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Senate Banking Committee discusses housing finance reform proposals
On September 10, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Housing Finance Reform: Next Steps” to discuss the federal government’s plans for reforming and strengthening the mortgage market. As previously covered by InfoBytes, the Department of Treasury and HUD released complementary proposals on September 5 discussing plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system. The Committee heard from Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson, and FHFA Director Mark Calabria. Committee Chairman Mike Crapo (R-ID) opened the hearing by stating a preference for comprehensive legislation to end the conservatorship of the GSEs but stressed that the agencies should “begin moving forward with incremental steps that move the system in the right direction.” Democratic members of the Committee stated their oppositions to the proposals, with Senator Sherrod Brown (D-Ohio) arguing that the Treasury’s plan “will make mortgages more expensive and harder to get,” make it more difficult for small lenders to compete, and roll back tools designed to help underserved families.
Treasury Secretary Mnuchin defended his agency’s proposal, and noted that while he prefers that Congress take the lead on ending the GSE conservatorships and plans to work with Congress on a bipartisan basis to enact comprehensive housing finance reform legislation, he also sees the need to concurrently develop administrative actions to protect taxpayers and foster competition. Among other things, Mnuchin discussed steps to remove the net worth sweep, which requires the GSEs to send nearly all their profits to the Treasury, arguing that ending the sweep will allow the GSEs to retain their earnings and build up capital.
FHFA Director Calabria emphasized that plans released by the Treasury and HUD are “broadly consistent” with his top priorities, which include developing capital standards for the GSEs to match their risk profiles that would “begin the process to end the [GSE] conservatorships,” as well as reforms to reduce the risks in the GSEs’ portfolios. All three witnesses agreed with Crapo’s assessment that the GSEs in their current form “are systemically important companies [and] that they continue to be too big to fail.” Calabria further emphasized that while he believes only Congress can reach a comprehensive solution, he believes the agencies can also make significant steps.
HUD Secretary Carson commented that a central principle of HUD’s housing finance plan is to improve coordination between HUD and FHFA to allow qualified borrowers access to responsible and affordable credit options, with HUD, the Department of Veterans Affairs, and the Department of Agriculture acting as the sole sources of low-down-payment financing for borrowers outside of the conventional mortgage market. Carson further noted that reform will “reduce the Federal Government’s outsized role in housing finance.”
Indiana issues rule providing temporary authority for mortgage loan originators
On August 28, the Indiana Department of Financial Institutions published in the Indiana Register an emergency rule providing 120-day temporary authority for certain mortgage loan originators (MLOs) to originate loans in Indiana without a state license, pursuant to Section 106 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The new rule provides that in order to be eligible for temporary authority to operate, an MLO, among other things, must have been licensed as an MLO in another state continuously during the past 30 days or operating as a registered MLO for a depository institution continuously for the past year. The rule permits an eligible MLO applicant to engage in mortgage transactions while their application is pending for licensure for up to 120 days or upon approval of the licensing application, whichever is sooner, beginning November 24.
Treasury, HUD release housing finance reform plans
On September 5, the U.S. Treasury Department and HUD released complementary proposals in response to a presidential memorandum issued last March (previously covered by InfoBytes here) directing the departments to develop plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system.
According to a press release released by the Treasury Department, the Treasury Housing Reform Plan outlines several broad goals and legislative and administrative reforms intended to protect taxpayers and assist homebuyers. Included in the Reform Plan are measures to privatize the GSEs, with the Treasury Department emphasizing that FHFA “should begin the process of ending” the conservatorships. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.” Other notable agency and limited congressional action highlights include:
- Congress should authorize an explicit, paid-for guarantee by Ginnie Mae on qualified mortgage-backed securities for single-family and multifamily loans.
- Private sector participation should increase in the mortgage market to compete with the GSEs, and ensure a level playing field for lenders of all sizes.
- Congress should replace GSEs’ statutory affordable housing goals with a “more efficient, transparent, and accountable mechanism” to support underserved borrowers and expand HUD’s affordable housing activities.
- GSEs under FHFA’s capital rule should be required to maintain “capital sufficient to remain viable as a going concern after a severe economic downturn,” the cap on the GSEs’ investments in mortgage-related assets should be further reduced, and GSEs’ retained mortgage portfolios should be restricted to “solely supporting [the] business of securitizing mortgage-backed securities.”
- Mortgages eligible for GSE guarantees should have to comply with strict underwriting requirements.
- The Qualified Mortgage rule should be simplified and the so-called QM patch that allows GSEs to avoid certain regulations should be eliminated (see previous InfoBytes coverage on the CFPB’s advance notice of proposed rulemaking to allow the QM patch to expire here).
- Access to 30-year fix-rate mortgages for qualified homebuyers should be preserved.
HUD’s Housing Finance Reform Plan, released in conjunction with Treasury’s proposal, addresses the role of FHA and Ginnie Mae, and outlines steps to reduce risk in the FHA portfolio. According to HUD’s press release, the proposal focuses on four objectives: refocusing FHA to its core mission, protecting American taxpayers, providing tools to FHA and Ginnie Mae to appropriately manage risk, and providing liquidity to the housing finance system. Among other objectives, HUD’s plan (i) stresses that FHA, which serves low- and moderate-income borrowers, “must ensure that borrowers are creditworthy and that they have access to loans that meet their financial needs without creating undue risk”; (ii) recommends that FHA and FHFA establish a “formalized collaborative approach” to streamline government-supported mortgage programs to ensure they are “not competing and do not crowd private capital out of the marketplace;” (iii) encourages continued efforts to reduce loan churning; (iv) encourages a continued partnership between FHA and DOJ “to provide more clarity on how the agencies will consult on the appropriate use of the [False Claims Act]” to provide regulatory certainty to lenders; (v) encourages FHA to develop servicing standards for home equity conversion mortgage programs to reduce operational and financial burdens; and (vi) recommends that FHA develop a mortgage origination risk tool that integrates an automated underwriting system.
FDIC enforcement actions include flood insurance, BSA violations
On August 30, the FDIC announced its release of a list of administrative enforcement actions taken against banks and individuals in July. The list reflects that the FDIC issued fourteen orders and one notice of charges, which include “four stipulated consent orders; four terminations of consent orders; four Section 19 orders; one stipulated civil money penalty order; one stipulated removal and prohibition order; and one notice of charges and hearing.”
Among other actions, the FDIC assessed a civil money penalty (CMP) against a Louisiana-based bank for alleged violations of the Flood Disaster Protection Act, including, among other things, (i) failing to obtain flood insurance coverage on loans at the time of origination, increase, renewal, or extension; or (ii) failing to maintain flood insurance coverage for the term of a loan secured by property located or to be located in a special flood hazard area.
The FDIC also entered into consent orders with an Oklahoma-based bank and a West Virginia-based bank relating to alleged weaknesses in their Bank Secrecy Act compliance programs.
FFIEC releases 2018 HMDA data; CFPB issues mortgage activity reports
On August 30, the Federal Financial Institutions Examinations Council released the 2018 Home Mortgage Disclosure Act (HMDA) data on mortgage lending transactions covering information submitted by financial institutions on or before August 7. The data will not remain static, but instead will be updated on an on-going basis to reflect late submissions and resubmissions. The data currently includes information on 12.9 million home loan applications, 7.7 million of which resulted in loan originations, and 2 million purchased loans. Observations on the data include: (i) the total number of originated loans decreased by roughly 12.6 percent; (ii) refinance originations decreased by 23.1 percent; (iii) the share of refinance loans to low- and moderate-income borrowers increased from 22.9 percent to 30 percent; and (iv) nondepository, independent mortgage companies accounted for 57.2 percent of first-lien owner-occupied home purchase loans (up from 56.1 percent in 2017).
On the same day, the CFPB also released two data point articles describing mortgage market activity based on data reported under HMDA. The first article presents a report providing a “first look” at mortgage application and origination trends within the 2018 HMDA data. The second article introduces a report introducing the “new and revised data points in the 2018 HMDA data” and discussing the Bureau’s initial observations on the mortgage market based upon those new or revised data points.
Agencies issue Hurricane Dorian guidance
On August 29, Fannie Mae, Freddie Mac, and HUD issued disaster relief guidance related to Hurricane Dorian. Fannie Mae reminded servicers of available mortgage assistance options for homeowners impacted by the hurricane: (i) qualifying homeowners are eligible to stop making mortgage payments for up to 12 months without incurring late fees and without having delinquencies reported to the credit bureaus; (ii) servicers may immediately suspend or reduce mortgage payments for up to 90 days without any contact with homeowners believed to have been affected by a disaster; and (iii) foreclosures and other legal proceedings for homeowners believed to be impacted by a disaster are temporarily suspended. Freddie Mac similarly reminded servicers of these mortgage relief options.
The same day, HUD released Mortgagee Letter ML 2019-14 (ML 2019-14), which updates Handbook 4000.1 and expands its “Disaster Standalone Partial Claim” loss mitigation option which “allow[s] borrowers in Presidentially Declared Major Disaster Areas (PDMDAs) with delinquent FHA-insured mortgages to bring their mortgages current without increasing their interest rates or principal and interest payments.” The mitigation option, introduced last year, “covers missed mortgage payments up to 30 percent of Unpaid Principal Balance” through an interest-free second loan on the mortgage without a required trial payment plan. The second loan will become payable only when the borrower sells the home or refinances. Additionally, the loss mitigation option will streamline income documentation and other requirements to expedite relief to eligible borrowers struggling to pay their mortgages while recovering from disasters.
Separately on August 30, the OCC issued a proclamation permitting OCC-regulated institutions, to close offices affected by Hurricane Dorian’s severe weather conditions at their discretion “for as long as deemed necessary for bank operation or public safety.” In issuing the proclamation, the OCC noted that it expects that only those bank offices directly affected by potentially unsafe conditions will close and that they should make every effort to reopen as quickly as possible to address the banking needs of their customers. The proclamation directs institutions to OCC Bulletin 2012-28 for further guidance on natural disasters and other emergency conditions.
District Court allows Sacramento's FHA claims to proceed against bank
On August 22, the U.S. District Court for the Eastern District of California granted in part and denied in part a national bank’s motion to dismiss an action by the City of Sacramento (City) alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its complaint, the City alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue and increased costs for municipal services for the city. The bank moved to dismiss the action. In reviewing the motion, the court looked to the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices. The court rejected the majority of the bank’s arguments, denying the motion as to the City’s tax revenue claims and non-economic claims. The court concluded that “there is ‘no reason to think as a general matter that the City’s [tax revenue] claims are out of step with the ‘nature of the statutory cause of action’ and the remedial scheme that Congress created’” in the FHA. Conversely, as for the claims for increased municipal services costs, such as police, fire fighting, and code enforcement, the court found that the claims “rely on conclusory allegations and a foreseeability-only theory without establishing proximate cause” and granted the bank’s motion to dismiss, but allowed the City leave to amend the complaint to establish proximate cause.
Fed updates private flood insurance interagency examination procedures
On August 22, the Federal Reserve Board (Fed) issued CA 19-10, which provides updates to the interagency examination procedures for the Flood Disaster Protection Act (FDPA). The updated guidance is applicable to all Fed-supervised institutions with total consolidated assets of $10 billion or less, and supersedes CA 16-1’s FDPA examination procedures. Specifically, the updated procedures address new sections from a final interagency rule issued in February concerning the acceptability of private flood insurance (previously covered by InfoBytes here). Additionally, the updated procedures provide guidelines for lending institutions when considering a mutual aid society flood protection plan. The Fed notes that “state member banks may not typically analyze mutual aid society plans in the course of their lending activities,” and reminds lenders that acceptance standards for mutual aid society plans will vary depending on the state.
9th Circuit: TILA right of rescission does not apply for mortgages used to reacquire property
On August 14, the U.S. Court of Appeals for the 9th Circuit held that TILA’s right of rescission does not apply when a borrower obtains a mortgage to reacquire residential property after having no ownership rights. According to the opinion, in 2003, a borrower quitclaimed his interest in residential property to his then wife; in 2007, he obtained a mortgage loan and took title to the property in accordance with a divorce judgment. The borrower sought rescission of the mortgage loan and the district court dismissed the action as untimely. On appeal, the 9th Circuit vacated the district court’s judgment, holding the borrower gave proper notice within the three year limit under TILA. On remand, the district court granted summary judgment in favor of the mortgage company, concluding the transaction was a residential mortgage transaction, in which no statutory right of rescission exists under TILA.
On appeal, the 9th Circuit affirmed summary judgment in favor of the mortgage company. The appellate court rejected the borrower’s arguments that (i) the mortgage documents showed he already owned an interest in the property before he took out the mortgage loan; and (ii) the mortgage was taken in accordance with a divorce judgment, not to finance the acquisition of the property. The appellate court concluded that under TILA, the mortgage loan was a “residential mortgage transaction,” the definition of which “includes both an initial acquisition and a reacquisition of a property.” The fact the mortgage company characterized the transaction as a refinance is not determinative, according to the panel, because the borrower did not acquire title to the property until the day after he signed the loan. Moreover, while the divorce judgment ordered the borrower to make a payment to his ex-wife in order to obtain title to the property, he obtained a residential mortgage loan “in order to carry out those conditions.”
Conn. Supreme Court reverses foreclosure based on bank misconduct
On August 13, the Connecticut Supreme Court reversed the appellate court’s judgment, concluding a borrower’s special defenses and counterclaims raised against a bank during a foreclosure action “bore a sufficient connection to the enforcement of the note or the mortgage.” According to the opinion, the bank sought to foreclose on real property owned by the borrower, and during that proceeding, the borrower and loan servicer began loan modification negotiations. The borrower contacted the Connecticut Department of Banking, which intervened on his behalf in the negotiations, but the bank subsequently increased the mortgage payment and the parties were unable to reach an agreement. The borrower asserted special defenses and counterclaims, which included, among other things, that the bank allegedly engaged in conduct that increased the borrowers overall indebtedness and caused the borrower to “incur costs that impeded his ability to cure the default, and reneged on loan modifications.” The trial court rendered a judgment of strict foreclosure, which the appellate court affirmed.
On appeal, the Supreme Court held the appellate court incorrectly concluded the borrower’s allegations did not provide a legally sufficient basis for those defenses and counterclaims. The Court noted that the borrower’s allegations—that the bank “engaged in a pattern of misrepresentation and delay in postdefault loan modification negotiations before and after initiating a foreclosure action,” which added to the borrower’s debt and hampered his ability to avoid foreclosure—involved misconduct that “bore a sufficient connection to the enforcement of the note or the mortgage.” To the extent the intervention of the Department of Banking actually resulted in a binding loan modification, the potential breach of such agreement would also “provide a legally sufficient basis for special defenses in the foreclosure action.” Therefore, the Court reversed the appellate judgment upholding the strict foreclosure.