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.

IN THIS ARTICLE

History

"Higher Risk" Mortgage Loans

Appraisal Requirements

Additional Written Appraisal

Calculating the Annual Percentage Rate

Replacing the Annual Percentage Rate

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History

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).
  

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).

IN THIS ARTICLE

Types of Mortgage Loan Fraud

Possible Red Flags

Suspicious Activity Reporting

Contacting FinCEN

Library

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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.

Anti-Money Laundering Program–Preparation is Protection

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, recently finalized regulations (Final Rule) requiring non-bank Residential Mortgage Lenders and Originators (RMLOs) to establish an Anti-Money Laundering Program (AML Program) and file Suspicious Activity Reports (SARs), as FinCEN requires of other types of financial institutions.[i]

FinCEN issued these regulations defining non-bank residential mortgage lenders and originators as loan or finance companies for the purpose of requiring them to establish AML Programs and report suspicious activities under the Bank Secrecy Act (BSA).

The effective compliance date for the Final Rule is August 13, 2012.[ii]

For additional background information, this article may be read in conjunction with my March 2012 article in this publication, entitled Anti-Money Laundering Debuts for Nonbanks.[iii]

FinCEN may impose civil monetary penalties for non-compliance with its regulations, including a penalty for each suspicious activity reporting violation, so compliance with the SAR regulations should be considered mandatory on the part of responsible management.[iv]

BSA authorizes the Treasury to issue regulations requiring financial institutions, including any “loan or finance company” to keep records and file reports that are deemed to have “a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”

In the supplementary information to the Final Rule, the term loan or finance company “can reasonably be construed to extend to any business entity that makes loans to or finances purchases on behalf of consumers and businesses. Some loan and finance companies extend personal loans and loans secured by real estate, mortgages and deeds of trust, including home equity loans.”

The following constitutes these categorical definitions recognized by FinCEN:

Loan or Finance Company – A person engaged in activities that take place wholly or in substantial part within the United States in one or more of the capacities listed below, whether or not on a regular basis or as an organized business concern. This includes but is not limited to maintenance of any agent, agency, branch or office within the United States. The term “loan or finance company” shall include a sole proprietor acting as a loan or finance company, and shall not include: a bank, a person registered with and functionally regulated or examined by the SEC or the CFTC, any GSE regulated by the FHFA, any federal or state agency or authority administering mortgage or housing assistance, fraud prevention or foreclosure prevention programs, or an individual employed by a loan or finance company or financial institution. A loan or finance company is not a financial institution as defined in these regulations.

Residential Mortgage Lender – The person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement. The term “residential mortgage lender” shall not include an individual who finances the sale of the individual’s own dwelling or real property.

Residential Mortgage Originator – The person accepting a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan.

Residential Mortgage Loan – The loan that is secured by a mortgage, deed of trust or other equivalent consensual security interest on:

· A residential structure that contains 1-4 units, including (if used as a residence) an individual condominium unit, cooperative unit, mobile home or trailer; or

· Residential real estate upon which such a structure is constructed or intended to be constructed.

FinCEN interprets the term “loan or finance company” under the BSA to include any non-bank residential mortgage lenders and originators (i.e., “mortgage companies,” mortgage bankers or lenders,” and “mortgage brokers”) in the residential mortgage business sector.

In this article, I will provide a brief overview of but a few of the many salient features that should be expected in every AML Program.* To give you an idea of the size and complexity of a well-constructed AML Program, my firm’s AML Program is well over fifty pages – which consists of a policy statement and numerous appendices for applicable procedures. This should give you some idea of the depth and detail needed for properly implementing AML compliance. The absence of or any inaccuracies in required program components may indicate a defective policy and procedures – the very tools needed to assist in detecting and preventing money laundering or other illegal activities conducted through mortgage banking conduits.

Brokers Compliance Group - Risk Management for Mortgage Brokers

I am pleased to announce the launch today of our new mortgage risk management support for mortgage brokers: * 

 

Brokers Compliance Group

 

For quite some time, I have believed that mortgage brokers are an under-served part of the residential mortgage loan industry. Yet, they originate traditionally the largest share of loan transactions.

In the last few years, mortgage brokers have had their integrity questioned and their professionalism pilloried. And there has been an unsettling perception that more regulation of mortgage brokers is required.

I feel that it is time for my firm to step up to the plate and provide the kind of advice and counsel that mortgage brokers must acquire, in order to remain strong and capable of forging their own destinies. Until today's launch of Brokers Compliance Group, there has been no mortgage risk management firm in the country devoted to the unique needs of mortgage brokers. Now there is!

Thus, the Directors of my firm and I have now made a commitment to provide to mortgage brokers the same reliable and supportive mortgage compliance expertise that we have provided to mortgage lenders.

The following are the Press Release and Brokers Compliance Group.

PRESS RELEASE

NEW WEBSITE - BROKERS COMPLIANCE GROUP 

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

Interview: Anti-Money Laundering Program for Nonbanks

Monday, August 13, 2012, marks the commencement of the Anti-Money Laundering Program.

Specifically, this is the effective date for implementing the regulatory compliance requirements for Residential Mortgage Lenders and Originators (RMLOs).

From August 13, 2012 forward, RMLOs must have established an Anti-Money Laundering Program (AML Program) and, as required, file Suspicious Activity Reports (SARs).  

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued regulations earlier this year that require RMLOs to establish AML Programs and report suspicious activities under the mandates of the Bank Secrecy Act.

For additional background information, please refer to my March 2012 article, entitled Anti-Money Laundering Debuts for Nonbanks. *

This month, I am publishing yet another article on AML compliance, this time the subject is about drafting the Anti-Money Laundering Program. The article is entitled Anti-Money Laundering Program - Preparation is Protection. When published, I will notify you and send you the download link.

INTERVIEW: ANTI-MONEY LAUNDERING COMPLIANCE

Recently, I was interviewed by Paul Donohue, the Founder of Abacus Mortgage Training and Education, for his highly-regarded Abacus Mortgage Mastery Series.

I discussed at considerable length the many compliance features and guidelines of the Anti-Money Laundering Program. We had a detailed and engaging discussion about anti-money laundering as it relates to RMLOs.

I suggest that you listen to this interview, because it covers a broad range of issues and will help you to be prepared for implementing FinCEN's Anti-Money Laundering Program for RMLOs.

There are two ways for you to listen to the interview:

• Listen to the full Interview.
  • Click the Interview button on our website.

• Download the full interview (MP3) to save for future reference and AML training plans. 
  • Click the MP3 button on our website.

INTERVIEW

Anti-Money Laundering Compliance

CLICK

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