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On October 19, the DOJ announced a $13.2 million settlement with a mortgage lender resolving allegations that the company violated the False Claims Act (FCA) by falsely certifying compliance with the Federal Housing Administration (FHA) mortgage insurance requirements in violation of the False Claims Act (FCA). Specifically, the government alleged that, between 2006 and 2011, the lender failed to follow proper mortgage underwriting and certification rules as a participant in the direct endorsement lender program and knowingly submitted loans for FHA insurance that did not qualify. Additionally, DOJ alleged that the lender “improperly incentivized underwriters and knowingly failed to perform quality control reviews.” Under the direct endorsement lender program, FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance; accordingly lenders are required to follow rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance. This settlement also resolves a related whistleblower lawsuit filed under the FCA, in which the former employee of a related entity will receive approximately $2 million.
On August 15, Fannie Mae issued SVC-2018-05, which updates the Servicing Guide to include, among other things, a streamlined mortgage insurance (MI) claims process with certain mortgage insurers to “reduce the operational burden and cost associated with the process for servicers.” While servicers will continue to submit claims in accordance with the MI policy, participating mortgage insurers will now process all claims using an algorithm named the “MI Factor.” Effective October 1, claims settled using the MI Factor will not be subject to the curtailment billing process and servicers will not be required to submit supplemental claim submissions and claim appeals to the mortgage insurer. Fannie Mae also updated its Servicing Guide to include (i) clarification of the servicer’s responsibilities for addressing urgent property conditions; (ii) policy reminders regarding insured loss repay inspection reimbursements; and (iii) notification thresholds and timing requirements regarding the transfer of default-related matters between law firms within a single state.
On July 18, Fannie Mae released Lender Letter LL-2018-03 (Letter) to provide updates to requirements for single-family servicers related to borrower-initiated conventional mortgage insurance (MI) termination requests. The Letter covers requirements for borrower-initiated MI terminations and outlines various processes for verifying current property values. Among other things, the Letter also incorporates into the Servicing Guide changes previously announced in LL-2017-09 (see previous InfoBytes coverage here), which allows for temporary forbearance mortgage loan modification for servicers with mortgage loans affected by recent disasters. Fannie Mae encourages servicers to implement the new requirements on January 1, 2019, but will not require them to do so until March 1, 2019, unless otherwise noted.
On July 10, Fannie Mae announced the Enterprise-Paid Mortgage Insurance (EPMI) pilot program, which offers an alternative to the standard borrower-paid mortgage insurance and lender-paid mortgage insurance options offered by private mortgage insurance companies. The EPMI program will allow lenders to deliver Fannie Mae a loan with a greater than 80 percent loan-to-value without lender-acquired private mortgage insurance as long as the lender pays a loan-level price adjustment fee. The EPMI option would then cover the loan under a forward insurance arrangement, which is acquired by Fannie Mae. Fannie Mae would also be responsible for filing the insurance claims and performing monthly reporting.
The initial roll-out was offered to “a diverse, representative cross-section of large, medium, and small lenders” and is subject to a volume limit. Participating lenders may begin delivering EPMI loans to Fannie Mae on or after August 1.
On June 5, Fannie Mae issued Selling Guide update SEL-2018-05, which announces, among other things, the MH Advantage initiative. MH Advantage is a manufactured home that meets specific construction, design, and efficiency standards. Fannie Mae offers a number of flexibilities on loans secured by these properties, including higher loan-to-value ratios and standard mortgage insurance. The Selling Guide is updated to include the requirements for loans secured by MH Advantage homes, such as property eligibility, appraisal, and underwriting requirements. The requirements for MH Advantage loans are effective immediately. Additionally, the Selling Guide includes updates to (i) HomeStyle Energy loans in Desktop Underwriter; (ii) HomeStyle Renovation loan forms; and (iii) project standards updates to condo, co-op, and PUD project policies.
On May 10, the Department of Housing and Urban Development announced its intention to seek public comment on whether the 2013 Disparate Impact Regulation (Regulation), which provides a framework for establishing legal liability for facially neutral practices that have a discriminatory effect under the Fair Housing Act (FHA), is consistent with the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Covered by a Buckley Sandler Special Alert.) The Supreme Court upheld the use of a disparate impact theory to establish liability under the Fair Housing Act, but according to HUD’s announcement, the Court only referenced the Regulation in its ruling but did not directly rule upon it.
As previously covered by InfoBytes, in October 2017, the Treasury Department called on HUD to reconsider the Regulation as it relates to the insurance industry – specifically, to homeowner’s insurance.
On April 24, the New York Department of Financial Services (NYDFS) announced updated guidance to New York-licensed insurers advising them of their obligations under New York’s Insurance Law and requiring entities to file disaster response plans and questionnaires by September 28, through two updated circular letters. The first updated circular letter—addressed to property/casualty insurance companies, including mortgage guaranty insurers, title insurers, and captive insurers—provides, among other things, that in addition to filing a disaster response and recovery plan, insurers must develop a business continuity plan and regularly perform a business impact analysis “to predict the consequences of disruption of a business function and process as a result of a disaster.” Additionally, the letter clarifies business impact analysis requirements and outlines areas to be addressed within an insurer’s business continuity plan. According to NYDFS, the updated requirements are issued “in light of disasters that may occur outside of New York, such as hurricanes, terrorist attacks, or cybersecurity breaches, which could affect an insurer’s ability to serve New York consumers.”
On April 11, Fannie Mae updated its Servicing Guide, regarding servicing transfer welcome calls. Pursuant to Fannie Mae SVC-2018-03, transferee servicers are no longer required to, among other things, initiate welcome calls within five days of the transfer of servicing. Transferee servicers may now implement their own processes for borrower contact as long as the servicer remains in compliance with applicable laws. Fannie Mae also updated the Servicing Guide to add flexibility in connection with the collection of escrow shortages during a mortgage modification. Under the amendment to the Servicing Guide, servicers may spread repayment of the shortage amount over a term of up to 60 months, unless the borrower decides to pay up-front. Additionally, Fannie Mae released a revised Reverse Mortgage Loan Servicing Manual, which includes updates to expense reimbursement claim submissions and mortgage loan status codes.
On the same day, Freddie Mac released Guide Bulletin 2018-6, which, among other things, updates servicer requirements on Subsequent Transfers of Servicing (STOS) and borrower-paid mortgage insurance. Effective July 23, transferor servicers must use the automated STOS request system and new transfer requests must be submitted at least 45 days and no more than 60 days prior to the effective date of the transfer. The Bulletin also provides additional details on initiating the electronic STOS and executing the STOS agreement. There will be a temporary moratorium on STOS requests and modifications to existing requests from July 9 through July 20, in order for Freddie Mac to implement the new process.
Separately, the Bulletin includes various changes to streamline servicer responsibilities in canceling borrower-paid mortgage insurance, such as now allowing servicers to process a borrower’s verbal request to cancel mortgage insurance and simplifying the process to determine current value.
Consistent with the Fannie updates, Freddie Mac also modified its escrow shortage collection requirements to allow repayment to be spread over up to 60 months.
Special Alert: D.C. Circuit Panel Rejects CFPB's RESPA Interpretation and Alters its Structure in PHH Corp. v. CFPB
On October 11, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion vacating a $109 million penalty imposed on PHH Corporation under the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA), concluding that the CFPB misinterpreted the statute and violated due process by reversing the interpretation of the prior regulator and applying its own interpretation retroactively. Furthermore, the panel rejected the CFPB’s contention that no statute of limitations applied to its administrative actions and concluded that RESPA’s three-year statute of limitations applied to any actions brought under RESPA.
In addition, a majority of the panel held that the CFPB’s status as an independent agency headed by a single Director violates the separation of powers under Article II of the U.S. Constitution. However, rather than shutting down the CFPB and voiding all of its regulations and prior actions, the majority chose to remedy the defect by making the CFPB’s Director subject to removal at will by the President. In effect, this makes the CFPB an executive agency (like the Department of the Treasury) rather than, as envisioned by the Dodd-Frank Act, an independent agency (like the Federal Trade Commission). (One member of the panel, Judge Henderson, dissented from this portion of the opinion on the grounds that it was not necessary to reach the constitutional issue because the panel was already reversing the CFPB’s interpretation of RESPA.)
The panel remanded the case to the CFPB to determine whether, within the three-year statute of limitations, the payments to PHH’s affiliate exceeded the fair market value of the services provided in violation of RESPA. The CFPB is expected to petition for en banc reconsideration by the full D.C. Circuit or to seek direct review by the United States Supreme Court. Therefore, final resolution of this matter may be delayed by a year or more.
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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.
- Jeremiah S. Buckley, (202) 349-8010
- Joseph M. Kolar, (202) 349-8020
- John P. Kromer, (202) 349-8040
- Jon David D. Langlois, (202) 349-8045
- Jeffrey P. Naimon, (202) 349-8030
- Benjamin K. Olson, (202) 349-7924
- Matthew P. Previn, (212) 600-2310
- Clinton R. Rockwell, (310) 424-3901
- Michelle L. Rogers, (202) 349-8013
- Andrew L. Sandler, (202) 349-8001
- Brandy A. Hood, (202) 461-2911
- Sasha Leonhardt, (202) 349-7971
- Sherry-Maria Safchuk, (310) 424-3917
- Steven vonBerg, (202) 524-7893
U.S. Court of Appeals for the D.C. Circuit Hears Oral Arguments Regarding CFPB's Interpretation of RESPA
On April 12, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case PHH Corporation v. CFPB. The primary issue in the case is whether the CFPB is constitutionally and statutorily authorized to assess a $109 million penalty against the petitioner, a nonbank mortgage lender (Lender), for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by referring customers to certain mortgage insurance companies that purchased mortgage reinsurance at fair market value from an affiliate of the Lender. According to CFPB Director Richard Cordray, this practice was a violation of Section 8’s prohibition on kickbacks for referrals, because the mortgage insurers allegedly only purchased mortgage reinsurance in order to receive customer referrals from the Lender.
In appealing the CFPB’s action, counsel for the Lender argued that the CFPB is attempting to effectively rewrite Section 8 to prohibit activities expressly permitted by the statute’s implementing regulation, Regulation X, as well as prior agency guidance and the plain language of the statute itself. According to the Lender, its mortgage reinsurance practices had long been understood to be legal, were widespread throughout the country, and aligned with existing HUD guidance. The Lender further argued that Section 8(c)(2) permits entities to refer business so long as the referrals are not compensated, and any payments are equal to the market value cost of services actually provided. In the Lender’s case, counsel argued that the mortgage reinsurance premiums could not have been compensation for referrals, because mortgage reinsurance premiums received by the Lender’s affiliate were equal to the fair market value of mortgage reinsurance services actually rendered. The Lender further argued that the CFPB improperly ignored RESPA’s statutorily-prescribed statute of limitations (SOL) of three years when, under Section 15, RESPA clearly applies the SOL to “any action” – which, in the Lender’s view, would include an administrative action. Finally, the Lender argued that the CFPB’s structure and funding under the Dodd-Frank Act was unconstitutional in that it violated the requirement for separation of powers by, among other things, (i) restricting the President’s removal power to “for cause” removal; (ii) concentrating power in one individual; and (iii) funding the CFPB outside of the Congressional appropriations process.
Counsel for the CFPB responded that, during the period in question, mortgage insurance companies only purchased reinsurance from affiliates of lenders who referred them business. According to the CFPB, this type of quid pro quo arrangement is a violation of Section 8 even if the reinsurance premiums were equal to the fair market value of a service rendered. Counsel for the CFPB said that, notwithstanding the fact that the Lender’s conduct was common throughout the financial services industry, it had never expressly been blessed by prior agency guidance, and resulted in the type of market distortion that RESPA was designed to prevent. The CFPB also defended its position that its administrative actions are not subject to an SOL by noting that the Consumer Financial Protection Act, which authorizes the CFPB to take enforcement actions against regulated entities, does not include an SOL for such actions. In response to the challenge to the constitutionality of its structure, the CFPB pointed to the diversity of agency structures throughout the executive branch, including single-headed agencies and agencies that do not rely on Congress for appropriations funding.
The panel consisted of Judges Kavanaugh, Randolph, and Henderson; Judge Henderson was not present.
- Jonice Gray Tucker to discuss "Trends in regulatory enforcement" at the American Bar Association Banking Law Committee Meeting
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference
- Jon David D. Langlois to discuss "Successors in interest updates" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo