Mortgage Loan Origination

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On September 27th, Mayer Brown’s Jon Jaffe, a partner in the firm’s Financial Services Regulatory Enforcement Group, will participate in a webinar sponsored by the California Mortgage Bankers Association. The webinar, an effort of the CMBA’s Mortgage Quality and Compliance Committee, will address the various compliance concerns for mortgage lenders and loan officers reaching out to potential borrowers through advertising, including through social media.

As the Mortgage Bankers Association gathers for its Regulatory Compliance conference next week in Washington, DC, Mayer Brown’s Consumer Financial Services group will be addressing all the hot topics.

Melanie Brody will be talking about the Equal Credit Opportunity Act (ECOA) on a panel called “Fair Lending and Equal Opportunity Laws” on Sunday, September 16.

On Monday, September 17th, Phillip Schulman will discuss trends in RESPA Section 8 compliance. He will also join in the round-table discussion of RESPA later that afternoon.

Ori Lev will speak on panel entitled “UDAAP Compliance.”

Krista Cooley will be discussing the latest developments in FHA servicing compliance. She will also field questions on the topic during the afternoon servicing round-table.

On Tuesday, September 18th, Keisha Whitehall Wolfe will discuss state compliance issues.

Also in attendance from Mayer Brown will be new partner Michael McElroy, partner David Tallman, and associates Christa Bieker, Joy Tsai, and James Williams.

We look forward to seeing you there!

 

Senators Mark Warner (D-VA) and Mike Rounds (R-SD) recently introduced Senate Bill 3401 to facilitate access to residential mortgage loans for consumers who are self-employed or otherwise receive income from nontraditional sources. The lawmakers indicated that lenders have shied away from loans to those consumers due to overly strict or ambiguous federal requirements for documenting the consumers’ income. The bill would, if enacted, provide mortgage lenders greater flexibility in documenting income during the underwriting process. They call the bill the Self-Employed Mortgage Access Act.

Federal regulations require that for most closed-end, dwelling-secured loans, a lender must make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan, based on (among other factors) the consumer’s verified income. To take advantage of a presumption of compliance with that requirement, most lenders follow the regulations’ Qualified Mortgage (QM) guardrails, described in part in Appendix Q of the regulations. Appendix Q generally dictates the type of income documentation a lender must obtain.

For example, for a self-employed individual (any consumer with a 25 percent or greater ownership interest in a business), Appendix Q requires that a lender seeking to make a QM must get the consumer’s signed, dated individual tax returns, with all applicable tax schedules, for the most recent two years. For a corporation, “S” corporation, or partnership, the lender must get signed copies of the federal business income tax returns, with all applicable tax schedules, for the last two years. Finally, the lender must get a year-to-date profit-and-loss statement and a balance sheet. Appendix Q does not expressly provide for any flexibility in those documentation requirements. Continue Reading Qualified Mortgages for Self-Employed Borrowers; Bill on the Hill

 

On May 8, 2018, the United States Department of Justice and KleinBank reached a settlement agreement resolving allegations that the bank engaged in mortgage lending discrimination by failing to adequately serve predominantly minority neighborhoods (so-called “redlining”) in and around the Twin Cities of Minneapolis and St. Paul, Minnesota. The settlement resolves one of the only redlining investigations to ever land in court, and marks the Trump DOJ’s first fair lending settlement.

DOJ filed its complaint against KleinBank on January 13, 2017, one week before the inauguration of President Trump, suggesting that the Obama administration’s DOJ may have been concerned that the Trump administration would be disinclined to pursue fair lending cases aggressively. Given recent activities at the Consumer Financial Protection Bureau, this worry may have been well-founded.

The complaint alleges that, from 2010 until at least 2015, KleinBank intentionally avoided lending to residents of predominantly minority neighborhoods in the Twin Cities area because of the race or national origin of the residents of those neighborhoods. Specifically, the DOJ alleged that KleinBank carved majority-minority census tracts out of its Community Reinvestment Act assessment area, located its branch and mortgage loan officers in majority-white census tracts (and not majority-minority census tracts), and directed marketing and advertising predominantly toward residents in majority-white census tracts. While most targets of redlining claims have sought to settle the allegations in short order, KleinBank took the rare step of fighting the DOJ’s claims in litigation.

Prior to the settlement, on March 30, 2018, the district court handling the case adopted a magistrate’s recommendation that KleinBank’s motion to dismiss be denied. The magistrate’s report and recommendation are under seal, making it impossible to fully analyze the rationale underlying the decision. However, the court noted that contrary to KleinBank’s contention, the government had sufficiently plead the intent element of a disparate treatment claim by, among other things, alleging that the bank intentionally drew its assessment area to avoid minority areas and intentionally avoided marketing to such areas.

Under the settlement agreement, KleinBank is required to open (and operate for at least three years) one new full-service branch office in a majority-minority census tract. Redlining resolutions that require banks to open branch offices are noteworthy considering the rapid increase in online banking activities and the cost associated with opening a full service branch.

The settlement agreement also requires KleinBank to invest $300,000 through a special purpose credit program to increase the amount of credit it extends in minority neighborhoods. Further, the bank must invest another $300,000 in advertising, outreach, financial education, and credit repair in order to “assist in establishing a presence in majority-minority census tracts in Hennepin County.

A few aspects of this agreement stand out. First, the DOJ’s use of a settlement agreement rather than a consent decree is notable. Most DOJ cases are resolved using consent decrees, which are generally easier for the government to enforce. Second, many of the settlement agreement provisions are less onerous than the terms of other recent redlining settlements. For example, the agreement does not subject KleinBank to a civil money penalty, and provides for flexibility on the timing of the bank’s advertising and loan subsidy obligations.  This suggests that the Trump DOJ may be taking a more subdued approach to fair lending cases than did its predecessor.

Time will tell if the KleinBank settlement is a red herring or harbinger for more federal fair lending enforcement.

A creditor’s inability to reset fee tolerances with a revised Closing Disclosure more than four business days before closing has been one of the more adverse unintended consequences of the TILA-RESPA Integrated Disclosure (“TRID”) regulations that became effective in October 2015. However, a fix is on the horizon. On Thursday, April 26, 2018, the Consumer Financial Protection Bureau (“CFPB”) announced final amendments to TRID to eliminate the timing restrictions that have plagued creditors and, in certain cases, increased creditors’ costs to originate residential mortgage loans. With an effective date 30 days after the final amendments are published in the Federal Register, this change is a welcome relief to mortgage lenders.  Continue Reading A Ray of Light Through the “Black Hole”: TRID Amendment Permits Tolerance Reset with Revised Closing Disclosure

Characterized as “protecting veterans from predatory lending,” S.2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, passed by the United States Senate on March 14, 2018. If enacted, the bill would impose material conditions on the eligibility of non-cash-out refinancings for government guaranty under the Veterans Affairs Loan Guaranty Program. While the legislation has received significant attention for the loosening of certain requirements under the 2010 Dodd-Frank Act for banks and other depository institutions, this particular provision should be of significant interest to all lenders of government-insured or guaranteed residential mortgage loans.

Read More in Mayer Brown’s Legal Update.

The U.S. Court of Appeals for the D.C. Circuit (the “court”) has issued its long-awaited en banc decision in PHH v. CFPB. In a January 31, 2018 opinion, the court rejected the three-judge panel’s conclusion that the structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional.  But the en banc court reinstated the panel’s decisions that the CFPB’s interpretation of the Real Estate Settlement Procedures Act (“RESPA”) is unlawful and may not stand and that the CFPB is subject to a three-year statute of limitations even when bringing RESPA claims administratively.

As is well known, on October 11, 2016, a three-judge panel of the court had overturned a $109 million disgorgement order that the CFPB had imposed on PHH Corporation (“PHH”) for its involvement in an allegedly unlawful mortgage reinsurance arrangement. Pursuant to that arrangement, PHH did business with mortgage insurance companies that purchased reinsurance from a wholly-owned subsidiary of PHH. The court held, by a 2-1 vote, that the CFPB’s single-director structure allowing the President to remove the Director during his/her five-year term only for cause violates the Constitution’s separation-of-powers principles.  The court severed the for-cause limitation, thereby effectively allowing the President to remove the Director at will at any time.

The three-judge panel also unanimously rejected the CFPB’s interpretation of Section 8 of RESPA, concluding that, contrary to the CFPB’s determination, Section 8(c)(2) of the statute provides an actual exemption to the anti-kickback provision in Section 8(a). On February 16, 2017, the court granted the CFPB’s petition for rehearing en banc, vacating the panel decision and setting up review by the full D.C. Circuit. Nearly a year later, the court ruled on these matters.

In a 7-3 majority ruling, the court held that the CFPB is not unconstitutionally structured and that the for-cause limitation on the President’s removal authority is a permissible exercise of congressional authority. This part of the decision, however, seems less momentous in the wake of former CFPB Director Richard Cordray’s resignation in November 2017 and President Trump’s appointment of Office of Management and Budget Director Mick Mulvaney as the CFPB’s Acting Director.

Of more immediate significance to the settlement service industry is the court’s decision to reinstate the three-judge panel decision respecting RESPA. The panel had found that Section 8(c)(2) was indeed an exemption to the Act’s Section 8(a) anti-kickback provisions, provided that reasonable payments are made in return for services actually performed or goods actually furnished.  As a result of the court’s reinstatement, real estate brokers, lenders and title companies that were waiting on the sidelines for this decision may take another look at advertising agreements, desk rentals, and other services agreements.

The panel opinion also had rejected the CFPB’s contention that no statute of limitations applies to administrative enforcement of RESPA. That aspect of the reinstated opinion is likely to be helpful to respondents facing administrative claims under other federal consumer financial laws as well.

Finally, despite the 7-3 ruling on the constitutional issues and differences of opinion regarding the proper interpretation of RESPA, one thing all of the judges seem to agree on is that an agency cannot seek penalties for past conduct that violates a novel legal interpretation first advanced in an enforcement case.  That is, “regulation by enforcement” is permissible as a way to announce new legal principles, but, for due process reasons, it cannot be a basis to penalize past conduct.

It remains to be seen if PHH will seek Supreme Court review of the constitutional holding or will instead try its luck on remand in front of the Mulvaney-led CFPB.

On December 22, 2017, Ohio Governor Kasich signed into law Ohio House Bill 199, which will make significant changes in how the state will license and regulate mortgage lenders and brokers. The bill takes effect 91 days after filing with the Ohio Secretary of State (which filing had not been made as of January 4, 2018).

The bill amends the Ohio Mortgage Brokers Act (the “OMBA”) to bring the registration of mortgage lenders and brokers, and the licensing of mortgage loan originators, together under a single statute. The amended statute will be called the Ohio Residential Mortgage Lending Act (“ORMLA”). Continue Reading Ohio Consolidates its Mortgage Finance Licensing Laws into a new Residential Mortgage Lending Act

For most of 2017, the Trump Administration was quiet with regard to the Federal Housing Administration (“FHA”) loan program. However, the Department of Housing and Urban Development (“HUD”) recently offered some relief to lenders and servicers of FHA-insured loans. Through Mortgagee Letter 2017-18, HUD ended its policy of allowing FHA insurance for mortgage loans secured by properties encumbered with Property Assessed Clean Energy (“PACE”) obligations. FHA’s new policy prohibiting PACE obligations in connection with FHA-insured loans, which becomes effective for loans with FHA case numbers issued on or after January 7, 2018, reverses Mortgagee Letter 2016-11, a short-lived Obama era policy that permitted lenders to originate FHA-insured loans involving PACE obligations.

PACE loans provide homeowners an alternative to traditional financing for energy efficient home improvements such as solar panels, insulation, water conservation projects, and HVAC systems. Instead of funding the home improvements through loans, the borrower pays through special property tax assessments. PACE financing does not follow the standard review of a borrower’s income, debt, and FICO score, but rather is based on the borrower’s equity in the home and the mortgage or property tax payment history. Many states and municipalities passed legislation implementing a PACE program and establishing their own terms and conditions for PACE loans. Homeowners voluntarily sign up for PACE financing through private companies, which often offer PACE through a network of approved dealers and installers. The PACE loan is secured by a property tax lien, often with terms of up to twenty years, which takes priority over both existing and future mortgages on the property.  Continue Reading FHA Changes Course on PACE Obligations

Fannie Mae and Freddie Mac (the “agencies”) have developed new uniform instruments for use with Texas home equity loans beginning January 1, 2018. Those forms will reportedly be available on the agencies’ web sites as that date approaches. In addition, the agencies are imposing a temporary moratorium on purchasing Texas home equity loans while lenders transition to new disclosures.

As we described here, Texas voters recently ratified amendments to the state constitution’s strict requirements for equity loans secured by homestead property. Among other topics, the amendments addressed fee restrictions for those loans, and loosened the limitation that a home equity loan can only be refinanced into another home equity loan that is subject to all the same strict requirements. Those amendments become effective in connection with loans made on and after January 1, 2018.

In addition, the agencies announced that they will not purchase any Texas home equity loans closed during the period of January 1 through January 12, 2018. The reason for the moratorium relates to a 12-day waiting period until closing that starts when the lender provides the borrower a mandatory disclosure describing the borrower’s rights and protections in connection with Texas home equity loans. That disclosure has been amended to reflect the recent amendments. That 12-day waiting period represents a conundrum in connection with loans for which the application process spans the new year. Accordingly, the agencies will temporarily decline to purchase Texas home equity loans closed during the first 12 days of January.

The agencies also, as expected, remind lenders that they must comply with all state law requirements, including the revised requirements for Texas home equity loans.