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CFPB releases 2021 HMDA data
On September 15, the CFPB released a Data Point report titled 2021 Mortgage Market Activity and Trends, which analyzes residential mortgage lending activity and trends for 2021. The 2021 HMDA data encompasses the fourth year of data that incorporates amendments to HMDA by Dodd-Frank. The changes include new data points, revisions to some existing data points, and authorizes the CFPB to require new data points. As covered by a Buckley Special Alert, the CFPB issued a final rule that implemented significant changes that reflected the needs of homeowners and the evolution in the mortgage market.
The Bureau previously reported a 66.8 percent increase in originations from 2019 to 2020, largely driven by refinances. However, most of the increase from 2020 to 2021 was a result of jumbo home purchase loans. Other highlighted trends in mortgage applications and originations found in the 2021 HMDA data point include, among other things:
- 4,332 financial institutions reported at least one closed-end record in 2021, down by 3.1 percent from 4,472 financial institutions who reported in 2020;
- At least one closed-end mortgage loan had been reported by 4,332 financial institutions, down by 3.1 percent from 4,472 financial institutions in 2020;
- Black borrowers’ share of home purchase loans increased from 7.3 percent in 2020 to 7.9 percent in 2021; and
- “The refinance boom, especially in non-cash-out refinance that dominated mortgage market activities in 2019 and 2020, peaked in March 2021.”
VA clarifies Covid-19 forbearance timeline
On September 19, the Department of Veterans Affairs issued a change to Circular 26-21-20 extending the rescission date to align with the end of Covid-19 pandemic, including conforming changes to VA’s expectation as to the completion of a forbearance period. As previously covered by InfoBytes, the VA issued Circular 26-21-20 in September 2021 to clarify timeline expectations for forbearance requests submitted by affected borrowers. The September 2021 Circular stated thar “[f]or borrowers who have not received a COVID-related forbearance as of the date of this Circular, servicers should approve requests from such borrowers provided that the borrower makes the request during the National Emergency Concerning the Novel Coronavirus Disease 2019 (COVID-19) Pandemic,” and that all Covid-19 related forbearances would end by September 30, 2022. However, Change 1 stated that “September 30, 2022” should be replaced with “six months after the end of the National Emergency Concerning the Novel COVID-19 Pandemic.” The circular is rescinded March 1, 2023.
FTC, DFPI shut down operation offering mortgage relief
On September 19, the FTC and the California Department of Financial Protection (DFPI) announced a lawsuit against several companies and owners for allegedly operating an illegal mortgage relief operation. (See also DFPI’s announcement here.) The filing marks the agencies’ first joint action, which alleges the defendants’ conduct violated the California Consumer Financial Protection Law, the FTC Act, the FTC’s Mortgage Assistance Relief Services Rule (the MARS Rule or Regulation O), the Telemarketing Sales Rule, and the Covid-19 Consumer Protection Act. The agencies claimed that the defendants preyed on distressed consumers with false promises of mortgage assistance relief. According to the complaint, the defendants made misleading claims during telemarketing calls to consumers, including those with numbers on the National Do Not Call Registry, as well as through text messages and in online ads. In certain cases, defendants represented they were affiliated with government agencies or were part of a Covid-19 pandemic assistance program. Among other things, defendants falsely claimed they were able to lower consumers’ interest rates or payments, and instructed consumers not to pay their mortgages, leading to late fees and significantly lower credit score. Defendants also allegedly told consumers not to communicate directly with their lenders, which caused consumers to miss default notices and face foreclosure. Additionally, defendants charged consumers illegal up-front fees ranging from $500 to $2,900 a month, and told consumers they were negotiating loan modifications that in most cases never happened.
The U.S. District Court for the Central District of California granted a restraining order temporarily shutting down the defendants’ operations. In freezing the defendants’ assets and ordering them to submit financial statements, the court noted that the agencies established a likelihood of success in showing that the defendants “have falsely, deceptively, and illegally marketed, advertised, and sold mortgage relief assistance services.”
2nd Circuit: NY law on interest payments for escrow accounts is preempted
On September 15, the U.S. Court of Appeals for the Second Circuit held that New York’s interest-on-escrow law impermissibly interferes with the incidentals of national bank lending and is preempted by the National Bank Act (NBA). Plaintiffs in two putative class actions obtained loans from a national bank, one before and the other after certain Dodd-Frank provisions took effect. The loan agreements—governed by New York law—required plaintiffs to deposit money into escrow accounts. After the bank failed to pay interest on the escrowed amounts, plaintiffs sued for breach of contract, alleging, among other things, that under New York General Obligations Law (GOL) § 5-601 (which sets a minimum 2 percent interest rate on mortgage escrow accounts) they were entitled to interest. The bank moved to dismiss both actions, contending that GOL § 5-601 did not apply to federally chartered banks because it is preempted by the NBA. The district court disagreed and denied the bank’s motion, ruling first that RESPA (which regulates the amount of money in an escrow account but not the accruing interest rate) “shares a ‘unity of purpose’ with GOL § 5-601.” This is relevant, the district court said, “because Congress ‘intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.’” Second, the district court reasoned that even though TILA § 1639d does not specifically govern the loans at issue, it is significant because it “evinces a clear congressional purpose to subject all mortgage lenders to state escrow interest laws.” Finally, with respect to the NBA, the district court determined that “the ‘degree of interference’ of GOL § 5-601 was ‘minimal’ and was not a ‘practical abrogation of the banking power at issue,’” and concluded that Dodd-Frank’s amendment to TILA substantiated a policy judgment showing “there is little incompatibility between requiring mortgage lenders to maintain escrow accounts and requiring them to pay a reasonable rate of interest on sums thereby received.” As such, GOL § 5-601 was not preempted by the NBA, the district court said.
On appeal, the 2nd Circuit concluded that the district court erred in its preemption analysis. According to the appellate court, the important question “is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.” In reversing the ruling and holding that that GOL § 5-601 was preempted by the NBA, the appellate court wrote that the “minimum-interest requirement would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power.” Notably, the 2nd Circuit’s decision differs from the 9th Circuit’s 2018 holding in Lusnak v. Bank of America, which addressed a California mortgage escrow interest law analogous to New York’s and held that a national bank must comply with the California law requiring mortgage lenders to pay interest on mortgage escrow accounts (covered by InfoBytes here). Among other things, the 2nd Circuit determined that both the district court and the 9th Circuit improperly “concluded that the TILA amendments somehow reflected Congress’s judgment that all escrow accounts, before and after Dodd-Frank, must be subject to such state laws.”
In a concurring opinion, one of the judges stressed that while the panel concluded that the specific state law at issue is preempted, the opinion left “ample room for state regulation of national banks.” The judge noted that the opinion relies on a narrow standard of preempting only those “state laws that directly conflict with enumerated or incidental national bank powers conferred by Congress,” and stressed that the appellate court declined to reach a determination as to whether Congress subjected national banks to state escrow interest laws in cases (unlike the plaintiffs’ actions) where Dodd-Frank’s TILA amendments would apply.
FDIC announces Arizona disaster relief
On September 15, the FDIC issued FIL-41-2022 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Salt River Pima-Maricopa Indian Community (Arizona) affected by severe storms from July 17-18. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.
OCC reports on mortgage performance
On September 15, the OCC released a report on the performance of first-lien mortgages in the federal banking system during the second quarter of 2022, providing information on mortgage performance through June 30. According to the OCC, 97 percent of mortgages were current and performing at the end of the quarter, compared to 95 percent a year earlier. The percentage of seriously delinquent mortgages was 1.5 percent in the second quarter of 2022, compared to 1.8 percent in the prior quarter and 3.8 percent a year ago. The report also found that servicers completed 28,109 modifications in the second quarter of 2022—a decrease of 33.7 percent from the previous quarter. Additionally, of the 28,109 mortgage modifications, 78.2 percent reduced borrowers’ monthly payments and 95.6 percent were “combination modifications,” which are modifications that include multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension.
11th Circuit affirms denial of title company’s cyber fraud claim
On September 6, the U.S. Court of Appeals for the Eleventh Circuit upheld a district court’s decision to deny insurance coverage to a Florida title company under its Cyber Protection Insurance Policy after it was allegedly “fraudulently induced—by an unknown actor impersonating a mortgage lender—to wire funds to an incorrect account.” The insurance company denied coverage on the basis that the title company did not meet the policy’s requirements. The title company submitted a claim under the cybercrime endorsement of its insurance policy, which includes a deceptive transfer fraud insurance clause that grants coverage provided certain criteria are met, including that the loss resulted from intentionally misleading actions, was done by a person purporting to be an employee, customer, client or vendor, and the authenticity of the wire transfer instructions was verified according to the title company’s internal procedures. The insurance company denied coverage, claiming that: (i) the mortgage lender to whom the funds were intended was not an employee, customer, client or vendor of the title company; and (ii) that the title company failed to verify the transfer request according to its procedures. The district court granted summary judgment in favor of the insurance company, agreeing that coverage did not exist under the plain language of the policy.
On appeal, the 11th Circuit determined that the mortgage lender was not listed as an entity under the plain language of the policy. It further disagreed with the title company’s position that under Florida law, insurance coverage clauses must “be construed as broadly as possible to provide the greatest amount of coverage,” and that the deceptive transfer fraud clause should also include “persons and entities involved in the real estate transaction.” The appellate court noted that “[a]s attractive as that proposition may be, it is simply not what the clause provides,” adding that because the clause “limits coverage to misleading communications ‘sent by a person purporting to be an employee, customer, client or vendor’” it must interpret these terms according to their plain meaning and may not “alter[] the terms bargained to by parties to a contract.”
District Court rules non-judicial foreclosure claims fail
On August 30, the U.S. District Court for the District of Oregon granted defendants’ motion for summary judgment in an action concerning an allegedly unlawful non-judicial foreclosure. Plaintiffs obtained a cash-out loan in 2005 and modified their mortgage terms. The plaintiffs stopped making payments after one of the defendant loan servicer’s agents allegedly informed them that “help was only available if they were in default,” and the defendant loan servicer threatened foreclosure. Following several years of bankruptcy proceedings and foreclosure mediation, plaintiffs sued to stop the foreclosure proceedings, claiming “that the deed of trust was void and that defendants committed fraud in attempting to foreclos[e] on the debt.” The initial non-judicial foreclosure proceedings were rescinded after the suit was dismissed with prejudice, and the defendant loan servicer was eventually allowed to proceed with a second non-judicial foreclosure under Oregon law. Plaintiffs sent a dispute letter demanding that the foreclosure be rescinded because the order in which several notices of default showing the amounts due and the amounts necessary to reinstate were sent did not comply with state law. After the notice was rescinded and a new notice of default was issued and recorded, plaintiffs sued again, seeking to enjoin the defendant trustee’s sale and filing several claims, including breach of contract and violations of the Oregon Unfair Trade Practices Act (OUTPA), RESPA, and FDCPA.
In granting summary judgment to the defendants on each of the claims, the court determined that the breach of contract claim fails because plaintiffs acknowledged that because “they have not substantially performed under the relevant contract,” they are precluded from seeking damages. The FDCPA claim against the defendant trustee also fails “because it is based on a perceived lack of authority under the relevant contract, but as explained in the breach of contract claim, that authority was not lacking.” Finally, the OUTPA and RESPA claims both fail “because there is no evidence that they incurred damages arising out of either claim”—a required element under both statutes, the court said. According to the court, plaintiffs failed “to support their drastic allegations with relevant evidence” and failed to “point to specific evidence supporting valid legal claims.”
HUD updates HECM program
On August 31, HUD issued Mortgagee Letter (ML) 2022-15, which updates the Home Equity Conversion Mortgage (HECM) program. The ML, among other things, modifies the requirements for mortgagees to provide notice to a borrower’s estate following an HECM becoming due and payable due to the death of the last surviving borrower. The ML may be implemented immediately but must be implemented no later than 90 days from the date of this ML for HECMs that become due and payable on or after the publication date of this ML. Additionally, comments are due within 30 days after the date of issuance.
California bankruptcy court says a forbearance that modifies the original loan is subject to state usury laws in certain instances
Earlier this year, the United States Bankruptcy Court for the Northern District of California granted in part and denied in part cross-motions for summary judgment in an action concerning “piecemeal exemptions” to California’s usury law. Plaintiffs entered into a loan agreement secured by their residence carrying an interest rate of 11.3 percent and a default interest rate of 17.3 percent (plus late fees) with a then-unlicensed lender. They also signed a promissory note, which stated that should they fail to make a monthly payment within 10 days of the due date they would be assessed a late charge equal to 10 percent of the monthly payment. After plaintiffs struggled to make payments, the parties entered into an extension agreement to supplement and amend the original loan (but not replace it), which slightly lowered the initial interest rate but increased the monthly payments and default interest rate. The extension also included language adding a charge on the final balloon payment that was not part of the original loan. Plaintiffs again began to miss loan payments and sought to refinance the loan with a different lender. A payoff quote provided by the defendant included what was originally called a “prepayment penalty” but was later changed to represent a late charge on the principal balance in line with the extension.
Plaintiffs sued the defendant and related parties in state court, seeking damages and alleging claims related to breach of contract, fraud, and intentional interference. After the court denied plaintiffs’ motion for preliminary injunction, plaintiffs filed an appeal on the same day one of the plaintiffs filed for bankruptcy. The defendant eventually filed a motion for summary judgment on the claims in the amended complaint, whereas plaintiffs sought partial summary judgment on several new claims, including that (i) the extension violated state usury law; (ii) the defendant “demanded an illegal acceleration penalty” from plaintiffs; and (iii) the defendant illegally charged multiple late fees on a single loan payment.
In a case of first impression, the court held that under California law, a loan extension that modifies the original loan, including by extending the maturity date, is considered a forbearance subject to state usury laws because there was no other sale, lease, or other transaction involved. The court noted that the statute “provides a restricted definition of the term ‘arranged’ in relation to a forbearance,” and that it also “painstakingly sets forth the instances in which a forbearance negotiated by a real estate broker would be exempt under usury law: when that broker was previously involved in arranging the original loan and that loan was in connection with a sale, lease, or other transaction, or when that broker had previously arranged for the sale, lease or other transaction for compensation.” The court further stated that “[c]onspicuously absent from those instances is a scenario in which a forbearance is arranged on a simple loan of money secured by real estate, with no other sale, lease, or other transaction involved,” adding that it “cannot create an exemption here to save [the defendant].” In the subject transaction, the real estate broker involved when the original loan was made was not involved in the extension, the court said.
The court also held that the loan forbearance violated California usury laws although the original loan was exempt from usury laws, disagreeing with the defendant’s position that “an originally non-usurious transaction cannot be transformed into a usurious transaction at a later point.” The court pointed out the distinction in this case from others cited by the defendant, stating that the “difference between a non-usurious loan and a loan subject to an exemption is slight but distinct. . . . Once the exemption (no real estate broker involved) ceased to apply, the exemption disappeared, and the transaction became subject to the full consequences of the usury law.” Because the extension’s interest rate and default interest rate both violated state usury law, the defendant is entitled only to the principal balance of the extension minus the amount of usurious interest paid.
Additionally, the court determined that under California law, the liquidated damages provision of the loan extension was separate from the interest charged by the extension, and a late charge on top of a balloon payment under extension was an unenforceable penalty provision instead of a valid provision for liquidated damages. The court also declined to consider punitive or other damages and said it will make a determination in the future as to what the defendant is entitled to by way of reimbursements or costs, as well as any interest accrued and owed after the extension’s maturity date.