10 Questions to Ask your Law Firm Vendor Management Program (Part 1)

10 Questions to Ask your Law Firm Vendor Management Program (Part 1)Law firms providing mortgage servicer clients default-related legal services are vendors, and financial services companies need to treat them as such. Not only that, law firms often interact directly and continuously with borrowers during the most sensitive periods of the lending relationship: foreclosure, bankruptcy, and eviction. As such, it should come as little surprise that federal regulators, including the Office of Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB) specifically target law firms in their regulatory guidance and enforcement activities.

In our dual capacity as outside counsel for servicer-vendor management groups and as vendors, we approach vendor management issues from a unique perspective. Based upon our experience in this area, we believe financial services companies should ask themselves a series of questions to determine whether their law firm vendor management programs are sufficiently robust and comprehensive.

Here are the first five questions you should consider:

1. Do you have standardized legal services agreements with your firms?

Servicers should have written agreements with all legal service providers. These agreements should clearly describe the contractual relationship between the law firm and the servicer. Issues such as confidentiality, insurance, scope of services, term/termination, representations and warranties, and indemnification should all be covered in the agreements. While contract templates can be standardized, servicers should recognize that certain provisions may be uniquely problematic for law firms. For example, indemnification provisions may be complicated by firm insurance policies, and confidentiality provisions may awkwardly overlapobligations imposed upon law firms by applicable ethical rules. This is not to say law firms deserve less scrutiny than other vendors, but servicers should be willing to listen and try to understand what their law firms have to say.

2. Do you focus on borrower-facing interactions?

Law firms must have robust policies, procedures, training, and other infrastructure. However, the law firm vendor management process must always begin and end with a focus on borrowers. In building the program, servicers should identify the areas where law firms interact with borrowers and make sure those areas fall within the scope of the oversight program. Look at Fair Debt letters, reinstatement and payoff letters, treatment of non-recoverable costs, and protection of borrower personal information. From a regulatory perspective, protecting the borrower will almost certainly be what catches the regulator’s attention.

3. Does your program fit your organization?

There is no simple “off the shelf” law firm vendor management program. The program that works for a servicer with $10 billion in serviced loans will be different from the servicer with a $50 million portfolio. The fundamentals of those programs may be the same, but the mechanics, processes, documentation, and implementation may be extremely different. As we have told clients before, some clients need the space shuttle, while others are just fine with a Buick. Additionally, a variety of other factors, such as corporate culture and experience of vendor management personnel, may come into play in designing a program.

4. Is there an attorney file review component in your program?

After nearly a decade of close scrutiny, most law firms providing default-related legal services have developed impressive looking lists of policies and procedures. It is not uncommon for a firm’s information security policies alone to stretch to more than a hundred pages. But not all firms that look good on paper are able to translate that into error-free legal services. In terms of remediation, it seems to us that an increasing percentage of the issues we find at firms are found through review of actual legal files. As a corollary, while operational law firm reviews performed by non-legal consultants can be extremely valuable, not having a lawyer review actual files is a potentially significant gap. File review checklists can be an important tool, but should only be one component of the review process. The most effective remediation is a collaborative process that recognizes the subject matter expertise of the law firm.

5. Are problems you identify during reviews corrected?

One of the primary purposes of any vendor management program is identifying issues were vendor remediation is necessary or appropriate. If you fail to properly track and document those issues through to completion, you may create bigger problems than you are solving. Regulators will be understandably skeptical and troubled if problems persist from one year to the next. To counter this, we recommend clients develop a formal process to track unresolved law firm remediation and to document completion of those processes. Preserve evidence of how each item is addressed. And, where a law firm has a repeat finding from one year to the next, make sure that finding is highlighted with the firm and subject to additional, heightened scrutiny.

The next five questions you should ask your vendor management program will be published next week. Stay tuned…

CFPB Expands Protections for Successors in Interest – Attend Part 2 of Our “CFPB Mortgage Servicing Amendments” Webinar Series to Learn More

CFPB Expands Protections for Successors in Interest – Attend Part 2 of Our “CFPB Mortgage Servicing Amendments” Webinar Series to Learn MoreAs part of its recent amendments to the mortgage servicing rules in Regulations X and Z, the Consumer Financial Protection Bureau (CFPB) is fundamentally changing the way mortgage servicers are required to treat successors in interest. In addition to expanding the scope of who is considered to be a successor in interest for the purposes of the mortgage servicing rules, the CFPB’s final rule provides confirmed successors in interest with the same servicing protections under the rules as the original borrower.

Upcoming Webinar

If this is an area you would like to learn more about, we encourage you to join us for Part 2 of our “CFPB Mortgage Servicing Amendments” Webinar Series, which is scheduled for Thursday, August 25, and will focus entirely on the new rules related to successors in interest. More information on the webinar can be found at the end of this post.

“Successor in Interest” Definition

Perhaps the most impactful change implemented by the CFPB is the expansion of who is considered a successor in interest. While the previous policy and procedure requirements only required mortgage servicers to facilitate communication with the successor in interest of a deceased borrower, the new rule has expanded the definition to include transfers (1) by devise, descent or operation of law from a decedent; (2) to a relative resulting from a borrower’s death; (3) from a spouse or parent; (4) as a result of a divorce decree, separation agreement, or property settlement agreement; and (5) into an inter vivos trust in which the borrower is and remains a beneficiary.

Confirmation of Successors in Interest

The CFPB has also imposed a new requirement that will require mortgage servicers to build out a process to identify and confirm successors in interest that have received an ownership interest in property subject to a mortgage. The amended rule will require servicers to have policies and procedures reasonably designed to identify potential successors in interest and communicate the documents reasonably required to confirm a person’s identity and ownership interest in the property. What is “reasonably required” will depend on the laws of the relevant jurisdiction, the specific situation of the potential successor, and the documents already in the servicer’s possession. This will undoubtedly require servicers to have a deep understanding of state law in a number of areas and also provide extensive training to ensure that customer-facing representatives can adequately convey the necessary information to potential successors in interest.

Upon receipt of documents from a potential successor in interest, a servicer will also have to promptly confirm or deny the person as a successor in interest or, alternatively, notify them of additional required documents necessary to make the confirmation determination.

Moreover, to the extent a potential successor in interest provides a written request to the servicer’s designated address for Requests for Information, servicers will be required to provide the potential successor in interest with a list of documents that are “reasonably required” to confirm that person’s identity and ownership interest in the property. The response must be done in compliance with the timing and procedural requirements in 12 CFR 1024.36(c)-(g).

Upon confirmation, successors in interest will be entitled to the full protections of subpart C and section 1024.17 of Regulation X, and Regulation Z, with some notable caveats.

Privacy Considerations

First, responses to Notices of Error and Requests for Information received from confirmed successors in interest (or from borrowers on accounts with a confirmed successor in interest) will be allowed to omit location and contact information and personal financial information (other than information about the terms, status, and payment history of the mortgage loan). While this does provide servicers with the ability to protect potential sensitive information for existing borrowers, it will undeniably require servicers to implement processes to ensure that there are no inadvertent disclosures of sensitive information.

Communication with Confirmed Successors in Interest

Second, the amended rule will require servicers to provide disclosures to confirmed successors in interest and also comply with live contact requirements for confirmed successors in interest unless they are provided to another borrower/successor in interest on the same account. The amended rule does, however, provide flexibility by allowing a servicer to provide an “opt-in” acknowledgment form to the confirmed successor in interest, and required disclosures and live contact requirements will not be required until the acknowledgment form is executed and returned.

Loss Mitigation for Successors in Interest

Lastly, servicers will be required to offer loss mitigation protections—and will be bound by all loss mitigation requirements—for loss mitigation applications submitted by confirmed successors in interest. Servicers will not be required to, but may, review and evaluate applications received from potential successors in interest. Servicers will, however, be required to preserve loss mitigation applications from potential successors in interest not reviewed prior to confirmation and to review and evaluate them upon confirmation. Importantly, servicers will not be permitted to require a successor in interest to assume the loan before being able to submit a loss mitigation application, but assumption can be a condition of extending a loss mitigation offer.

Recognizing the difficulty required to implement these requirements, the CFPB has provided for an 18-month implementation period for the successor in interest rules. Nevertheless, servicers would be well-advised to begin digesting and planning out the necessary system and operational changes necessary for implementation as soon as possible.

Register to attend Part 2 of our “CFPB Mortgage Servicing Amendments” Webinar Series

In Part 2 of our “CFPB Mortgage Servicing Amendments” Webinar Series, we will discuss the successor in interest requirements and share practical implementation tips based on our prior experience in this area. Please join us on Thursday, August 25 from 11:30 a.m. to 12:30 p.m. CT to learn “What You Need to Know” about successors in interest. Click here to RSVP to the webinar. Webinar login information will be provided one day prior to the event.

HUD Proposes Mandatory Assignment of HECMs

HUD Proposes Mandatory Assignment of HECMsAs part of a broader push to update its regulations regarding Home Equity Conversion Mortgages (HECMs, more commonly known as reverse mortgages), the Department of Housing and Urban Development (HUD) published a Supplemental Notice of Proposed Rulemaking on August 11, 2016. HUD is seeking comments on a regulatory change that would require mortgagees to assign HECMs to HUD once the loan balance is equal to or greater than 98 percent of the HECM’s Maximum Claim Amount.

Under HUD’s existing regulations, mortgagees are permitted to assign the HECMs to HUD once the loan balance reaches this threshold, but are not required to do so. HUD’s explanation for this policy change stems from a comment it received in response to the broader proposed rules it published in May. One commentator noted that, in some cases, a mortgagee may decline to assign the HECM if the underlying property value has risen rapidly and the loan has an above-market rate. Accordingly, the commentator concluded that mortgagees “can choose to keep the best loans and make claims for the worst ones.”

While it is unclear whether the issue posed by the commentator is merely academic or actually bears itself out in the industry, HUD appears to agree with his proposed solution requiring mortgagees to assign HECMs once the loan balance reaches 98 percent of the Maximum Claim Amount. Mortgagees seeking to comment on this proposed change must do so before September 12, 2016.

The Ninth Circuit Weighs In: Nevada HOA Super-Priority Lien Statute is Facially Unconstitutional

The Ninth Circuit Weighs In: NRS 116 is Facially Unconstitutional

The tide may finally be turning in Nevada.  Since the Nevada Supreme Court dealt a devastating blow to the whole of the financial services industry in September 2014 by holding that an HOA could foreclose on its super-priority lien and thereby extinguish a first deed of trust, first lien holders have been battling to protect first lien interests from extinguishment following HOA foreclosure sales.  While most of the decisions on Nevada HOA super-priority lien foreclosures come from Nevada state and federal courts, the Ninth Circuit weighed in on August 12, holding that NRS 116 is facially unconstitutional.

In Bourne Valley Court Trust v. Wells Fargo Bank, N.A., Bourne Valley purchased the subject property at an HOA foreclosure sale and subsequently filed suit seeking to quiet title on the grounds that, under NRS 116, the HOA foreclosure sale extinguished the first deed of trust. The district court granted Bourne Valley’s motion for summary judgment, holding that pursuant to SFR Investments Pool 1, LLC v. U.S. Bank, N.A., the deed of trust had been extinguished because foreclosure of a super-priority lien under NRS 116.3116(2) extinguishes all junior interests, including a first deed of trust on a property.  Bourne Valley Court Trust v. Wells Fargo Bank, N.A.

The Ninth Circuit vacated the district court’s judgment on the grounds that NRS 116 violated the first lien holder’s due process rights on its face because NRS 116 impermissibly shifts the burden to mortgage lenders to affirmatively request notice of an HOA’s foreclosure proceedings.  Bourne Valley argued that the provisions set forth in NRS 107.090, which sets forth the notice requirements for default under a deed of trust, cured NRS 116’s alleged deficiency—that it required lenders to “opt-in” to receive notice of HOA foreclosure sales.  The Court rejected this argument, finding that it would render the express “opt-in” notice provisions of Chapter 116—found in several different statutory sections—entirely superfluous.

The Court also found that there was sufficient state action to maintain a constitutional due process challenge.  Bourne Valley argued that a facial challenge to NRS 116 could not be maintained because there was no state action.  The Court rejected this argument, holding that the Nevada Legislature’s enactment of NRS 116 was sufficient state action.  While it is true that the actual foreclosure sale is a private action, the Court found this was irrelevant to the facial challenge because, absent the enactment of NRS 116, the foreclosure sale would not have extinguished the deed of trust.  Judge Wallace dissented, noting that he would find that the foreclosure sale did not constitute state action, and that the notice provisions of NRS 107.090 were incorporated into the NRS 116 HOA foreclosure scheme.

Importantly, the Ninth Circuit made a point to reject Bourne Valley’s reliance on Flagg Brothers, Inc. v. Brooks and Charmicor, Inc. v. Deaner, both of which dealt with preexisting contractual relationships between a creditor and debtor and are often cited by investor purchasers from HOA foreclosure sales, to argue that no state action existed.  The Court distinguished those cases, explaining that the authority to extinguish a debtor’s security interest arose from the underlying contractual relationships in both Flagg Brothers and Charmicor, whereas the HOA’s authority to extinguish a deed of trust here was purely statutory.  Since the Bourne Valley decision was released, a host of district court judges have begun staying cases involving a facial challenge to NRS 116 until the mandate for the decision is issued.

On the same day the Bourne Valley decision was issued, the Nevada Supreme Court scheduled oral argument in Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mortgage, a case that presents a facial challenge to NRS 116.  Oral argument is scheduled for September 8, 2016.

Nevada Supreme Court Strikes Significant Blow Against HOA Super-Priority Foreclosure-Sale Purchasers

Nevada Supreme Court Strikes Significant Blow Against HOA Super-Priority Foreclosure-Sale PurchasersIn September 2014, the Nevada Supreme Court held that an HOA could foreclose on its nominal super-priority lien and extinguish a senior mortgage in SFR Investments Pool 1, LLC v. U.S. Bank, N.A., a ruling that initially seemed cataclysmic to the mortgage industry. SFR Investments spawned thousands of contentious quiet-title actions, each pitting the senior mortgagee against the HOA-sale purchaser regarding whether the purchaser owned the property free and clear after its miniscule, speculative investment. While the mortgage industry’s outlook in Nevada after SFR Investments seemed rather bleak, the tide has recently turned in many respects, as the Nevada Supreme Court has issued several significant rulings in 2016 favorable to the mortgage industry in this continued battle over the effect of HOA super-priority lien foreclosures.

This pattern continued on August 11, 2016. In Stone Hollow Avenue Trust v. Bank of America, N.A.¸ the Nevada Supreme Court held that a mortgagee’s tender to the HOA of the super-priority amount of the HOA’s lien extinguishes the super-priority lien, even if the HOA wrongfully rejects the tender. In Stone Hollow, the senior mortgagee sent the HOA a check for nine months’ delinquent HOA assessments—the statutory super-priority amount of the HOA’s lien, as recently confirmed by the Nevada Supreme Court in Horizon at Seven Hills HOA v. Ikon Holdings, LLC. The letter enclosing the check explained the check was meant to pay off the HOA’s super-priority lien. The HOA rejected this full super-priority tender, a decision the Nevada Supreme Court deemed “unjustified.” This unjustified rejection did not alter the legal effect of the tender, as the Nevada Supreme Court explained that “[w]hen rejection of a tender is unjustified, the tender is effective to discharge the lien.” Because the super-priority lien was extinguished before the HOA’s foreclosure sale, the Court found that the HOA foreclosed only on the portion of its lien that was inferior to the senior mortgage. Consequently, the HOA’s foreclosure of this junior portion of its lien had no effect on the senior mortgage, meaning the HOA-sale purchaser took title to the property subject to the senior mortgage. The Court declined to address the argument that the HOA’s rejection of the tender was justified because of the tender’s purported conditions, as the argument was not raised at the trial court or on appeal.

Significantly, the Court’s ruling also suggests that the HOA-sale purchaser’s status as a bona fide purchaser is irrelevant in cases where the senior mortgagee extinguishes the super-priority lien before the sale. In Stone Hollow, the trial court held the mortgagee’s super-priority tender extinguished the super-priority lien. The Nevada Supreme Court initially remanded the case because the district court did not evaluate whether the HOA-sale purchaser was a bona fide purchaser, an issue which the Nevada Supreme Court has explained is generally important in HOA quiet-title litigation. But the Court granted the senior mortgagee’s petition for rehearing, affirming the trial court’s order granting summary judgment in the senior mortgagee’s favor based on the mortgagee’s super-priority tender. The Nevada Supreme Court did not mention the bona fide purchaser doctrine in its order granting the petition for rehearing, indicating that the bona fide purchaser doctrine is a non-issue in these super-priority tender cases.

While the Stone Hollow decision is unpublished, it nonetheless seems to shut the door on a common HOA-sale purchaser argument: that a senior mortgagee’s super-priority tender is irrelevant because they are “bona fide purchasers.” But many other issues remain open regarding the effect of a super-priority lien foreclosure in cases where the senior mortgagee did not tender the super-priority amount before the sale. By effectively reversing itself in Stone Hollow, however, the Nevada Supreme Court sent a clear signal to lower courts that the validity of these HOA foreclosure sales—where properties were usually sold for less than ten percent of their fair market value—is tenuous in many cases. While the mortgage’s industry’s road in Nevada has been a bumpy one recently, the Stone Hollow decision indicates brighter days are ahead in this HOA lien litigation. In fact, just this morning, the 9th Circuit Court of Appeals issued an opinion in Bourne Valley Court Trust v. Wells Fargo Bank, N.A. (Case No. 15-15233), holding that NRS 116.3116 (the Nevada HOA foreclosure lien statute) is facially unconstitutional. An additional article summarizing the Bourne Valley decision is available here.

Eleventh Circuit Court of Appeals Clarifies Standing Requirements for FDCPA Plaintiffs

Eleventh Circuit Court of Appeals Clarifies Standing Requirements for FDCPA PlaintiffsThe Eleventh Circuit Court of Appeals has clarified the type of injury that must be alleged by a plaintiff suing under the Fair Debt Collection Practices Act (FDCPA). This decision, in Church v. Accretive Health, Inc., is the first from the Eleventh Circuit applying the United States Supreme Court’s recent holding in Spokeo v. Robins.

As previously noted in this blog, the Supreme Court’s opinion in Spokeo is expected to have a significant impact on cases in which plaintiffs allege statutory violations but do not allege any specific, concrete harm to them. In Spokeo, a case that dealt with the Fair Credit Reporting Act, the Supreme Court held that a plaintiff does not satisfy Article III standing requirements if he or she “allege[s] a bare procedural violation, divorced from any concrete harm.” Rather, a plaintiff must be able to show “real” harm or at least “the risk of real harm.”

In Church, the Eleventh Circuit applied this holding in the context of a FDCPA plaintiff. The plaintiff in Church brought suit claiming that a letter sent to her by the defendant, advising her that she owed a debt for unpaid medical bills, violated the FDCPA. Specifically, she claimed the letter lacked certain written disclosures required by the FDCPA. The trial court granted summary judgment to the defendant on the basis that the FDCPA was not implicated because the defendant was not a “debt collector” as defined by the FDCPA.

On appeal, the Eleventh Circuit affirmed, noting that the debt was not in default when the defendant acquired it, and thus the defendant was not a “debt collector.” The appeals court then went on, however, to address the important issue of whether the plaintiff even had standing to bring suit in light of the Supreme Court’s holding in Spokeo.

With regard to the question of standing, the Eleventh Circuit noted that the plaintiff’s allegations of “harm” were merely that when she received the letter in question she became “very angry” and “cried a lot.” Nonetheless, the Eleventh Circuit found it undisputed that the letter sent to the plaintiff lacked all the disclosures required by the FDCPA. Further, the court noted, “[t]he invasion of [the plaintiff’s] right to receive the disclosures is not hypothetical or uncertain.” Although the plaintiff’s injury “may not have resulted in tangible economic or physical harm that courts often expect, the Supreme Court [in Spokeo] has made clear that an injury need not be tangible to be concrete.” Thus, the plaintiff’s allegations that she became angry and “cried a lot” amounted to “a legally cognizable injury” and she therefore had standing to sue under the FDCPA.

Webinar on CFPB’s Amendments to Mortgage Servicing Rules Scheduled for Thursday, August 11

Webinar online concept pointing finger.

Join us this Thursday, August 11, from 11:30 AM – 1:00 PM CST for the first webinar in our “CFPB Mortgage Servicing Amendments” series. Last week, the CFPB released its long-awaited amendments to the existing mortgage servicing rules in Regulations X and Z. The full release, which is 901 pages, details extensive changes to existing requirements in the following areas:

  • Successors in interest;
  • Borrowers in bankruptcy; and
  • Loss mitigation protections.

Of course, less significant changes are also being made to existing force-placed insurance notice requirements, payment crediting requirements, the definition of delinquency, and the definition of a small servicer.

Part 1 of the webinar series, titled “What You Need to Know: Overview,” will provide an overview of the entire CFPB release. We will explain the amendments, highlight areas of particular concern, and provide advice on next steps and implementation.

For additional information about the upcoming webinar and to RSVP, click here. You will receive the webinar login information one day prior to the event. We hope you’ll join us!

Washington Supreme Court Closes the Door on Changing the Locks

Washington Supreme Court Closes the Door on Changing the LocksIn Jordan v. Nationstar Mortgage, LLC, the Washington Supreme Court issued a stern warning to lenders seeking to change the locks on foreclosure properties. Given the significant potential liability exposure created by the opinion, foreclosing lenders should read the opinion with care and ensure their policies, procedures, and practices in that state comport with the Court’s articulated standards.

The relevant underlying facts in Jordan are relatively straightforward: Following the borrower’s 2011 default, the servicer’s vendor changed the lock on the front door of the property.  Significantly, this was the only door to the house, other than a rear screen door. The borrower only discovered that the locks were changed when she returned home and found a notice explaining what had happened posted on her door. While many of the underlying facts were not in dispute, the servicer and borrower disagreed as to whether the property was, in fact, vacant. The vacancy of the property was important because the servicer stated it only changed the locks if the property was found to be vacant or unsecure. After calling the number identified on the notice, the borrower ultimately was able to get into her house using the secure lockbox on her door.

The Jordan case began as a state court class action by the borrower alleging a broad range of claims against the servicer, including trespass, breach of contract, and violations of state and federal consumer protection laws. The Supreme Court acknowledged the scope of the issue in its opinion: “Jordan represents a certified class of 3,600 Washington homeowners who were locked out of their homes pursuant to similar provisions in their deeds of trust with Nationstar. This case presents an important issue for these homeowners and the thousands of others subject to similar provisions, as well as the many mortgage companies that have a concern with preserving and protecting the properties in which they have an interest.” The servicer removed the case to United States Federal District Court. Following removal, the litigants filed cross summary judgment motions. Because the District Court felt that resolution of the case depended upon interpretation of unresolved state law issues, it certified two questions to the Washington Supreme Court, which were the genesis of the Washington Supreme Court’s July 7, 2016 opinion.

The first question posed to the Washington Supreme Court was whether the “entry” provisions in the deed of trust conflicted with Washington law. “Entry” provisions are not uncommon in deeds of trust and permit a lender to “allow the lender to enter, maintain, and secure the property after the borrower’s default or abandonment” of the property. While the servicer sought to emphasize the vacant nature of the property, the Court effectively rejected the distinction as immaterial. Rather, the Court held that the determinative issue was whether the servicer’s action constituted “taking possession” of the property. Because the Court believed that the servicer “effectively ousted [borrower] by changing her locks” it concluded the seller “exercised its control over the property.” Such pre-foreclosure possessory acts contravened the mandate of Washington law. Having concluded that the entry provisions in the deed of trust conflicted with Washington law, the Court found those provisions unenforceable.

The second question, which will be left for discussion in future blogs, involved whether a servicer could only gain access to foreclosure properties through the “judicial appointment of a third party receiver.” In a victory for the servicer community, the Court concluded that the receivership process was not the sole avenue open to the foreclosure servicer.

Following Jordan, the message for the servicer community is clear: A servicer who acts to secure a property pre-foreclosure—even where that property is vacant—exposes itself to significant potential liability for its actions. Even where the loan documents appear to provide the servicer a contractual right to act, that right will likely be deemed unenforceable based upon Washington law.

Freddie Mac’s Manufactured Housing Initiative Task Force for Chattel Loans

Fiberboard walls lined up in a factory lumber yardSection 1129 of the Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to establish a duty for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) to serve three underserved markets: manufactured housing, affordable housing preservation, and rural areas. The purpose of this duty was to increase the number of mortgage investments and improve the distribution of investment capital available for mortgage financing in those markets. Section 1335 of the HERA required the Federal Housing Finance Agency (FHFA), beginning in 2010, to evaluate the extent to which Fannie Mae and Freddie Mac have complied with the “duty to serve underserved markets” and to rate the extent of compliance.

In December 2015, the FHFA issued a proposed rule that would implement HERA’s duty to serve provisions. Again, the statute establishes a duty for Fannie Mae and Freddie Mac to facilitate a secondary market to improve the distribution of mortgage financing for very low, low, and moderate-income families in the manufactured housing, affordable housing preservation, and rural housing markets.

Under the proposed rule for manufactured housing, duty-to-serve credit would be provided for loans that Fannie Mae and Freddie Mac are already undertaking when financing manufactured housing units titled as real estate. There is no equivalent language for chattel loans. According to the proposed rule, this is because real estate loans perform better, have greater borrower protections, and have lower default rates than chattel financing. However, the proposed rule did invite public comment on whether the final rule should authorize duty-to-serve credit for Fannie Mae and Freddie Mac to purchase chattel loans on a voluntary pilot basis.

Approximately 70 percent of manufactured homes purchased today are financed as chattel.  Therefore, there has been considerable effort by the industry and its supporters to encourage both Fannie Mae and Freddie Mac to establish pilot programs for chattel finance. I sit on the Board of Managers of the Manufactured Housing Institute’s (MHI) Financial Services Committee. As a group, we not only submitted a lengthy comment letter on the FHFA rule but also invited representatives of both Fannie Mae and Freddie Mac to discuss the chattel issue at an MHI meeting this past May. While Fannie Mae’s presentation was helpful, Freddie Mac’s representatives seemed truly committed to establishing a pilot program for chattel lending.

Not long after the May meeting, Freddie Mac distributed a charter for a Manufactured Housing Initiative Task Force (MHIT) to various select people. This was followed by an invitation to the first meeting of the MHIT, which was held in Reston, Virginia on July 19. There were probably a dozen Freddie Mac staff at this meeting, as well as mortgage bankers, public interest representatives, several MHI staff and several members of MHI’s Financial Services Committee. The discussions were brisk and serious, and we all left the meeting feeling that Freddie Mac is genuinely committed to finding a way to resume purchasing chattel loans. The plan is for the discussions to continue for the next two years, primarily by conference call. While the scope and structure of such a Freddie Mac program will have to be worked out over time, I am confident that this process will eventually yield a much needed secondary market recovery for manufactured housing chattel loans.

CFPB Caps a Busy Week with Amendments to Mortgage Servicing Rules

FHA Withdraws Proposed Rule Establishing Insurance Claim DeadlineToday, the Consumer Financial Protection Bureau (CFPB) released the long-awaited amendments to the existing mortgage servicing rules in Regulations X and Z. For the next 12-18 months, Mortgage servicers will once again be forced to shift some of their focus and energy towards implementing another CFPB rulemaking. We encourage everyone to kick off this implementation period by joining us for the first webinar in our “CFPB Mortgage Servicing Amendments” series, which is scheduled for Thursday, August 11, 2016. More information on the webinar series, including how to register, is at the end of this post.

Today’s release caps a busy week for the CFPB, and one that will undoubtedly have a lasting impact on the mortgage industry, particularly with respect to mortgage servicers. To recap:

  • Thursday, July 28 – Proposal to overhaul the debt collection market is released;
  • Friday, July 29 – Proposed amendments to the Know Before You Owe rules are released;
  • Friday, July 29 – A notice is posted in the Federal Register proposing to would allow consumers to rate companies’ responses to complaints that are submitted through the CFPB portal;
  • Tuesday, August 2 – CFPB’s “Principles for the Future of Loss Mitigation” are released; and
  • Thursday, August 4 – Amendments to the 2013 Mortgage Servicing Rules are released.

Each of these events has been newsworthy in their own right, but today’s release of final servicing rules will likely have the biggest immediate impact.

As expected, today’s release is generally consistent with their 2014 proposal and touches nearly all aspects of the current mortgage servicing framework in Regulations X and Z. In reading the new document, one thing that immediately sticks out is that the CFPB apparently does not think the final rule will be overly difficult, or burdensome, to implement. The release specifically explains that they “believe[] that the majority of the provisions in this final rule would impose, at most, minimal new compliance burdens, and in many cases would reduce the compliance burden relative to the existing rules.”

We certainly are skeptical of that claim. While additional clarity in some areas will certainly help from a compliance perspective, history has repeatedly shown—especially in the mortgage industry—that significant regulatory changes require significant compliance and implementation efforts. To fully and effectively operationalize today’s final rule, most servicers will need to make extensive changes in the following areas:

  • Successors in interest;
  • Borrowers in bankruptcy;
  • Loss mitigation protections; and
  • Servicing transfers.

Less significant changes are also being made to force-placed insurance notice requirements, payment crediting requirements, the definition of delinquency, and the definition of a small servicer.

Today’s release also provides answers to a number of hot-topic questions that have been circulating throughout the industry and with the trade associations since the proposal was released at the end of 2014. For example, we now know that the CFPB is giving the industry twelve months from the date the final rule is posted in the Federal Register to implement most of the new requirements. Those provisions related to successors in interest and periodic statements for borrowers in bankruptcy, on the other hand, will become effective eighteen months after publication in the Federal Register. The CFPB is not, however, offering a safe harbor for early compliance.

We also now know that the CFPB is largely moving forward with its proposal related to the treatment of, and protections afforded to, successors in interest despite the industry’s concerns. The CFPB notes in today’s final rule that it received comments regarding privacy concerns, but maintains that “complying with the final rule does not cause servicers to violate the GLBA [Gramm Leach Bliley Act] or its implementing regulations,” and that “a confirmed successor in interest’s ownership interest in the property securing the mortgage loan is sufficient to warrant that person’s access to information about the mortgage loan.” However, to somewhat address the industry’s privacy concerns, additional provisions are being added to limit the types of information that a confirmed successor in interest may receive about a borrower, and vice versa.

Now that the final rules have been made public, servicers would be well advised to begin digesting and planning out the next 12-18 months of implementation.

As mentioned above, our upcoming “CFPB Mortgage Servicing Amendments” series of lunchtime webinars will help kick off the implementation process. The first presentation on Thursday, August 11 from 11:30am to 1:00pm CT will provide an overview of the entire release. We will explain “What You Need to Know” about the final rules, and will highlight areas of particular concern. Click here to RSVP to the webinar. Webinar login information will be provided one day prior to the event.

We are also scheduling additional webinars that will focus on specific aspects and areas of the amendments that are particularly complicated, including successors in interest, borrowers in bankruptcy, and loss mitigation. Throughout the entire series, we will provide insight on requirements and provisions that are likely to pose operational and legal challenges. We hope you’ll join us!