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On October 31, the Federal Financial Institutions Examination Council (FFIEC) issued a revised Supervision of Technology Service Providers Booklet (TSP Booklet). The revised TSP Booklet, which is part of the FFIEC Information Technology Examination Handbook, provides guidance for examiners and financial institutions on the supervision of technology service providers by describing the federal banking regulators’ statutory authority to supervise third-party service providers, outlining the regulators’ risk-based supervision program, and providing the Uniform Rating System for examinations. The TSP Booklet clarifies that outsourced activities should be subject to the same risk management, security, privacy, and other internal controls and compliance policies as if such functions were performed internally, and that a financial institution’s board of directors and management have the responsibility for ensuring that outsourced activities are conducted in a safe and sound manner and in compliance with applicable laws and regulations.
Concurrent with the release of the updated TSP Booklet, the Federal Reserve Board, the FDIC, and the OCC issued new Administrative Guidelines for the Implementation of Interagency Programs for the Supervision of Technology Service Providers. The Guidelines are separate from the FFIEC IT Examination Handbook and describe how the agencies implement their interagency supervisory programs. The Guidelines are primarily a resource for examiners and include the reporting templates used by examiners.
Ohio Supreme Court Holds Standing to Foreclose Cannot Be Established by Assignment of Note After Filing
On October 31, the Ohio Supreme Court held unanimously that a party’s standing to foreclose on a delinquent borrower is determined as of the filing of the complaint, and the party’s receipt of an assignment of a promissory note and mortgage after such filing does not cure initial lack of standing to bring the action. Fed. Home Loan Mortg. Corp. v. Schwartzwald, No. 2012-Ohio-5017, slip op. (Ohio Oct. 31, 2012). The borrowers in the case appealed a trial court holding that allowed Federal Home Loan Mortgage Corporation (Freddie Mac) to foreclose, notwithstanding the fact that Freddie Mac commenced the action prior to obtaining an assignment of the promissory note and mortgage securing the borrowers’ loan. According to the borrowers, because Freddie Mac did not hold the assignment and mortgage at the time of filing, it had no standing to sue. The Ohio Second District Court of Appeals held that Freddie Mac had cured the lack of standing by obtaining an assignment from the real party in interest after it filed for foreclosure. The Ohio Supreme Court reversed the Second District and agreed with the borrowers. Freddie Mac did not hold both the assignment and mortgage as required under Ohio law as a predicate to foreclosure and admitted that it had not suffered any injury at the time it commenced the foreclosure action. The state supreme court held that because standing to sue is required to invoke the jurisdiction of the trial court, standing must be determined at the beginning of the suit. Further, the court found that Freddie Mac could not avail itself of civil procedures that allow for substitution of the real party in interest because such rules were not intended to cure a lack of standing. The court agreed with the borrowers that Freddie Mac lacked standing and dismissed the foreclosure without prejudice and without adjudicating the underlying indebtedness.
Fannie Mae and Freddie Mac Announce Short Sale Agreements with Mortgage Insurers; Freddie Mac Announces Other Servicing Updates
On October 31, Fannie Mae announced that it reached agreements with nine major mortgage insurance companies that will allow servicers to complete short sales and deeds-in-lieu of foreclosure without first obtaining approval from the mortgage insurer. The new standard delegation agreement executed with each of the mortgage insurers replaces various individual delegation agreements and is intended to create a more consistent and efficient process for borrowers and servicers.
On the same day, Freddie Mac issued Single-Family Seller/Servicer Guide Bulletin 2012-23, which also announced new delegation agreements with its mortgage insurers that will streamline short sales and deeds-in-lieu of foreclosure. Freddie Mac revised other requirements for servicers’ loss mitigation activities and updated its mortgage insurance claim documentation policy to require delivery of documentation no later than sixty days following the foreclosure sale, short sale, or acceptance of deed-in-lieu of foreclosure. The Bulletin also (i) requires approval by Freddie Mac of foreclosures in certain circumstances, (ii) revises imminent default documentation requirements, (iii) authorizes use of ACH for expense reimbursements and incentive payments, (iv) clarifies the policy for reimbursement of interest, and (v) updates charge-off recommendation requirements.
On October 26, the leaders of the Federal Reserve Board, the OCC, the FDIC, the CFPB, the NCUA, and the SEC sent a letter to Senators Lieberman (I-CT) and Collins (R-ME) opposing S. 3468, which would authorize the President to require that regulations promulgated by the independent regulatory agencies be subject to regulatory review in the same manner as other federal agencies, including central review of certain rules by the Office of Information and Regulatory Affairs. The regulators note that the bill, which was introduced by Senator Portman (R-OH) with the support of Senator Warner (D-VA) in August 2012, may be considered soon for markup by the Committee on Homeland Security and Governmental Affairs led by Mr. Lieberman and Ms. Collins. The letter argues that by giving the President unprecedented authority to influence policy and rulemaking functions of independent regulatory agencies through review of regulations, the bill would undermine congressional intent to create certain agencies that could exercise policymaking functions independent of any Administration.
On October 26, NCUA announced the selection of Gail Laster as Director of the Office of Consumer Protection. Ms. Laster most recently served as Deputy Chief Counsel for the House Financial Services Committee where she participated in drafting the Dodd-Frank Act. Prior to her work in the House, Ms. Laster served as General Counsel to HUD, as Director of Government Relations for the Legal Services Corporation, and as Counsel to two Senate committees. Ms. Laster succeeds Ken Buckham, who will retire at year-end 2012.
On November 1, the NMLS issued a reminder that the renewal period for state-licensed entities and individuals runs from November 1, 2012 through December 31, 2012. The NMLS also provided a Renewal Handbook to guide users in the renewal process, as well as state-specific renewal FAQs, and deadline and fees charts.
Arizona Appellate Court Requires Further Proceedings on Whether Certain Emails Constitute Electronic Signatures Under State Law
Recently, the Arizona Court of Appeals ruled that a state trial court erred in dismissing a claim that an emailed thank-you note acknowledging the receipt of a signed agreement constituted an electronic signature. Young v. Rose, 286 P.3d 518 (Az. Ct. App. 2012). In this case, a real estate agent sued two former clients for breaching an exclusive representation contract. The clients had manually signed the contract and returned it as a PDF copy. The agent never manually signed the agreement, but claimed that her electronic business card attached to an email thanking her clients for the PDF copy constituted an electronic signature under the Arizona Electronic Transactions Act, which includes a broad definition of electronic signature. The trial court disagreed and dismissed the case, noting that the agent’s business card was included on all of her outgoing emails and therefore could not constitute an electronic signature in some cases but not others. The Arizona Court of Appeals vacated the trial court order on procedural grounds and held that further proceedings are necessary to determine whether the email at issue qualifies as an electronic signature. The court explained that in addition to proving the existence of an electronic signature, the agent must also establish that the parties intended to conduct the transaction by electronic means.
The CFPB and the FHFA announced today an agreement to create a National Mortgage Database, the first comprehensive repository of mortgage loan information. The database primarily will be used to support the agencies’ policymaking and research efforts and help regulators better understand emerging mortgage and housing market trends. The database is intended to (i) monitor the health of mortgage markets and consumers, (ii) provide insight on consumer decision making, (iii) monitor new and emerging mortgage products, (iv) consolidate data on first and second lien mortgages for a given borrower, and (v) help policymakers understand consumer debt burden. The press release states that development of the dataset is currently underway and the agencies expect early versions of the full dataset to be complete in 2013. Once completed, the agencies plan to explore opportunities to share database information with other federal agencies, academics, and the public. The database will include information spanning the life of a mortgage loan from origination through servicing and include loan-level data about (i) the borrower’s financial and credit profile, (ii) the mortgage product and terms, (iii) the property purchased or refinanced, and (iv) the ongoing payment history of the loan. The agencies will build the database by matching a nationwide sampling of credit bureau files on borrowers’ mortgages and payment histories with informational files such as the HMDA database and property valuation models. The database will include historical data back to 1998 and will be updated on a monthly basis.
CFPB Reports Examination Findings, Updates Examination Manual, and Details Supervisory Appeals Process
The CFPB today released its first periodic Supervisory Highlights publication, along with an updated examination manual and a bulletin about the Bureau’s examination appeals process.
The Supervisory Highlights report describes the CFPB’s supervisory activity from July 2011 through September 2012, including with regard to credit cards, credit reporting, and mortgages, and “signal[s] to all institutions the kinds of activities that should be carefully scrutinized.” During its first year of conducting exams, the CFPB states that it has found compliance management system deficiencies, including with regard to fair lending compliance programs and oversight of affiliate and third-party service providers. The report also reviews nonpublic actions taken to enforce compliance with the CARD Act and FCRA, and identifies several areas of concern for mortgage originators.
Bulletin 2012-07 details the CFPB supervisory appeals process, and addresses confidentiality and the role of the CFPB Ombudsman. Finally, the updated Supervision and Examination Manual incorporates the various procedures issued since the manual first was published in October 2011, e.g. the payday lending and consumer reporting exam procedures. The updated manual also includes new references to the Code of Federal Regulations to reflect the republishing of federal consumer finance law regulations under the CFPB’s authority.
DOJ Files First Civil Fraud Suit Alleging False Claims Act And FIRREA Violations In The Sale Of Loans To Fannie Mae And Freddie Mac
On October 24, the United States Attorney’s Office for the Southern District of New York (SDNY) filed a $1 billion civil mortgage fraud lawsuit against a mortgage lender and a major financial institution in connection with loans sold to the government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Filed as a complaint-in-intervention in a pending qui tam, or whistleblower, lawsuit, the complaint alleges that the mortgage lender engaged in a scheme to defraud the GSEs in connection with the mortgage loans it sold to them, and that the financial institution that later acquired the lender was aware of and continued the misconduct. The suit seeks damages and penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This is the first civil suit brought by the Department of Justice concerning mortgages sold to the GSEs, and indicates that the government might commence other suits based on the sale of conventional mortgages to those entities.
The government’s allegations focus on a loan origination system initiated by the lender in 2006 that allegedly eliminated checkpoints on loan quality and led to fraud and other defects in the loans. The complaint alleges that the lender and the financial institution sold these loans to the GSEs but misrepresented that the loans complied with GSE requirements. The GSEs pooled the loans into mortgage backed securities and sold them to investors, subject to guarantees on principal and interest payments. As the allegedly defective loans defaulted, the GSEs suffered over $1 billion in losses through the payment of guarantees to investors.
These allegations set forth a theory of liability that the government had not previously articulated. Previous cases brought by the government primarily involved loans made by government program participants and alleged misrepresentations made directly to government agencies, whereas the complaint in this case is based on conventional loans and alleged misrepresentations to the GSEs. Moreover, unlike previous cases, defendants did not receive federal funds directly from the government, but rather only may have received such funds indirectly based on the government’s funding of the GSEs.
In addition, the complaint also represents another use by the government of FIRREA. Here, FIRREA is used to pursue the alleged profits made by defendants from the challenged loan origination system. See “Understanding FIRREA’s Reach: When Does Fraud ‘Affect’ a Financial Institution.” The case also marks yet another financial fraud qui tam action filed in New York. Both the FCA and FIRREA provide substantial rewards for whistleblowers and the government’s relatively quick decision to intervene, along with its fast response in other recent matters, may encourage other such suits in the SDNY. See “Whistle-Blower Bounties May Encourage Residential Mortgage-Backed Securities Fraud Reporting.”
In short, this action is another example of the government’s increasingly aggressive efforts to recoup losses stemming from the financial meltdown, as well as a reminder of the significance of the whistleblower provisions in both the FCA and FIRREA. Most importantly, it is a clear sign that government loan program participants are no longer the only targets for financial fraud recovery, and that the government may challenge the conduct of any lender who sold loans to the GSEs.
- Benjamin W. Hutten to discuss "BSA program reporting, management and board of directors responsibilities" at the Georgia Bankers Association BSA Experience Program
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- H Joshua Kotin to discuss "Recent developments in fair lending and avoiding the pitfalls" at the Arkansas Community Bankers/Bankers Assurance 2019 Compliance Conference
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Valerie L. Hletko to discuss "Banking on guns ‘n drugs: Social policy meets financial services" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Katherine L. Halliday to discuss "UDAP, UDAAP & the Map rule compliance basics" at the Mortgage Bankers Association Regulatory Compliance Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss "Washington regulatory overview" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Jeffrey P. Naimon to discuss "Truth in lending" at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions" at the Institute of International Bankers Risk Management and Regulatory Examination/Compliance Seminar
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference