Congratulations to New Partner Reid F. Herlihy

The Mortgage Banking Group congratulates Reid F. Herlihy on his election as partner at Ballard Spahr, effective July 1. Based in the firm's Washington, D.C., office, Reid has played an integral role in the Group for many years and has put in countless hours of hard work to achieve this professional milestone.

Reid provides regulatory and transactional advice for clients on a range of issues involving state and federal consumer finance laws. His clients include mortgage companies, servicers, consumer finance companies, financial institutions, investment banks, debt collectors, and secondary-market investors on state and federal regulatory compliance issues.

Reid regularly assists clients with meeting state and federal licensing and approval requirements, including those related to stock and asset acquisitions. He has extensive experience with the SAFE Act and has counseled numerous mortgage companies, servicers, and third-party service providers on implementing those requirements. He also assists clients with state and federal examination issues and regulatory actions.

In addition, he counsels clients on issues regarding the CFPB's Mortgage Servicing Rules, advertising, fair debt collection, lending and servicing disclosures, loss mitigation, foreclosure procedures, and business practices. He frequently prepares multistate regulatory surveys and analyses on a wide range of matters concerning residential mortgage lending, brokering, and servicing, and assists companies in implementing new laws and regulations.

Please join us in welcoming Reid to the partnership and congratulating him on this much deserved accomplishment.

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


CFPB Highlights Mortgage Servicing Examination Findings and Technology Issues

In an unmistakable warning shot to mortgage servicers, the CFPB recently issued a “Mortgage Servicing Special Edition” of its Supervisory Highlights. The CFPB also updated portions of its Mortgage Servicing Examination Procedures.

In the Bureau’s accompanying press release, and throughout the Supervisory Highlights, there is a particular focus on perceived technological failures. In the words of Director Cordray: “Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules.” The clear takeaway is that the CFPB will not be persuaded by arguments that system limitations impair a servicer’s ability to comply with CFPB regulatory interpretations.

The Supervisory Highlights focuses primarily on issues involving loss mitigation procedures and servicing transfers. Scrutiny in these areas should not be a surprise to the industry, due to the CFPB’s continued emphasis in the areas, the logistical difficulties involved, and the inherent potential impact on consumers.

On the topic of loss mitigation, the CFPB first addresses issues with loss mitigation acknowledgment notices under Regulation X. Findings include obvious issues, such as failing to send an acknowledgment notice due to system glitches, and failing to send the notice within the five-day time frame. The report also highlights issues with requests for additional information in connection with incomplete loss mitigation applications. Notably, the findings cite failures to request necessary documents, requesting documentation that is not applicable to a particular borrower, and requesting documents that a borrower already submitted. As we have noted in response to past Supervisory Highlights, the CFPB expects that five-day acknowledgement notices be tailored to the particular borrower and reflective of information already on file.

The CFPB also cites issues regarding loss mitigation offer letters. Noted issues include deceptive statements of the time at which fees, charges, and advances would be assessed. The document notes examples of servicers taking “unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan modification” in terms of when certain charges would be assessed. These findings reinforce the importance of considering potential payment shock for borrowers through the life of a modified loan, and the clarity with which payment schedules are disclosed in modification agreements and accompanying materials.

The Supervisory Highlights provide several other examples of issues for loss mitigation offers. Such issues include the failure to disclose conditions of a permanent loan modification with the trial modification plan, and failure to timely convert completed trial modifications into permanent modifications. In the category of easily preventable issues, the report notes repeated findings of broad waivers of consumer rights in loss mitigation agreements. In our experience, such waiver-of-rights provisions are common in legacy loss mitigation agreement templates. If not done already, servicers should review all loss mitigation agreement templates to remove these types of broad waiver clauses.

Finally on the topic of loss mitigation, the Supervisory Highlights notes issues pertaining to denial notices. Cited issues include incorrect statements of the reason for denial, and failing to correctly state the borrower’s right to appeal the denial.

Regarding servicing transfers, the CFPB notes that incompatibilities between servicer platforms have, in part, caused issues related to in-process loss mitigation. Examples of issues include a transferee servicer failing to honor the terms of loss mitigation agreements already in place at the time of transfer, and delays converting trial loan modifications to permanent loan modifications.

Notably, this section of the Supervisory Highlights includes some limited positive feedback. The CFPB states that one or more transferee servicers began to use certain tools available to the industry, such as Fannie’s HomeSaver Solutions Network and the HAMP Reporting Tool, to reconcile loan data during transfer and better identify in-flight modifications.

As noted above, the CFPB also revised its Mortgage Servicing Examination Procedures. On the topic of complaint handling, the revised module focuses on a servicer’s procedures for expedited evaluation of complaints and information requests for borrowers in foreclosure. The CFPB also notes that it will be conducting targeted reviews of fair lending issues for mortgage servicers.

The Mortgage Servicing Special Edition of the CFPB’s Supervisory Highlights can be found here, and the updated Mortgage Servicing Examination Procedures can be found here.

- Reid F. Herlihy


NY DFS Finalizes Rigorous AML/BSA Regulation

The New York Department of Financial Services (DFS) has finalized a new regulation setting forth rigorous standards for monitoring and filtering programs to monitor transactions for potential anti-money laundering (AML) and Bank Secrecy Act (BSA) violations and block transactions prohibited by the United States Treasury Department’s Office of Foreign Assets Control (OFAC). The regulation, which becomes effective on January 1, 2017, will apply to all banks, trust companies, private bankers, savings banks, and savings and loan associations chartered under the New York Banking Law (NYBL); branches and agencies of foreign banking corporations licensed under the NYBL to conduct banking operations in New York; and check cashers and money transmitters licensed under the NYBL (Regulated Institutions).  For mortgage businesses that are not affiliated with Regulated Institutions, the new regulation is instructive nonetheless as a benchmark for future standards likely to come from DFS, other states and/or federal regulators.

The most notable provisions of the new regulation require each Regulated Institution to submit to DFS by April 15 of each year either a “Senior Officer Compliance Finding” or a resolution of its “Board of Directors” to certify compliance with the regulation. A “Senior Officer” is “the senior individual or individuals responsible for the management, operations, compliance and/or risk” of a Regulated Institution. The “Board of Directors” is the “governing board of every Regulated Institution or the functional equivalent if the Regulated Institution does not have a Board of Directors.” The resolution or finding must state that the Senior Officer or Board of Directors has reviewed documents, reports, certifications, and opinions of such officers, employees, outside vendors, and other parties as necessary to adopt the resolution or compliance finding. A Regulated Institution must maintain for DFS examination, for a period of five years, all records, schedules and data supporting adoption of the board resolution or senior officer compliance finding. Specific references in the proposed rule issued in December 2015 to criminal penalties for an incorrect or false submission have been replaced by more generic language regarding the Superintendent’s enforcement authority.

The final regulation requires a Regulated Institution to maintain a manual or automated “Transaction Monitoring Program” and “Filtering Program” that are reasonably designed to, respectively, monitor transactions after their execution for potential BSA/AML violations and suspicious activity reporting, and interdict OFAC-prohibited transactions. The regulation lists eight attributes that a Transaction Monitoring Program must have and five attributes a Filtering Program must have, to the extent applicable. The listed attributes are very detailed; for example, one requires a Transaction Monitoring Program to include protocols setting forth how alerts will be investigated, "the process for deciding which alerts will result in a filing or other action, the operating areas and individuals responsible for making such a decision, and how the investigative and decision-making process will be documented[.]"

The final regulation also lists eight additional requirements that must be part of both a Transaction Monitoring and Filtering Program, to the extent applicable. Among the areas covered by such requirements are data identification, validation of data integrity, accuracy and quality, data extraction and loading processes, governance and management oversight, vendor selection, and training. 

On July 27, 2016, Ballard Spahr attorneys will hold a webinar on the final regulation from 12 p.m. to 1 p.m. ET. The webinar registration form is available here.

- Richard J. Andreano, Jr., Peter D. Hardy, and Beth Moskow-Schnoll


High Court’s Encino Decision Means No Deference for CFPB View on RESPA, PHH Argues

On June 23, PHH filed a letter in the D.C. Circuit supplementing its appeal briefing in PHH Corp v. CFPB, No. 15-1177. For those of you who may have missed our prior posts on this, PHH is appealing a decision made by CFPB Director Richard Cordray while sitting as the CFPB’s administrative appellate judge. In that capacity, Cordray held that PHH violated RESPA in connection with a captive mortgage reinsurance arrangement. In the appeal before the D.C. Circuit, the CFPB argues that Director Cordray’s interpretation of RESPA section 8(c)(2), which is central to the Director’s decision, is entitled to Chevron deference.

In its original appeal briefing, PHH vigorously opposed the application of Chevron deference to Director Cordray’s interpretation of RESPA section 8(c)(2). The Director determined the RESPA section 8(c)(2) is not an exemption from the broad referral fee prohibition of RESPA section 8(a). PHH argued that deference only applies if the “normal tools of statutory construction” fail to produce a clear outcome. It further argued that, because RESPA is also a criminal statute, any ambiguities must be resolved in PHH’s favor under the Rule of Lenity.

In its June 23 supplement, PHH argued that the Supreme Court’s June 20 decision in Encino Motorcars,LLC v. Navarro, No. 15-415 is yet another reason not to apply Chevron deference to Director Cordray’s decision. In Encino, the Court addressed a Department of Labor (DOL) final rule under which automobile dealer service advisors are not covered by an exemption from the requirement to pay overtime pursuant to the Fair Labor Standards Act. The Court held that the DOL interpretation in the final rule, which is opposite of the DOL position on the issue for more than 20 years preceding the rule, is not entitled to deference because of the reliance of the automobile industry on the prior position and because the DOL “gave almost no reasons” for the change.

Like the DOL position in the final rule that was at issue in Encino, Director Cordray’s decision went counter to previously-published guidance interpreting RESPA section 8(c)(2) as an exemption to the RESPA section 8(a) referral fee prohibition. Before the CFPB came into existence, HUD enforced RESPA. HUD interpreted RESPA section 8(c)(2) as an exemption to RESPA section 8(a), and had provided informal guidance on how lenders could establish mortgage reinsurance arrangements in compliance with RESPA. When PHH’s case was before the CFPB, PHH argued that it relied on these HUD interpretations. Director Cordray, however, summarily dismissed the reliance arguments as unpersuasive. PHH argues that, under Encino, Cordray’s unreasoned dismissal is fatal to the application of Chevron deference to his decision.

- Theodore R. Flo


New York Imposes Expanded Duties on Mortgage Servicers

New York Governor Andrew Cuomo signed AB 10741 into law on June 23, 2016. AB 10741, which is designed to address abandoned homes, known as zombie properties, amends several provisions of New York law and requires mortgage servicers that service first lien mortgages secured by one to four family residential real property units to take specified actions to determine if a secured property is vacant and abandoned, and to maintain properties that are vacant and abandoned. The bill also modifies the settlement conference requirement during foreclosure proceedings, enhances the duty to negotiate in good faith at the settlement conference, and calls for the creation of a Consumer Bill of Rights. The specified requirements to maintain a property include the duty to comply with various requirements of the New York Property Maintenance Code, and to take specific, enumerated measures to secure the property. These measures include mold abatement and winterization.

There is a narrow exemption from the requirements that applies on a calendar-year basis for state or federally chartered banks, savings banks, savings and loans institutions, or credit unions that originate, service, or maintain their own mortgages and have less than 0.3 percent of the total loans in the state that they either originate, own, service, or maintain for the calendar year ending two years prior to the current year.

Initially, when a borrower becomes delinquent, a servicer must determine whether or not the property is vacant and abandoned by inspecting the property within 90 days of the borrower’s delinquency (which is not defined), and then throughout the delinquency every 25 to 35 days, at varying times of the day. A property would be considered vacant and abandoned if at least three consecutive inspections have been conducted in accordance with the law, and at each inspection  no occupant was present and there was no evidence of occupancy; and the residential real property was not being maintained in a manner consistent with the standards set forth in specified sections of the New York Property Maintenance Code. Once a property is determined to be vacant and abandoned, the servicer must, within seven business days, take reasonable and necessary actions to maintain the property.

The obligation to secure and maintain the property lasts until the earlier to occur of the following: the occupant asserts his or her right to occupy the property; the borrower files for bankruptcy; a court orders the servicer to stop any maintenance; a homeowner's association or cooperative prevents the servicer from gaining access to the property; the property is sold or transferred to a new owner; the servicer or investor subject to the requirements releases or transfers the lien; or the mortgage note is assigned, transferred, or sold to another servicer.

Reasonable and necessary actions to maintain the property include: replacement of no more than one lock to provide for subsequent access to the property; securing, replacing, or boarding up broken doors and windows; securing any part of the property that may be deemed an “attractive nuisance”—one that is likely to attract children—including water features, refrigerators, freezers, outbuildings, wells, or septic tanks; ensuring pipes, ducts, conductors, fans, and blowers do not discharge harmful substances directly upon abutting or adjacent property; winterizing the property; providing basic utilities to the property; removing and remediating any significant health and safety issues; taking reasonable measures  to prevent the growth of harmful mold; responding to government inquiries regarding property condition; ensuring that a required notice is posted on the property; and otherwise maintaining the property consistent with specified provisions of the New York Property Maintenance Code.

The reasonable and necessary action requirements are enforceable by the state Superintendent of Financial Services as well as the local municipality. Penalties for violations include a $500 civil fine per property per day. The law also preempts local laws, ordinances, and resolutions to the extent such laws, ordinances, and resolutions either impose a duty to maintain vacant and abandoned property in a manner inconsistent with the new statutory provisions, or establish related penalties or other monetary obligations, with respect to a state or federally chartered bank, savings bank, savings and loan association or credit union that originates or maintains a mortgage related to such property.

Industry members need to carefully evaluate the obligations of the new law and assess the extent to which they may need to alter lending practices or pricing of loans in New York State.

- Matthew R. Smith


Did you know?

by Wendy Tran

New Licenses Added to NMLS

On July 1, 2016, the Nationwide Mortgage Licensing System and Registry (NMLS) started receiving new applications for the following licenses:

  • Illinois Consumer Installment Loan License;
  • Illinois Payday Reform License;
  • Illinois Sales Finance Agency License;
  • Wisconsin Adjustment Service Company License;
  • Vermont Litigation Funding Registration;
  • Minnesota Department of Commerce Credit Services Organization License; and
  • Minnesota Electronic Financial Terminal License.

Hawaii Amends MLO and Mortgage Servicer Licensing Provisions

Hawaii has made several amendments to its mortgage loan originator law and mortgage servicers law. In particular, the scope of activities subject to each law has been clarified. Provisions related to mortgage loan origination have been removed from the mortgage servicers law, and provisions related to mortgage servicing have been removed from the mortgage loan originator law. In addition, the definitions in each law were made consistent.

Texas Adopts Amendments Regarding Interpretations and Advisory Letters

The Finance Commission of Texas adopted changes to provide clarification, improved grammar, and better readability of interpretations and advisory letters. For instance, the new definition of the term “advisory letter” clarifies that official interpretations, advisory bulletins, and letters sent in connection with an examination or license application are not advisory letters. The term “interpretation” is replaced by “official interpretation.” 

These provisions became effective on June 30, 2016.

Texas Revises Provisions Regarding Mortgage Bankers, RMLOs, and Servicers

The Finance Commission of Texas (Commission), on behalf of the Department of Savings and Mortgage Lending, adopted provisions regarding residential mortgage loan originators and mortgage bankers, including, but not limited to, the following: 
  • The definitions have been rearranged in alphabetical order.
  • The required records must be accurate.
  • Failure to file a mortgage call report or statement of condition report may result in administrative action, which includes the assessment of an administrative penalty.

The Commission also adopted provisions regarding residential mortgage loan servicers, including rearranging definitions in alphabetical order as well. The complaint notice/servicer disclosure is required when servicing mortgage loans within the state. Registrants must post this disclosure on their websites and provide this disclosure notice when servicing residential mortgage loans on real estate located in Texas.

These provisions became effective on June 30, 2016.

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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.