InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York Announces Mortgage Discount Fees Enforcement Action
On October 23, New York Governor Andrew Cuomo announced a $3 million penalty against a mortgage lender that the New York State Department of Financial Services (DFS) determined engaged in deceptive practices concerning interest rate charges and related conduct. The DFS identified the violations during a 2010 examination. The consent order states that the lender (i) collected loan discount fees from certain borrowers to reduce the initial rate but failed to provide the discounted rates, (ii) facilitated originations through unlicensed originators, (iii) conducted business with unlicensed entities and through unauthorized websites and unlicensed branches, (iv) conducted business through improper “affiliated business arrangements,” (v) failed to disclose loan origination information, (vi) failed to issue commitment agreements to certain borrowers, and (vii) failed to properly maintain books and records. The lender consented to the penalty, agreed to refund $427,155 of unearned loan discount fees to 270 borrowers, and agreed to submit a written compliance program within 120 days, submit quarterly compliance progress reports over a three-year period, and take other corrective actions. The consent order noted that in 2011 the company entered into a $3.1M settlement with HUD over similar alleged conduct.
CFPB Director Discusses Mortgage Rule Implementation And Enforcement Against Individuals
On October 23, CFPB Director Richard Cordray briefly spoke with the Reuters Washington Summit about the Bureau’s rulemaking and enforcement work.
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.
Freddie Mac, Fannie Mae Offer Guidance Regarding Government Shutdown
On October 8, Freddie Mac issued Bulletin 2013-19 to provide guidance related to the federal government shutdown that began on October 1. Fannie Mae recently issued similar guidance in Lender Letter LL-2013-08. The guidance addresses income verification for new loans to government employees and reminds servicers of forbearance options for borrowers impacted by the shutdown.
First Circuit Holds Lender Can Require Increased Flood Insurance Coverage
Recently, the U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action alleging that a lender improperly required borrowers of FHA-insured mortgages to buy and maintain higher flood insurance coverage than that indicated in their mortgage contracts. Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2013 WL 5394192 (1st Cir. Sept. 27, 2013). The ruling, from an equally divided en banc court, allows mortgage lenders to require borrowers to maintain flood insurance equal to the replacement value of their homes. The named borrower claimed that he was forced to increase his flood insurance coverage in breach of his mortgage contract with his original lender that set the required flood amount coverage. In an amicus brief filed by DOJ on behalf of HUD, the government argued that the FHA’s model mortgage form gives lenders discretion to require coverage for the replacement cost of the property in the event of a flood. The Court of Appeals agreed with the government’s interpretation of the language in the model mortgage contract and reasoned that to interpret the form otherwise would hinder federal housing policy by discouraging banks from offering FHA-insured mortgages or forcing banks to charge higher rates. Dissenting judges argued that the ruling allowed a federal agency to intervene and rewrite a contract to serve its own purposes, and that the ruling’s prediction that banks would not offer FHA mortgages or charge higher rates was speculative.
Freddie Mac and Fannie Mae Provide Additional Guidance Regarding CFPB ATR/QM Rule
On October 1, Freddie Mac issued an industry letter and Fannie Mae issued Lender Letter LL-2013-07 to provide additional information regarding Freddie Mac’s and Fannie Mae’s new purchase eligibility requirements based on the CFPB’s final ability-to-repay/qualified mortgage (ATR/QM) rule. The letters inform sellers that, during an initial transitional period, the enterprises will not make any changes to their quality control processes and will not, except under certain circumstances, issue any repurchase requests related to the new points and fees eligibility requirements. The letters remind sellers that they must comply with all applicable laws regarding points and fees, including state laws and regulations that may be more restrictive than the CFPB ATR/QM rule, and withdraws prior guidance regarding excessive points and fees. Finally, the letters advise sellers that while Freddie Mac and Fannie Mae are not at this time requiring any additional documentation, sellers should retain all materials that might be necessary to demonstrate compliance with the new eligibility requirements.
New York Adopts Regulation Regarding Determination of Subprime Home Loans
On September 30, the New York Department of Financial Services (NY DFS) advised supervised institutions that it adopted emergency regulations to determine if a home loan qualifies as a subprime home loan under Section 6-m of the New York Banking Law. The NY DFS determined that recent changes to the calculation of mortgage insurance premiums mandated by the Federal Housing Administration in Mortgagee Letter 2013-04, which increased the annual percentage rate on subject loans, effectively decreased the threshold on certain loans and limited the availability of mortgage credit in New York. In response, the emergency regulations adjust the subprime threshold up by 75 basis points for most FHA-insured loans. The change took effect immediately.
Special Alert: HUD Proposes Its Own QM Rule
On September 27, HUD released a proposal defining what constitutes a “qualified mortgage” (QM) for purposes of loans insured by the FHA. We have prepared a Special Alert regarding this proposal, which, once it is finalized and takes effect, will replace the temporary QM definition for FHA loans established by the CFPB in its January 2013 Ability-to-Repay/Qualified Mortgage Rule. QMs, when made in accordance with the applicable requirements, provide lenders with some legal protection against borrower lawsuits under TILA alleging the lender did not sufficiently consider the borrower’s ability to repay the loan.
The CFPB’s temporary QM definition will continue to apply to loans that are eligible to be guaranteed or insured by the Department of Veterans Affairs and the Department of Agriculture until those agencies establish their own QM definitions. Similarly, the CFPB’s temporary QM definition will continue to apply to loans that are eligible to be purchased or guaranteed by Fannie Mae, Freddie Mac, or any successor entity for as long as those entities remain under the conservatorship or receivership of the Federal Housing Finance Authority or until January 10, 2021, whichever is earlier.
Questions regarding the matters discussed in the Special 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.
- Jeffrey P. Naimon, (202) 349-8030
- John P. Kromer, (202) 349-8040
- Clinton R. Rockwell, (310) 424-3901
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
Fannie Mae Announces Numerous Selling Policy Changes
On September 24, Fannie Mae issued Selling Guide Announcement SEL-2013-07, which includes changes to various selling policies. The announcement states that the flood insurance coverage requirements have been updated to clarify existing policy, address common lender questions and align with prevalent industry practices, as well as to alter the requirements for flood insurance on attached condominium projects (requiring a master policy in effect at least equal to 80% of replacement cost or the maximum insurance available from the National Flood Insurance Program per unit, whichever is lower). Fannie Mae updated its maintenance fee (formerly known as inactivity fee) requirements, including, among other things, lowering the loan delivery threshold from $2 million in mortgage loans to one mortgage loan. The announcement also (i) revises the instructions for Form 360 (“Certificate of Authority, Incumbency, and Specimen Signatures”) to clarify that the form must be completed and signed by an officer of the lender or, if the lender is not a corporation, a member of senior management, (ii) enhances guidance on the allowable age of federal income tax returns and the tax-related documentation required by adding disbursement dates, and (iii) revises the temporary leave income policy to clearly state that documentation concerning the timing of the borrower’s return to work can be provided directly to the lender by the borrower or the employer. The announcement also includes several other selling policy changes, and describes selling guide updates based on previously announced policy changes related to ability to repay and qualified mortgages.
Freddie Mac Revises Numerous Selling, Servicing Requirements
On September 24, Freddie Mac issued Bulletin 2013-18, which updates and revises certain selling and servicing requirements. Effective October 1, 2013, Freddie Mac will require that seller/servicers (i) provide third-party vendors retained to perform functions relating to origination and servicing of mortgages with training on fraud prevention, detection, and reporting as outlined in the Seller/Servicer Guide, (ii) maintain written procedures for reporting fraud or possible fraud in connection with a mortgage sold to or serviced for Freddie Mac, and (iii) report to Freddie Mac when they first know or suspect an incident of fraud may have occurred in connection with a mortgage sold to or serviced for Freddie Mac, rather than when they have a reasonable belief of such an incident. With regard to selling requirements, the bulletin, among other things, (i) updates asset documentation requirements, including the requirements for verification of large deposits, (ii) updates requirements for underwriting borrowers on temporary leave, (iii) updates certain relief refinance requirements, and (iv) retires Investor Feature Identifiers for temporary subsidy buydown mortgages with special characteristics.
Southern District of New York Again Endorses DOJ Mortgage Fraud Theory
On September 24, U.S. District Court Judge Jesse Furman largely denied a bank’s motion to dismiss a complaint filed by the U.S. Attorney’s Office for the Southern District of New York (SDNY) in which the government alleges that the bank falsely certified loans under the FHA’s Direct Endorsement Lender Program in violation of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). U.S. v. Wells Fargo Bank, N.A., No. 12-7527, 2013 WL 5312564 (S.D.N.Y. Sept. 24, 2013). Addressing four primary arguments raised by the bank, the court held that the government sufficiently pleaded (i) that the bank falsely certified compliance with FHA regulations upon which payment was conditioned, (ii) that the bank fraudulently induced the government to insure loans it otherwise would not have, and (iii) that this alleged misconduct caused the FHA to pay insurance claims it otherwise would not have. It also held that the government’s claims were pleaded with sufficient particularity. Citing two recent decisions from other Southern District of New York courts, the court held that FIRREA allows the government to pursue claims against an institution for engaging in alleged fraud that “affects” itself. Further, relying in part on a recent holding by the Fourth Circuit, the court held that the government’s claims were timely because they were tolled by the Wartime Suspension of Limitations Act. Finally, relying on an order issued earlier this year by the U.S. District Court for the District of Columbia, the court rejected the bank’s argument that the release it executed as part of the National Mortgage Servicing Settlement specifically released liability arising under the FCA and FIRREA for the government’s claims. The court dismissed as untimely certain of the government’s common law and quasi-contract claims, but preserved the government’s breach of fiduciary duty claim, reasoning that whether such a duty existed is a question of fact.