United States: Nutter Bank Report, August 2013

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.

Headlines

1. Federal Court Rules Lender's Right-to-Cure Notice Was Ineffective

The U.S. District Court for the District of Massachusetts has held that the inclusion of attorneys fees in a right-to-cure notice delivered to a home mortgage loan borrower under Section 35A of Chapter 244 of the General Laws of Massachusetts caused the notice to be ineffective. The case involved a home mortgage loan in which the borrower had previously defaulted in 2006. After being granted a loan modification, the borrower remained current on the loan payments for a time, and then fell behind again in 2011. The lender sent a notice of default that included a notice of the borrower's right to cure under Section 35A of Chapter 244. Section 35A of Chapter 244 provides that mortgagors are entitled to an opportunity to cure a mortgage default prior to foreclosure, and requires the mortgagee to notify the mortgagor of the mortgagor's right to cure. Section 35A also provides that "[t]he mortgagor shall not be liable for any attorneys' fees relating to the mortgagor's default that are incurred by the mortgagee or anyone holding thereunder prior to or during the period set forth in the notice required by this section." The notice provided in this case summarized past due installments that the borrower would need to pay in order to cure the default. The summary of past due installments included attorneys fees that, according to the lender, arose from the 2006 default but not the current default. In its July 23 decision, the court nevertheless found that Section 35A prevents a mortgagee from adding any attorneys' fees to a right-to-cure notice letter. The court held that the inclusion of attorney's fees, even if incurred in connection with a prior default, rendered the right-to-cure notice ineffective.

Nutter Notes: Division of Banks regulations implementing the right-to-cure notice requirements of Section 35A (201 C.M.R. §§ 56.03 and 56.04) specify the form and content of the right-to-cure notice that a foreclosing mortgagee must deliver to the mortgagor. The mandatory form includes a line item where the mortgagee may list "other late charges or fees" on the right-to-cure notice. The mortgagee in this case argued that the law's prohibition of attorney's fees that were incurred "prior to" the cure period refers only to attorney fees that were incurred from the time the present default began through the cure period. On that basis, the mortgagee argued that a mortgagee may condition a mortgagor's right to cure on the payment of attorney's fees that resulted from previous defaults, and that it was proper to list such fees along with other late charges or fees on the right-to-cure notice. This case is the first to address the question of whether a mortgagor's right to cure may be conditioned on payment of attorney's fees incurred by the mortgagee in connection with a default that occurred prior to the default giving rise to the right-to-cure notice. 

2. CFPB Updates Exam and Small Entity Guidance on Mortgage Rules

The Consumer Financial Protection Bureau ("CFPB") has released updates to its exam procedures and to its "Small Entity Compliance Guide for the Ability-to-Repay and Qualified Mortgage Rule" in connection with its new home mortgage regulations issued in January 2013. The CFPB's interim exam procedures released on August 15 provide guidance to depository institutions and other mortgage lenders on what the CFPB will be considering during compliance exams when the rules become effective. The updates provide new guidance on the CFPB's rules on Qualified Mortgages, the borrower's ability-to-repay, high-cost mortgages and appraisals for higher-priced mortgage loans, as well as new amendments related to the CFPB's escrow rule. The update also covers recent changes to credit card rules. The updated exam procedures now cover the CFPB's mortgage origination rules issued through May 29, 2013 and mortgage servicing rules issued through July 10, 2013. Most of the CFPB's new mortgage rules go into effect in January 2014. Banks and savings associations with assets of $10 billion or less are subject to the CFPB rules but are not subject to the CFPB's examination authority. Smaller depository institutions will continue to be examined by their respective prudential regulators in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").

Nutter Notes: The CFPB's update of its "Small Entity Compliance Guide for the Ability-to-Repay and Qualified Mortgage Rule" released on August 14 incorporates the changes made to the CFPB's new mortgage lending rules in June and July. The updated guide includes a new section describing, and providing guidance on, the exemptions added in June for certain creditors and loan programs, such as designated community development organizations, certain non-profit organizations, and loans made pursuant to housing finance agency programs. The updated guide also includes a new section covering the types of Qualified Mortgages that can be made by small creditors, in addition to general and temporary criteria for Qualified Mortgages. The updated guide includes changes to the section on the inclusion of loan originator compensation in the calculation of points and fees, deleting compensation paid by a creditor to a retail loan officer employee. The updated guide also reflects the additional temporary eligibility criteria for Qualified Mortgages related to home mortgage loans that are eligible for purchase, guaranty, or insurance by a government sponsored entity (such as Fannie Mae or Freddie Mac) or certain federal agencies. 

3. OCC Revises Commercial Real Estate Lending Guidance

The OCC has issued a booklet titled "Commercial Real Estate Lending" to replace the OCC's 1995 "Commercial Real Estate and Construction Lending" booklet in the Comptroller's Handbook. The new booklet released on August 20 includes expanded guidance on acquisition, development and construction ("ADC") lending. Issues unique to ADC and income-producing real estate lending are discussed in separate sections. Other topics that are new or with respect to which there is expanded guidance include supervisory loan-to-value guidelines, project feasibility, investor-owned residential real estate, amortization, debt yield, owner-occupied real estate, environmental risk management and underwriting considerations for various property types. For the purposes of the booklet, commercial real estate lending comprises ADC financing and the financing of income-producing real estate. Income-producing real estate comprises real estate held for lease to third parties and non-residential real estate that is occupied by its owner or a related party. The booklet discusses supervisory expectations and regulatory requirements for prudent risk management, and includes the internal control questionnaire and verification procedures used by examiners. The booklet applies equally to national banks and federal savings associations.

Nutter Notes: The new booklet replaces section 210, "Income Property Lending" and section 213, "Construction Lending" of the former OTS Examination Handbook. The booklet incorporates guidance issued since the 1995 release of the "Commercial Real Estate and Construction Lending" booklet. The updated guidance covers loan workouts, management of concentrations, stress testing, updated interagency appraisal guidelines, and statutory and regulatory developments in environmental risk management. The booklet also includes information about statutes and regulations governing federal savings associations. In addition to the replacement of the 1995 booklet and the OTS handbook sections, the OCC has rescinded OCC Bulletin 2012-27, "Investor-Owned One- to Four-Family Residential Properties: Supervisory Guidance on Risk Management and Reporting Requirements" (September 17, 2012) and OCC Advisory Letter 2003-7, "Guidelines for Real Estate Lending Policies" (August 8, 2003). 

4. SJC: Mortgage Assignee Liable for Originator's Predatory Practices

According to a recent decision of the Massachusetts Supreme Judicial Court ("SJC"), an assignee of a lender that originates a home mortgage loan may be liable for the originating lender's predatory lending practices, although a mere servicer of the loan may not be liable absent a showing that the servicer is also an assignee of the loan. In its July 12 ruling, the SJC considered whether a lender, by virtue of its status as assignee of a residential mortgage, or a loan servicer could be liable for violations by the loan originator of the Massachusetts Consumer Protection Act, the Massachusetts Predatory Home Loan Practices Act, or the Massachusetts Borrower's Interest Act. The case involved borrowers who defaulted on a refinance loan with a monthly payment approximately $600 higher than the borrowers' total monthly income. The loan was subsequently transferred into a securitized pool of loans and the assignees foreclosed on the mortgage. The alleged predatory lending practices included the lender's processing of the loan as a stated income loan (notwithstanding its receipt of documentation of the borrowers' much lower actual income), the borrowers' unawareness that their household income was inflated on the loan application, and the lack of a condition requiring the borrowers to demonstrate their ability to make mortgage payments that would be more than 150% greater than their then current payment. The SJC reversed the Superior Court's summary judgment decision in favor of the foreclosing lender on all claims, stating that the foreclosing lender's status as an assignee did not shield it from liability for acts of the originating lender. However, the SJC affirmed summary judgment in favor of the servicer, stating that the servicer was not shown to be an assignee and that there was no alternative theory for its liability.

Nutter Notes: The SJC stated that a mortgage that is unconscionable, and therefore unenforceable, does not become enforceable merely because it is assigned. The unconscionability of the loan terms was based in part on alleged violations of the Massachusetts Consumer Protection Act, the Massachusetts Predatory Home Loan Practices Act, and the Massachusetts Borrower's Interest Act. Under the Massachusetts Consumer Protection Act, Chapter 93A of the General Laws of Massachusetts, a lender may be liable for the origination of a home mortgage loan in circumstances where the lender should have reasonably recognized at the outset that the borrower would not be likely to be able to repay the loan. The Massachusetts Predatory Home Loan Practices Act, Chapter 183C of the General Laws of Massachusetts, requires a lender, in connection with a high-cost home mortgage loan, to make a reasonable determination that one or more of the borrowers will be able to make the scheduled payments to repay the loan based on a consideration of the borrower's income, obligations, employment status, and other financial resources other than the borrower's equity in the home. The Massachusetts Borrower's Interest Act, Chapter 183, Section 28C of the General Laws of Massachusetts, prohibits a lender from knowingly refinancing a home loan that was consummated within the prior 60 months unless the refinancing is in the borrower's interest, as determined by statutory criteria and in accordance with the implementing regulations of the Division of Banks at 201 C.M.R. 53.00. 

5. Other Developments: Risk Retention, FHA Guidance and Lending Limits

• Federal Banking Agencies Revise Proposed Risk Retention Rule

The federal banking agencies issued a joint notice on August 28 that revised a proposed rule that would require sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirements in the Dodd-Frank Act. The proposed rule would provide asset-backed securities ("ABS") sponsors with several options to satisfy the risk retention requirements. Comments on the proposed rule are due by October 30.

Nutter Notes: As required by the Dodd-Frank Act, the proposal would define a "qualified residential mortgage" ("QRM") and exempt securitizations of QRMs from the risk retention requirements. In addition, the original proposal generally measured compliance with the ABS risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The new proposal would provide that risk retention generally be based on fair value measurements without a premium capture provision. 

• HUD Issues FHA Guidance on Borrowers' Debt in Collection

The U.S. Department of Housing and Urban Development ("HUD") issued guidance on August 15 requiring lenders to consider potential borrowers' debt in collection and credit disputes before the Federal Housing Administration ("FHA") will insure a mortgage. According to the guidance published in HUD Mortgagee Letter No. 2013-24, collections and judgments may indicate a borrower's disregard for credit obligations and must be considered in the creditworthiness analysis.

Nutter Notes: The FHA does not require debts in collection to be paid off as a condition of mortgage approval. According to the guidance, the FHA will require lenders to conduct a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000 to mitigate the risk that collection efforts for unpaid debts could affect the borrower's ability to repay the mortgage. The guidance becomes effective on October 15 for all FHA programs other than non-credit qualifying streamline refinances and the Home Equity Conversion Mortgage. 

• OCC Amends Lending Limits to Include Exposures from Securities Financing

The OCC issued a final rule on August 15 that amends the OCC's rule governing lending limits applicable to banks to include credit exposures arising from derivative transactions and repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions (collectively referred to as securities financing transactions) as required by the Dodd-Frank Act.

Nutter Notes: An earlier interim final rule contained a temporary exception period through July 1, 2013, for the application of the rule's requirements as to derivative transactions and securities financing transactions. The final rule extends the temporary exception period through October 1, 2013, to allow additional time for banks to comply with the final rule. All other amendments made by the final rule will become effective on October 1, 2013. 

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, after interviewing our clients and our peers in the profession, 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 in the practice "helps clients manage challenges and balance risks while delivering strategic solutions," while the 2013 Chamber and Partners review reports that Nutter's bank clients describe Nutter banking lawyers as "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," which the clients went on to describe as "indicative of a true partner." Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Beth H. Mitchell, Jessica M. Alfano and Lisa M. Jentzen.

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