Correction: An earlier version of this post inaccurately stated that Mary McCulley, who won a mortgage fraud lawsuit against U.S. Bank, had been convicted of pulling a gun on someone. She was acquitted of the charge. McCulley did plead guilty to impersonating a federal employee, but not to "impersonating an FBI agent," as the post stated (and the plea was entered in September, not October). Lastly, the Bozeman Daily Chronicle article cited for the information was published on Feb. 10, not Feb. 12.
CFPB REQUIRES YOU TO GIVE THE CONSUMER THREE NEW INFORMATION BOOKLETS
The Consumer Financial Protection Bureau has issued a notice about the availability of three revised consumer publications, including the consumer information brochure and two booklets required under RESPA and/or TILA. These disclosures are required when a consumer applies for home equity lines of credit, an adjustable-rate mortgage loan, and/or purchase money financing.
The revised publications are titled:
The revised consumer publications are available for download at the CFPB’s website
Make certain you give out the correct ones.
RESPA AND TILA DISCLOSURE TO BE COMBINED INTO ONE DOCUMENT EFFECTIVE AUG. 1, 2015
CFPB has released a 1,888-page document to explain the final rule (makes it easy for any mortgage broker or lender to read, right?) to combine mortgage disclosures required under the Real Estate Settlement Procedures Act and the Truth in Lending Act. The new rule goes into effect Aug. 1, 2015 for the new Loan Estimate and Closing Disclosure forms.
Read it. Learn it. And know it before Aug. 1, 2015! Did you notice that to make the reading easier on the consumer the final statement now has five pages instead of three? Nothing like chopping down more trees and giving people reasons for getting glasses to read with. Does anyone want to borrow mine? Or do you already have your Excedrin for the Excedrin headache!
LENDER OR ANY SUBSEQUENT ASSIGNEE CAN FORCE BORROWER TO INCREASE THE FLOOD INSURANCE ABOVE THE LOAN AMOUNT AND PLACE FORCED INSURANCE IF BORROWER REFUSES TO INCREASE IT
A lender may require a borrower who has a federally-insured mortgage to obtain more flood insurance than the amount required under federal law.
In this case Feaz had obtained a mortgage loan that was guaranteed by the Federal Housing Administration. Feaz’s mortgage contained the following covenant, which is required by federal law for all FHA-guaranteed mortgages:
Fire, Flood and Other Hazard Insurance. The borrower shall insure all improvements on the property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which lender requires insurance. This insurance shall be maintained in the amounts and for the periods the lender requires. The borrower shall also insure all improvements on the property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary.
When Feaz originally obtained her loan, she obtained insurance in an amount greater than her loan’s principal balance but less than her home’s replacement value. Feaz’s loan was subsequently assigned to Wells Fargo Bank, N.A. Wells Fargo did not require Feaz to increase her flood insurance coverage when it initially acquired her mortgage. However, four years later, Wells Fargo sent her a letter entitled “Flood Insurance Coverage Deficiency Notification” in which it instructed Feaz to substantially increase her flood insurance coverage. When Feaz failed to comply, Wells Fargo obtained force-placed flood insurance for her home.
Feaz sued Wells Fargo, alleging that it had breached the mortgage by requiring her to obtain more flood insurance than that required by federal law. Feaz argued that the standard-form covenant acted as a ceiling on the amount of flood insurance Wells Fargo could require her to obtain. She also brought claims for breach of the duty of good faith and fair dealing and breach of fiduciary duty. Wells Fargo moved to dismiss the complaint, arguing that the standard-form covenant acted as a floor, and not a ceiling, on flood insurance. The United States District Court for the Southern District Alabama had held in favor of Wells Fargo, dismissing Feaz’s complaint. Faez appealed.
The Eleventh Circuit held that the standard-form covenant unambiguously makes the federally-required flood insurance amount the minimum a borrower must have, not the maximum. Eleventh Circuit noted that the standard-form covenant allows a lender to set the required insurance for “any” hazards, including floods. The sentence regarding the federal requirement, the court noted, imposes a “a separate and independent requirement that the borrower maintain the federally required minimum amount of flood insurance in addition to—not in lieu of—what the lender requires.” This interpretation, the court noted, is consistent with the provision in the mortgage that allows the lender to do whatever is necessary to protect the value of the property.
HUD regulation governing federally-subsidized flood insurance requires borrowers in “special flood hazard” areas to obtain flood insurance in an amount “at least equal to either the outstanding balance of the mortgage or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less.” The words “at least,” the court noted, are consistent with a lender being permitted to require more insurance than HUD requires.
When a borrower defaults on an FHA-guaranteed mortgage, the lender conveys the mortgage to the FHA and collects on the guarantee. However, the FHA prohibits lenders from collecting until it repairs the damage or deducts the cost of repair from insurance benefits. If insurance were limited to the amount required by HUD regulations, a lender may have to pay more for repair than it could collect in insurance benefits. This would likely make many lenders reluctant to offer FHA-insured mortgages in high-risk flood areas.
Since there was no underlying breach of contract, the court dismissed Feaz’s claim for breach of the duty of good faith and fair dealing. The court also dismissed her breach of fiduciary claim,
So if the borrower has flood insurance and the lender or servicer says not enough increase it, guess what? The monthly payment just went up and would the borrower qualify for a refi under these circumstances? Interesting question, isn’t it?
DENVER MAN GOES TO PRISON FOR NINE YEARS
On Feb. 11, Roger Howard was sentenced to serve 108 months in federal prison for wire fraud and money laundering. Following his prison sentence, Howard was ordered to serve three years on supervised release. He also has to pay $8.9 million in restitution to the victims of his crime. The defendant, who appeared at the sentencing hearing while free on bond, was ordered to report to a facility designated by the U.S. Bureau of Prison within 15 days from the date of designation.
Howard, along with a co-defendant, Oai Quang Luong, was indicted by a federal grand jury in Denver. Luong pled guilty to wire fraud and was sentenced on Aug. 15, 2013, to serve 18 months in prison. Luong was ordered to pay restitution totaling $3.2 million along with Howard.
In 2006 and 2007, Howard devised and participated in three similar but separate mortgage fraud schemes. The first and larger scheme involved the sales of 26 townhomes in a development known as Oliveglen Villas on East Princeton Place, Aurora, Colo. The second scheme involved the sale of a residence in Castle Rock, Colo., and the third a house in Denver. During the relevant times, Howard operated under the business names of Spring Creek Mortgage Real Estate Services and Open Range Development LLC. Howard controlled bank accounts in the names of both companies. Luong worked for a company that processed mortgage loan applications on behalf of potential home buyers. Both Howard and Luong had offices in the same building in Centennial, Colo.
By the middle of 2006, the developer of Oliveglen Villas had accumulated an inventory of unsold town homes. At that time, two real estate agents attempted to obtain the right to buy some of the town homes, but they were unsuccessful. The agents then were referred to Howard, who told them that he could arrange for individuals, whom he described as investors, to purchase the properties. In August 2006, Howard asked Luong to obtain the $250,000, and Luong did so using funds loaned by another individual. Howard persuaded 17 individuals, his so-called investors, to purchase the townhomes.
Howard arranged for the individuals to obtain the mortgage loans, and in doing so, he knowingly caused the applications for those mortgages to include false or misleading information or omit material information. Many of the applications overstated borrowers’ monthly incomes, often claiming incomes were more than double the actual amounts. Loan applications also contained false information about borrowers’ assets, usually bank account balances.
As part of the mortgage application process, a borrower obtained from his or her bank a form known as a Request for Verification of Deposit, which verified the balance of an account. In this case, VODs were misleading because Howard and others working at his direction arranged for bank account balances to be inflated temporarily; that is, money was deposited into the accounts and, after the balances were verified and the VODs were completed, the money was withdrawn. All of the townhome sales prices were supported by appraisals, most of which were done by an associate of Howard’s who told the appraiser the amount he wanted.
For each closing, the closing agent prepared a settlement statement reflecting that the disbursements of loan proceeds included a payment “from Seller’s Funds at Settlement” to Open Range Development. These payments were the “service fees” mentioned in the contract with the developer; they ranged from $85,700 to $117,204. After the closings, Howard used some of that money to make payments to all but one of the buyers, but those payments were not disclosed to the lenders or their underwriters. Howard for a time wrote checks payable to the borrowers to cover the differences between rental incomes and mortgage payments, but he stopped doing so on April 19, 2007. A few borrowers thereafter used their own money to make mortgage payments, but eventually all the mortgages went into default and the lenders foreclosed. Ultimately, there were 20 different victim lenders for the three fraudulent schemes, causing an $8.9 million loss. (usattco21314)
Nine years is a long time to spend in a federal prison. Note how the prosecutor went after loans that occurred seven years ago.
MONTANA WOMAN PULLS GUN, IMPERSONATES FEDERAL OFFICER AND STILL WINS A $6 MILLION MORTGAGE FRAUD LAWSUIT AGAINST THE BANK
On Feb. 10, it was reported that Mary McCulley was awarded $6 million in a mortgage fraud lawsuit against U.S. Bank. The award was $5 million in punitive damages and $1 million in compensatory damages after a jury found the bank guilty of fraud in a mortgage transaction, according to a report by the Bozeman Daily Chronicle.
In 2006, McCulley decided to buy a condo in downtown Bozeman, Mont. and sought a mortgage loan from Heritage Bank, which was later bought by US Bank of Montana, according to the Chronicle. She signed a promissory note and a deed of trust as collateral. After she signed, however, the designated use of the condo was changed on the deed from residential to commercial, allegedly without her knowledge.
After she closed on the condo, McCulley discovered that the bank had issued her an 18-month commercial loan rather than the 30-year mortgage she’d applied for, according to the Chronicle. Unable to obtain long-term refinancing, she was forced to sell the property to pay off the loan.
McCulley sued US Bank and American Land Title Co. in 2009, claiming the companies committed fraud by misrepresenting the loan. The county district court ruled in favor of the bank and the title company, but McCulley appealed to the Montana Supreme Court. While upholding the lower court’s dismissal of claims against the title company, the high court remanded the claims against US Bank back to the county district court, the Chronicle reported.
After a weeklong trial, a jury agreed with McCulley, finding US Bank liable for fraud.
Who said the banks were honest?
THE INFORMATION CONTAINED HEREIN IS NOT LEGAL ADVICE. AN ATTORNEY SHOULD BE CONSULTED IF YOU DESIRE LEGAL ADVICE