On November 13, HUD issued Mortgagee Letter 2013-41, which, effective immediately, clarifies self-reporting requirements for all single-family FHA-approved lenders. The letter details lenders’ obligations to report all findings of fraud and material misrepresentations, as well as any material findings concerning origination, servicing, or underwriting of a loan that the lender is unable to mitigate. The letter defines “material finding” and provides a non-exhaustive list of examples, and describes the parameters for mitigating reportable findings. The letter outlines internal and external reporting timeframes: (i) internal reporting to senior management must take place within 30 days of an initial findings report; (ii) findings of fraud or material misrepresentation must be reported immediately to the FHA; and (iii) all other material findings must be reported no later than 30 days after the lender has completed its internal evaluation, or within 60 days of initial disclosure, whichever occurs first. The letter also explains that the FHA may request supporting documentation for use in reviewing a report, and that the FHA requires the reporting contact to have immediate access to: (i) the endorsement case binder; (ii) the quality control report; and (iii) any other documentation necessary to evaluate the finding. The letter further states that failure to comply with these requirements may result in the FHA taking administrative action against the lender.
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 1, HUD issued Mortgagee Letter 2013-40, which clarifies requirements under FHA’s mandatory loss mitigation program and sets expectations for servicers engaging in loss mitigation during the foreclosure process. The letter states that servicers must (i) evaluate on a monthly basis all loss mitigation tools available for delinquent borrowers, (ii) document those evaluations, and (iii) timely evaluate borrower loss mitigation requests and provide specified written responses. HUD emphasizes that servicers may reduce challenges to foreclosure actions by providing thorough explanations about appeal or escalation processes. The letter further advises servicers that a foreclosure may not be commenced for monetary default unless at least three consecutive monthly payments are unpaid, and details other conditions under which a foreclosure may be initiated. Many of these requirements do not apply if the property has been abandoned or vacant for more than 60 days. Once a foreclosure has been initiated, HUD expects servicers to continue to attempt to communicate with borrowers about potential loss mitigation options based on changing circumstances. The letter also (i) details in a chart the actions the servicer must take when it receives a loss mitigation request from a borrower, (ii) discusses servicer requests for additional borrower documents, (iii) identifies events that trigger extensions of time for initiating a foreclosure, and (iv) outlines steps for terminating foreclosures. All of the requirements in the letter are effective January 1, 2014.
On October 29, HUD released a draft section of its new FHA Single Family Housing Policy Handbook (SF Handbook). The draft section consolidates all FHA Single Family requirements—including content from hundreds of mortgagee letters, housing notices, and other requirements—for application through endorsement into a single, authoritative source for FHA Single Family Housing Policy. HUD stated that the new SF Handbook is “universally and fundamentally different in the format, style, content and delivery.” While many of the changes made in developing this first draft section of the SF Handbook are designed to conform FHA policy to a standard format using clear, consistent language, other proposed revisions reflect actual proposed changes to policy. The draft section and other information about the broader project are available on a new HUD website. HUD provided tips for reviewing the draft and requested that stakeholders provide comments on the draft section by November 29. HUD noted that the draft posting is the first phase of a multi-phased effort to overhaul the SF Handbook.
On October 28, HUD issued two mortgagee letters related to the servicing of certain FHA-insured loans. Mortgagee Letter 2013-38 provides a list of the first legal actions necessary to initiate a foreclosure and the reasonable diligence timeframes for completing foreclosure and acquisition of title in each state. The letter also outlines acceptable delays in those timeframes due to mediation or bankruptcy, or when a separate legal action is necessary to acquire possession of the title. In addition, the letter provides a new schedule of allowable attorney fees by state for services performed in connection with a mortgage default. The updated reasonable diligence timeframes apply to all cases in which the first legal action to initiate foreclosure occurs on or after November 1, 2013. The updated attorney fees are effective for all cases in which certain actions occur on or after November 1, 2013. Mortgagee Letter 2013-39 updates the timelines servicers must follow for collection communications, advises servicers regarding early engagement in loss mitigation, outlines staffing requirements to support timely borrower communications, and provides guidance on the timing, content, and method of delivery for collection letters and other borrower communications. This letter also advises servicers to pay special attention to borrowers at risk of early payment default and re-default, and provides specialized collection techniques for such borrowers. Finally, this letter details the FHA’s expectations for escalating borrower inquiries and complaints that allege (i) improper analysis of borrower information or denials of loss mitigation options, (ii) foreclosures initiated or continued in violation of HUD’s policy, or (iii) any other violations of HUD collections and loss mitigation policies. This guidance is effective for all mortgages in default as of January 1, 2014.
On October 10, a bank holding company announced that it has agreed in principle, on behalf of itself and certain affiliates, to resolve mortgage-related allegations by the federal government. The company reached agreements in principle with HUD and the DOJ to settle (i) certain civil and administrative claims arising from FHA-insured mortgage loans originated over a six-and-a-half year period and (ii) certain alleged civil claims regarding the company’s mortgage servicing and origination practices as part of the National Mortgage Servicing Settlement. Pursuant to the agreements in principle, the company committed to $500 million of consumer relief, a $468 million cash payment, and the implementation of certain mortgage servicing standards. The company also reached an agreement in principle with the Federal Reserve Board to impose a $160 million civil monetary penalty, in conjunction with an April 2011 Consent Order.
On September 27, HUD issued three Mortgagee Letters. In Mortgagee Letter 2013-34, HUD announced the indefinite delay of pre-foreclosure sale (PFS) requirements for FHA mortgagees, which were announced in July. Mortgagee Letter 2013-35 announces that, effective March 31, 2014, HUD will consolidate the identification numbers it issues to FHA lenders under Title I and II. Finally, Mortgagee Letter 2013-36 updates guidance regarding 203(k) insured mortgages in the Hurricane Sandy disaster area.
On September 30, the New York Department of Financial Services (NY DFS) advised supervised institutions that it adopted emergency regulations to determine if a home loan qualifies as a subprime home loan under Section 6-m of the New York Banking Law. The NY DFS determined that recent changes to the calculation of mortgage insurance premiums mandated by the Federal Housing Administration in Mortgagee Letter 2013-04, which increased the annual percentage rate on subject loans, effectively decreased the threshold on certain loans and limited the availability of mortgage credit in New York. In response, the emergency regulations adjust the subprime threshold up by 75 basis points for most FHA-insured loans. The change took effect immediately.
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.
On September 25, HUD issued Mortgagee Letter 2013-33, which clarifies the recent changes HUD made to its HECM program earlier this month through Mortgagee Letter 2013-27. The new letter (i) defines mandatory obligation, (ii) adds additional mandatory obligations for traditional and refinance transactions, and for purchase transactions, (iii) identifies items that must be included in the first twelve-month disbursement limit and initial MIP calculation, (iv) states that the monthly increase to the principal limit must include the annual mortgage insurance rate as well as the mortgage note interest rate, (v) corrects the calculation of the life-expectancy set-aside, (vi) makes accommodations for mortgagors who entered into a bona fide sales contract and made an earnest money deposit on a property before the issuance of Mortgagee Letter 2013-27, and (vii) clarifies an exception to the general policy that a mortgagee increase the available principal limit if the mortgagor makes a partial payment. On September 20, HUD issued Mortgagee Letter 2013-32 to supersede its prior guidance regarding loss mitigation in Mortgagee Letter 2012-22. The letter, among other things, (i) defines “continuous income,” other than wages, for loss mitigation evaluations, and other terms, (ii) establishes the conditions required for a “special forbearance” to be used as a loss mitigation tool, (iii) provides guidance on capitalization of arrearages for modifications and partial claims, and (iv) discusses working with mortgagors in bankruptcy and those failing to complete trial payment plans. Mortgagees are required to implement the policies in Mortgagee Letter 2013-32 by December 1, 2013.
On September 24, U.S. District Court Judge Jesse Furman largely denied a bank’s motion to dismiss a complaint filed by the U.S. Attorney’s Office for the Southern District of New York (SDNY) in which the government alleges that the bank falsely certified loans under the FHA’s Direct Endorsement Lender Program in violation of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). U.S. v. Wells Fargo Bank, N.A., No. 12-7527, 2013 WL 5312564 (S.D.N.Y. Sept. 24, 2013). Addressing four primary arguments raised by the bank, the court held that the government sufficiently pleaded (i) that the bank falsely certified compliance with FHA regulations upon which payment was conditioned, (ii) that the bank fraudulently induced the government to insure loans it otherwise would not have, and (iii) that this alleged misconduct caused the FHA to pay insurance claims it otherwise would not have. It also held that the government’s claims were pleaded with sufficient particularity. Citing two recent decisions from other Southern District of New York courts, the court held that FIRREA allows the government to pursue claims against an institution for engaging in alleged fraud that “affects” itself. Further, relying in part on a recent holding by the Fourth Circuit, the court held that the government’s claims were timely because they were tolled by the Wartime Suspension of Limitations Act. Finally, relying on an order issued earlier this year by the U.S. District Court for the District of Columbia, the court rejected the bank’s argument that the release it executed as part of the National Mortgage Servicing Settlement specifically released liability arising under the FCA and FIRREA for the government’s claims. The court dismissed as untimely certain of the government’s common law and quasi-contract claims, but preserved the government’s breach of fiduciary duty claim, reasoning that whether such a duty existed is a question of fact.
On September 17, HUD issued a final rule that streamlines the FHA financial statement reporting requirements for lenders and mortgagees who are supervised by federal banking agencies and whose consolidated assets do not meet the thresholds set by their supervising federal banking agencies for submission of audited financial statements—currently set at $500 million in consolidated assets. HUD’s regulations currently require all supervised lenders and mortgagees to submit annual audited financial statements as a condition of FHA lender approval and recertification. Effective October 17, 2013, in lieu of the annual audited financial statements, small supervised lenders and mortgagees will be required to submit their unaudited financial regulatory reports that align with their fiscal year ends and are required to be submitted to their supervising federal banking agencies. Only if HUD determines that the supervised lenders or mortgagees pose heightened risk to the FHA insurance fund would such lenders be required to submit audited financial statements. The final rule also makes technical changes to current regulations regarding reporting requirements for FHA-approved supervised lenders and mortgagees.
On September 5, HUD issued Mortgagee Letter 2013-29 regarding the application of unused borrower funds from an escrow account on an existing mortgage in FHA-insured refinance transactions. The letter states that mortgagees processing such refinances may apply unused borrower funds from an existing mortgage for any purpose authorized by the borrower, and the return of unused funds to the borrower at closing is not considered cash back to the borrower. Further, the letter provides documentation and submission requirements evidencing borrower authorization for application of unused escrow funds. The letter also reminds mortgagees that calculating the maximum mortgage on a streamline refinance transaction starts with the outstanding principal balance of the existing loan, not the payoff amount.
On September 3, HUD announced changes to the reverse mortgage program that are intended to strengthen the FHA Mutual Mortgage Insurance Fund and to ensure that it provides a financially sustainable option to senior citizens. Changes reflected in Mortgagee Letter 2013-27 affect the following aspects of the program: (i) initial disbursement limits, (ii) initial mortgage insurance premiums, (iii) initial mortgage insurance premium calculations for refinance transactions, (iv) principal limit factors, (v) financial assessment requirements, and (vi) funding requirements for the payment of property charges based on the financial assessment. In addition, it creates a new single disbursement lump sum payment option. The requirements for preparing the financial assessments are specified in Mortgagee Letter 2013-28 and an Attachment also released on September 3.
On September 3, industry trade groups filed amici curiae briefs with the U.S. Supreme Court in support of petitioners in the case of Township of Mt. Holly v. Mt. Holly Gardens Citizens in Action, No. 11-1507. The briefs argue, among other things, that (i) neither the legislative history of the Fair Housing Act nor the text of Section 804(a) demonstrate any congressional intent to authorize claims based on a disparate impact theory of liability, (ii) an agency cannot create a right of action absent a clearly expressed intent for one, (iii) Congress did not intend to create a disparate-impact cause of action against lenders under Section 805, noting that, like Section 804, it contains no language about the “affect” or “effects” of facially neutral conduct, and that the Supreme Court has “long held” the “’normal definition of discrimination’” to be differential treatment not differential impact.