FHA Issues Mortgagee Letter Clarifying Lender Self-Reporting Requirements

Possibly in response to the CFPB's recent emphasis on self-reporting, FHA issued Mortgagee Letter 2013-41 last week, which clarifies the self-reporting requirements for Single Family FHA-approved lenders. Ballard Spahr has reported extensively on the CFPB's self-reporting initiative (linked here, here, and here) and recently held a webinar on the topic. As discussed on our recent webinar, this is a predictable step for FHA as a result of the CFPB's initiative, and the industry should expect similar guidance from other federal and state regulators in the near future.

Effective as of the date issued (November 13, 2013), the Mortgagee Letter addresses the following areas:

  • What must be reported to FHA – The Mortgagee Letter outlines the requirement that lenders report to FHA: (i) all findings of fraud and material misrepresentations, and (ii) any material findings concerning the origination, underwriting, or servicing of the loan, that the lender is unable to mitigate or otherwise resolve in accordance with the Mortgagee Letter. The Mortgagee Letter goes on to define what constitutes a "finding," when a finding is "material," and whether a finding has been "mitigated."

The Mortgagee Letter also states that for all findings that must be reported, the lender must identify what actions, if any, have been taken to attempt to mitigate or resolve each finding, and report any planned or pending follow-up activities. In order to facilitate compliance with this requirement, the Lender Reporting Feature in the Neighborhood Watch Early Warning System has been updated with new functionality to document such information.

  • Timeframe for lenders' internal reporting to senior management – The Mortgagee Letter clarifies that initial findings from a quality control review must be reported to senior management within 30 days of completion of the initial findings report. The letter further describes requirements should the initial findings report raise suspicion of the reportable occurrences noted above.

  • Timeframe for lenders' external reporting to FHA – The Mortgage Letter makes clear that findings of fraud or material misrepresentation must be reported to FHA immediately. All other material findings must be reported to FHA no later than 30 days after the lender has completed its internal investigation, or within 60 days of initial disclosure of the findings, whichever occurs first.

  • How findings should be reported to FHA – Self-reports must be submitted to FHA through the Neighborhood Watch Early Warning System. FHA will not accept paper reports. The Mortgagee Letter clarifies that this directive supersedes Section 7-3(J) of HUD Mortgagee Approval Handbook 4060.1, which states that findings of fraud or other serious violations must be reported directly to the HUD Homeownership Center having jurisdiction over the lender.

  • FHA's review process – The Mortgagee Letter provides a basic description of its review process for any self-reported events. It does emphasize that a contact person for the lender must be listed in the self-report, with access to the Endorsement Case Binder, the Quality Control Report, and any additional documentation needed for FHA to complete a full evaluation. Notably, the letter states that if FHA finds that the lender has not satisfactorily mitigated or resolved the findings, FHA may demand indemnification for loans endorsed through the Lender Insurance process or request indemnification for any non-endorsed loans, among other potential remedies.

  • Repercussions of failing to report to FHA – The Mortgagee Letter simply states that failure to comply with FHA requirements may result in FHA taking administrative action against the lender.

The Mortgagee Letter also references the existing Quality Control Plan requirements for FHA lenders, which must include procedures for reporting findings to senior management, taking corrective action, and notifying FHA. As a reminder, the FHA Quality Control Plan requirements can be found in Chapter 7 of the HUD Mortgagee Approval Handbook 4060.1.

Thankfully, for FHA lenders, the Mortgagee Letter does provide more concrete guidance as to what must be reported, the consequences of such reporting, and procedures for reporting and review by FHA. This is a welcome approach as compared to the CFPB's self-reporting guidance, which involves a vague incentive structure and poorly defined expectations.

Reid F. Herlihy

Ballard Spahr Attorneys Weigh in on Lawsuit Alleging Collection of Illegal Finder's Fees

Last month, Ballard Spahr attorneys Gary C. Tepper and Daniel J. Tobin filed an amicus brief for the Mortgage Bankers Association in the U.S. Court of Appeals for the Fourth Circuit in Petry et al. v. Prosperity Mortgage Co., et al., No. 13-1869.

Petry is a multimillion-dollar class action filed against Wells Fargo Bank, N.A., and Prosperity Mortgage Co. involving the scope of the Maryland Finder's Fee Act (MFFA). The MFFA prohibits a mortgage broker from accepting a "finder's fee" in a transaction in which it or an affiliate is also the lender. Ultimately, after allowing the plaintiffs' ample discovery, the district court granted summary judgment to the defense, reasoning that the plaintiffs had failed to uncover any evidence of a finder's fee. Nonetheless, the lower court had earlier refused to dismiss the case outright, allowing a lender that table funds to be treated as a "broker" subject to the MFFA.

Although there was no finder's fee assessed per se, the plaintiffs had alleged that the finder's fees were "disguised" as a part or all of a table-funded lender's customary fees. The district court permitted the case to go forward based in part on a very successful run of decisions the plaintiffs' counsel garnered in state court. The district court's ruling on the broker issue conflicts with the plain words of the MFFA, which make it impossible for a lender that table funds to be subject to the MFFA. Now that the case is before the Fourth Circuit, there is an opportunity for the appeals court to reverse that earlier decision.

The MFFA table-funding issue is probably worth hundreds of millions of dollars, as it likely touches the fees in (and provides statutory damages for) every table-funded loan made in Maryland over the last 12 years. Petry was but the first of a series of federal class actions involving other major lenders. Despite the fact that the district court eventually granted the Petry lenders summary judgment, the earlier opinions still stand and will likely be addressed by the Fourth Circuit.

FHFA Announces Ban for Reimbursement of Expenses For Captive Reinsurance Arrangements

On November 5, 2013, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the GSEs) will no longer reimburse their participating servicers for expenses arising out of captive reinsurance arrangements. Captive reinsurance occurs when the servicer purchases a lender-placed policy from the insurer and then issues reinsurance to the insurer through a subsidiary or affiliate. This past March, the FHFA proposed a ban on certain force-placed insurance practices, citing potential losses, as well as litigation and reputation risk.

In banning reimbursement for captive reinsurance arrangements, acting director Edward DeMarco explained that "FHFA remained concerned about the cost of lender-placed insurance for Fannie, Freddie Mac and consumers" and that the ban "is intended to reduce their costs as we consider additional measures." The FHFA announced that this directive was issued only after considering the views of a Regulatory Working Group, consisting of federal and state regulatory agencies, and key industry and consumer groups. Finally, the FHFA announced that the GSEs will provide guidance and implementation schedules to sellers and servicers in order to ensure the ban's success. 

- Justin Angelo

Statewide Judicial System Report Issued on N.Y. Foreclosure Cases

Earlier this month, the Chief Administrative Judge of New York's Unified Court System issued a report on the status of foreclosure cases in the state judicial system. The 2013 report contains important information about how the state's courts are handling the large volume of foreclosure cases in New York, based on case data covering the period of October 9, 2012, to October 6, 2013. Among other findings, the report noted a major uptick this year in the number of new foreclosure filings, which is likely to pose further challenges to a system already facing a daunting caseload.

The report is issued annually in accordance with Section 10-a(2) of Chapter 507 of the Laws of 2009, which enacted various provisions principally related to foreclosure proceedings on residential mortgages in New York State. Under this legislation, the chief administrator of the courts must submit a report to the governor and designated key legislative officials addressing "the adequacy and effectiveness" of mortgage foreclosure settlement conferences authorized by the legislation, which must also include statistical information regarding the conferences.

The report noted that foreclosure cases account for nearly one-third of the Unified Court System's civil cases in the supreme court system (the statewide trial-level court system). Given this heavy caseload, the court system is "committed to prioritizing the foreclosure docket," according to the report. To that end, the system has refined and enhanced the case information gathered in foreclosure cases—a process that continues to evolve. For example, recently the court system proposed amending the Request for Judicial Intervention (RJI) form filed at the initiation of a residential mortgage foreclosure case (discussed below) to require identification of the mortgage servicer involved in the case.

The report also noted the role of the Statewide Foreclosure Committee. The Committee, which was created in December 2011, comprises state and local administrators, judges, and legal and clerical staff from every judicial district in the state. It gathers and shares case management strategies, best practices, and lessons learned from local programs. It also has begun to explore an expedited procedure for foreclosures involving abandoned properties.

The report highlighted success in the statewide initiative to create uniformity and streamline data entry in foreclosure matters, observing that the courts "have embraced the new data collection system." Every county in the state is using the same data metrics, which will soon allow for reliable year-to-year comparisons and also will be very helpful in individual counties as a case management resource.

Based upon the data compiled, the report also addressed salient aspects of the judicial foreclosure system:

Foreclosure Filing Trends

In 2011 and 2012, filings had decreased substantially. This decline is attributed to the requirement (established by a court system administrative order in 2010) that the plaintiff file an affirmation certifying the accuracy of court documents in residential foreclosure cases; the requirement was intended to combat the practice of "robo-signing" (where, as described in the report, bank representatives claimed to have reviewed thousands of documents in impossibly short time periods). The report stated that the filing declines in 2011 and 2012 indicated "that the banking industry had difficulty complying with the affirmation requirement," but that the 2013 filing trends "suggest that they are now better able to meet the requirement."

Consequently, the report explained that so far in 2013, the number of new foreclosure cases has increased, projecting approximately 44,000 new cases by year-end—a "markedly higher" number than in the prior two years. In fact, this projection is more than the combined total of filings in 2011 and 2012. The report noted that the pending inventory of foreclosure cases has increased more than 16 percent since the beginning of the year. This increase will no doubt further challenge the already heavily burdened system.

Settlement Conferences

An important addition to New York foreclosure reform was the adoption in 2008, by statute, of a mandatory settlement conference early on in a residential foreclosure action. The provision was enacted as a mechanism to facilitate prompt resolution where a homeowner is in default and faces foreclosure. The recent substantial increase in filings has caused a major increase in these mandated settlement conferences.

The report explained that in the first nine months of 2013, more than 76,000 of these conferences were held, and that nearly 100,000 conferences are projected to be held in 2013. According to the report, "[t]he conference process has stretched resources to their limits in the courts, as well as for the housing counseling agencies and legal service providers that handle these matters on a daily basis."

Representation by Counsel

New York is very aware of the need to afford appropriate legal services to homeowners facing foreclosure, particularly for low-income New Yorkers. As the report emphasized: "The Judiciary continues its efforts to increase the availability of counsel to homeowners unable to afford representation. Legal service providers, volunteer lawyers, law school clinics and housing counselors are working with the courts in each judicial district to provide representation at these conferences."

In 2011, only 33 percent of defendants in residential foreclosure cases were represented at their settlement conferences, but this representation increased to 51 percent for 2012, according to the report. And for 2013, more than 54 percent of defendants had counsel—even though this increase in representation occurred when the number of conferences greatly increased. The report stated that the level of 2013 representation is a marked increase from when the foreclosure crisis began. The flip side is that many defendants still are unrepresented and frequently appear pro se, making it harder to resolve a foreclosure.

'Shadow Inventory' Pilot

Although a case can be commenced with filing and service in New York, a judge does not become involved for conferencing or addressing motions until an additional document—the RJI—is filed. As a result, the New York court system includes many residential foreclosure cases that, while commenced against a homeowner, are not actually before the court for action by a judge. The report notes that there are thousands of these cases, referred to as "shadow inventory."

In June 2012, the Chief Administrative Judge authorized special "pilot" courts designed to schedule foreclosure cases, even though an RJI had not been filed. After initial success with that program, the approach was expanded by adding a new rule authorizing special calendars (no longer as pilot programs) for certain residential foreclosure actions. This likewise would permit scheduling foreclosure cases for conference without an RJI filing. The county clerks of the five supreme courts in New York City then undertook the labor-intensive task of identifying more than 7,500 cases in shadow inventory. These courts began notifying homeowners to appear for conferences.

The goal is to get as many of these cases as possible to a foreclosure settlement conference early in the proceeding, when resolution is most feasible. The report noted that approximately 7,000 conference appearances have resulted from this approach. The report underscored, however, that county clerks outside of New York City are not easily equipped to identify these cases, so only a few counties statewide have progressed with their shadow inventory.

New Certificate of Merit Legislation

The report noted that effective August 30, 2013, new legislation requires the filing of a certificate of merit at the time of filing a residential foreclosure action. This legislation addresses both the practice of "robo-signing" of documents and the "shadow inventory" concern. It continues the court system's enhancements to address the integrity of filings for residential foreclosure cases.

In 2010, an administrative order was promulgated that required a plaintiff to file an affirmation certifying the accuracy of documents when the RJI is filed. The new legislation advances the timing on that showing by requiring that an equivalent certificate of merit be filed when the action is commenced. The report stated that this new legislation "is critical to ensuring the integrity and transparency of the foreclosure process."

The Chief Administrative Judge's report is an informative synopsis of the status of residential foreclosure cases in New York and how the court system is endeavoring to handle this very important inventory of cases before it. The report highlights the innovative actions and foreclosure-specific litigation requirements taken systemically to address the burgeoning foreclosure docket. All players in the foreclosure arena—lenders, borrowers, servicers, and others—should be attuned to these actions and the court system's evolving efforts to manage the unique challenges of New York foreclosure cases efficiently and fairly.

- Scott M. Himes

Oklahoma Adds New Mortgage Lender License to the NMLS

The Oklahoma Department of Consumer Credit has begun receiving applications for the new Mortgage Lender License through the NMLS. As we have reported, Oklahoma recently amended its Secure and Fair Enforcement for Mortgage Licensing Act to create the new Mortgage Lender License in addition to its pre-existing Mortgage Broker License. A Mortgage Lender License is required of any entity that takes an application for a residential mortgage loan, makes a residential mortgage loan, or services a residential mortgage loan and is an approved or authorized mortgagee with direct endorsement underwriting authority granted by the U.S. Department of Housing and Urban Development, a seller or servicer of Fannie Mae or Freddie Mac, or issuer for Ginnie Mae. Accordingly, the Mortgage Lender License is required only for entities with these federal authorizations.

In order to apply for a Mortgage Lender License, an entity must satisfy the following requirements: (1) provide authorization for criminal background and credit checks for each owner, officer, director, officer, and partner of the company; (2) show a net worth of $25,000; and (3) furnish a surety bond in the amount of $1,000,000. The total license costs $1,760, which includes the NMLS processing fee.  

- Marc D. Patterson

Copyright © 2013 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.

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