Recently, the U.S. Court of Appeals for the Ninth Circuit affirmed the District Court of Nevada’s ruling that, for the purposes of the False Claims Act (FCA), 31 U.S.C § 3729(b)(2)(A)(i), Fannie Mae and Freddie Mac are not instrumentalities or officers, employees, or agents of the federal government. U.S. ex rel. Adams v. Aurora Loan Servs., Inc., No. 14-15031 (9th Cir. Feb. 22, 2016). In this case, the plaintiffs alleged that several lenders and loan servicers (collectively, defendants) made certain false certifications to Fannie and Freddie in connection with the purchase and sale of loans. Plaintiffs argued that the False Claims Act applies to claims made to Fannie and Freddie because they are agencies or instrumentalities of the federal government under one of the two definitions of a “claim” in the Act. The Ninth Circuit held that Fannie and Freddie are not federal instrumentalities for FCA purposes of the first definition of a “claim,” notwithstanding the government’s conservatorship. Likewise, the court confirmed that because Fannie Mae and Freddie Mac are private companies, albeit subject to the government’s conservatorship, claims made to the companies were not made to an officer, employee or agent of the federal government. The court observed that plaintiffs did not make an argument under the second definition of claim under the FCA, which defines a claim as a request or demand made upon non-government third parties under certain conditions, and therefore expressed no opinion on whether such a claim could have been brought.
On April 11, the Government Accountability Office (GAO) released a report titled, “Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened.” The report analyzes data on the mortgage servicing market from June 2006 through June 2015 from Fannie Mae and Freddie Mac (collectively, the Enterprises), the Federal Reserve, and Ginnie Mae, as well as academic studies and research conducted by industry organizations, federal agencies, and others since the financial crisis. The report focuses in particular on the role of nonbank servicers in servicing privately securitized nonprime loans. According to the report, the percentage of mortgage loans serviced by nonbank servicers – which, according to market participants, tend to service more delinquent loans than banks – increased significantly from the first quarter of 2012 through the second quarter of 2015, but still account for less than a quarter of the overall mortgage servicing market. Concerns regarding the regulatory oversight of nonbank servicers are highlighted in the report, which comments on (i) the CFPB’s direct role in overseeing nonbank servicers’ compliance with federal consumer financial laws; (ii) state regulators’ various prudential and operational requirements for nonbank servicers; and (iii) Ginnie Mae and the Enterprises’ monitoring of nonbank servicer activities to manage risk exposure. According to the report, issues related to nonbank servicers’ “aggressive growth and insufficient infrastructure have resulted in harm to consumers, have exposed counterparties to operational and reputational risks and … complicated servicing transfers between institutions.” Based on the findings summarized in the report, the GAO recommends that (i) Congress consider giving FHFA the authority to examine third parties doing business with the Enterprises; and (ii) the CFPB collect additional data regarding the identity and number of nonbank servicers.
On November 25, Fannie Mae issued Servicing Guide Announcement SVC-2015-14 to reveal recent updates to the Servicing Guide. Specifically, Fannie Mae updated guidance relating to 10 areas, including but not limited to: (i) the Remittance of Property (Hazard) Insurance Loss Proceeds for Short Sales; (ii) Pledge of Servicing Rights and Transfers of Interest in Servicing Compensation; (iii) Timeline Requirements for HAMP Expanded “Pay for Performance” Incentive Notices; (iv) Early Delinquency Counseling Requirements; and (v) the removal of the Borrower Notification Sample Letter Exhibit.
In separate November 17 announcements, Fannie Mae and Freddie Mac (collectively the GSEs) revealed updates to the Uniform Closing Dataset, developed as part of the Uniform Mortgage Data Program to facilitate lender submission of the Closing Disclosure Form under the new TILA/RESPA regulations. The updates revise Appendix A: Closing Disclosure Mapping to the MISMO and Appendix H: UCD Delivery Specification and include: (i) newly added data points; (ii) changes to conditionality for several data points; (iii) changes/additions to the enumerated values; and (iv) updates to conditionality details.
On October 7, under the direction of the FHFA, Fannie Mae and Freddie Mac jointly issued new guidelines clarifying how the GSEs will categorize origination defects, how lenders can correct the defects, and allows for various remedies, including requiring lenders to repurchase a loan for mortgages containing “significant defects.” The framework, Selling Representations and Warranties Framework – Origination Defects and Remedies, expands on 2012 and 2014 announcements, sets forth new parameters for when lenders must cover the losses on mortgage loans that are identified as having one or more defects, and categorizes defects in three ways: (i) findings; (ii) price-adjusted loans; and (iii) significant defects. According to the guidelines, loan defects categorized as “findings” would not require lenders to correct or “remedy” the loan. Loan defects categorized as “price-adjusted loans” would require lenders to pay applicable loan-level price adjustment fees. Lastly, for loans under the “significant defects” category, lenders must repurchase the loan unless the GSE offers the lender a repurchase alternative. The lender is permitted to appeal “significant defects” findings and the possible outcomes are (i) rescission or close out, as applicable, of the remedy request; (ii) agreement on a repurchase alternative; or (iii) fulfillment of the remedy request. The new guidelines are effective January 1, 2016.
On October 6, Fannie Mae and Freddie Mac issued guidance stating that both GSEs, under the direction of the FHFA, “will not conduct routine post-purchase loan file reviews for technical compliance with the TRID Rule,” providing a “transitional period” for lenders to update their operational systems to adhere to the Rule’s requirements. However, the GSEs cautioned lenders that they “expect lenders to make good faith efforts to comply with TRID” and will evaluate whether lenders issued the new required disclosure during the mortgage origination process. Moreover, the guidance explains that “failure to use a TRID-required form” will be viewed as a violation, subjecting the loan to all contractual remedies, including repurchase.