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CSBS Announces Four More State Agencies Transitioning To Uniform Mortgage Test
On January 7, the CSBS announced that, as of January 1, four additional state or U.S. territorial agencies began using the National SAFE MLO test. With the addition of these four agencies—the Nevada Department of Business & Industry, the New Mexico Financial Institutions Division, the Puerto Rico Office of the Commissioner of Financial Institutions, and the U.S. Virgin Islands Division of Banking & Insurance—a total of 39 agencies are now using the test, which was announced last January and launched in April 2013. The test includes a uniform state component to replace the state-specific component in adopting states.
Utah Federal Court Holds Model TILA Rescission Notice Not "Clear And Conspicuous"
On January 6, the U.S. District Court for the District of Utah held that the model TILA rescission disclosure, form H-8, does not clearly and conspicuously disclose the three business day rescission period. Simmons v. Citimortgage Inc., No. 11-171, 2014 WL 37623 (D. Utah Jan. 6, 2014). In this case, two borrowers sued their lender, claiming that the lender improperly refused to rescind the borrowers’ loan within the statutory three-day rescission period. The borrowers, who closed on a Wednesday and sought rescission the following Monday, claimed that their rescission attempt fell within the three business day window granted by TILA. The lender countered that Regulation Z defines Saturday as a business day and therefore the borrowers’ request was untimely. On summary judgment, the court determined that the rescission disclosure the lender provided to the borrowers, model disclosure form H-8, did not clearly and conspicuously disclose the date the rescission period expired. The court explained that the model disclosure is subject to more than one sensible reading and required the borrowers to conduct further research into the meaning of “business day.” The court reasoned that the fact that the borrowers were required to do anything to understand the notice is sufficient to disqualify the notice from being “clear and conspicuous.” The court granted partial summary judgment to the individual borrowers, holding that the borrowers are entitled to the three-year rescission period, and invited further briefing as to whether the borrowers have otherwise met their rescission burden.
SEC Announces Senior Enforcement Staffing Changes
On January 3, the SEC announced that George Canellos, co-director of the SEC’s Enforcement Division, will leave the agency this month. Mr. Canellos has been in the position since April 2013, after serving as acting director for several months prior. The Enforcement Division now will be led solely by Andrew Ceresney, who also was appointed co-director last April. On January 6, the SEC named Michael J. Osnato, Jr. chief of the Complex Financial Instruments Unit of the Enforcement Division. Mr. Osnato joined the SEC in 2008 and has served as an assistant director in the New York Regional Office since 2010. The SEC stated that he has played a key role in a number of significant SEC enforcement actions and will now lead a unit comprised of attorneys and industry experts investigating potential misconduct related to asset-backed securities, derivatives, and other complex financial products.
Federal Court Dismisses FCA Claims Against Bank's Outside Directors
On January 3, the U.S. District Court for the Northern District of Illinois held that a relator failed to support allegations that the outside directors of a failed bank misrepresented to the FDIC the quality of the bank’s collateral on real estate loans, and dismissed those claims. U.S. v. Veluchamy, No. 11-4458, 2014 WL 51398 (N.D. Ill. Jan. 3, 2014). The relator alleges that the outside directors, as well as bank managers and employees and the bank’s appraisal company, violated the False Claims Act by engaging in a scheme to defraud the FDIC by misrepresenting the loan-to-value ratios for real estate lending and submitting fraudulent Call Reports based on overvalued appraisals. The court held that the bank’s outside directors were not shown to be involved in the day-to-day operations of the bank, and that the relator failed to demonstrate the directors had knowledge of or contributed to the alleged scheme. The court denied motions to dismiss filed by the other defendants. The court also held that the relator’s claims were not barred by prior public disclosure of the allegations. The court explained that a Material Loss Review issued by the FDIC’s inspector general following the bank’s failure did not include “critical elements” of the relator’s fraud claims, and that a prior state court employment case filed against the bank by the relator also did not reveal essential elements of the current claims.
FDIC Responds To Concerns Over Bank Formations, Need For De Novo Policy Changes
On December 30, the FDIC responded to a recent joint letter from the AABD and ICBA expressing concern with the lack of new bank charters and proposing policy reforms to encourage more de novo applications. As the trade groups pointed out, the FDIC has only approved deposit insurance for one de novo bank since 2011, a dramatic shift from many years of de novo bank formation averaging over 170 per year. FDIC Director Doreen Eberley acknowledged the concern, but defended FDIC policy and cited cyclical conditions as a potential explanation for the current situation rather than any FDIC policy change. Ms. Eberley reasserted the FDIC’s commitment to assisting with potential de novo community bank formations.
Bank Obtains Dismissal Of Surviving Heir's Reverse Mortgage Class Action
On January 3, the U.S. District Court for the Northern District of California dismissed with prejudice a putative class action alleging a bank breached its Home Equity Conversion Mortgage Deed of Trust and HUD regulations by failing to provide a surviving heir notice and opportunity to purchase the property at 95 percent of its appraised value. Chandler v. Wells Fargo Bank, N.A., No. 11-3831, 2014 WL 31315 (N.D. Cal. Jan. 3, 2014). The court held that the plain language of the deed does not require such notice, in part because the relevant section of the deed that requires the lender to provide notice when the loan becomes due and payable and an option to purchase the property for 95 percent of its appraised value prior to foreclosure (i) specifically does not include as a triggering event the death of the borrower, and (ii) grants rights to the borrower, not the borrower’s heirs. The court also rejected the heir’s claims that HUD regulations required the same notice and opportunity to purchase. The court held that the HUD regulations were not incorporated into the deed, and, even if they were and could be read to allow an heir to take advantage of the 95 percent rule, the applicable HUD interpretation of those regulations at the time required full payment of the debt.
North Carolina Regulator Issues Guidance On New Service Contracts Sales Tax
Recently, the North Carolina Department of Revenue issued guidance regarding a new state law that imposes the state’s 4.75% general sales and use tax, as well as applicable local and transit sales and use tax rates, to the sales price of “service contracts.” The law applies to “service contracts” sold at retail by a retailer on or after January 1, 2014 and sourced to North Carolina. “Service contract” includes any warranty agreement, maintenance agreement, repair contract, or similar agreement or contract by which a seller agrees to maintain or repair tangible personal property. The guidance addresses retailer liability, stating that a retailer that sells a covered service contract is liable for the sales and use tax due on the transaction. Further, a retailer that authorizes another person to sell or enter into a covered service contract with a purchaser on behalf of the retailer is encouraged to ensure that any agreement between the parties provides that any sales and use tax collected on the sales price of a service contract must be submitted to the retailer to be remitted to the Revenue Department. A retailer is not relieved of its liability for sales and use tax on the retail sale of a covered service contract due to failure by another person to collect or remit the applicable sales and use tax due on the sale to the retailer of the contract. The guidance also addresses (i) sales and use tax applicable to receipts for certain contracts entered into prior to January 1; (ii) sourcing of service contracts; and (iii) cancellation or refund of a service contract.
CFPB Director Discusses Enforcement Against Individuals
On January 8, in a Daily Show interview, CFPB Director Richard Cordray discussed with host Jon Stewart some of the Bureau’s efforts to date, including implementation of the CFPB’s mortgage rules and the Bureau's credit card add-on product enforcement actions. Director Cordray added that the Bureau will continue to take enforcement actions against individual officers and employees responsible for company wrongdoing, including by imposing officer-director bans, seeking disgorgement, and referring matters for criminal investigation. “There’s always officials and people in the company that make the decisions. So going after them for money, making them feel at risk, sometimes going after them to take them out of the business for a period of time, or referring them criminally if that is appropriate, that’s part of what we’re doing,” Cordray stated.
These comments mirror statements Director Cordray made last year, in which he cautioned that “[i]ndividuals need to know they’re at risk when they do bad things under the umbrella of a company.” The agency has already pursued individuals in several enforcement actions, and Director Cordray’s remarks suggest the Bureau will continue to devote resources toward investigating individual involvement in alleged company misconduct, along with the entities themselves.
CFPB Announces Mortgage Servicing Rule Training Event, Releases Borrower Resources
This Friday, January 10, the CFPB will host a training event in Phoenix, Arizona for housing counselors, legal aid attorneys, and other advocates about the new mortgage servicing rules taking effect on that date. The event—which will include an in-depth training presentation and feature remarks from CFPB Director Richard Cordray—follows the CFPB’s release of new resources intended to boost awareness of and educate the public about the new consumer protections provided by the rules. The new consumer resources include:
- Sample letters for consumer use related to topics such as information requests and error corrections;
- Mortgage tips for homebuyers, homeowners, and borrowers facing foreclosure;
- A database of answers to mortgage-related questions generated through AskCFPB, an interactive online tool for consumers;
- Online tools for consumers to locate housing counseling agencies in their area and to submit complaints online;
- Factsheets covering new consumer protections provided for under the rules and access to foreclosure avoidance options; and
- A reference guide for housing counselors and others that interact with consumers entitled to new federal protections.
A live broadcast of the event—Protecting Homeowners: New Tools for Empowering Consumers and Advocates—will be available on consumerfinance.gov at 1:00 PM EST.
CFPB Seeks Information On Mortgage Closing "Pain Points"
On January 2, the CFPB issued a request for information about “key consumer ‘pain points’ associated with mortgage closing and how those pain points might be addressed by market innovations and technology.” The request includes 17 specific questions about the closing process, common errors at closing, the role of “other parties” at closing, and closing documents. The CFPB stated that the request is part of the next phase of its Know Before You Owe initiative in which the CFPB will “encourage interventions that increase consumer knowledge, understanding, and confidence at closing.” In particular, the CFPB seeks to promote “the development of a more streamlined, efficient, and educational closing process as the mortgage industry increases its usage of technology, electronic signatures, and paperless processes.” The CFPB first announced this initiative in November 2013 in conjunction with the release of the final rule combining mortgage disclosures under TILA and RESPA. Responses to the request are due by February 7, 2014.