Townstone Financial filed a response to the Consumer Financial Protection Bureau appealing the dismissal of a redlining suit it brought against the mortgage lender in 2020.
In a brief filed Aug. 14, the Chicago mortgage lender argued the Seventh Circuit Court of Appeals should affirm the U.S. District Court for the Northern District of Illinois decision, which granted the lender a victory and rejected the bureau’s argument that an anti-discrimination law protects prospective borrowers.
At the time, the District Court ruled that government watchdog’s suit was invalid because the Equal Credit Opportunity Act applies only to home loan applicants, not to potential applicants.
Richard Horn, co-managing partner at Garris Horn LLP and legal counsel for Townstone, called the CFPB’s appeal “an uphill battle” for the bureau and its “arguments weak.”
He noted he was not fully surprised the agency appealed the case because of the “level of hubris internally.”
“The [CFPB] may have some blinders to their legal risks because it doesn’t affect any of the staff there internally…everyone is getting paid and no one is getting fired,” he said. “If the CFPB loses, which we firmly believe they will, they could also appeal to the Supreme Court, so this could go on for a while.”
The CFPB declined to comment.
The Federal Trade Commission, however, did provide input in early June. An amicus brief authored by James Doty, an attorney for the FTC, said the “Congress’s aim of equal access to credit would be a nullity if creditors could blatantly broadcast to protected classes that their applications were not welcome.”
“In upending almost fifty years of law, the district court ignored Congress’s plain language directing regulators to further ECOA’s “purpose” and prevent its “evasion,” Doty’s letter reads.
The suit, launched by the government watchdog almost half a decade ago, accused Townstone of engaging in illegal redlining by discouraging prospective Black applicants from applying for home loans.
The bureau’s complaint alleged that from 2014 through 2017, the company’s CEO and president made statements that “discouraged prospective applicants living in African-American neighborhoods in the Chicago MSA from applying to Townstone for mortgage loans.”
Such alleged remarks included the company’s CEO describing the South Side of Chicago between Friday and Monday as “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.”
In February, Judge Franklin Valderrama of the Illinois federal court gave Townstone a victory.
The case was dismissed with prejudice, which meant the CFPB could not refile the complaint. However, the Bureau still maintained a right to appeal. On April 3, it filed a notice with the Seventh Circuit Court of Appeals stating it would do that. The filing did not go into the specific reasons it elected to challenge Judge Valderrama’s ruling.
Two Orange County, California, individuals face charges of conspiracy, bank fraud and identity theft, accused of targeting elderly members of the local Vietnamese community and duping banks into distributing $2.2 million of their accrued home equity.
Thao Thi Kim Nguyen and Nghiep Chinh Nguyen were arraigned in United States District Court in Santa Ana, California, on Monday. Both entered not guilty pleas to the charges against them and were granted bond. They each face a single count of conspiracy to commit bank and wire fraud.
Thao Nguyen was also charged with multiple other counts of both bank fraud and aggravated identity theft. Nghiep Nguyen, meanwhile, faces an additional two counts of bank fraud and another of aggravated identity theft.
The purported violations occurred over a four-month period in 2018 after Thao Nguyen opened accounts in her name at two banks, who were not identified in the court indictment. Later, she would return to the banks accompanied by Ngiep Nguyen and other participants involved in the fraud, who posed as homeowners.
Using stolen identities and phony documents, including California driver’s licenses and Social Security cards, Ngiep Nguyen and the other alleged fraudsters would typically impersonate elderly Vietnamese homeowners to take out mortgages. This gave them access to the victim’s accrued equity, through obtaining reverse liens after forging signatures on banking documents and grant deeds. Thao Nguyen also added the victims’ names to the accounts she had previously opened at the banks, claiming, in at least one case, they belonged to her parents.
She then reportedly received wire transfers of the withdrawals made by the other parties from the fraudulent mortgage accounts. Thao Nguyen subsequently moved those funds to different bank accounts she owned.
The scheme netted almost $2.2 million, according to the indictment, with Thao Nguyen taking in approximately $1 million while distributing the remaining amount to her cohorts.
A trial date for the two defendants is scheduled to begin on Sept. 26. If convicted, both face a maximum sentence of 30 years in federal prison for each conspiracy and fraud charge. They would also be required to serve two years for each count of aggravated identity theft if found guilty.
Neither the identities of others participating in the scheme, who were not part of this indictment, nor of the victims were reported.
The charges against Thao Nguyen and Ngiep Nguyen follow another recent trial involving elderly homeowners in California. In that case, the head of an investment company promised homeowners he could help distressed borrowers avoid foreclosure through transfer of their deed title to his business. After losses totaling more than $7 million and the eventual seizure of all homes belonging to the victims between 2015 and 2019, Robert Sedlar was found guilty on more than 100 felony counts earlier this year, including conspiracy, grand theft and elder abuse.
A multiple listing service settled a lawsuit challenging Realtor commission rules for $3 million, a possible harbinger for several ongoing actions by home sellers alleging listing requirements are anticompetitive.
The case, Nosalek v. MLS Property Information Network, had class action status and was filed in the U.S. District Court for Massachusetts. Only the MLS agreed to a settlement, according to a June 30 legal filing. Other defendants in the case, both franchisors and brokerages, were not part of the agreement.
Sellers, along with the Department of Justice, are pushing for a major change to the real estate industry’s compensation structure that both its proponents and opponents agree will affect every party involved in home buying.
“Life after all of this is gonna be quite different,” Dennis Norman, a real estate broker and owner of More, Realtors, said. “And I don’t know if NAR survives because we’re talking about massive, massive amounts of money.”
Rules by the National Association of Realtors and associated multiple listing services, which are databases real estate brokers use to list and search for properties, are at the crux of all three major lawsuits — Nosalek v. MLS PIN, Sitzer v. NAR and Moehrl v. NAR. All three cases cite the Sherman Antitrust Act.
The Nosalek plaintiffs didn’t sue NAR, although they did go after realty companies like Century 21, HomeServices of America and Keller Williams. Their initial complaint, filed in December 2020, cites MLS PIN rules on Realtor commissions that say listing brokers must include a fee for the buyer’s representation on each property.
This is because of a coupled compensation structure: most home sellers pay for both the buy-side and sell-side broker fees.
Sellers who don’t offer a fee on the MLS PIN can’t list their home on the service. The lawsuit says this complicates the selling process because buyer agents use the MLS to search for their clients and popular websites like Zillow also use it for their home listings.
Another complaint in the lawsuit says if sellers offer a lower-than-normal fee, buyer agents can see this on the MLS and will likely steer their clients away from the listing.
As part of the settlement, MLS PIN agreed to change its rules on the topic, eliminating the compensation listing requirement. They will also require brokers to inform buyers that they can negotiate the buyer-broker fee and inform sellers that they can elect not to pay it.
HomeServices of America and its affiliates recently filed for summary judgment on the case, arguing there’s no evidence the company conspired with the MLS PIN to inflate commissions.
Both the Sitzer and Moehrl cases contain similar complaints, but are focusing on the NAR as well because of its strong influence on listing service rules: 97% of regional MLSs are affiliated with the NAR and follow its code of ethics, according to by T3 Sixty, a real estate consultant firm.
If the Sitzer and Moehrl lawsuits compel NAR to uncouple with MLSs as some industry voices like Norman are expecting, on top of large damages, the organization and its local chapters would lose their major draw: member-only access.
“I think that’s almost the last bullet for the associations,” Norman said. “MLSs are gonna have their challenges too… but they still have what everybody wants and they’re good for the consumer.”
How Realtors get paid Coupled commissions have been around for a long time. With this system, home sellers pay their listing broker 5% to 6% of the final sale price after closing. That commission is then divvied up evenly between sell-side and buy-side agents, who interact with the customers, and their broker agencies. The majority of each half goes to the agent.
For example, after selling a $300,000 house, a seller pays $15,000 in Realtor fees. Agents receive $6,000 each and their brokers $1,500 each for the sale. The buyer doesn’t pay any fees.
“The whole compensation system doesn’t make a lot of sense,” Steve Brobeck, a senior fellow at the Consumer Federation of America and a self-described public interest advocate, said.
Why are Realtors compensated this way? It evolved from the original system used in 1908 when the first iteration of NAR, the National Association of Real Estate Exchanges, was founded, according to a report by T3 Sixty.
Back then, the industry relied on an exclusive representation system: sellers hired a single listing broker for a fee. Buying brokers were sub-agents of listing brokers, and both sides had a fiduciary duty to sellers. When property sold, listing agents gave their sub-agents a portion of the commission fee.
Eventually, the industry moved away from the subagency model to properly align fiduciary duties, but it didn’t move away from coupled compensations.
“It’s a weird system,” Ann Schnare, a former Freddie Mac executive who ran a study on the compensation structure, said. “Admittedly, it wouldn’t be the first to come to mind, but the fact is that’s what exists… changing it, I think, would be unnecessarily disruptive.”
The NAR has a similar outlook: it resists the lawsuits’ efforts to outlaw shared commissions because they say it’s optional and the rate is negotiable.
Critics of the system like Brobeck point to uniform commission rates despite this negotiability. Brobeck found that in 24 cities across the country, 88% or more of home sales had buy-side commission rates between 2.5% and 3% in a CFA report.
“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” Brobeck said in the report.
Other antitrust lawsuits Legal action over commission fees began in 2018, when a 10-year settlement between the DOJ and the NAR expired. Before crafting a new agreement, the DOJ and Federal Trade Commission held a joint workshop about competition in the real estate industry.
In 2020, the DOJ filed a new lawsuit against the NAR under the Sherman Antitrust Act and simultaneously settled with the association. The settlement required several changes to NAR’s code of ethics to provide “greater transparency to consumers about broker fees.”
The settlement banned buyer brokers from advertising their services as free unless they receive zero compensation from any source. It also prohibited these brokers from searching MLSs by filtering out properties with low commission fees and pushed for greater transparency on those sites.
Because of the settlement, many MLSs began to publicly post commission fees for each property. Redfin and Zillow followed suit. For the first time, homebuyers saw how much their agent would earn from each listing.
But then, the DOJ pulled out of the settlement in 2021 because it prevented them from investigating the association’s rules further.
The Moehrl and Sitzer lawsuits popped up around the same time as the DOJ’s initial workshop.
On March 6, 2019, Christopher Moehrl sued Realtor companies “for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.”
Then, in April 2019, Joshua Sitzer and Amy Winger, Scott and Rhonda Burnett and Ryan Hendrickson filed a similar lawsuit in Missouri.
Both plaintiffs sued the NAR along with large national broker franchisors: Realogy (now Anywhere Real Estate), HomeServices of America, RE/MAX Holdings, and Keller Williams Realty, as well as HomeServices affiliates BHH Affiliates, HSF Affiliates and The Long & Foster Companies.
Real Estate Exchange, a real estate brokerage, also filed an antitrust lawsuit in 2021 against the NAR, Zillow and Trulia. The lawsuit alleges that Zillow’s search features prevent “transparent access to home inventory.”
Will cash-constrained homebuyers suffer? NAR argues in press releases about the lawsuits that the coupled compensation system fosters market competition because it frees up cash for buyers, allowing them to make a larger down payment.
A study funded by HomeServices of America, a defendant in all three suits, supports the claim. It declares that unless lending changes come in tandem with revisions to this commission structure, it would hurt “minorities, lower income households, and first-time home buyers” the most.
Consumer advocates argue that agent fees won’t hurt buyers because their cost is currently built into home prices. If sellers no longer pay both agent commissions, home prices will fall, and buyers will have the same net cost.
Schnare, one of the study’s authors, said because most finance their home with a mortgage, that’s not true.
“If everything was cash, it wouldn’t make a difference,” Schnare said. “What seems like a small adjustment can make a big adjustment on what they can afford to pay and, you know, potentially hurt the lower end of the market, but with ripple effects upwards.”
Brobeck says this concern is exaggerated, and that lenders will adapt accordingly: “the only reason that argument has any force at all is because the industry supports buyers not being able to finance their commission on the mortgage.”
But Schnare’s study found it’s not that simple.
In order to avoid hurting cash-constrained buyers, lenders would need to change underwriting standards, specifically the loan to value ratio, which represents the borrower’s equity position in the property. This is the most powerful measure of default, the study says, and including an “extraneous factor” like buyer agent fees in the ratio could decrease its predictive accuracy. Schnare says government-sponsored enterprises, the Federal Housing Administration and the Department of Veterans Affairs are unlikely to approve of this change.
Even if they did, it would “require regulatory approval and coordination across multiple parties along the mortgage supply chain,” so Schnare expects it to be a lengthy, expensive process. In the meantime, first time homebuyers would struggle to pay broker fees out of pocket.
“We have what we have, we’re not starting from scratch,” she said. “That’s a big ask for something where the benefits are not entirely certain.”
But the CFA and REX both dismissed the study, citing its funding and accusing it of a faulty premise.
Either way, the industry might be forced to change — both the Sitzer and Moehrl lawsuits are going to trial and many expect the plaintiffs to win. The Sitzer trial is scheduled for Oct. 16, and the Moehrl trial will likely begin early 2024.
“I would not be surprised if there was a settlement before them in both cases,” Brobeck said. “And then the question is, will this settlement really lead to effective price competition?”
A Utah-based national home lender will shell out over $1.2 million to settle a class-action lawsuit involving a ransomware attack and compromise of personal employee data.
Without admitting to any liability for the infraction, Citywide Home Loans agreed to the settlement in order to resolve the claims, which came after a November 2020 data breach. In the incident, an unauthorized outside individual gained access to the company’s computer network and deployed ransomware, encrypting certain systems that contained the personal identifiable information of Citywide employees.
Included in the compromised data were Social Security numbers, passport and driver’s license information and banking and credit card details. Citywide notified affected employees of the incident between February and April 2021.
Marjorie Curtis, who served as the plaintiff for the class consisting of approximately 3,300 current and former staff members, filed the original lawsuit in October 2021, alleging negligence, breach of contract and invasion of privacy on the part of Citywide Home Loans.
The lender, which has headquarters in Sandy, Utah, did not respond to a request for comment from National Mortgage News prior to publication. Founded in 1998, Citywide is licensed in 35 states and employs more than 800 people. Stearns Lending entered into a shared-equity partnership deal with Citywide in 2018 before it was acquired by Guaranteed Rate in 2021.
Under the terms of the settlement, individuals who were notified their data was compromised can claim up to $5,000 for economic losses incurred as a result of the cyberattack. Another $200 is available for lost time related to the incident. Citywide also agreed to provide two years worth of credit monitoring and identity-theft protection services from Kroll Associates.
In order to receive benefits from the agreement, impacted parties must submit claim forms by Aug. 8. A final approval for the settlement is scheduled on Aug. 25.
The cyber incident at Citywide is one of several to have hit mortgage lenders and servicers in the past few years. Earlier in 2023, a noted hacker threatened to publish customer data he claimed to have obtained through cyberattacks on Academy Mortgage after that lender refused to pay any ransom.
Also this year, Alvaria, a third-party technology vendor contracted by Carrington Mortgage Services became a victim of a ransomware attack that impacted over 50,000 people, with data including names, addresses, loan information and partial Social Security numbers compromised. It was the second attack on Alvaria in the space of a few months, following a late-2022 event. Cybersecurity experts have previously warned of the security threats sometimes coming through outside vendors.
The Federal Bureau of Investigation advises companies to avoid paying ransom following a cyberattack. Payment offers no guarantee data will be returned and could incentivize cyber criminals.
The Federal Housing Finance Administration is looking to make it easier to put entities and people into its Suspended Counterparty Program, a proposed rule change states.
This would require Fannie Mae, Freddie Mac and the Federal Home Loan Banks to report to the FHFA any individual or company they do business with that committed “certain forms of misconduct” in the past three years. The current program was established by FHFA letter in June 2012 and amended in December 2015.
Today, the SCP list is limited to those that have committed and are convicted of criminal offenses. “However, in FHFA’s experience of administering the SCP, it has determined that this standard is too narrow; specifically, it does not authorize suspension of counterparties that have been found to have committed various forms of misconduct in the context of civil enforcement actions,” the proposed amendment to the rule said.
It is looking to broadly expand the definition of misconduct “to all manner of civil enforcement proceedings,” including cases before administrative law judges, as well as qui tam actions (also known as whistleblower cases) such as those brought under the False Claims Act.
While many of those civil cases are settled without an admission of misconduct, the proposal noted, the change could allow the FHFA to put those entities on the SCP list. “FHFA has determined that it is appropriate to permit suspension where enforcement claims are resolved without admission of misconduct,” the proposal said.
For example, in the most recent qui tam settlement involving Movement Mortgage, the company specifically did not admit any legal liability for the False Claims Act violations.
Other changes would allow for placement on the SCP for criminal or civil misconduct in connection with the management or ownership of real property.
“Amending the Suspended Counterparty Program will help strengthen FHFA’s ability to protect its regulated entities from business risks presented by individuals or institutions who engage in misconduct,” said Director Sandra Thompson, in a press release. “The proposed rule will strengthen FHFA’s ability to ensure the regulated entities remain safe and sound so they continue to serve as reliable sources of liquidity.”
The changes would also create an ability to vacate suspension orders in certain circumstances.
Currently, the SCP list has 170 individual or company names, most of which have a definitive end date for the suspension. The person on the list the longest time, starting on April 15, 2013 with an indefinite suspension, is Lee Farkas, the convicted mortgage fraudster who ran Taylor, Bean & Whitaker.
First Mortgage and its convicted founder and chairman Ron McCord — a former Mortgage Bankers Association chairman — are both also on the list. Live Well Financial, the defunct reverse mortgage lender, was the most recent addition.
This proposal will be opened for a 60-day comment period once it is published in the Federal Register.
AnnieMac is suing a former branch manager to recoup an alleged $500,000 signing bonus, its second such federal lawsuit against a former employee in the past two months.
Peyton Elizabeth Fullerton, a Denver-based originator, owes $496,136.63 after voluntarily leaving the company in January, AnnieMac alleges in its complaint filed last week. The sum stems from a $500,000 retention bonus Fullerton signed when she joined the company last July as an originating branch manager, and it mandated she stay with the firm for at least 18 months or repay the bonus.
Neither AnnieMac, its attorney, nor Fullerton, who is still working for the Denver-based The Mortgage Project, responded to requests for comment last week. A summons for Fullerton in the U.S. District Court for the District of New Jersey was issued June 28.
The lawsuit includes an alleged copy of Fullerton’s electronically signed retention bonus, which said she would receive the sum across her first two paychecks last July. Sections describing Fullerton’s salary and compensation in basis points per volume threshold are redacted.
Fullerton had $3,863.37 deducted from her final paycheck in January to cover the retention bonus, the complaint said. The employment agreement also requires Fullerton to pay for costs of litigation and to consent to litigation in a New Jersey state or federal court.
AnnieMac earlier this month voluntarily dismissed a similar suit against former Pennsylvania-based branch manager Nicholas Roberto DeJesus, who allegedly owed the firm $102,133.01 after his departure. DeJesus, according to the complaint, received a $144,000 retention bonus when he joined in October 2021 but quit last October, falling just short of his agreement’s 12-month stipulation to keep the bonus.
The lender allegedly deducted $41,867 from DeJesus’ final paycheck, and the former branch manager refused to repay the rest. AnnieMac’s voluntary dismissal of the suit June 1 didn’t say whether the sides had reached any agreement.
The company is also facing a discrimination complaint from a former Florida-based mortgage closer, who alleged disparate treatment of Black workers during her employment, and AnnieMac has yet to respond to a summons in that case.
The Mount Laurel, New Jersey-based firm originated over $731 million in mortgage volume between January and April this year and over $4 billion in mortgage volume last year, according to data from analytics firm S&P Global. AnnieMac counts 450 mortgage loan originators according to Nationwide Multistate Licensing System records, and in March it acquired in-state competitor Family First Funding.
The lawsuits over retention bonuses resemble an action by megalender CrossCountry Mortgage, which is also suing at least one former employee to recoup an alleged five-figure sign-on bonus. That case remains pending in an Ohio federal court.
The racial gap in denial rates for home-purchase loans widened last year as the Federal Reserve began tightening credit conditions via interest-rate increases, according to new data from U.S. regulators.
Black Americans experienced denial rates of 16.4% in 2022, up from 15.7% the year before, the Federal Financial Institutions Examination Council said last week. Rates for non-Hispanic-identifying White applicants ticked up to 5.8%, from 5.6%.
Rising disparities in denial rates help underscore the impact of tighter credit on progress toward a more inclusive economy. Even before the Fed began raising rates, the homeownership gap had been widening over the previous decade. By 2021, homeownership for Black Americans was nearly 29 percentage points less than that for White Americans, according to National Association of Realtors data published earlier this year.
Banks have failed to live up to promises to support Black homeowners in recent years. Major home lender Wells Fargo & Co. pledged in 2017 to lend $60 billion to generate 250,000 Black homeowners in a decade, though in 2020 the lender approved fewer than half of Black homeowners’ refinancing applications.
Hispanic and Asian individuals also face challenges securing home loans. Hispanic-White applicants saw denial rates of 11.1% last year, and Asian applicants faced denials at 9.2%. “Hispanic-White” identifies individuals with Hispanic ethnicity and White race, while “non-Hispanic-White” identifies individuals with non-Hispanic ethnicity and White race.
The FFIEC data are based on mortgage-lending transactions reported by U.S. financial institutions and are reported for first-lien, one-to-four family, site-built, owner-occupied conventional, closed-end home-purchase loans.
A federal judge gave an early victory to loanDepot this month in a poaching case against CrossCountry Mortgage, in the latest legal battle between the industry giants.
LoanDepot sued its rival last July for raiding staff responsible for 81% of its annual New York-area production, and taking with it confidential company and client data. U.S. District Judge Lorna G. Schofield last week ordered a preliminary injunction barring CrossCountry and two dozen of its employees, who are named defendants, from using the loanDepot data they obtained.
“LoanDepot will suffer immediate, substantial, and irreparable harm should the following preliminary injunction order not be entered,” she wrote in an order last week. “… LoanDepot is likely to succeed on the merits of its Defend Trade Secrets Act claim against all Defendants.”
Schofield, however, didn’t approve loanDepot’s request to bar CrossCountry from soliciting its employees, writing that loanDepot didn’t show a “threat of irreparable harm” to support an injunction. The companies will participate in a mediation and must update the court by July 14, a separate order said.
Both companies declined to comment this week. The case in the U.S. District Court for the Southern District of New York remains pending. It mirrors loanDepot’s poaching suit against CrossCountry in Illinois, where a similar injunction was ordered last December.
The Cleveland, Ohio-based lender has fended off numerous poaching suits from other firms, including a dismissal of a raiding complaint from Guild Mortgage. A spate of poaching lawsuits between mortgage competitors has subsided this year following mass layoffs and a market slowdown.
LoanDepot initially accused CrossCountry of poaching 32 employees from branches in Brooklyn, Manhattan and Fishkill, New York. The Irvine, California-based lender and servicer claims departed employees had since closed at least 60 loans at CrossCountry using confidential information they took with them.
The amount of loanDepot data covered in the injunction is unknown, and a filing detailing the information is under seal. An amended complaint cites at least 10,000 documents copied by two employees alone, and describes files such as mortgage applications, pre-approvals and company compensation and sales data.
Schofield ordered CrossCountry to not contact any customer in the loanDepot information, although the ruling doesn’t apply to CrossCountry’s applicants and borrowers who closed a loan between December 2021 and September 15, 2022.
CrossCountry is also under fire from a former loan salesperson, who accuses the company of failing to pay employees when origination volume fell. That lawsuit remains pending in an Ohio federal court.
The publicly traded LoanDepot has undertaken a massive downsizing effort in the past year, including letting thousands of employees go. The industry’s third-largest originator recorded a $91.7 million net loss in the first quarter, and earlier this month announced an executive shakeup.
Home insurance premiums are soaring and homebuying demand is waning because of the National Flood Insurance Program’s overhaul, stakeholders claim in a new federal lawsuit.
Dozens of local and state governments are seeking to halt, and learn more about, Risk Rating 2.0, the Federal Emergency Management Agency’s new methodology to determine flood insurance coverage. Plaintiffs say premiums for home insurance in Special Hazard Flood Areas [SHFAs], defined by the NFIP as at-risk areas where coverage is mandatory, have spiked as much as ten times their previous amount.
“Risk Rating 2.0 has created a growing sense of uncertainty in the minds of the home buying public,” wrote Dan Mills, CEO of the Home Builders Association of Greater New Orleans [HBAGNO], in a declaration filed last week. “Uncertainty in the marketplace has caused reluctance to invest either in improvements to existing homes, or to purchase new homes.”
The suit was filed by Louisiana Attorney General Jeff Landry last week in the U.S. District Court for the Eastern District of Louisiana, and names FEMA and the Department of Homeland Security as defendants. FEMA declined to comment, while the DHS didn’t respond to a request for comment.
The HBAGNO and Louisiana-based Miller Home Mortgage, in declarations filed alongside the suit, cite examples of premiums that have skyrocketed under the new methodology. Some communities in the St. Charles Parish outside of New Orleans will see premiums on average rise 752%, increasing anywhere from $784 to $6,677.
“This is going to devastate home ownership,” said Tony Turner, senior vice president of New Orleans-based Gulf Coast Bank and Trust. “People who are currently in their homes will no longer be able to afford those homes simply because of the flood coverage.”
Gulf Coast Bank and Trust isn’t a plaintiff in the complaint, but Turner echoed its sentiments. Louisiana, like Florida, has a deeply troubled homeowners insurance market following major storms and other issues.
“Whenever you add these premiums to people’s escrow accounts, it’s huge because the servicers of these loans are going to put those borrowers in a negative escrow position,” Turner said. “They’re going to require that borrower to now increase their monthly escrows going forward, and they’re not going to be able to afford these monthly payments that come along with their (principal & interest) payment.”
The CEO of Miller Home Mortgage said his firm has already seen mortgage origination activity in SHFAs decline because of the premium hike, and 75% of his company’s revenue comes from home loans in those areas.
Lawmakers in March filed a bill to deliver relief to homeowners affected by the new risk rating, which FEMA introduced to the 55-year-old NFIP in 2021. In 2020, the NFIP issued more than 5 million policies accounting for over $1.3 trillion in coverage; it lost 300,000 policyholders since Risk Rating 2.0 was introduced, according to the lawsuit.
Plaintiffs say FEMA hasn’t disclosed details around its risk modeling, which accounts for hypothetical future events rather than the legacy system looking at historical events. Rising premiums are capped at 18% annual hikes, while new homebuyers can’t claim the grandfathered rates of current homeowners selling their properties.
FEMA also no longer offers rate discounts to buyers of elevated properties, harming developers and homeowners who may now sell homes at a loss, according to the lawsuit. Current policyholders won’t know their new annual rate until they receive their renewal notice, and won’t know their premium increase until they receive their Declaration Page, after they renewed their policy.
“Its reliance on such undisclosed, hypothetical, and abstract possibilities results in widely divergent risk assessments as compared to other modeling systems,” the lawsuit said of Risk Rating 2.0.
Plaintiffs are seeking a preliminary and permanent injunction against FEMA from using Risk Rating 2.0 and force the agency to fully disclose its methodology.
The agencies have not yet to respond to the lawsuit in federal court.
Bank of Americais at the center of a new class-action lawsuit, which claims it unlawfully charged fees to mortgage servicing customers paying by telephone or online.
Attorneys for plaintiff Diana Higginbotham, a resident of Nitro, West Virginia, allege the banking giant illegally charged her $6 whenever making phone payments, a violation of the state’s consumer credit and protection act. The lawsuit, which was filed last month in U.S. District Court for the Southern District of West Virginia, also asserts so-called pay-to-pay fees represent a breach of contract and unjust enrichment by the Charlotte, North Carolina-based company through the creation of an “additional profit center for itself.”
“Neither the note nor deed of trust entitled defendant to assess fees for scheduled payments, electronic payments, online payments or telephone payments,” according to the lawsuit.
Typically, the cost to servicers to process online or phone transactions would be close to 30 cents, well below the $6 charged by Bank of America, Higginbotham’s attorneys claimed, adding the bank had no authorization to assess such a fee per any statute or agreement. Even if such charges were permitted in a lender agreement, pay-to-pay would still violate West Virginia regulations.
“Despite its uniform contractual obligations to charge only fees explicitly allowed under the mortgage and applicable law, defendant leverages its position of power over homeowners and demands exorbitant pay-to-pay fees,” the filing stated.
Higginbotham’s lawsuit also alleged that Bank of America included other charges in 2020 amounting to just over $47, which have yet to be explained on her monthly statements.
The plaintiff first took out the mortgage in 1998, with the loan and servicing rights later transferred to Bank of America. Higginbotham is suing the bank on behalf of herself and a proposed class of West Virginia consumers holding residential mortgages who incurred fees when making loan payments to the company. The law firm Bailey & Glasser is providing legal representation to Higginbotham in the case.
While the lawsuit requested a civil penalty be awarded to Higginbotham and all class members, no specific monetary amount was included in the filing.
Bank of America and Bailey & Glasser had not responded to inquiries at time of publication.
Bank of America is currently one of the country’s leading depository institutions with mortgage servicing operations based on the unpaid principal balance of loans involved. At the end of the first quarter, it held $735 billion worth of mortgages in its servicing portfolio, placing it in 10th place among banks. Wells Fargo topped the list with close to $9 trillion on its books, but it is in the process of downsizing its servicing portfolio.
The lawsuit arrives amid an ongoing dispute surrounding regulation of junk fees, with the Biden Administration, Consumer Financial Protection Bureau and several state governments all weighing in over the past 18 months. While the term can entail everything from ticketing surcharges to hotel fees, the financial services industry has been a regular target of criticism by the CFPB for proliferating and relying on them as a source of revenue.
Last year, several state regulators also called for an end of pay-to-pay within mortgage and other loan servicing, a practice the CFPB says falls under the definition of a junk fee, In a letter addressed to the CFPB, officials cited the frequency liens could be transferred in their life cycle, with borrowers having no say in who might service them as reason to eliminate them. No officials from West Virginia signed onto that letter.
Several trade groups, including the Mortgage Bankers Association, pushed back against calls for additional regulation in this area, saying the CFPB already provides a sufficient number of rules to ensure borrowers understand fee structure.