Wednesday, November 30, 2011

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.
The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.
Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.
In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.
For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   
The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.
Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Interim Report
The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.
The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.
The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.
A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.
Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.
The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 
The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.
Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.
For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.
Correcting Foreclosure Deficiencies
Independent Foreclosure Review
As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.
Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.
As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.
Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.
The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 
During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.
Professional Assistance
Contact Us-2
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Interim Status Report: Foreclosure-Related Consent Orders
November 2011
Interagency Review of Foreclosure Policies and Practices
April 2011

Monday, November 28, 2011

Loan Originator Compensation–The Regulatory Examination

The easy part is over. Now the real fun begins.
Since April 6, 2011, the mortgage industry has been required to implement the new loan originator compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.[1] The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits “steering” consumers to loans to receive greater compensation.
I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.[2] Indeed, I have even published a compendium of analysis, called the FAQs Outline – Loan Originator Compensation, which, as of this writing, consists of over 400 FAQs and reaches to over 130 pages. [3] These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.
The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) [4] enacted Title XIV into law, which amended the Truth in Lending Act (TILA) to establish certain mortgage loan origination standards; then to August 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through September 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on January 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.” [5] After that, the FRB offered some conference calls, a webinar – which cleared up some confusion, while causing still other confusion – and occasional updates of the oral, rather than the written, official variety. [6]
When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.
As we all know, generally there is no regulation issued – whether the statutes are at the federal or state level – that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on October 6, 2011 - exactly six months to the day when the Rule became effective - the first examination guidelines for loan originator compensation were promulgated. [7]
In the "State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule," hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The Multi-State Mortgage Committee (MMC) is a ten-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). [8]
Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z - Truth in Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of nondepository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.
When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in the midst of actual reviews of loan originator compensation compliance that we were then conducting for our clients.
Expect the Unexpected
As I have said many times, preparation is protection. Don’t wait for the regulator’s Document Request letter to implement any regulatory requirement. If you wait, by then it’s often too late. Remember, most examinations are look-backs, reaching to the previous examination, or a stated timeframe previous to the current examination. Most examiners have a “No Tolerance” view of firms that cannot provide supporting documents and information in a timely manner. The “record speaks for itself” is the inflexible standard! Our audit and due diligence reviews are the property of our client, and as fully confidential as if the client conducted its own review, with its internal resources – which, of course, is certainly a viable option. So, there really is no excuse for not being prepared for a regulatory examination for loan originator compensation or any other examination.
In my view, undertaking preparedness action for a loan originator compensation examination should consist of the following basics. [9] My remarks include some of my firm’s audit and due diligence practices as well as certain features of the recently issued Examiner Guidelines.
Preparation is Protection
  • It is critical to set forth the bounds of the review. Indicate a research range that utilizes an audit sequence which, in part, incorporates federal Interagency procedures and guidelines implemented prior to the effective date of the Rule, as well as federal Interagency procedures and guidelines effective after the date of the Rule, as promulgated by the Multi-State Mortgage Committee (MMC) examiner guidelines, any federal agency, and, when issued, state government agencies.
  • A significant portion of the review should be devoted to (1) completing the Institution Information Request and Institution Questionnaire provided in the Examiner Guidelines, (2) assembling items required in a Document Request, (3) providing information asked for in an Audit Checklist (whether specifically designed or Interagency), and (4) including independent review criteria through documentation review, on-site transaction testing (if required), off-site sampling of transaction documents, and interviews of institution staff or other parties.

Wednesday, November 16, 2011

The Empire Strikes Back: HUD's Fair Lending Standards

On November 16, 2011, the Department of Housing and Urban Development (HUD) issued a proposal, entitled Implementation of the Fair Housing Act's Discriminatory Effects Standard. Comments from the public are due by January 17, 2012.

This announcement is much more involved than it seems, for HUD, to which Congress gave the authority and responsibility for administering the Fair Housing Act and the power to make rules implementing the Act. In HUD's proposal, a demonstration that a housing practice is supported by a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.

The question of "disparate impact" (euphemistically linked to the "effects test") has deep roots in previous and on-going litigation, rising now to judicial review before the United States Supreme Court.

So, what's at stake? Let's take a closer look.
HUD's Preemptive Attack
It is rare, indeed, when a federal agency, such as HUD, seems to be issuing its position on a matter that is currently before the U. S. Supreme Court. But that is what appears to be happening. The case is Gallagher v. Magner, and on November 7, 2011, the Supremes granted a petition to review the Eighth Circuit's decision reversing summary judgment in the defendants' favor. Yet HUD is not filing an amicus curiae, the normative response expected by a federal agency, it is actually publishing its standards now - after the Supreme Court has decided to review the case.

To say HUD's tactic is unusual, is a considerable understatement!
Purpose of HUD's Proposal
So what is the basis of HUD's "preemptive strike," if I might be at liberty to use that term?

Here is HUD's stated purpose for its issuance:
"Although there has been some variation in the application of the discriminatory effects standard, neither HUD nor any Federal court has ever determined that liability under the Act requires a finding of discriminatory intent. The purpose of this proposed rule, therefore, is to establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act."

Now to make sense of that statement of purpose, we'll need to give some consideration to Gallagher v. Magner.
Gallagher v. Magner
Gallagher v. Magner (hereinafter Gallagher), is a claim by owners of rental properties against the City of St. Paul's alleged "practice" of "aggressively enforcing" its Housing Code.

The case arose when a group of landlords claimed that officials in the City of St. Paul, Minnesota, targeted rental properties for housing code violations, with a disparate impact on African-American tenants. Despite the lack of evidence showing intent, the Eighth Circuit Court of Appeals upheld a finding of Fair Housing Act violations.
The Route to the Supreme Court
Phase 1:
The district court granted the defendants' motion for summary judgment.
Phase 2:
The Eighth Circuit reversed with respect to the plaintiffs' "disparate impact" claim under the Fair Housing Act (FHA), 42 U.S.C. § 3604(a)-(b). In so holding, the Eighth Circuit applied a three prong "burden-shifting" approach requiring: (a) a prima facie case of disparate impact on protected classes; (b) a showing by the defendant that the challenged policy or practice has a "manifest relationship" to a legitimate, non-discriminatory policy objective; and (c) a showing by the plaintiffs that there exists "a viable alternative means" to meet the legitimate objective without discriminatory effects. [619 F.3d at 833-34]

The Eighth Circuit described the "policy or practice" at issue as "the City's aggressive Housing Code Enforcement practices," including allegations that "the City issued false Housing Code violations and punished property owners without prior notification," invitations to "cooperate" with the enforcement authority, or adequate time to remedy Housing Code violations." [Idem 834]

The court held that the plaintiffs presented a prima facie case of disparate impact by presenting evidence that (1) the city had a shortage of affordable housing; (2) racial minorities were disproportionately represented in the pool of those requiring affordable housing; (3) the city's "aggressive enforcement" of its code made ownership of rental properties more expensive; and (4) these increased costs to owners resulted in less affordable housing in the city. [Idem 834-35]

The City of St. Paul's position, when seeking certiorari from the Supreme Court, stated that increased costs relating to enforcement of a housing code would always have a prima facie disparate impact in cities where there is insufficiently low income housing and, of course, minorities are disproportionately in need of such housing.

So, the court found that there was a prima facie case of disparate impact, and the City of St. Paul had demonstrated that the challenged "aggressive enforcement" of its Housing Code promoted legitimate objectives; however, the court also held that the plaintiffs had produced evidence of a viable alternative without discriminatory effect.

Monday, November 14, 2011

New Mortgage Servicing Practices

On August 10, 2010, the New York State Banking Department issued new regulations that address the business practices of mortgage loan servicers and establish additional consumer protections for homeowners.

Part 419 of the Superintendent's Regulations, which went into effect on October 1, 2010, were a follow-up to the adoption of Part 418 in July 2009, which established standards and procedures for the registration of mortgage loan servicers in New York. The regulations implement certain provisions of the Mortgage Lending Reform Law enacted in 2008 to address the foreclosure crisis and establish greater consumer protections for subprime and high-cost home loans.

Recently, Benjamin M. Lawsky, the Superintendent of Financial Services of New York's Department of Financial Services and Banking Department, announced that the Department had entered into two agreements with certain servicers to implement new servicing practices. The Department considers these new servicing requirements to be landmark changes, and they form the basis of the new Mortgage Servicing Practices.

In the first instance, Superintendent Lawsky announced on September 1, 2011 that Goldman Sachs Bank, Ocwen Financial Corp, and Litton Loan Servicing LP agreed to adhere to the new Mortgage Servicing Practices. The agreement, entitled "Agreement on Mortgage Servicing Practices," was required by the Department as a condition to allowing Ocwen's acquisition of Litton, the Goldman Sachs mortgage servicing subsidiary. With the Litton acquisition, Ocwen's mortgage servicing entity, Ocwen Loan Servicing, LLC becomes the 12th largest servicer in the nation. The servicer has 60 days from the date of the acquisition to implement the provisions and requirements of the Mortgage Servicing Practices.

In the second instance, Superintendent Lawsky announced on November 10, 2011 that Morgan Stanley and its mortgage servicer Saxon, American Home Mortgage Servicing, and Vericrest Financial had agreed to the new Mortgage Servicing Practices.

The changes are substantial and clearly the Department is committed to enforcing them. Maybe you would suggest other changes. In any event, these servicing requirements will benefit both the consumer and the mortgage industry.

It is likely that these new Mortgage Servicing Practices will become a model in other states.

The following is a brief review of these new practices.
The Department has consumer protection concerns relating to practices "highlighted in the media" that have been prevalent in the mortgage servicing industry generally, including but not limited to, (1) the practice of "Robo-signing," (2) referring to affidavits in foreclosure proceedings that falsely attest that the signer has personal knowledge of the facts presented therein and/or were not notarized in accordance with state law; (3) weak internal controls and oversight that may have compromised the accuracy of foreclosure documents; (4) unfair and improper practices in connection with loss mitigation, including improper denials of loan modifications; and, (5) imposition of improper fees by servicers, among others.
-Document Execution and Accuracy of Documentation
-Ownership of Note, Foreclosures
-Quality Assurance and Audits
-Oversight of Third Party Vendors
-Notices, Single Point of Contact and Modifications for Transferred Servicing Files
-Borrower Communication
-Independent Evaluation of Loan Modification Denials
-Restrictions on Dual Tracking
-Application of Payments
-Servicing Fees
-Force-Placed Insurance
-Compliance with Federal and State Law
  • "Robo-signing," where servicer staff signed affidavits stating they reviewed loan documents when they had not actually done so.
  • Weak internal controls and oversight that compromise the accuracy of foreclosure documents.
  • Referring borrowers to foreclosure at the same time as those borrowers are attempting to obtain modifications of their mortgages or other loss mitigation.
  • Improper denials of loan modifications.
  • Failing to provide borrowers with access to a single customer service representative, resulting in delays or failure of the loss mitigation process.
  • Imposition of improper fees by servicers.
1) End Robo-signing and impose staffing and training requirements that will prevent Robo-signing.
2) Require servicers to withdraw any pending foreclosure actions in which filed affidavits were Robo-signed or otherwise not accurate.
3) End "dual tracking", for instance referring a borrower to foreclosure while the borrower is pursuing loan modification or loss mitigation, and prohibit foreclosures from advancing while denial of a borrower's loan modification is under an independent review, which is also required by the agreements.
4) Provide a dedicated single point of contact representative for all borrowers seeking loss mitigation or in foreclosure so borrowers are able to speak to the same person who knows their file every time they call.
5) Require servicers to ensure that any force-placed insurance be reasonably priced in relation to claims incurred, and prohibit force-placing insurance with an affiliated insurer.
6) Impose more rigorous pleading requirements in foreclosure actions to ensure that only parties and entities possessing the legal right to foreclose can sue borrowers.
7) For borrowers found to have been wrongfully foreclosed, require servicers to ensure that their equity in the property is returned, or, if the property was sold, compensate the borrower.
8) Impose new standards on servicers for application of borrowers' mortgage payments to prevent layering of late fees and other servicer fees and use of suspense accounts in ways that compounded borrower delinquencies and defaults.
9) Require servicers to strengthen oversight of foreclosure counsel and other third party vendors, and impose new obligations on servicers to conduct regular reviews of foreclosure documents prepared by counsel and to terminate foreclosure attorneys whose document practices are problematic or who are sanctioned by a court.

Tuesday, November 8, 2011

CFPB Issues “Early Warning Notice” Procedures

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.
This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.
The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.
The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.
The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.
Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.
In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.
The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.
Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.
The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.
The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.
The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.
Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.
Submissions may be discoverable by third parties in accordance with applicable law.
The written statement must:
-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.
The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.
If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.
Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.
Law Library Image
Consumer Financial Protection Bureau
Early Warning Notice
Bulletin 2011-04
November 7, 2011
Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011