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Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action
On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”
Fannie Mae Updates Hardest Hit Fund Requirements
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2013-14 to notify servicers that they must accept modification assistance received from a state housing finance agency for a mortgage loan in connection with any Fannie Mae modification, without regard to whether principal forbearance is required. In doing so, servicers must also comply with certain delinquency management and default prevention requirements outlined in Announcement SVC-2011-18. Servicers are required to implement the policy changes no later than October 1, 2013, and are encouraged to do so immediately.
Freddie Mac Changes Low Activity Fee to No Activity Fee
On June 25, Freddie Mac announced in Bulletin 2013-12 that, based on industry feedback, it is changing its recently-announced “low activity fee” to a “no activity fee.” In May, Freddie Mac announced that, effective January 1, 2014, a seller/servicer would be charged a $7,500 fee if the seller/servicer did not either (i) sell mortgages to Freddie Mac with an aggregate unpaid principal balance greater than $5 million during the immediately preceding calendar year, or (ii) service, or act as a servicing agent for, mortgages for Freddie Mac with an aggregate unpaid principal balance of at least $25 million as of December 31 of the immediately preceding calendar year. Under the revised policy, seller/servicers can avoid the fee if they (i) sell to Freddie Mac during the immediately preceding 36 months, or (ii) service, or act as a servicing agent for, a mortgage portfolio for Freddie Mac as of December 31 of the immediately preceding calendar year. In addition, new seller/servicers are exempt from the fee until they have been approved by Freddie Mac for three years.
Illinois Extends Foreclosure Protections Sunset Provision
On June 20, Illinois enacted HB 99, which extends for three years the protections afforded borrowers in the Illinois Homeowner Protection Act. The Act requires mortgagees to notify homeowners who are at least 30 days late on their payments that they have 30 days to seek housing counseling. A homeowner who seeks counsel gets an additional 30 days to work out a payment plan or refinance their loan, meaning that such homeowners have a “grace period” of up to 90 days. Those protections were set to expire on July 1, 2013, but now will remain in effect until July 1, 2016. The bill took effect immediately.
Nevada Alters Foreclosure Mediation Program
Recently, Nevada enacted AB 273, which altered the state’s foreclosure mediation program to require a trustee under a deed of trust to send certain information concerning the foreclosure mediation program to a borrower concurrently with, but separately from, the copy of the notice of default and election to sell that also must be sent to the borrower. The bill also requires that a borrower facing foreclosure be automatically enrolled in the foreclosure mediation program unless the borrower elects to waive mediation or fails to pay his or her share of the program fee. The bill also adds, among other things, certain procedural requirements for mediators and trustees. These changes become effective on October 1, 2013.
Special Alert: CFPB Proposes Additional Changes to Mortgage Rules
On June 24, 2013, the Consumer Financial Protection Bureau ("CFPB") issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.
Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.
Comments on the proposed amendments are due July 22, 2013.
Key Proposed Amendments
Mortgage Servicing
Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of "first notice or filing required by applicable law" and prohibit servicers from filing any document that "would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law" during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.
This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the "first notice or filing required by applicable law." Similarly, servicers in California and other states with pending or effective "Homeowners Bill of Rights" statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes' requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB's minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.
Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower's loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.
The proposed amendments would:
- Allow servicers who initially describe an application as complete based on the five-day review to request additional information in some circumstances;
- Allow servicers to select a "reasonable date" by which an incomplete application should be completed; and
- Allow servicers to offer a borrower the option of a short-term forbearance program (i.e., forbearance of payments for up to two months) even if the application is not complete, subject to certain requirements.
Notice of Denial. The proposed amendments would clarify that, when notifying a borrower that he or she has been denied for a loss mitigation option, the servicer need only disclose the actual reasons for the denial and not other potential reasons.
Loan Originator Compensation
Effective Date. The CFPB proposed to modify the effective date for portions of this rule. Specifically, the proposed rule would: (1) move the effective date for most provisions forward from January 10, 2014 to January 1, 2014; and (2) generally apply the revised restrictions on compensation to transactions consummated and for which the employer paid compensation on or after January 1, 2014. These revisions are intended to permit employers of loan originators to make changes to their compensation, registration, licensing, and training practices at the start of the calendar year.
Definition of Loan Originator. The proposed amendments would provide a number of clarifications about who is and is not covered by the rule. In particular, the CFPB would clarify that employees of a creditor or loan originator in certain administrative or clerical roles (such as tellers or greeters) do not become loan originators solely by providing an application form or discussing general credit terms with consumers (e.g., "We offer rates as low as 3% to qualified consumers."). Instead, to be a loan originator, the employee would need to discuss particular credit terms that are or may be available from the creditor to that consumer selected based on the consumer's financial characteristics.
Other Rules
Points and Fees for Qualified Mortgages and High-Cost Mortgages. The proposed amendments would clarify the treatment of: (1) charges paid by parties other than the consumer - in particular, the amendments make clear that seller's points and charges paid by the creditor are excluded from the finance charge component of points and fees; and (2) loan originator compensation to retailers of manufactured homes and their employees.
Rural and Underserved Areas. The proposed amendments would revise the exceptions available to small creditors (creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year) operating in predominantly "rural" or "underserved" areas while, as announced in May, the CFPB re-examines the underlying definitions of "rural" or "underserved" over the next two years. Specifically, the CFPB would allow all small creditors, regardless of whether they operate predominantly in "rural" or "underserved" areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for balloon qualified mortgages. In addition, the CFPB would allow more small creditors to take advantage of the exemption from the requirement to establish escrow accounts for higher-priced mortgage loans.
Prohibition on Financing Credit Insurance. For purposes of the prohibition on financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, the proposed amendments would clarify what constitutes financing of premiums by a creditor and, for purposes of the statutory exclusion for certain credit insurance premium calculation and payment arrangements, when credit insurance premiums are considered to be calculated and paid on a monthly basis.
National Mortgage Settlement Monitor Identifies Few Servicing Violations
On June 19, the National Mortgage Settlement Monitor, Joseph A. Smith, Jr., released summaries of the mortgage servicing compliance reports he submitted to U.S. District Court Judge Rosemary Collyer — the judge presiding over the consent judgments that constitute the National Mortgage Settlement. The summaries indicate that the five servicers subject to the national agreement were largely compliant with the agreement’s mortgage servicing requirements and currently are taking actions to address certain potential violations. Still, the Monitor stated that consumer and state attorney general complaints indicated that some issues may remain with regard to the loan modification process, single points of contact, and billing and statement inaccuracies, and that he is negotiating more stringent testing with the banks to address these issues.
Fannie Mae Updates Short Sale Requirements, Issues Servicing Clarifications and Reminders
On June 19, Fannie Mae issued Servicing Guide Announcement SVC-2013-13, which describes policy changes related to its standard short sale requirements, including (i) the multiple listing service requirements, (ii) credit report seasoning, and (iii) streamlined documentation requirements for transition from standard short sale to standard deed-in-lieu of foreclosure. With regard to standard deeds-in-lieu of foreclosure, the announcement addresses (i) property inspection requirements, (ii) REOgram® and subordinate lien release submission requirements, and (iii) title insurance requirements. In a Servicing Notice issued the same day, Fannie Mae clarified its policies related to (i) “full file” reporting to credit repositories, (ii) certain income documentation requirements, and (iii) liquidation reporting requirements for standard short sales and deeds-in-lieu of foreclosure.
Connecticut Expands Foreclosure Mediation Program
On June 18, Connecticut enacted HB 6355, which expands the state’s existing foreclosure mediation program and adds new mortgagee requirements. Specifically, the bill extends the foreclosure mediation program to (i) cover the disposition of property through means other than foreclosure, including short sales and deeds-in-lieu of foreclosure, and (ii) foreclosure actions with return dates of July 1, 2008 through June 30, 2009. The bill also, among other things, (i) establishes a pre-mediation process, (ii) requires mortgagees to provide to a borrower a complete financial package in connection with a request for a foreclosure alternative and provide to a mediator and the borrower an account history and related information after receiving notification that the case has been assigned to mediation, and (iii) establishes expedited foreclosure procedures for vacant and abandoned properties. The bill becomes effective on July 15, 2013.
Massachusetts Finalizes Foreclosure Regulations
Last week, the Massachusetts Division of Banks adopted revised foreclosure and mortgage modification regulations. The amendments implement a 2012 law that makes it harder to foreclose in that state, including by creating a pre-foreclosure modification notice requirement for creditors. The amended regulations (i) establish the processes for a borrower and creditor with regard to the borrower’s right to request a loan modification, (ii) establish the actions that constitute a borrower’s good faith response to a creditor’s notice of the right to request a loan modification, (iii) define good faith efforts by creditors to avoid foreclosure, and (iv) establish safe harbors for creditors that comply with the loan modification process. The new regulations take effect on June 21, 2013 and must be implemented by September 18, 2013.