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Federal Regulators Propose New Appraisal Rules
On August 15, the Federal Reserve Board, the OCC, the FDIC, the NCUA, the FHFA, and the CFPB proposed new appraisal requirements for certain “higher-risk loans.” The new requirements apply to loans for which the APR exceeds the average market rate by 1.5 percent for first-lien loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent for subordinate-lien loans. The proposal exempts loans that are considered “qualified mortgages” as defined under a separate CFPB rulemaking to implement TILA section 129C, as well as reverse mortgages and loans secured by manufactured homes. The rule would implement amendments to TILA under the Dodd-Frank Act that require creditors to meet certain appraisal conditions before making a higher-risk loan. A creditor would have to obtain a written appraisal from a certified or licensed appraiser that is based on a physical property visit of the interior of the property. At application, the creditor would have to issue a disclosure stating the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted at his or her own expense. The creditor also would have to provide the borrower with a free copy of any written appraisals at least three business days before closing. Additional appraisal requirements would apply under certain circumstances.
Concurrently, the CFPB proposed a rule to implement a Dodd-Frank Act provision that adds similar appraisal requirements to ECOA. According to the proposal, for any loan to be secured by a first lien on a dwelling, a creditor would have to (i) notify applicants within three business days of receiving an application of their right to receive a free copy of written appraisals and valuations and (ii) provide applicants a free copy of all written appraisals and valuations promptly after receiving them, but in no case later than three business days prior to closing on the mortgage. The proposed rule prohibits creditors from charging additional fees for providing a copy of written appraisals and valuations. Applicants would be permitted to waive the three day requirement, provided a copy of all written appraisals and valuations is provided at or prior to closing. Together, the revisions to TILA and ECOA, as implemented by the proposed rules, would require creditors to provide two appraisal disclosures to consumers applying for a higher-risk loan secured by a first lien on a borrower’s principal dwelling. Comments on both rules are due by October 15, 2012.
Sixth Circuit Holds Lender May be Liable for Broker's Failure to Disclose Commission
On August 13, the U.S. Court of Appeals for the Sixth Circuit held that a lender may be liable under state common law claims of civil conspiracy for failing to disclose fees paid to a mortgage broker. Lee v. Countrywide Home Loans, Inc., No. 10-3777, 2012 WL 3264064 (6th Cir. Aug. 13, 2012). In this case, the borrowers brought common law civil conspiracy and fraud claims against their lender, alleging that the lender defrauded the borrowers by failing to disclose a commission the lender paid to the broker (the Yield Spread Premium) and subsequently recouped by raising the interest rate on the borrowers’ loan over the life of the loan. The borrowers also brought a claim for rescission under TILA. The district court found no evidence that the lender had any knowledge that the broker failed to disclose the fee and granted summary judgment to the bank on both common law claims. The district court also granted summary judgment for the lender with regard to the borrowers’ federal TILA claim. The appeals court upheld the district court ruling on common law fraud and TILA rescission but reversed the district court’s holding with regard to civil conspiracy. The appeals court held that a jury could find the lender participated in a civil conspiracy if the borrowers could show that the lender was aware that the broker was breaching its fiduciary duty by misrepresenting or concealing the commission and that the lender aided in this breach.
Illinois Amends Its Mortgage Licensing Act
On August 3, Illinois enacted numerous changes to its Residential Mortgage Licensing Act. Effective immediately, House Bill 4521 (i) increases annual licensing fees, (ii) substantially raises the cap on fines for fraudulent and deceptive acts, (iii) authorizes the state regulator to contract with the NMLS to collect and maintain records and process fees, (iv) prohibits advance fees for loan modifications, and (v) restricts short sale facilitation services to those originators who also hold a license under Illinois' Real Estate License Act. The bill amends and adds several definitions to facilitate the substantive changes above, such as its revision of the definition of “mortgage loan originator” to incorporate individuals engaged in loan modification activities. The bill also amends the state Residential Real Property Disclosure Act to require that monthly consumer debt be included in reports prepared by originators for the state predatory lending database. This change takes effect January 1, 2013.
HUD Delays Changes to Title Approval at Conveyance
On July 31, HUD issued Mortgagee Letter 2012-14, which delays until November 1, 2012 implementation of recent changes to title approval at conveyance. The changes, originally set to take effect August 1, 2012, were issued in June as Mortgagee Letter 2012-11. Pursuant to that letter, mortgagees must pay in full prior to conveyance all taxes, homeowners’ association fees, and water, sewer or other assessments. The initial letter also detailed related documentation and certification requirements and outlined FHA’s rights to reconvey a property under certain circumstances.
State Law Update: Hawaii Establishes Transition Period for Certain Mortgage Loan Originators
On July 25, the Hawaii Department of Commerce and Consumer Affairs (DCCA) announced a transition period for certain mortgage loan originator companies (MLOCs) to comply with recently enacted mortgage loan originator (MLO) licensing requirements. Pursuant to Act 252 (Session 2012), effective July 1, 2012, all exempt registered MLOs and MLOCs of a subsidiary of an insured depository institution regulated by a federal banking agency are required to be licensed under the state’s SAFE Act. Under the DCCA action, affected MLOs can continue to engage in mortgage loan origination activity until September 30, 2012, provided that they take certain preliminary steps towards compliance, such as creating a record in the Nationwide Mortgage Licensing System.
Fannie Mae Announces Numerous Servicing Policy Changes; ULDD Mandate Takes Effect
On July 25, Fannie Mae issued Servicing Guide Announcement SVC-2012-12, which provides notice of miscellaneous changes to the Fannie Mae Servicing Guide related to (i) the MERS Rule 14 Notice, (ii) approved title company requirements for certain states, and (iii) allowable attorney fees. With respect to the MERS Rule 14 notice, servicers will now be required to notify Fannie Mae whenever they are required to send MERS notice of certain MERS-related legal challenges. Fannie Mae announced that it is eliminating the requirement that servicers select a Fannie Mae-approved title company for work performed inArizona,California andWashington. Instead, servicers may select the title company of their choice. Fannie Mae also announced changes to the allowable amount of attorney’s and trustee’s fees in several jurisdictions.
On July 23, the Uniform Loan Delivery Dataset (ULDD) mandate took effect for loans delivered to Fannie Mae and Freddie Mac. Fannie Mae recently provided a notification, and Freddie Mac recently published a Bulletin, outlining updates to their ULDD resources.
State Law Update: Hawaii and California Take Actions on Mortgages and Privacy
California AG Announces Privacy Enforcement Unit. On July 19, California Attorney General Kamala Harris announced the creation of the Privacy Enforcement and Protection Unit. The unit will combine the various existing privacy functions of the California Department of Justice to centrally enforce and protect consumer privacy. The unit will pursue civil prosecution of state and federal privacy laws regulating the collection, retention, disclosure, and destruction of private or sensitive information by individuals, organizations, and the government. These include laws relating to cyber privacy, financial privacy, identity theft, and data breaches, among others. The new unit will reside within the eCrime Unit, which was created in December 2011 to identify and prosecute identity theft crimes, cyber-crimes and other crimes involving the use of technology.
California Expands Servicemember Protections. On July 13, California enacted AB 2476, which expands the period of time during which servicemembers are protected from high interest rates. Under current law, a creditor cannot charge, during a servicemember’s period of military service, an interest rate in excess of 6% on any obligation or liability incurred by a servicemember before that person’s entry into service. The bill expands the interest rate protections to prevent an increase in any such rate on a mortgage, trust deed, or other security in the nature of a mortgage for one year after the period of military service.
Hawaii Enacts Multiple Mortgage-Related Bills and Legislation to Protect Personal Information. Recently, Hawaii enacted a set of bills related to mortgage origination and servicing. With regard to mortgage origination, S.B. 2763 amends the state SAFE Act to reflect changes to the federal law and to adjust originator registration fees. With regard to mortgage servicers, H.B. 2502 allows the Commissioner of Financial Institutions to require registration with the NMLS and makes it unlawful for a servicer to provide loan modifications without first complying with certain licensing requirements. Another bill, H.B. 1875 makes numerous changes to the state’s foreclosure laws, largely implementing recommendations from the Mortgage Foreclosure Task Force created by the state legislature in 2010. Finally, with regard to mortgages, H.B. 2375 establishes criminal penalties for certain violations of the state’s Mortgage Rescue Fraud Prevention Act. Hawaii also recently enacted S.B. 2419, which prohibits businesses from scanning a customer’s identification card or driver’s license with an electronic device capable of obtaining information electronically encoded on that identification card, except for specific purposes.
Texas Revises Residential Mortgage Loan Originator and Mortgage Banker Regulations
Recently, the Texas Department of Savings and Mortgage Lending finalized revisions and updates to its regulations governing residential mortgage loan originators and mortgage bankers. The final rules took effect July 5, 2012 and mirror the rules as proposed on May, 4, 2012. In addition to clarifying and updating the regulations, the new rules alter disclosure forms for loans originated by mortgage companies or brokers. However, the department will not begin citing violations for use of an outdated form until September 1, 2012.
FHFA Announces Multiple New Policy Initiatives
On June 15, the FHFA published a Notice of Proposed Rulemaking regarding state and local Property Assessed Clean Energy (PACE) programs, as required by a preliminary injunction issued by the Northern District of California in a lawsuit challenging the FHFA’s direction to Fannie Mae and Freddie Mac not to purchase mortgages subject to first-lien PACE obligations, and to the Federal Home Loan Banks to limit exposure to first-lien PACE programs. Under the PACE programs, local governments provide property-secured financing to property owners for the purchase of energy-related home improvement projects. The FHFA believes such financing arrangements present safety and soundness concerns. Several states challenged the FHFA actions in court. While most of the cases were dismissed, California succeeded in forcing the FHFA to conduct a formal rulemaking on the issue. Comments on the proposed rule are due by July 30, 2012.
On June 18, the FHFA announced an initiative to supplement fraud reporting by the entities it supervises. Under the Suspended Counterparty Program, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are required to notify the FHFA whenever an individual or company with whom they do business is adjudicated to have engaged in fraud or other financial misconduct. The FHFA also will consider information it receives from other government sources. Based on the reported information, the FHFA will make a determination as to whether the individual or business will be suspended from doing business with the supervised entities. The new program takes effect August 15, 2012.
On June 19, the FHFA published a Notice and Request for Comment regarding a proposed new rating system to be used in conducting safety and soundness examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The proposal seeks to implement a single risk-focused examination system for all three entities that would be similar to the “CAMELS” rating system used by federal prudential regulators for depository institutions. The FHFA is accepting comments on the proposed system through July 19, 2012.
Fannie Mae Announces Private Transfer Fee Covenant Policy, Revises Loan Modification Agreement
On June 19, Fannie Mae issued the Selling Guide Announcement SEL-2012-05, which states that effective July 12, 2012, Fannie Mae will not purchase or securitize mortgages on properties encumbered by private transfer fee covenants that were created on or after February 8, 2011, with some exceptions. The policy follows a rule finalized by FHFA on March 16, 2012 that prohibits Fannie Mae and Freddie Mac from purchasing or investing in any properties or securities backed by such mortgages. In light of the new policy, mortgages on affected properties must be purchased by Fannie Mae as whole loans no later than July 13, 2012, or must be delivered no later than July 13, 2012 into MBS pools with issue dates of July 1, 2012 or later. The policy requires lenders to establish their own policies and procedures to ensure compliance. On June 20, Fannie Mae published a Servicing Notice to advise servicers to begin using a new Loan Modification Agreement that was updated to include a line for the date of the lenders signature. The new form must be used for all Trial Period Plans beginning on or after September 1, 2012.