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 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 3, the U.S. District Court for the Northern District of California dismissed with prejudice a putative class action alleging a bank breached its Home Equity Conversion Mortgage Deed of Trust and HUD regulations by failing to provide a surviving heir notice and opportunity to purchase the property at 95 percent of its appraised value. Chandler v. Wells Fargo Bank, N.A., No. 11-3831, 2014 WL 31315 (N.D. Cal. Jan. 3, 2014). The court held that the plain language of the deed does not require such notice, in part because the relevant section of the deed that requires the lender to provide notice when the loan becomes due and payable and an option to purchase the property for 95 percent of its appraised value prior to foreclosure (i) specifically does not include as a triggering event the death of the borrower, and (ii) grants rights to the borrower, not the borrower’s heirs. The court also rejected the heir’s claims that HUD regulations required the same notice and opportunity to purchase. The court held that the HUD regulations were not incorporated into the deed, and, even if they were and could be read to allow an heir to take advantage of the 95 percent rule, the applicable HUD interpretation of those regulations at the time required full payment of the debt.
On December 30, HUD finalized revisions to the system used by the FHA to measure and inform mortgagees of their loss mitigation performance. The revisions, finalized in Mortgagee Letter 2013-46, involve more comprehensive metrics to evaluate mortgagees on their overall performance with regard to delinquent loan servicing, as opposed to the limited review of default reporting of forbearance actions and loss mitigation and foreclosure claims paid under the previous system. The evaluation will be used to determine which mortgagees are eligible for additional incentive payments during the January 1, 2014 through December 31, 2014, calendar year. The final system is substantially similar to the proposed version, with some changes made in response to comments. HUD also updated the final scoring methodology using new default status codes delineated in Mortgagee Letter 2013-15. Also in its responses to comments, HUD agreed that it should improve loss mitigation performance by imposing penalties in individual cases of non-compliance with its loss mitigation requirements, stating that with the implementation of TRS II, HUD will have the granular data required for referral to enforcement divisions for “meaningful consequences to be imposed.”
On December 20, HUD announced in Mortgagee Letter 2013-45 that new requirements related to the FHA’s Home Equity Conversion Mortgage program (HECM) are tolled pending further guidance from the agency. Since announcing the new financial assessment requirements and funding requirements for the payment of property charges in September 2013, HUD has received comments that require HUD to update the requirements and guidance. Given those changes, HUD delayed the original date for compliance with the requirements—January 13, 2014—and will set a new effective date when it issues the updated guidance. Mortgagees will have at least 90 days to comply with the new guidance.
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 December 6, HUD issued Mortgagee Letter 2013-44, which updates HUD’s policies on (i) the use of an FHA-insured mortgage to purchase a HUD REO property; and (ii) the use of distressed properties in determining the market value of REO properties. With regard to the first, the letter provides a chart of conditions that trigger a requirement for the mortgagee to order a new appraisal. According to the letter, if a new appraisal is ordered, then (i) the original appraisal ordered by HUD may not be used to underwrite the loan; (ii) HUD will not reimburse the mortgagee for the cost of the new appraisal and the borrower/purchaser can be charged for the expense of the new appraisal as part of the borrower’s closing costs; (iii) the mortgagee must provide a written justification for ordering a new appraisal; and (iv) the mortgagee must retain copies of all appraisals available to the mortgagee in its loan file. With regard to establishing market value of REO properties, the letter details the conditions implicit in HUD’s characterization that a market value price should “reflect the price appropriate for properties sold in a competitive and open market, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” In addition, the letter states that, when considering sales to be used as comparables, the appraiser must note the conditions of sale and the motivations of the sellers and purchasers, and that in developing an opinion of market value, REO sales and pre-foreclosure sales transactions should only be chosen as comparables if there is compelling evidence in the market to warrant their use. Mortgagees are required to implement the policy changes in the letter by February 4, 2014.
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
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.
Special Alert: Settlement In Key Fair Housing Case Moves Forward, Supreme Court Unlikely To Hear Appeal
Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.
The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory.
Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly. Read more…
On November 5, HUD released a Conciliation Agreement with a lender alleged to have discriminated against African-American and Hispanic borrowers seeking mortgage loans. In an administrative complaint filed following a review of the lender’s internal loan data, HUD claimed that the lender’s wholesale lending program violated the Fair Housing Act by underwriting, approving, purchasing, and securitizing mortgage loans in a manner that allowed pricing and denial disparities on the basis of race and national origin. HUD stated that the lender’s wholesale business, which granted third-party brokers discretion to negotiate fees and compensated those brokers through direct fees paid by borrowers to brokers, and/or through yield spread premiums paid by the lender, allegedly resulted in African-American and Hispanic borrowers paying higher APRs, receiving higher-priced loans, and paying more fees than similarly situated white borrows. HUD also alleged that African-American and Hispanic applicants were more likely to have their loan applications denied. HUD did not allege any intentional discrimination, and instead based its claims on its finding that statistical dipartites existed. To resolve the HUD investigation and complaint without litigation, and without admitting the allegations, the lender agreed to establish a $12.1 million fund to compensate allegedly harmed consumers and to distribute any excess funds to housing advocacy and counseling groups.
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.