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Agencies Finalize Exemptions To Higher-Priced Mortgage Loan Appraisal Requirements
On December 12, the Federal Reserve Board, the CFPB, the FDIC, the FHFA, the NCUA, and the OCC, issued a final rule supplementing their January 2013 interagency appraisal rule. As described in detail in our Special Alert, the January 2013 rule amended Regulation Z to require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs) and to notify consumers who apply for these loans of their right to a copy of the appraisal. Those new requirements take effect January 18, 2014.
The supplemental final rule, which takes effect on the same date, exempts certain transactions from the HPML appraisal requirements. First, all loans secured in whole or in part by a manufactured home are fully exempt until July 18, 2015. After that date: (i) transactions secured by a new manufactured home and land are exempt only from the requirement that the appraisal include a physical review of the interior of the property; (ii) transactions secured by an existing manufactured home and land are not exempt from any HPML appraisal requirements; and (iii) transactions secured by a manufactured home but not land are exempt from all HPML appraisal requirements, provided the creditor provides the consumer with certain specified information about the home’s value. Second, the supplemental final rule exempts streamlined refinances—i.e. refinancing transactions where the holder of the successor credit risk also held the credit risk of the original credit obligation—so long as the consumer does not take any cash out and the new loan does have negative amortization, interest only, or balloon payments. Third, the supplemental final rule exempts “small dollar” transactions of $25,000 or less, indexed annually for inflation.
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.
Federal, State Authorities Announce Coordinated Economic Sanctions Enforcement Actions Against Foreign Bank
On December 11, the Federal Reserve Board, the Treasury Department’s Office of Foreign Assets and Controls (OFAC), and the New York Department of Financial Services (DFS) announced that a foreign bank agreed to pay $100 million to resolve federal and state investigations into the bank’s practices concerning the transmission of funds to and from the U.S. through unaffiliated U.S. financial institutions, including by and through entities and individuals subject to the OFAC Regulations. The investigations followed a voluntary review by the bank of its U.S. dollar transactions, the results of which it submitted to federal, state, and foreign authorities. The federal and state authorities alleged that the bank engaged in payment practices that interfered with the implementation of U.S. economic sanctions, including by removing material references to U.S.-sanctioned locations or persons from payment messages sent to U.S. financial institutions. They assert the alleged failures resulted from inadequate risk management and legal review policies and procedures to ensure that activities conducted at offices outside the U.S. comply with applicable OFAC Regulations. As part of the resolution, the bank consented to a Federal Reserve cease and desist order and civil money penalty order, pursuant to which the bank must pay $50 million, continue to enhance its compliance controls, and retain an independent consultant to conduct an OFAC compliance review. A separate settlement with OFAC requires the bank to pay $33 million, which will be satisfied as part of the payment to the Federal Reserve. The DFS order assesses an additional $50 million penalty. The DFS highlighted that, as part of its cooperation with authorities, the bank took disciplinary action against individual wrongdoers, including through dismissals.
Senate Confirms FHFA Director; FHFA Announces Senior Staff, Organizational Change
On December 10, the U.S. Senate voted to confirm Representative Mel Watt (D-NC) to serve as Director of the FHFA. Once sworn in, Mr. Watt will replace Edward DeMarco, who has led the agency on an “acting” basis for more than four years. Mr. DeMarco has faced criticism from federal and state Democratic policymakers and housing groups, in part based on his decision to not direct Fannie Mae and Freddie Mac to engage in broad principal reduction programs.
On December 11, the FHFA announced that Jeffrey Spohn, FHFA’s Deputy Director of the Office of Conservatorship Operations, will retire in January, and that the FHFA will combine two offices managing conservatorship-related matters into a new Division of Conservatorship. That new division will be led by Wanda DeLeo, who currently serves as Deputy Director in the Office of Strategic Initiatives.
FHFA Increases Guarantee Fees
On December 9, the FHFA directed Fannie Mae and Freddie Mac to raise guarantee fees (g-fees). Under the directive, Fannie Mae and Freddie Mac will increase the base g-fee (or ongoing g-fee) for all mortgages by 10 basis points, and will update the up-front g-fee grid to better align pricing with the credit risk characteristics of the borrower. In addition, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 will be eliminated except in four states. As described in the FHFA’s State-Level Guarantee Fee Analysis, mortgages newly acquired by Fannie Mae and Freddie Mac that are originated in states that have expected carrying costs more than two standard deviations above the national average, will be charged an additional upfront guarantee fee of 25 basis points. The affected states include New York, New Jersey, Connecticut, and Florida. The FHFA originally proposed charging fees on mortgages originated in all states over one standard deviation, which would have covered the four listed, plus Illinois. The new g-fees will apply to (i) all loans exchanged for mortgage-backed securities with settlements starting April 1, 2014, and (ii) all loans sold for cash with commitments starting March 1, 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.
Federal Agencies Finalize Volcker Rule
On December 10, the Federal Reserve Board, the OCC, the FDIC, the SEC, and the CFTC issued a final rule to implement Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 was a central component of the Dodd-Frank Act reforms, and the final rule and its preamble are lengthy and complex. The Federal Reserve Board released a fact sheet, as well as a guide for community banks. Generally, the final rule implements statutory requirements prohibiting certain banking entities from (i) engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund, (iii) engaging in an exempted transaction or activity if it would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, or that would result in a material exposure to high-risk assets or trading strategies, and (iv) engaging in an exempted transaction or activity if it would pose a threat to the safety and soundness of the banking entity or to the financial stability of the U.S. Exempted activities include: (i) market making; (ii) underwriting; (iii) risk-mitigating hedging; (iv) trading in certain government obligations; (v) certain trading activities of foreign banking entities; and (vi) certain other permitted activities. The compliance requirements under the final rules vary based on the size of the institution and the scope of activities conducted. Those with significant trading operations will be required to establish a detailed compliance program, which will be subject to independent testing and analysis, and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule. The regulators state that the final rules reduce the burden on smaller, less-complex, institutions by limiting their compliance and reporting requirements. The rule takes effect on April 1 2014; however, the Federal Reserve Board announced that banking organizations covered by section 619 will not be required to fully conform their activities and investments until July 21, 2015.
SDNY Holds 2005 SEC Rule Change Did Not Alter Directors' Potential MBS Liability
On December 10, the U.S. District Court for the Southern District of New York held that the SEC’s promulgation of Rule 430B in 2005—which, among other things, broadened the category of disclosures that can be made in prospectus supplements rather than post-effective amendments to registration statements—did not alter the "liability date" for Section 11 liability for individuals who sign registration statements in the context of the shelf registration process. Fed.Hous. Fin. Agency v. HSBC N. Am. Holdings Inc., No. 1:11-cv-06201 (S.D.N.Y. Dec. 10, 2013). The ruling comes in the consolidated federal cases brought by the FHFA alleging numerous institutions misled Fannie Mae and Freddie Mac in connection with the packaging, marketing, sale and issuance of certain RMBS. The FHFA suits also named numerous individuals as a “control person[s]” under Section 15 of the Securities Act of 1933, or as directors or signing officers under Section 11 of the Securities Act. In response to a motion filed by more than 90 directors who signed the original registration statements but not the subsequent prospectus supplements, the court explained that Rule 430B deems newly disclosed information to be included in the registration statement, and Section 11 creates liability for signers whenever “any part of the registration statement, when such part became effective, contained an untrue statement of material fact or [omission].” The court interpreted the rule to mean that a prospectus supplement containing information representing a fundamental change in the information provided in the registration statement creates Section 11 liability for directors based on that new information. The court held that, as such, where there is a fundamental change in the information provided to the marketplace through the filing of a prospectus supplement, the new trigger dates for Section 11 liability will apply to those persons.
Federal Reserve Board Seeks Additional Comment On Electronic Returned Checks Processing
On December 12, the Federal Reserve Board issued a revised proposed rule that would, among other things, encourage depositary banks to receive, and paying banks to send, returned checks electronically. The revised proposal is intended to address comments the Board received in response to a 2011 proposal to amend subparts C and D of Regulation CC. The Board is now seeking comment on two alternative frameworks for return requirements. Under the first, the expeditious-return requirement currently imposed on paying and returning banks for returned checks would be eliminated; a paying bank returning a check would be required to provide the depositary bank with a notice of nonpayment of the check—regardless of the amount of the check being returned—only if the paying bank sends the returned check in paper form. Under the second, the current expeditious-return requirement—using the current two-day test—would be retained for checks being returned to a depositary bank electronically via another bank, but the notice-of-nonpayment requirement would be eliminated. The Board is proposing to retain, without change, the current same-day settlement rule for paper checks. In addition, the Board is also requesting comment on applying Regulation CC’s existing check warranties to checks that are collected electronically and on new warranties and indemnities related to checks collected electronically and to electronically-created items. Comments are due by May 2, 2014.