Financial Services Update June 11, 2013

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1 Financial Services Update June 11, 2013 HIGHLIGHTS Federal Regulatory Developments: CFPB Amends Examination Manual State Regulatory Developments: Texas Proposes Constitutional Amendment Regarding Reverse Mortgages And Requires Posting Of Notice Of Foreclosure Sale Litigation Developments: Mortgage Servicers Cannot Be Sued Under Ohio s Consumer Sales Practices Act WBK NEWS Mitch Kider, Fed Kamensky and Jason McElroy will present an MBA Compliance Essentials Webinar, Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) & FTC Mortgage Acts and Practices Advertising (MAP) Rule, on Wednesday, June 12 at 2:00 pm EDT. For more information contact Mitch, kider@thewbkfirm.com, Fed, kamensky@thewbkfirm.com, or Jason, mcelroy@thewbkfirm.com. Jim Milano will provide a regulatory update on the CFPB s new mortgage servicing rules to senior management of a large bank on Wednesday, June 12. For more information contact Jim at milano@thewbkfirm.com. Jack Konyk will present a session on the Regulators Expectations Of Directors And Senior Officers for the Pennsylvania Bankers Association & Directors Institute

2 meeting on Monday, June 17. For more information contact Jack at Michael Kieval will be an instructor at AllRegs School of Mortgage Compliance on Wednesday, June 19 in Baltimore, MD. For more information contact Michael at SUMMARIES Federal Regulatory Developments: CFPB Amends Examination Manual On June 4, 2013, the Consumer Financial Protection Bureau (Bureau) published an update to its examination procedures regarding new mortgage regulations issued under the Equal Credit Opportunity Act (ECOA) and the Truth in Lending Act (TILA). The updated examination guides give mortgage companies an idea of the depth and scope that the Bureau will be reviewing regarding TILA and ECOA compliance systems. The examination procedures include a review of both written and actual policies and practices. It is expected that additional updates will be issued to the Bureau s examination procedures as examiners begin to incorporate the numerous new rules that will become effective January The new examination procedures amend the Bureau s Supervision and Examination Manual, issued in October 2012, and describe how the Bureau examines and supervises mortgage servicers and originators. The purpose of the examinations is to determine whether mortgage companies have effective policies and procedures in place to ensure compliance with consumer financial protection laws. The updated examination guidance and procedures offer financial institutions and mortgage companies instructions regarding issues and policies the Bureau will be analyzing when the new rules become effective. These two recently issued updates to the examination procedures include new rules affecting compensation and qualifications for loan originators, appraisals, and escrow accounts. Specifically, the guidance will assist mortgage companies in determining how to comply with rules that: Establish qualification and screening standards for loan originators; Prohibit steering incentives and dual compensation; Protect borrowers who take out higher-priced mortgage loans; Prohibit mortgage companies from asking consumers to waive their rights or requiring mandatory arbitration; Require lenders to provide appraisal reports and valuations to consumer; Restrict single premium credit insurance. 2

3 The above policies are explained in greater detail throughout the manual. A few examples of the rules the Bureau will be enforcing are illustrative of the wide range of restrictions placed on mortgage companies. First, the Bureau will analyze whether a mortgage company has policies and procedures in place to ensure its loan originators are ethical, knowledgeable, and meet character, fitness, and financial responsibility requirements. Loan originators must pass criminal background checks and complete appropriate training. Next, the Bureau will examine loan originator compensation policies. Generally, loan originator compensation cannot be contingent upon the terms of the mortgage loan. For example, the Bureau will look at whether a broker was paid more for loans that had higher interest rates, prepayment penalties, or higher fees. Moreover, the new rules prohibit a loan originator from being paid by both the consumer and any other party subject to the transaction, such as the lender. For higher-priced mortgage, the Bureau will examine mortgage companies policies regarding escrow policies. Higher-priced mortgage loans are defined as having an annual percentage rate that exceeds the average prime offer rate by 1.5 percentage points for first liens and 3.5 percentage points for second liens. Servicers must maintain escrow accounts for these loans for a minimum of five years instead of the currently required one year. Mortgage companies cannot restrict consumers from bringing claims against mortgage companies for any alleged violation of federal law. The Bureau will analyze whether a mortgage company has required a consumer to sign a waiver of any rights or legal protections as a condition of financing a home purchase. Further, mandatory arbitration clauses for mortgage loans are generally prohibited, and the Bureau will examine mortgage companies contracts for these clauses. Finally, mortgage lenders or brokers must now provide consumers with free copies of all appraisals and other written valuations completed in connection with mortgage applications. The Bureau will examine mortgage companies disclosures made to consumers regarding the appraisal requirements and ensure companies have procedures in place to provide consumers with appraisals or valuations within the prescribed timeframe. Highlighted ECOA Examination Procedures The Bureau will review mortgage loan application forms, disclosures, training materials, screen shots of online applications, telephone scripts for taking applications, and a sample of loan files for compliance with loan application processes; The Bureau will conduct interviews with personnel to determine whether they have working knowledge of regulatory requirements and are aware of policies and procedures established to ensure compliance with credit application evaluation and pricing; 3

4 The Bureau will examine policies, procedures, and internal controls regarding loan servicing and loss mitigation to ensure standards are consistently applied; and The Bureau will focus especially on whether credit operations are implemented on a prohibited basis, if pricing guidelines contain any criteria that could have a disparate impact on a protected class, and whether policies and procedures can be clearly understood by consumers. Highlighted TILA Examination Procedures The Bureau will review organizational and process charts, policies and procedures, loan disclosures, checklists, and computer software programs to ensure maintenance programs are used daily to detect TILA discrepancies and violations; The Bureau will examine actions taken to address previously identified deficiencies with internal controls, whether the corrective actions were timely and appropriate, and if significant deficiencies reported to management; The Bureau will review sample transactions documents and procedures (both closed-end and open-end) to ensure accuracy and completeness with TILA disclosure and procedural rules; The Bureau states that documentation is imperative to showing a valid defense because evidence must be produced that shows the company has internal controls designed to ensure compliance with the various TILA rules. The new TILA and ECOA examination procedures emphasize the Bureau s role as the primary examiner of mortgage companies. Moreover, examinations will create opportunities for the Bureau to enforce the new requirements regarding steering incentives, dual compensation, mandatory arbitration clauses, and appraisal disclosures. The Bureau is coordinating with various federal regulators to ensure a shared understanding of the new rules and consistency regarding applicable examination procedures. Going forward, the Bureau expects to issue examination guidance regarding the ability to repay and mortgage servicing rules within the next few months. State Regulatory Developments: Texas Proposes Constitutional Amendment Regarding Reverse Mortgages And Requires Posting Of Notice Of Foreclosure Sale The state of Texas proposed a constitutional amendment to authorize the making of a reverse mortgage loan for the purchase of homestead property that the borrower will occupy as a principal residence. Reverse mortgages in Texas are authorized and 4

5 governed by the Texas Constitution. The proposed amendment is intended to expressly authorize reverse mortgages for the purchase of homestead property in Texas. The proposed constitutional amendment would also authorize lenders to call a purchase money reverse mortgage due and payable if the borrower fails to occupy the property as a principal residence within a stipulated period of time after the extension of credit. The proposed amendment would also revise certain provisions of the Texas Constitution applicable to all reverse mortgages in Texas. The amendment would require lenders to provide a written notice to reverse mortgage borrowers at least 12 days before loan closing. The written notice must be on a separate instrument and must be signed by the lender and the borrower to be effective. The amendment provides the language of the notice that would replace the existing requirement to disclose to borrowers certain provisions of the Texas Constitution regarding reverse mortgages. The proposed amendment also requires the borrower and the spouse of the borrower to attest in writing that the borrower and the borrower s spouse received reverse mortgage counseling that was completed between 180 and 5 days before the date of the extension of credit. These proposed constitutional amendments regarding reverse mortgages will be submitted to Texas voters in the election to be held on November 5, Texas also enacted a provision requiring counties that maintain an Internet website to post a notice of foreclosure sale filed with the county clerk on the website in a manner that is publicly available for viewing without charge or registration. Litigation Developments: Mortgage Servicers Cannot Be Sued Under Ohio s Consumer Sales Practices Act Ohio s Consumer Sales Practices Act ( OCSPA or the Act ) prohibits unfair or deceptive acts and unconscionable acts or practices by suppliers in consumer transactions. R.C (A) and (A). The Ohio Supreme Court recently held that the servicing of residential mortgage loans is not a consumer transaction, and a mortgage servicer is not a supplier, as both terms are defined under the Act. In Anderson v. Barclay s Capital Real Estate, Inc., the U.S. District Court for the Northern District of Ohio certified the following questions to the Ohio Supreme Court: (1) whether the OCSPA applies to the servicing of residential mortgage loans; and (2) whether mortgage servicers are suppliers under the Act. The Ohio Supreme Court answered both in the negative. Reasoning that because mortgage servicers contract with financial institutions rather than borrowers, the Court concluded that mortgage servicing is a collateral service 5

6 associated with pure real estate transactions. Collateral services, such as escrow or closing services, are expressly excluded from the OCSPA. Despite its acknowledgment that mortgage servicers may have direct interactions with borrowers on behalf of financial institutions, such as during negotiations or modifications of the terms of a loan, the Court concluded that mortgage servicing did not constitute a consumer transaction. In reaching its conclusion, the Court noted that in mortgage servicing, there is no transfer of an item of goods, a service, a franchise, or an intangible, to an individual. The Court differentiated between the provision of services by mortgage servicers to financial institutions and the transfer of a service to borrowers. In further support of its holding, the Court cited the Uniform Consumer Sales Practices Act ( UCSPA ), on which the OCSPA is modeled. The UCSPA states that because land transactions are often regulated by specialized legislation, they are excluded from the UCSPA. In addition, the Court noted that, unlike other states, the Ohio legislature did not include specific language referencing land transactions in the OCSPA despite repeated amendments to the statute. In determining whether mortgage servicers are suppliers under the OCSPA, the Court reasoned that suppliers either cause to happen or seek to enter into consumer transactions. The Court concluded that servicing a mortgage is not causing a consumer transaction to happen. The Court, therefore, concluded that a mortgage servicer is not a supplier under the OCSPA. The attorneys at Weiner Brodsky Kider PC regularly handle cases alleging violation of unfair or deceptive acts or practices (UDAP) laws at the federal and state level. 6