Legislative Update – January 2019

Legal and Compliance Report—January 2019[1]
Steven Kubik, Attorney at Law
Kubik Law Firm, PLLC
13150 Coit Road, Suite 316
Dallas, Texas 75240
www.kubiklawfirm.com
January 10, 2019

Fannie and Freddie Issue Temporary Guidance on Government Shutdown

As you are probably aware, the US Government has been partially shutdown for over two weeks. On December 26, Fannie Mae issued temporary guidance related to loan origination and loan servicing during the government shut down in Lender Letter LL-2018-06, available here. On January 3, Freddie Mac also released guidance regarding loan origination and loan servicing during the government shutdown, available here.

Borrowers Employment Impacted by the Shutdown. According to the Fannie Mae, loans are not rendered ineligible for purchase solely because a borrower’s employment is directly impacted by the shutdown. Lenders must, however, still obtain a verbal verification of employment prior to the time of loan delivery in order for the loan to be eligible for sale to Fannie Mae. For military borrowers, the lender can use a Leave and Earnings Statement dated within 30 calendar days prior to the note date in lieu of a verbal verification. Additionally, among other things, if a borrower is furloughed on or after closing, the loan remains eligible for sale to Fannie so long as the lender has obtained all required documentation, including the verbal verification.

According to Freddie Mac, loans made to borrowers directly impacted by the government shutdown are still eligible for sale to Freddie Mac, even if the borrower is not receiving pay when the loan is delivered, so long as (i) all income and employment documentation requirements are met; (ii) the seller has no knowledge that the borrower will not return to work after the shutdown ends; and (iii) all other requirements of the “Seller’s Purchase Documents” are met.

Verifications of Information Impacted by the Shutdown. The letter also addresses government verifications of certain information. For IRS transcripts, Fannie Mae notes that Desktop Underwriter will continue to process tax transcript verification reports received prior to the shutdown, but will not able to access new verification reports for validation. As a result, requests for verification reports may remain in pending status until normal government operations resume. Further, Fannie Mae is temporarily allowing lenders to obtain verification of a borrower’s social security number, if needed, prior to the delivery of the loan. If the number cannot be verified prior to delivery, however, the loan will not be eligible for sale. Regarding flood insurance, Fannie Mae states that it will purchase loans secured by properties located in Special Flood Hazard Areas as long as the loans meet certain conditions, including proof the borrower has completed an application for the insurance and paid the initial premium. Lenders are obligated to have a process in place to identify any mortgaged properties that do not have proper evidence of active flood insurance, or where an increase in coverage or renewal of existing policies would have occurred during the shutdown, and to make sure coverage is obtained once the shutdown ends.

Freddie Mac also stated that Form 4506-T will continue to be signed by borrowers at closing, but these forms do not need to be processed by the IRS prior to closing. The Form 4506-T information should, however, be obtained as part of Sellers’ in-house control program.  Freddie Mac flood insurance requirements will remain unchanged during the shutdown.

Loan Servicing. Finally, with respect to loan servicing, both Fannie and Freddie authorize servicers to offer forbearance plans to assist borrowers who cannot make their regular monthly payment as a result of the shutdown

Lenders should look for additional guidance from Fannie and Freddie should as the shutdown continues.

CFPB Issues Final Policy on HMDA Data Disclosure to Address Privacy Concerns

On December 21, 2018, the CFPB issued final policy guidance concerning data collected under the HMDA rule that will be made publicly available in 2019. For background purposes, the CFPB comprehensively revised HMDA data collection/reporting requirements in 2015. These new data collection requirements became effective in 2018, with a reporting deadline of March 2019. The CFPB issued a proposed policy in September 2017 and, after reviewing public comments, the CFPB agreed to modify certain public data disclosures to address concerns regarding consumers’ privacy.

The following HMDA data collected in 2018 will be excluded from public disclosure under the final policy: (i) the Universal Loan Identifier or ULI; (ii) the application and action taken dates; (iii) the property address; (iv) the applicants’ credit scores; (v) the mortgage originator’s NMLS identifier; and (vi) the results generated by the automated underwriting system. The CFPB will also exclude free-form text fields which report data such as the applicant’s race or ethnicity. The Bureau further announced that it will publish data for (i) the applicants’ ages; (ii) the loan amount; and (iii) the number of units in the dwelling as ranges rather than specific values.

The CFPB stated that it intends to initiate in a separate notice-and-comment rulemaking in 2019 to incorporate any modifications of HMDA data into the text of Regulation C and will use the rulemaking to consider what HMDA data will be disclosed in future years. The CFPB’s announcement and the final policy are available here.

Supreme Court Considers Whether FDCPA Applies to Nonjudicial Foreclosure

The U.S. Supreme Court is currently considering an important question affecting the mortgage industry: whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. §§ 1692 et seq. [2] Whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the FDCPA has divided U.S. Circuit Appellate Courts. The Supreme Court’s ruling on this issue could finally provide the mortgage industry and lower courts with guidance as to the proper steps to follow in nonjudicial foreclosure proceedings.

Background. The FDCPA applies to entities or persons that fall under its definition of “debt collector.” Under the FDCPA, a debt collector is any person engaged in any business “the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due or asserted to be owed or due another.”[3] Thus, to qualify as a debt collector a person must be collecting a “debt.” The FDCPA generally defines debt as a consumer’s obligation to pay money.[4] These definitions of “debt” and “debt collector” are of paramount importance with respect to whether nonjudicial foreclosures fall within the purview of the FDCPA. Specifically, the courts have inconsistently determined whether nonjudicial foreclosures are attempts at collecting a debt.

Conflicting Circuit Court Decisions. The Supreme Court granted certiorari to review the decision of the Court of Appeals for the Tenth Circuit in Obduskey v. McCarthy.[5] In Obduskey, the Tenth Circuit ruled that entities engaged solely in nonjudicial foreclosure proceedings are not debt collectors under the FDCPA and, therefore, not subject to the requirements of the FDCPA.[6] The Tenth Circuit reasoned that the definition of debt in the FDCPA is synonymous with money.[7] It further reasoned that nonjudicial foreclosures are attempts to enforce security interests and not attempts to collect money from a debtor.[8] The Tenth Circuit reached this conclusion by noting that the general rule in nonjudicial foreclosures is that the sale does not preserve to the trustee a right to collect any deficiency in the loan amount against the debtor personally.[9] Therefore, according to the Tenth Circuit, because nonjudicial foreclosures allow the trustee to recover money or proceeds only from the sale of the property and not the debtor personally, it is not an attempt to collect a debt subject to the requirements of the FDCPA.[10] The Tenth Circuit aligned itself with the Ninth Circuit’s decision in Vien-Phuong Thi Ho v. ReconTrust Co., NA.[11] In Ho, the Ninth Circuit similarly reasoned and held that a trustee engaged in nonjudicial foreclosure proceedings under California law was not a debt collector subject to the requirements of the FDCPA.[12]

On the other hand, the Fourth and Sixth Circuit Courts of Appeals have ruled that nonjudicial foreclosure proceedings fall under the scope of the FDCPA as attempts to collect a debt. In Glazer v. Chase Home Finance LLC,[13] the Sixth Circuit found that mortgage foreclosure is an attempt to collect a debt because it reasoned that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion … or compulsion …”[14] The Sixth Circuit aligned itself with the Fourth Circuit’s decision in Wilson v. Draper & Goldberg, P.L.L.C.[15] In Wilson, the Fourth Circuit reasoned that the enforcement of a security interest in foreclosure was just one method of collecting the underlying debt and, therefore, it fell under the scope of the FDCPA.[16] Neither the Sixth nor the Fourth Circuit, however, discussed the potential conflict between state law and the FDCPA arising from their interpretation that entities engaged in nonjudicial foreclosure actions are required to also comply with the FDCPA.

Why it Matters. The potential conflict between the FDCPA’s requirements and state nonjudicial foreclosure law creates significant tension between state and federal law. For example, the FDCPA generally prohibits debt collectors from communicating with third parties about the debt absent consent by the debtor. However, state nonjudicial foreclosure law may require the public filing of liens and trustee notices of sale. Further, under certain circumstances, the FDCPA prohibits communications with the debtor. However, many state nonjudicial foreclosure laws have strict requirements for notices that must be sent to the debtor before foreclosure may proceed and do not provide an exception to sending these notices if, for example, the debtor is represented by an attorney. These types of conflicts led the Ninth Circuit to observe that “a trustee could not comply with California law without violating the FDCPA.”[17]

The Supreme Court’s review of the Tenth Circuit’s decision in Obduskey is expected to provide lower courts with guidance as to the scope of the FDCPA in the area of mortgage foreclosure law. Importantly, the Supreme Court’s ruling could have a wide-ranging effect on the foreclosure actions that are instituted every day throughout states that have established systems for nonjudicial foreclosures.

 


[1] Disclaimer: While the information on this page is about legal issues, it is not legal advice. This web page is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of an attorney/client relationship. Moreover, due to the rapidly changing nature of the law and the reliance on information provided by outside sources, we make no warranty or guarantee concerning the accuracy or reliability of the content at this site or at other sites to which we link.

[2] Obduskey v. McCarthy & Holthus LLP, 138 S. Ct. 2710 (Mem) (2018).

[3] 15 U.S.C. § 1692a(6).

[4] Id. at §1692a(5).

[5] 879 F.3d 1216 (10th Cir. 2018).

[6] Id. at 1221.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] 858 F.3d 568 (9th Cir. 2017).

[12] Id. at 571.

[13] 704 F.3d 453 (6th Cir. 2013).

[14] Id. at 461.

[15] 443 F.3d 373 (4th Cir. 2006).

[16] Id. at 376 (“We see no reason to make an exception to the [FDCPA] when the debt collector uses foreclosure instead of other methods.”).

[17] Ho, 858 F.3d at 575.

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