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FHFA OIG Recommends Changes To Fannie Mae Short Sale Oversight
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.
CFPB Director Testifies Before Senate Banking Committee
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month.
Mortgage Rule Implementation
Several committee members asked the Director about the CFPB’s compliance expectations for financial institutions when the various mortgage rules take effect in January. Director Cordray reiterated statements he has made recently in other forums: (i) the CFPB believes the vast majority of financial institutions, both large and small, will be in substantial compliance by January, (ii) the CFPB is sticking with the January implementation deadline, and (iii) “in the early months” the CFPB will not be looking for strict compliance, but rather will assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Senator Coburn (R-OK) sought clarification on the terms “early months” and “good faith effort.” On the former, the Director stated that it remains undefined. With regard to the latter, the Director explained that the CFPB will look to see whether institutions generally are taking the rules seriously and if they have compliance management system is in place that allow for monitoring and reporting to the institution’s board. He added that the CFPB does not intend to play “gotcha.”
Auto Finance
Several Republican members raised concerns about the CFPB’s approach to auto finance supervision and enforcement and specifically the indirect auto finance bulletin issued earlier this year. For example, Senator Moran (R-KS) urged Director Cordray to provide more specific answers to questions recently posed by a bipartisan group of Senators, including more detail on the CFPB’s statistical methodology for determining disparate impact and its use of proxies. Director Cordray’s November 4 response to the Senate letter largely re-stated the CFPB’s response to a similar inquiry submitted by a group of House members over the summer.
In the most recent letter, Director Cordray explained further the CFPB’s integrated methodology for proxying race and national origin, which combines probabilities about an individual’s race or ethnicity based on surname and geocoding. In a related blog post, the CFPB’s Assistant Director of Fair Lending and Equal Opportunity described proxy methodologies employed by “responsible lenders,” and attempted to further justify the CFPB’s methodology. During the hearing, Director Cordray asserted that the CFPB’s approach to both is time honored and well-tested. He explained that the CFPB’s proxy methodology is a refinement of that used by the Federal Reserve Board and is “state of the art.” He acknowledged that some may have a problem with the state of the art, but asserted that the methodology is proven in social science literature and used beyond the lending context, and added that the CFPB has to have confidence in the approach knowing that it could be tested in court.
Director Cordray expressed concern about discussing the CFPB’s specific methods in detail because they relate to ongoing investigative processes the CFPB is pursuing with the DOJ. He also repeatedly referenced today’s auto finance forum as a venue in which these issues will be discussed in more detail, and one that will provide industry an opportunity to weigh in on the CFPB’s approach. He dismissed concerns that the CFPB’s activities in the auto finance realm—in particular its push towards flat fee compensation arrangements for dealers—might constrain credit or raise consumer costs, citing the “red hot” car market.
Senator Warren (D-MA) commented on dealer markups, citing “studies” that show markups cost consumers $26 billion a year and that minorities pay a higher share of those costs. She called for Congress to remove the Dodd-Frank Act exemption for dealers and provide the CFPB authority over all auto lending. Director Cordray later stated that the law drew an “unnatural line” between finance companies on the one hand and dealers on the other, but that the CFPB understands its jurisdiction and does not want to be perceived to be extending its reach to cover dealers.
Student Lending
Student loans were the only product that received special, though not new, attention in the CFPB Director’s written testimony. There and in his oral statement he highlighted the comments and complaints the CFPB has received on student lending issues and again identified problems in the student loan market that the CFPB believes mirror those seen in the mortgage market prior to the financial crisis.
Senator Coburn posited that some of the student debt problem is attributable to borrowers maxing out loans for purposes other than paying for costs not directly associated with education and suggested that Congress look at limiting acceptable uses of federal loans.
Military Lending Act
In response to a question from Senator Reed (D-RI), Director Cordray stated that the CFPB, the DOD and other agencies are close to proposing new rules under the MLA. He indicated that the proposal is pending OMB review.
Prepaid Cards
Senator Menendez (D-NJ) complained about prepaid card fees and stated he plans to reintroduce his prepaid card bill. Director Cordray generally agreed that the CFPB has concerns about the prepaid market and noted the Bureau’s 2012 ANPR. The CFPB’s spring rulemaking agenda indicated the CFPB could propose a prepaid card rule before the end of this year. However, the Director did not provide an updated timetable for issuing a prepaid card rule during his testimony.
GLB Act Privacy Notices
Senator Brown (D-OH) continued to push his bill that would exempt from the Gramm-Leach-Bliley Act’s annual privacy policy notice requirement any financial institution that (i) provides nonpublic personal information only in accordance with specified requirements and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from its most recent disclosure. The House of Representatives passed its version earlier this year and the Senate could move the bill before the end of this year. Director Cordray indicated that the CFPB continues to work on a rulemaking on this issue, and that while the CFPB may not be able to go as far as Congress could through legislation, the CFPB rule is “moving in the same direction” as the legislation.
CFPB Data Collection
Much of the hearing again centered on the CFPB’s collection and use of personally identifiable information (PII). Sen. Crapo (R-ID) continued to press the issue for Republicans, and was joined by Senators Vitter (R-LA) and Toomey (R-PA). Those members asked Director Cordray to describe the types of data the CFPB collects and how that data is protected. Sen. Crapo focused primarily on the credit card account data that the CFPB obtains from Argus, which the Senator estimated to include 900 million accounts. Senator Crapo believes that even though the data may be “de-identified,” the possibility exists that it could be reverse engineered to allow CFPB staff to obtain PII or review individual accounts. Director Cordray repeatedly explained that the CFPB’s interest in that data set is to monitor market trends and the broad treatment of card holders, and the CFPB is not interested in monitoring individual accounts. He asserted the CFPB lacks the capability or interest to obtain or use consumer PII in that context. He pointed out that other regulators have had and continue to have access to the same data. Senator Crapo noted that he has requested a GAO review of this issue; Director Cordray welcomes the audit.
CFPB Rulemaking and Examination Processes
Senators Corker (R-TN) and Toomey (R-PA) brought up the recent Bipartisan Policy Center report on the CFPB to make the case that the CFPB should pursue open rulemakings instead of issuing guidance. Director Cordray stated that the CFPB will continue to use guidance when it is restating or clarifying the law, but otherwise will use open rulemakings. He admitted the auto finance guidance process could have been more open or inclusive, but again cited the upcoming forum as a way to address those concerns. He defended the CFPB’s debt collection bulletin and its 2012 fair lending bulletin.
Director Cordray stated that the CFPB still is only 80% staffed on supervision. While he agrees that the CFPB may have been slow on closing out examinations, the CFPB deliberately chose quality and consistency over speed while it staffed-up. He asserted that speed and responsiveness have greatly improved in recent months and will continue to improve next year.
Fannie Mae, Freddie Mac To Restrict Lender-Placed Insurance Practices
On November 5, the FHFA announced that it had directed Fannie Mae and Freddie Mac to implement new restrictions on lender-placed insurance practices. In March, the FHFA sought comments on certain potential lender-placed insurance restrictions, including new policies to (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers, and (ii) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer. Following that comment process and related efforts by the FHFA to obtain feedback on these issues, the FHFA now has directed Fannie Mae and Freddie Mac to provide aligned guidance to sellers and servicers to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. The announcement does not provide any timeline for the new guidance, but states Fannie Mae and Freddie Mac will provide implementation schedules with the new rules.
HUD Clarifies FHA Loss Mitigation Requirements
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.
C.D. Cal. Denies Class Certification In Lender-Placed Insurance Dispute
On November 4, the United States District Court for the Central District of California denied certification of a putative nationwide class that alleges a mortgage servicer and lender-placed insurance (LPI) companies violated California’s Unfair Competition Law (UCL), breached mortgage contracts, and unjustly enriched themselves by improperly charging and overcharging borrowers for lender-placed insurance. Gustafson v. BAC Home Loans Servicing LP, No. 11-00915, 2013 WL 5911252 (C.D. Cal. Nov. 4, 2013). The court held that the named borrowers could not assert a UCL claim nationwide because (i) the UCL claims fell within the mortgage contracts’ choice-of-law provisions, (ii) there are material differences among the states’ consumer protection laws, (iii) foreign states have an interest in regulating conduct that was carried out, in part, within their borders, and (iv) the last event necessary to make the insurers and servicer liable occurred where the insurance premiums were charged to borrowers in their home states. The court also held that the borrowers failed to meet the commonality and predominance requirements of Rule 23 for both their breach of contract and unjust enrichment claims, in part because laws regarding breach of contract, affirmative defenses, and unjust enrichment vary from state to state. Further, the court explained that the unjust enrichment claim required individualized fact determinations as to whether (i) borrowers who are charged for LPI may either not pay for it, or not pay the full rate, and (ii) individual class members’ circumstances could preclude or reduce recovery. BuckleySandler represents lender-placed insurers in this and other similar actions.
Seventh Circuit Affirms Dismissal of Lender-Placed Insurance Claims
On November 4, the United States Court of Appeals of the Seventh Circuit affirmed a trial court’s dismissal of allegations that a lender and insurer fraudulently placed insurance on the borrower’s property after the borrower’s homeowner’s policy lapsed. Cohen v. Am. Sec. Ins. Co., No. 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013). The court held that the borrower’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act failed because (i) the loan agreement and the lender’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation, (ii) the borrower did not allege an unfair business practice because “there is nothing oppressive or unscrupulous about giving a counterparty the choice to fulfill his contractual duties or be declared in default for failing to do so,” and (ii) “[the lender] was not subject to divided loyalties; rather, it was subject to an undivided loyalty to itself, and it made this clear from the start.” The court also held that the borrower failed to state a breach of contract claim because nothing in the loan agreement and related documents prohibited the lender and its insurance-agency affiliate from receiving a fee or commission for LPI. To the contrary, the court explained, the loan agreement and related notices and disclosures specifically warned the borrower of this possibility. The court also affirmed the dismissal of the borrower’s fraud, conversion, and unjust enrichment claims for failing to state a claim as a matter of law, but on different grounds than the district court. The district court had ruled in favor of the lender and insurer based on federal preemption and the filed rate doctrine. The Seventh Circuit chose not to address those bases for dismissal in its ruling.
Unofficial Transcripts Of CFPB Webinars On Mortgage Rules
In an effort to address outstanding questions regarding the new mortgage rules that are scheduled to take effect in January 2014, CFPB staff provided non-binding, informal guidance in two webinars hosted by the Mortgage Bankers Association. Specifically, CFPB staff answered questions regarding the mortgage servicing rules on October 16, 2013 and questions regarding the mortgage origination rules (including the Ability-to-Repay/Qualified Mortgage and Loan Originator Compensation rules) on October 17, 2013.
The CFPB staff’s slides presenting the questions addressed during the webinars and the audio recordings of their responses are available through the MBA’s Compliance Resource Center. BuckleySandler has prepared transcripts of the servicing and mortgage origination webinars that incorporate the CFPB’s slides. These transcripts are provided for informational purposes only and do not constitute legal opinions, interpretations, or advice by BuckleySandler. The transcripts were prepared from the audio recordings provided by the MBA and may have minor inaccuracies due to sound quality. In addition, the transcripts have not been reviewed by the CFPB for accuracy or completeness.
Questions regarding the matters discussed in the webinars or the rules themselves may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past. Additional information about the CFPB mortgage rules is available in our CFPB Resource Center.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Sherry-Maria Safchuk, (310) 424-3917
HUD Updates Foreclosure Procedures, Pre-Foreclosure Borrower Communication Policies
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.
Fannie Mae Announces Servicing Policy Changes
On October 30, Fannie Mae issued Servicing Guide Announcement SVC-2013-22, which describes various servicing policy updates. First, effective on or after February 1, 2014 for condominium insurance policy renewals, Fannie Mae is prohibiting the use of master or blanket insurance policies that cover multiple unaffiliated projects. Second, effective immediately for mortgage loan modifications, Fannie Mae is requiring that principal forbearance is payable upon the earliest of the maturity of the mortgage loan modification, sale or transfer of the property, refinance of the loan, or payoff of the interest-bearing unpaid principal. Third, effective January 1, 2014 for property inspection reimbursements, the Announcement updates the maximum amounts Fannie Mae will reimburse servicers for property inspections, outlines servicer responsibilities related to reimbursement requests, and clarifies the escalated case resolution process. Finally, the Announcement reminds servicers of their obligation to comply with both the Selling Guide and Servicing Guide, and informs servicers that requirements for maintaining eligibility and related fees were recently updated in the Selling Guide.
Freddie Mac Updates Foreclosure, Abandoned Property Requirements
On October 18, Freddie Mac issued Bulletin 2013-22, which updates servicing requirements related to foreclosures and management of abandoned properties. The Bulletin states that servicers may, without obtaining prior written approval, instruct foreclosure counsel to conduct a foreclosure in Freddie Mac’s name when applicable law precludes the servicer from conducting the foreclosure in its own name, and establishes other requirements for servicers that do so. The Bulletin also updates requirements regarding vesting the title after foreclosure, stating that for conventional mortgages servicers must ensure that the title to the property is vested in Freddie Mac’s name (if the property is not purchased by a third party), unless it is in Freddie Mac’s best interest to have the title vested in the servicer’s name after the foreclosure sale, and then have the title to the property transferred to Freddie Mac via quitclaim deed. With regard to preservation of abandoned properties, the Bulletin, for example, (i) informs servicers of new expense codes and limits, (ii) introduces new pricing requirements for property preservation expense items that identify the per unit cost that Freddie Mac finds reasonable, and (iii) removes the requirement that servicers obtain pre-approval for reimbursement of certain vacant property registration fees. The Bulletin also announces certain other changes related to foreclosures and abandoned properties.