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District Court addresses plain meaning of “pattern or practice of noncompliance” under RESPA.
On February 7, the U.S. District Court for the District of Maryland granted in part and denied in part a defendant mortgage company’s motion to dismiss a class action lawsuit alleging RESPA violations related to escrow account management for borrowers. Class action plaintiffs claim that the defendant’s failure to pay their property taxes in a timely manner, resulting in their homes being potentially subject to local tax sale procedures for unpaid taxes, created a “pattern or practice of noncompliance” within the meaning of RESPA.
In moving to dismiss, defendant argued that alleged violations of servicing obligations that fall under separate subsections of RESPA cannot create a “pattern or practice of noncompliance” for obligations of the section setting for the escrow-handling obligations. While noting that “case law interpreting RESPA statutory damages claims is still developing,” the court found that the statute does not require identical violations from the same subsection of RESPA to state a “pattern or practice” claim. The court reasoned that the absence of the word “subsection” from the statute is noteworthy, and it indicates that Congress did not intend to confine “pattern or practice” to a single subsection, and held that the plain meaning of the provision only requires plaintiffs to allege repeated violations of the “[s]ervicing of mortgage loans and administration of escrow accounts” section of RESPA (i.e., all of the obligations set forth in 12 U.S.C. § 2605). The court also rejected defendant’s argument that plaintiffs failed to state a claim because they “cannot rely upon their own allegations or the existence of public complaints and lawsuits which have not resulted in a judgment against it for violations of RESPA,” finding that allegations of servicing violations from multiple named plaintiffs in separate jurisdictions was sufficient to survive a motion to dismiss.
Separately, the court dismissed allegations that defendant violated RESPA by failing to respond to plaintiffs’ qualified written requests, finding that plaintiffs’ claims of “emotional distress, without more, do[] not establish the causal link necessary to show actual damages,” and that plaintiffs did not support claims that voluntary postage costs for sending correspondence to defendants could be recognized as economic damages.
FFIEC releases statement on examination principles related to discrimination and bias in residential lending
On February 12, the Federal Financial Institutions Examinations Council (FFIEC) released a statement on “Examination Principles Related to Valuation Discrimination and Bias in Residential Lending.” The statement outlined principles that examiners should use to evaluate an institution’s residential property appraisal and valuation practices to mitigate risks that stem from (i) discrimination “based on protected characteristics in the residential property valuation process, and (ii) bias, defined as “a preference or inclination that precludes an appraiser or other preparer of the valuation from reporting with impartiality, independence, or objectivity” as required by the Uniform Standards of Professional Appraisal Practice. Failure to have these internal controls to identify and address discrimination or bias can result in poor credit decisions, consumer harm, increased safety and soundness risk. The principles outlined by the statement are categorized into consumer compliance examination principles and safety and soundness principles. For consumer compliance, examiners should consider an institution’s (i) board and senior management oversight to determine if it is commensurate with the institution’s risk profile; and (ii) consumer compliance policies and procedures to identify and resolve potential discrimination. The principles during a safety and soundness examination should include reviewing the consumer protection issues, governance, collateral valuation program, third-party risk management, valuation review, credit risk review, and training programs.
DOJ announces settlement against Pennsylvanian bank for alleged redlining
On February 5, the DOJ, together with the State of North Carolina, announced a settlement with a Pennsylvania-based bank (respondent) to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in Charlotte and Winston-Salem, North Carolina, in violation of the Fair Housing Act and ECOA. The DOJ’s complaint alleged that from at least 2017 through 2021, the bank failed to provide mortgage lending services to predominantly Black and Hispanic neighborhoods in Charlotte and Winston-Salem and discouraged people seeking credit in those communities from obtaining home loans. The DOJ compared the respondent’s performance with other lenders, noting that other lenders generated applications in predominantly Black and Hispanic neighborhoods at two-and-a-half times the rate of respondents in Charlotte, and four times the rate of respondents in Winston-Salem.
Under the two proposed consent orders, the respondent will, among other things (i) invest at least $11.75 million in a loan subsidy fund to increase access to home mortgage, home improvement, and home refinance loans for residents of majority Black and Hispanic neighborhoods; (ii) spend $1 million on community partnerships; (iii) spend $750,000 for advertising, outreach, consumer financial education, and credit counseling focused on the areas at hand; (iv) open three new branches in the areas at hand, with at least one mortgage banker assigned to each branch; (v) hire a director of community lending who will oversee the continued development of lending in communities of color; (vi) retain independent consultants to enhance its fair lending program and better meet communities’ needs for mortgage credit; (vii) conduct a community credit needs assessment and offer a staff training; and (viii) evaluate its fair lending compliance management systems.
District Court denies stay of CFPB case against lender
On January 12, the U.S. District Court for the Southern District of Florida denied a defendant-mortgage lender’s motion to stay a case filed by the CFPB. The defendant argued that judicial economy—the preservation of the court’s time and resources—favored the stay because the defendant’s pending motion to dismiss is premised on the same constitutional issue addressing the CFPB’s funding structure now before the Supreme Court (see continuing InfoBytes coverage here and here). In opposition, the CFPB argued that the Supreme Court may take months to issue a ruling, the public interest in enforcement of consumer protection laws, and the failure to show how an adverse ruling in the Supreme Court case would definitively result in dismissal of this case.
The District Court sided with the CFPB, stating that as of now, the CFPB “is a valid agency that is entitled to enforce the consumer financial laws.” With the stay denied, the court will now consider the defendant’s motion to dismiss.
Ginnie Mae to explore a new reverse MBS
On January 16, Ginnie Mae announced its plans to consider the development of a new securitization product in connection with broader efforts to expand its existing Home Equity Conversion Mortgage (HECM) mortgage-backed securities program. Specifically, Ginnie Mae is considering the viability of a securitization product that would accept HECM loans with balances above 98% of the FHA’s Maximum Claim Amount. Ginnie Mae stated that the proposed product reflects efforts to address liquidity issues affecting the stability of secondary mortgage markets, which are crucial for older Americans who may need to rely on home equity for financial support.
HUD Secretary Fudge confirms interest in eliminating Mortgage Interest Premiums
On January 11, the Secretary for Housing and Urban Development, Marcia Fudge, testified at the House Financial Services Committee hearing on the Oversight of HUD and the FHA. Topics included qualification for housing programs by veterans, HUD efforts to support more affordable housing, and oversight of public housing authorities, among other things.
Secretary Fudge addressed the possibility of eliminating the Mortgage Insurance Premiums (MIP) from Federal Housing Administration (FHA) mortgages. Specifically, Rep. Brad Sherman (D-CA) asked Secretary Fudge whether she would be willing to eliminate MIPs, to which Secretary Fudge replied “Yes, I’m willing to look at it.” Rep. Gregory Meeks (D-NY) asked whether FHA insurance could follow the same model as private mortgage insurance, where the product is terminated after a certain amount of payment on the principal of the loan. In response, the Secretary replied positively with “I would love to see it happen.”
Bank to pay $1.9 million to resolve redlining suit
On January 17, the DOJ announced a $1.9 million settlement with a national bank resolving allegations that the bank engaged in unlawful redlining in Memphis, Tennessee by intentionally not providing home loans and mortgage services to majority-Black and Hispanic neighborhoods, thereby violating the Fair Housing Act, ECOA, and Regulation B. In the complaint, the DOJ alleged that from 2015 through at least 2020, the bank (i) concentrated marketing and maintained nearly all its branches in majority-white neighborhoods; (ii) was aware of its redlining risk and failed to address said risk; (iii) generated disproportionately low numbers of loan applications and home loans during the relevant period from majority-Black and Hispanic neighborhoods in Memphis, compared to similarly-situated lenders; (iv) maintained practices that denied equal access to home loans for those in majority-Black and Hispanic neighborhoods, and otherwise “discouraged” those individuals from applying; and others.
Under the consent order, which is subject to court approval, the bank will, among other things, invest $1.3 million in a loan subsidy fund to enhance home mortgage, home improvement, and home refinancing access in the specified neighborhoods. The bank will also allocate $375,000 in advertising, outreach, and financial counseling to specified neighborhoods, and allocate $225,000 to community partnerships for services boosting residential mortgage credit access in the specified areas. Additionally, the bank will assign at least two mortgage loan officers to serve majority-Black and Hispanic neighborhoods in the bank’s service area and appoint a Director of Community Lending who will oversee the continued development of lending in communities of color.
Idaho Department of Finance publishes proposed rule changes on its Mortgage Practices Act
On January 3, the Idaho Department of Finance published a bulletin on proposed rule changes to Vol. 23-10 of the Idaho Administrative Bulletin, specifically to section 12.01.10 – Rules Pursuant to The Idaho Residential Mortgage Practices Act; a redline of the bill’s section changes is here. According to the bill, the rule changes aim to “reduce regulatory burden by removing outdated requirements,” and the rulemaking changes were made pursuant to Executive Order 2020-01.
There were several changes to the bill. First, the section on “Deceptive Advertising” was struck from the bill. Second, and under “Written Disclosures,” the portion on “Receipt of an Application” was struck from the bill. Third, and under “Prohibited Practices” and further under “Engage in Deceptive Advertising,” the proposed changes include the addition of two subsections: one on engaging in bait and switch advertising; and another on misleading someone to believe a solicitation is from a person’s current mortgage holder, or government agency, among others. Fourth, the section on “Borrowers Unable to Obtain Loans” was struck entirely.
CFPB posts blog entry analyzing cash-out refinancing
On December 18, the CFPB posted a blog entry regarding cash-out refinance mortgages and their borrowers between 2013 to 2023. According to the entry, which noted reflects the authors’ views, and not those of the CFPB, refinance mortgage originations decreased amid 2022’s rapid interest rate hikes, and notably favored cash-out refinances over non-cash-out options. Cash-out refinances involve borrowing significantly more than the amount owed on an existing mortgage, often used for diverse purposes like debt settlement or home improvements. Despite reduced volumes due to rising rates, the post noted that cash-out refinances are “worth monitoring” since they were considered one of the factors that contributed to the 2008 financial crisis.
Analyzing loans from 2013 to 2023 from data in the National Mortgage Database, the blog entry revealed some insights into delinquencies. Some of the findings include: (i) cash-out refinances held a larger share of all refinances when interest rates rose; (ii) borrowers opting for cash-out refinances typically had lower income and lower credit scores compared to those pursuing different refinancing avenues; (iii) borrowers with stronger credit scores showed minimal serious delinquencies irrespective of the refinancing type; and (iv) borrowers with lower credit scores showed similar two-year delinquency rates for both cash-out and non-cash-out refinancing, except for borrowers in 2017, a year marked by rising interest rates and lower credit scores for cash-out borrowers. Based on this last finding, the blog post noted that there may be increased delinquencies among cash-out refinances originated in 2022, a year with similar interest rate increases and decrease in cash-out borrowers’ credit score.
Fannie Mae announces updates to the servicing guide
On December 20, Fannie Mae issued SVC-2023-06, announcing updates made to its Servicing Guide. The updates include new financial reporting requirements requiring large non-depository sellers/servicers to submit a Mortgage Banker’s Financial Reporting Short Form (Form 1002A) within 30 days of the end of each month, beginning May 31, 2024 for the April 2024 monthly reporting. An additional change to the Servicing Guide involves a revised policy for loans transferred to an LLC, eliminating the specific timing requirement for the title transfer and instead directing sellers to refer to the Selling Guide for guidance on the timing requirement. This policy clarification is effective immediately. The announcement also contains, among other miscellaneous changes, an updated Special Lender Approval Form (Form 1000A) that improves the application process for sellers and servicers applying to sell or acquire a particular renovation mortgage.