Friday, October 29, 2010

FRB: Appraisal Independence - Interim Final Rule

On October 28, 2010, the Federal Reserve Board published an interim final rule in response to revision requirements to the Truth in Lending Act (TILA), pursuant to the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act. TILA Section 129E establishes new requirements for appraisal independence for consumer credit transactions secured by the consumer's principal dwelling.

The amendments ensure that real estate appraisals used to support creditors' underwriting decisions are based on the appraiser's independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. The amendments also seek to ensure that creditors and their agents pay customary and reasonable fees to appraisers.

The interim final rule applies to a person who extends credit or provides services in connection with a consumer credit transaction secured by a consumer's principal dwelling. Although TILA and Regulation Z generally apply only to persons to whom the obligation is initially made payable and that regularly engage in extending consumer credit, TILA Section 129E and the interim final rule apply to persons that provide services without regard to whether they also extend consumer credit by originating mortgage loans. Thus, the interim final rule applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers and other firms that provide settlement services.

Specifically, the interim final rule applies to appraisals for any consumer credit transaction secured by the consumer's principal dwelling. Covering consumer credit transactions is consistent with the scope of TILA generally, which only applies to credit extended for personal, family or household purposes. The revisions provide a broader scope, as required by Section 1472 of the Dodd-Frank Act, which does not limit coverage to closed-end loans and also covers HELOCs.

Finally, with a few exceptions, the interim final rule applies to any person who performs valuation services, performs valuation management functions, and to any valuation of the consumer's principal dwelling, not just to a licensed or certified ''appraiser,'' an ''appraisal management company,'' or to a formal ''appraisal.''

The Board seeks comment on this interim final rule.

Dates:
Effective: December 27, 2010
Compliance Date: April 1, 2011
Comments Deadline: December 27, 2010

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HIGHLIGHTS

Coercion and prohibited extensions of credit.

-Prohibits covered persons from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person's independent judgment.

-Prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that (a) coercion or other similar conduct has occurred, or (b) that the person who prepares a valuation or who performs valuation management services has a prohibited interest in the property or the transaction as discussed below, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the value of the property.

Conflicts of interest.

-Provides that a person who prepares a valuation or who performs valuation management services may not have an interest, financial or otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use of in-house appraisers or affiliates. However, because the Act prohibits appraisers from having an ''indirect financial interest'' in the transaction, it is possible to interpret the Act to prohibit creditors from using in house staff appraisers and affiliated appraisal management companies (AMCs).

-Clarifies that an employment relationship or affiliation does not, by itself, violate the prohibition.

-Establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function, to prevent conflicts of interest. Special guidance on firewalls is provided for small institutions, because they likely cannot completely separate appraisal and loan production staff. Small institutions are those with assets of $250 million or less.

Mandatory reporting of appraiser misconduct.

-Provides that a creditor or settlement service provider involved in the transaction who has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers under applicable federal or state law, or the Uniform Standards of Appraisal Practice (USPAP) must report the failure to comply to the appropriate state licensing agency.

-Limits the duty to report compliance failures to those that are likely to affect the value assigned to the property.

-Provides that a person has a ''reasonable basis'' to believe an appraiser has not complied with the law or applicable standards, only if the person has knowledge or evidence that would lead a reasonable person under the circumstances to believe that a material failure to comply has occurred.

Customary and reasonable rate of compensation for fee appraisers.

-A creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located. The rule provides two presumptions of compliance. Under the first, a creditor and its agent is presumed to have paid a customary and reasonable fee if the fee is reasonably related to recent rates paid for appraisal services in the relevant geographic market, and, in setting the fee, the creditor or its agent has:

· Taken into account specific factors, which include, for example, the type of property and the scope of work; and

· Not engaged in any anti-competitive actions, in violation of state or federal law, that affect the appraisal fee, such as price fixing or restricting others from entering the market.

-A creditor or its agent would also be presumed to comply if it establishes a fee by relying on rates established by third party information, such as the appraisal fee schedule issued by the Veteran's Administration, and/or fee surveys and reports that are performed by an independent third party (the Act provides that these surveys and reports must not include fees paid by AMCs).

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Federal Reserve Board
Interim Final Rule - Appraiser Independence
Federal Register, Vol. 75, No. 208
October 28, 2010

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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

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Thursday, October 28, 2010

Dodd-Frank Act - Part III: CFPB - Bureau and Bureaucracy

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

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I think you will be interested in reading my newest article in the National Mortgage Professional Magazine, the national publication that is considered the premier mortgage industry magazine for mortgage originators.

This is the third article in a 3-part series that dissects the landmark financial reform legislation now known as the Dodd-Frank Act.

In this final article, I consider the new Bureau of Consumer Financial Protection and offer some observations on how the many features of the Act may affect the mortgage industry's prospects.

This new article is entitled Part III: Consumer Financial Protection - Bureau and Bureaucracy.

In this article, I turn my attention to the very core of the Act itself vis-à-vis the mortgage industry and consumer financial protection: the Bureau of Consumer Financial Protection (known also as the "Consumer Financial Protection Bureau," or "CFPB").

And, I provide a matrix of the supervisory units and their functions, and respective compliance requirements, that the Bureau's Director must establish.

Download Original Article (1.75)

EXCERPT

A Thought Experiment:

A vast, entangled array of very small and sleek wires, super strong magnets, and very wide and long cables extend out omnidirectionally - all of which lines and circuits are laid throughout a network of interlocking, electrically generated devices that are held in place in their respective positions on a shaky iron scaffold by fraying, single-knotted ropes.

The devices are needed to power vital and critical services to a community. But, due to wear and tear on their bindings, some devices are about to break free, threatening to pull down with them the entire array of wires, magnets, cables, and other devices. Any device can plummet at any time. Before it is too late, all the lines must be disentangled, traced to each of the devices, and rerouted to a new and more stable grid; plus, the devices themselves must be transferred, one by one, to the new grid without damaging them, and then reconnected to their lines.

But the collapse can take place at any time. A "crisis" looms!

So, how are you going to accomplish this heroic task quickly and effectively?

Now let's consider this analogue: the energy source is Constitutional authority; the grid is the financial regulatory framework; wires and cables are the ways and means that implementing regulations affect one another; magnets are the legal foundations (i.e., case law precedents (stare decisis), statutes (federal and state), Constitutional laws or rights) on which all subject enumerated laws rest; devices are the existing regulations; and ropes are the various governmental agencies that are charged with enforcement of and monitoring compliance with specific implementing regulations.

By the end of this article, I hope you will have decided how best to solve the above-described and admittedly convoluted "crisis." This article and the preceding articles in this series outline how Congress decided!

Download Original Article (1.75)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Thursday, October 21, 2010

NYS: Leads with Foreclosure Affirmation

In what may be a national trend, on October 20, 2010 the court system of the State of New York directed that lender's lawyers must verify the accuracy of foreclosure papers filed with the court by signing an Affirmation.

The Affirmation provides this preamble:

During and after August 2010, numerous and widespread insufficiencies in foreclosure filings in various courts around the nation were reported by major mortgage lenders and other authorities. These insufficiencies include: failure of plaintiffs and their counsel to review documents and files to establish standing and other foreclosure requisites; filing of notarized affidavits which falsely attest to such review and to other critical facts in the foreclosure process; and "robosignature" of documents by parties and counsel. The wrongful filing and prosecution of foreclosure proceedings which are discovered to suffer from these defects may be cause for disciplinary and other sanctions upon participating counsel.

The Affirmation is available at the New York State Bar Association website or may be downloaded from our Library.

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Highlights

Under penalty of perjury lawyers for lenders must file an Affirmation that includes the following attestations:

1. I am an attorney at law duly licensed to practice in the state of New York and am affiliated with the Law Firm of __________________, the attorneys of record for Plaintiff in the above-captioned mortgage foreclosure action. As such, I am fully aware of the underlying action, as well as the proceedings had herein.

2. On [date], I communicated with [name and title], a representative of Plaintiff, who informed me that he/she (a) has personally reviewed plaintiff's documents and records relating to this case; (b) has reviewed the Summons and Complaint, and all other papers filed in this matter in support of foreclosure; and (c) has confirmed both the factual accuracy of these court filings and the accuracy of the notarizations contained therein.

3. Based upon my communication with [person specified in ¶2], as well as upon my own inspection of the papers filed with the Court and other diligent inquiry, I certify that, to the best of my knowledge, information, and belief, the Summons and Complaint and all other documents filed in support of this action for foreclosure are complete and accurate in all relevant respects. I understand my continuing obligation to amend this Affirmation in light of newly discovered facts following its filing.

4. I understand that the Court will rely on this Affirmation in considering the application.

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State of New York, Unified Court System, Press Release, "New York Courts First in Country to Institute Filing Requirement to Preserve Integrity of Foreclosure Process" October 20, 2010
Affirmation (Verification of Foreclosure Papers) October 20, 2010

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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Tuesday, October 19, 2010

FRB: Issues Interim Final Rule for Appraiser Independence

On October 18, 2010, the Federal Reserve Board (FRB) announced an interim final rule that is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). This interim final rule includes several provisions that are meant to protect the integrity of the appraisal process when a consumer's home is securing the loan.

The Act mandates that the Home Valuation Code of Conduct (HVCC) shall have no effect, once the Board issues this interim final rule. [See: TILA Section 129E(j), 15 U.S.C. 1639e(j)] The HVCC provides that, among other things, only a creditor or its agent may select, engage, and compensate an appraiser and that a creditor must ensure that its loan production staff do not influence the appraisal process or outcome.

The FRB's interim final rule intends to ensure that real estate appraisers are "free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions."

In addition, the interim final rule seeks to ensure that appraisers receive customary and reasonable payments for their services.

Public comments are due 60 days after publishing the interim final rule in the Federal Register, which is expected soon.

Compliance: April 1, 2011.

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HIGHLIGHTS

The Rule includes several provisions that protect the integrity of the appraisal process when a consumer's home is securing the loan.

Interim Final Rule

  • Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment.
  • Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions.
  • Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated.
  • Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities.
  • Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.

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FRB: Appraiser Independence, Interim Final Rule,
12 CFR Part 226, Regulation Z, Truth in Lending
October 18, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Monday, October 18, 2010

Foreclosures: The Plot Thickens

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

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Question: What term describes when a servicer does not comply with applicable state and local laws on foreclosure?

Multiple Choice:
(A) Foreclosuregate.
(B) Foreclosure meltdown.
(C) Foreclosure scandal.
(D) Foreclosure fraud.
(E) All of the Above.

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In my Commentary of October 4, 2010, issued soon after the commencement of the current crisis in foreclosure processes, I wrote:

  • I suppose an argument can be made that this situation will eventually straighten out and most foreclosures will be completed in the fullness of time. This is a procedural matter that will require a legal solution. Most foreclosures are not going to be reversed, once this legal mess gets disentangled, although regulatory oversight may be considerably strengthened.

In the two weeks since making that observation, we have learned that gaming the foreclosure process has been far more the norm than the exception among several servicers. It is one thing when a particular servicer acts on its own to cut corners in due diligence, it is quite another thing when others, especially the largest servicers, act in a similar way.

Regulators have a phrase for this: systemic failure.

There is nobody who truly believes the handling of enormous number of mortgages through the foreclosure process has been an easy or efficient task to effectuate. Our clients look to us to offer guidance in administrative coordination and relevant preparation. But applicable statutes and implementing regulations are meant to be followed - fully, accurately, and timely - by all parties to a transaction. An alleged failure to comply - and what compliance is! - may require a court to decide. But no party to a contract can walk away from requirements of the law, or the attendant legal remedies. Servicers are no doubt anticipating extensive litigation against them from borrowers and investors alike!

Of course, the politicians have gotten into the act, with some of them asking all servicers to voluntarily impose a moratorium on all foreclosures. All servicers? All foreclosures? Voluntarily? Good luck with that! At this point, the Attorneys General of all 50 states - up from 23 states two weeks ago - have banded together to investigate the alleged violation of foreclosure procedures and the "robo-signing" predicament.

Last Tuesday, October 12th, President Obama pocket vetoed a bill that would have streamlined the foreclosure process by permitting servicers to file foreclosure documents at state and federal courts that were notarized by a notary or by a computer. Recently, there have been allegations that the Administration actually knew for some time about the weaknesses inherent in some servicers' foreclosure processes. Expediency in foreclosing seemed to be tolerated, in lieu of regulatory compliance and following the dictates of the law.

The following day, Wednesday, October 13th, I was on a morning call with a friend when he broke off our conversation to tell me that, just at that instant, news sources had reported in real time that JPMorgan Chase had suspended its use of MERS - and would henceforth foreclose in its own name, not in the name of MERS. Given the on-going litigation against MERS, I suppose such an outcome was inevitable. Lawsuits against MERS abound in many states, including California, Nevada, Arizona, Maine, Arkansas, Tennessee, and Kansas. There is now a class action complaint in Kentucky, a RICO-action, against MERS, GMAC, Et Al.

Simply put: at issue is whether MERS has standing to foreclose in its own name, as nominee, with beneficial interest in the note or mortgage, and thus the legal authority to transfer promissory notes and appoint successor trustees.

Many borrowers facing foreclosure, and their attorneys, have become aware of the opportunity to postpone or prevent foreclosure. They are finding ways and means to challenge foreclosure proceedings. In fact, an investigative journalist has written a 250 page report, entitled "Clouded Titles," about the MERS fiasco and the possible options that attorneys are suggesting to avoid foreclosure.

Fannie and Freddie, and Citicorp, have suspended their use of certain foreclosure attorneys in the wake of the "robo-signing" scandal.

Over the weekend, Shaun Donovan, the HUD Secretary, stated that "a national, blanket moratorium on all foreclosure sales would do far more harm than good -- hurting homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales." The problem is this, though: without clear title or insurance companies willing to insure title, who would buy an REO?

As I have said repeatedly, the drafting, maintaining, and monitoring of policies, procedures, forms, and practices, and also hiring appropriately trained personnel, to assure compliance with state and local foreclosure laws are the only operationally sound corrective and proactive measures. Nevertheless, this sudden foreclosure paralysis is yet another example of financial institutions not implementing existing regulations.

An opportunity now presents itself to permanently fix this systemic risk! Will we rise to the challenge?

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So, What Do You Think?

I would welcome your comments and views.


Please feel free to email me at any time.


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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Friday, October 15, 2010

FRB: Issues Final, Interim, and Proposed TILA Rules

Recently, the Federal Reserve Board (FRB) has issued both Final, Interim, and Proposed revisions to the Truth in Lending Act (TILA).

We have notified you of some of these revisions in previous compliance updates.

Some of the final, interim, and proposed rules are a direct response to the Dodd-Frank Act (Act). Others predate the Act.

The implementation of requirements under the Act are taking place in a dynamically unfolding time frame, with very specific dates by which the mandated regulatory compliance must be activated correctly, fully, and seamlessly. As new final and proposed revisions are promulgated and set forth by federal agencies, including the new Bureau of Consumer Financial Protection, it is incumbent on affected financial institutions to provide written policies and procedures as well as corrective actions throughout their mortgage origination platforms.

The importance of monitoring and implementation is critical to timely and comprehensive compliance. Failure to comply with the required changes, in many instances, exposes a financial institution to, among other things, substantial, civil monetary penalties.

In this Mortgage Compliance Update, we will provide a brief synopsis of the following recent Final, Interim, and Proposed revisions to TILA.

  • Proposed: Second phase of the FRB's comprehensive review and update of the mortgage lending rules in the regulation.
  • Interim: Implements provisions of the Mortgage Disclosure Improvement Act (MDIA) to disclose how regular mortgage payments can change over time.
  • Proposed: Escrow account requirements for higher-priced, first-lien "jumbo" mortgage loans.
  • Final: Loan Originator Compensation
  • Final: Notification of Sale or Transfer of Loan

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HIGHLIGHTS

Second Phase of Comprehensive Review

Issuance: September 24, 2010
Comments Deadline: December 23, 2010

General Review

The first phase of the FRB's regulatory review of mortgage lending rules commenced with the publication of two proposals in August 2009 that were meant to improve the disclosures for closed-end home mortgage loans and open-end home equity lines of credit. After considering the comments to the proposals, the FRB plans to issue final rules that combine the 2009 and 2010 proposals.

According to the FRB, the latest proposal would:

  • Improve the disclosures consumers receive for reverse mortgages and impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information.
  • Prohibit certain unfair practices in the sale of financial products with reverse mortgages.
  • Improve the disclosures that explain a consumer's right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right.
  • Ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan

Reverse Mortgages

The FRB's proposed rules for reverse mortgages would:

  • Prohibit creditors from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product.
  • Require that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan.

All Mortgages

The FRB proposing amendments pertaining to all types of mortgages that would:

  • Ensure that consumers have time to review their loan cost disclosures before they become obligated for fees, by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after they receive the disclosures.
  • Clarify that when a consumer requests information from their loan servicer about the owner of the loan, the servicer must provide the information within a reasonable time, which generally would be 10 business days.

Forms and Disclosures

The following forms and disclosures, and implementation criteria and discussion, are the subjects of this proposal:

Reverse Mortgages

  • Summary of Findings: Design and Testing of Truth in Lending Disclosures for Reverse Mortgages
  • Key Questions to Ask about Your Reverse Mortgage
    • Open-End Reverse Mortgage Early Disclosure Model Form
    • Open-End Reverse Mortgage Account-Opening Disclosure Model Form
    • Closed-End Reverse Mortgage Model Form
    • Open-End Reverse Mortgage Early Disclosure Sample
    • Open-End Reverse Mortgage Account-Opening Disclosure Sample
    • Closed-End Reverse Mortgage Sample
    • Shared Appreciation Model Clause

Rescission

  • Summary of Findings: Design and Testing of Truth in Lending Disclosures for Rescission Notices

HELOCs

  • Rescission Model Form
  • Rescission Sample (When Opening an Account)
  • Rescission Sample (When Increasing the Credit Limit)

Closed-end Mortgages

  • Rescission Model Form (General)
  • Rescission Sample (General)
  • Rescission Model Form (New Advance of Money with the Same Creditor)

Credit Protection

  • Summary of Findings: Design and Testing of Periodic Statements for Home Equity Lines of Credit, Disclosure about Changes to Home Equity Line Credit Limits, and Disclosures about Credit Protection Products

HELOCs

  • Credit Insurance, Debt Cancellation Coverage, or Debt Suspension Coverage Model Form
  • Credit Life Insurance Sample
  • Disability Debt Cancellation Coverage Sample
  • Unemployment Debt Suspension Coverage Sample

Closed-end Mortgages

  • Credit Insurance, Debt Cancellation Coverage, or Debt Suspension Coverage Model Form
  • Credit Life Insurance Sample
  • Disability Debt Cancellation Coverage Sample
  • Unemployment Debt Suspension Coverage Sample

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Mortgage Disclosure Improvement Act (MDIA) Revisions

Issuance: September 24, 2010
Effective: October 25, 2010
Compliance: January 30, 2011
Comments Deadline: November 23, 2010

  • Lenders' cost disclosures must include a payment summary in the form of a table, stating the following:

    • The initial interest rate together with the corresponding monthly payment;
    • For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a "worst case" example showing the maximum rate and payment possible over the life of the loan; and
    • The fact that consumers might not be able to avoid increased payments by refinancing their loans.
  • Requires lenders to disclose certain features, such as balloon payments, or options to make only minimum payments that will cause loan amounts to increase.

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Escrow Account for Higher-Priced, First-Lien Jumbo's

Issuance: September 24, 2010
Comments Deadline: October 25, 2010

Implements the Act's provisions regarding an increase in the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans (i.e., loans exceeding the conforming loan-size limit for purchase by Freddie Mac).

In July 2008, the FRB issued final rules to establish escrow accounts for first-lien loans if a loan's APR is 1.5% or more above the applicable prime offer rate.

Under the Act - which amended TILA - the escrow requirement will apply for jumbo loans only if the loan's APR is 2.5% or more above the applicable prime offer rate. The APR threshold for non-jumbo loans remains unchanged.

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Loan Originator Compensation

Issuance: September 24, 2010
Compliance: April 1, 2011

  • Prohibits payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended.
  • Prohibits any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly.
  • Prohibits loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.

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Notification of Sale or Transfer of Loan

Issuance: September 24, 2010
Effective: January 1, 2011

  • New requirement for notifying consumers of the sale or transfer of their mortgage loans. Requires a purchaser or assignee that acquires a loan to provide the disclosures in writing no later than 30 days after the date on which the loan was sold, transferred or assigned.
  • Certain exceptions may apply if the covered person transfers or assigns the loan to another party on or before the 30th day.

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Federal Reserve Board
Regulation Z: Truth in Lending Act
September 24, 2010

  • Second Phase Mortgage Review, Proposed, FR - Vol. 75, No. 185 (58539-58788)
  • Mortgage Disclosure Improvement Act of 2008, Interim, FR - Vol. 75, No. 185 (58470-58489)
  • Escrow - Higher-Priced, First Lien Jumbos, Proposed, FR - Vol. 75, No. 185 (58505-58508)
  • Loan Officer Compensation, Final, FR - Vol. 75, No. 185 (58509-58538)
  • Notification of Sale or Transfer of Loan, Final, FR - Vol. 75, No. 185 (58489-58504)

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Wednesday, October 6, 2010

Fannie: Directs Servicers to Review Foreclosure Procedures

On October 1, 2010, Fannie Mae issued Lender Letter LL-2010-11 which directs all of its servicers to immediately undertake a review of their policies and procedures relating to the execution of affidavits, verifications, and other legal documents in connection with the default process.

Fannie issued this notice because it recently learned that there are potential defects with affidavits submitted by servicers in support of motions for summary judgment in states with judicial foreclosure processes. The issues pertain to "whether the individuals executing the affidavits on behalf of the servicer had the required personal knowledge of the information contained in the affidavits and whether the affidavits were notarized in accordance with applicable requirements."

The issuance provides citations to Fannie's Mortgage Selling and Servicing Contract and Servicing Guide provisions with regard to:

  • Servicer's basic duties and responsibilities
  • Compliance with applicable laws and mortgage documents
  • Servicer's audit and control systems
  • Consequences of non-performance of servicer's duties and responsibilities and non-compliance with applicable laws and mortgage documents

Highlights

Servicer's Basic Duties and Responsibilities

The servicer must have sufficient and properly-trained staff, and adequate controls and quality assurance procedures in place:

  • to carry out all aspects of their servicing duties
  • to protect against fraud, misrepresentation, or negligence by any parties involved in the mortgage servicing processes
  • to protect Fannie Mae's investment in the security properties
  • to provide borrowers with assistance when it is requested
  • to ensure that its staff is knowledgeable in all aspects of mortgage servicing to comply with Routine vs. Non-routine Litigation procedures, and contact Fannie Mae's Regional Counsel via e-mail if:
    • any routine legal proceeding becomes contested (i.e., the defendant in any proceeding files any appeal, motion for rehearing, or similar procedure
    • the servicer receives notice of a non-routine action that involves a Fannie Mae-owned or - the securitized mortgage loan or that will otherwise affect Fannie Mae's interests, regardless of whether Fannie Mae is also named as a party to the action.

Compliance with Applicable Laws and Mortgage Documents

All federal, state, and local laws (including statutes, regulations, ordinances, administrative rules and orders that have the effect of law, and judicial rulings and opinions) that apply to any of its origination, selling, or servicing practices or other business practices (including the use of technology) that may have a material effect on Fannie Mae, including:

  • fair housing
  • equal credit opportunity
  • truth-in-lending
  • wrongful discrimination
  • real estate settlement procedures
  • borrower privacy
  • escrow account administration
  • mortgage insurance cancellation
  • debt collection
  • credit reporting
  • electronic signatures or transactions
  • predatory lending
  • terrorist activity
  • the enforcement of any of the terms of the mortgage loan

Servicer's Audit and Control Systems

The servicer must maintain adequate internal audit and management control systems to ensure that mortgage loans are serviced in accordance with sound mortgage banking and accounting principles; to guard against dishonest, fraudulent, or negligent acts; and to guard against errors and omissions by officers, employees, or other authorized persons.

Requires the servicer to provide for at least the following:

  • a delinquent loan servicing system
  • a system to control and monitor bankruptcy proceedings
  • a foreclosure monitoring system

Consequences of Non-performance of the Servicer's Duties and Responsibilities and Non-compliance with Applicable Laws and Mortgage Documents

  • Agreement to Indemnify and Hold Harmless
  • Compensatory Fees
  • Specific Breaches of Contract
    • Specific breaches of the Contract as they relate to execution of affidavits, verifications, and other legal documents include:
      • Failure To Properly Foreclose Or Liquidate
      • Failure To Properly Manage, Dispose Of, Or Effect Proper Conveyance Of Title
  • Remedies for Breach of Contract

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Fannie Mae: Servicer Review of Procedures Relating to the Execution of Affidavits, Verifications, and Other Legal Documents -
Lender Letter LL-2010-11
October 1, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Monday, October 4, 2010

Can't blame the homeowners!

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

In each of the first two meltdowns, many people believe that regulators failed to enforce existing regulations - even if some of those regulations were inadequate or dysfunctional. But this third meltdown has occurred for the most fundamental of all reasons: not complying with the execution of affidavits! This is basic legal process. What good are implementing statutes already on the books, if the entities subject to those laws do not comply with them?

The culprits? Lenders, and only the lenders, and nobody but the lenders.

By now most of you know that GMAC, JPMorgan Chase, and Bank of America have put tens of thousands of foreclosure processes on hold. When news first came out about this recently, many in the industry had no idea why this happened! Yet my conversations with several industry leaders indicate, sadly, that they were disappointed but not surprised. Disappointed - because this debacle further delays financial recovery and creates even more uncertainty; and, not surprised - because banks have made this kind of mess before, placing expediency over exacting regulatory compliance, and should have known better - given their own culpability in the financial and mortgage meltdowns.

As I write, the aforementioned 3 companies have suspended foreclosures in 23 states; Fannie Mae has issued a Lender Letter (LL-2010-11) that directs all of its servicers "to immediately undertake a review of their policies and procedures relating to the execution of affidavits, verifications, and other legal documents in connection with the default process;" the OCC has ordered its regulated banks to review foreclosure processes for flaws in their document management systems; and, Old Republic National Title Insurance, certainly one of the country's largest title companies, has advised that it would not insure title to GMAC and JPMorgan Chase foreclosures (thereby imperiling clear title). Rippling through the states, some AGs are now calling for a moratorium on all foreclosures in their states.

Plaintiffs' attorneys must be positively gleeful!

And a new term has crept into the vernacular: "robo-signing." Briefly put, this is a technique - if you want to call it that! - which a lender's servicer uses to approve foreclosure cases without personally reviewing the underlying foreclosure documents or without signing affidavits pursuant to required legal procedures. A lender seeking foreclosure must file a specified affidavit in many states' courts. And, of course, such affidavits attest to various facts about the subject foreclosures, such as a description of the lender's legal standing to foreclose. The affidavit is attested to by the bank's representative, who submits the affidavit in support of motions for summary judgment in states with judicial foreclosure processes. But "robo-signing" short cuts this procedure by having the individuals executing these affidavits on behalf of the servicer "sign" the documents en masse without inspecting the attested documents, without actually having the personal knowledge of information contained in the affidavits - and without determining that the affidavits were notarized in accordance with applicable requirements!

I suppose an argument can be made that this situation will eventually straighten out and most foreclosures will be completed in the fullness of time. This is a procedural matter that will require a legal solution. Most foreclosures are not going to be reversed, once this legal mess gets disentangled, although regulatory oversight may be considerably strengthened.

At this point, it seems that lenders did not willfully evade compliance. Taking short cuts - Maybe. We'll all find out soon enough the extent of legal culpability and any willful failure to comply with the law. But perception is a critical issue - especially when we are dealing with the heart wrenching condition of foreclosure.

One has the sense that yet another avoidable situation in our industry could really have been avoided.

At a time of lowered consumer confidence in the economy in general and the mortgage industry in particular, it is incumbent on all of us - the market participants - to police ourselves better and hold ourselves to the highest standards.

Let's not allow ourselves to be 'called out' again like this!

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So, What Do You Think?

I would welcome your comments and views.
Please feel free to email me at any time.


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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.