By Benjamin B. Klubes, Michelle L. Rogers, and Katherine L. Halliday, BuckleySandler
The Home Affordable Modification Program (“HAMP”) has had a rocky history in the three short years since its inception. Although participation in the Treasury Department's HAMP program is voluntary, loan investors, including Fannie Mae and Freddie Mac, require their mortgage servicers to participate in their respective HAMP programs. As a result, nearly every servicer has been affected by HAMP. Initially, servicers struggled to implement a new, far-reaching program, and the government struggled to define the program's contours and requirements. As the program matured, servicers have contended with increased regulatory scrutiny while the government has faced public and congressional criticism because it has failed to deliver the full scope of its promised improvements. All the while, litigation and government enforcement actions relating to HAMP have increased, signaling that issues surrounding HAMP compliance are not likely to end anytime soon.
From the government and government sponsored enterprises' (“GSEs’”) perspectives, HAMP's impact has been much smaller than initially forecast, while the volume and depth of public scrutiny and criticism have been much greater than predicted. HAMP's stated goal was to modify three to four million mortgages. Through February 2013, however, just over 1.3 million HAMP permanent modifications had begun, and more than 300,000 of those modifications had been canceled because borrowers defaulted. Additionally, the Congressional Budget Office (“CBO”) has estimated that half of the loan modifications were completed for loans owned by Fannie Mae and Freddie Mac, which means the modifications were mandated and not the result of Treasury's efforts to induce servicers to participating in the Treasury HAMP.1
Participating loan servicers have identified one of the reasons for HAMP's less than expected impact, voicing complaints about HAMP's detailed and constantly changing set of program requirements, which vary by each HAMP sponsor. These frequent changes have been an ongoing challenge to implement and report correctly. Because HAMP was created to respond to a crisis, its program guidelines and requirements were disseminated in a series of updates and revisions that required substantial staffing and workflow changes. Nevertheless, servicers are strictly obligated to comply with each piece of the program and remain abreast of new developments. Complying, of course, means more than knowledge of the changes; it means considerable investments in human capital, including training and staffing, and technology capabilities to track each new iteration and requirement. Finally, given the regulatory, litigation, and public scrutiny of HAMP, it also means having the results to show a serious commitment to making HAMP work.
The risks associated with HAMP participation — or more specifically, noncompliance — are significant. Although HAMP originally was slated to end in 2012, it has been extended through the end of 2015 (see relatedreport in the News section), and program eligibility qualifications have been expanded, meaning more requirements and more room for mistakes. With this extension, any patience for servicer non-compliance that marked the program's early years is likely to diminish.
Most significantly, the Justice Department already has announced the settlement of False Claims Act cases accusing servicers of failing to properly modify loans under HAMP, and for claims that servicers deliberately steered borrowers away from HAMP modifications to more profitable modifications or foreclosures. Several other investigations are underway, likely with similar outcomes on the horizon. Moreover, the plaintiff's bar has discovered HAMP, both in whistleblower and class action contexts, with private citizens challenging servicers' HAMP programs in over 100 lawsuits nationwide, including multiple class actions.2 Finally, even as GSEs have incorporated a system of monetary incentives to prioritize HAMP compliance, they have begun closely monitoring servicers and imposing penalties for non-compliance.
The Treasury Department's HAMP program, which is administered by the federal government, exposes servicers to liability under the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), based on a variety of theories, including the filing of annual certifications and receipt of government program funds. Specifically, each year participating servicers must submit an annual certification attesting to their compliance with all aspects of the HAMP program and the truth and accuracy of all data or reports submitted to the Treasury Department in connection with the HAMP program. Indeed the certifications themselves require servicers to acknowledge that the provision of false or misleading information in connection with HAMP may violate federal criminal law or the FCA.3
Two of the first HAMP FCA cases against major financial institutions settled in early 2012. The settlements were announced as part of the multi-state mortgage servicer settlement (“national servicer settlement”) between the federal government, 49 states and the five largest mortgage servicing banks in the country. At the time, the first of the two suits announced was touted by the U.S. Attorney's Office for the Eastern District of New York (“EDNY”) as the largest-ever False Claims Act settlement relating to mortgage fraud at the time.4
There are striking similarities between the two cases, both filed by whistleblowers — one, an employee; another, a subcontractor of the bank. Both claimed that the institutions failed to follow HAMP requirements, denying qualified homeowners access to HAMP, while continuing to certify compliance and accept financial incentives for program participation. The suits cited a variety of compliance failures, some attributable to staffing and resource inadequacies, including problems caused by untrained staff and outdated technology — problems that have plagued many loan servicers and lenders alike.
Many of the allegations were focused less on any supposed intent to deceive and more on purported compliance failures, for example, allegations that one bank failed to develop a proper Quality Control operation as required by its Servicer Participation Agreement. One of the suits also alleged violations related to modification programs administered by other government agencies, including FHA, the Veterans Administration, the Farmer's Home Administration, and HUD's Office of Public and Indian Housing, along with FCA claims for loans serviced for the GSEs (not under Treasury HAMP). 5
Perhaps emboldened by these successful lawsuits, enforcement authorities appear to be increasing their focus on this area, with the DOJ expanding investigations related to alleged HAMP violations, including reportedly issuing several new investigative demands in late 2012. Likewise, the Federal Housing Finance Agency (“FHFA”), which oversees the GSEs, has expressed its own interest in monitoring program compliance. FHFA's Office of the Inspector General (“OIG”) in particular recently has been engaged in several compliance reviews in a variety of areas that have significant potential FCA risk exposure. SIGTARP also has its own mandate to prevent fraud, waste and abuse related to TARP, and currently is specifically targeting HAMP mortgage modification fraud on its website.6 Because FCA complaints can remain under seal for years while the government investigates qui tam allegations and negotiates a settlement, other HAMP FCA cases may already be pending.
These actions demonstrate that a servicer may be exposed to significant liability if its HAMP policies, procedures, and practices are deemed deficient, and that there are several theories for government claims, including for GSE loans. Further, because the FCA provides for treble damages and penalties, and promises lucrative returns for whistleblowers who report misconduct,7 servicers ignore the risks at their own peril. While the settlement is the first public example of the government bringing an FCA case for HAMP violations, it continues the recent expansion of FCA litigation to the mortgage servicing arena. Because these cases are extremely lucrative for the whistleblowers who stand to receive substantial payouts as relators, there are strong incentives for even private parties to pursue them.
Class action and private HAMP litigation also is increasing at an alarming rate, with matters pending nationwide, including as purported class actions and in expansive multi-district litigation. Since HAMP's inception, borrowers have brought lawsuits under a variety of theories, ranging from alleged Fifth Amendment due process violations to state-based contract and tort law claims. While there is general agreement among courts that HAMP itself did not create a private right of action and a growing consensus that borrowers do not have standing as third party beneficiaries of a servicer's participation agreement with the Treasury Department or even a GSE, borrowers have found traction in claims rooted in state law, including in Unfair and Deceptive Practices (“UDAP”) statutes, and common law actions, such as breach of contract.
The Seventh Circuit's decision in Wigod v. Wells Fargo Bank, N.A., No. 11-1423 (7th Cir. Mar. 7, 2012) affirmed the trend of permitting state law claims premised on HAMP violations. There, the Seventh Circuit overturned the dismissal of a putative HAMP class action and held that a borrower does have a right to bring claims against its mortgage loan servicer for violating state laws in the execution of its HAMP program. In the case, borrower Lori Wigod challenged Wells Fargo's failure to offer her a permanent HAMP modification despite the fact that Wigod had abided by the terms of her temporary modification agreement and successfully completed a HAMP Trial Period Plan (“TPP”) agreement. According to Wigod, Wells Fargo improperly reevaluated her for HAMP following successful completion of her TPP agreement. Wigod asserted claims against Wells Fargo for breach of contract, promissory estoppel, fraudulent misrepresentation, and violating Illinois consumer protection statutes. At the district court level and on appeal, Wells Fargo argued that there was no private right of action for individual consumers to sue servicers for violating HAMP. Although this argument persuaded the district court and had previously been invoked to defeat other consumer civil actions relating to HAMP, the Seventh Circuit was not convinced. Instead, the Seventh Circuit held that Congress' failure to create a private right of action within HAMP did not preclude borrowers from asserting state law claims relating to or arising from a servicer's HAMP obligations or contracts. 8
Similar theories have been advanced in the various class actions and multi-district litigation matters currently pending based on alleged HAMP violations.9 As a general matter, the claims encompassed by the MDLs allege that the banks at issue improperly denied borrowers HAMP modifications, breached the terms of their TPP agreements with borrowers, made false and misleading promises about the prospects of mortgage modifications, failed to properly manage the modification process, unnecessarily delayed the process, drove borrowers into deeper debt with the addition of fees for loans already in default, and as a result of starting the foreclosure process while modifications were still being negotiated, in some cases, foreclosed on homes while the modification process was underway.
Although lawsuits have been filed nationwide challenging HAMP modification practices, many have been dismissed citing HAMP's failure to provide a private right of action to consumers. As the plaintiffs' bar refines its pleadings, tests theories of liability, and cases move beyond motions to dismiss, expect to see more private litigation rooted in HAMP.
In addition to the federal government and consumers, Fannie Mae and Freddie Mac are able and ready to penalize servicers for HAMP violations. Both Fannie Mae and Freddie Mac have implemented the HAMP program within their servicing guides, along with a system of incentives and compensatory fees, which, unlike the voluntary Treasury-run program, compels servicer participation in conducting accurate, efficient evaluation of borrowers for HAMP eligibility and HAMP modifications. The GSEs are under significant pressure from FHFA to increase HAMP modifications and in turn expect their participating servicers to facilitate that goal. Servicers are required to evaluate eligible borrowers for HAMP modifications prior to considering standard or proprietary modification. The GSEs are monitoring servicers for compliance with HAMP guidelines and expect servicers to self-report HAMP evaluations and modifications accurately and timely. Failure to meet the GSEs' requirements could subject servicers to penalty fees, or in more drastic cases, prompt the GSEs to revoke servicing contracts.
Freddie Mac, for example, requires servicers to use a series of default action reporting codes in connection with review of loans for HAMP eligibility. Specific codes are associated with each step of the review process: receiving a complete borrower application package, assessing initial HAMP eligibility, confirming HAMP eligibility, offering and confirming receipt of a HAMP trial plan and completion of a successful trial period, and commencement of a permanent HAMP modification. Accurate reporting of these steps through default codes is crucial for servicers hoping to receive incentive payments and minimize compensatory fees. Because Freddie Mac can, and does, modify its requirements regarding the HAMP review process and default reporting on a regular basis, it is imperative that servicers vigilantly review servicing bulletins and inform staff of any reporting or evaluation changes promptly. Fannie Mae also imposes HAMP reporting requirements though, for now, they are arguably less complicated than Freddie Mac's requirements.
Indeed, as the federal government and the GSEs in turn attempt to boost HAMP participation rates as the program winds down, the GSEs may be more closely monitoring servicers' HAMP compliance to confirm that no eligible borrowers are being turned away and to make sure that servicers are alternately compensated or fined based on their compliance reports.
In addition, the federal government also has indicated its willingness to withhold incentive payments for completed Treasury HAMP modifications to servicers who fail to comply with HAMP's rules. In June 2011, the Treasury Department pledged to withhold payments to three major servicers unless they improved their program compliance. Subsequently, one improved its performance and was awarded its incentive payments; payments for the remaining two, which totaled more than $170 million combined — were released as part of the national servicer settlement in March 2012. To date, the Treasury Department has not publicly announced its intention to withhold incentive payment from any other servicers, but it remains a viable option.
In addition to ensuring compliance with the written HAMP guidelines promulgated by the Government or the GSEs, servicers also are subject to the CFPB's review and, in particular, its focus on UDAAP — unfair, deceptive, and abusive acts or practices. Practically speaking, this means that in addition to ensuring strict compliance with the HAMP program requirements, servicers must also examine their HAMP programs to make sure that they are, and appear to be, fair to consumers.
Proving that HAMP is on its radar, in May 2012, the CFPB's Office of Servicemember Affairs announced a joint initiative with Treasury to make HAMP friendlier to military homeowners. Under the changes, which took effect in June, military homeowners and other families permanently displaced by a job-related move may still qualify as owner-occupants, and thus may still qualify for a HAMP mortgage modification. Similarly, in December 2011, the CFPB announced its creation of a joint task force, along with the Office of the Special Inspector General for the Troubled Asset Relief Program and Treasury, designed to combat scams aimed at borrowers applying for HAMP.
Indeed, the CFPB's published servicing examination guidelines make explicit that HAMP programs are under review, but the guidelines lack additional detail. The CFPB's examinations for UDAAP violations to date have been extensive and thorough, including reviews of written policies and procedures, consumer complaint files, organizational charts, scripts for borrower communications, compliance and audit programs, training materials, compensation arrangements, and marketing materials. The CFPB also is expected to conduct transaction testing. In addition, the loss mitigation examination guidelines expressly require examiners to determine whether a servicer is complying with HAMP requirements.
With the Justice and Treasury Departments, federal agencies, private party litigants, the GSEs, and the CFPB on the lookout for noncompliance, the risk of litigation or other enforcement actions is real and increasing. Now, more than ever, HAMP participants should closely examine their HAMP procedures and compliance programs. It is crucial to have quality control procedures in place for routine monitoring of HAMP programs. Servicers also should ensure that they are keeping up with new regulations, servicing guidelines, and litigation trends and revising their HAMP programs as appropriate to satisfy new requirements. Finally, it is important for servicers to consider their HAMP programs holistically and from the borrowers' perspective to satisfy CFPB examiners and prevent civil liability. While these measures may not avoid all of the potential pitfalls, they are a significant step to identifying areas of potential weaknesses for prompt correction and demonstrating institutional commitment to compliance.
Ben Klubes and Michelle Rogers are partners, and Katie Halliday is an associate with BuckleySandler in the firm's Washington, D.C. office. The authors represent entities and individuals facing government enforcement actions, complex civil litigation, and internal investigations, including matters involving the government loan programs and the False Claims Act.
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