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.
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New York Enacts HECM Law
A&B ABstract:
Effective March 5, 2020, New York Assembly Bill 5626 (“AB 5626”) regulates the origination and servicing of the federal U.S. Department of Housing and Urban Development (“HUD”) home equity conversion mortgages (“HECMs”).
Significant Impact to Mortgage Lenders and Servicers
With the stated purpose of providing “new regulations on reverse mortgage products pertaining to the marketing, origination, and management” of HECMs, AB 5626 will expand New York’s reverse mortgage law to apply to HECMs. The following provides a brief summary of AB 5626’s substantive provisions:
Applicability:
The measure applies to an “authorized lender,” as defined in section 280 of the Real Property Law. Under current law, authorized lenders of proprietary reverse mortgage loans are subject to additional approval by the Superintendent of the New York Department of Financial Services. It is unclear if such additional approval will now be required to originate or service HECMs.
Advertising and Offering of Reverse Mortgages:
In addition to imposing new disclosure obligations and prohibiting an authorized lender or any other party from engaging in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans, AB 5626 prohibits using the words “government insured” or other similar language representing that reverse mortgage loans are insured, supported and sponsored by any governmental entity in any solicitation, or representing that any reverse mortgage loan is other than a commercial product. This may prove challenging given that HUD characterizes its own HECM loan product as a “reverse mortgage insured by the U.S. Federal Government.”
Periodic Statements:
The measure requires an authorized lender to provide additional disclosures on the borrower’s periodic statement when the authorized lender administers payments for property obligations (such as tax payments or mortgage or homeowners insurance) and when those payments are derived from the proceeds of the mortgage.
Life Expectancy Set Aside (“LESA”):
Under AB 5626, an authorized lender must provide notice to the borrower by telephone and first-class mail when the borrower’s home equity line of credit or LESA is depleted to ten percent or less of its value (and again when the borrower’s line of credit or LESA is depleted entirely). The measure does not specify the timeframe for providing this notice.
Advances:
The measure prohibits an authorized lender from making an advance payment for any obligation arising from the mortgaged real property and, if there is an insurance or tax default, the authorized lender may only pay those premiums and/or taxes which are in arrears. It is unclear if this provision applies to borrowers who have established a LESA, as HUD’s HECM regulations require a mortgagee to make disbursements for property charges before the bills become delinquent.
Occupancy Defaults:
The measure addresses situations where an authorized lender seeks to foreclose on a HECM loan because the property is no longer the primary residence of, or occupied by, the borrower.
If the authorized lender does not receive any responses to mailings related to verification of the borrower’s primary residence and/or occupancy, prior to commencing any foreclosure proceeding the authorized lender must: (a) call the borrower (or, if the borrower cannot be reached by telephone, a designated third party specified by the borrower), and (b) visit the property, in person. During such visit, the authorized lender or its agent must provide clear information as to who they are, that the visit pertains to the reverse mortgage, the reason for the home visit, and the telephone number to call for further information.
Further, the authorized lender must wait at least 30 days following such visit, in addition to any additional time or notice requirements specified by any other provision of law, before initiating a foreclosure action on the basis that the mortgaged property is no longer the primary residence of the borrower. If the borrower contacts the authorized lender and provides proof of residence or occupancy after such visit, but before the commencement of a foreclosure action, the authorized lender is barred from initiating such foreclosure action. Presumably, this provision would not require an authorized lender to violate privacy laws, debt collection laws (which may only permit the authorized lender to obtain contact information and not discuss the debt), or trespassing laws.
Inspection Fees:
AB 5626 prohibits an authorized lender from charging the borrower any fee for the visit or inspection, including any and all inspections conducted by the authorized lender to verify the status of the reverse mortgage, or any suspected or actual default condition.
Closing Attorneys:
The measure requires both the authorized lender and the borrower to be represented at closing by an attorney, and to have at least one attorney present to conduct the closing. It is unclear who is responsible for the cost of the borrower’s attorney.
Penalties:
Failure to comply with the requirements of AB 5626 could result in significant penalties. For example, any person injured by new Section 280-b of the Real Property Law (which the measure creates) or HUD’s HECM regulations may bring an individual action to recover treble actual damages plus the prevailing plaintiff’s reasonable attorney’s fees. Moreover, compliance with the provisions is a condition precedent to bringing a foreclosure action; failure to comply is a complete defense to a foreclosure. Accordingly, AB 5626 could have a significant impact on mortgage lenders and servicers of HECMs.
Takeaway:
By adding several new obligations on top of HUD’s existing requirements, this law may impose significant burdens on lenders and servicers. We anticipate amendments to existing Banking Regulation Part 79 that, hopefully, will clarify many ambiguities.
New Jersey Requires License to Hold Mortgage Servicing Rights
A&B ABstract: New Jersey is the latest state to require the licensing of an entity that passively invests in whole residential mortgage loans on a servicing-released basis or in the servicing rights in such loans. The New Jersey Department of Banking and Insurance recently released Bulletin No. 19-13 to elaborate on the state’s new licensing requirement, and to clarify that applications must be submitted by April 13, 2020.
Discussion
New Jersey enacted the Mortgage Servicers Licensing Act, N.J.S.A. 17:16F-27 to -46 (“Act”), on July 28, 2019, to create a new licensing requirement for entities “servicing” New Jersey mortgage loans. Notwithstanding the effective date of the Act, the New Jersey Department of Banking and Insurance (“DOBI”) did not provide a means by which such an entity may apply for a Mortgage Servicer License or clarification regarding the types of activities that constitute “servicing” in the state.
A New Licensing Obligation
In response to the industry’s questions regarding these points, DOBI recently released Bulletin No. 19-13. Bulletin No. 19-13 reiterates that the Act expressly provides that an entity is prohibited from acting, either directly or indirectly, as a mortgage servicer in New Jersey without obtaining a license. The term “mortgage servicer” is broadly defined as:
“[A]ny person, wherever located, who, for the person or on behalf of the holder of a residential mortgage loan, received payments of principal and interest in connection with a residential mortgage loan, records the payments on the person’s books and records and performs the other administrative functions as may be necessary to properly carry out the mortgage holder’s obligations under the mortgage agreement, including, when applicable, the receipt of funds from the mortgagor to be held in escrow for the payment of real estate taxes and insurance premiums and the distribution of the funds to the taxing authority and insurance company.”
The term also includes “a person who makes payments to borrowers pursuant to the terms of a home equity conversion mortgage or reverse mortgage.”
Significantly, Bulletin No. 19-13 states that “[t]he New Jersey Mortgage Servicer License … applies to all holders of mortgage servicing rights, including holders of master servicing rights.” Accordingly, it is now clear that DOBI considers a passive investor in New Jersey whole residential mortgage loans on a servicing-released basis or the servicing rights in such loans to be a “mortgage servicer” and requires such a person to hold a Mortgage Servicer License to conduct business.
Exemptions
Importantly, the Act provides certain exemptions from this licensing requirement, including, but not limited to:
- Any bank, out-of-state bank, credit union chartered in New Jersey, federal credit union, or out-of-state credit union, provided that that bank or credit union is federally insured;
- Any wholly-owned subsidiary of that bank or credit union;
- Any operating subsidiary in situations in which each owner of the operating subsidiary is wholly-owned by the same bank or credit union; and
- Any entity licensed as a Residential Mortgage Lender or Correspondent Residential Mortgage Lender pursuant to the New Jersey Residential Mortgage Lending Act, N.J.S.A. 17:11C-51 to -89 (“RMLA”), as long as it meets mortgage servicer registration requirements under the Act.
DOBI intends to release an application for this license on the Nationwide Multistate Licensing System & Registry this month. Further, DOBI will require all entities that are not exempt from the Act to apply for a Residential Mortgage Servicer License by April 13, 2020. Any entity claiming an exemption on the grounds that it is already licensed under the RMLA should ensure that it is appropriately registered by that date.
Other Provisions of Note
The Act also subjects licensees and other entities engaging in “mortgage servicing” to various regulatory obligations, restrictions, and prohibitions. Specifically, it creates new operational requirements for some mortgage servicers, and creates a list of prohibited activities for all mortgage servicers. Further, the Act provides DOBI with investigative, examination, and enforcement authority, including the power to impose civil monetary penalties of up to $25,000 per violation. DOBI anticipates proposing new rules under the Act to further assist mortgage servicers in meeting their obligations.
Takeaway
As Bulletin No. 19-13 provides that entities operating without a Mortgage Servicer License will be deemed to be engaging in unlicensed activities and may be subjected to an enforcement action, we encourage all persons engaging in “mortgage servicing” in the state to consider whether a license is required early on in the application cycle. This is an area of focus for DOBI, and we expect its continued attention in the months ahead.
Alston & Bird Adds Senior Consumer Finance Litigator in San Francisco Office
Alston & Bird continues its Bay Area growth with the addition of senior litigator Jim McCabe as counsel. McCabe joins from Morrison & Foerster LLP, where he practiced for more than 30 years, most recently as senior of counsel.
“Jim is a top-notch litigator with an impeccable reputation for defending clients in high-stakes civil litigation before state and federal courts at the trial and appellate levels,” said Kristy Brown, Alston & Bird partner and co-leader of the firm’s Litigation & Trial Practice Group. “His track record as a trial and appellate lawyer and experience across a range of commercial and regulatory litigation, including complex class actions, make him a superb choice for clients seeking sophisticated guidance on matters critical to their success.”
In a career spanning more than three decades, McCabe has distinguished himself as a trusted adviser to corporate clients, primarily in the financial services industry.
Among his many notable successes, McCabe has defended financial services companies in more than 100 different class actions and other complex civil litigation encompassing consumer reports and consumer financial products.
Over the past decade, McCabe has represented LexisNexis – a subsidiary of RELX plc – in more than 40 individual disputes and 12 putative consumer class actions asserting claims under the Fair Credit Reporting Act. He also represented LinkedIn in defeating a putative class action that attempted to characterize the company as a consumer reporting agency. And for the Mortgage Bankers Association, he won summary judgment in a putative nationwide class action that challenged the issuance of multiple credit cards to subprime customers, serving as national coordinating counsel for the association and assisting lender defendants in defeating class certification in more than 60 cases asserting claims under the Real Estate Settlement Procedures Act.
In addition to his client work, McCabe has served as a trial skills instructor for the National Institute for Trial Advocacy and the Stanford University Advocacy Workshop.
“Jim brings exceptional litigation capabilities to our San Francisco office and broader financial services practice,” said Teresa Bonder, partner in charge of Alston & Bird’s San Francisco office. “His leadership, experience, and talent deepen our bench of leading litigators and provide another powerful advantage for our clients.”
Changes to the Department of Defense’s SCRA Website Database Could Impact Servicers
A&B ABstract: Servicers should be aware of changes being made to the Department of Defense’s (“DoD”) Servicemembers Civil Relief Act (“SCRA”) website in response to a complaint that the DoD failed to protect the privacy of servicemembers’ personal information.
Discussion
The SCRA provides certain financial and legal protections to active duty service members. Servicers are encouraged to identify and verify eligible populations of active duty servicemembers to ensure they are obtaining the relief benefits to which they are entitled. Under scrutiny for failing to protect the personal information of servicemembers, the DoD is making changes to the SCRA website database that may impact how servicers identify and verify eligible servicemembers.
The Complaint
The complaint alleged that the DoD’s SCRA website violates the Administrative Procedures Act and the federal Privacy Act of 1974 (which regulates how the federal government may collect, maintain, use and disseminate personal information about citizens and permanent residents).
Specifically, the Vietnam Veterans of America, New York State Council, Vietnam Veterans of America Chapter 7, and Thomas Barden (“Plaintiffs”) alleged that the SCRA portal leaves a servicemember’s private information unprotected. (Private information on the site includes dates of active duty service; specific dates on which a reservist, guardsman or individual not currently on active duty has been called up for future active duty; the specific component of the military in which an individual served; and confirmation that the individual served on active duty.) Further, Plaintiffs asserted that the DoD is violating the Federal Information Security Modernization Act by failing to comply with policies that strictly limit the use of social security numbers (“SSNs”). Finally, Plaintiffs asserted that the SCRA website’s purpose is only to determine whether someone is protected by the SCRA; Plaintiffs had no objections to limited disclosure of information for legitimate SCRA purposes.
The Settlement Agreement
The parties reached a settlement agreement (“Agreement”) on October 1, 2019. The Agreement requires the DoD to
make significant changes to the SCRA website to enhance security of the site and better protect the personal information of servicemembers while restricting access, pursuant to the website’s “Terms of Use,” to those individuals and entities who are using the website for its intended purpose, so as to ensure the website achieves its intended purpose.
On or before October 31, 2019, the Agreement requires all users to register for an account on the SCRA website in order to run searches (i.e., single-record or batch searches). DoD will collect the name, mailing address and company name of every user as part of the account creation process.
DoD Obligations under the Agreement
The Agreement also imposes a series of obligations on the DoD. First, on or before October 31, 2019, the Agreement required the DoD to:
- Implement analytics to monitor the use of the SCRA website in order to: (i) identify, among other things, patterns of misuse that would indicate a user is attempting to misuse the database; and (ii) flag accounts that are searching the same name against multiple SSNs (or vice versa); and
- Adopt a procedure to investigate potential misuse and for deactivation of accounts.
Second, within three months after the date of the Agreement, the DoD will:
- Implement Terms of Use Language as provided for in Appendix A of the Agreement (which restricts the purposes for which the site may be accessed, and sets penalties for violations), and require users to agree to the terms and certify under penalty of perjury that they are using the website for permissible purposes;
- Add language to the SCRA website to discourage collection of SSNs for third-party users of the SCRA website, where the sole purpose for using the website is for SCRA verification; and
- Post a reasonable notification on the SCRA website stating that changes are made to prohibit misuse, including for non-SCRA commercial purposes, with the language set forth in Appendix C of the Agreement.
Finally, the Agreement requires DoD to:
- Publish a new Systems of Records Notice in the Federal Register that specifies the circumstances in which information may be disclosed through the SCRA website; and
- Subject to applicable laws and regulations, provide quarterly reports to Plaintiffs for two years.
Specifically, the required reports must list: (i) the company name of active users, (ii) information on volumes of searches per active user, (iii) the number of suspected and terminated accounts, (iv) the company names of suspended and terminated accounts, so long as those company names would not identify individuals, and (v) a description of the back-end analytics that have been implemented, and the results thereof.
Takeaways
Based on the Terms of Use reflected in the Agreement, servicers may only use the SCRA website for purposes of ensuring that servicemembers receive SCRA protections. Servicers may run multiple searches in the SCRA website throughout the life of a loan. In fact, some investors require searches on a quarterly basis. While servicers should be permitted to continue good faith searches conducted for purposes of ensuring SCRA protections are afforded, it is unclear whether excessive searches (even if conducted for good faith purposes) could nevertheless constitute misuse of the website and result in account termination.
To the extent that the DoD publishes the procedures it is obligated to adopt for investigation of potential misuse, such procedures should provide additional clarity. In the meantime, servicers should review their existing policies and procedures for conducting SCRA searches to ensure appropriate guardrails are in place to prevent the unintentional misuse of the SCRA website.