Tuesday, April 30, 2013

FHA: Mortgagee Review Board - Administrative Actions

Periodically, we review with you the types of administrative actions taken by HUD's Mortgagee Review Board (MRB).
The review of the MRB's published administrative actions should be considered a teaching moment for all FHA approved mortgagees, inasmuch as the MRB is empowered to enforce its administrative sanctions through, among other things, reprimand, probation, suspension or withdrawal of approval and/or underwriting authority, cease-and-desist orders, and civil money penalties.
On April 11, 2013 HUD published the administrative actions taken by the Mortgagee Review Board (MRB) against certain FHA mortgagees. The period covered in the issuance is January 1, 2012 to September 30, 2012.
In this article, we provide an outline of the kinds of violations and respective sanctions that the MRB recently sustained.
A Word to the Wise
Rule of Thumb
Administrative Actions
A Word to the Wise Word
In representing clients before the MRB, we 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.
It is instructive to note the causes for the administrative action brought against an FHA-approved mortgagee.
Ignorance is a futile defense, when it comes to the causes that can affirmatively contribute to disciplinary action.
Rule of Thumb Rule
The MRB is not sympathetic to a mortgagee that violates HUD/FHA requirements which are, or are expected to be, within the mortgagee's control.
Violations that are not, or not expected to be, in the mortgagee's control provide the MRB with a more nuanced basis upon which to provide some leniency.
Administrative Actions
Failed to notify the Department that it was the subject of multiple state regulatory actions and sanctions, and submitted false certifications to HUD in connection with its annual renewal of eligibility documentation for its fiscal years ending in 2009, 2010 and 2011.
ACTION: Civil money penalty in the amount of $75,000.
Failed to perform quality control functions in compliance with HUD/FHA requirements, failed to meet the requirements for participation in the FHA mortgage insurance program, failed to ensure the correct mortgagee identification number was used when originating FHA-insured mortgage loans, failed to adequately document the source of and/or adequacy of funds used for closing, failed to correctly calculate and document the mortgagor's income, failed to verify the stability of the mortgagor's income, failed to ensure the mortgagor was eligible for an FHA-insured mortgage loan, failed to ensure the property met HUD's eligibility requirements, failed to comply with TOTAL Scorecard requirements, failed to comply with HUD's property flipping requirements, failed to provide construction documents required for property eligibility and/or high ratio financing resulting in over-insured mortgages, failed to ensure that the maximum mortgage amount was correctly calculated, resulting in over-insured mortgages, failed to ensure that data submitted to HUD systems was accurate, and charged mortgagors unallowable fees.
Notice of Administrative Action immediately and permanently withdrawing the FHA approval.
VIOLATION: Failed to obtain adequate documentation of the income used to qualify a borrower, failed to resolve discrepancies and/or conflicting information before submitting loans for FHA mortgage approval, and failed to ensure mortgagors were not charged fees that were excessive and/or unreasonable for the services performed.
Settlement Agreement that required civil money penalties in the amount of $17,000, to indemnify HUD/FHA for its losses with respect to two FHA-insured loans, and to refund borrowers for excessive origination fees.
Submitted or caused to be submitted false information to HUD in relation to 63 mortgagee record changes, failed to reconcile its portfolio data and allowed HUD records to incorrectly identify the mortgagee as the holder of 97 FHA-insured mortgage loans, and submitted false information to HUD on 133 claims for FHA insurance benefits and, in 90 instances, claimed benefits for ineligible holders of record.
ACTION: Settlement Agreement that, among other things, required a civil money penalty in the amount of $1.2 million and to complete mortgage record changes to facilitate the payment of certain FHA insurance claims.

Tuesday, April 23, 2013

Waiting for the CFPB

My sources tell me that the Consumer Financial Protection Bureau (CFPB) will soon announce substantial monetary penalties and other administrative actions against a large nonbank. I guess it is inevitable that when such an announcement is finally out and about, humans  - and especially the financial services type humans - will be easily aroused to panic - which means the nascent, CFPB exam preparation industry will receive a steroidal boost. And the frisson of dismay and frenzy will be stirred up even further by the ambulance chasers, running to the rescue, with their merry band of products and services to quell the indomitable, bureaucratic brute.
There are plenty of compliance and law firms scouring the horizon for new clients that seek CFPB exam readiness. Indeed, I know of one such firm that has made fear-mongering into a fine art, whirring about and speaking at industry events where a surfeit of anxiety and angst may be supremely generated. As the affrighted crowd bounds into the arms of these ushers of deliverance, seeking the aegis of their singular protection, they are quite sold on a full scale risk assessment and sempiternal, on-going monitoring. But the prospective clients, sore at the loss of money in this endeavor, need not be too vexed, inasmuch as they do get action plans, some risk assessment tools, and assorted bric-a-brac of one-size-fits-all templates "specially drafted" for their own unique purposes.
Our industry is a strong bunch, survivors of the toughest real estate cycles, and accustomed to adapting to regulatory mandates. We have seen the largest fall and the lowest rise. We push back, when needed; and we push forward, when appropriate. We know that our industry is the backbone of the economy. Our future will not be compromised by cold sweat and consternation.
So, when considering the legal and regulatory compliance requirements of the CFPB, how alarmed and apprehensive should we be?
Trembling before the Tsar
In the Tsardom of Russia, most people never met the Tsar. They met his agents, which at the time meant the duly constituted orders of functionaries who acted in accordance with the law. The people who did meet the Tsar, even nobles, were known (and even expected) to tremble in his presence. Like the custom required by English kings, the people who stood in the presence of the Tsar stated their views, when called upon to speak, and, upon finishing their statements, they left the reception chamber by bowing and slowly backing out of the room, always facing the Tsar. This kind of obeisance showed respect for the established order and reflected the insuperable power and primacy of the monarchy.
But we do not live in a monarchy and the CFPB is not the Tsar.
We need not tremble before the CFPB!
There are a set of guidelines that the CFPB requires for implementation by lenders, mortgage brokers, servicers, and others in the financial services sector. Most of these guidelines are not particularly ponderous, unless the foregoing entities hadn't been implementing them all along. It is not as if we do not know the importance of fair lending or proper data collection pursuant to the Home Mortgage Disclosure Act (HMDA). There is no real mystery regarding compliance with advertising rules. Every company is keenly aware of the mandates set forth in the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).
At this point in the industry's growth, who does not know about the importance of risk controls and risk mitigation? Who does not know about the central importance of responsible and knowledgeable management? How many companies willfully ignore consumer complaints?
A whole generation of bankers, lenders, brokers, and servicers have cultivated a heightened sensitivity to the Fair Credit Reporting Act (FCRA) and Fair & Accurate Credit Transaction Act (FACTA), Gramm-Leach-Bliley Act (GLBA), Bank Secrecy Act and Anti-Money Laundering Program requirements, Equal Credit Opportunity Act (Regulation B), Home Ownership & Equity Protection Act (HOEPA), Secure & Fair Enforcement for Mortgage Licensing Act (SAFE Act), the Fair Housing Act, the Anti-Predatory Lending Act, the National Do-Not-Call Registry, and monitoring third party service providers (sometimes neutrally referred to as "vendor management").
These are the sorts of areas about which the CFPB has an interest in ensuring consumer financial protection. None of the aforementioned is strange or new to anybody who has been paying attention!
I have said many times that 'Preparation is Protection' - and most companies associated with residential mortgage loan originations and servicing have been preparing, thus protecting themselves, for a long, long time. Many have been through numerous state and federal banking examinations, responding, where needed, with corrective actions. Not a few have retained competent mortgage risk management firms or in-house compliance advisors. Even those who cannot afford compliance counsel have participated in one way or another in conferences, conventions, and training venues in order to be educated in regulatory developments. Everybody now knows unequivocally that sales are cemented to compliance.
Who's afraid of the big bad wolf?
As I wrote recently, the CFPB has considerable enforcement powers. Among other things, it can rescind or reform contracts, require the refunding of money to a consumer and demand other forms of restitution, mandate the disgorgement and refunding of various types of assets, compel the return of real property, cause fees and other compensation to be disgorged for unjust enrichment, require the payment of damages or other monetary relief, cause public notification regarding a violation, limit the activities or functions of alleged violators, and, of course, exact civil monetary penalties.
But, in terms of the remedies mentioned above, none of these administrative actions is really new. Virtually every state banking department in the country has most of these enforcement powers. Nearly all prudential regulators have many such authorities. Banks and nonbanks that have undergone routine examinations are not an unsuspecting lot, completely unprepared for the kinds of detailed review that the CFPB conducts. Having watched the CFPB in action, I can say that a firm that is adequately prepared for a state or federal examination should be prepared for a CFPB examination.
Is the CFPB's examination a bit more detailed? Yes. But most of the exam requirements are re-treads or the kinds of state and federal banking information and documentation requests or guidelines that are mostly customary and pro forma.

Thursday, April 11, 2013

The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.
It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]
For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.
Hearings and Adjudications
Scope of Legal Remedies
Blowing the Whistle on Violations
Policy Statement and Whistleblower Protection
Locking Horns with the Department of Labor
Hearings and Adjudications
On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]
Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]
Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:
  • Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and
  • “… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.”
Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.
Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.
Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]
Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.
When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.
Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

Wednesday, April 3, 2013

Loan Originator Compensation: New Rules

On January 24, 2013, as the last of the Final Rules of the Consumer Financial Protection Bureau (CFPB) rolled out, I offered an outline of all of them, entitled "CFPB's Gang of Seven (Final Rules)".*
I listed them in order of issuance, as follows:
1. Ability-to-Repay (ATR)
2. High-Cost Mortgage (HCM)
3. Escrow
4. Servicing
5. Appraisals for High-Risk Mortgages
6. Copies of Appraisals
7. Mortgage Loan Originator Compensation
Having come through the last two months responding to numerous questions about these Final Rules, I have been able to cobble together some of the most salient questions, regulatory features, and concerns that our clients have expressed about them. And when I have spoken to the media types, it seems that they also have a set of questions and interests that are not being fully addressed in the current dialogue. Of abiding interest is the change relating to loan originator compensation.
With that in mind, I want to provide a brief outline of some loan originator compensation issues, offering additional details garnered from two months in the trenches working through these regulatory issues on behalf of our clients. From time to time, I will have more to discuss about many regulatory changes anticipated in 2013 and 2014. I am going to conduct this review topic by topic, rather than just as specific regulations subject to a final rulemaking.
Terms and Conditions
Retirement Plans
Factors and Proxies
Dual Compensation
Non-loan Originations Services
Points and Fees
Loan Originator Qualifications
Mandatory Arbitration Clause
Single Premium Insurance
Record Retention Requirements
Terms and Conditions
By now, there is nary a residential mortgage lender or originator that does not know that, under Regulation Z, loan originator compensation is prohibited from being based upon the terms and conditions of a mortgage loan transaction.
The CFPB has provided new nomenclature for the terminology "transaction terms and conditions," without much changing the prohibition and certain exceptions to the standing rule. The new terminology is "term of a transaction," but now with the clarified meaning that term of a transaction means to include "any right or obligation of the parties to a credit transaction."
The usual cast of regulatory prohibitions continue in force. For instance, loan originator compensation is still prohibited from being based on such things as the interest rate of a loan, or upon the inclusion of additional fees or charges for products or services provided by other parties to the transaction.
And the usual cast of regulatory identifiers of a term of a transaction continue in force. Thus, fees or charges are a term of the transaction if they must be disclosed in the Good Faith Estimate (GFE) or HUD-1 or HUD-1A Settlement Statement (HUD-1). That obviously means to include loan originator or creditor fees or charges for the credit transaction or for a product or service provided by the loan originator or creditor that is related to the extension of credit; and it also means those fees or charges of other parties for any product or service required by the lender as a condition of the extension of credit. Keep in mind, however, that just because a fee or charge is stated on the HUD-1 does not in itself make the fee or charge a term of the transaction.
One rather controversial area involves the off-setting of compensation due to increased costs. The standing rule has provided that loan originator compensation is prohibited from being reduced in response to a change in the transaction terms. This has caused lenders all manner of frustration, not to mention loss of revenues and diminished profits. Yet, the new rule would allow compensation to be reduced in order to offset unexpected increases to estimated settlement costs, otherwise known as "unforeseen circumstances." What is a circumstance that is unforeseen? The imagination reels! But since the CFPB has offered no formal guidance to delineate very specifically what may or may not be an unexpected event, the lender must be extremely careful not to enter these dark waters too briskly.