Monday, January 31, 2011

FRB's Loan Officer Compensation "Guidance"

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.
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On January 26, 2011, the Federal Reserve Board issued a "Guide" - a "small entity compliance guide"  required under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), as amended. 
I have placed "Guide" in quotes because I haven't seen such a perfunctory and virtually useless issuance from the FRB in quite a long time in a matter of such consequence!
It seems to me that the "Guide" is more of a reaction to the January 13, 2011 letter from the SBA's Office of Advocacy, which expressed concern, among other things, that the "the Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)."
If this is meant to be a response to that letter, and to comply with the SBREFA, it falls far short of the mark; and, in any event, it surely doesn't seem to fulfill the statutory requirements carefully reasoned in the SBA's letter. 
Much of the FRB "Guide" is no more than a regurgitation of the "already known" aspects of the Regulation Z amendments affecting loan officer compensation. I doubt our clients will get much help from this document!
The SBA's letter recommended that the Board publish a compliance guide in the immediate future and extend the time for small entities to comply - now scheduled for April 1, 2011 - to reflect the delay in the availability of the guide. 
To quote directly from the SBA letter:
  • "Small entities have indicated that the requirements of some of these changes are unclear and confusing. They are concerned that the lack of clarity may lead to problems in compliance.
  • Advocacy reviewed the Board's website. Advocacy commends the Board for having a SBREFA compliance guide page on its website. However, although there are compliance guides for Regulations C, D, E, F, H, I, J, L, M, O, P, R, V, X, AA, BB, CC, DD, and GG, Advocacy was unable to find a compliance guide for Regulation Z."
Nevertheless, at this time it does not appear that a delay is being seriously considered.
In reviewing our Library and Archives, it appears that we have well over 300 documents on the subject of loan officer compensation. So I decided to open a new section in the Library devoted to COMPENSATION - MLOs. Over time, it will receive more and more relevant documents. Check back or bookmark the page, if you want to keep track of this controversial subject.
At this time, I am completing an article that will be published in the March 2011 edition of National Mortgage Professional Magazine, the country's premier magazine of the mortgage industry. The article will cover, comprehensively and practically, the salient features of loan officer compensation that will become effective on April 1, 2011. 
Moreover, my article will provide clear guidelines to assist mortgage loan originators in understanding and applying compensation requirements. 
In the meantime, we will watch the situation closely and provide updates, where needed.
Best wishes,
Jonathan Foxx

Some Highlights of the "Guide"
Definitions of a Loan Originator and Mortgage Broker:
  • All persons who originate loans, including mortgage brokers and their employees, as well as mortgage loan officers employed by depository institutions and other lenders.
Payments based on transaction terms or conditions:
  • Prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended.
  • Compensation can neither be increased nor decreased based on the loan terms or conditions.
  • When the creditor offers to extend a loan with specified terms and conditions (such as rate and points), the amount of the originator's compensation for that transaction is not subject to change, based on either an increase or a decrease in the consumer's loan cost or any other change in the loan terms.
  • The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the prohibition, provided the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. (Such compensation may be subject to a minimum or maximum dollar amount. The minimum or maximum amount may not vary with each credit transaction.)
  • Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.
  • An originator that increases the consumer's interest rate to generate a larger yield spread premium can apply the excess creditor payment to third-party closing costs and thereby reduce the amount of consumer funds needed to cover upfront fees. (There is no prohibition from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction's terms or conditions.)
Payments by persons other than the consumer:
  • If compensation is received directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction.
  • Payments made by creditors to loan originators are not payments made directly by the consumer, regardless of how they might be disclosed under HUD's Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA).
Prohibition on steering and allowance of Safe Harbor:
  • Prohibits a loan originator from "steering" a consumer to a lender offering less favorable terms in order to increase the loan originator's compensation.
  • Provides a safe harbor to facilitate compliance:
To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business.
The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in the rule.
The safe harbor is met if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include:
(A) the loan with the lowest interest rate for which the consumer qualifies;
(B) the loan with the lowest total dollar amount for origination points or fees, and discount points, and
(C) the loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.
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FRB - Small Entity Compliance Guide - Regulation Z:
Loan Originator Compensation and Steering,
12 CFR 226 (1/26/11)

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Monday, January 24, 2011

Accidentally Foreclosing on Veterans



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


It seems the mantra of our times is "mistakes were made." In an era when lack of accountability in politics and finance has become all but forlornly accepted by many voters, and the word "blame" is banned from public discourse as being unproductive rhetoric, we find out within the last few days that J.P. Morgan Chase (JPM) "wrongly foreclosed on 14 active-service military families and overcharged thousands more on their mortgages."

Is this a symptom or an isolated incident?


Accidentally Foreclosing on Veterans


The findings come from a year long internal audit conducted by JPM of its accounting requirements involving active military service under the Service Members Civil Relief Act (SCRA).

Indeed, back in April 2008, Congress passed the Foreclosure Prevention Act, which aimed at protecting active duty service members and their families from foreclosure. In this legislation, John Kerry introduced the Military Family Homes Protection Act (MFHPA), thereby expanding the scope of the SCRA.

Salient provisions included the specific relief to active duty soldiers with, among other things, one year relief from increases in mortgage interest rates. Soldiers returning from war could expect that, under current law, those interest rates would be no more than 6%, and their mortgages are not subject to the delinquency process, let alone having their properties subject to foreclosure. In fact, another feature of the MFHPA was its extension of certain SCRA protections from 3 to 9 months, allowing a returning service member time to meet with the lender and take corrective action.


Mistakes Were Made


Still, mistakes were made. Foreclosures happened.

Veterans lost their homes and many were overcharged.

How many military families were overcharged in interest? 4,000.

Thus speaks JPM's Kristin Lamkau, Chief Communication Officer:

  • We made mistakes here and we are fixing them. Any customer mistake is regrettable.
  • We feel particularly badly about the mistakes we made here.


Let the Finger Pointing Begin


Now the finger pointing commences, as we have seen so many times over the last few years, with little or, at best, mixed results:

->Jonathan Rowles, Marine Captain and veteran, who sued JPM over this matter wants punitive damages in light of the alleged repeated violations of the law going back years,

->Class action certification (PDF) is being developed by Richard A. Harpootlian, Rowles's attorney,

->Federal prosecutors in South Carolina are possibly getting involved,

->Elizabeth Warren indicates that the situation "emphasizes" the need for the CFPB,

->Senator Reed (D-RI) wants US Attorney General Holder's DOJ to investigate,

->An inquiry from a congressional committee is supposedly underway, and

->Jamie Dimon, JPM's CEO, whose PR casts him as a friend to the veterans, probably has some relationship repair on his agenda, especially in light of all the touting he's done recently about JPM being so friendly to the military.

This often repeated ritual of unaccountable blame has an atavistic quality to it. And it lasts for a few news cycles and then fades away. Eventually, some resolution will appear on page 5 of the second section of the regional newspaper or make its way onto the 11 o'clock news broadcast.

Yet disrupted lives of those affected are not mere statistics.

Mistakes in foreclosure processing are inexcusable, and especially egregious when the lives at stake belong to members of the military - those particular Americans who have served our country valiantly through military service and sacrificed so much on our behalf!

Upon their return from action, should they be faced with such a situation?


Real Lives - Not Just Statistics


Sometimes it's a good idea to get out of the analysis itself and listen to people. Please read the following.

Here's what Julia Rowles, wife of the aforementioned Captain Rowles, stated about the way they were treated:

They would say, "We will take your house. We will report you to the credit agency. This is a bad situation that you don't want to be getting into. Pay us today." They were harassing us for money that we did not owe them.


They kept still charging us 9 and 10 percent, and we were paying upwards to $2,000 when we should have only been paying $1,400.

This is just one voice, and she's speaking as the wife of a service member who had to litigate in order to save his home. But a "mistake" almost cost them their house!

How many more Jonathan and Julia Rowles are there out there these days, but do not have the benefit of counsel or proper assistance from representatives of the VA?


Veterans Administration - Complicity


Many people I have spoke with believe that the VA is affirmatively preventing this situation from getting worse for service members. If you think so, too, you would be wrong.

According to Torrey Shannon - activist wife and Executive Director of Cleaning for Heroes, whose veteran husband is on 100% total and permanent, yet ineligible for any special grants for an adapted home, and whose steady income that comes with 100% total and permanent disability is being delayed due to the usual bureaucratic gridlock:

It appears the Veteran's Administration has been flying under the radar when it comes to their contribution to the homeless veteran population. Due to a backlog in processing thousands of disability claims, military members and their families are forced to live on the streets because of foreclosures and are heading into bankruptcy courts at an alarming rate.

Mrs. Shannon further states that "most of the wounded veterans I know have waited more than six months to get their first disability check from the VA after leaving the military. By the time they got their first payment from the VA, they were bankrupt or had lost their home to foreclosure." What she would like to see happen immediately is a moratorium on veterans foreclosures for at least nine months.

Her view is valid, and it's a start.

Of course, this assumes that some problems veterans tend to have emerge within 9 months of discharge. Some may take years to develop, and, once incurred, can have a catastrophic impact on health and financial stability.

There are organizations that will help veterans who face foreclosure, if at times even belatedly, such as the National Association of Consumer Advocates (NACA).


REOs and the Veterans Administration


The VA has a robust REO pool.

A whole segment of the real estate industry is now devoted to the acquisition and marketing of veterans' homes that have become REOs.

But was the way that these properties became REOs a result of prompt claims processing, accurate charging of mortgage interest, proper application of the protections provided by the aforementioned laws, providing foreclosure prevention remedies, mediation, and assistance to veterans?

When it comes to REOs, maybe the VA bureaucrats want to run the Veterans Administration like any other business. But evicting veterans, often with just a couple of weeks notice or even less, and as a result of those VA bureaucrats' own dereliction of duty in processing veterans claims or neglect to scrupulously implement the law itself, is surely contrary to the spirit and strengths of our obligations to members of our military service.

We can do better - and we must do much more for our veterans.


What do you think?

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

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Friday, January 21, 2011

Privacy & GLBA: Model Forms

On January 12, 2011, the Office of Thrift Supervision (OTS) published information intended to help small thrifts comply with the obligation to send initial and annual privacy notices to their customers. The agency's Small Entity Compliance Guide for the Model Privacy Notice is aimed at helping small thrifts use the model privacy notice form established by the bank and thrift regulatory agencies in December 2009. Proper use of the model forms provides a safe harbor for compliance with the privacy notice duties.

On December 1, 2009, the agencies published the final rule relating to the model privacy notice. Financial institutions that elect to use the model privacy form may rely on the model privacy form as a safe harbor to comply with the GLBA disclosure requirements.

The effective date of the amendments was December 31, 2009, except for the amendments eliminating the sample clauses and associated guidance, which become effective for notices sent after December 31, 2010.


Timing and Safe Harbor


A model privacy form that meets the privacy regulations' notice content requirements, which institutions may voluntarily rely on as a safe harbor in providing privacy notices as of December 31, 2009, appears in Appendix A to the regulations.

[Sample clauses also relating to the privacy regulations' notice content requirements, applicable in connection with privacy notices provided on or before December 31, 2010, appear in Appendix B to the regulation through December 31, 2011 (and thereafter will be deleted).]

The regulatory agencies have created an on-line form builder that thrifts can use to develop customized versions of the model notices. Although all financial institutions may model forms, they are not required to do so. Other forms, including those that rely on the sample clauses that will be replaced by the model forms, can be used if they comply with the notice requirements. However, only using the model forms will provide a safe harbor after December 31, 2010.


Privacy Notice - Form Requirements


The model privacy form has several versions:

1. If opt out is provided and include affiliate marketing.

2. If opt out is provided and do not include affiliate marketing.

3. If opt out is not provided and include affiliate marketing.

4. If opt out is not provided and do not include affiliate marketing.

5. If opt out is provided and include affiliate marketing, and mail-back form.

6. If opt out is provided and do not include affiliate marketing, and mail-back form.

To prevent identity theft, institutions should use a truncated form of an account number other than a Social Security Number on privacy notices.


Specific disclosure requirements are mandatory, if a financial institution wants to customize the privacy notice. However, the following features are permitted:

  • Print the form on both sides of a single sheet of paper (or on two pages)
  • Incorporate the form in another document or with other notices, and include additional documents or information so long as the form is presented in a clear and conspicuous manner
  • Provide a single form jointly with other affiliated institutions (including affiliated institutions regulated by different agencies), as long as each institution is clearly identified in the correct space of the form
  • Include color and logos to create visual interest, provided they do not interfere with the readability of the form
  • Use different sizes of paper, provided the paper is large enough to meet the minimum 10-point font size and provide sufficient white space around the model form text
  • Include certain information on state and international privacy law in the blank spaces provided
  • Include a mail-in version of the opt-out form as described in the rule
  • Translate the form into languages other than English


Online Form Builder - Quick Links


On April 15, 2010, the Agencies released an Online Form Builder that financial institutions can download and use to develop and print customized versions of the model consumer privacy notice.

The Online Form Builder, based on the model form regulation published in the Federal Register on December 1, 2009, under the GLB Act, is available with several options. Easy-to-follow instructions for the form builder guide an institution to select the version of the model form that fits its practices.


Online Form Builder

Model Form in PDF

Model Form in HTML


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Small Entity Compliance Guide
for the Model Privacy Notice - OTS
January 12, 2011

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Wednesday, January 19, 2011

GMAC: Spectral Hand of "Robosigning"



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


This past Friday, January 14, 2011, GMAC decided to cancel certain foreclosure actions in Maryland.

At a time in which foreclosure actions are expected to accelerate 20% in 2011, and 2.87 million properties were the subject of default notices, auctions, or repossession in 2010 (a 2% gain from 2009), and banks seized more than 1 million homes in 2010 (up 14% from 2009), the impact of the spectral hand of so-called "robosigning" has now apparently reached a new threshold.


GMAC and Maryland Foreclosures


In a move that should place renewed emphasis on loss mitigation and further curtail the headlong rush to foreclosure processing, GMAC has decided to cancel foreclosure proceedings on 250 properties in Maryland. There have been reports of perhaps 1,000 foreclosures affected and possibly many more.

The ostensible cause of this retreat is due to defective affidavits, executed by one Jeffrey Stephan, a "robo-signer" who has attested to, among other things, the authenticity of foreclosure documents without having had any knowledge about them.

By this point, we all should know the sorry story of robo-signing that has facilitated the massive foreclosure proceedings by banks. GMAC's decision was brought on by a class action handled through the University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit. Though there were other aspects tried in the case, the central position of the case argued that any foreclosure action which used Jeffrey Stephan as the "signer" was essentially illegitimate, and therefore must be dismissed.

I should point out that GMAC is not the only recipient of this argument: although not yet a settled matter, the University of Maryland Consumer Protection Clinic and Civil Justice also want dismissed any foreclosure actions with affidavits from Xee Moua, Wells Fargo employee and admitted "robosignor," who stated in a sworn deposition in a Florida case that she had signed foreclosure-related papers on behalf of the bank and that the only information she verified was whether her name and title appeared correctly on the relevant documents.

Stephan estimated that he signed 10,000 documents a month; Moua claimed to sign at the rate of as much as 500 documents each day.




In Maryland, a judicial foreclosure state, GMAC will refile these cases, but will be required to do so under new laws that went into effect on July 1, 2010. Certain features of these laws probably should be adopted in those states where state law itself provides a means to implement them.

Pursuant to these new Maryland laws, for instance, banks seeking to foreclose must demonstrate in filings that they reviewed and considered foreclosure alternatives, and provided specific notices to the borrowers. Importantly, these laws permit borrowers to be eligible to pursue court supervised mediation. Obviously, this law will change the timing, method and cost for conducting residential foreclosures in Maryland.

So the foreclosure process, as I've mentioned in previous Commentaries, is not going to cease permanently; for the most part, it will slow down for awhile, regroup, gather up its standing, reinforce its procedural integrity, and then restart.

Here's a good article on the Maryland controversy by a fine reporter who has been tracking this story with clarity for some time.


Servicing and Foreclosure


All this brings me to remarks that will be made today in an "Opening Address by FDIC Chairman Sheila C. Bair" at the Summit on Residential Mortgage Servicing for the 21st Century, an event sponsored in DC by the Mortgage Bankers Association.

In her prepared remarks, Mrs. Bair states that "chaos in mortgage servicing and foreclosure is introducing a dangerous new uncertainty into this fragile market," and that the "persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans." Her speech centers on the "mortgage servicing problem."

I think this observation of hers pretty much sums up the situation:

"The mortgage crisis also has revealed a fatal flaw in this unbundling of the mortgage-lending process: the misalignment of incentives between the various parties and specialists involved. We have dramatically underappreciated the potential for what economists call "principal-agent" problems arising from misaligned incentives. Mortgage brokers and lenders had little or no incentive to worry about whether borrowers could repay their mortgages. Neither did the investment banks putting together securitizations and CDOs." (My Emphasis.)


Some Suggestions


Essentially, Mrs. Bair suggests a clearly delineated loss mitigation approach that enhances mediation. Perhaps this realization is dawning belatedly on her and the servicers part, but at least it is being discussed in some way.

The suggestions she outlines are well worth considering:

1) In order to remedy failures endemic to the largest mortgage servicers ... [there should be] "enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure."

2) Servicers must commit to adequate staffing and training for effective loss mitigation ... [and] "establish industry benchmarks - based on a maximum number of delinquent loans per representative - and insist on a minimum standard of training to ensure that staff are up-to-date on the latest loss-mitigation programs."

3) [Servicers should] "expedite the loan modification process and help clear the market, [looking] for opportunities to greatly simplify loan-modification offers in exchange for waivers of claims."

4) Regarding second lien holders interests competing with first lien holder interests, "as part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgages when the servicer or its affiliate owns the second lien" [a formula which should, at minimum] "require that the subordinate lien be reduced pro-rata to any change in the first mortgage."

5) There should be an "independent review of loss-mitigation denials" and "borrowers should have the right to appeal any adverse denial of a loan modification request to an independent party who has the proper information to conduct an immediate review and the power to correct erroneous determinations."

6) "Weak practices" in handling title documentation must also "cease" by assuring that banks and other servicers will be required to "foreclose in their own names instead of allowing MERS to foreclose [and] provide complete chain of title and note transfer history in the notice of default."

7) Settlements should eliminate "incentive payments to law firms for speedy foreclosures, as well as the use of lost-note affidavits, except where the servicer has made good faith efforts to obtain the note" [and such settlements] should "prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts, or reward a borrower acting in bad faith."


Foreclosure Claims Commission


Mrs. Bair asserts a rather bold suggestion - one I have heard much about over the last few years, but now note that it has made its way into quotidian discourse: the creation of a foreclosure claims commission.

According to Mrs. Bair, this commission would be "modeled on the BP or 9/11 claims commissions, [and] could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors."

I think this will likely be resisted politically, legally, and financially for a number of reasons, but I'll let Mrs. Bair speak:

"Many in the servicing industry will resist a settlement such as this because it would impose much of the immediate financial cost on the major servicers themselves. But this would be short-sighted. The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them - and the rest of us - even more."




Somewhere in the interstitial fields of loss mitigation and foreclosure actions a resolution must be found.

And must be found soon!


What do you think?

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

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