On October 28, 2019, the U.S. Department of Housing and Urban Development announced: (1) proposed revisions to lenders’ loan-level lender certifications in Federal Housing Administration (FHA)-insured mortgage transactions; (2) issuance of a revised Defect Taxonomy; (3) execution of a Memorandum of Understanding (MOU) with the U.S. Department of Justice regarding False Claims Act (FCA) actions
HUD updates FHA TOTAL Mortgage Scorecard
The Federal Housing Administration (“FHA”) is updating its Technology Open to Approved Lenders (“TOTAL”) Mortgage Scorecard in an effort to address excessive risk layering where, for example, FHA mortgage loan applicants have low credit scores and high debt-to-income (“DTI”) ratios. The FHA announced on March 14th that the TOTAL Mortgage Scorecard updates will apply for all mortgages with FHA case numbers assigned on or after March 18, 2019. As a result, the Department of Housing and Urban Development (“HUD”) indicated that lenders should expect to receive an increase in the number of referrals from TOTAL for manual underwriting. While HUD appears to be focused on loans with low credit scores and high DTI ratios, it did not identify the specific changes it will make or the precise combinations of factors that may result in referrals for manual underwriting.
HUD created the FHA TOTAL Mortgage Scorecard as a statistical algorithm to evaluate loan applications and consumer credit using a scoring system that remains constant for all applicants. FHA lenders access TOTAL through an automated underwriting system. Lenders are required to score potential FHA mortgage transactions through TOTAL, except for streamline refinances, home equity conversion mortgages, Title I mortgages, and loans involving borrowers without credit scores.
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New York Court Annuls DFS Effort to Curb Unscrupulous Title Practices
On October 17, 2017, in response to an investigation concluding that title insurance companies and agents were spending millions of dollars a year in “marketing costs” provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, free classes, and vacations that ultimately were passed on to consumers through heightened title insurance rates, the New York Department of Financial Services (“DFS”) issued Insurance Regulation 208, in which it identified a non-exhaustive list of prohibited inducements and permissible marketing expenses. The new rule went into effect on February 1 of 2018. Five months later, on July 5th, 2018, the New York State Supreme Court (the state’s trial-level court) annulled the part of the DFS regulation addressing marketing practices, holding that any such rule must be issued by the state legislature, not a regulating agency.
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Nationwide Safe Water Requirements for FHA-Insured Loans
Who is responsible for the safety of drinking water?
The U.S. Department of Housing and Urban Development (HUD) Office of Inspector General (OIG) has suggested – for the second time – that lenders making Federal Housing Administration (FHA) insured loans should be held to a higher level of accountability in ensuring that FHA borrowers have a safe and potable water supply. In a report dated September 29, 2017, the OIG’s stated concerns are two-fold: first, HUD may be endorsing loans for properties with water contaminants that affect their occupants’ health; and second, property values may decrease due to water quality issues, thereby posing an increased risk of loss to both HUD and homeowners. The OIG’s solution is for HUD to improve its guidance on safe water requirements as well as to sanction lenders that fail to identify water safety issues for properties known to be affected by water contaminants.
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CFPB Requires Title Agent to Pay Up To $1.25 Million to Consumers Referred to Affiliated Title Insurer
No AfBA disclosure — no safe harbor!
By Consent Order dated September 27, 2017, the Consumer Financial Protection Bureau took action against Meridian Title Corporation for violating Section 8 of the Real Estate Settlement Procedures Act of 1974 by failing to furnish affiliated business arrangement (AfBA) disclosures to consumers. Meridian, an Indiana title and settlement agent, referred over 7,000 customers to its affiliated title insurer, Arsenal Insurance Corporation, without providing written AfBA disclosures notifying consumers of the entities’ affiliation and consumers’ rights. It also received compensation above and beyond its standard allowable commission set forth in the companies’ agency agreement. Under the Consent Order, Meridian agreed to disclose its affiliation with Arsenal, implement certain compliance measures, and set aside $1.25 million for affected consumers, with any portion of that amount not ultimately provided to consumers to be paid to the CFPB.
As indicated above, the underlying basis for action in this case was Meridian’s failure to provide written AfBA disclosures to consumers it referred to Arsenal. The disclosure requirement is black and white – payments under an AfBA cannot qualify for RESPA’s Section 8(c)(4) exception to the anti-kickback and fee-splitting provisions unless the referring entity provides written disclosures to customers meeting certain form and content requirements. Failure to furnish the disclosures leaves payments between the entities subject to scrutiny to determine whether they constitute payments for referrals or qualify for some other exception,
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HUD/FHA to Launch New Automated Loan Review System, Incorporating Defect Taxonomy
On January 11, 2017, the U.S. Department of Housing and Urban Development (HUD) published Mortgagee Letter (ML) 2017-03, “Federal Housing Administration (FHA) Loan Review System – Implementation and Process Changes.” The ML indicates that HUD is developing a new Loan Review System (LRS) that will provide an electronic platform for FHA loan-level file reviews and other functions for single family insured mortgages. The new requirements will apply to all FHA Title II Single Family programs, including reverse mortgages.
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CFPB Petitions D.C. Circuit for Review of PHH Ruling by Full Court
With just a week to spare before its 45-day deadline for appeal expired, last week the Consumer Financial Protection Bureau (CFPB) petitioned the U.S. Court of Appeals for the D.C. Circuit for en banc review of the October three-judge panel decision in PHH Corp. v. CFPB. Penned by Judge Brett Kavanaugh, that ruling declared the CFPB’s single-director structure unconstitutional and rejected the CFPB’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB’s petition does not come as a surprise. If the D.C. Circuit agrees to rehear the constitutional and/or RESPA arguments, the three-judge panel ruling will be stayed pending the full court’s decision and the CFPB will return to business as usual, at least for now.
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Court Rejects CFPB’s RESPA Interpretation, Declares Single-Director Structure Unconstitutional
Today, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit issued a ruling overturning a $109 million monetary penalty imposed by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The decision in PHH Corporation v. CFPB, written by Circuit Judge Brett Kavanaugh, addressed the unconstitutionality of the Bureau’s structure and its retroactive application of a new RESPA interpretation, and imposed RESPA’s three-year statute of limitations on the Bureau.
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