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CFPB Announces First RESPA Enforcement Actions
On April 4, the CFPB announced enforcement actions against four mortgage insurers against which it filed complaints alleging that their captive reinsurance arrangements with mortgage lenders violated Section 8 of the Real Estate Settlement Procedures Act (RESPA). The actions are the first public actions the CFPB has taken to enforce RESPA, and follow investigations started by HUD and transferred to the CFPB in July 2011. The insurers did not admit the allegations but agreed to pay a combined $15.4 million to end the investigations. The consent orders also (i) prohibit the insurers from entering into any new captive mortgage reinsurance arrangements with mortgage lenders or their affiliates, and from obtaining captive reinsurance on any new mortgages, for a period of ten years, (ii) require the insurers to forfeit any right to the funds not directly related to collecting on reinsurance claims in connection with pre-existing reinsurance arrangements, and (iii) subject the insurers to compliance monitoring and reporting. The orders must be approved by the U.S. District Court for the Southern District of Florida before taking effect.
HUD Announces Reverse Mortgage Program Changes, Increases Mortgage Insurance Premiums, Alters Underwriting Requirements
On January 30, HUD announced that for FHA case numbers assigned on or after April 1, 2013, FHA will use a consolidated pricing option for its home equity conversion mortgages, as explained in more detail in Mortgagee Letter 2013-01. Separately, HUD also announced that effective April 1, 2013, the mortgage insurance premiums for most new mortgages will increase by 10 basis points, and by 5 basis points for jumbo mortgages. To further support the stability of the Mutual Mortgage Insurance Fund, FHA also issued Mortgagee Letter 2013-04 to require most borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a policy adopted in 2001 under which FHA cancelled premium requirements on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA also will (i) require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent, (ii) increase from 3.5 to 5 percent the minimum down payment for jumbo loans, and (iii) increase its enforcement for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures. Separately, HUD issued Mortgagee Letter 2013-02, which updates the certification language for all late endorsement requests for reverse mortgages. Finally, through Mortgagee Letter 2013-03, HUD extended to March 15, 2013 the date by which lenders must begin to assess borrowers in default under a new loss mitigation priority order and policies, as outlined in Mortgagee Letter 2012-22.
Federal District Court Holds Federal Law Preempts Massachusetts' Statutory Limits On Hazard Insurance
On September 21, the U.S. District Court for the District of Massachusetts held that the Federal Homeowners Loan Act preempted a Massachusetts law that forbids lenders from requiring borrowers to purchase insurance greater than the replacement cost of the building on the mortgaged property. Silverstein v. ING Bank, fsb, No. 12-10015, 2012 WL 4340587 (D. Mass. Sep. 21, 2012). A borrower brought a putative class action in state court alleging that the bank’s requirement that borrowers purchase insurance equal to the outstanding principal balance on the mortgage violated the state’s limit on mortgage insurance. The bank removed the case to federal court and subsequently moved to dismiss while the borrower moved to remand the case. In denying the motion to remand and granting the bank’s motion to dismiss, the court held that the Massachusetts statute limiting hazard insurance to the replacement cost of the building falls plainly within the illustrative list of preempted state laws provided by the Homeowners Loan Act’s implementing regulations. The court conceded that the borrower could bring common law claims against the bank, but held that the borrower’s attempt to label his clear statutory claims as common law claims failed.
Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand
On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID). The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests. CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days. In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.
The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA). In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.
In denying the petition, the Bureau began by explaining that CIDs play a “crucial role” in the Bureau’s ability to carry out its duty to enforce consumer financial laws. It stated that the purpose of CIDs are to “close the [information] gap” between the Bureau and the subject company and/or individual in order for the Bureau to determine whether the investigation is worth pursuing, and if so, to what extent.
The CFPB then set forth the standard it will use to consider and resolve petitions to modify or set aside CIDs, adopting the deferential standard of review relied upon by Circuit Courts of Appeals in proceedings to enforce administrative subpoenas. That standard provides that a CID will be enforced if it satisfies the following requirements: (i) the investigation is for a lawfully authorized purpose; (ii) the information requested is relevant to the investigation; and (iii) procedural requirements are followed. If the Bureau establishes these factors, the CID will be enforced unless the petitioner demonstrates the CID imposes an “undue burden” or constitutes an abuse of process.
With respect to the Company’s first issue, that the CID failed to state the nature of the conduct at issue, the Company argued that the CID’s description of the purpose of the investigation was so broad as to encompass every aspect of mortgage lending, and thus did not satisfy the notice requirement established by the Dodd-Frank Act. The Bureau rejected this contention and found that “notice was provided from the outset and repeatedly thereafter” beginning as early as January 3 and through to May 22 in the CID’s “Notification of Purpose.” In support of this finding, the CFPB cited cases standing for the proposition that the subject matter of investigations can be provided generally.
With respect to the Company’s assertion that the CID was an overly broad and unduly burdensome fishing expedition, the Bureau noted that the petition “offered little or no detail to make the kind of showing required to substantiate these claims.” It explained that in order to meet its legal burden, the petitioner needed to show the specific nature and the magnitude of the hardship and state specifically how compliance will harm its business. The Bureau further noted that it already had made substantial modifications to the CID through the meet-and-confer process, and the Bureau’s enforcement team had stated that it was willing to consider other potential limitations.
Finally, with respect to the Company’s objection that the CID sought documents, items, and information exceeding the applicable limitations period, the CFPB maintained that the relevant issue was not whether the information itself was actionable but rather whether that information was relevant to conduct that was actionable. It cited other authority which allowed discovery beyond the statute of limitations and noted the importance of collecting relevant information in order to accurately and completely investigate a matter.
Petitioning a newly-founded government agency in unchartered territories always is a difficult exercise. With the increasing number of CFPB investigations and enforcement actions, that exercise will become even more challenging. In light of the Bureau’s first determination of a petition to modify or set aside a CID, potential CID recipients will be left to wonder: how is the CFPB likely to respond to future petitions of this type? Given its precedential value for potential petitioners, it is important to determine what, if anything, can be gleaned from the CFPB’s determination.
First, the Bureau makes clear that it is incumbent on petitioners to be specific in their objections to a CID. Petitioners must specifically describe the burdens that supplying requested information imposes on the company and how the information sought is irrelevant to the investigation. In fact, the Bureau criticized the petition’s use of “general objections” and summarily dismissed the arguments associated with those objections.
Second, given the deferential standard of review which will be applied to such petitions, the meet-and-confer sessions take on increased importance. The meet-and-confer session is intended as an opportunity to narrow the scope of the requests and close the information gap between the CFPB and the subject of the investigation. As a prerequisite to filing a petition, CID recipients are obligated to confer with the Bureau in a good-faith effort to resolve issues and concerns. In fact, the CFPB’s Rules of Investigations provide that “[t]he Bureau will not consider petitions to set aside or modify civil investigative demands unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.” 12 C.F.R. part 1080.6(c)(3) (emphasis added). While the CFPB did not decide whether the Company met this obligation, the Bureau did express its concern to future parties about the importance of approaching this obligation affirmatively and engaging in “a productive discussion that can resolve issues or concerns more effectively.”
First Circuit Reinstates Two Force-Placed Insurance Class Actions
On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.
CFPB Proposes National Mortgage Servicing Standards
On August 10, the CFPB proposed two sets of rules covering a number of residential mortgage servicing practices. The rules would amend Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The TILA proposal includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoffs. The proposed changes to RESPA relate to (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. While many of the rules implement changes required by the Dodd-Frank Act, other proposed requirements incorporate those placed on servicers as part of the national mortgage servicing settlement earlier this year, or corrective actions taken in 2011 by the prudential regulators. The proposed rules follow a small business review panel that provided feedback on the rules’ impact on small servicers. In response to the panel, the CFPB states that it incorporated small business concerns, such as an exemption from new periodic statement requirements for certain small servicers. In addition to comments on the substance of the proposals, the CFPB requests detailed comments about the appropriate effective date of the rules, including whether the CFPB should set staggered effective dates for different aspects of the rules or a single implementation deadline. The CFPB is accepting comments through October 9, 2012 and intends to finalize the rules by the Dodd-Frank statutory deadline in January 2013.
New York Requires New Premium Rates for Lender-Placed Insurance
On June 12, New York Governor Andrew Cuomo and the New York Department of Financial Services (DFS) announced that insurers offering lender-placed insurance must submit new premium rate schedules by July 6, 2012, along with justifications for those new rates. The DFS argues that new rates and justifications are needed based on information derived from recent hearings, which DFS Superintendent Lawsky believes proves that a lack of competition, unnecessarily high rates, and low loss ratios are harming borrowers in New York.
California Federal District Court Dismisses Four Mortgage Insurers from Captive Reinsurance Kickback Suit
On May 25, the U.S. District Court for the Eastern District of California dismissed a group of mortgage insurers from a proposed class action over allegations that their reinsurance arrangement with a lender’s affiliate violated RESPA’s anti-kickback prohibitions. McCarn v. HSBC USA, Inc, No. 12-00375, 2012 U.S. Dist. LEXIS 74085 (E.D. Ca. May 29, 2012). In this case, the borrower was required to procure private mortgage insurance (PMI) in order to obtain a mortgage loan. The mortgage insurance he purchased was arranged by his lender. Unbeknownst to the borrower, the PMI provider he engaged had a reinsurance arrangement with the lender whereby the lender required the PMI provider, as a condition of doing business with the lender, to reinsure the PMI provider’s insurance risk with the lender’s subsidiary. The borrower alleged that this arrangement violated RESPA’s anti-kickback provision, which specifies that captive reinsurance arrangements are permissible only if the payments to the affiliated reinsurer (i) are for reinsurance services actually furnished or for servicers performed and (ii) are bona fide compensation that does not exceed the value of such services. Certain of the PMI providers—not the borrower’s actual PMI provider—moved to dismiss the action on standing grounds. They claimed that they did not provide PMI for the borrower’s loan and therefore the borrower’s injuries were not fairly traceable to their alleged actions. The court agreed, and held that the borrower failed to adequately plead a conspiracy and thus did not establish that the injuries were causally connected to these PMI providers’ actions. The court noted that from the PMI providers’ standpoint, the fewer participants in the alleged “scheme” the better because the remaining providers would each get more of the lender’s business. The court found that the borrower had not pled facts supporting a conspiracy, aside from “conclusory allegations of ‘collective action’ to suggest that the various PMI providers would have any financial motivation to act in concert” and dismissed the action without prejudice.
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