. The HUD investigation was initiated after a married couple claimed their mortgage loan application was wrongly denied because the wife was on maternity leave. The credit union asserted that its mortgage insurer’s guidelines for calculating income for women on maternity leave allowed regular pay to be considered only if the women returned to work before the loan closed. Although the complainants previously resolved their claims, the credit union agreed to pay $10,000 to an allegedly affected borrower identified during HUD’s investigation, and $15,000 to a qualified organization to help educate the public about fair lending requirements and obligations, including the rights of borrowers on maternity, paternity, pregnancy, or parental leave at the time of an application for a home mortgage loan. The credit union also agreed to adopt an FHA-compliant policy with regard to calculation and treatment of maternity, paternity, and pregnancy leave income, and to identify when employment income may be used based upon the timing of a scheduled return to work date.
On July 1, the FHFA Office of Inspector General (OIG) issued a report containing its assessment of FHFA controls to ensure that Fannie Mae and Freddie Mac monitor nonbank special servicer performance and mitigate related risks. The report concluded that the FHFA has not established a risk management process to handle risks resulting from specialty servicers’ (i) use of short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties; and (ii) obtaining large volumes of mortgage loans that may be beyond what their infrastructures can handle. The OIG asserted that such risks “are amplified by nonbank special servicers operating without the same standards and regulation as banks that service mortgage loans,” including capital requirements, which the OIG believes makes nonbank servicers “more susceptible to economic downturns” that could “substantially increase nonperforming loans that require servicer loss mitigation while at the same time impact[ing] the ability of the servicer to perform.” The OIG recommended that the FHFA (i) issue guidance on a risk management process for nonbank special servicers and (ii) develop a comprehensive, formal oversight framework to examine and mitigate the risks these nonbank special servicers pose. The report highlighted recent FHFA guidance that the OIG believes is sufficient to resolve the second recommendation—a June 11, 2014 FHFA Advisory Bulletin outlining supervisory expectations for risk management practices in conjunction with the sale and transfer of mortgage servicing rights or the transfer of the operational responsibilities of servicing mortgage loans owned or guaranteed by Fannie Mae and Freddie Mac. The Bulletin requires Fannie Mae and Freddie Mac to consider servicer capacity, including staffing, facilities, information technology systems, and any sub-servicing arrangements, as part of the analysis of mortgage servicing transfers. The FHFA agreed to also develop supervisory guidance on how Fannie Mae and Freddie Mac manage risks associated with servicing troubled loans.