Ballard Spahr LLP Mortgage Update

CFPB Finalizes Amendments to Mortgage Rules

The Consumer Financial Protection Bureau (CFPB) has finalized several amendments and clarifications to the mortgage rules that had been proposed on June 24, 2013. The amendments include revisions to the CFPB's mortgage servicing rules, loan originator compensation rules, rules related to financing credit insurance premiums, and ability-to-repay rules. Certain of the changes are detailed below.

Mortgage Servicing

The mortgage servicing amendments include a process for servicers to offer short-term forbearance plans to delinquent borrowers without completing the full loss-mitigation evaluation process. The rule permits a servicer to provide a six-month forbearance to a borrower who is suffering a short-term hardship, upon reviewing an incomplete loss mitigation application.

The amended rule clarifies which servicer activities are prohibited during the first 120 days of delinquency. Under the final rule, servicers will be allowed to send certain early delinquency notices required under state law that may provide information regarding borrower counseling or other resources.

The amendments include specific procedures for obtaining follow-up information in the event a servicer fails to identify and inform a borrower that information is missing, upon initial review of a loss mitigation application. They also provide additional details on how to inform borrowers about the servicer's contact address for the purpose of complaints and information requests.

Loan Originator Compensation

The amended rule on loan originator compensation clarifies the activities that administrative employees of a creditor or loan originator may engage in without being considered loan originators. It also changes the effective date for most of the loan originator compensation provisions from January 10, 2014, to January 1, 2014.

Financing Credit Insurance Premiums

The amended rule includes clarifications regarding the prohibition on financing credit insurance premiums. The rule now provides that credit insurance premiums are financed by a creditor when the creditor allows the consumer to defer payment of the premium past the month in which it is due. It further clarifies how the rule applies to levelized premiums.

Ability to Repay

The amended rule clarifies the types of fees and charges that must be counted toward points and fees thresholds under the ability-to-repay and high-cost mortgage rules. Among the changes:

• Points and fees items paid by third parties are included in the points and fees calculation as if paid by the consumer.

• Points and fees items paid by the seller are included in the points and fees calculation as if paid by the consumer, except for seller's points, which are excluded from points and fees.

• Points and fees items paid by the creditor are excluded from the points and fees calculation, except for compensation paid to a non-employee loan originator, which must be included in points and fees.

The text of amended final rule can be found here and additional resources can be found on the CFPB's Regulator Implementation page.

- Reid F. Herlihy


Mortgage Banking Industry Fights Use of Eminent Domain To Seize Underwater Mortgage Loans

In the aftermath of the foreclosure crisis, a number of local governments are weighing whether to use the power of eminent domain to assist homeowners struggling with underwater mortgages held by lenders who have issued mortgage-backed securities. The prospect of such government intervention has raised considerable concern in several corners, however, including within the mortgage banking industry.

For local government, the idea involves acquiring residential mortgages at less than market value. The local government then refinances the loan at an amount slightly more than it paid, theoretically resulting in a lower principal amount and possibly some equity for the homeowner. A consultant or private entity assists the local government throughout the process and is entitled to fees.

Two municipalities that have considered governmental seizure of private mortgages are the City of Richmond, California, and the City of North Las Vegas, Nevada. While Richmond has embraced the idea in the face of significant opposition, North Las Vegas has decided not to travel this path.

Earlier this month, the Richmond City Council approved a resolution to establish a Joint Powers Authority with other interested municipalities to develop an eminent domain program related to mortgages. The mayor of the City of El Monte has expressed support for the proposal. A resolution also has been introduced urging the City and County of San Francisco Board of Supervisors to offer their support and to explore whether the use of a similar program would make sense in their respective jurisdictions. Seattle and Newark, New Jersey, also may be considering similar plans.

Opponents of Richmond's plan, and opponents of this type of eminent domain use in general, have argued that it will simply invite litigation. At least one lawsuit was filed in federal court by certain bondholders against Richmond, but it was recently dismissed for lack of ripeness because the City's plan is not in a final form. In addition, Mortgage Bankers Association President and CEO David H. Stevens has called the program "a short-term solution for a few underwater borrowers that will have severe negative long-term costs for every homeowner in the city."

Like the City of Richmond, the City of North Las Vegas initially approved an agreement to develop a plan to seize certain mortgage loans. At the City Council meeting, Ballard Spahr spoke against the plan on behalf of members of the mortgage banking industry. Ultimately, North Las Vegas approved entering into an agreement with a private entity that would assist in implementing a plan to seize certain privately held mortgages.

A change in the political landscape, however, led the City of North Las Vegas to terminate the plan. This occurred after a new mayor and a new city council member were later seated and replaced two supporters of the plan. Additionally, the city manager and the city attorney, who also supported the plan, resigned.

While the recent federal complaint against the City of Richmond's plan was dismissed, it is likely that as its plan approaches a final form, more lawsuits will ensue. Depending on how far such eminent domain plans have progressed in other cities, though, early involvement at the local government level may prove to be more fruitful for the lending industry than litigation. Ballard's Spahr's Mortgage Banking Group is assisting members of the industry in their fight against the use of eminent domain to seize and restructure underwater mortgages.

- Abran Vigil and Edward Chang


States Announce New Criminal Background Checks for License Renewal

Multiple state regulators are introducing new background check procedures for MLOs licensed through NMLS. Under FBI rules, Connecticut, Delaware, Florida, Hawaii, Idaho, Massachusetts, Missouri, Montana, Nebraska, New York, North Carolina, Puerto Rico, Rhode Island, the Utah Department of Financial Institutions, and the Commonwealth of Puerto Rico now require a new criminal background check to renew a mortgage loan originator license for 2014.

These state agencies also require an MLO to submit new fingerprints with a criminal background request if the fingerprints on record in NMLS are older than three years. NMLS has notified all affected MLOs and company account administrators via e-mail.

- Marc D. Patterson


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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