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Financial Services Law Insights and Observations


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  • HUD updates consultant fees for its mortgage insurance program

    Agency Rule-Making & Guidance

    On July 9, HUD released Mortgagee Letter 2024-13 which revised Section 203(k) of the Rehabilitation Mortgage Insurance Program and specifically updated the 203(k) Consultant Requirements and Fees among other changes. The FHA 203(k) Rehabilitation Mortgage Insurance Program provided mortgage insurance to purchase a home or refinance an existing home mortgage. These updates will be on minor remodeling and nonstructural repairs, and the rehabilitation costs for the rehabilitation mortgage must not exceed $75,000. The Mortgagee Letter also specified that a 203(k) Consultant will be required to obtain a standard 203(k) Rehabilitation Mortgage and provided a schedule of updated 203(k) Consultant fees:

    • Paid up to $1,000 for repairs less than $50,000.
    • Paid up to $1,200 for repairs between $50,001 and $85,000.
    • Paid up to $1,400 for repairs between $85,001 and $140,000.
    • Up to 1 percent of the repair costs or $2,000, whichever would be lower, for repairs over $140,000.

    Section 203(k) Consultants may also charge a maximum of $375 in draw inspection fees, $120 in change order fees, $225 in reinspection fees, and mileage fees subject to IRS limitations. This Mortgagee Letter will go into effect for FHA case numbers assigned on or after November 4.

    Agency Rule-Making & Guidance HUD FHA Mortgages

  • HUD proposes rule to govern the sale of FHA mortgage notes

    Agency Rule-Making & Guidance

    On July 17, HUD announced a rule to regulate the sale of seriously delinquent mortgage loans insured by FHA. According to HUD, the proposed rule would increase the availability of affordable homes and enhance the stability of communities.

    HUD proposed the merger of two existing demonstration programs, the Single Family Loan Sale Program (SFLS) and the HUD-held Vacant Loan Sales Program for Home Equity Conversion Mortgages (HLVS), into a single permanent program called the Single Family Sale Program. The new program will continue to sell forward and reverse mortgage loans separately, but it will be designed to provide FHA with the flexibility to maximize returns to the Mutual Mortgage Insurance Fund and manage defaulted loans more efficiently, including the sale of such loans.

    The proposed rule would codify the demonstration structure and process under SFLS and HVLS. Additionally, the proposal will include guidelines for servicers on borrower notifications regarding loan sales and establishes post-sale requirements, such as a “first-look” provision for certain entities when properties become owned after foreclosure.

    The proposed rule further set forth (i) HUD’s ability to reduce or reject claims that were filed late or remain in suspended status, (ii) mortgagees’ requirements to certify certain mortgages, (iii) what constitutes qualified participants in the Single Family Sale; (iv) requirements of Purchasers; (v) settlement procedures for a Single Family Sale; (vi) purchasing servicing requirements; (vii) disqualifications; and (viii) relevant definitions, among other things.

    HUD is seeking public comment on the proposed rule and comments must be received by September 16. 

    Agency Rule-Making & Guidance Federal Issues FHA HUD Mortgages

  • District Court denies class certification in lending discrimination suit


    On May 30, the U.S. District Court for the Eastern District of Virginia entered an opinion denying class certification in a suit accusing a credit union (defendant) of lending discrimination. Each plaintiff applied to defendant for at least one home loan product, including first-lien mortgages, VA-backed loans, and refinancings. Plaintiffs’ complaint alleged that defendant’s mortgage underwriting policies violated the Fair Housing Act (the FHA) and the ECOA because they have had a “disparate impact on minority loan applicants” and defendant’s “refusal to correct those discrepancies constitutes intentional discrimination.” Plaintiffs based their claims on three independent reports analyzing publicly-available HMDA data from 2019-2022.

    The court found that plaintiffs failed to establish a disparate treatment claim under the FHA, the ECOA, section 1981, and state law. Among other things, the court found that plaintiffs failed to address defendant’s argument that the data relied on in the reports lacked important metrics relating to credit scores and debt-to-income ratios. The court reasoned that plaintiffs’ sole reliance on reports analyzing defendant’s HMDA data – absent other allegations of evidence of discriminatory intent – did not make out a plausible claim of intentional discrimination. Moreover, the court found defendant’s argument persuasive that some of the plaintiffs attained loans elsewhere at higher interest rates than the loans originally sought from defendant, which suggested that plaintiffs were unqualified for the lower-interest rate loans for which they originally applied.

    The court did, however, find that the complaint sufficiently pled a claim for disparate impact under the FHA and the ECOA at the motion to dismiss stage because the statistical analyses cited in the complaint revealed a disparate impact among non-white loan applicants and the underwriting algorithm and process was alleged to have caused the disparity. However, the court cautioned that if plaintiffs later failed to link during discovery the described “secret” underwriting process to the precise disparities and adverse consequences experienced by plaintiffs, the court may revisit whether the claim can survive at summary judgment.

    Finally, the court struck the class allegation because the circumstances of plaintiffs’ loan application processes are too varied. Even though the proposed class was denied, plaintiffs may proceed on their FHA and ECOA disparate impact claims.

    Courts Consumer Finance Mortgages Credit Union ECOA FHA

  • FHA issues reporting requirements on significant cybersecurity incidents

    Privacy, Cyber Risk & Data Security

    On May 23, HUD issued Mortgagee Letter (ML) 2024-10 titled “Significant Cybersecurity Incident (Cyber Incident) Reporting Requirements” which required FHA-approved mortgagees to notify HUD when a “Cyber Incident” occurs. A Cyber Incident would be any unauthorized event that could harm information or computer systems, breaching security rules, and affecting a mortgagee’s ability to meet FHA program requirements. It also would include actions that threaten data confidentiality, integrity, or availability, potentially disrupting mortgage operations. Mortgagees must report all suspected Cyber Incidents to HUD's FHA Resource Center and Security Operations Center within 12 hours of detection. The report must include several details, including the mortgagee's name and ID, contact information, a description of the incident (including the date, cause, and impact to PII, login credentials, and IT systems), any affected subsidiary or parent companies, and the status of the mortgagee’s incident response, including whether law enforcement has been notified. The provisions of this ML are effective immediately and will be reflected in a forthcoming update to the HUD Handbook 4000.1.

    Privacy, Cyber Risk & Data Security HUD FHA

  • District Court grants motion for reconsideration on reverse redlining claim


    On April 26, the U.S. District Court for the Eastern District of Michigan granted in part and denied in part the plaintiffs’ motion for reconsideration of its order granting the defendants summary judgment and dismissing claims under the Fair Housing Act (FHA) and the ECOA. The plaintiffs argued the court erred in its decision to dismiss their FHA and ECOA claims without addressing their disparate treatment claims. The court found plaintiffs’ arguments on reverse redlining (i.e., alleged intentional targeting of borrowers in minority areas for predatory loans) supported their claims of disparate treatment under the FHA and the ECOA, and the court had erred in “dismissing those claims in their entirety[.]”

    Since this revived plaintiffs’ FHA and ECOA claims, the court then addressed a defendant’s motion for summary judgment, which argued that it was entitled to summary judgment because it merely facilitated a loan to a co-defendant and did not engage in any conduct controlled or restricted by the FHA. The court found that the scope of FHA § 3604(a) extended beyond owners and agents to other actors who are in a direct position to deny housing rights to a member of a protected group. The court found the defendant participated actively in the acquisition and disposition of residential property (e.g., the defendant was the primary funder of property acquisitions, participated in the design of the purchase contracts, had detailed knowledge of a co-defendant’s business model, reviewed a co-defendant’s marketing and advertising strategies, and participated in decisions on individual purchase contracts).

    According to the court, this supported plaintiffs’ allegation that such defendant directly affected the availability of housing within the meaning of FHA § 3604(a). The court also disagreed with defendant’s alternative arguments regarding plaintiffs’ showing of disparate treatment, stating “plaintiffs can establish disparate treatment based on reverse redlining by showing that (1) they are a member of a protected class; (2) they applied for and were qualified for loans; (3) they received grossly unfavorable terms; and (4) they were intentionally targeted or intentionally discriminated against.” Therefore, because the court found issues of material fact on plaintiffs’ FHA and ECOA claims, the court denied the defendant’s motion for summary judgment.

    Courts Predatory Lending FHA ECOA Michigan

  • CFPB reports on the relationship between discount points and interest rates

    Federal Issues

    On April 5, the CFPB issued a report on the relationship between trends in discount points and interest rates. The report used HMDA data between Q1 of 2019 and Q3 of 2023 when interest rates were at “record-highs” and before the Federal Reserve announced its intention to lower interest rates. The CFPB found that (i) the majority of borrowers paid discount points, (ii) more borrowers paid discount points as interest rates increased, and (iii) borrowers with low credit scores were even more likely to pay discount points. Delving deeper into the data, 87 percent of borrowers with cash-out refinances paid discount points (up from 61 percent in 2021), and borrowers with cash-out refinance loans paid twice the number of discount points compared to other borrowers (with a median of 2.1 points per loan). Additionally, almost 77 percent of FHA borrowers with a credit score below 640 paid discount points compared to 65 percent of all FHA borrowers. Considering these trends, the CFPB will plan to monitor the use of discount points and weigh the advantages against the potential risks to borrowers.      

    Federal Issues CFPB Interest Rate Discount Points HMDA FHA

  • FHA implements changes to branch office registration requirements

    Agency Rule-Making & Guidance

    On March 19, the FHA issued Mortgagee Letter 2024-04 to implement the provisions of a Final Rule, “Changes in Branch Office Registration Requirements.” The Final Rule will eliminate the requirement for mortgagees and lenders to register with HUD in each branch office from which they conduct FHA business, making branch registration optional and branch registration fees applicable only to branch offices that mortgagees or lenders choose to register with FHA. As previously covered by InfoBytes, FHA proposed the rule last March. Following public comments, HUD published the Final Rule without changes from the proposed rule, and the Final Rule became effective on March 4.

    The Final Rule will exclude branch offices not registered with HUD from the HUD Lender List Search page. The Mortgagee Letter will summarize changes that will be incorporated into Handbook 4000.1 to implement the Final Rule, including updating the policy for registering branch offices, clarifying the “Area Approved for Business” for home offices and branch offices, updating the definitions for Branch Manager and Regional Manager, and clarifying the policy requirements that apply to registered branch offices. Although the Mortgagee Letter will go into effect immediately, it will not impact annual recertifications due to be completed by March 31; rather, the recertification fee “will be calculated based on the registered branches as of the last business day of the mortgagee’s certification period (fiscal year end).”

    Agency Rule-Making & Guidance Federal Issues FHA Mortgagee Letters Mortgages HUD

  • HUD sued for allegedly failing to refund mortgage insurance premiums for early-terminated FHA-insured mortgages


    On March 12, a putative class action complaint was filed against the Department of Housing and Urban Development (HUD) for allegedly denying homeowners their Mortgage Insurance Premium (MIP) refunds upon the early termination of their FHA-insured mortgages. According to the complaint, HUD must refund unearned MIPs, but has refused to refund homeowners by creating “unnecessary bureaucratic hurdles.” The plaintiffs alleged that the OIG had confirmed “the validity of complaints regarding HUD’s handling of MIP refunds.”

    Citing HUD regulations, the plaintiffs alleged that when an FHA mortgage is terminated early, within seven years of the purchase of the refinancing of the property, there is an overpayment of the MIP which should be refunded by HUD. According to the plaintiffs it is a “widespread practice” for HUD not to automatically refund MIPs, but instead require a burdensome, lengthy process which hindered the prompt refund of fees in multiple ways. The 2022 OIG report cited by plaintiffs allegedly found, among other things, that HUD did not have adequate controls in place to ensure that refunds were appropriately tracked, monitored, and issued. The plaintiffs alleged that Floridians are owed over $21.7 million in refunds.

    The plaintiffs are seeking injunctive and declaratory relief and a return of all unfairly retained refunds “together with damages in the amount of the total earned interest and other investment monies accrued by Defendant with Plaintiff’s and Class Members’ monies.” 

    Courts Federal Issues HUD Class Action OIG FHA

  • FHLBanks’ net income skyrockets in 2023 due to high volume of advances

    Federal Issues

    Recently, the FHFA released its annual combined operating highlights for 2023 which were prepared from the unaudited financial statements of the Federal Home Loan Bank system (FHLBank). Administered by the FHFA, the FHLBank system was created to provide lending institutions with liquidity. In 2023, FHLBanks' annual net income grew from $3.16 billion to $6.69 billion—a 111 percent increase—while advances increased from $13.2 billion to $48.5 billion, representing a 266 percent increase. This change in pace was due in part to the stresses placed on banking and financial markets in March 2023. The operating highlights follow FHFA’s comprehensive report on the FHLBank system published in late 2023, previously covered by InfoBytes here. More information on the FHFA’s operating statements can be found in its 8-K filing with the SEC.

    Federal Issues FHA FHLB

  • HUD Secretary Fudge confirms interest in eliminating Mortgage Interest Premiums

    Federal Issues

    On January 11, the Secretary for Housing and Urban Development, Marcia Fudge, testified at the House Financial Services Committee hearing on the Oversight of HUD and the FHA. Topics included qualification for housing programs by veterans, HUD efforts to support more affordable housing, and oversight of public housing authorities, among other things.

    Secretary Fudge addressed the possibility of eliminating the Mortgage Insurance Premiums (MIP) from Federal Housing Administration (FHA) mortgages. Specifically, Rep. Brad Sherman (D-CA) asked Secretary Fudge whether she would be willing to eliminate MIPs, to which Secretary Fudge replied “Yes, I’m willing to look at it.” Rep. Gregory Meeks (D-NY) asked whether FHA insurance could follow the same model as private mortgage insurance, where the product is terminated after a certain amount of payment on the principal of the loan.  In response, the Secretary replied positively with “I would love to see it happen.”

    Federal Issues HUD FHA House Oversight Committee House Financial Services Committee Mortgages Mortgage Insurance Premiums


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