Thursday, December 6, 2012

Throwing a Lifesaver to Underwater Borrowers

The Federal Housing Finance Agency (FHFA) released its September 2012 Refinance Report (Report) on November 28, 2012. The Report provides some statistical information, most of which comes as no surprise to mortgage industry participants, while there are some tidbits of data that seem to demonstrate the impact of the Home Affordable Refinance Program, known as HARP, on the GSEs (viz., Fannie Mae and Freddie Mac). The end date for HARP was extended until December 31, 2013 for loans originally sold to the GSEs on or before May 31, 2009.
HARP was established in 2009 to assist homeowners who are unable to access refinance due to a decline in their home value. The program was originally designed to provide these borrowers with an opportunity to refinance by permitting the transfer of existing mortgage insurance to their newly refinanced loan, or by allowing those without mortgage insurance on their previous loan to refinance without obtaining new coverage.
The premises for HARP are simply stated, as follows:
1) Since the GSEs are already responsible for certain high LTV loans; and 
2) Default risk is lowered by allowing a refinance of these high LTV loans; therefore, 
3) HARP loans refinancing high LTV loans at lower rates reduce default risk.
One of my concerns with HARP, or as it is referred to now HARP 2.0, is it has failed homeowners because it just is not reaching enough qualified borrowers and many lenders take too long to issue approvals. One remedy would be to have the government expand its guidelines to include non-agency lenders and by removing certain features of the 2009 origination qualifier. Also, low credit scores remain an obstacle by preventing underwater homeowners from taking full advantage of the current HARP guidelines with respect to refinancing eligibility.
HARP has obviously triggered a wave of refinance activity, just as expected. In speaking with several of our clients that are very involved in HARP refinances, it seems that about 50%-75% of their refinance business may be coming from homeowners who have LTVs above 125%. Because the 125% ceiling on LTV was removed, some lenders are actually refinancing LTVs of 155%.
In the following discussion, I will offer some consideration to HARP's most recent survey.*
HARP Refinance, Quarterly Volume
Monthly HARP Volume by LTV
Percentage of HARP Refinances by LTV
Mortgage Terms, LTVs Greater than 105%
Total HARP, Percentage of Total Refinances
Timeline for Interest Rate Changes
-More than 90,000 homeowners refinanced their mortgage in September through HARP with more than 709,000 loans refinanced since the beginning of this year.
-Since the program’s inception in 2009, the GSEs have financed more than 1.7 million loans through HARP.
-In September, half of the loans refinanced through HARP had LTV of greater than 105% and one-fourth had LTVs greater than 125%.
-In September, 19% of HARP refinances for underwater borrowers were for shorter-term 15-year and 20-year mortgages.
-HARP refinances in September represented 45% of total refinances in states hard hit by the housing downturn - Nevada, Arizona, Florida and Georgia - compared with 21% of total refinances nationwide.
-In September, HARP refinances for borrowers with LTV ratios greater than 105% accounted for more than 70% of HARP volume in Nevada, Arizona and Florida and more than 60% of the HARP refinances in California.
HARP Refinance, Quarterly Volume
1-HARP Refinance-Quarterly
HARP volume continued to represent a material portion of total refinance volume in 2012 as HARP enhancements took effect in the first half of the year. HARP volume represented 24% of total refinance volume in the third quarter of 2012.

Wednesday, November 21, 2012

CFPB and FTC: Warning Letters - Misleading Advertisements

The Consumer Financial Protection Bureau (CFPB), in coordination with the Federal Trade Commission (FTC), has issued warning letters to twelve mortgage lenders and mortgage brokers advising them to remove or revise misleading advertisements. The warnings concern advertisements that target veterans, seniors, and other consumers.*
Additionally, the CFPB announced that it has begun formal investigations of six companies believed to have committed more serious violations of the law.
After reviewing hundreds of mortgage advertisements, the FTC staff has also sent warning letters to twenty companies, warning them that their ads may be deceptive. The FTC sent its warning letters to real estate agents, home builders, and lead generators, urging them to review their advertisements for compliance with the Mortgage Acts and Practices Advertising Rule and the FTC Act. 
The collaboration between the CFPB and the FTC are characterized as a "sweep" - a review conducted by these agencies of about 800 "randomly selected mortgage-related ads across the country, including ads for mortgage loans, refinancing, and reverse mortgages." The agencies looked at ads in newspapers, on the Internet, and from mail solicitations, and advertisements that were the subject of consumer complaints.
I really can't emphasize enough how important it is to control all the advertising your firm publishes - and I mean advertisements in any media. Just adopting a policy and procedure is insufficient.
In my view, several components must be included in advertising compliance:
a formally adopted policy and procedure;
an advertising manual that is signed for and attested to by the employee;
checklists, model forms, ad formats, and authorizations;
an easy reference guide for employees;
periodic training;
and auditing.
If you are not implementing at least these risk management practices, you are certainly falling short of the controls you need to manage the regulatory challenges posed in advertising of mortgage loan products.
The Sweep
The Rule
The Warning
The Remedy
The Sweep
The following problems were identified by the sweep:
Potential misrepresentations about government affiliation.
For example, some of the ads for mortgage products contained official-looking seals or logos, or have other characteristics that may be interpreted by consumers as indicating a government affiliation (i.e., advertisements containing statements, images, symbols, and abbreviations suggesting that an advertiser is affiliated with a government agency).
Potentially inaccurate information about interest rates. For example, some ads promoted low rates that may have misled consumers about the terms of the product actually offered. These are advertisements offering a very low “fixed” mortgage rate, without discussing significant loan terms (i.e., advertisements “guaranteeing” approval and offering very low monthly payments, without discussing significant conditions on these offers).
Potentially misleading statements concerning the costs of reverse mortgages. For example, some ads for reverse mortgage products claimed that a consumer will have no payments in connection with the product, even though consumers with a reverse mortgage are commonly required to continue to make monthly or other periodic tax or insurance payments, and may risk default if the payments aren’t made.
Potential misrepresentations about the amount of cash or credit available to a consumer. For example, some ads contained a mock check and/or suggested that a consumer has been pre-approved to receive a certain amount of money in connection with refinancing their mortgage or taking out a reverse mortgage, when a number of additional steps would customarily need to be completed before the consumer would qualify for the loan.

The Rule
The Mortgage Acts and Practices Advertising Rule ("MAP-AD Rule" or "MAP Rule"), known as Regulation N since rulemaking authority for it transferred from the FTC to the CFPB, is applied to advertising compliance relating to mortgage loan products. (We have discussed the MAP Rule previously. See, for instance, our September 2, 2011 newsletter, FTC: Adopts Mortgage Advertising Rule.)
The MAP Rule prohibits material misrepresentations in advertising or any other commercial communication regarding consumer mortgages. The FTC and the CFPB share enforcement authority over non-bank mortgage advertisers such as mortgage lenders, brokers, servicers, and advertising agencies. Mortgage advertisers that violate the MAP Rule may be required to pay civil penalties. HUD mortgagees may be subject to additional sanctions by the Mortgagee Review Board.
The MAP Rule was issued as a Final Rule by the FTC on July 22, 2011 (the day after the CFPB received its enumerated authorities) and given the compliance effective date of August 19, 2011. On July 21, 2011, the Commission’s rulemaking authority for the MAP Rule transferred to the CFPB, but the FTC, the CFPB, and the states all have authority to enforce the MAP Rule.
It applies to all entities within the FTC’s jurisdiction that advertise mortgages - mortgage lenders, brokers, and servicers; real estate agents and brokers; advertising agencies; home builders; lead generators; rate aggregators; and others. The MAP Rule, however, does not cover banks, thrifts, federal credit unions, and other entities that are outside the Commission’s jurisdiction.

Tuesday, November 13, 2012

Elizabeth Warren's Interview

In July 2011, I published my interview of Elizabeth Warren, entitled Opening a Dialogue: Elizabeth Warren and the Mortgage Industry.*
I have been told that this interview is one of the last published interviews of Mrs. Warren prior to President Barack Obama's announcement of the nomination of former Ohio Attorney General Richard Cordray as the first director of the Consumer Financial Protection Bureau (CFPB) on July 18, 2011. Until that point, Mrs. Warren was acting in the capacity of the interim director of the CFPB.
In August 2011, Mrs. Warren began to receive substantial political support from many political organizations and private citizens, and on September 14, 2011 she announced her campaign as a candidate for Senator of Massachusetts.
Mrs. Warren is known to be a fierce consumer advocate and is considered by many to be the primary visionary behind the creation of the Consumer Financial Protection Bureau. The CFPB - these days known more and more colloquially as the "Bureau" -  was established by the Dodd–Frank Wall Street Reform and Consumer Protection Act and signed into law by President Obama in July 2010. For the first year after the bill's signing, Mrs. Warren worked tirelessly as the CFPB's Special Assistant to the President to “stand up” the Bureau.
But Warren's nomination for the Director's position was not put forward by Mr. Obama because of his conclusion that her nomination would be too politically contentious.
Notwithstanding the political environment, the CFPB received its enumerated authorities on July 21, 2011.
Due to the partisan resistance to virtually any nomination for Director - some members of Congress wanted to disempower the CFPB or defund it – Mr. Obama felt constrained to appoint former Ohio Attorney General Richard Cordray to be the Director of the CFPB in January 2012, through a "recess appointment", over the objections of Republican Senators.
Last week Mrs. Warren, the 63-year-old Harvard Law School professor, was elected the first female U. S. Senator of Massachusetts by the considerable lead of 54% to 46% over Scott Brown, who had been elected in 2010 to fill out the late Edward M. Kennedy’s term. Her acceptance speech included her promise that she would be "a fighter for the middle class".
Soon, Mrs. Warren will take her oath as the junior Senator of Massachusetts.
With this in mind, I thought it would be informative to consider Mrs. Warren's responses to the questions I posed in my interview, in the context of what the CFPB has accomplished to date and has pledged to accomplish in the future.
I have written extensively about the CFPB. If interested, please feel free to view or download these articles, newsletters, and recent papers.
For selected issuances involving the CFPB, visit our library.
Although it is in its infancy, perhaps we can begin to discern the broad outlines of the CFPB’s commitment to the vision of consumer advocacy set forth by Mrs. Warren.
Organizations that Accepted Participation
Organizations that Declined Participation
In Her Own Words
Organizations that Accepted Participation
Nearly all major mortgage industry associations responded to my invitation to provide questions to me to ask Mrs. Warren. Many interview questions, though very important, were also very specific, and it was just not possible for Mrs. Warren to answer such questions of detailed specificity, prior to the CFPB being empowered to evaluate rulemaking and policy alternatives.
Nevertheless, I proffered a wide enough scope of questions that we were able to obtain firm and clear replies.
Organizations that Accepted Participation
Association of Residential Mortgage Compliance Professionals (ARMCP)
Jonathan Foxx, President
Community Mortgage Bankers Project (CMBP) Glen Corso, Managing Director
Impact Mortgage Management Advocacy & Advisory Group (IMMAAG)
Bill Kidwell, President
National Association of Independent Housing Professionals (NAIHP) Marc Savitt, President
National Association of Mortgage Brokers (NAMB)
Don Frommeyer, Them President Elect
National Association of Professional Mortgage Women (NAPMW)
Laurie Abshier, National President
National Association of Realtors (NAR)
Lucien Salvant, Managing Director
National Credit Reporting Association (NCRA) Terry Clemens, Executive Director
National Reverse Mortgage Lenders Association (NRMLA)
Daryl Hicks, Vice President, Communications
Real Estate Services Providers Council (RESPRO)
Sue Johnson, Executive Director
Organizations that Declined Participation
American Bankers Association (ABA)
Peter Garuccio, Vice President, Public Relations
Mortgage Bankers Association (MBA) John Mechem, Sr. Director - Public Affairs Communications & Marketing

Tuesday, November 6, 2012

CFPB: Compliance Management System

On October 31, 2012, the CFPB issued its first issue of Supervisory Highlights: Fall 2012, a newsletter to the public and the financial services industry about its examination program, including the concerns that it finds during the course of its completed work, and the remedies that it has obtained for consumers who have suffered financial or other harm.
It is written as an Executive Summary, and it will not refer to any specific institution. But it will "signal to all institutions the kinds of activities that should be carefully scrutinized for compliance with the law."
According to the CFPB, it has already taken non-public supervisory actions against financial institutions participating in the credit card, credit reporting, and mortgage markets, confirming "remedial relief" to 1.4 million consumers, and causing the affected financial institutions to correct illegal practices. Importantly, and in consequence to the CFPB's examinations and actions, financial institutions were required to adopt effective policies and procedures to ensure that violations do not recur and, especially, mandating that they implement a robust Compliance Management System (CMS). 
The CFPB maintains that an effective CMS is a "critical component of a well-run financial institution."
After a brief discussion about the CMS concept, I should like to outline these three significant findings derived from the CFPB's examinations:
- Comprehensive CMS Deficiencies Found Through CFPB Supervisory Activities
- Deficiencies Related to Failure to Oversee Affiliate and Third-party Service Providers
- Deficient Fair Lending Compliance Programs
Compliance Management System
Comprehensive CMS Deficiencies
Failure to Oversee Affiliate and Third-party Service Providers
Deficient Fair Lending Compliance Programs
Compliance Management Systems
I consider the term Compliance Management System to be a proxy for the term mortgage risk management. Our firm was founded on the premise that such risk management was the best way to ensure a financial institution's safety and soundness with respect to mortgage banking. At the time, there was only the term "risk management", a catch-all term that was overly broad. So I coined the term "mortgage risk management" to bring mortgage compliance into greater focus, expertise, and application.
Over the years, the prudential regulators and state banking departments have included much guidance in preparedness for their mortgage banking examinations. And now the CFPB has further elaborated the crucial and central importance of managing risk and examination readiness. As recently as July 2012, I published a magazine article about The Rules of Operational Risk, in order to bring into strong relief the practical matters and unique circumstances of mortgage risk management.
The CFPB's conception of a well-conceived CMS is certainly consistent with the foundational features of mortgage risk management.
Both the CFPB and mortgage risk management require effective internal controls and oversight, training, internal monitoring, consumer complaint response, independent testing and audit, third-party service provider oversight, recordkeeping, product development and business acquisition, and marketing practices.
Mortgage risk management and the CMS both expect the development, maintenance, and integration of mortgage compliance practices across a financial institution's framework and applied to its entire loan product and service lifecycle.
As the CFPB states:
"Without such a system, serious and systemic violations of Federal consumer financial law are likely to occur. Further, a financial institution with a deficient CMS may be unable to detect its own violations. As a result, it will be unaware of resulting harm to consumers, and will be unable to adequately address consumer complaints."
Comprehensive CMS Deficiencies
The CFPB has issued findings for financial institutions lacking an effective CMS across the entire consumer financial portfolio, or in which the company failed to adopt and follow comprehensive internal policies and procedures. In these instances, the finding held that this condition resulted in "a significant breakdown in compliance and numerous violations of Federal consumer financial law."
The corrective action required an adopting of appropriate policies and procedures, and establishing an effective CMS to ensure legal compliance, which had to include the "enhancement" of financial institutional regulatory knowledge and expertise to help ensure proper monitoring of business activities and prompt identification of potential risks to consumers.
In this regards, educating about and training employees in a company's policies and procedures should be fully implemented and routinely followed. I suggest a schedule of on-going education and training modules, given to both new hires and all active, affected personnel.
Keep in mind that the CFPB will exam not only the policies and procedures and their communication to employees but also management's inclination to be proactive or passive, preemptive or complacent, knowledgeable or disinterested. According to the CFPB, a financial institution’s CMS is “inadequate” where appropriate policies have been adopted, but management fails to take measures to ensure compliance with those policies.
In a typical CMS examination, the CFPB evaluates both the understanding and application of the financial institutions’ compliance management program by its managers and employees. The CFPB has stated that it has found "one or more situations in which the financial institution had articulated many elements of an appropriate compliance policy, but the policy was not followed."

Monday, November 5, 2012

FinCEN: SAR Narrative, PowerPoint, and Mortgage Loan Fraud

On September 18, 2012 FinCEN held an Informational Webinar regarding the new FinCEN Suspicious Activity Report (SAR).
The corresponding, full PowerPoint presentation of the recorded version of this Webinar is available HERE.
For those interested in actually viewing the Webinar, HERE is the link to the FinCEN webpage.
Recently, FinCEN issued two important reports (available in our Library): 
- SAR Activity Review – Trends, Tips & Issues (Issue 22)
- Mortgage Loan Fraud Update - Suspicious Activity Report Filings in 2nd Quarter 2012 
The first report offers significant insight and guidance in monitoring suspicious activity, and the second report provides important insights regarding SAR filings related to mortgage loan fraud. For years we have worked with our bank clients on auditing their SAR filings and AML compliance, and I can vouch for the practical advantages of reading these on-going FinCEN reports to enhance your risk management responsibilities.
SAR Narrative: "5 W's and the How"
Mortgage Loan Fraud - Statistics and Charts
Foreclosure Rescue Scams on the Rise
California: Highest 2012-Q2 Foreclosure Rescue SARs
SAR Narrative: "5 W's and the How"
In the recent SAR Activity Review, sections are provided that outline the basic aspects toward filing a SAR. In particular, the section  on writing an effective SAR Narrative is important to consider.
FinCEN rightly states that the narrative "is a critical part of the SAR because it is where the filer can summarize and provide a more  detailed description of the activity being reported." For that reason, it is essential that the narrative be clear, complete and thorough.
This section of the FinCEN report offers the "5 W's" that I have written about extensively as a way to develop the SAR narrative. (See, for instance, my magazine article, Anti-Money Laundering Program - Preparation is Protection, August 2012.)
Our clients have learned  how to use this narrative method. The FinCEN report does not mention the "How" narrative that I have advocated - and which I will discuss below. In my view, the Anti-Money Laundering Program should have an appendix devoted exclusively to the SAR Narrative procedures, especially outlining  the "5 W's and the How" method of writing it.
The narrative must be clear, complete and thorough and the method I advocate is an effective means toward accomplishing these  goals.
FinCEN's outline is rather brief, so I will provide a much more extensive set of action steps for you to follow.
The following are the "5 W's" method provided by FinCEN, after which I will add some remarks about narrating the "How".
Who is conducting the suspicious activity?
While one section of the SAR form calls for specific suspect information, the narrative should be used to further describe the suspect or suspects, including occupation, position or title within the business, and the nature of the suspect’s business(es). If more than one individual or business is involved in the suspicious activity, identify all suspects and any known relationships amongst them in the Narrative Section.
While detailed suspect information may not always be available (i.e., in situations involving non-account holders), such information should be included to the maximum extent possible. Addresses for suspects are important: filing institutions should note not only the suspect’s primary street addresses, but also, other known addresses, including any post office box numbers and apartment numbers when applicable. Any identification numbers associated with the suspect(s) other than those provided earlier are also beneficial, such as passport, alien registration, and driver’s license numbers.
What instruments or mechanisms are being used to facilitate the suspect transaction(s)?
An illustrative list of instruments or mechanisms that may be used in suspicious activity includes, but is not limited to, wire transfers, letters of credit and other trade instruments, correspondent accounts, casinos, structuring, shell companies, bonds/notes, stocks, mutual funds, insurance policies, travelers checks, bank drafts, money orders, credit/debit cards, stored value cards, and/or digital currency business services. Specific suspect identifying information is provided in the relevant Suspicious Activity Report for RMLO filings.
In addition, a number of different methods may be employed for initiating the negotiation of funds such as the Internet, phone access, mail, night deposit box, remote dial-up, couriers, or others. In summarizing the flow of funds, always include the source of the funds (origination) that lead to the application for, or recipient use of, the funds (as beneficiary).
In documenting the movement of funds, identify all account numbers at the financial institution affected by the suspicious activity and when possible, provide any account numbers held at other institutions and the names/locations of the other financial institutions, including MSBs and foreign institutions involved in the reported activity.
When did the suspicious activity take place?
If the activity takes place over a period of time, indicate the date when the suspicious activity was first noticed and describe the duration of the activity. Filers will often provide a tabular presentation of the suspicious account activities (transactions in and out).
While this information is useful and should be retained, do not insert objects, tables, or pre-formatted spreadsheets when filing a SAR.
These items may not convert properly when keyed in or merged into the SAR System. Also, in order to better track the flow of funds, individual dates and amounts of transactions should be included in the narrative rather than just the aggregated amount.

Monday, October 22, 2012

CFPB's Five Year Strategic Plan

Recently, the Consumer Financial Protection Bureau (CFPB) published for comment on its website its draft Strategic Plan for 2013 - 2018 (Plan).
According to the CFPB, the plan includes the following four goals:
(1) Prevent financial harm to consumers while promoting good practices that benefit them.
(2) Empower consumers to live better financial lives.
(3) Inform the public, policymakers, and the CFPB’s own policymaking with data-driven analysis of consumer finance markets and consumer behavior.
(4) Advance the CFPB’s performance by maximizing resource productivity and enhancing impact. For each goal, the plan identifies outcomes to be achieved and how progress will be measured.
Submit comments to before October 25, 2012.
Goals, Strategies, and Metrics
Goal 1: Prevent Financial Harm to Consumers
Goal 2: Empower Consumers to Live Better Financial Lives
Goal 3: Inform The Public
Chart: Data Sources and Data Outputs
Goal 4: Maximizing Resources and Impact
Goals, Strategies, and Metrics
The Plan outlines these goals, strategies, and metrics:
- Strategic goals that outline what the CFPB aims to achieve.
- Desired outcomes in support of its goals.
- Strategies that state the actions the CFPB will take to accomplish our outcomes.
- Performance measures that CFPB will track against specific targets in order to assess its progress toward achieving its outcomes.
- Indicators that the CFPB will track and use to assess progress toward achieving our outcomes. (Unlike performance measures, indicators do not reflect targets.)
Goal 1
Prevent Financial Harm to Consumers while Promoting Good Practices
The CFPB stated that, prior to Congress enacting the Consumer Financial Protection Act (CFPA) as Title X of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203, dated July 21, 2010), consumer financial protection had not been the primary focus of any one Federal agency, and no agency had effective tools to set the rules for and oversee the whole market.
Per the CFPB, the result was a system without sufficiently effective rules or consistent enforcement of the law. The CFPB believes that the consequences can be seen both in the 2008 financial crisis and in its aftermath.
The CFPB increased accountability in government by consolidating consumer financial protection authorities that had existed across seven different federal agencies into one, the Consumer Financial Protection Bureau. In addition to establishing the CFPB's enforcement powers, the CFPA gives the CFPB the authority to supervise and examine many financial institutions that were not previously subject to Federal oversight, such as nonbank mortgage companies, payday lenders, and private education lenders.
With the consolidation of existing and new federal authorities under one roof, the CFPB seeks to be properly focused and equipped to prevent financial harm to consumers while promoting practices that benefit consumers across financial institutions.
Goal 2
Empower Consumers to Live Better Financial Lives
This second goal of the CFPB is "to arm consumers with the knowledge, tools, and capabilities they need in order to make better informed financial decisions by engaging them in the right moments of their financial lives, in moments when the consumer is most receptive to seeking out and acting on assistance."
The CFPB plans to develop and maintain a variety of tools, programs, and initiatives that provide targeted, meaningful, and accessible assistance and information to consumers at the moment they need it.
To reify this goal, the CFPB has predicated two outcomes.
Outcome # 1:
The first outcome will collect, monitor, respond to, and share data associated with consumer complaints and inquiries about consumer financial products or services.
The CFPB has asserted that the consumer response function is central to its mission. The CFPB would provide direct assistance to consumers, in real-time, through its Consumer Response team. (See our October 4, 2012 article on Consumer Complaints and the Consumer Response team.) This team hears directly from consumers about the challenges they face in the marketplace and brings their concerns to the attention of the financial institutions that the CFPB regulates for investigation and resolution.
The Consumer Response team is tasked also to learn from the experiences of already operating complaint centers, for instance, by using the historical data from the FTC's Consumer Sentinel network, which is a collection of consumer complaint data from a variety of contributors, to inform its approach to handling complaints.
Performance metrics are applied by deriving data from complaint volume, the percentage of complaints routed through the dedicated company portal, and the complaint cycle time (i.e., intake cycle time, from receipt to company referral; company cycle time, from referral to company response; consumer cycle time, from company closure response to dispute; investigations cycle time, from investigations queue to closure).
Outcome # 2:
The second outcome helps consumers understand the costs, risks, and tradeoffs of financial decisions; build trusted relationships that are interactive and informative to help consumers take control of their financial choices to meet their own goals; and raise effectiveness of those who provide financial education services to increase financial literacy.

Wednesday, October 10, 2012

Loan Originator Compensation: Past is Prologue - Part I

In the economic sphere an act, a habit, an institution, a law
produces not only one effect, but a series of effects.
Of these effects, the first alone is immediate;
it appears simultaneously with its cause; it is seen.
The other effects emerge only subsequently; they are not seen;
we are fortunate if we foresee them.
What Is Seen and What Is Not Seen[i]
Frédéric Bastiat
Since April 6, 2011, mortgage loan originators (MLOs) have struggled to comply with the many requirements imposed on them by the MLO compensation provisions of the Truth in Lending Act (TILA),[ii] as amended by Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). That date was the compliance effective date.[iii] Prior to that date, however, there were considerable and persistent efforts made to postpone its implementation. I tracked the burgeoning protests and litigation in a series of articles[iv] and newsletters.[v] Associations resisted these TILA revisions on behalf of their membership. The National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP) sued the Federal Reserve Board of Governors (FRB). Amicus briefs were filed. Many members of Congress, from both sides of the aisle, also protested aspects of the new MLO compensation requirements. All for naught!*
April 6, 2011 arrived. Resistance was futile!
The FRB had issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions, but further guidance came 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.[vi] After that, the FRB offered some conference calls, a webinar – which ostensibly cleared up some confusion, while causing other confusion – and provided occasional updates of the oral, rather than the written, official variety.
In the meantime, the Consumer Financial Protection Bureau (CFPB) received its “enumerated authorities” on July 21, 2011. From that date forward, the CFPB was in charge of promulgating and administering these compensation guidelines.
And 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.[vii] In the State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule, issued by the Multi-State Mortgage Committee (MMC),[viii] we were given a pretty good idea of the direction that federal and state regulators would be taking in their regulatory examinations for loan originator compensation.[ix]
For the most part, my firm’s clients were prepared for implementation of the compensation rule, but we spent hundreds of hours preparing them for it, consisting of many conferences and meetings, which included very comprehensive reviews of employment agreements, compensation plans, disclosures, policies and procedures, and many other details, both logistical and systemic.
Inevitably, I felt mortgage loan originators needed more information than was readily available. So, we consolidated our knowledgebase and offered the FAQs Outline - Loan Originator Compensation, a compendium of questions and answers about the MLO compensation requirements, first published on March 21, 2011 with 142 FAQs and 35 pages. About a year later, after 20 updates, the FAQs Outline was up to 450 FAQs and 147 pages![x]
In this article, the first in a two-part series, I will consider the recent CFPB proposal, issued on August 17, 2012, which contains certain proposed rules governing mortgage loan originations, especially relating to the MLO compensation guidelines in Regulation Z, the implementing regulation of TILA. Comments for this proposal are due by October 16, 2012.[xi]
In the second part of this series, I will explore these proposals in considerable depth, specifically their clarification of and expansion on existing regulations governing MLO compensation and qualifications.
The CFPB does plan to implement new laws, including a restriction on the payment of upfront discount points, origination points, and fees on most mortgage loan transactions. For this reason, I will conclude this article with a brief, generic outline of certain proposals. To some extent, these new proposals exemplify the hurly-burly, roller-coaster ride we’ve been jaunting about on, in the on-going, elusive quest to implement the MLO compensation rule.
Small Business Review Panel
There is only one difference between a bad economist and a good one:
the bad economist confines himself to the visible effect;
the good economist takes into account both the effect that can be seen
and those effects that must be foreseen.
What Is Seen and What Is Not Seen[xii]
Frédéric Bastiat
The CFPB is required to certify that a proposed rule will not have a significant, adverse, economic impact on a substantial number of small entities.[xiii] The Small Business Regulatory Enforcement Fairness Act (SBREFA) provides the basis for a review, inasmuch as, among other things, “small businesses bear a disproportionate share of regulatory costs and burdens.”[xiv] In order to comply with this requirement, the CFPB convened and chaired a Small Business Review Panel to consider the impact of the proposal and obtain feedback from representatives of the small entities that would be subject to the rule. When preparing the proposed rule and an initial regulatory flexibility analysis, the CFPB is expected to consider this panel’s findings.
The panel consisted of representatives from the CFPB, the Chief Counsel for Advocacy of the Small Business Administration (SBA), and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[xv] On the panel were so-called small entity representatives (SERs), individuals who represent the business entities that would be subject to the CFPB’s proposal.[xvi] On July 11, 2012, the panel issued its report.[xvii]
Here are certain, salient topics that were reviewed by the panel:

  • Payment of Discount Points
  • Payment of Origination Points and Fees in Creditor-Paid Compensation
  • Payment of Origination Points and Fees in Brokerage-Paid Compensation
  • MLO Retirement Plans, Profit-Sharing, and Bonuses
  • Pricing Concessions and Point Banks
  • MLO Qualification and Training Requirements
Let us now consider the panel’s suggestions, concerns, resolutions, and recommendations.

Tuesday, October 9, 2012


The new HECM HERMIT system is on schedule to launch today, October 9, 2012. The Home Equity Conversion Mortgage (HECM) now has a fully enabled web-based system, called Home Equity Reverse Mortgage Information Technology, or HERMIT.
Until now, HUD has managed the HECM portfolio by collecting Mortgage Insurance Premiums (MIP) through its Insurance Accounting Collection System (IACS); servicing HECM loans assigned to HUD through its Single Family Mortgage Asset Recovery Technology (SMART) system; processing and tracking HECM insured servicing requests through SMART and Extensions and Variances Automated Requests System (EVARS); and, manually processing Mortgagee’s insurance claims.
The new HERMIT system is now meant to provide one common HECM platform to consolidate legacy systems.
The new platform, HERMIT, will be used also to monitor and track HUD's HECM loan portfolio in real-time and automate the payment of insurance claims while increasing efficiency and mitigating risks to its Insurance Funds.
Detailed information is provided in Mortgagee Letter 2012-17, issued on September 11, 2012.
HERMIT Material
The IACS will be phased out IACS and HERMIT will replace it as the system of record for:
1. Collecting MIP;
2. Managing all servicing activities; and
3. Paying insurance claims.
Additionally, through HERMIT mortgagees will be able to:
1. Interact with an integrated HUD HECM system;
2. Interact with HUD’s National Servicing Center (NSC) through a new, automated workflow process; and
3. Replace manual claims filing processes with an online, automated claims filing procedure.
Other features include the mortgagees ability to access HERMIT to notify HUD of the:
1. Borrower’s date of death; and
2. Initiation of foreclosure.
HERMIT Material
Mortgagees may access and download the following documents HUD's webpage, FHA Reverse Mortgage for Lenders (HECM).
* HERMIT User Guide
* Business to Government (B2G)
* Guide Instructions on HERMIT registration process, including User Access forms
* Phone number(s) and other contact information for the HERMIT Help Desk
HUD also provides a webpage devoted to the HERMIT System & Resources.
Law Library Image
Home Equity Reverse Mortgage Information Technology (HERMIT)
System for the Home Equity Conversion Mortgage (HECM)

ML 2012-17

Thursday, October 4, 2012

CFPB's Company Portal for Consumer Complaints

Last year, we notified you about the Company Portal Manual (Manual) issued by Consumer Financial Protection Bureau (CFPB). The Manual gave instructions on the use of the special access portal, known as the Company Portal (Portal). The Portal allows financial institutions to view and respond to complaints in the CFPB consumer complaint database. At that time, the Portal was enabled to take consumer complaints about credit cards and provider resources for distressed homeowners.

Since the inception of the Portal, we have responded to numerous requests from clients to help them navigate its rather labyrinthine pathways. Thus, we have obtained considerable experience in guiding our clients from point of contact with the CFPB to point of resolution. In most instances, resolution of the complaint was achieved. While the CFPB continues to acquire statistics about the nature of the complaints, we also have become familiar with how best to respond to the complaints and have kept our own database.

When I cite statistics in this article, the time frame that I am writing about is July 21, 2011 to June 1, 2012. More recent statistics have not yet been officially announced by the CFPB. However, it is known that this database is updated on a daily basis. Retroactive data is expected shortly.

I would like you to become more familiar with the Portal and learn how to set up your access to it. Of course, in an article I can only offer a generic, rather than a detailed, description. I encourage you to explore the Portal, download the most recent Manual, and, most importantly, draft and implement complaint management procedures for using it. Regulators will surely expect as much!


Common Complaints
Screening Process
Flow Chart
Step-by-Step Procedures
CFPB Response
Company Response
Monetary Relief
Specifying Relief and Status
Government Portal
Requesting Access
Viewing Complaints
Technical Assistance



By this point, the CFPB has staffed a Consumer Response team. The Consumer Response team, or “Consumer Response” as it has become known, began taking consumer complaints about credit cards on July 21, 2011; it began handling mortgage complaints on December 1, 2011; and it began accepting complaints about bank products and services, private student loans, and other consumer loans on March 1, 2012. Over the next year, the CFPB expects to handle consumer complaints on all products and services under its authority.

According to the CFPB, between July 21, 2011, and June 1, 2012, the CFPB received approximately 45,630 consumer complaints, including approximately:

  • 16,840 credit card complaints,
  • 19,250 mortgage complaints,
  • 6,490 bank products and services complaints, and
  • 1,270 private student loan complaints.

Approximately 44 percent of all complaints were submitted through the CFPB’s website and 11 percent via telephone calls. In the same period, referrals from other regulators and agencies accounted for 39 percent of all complaints received. (The rest were submitted by mail, email, and fax.)

Furthermore, the CFPB has notified the public that more than 37,120 complaints (81 percent) of complaints received as of June 1, 2012, have been sent by Consumer Response to companies for review and response. The remaining complaints have been referred to other regulatory agencies (9 percent), found to be incomplete (4 percent), or are pending with the consumer or the CFPB (6 percent).

Companies have already responded to approximately 33,000 complaints or 89 percent of the complaints sent to them for response.

Monday, October 1, 2012

CFPB Proposes New Servicing Rules - TILA

On September 26, 2012, we notified you about the proposed rules promulgated by the Bureau of Consumer Financial Protection (Bureau) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation. These proposed rules seek to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing.

Now we would like to provide an outline of the CFPB's proposed companion regulation (Proposal) to amend Regulation Z, which implements the Truth in Lending Act (TILA), such Proposal meant also to implement the Dodd-Frank provisions regarding mortgage loan servicing.

Specifically, the Proposal implements Dodd-Frank sections addressing:

1) Initial rate adjustment notices for adjustable-rate mortgages (ARMs).

2) Periodic statements for residential mortgage loans.

3) Prompt crediting of mortgage payments.

4) Response to requests for payoff amounts.

Furthermore, the Proposal would amend current rules governing the scope, timing, content, and format of current disclosures to consumers occasioned by the interest rate adjustments of their variable-rate transactions.

The Proposal is extensive, nuanced, and comprehensive, covering many aspects of the TILA statute. Therefore, I will touch on some of the salient features of it. You can access our Library to download the Proposal in its entirety.

Comments Due: On or before October 9, 2012.



Nine Major Topics
Small Servicers



The Proposal generally applies to closed-end mortgage loans, with certain exceptions.

Under the proposed amendments to Regulation X, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded. Under this Proposal to Regulation Z, the periodic statement and ARMs disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.

Additionally, reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.

The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

Nine Major Topics

As is the case of the aforementioned RESPA proposal, this Proposal regarding TILA also contains nine major topics.

1. Periodic billing statements.

Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use. The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The Proposal also includes an exception for small servicers that service 1,000 or fewer mortgage loans and service only mortgage loans that they originated or own.

Wednesday, September 26, 2012

CFPB Proposes New Servicing Rules - RESPA

Recently, the Bureau of Consumer Financial Protection (Bureau) issued proposed rules (Proposal) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation.
The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing. 
Specifically, this proposal requests comment regarding proposed additions to Regulation X to address seven servicer obligations:
1) Correct errors asserted by mortgage loan borrowers; 
2) Provide information requested by mortgage loan borrowers;
3) Ensure that a reasonable basis exists to obtain force-placed insurance;
4) Establish reasonable information management policies and procedures;
5) Provide information about mortgage loss mitigation options to delinquent borrowers;
6) Provide delinquent borrowers access to servicer personnel with continuity of contact about the borrower's mortgage loan account; and
7) Evaluate borrowers' applications for available loss mitigation options.
The Proposal would modify and streamline certain existing servicing-related provisions of Regulation X. 
For instance, it would revise provisions relating to:
1) A mortgage servicer's obligation to provide disclosures to borrowers in connection with a transfer of mortgage servicing, and
2) A mortgage servicer's obligation to manage escrow accounts (including the obligation to advance funds to an escrow account to maintain insurance coverage and to return amounts in an escrow account to a borrower upon payment in full of a mortgage loan).
The Bureau proposes 'companion' regulations implementing amendments to the Truth In Lending Act (TILA) in Regulation Z (the 2012 TILA Servicing Proposal). We will provide an outline of the 2012 TILA Servicing Proposal in a subsequent newsletter.
Comments Due: On or before October 9, 2012.
Nine Major Topics
Small Servicers
  • The Proposal generally applies to closed-end mortgage loans, with certain exceptions.
  • Under the Proposal, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded.
  • Under the 2012 TILA Servicing Proposal, the periodic statement and adjustable-rate mortgage (ARM), disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.
  • Reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.
  • The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.
Nine Major Topics
The Proposal covers nine major topics, as follows:
1. Periodic billing statements.
Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use.
The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans and service only mortgage loans that they originated or own.
2. Adjustable-rate mortgage interest-rate adjustment notices.
Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The Proposal contains model and sample forms that servicers could use.

Thursday, September 13, 2012

HUD: Causes of Administrative Actions

The Department of Housing and Urban Development (HUD) has published the Administrative Actions taken by the Mortgagee Review Board (MRB) against certain FHA mortgagees. The issuance, published in the Federal Register on September 10, 2012, covers administrative actions against mortgagees from August 1, 2011 to December 31, 2011.

The MRB has the authority to issue Settlement Agreements, Civil Money Penalties, Withdrawals of Federal Housing Administration (FHA) Approval, Suspensions, Probations, Reprimands, and Administrative Payments.

Or to put this in more modern parlance, the MRB is empowered to enforce administrative sanctions, including reprimand, probation, suspension or withdrawal of approval, cease-and-desist orders, and civil money penalties

Trust me - you don't want to go there!



Preparation is Protection
47 Causes of Administrative Actions


Preparation is Protection

I have said repeatedly that preparation is protection. One way to always be prepared is to consider what other mortgagees did that got them into trouble in the first place.* Learning from the mistakes of others is a proactive way to ensure that we are following up on every aspect of our compliance requirements.

In representing clients before the MRB, I can vouch for the exhaustive due diligence that is virtually mandated, the considerable costs involved, the experienced legal counsel and requisite regulatory compliance expertise that is needed, and the significant adverse impact on an FHA lender's ability to conduct or even continue in business.

It's easy to get lulled into a sense of false confidence by thinking that some violations are minor. But if the MRB gets involved, those minor violations will become a part of the causes for administrative action, and even in some instances the proximate cause of the administrative action.

Nothing should be considered a "minor" violation, when originating HUD/FHA mortgage loans.

So it is instructive to take note of the causes for administrative action against a HUD-approved mortgagee. Ignorance is a futile defense, when it comes to the causes that can affirmatively contribute to disciplinary action. HUD's position has been consistently clear: actions taken or not taken, that are within our control, are a principal evaluator in determining a mortgagee's culpability.

As Benjamin Franklin said, "an ounce of prevention is worth a pound of cure!"

47 Causes of Administrative Actions

Below is a list of 47 causes that have led to the MRB taking administrative action.

In many cases, the civil money penalties were very large.

1. Falsified and/or conflicting information in the origination of HUD/FHA loans.

2. Failed to ensure loan applications were taken and processed by authorized employees.

3. Failed to ensure that documents were not handled by an interested third party.

4. Failed to adequately document the income used to qualify the borrower.

5. Failed to document the source of funds used for the down payment and/or closing costs; failed to perform quality control on all loans that went into default within the first six months.

6. Failed to timely submit audited financial statements and supplementary reports to HUD.

7. Failed to notify the Department that it had paid a fine to a state banking department.

8. Failed to ensure that only principal owners or corporate officers submit the annual certification report.

9. Submitted a false certification to HUD when it submitted its electronic annual certification for 2011.

10. Submitted false audited financial statements to HUD for Fiscal Year ending April 30, 2010, when it claimed ownership of a residential condominium unit.

11. Submitted audited financial statements to HUD that were not in conformity with Generally Accepted Accounting Principles due to the improper capitalization of a residential condominium unit.

12. Displayed the FHA/HUD logo on its Web site when promoting its FHA mortgage services.

13. Failed to timely submit or complete its audited financial statements for its fiscal year ending December 31, 2011.

14. Failed to pay its annual certification fee.

15. Failed to submit its annual certification for 2010.

16. Failed to notify HUD that it paid a fine to a state banking department to resolve allegations that it had violated the state's lenders licensing laws.

17. Failed to remit mortgage insurance premiums to HUD/FHA on its loans.

18. Failed to notify HUD/FHA within fifteen (15) days of the termination of contracts for mortgage insurance.

19. Failed to notify HUD that it voluntarily surrendered its license to a state banking department.

20. Originated FHA mortgages in a state while it was the subject of an order suspending its lending license in that state.

21. Permitted a non-FHA approved mortgage broker to perform loan origination services on its FHA loans.

22. Approved loans for borrowers who were ineligible for federally insured mortgages due to outstanding delinquent federal debt.

23. Approved FHA loans without adequately documenting the income used to qualify the borrowers.

24. Approved FHA loans without resolving discrepancies in the loan files relating to the borrowers’ income and employment.

24. Failed to document the source of gift funds on FHA loans.

25. Approved a loan when the borrower did not meet the minimum credit required.

26. Approved a loan where it omitted a liability of the borrower in the underwriting analysis.

27. Accepted loan applications from loan correspondents for which it was not an FHA approved Sponsor.

28. Failed to review FHA loans that went into early payment default within the first six (6) months of repayment.

29. Failed to comply with property preservation and protection requirements on HUD-insured homes following foreclosure.

30. Violated HUD/FHA requirements when it approved FHA loans without identifying irregularities and resolving discrepancies and conflicting information in the loan files.

31. Violated HUD/FHA requirements on FHA loans when it failed to adequately document the borrowers’ income.

32. Violated HUD/FHA requirements when it approved FHA loans after failing to ensure that documents were not handled by an interested third party.

33. Violated HUD/FHA requirements on FHA transactions when it failed to document the source of funds used for the borrowers’ down-payments and/or closing costs.

34. Violated HUD/FHA requirements when it approved FHA loans and omitted monthly debt obligations from its underwriting analysis.

35. Violated HUD/FHA requirements when it approved an FHA loan for a borrower who was ineligible because of an outstanding court-ordered judgment.

36. Violated HUD/FHA requirements when it approved a loan for FHA mortgage insurance without ensuring the borrower met the statutory 3.5% minimum investment requirement.

37. Violated HUD/FHA requirements when it approved a loan for a borrower that was over insured, because it had failed to consider the seller’s inducement to purchase.

38. Failed to timely remit mortgage insurance premiums.

39. Failed to notify HUD that the mortgagee and its President were issued a Complaint and Cease and Desist Order from a state banking department that required the mortgagee to pay fines, ordered it to permanently cease and desist from operating and engaging in the business of a lender in that state, required it to immediately surrender its lender's license, and barred its President from serving as an officer, director, or owner of any financial institution in the state.

40. Failed to comply with HUD’s quality control requirements.

41. Violated HUD’s mortgagee employee and staffing requirements.

42. Charged unallowable and unsupported fees.

43. Reproduced the official HUD seal on an advertisement or business solicitation, and disseminated a misrepresentative or misleading advertisement or business solicitation to the public.

44. Failed to ensure that the quality control reviews for early payment defaults were completed.

45. Used conflicting information in originating and obtaining HUD/FHA mortgage insurance.

46. Failed to adequately document the stability of income used to qualify the borrowers.

47. Failed to notify HUD/FHA within 15 calendar days of the termination, transfer or sale of mortgage insurance contracts.


Law Library Image

Department of Housing and Urban Development

Mortgagee Review Board: Administrative Actions

Federal Register: 77/175
September 10, 2012

*Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

Thursday, August 30, 2012

Appraisals and APR for Higher-Risk Mortgages

On August 15, 2012, six federal financial regulatory agencies issued a proposed rule to establish new appraisal requirements for "higher-risk mortgage loans." The proposed rule has been issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (Bureau), the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

The proposed rule would implement amendments to the Truth in Lending Act (TILA) enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Under the Dodd-Frank, mortgage loans are higher-risk if they are secured by a consumer's home and have interest rates above a certain threshold.

For higher-risk mortgage loans, the proposed rule would require creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property. The proposed rule also would require creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

Creditors would have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the past six months. This requirement is meant to address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.

The aforementioned agencies are seeking comments from the public on all aspects of the proposal. The public will have 60 days, or until October 15, 2012, to review and comment on most of the proposal.

"Higher Risk" Mortgage Loans
Appraisal Requirements
Additional Written Appraisal
Calculating the Annual Percentage Rate
Replacing the Annual Percentage Rate


On July 21, 2010, Dodd-Frank was signed into law. Section 1471 of Dodd-Frank establishes a new TILA section 129H, which sets forth appraisal requirements applicable to “higher-risk mortgages.”

Specifically, new TILA section 129H does not permit a creditor to extend credit in the form of a higher-risk mortgage loan to any consumer without first:

  • Obtaining a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property.

  • Obtaining an additional appraisal from a different certified or licensed appraiser if the purpose of the higher-risk mortgage loan is to finance the purchase or acquisition of a mortgaged property from a seller within 180 days of the purchase or acquisition of the

  • Property by that seller at a price that was lower than the current sale price of the property. (The additional appraisal must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale.)

  • Providing the applicant, at the time of the initial mortgage application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant’s expense.

  • Providing the applicant with one copy of each appraisal conducted in accordance with TILA section 129H without charge, at least three (3) days prior to the transaction closing date.

"Higher Risk" Mortgage Loans

The new TILA section 129H(f) defines a “higher-risk mortgage” with reference to the annual percentage rate (APR) for the transaction. A higher-risk mortgage is a “residential mortgage loan” secured by a principal dwelling with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set, as follows:

  • By 1.5 or more percentage points, for a first lien residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454).

Thursday, August 23, 2012

Mortgage Fraud and SARs

On August 16, 2012, the Financial Crimes Enforcement Network (FinCEN) issued an Advisory to highlight activity related to mortgage loan fraud, especially as it pertains to Residential Mortgage Lenders and Originators (RMLOs). The issuance serves to further clarify suspicious financial activity that may require filing Suspicious Activity Reports (SARs).*

The issuance consolidates certain information from previously issued FinCEN reports, and contains examples of common fraud schemes and potential "red flags" for activity related to mortgage loan fraud.

This Advisory, which consolidates certain information from previously issued FinCEN reports, contains examples of common fraud schemes and potential Red Flags for activity related to mortgage loan fraud. Furthermore, the data gathered supports the efforts of the Financial Fraud Enforcement Task Force (FFETF), the Treasury's broader initiative to ensure that U.S. financial institutions are not used as conduits for illicit activity, as well as the OIG's mortgage fraud initiatives of FinCEN and the Department of Housing and Urban Development (HUD).


Types of Mortgage Loan Fraud
Possible Red Flags
Suspicious Activity Reporting
Contacting FinCEN
Types of Mortgage Loan Fraud

Based on the Advisory and previous mortgage fraud reports issued by FinCEN, the following list identifies certain types of mortgage loan fraud. These are primarily based upon schemes and scams frequently reported or described in SARs or identified by law enforcement authorities.

Occupancy Fraud
Occurs when borrowers, to obtain favorable loan terms, claim that subject properties will be their primary residences instead of vacation homes or investment properties. It also occurs when subjects apply for loans for properties that others, such as family members, will actually occupy.

Income Fraud
Includes both overstating income to qualify for larger mortgages and understating income to qualify for hardship concessions and modifications.

Appraisal Fraud
Includes both overstating home value to obtain more money from a sale of property or cash-out refinancing, and understating home value in connection with a plan to purchase a property at a discount to market value.

Employment Fraud
Includes misrepresenting whether, where, and for how long borrowers have been employed; whether borrowers are unemployed or collecting unemployment benefits; and whether borrowers are independent contractors or business owners.

Liability Fraud
Occurs when borrowers fail to list significant financial liabilities, such as other mortgages, car loans, or student loans, on mortgage loan applications. Without complete liability information, lenders cannot accurately assess borrowers' ability to repay debts.

Debt Elimination Schemes
Involves the use of fake legal documents and alternative payment methods to argue that existing mortgage obligations are invalid or illegal, or to purport to extinguish mortgage balances. Individuals orchestrating debt elimination schemes typically charge borrowers a fee for these debt elimination "services."

Foreclosure Rescue Scams
Targets financially distressed homeowners with fraudulent offers of services or advice aimed at stopping or delaying the foreclosure process. Some of these scams require homeowners to transfer title - or make monthly mortgage payments - to the purported "rescuer," rather than the real holder of the mortgage. Some foreclosure rescue scams require homeowners to pay fees before receiving "services," and are known as "advance fee" schemes.

Social Security Number (SSN) Fraud and Other Identify Theft
Includes the use of an SSN or other government identification card or number that belongs to someone other than the applicant in a loan application. Identity Theft includes broader use of another's identity or identifiers (beyond an SSN) to obtain a mortgage or perpetrate a "fraud for profit" scheme.