ATS Secured’s March 22 webinar, “Mortgage Repurchase & Indemnification Demands Including TRID’s Impact,” featured speakers Melissa Klimkiewicz and Amanda Raines Lawrence.
Recent Developments in RMBS Litigation
June 2015 saw a decision by the New York Court of Appeals in the ACE Securities case regarding the statute of limitations in reps and warrants. It held that the 6-year limitation period began “when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.”
Whether or not this applies to you depends on the language in your contract and choice of law. In light of ACE Securities, many cases related to reps and warrants breaches raise indemnification causes of action. Certain states recognize indemnification claims as distinct causes of action from breach of contract claims.
In basic terms, know what your contract says. Get your legal counsel involved in reviewing and interpreting contracts.
- What repurchase obligations do you have and when are they triggered?
- What reps and warrants did you make?
- When are you required to indemnify?
- Did you cause the loss that triggered the demand?
Analysis and responses should be factual
- Assume that any analysis you do is discoverable
TRID’s Impact on Repurchase Demands
Some technical requirements of the rule have proven difficult to interpret and implement. Examples include formatting and calculations.
A high rate of violations is hindering loan sales:
- Uncertainty regarding assignee liability
- Strict rep and warrant structure (“in compliance with law”)
- History of private and government litigation (False Claims Act (FCA), Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA))
- Assurances regarding “good faith efforts” by regulators and GSEs ineffective
CFPB Director Cordray issued a letter in December 2015 attempting to assuage investor concerns. But this is not an official interpretation, so it is not binding. Cordray also addressed liability for violations of TILA § 128, however, the TRID rule implements TILA provisions outside of § 128.
TRID and TILA provide for post-consummation “cures” to avoid liability in certain circumstances. Example: A non-numeric clerical error, corrected within 60 days of consummation (TRID).
The Fitch press release states that TRID non-compliance risk is modest. However, the marketplace has not corrected itself yet. Some loans are being sold as scratch-and-dent; others are attempting to modify reps and warrants provided or remedies based on TRID violations.
Loans still must be ratable by rating agencies, so take care with any modifications. There is a real need to implement more targeted quality control reviews on closed loans.
FHA Indemnification Demands and Related Risks
- Origination violations
- Fraud or misrepresentation in origination
- Servicing violations
Below are just a few examples that may be “serious and material violations” of FHA requirements:
- Failure to ensure that the borrower meets applicable eligibility requirements in accordance with HUD requirements;
- Failure to verify the creditworthiness, income, and/or employment of a borrower in accordance with HUD requirements;
- Failure to verify the assets used by the borrower for down payment and/or closing costs, or to meet applicable reserve requirements, in accordance with HUD requirements;
- Failure to ensure that the amount of the mortgage insured is consistent with the loan type, property value, and other applicable HUD requirements
Term of indemnification period is based on severity of the violation. Indemnification agreements generally last five years from date of endorsement or date of indemnification agreement. There is no five-year limitation if the lender knew or should have known that fraud or misrepresentation was involved in connection with the origination of the loan.
HUD can effectively compel its indemnification requests by threatening to terminate lenders’ FHA approval if they do not “voluntarily” agree to indemnify HUD for claims on certain loans.
Options to Mitigate Risk:
- Build a culture of compliance – set the “tone at the top”
- Be proactive and not just reactive
- Reinforce lines of business
- Update training, policies, and procedures
- Conduct loan level file reviews
- Create and implement second and third lines of defense
- Empower employees to act by creating an Internal Reporting Plan (IRP)
If HUD has already instituted an inquiry or brought an enforcement action against an FHA lender, lenders should execute a defense strategy:
- Assess the validity of HUD’s claims;
- Develop a response strategy;
- Interface with HUD personnel; and
- Public and internal relations responses (if necessary).
Interested in learning more from this webinar? Download the full webinar, complete with Q&As, today!
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