InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
UK FSA Fines Bank for Inaccurate Mortgage Records
On October 19, the UK FSA announced that it fined a bank £4.2 million ($6.7 million) for failing to keep accurate records regarding 250,000 mortgages it was servicing. In monitoring a consumer forum website, the FSA found that certain of the bank’s borrowers had complained of being excluded from a bank program meant to remedy a separate problem. Upon investigation, the FSA determined that the bank held its mortgage information on two separate unaligned systems. The FSA also identified problems with two other processes where manual updates were not always carried out. The FSA claimed that, as a result of its recordkeeping practices, the bank relied on incorrect records for certain of its mortgages over a seven-year period. Because the bulk of the alleged misconduct occurred before the FSA’s new penalty framework came into force in March 2010, the penalty was assessed under the prior regime. Further, since the bank agreed to settle at an early stage of the investigation, it qualified for a 30% discount pursuant to the FSA’s executive settlement procedures.
California Appeals Court Reinstates Challenge to Allegedly Deceptive ARMs
On October 11, the California Court of Appeal, Sixth District, reinstated a case in which borrowers claim fraudulent omission and violation of the unfair competition law (UCL) based on lenders' alleged failure to disclose the essential terms of certain mortgage loans. Thibault v. Am. Mortg. Network, Inc., No. H036620, 2012 WL 4881541 (Cal. Ct. App. Oct. 11, 2012). The borrowers claim the lenders did not disclose that the option adjustable rate mortgage loans (ARMs) were guaranteed to cause negative amortization under the minimum payments required under the loans, as set forth in the only payment plan presented to the borrowers. The trial court dismissed the case, holding that the ARMs at issue do not necessarily cause negative amortization as the loan documents clearly disclose that negative amortization occurs only if the minimum payment fails to cover the interest due, and the borrowers chose not to make more than the minimum payment. The appellate court, relying on a prior California appellate decision, Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230 (2011), disagreed and held that the borrowers adequately pleaded that material facts were concealed by inaccurate representations and half-truths; the court reasoned that the actual interest rates and monthly payment amounts necessary to amortize the loan were hidden in the complexity of the loan terms. The court further noted that the loans disclosed the use of "teaser" interest rates to calculate the minimum payments without showing how those payments compare to the interest accruing on the loan. With regard to the borrowers' potentially duplicative UCL claim, the court found no reason to force the borrowers to choose between that claim and their common law fraud claim at this stage of the proceedings. The appellate court reversed the trial court's judgment.
Freddie Mac Revises ARM Requirements, Updates Home Possible Program
On October 16, Freddie Mac issued Single-Family Seller/Servicer Guide Bulletin 2012-21, which revises certain requirements for adjustable rate mortgages (ARMs) and provides guidance regarding Home Possible Mortgages. For mortgages with settlement dates on or after July 1, 2013, ARMs with initial periods of five years or less cannot have initial or periodic caps that exceed 2%. In connection with the Home Possible Mortgage program and based on the 2012 area median income estimates, Freddie Mac revised the definition of "underserved area."
California Federal District Court Affirms Lender's Sole Discretion to Change Rate Index for ARM Loan
On October 3, the U.S. District Court for the Northern District of California held that a lender had no duty to abandon the index to which certain adjustable rate mortgage rates were tied when the index experienced an unprecedented jump. Haggarty v. Wells Fargo Bank, N.A., No 10-02416, 2012 WL 4742815 (N.D. Cal. Oct. 3, 2012). The borrowers, who had entered into two adjustable rate mortgages, sued the lender when their rates increased substantially following a jump in the index to which the adjustable rates were tied. On behalf of themselves and a putative class, the borrowers claimed that the bank breached an implied covenant of good faith and fair dealing by failing to substitute a new index under a clause in the Notes that allowed the lender to choose a new index if the original index was “substantially recalculated.” The court held that the Note language granting the lender ”sole discretion” to determine whether the index had been substantially recalculated insulated the lender from claims that it was required to reach a certain conclusion about the index and the need to substitute a new index. Further, the court held that the borrowers’ attempt to use implied covenants to add contract terms or establish a breach was preempted by the Home Owners’ Loan Act, which in relevant part was intended to avoid inconsistent obligations for lenders regarding interest rate adjustments. The court granted summary judgment in favor of the lender.
Fannie Mae Announces Numerous Selling Guide Updates
On October 2, Fannie Mae issued Selling Guide Announcement SEL-2012-10, which updates and clarifies certain Selling Guide policies and procedures. First, the Announcement explains that the Selling Guide has been updated to incorporate prior changes announced in SEL-2012-09 (Updates to Refi Plus and DU Refi Plus) and SEL 2012-03 (Changes to Pricing Terms). Second, effective immediately, lenders must use the higher of the outstanding unpaid principle balance or the modified credit limit when calculating the HCLTV ratio for permanently modified home equity lines of credit. Third, Fannie Mae has removed the limit on the weighted-average coupon of fixed rate mortgage loans in MBS pools that involve a guaranty fee buyup, also effective immediately. Fourth, Fannie Mae has (i) clarified clarify distinctions between inactive and deactivated lenders, (ii) revised document custodian and custodial depository requirements, and (iii) updated the Eligibility Matrix.
First Circuit Reinstates Two Force-Placed Insurance Class Actions
On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.
FDIC to Host Teleconferences on CFPB Proposed Mortgage Rules
On September 18, the FDIC announced in Financial Institution Letter FIL-39-2012 that it plans to host two teleconferences in the coming weeks to discuss the CFPB’s mortgage-related proposed rules. The teleconferences will be conducted by staff from the FDIC’s Division of Depositor and Consumer Protection and are being offered to officers and employees of FDIC-supervised institutions. The first call will take place on September 27, 2012 and will cover (i) mortgage origination standards, (ii) appraisals for “higher-risk” mortgages, (iii) ECOA appraisal requirements, and (iv) mortgage servicing standards. On October 10, 2012, FDIC staff will discuss (i) RESPA/TILA mortgage disclosure integration, (ii) qualified mortgages and the ability to repay standard, (iii) escrow requirements for “higher-priced mortgage loans”, and (iv) high-cost HOEPA loans.
FHFA Inspector General Publishes Two Reports
On September 18, the Inspector General (IG) for the FHFA published a report on the FHFA’s oversight of management of high-risk sellers and servicers by Fannie Mae and Freddie Mac (the Enterprises). The high-risk seller/servicer report presents a review of the Enterprises’ high risk counterparties and noted that more than 300 are on the Enterprises’ watch lists while more than forty have been blocked from doing business with the Enterprises. To better manage counterparty risk, the IG recommends that the FHFA promulgate standards for the Enterprises to develop contingency plans for handling a large seller/servicer’s failure, and that the FHFA finalize its proposed guidance for FHFA examiners to use in assessing the Enterprises’ contingency plans.
On the same day, the FHFA IG published a report regarding Fannie Mae’s purchase and transfer of certain mortgage servicing rights on approximately 384,000 loans for roughly $512 million. The IG determined that the amount paid was consistent with other such purchases made as part of a Fannie Mae program through which Fannie Mae transferred mortgage servicing rights from a regular servicer to a specialty servicer. While it determined that Fannie Mae did not overpay for the servicing rights in context, the IG recommended that the FHFA (i) consider requiring the Enterprises to seek approval for high costs initiatives, (ii) ensure additional scrutiny of pricing of future significant servicing transactions, (iii) reevaluate the Fannie Mae transfer program, and (iv) follow through with Fannie Mae’s implementation of prior FHFA directions regarding the purchase and transfer of mortgage servicing rights.
Fannie Mae and Freddie Mac Implement Numerous Selling Updates, Announce Appraisal Submission Enhancements
On September 14, Freddie Mac issued Bulletin 2012-19, which implements changes to the requirements for Relief Refinance Mortgages announced on July 31, 2012. The Bulletin also notifies sellers that (i) Freddie Mac no longer is purchasing balloon/reset mortgages, (ii) the Selling Guide has been updated to reflect that at least one borrower on a refinance must have held title and resided in the property for the prior twelve months, and (iii) several requirements for the Selling System Servicing Released Sales Process have been updated and revised.
Also on September 14, Fannie Mae announced in Selling Guide Announcement SEL-2012-09 numerous enhancements to the underwriting and documentation policies for Refi Plus and DU Refi Plus loans, including to (i) reduce representation and warranties, (ii) provide an alternative to income verification for certain payment changes, (iii) reduce income and assets documentation, and (iv) provide an alternative qualification method when removing a borrower.
On September 18, Fannie Mae and Freddie Mac announced that the appraisal submission process through the Uniform Collateral Data Portal will be enhanced on October 7, 2012.
FHFA, Fannie Mae, and Freddie Mac Implement New Representation and Warranty Framework
On September 11, the FHFA announced that Fannie Mae and Freddie Mac (the GSEs) are implementing a new representation and warranty framework for all conventional loans sold or delivered to the GSEs on or after January 1, 2013. As detailed in subsequent announcements from the GSEs, including Fannie Mae Selling Guide Announcement SEL-2012-08, Fannie Mae Lender Letter LL-2012-05, Freddie Mac Bulletin 2012-18, and a Freddie Mac Industry Letter, the new framework is designed to improve the GSE loan review process and to clarify lenders' repurchase exposure. With regard to loan review, under the new framework, (i) GSE reviews will generally be conducted between 30 and 120 days after loan purchase, (ii) the GSEs will have consistent timelines for submission of loan file review requests, (iii) loan file evaluation will be more comprehensive and will leverage data from tools currently used by the GSEs, and (iv) the repurchase request appeals process will be made more transparent. For lenders, the new framework will provide relief from certain repurchase obligations for loans that meet specific payment requirements, including for loans with 36 consecutive months of timely payments and HARP loans with a twelve-month acceptable payment history. Lenders will receive additional detailed information about exclusions from this new representation and warranty relief.