On November 25, Freddie Mac issued Bulletin 2013-24, which revises numerous short sale and deed-in-lieu of foreclosure (DIL) requirements. The bulletin updates, among other things, eligibility requirements for exceptions to borrower documentation for short sales and DILs by (i) permitting a borrower whose mortgage debt has been discharged in a Chapter 7 bankruptcy to be eligible for an exception to documentation, regardless of FICO score; and (ii) removing mortgages that were originated as investment properties from eligibility for an exception to documentation. The bulletin also requires servicers to: (i) submit a short sale or DIL recommendation to Freddie Mac for approval when the borrower’s cash reserves exceed $50,000; and (ii) delay, or ensure that foreclosure counsel delays, the next legal action in the foreclosure process when such servicers receive a first complete borrower response package (BRP) more than 37 days prior to a scheduled foreclosure sale date, and the evaluation results in an offer to proceed with a short sale or DIL. Further, the bulletin states that servicers no longer are required to conduct an expedited review when a completed BRP with a short sale purchase offer is received greater than 37 days prior to a scheduled foreclosure sale date. Finally, the bulletin updates trial period plan requirements to provide that if a borrower accepts an original trial period plan offer after receiving an appeal decision, and the borrower remains eligible for the original offer, servicers must reissue the original offer with a new trial period plan due date.
On November 26, the U.S. Court of Appeals for the Sixth Circuit held that mortgage servicers are exempted from TILA liability, despite recent amendments to the statute. Marais v. Chase Home Fin. LLC, No. 12-4248, 2013 WL 6170977 (6th Cir. Nov. 26, 2013). A borrower had alleged that her servicer violated TILA by failing to properly respond to her written request for information regarding her loan. The Sixth Circuit rejected the borrower’s argument that amendments to TILA as part of the Helping Families Save Their Homes Act of 2009 created a cause of action against mere servicers, and held that servicers who are not creditors or creditor assignees are expressly exempt from TILA liability. The court, however, held that the servicer could be liable under RESPA for damages caused by its purported deficient response to the borrower’s request for information.
On December 4, Fannie Mae issued Servicing Guide Announcement SVC-2013-24, which: (i) updates the modification terms for the “Cap and Extend Modification for Disaster Relief” to require servicers to set the interest rate to a fixed rate; and (ii) establishes the steps servicers must follow to determine borrowers’ modified payment terms. Fannie Mae encourages servicers to implement the new requirements immediately, but will not require them to do so until February 1, 2014. The announcement likewise requires, with immediate effect, that servicers update Form 582 (Lender Record Information) promptly after any change in previously-submitted information occurs. Finally, the announcement adds to the Servicing Guide glossary a definition for “seriously delinquent mortgage loan.”
On November 15, Freddie Mac issued Bulletin 2013-23, which withdraws recently announced fraud training requirements and describes various changes to other requirements. Citing the need to assess industry feedback, Fannie Mae withdrew Bulletin 2013-18, which required, among other things, that seller/servicers provide third-party vendors retained to perform functions relating to origination and servicing of mortgages with training on fraud prevention, detection, and reporting. In addition, Bulletin 2013-23 (i) updates payment history verification requirements for manually underwritten mortgages; (ii) announces that previously announced eligibility requirements applicable to higher-priced mortgage loans (HPMLs) are applicable to higher-priced covered transactions (as defined in the CFPB ability to repay/qualified mortgage rule) and not solely to HPMLs; (iii) updates certain requirements for Freddie Mac Relief Refinance Mortgages; (iv) updates requirements for verifying tax information for borrowers with income derived from sources in Puerto Rico, Guam and the U.S. Virgin Islands; and (v) clarifies signature requirements for security instruments.
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month. Read more…
On November 5, the FHFA announced that it had directed Fannie Mae and Freddie Mac to implement new restrictions on lender-placed insurance practices. In March, the FHFA sought comments on certain potential lender-placed insurance restrictions, including new policies to (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers, and (ii) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer. Following that comment process and related efforts by the FHFA to obtain feedback on these issues, the FHFA now has directed Fannie Mae and Freddie Mac to provide aligned guidance to sellers and servicers to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. The announcement does not provide any timeline for the new guidance, but states Fannie Mae and Freddie Mac will provide implementation schedules with the new rules.
On November 1, HUD issued Mortgagee Letter 2013-40, which clarifies requirements under FHA’s mandatory loss mitigation program and sets expectations for servicers engaging in loss mitigation during the foreclosure process. The letter states that servicers must (i) evaluate on a monthly basis all loss mitigation tools available for delinquent borrowers, (ii) document those evaluations, and (iii) timely evaluate borrower loss mitigation requests and provide specified written responses. HUD emphasizes that servicers may reduce challenges to foreclosure actions by providing thorough explanations about appeal or escalation processes. The letter further advises servicers that a foreclosure may not be commenced for monetary default unless at least three consecutive monthly payments are unpaid, and details other conditions under which a foreclosure may be initiated. Many of these requirements do not apply if the property has been abandoned or vacant for more than 60 days. Once a foreclosure has been initiated, HUD expects servicers to continue to attempt to communicate with borrowers about potential loss mitigation options based on changing circumstances. The letter also (i) details in a chart the actions the servicer must take when it receives a loss mitigation request from a borrower, (ii) discusses servicer requests for additional borrower documents, (iii) identifies events that trigger extensions of time for initiating a foreclosure, and (iv) outlines steps for terminating foreclosures. All of the requirements in the letter are effective January 1, 2014.
On November 4, the United States District Court for the Central District of California denied certification of a putative nationwide class that alleges a mortgage servicer and lender-placed insurance (LPI) companies violated California’s Unfair Competition Law (UCL), breached mortgage contracts, and unjustly enriched themselves by improperly charging and overcharging borrowers for lender-placed insurance. Gustafson v. BAC Home Loans Servicing LP, No. 11-00915, 2013 WL 5911252 (C.D. Cal. Nov. 4, 2013). The court held that the named borrowers could not assert a UCL claim nationwide because (i) the UCL claims fell within the mortgage contracts’ choice-of-law provisions, (ii) there are material differences among the states’ consumer protection laws, (iii) foreign states have an interest in regulating conduct that was carried out, in part, within their borders, and (iv) the last event necessary to make the insurers and servicer liable occurred where the insurance premiums were charged to borrowers in their home states. The court also held that the borrowers failed to meet the commonality and predominance requirements of Rule 23 for both their breach of contract and unjust enrichment claims, in part because laws regarding breach of contract, affirmative defenses, and unjust enrichment vary from state to state. Further, the court explained that the unjust enrichment claim required individualized fact determinations as to whether (i) borrowers who are charged for LPI may either not pay for it, or not pay the full rate, and (ii) individual class members’ circumstances could preclude or reduce recovery. BuckleySandler represents lender-placed insurers in this and other similar actions.
On November 4, the United States Court of Appeals of the Seventh Circuit affirmed a trial court’s dismissal of allegations that a lender and insurer fraudulently placed insurance on the borrower’s property after the borrower’s homeowner’s policy lapsed. Cohen v. Am. Sec. Ins. Co., No. 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013). The court held that the borrower’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act failed because (i) the loan agreement and the lender’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation, (ii) the borrower did not allege an unfair business practice because “there is nothing oppressive or unscrupulous about giving a counterparty the choice to fulfill his contractual duties or be declared in default for failing to do so,” and (ii) “[the lender] was not subject to divided loyalties; rather, it was subject to an undivided loyalty to itself, and it made this clear from the start.” The court also held that the borrower failed to state a breach of contract claim because nothing in the loan agreement and related documents prohibited the lender and its insurance-agency affiliate from receiving a fee or commission for LPI. To the contrary, the court explained, the loan agreement and related notices and disclosures specifically warned the borrower of this possibility. The court also affirmed the dismissal of the borrower’s fraud, conversion, and unjust enrichment claims for failing to state a claim as a matter of law, but on different grounds than the district court. The district court had ruled in favor of the lender and insurer based on federal preemption and the filed rate doctrine. The Seventh Circuit chose not to address those bases for dismissal in its ruling.
In an effort to address outstanding questions regarding the new mortgage rules that are scheduled to take effect in January 2014, CFPB staff provided non-binding, informal guidance in two webinars hosted by the Mortgage Bankers Association. Specifically, CFPB staff answered questions regarding the mortgage servicing rules on October 16, 2013 and questions regarding the mortgage origination rules (including the Ability-to-Repay/Qualified Mortgage and Loan Originator Compensation rules) on October 17, 2013.
The CFPB staff’s slides presenting the questions addressed during the webinars and the audio recordings of their responses are available through the MBA’s Compliance Resource Center. BuckleySandler has prepared transcripts of the servicing and mortgage origination webinars that incorporate the CFPB’s slides. These transcripts are provided for informational purposes only and do not constitute legal opinions, interpretations, or advice by BuckleySandler. The transcripts were prepared from the audio recordings provided by the MBA and may have minor inaccuracies due to sound quality. In addition, the transcripts have not been reviewed by the CFPB for accuracy or completeness.
Questions regarding the matters discussed in the webinars 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. Additional information about the CFPB mortgage rules is available in our CFPB Resource Center.
- 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 October 28, HUD issued two mortgagee letters related to the servicing of certain FHA-insured loans. Mortgagee Letter 2013-38 provides a list of the first legal actions necessary to initiate a foreclosure and the reasonable diligence timeframes for completing foreclosure and acquisition of title in each state. The letter also outlines acceptable delays in those timeframes due to mediation or bankruptcy, or when a separate legal action is necessary to acquire possession of the title. In addition, the letter provides a new schedule of allowable attorney fees by state for services performed in connection with a mortgage default. The updated reasonable diligence timeframes apply to all cases in which the first legal action to initiate foreclosure occurs on or after November 1, 2013. The updated attorney fees are effective for all cases in which certain actions occur on or after November 1, 2013. Mortgagee Letter 2013-39 updates the timelines servicers must follow for collection communications, advises servicers regarding early engagement in loss mitigation, outlines staffing requirements to support timely borrower communications, and provides guidance on the timing, content, and method of delivery for collection letters and other borrower communications. This letter also advises servicers to pay special attention to borrowers at risk of early payment default and re-default, and provides specialized collection techniques for such borrowers. Finally, this letter details the FHA’s expectations for escalating borrower inquiries and complaints that allege (i) improper analysis of borrower information or denials of loss mitigation options, (ii) foreclosures initiated or continued in violation of HUD’s policy, or (iii) any other violations of HUD collections and loss mitigation policies. This guidance is effective for all mortgages in default as of January 1, 2014.
On October 30, Fannie Mae issued Servicing Guide Announcement SVC-2013-22, which describes various servicing policy updates. First, effective on or after February 1, 2014 for condominium insurance policy renewals, Fannie Mae is prohibiting the use of master or blanket insurance policies that cover multiple unaffiliated projects. Second, effective immediately for mortgage loan modifications, Fannie Mae is requiring that principal forbearance is payable upon the earliest of the maturity of the mortgage loan modification, sale or transfer of the property, refinance of the loan, or payoff of the interest-bearing unpaid principal. Third, effective January 1, 2014 for property inspection reimbursements, the Announcement updates the maximum amounts Fannie Mae will reimburse servicers for property inspections, outlines servicer responsibilities related to reimbursement requests, and clarifies the escalated case resolution process. Finally, the Announcement reminds servicers of their obligation to comply with both the Selling Guide and Servicing Guide, and informs servicers that requirements for maintaining eligibility and related fees were recently updated in the Selling Guide.
On October 18, Freddie Mac issued Bulletin 2013-22, which updates servicing requirements related to foreclosures and management of abandoned properties. The Bulletin states that servicers may, without obtaining prior written approval, instruct foreclosure counsel to conduct a foreclosure in Freddie Mac’s name when applicable law precludes the servicer from conducting the foreclosure in its own name, and establishes other requirements for servicers that do so. The Bulletin also updates requirements regarding vesting the title after foreclosure, stating that for conventional mortgages servicers must ensure that the title to the property is vested in Freddie Mac’s name (if the property is not purchased by a third party), unless it is in Freddie Mac’s best interest to have the title vested in the servicer’s name after the foreclosure sale, and then have the title to the property transferred to Freddie Mac via quitclaim deed. With regard to preservation of abandoned properties, the Bulletin, for example, (i) informs servicers of new expense codes and limits, (ii) introduces new pricing requirements for property preservation expense items that identify the per unit cost that Freddie Mac finds reasonable, and (iii) removes the requirement that servicers obtain pre-approval for reimbursement of certain vacant property registration fees. The Bulletin also announces certain other changes related to foreclosures and abandoned properties.
Upcoming Effective Dates for Mortgage Rules
According to the report, Cordray stated that he was confident most mortgage lenders would be able to comply with the new mortgage rules by the January 2014 effective dates. “Everybody’s had plenty of time to see this coming,” Cordray said. However, he added that the Bureau would take into consideration that some smaller firms would need more time to fully comply. “What we’re looking for come January 10 is that they’ve made good-faith efforts to come into substantial compliance with the rules,” he said.
Enforcement Actions Against Individuals
Corday also stated that the Bureau would continue to take enforcement action against individual officers and employees, as well as banks and other entities. “I’ve always felt strongly that you can’t only go after companies. Companies run through individuals, and individuals need to know that they’re at risk when they do bad things under the umbrella of a company,” Cordray said.
The CFPB already has pursued individuals in several civil litigation matters. For example, the CFPB has named individuals in actions to enforce Section 8 of RESPA, including a lawsuit announced just this week against principals of a law firm. In July, the CFPB announced an enforcement action against a Utah-based mortgage company and two of its officers for giving bonuses to loan officers who allegedly steered consumers into mortgages with higher interest rates.