Author Archives: David Reiss

Reiss on Countrywide Verdict

Posted on by

Law360 interviewed me in DOJ’s Countrywide Win Could Force More Bank Settlements (behind a paywall).  The story opens

The U.S. Department of Justice’s victory in a case against Bank of America Corp.’s Countrywide subsidiary over a housing-bubble-era mortgage program shows the power of a 1980s fraud statute, and could further encourage banks to settle future financial crisis cases, attorneys say.

A federal jury in New York on Wednesday unanimously found that Countrywide Financial Corp. and one of its former executives defrauded Fannie Mae and Freddie Mac through a program designed to speed up mortgage issuing in 2007 and 2008.

The court victory was significant in part because of U.S. Attorney Preet Bharara’s use of the Financial Institutions Reform Recovery and Enforcement Act, a law that grew out of the 1980’s savings-and-loan crisis, to bring a case over the 2007-09 financial crisis. With a fairly low standard of proof and a 10-year statute of limitations, a jury’s verdict based on FIRREA bodes well for future government cases, said Brooklyn Law School professor David Reiss.

“This successful use of FIRREA makes it much more likely that financial institutions are going to settle with the government,” he said.

Qualified Mortgage Fair Lending Concerns Quashed

Posted on by

Federal regulators (the FRB, CFPB, FDIC, NCUA and OCC) announced that “a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” This announcement was intended to address lenders’ concerns that they could be stuck between a rock (QM regulations) and a hard place (fair lending requirements pursuant to the Equal Credit Opportunity Act and the Fair Housing Act). For instance, a lender might want to limit its risk of lawsuits relating to the mortgages it issues that could arise under a variety of state and federal consumer protection statutes by only issuing QMs only to find itself the defendant in a Fair Housing Act lawsuit that alleges that its lending practices had a disproportionate adverse impact on a protected class.

The five agencies issued an Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule that gives some context for this guidance:

the Agencies recognize that some creditors’ existing business models are such that all of the loans they originate will already satisfy the requirements for Qualified Mortgages. For instance, a creditor that has decided to restrict its mortgage lending only to loans that are purchasable on the secondary market might find that — in the current market — its loans are Qualified Mortgages under the transition provision that gives Qualified Mortgage status to most loans that are eligible for purchase, guarantee, or insurance by Fannie Mae, Freddie Mac, or certain federal agency programs.

With respect to any fair lending risk, the situation here is not substantially different from what creditors have historically faced in developing product offerings or responding to regulatory or market changes. The decisions creditors will make about their product offerings in response to the Ability-to-Repay Rule are similar to the decisions that creditors have made in the past with regard to other significant regulatory changes affecting particular types of loans. Some creditors, for example, decided not to offer “higher-priced mortgage loans” after July 2008, following the adoption of various rules regulating these loans or previously decided not to offer loans subject to the Home Ownership and Equity Protection Act after regulations to implement that statute were first adopted in 1995. We are unaware of any ECOA or Regulation B challenges to those decisions. Creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. As with any other compliance matter, individual cases will be evaluated on their own merits. (2-3)

 Lenders and their representatives have raised this issue as a significant obstacle to a vibrant residential mortgage market. This interagency statement should put this concern to rest.

Private Capital and the Mortgage Markets

Posted on by

The American Securitization Forum recently wrote to the Federal Housing Finance Agency to argue for at least a small reduction in the size of the loans that Fannie and Freddie can guaranty. While this makes sense to me, it is pretty controversial.  The ASF argues that “incremental reductions are appropriate for the following reasons:”

(i) as a means to begin scaling back the outsized role the GSEs currently play in the U.S. housing finance system and encourage the return of private capital;

(ii) FHFA has the legal authority in its role as conservator to act according to its dual mandate; and

(iii) the timing of any Congressional action on wide-ranging housing finance reform remains uncertain. (1)

Various groups like the Realtors and some members of Congress argue that any restriction of credit is unwarranted while the housing recovery is so tentative. The ASF notes, however, that the federal government is insuring roughly 90% of new residential mortgages. Virtually no one supports such a level of government support for the mortgage market, so the only question is one of timing. Do we start cutting back now or do we wait for better market conditions?

Others argue that there is not enough private capital to replace the government guaranteed capital in the market. But scaling back the Fannie/Freddie loan limit is a great way to work private capital back into the market gradually. The long term health of the American mortgage market is best assured by having private capital assume as much of the credit risk as it can responsibly handle. This private capital should also be subject to consumer protection regulation to ensure that it is not put to predatory uses. The Consumer Financial Protection Bureau has rules in place to provide that consumer protection. The FHFA should complement that regulatory action with its own. It should reduce the Fannie and Freddie loan limits starting in 2014.

Access to Sustainable Credit

Posted on by

Reid & Quercia have posted Risk, Access and the QRM Reproposal. This document is intended to influence the most recent proposed rulemaking for the Qualified Residential Mortgages (QRMs). The rulemaking process for the QRM has been controversial and the stakes could not be higher for the health of the residential mortgage market. The first  proposed rulemaking in 2011 would have required QRMs to have substantial down payments. A broad coalition of lenders and consumer groups believed that this requirement would excessively restrict credit and so the regulators responsible for the QRM rule issued an new proposed rulemaking in 2013 that removed the requirement for down payments from the QRM definition.

Reid & Quercia argue that the more restrictive 2011 proposed QRM rule only provided marginal benefits over the 2013 proposed QRM rule, while significantly restricting credit particularly for households of color. They note that the “objective of weighing the marginal benefit of stricter QRM requirements against the costs of cutting off access to the mainstream mortgage market is an important one.” (7) They have created simple metrics “for evaluating the tradeoffs of reducing the number of defaults against the number of successful borrowers who would not be able to obtain a QRM loan as a result of stricter down payment and credit score requirements” (7)

While Reid & Quercia do not say so explicitly, I believe that their metrics, such as the benefit ratio, should be explicitly worked into the final QRM rule so that regulators are constantly considering the two sides of credit: availability and sustainability. There is a lot of pressure to increase access to residential mortgage credit by a range of players — consumer advocates, lenders and politicians to name just a few. But credit that cannot be sustained by homeowners leads to mortgage default and foreclosure. We will be doing new homeowners no favors by letting them take out mortgages with payments that they cannot consistently make, year in and year out.

 

Making Sense of Finance Charges

Posted on by

The Consumer Financial Protection Bureau has a very helpful Finance Charge Chart (page 13) in its Truth In Lending Act examination procedure manual.  The manual is “intended for use by CFPB examiners in examining the mortgage companies and other financial institutions subject to the new regulations.”

Figuring out the finance charge for the purposes of calculating the Annual Percentage Rate (APR) can be very difficult. The manual states that the finance charge

initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the creditor requires use of the third party. Charges imposed on the consumer by a settlement agent are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge is not otherwise excluded from the finance charge. (14)

The chart makes clear which charges are always included, which are included unless certain conditions are met, which are typically not included and which are never included.

The guide also has a useful history of TILA and overview of Regulation Z (which implements TILA).  It also includes (on page 9) a flowchart that explains what kind of credit is covered by Regulation Z.

 

$2.7 Million Punitive Damages for Wrongful Foreclosure Action

Posted on by

Many argue (see here, for instance) that wrongful foreclosures aren’t such a big deal. A recent case, Dollens v. Wells Fargo Bank, N.A., No. CV 2011-05295 (N.M. 2d Jud. Dist. Aug. 27, 2013)  highlights just how bad it can be for the homeowner who has to defend against one.

Dollens, the borrower, died in a workplace accident but had purchased a mortgage accidental death insurance policy through Wells Fargo, the lender (although the policy was actually underwritten by Minnesota Life Insurance Company). Notwithstanding the existence of the policy, Wells Fargo kept trying to foreclose, even five months after the insurance proceeds paid off the mortgage.  Some lowlights:

  • “Apparently, ignoring its ability to to make a death benefit claim is typical of how Wells Fargo deals with such situations. . . . This is a systemic failure on the part of Wells Fargo.” (4)
  • “There is no doubt that Wells Fargo’s conduct was intended to take advantage of a lack  of knowledge, ability, experience or capacity of decedent’s family members, and tended to or did deceive.” (5)
  • “Wells Fargo charged the Estate for lawn care of the property” even though the “property did not have a lawn.” (6)

The court found that the”evidence of Wells Fargo’s misconduct is staggering.” (6) The court also found that “Wells Fargo used its computer-driven systems as an excuse for its ‘mistakes.’ However, the evidence established that this misconduct was systematic and not the result of an isolated error.. . . The evidence in this case established that the type of conduct exhibited by Wells Fargo in this case has happened repeatedly across the country.” (7) As a result of these findings, the Court awarded over $2.7 million in punitive damages.

Mary McCarthy famously said that “[b]ureaucracy, the rule of no one, has become the modern form of despotism.” We generally think of this in terms of government actors, but it applies just as well to large financial institutions that implement “computer-driven systems” that seemingly cannot be overwritten by a human being who might exercise common sense and common decency.

Given that this type of problem seems to affect all of the major loan servicers, I must reiterate, thank goodness for the CFPB.

 

[HT April Charney]

Glaski Full of It?

Posted on by

I had blogged about Glaski v. Bank of America, No. F064556 (7/31/13, Cal. 5th App. Dist.) soon after it was decided, arguing that it did not bode well for REMICs that did not comply with the rules governing REMICS that are contained in the Internal Revenue Code. The case is highly controversial. Indeed, the mere question of whether it should be a published opinion or not has been highly contested, with the trustee now asking that the case be depublished. The request for depublication is effectively a brief to the California Supreme Court that argues that Glaski was wrongly decided.

Because of its significance, there has been a lot of discussion about the case in the blogosphere. Here is Roger Bernhardt‘s (Golden Gate Law School) take on it, posted to the DIRT listserv and elsewhere:

If some lenders are reacting with shock and horror to this decision, that is probably only because they reacted too giddily to Gomes v Countrywide Home Loans, Inc. (2011) 192 CA4th 1149 (reported at 34 CEB RPLR 66 (Mar. 2011)) and similar decisions that they took to mean that their nonjudicial foreclosures were completely immune from judicial review. Because I think that Glaski simply holds that some borrower foreclosure challenges may warrant factual investigation (rather than outright dismissal at the pleading stage), I do not find this decision that earth-shaking.

Two of this plaintiff’s major contentions were in fact entirely rejected at the demurrer level:

-That the foreclosure was fraudulent because the statutory notices looked robosigned (“forged”); and

-That the loan documents were not truly transferred into the loan pool.

Only the borrower’s wrongful foreclosure count survived into the next round. If the bank can show that the documents were handled in proper fashion, it should be able to dispose of this last issue on summary judgment.

Bank of America appeared to not prevail on demurrer on this issue because the record did include two deed of trust assignments that had been recorded outside the Real Estate Mortgage Investment Conduit (REMIC) period and did not include any evidence showing that the loan was put into the securitization pool within the proper REMIC period. The court’s ruling that a transfer into a trust that is made too late may constitute a void rather than voidable transfer (to not jeopardize the tax-exempt status of the other assets in the trust) seems like a sane conclusion. That ruling does no harm to securitization pools that were created with proper attention to the necessary timetables. (It probably also has only slight effect on loans that were improperly securitized, other than to require that a different procedure be followed for their foreclosure.)

In this case, the fact that two assignments of a deed of trust were recorded after trust closure proves almost nothing about when the loans themselves were actually transferred into the trust pool, it having been a common practice back then not to record assignments until some other development made recording appropriate. I suspect that it was only the combination of seeing two “belatedly” recorded assignments and also seeing no indication of any timely made document deposits into the trust pool that led to court to say that the borrower had sufficiently alleged an invalid (i.e., void) attempted transfer into the trust. Because that seemed to be a factual possibility, on remand, the court logically should ask whether the pool trustee was the rightful party to conduct the foreclosure of the deed of trust, or whether that should have been done by someone else.

While courts may not want to find their dockets cluttered with frivolous attacks on valid foreclosures, they are probably equally averse to allowing potentially meritorious challenges to wrongful foreclosures to be rejected out of hand.