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 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 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.
On June 17 the DOJ, the CFPB, HUD, and 49 state attorneys general and the District of Columbia’s attorney general announced a $968 million consent judgment with a large mortgage company to resolve numerous federal and state investigations regarding alleged improper mortgage origination, servicing, and foreclosure practices. The company agreed to pay $418 million to resolve potential liability under the federal False Claims Act for allegedly originating and underwriting FHA-insured mortgages that did not meet FHA requirements, failing to adhere to an effective quality control program to identify non-compliant loans, and failing to self-report to HUD the defective loans it did identify. The company also agreed to measures similar to those in the National Mortgage Settlement (NMS) reached in February 2012. In particular, the company will (i) provide at least $500 million in borrower relief in the next three years, including by reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for current but underwater borrowers, and other relief; (ii) pay $50 million to redress its alleged servicing violations; and (iii) implement certain changes in its servicing and foreclosure activities to meet new servicing standards. The agreement is subject to court approval, after which compliance with its terms, including the servicing standards, will be overseen by the NMS Monitor, Joseph A. Smith Jr.
On June 18, HUD issued Mortgagee Letter 2014-11, which amends the HECM reverse mortgage program to limit the insurability of fixed interest rate reverse mortgages. The letter explains that HUD has identified new emerging risks in connection with certain fixed interest rate HECM strategies that are being introduced in the market. Specifically, HUD is concerned about (i) a new option that “strongly encourages the mortgagor to take the maximum amount available during the first twelve-month disbursement period and to take the remaining amount shortly after the expiration of the first twelve-month disbursement period whether they need it or not;” and (ii) a second option that “emphasizes mortgagor options for future draws at the fixed interest rate set at origination.” As a result, under the new policy, FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to: (i) a single, full draw to be made at loan closing; and (ii) does not provide for future draws by the mortgagor under any circumstances. In addition, FHA will only insure adjustable interest rate reverse mortgages where the payment plan option is either: (i) tenure; (ii) term; (iii) line of credit; (iv) modified tenure; or (v) modified term. The letter details numerous additional related policy changes, describes changes to HECM loan document forms required to implement the policy changes, and updates instructions for entering in FHA Connection a fixed interest rate HECM with a single disbursement lump sum payment option.
On June 10, the U.S. Court of Appeals for the District of Columbia affirmed the district court’s decision not to enjoin the federal government from pursuing alleged False Claims Act violations against a bank that argued such claims were precluded by the terms of the National Mortgage Settlement. United States v. Bank of Am. Corp., No 13-5112, 2014 WL 2575426 (D.C. Cir., Jun. 10, 2014). The bank sought to halt a suit filed by the government in the Southern District of New York (SDNY), in which the government alleges that the bank’s certification of loans as eligible for FHA insurance under the FHA’s Direct Endorsement Lender Program violated the False Claims Act. The bank asserted that the National Mortgage Settlement contains a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The appeals court held that the agreement releases only the narrower category of liability for loans based on allegations that the bank’s annual certification was false without regard to whether any such loans contain material violations of HUD-FHA requirements, , and held that distinct loan-level violations for such loans would provide an independent basis for liability. However, the appeals court agreed that the SDNY must construe the government’s complaint and “ensure that the claims are litigated in a manner that comports with the [National Mortgage Settlement] Release’s limitations.” The appeals court agreed with the bank that some of the government’s claims “tread on the verge of the released claims, referencing false annual certifications explicitly.” The appeals court noted that the government repeatedly conceded that, to comport the SDNY suit with the National Mortgage Settlement release terms, “material violations do need to be demonstrated with respect to individual loans,” and cautioned the government that, should prosecution of its claims depart from that concession, the bank may seek appropriate relief.
On May 13, the FHA released its Blueprint for Access, which previews changes to the agency’s quality assurance process and outlines new housing counseling measures. Following its request last year for input on potential improvements to its quality assurance process, the FHA states that it is developing a new methodology for evaluating underwriting defects, including new criteria that will identify a limited number of specific defects, their related causes, and levels of severity. The FHA also is planning to amend its quality assurance process by (i) expanding its evaluation of loans to include random sampling of performing loans closer to the time of endorsement; and (ii) introducing a supplemental performance metric that will assess lender performance by comparing default rates within three credit score bands to an FHA target rate for each band, rather than to a lender’s peers’ rates. The Blueprint also announced the Homeowners Armed with Knowledge (HAWK) pilot program, which will allow homebuyers to qualify for savings on their FHA-insured loans by completing HUD-approved housing counseling provided through independent nonprofit organizations. Comments on the proposed pilot program are due by July 14, 2014.
On May 8, HUD proposed a rule to amend the FHA’s single family adjustable rate mortgage (ARM) program regulations to align those regulations with the interest rate adjustment and notification periods required for ARMs under the CFPB’s new TILA mortgage servicing rules. The proposed rule would require that an interest rate adjustment resulting in a corresponding change to the mortgagor’s monthly payment for an ARM be based on the most recent index value available 45 days before the date of the rate adjustment. FHA’s current regulations provide for a 30-day lookback period. The proposed rule also would require that the mortgagee of an FHA-insured ARM comply with the disclosure and notification requirements of the CFPB’s TILA servicing rules, including at least a 60-day but no more than 120-day advance notice of an adjustment to a mortgagor’s monthly payment. FHA’s current regulations provide for notification at least 25 days in advance of an adjustment to a mortgagor’s monthly payment. Comments on the proposal are due by June 9, 2014.
HUD To Insure Reverse Mortgages Protecting Non-Borrowing Spouses; Senators Seek Protections For Surviving Heirs
On April 25, HUD issued Mortgagee Letter 2014-07, which states that effective August 4, 2014, HUD will apply an alternative interpretation of Subsection 255(j) of the National Housing Act, which HUD has interpreted to limit its reverse mortgage program (HECM) to insuring only those that contain a safeguard to defer repayment of the loan until the homeowner’s death and certain other circumstances. Going forward, HUD also will insure HECMs that contain a provision deferring the due and payable status in the event of the death of the last surviving mortgagor or the death of the last surviving non-borrowing spouse (including common law), if the spouse was identified at the time of closing. HUD states the change will obviate the need for non-borrowing spouses to refinance the loan upon the mortgagor’s death. HUD intends to publish a rule on this issue, but decided to take initial action through a mortgagee letter, as allowed under the Reverse Mortgage Stabilization Act of 2013.
On April 30, Senators Schumer (D-NY) and Boxer (D-CA) sent a letter to HUD Secretary Donovan following reported allegations that reverse mortgage companies are threatening heirs with foreclosure instead of following HUD’s rules and allowing them to satisfy the loan at 95% of current appraised value. The Senators’ letter asks HUD to: (i) issue a mortgagee letter making clear that a matured reverse mortgage loan can be extinguished by the mortgagor, the mortgagor’s estate, or personal representative by paying 95% of the home’s market value; (ii) develop a letter that servicers can send to a borrower’s family members and heirs that outlines options for satisfying the loan; and (iii) enforce existing rules and require that any servicer that fails to offer this option within the required time allow a family member or heir to pay the lower of 95% of the home’s value at the time the loan became due or 95% of the home’s value at the time the error was corrected.
On March 26, HUD presented a webinar regarding upcoming changes to the online system used by FHA mortgagees to certify, pay annual fees, and report other information. Specifically, the Lender Electronic Assessment Portal (LEAP) will be replacing LASS, Lender Approval and Cash Flow Account Set Up in FHA Connection. Per Mortgagee Letter 2013-42, due to the online system being unavailable during the transition, the recertification and annual fee requirement for mortgagees with Fiscal Years ending on December 31, 2013, has been extended until June 9, 2014, thirty-days following the LEAP “Go-Live” date of May 9, 2014. All other mortgagees will have 90 days after their fiscal year end to submit recertification. Among other changes to the recertification process, LEAP will require mortgagees to indicate which certifications they cannot complete and submit supporting documents specific to each instance in which the mortgagee cannot recertify. In addition, FHA is consolidating Title I and II ID numbers for all mortgagees that share a common Tax Identification Number. The first phase of the consolidation will take place on Monday, March 31, 2014, and will result in all mortgagee profile information and loan history for existing Title I IDs to be transferred to the new IDs. Additional information, including corporate officers, EFT Account numbers and Historical Approval dates will be consolidated on LEAP’s “Go-Live” date on May 9, 2014. Finally, LASS will not be available after March 31, and any pending recertification or filing in LASS will be inaccessible. However, FHA employees will have access to LASS and can work with mortgagees on an individual basis to complete those filings. During an April 18 to May 9 transition period, mortgagees must request changes to their profiles via hard copy requests to HUD’s Officer of Lender Activities and Program Compliance.
On March 13, HUD proposed a rule to prohibit mortgagees from charging post-payment interest under FHA’s single family mortgage insurance program. The proposal is responsive to the CFPB’s ATR/QM rule, under which post-payment interest charged in connection with FHA loans closed on or after January 21, 2015 will be considered a prepayment penalty. HUD’s proposal states that while some single-family FHA mortgages would meet the requirements under the ATR/QM rule permitting limited prepayment penalties during the first 36 months of the mortgage, others would not. The proposal seeks to achieve consistency among FHA single-family mortgage products and to provide the same protections for all borrowers. It would remove a provision that currently allows mortgagees to require payment of interest up to the next installment due date, and instead require mortgagees to accept a prepayment at any time and in any amount without charging a post-payment charge, notwithstanding the terms of the loan. Under the proposed rule, monthly interest on the debt would be calculated on the actual unpaid principal balance as of the date prepayment is received. Comments on the proposal are due by May 12, 2014.
On March 7, the U.S. District Court for the Southern District of New York approved a stipulation and order awarding nearly $64 million to the relator in a mortgage fraud case recently settled by the federal government. Pursuant to that settlement, a mortgage lender agreed to pay a total of $614 million to resolve allegations that it violated the False Claims Act by submitting false loan-level certifications that fraudulently induced HUD and the Department of Veterans Affairs to insure ineligible mortgage loans.
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.