On July 6, HUD’s Federal Housing Administration (FHA) proposed a rule to establish a maximum time period for FHA-approved lenders to file insurance claims for benefits following the foreclosure of FHA-insured mortgages. Currently, HUD does not require mortgagees to file claims by a certain time, but the proposed rule will require lenders to file insurance claims (i) three months from when they obtain marketable title to the property; or (ii) when the property is sold to a third party. Since the housing market collapse, which dramatically increased mortgage defaults, mortgagees have chosen to forgo promptly filing insurance claims with the FHA, instead opting to wait and file multiple claims at once. This uncertainty of when claims will be filed, along with the high number filed at the same time, has strained FHA resources and negatively impacted its ability to project the future state of the Mutual Mortgage Insurance Fund (MMIF), which it is statutorily obligated to safeguard. In addition to the deadline, the proposed rule would ban from insurance payouts certain expenses incurred by mortgagees that are the result of their failure to timely fulfill the requirements necessary to submit an insurance claim (such as promptly initiating foreclosure). Comments on the proposed rule are due September 4, 2015.
CFPB Issues Guidance Reminding Servicers of Requirements for Cancellation and Termination of Private Mortgage Insurance
On August 4, the CFPB issued Compliance Bulletin 2015-03 to provide guidance to mortgage servicers on their compliance obligations related to the private mortgage insurance (PMI) cancellation and termination provisions under the Homeowners Protection Act (HPA). The bulletin summarizes HPA requirements regarding annual disclosures, PMI refunds, borrower-requested cancellation, automatic termination, and final termination of PMI. The bulletin also cautions servicers to implement investor guidelines in a manner that does not violate the HPA. In a statement released by the Bureau, CFPB Director Richard Cordray advised, “We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and [the Bureau’s] guidance should help servicers come into compliance with the [HPA].”
On July 10, the FHFA sought input on a proposal to establish new eligibility requirements for private mortgage insurers seeking to insure Fannie Mae and Freddie Mac (the Enterprises) mortgages. As described in an overview document, the FHFA proposes to revise business requirements to identify, measure, and manage exposure to counterparty risk. The FHFA also proposes new financial requirements and minimum quality control program requirements, which it states are intended to (i) facilitate an insurer’s monitoring of adherence to its underwriting and eligibility guidelines; (ii) ensure data accuracy; and (iii) prevent the insuring of fraudulent mortgages or mortgages with other defects. An insurer would be required to submit to each Enterprise a copy of its quality control program annually, with changes noted from the prior year’s version. The proposal also describes numerous potential remedies available to the Enterprises should an insurer fail to meet its requirements, ranging from more frequent dialogue or visits with an insurer to suspension or termination. All components of the requirements would become effective 180 days after the publication date of the finalized requirements. During the input period, and until the requirements are finalized, any insurer already approved to do business with the Enterprises that does not fully meet each Enterprise’s existing eligibility requirements would continue to operate in its current status and would be given a transition period of up to two years from the publication date to fully comply. Comments on the proposal are due by September 8, 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.
Fannie Mae Offers Alternative To Repurchase For Mortgage Insurance Rescission, Announces Numerous Other Servicing Policy Updates
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2014-13, which describes a new alternative to repurchase, an “MI stand-in.” The MI stand-in is defined as the full mortgage insurance (MI) benefit that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates. The alternative was first announced earlier this year as part of broader updates to Fannie Mae’ representation and warranties framework. Fannie Mae will not require immediate repurchase when the MI is rescinded on mortgage loans acquired on or after July 1, 2014, and instead will offer the MI stand-in if: (i) the responsible party meets Fannie Mae’s eligibility criteria; and (ii) the only defect Fannie Mae identifies in the mortgage loan is the rescission of MI; or (iii) the responsible party cures all defects identified, except the MI rescission defect, during the required cure period. A mortgage loan will not be eligible for the MI stand-in if: (i) Fannie Mae identifies other defects during the full file quality control review which the responsible party fails to cure during the required cure period, or (ii) the responsible party does not respond in a timely manner or submit all of the required documents within the timeframes required by Fannie Mae. If the responsible party cures the defects that made the mortgage loan ineligible for the MI stand-in, Fannie Mae will review the mortgage loan and responsible party for this alternative to repurchase. On July 9, in Servicing Guide Announcement SVC-2014-14, Fannie Mae announced that servicemembers can use alternatives to Fannie Mae’s form for documenting active duty orders. The announcement also updates policies regarding (i) ordering a property valuation for short sales, Mortgage Releases, and foreclosure sale bidding instructions; (ii) submitting financial statements and reports; and (iii) loan modification monthly principal and interest payment requirements.
FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements
On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.
On November 15, the CFPB announced a settlement with a mortgage insurer accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA. The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders’ captive reinsurers, but over time ceded increasingly large percentages of its premiums—up to 40% for each referral—in exchange for lenders’ continued referral of customers.
The proposed consent order requires the company to pay $100,000 in penalties and subjects the company to regular and mandatory compliance reporting and monitoring for a period of four years. In addition, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims.
On April 4, the CFPB announced enforcement actions against four mortgage insurers against which it filed complaints alleging that their captive reinsurance arrangements with mortgage lenders violated Section 8 of the Real Estate Settlement Procedures Act (RESPA). The actions are the first public actions the CFPB has taken to enforce RESPA, and follow investigations started by HUD and transferred to the CFPB in July 2011. The insurers did not admit the allegations but agreed to pay a combined $15.4 million to end the investigations. The consent orders also (i) prohibit the insurers from entering into any new captive mortgage reinsurance arrangements with mortgage lenders or their affiliates, and from obtaining captive reinsurance on any new mortgages, for a period of ten years, (ii) require the insurers to forfeit any right to the funds not directly related to collecting on reinsurance claims in connection with pre-existing reinsurance arrangements, and (iii) subject the insurers to compliance monitoring and reporting. The orders must be approved by the U.S. District Court for the Southern District of Florida before taking effect.
HUD Announces Reverse Mortgage Program Changes, Increases Mortgage Insurance Premiums, Alters Underwriting Requirements
On January 30, HUD announced that for FHA case numbers assigned on or after April 1, 2013, FHA will use a consolidated pricing option for its home equity conversion mortgages, as explained in more detail in Mortgagee Letter 2013-01. Separately, HUD also announced that effective April 1, 2013, the mortgage insurance premiums for most new mortgages will increase by 10 basis points, and by 5 basis points for jumbo mortgages. To further support the stability of the Mutual Mortgage Insurance Fund, FHA also issued Mortgagee Letter 2013-04 to require most borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a policy adopted in 2001 under which FHA cancelled premium requirements on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA also will (i) require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent, (ii) increase from 3.5 to 5 percent the minimum down payment for jumbo loans, and (iii) increase its enforcement for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures. Separately, HUD issued Mortgagee Letter 2013-02, which updates the certification language for all late endorsement requests for reverse mortgages. Finally, through Mortgagee Letter 2013-03, HUD extended to March 15, 2013 the date by which lenders must begin to assess borrowers in default under a new loss mitigation priority order and policies, as outlined in Mortgagee Letter 2012-22.
Federal District Court Holds Federal Law Preempts Massachusetts’ Statutory Limits On Hazard Insurance
On September 21, the U.S. District Court for the District of Massachusetts held that the Federal Homeowners Loan Act preempted a Massachusetts law that forbids lenders from requiring borrowers to purchase insurance greater than the replacement cost of the building on the mortgaged property. Silverstein v. ING Bank, fsb, No. 12-10015, 2012 WL 4340587 (D. Mass. Sep. 21, 2012). A borrower brought a putative class action in state court alleging that the bank’s requirement that borrowers purchase insurance equal to the outstanding principal balance on the mortgage violated the state’s limit on mortgage insurance. The bank removed the case to federal court and subsequently moved to dismiss while the borrower moved to remand the case. In denying the motion to remand and granting the bank’s motion to dismiss, the court held that the Massachusetts statute limiting hazard insurance to the replacement cost of the building falls plainly within the illustrative list of preempted state laws provided by the Homeowners Loan Act’s implementing regulations. The court conceded that the borrower could bring common law claims against the bank, but held that the borrower’s attempt to label his clear statutory claims as common law claims failed.
Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand
On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID). The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests. CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days. In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.
The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA). In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.
In denying the petition, Read more…
On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.
On August 10, the CFPB proposed two sets of rules covering a number of residential mortgage servicing practices. The rules would amend Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The TILA proposal includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoffs. The proposed changes to RESPA relate to (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. While many of the rules implement changes required by the Dodd-Frank Act, other proposed requirements incorporate those placed on servicers as part of the national mortgage servicing settlement earlier this year, or corrective actions taken in 2011 by the prudential regulators. The proposed rules follow a small business review panel that provided feedback on the rules’ impact on small servicers. In response to the panel, the CFPB states that it incorporated small business concerns, such as an exemption from new periodic statement requirements for certain small servicers. In addition to comments on the substance of the proposals, the CFPB requests detailed comments about the appropriate effective date of the rules, including whether the CFPB should set staggered effective dates for different aspects of the rules or a single implementation deadline. The CFPB is accepting comments through October 9, 2012 and intends to finalize the rules by the Dodd-Frank statutory deadline in January 2013.
On June 12, New York Governor Andrew Cuomo and the New York Department of Financial Services (DFS) announced that insurers offering lender-placed insurance must submit new premium rate schedules by July 6, 2012, along with justifications for those new rates. The DFS argues that new rates and justifications are needed based on information derived from recent hearings, which DFS Superintendent Lawsky believes proves that a lack of competition, unnecessarily high rates, and low loss ratios are harming borrowers in New York.
California Federal District Court Dismisses Four Mortgage Insurers from Captive Reinsurance Kickback Suit
On May 25, the U.S. District Court for the Eastern District of California dismissed a group of mortgage insurers from a proposed class action over allegations that their reinsurance arrangement with a lender’s affiliate violated RESPA’s anti-kickback prohibitions. McCarn v. HSBC USA, Inc, No. 12-00375, 2012 U.S. Dist. LEXIS 74085 (E.D. Ca. May 29, 2012). In this case, the borrower was required to procure private mortgage insurance (PMI) in order to obtain a mortgage loan. The mortgage insurance he purchased was arranged by his lender. Unbeknownst to the borrower, the PMI provider he engaged had a reinsurance arrangement with the lender whereby the lender required the PMI provider, as a condition of doing business with the lender, to reinsure the PMI provider’s insurance risk with the lender’s subsidiary. The borrower alleged that this arrangement violated RESPA’s anti-kickback provision, which specifies that captive reinsurance arrangements are permissible only if the payments to the affiliated reinsurer (i) are for reinsurance services actually furnished or for servicers performed and (ii) are bona fide compensation that does not exceed the value of such services. Certain of the PMI providers—not the borrower’s actual PMI provider—moved to dismiss the action on standing grounds. They claimed that they did not provide PMI for the borrower’s loan and therefore the borrower’s injuries were not fairly traceable to their alleged actions. The court agreed, and held that the borrower failed to adequately plead a conspiracy and thus did not establish that the injuries were causally connected to these PMI providers’ actions. The court noted that from the PMI providers’ standpoint, the fewer participants in the alleged “scheme” the better because the remaining providers would each get more of the lender’s business. The court found that the borrower had not pled facts supporting a conspiracy, aside from “conclusory allegations of ‘collective action’ to suggest that the various PMI providers would have any financial motivation to act in concert” and dismissed the action without prejudice.