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Mortgage Crisis Watch

Business and legal issues affecting: loan repurchases | mortgage-backed securities | mortgage insurance

Connect at the 2014 MBA Annual Convention & Expo

The 2014 MBA Annual Convention & Expo will be held in Las Vegas, NV from October 19-22. My colleague Robert M. Siegel and I will be attending the conference. As many of you know, we lead the mortgage industry team here at Bilzin Sumberg. In addition to representing mortgage companies throughout the country, we often host educational and training seminars for industry professionals. During the conference, we are available to discuss legal issues that your company may be facing.

If you would like to schedule a meeting in advance, please email Phil (pstein@bilzin.com) or Robert (rsiegel@bilzin.com).

We look forward to meeting you there.

Regulators Increase Scrutiny of Wall Street Lending

Federal bank regulatory agencies are significantly increasing their scrutiny of Wall Street bank lending, moving from annual reviews to a system of monthly audits in a major effort to curtail aggressive underwriting practices.

Until recently, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) have monitored banks’ behavior annually in Shared National Credit (SNC) reviews, meaning that banks had to wait up to a year to receive feedback from regulators. With a move toward monthly audits — focused on whether banks are adhering to guidelines released by the regulatory agencies in March of last year — there will be ongoing feedback from regulators, and regulators will be able to provide more specific guidance. The audits, for example, are understood to be broader than the SNC reviews, looking beyond just loans that the banks have made to deals that the banks turned down, how the banks rate and classify each loan, and the process the banks go through to approve credit. Continue Reading

Protecting Your Company Against CFPB Investigations & Investors’ Mortgage Buyback Claims

What are the boundaries of the Consumer Financial Protection Bureau’s authority? How might those boundaries continue to expand in the future? Are there ways that the CFPB can take action against a company even if it does not have true supervisory authority? These are just some of the questions that frustrated and concerned financial institutions and other consumer finance companies have been asking since the CFPB began operating in July 2011.

The CFPB’s jurisdiction is wide and its reach seems to grow longer as time passes. The CFPB has extended its supervisory jurisdiction to include credit bureau reporting agencies, debt collectors and student loan servicers. The bureau has even indicated that it will continue to expand its supervisory jurisdiction into other industries as well, including auto lending by non-banks.

Join me on Thursday, October 9, 2014 at 12:00pm EST for an in-depth webinar about the Consumer Financial Protection Bureau’s jurisdiction and authority over consumer finance companies and financial institutions. This webinar will focus on the CFPB’s reach for an even greater level of authority, and what financial services companies can do to prevent themselves from being the next target of a CFPB investigation or enforcement action. The webinar will also cover the latest developments pertaining to defending against mortgage buyback demands.

Click Here to Register.

Banks May Be Required to Increase Reserves

The Federal Reserve is expected to require the biggest U.S. banks to increase reserves in an effort to prevent the possibility of another financial crisis. Federal Reserve Governor Daniel K. Tarullo is scheduled to testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs on Tuesday to introduce new rules, which would impose a so-called capital surcharge to reinforce the banking system by requiring too-big-to-fail banks to increase protections against potential losses.

Mr. Tarullo has advised that the Feds latest proposal would affect the biggest U.S. banks which are deemed “systematically important financial institutions.” By increasing capital reserve requirements, the Fed intends to “improve the resiliency of these firms.” Continue Reading

J.P. Morgan’s $4.6 Billion in Legal Reserves

In a regulatory filing filed with the U.S. Securities and Exchange Commission and released on Monday, August 4, J.P. Morgan Chase & Co. announced that it has $4.6 billion in legal reserves. Believe it or not, this massive number is actually an increase in reserves from last quarter, during which the banking giant had $4.5 billion marked for legal expenses.

J.P. Morgan is currently a defendant or putative defendant in a variety of legal proceedings that range from private civil litigation to regulatory/government investigations; from individual actions to class actions; and from suits in U.S. courts to those across Europe. It has received requests for information and documents related to its foreign exchange trading business and participation in setting the process for the London Interbank Offered Rate and other European and Tokyo interbank rates. It is also enmeshed in lawsuits with three municipalities that are seeking damages for lost tax revenue and increased costs associated with foreclosed properties, based on alleged violations of the Fair Housing Act and Equal Credit Opportunity Act. Continue Reading

Former Analyst Claims Moody’s Falsely Inflated Ratings

Former Moody’s analyst, Ilya Kolchinsky, has accused the credit rating powerhouse of overstating its ratings for countless toxic mortgage-backed securities that caused the financial meltdown in 2008, misleading investors and costing the U.S. billions in funds spent bailing out Wall Street’s too-big-to-fail banks. Kolchinsky’s 107-page False Claims Act complaint, filed in 2012, was recently unsealed after the government failed to intervene.

The complaint alleges that from 2004 to 2007, Moody’s issued inflated ratings, often “triple-A,” for the majority of risky residential mortgage-backed securities and collateralized debt obligations it reviewed, as a result of “concealed conflicts of interest and Moody’s reckless profit-maximization policies.” According to Kolchinsky, it wasn’t until October 2007 when the market started its downward turn that Moody’s began downgrading its ratings. Continue Reading

Mortgage Loans: Deutsche Bank v. Quicken Loans

We previously posted about ACE Securities Corp. v. DB Structured Products, Inc., 977 N.Y.S.2d 229, 231 (N.Y.A.D. 1st Dept. Dec. 19, 2013), which is a critical ruling out of New York’s intermediate state appellate court. In that case, the Appellate Court held that under New York law, the statute of limitations on a mortgage buyback claim begins to run when the loan was sold by the correspondent lender. We noted that the decision was extremely significant to originators, sellers and investors in mortgage-backed securities because it makes the statute of limitations an even more formidable barrier to pursuing mortgage put-back claims. We predicted that other courts would take note of the decision and follow suit. Thereafter, federal courts in Lehman XS Trust, Series 2006-4N v. Greenpoint Mortg. Funding, Inc., No, 13-CV-4707, 2014 WL 108523 (S.D.N.Y. Jan. 10, 2014); ACE Sec. Corp. Home Equity Loan Trust, Series 2007-HE3 v. DB Structured Prods., Inc., No.13-CV-1869, 2014 WL 1116758 (S.D.N.Y. Mar. 20, 2014); Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., No. 12-CV-6168, 2014 WL 1259630, at *3 (S.D.N.Y. Mar. 27, 2014) have all reached the same conclusion.

On August 4, 2014, also following this body of law, Judge Paul A. Crotty issued his opinion in Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc., No, 13-CV-6482, 2014 WL 3819356 (S.D.N.Y. Aug. 4 2014). Plaintiff, Deutsche Bank National Trust Company in its capacity as trustee of the GSR Mortgage Loan Trust 2007-0Al (“Deutsche Bank”) claimed that Quicken Loans Inc. (“Quicken”) breached its contractual representations and warranties relating to the quality of the mortgage loans sold by Quicken in 2006 and 2007, and thereafter breached its obligation to repurchase these loans. In its motion to dismiss the complaint, Quicken countered that any alleged breaches of the representations and warranties occurred when Quicken sold the allegedly defective loans on several dates from November 2006 through April 2007. Quicken argued that any alleged failure to repurchase the loans was not a separate breach of the contract. Quicken thus maintained that Deutsche Bank’s claims were time-barred by New York’s 6-year statute of limitations for contract claims because the alleged breaches of the representations and warranties occurred more than six years prior to May 8, 2013, the date the suit against Quicken was filed. Continue Reading

Bank of America’s $16.65 Billion Settlement

In what is being reported as the largest settlement ever between the U.S. and a single business entity, Attorney General Eric Holder and Associate Attorney General Tony West announced Thursday that Bank of America Corp. (“BofA”) has agreed to pay $16.65 billion to settle accusations by the Department of Justice that it, as well as Countrywide Financial Corp. (“Countrywide”) and Merrill Lynch & Co. (“Merrill”), sold residential mortgage securities backed by “toxic” loans in the run up to the financial crisis in 2008. The payment includes almost $10 billion to be paid to settle federal and state civil claims and penalties, and $7 billion to be paid in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis precipitated by the unlawful conduct of lenders like BofA, Merrill Lynch and Countrywide. This settlement comes on the heels of deals reached by the government with JPMorgan Chase in the sum of $13 billion and Citigroup in the sum of $7 billion.

At a news conference, Attorney General Eric Holder said BofA, Countrywide, and Merrill Lynch had “engaged in pervasive schemes to defraud financial institutions and other investors” by misrepresenting the soundness of residential mortgage-backed securities (“RMBS”). He stated that “[t]hese [RMBS] loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized. Yet these financial institutions knowingly, routinely, falsely and fraudulently marked and sold these loans as sound and reliable investments.”

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Servicer’s Error Leads to $16 Million Award

Kate Berry reported in American Banker and SourceMedia’s National Mortgage News on how a $616 servicing error snowballed into a $16 million jury verdict. It was reported that a jury last month awarded $514,000 in compensatory damages and $15.7 million in punitive damages to a California homeowner, who waged a multi-year battle to block a foreclosure by the private-label mortgage servicer PHH Corp. As Berry noted, the verdict “is among the largest ever awarded in a mortgage case and $6 million more than PHH’s mortgage servicing business earned in the second quarter.”

While the details of the case are complicated, the source of the dispute between the homeowner and the servicer traces back to a mere $616 shortfall in an escrow account, and an administrative failure by PHH to admit and correct its error in failing to apply $34 a month that the homeowner had already been charged in his monthly payments to that escrow account. This seemingly minor error by PHH apparently resulted in the homeowner’s loan modification being botched in spectacular fashion. Among other errors, following the loan modification, PHH began sending letters to the homeowner demanding a different amount each month for his mortgage payment, and claiming that the homeowner was deficient in varying amounts month to month. Despite efforts by the homeowner to resolve the issue, PHH failed to resolve it. It was later discovered that the $616 shortfall in the homeowner’s escrow account caused the company’s computer systems to automatically generate the letters with the varying payment and deficiency amounts. Continue Reading

Citigroup Settles with DOJ for $7 Billion

Citigroup announced last week that it will pay $7 billion to end an investigation by the U.S Department of Justice into misconduct related to its mortgage securitization practices. The blockbuster settlement came days before DOJ lawyers were expected to file a lawsuit. $4.5 billion will go towards settling civil claims related to the DOJ probe, of which $500 million will be split among the FDIC and the attorney generals of California, Delaware, Illinois, Massachusetts, and New York. The remaining $2.5 billion in consumer relief is expected to help borrowers struggling with their home payments.

The settlement results from Citigroup’s securitization and sale of high-risk subprime mortgages, knowingly misrepresenting their quality and associated risk, which ultimately contributed to the financial crisis at the end of 2007.  At a recent news conference, Attorney General Eric Holder stated that Citigroup’s misconduct had “shattered lives and livelihoods throughout the country and around the world.”

The large check that Citi will write amounts to a 96 percent drop in its quarterly earnings. Moreover, the majority of the settlement funds will not be tax deductible. This amount is in addition to the billions Citi has already paid in settlements to resolve mortgage buyback lawsuits.

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