Georgia Real Estate Fraud Prevention and Awareness Coalition (GREFPAC) 12th Annual

Conference

Litigation and Mitigation Related Fraud Issues &

Compliance Related Fraud Issues in Mortgage Lending

March 2, 2016

James W. Brody

Senior Managing Member

American Mortgage Law Group, P.C.

Shayna H. Arrington

Attorney

American Mortgage Law Group, P.C.

Notice Important Notice(s): The American Mortgage Law Group, P.C. ("AMLG") makes available the information (the "Information") in this presentation (the “Presentation”) for general informational purposes only. The Information is not intended to constitute, and does not constitute, legal advice. The Information is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship. No attorney-client relationship is created through your use of or your receipt of the Information contained within the Presentation. AMLG accepts clients only in accordance with certain formal procedures, and renders legal advice only after the completion of those procedures, and/or completion and execution of an appropriate retainer agreement.

Private Actions: Litigation and Mitigation Related Fraud Issues

James W. Brody

Senior Managing Member

American Mortgage Law Group, P.C.

Ongoing Mortgage Repurchase and Indemnification Litigation • Founded in breach of contract claims by investors

• Focused on breaches of representations and warranties made in governing Loan Purchase Agreements

• Common allegations include:

• Misrepresentation of borrower’s income

• Misrepresentation of debts

• Misrepresentation of value (appraisal)

• Misrepresentation of occupancy

• Violations of various program guidelines

Mitigation of Potential Damages • Request for documentation

• Loan file

• Servicing notes

• Detailed explanation of claimed loss amount

• Investigative review of entire loan file and all related documents

• Reverifications

• Retrospective appraisals

• Verification of loss amounts

Third Party Recovery Efforts • Brokers/Correspondent Lenders

• Breach of Contract Claims

• Representations and Warranties

• Appraisers

• E&O Insurance

• Title Companies

• Title Policies

• Closing Protection Letters

• Insurance Policies

• Fidelity Bonds, E&O, Professional Liability, D&O, Surety Bonds, etc.

Current Litigation Trends • Statute of Limitations Debates

• Causation and Materiality Issues

• Unilateral Attorneys’ Fees Provisions

• Currently being played out in:

• Minnesota & New York– RFC

• Colorado & New York – LBHI

• New Jersey & New York – Chase

• Missouri – Citi

• Michigan – Flagstar

• Minnesota – Wells Fargo

• Tennessee – Franklin American Mortgage Company

The Statute of Limitations Debate • A typical Loan Purchase Agreement (“LPA”) contains a “choice-of-law” provision

covering state law governs and can have ramifications later if the case ends up in litigation

• LBHI and Chase have choice of law provisions in which New York law applies

• BOA/Countrywide Home Loans, Inc. LPAs are typically governed by California law

• Citi LPAs are governed by Missouri law

• Wells Fargo LPAs are governed by Minnesota law

• Borrowing statutes

• Operate by “borrowing” the statute of limitations where a nonresident resides to prevent plaintiffs from shopping jurisdictions for the best possible statute of limitations

The Statute of Limitations Debate • Investors argue that the statute of limitations (“SOL”) does not begin to run until a

repurchase demand is refused by a lender, or until it suffers a loss with respect to an indemnification claim.

vs.

• Lenders generally argue that the SOL begins to run on the date of breach, generally the date of sale, though this date may be later in the case of an early payment default.

The Statute of Limitations Debate: Ace Securities Corp. v. DB Structured Products, Inc.

• A four judge appeals panel in New York unanimously ruled that repurchase claims, “did not accrue until defendant either failed to timely cure or repurchase defective

mortgage loan,” but rather, “accrued on the closing date of the [LPA].” • Ace Securities Corp. v. DB Structured Products, Inc., 2013 WL 6670379 (New York

Supreme Court, Appellate Division, No. 11384 and M-5893, M-6111 and M-6133, December 19, 2013), which was recently upheld by New York’s Highest Court.

• On June 11, 2015, the decision of the lower court relating to the SOL was upheld. The Court of Appeals explained that, “where, as here, the representations and warranties concern the characteristics of their subject as of the date they are made, they are breached, if at all, on that date.”

• The ACE Sec. ruling applies only to New York law. Nevertheless, it may be used as persuasive authority in other states

• The facts of the case apply to “repurchase” demands and accrued on the date of signing of the LPA.

The Statute of Limitations Debate: Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc.

• In upholding the lower court decision that the action was time-barred, the Court held that a right to repurchase contained within a LPA is merely an alternative remedy to a damage remedy that arises only from the substantive claim of breach of representations and warranties.

• The SOL begins to run upon the effective date of the LPA, and not upon the date the demand for repurchase was made.

• The Court relied heavily on ACE Securities and adopted the key reasoning in ACE – that the repurchase obligation was itself “dependent on, and indeed derivative of” the representations - and therefore time barred.

• Deutsche Bank Nat. Trust Co. v. Quicken Loans Inc., No. 14-3373-CV, 2015 WL 7146515 (2d Cir. Nov. 16, 2015).

The Statute of Limitations Debate: New York Interpretations • A federal judge in Washington, applying New York state law, ruled that the SOL for

repurchase claims commenced on the date upon which the investor could have initially demanded payment for the alleged misrepresentations – i.e., the date the investor purchased the loan from the originator. See LBHI v. Evergreen, 793 F. Supp. 2d 1189 (2011).

• See also, Hahn Automotive Warehouse, Inc. v. Am. Zurich Ins. Co., 81 A.D.3d 1331, 916 N.Y.S.2d 678, 680 (2011), holding that, “[a] cause of action for breach of contract accrues when the party making the claim possesses a legal right to demand payment….To find otherwise would allow an Investor to circumvent the statute of limitations by deferring its demand.”

• See also, Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., 2014 WL 1259630 (S.D.N.Y. March 27, 2014) holding that, when a contract involves a repurchase clause, “the general rule in New York is that ‘the cause of action accrues when the party making the claim possesses a legal right’ to make the demand, not when the demand actually occurs.”

The Statute of Limitations Debate: Investor Arguments • Conversely, investors point to LBHI v. National Bank of Arkansas, which supports the

position that a separate breach occurs when the originator fails to repurchase a loan, as required by contract.

• LBHI sued lenders in New York on claims of “contractual indemnification” and declaratory relief where gravamen of claims are breaches of representations and warranties.

• LBHI claims accrual date is January 22, 2014, when it settled claims with agencies based on inapposite equitable indemnification law – McDermott v. City of New York, 406 N.E.2d 460 (N.Y. 1980).

• Bankruptcy judge ruled in LBHI’s favor in the cases based on McDermott and reasoning from U.S. District Court in Colorado decision.

• Ace Securities’ reasoning is persuasive authority from the highest court in New York and may change the course of SOL arguments. Ace is supported by Deutsche Bank, which just came out of the Second Circuit and provides further persuasive authority.

Causation Issues Can an investor show that the alleged breach of representations and warranties under the LPA on individual loans actually resulted in the damages the investor is claiming?

• Major investors are often unable to show there is a direct correlation or causal connection between the settlement damages they are claiming reimbursement/indemnification for and the defects they are alleging actually breached the representations or warranties under the LPA.

• This creates problems for lenders and originators because they are unable to verify, at the individual loan level, whether claimed defects with the loans actually caused the damages some investors are claiming.

• The issue of causation can overlap with claims of fraud and misrepresentation under the representations and warranties made in LPAs, which are tort claims requiring a showing of direct and proximate causation.

Unilateral Attorneys’ Fees Provisions • The vast majority of LPAs and Seller’s Guides have unilateral attorneys’ fees clauses

• This means that if an investor wins a case, it can recover its fees, but the lender/broker cannot

• The vast majority of states do not have protections against unilateral attorney fee provisions

• In 7 states, unilateral attorneys’ fees clauses are automatically treated as bilateral; a reciprocal attorneys’ fees right is read into the contract by statute. These include:

• California (Cal. Civ. Code Section 1717);

• Florida (Fla. Stat. Ann. Section 57.107(7);

• Hawaii (Haw. Rev. Stat. section 607-14);

• Montana (Mont. Code. Ann. Section 28-3-704);

• Oregon (Or. Rev. Stat. Ann. Section 20.096);

• Utah (Utah Code Ann. Section 78B-5-826);

• Washington (Wash. Rev. Code. Ann. Section 4.84.330); and

• Arizona implies reciprocal attorneys’ fees by decisional authority rather than statute.

Litigation Settlement Strategies • Depending on the investor, repurchase claims settle for an average of 20-50

cents on the dollar

• Claims involving indemnification agreements often settle for 50-60 cents on the dollar

• Due to the high cost of litigation, investors are often more willing to negotiate once litigation has commenced

• Challenge the loss figures claimed by the investor

• Request that the investor remove all prejudgment interest for the purposes of settlement negotiations

• Consider a global settlement with the investor to resolve all known and unknown claims

Administrative Actions: Compliance Related Fraud Issues

Shayna H. Arrington

Attorney

American Mortgage Law Group, P.C.

Recent CFPB Enforcement Actions • In re: PHH Corp., File No. 2014-CFPB-0002, Decision of the Director (Public Version) (June 4, 2015). • CFPB v. Genuine Title, LLC, et al., Stipulated Final Judgment and Order, Case No. 1:15-cv-01235-JFM (D. Md. Apr. 29, 2015). • In re: New Day Financial, LLC, File No. 2015-CFPB-0004 (Feb. 10, 2015). • In re: JPMorgan Chase Bank, N.A., File No. 2015-CFPB-0001 (Jan. 22, 2015). • In re: Wells Fargo Bank, N.A., File No. 2015-CFPB-0002 (Jan. 22, 2015). • In re: Lighthouse Title, Inc., File No. 2014-CFPB-0015 (Sept. 30, 2014). • In re: Fidelity Mortgage Corp., File No. 2014-CFPB-0001 (Jan. 16, 2014).

Recent CFPB Enforcement Actions • Focus on marketing and advertising violations • RESPA Section 8’s Prohibition Against Kickbacks and Unearned Fees

• 12 U.S.C. § 2607 • Section 8(a) - Business Referrals • Section 8(b) - Splitting Charges • Section 8(c) - Carve out for seemingly permissible activities • Implementing regulations at 12 C.F.R. Part 1024 (Regulation X)

• UDAAP • Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 12 U.S.C. § 5536(a)(1)(B) • Makes it unlawful for any covered person or service provider to engage in any unfair, deceptive, or abusive act or practice • No implementing regulations • Instead defined through enforcement actions

In re: Lighthouse Title, Inc. Background

• Title insurance agency entered into Marketing Services Agreements (MSAs) with various settlement service providers for marketing and advertising services

• Title agency did not document basis for fees paid under agreements nor determine the fair market value of services to be performed

• Title agency did not monitor its counterparties to ensure services were received

• CFPB alleged payments under MSAS were quid pro quos for the referral of business

• Fees paid under the MSAs were set based on the volume of business referred by the settlement service provider in the past, or anticipated to be referred by the settlement service provider in the future

Alleged Violations • RESPA Section 8, 12 U.S.C. § 2607(a) • 12 C.F.R. §1024.14

Consent Order • Title agency pays $200,000 civil money penalty

In re: PHH Corp. Background

• Mortgage company referred borrowers to mortgage insurers, who in turn purchased reinsurance from mortgage company’s subsidiaries

• CFPB alleged the reinsurance payments were kickbacks for referrals

Alleged Violations • RESPA Section 8, 12 U.S.C. § 2607(a)

Order

• Administrative Law Judge recommended disgorgement of $6.4 million

• PHH Corp. ordered to pay $109 million in disgorgement

• PHH appealed the decision, which is still pending in federal court where payment has been stayed

Genuine Title, JP Morgan & Wells Fargo Background

• Executives at title company and loan officers at banks traded cash and marketing services in turn for referrals

• Title company purchased, analyzed, and provided consumer data to loan officers

• Title company created, printed, and mailed letters to consumers on loan officer’s behalf

• Loan officers referred homebuyers to title company for closing services

• Certain loan officers received lump sum cash payments though companies they created and controlled

Alleged Violations • RESPA Section 8, 12 U.S.C. § 2607(a)

• 12 U.S.C. § 5536(a)(1)(A)

• Maryland Consumer Protection Act

Consent Orders

• Genuine Title: $662,500 in collective fines and banned from mortgage industry for 2-5 years

• JP Morgan: $600,000 civil money penalty (6 loan officers in 3 branches)

• Wells Fargo: $24,000,000 civil money penalty (100+ loan officers in 18 branches)

• Collective $11,100,000 in redress to consumers

In re: New Day Financial, LLC Background

• Mortgage company entered into marketing relationship with veterans’ organization through the

use of a broker

• Mortgage company was designated as the exclusive vendor of the veterans’ organization

• Mortgage company sent direct mail advertisements to veterans’ organization members. The

mail was:

• Identified as being from veterans’ organization;

• Promoted mortgage company and recommended use;

• Did not disclose relationship between mortgage company and veterans’ organization; and

• Did not disclose payments made by mortgage company to veterans’ organization

• Mortgage company paid broker $15,000/month licensing fee

• Mortgage company paid veterans’ organization “lead generation” fees for members who

contacted mortgage company to inquire about reverse mortgages and completed mandatory

counseling and for members who contacted mortgage company to inquire about refinancing

and had their credit report pulled

In re: New Day Financial, LLC Alleged Violations

• UDAAP,12 U.S.C. § 5536(a)(1)(B)

• Deceptive because likely to mislead consumers

• Endorsed mortgage company based on payments, while providing other substantive reasons for endorsement

• Failed to disclose relationship or referral payments

• RESPA Section 8, 12 U.S.C. § 2607(a)

• Payments made to broker and veterans’ organization in connection with marketing of home loans constituted illegal payments for referrals of mortgage origination business

Consent Order

• Ordered to submit comprehensive compliance plan to CFPB within 60 days, including corrective actions to address activities in Consent Order

• Mortgage company pays $2,000,000 civil money penalty

• Mortgage company subject to additional reporting requirements to CFPB upon triggering events for next 5 years

In re: Fidelity Mortgage Corp. Background

• Mortgage company and its president enter into exclusive joint venture with bank

• Bank rents space to mortgage company

• Bank referred customers who wanted mortgages

• Mortgage company referred customers who wanted banking services

• Determined to be quid pro quo relationship

• Fee is not a flat monthly rate, but rather tied to loan volume generated

• Fee is found to be substantially above fair market value for comparables

Alleged Violations • RESPA Section 8, 12 U.S.C. § 2607(a)

• Implementing regulations at 12 C.F.R. §1024.14(e)

Consent Order • Mortgage company pays $27,076 as disgorgement for origination fees collected from loans

procured as part of agreement

• Mortgage company and president pay $54,000 civil money penalty

Lessons Learned: Best Practices • Clearly disclose marketing relationships and any associated fees or payments

• Set any resulting fees at fair market value – do not tie to loan volume in any way

• Do not enter into exclusive marketing or referral relationships

• Do not enter into quid pro quo relationships

• It doesn’t matter if an agreement is in writing, it can be inferred from actions

• Keep UDAAP definitions in mind – consider consumer’s point of view

• Self-monitor and self-report

• If you identify compliance issues, institute a corrective action plan immediately

• Prevention and Detection

• Clear, comprehensive Policies and Procedures

• Update periodically

• Reflect current requirements/guidelines

• Quality Control Plan

• Quality Control Reviews

• Opportunity to identify problem areas and resolve issues internally

• Benefits of self-reporting and cooperation with law enforcement and regulatory oversight entities

• Foster relationships

• Access to information and resources

• Build goodwill

• Mitigate damages

Fraud Prevention and Detection

Thank You Contact Information:

James W. Brody, Esq., Managing Member

American Mortgage Law Group, P.C.

75 Rowland Way, Ste. 350, Novato, CA 94945

Telephone: (415) 878-0030 x151

Email: JBrody@americanmlg.com

James W. Brody As a Managing Member, Mr. Brody actively manages complex mortgage banking mitigation and litigation matters for the American Mortgage Law Group, P.C. (“AMLG”) and its diverse clientele (e.g., national mortgage lenders, warehouse lenders, secondary market investors, loan servicing companies, Wall Street banking firms and insurers). Being one of the AMLG’s founding attorneys, Mr. Brody has been instrumental in the Firm’s development and in its continued success.

Mr. Brody has successfully resolved hundreds of mitigation and litigation cases that involve complex mortgage fraud schemes, as well as large-scale repurchase and/or make-whole disputes. Mr. Brody’s experience centers on those legal issues that arise during and through loan originations, loan purchases/sales, loan securitizations, foreclosures/ bankruptcy actions, and repurchase/make- whole claims.

Mr. Brody received his B.A. in International Relations from Drake University in 1997. He also received his J.D., with a certified concentration in Advocacy, from the University of the Pacific, McGeorge School of Law in 2000. In addition to being admitted to practice law in all State and Federal Courts in CA, Mr. Brody has served as lead litigation counsel for numerous mortgage banking and commercial related disputes venued in both State and Federal Courts, in a direct capacity or on a pro hac vice basis, in AZ, CA, FL, MD, MI, MO, OR, NJ, NY, PA, TN, and TX.

Mr. Brody has made numerous media appearances and industry presentations regarding the prevention, detection and resolution of mortgage fraud matters. In addition, Mr. Brody continues to be a featured speaker in the area of repurchase and make-whole claims. Mr. Brody may be reached at jbrody@americanmlg.com or at 415-878-0030.

Shayna H. Arrington Ms. Arrington routinely advises clients on compliance related matters, including applicable laws, regulations, official interpretations, and industry best practices. Ms. Arrington works with AMLG’s diverse clientele to review clients’ policies, procedures, quality control plans, and governing agreements to identify red flags and mitigate compliance risks. She advises on a variety of mortgage banking related compliance issues, including those arising under RESPA, the SAFE Act, TILA, and the CFPB’s UDAAP provisions. Before joining AMLG, Ms. Arrington worked at the U.S. Department of Housing and Urban Development where she focused on regulations and policies within the Office of Lender Activities and Program Compliance. Ms. Arrington previously served as an Attorney-Advisor to HUD’s Administrative Law Judges in the agency’s Office of Hearings and Appeals, and as a Special Assistant United States Attorney for the U.S. Attorney’s Office in the Eastern District of Virginia, Criminal Division. She began her work with the federal government as a Presidential Management Fellow in Washington, DC. Ms. Arrington is a graduate of American University where she received a B.A. in Political Science and C.L.E.G. (Communications, Legal Institutions, Economics, and Government). She holds an M.B.A. with a concentration in Finance from the University at Buffalo School of Management, and a J.D. with a concentration in Finance Transactions from the University at Buffalo Law School. Ms. Arrington is licensed to practice law in both California and New York. Ms. Arrington may be reached at sarrington@americanmlg.com or at 415-878-0030.

Brief Introduction to American Mortgage Law Group, P.C. AMLG is a nationally recognized full suite mortgage banking law firm that represents a diverse clientele (e.g., mortgage lenders and servicers, commercial banks, thrifts, savings and loan associations, credit unions, title companies, third-party vendors, etc.), both in and out of court, either directly or in a pro hac vice capacity, all across the country. We focus on:

• Mortgage Repurchase and Indemnification Defense & Workout

• Litigation & Mitigation

• Regulatory Compliance & Examinations

• White Collar Defense

• Public Speaking and Education at Conferences

Visit our website at americanmlg.com