Settlements and Lawsuits - Will the CFPB Settle Discrimination Suit?

I spent some time at the Texas Mortgage Banker's event earlier this week in Houston, and some of the discussion revolved around another refi boom. Namely, the recent Japanese rate cut makes it very difficult for our Fed to raise rates more. The U.S. economy is not doing well enough to support higher residential rates, and income is not outpacing house price appreciation - an issue in many markets. Our course if rates slide down lenders and originators reap the benefits of more refinancing although lenders are seeing less and less of a "pop" in refinancing activity each time rates go down. In fact refi volume levels are down over 30% from a year ago.

While we're on personnel, here's a case certain to turn some heads. Of course anyone can sue anyone else, but when the Consumer Finance Protection Bureau is involved it garners more interest. A CFPB employee is suing the CFPB for alleged pay inequality: equal-employment specialist Florine Williams is accusing the consumer bureau of discrimination. Will the CFPB pay to settle the case, just as other institutions do? Stay tuned.

 Speaking of suits & settlements, Morgan Stanley has agreed to pay nearly $63 million to resolve claims over the sale of toxic mortgage-backed securities to three banks that later failed, the Federal Deposit Insurance Corp said on Tuesday. The settlement resolves lawsuits the U.S. regulator filed as receiver for the three failed banks against Morgan Stanley and other defendants over what the FDIC said were misrepresentations in the offering documents for the mortgage-backed securities. The FDIC was receiver for three failed banks. The settlement funds will be distributed among the receiverships for the three failed banks - Colonial Bank of Montgomery, Alabama, which failed on August 14, 2009; Security Savings Bank of Henderson, Nevada, which failed on February 27, 2009; and United Western Bank of Denver, Colorado, which failed on January 21, 2011. Along with $24 million from a settlement with Morgan Stanley last year of RMBS claims related to Franklin Bank, S.S.B., of Houston, Texas, which failed on November 7, 2008, this settlement brings total RMBS claim settlements by the FDIC with Morgan Stanley to $86.95 million.

 This settlement resolves federal and state securities law claims based on misrepresentations in the offering documents for 14 RMBS purchased by the three failed banks. As receiver for failed financial institutions, the FDIC may sue professionals and entities whose conduct resulted in losses to those institutions in order to maximize recoveries. For those at home keeping track, as of December 31, 2015, the FDIC has filed 19 RMBS lawsuits on behalf of eight failed institutions seeking damages for violations of federal and state securities laws. This settlement, which resolves all of the FDIC's RMBS claims against Morgan Stanley that were brought in those lawsuits, was reached in coordination with the U.S. Department of Justice.

 The Law Offices of Peter N. Brewer published an article relating to Liquidated Damages. A liquidated damage clause in a real estate transaction can allow the seller and buyer to come to an agreement, minimizing the likelihood of a dispute to arise. The agreement would entail an amount of damages to be awarded to the seller if the transaction fails due to the buyer's breach. In order for a liquidated damage clause to be valid, the funds defined as liquidated damage must be a "reasonable estimate" of the seller's loss and for most properties, the amount cannot be more than 3 percent of the sales price. Then the liquidated damages provision would need to satisfy special format requirements and must be signed by both parties involved in the purchase contract. The courts are then responsible for determining if the liquidated damages clause is enforceable. A liquidated damage clause can provide certainty regarding the amount a buyer may lose when a transaction fails.

 In state news the Commonwealth of Virginia is poised to adopt changes to their residential mortgage settlement agent regulations (Chapter 395, Title 14 of the VA Administrative Code). The new regulations, which exempt law firms, currently require "settlement agents" to register with the state and maintain insurance, a fidelity bond and a trust account. Proposed changes seek to broaden the definition of who is considered a "settlement agent" to include anyone who  "provides escrow, closing or settlement services" that may sweep notary closers into the mix if they have access to funds at the closing since they sometimes "handle money" by receiving and delivering checks. It also appears to require any contractor utilized by a settlement firm to be registered with the state; it is not enough that the firm for which they work is registered. The proposed new regulations also would prohibit "duplicative" and "inflated" fees. Of most concern for many settlement firms operating in Virginia, the changes would impute liability to anyone who hires an outside contractor (notary, escrow or settlement agent) who then causes harm to a lender or consumer. Lastly agents who close up shop would be required to file a report with the state within 60 days and within 180 days provide a close out report of their trust account.

 Andrew Liput, CEO of Secure Insight, offered "we are seeing the move towards greater regulatory scrutiny and enhanced licensing requirements for settlement agents nationwide, as well as the demand for greater scrutiny of third parties retained by title, escrow and settlement firms to conduct closing services who then access lender documents, consumer data, and transaction proceeds. This is a logical and inevitable step forward from the CFPB's third party vendor management directives first issued back in 2012."

 And vendors are happy to oblige. As an example, Mortgage Builder, a provider of mortgage loan origination and servicing software systems, announced its new Closing Conduit module. Closing Conduit is offered as an add-on module to the Mortgage Builder Loan Origination System (LOS) and "can significantly improve the collaborative process between lenders, settlement agents and other third parties as they finalize closing disclosures. Home closings are more efficient because loan originators do not need to exit the Mortgage Builder LOS as disclosures are finalized and more accurate because data is shared electronically. Closing Conduit can also help lenders, title companies and other parties involved in the closing process to comply with CFPB regulations by maintaining an audit log of the settlement-related transactions including comments shared between participants."

 The American Land Title Association (ALTA) has announced that Carr, Riggs & Ingram (CRI) has been named an Elite Provider. Elite Providers is comprised of premier service providers committed to offering comprehensive benefits to the title insurance and settlement services industry. CRI is offering ALTA members a complimentary one-hour consultation regarding any ALTA Best Practices subject(s) of their choosing with a CRI partner and will provide a summary outlining the conversation. For more information about the program or to apply, please visit ALTA's Elite Provider website.

 Fannie Mae and Freddie Macannounced the Independent Dispute Resolution (IDR) program which is the final major component of the representation and warranty framework. This program will provide lenders with more clarity and transparency in assessing their responsibility for alleged loan-level selling and servicing defects. "Just tell us the rules and let us play the game." So the FHFA (and F&F) announced that a neutral third party arbitrator would be introduced to resolve disputes relating to reps and warranties. The new IDR should hopefully further help with put back fears. Loans delivered to the GSEs on or after January 1, 2016 (a month ago) will be affected.

 The MBA noted that, "When combined with the life of loan revisions, right to correct and alternative remedies framework that have been recently implemented, the IDR process will ensure that repurchase disputes are resolved based on objective, transparent criteria evaluated by an independent party. In turn, lenders should have more confidence and protection needed to increase access to credit...This is the capstone of four years of MBA working closely with the FHFA, Fannie Mae and Freddie Mac to reform the representation and warranty framework. In fact, MBA convened a working group of more than a dozen members, including large banks, community banks and independent mortgage bankers to accomplish this effort."

 U.S. banks have complained for years that the risk of having to buy back flawed mortgages has discouraged them from lending. Mortgage lenders will be able to take disputes over home loans to an independent arbitrator. Fannie Mae and Freddie Mac will allow a third party to decide how grievances should be resolved after other options have been exhausted. The new arrangement gives lenders, and Fannie Mae and Freddie Mac, a way to avoid the possibility "that a dispute might languish unresolved for an extended period of time, as has often occurred in the past," FHFA Director Mel Watt said in the statement. FHFA oversees the mortgage companies as part of a government conservatorship.

 LOs and others are certainly aware of underwriting overlays over and above what investors mandate. Many lenders have tightened credit even beyond standards imposed by Fannie Mae and Freddie Mac to avoid repurchasing faulty mortgages. And who can blame them? Government lawsuits over loans with errors have cost lenders tens of billions of dollars, making them more cautious about extending credit.

 How can anyone say our economy is doing well when news continues to indicate otherwise? The latest came yesterday when Yahoo said it would consider "strategic alternatives" for its core Internet business and cut about 15 percent of its workforce, even as it continues with its plan to revamp the business and spin it off. Yesterday both equity and bond markets indicated that they believed our economy is slowing. The 10-year note yield, which got down to 1.85%, is nearing its lowest level in nearly a year - reminding us that the Fed's setting of short-term rates doesn't impact long term rates.

 At the close Tuesday 10-year notes were at the high of the day improving nearly 1 point in price. Although mortgage prices lagged, as one would expect with the fear of recent production refinancing already, current coupon prices still improved about .5.

 This morning we've already had the MBA's apps figures for last week: down about 3% with purchase apps -7%. We've also had the January ADP report: +205k, higher than estimated. Later on we'll have some second-tier numbers like January's Markit Services PMI and January ISM Non-manufacturing PMI. We're at 1.89% on the 10-year with agency MBS prices worse .125 versus Tuesday's close.