Special Alert: FHA Announces It Will Accept Electronically-Signed Mortgage Documents

On January 30, HUD issued Mortgagee Letter 2014-03, announcing that FHA will now treat electronic signatures as equivalent to handwritten signatures for certain mortgage documents. The announcement sets forth FHA’s first authorization of electronic signatures on mortgage documents (other than certain third party documents – see Mortgagee Letter 2010-14) and applies to FHA Single Family Title I and II forward mortgages and Home Equity Conversion Mortgages. The announcement is consistent with other government agency initiatives to promote a more streamlined and efficient mortgage process for consumers, particularly through the use of technology such as electronic signatures. Earlier this month, for example, the CFPB issued a request for information containing a questionnaire focused on improving the home loan closing process. “By extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices,” said FHA Commissioner Carol Galante. “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process.”

The announcement indicates that, effective immediately, FHA will accept electronic signatures on (i) any documents associated with servicing or loss mitigation; (ii) any documents associated with the filing of a claim for FHA insurance benefits; (iii) the HUD Real Estate Owned Sales Contract and related addenda; and (iv) all documents included in the case binder for mortgage insurance except the Note.  FHA will begin accepting electronic signatures on the Note for forward mortgages, but not Home Equity Conversion Mortgages, on December 31, 2014. FHA already allows electronic signatures on documents originated and signed outside of the lender’s control, such as the sales contract.

FHA requires lenders that accept electronic signatures to comply with the ESIGN Act (15 U.S.C. §§ 7001-7006). The ESIGN Act mandates that the signer be presented the document before the electronic signature is obtained, that the document is true and correct at the time it is signed, and that the signature is attached to, or logically associated with, the documents being electronically signed. Lenders must also take steps to confirm the identity of the signer as a party to the transaction and to establish that the signature may be attributed to the purported signer. Lenders must have systems in place to ensure that information generated to confirm the identity of signers is secure and that electronically signed documents cannot be altered without detection.

In addition to citing the requirements of ESIGN, FHA sets some more specific requirements for certain elements of the signing process. These include requirements for establishing attribution of the signature and authentication of the signer.  FHA also sets requirements for maintaining audit logs, computer systems, controls and documentation, and making them available for FHA inspection.

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Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Electronic Signatures and Records practice, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: HUD Adopts Its Own QM Rule

On December 11, 2013, the Department of Housing and Urban Development (“HUD”) issued a final rule defining what constitutes a “qualified mortgage” (“QM”) for purposes of loans insured by the Federal Housing Administration (“FHA”). With limited clarifications and adjustments, the rule tracks the proposal issued by HUD in September.  This final rule, which applies to all case numbers assigned on or after January 10, 2014, replaces the temporary QM definition for FHA loans established by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) in its Ability-to-Repay/Qualified Mortgage Rule (“ATR/QM Rule”).

Loans that qualify as QMs provide lenders with some legal protection against borrower lawsuits under the Truth in Lending Act (“TILA”) alleging the lender did not sufficiently consider the borrower’s ability to repay the loan.  Under HUD’s final rule, most FHA loans will qualify for the QM safe harbor if they have Annual Percentage Rates (“APRs”) that are no more than 2.5 percentage points over the Average Prime Offer Rate (“APOR”) for a comparable transaction (as opposed 1.5 percentage points over APOR in the CFPB’s ATR/QM Rule).

Click here to read our Special Alert.

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.

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Special Alert: Federal Reserve Board Guidance on Managing Outsourcing Risks Mirrors Recent OCC Guidance

On December 5, 2013, the Federal Reserve Board (FRB or the Fed) issued Supervision and Regulation Letter 13-19, which details and attaches the Fed’s Guidance on Managing Outsourcing Risk  (FRB Guidance).  The FRB Guidance sets forth risks arising out of the use of service providers and the regulatory expectations relating to risk management programs. It is substantially similar to OCC Bulletin 2013-29, which the Office of the Comptroller of the Currency (OCC) issued on October 30, 2013.

The FRB Guidance supplements existing guidance relating to risks presented by Technology Service Providers (TSPs) to reach service providers that perform a wide range of business functions, including, among other things, appraisal management, internal audit, human resources, sales and marketing, loan review, asset and wealth management, procurement, and loan servicing.

While a complete roadmap of the FRB Guidance would be largely duplicative of our recent Special Alert relating to the OCC Bulletin 2013-29, key supervisory and enforcement themes emerge from a comparison of the two guidance documents.  Like the OCC, the Fed signals broadly that failure to effectively manage the use of third-party service providers could “expose financial institutions to risks that can result in regulatory action, financial loss, litigation, and loss of reputation.” The Fed also emphasizes the responsibility of the Board of Directors and senior management to provide for the effective management of third-party relationships and activities.  It enumerates virtually the same risk categories as the OCC, including compliance, concentration, reputational, operational, country, and legal risks, though its discussion of those risks is slightly less comprehensive.

The FRB Guidance makes clear that service provider risk management programs should focus on outsourced activities that are most impactful to the institution’s financial condition, are critical to ongoing operations, involve sensitive customer information, new products or services, or pose material compliance risk. While the elements comprising the service provider risk management program will vary with the nature of the financial institution’s outsourced activities, the Fed’s view is that effective programs usually will include the following: Read more…

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Special Alert: CFPB Finalizes Rule Combining TILA and RESPA Mortgage Disclosures

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.

Click here to read our Special Alert.

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.

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Special Alert: Settlement In Key Fair Housing Case Moves Forward, Supreme Court Unlikely To Hear Appeal

Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount  Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.

The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plain­tiffs to bring claims under a disparate impact theory.

Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly. Read more…

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Special Alert: OCC Updates Third-Party Risk Management Guidance

On October 30, the OCC issued Bulletin 2013-29 to update guidance relating to third-party risk management. The Bulletin, which rescinds OCC Bulletin 2001-47 and OCC Advisory Letter 2000-9, requires banks and federal savings associations (collectively “banks”) to provide comprehensive oversight of third parties, including joint ventures, affiliates or subsidiaries, and payment processors. It is substantially more prescriptive than CFPB Bulletin 2012-3, and incorporates third-party relationship management principles underlying recent OCC enforcement actions.

The Bulletin warns that failure to have in place an effective risk management process commensurate with the risk and complexity of a bank’s third-party relationships “may be an unsafe and unsound banking practice.”  It outlines a “life cycle” approach and provides detailed descriptions of steps that a bank should consider taking at five important stages: Read more…

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Special Alert: Agencies Issue Joint Statement On Fair Lending Compliance And The CFPB’s ATR/QM Rule

On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.”  Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule).  The DOJ and HUD did not participate in the Interagency Statement.

The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014.  The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “do not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”  Furthermore, the Interagency Statement will not necessarily preclude civil actions. Read more…

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Special Alert: CFPB ISSUES MORTGAGE SERVICING RULE AMENDMENTS AND GUIDANCE ADDRESSING CONFLICTS WITH BANKRUPTCY AND DEBT COLLECTION RULES

On October 15, the CFPB issued an interim final rule amending certain provisions of its mortgage servicing rules and making technical changes to other January 2013 mortgage rules (the Interim Amendments). As explained in our Special Alert, the amendments address issues raised by bankruptcy trustees and industry about the incompatibility of the servicing rules with protections afforded to consumers by bankruptcy law and the FDCPA. The CFPB also issued a bulletin providing guidance on other aspects of the servicing rules and an advisory opinion on the interaction between the rules and the FDCPA. In addition, on October 16, CFPB staff provided unofficial oral guidance on specific questions about the mortgage servicing rules in a webinar hosted by the Mortgage Bankers Association.  BuckleySandler attorneys attended the webinar and can address any questions you may have.

Like the mortgage servicing rules, the Interim Amendments will take effect on January 10, 2014. The CFPB issued the Interim Amendments without advance notice and public comment because of the impending effective date. The public will have 30 days to provide comments after publication of the amendments in the Federal Register (which has not yet occurred). After the comment period, the CFPB may make adjustments to the Interim Amendments before adopting them in final form.

Questions regarding the matters discussed in this Special 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.

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Special Alert: CFPB Announces First HMDA Enforcement Actions, Issues HMDA Guidance

On October 9, the CFPB (or Bureau) announced it had assessed civil money penalties totaling $459,000 against two financial institutions—one bank and one nonbank—after examinations identified significant data errors in mortgage loans reported pursuant to the Home Mortgage Disclosure Act (HMDA). The Bureau simultaneously issued a HMDA bulletin to all mortgage lenders regarding the elements of an effective HMDA compliance management system, resubmission thresholds, and factors the Bureau may consider when evaluating whether to pursue a public HMDA enforcement action and related civil money penalties.

Enforcement Actions

According to the consent orders (available here and here), both financial institutions maintained inadequate HMDA compliance systems that resulted in the reporting of “severely compromised mortgage lending data.” The nonbank, which reported 21,015 applications in its 2011 HMDA Loan Application Register (LAR), agreed to pay a penalty of $425,000. The consent order notes previous violations identified by the state regulator and states that the Bureau sampled 32 loans and concluded that the sample error rate unreasonably exceeded the Bureau’s resubmission threshold, although the error rate was not disclosed. The investigation of the nonbank was conducted in cooperation with the Massachusetts Division of Banks, which announced its own consent order imposing a $50,000 administrative fine at the same time that the CFPB announced its order. The bank, which reported 5,785 applications in its 2011 HMDA LAR, agreed to pay a penalty of $34,000. The consent order against the bank states that the bank’s sample error rate was 38 percent but does not disclose the size of the sample. Both institutions will be required to correct and resubmit their 2011 HMDA data and develop and implement an effective HMDA compliance management system to prevent future violations. Neither of the orders reveals the specific deficiencies in the institutions’ HMDA compliance programs. Read more…

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Special Alert: HUD Proposes Its Own QM Rule

On September 27, HUD released a proposal defining what constitutes a “qualified mortgage” (QM) for purposes of loans insured by the FHA. We have prepared a Special Alert regarding this proposal, which, once it is finalized and takes effect, will replace the temporary QM definition for FHA loans established by the CFPB in its January 2013 Ability-to-Repay/Qualified Mortgage Rule. QMs, when made in accordance with the applicable requirements, provide lenders with some legal protection against borrower lawsuits under TILA alleging the lender did not sufficiently consider the borrower’s ability to repay the loan.

The CFPB’s temporary QM definition will continue to apply to loans that are eligible to be guaranteed or insured by the Department of Veterans Affairs and the Department of Agriculture until those agencies establish their own QM definitions. Similarly, the CFPB’s temporary QM definition will continue to apply to loans that are eligible to be purchased or guaranteed by Fannie Mae, Freddie Mac, or any successor entity for as long as those entities remain under the conservatorship or receivership of the Federal Housing Finance Authority or until January 10, 2021, whichever is earlier.

Questions regarding the matters discussed in the Special 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.

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Special Alert: CFPB Finalizes Additional Amendments to the 2013 Mortgage Rules

On September 13, the CFPB finalized another set of amendments to its January 2013 mortgage rules. Whereas previous amendments focused largely on the ability-to-repay/qualified mortgage rule, these amendments – originally proposed in late June 2013 – principally address several important questions that have emerged during the implementation process for the mortgage servicing and loan originator compensation rules. We have prepared a Special Alert regarding these latest amendments.

The amendments provide guidance on complying with the rules and, in several cases, the CFPB revised the proposed amendments in response to concerns raised by the industry during the comment period.  Nevertheless, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they work to implement the rules by January 2014.  The CFPB declined industry requests to provide additional time for compliance and, except as discussed in our Special Alert, has not indicated whether additional amendments will be forthcoming.

Questions regarding the matters discussed in the 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.

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Special Alert: CFPB Finalizes Additional Amendments to ATR/QM Rule; Agencies Propose Appraisal Rule Amendments

On July 10, the Consumer Financial Protection Bureau (“Bureau”) finalized important amendments (the “Amendments”) to its ability-to-repay / qualified mortgage rule (the “QM / ATR Rule”) that are intended to ease certain compliance challenges with making qualified mortgages (“QMs”). In response to industry concerns on the extensive underwriting requirements in Regulation Z’s new Appendix Q, the Bureau acknowledged that certain of its provisions were “not well-suited to function as regulatory requirements” and, as a result, finalized major revisions to the methodology for determining a consumer’s monthly debt and income for purposes of making a QM under the 43% debt-to-income (“DTI”) underwriting alternative.

The Amendments, which had been proposed in April of this year (the “April Proposal”), also finalize clarifications to its mortgage servicing and escrows rules that were issued this January.  Like the mortgage rules themselves, the Amendments will take effect on January 10, 2014.

Separately, on the same date, the Bureau, together with the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (the “Agencies”) issued proposed amendments to their January 2013 final rule governing appraisal practices.

 Click here to read the special alert.

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.

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Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers

This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues. Read more…

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Special Alert: CFPB Proposes Additional Changes to Mortgage Rules

On June 24, 2013, the Consumer Financial Protection Bureau (“CFPB”) issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.

Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.

Comments on the proposed amendments are due July 22, 2013.

Key Proposed Amendments

Mortgage Servicing

Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of “first notice or filing required by applicable law” and prohibit servicers from filing any document that “would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law” during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.

This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the “first notice or filing required by applicable law.”  Similarly, servicers in California and other states with pending or effective “Homeowners Bill of Rights” statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes’ requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB’s minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.

Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower’s loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.

The proposed amendments would: Read more…

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Special Alert: CFPB Issues Guidance on “Responsible Conduct”

This afternoon, the CFPB issued CFPB Bulletin 2013-6, which identifies four pillars of “responsible conduct” on the part of potential targets of enforcement action by the Bureau.  The CFPB expressly states that such conduct may be rewarded with (i) resolution of an investigation with no public enforcement action; (ii) treatment of subject conduct as a less severe type of violation; (iii) reduction in the number of violations pursued; or (iv) reduction in sanctions or penalties.  The Bulletin, titled “Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation,” states that such conduct has “concrete and substantial benefits for consumers and significantly contributes to the success of the Bureau’s mission” because it speeds detection and increases investigative and enforcement efficiency, thereby enabling the Bureau to pursue a larger number of investigations.

The Bulletin has interesting parallels to the SEC Seaboard Report and the DOJ’s Thompson and McNulty Memoranda.  The four factors to be considered by the CFPB—self-policing, self-reporting, remediation, and cooperation—are discussed in further detail below.

  • Self-Policing.  In deciding whether to provide favorable consideration for self-policing, the Bureau will evaluate the nature of the violation (duration, pervasiveness, and significance); how it was detected (effectiveness of internal mechanisms); prior or relative performance of compliance management and audit functions; and the institution’s “culture of compliance.”
  • Self-Reporting.  The Bureau notes that it views self-reporting to be “special” among the four factors, and will evaluate for favorable consideration the completeness, effectiveness, and timeliness of the disclosure, as well as the degree to which the disclosure was purely proactive or a violation otherwise was likely to be discovered.
  • Remediation.  Remediation activity will be credited based on a review of how timely potential misconduct was addressed and how quickly it was remediated; whether responsible individuals were disciplined; whether information and extent of harm were documented and preserved promptly; and the Bureau’s confidence that misconduct is unlikely to recur. Read more…
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