On July 17, the FHFA Office of Inspector General (OIG) published a report on risks to Fannie Mae and Freddie Mac (the Enterprises) related to purchasing mortgages from smaller lenders and nonbank mortgage companies. The report states such lenders present elevated risk in the following areas: (i) counterparty credit risk—smaller lenders and nonbank lenders may have relatively limited financial capacity, and the latter are not subject to federal safety and soundness oversight; (ii) operational risk—smaller or nonbank lenders may lack the sophisticated systems and expertise necessary to manage high volumes of mortgage sales to the Enterprises; and (iii) reputational risk—the report cites as an example an institution that was sanctioned by state regulators for engaging in allegedly abusive lending practices. The report notes that in 2014 the FHFA’s Division of Enterprise Regulation’s plans to focus on Fannie Mae’s and Freddie Mac’s controls for smaller and nonbank sellers, which will include assessments of the Enterprise’s mortgage loan delivery limits and lender eligibility standards and assessment of the counterparty approval process and counterparty credit risk resulting from cash window originations. The report also notes FHFA guidance to the Enterprises last year on contingency planning for high-risk or high-volume counterparties, and states that the FHFA plans to issue additional guidance on counterparty risk management. Specifically, the Division of Supervision Policy and Support plans to issue an advisory bulletin focusing on risk management and the approval process for seller counterparties. The OIG did not make any recommendations to supplement the FHFA’s planned activities.
Ninth Circuit Holds Plaintiffs Not Required To Plead Tender Or Ability To Tender To Support TILA Rescission Claim
On July 16, the U.S. Court of Appeals for the Ninth Circuit held that an allegation of tender or ability to tender is not required to support a TILA rescission claim. Merritt v. Countrywide Fin. Corp., No. 17678, 2014 WL 3451299 (9th Cir. Jul. 16, 2014). In this case, two borrowers filed an action against their mortgage lender more than three years after origination of the loan and a concurrent home equity line of credit, claiming the lender failed to provide completed disclosures. The district court dismissed the borrowers’ claim for rescission under TILA because the borrowers did not tender the value of their HELOC to the lender before filing suit, and dismissed their RESPA Section 8 claims as time-barred.
On appeal, the court criticized the district court’s application of the Ninth Circuit’s holding in Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) that courts may at the summary judgment stage require an obligor to provide evidence of ability to tender. Instead, the appellate court held that borrowers can state a TILA rescission claim without pleading tender, or that they have the ability to tender the value of their loan. The court further held that a district court may only require tender before rescission at the summary judgment stage, and only on a case-by-case basis once the creditor has established a potentially viable defense. The Ninth Circuit also applied the equitable tolling doctrine to suspend the one-year limitations period applicable to the borrower’s RESPA claims and remanded to the district court the question of whether the borrowers had a reasonable opportunity to discover the violations earlier. The court declined to address two “complex” issues of first impression: (i) whether markups for services provided by a third party are actionable under RESPA § 8(b); and (ii) whether an inflated appraisal qualifies as a “thing of value” under RESPA § 8(a).
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 15, Fannie Mae and Freddie Mac announced the availability of additional documentation to support the mortgage industry with the implementation of the Uniform Closing Dataset (UCD), the common industry dataset that supports the CFPB’s closing disclosure. The documents provide information to supplement the MISMO mapping document released in March 2014. Fannie Mae and Freddie Mac intend to collect the UCD from lenders in the future, but have not yet determined the method or timeline for that data collection.
On July 10, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s holding that the fees charged by a mortgage company jointly owned by a national bank and a real estate firm did not violate Maryland’s Finder’s Fee Act. Petry v. Prosperity Mortg. Co., No. 13-1869, 2014 WL 3361828 (4th Cir. Jul. 10, 2014). On behalf of similarly situated borrowers, two borrowers sued the bank, the real estate firm, and the mortgage company, claiming that the mortgage company operated as a broker that helped borrowers obtain mortgage loans from the bank. The borrowers alleged that all the fees that the mortgage company charged at closing were “finder’s fees” within the meaning of the Maryland Finder’s Fee Act, and, as such, the company—aided and abetted by the bank and the real estate firm—violated the Finder’s Fee Act (i) by charging finder’s fees in transactions in which it was both the mortgage broker and the lender and (ii) by charging finder’s fees without a separate written agreement providing for them.
After certifying the class the district court advised the borrowers that the fees did not qualify as finder’s fees under state law unless they had been inflated so that the overcharge could disguise the referral fee. When the borrowers acknowledged they could not prove the fees were inflated, the district court entered judgment for the defendants. On appeal, the court agreed with the district court’s conclusion as to the fees at issue, but held for the defendants on different grounds. The appeals court determined that because the mortgage company was identified as the lender in the documents executed at closing, it was not a “mortgage broker” under Finder’s Fee Act and therefore was not subject to the Act’s provisions. As such, the court further determined it need not decide whether the bank and real estate firm could be liable for the mortgage company’s alleged violations under theories of aiding and abetting.
Recently, the Massachusetts Division of Banks published final amendments to its regulation concerning documentation and determination of borrower’s interest to establish an additional safe harbor for any home loan that meets the definition of a “Qualified Mortgage” under the CFPB’s ability-to-repay/qualified mortgage rule. A Qualified Mortgage now will be deemed to be in the borrower’s interest under the regulation. The amendments also clarify that the exemption under the borrower’s interest regulation applies to all Qualified Mortgages which are eligible for safe harbor consideration under TILA, including the small creditor exemption, provided that the Qualified Mortgage is not higher cost. The amendments became effective July 18, 2014.
On July 2, the Massachusetts Division of Banks published an industry letter regarding mortgage lenders’ obligation to timely fund and disburse mortgage proceeds and oversee internal and third-party compliance with that requirement. The letter advises lenders that numerous recent examinations have revealed issues with timely funding of loans by lenders and disbursement of funds by settlement agents. The letter reminds lenders that the state’s “Good Funds Law” requires a mortgage lender to disburse—in the form of a certified check, bank treasurer’s check, cashier’s check, or wire transfer—the full amount of the loan proceeds prior to recording the mortgage, and that failure to do so may be considered an unfair and deceptive practice. In addition, the letter advises lenders that (i) they must establish and implement policies and procedures to ensure that vendors distribute loan proceeds in the required timeframe, and (ii) internal compliance audits should include testing of the lender’s and any settlement agents’ settlement processes and procedures.
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 1,Fannie Mae issued Selling Guide Announcement SEL-2014-09 to remind lenders and originators—as it recently did for servicers—of their obligations to be in compliance with applicable provisions of the Bank Secrecy Act and its implementing regulations and to have internal policies, procedures, and controls in place to identify suspicious activities.
This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”
The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act. Read more…
On July 8, the CFPB issued an interpretive rule stating that the addition of a successor as an obligor on a mortgage does not trigger the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requirements if the successor previously received an interest in the property securing the mortgage by operation of law, such as through inheritance or divorce. Creditors may rely on the interpretive rule as a safe harbor under section 130(f) of TILA.
In adopting the interpretations described below, it appears that the CFPB primarily intended to respond to inquiries from the industry and consumer advocates about situations where one family member inherits a home from another and, in order to keep the home, requests to be added to the mortgage and to modify its terms, such as by reducing the rate or payments.
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Questions regarding the matters discussed in the 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 June 19, Freddie Mac issued Bulletin 2014-12, which updates and revises numerous selling and servicing requirements. According to the Bulletin, Freddie Mac has determined that because sellers/servicers will have difficulty complying with the CFPB’s borrower notification requirements for ARMs with lookback periods less than 45 days, as of January 1, 2015, Freddie Mac will no longer purchase those loans. Freddie Mac also announced that, effective October 15, 2014, mortgages originated in Montana, Oregon, and Washington where MERS is not the original mortgagee of record, but is a subsequent assignee, are not eligible for sale to Freddie Mac. The Bulletin updates and clarifies several other MERS-related requirements. In addition, the Bulletin announces revisions to fraud reporting requirements to require a seller/servicer to report fraud and suspected fraud to Freddie Mac when the seller/servicer has a reasonable belief that certain actions occurred during origination or servicing of a mortgage, and to extend the number of days within which a seller/servicer must report fraud and suspected fraud to Freddie Mac from 30 to 60 days. Finally, the Bulletin provides numerous additional updates related to (i) certain servicing-related forms; (ii) relief refinance mortgages; (iii) monthly debt-to-income ratio requirements; (iv) requirements for verification of large deposits; (v) area median income estimates; and (vi) several other selling issues.
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, CFPB Deputy Director Steve Antonakes opened the CFPB’s first public Consumer Advisory Board (CAB) meeting with remarks about implementation of the CFPB’s mortgage rules and the Bureau’s approach to enforcing those rules.
Over the past year, the CFPB has attempted to publicly outline and clarify its expectations for mortgage originators and servicers as those companies seek to comply with a host of new rules and requirements while continuing to face significant market challenges. The CFPB’s initial public position, particularly with regard to the new servicing rules, was that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.” Read more…
On May 27, Fannie Mae announced in Selling Guide Announcement SEL-2014-06 numerous selling policy updates. The announcement includes changes to Fannie Mae policies related to cash-out refinance transactions to provide additional flexibility and clarity with regard to delayed finance, continuity of obligation, and multiple finance properties for the same borrower. The announcement also details several asset-related updates, including, for example, that Fannie Mae will no longer require documentation for any deposit on a borrower’s recent bank statement that exceeds 25% of the total monthly qualifying income for the loan. Instead, Fannie Mae is changing the definition of a large deposit to 50% of the total monthly qualifying income, and states that when a deposit includes both sourced and unsourced portions, only the unsourced portion must be used when calculating whether the deposit meets the 50% definition. Fannie Mae also announced: (i) updates to the definitions for retail, broker, and correspondent origination types; (ii) clarification of the requirements for use of a power of attorney; and (iii) revised requirements for reporting lender financial statements.