Banking Law Prof Blog

Mortgage Electronic Registration System Threatened by Kansas Supreme Court Opinion

The Kansas Supreme Court recently found the the Mortgage Electronic Registration System (MERS), which is in the chain of title of approximately 60 Million real estate secured loans could not challenge a foreclosure action by a senior creditor.  The Kansas Court held that, although MERS is recorded as a mortgagee, it is not entitled to be served or joined as a party to the foreclosure of a senior mortgage because it is a mere nominee, and not a true obligee under the debt or holder of rights under the mortgage.

The case is Landmark National Bank v. Kesler.  This case and other challenges to MERS threaten banks in second lien positions.

Link to NY Times article:  http://www.nytimes.com/2009/09/27/business/27gret.html 

Link to blog posting by University of Missouri - Kansas City School of Law Professor Patrick A. Randolph, Jr. about the case:  http://dirt.umkc.edu/SEP2008/DD_09-18-08.htm

Thanks to Frisco, TX, attorney Roger Hood for bringing this case to my attention!

(ag) Oct. 1, 2009, in Lending Issues/Secondary Mortgage Market Issues

Eighth Circuit Recognizes Limits on Federal Preemption

The U.S. Court of Appeals for the Eighth Circuit recently ruled that national bank assignees or purchasers of mortgages are not completely shielded from state law violation claims by a blanket claim of federal preemption.  The case is Thomas v. U.S. Bank. 

Plaintiff/Appellants are Missiouri homeowners who received "high loan-to-value" second mortgages (reflecting total debt of 125% of the value of their homes) from FirstPlus Bank, a federally insured state-chartered bank which has since failed.  Their mortgages were purchased or assumed by other banks, including some national banks.

Plaintiffs claim that the loans violated state law, specifically the Missouri Second Mortgage Loans Act (MSMLA) which limits the type and amount of closing costs and fees that can be imposed on residential second mortgages secured by MissourI real estate.

The national banks removed the case to federal court and successfully moved for dismissal of the case, contending that state law claims were completely preempted by the Depository Institutions Deregulation and Monetary Control Act (DIDA). 

On appeal, the Eighth Circuit reversed and remanded to state court for trial.  The Eighth Circuit opinion distinguished preemption under the National Bank Act (NBA) and the limited scope of preemption provided by the plain language of DIDA.  NBA would have applied if national banks had originated the loans.  DIDA applies to loans originated by statte-chartered banks.

State law claims in this case are not preempted because state law usury limits are higher than the ceiling provided under federal law -- even though these claims are for non-refundable broker's fees that exceeded MSMLA limits and for closing costs and fees that exceeded the fees actually charged by third-party providers where the originator FirstPlus retained the difference.

The state law remedy -- forfeiture of interest and twice the interest paid -- is not preempted here -- if the state law claims can be established at trial.

Link:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ThomasvUSBankNational.pdf

(ag) Sept. 5, 2009, in Federal Preemption, Lending Issues, Consumer Protection, Predatory Lending, Dual Banking

New RESPA FAQs

The Department of Housing and Urban Development (HUD) has posted new FAQs for its RESPA (Real Estate Settlement Procedures Act) regulations.

Some new requirements were effective January 16, 2009.  Other very significant changes involving revised Good Faith Estimates (GFEs) and HUD-1 Settlement Statements will be effective January 1, 2010.  The time to prepare is now!

Link:  http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf

(ag) August 23, 2009, in Lending Issues

GAO Suggests More HMDA Reporting Needed

The Government Accountability Office (GAO) has submitted a report to Congress entitled "Fair Lending:  Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts." 

One of the key recommendations is that Congress require financial institutions to submit more underwriting-related data, including credit scores, loan-to-value and debt-to-income ratios, and personal characteristics such as race, ethnicity, and sex, as well as requiring data for nonmortgage loans. 

GAO says the purpose for requiring more data is "To facilitate the capacity of federal enforcement agencies and depository institution regulators as well as independent researchers to identify lenders that may be engaged in discriminatory practices in violation of the fair lending laws."

(ag) August 15, 2009, in Fair Lending/Lending Issues, HMDA

Hey Noah, There's a New Q&A on Flood Insurance

The federal banking agencies have published a new set of Questions and Answers on Flood Insurance.  This may sound mundane in comparison to issues relating to the financial crisis and proposed restructuring of the nation's regulatory framework, but let me assure you that bank examiners still think this is very important.  If a bank loses its collateral to uninsured flood damage, that's a real loss. 

The agencies are also seeking comment on additional questions and answers.

Link:  http://www.fdic.gov/news/news/press/2009/pr09127.html

(ag) July 23, 2009, in Lending Issues

What Happens to Restructured Loans and Bank Capital

One-to-four-family mortgage loans usually have a risk-weighting of 50% for purposes of calculating a bank's capital requirements.  Once they're restructured, they receive a risk-weighting of 100%.  Banks suddenly need a lot more capital to balance these assets that have been recognized as riskier. 

What has really changed?  Well, nothing about the loans.  They carried just as high a risk of default one minute before restructuring as they do one minute after, but the impact on the amount of capital required can be quite significant!  Some of the biggest banks won't be able to do this without a capital infusion from somewhere.  Let's see, where to find more capital . . . .

Oh, I know, we'll change the rules about risk-weighting.  We'll let the restructured loans keep their previous risk-weighting, "so long as the loan continues to meet other prudential criteria."

Link to Interim Final Rule:  http://www.occ.treas.gov/ftp/bulletin/2009-22.html

(ag) July 12, 2009, in Capital, Lending Issues, Federal Banking Agencies, Economy

Clark Abrahams and the Comprehensive Credit Assessment Framework (CCAF)

This week, I've been talking by e-mail with Clark Abrahams, long-time financial institutions compliance advisor and author of CREDIT RISK ASSESSMENT:  THE NEW LENDING SYSTEM (2009).  In his July 2, 2009, blog post, he discusses the proposed Consumer Financial Protection Agency ("CFPA").  He sees the administration's push for "plain vanilla" loan products as bringing with it the need for different means of evaluating a borrower's creditworthiness.  He is working on a Comprehensive Credit Assessment Framework ("CCAF"). 

Credit scores alone are an insufficient indicator of true risk.  Abrahams recognizes the need to include additional "alternative data to qualify borrowers who fall outside of the mainstream"  and to avoid the “one size fits all aspect of credit scoring by conditionally assessing each borrower and deciding what factors are most relevant in a particular situation and what, if any, secondary factors need to be considered in order to render a final decision and, if approved, appropriately price the loan."

Here are some more of his thoughts about evaluating loan applications in the current economic situation and soon-to-be-changing regulatory framework:

" Reading the news, it is obvious that folks like to come up with generalizations, or rationalizations, regarding just about anything.  Perhaps it is the human mind's desire to try to organize information and create rules around observed behavior.   

So, how does this idea relate to the financial crisis, new lending systems, and borrowers, lenders, and investors?  Well, in my travels and discussions with lenders, I have found that they like to generalize a good bit, and their policies reflect that tendency.  In this day and age, it is routine for people to get associated with a number – like their credit score for example.  But people are people, not numbers, and when we start treating people like numbers we end up in a rut like we have today. 

There has been far too much reliance put on credit scores, for starters.  In addition, when lenders decide to tighten or loosen credit standards, they adjust thresholds on individual credit factors in a fragmented fashion – e.g. lower the cap on debt-to-income ratio from 40 to 36 percent, or lowering of the loan-to-value ratio from 90 to 80 percent, or raise the minimum FICO score from 620 to 640, etc.  These sort of adjustments mow down a lot of qualified applicants along with the more marginal ones. 

So what would be a good way to manage risk and adjust credit standards?  The answer is adoption of a comprehensive framework that covers all of the bases at once.  So, what is a proper adjustment of the debt-to-income ratio if credit policy needs tightening?  The answer is: “That Depends!”  For some, the debt ratio does not need to be lowered.  For others it may need to be lowered more than for others.  Still, for others, it may actually make sense to raise it.  I am trying to get folks to imagine a world that avoids sweeping generalizations and treats people more like individuals."

--

My comments:

Long ago and far away -- let's say 30 years ago -- our remembrance is that lenders did sit across the desk from prospective borrowers from the same community, whom they saw every day in the grocery store, the feed store, and in church.  Just like in "It's a Wonderful Life," right?  Well, maybe. . .

Even if this were an accurate picture of lending in the past, we can't go back.  We live in a world of computer models and greater risk tolerance as well as greater consumer appetite for debt.  We've seen the result of carrying risk tolerance and high debt levels come crashing down around us.  We're still struggling to figure out what comes next. 

Objective lending criteria like credit scores make it easy for lenders who lack the skill to make subjective loan decisions.  And they avoid charges of impermissible discrimination.  If it's all quantifiable, it can't be discriminatory.  Can it?  

This is the tension.  How to more accurately evaluate each loan application, without tripping over fair lending laws. 

Other problems are inherent in the credit scores themselves.  Of course, their creators want to maintain the proprietary advantage of keeping confidential the information and algorithms that spit out the scores.  But as long as the scores remain a "black box," we will have trouble on this front.  More study and reform of the consumer credit rating agencies should be on our radar screen.

(ag) July 7, 2009, in Lending Issues

 

Banks and the Right of Setoff - Lehman Brothers Bankruptcy Illustrates a Potential Pitfall

Established law says that even after a bankruptcy petition is filed, a bank may have the right to offset amounts in an account owned by the debtor against loans the same debtor owes to the bank -- WITH APPROVAL OF THE BANKRUPTCY COURT IN RESPONSE TO THE CREDITOR'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY. 

In addition to Bankruptcy Court approval, two other conditions must be met: 

1. The debt must be unconditionally fixed, due and owing before the debtor files the petition in bankruptcy; and 
2. At the time the bankruptcy petition is filed, the account and the debt to be offset must be in the same right and capacity.  (That means, for example, that the bank can't offset amounts in an account owned by X Corporation against a debt owed by Y Corporation even if Y Corporation is an affiliate of X).

So here's the problem in the Lehman Brothers Holdings, Inc, bankruptcy case: 

Lehman Brothers Holdings, Inc., owed a substantial sum to DnB NOR Band ASA (the "Bank").  The amount in question was denominated in Norwegian Kroner and not converted to dollars in the reported case, so let's just say there was a lot of money at stake. 

Before the bankruptcy filing by Lehman Brothers Holdings, Inc., a related but distinct corporate entity, Lehman Brothers Commercial Corporation, initiated a book transfer of funds to an account owned by Lehman Brothers Holdings, Inc.  The transfer of funds was initiated on Friday, three hours after the bank's cutoff time, which meant that the bank's account agreements provided that funds would be treated as transferred on the next business day which was Monday.  Before the transfer could be finalized around noon on Monday, Lehman Brothers Holdings, Inc., had filed a petition in bankruptcy. 

The issue facing the court was whether the transfer was deemed complete before the filing of the bankruptcy petition.  If the transfer was complete, the funds could be offset.  If not, the bank could not use offset to effect payment of the debt owed by Lehman Brothers Holdings because the funds were still owned by an entity other than Lehman Brothers Holdings at the moment the bankruptcy petition was filed.  

In this case, the delay in processing the transfer meant the bank was out of luck.  No offset was permitted because the deposit and the debt were not mutual (owned and owed in the same right and capacity) at the time the bankruptcy petition was filed.  Timing is everything!

In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

 

Link to background about Lehman Brothers Holdings bankruptcy:  http://www.bloomberg.com/apps/news?sid=awh5hRyXkvs4&pid=20601087

 

Link to case:  Download 08_13555 2

Thanks to Karen Neeley of the law firm Cox Smith in San Antonio and Austin, Texas, for mentioning this case in her client newsletter.   

(ag) July 6, 2009, in Lending Issues

Ohio Court Says Securitizing Subprime Mortgages Is Not Public Nuisance

The City of Cleveland advanced a novel legal theory when it sued a host of lenders, including Ameriquest, Bank of America, Bear Stearns, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, JP Morgan Chase, and others.  The U.S. District Court for the Northern District of Ohio, Eastern Division, however, did not bite. 

The City claimed that subprime lending was "categorically inappropriate" for Cleveland.  The lawsuit did not attack subprime lending directly, but claimed that securitizing subprime loans into mortgage-backed securities constituted a public nuisance.

Damages sought included the cost of monitoring, maintaining, and demolishing foreclosed properties and the diminution in property tax revenues caused by the depreciating effect foreclosures had on affected homes and surrounding properties.

Link to the May 15, 2009, Court Order dismissing the complaint:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ClevelandOpinion.pdf

(ag) June 8, 2009, in Lending Issues

Compliance Officer Alert: New Reg Z Disclosures

Changes to Regulation Z (Truth in Lending Act or TILA) Disclosures mandated by the Mortgage Disclosure Improvement Act (MDIA) become effective July 30, 2009, and will apply to all closed end loans secured by consumer dwelling received on or after that date.

Creditors must give good faith estimates of mortgage loan costs ("early disclosures") within three business days after receiving a consumer's application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer's credit history.  Early disclosures for loans secured by dwellings other than the consumer's principal dwelling, such as a second home, are now required as well.

Creditors must wait seven business days after providing the early disclosures before closing the loan.  Redisclosure is required to show a revised annual percentage if a change occurs that makes the APR in the early disclosures inaccurate beyond a specified tolerance.

Be sure to check the definition of "business day." 

The consumer may waive either or both of the seven and three day waiting periods but only for a bona fide financial emergency.  Handle this waiver with care -- and use it rarely!!!

Don't forget that in Texas, there are also extra home equity loan disclosure requirements.

Link:  http://www.federalreserve.gov/newsevents/press/bcreg/20090508a.htm

(ag) June 8, 2009, in Lending Issues/Regulation Z

Proposed Rule for Mortgage Originator Registration

Today, the federal financial institution regulatory agencies jointly proposed a regulation implementing the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.  This proposal will be published in the Federal Register soon and a public comment period will be open for 30 days thereafter.

Link:  http://www.occ.treas.gov/ftp/release/2009-58.htm

(ag) June 1, 2009, in Lending Issues

Bank Failure Basics for Borrowers

The FDIC has a new “Borrower’s Guide to an FDIC Insured Bank Failure,” which provides information about:

·          Bank Failure generally

·         FDIC’s policy to return assets (loans are bank assets) to the private sector as quickly as possible

·         How FDIC communicates with borrowers about loan servicing, including who to pay and the advice to seek new financing promptly if possible

·         What a borrower should do when experiencing financial difficulty

·         FDIC policies about lines of credit, construction & development financing, and additional funding requests

·         What to expect when FDIC sells a loan

·         How to contact the Ombudsman

 

(ag) May 25, 2009 In Lending Issues/Federal Banking Agencies-FDIC

 

Bankers Say They've Learned Their Lessons

In testimony before the U.S. House of Representatives Financial Services Committee, an American Bankers Association representative testified that bank lending practices are trending away from risky lending and back toward conservative underwriting.  (Let’s hope so!)  Bankers are asking Congress not to overregulate in response to the current crisis.

Link:  http://www.aba.com/NR/rdonlyres/222CE044-577A-11D5-AB84-00508B95258D/59450/ABAFinalApril232009GaryBernerHouseFSC.pdf

(ag) May 14, 2009 in “Lending Issues”

Mortgage Metrics

The OTS and the OCC have jointly published a "Mortgage Metric Report" with data from the fourth quarter of 2008 and for the full year 2008.  See what national banks and thrifts were doing in graphic format.  The Report includes information about credit quality, defaults, loan modifications, and foreclosures.

Link:  http://www.occ.treas.gov/ftp/release/2009-37a.pdf

(ag) May 6, 2009, in Lending Issues

Foreclosure Rescue Scams

Not surprisingly, scammers are taking advantage of the current economic crisis to bilk the unsuspecting.  Have they no shame?  Apparently not!

The Financial Crimes Enforcement Network (FinCEN) is instructing banks to file Suspicious Activity Reports (SARs) about any such activity they discover and to use the term "Foreclosure Rescue Scam" in the SAR filing.

FinCEN also provides a list of "red flags" that may indicate a foreclosure rescue scam, including:

• Homeowners who have been tricked into making payments to an entity other than the mortgage holder;
• Unscrupulous ploys to convince a homeowner to sign a quitclaim deed in return for mortgage help;
• Third party "foreclosure specialists" who:
  •  chargeup-front fees,
  • accept payment only in cash or by cashier's check or wire transfer,
  •  pressure homeowners to sign documents they don't understand, 
  • charge homeowners to get help from a federal affordable housing program,
  • offer to buy the house and rent it back to the homeowner,
  • guarantee that they can stop foreclosure,
  • falsely claim to be affiliated with the government, or
  • instruct the homeowner not to contact the lender, a lawyer or a financial counselor.
• Homeowners who appear to be committing fraud, for example, by claiming that they do not have to repay a loan because the loan contract is invalid.

Link to FinCEN Advisory 2009-A001 (April 6, 2009), Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding Loan Modification/Foreclosure Rescue Scams:  http://www.fincen.gov/statutes_regs/guidance/html/fin-2009-a001.html

(ag) April 6, 2009, in BSA/AML, Lending Issues

Asking for Mortgage Foreclosure Forbearance Until Oct. 1

The Hope for Homeowners Act portion of the comprehensive Mortgage Reform Bill will go into effect on Oct. 1, 2008, and House Financial Services Committee Chairman Barney Frank is asking lenders to delay taking action on mortgage foreclosures until Oct. 1, 2008, when the new programs become available to at-risk homeowners.

Link:  http://www.house.gov/apps/list/press/financialsvcs_dem/press072508.shtml

(ag) July 31, 2008, in Lending Issues

OCC's Views on FHA Housing Stabilization & Homeownership Retention Act of 2008

Comptroller John Dugan presented the agency's views on the FHA Housing Stabilization and Homeownership Act of 2008 before Congress today.  This is basically a voluntary loan workout program with the lender taking a write-down and the borrower getting a refinanced FHA-guaranteed loan at the reduced principal amount. 

Link:  http://www.occ.gov/ftp/release/2008-38.htm

(ag) April 9, 2008, in Congress/Lending Issues

Warren Buffett Comments on the Subprime Mortgage Lending Crisis

Excerpt from Warren Buffett's current Letter to Berkshire Hathaway Shareholders: 

"Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.

As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight."

Link:  http://www.berkshirehathaway.com/letters/2007ltr.pdf

(ag) April 2, 2008, in Lending Issues

Commercial Real Estate Concentrations - The Next Problem Loan Category?

FDIC has issued a Financial Institution Letter (FIL 22-208, March 17, 2008) reemphasizing the importance of risk management strategies and strong capital to back Commercial Real Estate and Construction & Development concentrations. As our economy edges toward recession, losses in these loan concentrations will undoubtedly increase.  The Federal Banking Agencies are trying to give advance guidance in this arena.

Link:  http://www.fdic.gov/news/news/financial/2008/fil08022.html

(ag) March 25, 2008, in Lending Issues

It's Not Sexy But It's Still an Examination Concern

Flood Insurance continues to be a bank examination issue.  It may not have the pizzazz of complex financial issues, but for those banks doing a traditional lending business and for borrowers seeking plain vanilla home mortgages, it's still important.

The Federal Banking Agencies have issued a Revised Q&A (updated from the 1997 version) to aid compliance.

Link:  http://www.occ.gov/ftp/bulletin/2008-7.html

(ag) March 24, 2008, in Lending Issues/Federal Banking Agencies