InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York Court of Appeals Rules Possession of Note, Rather than Mortgage, Conveys Standing to Commence Foreclosure Action
On June 11, the New York Court of Appeals held that a loan servicer who holds the note has standing to commence a mortgage foreclosure action against a borrower even if the servicer cannot show that it also holds the mortgage. See Aurora Loan Servs., LLC v. Taylor, 2015 NY Slip Op 04872 (Jun. 11, 2015). The court reasoned that the servicer did not need to show possession of the mortgage because “the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New York law.” In Aurora, the defendant borrowers had executed an adjustable rate note and a mortgage in 2006. The mortgage designated Mortgage Electronic Recording Systems, Inc. (“MERS”) as nominee, but the note was not transferred to MERS with the mortgage. After the borrowers defaulted, the servicer took possession of the note and filed for foreclosure against the borrowers. In reaching its decision, the court disregarded borrowers’ argument that the involvement of MERS somehow impacted the servicer’s standing to foreclose.
Net 1 Announces Closure of SEC FCPA Investigation
On June 8, Net 1 UEPS Technologies, Inc., a South Africa-based mobile payments company incorporated in Florida, announced that the SEC had closed a FCPA investigation arising out of a contract with the South African Social Security Agency. The SEC and the DOJ opened parallel investigations in November 2012, and the DOJ investigation remains ongoing. Net 1 has asserted that the investigation was instigated by one of the losing bidders on the contract.
Eletrobras Hires U.S. Law Firm to Conduct FCPA Investigation
On June 10, Eletrobras, Brazil’s state-run power company, announced that it had hired Hogan Lovells to investigate potential violations of the FCPA and other anti-corruption laws and corporate policies. The focus of the investigation will be “projects in which Eletrobras Companies take part in a corporate form or as minority shareholder, through special purpose entities.” According to an earlier Eletrobras filing, the investigation was triggered by testimony taken in conjunction with the Brazilian government’s ongoing investigation of corruption allegations against Petrobras, dubbed “Operation Car Wash.” That testimony alleged that the CEO of an Eletrobras subsidiary received illicit payments from a consortium of companies bidding for the Angra 3 power plant project.
Spotlight on Vendor Management: Mortgage Industry Continues To Bear Brunt of CFPB Regulatory Burdens
Mortgage industry players have had to adapt quickly in recent years to the evolving regulatory environment, and the latest scramble for mortgage lenders includes the various downstream effects of pending rule changes set to take effect on August 1, 2015, related to disclosures required under the implementing regulations of the Truth-in-Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). A critical factor to successful implementation of this historic set of rule changes, known as the TILA-RESPA Integrated Disclosure (“TRID”) rule, is coordinating with various vendors to address new timing and information requirements for Loan Estimates and Closing Disclosures, which are creating project management nightmares for mortgage professionals growing weary of the regulatory onslaught of revised regulations and enforcement actions.“Despite the relative speed with which many companies have adapted to various rule changes since the CFPB came online, there seems to be a new rule change waiting in the wings at almost every turn,” observed Elizabeth McGinn, Partner in the D.C. office of BuckleySandler. “To make matters worse, managing service providers through the changes has undoubtedly tested the strength of deep industry relationships that have been in place for decades.”
Synchronizing TRID-related changes with third party mainstays throughout the origination and closing processes has required extensive planning with mortgage brokers, software vendors, title companies, and closing agents, all of whom play a significant role in ensuring that Loan Estimates and Closing Disclosures (and any revisions thereto) are delivered to borrowers in an accurate and timely fashion. Importantly, as the CFPB has made clear repeatedly in stating its vendor management expectations, the mortgage lender will bear primary responsibility for any failure to comply with the new TRID rules, regardless of whether such failures are the result of vendor missteps.
“There is a lot of concern that vendors and various critical third parties will not be up to the task,” notes Moorari Shah, Counsel in BuckleySandler’s Los Angeles office. “As a result, we are seeing a number of companies revising service provider contracts in an effort to have better visibility and control over the end-to-end process of loan origination.”
While many will sweat through the summer months in hopes of a flawless transition, TRID represents just the latest vendor management test for an industry that has already perspired through plenty. McGinn and Shah also recommend that legal and compliance personnel take note of recent guidance and enforcement actions which raise vendor management issues specific to the mortgage industry, including oversight of (i) mortgage servicers, (ii) mortgage advertising companies, and (iii) relationships between loan officers and title companies.
Mortgage Servicers
Amongst the most difficult adjustments companies have had to make has been increased oversight of mortgage servicers, which continues to consume considerable compliance resources and expense. Regulators are focused in particular with ensuring that servicers (i) have instituted policies and procedures consistent with new regulations and guidance, and (ii) comply with collections and credit reporting requirements:
- Under the revisions to Regulation X that took effect in January 2014, the CFPB may now cite an institution for failure to maintain policies and procedures reasonably designed to, among other things, facilitate (i) ready access to accurate and current documents and information reflecting actions taken by service providers, and (ii) periodic reviews of service providers. See 12 C.F.R. § 1024.38(b)(3). The Bureau explained at the time it proposed § 1024.38(b)(3), that the new regulation was designed to address evaluations of mortgage servicer practices that had found that some major servicers ‘‘did not properly structure, carefully conduct, or prudently manage their third-party vendor relationships,” citing deficiencies in monitoring foreclosure law firms and default management service providers as key examples. Going forward, the CFPB expects that servicers seeking to demonstrate that their policies and procedures are reasonably designed to achieve these objectives will demonstrate that, in fact, the servicer has been able to use its information to oversee its service providers effectively.
- The compliance burdens on servicers are also evident in the latest CFPB guidance on mortgage servicing transfers. Bulletin 2014-01, Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers, was issued August 19, 2014, and outlines a number of CFPB expectations of servicers in connection with the transfer of mortgage servicing rights, including potentially preparing and submitting informational plans to the Bureau describing how the servicers will be managing the related risks to consumers. In this regard, a primary focus of Bulletin 2014-01 is signaling that the CFPB is committed to enforcing the new servicing transfer rules under RESPA, which, requires servicers to, among other things, maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.
- It should come as no surprise that one of the primary vendor management implications of the evolving regulatory requirements described above is that ongoing compliance will likely require significantly more dedication of financial and human resources for most mortgage servicers to comply. However, the cost of non-compliance can be substantially more devastating. Consider the troubles of one of the largest nonbank servicers that entered into a $2 billion settlement with the CFPB, authorities in 49 states, and the District of Columbia under a joint enforcement action in December 2013 over allegations related to charging customers unauthorized fees, misleading customers about alternatives to foreclosure, denying loan modifications for eligible homeowners, and sending robo-signed documents through the courts during the foreclosure process. Just one year later, in December 2014, the same servicer entered into a $150 million settlement with the New York Department of Financial Services in connection with allegations of mishandling foreclosures, abusing delinquent borrowers, and failing to maintain adequate systems for servicing hundreds of billions of dollars in mortgages. In each consent order, the failure to maintain reasonable policies and procedures and engage in appropriate vendor oversight was highlighted as a finding by the regulators.
- In addition to ensuring that mortgage servicers are implementing adequate policies and procedures with respect to vendor oversight, federal agencies have also been attentive to debt collection and credit reporting practices of mortgage servicers. A joint enforcement action by the FTC and CFPB in April of this year was critical of the servicer, in part, for allegedly (i) threatening arrest and imprisonment to consumers that were behind on payments and placing collection calls outside of the daily call window permitted under the Fair Debt Collections Practices Act (15 U.S.C. 1692 et seq.), and (ii) furnishing inaccurate credit information to consumer reporting agencies in violation of the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) even after consumers indicated that they had reported the inaccuracies to the servicer. The servicer agreed to a $63 million settlement with the FTC and CFPB to resolve the matter.
Mortgage Advertising Companies
The CFPB has taken direct aim at deceptive mortgage advertisements in 2015, particularly those that imply an affiliation with programs offered by the U.S. government. At least a handful of enforcement actions have been announced by the Bureau during the first half of the year, including a simultaneous announcement in February against three private mortgage lenders that sent mailings simulating notices from the U.S. government despite the fact that none of the companies had any connection to a government agency. In bringing these actions, the CFPB made note of the customary practice of mortgage brokers and mortgage lenders to hire marketing companies to produce advertisements for mortgage credit products:
- In the two matters that resulted in consent orders (n.b., the third matter is still pending), the CFPB compelled the companies to (i) pay a civil monetary penalty for which they could not seek indemnification from any of the marketing companies that assisted with producing the advertisements, and (ii) carefully review henceforth any proposed marketing materials prepared by such marketing companies for compliance specifically with the Mortgage Acts and Practices Rule (Regulation N, 12 C.F.R. § 1014.3(n)), and the Dodd-Frank Act, which generally prohibits unfair, deceptive, or abusive acts or practices (12 U.S.C. §§ 5531(a), 5536(a)(1)(B)).
- In terms of vendor management, a key takeaway from these enforcement actions is that the CFPB expects mortgage lenders to take the same precautions with mortgage advertising companies as they are required to do with any other service provider that interacts with customers, inclusive of appropriate due diligence and oversight. Treating mortgage advertising companies as service providers has taken some in the industry by surprise as such companies have generally been viewed as marketing partners rather than service providers for mortgage brokers and lenders, and often receive a marketing fee for any advertisement that yields a new origination. Note also that the general expansion of third parties that qualify as “service providers” under Dodd-Frank is in keeping with various CFPB enforcement actions taken against ancillary and add-on product providers in the credit card and auto finance industries.
Relationships between loan officers and title companies
Another area of focus for the CFPB has been referrals made by loan officers to title companies in exchange for cash and marketing services:
- In April of this year, the CFPB joined forces with Maryland Attorney General to take action against several loan officers for their alleged participation in steering title insurance and closing services to a title company in exchange for the loan officers’ receipt of marketing services and cash from the title company. The consent orders, in addition to outlining RESPA violations which prohibit the giving of a “fee, kickback, or thing of value” in exchange for a referral of business related to a real estate settlement service (12 U.S.C. § 2607(a)), barred each of the loan officers from the mortgage industry for a period of years. The April announcements were follow-on enforcement actions to ones that the CFPB had announced in January against two large banks stemming from allegations that the banks’ loan officers had participated in similar schemes with the same (now defunct) title company.
- The potential for RESPA violations presents another compliance challenge for mortgage lenders to increase their oversight of not only third party title companies, but also the lender’s own loan officers that may be engaged, wittingly or unwittingly, in potentially illegal activity. In addition to enhanced RESPA training for loan officers and title companies, mortgage lenders may need to increase their monitoring and auditing activities of interactions between loan officers and title companies to further mitigate the risk of RESPA violations.
Note: This article previously appeared in the June 12, 2015, issue of Mortgage News Daily.
Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets
The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party. If left undisturbed, the Court’s decision may well have broad and alarming ramifications. The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.
Click here to view the full special alert.
* * *
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Walter E. Zalenski, (202) 461-2910, wzalenski@buckleyfirm.com
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
Special Alert: CFPB Finalizes Rule To Oversee Nonbank Auto Lenders
On June 10, the CFPB issued its final rule to oversee “larger participant” nonbank auto finance companies. Although the CFPB received significant feedback during the comment period, the final rule is nearly identical to that proposed in September 2014. Under the final rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations. These originations include making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of an automobile. The CFPB estimates this threshold will bring about 34 entities and their affiliates under its supervisory authority, which represents roughly seven percent of all nonbank auto finance companies, and approximately 91% of the nonbank automobile financing market. In addition to the final rule, the CFPB also published updated automobile finance examination procedures to include industry specific guidance for covered persons.
The rule will take effect 60 days after publication in the Federal Register. Although the CFPB has not determined when and in what order examinations will begin, some industry insiders have predicted they could start in late 2015.
In the months since the CFPB released its proposed rule, auto finance industry trade associations and market participants submitted a number of comments to the CFPB addressing: (i) the threshold for defining “larger participant;” (ii) the definition of “lease” for purposes of the larger participant threshold; and (iii) exceptions for securitizations.
Number of Originations
With respect to the 10,000 originations threshold, although the CFPB received comments recommending the CFPB both increase and decrease the number, most appeared in favor of increasing the threshold. As industry commenters noted, the low threshold results in participants with less than one percent market share and small businesses being deemed larger participants. Commenters recommended an alternative threshold of 50,000 originations, which would capture approximately 86% of market participants. Ultimately, the CFPB adopted the original 10,000 originations threshold, noting it allowed the CFPB to “supervise market participants that represent a substantial portion of the automobile financing market and that have a significant impact on consumers.”
Leases
The final rule also extended the application of the term “lease” under Dodd-Frank to include automobile leasing. The Dodd-Frank Act includes certain leases that are, among other things, the “functional equivalent of purchase finance arrangements. 12 U.S.C. § 5481(15)(A)(ii). As detailed in the comments submitted to the CFPB, prudential regulators and other statutory schemes such as TILA have traditionally applied this idea of “functional equivalent” to leases where the monthly payments total a sum substantially equivalent to or in excess of the value of the property, resulting in the lessee becoming the owner of the property for little or no consideration at the end of the least term. Nonetheless, the CFPB noted that, in light of its purpose and objectives, “functional equivalent of purchase finance agreements” should be interpreted from the perspective of the consumer. In arriving at this conclusion, the CFPB noted that, from a customer’s point of view, lease transactions provide an identical experience to a purchase transactions because leasing requires an application process that involves providing basic financial information and credit history, an ongoing contractual obligation, and the option to purchase the vehicle at the end of the lease term for a pre-determined amount.
Securitizations
While the proposed rule excluded investments in asset-backed securities from the definition of “aggregate annual originations”, the CFPB expanded the securitization exception as part of the final rule. As a result, the exemption will also apply to purchases or acquisitions of obligations by securitization trusts and other special purpose entities created to facilitate securitization transactions.
Timing
The rule will become effective 60-days after publication in the Federal Register
Examination Focus
In its press release announcing the final rule, the CFPB identified a number of areas its examiners will focus on when conducting examinations of auto finance companies. Those areas include (i) the marketing and disclosure of terms in auto finance, (ii) credit reporting practices and accuracy, (iii) treatment of consumers when collecting debts both directly by the finance company and through its vendors, and (iv) fair lending under the Equal Credit Opportunity Act. In light of the CFPB’s continued focus on these areas, all market participants would be well served to review policies, procedures and practices occurring within their business.
* * *
Questions regarding the matters discussed in this Alert may be directed to the lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Benjamin B. Klubes, (202) 349-8002
- John P. Kromer, (202) 349-8040
- John C. Redding, (310) 424-3916
- Marshall T. Bell, (202) 461-2997
- Mitchell M. Grod, (310) 424-3907
- Jessica L. Pollet, (310) 424-3905
Agencies Finalize Diversity Policy Statement
On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.
FTC Provides Annual Financial Acts Enforcement Report to CFPB and Federal Reserve
On June 9, the FTC announced that it has provided to the CFPB its 2014 Annual Financial Acts Enforcement Report. The report highlights the FTC’s enforcement, research, rulemaking, and policy development activities with respect to the Truth in Lending Act (Regulation Z), the Consumer Leasing Act (Regulation M), and the Electronic Fund Transfer Act (Regulation E). Areas detailed within the report include enforcement actions related to non-mortgage credit, including auto finance and payday lending, mortgage loan advertising, and forensic audit scams; and consumer and business outreach related to truth in lending requirements. The report, submitted on May 29, will be used to prepare the CFPB’s Annual Report to Congress. The FTC also submitted a copy of the report to the Federal Reserve Board.
FCC Chairman Circulates Proposal to Strengthen Consumer Protection Under the TCPA; Open Meeting Scheduled For June 18
On May 27, the FCC released a fact sheet outlining Chairman Wheeler’s proposal for a series of rulings under the Telephone Consumer Protection Act (TCPA) that he asserts will better protect American consumers from unsolicited robocalls, spam text messages, and telemarketing calls. If adopted, the proposal would, among other things: (i) give consumers the right to revoke their consent to receive robocalls and robotexts at any reasonable time and in any reasonable way; (ii) authorize carriers to offer robocall-blocking or “Do Not Disturb” technologies to consumers; and (iii) require robocallers to stop calling a number when it has been reassigned to a new subscriber. Responding to multiple petitions that “sought clarity on how the Commission enforces” the TCPA, the proposal aims to “close loopholes and strengthen consumer protections already on the books.” The Chairman’s proposal is scheduled to be voted on at the Open Commission Meeting on June 18.
South Carolina Passes Legislation to Create the Guaranteed Asset Protection Act, Effective Immediately
On June 1, Governor Nikki Haley (R-SC) signed into law Senate Bill 441, enacting the Guaranteed Asset Protection Act and instituting a framework under which guaranteed asset protection (GAP) waivers may be offered in South Carolina. As outlined in SB 441, a GAP waiver is “a contractual agreement in which a creditor agrees for a separate charge to cancel or waive all or part of amounts due on a borrower’s finance agreement in the event of a total physical damage loss or unrecovered theft of the motor vehicle.” Effective June 5, SB 441 prohibits the creditor from conditioning the terms of an extension of credit upon the borrower’s purchase of a GAP waiver and requires the creditor to disclose the terms of the GAP waiver “in easily understandable language,” including the purchase price, the procedures for obtaining GAP waiver benefits, and a statement that the purchase of a GAP waiver is optional.