The saga over whether to include a controversial “preferred language” question on the new redesigned Uniform Residential Loan Application (URLA) continues. Last week, the Federal Housing Finance Agency (FHFA) changed course yet again and decided to remove the language preference question from the redesigned URLA. Instead, the question will be moved to a separate, optional consumer information form that will not be part of the URLA.

The preferred language question would ask all mortgage applicants (using the GSEs’ form) to indicate their language preference when completing the application. The history of this controversial question dates back several years. We previously commented on developments related to the preferred language question in July 2017 and October 2017. In August 2016, the FHFA decided not to move forward with a plan to include a language preference question in the redesigned URLA due, in part, to strong industry opposition. A year later, after requesting public comments on the preferred language question through a formal RFI process, the FHFA announced in October 2017 that it would include a modified version of the proposed preferred language question in the revised URLA. In an attempt to allay industry concerns about the operational and legal consequences of collecting information on applicants’ language preferences, the final version of the question included additional disclaimer language advising applicants that the loan transaction is likely to be conducted in English and that communications in the applicants’ preferred language may not be available. Mandatory use of the redesigned URLA was originally set for February 2020.

Under new leadership, the FHFA has changed course again and decided to move the preferred language question from the URLA to a separate, optional form. Although this change helps mitigate some of the risks associated with including a question on language preference on the mortgage application itself, it does not alleviate such risks completely. For example, it is still unclear what – if anything – a lender is required to do with the language-preference information it collects. And there continues to be a risk that applicants themselves will be confused or misled by the preferred language question, especially applicants with limited English proficiency. Moreover, the FHFA cannot control how other government agencies, private plaintiffs, or consumer groups may seek to use the language-preference information collected.

The deadline for mandatory use of the redesigned URLA will no longer be February 1, 2020. The new deadline for implementation has not yet been announced.

Redlining is back in the news.  Last week, the Department of Housing and Urban Development announced that it approved a settlement resolving redlining claims brought by the California Reinvestment Coalition against a California-based depository institution.

Unlike DOJ’s June redlining settlement with First Merchants Bank, which we wrote about here, this new case was not initiated by a government investigation, but rather by a CRC complaint filed with HUD.  Unfortunately, the Conciliation Agreement does not provide details about that facts underlying CRC’s concerns; it only states that CRC filed a complaint with HUD in February 2017 alleging that the bank’s “branch locations, marketing, and origination of mortgages discriminated against the residents of majority-minority neighborhoods” in the bank’s Community Reinvestment Act assessment area.

The settlement terms look similar to those found in other redlining settlements, and include a requirement that the bank open or acquire a branch in a majority-minority and low-to-moderate income census tract within the bank’s assessment area.  The bank also agreed to:

  • originate $100 million worth of owner-occupied, residential mortgage loans (within the GSE conforming loan limit) in majority-minority census tracts in its assessment area;
  • impose no minimum loan amount;
  • offer and market FHA-insured loans in all of its assessment area branches;
  • provide $5 million worth of discounts or subsidies on loans in majority-minority census tracts as part of an Affordable Home Mortgage Program;
  • provide $1million to non-profit community service organizations that provide financial literacy and other benefits in majority-minority census tracts; and
  • dedicate $1.3 million toward marketing and outreach to consumers in majority-minority census tracts.

Although this new settlement does not provide much detail about the factors that could prompt a redlining complaint, the settlement terms do provide insights about how institutions can expand credit opportunities in majority-minority communities and thus reduce their redlining risk.

While banks must be prudent and follow applicable regulations, the latest guidelines from the Office of the Comptroller of the Currency may allow banks to justify a nuanced asset dissipation or depletion underwriting program, so long as it is backed by analysis.

On July 23, 2019, the OCC issued a bulletin reminding its regulated institutions to use safe and sound banking practices when underwriting a residential mortgage loan based on the applicant’s assets. While the bulletin does not provide much satisfaction for those seeking safe harbors or any specific guidance, it provides certain hints at what the OCC will look for in an examination.

Asset dissipation underwriting (or asset amortization or depletion underwriting) is a way for mortgage lenders to calculate a stream of funds derived from an applicant’s assets that could be available for loan payments, in addition to income (if any) received from employment or other sources. The bulletin notes that while the OCC’s regulated institutions have prudently administered asset depletion models for many years, examiners have seen an uptick that is unsupported by credit risk management practices and insufficiently compliant with existing regulations and guidelines.

One such existing regulation, which the bulletin mentions in a footnote, is the Consumer Financial Protection Bureau’s Ability to Repay/Qualified Mortgage (QM) Rule, applicable to most closed-end residential mortgage loans. That Rule allows a mortgage lender to consider an applicant’s current or reasonably expected assets in determining his/her ability to repay a mortgage loan, so long as the lender verifies the assets through financial institution statements or other reliable documents. Still, mortgage lenders must – when making QMs or non-QMs – calculate a debt-to-income ratio (DTI). (Non-QM lenders could also use a residual income figure.) Accordingly, if lenders are relying on an applicant’s assets, the lenders must come up with a monthly amount available for mortgage payments. However, unlike the Rule’s Appendix Q, which regulates how lenders may consider various types of income when making general QMs, neither the Rule nor Appendix Q specifies any requirements for unacceptable types of assets, discounts of asset values based on liquidity, amortization periods, or rate-of-return estimates.

While the OCC bulletin does not directly fill in any of those blanks, it does provide some clues. Continue Reading OCC Bulletin on Asset Dissipation – The Art and Science of Underwriting

On July 25th, the CFPB announced plans to allow the temporary Qualified Mortgage (QM) status given to loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs) to expire. However, the agency stated it could allow a short extension past the January 10, 2021 expiration date, and is in any case soliciting public comments on the general QM definition, including its income and debt documentation requirements.

When the CFPB issued its Ability-to-Repay/QM Rule in response to the Dodd-Frank Act, it sought to provide some bright-line tests for loans deemed generally safe for residential mortgage borrowers. The CFPB decided that a debt-to-income ratio (DTI) that does not exceed 43% was an appropriate proxy, along with several other factors. While the CFPB believed that many consumers can afford a DTI above 43%, those consumers should be served by the non-QM market, where lenders must individually evaluate the consumers’ compensating factors. However, the CFPB recognized that it may take some time, post-crisis, for a non-QM market to develop, even for credit-worthy borrowers. Accordingly, the CFPB created a category of loans that would temporarily enjoy QM status – loans that meet the GSEs’ underwriting criteria (plus a few other requirements). The CFPB set the expiration date for the temporary QM category at five years (unless the GSEs were to emerge from conservatorship prior to that).

Now, several years later, the CFPB has found that the temporary GSE QM “patch” represents a “large and persistent” share of originations, and likely was the reason the Rule did not result in decreased access to credit for those with DTIs over 43%. Continue Reading CFPB to Rip Off the Patch?

Last month, in the first redlining matter initiated and settled under the Trump Administration, the United States Department of Justice settled redlining claims against First Merchants Bank, an Indiana-based bank regulated by the Federal Deposit Insurance Corporation (“FDIC”). The First Merchants settlement contains useful insights for institutions seeking to evaluate redlining risk.

Read more in Mayer Brown’s Legal Update.

Today, the Supreme Court returned to the lower courts the question whether a 2006 order by the Federal Communications Commission (FCC) is binding on the district court. In PDR Network, LLC v. Carlton & Harris Chiropractic, the Court held that resolution of that question may depend on the resolution of two preliminary questions: (1) whether the order is the equivalent of a “legislative rule” that has the force of law; and (2) whether the party challenging the FCC’s interpretation had a prior and adequate opportunity to seek judicial review of the order.

As background, the petitioners in the case produced a reference guide about prescription drugs, and sent healthcare providers faxes stating that the providers could reserve a free copy of the e-book version of the reference guide. One fax recipient brought a putative class action, alleging that the fax was an “unsolicited advertisement” within the meaning of the Telephone Consumer Protection Act (TCPA). The district court dismissed the case, but the Fourth Circuit reversed, concluding that the Hobbs Act—which gives courts of appeals exclusive jurisdiction to determine the validity of certain final orders by the FCC—required the district court to follow the FCC’s 2006 interpretation of the term “unsolicited advertisement” as including “any offer of a free good or service.”

In an opinion written by Justice Breyer and joined by Chief Justice Roberts and Justices Ginsburg, Sotomayor, and Kagan, the Supreme Court vacated and remanded. Continue Reading Supreme Court Declines To Answer Whether District Court Is Bound To Follow FCC’s Interpretation of TCPA

Holly Spencer Bunting, a partner in Mayer Brown’s Financial Services Regulatory and Enforcement (FSRE) group will be honored tonight by the Women in Housing and Finance (WHF) as a 40 Under 40 honoree.

WHF is a Washington, DC-based premier, nonpartisan association that focuses on promoting women professionals in the fields of housing and financial services. As WHF celebrates its 40th anniversary, it also is celebrating professionals under the age of 40 in the fields of housing and finance, and in public service.

Kris Kully, also a partner in Mayer Brown’s FSRE group, will serve as President of WHF for 2019-2020.

The U.S. House of Representatives is considering a bill to address the underwriting difficulties and resulting lack of access to mortgage credit for self-employed borrowers and others with nontraditional income sources.

Representatives Bill Foster (D-IL) and Tom Emmer (R-MN) introduced H.R. 2445, a House companion to the Senate bill recently re-introduced by Senators Mike Rounds (R-SD) and Mark Warner (D-VA). H.R. 2445 calls itself the “Self-Employed Mortgage Access Act of 2019,” although its effects would not be limited to those borrowers. It would, if enacted, amend the ability-to-repay and qualified mortgage provisions of the Truth in Lending Act to allow mortgage lenders to satisfy those requirements by relying on one of several sets of industry-recognized underwriting guidelines. Specifically, the bill would state that a mortgage lender may satisfy the ability-to-repay requirements, and obtain qualified mortgage status, by considering income, assets, and obligations in accordance with either Regulation Z’s Appendix Q, or a guide or handbook maintained by Fannie Mae, Freddie Mac, a Federal Home Loan Bank, the Department of Housing and Urban Development/Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture, or the Rural Housing Service.

As we noted previously in this space, Appendix Q currently requires lenders making a qualified mortgage to a self-employed borrower to obtain a significant amount of income documentation, without providing any flexibility. For borrowers with certain other types of income (besides income from W-2 employment), Appendix Q provides either scant or no instructions, leaving mortgage lenders unclear as to how to comply, and often unwilling to take the chance. The apparent purpose of the Self-Employed Mortgage Access Act of 2019 would be to allow lenders access to other tested industry guidelines as an alternative to Appendix Q.

Since the CFPB is already considering how to address the expiration of the temporary Fannie Mae/Freddie Mac “patch” (which allows lenders to rely on those enterprises’ guidelines until January 10, 2021, so long as the enterprises remain in conservatorship), this legislation might direct the agency to use the new standard as the replacement for the “patch.” This will be welcomed by those in the industry that want a wider underwriting standard for QM lending, but will not satisfy others that believe that acceptable underwriting under QM should not be limited to standards set by the government or government-related entities.

On April 29, 2019, New Jersey joined a growing number of states that license mortgage loan servicers when Governor Phil Murphy signed the Mortgage Servicers Licensing Act, to be effective in July 2019. Mayer Brown’s latest Legal Update discusses implications for mortgage servicers, including new licensing requirements, certain exemptions, and the Act’s relationship to federal requirements.

Read more in Mayer Brown’s Legal Update.