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ACLU Fair Lending Case Against Mortgage Securitizer Highlights New Fair Lending Litigation Risk; Fair Lending Litigation Against Lenders Continues
On October 15, the ACLU filed a putative class action suit on behalf of a group of private citizens against a financial institution alleged to have financed and purchased subprime mortgage loans to be included in mortgage backed securities. The complaint alleges that the institution implemented policies and procedures that supported the market for subprime loans in the Detroit area so that it could purchase, pool, and securitize those loans. The plaintiffs claim those policies violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure. The suit seeks injunctive relief, including a court appointed monitor to ensure compliance with any court order or decree, as well as unspecified monetary damages. The National Consumer Law Center, which developed the case with the ACLU, reportedly is investigating similar activity by other mortgage securitizers, suggesting additional suits could be filed. The ACLU also released a report on the fair lending aspects of mortgage securitization and called for, among other things, DOJ and HUD to expand their Fair Housing Testing Program, and for Congress to increase penalties for FHA and ECOA violations and provide additional funding for DOJ/HUD fair lending enforcement.
On October 18, three Georgia counties filed suit on behalf of their communities and certain residents against a financial institution the counties allege targets FHA-protected minority borrowers with “predatory high cost, subprime, ALT-A and conforming mortgages without considering the borrowers’ ability to repay such loans.” The complaint claims that the lender’s practices caused and continue to cause minority borrowers to be more at risk of default and foreclosure than similarly situated white borrowers, and, as such, constitute a pattern or practice of discriminatory lending and reverse redlining in violation of the FHA. The counties are seeking injunctive relief and unspecified compensatory and punitive damages.
BuckleySandler’s Fair and Responsible Financial Services Team has extensive experience litigating fair lending cases and assisting financial institutions seeking to manage fair lending risk. For a review of fair lending red flags for banks and strategies for addressing them, see our recent article.
Fannie Mae and Freddie Mac Issue Disaster Assistance Reminders for Servicers, Announce Disaster Policy Changes for Sellers
On October 31, Fannie Mae issued a servicing notice to remind servicers that they may temporarily suspend or reduce mortgage payments for up to ninety days for borrowers whose income is affected by a disaster or for borrowers within federally declared disaster areas. The notice also lists the steps a servicer providing relief measures must take once it becomes aware that a property has incurred damage as a result of a disaster. On November 1, Fannie Mae issued Selling Guide Announcement SEL-2012-12, which establishes a permanent selling policy for mortgages impacted by a disaster. This policy replaces Fannie Mae’s traditional approach of issuing Lender Letters for each disaster. Under the new policy, for mortgage loans other than DU Refi Plus and Refi Plus, lenders must take prudent and reasonable actions to determine whether the condition of the property may have materially changed since the effective date of the appraisal report, and whether an additional inspection or appraisal is necessary. The Announcement identifies specific criteria lenders should use when determining if a mortgage can be delivered without additional action. Fannie Mae will not require a property secured by a DU Refi Plus or Refi Plus mortgage to undergo an additional inspection and/or new appraisal following a disaster, and will not require that a property damaged as a result of a disaster be repaired prior to delivery as long as the loan meets the property insurance requirements described in the Selling Guide.
On October 30, Freddie Mac announced that its full menu of relief policies for borrowers affected by disaster is being extended to homeowners whose homes were damaged or destroyed by Hurricane Sandy and are located in jurisdictions that the President has declared to be Major Disaster Areas and where he has made federal Individual Assistance programs available to affected individuals and households. Freddie Mac encouraged servicers to help affected borrowers with Freddie Mac loans by (i) suspending foreclosure and eviction proceedings for up to 12 months, (ii) waiving assessments of penalties or late fees against borrowers with disaster-damaged homes, and (iii) not reporting forbearance or delinquencies caused by the disaster to the nation's credit bureaus. On November 2, Freddie Mac issued Single-Family Seller/Servicer Guide Bulletin 2012-24 to revise selling requirements for properties damaged as a result of a disaster. The Bulletin explains that, on a temporary basis for mortgages secured by properties located in eligible Disaster Areas impacted by Hurricane Sandy, required property valuation and underwriting documentation must be dated no more than 180 days before the note date. For Relief Refinance Mortgages, sellers are not required to determine if an additional property inspection or a new appraisal is necessary after an initial property valuation has been relied upon, provided that the mortgage meets property insurance requirements.
CFPB Launches College Credit Card Agreement Database, Releases Annual Report on College Card Agreements
On November 1, the CFPB launched a database of college credit card agreements in effect during 2011 and released an annual report to Congress on such agreements. The database provides copies of all 2011 agreements and presents other information submitted by card issuers for each agreement, including total payments, total open accounts, and new accounts opened in 2011. The report presents summary information about the data reflected in the database and identifies some trends from 2009-2011. For example, the report notes that (i) the total number of college card agreements declined from 2010 to 2011, (ii) issuers added 26 new agreements in 2011, and (iii) the majority of agreements were between issuers and an organization affiliated with an institution of higher education (such as an alumni association) or an institution of higher learning.
California AG Notifies Mobile Application Developers of Non-Compliance
On October 30, California Attorney General (AG) Kamala Harris announced that her office’s Privacy Enforcement and Protection Unit sent letters to numerous mobile application developers advising those entities of their noncompliance with state privacy law. Specifically, the AG alleges that the targeted mobile application developers failed to post a privacy policy that is reasonably accessible to the consumer, as required by the California Online Privacy Protection Act. Under the state unfair competition law, violation of the Act may result in penalties of up to $2,500 per violation. A violation in this instance is each download of a mobile application that does not properly include a privacy policy. The letters provide thirty-day notice of noncompliance as required by the Act, within which each developer must provide specific plans and a timeline for compliance, or an explanation of why the application is not covered by the Act.
Federal Banking Regulators Issue Guidance Regarding Supervision of Technology Service Providers
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.
Independent Financial Regulators Express Opposition to Senate Regulatory Analysis Bill
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.
NCUA Names New Consumer Protection Director
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.
NMLS Issues Annual Renewal Reminder
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.