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  • They're Not All Bad Guys: Mortgage Bankers Seeking Bank Charters
    July 3, 2014
    David Baris and Peter L. Olszewski

    Banking presents opportunities for non-depository mortgage companies seeking to boost competitiveness and expand market share. By acquiring or establishing a bank, a mortgage company can enjoy advantages over nonbank lenders, including access to cheap and reliable funding through FDIC-insured deposits, the ability to export interest rates, exemptions from state licensing, and—with a federal charter—preemption of many state mortgage lending laws.

    Banking products and services offer new revenue streams, and can help a mortgage company reduce concentrations, diversify risk and minimize uneven business cycles. But regulatory hurdles have become so difficult that unless the mindset changes, it is unlikely that a mortgage company can acquire or establish a bank.

    Click here to read the full article at NationalMortgageNews.com.

  • Pom v. Coke Will Impact Financial Services Too
    June 23, 2014
    Benjamin K. Olson, Jeffrey P. Naimon & Caroline M. Stapleton

    Legal and compliance departments, take note: the U.S. Supreme Court’s recent decision in Pom Wonderful LLC v.Coca-Cola Co. confirms that even if an institution’s conduct meets the specific requirements established by the federal agency responsible for implementing one federal consumer protection law, it may nevertheless be considered unfair or deceptive under a different federal statutory scheme. Although the Pom opinion was written in response to alleged deceptive practices in the food and drug context, the high court’s reasoning has significant implications for a broad range of entities — including financial institutions — that are subject to both specific consumer protection rules as well as more general prohibitions on unfair, deceptive or abusive conduct.

    Originally published in Law360; reprinted with permission.

  • Procedural Protections for Individuals in Financial Enforcement Actions
    June 6, 2014
    Jeremiah S. Buckley, Robert B. Serino & Ann D. Wiles

    In the ve years since the nancial crisis began, critics have argued that regulators aren’t doing enough to hold individual actors accountable for their conduct leading up to the crisis.

    These critics, however, may soon be appeased, with regulators promising to name names and hold individuals accountable in enforcement actions going forward.

    While there is general agreement with the basic principle that individuals should be held accountable for their conduct, pursuing individuals raises questions regarding what procedural protections should be in place to safeguard those whose conduct may not ultimately warrant an enforcement action. Indeed, regulators have long grappled with the question of whether, and how, to pursue individuals in enforcement actions, and lessons learned from prior individual enforcement actions can help guide us going forward.

    Originally published by Consumer Financial Services Law Report; reprinted with permission.

  • A New Defense Against Municipal Disparate Impact Claims
    May 28, 2014
    Valerie L. Hletko & Ann D. Wiles

    Banks and non-bank lenders face a variety of fair lending disparate impact claims, which allege unintentional and unfavorable disparate impacts of otherwise neutral policies or practices on minority borrowers. Regulators, consumer groups and the mortgage industry have long debated whether disparate impact claims are permissible under the federal Fair Housing Act. Lenders take the position that they are not because the statute covers only intentional discrimination and not discriminatory effects, while consumer advocacy groups argue that discriminatory effects are implied in the statute.

    Banks have defended themselves by relying on a 2005 Supreme Court decision, Smith v. City of Jackson, which held that the Age Discrimination in Employment Act only permits claims for intentional discrimination. Like the FHA, the ADEA does not include language covering discriminatory effects. The Supreme Court has twice agreed to hear FHA disparate impact cases in the last two years, but litigants in each case dismissed their appeals before the court could decide the issue. In a late March ruling that had nothing to do with either housing or discrimination, however, the court quietly established an alternative way to defend far-fetched claims—including under the FHA.

    Originally published by American Banker; reprinted with permission.

Knowledge + Insights

  • Special Alert: CFPB Issues Guidance on Supervision and Enforcement of Mini-Correspondent Lenders
    July 10, 2014

    This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”

    The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”

    The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act.

    Background

    The CFPB explains that generally, a correspondent lender performs the activities necessary to originate a mortgage loan—it takes and processes applications, provides required disclosures, sometimes underwrites loans and makes the final credit approval decision, closes loans in its name, funds them (often through a warehouse line of credit), and sells them to an investor. The CFPB’s focus here is on mortgage brokers who are attempting to move to the role of a correspondent lender by obtaining a warehouse line of credit and establishing relationships with a few investors. The CFPB believes that some of these transitioning brokers may appear to be the lender or creditor in each transaction, but in actuality have not transitioned to the mini-correspondent lender role and are continuing to serve effectively as mortgage brokers, i.e. they continue to facilitate brokered loan transactions between borrowers and wholesale lenders.

    RESPA (Regulation X) and TILA (Regulation Z) include certain rules related to broker compensation, including RESPA’s requirement that lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement, and TILA’s requirements that broker compensation be included in “points and fees” calculations, and its restrictions on broker compensation and prohibition on steering to increase compensation. Those requirements do not apply to exempt bona fide secondary-market transactions, but do apply to table-funded transactions, the difference between which depends on the “real source of funding” and the “real interest of the funding lender.”

    The CFPB states that the requirements and restrictions that RESPA and TILA and their implementing regulations impose on compensation paid to mortgage brokers do not depend on the labels that parties use in their transactions. Rather, under Regulation X, whether compensation paid by the “investor” to the “lender” must be disclosed depends on determinations such as whether that compensation is part of a secondary market transaction, as opposed to a “table-funded” transaction. And under Regulation Z, whether compensation paid by the “investor” to the “creditor” must be included in the points-and-fees calculation and whether the “creditor” is subject to the compensation restrictions as a mortgage broker depends on determinations such as whether the “creditor” finances the transaction out of its own resources as opposed to relying on table-funding by the “investor.”

    CFPB’s Factors For Assessing Mini-Correspondent Lenders

    The guidance advises lenders that in exercising its supervisory and enforcement authority under RESPA and TILA in transactions involving mini-correspondents, the CFPB considers the following questions, among others, to assess the true nature of the mortgage transaction:

    • Beyond the mortgage transaction at issue, does the mini-correspondent still act as a mortgage broker in some transactions, and, if so, what distinguishes the mini-correspondent’s “mortgage broker” transactions from its “lender” transactions?
    • How many “investors” does the mini-correspondent have available to it to purchase loans?
    • Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
      • Is the warehouse line of credit provided by a third-party warehouse bank?
      • How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
      • Does the mini-correspondent have more than one warehouse line of credit?
      • Is the warehouse bank providing the line of credit one of, or affiliated with any of, the mini-correspondent’s investors that purchase loans from the mini-correspondent?
      • If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans to, is the warehouse line a “captive” line (i.e., the mini-correspondent is required to sell the loans to the investor providing the warehouse line or to affiliates of the investor)?
      • What percentage of the mini-correspondent’s total monthly originated volume is sold by the mini-correspondent to the entity providing the warehouse line of credit to the mini-correspondent, or to an investor related to the entity providing the warehouse line of credit?
      • Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
    • What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
    • What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
    • Which entity (mini-correspondent, warehouse lender, or investor) is performing the majority of the principal mortgage origination activities?
      • Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
      • What percentage of the principal mortgage origination activities, such as the taking of loan applications, loan processing, and pre-consummation underwriting, is being performed by the mini-correspondent, or an independent agent of the mini-correspondent?
      • If the majority of the principal mortgage origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent, and, if so, what conditions must be met to make this transition (e.g. number of loans, time)?

    The CFPB cautions that (i) the inquiries described in the guidance are not exhaustive, and that the CFPB may consider other factors relevant to the exercise of its supervisory and enforcement authorities; (ii) no single question listed in the guidance is necessarily determinative; and (iii) the facts and circumstances of the particular mortgage transaction being reviewed are relevant.

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    Questions regarding the matters discussed in this 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.

  • Special Alert: CFPB Guidance States That Successors Are Not Subject to the ATR/QM Rule
    July 9, 2014

    On July 8, 2014, 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 the Truth in Lending Act (“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.

  • Special Alert: VA Adopts Its QM Rule
    May 16, 2014

    On May 9, 2014, the Department of Veterans Affairs (VA) issued an interim final rule defining what constitutes a “qualified mortgage” (QM) for purposes of the loans it guarantees, insures, or originates. The VA stated that, to quell persistent uncertainty among lenders regarding the treatment of VA loans under the temporary QM definition established by the Consumer Financial Protection Bureau, it was adopting a rule designating all VA loans as QMs and all VA loans other than a subset of VA streamlined refinancings as safe harbor QMs.

    Click here to view our special alert.

    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.
  • Special Alert: CFPB Proposes Amendments to Mortgage Rules
    May 1, 2014

    On April 30, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed targeted amendments to the Dodd-Frank Act mortgage rules that took effect in January 2014. Comments are due 30 days after publication of the proposal in the Federal Register.

    Ability-to-Repay/Qualified Mortgage

    • Points and fees cure. The CFPB proposed a post-consummation cure mechanism for loans that are originated with the good faith expectation of qualified mortgage (QM) status but exceed the points and fees limit for QMs. Specifically, the Bureau’s proposal would allow the loan to retain QM status if the excess points and fees are refunded to the borrower within 120 days after consummation by the creditor or assignee.

      In proposing this amendment, the Bureau acknowledged that “[t]he calculation of points and fees is complex and can involve the exercise of judgment that may lead to inadvertent errors.” The Bureau further acknowledged that “some creditors may not originate, and some secondary market participants may not purchase, mortgage loans that are near the [QM] limits on points and fees because of concern that the limits may be inadvertently exceeded at the time of consummation.” As a result, creditors seeking to originate QMs may establish buffers to avoid exceeding the points and fees limit and “refuse to extend mortgage credit to consumers whose loans would exceed the buffer threshold, either due to the creditors’ concerns about the potential liability attending loans originated under the general ability-to-repay standard or the risk of repurchase demands from the secondary market if the qualified mortgage points and fees limit is later found to have been exceeded.” The Bureau expressed concern that such buffers would negatively affect the cost and availability of credit.

    • Debt-to-income cure. The Bureau did not propose a cure for loans that inadvertently exceed the 43% debt-to-income ratio (DTI) requirement for QMs made under Appendix Q. The Bureau did, however, request comment on the question, noting concerns that creditors may establish DTI buffers that would affect access to credit. For a DTI cure provision to be considered, the Bureau stated that “creditors would need to maintain and follow policies and procedures of post-consummation review of loans to restructure them and refund amounts as necessary to bring the debt-to-income ratio within the 43-percent limit.” However, the Bureau expressed skepticism that creditors could realistically meet such a requirement.

      The Bureau stated that it would also consider allowing creditors or assignees to correct DTI overages that result solely from errors in documentation of debt or income. However, the Bureau expressed concern that such a process might lead to post-consummation underwriting and requested comment on “whether or how a debt-to-income cure or correction provision might be exploited by unscrupulous creditors to undermine consumer protections and undercut incentives for strict compliance efforts by creditors or assignees.”

    • Non-profit small creditor exemption. The CFPB proposed to amend the exemption for non-profit lenders that make 200 or fewer dwelling-secured loans in a year to exclude from that limit certain interest-free, contingent subordinate liens commonly offered by affordable homeownership programs.
    • Other small creditor exemptions. The Bureau requested feedback and data from smaller creditors regarding the 500 loan limit on first lien mortgages for “small creditor” status, the implementation of the Dodd-Frank Act mortgage rules by small creditors, and how small creditors’ origination activities have changed in light of the new rules.

    Mortgage Servicing

    • Non-profit small servicer exemption. The CFPB proposed to provide an alternative definition of “small servicer,” that would apply to certain non-profit entities that service for a fee loans on behalf of other non-profit chapters of the same organization that do not fall within the Bank Holding Company Act definition of “affiliate.” Adoption of the proposal would exempt these entities would be exempt from the Regulation Z periodic statement requirements as well as certain provisions in Regulation X regarding force-placed insurance, servicing policies and procedures, and loss mitigation.

    Additional Amendments

    The CFPB also stated that it expects to issue additional proposals to address other topics relating to the Dodd-Frank Act mortgage rules, including the definition of “rural and underserved” for purposes of certain mortgage provisions affecting small creditors.

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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.

  • Special Alert: Supreme Court to Hear TILA Recission Case
    April 29, 2014

    On April 28, the U.S. Supreme Court granted certiorari in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, an appeal of the U.S. Court of Appeals for the Eighth Circuit’s September 2013 holding that a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, and that written notice within the three-year rescission period is insufficient to preserve a borrower’s right of rescission.

    TILA Section 1635 grants borrowers the right to rescind a transaction “by notifying the creditor” and provides that a borrower’s “right of rescission shall expire three years after the date of consummation of the transaction” even if the “disclosures required . . . have not been delivered.” In Jesinoski, the Eighth Circuit cited its July 2013 holding in Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. Jul. 12, 2013), in which the court reasoned that the text of the statute, as explicated by the Supreme Court in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), established a strict limit on the time for filing suits for rescission. The Eighth Circuit expressly rejected an argument presented in an amicus brief filed by the CFPB that the lender, rather than the obligor, should be required to file suit to prevent rescission. To adopt the CFPB’s position, the court explained, “would create a situation wherein rescission is complete, in effect, simply upon notice from the borrower, whether or not the borrower had a valid basis for such a remedy. Under this scenario, the bank’s security interest would be unilaterally impaired, casting a cloud on the property’s title, an approach envisioned and rejected by Beach.”

    In holding in favor of the lender, the Eighth Circuit joined the majority of the circuit courts that have addressed the issue—the First, Sixth, Ninth, and Tenth Circuits all previously have held that a borrower must file suit within the three-year rescission period, while the Third, Fourth, and Eleventh Circuits have held that written notice is sufficient to preserve a borrower’s statutory right of rescission. BuckleySandler filed an amicus brief in Keiran on behalf of a group of industry trade groups, as it has done in three other circuit court cases on this issue.

    The Supreme Court now may resolve this circuit split. Like the prior circuit court cases, the Supreme Court’s review of the issue likely will draw attention and briefs from lenders, the CFPB, and consumer groups.