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Superior Court denies student loan servicer’s motion to dismiss Massachusetts Attorney General’s lawsuit
On February 28, a Suffolk County Superior Court denied a Pennsylvania-based student loan servicing agency’s (defendant) motion to dismiss a lawsuit filed by the Massachusetts Attorney General, which alleged the defendant overcharged borrowers and improperly processed claims for public service loan forgiveness. (See previous InfoBytes coverage here.) According to the court, the loan servicer’s argument that it is “an arm of the Commonwealth of Pennsylvania” and therefore entitled to sovereign immunity from lawsuits was not convincing; it noted that not only had the defendant failed to qualify as a state entity but it demonstrated “substantial financial and operational independence” from the state.
Furthermore, the court also rejected the defendant’s arguments that the action was not permitted because the Department of Education is an indispensable party to the suit and that the Massachusetts Attorney General’s claims “are preempted ‘to the extent’ that they ‘conflict with the requirements of federal law.’” The judge opined that the Department of Education is not an indispensable party even though some of the injunctive relief sought may conflict with the Department of Education’s rights under its loan servicing contract or regulatory requirements.
New York Fed says fintech companies improved lending efficiency in mortgage market
The Federal Reserve Bank of New York (New York Fed) released a February 2018 Staff Report titled, “The Role of Technology in Mortgage Lending,” which concludes that technological innovation by fintech mortgage lenders has improved the efficiency of lending in the U.S. mortgage market. In the report, the New York Fed defines a fintech mortgage lending model as one that features “an end-to-end online mortgage application platform and centralized mortgage underwriting and processing augmented by automation.” The report uses quantitative analysis to study the effects of technological innovation in the U.S. mortgage market by identifying several areas of friction in traditional lending and examining whether fintech lending improves them. Among other things, the report finds that, without increasing risk, fintech lenders (i) process mortgages more quickly; (ii) respond more elastically to fluctuations in demand; and (iii) increase borrowers’ propensity to refinance. However, the report notes that there is little evidence that fintech lending is more effective than traditional lending at providing financially constrained borrowers access to credit.
VA clarifies policy regarding the use of lender payment or credit of certain borrower costs
On February 23, the Department of Veterans Affairs (VA) issued Circular 26-18-4 in response to reports that lenders may be funding temporary “buydown” or escrow accounts in order to subsidize a borrower’s payment through an above market interest rate, which the VA views as a “cash-advance on principal.” The circular reminds lenders that cash-advances on principal are prohibited, and lenders may not pay temporary buydown fees and charges. The circular notes that sellers are not prohibited from paying buydown fees and charges for the borrower and that lenders are allowed to charge a maximum of one percent of the loan amount as a flat charge in lieu of all other charges related to the costs of origination not expressly allowed by 38 C.F.R. 36.4313. The circular is effective until January 1, 2020.
Previously, on February 1, the VA updated multiple chapters of the VA Servicer Handbook M26-4, which, among other things, added the definition of delinquency, corrected the bankruptcy reporting timeframe, and added information on the new VA Affordable Modification.
IRS issues reporting guidance for MIP
On February 22, the IRS issued a notice providing guidance to mortgage lenders on the reporting of mortgage insurance premiums (MIP) treated as qualified residence interest. The IRS emphasizes that MIP paid or accrued through December 31, 2017 will be deductible for eligible taxpayers and informs lenders to report MIP received in 2017 on Form 1098. If a lender has already filed Form 1098 and did not include the reportable MIP, the IRS requires lenders to file corrected forms by the filing due date and to furnish corrected statements to borrowers by March 15.
Department of Education releases RFI on undue hardship threshold
On February 21, the Department of Education published a Request for Information (RFI) seeking feedback on whether there is a need to clarify the threshold for “undue hardship” when evaluating bankruptcy cases in which borrowers seek to discharge student loans. According to the RFI, current U.S. Bankruptcy Code states that student loans can be discharged in bankruptcy claims only if “excepting the debt from discharge would impose an ‘undue hardship’ on the borrower and the borrower’s dependents.” However, according to the RFI, the term “Undue hardship” has never been defined by Congress in the Bankruptcy Code, nor has the Department been delegated the authority to do so. Instead, the context for proving a hardship claim falls under one of two tests summarized in the department’s 2015 Dear Colleague Letter (2015 Letter). The RFI requests comments on the following: (i) what factors should be considered when evaluating undue hardship claims; (ii) the weight to be given to any such factors; (iii) whether the use of two tests result in any “inequities among borrowers”; (iv) under what circumstances should loan holders “concede an undue hardship claim by the borrower”; and (v) whether and how changes should be made to the 2015 Letter. Comments on the RFI are due May 22.
OCC requests comments on registration of mortgage loan originators
On February 6, the OCC published a notice and request for comment in the Federal Register concerning its information collection entitled, “Registration of Mortgage Loan Originators.” Under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), any person employed by a regulated entity, who is engaged in the business of residential mortgage loan origination, must register with the Nationwide Mortgage Licensing System and Registry (NMLS), obtain a unique identifier, and adopt policies and procedures to ensure compliance with the SAFE Act’s requirements. The NMLS is structured to, among other things, (i) improve information sharing between regulators; (ii) increase mortgage loan originator accountability; and (iii) provide consumers easy access to background information on mortgage loan originators, including publicly adjudicated disciplinary and enforcement actions. The OCC retains enforcement authority under the SAFE Act for financial institutions (including federal branches of foreign banks) with total assets of $10 billion or less. Comments on the notice must be received by April 9.
Massachusetts AG fines nonbank for alleged mortgage servicing concerns
On January 30, Massachusetts Attorney General Maura Healey announced a settlement with a nonbank mortgage servicer to resolve allegations concerning unfair and deceptive mortgage modifications made by the servicer that put borrowers at a heightened risk of foreclosure. According to the state’s press release, in making modifications, the servicer allegedly violated Massachusetts’ Act Preventing Unlawful and Unnecessary Foreclosures (the “Act”), which offers foreclosure protections to borrowers, including requiring “creditors to make a good faith effort to avoid foreclosure for borrowers whose mortgage loans have unfair subprime terms.” Specifically, the AG’s office found that the servicer had violated the Act by offering “unfair and deceptive short-term, interest-only loan modifications” to borrowers without considering the borrowers’ ability to repay. In support of claim against the servicer, the Massachusetts AG pointed to the fact that “[a]fter one or two years, the monthly payments on those modifications ballooned to an amount higher” than what the borrower was paying when the default originally occurred. This practice, Healy stated, increased the risk of foreclosure and thus violated the Act. According to the AG’s press release, in addition to providing $500,000 in restitution to certain borrowers affected by foreclosures, the servicer is also required to provide “millions of dollars” in principal reductions to affected borrowers.
CSBS announces FTC access to non-confidential NMLS licensing information
On January 18, the Conference of State Bank Supervisors (CSBS) announced it will start sharing non-confidential licensing information obtained through the Nationwide Multistate Licensing System (NMLS) with the FTC. Once implemented, the FTC will have access to regulated companies’ ownership information, and public FTC enforcement actions will be added to the NMLS database and made available to state regulators and to the public. According to the FTC, access to this type of information will improve consumer protection investigation efficiency and coordination with state law enforcement partners. Currently, select NMLS data is shared with the Office of Financial Research, CFPB, Financial Crimes Enforcement Network, and FHA.
City of Philadelphia’s discriminatory lending lawsuit moves forward
On January 16, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania denied a national bank’s motion to dismiss the City of Philadelphia’s (City) claims that the bank engaged in alleged discriminatory lending practices in violation of the Fair Housing Act (FHA). As previously covered in InfoBytes, the City filed a complaint in May of last year against the bank alleging discrimination under both the disparate treatment and disparate impact theories. The City asserted that the bank’s practice of offering better terms to similarly-situated, non-minority borrowers or refusing to make loans in minority neighborhoods has led to foreclosures and vacant homes, which in turn, has resulted in a suppression of property tax revenue and increased cost of providing services such as police, fire fighting, and other municipal services. In support of its motion to dismiss, the bank argued, among other things, that the City’s claim (i) is time barred; (ii) improperly alleges the disparate impact theory; and (iii) fails to allege proximate cause as required by a recent U.S. Supreme Court ruling (see previous Special Alert here).
While the court expressed “serious concerns about the viability of the economic injury aspect of the City’s claim with regard to proximate cause,” the court found that the bank “has not met its burden to show why the City’s entire FHA claim should be dismissed.” Consequently, the court held that the case may proceed to discovery beyond the two-year statute of limitations period for FHA violations in order to provide the City an opportunity to prove whether the bank’s policy caused a racial disparity that constituted a violation continuing into the limitations period.
Fed terminates foreclosure enforcement actions, fines five banks CMPs
On January 10, the Federal Reserve Board (Fed) announced the termination of ten enforcement actions for legacy mortgage loan servicing and foreclosure processing activities, along with the issuance of more than $35 million in combined civil money penalties (CMPs) against five of the ten banks. Combined with penalties previously assessed against other supervised firms (see previous InfoBytes coverage here), the Fed’s mortgage servicing enforcement actions have totaled approximately $1.1 billion in penalties. The CMPs assessed against the five banks range from $3.5 million to $14 million.
According to the Fed, the termination of the ten enforcement actions is a result of “evidence of sustainable improvements in the firms’ oversight and mortgage servicing practices.” Under the terms of the previously issued consent orders, in addition to the CMPs, the banks were required to (i) improve residential mortgage loan servicing oversight, and (ii) correct deficiencies in residential mortgage loan servicing and foreclosure processing for banks with Fed supervised-mortgage servicing subsidiaries.
The Fed also announced the termination of two related joint enforcement actions (see here and here) with the OCC, FDIC and FHFA (a party to only one of the actions) against key mortgage servicing service providers. According to the announcement, the terminations were a result of proof of “sustainable improvements” in the companies’ foreclosure-related practices.