Welcome to the California Mortgage Bankers Association s Mortgage Quality and Compliance Monthly Webinar

Transcription

1 Welcome to the California Mortgage Bankers Association s Mortgage Quality and Compliance Monthly Webinar February 26, 2015 You have entered the call on mute. If you have a question for Susan or CMBA, please direct a question to her only by typing it into the panel to the left of the screen. The operator will open the lines for audience participation for Introduction of New Members, Alerts and also Q & A at the conclusion of the presentation. To join the audio portion, dial (800) and use passcode 4378

2 CMBA MORTGAGE QUALITY & COMPLIANCE WEBINAR Annemaria Allen, Committee Chair Susan Milazzo, CMBA Executive Director DIAL IN #: (800) Passcode: 4378 AGENDA I. Preliminary Remarks and welcome to the committee Annemaria Allen, The Compliance Group II. Introduction of New Members/Member Alerts / Recent Developments / Upcoming Events III. California Legislative Update Pat Zenzola, KP Public Affairs, California MBA Legislative Advocate IV. Litigation Update Michael Pfeifer, Pfeifer & DelaMora, LLP, California MBA General Counsel V. Presentation Overview of New QM Rule Speakers: Joseph T. Lynyak III, Dorsey & Whitney, LLP

3 California MBA State Mortgage Legislation Update February 2015 AB 99 (Perea D) Personal income taxes: income exclusion: mortgage debt forgiveness. Current Text: Amended: 2/18/2015 Status: 2/19/2015-Re-referred to Com. on REV. & TAX. Location: 2/19/2015-A. REV. & TAX Summary: The Personal Income Tax Law provides for modified conformity to specified provisions of federal income tax law relating to the exclusion of the discharge of qualified principal residence indebtedness, as defined, from an individual's income if that debt is discharged after January 1, 2007, and before January 1, 2014, as provided. The federal Tax Increase Prevention Act of 2014 extended the operation of those provisions to debt that is discharged before January 1, This bill would conform to the federal extension, discharge indebtedness for related penalties and interest, and make legislative findings and declarations regarding the public purpose served by the bill. This bill contains other related provisions.

4 California MBA State Mortgage Legislation Update February 2015 AB 244 (Eggman D) Mortgages and deeds of trust: successors in interest. Current Text: Introduced: 2/9/2015 Status: 2/17/2015-Referred to Coms. on B. & F. and JUD. Location: 2/17/2015-A. B. & F. Summary: Existing law imposes various requirements to be satisfied prior to exercising a power of sale under a mortgage or deed of trust. Existing law defines a mortgage servicer as a person or entity who directly services a loan, or is responsible for interacting with the borrower, and managing the loan account on a daily basis, as specified. Existing law defines a borrower, for purposes of specified provisions relating to mortgages and deeds of trust, as a natural person who is a mortgagor or trustor who is potentially eligible for any federal, state, or proprietary foreclosure prevention alternative program offered by, or through, his or her mortgage servicer. This bill would include a successor in interest in the definition of a borrower for purposes of the eligibility provisions described above. The bill would define a successor in interest for these purposes as a natural person who provides the mortgage servicer with notification of the death of the mortgagor or trustor and reasonable documentation, as specified, showing that the person falls into one of four categories of successors, including a personal representative of the mortgagor's or trustor's estate or a surviving spouse, as specified.

5 Litigation Update: February 26, 2015 In Re: NewDay Financial, LLC By Michael R. Pfeifer, Esq. Copyright 2015 Pfeifer & De La Mora, LLP. CMBA MQAC February 26, 2015

6 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC In the Matter of: NewDay Financial, LLC. (2015-CFPB-0004) (Consent Order Filed February 10, 2015) 1. Deceptive acts/practices in failing to disclose payments to a veteran s organization that endorsed Respondent while providing other substantive reasons for the endorsements; 2. Illegal payments for referrals of mortgage origination business in connection with the marketing of home loans. (RESPA 8(a)) Result: Civil Money Penalties: $2 Million Dollars + injunctive relief and submission to extensive monitoring --- Respondent includes NewDay USA, a Delaware corporation and its subsidiaries, NewDay Financial, LLC, and NewDay Reverse Mortgage, LLC, and their successors and assigns --- Respondent s primary business has been originating refinance home loans through a program wherein VA guarantees a portion of home loans taken out by servicemembers, veterans, and eligible surviving spouses. Until Sept. 2013, Respondent also originated gov t insured reverse mortgages to seniors. Copyright 2015 Pfeifer & De La Mora, LLP. 6

7 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC --- During the Relevant Period (July 21, 2011 July 1, 2014) Respondent advertised its products to consumers primarily through direct mail campaigns and sent over 50 million solicitations by mail and to pre-screened customers who were invited to call Respondent s call center where questions were answered and applications taken. --- From 2010 through Relevant Period, Respondent had a marketing relationship with a non-profit Veterans Organization through an independent broker company ( Broker Company ) who contracted directly with Respondent on behalf of the Veterans Organization and paid the Veterans Organization a portion of the fees it received from Respondent. --- Pursuant to agreements and understandings between and among the Respondent, Veterans Organization, and Broker Company, Respondent was designated as the exclusive lender of Veterans Organization, and Respondent drafted and sent advertising communications by postal and electronic mail to Veterans Organization members, with Veterans Organization s approval, that were identified as being from Veterans Organization. Copyright 2015 Pfeifer & De La Mora, LLP. 7

8 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC ---From 2010 through the Relevant Period, the following fees were paid per agreements and understandings between Respondent, Veterans Organization, and Broker Company: a. Respondent paid Broker Company a monthly licensing fee of $15K b. For each referred member of Veterans Organization who contacted Respondent about a reverse mortgage and completed mandatory counseling, Respondent paid lead generation fees of $75 to Veterans Organization and $100 to Broker Company; c. For each referred member of Veterans Organization who contacted Respondent to inquire about a 100% LTV mortgage refi and had their credit report pulled, Respondent paid a lead generation fee of $15 to Veterans Organization and $20 to Broker Company At no point were Veterans Organization members made aware of the payments, nor has the information been available publically. Copyright 2015 Pfeifer & De La Mora, LLP. 8

9 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC I. FINDINGS AND CONCLUSIONS RE RESPONDENT S MARKETING ---Failure to disclose the fact that Respondent was making regular payments, both directly and indirectly, for the Veterans Organization s endorsements, while also making affirmative statements concerning a substantive basis for the endorsements--- e.g., Respondent is Veterans Organization s exclusive provider of home loan programs based on their high standards for service and the excellent value of their programs likely would have been misleading to reasonable consumers and thus constituted deceptive acts or practices in violation of 1031(a) and 1036(a)(1)(B) of the CFPA (Dodd Frank) II. FINDINGS AND CONCLUSIONS RE RESPA VIOLATION --- RESPA 8(a) [12 U.S.C. 2607(a)] provides that [n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. ---The above payments (3,900 resulting in nearly 400 closed forward & reverse mortgages) violated RESPA 8(a) Copyright 2015 Pfeifer & De La Mora, LLP. 9

10 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC --- Significant implications for so-called Marketing Services Agreements --- See also following Consent Orders filed : 1. In the Matter of: JP Morgan Chase, N.A. (2015-CFPB-0001) 2. In the Matter of: Wells Fargo Bank, N.A. (2015-CFPB-0002) Copyright 2015 Pfeifer & De La Mora, LLP. 10

11 Litigation Update February 26, 2015: In Re: NewDay Financial, LLC. PFEIFER & DE LA MORA, LLP Pfeifer & De La Mora, LLP is an AV rated law firm dedicated to providing litigation and compliance representation to members of the financial services industry, including mortgage lenders, servicers, investors, brokers, and related service providers. Michael R. Pfeifer, Esq. Pfeifer & De La Mora, LLP 765 The City Drive South, Suite 380 Orange, California (714) Copyright 2015 Pfeifer & De La Mora, LLP. 11

12 California Mortgage Bankers Association MQAC Presentation The Risk Retention Rule February 26, 2015 Joseph T. Lynyak III Dorsey & Whitney LLP

13 History Dodd-Frank Section 941: Codified as Section 15G of the Securities Exchange Act of 1934 Intention align the interests of securitizers with those of other securitization transaction participants by requiring securitizers to retain some of the credit risk, i.e., have skin in the game Provide incentive to securitizers to monitor and ensure quality of assets underlying a securitization transaction 13

14 History Dodd-Frank Section 941 (cont d): Directed regulators to issue rules requiring a securitizer to retain generally not less than 5% of the credit risk for assets securitized that are sold, transferred or conveyed to third parties No risk retention required for securitizers of qualified residential mortgages ( QRMs ), to be defined by the regulators Regulators must permit securitizers to retain less than 5% credit risk of securitized commercial loans, commercial real estate loans and consumer automobile loans meeting established underwriting standards. 14

15 History Dodd-Frank Section 941 (cont d): Regulator Discretion Permitted Regulators may allow risk retention to be split between securitizer and originator May establish separate rules for different classes of assets Some discretion left to regulators to establish exemptions from risk retention requirements Discretion in developing QRM standards, though QRM definition can be no broader than the definition of qualified mortgage created by the CFPB for consumer regulatory purposes 15

16 History Regulators Involved: Federal Reserve Board ( FRB ) Federal Deposit Insurance Corporation ( FDIC ) Office of the Comptroller of Currency ( OCC ) Securities and Exchange Commission ( SEC ) Department of Housing and Urban Development ( HUD ) Federal Housing Finance Agency ( FHFA ) 16

17 History 2011 Proposed Rules: On April 29, 2011, regulators issued the initial proposed risk retention rules A pretty big mess Specified risk retention method and exemptions Definition of QRMs: criteria similar to QM criteria, but also more restrictive For purchase money mortgages, required a maximum loan-to-value ratio of 80% and a 20% down payment Required debt-to-income ratio of 36% vs. the 43% QM limit 17

18 History 2013 Proposed Rules: On August 28, 2013, regulators released revised proposed rules risk retention Definition of QRM changed to conform with the CFPB s recently adopted definition of qualified mortgage ( QM ) Proposed greater flexibility for structuring risk retention for certain categories of transactions 18

19 History Final Rules: October 2014 regulators jointly approve final risk retention rule Largely retains risk retention framework contained in 2013 proposed rules Federal Register notice - gs/bcreg a1.pdf 19

20 Final Rule Overview Basic Rule: A securitizer must retain not less than 5% of the credit risk for any asset that the securitizer, through the issuance of ABS Interests, transfers, sells or conveys to a third party, unless an exemption is available Provides for horizontal and vertical risk retention, or a combination 20

21 Final Rule Overview (cont d) Basic Rule (cont d): An eligible vertical interest is either a single vertical ABS Interest or an interest in each class of ABS Interests in the issuing entity that constitutes the same proportion of each such class (i.e., shares payments and losses ratably with each class of investor ABS Interests). Vertical interests are valued at face value An eligible vertical interest is either a single vertical ABS Interest or an interest in each class of ABS Interests in the issuing entity that constitutes the same proportion of each such class (i.e., shares payments and losses ratably with each class of investor ABS Interests). Vertical interests are valued at face value 21

22 Final Rule Overview (cont d) Basic Rule (cont d): Unfunded/third party risk retention is generally not permitted Other risk retention methods available for some asset classes or transaction types Permits allocation of risk retention to originators that contribute at least 20% of assets in a pool Allocations must be ratable portions of each type of retained risk 22

23 Final Rule Overview (cont d) Basic Rule (cont d): Prohibits a securitizer from hedging or otherwise transferring its retained interest prior to the applicable sunset date (determined by asset type), subject to an exception for CMBS transactions May hedge overall market movements (including interest rates, currency exchange rates, asset prices) as long as the hedge instrument is independent of the pool or ABS Interest hedged Third party credit support generally not permitted 23

24 Final Rule Overview (cont d) Risk Retention Sunset: Except for RMBS, the transfer and hedging restrictions expire on or after the latest of (1) the date on which the total unpaid principal balance of the securitized assets is reduced to 33 percent of the original unpaid principal balance as of the closing date, (2) the date on which the total unpaid principal obligations under the ABS Interests is reduced to 33 percent of the original unpaid principal obligations on the closing date, or (3) two years after the closing date The transfer and hedging restrictions on RMBS risk retention expire on or after the earlier of (1) the date at least 5 years after closing on which the total unpaid principal balance of the securitized assets is reduced to 25 percent of the original unpaid principal balance as of the closing date, or (2) seven years after the closing date 24

25 Final Rule Overview (cont d) Timeline for Effectiveness: For RMBS: One year after publication in the Federal Register (i.e., December 2015) For other asset classes: Two years after publication in the Federal Register (i.e., December 2016) 25

26 Final Rule Overview (cont d) General Exceptions: ABS Interests backed by certain loans or assetsprimarily government-related Federally insured or guaranteed residential, multifamily and health care loans Assets issued, insured or guaranteed by U.S. Government or specified agencies or State agencies Qualified scholarship funding bonds and certain student loan assets Public utility stranded assets FDIC securitizations Certain seasoned loans 26

27 Final Rule Overview (cont d) What is a Securitization? Any transfer through the issuance of ABS Interests. ABS Interest means: Any type of interest or obligation issued by an issuing entity, whether or not in certificated form, including a security, obligation, beneficial interest or residual interest (other than (i) a noneconomic residual interest issued by a REMIC or (ii) an uncertificated regular interest in a REMIC that is held by another REMIC, where both REMICs are part of the same structure and a single REMIC in that structure issues ABS Interests to investors), payments on which are primarily dependent on the cash flows of the collateral owned or held by the issuing entity; 27

28 Final Rule Overview (cont d) ABS Interest means: (cont d) Does not include common or preferred stock, limited liability interests, partnership interests, trust certificates, or similar interests that: Are issued primarily to evidence ownership of the issuing entity; and The payments, if any, on which are not primarily dependent on the cash flows of the collateral held by the issuing entity; and Does not include the right to receive payments for services provided by the holder of such right, including servicing, trustee services and custodial services. 28

29 Final Rule Overview (cont d) What is not a securitization? Whole loan sale/outright sale of receivables Participation interests in underlying assets Secured lending arrangements: Repurchase agreements Advances from Federal Reserve, FHLB 29

30 Categories of ABS Residential Mortgage-Backed Securities Collateralized Mortgage Obligations Commercial Mortgage-Backed Securities Automobile and Lease-Backed Securities Revolving Pool Securitizations Asset-Backed Commercial Paper Conduits 30

31 Residential Mortgage-Backed Securities Definition: Debt obligations that represent claims to the cash flows from pools of mortgage loans secured by residential (1-4 family) properties 31

32 Residential Mortgage-Backed Securities (cont d) Exceptions to Risk Retention: ABS Interests backed by QRMs Tracks CFPB definition of QM Includes future CFPB revisions Until January 10, 2021, includes mortgages insured or guaranteed under certain federal programs or meeting Fannie Mae and Freddie Mac requirements until they exit conservatorship 32

33 Residential Mortgage-Backed Securities (cont d) Exceptions to Risk Retention (cont d): Sponsor must be obligated to repurchase loans that should not have qualified Separate exception for qualifying 3-4 unit residential mortgage loans that are not consumer credit transactions. May be combined with QRMs No other blended pools 33

34 Residential Mortgage-Backed Securities (cont d) Exceptions to Risk Retention (cont d): Fannie Mae and Freddie Mac Fannie Mae and Freddie Mac securities are exempt as long as they operate under conservatorship or receivership with capital support from U.S. Government Additional exceptions for ABS Interests collateralized solely by community focused residential mortgage loans Blended pools permitted; maximum 50% risk retention reduction 34

35 Residential Mortgage-Backed Securities (cont d) Exceptions to Risk Retention (cont d): Seasoned loans. For RMBS, limited to loans (1) not modified since origination, (2) never more than 30 days delinquent, (3) either (A) outstanding and performing for 7 years or (B) outstanding and performing for 5 years and outstanding principal balance reduced to 25% of original principal balance 35

36 Commercial Mortgage-Backed Securities (cont d) Exception from Risk Retention: Qualifying commercial real estate loans First lien (real property, leases and rents, related personal property) Verified and documented financial condition; qualified for fully amortizing level payment loan; ability to service all debt; DSC > 1.5 based on qualified leases (1.25 for multifamily), otherwise

37 Commercial Mortgage-Backed Securities (cont d) Exception from Risk Retention (cont d): Property appraisal meeting bank regulatory requirements; minimum LTV (65%) and CLTV (70%) (lower for appraisals with low direct capitalization rates). Minimum 30% equity Environmental assessment 10-year minimum term; amortization over no more than 25 years (30 years for multifamily housing loans) Fixed or capped interest rate only Must limit second liens Loans must be current at securitization 37

38 Automobile Loan and Lease Backed Securities Definition: Automobile loan: Means any loan to an individual to finance the purchase of, and that is secured by a first lien on, a passenger car or other passenger vehicle, such as a minivan, van, sport-utility vehicle, pickup truck, or similar light truck for personal, family, or household use 38

39 Automobile Loan and Lease Backed Securities (cont d) Definition (cont d): Does not include any: Loan to finance fleet sales; Personal cash loan secured by a previously purchased automobile; Loan to finance the purchase of a commercial vehicle or farm equipment that is not used for personal, family, or household purposes; Lease financing; Loan to finance the purchase of a vehicle with a salvage title; or Loan to finance the purchase of a vehicle intended to be used for scrap or parts. 39

40 Automobile Loan and Lease Backed Securities (cont d) Exception from Risk Retention: Qualifying Automobile Loans must meet certain underwriting criteria including Verified and documented credit history. Verified and documented DTI 36% Down payment of 10% and title tax and fees and additional product costs First lien Term must not exceed (i) 6 years or (ii) 10 years minus age of car Loans must be current when securitized 40

41 Observations A comparison of joint agency risk-based capital rules for securitizations: Risk-based capital for exposure to GSEs is 20%. Specifically recognizes implicit guaranty Risk-based exposure for a retained interest in a securitization is 1250% UNLESS On a quarterly basis a bank engages in extensive due diligence on its risk exposure. The calculation must be acceptable to the bank regulator Given this difference in capital treatment, will banks securitize anything other than QRMs? 41

42 Contacts Joseph T. Lynyak III Dorsey & Whitney LLP Joe Lynyak is a financial services partner in Dorsey & Whitney s Financial Services Practice. Focusing his practice on the regulation and operation of financial service intermediaries, he provides counsel on strategic planning, application and licensing, legislative strategy, commercial and consumer lending, examination, supervision and enforcement and general corporate matters. He has extensive expertise across a comprehensive range of issues before federal and state regulatory agencies such as the Federal Reserve Board, OCC, FDIC, CFPB, SEC, FTC and California and New York Banking Departments. Mr. Lynyak s representative clients include foreign and domestic banks, savings associations, holding companies and mortgage banking companies. He can be contacted via at Lynyak.joseph@Dorsey.com or at

43 We will now take questions for the presenter. If you would like to ask a question, please press the * key followed by the 1 key (*1) on your touch-tone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press *2.

44 Thank you for joining us today. Please mark your calendar for our next call which will be held as follows: March 26, 2015 Time: 11:00 a.m. Pacific Topic: Vendor Management, Embracing the New Norm Presented by: Ben Madick, Mortgage Quality Management & Research Please join us for the 2015 California MBA Legislative Day March 16, 2015 The Citizen Hotel, Sacramento, CA Visit to register today!