On February 26, Fannie Mae issued Servicing Guide Announcement SVC-2014-04, which states that a servicer must retain in the mortgage loan servicing file all supporting documentation for all expense reimbursement claims, in addition to other servicing and liquidation information. A servicer must document its compliance with all Fannie Mae policies and procedures, including but not limited to, timelines that are required in the Servicing Guide, and must maintain in the individual mortgage loan file all documents and system records that preserve Fannie Mae’s ownership interest in the individual mortgage loan. The Announcement also (i) clarifies that when Fannie Mae requests a mortgage loan servicing file for a quality control review, the servicer must include supporting documents for all expense reimbursement claims it has submitted or intends to submit to Fannie Mae; (ii) states that a servicer must submit the final Cash Disbursement Request (Form 571) within 30 days after completion of a loss mitigation alternative, filing a mortgage insurance claim for a property that will be conveyed to the insurer or guarantor, acquisition of a property by a third party at a foreclosure sale, or disposition of an acquired property; (iii) provides examples of information sufficient to support a servicer’s attorney expense reimbursement request; and (iv) clarifies that when a servicer transfers its contractual right to service some or all of its Fannie Mae single-family servicing to another Fannie Mae-approved servicer, any variance or waiver granted to a transferor servicer does not automatically transfer to the transferee servicer, and the transferor and transferee servicers must ensure that all existing special servicing obligations associated with the transferred mortgage loan are disclosed. Finally, in a separate notice, Fannie Mae announced that it may adjust the Fannie Mae Standard Modification Interest rate for Fannie Mae Standard or Streamlined Modifications on a monthly basis, beginning July 1, 2014.
On February 25, the FDIC issued FIL-9-2014 to notify supervised institutions of new consumer compliance examination procedures for the mortgage rules issued pursuant to the Dodd-Frank Act, that took effect nearly two months ago. FDIC examiners will use the revised interagency procedures to evaluate institutions’ compliance with the new mortgage rules. The FDIC states that during initial compliance examinations, FDIC examiners will expect institutions to be familiar with the mortgage rules’ requirements and have a plan for implementing the requirements. Those plans should contain “clear timeframes and benchmarks” for updating compliance management systems and relevant compliance programs. “FDIC examiners will consider the overall compliance efforts of an institution and take into account progress the institution has made in implementing its plan.”
On February 20, the U.S. District Court for Central District of California dismissed with prejudice a putative class action against several large mortgage servicers because the named borrowers failed to properly plead their allegations that the servicers stonewalled loan modification applications in order to continue earning servicing fees. Casault v. Federal National Mortgage Association, No. 11-10520, 2014 WL 689884 (C.D. Cal. Feb. 20, 2014). In their third amended complaint, the borrowers alleged three causes of action against the servicers: (i) fraud; (ii) violation of California’s Unfair Competition Law (UCL); and (iii) violation of the Rosenthal Act, California’s version of the FDCPA. The court granted the servicers’ motion to dismiss the fraud allegation because they failed to allege any causal connection between the scheme and the borrowers’ foreclosure. The borrowers alleged only that the foreclosures were the result of their inability to make their mortgage payments, even after receiving loan modifications. The court dismissed the UCL claim because the borrowers could not demonstrate a right to a loan modification—through contract, promissory estoppel, or some other theory—and, as a result, could not prove injury in fact. Finally, the court dismissed the borrowers’ claims under the Rosenthal Act because they failed to allege facts demonstrating that their loans defaulted prior to the debt being assigned to the servicers.
On February 19, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter asking Comptroller of the Currency Thomas Curry and National Mortgage Settlement Monitor Joseph Smith to “carefully scrutinize the sale of mortgage servicing rights from banks to nonbanks” to ensure nonbank servicers have the capacity to handle increased loan volume and that borrowers are not harmed. Representative Waters explained that consumer advocates are concerned that when a bank subject to the National Mortgage Settlement transfers MSRs to a nonbank not subject to the National Mortgage Settlement, the transferred loans are not afforded the same protections as they would be under that agreement. Ms. Waters is concerned that the CFPB rules that would apply to such transferred loans offer fewer protections than those in the National Mortgage Settlement. She also requested that the Comptroller and/or the Monitor examine the extent to which servicing transfers are potentially being used to “evade the modification of loans for borrowers who would benefit most from the terms of the Settlement.” Ms. Waters joins other policymakers, including the CFPB’s Deputy Director and New York’s banking regulator, who recently raised concerns about the impact on borrowers from the transfer of mortgage servicing rights.
On February 14, Freddie Mac issued Bulletin 2014-02, which includes numerous selling and servicing policy changes. For example, the Bulletin states that, effective for mortgages with settlement dates on or after June 1, 2014, (i) sellers’ reserves must be based on the full monthly payment amount for the property, not only principal, interest, taxes, and insurance; (ii) sellers no longer have to provide borrowers an additional six months’ reserve when the borrower converts a two- to four-unit primary residence to an investment property; and (iii) Freddie Mac is removing the requirements that the appraisal must be dated no more than 60 days prior to the note date when used to document the value of a primary residence pending sale or being converted to a second home or an investment property for the purposes of establishing the minimum required reserves. Freddie Mac also is reducing the delivery fee rate to 75 basis points for Home Possible Mortgage purchase transactions with settlement dates on or after March 1, 2014. Also for sellers, the Bulletin (i) introduces a summary of changes made to Guide Exhibit 19, Postsettlement Delivery Fees; (ii) revises resubmission requirements for mortgages submitted to Loan Prospector after the note date or the effective date of Permanent Financing for Construction Conversion and Renovation Mortgages; (iii) updates the Guide to include Phase 2 ULDD data point requirements and clarifications on existing ULDD data points; and (iv) updates and consolidates property eligibility and appraisal requirements in Guide Chapter 44, Property and Appraisal Requirements. For sellers and servicers, the Bulletin announces updates to Guide Form 16SF, Annual Eligibility Certification Report, to enhance its usability and provide additional functionality. Finally, for servicers, the Bulletin revises requirements for reimbursement of condominium, homeowners’ association and Planned Unit Development assessments in states where a lien for such amounts can take priority over Freddie Mac’s lien.
New Mexico Supreme Court Analyzes State’s Foreclosure Standing Requirements, Ability To Repay Standard
On February 13, the New Mexico Supreme Court held that a borrower’s ability to repay a home mortgage loan is one of the “borrower’s circumstances” that lenders and courts must consider in determining compliance with the New Mexico Home Loan Protection Act (HLPA). Bank of New York v. Romero, No. 33,224, 2014 WL 576151 (N.M. S. Ct. February 13, 2014). In this case, after two borrowers became delinquent on a cash-out refinance mortgage loan, a bank initiated a foreclosure action in state court. The trial court and appellate court rejected the borrowers’ arguments that the bank failed to establish that it was the holder of the note and that the loan violated the “anti-flipping provision” of the HLPA, which prohibits creditors from knowingly and intentionally making a refinance loan when the new loan does not have reasonable, tangible net benefit to the borrower considering all of the circumstances—i.e. “flipping” a home loan. The Supreme Court reviewed the state’s stringent standing requirements and held that possession of the note alone is insufficient to establish standing and that the bank failed to provide other evidence sufficient to demonstrate transfer of the note. Although its decision on standing mooted the issue of the alleged HLPA violation, the court decided to address the issue given some party may eventually establish standing to foreclose. The court, in what might be considered dicta, stated that although the “anti-flipping provision” of the HLPA did not specifically include ability to repay as a factor to be considered in assessing the “borrower’s circumstances,” it could find “no conceivable reason why the Legislature in 2003 would consciously exclude consideration of a borrower’s ability to repay the loan as a factor of the borrower’s circumstances.” As such, the court stated that the HLPA’s “reasonable, tangible net benefit” requirement must include as a factor “the ability of a homeowner to have a reasonable chance of repaying a mortgage loan,” and that here the lender failed to do so when it claimed to rely solely on the borrowers’ assertions about their income and failed to review tax returns or other documents to confirm those assertions. Finally, the court also stated that (i) the National Bank Act does not expressly preempt the HLPA; (ii) the bank failed to prove that conforming to the dictates of the HLPA prevents or significantly interferes with its operations; and (iii) the HLPA does not create a discriminatory effect. The Supreme Court reversed the lower courts’ decisions and remanded to the district court with instructions to vacate its foreclosure judgment and to dismiss the bank’s foreclosure action for lack of standing.
On February 19, CFPB Deputy Director Steve Antonakes spoke at the Mortgage Bankers Association’s annual servicing conference and detailed the CFPB’s expectations for servicers as they implement the new servicing rules that took effect last month.
Mr. Antonakes’s remarks about the CFPB’s plans to supervise and enforce compliance with the new rules are the most assertive to date. Until now, the CFPB’s public position has been 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.”
Mr. Antonakes clarified this position, stating that “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Default Servicing and Foreclosures
Specifically, the CFPB expects that, “in these very early days,” servicers will (i) identify and correct “technical issues”; (ii) “conduct outreach to ensure that all consumers in default know their options”; and (iii) “assess loss mitigation applications with care, so that consumers who qualify under [a servicer’s] own standards get the loss mitigation that saves them – and the investor – from foreclosure.” Mr. Antonakes acknowledged that “foreclosures are an important part of the business, but they shouldn’t happen unless they’re necessary and they must be done according to relevant law. We expect the new rules to go a long way to reduce consumer harm for all consumers with mortgages, especially as these rules work in concert with the existing prohibition against unfair, deceptive, and abusive practices.”
Mr. Antonakes specifically detailed expectations concerning mortgage servicing rights transfers. He stated that the CFPB expects servicers to “pay exceptionally close attention to servicing transfers and understand [that the CFPB] will as well. . . . Our rules mandate policies and procedures to transfer ‘all information and documents’ in order to ensure that the new servicer has accurate information about the consumer’s account. We’re going to hold you to that. Servicing transfers where the new servicers are not honoring existing permanent or trial loan modifications will not be tolerated. Struggling borrowers being told to pay incorrect higher amounts because of the failure to honor an in-process loan modification – and then being punished with foreclosure for their inability to pay the incorrect amounts – will not be tolerated. There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”
On February 7, the OCC issued an updated Mortgage Banking booklet of the Comptroller’s Handbook. The revised booklet (i) provides updated guidance to examiners and bankers on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management; (ii) makes wholesale changes to the functional areas of production, secondary marketing, servicing, and mortgage servicing rights; and (iii) addresses recent CFPB amendments to Regulation X and Regulation Z, as well as other Dodd-Frank related statutory and regulatory changes. The updated booklet replaces a similarly titled booklet issued in March 1996, as well as Section 750 (Mortgage Banking) issued in November 2008 as part of the former OTS Examination Handbook. On February 12, the OCC issued a revised Retirement Plan Products and Services booklet of the Comptroller’s Handbook that (i) updates examination procedures and groups them by risk; (ii) updates references and adds a list of abbreviations; (iii) adds references to recent significant U.S. Department of Labor regulations and policy issuances; (iv) adds a discussion of Bank Secrecy Act/anti-money laundering and Regulation R; and (v) adds a discussion of board and senior management responsibilities regarding oversight of risk management.
On February 12, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky released excerpts of remarks he delivered to the New York Bankers Association, which focused on the “troubling trend” of “the rapid and dramatic growth of so-called ‘non-bank mortgage servicers.’” Mr. Lawsky explained that because banks are being given “less credit” for mortgage servicing rights (MSRs) with respect to capital, they are offloading MSRs to non-bank mortgage servicers rather than building up additional capital. Further, he expressed concern that non-bank mortgage services are often more lightly regulated, and indicated that regulators need to intervene on the front end of MSR transactions to prevent undue harm to homeowners before it occurs. Mr. Lawsky indicated that the DFS will have more to say on the topic in the coming weeks and months.
On February 6, the GAO released a report of its review of Making Home Affordable (MHA)/Home Affordable Modification Program (HAMP) servicers’ compliance with fair lending laws. The GAO states that while the Treasury Department requires MHA servicers to develop internal control programs that monitor compliance with fair lending laws, Treasury has not assessed the extent to which servicers are meeting this requirement. Treasury noted that it shares HAMP loan-level data with the federal agencies responsible for fair lending enforcement. GAO states that its analysis of HAMP loan-level data from four large MHA servicers identified some statistically significant differences in the rate of denials and cancellations of trial modifications as well as in the potential for redefault between populations protected by fair lending laws and other populations. GAO acknowledges that its analysis alone cannot account for all factors that could explain these differences. It states that reviewing the fair lending internal controls of MHA servicers could give Treasury additional assurance that servicers are complying with fair lending laws. The report recommends that Treasury should (i) assess the extent to which servicers have established internal control programs to monitor compliance with fair lending laws, (ii) issue guidance to servicers on working effectively with limited English proficiency borrowers, and (iii) monitor servicers’ compliance with that guidance. Treasury noted that it was considering GAO’s recommendations and agreed that it should continue to strengthen its program.
On January 30, Nevada’s Clark County District Court ordered the State AG to pay attorneys’ fees in connection with a mortgage servicing vendor’s attempts to obtain discovery in the state’s case alleging the company facilitated fraudulent residential foreclosures, including through so-called “robosigning” tactics. Nevada v. Lender Processing Svcs., Inc., No. A-11-653289-B, (Nev. Dist. Ct. Jan. 30, 2014). The company asserted that the AG abused the discovery process by repeatedly failing to produce materials sufficient to support its claims under the Nevada Deceptive Trade Practices Act. The court rejected the AG’s defense, among others, that the alleged discovery deficiencies simply reflect disagreements between the parties over the evidence necessary to support a claim under state law. Although not a direct issue in this case, the company’s brief repeatedly calls out the AG’s use of outside counsel and notes a challenge to the AG’s use of an outside firm on a contingency fee basis, which is pending before the state supreme court.
On January 28, the GAO issued a report on SCRA mortgage protections required by the 2012 legislation that extended those protections. Using data from three large mortgage servicers and a large credit union, the GAO examined changes in the financial well-being of servicemembers who received foreclosure-prevention and mortgage-related interest rate protections under SCRA, including the extent to which they became delinquent and the impact of protection periods. The report states that the number of servicemembers with mortgages eligible for SCRA mortgage protections is unknown because servicers have not collected this information in a comprehensive manner. For those identified as SCRA-eligible at the two servicers, delinquency rates ranged from 16 to 20 percent and from four to eight percent for other military borrowers. Delinquencies at the credit union were under one percent. GAO concluded that some servicemembers appeared to have benefitted from the SCRA interest rate cap of six percent, but that many eligible borrowers had not taken advantage of the protection. GAO also determined that the data were insufficient to assess the impact of SCRA protections after servicemembers left active duty, although it believes one institution’s limited data indicated that military borrowers had a higher risk of delinquency in the first year after leaving active duty. GAO also reviewed documentation on DOD’s partnerships and relevant education efforts related to SCRA mortgage protections and found relevant information to be limited because DOD has not undertaken any formal evaluations of the partnerships’ effectiveness. Given its finding that many servicemembers did not appear to be taking advantage of the SCRA interest rate cap, GAO concluded that DOD’s SCRA education efforts could be improved and that an assessment of the effectiveness of these efforts is still warranted.
On January 23, the California Court of Appeal, Sixth District, held that under the federal Protecting Tenants Against Foreclosure Act (PTFA) a lease survives foreclosure through the end of the lease term, except under limited circumstances, and allows tenants to bring state law claims for violation of the federal law. Nativi v. Deutsche Bank Nat’l Trust Co., No. H037715, 2014 WL 255587 (Cal. Ct. App. Jan. 23, 2014). Two tenants sued to challenge their eviction by a bank that through a nonjudicial foreclosure sale purchased the property the tenants were renting. The trial court held that the eviction was not improper because the foreclosure sale extinguished the lease under California law and, therefore, the bank, as immediate successor in interest did not step into the shoes of the landlord. The trial court held that the PTFA only required the bank to give a 90-day notice to vacate the premises; the PTFA did not require the bank to assist the tenants in recovering possession of the leased premises. On appeal, the tenants challenged the trial court’s interpretation of the PTFA. The appeals court held that the PTFA causes a bona fide lease for a term to survive foreclosure through the end of the lease term, and grants only limited authority of the immediate successor in interest to terminate the lease, with proper notice, upon sale to a purchaser who intends to occupy the unit as a primary residence. The court explained that while the PTFA impliedly overrides state laws that provide less protection, it expressly allows states to retain the authority to enact greater protections. The court added that California law protects bona fide tenancies for a term that continue by operation of the PTFA, and explained that although the PTFA does not itself provide a private right of action, it can be enforced through litigation under state law claims. After finding that there were triable issues of fact, the court reversed the trial court’s order granting summary judgment to the bank and reinstated the tenants’ claims.
On January 24, Fannie Mae issued Servicing Guide Announcements SVC-2014-01 and SVC-2014-02, and on January 29 issued SVC-2014-03. Effective April 1, 2014, the first announcement revises Fannie Mae’s requirements for borrower notification of the interest rate adjustment for a mortgage loan that has been modified and is subject to step interest rate adjustments, including Fannie Mae HAMP modifications. SVC-2014-02 updates Fannie Mae policies regarding (i) refunding overcharges for special adjustable-rate mortgage loans; (ii) bankruptcy schedules of assets and liabilities; (iii) foreclosure prevention opportunities; and (iv) third-party sales proceeds. For example, effective May 1, 2014, when an adjustable-rate mortgage loan error is identified, servicers are no longer required to contact Fannie Mae to determine if foreclosure proceedings should be discontinued or stayed, regardless of the stage of delinquency, including cases where the loan has been referred for foreclosure and the application of any payment as a result of corrections reduces the delinquency. The servicer must establish its own procedures to ensure compliance with Fannie Mae’s requirements regarding the correction of adjustment errors for all mortgage loans serviced for Fannie Mae. Through SVC-2014-03, Fannie Mae increased the repayment plan incentive fee to $500 for each new and existing repayment plan that meets Fannie Mae’s criteria and that successfully brings a mortgage loan current. The increased repayment plan incentive amount will be effective for each repayment plan that meets Fannie Mae’s criteria and successfully brings the mortgage loan current on or after March 1, 2014. Fannie Mae is also adjusting servicer incentives on short sales and Mortgage Releases.
On January 24, Freddie Mac issued Bulletin 2014-01, which updates and revises servicing requirements related to (i) step-rate mortgages; (ii) foreclosures; (iii) third-party use of Workout Prospector and BPOdirect; and (iv) electronic default reporting requirements. Effective April 1, 2014, servicers must provide notification of an initial interest rate adjustment for a step-rate mortgage to the borrower as early as 150 days, but no less than 90 days, prior to the first payment due date at the adjusted interest rate. A second notification of the initial interest rate adjustment must be provided as early as 75 days, but no less than 60 days, prior to the first scheduled payment at the new rate. For mortgages requiring two or more interest rate adjustments to reach the corresponding interest rate cap, servicers must provide borrowers written notification of the upcoming interest rate change for each subsequent rate adjustment as early as 120 days, but no less than 60 days, prior to the first payment due date at the re-adjusted rate. In addition, servicers’ staff must be adequately trained to discuss interest rate adjustments with borrowers. Among the foreclosure-related updates, the Bulletin provides notice to servicers regarding changes in state foreclosure time lines, updates requirements for reimbursement of costs associated with the posting and publication of foreclosure notices, and updates provisions for expediting default legal matters and foreclosure sale bidding. With regard to Workout Prospector and BPOdirect, effective immediately Freddie Mac is allowing authorized third-party service providers to access those tools. Finally, the Bulletin updates certain default action codes, which servicers must use beginning May 1, 2014.