On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.
For the second time in less than five months, a U.S. Court of Appeals ruled that the FHA Model Mortgage sets a floor, not a ceiling, on the amount of flood insurance coverage a borrower must maintain. Feaz v. Wells Fargo Bank, N.A., No. 13-10230, 2014 WL 503149 (11th Cir. Feb. 10, 2014); see also Kolbe v. BAC Home Loans Servicing, LP, 738 F.3d 432 (1st Cir. Sept. 2013). On February 10, the U.S. Court of Appeals for the Eleventh Circuit upheld a district court’s dismissal of a borrower’s claim for breach of contract and violations of various other state laws, concluding that the FHA Model Mortgage “unambiguously makes the federally required flood-insurance amount the minimum, not the maximum, the borrower must have.” Thus, the court concluded that the lender did not violate the mortgage when it required the borrower to increase her flood insurance coverage from the minimum amount required by federal law to the replacement cost value of her home or the maximum available under the National Flood Insurance Program, whichever was less. In reaching its decision, the court sided with the United States, which filed an amicus brief in this case and in a First Circuit case decided in September 2013, reasoning, in part, that any other interpretation would undermine federal housing policy.
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.
* * *
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.
On January 21, HUD issued Mortgagee Letter 2014-02, which implements new manual underwriting standards announced in December 2013. The new standards and guidance will be effective for all case numbers assigned on or after April 21, 2014, and will apply to (i) loans involving borrowers without a credit score which were not scored against FHA’s TOTAL Scorecard; (ii) loans receiving a “Refer” scoring recommendation from FHA’s TOTAL Scorecard; and (iii) loans receiving an “Accept” scoring recommendation from FHA’s TOTAL Scorecard but which have been downgraded to a “Refer” by the underwriter. In addition, the standards apply when a loan receiving an “Accept” scoring recommendation is downgraded to a “Refer.” The HUD guidance addresses (i) maximum qualifying ratios for all manually underwritten loans based on the minimum decision credit score; (ii) revised compensating factors that must be used in order to exceed FHA’s standard qualifying ratios; and (iii) the requirement for cash reserves equal to one or more total monthly mortgage payments for manually underwritten loans involving one and two unit properties.
On January 10, HUD issued Mortgagee Letter 14-01, which notifies mortgagees that within 30 days they must begin using a new brochure for sending notice to delinquent FHA borrowers. HUD regulations require mortgagees to send the notice to FHA borrowers in default between the 32nd and 60th day of delinquency. Notice includes a cover letter and a brochure with foreclosure-related advice for borrowers. The new brochure, “Saving Your Home: Tips to Avoid Foreclosure,” replaces the “How to Avoid Foreclosure” brochure, HUD-PA-426, and includes information on revised loss mitigation tools available to FHA-insured borrowers. The mortgagee letter also reviews the requirements for the cover letter that must accompany the brochure, and provides a link for mortgagees to order the brochure.
On December 29, the New York State Department of Financial Services advised supervised institutions that it readopted expiring emergency regulations used to determine if a home loan qualifies as a subprime home loan under Section 6-m of the New York Banking Law. The latest emergency regulations are identical to those initially adopted in September 2013. Without further action, the readopted emergency regulations will expire March 29, 2014.
On December 12, the U.S. District Court for the Southern District of New York granted the DOJ’s motion to add a bank executive to a civil fraud suit it filed over a year earlier against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. U.S. v. Wells Fargo Bank, N.A., No. 12-7527, slip op. (S.D.N.Y. Dec. 12, 2013). The government alleges that the bank’s vice president in charge of quality control purposefully failed to self-report bad loans to HUD, despite having knowledge of HUD’s reporting requirements, and that he signed annual certifications misrepresenting to HUD that the bank complied with those reporting requirements. The court agreed with the government’s contentions that amending the complaint to add the individual defendant was permissible because (i) the bank would not be unduly prejudiced because the allegations were already at issue in the pending suit and the parties had yet to begin discovery; (ii) the claims that the government would assert were not futile, as the court had already ruled on the validity of the government’s theories of liability under the FCA and FIRREA, and the new defendant would have the opportunity to seek dismissal on other grounds; (iii) there had been no undue delay, because the government had not received authority to add the executive until after the bank’s motion to dismiss was fully submitted, and had not made a final determination to bring the proposed action against the executive until the day it informed the bank of its intention to do so; and (iv) the interests of judicial economy supported joinder insofar as a separate suit against the executive for conduct already at issue here would have been inefficient. The court did not address the bank’s argument that the government knew sooner of its authority to add the executive, ultimately and improperly electing to do so because the bank suspended settlement negotiations.
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).
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.
On December 11, HUD issued a final rule defining what constitutes a “qualified mortgage” (QM) for purposes of loans insured by the FHA. The final rule largely adopts HUD’s proposal, which was the subject of our October 2013 Special Alert. The final rule clarifies certain aspects of the HUD proposal. Among other things, it replaces provision in a CFPB’s QM rule that allows consumers to rebut the presumption of compliance based on residual income, with a provision that the consumer show that the creditor failed to underwrite consistent with HUD requirements. With the final rule, HUD also adopted new underwriting standards. The effective date for the underwriting standards will be set by a future Mortgagee Letter, but will be no earlier than March 11, 2014.
On December 6, HUD announced new loan maximum limits for FHA-insured mortgages. As detailed in Mortgagee Letter 2013-43, effective for all FHA case numbers assigned on or after January 1, 2014 through December 31, 2014, the current high-cost area “ceiling” of $729,750 will be reduced to $625,500. HUD stated that approximately 650 counties will have lower limits as a result of this change. Mortgages that meet the requirements for streamline refinance transactions without an appraisal are not subject to the new limits. Further, the Mortgagee Letter leaves the current standard loan limit for low cost areas unchanged at $271,050, and the maximum claim amount for FHA-insured reverse mortgages (HECMs) will remain $625,500.
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 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 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.