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DOJ Announces Settlements with Non-Bank Mortgage Lender to Resolve Alleged False Claims Act Violations
On August 8, the DOJ announced a $74.5 million settlement with a non-bank mortgage lender and certain affiliates to resolve potential claims that they violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development and the Veterans Administration (VA), and by selling certain loans to Fannie Mae and Freddie Mac that did not meet applicable requirements. According to the terms of the two settlement agreements, $65 million of the settlement will be paid to resolve allegations relating to FHA loans, and $9.45 million will be paid to resolve potential civil claims relating to certain specified VA, Fannie Mae, and Freddie Mac loans. The settlements also fully resolved a False Claims Act qui tam lawsuit that had been pending in the United States District Court for the Eastern District of New York.
The settlement included no admission of liability by the lender. The lender issued a statement responding to the settlements: “We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation. While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of [the company] and its constituents.”
Mortgage Closing Relies Exclusively on Electronic Loan Documents
On August 9, a Wall Street Journal article reported the first mortgage refinance conducted entirely through a remote electronic online closing using electronic signatures. The loan will soon be electronically sold to Freddie Mac. While electronic mortgages are not new, this was the first closing that did not require a notary public be physically present, according to the article. Using an online notary service, the borrowers answered a series of questions to authenticate their identities, and without the need to “wet sign” any of the documents. Freddie Mac’s Vice President of Single-Family Business Transformation Management, Samuel E. Oliver III, stated that “by having things digitized, a loan would be able to get to the secondary market much more quickly. . . . [M]ortgages could be delivered to an investor in as little as one day—a process that takes a median of 29 days now.”
As previously covered in InfoBytes, Freddie Mac released a bulletin last September outlining conditions, which allow closing documents to be electronically recorded. Freddie Mac also provides several resources concerning eClosings and eMortgages on their website.
FHFA Reports Results of Fannie Mae, Freddie Mac Annual Stress Tests
One August 7, the Federal Housing Finance Agency (FHFA) published a report providing the results of the fourth annual stress tests conducted by government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs). In March 2017, the FHFA issued orders directing the GSEs to report the results of the required Dodd-Frank Act stress test to enable financial regulators to determine whether the companies have sufficient capital to support operations in adverse or severely adverse economic conditions. (See previous InfoBytes coverage here.) According to the report, Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario—which provides modeled projections on possible ranges of future financial results and does not define the entirety of possible outcomes—the GSEs will need to draw between $34.8 billion and $99.6 billion in incremental Treasury aid under a “severely adverse” economic crisis, depending on how deferred tax assets are treated. The losses would leave $158.4 billion to $223.2 billion available to the companies under their current funding commitment agreements. Notably, the projected bailout need is lower than what the FHFA reported last year, which ranged between $49.2 billion and $125.8 billion.
Fourth Circuit Affirms SCRA Does Not Apply to Mortgage Loan Incurred During Service
In an opinion handed down on July 17, the U.S. Court of Appeals for the Fourth Circuit ruled that the Servicemembers Civil Relief Act (SCRA) does not apply to a mortgage loan obligation incurred during a borrower’s military service, even if the obligation was incurred during an earlier, distinct period of military service. At issue was the SCRA’s requirement that lenders obtain a court order before foreclosing on or selling property owned by a current or recent servicemember if the mortgage obligation “originated before the period of the servicemember’s military service.”
The case concerned a borrower who had financed the purchase of a house while serving in the Navy. After his discharge from the Navy, he defaulted on his mortgage loan. The borrower then enlisted in the Army, and shortly thereafter, the bank sold the borrower’s house—without prior court approval—at a foreclosure sale. The borrower signed a move-out agreement and addendum that affirmatively waived “any rights and protections provided by [SCRA] with respect to” the deed and foreclosure sale.
More than five years after the foreclosure sale, the borrower filed a lawsuit against the bank, alleging that the foreclosure sale was invalid under SCRA. The district court granted summary judgment for the bank, ruling that “[b]ecause it is undisputed that [the borrower’s] mortgage originated while he was in the military, that obligation does not qualify under [SCRA].” Specifically, the district court reasoned that the SCRA is “designed to ensure that servicemembers do not suffer financial or other disadvantages as a result of entering the service . . . by shielding servicemembers whose income changes as a result of their being called to active duty, and who therefore can no longer keep up with obligations negotiated on the basis of prior levels of income.” “Such a change in income and lifestyle,” the district court explained, “was not a factor in [the borrower’s] case, as the mortgage at issue here originated while he was already in the service.”
The Fourth Circuit adopted the district court’s reasoning in a 2-1 decision. In dissent, Judge King contended that the majority’s ruling was contrary to the SCRA’s plain, unambiguous language. Judge King further reasoned that, even if the SCRA’s language was ambiguous, the borrower would still prevail because the SCRA must be liberally construed to protect servicemembers.
Of note, because of its ruling, the district court did not address the bank’s alternative argument that the borrower had waived his rights under the SCRA by executing the addendum to his move-out agreement.
FTC to Host Joint Conference on Protecting Military Consumers
On July 27, the FTC announced it is partnering with state and local authorities to host the Protecting Military Consumers: A Common Ground Conference on September 7 in Los Angeles to provide training on consumer fraud and other issues affecting servicemembers and their families. The conference is geared towards military attorneys, law enforcement personnel, and consumer protection officials, and will include the following topics:
- student loans and for-profit colleges;
- identity theft and imposter scams;
- debt collections;
- mortgage disputes; and
- real estate fraud.
Additionally, the conference will discuss several federal, state, and local consumer protection laws, including the Servicemembers Civil Relief Act, the Military Lending Act, and FTC and CFPB rules and regulations.
Earlier in July, the FTC held a Military Consumer Financial Workshop to educate consumers on financial issues and scams they may face. (See previous InfoBytes coverage here.)
HUD-OIG Report: Single-Family Note Sales Program Failed to Follow Rulemaking Requirements
On July 14, the HUD Office of Inspector General (HUD-OIG) published a report on HUD’s rulemaking process for its single-family note sales program, now referred to as the Distressed Asset Stabilization Program (DASP), under which HUD has sold more than 108,000 notes with over $18 billion in unpaid principal balances. According to the report, HUD-OIG conducted an audit to determine whether HUD adhered to open public rulemaking requirements when it implemented the program. The report concluded that while HUD issued an advance notice of proposed rulemaking in 2006, it did not finalize the comment process or prepare the program for a final rule. The report further stated that there was a lack of formal guidance and procedures for the program, stating that “[s]ince its inception, HUD has issued 31 enhancements, or changes, to its single-family note sales program . . . [but does not have] a handbook or guidebook that establishe[s] its formal requirements or policies for the administration of the program.”
As a result, HUD-OIG recommended that HUD (i) “[c]omplete the rulemaking process for [its] single-family note sales program,” and (ii) “[d]evelop and implement formal procedures and guidance for the note sales program.”
FDIC Updates Affordable Mortgage Lending Guide Part II
On July 26, the FDIC released an update to its Affordable Mortgage Lending Guide, Part II: State Housing Finance Agencies (Guide) and Quick Links: State Links for Housing Finance Agencies. The Guide provides information for community banks about the programs and products offered by each State Housing Finance Agency (HFAs), and discusses, among others things: (i) first-lien mortgage products; (ii) down payment and closing cost assistance; (iii) mortgage tax credit certificates; and (iv) mortgage lending homeownership education and counseling programs. Updates to the Guide include program updates to 40 out of the 54 HFAs and changes to the State HFA Product Matrix. A review of Part II, completed July 1, 2017, reflects the FDIC’s commitment to provide the most up-to-date borrower and loan criteria information available.
Small Lenders Call for Restraint on Housing Finance Reform During Senate Banking Committee Hearing
On July 20, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Housing Finance Reform: Maintaining Access for Small Lenders.” Frequent topics of discussion in the hearing included, among other things, housing finance reform, secondary market access, affordable housing, access to credit in rural areas, mortgage insurance, and mortgage backed securities issued by government-sponsored enterprises (GSEs), operating under conservatorship since 2008.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that “small lenders play a critical role in the mortgage market,” and that a need exists to preserve access to the secondary market. However, Sen. Crapo asserted that although GSEs are currently earning profits, a risk exists for taxpayers if there is a market downturn. “A mortgage market dominated by two huge government-sponsored companies in conservatorship is not a long-term solution, and is not in the best interest of consumers, taxpayers, lenders, investors, or the broader economy,” Sen. Crapo stated.
Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, released an opening statement in which he stated, “[S]mall lenders are often the only lenders willing to go the extra mile to underwrite mortgages . . . in cities’ urban core and in rural communities. . . . As we continue to debate the role of the GSEs, private capital, and large financial institutions in providing access to affordable mortgages, we cannot create a system that allows the GSEs or new players to use a business model that serves only the largest lenders, the highest income borrowers, or the well-off pockets of our country.”
The coalition of consumer groups and small lenders present at the hearing supported GSE reform, sought additional support for small lenders, and called for prompt government action relative to housing finance reform.
The July 20 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Ms. Brenda Hughes, Senior Vice President and Director of Mortgage and Retail Lending, First Federal Savings Bank of Twin Falls, on behalf of the American Bankers Association (testimony)
- Mr. Tim Mislansky, Senior Vice President and Chief Lending Officer, Wright-Patt Credit Union and President and CEO, myCUmortgage, LLC on behalf of the Credit Union National Association (testimony)
- Mr. Jack E. Hopkins, President and CEO, CorTrust Bank, N.A., on behalf of the Independent Community Bankers of America (testimony)
- Mr. Charles M. Pruvis, President and CEO, Coastal Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (testimony)
- Mr. Wes Hunt, President, Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America (testimony)
- Mr. Bill Giambrone, President and CEO, Platinum Home Mortgage and President, Community Home Lenders Association (testimony)
Buckley Sandler Insights: CFPB Updates Rulemaking Agenda
On July 20, the CFPB released its Spring 2017 rulemaking agenda. The agenda was last updated in Fall 2016. The summer release date, and the fact that certain deadlines listed in the updated agenda have already passed, indicates that the agenda’s release may have been delayed after the CFPB drafted it. The following aspects of the updated agenda are particularly noteworthy:
- Regulation Reviews: The Bureau plans to begin “the first in a series of reviews of existing regulations that we inherited from other agencies through the transfer of authorities under the Dodd-Frank Act,” noting that “other federal financial services regulators have engaged in these types of reviews over time, and believe that such an initiative would be a natural complement to our work to facilitate implementation of new regulations.” The Bureau has formed “an internal task force to coordinate and deepen the agency’s focus on concerns about regulatory burdens and projects to identify and reduce unwarranted regulatory burdens….” The agenda lists “pre-rule activities” as continuing through September 2017. Separately, the Bureau notes its ongoing assessments of the effectiveness of the Mortgage Servicing Rules, the Ability-to-Repay/Qualified Mortgage Rule, and the Remittance Transfer Rule pursuant to the Dodd-Frank Act’s five-year lookback provision.
- Small Dollar Lending: The Bureau reports that it received more than one million comments on its June 2016 proposed rule to impose ability-to-repay requirements for payday, vehicle title, and similar installment loans. The Bureau states that it “continue[s] to believe that the concerns articulated in the [proposed rule] are substantial” but does not provide an expected release date for a final rule.
- “Larger Participants” in Installment Lending: The agenda lists September 2017 as the expected release date for “a proposed rule that would define non-bank ‘larger participants’ in the market for personal loans, including consumer installment loans and vehicle title loans.” Designation as a larger participant brings a non-bank entity within the CFPB’s supervisory jurisdiction. The agenda indicates that a companion rule requiring payday, vehicle title lenders, and other non-bank entities to register with the Bureau is also underway, as noted below.
- Debt Collection: In July 2016, the Bureau released an outline of proposals under consideration for debt collection and convened a panel under the Small Business Regulatory Enforcement Fairness Act in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy to consult with representatives of small businesses that might be affected by the rulemaking. The Bureau notes that, “[b]uilding on feedback received through [that] panel, we have decided to issue a proposed rule later in 2017 concerning debt collectors’ communications practices and consumer disclosures.” The agenda states that a proposed rule is expected in September 2017. The Bureau also states that, in a departure from the July 2016 outline of proposals, the Bureau “intend[s] to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
- Overdrafts: The Bureau states that the current opt-in regime “produces substantially different opt-in rates across different depository institutions” and that its “supervisory and enforcement work indicates that some institutions are aggressively steering consumers to opt in.” The Bureau reports that it is “engaged in consumer testing of revised opt-in forms and considering whether other regulatory changes may be warranted to enhance consumer decision making.” The agenda lists “pre-rule activities” as continuing through June 2017.
- Small Business Lending: The agenda lists “pre-rule activities” on the implementation of the small business data reporting provisions of the Dodd-Frank Act as continuing through June 2017. Specifically, the agenda states that, at this juncture, the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.”
- HMDA & ECOA Amendments: The agenda lists October 2017 as the expected release date for the April 2017 proposed ECOA amendments to clarify requirements for collecting information on ethnicity, race, and sex, but does not list an expected release date for finalization of the April 2017 proposed technical corrections to the 2015 HMDA rule, or the July 2017 proposed amendments to the 2015 HMDA rule’s requirements for reporting home equity lines of credit.
- TRID/Know Before You Owe Amendments: The agenda lists March 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in our special alert.
- Mortgage Servicing Amendments: The Bureau states that it expects to issue a proposal in September 2017 “to make one or more substantive changes to the rule in response to . . . concerns” raised by the industry.
- Arbitration: Interestingly, the agenda states that the Bureau’s final rule on mandatory arbitration clauses, which was released this month to significant controversy, was not expected until August.
- Non-Bank Registration: The Bureau states that it is “considering whether rules to require registration of [installment lenders] or other non-depository lenders would facilitate supervision, as has been suggested to us by both consumer advocates and industry groups.”
- Prepaid Cards: The agenda does not provide an expected release date for finalization of the June 2017 proposed amendments addressing error resolution and limitations on liability, application of the rule’s credit-related provisions to digital wallets, and other issues.
- Credit Card Agreement Submission: The Bureau is “considering rules to modernize our database of credit card agreements to reduce burden on issuers that submit credit card agreements to us and make the database more useful for consumers and the general public.” The agenda lists “pre-rule activities” as continuing through October 2017.
ABA, CFPB to Host Webinar for Financial Institutions on New HMDA Submission Platform
On July 17, the ABA and CFPB announced a joint webinar on August 8 at 2:00 pm EDT, which will instruct compliance, operations, and loan processing professionals on how to use the new platform for submitting HMDA data. The webinar will provide an overview of the new tool and data collection process that all financial institutions must use to submit HMDA data beginning January 1, 2018 for data collected during 2017 and going forward.
Notably, however, on July 14, the CFPB issued a request for comments on proposed amendments to its HMDA reporting threshold for calendar years 2018 and 2019 to ease the burden on small-volume lenders. The comment period ends July 31, 2017. (See previous InfoBytes summary here.)