Melanie Brody will discuss a topic on everyone’s radar — fair lending and disparate impact — on Tuesday morning (May 21) , with a repeat session on Tuesday afternoon . Melanie also will facilitate a fair lending roundtable discussion on Tuesday afternoon.

Paul Hancock will address major litigation and enforcement trends on Monday afternoon (May 20).

Philip Schulman will speak at the Government Housing round table on Monday afternoon (May 20) about FHA Landmines, including the perils to the Online Annual Certification, the increase in False Claims Act cases against approved mortgagees, and indemnification demands of Lender Insurance participants.

Nanci Weissgold will participate on both the Sunday (May 19) and Tuesday (May 21) panels on the CFPB National Servicing Standards (“NSS”) and other servicing requirements. Come to the dive deep session on Sunday afternoon for an overview of the RESPA and TILA provisions of the NSS. On Tuesday, Nanci will focus on non-default servicing standards, including challenges with implementing error resolution, information requests, record retention and general policy and procedure requirements.

In addition, many of our group’s attorneys are attending the conference. We look forward to seeing you all in Boca!

• developing and implementing effective compliance management systems
• avoiding and defending disparate impact claims
• identifying and curtailing unfair, deceptive, and abusive acts and practices
• understanding and preparing for examinations or investigations
• managing vendors appropriately

If you would like a copy of the materials from this event, please contact Melanie Brody (melanie.brody@klgates.com) or Stephanie Robinson (stephanie.robinson@klgates.com).

On May 8, 2013, the Conference of State Bank Supervisors published release notes for a June 24, 2013 Nationwide Multistate Licensing System (“NMLS” or the “System”) upgrade which includes, among other changes, an advance filing feature that will permit state licensees to file advance notice of certain business changes electronically through the NMLS. Presently, state licensees must submit advance notices in hard copy paper format outside the System. This upgrade should ease the burden on state licensed entities to provide advance notice and, where applicable, secure prior approval of, changes in officers, directors and direct or indirect shareholders. The advance notice filing feature also may be used in connection with a legal name change, office relocation and organizational changes. Not only will this help to facilitate the notification process, but the advance filing feature should significantly enhance the method by which state regulatory agencies can process and approve these changes. This is welcome news to the industry after the release of the upgrade was postponed earlier this year.

Although this change will allow for filings regarding transactions that have a future effective date to be made and processed through the NMLS, the new process will add a layer of complexity to certain transactions where state law only requires that notice be submitted, as the System will require that state regulators check-off a box to approve or accept the change. Administrators of the NMLS have indicated that they are willing to consider a change in the System to distinguish filings requiring approval from those that require mere notice, but those changes cannot be implemented before the “roll-out” of this new feature.

Financial life just got a little bit easier for stay-at-home moms and dads. For over a year and a half, regulations originally promulgated by the Federal Reserve (and reissued by the CFPB) have restricted credit access for “spouses and partners who do not work outside the home,” based on an interpretation of the Credit Card Accountability, Responsibility, and Disclosure Act (the “CARD Act”) that required a creditor to consider a card applicant’s “independent” ability to repay any credit extended. On May 3, the CFPB finalized amendments to Regulation Z that loosen the credit card underwriting standards, allowing consumers over age 21 to qualify based on any income to which they have a “reasonable expectation of access.” By acknowledging that the practical aspects of interfamily relationships may sometimes support a determination that a consumer has an ability to repay even when the consumer may not have a formal legal right to the underlying income or assets, the Bureau acquiesced to the requests of a broad-based coalition of politicians, consumer groups, and credit card issuers to remove an artificial barrier to the ability of stay-at-home spouses and partners to obtain and build credit.

Enacted in 2009, the CARD Act requires a card issuer to consider a consumer’s ability to repay any credit extended under a credit card account. It also requires applicants under the age of 21 to either demonstrate an “independent” ability to repay or include a qualifying, of-age cosigner on the account. Reaching the right balance in implementing these requirements has been an iterative process. The Federal Reserve’s initial CARD Act rules, effective February 22, 2010, did not impose any independence requirement on income or assets for consumers over age 21. Concerned that applicants qualifying based on “household income” could obtain credit without access to the funds necessary to repay debts incurred, the Federal Reserve amended Regulation Z, effective October 1, 2011, to extend an “independent” ability to repay requirement to all consumers. While presumably well intentioned, the Federal Reserve’s actions had unintended consequences, one of which was to disadvantage certain stay-at-home parents.

Following expressions of concern from consumers and card issuers, as well as analysis of data suggesting certain consumers have been systematically denied credit despite “demonstrable access to funding sources,” the CFPB proposed its solution last November. The final rule is substantially in line with that proposal. The Bureau’s approach allows consumers over the age of 21 to qualify for a credit card product based on income or assets to which they have “a reasonable expectation of access,” but still retains an “independent” repayment ability requirement for consumers under age 21. It also clarifies that a creditor’s application of these separate age-based standards is not, in itself, a violation of Regulation B’s prohibition on age-based discrimination.

In one significant departure from its November proposal, the final rule specifies that applying the more relaxed standard for consumers over age 21 is optional. In other words, a card issuer may continue to qualify consumers over age 21 “using an independent-income-or-assets underwriting criterion” without violating the requirement to consider repayment ability. However, the issuer now also has the option to qualify the borrower under the less restrictive “reasonable expectation of access” standard.

The regulatory commentary to the final rule further clarifies that an issuer’s “reasonable expectations” should be based on the regular use of accounts. For example, a consumer will have reasonable access to funds where a third party, such as a member of the consumer’s household, regularly transfers funds from an account for which the consumer is not an accountholder to an account from which the consumer regularly makes payments to the consumer’s credit card account, even if the consumer is not an accountholder for the payment account. There would be no reasonable expectation of access, however, where regular activity indicates the consumer lacks access and the consumer has no legal interest in the funds under federal or state law.

Despite providing commentary that addresses access patterns for individual accounts, the CFPB’s rule does not require any particular income or asset documentation. In fact, the rule expressly allows “stated income” applications, which are currently the norm in the credit card context. In assessing a consumer’s ability to repay, card issuers may rely on information provided by the consumer in response to a request in the application for income or assets in language evoking the “reasonable expectation of access” standard. Therefore, requests for “income,” “available income,” or “accessible income” will provide card issuers information on which they may rely. At this time, the only phrasing identified by the CFPB that will not result in reliable information is “household income,” as the Bureau is concerned about situations in which a consumer provides information regarding members of his or her “household,” such as unrelated roommates, whose relationship to the consumer does not include shared finances.

The final rule became effective upon its publication on May 3, but card issuers are not required to comply until November 4, 2013.

The U.S. Attorney’s Office for the Southern District of New York filed a criminal indictment on May 7, 2013 against Mission Settlement Agency, its owner, and three of its employees. Mission Settlement Agency is a debt settlement company based in New York City. The defendants were charged with mail fraud, wire fraud, and conspiracy to commit mail and wire fraud based on alleged misstatements they made regarding Mission Settlement Agency’s fees, services, and affiliations. The indictment alleged that the fraudulent scheme started in mid-2009 and involved at least 1,200 customers and several million dollars. The defendants allegedly collected millions of dollars in fees from customers who were struggling financially, but did no or little work to manage their clients’ debt or pay their creditors.

This case marks the first time the Justice Department has brought criminal charges based on a referral from the CFPB. Preet Bharara, U.S. Attorney for the Southern District of New York, and CFPB Director Richard Cordray held a joint press conference to discuss the case. This first-ever criminal referral serves as a reminder that the CFPB not only has enforcement powers of its own, but also functions as an industry observer that can, and will, make referrals to other federal and state enforcement agencies.

Many companies and individuals that are facing investigations or subsequent enforcement actions by the Consumer Financial Protection Bureau (“CFPB”) will be forced to incur substantial sums to defend such claims, to settle such claims, and/or to pay any judgments. In many cases, companies and individuals may have insurance coverage to pay for such costs, such as Directors and Officers liability insurance (“D&O Policies”) and Errors and Omissions liability insurance (“E&O Policies”). The availability of coverage will turn on the specific contract language in any insurance policy and the specific nature of the CFPB matter at issue.

To read the full alert, click here.

On Wednesday, HUD issued Mortgagee Letter 2013-10 to implement the Lender Insurance (“LI”) regulation it finalized in January of 2012. As announced in the final regulation, FHA mortgagees participating in the LI program will be required, as a condition of approval for LI authority, to indemnify HUD for self-endorsed loans that HUD deems ineligible for FHA insurance. Mortgagee Letter 2013-10 provides additional guidance on the Department’s policy changes regarding indemnification, which are effective for all loans insured by LI mortgagees on or after April 9, 2013. The Mortgagee Letter and a revised Lender Insurance Guide released Wednesday provide additional guidance regarding LI changes, including LI eligibility criteria and HUD’s processes to monitor, terminate, and reinstate LI authority.

Since announcing in November of 2012 that an independent actuarial review of the FHA Mutual Mortgage Insurance (MMI) Fund found that the Fund’s capital reserve ratio has fallen to -1.44%, which represents a negative economic value of $16.3 billion, HUD has aggressively sought to mitigate the risk of the Fund’s insolvency. The powerful indemnification authority set forth in the final regulation and this Mortgagee Letter represent the latest step in HUD’s significant efforts to improve FHA’s safety and soundness and to transfer the risks associated with FHA-insured loans from the Department, and thus the American taxpayer, to FHA-approved mortgagees, particularly those participating in the LI program.

Indemnification Policy Clarifications

The Mortgagee Letter reiterates HUD’s authority to demand indemnification for serious and material violations of FHA origination requirements and instances of fraud or misrepresentations about which the lender knew or should have known. For serious and material violations that caused the loan not to be eligible for FHA insurance, the lender will be required to indemnify HUD for any loss on the loan if it goes into default within five years of mortgage insurance endorsement. For fraud or misrepresentation, the lender will be required to indemnify HUD for any loss for the life of the loan.

While the final regulation was silent as to the procedures HUD would follow in demanding indemnification from LI mortgagees, Mortgagee Letter 2013-10 provides details regarding this process. The Mortgagee Letter clarifies that HUD will provide lenders with an opportunity to refute an indemnification determination before making a final demand for indemnification. Specifically, when HUD uncovers fraud, misrepresentation, or serious and material violations of FHA origination requirements through post-endorsement technical reviews, appraisal reviews, on-site mortgagee monitoring reviews, audits conducted by HUD’s Office of Inspector General, or other means, HUD will notify the LI mortgagee that a preliminary assessment based on file documentation indicates that the loan contains material findings such that HUD is exposed to an unacceptable level of risk.

HUD will provide the LI mortgagee an opportunity to present additional documentation to address the review findings. If the LI mortgagee does not respond, or if HUD determines, after reviewing the LI mortgagee’s response, that the deficiencies have not been resolved, HUD will send a notice of indemnification to the LI mortgagee, which will demand that the LI mortgagee indemnify HUD against any possible financial loss stemming from that loan pursuant to the final regulation. Demands for indemnification may be made by the Director of the Quality Assurance Division in HUD’s Homeownership Centers, by the Office of Lender Activities and Program Compliance, or by the Mortgagee Review Board.

In addition to fraud and misrepresentation, Mortgagee Letter 2013-10 includes a non-exhaustive list of actions that may be considered serious and material violations of FHA requirements if the LI mortgagee knew or should have known of the violation. These violations include, but are not limited to:

• Failing to ensure that the borrower meets applicable eligibility requirements in accordance with HUD requirements;

• Failing to verify the creditworthiness, income, and/or employment of a borrower in accordance with HUD requirements;

• Failing to verify the assets used by the borrower for down payment and/or closing costs, or to meet applicable reserve requirements, in accordance with HUD requirements;

• Failing to ensure that the amount of the mortgage insured is consistent with the loan type, property value and other applicable HUD requirements;

• Failing to ensure that the loan was current and met any applicable payment history requirements at the time of insurance endorsement in accordance with HUD requirements;

• Failing to address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property in accordance with HUD requirements; and

• Failing to ensure that the appraisal of the property satisfies HUD appraisal requirements and other applicable HUD requirements.

Mortgagee Letter 2013-10 also clarifies that the mortgagee that insured the loan will be responsible for indemnifying HUD, regardless of how the loan was originated, including loans in which a Third Party Originator was an FHA-approved lender. In cases involving a principal and an authorized agent where the principal insures the loan, HUD may seek indemnification from the authorized agent for any serious and material violations of HUD requirements or for fraud or misrepresentation. In instances where an outstanding indemnification exists at the time of claim for insurance benefits, HUD will pay insurance benefits to the holder of the mortgage, as long as the holder is not the same entity that was named in the indemnification agreement.

According to the Mortgagee Letter, indemnified loans are eligible for streamline refinance. If HUD pays a claim on a non-credit qualifying streamline refinance loan, HUD will continue to hold the mortgagee that indemnified the original loan responsible for any loss suffered by HUD. For credit qualifying streamline refinance transactions, the indemnification on the previous loan will be terminated. In both instances, the LI mortgagee insuring the streamline refinance will be responsible for any loss suffered by HUD in connection with serious and material violations of HUD requirements or fraud or misrepresentation in connection with the refinanced loan.

Additional Policy Changes

Mortgagee Letter 2013-10 includes additional guidance regarding LI eligibility criteria for new LI lenders and LI lenders created by a merger, acquisition or reorganization. Importantly, Mortgagee Letter 2013-10 and the revised LI Guide include procedures for applying for LI approval, which is an electronic process for new LI applicants and a manual process for LI lenders created by merger, acquisition, or reorganization.

The Mortgagee Letter also provides details regarding LI termination and reinstatement procedures. As detailed in the final regulation, LI authority may be terminated when, among other things, a lender fails to maintain a two-year claim and default rate equal to 150% or less of the two-year claim and default rate for the states in which the mortgagee has underwritten loans. Beginning in July of 2013, HUD will monitor LI performance and compliance with LI requirements of mortgagees whose compare ratios exceed 150% on a quarterly basis and may terminate LI authority for mortgagees who fail to meet LI requirements. Like HUD’s Credit Watch program, HUD’s Headquarters will monitor LI mortgagee compare ratios based on quarterly data as of March 31, June 30, September 30, and December 31. Mortgagee Letter 2013-10 and the revised LI Guide also list the circumstances under which the Department can suspend a lender’s LI authority, which include, among others, failing to submit case binders in a timely manner or failing to adequately conduct pre-endorsement reviews.

HUD warns existing LI lenders that changes to the compare ratios used to monitor LI mortgagees, from a national rate to a rate based on the states in which the lender does business, as well as a move from annual reviews to quarterly reviews, could affect LI eligibility of current LI lenders. Because of these changes, existing LI lenders should use the next few months to ensure they are monitoring their LI performance under the new standards. The LI Guide provides detailed instructions on how to monitor LI performance via HUD’s Neighborhood Watch System.

A lender whose LI authority has been terminated may not reapply for at least six months from the date of termination, and the reinstatement request must be in writing. At the time of application for reinstatement, the lender must have unconditional Direct Endorsement approval and a two-year claim and default rate that does not exceed 150% of the aggregate claim and default rate for the states in which it underwrote loans. Among other items, the reinstatement application must include a corrective action plan identifying the changes in internal policies and procedures that address the termination issues and evidence that the plan has been implemented.

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According to the revised LI Guide, over 700 mortgagees are currently participating in the LI program and, in any given month, approximately 80% of all forward loans are being endorsed under the LI program. Based on the predominance of the LI program among FHA-insured loans, the policy changes announced this week will have a significant impact on FHA-approved lenders, who will soon find themselves the target of HUD’s audits and monitoring reviews, which may lead to increased demand for indemnifications. With these policy changes, lenders are likely to be more conservative in their underwriting decisions, which could result in fewer FHA originations and reduced financing opportunities to more Americans.

To read our Client Alert on the final regulation regarding Lender Insurance issued in January of 2012, click here.

April Fools’ Day, a day traditionally reserved for pranks, trickery, and funny escapades, is upon us.

All joking aside, on this April 1, 2013, the Conference of State Bank Supervisors (“CSBS”) will begin to offer the new Uniform State Test (“UST”) for the licensing of state regulated mortgage loan originators (“MLOs”).

No fooling around, 26 states have agreed to scuttle their state-specific tests, and adopt the new UST, with 20 states on board as of April 1, 2013, 5 states doing so on July 1, 2013, and 1 more online as of October 1, 2013.

Pinch me to make sure I am not dreaming, but there will be one state test in these states that will replace 27 individual state exams.

I am sure you’re shocked, but states stepping forward with the UST on April 1, 2013 are Delaware, Georgia, Idaho, Indiana (DFI), Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, New Hampshire, North Carolina, North Dakota, Pennsylvania, Rhode Island, South Dakota, Utah (DFI), Virginia, Washington, and Wisconsin. States adopting the UST effective July 1, 2013 are Alaska, Kansas, Nebraska, Tennessee and Vermont. The two Texas agencies that regulate mortgage loan originators (the Department of Savings and Mortgage Lending (“SML”) and the Office of the Consumer Credit Commissioner (“OCCC”)) will join the group in October. Other states plan to adopt the UST, but will first require legislative changes. CSBS will maintain and update on a quarterly basis a list of the states that will rely on the UST.

I kid you not, but these states were willing to drop questions from the state exam that involved questions specific to originating mortgage loans under their mortgage finance laws.

Believe it or not, the UST will be comprised of 25 questions based on the SAFE Act and the Model State Law, which states have followed to enact their own state SAFE Act statute.

No tomfoolery here, the 25 question UST will be integrated into the 100 question national test increasing the test to 125 questions.

But wait, there is more. The existing national test will be retired on April 1, 2013. In addition, the 25 question UST will be offered as a stand-alone test for those MLOs who previously passed the National Test Component, but still must meet state SAFE Act requirements. This will be available until March 31, 2014.

Hard to believe, but the time allotment for applicants taking the national test with the UST will increase from 150 minutes to 190 minutes, with the addition of the 25 UST questions. With the addition of the 25 UST questions, applicants taking the 25 question stand-alone UST will have 45 minutes to complete the test. Of the 125 questions on the national test with the UST, 115 of the questions will be scored, while all of the 25 questions will be scored for individuals taking the stand alone UST.

This is no shell game. The minimum passing score on the national test with the UST will continue to be 75 percent. MLOs who previously have passed the national test, and take the stand-alone UST will be scored on the results of both their national test score and the stand-alone UST score.

Who would have thunk it a year ago – the breakdown of the national test with the UST will be as follows: (i) Federal Mortgage Related Laws (24 – 25 percent); (ii) General Mortgage Knowledge (19 – 20 percent); (iii) Mortgage Loan Origination Activities (19 – 20 percent); (iv) Ethics (14 – 15 percent); and (v) Uniform State Content (20 – 22 percent).

No Lucy pulling the football away, but there is a catch: several states that have adopted the UST will require additional educational requirements of their MLOs. Nonetheless, all told, an enormous stride forward by state regulators and CSBS to promote uniformity with the licensing of MLOs.

So come April 1st, be on the lookout for short-sheeted beds, offices wrapped in tinfoil, and hold onto your hat – a uniform state test for MLOs.

Yes, we can attest that this is current, true and complete (until the next change).

Senators Bob Corker (R-TN), Mark Warner (D-VA), David Vitter (R-LA), and Elizabeth Warren (D-MA) have introduced legislation that, if enacted, may make a partial dent in the U.S. housing reform effort. The “Jumpstart GSE Reform Act” (the “Legislation”), introduced on March 14 in the Senate Committee on Banking, Housing and Urban Affairs (the “Senate Banking Committee”), would prevent any increase in guarantee fees (“g-fees”) imposed by Fannie Mae and Freddie Mac (the “GSEs”) from offsetting other government spending. The Legislation would also prohibit the sale of GSE preferred stock by the United States Treasury (the “Treasury”) without Congressional approval and structural housing finance reform. Furthermore, on March 22, Senator Tim Johnson (D-SD), chairman of the Senate Banking Committee, offered a bipartisan amendment (the “Amendment”) to the Senate budget that would prohibit Congress from using g-fee increases to offset additional government spending. The Amendment was agreed to in the Senate by unanimous consent. Although this budget will not become law, the Amendment shows growing support for this issue.

The GSEs impose g-fees in order to compensate for the credit risk that they undertake when they own or guarantee mortgages. Some argue, as well, that the GSEs are increasing fees beyond an actuarial basis on current loans to generate revenue to pay off losses on earlier loans. While these fees are an essential ingredient in maintaining the liquidity of the GSEs, Congress has looked to these fees to fund government expenses outside of housing finance. For instance, in December 2011, Congress agreed to fund a short-term extension in the payroll-tax cut by directing the GSEs’ regulator, the Federal Housing Finance Agency (“FHFA”), to raise g-fees by 10 basis points (0.1 percent). Using g-fees to fund such external government shortfalls has undergone harsh criticism. Some critics have espoused that home buyers (who ultimately bear the cost of g-fees) should not be forced to subsidize tax cuts amidst a recovering housing market. Moreover, critics have suggested that g-fees must stay within the GSE family in order to promote GSE liquidity, and effectively wind the GSEs off of the taxpayer dole. As Senator Corker stated in a recent press release regarding the Legislation, “…if Congress were to spend ‘g’fee’ revenue from the GSEs on other programs, reforming these mortgage behemoths would become nearly impossible.”

Regarding the sale of GSE preferred stock, in September 2008, the Treasury agreed to provide financial assistance to the struggling GSEs in exchange for receiving senior preferred stock valued at the amount of assistance provided. As of December 2012, the Treasury has provided nearly $200 billion in support to the GSEs, and may be required to provide approximately another $275 billion, as needed. The Legislation would prevent the Treasury from divesting itself of this stock without Congressional approval and structural housing finance reform. In support of this position, Senator Corker has stated that “if Treasury were to decide to sell its preferred share investment without Congress having first reformed our housing sector, we would just be returning to a time when gains are for private shareholders and losses are for taxpayers.”

The Jumpstart GSE Reform Act offers two discrete solutions to the larger challenge of deleveraging government involvement from housing finance. However, both government and non-governmental stakeholders have called for comprehensive housing reform (by way of restructuring the government’s involvement in the GSEs, and perhaps the GSEs, themselves). Just last week, Acting FHFA Director Edward DeMarco delivered testimony before the House Committee on Financial Services, calling upon it to take aggressive action to overhaul the GSEs’ current role in the secondary market. As such, it is unclear what efficacy the Legislation’s two solutions, in isolation, would have.