Alston & Bird Consumer Finance Blog

Mortgage Loans

South Carolina Revisiting Borrower Preference Requirements

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A&B ABstract: The South Carolina Department of Consumer Affairs  (“Department”) announced that it is soliciting comments on proposed Regulation 28-75, which would provide mortgage lenders with additional guidance on the state’s attorney and insurance agent borrower preference requirements.

Determination of Borrower Preferences

Section 37-10-102 of the South Carolina Consumer Protection Code requires a creditor to ascertain and comply with the consumer’s preference as to the legal counsel the consumer wants to hire to conduct the transaction. The requirement is not new – it was enacted in 1976 and amended in 1996 – but it is vigilantly enforced by state regulators.  Despite the Department’s issuance of numerous guidance documents (most recently in February 2017, as discussed in a previous client advisory), the requirement still presents compliance challenges to mortgage lenders.

According to regulators, satisfying Section 37-10-102 requires: (i) providing consumers the notice of the right to select an attorney and insurance agent within three days of an application; (ii) ascertaining these preferences before loan closing; and (iii) assuring that the borrower-chosen providers execute the loan closing. ‘

The Department recognizes a safe harbor, of sorts, if the lender provides the borrower with a form (based on Consumer Protection Code Administrative Interpretation 10.102(a)-8302) and the form is fully completed and signed and dated by the borrower.

The statute is designed to ensure that lenders do not improperly force or steer borrowers to an attorney. But what happens when a borrower states his or her preference to the lender, rather than including it on the form? Or if the borrower truly doesn’t have a preference?  Must a lender require a borrower to select an attorney when the borrower doesn’t have a choice?  The Department is poised to provide additional clarity to the industry. However, the Department’s announcement is light on details, merely noting that a future regulation may clarify creditors’ responsibilities and provide definitions.

Takeaway

Additional guidance from the Department is a welcome development.  Interested parties should submit written comments by 5 p.m. on October 29, 2019 to Kelly Rainsford, Deputy of Regulatory Enforcement, South Carolina Department of Consumer Affairs, P.O. Box 5757, Columbia, SC 29250.

Massachusetts Settlement Agreements Highlight AG’s Compliance Expectations

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A&B Abstract: In a series of 2019 settlement agreements, the Massachusetts Attorney General has publicly provided insights into her compliance expectations for residential mortgage servicers.  The settlements demonstrate a focus on compliance with the Commonwealth’s Act to Prevent Unlawful and Unnecessary Foreclosures, codified in part as M.G.L. Chapter 244, Section 35B (“Section 35B”) and its unfair and deceptive acts and practices law (the “UDAP law”), found in Chapter 93A of the Massachusetts General Laws.

Section 35B and Chapter 93A Expectations

Section 35B prohibits a creditor (defined to include a servicer) from causing publication of notice of a foreclosure sale upon “certain mortgage loans” unless it has first taken reasonable steps and made a good faith effort to avoid foreclosure.  To be considered to have taken reasonable steps and made a good faith effort to avoid foreclosure, a creditor must have provided a statutorily defined notice (“35B Notice”) at the time a borrower is in default.  Additionally, if certain criteria are met, a creditor must conduct a review to determine whether the borrowers are eligible for a loan modification prior to publishing a notice of foreclosure sale pursuant to M.G.L. ch. 244, Section 14. While the requirements may sound simple, they are complex and difficult to operationalize.

To avoid violations of Section 35B and the UDAP law, the Massachusetts Attorney General expects servicers to:

  • Accurately record, capture or note in the servicing system when borrowers exercise their right to pursue a loan modification under Section 35B by returning the mortgage modification options form (“MMO”), as required by 209 CMR 56.09;
  • Complete a timely review of borrowers’ loan modification applications, as required by Section 35B(c), and avoid causing undue delay in the loan modification review process;
  • Disclose to borrowers the servicer’s determination of the income, debts and obligations and the net present value assessment performed by the servicer in the review of the loan modification, as required by Section 35B(c);
  • Offer modifications, including short-term and interest-only modifications that reflect the borrower’s future ability to repay the modified mortgage loan according to its scheduled payments, as required by Section 35B(b);
  • Not deny loan modification applications on the basis that the borrower did not return sufficient documents to be reviewed, if the servicer did not adequately or timely communicate the requirements to the borrowers or identify when all such documents have in fact been submitted;
  • Provide borrowers with notice of their right to present a counter-offer after being offered a loan modification as part of a Section 35B review, as required by Section 35B(c);
  • Take reasonable steps and make a good faith effort to avoid foreclosure when a borrower requested a loan modification;
  • Not record affidavits pursuant to Section 35B(f) attesting compliance with the requirements of Section 35B where deficiencies exist  in the servicers’ Section 35B loan modification review process, including the failure to identify MMO forms returned by the borrower; and
  • Accurately and timely report accurate borrower response rates under Section 35B to the Massachusetts Division of Banks (“DOB”) as required by 35B(g).

Additional Chapter 93A Expectations

To avoid UDAP concerns, servicers should also:

  • Provide borrowers in default meaningful access to a single point of contact (“SPOC”), such that borrowers can (i) reach a person who can provide information about the modification application, foreclosure status or other account information, and (ii) adequately ensure accessibility to company representatives to ensure borrowers do not encounter connectivity issues, including busy signals, long hold times, and multiple transfers without reaching a live representative;
  • Provide successors-in-interest (“SIIs”) information about what documentation is required to access the account, provide SIIs accurate information as to the availability and requirements related to loss mitigation programs, and adequately note in borrower account files a confirmed SII, such that surviving spouses or other types of SIIs are not required to resubmit death certificates or other documentation, when a servicer already has  such documentation;
  • Proactively  communicate with limited English proficiency (“LEP”) borrowers in their native language to provide information related to the mortgage account, adequately notate in the borrower account files a borrowers LEP status such that LEP borrowers do not have to reestablish their language-access needs with each contact with a servicer, and do not make outgoing calls to previously confirmed LEP borrowers without first engaging reasonably available translation services, such that LEP borrowers (i) encounter an English-speaking representative, (ii) face unexplained holds while translation services are engaged, and (iii) become confused about the nature of the call and disconnect;
  • Allow borrowers to complete short sales by (i) approving, explicitly or implicitly, a listing price in connection with a short sale application only after confirming the loan’s investor would accept an offer received at that price, (ii) not countering or rejecting short sale offers that meet the approved listing price due to a failure to obtain investor proceeds requirements prior to explicitly or implicitly approving the listing price, (iii) having adequate processes to resolve disputes in valuation of a property, and (iv) having a standardized or consistent review process such that borrowers attempting to complete a short sale do not have to relist the property to meet the servicer’s requirements; and
  • For in-flight modifications, ensure that loss mitigation applications initiated by a prior servicer are continued and  identify and honor loan modifications offered by previous servicer.

Takeaway:  

These settlement agreements serve as a reminder that Massachusetts continues to be active in mortgage servicing issues and will use its broad and sometimes nebulous UDAP authority to enforce activities that aren’t specifically regulated under existing law.

 

Agencies Raise Appraisal Threshold Exemption

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A&B ABstract:

A new rule from the federal banking regulators reduces the number of residential mortgage transactions for which an appraisal is required.  The rule also incorporates changes to federal appraisal requirements made by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

On September 27, 2019, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the “Agencies”) issued a much-anticipated Final Rule increasing the threshold below which an appraisal is not required for a residential mortgage transaction from $250,000 to $400,000.  (The announcement parallels a similar increase in the de minimis thresholds for commercial transactions that the Agencies announced in April 2018.)  The rule takes effect October 9, 2019 (the day after publication in the Federal Register), except as otherwise noted below.

Background

The Agencies first promulgated regulations and guidance required by Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) in 1994.  While FIRREA generally requires a regulated lending institution to obtain an appraisal to support any “federally related transaction,” the Agencies have identified more than a dozen categories of appraisals that are exempt.  Until the recent rule adoptions, the $250,000 de minimis threshold had remained unchanged since its creation.

Impact of the Rule

The Final Rule does not impact the requirement that a regulated lending institution obtain an evaluation of the property, consistent with the Agencies’ regulations and the Interagency Appraisal and Evaluation Guidelines, for transactions below the de minimis threshold.  Notably, broker price opinions and automated valuation models (“AVMs”), which FIRREA separately addresses, among the valuation products that do not meet that standard.

In addition, the Final Rule creates a new exemption from the appraisal requirement.  Consistent with the Regulatory Relief Act, effective January 1, 2020, the Agencies will no longer require an appraisal for a rural residential mortgage loan transaction that meet the qualifications set forth in 12 U.S.C. § 3356.

Finally, effective January 1, 2020, the Final Rule requires that appraisals performed in connection with federally related transactions be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.

Takeaway:

The increased appraisal exemption thresholds are welcome news for the residential and commercial mortgage markets.  The augmented exemption will be especially helpful to originators of smaller loans (such as second-lien home equity lines of credit) and fix/flip, non-owner-occupied loans that typically have smaller transaction values.  However, lenders should note the requirements for evaluations (still required for exempt transactions) – a topic that is drawing increased attention.

CSBS’s State Examination System Coming Soon

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A&B ABstract

The Conference of State Bank Supervisors (CSBS) revolutionized state licensing with the National Mortgage Licensing System (NMLS) by providing a more uniform approach to state licensing of non-bank financial services companies.  CSBS will bring a similar transformation to supervising such companies.

The New State Examination System

CSBS designed the State Examination System (SES) to be an end-to-end system for scheduling a single or multi-state examination to completion; the system can also be used for investigations, enforcement actions and complaints.

Within the SES, regulators will be able to access an agency library of resources, track examination time and expenses, prepare and send information requests, and engage in collaborative scheduling.  Compliance and examination support staff within companies will be able to schedule examinations, receive and respond to information requests, and receive completed examination reports.  Further, such staff also will be able to access the licensee’s company NMLS record, which should decrease regulator requests for additional information throughout the course of an examination. How the system will work outside the examination context is yet to be seen.

CSBS has announced a pilot of the SES system with 11 agencies and nine mortgage or money servicer examinations.  The pilot is scheduled to run from October 1 to December 31, 2019.  Assuming that the pilot program runs smoothly, CSBS expects to make SES available nationwide early in 2020.

Takeaways

The CSBS should be commended for taking this initiative to modernize the supervision process and make it less burdensome for non-bank financial institutions and regulators alike.  Companies should keep an eye out for training on this new system in the not-so-distant future.

CFPB Rules Permit Qualified Mortgage “Cures”

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A&B Abstract:

What happens when a proposed qualified mortgage is later discovered to have points and fees in excess of the statutory threshold?  The answer lies in a cure provision scheduled to sunset on January 21, 2021.

 CFPB Rules Permit Qualified Mortgage “Cures”

What happens to an originator or assignee of a “qualified mortgage” who discovers after the loan has been consummated that the points and fees charged in connection with the transaction exceed the permitted 3% threshold?  Such a change not only jeopardizes the QM status of the loan, but also prevents the mortgage from being considered a “qualified residential mortgage” (and, therefore, from being exempt from risk retention requirements) if it is intended to be securitized.  Is the loan irrevocably relegated to non-QM and non-QRM status?  Under certain circumstances, the answer is “no”.

A little-known provision in the CFPB’s qualified mortgage/ability-to-repay rules provides a “cure” for loans consummated before January 10, 2021.  When the creditor or assignee determines after consummation that the transaction’s total points and fees exceed the applicable limit (in most situations, 3% of the total loan amount), the creditor or assignee may “cure” the error and preserve and the QM status of the loan.

The “cure” is available if the following conditions are met:

  • Within 210 days of consummation, the creditor or assignee refunds the excess fees to the borrower;
  • The loan otherwise complies with the other QM requirements;
  • The loan is not 60 days past due;
  • The borrower has not instituted an action in connection with the loan or apprised the creditor, assignee or servicer that the points and fees exceed the applicable threshold; and
  • The creditor or assignee, as applicable, maintains and follows policies and procedures for post-consummation review of the points and fees charged to borrowers.

The Take Away       

This “cure” provision is a valuable tool for creditors and their assignees and may be used under the circumstances described above to salvage the QM and QRM status of a mortgage loan.  However, this limited “cure” provision does not remedy other errors that could jeopardize the loan’s QM status, such as failure to adhere to Appendix Q underwriting standards.

In order to take advantage of this cure provision, it is imperative that creditors and their assignees develop post-closing quality control mechanisms to ensure that the points and fees charged in connection with loans intended to be QMs do not exceed the prescribed thresholds.   Note, however, that unless extended, this cure mechanism sunsets on January 21, 2021.