Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • HUD Finalizes Expansion Of Mortgagee Evaluation System

    Lending

    On December 30, HUD finalized revisions to the system used by the FHA to measure and inform mortgagees of their loss mitigation performance. The revisions, finalized in Mortgagee Letter 2013-46, involve more comprehensive metrics to evaluate mortgagees on their overall performance with regard to delinquent loan servicing, as opposed to the limited review of default reporting of forbearance actions and loss mitigation and foreclosure claims paid under the previous system. The evaluation will be used to determine which mortgagees are eligible for additional incentive payments during the January 1, 2014 through December 31, 2014, calendar year. The final system is substantially similar to the proposed version, with some changes made in response to comments. HUD also updated the final scoring methodology using new default status codes delineated in Mortgagee Letter 2013-15. Also in its responses to comments, HUD agreed that it should improve loss mitigation performance by imposing penalties in individual cases of non-compliance with its loss mitigation requirements, stating that with the implementation of TRS II, HUD will have the granular data required for referral to enforcement divisions for “meaningful consequences to be imposed.”

    HUD Mortgagee Letters Loss Mitigation

  • FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements

    Lending

    On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.

    Freddie Mac Fannie Mae Mortgage Origination Mortgage Insurance FHFA Loss Mitigation

  • HUD Clarifies FHA Loss Mitigation Requirements

    Lending

    On November 1, HUD issued Mortgagee Letter 2013-40, which clarifies requirements under FHA’s mandatory loss mitigation program and sets expectations for servicers engaging in loss mitigation during the foreclosure process. The letter states that servicers must (i) evaluate on a monthly basis all loss mitigation tools available for delinquent borrowers, (ii) document those evaluations, and (iii) timely evaluate borrower loss mitigation requests and provide specified written responses. HUD emphasizes that servicers may reduce challenges to foreclosure actions by providing thorough explanations about appeal or escalation processes. The letter further advises servicers that a foreclosure may not be commenced for monetary default unless at least three consecutive monthly payments are unpaid, and details other conditions under which a foreclosure may be initiated. Many of these requirements do not apply if the property has been abandoned or vacant for more than 60 days. Once a foreclosure has been initiated, HUD expects servicers to continue to attempt to communicate with borrowers about potential loss mitigation options based on changing circumstances. The letter also (i) details in a chart the actions the servicer must take when it receives a loss mitigation request from a borrower, (ii) discusses servicer requests for additional borrower documents, (iii) identifies events that trigger extensions of time for initiating a foreclosure, and (iv) outlines steps for terminating foreclosures. All of the requirements in the letter are effective January 1, 2014.

    Mortgage Servicing HUD FHA Mortgagee Letters Loss Mitigation

  • HUD Updates Foreclosure Procedures, Pre-Foreclosure Borrower Communication Policies

    Lending

    On October 28, HUD issued two mortgagee letters related to the servicing of certain FHA-insured loans. Mortgagee Letter 2013-38 provides a list of the first legal actions necessary to initiate a foreclosure and the reasonable diligence timeframes for completing foreclosure and acquisition of title in each state. The letter also outlines acceptable delays in those timeframes due to mediation or bankruptcy, or when a separate legal action is necessary to acquire possession of the title. In addition, the letter provides a new schedule of allowable attorney fees by state for services performed in connection with a mortgage default.  The updated reasonable diligence timeframes apply to all cases in which the first legal action to initiate foreclosure occurs on or after November 1, 2013. The updated attorney fees are effective for all cases in which certain actions occur on or after November 1, 2013. Mortgagee Letter 2013-39 updates the timelines servicers must follow for collection communications, advises servicers regarding early engagement in loss mitigation, outlines staffing requirements to support timely borrower communications, and provides guidance on the timing, content, and method of delivery for collection letters and other borrower communications. This letter also advises servicers to pay special attention to borrowers at risk of early payment default and re-default, and provides specialized collection techniques for such borrowers. Finally, this letter details the FHA’s expectations for escalating borrower inquiries and complaints that allege (i) improper analysis of borrower information or denials of loss mitigation options, (ii) foreclosures initiated or continued in violation of HUD’s policy, or (iii) any other violations of HUD collections and loss mitigation policies. This guidance is effective for all mortgages in default as of January 1, 2014.

    Foreclosure Mortgage Servicing HUD FHA Consumer Complaints Loss Mitigation

  • National Mortgage Servicing Settlement Monitor Adds Enforcement Metrics

    Lending

    On October 2, Joseph A. Smith, Jr., the Monitor of the National Mortgage Servicing Settlement announced four new metrics his office will use to measure the settling servicers’ compliance with the agreement’s servicing standards. Two of the metrics take effect on January 1, 2014 and are intended to (i) ensure borrowers are provided contact information for new “single points of contact” and (ii) ensure that servicers’ monthly billing statements are accurate and detailed. Compliance testing on two additional metrics related to servicers’ communications to borrowers regarding the requirements for loan modification applications will begin on April 1, 2014. Those metrics are meant to (i) ensure that the servicers do not reject a borrower’s loan modification application or proceed with a foreclosure for at least 30 days while the borrower is responding to requests for additional documents and (ii) ensure the servicers communicate modification denials and make loss mitigation alternatives available.

    Mortgage Servicing National Mortgage Servicing Settlement Loss Mitigation

  • HUD Clarifies Changes to HECM Program, Updates FHA Loss Mitigation Home Retention Options

    Lending

    On September 25, HUD issued Mortgagee Letter 2013-33, which clarifies the recent changes HUD made to its HECM program earlier this month through Mortgagee Letter 2013-27. The new letter (i) defines mandatory obligation, (ii) adds additional mandatory obligations for traditional and refinance transactions, and for purchase transactions, (iii) identifies items that must be included in the first twelve-month disbursement limit and initial MIP calculation, (iv) states that the monthly increase to the principal limit must include the annual mortgage insurance rate as well as the mortgage note interest rate, (v) corrects the calculation of the life-expectancy set-aside, (vi) makes accommodations for mortgagors who entered into a bona fide sales contract and made an earnest money deposit on a property before the issuance of Mortgagee Letter 2013-27, and (vii) clarifies an exception to the general policy that a mortgagee increase the available principal limit if the mortgagor makes a partial payment. On September 20, HUD issued Mortgagee Letter 2013-32 to supersede its prior guidance regarding loss mitigation in Mortgagee Letter 2012-22. The letter, among other things, (i) defines “continuous income,” other than wages, for loss mitigation evaluations, and other terms, (ii) establishes the conditions required for a “special forbearance” to be used as a loss mitigation tool, (iii) provides guidance on capitalization of arrearages for modifications and partial claims, and (iv) discusses working with mortgagors in bankruptcy and those failing to complete trial payment plans. Mortgagees are required to implement the policies in Mortgagee Letter 2013-32 by December 1, 2013.

    Mortgage Servicing HUD Reverse Mortgages FHA Mortgagee Letters Loss Mitigation

  • CFPB Finalizes Additional Modifications to Certain Mortgage Rules

    Lending

    On September 13, the CFPB issued final amendments to its Mortgage Servicing and Loan Originator Compensation rules. The CFPB’s press release states that the amendments (i) clarify what servicer activities are prohibited in the first 120 days of delinquency, (ii) outline procedures for obtaining follow-up information on loss mitigation applications, (iii) facilitate servicers’ offering of short-term forbearance plans, (iv) clarify best practices for informing borrowers about the address for error resolution documents, (v) facilitate lending in rural or underserve areas, (vi) clarify the restrictions on the financing of credit insurance premiums, (vii) clarify the definition of a loan originator, (viii) clarify the points and fees thresholds and loan originator compensation rules for manufactured housing employees, and (ix) revise effective dates of many loan originator compensation rule provisions to align with other mortgage rule effective dates. We are reviewing the actual final amendments and plan to provide more information and analysis in the near future. Please also see our Special Alert on these changes as proposed in June.

    CFPB Mortgage Origination Mortgage Servicing Loss Mitigation

  • CFPB Issues Report on Examination Findings, Other Supervisory Activities

    Consumer Finance

    This afternoon, the CFPB released its summer 2013 Supervisory Highlights report, which covers supervisory activity from November 2012-June 2013.  This is the second such report the CFPB has released; the first report came out in October 2012 and covered activity from July 2011 through September 2012.

    The report provides a brief review of the CFPB’s public enforcement actions and non-public supervisory actions and developments in the supervision program, including the issuance of bulletins, the issuance of new fair lending examination procedures, and the reorganization of supervision staff. The report also reviews the CFPB’s risk-based approach to examinations, including the “Institution Product Lines” approach, and outlines the factors that influence examination priorities.  The report does not identify any planned supervisory activities.

    The bulk of the report, however, summarizes the CFPB’s examination findings. Key findings are discussed below.

    Compliance Management Systems (CMS)

    • CMS Elements
      • Although the report states no specific CMS structure is required, it also states that, based on the CFPB’s supervisory experience, an effective CMS commonly has the following components:  (i) board and management oversight; (ii) compliance program; (iii) consumer complaint management program; and (iv) independent compliance audit.  The report provides additional discussion on each component.
    • Nonbanks
      • The report states that nonbanks are more likely than banks to lack a robust CMS. The CFPB found one or more instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits. According to the CFPB, the lack of an effective CMS has, in a number of instances, resulted in violations of Federal consumer financial laws. In these instances, the CFPB has required appropriate corrective action.
      • The report notes that CMS deficiencies in nonbanks are generally related to the supervised entity’s lacking a CMS structure altogether. CFPB examinations have found instances where nonbanks do not have a separate compliance function; rather, compliance is embedded in the business line, which can lead to deficiencies.
    • Banks
      • The CFPB found that banks generally had an adequate CMS structure; however, several institutions lacked one or more of the components of an effective CMS.
      • The most common weakness the CFPB identified in banks is a deficient system of periodic monitoring and independent compliance audits. An entity that lacks periodic monitoring and instead relies on an annual independent compliance audit to identify regulatory violations and CMS deficiencies increases its risk that violations and weaknesses will go undetected for long periods of time, potentially leading to multiple regulatory violations and increased consumer harm.

       

    Mortgage Servicing

    • Servicing Transfers
      • Examiners found noncompliance with RESPA’s requirement to provide disclosures to consumers about transfers of the servicing of their loans.
      • Examiners also noted lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan.
      • Examiners noted that one servicer did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.
      • At another servicer, examiners determined that documentation the servicer received in the transfer was not organized or labeled, and as a result, the servicer did not utilize loss mitigation information provided to the prior servicer in its loss mitigation efforts.
    • Payment Processing
      • A servicer provided inadequate notice to borrowers of a change in the address to which they should send payments, which constituted a potentially unfair practice impacting thousands of borrowers. The entity acted promptly to ensure that it did not impose late fees or other delinquency fees, or any other negative consequences.
      • A servicer decided – without notice to borrowers – to delay property tax payments from December of one year to January of the next, resulting in the borrowers’ inability to claim a tax deduction for the prior year, which the CFPB cited as an unfair practice.
      • A servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and solicit information about any additional harm. If any such harm is identified, the servicer will remediate it.
      • Examiners have found violations of the Homeowners Protection Act (HPA) at several servicers. In one examination, examiners found excessive delays in processing borrower requests for private mortgage insurance (PMI) cancellation. Additionally, in cases where PMI was canceled, the servicer improperly handled unearned PMI premiums in violation of the HPA. The CFPB required the servicer to amend its policies and procedures relating to PMI cancellation. The servicer also must conduct a review to determine whether borrowers were subject to additional harm caused by delays in processing PMI cancellations.
      • Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees. Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements. Servicers have refunded these fees to borrowers.
    • Loss Mitigation
      • Examiners have found issues related to: (i) inconsistent borrower solicitation and communication; (ii) inconsistent loss mitigation underwriting; (iii) inconsistent waivers of certain fees or interest charges; (iii) long application review periods; (iv) missing denial notices; (v) incomplete and disorganized servicing files; (vi) incomplete written policies and procedures; and (v) lack of quality assurance on underwriting decisions.
      • The CFPB states that weak compliance management surrounding loss mitigation processes creates fair lending risk and that it expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are ECOA compliant. The CFPB states that servicers should conduct fair lending training for loss mitigation staff and engage in effective and timely fair lending risk assessments, compliance monitoring, and testing.

    Fair Lending

    • ECOA
      • The report states that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. The CFPB has found instances where supervised entities violated ECOA and Regulation B by failing to comply with either the provision, content, or timing requirements for adverse action notices and has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations.
      • The report specifically notes that loan servicers should have systems in place to determine whether borrowers who apply for a change in the terms of credit are entitled to adverse action notices. The CFPB notes that some institutions may find it helpful to arrange for independent, internal reviews of loan files to ensure that the documentation supports the action taken and that all timing requirements are met. In addition, the report states that institutions should provide comprehensive periodic training to management and staff regarding compliance with ECOA and Regulation B, including compliance with provisions on adverse action notices.

    CFPB Nonbank Supervision Mortgage Servicing Fair Lending Compliance Bank Supervision Loss Mitigation

  • Congress Passes Reverse Mortgage Legislation; Senate Banking Committee Approves Broader FHA Reform Legislation

    Federal Issues

    On July 30, the U.S. Senate passed by unanimous consent the Reverse Mortgage Stabilization Act, H.R. 2167. The bill, which was passed by the House in June and now goes to the President for his signature, will allow HUD to use notices or mortgagee letters to establish additional or alternative requirements necessary to improve the fiscal safety and soundness of the Home Equity Conversion Mortgage (HECM) program.

    On July 31, the Senate Banking Committee voted 21-1 to approve the FHA Solvency Act of 2013, S. 1376, as amended during committee markup. As previously reported, that bill also includes reverse mortgage provisions, as well as measures to more broadly reform the FHA. The bill as approved by the committee includes amendments that would, among other things, (i) provide that in addition to the principal dollar amount limitation on all insured HECM loans, fixed rate HECMs may not involve  a principal limit with a principal limit factor in excess of .61, (ii) allow HUD to promulgate rules to require servicers of FHA loans to enter into a subservicing arrangement with any independent specialty servicer approved by HUD, and (iii) prohibit FHA from insuring a mortgage executed by a borrower who was the borrower under any two residential properties that have been previously foreclosed upon. In addition, during the markup committee members offered and then withdrew numerous amendments that later could be included in the bill that is considered by the full Senate. For example, those amendments would (i) create a statutory requirement that HUD/FHA repay Treasury for any funds needed to stabilize the MMI Fund, (ii) revise the indemnification provisions to provide certainty for lenders, and (iii) provide the FHA additional flexibility in times of financial crisis to ensure it can play a countercyclical role. Finally, committee members agreed to work with the FHA to expand loss mitigation options for individuals who receive income from sources other than employment.

    Reverse Mortgages FHA U.S. Senate Loss Mitigation

  • Special Alert: CFPB Proposes Additional Changes to Mortgage Rules

    Lending

    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.

    CFPB Mortgage Origination Mortgage Servicing Loss Mitigation

Pages

Upcoming Events