CSBS Announcement: Arizona Department of Financial Institutions Becomes Latest State Agency to Adopt National SAFE MLO Test

On July 29, the Conference of State Bank Supervisors (CSBS) announced that the Arizona Department of Financial Institutions began using the National SAFE Mortgage Loan Originator (MLO) Test, making it the 47th state banking agency to adopt the SAFE MLO Test containing Uniform State Content. Combining both the national and state testing requirements of the SAFE Act and the CSBS/AARMR model state law, the test with Uniform State Content was first made available to state banking agencies on April 1, 2013 to help streamline the application process for MLOs seeking to obtain licensure in more than one state. Since April 1, 2013, according to the CSBS, over 58,000 MLOs have taken the National SAFE MLO Test with Uniform State Content. Notably, applicants who take the test on or after October 3, 2015, will be expected to understand requirements of the TRID Rule as promulgated by the CFPB.


Maryland Court of Appeals Rules Borrowers Barred By Three-Year Statute of Limitations in HELOC Decision

On June 23, The Court of Appeals of Maryland reversed the judgment of the Court of Special Appeals in Windesheim v. Larocca, 2015 WL 3853500 (MD. 2015), holding that the statute of limitations for a mortgage origination fraud case began to run at origination because the borrowers had inquiry notice of the loan terms. Under the alleged “buy-first-sell-later” scheme, the borrower-plaintiffs contend that the realtor and lender-defendants encouraged the borrowers to open home equity lines of credit (HELOCs) on their current homes while simultaneously selling their current homes. The lenders allegedly forged documents and signatures in order to approve both the HELOCs and the mortgages on new homes. The trial court initially found that the claims were time-barred, as the plaintiffs should have discovered the alleged fraud when the loans were originated. On appeal to the Court of Special Appeals, Maryland’s intermediate appellate court, the plaintiffs succeeded in reversing the decision of the trial court. The defendants then filed their own appeal, and the Court of Appeals sided with the trial court in holding that the three-year statute of limitations had run. In particular, the Court of Appeals held that the borrowers had inquiry notice at origination because they signed the loan applications and thus were “presumed to have read and understood their contents.” Furthermore, the statute of limitations was not tolled by Maryland law or the fiduciary rule “because there is neither evidence that the Petitioners encouraged Borrowers not to read the Applications nor evidence that the Borrowers and Petitioners were in a fiduciary relationship.” The Court of Appeals further held that the defendants neither engaged in nor conspired to engage in false or misleading indirect advertising regarding secondary mortgage loans.


CFPB Publishes Eighth Edition of Supervisory Highlights

On June 23, the CFPB published its eighth edition of Supervisory Highlights, covering supervisory activities from January 2015 through April 2015. The latest edition identifies issues with dual-tracking at mortgage servicers and the need for improved quality control measures at consumer reporting agencies. The report also provided supervisory observations related to debt collection, student loan servicing, mortgage origination and servicing, and fair lending. Notably, the report reveals that non-public supervisory actions and self-reported violations at banks and nonbanks in the areas of mortgage origination, fair lending, mortgage servicing, deposits, payday lending, and debt collection resulted in $11.6 million in remediation to more than 80,000 consumers during the first four months of 2015.


FHA Announces Updated Defect Taxonomy to Clarify its Plan for Classifying Loan Defects Found in its Single-Family Loan Portfolio

On June 18, the FHA released its Single-Family Housing Loan Quality Assessment Methodology (“Defect Taxonomy”), a framework outlining the agency’s plans to identify and capture information related to loan defects found in Single-Family FHA endorsed loans. The new framework is intended to increase the efficacy of FHA’s Quality Assurance efforts and focuses on three core concepts – (i) identifying defects, (ii) capturing the sources and causes of defects, and (iii) assessing the severity of defects. Once implemented, the Defect Taxonomy will reduce the number of codes that the FHA uses to describe loan defects from 99 to nine.  Additionally, the Defect Taxonomy will implement “Basis of Ratings Codes” that will capture both the sources and causes of defects.  Finally, the Defect Taxonomy will refine FHA’s process for communicating the severity of defects by subdividing its current categories of “Unacceptable” and “Deficient” findings into four tiers of findings that will describe defects in greater detail. The FHA anticipates that these changes will provide greater transparency to lenders so that they can mitigate their credit risk when originating FHA loans. FHA further hopes that the Defect Taxonomy will help FHA monitor for deficiency trends and enhance its program policies.  In its announcement, FHA warns that the Defect Taxonomy “is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the Federal Government and does not establish standards for administrative or civil enforcement action….”  FHA also maintains that the Defect Taxonomy does not address how FHA will respond (i) to findings of patterns and practices of loan-level defects in FHA originations or (ii) to findings of fraud or misrepresentation in connection with any FHA-insured loan.  FHA has yet to set a date for the Defect Taxonomy to take effect.


Nevada Assembly Passes Legislation Relating to Mortgage Lending and Servicing Regulation, Licensing and Fees

On June 9, Governor Brian Sandoval (R-NV) signed into law AB 480, which revises existing law concerning the licensing and regulation of escrow agents and escrow agencies.  The law also authorizes a wholesale lender from outside the state to operate in Nevada as a mortgage broker or mortgage banker, and increase fees related to those roles.  Further, the bill requires the Commissioner of Mortgage Lending to prescribe by regulation the requirements for licensing, regulation and discipline of mortgage servicers.  Specific sections of the bill – 101.3, 101.7, and 103 – are effective immediately, while others become effective January 1, 2016.


CFPB Reminds Mortgage Lenders to Include Section 8 Income

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.


Georgia Banking Regulator Revokes License of Pennsylvania Mortgage Lender

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.


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.

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Special Alert: USDA-RHS Proposes Its Own QM Rule

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.


Fair Housing Organization Files Suit for Alleged Racial Bias

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).


CFPB Proposes Changes to Mortgage Rules for Small Lenders

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.


NY Attorney General Announces Agreement To End Bank’s Alleged Mortgage Redlining

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).


CFPB Fines Mortgage Lender for Violating Loan Originator Compensation Rule

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.


Webinar Recap: Discussing “The New CFPB Mortgage Origination Rules Deskbook”

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…