Special Alert: CFPB Bulletin Re-Emphasizes Focus on Mortgage Servicing Transfers

On August 19, 2014, the CFPB issued Bulletin 2014-01 to address “potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights.”  The bulletin, which is the latest in a series of CFPB regulations, statements, and guidance on this subject, replaces the Bureau’s February 2013 bulletin on mortgage servicing transfers and states that “the Bureau’s concern in this area remains heightened due to the continuing high volume of servicing transfers.”  It further states that “the CFPB will be carefully reviewing servicers’ compliance with Federal consumer financial laws applicable to servicing transfers” and “may engage in further rulemaking in this area.”

The bulletin contains the following information, which is summarized in great detail below:

  • Examples of policies and procedures that CFPB examiners may consider in evaluating whether the servicers on both ends of a transfer have complied with the CFPB’s new regulations requiring, among other things, policies and procedures reasonably designed to facilitate the transfer of information during servicing transfers and to properly evaluate loss mitigation applications.
  • Guidance regarding the application of other aspects of the new servicing requirements to transfers.
  • Descriptions of other Federal consumer financial laws that apply to servicing transfers, such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the prohibition on unfair, deceptive, and abusive acts or practices (“UDAAPs”).
  • A statement that “[s]ervicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.”  This largely reiterates the Bureau’s statements in its February 2013 bulletin.

In a press release accompanying the bulletin, CFPB Director Richard Cordray stated that: “At every step of the process to transfer the servicing of mortgage loans, the two companies involved must put in appropriate efforts to ensure no harm to consumers. This means ahead of the transfer, during the transfer, and after the transfer.  We will not tolerate consumers getting the runaround when mortgage servicers transfer loans.

Click here to view the special alert.

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Unofficial Transcripts of the ABA Briefing/Webcast “Mortgage Q&A with the Consumer Financial Protection Bureau”

To address outstanding questions regarding the new mortgage rules that took effect in January 2014, CFPB staff provided non-binding, informal guidance in a webinar hosted by the American Bankers Association (ABA). Specifically, CFPB staff answered questions regarding the mortgage origination rules and the mortgage servicing rules on April 22, 2014.

With the ABA’s consent, BuckleySandler has prepared a transcript of the webinar that incorporates the ABA’s slides. The transcript is provided for informational purposes only and does not constitute legal opinions, interpretations, or advice by BuckleySandler. The transcript was prepared from the audio recording arranged by the ABA and may have minor inaccuracies due to sound quality. In addition, the transcripts have not been reviewed by the CFPB or the ABA for accuracy or completeness.

Questions regarding the matters discussed in the webinar or the rules themselves may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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CFPB Adjusts CARD Act, HOEPA, And Ability To Repay Thresholds

On August 14, the CFPB issued a final rule to re-calculate certain threshold amounts under Regulation Z. With respect to certain amounts under the CARD Act, effective January 1, 2015, the minimum interest charge disclosure thresholds will remain unchanged, while the permissible penalty fees safe harbor will increase to $27 for a first late payment and $38 for each subsequent violation in the following six months. With respect to HOEPA loans, effective January 1, 2015, the adjusted total loan amount threshold will be $20,391, and the adjusted statutory fee trigger will be $1,020. Also effective January 1, 2015, for the purpose of a creditor’s determination of a consumer’s ability to repay a transaction secured by a dwelling, a covered transaction will not be a qualified mortgage unless the transaction’s total points and fees do not exceed: (i) 3% of the total loan amount for a loan greater than or equal to $101,953; (ii) $3,059 for a loan amount greater than or equal to $61,172 but less than $101,953; (iii) 5% of the total loan amount for a loan greater than or equal to $20,391 but less than $61,172; (iv) $1,020 for a loan amount greater than or equal to $12,744 but less than $20,391; and (v) 8% of the total loan amount for a loan amount less than $12,744.

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FHFA Seeks Comments On Proposed Single GSE Security

On August 12, the FHFA requested comments on the structure of a proposed single security that would be issued and guaranteed by Fannie Mae or Freddie Mac (the GSEs). The implementation of the single security would be part of a “multi-year initiative” to build a common securitization platform. The request explains that the proposed single security would generally encompass many of the pooling features of the current Fannie Mae Mortgage Backed Security (MBS) and most of the disclosure framework of the current Freddie Mac Participation Certificate (PC). The single security would have key features that exist in the current market, such as: (i) a payment delay of 55 days; (ii) pooling prefixes; (iii) mortgage coupon pooling requirements; (iv) minimum pool submission amounts; (v) general loan requirements, such as first lien position, good title, and non-delinquent status; (vi) seasoning requirements; and (vii) loan repurchase, substitution, and removal guidelines. The GSEs would continue to maintain their separate Servicing and Selling Guides for the single security. The FHFA is especially interested in comments on how to preserve “to-be-announced” (TBA) eligibility and ensure that legacy MBS and PCs are “fully fungible” with the single security. The FHFA also seeks specific input on: (i) what key factors regarding TBA eligibility status should be considered in the design of and transition to a single security; (ii) what issues should be considered to ensure broad market liquidity for the legacy securities; (iii) what operational, system, policy, or other effects on the industry should be considered; and (iv) what can be done to ensure smooth implementation of a single security with minimal risk of market disruption. Comments are due by October 13, 2014.

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Freddie Mac Implements FinCEN AML Rules, Updates Other Selling And Servicing Policies

On August 14, Freddie Mac issued Bulletin 2014-15, which reminds seller/servicers subject to the AML requirements of the BSA that they are expected to maintain an AML compliance program and are required to report to Freddie Mac any instances of AML program noncompliance. Effective October 1, 2014, Freddie Mac is also requiring seller/servicers not subject to the AML provisions of the BSA to develop internal controls and policies and procedures to detect and report Suspicious Activity to Freddie Mac (but without the requirement to file SARs). Additionally, the Bulletin notifies seller/servicers that, effective October 15, 2014, Freddie Mac will require wholly-owned subsidiaries of seller/servicers that are federally-regulated depository institutions to obtain separate Freddie Mac seller/servicer approvals. The Bulletin also: (i) provides that seller/servicers can waive the requirement for flood insurance for non-residential detached structures located on the Mortgaged Premises; (ii) clarifies ULDD data points; (iii) updates Freddie Mac’s certificate of incumbency for sellers and warehouse lenders (effective October 1, 2014); and (iv) updates miscellaneous manufactured home requirements.

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Texas Federal Court Upholds HUD’s Suspension Of Mortgagee

On August 5, the U.S. District Court for the Southern District of Texas held that HUD’s decisions to immediately suspend a HUD mortgagee and its CEO were not “arbitrary and capricious” and did not violate due process. Allied Home Mortg. Corp. v. Donovan, No. H-11-3864, 2014 WL 3843561 (S.D. Tex. Aug. 5, 2014). In October 2011, a U.S. Attorney’s Office sued the mortgagee, its CEO, and related parties under the False Claims Act and FIRREA for allegedly making false statements and false claims to HUD in connection with FHA-insured mortgage loans. Shortly thereafter, based on information obtained by the U.S. Attorney’s Office, HUD immediately suspended the mortgagee’s HUD/FHA origination and underwriting approvals and suspended the CEO from participation in procurement and nonprocurement transactions as a participant or principal. The mortgagee plaintiffs argued that such suspensions were “arbitrary and capricious” (and thus violated the Administrative Procedure Act) given the age of the evidence against the CEO and the limited evidence directly attributable to the mortgagee. Specifically, the mortgagee plaintiffs argued that HUD failed to follow its own standards for issuing immediate suspensions because it did not have adequate evidence of any present or imminent threat to the financial interests of the public or HUD that would warrant an immediate suspension. The court, however, held that the evidence uncovered in the investigation was sufficient to support HUD’s action, and that HUD “drew rational inferences based on the severity, persistence, and length of the [alleged] misconduct.” The court also denied the mortgagee plaintiffs’ due process claim, reasoning that the initial suspensions were temporary and could have been administratively appealed. The court denied the mortgagee plaintiffs’ motion for summary judgment and dismissed the case with prejudice.

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Fair Housing Group Issues Annual Report

On August 13, the National Fair Housing Alliance (NFHA) published its annual fair housing report titled “Expanding Opportunity: Systemic Approaches to Fair Housing.” The paper summarizes 2013 fair housing enforcement actions and litigation, as well as federal policy developments, and provides fair housing-related data. NFHA reports that, overall, the number of fair housing complaints filed in 2013 remained flat compared to recent years, but notes that private fair housing organizations received more complaints of discrimination in real estate sales and homeowners insurance, as well as complaints of discriminatory housing advertisements by housing providers. According to the report, the DOJ Housing Section filed 43 cases in 2013, including 24 cases involving pattern and practice claims, compared to 36 cases in 2012, of which 21 involved pattern and practice. Of the 2013 pattern or practice cases, five alleged fair lending claims; 11 alleged rental discrimination on the basis of race, disability, sex, familial status, national origin, or religion; three alleged violations of the accessibility provisions of the Fair Housing Act; three alleged discrimination in land use and zoning practices or policies by local governments; and one alleged disability discrimination by a homeless shelter. Finally, the report provides, for the first time, an analysis of HUD data by region, which includes a breakdown of complaints by protected class within each of HUD’s 10 regions.

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HUD Announces Disability Income Fair Housing Conciliation Agreement

On August 13, HUD announced that a nonbank mortgage lender agreed to pay $104,000 to resolve allegations that the lender’s underwriting practices resulted in discrimination against mortgage applicants who rely on disability income. HUD filed a complaint claiming the lender required loan applicants to submit medical and other documentation related to an applicant’s disability income that it did not require from non-disabled applicants, in violation of the Fair Housing Act. Working with HUD, the lender identified 69 applicants whose loan files contained evidence of a request for additional disability documentation or evidence that a loan may have been denied on the failure or inability of the applicant to provide such documentation. The lender agreed to compensate those applicants using a tiered system, under which each applicant will receive $1,000, $2,000, or $5,000 in damages. The lender did not admit to any fault, guilt, or liability, and denied that it discriminated against any loan applicant on the basis of disability. The lender also submitted to a monitoring requirement and implemented a modified fair lending training program for its employees.

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CFPB Fines Online Mortgage Company And Its Owner For Alleged Deceptive Rate Advertising

On August 12, the CFPB announced a consent order with a nonbank mortgage lender, its affiliated appraisal management company (AMC), and the individual owner of both companies to resolve allegations that the lender deceptively advertised mortgage rates to consumers, improperly charged fees before providing consumers with Good Faith Estimates (GFE), and failed to disclose its affiliation with the AMC while allowing the AMC to charge inflated fees.

Allegations

As explained in the consent order, the lender primarily conducts business online through its own website, and also advertises its mortgages through display ads on independent websites and the website of an unaffiliated third-party rate publisher. The CFPB asserts that, over a roughly two-year period, a “systemic problem” caused the lender to list on the rate publisher’s website lower rates for certain mortgages than the lender was willing to honor, and that the lender supplied other rates to the rate publisher that were unlikely to be locked for the majority of the lender’s borrowers. The CFPB claims that the lender failed to perform systematic due diligence or quality control to ensure the accuracy of listed rates, even though the lender was made aware through consumer complaints that certain rates were inaccurate. Read more…

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Eighth Circuit Holds Loan Guarantors Are Not Applicants Under ECOA

On August 5, the U.S. Court of Appeals for the Eighth Circuit held that ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another. Hawkins v. Comm. Bank of Raymmore, No. 13-3065, 2014 WL 3826820 (8th Cir. Aug. 5, 2014). In this case, two individuals executed personal guaranties to secure several loans made to a residential development company owned by their husbands. After the company defaulted on the loans, the bank accelerated the loans and demanded payment from the company and the two individual guarantors. The guarantors, in turn, sued the bank, seeking damages and an order declaring their guaranties void and unenforceable, alleging that the bank required them to execute the guaranties securing the company’s loans solely because they are married to their respective husbands—the owners of the company. The guarantors asserted that such a requirement constituted discrimination against them on the basis of their marital status, in violation of ECOA. The court held that “the plain language of ECOA unmistakably provides that a person is an applicant only if she requests credit,” and that “a person does not, by executing a guaranty, request credit.” In doing so the court rejected the Federal Reserve Board’s implementing regulation that interpreted the term applicant to include guarantors. The court’s holding also creates a split with the Sixth Circuit, which recently “came to the contrary conclusion, finding it to be ambiguous whether a guarantor qualifies as an applicant under the ECOA.”

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Minnesota Supreme Court Rejects Twombly/Iqbal Pleading Standard

On August 6, the Minnesota Supreme Court held in a foreclosure-related case that the plausibility standard announced in Twombly and Iqbal does not apply to civil pleadings in Minnesota state court. Walsh v. U.S. Bank, N.A., No. A13-0742, 2014 WL 3844201 (Minn. Aug. 6, 2014). A borrower sued her mortgage lender to vacate the foreclosure sale of her home, claiming the lender failed to properly serve notice of the non-judicial foreclosure proceeding. The bank moved to dismiss the suit based on the plausibility standard established by the U.S. Supreme Court in Twombly, which requires plaintiffs to plead “enough facts to state a claim to relief that is plausible on its face.” The Minnesota Supreme court held that the state’s traditional pleading standard is controlling, and not the federal standard established in Twombly. The court explained that under the state standard, “a claim is sufficient against a motion to dismiss for failure to state a claim if it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.” The court identified five reasons the state rule applies: (i) the relevant state rule does not clearly require more factual specificity; (ii) the state’s rules of civil procedure express a strong preference for short statements of facts in complaints; (iii) the sample complaints attached to the rules show that short, general statements are sufficient; (iv) the rules allow parties to move for a more definite statement if a pleading is overly vague; and (v) there are other means to control the costs of discovery.

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SDNY Judge Approves RMBS Consent Judgment But Questions Second Circuit’s Standard For Reviewing Agency Consent Judgments

On August 5, U.S. District Court for the Southern District of New York Judge Jed Rakoff approved a consent judgment between the SEC and a financial institution to resolve allegations that the institution violated securities laws in connection with certain mortgage-backed securities. SEC v. Citigroup Global Markets Inc., No. 11-7387, 2014 WL 3827497 (S.D.N.Y. Aug. 5, 2014). Earlier this year, the U.S. Court of Appeals for the Second Circuit vacated and remanded the district court’s earlier decision to reject the proposed settlement, holding that the proper standard for reviewing a proposed enforcement agency consent judgment is whether the proposed consent decree is fair and reasonable, and in the event the agreement includes injunctive relief, whether “the public interest would not be disserved.” On remand, Judge Rakoff approved the consent judgment stating that based on the underlying record, “the Court cannot say that the proposed Consent Judgment is procedurally improper or in any material respect fails to comport with the very modest standard imposed by the Court of Appeals.” Judge Rakoff noted his concern, however, that “as a result of the Court of Appeals decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever.”

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Trade Group Proposes Standards For Private RMBS Market

On August 6, the Structured Finance Industry Group released the first edition of a “comprehensive set of proposed industry standards” to promote growth in the private label RMBS market. The SFIG explains that the project “seeks to reduce substantive differences within current market practices through an open discussion among a broad cross-section of market participants,” and, where possible establish best practices related to: (i) representations and warranties, repurchase governance, and other enforcement mechanisms; (ii) due diligence, disclosure, and data issues; and (iii) roles and responsibilities of transaction parties and their communications with investors. The paper is the first in an iterative process, and touches on only a few of the items identified in a sprawling master agenda. With regard to representations and warranties, the paper discusses fraud, regulatory compliance, and objective independent review triggers. For due diligence, data and disclosure, the paper considers underwriting guidelines disclosure and due diligence extract to investors. Finally, the paper addresses the role of transaction parties and bondholder communication.

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SDNY Orders Bank To Pay $1.3 Billion Following Verdict In GSE Civil Fraud Case

On July 30, the U.S. District Court for the Southern District of New York ordered a bank to pay a nearly $1.3 billion civil penalty after a jury found the bank liable in October 2013 on one civil mortgage fraud charge arising out of a program operated by a mortgage lender the bank had acquired. The case was the first in which the government alleged violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. The government originally sought damages of $1 billion based on alleged losses incurred by Fannie Mae and Freddie Mac. Subsequently the government argued the penalty should be calculated not based on loss to the GSEs, but rather based on gross gain to the lender, in order to accomplish “FIRREA’s central purpose of punishment and deterrence.” The government calculated a gross gain of $2.1 billion, and requested that the court impose a penalty in that amount.

In its order on civil penalties, the court noted that FIRREA provides no guidance on how to calculate a gain or loss or how to choose a penalty within the broad range permitted. To quantify the gain or loss on the 17,611 loans at issue, the court focused on the general principle that the “civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in favor of those purposes.” The court determined that both gain and loss should be viewed in terms of how much money the lender “fraudulently induced” the GSEs to pay. Even though many of the loans were in fact high quality, the Court included all of the loans in the gain and loss analysis because the jury found that the lender engaged in an intentional scheme to defraud the GSEs and that the lender intended to represent loans as being materially higher quality than they actually were. The court reasoned that the “happenstance that some of the loans may still have been of high quality should not relieve the defendants of bearing responsibility for the full payments they received from the scheme, at least not if the purposes of the penalty are punishment and deterrence.” As a result, the Court found the proper measure of both gain and loss to be the amount Fannie and Freddie paid for all loans at issue, and set $2,960,737,608 as the statutory maximum for the penalty. As a compensating factor, the court considered that 57.19 percent of the loans were not materially defective and reduced the penalty to 42.81 percent of the statutory maximum, or $1,267,491,770.

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Comment Period For FHFA G-Fee Review Extended

On July 29, the FHFA extended the comment period on its request for input regarding potential changes to guarantee fees that Fannie Mae and Freddie Mac charge lenders.  Comments originally were due by August 4, 2014, but now will be accepted through September 8, 2014.

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