Financial Services Update
February 16, 2011
Alert Contents
This Alert highlights the following recent developments:
Federal Regulatory Developments
:
HUD
FHA Extends “Anti-Flipping Waiver” to Help Housing Market
FHA Announces Increase in the Annual Mortgage Insurance Premium FHA Issues Guidance on HECM Counseling Fees
Federal Reserve Board
Board Announces Deferral of Further Regulation Z Changes State Regulatory Developments:
Massachusetts Issues Guidance on Reverse Mortgage Products
Mortgage Banking Litigation
:
California Mortgagor Wins, Without Winning (Aceves v. U.S. Bank, N.A.)
Recent and Upcoming Events
WBSK Government Affairs Director to Speak at MBA Servicing Conference (February 22-25). Jack Konyk, Executive Director of Government Affairs at WBSK, will be a panelist in the Default Super Session at the MBA Annual Servicing Conference & Expo. He will address legislative and regulatory
developments in the mortgage space, concentrating on the default area. The Meeting will be held February 22 - 25, 2011 in Dallas, TX. For more information, visit the event’s website at
WBSK Attorney to Speak at TMBA's SEO Conference (March 6-8). Troy Garris, from our Dallas Metropolitan Area Office, will be in Austin on March 6-8 to speak at the Texas Mortgage Bankers Association's Senior Executive Officers & Managers Conference. The topic will be developments arising under the Federal Reserve Board’s rules governing compensation to Loan Originators, and Federal and State overtime and minimum wage requirements.
WBSK Government Affairs Director to Speak at Five Star Government Forum (March 8). Jack Konyk, Executive Director of Government Affairs at WBSK, will moderate and present on the opening panel at the Five Star Government Forum, addressing the topic, “Regulation Nation: What More Is In Store For U.S.
Regulators?” The Meeting will be held March 8, 2011 in Washington, DC. For more information, visit the event’s website
WBSK Attorney to Speak at Capital Markets Cooperative 7th Annual Conference (March 14-16). Troy Garris, from our Dallas Metropolitan Area Office, will be in Florida to speak at the 7th Annual Conference of the Capital Markets Cooperative. The presentation will cover developments under the Federal Reserve Board’s rules governing compensation to Loan Originators, and related issues.
WBSK Attorneys to Speak at National Reverse Mortgage Lenders Association Conference (March 15). On March 15, Jim Brodsky and Jim Milano will be making presentations to the reverse mortgage lending industry at the National Reverse Mortgage Lenders Association West 2011 Conference in Newport Beach, California, on “Loan Originator Compensation Rules and Their Impact on
Sponsors and TPOs” and “Staying Afloat in a Tsunami of Regulatory Reform.” Weiner Brodsky Sidman Kider PC serves as outside General Counsel to the Association.
WBSK Government Affairs Director to Speak at 2011 Regional Conference of MBA’s (March 15-17). Jack Konyk, Executive Director of Government Affairs at WBSK, will speak on legislative and regulatory developments affecting the mortgage industry at the 2011 Regional Conference of MBA’s in Atlantic City, NJ. The Meeting will be held March 15 - 17, 2011 at the Trump Taj Mahal. For more information, visit the event’s website
Summaries
Federal Regulatory Developments
:
HUD
FHA Extends “Anti-Flipping Waiver” to Help Stabilize Housing Market
In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity, the Federal Housing Administration (FHA) has extended FHA’s temporary waiver of the agency’s “anti-flipping rule.” The extension is intended to accelerate the resale of foreclosed upon homes in neighborhoods struggling to overcome possible property abandonment and blight.
With certain exceptions, FHA regulations prohibit insuring a mortgage on a home, where the seller owned it for less than 90 days. Early last year, FHA temporarily waived this regulation through January 31, 2011. FHA is extending this waiver through the remainder of 2011, and the waiver applies not only to properties resold through private sales, but also to HUD and bank-owned properties. The waiver will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities. FHA research finds that in today’s market, acquiring, rehabilitating and reselling foreclosed properties often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition, adversely impacts the willingness of sellers to accept purchase contracts from potential FHA buyers. Without the waiver, sellers must incur the costs of acquisition capital, as well as run the risk of vandalism for the 90 day period. The extension is effective through December 31, 2011, unless otherwise extended or withdrawn by FHA. All other terms of the waiver will remain the same. The waiver contains strict conditions and guidelines to assure that predatory
practices are not allowed.
To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver continues to be limited to those sales meeting the following general conditions:
• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
FHA Announces Increase in the Annual Mortgage Insurance Premium
FHA issued Mortgagee Letter 2011-10, February 14, 2011, which announces a 25 basis point increase to the annual mortgage insurance premiums for forward amortizing loans. The increase applies to all 30- and 15-year loans. The upfront mortgage insurance premium remains unchanged at one percent. The increase in the annual mortgage insurance premiums is effective for FHA case numbers assigned, or after April 18, 2011.
FHA has determined that it is necessary to increase the annual mortgage insurance premium at a critical time for the ongoing stability of the Mutual Mortgage Insurance fund. FHA also believes that this move will help private capital return to the housing market.
The increase in the annual mortgage insurance premiums is as follows:
Mortgage Insurance Premiums Loans > 15 years
UFMIP = 100 bps Annual Premium
LTV Through 4/03/2011* On/After 4/04/2011**
< 95.00 percent 85 bps 110 bps > 95.00 percent 90 bps 115 bps
Loans < 15 years
UFMIP = 100 bps Annual Premium
LTV Through 4/03/2011* On/After 4/04/2011**
< 90.00 percent None 25 bps > 90.00 percent 25 bps 50 bps *For case numbers assigned on/before April 17, 2011 **For case numbers assigned on/after April 18, 2011
The increase applies to all forward mortgages insured under FHA’s single family mortgage insurance programs except:
• Title I
• Home Equity Conversion Mortgages (HECM)
• HOPE for Homeowners (H4H)
• Section 247 (Hawaiian Homelands)
• Section 248 (Indian Reservations)
• Section 223(e) (Declining Neighborhoods)
• Section 238(c) (Military Impact areas in Georgia and New York)
FHA Issues Guidance on HECM Counseling Fees
On February 4, 2011, the FHA published Mortgagee Letter 2011-09 (ML 11-09), providing guidance to FHA-approved counseling agencies and HECM lenders on the amount and the waiver of a HECM counseling fee. ML 11-09 is effective 30 days from the date of publication.
HUD previously indicated in Mortgagee Letter 2008-12 (ML 08-12) that a HECM counseling fee of $125 per counseling session is considered reasonable. ML 11-09 overrides this part of ML 08-12 and authorizes counseling agencies to charge more than $125 per session. According to ML 11-09, HECM counseling agencies may establish a fee structure as long as the fee is (a) reasonable and customary, (b) does not exceed a level commensurate with the counseling services that are provided, and (c) is not being charged to pay for the service that is already funded with HUD’s grants or other funds. The fee structure must be included in the counseling agency’s workplan and must be disclosed to the borrower during intake. In any event, a borrower may not be turned away because of an inability to pay a HECM counseling fee.
ML 11-09 also provides that HECM counseling agencies should not collect a HECM counseling fee at the time of the counseling session if the borrower’s income is below 200 percent of the Federal Poverty level. However, counseling agencies may charge such borrowers a HECM counseling fee at the time of loan closing provided the borrower has been advised during the counseling session of the amount of the fee. ML 11-09 also describes procedures for determining the borrower’s ability to pay a HECM counseling fee, including the documentation required for the waiver of the fee.
According to ML 11-09, only the actual time spent on providing counseling to the borrower (in person or by telephone) may be recorded on the HECM Counseling Certificate. Time other than actual counseling, such as intake, putting together the information packet, and follow-up may not be included on the HECM
Counseling Certificate, but can be included when determining the cost of HECM counseling.
Federal Reserve Board
Federal Reserve Board Announces Deferral of Further Regulation Z Changes
On February 2, 2010, the Federal Reserve Board (the Board) announced that it does not expect to finalize three pending proposed rules under Regulation Z prior to the transfer of authority for rulemakings under the federal Truth in Lending Act (TILA) to the Consumer Financial Protection Bureau (CFPB). General rulemaking authority for TILA is scheduled to transfer to the CFPB on July 21, 2011 (the “designated transfer date”). The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) also requires that the CFPB issue a proposal within 18 months after the designated transfer date to combine, in a single form, the mortgage disclosures required by TILA and the disclosures required by the Real Estate Settlement Procedures Act (RESPA). In light of that directive by Congress to the CFPB, the Board has concluded that its finalizing several pending Regulation Z proposals prior to the designated transfer date is not in the public interest.
The Board issued two proposed rules in August 2009, which set forth proposed revisions to the disclosures under TILA for closed-end mortgage loans and open end credit secured by a consumer’s dwellings (home equity lines of credit). The Board also issued a third set of proposed rule changes and revisions in
September 2010. Among other things, this September 2010 proposal included changes to the disclosures consumers receive to explain their right to rescind certain loans and would have clarified the responsibilities of the creditor if a consumer exercises this rescission right. The September 2010 proposal also included changes to the disclosures for reverse mortgages, restrictions on certain advertising practices and sales practices for reverse mortgages, changes to the disclosure obligations of loan servicers, as well as proposed new disclosures for loan modifications.
Of note is that on September 24, 2010, the Board finalized part of the August 2009 closed-end proposal dealing with loan originator compensation. That rule becomes effective for closed-end mortgage loan applications received by creditors on or after April 1, 2011.
On September 24, 2010, the Board also issued an Interim Final rule on MDIA related disclosure changes to provide guidance on rate and payment disclosures mandated by the Housing and Economic Recovery Act of 2008, which changes
had a statutory effective date of January 30, 2011. In that Interim rule, the Board noted it would issue final MDIA related regulations to further provide guidance in the future. Given its announcement on February 2, 2011 to refrain from
finalizing other pending Regulations Z items, it is not clear that the Board will act to issue final MDIA disclosure rules prior to the designated transfer date, thus possibly leaving the CFPB to take up that matter also.
The Board received numerous comments to the August 2009 and September 2010 proposals, as well as the Interim MDIA rule, including comments from mortgage industry participants expressing the view that the Board should delay further rule making in these areas to allow the CFPB to coordinate the Dodd-Frank Act mandated RESPA/TILA reform with pending proposed Regulation Z changes. Although there are specific provisions of the August 2009 and September 2010 proposals that would not be affected by the CFPB's development of joint TILA-RESPA disclosures, the Board indicates that attempting to finalize these proposals now in a piecemeal fashion would be of limited benefit, and the issuance of multiple rules with different implementation periods would create further compliance difficulties.
State Regulatory Developments
:
Massachusetts Issues Guidance on Reverse Mortgage Products
On December 15, 2010, the Massachusetts Division of Banks (“DOB”) issued Guidance for Managing Compliance and Reputation Risks for Reverse Mortgage Products (“Guidance”). The Guidance parallels the interagency Guidance on Reverse Mortgage Products for financial institutions previously issued by the federal agencies (OCC, FRB, FDIC, OTS, and NCUA) that became effective October 18, 2010. The Guidance applies to mortgage brokers and mortgage lenders licensed in Massachusetts.
The Guidance is intended to promote consistent regulation in the reverse mortgage market and clarify how Massachusetts licensees can offer reverse mortgages in a way that addresses the unique consumer protection concerns raised by reverse mortgage products. The Guidance substantially mirrors the interagency guidance, with the exception of sections that do not apply to non-depository institutions. The Guidance also provides information on certain existing and recently enacted Massachusetts specific laws and regulations that apply to reverse mortgages in such state. We note below some of the
Massachusetts-specific provisions included in the Guidance.
The Guidance reminds licensees that under the existing Massachusetts reverse mortgage law, all reverse mortgage loans in Massachusetts must be made in
accordance with programs that have been reviewed and approved by the DOB. Any mortgage lender seeking approval of a reverse mortgage program must submit a written request for approval to the DOB. Mortgage brokers do not need to submit a reverse mortgage program for approval, but should ensure that the program has been approved at the lender level.
The Guidance reminds licensees of the following Massachusetts reverse mortgage requirements:
• Under existing Massachusetts reverse mortgage law, licensees must ensure that the borrower completes a counseling program approved by the
Massachusetts Executive Office of Elder Affairs (EOEA).
• Existing Massachusetts reverse mortgage law also requires that borrowers be provided with a 7 day “cooling off” period following the acceptance of a loan commitment.
• In addition, Massachusetts recently enacted certain new reverse mortgage requirements. More specifically, Chapter 258: An Act Relative to Mortgage Foreclosures (“Chapter 258”), signed into law on August 7, 2010 and effective November 1, 2010, imposes an affirmative “opt-in” requirement for certain borrowers.
• Pursuant to Chapter 258, certain borrowers with a gross income of less than 50% of the area median income who possess assets, excluding primary residence, valued at less than $120,000, must attend an in person reverse mortgage counseling session. This in person counseling requirement has a delayed effective date of August 1, 2012.
• Chapter 258 also provides that a reverse mortgage transaction with a borrower that has not received counseling by a third party approved by the EOEA shall render the terms of the reverse mortgage unenforceable.
The Guidance outlines the DOB’s position that counseling may not be waived under any circumstance, even though HUD permits a waiver of counseling in limited HECM transactions. Therefore, according to the Guidance, a waiver of counseling is not permissible in any reverse mortgage transaction, including a HECM to HECM refinance in Massachusetts.
In addition, the Guidance indicates that the DOB expects licensees offering proprietary reverse mortgages to price such products, reasonably, including origination fees. The DOB also expects licensees to take appropriate steps to determine or ensure that consumers will be able to pay required taxes and insurance.
In addition, note that the Massachusetts DOB requested comments concerning the new reverse mortgage requirements in Chapter 258. The Division sought
comments on, among other things, the “opt-in” and counseling certification requirements of Chapter 258. The Division also requested information on the availability of reverse mortgage counseling, personal experiences of counseling sessions, and the level of reverse mortgage foreclosure activity in Massachusetts. Public hearings on these and related questions were scheduled in late January and February. Upon conducting the hearings and the review of comments, the DOB intends to propose regulations implementing provisions in Chapter 258 relative to reverse mortgage loans.
Mortgage Banking Litigation
:
California Mortgagor Wins, Without Winning
In Aceves v. U.S. Bank, N.A., a California Court of Appeal recently issued an opinion in favor of the mortgage borrower, which has perplexed the mortgage industry. The Court found that the borrower stated valid claims for promissory estoppel and fraud against a foreclosing mortgagee, but the Court refused to invalidate the foreclosure sale, the primary relief sought by the borrower.
The Court reasoned that the borrower properly alleged a failure by the defendant to keep its promise to at least attempt to negotiate a loan modification, before it foreclosed on the borrower’s property. The Court, however, refused to
invalidate the foreclosure sale, “[b]ecause this [wa]s not a case where the
homeowner paid the funds needed to reinstate the loan before the foreclosure.” Instead, the Court stated that the borrower was only entitled to potential
monetary damages under her promissory estoppel and fraud claims. Notably, the Court provided no guidance as to what the monetary damages for these claims might reflect, but given the decrease in values experienced by so many residential properties in California, it may be that the potential damages now at issue are nominal.
Of more practical interest, the Court also refused to invalidate the foreclosure sale based on other assertions made by the borrower. Specifically, she alleged: (1) the defendant’s attorney-in-fact could not validly sign the Substitution of Trustee for the foreclosure; and (2) the notice of default contained errors. The Court found that these allegations were either legally incorrect or
inconsequential mistakes. Consequently, the Court rejected these allegations. The Court reasoned that a borrower could not invalidate a foreclosure sale by simply asserting any irregularity in the foreclosure documents. Rather, the Court found that errors had to be “prejudicial.” Since the borrower had failed to assert
any material, procedural irregularities relating to the foreclosure process, none of her allegations were prejudicial, and none warranted the invalidation of the foreclosure sale.
In conclusion, the message of the Aceves opinion is mixed. Conduct and communications by parties attempting to foreclose can create fraud and promissory estoppel claims, but such claims do not appear to be sufficient to invalidate a foreclosure. It remains to be seen, however, what value, if any, such claims may have. Correspondingly, minor irregularities in foreclosure
documents are not fatal.
WBSK regularly handles lawsuits involving claims to set aside foreclosures throughout the country.
