InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
HUD Finalizes QM Rule, Manual Underwriting Standards
On December 11, HUD issued a final rule defining what constitutes a “qualified mortgage” (QM) for purposes of loans insured by the FHA. The final rule largely adopts HUD’s proposal, which was the subject of our October 2013 Special Alert. The final rule clarifies certain aspects of the HUD proposal. Among other things, it replaces provision in a CFPB’s QM rule that allows consumers to rebut the presumption of compliance based on residual income, with a provision that the consumer show that the creditor failed to underwrite consistent with HUD requirements. With the final rule, HUD also adopted new underwriting standards. The effective date for the underwriting standards will be set by a future Mortgagee Letter, but will be no earlier than March 11, 2014.
HUD Decreases FHA Maximum Loan Limits
On December 6, HUD announced new loan maximum limits for FHA-insured mortgages. As detailed in Mortgagee Letter 2013-43, effective for all FHA case numbers assigned on or after January 1, 2014 through December 31, 2014, the current high-cost area “ceiling” of $729,750 will be reduced to $625,500. HUD stated that approximately 650 counties will have lower limits as a result of this change. Mortgages that meet the requirements for streamline refinance transactions without an appraisal are not subject to the new limits. Further, the Mortgagee Letter leaves the current standard loan limit for low cost areas unchanged at $271,050, and the maximum claim amount for FHA-insured reverse mortgages (HECMs) will remain $625,500.
HUD Updates REO Policies
On December 6, HUD issued Mortgagee Letter 2013-44, which updates HUD’s policies on (i) the use of an FHA-insured mortgage to purchase a HUD REO property; and (ii) the use of distressed properties in determining the market value of REO properties. With regard to the first, the letter provides a chart of conditions that trigger a requirement for the mortgagee to order a new appraisal. According to the letter, if a new appraisal is ordered, then (i) the original appraisal ordered by HUD may not be used to underwrite the loan; (ii) HUD will not reimburse the mortgagee for the cost of the new appraisal and the borrower/purchaser can be charged for the expense of the new appraisal as part of the borrower’s closing costs; (iii) the mortgagee must provide a written justification for ordering a new appraisal; and (iv) the mortgagee must retain copies of all appraisals available to the mortgagee in its loan file. With regard to establishing market value of REO properties, the letter details the conditions implicit in HUD’s characterization that a market value price should “reflect the price appropriate for properties sold in a competitive and open market, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” In addition, the letter states that, when considering sales to be used as comparables, the appraiser must note the conditions of sale and the motivations of the sellers and purchasers, and that in developing an opinion of market value, REO sales and pre-foreclosure sales transactions should only be chosen as comparables if there is compelling evidence in the market to warrant their use. Mortgagees are required to implement the policy changes in the letter by February 4, 2014.
Sixth Circuit Rejects HUD Test For RESPA Affiliated Business Safe Harbor
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
HUD Extends Renewal Period For Certain Lenders And Mortgagees
On November 27, HUD issued Mortgagee Letter 2013-42, granting an extension of time to Title I and II lenders and mortgagees with a December 31, 2013 fiscal year end to submit required materials and fees for annual recertification. The letter notes that FHA-approved lenders and mortgagees with a fiscal year end of December 31, 2013 or later must use the Lender Electronic Assessment Portal (LEAP) to complete the annual certification process. Given that LEAP recertification functionality will not be deployed until after March 31, 2014, lenders and mortgagees with a fiscal year end of December 31, 2013 will be unable to access LEAP within the required timeframe, and instead will have until 30 days after the deployment of LEAP functionality to complete their annual certification.
HUD Revises Lender Self-Reporting Requirements
On November 13, HUD issued Mortgagee Letter 2013-41, which, effective immediately, clarifies self-reporting requirements for all single-family FHA-approved lenders. The letter details lenders’ obligations to report all findings of fraud and material misrepresentations, as well as any material findings concerning origination, servicing, or underwriting of a loan that the lender is unable to mitigate. The letter defines “material finding” and provides a non-exhaustive list of examples, and describes the parameters for mitigating reportable findings. The letter outlines internal and external reporting timeframes: (i) internal reporting to senior management must take place within 30 days of an initial findings report; (ii) findings of fraud or material misrepresentation must be reported immediately to the FHA; and (iii) all other material findings must be reported no later than 30 days after the lender has completed its internal evaluation, or within 60 days of initial disclosure, whichever occurs first. The letter also explains that the FHA may request supporting documentation for use in reviewing a report, and that the FHA requires the reporting contact to have immediate access to: (i) the endorsement case binder; (ii) the quality control report; and (iii) any other documentation necessary to evaluate the finding. The letter further states that failure to comply with these requirements may result in the FHA taking administrative action against the lender.
Special Alert: Settlement In Key Fair Housing Case Moves Forward, Supreme Court Unlikely To Hear Appeal
Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.
The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory.
Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly.
To date, eleven federal Circuits have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court’s then-current Title VII jurisprudence regarding employment discrimination – which the appellate courts interpreted as permitting disparate impact claims – and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company’s neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, most significantly in Smith v. City of Jackson, 544 U.S. 228 (2005), that call prior appellate court precedent into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII’s specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, federal courts have offered almost no guidance as to whether the FHA’s statutory text permits disparate impact claims.
It is worth noting that in Mt. Holly, the Court could have bypassed certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in Mt. Holly in a multi-part second question on which cert. was not granted, which would have required argument on “burden shifting,” “balancing” and other tests that have been developed by various Circuits. Additionally, the question before the Court was whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court’s analysis, the question of whether Section 805 of the FHA—the section specifically applicable to mortgage financing—permits disparate impact claims may have remained an open issue. Still, the Supreme Court generally does seem willing to review at least some aspects of disparate impact analysis in the fair housing context.
With the settlement of the underlying Mt. Holly litigation, attention will likely shift to a matter that is pending in the U.S. District Court for the District of Columbia, but which is currently stayed pending the conclusion of the Supreme Court appeal in Mt. Holly. In that action, insurance trade associations challenge a rule issued by the Department of Housing and Urban Development on the use of disparate impact analysis under the FHA, which codified the three-step burden-shifting approach to determine liability related to a disparate impact claim.
HUD Settlement Resolves Fair Housing Act Allegations
On November 5, HUD released a Conciliation Agreement with a lender alleged to have discriminated against African-American and Hispanic borrowers seeking mortgage loans. In an administrative complaint filed following a review of the lender’s internal loan data, HUD claimed that the lender’s wholesale lending program violated the Fair Housing Act by underwriting, approving, purchasing, and securitizing mortgage loans in a manner that allowed pricing and denial disparities on the basis of race and national origin. HUD stated that the lender’s wholesale business, which granted third-party brokers discretion to negotiate fees and compensated those brokers through direct fees paid by borrowers to brokers, and/or through yield spread premiums paid by the lender, allegedly resulted in African-American and Hispanic borrowers paying higher APRs, receiving higher-priced loans, and paying more fees than similarly situated white borrows. HUD also alleged that African-American and Hispanic applicants were more likely to have their loan applications denied. HUD did not allege any intentional discrimination, and instead based its claims on its finding that statistical dipartites existed. To resolve the HUD investigation and complaint without litigation, and without admitting the allegations, the lender agreed to establish a $12.1 million fund to compensate allegedly harmed consumers and to distribute any excess funds to housing advocacy and counseling groups.
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.
HUD Releases Draft Section Of Overhauled SF Handbook
On October 29, HUD released a draft section of its new FHA Single Family Housing Policy Handbook (SF Handbook). The draft section consolidates all FHA Single Family requirements—including content from hundreds of mortgagee letters, housing notices, and other requirements—for application through endorsement into a single, authoritative source for FHA Single Family Housing Policy. HUD stated that the new SF Handbook is “universally and fundamentally different in the format, style, content and delivery.” While many of the changes made in developing this first draft section of the SF Handbook are designed to conform FHA policy to a standard format using clear, consistent language, other proposed revisions reflect actual proposed changes to policy. The draft section and other information about the broader project are available on a new HUD website. HUD provided tips for reviewing the draft and requested that stakeholders provide comments on the draft section by November 29. HUD noted that the draft posting is the first phase of a multi-phased effort to overhaul the SF Handbook.