New York DFS: Nonbank Servicers Can Expect Increased Scrutiny

New York's top financial regulator plans to aggressively expand his agency’s investigation into nonbank servicers and the firms' affiliates that provide ancillary services. Speaking at the Mortgage Bankers Association's Secondary Markets Conference in New York City on May 20, 2014, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky told attendees that he continues to have serious concerns about the growth in nonbank mortgage servicing that has occurred as a result of traditional banks scaling back their mortgage servicing rights (MSR) business due to Basel III capital requirements.

Mr. Lawsky's remarks come on the heels of letters sent to certain nonbank servicers requesting information about the companies and their relationships with affiliates based on concerns that such relationships are increasing fees for borrowers.

"The potential for conflicts of interest and self-dealing here are perfectly clear," Mr. Lawsky said at the conference. "Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do. The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so."

In February, Mr. Lawsky told bankers at the New York Bankers Association Annual Meeting and Economic Forum that "it is appropriate for regulators, where warranted, to halt the explosive growth in the nonbank mortgage servicing industry before more homeowners get hurt." His focus on scrutinizing nonbanks continued at the Secondary Markets Conference, where he said that the DFS's review of nonbank servicers has found that the provision of ancillary services is another enormous profit center associated with MSRs that may put homeowners and mortgage investors at risk.

"Now, in most circumstances, there's nothing inherently wrong with companies and their affiliates providing a range of ancillary services," Mr. Lawsky said. "However, these are not ordinary circumstances where a customer has the opportunity to choose from a range of options and selects the option that meets the customer's requirements at the lowest price. Rather, this is the extraordinary circumstances where there effectively is no customer to select its vendor for ancillary services. Nonbank servicers have a captive (and often confused) consumer in the homeowner.

"So who makes the decision about where to procure these ancillary services, and how much of the investor's or the borrower's money to pay for them? It's usually the servicer, seemingly with no oversight whatsoever. The very same servicer that benefits—either directly or indirectly—from the profitability of the affiliated companies that provide these services," Mr. Lawsky said.

In closing, Mr. Lawsky stated that the DFS plans to expand its probe of ancillary businesses by nonbank mortgage servicers because homeowners and investors are at risk of becoming "fee factories."

"We've publicly highlighted our concerns about ancillary services with one particular nonbank servicer, but they are not the only industry player doing this. So you should expect us to expand our investigation into ancillary services in the coming weeks and months," he said.

Marc D. Patterson

Mortgage Lead Generator To Pay $250,000 in FTC Settlement on Deceptively Advertised Mortgage Rate Charges, Inc., a Houston, Texas-based mortgage lead generator, will pay the Federal Trade Commission $250,000 under a settlement announced earlier this month of claims it operated mortgage lending websites that deceived consumers about mortgage terms. The FTC charged that advertised low-interest-rate loans as fixed-rate mortgages to generate potential borrowers for third parties, but actually matched consumers with mortgage brokers, mortgage lenders, or lead brokers that did not provide mortgages with the advertised terms.

The FTC alleged that's advertisements represented that the company or its affiliated third-party purchasers would provide a mortgage with a low fixed interest rate or fixed monthly payment, such as a fixed rate of 2.25 percent, when the rate actually corresponded to an adjustable rate mortgage. The FTC stated that the phrase "Adjustable-Rate Mortgage," "Variable-Rate Mortgage," or "ARM" did not appear in's advertisements, or was not as conspicuous as the word "fixed." The FTC also claimed that's websites advertised a rate of finance charge without disclosing the rate as an annual percentage rate and failed to state the repayment obligations over the full term of the loan.

Based on these allegations, the complaint charged that disseminated deceptive commercial communications regarding mortgage credit products in violation of the FTC Act and the Mortgage Acts and Practices Advertising Rule (the MAP Rule and Regulation N). It also alleged the company failed to include the annual percentage rate and whether it would increase after the loan is made in violation of the Truth in Lending Act (TILA) and Regulation Z.

As part of the settlement, agreed to significant compliance reporting and recordkeeping requirements in addition to paying the $250,000 civil penalty. The settlement also prohibits from:

  • Disclosing, selling, or transferring consumer data
  • Misrepresenting the terms and conditions of any financial product or service, and any term or condition of a mortgage credit product
  • Assisting others with misrepresenting any material fact about a mortgage credit product
  • Violating the Federal Trade Act, the MAP Rule and Regulation N, and TILA and Regulation Z

"Buying a home is one of the most important financial decisions a consumer can make," said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, when the settlement was announced. "When companies deceive consumers about the true cost of the mortgages they offer, and consumers take on a mortgage they can’t afford, the harm can last a long time. The FTC's message is clear: Mortgage advertising must be truthful."

The recent settlement and the FTC's announcement demonstrate that the FTC intends to continue targeting companies that engage in deceptive mortgage advertising. Mortgage lenders, brokers, and lead generators should be aware of the FTC's vigorous enforcement actions and review their advertising policies and procedures to ensure continued compliance with the law.

- Marc D. Patterson

HUD Solicits Comments on Proposed Housing Counseling Pilot, HAWK for New Homebuyers

HUD recently issued a notice in the Federal Register soliciting public comment on a proposed four-year, two-phase housing counseling pilot, HAWK for New Homebuyers. HAWK (Homeowners Armed With Knowledge) is linked to HUD’s Housing Counseling program with FHA-insured mortgage origination and servicing. The HAWK pilot is consumer-driven and designed to expand the benefits of housing counseling not only to consumers but also to lenders, investors, and the FHA Mutual Mortgage Insurance Fund (MMIF). HUD strongly encourages those interested to submit comments electronically through the Federal eRulemaking Portal by July 14, 2014.

The goal of the HAWK pilot is to assess program designs involving:

  • Improving the loan performance of participants and reducing claims paid by MMIF
  • Expanding the number of families who improve their budgeting skills and housing decisions through access to HUD-approved housing counseling agency services
  • Increasing access to sustainable home mortgages for homebuyers underserved by the current market

The pilot will provide FHA insurance pricing incentives to first-time homebuyers who participate in housing counseling and education focused on evaluating housing affordability and mortgage alternatives, managing borrower finances, and understanding the rights and responsibilities of homeownership. Housing counseling and education will occur at the points in time determined to be most useful to first-time buyers, i.e., before signing the home purchase contract, before the loan closes, and during the first year of homeownership. FHA-insured borrowers, consumers in general, originators, servicers, and other parties expected to benefit from the housing counseling will fund the program.

The pilot has two phases. Phase One is the startup period, where a limited number of borrowers working with HUD-selected housing counseling agencies, FHA-approved lenders, and servicers will participate to test the program. HUD will assess the sufficiency of communication, operations, systems, and coordination of the pilot processes. In Phase Two, participation will expand to all first-time homebuyers using FHA-insured financing, up to a capped number of loans in each of the four years.

In addition to describing the pilot, the notice describes how HUD intends to select housing counseling, lender, and servicer participants for Phase One in accordance with certain selection criteria and procedures. Finally, the notice solicits comments and suggestions on:

  • The marketing of the pilot to real estate professionals and consumers
  • How to coordinate or leverage the pilot with other non-FHA benefits for HAWK homebuyers, such as local down payment assistance programs or mortgage products with reduced credit overlays
  • The content, duration, and timing of housing counseling and education
  • How to pay for housing counseling and education
  • The sufficiency of pilot incentives to attract homebuyers to obtain housing counseling services
  • The mitigation of fraud and risk in the pilot
  • Program coordination, operations, and systems requirements.

Shane Jasmine Young

HUD Issues Proposed Rule Regarding ARM Disclosures

On May 8, 2014, HUD issued a Proposed Rule meant to align HUD rules governing FHA-insured ARMs with the recent CFPB rules regarding ARM interest rate adjustment and disclosures under Regulation Z (ARM Rules). Comments on the Proposed Rule are due June 9, 2014. HUD notes that the shorter 30-day comment period is appropriate here because the industry has had ample time to adjust to the ARM Rules.

Under the ARM Rules, when the interest rate adjusts based on index movement, servicers are required to notify borrowers of an impending payment change between 60 and 120 days before the new payment amount is first due. However, for loans that have rate adjustments every 60 days or more frequently, or are originated before January 10, 2015, and have look-back periods for the index value of less than 45 days, the notice may be provided between 25 and 120 days before the adjusted payment amount is first due. HUD interprets the ARM Rules as actually setting the look-back period for the index value as 45 days, which is not the case. Under present HUD rules, any ARM insured by the FHA requires a 30-day look-back period. The Proposed Rule would amend 24 C.F.R. § 203.49(d)(2) to require FHA-insured mortgages to use the most recent index figure available 45 days before an interest rate change becomes effective.

The Proposed Rule also amends 24 C.F.R. § 203.49(h) to align directly with the ARM Rules under Regulation Z. HUD accomplishes this by cross-referencing 12 C.F.R. § 1026.20 to "not only avoid repetition of regulatory text, but help to ensure that HUD's codified regulations remain current" in the event that the CFPB amends Regulation Z. Under the Proposed Rule, lenders and servicers of FHA-insured ARM loans would be required to make the initial adjustment disclosures and subsequent adjustment disclosures as required under the ARM Rules. HUD states that it does not insure ARMs with rate adjustment terms less than 12 months, thus the shorter-term exemption found in the ARM Rules is not applicable to FHA-insured ARMs.

Jared R. Kelly 

Maryland Narrows Time Frame for Seeking Deficiency Judgments against Borrowers

The amount of time that mortgage lenders and servicers have to seek a deficiency judgment against borrowers will be shortened from 12 years to three years under new legislation enacted in Maryland. The new law takes effect July 1, 2014.

Under current Maryland law, when the proceeds of a residential foreclosure sale are insufficient to pay off the entire loan, a lender or servicer usually has up to 12 years to seek a deficiency judgment against a defaulting borrower. That is because most mortgages, deeds of trust, and promissory notes are executed "under seal," making them subject to a special 12-year statute of limitations.

The new law, signed by Governor Martin O'Malley last week, will eliminate the special 12-year limitations period for mortgages, deeds of trust, and promissory notes that secure or are secured by residential property. Instead, lenders will have just three years from the date of the court's final ratification of the foreclosure to seek a deficiency judgment.

In addition, the new law makes a motion for the deficiency judgment within the foreclosure action the lender's only remedy for seeking to collect a deficiency after a residential foreclosure. Existing Maryland law permitted lenders to file a separate action for breach of contract after a foreclosure was completed. That option will no longer be available under the new law.

- Robert A. Scott

VA Issues ‘Qualified Mortgage’ Definition for VA Guaranteed or Insured Loans

On May 9, 2014, the Department of Veterans Affairs (VA) issued an interim final rule defining a qualified mortgage (QM) for VA insured and guaranteed loans. Under the proposed rule, all purchase money origination loans and refinances other than certain interest rate reduction refinance loans (IRRRL) guaranteed or insured by the VA are defined as safe harbor QM loans. The interim final rule also designates as a QM: (1) any loan that the VA makes directly to a borrower; (2) Native American direct loans; and (3) vendee loans, which are made to purchasers of properties the VA acquires as a result of foreclosures in the guaranteed loan program. The rule is effective May 9, 2014.

The VA’s rule will replace the CFPB’s temporary QM rule that exempts VA loans from the strict 43 percent DTI ratio threshold that applies to general QM loans. In general, all VA loans are safe harbor QM loans regardless of whether the loan is a high cost mortgage or exceeds the CFPB’s DTI ratio limit, subject to certain exceptions pertaining to VA IRRRLs. Consequently, the APR and DTI ratio on a VA loan has no effect on its safe harbor status.

Note that while all VA IRRRLs (also known as streamlined refinance loans) are considered QM loans, not all such IRRRLs are safe harbor QM loans. However, the VA IRRRLs that are not classified as safe harbor QM loans are still entitled to a rebuttable presumption that they meet the ability-to-repay requirements. In order for a VA IRRRL to be considered a safe harbor QM, the loan must meet the following conditions:

  • The loan being refinanced was originated at least six months before the new loan’s closing date
  • The veteran has not been more than 30 days past due during the six months preceding the new loan’s closing date
  • The recoupment period for all allowable fees and charges financed as part of the loan or paid at closing does not exceed 36 months
  • All other VA requirements for guaranteeing an IRRRL are met.

In addition, VA IRRRLs are excluded from the CFPB’s income verification requirements if seven enumerated criteria are met, including the condition that the total points and fees do not exceed 3 percent of the total loan amount. Note that the VA did not incorporate the higher point and fee limits for streamlined refinance loans below $100,000. The VA estimates that the exemption will shorten the closing time for qualifying streamlined refinances by 2-4 weeks.

In adopting the interim final rule, the VA noted that of the loans that the VA guaranteed in FY 2013, more than 95,000 would have exceeded the CFPB’s strict 43 percent DTI ratio, and nearly 5,000 would have exceeded the APR limit to qualify for the QM safe harbor. The VA stated that it needed to address and ease concerns of veterans, lenders, and investors on the potential effect of the QM requirements on the VA’s programs, and issued this interim final rule to provide legal certainty and restabilize the market for VA loans.

Please note that the VA has provided a short, 30-day comment period for the interim final rule. Comments are due on or before June 9, 2014.

- Marc D. Patterson

CFPB Issues Snapshot of Older Consumers and Mortgage Debt

The CFPB’s Office for Older Americans released a report this month reviewing mortgage debt held by older consumers—individuals age 65 and older. The report found that older consumers are carrying more mortgage debt into retirement, and fewer older homeowners own their home outright than in the past two decades. In addition to mortgage debt, the report found that older Americans are also carrying more credit card and student loan debt into retirement than they were during the same period.

From July 2011 through December 2013, approximately 15,500 complaints were submitted to the CFPB by older consumers. Approximately one-third of these complaints concerned the consumers’ mortgages. The most common complaint related to the refusal by mortgage servicers to allow consumers to modify their loans. After the resolution, 28 percent of consumers disputed the company’s response.

Through this report, the CFPB continues to stress that financial institutions should provide a heightened level of care and review when assisting older consumers.

- Joseph J. Schuster



ABA and CBA Express Concern That the CFPB’s Consumer Debt Collection Survey Falls Short

On May 6, 2014, the American Bankers Association (ABA) and Consumer Bankers Association (CBA) submitted comments to the CFPB’s “Debt Collection Survey from the Consumer Credit Panel” (the Survey). While the ABA and CBA applauded the CFPB’s collection of information regarding actual consumer experiences with the collection industry, both expressed concern that as currently formatted, the Survey will likely fall short of producing reliable and representative data that can be used to inform any related rulemakings or other agency actions.

For one, both the ABA and CBA are concerned that the Survey does not differentiate between consumer experiences with first-party creditors and third-party collectors. In adopting this generic approach, the ABA and CBA caution that the CFPB is missing a meaningful opportunity to investigate the extent to which consumer experiences differ with respect to creditors and collectors. For example, as the CBA remarked in its May 6, 2014, comments:

“Unlike the relationship between third-party collectors and debtors, the creditor-borrower relationship is usually a long-standing one, covering the entire lifecycle of the loan. The creditor also has strong business incentives to foster this relationship as in many instances it has a multi-faceted relationship with the consumer.”

The ABA and CBA suggest that drawing a clearer distinction in the Survey between first-party creditors and third-party collectors will likely show that consumers have materially different collection experiences with each. Moreover, this distinction will allow the Survey to provide meaningful data that is relevant to a number of the questions posed in the CFPB’s Advance Notice of Proposed Rulemaking. In addition, the ABA suggests that the Survey should allow consumers to identify not just the type of collector, but also the type of debt involved because that too could significantly affect the consumer’s collection experience.

Additionally, the ABA and CBA both question the CFPB’s decision to oversample data from consumers who are in collections or who have low credit scores. They fear this will skew the surveyed population to those who are more likely to have charged-off or past due debt. As the CBA remarked, this introduces confounding variables into the Survey results because these consumers are much more likely than the general population to hold unfavorable views about collectors. Further, this oversampling diminishes the experiences of consumers who may have different debt collection experiences where they were able to come current or otherwise resolve their account. To capture these consumer experiences, the ABA suggests that in addition to oversampling consumers in collections or with low credit scores, the CFPB also should oversample consumers whose credit reports show they were more than 30 days late with a payment but do not show any further delinquency.

The ABA and CBA also both call on the CFPB to ensure transparency as to the Survey results by disclosing the underlying data and information collected. Moreover, the CBA asks the CFPB to make an effort to verify the validity of the experiences reported by consumers prior to drawing any conclusions from that information, in contrast to the CFPB’s current approach in publishing its consumer complaints. The ABA further suggests that the CFPB should pretest the Survey questions, evaluate any possible shortcomings, and make the results of that pretesting publicly available in order to maximize the Survey’s policymaking value.

Relatedly, the ABA also suggests that the Survey should be administered exclusively online to maximize response rates, include prescreening questions to identify potential response bias, and allow questions and answers to be randomized in order to minimize the potential for bias and other potential errors to impact the results. Moreover, the ABA believes that the online format will allow more formatting flexibility aimed at assisting consumers in understanding the Survey, as well as make the Survey collection and review process more efficient and streamlined by eliminating potential loading errors that can plague paper documents (i.e., keypunch errors).

Finally, both the ABA and CBA make specific suggests with regard to revising the various available responses in the Survey to more accurately reflect the options and situations that consumers confront during the collection process, including responses that cover situations where a consumer may not recall or know the specific answer. The ABA also suggests that the Survey should be shorter and more focused, again to minimize consumer response fatigue and confusion.

We share many of the same concerns about the Survey as those expressed by the ABA and CBA. As the Survey is currently formatted, we too question whether it will result in the collection of useful, verifiable data that is representative and accurate with regard to the overall consumer collection experience. Given that the Survey undoubtedly will play a major role in any future collection rulemaking or policy pronouncements by the CFPB, it is vital that the CFPB ensure the Survey is designed in a way to minimize the potential for producing skewed, biased data that may result in regulations and policies that do not reflect address actual collection issues in a meaningful and effective manner.

Moreover, we agree that public disclosure of the underlying data collected through the Survey is critical to ensuring the legitimacy of the Survey itself, as well as any resulting rulemaking or other regulatory action. As the ABA suggests, there is no reason such data cannot be scrubbed to protect personally identifiable information or other sensitive data, and then made available to the public for review and comment in connection with any findings and proposals born out of the Survey. The CFPB continues to state that it is a data-driven agency, but being data-driven is not enough—transparency also is required and should be something the CFPB welcomes since transparency serves to increase public understanding and acceptance of its actions. In contrast, closed-door meetings and refusals to disclose information serves only to sow seeds of distrust, which is not a productive or efficient manner by which to effectuate lasting change. We hope the CFPB will give due regard to the legitimate concerns raised in these comments, as addressing the concerns raised therein will help to ensure that the Survey results in useful and statistically sound data.

- Stefanie H. Jackman

Cordray Stresses Individual Accountability and Service Provider Oversight in Remarks to Chicago Fed

In remarks to the Chicago Federal Reserve Bank on May 9, 2014, Director Richard Cordray outlined the past and future of the Bureau’s enforcement efforts. Director Cordray’s theme was to outline Bureau expectations in what he calls a “new era of accountability.”

Director Cordray highlighted the Bureau’s efforts to hold individual decision makers responsible for violations of consumer finance laws along with companies through the use of “time-honored principles of law” governing vicarious liability and piercing the corporate veil. His remarks echoed previous statements that the Bureau planned to use its enforcement powers to pursue individual wrongdoers along with financial companies. The Bureau announced last month that the first guilty plea had been entered by an individual referred by the Bureau to the Justice Department.

Director Cordray also highlighted the Bureau’s effort to provide guidance on management of third-party service providers. He touted the Bureau’s efforts to hold service providers liable for violations of consumer financial laws and financial institutions responsible for the violations of their service providers. “People who do not understand what company they are really dealing with will find it hard to assign proper responsibility to those who may be mistreating them,” he said. To illustrate the Bureau’s activity in this area, Director Cordray cited recent bureau enforcements and examination in areas including credit card add-on products, loan servicing relationships, debt collection, and payment processors.

Director Cordray closed his remarks by mentioning the Bureau’s efforts to collect and process consumer complaints, noting that the aggregation of consumer complaints will help to drive future CFPB activity.

While these remarks do not outline any new policies from the Bureau, they underscore the Bureau’s focus observable in recent months on third-party service provider oversight and efforts to hold individuals accountable.

- Lauren McDermott


Maine Adopts New National SAFE MLO Test with Uniform State Component

Maine is the latest state to announce that it will be adopting the new National SAFE Mortgage Loan Originator (MLO) Test with the Uniform State Test (UST) component. The Maine Bureau of Consumer Credit Protection (the Bureau) will adopt the test effective July 1, 2014. As we previously reported, Maine lawmakers passed legislation that paved the way for the Bureau to adopt the UST last month.

The National SAFE MLO Test with the UST component first became available on April 1, 2013. With this announcement, a total of 40 state agencies have adopted the UST. Remaining state agencies will continue to require new MLOs to take state-specific test components, although they may adopt the UST in the future.

Guam Now Accepting Applications through NMLS

The Guam Department of Revenue and Taxation has announced that it is accepting new applications and transition requests through NMLS. Effective April 28, 2014, Guam began accepting applications for the following licenses:

  • Mortgage Servicer License
  • Residential Mortgage Lender Servicer License
  • Residential Mortgage Lender License
  • Mortgage Servicer Branch License
  • Residential Mortgage Lender and Servicer Branch License
  • Mortgage Loan Originator License

In addition, Guam adopted the National SAFE MLO Test with the UST component on April 28, 2014.

New York Promises To Shorten Mortgage Licensing Process

The New York Department of Financial Services (DFS) plans to significantly reduce the time it takes to get a mortgage license in the state. In remarks to the Mortgage Bankers Association 2014 National Secondary Market Conference on May 20, Superintendent Benjamin Lawsky said the DFS plans to revise the application process by removing layers of review for new mortgage banker licenses and branch locations. The agency also anticipates publishing policy guidebooks that will serve as a resource for licensees seeking or maintaining licensure.

Mr. Lawsky stated that the DFS will cut the current "four-month" license approval process for lenders in half. "When I heard that we were one of the slowest in the country, my reaction was to do a whole reform process and make us the fastest," he said. "I want to be Number One."

We applaud any efforts taken by the state to make the process faster and more efficient.

- Marc D. Patterson

Copyright © 2014 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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