Stanley Mabbitt Joins Ballard Spahr

We’re proud to announce a prestigious addition to Ballard Spahr’s Mortgage Banking Group. On March 1, Stanley D. Mabbitt joined Ballard Spahr as of counsel in the firm’s Phoenix and Washington, D.C., offices.

Mr. Mabbitt is one of the nation’s leading attorneys in the area of consumer financial services, with extensive experience working in the industry from all vantage points—first as a government regulator working for the Federal Reserve; later as a law firm partner based in Washington, D.C., and in Phoenix; and most recently as in-house counsel at Bank of America and Countrywide Home Loans.

A founding member of the prestigious American College of Consumer Financial Services Lawyers, Mr. Mabbitt has held a number of leadership positions on the American Bar Association’s Consumer Financial Services Committee, including Vice Chair of the committee and Chair of the subcommittees on Truth-in-Lending and Electronic Funds Transfer. He also is a member of the Consumer Bankers Association’s Lawyers Committee and the Financial Services Roundtable’s CFPB Workgroup.

Admitted to practice in Arizona, California, and Washington, D.C., Mr. Mabbitt will focus his practice on counseling mortgage companies and financial institutions nationwide on compliance with state and federal laws governing consumer credit and deposit products and other financial services, particularly mortgages, as well as rule-making, examinations, and enforcement proceedings involving the Consumer Financial Protection Bureau and other federal and state authorities.

- Richard J. Andreano, Jr.

HUD Revises Proposal to Reduce Seller Concessions on FHA Loans

On February 23, 2012, the United States Department of Housing and Urban Development published a revised proposal to reduce the maximum concession that a seller or other interested third party may provide to a borrower purchasing a home with an FHA-insured single-family mortgage loan. The revised proposal would reduce the current concession limit from 6 percent of home’s value to the greater of 3 percent of the home’s value or $6,000, and also narrow the items that may be paid with a concession. Comments on the revised proposal are due by March 26, 2012.

Under current rules, a seller of a home or other interested third party may assist the borrower in purchasing a home with FHA financing by paying certain permitted costs up to a limit of 6 percent of the lesser of the sales price or appraised value of the home. While such payments, referred to as "concessions," in excess of the 6 percent amount are not prohibited, the maximum loan amount must be reduced on a dollar-for-dollar basis to the extent a concession exceeds the amount. Also, if an interested party provides anything to a borrower that is not an item that may be included in a concession, the item is considered an inducement and requires a dollar-for-dollar reduction in the maximum loan amount.

In July 2010, HUD proposed three changes to reform the FHA-insured loan program based on significant losses incurred by the program that resulted in the capital reserve for the Mutual Mortgage Insurance Fund falling below the statutorily mandated ratio of 2 percent of the FHA- insured loans covered by the Fund. HUD proposed to:

  • Reduce the maximum amount of concessions from sellers or other interested third parties (before a reduction in the loan amount is required) from 6 to 3 percent of the home’s value
  • Establish a minimum qualifying borrower credit score of 500 and impose a maximum loan-to-value ratio of 90 percent for a borrower with a credit score below 580
  • Require that when a loan must be manually underwritten, because the borrower has a limited or nontraditional credit history and a “Refer” risk classification is provided by FHA’s TOTAL Mortgage Score Card, that certain maximum loan-to-value ratio, debt ratio, credit score, and cash reserve requirements be satisfied

HUD published a final rule in September 2010 implementing the second proposal, although because of the housing crisis HUD currently “is providing a special, temporary allowance” so that borrower’s with lower credit scores can obtain loans with higher loan-to-value ratios. (See the August 2010 Mortgagee Letter regarding the special, temporary allowance.) In connection with the revised concession proposal, HUD advises that it “is in the process of implementing another notice tightening the underwriting standards for mortgage loan transactions that are manually underwritten.”

Revised Proposal
Based on comments to the July 2010 concession proposal that a reduction of the limit from 6 to 3 percent would have “a disproportionately negative impact on low- and moderate-income borrowers purchasing lower priced homes,” HUD decided to revise the proposal to impose a maximum limit of the greater of 3 percent of the home’s value or $6,000.

HUD also proposes to revise the items that may be covered by an interested third-party concession to exclude payment supplements such as homeowner’s association fees, mortgage interest, and charges for mortgage payment protection plans. HUD advises it “believes that these types of payment supplements, while permissible under current seller concession guidance, are really inducements to purchase and should be treated as such.” HUD also advises that it believes the affect of the change will be minimal because a review of FHA loans “revealed that sellers typically offer concessions that pay for borrowers’ actual costs to acquire the property, and not payment supplements.”

Finally, HUD advises that the July 2010 proposal “clarified the definition of Interested Third Party.” The July 2010 proposal includes a footnote that identifies a party with an interest in the transaction “to include the seller, builder, developer, mortgage broker, lender, or settlement company.” In the revised proposal, HUD defines an interested third party as the “[s]eller or other interested party such as a real estate agent, builder, developer, mortgage broker, lender, and/or settlement company.”

- Richard J. Andreano, Jr.

Out of Challenges Come Opportunities

While much of the mortgage industry’s collective energy will continue to be spent on navigating the ever-expanding and increasingly complex regulatory landscape, there are segments of the business that are focused on doing deals. As the industry resets, platforms, assets, and key management personnel are becoming the subject of transactions that are being structured to address both the challenges and opportunities that lie ahead. While it likely will take years for markets to normalize, industry business models are adapting and deals are being discussed, assessed, and with increased frequency, closed. These deals are launching new platforms, creating scale in existing platforms, and bolstering the bench strength of management teams that are committed to evolving.

In 2011, we saw an upward trend in deal activity and we expect that trend to continue. Ongoing active areas for transactions will be servicing, third-party service providers and financial technology companies, and small to mid-tier originators who have access to capital and seek growth or are in need of capital and are therefore targets for consolidation.

John J. Nelligan, Managing Director of Milestone Advisors, said: “Our belief is that we will witness an uptick in M&A activity in 2012 as several independent well-capitalized mortgage firms look to expand their geographic reach or pursue channel diversification and expansion. In terms of large cap banks weighing in on all the fun, we think it is far too early. However, ultimately the large cap banks will need to make acquisitions of residential mortgage companies to bolster their origination capabilities as an overabundance of liquidity will continue to drag on their earnings.”

Outside of M&A, Nelligan said, “all eyes are focused on MSRs. The economic return profile of MSRs in the current environment will clearly generate interest from the investor community. Untold hours will be spent trying to crack the code of combining investor capital with MSRs.”

In order to address the industry’s needs, Ballard’s Mortgage Banking Group is working closely with our Mergers and Acquisions/Private Equity Group, headed by Karen McConnell in Ballard’s Phoenix office. Starting in our next edition of Mortgage Banking Update, the Mergers and Acquisitions Group will launch its article series to address the various aspects of transactions that are of interest to our industry, including preparing your company for sale, effective confidentiality agreements, drafting term sheets and letters of intent, assessing purchase price and adjustments, standard industry reps and warranties, critical closing conditions, and industry tailored employment agreements. We trust you will find this article series to be of value, and encourage your feedback on other topics of interest.

FHA Announces Expected Premium Increase

On February 27, 2012, the Federal Housing Administration announced increases in both the upfront mortgage insurance premium and the annual mortgage insurance premium for single-family insured loans. The premium increases are part of FHA’s efforts to rebuild the Mutual Mortgage Insurance Fund, which currently is below the minimum statutorily required level of 2 percent of covered FHA loans. The changes will be addressed in an upcoming Mortgagee Letter.

Pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, the annual mortgage insurance premium for FHA loans will increase by 0.1 percent for loans with case numbers assigned on or after April 1, 2012. FHA is also using its statutory authority to increase the annual mortgage insurance premium by an additional 0.25 percent for loans greater than $625,000 with case numbers assigned on or after June 1, 2012. As a result, the annual premium for loans greater than $625,000 will increase by a total of 0.35 percent.

FHA also increased the upfront mortgage insurance premium from 1 percent to 1.75 percent for loans with case numbers assigned on or after April 1 2012. The upfront premium may continue to be financed by the borrower. FHA estimates that the upfront premium change will cost new borrowers an average of approximately $5 per month.

The premium increases apply to forward mortgage loans, other than special loan programs to be identified in the Mortgagee Letter. FHA did not change the premiums for Home Equity Conversion Mortgages.

- Richard J. Andreano, Jr.

New Jersey Supreme Court Rules Deficient Foreclosure Notices Not Fatal to Foreclosure Action

A mortgage servicer’s failure to identify the name and address of the lender on the required Notice of Intention to Foreclose (Notice) does not require that the court dismiss a subsequent foreclosure action, the Supreme Court of New Jersey ruled on February 27.

The decision in US Bank National Association v. Guillaume gives trial courts in New Jersey broad discretion to fashion an appropriate remedy for deficient Notices, including dismissal without prejudice, service of a corrected Notice, or any other remedy appropriate under the circumstances of a given case. The Supreme Court directed trial courts to consider the impact of the defective Notice on the borrower’s information about the status of the loan, and on his or her opportunity to cure the default.

In most situations where the Notice fails to identify the lender, the borrower will interact with the servicer and consequently there will be no negative impact. This is what happened in Guillaume and it is anticipated that most courts will now follow the decision of that trial court and direct lenders to file corrected Notices.

In Guillaume, the Notice identified the name and address of the servicer, but not the lender. After a foreclosure suit was instituted by the lender, the borrowers negotiated with the servicer in an unsuccessful attempt to modify the loan. The borrowers failed to answer the foreclosure complaint and a default judgment was entered.

The borrowers then moved to vacate the default judgment on grounds that the Notice did not identify the name and address of the lender, as required by the New Jersey Fair Foreclosure Act (FFA). The trial court refused to vacate the judgment and instead directed that the lender serve a corrected Notice on the borrowers.

On appeal, the lender argued, alternatively, that: (1) the original Notice complied with the FFA because the servicer met the statute’s definition of “lender”; and (2) the allegedly defective Notice demonstrated “substantial compliance” with the statute’s requirements. The court rejected both arguments and held that the Notice required by the FFA must include the name and address of the actual lender, in addition to contact information for any loan servicer who is collecting mortgage payments and/or negotiating the resolution of any dispute between the lender and borrower.

However, the Supreme Court held that the trial court had properly exercised its discretion in allowing the lender to cure the deficiency by sending a revised Notice. This decision is significant because it expressly overrules the Appellate Division’s contrary decision in Bank of New York v. Laks, 422 N.J. Super. 201 (App. Div. 2011), which held that the only remedy available to a trial court for such a violation of the FFA was a dismissal without prejudice. Had the Guillaume Court affirmed the decision in Laks, thousands of pending foreclosure cases would likely have been dismissed causing lenders to have to start from scratch by serving new Notices and filing new lawsuits.

Finally, the borrowers also asserted that the original lender violated Sections 1601 to 1667f of the Truth in Lending Act because it overcharged them for recording fees. Based on this violation, the borrowers contended that they were entitled to the remedy of rescission, as provided for by TILA’s Section 1635. The Supreme Court agreed with the trial court and Appellate Division that the remedy of rescission was not available to the borrowers because they did not tender the principal due under the loan. The Supreme Court’s decision is consistent with numerous decisions in the federal courts.

- Martin Bryce, Jr.

Supreme Court Hears RESPA Section 8(b) Dispute

The U.S. Supreme Court heard oral argument on February 21, 2012, in Freeman v. Quicken Loans, Inc. to determine whether the unearned fee prohibition in Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) applies only when such fees are split between two or more parties. As reported earlier, at issue is a broad interpretation of Section 8(b) set forth in a 2001 statement of policy issued by the Department of Housing and Urban Development. HUD interprets Section 8(b) to prohibit not only the splitting of fees between two or more parties, but also a single party’s marking up the fee charged by another settlement service provider without providing additional services, and even a single party charging a fee that exceeds the value of services provided by the party.

While it would be unwise to predict an outcome based upon the Court’s musings, a certain amount of tea-leaf reading is possible, particularly given some justices’ penchant to argue with one another through their questions to counsel.

Among Justice Scalia’s concerns was that HUD’s interpretation “immense[ly]” altered the most logical and straightforward reading of what appears to be a kick-back statute by taking certain words in isolation and out of context. Chief Justice Roberts posed similar questions. Justice Breyer raised a possible concern as to the procedural posture in which HUD’s interpretations were implemented, and further inquired as to what congressional concerns were expressed in RESPA’s legislative history. Justice Kennedy asked whether RESPA’s criminal ramifications should influence the degree of deference HUD should be afforded. Justice Alito queried whether RESPA in this instance was just a labeling statute in that the lender could have simply listed everything in one category with apparent impunity.

Justices Kagan and Sotomayor seemed the most inclined to bow to HUD’s expertise. They expressed concern under the Court’s prior decision in Chevron that an administrative agency charged with rule-making, like HUD, was entitled to absolute deference in interpreting an ambiguity in the statute it is meant to enforce, so long as its interpretation was linguistically reasonable.

Overall, the justices’ posed tough questions to both sides, which will add to the anticipation during the coming months in which the Court determines how to rule. An opinion should be forthcoming sometime in the next four months.

Guidance on California Law Creates New Ambiguity

Since January 1, 2012, California employers have been bound to comply with the state’s new Wage Theft Prevention Act, set forth at Cal. Lab. Code Section 2810.5. The WTPA amended the California Labor Code to require that employers provide new hires with a written notice that specifies:

  • the employee’s rate of pay;
  • the allowances and regular payday designated by the employer;
  • the employer’s name, address and telephone number;
  • the name address and telephone number of the employer’s worker’s compensation provider; and
  • “any other information the Labor Commissioner deems material and necessary.”

Just days before the WTPA took effect, the California Division of Labor Standards Enforcement released a recommended template for the notice, along with a list of answers to Frequently Asked Questions about compliance with the new law.

Unfortunately, in its efforts to clarify the requirements of the WTPA, the DLSE has created further ambiguities. For instance, the template uses vague terms such as “worksite employer” that the DLSE does not define and that do not appear elsewhere in California employment law. In addition, the template includes check boxes to indicate whether the employee has an oral or written employment contract, but does not include any space for the employer to note that employment is at will. As the last 10 years have shown, where California law is ambiguous as to an employer’s wage and hour obligations, litigation is sure to follow.

In order to put your company in the best position to withstand any claims arising from the WTPA, we recommend that you prepare a modified WTPA notice. Such a notice should include all of the information listed on the DLSE’s model template, but should also state your company’s position regarding employment at will and clarify any terms in the DLSE’s model template that are ambiguous as applied to your company. If you would like assistance in preparing such a template, please contact John R. Carrigan, Jr., in our Los Angeles office.

NMLS Expansion to Begin in April 2012

The Conference of State Bank Supervisors recently announced that starting in April 2012, the Nationwide Mortgage Licensing System (NMLS) will be expanding to administer additional non-mortgage license types. The following states have agreed to transition certain licenses onto the NMLS in 2012: D.C., Idaho, Louisiana, Maryland, Massachusetts, New Hampshire, Oklahoma, Rhode Island,Tennessee, Vermont, and Washington.

Limited information has been released by the states regarding which license types will be impacted, and when. The Massachusetts Division of Banks recently announced that Debt Collectors, Small Loan Companies, Motor Vehicle Sales Finance Companies, Retail Installment Sales Finance Companies, Insurance Premium Finance Companies, Check Cashers, Check Sellers, and Foreign Transmittal Agencies will be required to complete a record in the NMLS.

- Reid Herlihy

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.