MORTGAGE REFORM AND THE IMPACT ON FINANCING AND FORECLOSURES

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1 MORTGAGE REFORM AND THE IMPACT ON FINANCING AND FORECLOSURES Lauren E. Winters, Senior Policy Analyst (503) Department of Consumer and Business Services, March 20, 2013 IMPORTANT INFORMATION ABOUT THIS PRESENTATION This presentation is for general informational purposes only and does not represent and is not intended to provide legal advice or opinion and should not be relied on as such. This presentation is not intended to address all relevant legal developments or situations relating to mortgage reform or foreclosures. 1

2 AGENDA Introduction - DCBS, DFCS Regulatory Backdrop Seller Carry Financing SAFE Act and the SAFE Act Final Rule The Dodd-Frank Act and CFPB Final Rules Foreclosure Niday Fair Debt Collection Practices Act Judicial Foreclosure of Residential Trust Deeds DCBS, DFCS WHO WE ARE Protecting and serving Oregon s consumers and workers while supporting a positive business climate in the state. The role of DFCS is to ensure that a wide-range of financial services and products are provided to Oregonians in a safe, sound, equitable, and fraud-free manner. State-Chartered Banks and Credit Unions Mortgage Lending Financial Consumer Protection Laws Securities 2

3 REGULATORY BACKGROUND In the years preceding the 2008 mortgage crisis, the following conditions existed: Too many residential mortgage loans made without regard to a consumer s ability to repay the loan. Creditors failing to verify a consumer s income or debts. Creditors qualifying consumers for residential mortgage loans based on teaser interest rates that would cause payments to increase to unaffordable levels after the teaser period expired. Creditors promising that consumers would be able to refinance their loans. SELLER CARRY FINANCING Involves two transactions the sale of the property and the financing of the sale. Important tool in an era in which many borrowers may not qualify for conventional institutional financing. Arises when an owner of residential real estate is willing to sell property that is not the seller s primary residence or a family member s primary residence in exchange for receiving a promissory note secured by a trust deed giving the seller a lien on the property or in exchange for receiving a land sale contract creating a lien on the property. 3

4 TYPICAL SELLER CARRY TERMS The seller agrees to finance the sale of the property in exchange for receiving monthly installments based on a 30- year amortization schedule with interest at the rate of five percent and a balloon payment due five years from the date of closing. May cover the full amount of the purchase price. May provide financing to cover the short fall between a conventional first loan and the full purchase price. SAFE Act Effect Dodd-Frank Act Effect LICENSING REQUIREMENTS UNDER ORS CHAPTER 86A Remember: ORS Chapter 86A governs the residential mortgage lending activities of companies (ORS 86A.095 to 86A.198) and the mortgage lending activities of individuals (ORS 86A.200 to 86A.239). ORS 86A.103(1) prohibits a person from engaging in residential mortgage transactions as a mortgage banker or mortgage broker unless they are licensed under ORS 86A.095 to 86A.198. ORS 86A.100(8) triggers the licensing requirements and defines residential mortgage transaction as a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in property upon which four or fewer residential dwelling units are planned or situated.... 4

5 THE SAFE ACT BACKGROUND In 2008, the Federal government passed the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act to enhance consumer protection and reduce fraud and mandated that states adopt minimum licensing requirements for residential real estate transactions. Oregon law governing seller carry transactions must be consistent with and not contrary to the SAFE Act and the SAFE Act Final Rule, 12 CFR Part 1008 (Regulation H). The SAFE Act and related rules establish the minimum floor for the state regulation of loan originators and require States to meet or exceed SAFE Act licensing requirements. DIFFERENCES BETWEEN STATE AND FEDERAL LAW The Oregon definition of mortgage banking loan is broader than the federal definition of residential mortgage loan contained in the federal SAFE Act or in state SAFE Acts that incorporated the federal definition. The SAFE Act and Texas define residential mortgage loan as a loan primarily for personal, family, or household use. [Added for clarification] -. ORS 86A.200(8) defines residential mortgage loan as a loan that is secured by a mortgage, deed of trust or equivalent consensual security interest on four or fewer residential dwelling units, including but not limited to individual dwelling units, mobile homes, condominiums or cooperatives that are planned for or situated on real property in this state. ORS 86A.100(4) defines mortgage banking loan as a loan, extension of credit or a retail sales contract that is funded exclusively from the mortgage banker s own resources, that is directly or indirectly secured by a mortgage or deed of trust or any lien interest on real estate and that is created with the consent of the owner of the real property. 5

6 LICENSING REQUIREMENTS OF LOAN ORIGINATORS Under the Federal SAFE Act and the Final Rule, an individual is not required to have a mortgage loan originator license if the individual is selling the individual s personal residence or the primary residence of a family member. ORS 86A.200(4)(a) requires a person to have a loan originator license if the person takes a residential mortgage loan application or negotiates the terms or conditions of a residential mortgage loan unless an exemption applies. This means that an individual must have a loan originator license if the sale and financing involves residential real estate that the individual owns as investment property. COMPANY LICENSING EXEMPTIONS A licensing exemption exists for a company engaged in private money lending if the company makes less than 10 loans secured by an interest in residential real estate during any consecutive 12-month period and does not advertise or otherwise hold itself out as being in the business of making mortgage loans. The company would still need an Oregon licensed loan originator to take the application or negotiate the terms or conditions of the seller carry loan. 6

7 ATTORNEY LICENSING EXEMPTIONS ORS 86A.100(5)(b)(G) and 86A.203(2)(d) provide an exemption for Oregon licensed attorneys under very narrowly defined circumstances (the activity is ancillary to the attorney s representation of a client, and the attorney does not receive compensation from a mortgage banker, mortgage broker, mortgage loan originator or lender or their agents.) Ancillary is not statutorily defined; however, consistent with other jurisdictions, the term is construed to mean that the transaction occurred while the attorney is representing the client on an independent matter. REAL ESTATE BROKER LICENSING EXEMPTIONS The SAFE Act exempts real estate licensees from obtaining a loan originator license if they are listing homes for sale and finding homes that meet a buyer s needs; however, a loan originator license is required if the real estate licensee takes an application or negotiates the terms or conditions of a residential mortgage loan. ORS 86A.100(5)(b)(D) and 86A.200(4)(b)(B) provide an exemption from licensing for Oregon real estate licensees unless the real estate licensee is performing the functions of a mortgage banker or mortgage broker (i.e., negotiating the terms of a mortgage loan). Under the Dodd-Frank Act, Title X (the Consumer Financial Protection Act), real estate licensees are exempt from the jurisdiction of the Consumer Financial Protection Bureau (CFPB), unless the real estate licensee is offering financing services in connection with a real estate transaction. 7

8 THE DODD-FRANK ACT AND SELLER CARRY LOANS Section 1403 of the Dodd-Frank Act, as implemented by 15 U.S.C. 1639b(c) and Regulation Z, 12 C.F.R , prohibits a loan originator from directly or indirectly receiving compensation based on the transaction s terms or conditions or proxies for such terms and conditions. In short, a loan originator may not steer a consumer into a credit transaction on the basis that the originator will receive more compensation from the creditor (i.e., a seller of the residential real estate) than would be received in a different transaction unless the transaction is in the best interest of the consumer. Regulation Z defines compensation as, among other things, salaries, commissions, bonuses, awards, and any financial or similar incentives based on the terms or conditions of the loan. SELLER CARRY AND STEERING A loan originator may not steer a consumer to a particular loan if the originator s compensation will increase based on the terms or conditions of the loan unless the loan is in the best interest of the consumer. TILA generally defines a loan originator as a person who, in expectation of direct or indirect compensation or other monetary gain, (i) takes an application; (ii) arranges or assists a consumer in obtaining or applying for a residential mortgage loan; or (iii) negotiates or offers to negotiate the terms of a residential mortgage loan. TILA defines compensation to include salaries, commissions, and any financial or similar incentive. 8

9 SELLER CARRY AND STEERING THE NEW RULES On January 22, 2013, the Consumer Financial Protection Bureau (CFPB) issued the final loan originator compensation rule, amending Regulation Z, which implements the Truth in Lending Act. The effective date of the rule is January 10, Continues the prohibition on receiving compensation based on the profitability of a transaction, the interest rate, or any other term of a transaction. The final rule prohibits a person from steering a consumer into a non-prime loan that provides more compensation to the person than a prime loan that the consumer could obtain from a different creditor unless the consummated non-prime loan is in the consumer s best interest. SELLER CARRY AND REAL ESTATE LICENSEES How will this affect real estate licensees involved in seller carry transactions? Do the steering prohibitions and requirements apply if the real estate licensee s commission does not increase based on a term or condition of the seller carry financing? Does the steering prohibition apply if, but for steering a buyer who could qualify for a prime loan into a seller carry subprime loan, the real estate licensee would not have received a real estate commission? Does the real estate licensee have to determine that the seller carry transaction is in the best interest of the buyer? 9

10 SELLER CARRY STEERING EXEMPTIONS The steering prohibitions contained in Section 1403 and the final rule do not apply to seller carry financings if the loan originator (i.e., the seller of residential real estate) provides seller financing for the sale of three or fewer properties in any 12-month period and the following conditions are met: The seller did not construct the home; The loan is fully amortizing; The seller reasonably determines that the buyer can repay the loan; The loan has a fixed rate or adjustable rate that is adjustable after 5 or more years. WHAT ABOUT THE ABILITY TO REPAY? On January 10, 2013, the CFPB issued the final rules implementing Sections 1411, 1412, and 1414 of the Dodd-Frank Act, amending TILA (collectively, Final TILA Rule). The Final TILA Rule takes effect on January 10, The Final TILA Rule follows the statutory mandates contained in the Dodd-Frank Act and requires creditors to assess a consumer s ability to repay before they make a residential mortgage loan. The Final TILA Rule defines the term qualified mortgage and creates a presumption that a creditor satisfies the ability-to-repay requirements if the loan falls within the definition of a qualified mortgage as set forth in the Final TILA Rule. Section 1411 of the Dodd-Frank Act defines the term creditor as a person who extends consumer credit more than five (5) times in a calendar year. 10

11 SAFE HARBOR AND THE REBUTTABLE PRESUMPTION Safe harbor prime or lower priced loans Rebuttable presumption subprime or higher priced loans REBUTTABLE PRESUMPTION Applies only to higher-priced mortgage loans. These loans are generally given to consumers with insufficient or weak credit history. Legally, lenders that offer these loans are presumed to have determined that the borrower had an ability to repay the loan. A consumer can challenge that presumption by proving that the consumer did not, in fact, have sufficient income to pay the mortgage and other living expenses, and that the lender did not evaluate the consumer s ability to repay the loan. 11

12 WHAT IS A QUALIFIED MORTGAGE? Section 1412 of the Dodd-Frank Act. A loan that does not feature negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years; A loan in which the total points and fees do not exceed three percent of the total loan amount for loans over $100,000 (with provision for a sliding scale of acceptable caps on fees for lesser loan amounts); and A loan in which the borrower s income or assets are verified and documented. A loan that is originated and held by small creditors operating predominantly in rural or underserved areas is exempt from the prohibition on balloon payments. MAXIMUM DTI FOR QUALIFIED MORTGAGES The final rule establishes a maximum debt-to-income (DTI) ratio for qualified mortgages. Subject to certain exceptions, the final rule requires that the borrower s resulting (or back-end ) DTI ratio be less than or equal to 43 percent. The monthly payment is to be calculated based on the highest interest rate that will apply in the first five years of the loan rather than any lower introductory rate. 12

13 HOEPA REQUIREMENTS The Dodd-Frank Act defines HOEPA loans as a high-cost mortgage loan that include purchase money and open-end loans but will continue to exclude reverse mortgages. Specifically, a high-cost mortgage loan includes a loan in which: The APR exceeds the average prime offer rate by 6.5 percentage points for most first-lien mortgages and 8.5 percentage points for subordinate lien mortgages; The points and fees exceed five percent of the transaction amount or a higher threshold for loans below $20,000; or The creditor is entitled to collect a prepayment penalty of more than 36 months after loan consummation or account opening, or penalties that exceed more than two percent of the amount prepaid. HIGH COST MORTGAGE LOANS Consumers who obtain a high-cost mortgage loan are entitled to all of the protection that currently exist for HOEPA loans, and the rule: Bans prepayment fees and balloons; Restricts late fees; Requires creditors originating open-end credit plans to assess a consumer s ability to repay the loan. Prohibits mortgage brokers or creditors from recommending or encouraging a consumer to default on an existing loan or debt to obtain refinancing by a high-cost mortgage loan. Requires mandatory counseling. 13

14 HIGH COST COUNSELING REQUIREMENTS The rule generally requires lenders to distribute a list of homeownership counselors or counseling organizations to consumers within a few days after applying for any mortgage loan. The rule also implements a requirement that first-time borrowers receive homeownership counseling before taking out a negatively amortizing loan. FORECLOSURE LANDSCAPE The switch from nonjudicial foreclosures of residential trust deeds to judicial foreclosures. The role of Mortgage Electronic Registration Systems, Inc. (MERS) as the designated nominee for the original beneficiary of a residential deed of trust. SB 1552: Opt-in mediation requirements for the nonjudicial foreclosure of a residential trust deed. 14

15 SB 1552: KEY REQUIREMENTS If the trustee has recorded a notice of default or a homeowner is at risk of default and a notice of default has not been recorded, the homeowner may request mediation. The servicer or trustee must notify the Attorney General within 15 days of receiving the notice that mediation was requested. Under current law, 120-day waiting period before the sale occurs. SB 1552 extends the waiting period to 180 days. The mediation session must be scheduled to occur no earlier than 45 days but no later than 90 days after the mediation notice. Homeowners must confirm that they will attend the mediation at least 30 days before the scheduled mediation. NIDAY V. GMAC THE ACTORS The Promissory Note Players Lender Borrower The Deed of Trust Players Lender Beneficiary Borrower Grantor Trustee Holds the deed of trust for the benefit of the beneficiary 15

16 NIDAY THE LAWS AT ISSUE ORS (1) allows the trustee to foreclose a trust deed by advertisement and sale if, among other things, the trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee are recorded in the mortgage records in the counties in which the property described in the deed is situated. ORS (2) defines beneficiary as a person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or the person s successor in interest. NIDAY THE QUESTION AND ANSWER Whether MERS falls within the scope of the statutory definition of beneficiary when it is designated in a trust deed as the beneficiary of the trust deed solely as nominee for the lender and the lender s successors and assigns and has the right to foreclose and sell the property in the event of default without satisfying the recording requirements contained in ORS (1). The Oregon Court of Appeals concluded that the failure to record all assignments of a beneficial interest in a trust deed means that the trust deed cannot be foreclosed nonjudicially, regardless of whether the assignment of the note automatically assigned the trust deed. 16

17 NIDAY THE EFFECT AND ACT II It did not impact the ability of a MERS beneficiary to foreclose residential trust deeds judicially. It did not affect the agency relationship between MERS and the beneficiary; thus, as agent for the beneficiary and its successors and assigns, MERS has the authority to transfer the trust deed to a new party; record that interest; and appoint a successor trustee, if necessary. In January, the Oregon Supreme Court heard oral arguments on whether MERS can stand in for its member lenders and foreclose by advertisement and sale without recording the assignment of the trust deed when the note is sold on the secondary market to numerous investors. NIDAY MORE ISSUES THAN ANSWERS The other two questions - The Agency Relationship Splitting the Note and the Trust Deed What if the note is delivered to one party (the lender) and then transferred; the borrower grants a security interest in the property securing repayment of the note to a different entity (MERS), and MERS later assigns the trust deed to the foreclosing party. What is the legal effect of this arrangement and can it stop a foreclosure from happening? 17

18 OTHER POTENTIAL NIDAY ANSWERS Only the actual holder of the note falls within the scope of the statutory definition of beneficiary because the person for whose benefit the trust deed was given is the person entitled to receive payment under the note. The language designating MERS as nominee for the lender and its successors and assigns creates an agency relationship that allows MERS to transfer the note. Splitting the note from the trust deed is not fatal to the enforcement of the note or the trust deed securing repayment of the note. JUDICIAL FORECLOSURES RESIDENTIAL TRUST DEEDS Debt Validation Requirements, FDCPA Code Pleading Requirements Burden of Proof and Challenges Meeting that Burden Summary Judgment Affidavits 18

19 DEBT VALIDATION REQUIREMENTS Oregon federal district courts hold that the federal Fair Debt Collection Practices Act (FDCPA) does not apply to residential mortgage foreclosures if the person performing the foreclosure engages in the rote enforcement of foreclosing liens on residential real property including, but not limited to, the mailing and recording of the notice of default in a nonjudicial foreclosure. A judicial foreclosure includes a request for monetary relief as well as the right to foreclose the residential mortgage lien; thus, in Oregon, attorneys generally include the debt validation notice required under the federal FDCPA as part of the judicial foreclosure of a residential lien. CODE PLEADING REQUIREMENTS ORCP 18 A requires parties to allege ultimate facts establishing each of the elements of a prima facie case for a recognized claim for relief. ORCP 21 A(8) Motion to Dismiss for Failure to State Ultimate Facts ORCP 21 D - Motion to Make More Definite and Certain ORCP 21 E Motion to Strike 19

20 BOP AND BOP CHALLENGES The burden of proof is on the foreclosing party the beneficiary (or the beneficiary s assignee) under the deed of trust. Must allege facts, which if proved, show the original beneficiary is the foreclosing party, or that the original beneficiary or the beneficiary s agent (in most cases, MERS) assigned the trust deed to the foreclosing party. Must allege facts, which if proved, show the foreclosing party has physical possession of the promissory note or show that the note was lost or destroyed. The foreclosing party is entitled to enforce the note under Article 3 of the UCC, Oregon Revised Statutes Chapter 73. ORS CHAPTER 73 Must have physical possession of the promissory note, ORS (u)(A). If the note was transferred to the foreclosing party, ultimate facts showing that the transfer was accompanied by a proper assignment, ORS , or endorsed in blank, ORS If the note is lost or destroyed, ultimate facts showing how the note was lost or destroyed, ORS Complete chain of assignments Foreclosing party had physical possession of the note at the time the note was destroyed or lost. 20

21 SUMMARY JUDGMENT AFFIDAVITS Robo-signing - How did we get here, and what Oregon lawyers can do to prevent it and prove we are better than the rest to avoid reputational scorn. Ignoring the basics: an affidavit is a substitute for direct testimony, and it must be admissible. To be admissible, it must be offered by a witness with personal knowledge of the facts. Forgetting that affidavits are evidence requiring a competent, credible witness with personal, first-hand knowledge of the facts. Failing to use multiple affidavits to establish payment history or failing to satisfy the business records exception to hearsay. BUSINESS RECORDS EXCEPTION The affiant (individual) has personal knowledge of the servicer s computer system, including how information is made and recorded (who enters the data into the system, and that the person entering the data knows the dates and amounts of payments and charges). Records are made at or about the time of each payment or charge reflected on the history. The servicer regularly makes records of payments and charges related to the accounts it services. The particular payment history was made and kept in the routine and ordinary course of the servicer s business. The document attached to the affidavit is a genuine and authentic printout of the entries on the system related to the defaulting party s account. 21

22 Questions 22