Senator Elizabeth Warren wants regulators to take more banks accused of financial misconduct to trial instead of settling with them before trial. But she is not the only one in Washington looking for ways to send a message to financial institutions that they had better not violate the law. The Justice Department (DOJ) is already implementing a new approach to dealing with banks it is prosecuting. Prosecutors have been pushing for guilty pleas, in addition to fines and reforms, in settling financial fraud cases. See http://dealbook.nytimes.com/2013/02/18/prosecutors-build-a-bett…
During the Great Recession courts expressed frustration with sloppy paperwork and borrowers’ inability to get anyone to help them work out problem loans. Many courts refused to allow mortgage foreclosures to proceed because of the perceived mess. The Consumer Financial Protection Bureau just made it clear it was not going to tolerate these problems when it comes to the transfer of mortgage servicing rights.
On Monday, the CFPB issued guidance directing servicers to “make sure consumers are not collateral damage in the mortgage servicing transfer process.” Servicer must be careful when transferring loans servicing rights. The CFPB wants servicers to know that, where appropriate, they will be required to prepare and submit “informational plans describing how they will be managing the related risk to consumers” when making transfers.
Dubbed as the “Homeowner’s Bill of Rights,” on July 11, 2012, California Governor Jerry Brown signed into law AB 278/SB 900 marking the first U.S. state to adopt into law the residential mortgage foreclosure reform principles outlined in the February 2012 National Mortgage Servicing Settlement with the nation’s top five mortgage servicers. The Homeowner’s Bill of Rights (“HBOR”) makes changes to nonjudicial foreclosure protocols for first lien residential mortgage loans. The law takes effect on January 1, 2013 and sunsets generally on January 1, 2018. HBOR will primarily impact the current practices of financial institutions, lenders, and other mortgage servicers regarding foreclosure proceedings as follows: (1) prohibits “dual tracking” non-judicial foreclosure with a pending loan modification; (2) prohibits the practice commonly referred to as “Robo-Signing” (3) creates a private right of action; and (4) makes attorney’s fees and costs available to the borrower.
The Scope Of The Homeowner’s Bill Of Rights: With certain exceptions, HBOR applies only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. Cal. Civ. Code § 2924.15. In addition, HBOR distinguishes between regulated /licensed lenders who conduct 175 or fewer residential foreclosures per year in California (Smaller Residential Mortgage Lenders) and other lenders (Larger Residential Mortgage Lenders) in that some parts of the law do not apply to Smaller Residential Mortgage Lenders. Cal. Civ. Code § 2924.18(b). A deed of trust in the mortgage industry is legal security relating to a property, and is used in place of a mortgage. In a deed of trust, the loan borrower is the trustor. The borrower/trustor transfers the subject property in a trust to an independent third party, which is the trustee. The trustee holds a conditional title on behalf of the lender or the promissory note holder, the beneficiary. The trustee is delegated with certain trustee powers under the deed of trust.
The Homeowner’s Bill Of Rights Prohibits Dual Tracking: The law’s prohibition on dual tracking a non judicial foreclosure with a loan modification or short sale is perhaps HBOR’s most significant component. Pursuant to HBOR, a mortgage servicer cannot commence foreclosure by recording a notice of default or notice of sale while a loan modification is pending or during short sale. If the mortgage servicer approves the borrower’s loan modification application, the mortgage servicer generally cannot record a notice of default, notice of sale, or proceed with a trustee’s sale so long as the borrower is in compliance with the terms of the written loan modification. Cal. Civ. Code § 2924.11. This approval must be honored by a subsequent mortgage servicer if the borrower’s loan is transferred or sold. Cal. Civ. Code § 2924.11(g). If a notice of default or notice of sale has been recorded or a trustee’s sale has been scheduled before the loan modification application was approved, the mortgage servicer must record a rescission of the notice of default or notice of sale, or cancel the pending trustee’s sale upon the approval of the loan modification application. Cal. Civ. Code § 2924.11(d). HBOR’s no-dual tracking provisions apply until January 1, 2018, and do not apply to Smaller Residential Mortgage Lenders.
The Homeowner’s Bill Of Rights Prohibits “Robo-Signing:” In an apparent response to the practice commonly known as “robo-signing,” HBOR requires a mortgage servicer to review the foreclosure documents and ensure that the documents are accurate, complete, and supported by “competent and [reliable] evidence” concerning the borrower’s loan, loan status, and the mortgage servicer’s right to foreclose. Cal. Civ. Code § 2924.17(b). The law places the burden of compliance on the mortgage servicer.
The Homeowner’s Bill Of Rights Creates A Private Right Of Action For Borrowers To Seek Injunctive Relief Or Monetary Damages: If a trustee’s sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin the mortgage servicer from proceeding with foreclosure until the mortgage servicer corrects a material violation of the law. Cal. Civ. Code § 2924.12. On the other hand, if a trustee’s sale has already occurred and the deed on sale has been recorded, a borrower may pursue an action for “actual economic damages.” If the court finds that the material violation was “intentional or reckless, or resulted from willful misconduct by a mortgage servicer,” the court may award damages to the borrower the greater of treble actual damages or $50,000 statutory damages. Cal. Civ. Code § 2924.12(b).
The Homeowner’s Bill Of Rights Makes Attorney’s Fees Available To The Borrower: HBOR authorizes the court to award the prevailing borrower reasonable attorneys’ fees and costs. Cal. Civ. Code § 2924.12(i). Given the discretionary nature of HBOR’s attorneys’ fee provision, it is unclear whether the court may also award attorneys’ fees and costs to a prevailing mortgage servicer. While the idea of reciprocity of attorneys’ fees is not unusual in California, the statutory provision mandating reciprocity applies only to contract provisions containing one-sided attorneys’ fee provisions, rather than to one-sided attorneys’ fee provision contained in a statute, such as HBOR.
The requirements imposed by HBOR are not insurmountable, but because HBOR imposes significant obligations and restrictions, financial institutions, lenders, and mortgage servicers must implement procedures to ensure compliance with the law. Loan servicing employees and individuals must be given proper training and the right tools in their daily activities for evaluating loans and dealing with borrowers. Finally, it remains to be seen whether any of the provisions of HBOR may be challenged on preemption grounds under the National Bank Act.
Today, the Office of the Comptroller of the Currency (OCC) announced a $500 million penalty against a national bank, HSBC Bank USA, N.A. The OCC’s penalty was based upon its determination that HSBC had violated the Bank Secrecy Act. Separately, the OCC announced that it had issued a cease and desist order to HSBC to address deficiencies in the bank’s compliance program.
The Comptroller of the Currency, Thomas J. Curry, stated that the penalty is the largest penalty the OCC has ever assessed. Comptroller Curry advised that the penalty reflects the severity and duration of the violation and demonstrates the OCC’s resolve to take firm action when warranted to ensure compliance with the law and to hold banks accountable when they fail to live up to those standards.
In other words, this appears to be the OCC’s shot across the bow of the industry to show that the OCC has not lost its ability to flex its muscles when needed to keep banks in line. The OCC’s enforcement action is part of a larger coordinated effort with the Department of Justice, the Federal Reserve, the Financial Crimes Enforcement Network, the Office of Foreign Assets Control, and the New York County District Attorney’s Office. Thus, the size of the penalty leaves one to wonder whether the OCC was flexing its muscles to get the collective attention of the national banks, or to prove to its sister agencies and state agencies that it is quite capable of doing its job. The penalty also leaves one to wonder whether the OCC’s strong statement is an indication of the current administrations intent to bring an increased number of enforcement actions.
In addition to the OCC’s penalty, the bank entered into an agreement with the Department of Justice which requires the bank to forfeit $1.256 billion to the government. The Board of Governors and the Federal Reserve further jointly assessed a $165 million civil money penalty against the Bank and its subsidiary.
Cynically speaking, with penalties this size, the agencies may not have to issue budget cuts as severe as feared if the legislature can’t stop the bus from driving off the fiscal cliff. No matter the motives of the OCC in levying the heavy penalty, it is clear that each actor in the financial services industry must ensure that it has a robust compliance program that is monitored and updated frequently.
Legislation was introduced in Congress August 2, 2012 that would prevent the Federal Reserve from designating nonbanks as systemically significant. This bill is significant, because it in effect prevents the Federal Reserve from supervising insurance companies and other nonbanks. Under Dodd Frank, nonbank entities that are designated as systemically important are subject to the Federal Reserve’s rules governing capital, contingency and succession planning (“living wills”). Entities designated as systemically significant are also subject to the FDIC’s authority.
Concerns regarding the Federal Reserve’s oversight of nonbank entities first began to surface when the Federal Reserve announced the results of its “stress test” for large nonbank entities, such as MetLife. After MetLife and others failed the “stress test,” it was apparent that the Federal Reserve was trying to fit square pegs into round holes. The Federal Reserve was employing the same metrics it had historically used to evaluate depository banks. Those metrics do not translate well to determine the viability and sustainability of large nonbank entities.
The proposed legislation is an extension of that square peg-round hole argument. It seeks to prevent the Federal Reserve from classifying nonbank entities as “too big to fail.” Trade groups argue that the designation of nonbank entities as systemically significant would subject such entities to such massive compliance costs, thereby forcing them out of business, or at the very least, further stifling an economic rebound.
Critics disagree. Critics of the bill argue that allowing nonbank entities to escape the Federal Reserve’s supervision may cause a financial panic. Thus, based on the opposing sentiments, it appears we have come full circle to damned if you do, or damned if you don’t.
For weeks the Consumer Financial Protection Bureau has been advertising the pending release of its proposed mortgage loan disclosures that “are easier for both consumers and lenders to understand and use.” Alas, await no more. The CFPB released its proposed mortgage loan disclosures today. The purpose of the new, supposedly friendlier disclosures, is for the CFPB to meet the requirement under the Dodd-Frank Act that the Truth in Lending Act (commonly referred to as TILA) and the Real Estate Settlement Procedures Act (commonly referred to as RESPA) disclosures be combined into one easy-to-read disclosure. If adopted, the new rule will modify the rules commonly known as Regulations X and Z.Continue reading this entry
Earlier this Summer, the Arkansas Supreme Court affirmed the effectiveness of the 89th Amendment to the Arkansas Constitution, which was approved by Arkansas voters last November. For consumer credit, the amendment permits creditors other than federally insured depository institutions to charge interest on loans or contracts up to a maximum rate of 17% per annum.
Previously, the Arkansas Constitution only permitted interest at the lesser of (i) 17% per annum or (ii) 5% per annum in excess of the 90-day commercial paper rate announced by the Federal Reserve Bank of St. Louis. Contracts charging a rate exceeding 17% per annum were void as to both principal and interest; contracts charging a rate exceeding the rate in clause (ii) above were void as to unpaid interest.
As mandated by Section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new final rules issued by the Federal Reserve Board and the Federal Trade Commission (FTC) require creditors to disclose credit scores and information about credit scores to applicants for credit in adverse action and risk-based pricing notices.
Creditors who use credit scores in denying applications for credit (or otherwise taking adverse action), and/or in granting or extending credit on material terms that are materially less favorable than the most favorable terms offered by them to a substantial proportion of their consumer customers, will need to modify their forms of adverse action and risk-based pricing notices. The rules prescribe model forms for these notices.
The new rules were issued on July 6, 2011, and modify the Federal Reserve Board’s Regulations B and V (12 CFR Parts 202 and 222) and the FTC’s risk-based pricing and model forms rules (16 CFR Parts 640 and 698). The new rules will become effective 30 days after publication in the Federal Register (which is expected imminently).
The Federal Deposit Insurance Corporation (“FDIC”) this week announced it is working with the FBI to investigate crime in federally insured financial institutions and to recover more money from persons formerly affiliated with such banks. The FDIC has long held the power to investigate member-insured institutions, as well as individuals, defined by statute as “institution-affiliated parties.” However, the FDIC has laid low for a decade, making some forget that it enjoys a lower standard of proof to recover civil remedies and a wide berth in the criminal arena as well. Current and former bank executives, as well as other individuals with relationships to financial institutions, should be prepared for several years of increased civil and criminal scrutiny.
Areas of particular interest to the investigation would include:
On February 21, 2008, the U.S. Department of Housing and Urban Development (HUD) issued an informal (and non-binding) staff interpretation regarding home warranty companies, which seemed to raise more questions than it answered, primarily on the issues of marketing agreements and the marketing of home warranties. The agency found itself besieged by industry groups demanding clarification. Last week HUD finally provided amplification of its original letter and established clearer guidelines on the circumstances under which home warranty companies may compensate real estate brokers and agents for marketing their products.
Foley & Lardner issued an E-News Alert to clients and contacts detailing the new rules’ likely impact. In it, we note that, although directed at agreements between HWCs and real estate brokers and agents, the rule likely will have a broader impact, affecting many other providers who offer services in the residential real estate market.