Fair Servicing and UDAAP
Presentation
Marianne Byrne, Esq.
June 2013
©2013 FIS and/or its subsidiaries. All Rights Reserved.
Loan Servicing: Source of Laws and Standards
Loan Servicers often find themselves “serving many masters” as there are numerous
sources of loan servicing laws and standards, including but not limited to:
• Federal Law
• State Law
• Investor Guidelines
• Fannie, Freddie, etc.
• Case Law
• Regulatory Enforcement Actions
• National Mortgage Settlement
2
Notable Loan Servicing Cases
• 2011 Attorney General Lawsuit Against Five National Banks
• Ibanez
• Fremont
• Option One
• Eaton
• Bevilacqua
• Delva
• United States (and several states including Massachusetts) v. Bank of America, BAC
Home Loans Servicing fka Countrywide, Citigroup, Citibank, Citimortgage, JP
Morgan Chase, Residential Capital, Ally Financial, GMAC, Wells Fargo
3
Lawsuit Against Five National Banks, December 2011
The Five National Banks Named in the Lawsuit:
1.
2.
3.
4.
5.
Bank of America
Wells Fargo
JP Morgan Chase
Citibank
GMAC
The lawsuit also cited MERS and MERSCORP.
4
Lawsuit Against Five National Banks, December 2011
(cont.)
In a nutshell, the complaint focused on four major UDAAP components:
1.
2.
3.
4.
Robo signing
“Ibanez” issues – foreclosing without actually holding the mortgage
MERS “corruption”
Misrepresentation regarding loan modifications
Robo-Signing
• Using false documentation in the foreclosure process.
• Bank personnel sign affidavits that were untrue or without personal knowledge.
Rule: To be in compliance with Massachusetts law, an affiant foreclosing on property
must demonstrate.
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Lawsuit Against Five National Banks, December 2011
(cont.)
Ibanez-type Issues
United States Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011)
• Foreclosing without legal authority.
• Foreclosing without actually holding the mortgage.
• Assignments must be valid.
Rule: Only the present holder of the mortgage is authorized to foreclose.
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Lawsuit Against Five National Banks, December 2011
(cont.)
• MERs Corruption
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Undermining public land records through MERS.
Use of MERS to avoid land registration and recording requirements.
Lack of transparency through MERS system as to who has the right to enforce the mortgage.
True identity of the note holder is concealed from borrowers.
Banks failed to register assignments and transfers.
• Misrepresentation of Loan Modification Programs
– Misrepresentation regarding process, requirements and availability of loan modification
programs.
– National Homeownership Retention Program (“NHRP”) – banks claimed they worked with
borrowers to reduce monthly payments, however, there were misrepresentations about the
availability of this program and amount of relief available.
– Borrowers “strung along” for months in trial modifications that ultimately were rejected.
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Ibanez
United States Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011)
– This case is important because it challenged the validity of foreclosures when they are part of
securitized mortgage pools. Because the ownership of mortgage loans were divided and
transferred numerous times, the mortgage assignment was not recorded until over a year
after the foreclosure process had started. This was a fairly common practice in
Massachusetts. After Ibanez, ownership of the mortgage must be evidenced before starting
any foreclosure process.
Issue: Assignment after assignment
– Option One originated the Ibanez loan and sold it to Lehman Brothers. It was then sold it to a
Lehman subsidiary, Structured Asset Securities Corporation. Structured Asset Securities
Corporation subsequently pooled the loan with hundreds of other loans and then sold the
pool. Classes of certificates were created and sold to investors.
8
Ibanez (cont.)
Issue: Numerous servicing transfers not recorded
– The loans in the Ibanez pool were administered by five “Servicers,” one of which was Option
One (now acting in a different capacity than Originator). These Servicers were supervised by
Aurora Loan Services LLC (the “Master Servicer”). The loan documents themselves were kept
by “Custodians” — Deutsche Bank, Wells Fargo, or U.S. Bank.
– The Ibanez loan thus changed ownership at least four times prior to foreclosure without any
documentation of such on public record.
9
Fremont
Commonwealth v. Fremont Inv. & Loan, 452 Mass. 733, 739 (2008)
– The origination of mortgage loans “doomed to foreclosure” violated the Consumer Protection
Act. This case involved the AG’s use of the state UDAP statute (MGL 93A).
• Fremont was enjoined from foreclosure actions because its loans were deemed
“presumptively unfair” or unsuitable . Previously, Fremont had entered into a
consent agreement with the FDIC over its “unsound” origination practices. The loans
in question had four characteristics:
1.
2.
3.
4.
ARMs with an introductory period of 3 years or less;
An into/teaser rate 3% below the fully indexed rate;
Borrower DTI exceeded 50%; and
LTV was 100% or the loan carried a substantial prepayment penalty
10
Option One
Citation not available. Please see http://www.mass.gov/ago/consumerresources/consumer-information/home-and-housing/foreclosures-and-mortgagelending/option-one-faqs.html.
– According to Massachusetts Attorney General Martha Coakley, Option One made loans that it
knew were likely to fail and discriminated against African-American and Latino borrowers. “
Its blatant disregard for prudent underwriting standards contributed to the economic
downturn we still find ourselves in today. Like our other cases against mortgage lenders and
their Wall Street facilitators, this case holds this corporation accountable and provides much
needed relief to homeowners." Resolving claims of unfair and discriminatory lending
practices, Option One will modify thousands of Massachusetts homeowners' loans and make
a significant payment to the Commonwealth as part of a settlement valued at $125 million.
• This case also involved UDAP actions by AG Coakley.
11
Eaton
Eaton v. Fannie Mae, 462 Mass. 569 (2012)
The theory of unity…
– Similar to Ibanez, the main issue was whether the holder of a mortgage assignment but not
the debt could foreclose upon a property for non-payment of that debt. An existing
foreclosure action had already transpired and Eaton sought to void the foreclosure.
• Green Tree Servicing serviced the Eaton loan and was the mortgagee (BankUnited
was the note holder). The SJC ruled that because Green Tree only held the mortgage
(and not the note), the underlying foreclosure was void. For a foreclosure to be valid,
it must comply with MGL Ch. 183 section 21 and MGL 244 section 14 (these are laws
setting forth creditor’s right to foreclose upon default). The court said that these
laws now redefine the term “mortgagee” to mean both the mortgage holder and
note holder.
12
Eaton (cont.)
• MERS assigned its interest in the Eaton mortgage to Green Tree. The assignment was
recorded at the registry, but there was no evidence of a corresponding transfer of the
note. A short time later, Eaton became delinquent and failed to pay Green Tree.
Green Tree started foreclosure action. The identity of the note holder at the time
of the foreclosure was not identified on the record. A short time later, Green Tree
assigned its rights to Fannie Mae and a foreclosure deed was recorded at the registry.
• A couple of months later, Fannie Mae filed an action to evict Eaton. Eaton sued and
the court deemed the foreclosure void.
13
Bevilacqua
Bevilacqua v . Rodriguez, 460 Mass. 762 (2011)
– Bevilacqua purchased real estate through a foreclosure sale. Although he was in physical
possession of the property, he later learned that he did not own it through record title. The
reason was because the grantor (bank) did not establish that it was the assignee of the time
of foreclosure. This is a case of serious title defects. The court said that “the bank was a
complete stranger to title…” The foreclosure was deemed to be conducted by someone
other than the mortgagee.
14
Delva
Delva v. America’s Servicing Company and U.S. Bank National Association
– This case highlights misconduct related to loan modification. Borrowers sued under several
theories, including the 93A theory (state UDAAP). Although the court ruled against the
borrowers stating that it could not find an issue of material fact and citing lack of evidence to
prove allegations of wrongdoing, it nevertheless highlights the scrutiny around misconduct
related to modifications.
The parties:
– Mortgage identified lender as Mortgage Lenders Network, USA.
– Mortgage identified the mortgagee as MERS.
– MERS later assigned the mortgage to US Bank.
– America’s Servicing Company (“ASC”) services the loan.
15
Delva
• The borrowers contacted the servicer several times in an attempt to resolve the
default. The servicer, ASC, asked the borrowers for the same documents, multiple
times, even after the borrowers provided them on several prior occasions. Things got
more complicated and one of the borrowers filed for bankruptcy.
• ASC then offered the borrowers a “special” forbearance where three set payments
had to be made. Once the three payments were made, ASC was to review the
account for HAMP. However, after the third payment was made, ASC sent the
borrowers a letter informing that the “investor denied the request for HAMP.”
Several other modification attempts occurred to no avail.
• Finally, ASC approved a permanent loan modification which required an initial
payment of $8,103.53 which had to be paid within 10 days. Unable to meet the
large initial payment, the borrowers filed a lawsuit.
16
The United States v. Several Large Lenders
United States (and several states including Massachusetts)
v.
Bank of America, BAC Home Loans Servicing fka Countrywide, Citigroup, Citibank,
Citimortgage, JP Morgan Chase, Residential Capital, Ally Financial, GMAC, Wells Fargo
Filed 3/12/12
Case 1:12-cf-00361-JDB
This complaint sets forth what lenders do wrong during origination and what servicers
do wrong during servicing. This case is a good example of lessons learned.
17
The United States v. Several Large Lenders (cont.)
As for servicing, the following illegal practices were alleged. Although the actions were
allegedly committed by third party services, the banks are being held accountable for
the servicers’ actions.
• Unfair, Deceptive and Unlawful Servicing Processes:
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Under state UDAP laws, banks are prohibited from engaging in UDAP practices.
Failure to timely and accurately apply borrower payments.
Charging excessive or improper fees.
Failing to properly oversee third party vendors involved in servicing activities.
Imposing force-placed insurance without properly notifying borrowers.
Providing borrowers with false or misleading information in response to complaints.
Failing to maintain appropriate staffing, training and quality control systems.
18
The United States v. Several Large Lenders (cont.)
• As for loan modifications, the following practices were cited as unfair and deceptive
loan modification practices:
– Failure to discharge loan modification obligations.
– Failure to perform proper loan modification underwriting.
– Failure to gather or losing loan modification paperwork.
– Failure to adequately staff programs.
– Failure to adequately train staff, including failure to adequately train staff to deal with
–
–
–
–
distressed borrowers.
Failure to establish adequate loan modification processes.
Allowing borrowers to linger in trial modifications for excessive time periods.
Wrongfully denying modification applications.
Failure to respond to borrower inquiries.
19
The United States v. Several Large Lenders (cont.)
• Providing false or misleading modification information while referring loans to
•
•
•
•
foreclosure during the modification application process.
Failure to timely and accurately provide loss mitigation options to borrowers.
Advising borrowers that they must be at least 60 days delinquent to be eligible for
modification.
Miscalculating borrowers’ eligibility for loan modification programs.
Failure to timely and properly process loan modification applications.
20
UDAAP - Background
• Section 5 of the Federal Trade Commission (FTC) Act prohibits “unfair or deceptive
trade practices in or affecting commerce.” (aka UDAP)
• Bank regulators have enforcement authority under Section 8 of the Federal Deposit
Insurance Act for violation of any law including Section 5 of the FTC Act and
increasingly are using it against banks of all sizes.
21
UDAAP - Background (cont.)
• Regulation AA prohibits a number of consumer credit practices defined as unfair
and deceptive, including:
– Misrepresenting a co-signer’s liability
– Pyramiding of late charges
– Confessions of judgment
– Assignment of wages or other earnings
– Taking a non-possessory security interest in household goods other than a purchase-money
security interest
22
UDAAP - Background – Fairness
• Federal Fair Lending Laws:
–
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Equal Credit Opportunity Act (Regulation B)
Fair Housing Act
Home Mortgage Disclosure Act (Regulation C)
Community Reinvestment Act (Regulation BB)
Discriminatory Effects Rule (HUD )
23
Fairness – The Present Day
• Recently, and since the advent of the CFPB, there has been a renewed interest in
fairness. Although fair lending has historically been applied to originations and the
lending process, it is now being applied to loan servicing, loan modifications, loss
mitigation, collections and foreclosure.
• To accomplish this mission of fairness, the CFPB established an office of Fair Lending
and Equal Opportunity that is exclusively devoted to promoting the notion of
fairness in all consumer financial products and services. This includes mortgages,
student loans, credit cards, auto loans, etc., with future plans to focus on credit
reporting, bankruptcy and other aspects that touch and concern consumer financial
products and services. This commitment is echoed pervasively throughout the Fair
Lending Report of the Consumer Financial Protection Bureau, released December
2012.
24
The CFPB’s Fairness Focus
• The CFPB intends to look for evidence
of ECOA violations in three distinct
areas:
– Optional Products
– Loan Modifications
– Foreclosures
• The focus on ECOA isn’t a real surprise.
ECOA is one of the federal consumer
financial protection laws handed over
to the CFPB for supervision and
enforcement.
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The board of directors should provide oversight for an institution’s Fair Lending
Program and its overall compliance risk management program. At minimum, the
board should dedicate a committee, such as the audit committee or risk
management committee, to routinely discuss matters and receive reports related to
consumer compliance risk. That committee’s agenda should also periodically include
items related to fair lending issues, risks and controls.
Auto Lending – The Next Bastion of Fairness
• The CFPB warned auto lenders in March that it is using the “disparate impact”
theory to look for racial discrimination in auto loans.
– In March of 2013, the CFPB released CFPB Bulletin 2013-02 - Indirect Auto Lending and
Compliance with the Equal Credit Opportunity Act.
http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf
– Car dealerships typically present a customer’s credit application to several lenders, who
compete for the business. This can be a convenience for the customer, and an opportunity for
dealers to add value for which they can be compensated.
– The lenders provide the dealer with a risk-based “buy rate” that establishes a minimum
interest rate at which the lender is willing to purchase the retail installment sales contract.
– Typically, indirect auto lenders may have a policy that allows the dealer to mark up the
interest rate above the indirect auto lender’s buy rate.
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Auto Lending (cont.)
• The markup happens when the dealer charges the consumer an interest rate that is
higher than the lender’s buy rate, with the difference in the rate going to the dealer
– typically referred to a “reserve” or “participation” compensation.
• After the deal is sealed with the consumer, the contract is the sold to the lender.
• Because of the incentives these policies create, and the discretion they permit,
there is a significant risk that they create pricing disparities on the basis of race,
national origin, and other prohibited bases.
• ECOA Rule: A “creditor” includes not only “any person who regularly extends,
renews, or continues credit,” but also “any assignee of an original creditor. Reg. B
further provides that “creditor” means “a person, who, in the ordinary course of
business, regularly participates in the decision of whether or not to extend credit”
and expressly includes an “assignee, transferee, or subrogee who so participates.”
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Auto Lending, con’t
• ECOA Guidance: The CFPB stated that the practices of indirect auto lenders likely
constitute participation in a credit decision under the ECOA and Regulation B.
• The Liability of Indirect Auto Lenders for Discrimination Resulting from Markup and
Compensation Policies
– An indirect auto lender’s markup and compensation policies may alone can trigger liability
under ECOA if the lender participates in a credit decision and its policies result in
discrimination.
– The disparities triggering liability could arise either within a particular dealer’s transactions or
across different dealers within the lender’s portfolio.
– An indirect auto lender that permits dealer markup may be liable for ECOA violations if they
result in disparities on a prohibited basis.
29
A Word of Caution
• The CFPB set the record straight in Bulletin 2013-02.
– Some indirect auto lenders may be operating under the incorrect assumption that they are
not liable under ECOA for pricing disparities caused by markup and compensation policies
because Regulation B provides that “a person is not a creditor regarding any violation of the
ECOA]or Regulation B committed by another creditor unless the person knew or had
reasonable notice of the act, policy, or practice that constituted the violation before
becoming involved in the credit transaction.” This provision limits a creditor’s liability for
another creditor’s ECOA violations under certain circumstances. But it does not limit a
creditor’s liability for its own violations — including, for example, disparities on a prohibited
basis that result from the creditor’s own markup and compensation policies. Additionally, an
indirect auto lender further may have known or had reasonable notice of a dealer’s
discriminatory conduct, depending on the facts and circumstances.
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Limiting Fair Lending Risk in Indirect Auto Lending
• Indirect lenders should take steps to ensure that they are operating in compliance
with the ECOA and Regulation B as applied to dealer markup and compensation
policies. These steps may include, but are not limited to:
1. Imposing controls on dealer markup and compensation policies, or otherwise revising
dealer markup and compensation policies; and also
2. Monitoring and addressing the effects of those policies so as to address unexplained
pricing disparities on prohibited bases.
Or
3. Eliminating dealer discretion to mark up buy rates and fairly compensating dealers using
another mechanism, such as a flat fee per transaction, that does not result in
discrimination.
31
The CFPB on a Fair Lending Compliance Program
• In its Fall 2012 Supervisory Highlights, the CFPB provided the following guidance
about Fair Lending Compliance Programs. This guidance is referenced in Bulletin
2013-02 and is applicable to Indirect Auto Lending.
– Have an up-to-date fair lending policy statement.
– Conduct regular fair lending training for all employees involved with credit transactions, as
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–
–
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well as all officers and Board members.
Continually monitor for compliance with fair lending policies and procedures.
Continually monitoring controls intended to reduce fair lending risk (e.g. controls on dealer
discretion).
Review lending policies for fair lending risks, including disparate impact.
Depending on the size and complexity of the institution, regularly analyze loan data in all
product areas for disparities on a prohibited basis in pricing, underwriting, or other aspects of
the credit transaction.
32
The CFPB on a Fair Lending Compliance Program (cont.)
– Regularly assess the marketing of credit products.
– Board of directors and management must have “meaningful oversight” of fair lending
compliance.
• With respect to fair lending compliance pertaining to indirect auto lending, the
CFPB suggests:
– Sending communications to all participating dealers explaining the ECOA, stating the
expectations with respect to ECOA compliance, and articulating the dealer’s obligation to
mark up interest rates in a non-discriminatory manner in instances where such markups are
permitted.
33
The CFPB on a Fair Lending Compliance Program (cont.)
• Fair lending compliance pertaining to indirect auto lending, continued
– Conduct regular analyses of both dealer-specific and portfolio-wide loan pricing data for
disparities on a prohibited basis resulting from dealer markup and compensation.
– Commence prompt corrective action against dealers, including restricting or eliminating
dealer markup and compensation or excluding dealers from future transactions, when
analysis identifies unexplained disparities on a prohibited basis.
– Promptly remunerate affected consumers when unexplained disparities on a prohibited basis
are identified either within an individual dealer’s transactions or across the indirect lender’s
portfolio.
34
Duty to Customers Under the Dodd-Frank Act
• Under the Dodd-Frank Act, banks and financial institutions have a duty to:
– Act in the best interest of customers
– Disclose loan terms so that they are understandable; not unfair, deceptive or abusive
– Not steer consumers toward loans that they cannot repay or toward loans with predatory
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characteristics
Not require mandatory arbitration
Not finance single-premium credit insurance
Prohibits prepayment penalties on high-rate loans
If offering loans with prepayment penalty, must also offer loans without such a penalty
Disclose total interest, aggregate fees and full amount paid
Monthly statement showing principal remaining, interest rate, next rate adjustment, any fees,
description of late fee, and contact info.
35
Fair Lending and UDAAP: To-Do’s
• Implement policies and procedures or update policies and procedures pertaining to
the following:
- ECOA
- TILA
- FCRA
- EFTA
- GLBA
- FDCPA
- E-Sign
- UDAAP
• Implement or update policies and procedures related to what the CFPB considers to
•
•
be UDAAP hot-buttons: simple interest financing and sales of gap insurance,
extended warranties and add-on products.
Robust oversight of third party service providers including, but not limited to,
closing attorneys, collection agencies, foreclosure attorneys, outsourced flood
vendors, etc.
Update policies and processes related to the handling of consumer complaints.
36
UDAAP Characteristics
• UDAAP affects financial institutions of all sizes, including small community banks. In
fact, many UDAAP cases have involved small banks with total assets under $250
million.
• UDAAP applies to both consumer and business-purpose products and services.
• Recent history has shown that UDAAP violations can adversely impact CRA ratings.
37
Helpful Resources
• CFPB Supervision and Examination Manual
– http://files.consumerfinance.gov/f/201210_cfpb_supervision-and-examination-manualv2.pdf
• CFPB Factsheet on Auto Lending
•
•
•
– http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Factsheet.pdf
Memorandum of Understanding on Supervisory Coordination
– http://files.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf
Consumer Regulations
– http://www.consumerfinance.gov/regulations/
Massachusetts Attorney General’s News and Updates
– http://www.mass.gov/ago/news-and-updates/
38
Thank you!
Marianne Byrne, Esq.
Assistant Compliance Director
FIS Enterprise Governance, Risk &
Compliance (EGRC) Solutions
860.510.3592
Marianne.Byrne@fisglobal.com