Financial Services Update
February 6, 2013
HIGHLIGHTS
Federal Regulatory Developments:
FHA Announces Increase In Mortgage Insurance Premiums
Murky Regulatory Waters Ahead: FEMA Rescinds Mandatory Purchase of Flood
Insurance Guidelines
State Regulatory Developments:
Conference of State Bank Supervisors Initiates Standardized Testing for MLOs
Virginia Clarifies Loan Originator Licensing Requirements and Related Regulations
Mortgage Banking Litigation:
Borrowers Seeking Loan Modification Must Be “Particular” When Claiming Fraud
WBK NEWS
Mitch Kider will join a panel at the PSMI Conference to discuss “Surviving & Thriving in
the New Regulatory Environment” on Thursday, February 7, in Phoenix, AZ. For more
information contact Mitch at kider@thewbkfirm.com.
Mitch Kider will provide a regulatory update to executives and managers of a large
western independent mortgage company on Friday, February 8. For more information
contact Mitch at kider@thewbkfirm.com.
Mitch Kider will participate on an ABA telephone briefing “Understanding Ability-toRepay and Qualified Mortgages” scheduled for Tuesday, February 12 from 2:00 – 4:00
p.m. ET. For more information contact Mitch at kider@thewbkfirm.com.
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Mitch Kider will visit the MBA of St. Louis on February 14 to discuss the latest regulatory
and compliance information coming from the CFPB. For more information contact Mitch at
kider@thewbkfirm.com.
SUMMARIES
Federal Regulatory Developments:
FHA Announces Increase In Mortgage Insurance Premiums
To further bolster the strength of its mutual mortgage insurance fund, on January 31,
2013, the FHA announced in Mortgagee Letter 2013-04 that it will increase its annual
mortgage insurance premiums for most new mortgages by 10 basis points, or 0.10%.
Premiums on mortgages of $625,000 or greater will also increase by 5 basis points, or
0.5%. The increases exclude certain streamline refinances. FHA will also require most
borrowers to continue paying annual premiums for the life of their loan. This will permit
FHA to retain significant revenue that presently is being lost prematurely. The policy
increasing the premiums is effective for all case numbers assigned on or after April 1,
2013. The policy extending the payment of premiums for life of the loan is effective for all
case numbers assigned on or after June 3, 2013.
To better manage risk, FHA also announced in a Federal Register Notice, Volume 78,
No. 25, February 6, 2013, a proposed increase in its requirement for borrower
downpayment. This would apply to mortgages above $625,000. The minimum
downpayment will increase from 3.5% to 5%.
Comment due date: March 8, 2013.
FHA also announced on January 31, 2013, in Mortgagee Letter 2013-05, that it will
require lenders to manually underwrite loans regarding borrowers that have a credit
score below 620 and a total debt to income ratio above 43%. These requirements are
effective for all case numbers assigned on or after April 1, 2013.
Murky Regulatory Waters Ahead: FEMA Rescinds Mandatory Purchase of Flood
Insurance Guidelines
With the passage of the Biggert-Waters Flood Insurance Reform Act of 2012, and the
many changes the program will require, the Federal Emergency Management Agency
(FEMA) has decided to rescind the Mandatory Purchase of Flood Insurance Guidelines
booklet (F-083). The FEMA booklet was originally produced to help lenders, and other
stakeholders, navigate the rules Congress laid out in the various Flood Insurance Act(s).
Since it was never intended to be a regulatory document, it was not regularly updated,
and it is now outdated. As such, as of February 4th, 2013, it will no longer be available in
hard copy format or be available for download through FEMA’s website.
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Lenders should look to their regulator(s) for questions of compliance. They may also
look to the source documents; the various Flood Insurance Act(s); the Interagency
Questions and Answers; and the FEMA Flood Insurance Manual. A copy of the Flood
Insurance Manual is available for download at www.fema.gov.
State Regulatory Developments:
Conference of State Bank Supervisors Initiates Standardized Testing for MLOs
On April 1, 2013, twenty states or state agencies will begin offering a new Uniform State
Test (“UST”) for the licensing of state-regulated mortgage loan originators (“MLO”). Four
additional states will adopt the test on July 1, 2013. The new test, which is comprised of
125 questions, replaces the current “national” test and, for the states implementing the
UST, removes the requirement of an additional state-specific test component for that state
as of the implementation date. The UST is intended to help streamline the state license
process for MLOs that would like to obtain licenses in multiple states. Any individual
wishing to become licensed as an MLO, or who has not already passed the current national
test, may take this new test, whether or not the state in which they are wishing to become
licensed has adopted the test.
In addition, currently licensed MLOs will be able to take a new “standalone” UST
(comprised of 25 questions) to meet testing requirements for states that are now
adopting the test and for those that will adopt the test in the future. The “standalone”
UST will only be available for about one year following the April 1, 2013 rollout, and the
Mortgage Bankers Association is encouraging all current state-licensed MLOs to take
this “standalone” UST during the time that it is available.
More states plan on adopting the UST in the future, but first must amend existing
regulations and/or statues so that the UST will satisfy specific testing requirements for
those states. In addition, it is possible that, with the advent of the UST, some states may
need to revise their educational requirements as well.
More information on the test can be found at
http://mortgage.nationwidelicensingsystem.org/profreq/testing/Pages/UniformStateTest.
aspx.
A list of states that will be adopting the new test April 1, 2013 and July 1, 2013 is
available at
http://mortgage.nationwidelicensingsystem.org/profreq/testing/Documents/UST%20Ado
ption%20Table.pdf.
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Virginia Clarifies Loan Originator Licensing Requirements and Related
Regulations
The Virginia Bureau of Financial Institutions has amended certain of its regulations
applicable to mortgage lenders, effective January 28, 2013. Among the changes is a
requirement that lenders may only use mortgage loan originators who are licensed,
sponsored by such lender in NMLS, and are employees or exclusive agents of such
lender. Loan processors and underwriters do not need to be licensed, provided that they
do not take loan applications or counsel consumers regarding loan terms. Also, loan
processing and underwriting functions may be outsourced pursuant to conditions set
forth in the amended regulations.
Chapter 160 of Title 10 of the Virginia Administrative Code has been amended as
follows:

Any person who is engaged solely in the business of a loan processor or
underwriter is now expressly carved out from the definition of a “mortgage
broker.” As a result, the regulations make clear that these individuals are not
subject to licensure. Loan processors or underwriters may receive, collect,
distribute, and analyze information common for loan processing or underwriting
and may communicate with consumers to obtain such information, so long as
they do not take loan applications or otherwise communicate with consumers
about a prospective loan before the consumer has submitted a loan application.
They also may not counsel consumers about loan terms.

A licensee may outsource its loan processing or underwriting activities to a third
party loan processor or underwriter, pursuant to a written agreement with the third
party that obligates the third party to comply with applicable law and submit
to examinations of its business by the Virginia regulator. The third party may not
subcontract the services it performs for a licensee to any person other than its
employees.

The term “refinancing” is now defined in the regulations to mean an exchange of old
debt for new debt, including through negotiating a different interest rate or term, and
expressly including any loan modification. As such, loan modifications are subject
to Virginia’s advertising restriction that requires lenders offering loan refinancing to
disclose to consumers when the total finance charges may be higher over the life of
the refinanced loan.

Licensees are expressly prohibited from making any false, deceptive, or
misleading statement to consumers.

Licensees are obligated to file a report to the state regulator within 15 days of
becoming aware that the licensee or any of its employees, officers, directors,
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principals, or exclusive agents is convicted of a misdemeanor involving fraud,
misrepresentation, or deceit. Previously this requirement only applied to felonies
and did not encompass an exclusive agent of the licensee.

Licensees must only use mortgage loan originators who are licensed and
sponsored by the licensee in NMLS. Such individuals must be an employee or an
exclusive agent of the licensee and must be covered by the licensee's surety
bond.
Initially published as proposed regulations on November 19, 2012, the State
Corporation Commission ordered that they be adopted on January 22, 2013, with an
effective date of January 28, 2013.
Mortgage Banking Litigation:
Borrowers Seeking Loan Modification Must Be “Particular” When Claiming Fraud
In the context of a mortgage loan modification, the Eighth Circuit Court of Appeals
recently declined to adopt a relaxed pleading standard for borrowers asserting
misrepresentation claims against their loan servicer. Affirming the lower court’s
decision, the Eighth Circuit held that borrowers bringing fraud claims must meet the
traditional heightened pleading standard of Federal Rule of Civil Procedure (9)(b) by
asserting particular facts, such as the time and place of a purported misrepresentation.
Between 2008 and 2010, Appellants attempted to negotiate a mortgage modification
with their mortgage loan servicer, Wells Fargo Home Mortgage, Inc. Appellants later
stopped making payments on their mortgage loan, allegedly in reliance on the
purported representations of an unidentified Wells Fargo representative that the
borrowers would qualify for a loan modification. Wells Fargo subsequently initiated
foreclosure proceedings, and the Appellants sued for fraudulent misrepresentation and
promissory estoppel, alleging that “Wells Fargo representatives” gave assurances that
they “would qualify for a modification and their mortgage would be modified upon
receipt of requested documentation.”
The district court found the representations by Wells Fargo, that the Appellants “would
qualify” and “would be modified,” were “akin to expectations and predictions for the
future,” and, did not warrant recovery for fraudulent misrepresentation. The Circuit Court
found this line of reasoning persuasive, but it ultimately affirmed the district court’s
holding on Rule 9(b) grounds. The Court explained that the Appellants’ pleadings were
inadequate for failing to identify the Wells Fargo employee who allegedly made the
representations, as well as for failing to state the times or places when such
representations were made.
The Court recognized that the pleading standards of Rule 9(b) may be relaxed when the
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plaintiff can show he or she is unable to obtain “essential information peculiarly in the
possession of the defendant.” The Court found, however, that the circumstances of this
case did not warrant relaxation of Rule 9(b). Rather, the Court found that the Appellants
had failed to demonstrate that they were unable to obtain essential information. Since the
purported misrepresentation had occurred during a conversation with the borrowers, the
Court reasoned there was no clear indication that the details of the alleged fraud were
peculiarly within the possession of Wells Fargo.
WBSK routinely handles lawsuits throughout the United States that involve alleged
violations of federal and state laws relating to mortgages.
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