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Bank Argues Government's False Claims Act Case Violates National Servicing Settlement
On November 1, one of the five banks that entered into a comprehensive mortgage servicing settlement earlier this year with the federal government and 49 state attorneys general invoked that agreement in defense of claims recently filed against it by the federal government. Motion of Defendant Wells Fargo Bank, N.A. to Enforce Consent Judgment, United States v. Bank of America Corp., No. 1:12-cv-00361 (D.D.C. Nov. 1, 2012). Wells Fargo’s motion responds to a complaint filed in the Southern District of New York in which the DOJ and HUD allege that the bank falsely certified loans under the FHA’s Direct Endorsement Lender Program in violation of the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In response, the bank has asked the court overseeing the national servicer settlement to enforce the Consent Judgment the bank entered, which the bank notes includes a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The bank argues that the release specifically releases liability arising under the FCA and FIRREA for its alleged FHA-certification conduct. The bank seeks declaratory relief with respect to its rights under the servicing settlement, as well as an order enjoining the federal government from pursuing its case in New York. Wells Fargo’s motion indicates that the government plans to oppose the motion.
NCUA Releases New National Supervision Policy Manual
On November 2, the NCUA released a public version of its new National Supervision Policy Manual, which describes the agency’s internal operations and procedures for supervisory staff. Certain sensitive portions of the Manual remain confidential. The release completes a two-year process to create uniform national procedures for NCUA’s supervisory staff that are expected to improve examination consistency.
District of Columbia Enacts Emergency Bill to Enhance Foreclosure Protections
On October 26, the District of Columbia enacted, on an emergency basis, Bill 914, which extends to borrowers that receive a defective notice of default on a residential mortgage the same protections that apply with regard to a defective notice of intention to foreclose. The bill also (i) provides that a foreclosure sale is void if a lender files a notice of intention to foreclose without a mediation certificate, (ii) revises the definition of residential mortgage, and (iii) creates a Foreclosure Mediation Fund to collect the proceeds from the mediation program and the national servicing settlement completed earlier this year. Those proceeds can be used for specified purposes, including financial fraud and consumer protection enforcement and certain borrower outreach and assistance. The bill was made retroactively effective to September 13, 2012, and expires on January 24, 2013.
Federal District Court Dismisses Borrowers' Subprime Lending RICO Claims
On October 30, the U.S. District Court of the Northern District of California dismissed, without prejudice, claims brought by two borrowers alleging that their mortgage lender engaged in fraudulent loan practices which violated RICO. The court held that the claims were time-barred and that the complaint failed to allege facts about predicate acts and a pattern of activity necessary to sustain a civil RICO claim. Cabrera v. Countrywide Fin., No. 11-4869, 2012 WL 5372116 (N.D. Cal. Oct. 30, 2012). The court rejected the borrowers’ arguments that (i) the statute of limitations began to run not from the date they entered into their adjustable rate mortgage, but from the date the rate adjusted, and (ii) equitable tolling should apply because the borrowers’ could not have discovered their adjusted rate absent a forensic loan audit they obtained years into the contract. With regard to equitable tolling, the court held that the plain terms of the mortgage provide information about the rate at issue, which could have been uncovered by “a reasonably diligent investigation of the loan documents.” The court similarly dismissed the borrowers’ claims that the lender discriminated against minority borrowers in violation of the ECOA, as time-barred. It also held that the borrowers, who are Hispanic, failed to state a claim under ECOA in that, although they offered statistical evidence that Hispanics were given less favorable loans than white borrowers with the same risk characteristics, they failed to allege that they themselves qualified for better loans. The borrowers’ claim of unfair business practices under the state’s unfair competition law survived. The court held that the borrowers pled facts sufficient to support their claim that the lender’s effort to initiate a foreclosure while a loan modification was pending violated public policy reflected in the California Homeowner Bill of Rights, even though the specific provision of that statute that prohibits such practices was not codified until after the foreclosure occurred.
FTC and States Target "Cardholder Services" Robocalls
On November 1, the FTC announced that courts have granted temporary restraining orders in five cases in which the FTC alleged that the defendants placed automated calls to consumers to make allegedly deceptive “no-risk” offers to substantially reduce the consumers’ credit card interest rates in exchange for an upfront fee. The telemarketers claimed to be calling from the consumers’ credit card company, or otherwise used the generic “Cardholder Services” title to suggest a relationship with a bank or credit card company, the FTC says. Each complaint alleges that the defendants violated the FTC Act by misrepresenting that consumers who buy their services will have their credit card interest rates reduced substantially and will save thousands of dollars as a result. Four of the five complaints also charge that the defendants violated the FTC Act by making other misrepresentations, such as promises of faster debt payoff. The FTC also charges that the defendants violated the Telemarketing Sales Rule (TSR) by misrepresenting their services, calling numbers on the Do Not Call Registry, making illegal robocalls, and collecting up-front fees. The FTC coordinated with multiple state entities, including the attorneys general of Arizona and Arkansas and the Florida Department of Agriculture and Consumer Services, each of which took separate actions against other companies for similar alleged activities.
HUD and Banking Regulators Offer Borrower and Institution Relief Following Hurricane Sandy
Recently, HUD has made a series of announcements regarding housing relief for individuals displaced by Hurricane Sandy. For example, on October 30 HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA-insured mortgages. Similar announcements have followed for victims in New York, Connecticut, and Rhode Island. Also on October 30, the Federal Reserve Board, the OCC, and the FDIC issued a statement on supervisory practices impacted by the hurricane. For example, the regulators stated that “prudent efforts to adjust or alter terms on existing loans in affected areas should not be subject to examiner criticism.”
Pennsylvania Enacts Package of Bills to Modernize Banking Law
On October 24, Pennsylvania enacted three bills that together make numerous substantive and technical changes to upgrade and modernize the state’s banking code, all of which take effect December 23, 2012. HB 2368 updates commercial, mortgage, and consumer lending provisions of the code by, among other things, removing conflicting and outdated lending provisions, and reflecting current lending interest rates and fees. This bill also (i) adds provisions required by the Dodd-Frank Act with regard to lending limits that require state financial regulators to consider credit exposure to derivative transactions, (ii) increases penalties for unlawful lending and trust activities to a felony and a $10,000 to $500,000 fine, and (iii) removes the current two-person cap on the number of individuals who can be beneficiaries of deposit accounts. HB 2369 provides for greater public disclosure and enforcement by the Department of Banking, and clarifies the Department’s examination authority over bank subsidiaries. It also allows the Department to assess civil money penalties against individuals and institutions for conduct that causes the institution to suffer substantial financial loss, is willful, flagrant or evidences bad faith, involves an insider who benefits in a substantial way, or does not comply with previous supervisory actions involving violations. The bill allows the Department to publicly disclose enforcement actions against depository institutions and their employees, and expands the Department’s authority to remove officers and employees from bank management and boards whenever such individuals violate any law or Department order. HB 2369 also requires any state or local government agency that proposes civil enforcement of a law or ordinance against a bank to consult with and receive approval from the Department prior to enforcement. HB 2370 repeals certain sections of the state’s general usury law that duplicate TILA’s variable rate mortgage loan disclosures. It also adds savings banks to the list of institutions subject to maximum interest rate provisions and clarifies that the maximum rate is the rate authorized by federal or state law.
Lender Wins Dismissal of Force-Placed Insurance Class Action
On October 30, the U.S. District Court for the Northern District of California dismissed a putative class action alleging that the lender breached certain mortgage contracts and violated state and federal law through its policy and practices requiring borrowers to maintain flood insurance sufficient to cover the replacement value of their homes. McKenzie v. Wells Fargo Home Mortg., Inc., No. 11-4965, 2012 WL 5372120 (N.D. Cal. Oct. 30, 2012). The borrowers claim that the FHA requirement that flood insurance must cover the remaining balance of the mortgage served as a cap on the flood insurance amounts the lender could require. Declining to follow the reasoning of the court in Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012), the McKenzie court held that because the deeds of trust authorized the lender to set the required level of insurance and the FHA requirement is a statutory floor, the lender did not breach the mortgage contracts by requiring coverage above the outstanding principal loan balance. Therefore, the court dismissed those claims with prejudice. For the same reasons, the court dismissed with prejudice the borrowers’ claims that letters sent to the borrowers notifying them of insufficient coverage altered the terms of their loans and required the lender to make additional disclosures under TILA. The court dismissed, with one opportunity to amend, claims that the lender breached the contract by force-placing insurance through an affiliate that charged excessive amounts allegedly in exchange for kickbacks.
HUD Again Delays Changes to Title Approval at Conveyance
On October 31, HUD issued Mortgagee Letter 2012-21, which delays until January 1, 2013, implementation of changes to title approval at conveyance. The changes, originally set to take effect August 1, 2012, were issued in June 2012 as Mortgagee Letter 2012-11. Under the original 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.
Spotlight on HDMA: Your Institution's Public HMDA Data and What to Do with It
In an annual rite of autumn, on September 18 the Federal Financial Institutions Examination Council released 2011 Home Mortgage Disclosure Act (HMDA) data for U.S. mortgage lenders. The public data contains information regarding nearly all home mortgage applications acted on in the prior calendar year, designated by loan purpose (i.e., home purchase, home refinance and home improvement). The HMDA data covers home loan applications made to over 7,600 U.S. financial institutions, including banks, savings associations, credit unions and mortgage companies, and contains information on approximately 11.7 million applications, 7.1 million originations and 2.9 million purchases.
HMDA data provides a wealth of mortgage industry-related information, including data on application and loan volume, the proportion of loans backed by the Fair Housing Administration and Veterans Administration, and lender concentration in the mortgage market. However, its most important function and the reason HMDA was enacted is the role the data plays in fair lending enforcement. Toward this end, the outcome of each home mortgage loan application is classified according to the applicant’s race, ethnicity and gender. HMDA data further allows analyses based on the site of the subject property, as well as the location of the lender.
It is important to recognize that while HMDA data alone does not prove or disprove discrimination, it is an important component of fair lending examinations. According to the Federal Reverse Board, which provides a lengthy analysis that accompanies the annual release of HMDA data:
Although the HMDA data include some detailed information about each mortgage transaction, many key factors that are considered by lenders in credit underwriting and pricing are not included. Accordingly, it is not possible to determine from HMDA data alone whether racial and ethnic pricing disparities reflect illegal discrimination. However, analysis using the HMDA data can account for some factors that are likely related to the lending process.
In other words, notwithstanding its limitations, HMDA data is often the starting point for regulators seeking indicia of possible discrimination. Additionally, advocacy groups and the media frequently focus on lending disparities suggested by HMDA data. These factors, and the very public nature of HMDA data, make it important that lenders fully understand their own data and consider it in the context of what the national HMDA data suggests.
Here’s a list of the key fair lending-related findings from the 2011 data:
- Denial Rates - Black applicants and Hispanic-white applicants had notably higher denial rates than non-Hispanic white applicants. The denial rates for conventional home-purchase loans were 30.9 percent for blacks, 21.7 percent for Hispanic whites, 14.8 percent for Asians, and 11.9 percent for non-Hispanic whites.
- Higher-Priced Loans - The incidence of higher-priced lending across all products in 2011 was about 3.7 percent, up from 3.2 percent in 2010. Black and Hispanic-white borrowers were more likely to obtain higher-priced loans than were non-Hispanic white borrowers.
- Loan Penetration in Distressed Areas - Lending activity has not yet rebounded in neighborhoods experiencing high levels of distress. Home purchase lending in census tracts identified by the Neighborhood Stabilization Program as being highly distressed declined by a larger percentage since 2010 than less-distressed tracts. This decline was particularly pronounced for lower- and middle-income borrowers.
These industry-wide findings help guide the analyses that individual lenders should conduct on their own HMDA data. Here are three basic statistical reviews that we recommend each lender undertake to better understand what the data shows:
- Evaluate the share of applications received from protected class applicants.
- Compare denial rates for minority applicants and non-Hispanic white applicants.
- Determine the proportion of higher priced loans originated to minority applicants and non-Hispanic white applicants.
We reiterate that HMDA data alone does not prove or disprove mortgage lending discrimination. A HMDA review that suggests fair lending concerns should be followed by further statistical analysis that considers credit-related factors that are not part of HMDA, such as credit score and loan-to-value ratios. Review of individual loan files may also be necessary before making a final determination that there are lending patterns that cannot be explained, and that ameliorative action is necessary.
Nevertheless, it is important to understand your institution’s raw, public HMDA data and be prepared to defend and follow-up on any lending disparities it may suggest. Put simply, the best way to avoid getting blind-sided by a regulator, community group, or media representative is to know your HMDA data better than they do.
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Warren W. Traiger, counsel at BuckleySandler LLP, advises clients on consumer regulatory matters, particularly fair lending and Community Reinvestment Act (“CRA”) compliance. Mr. Traiger is a nationally recognized expert in CRA and fair lending issues. His research and analysis of mortgage lending data has been cited in publications of the Federal Reserve Banks of San Francisco, Boston, and Dallas, the Federal Deposit Insurance Corporation, and in testimony before the U.S. House Financial Services Committee.