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FHA seeks feedback on enhancements to rehabilitation mortgage insurance program
On February 14, FHA issued a request for information (RFI) seeking input on ways the agency can enhance its Single Family 203(k) Rehabilitation Mortgage Insurance Program. Under the 203(k) Program, borrowers who are purchasing or refinancing a home may obtain FHA insurance on a mortgage that will cover the home’s current value plus rehabilitation costs. The 203(k) Program currently offers two options for borrowers: (i) the Standard 203(k) Mortgage, which is used for remodeling and major repairs, carries a minimum repair cost of $5,000, and requires the use of a 203(k) consultant; and (ii) the Limited 203(k) Mortgage, which is used for minor remodeling and non-structural repairs, has a maximum repair cost of $35,000, and does not require the use of a 203(k) consultant. FHA will use information gathered in response to the RFI “to identify barriers that limit the origination of 203(k) insured mortgages and lender participation in the program and consider opportunities to enhance the 203(k) Program to support HUD’s goal of increasing the available supply of affordable housing in underserved communities.” Comments on the RFI are due April 17.
CFPB issues HMDA reference chart for 2023
On February 9, the CFPB published the 2023 Reportable HMDA Data: A regulatory and reporting overview reference chart. The chart serves as a reference tool for data points that are required to be collected, recorded, and reported under Regulation C, as amended by HMDA rules, which were most recently issued in April 2020 (covered by InfoBytes here). The chart also provides relevant regulation and commentary sections and guidance for when to report “not applicable or exempt” as found in Section 4.2.2 of the 2022 Filing Instructions Guide. The Bureau notes that the “chart does not provide data fields or enumerations used in preparing the HMDA loan/application register (LAR).” For additional information on preparing the HMDA LAR, financial institutions should consult FFIEC guidance here.
8th Circuit affirms almost $20 million in damages and attorney’s fees in RMBS action
On February 2, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court order requiring a mortgage lender to pay $5.4 million in damages and $14 million in attorney’s fees for selling mortgages that did not meet agreed-upon contractual representations and warranties to a now-defunct company that packaged and resold the loans to residential mortgage-back securities (RMBS) trusts. The now-defunct company was sued by the RMBS trusts after loans underlying the securitizations began defaulting at a high rate during the 2008 financial crisis. A liquidating trust was established to oversee wind-down measures after the company filed for bankruptcy. The liquidating trust later began suing originators for indemnification over the allegedly defective mortgages. In 2020, the district court ruled in favor of the liquidating trust and entered judgment for $5.4 million in damages, $10.6 million in attorney’s fees, $3.5 million is costs, $2 million in prejudgment interest, and $520,212 in “post-award prejudgment interest.” The district court found, among other things, that the lender had breached its client contracts, and that in doing so, contributed to the now-defunct company’s “losses, damages, or liabilities within the scope of the contractual indemnity.” The court also found the liquidating trust’s damages methodology to be reasonable and nonspeculative. The lender appealed, disagreeing with how the underlying contracts were interpreted, as well as the allocation of multi-party damages and the post-trial award of fees, costs, and interest.
On appeal, the 8th Circuit disagreed, concluding that the terms of the parties’ contract made the lender liable. The appellate court also rejected the lender’s contention that it should not be expected to pay the claims against the now-defunct company because they were extinguished in bankruptcy, and that the methodology used to calculate the damages was inaccurate. In awarding $5.4 million in indemnification damages, the appellate court held that the district court properly found that the expert’s “‘calculation of damages was reasonable and non-speculative,’ and that his methodology produced a reasonably certain measure of [the liquidating trust’s] indemnifiable damages.” The 8th Circuit further concluded that the fee award was fair and that the district court had accounted for the complexity of the case and the importance of conducting a detailed loan-by-loan analysis. The appellate court also accused the lender of relitigating already decided issues and driving up the costs. However, the 8th Circuit did order the district court to recalculate the post-judgment interest award using guidance under 28 U.S.C. § 1961(a) rather than the 10 percent prejudgment interest rate under Minnesota law.
Special Alert: CFPB’s RESPA advisory addresses online mortgage-comparison platforms
The Consumer Financial Protection Bureau (CFPB) issued guidance yesterday making clear that those who operate or participate in online mortgage-comparison shopping platforms will be closely scrutinized for compliance with the prohibition on payments for referrals to mortgage lenders. “Companies operating these digital platforms appear to shoppers as if they provide objective lender comparisons, but may illegally refer people to only those lenders paying referral fees,” the agency said. Here’s what you need to know:
What happened?
The CFPB issued an Advisory Opinion on how the Real Estate Settlement Procedures Act (RESPA) applies to online mortgage-comparison platforms. The agency said platform operators violate RESPA “when they steer shoppers to lenders by using pay-to-play tactics rather than providing shoppers with comprehensive and objective information.” Specifically, the agency said operators receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value.
Agencies remind banks of HMDA reporting changes on closed-end mortgages
On February 1, the OCC reminded banks and OCC examiners that the loan origination threshold for reporting HMDA data on closed-end mortgages has changed due to a court decision issued last year, which addressed challenges made by a group of consumer fair housing associations to changes made in 2020 by the CFPB that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA (covered by InfoBytes here.) Due to a court order vacating the 2020 HMDA Final Rule as to the loan volume reporting threshold for closed-end mortgage loans, the OCC explained that the loan origination threshold for reporting HMDA data on closed-end mortgage loans reverted to the threshold established by the 2015 HMDA Final Rule.
According to Bulletin 2023-5, the threshold for reporting HMDA data is now 25 closed-end mortgage loans originated in each of the two preceding calendar years rather than the 100-loan threshold set by the 2020 HMDA Final Rule. “Banks that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years (referred to collectively as affected banks) may need to make adjustments to policies and procedures to comply with reporting obligations,” the OCC said. The agency added that it does not plan to assess penalties for failures to report closed-end mortgage loan data on reportable transactions conducted in 2022, 2021 or 2020 for affected banks that meet other coverage requirements under Regulation C.
The FDIC and Federal Reserve Board also issued similar guidance (see FIL-06-2023 and CA 23-1).
FHA expands Covid-19 loss mitigation options
On February 13, HUD issued Mortgagee Letter 2023-03, which makes technical corrections to Mortgagee Letter 2023-02 issued in January that expanded and enhanced loss mitigation options for borrowers struggling to make payments on FHA-insured mortgages. The enhancements extend FHA’s Covid-19 loss mitigation options to all eligible borrowers, including non-occupant borrowers, who fall behind on mortgage payments, regardless of the cause of delinquency. Mortgage servicers must use FHA’s Covid-19 recovery loss mitigation “waterfall” of options to assess all borrowers who are in default (or at risk of imminent default). The enhancements also raise the maximum partial claim amount from 25 percent of the mortgage’s unpaid principal balance to the maximum 30 percent allowed by statute to help increase home retention. Mortgage servicers can also offer loss mitigation options to borrowers who qualified for or used homeowner assistance funds who may no longer technically be delinquent but require further assistance to avoid redefault. Additionally, the enhancements provide incentive payments to mortgage servicers when Covid-19 recovery options are successfully completed.
The availability of FHA’s Covid-19 loss mitigation options are extended for 18 months beyond the April 30 mandatory effective date for servicers to remove “uncertainties associated with the timing of the end of the National Emergency,” HUD explained, adding that “FHA is temporarily suspending the use of its FHA-Home Affordable Modification (FHA-HAMP) options concurrent with [Mortgagee Letter 2023-02]” in order to simplify loss mitigation options. Mortgage servicers may begin offering these options to borrowers immediately.
FCC warns telecoms to stop carrying “mortgage scam” robocalls
On January 24, the FCC’s Enforcement Bureau announced it had ordered telecommunications companies to effectively mitigate robocall traffic originating from a Florida-based real estate brokerage firm selling mortgage scams. The FCC also sent a cease-and-desist letter to a voice service provider carrying the allegedly illegal robocall traffic. According to the FCC, several state attorneys general filed lawsuits late last year against the firm for allegedly using “misleading robocalls to ‘swindle’ and ‘scam’ residents into mortgaging their homes in exchange for small cash payments.” (See state AG press releases here, here, and here.) Additionally, last month, Senate Banking Committee Chairman Sherrod Brown (D-OH), along with Senators Tina Smith (D-MN) and Ron Wyden (D-OR) sent a letter to the FTC and the CFPB requesting a review of the firm’s use of exclusive 40-year listing agreements marketed as a “loan alternative.” (Covered by InfoBytes here.) In shutting down the robocalls, FCC Chairwoman Jessica Rosenworcel stressed that sending junk calls to financially-stressed homeowners in order to offer “deceptive products and services is unconscionable.” Enforcement Bureau Chief Loyaan A. Egal added that the voice service provider should have been applying “Know Your Customer” principles before allowing the traffic on its networks.
CFPB says servicers should suggest sales over foreclosures for some borrowers
On January 20, the CFPB encouraged mortgage servicers to advise homeowners struggling to pay their mortgages that a traditional sale may be better than foreclosure. The Bureau reported that due to the Covid-19 pandemic many homeowners are facing foreclosure, especially consumers who were delinquent when the pandemic began. The Bureau pointed out that while foreclosure rates are relatively low compared to pre-pandemic levels, mortgage data from November 2022 shows an increase of 23,400 foreclosure starts. “Often, the mortgage servicer’s phone representatives are the first line of communication with homeowners,” the Bureau said, reminding servicers to provide training to their representatives so they are prepared to provide information to equity-positive homeowners about selling their home as a potential option. “Of course, conversations about selling the home cannot substitute for the Regulation X requirement that mortgage servicers present all available loss mitigation alternatives to borrowers,” the Bureau stated, explaining that Appendix MS-4(B) to Regulation X contains sample language that can be used to inform homeowners of the option to sell their home. Additionally, the Bureau advised servicers to refer homeowners to HUD-approved housing counseling agencies to discuss their options.
CFPB updates Mortgage Servicing Examination Procedures
On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.
FHFA outlines MSR guidance for managing counterparty credit risk
On January 12, FHFA released an advisory bulletin communicating supervisory expectations for Fannie Mae and Freddie Mac (the Enterprises) related to the valuation of mortgage servicing rights (MSRs) for managing counterparty credit risk. FHFA emphasized that Fannie and Freddie’s “risk management policies and procedures should be commensurate with an Enterprise’s risk appetite[] and based on an assessment of seller/servicer financial strength and MSR risk exposure levels.” FHFA relayed that while sellers and servicers assign values to their MSRs, the Enterprises should implement their own processes to evaluate the reasonableness of seller/servicer MSR values. FHFA explained that Fannie and Freddie are “exposed to counterparty credit risk when seller/servicers provide representations and warranties that mortgage loans conform with its selling guide requirements,” and reiterated that “[f]ailure to meet such obligations and commitments may cause the Enterprise to incur credit losses and operational costs.”
The advisory bulletin lays out risk management expectations to ensure MSR values are reasonable, objective, and transparent, and provides guidance covering several areas, including (i) objective evaluation of MSR values; (ii) MSR valuations for mortgage loans owned or guaranteed by Fannie and Freddie as well as stress testing; (iii) MSR valuations for mortgage loans not owned or guaranteed by Fannie or Freddie; (iv) market data input; (v) use of third-party providers; (vi) frequency of evaluations; and (vii) discount to MSR values when servicing rights are terminated. The advisory bulletin is applicable only to MSRs for single-family mortgage loans and is effective April 1.