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Nutter Bank Report, May 2013

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The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.


1. Fannie Mae and Freddie Mac to Limit Loan Purchases to “Qualified Mortgages”
2. Division of Banks Issues Guidance on Indirect Auto Lending
3. Court Allows Chapter 93A Claim in Foreclosure Case under the HAMP Program
4. CFPB Amends Ability-to-Repay Rule to Provide Regulatory Relief for Small Lenders
5. Other Developments: Remittance Transfers and CFPB-CSBS Supervisory Framework

1. Fannie Mae and Freddie Mac to Limit Loan Purchases to “Qualified Mortgages”

The Federal Housing Finance Agency (“FHFA”) has directed Fannie Mae and Freddie Mac (“GSEs”) to limit their future mortgage loan acquisitions to loans that meet the requirements for a “qualified mortgage” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Separately, the FHFA’s directive issued on May 2 will allow the GSEs to acquire mortgage loans that meet the special or temporary qualified mortgage requirements under the CFPB’s rule that implements the “ability-to-repay” provisions of the Dodd-Frank Act as well as mortgage loans that are exempt from the ability-to-repay rule. The ability-to-repay rule will become effective on January 10, 2014, so the GSEs will not be allowed to purchase any loan with an application date on or after January 10, 2014 if the loan is subject to the ability-to-repay rule and does not meet the requirements for a qualified mortgage. Effectively, this means that the GSEs will not purchase negative amortization or interest-only loans, loans with terms longer than 30 years, or loans with points and fees in excess of 3% of the total loan amount or such other limits on points and fees on certain low-balance loans as are set forth in the ability-to-repay rule. The ability-to-repay rule generally requires lenders, including banks, to make a reasonable, good faith determination of a consumer’s ability to repay before originating a home mortgage loan and establishes certain protections from liability for qualified mortgages.

    Nutter Notes: The GSEs issued statements on the FHFA directive on May 6 clarifying that they will continue to purchase mortgage loans that meet the underwriting and delivery eligibility requirements (such as existing debt-to-income ratios, loan-to-value ratios and reserves) stated in their respective selling guides. This includes loans that are processed through their automated underwriting systems. The GSEs said that they will initially rely on lender representations and warranties that loans are qualified mortgages, and will phase in a process to collect and assess data to assist in validating whether the loans actually meet the qualified mortgage criteria. The GSEs said that they currently intend to continue purchasing loans that qualify under certain programs intended to facilitate refinancings for consumers at risk of delinquency or default (specifically, Refi PlusTM, DU Refi PlusTM, and Freddie Mac Relief Refinance MortgagesSM) and loans sold under written negotiated exceptions to their respective seller guides. The CFPB has opted not to adopt a proposed exemption to the ability-to-repay rule for such GSE refinancing programs. The GSEs said that they would monitor the impact of the ability-to-repay rule and determine whether additional changes should be made to underwriting and eligibility requirements, pricing, file review processes, repurchase requirements, or the overall representation and warranty framework as a result of the rule.

2. Division of Banks Issues Guidance on Indirect Auto Lending

The Division of Banks issued a statement on April 29 recommending that Massachusetts depository institutions engaged in indirect auto lending follow recent CFPB guidance on compliance with the fair lending requirements of the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B. CFPB Bulletin 2013-02, released on March 21, discusses compliance issues for lenders that have policies that permit auto dealers to increase consumer interest rates and then compensate the dealers with a share of the increased interest revenues, commonly called a “reserve” or “participation.” According to the CFPB bulletin, such markup and compensation policies create significant risk of pricing disparities on the basis of race, national origin and potentially other prohibited bases because of the incentives the policies create. Under ECOA, it is illegal for a creditor to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age and other prohibited bases. Indirect auto lenders may be considered creditors under ECOA and Regulation B if, in the ordinary course of business, they regularly participate in credit decisions. Under certain circumstances, such indirect auto lenders may be liable for pricing disparities on a prohibited basis caused by an auto dealer or dealers. According to the guidance, the disparities triggering liability could arise either within a particular dealer’s transactions or across different dealers within the lender’s portfolio.  

    Nutter Notes: The CFPB guidance recommends that indirect auto lenders, including banks, take steps to ensure that they are operating in compliance with ECOA and Regulation B as applied to dealer markup and compensation policies. The recommendations include imposing controls on dealer markup and compensation policies and monitoring the effects of those policies so as to address unexplained pricing disparities on prohibited bases. The guidance also recommends eliminating dealer discretion to mark up interest rates and fairly compensating dealers using another mechanism that does not result in discrimination. The CFPB guidance lists features of a robust fair lending compliance program applicable to indirect auto lending, including an up-to-date fair lending policy statement, regular fair lending training for all employees involved in credit transactions, officers and board members, and ongoing monitoring for compliance with fair lending policies and procedures. The guidance also recommends that a compliance program include ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk, review of lending policies for potential fair lending violations, including disparate impact, and regular analysis of loan data in all product areas for potential disparities on a prohibited basis, depending on the size and complexity of the institution.

3. Court Allows Chapter 93A Claim in Foreclosure Case under the HAMP Program

A recent decision by a federal court of appeals has allowed a consumer to sue her bank under the Massachusetts consumer protection statute, Chapter 93A of the General Laws of Massachusetts, for failure to modify a home mortgage loan held by the bank, among other claims. The May 21 decision by the U.S. Court of Appeals for the First Circuit came in a case in which the consumer sought to modify the terms of her mortgage loan under the federal Home Affordable Modification Program (“HAMP”) after falling behind on scheduled payments. The consumer and the bank entered into a trial period plan (“TPP”) under HAMP guidelines, pursuant to which the consumer would become eligible for a permanent loan modification if she complied with the terms of the TPP, including making three consecutive monthly payments. The consumer made the required monthly payments under the TPP but the bank mistakenly denied the consumer a permanent loan modification, claiming that it did not receive all of the TPP payments on time. The bank eventually acknowledged the error and delivered a permanent modification agreement to the consumer several months after the expiration of the TPP, which constituted a breach of the TPP. The consumer evidently did not sign the permanent modification agreement and the bank initiated foreclosure proceedings. In its ruling, the court held that the consumer could make a claim against the bank for unfair debt collection practices under Chapter 93A for mishandling the HAMP process, among other mistakes.   

    Nutter Notes: At issue in this case was whether the consumer sufficiently claimed actual damages as a result of conduct in violation of Chapter 93A. The court held that the consumer’s allegations were sufficient where she claimed that, as a result of the bank’s conduct, she has suffered money damages including potential loss of equity in the home, damage to her credit rating and her ability to obtain loans or credit in the future, and an increase in interest rates she will have to pay on any existing or future loans and credit card accounts. The court’s opinion explained that Chapter 93A “provides a cause of action for a plaintiff who ‘has been injured,’ by ‘unfair or deceptive acts or practices,’” and that “[a] practice is unfair if it is within the penumbra of some common-law, statutory, or other established concept of unfairness; is immoral, unethical, oppressive, or unscrupulous; and causes substantial injury.” According to the court, violation of a statute is not a necessary element of a Chapter 93A claim, as the consumer protection law “creates new substantive rights and, in particular cases, makes conduct unlawful which was not unlawful under the common law or any prior statute.” Although in this case the court found evidence that the bank had breached a contract with the consumer, it held that liability under Chapter 93A is not precluded by the absence of a contractual breach.

4. CFPB Amends Ability-to-Repay Rule to Provide Regulatory Relief for Small Lenders

The CFPB has approved final amendments to its ability-to-repay rule for small creditors, community development lenders and housing stabilization programs. The amendments released on May 29 also revise rules on how to calculate loan origination compensation for certain purposes. The CFPB’s ability-to-repay rule was initially released in January of this year. The amendments make adjustments to the rule to promote lending by small lenders, including community banks that have less than $2 billion in assets and make 500 or fewer first-lien mortgages each year. The amended rule extends qualified mortgage status to certain loans that such small lenders hold in their own portfolios even if a consumer’s debt-to-income ratio exceeds 43% (which would otherwise not satisfy the criteria for qualified mortgages). The amended rule provides a two-year transition period during which small lenders can make mortgage loans with balloon payment features, subject to certain conditions, that may still be considered qualified mortgages. The amended rule also shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rule for small lenders from 1.5 percentage points above the average prime offer rate on first-lien loans to 3.5 percentage points because small lenders often have higher costs of funds, according to the CFPB. The amendments will take effect when the ability-to-repay rule becomes effective on January 10, 2014.   

    Nutter Notes: In addition to the changes benefitting small lenders, the CFPB amended the ability-to-repay rule to provide some exceptions to a Dodd-Frank Act requirement that loan originator compensation be included in the total permissible points and fees for both qualified mortgages and high-cost loans. The Dodd-Frank Act imposes a cap on points and fees on qualified mortgages, and requires that compensation paid to loan originators, such as loan officers and brokers, is included in the calculation of points and fees. According to the CFPB, the cap ensures that lenders offering qualified mortgages do not charge excessive points and fees. The amended rule excludes compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee from the calculation of points and fees for purposes of the cap. The amendment does not change the original provisions in the final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor. The amendments also exempt from the ability-to-repay rule certain nonprofit and community-based lenders that work to help low- and moderate-income consumers obtain affordable housing, as well as mortgage loans made by or through a housing finance agency or through certain homeownership stabilization and foreclosure prevention programs.

5. Other Developments: Remittance Transfers and CFPB-CSBS Supervisory Framework

  • CFPB Revises International Money Transfers Rule

The CFPB has approved amendments to its remittance transfer rule, which is part of Regulation E, to make optional a requirement that remittance transfer providers disclose foreign taxes or fees imposed by a recipient institution for receiving transfers into an account at the recipient institution. The amendments will take effect when the remittance transfer rule becomes effective on October 28, 2013.   

    Nutter Notes: The amendments also require a remittance transfer provider to attempt to recover transferred funds when the funds are deposited into the wrong account because the sender provided an incorrect account number or routing number. The amendments state that a remittance transfer provider will not bear the cost of any funds that cannot be recovered.

  • CFPB and CSBS Agree on Supervisory Framework for Larger Institutions

The Conference of State Bank Supervisors (“CSBS”) and the CFPB announced on May 21 that they have signed a new supervisory framework for coordination and information sharing between the CFPB and state banking regulators in supervision and enforcement work. The new framework establishes the process for how state and federal regulators will share supervision of non-depository financial services providers and covered depository institutions with more than $10 billion in assets.   

    Nutter Notes: According to the CFPB and CSBS, the new framework is intended to implement a flexible process to achieve examination efficiencies and to avoid duplication of time and resources. The new framework builds on a 2011 information-sharing memorandum of understanding between the CFPB, CSBS and various state financial regulatory agencies and regulatory associations.

Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a “broad platform of legal expertise and experience” in the practice “helps clients manage challenges and balance risks while delivering strategic solutions.” According to the 2013 Chamber and Partners review, bank clients report that Nutter banking lawyers are “proactive” in their thinking, “creative in structuring agreements, and forward-thinking in terms of making us aware of regulation and how it may impact us. We believe this approach is indicative of a true partner.” Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa Jentzen. The information in this publication is not legal advice. For further information, contact:

               Kenneth F. Ehrlich                    Michael K. Krebs
              Tel: (617) 439-2989                Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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