Financial Services Law Developments: 6/5/11

Tuesday, June 7, 2011

FYI: Feds Extend Comment Period on Proposed Dodd-Frank "Risk Retention" Rule to August 1, 2011

As you may recall, the federal financial regulators (OCC, FRB, FDIC, SEC,
FHFA and HUD) recently issued a joint notice of proposed rulemaking to
implement the risk retention requirements of section 15G of the Securities
Exchange Act of 1934, as added by section 941 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act. See our prior update below.

The regulators originally solicited comments on the NPRM by June 10, 2011.

The regulators announced today that the comment period will be extended,
"[d]ue to the complexity of the rulemaking and to allow parties more time
to consider the impact of the Credit Risk NPR on affected markets," and to
"allow interested persons additional time to analyze the proposed rules
and prepare their comments."

The new deadline for comments is August 1, 2011.

A copy of the announcement is available at:
http://www.occ.gov/news-issuances/news-releases/2011/nr-ia-2011-66a.pdf

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
http://www.mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

-----Original Message-----
From: Ralph Wutscher [mailto:rwutscher@kw-llp.com]
Sent: Thursday, March 31, 2011 8:40 PM
To: Ralph Wutscher
Cc: socaloffice@kw-llp.com; dcoffice@kw-llp.com; Chicago Office
Subject: FYI: Feds Issue Proposed Rule re: Dodd-Frank "Risk Retention"
Requirements

The federal financial regulators issued the widely anticipated proposed
rule regarding the risk-retention requirements of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.

A copy of the proposed rule is available at:
http://www.occ.gov/news-issuances/news-releases/2011/nr-ia-2011-39a.pdf

As you may recall, new section 15G of the '34 Act (section 941 of
Dodd-Frank) generally requires the securitizer of asset-backed securities
to retain not less than 5% of the credit risk of the assets
collateralizing the asset-backed securities.

Section 15G includes a variety of exemptions from these requirements,
including an exemption for asset-backed securities that are collateralized
exclusively by residential mortgages that qualify as "qualified
residential mortgages" ("QRM"), a term to be defined by rule.

QRMs:

The proposed rule would define QRMs as those loans meeting certain
underwriting standards, such as: (1) maximum front-end and back-end
debt-to-income ratios of 28 percent and 36 percent, respectively; (2) a
maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase
transaction (with a lesser combined LTV permitted for refinance
transactions); (3) a 20 percent down payment requirement in the case of a
purchase transaction; and (4) credit history restrictions.

The proposed rule also includes investor disclosure requirements regarding
material information concerning the sponsor's retained interests in a
securitization transaction. According to the federal agencies, the
disclosures would provide investors and the agencies with an efficient
mechanism to monitor compliance with the risk-retention requirements of
the proposed rules.

Certain Commercial, Auto ABS:

The proposed rule also has a zero percent risk-retention requirement for
ABS collateralized exclusively by commercial loans, commercial mortgages,
or automobile loans that meet certain underwriting standards. As with
QRMs, the federal agencies state that the underwriting standards for such
ABS were "designed to be robust and to ensure that the loans backing the
ABS are of very low credit risk."

GSE Exclusion:

The proposed rule would also exempt Fannie Mae (the Federal National
Mortgage Association) and Freddie Mac (the Federal Home Mortgage Loan
Corporation) as sponsors of mortgage-backed securities for as long as they
are in conservatorship or receivership with capital support from the U.S.
government.

Options for Meeting the 5% Risk Retention:

The proposed rule provides several ways in which a securitizer might meet
the 5% risk retention requirement, including:
(1) "Vertical risk retention": whereby the sponsor or other entity
retains a specified pro rata piece of every class of interests issued in
the transaction;
(2) "Horizontal risk retention": whereby the sponsor or other entity
retains a subordinate interest in the issuing entity that bears the first
losses on the assets, before any other classes of interests;
(3) "L-shaped risk retention": whereby the sponsor essentially uses an
equal combination of vertical risk retention and horizontal risk retention
as a means of retaining the required five percent exposure to the credit
risk of the securitized assets;
(4) "Revolving asset master trusts" or "seller's interest": whereby the
sponsor or other entity holds a separate interest that is pari passu with
the investors' interest in the pool of receivables (unless and until the
occurrence of an early amortization event); or
(5) "Representative sample": whereby the sponsor retains a representative
sample of the assets to be securitized that exposes the sponsor to credit
risk that is equivalent to that of the securitized assets.

The rule is proposed by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the U.S. Securities and Exchange Commission, the Federal Housing Finance
Agency, and the Department of Housing and Urban Development.

The agencies request comments on the proposed rule by June 10, 2011.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@kw-llp.com
http://www.kw-llp.com

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

The information transmitted (including attachments) is covered by the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521, is intended only for the person(s) or entity/entities to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient(s) is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Notice Under U.S. Treasury Department Circular 230: To the extent that this e-mail communication and the attachment(s) hereto, if any, may contain written advise concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advise is not written or intended to be used, and cannot be used by you (the addressee) or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.

FYI: Cal App Confirms Estoppel For Failure to Disclose Claims in Intervening BK, Even Absent Bad Faith

The Court of Appeal of the State of California, Second District, recently
confirmed that if a borrower fails to "schedule" or disclose claims
against a creditor in the borrower's bankruptcy proceedings, the borrower
is barred from litigating the undisclosed claims against the creditor in
subsequent proceedings. A copy of the opinion is attached.

The plaintiff-borrower defaulted on his home loan. He entered into a
forbearance agreement with the servicer of the loan, Select Portfolio
Servicing, Inc. ("SPS"), but then re-defaulted. SPS notified the borrower
that his loan had been transferred to Greenwich Investors ("Greenwich").

The borrower then filed for bankruptcy, making no mention of a possible
claim against Greenwich. The borrower's bankruptcy workout plan called
for borrower to make regular payments to Greenwich. The borrower again
defaulted, and Greenwich initiated nonjudicial foreclosure proceedings.
The borrower then filed suit against Greenwich, alleging breach of
contract, fraudulent and negligent misrepresentation, and violation of
foreclosure statutes. These claims arose from Greenwich's alleged failure
to acknowledge the forbearance agreement, as well as Greenwich's alleged
failure to abide by the notice provisions of the relevant foreclosure
statute, among other alleged statutory violations.

Greenwich demurred to the borrower's complaint, on the grounds that the
borrower was barred from raising his claims by the doctrines of res
judicata and estoppel. The trial court sustained the demurrer, and the
foreclosure sale took place. The borrower appealed, but the appellate
court upheld the trial court's decision.

The appellate court's decision to sustain the lower court hinged on the
application of the rule established in Oneida Motor Freight, Inc., v.
United Jersey Bank, 848 F.2d 214 (3d Cir. 1988). As you may recall, the
court in Oneida Motor Freight stated that a party's failure to disclose
litigation claims likely to arise in a nonbankruptcy context "triggers
application of the doctrine of equitable estoppel, operating against a
subsequent attempt to prosecute the action." Id. at 417.

The borrower argued that cases decided subsequent to Oneida Motor Freight
provided that the rule applied only where the nondisclosure was
accompanied by bad faith. The court disagreed because, among other
reasons, the cases cited by borrower did not involve a subsequent lawsuit
against an entity that had been a creditor in the bankruptcy proceedings.
As such, in the other cases, the debtor did not benefit from the
nondisclosure. As the cases the borrower relied upon by the borrower were
all distinguishable from the matter at hand, the court concluded that the
Oneida Motor Freight rule should apply. Therefore, the borrower was
barred from litigating the claims he failed to disclose in his bankruptcy
proceedings.

However, the borrower's statutory claims (lack of notice, failure to
provide a loan modification) arose after the bankruptcy proceedings, and
thus were not barred by the Oneida Motor Freight rule. However, the court
found no merit in either claim.

The court held that the statutory remedy for lack of notice of the
foreclosure sale is limited to a postponement of the sale. As the
foreclosure sale had already taken place, the court held that borrower had
"no further remedy." The court also held that there is no statutory duty
to provide a loan modification.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

PLEASE NOTE:

The editor and sponsoring law firm of this blog represent and serve banks, lenders, loan buyers, loan servicers, debt collectors, and other financial services companies. We do not represent consumers.

Any communications or information obtained may be provided to our clients, including for the purpose of debt collection.

The information in this blog and related updates is general in nature, and should not be considered legal advice.

Legal advice requires a full and complete understanding of a particular situation. Your situation may involve material facts that prevent the direct application of the information in this blog and related updates.

You will not become a client of the editor or sponsoring law firm simply by reading this blog.

In order to become a client of the editor or sponsoring law firm, the editor or sponsoring law firm must agree to represent you in writing.

Until we agree to represent you in writing, we are not prevented from representing any other party.

Until you are a client of the editor or sponsoring law firm, any communications with us will not be confidential.

The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.