On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
On December 5, ACLU-affiliated entities and borrower advocacy groups filed a lawsuit in the Northern District of California seeking to compel FHFA to produce “all [FHFA] records pertaining to the use of eminent domain to purchase mortgages.” Alliance of Californians for Community Empowerment v. Fed. Hous. Fin. Agency, No. 13-5618 (N.D. Cal. Dec. 5, 2013). Specifically, the plaintiffs seek to compel FHFA to respond to a FOIA request that demanded, among other things, (i) all communications and records of meetings between FHFA leadership and financial services industry trade associations and individual companies; (ii) all FHFA records regarding the City of Richmond’s proposal to seize certain mortgages; and (iii) all studies and analyses of the impact of eminent domain or principal reduction proposals relied upon by FHFA in support of materials it released in August 2013 outlining potential actions the agency could take in response to local efforts to employ eminent domain to seize mortgages. The complaint details the organizations’ position on eminent domain as a tool to implement principal reduction, which the organizations complain FHFA has improperly failed to pursue on its own. The request and complaint suggest that FHFA’s eminent domain position was unduly influenced by the financial services industry and “is advancing the interests of Wall Street firms at the expense of the nation’s homeowners.” This latest challenge of FHFA’s positions on eminent domain and principle reduction precede, potentially by days, an anticipated vote to confirm Representative Mel Watt (D-NC) to serve as FHFA Director.
On November 26, the U.S. Court of Appeals for the Sixth Circuit held that mortgage servicers are exempted from TILA liability, despite recent amendments to the statute. Marais v. Chase Home Fin. LLC, No. 12-4248, 2013 WL 6170977 (6th Cir. Nov. 26, 2013). A borrower had alleged that her servicer violated TILA by failing to properly respond to her written request for information regarding her loan. The Sixth Circuit rejected the borrower’s argument that amendments to TILA as part of the Helping Families Save Their Homes Act of 2009 created a cause of action against mere servicers, and held that servicers who are not creditors or creditor assignees are expressly exempt from TILA liability. The court, however, held that the servicer could be liable under RESPA for damages caused by its purported deficient response to the borrower’s request for information.
FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements
On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.
On November 27, HUD issued Mortgagee Letter 2013-42, granting an extension of time to Title I and II lenders and mortgagees with a December 31, 2013 fiscal year end to submit required materials and fees for annual recertification. The letter notes that FHA-approved lenders and mortgagees with a fiscal year end of December 31, 2013 or later must use the Lender Electronic Assessment Portal (LEAP) to complete the annual certification process. Given that LEAP recertification functionality will not be deployed until after March 31, 2014, lenders and mortgagees with a fiscal year end of December 31, 2013 will be unable to access LEAP within the required timeframe, and instead will have until 30 days after the deployment of LEAP functionality to complete their annual certification.
On November 25, Freddie Mac issued Bulletin 2013-24, which revises numerous short sale and deed-in-lieu of foreclosure (DIL) requirements. The bulletin updates, among other things, eligibility requirements for exceptions to borrower documentation for short sales and DILs by (i) permitting a borrower whose mortgage debt has been discharged in a Chapter 7 bankruptcy to be eligible for an exception to documentation, regardless of FICO score; and (ii) removing mortgages that were originated as investment properties from eligibility for an exception to documentation. The bulletin also requires servicers to: (i) submit a short sale or DIL recommendation to Freddie Mac for approval when the borrower’s cash reserves exceed $50,000; and (ii) delay, or ensure that foreclosure counsel delays, the next legal action in the foreclosure process when such servicers receive a first complete borrower response package (BRP) more than 37 days prior to a scheduled foreclosure sale date, and the evaluation results in an offer to proceed with a short sale or DIL. Further, the bulletin states that servicers no longer are required to conduct an expedited review when a completed BRP with a short sale purchase offer is received greater than 37 days prior to a scheduled foreclosure sale date. Finally, the bulletin updates trial period plan requirements to provide that if a borrower accepts an original trial period plan offer after receiving an appeal decision, and the borrower remains eligible for the original offer, servicers must reissue the original offer with a new trial period plan due date.
On December 4, Fannie Mae issued Servicing Guide Announcement SVC-2013-24, which: (i) updates the modification terms for the “Cap and Extend Modification for Disaster Relief” to require servicers to set the interest rate to a fixed rate; and (ii) establishes the steps servicers must follow to determine borrowers’ modified payment terms. Fannie Mae encourages servicers to implement the new requirements immediately, but will not require them to do so until February 1, 2014. The announcement likewise requires, with immediate effect, that servicers update Form 582 (Lender Record Information) promptly after any change in previously-submitted information occurs. Finally, the announcement adds to the Servicing Guide glossary a definition for “seriously delinquent mortgage loan.”
On November 20, 2013, the CFPB finalized its long-awaited rule combining the mortgage disclosures consumers receive under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board (“FRB”) and the U.S. Department of Housing and Urban Development (“HUD”). In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) transferred authority over TILA and RESPA to the Bureau and directed the Bureau to create “rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws.” Congress did not, however, amend TILA and RESPA provisions governing timing, responsibility, and liability for the disclosures, leaving it to the Bureau to resolve the inconsistencies. The final rule generally applies to covered transactions for which the creditor or mortgage broker receives an application on or after August 1, 2015.
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Joseph J. Reilly, (202) 349-7965
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Benjamin K. Olson, (202) 349-7924
- Jonathan W. Cannon, (310) 424-3903
- Brandy A. Hood, (202) 461-2911
On November 18, at an American Bar Association/American Bankers Association conference on the Bank Secrecy Act/Anti-Money Laundering (BSA/AML), Deputy Attorney General (Deputy AG) James Cole challenged financial institutions’ compliance efforts and outlined the DOJ’s financial crimes enforcement approach. Noting that compliance within financial institutions is of particular concern to the DOJ, based in part on recent cases of “serious criminal conduct by bank employees,” the nation’s second highest ranking law enforcement official detailed DOJ’s approach to investigating and deciding in what manner to pursue potential violations. The Deputy AG included among his examples of serious misconduct recent BSA/AML, RMBS, mortgage False Claims Act, and LIBOR cases. He explained that the DOJ is particularly concerned about incentives that encourage excessive risk taking, and stated that “too many bank employees and supervisors value coming as close to the line as possible, or even crossing the line, as being ‘competitive’ or ‘aggressive.’” Read more…
On November 19, the DOJ, other federal authorities, and state authorities in California, Delaware, Illinois, and Massachusetts, announced a $13 billion settlement of federal and state RMBS civil claims, which were being pursued as part of the state-federal RMBS Working Group, part of the Obama Administration’s Financial Fraud Enforcement Task Force. The DOJ described the settlement as the largest it has ever entered with a single entity. Federal and state law enforcement authorities and financial regulators alleged that the bank and certain institutions it acquired mislead investors in connection with the packaging, marketing, sale and issuance of certain RMBS. They claimed the institutions’ employees knew that loans backing certain RMBS did not comply with underwriting guidelines and were not otherwise appropriate for securitization, yet allowed the loans to be securitized and sold without disclosing the alleged underwriting failures to investors.The agreement includes $9 billion in civil penalties and $4 billion in consumer relief. Of the civil penalty amount, $2 billion resolves DOJ’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion resolves federal and state securities claims by the NCUA, $515.4 million resolves federal and state securities claims by the FDIC, $4 billion settles federal and state claims by the FHFA, while the remaining amount resolves claims brought by California ($298.9 million), Delaware ($19.7 million) Illinois ($100.0 million), Massachusetts ($34.4 million), and New York ($613.0 million). The bank also was required to acknowledge it made “serious misrepresentations.” The agreement does not prevent authorities from continuing to pursue any possible related criminal charges.
Governor Yellen Addresses Bank Director Removal Over Foreclosure Practices; Lawmakers Press Regulators On Independent Foreclosure Review Details
On November 18, Federal Reserve Chair nominee Janet Yellen responded to a recent inquiry by Senator Elizabeth Warren (D-MA) seeking more details about the Federal Reserve Board’s process for determining whether bank officers or directors should be removed because they directly or indirectly participated in the alleged violations that have resulted in various mortgage servicer settlements. Governor Yellen stated that the Federal Reserve Board “has not, to date, taken any actions removing or prohibiting insiders of the mortgage servicing organizations that were subject to the 2011 and 2012 mortgage servicing enforcement actions for their conduct in connection with servicing or foreclosure activities”, but “[the Federal Reserve Board is], however, continuing to investigate whether such removal or prohibition actions are appropriate.” In addition, on November 15, Senator Warren, joined by Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA), again pressed the Federal Reserve Board and the OCC to release a public report on the Independent Foreclosure Review process. This latest request follows other similar requests made earlier this year.
On November 15, Freddie Mac issued Bulletin 2013-23, which withdraws recently announced fraud training requirements and describes various changes to other requirements. Citing the need to assess industry feedback, Fannie Mae withdrew Bulletin 2013-18, which required, among other things, that seller/servicers provide third-party vendors retained to perform functions relating to origination and servicing of mortgages with training on fraud prevention, detection, and reporting. In addition, Bulletin 2013-23 (i) updates payment history verification requirements for manually underwritten mortgages; (ii) announces that previously announced eligibility requirements applicable to higher-priced mortgage loans (HPMLs) are applicable to higher-priced covered transactions (as defined in the CFPB ability to repay/qualified mortgage rule) and not solely to HPMLs; (iii) updates certain requirements for Freddie Mac Relief Refinance Mortgages; (iv) updates requirements for verifying tax information for borrowers with income derived from sources in Puerto Rico, Guam and the U.S. Virgin Islands; and (v) clarifies signature requirements for security instruments.
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.
Florida Appeals Court Affirms Dismissal Of State Qui Tam FCA Lawsuit Alleging Failure To Pay Stamp Tax Upon Assignment
On November 21, the Florida First District Court of Appeals affirmed the dismissal of a qui tam false claims act lawsuit against a lender, securitization trust, and MERS for the recovery of allegedly unpaid documentary stamp taxes associated with certain assignments of mortgage notes. Stevens v. State of Florida, No. 1D13-1206, 2013 WL 6097312 (Fl. Ct. App. Nov. 20, 2013). Appellants, two Florida residents, sought to recover the alleged unpaid taxes on behalf of the State of Florida as relators under the Florida False Claims Act (FFCA), as well as a cut of the recovered proceeds. But the First District Court of Appeal affirmed the trial court’s determination that it lacked subject matter jurisdiction under the FFCA to address Appellants’ claims. Specifically, the First District found that Florida’s Tax Act—not the FFCA—governed private actions like Appellants’ where a plaintiff sought recovery for a failure to pay taxes. Analyzing the Tax Act and FFCA under well-settled principles of statutory construction, including that specific statutes trump general statutes and that legislatures are presumed to be aware of existing laws when they pass new ones, the court of appeals determined that the Tax Act, which vests the Florida Department of Revenue with the power to compensate tax whistleblowers, precluded Appellants’ FFCA claim. BuckleySandler attorneys Matthew Previn, Andrew Louis, and Bradley Marcus represented the lender, GE Money Bank, which is now known as GE Capital Retail Bank, in the successful lower court action and subsequent successful appeal.
**Update – The CFPB has now released the final rule and related materials, available here.**
Later today, as anticipated, the CFPB will release its final rule combining the TILA and RESPA mortgage disclosure forms and rules. We will review the final forms and rule, monitor the related field hearing, and prepare a preliminary Special Alert followed by a more detailed summary.
The final rule and forms follow two years of drafting, testing, and revision by the Bureau. According to the Bureau, its testing demonstrates that the new forms significantly improve the ability of consumers with a variety of experience levels and loan types to answer questions about their loans, compare competing loans, and compare estimated and final loan terms and costs.
The text of the final rule will not be available until later today. However, we are able to make several preliminary observations based on our review of the materials made available thus far, perhaps most importantly that industry will have until August 1, 2015 to make the changes to systems and training necessary to implement the new forms, which is longer than anticipated. Additional observations follow. Read more…