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Financial Services Law Insights and Observations

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  • Fannie Mae Issues Numerous Selling and Servicing Updates

    Lending

    On August 21, Fannie Mae issued Selling Guide Announcement SEL-2012-07, which updates numerous Selling Guide topics, including changes to loan eligibility requirements. As of October 20, 2012, for adjustable rate mortgages, the maximum LTV ratios will be reduced and the minimum score requirement for manually underwritten loans will increase. Fannie Mae is also changing LTV ratios and minimum credit score requirements in certain areas to simplify the requirements and align product and property types. Also effective on October 20, 2012, Fannie Mae will (i) retire the Comprehensive Risk Assessment Worksheet for Manual Underwriting, (ii) update the eligibility criteria matrix for manually underwritten loans, (iii) implement several changes to the DU Version 9.0, and (iv) retire the FannieNeighbors product.

    On August 22, Fannie Mae issued Servicing Guide Announcement SVC-2012-18, which announces several policy changes related to delinquency management and default prevention. To further short sale directives, and to support other policy changes, the Announcement updates Fannie Mae’s Uniform Borrower Assistance Form. The announcement also implements the extended stay of foreclosure protections enacted recently as part of the Honoring America’s Veterans and Care for Camp Lejeune Families Act and the extension of the federal Making Home Affordable Programs. Concurrently, Fannie Mae issued Announcement SVC-2012-17, which requires servicers to cancel hazard insurance coverage within fourteen days after a property has been inspected and is confirmed vacant by a broker, agent, or property management company designated by Fannie Mae. This change takes effect on October 1, 2012.

    Fannie Mae Mortgage Origination Mortgage Servicing Servicing Guide

  • FHFA Announces New Short Sale Guidelines

    Lending

    On August 21, the FHFA announced new guidelines that align and merge Fannie Mae’s and Freddie Mac’s (the GSEs) short sale programs to facilitate quicker short sale processing. For mortgages owned or guaranteed by the GSEs, the consolidated guidelines, as implemented through Freddie Mac Bulletin 2012-16 and Fannie Mae Announcement SVC-2012-19, (i) reduce or eliminate the documentation borrowers must provide to demonstrate a need for a short sale, (ii) allow servicers to qualify certain borrowers for short sales—for example those based on hardship caused by death, divorce, or disability—without approval from the GSEs, even when the borrower is current, (iii) automatically qualify for short sale servicemembers receiving Permanent Change of Station Orders and borrowers who must relocate more than fifty miles for existing or new employment, (iv) waive the GSEs’ rights to pursue deficiency judgments in certain circumstances, and (v) allow the GSEs to expedite short sales by offering up to $6,000 to second lien holders. These changes take effect on November 1, 2012.

    Freddie Mac Fannie Mae Mortgage Servicing FHFA Short Sale

  • Massachusetts AG Outlines Foreclosure Expectations for Fannie Mae and Freddie Mac

    Lending

    On August 23, Massachusetts Attorney General Martha Coakley sent a letter to FHFA Director Edward DeMarco in which she advised Fannie Mae and Freddie Mac about their obligation to comply with a recently enacted state law that will make it harder to initiate foreclosures. The letter states that like all creditors, Fannie Mae and Freddie Mac are expected to follow the new statutory requirements and generally should “pursue common-sense loan modifications for borrowers” when economically beneficial to borrowers. The letter also asks the FHFA to reconsider its decision to not require Fannie Mae and Freddie Mac to offer principal forgiveness. Also on August 23, the Massachusetts Division of Banks announced that it will hold a public hearing on August 29, 2012 to gather input regarding regulations it is required to develop to implement the state’s new foreclosure law.

    Foreclosure Freddie Mac Fannie Mae State Attorney General FHFA

  • Federal Court Declines to Enjoin AG Prosecution of Claims Subject to Class Settlement

    Consumer Finance

    On August 22, the U.S. District Court for the Middle District of Florida denied a major bank’s motion to enjoin prosecution by two state attorneys general of claims related to the bank’s credit card payment protection products. Spinelli v. Capital One Bank, USA, No. 08-cv-00132, 2012 WL 3609028 (M.D. Fla. Aug. 22, 2012). In 2010 the bank entered a global class action settlement to release certain claims regarding payment protection, including those by all natural persons who have or had credit card accounts with the bank and who were charged for payment protection during a defined time period. After the Attorneys General of Hawaii and Mississippi (the state AGs) filed cases earlier this year regarding the same products, the bank petitioned the court that approved the class settlement to enjoin the state AGs, as well as any other person or entity with knowledge of the class settlement, from prosecuting similar claims against the bank. The bank argued that the state AG actions were brought on behalf of citizens who were bank customers released as part of the class settlement. The court held that a state’s sovereign interests cannot be compromised by a private settlement, the AGs were not bound by the class settlement, and an injunction would violate due process. The court also held that it no longer retained jurisdiction over the matter and that the courts hearing the state AG claims must decide whether the claims can properly proceed.

    Credit Cards Class Action State Attorney General

  • SEC Announces First Award Under Whistleblower Program

    Securities

    On August 21, the SEC announced the first award issued as part of a new whistleblower program mandated by the Dodd-Frank Act. The program is designed to encourage individuals to submit high-quality evidence of securities fraud. Under the program, if a whistleblower submits information that results in a successful SEC enforcement action in which more than $1 million in sanctions is ordered, the SEC will pay up to thirty percent of the money obtained. The SEC stated that it paid the maximum thirty percent, in this case $50,000 of the $150,000 collected thus far from the enforcement action. The SEC did not reveal the matter for which the whistleblower provided evidence of fraud and did not reveal the individual’s name, noting that the Dodd-Frank Act provisions require the SEC to protect any information that could reasonably be expected to reveal a whistleblower’s identity.

    SEC Whistleblower

  • Nevada Mortgage Regulator Clarifies Wholesale Lender Licensing Requirements

    Lending

    On August 20, the Nevada Division of Mortgage Lending issued a memorandum clarifying licensing requirements for wholesale lenders under the Nevada Mortgage Brokers and Mortgage Agents Act. The Act prohibits anyone from offering or providing mortgage-broker services—such as making mortgage loans or buying and selling mortgage notes—without first obtaining a license. The memorandum states that a wholesale lender must be licensed as a broker if (i) the wholesale lender closes and funds a mortgage in its own name as the lender of record, or (ii) buys a mortgage loan from a mortgage broker after closing. A wholesale lender need not be licensed if it only provides a funding source for a licensed or exempt mortgage broker to close and fund a loan as the lender of record. After closing, the lender of record may assign a closed or funded loan to the wholesale lender. The Division will allow until October 1, 2012 for wholesale lenders to apply for a license under this interpretation, and it will start enforcing the licensing requirement on January 1, 2013.

    Mortgage Licensing Mortgage Origination Wholesale Lending

  • District Court Holds Gift Cardholders Suffer No Damages from Inability to Apply Unexhausted Balances

    Fintech

    On August 17, the U.S. District Court of the Southern District of New York dismissed a putative class action alleging deceptive sales practices under New York law against gift card distributors. Preira v. Bancorp Bank, No 11-1547, 2012 WL 3541702 (S.D.N.Y. Aug. 17, 2012). The plaintiff alleged that the defendants advertised that the gift cards could be used like debit cards, but that in fact merchants would not allow cardholders to conduct split transactions where the card was used to pay for a portion of a transaction and other means were used to pay the remaining balance. This restriction, the plaintiff claimed, prevented cardholders from completely depleting the value of the gift cards. The court rejected the plaintiff’s claim, holding that she failed to allege a cognizable injury because (i) some merchants do accept split transactions, (ii) the cardholder agreement provides that cards can be returned to the issuer in exchange for the unused balance, which never expires, and (iii) even if the damages are not based on the loss of the remaining value of the cards but on misleading statements that lead cardholders to believe the cards function like debit cards, the plaintiff failed to allege that debit cardholders can make split purchases at any retailer and, in any event, deception itself, without further injury, is not a cognizable harm under state law.

    Payment Systems Gift Cards

  • HUD Amends Social Security Income Documentation Requirements for FHA-Approved Mortgages

    Lending

    On August 17, HUD issued Mortgagee Letter 12-15, which clarifies the documentation requirements for the types of Social Security Administration (SSA) income used to assess a borrower’s income qualification. According to the Letter, all income from the SSA can be used to qualify a borrower, provided the income is verified using one of several listed documents. A lender also must document the continuance of SSA income, and if such income is due to expire within three years of the mortgage application date, it can be considered only as a compensating factor. A lender should assume continuance if the documentation does not provide a defined expiration date, and the lender should not request additional documentation.

    Mortgage Origination HUD

  • New FinCEN Director Announced

    Financial Crimes

    On August 20, the U.S. Department of Treasury announced that next month Jennifer Shasky Calvery will replace James Fries as the Director of FinCEN. Ms. Calvery joins FinCEN after a fifteen year career with the U.S. Department of Justice. Most recently she served as Chief of the Asset Forfeiture and Money Laundering Section.

    Anti-Money Laundering FinCEN

  • Washington Supreme Court Rules on Electronic Mortgage Registry's Role As Beneficiary

    Lending

    On August 16, the Supreme Court of the State of Washington held that an electronic mortgage registry system cannot commence a nonjudicial foreclosure in that state if it is not the promissory note holder. Bain v. Metro. Mort. Group, Inc., No. 86206-1, 2012 WL 3517326 (Wash. Aug. 16, 2012). In this case, the registry, as the named beneficiary of the deeds of trust, appointed trustees to initiate foreclosure proceedings against two borrowers. The borrowers sought injunctions in federal court to halt the foreclosures, arguing that the beneficiary did not actually hold the promissory notes, and therefore could not foreclose in its own name. The federal court certified several questions for consideration by the Washington Supreme Court. The Washington Supreme Court held that under Washington law only the actual holder of the promissory note evidencing the obligation may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure. The court concluded that the electronic registry “does not hold the note, it is not a lawful beneficiary,” and therefore cannot commence a nonjudicial foreclosure. The court also noted that an agent can represent the note holder, but found that the electronic registry failed to identify the entities that “control and are accountable for its actions,” and therefore failed to establish that it is an “agent for a lawful principal.”

    Foreclosure Mortgage Servicing

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