The Department of Justice filed a lawsuit against Bank of America seeking in excess of $1 billion dollars, associated with its use of expedited mortgage processing that allegedly took inappropriate shortcuts resulting in improper approvals. Ultimately some of these loans—sold to Fannie Mae and Freddie Mac—went into default, causing losses the government now seeks to recoup.
Beyond all of the enforcement through regulators, lawsuits are increasingly focusing on the systems lenders utilize to originate, process and approve loans. The Bank of America lawsuit—now the third of its kind—seeks substantial damages against a major bank for errors in the systems it implemented to review, process, and approve the loans. At the same time, many investor agreements are increasingly requiring indemnification for general compliance deficiencies in connection with repurchase obligations. What this creates is an environment where industry standards—enforceable through private litigation—are being developed in the courts. Judges and juries will be supplementing what regulators determine are “reasonable” processes and procedures in originating and closing residential mortgage loans. While these will not necessarily be applied to lenders through state or federal regulators, these judicially created “industry standards” will become highly relevant in repurchase and consumer litigation against lenders. In addition, lenders will need to focus more than ever on remaining up to speed with court decisions—not just the latest press releases from the Consumer Financial Protection Bureau. Finally, judicially created standards will largely be exempt from political shifts that can impact the regulatory process.
Increasingly, it is becoming clear that there is no turning back in terms of the compliance burdens lenders now face. Judicially created standards will effectively seal in compliance as a core aspect of operations critical to financial and operational viability. At least those lenders investing in compliance infrastructure—as many currently are—can do so knowing it is not going to be an expenditure or effort that will someday be rendered moot.