The Consumer Financial Protection Bureau (CFPB) recently issued an interim final rule, as well as an explanatory bulletin, to further detail and clarify the requirements of the agency’s mortgage servicing rules that were finalized in January 2013 (the Servicing Rules). The Servicing Rules implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amending the Real Estate Settlement Procedure Act of 1974 (RESPA) and the Truth in Lending Act (TILA) to provide borrowers with more detailed information regarding their loans, ensure that borrowers are not unexpectedly assessed charges or fees, and inform borrowers of alternatives to foreclosures.
Currently browsing the Residential Mortgages category.
Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power. The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument.
Here is the background: The city of Richmond, California, has long-faced deteriorating property values. Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard. City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations. And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.
In response, the City has considered a novel move: mortgage condemnations through the power of eminent domain. That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself. If implemented, banks would be forced to write down large portions of a borrower’s principal. The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan. And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme. The Network covered counterarguments as well.
Privy Council Rules on the Court’s Equitable Jurisdiction to Set the Financial Terms of Relief against Appropriation
[Editor's Note: The following post is authored by Ropes & Gray LLP]
Last week the Board of the Privy Council delivered a critical sequel to its previous judgments in connection with the Cukurova Group’s attempt to recover shares following an appropriation. The Board held that not only can the court reopen an appropriation and exercise its jurisdiction to grant relief from forfeiture after the event, as per its decision earlier this year, but it can also exercise its jurisdiction to determine the basis and conditions of such relief.
For mortgagors and borrowers in secured transactions, the decision provides a helpful guide as to the breadth and flexibility of equity’s ability, after forfeiture, to intervene in their favour and adjust the contractual terms where it would be unconscionable to enforce them strictly. Read the rest of this entry »
Last year the $25 billion National Mortgage Settlement meant to end mortgage servicing abuses was announced by federal and state officials; however, there is mounting evidence that not all the involved banks are living up to their commitment. The five banks involved with the settlement are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial Inc. In a recent letter, New York Attorney General Eric Schneiderman claims that Bank of America and Wells Fargo are violating the terms of the settlement. Schneiderman states that the two banks have committed a combined 339 violations of servicing standards, including deliberate delays by Wells Fargo and Bank of America to reviewing loan modification applications, a practice reminiscent of the “same misconduct that precipitated the National Mortgage Settlement.” Schneiderman has plans to sue both banks for failing to uphold their obligations under the settlement. However, in a letter to Schneiderman, Bank of America responded that they cannot be sued since they have not been given ample time to remedy their alleged violations. Both Bank of America and Wells Fargo say they remain committed to the terms of the settlement and deny that they have committed violations.
According to a recent story published by Corporate Crime Reporter, the proxy advisory services firm Institutional Shareholder Services (ISS) was fined by the SEC for failing to prevent one of its employees from distributing confidential material. In exchange for information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots, the employee, who no longer works at ISS, received expensive tickets to concerts and sporting events, meals, and an airline ticket. The SEC investigation revealed that ISS lacked sufficient controls over access to confidential client vote information, allowing for the employee to gather the data. As a result of the failure of ISS to protect its confidential information, the SEC has required ISS to pay a $300,000 penalty and allow for an independent compliance consultant to review its procedures and ensure they comply with the Investment Advisers Act’s requirements for treatment of confidential information.
More is better – or so it’s said. That’s bad news for Dell stockholders, as the Blackstone Group has dropped its bid for the company. Blackstone had not formally announced an offer to compete with the $13.65 per share Michael Dell hopes will take the company private. Through the due diligence process, Blackstone became unsatisfied with the world’s third-largest PC maker’s rapidly-atrophying marketshare—notably including a 14% decline in PC volume during 2013 Q1. With Blackstone out, the activist investor Carl Icahn is the only likely competitor. Mr. Icahn has preliminarily discussed a $15-per-share offer, but has not yet put it on the table. For more, see NYTimes and Business Insider.
AIG v. BAC is headed to New York state court. American International Group’s $10 billion lawsuit against Bank of America, filed in August 2011, alleges “fraudulent misrepresentations” regarding $28 billion in residential MBSs (mortgage-backed securities) which resulted in heavy losses for the insurer. The merits of the case have been stalled as each side has jockeyed for jurisdictional advantage. The Second Circuit Court of Appeal ruled this morning that the lower court had improperly denied AIG’s motion the case to state court. For more, see Reuters.
Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee. Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney. She appears likely to win confirmation (as early as next week). If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency. During her testimony, Ms. White said: “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.” For more, see the NYTimes. On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.
The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15. Registration is required. See a previous post for a complete description of this year’s symposium lineup.
Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger. In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’ “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case. The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank. For more, see Bloomberg.
A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.” The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.” Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.” Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?” For more, see the LATimes and Forbes.
[Editor’s Note: The following post is from Goodwin Proctor’s recent Financial Services Alert by Eric R. Fischer, Jackson B. R. Galloway, and Elizabeth Shea Fries. This and other updates from Goodwin Proctor are available here.]
On February 28, 2013, FRB Governor Sarah Bloom Raskin made a presentation entitled “Reflections on Reputation and its Consequences” to the 2013 Banking Outlook Conference at the Federal Reserve Bank of Atlanta. Governor Raskin noted that, in the aftermath of the 2007-2009 financial crisis, financial institutions of all sizes have seen a decline in the public’s perception of their reputation and trustworthiness (and she added that the quality of their reputation is of particular importance to financial institutions). Governor Raskin stated that the decline in public trust of, and confidence in, financial institutions has been increased recently by, among other things, “the Occupy Wall Street movement, payday loans, overdraft fees, rate-rigging settlements in London Interbank Offered Rate [LIBOR] cases, executive compensation and bonuses that seem to bear no relationship to performance or risk, failures in the foreclosure process, and a drumbeat of civil litigation.”
Please click here to read the rest of this entry.
The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages. The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act. The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.
The Ability-to-Repay rule is aimed at protecting American consumers. According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
Under the new rule:
- 1. Lenders are required to obtain and verify financial information from potential borrowers,
- 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
- 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.
In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors: 1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.
In August 2012, six federal financial regulatory agencies issued a proposed rule to implement Section 1471 of the Dodd-Frank Act which sets forth appraisal requirements for “higher-risk” mortgage loans.
The intended purpose of the proposed rule is to tighten valuation standards for homes in order to reduce the risk of appraisal fraud, a move meant to reassure creditors, borrowers, and investors alike. Section 1471 was created as part of Congress’ intention to prevent the use of false or inflated appraisals in obtaining mortgages. If the proposed rule is finalized without amendment, lenders seeking to issue high-risk mortgage loans will be “unable to value properties on the basis of broker-price opinions, automated valuations, or drive-by appraisals”. The proposed rule would affect mortgages with annual percentage rates (APRs) at designated levels above the Average Prime Offering Rate (APOR). First-lien loans (such as standard mortgages) with an APR 1.5 percentage points above the APOR would be classified as a higher risk mortgage under the proposed rule, while first-lien jumbo loans with APRs 2.5 percentage points above, and subordinate-lien loans with an APR 3.5 percentage points above the APOR would similarly be considered higher-risk.