On April 13, the Georgia Department of Banking and Finance (Department) entered into a Consent Order (Order) with a Pennsylvania-based mortgage lender and its owners for failing to file a timely application with the state regulator. Specifically, the Order was entered into with the lender to resolve a Notice of Intent to Revoke and proposed Orders to Cease and Desist for allegedly, among other things, allowing the acquisition of 10 percent or more of the ownership of a Georgia licensed entity without first filing an application with the Department, conducting business with an unlicensed person who is not exempt from licensing, employing a felon, and making false statements or misrepresenting material facts in mortgage loan documents. Under terms of the Order: (i) the lender must surrender its mortgage license and pay a $5,000 fine; (ii) one of its owners must surrender his MLO license, must pay two fines of $1,000 each to both the Department and the State Regulatory Registry, and is prohibited from being employed by a licensed Georgia mortgage broker or lender for five years; and (iii) another owner must contribute $1,000 to the State Regulatory Registry and is prohibited for five years from acquiring more than 10% voting shares of a Georgia licensed company. The Order also prohibits both aforementioned owners from: (i) applying for mortgage loan originator, mortgage broker, or mortgage lender licenses; (ii) serving as a director, officer or any other equivalent role for a Georgia licensee; and (iii) acting as a branch manager for a Georgia branch of a Georgia licensed mortgage broker or lender.
On May 11, the CFPB issued Bulletin 2015-02, reminding creditors to include income from the Section 8 Housing Choice Voucher (HCV) Homeownership Program when underwriting mortgage loans. Within the Bulletin, the Bureau noted that it “has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes,” further mentioning that “some institutions have restricted the use of Section 8 HCV Homeownership Program vouchers to only certain home mortgage loan products or delivery channels.” The Bulletin warns that disparate treatment prohibited under ECOA and Reg. B may exist when a creditor does not consider Section 8 as a source of income and provides guidance on how lenders can mitigate their fair lending risk. In conjunction with the guidance, the CFPB also published a blog post, providing an overview of the Section 8 HCV Program and detailed how consumers can submit complaints if they believe they have been discriminated against.
Northern District of California Denies Motion to Dismiss Claims of Negligent Oversight of Loan Origination Employee
On March 31, the Northern District of California denied a Michigan-based mortgage company’s motion to dismiss a Louisiana resident’s amended complaint alleging that the company was negligent in hiring and supervising a branch manager later indicted for wire and mail fraud. Theime v. Cobb, et al., No. 13-cv-03827, 2013 WL 1477718 (N.D. Cal. Mar. 31, 2015). According to the amended complaint, a California branch manager for the mortgage company separately originated and arranged residential bridge loans under a fictitious business name and solicited money from investors, including the plaintiff, to fund the loans. The Plaintiff alleged that the activities of selling second mortgage bridge loans took place in the Defendant’s California offices using some of Defendant’s resources and that the Defendant ultimately condoned the employee’s bridge loan activities. In denying the mortgage company’s motion to dismiss, the court relied on allegations that the company was aware of and encouraged the branch manager’s separate bridge loan activity and that the manager paid her staff to work in the company’s offices and commingled offices and services.
On March 5, 2015, the USDA-RHS released a proposed rule to amend the regulations for the Single Family Housing Guaranteed Loan Program (SFHGLP) to provide that a loan guaranteed by USDA-RHS is a QM if it meets certain requirements set forth by the CFPB. In addition, USDA-RHS proposed to add the definition of “Qualified Mortgage” to its regulations. The proposal follows the adoption of separate QM definitions for FHA and VA loans last year.
The proposed rule also seeks to: (i) expand USDA-RHS’ lender indemnification authority for loss claims in certain instances, such as fraud , misrepresentation, and noncompliance with loan origination requirements, (ii) add a new special loan servicing option, (iii) revise the interest rate reduction requirement for refinances, and (iv) add a streamlined-assist refinance option. Comments to the proposed rule must be received on or before May 4, 2015.
Questions regarding the proposed rule 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 February 3, the Fair Housing Justice Center (FHJC), a regional fair housing non-profit organization based in New York City, filed a complaint alleging that a large bank discriminated in its mortgage lending practices on the basis of race and national origin. According to the complaint, the organization hired nine “testers” of various racial backgrounds to inquire about obtaining a mortgage for first-time homebuyers. Specifically, the complaint claims that the bank’s loan officers (i) used neighborhood racial demographics to steer minority testers to racially segregated neighborhoods and (ii) offered different loan terms and conditions based on race or national origin. The plaintiff is seeking compensatory and punitive damages and injunctive relief to ensure compliance with fair housing and fair lending laws. FHJC et al v. M&T Bank Corp., No-15-cv-779 (S.D. NY. Feb. 3, 2014).
On January 29, the CFPB announced a proposed rule that would provide regulatory relief to more small lenders. Among other things, the proposed rule would (i) increase the loan origination limit to qualify for “small creditor” status from 500 loans to 2,000 loans annually; (ii) include certain mortgage affiliates in the calculation of small-creditor status; (iii) expand the definition of “rural” to include census blocks that are not in an urban area; and (iv) extend the transition period in which small lenders can make QMs with balloon payments, regardless of location, to April 1, 2016. Comments on the proposed rule are due by March 30.
On January 19, the New York Attorney General (AG) announced an agreement with a New York-based community bank that the AG alleged had excluded predominantly minority neighborhoods from its mortgage lending business. As part of the agreement, the bank will (i) open two branches in neighborhoods with a minority population of at least 30 percent, with the first located within two miles of a majority-minority neighborhood and the second located within one mile of a majority-minority neighborhood; (ii) create a special financing program to provide $500,000 in discounts or subsidies on loans to residents of majority-minority neighborhoods; and (iii) create a marketing program directed at minority communities. Additionally, the bank agreed to submit to reporting and monitoring by the AG for a three-year period and pay $150,000 in costs to the State of New York.
Tenth Circuit Reverses District Court Ruling, Allows Credit Union To Pursue Lawsuit Against Mortgage Lender For Misappropriating Loan Funds
Recently, the United States Court of Appeals for the Tenth Circuit reversed a district ruling allowing a Texas-based credit union to sue against a mortgage lender. In 2003, the credit union’s predecessor in interest entered into a funding service agreement with the mortgage lender which originated 26 mortgage loans to individual borrowers. The credit union alleged that the mortgage lender and its closing agents wrongfully induced the predecessor to fund loans to “straw borrowers” as a vehicle to misappropriate $14 million in loan proceeds. In 2007, the credit union and its predecessor in interest entered into a purchase and assumption agreement (PAA). According to the Court, when two parties to a contract agree to its terms, as pursuant to the PAA, a third party cannot object. Further, the Court noted that, because of the PAA, the credit union had all rights to pursue claims on behalf of the predecessor in interest. A district court had previously ruled that the credit union was not a proper plaintiff and dismissed the case. The dismissal was reversed. Security Service FCU v. First American Mortgage Funding, LLC, No. 13-1133 (10th Cir. Nov. 4, 2014).
On November 13, the CFPB ordered a residential mortgage lender to pay $730,000 for violating the Loan Originator Compensation Rule. According to the complaint filed by the CFPB, from June 2011 to October 2013, the mortgage lender paid quarterly bonus payments totaling $730,000 to 32 loan officers based in part on the interest rates of the originated loan. The rule, which has been enforced by the CFPB since July 2011, prohibits mortgage lenders from paying loan officers based on loan terms such as interest rates. As part of the consent order, the mortgage lender agreed to end its current compensation practice and pay $730,000 to affected consumers. The CFPB did not seek a civil penalty.
On October 28, 2014, BuckleySandler presented the webinar “Discussing The New CFPB Mortgage Origination Rules Deskbook.” Author Joe Reilly and contributors Joseph Kolar and Ben Olson discussed the need for the book and highlighted information from specific chapters. The webinar was moderated by Jeffrey Naimon. This webinar recap covers the highlights from their discussion. For more information about the CFPB Deskbook, including information on obtaining hard copies, email CFPBDeskbook@buckleysandler.com.
The purpose of the CFPB Deskbook is simple – consolidate in a clear, organized format, material from all of the many sources of regulatory guidance on the Consumer Financial Protection Bureau’s (CFPB) mortgage origination rules. Reilly described the CFPB rulemaking, done in such a short period of time, as “herculean.” However, this short time frame created a major need for clarifications, leading to the development of numerous non-rule sources.
“The number of sources [actual rules, preamble language, CFPB webinars, CFPB Small Entity Compliance Guides and more] cried out for a one-stop shop and that’s what I tried to create,” said Reilly.
Olson, former Deputy Assistant Director for the Office of Regulations at the CFPB, helped write many of the rules discussed in the CFPB Deskbook and finds a great deal of valuable in the book.
“You always wish after you publish a rule that you had said more,” said Olson. “The Bureau has tried to answer some of those questions, but answers can be hard to find. If the Bureau says something about it, it’s in the Deskbook.” Read more…
BuckleySandler is pleased to announce the availability of “The New CFPB Mortgage Origination Rules Deskbook,” by partner Joseph Reilly. The CFPB Deskbook, published in partnership with the American Bankers Association, is an all-inclusive compilation of all the mortgage origination rules made by effective by the Consumer Financial Protection Bureau (CFPB) in January 2014, including:
- Ability-to-Repay and Qualified Mortgage requirements
- Points and Fees
- Loan Originator Compensation
- High-Cost Mortgages
- Qualified Mortgage Provisions for Federal Housing Administration and Veterans Affairs loans
- Summary of the TILA-RESPA disclosure integration taking effect in 2015
“Our goal was to consolidate the numerous sources of CFPB regulatory guidance into a clear, organized format,” said Reilly. “We wanted to provide comprehensive descriptions from not just the rule text and official commentary but also from CFPB webinars, compliance guides, preamble material from federal register releases and informal compliance discussions with CFPB staff. We hope this will be a ‘one-stop shop’ for origination compliance.”
Benjamin K. Olson, BuckleySandler partner and former Deputy Assistant Director in the CFPB’s Office of Regulations who was involved in the development of many of the rules covered by the CFPB Deskbook, describes it as “an invaluable resource with the potential to change the way regulations are understood.”
The CFPB Deskbook is available in PDF and hard copy formats. Requests for copies should be sent to CFPBDeskbook@buckleysandler.com.
On August 21, the CFPB announced the companies that have been selected to participate in its residential mortgage eClosing pilot program. The program is intended to explore how the increased use of technology during the mortgage closing process may affect consumer understanding and engagement and save time and money for consumers, lenders, and other market participants. Specifically, the program seeks to aid the CFPB in better understanding the role that eClosings can play in addressing consumers’ “pain points” in the closing process, as identified by the CFPB in an April 2014 report. The three-month pilot program will begin later this year, and the participants include both technology vendors that provide eClosing solutions and creditors that have contracted to close loans using those solutions.
Unofficial Transcripts of the ABA Briefing/Webcast “Mortgage Q&A with the Consumer Financial Protection Bureau”
To address outstanding questions regarding the new mortgage rules that took effect in January 2014, CFPB staff provided non-binding, informal guidance in a webinar hosted by the American Bankers Association (ABA). Specifically, CFPB staff answered questions regarding the mortgage origination rules and the mortgage servicing rules on April 22, 2014.
With the ABA’s consent, BuckleySandler has prepared a transcript of the webinar that incorporates the ABA’s slides. The transcript is provided for informational purposes only and does not constitute legal opinions, interpretations, or advice by BuckleySandler. The transcript was prepared from the audio recording arranged by the ABA and may have minor inaccuracies due to sound quality. In addition, the transcripts have not been reviewed by the CFPB or the ABA for accuracy or completeness.
Questions regarding the matters discussed in the webinar or the rules themselves may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Joseph J. Reilly, (202) 349-7965
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Benjamin K. Olson, (202) 349-7924
- Shara M. Chang, (202) 349-8096
- Sherry-Maria Safchuk, (310) 424-3917
On August 6, the Structured Finance Industry Group released the first edition of a “comprehensive set of proposed industry standards” to promote growth in the private label RMBS market. The SFIG explains that the project “seeks to reduce substantive differences within current market practices through an open discussion among a broad cross-section of market participants,” and, where possible establish best practices related to: (i) representations and warranties, repurchase governance, and other enforcement mechanisms; (ii) due diligence, disclosure, and data issues; and (iii) roles and responsibilities of transaction parties and their communications with investors. The paper is the first in an iterative process, and touches on only a few of the items identified in a sprawling master agenda. With regard to representations and warranties, the paper discusses fraud, regulatory compliance, and objective independent review triggers. For due diligence, data and disclosure, the paper considers underwriting guidelines disclosure and due diligence extract to investors. Finally, the paper addresses the role of transaction parties and bondholder communication.
On July 23, Massachusetts Governor Deval Patrick signed HB 3783, which prohibits creditors from requiring borrowers or owners to purchase flood insurance on the property: (i) at a coverage amount that exceeds the outstanding mortgage thereon; (ii) that includes coverage for contents; or (iii) that includes a deductible less than $5,000. Borrowers and owners will still have the option of purchasing a greater amount of insurance. The law provides that, in each instance flood insurance is required, the creditor must provide notice explaining that insurance coverage will only protect the creditor or lender’s interest in the property, and may not be sufficient to pay for repairs or property loss after a flood. The changes took effect immediately.