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Financial Services Law Insights and Observations


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  • Federal Government Obtains Settlement of False Claims Act Claims Against CitiMortgage


    On February 15, HUD and the U.S. Attorney for the Southern District of New York announced that CitiMortgage, Inc. had agreed to settle the government’s claims that CitiMortgage violated the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act by failing to comply with certain requirements of the Fair Housing Administration’s Direct Endorsement Lender Program. According to the press release, the defendant submitted certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not, causing HUD to unnecessarily incur losses when those loans defaulted. As part of the settlement, which was approved by the United States District Court for the Southern District of New York, CitiMortgage agreed to pay $158.3 million in damages to the United States.

    Mortgage Origination HUD False Claims Act / FIRREA

  • FTC Obtains Orders Banning Alleged Mortgage Relief Scammers


    On February 14, the FTC announced consent orders banning U.S. Mortgage Funding, Inc., and other related companies and individuals from conducting any mortgage relief business. The FTC had charged the defendants with violating the FTC Act and the FTC’s Telemarketing Sales Rule by using direct mail, the Internet, and telemarketing to target borrowers and falsely promise successful mortgage modification programs in exchange for an up-front fee.  In addition to the bans, the orders, which were approved by the United States District Court for the Southern District of Florida, require the defendants to pay monetary judgments and forfeit certain property.


  • Special Alert: Report on NMLS Annual User Conference and Training


    The Nationwide Mortgage Licensing System and Registry (NMLS) held its fourth annual NMLS User Conference and Training (the Conference) in Scottsdale, Arizona from February 6-9, 2012. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry. This special report includes a summary of key topics addressed at the meeting as well as announcements regarding important state licensing initiatives, including:  (i) enhancements to the NMLS system to expand its use for licensing of non-mortgage financial services companies, (ii) issuance of SAFE Act examination guidelines, and (iii) the announcement of efforts to develop a uniform mortgage loan originator state test.

    The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Deborah Bortner, Director of the Non-Depository Division of the Washington Department of Financial Institutions, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on "leveling the playing field" between depositories and non-depositories by suggesting various means to allow a more efficient flow of mortgage loan originators (MLOs) from a federally-registered MLO status to a state-licensed MLO status. Suggestions included "transitional licensing", which would allow a federally registered MLO that moves to a state-licensed entity to continue operating for a period of 120 days, during which the individual would complete education, testing and other requirements in order to secure licenses within the transitional approval. Another suggestion was to allow federally registered MLOs to complete state education, examination, and other approval requirements prior to moving from a federal registrant to a state licensee. During a later panel, the Consumer Financial Protection Bureau (CFPB) indicated that there are no immediate plans to amend the requirements applicable to federal registrants.

    Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, are available on the NMLS website.  A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.

    The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS. Specifically, various sessions covered the following issues:

    • The CFPB’s supervision of the mortgage industry and the direction that the CFPB is taking with respect to depository and non-depository financial services, including a discussion with CFPB staff regarding issues of interpretation and implementation of state licensing, NMLS and the rules implementing the SAFE Act. Of particular interest, the CFPB indicated that it has started planning its first set of exams of non-depository financial institutions and that the CFPB will select institutions for examination based on size, volume, type of product or service offered, extent of state oversight, patterns of complaints, and other factors.
    • Industry views on the regulation of and the future of the mortgage industry.
    • Updates regarding the Mortgage Call Report, including a review of preliminary data, how it is used by regulators, and a review of additional changes and updates to assist with the compliance process.
    • Review of the NMLS federal registration process and a discussion on how to improve the process.
    • NMLS testing and education discussion, with a focus on understanding the desire from industry for increasing the available continuing education topics in order to provide a better learning experience for MLOs.
    • NMLS federal examination and third party compliance management, including a discussion of best practices that institutions can consider to efficiently and effectively implement policies and procedures to ensure third parties are properly licensed and/or registered.
    • Credit and criminal background checks for MLOs, control persons, and branch managers, which included discussions of expanding the criminal background check process from MLOs to also include branch managers and control persons.
    • Potential modifications to the NMLS to accommodate state pre-notification filings for changes in control, changes in branch manager, or other changes in corporate structure or operations that require prior notice.
    • Federal and state rules implementation, including ability to repay, loan officer compensation and TILA/RESPA disclosure conflicts.
    • Discussion of important FHA rule changes for 2011 and upcoming changes in 2012.
    • Surety bonds necessary to comply with state and federal law, including underwriting considerations, risk mitigation, and claim resolution.

    In addition to the above general sessions, the Conference covered several major changes and new initiatives announced by the Conference of State Bank Supervisors (CSBS), including:

    • System Enhancements and Expansion of NMLS to Cover Additional Financial Services Companies. The CSBS announced plansto expand the use of the NMLS to include nonbank, non-mortgage financial service providers, including consumer lenders, money services businesses, and debt collectors. Following this expansion, these other nonbank firms will be obligated to alter their compliance programs in order to apply for, amend, and renew state licenses using the NMLS. Entities that previously obtained and maintained relevant licenses via hard-copy applications and filings will be required to transition onto the NMLS, a process which could prove difficult as licensee's struggle to learn the new system and which may allow the state agency an opportunity to vet anew its licensees. While the electronic application and related processes will be centralized and uniform, entities that use the NMLS to obtain and maintain their licenses still will be subject to various unique state-specific requirements, which must be dealt with outside of the NMLS. For many participants in the mortgage industry, the mandated use of the NMLS has brought with it heightened compliance costs and increased reporting requirements, particularly as states increased disclosure and other application requirements to become more consistent with other states.  Non-mortgage state licensed financial institutions should be mindful of this experience and be prepared to review their licensing compliance procedures and resources following transition to the NMLS.  At a minimum, licensees should carefully monitor developments regarding licensing requirements during and after the transition to the NMLS.Through expansion of the system state bank regulators expect to see improved efficiency, and regulated entities can expect enhanced supervision and increased public access to license, registration, and supervisory information. The expansion is scheduled to begin in April when at least 12 states will begin transitioning their exiting licensing and registration systems to the NMLS.Further, the April expansion and update will include other changes and enhancements in an effort to improve the system overall:

      • New Workflow – the changes and enhancements to the system require a new "license management workflow" (i.e., online navigation and information contained in the uniform plans) to support the new Business Activities section. The new workflow will (1) introduce a new navigational landing page in the Company (MU1), (2) combine the selection of licenses and entry of transition numbers into one step, and (3) introduce new navigation items onto the License/Registrations page.
      • Amended Forms – the uniform mortgage forms (i.e., MU1 and MU3) will be amended to "Company Filing" and "Branch Filing", respectively, in anticipation of the expansion of the system to cover non-mortgage related industries.
      • Business Activities – expands this section of the Form MU1 to allow users to identify a broader range of business activities conducted by the user (e.g., loan modifications, seller of money orders) based on definitions developed by the states.
      • Approvals and Designations – introduces new approval and designation types, and allows users to add approval or identification numbers.
      • Disclosure Explanation – in addition to updated company, branch and individual disclosure questions, a new disclosure explanation feature will allow users to add explanations to each disclosure question that has a “yes” answer in conjunction with submitting a filing.
      • Document Upload – users will be able to upload specific materials into the NMLS to be shared by state regulators, thereby eliminating the need to send certain materials via hard copy outside the system. The type of materials that may be uploaded may include business plans, certificates of good standing, fidelity bonds, errors and omissions insurance, and other materials generally provided in the application and renewal process.
      • Criminal Background Check for a Control/Qualifying Individual – all state licensed individuals will be required to complete a criminal background check via the NMLS.

    Copies of the updated forms and "Business Activities Description" are available on the NMLS under News & Events.

    Upon implementation of the new forms in April, existing NMLS users should be aware that in order to submit any new applications, address updates, addition of officers, or other general maintenance items, the company will be required to complete all new Company Filing fields, and the company's control persons and qualifying individuals must complete additional questions and information requests.

    • SAFE Act Examination Guidelines. The Multi-State Mortgage Committee (MMC), a ten-state representative body created by CSBS and AARMR, issued SAFE Act Examination Guidelines (SEGs) for use by state non-depository mortgage regulators.  The SEGs are not required guidelines for state agencies, but utilization of SEGs is intended to allow state agencies to determine compliance with the SAFE Act and provides consistent and uniform guidelines for use by institution in-house compliance and audit departments conducting SAFE Act and state compliance reviews. The SEGs are presented in a question and answer format and are “modular,” such that state mortgage regulators may easily use part or all of the SEGs as they see fit.

    • Uniform MLO State Test. The CSBS announced that efforts are underway to develop content for a uniform MLO state test. Currently, an MLO is required to take the state component of the SAFE Act mortgage loan originator test for each state in which he or she intends to be licensed. With the introduction of a uniform MLO state test, an MLO will meet the testing requirement for multiple states by passing a single test that includes content representative of all of the states.An ad hoc committee composed of state regulators has been charged with researching the feasibility of developing a uniform MLO state test.  In coordination with industry subject matter experts and test consultants, the committee has completed its initial feasibility studies and test development is now underway. Later this year, the committee plans to present a uniform test proposal to state regulators.

    A message that pervaded the Conference was that with the completion of several multi-year NMLS initiatives responding to the requirements of the SAFE Act (e.g., the introduction of the NMLS Mortgage Call Report), NMLS is turning its attention to implementing changes to and expanding the NMLS.  While the changes are ultimately intended to streamline the NMLS process, current NMLS users should prepare for additional oversight and regulation, and licensees transitioning onto the system should prepare for heightened compliance costs and increased reporting requirements.

    For more information about NMLS, visit the NMLS Resource Center, About NMLS.

    CFPB Mortgage Licensing Nonbank Supervision Mortgage Origination

  • UPDATE: Petitioners Withdraw Major Fair Housing Case Pending Before U.S. Supreme Court


    On February 10, the parties in a major fair housing case under review by the U.S. Supreme Court requested that the Court dismiss the case. As reported previously by BuckleySandler, the City of St. Paul, Minnesota withdrew its petition in Magner v. Gallagher, No. 10-1032, due to concerns that "a victory could substantially undermine important civil rights enforcement throughout the nation." A Supreme Court decision in Magner likely would have definitively decided whether disparate impact claims are cognizable under the Fair Housing Act (FHA), and if they are, the applicable legal standards for such claims. Under the disparate impact theory of discrimination, a plaintiff can establish "discrimination" based solely on the results of a neutral policy, without having to show any intent to discriminate.  The result of the Supreme Court review would have had profound impact both in private litigation and government enforcement actions, and as such had drawn significant attention from civil rights groups, state attorneys general, and financial services trade groups. The withdrawal of Magner means that these important questions will remain open.

    In Magner, the City had asked the Supreme Court to consider whether the FHA permits disparate impact claims. Private landlords, seeking to limit the City's "aggressive" enforcement of its housing code, sued the City for violating the FHA. The landlords argue that the City's attempts to close housing that violates its housing code reduces the amount of affordable housing available to minority renters. The landlords claim that as a result, the City's enforcement efforts have a disparate impact on minority renters in violation of the FHA. Although the District Court ruled for the City, the Eighth Circuit reversed, holding that the landlords had stated a cognizable claim under the FHA. The City petitioned the Eighth Circuit for rehearing en banc, but the court denied the petition. As previously reported, the U.S. Supreme Court granted the City's petition for certiorari on November 7, 2011.  The parties and numerous amici had submitted briefs to the Court, and oral argument was scheduled for February 29.

    Magner was the Supreme Court's first opportunity to evaluate whether disparate impact claims can exist under the FHA since Smith v. City of Jackson, 544 U.S. 228 (2005). In City of Jackson, the Court held that disparate impact claims are grounded in Title VII's statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, the courts of appeals have offered almost no guidance as to whether the FHA permits disparate impact claims. Reviewing parallel language in the Equal Credit Opportunity Act in Garcia v. Johanns, 444 F.3d 625 (D.C. Cir. 2006), the D.C. Circuit stated in dicta that "[t]he Supreme Court has held that this ["effects"] language gives rise to a cause of action for disparate impact discrimination under Title VII and the ADEA.  ECOA contains no such language."

    The City issued a statement explaining its unusual decision to withdraw its petition at this late stage, explaining that if the City prevailed, the decision "would undercut important and necessary civil rights cases throughout the nation. The risk of such an unfortunate outcome is the primary reason the city has asked the Supreme Court to dismiss the petition." The City has stated that it will continue to pursue the case in federal district court in Minnesota.

    In a separate attempt to resolve through federal agency action the question of whether the FHA permits disparate impact claims, on November 15, 2011, the U.S. Department of Housing and Urban Development (HUD) issued a proposed rule interpreting the FHA as authorizing disparate impact claims, and proposing the applicable standards for such claims. HUD has yet to promulgate a final rule. The absence of a decision in Magner will focus substantial additional attention on HUD's rulemaking process and decisions, and in particular the standards and associated burdens of proof HUD asserts apply to disparate impact claims. Click here for BuckleySandler's previous reporting on the HUD proposed rule.

    U.S. Supreme Court Fair Housing

  • Petitioners Withdraw Major Fair Housing Case Pending Before U.S. Supreme Court


    On February 10, several media outlets reported that a major fair housing case under review by the U.S. Supreme Court had been dismissed by agreement of the parties. The case, Magner v. Gallagher, No. 10-1032, described previously in a BuckleySandler alert, poses the question of whether disparate impact claims are cognizable under the Fair Housing Act. The result of the Supreme Court review would have had profound impact both in private litigation and government enforcement actions, and as such had drawn significant attention from civil rights groups, state attorneys general, and financial services trade groups. The City of St. Paul, which raised the question on appeal, reportedly decided not to pursue the appeal out of concern that “a victory could substantially undermine important civil rights enforcement throughout the nation.” Instead, the City will now take its case to trial in the U.S. District Court for the District of Minnesota. For additional reports regarding these developments, please click here and here.

    U.S. Supreme Court Fair Housing

  • Idaho Supreme Court Holds Standing Does Not Need To Be Proven Prior To Nonjudicial Foreclosure


    On January 25, the Idaho Supreme Court held that a party is not required to prove it has standing before foreclosing nonjudicially on a deed of trust. Trotter v. Bank of New York Mellon, No. 38022, 2012 WL 206004 (Idaho Jan. 25, 2012). Prior to a scheduled trustee’s sale, the borrower filed a complaint alleging lack of standing to foreclose, and challenging MERS’ ability to assign the loan.  The district court granted the bank’s motion to dismiss, finding that the statutory requirements for nonjudicial foreclosures had been satisfied, and that MERS was the beneficiary under the deed of trust and had properly assigned its rights as beneficiary to the bank. The Idaho Supreme Court affirmed, noting that “the plain language of the statute makes it clear that the trustee may foreclose on a deed of trust if it complies with the requirements contained within the Act” and that unlike judicial foreclosures, “there is no statutory requirement for the trustee to prove standing before initiating a nonjudicial foreclosure on a deed of trust.”


  • South Carolina Bans Transfer Fee Covenants


    On February 1, South Carolina enacted legislation that deems any transfer fee covenant recorded after February 1, 2012, to be non-binding and non-enforceable. Generally, a transfer fee covenant is a deed provision that requires a current owner or successor in title to pay a fee to the owner who added the covenant to the property each time the property is transferred. Covenants recorded before February 1 remain valid and enforceable only if a Notice of Transfer Fee Covenant is filed by July 30, 2012 in each county in which the real property subject to the transfer fee covenant is located. The Notice must contain information such as (i) how the transfer fee covenant is calculated, (ii) actual dollar-cost examples for a home priced at $250,000, $500,000, and $750,000, (iii) how and if the transfer fee covenant expires, and (iv) instructions and contact information concerning the payment of the fee required by the transfer fee covenant.

  • Illinois Expands Housing Assistance Efforts


    On February 3, the Illinois Housing Development Authority (IHDA) published recently adopted Emergency Rules, effective January 23, 2012, to establish a new program through which the IHDA will finance or refinance mortgage loans to persons and families of low and moderate income who meet certain qualifications. The IHDA cited a “serious shortage of decent, safe and sanitary residential housing” in the state due to “recurring critical shortages of funds in private lending institutions” available to certain buyers. The new program is intended for non-first time homebuyers and supplements an existing similar program for first-time homebuyers. The emergency rules will expire after 150 days, or upon adoption of permanent rules. Illinois also announced two additional new housing efforts in early February. First, the Illinois Foreclosure Prevention Network, a multi-agency effort coordinated by the IHDA, will connect struggling homeowners with assistance and resources to prevent foreclosures. Second, the Illinois Building Blocks Program, also administered by the IHDA, will focus on six communities and provide (i) financing to rehabilitate vacant properties to prepare them for productive use and sale, (ii) assistance to homeowners to purchase homes in pilot communities, and (iii) support for existing homeowners in the communities to prevent additional foreclosures.


  • Federal and State Officials Announce Mortgage Servicing Settlement


    On February 9, U.S. Attorney General Eric Holder, HUD Secretary Shaun Donovan, Iowa Attorney General Tom Miller, and several other state and federal officials jointly announced an approximately $25 billion agreement in principle between the federal government, 49 state attorneys general and the five largest mortgage servicers to settle various mortgage servicing and foreclosure related issues. Oklahoma Attorney General E. Scott Pruitt later announced an "independent mortgage settlement" between Oklahoma and the five servicers. The national-level agreement - with Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and Ally Financial (the servicers) - was the culmination of several state and federal investigations and extended negotiations between the parties. The settlement's terms require a commitment of approximately $20 billion in financial relief for homeowners. In addition, the servicers will pay $5 billion in cash to the state and federal governments, including $1.5 billion to establish a Borrower Payment Fund that will provide payments to qualifying borrowers whose homes were sold or foreclosed on between January 1, 2008 and December 31, 2011. The $25 billion agreement includes more than $766.5 million in monetary sanctions assessed by the Federal Reserve Board. An additional $394 million of penalties from the Office of Comptroller of the Currency are held in abeyance provided four of the servicers make payments and take other actions under the settlement with a value equal to at least the penalty amounts assessed for each servicer by the OCC. In addition to the financial compensation offered in the settlement, the servicers will conduct future business under new servicing standards, which include (i) restrictions on the default management process known as "dual tracking", (ii) a requirement for the institutions to provide a single point of contact for borrowers, (iii) specific protections for military service members beyond those provided by the federal Servicemembers Civil Relief Act, (iv) obligations concerning disclosures and practices related to force-placed insurance, and (v) limitations on servicing fees. The standards also require the servicers to establish (i) updated foreclosure and bankruptcy documentation processes, (ii) enhanced servicer oversight of third party vendors, and (iii) adherence to a new set of loan modification timelines. The terms of the agreement will be filed as a consent judgment in the U.S. District Court for the District of Columbia. Their fulfillment, over the three-year term of the settlement, will be overseen by an independent monitor, North Carolina Commissioner of Banks Joseph A. Smith. In order to ensure timely dissemination of the settlement's terms to those who may be eligible for financial relief, the parties have established a "National Mortgage Settlement" web site, which provides "Servicing Standards Highlights" and outlines key aspects of the servicing settlement. The materials provided by the federal and state officials in announcing the settlement agreement note that the agreement left numerous issues unresolved and does not preclude (i) criminal claims, (ii) securities claims and claims related to the use of an electronic mortgage registry, (iii) loan origination claims in connection with FHA-insured loans, except those covered specifically by this settlement, and (iv) borrower claims. For additional information concerning some of the state-level recoveries and issues the state attorneys general have reserved for potential future action please see California's announcement here and New York's announcement here. Buckley LLP advises clients regarding mortgage servicing issues and conducted a webinar on servicing developments, including a review of the OCC's April, 2011 Consent Orders and related servicing guidance. If you have any questions about the settlement or servicing issues in general please contact a member of our Mortgage Servicing Team.


    Foreclosure Federal Reserve Mortgage Servicing OCC Servicemembers State Attorney General

  • New York AG Files Suit Against MERS and Servicers Alleging Deceptive and Fraudulent Foreclosure Practices


    On February 3, New York Attorney General Eric Schneiderman filed a lawsuit against MERS and several major banks, challenging the MERS system and alleging that the defendants engaged in fraudulent and deceptive foreclosure practices in violation of state law. Among the allegedly illegal practices, the New York Attorney General claims that the defendants (i) initiated thousands of foreclosure proceedings without proper standing, (ii) submitted in court deceptive and invalid mortgage assignments, (iii) misled borrowers by submitting in court defective mortgage assignments executed by untrained and unsupervised certifying officers and assignments that were automatically generated (i.e. "robosigned"), (iv) created a system that deliberately obscures the chain of title for a loan or hides the current note-holder. The Attorney General is seeking (i) an injunction to stop the practices recited in the complaint, (ii) disgorgement of all profits obtained in connection with those practices, and (iii) payment of other damages and civil penalties.

    Foreclosure Mortgage Servicing


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