Alston & Bird Consumer Finance Blog

Mortgage Loans

FHFA Proposes New Minimum Financial Requirements for Fannie Mae and Freddie Mac Seller/Servicers

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A&B ABstract

 In keeping with broader scrutiny on non-bank servicers, the Federal Housing Finance Agency (FHFA) is proposing new financial eligibility requirement for non-bank servicers doing business with Fannie Mae or Freddie Mac.

The Proposal:

On January 31, the FHFA proposed new financial eligibility requirements for approved nonbank Seller/Servicers doing business with Fannie Mae or Freddie Mac.  FHFA will accept comments for 60 days and anticipates that the requirements will be finalized in the second quarter of 2020 and take effect six months thereafter.

FHFA’s announcement follows the Financial Stability Oversight Council’s (FSOC) finding in its 2019 Report to Congress that nonbank mortgage companies are a “potential emerging threat” to the U.S. economy.  Specifically, FSOC noted that such nonbanks play a large role in originating and servicing mortgage loans, including those held by Fannie Mae, Freddie Mac and Ginnie Mae securities.

FSOC:

The Dodd-Frank Act created FSOC to identify risks, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.  FSOC comprises 10 voting members (one of which is FHFA), and five nonvoting members (that serve an advisory role).

In its annual report to Congress, FSOC made several statements concerning the potential risks from nonbank mortgage companies.  For example, FSOC found that nonbanks “rely heavily on short-term funding sources,” “typically have low capital levels,” and “have few resources to absorb adverse economic shocks.”  FSOC concluded that “[g]iven these fragilities, the nonbank sector could potentially be a source of weakness as a contraction in the largest nonbanks’ ability to originate and service mortgages may transit risk to the broader financial system  through several channels.”   FHFA is taking steps to address FSOC’s concerns.

FHFA’s New Financial Requirements

FHFA proposes the following updates to its minimum net worth and liquidity requirements:

Increased Net Worth for Ginnie Mae Servicing:

FHFA would increase by 10 basis points the minimum net worth requirement to service Ginnie Mae mortgages.  Currently, the minimum net worth is $2.5 million plus 25 basis points of the unpaid principal balance for total 1-4 unit residential mortgage loans serviced.  FHFA proposes to increase the minimum net worth for servicing of Ginnie Mae mortgages to 35 basis points.

Liquidity Requirements
Increased Minimum Base Liquidity:

Currently, the base liquidity is 3.5 basis points of the aggregate unpaid principal balance of single-family mortgages serviced by the Seller/Servicer for Freddie Mac, Fannie Mae and Ginnie Mae (Agencies). FHFA proposes to increase the base liquidity to 4.0 basis points, plus an additional 10 basis points of the unpaid principal balance of Ginnie Mae servicing.

Reduced Allowable Assets: 

FHFA would revise the allowable assets for determining liquidity to exclude the unused/available portion of the committed servicing advance lines of credit.  As a result, it would limit allowable assets for liquidity to: (i) cash and cash equivalents and (ii) Available for Sale or Held for Trading Investment Grade Securities: Agency MBS, Obligations of GSEs or U.S. Treasury Obligations.

Changes to NPL Threshold and Charges:

FHFA also proposes increases to the liquidity requirements for nonperforming loans (NPLs), including loans 90 days or more delinquent and loans in the foreclosure process.  Under the proposed standards, FHFA would reduce the NPL threshold from 6% to 4%.  As a result, a Seller/Servicer would be subject to increased liquidity requirements (in the form of an Incremental NPL Charge) for the portion of non-performing single-family mortgages serviced by the Agencies.  The proposal also would increase the Incremental NPL Charge from 200 basis points to 300 basis points.  Thus, for NPLs, Seller/Servicers would be subject to an incremental 300 basis point charge for the portion of Agency NPLs that exceeds 4%.

The proposal clarifies that the requirements apply to the master servicer only; loans that are subserviced are not subject to these capital or liquidity requirements. Rather, a subservicer must meet minimum net worth and tangible capital ratio requirements.  The minimum capital ratio remains unchanged under the proposal.

Further, FHFA clarifies that only nondepository institutions will be tested against the new liquidity requirements, with reviews done on a quarterly basis. While the proposal requires Seller/Servicers to be in compliance as of the effective date, it also provides Fannie Mae and Freddie Mac latitude to: (1) take appropriate action for a Seller/Servicer who does not maintain compliance; (2) grant exception requests; or (3) institute requirements beyond the minimum for certain Seller/Servicers that pose heightened risk.

Takeaways

Nonbank mortgage servicers should prepare for increased financial requirements taking effect later in 2020.  Seller/Servicers concerned with these requirements and how they will be implemented should consider submitting comments to ServicerEligibility@fhfa.gov.

CFPB Director Provides Update Relating to QM Patch Expiration

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A&B ABstract: A recent letter from Consumer Financial Protection Bureau (“CFPB”) Director Kathleen Kraninger provides clues about the potential future of the so-called “QM Patch.”

Discussion:

In  a December 17, 2020 letter to Senator Mike Rounds (“Letter”), CFPB Director Kathleen Kraninger, revealed a number of interesting insights about the CFPB’s ongoing evaluation of the reformation of the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, including the phase-out of the “QM Patch”.

Background:

The CFPB enacted the QM Patch as a temporary provision of the ATR/QM regulations promulgated pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a qualified mortgage and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

On July 25, 2019, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch”, which is scheduled to expire no later than January 10, 2021.  In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.

The Letter:

Based on public comments submitted in response to the ANPR, Director Kraninger indicated that the CFPB, in amending the definition of what constitutes a qualified mortgage, will issue a Notice of Proposed Rulemaking (“NPRM”) by no later than May 2020.

The Letter provides further detail on the NPRM.  First, the CFPB will propose to eliminate the current 43% debt-to-income requirement and impose an alternative measure such as a pricing threshold (“i.e., the difference between the loan’s APR and the average prime offer rate for a comparable transaction”).  Director Kraninger asserted that the pricing threshold would help facilitate the offering of “responsible, affordable mortgage credit”.   Second, the CFPB will propose to extend the expiration of the QM Patch for a short period pending the effective date of the proposed alternative.

Perhaps even more significantly, Director Kraninger indicated that the CFPB in a separate NPRM may adopt a new “seasoning” mechanism that would confer QM Safe Harbor treatment to certain loans that have a history of timely payments.  This mechanism would greatly facilitate the sale and securitization of non-QM loans that may have missed being classified as QM due to some blemish prior to consummation.

Takeaway:

Director Kraninger’s brief comments in the Letter indicate that the CFPB is determined to eliminate the QM Patch after a short extended transition period.   Further, the CFPB has demonstrated its commitment to reforming the definition of a qualified mortgage in a manner that will enhance credit availability to a broader spectrum of the credit markets—or so it is thought—and give a lifeline to seasoned highly performing loans that have previously been excluded from the gold standard QM Safe Harbor  category.   The credit markets anxiously await the promulgation of these anticipated proposed rulemakings.

 

NYDFS Issues Final Mortgage Loan Servicer Business Conduct Rules (Part 419)

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The New York Department of Financial Services (“NYDFS”) has issued final mortgage servicer business conduct rules found in Part 419 of the Superintendent’s Regulations.  Our January 24 client advisory provides a full analysis of the changes, which include:

  • New provisions governing affiliated business arrangements;
  • Expanded restrictions on servicing fees (including property valuation fees);
  • A broader servicer duty of fair dealing;
  • Expanded protections available to delinquent borrowers and borrowers seeking loss mitigation assistance; and
  • Detailed third party vendor management requirements.

Although the rules took effect on December 18, the NYDFS added Section 419.14 to provide a 90-day transition period for servicers who were compliant with the previous version of the rules as of the effective date.

FTC Announces Settlement with Mortgage Broker for Publishing Personal Information about Consumers

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A&B ABstract:

On January 7, 2020, the Federal Trade Commission (FTC) announced a complaint and settlement against California mortgage broker Mortgage Solutions FCS, doing business as Mount Diablo Lending, and its owner, Ramon Walker, (collectively, Mortgage Solutions).  The FTC’s complaint (Complaint) alleged that in response to negative Yelp reviews posted by applicants and customers, the company publicly posted sensitive personal information, including financial information, about those individuals gleamed that it gleaned from mortgage applications and credit report.  Specifically, according to the Complaint, that information included sources of income, payment and credit histories, taxes, family relationships and health. The FTC alleged that Mortgage Solutions’ actions violated the Fair Credit Reporting Act (FCRA), the Gramm Leach Bliley Act (GLBA) and Section 5 of the FTC Act. As part of the settlement, Mortgage Solutions will pay a $120,000 civil penalty for violating the FCRA.

Discussion

The Complaint, filed in the U.S. District Court for the Northern District of California by the U.S. Department of Justice on behalf of the FTC, alleges that between June 2015 and August 2016, defendant Walker published or caused to be published responses to negative consumer reviews about Mortgage Solutions’ services that appeared on the consumer review website, Yelp.com, that were publicly viewable on Yelp’s page for Mount Diablo Lending.  The Complaint also alleges that required privacy notices provided to customers were inadequate and were not followed, and that the company’s information security program was inadequate.   A summary of the FTC’s complaint counts follows:

Violations of the FCRA: 

The Complaint alleges that Mortgage Solutions impermissibly used consumer reports in violation of the FCRA.  According to the Complaint, some of the personal information that Mortgage Solutions publicly posted about consumers was information contained in consumer reports it obtained.  The FCRA allows use of consumer reports only for the permissible purposes identified in section 604(a) of the FCRA; however, public dissemination – such as Mortgage Solutions’ posting of consumers’ information on Yelp.com – is not a permissible purpose

Violation of the GLBA Privacy Rule (Regulation P): 

The Complaint alleges that Mortgage Solutions failed to provide a clear, conspicuous and accurate privacy notice and impermissibly disclosed non- public personal information about some of its customers in violation of the GLBA Privacy Rule.  The Privacy Rule requires, among other things, that a financial institution provide annually a clear and conspicuous notice to customers that accurately reflects the financial institution’s privacy policies and practices, including its security policies and practices.

According to the Complaint, from October 2012 until April 2018, Mortgage Solutions disseminated a privacy notice that omitted or misstated significant information. Among other things, the notice indicated that the only personal information collected by Mortgage Solutions is customers’ Social Security numbers and that Mortgage Solutions did not share this personal information with any third party for any reason. In fact, the company collected myriad types of sensitive personal information, including income information, credit histories, and dates of birth.  The Complaint further alleges that Mortgage Solutions’  posting of customer information on Yelp.com caused the privacy notice to be inaccurate, and additionally violated the Privacy Rule

Violation of the GLBA Safeguards Rule:

The Complaint alleges that  Mortgage Solutions failed for a period of time to develop and implement an information security program, and when it did implement a program, it fell short of regulatory standards.  The Safeguard’s Rule requires financial institutions to implement a comprehensive written “information security program” containing reasonable administrative, technical, and physical safeguards. It further requires that financial institutions regularly test or otherwise monitor the effectiveness of the safeguards’ key controls, systems, and procedures.

According to the Complaint, Mortgage Solutions did not have an information security program until September 2017 (in spite of being in business since at least 2012), and when it did finally implement a plan, the plan made no provision for regularly testing or assessing its own effectiveness.  Further, according to the complaint, Diablo failed to engage in such regular testing or assessment.

Violation of Section 5 of the FTC Act: 

The Complaint alleges that publicly posting consumers’ personal information was deceptive and unfair under Section 5 of the FTC Act.

Relief:

In addition to paying a $120,000 civil penalty, the terms of the settlement prohibit Mortgage Solutions from misrepresenting its privacy and data security practices; misusing credit reports; and improperly disclosing personal information to third parties. It also must implement a comprehensive data security program designed to protect the personal information it collects and obtain third-party assessments of its information security program every two years. Finally, the company must designate a senior corporate manager responsible for overseeing the information security program to certify compliance with the order every year.

Takeaways

The FTC is continuing to assert its authority against financial institutions within its jurisdiction, including its general authority to prevent unfair and deceptive acts or practice under the FTC Act, and its authority with respect to the FCRA and GLBA.

In addition, this case represents the FTC’s latest effort to crack down on companies who attempt to restrict or retaliate against consumers negative public reviews on social media and other public websites.  In 2019 the FTC announced five cases alleging violations of the Consumer Review Fairness Act, which bans form contract provisions that restrict a consumer’s ability to post reviews about a seller’s goods, services, or conduct. Those cases challenged illegal “confidentiality” or “non-disparagement” clauses that sometimes threatened consumers with financial penalties for posting reviews.

 

 

Congress Extends Expired Mortgage Insurance Deductions

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On December 20, 2019, the President signed into law House Resolution 1865, the Further Consolidated Appropriations Act, 2020, which is now Public Law 116-94. The law extends the deduction for mortgage insurance premiums (“MIP”) retroactive to 2018, applies to amounts paid or accrued after December 31, 2017, and is set to expire once again on December 31, 2020.  Mortgage lenders and servicers should take note of this extension for MIP deductibility as they prepare IRS Form 1098 for the 2019 tax year.