CFPB Issues Dodd-Frank Mortgage Rules Readiness Guide

The Consumer Financial Protection Bureau (CFPB) has just released a new guide that attempts to summarize various new mortgage rules that were finalized by the CFPB earlier this year. The 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (the Guide) is intended to help financial institutions strengthen their CFPB compliance and better understand the complexities of recent mandates.

A number of the new rules covered in the Guide will take effect in January 2014 and fall under Regulation Z, which implements various provisions of the Truth in Lending Act (TILA). They include the ability-to-repay/qualified mortgage rules, the high-cost mortgage and homeownership counseling rule, mortgage servicing rules, and loan originator compensation requirements. The Guide also includes a summary of the CFPB's mortgage escrow account rule, which took effect June 1, 2013.

Our attorneys are at the forefront of rapidly changing regulatory developments, and we are working closely with clients and industry trades to assist with implementing these new rules. We have substantial experience assisting clients with the ever-expanding range of federal laws governing mortgage banking, and we are helping them clear a path through the thicket of new CFPB rules as the effective dates approach.

FTC Settles First Mortgage Advertising Rule Enforcement Action

The Federal Trade Commission recently announced a settlement of its first enforcement action under its Mortgage Acts and Practices - Advertising Final Rule (MAPR). The MAPR, which was recodified as Regulation N, prohibits misrepresentations in mortgage advertising and imposes record-keeping requirements on mortgage advertisers.

The FTC's action was brought against "one of the nation's largest refinancers of veterans' home loans," according to an FTC press release announcing the settlement. The FTC charged the company with violations of the MAPR and the FTC's Telemarketing Sales Rule (TSR) regarding its marketing of refinancing services to current and former military service members. The FTC can seek civil penalties under the FTC Act of up to $16,000 for each violation of either rule. The settlement requires the company to pay a civil penalty of $7.5 million, which, according to the FTC's press release, is the largest fine the FTC has ever collected for TSR violations.

The FTC's complaint alleged that the company had violated the MAPR by making various misrepresentations about available loan products and its government-related status in telemarketing calls. It also alleged that the company violated the TSR by interfering with the right of consumers to be placed on an entity-specific "do not call" list and making calls to consumers who were on the company's "do not call" list and the National Do Not Call Registry.

The FTC shares enforcement jurisdiction for the MAPR with the Consumer Financial Protection Bureau. In November 2012, the FTC and the CFPB jointly announced that they had each sent warning letters to mortgage advertisers urging them to review their marketing materials to ensure compliance with the MAPR. Those actions resulted from the agencies' review of advertisements across the country for mortgage loans, refinancings, and reverse mortgages that appeared in a variety of media including websites, Facebook, direct mail, and newspapers.

- Barbara S. Mishkin

Fourth Circuit Affirms Dismissal of Claims Based on Purportedly "Robo-signed" Foreclosure Documents

The U.S. Court of Appeals for the Fourth Circuit has upheld a district court ruling dismissing claims against a law firm by plaintiffs who alleged that the firm filed "robo-signed" documents in a foreclosure action against plaintiffs' home.

In a ruling issued June 12, 2013, the Fourth Circuit held the following:

  • The discovery rule applied to toll the statute of limitations on the plaintiffs' claim under the Fair Debt Collection Practices Act (FDCPA).
  • The FDCPA claim failed because the plaintiffs did not allege facts showing any material misrepresentation by the law firm.
  • The plaintiffs' claim under the Maryland Consumer Protection Act (MCPA) failed because the MCPA does not apply to attorneys.
  • The plaintiffs' claim under the Maryland Consumer Debt Collection Act (MCDCA) failed because they did not allege that the law firm acted with knowledge that the debt was invalid, or acted with reckless disregard as to the debt's validity, as required by the statute.

The plaintiffs alleged that the foreclosure documents filed by the law firm retained to conduct the foreclosure were falsely executed because the substitute trustee did not sign the documents as required by Maryland law. Instead, the plaintiffs alleged that employees of the law firm signed the documents, and notaries attested that the documents were personally signed when they were not. The plaintiffs did not dispute, however, that they were in default and did not allege any inaccuracies concerning the amount of the debt owed.

As an initial matter, in response to a cross-appeal filed by the law firm, the Fourth Circuit ruled that the district court properly applied the discovery rule to toll the FDCPA's statute of limitations. Although actions must be brought under the FDCPA within a year of violation, and the plaintiffs brought their claim after the statute of limitations ran out, the action was timely filed because the filing occurred within one year of when the alleged fraud was discovered.

Next, the Fourth Circuit held that the plaintiffs did not allege any false or misleading representations, as required to proceed under section 1692(e) of the FDCPA. The court adopted the reasoning of the Seventh Circuit, explaining that "if a statement would not mislead the unsophisticated consumer, it does not violate the [FDCPA]—even if it is false in some technical sense." Because the plaintiffs did not allege that the falsely executed documents misled them or misrepresented the debt, the law firm did not make any material misrepresentation. Accordingly, the plaintiffs' section 1692(e) claim failed. The court similarly held that the signatures also did not constitute a violation of section 1692(f), which prohibits "unfair practices" by a debt collector that are not otherwise prohibited by other sections of the FDCPA. Since the plaintiffs failed to allege any other false or unconscionable conduct, this claim also failed.

Regarding the plaintiffs' state law claims, the Fourth Circuit noted that the district court had exercised its supplemental jurisdiction to hold that the allegedly forged signatures on the foreclosure documents did not violate Maryland state consumer protection laws. The Fourth Circuit affirmed the district court's holding because the MCPA expressly excludes the conduct of attorneys from its scope. The Fourth Circuit also affirmed the district court's decision that the plaintiffs failed to allege any violation of the MCDCA. The court noted that the plaintiffs did not (and could not) allege that the law firm had acted with knowledge that the debt was invalid, or acted with reckless disregard as to its validity, as required by the statute.

- Robert A. Scott and Stefanie H. Jackman

New York Office Broadens Mortgage Banking Group's Platform

The recent opening of Ballard Spahr's 14th office in New York is an exciting development for our Mortgage Banking Group. The firm's entry into this market enables us to expand our service to clients not only in mortgage-related litigation, but also in transactional matters. And we already are doing substantial work for clients in New York.

The New York office operates under the name Ballard Spahr Stillman & Friedman. Its 14 litigators represent a variety of clients, including financial services firms and their executives, in a range of high-profile, high-stakes litigation and government and internal corporate investigations. In particular, they have substantial experience defending clients being investigated by the New York Office of the Attorney General.

We already have strong relationships with an array of major U.S. banking institutions, and many of those clients are headquartered in New York. In addition, we're keenly aware that the New York Attorney General and Department of Financial Services have been aggressively pursuing enforcement actions against the industry.

Residential mortgage litigation remains near an all-time high, and we expect to handle a large volume of it in New York since we have experience in defending these types of lawsuits throughout our geographic footprint. A vast number of regulatory changes adopted (and to be adopted) by the Dodd-Frank Act and Consumer Financial Protection Bureau will inevitably spur new litigation.

Along with our formidable skill in litigation, our mortgage banking attorneys have broad regulatory experience and depth in enforcement actions and transactions. Advising clients on compliance remains critical as various new rules are set to take effect in January 2014, including the ability-to-repay/qualified mortgage rules, mortgage servicing rules, and revisions to loan originator compensation rules.

We welcome our New York colleagues to the firm and look forward to working with them.

- Richard J. Andreano, Jr. and John D. Socknat

Navigating the MSR Opportunity


Part I in a Two-Part Series from Steadfast Capital, LLC

Many depository institutions and mortgage companies have begun to accumulate servicing portfolios over the past two years, a compelling opportunity. They can add mortgage servicing rights (MSR) at effective price levels well below the historical market average, producing excellent long-term cash flow and earnings. These MSRs are primarily on loans these companies originate, but also can be from purchases of whole loans (correspondent) or purchase of existing MSR (bulk) from others. The recent run-up in mortgage rates highlights the advantage of retaining servicing, as increased MSR valuations will help to offset reduced pipeline valuations and lower origination volume. These valuations can vary significantly, however, according to state, product type, servicing remittance type, and other variables. Retaining servicing is also capital intensive, with further working capital demands for servicing advances over time. This two-part series provides a brief overview of issues to consider when embarking on an MSR retention strategy.

Once a mortgage lender decides to begin retaining MSR, its capital plan should be updated to fully reflect the impact of doing so under various retention scenarios over at least a five- to seven-year period, along with shock analysis on key factors such as prepayments and delinquencies. This is not a simple spreadsheet exercise; sophisticated MSR analytics must be incorporated into these projections to ensure that sufficient capital is available to replace foregone service release premiums and fund peak servicing advances. Retaining servicing is tax advantaged during the accumulation stage, materially affecting cash flow projections. What happens if rates decline and MSR portfolio runoff is faster than expected? What if delinquencies and foreclosures spike? Thorough analysis of multiple pro forma scenarios will serve to quantify a range of outcomes and ensure that the capital plan is sound.

Mortgage bankers and other institutions that make the decision to accumulate MSR should conduct a "retain versus release" analysis each month. Companies should rarely retain MSR on 100 percent of production, but instead use analytics to augment the best execution decisions being made by their secondary marketing departments. Day-to-day, secondary pricing paid by large investors fluctuates according to product type and coupon, and selling certain loans servicing released may result in the best economic decision. Also, regardless of pricing, this approach will enable "cherry picking" MSR with the best characteristics for retention.

A related and important topic is how to determine the amount to be capitalized when the MSR is added to the portfolio each month. In our adviser role, we see a wide variety of approaches, and misconceptions are common. For example, capitalizing substantially less than fair value (FV) under the theory of being "conservative" is almost always flawed logic – why not produce a more robust current income statement in accordance with GAAP when the entire amount of income recorded relating to capitalizing the MSR is backed out in determining taxable income? Nonetheless, some cushion in the amount capitalized as compared to full FV is usually desirable, particularly since the actual servicing cost incurred by most MSR owners is substantially higher than the "market" assumption used in FV analysis, reducing the "economic valuation."

The trade-off is straightforward; increasing the amount capitalized increases current income and reduces the yield to maturity of the MSR asset, and vice-versa. An important trend to follow going forward is the comparison of liquidation values (street price) to fair values using traditional market assumptions. Street price has been significantly lower in recent years, but this is changing rapidly, with some recent offerings garnering over a dozen bids and much more robust pricing. Part 2 of this series will review other critical decisions that must be made, such as whether to employ a subservicer and the pitfalls to consider when hiring one. We also will discuss whether companies not affiliated with depository institutions should consider raising capital or arranging financing to permit greater MSR retention. Other topics will include warehouse lender considerations and MSR hedging.

- David Fleig

About the author: David Fleig is President and CEO of Steadfast Capital, LLC, a boutique investment firm primarily focused on providing capital and strategic solutions to the mortgage banking industry. Steadfast's analytics division provides independent MSR valuations and related analytics to its bank and mortgage company clients. 

Long-Term Relationship Between Landlord and Tenant: Ongoing Operations


Guest Column by Ballard Spahr's Leasing Group

Editor's Note: Mortgage banking companies are often tenants leasing or subleasing office space, usually in multiple locations. This is the third in a series of articles by attorneys in Ballard Spahr's Leasing Group that explain the commercial leasing process and explore issues such as how a lease affects ongoing operations, how to plan for changing needs, the impact of foreclosure and bankruptcy, and how to get out of a lease. In this article, Alicia B. Clark, an attorney in the firm's Denver office, discusses the landlord-tenant relationship.

Leases govern the landlord-tenant relationship for the term of the lease. In the case of commercial leases, this period often can be five or 10 years or even longer if the term is extended. It is important to contemplate all of the parties' ongoing responsibilities that apply to the term after the space is initially built out. This article summarizes some of the important items to consider when negotiating a lease that may result in significant costs to a tenant over the lease term.

Maintenance and Repair Obligations

The lease will allocate the responsibilities for repair and maintenance of the leased premises, the building in which the premises are located, and the common areas. Usually, the landlord will agree to maintain, repair, and replace the structural portions of the building, including the exterior walls; roof and foundations; the building's systems, including heating, ventilation, and air conditioning; and the common areas that are available to all tenants, such as parking areas, elevators, lobbies, and shared restrooms. The tenant is usually obligated to maintain and repair the interior of the premises and, if applicable, any systems that solely serve the leased premises.

These responsibilities are often altered, however, depending on the specific circumstances of a particular lease. If the lease is for the entire building, the tenant may take on significantly more maintenance responsibilities. In other leases, for example, a tenant may agree to maintain an HVAC contract and perform regular maintenance of the HVAC system, but the landlord may agree to be responsible for replacement of such system.

In all cases, the lease should specify the maintenance standards, and the tenant should consider the costs it will incur to satisfy its responsibilities and compare them against the benefits it will receive, particularly when repair items benefit other tenants in the building or have a useful life beyond the lease term. A tenant may consider negotiating a cap on these costs over certain periods to limit its potential exposure.

Compliance with Laws

Leases should specify the party responsible for complying with laws in existence at the commencement date, as well as any laws that are subsequently enacted. A broad statement that the tenant shall be responsible for the premises complying with all laws is likely to result in more responsibility for the tenant than it realizes. Even if the landlord refuses to verify that the premises comply with all applicable laws at the commencement date, it should agree to be responsible for all costs to bring the premises into compliance and not charge the tenant, whether directly or through common area maintenance charges. This will include zoning regulations, building codes, and environmental laws, among others.

In addition, the tenant's responsibility for compliance with newly enacted laws should be limited to those matters that relate to the tenant's specific use of the premises only. For example, an office tenant should not bear the cost of items that apply generally to office buildings (such as life safety requirements), but only to those matters that apply to its business specifically (such as signage or other licensing requirements of mortgage servicers).


The landlord will usually supply all utilities to the leased premises, including water, heat, air conditioning, gas, and electric, as applicable, except telecommunications. The tenant will need to investigate whether the utilities, particularly air conditioning and electric, are included or excluded from base rent and adequate for the tenant's intended use. Many leases require that the premises have separate meters so the costs can be directly charged to the tenant. Other leases provide for the tenant to reimburse the landlord for the tenant's proportionate share of utilities as part of the tenant's additional rent obligations.

A tenant should confirm the specific hours the landlord will provide heat and air conditioning and whether after-hours use is available and if any additional charges apply. Depending on the intended use of the premises, the tenant may want to investigate the building's capacity for heavy use of a particular utility, such as electricity for a call or data center.


During the lease term, the tenant may need to make changes or upgrades to the premises, particularly in situations involving an assignment of the lease or sublease. A lease provision that requires the landlord's prior written consent in all cases is overly restrictive, particularly for minor cosmetic changes or alterations that do not affect the building's structure or systems.

The landlord will usually have an approval right over the contractor the tenant intends to use and the plans, and often charges an administrative fee as part of its supervision or approval of the alterations. If possible, the landlord's approvals should not be unreasonably withheld, conditioned, or delayed, and the landlord should be deemed to have provided its approval if it fails to respond to the tenant's approval request within a set period of time.

Many leases contain blanket statements that require the tenant to remove any alterations at the end of the lease term and surrender the premises in the condition they were in before the alteration was made. If the landlord is willing to confirm at the time it approves the alterations whether it will require that they be removed at the end of the lease, the tenant will be in a better position to make decisions on the value of the alterations and the costs of removal.

Landlord's Right of Entry

It is standard for a lease to grant the landlord a right to enter the leased premises to inspect, provide janitorial services, make necessary repairs, determine if the tenant is in compliance with the lease, and show the space to prospective purchasers and tenants and existing and prospective lenders. The lease usually then provides for the tenant to waive any claims of injury or interference or breach of quiet enjoyment as a result of such entry.

A tenant is usually successful in imposing various parameters on these entry rights to minimize security concerns and interruption of its business. For example, except in emergencies or when repairs are needed that will interfere with the tenant's use of the premises, the landlord can be required to enter only during normal business hours upon prior written notice to the tenant, and the tenant should be permitted to have a tenant representative accompany the landlord and its representatives when in the leased premises.

To the extent possible, repairs should be made after hours to minimize interference with the tenant's operations. In addition, the landlord should only be permitted to show the premises to potential tenants in the last few months of the lease term after all renewal rights have expired without having been exercised by the tenant.

- Alicia B. Clark

How the Supreme Court's DOMA Ruling Affects the FMLA


Last month, the U.S. Supreme Court issued its ruling in United States v. Windsor on the constitutionality of the Defense of Marriage Act of 1996 (DOMA). The Court ruled 5-4 that Section 3 of DOMA is unconstitutional, finding that it violated the due process clause of the Fifth Amendment to the U.S. Constitution, which prohibits denying any person the equal protection of the law.

The ruling means that same-sex couples who are married under state law will be treated as married for the purpose of many federal laws that had been interpreted to apply only to opposite-sex couples, including the Family and Medical Leave Act of 1993 (FMLA). Read a Q&A from members of our Labor & Employment Group discussing the FMLA implications of the DOMA ruling.

Another Agency Adopts the Uniform State Test


Another state agency has announced that it will be adopting the new national MLO test with the Uniform State Content. The Hawaii Division of Financial Institutions will adopt the test effective October 1, 2013. With this announcement, a total of 35 state agencies have adopted the new test and will, therefore, no longer require a separate state-specific test component as a prerequisite for MLO licensure.

California Agencies Undergo Name Change; Licensing Disclosures Impacted

Effective July 1, 2013, the California Department of Corporations was merged with the Department of Financial Institutions to become the Department of Business Oversight. hile the applicable regulations have not yet been updated, it is important to note the new department name for the purpose of advertising and website disclosures or other representations regarding licenses now administered by this regulatory body. Its website can be found here.

The California Department of Real Estate also underwent a name change, becoming the Bureau of Real Estate (BRE) effective July 1, 2013. Updated address and contact information can be found here. Again, it is important to note the new name for the purpose of advertising and website disclosures. On that issue, the BRE issued an Advisory stating that while it recommends that licensees use "BRE," "Bureau," or "Bureau of Real Estate" after July 1, 2013, the BRE will not be citing licensees solely based on the use of solicitation materials that reference the "Department," "Department of Real Estate," or "DRE." Accordingly, licensees can exhaust their existing stock of solicitation materials, but should make reasonable efforts to make the appropriate changes going forward.

Pennsylvania Adds Several Mortgage Licensing Exemptions

Pennsylvania recently amended its mortgage licensing statute to add several exemptions from the mortgage licensure requirements. Under the new amendment, licensure will not be required for anyone who originates or negotiates fewer than four mortgage loans in a calendar year, unless they are otherwise determined to be engaged in the mortgage loan business by the Pennsylvania Department of Banking and Securities. Additionally, employees of any agency or instrumentality of the federal government, a corporation otherwise created by an act of Congress (e.g. Fannie Mae, Freddie Mac, etc.), or any state or local government who are acting within the scope of their employment are exempt from licensure. These amendments become effective August 31, 2013.

- Reid F. Herlihy and Matthew Saunig 

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

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.

Related Practices

Consumer Financial Services
Mortgage Banking


Visit CFPB Monitor, our blog on the Consumer Financial Protection Bureau >

Subscribe to the blog via e-mail >