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Montana adopts NMLS forms and procedure amendments
Recently, the Montana Department of Administration adopted Nationwide Multistate Licensing System & Registry standardized forms and procedures that include, among other things, information and updates on: (i) escrow business licenses; (ii) definitions for mortgage licensees; (iii) revocation, suspension, or surrender of mortgage licenses; (iv) sales finance company licenses; and (v) consumer loan license surrender. The provisions became effective February 12.
CFPB seeks to prevent algorithmic bias
On February 23, the CFPB released an outline of possible options for upcoming rulemaking to prevent algorithmic bias in automated home valuation models (AVMs). Dodd-Frank mandates that the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA engage in joint agency rulemaking to strengthen the oversight of AVMs, which requires (i) ensuring a high level of confidence in the estimates; (ii) protecting against data manipulation; (iii) avoiding conflicts of interest; (iv) requiring random sample testing and reviews; and (v) accounting for other factors deemed “appropriate” by the agencies. The Small Business Advisory Review Panel’s Outline of Proposals and Alternatives Under Consideration details options for ensuring computer models used to determine home valuations are accurate and fair. While recognizing that AVMs “have the potential to contribute to lower costs and shorter turnaround times in the performance of property valuations” and are increasingly being used—in part due to advances in database and modeling technology and the availability of larger property datasets—the Bureau cautioned that using AVMs may introduce several risks that can impact data integrity and accuracy. The outline also expressed concerns that AVMs may “reflect bias in design and function or through the use of biased data and may introduce fair lending risk.” To mitigate potential fair lending risks in AVMs, the Bureau stated it is considering proposing “a requirement that covered institutions establish policies, practices, procedures, and control systems to ensure that their AVMs comply with applicable nondiscrimination laws.” The Bureau added that it “preliminarily believe[s] standards designed to ensure compliance with applicable nondiscrimination laws may help ensure the accuracy, reliability, and independence of AVMs for all consumers and users.” Without proper safeguards, the Bureau warned in its announcement that “flawed” AVMs “could digitally redline certain neighborhoods and further embed and perpetuate historical lending, wealth, and home value disparities.”
Among other things, the outline also previewed definitions under consideration for terms such as “mortgage originator,” “mortgage,” and “consumer’s principal dwelling,” and noted that the Bureau is considering a “principles-based option” to allow regulated institutions more flexibility to set their own AVM quality control standards, as well as a “prescriptive option” with a more detailed set of requirements for institutions to reduce potential compliance uncertainty. “It is tempting to think that machines crunching numbers can take bias out of the equation, but they can’t,” CFPB Director Rohit Chopra said. “This initiative is one of many steps we are taking to ensure that in-person and algorithmic appraisals are fairer and more accurate.”
The Bureau stated that the next step will be to review the options to determine their potential impact on small business stakeholders as required by the Small Business Regulatory Enforcement Fairness Act of 1996. Feedback will be used to inform the Bureau’s efforts on developing a formal proposal with the other agencies.
CFPB releases fact sheet on interest rate calculation under QM APR
On February 23, the CFPB released a factsheet on the interest rate that is used for calculating prepaid interest under the price-based General Qualified Mortgage (QM) annual percentage rate (APR) calculation rule for certain adjustable-rate mortgages (ARMs) and step-rate loans. As previously covered by InfoBytes, the Bureau issued the General QM Final Rule in December 2020, which amended Regulation Z and revised the definition of a General QM by eliminating the General QM loan definition’s 43 percent debt-to-income ratio limit and replacing it with bright-line price-based thresholds. The fact sheet, among other things, “describes the interest rate that is used for calculating prepaid interest for purposes of this special APR calculation rule.” Additionally, the fact sheet clarifies, by section, the interest rate used to calculate the APR under the General QM ARMs special rule and the interest rate used to calculate prepaid interest under the General QM ARMs special rule.
HUD announces Hawaii and Kansas disaster relief
On February 16, HUD announced disaster assistance for certain areas in Hawaii impacted by severe storms, flooding, and landslides. The disaster assistance supplements state and local recovery efforts in specific counties, and provides foreclosure relief and other assistance to affected homeowners following President Biden’s major disaster declaration on February 15. According to the announcement, HUD is providing an automatic 90-day moratorium on foreclosures of FHA-insured home mortgages for covered properties and is making FHA insurance available to victims whose homes were destroyed or severely damaged, such that “reconstruction or replacement is necessary.” HUD’s Section 203(k) loan program allows individuals who have lost homes to finance the purchase of a house or refinance an existing house along with the costs of repair through a single mortgage. The program also allows homeowners with damaged property to finance the rehabilitation of existing single-family homes. Furthermore, HUD is allowing applications for administrative flexibility and waivers for community planning and development grantees and public housing authorities.
On February 18, HUD announced disaster assistance for certain areas in Kansas impacted by severe storms and straight-line winds. The disaster assistance supplements state and local recovery efforts in specific counties, and provides foreclosure relief and other assistance to affected homeowners following President Biden’s major disaster declaration on February 17. According to the announcement, HUD is providing an automatic 90-day moratorium on foreclosures of FHA-insured home mortgages for covered properties and is making FHA insurance available to victims whose homes were destroyed or severely damaged, such that “reconstruction or replacement is necessary.” HUD’s Section 203(k) loan program allows individuals who have lost homes to finance the purchase of a house or refinance an existing house along with the costs of repair through a single mortgage. The program also allows homeowners with damaged property to finance the rehabilitation of existing single-family homes. Furthermore, HUD is allowing applications for administrative flexibility and waivers for community planning and development grantees and public housing authorities.
DOJ says Fair Housing Act covers appraisal discrimination
On February 14, the DOJ filed a statement of interest in a lawsuit alleging defendants violated the Fair Housing Act (FHA or the Act) by discriminating on the basis of race in connection to a residential home appraisal. The plaintiffs, a Black couple, sought to refinance their home mortgage, and received an appraisal from the defendants valued at $995,000. However, a few weeks later a second appraiser valued their home at $1,482,500. The plaintiffs alleged that their race factored into the defendants’ low valuation, which violated federal and state law, including the FHA. The defendants moved to dismiss for failure to state a claim, arguing that the FHA does not apply to residential appraisers, and that the plaintiffs failed to allege facts that make out a prima facie case at this stage of litigation.
In its statement of interest, the DOJ noted that both the agency and HUD share enforcement authority under the FHA, including addressing appraisal discrimination. The DOJ also highlighted Executive Order 13985, which directed federal agencies “to address ‘[o]ngoing legacies of residential segregation and discrimination’–including ‘a persistent undervaluation of properties owned by families of color,’” (issued in 2021 and covered by InfoBytes here), and stated that President Biden also established an interagency task force to, among other things, “‘root out discrimination in the appraisal and homebuying process.’” To illustrate that the FHA applies to residential appraisals and appraisers, the DOJ pointed to the FHA’s text and to caselaw to demonstrate that the statute applies to residential mortgages. “[B]y its plain terms, the Act directly prohibits discrimination by ‘any person or other entity’ engaged in the “apprais[al] of residential real property,” the DOJ stated, adding that the appraisal exemption under Section 3605(c) clarifies that while appraisers may consider relevant and nondiscriminatory factors, they may not discriminate on the basis of protected classes. The DOJ also disagreed with the defendants’ position that under Section 3603 the FHA is not applicable to the subject property, stating that the section referenced by the defendants was only effective until 1968 and that henceforth, “all dwellings are covered by the FHA unless specifically exempted.” Additionally, the DOJ cited caselaw, which “found that proper defendants for appraisal-related discrimination may include not only appraisers, but their employers and the lenders who relied on their valuations.” With respect to the defendants’ prima facie argument, the DOJ contended, among other things, that the FHA “simply requires that Plaintiffs allege a plausible entitlement to relief as a result of Defendants’ ‘discriminatory housing practices.’”
4th Circuit affirms district court’s decision in lone class member's appeal
On February 10, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s approval of a $3 million class action settlement between a class of consumers (plaintiffs) and a national mortgage lender (defendant), resolving allegations arising from a foreclosure suit. In 2014, the lead plaintiffs alleged that the defendants violated federal and Maryland state law by failing to; (i) timely acknowledge receipt of class members’ loss mitigation applications; (ii) respond to the applications; and (iii) obtain proper documentation. After the case was litigated for six years, a settlement was reached that required the defendant to pay $3 million towards a relief fund. The district court approved the settlement and class counsel’s request for $1.3 million in attorneys’ fees and costs, but an absent class member objected to the settlement, arguing that “the class notice was insufficient; the settlement was unfair, unreasonable, and inadequate; the release was unconstitutionally overbroad; and the attorneys’ fee award was improper.” A magistrate judge overruled the plaintiff’s objections, finding that “both the distribution and content of the notice were sufficient because over 97% of the nearly 350,000 class members received notice,” and that “class members ‘had information to make the necessary decisions and . . . the ability to even get more information if they so desired.’”
On the appeal, the 4th Circuit rejected the class member’s argument that the magistrate judge lacked jurisdiction to approve the settlement where she had not consented to have the magistrate hear the case. The 4th Circuit noted that only “parties” are required to consent to have a magistrate hear a case and held that absent class members are not “parties,” noting that “every other circuit to address the issue has concluded that absent class members aren’t parties.” The appellate court also upheld the adequacy of the class notice, and held that the magistrate judge did not abuse his discretion in finding that the settlement agreement was fair, reasonable, and adequate.
District Court grants summary judgment in discriminatory lending suit
On February 10, the U.S. District Court for the Northern District of Illinois granted summary judgment in favor of a national bank, its subsidiary, and a lending corporation (collectively, “defendants”) with respect to discriminatory lending allegations brought by the County of Cook in Illinois (County). The County alleged that the defendants “identified and targeted minority borrowers ‘using advanced data mining techniques and predictive analysis methodologies,’” to make short-term profits from African American, Latino, and other borrowers protected by the Fair Housing Act through a purported “equity stripping scheme,” as well as by foreclosing disproportionately on their homes. The alleged illegal practices included, among other things, marketing loan products to consumers who were not qualified for them, offering incentives to employees to increase loan volume among borrowers with lower credit scores, and making high-risk loans. However, the court found that “even if a jury were persuaded that [the defendants] engaged in one or more of these practices at some point between 2004 and 2012, nothing in the county’s submissions offers a basis for the jury to leap from such a finding to the conclusion that defendants carried out an integrated equity stripping scheme targeting minority borrowers.” With respect to the County’s claim that defendants used “data mining” to identify and target minority populations for the purpose of marketing its home loans, the court found that “[I]f there is any authority for the proposition that soliciting business from minority prospects, or marketing in neighborhoods with a high concentration of minority residents, amounts to intentional discrimination in violation of the FHA, the county has not cited it.” The court also ruled that “[b]ecause the [County] acknowledges that its ledger (including the appropriations and expenditures of the three offices it claims had additional costs) was not affected by the alleged discrimination, compensatory damages are unavailable.”
District Court says NY champerty statute bars RMBS suit
On February 8, the U.S. District Court for the Southern District of New York issued an opinion granting in part and denying in part defendants’ motion for summary judgment and denying plaintiffs’ motions for partial summary judgment in parallel actions concerning pre-2008 residential mortgage-back securities (RMBS) trusts. In both cases, plaintiffs—RMBS certificateholders—filed suit alleging breaches of contractual, fiduciary, statutory, and common law duties with respect to certificates issued by RMBS trusts for which two of the defendants’ units served as trustee. Both plaintiffs alleged that the defendants failed to follow through on obligations to monitor the pre-2008 RMBS trusts that they administered. However, the court partially ruled in favor of the defendants, concluding that one set of plaintiffs could not avoid their loss in an RMBS trustee case brought against a different national bank, in which the court deemed the plaintiffs lacked a valid legal right to sue. In that matter, the U.S. Court of Appeals for the Second Circuit issued an opinion last October, agreeing with a different New York judge that “found the assignments champertous under New York law, rendering them invalid and leaving Plaintiffs without standing.” According to the 2nd Circuit, district court findings showed it was clear that the assignments were champertous “as they were made ‘with the intent and for the primary purpose of bringing a lawsuit.’”
The district court noted that the assignments of all the claims in the current matter were essentially identical to the issue already decided by the 2nd Circuit, and saw sufficient overlap to find the plaintiffs’ vehicles “collaterally estopped” from relitigating the issues of prudential standing and champerty. “The issues decided by the court of appeals relating to champerty and prudential standing are dispositive of the present action,” the court wrote. “Without prudential standing, the [] plaintiffs cannot assert claims arising out of the certificates and the entire [] action must be dismissed.” With respect to the other set of plaintiffs, while the court allowed certain claims to stand, it declined to grant any portion of the joint partial summary judgment related to the defendants’ alleged responsibilities as trustee, ruling that plaintiffs must prove those claims at trial.
FHFA releases AI/ML risk management guidance for GSEs
On February 10, FHFA released Advisory Bulletin (AB) 2022-02 to Fannie Mae and Freddie Mac (GSEs) on managing risks related to the use of artificial intelligence and machine learning (AI/ML). Recognizing that while the use of AI/ML has rapidly grown among financial institutions to support a wide range of functions, including customer engagement, risk analysis, credit decision-making, fraud detection, and information security, FHFA warned that AI/ML may also expose a financial institution to heightened compliance, financial, operational, and model risk. In releasing AB 2022-02 (the first publicly released guidance by a U.S. financial regulator that specifically focuses on AI/ML risk management), FHFA advised that the GSEs should adopt a risk-based, flexible approach to AI/ML risk management that should also be able “to accommodate changes in the adoption, development, implementation, and use of AI/ML.” Diversity and inclusion (D&I) should also factor into the GSEs’ AI/ML processes, stated a letter released the same day from FHFA’s Office of Minority and Women Inclusion, which outlined its expectations for the GSEs “to embed D&I considerations throughout all uses of AI/ML” and “address explicit and implicit biases to ensure equity in AI/ML recommendations.” The letter also emphasized the distinction between D&I and fairness and equity, explaining that D&I “requires additional deliberation because it goes beyond the equity considerations of the impact of the use of AI/ML and requires an assessment of the tools, mechanisms, and applications that may be used in the development of the systems and processes that incorporate AI/ML.”
Additionally, AB 2022-02 outlined four areas of heightened risk in the use of AI/ML: (i) model risk related to bias that may lead to discriminatory or unfair outcomes (includes “black box risk” where a “lack of interpretability, explainability, and transparency” may exist); (ii) data risk, including concerns related to the accuracy and quality of datasets, bias in data selection, security of data from manipulation, and unfamiliar data sources; (iii) operational risks related to information security and IT infrastructure, among other things; and (iv) regulatory and compliance risks concerning compliance with consumer protection, fair lending, and privacy laws. FHFA provided several key control considerations and encouraged the GSEs to strengthen their existing risk management frameworks where heightened risks are present due to the use of AI/ML.
States settle with company on fraudulent MLO certifications
On February 10, the Conference of State Bank Supervisors announced that the California Department of Financial Protection and Innovation, Maryland’s Office of the Commissioner of Financial Regulation, and the Oregon Division of Financial Regulation have reached a settlement agreement with the owner of a California-based company for providing false certificates claiming that mortgage loan originators (MLOs) took mandatory eight-hour continuing education courses as required for licensure under state and federal law. The three state financial regulators brought separate enforcement actions alleging violations of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) against the individual and his family (collectively, “respondents”) for their role in the “multi-state fraud scheme that involved hundreds of mortgage loan originators.” According to the announcement, the respondents have “agreed to fully cooperate and provide testimony against implicated mortgage loan originators,” and have “agreed to a lifetime restriction from direct and indirect involvement in businesses that provide mortgage lending-related education.” In addition to a $75,000 monetary penalty (which will be divided between the three states), the respondents have agreed to a non-compliance penalty of $15 million should they fail to fully comply with the terms of the settlement agreement.
The action follows a multistate $1.2 million settlement reached last month with 441 MLOs. As previously covered by InfoBytes, the enforcement action included the participation of 44 state agencies from 42 states, and required the settling MLOs to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license.