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Key Stakeholders Comment on FHFA State-Level Guarantee Fee Pricing Proposal
Over the past week, key stakeholders submitted comments on the FHFA’s proposal regarding state-level guarantee fees, which would allow Fannie Mae and Freddie Mac to charge higher upfront fees for single-family mortgages originated in Connecticut, Florida, Illinois, New Jersey, and New York. The FHFA argues that the higher fees are needed to offset higher default-related costs incurred by Fannie Mae and Freddie Mac in those states resulting in part from state and local foreclosure policies. Senators from four of those states sent a letter on November 21, 2012 asking the FHFA to abandon the proposal in its entirety, citing shortcomings in the proposal and negative impacts on borrowers in those states. The senators argued that the proposal would penalize borrowers in states with higher consumer protections and would undermine those protections and restrict residential lending. The Attorneys General of Illinois, Connecticut, and New York similarly objected to the proposal in a November 26, 2012 letter. Also on November 26, 2012, the ABA submitted a letter in support of the increased fees in which it pointed out that the fees would be modest and argued that the fees would help to spur state and local policymakers to reform foreclosure processes. On the same day, the MBA submitted a letter seeking more information about the formula used by the FHFA to determine which states should be assessed the higher fees and urging the FHFA to (i) expand the proposal to reward states with lower default-related costs, (ii) change the format of the proposed pricing to more closely match industry practice, and (iii) alter its approach to compensatory fees charged to servicers for unavoidable foreclosure delays. The FHFA received numerous other comment letters.
SEC Chairman Announces Departure, President Obama Names Replacement
On November 26, SEC Chairman Mary Shapiro announced that she will step down from her position on December 14, 2012, after serving as Chairman for nearly four years. The SEC press release described her tenure as one during which she “strengthened, reformed, and revitalized the agency” while overseeing “a more rigorous enforcement and examination program” and implementing new rules. On the same day, President Obama designated SEC Commissioner Elisse Walter as Chairman.
European Parliament Moves Towards Common Rules for Card Payments
On November 20, the European Parliament adopted a nonbinding resolution calling for the development of common rules and standards for personal credit and debit card payments. The resolution explains that such rules would bring the card payment market “closer to its full potential and efficiency.” The Members of Parliament called on the European Commission to develop the legislative proposals needed to extend the current single Euro payments area (SEPA) regulation, which governs euro credit and direct debit transactions among banks, to the market for card, internet and mobile payments, but cautioned that lawmakers should avoid regulating the internet and mobile payment market too heavily, so as not to hinder its growth and innovation. The resolution also claims that current fees for handling card payments are high relative to the costs they need to cover, but does not call for caps. Finally, the resolution states that minimum security requirements for card, internet and mobile payments should be the same in all EU member states.
Bank Agrees to Settle Suit Over Cyber Security Procedures
On November 19, a bank sued by a commercial account holder to recover funds lost after cyber attackers gained electronic access to its account and made a series of unauthorized withdrawals reportedly agreed to pay the customer for the unrecovered funds, in connection with the dismissal of the suit. Patco Const. Co. Inc. v. Peoples United Bank, No. 9-503, Stipulation of Dismissal (D. Me. Nov. 19, 2012). In July, the First Circuit held that the bank’s collective security failures, when compared to the security measures employed by other financial institutions and the bank’s capacity to implement more robust protections, rendered its security procedures commercially unreasonable. In doing so, the First Circuit became the first federal appellate court to address the issue of bank liability for the loss of customer funds resulting from a breach of a bank’s cyber security. It reversed a district court ruling in favor of the bank and remanded for further proceedings. On remand, the bank agreed to pay in full for the lost funds.
Fannie Mae Releases Standard Deed-in-Lieu of Foreclosure Requirements, Announces Other Servicing Policies
On November 28, Fannie Mae introduced new requirements for Fannie Mae Mortgage Release, Fannie Mae’s deed-in-lieu of foreclosure process. Servicing Guide Announcement SVC-2012-25 announced three exit options for borrowers under Mortgage Release: (i) immediate move, (ii) three-month transition with no rent payment, and (iii) 12-month lease with market rent payment. The new policy applies to mortgage loans evaluated for a Mortgage Release on or after March 1, 2013, though Fannie Mae encourages servicers to implement the policy changes earlier. The Announcement details Mortgage Release requirements, including borrower eligibility, documentation requirements, servicer duties and responsibilities, and mortgage insurer approval. The new requirements were developed in response to the FHFA’s directive to Fannie Mae and Freddie Mac to simplify and streamline the Mortgage Release processes, and they parallel those announced last week by Freddie Mac. SVC-2012-25 also updates certain short sale requirements originally addressed in SVC-2012-19, which are to be implemented immediately.
Also on November 28, Fannie Mae issued Servicing Guide Announcement SVC-2012-24, which, effective immediately, applies Servicing Guide terms and conditions regarding temporary suspension of foreclosure proceedings to all mortgage loans that have been referred to foreclosure prior to receipt of a complete Borrower Response Package, regardless of the length of the delinquency. The Announcement states that Fannie Mae approval is no longer required to postpone a foreclosure sale for a mortgage loan that is more than 12 months past due (as measured from the last paid installment date). Finally, on November 21, Fannie Mae issued Servicing Guide Announcement SVC-2012-23 to update the maximum foreclosure attorney fees allowed for certain states.
Freddie Mac Provides New Tools for Managing Law Firms
On November 28, Freddie Mac released new tools to help servicers select and manage law firms to handle default-related services. The new web page contains resources regarding (i) training opportunities, (ii) program facts and details, (iii) frequently asked questions, and (iv) links to current firms in the Designated Counsel Program. The new tools help implement Freddie Mac’s recent policy change that allows servicers to choose and manage their own attorneys effective June 1, 2013.
CFPB and FTC Warn Mortgage Companies about Potentially Misleading Advertisements
On November 19, the CFPB announced that it issued warning letters to about a dozen nonbank mortgage lenders and brokers regarding advertisements targeted towards older Americans and veterans that may violate the Mortgage Acts and Practices Advertising Rule (MAP Rule). The CFPB claims that certain companies’ ads may (i) make misrepresentations about government affiliation, (ii) provide inaccurate information about interest rates, (iii) make misleading statements about the costs of reverse mortgages, or (iv) misrepresent the amount of cash or credit available to a consumer. The letters do not make any determinations as to whether the ads at issue violate the law, and the letters provide the companies an opportunity to review and remedy any potential violations. However, the CFPB announcement also notes that the Bureau has initiated formal investigations of six companies for “serious violations of the law.” At the same time, the FTC announced that it sent letters to twenty real estate agents, home builders, and lead generators warning that certain advertisements may similarly violate the MAP Rule or section 5 of the FTC Act. The FTC also acknowledged that it has opened nonpublic investigations of other advertisers that may have violated federal law. This coordinated CFPB/FTC action resulted from a review of about 800 randomly selected mortgage-related ads from across the country, including ads for mortgage loans, refinancing, and reverse mortgages. BuckleySandler is representing one of the companies being investigated by the FTC in connection with this review.
Residential Mortgage-Backed Securities Working Group Announces Several New Cases
On November 20, New York Attorney General Eric Schneiderman, one of the Co-Chairs of the federal-state Residential Mortgage-Backed Securities (RMBS) Working Group, announced a new case filed in the New York State Supreme Court alleging Martin Act violations by a securities firm and several of its affiliates in connection with the offering of RMBS. The complaint charges that the firms made fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors and deceived investors regarding the care with which the firms evaluated the quality of loans included in certain RMBS offerings. The suit claims that investors suffered cumulative losses over $11 billion on RMBS sponsored and underwritten in 2006 and 2007. The DOJ’s Financial Fraud Enforcement Task Force, of which the RMBS Working Group is a part, noted the significant federal-state coordination that led to the filing, including the “significant” contributions of the FHFA’s Inspector General, as well as assistance from the SEC and Assistant U.S. Attorneys from across the country.
On November 16 the SEC announced that it had obtained more than $400 million from two firms alleged to have misled investors in RMBS. In cases coordinated with the RMBS Working Group, the SEC charged that both firms failed to fully disclose their bulk settlement practices, which involved retaining cash from the settlement of claims against mortgage loan originators for problem loans that the firms had sold into RMBS trusts, and which they no longer actually owned. The SEC also claimed, among other things, that one of the firms misstated information concerning the delinquency status of loans that served as collateral for an RMBS offering it had underwritten, while the second firm allegedly applied different quality review procedures for loans that it sought to put back to originators and instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them.
Federal District Court Dismisses Virginia State Law Claims in FHFA RMBS Suit
On November 19, the U.S. District Court for the Southern District of New York held that the FHFA’s state-law claims against a financial institution with regard to the offering of certain residential mortgage-backed securities (RMBS) could not survive because, unlike federal law, the state law does not apply to the “offering” of securities. Fed. Housing Fin. Agency v. Barclays Bank PLC, No. 11-6190, slip op. (S.D.N.Y. Nov. 19, 2012). The case is one of sixteen in which the FHFA alleges as conservator for Fannie Mae and Freddie Mac that billions of dollars of RMBS purchased by Fannie Mae and Freddie Mac were based on offering documents that contained materially false statements and omissions. In prior rulings in this series of cases the court generally has denied the financial institutions’ motions to dismiss, with the lead case currently pending on appeal to the Second Circuit. The instant case, however, presented a unique issue with regard to the FHFA’s state law claims. As the court explained, the federal Securities Act’s private liability provisions apply to any person who “offers or sells” a security and broadly defines “offer,” while the Virginia Securities Act “omits the term ‘offer’ from its otherwise identical private liability provision.” The court determined that through inaction, Virginia “has purposefully sought to ensure that the scope of private liability under its statutes is more limited than that under federal law” and its law does not apply to the offering of securities, only the sale. The court dismissed the FHFA’s state law claims but allowed all other claims to proceed based on the reasoning presented in prior decisions.
CFPB and Federal Reserve Board Increase Thresholds for Exempt Consumer Credit and Lease Transactions
On November 20, the CFPB and the Federal Reserve Board announced that, effective January 1, 2013, dollar thresholds in Regulation Z (TILA) and Regulation M (Consumer Leasing Act) for exempt consumer credit and lease transactions will increase to reflect the annual percentage increase in the consumer price index as of June 1, 2012. Transactions at or below the thresholds are subject to the protections of the regulations. Based on the adjustments, the TILA and Consumer Leasing Act protections generally will apply to consumer credit transactions and consumer leases of $53,000 or less in 2013. Mortgage transactions and private student loans remain subject to TILA regardless of the amount of the loan. While the CFPB has rulemaking authority under TILA and the Consumer Leasing Act, the Federal Reserve Board retains authority to issue rules for certain motor vehicle dealers. In addition to the joint adjustment, the CFPB separately adjusted the dollar amount that triggers additional protections for certain home mortgages under the Home Ownership and Equity Protection Act (HOEPA). Consistent with the increase in the consumer price index, the 2013 dollar amount of the HOEPA fee trigger will be $625.