On September 30, the FHA published updates to several sections of its Single Family Housing Policy Handbook. The updates only apply to loans originated on or after June 15, 2015 and are a result of FHA’s attempt to create a consolidated Handbook that is intended to be a single authoritative source of relevant FHA policy. The updates relate to a variety of policies including origination/processing of loan applications, underwriting, and mortgage closing requirements. They also relate to several specific programs and products including refinances, ARM loans, new construction, weatherization, and solar and wind technologies. Future updates are anticipated regarding (i) doing business with FHA; (ii) servicing and loss mitigation; (iii) claims and disposition; and (iv) quality control, oversight, and compliance issues.
On October 15, HUD announced the award of more than $38 million to fair housing and non-profit organizations in 43 states and the District of Columbia to address discrimination in the housing industry. Through HUD’s Fair Housing Initiatives Program, grants are funded with the intent that they will “help enforce the Fair Housing Act through investigations and testing of alleged discriminatory practices.” Additionally, the grants are meant to help provide education on rights and responsibilities under the Fair Housing Act to housing providers, local governments, and potential victims of housing discrimination. HUD’s most recent categories of grants included: (i) Private Enforcement Initiative Grants; (ii) Education and Outreach Initiative Grants; and (iii) Fair Housing Organizations Initiative.
On October 2, the U.S. Supreme Court granted certiorari in Texas Department of Housing and Community Affairs, et al. v. The Inclusive Communities Project, Inc., No. 13-1371, a case in which the Fifth Circuit became the first federal Circuit Court of Appeals to apply the Department of Housing and Urban Development’s (HUD) “effects test” rule (see The Inclusive Communities Project, Inc., v. Texas Department of Housing and Community Affairs, et al., Nos. 12-11211, 13-10306 (747 F.3d 275, March 24, 2014)), which authorizes so-called “disparate impact” or “effects test” claims under the Fair Housing Act (FHA). In granting cert., the Supreme Court accepted one of the two questions presented by the petitioners, which was, “Are disparate-impact claims cognizable under the [FHA]?” It did not accept the second question: “If disparate-impact claims are cognizable under the [FHA], what are the standards and burdens of proof that should apply?” The Supreme Court’s partial grant of the petition represents the third recent matter in which the Court has taken up the issue of whether disparate impact claims may be brought under the FHA. The first opportunity ended in February, 2012 when petitioners in Magner, et al. v Gallagher, et al., No. 10-1032, stipulated to dismissal due to concerns that “a victory could substantially undermine important civil rights enforcement throughout the nation.” The Court’s second opportunity, Township of Mount Holly, New Jersey, et al., v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, was dismissed in November 2013, just prior to oral argument after a settlement was reached by the parties.
Federal Housing Administration Posts Draft Servicing Section of its Single Family Housing Policy Handbook
On September 11, as part of its initiative to develop a single authoritative source for Federal Housing Administration (“FHA”) Single Family Policy, the FHA posted a draft of the servicing section of its Single Family Housing Policy Handbook. The draft servicing section covers post endorsement to the end of the mortgage insurance contract and provides specific guidance on the following: (i) general servicing requirements for FHA-insured mortgages; (ii) servicing of performing mortgages; (iii) default servicing, including HUD’s Loss Mitigation Program and conveyance standards; (iv) loss mitigation performance; and (v) special mortgage program servicing for active and inactive programs. On September 18, 2014, the FHA will host an industry briefing call to go over the organization and structure of the draft servicing section. The FHA is accepting comments on the draft servicing section through October 17, 2014.
On September 12, HUD announced a conciliation agreement with a Tennessee mortgage lender, pursuant to which the lender will pay $35,000 to resolve allegations that it violated the Fair Housing Act when it denied a mortgage loan to a couple because the lender did not consider the couple’s ability to make loan payments during the wife’s maternity leave despite the husband’s salary and the wife’s short-term disability insurance payments. 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 or familial status, including denying a mortgage loan or mortgage insurance because an applicant is pregnant or on maternity leave. In addition to requiring a payment be made to the couple, the company must adopt a national parental leave policy and receive annual fair housing and fair lending training. HUD has brought similar cases against other mortgage lenders in recent years.
On September 3, the U.S. District Court for the Northern District of Illinois declined to invalidate to the burden-shifting framework established by HUD in its 2013 disparate impact rule, but remanded to HUD for further consideration certain comments on the rule submitted by insurers. Property Casualty Insurers Assoc. of Am. V. Donovan, No. 13-8564, WL 4377570 (N.D. Ill. Sept. 3, 2014). An association of insurers challenged HUD’s rule, which authorized so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The insurers filed suit to enjoin HUD from applying the rule to the homeowners’ insurance industry, arguing that HUD’s refusal to build safe harbors for homeowners’ insurance violates the McCarron-Ferguson Act and is arbitrary and capricious. The court agreed that HUD acted in an arbitrary and capricious manner because HUD did not give adequate consideration to comments from the insurance industry relating to the McCarran-Ferguson Act, the filed-rate doctrine, and the potential effect that the disparate impact rule could have on the nature of insurance. Therefore, the court remanded those issues back to HUD for further explanation. The court also addressed the burden-shifting approach established by HUD to determine liability under a disparate impact claim. Under the rule, once a practice has been shown by a plaintiff to have a disparate impact on a protected class, the defendant has the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” The court held that the final burden-shifting framework “reflects HUD’s reasonable accommodation of the competing interests at stake—i.e., the public’s interest in eliminating discriminatory housing practices and defendants’ (including insurer-defendants’) interest in avoiding costly or frivolous litigation based on unintentional discriminatory effects of their facially neutral practices[,]” and deferred to HUD’s interpretation of the Fair Housing Act pursuant to Chevron v. U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
On August 26, HUD issued its final rule prohibiting mortgagees from charging post-payment interest under FHA’s single family mortgage insurance program. The final rule is responsive to the CFPB’s ATR/QM rule, under which post-payment interest charges will be considered a prepayment penalty in connection with FHA loans closed on or after January 21, 2015. Because prepayment penalties are prohibited on higher-priced FHA loans, the new definition of “prepayment penalty” under the ATR/QM rule would have effectively prohibited the making of higher-priced FHA mortgage loans. Also effective January 21, 2015, HUD’s final rule ensures consistency among FHA single-family mortgage products and provides the same protections for all borrowers. Under the final rule, monthly interest on the debt must be calculated on the actual unpaid principal balance as of the date prepayment is received.
On August 26, HUD issued its final rule to amend FHA’s single family adjustable rate mortgage (ARM) program regulations to align with the interest rate adjustment and notification periods required for ARMs under the CFPB’s new TILA mortgage servicing rules. The final rule is effective January 10, 2015 and adopted the proposed rule issued on May 8 without change. Under the final rule, interest rate adjustments resulting in a corresponding change to the mortgagor’s monthly payment for an ARM must be based on the most recent index value available 45 days before the date of the rate adjustment. FHA’s previous regulations provided for a 30-day look-back period. Further, the final rule mandates that mortgagees of FHA-insured ARMs comply with the disclosure and notification requirements of the CFPB’s TILA servicing rules, which require at least 60-days, but no more than 120-days advance notice of an adjustment to a mortgagor’s monthly payment. Previously, the regulations provided for only 25 days advance notice.
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.
On July 23, HUD issued Mortgagee Letter 2014-16, which requires FHA mortgagees to retain electronic copies of certain foreclosure-related documents and extends the record retention period to seven years after the life of an FHA-insured mortgage. HUD advises that, in addition to any requirements for retaining hard copies or original foreclosure-related documents, loss-mitigation review documents also must be retained in electronic format. Those documents include: (i) evidence of the servicer’s foreclosure committee recommendation; (ii) the servicer’s Referral Notice to a foreclosure attorney, if applicable; and (iii) a copy of the document evidencing the first legal action necessary to initiate foreclosure and all supporting documentation, if applicable. The letter adds that mortgagees also must retain in electronic format a copy of the mortgage, the mortgage note, or the deed of trust. If a note has been lost, mortgagees must retain both an electronic and hard copy of a Lost Note Affidavit. The letter is effective for all foreclosures occurring on or after October 1, 2014.
On July 15, the U.S. District Court for the Central District of California dismissed a relator real estate agent’s suit against a group of lenders the relator alleged submitted claims for FHA insurance benefits to HUD based on false certifications of compliance with the National Housing Act. U.S. ex rel Hastings v. Wells Fargo Bank, No. 12-3624, Order (C.D. Cal. Jul. 15, 2014). The relator alleged on behalf of the U.S. government that loans where borrowers received assistance from seller-funded down payment assistance programs, such as the Nehemiah Program, did not satisfy requirements for gift funds, and as a result the lenders had falsely certified compliance with the National Housing Act’s three-percent down payment requirement when seeking FHA insurance for such loans. The government declined to intervene in the case. The court agreed with the lenders and held that the complaint could not survive the False Claims Act’s public disclosure bar—a jurisdictional bar against claims predicated on allegations already in the public domain. The court explained that the public disclosure standard is met if there were either (i) public allegations of fraud “substantially similar” to the one described in the False Claims Act complaint, or (ii) enough information publicly disclosed regarding the allegedly fraudulent transactions to put the government on notice of a potential claim. Here, the court determined that claims related to seller-funded down payment assistance programs were part of a “robust public debate” well prior to the time the complaint was filed in this case, and that the debate was sufficient to put the government on notice of the alleged conduct. The court also determined that the relator was not an “original source” of the public disclosures and as such could not overcome the public disclosure bar. Because the court concluded that amendment would be futile, the court dismissed the suit with prejudice. BuckleySandler represented one of the lenders in this case.
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 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.
Recently, the FHA released for comment two additional draft sections of its new Single Family Policy Handbook. The first, Doing Business with FHA, outlines the requirements associated with FHA mortgagee approval, including eligibility requirements, application processes, operating requirements, post-approval changes, the recertification process, and processes for applying for supplemental mortgagee authorities. The second, Quality Control, Oversight and Compliance, outlines the ongoing lender and mortgagee responsibility to perform institution and loan-level quality control, and details the repercussions for failing to act in accordance with FHA requirements, including explanations of possible administrative actions and sanctions. Comments on both sections are due by July 29, 2014.
On July 3, HUD issued Mortgagee Letter 2014-13, which requires mortgagees seeking voluntary termination of FHA mortgage insurance to obtain a signed borrower consent form from each borrower on the mortgage. HUD states that in order to ensure that voluntary terminations of mortgage insurance are processed in accordance with the National Housing Act and HUD regulations, HUD now requires mortgagees requesting such termination to inform borrowers in writing that electing to terminate the mortgage insurance means that the mortgage will no longer be governed by FHA insurance program rules and regulations, including FHA’s loss mitigation requirements. Effective October 1, 2014, mortgagees must obtain a signed Borrower’s Consent to Voluntary Termination of FHA Mortgage Insurance, which must be on the mortgagee’s letterhead and must include the language in the sample form provided by HUD. HUD will require each borrower on the mortgage to sign the consent form in order for the request for voluntary termination to be considered valid by FHA. Mortgagees must retain copies of the consent form(s) in the servicing file in accordance with HUD’s record retention policies.