HUD Updates Requirements For Pre-Foreclosure Sales And Deeds-In-Lieu Of Foreclosure

On July 10, HUD issued Mortgagee Letter 2014-15, which updates requirements for pre-foreclosure sales (PFS) and deeds-in-lieu (DIL) of foreclosure for all mortgagees servicing FHA single-family mortgages. The letter explains that if none of FHA’s loss mitigation home retention options are available or appropriate, the mortgagee must evaluate the borrower for a non-home retention option, with mortgagors in default or at imminent risk of default being evaluated first for a PFS transaction before being evaluated for a DIL transaction. The letter details eligibility and documentation requirements for standard PFS, streamlined PFS, and DILs, as well as rules for calculating cash reserve contributions for standard PFS transactions. Further, the letter advises mortgagees that they may, under certain conditions, approve a servicemember for a streamlined PFS or DIL without verifying hardship or obtaining a complete mortgagor workout packet. The letter also addresses numerous other topics, including: (i) requirements for real estate agents and brokers participating in PFS transactions; (ii) an initial listing period requirement for PFS transactions; (iii) updated sample language for the PFS Addendum; (iv) validation requirements for appraisals; (v) the criteria under which the HUD will permit non-arms-length PFS transactions; and (vi) minimum marketing period for all PFS transactions.

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New York Adopts Shared Appreciation Mortgage Regulations

On July 9, the New York DFS announced that it finalized a rule that allows for shared appreciation mortgage modifications, which permit banks and mortgage servicers to reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The option is limited to borrowers who are 60 or more days past due on their loan or whose loan is the subject of an active foreclosure action and who are not eligible for existing federal and private foreclosure prevention programs. The regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification. The new regulations took effect immediately.

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Freddie Mac Updates Alternative To Foreclosure Requirements, Other Servicing Policies

On July 15, Freddie Mac issued Bulletin 2014-14, which announced a new automated settlement process for mortgage modification settlements. Effective December 1, 2014, servicers must submit the required settlement data for a modification of a conventional first lien Freddie Mac-owned or guaranteed mortgage via the new “Loan Modification Settlement” screen in Workout Prospector. Servicers may begin doing so on or after August 25, 2014. In addition, the Freddie Mac is amending mortgage modification signature requirements to provide that a servicer and any borrowers can agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note, as otherwise authorized by Freddie Mac, without obtaining the co-signer’s signature or consent on the condition that the Security Instrument that was signed by the co-signer contained a provision allowing for such action. The bulletin also, among other things, (i) updates transfer of ownership and assumption requirements; (ii) revises certain requirements for mortgages insured by the FHA or guaranteed by the VA or Rural Housing Service; and (iii) adds several new expense codes related to attorney fees and costs and updates certain attorney fees and costs reimbursement requirements.

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FHFA OIG Concerned About Specialty Servicers, Highlights FHFA Servicing Transfer Guidance

On July 1, the FHFA Office of Inspector General (OIG) issued a report containing its assessment of FHFA controls to ensure that Fannie Mae and Freddie Mac monitor nonbank special servicer performance and mitigate related risks. The report concluded that the FHFA has not established a risk management process to handle risks resulting from specialty servicers’ (i) use of short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties; and (ii) obtaining large volumes of mortgage loans that may be beyond what their infrastructures can handle. The OIG asserted that such risks “are amplified by nonbank special servicers operating without the same standards and regulation as banks that service mortgage loans,” including capital requirements, which the OIG believes makes nonbank servicers “more susceptible to economic downturns” that could “substantially increase nonperforming loans that require servicer loss mitigation while at the same time impact[ing] the ability of the servicer to perform.” The OIG recommended that the FHFA (i) issue guidance on a risk management process for nonbank special servicers and (ii) develop a comprehensive, formal oversight framework to examine and mitigate the risks these nonbank special servicers pose. The report highlighted recent FHFA guidance that the OIG believes is sufficient to resolve the second recommendation—a June 11, 2014 FHFA Advisory Bulletin outlining supervisory expectations for risk management practices in conjunction with the sale and transfer of mortgage servicing rights or the transfer of the operational responsibilities of servicing mortgage loans owned or guaranteed by Fannie Mae and Freddie Mac. The Bulletin requires Fannie Mae and Freddie Mac to consider servicer capacity, including staffing, facilities, information technology systems, and any sub-servicing arrangements, as part of the analysis of mortgage servicing transfers. The FHFA agreed to also develop supervisory guidance on how Fannie Mae and Freddie Mac manage risks associated with servicing troubled loans.

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Pennsylvania Federal Court Holds Promissory Note Transfer Equivalent To A Mortgage Assignment And Must Be Recorded

On July 1, the U.S. District Court for the Eastern District of Pennsylvania held that in Pennsylvania the assignment or transfer of a promissory note secured by a mortgage on real estate is equivalent to a mortgage assignment and, as such, must be recorded. Montgomery County, Penn. Recorder of Deeds v. Merscorp, Inc., No. 11-6968, 2014 WL 2957494 (E.D. Pa. July 1, 2014). A Pennsylvania county recorder of deeds filed a putative class action against an electronic mortgage registry claiming the registry violated state law and unjustly enriched itself by failing to record conveyances of interests in real property. The recorder challenged the registry’s practice of serving as the mortgagee of record and as the nominee for a lender, which obviates the need to record the transfer of a note each time it is sold. The court held that although state law recognizes a clear distinction between a promissory note and a mortgage and that a promissory note generally may be transferred without recording, a promissory note still falls within the meaning of a “conveyance” under state law, and therefore must be recorded. The court further explained that notes and mortgages are legally inter-woven, and “whether effectuated via a writing or a mere ‘transfer of possession’ of a note, the result is the same by operation of law”—an interest in the property has been assigned and conveyed and therefore must be recorded. The court acknowledged evidence that the registry may have been unjustly enriched by avoiding recording fees on transfers the court now determined were required to be recorded, but declined to make that determination as a matter of law, let alone a determination as to the amount of damages. The court left those issues to be determined at trial. The decision is likely to be appealed to the Third Circuit.

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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.

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Special Alert: CFPB Guidance States That Successors Are Not Subject to the ATR/QM Rule

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.

Click here to view the special alert.

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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.

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Freddie Mac Updates MERS Requirements, Fraud Reporting, Other Selling And Servicing Policies

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.

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Second Circuit Affirms Dismissal Of RESPA Claims Based On Faulty QWR

On June 24, the U.S. Court of Appeals for the Second Circuit held that a borrower failed to state a claim under RESPA because her purported qualified written requests (QWRs) did not trigger the servicer’s RESPA duties. Roth v. CitiMortgage, Inc., No. 13-3839, 2014 WL 2853549 (2d Cir. Jun 24, 2014). A borrower who defaulted on her second residential mortgage sued the servicer of the loan after the servicer threatened to take legal action. The borrower alleged that the servicer violated RESPA by failing to respond to three letters the borrower characterized as QWRs. The court agreed with a Tenth Circuit holding that Regulation X permits servicers to designate an exclusive address for QWRs, and held that the borrower’s letters did not trigger the servicer’s RESPA duties because they were not sent to the QWR address designated by the servicer and provided on the borrower’s mortgage statements. The court further explained that servicers are not prohibited from changing a QWR address. For the same reasons, the court rejected the borrower’s claim that the alleged inadequate QWR address notice violated state prohibitions on unfair and deceptive practices. Finally, the court held that the borrower’s FDCPA claim failed because the servicer did not acquire the debt after it was in default and therefore the servicer did not qualify as a debt collector subject to the FDCPA.

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Federal, State Authorities Announce Substantial Mortgage Settlement

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.

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Massachusetts AG Requires Mortgage Servicer To Provide Foreclosure-Related Relief

On June 16, Massachusetts Attorney General (AG) Martha Coakley announced that a large mortgage servicer agreed to provide $3 million in borrower relief and pay $700,000 to the Commonwealth to resolve allegations that the servicer failed to provide certain notices to homeowners, as required by state law, and that it unlawfully foreclosed on certain properties. Specifically, the AG alleged that the servicer failed to send state-mandated notices to homeowners in default, and failed to execute proper mortgage assignments, filed in the Massachusetts Registry of Deeds, as required by Massachusetts law. The agreement also resolves claims that a servicer acquired by the settling servicer allegedly initiated foreclosures when it did not hold the actual mortgages, a violation of Massachusetts law, as established by a 2011 state supreme court decision. As described in the AG’s announcement, the agreement requires the servicer to properly execute documents filed in connection with foreclosure proceedings, and to mail to residents notices that are in compliance with applicable statutes and regulations.

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CFPB Deputy Director’s Remarks May Indicate Evolving Approach To Mortgage Rules Enforcement

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…

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Colorado Adds Mortgage Servicer Requirements

Recently, Colorado enacted legislation that requires servicers of residential loans, including lenders and other parties that offer a borrower a loss mitigation option or seek to enforce the power to foreclose and sell the residential real estate that secures a delinquent loan, to establish a single point of contact with a borrower. The bill obligates the single point of contact to inform the borrower about loss mitigation options, the status of the borrower’s loan, circumstances that may result in foreclosure, and procedures to submit a notice of error or information request. Further, the bill prohibits the servicer from initiating foreclosure proceedings unless the borrower has not qualified for, accepted, or complied with the terms of a loss mitigation option. The bill provides that if a servicer is engaging in prohibited “dual tracking,” the public trustee must follow certain procedures, including continuance of the foreclosure sale and withdrawal of the notice of election and demand, provided so the borrower is complying with all applicable terms of a loss mitigation option. In addition, the bill requires a foreclosing lender to disclose that it is illegal for a foreclosure consultant to require a deposit or charge fees in advance for providing services, and requires that the posted notice include a statement regarding the borrower’s ability to file a complaint with state and federal authorities if the borrower believes the lender or servicer has violated certain provisions of the bill. The bill takes effect January 1, 2015.

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Louisiana Requires Mortgage Loan Servicers To Obtain License

On May 29, Louisiana Governor Bobby Jindal signed HB 807, which requires companies that service mortgage loans in the state to obtain a state license. The bill amends the state’s Residential Mortgage Lender Law to require a company to obtain a state license by June 30, 2015 if it collects or remits payment for another, or if it holds the right to collect or remit payments for another, of principal, interest, tax, insurance, or other payment under a mortgage loan. The bill subjects mortgage loan servicers to existing licensure requirements and establishes the process to be used to determine the amount of the surety bond mortgage loan servicers must obtain. Finally, the bill requires any individual who services mortgage loans (which, according to the Louisiana Office of Financial Institutions, includes individuals who modify mortgage loans) to register as a mortgage loan originator through the NMLS. The Louisiana Office of Financial Institutions is expected to issue guidance on the new law later this year.

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Connecticut Bill Revises Licensing Laws, Numerous Other Financial Services Laws

On June 3, Connecticut Governor Dannel Malloy signed HB 5353, which makes numerous unrelated changes to Connecticut’s laws governing financial services companies. For example, with regard to mortgage servicing, the bill: (i) modifies who is subject to licensure and expands the scope of services subject to licensure; (ii) adds new licensing, application, fee, bonding, and recordkeeping requirements; (iii) establishes servicer conduct standards; and (iv) grants the state regulator authority to conduct investigations and examinations and take enforcement actions against violators. For the various types of mortgage loan originators, the bill increases the pre-licensing and continuing education and testing requirements, and modifies the exemptions from licensure that apply to certain subsidiaries of banks and credit unions. With regard to licensing in general, the bill extends the banking commissioner’s authority to use the NMLS, authorizes the system to receive and maintain licensing and registration records, and establishes filing, licensing, fees, reports, and other system procedures and requirements. The bill also, among other things, (i) establishes procedural requirements for a Connecticut bank that proposes to close a loan production office; (ii) expands the definition of an “automatic teller machine” to include those equipped with a telephone or televideo device that allows contact with bank employees; (iii) extends the state’s foreclosure mediation program by two years, until July 1, 2016; and (iv) establishes a task force to study and develop a report for the General Assembly on the reverse mortgage industry.

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