Monday, December 19, 2011

Whistleblowers and Bounty Hunters

Americans have often had an ambivalent view of whistleblowers. When we feel that the whistleblowing serves some righteous cause, the whistleblower's actions are worthy of a medal; but when the whistleblower's cause is considered to mask self-aggrandizement, then we often contend that some jail time might be a more suitable reward, whatever the cause. Still, one person's justification for such actions may be castigated by another person as an act of perfidy.
In a rather morally twisted way, recent law has combined the act of whistleblowing with the remuneration of bounty hunting, the latter being yet another concerning happenstance of American ambivalence.
Let's call this new ethical imperative the "Dope for Dough" compact.
In this article:
  • A Snitch In Time Saves Crime
  • If You See Something, Say Something
  • Welcome to the Office of the Whistleblower
  • Bounty Hunter
  • Tips, Complaints and Referrals
  • Anonymity More-or-Less
  • Preventing Retaliation More-or-Less
  • First Do No Harm
A Snitch In Time Saves Crime
Being a snitch is not exactly the kind of job position somebody must apply for, even in these days of high unemployment. It's not a career opportunity. A snitch doesn't want to be a snitch, hates snitching, and would rather not have to snitch at all. Being a snitch does not bestow a badge of honor! There are no annual conferences for snitchers. A snitch is not born a snitch; something has to happen to make a snitch snitch.
Often, the stakes for snitching are very high. Being a snitch means subjecting oneself to potential ostracism, being fired, not being hired, jail time, and even community time (yes, courts have held that "community service" may be a proxy for prison time). Snitchers know that whenever people pass them by, there will be fingers pointed at them and breathless whispers behind their backs about the supposed damage done by, or the great good achieved through, their snitching. Snitching has a wake all its own and the snitcher can never get out of it, whatsoever the tattletale tattled.
The list of snitch martyrdom is long and, depending on the results and society's comfort zone, contains patriots and traitors, saints and the damned, reformists and reactionaries, the sempiternal loyalists and the double-crossing turncoat. Even if the weaseling betrayer squeals the unvarnished truth, the very act of making manifest the heretofore hidden may bring with it many dangers impinging on the tipster's physical, let alone social, survival.
If You See Something, Say Something!
We constantly hear, "if you see something, say something." Implied in that statement is the moral judgment that we do know when something is wrong and when something is right, and, knowing that difference, when we know something wrong is happening, we should share such knowledge with somebody else. The phrase does not say, "if you see something, say something, and if you do we'll pay you for the information." It does not say, "if you see something, say something, but if you do you will put yourself and perhaps all of your loved ones at personal risk." And it does not say, "if you see something, say something, but if you do you may go to jail or you may not." Finally, it does not say, "if you see something, say something, though if you do we will ignore what you have to say and nobody will ever know something wrong happened."
The instinct for self-preservation is strong. Especially strong in a stoolie! This is obviously why a recent study shows that 78 percent of Americans said they would report something wrong only if they could be anonymous informants, be assured of evading retaliation, and nevertheless get a reward for information, whether such information was pilfered, pinched, purloined, or professed.
Pity the poor snitch! So misunderstood, often the butt of ridicule, and only occasionally appreciated for the grumbling sacrifice of life and liberty. But now a new era of gratitude, tribute, and prestige has begun for the deep throated canary that yearns to sing.
Welcome to the Office of the Whistleblower
Henceforth, we will need to replace the term snitch with a new title, the "whistleblower," and appoint an overseer to protect the whistleblower's rights, prevent retaliation, and offer remuneration for blowing the whistle and assisting with any investigation or judicial or administrative action that follows from the information thereby obtained.
Section 924(d) of the Dodd-Frank Act (Dodd-Frank) directs the Security and Exchange Commission (Commission) to establish a separate office within the Commission to administer and to enforce the Section 21F provisions of the Securities Exchange Act of 1934 (Exchange Act). On February 18, 2011, the Commission appointed an overseer or Chief, Sean X. McKessy, to head the newly-created Office of the Whistleblower in the Division of Enforcement (Whistleblower's Office). Chief McKessy is looking for a Deputy Chief, and there are several attorneys among the staff.
The ostensible purpose of the Whistleblower's Office is to provide assistance to a whistleblower who knows of possible securities law violations, such as identifying possible fraud and other violations, much earlier than might otherwise have been possible. The result, presumably, will be to minimize the harm to investors, preserve confidence in capital markets, and hold accountable those responsible for unlawful conduct.
Bounty Hunter
For remunerating the whistleblower, the Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with "high-quality original information" that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the monetary sanctions collected (which I will term the Bounty Fee).
This Bounty Fee of 10% to 30% is particularly robust, compared to the usual 10% (or less) of bail collected these days by bounty hunters. Of course, the whistleblower's Bounty Fee is not quite the same as the fee paid to a bounty hunter for capturing a fugitive outlaw. Bounty hunters are usually employed by bail bondsmen. But there is, shall we say, a resemblance.

Friday, December 16, 2011

OCC Issues Foreclosure Guidance - Part II

In yesterday's newsletter, Part I of this two-part series, I outlined the role of the bank as owner and servicer of foreclosed property, as described in the recent guidance issued by the Office of the Comptroller of the Currency (OCC) with respect to a bank's obligations and risks related to foreclosed property. (See OCC 2011-49)
A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.
Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.
In today's newsletter, Part II or this two-part series, I outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.
For detailed information and guidance, please consult with us or a regulatory compliance professional.
In this Newsletter
Safety and Soundness
Bank as Trustee of Securitization Trust
Releasing a Lien Rather Than Foreclosing

Safety and Soundness
As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.
Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.
Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.
Bank as Trustee of Securitization Trust
The securitization trustee is primarily responsible for holding a lien on the trust assets for the benefit of the investors who purchase securities issued pursuant to the securitization and administering the trust in conformance with requisite agreements.
The trustee's duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex administrative functions. Such functions usually include ensuring the timely receipt of payments from the servicer, calculating payments, remitting payments to the investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.
As permitted by the PSA, the trustee should work with the servicer to ensure the performance of its responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any powers or duties with respect to the foreclosure or with the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.
Nevertheless, to the extent a servicer undertakes foreclosure actions in the trustee's name as the secured party, a bank trustee should be aware of potential reputation and litigation risks. (See my comments in Part I, relating to reputation risk.)
Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee would also be exposed to credit risk.
Releasing a Lien Rather Than Foreclosing
At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property.
This decision is often based on financial considerations when the bank or servicer and/or investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community.
Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property.
If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.
Law Library Image
Office of the Comptroller of the Currency (OCC)
Foreclosed Properties
Guidance on Potential Issues
With Foreclosed Residential Propertie
OCC 2011-49
December 14, 2011
* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group

Thursday, December 15, 2011

OCC Issues Foreclosure Guidance - Part I

The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. Issued on December 14, 2011, this guidance highlights legal, safety and soundness, and community impact considerations. It primarily focuses on residential foreclosed properties. (See OCC 2011-49)
A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.
Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.
Furthermore, understanding the requirements imposed by Fannie Mae and Freddie Mac (GSEs) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly important.
I will analyze the OCC's guidance as it relates to the aforementioned three roles of the bank in foreclosing on residential properties.
This is a two-part newsletter. I will offer a brief overview of the OCC 2011-49 bulletin pertaining to guidance on potential issues with foreclosed residential properties. Today, in this first part, I will outline the role of the bank as owner and servicer of foreclosed property. Tomorrow, in the second part, I will outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.
For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Owner of Foreclosed Property
Bank as Servicer of Foreclosed Property

Safety and Soundness
As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.
Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.
Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.
Bank as Owner of Foreclosed Property
Obligations and Actions
  • In acquiring title to foreclosed properties, banks assume the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties.
    • Banks should communicate with localities, including homeowner associations, about specific requirements with respect to foreclosed residential properties (i.e., localities may have requirements about certain aspects of upkeep, such as lawn mowing, property maintenance, and security, et cetera).
    • In the absence of these actions, banks should be aware of potential nuisance actions or the exercise of local receivership powers to seize properties.
  • For FHA-insured mortgages, the bank must ensure compliance with property and preservation guidance issued by HUD to preserve the insurance claim and obtain reimbursements for allowable expenses.
  • Following foreclosure, the bank must record its ownership interest in local land records.
  • Banks must comply with the other real estate owned (OREO) appraisal and accounting requirements.
  • Banks should maintain appropriate insurance on the property.
  • Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Banks should be aware of and comply with such requirements.
  • The Protecting Tenants at Foreclosure Act of 2009 (PTFA) provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.
    • When a bank takes title to a house after foreclosure, it must honor any existing rental agreement with a bona fide tenant and must provide 90 days' notice to the tenant prior to eviction whether or not the tenant has a rental agreement.
    • State laws may impose additional requirements that are not preempted by the PTFA.
    • Additional potential requirements with respect to rental properties include:
      • reviewing the lease to determine if the property can be shown to prospective purchasers; and
      • returning any security deposit upon termination of the rental agreement.

Friday, December 9, 2011

OCC and OTS: Policy Integration

On December 8, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin that outlines the process which the OCC intends to follow to fully integrate the Office of Thrift Supervision (OTS) policy guidance documents into a common set of supervisory policies that applies to both national banks and federal savings associations.
We have been monitoring the integration from its inception and informing our OCC and OTS clients accordingly. [For instance, see our newsletter OCC and OTS Synchronizing (6/8/11)]
If you are one of our OCC or OTS clients, please contact us for further information and discussion.
In this Newsletter
Process: Phase I
Process: Phase II

Dodd-Frank required that all functions of OTS relating to federal savings associations, and the rulemaking authority of the OTS relating to all federal savings associations, were transferred to the OCC on July 21, 2011. Consequently, the OCC assumed the responsibility for the ongoing supervision, examination, and regulation of federal savings associations.
Further, Dodd-Frank continues all OTS orders, resolutions, determinations, agreements, regulations, interpretive rules, other interpretations, guidelines, procedures, and other advisory materials in effect the day before the transfer date, while also permitting the OCC to administer these documents with respect to federal savings associations, until the documents are modified, terminated, set aside, or superseded by the OCC, by a court, or by operation of law.
The OCC issued an interim final rule on July 21, 2011, with request for comments that republished, with nomenclature and other technical changes, the OTS regulations formerly found in chapter V of title 12 of the Code of Federal Regulations. (These republished regulations became effective on July 21, 2011, and will be codified in chapter I at parts 100 through 197.1.)
Now, the OCC has announced in bulletin OCC 2011-47 that it is embarking on a comprehensive rulemaking project to integrate, when possible, these former OTS rules with OCC rules applicable to national banks. Concurrently, the OCC is integrating more than 1,000 supervisory policies of the former OTS into the OCC policy framework.
The OCC expects to produce a consistent, supervisory approach and integrated policy platform for national banks and federal savings associations, while recognizing differences anchored in statute.
The OCC will group, to the extent possible, rescission notifications and other announcements related to the integration of OTS guidance, according to a two-phased process.
Process: Phase I
This phase involves rescinding a significant number of documents. The documents rescinded in this phase will include OTS documents that:
  • transmitted or summarized rules, interagency guidance, or Examination Handbook sections (not the conveyed guidance or rule itself);
  • are no longer useful because of the elimination of the OTS or the passage of time; and/or
  • duplicate existing OCC guidance.
Additionally, the OCC will rescind outdated guidance issued to national banks. Forthcoming OCC bulletins will announce these rescissions.
NOTE: In order to minimize confusion, documents will be watermarked as rescinded on the OCC Web site or former OTS Web site, as applicable.
Process: Phase II
This phase focuses on guidance that requires further review, substantive revision, or combination or is considered unique to federal savings associations.
Guidance that is linked to regulatory or statutory requirements will be coordinated closely with the concurrent integration of OCC and former OTS regulations. In many cases, guidance cannot be revised or combined until the revisions to the rules on which the guidance is based have been finalized.
Prioritization of the work will be influenced by feedback from the OCC's supervision staff as it encounters policy differences in the day-to-day supervision of national banks and federal savings associations.
Former OTS policies and guidance remain applicable to federal savings associations until rescinded, superseded, or revised. In some cases, the OCC may amend an OTS rule, policy, or practice that is cross-referenced in more than one document or affects only a portion of a document.
If overlapping guidance exists, any guidance or regulation issued by the OCC after July 21, 2011, that specifically includes federal savings associations in its scope, will prevail. If a document has not been rescinded, but a portion of the content no longer applies, the superseded portion will be grayed out electronically.
Law Library Image
Office of the Comptroller of the Currency
OCC 2011-47 (Bulletin)
Subject: OTS Integration
December 8, 2011

Tuesday, December 6, 2011

Defining “Homeless”

Yesterday, HUD reasserted its definition of the term "homeless." It also established the regulatory final rule for the definition "developmental disability'' and the definition and record keeping requirements for a "homeless individual with a disability.''
Many people do not come into face-to-face contact with this population on a regular basis. Indeed, except as we might encounter such individuals through charitable venues, outreach programs, and so-called "faith-based" initiatives, most of us have derived our knowledge about the situation faced by the disabled and the homeless from infrequent news broadcasts as well as from media Spin Meisters and politicians.
In the spirit of this holiday season, a time of charity and compassion, let's explore together the various ways that HUD has sought to provide a definition for the often disenfranchised and weakest amongst us. I think you will find it enlightening.
On May 20, 2009, an important congressional act was enacted into law. It is called the Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009, aptly named HEARTH. This law consolidated three separate homeless assistance programs administered by HUD under the McKinney-Vento Homeless Assistance Act into a single grant program, revised the Emergency Shelter Grants program (renaming it the Emergency Solutions Grants program), and created the Rural Housing Stability program (which replaced the Rural Homelessness Grant program). HEARTH also codified in law the Continuum of Care planning process, long a part of HUD's application process to assist homeless persons by providing greater coordination in responding to their needs.
Yesterday, HUD issued its final rule to integrate the regulation for the definition of "homeless," and the corresponding record keeping requirements, for the Shelter Plus Care program, and the Supportive Housing Program. And it established the regulation for the definition  of "developmental disability" as well as the definition and record keeping requirements for the "homeless individual with a disability" for the Shelter Plus Care program and the Supportive Housing Program.
What does "homeless" mean?
According to HUD, there are currently four categories of homelessness:
(1) Individuals and families who lack a fixed, regular, and adequate nighttime residence. This includes a "subset" subset for an individual who resided in an emergency shelter or a place not meant for human habitation and who is exiting an institution where he or she temporarily resided.
(2) Individuals and families who will imminently lose their primary nighttime residence.
(3) Unaccompanied youth and families with children and youth who are defined as homeless under other federal statutes who do not otherwise qualify as homeless as described herein.
(4) Individuals and families who are fleeing, or are attempting to flee, domestic violence, dating violence, sexual assault, stalking, or other dangerous or life-threatening conditions that relate to violence against the individual or a family member.
Sheltering Children and Youth
Some terms above require an explanation. For instance HUD considers a "shelter" to mean "emergency shelter," but not "transitional housing." And "youth" is defined as less than 25 years of age. Traditionally, HUD has defined children as less than 18 years of age and adults as 18 years of age and above. But by establishing the term "youth" to mean less than 25 years of age, HUD hopes to more fully address the special needs of transition-aged youth, including youth exiting foster care systems to become stable in permanent housing.
I would also mention that other federal statutes provide definitions of homelessness under which unaccompanied youth and families with children and youth could alternatively qualify as homeless under category 3 of the homeless definition. These statutes are the Runaway and Homeless Youth Act (42 U.S.C. 5701 et seq.), the Head Start Act (42 U.S.C. 9831 et seq.), subtitle N of the Violence Against Women Act of 1994 (42 U.S.C. 14043e et seq.) (VAWA), section 330 of the Public Health Service Act (42 U.S.C. 254b), the Food and Nutrition Act of 2008 (7 U.S.C. 2011 et seq.), section 17 of the Child Nutrition Act of 1966 (42 U.S.C. 1786), and subtitle B of title VII of the McKinney-Vento Act (42 U.S.C. 11431 et seq.).
As best as I can tell, this list represents the salient statutes with definitions under which an unaccompanied youth or a family with children and youth can qualify as homeless under this category; that is, although there may be other federal statutes with definitions of "homeless," the statutes I've listed include those that encompass children and youth.
A Fifth Category?
A public comment was submitted for HUD to consider in its drafting of the final rule. This comment recommended a fifth category of "homeless," one that frankly I also can see as having a category of its own.
Here's the proposed fifth category:
Persons with disabilities who (1) have resided with a relative, but by virtue of age or other circumstances of that relative is unable to continue to provide shelter to the individual with a disability; (2) reside in an institution or facility not meant for permanent human habitation such as a hospital, rehabilitation facility, nursing or board and care home, and such individual has no home to return to where that person could live independently and safely; and (3) are in situations such as (1) and (2) who no longer choose to live in that circumstance and who wish to live independently.
HUD's response to this proposed fifth category was that it recognized there are "vulnerable populations that continue to be excluded from the definition of homeless," however, HUD determined to stay close to the statutory guidelines established in section 103 of the McKinney-Vento Act as HUD further clarifies the definition. That means, in brief, that the definition provided in the McKinney-Vento Act for "at risk of homelessness" reaches to the Emergency Solutions Grants program, the Rural Housing Stability program, and the Continuum of Care program. So, re-setting the interpretation will require proposed and interim program rules.
Proving Disability
HUD does look for written documentation of disability status. Information on disability is obtained in the course of each individual's assessment once that individual is admitted to a project, unless having a disability is an eligibility requirement for entry into the project.
And, where disability is an eligibility requirement, an intake staff-recorded observation of disability may be used to document disability status as long as the disability is confirmed by the aforementioned evidence within 45 days of the application for assistance.
The procedural criteria for determining disability are:
(1) Written verification from a professional who is licensed by the state to diagnose and treat that condition, that the disability is expected to be long-continuing or of indefinite duration and that the disability substantially impedes the individual's ability to live independently; and,
(2) Written verification from the Social Security Administration, or the receipt of a disability check (i.e., Social Security Disability Insurance check or Veteran Disability Compensation).
What does "lacking resources" mean?
It is worth considering what HUD views as a condition in which an individual may claim to be "lacking resources." Often, the ideologues and demagogues of the world assert that this condition is contrived, a result of an unwillingness to work, laziness, lack of ambition, squandered opportunities, and willfully failing to contribute to their own and society's betterment.
I think the question to ask ourselves, when determining this condition, is "Who would we turn to if we were down and out?" For many people, there simply are no support networks available, and that is a condition which has nothing to do with rejecting a work ethic or turning away from contributing positively to society.
Historically, HUD's view has not specifically defined in regulations or notices the concept of "lacks the resources or support networks" for the purposes of documenting eligibility for HUD's homeless and homelessness prevention programs. HUD's view has been that the resources and support networks required to demonstrate this criteria can vary drastically from person to person and community to community. This is a valid view, given that HUD could never capture all of the various possibilities.
The final rule, therefore, does not provide a definition for "resources or support network." However, it does provide examples of support networks when determining whether an individual or family lacks the resources or support networks to obtain other permanent housing.
These examples, which include friends, family, and faith-based or other social networks, are not meant to be an all-inclusive list, but rather they are designed to illustrate the kinds of support networks that people must first turn to, if they are able to, before drawing on the scarce resources targeted to homeless people. Putting this differently, a housing situation that is unsafe due to violence is obviously not considered a "resource or support network," and such a condition does not disqualify an individual or family under the applicable category based on such a situation.
So HUD has clarified that family, friends, and faith-based or other social networks are examples of "resources or support networks."
"We" or "Me"
The challenge of homelessness, especially at a time when millions of families have lost their homes and jobs, is not someone else's problem. The effects of homelessness, as we all know, reach horizontally out to virtually all areas of economic activity, and vertically through generation after generation.
The least amongst us affects the strongest. I hope we will continue to address the needs of the homeless, especially because we are a great and caring nation, so that the children and youth that suffer as a result of homelessness will join us all in the task of building a stable and prosperous society.
Consider Hillel the Elder's piercing questions:
If I am not for myself, who will be for me?
If I am only for myself, what am I?
If not now, when?
In this season of joy and charity, maybe there will be a chance for us to become "first responders" to the homeless and the disabled.
Is our country a "We" or a "Me" nation?
Since 1776 we have had the answer: E Pluribus Unum. Out of Many, One.
Further Readings
Homeless Emergency Assistance and Rapid Transition to Housing: Defining "Homeless"
Final Rule
Department of Housing and Urban Development
Federal Register - 76/233
December 5, 2011
* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.

Wednesday, November 30, 2011

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.
The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.
Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.
In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.
For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   
The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.
Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Interim Report
The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.
The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.
The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.
A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.
Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.
The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 
The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.
Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.
For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.
Correcting Foreclosure Deficiencies
Independent Foreclosure Review
As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.
Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.
As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.
Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.
The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 
During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.
Professional Assistance
Contact Us-2
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Interim Status Report: Foreclosure-Related Consent Orders
November 2011
Interagency Review of Foreclosure Policies and Practices
April 2011

Monday, November 28, 2011

Loan Originator Compensation–The Regulatory Examination

The easy part is over. Now the real fun begins.
Since April 6, 2011, the mortgage industry has been required to implement the new loan originator compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.[1] The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits “steering” consumers to loans to receive greater compensation.
I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.[2] Indeed, I have even published a compendium of analysis, called the FAQs Outline – Loan Originator Compensation, which, as of this writing, consists of over 400 FAQs and reaches to over 130 pages. [3] These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.
The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) [4] enacted Title XIV into law, which amended the Truth in Lending Act (TILA) to establish certain mortgage loan origination standards; then to August 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through September 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on January 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.” [5] After that, the FRB offered some conference calls, a webinar – which cleared up some confusion, while causing still other confusion – and occasional updates of the oral, rather than the written, official variety. [6]
When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.
As we all know, generally there is no regulation issued – whether the statutes are at the federal or state level – that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on October 6, 2011 - exactly six months to the day when the Rule became effective - the first examination guidelines for loan originator compensation were promulgated. [7]
In the "State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule," hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The Multi-State Mortgage Committee (MMC) is a ten-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). [8]
Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z - Truth in Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of nondepository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.
When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in the midst of actual reviews of loan originator compensation compliance that we were then conducting for our clients.
Expect the Unexpected
As I have said many times, preparation is protection. Don’t wait for the regulator’s Document Request letter to implement any regulatory requirement. If you wait, by then it’s often too late. Remember, most examinations are look-backs, reaching to the previous examination, or a stated timeframe previous to the current examination. Most examiners have a “No Tolerance” view of firms that cannot provide supporting documents and information in a timely manner. The “record speaks for itself” is the inflexible standard! Our audit and due diligence reviews are the property of our client, and as fully confidential as if the client conducted its own review, with its internal resources – which, of course, is certainly a viable option. So, there really is no excuse for not being prepared for a regulatory examination for loan originator compensation or any other examination.
In my view, undertaking preparedness action for a loan originator compensation examination should consist of the following basics. [9] My remarks include some of my firm’s audit and due diligence practices as well as certain features of the recently issued Examiner Guidelines.
Preparation is Protection
  • It is critical to set forth the bounds of the review. Indicate a research range that utilizes an audit sequence which, in part, incorporates federal Interagency procedures and guidelines implemented prior to the effective date of the Rule, as well as federal Interagency procedures and guidelines effective after the date of the Rule, as promulgated by the Multi-State Mortgage Committee (MMC) examiner guidelines, any federal agency, and, when issued, state government agencies.
  • A significant portion of the review should be devoted to (1) completing the Institution Information Request and Institution Questionnaire provided in the Examiner Guidelines, (2) assembling items required in a Document Request, (3) providing information asked for in an Audit Checklist (whether specifically designed or Interagency), and (4) including independent review criteria through documentation review, on-site transaction testing (if required), off-site sampling of transaction documents, and interviews of institution staff or other parties.

Wednesday, November 16, 2011

The Empire Strikes Back: HUD's Fair Lending Standards

On November 16, 2011, the Department of Housing and Urban Development (HUD) issued a proposal, entitled Implementation of the Fair Housing Act's Discriminatory Effects Standard. Comments from the public are due by January 17, 2012.

This announcement is much more involved than it seems, for HUD, to which Congress gave the authority and responsibility for administering the Fair Housing Act and the power to make rules implementing the Act. In HUD's proposal, a demonstration that a housing practice is supported by a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.

The question of "disparate impact" (euphemistically linked to the "effects test") has deep roots in previous and on-going litigation, rising now to judicial review before the United States Supreme Court.

So, what's at stake? Let's take a closer look.
HUD's Preemptive Attack
It is rare, indeed, when a federal agency, such as HUD, seems to be issuing its position on a matter that is currently before the U. S. Supreme Court. But that is what appears to be happening. The case is Gallagher v. Magner, and on November 7, 2011, the Supremes granted a petition to review the Eighth Circuit's decision reversing summary judgment in the defendants' favor. Yet HUD is not filing an amicus curiae, the normative response expected by a federal agency, it is actually publishing its standards now - after the Supreme Court has decided to review the case.

To say HUD's tactic is unusual, is a considerable understatement!
Purpose of HUD's Proposal
So what is the basis of HUD's "preemptive strike," if I might be at liberty to use that term?

Here is HUD's stated purpose for its issuance:
"Although there has been some variation in the application of the discriminatory effects standard, neither HUD nor any Federal court has ever determined that liability under the Act requires a finding of discriminatory intent. The purpose of this proposed rule, therefore, is to establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act."

Now to make sense of that statement of purpose, we'll need to give some consideration to Gallagher v. Magner.
Gallagher v. Magner
Gallagher v. Magner (hereinafter Gallagher), is a claim by owners of rental properties against the City of St. Paul's alleged "practice" of "aggressively enforcing" its Housing Code.

The case arose when a group of landlords claimed that officials in the City of St. Paul, Minnesota, targeted rental properties for housing code violations, with a disparate impact on African-American tenants. Despite the lack of evidence showing intent, the Eighth Circuit Court of Appeals upheld a finding of Fair Housing Act violations.
The Route to the Supreme Court
Phase 1:
The district court granted the defendants' motion for summary judgment.
Phase 2:
The Eighth Circuit reversed with respect to the plaintiffs' "disparate impact" claim under the Fair Housing Act (FHA), 42 U.S.C. § 3604(a)-(b). In so holding, the Eighth Circuit applied a three prong "burden-shifting" approach requiring: (a) a prima facie case of disparate impact on protected classes; (b) a showing by the defendant that the challenged policy or practice has a "manifest relationship" to a legitimate, non-discriminatory policy objective; and (c) a showing by the plaintiffs that there exists "a viable alternative means" to meet the legitimate objective without discriminatory effects. [619 F.3d at 833-34]

The Eighth Circuit described the "policy or practice" at issue as "the City's aggressive Housing Code Enforcement practices," including allegations that "the City issued false Housing Code violations and punished property owners without prior notification," invitations to "cooperate" with the enforcement authority, or adequate time to remedy Housing Code violations." [Idem 834]

The court held that the plaintiffs presented a prima facie case of disparate impact by presenting evidence that (1) the city had a shortage of affordable housing; (2) racial minorities were disproportionately represented in the pool of those requiring affordable housing; (3) the city's "aggressive enforcement" of its code made ownership of rental properties more expensive; and (4) these increased costs to owners resulted in less affordable housing in the city. [Idem 834-35]

The City of St. Paul's position, when seeking certiorari from the Supreme Court, stated that increased costs relating to enforcement of a housing code would always have a prima facie disparate impact in cities where there is insufficiently low income housing and, of course, minorities are disproportionately in need of such housing.

So, the court found that there was a prima facie case of disparate impact, and the City of St. Paul had demonstrated that the challenged "aggressive enforcement" of its Housing Code promoted legitimate objectives; however, the court also held that the plaintiffs had produced evidence of a viable alternative without discriminatory effect.

Monday, November 14, 2011

New Mortgage Servicing Practices

On August 10, 2010, the New York State Banking Department issued new regulations that address the business practices of mortgage loan servicers and establish additional consumer protections for homeowners.

Part 419 of the Superintendent's Regulations, which went into effect on October 1, 2010, were a follow-up to the adoption of Part 418 in July 2009, which established standards and procedures for the registration of mortgage loan servicers in New York. The regulations implement certain provisions of the Mortgage Lending Reform Law enacted in 2008 to address the foreclosure crisis and establish greater consumer protections for subprime and high-cost home loans.

Recently, Benjamin M. Lawsky, the Superintendent of Financial Services of New York's Department of Financial Services and Banking Department, announced that the Department had entered into two agreements with certain servicers to implement new servicing practices. The Department considers these new servicing requirements to be landmark changes, and they form the basis of the new Mortgage Servicing Practices.

In the first instance, Superintendent Lawsky announced on September 1, 2011 that Goldman Sachs Bank, Ocwen Financial Corp, and Litton Loan Servicing LP agreed to adhere to the new Mortgage Servicing Practices. The agreement, entitled "Agreement on Mortgage Servicing Practices," was required by the Department as a condition to allowing Ocwen's acquisition of Litton, the Goldman Sachs mortgage servicing subsidiary. With the Litton acquisition, Ocwen's mortgage servicing entity, Ocwen Loan Servicing, LLC becomes the 12th largest servicer in the nation. The servicer has 60 days from the date of the acquisition to implement the provisions and requirements of the Mortgage Servicing Practices.

In the second instance, Superintendent Lawsky announced on November 10, 2011 that Morgan Stanley and its mortgage servicer Saxon, American Home Mortgage Servicing, and Vericrest Financial had agreed to the new Mortgage Servicing Practices.

The changes are substantial and clearly the Department is committed to enforcing them. Maybe you would suggest other changes. In any event, these servicing requirements will benefit both the consumer and the mortgage industry.

It is likely that these new Mortgage Servicing Practices will become a model in other states.

The following is a brief review of these new practices.
The Department has consumer protection concerns relating to practices "highlighted in the media" that have been prevalent in the mortgage servicing industry generally, including but not limited to, (1) the practice of "Robo-signing," (2) referring to affidavits in foreclosure proceedings that falsely attest that the signer has personal knowledge of the facts presented therein and/or were not notarized in accordance with state law; (3) weak internal controls and oversight that may have compromised the accuracy of foreclosure documents; (4) unfair and improper practices in connection with loss mitigation, including improper denials of loan modifications; and, (5) imposition of improper fees by servicers, among others.
-Document Execution and Accuracy of Documentation
-Ownership of Note, Foreclosures
-Quality Assurance and Audits
-Oversight of Third Party Vendors
-Notices, Single Point of Contact and Modifications for Transferred Servicing Files
-Borrower Communication
-Independent Evaluation of Loan Modification Denials
-Restrictions on Dual Tracking
-Application of Payments
-Servicing Fees
-Force-Placed Insurance
-Compliance with Federal and State Law
  • "Robo-signing," where servicer staff signed affidavits stating they reviewed loan documents when they had not actually done so.
  • Weak internal controls and oversight that compromise the accuracy of foreclosure documents.
  • Referring borrowers to foreclosure at the same time as those borrowers are attempting to obtain modifications of their mortgages or other loss mitigation.
  • Improper denials of loan modifications.
  • Failing to provide borrowers with access to a single customer service representative, resulting in delays or failure of the loss mitigation process.
  • Imposition of improper fees by servicers.
1) End Robo-signing and impose staffing and training requirements that will prevent Robo-signing.
2) Require servicers to withdraw any pending foreclosure actions in which filed affidavits were Robo-signed or otherwise not accurate.
3) End "dual tracking", for instance referring a borrower to foreclosure while the borrower is pursuing loan modification or loss mitigation, and prohibit foreclosures from advancing while denial of a borrower's loan modification is under an independent review, which is also required by the agreements.
4) Provide a dedicated single point of contact representative for all borrowers seeking loss mitigation or in foreclosure so borrowers are able to speak to the same person who knows their file every time they call.
5) Require servicers to ensure that any force-placed insurance be reasonably priced in relation to claims incurred, and prohibit force-placing insurance with an affiliated insurer.
6) Impose more rigorous pleading requirements in foreclosure actions to ensure that only parties and entities possessing the legal right to foreclose can sue borrowers.
7) For borrowers found to have been wrongfully foreclosed, require servicers to ensure that their equity in the property is returned, or, if the property was sold, compensate the borrower.
8) Impose new standards on servicers for application of borrowers' mortgage payments to prevent layering of late fees and other servicer fees and use of suspense accounts in ways that compounded borrower delinquencies and defaults.
9) Require servicers to strengthen oversight of foreclosure counsel and other third party vendors, and impose new obligations on servicers to conduct regular reviews of foreclosure documents prepared by counsel and to terminate foreclosure attorneys whose document practices are problematic or who are sanctioned by a court.

Tuesday, November 8, 2011

CFPB Issues “Early Warning Notice” Procedures

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.
This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.
The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.
The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.
The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.
Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.
In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.
The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.
Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.
The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.
The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.
The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.
Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.
Submissions may be discoverable by third parties in accordance with applicable law.
The written statement must:
-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.
The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.
If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.
Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.
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Consumer Financial Protection Bureau
Early Warning Notice
Bulletin 2011-04
November 7, 2011
Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011

Monday, October 31, 2011

Learning to Play the HARP

A week ago the Obama Administration announced revisions to the Home Affordable Refinance Program (HARP).
Better late than never! Actually, coming three years belatedly, a change to HARP may bring some relief to homeowners and the economy.
But is it a viable solution?
As you may know, I have written extensively about the failure of both the Home Affordable Modification Program (HAMP) and HARP.
Is the new and improved version of the two-year old HARP a quick fix or yet another boondoggle in the making?
Real Estate and Jobs
Last week's announcement stems from the revisions developed by the Federal Housing Finance Agency (FHFA), the GSE's overseer, with feedback from lenders, mortgage insurers and other mortgage industry participants. In a sense the revisions are a patent admission that the economy simply will not regain its strength without a robust real estate market; or, put another way, jobs will not return unless a strengthened real estate market returns.
The linkage of real estate to jobs has roots in the MBS World, a murky realm way below the revisions contemplated by the Administration and the homeowners' needs.
The Federal Reserve has a central place in the MBS World, since it is permitted to participate in the agency MBS financial instruments, and not permitted to participate in buying equity, real estate, or corporate debt.
Remember: MBS yields are the primary trigger in the formation of mortgage rates. The safest financial instruments, of course, are Treasuries; so, relative to Treasuries, the margin or spread between mortgage rates and yields on 10-year Treasuries has continued to move upward. When the Fed makes its MBS purchase, it thereby reduces mortgage interest rates, compressing those relative margins. Operationally speaking, then, a so-called target for mortgage rates is set in this manner.
Ostensibly, lower mortgage rates lead to refinances and the concomitant diminution of financial pressure on homeowners who have been trapped in the housing crisis with underwater mortgages, because such reduction both lowers the cost of debt service through refinance and supports purchases of houses, which creates demand - and thus an increase in pricing - for housing.
What Went Wrong?
To date, a tiny percentage of seemingly eligible borrowers have refinanced through HARP.
In my estimation, these are the factors that led to the HARP failure:
-Resistance: the refusal by some second lienholders to subordinate themselves to the first mortgagee.
-Fear: the GSEs might "put back" the new loans if they subsequently move into default, which causes constrained underwriting.
-Restrictions: the original MI being applied to the new loan, particularly if the new loan has a different servicer.
-Reluctance: homeowners afraid of being rejected, lack of public awareness, and insufficient news about program information.
Also, it is common knowledge that lenders have rejected all but the most creditworthy borrowers from taking advantage of HARP, out of reluctance to take on the risk of existing representations and warranties; however, this may yet find a solution (see below).
Plans and Suggestions
In this latest version of HARP, there is an extension of the program's mandates through December 2013. As a quick overview, I think it's fair to describe HARP as a temporary program by the GSEs, the primary goal of which is to permit borrowers whose loans are currently guaranteed by the GSEs to be refinanced, despite the fact that these loans are significantly higher than 80LTV.
There are some important revisions, perhaps the most important being the removal of the 125LTV ceiling. In addition, in many cases a new appraisal is eliminated, fees to borrowers are lowered, and the GSEs are waiving some lender representations and warranties (about which we will know more by November 15, 2011, when the program guidelines are issued).
I think the revisions to representations and warranties are needed and justified, inasmuch as all loans eligible under HARP have been seasoned for more than three years, and defects in a loan usually show up in the first few years of the loan. So, the risk - and the implications for representations and warranties - is certainly much lower at this point.
As to homeowners' reluctance and lack of information, although the HARP revision does not require it, I think the GSEs should communicate with potentially eligible borrowers and let them know that their loans are eligible under HARP at current mortgage rates.
With respect to the resistance of second lienholders, many studies suggest that second liens are no longer a major barrier to refinancing. It is very important that second lienholders participate in the program, because refinancing the first lien ameliorates the condition of the second lien, due to the fact that it frees up funds that can be used for second lien servicing.
The MI issue is a thorny one. The fact is, notwithstanding the foregoing, borrowers with MI will have fewer options than others to refinance. It remains to be seen how the proposal to waive aspects of the representations and warranties will incentivize servicers to resolve the MI debacle.
A Macroeconomic Solution
So, can revamping HARP bring new jobs and stabilize the real estate market?
One study I have read, a CBO research paper, estimates that a revised HARP, structured along the lines I've outlined above, would (1) result in $428 billion additional refinancings with annual savings to households of $7.4 billion, (2) would have a small positive effect on the GSEs' net worth, and (3) would have a small net cost to the government of less than $1 billion (which, in any event, is subsumed by the Fed's prepaid MBS portfolio).
The overall effect is to create a stimulus, since HARP beneficiaries will have higher marginal means to create demand, that is, their consumption will more than offset the opposing demand from existing MBS investors (i.e., financial institutions). Based on the studies I have read, if HARP increased GDP by as little as $1 billion per year for two or three years, the additional tax revenues would significantly exceed the costs. So, the macroeconomic effect would be net positive and stimulative.
Finally, if mortgage rates were sustained by the 2% to 2.5% range that has been a trending indicator, when combined with the HARP revisions, there would be a very substantial boost of mortgage loan originations, perhaps enough of a boost to a sizeable part of the GSE portfolio. Such an impetus would mean a re-set of trillions of dollars in asset value, and a yearly reduction in household interest expenses into the many billions.
The Fed's Role
As I see it, the Fed can weigh in forcefully in supporting the HARP revisions.
For instance, if the Fed purchased as much as $2 trillion of new MBS, then existing MBS holders would be displaced into investing that $2 trillion elsewhere. Hence, such re-investment would lead to an increase in stock prices, reduction in debenture yields, increase in real estate values, and higher foreign currency values.
A recent study, conducted by the San Francisco Fed, clearly shows that Fed purchases upward of 2$ trillion would increase GDP by more than 2% in two years and create 3 million new jobs. If the HARP refinance revisions are factored in, the overall stimulative effect would be much larger, perhaps as high as creating 4 million new jobs.
Moving forward robustly with the HARP revisions would surely lead us to conclude that the new and improved version, though coming about belatedly, is not too little, too late.
What do you think?
Please feel free to comment!

Tuesday, October 18, 2011

FRB Issues Flood Insurance FAQs and Proposed Revisions

The federal agencies that supervise banks, thrifts, and credit unions, and the Farm Credit System, on October 14, 2011 announced that it published guidance that updates the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009 (see 74 FR 35914-35947).
On October 17, 2011, the Federal Register published the guidance concerning the Loans in Areas Having Special Flood Hazards, Interagency Questions and Answers Regarding Flood Insurance.
The federal agencies participating in this guidance are the Office of the Comptroller of the Currency, Treasury (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA), (collectively, the Agencies).
The guidance finalizes two questions and answers that had been previously proposed. The first relates to insurable value. The second relates to force placement of flood insurance. The Agencies withdrew another question regarding insurable value.
The two final questions and answers supplement the Interagency Questions and Answers Regarding Flood Insurance (Interagency Questions and Answers), which were published on July 21, 2009 (74 FR 35914).
  • Effective Date - Final questions and answers: October 17, 2011.
  • Effective Date for Comments: December 1, 2011.
It is the intention of the Agencies that, after public comment has been received and considered and the guidance has been adopted in final form, the Agencies will issue a final update to the 2009 Interagency Questions and Answers Regarding Flood Insurance. The final update will continue to supplement other guidance or interpretations issued by the Agencies and the Federal Emergency Management Agency.
The Agencies request comment on three additional proposed updates to questions and answers relating to force placement of flood insurance. Two answers have been significantly and substantively changed. The third change, regarding force placement of flood insurance, revises a previously finalized Question and Answer for consistency with the proposed changes.
The Agencies are requesting comment on the proposed changes to the Interagency Questions and Answers Regarding Flood Insurance and, more generally, on other issues and concerns regarding compliance with the federal flood insurance statutes and regulations. Comments are due 45 days after publication in the Federal Register.
Based on comments received, the Agencies also have significantly revised two questions and answers regarding force placement of flood insurance that were initially proposed on July 21, 2009, and are now proposing revision to a previously finalized question and answer. These three revised questions and answers are being proposed for comment.
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Federal Reserve System - Interagency    
Loans in Areas Having Special Flood Hazards
Interagency Questions and Answers Regarding Flood
Federal Register - 76/200
October 17, 2011

Monday, October 17, 2011

CFPB Issues Supervision and Examination Manual

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is the first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.
The Manual is divided into three parts:
Part 1: Describes the supervision and examination process.
Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations.
Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.
Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.
However, we have created a Directory and Compendium.
At this time, Part 1 and Part 2 are only available as website pages.
Part 3 is available in PDF.
In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's text and website links. There are over 700 pages in this compendium.
Our compendium provides:
  • Directory: All Sections
  • Contents: Links to Compendium Text
  • Contents: Links to CFPB Website Text
We are pleased to share this compilation with you for free.
Due to the huge size of the compendium - over 13 MBs - it must be downloaded from our secure Extranet. If you are interested in obtaining this compendium, please request it and we'll send you the download instructions.
Supervision and Examination Manual - Version 1.0

Part I - Compliance Supervision and Examination
Supervision and Examination Process
Part II - Examinations Procedures
Compliance Management Review
Unfair, Deceptive or Abusive Acts or Practices
    Examination Procedures
Equal Credit Opportunity Act
    Examination Program
    Interagency Fair Lending Examination Procedures
    Interagency Fair Lending Examination Procedures – Appendix
Home Mortgage Disclosure Act
    Examination Procedures
    Home Mortgage Disclosure Act Checklist
Truth in Lending Act
    Examination Procedures
    Appendix A: High-Cost Mortgage (§ 226.32) Worksheet
Real Estate Settlement Procedures Act
    Examination Procedures
Homeowners Protection Act
    Examination Procedures
Consumer Leasing Act
    Consumer Leasing Act Examination Procedures
    Consumer Leasing Act Checklist
Fair Credit Reporting Act
    Examination Procedures
Fair Debt Collection Practices Act
    Examination Procedures
Electronic Fund Transfer Act
    Examination Procedures
Truth in Savings Act
    Examination Procedures
Privacy of Consumer Financial Information (GLBA)
    Examination Procedures
    Examination Procedures Attachment
Mortgage Servicing Examination Procedures
Part III - Examination Process Templates
    Entity Profile
    Risk Assessment
    Supervision Plan
    Examination Scope Summary
    Examination Report
    Examination Report cover
    Examination Report cover letter
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Consumer Financial Protection Bureau
Supervision and Examination Manual
Version 1.0
October 13, 2011