CFPB Rules on Ability-to-Repay and Qualified Mortgages

On January 10, the CFPB issued a final rule, effective January 10, 2014, requiring mortgage lenders to consider consumers’ ability to repay mortgage loans and regarding the “qualified mortgage” (QM) definition.  The rule sets forth underwriting factors that must be considered (at a minimum) in making ability-to-repay determinations, which are:  (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history.  In addition, the rule implements product-feature prerequisites and affordability underwriting requirements for qualified mortgages, including that a consumer must have a total (back-end) DTI ratio of less than or equal to 43%.  CFPB Release.  CFPB Final Rule.  CFPB Summary of Final Rule.  CFPB Fact Sheet.

In addition, on January 10, the CFPB issued a concurrent proposed rule amendment to the ability-to-repay rule which would, among other things, include exemptions for: (i) certain nonprofit creditors; (ii) certain homeownership stabilization programs; and (iii) certain Fannie Mae and Freddie Mac refinancing programs.  Comments on the proposed rule must be submitted by February 25.  CFPB Proposed Rule.

Independent Foreclosure Review Settlement

On January 7, the OCC and the Fed announced a settlement with 10 mortgage servicing companies which includes cash payments to eligible borrowers and other assistance, such as loan modifications and forgiveness of deficiency judgments.  The settlement relates to mortgage servicers operating under enforcement actions issued in April 2011 by the OCC, the Fed, and the OTS.  Joint Release.

CFPB Final Rules on High-Cost Mortgages

On January 10, the CFPB issued final rules that: (i) amend HOEPA to provide protections relating to risky loan features, such as prepayment penalties and to require homeownership counseling and (ii) require escrow accounts to be established for a minimum of 5 years for certain higher-priced mortgage loans, effective June 1.  CFPB Release.  CFPB Final HOEPA Rule.  CFPB Guide on HOEPA Rule.  CFPB Final Escrow Rule.  CFPB Guide on Escrow Rule.  

On January 10, DBRS released the following rating methodologies:

• • European covered bonds.
  • Unified interest rate model for European securitizations.
  • Unified interest rate model for global structured finance CDO restructurings.
  • Unified interest rate model for U.S. and European structured credit.
  • Unified interest rate model for U.S. RMBS transactions.
  • Unified interest rate model for U.S. timeshare loan ABS transactions.

On January 10, S&P updated its methodology and assumptions for CLOs backed by European small and midsize enterprises (SMEs).  S&P Release.

On January 8, Moody’s released its methodology for assessing RMBS servicing quality.  Moody’s Release.

On January 7, Fitch updated its criteria for rating derivative product companies.  Fitch Release.  Fitch Report.

China 20/20: Legal and Regulatory Developments

China 20/20 is a monthly Orrick newsletter which covers legal and regulatory developments in China.  To view the latest edition, please click here.

Federal Court Narrows FDIC Lawsuit Against Countrywide

On January 3, Judge Mariana R. Pfaelzer of the Central District of California ruled on motions to dismiss filed by defendants Countrywide, Bank of America, and UBS in an action brought against them by the Federal Deposit Insurance Corp. (FDIC) concerning $108.4 million in residential mortgage-backed securities.  The Court’s order concerned the FDIC’s claims under Section 11-51-501(1)(b) of the Colorado Securities Act.  The Court granted the motions with respect to alleged misstatements pertaining to owner-occupancy data and additional liens because the Offering Documents indicated that this data was self-reported by borrowers.  It also granted the motion with respect to successor liability claims asserted against Bank of America.  The Court denied the motions with respect to alleged misstatements pertaining to loan underwriting standards and appraisals.  The Court also denied the motions with respect to defendants’ argument that the FDIC did not adequately allege reliance and causation, holding that those are not elements of the FDIC’s claim and thus not required to be pled.  Opinion.

Southern District of New York Dismisses Investors’ Claims Against Deutsche Bank

On January 4, Judge Jed S. Rakoff of the Southern District of New York issued a memorandum order explaining the bases for his February 6, 2012 decision that RMBS claims brought by several investor plaintiffs against several Deutsche Bank affiliates would be dismissed, with prejudice in part and without prejudice in part.  Plaintiffs allege that Deutsche Bank made misrepresentations concerning the quality of the loans underlying 43 RMBS that they purchased.  Plaintiffs also allege that Deutsche Bank concealed from plaintiffs that it had taken a short position against its own RMBS, including some of the securities it sold to plaintiffs.  Plaintiffs asserted claims for common law fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation.  Judge Rakoff held that plaintiffs failed to plead their claims with particularity, as required by Rule 9(b), in a number of ways.  For instance, they failed to state with particularity the alleged misstatements in the offering documents for each of the 43 securities or who made each of those statemens.  Plaintiffs also failed to allege the dates on which they purchased the securities and whether they relied on draft or final versions of the offering documents at the time of purchase.  Judge Rakoff granted plaintiffs leave to amend their claims involving RMBS sponsored by Deutsche Bank.  The claims related to RMBS not sponsored by Deutsche Bank, however, were dismissed with prejudice because Deutsche Bank had only a limited and attenuated role in the offerings.  Order.

Bank of America and Fannie Mae Reach $10 Billion Settlement Agreement

Bank of America announced on January 7 that it would pay $3.6 billion to Federal National Mortgage Association (Fannie Mae) and repurchase for $6.75 billion certain residential mortgage loans sold to Fannie Mae.  The agreement, which covers loans with an aggregate original principal balance of approximately $1.4 trillion and an aggregate outstanding principal balance of approximately $300 billion, resolves all outstanding and future representation and warranty claims associated with substantially all residential mortgage loans sold directly to Fannie Mae by Bank of America or Countrywide from January 1, 2000 through December 31, 2008.  Press Release.

Corruption Charges Brought Against Former Employees of HBOS’s High Risk Lending Unit

On January 8, the Crown Prosecution Service issued a press release stating that eight people had been charged in connection with Operation Hornet, an investigation by Thames Valley Police into allegations of fraudulent trading, money laundering and conspiracy to corrupt at HBOS’s high risk lending unit.  The allegation is that in return for high value gifts, a turnaround consultancy, Quayside Corporate Services, was appointed to administer £35 million worth of loans made to corporate customers in difficulty.  Neither Bank of Scotland nor Lloyds Banking Group is the subject of the investigation. 

Basel Committee on Banking Supervision Endorses Revised Basel III Liquidity Standards for Banks

It was announced on January 6, that the Basel Committee on Banking Supervision’s (BCBS) Group of Governors and Heads of Supervision (GHOS) has endorsed revised Basel III liquidity standards for banks.  This was later welcomed in a statement made by Michael Barnier of the European Commission on January 8.

The revised liquidity standards relate to the formulation of liquidity coverage ratio (LCR), which is an essential part of the reforms being made by Basel III.  The package of amendments, which is summarised in a document headed Annex 1, comprises of four elements as follows:

• • revisions to the definition of high quality liquid assets and net cash outflows;
  • a timetable for phasing in the standard;
  • a reaffirmation of the usability of the stock of liquid assets in periods of stress (including during the transition period); and
  • an agreement that the Basel Committee will conduct further work on the interaction between the LCR and the provision of Central Bank Facilities.

In addition to the revised liquidity standards, the GHOS also reiterated the importance of full and timely implementation of the Basel III standards.  It also endorsed a new charter for the BCBS in order to enhance understanding of its activities and decision-making processes, and identified that a review of the net stable funding ratio would also be a priority over the next few years. 

European Commission Report on Financial Conglomerates Directive Review

On January 9, the Council of the European Union published a cover note annexing the European Commission’s report of December 20, 2012, on its review of the Financial Conglomerates Directive (2002/87/EC) (FICOD), which focused, among other things, on coverage relating to unregulated entities within a wider corporate group which operates in the finance sector.

Having conducted the review, the European Commission concluded that the following issues would be of most relevance in a future revision of FICOD:

• • the criteria by which a conglomerate is defined and identified;
  • the criteria by which the parent entity ultimately responsible for meeting group-wide requirements is identified; and
  • the strengthening of enforcement in respect of the ultimately responsible parent entity.

The European Commission does not propose that FICOD should be amended in 2013.  However, FICOD will remain under constant review in order to identify a more appropriate time for amending legislation to be introduced.

American Securitization Forum 2013 Conference

January 27-30, 2013 – ASF 2013 is the largest capital markets conference in the world. Hosted by the American Securitization Forum at the ARIA Hotel and Convention Center in Las Vegas, NV., the conference attracts the industry's top professionals where they will discuss the most relevant topics and challenges in the industry.  Orrick is an Associate-level sponsor.  On January 28, Howard Altarescu will be speaking on a panel regarding the Private Label RMBS Sector.  Click here to view the current agenda.