On October 21, New York DFS’s Superintendent Lawsky issued a letter to a large loan servicer institution regarding its systems and processes, most significantly the practice of backdating letters to borrowers. As a result of the alleged backdating issue, Lawsky’s letter highlights the servicer’s failure to meet state and federal agreements concerning its communication timing with borrowers on requests for mortgage modifications or the initiation of foreclosure proceedings. According to the letter, potentially hundreds of thousands of borrower letters were incorrectly dated. The DFS alleged that one letter in particular contained a time lapse of nearly a year: “[The servicer’s] system shows that [it] sent a borrower a pre-foreclosure dated May 23, 2013, stating that the borrower was in default and at risk of foreclosure. Yet, a conflicting notice record in [the servicer’s] system indicates that the notice was created on April 9, 2014.” The NYDFS stresses the urgency the servicer must take to remedy these issues by fixing its systems, and notes that it “intends to take whatever action is necessary to ensure that borrowers are protected.”
Senator Warren And Congressman Cummings Urge GAO To Study Economic Vulnerability Of Non-Bank Mortgage Servicers, Risks To Consumers
On October 20, Senator Warren and Congressman Cummings co-authored a letter to the GAO requesting that the agency investigate possible effects on the non-bank servicing industry in the event of an economic downturn. In addition, the duo urged the GAO to study the potential risks to consumers should a major non-bank servicer fail. The letter stems from a report recently issued by the FHFA-OIG. The report cites that the rise in non-bank mortgage servicers “has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity.”
This month, Ginnie Mae published a position paper titled “An Era of Transformation,” which describes changes in the mortgage lending market that stem from the 2007-08 financial crisis, and explains how Ginnie Mae intends to react to those changes. The key change in the mortgage lending market that the paper focuses on is the “rapid, substantial increase in the presence of non-depository institutions” in the face of the retreat of commercial banks from mortgage lending and servicing. In the face of this trend, Ginnie Mae intends to make a number of changes that issuers should take note of, including modifying its MBS program to accommodate the larger role of non-depository lenders; upgrading its abilities to assess the financial and operating capacity of its issuers; and taking steps to ensure liquidity in the market for MSRs. Ginnie Mae also intends to actively police that issuers are in compliance with program requirements, and when issuers fail, to move MSR portfolios to other approved issuers rather than seize and manage the assets itself.
On August 19, 2014, the CFPB issued Bulletin 2014-01 to address “potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights.” The bulletin, which is the latest in a series of CFPB regulations, statements, and guidance on this subject, replaces the Bureau’s February 2013 bulletin on mortgage servicing transfers and states that “the Bureau’s concern in this area remains heightened due to the continuing high volume of servicing transfers.” It further states that “the CFPB will be carefully reviewing servicers’ compliance with Federal consumer financial laws applicable to servicing transfers” and “may engage in further rulemaking in this area.”
The bulletin contains the following information, which is summarized in great detail below:
- Examples of policies and procedures that CFPB examiners may consider in evaluating whether the servicers on both ends of a transfer have complied with the CFPB’s new regulations requiring, among other things, policies and procedures reasonably designed to facilitate the transfer of information during servicing transfers and to properly evaluate loss mitigation applications.
- Guidance regarding the application of other aspects of the new servicing requirements to transfers.
- Descriptions of other Federal consumer financial laws that apply to servicing transfers, such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the prohibition on unfair, deceptive, and abusive acts or practices (“UDAAPs”).
- A statement that “[s]ervicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.” This largely reiterates the Bureau’s statements in its February 2013 bulletin.
In a press release accompanying the bulletin, CFPB Director Richard Cordray stated that: “At every step of the process to transfer the servicing of mortgage loans, the two companies involved must put in appropriate efforts to ensure no harm to consumers. This means ahead of the transfer, during the transfer, and after the transfer. We will not tolerate consumers getting the runaround when mortgage servicers transfer loans.
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 Minnesota Supreme Court held in a foreclosure-related case that the plausibility standard announced in Twombly and Iqbal does not apply to civil pleadings in Minnesota state court. Walsh v. U.S. Bank, N.A., No. A13-0742, 2014 WL 3844201 (Minn. Aug. 6, 2014). A borrower sued her mortgage lender to vacate the foreclosure sale of her home, claiming the lender failed to properly serve notice of the non-judicial foreclosure proceeding. The bank moved to dismiss the suit based on the plausibility standard established by the U.S. Supreme Court in Twombly, which requires plaintiffs to plead “enough facts to state a claim to relief that is plausible on its face.” The Minnesota Supreme court held that the state’s traditional pleading standard is controlling, and not the federal standard established in Twombly. The court explained that under the state standard, “a claim is sufficient against a motion to dismiss for failure to state a claim if it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.” The court identified five reasons the state rule applies: (i) the relevant state rule does not clearly require more factual specificity; (ii) the state’s rules of civil procedure express a strong preference for short statements of facts in complaints; (iii) the sample complaints attached to the rules show that short, general statements are sufficient; (iv) the rules allow parties to move for a more definite statement if a pleading is overly vague; and (v) there are other means to control the costs of discovery.
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.
On July 30, Fannie Mae issued a servicing notice to remind servicers of requirements pertaining to Adverse Action Notices. The notice states that Fannie Mae requires a servicer to send an Adverse Action Notice to a borrower within 30 days after Fannie Mae advises the servicer through HomeSaver Solutions Network (HSSN) of the declination of the modification request if: (i) the servicer submitted the request to Fannie Mae through HSSN for a mortgage loan modification decision; and (ii) the borrower was current on the date that Fannie Mae advised the servicer that Fannie Mae declined the mortgage loan modification request. In such cases, the servicer must: (i) maintain a copy of the Adverse Action Notice in the mortgage loan servicing file; and (ii) provide Fannie Mae a copy of the Adverse Action Notice the servicer sends to the borrower by uploading it to HSSN. At a minimum, if the servicer elects to use its own Adverse Action Notice as opposed to the Fannie Mae-provided form, it must: (i) inform the borrower that Fannie Mae as the owner of the mortgage loan reviewed the mortgage loan modification request; (ii) provide Fannie Mae’s contact address; (iii) provide the reason Fannie Mae did not approve the request, in addition to the reason the servicer did not approve the request; and (iv) identify the credit reporting agency and contact information, if applicable. The notice also alerts servicers of updates to the Allowable Foreclosure Attorney Fees Exhibit, Evaluation Model Clauses, and the Master Custodial Agreement (Form 2003).
On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.
On July 8, Rhode Island Governor Lincoln Chafee signed HB 7997, which extends the state’s licensing requirements to include companies servicing a loan, directly or indirectly, as a third-party loan servicer. Under the existing state statute, the term “loan” means any advance of money or credit, including mortgage loans, educational loans, and other consumer loans. The new law adds new definitions for servicing and third-party loan servicer, establishes for such servicers a $1,100 annual licensing fee, and requires licensed servicers to: (i) maintain at least $100,000 capital; (ii) obtain a bond; (iii) maintain segregated borrower accounts; and (iv) maintain certain records. The law also establishes prohibited acts and practices for third-party servicers, including, among others: (i) knowingly misapplying loan payments to the outstanding balance of a loan or to escrow accounts; (ii) requiring unnecessary forced placement of insurance; (iii) failing to provide loan payoff information as required; (iv) collecting private mortgage insurance beyond the date required; (v) failing to timely respond to consumer complaints; and (vi) charging excessive or unreasonable fees to provide loan payoff information. The law exempts depository institutions and licensed lenders and other licensed entities. The new rules and requirements take effect July 1, 2015.
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.
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.
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.
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.
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.