On May 13, Freddie Mac announced in Bulletin Number 2013-7 that servicers can immediately begin offering modifications under the streamlined modifications initiative announced by the FHFA in March. The Bulletin states that servicers must generate the terms of each trial period plan using their own proprietary system or third-party system until Workout Prospector® becomes available July 15, 2013 to process the terms of a streamlined modification. The Bulletin also revises Freddie Mac’s property valuation requirements for modifications of mortgages secured by manufactured homes and 2- to 4-unit properties, and eliminates the requirement that a property value be obtained for a long-term forbearance plan. On May 7, Fannie Mae published new Frequently Asked Questions intended to help servicers understand and implement the requirements of Servicing Guide Announcement SVC-2013-05, which, beginning July 1, 2013, requires services to offer eligible borrowers who are at least 90 days delinquent on their mortgage a way to lower their monthly payments and modify their mortgage without requiring financial or hardship documentation. The FAQs relate to (i) solicitation, (ii) eligibility requirements/exclusions, (iii) workout hierarchy, (iv) valuations, and (v) servicer requirements.
On May 15, the CFPB announced a YouTube playlist, which includes seven videos that provide information about the mortgage rules the CFPB published earlier this year. The CFPB stated that the purpose of the videos is to provide an overview of the rules in a plain language format for use by a broad array of industry constituents, but cautioned that the videos are not a substitute for the rules themselves. Also on May 15, the CFPB announced a Spanish language website, with mobile capability, that provides access to CFPB resources, including information about how to submit a consumer complaint and answers to consumers’ frequently asked questions.
On May 14, the Ohio Supreme Court held in response to two certified questions from a federal district court that the Ohio Consumer Sales Practices Act (CSPA) generally does not apply to mortgage servicers and servicing. Anderson v. Barclay’s Capital Real Estate, Inc., No. 2013-Ohio-1933, 2013 WL 2097556 (Ohio May 14, 2013). Specifically, the court held that residential mortgage servicing is not a “consumer transaction” subject to the CSPA. The court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and the financial institution that owns both the note and mortgage, and is carried out in the absence of a contract between the borrower and the servicer. Therefore the transaction does not meet an essential element of the statutory definition because it is not a sale, lease, assignment, award by chance, or other transfer of a service to a consumer. The court also held that a residential mortgage servicer is not a “supplier” subject to the CSPA. The statute defines “supplier” to include a seller, lessor, assignor, franchisor, or other person engaged in the business of effecting or soliciting consumer transactions, whether or not the person deals directly with the consumer. Because mortgage servicers are not part of the residential mortgage transaction and do not seek to enter into consumer transactions with borrowers, they are not “suppliers” under the law.
On May 15, Freddie Mac issued Bulletin Number 2013-8, which includes numerous revisions to requirements for sellers and servicers. According to the Bulletin, beginning January 1, 2014, a seller/servicer will be charged a $7,500 low activity fee if the seller/servicer does not either (i) sell mortgages to Freddie Mac with an aggregate unpaid principal balance greater than $5 million during the immediately preceding calendar year, or (ii) service, or act as a servicing agent for, mortgages for Freddie Mac with an aggregate unpaid principal balance of at least $25 million as of December 31 of the immediately preceding calendar year. In addition, the Bulletin, among other things: (i) requires seller/servicers to comply with the deadlines specified by Freddie Mac when it requests cooperation in a fraud investigation; (ii) notifies sellers and reminds servicers that seller/servicers must direct mortgage insurers providing coverage on mortgages sold to and/or serviced for Freddie Mac to release data to Freddie Mac at Freddie Mac’s request; (iii) updates and revises requirements for Living Trusts and announces that mortgages secured by properties in which the legal and equitable title is held by a land trust will no longer be eligible for purchase under the Guide, unless certain conditions are met; and (iv) prohibits sellers that have guarantor master commitments from taking out fixed-rate cash contracts for the sale of super conforming mortgages.
On April 29, the U.S. District Court for the Central District of California refused to certify a class seeking to challenge a mortgage servicer’s loan modification practices. Campusano v. BAC Home Loans Servicing, LP, No. 11-4609, slip op. (C.D. Cal. Apr. 29, 2013). The named borrowers allege that their mortgage servicer breached agreements to modify mortgage loans by failing to timely implement the terms of the modification agreements and claim that the servicer’s failures are pervasive and appropriate for class treatment. The court held that the class lacked commonality and typicality because the borrowers failed to demonstrate that their modification agreements were the only ones used by the servicer and that all such agreements contained identical provisions pertaining to effective dates and other material terms. The court also held that the borrowers failed to demonstrate that (i) differences in contract would be immaterial to the question of whether acceptance of a first payment binds the servicer to the agreement regardless of other contract deficiencies and (ii) the borrowers suffered harm as a result of the servicer’s quality control, validation, and repudiation procedures. The court denied the borrowers’ motion for class certification.
On May 1, President Obama announced the nomination of Representative Mel Watt (D-NC) to serve as Director of the FHFA. Mr. Watt has represented portions of Charlotte and other North Carolina communities since 1993 and currently is a member of the House Committees on Financial Services and Judiciary. He would replace FHFA Acting Director Edward DeMarco, who federal and state Democratic policymakers and housing groups have called on to be replaced, in part based on his decision to not direct Fannie Mae and Freddie Mac to engage in broad principal reduction programs. On the same day as the President’s announcement, the Congressional Budget Office released a report that examined three options for Fannie Mae and Freddie Mac to use principal forgiveness, which the CBO finds would be likely to (i) result in small savings to the government, (ii) slightly reduce mortgage foreclosure and delinquency rates, and (iii) slightly boost overall economic growth.
On May 1, Fannie Mae issued Servicing Guide Announcement SVC-2013-10, which includes numerous servicing policy changes. The announcement informs servicers that they must (i) conduct regular testing of compliance with applicable laws in all jurisdictions in which they service mortgage loans for Fannie Mae, (ii) provide test results to senior management and, upon request, to Fannie Mae, and (iii) maintain evidence of any corrective actions. For eMortgages, the Announcement explains that servicers must obtain special approval to service such mortgages by contacting their Servicing Consultant, Portfolio Manager, or Fannie Mae’s National Servicing Organization’s Servicing Solutions Center. The Announcement also (i) provides new requirements for repayments of escrow deficits and shortages for all conventional loan modifications, (ii) requires servicers to obtain the results of property valuation order requests for the purposes of bidding instructions through HomeSaver Solutions® Network within 7 to 10 calendar days from the date the servicer submits the request, (iii) clarifies delinquency management and default prevention policies outlined in SVC-2012-18, (iv) removes Guide language regarding temporary possession of mortgage notes, and (v) incorporates a recent change to Moody’s rating system.
On April 19, the CFPB proposed a rule to amend and clarify certain provisions of its final qualified mortgage rule and final mortgage servicing rule. The proposal addresses (i) preemption issues with regard to Regulation X’s servicing provisions, (ii) the small servicer exemption from certain of the new servicing standards, (iii) the use of government-sponsored enterprise and federal agency purchase, guarantee, or insurance eligibility for determining qualified mortgage status, and (iv) the determination of debt and income for purposes of originating qualified mortgages. With regard to small servicers, the proposal would clarify which mortgage loans to consider in determining small servicer status and the application of the small servicer exemption to servicer/affiliate and master servicer/subservicer relationships. It would exclude from consideration mortgage loans voluntarily serviced for an unaffiliated entity without remuneration, reverse mortgages, and mortgage loans secured by a consumer’s interest in timeshare plans. With regard to debt-to-income ratio assessments for purposes of offering qualified mortgages, the rule would amend language related to employment record and income, obtaining business credit reports and other issues related to self-employed borrowers, and the treatment of Social Security and rental income.
Minnesota Supreme Court Affirms that Foreclosing Parties Must Record Mortgage Assignments Prior to Initiating Foreclosure by Advertisement
On April 17, the Minnesota Supreme Court affirmed an intermediate appellate court ruling that held (i) a strict compliance standard applies to Minnesota’s foreclosure by advertisement process, and (ii) a foreclosure by advertisement is void where the foreclosing party fails to record all mortgage assignments prior to initiating the foreclosure process. Ruiz v. 1st Fidelity Loan Servicing, LLC, No. A11-1081, 2013 WL 1629192 (Minn. Apr. 17, 2013). The case arose after an assignment correcting the name of the assignee was recorded on the same day that the assignee (i) published the first notice of foreclosure sale, and (ii) recorded a notice of pendency of foreclosure. After the assignee foreclosed on the property, the mortgagor brought an action in Minnesota District Court seeking to void the foreclosure by arguing that foreclosing parties must comply strictly with Minnesota’s foreclosure by advertisement process. The district court granted summary judgment in the assignee’s favor, concluding, among other things, that a substantial-compliance standard, rather than a strict compliance standard, applies to Minnesota’s foreclosure by advertisement process. The Minnesota Court of Appeals reversed the district court on appeal, holding instead that a strict compliance standard applies to Minnesota’s foreclosure by advertisement process. On further appeal, the state supreme court analyzed the statutory language containing Minnesota’s foreclosure by advertisement process and determined that the plain language of the statute unambiguously requires all mortgage assignments to be recorded before a foreclosing party has a right to engage in the process of foreclosure by advertisement. As a result, the court determined that the assignee’s foreclosure was void and that the case should be remanded to the district court for further proceedings.
On April 15, Freddie Mac issued Bulletin Number 2013-6, which announces numerous revisions to servicing requirements. The bulletin updates the allowable amounts for attorney fees for default-related legal services and details changes to the reimbursement process for such fees. Freddie Mac also reminds servicers about changes to foreclosure sale bidding on first lien mortgages. The bulletin explains that because Freddie Mac may need to verify directly with mortgage insurers the presence and nature of mortgage insurance coverage, servicers and sellers are required to direct mortgage insurers in writing to release data to Freddie Mac upon request. In addition, the bulletin (i) reminds servicers of the reporting activities they must undertake after extending trial periods for borrowers who subsequently file for bankruptcy during the trial period plan and provides requirements on reporting the optional interim month, (ii) revises Servicing Success Program requirements related to Servicer Success File Reviews and the Servicer Performance Profile, (iii) updates the Guide to reflect the retirement of the Freddie Mac Home Affordable Foreclosure Alternatives initiative, and (iv) announces other miscellaneous form and Guide updates.
On April 17, Fannie Mae issued Servicing Guide Announcement SVC-2013-09, which revises Fannie Mae’s execution of legal documents policy related to (i) quitclaim deeds, (ii) limited power of attorney, (iii) execution of assumptions, and (iv) releases of security. The policy changes are effective immediately. Also on April 17, Fannie Mae issued a servicing notice to inform servicers of a change in the format for bidding instructions to help clarify the situations in which specific bidding instructions must be used.
On April 11, the FHFA announced that Fannie Mae and Freddie Mac will extend the Home Affordable Refinance Program (HARP) to December 31, 2015. The program was set to expire at the end of 2013. In addition, the FHFA plans to launch a nationwide campaign to educate consumers about HARP. The FHFA announcement also includes HARP frequently-asked-questions and eligibility criteria for a HARP refinance.
On April 10, Fannie Mae issued Servicing Guide Announcement SVC-2013-08, which introduces a delinquency status code hierarchy and updates delinquency status code definitions. The hierarchy requires servicers to report the most appropriate delinquency status code based on priority level, using a six level priority hierarchy. The announcement explains that when multiple delinquency status codes are applicable to an individual loan, the servicer must use the appropriate delinquency status code in the highest priority, though Priority Level 1 through 3 status codes are mutually exclusive. The changes will take effect for the February 2014 delinquency status code reporting cycle (for January 2014 activity), though Fannie Mae encourages servicers to implement the new policies as soon as possible.
On April 9, the Federal Reserve Board and the OCC announced that payments to borrowers impacted by allegedly improper foreclosure practices would begin on April 12, 2013. The planned payments range from $300 to $125,000, and will be sent to certain borrowers whose mortgages were serviced by 11 of the 13 mortgage servicers subject to recently amended consent orders that replaced requirements related to the Independent Foreclosure Review process with $3.6 billion in cash payments and $5.7 billion in other assistance to 4.2 million borrowers. Payments to borrowers with mortgages serviced by two other servicers will be announced later. The payments will be sent in several waves, with the last wave expected to be sent in mid-July 2013. The announcement notes that the regulators categorized borrowers according to the stage of their foreclosure process and the type of possible servicer error. Then, amounts were determined for each category using the financial remediation matrix published in June 2012 as guidance, but also incorporating input from various consumer groups. The Board and the OCC also published a chart of payment amounts and the number of borrowers identified for each category.
On April 1, Indiana enacted a bill to retroactively amend certain lien release provisions. The bill, HB 1079, provides that if the record of a mortgage or vendor’s lien was created before July 1, 2012 and does not show the due date of the last installment, the mortgage or vendor’s lien expires 20 years after the date of execution of the mortgage or vendor’s lien. If the execution date is omitted, the lien expires 20 years after the lien is recorded. Prior to this change, all liens expired after 10 years. The bill also (i) makes exceptions to the expiration period if a foreclosure action is brought not later than the expiration period, and (ii) removes language that prohibits a person from maintaining an action to foreclose a mortgage or enforce a vendor’s lien if the last installment of the debt secured by such lien has been due more than 10 years.