Mortgage Banking Newsletter – September, 2018

In this newsletter we cover the following:
  • Welcome
  • Loan Officer Compensation – Down Payment Assistance / Bond Payment
  • Regulatory Compliance – Deceptive Advertising Issues
  • Lessons Learned in Defending Chase’s Indemnification Demands for RMBS Claims
  • CitiMortgage Litigation Update
  • Complimentary Information Available from Johnston & Associates Webinars
  • The Legal Services we offer at Johnston & Associates
  • Upcoming conferences that Johnston & Associates will be attending
Welcome to the September Installment of Johnston & Associates’s Newsletter

To all our preexisting clients, industry friends and strategic partners whom are in receipt of the Johnston & Associates Newsletter, as well as any and all the new readers whom have decided to subscribe hereto, we welcome and thank you for taking the time to read about those topics that we believe to be of great importance to the mortgage banking industry in which we all are fortunate enough to be a part of and to those mortgage banking professionals whom we count ourselves lucky to work alongside.

As part of our ongoing effort to provide our readers with content rich Newsletters, including timely discussions on those topics that are of great concern and interest to many within our industry, we always welcome any and all follow-up questions and/or feedback that you and/or your companies may have.  In fact, if any of you have such questions and/or feedback, please know that we will be in attendance at the New England Mortgage Bankers Conference in Newport, RI, and/or the MBA’s Regulatory Compliance Conference in Washington D.C. later this month. To that end, we are always grateful for the chance to meet with you in person, to hear firsthand what your most pressing business and legal challenges are, to discuss all those ways in which our attorneys and other legal professionals can help to address such challenges, and to always listen about how we can better tailor our Newsletters and services to your needs.

Finally, as many of you already know, the professionals who comprise Johnston & Associates’s Mortgage Banking Practice Group represent our clients in matters that include, but are not limited to, repurchase and make-whole lawsuits, Servicer litigation, third-party mortgage fraud litigation, appeals to HUD’s Mortgagee Review Board, preparation of policies and procedures, creation of Loan Officer Compensation plans, formation of Marketing Service Agreements, assisting with the negotiation and review of Broker and Correspondent LPAs, and much, much more.

Loan Officer Compensation – Down Payment Assistance / Bond Payment

Loan originator compensation is complex, despite the Consumer Financial Protection Bureau’s 2014 changes to loan originator compensation requirements under the Truth in Lending Act (Regulation Z). Even with these changes, there is still tremendous flexibility in how lenders can legally compensate their LOs, which flexibility is crucial for lenders looking to attract and/or retain top talent. The trends that we’re seeing with loan officer compensation right now relate primarily to being creative within the Dodd Frank rules.

As most know, basis points per loan remains the formula by which most LO commission is calculated. However, where lenders have gotten creative is by layering on additional criteria to create the compensation structure. These criteria include, but are not limited to, the following:

  • Referral source (self-generated, branch, marketing campaign, builder)
  • Origination channel
  • Quality of loan files submitted
  • Metropolitan Statistical Area
  • Loan Type

Nothing in the LO compensation rule, which is part of the Truth in Lending Act (TILA), prohibits a lender from varying compensation among different loan officers, so long as payment variations are not related to terms and conditions of a loan or a proxy thereof.  Such variances might be attributed to experience, market differences, variations in overhead costs, as well as other reasons. It is prudent to monitor compensation practices and how they affect the consumer to ensure that such variances do not result in fair lending issues.

This creative need and variation usage can be seen by looking at the number of DPA programs available, which entities can offer them, and where. A Down Payment Assistance Program has limited margins. As a program designed to assist in helping consumers who dream of owning a home with actually obtaining that home, the programs only allow for limited fees, percentages, and other charges to the borrower. If most, if not all of that margin is taken up paying the LO comp, the entity is not likely to choose to offer that program. The costs simply do not make it feasible.

In fact, many lenders have chosen to create salaried positions in which the LO only originates less-profitable products like reverse mortgages, Home Equity Lines of Credit, bond-funded loans and construction loans to avoid having to pay out more in commission than the loan will ultimately bring in profit, which is permissible. But because of the limited LO’s that would be in the position to offer those products, there would still be a limited number of consumers who have access to that program designed to help.

This trend to be creative with compensation plans and the effort to offer more programs to more consumers, also, has a cost to the company and regulators. What’s really happening in the industry is that the decision about the compensation plan is made between the recruiting sales manager for the retail mortgage compensation and the prospective loan officer. These arrangements are made almost with accounting and procedural commission calculations as an afterthought. The beleaguered accounting department gets this compensation plan for LO compensation for a new LO, which they didn’t get a chance to comment on. Although this is a very simple example, there is much more complexity that can be involved.

Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company with regard to advice on your LO Comp plans or otherwise, please contact its Chairman James Brody.

Regulatory Compliance – Deceptive Advertising Issues

When consumers are looking for a mortgage to buy a home or refinance an existing loan, they may see or hear ads with offers of low rates or payments. In whatever manner the borrower sees them, some of these ads look like they’re from a mortgage company or a government agency. Although the offers can be very tempting to consumers, some are terribly flawed in that they don’t disclose the true terms of the deal as the law requires. These are the types of misleading ads that regulators are almost always looking for.

Each year regulators review hundreds of mortgage advertisements, sending dozens of letters to companies, warning them that their ads may be deceptive. In 2016, the CFPB fined three reverse mortgage lenders over deceptive advertising.

Advertising in the financial services industry is governed by multiple federal agencies such as the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), Federal Financial Institutions Examination Council (FFEIC), state agencies, as well as by a slew of regulations, including Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Mortgage Acts and Practices Act (MAP), Unfair Deceptive Abusive Acts or Practices Act (UDAAP), Secure and Fair Enforcement for Mortgage Licensing Act (SAFE), and the Fair Housing Act/Fair Lending/Community Reinvestment Act.

In general, the agencies and rules prohibit any material misrepresentation, either express or implicit, in any marketing or advertisement regarding any term of any mortgage credit product and prohibit institutions from engaging in deceptive acts or practices.

Advertising for mortgage products can include a broad range of media, such as magazines, newspaper ads, flyers, radio and more. In a time of expanding technology and social media, advertising can be almost anywhere and is almost everywhere. As a result, consumer’s are bombarded by focused advertising at every turn. When it comes to advertising in the financial services industry, financial institutions are expected to manage risks associated with all types of consumer and customer communications, no matter the medium.

In addition to traditional advertising methods, social media use may be considered advertising and/or marketing and it may be used as a communication tool to reach customers and other consumers. Social media content used by financial institutions must meet the regulatory and disclosure requirements of consumer compliance regulations as well as the Federal Trade Commission (“FTC”) and the Federal Communication Commission (“FCC”) rules for on-line marketing and communications. This type of advertising can include:

  • A Mortgage Marketing Department uses Twitter to promote a new mortgage loan program for your organization.
  • A Mortgage Loan Officer is struggling to increase business and, to grow volume, decides to send Facebook messages and creates Facebook posts for solicitation.
  • The Business Development officer creates entries for the institution’s public blog.

Social media covers a broad range of activities that bring together technology, social interaction, and creation of content, and it is now mainstream for advertising communications . Communication channels used in social media are social network messaging, blogs, podcasts, and photos, and such continue to expand on an almost daily basis. Of course, the rapidly increasing use of social media by financial institutions has drawn the interest of regulators, who, for the most part, have found that many institution marketing and advertising policies and procedures are nonexistent, too vague, and/or are not enforced in such a way to effectively manage the inherent risks.

Notwithstanding the foregoing, there are key factors financial institutions may incorporate to help ensure their marketing and advertising practices are compliant. These factors include, but may not be limited to, the following:

  • Social Media Policy
  • Usage Guidelines
  • Content Standards
  • Monitoring Scope and Frequency
  • Review and Approval of Content
  • Complaint Management
  • Record Retention
  • Third-Party Vendor Management
  • Information Security

Regardless of a financial institution’s size or complexity, urban or rural location, fewer or greater array of products and services, marketing and advertising is now a major source of regulatory risk. As a result, it remains critical that institutions take any and all those steps necessary to provide appropriate oversight and controls when it comes to their in-house or outside marketing efforts.

Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company with regard to Advertising issues or otherwise, please contact its Chairman James Brody.

Lessons Learned in Defending Chase’s Indemnification Demands for RMBS Claims

Chase RMBS Indemnification Claim Wave

We are seeing a wave of indemnification claims from Chase for loans originated during 2005 and 2006 that EMC or Chase securitized via Bear Stearns.  In 2013, JPMorgan Chase & Co. (“Chase”) entered into a four and a half billion dollar settlement agreement with various institutional investors in RMBS trusts for breaches of representations and warranties in the trust governing agreements and servicing claims, through a mediation process. An expert has apparently determined the allocations to the various trusts. The trustees of these trusts then filed a petition in New York State court to give certificateholders an opportunity to object and for an order approving the settlement. This order was issued in 2016. The trustees then filed a separate petition, seeking the help of the court in administering and distributing the $4.5 billion settlement payment to the various trusts.  Due to the complexity of the trusts, many of which have several classes and varied methods of allocating payments, there are many legal issues as to how much each of the various certificate classes are paid out. Due in part to this complexity, there are several strong defenses against such claims, including the inapplicability of statistical sampling.

Trends in RMBS Indemnity Claims based on statistical sampling – ResCap Case may Hold Key

While earlier cases favored statistical sampling, more recent cases have limited the application of statistical sampling. Whether or not this trend will continue depends on how the court in the ResCap case rules on statistical sampling.

In 2012, ResCap filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York and its Chapter 11 bankruptcy plan became effective on December 17, 2013.  Under the Plan, the Trust succeeded to all of ResCap’s rights and interests.  The purpose of the Trust is to monetize ResCap’s remaining assets, pursue claims in litigation, and distribute the proceeds to ResCap’s creditors.

ResCap has only two major active repurchase cases in Minnesota District Court. One of these cases is Residential Funding Company, LLC, and ResCap Liquidating Trust v. Universal American Mortgage Co., LLC case number 13-cv-3519. Defendant, Universal American Mortgage Company, LLC (“Universal”) filed a Motion for Summary Judgment, but it was filed under seal and is largely redacted.  Based on the non-redacted portions, Universal’s first argument appears to have been that ResCap could not sufficiently prove damages on a loan-by-loan basis, as follows:

Courts have held that where the applicable provisions of the governing agreement “generally refer to a breach event, the offending loan, and the repurchase price in singular terms,” “[t]he structure of these provisions and the nature of the defined terms therein leads to the conclusion that the parties agreed upon a remedial process that generally calls for proof of breach on a loan-by-loan basis.” Homeward Residential, Inc. v. Sand Canyon Corp., 2017 WL 5256760, at *7 (S.D.N.Y. Nov. 13, 2017). …[REDACTED]…

Therefore, to the extent that an aggregator is attempting to use statistical sampling against you, the first place to look is at your loan purchase agreement. Typically, loan purchase agreements are framed in terms of individual reps & warrants relating to individual loans, and as such statistical sampling is not applicable.In addition, be sure to watch out for several sneaky types of statistical sampling that aggregators have attempted to use, including applying “repurchase rates” or undefined terms such as “severity of defect”.  Aggregators appear hesitant to define such terms, doubtless because they know it will open a can of worms as to the scientific basis for their calculations.

Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company, please contact its Chairman James Brody and/or its Co-Chair Ingrid Peterson.

CitiMortgage Litigation Update

Due to the pending appeals in the Eighth Circuit, CitiMortgage Inc. v. Equity Bank, Case No. 18-1312, and CitiMortgage v. Platinum Home Mortgage Corporation, Case No. 17-3158, many of the legal issues relevant to originators’ potential defenses are still in a state of limbo.  As of today, there has been no ruling in the Platinum or Equity Bank appeals, and the Platinum appeal is set for oral argument in September.  (Platinum had argued that a condition precedent to its obligation to repurchase never arose, and as a result, Platinum never became obligated to repurchase the loans.)

In the Equity Bank case, Citi filed its Reply on 7/31/2018.  In its Reply, Citi responded to Equity Bank’s appeal on the statute of limitations.  Citi argued that because the repurchase provision in Section 11 is a separate contractual provision to Section 2 regarding representations and warranties, that breach of Section 11 only accrues when Equity Bank failed, after a demand, to repurchase the loan.  Citi argued that the lower court correctly held that its cause of action for breach of Section 11 arose at that time.  It now remains to be seen what the Court of Appeals will decide.

Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company, please contact its Chairman James Brody and/or its Co-Chair Ingrid Peterson.

Complimentary Webinar Recordings andPresentation Materials Available fromJohnston & Associates Mortgage Banking

We are pleased to offer complimentary recordings and other presentation materials from our recent webinars:

  • July 26, 2018 – “Loan Officer Compensation Tips and Trends: How to Gain a Competitive Edge While Remaining Compliant” webinar
  • June 28, 2018 – “Repurchase and Indemnification Claims in 2018 and Beyond: A Comprehensive Update” webinar
  • May 10, 2018 – “Mergers and Acquisitions in the Mortgage Banking Industry: Expert Insights and Forecasts for 2018 and Beyond” webinar

These materials may be downloaded from our Johnston & Associates website or, for more information concerning any of the foregoing webinars and/or the subject matter of these webinars, please contact its Chairman James Brody.

Legal Services Offered by Johnston & Associates in the Mortgage Banking Industry 

Johnston & Associates is a full suite boutique law firm, which amongst other practices such as real estate and commercial litigation, has a nationally recognized Mortgage Banking Practice Group.  With an experienced team of mortgage banking lawyers (including senior litigation attorneys, former in-house General Counsel and in-house Compliance Counsel from a well-known bank and mortgage company, etc.), certified fraud examiner and forensic underwriters, and an extremely competent support staff, all of whom are dedicated to aggressively and competently serving the needs of our valued clientele, Johnston & Associates’ Mortgage Banking Practice Group is known all across the country for the experience and results that it brings to the areas of regulatory compliance, mortgage banking litigation, and a broad range of mitigation services.

Amongst the many legal services Johnston & Associates offers the mortgage banking industry (e.g., brokers, lenders, servicers, vendors and more), such include, but are in no way limited to, as follows:

  • Mortgage Repurchase and Make-Whole Indemnification Litigation and Mitigation (e.g., Secondary Market Investors, Agencies, etc.)
  • Mortgage Industry Litigation (e.g., Servicer and Sub-Servicer Disputes, 3rd Party Fraud Recovery, CPL and Title Policy Actions, Appraiser E&O Claims, Loan Officer Actions, etc.
  • Mortgage Repurchase and Make-Whole Alternative Dispute Resolution (e.g., Arbitration, Mediation, etc.)
  • Regulatory Compliance, Administrative and Business Services (e.g., Mock Audits, LO Compensation, MSAs, Licensing, CA Dep’t of Business Oversight, HUD Review Board, etc.)
  • Transactional Matters (e.g., Drafting and Negotiating Broker and Correspondent Loan Purchase Agreements, Mergers & Acquisitions, etc.)

Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company, please contact its Chairman James Brody and/or its Co-Chair Ingrid Peterson.

Conference Attendance by Johnston & Associates

Johnston & Associates will have a number of its attorneys in attendance and/or speaking at the following upcoming conferences:

  • September 12-14, 2018: Mr. Brody will be speaking as an expert panelist at the annual New England Mortgage Bankers Conference (“NEMBC”) in Newport, Rhode Island.
  • September 16-18, 2018: Mr. Brody and certain of his colleagues will be in attendance at the MBA’s Regulatory Compliance Conference in Washington, DC.
  • October 22-24, 2018: Mr. Brody will be speaking as an expert panelist at the American Conference Institute’s 25th Residential Mortgage Litigation & Regulatory Enforcement Conference in Dallas, Texas.

If you or someone from your company will also be in attendance at the foregoing conferences and would like to set up a complimentary appointment to meet with Johnston & Associates’ Mortgage Banking Practice Group, please contact its Chairman, James Brody, to schedule a date and time. We hope to see you there!

Although this communication may contain or possibly be considered attorney advertising, it is meant to be for informational and commentary purposes only. As such, it is not intended as legal advice and does not create an attorney-client relationship. Because of the generality of this update, the information and opinions provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. All opinions expressed herein are solely the opinion of the individual author and do not necessarily reflect the opinions of Johnston & Associates Law Firm, its attorneys, or any other individual.

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