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California Appeals Court Enjoins Nonjudicial Foreclosure for Lenders' Failure to Comply with HUD Servicing Requirements
On December 13, the California Court of Appeal for the First Appellate District held that the HUD servicing requirements were incorporated by reference into the borrowers’ FHA deed of trust and served as conditions precedent to the acceleration of the debt or to foreclosure. Pfeifer v. Countrywide Home Loans, No. A133071, 2012 WL 6216039 (Cal. Ct. App. Dec. 13, 2012). In this case, after the lender declared the borrowers’ FHA-insured mortgage in default and commenced nonjudicial foreclosure proceedings, the borrowers filed suit against the lender seeking general and punitive damages, as well as to enjoin the foreclosure proceedings and to obtain declaratory relief, for failure prior to provide the 30-day advance debt validation notice required by the Fair Debt Collection Practices Act (FDCPA) or to conduct a face-to-face interview required by HUD’s servicing regulations prior to commencing foreclosure proceedings. On appeal, the court affirmed the lower court’s ruling that the borrowers did not have a claim for damages against the collection firm under the FDCPA, because that firm was not a debt collector under the statute. However, the court reversed the trial court’s judgment as to the borrowers’ request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. The court agreed with the borrowers that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to commencing a valid nonjudicial foreclosure. The court also held that tender was not required, because the borrowers were seeking to enjoin a pending foreclosure sale based on the lenders’ failure to comply with the HUD servicing requirements. Concurring with those courts that distinguish an offensive action from a defensive action, the court explained that the borrowers had no private right of action for failure to comply with the HUD regulations and could not seek damages based on their wrongful foreclosure action, but held that the HUD regulations may be used as an affirmative defense to a judicial foreclosure action instituted by the creditor.
HUD Revises FHA Recertification Fee Calculation, Issues 2013 Loan Limits
On December 11, Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2012-27, which changes the way the Federal Housing Administration (FHA) will calculate the recertification fee for its approved lenders. Effective immediately, FHA will calculate recertification fees based on the number of FHA-approved branch offices as of the first business day of the lender’s annual reporting period. Lenders that wish to terminate branches and thereby not pay a recertification fee for the next annual period must do so on or before the last business day of the annual reporting period. On December 6, Mortgagee Letter 12-26 announced the FHA’s single-family loan limits for 2013. The FHA national loan limit floor remains at 65 percent of the national conforming limit (which holds constant at $417,000 for a one-unit property). The letter also lists the maximum FHA loan limits by property size for areas designated as high-cost. The letter also identifies certain exceptions to the limits, and notes that the FHA maximum claim amount for reverse mortgages remains at the statutory limit of $625,500.
HUD and Banking Regulators Offer Borrower and Institution Relief Following Hurricane Sandy
Recently, HUD has made a series of announcements regarding housing relief for individuals displaced by Hurricane Sandy. For example, on October 30 HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA-insured mortgages. Similar announcements have followed for victims in New York, Connecticut, and Rhode Island. Also on October 30, the Federal Reserve Board, the OCC, and the FDIC issued a statement on supervisory practices impacted by the hurricane. For example, the regulators stated that “prudent efforts to adjust or alter terms on existing loans in affected areas should not be subject to examiner criticism.”
HUD Again Delays Changes to Title Approval at Conveyance
On October 31, HUD issued Mortgagee Letter 2012-21, which delays until January 1, 2013, implementation of changes to title approval at conveyance. The changes, originally set to take effect August 1, 2012, were issued in June 2012 as Mortgagee Letter 2012-11. Under the original letter, mortgagees must pay in full prior to conveyance all taxes, homeowners’ association fees, and water, sewer or other assessments. The initial letter also detailed related documentation and certification requirements and outlined FHA’s rights to reconvey a property under certain circumstances.
DOJ Sues Mortgage Lender Over Alleged Fraudulent Certification of FHA Loans
On October 9, the U.S. Attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development (HUD) announced a civil fraud suit against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. The suit, filed in coordination with the Financial Fraud Enforcement Task Force (FFETF), claims that from May 2001 through October 2005, the lender regularly and knowingly engaged in reckless origination and underwriting of FHA loans, while certifying to HUD that those loans met the FHA Direct Endorsement Lender Program requirements and were therefore eligible for FHA insurance. Further, the suit alleges that the lender failed to conduct adequate quality control, failed to comply with HUD self-reporting requirements, and later attempted to cover up its reporting failures. The government claims that it was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the False Claims Act, as well as Financial Institutions Reform, Recovery, and Enforcement Act penalties. The government also seeks compensatory damages under the common law theories of breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake of fact. This suit follows the settlements earlier this year of several other cases involving similar claims. One other similar suit is currently pending.
DOJ Announces Results of Year-Long Mortgage Fraud Initiative
On October 9, the DOJ, HUD, the FTC, and the FBI announced the results of the Distressed Homeowner Initiative, a year-long national effort to coordinate federal and state investigation and prosecution of alleged mortgage fraudsters. The Initiative was carried out under the Mortgage Fraud Working Group of the FFETF. Between October 1, 2011 and September 30, 2012, the unit’s work resulted in 285 criminal indictments and informations against 530 defendants. The announcement described many of the Working Group’s investigative tactics, including undercover operations, and explained the reasons behind the Working Group’s focus on Southern California. The Working Group expects more enforcement actions to result from ongoing investigations, and the FFETF has several other active working groups, including the Residential Mortgage-Backed Securities Working Group that recently sued a major bank over alleged fraudulent misrepresentations and omissions in the sale of RMBS to investors.
HUD Plans New Reverse Mortgage Platform
On September 11, HUD announced the launch of a new platform to manage its home equity conversion mortgage portfolio. Mortgagee Letter 2012-17 advises mortgagees of the new system and related claim enhancements, and directs mortgagees to additional information about the new online platform.
House Passes FHA Solvency Legislation
On September 11, the U.S. House of Representatives voted overwhelmingly to pass legislation that seeks to bolster and protect FHA capital reserves. The bill, H.R. 4264, would set a minimum 0.55% annual premium and would increase the maximum annual premium from 1.55% to 2.05% for all FHA-insured single-family mortgage loans. The bill also would authorize the Secretary of Housing and Urban Development to require lenders to indemnify the FHA for claims paid on loan, if the lender knew or should have known that the loan included serious or material violations of FHA requirements under the direct endorsement program, regardless of whether the violations caused the loss. In cases of fraud or misrepresentation in connection with the origination or underwriting of a loan on which the FHA suffers a loss, the Secretary would be required to seek indemnification from the lender. As a condition of obtaining FHA lending approval, lenders would be required to notify HUD if the lender terminates purchases of FHA mortgages or servicing rights from another FHA lender based on evidence of fraud or material misrepresentation. Finally, under the bill, lenders could have their approval to originate and underwrite FHA mortgages terminated if their delinquency rates are comparatively high.
HUD Amends Social Security Income Documentation Requirements for FHA-Approved Mortgages
On August 17, HUD issued Mortgagee Letter 12-15, which clarifies the documentation requirements for the types of Social Security Administration (SSA) income used to assess a borrower’s income qualification. According to the Letter, all income from the SSA can be used to qualify a borrower, provided the income is verified using one of several listed documents. A lender also must document the continuance of SSA income, and if such income is due to expire within three years of the mortgage application date, it can be considered only as a compensating factor. A lender should assume continuance if the documentation does not provide a defined expiration date, and the lender should not request additional documentation.
HUD Delays Changes to Title Approval at Conveyance
On July 31, HUD issued Mortgagee Letter 2012-14, which delays until November 1, 2012 implementation of recent changes to title approval at conveyance. The changes, originally set to take effect August 1, 2012, were issued in June as Mortgagee Letter 2012-11. Pursuant to that letter, mortgagees must pay in full prior to conveyance all taxes, homeowners’ association fees, and water, sewer or other assessments. The initial letter also detailed related documentation and certification requirements and outlined FHA’s rights to reconvey a property under certain circumstances.