Mortgage Banking & Consumer Financial Products Alert

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1 Mortgage Banking & Consumer Financial Products Alert October 4, 2010 Authors: Nanci L. Weissgold Morey E. Barnes Yost K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit The New Rules of the Road: New York Banking Department Finalizes Regulations on Mortgage Loan Servicer Business Conduct The rules of the road have changed for mortgage loan servicers doing business in New York state. Several months after their initial introduction, the New York State Banking Department (the Department ) has issued significant and substantial business conduct rules for servicers. Part 419 of the Superintendent s Regulations ( Part 419 or the Rules ), addressing topics from fees to disclosures to loss mitigation, become effective on an emergency basis on October 1, Until recently, servicing was somewhat of a gray area under New York law. Servicers had to comply with a patchwork of laws and regulations impacting servicing practices for instance, sections of New York s Real Property Actions and Proceedings Law relating to foreclosure but were not subject to one set of comprehensive regulations. That began to change in 2009, when New York s Mortgage Lending Reform Law (the Law ) I took effect. The Law, which requires registration with the Superintendent of Banks (the "Superintendent") of any person or entity engage in the business of servicing mortgage loans in the state and arguably authorizes a private right of action for any violation, set the stage for the Rules by authorizing the Department to adopt a new regulatory framework for mortgage loan servicers. The Department took advantage of that opportunity, including in the Rules a level of detail that may challenge servicers in their compliance efforts. From the processes and procedures a servicer must have in place to address borrower complaints and inquiries, to the timeline by which a servicer must credit payments received from a borrower, to the obligations a servicer has to a borrower who seeks loss mitigation options, the Rules lay out a vast and complex set of requirements for the conduct of mortgage loan servicers business. This alert provides a brief overview of the Rules, intended to help servicers navigate the new requirements of Part 419. An Overview of the Rules The Rules are the Department s most recent efforts to give force to the Law, which took effect in July As a first step, the Department adopted Part 418 of the Superintendent s Regulations, which established application and registration procedures and financial responsibility requirements for servicers. II The Department followed up by proposing Part 419 in draft form (the Draft Rules ) on December 15, 2009, giving servicers an opportunity to comment before these requirements took effect in their current form. III

2 The Law authorizes the Superintendent to promulgate regulations on topics including the provision of payoff statements and the timing of the crediting of borrower payments. IV The Department broadly applied that authority, and in the Rules addressed not only those topics, but also a number of others that impact how servicers do business. Specifically, Part 419: creates a duty of fair dealing; requires compliance with federal and state laws; regulates the payment of tax or insurance premiums; provides for servicers responses to consumer complaints and inquiries; regulates the crediting of payments; establishes requirements for account statements, late payment notices, and payoff balances; regulates fee practices; establishes expectations for loss mitigation efforts; imposes quarterly and annual reporting and bookkeeping requirements; and prohibits servicers from engaging in certain conduct. Below we generally address each provision of the Rules in turn, noting differences between the draft and final versions. We also note where the Rules address concerns that may have arisen during the Department s comment process and where additional clarification from the Department may be needed. Before we do so, a few general notes on the Rules merit mention. First, although we refer throughout this alert to servicers, the Rules purport to apply with equal force to all entities servicing mortgage loans in New York, whether or not they are subject to registration pursuant to Part 418 of the Superintendent s Regulations. V Whether the Department has the authority under the Law to regulate entities exempt from servicer registration is not free from doubt, however. Second, with regard to loan type, the Rules encompass the servicing of reverse mortgage loans as well as conventional firstand subordinate-lien loans; however, it remains unclear whether they extend to HELOCs. VI Third, although the Rules do not exempt federally chartered institutions or their operating subsidiaries, federal law may preempt many provisions of the Rules for these institutions (although this will change when certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to preemption take effect next year). Finally, the Rules expressly provide that no provision of Part 419 requires a servicer to perform services in a manner that is inconsistent with the terms of the note, mortgage, or servicing contract though that may be difficult to discern from the Rules themselves, given the level of detail in their requirements. Duty of Fair Dealing Part 419.2, which remains almost unchanged from the Draft Rules, imposes on a servicer a duty of good faith and fair dealing in all communications, transactions, and courses of dealing in connection with the servicing of a borrower s mortgage loan. Among other duties, a servicer must follow the borrower s reasonable and lawful instructions (and, as clarified from the Draft Rules, only to the extent that such instructions are consistent with the underlying note and mortgage). The Rules also require a servicer to: (1) provide trained personnel and telephone facilities sufficient to respond promptly to borrower inquiries; (2) promptly provide the borrower with an accurate account statement; (3) inform borrowers of all loss mitigation options and services that the servicer offers; and (4) pursue loss mitigation with the borrower whenever possible. The final three duties tie into other parts of the Rules, which we discuss in greater detail below. Compliance with State and Federal Law Part requires a servicer to comply with all laws and regulations applicable to mortgage loan servicing. On the federal side, such laws and regulations include but are not limited to RESPA, TILA, and Regulation Z; on the state side, they include Article 12-D of the Banking Law, Section 6-k of the Banking Law, and Article 9, Title 3-A of the Real Property Tax Law. Of course, servicers must comply with all applicable federal and state laws, but by making compliance an express October 4,

3 requirement, the Department can more readily sanction servicers for non-compliance with other federal and state laws. Although neither the draft nor the final version of the Rules creates penalties for violations of their provisions, the underlying law permits the imposition of civil penalties and other remedies on any entity that violates its provisions or related rules or regulations. VII Consumer Complaints and Inquiries Part regulates the manner in which a servicer must respond to consumer complaints and inquiries. For instance, a servicer must follow the RESPA requirements relating to Qualified Written Requests. VIII Part also requires a servicer to have procedures and systems in place to respond to and resolve borrower inquiries and complaints in a prompt and appropriate manner, including through designated customer service personnel and a tollfree or collect calling telephone number. In promulgating the Rules, the Department clarified that a servicer need not designate a specific individual for customer contact; rather, a customer service department staffed by trained personnel can satisfy the customer contact requirement of Part This revision allays the concern we expressed in our previous alert that a single customer service contact might be insufficient to provide prompt, responsive service to the customers of a large servicing entity. A servicer must provide clear[] and conspicuous[] disclosures (with content the Rules specify) to borrowers in its welcome packet, annual statement, and, as applicable, with each monthly statement or annual coupon book. The Draft Rules applied these disclosure requirements to a regular account statement, but did not define that term. The Rules now specifically refer to an annual statement, no longer suggesting that servicers might have to provide monthly statements in place of coupon books or otherwise change their systems to comply with the disclosure requirements. Part also requires a servicer to provide the name and contact information for the owner or assignee of the mortgage loan within 10 days of receiving a written request from a borrower (or the borrower s authorized representative IX ). By contrast, we note that the Draft Rules would have: (1) provided a 15 day response period; and (2) required a servicer to provide contact information for the current legal or beneficial owner of the loan. In final form, it remains unclear whether the Rules require a servicer to provide the owner s or assignee s contact information with every borrower request or only when the borrower specifically requests that information. Payment of Tax or Insurance Premiums Part requires a servicer that escrows borrower payments for tax or insurance premiums to make payments of those premiums in accordance with RESPA and the requirements of New York law; liability may arise for a servicer s failure to comply with either the federal or state law requirements. A servicer must disclose any payments from an escrow account clearly and conspicuously in the next periodic statement provided to the borrower. Furthermore, where an escrow account has been established and a servicer advances funds in paying a disbursement that is not the result of a borrower s payment default, the servicer must conduct an escrow account analysis to determine the reasons for and extent of the deficiency and to provide the borrower with a written explanation before seeking repayment of the funds by the borrower. The Draft Rules lacked the clarification that this requirement applies only where an escrow account has been established. Crediting of Payments Part 419.6, which concerns the crediting of payments received from a borrower, highlights the differences between the requirements of the Rules and those of other state and federal laws with which servicers must comply. Although Regulation Z is one of the federal regulations with which the Rules mandate servicers compliance, the requirements of Part exceed those of Regulation Z with respect to the crediting of payments. X First, to ensure consistency in the treatment of borrowers, the Rules require a servicer to have reasonable requirements for accepting and crediting payments, as well as written policies and procedures for handling payment overages and shortages. Second, with regard to late payments, Part instructs a servicer to credit a late payment before collecting any late charge; in the case of a loan originated after January 1, 2010, a servicer must credit payments first to the interest October 4,

4 and principal due on the loan and then to taxes, insurance, or fees. Third, the Rules mandate timelines for the crediting of payments, which vary according to whether or not a payment is conforming or non-conforming. XI Fourth, any servicer who uses the scheduled method of accounting must credit a regularly scheduled payment made prior to its scheduled due date by the earlier of that due date or 30 days from receipt, or must notify the borrower within 10 days as to why the servicer did not credit the payment. Under the Draft Rules, the notice requirement arose regardless of when the servicer failed to act. By contrast, the Rules in final form clarify that this notice requirement applies only if the servicer does not credit a payment within 30 days of receipt. Account Statements, Late Payment Notices, and Payoff Balances Parts 419.7, 419.8, and require a servicer to provide annual statements, late payment notices, and payoff balances, respectively; these requirements may apply automatically, or upon a borrower s request. Part addresses requirements for annual statements and escrow statements. A servicer must provide a borrower with a plain-language annual statement at least once per year, within 30 days of the end of the computation year; this may be separate from the annual escrow statement. Additionally, upon request from a borrower, a servicer must provide a plain English payment history; the Rules do not specify whether the borrower s request must be in writing. The timeline for delivery varies according to the number of months included in the payment history. A servicer may not charge a borrower for providing the annual escrow statement or for the first payment history furnished within a 12-month period. We note that the Rules are silent as to fees for the annual account statement. As the Rules obligate the delivery of that statement, the conservative view would be that a servicer should not charge for its provision. Part also re-emphasizes a servicer s general obligation under the Rules to comply with RESPA, mandating that a servicer handle any shortage, surplus, or deficiency in a borrower s escrow account in accordance with RESPA. However, with the borrower s consent, a servicer may apply an excess escrow account balance to the principal balance of the loan. As it was under the Draft Rules, this provision is somewhat at odds with RESPA, which gives a servicer two options in the event of an escrow account surplus. XII The Rules also do not the method of delivery for the requested statements. Part requires a servicer to send a borrower a payment reminder notice at the borrower s last known address no later than 17 days after the payment becomes due and remains unpaid. That requirement does not apply in each consecutive month in which the mortgage loan continues to remain unpaid, or to the extent it is inconsistent with the automatic stay provisions of the federal Bankruptcy Code (which protect a borrower with a pending bankruptcy proceeding). The Department added both of these exceptions when finalizing the Rules, and with the addition of the latter exception, prevented conflict between the Rules and the requirements of the Bankruptcy Code. Part requires a servicer to provide a clear, understandable, and accurate payoff statement within five business days after receiving a request for such a statement from a borrower. The servicer may only charge a reasonable fee to provide a payoff statement after the first five requests in any calendar year. The requirements of Part supplement those of Section 274-a of the Real Property Law with regard to responses to bona fide written demands. XIII However, Part is silent as to its interaction with the other provisions of Section 274-a, which may create some conflict. Section 274-a requires a servicer to provide a payoff statement within 30 days of receiving a written request from a borrower and permits the servicer to charge $20 for the second and every subsequent payoff statement requested within a calendar year. Reading Part together with Section 274-a, it appears that both apply, but it is unclear how a servicer could comply with both sets of requirements simultaneously. Fees With regard to servicing fees, Part requires a servicer to maintain a current schedule of standard or common fees, and to make that schedule available on its website or to borrowers upon request. The fee schedule must: (1) identify each fee; (2) provide a plain English explanation of the October 4,

5 fee; and (3) state the amount or range of amounts for the fee, or explain how the fee is calculated if there is no standard fee. Under the Draft Rules, a servicer was obligated to update its fee schedule on a semiannual basis; it now appears that the duty to update is constant. The Rules provide some flexibility by permitting the expression of fees as a range of amounts, accommodating servicers in the case of fees that vary from loan to loan and which the servicer does not establish. However, it is unclear whether foreclosure or bankruptcy fees qualify as standard or common fees. Part also prescribes the types of fees that a servicer may charge. Specifically, a servicer may not assess and collect any fee unless it is for services actually rendered and is: (1) expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law; (2) expressly permitted by law and not prohibited by the loan instruments; or (3) not prohibited by law or the loan instruments and is a reasonable fee for a specific service requested by the borrower, and is assessed only after clear and conspicuous disclosure to the borrower and the borrower s express consent to pay the fee in exchange for the services. By contrast, the Draft Rules required that any fee be: (1) reasonable; (2) for bona fide services rendered or costs incurred; (3) expressly authorized by the mortgage loan instruments (presumably, the note and/or mortgage); and (4) not otherwise prohibited by law. The final version of the Rules relaxes that standard, mirroring restrictions imposed by the Federal Trade Commission in recent settlements with servicers. XIV In promulgating the Rules, the Department made two significant changes from the draft version. First, Part now includes limitations on attorney fees. In connection with a foreclosure action, a servicer may only charge attorney fees that are reasonable and customary. If such action is terminated prior to the final judgment and sale, Part further limits the borrower s liability to reasonable and customary fees for work actually performed in connection with the action. Second, the Rules include expanded restrictions on the assessment of late fees. Part requires compliance with Section 254-b of the Real Property Law and also prohibits a servicer from pyramiding late charges, XV deducting late charges from any regular payment, or collecting a late charge from a borrower s escrow account or escrow surplus (except with the borrower s consent). A servicer also may not impose a late charge: (1) more than once with respect to a single delinquent installment; (2) based on an amount greater than the amount that is past due; or (3) in excess of two percent (2%) of the amount of the delinquent installment. By comparison to the Draft Rules, Part no longer includes late payment provisions that are duplicative of (and possibly inconsistent with) existing provisions of New York law; instead, Part now requires compliance with Section 254-b of the Real Property Law. The Rules also mirror the requirements of Section 254-b by basing the late fee cap discussed above on the amount of the delinquent installment. (The Draft Rules would have calculated the late fee cap based on the past due payment, but did not define that term.) Delinquency and Loss Mitigation Echoing many of the requirements of the federal Home Affordable Modification Program ( HAMP ) XVI and of other state laws, Part sets out extensive requirements for dealing with delinquent borrowers. Part includes the clarification noted above that no provision of the Rules shall be construed to require a Servicer to perform services in a manner inconsistent with the terms of the note, mortgage or contract for the servicing of a mortgage loan. Although the placement of that provision within Part might suggest that it applies only to the provisions on delinquency and loss mitigation, the wording of the provision suggests to us that it applies to the Rules generally. Why the Department chose to locate the provision within Part is unclear. Reasonable and Good Faith Efforts A servicer must make reasonable and good faith efforts consistent with usual and customary industry standards and the requirements described below to engage in appropriate loss mitigation options, including loan modifications, to avoid foreclosure. XVII For instance, the Rules require a servicer to have adequate staffing, written procedures, resources, and facilities to respond to borrower inquiries and complaints regarding loss mitigation in a timely manner and to ensure that borrowers are not required to submit multiple copies of required documents during consideration of loss October 4,

6 mitigation options. A servicer also must inform any borrower who is at least 60 days delinquent, or in imminent risk of default, about the nature of the delinquency and the availability of any loss mitigation options that the servicer offers. Upon the borrower s request, Part also requires the servicer to negotiate in good faith to attempt a resolution or workout of the delinquency or to prevent the borrower s default, including a loan modification. A servicer is presumed to satisfy the good faith requirement by offering loan modifications and other loss mitigation options in accordance with HAMP guidelines or directives developed by the U.S. Department of the Treasury. The provisions regarding reasonable and good faith efforts include two notable changes from the Draft Rules. The Department added the requirement that a servicer have personnel, procedures, and resources in place to respond to borrower loss mitigation inquiries and complaints. In contrast to Part (discussed above), the Department did not change the requirements for customer contact personnel with regard to loss mitigation options when creating the Rules, suggesting that a servicer must also have designated loss mitigation staff to address specific inquiries and complaints regarding loss mitigation options. Loan Modifications Stopping short of a mandate, the Rules require a servicer to consider a loan modification as an alternative to foreclosure when: (1) the borrower is in imminent risk of default or is unable to maintain the current payments required under the mortgage or to make up delinquent payments; and (2) the net present value of the servicer s income stream under a modified loan would exceed the net present value of the servicer s recovery after a foreclosure sale. Part also requires a servicer to comply with all HAMP guidelines or directives, if applicable, which may involve using reasonable efforts to remove prohibitions or impediments to their authority and to obtain third party consents and waivers that are required, by contract or law, in order to effectuate a loan modification under HAMP. As a result, a servicer would appear to have a regulatory obligation to comply with HAMP guidelines that could conflict with its obligations under investor contracts. Thus, a servicer could be subject to a claim by an investor that the servicer did not try hard enough to obtain the investor s authorization for a modification, notwithstanding the terms of the servicing agreement. Responses to Loss Mitigation Requests Part sets the timeline for and manner of a servicer s response to a request for loss mitigation from a borrower (although separate timelines may apply to servicers participating in HAMP). A servicer must acknowledge a loss mitigation request in writing within 10 business days of receipt, specifying any information necessary for the servicer to review the request and describing key elements of the loss mitigation process. And within 30 days of receiving all necessary documentation from the borrower and third parties, a servicer must evaluate the borrower s eligibility for loss mitigation and provide written notification of its decision on the borrower s request. (As under Part 419.4, the Rules include a contracted timeline for response: the Draft Rules would have given a servicer 45 days to evaluate a loss mitigation request.) The content of the servicer s response must reflect whether the notification concerns an approval or a denial. An approval notice must provide the borrower with clear and understandable written information explaining the material terms, costs and risks of the option offered. A notice of denial must specifically state the reason(s) therefor, provide contact information through which the borrower can discuss the denial, inform the borrower of other foreclosure alternatives for which he or she may be eligible, and include a statement that the borrower may file a complaint with the State Banking Department if he or she believes that the loss mitigation request was wrongly denied. When promulgating the Rules, the Department added the requirements that a notice of denial explain with specificity the reasons for such denial and that the notice include the Department s contact information. Policies and Procedures Part establishes internal procedural requirements related to loss mitigation. To satisfy those requirements, a servicer must dedicate resources to loss mitigation and ensure that its staff is aware of foreclosure assistance programs. To October 4,

7 facilitate borrowers access to loss mitigation opportunities, Part requires servicers to alert borrowers who are at least 60 days delinquent or at imminent risk of default to the availability of government-approved housing counseling resources; servicers also must maintain contact information for designated loss mitigation staff members, with whom borrowers can discuss and negotiate loss mitigation options. To address any conflicts concerning eligibility for loss mitigation, a servicer must have a process through which borrowers may escalate disagreements about their eligibility for loss mitigation options, and must designate special thirdparty escalation contacts who can review or intervene in the handling of a pending loss mitigation matter when necessary. Foreclosure When promulgating the Rules, the Department also added to Part the requirement that a servicer develop and implement policies and procedures for foreclosure. First, a servicer must notify its foreclosure attorneys and trustees whether a borrower: (1) is under consideration for a loss mitigation option; and (2) is being evaluated for, or is currently in, a trial or permanent modification. Second, a servicer must ensure that its foreclosure attorneys comply with the mandatory settlement conference requirements of Section 3408 of the Civil Practice Law and Rules. Third, a servicer should not initiate a foreclosure action if a borrower s request for a loss mitigation option is pending, or if the borrower is in a trial or permanent modification and is not more than 30 days in default under the modification agreement. Servicing Delinquent Loans As a complement to its loss mitigation strategies, Part requires a servicer to develop protocols for the servicing of delinquent loans. For instance, a servicer s accounting system must promptly alert servicing personnel of any delinquency. Additionally, a servicer must have procedures: (1) to identify and work with borrowers who are at risk of delinquency or foreclosure; (2) to send delinquency notices, assess late charges, handle partial payments, maintain collection histories, and report delinquencies to credit bureaus; and (3) to permit management personnel to review and evaluate decisions regarding appropriate loss mitigation options or the commencement of foreclosure actions. Reporting and Bookkeeping: Parts and impose reporting and bookkeeping requirements, respectively. As noted in the introduction, these obligations apply regardless of whether the servicer is registered pursuant to Part 418 of the Superintendent s Regulations. Part authorizes the Superintendent of Banking to require each servicer to compile and submit a quarterly report on its servicing activity in the state within 30 days of the end of each calendar quarter. Types of information covered by these reports include delinquency and default rates, loss mitigation and loan modification efforts, foreclosure-related activities, and participation in settlement conferences. By contrast to the Draft Rules, Part does not require each servicer to provide this information to the Superintendent; rather, the Superintendent has discretion as to whether to require the submission. Despite these changes, the Rules impose the possibility of a relatively heavy reporting burden on servicers, especially when compared to the requirements of similar laws in states such as New Jersey and North Carolina. Similarly, Part mandates the maintenance of servicing records. A servicer must keep certain records on New York mortgage loans for at least three years, facilitating the Superintendent s work of determining whether the servicer is complying with applicable laws and records. To satisfy this requirement, a servicer must: (1) maintain a telephone log and written correspondence file relating to mortgage loan servicing; (2) have internal controls to assess its compliance with established servicing standards and procedures and to audit its payment processing functions on a periodic basis; and (3) collect, maintain, and analyze appropriate data on delinquency and foreclosure rates. Additionally, a servicer must submit to the Department quarterly financial reports and certifications of net worth, annual audited financial statements, and any other regular or special reports that the Superintendent requires. In finalizing the Rules, the Department dropped the requirement for a servicer to maintain a servicing October 4,

8 history of all loans acquired from another entity from Part Instead, the Rules clarify that a servicer need only maintain records of any prior Servicer of a loan to the extent that such information is reasonably available. Prohibited Conduct: On top of all of the requirements discussed above, Part of the Rules further constrict servicers business activities by prohibiting engagement in certain types of conduct. Generally, a servicer may not engage in unfair or deceptive business practices or misrepresent or omit any material information in connection with the servicing of the loan. XVIII More specifically, the Rules provide that a servicer may not place hazard, homeowner s, or flood insurance in certain circumstances (such as when the amount of the insurance exceeds the replacement cost of the improvements on the mortgaged property) or fail to take other specified actions. The Rules also prohibit a servicer from complicating a borrower s efforts to comply with its obligations under a mortgage loan; for instance, a servicer cannot require a borrower to remit funds by any means more costly to the consumer than a check. Finally, Part emphasizes the requirement for a servicer to comply with applicable requirements of state law, by providing that a servicer may not fail to comply with the pre-foreclosure notice and filing requirements of Sections 1304 and 1306 of New York s Real Property Actions and Proceedings Law, respectively. Once again, by mandating such compliance, Part may facilitate the Department s enforcement of other provisions of the Rules. Conclusion In the months between the publication of the Draft Rules and the emergency adoption of the Rules, it appears that the Department spent considerable time and energy reviewing comments on how the Rules will impact servicers doing business in the state. As we discussed briefly, the Rules reflect some significant changes from their draft form, in many cases reconciling conflicting requirements with federal and state laws and clarifying servicers obligations. At the same time, some issues remain outstanding. As the Department adopted the Rules on an emergency basis, the Department should be able to refine them based on continued feedback from servicers after the October 1 effective date. The Department is expected to issue for public comment a proposal to adopt permanent regulations in the near future. In its current form, Part 419 makes it clear that the rules of the road have changed for mortgage loan servicers operating in New York state. Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d Alene Taipei Tokyo Warsaw Washington, D.C. K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp.k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer K&L Gates LLP. All Rights Reserved. October 4,

9 I Ch. 472, Laws of II The Department first adopted Part 418 of the Superintendent s Regulations on an emergency basis on July 1, 2009; it most recently re-adopted Part 418 effective September 6, On September 15, the Department proposed Part 418 and Supervisory Procedures MB 109 and MB 110 for public comment, in order to adopt those regulations in permanent form. Interested parties may submit comments on Part 418 to Sam L. Abram, Secretary, New York Banking Board, at sam.abram@banking.state.ny.us; the deadline for comments is November 1, III The Department is expected to issue a proposal to adopt permanent regulations in substantially similar form to the Rules in the near future; the Department will seek further public comment before the final adoption. Comments on the Rules may be submitted to: Jane M. Azia, Director of Nondepository Institutions and Consumer Protection, One State Street, New York, NY 10004, or via at jane.azia@banking.state.ny.us. IV See N.Y. Banking Law 590, 595-b. V Entities and individuals exempt from the registration requirement are: (1) insurance companies and banks licensed by the Superintendent or the Comptroller of the Currency to transact business in New York State, and banks, savings banks, savings and loan associations, and credit unions organized under state or federal law and authorized to make mortgage loans; (2) mortgage brokers, registered under Section 592-a of New York s Banking Law; (3) mortgage lenders, licensed under Section 592 of the Banking Law; or (4) employees of exempt entities. N.Y. Comp. Codes R. & Regs. tit. 3, Part 418 requires entities exempt from registration to notify the Superintendent before engaging in the servicing of mortgage loans in New York and makes them subject to the business conduct and consumer protection rules of Part 419. VI Article 12-D addresses both first- and subordinate-lien loans, and neither Part 418 nor the Rules define the term mortgage loan so as to exclude subordinate-lien loans. Generally, for purposes of Article 12-D, a mortgage loan is a loan to a natural person made primarily for personal, family, or household purposes, secured by a mortgage or deed of trust on a one-to-four family dwelling in New York state that is used or intended to be used or occupied (in whole or in part) as the home or residence of one or more persons. N.Y. Banking Law 590(1)(a)-(b). Part 418 of the Superintendent s Regulations also defines the term servicing mortgage loans to include activity with regard to home equity conversion mortgages and reverse mortgages, but does not specifically address HELOCs. N.Y. Comp. Codes R. & Regs. tit. 3, 418.3(d). VII N.Y. Banking Law 598; see also N.Y. Comp. Codes R. & Regs. tit. 3, VIII Part 419 defines as Qualified Written Request as it is defined under RESPA: a written correspondence (other than notice on a payment coupon or other payment medium supplied by the servicer) that includes, or otherwise enables the servicer to identify, the name and account of the borrower, and includes a statement of the reasons that the borrower believes the account is in error, if applicable, or that provides sufficient detail to the servicer regarding information relating to the servicing of the loan sought by the borrower. IX A borrower s authorized representative may be any person whom the borrower designates through a written and signed authorization, including an employee or agent of a non-profit housing counseling or legal services organization. We use the term borrower to refer to either the borrower or his or her authorized representative. X See 12 C.F.R (c). XI A conforming payment is a payment for which the borrower has provided sufficient information to credit the account and which the borrower has sent to the correct address. A nonconforming payment is a payment that the servicer accepts despite the fact that it does not conform to a servicer s specific written requirements for the consumer to follow in making payments. N.Y. Comp. Codes R. & Regs. tit. 3, 419.6(c). XII Under RESPA, in the case of an escrow surplus of $50 or more, the servicer may refund that amount to the borrower; if the surplus is less than $50, the servicer may refund the amount or may credit it against the next year s escrow payments. 24 C.F.R (f)(2). XIII Section 274-a of the Real Property Law defines a bona fide written demand as a written demand made by an authorized individual in connection with a sale or refinancing of the mortgaged property or some other event where the mortgage is reasonably expected to be paid off or assigned, and enumerates the requirements for making such demands. N.Y. Real Prop. Law 274-a(2)(b)(iii). XIV See, e.g., The FTC settlement with EMC Mortgage and Bear Stearns resolved allegations that, among other actions, the companies charged borrowers unauthorized fees in violation of the FTC Act. As part of the settlement, the companies were prohibited from charging any such unauthorized fees. XV Pyramiding late charges refers to the practice of charging a late fee when the only delinquency is attributable to late fees assessed on an earlier payment, when the payment is otherwise a full payment for the applicable period and is made on the due date or within the grace period, if applicable. XVI Although Part 419 s requirements with regard to loan modification largely mirror those of HAMP, we note that the scope of the two programs varies significantly in terms of the types of loans included. HAMP guidelines include a series of criteria that a loan must meet in order to be eligible. By contrast, as noted above, Part 419 applies broadly to first- and subordinate-lien loans, and is therefore much more expansive with regard to the eligibility of loans for modification. XVII Loss mitigation options are alternatives to foreclosure, including loan modification, reinstatement, forbearance, deedin-lieu, and short sale. N.Y. Comp. Codes R. & Regs. tit. 3, 419.1(d). Loan modification means waiver, modification or variation of any material term of the mortgage loan, irrespective of whether the duration is short-term, long-term or life-of-loan, that changes the interest rate, forbears or forgives the payment of principal or interest or extends the final maturity date of the loan. Id (c). October 4,

10 XVIII Material information subject to this prohibition includes: (1) the amount, nature, or terms of any fee or payment due or claimed to be due on a loan; (2) the terms and conditions of the servicing agreement; or (3) the borrower s obligations under the loan. N.Y. Comp. Codes R. & Regs. tit. 3, (a). October 4,