Lenders Compliance Group

CFPB's New "Feedback Tool"

2012-02-17T11:53:00.000-05:00

On February 16, 2012, the Consumer Financial Protection Bureau (Bureau or CFPB) launched a new initiative, dubbed the Streamlining Regulations Feedback Web Tool.

According to the Bureau, the tool will enable the public and financial institutions alike to more easily submit suggestions for streamlining regulations that the CFPB received from other Federal agencies on July 21, 2011, which the Bureau calls inherited regulations.

In effect, the Bureau is seeking comments and suggestions about existing regulations. The goal is to identify provisions of the regulations that the CFPB should make the "highest priority" for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary.

The purpose of the Feedback Tool is to create one means by which the agency may consider ways to reduce the burdens imposed by existing regulations without reducing actual financial protection to consumers.

This newsletter provides a general outline of the ways and means by which the CFPB will use the information derived from the Feedback Tool, other sources, and an overview of the Federal Register Notice of Streamlining Project of December 5, 2011.

Proposal in the Federal Register
Suggestions Criteria
Suggestions Factors
Potential Streamlining Opportunities
Streamlining Regulations Feedback Web Tool
Public View

Proposal in the Federal Register

On December 5, 2011, the CFPB published in the Federal Register its proposal to streamline regulations it recently inherited from other Federal agencies. The Bureau indicated that it would ask the public to identify provisions of the inherited regulations that the Bureau should make the highest priority for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary. Comments on the proposal must be submitted by March 5, 2012 and commenters will have 30 additional days (until April 3, 2012) to respond to other comments.

The proposal itself provided several specific requirements that the CFPB believes may warrant review.

For the next year the Bureau is focusing most of its rulemaking resources various mortgage reforms that Congress instructed the Bureau to implement. This focus is dictated by the January 2013 statutory deadline for most of these rules.

After the Bureau receives public input and determines its priorities, the Bureau will consider whether to issue a notice of proposed rulemaking to streamline specific provisions of regulations.

The CFPB will focus on a particular regulation or set of regulations. It will also focus on a market sector and all of the regulations that apply to that sector. The Bureau states that it is interested in "identifying practical measures it can take, apart from revising regulations, to make compliance with the inherited regulations easier." It is also interested in identifying practical measures to be taken to promote, or remove obstacles to, responsible innovation in consumer financial services markets.

The Bureau announced that it will also consider practical measures to make it easier for firms, especially smaller ones, to comply with the inherited regulations.

Suggestions Criteria

Commenters may consider suggesting provisions of regulations that should be:

Simplified, rationalized, or consolidated;

Relaxed, modified, or eliminated, perhaps for smaller firms or certain classes of transactions, without undermining essential protections;

Updated to reflect current practices and technology;

Adjusted to avoid unintended consequences; or

Changed to remove an obstacle to responsible innovation.

Suggestions Factors

Commenters are invited to:

Offer their highest priorities for updating, modifying, or eliminating specific provisions of regulations that are outdated, unduly burdensome, or unnecessary.

Single out their top priority.

Factors to be considered by Commenters are:

Suggestions should focus on revisions that would not require Congressional action.

Take into account the five factors the Bureau plans to consider to set its priorities:

1. Size,

2. Likelihood, and

3. Speed of potential gains from streamlining;

4. Resources needed to achieve the gains; and

5. Strength of the evidence with which to judge these factors.

Potential Streamlining Opportunities

A reading of the Federal Register announcement shows that the Bureau wants information and views about specific potential revisions to the inherited regulations. The Bureau has not necessarily determined its authority to address various aspects of the regulatory frameworks and may determine after further consideration that statutory amendments may be required.

Nor has the Bureau determined whether it should adopt any of the revisions, or whether these particular revisions, if warranted, would be more important than other possible revisions the CFPB may consider after receiving public input.

However, the following is a list of some regulatory frameworks subject to forthcoming review and rulemaking:

Annual Privacy Notices (Regulation P)
ATM Fee Disclosure (Regulation E)
Coverage/Scope of Regulation C (Home Mortgage Disclosure)
Coverage/Scope of Regulation B (Equal Credit Opportunity)
Coverage/Scope of Regulation Z (Truth in Lending)
Ability To Pay Credit Card Debt (Regulation Z)
Electronic Disclosures (Regulations E and Z)
Interstate Land Sales Full Disclosure Act (Interstate Land Sales Full Disclosure Act (ILSA) (15 U.S.C. 1701 et seq.)

The Bureau also states that it could fold proposals to revise specific provisions into one or more of the broader rulemakings that will implement the Dodd-Frank Act's changes to (1) the Truth in Lending (TILA), (2) Real Estate Settlement Procedures (RESPA), (3) Home Mortgage Disclosure (HMDA), and (4) Equal Credit Opportunity Acts (ECOA).

Streamlining Regulations Feedback Web Tool

The Feedback Tool offers, among other things:

Drop-down menus an links to regulations that allow the user to find regulations and sections within those regulations more effectively.

Multiple comment boxes for you to provide specific feedback that can help us decide how to act.

Public View

Certain information entered into the Feedback Tool will be published and made available to the public on Regulations.gov. Information entered on other fields will not be published there but the Bureau may publish it in aggregate form.

Regarding the comments themselves, the fields that will be made public are:

Commenter's Name
Organization Name
State
Organization Type
Subject regulation
Section of regulation
Suggested change
Reason for the suggestion
How the change would affect consumers

How the change would affect financial services providers

Library

Consumer Financial Protection Bureau

Streamlining Inherited Regulations

Notice of Streamlining Project - Request for information.

Federal Register
December 5, 2011

Fannie and Freddie: New Appraisal Portal–Deadline Approaches

2012-02-09T07:58:00.001-05:00

A critical appraisal requirement deadline approaches![i]

The requirement went into effect on December 1, 2011. The deadline is March 19, 2012.

In This Article *

Synopsis

Overview

Starting the Registration Process

-Registering with Fannie Mae

-Registering with Freddie Mac

Accessing the UCDP Portal

Using the UCDP Portal

Training

What to Expect from Lenders

Important Dates

Synopsis

On and after March 19, 2012, Fannie Mae and Freddie Mac (GSEs) will mandate compliance with their new Uniform Mortgage Data Program® (UMDP Program).[ii] The UMDP Program has been developed under the direction of their regulator, the Federal Housing Finance Agency.

The UMDP Program implements uniform appraisal and loan delivery data standards that are meant to support data accuracy and integration of mortgage data. Actually, the UMDP Program implements two of Fannie Mae's Loan Quality Initiative (LQI) objectives: electronic submission of appraisal data and collection of additional loan data in an updated format. Thus, the UMDP Program is an intrinsic part of the LQI requirements.

The UMDP Program includes:

· Uniform Appraisal Dataset (UAD): standardizes key appraisal data elements.

· Uniform Collateral Data Portal® (UCDP®): electronic collection of appraisal data.

· Uniform Loan Delivery Dataset (ULDD): leverages MISMO Version 3.0 standard. [iii]

In this article, I will pay particular attention to the Uniform Collateral Data Portal® (hereinafter, UCDP Portal).[iv] The UCDP Portal was activated in June 2011. This is a single portal for submitting data electronically of an appraisal file. Lenders must use the UCDP Portal to those data files, including the Uniform Appraisal Dataset (UAD),[v] when applicable, before the delivery date of the mortgage to Fannie Mae and Freddie Mac.

Appraisal report forms for all conventional mortgages delivered to the GSEs on or after March 19, 2012 must be transmitted through the UCDP Portal (prior to the delivery date of the mortgage) under these two conditions:

The loan application is dated on or after December 1, 2011, and
An appraisal report is required.

Variances and waivers will not be given to a lender from either GSE for the subject data, if a lender is not able to submit an appraisal before a single delivery or is not ready by the announced effective dates.

The loans subject appraisal data upload to the UCDP Portal at this time are conventional loans sold to Fannie and Freddie. FHA, VA, and Rural Development mortgages are excluded from the UCDP Portal requirement. Mortgage brokers cannot register for UCDP Portal.[vi]

There are three user categories that will access the UCDP Portal:

Lenders that have an existing Fannie Mae Seller/Servicer Number
Correspondents that do not have an existing Fannie Mae Seller/Servicer Number
Agents (Appraisal Management Companies, Appraiser Vendors)

Overview

There are many “moving parts” to the UMDP Program, but we will highlight the UCDP Portal.

The rule of thumb is, as follows: if an appraisal is required, the appropriate appraisal report form should be transmitted via the UCDP Portal for all conventional mortgages with application received dates on or after December 1, 2011 for loans delivered to the GSEs on or after March 19, 2012.

Starting the Registration Process

It is not possible to submit to the UCDP Portal unless the lender sets up a “primary lender administrator” with Fannie and/or Freddie. This administrator must be the same individual for both Fannie and Freddie. So-called “backup” lender administrators are permitted, if the lender chooses to delegate certain administrator responsibilities to other lender employees; however, the initial set-up must be established by the primary lender administrator.

There is a rather simple, four step process to registering for and setting up the UCDP Portal, consisting of:[vii]

Step 1: Registration

Step 2: Completing the UCDP Set-up Form

Step 3: Accessing the UCDP registration URL, and

Step 4: Completing UCDP registration by clicking on the registration URL (Step 3).

Fannie Mae and Freddie Mac have separate registration processes for the UCDP Portal.

Registration with Fannie Mae

Fannie Seller/Servicers and Non-Seller/Servicers:

Download and review Getting Registered for UCDP.

Seller/Services: Use their current Fannie Mae User ID.

New users and Non-Seller/Servicers: receive their User ID in an email from Fannie Mae.

Registration with Freddie Mac

Download and review Getting Registered for the Uniform Collateral Data Portal.

The Freddie Mac UCDP Authorization Code is emailed from Freddie Mac.

Accessing the UCDP Portal

The UCDP Portal is accessed via www.eFannieMae.com.

Appraisals must be submitted to the GSEs prior to the mortgage’s delivery date of the mortgage and must include the applicable required appraisal report forms for all conventional appraisal reports.[viii] The appraisal data remains in the UCDP Portal, even if the loan is not delivered to a specific GSE.

The GSEs have provided several means by which lenders may access the UCDP Portal, both through a web-based URL and also vendor-based technology.

At this time, the following are the accessing methodologies:

· Web-based:

Accessing the URL allows users to browse and upload files in XML or PDFs.

· Vendor-based:

The GSEs have a published list of vendors that provide integrated systems into the UCDP Portal. [ix]

There are no transaction fees charged by the GSEs for using the UCDP Portal, either through the web-based or the vendor-based methods. However, if the appraisal requires conversion from the PDF to the XML format, there is a per transaction fee charged by Veros Real Estate Solutions, the technology provider selected for the UCDP Portal.[x]

Using the UCDP Portal

Through the UCDP Portal, the lender submits the electronic appraisal data files. A maximum of ten (10) appraisal data files are permitted per upload request, file size permitting.[xi] But the data also is given a status by the GSEs and findings. These occur due to the fact that the uploaded appraisal data go through an internal review, which include s UAD Compliance Check.

Appraisals that “pass” are given the status "Successful." A failed review, dubbed “Not Successful,” indicates that the submission is in some way not compliant, perhaps signifying errors that require an appraisal to be corrected by the appraiser.

There is a Submission Summary Report (SSR) for each appraisal upload. The SSR contains a summary of the appraisal submission for each loan, the status of the submission, and an identifier tagged by the UCDP Portal, termed the Document File Identifier (or Doc File ID). Each Doc File ID is assigned per loan and must match that loan’s delivery data provided to the GSEs. The status of “Successful” must be output from the UCDP Portal prior to the loan being delivered to the GSEs.

Appraisals cannot be transferred within the UCDP Portal from one entity to another (i.e., from a correspondent to an aggregator). Therefore, lenders and their correspondents must develop a process to ensure that the aggregator receives the Doc File ID after appraisal date upload and prior to loan delivery.

An appraisal that receives a Doc File ID will be accessible for viewing within the UCDP Portal for up to three years. If the appraisal is modified after the original submission date and the submission needs to be updated, the lender may replace the original submission or add another appraisal, if appropriate (i.e., such as may occur on appraisals that support a new construction loan or for new construction where the original appraisal is no longer valid because of its age).

It is important, therefore, that the lender is in a position to review and, where necessary, correct the appraisal data. Consequently, the lender is able to access the UCDP Portal and receive the status and findings, correct and/or revise appraisal file submissions, and request overrides when the appraisal is not accepted by the UCDP Portal. There is a Search function and also a report feature, each of which makes it easier for the lender to review uploaded data.

Training

Training manuals are available for the UCDP Portal.

These most important training guides are recorded tutorials, called Using the Uniform Collateral Data Portal and Submitting Appraisal Data Files to the Uniform Collateral Data Portal Tutorials and a General User Guide.

Furthermore, Fannie Mae and Freddie Mac have a joint UCDP Support Center, which can be reached by calling 1-800-917-9291.

What to Expect from Lenders

Lenders will require, at minimum:

The Submission Summary Report (SSR) from the UCDP Portal must state that the submission status was “Successful.”

The UAD Compliant Appraisal must be submitted to Fannie Mae and Freddie Mac and must be “Successful” for each.

The Appraisal must clearly state on the bottom of the appraisal the following UAD “indicator,” UAD Version 9/2011.

Important Dates

December 1, 2011 (loan application date): Lenders must deliver fully UAD-compliant electronic appraisal report data (if appraisal required) and expanded loan delivery data.

March 19, 2012 (loan delivery date): Lenders must submit fully UAD-compliant electronic appraisal report data (if appraisal required) to the UCDP Portal.

July 23, 2012 (loan delivery date): Loan delivery data must be provided in industry-standard ULDD format (unless manually entered in Loan Delivery). All loans delivered to Fannie Mae on or after July 23, 2012 with an application date on or after December 1, 2011, must meet the ULDD requirements.

November 26, 2012 - additional XML Data Requirement for Delivery: pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC) issued a rule which requires all securitizers, including the GSEs, to publicly disclose information regarding ABS loan repurchase requests.[xii] One of the requirements of this rule is to disclose the identity of the entity funding the applicable loan. Therefore, to comply with the SEC rule, the GSEs will require lenders to deliver these additional data points.

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

This Article is also available online at National Mortgage Professional Magazine.

[i] The following Fannie Mae and Freddie Mac documents were amongst those issuances consulted in preparation of this article:
FHFA Announcement, 12/14/11
Lender Letter LL-2011-09, Extension of the Uniform Loan Delivery
Dataset Implementation Date
Uniform Mortgage Data Program, Registration Checklist, UCDP 11/11
Reminder: Key UMDP Requirements Go Into Effect on December 1, 2011, 11/29/11
Uniform Collateral Data Portal (UCDP), FAQs, 10/25/11
Uniform Collateral Data Portal Reference Series for the Lender Admin: 1-Lender Admin Registration, 8/2011
Uniform Collateral Data Portal Reference Series for the Lender Admin: 2-Managing Business Units, 5/2011
Uniform Collateral Data Portal Reference Series for the Lender Admin: 2-Managing Users, 5/2011
Uniform Collateral Data Portal Reference Series for the Lender Admin: 4-Managing Lender Agents, 5/2011
Uniform Collateral Data Portal, Overview, 11/17/11
Getting Ready for UCDP Job Aid, 10/24/11
Uniform Collateral Data Portal (UCDP), General User Guide, 8/2011
[ii] See the Uniform Collateral Data Portal® page: www.efanniemae.com/sf/technology/commitloandel/ucdp/
[iii] At this time, MISMO Version 3.0 does not provide a framework for appraisal report data. Fannie Mae and Freddie Mac are transitioning their single-family loan delivery file formats to the industry standard MISMO Version 3.0 Reference Model and changing the data elements required at the time of loan delivery.
[iv] See Lender Letter LL-2010-15
[v] UAD forms indicate a version date of "UAD Version 9/2011," in addition to the current March 2005 form date, while the previous form will have a March 2005 form date. An appraisal report is considered to be UAD compliant if it is completed in accordance with Appendix D, UAD Field-Specific Standardization Requirements of the UAD Specification.
[vi] While mortgage brokers are not responsible for submitting the appraisal to the UCDP Portal, they must be aware that if the lender submits the appraisal and does not receive a “Successful” submission status from both Fannie and Freddie, the loan is not likely to be eligible for funding/purchase by the lender.
[vii] For registration instructions, see Uniform Collateral Data Portal Reference Series for the Lender Admin: 1- Lender Admin.
[viii] GSE appraisal forms include:
Uniform Residential Appraisal Report (Fannie Mae 1004/Freddie Mac Form 70) - UAD
Manufactured Home Appraisal Report (Fannie Mae 1004C/Freddie Mac Form 70B)
Small Residential Income Property Appraisal Report (Fannie Mae 1025/Freddie Mac Form 72)
Individual Condominium Unit Appraisal Report (Fannie Mae 1073/Freddie Mac Form 465) - UAD
Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Fannie Mae 1075/Freddie Mac Form 466) - UAD
Exterior-Only Inspection Residential Appraisal Report (Fannie Mae 2055/Freddie Mac Form 2055) - UAD
Individual Cooperative Interest Appraisal Report (Fannie Mae Form 2090)
Exterior-Only Inspection Individual Cooperative Interest Appraisal Report (Fannie Mae Form 2095)
[ix] Vendor lists are available at www.eFannieMae.com and www.FreddieMac.com.
[x] See www.veros.com
[xi] The maximum size per appraisal data file is 12 MB for a PDF-only and 15 MB for an XML file format that contains an embedded PDF. For multiple appraisal files at one time, the total combined file size limit is 100 MB.
[xii] SEC Rule 15G(a)-1

Mortgage Crisis Commission: Tragedy or Farce?

2012-01-25T15:41:00.000-05:00

Here we go again! A commission. The politician's way of seeming to do something, though really doing nothing, all the while defusing criticism and dispersing risk. *

Three years late and stunted politically at its very inception, this year's version of a Truth and Reconciliation Commission will likely do little to uncover any truths which we don't already know and reconcile nothing that would not have been reconciled in any event without a commission.

Let's take a close look at the new special investigations unit, already being dubbed the Mortgage Crisis Commission.

Marching Orders
The Players
Chairman
Chairmen
Predators and Prey
Gambit
Quis custodiet ipsos custodes?

Marching Orders

The following 'marching orders' are from President Obama's State of the Union Address 2012, given on January 24, 2012:

"And if you're a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can't afford with confusing forms and deceptive practices are over."

"And tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans."

The Players

The "special unit" mentioned by the President is an office of Mortgage Origination and Securitization Abuses. Special units don't have Chairpersons, but this one does. So, let's just stick to the word "commission" for the time being. Its chairman is to be Eric Schneiderman, the Attorney General of New York. This investigation unit is to be part of the Financial Fraud Enforcement Task Force.

In addition to Eric Schneiderman, the commission will be co-chaired by Lanny Breuer, Assistant Attorney General at the Criminal Division of the Department of Justice; Robert Khuzami, the SEC's Director of Enforcement; John Walsh, the U. S. Attorney in Colorado; and Tony West, the Assistant Attorney General of the DOJ's Civil Division.

According to the White House, "the goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation's history."

Chairman

Eric Schneiderman has been developing a reputation as a fighter against tax cheaters. More to the point, he has been opposing a bank foreclosure deal - which has been strongly backed by the Obama Administration - arguing that the settlement would place a limit on investigating wrongdoing on the part of banks. He has come under intense pressure from the Administration and its functionaries, such as Shawn Donovan of HUD, and many Attorneys General, to support the settlement. In fact, Mr. Schneiderman was kicked off the AGs' negotiating committee. The big stumbling block in the settlement has been that, in exchange for the banks' agreeing to a settlement, the Attorneys General who are participating in the settlement would have to agree to sign broad releases preventing them from bringing further litigation on matters relating to improper bank practices. The price tag was $20 billion.

Interestingly, quite recently there has been news about a potential settlement after all. Under this proposed settlement, banks would agree to follow existing laws against abusive foreclosures and set aside $25 billion to help homeowners who are underwater on their homes or who were wrongfully foreclosed. We still need to learn the full details regarding the level of legal immunity granted to banks accused of wrongdoing as well as the scope of violations covered by the settlement.

The cynical amongst us might think that AG Schneiderman has held out long enough against mighty Administration pressure and has been offered now some national prominence by being named the Chairman of this commission. After all, Mr. Schneiderman sat near First Lady Michelle Obama at the State of the Union speech and he issued the following statement: "I would like to thank President Obama for his leadership in the creation of a coordinated investigation that marshals state and federal resources to bring justice for the victims of the misconduct that caused the mortgage crisis."

Anyway, assuming AG Schneiderman's sincerity, he's but one vote amongst several. And, as political cover and possibly a political tool, Mr. Schneiderman's position to chair the commission serves to undermine and deleverage the strenuous and politically sensitive efforts made heretofore by other AGs to resist the bank settlement - such as the efforts made by the AGs of Delaware and Massachusetts, and certainly the effort made by AG Catherine Cortez Masto of Nevada, one of the hardest hit states in the foreclosure debacle.

Chairmen

Maybe Mr. Schneiderman has taken the Chairman's position for all the best consumer financial protection reasons, yet his appointment has perhaps given cover to certain other co-chairs who will be serving on this commission.

A brief note on just two of them should suffice:

Lanny Breuer, Assistant Attorney General at the Criminal Division of the Department of Justice worked for Covington & Burling the law firm that has been prominently defending MERS. This is also U. S. Attorney General Eric Holder's former law firm. Anyone who has spent time in DC with the lobbyists there (such as myself) know that Covington & Burling has many long term ties to the financial services industry, regulators, and congress.

Robert Khuzami, the SEC's Director of Enforcement, has distinguished himself for never seeing a no-fault settlement that he didn't like. This is the same person who was General Counsel to the fixed income department at Deutsche Bank - that would be the same Deutsche Bank which included the Greg Lippmann trading operation that traded in toxic mortgage assets, a key player in extending the subprime bubble.

Predators and Prey

I think I've seen this five step gambit before.

Step One: Ignore

The Administration ignores the needs of the foreclosed-upon and demonizes the mortgage originators, but lets the banks have their bailouts.

Step Two: Public Relations

Popular sentiment arises with its inevitable push-back and forces the Administration to seem to be doing something.

Step Three: Do Something, Anything

Dodd-Frank gets traction and the CFPB is founded.

Step Four: Prey

Elizabeth Warren "stand ups" up the CFPB, but is nudged out of the way.

Step Five: Neutralize

Now that something appears to be getting done, and the populace seems to be placated, continue doing whatever caused the uproar in the first place, with slight alterations around the edges for effect.

In each step above, platitudes abound and posturing follows as surely as the night follows the day.

Gambit

So let's apply the five step gambit to this commission:

1. Ignore: three years very little or nothing satisfactorily done to really resolve the plight of borrowers, but plenty of blame for mortgage originators.

2. Public Relations: despairing and forlorn, the popular protest is too loud and nasty to avoid, so it is time to do something.

3. Do Something, Anything: create a Mortgage Crisis Commission - in an election year! - to supposedly fix the problem.

4. Prey: appoint Eric Schneiderman to chair the commission, but surround him with the proclivities of the aforementioned co-chairs.

5. Neutralize: appearance takes the place of real action, since there is no independent investigator, no budget, no staffing, but the public occasionally will learn about "prosecutions" and "investigations" and the good works of the commission.

Quis custodiet ipsos custodes?

Who will watch over the watchmen themselves?

The above Latin interrogative is attributed to the Roman poet Juvenal, who penned these words in his Satires (Satire VI, Lines 347-8, my translation).

Remember early in 2011, when the Foreclosure Task Force looked at 2800 loan files - and at only one hundred foreclosures! - that produced findings using internal reports, with virtually no external validation?

So it is early 2012, and we are presented with the game plan called the Mortgage Crisis Commission or Unit of the Department of Justice or Special Investigations Unit or Office of Mortgage Origination and Securitization Abuses of the Financial Fraud Enforcement Task Force of the Department of Justice.

By my reckoning, this puts us at Step Three (Do Something, Anything) transitioning to Step Four (Prey).

Step Five (Neutralize) will come soon enough. Appearance counts. It is an election year.

But if the Administration were really devoted to rectifying the issues that caused the problems confronting borrowers, it would be urging the postponement of the bank settlement until such time as the AG negotiating committee has completed its investigation, and an adequate monetary settlement is forged, one that denies too much legal immunity to banks accused of wrongdoing, and also includes a list of violations that the banks must resolve.

Is the Mortgage Crisis Commission an admission that the purported investigations by the Department of Justice for the last three years have failed to produce any credible results?

Whatever the results, many in the public now know this Administration's strategies and political gambits only too well.

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

Controlling Credit Risk

2012-01-18T11:05:00.001-05:00

We begin 2012 with the certain knowledge that many new regulations and responsibilities have made significant and costly demands on lenders, servicers, mortgage brokers, banks, investors, and mortgage securitizers to revise and strengthen plans to assure their economic survival. Many compliance departments throughout the country have set forth robust compliance calendars in order to monitor, test for, and implement federal and state guidelines. [*]

The primary source of revenue for the aforementioned companies (collectively, “financial institutions”) is the negotiating, extending, administering, and packaging of credit. Extension of credit and credit risk are really inseparable features of mortgage loan originations – one does not exist without the other.

Credit risk is quite measurable, especially with respect to any activity that poses a risk to earnings and capital. It is no secret that inadequate risk management is a leading cause of the failure of financial institutions. Just as credit risk and extension of credit are inseparable, so also are they inseparable from risk management. Only to the extent that credit risk and appropriate risk management procedures are identified, analyzed, established, and implemented may financial institutions claim to have safe and sound lending practices.

Risk management (often referred to, generically, as Compliance) should not formally come under the rubric of the so-called “Best Practices” section of corporate governance. In my view, risk management is not an elective, a negotiable issue, a good operating practice, a mere technique consistently providing superior results, a Six Sigma template, or a business management strategy. Rather, risk management is, and ought to be, an inherent and essential, evaluative and ministerial function reaching to virtually all intrinsic aspects of a financial institution’s business model. This is why I coined the term “Mortgage Risk Management,” because it stands on its own, a specialization that provides a firm foundation to the residential mortgage loan flow process – from point of sale to securitization. Put otherwise, it is the one and only “fail-safe” means by which a board of directors may ensure that management effectively implements internal processes designed to identify, measure, monitor, and control credit risk. [†]

Close consideration of appropriate risk management practices is vital to a financial institution’s stability, most especially in the outset of a new year and at all other times. But what is risk management? And, how does risk management affect a financial institution’s way of doing business?

In this article I will provide a brief outline of two key areas where credit risk review and risk management conjoin directly to impact a financial institution’s capability to conduct business and manage a thicket of regulations. Drawing on my own experience in working with our clients, I will offer an overview of what risk management entails, whether conducted internally or through external resources.

To get a sense of a typical approach involved in evaluating credit risk and the concurrent role played by risk management, I will outline the following areas: Quantity of Risk and Quality of Risk Management.

In a penultimate section, entitled Implementing Risk Management, I will offer some guidance about how to use credit risk information effectively to fortify a financial institution.

Quantity of Risk

I define quantity of risk as the level of credit risk associated with the credit portfolio of a financial institution.

Generally, there are three levels for quantity of risk: low, moderate, or high.

In evaluating credit risk, there are nine areas of review that should be undertaken.

1) Risk Level

Consider in the analysis the size of the exposure associated with each of the areas bulleted below, their risk profiles, credit quality indicators, amounts, volatility, and trends:
- delinquencies
- criticized and classified loans
- nonaccrual or nonperforming loans
- losses
- other credit quality metrics used by the financial institution (i.e., weighted average: risk grade or default probability)
- underwriting standards
- exceptions to policy

2) Risk Implications

There are two areas in particular that are determinative with respect to risk implications:

Significant growth in the size of a credit risk exposure, including whether such growth might be masking deterioration in credit quality indicators, and

Material changes in policies, procedures, or underwriting standards.

3) Risk Assessments

Prepare, review, and discuss with management any internally prepared risk assessments of credit risk (i.e., borrower profiles, disclosures, procedures, compliance with regulatory mandates).

4) Economic Environment

Review the local, regional, and national economic trends and outlook, and assess their impact on the credit risk.

5) Business Plans

Review business and strategic plans, and evaluate how their implementation may affect the level of risk posed by any credit risk.

6) Earnings and Capital

Review and discuss with management the results from applicable testing of product evaluations with respect to potential impact on earnings, investment, and raising or maintaining capital.

7) Mitigation Strategies

Evaluate the impact of mitigation strategies on the quantity of risk in all areas of the loan flow process. Consider the objectives of programs, and evaluate all departments’ experience with these risk levels, including management’s experience in addressing problems that may arise, or have previously arisen, in such risk levels.

8) Asset Classes

Determine and give in-depth attention to asset classes and loan products with more volatility in performance.

9) Capital

Based on the above-listed reviews and findings, assess whether the financial institution has adequate capital to support the risk posed by the quantity of risk.

Quality of Risk Management

Having worked with clients on their risk management needs over the years, I have often felt that quality of risk management is where the most work is needed. Financial institutions usually can compile most, if not all, of the quantity of risk information. But then what?

I define quality of risk management, broadly, as the exercise of producing evaluative findings with respect to the areas of Policy, Processes, Procedures, and Personnel, for the purpose of identifying, measuring, and appropriately mitigating credit risk.

Generally, there are three levels for quality of risk management: strong, satisfactory, or weak.

Policy

Determine whether the management has adopted effective policies that are consistent with safe and sound practices, given the financial institution’s size, nature, complexity, and risk profile.

Evaluate the following areas to determine whether relevant policies provide appropriate guidance for identifying and managing the financial institution’s credit risk.

Consider whether the financial institution:

Establishes a tolerance for risk, which would be shown, for instance, as a percentage of capital or expressed in terms of risk, but not simply by the financial institution’s size (i.e., tolerance should be expressed as risk of dollar loss, risk to earnings, or risk to capital).

Develops a company-wide framework for identifying credit risk across business lines, and origination channels, including consideration of distinct groups of loans whose credit performance may be correlated.

Establishes a process for testing the identification of potential credit risk, and to use such testing to evaluate the potential impact of adverse scenarios for credit risk on capital and liquidity, and for reporting those results to senior management and/or the board of directors.

Clarifies the roles and responsibilities associated with identifying and managing credit risk, particularly those that may cross business lines or otherwise not be under common management.

Defines the process for setting credit risk limits and for approving changes and exceptions thereto.

Determine whether credit risk limits are well defined and reasonable. Consider the way that limits are measured and the use of limits or parameters for different types of exposure within a credit risk class (i.e., property types, product types, geographical considerations, and so forth).

Verify that management periodically reviews and approves the financial institution’s credit risk policies, including relevant limits or strategies on significant credit risk.

Processes

Determine whether the financial institution has processes in place to provide accurate and timely assessments of credit risk associated with its activities involving the extension of credit.

There are two areas that we look for in determining quality of risk management processes:

1. We evaluate how policies, procedures, and plans affecting credit risk are communicated. This analysis involves considering whether management has clearly communicated objectives and credit risk parameters to the board of directors and affected staff. And this review also includes a determination of whether the board has approved the existing credit risk limits.

2. In light of the scope and complexity of a financial institution, we evaluate the adequacy of its processes for analyzing credit risk by considering the following questions:

Does the financial institution assess the level of risk associated with each credit risk?

Does the financial institution’s risk assessment aggregate exposures on a company-wide basis and across lines of business?

Are the results of the risk assessments, including those from testing, appropriately incorporated into the overall capital planning process?

Do the conclusions concerning credit risk appear reasonable in light of information available from other sources?

Is the capital level adequate to support the levels and types of credit risk exposures?

Is a formal analysis of higher credit risk conducted periodically, and does the financial institution have an effective system for monitoring developments in the interim?

Are the financial institution’s analyses adequately documented and the credit risk conclusions communicated in a way that provides decision makers with a reasonable basis for strategic development?

Are the resources devoted to the analysis of credit risk, including the number and expertise of staff members, considered adequate?

Procedures

In reviewing procedures, we determine whether the financial institution has systems and guidelines in place to provide accurate and timely assessments and feedback of credit risk associated with its credit extension activities.

There are four areas that we look at in determining quality of risk management procedures:

1. Determine whether management information systems (MIS) provide timely, accurate, and useful information to evaluate risk levels and trends in credit risk by considering the following questions:

Are all material credit risk exposures captured across all lines of business?

Does the entirety of the data elements collected in the review of procedures appear to be adequate, given the scope and complexity of the portfolio?

To whom are MIS and all reports involved in the loan flow process distributed and how timely are these reports?

2. Analyze how complying with credit risk parameters is monitored and reported to senior management and the board of directors.

3. Assess the level of review for credit risks that are nearing their credit risk limits. For instance, is there sufficient reporting to senior management and is oversight heightened?

4. Evaluate the adequacy of the procedures for monitoring current conditions in higher credit risks, and assess the reliability and accuracy of the types of internal and external resources used.

Personnel

Staffing is a pivotal area for the quality of risk management, because it reveals the overall ability of the financial institution to meet the demands and responsibilities relating to administering the loan flow process. In effect, the level assigned to this quality of risk management indicates management’s ability to supervise its credit risk in a safe and sound manner.

There are four areas that we look at in determining quality of risk management personnel:

1. Given the scope and complexity of the financial institution’s portfolio, assess the appropriateness of the credit risk management structure and the experience of designated personnel, by evaluating:

Whether the expertise, training, and number of staff members assigned to manage credit risk issues are adequate.

Whether reporting lines encourage open communication and limit the chances of conflicts of interest.

Whether there is an unusual level of staff turnover and the effect of any staff turnover on credit risk management.

2. Determine whether management has ascertained the adequacy of written policies for managing credit risk and assess management’s knowledge thereof.

3. Ascertain the adequacy of management’s practices and capabilities for managing credit risk, including timely responses to a changing environment.

4. Assess the performance of management and the compensation programs for staff members managing credit risks. Consider whether these programs measure and reward behavior that supports the financial institution’s strategic objectives and risk tolerance limits. (If the financial institution offers incentive compensation programs, ensure that (1) they provide employees with incentives that appropriately balance risk and reward, (2) are compatible with effective controls and risk management, and (3) at all times are supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.)

Implementing Risk Management

Now that we have given consideration to certain features of Quantity of Risk and Quality of Risk Management, let’s outline what is required to implement risk management in a practical and effective way.

If the methodologies outlined above have been completed, we have reached the point where we may determine, perhaps on a preliminary basis, certain overall conclusions, and communicate our findings regarding quantity of risk and quality of risk management.

Keeping in mind that risk management, as previously stated, involves the ability to identify, measure, monitor, and control credit risk, there are several areas of guidance that we usually discuss with or provide to management as part of a due diligence review.

1) Memorandum

We provide a summary that elucidates the quantity of risk and quality of risk management, thereby clarifying the direction of credit risk and the adequacy of the financial institution’s process for managing credit risk.

A typical summary includes:

Quality of the financial institution’s process for managing credit risk, including the adequacy of policies and procedures.

Asset quality of credit risk.

Appropriateness of strategic and business plans in light of their impact on credit risks.

Responsiveness of strategic and business plans to test results that identify credit risks and materially affect risk exposure due to adverse economic scenarios.

Accuracy and timeliness of management information systems and the entirety of data captured relative to the scope and complexity of the loan portfolio.

Quality of staffing, and management’s capability to manage credit risk.

Recommendation of corrective actions for deficient policies, procedures, practices, or other concerns, which include:

Adequacy of adherence to policies and credit parameters.

Adequacy of loan review or audit functions.

Other matters of significance.

2) Impact. For any issues of concern identified when performing the credit risk procedures, we determine and discuss their impact on the financial institution’s aggregate credit risk and its direction.

3) Corrective Action. We encourage a discussion regarding previous, regulatory examination findings and conclusions, including a list of those credit risks that posed a challenge to management or presented unusual and significant credit risk to the financial institution. If needed, we provide a Corrective Action Matrix, which is a form that tracks all recommended changes and monitors compliance with those changes.

Corrective Action Matrix. We issue the Corrective Action Matrix most often when conditions indicate (1) there has been a deviation from sound, fundamental principles that is likely to result in financial deterioration or increased risk if not addressed, and (2) there is substantive noncompliance with laws or regulations.

When a Corrective Action Matrix is not used, the following features should still pertain:

Describe the defect.
Identify contributing factors or the root cause(s) of the defect.
Describe likely consequences or effects from inaction.
State the record management commitment to corrective action.
Include the time frame and the person(s) responsible for corrective action.

4) Discussion. We set aside time to carefully review the actions that management and all relevant staff will take in the future to effectively supervise credit risk. In this setting, we discuss various findings with management, suggesting ways to further monitor and mitigate credit risk. Often, management offers a pledge to implement corrective action.

Preparation is Prevention

Compliance cannot be reverse engineered. I have stated many times that preparation is prevention. Working to evaluate credit risk is critical to the staying power needed by any financial institution involved in the loan flow process.

Some mistakes may have a minor effect. But there are costly mistakes that bring with them virtually catastrophic consequences. It is unacceptable and indefensible to attempt to fix mistakes belatedly, when they could have been avoided in the first place. And, for the most part, the tardy and delayed approach just does not work.

Allowing exposure to credit risk is such a potentially fatal and fundamental flaw that there really is often no way to undo the damage done by risk management failures. However, by using the above-mentioned tools to determine Quantity of Risk and Quality of Risk Management, a financial institution may still have the proactive opportunity to be stable, strong, and vibrant.

[*] This article first appeared in National Mortgage Professional Magazine, January 2012, Volume 4, Issue 1, pp. 8-23.

[†] Certain information provided in this article is based on the research and work I have done in developing one of my firm’s risk management tools, called the CORE Compliance Matrix®. A CORE® review consists of an in-depth evaluation of a financial institution's CORE® features: Compliance Program (C), Organizational Structure (O), Regulatory Risk (R), and Enforcement Strategies (E). For more information about the CORE Compliance Matrix®, or our other audit and due diligence review services, please visit our website.

CFPB: Nonbank Supervision Program

2012-01-13T16:34:00.000-05:00

On January 5, 2012, the Consumer Financial Protection Bureau (CFPB) launched its nonbank supervision program.

This program has the goal of implementing supervisory audits and reviews of nonbanks, such as mortgage loan originators, lenders, mortgage bankers, mortgage brokers, servicers, and loan modification or foreclosure relief services (including also payday lenders and private education lenders).

This nonbank supervision program is in many ways an extension of the development of CFPB's bank supervision program that began last July.

We have issued several newsletters about certain aspects of the bank and nonbank supervision programs and I have written several articles about the CFPB.

Six days after the CFPB launched its nonbank supervision program, on January 11, 2012 the CFPB began its very first investigation of a nonbank mortgagee, PHH Corp. of Mount Laurel, NJ. The allegations against PHH Corp. involve violation of RESPA, with respect to the prohibitions against kickbacks. Although there is no mention of the PHH Corp. investigation on the CFPB website, nor is there a press release from the CFPB, we know of the investigation because PHH Corp. filed notice about it with the Securities and Exchange Commission.

Our firm is committed to providing comprehensive audit and due diligence reviews in preparation for the CFPB's nonbank and bank Supervision and Examination Manual (Manual), a basic tool in the CFPB's supervision programs.

Our audit and examination group provides an independent and thorough due diligence review of the CFPB examination requirements, offering corrective actions for enforcement.

I would urge you to contact us and find out about preparing for a CFPB examination.

In this newsletter, I would like to give you a brief overview of the CFPB's nonbank supervision program.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Scope of the Nonbank Supervision Program
Supervision Process
Supervision and Examination Manual
Examinations
Staffing and Training
State Coordination
Future Plans
Library

Scope of the Nonbank Supervision Program

By the term "nonbank," the CFPB refers to a financial institution that is not a depository, but offers or provides consumer financial products or services. The nonbank does not have a bank, thrift, or credit union charter.

Nonbanks include, but are not limited to, mortgage lenders (i.e., mortgage bankers), mortgage servicers, loan modification or foreclosure relief services, payday lenders, consumer reporting agencies (CRAs), mortgage loan originators, debt collectors, money services companies, lenders (i.e., creditors), mortgage brokers, and private education lenders.

The CFPB also has authority to supervise any nonbank that it determines is posing a risk to consumers.

Under the law, the CFPB has the authority to oversee nonbanks, regardless of size, in certain specific markets.

The CFPB can also supervise the larger players, or "larger participants."

Please read our newsletter on the "larger participant" supervision.

Supervision Process

Similar to the bank supervision program, the CFPB's nonbank supervision program is designed to ensure that nonbanks comply with federal consumer financial laws. It assesses risk to consumers arising from these businesses.

The nonbank supervision program includes conducting individual examinations, while also requiring reports from companies that determine where companies need to put greater focus.

How often and to what degree the examinations are performed will depend on CFPB's analysis of risks posed to consumers based on factors such as the nonbank's volume of business, types of products or services, and the extent of state oversight.

Supervision and Examination Manual

The CFPB's approach to nonbank examination will be to some extent the same as its approach to bank examination. The Supervision and Examination Manual (Manual) acts also as a field guide to examiners, which we outlined here; therefore, essentially, examiners will use the Manual for both nonbank and bank examinations.

This first edition of the CFPB Supervision and Examination Manual (Version 1) is a guide to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

The Manual is divided into three parts.

The first part describes the supervision and examination process.
The second part contains examination procedures, including both general instructions and procedures for determining compliance with specific regulations.
The third part presents templates for documenting information about supervised entities and the examination process, including examination reports.

We have compiled a Compendium of all parts and each section of the Manual, freely offered here.

Our Library contains the full Version 1 of the Manual.

Examinations

Prior to examiners contacting a company or going on-site, they will review information that is available publicly or from state or federal regulators. Examiners will be looking at the company's consumer financial products and services with a focus on risk to consumers.

Procedurally, the company generally will be told of an upcoming examination and will receive status updates throughout the process.

When the examination commences, the examiners will review the company's compliance with federal consumer financial laws for the entire life cycle of the product or service, including how a product is developed, marketed, sold, and managed.

In accordance with the Examination guidelines, examiners will conduct interviews with personnel and observe the company's operations.

One important component that examiners will be looking for the company's internal ability to detect, prevent, and remedy violations that may harm consumers.

If a company is in violation of federal consumer financial laws, the CFPB will seek corrective actions, programs, and processes to ensure that violations do not recur and, where appropriate, that remedies are instituted.

Enforcement: when necessary, examiners will coordinate and work closely with CFPB's enforcement staff to bring appropriate legal actions to address harm to consumers.

Staffing and Training

The CFPB examiners will include staff examiners from the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, state banking regulatory bodies, and industry.

The examiners will be trained in both bank and nonbank supervision.

Examiners will cover the country and report to field offices in New York, Chicago, San Francisco, and Washington, D.C.

State Coordination

The CFPB's nonbank supervision program will be coordinated with state regulators, when applicable.

Actually, the CFPB has already begun to work with the states by developing, in cooperation with the Conference of State Bank Supervisors, a Memorandum of Understanding (MOU) to share information between the CFPB, state regulators, and state regulatory associations. We discussed this initiative here.

To date, regulators in 42 states and Puerto Rico, representing 45 regulatory agencies, have joined the MOU.

Five state regulatory associations have also signed the MOU, including the American Association of Residential Mortgage Regulators (AARMR) and the National Association of Consumer Credit Administrators (NACCA).

Future Plans

The following are some of the future plans that the CFPB expects to implement:

Expand its ongoing supervision of mortgage servicers to nonbank mortgage servicers

Publish additional examination procedures tailored to the types of consumer financial products and services offered by nonbanks

Propose an initial rule to begin defining who meets the test for "larger participants" in certain nonbank markets

Publish rules to establish procedures to supervise a nonbank company where the CFPB has reasonable cause to believe it poses risks to consumers

Continue ongoing communications with state and federal regulators with a more specific focus on examination planning

Continue to obtain feedback on its supervision program from nonbank financial services companies, banks, thrifts, and credit unions, federal and state agencies, consumer and community groups, and the public

Library

Consumer Financial Protection Bureau

Selected Issuances

Protecting Tenants at Foreclosure

2012-01-11T11:28:00.000-05:00

The Protecting Tenants at Foreclosure Act (PTFA) went into effect in May 2009. The PTFA provides protections to tenants in foreclosed properties.

The PTFA is found in the Helping Families Save Their Homes Act of 2009 (a document of 1632 pages). Originally set to expire (or "sunset") on December 31, 2012, Dodd-Frank extended the expiration date of the PTFA to December 31, 2014.

Under this legislation, the immediate successor of interest (generally the purchaser) of a foreclosed property must provide all tenants with at least 90 days notice prior to eviction because of foreclosure.

Additionally, tenants must be permitted to stay in the residence until the end of the lease, with two exceptions:

The property is sold after foreclosure to a purchaser who will occupy the property as a primary residence, or

There is no lease or the lease is terminable at will under state law.

Even if these exceptions apply, the tenant must be given at least 90 days notice prior to eviction. The rights of Section 8 tenants are also protected under the PTFA.

In this newsletter, we should like to direct you to further information on the PTFA.

Protecting Tenants at Foreclosure Act

Dodd-Frank extends the PTFA

National Housing Law Project

Library

Protecting Tenants at Foreclosure Act

The Protecting Tenants at Foreclosure Act (PTFA) is Title VII of the Helping Families Save Their Homes Act of 2009.

We have extracted the relevant section and placed it in our Library.

Dodd-Frank extends the PTFA

The PTFA was extended and clarified by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

We have extracted the relevant section and placed it in our Library.

National Housing Law Project

The National Housing Law Project (NHLP) has materials that can help housing counseling agencies understand the PTFA's provisions and help tenants exercise their rights under the law.

NHLP's materials include sample letters that tenants can use to inform their landlords, as well as sample letters that advocates can use to inform the courts and public housing authorities.

These materials are available on the National Low Income Housing Coalition website.

LIBRARY

Protecting Tenants at Foreclosure Act (PTFA)
Title VII of the Helping Families Save Their Homes Act of 2009

PTFA Extension and Clarification -
Dodd-Frank Wall Street Reform and Consumer Protection Act

OCC - Correcting Foreclosure Practices

2012-01-09T08:30:00.002-05:00

On December 20, 2011, the Office of the Comptroller of the Currency (OCC) updated its announcement regarding correcting foreclosure practices. We have previously issued newsletters here, here, and here on this subject and also related matters regarding foreclosure processing.

Earlier in 2011, on April 13, 2011, the OCC, the Board of Governors of the Federal Reserve System (FRB), and the Office of Thrift Supervision (OTS) announced enforcement actions against 14 large residential mortgage servicers and two third-party vendors for unsafe and unsound practices related to residential mortgage servicing and foreclosure processing. The enforcement actions were based on interagency examinations conducted in the fourth quarter of 2010.

Through those enforcement actions (consent orders), federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

In this newsletter, we will consider several aspects with respect to implementation of the consent orders.

Independent Foreclosure Review
Mailings to Consumers
Deadline for Review Requests
Independent Foreclosure Auditor
Eligibility for Review
Notifying the Public
Engagement Letters
Interim Report
Library

Independent Foreclosure Review

Under the consent orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers.

Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

Mailings to Consumers

As part of that program, the 14 mortgage servicers covered by the enforcement actions were required to begin mailings to consumers on November 1, 2011, continuing to December 31, 2011.

The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the special Independent Foreclosure Review website for more information about the review and claim process. Telephonic assistance is given at this website.

Deadline for Review Requests

Review requests must be received by April 30, 2012.

Independent Foreclosure Auditor

An independent foreclosure auditor must be a third-party. The independent foreclosure auditor will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers.

Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided.

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Eligibility for Review

To be eligible, the mortgage must (1) have been active in the foreclosure process between January 1, 2009 and December 31, 2010, (2) the property securing the loan must have been the primary residence, and (3) the mortgage must have been serviced by one of the following mortgage servicers:

Notifying the Public

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

These are print and radio public service advertisements to increase awareness of the Independent Foreclosure Review.

The public service items include a feature story, and are being distributed to 7,000 small newspapers throughout the country. Two 30-second radio spots are being distributed to 6,500 small radio stations. The material will be distributed in English and Spanish.

The texts of the print and radio advertisements may be found in our Library.

Engagement Letters

The OCC released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

Interim Report

In November 2011, the OCC issued a report, entitled "Interim Status Report: Foreclosure-Related Consent Orders," which summarizes progress on activities related to the independent foreclosure review announced on November 1, 2011.

The report also provides an outline of plans to enhance mortgage servicing operations, increase oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Library

Office of the Comptroller of the Currency

Print Feature - Your Independent Foreclosure Review
Radio Script 1 - Money Matters: Independent Foreclosure Review
Radio Script 2 - Consumer Corner: Foreclosure Review

January 4, 2012

Wage Theft Prevention Act (WTPA) - NEW YORK STATE

2012-01-05T08:30:00.001-05:00

As you may know, we audit for compliance with respect to the new TILA loan originator compensation rule. In the course of doing such audits for New York companies, we look for compliance with the Wage Theft Prevention Act (WTPA) and its implementing regulations. These WTPA requirements are administratively cumbersome.

The Wage Theft Prevention Act (WTPA) annual notice requirement is effective as of January 1, 2012 and must be complied with by February 1, 2012. Thus, the implementation period is exceedingly short.

If you are a New York company or have affiliates and branches in New York or own companies in New York, you must comply with the current notification requirement of the WTPA.

Please be sure to discuss this matter with your firm's accountant or financial adviser. Be prepared to implement the WTPA procedures immediately.

Even if you are not a New York company or subject to this regulation, a review of the notification requirement provides a useful tool in implementing the TILA loan originator compensation rule.

Requirements

Deadlines

Examinations

Exemption

Overtime

Forms and Processing

Penalties

Library

Requirements

Employers must provide all New York employees with an annual written notice known as a Notice of Pay Rate and Payday (Notice) beginning January 1, 2012.

Previously, employers were required to provide this notice only to new employees when certain changes in compensation were made.

Now all employees must receive this notice on an annual basis and it must be signed every year as it is an annual requirement.

Deadlines

The Notice must be provided between January 1 and February 1 of each year beginning in 2012.

The form must be signed by the employee and dated prior to the deadline of February 1, 2012. The signature is necessary as proof that the employee received the Notice.

The employer must sign as preparer, and complete the information in box one of the Notice.

In addition, the employer must retain the signed and dated original copy for six (6) years.

Examinations

New York's Department of Labor will be conducting random compliance audits, in which very significant penalties for failure to comply will be assessed.

It is also possible that this Notice will be either called for or referred to in a banking department examination or a CFPB state-affiliated audit for compliance with the TILA loan originator compensation mandates.

Exemption

There is no exemption for small employers.

As long as a business has a single employee in New York State, the Notice is required.

Independent contractors are not covered by this law.

Overtime

Regardless of an employee's method of compensation and entitlement to overtime, the Notice must be provided. This means that all employees, both exempt from overtime requirements and non-exempt, must receive the Notice.

Since there are different forms to use, depending on the method of pay for an employee, several accepted variations and required forms are:

Notice for employees paid a weekly rate or salary for 40 hours or less.
Notice for employees paid at multiple hourly rates, for various work.
Notice for hourly rate employees.
Notice for employees paid salary for varying hours, day rate, piece rate, etc.
Notice for employees exempt from overtime, usually applying to administrative persons.
Notice for other jobs.
Revised Federal form W-4 for 2012
Updated Federal form I-9

Forms & Processing

There are several issues that relate to both the required forms and payroll processing in general:

The payroll service companies are not maintaining these signed forms. It is the responsibility of the employer to maintain the original signed forms, updated annually for all employees, and maintained for the six year requirement.
In addition to the retention of these Notices, the employer must maintain signed Federal form W-4 and Federal form I-9. A file should be maintained for each employee with the required forms. Although voluntary, a policy statement should be enacted and maintained for each employee with specific vacation, personal, and sick time available and utilized.
Any employee hired after the Notices are submitted (i.e., after February 1, 2012), must sign the required Notice and provide forms W-4 and I-9 at the time of hiring. Similarly, the form required by the WTPA must be updated when there is a change in pay rate.
New York State requires Disability and Worker's Compensation insurance to be in force at all times if there are employees. The only exception is for employers having no employees other than one or two corporate officers. Note: once there are more than two corporate officers, these policies are required.
The Notice does not apply to independent contractors meeting the appropriate legal standards, as they are not considered employees. Note: the criteria for classification of an independent contractor are very narrow, and several government agencies may aggressively seek to reclassify many current independent contractors to employees.
Make sure that a written and fully executed loan originator compensation plan or employment agreement exists for all affected employees, including for all loan officers, producing and non-producing branch managers, salesperson employees paid on a commission basis (as required by NYS Labor Law), and attach that plan or employment agreement to the pay notice.
Make sure that employees designated as exempt from overtime requirements meet the legal requirements for such exemption and identify the particular exemption upon which the employer will rely.
Ensure that where overtime is applicable the overtime rate is correctly calculated with respect to all employees eligible for overtime pay.
In addition, every employee must receive with their pay check a corresponding pay stub. Be sure that the pay stub states computations and withholdings. Penalties could result for the failure to provide such documentation.

Penalties

Employers will be assessed $50 per week per worker by the Department of Labor if the Notice is not provided and in addition, an individual worker can institute a private action.

Where an individual sues, damages are capped at $2,500. Additionally, the notice must be provided in the employee's primary language.

Additionally, there may be class action certification available to plaintiffs.

LIBRARY

Department of Labor
New York State

Wage Theft Prevention Act - Fact Sheet
Notice of Rates of Pay and Regular Payday (4/9/11)

Wage Theft Prevention Act – FAQ's

Whistleblowers and Bounty Hunters

2011-12-19T13:40:00.000-05:00

Americans have often had an ambivalent view of whistleblowers. When we feel that the whistleblowing serves some righteous cause, the whistleblower's actions are worthy of a medal; but when the whistleblower's cause is considered to mask self-aggrandizement, then we often contend that some jail time might be a more suitable reward, whatever the cause. Still, one person's justification for such actions may be castigated by another person as an act of perfidy.

In a rather morally twisted way, recent law has combined the act of whistleblowing with the remuneration of bounty hunting, the latter being yet another concerning happenstance of American ambivalence.

Let's call this new ethical imperative the "Dope for Dough" compact.

In this article:

A Snitch In Time Saves Crime
If You See Something, Say Something
Welcome to the Office of the Whistleblower
Bounty Hunter
Tips, Complaints and Referrals
Anonymity More-or-Less
Preventing Retaliation More-or-Less
First Do No Harm

A Snitch In Time Saves Crime

Being a snitch is not exactly the kind of job position somebody must apply for, even in these days of high unemployment. It's not a career opportunity. A snitch doesn't want to be a snitch, hates snitching, and would rather not have to snitch at all. Being a snitch does not bestow a badge of honor! There are no annual conferences for snitchers. A snitch is not born a snitch; something has to happen to make a snitch snitch.

Often, the stakes for snitching are very high. Being a snitch means subjecting oneself to potential ostracism, being fired, not being hired, jail time, and even community time (yes, courts have held that "community service" may be a proxy for prison time). Snitchers know that whenever people pass them by, there will be fingers pointed at them and breathless whispers behind their backs about the supposed damage done by, or the great good achieved through, their snitching. Snitching has a wake all its own and the snitcher can never get out of it, whatsoever the tattletale tattled.

The list of snitch martyrdom is long and, depending on the results and society's comfort zone, contains patriots and traitors, saints and the damned, reformists and reactionaries, the sempiternal loyalists and the double-crossing turncoat. Even if the weaseling betrayer squeals the unvarnished truth, the very act of making manifest the heretofore hidden may bring with it many dangers impinging on the tipster's physical, let alone social, survival.

If You See Something, Say Something!

We constantly hear, "if you see something, say something." Implied in that statement is the moral judgment that we do know when something is wrong and when something is right, and, knowing that difference, when we know something wrong is happening, we should share such knowledge with somebody else. The phrase does not say, "if you see something, say something, and if you do we'll pay you for the information." It does not say, "if you see something, say something, but if you do you will put yourself and perhaps all of your loved ones at personal risk." And it does not say, "if you see something, say something, but if you do you may go to jail or you may not." Finally, it does not say, "if you see something, say something, though if you do we will ignore what you have to say and nobody will ever know something wrong happened."

The instinct for self-preservation is strong. Especially strong in a stoolie! This is obviously why a recent study shows that 78 percent of Americans said they would report something wrong only if they could be anonymous informants, be assured of evading retaliation, and nevertheless get a reward for information, whether such information was pilfered, pinched, purloined, or professed.

Pity the poor snitch! So misunderstood, often the butt of ridicule, and only occasionally appreciated for the grumbling sacrifice of life and liberty. But now a new era of gratitude, tribute, and prestige has begun for the deep throated canary that yearns to sing.

Welcome to the Office of the Whistleblower

Henceforth, we will need to replace the term snitch with a new title, the "whistleblower," and appoint an overseer to protect the whistleblower's rights, prevent retaliation, and offer remuneration for blowing the whistle and assisting with any investigation or judicial or administrative action that follows from the information thereby obtained.

Section 924(d) of the Dodd-Frank Act (Dodd-Frank) directs the Security and Exchange Commission (Commission) to establish a separate office within the Commission to administer and to enforce the Section 21F provisions of the Securities Exchange Act of 1934 (Exchange Act). On February 18, 2011, the Commission appointed an overseer or Chief, Sean X. McKessy, to head the newly-created Office of the Whistleblower in the Division of Enforcement (Whistleblower's Office). Chief McKessy is looking for a Deputy Chief, and there are several attorneys among the staff.

The ostensible purpose of the Whistleblower's Office is to provide assistance to a whistleblower who knows of possible securities law violations, such as identifying possible fraud and other violations, much earlier than might otherwise have been possible. The result, presumably, will be to minimize the harm to investors, preserve confidence in capital markets, and hold accountable those responsible for unlawful conduct.

Bounty Hunter

For remunerating the whistleblower, the Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with "high-quality original information" that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the monetary sanctions collected (which I will term the Bounty Fee).

This Bounty Fee of 10% to 30% is particularly robust, compared to the usual 10% (or less) of bail collected these days by bounty hunters. Of course, the whistleblower's Bounty Fee is not quite the same as the fee paid to a bounty hunter for capturing a fugitive outlaw. Bounty hunters are usually employed by bail bondsmen. But there is, shall we say, a resemblance.

In any event, the whistleblower's information must be provided voluntarily, which means it must be given before the Congress, or a regulatory or enforcement agency requests it or asks for the information in connection with an investigation or certain examinations or inspections. It's hard to determine what is meant by "high-quality original information" but it likely means independent knowledge (facts known to the whistleblower that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known) that is not already known by the aforementioned governmental entities.

If the whistleblower believes that reporting information internally is a problem, the Whistleblower's Office has a solution. Although internal reporting is not required to be considered for an award, the whistleblower may be eligible for an award for information reported internally if the whistleblower also reported the information to the Whistleblower's Office within 120 days of reporting it internally. The scrutiny for "original information" will then take place and investigation will be conducted. If such information is considered useful, the range provided in the Bounty Fee will then be considered.

Tips, Complaints and Referrals

There's even a form for the whistleblower. In order to qualify for an award under the whistleblower program, the whistleblower submits information either through an online Tips, Complaints and Referrals questionnaire or by completing a hardcopy Form-TCR and mailing or faxing it to the Whistleblower's Office. And anonymity is available, as well, if the whistleblower has attorney representation and the Form-TCR is submitted.

Anonymity More-or-Less

Unfortunately, total anonymity is not actually possible, but it's perhaps better than nothing. The Whistleblower's Office will not disclose the whistleblower's identity in response to requests under the Freedom of Information Act.

But, in an administrative or court proceeding it may be required to produce documents or other information which would reveal the identity, and, as part of ongoing investigatory responsibilities, it may use information provided by the whistleblower during the course of its investigation.

Furthermore, in certain circumstances, the Whistleblower's Office may also provide information, subject to confidentiality requirements, to other governmental or regulatory entities.

Preventing Retaliation More-or-Less

If an employer retaliates against the whistleblower, for instance discharges, demotes, suspends, harasses, or in any way discriminates against the whistleblower, a private action may be brought in federal court against the employer. If the whistleblower prevails, remedies include reinstatement, and payment of double back pay, litigation costs, expert witness fees, and attorneys fees.

The Commission can also take legal action in an enforcement proceeding against any employer who retaliates against a whistleblower for reporting information to it. This redress covers the whistleblower for any lawful act done by the whistleblower in providing information to the Whistleblower's Office under the whistleblower program or assisting in any investigation or proceeding based on the information submitted.

In fact, under the Sarbanes-Oxley Act, the whistleblower may be entitled to file a complaint with the Department of Labor if there is retaliation for reporting possible securities law violations, including making internal reports to the employer.

First Do No Harm

An organization can foster a culture of transparency and dignified responsibility rather than encouraging a tribal mentality. The era of the whistleblower has arrived, and with its advent there is an obligation to be alert to incompetence parading as misguided loyalty, thwarting information about unlawful conduct. Whistleblowers are now incentivized by a monetary award to come forward, their anonymity guarded, and retaliation against them protected.

Compliance departments, risk management professionals, outside and inside counsel, need to focus immediately on internal reporting procedures for whistleblowers, recognizing the key areas where whistleblowers are likely to report information.

And, most of all, each employee should be told "if you see something, say something."

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

OCC Issues Foreclosure Guidance - Part II

2011-12-16T08:51:00.000-05:00

In yesterday's newsletter, Part I of this two-part series, I outlined the role of the bank as owner and servicer of foreclosed property, as described in the recent guidance issued by the Office of the Comptroller of the Currency (OCC) with respect to a bank's obligations and risks related to foreclosed property. (See OCC 2011-49)

A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

In today's newsletter, Part II or this two-part series, I outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Trustee of Securitization Trust
Releasing a Lien Rather Than Foreclosing
Library

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.

Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.

Bank as Trustee of Securitization Trust

The securitization trustee is primarily responsible for holding a lien on the trust assets for the benefit of the investors who purchase securities issued pursuant to the securitization and administering the trust in conformance with requisite agreements.

The trustee's duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex administrative functions. Such functions usually include ensuring the timely receipt of payments from the servicer, calculating payments, remitting payments to the investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.

As permitted by the PSA, the trustee should work with the servicer to ensure the performance of its responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any powers or duties with respect to the foreclosure or with the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.

Nevertheless, to the extent a servicer undertakes foreclosure actions in the trustee's name as the secured party, a bank trustee should be aware of potential reputation and litigation risks. (See my comments in Part I, relating to reputation risk.)

Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee would also be exposed to credit risk.

Releasing a Lien Rather Than Foreclosing

At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property.

This decision is often based on financial considerations when the bank or servicer and/or investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community.

Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property.

If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.

Library

Office of the Comptroller of the Currency (OCC)
Foreclosed Properties
Guidance on Potential Issues
With Foreclosed Residential Properties
OCC 2011-49
December 14, 2011

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

OCC Issues Foreclosure Guidance - Part I

2011-12-15T12:49:00.002-05:00

The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. Issued on December 14, 2011, this guidance highlights legal, safety and soundness, and community impact considerations. It primarily focuses on residential foreclosed properties. (See OCC 2011-49)

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

Furthermore, understanding the requirements imposed by Fannie Mae and Freddie Mac (GSEs) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly important.

I will analyze the OCC's guidance as it relates to the aforementioned three roles of the bank in foreclosing on residential properties.

This is a two-part newsletter. I will offer a brief overview of the OCC 2011-49 bulletin pertaining to guidance on potential issues with foreclosed residential properties. Today, in this first part, I will outline the role of the bank as owner and servicer of foreclosed property. Tomorrow, in the second part, I will outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

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

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Bank as Owner of Foreclosed Property

Obligations and Actions

In acquiring title to foreclosed properties, banks assume the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties.
- Banks should communicate with localities, including homeowner associations, about specific requirements with respect to foreclosed residential properties (i.e., localities may have requirements about certain aspects of upkeep, such as lawn mowing, property maintenance, and security, et cetera).
- In the absence of these actions, banks should be aware of potential nuisance actions or the exercise of local receivership powers to seize properties.

For FHA-insured mortgages, the bank must ensure compliance with property and preservation guidance issued by HUD to preserve the insurance claim and obtain reimbursements for allowable expenses.

Following foreclosure, the bank must record its ownership interest in local land records.

Banks must comply with the other real estate owned (OREO) appraisal and accounting requirements.

Banks should maintain appropriate insurance on the property.

Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Banks should be aware of and comply with such requirements.

The Protecting Tenants at Foreclosure Act of 2009 (PTFA) provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.

When a bank takes title to a house after foreclosure, it must honor any existing rental agreement with a bona fide tenant and must provide 90 days' notice to the tenant prior to eviction whether or not the tenant has a rental agreement.

State laws may impose additional requirements that are not preempted by the PTFA.

Additional potential requirements with respect to rental properties include:

reviewing the lease to determine if the property can be shown to prospective purchasers; and

returning any security deposit upon termination of the rental agreement.

Additional Issues as Owner

Banks should have sufficient staffing to manage their foreclosed properties portfolios and policies, procedures, and risk management systems in place to properly oversee and manage third-party relationships.

Use of third parties does not diminish the responsibility of the bank board of directors and management to ensure that foreclosed properties are administered in a safe and sound manner and in compliance with applicable law.

These third-party relationships should be subject to the same risk management process that would be expected if a bank were conducting the activities directly. Such a risk management process should include:

written contracts outlining the duties, obligations, and responsibilities of the parties involved;

appropriate due diligence before entering a third-party contract; and

ongoing oversight of the third parties and third-party activities.

Prior to undertaking the rehabilitation or improvement of foreclosed properties, banks should consider the legal authority to make expenditures on OREOs and any HUD requirements for mortgages insured by the Federal Housing Administration (FHA).

(I would add that, generally, for OREOs, expenditures are permissible if reasonably calculated to reduce any shortfall between the parcel's market value and the bank's recorded investment amount. If such expenditures are permissible, banks must ensure compliance with local building codes and licensing requirements. I will treat this subject in a forthcoming newsletter.)

When disposing of foreclosed residential properties, banks should consider:

disposition costs and delays, including advertising, broker, or maintenance fees and repair costs for defects found at inspection.

the provision of financing for OREO properties. While generally not subject to lending limits, financing the sale of a significant number of properties to the same borrower could result in unsafe or unsound concentrations.

negative reaction and potential reputation risk from disposition practices that favor, as purchasers of foreclosed properties, investors (paying cash) over owner-occupants (purchasing with financing).

opportunities to participate and coordinate with state and local land bank programs, neighborhood stabilization programs, redevelopment programs, and other anti-blight programs, or opportunities to enhance owner occupancy.

When disposing of foreclosed residential properties from FHA-insured mortgages, either through sales or conveyance to HUD, banks must comply with HUD requirements to receive insurance payments or other allowable reimbursements.
Holding period issues may arise if banks are not able to dispose of foreclosed properties.

Bank as Servicer of Foreclosed Property

Obligations and Actions

Fannie Mae and Freddie Mac each have detailed servicing guides setting forth servicer obligations and responsibilities for foreclosed properties or vacant properties in the process of foreclosure.

In the case of private securitizations, the obligations are detailed in a document often called a pooling and servicing agreement (PSA).

Servicers of foreclosed properties may be required to undertake many of the responsibilities of an owner, including providing maintenance and security, paying expenses, serving as the landlord for rentals, and marketing the property.

Servicers may be required to advance funds for taxes, insurance, and homeowners' association dues, as well as for maintenance and security expenses, some or all of which may be reimbursable.

Although rehabilitation, maintenance, and marketing of foreclosed properties acquired on behalf of Fannie Mae and Freddie Mac are typically handled by the GSEs, servicers may be required to perform routine upkeep - including winterization, as needed - until the property is assigned by the GSE to a property manager.

Servicers should ensure that they follow applicable GSE or PSA requirements and guidelines for performing necessary maintenance and upkeep on the property.

Banks should maintain appropriate insurance on the property.

Servicers may be required to file claims with any mortgage insurers.

Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Under the PSA or the Fannie Mae and Freddie Mac servicing guidelines, this requirement may be the responsibility of the servicer. Servicers should communicate with localities about other specific requirements with respect to foreclosed residential properties.

When disposing of foreclosed properties, servicers should look to the PSA or other servicing document for specific requirements and responsibilities.

Servicers may have responsibilities, as described above, under the PTFA or other applicable state law requirements that provide protections to tenants from eviction on the properties they are renting as a result of foreclosure.

Additional Issues as Servicer

Banks acting as servicers should have sufficient staffing and appropriate third-party vendor oversight to manage the foreclosed properties portfolios.

Rehabilitation or improvement of foreclosed properties should comply with local building codes, licensing requirements, and any requirements in servicing agreements.

When disposing of foreclosed residential properties, banks acting as servicers should consider:

contractual requirements for valuing and marketing the properties and addressing defects found at inspection. The servicer may be required to advance funds for these activities, though these funds may be recovered.

that disposition practices may carry reputation and litigation risks. (To which I add that even when the servicer follows the disposition requirements in the servicing agreements, the impact of the dispositions reflects on the servicer and could result in reputation risk and risk of litigation.)
opportunities to participate and coordinate with state and local land bank programs, neighborhood stabilization programs, redevelopment programs, and other anti-blight programs, consistent with servicing agreements.

Library

Office of the Comptroller of the Currency (OCC)
Foreclosed Properties
Guidance on Potential Issues With Foreclosed Residential Properties
OCC 2011-49
December 14, 2011

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

OCC and OTS: Policy Integration

2011-12-09T10:17:00.000-05:00

On December 8, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin that outlines the process which the OCC intends to follow to fully integrate the Office of Thrift Supervision (OTS) policy guidance documents into a common set of supervisory policies that applies to both national banks and federal savings associations.

We have been monitoring the integration from its inception and informing our OCC and OTS clients accordingly. [For instance, see our newsletter OCC and OTS Synchronizing (6/8/11)]

If you are one of our OCC or OTS clients, please contact us for further information and discussion.

In this Newsletter
Overview
Process
Process: Phase I
Process: Phase II
Library

Overview

Dodd-Frank required that all functions of OTS relating to federal savings associations, and the rulemaking authority of the OTS relating to all federal savings associations, were transferred to the OCC on July 21, 2011. Consequently, the OCC assumed the responsibility for the ongoing supervision, examination, and regulation of federal savings associations.

Further, Dodd-Frank continues all OTS orders, resolutions, determinations, agreements, regulations, interpretive rules, other interpretations, guidelines, procedures, and other advisory materials in effect the day before the transfer date, while also permitting the OCC to administer these documents with respect to federal savings associations, until the documents are modified, terminated, set aside, or superseded by the OCC, by a court, or by operation of law.

The OCC issued an interim final rule on July 21, 2011, with request for comments that republished, with nomenclature and other technical changes, the OTS regulations formerly found in chapter V of title 12 of the Code of Federal Regulations. (These republished regulations became effective on July 21, 2011, and will be codified in chapter I at parts 100 through 197.1.)

Now, the OCC has announced in bulletin OCC 2011-47 that it is embarking on a comprehensive rulemaking project to integrate, when possible, these former OTS rules with OCC rules applicable to national banks. Concurrently, the OCC is integrating more than 1,000 supervisory policies of the former OTS into the OCC policy framework.

The OCC expects to produce a consistent, supervisory approach and integrated policy platform for national banks and federal savings associations, while recognizing differences anchored in statute.

Process

The OCC will group, to the extent possible, rescission notifications and other announcements related to the integration of OTS guidance, according to a two-phased process.

Process: Phase I

This phase involves rescinding a significant number of documents. The documents rescinded in this phase will include OTS documents that:

transmitted or summarized rules, interagency guidance, or Examination Handbook sections (not the conveyed guidance or rule itself);

are no longer useful because of the elimination of the OTS or the passage of time; and/or

duplicate existing OCC guidance.

Additionally, the OCC will rescind outdated guidance issued to national banks. Forthcoming OCC bulletins will announce these rescissions.

NOTE: In order to minimize confusion, documents will be watermarked as rescinded on the OCC Web site or former OTS Web site, as applicable.

Process: Phase II

This phase focuses on guidance that requires further review, substantive revision, or combination or is considered unique to federal savings associations.

Guidance

Guidance that is linked to regulatory or statutory requirements will be coordinated closely with the concurrent integration of OCC and former OTS regulations. In many cases, guidance cannot be revised or combined until the revisions to the rules on which the guidance is based have been finalized.

Priorities

Prioritization of the work will be influenced by feedback from the OCC's supervision staff as it encounters policy differences in the day-to-day supervision of national banks and federal savings associations.

Cross-References

Former OTS policies and guidance remain applicable to federal savings associations until rescinded, superseded, or revised. In some cases, the OCC may amend an OTS rule, policy, or practice that is cross-referenced in more than one document or affects only a portion of a document.

Duplications

If overlapping guidance exists, any guidance or regulation issued by the OCC after July 21, 2011, that specifically includes federal savings associations in its scope, will prevail. If a document has not been rescinded, but a portion of the content no longer applies, the superseded portion will be grayed out electronically.

Library

Office of the Comptroller of the Currency
OCC 2011-47 (Bulletin)
Subject: OTS Integration
December 8, 2011

Defining “Homeless”

2011-12-06T12:56:00.000-05:00

Yesterday, HUD reasserted its definition of the term "homeless." It also established the regulatory final rule for the definition "developmental disability'' and the definition and record keeping requirements for a "homeless individual with a disability.''

Many people do not come into face-to-face contact with this population on a regular basis. Indeed, except as we might encounter such individuals through charitable venues, outreach programs, and so-called "faith-based" initiatives, most of us have derived our knowledge about the situation faced by the disabled and the homeless from infrequent news broadcasts as well as from media Spin Meisters and politicians.

In the spirit of this holiday season, a time of charity and compassion, let's explore together the various ways that HUD has sought to provide a definition for the often disenfranchised and weakest amongst us. I think you will find it enlightening.

Background

On May 20, 2009, an important congressional act was enacted into law. It is called the Homeless Emergency Assistance and Rapid Transition to Housing Act of 2009, aptly named HEARTH. This law consolidated three separate homeless assistance programs administered by HUD under the McKinney-Vento Homeless Assistance Act into a single grant program, revised the Emergency Shelter Grants program (renaming it the Emergency Solutions Grants program), and created the Rural Housing Stability program (which replaced the Rural Homelessness Grant program). HEARTH also codified in law the Continuum of Care planning process, long a part of HUD's application process to assist homeless persons by providing greater coordination in responding to their needs.

Yesterday, HUD issued its final rule to integrate the regulation for the definition of "homeless," and the corresponding record keeping requirements, for the Shelter Plus Care program, and the Supportive Housing Program. And it established the regulation for the definition of "developmental disability" as well as the definition and record keeping requirements for the "homeless individual with a disability" for the Shelter Plus Care program and the Supportive Housing Program.

What does "homeless" mean?

According to HUD, there are currently four categories of homelessness:

(1) Individuals and families who lack a fixed, regular, and adequate nighttime residence. This includes a "subset" subset for an individual who resided in an emergency shelter or a place not meant for human habitation and who is exiting an institution where he or she temporarily resided.

(2) Individuals and families who will imminently lose their primary nighttime residence.

(3) Unaccompanied youth and families with children and youth who are defined as homeless under other federal statutes who do not otherwise qualify as homeless as described herein.

(4) Individuals and families who are fleeing, or are attempting to flee, domestic violence, dating violence, sexual assault, stalking, or other dangerous or life-threatening conditions that relate to violence against the individual or a family member.

Sheltering Children and Youth

Some terms above require an explanation. For instance HUD considers a "shelter" to mean "emergency shelter," but not "transitional housing." And "youth" is defined as less than 25 years of age. Traditionally, HUD has defined children as less than 18 years of age and adults as 18 years of age and above. But by establishing the term "youth" to mean less than 25 years of age, HUD hopes to more fully address the special needs of transition-aged youth, including youth exiting foster care systems to become stable in permanent housing.

I would also mention that other federal statutes provide definitions of homelessness under which unaccompanied youth and families with children and youth could alternatively qualify as homeless under category 3 of the homeless definition. These statutes are the Runaway and Homeless Youth Act (42 U.S.C. 5701 et seq.), the Head Start Act (42 U.S.C. 9831 et seq.), subtitle N of the Violence Against Women Act of 1994 (42 U.S.C. 14043e et seq.) (VAWA), section 330 of the Public Health Service Act (42 U.S.C. 254b), the Food and Nutrition Act of 2008 (7 U.S.C. 2011 et seq.), section 17 of the Child Nutrition Act of 1966 (42 U.S.C. 1786), and subtitle B of title VII of the McKinney-Vento Act (42 U.S.C. 11431 et seq.).

As best as I can tell, this list represents the salient statutes with definitions under which an unaccompanied youth or a family with children and youth can qualify as homeless under this category; that is, although there may be other federal statutes with definitions of "homeless," the statutes I've listed include those that encompass children and youth.

A Fifth Category?

A public comment was submitted for HUD to consider in its drafting of the final rule. This comment recommended a fifth category of "homeless," one that frankly I also can see as having a category of its own.

Here's the proposed fifth category:

Persons with disabilities who (1) have resided with a relative, but by virtue of age or other circumstances of that relative is unable to continue to provide shelter to the individual with a disability; (2) reside in an institution or facility not meant for permanent human habitation such as a hospital, rehabilitation facility, nursing or board and care home, and such individual has no home to return to where that person could live independently and safely; and (3) are in situations such as (1) and (2) who no longer choose to live in that circumstance and who wish to live independently.

HUD's response to this proposed fifth category was that it recognized there are "vulnerable populations that continue to be excluded from the definition of homeless," however, HUD determined to stay close to the statutory guidelines established in section 103 of the McKinney-Vento Act as HUD further clarifies the definition. That means, in brief, that the definition provided in the McKinney-Vento Act for "at risk of homelessness" reaches to the Emergency Solutions Grants program, the Rural Housing Stability program, and the Continuum of Care program. So, re-setting the interpretation will require proposed and interim program rules.

Proving Disability

HUD does look for written documentation of disability status. Information on disability is obtained in the course of each individual's assessment once that individual is admitted to a project, unless having a disability is an eligibility requirement for entry into the project.

And, where disability is an eligibility requirement, an intake staff-recorded observation of disability may be used to document disability status as long as the disability is confirmed by the aforementioned evidence within 45 days of the application for assistance.

The procedural criteria for determining disability are:

(1) Written verification from a professional who is licensed by the state to diagnose and treat that condition, that the disability is expected to be long-continuing or of indefinite duration and that the disability substantially impedes the individual's ability to live independently; and,

(2) Written verification from the Social Security Administration, or the receipt of a disability check (i.e., Social Security Disability Insurance check or Veteran Disability Compensation).

What does "lacking resources" mean?

It is worth considering what HUD views as a condition in which an individual may claim to be "lacking resources." Often, the ideologues and demagogues of the world assert that this condition is contrived, a result of an unwillingness to work, laziness, lack of ambition, squandered opportunities, and willfully failing to contribute to their own and society's betterment.

I think the question to ask ourselves, when determining this condition, is "Who would we turn to if we were down and out?" For many people, there simply are no support networks available, and that is a condition which has nothing to do with rejecting a work ethic or turning away from contributing positively to society.

Historically, HUD's view has not specifically defined in regulations or notices the concept of "lacks the resources or support networks" for the purposes of documenting eligibility for HUD's homeless and homelessness prevention programs. HUD's view has been that the resources and support networks required to demonstrate this criteria can vary drastically from person to person and community to community. This is a valid view, given that HUD could never capture all of the various possibilities.

The final rule, therefore, does not provide a definition for "resources or support network." However, it does provide examples of support networks when determining whether an individual or family lacks the resources or support networks to obtain other permanent housing.

These examples, which include friends, family, and faith-based or other social networks, are not meant to be an all-inclusive list, but rather they are designed to illustrate the kinds of support networks that people must first turn to, if they are able to, before drawing on the scarce resources targeted to homeless people. Putting this differently, a housing situation that is unsafe due to violence is obviously not considered a "resource or support network," and such a condition does not disqualify an individual or family under the applicable category based on such a situation.

So HUD has clarified that family, friends, and faith-based or other social networks are examples of "resources or support networks."

"We" or "Me"

The challenge of homelessness, especially at a time when millions of families have lost their homes and jobs, is not someone else's problem. The effects of homelessness, as we all know, reach horizontally out to virtually all areas of economic activity, and vertically through generation after generation.

The least amongst us affects the strongest. I hope we will continue to address the needs of the homeless, especially because we are a great and caring nation, so that the children and youth that suffer as a result of homelessness will join us all in the task of building a stable and prosperous society.

Consider Hillel the Elder's piercing questions:

If I am not for myself, who will be for me?
If I am only for myself, what am I?
If not now, when?

In this season of joy and charity, maybe there will be a chance for us to become "first responders" to the homeless and the disabled.

Is our country a "We" or a "Me" nation?

Since 1776 we have had the answer: E Pluribus Unum. Out of Many, One.

Further Readings

Homeless Emergency Assistance and Rapid Transition to Housing: Defining "Homeless"
Final Rule
Department of Housing and Urban Development
Federal Register - 76/233
December 5, 2011

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

OCC: Fixing Deficient Foreclosure Practices

2011-11-30T12:27:00.000-05:00

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders.

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided.

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

Loan Originator Compensation–The Regulatory Examination

2011-11-28T09:02:00.003-05:00

The easy part is over. Now the real fun begins.

Since April 6, 2011, the mortgage industry has been required to implement the new loan originator compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.[1] The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits “steering” consumers to loans to receive greater compensation.

I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.[2] Indeed, I have even published a compendium of analysis, called the FAQs Outline – Loan Originator Compensation, which, as of this writing, consists of over 400 FAQs and reaches to over 130 pages. [3] These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.

The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) [4] enacted Title XIV into law, which amended the Truth in Lending Act (TILA) to establish certain mortgage loan origination standards; then to August 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through September 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on January 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.” [5] After that, the FRB offered some conference calls, a webinar – which cleared up some confusion, while causing still other confusion – and occasional updates of the oral, rather than the written, official variety. [6]

When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.

As we all know, generally there is no regulation issued – whether the statutes are at the federal or state level – that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on October 6, 2011 - exactly six months to the day when the Rule became effective - the first examination guidelines for loan originator compensation were promulgated. [7]

In the "State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule," hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The Multi-State Mortgage Committee (MMC) is a ten-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). [8]

Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z - Truth in Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of nondepository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.

When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in the midst of actual reviews of loan originator compensation compliance that we were then conducting for our clients.

Expect the Unexpected

As I have said many times, preparation is protection. Don’t wait for the regulator’s Document Request letter to implement any regulatory requirement. If you wait, by then it’s often too late. Remember, most examinations are look-backs, reaching to the previous examination, or a stated timeframe previous to the current examination. Most examiners have a “No Tolerance” view of firms that cannot provide supporting documents and information in a timely manner. The “record speaks for itself” is the inflexible standard! Our audit and due diligence reviews are the property of our client, and as fully confidential as if the client conducted its own review, with its internal resources – which, of course, is certainly a viable option. So, there really is no excuse for not being prepared for a regulatory examination for loan originator compensation or any other examination.

In my view, undertaking preparedness action for a loan originator compensation examination should consist of the following basics. [9] My remarks include some of my firm’s audit and due diligence practices as well as certain features of the recently issued Examiner Guidelines.

Preparation is Protection

REVIEW CONSTRUCT

It is critical to set forth the bounds of the review. Indicate a research range that utilizes an audit sequence which, in part, incorporates federal Interagency procedures and guidelines implemented prior to the effective date of the Rule, as well as federal Interagency procedures and guidelines effective after the date of the Rule, as promulgated by the Multi-State Mortgage Committee (MMC) examiner guidelines, any federal agency, and, when issued, state government agencies.
A significant portion of the review should be devoted to (1) completing the Institution Information Request and Institution Questionnaire provided in the Examiner Guidelines, (2) assembling items required in a Document Request, (3) providing information asked for in an Audit Checklist (whether specifically designed or Interagency), and (4) including independent review criteria through documentation review, on-site transaction testing (if required), off-site sampling of transaction documents, and interviews of institution staff or other parties.

REVIEW COMPONENTS

Report of Findings

Review of Policy and Procedures

Institution Information Request

Institution Questionnaire

Document Request

Auditing of Sampling Indicia

METHODOLOGY

There are several ways to go about preparing for a regulatory examination of loan originator compensation.

Prior to determining the most suitable procedures to follow, three Modules should be outlined, as follows:

MODULE 1 – EXAMINER CHECKLIST

This consists of certain kinds of questions that would be expected to guide the examiner throughout the course of the examination. It is important to be familiar with the criteria that will be applied.

MODULE 2 – INSTITUTION INFORMATION REQUEST

The information that we would seek does not apply to dates prior to April 6, 2011. However, this module does take into consideration a very comprehensive review of all information and documentation that affect loan originator compensation.

MODULE 3 – INSTITUTION QUESTIONNAIRE

This module is meant to save time and resources. We usually incorporate this in every Document Request, and, unless we direct otherwise, we expect this questionnaire to be completed and returned to us prior to our audit and due diligence review. Most clients know to support their answers with documentation. Certain questions, though, may be answered with a Yes or No response, but most questions require comprehensive, fully documentable responses.

SCOPE

There are, essentially, three options in fulfilling the scope of exam preparedness, each of which consists of one or more of the aforementioned modules.

Full Scope

The Full Scope requires the completion of Modules 2 and Module 3, followed by completion of Module 1 through a documentation review, on-site transaction testing, and interviews of institution staff or other parties.

Limited Scope

A Limited Scope only requires completion of Module 1, and it excludes transaction testing and interviews, based on the institution's responses to Modules 2 and 3.

Limited Scope with off-site testing

This review combines the Limited Scope with off-site sampling of transaction documents and/or telephone interviews of institution staff or other parties.

CAVEAT: Before moving on to the next section, I want to mention that the appropriate risk management approach vis-à-vis the selection of the scope depends on a financial institution's type, size, complexity, and risk profile. Conferring with a risk management professional would be helpful to determining which scope is most suited to providing the level of exam preparedness needed.

Information Questionnaire

Please give earnest consideration to the following questions, as these will come up in one form or another during an examination of loan origination compensation. The financial institution may or may not know the answers to all the questions, but that very fact demonstrates weakness in policies, procedures, and compliance enforcement. When my firm issues a Document Request, the Information Questionnaire is now always included. Prior to the examination, it is unlikely that the examiner will provide information about appropriate answers to these kinds of questions. While some of the questions may seem relatively simple on the surface, they are not really simple at all. The answers are either clearly stated or they are not, and if they are not stated or incorrectly stated, this in itself alerts the examiner to the financial institution’s level of preparedness, its management competence, its implementation awareness, and the additional information and documentation that may be need to be requested for the examination.

How are loan originators compensated? Provide details of all compensation procedures and calculations.
What incentive plans are offered to loan originators? Provide details.
Are loan originators ever compensated based on:
1. The interest rate or Annual Percentage Rate obtained on a loan?
2. The loan to value obtained on a loan?
3. Originating a loan with a prepayment penalty?
4. The amount of loan fees paid to the institution or creditor?
Are credit scores a determining factor in the amount of compensation earned by a loan originator? Explain.
Is debt to income a determining factor in the amount of compensation earned by a loan originator? Explain.
Are loan originators allowed to receive reimbursement for third party costs (i.e., appraisal, credit report, et cetera)?
Are loan originators allowed to charge more for third party costs than the actual cost of the service and retain such costs as compensation? Explain.
Are loan originators allowed to charge for services other than loan origination services that are performed by the originator? For example: loan processing, document preparation, inspection fees, and so forth.
Is the loan originator compensated any differently when price is increased by the creditor or employer to offset loan costs?
Is loan originator compensation ever reduced in order for the institution to compete on loan terms? (For example: the institution reduces its rate by 50 basis points to induce a shopping consumer to stay with the institution, and the loan originator’s compensation is reduced accordingly.)
Are loan originators able to deliver loans to more than one affiliate or subsidiary of the institution’s parent company? If so, are loan originators compensated differently based on which affiliate the loans are delivered to?
Are loan originators allowed to receive compensation (including yield spread premium or similar compensation) from both the consumer and any other person on the same transaction?

Brokered Loans: Questions 13 through 18 must be answered by both mortgage broker loan originators originating loans and creditor institutions receiving brokered loans.

Does the institution allow loan originators to “steer” consumers to transactions where the loan originator receives more compensation and the loan is not in the consumer’s interest? Explain.
Does the institution require or use the steering Safe Harbor provision under the Rule? [10]
During the examination period or the last three years, in how many transactions has the institution required or used the steering Safe Harbor provision under the Rule? Institution may answer with a number or the percentage of total loans originated.
Does the institution require third party originators to use the steering Safe Harbor provision?
If a creditor, what action does the institution take to monitor third party compliance with the steering Safe Harbor provision?
If the institution does not require or use the steering Safe Harbor provision what methods does it use to determine that steering has not and will not occur?
How long does the institution retain compensation agreements?
How long does the institution retain records of actual compensation?
How long does the institution retain records that support the options offered under the steering Safe Harbor provision?

Documents and Information

I would like to end this article with a brief overview of the kinds of documents that should be involved in a thorough review involving loan originator compensation. The list I am providing is not meant to be complete, since each financial institution differs in many ways. This is a general list that we would require in a Document Request. A financial institution should be prepared to provide the documentation and information virtually immediately. If a lot of time is needed to get the documents together, the financial institution is, unfortunately, simply not prepared for the examination and should expect the examiner to notice the lack of preparedness.

In addition to the Institution Information Request and Institution Questionnaire that I have described, expect to provide Employment Agreements for Loan Officers, Sales Managers, Producing Branch Managers, and Non-Producing Branch Managers. If the Compensation Plans are not part of the Employment Agreements, but separately attested to, then expect to provide them for these same individuals. A list of affiliates will be required (i.e., title companies), if applicable. [11]

Wholesale channels must be able to deliver the Wholesale Broker Agreement, Compensation Plan, and any Announcements. Indeed, any origination channel must be ready to provide Presentations and all relevant Announcements.

Examiners will audit certain areas of interest that directly impact actual loan originations. In this regard, expect to provide the loan application register for all applications taken from April 6, 2011 to the date stipulated in the examiner’s Document Request letter. For that same period, also expect to provide Monthly Production Reports, and Rate Sheets.

Finally, the examiner will test the data provided against a complete analysis of loan originator specific data, such as the loan number, loan originator’s name, and borrower’s name, as well as the subject property state, each MLO’s compensation payments, and each MLO’s date of employment or affiliation.

Final Words of Advice

Most of our clients know that I tend to be a Mother Hen when it comes to taking care of their mortgage compliance needs. I admit it wholeheartedly. In my opinion, each institution should appoint its own version of a Mother Hen in order to assure that examination preparation for loan originator compensation is properly vetted and readied.

The penalties for violations are steep and could be catastrophic, not only with respect to the so-called “traditional” penalties, such as actual damages, statutory damages (up to $4,000 for each individual action and potential class action), and attorneys’ fees and costs, but also there is "enhanced” liability for creditors, such as refunding all finance charges and fees paid by the consumer (unless the creditor demonstrates that the failure to comply is not material). Loan originators are exposed to penalties of the greater of actual damages or three times the compensation or gain on the loan (i.e., liability even if there are no damages); a longer “statute of limitations” for loan originator compensation and certain other violations so that actions may be brought until the end of a three year (i.e., not a one year) period from the date of the violation; and, state Attorneys General are authorized to enforce violations of loan originator compensation and certain other requirements.

Given the penalties for violations of the loan originator compensation guidelines, now is the time to prepare, in advance, and be continually ready for the inevitable notice of the forthcoming regulatory examination.

[1] Due to litigation, the April 1, 2011 implementation date was temporarily stayed. The stay was dissolved. The effective compliance implementation date of the Rule is April 6, 2011.

[2] For instance, Foxx, Jonathan, Landmark Financial Legislation: New Rules for Mortgage Originators – Part I: Reformation and Regulations, National Mortgage Professional Magazine, August 2010, Volume 2, Issue 8, pp 28-42; Foxx, Jonathan, A New Era of Mortgage Reform – Part II: Legislation – Reactive or Proactive, National Mortgage Professional Magazine, September 2010, Volume 2, Issue 9, pp 22-28; Foxx, Jonathan, A New Era of Mortgage Reform – Part III: Consumer Financial Protection – Bureau and Bureaucracy, October 2010, Volume 2, Issue 10, pp 22-40; Foxx, Jonathan, The Birth of an Agency, in National Mortgage Professional Magazine, September 2009, Volume 1, Issue 5, pp 24-27; and, Foxx, Jonathan, The CFPA Controversy: Asking the Tough Questions, in National Mortgage Professional Magazine, October 2009, Volume 1, Issue 6, pp 22-25. All Newsletters and Articles through 2011 are available at: http://publications.lenderscompliancegroup.com/.

[3] See information about the FAQs Outline – Loan Originator Compensation by visiting the Library section of my firm’s website. See: http://lenderscompliancegroup.com.

[4] H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act, 111th Congress (2009-2010): "A bill to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." Sponsored by Representative Barney Frank (D-MA) and Senator Christopher Dodd (D-CT)

[5] Compliance Guide to Small Entities, Regulation Z: Loan Originator Compensation and Steering, 12 CFR 226, Federal Reserve Board, January 26, 2011

[6] July 21, 2011 is the date, pursuant to Dodd-Frank, that the Consumer Financial Protection Bureau (CFPB) receives rulemaking and examination authority over the “enumerated laws,” the so-called “Designated Transfer Date.” See Designated Transfer Date, Bureau of Consumer Financial Protection, Federal Register, Vol. 75, No. 181 (09/20/10). The Designated Transfer Date must be between January 17, 2011 and July 21, 2011, unless the Treasury Secretary determines that the orderly implementation of Title X is not feasible within 12 months; but, in no case may the Designated Transfer Date be later than January 21, 2012. In fact, the loan originator compensation guidance was transferred to the CFPB on July 21, 2011.

[7] The State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule is dated October 6, 2011, although the announcement of its issuance was on October 7, 2011.

[8] The Multistate Mortgage Committee (MMC) released this set of examiner guidelines to assist state regulators in implementing the FRB’s loan originator compensation restrictions under Regulation Z [12 C.F.R. § 226.36(d), (e)]. Earlier this year, the MMC also issued the Mortgage Examination Manual, which provides information and criteria for the examination of multistate mortgage entities, and further provides guidance on examination planning and administration.

[9] Please take note: this article is being published in the November 2011 edition of National Mortgage Professional Magazine, and it reflects certain information available at this time. Please be mindful that regulatory requirements and preparedness actions may change in the future and at any time.

[10] See §226.36(e)(1)

[11] See §226.36(d)(3)

The Empire Strikes Back: HUD's Fair Lending Standards

2011-11-16T15:53:00.000-05:00

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

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

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

So, what's at stake? Let's take a closer look.

HUD's Preemptive Attack

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

To say HUD's tactic is unusual, is a considerable understatement!

Purpose of HUD's Proposal

So what is the basis of HUD's "preemptive strike," if I might be at liberty to use that term?

Here is HUD's stated purpose for its issuance:

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

Now to make sense of that statement of purpose, we'll need to give some consideration to Gallagher v. Magner.

Gallagher v. Magner

Gallagher v. Magner (hereinafter Gallagher), is a claim by owners of rental properties against the City of St. Paul's alleged "practice" of "aggressively enforcing" its Housing Code.

The case arose when a group of landlords claimed that officials in the City of St. Paul, Minnesota, targeted rental properties for housing code violations, with a disparate impact on African-American tenants. Despite the lack of evidence showing intent, the Eighth Circuit Court of Appeals upheld a finding of Fair Housing Act violations.

The Route to the Supreme Court

Here is a brief outline of Gallagher v. Magner's route to the Supreme Court:

Phase 1:

The district court granted the defendants' motion for summary judgment.

Phase 2:

The Eighth Circuit reversed with respect to the plaintiffs' "disparate impact" claim under the Fair Housing Act (FHA), 42 U.S.C. § 3604(a)-(b). In so holding, the Eighth Circuit applied a three prong "burden-shifting" approach requiring: (a) a prima facie case of disparate impact on protected classes; (b) a showing by the defendant that the challenged policy or practice has a "manifest relationship" to a legitimate, non-discriminatory policy objective; and (c) a showing by the plaintiffs that there exists "a viable alternative means" to meet the legitimate objective without discriminatory effects. [619 F.3d at 833-34]

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

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

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

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

That alternative was an enforcement program previously used by the city, called "Problem Properties 2000." [Idem 837]

Unfortunately, the "Problem Properties 2000" program was not described in sufficient detail in the case, and, in any event, the defendants argued that use of this enforcement program, itself being a prior enforcement program, would not reduce the alleged impact on protected class tenants. Of course, the defendants took this position because there might be increased costs to the owners, and, as I've stated above, increased costs would be construed concomitantly alongside of enforcement.

The Eighth Circuit found that the alternative enforcement program "would significantly reduce the impact on protected class members." [Idem 838]

Phase 3:

The City of St. Paul petitioned for rehearing en banc. That petition was denied (five judges dissented).

Phase 4:

The City of St. Paul then filed a petition for certiorari in the Supreme Court on the basis of two positions requiring judicial review: (a) whether disparate impact claims are cognizable under the FHA and, if so, (b) whether the proper mode of analysis is the "shifting the burden" approach (Seventh and Tenth Circuits, so held); variations were applied by the First and Second Circuits; or perhaps some other standard.

Phase 5:

Certiorari - U. S. Supreme Court. Petition granted on November 7, 2011.

Specifically, the questions to be adjudicated by the Supreme Court are:

1. Are disparate impact claims cognizable under the Fair Housing Act?
2. If such claims are cognizable, should they be analyzed under the burden shifting approach used by three circuits, under the balancing test used by four circuits, under a hybrid approach used by two circuits, or by some other test?

Precedent

The primary question is this: is there availability under the FHA of "disparate impact" claims - given the City of St. Paul's petition for certiorari, and considering the dissent from the petition for rehearing en banc - when the Supreme Court has never addressed the propriety of "disparate impact" claims under the FHA?

And this is in addition to the fact that lower courts have recognized such claims actually began before the Supreme Court had decided on another case, Smith v. City of Jackson, Mississippi. [544 U.S. 228 (2005)]

In Smith, the Supreme Court held that disparate impact claims are cognizable under Section 4(a)(2) of the Age Discrimination in Employment Act because the language in the aforementioned, cited section is "identical" to that of Title VII - and that language is absent from the FHA.

I should mention, as well, that the same language is also absent from the Equal Credit Opportunity Act (ECOA). However, even after the ruling on Smith, courts have allowed disparate impact claims to proceed under the ECOA, and most of those claims followed in the wake of the availability of the expanded Home Mortgage Disclosure Act data in recent years.

HUD - The Empire Strikes Back

The Supreme Court has ruled that a plaintiff seeking to use disparate impact bears the burden of proof at all stages of the proceedings. That is, it places the burden of proving a "necessary and manifest relationship" to a legitimate, nondiscriminatory interest on the defendant or respondent and the burden of proving a less discriminatory alternative on the plaintiff or complainant.

In the proposed rule, the following process applies:

1) Complainant or plaintiff first "bears the burden of proving its prima facie case," that is, that a housing practice caused, causes, or will cause a discriminatory effect on a group of persons or a community on the basis of race, color, religion, sex, disability, familial status, or national origin.

2) Once the complainant or plaintiff has made its prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice has a necessary and manifest relationship to one or more of the housing provider's legitimate, nondiscriminatory interests.

3) If the respondent or defendant satisfies its burden, the complainant or plaintiff may still establish liability by demonstrating what the legitimate, nondiscriminatory interests could be that produce a less discriminatory effect.

In HUD's proposal, a demonstration that a housing practice is supported by a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.

HUD's new standards for shifting the burden conflicts with the Supreme Court's own precedent that a plaintiff who seeks to use disparate impact must bear the burden of proof at all stages of the proceedings.

What's at Stake?

The Supreme Court's decision - which is expected in the spring of 2012 - will have implications for fair lending litigation and the enforcement affecting all types of consumer financial products.

Depending on the ruling, there may be far-reaching consequences, such as effectively determining the availability of disparate impact claims under the ECOA as well as under the FHA. It is also possible that, given the Eighth Circuit's ruling, a narrow decision may be the outcome, such as vacating the Eighth Circuit's opinion, but leaving intact the possibility of the FHA disparate impact claims in some circumstances.

Under the current disparate impact theory of discrimination, a plaintiff can establish "discrimination" based solely on the results of a neutral policy, without having to show any actual intent to discriminate. The Supreme Court has never decided whether the FHA permits plaintiffs to bring claims under a disparate impact theory.

So, the Supreme Courts decision entails whether the FHA permits disparate impact claims.

Will a decision lead to a view that the the Fair Housing Act permits claims of discrimination if there was no intent to discriminate?

In its proposed disparate impact standards, is HUD now asserting an authority it has not been granted by Congress, in effect legislating a new rule without support from actual, existing legislation?

Further Readings

Implementation of the Fair Housing Act's Discriminatory Effects Standard
Department of Housing and Urban Development
Proposed rule
Federal Register - 76/221
November 16, 2011

Gallagher v. Magner
Docketed: February 16, 2011
Decision Date: September 1, 2010
United States Court of Appeals for the Eighth Circuit

Magner v. Gallagher
United States Supreme Court
Questions Presented
November 7, 2011

________________________________________________________________

Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.

New Mortgage Servicing Practices

2011-11-14T08:10:00.001-05:00

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

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

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

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

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

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

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

The following is a brief review of these new practices.

OVERVIEW

The Department has consumer protection concerns relating to practices "highlighted in the media" that have been prevalent in the mortgage servicing industry generally, including but not limited to, (1) the practice of "Robo-signing," (2) referring to affidavits in foreclosure proceedings that falsely attest that the signer has personal knowledge of the facts presented therein and/or were not notarized in accordance with state law; (3) weak internal controls and oversight that may have compromised the accuracy of foreclosure documents; (4) unfair and improper practices in connection with loss mitigation, including improper denials of loan modifications; and, (5) imposition of improper fees by servicers, among others.

OUTLINE OF PRACTICES

-Document Execution and Accuracy of Documentation
-Ownership of Note, Foreclosures
-Quality Assurance and Audits
-Oversight of Third Party Vendors
-Staffing
-Training
-Notices, Single Point of Contact and Modifications for Transferred Servicing Files
-Borrower Communication
-Independent Evaluation of Loan Modification Denials
-Restrictions on Dual Tracking
-Application of Payments
-Servicing Fees
-Force-Placed Insurance
-Compliance with Federal and State Law

PROHIBITED PRACTICES

"Robo-signing," where servicer staff signed affidavits stating they reviewed loan documents when they had not actually done so.

Weak internal controls and oversight that compromise the accuracy of foreclosure documents.

Referring borrowers to foreclosure at the same time as those borrowers are attempting to obtain modifications of their mortgages or other loss mitigation.

Improper denials of loan modifications.

Failing to provide borrowers with access to a single customer service representative, resulting in delays or failure of the loss mitigation process.

Imposition of improper fees by servicers.

SPECIFIC CHANGES

1) End Robo-signing and impose staffing and training requirements that will prevent Robo-signing.

2) Require servicers to withdraw any pending foreclosure actions in which filed affidavits were Robo-signed or otherwise not accurate.

3) End "dual tracking", for instance referring a borrower to foreclosure while the borrower is pursuing loan modification or loss mitigation, and prohibit foreclosures from advancing while denial of a borrower's loan modification is under an independent review, which is also required by the agreements.

4) Provide a dedicated single point of contact representative for all borrowers seeking loss mitigation or in foreclosure so borrowers are able to speak to the same person who knows their file every time they call.

5) Require servicers to ensure that any force-placed insurance be reasonably priced in relation to claims incurred, and prohibit force-placing insurance with an affiliated insurer.

6) Impose more rigorous pleading requirements in foreclosure actions to ensure that only parties and entities possessing the legal right to foreclose can sue borrowers.

7) For borrowers found to have been wrongfully foreclosed, require servicers to ensure that their equity in the property is returned, or, if the property was sold, compensate the borrower.

8) Impose new standards on servicers for application of borrowers' mortgage payments to prevent layering of late fees and other servicer fees and use of suspense accounts in ways that compounded borrower delinquencies and defaults.

9) Require servicers to strengthen oversight of foreclosure counsel and other third party vendors, and impose new obligations on servicers to conduct regular reviews of foreclosure documents prepared by counsel and to terminate foreclosure attorneys whose document practices are problematic or who are sanctioned by a court.

CFPB Issues “Early Warning Notice” Procedures

2011-11-08T15:21:00.000-05:00

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.

This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.

The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.

OVERVIEW

The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.

The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.

Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.

In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.

The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.

EARLY WARNING NOTICE LETTER - SAMPLE

Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.

The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.

The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.

RESPONDING TO THE “EARLY WARNING NOTICE” LETTER

The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.

Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.

Submissions may be discoverable by third parties in accordance with applicable law.

GUIDELINES FOR LETTER'S FORMAT

The written statement must:

-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.

The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.

If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.

Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.

LIBRARY

Consumer Financial Protection Bureau

Early Warning Notice
Bulletin 2011-04
November 7, 2011

Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011

Learning to Play the HARP

2011-10-31T14:54:00.001-04:00

A week ago the Obama Administration announced revisions to the Home Affordable Refinance Program (HARP).

Better late than never! Actually, coming three years belatedly, a change to HARP may bring some relief to homeowners and the economy.

But is it a viable solution?

As you may know, I have written extensively about the failure of both the Home Affordable Modification Program (HAMP) and HARP.

Is the new and improved version of the two-year old HARP a quick fix or yet another boondoggle in the making?

Real Estate and Jobs

Last week's announcement stems from the revisions developed by the Federal Housing Finance Agency (FHFA), the GSE's overseer, with feedback from lenders, mortgage insurers and other mortgage industry participants. In a sense the revisions are a patent admission that the economy simply will not regain its strength without a robust real estate market; or, put another way, jobs will not return unless a strengthened real estate market returns.

The linkage of real estate to jobs has roots in the MBS World, a murky realm way below the revisions contemplated by the Administration and the homeowners' needs.

The Federal Reserve has a central place in the MBS World, since it is permitted to participate in the agency MBS financial instruments, and not permitted to participate in buying equity, real estate, or corporate debt.

Remember: MBS yields are the primary trigger in the formation of mortgage rates. The safest financial instruments, of course, are Treasuries; so, relative to Treasuries, the margin or spread between mortgage rates and yields on 10-year Treasuries has continued to move upward. When the Fed makes its MBS purchase, it thereby reduces mortgage interest rates, compressing those relative margins. Operationally speaking, then, a so-called target for mortgage rates is set in this manner.

Ostensibly, lower mortgage rates lead to refinances and the concomitant diminution of financial pressure on homeowners who have been trapped in the housing crisis with underwater mortgages, because such reduction both lowers the cost of debt service through refinance and supports purchases of houses, which creates demand - and thus an increase in pricing - for housing.

What Went Wrong?

To date, a tiny percentage of seemingly eligible borrowers have refinanced through HARP.

In my estimation, these are the factors that led to the HARP failure:

-Resistance: the refusal by some second lienholders to subordinate themselves to the first mortgagee.

-Fear: the GSEs might "put back" the new loans if they subsequently move into default, which causes constrained underwriting.

-Restrictions: the original MI being applied to the new loan, particularly if the new loan has a different servicer.

-Reluctance: homeowners afraid of being rejected, lack of public awareness, and insufficient news about program information.

Also, it is common knowledge that lenders have rejected all but the most creditworthy borrowers from taking advantage of HARP, out of reluctance to take on the risk of existing representations and warranties; however, this may yet find a solution (see below).

Plans and Suggestions

In this latest version of HARP, there is an extension of the program's mandates through December 2013. As a quick overview, I think it's fair to describe HARP as a temporary program by the GSEs, the primary goal of which is to permit borrowers whose loans are currently guaranteed by the GSEs to be refinanced, despite the fact that these loans are significantly higher than 80LTV.

There are some important revisions, perhaps the most important being the removal of the 125LTV ceiling. In addition, in many cases a new appraisal is eliminated, fees to borrowers are lowered, and the GSEs are waiving some lender representations and warranties (about which we will know more by November 15, 2011, when the program guidelines are issued).

I think the revisions to representations and warranties are needed and justified, inasmuch as all loans eligible under HARP have been seasoned for more than three years, and defects in a loan usually show up in the first few years of the loan. So, the risk - and the implications for representations and warranties - is certainly much lower at this point.

As to homeowners' reluctance and lack of information, although the HARP revision does not require it, I think the GSEs should communicate with potentially eligible borrowers and let them know that their loans are eligible under HARP at current mortgage rates.

With respect to the resistance of second lienholders, many studies suggest that second liens are no longer a major barrier to refinancing. It is very important that second lienholders participate in the program, because refinancing the first lien ameliorates the condition of the second lien, due to the fact that it frees up funds that can be used for second lien servicing.

The MI issue is a thorny one. The fact is, notwithstanding the foregoing, borrowers with MI will have fewer options than others to refinance. It remains to be seen how the proposal to waive aspects of the representations and warranties will incentivize servicers to resolve the MI debacle.

A Macroeconomic Solution

So, can revamping HARP bring new jobs and stabilize the real estate market?

One study I have read, a CBO research paper, estimates that a revised HARP, structured along the lines I've outlined above, would (1) result in $428 billion additional refinancings with annual savings to households of $7.4 billion, (2) would have a small positive effect on the GSEs' net worth, and (3) would have a small net cost to the government of less than $1 billion (which, in any event, is subsumed by the Fed's prepaid MBS portfolio).

The overall effect is to create a stimulus, since HARP beneficiaries will have higher marginal means to create demand, that is, their consumption will more than offset the opposing demand from existing MBS investors (i.e., financial institutions). Based on the studies I have read, if HARP increased GDP by as little as $1 billion per year for two or three years, the additional tax revenues would significantly exceed the costs. So, the macroeconomic effect would be net positive and stimulative.

Finally, if mortgage rates were sustained by the 2% to 2.5% range that has been a trending indicator, when combined with the HARP revisions, there would be a very substantial boost of mortgage loan originations, perhaps enough of a boost to a sizeable part of the GSE portfolio. Such an impetus would mean a re-set of trillions of dollars in asset value, and a yearly reduction in household interest expenses into the many billions.

The Fed's Role

As I see it, the Fed can weigh in forcefully in supporting the HARP revisions.

For instance, if the Fed purchased as much as $2 trillion of new MBS, then existing MBS holders would be displaced into investing that $2 trillion elsewhere. Hence, such re-investment would lead to an increase in stock prices, reduction in debenture yields, increase in real estate values, and higher foreign currency values.

A recent study, conducted by the San Francisco Fed, clearly shows that Fed purchases upward of 2$ trillion would increase GDP by more than 2% in two years and create 3 million new jobs. If the HARP refinance revisions are factored in, the overall stimulative effect would be much larger, perhaps as high as creating 4 million new jobs.

Moving forward robustly with the HARP revisions would surely lead us to conclude that the new and improved version, though coming about belatedly, is not too little, too late.

What do you think?

Please feel free to comment!

FRB Issues Flood Insurance FAQs and Proposed Revisions

2011-10-18T14:38:00.000-04:00

The federal agencies that supervise banks, thrifts, and credit unions, and the Farm Credit System, on October 14, 2011 announced that it published guidance that updates the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009 (see 74 FR 35914-35947).

On October 17, 2011, the Federal Register published the guidance concerning the Loans in Areas Having Special Flood Hazards, Interagency Questions and Answers Regarding Flood Insurance.

The federal agencies participating in this guidance are the Office of the Comptroller of the Currency, Treasury (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA), (collectively, the Agencies).

The guidance finalizes two questions and answers that had been previously proposed. The first relates to insurable value. The second relates to force placement of flood insurance. The Agencies withdrew another question regarding insurable value.

The two final questions and answers supplement the Interagency Questions and Answers Regarding Flood Insurance (Interagency Questions and Answers), which were published on July 21, 2009 (74 FR 35914).

Effective Date - Final questions and answers: October 17, 2011.
Effective Date for Comments: December 1, 2011.

REVISIONS

It is the intention of the Agencies that, after public comment has been received and considered and the guidance has been adopted in final form, the Agencies will issue a final update to the 2009 Interagency Questions and Answers Regarding Flood Insurance. The final update will continue to supplement other guidance or interpretations issued by the Agencies and the Federal Emergency Management Agency.

The Agencies request comment on three additional proposed updates to questions and answers relating to force placement of flood insurance. Two answers have been significantly and substantively changed. The third change, regarding force placement of flood insurance, revises a previously finalized Question and Answer for consistency with the proposed changes.

The Agencies are requesting comment on the proposed changes to the Interagency Questions and Answers Regarding Flood Insurance and, more generally, on other issues and concerns regarding compliance with the federal flood insurance statutes and regulations. Comments are due 45 days after publication in the Federal Register.

Based on comments received, the Agencies also have significantly revised two questions and answers regarding force placement of flood insurance that were initially proposed on July 21, 2009, and are now proposing revision to a previously finalized question and answer. These three revised questions and answers are being proposed for comment.

LIBRARY

Federal Reserve System - Interagency

Loans in Areas Having Special Flood Hazards
Interagency Questions and Answers Regarding Flood

Federal Register - 76/200

October 17, 2011

CFPB Issues Supervision and Examination Manual

2011-10-17T15:00:00.000-04:00

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is the first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

The Manual is divided into three parts:

Part 1: Describes the supervision and examination process.

Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations.

Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.

Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.

However, we have created a Directory and Compendium.

At this time, Part 1 and Part 2 are only available as website pages.

Part 3 is available in PDF.

In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's text and website links. There are over 700 pages in this compendium.

Our compendium provides:

Directory: All Sections
Contents: Links to Compendium Text
Contents: Links to CFPB Website Text

We are pleased to share this compilation with you for free.

Due to the huge size of the compendium - over 13 MBs - it must be downloaded from our secure Extranet. If you are interested in obtaining this compendium, please request it and we'll send you the download instructions.

Supervision and Examination Manual - Version 1.0

OUTLINE

Part I - Compliance Supervision and Examination

Supervision and Examination Process
Overview
Examinations

Part II - Examinations Procedures
Compliance Management Review

Unfair, Deceptive or Abusive Acts or Practices
Narrative
Examination Procedures

Equal Credit Opportunity Act
    Narrative
    Examination Program
    Interagency Fair Lending Examination Procedures
    Interagency Fair Lending Examination Procedures – Appendix

Home Mortgage Disclosure Act
    Narrative
    Examination Procedures
    Home Mortgage Disclosure Act Checklist

Truth in Lending Act
    Narrative
    Examination Procedures
    Appendix A: High-Cost Mortgage (§ 226.32) Worksheet

Real Estate Settlement Procedures Act
    Narrative
    Examination Procedures
    Checklist

Homeowners Protection Act
Narrative
Examination Procedures

Consumer Leasing Act
    Narrative
    Consumer Leasing Act Examination Procedures
    Consumer Leasing Act Checklist

Fair Credit Reporting Act
Narrative
Examination Procedures

Fair Debt Collection Practices Act
Narrative
Examination Procedures

Electronic Fund Transfer Act
    Narrative
    Examination Procedures
    Checklist

Truth in Savings Act
    Narrative
    Examination Procedures
    Checklist

Privacy of Consumer Financial Information (GLBA)
    Narrative
    Examination Procedures
    Examination Procedures Attachment
    Checklist

Mortgage Servicing Examination Procedures

Part III - Examination Process Templates
    Templates
    Entity Profile
    Risk Assessment
    Supervision Plan
    Examination Scope Summary
    Examination Report
    Examination Report cover
    Examination Report cover letter

LIBRARY

Consumer Financial Protection Bureau

Supervision and Examination Manual
Version 1.0
Announcement

October 13, 2011

FinCEN: Fraud and Mortgage Rescue Schemes

2011-10-13T12:40:00.000-04:00

The Financial Crimes Enforcement Network (FinCEN) has just released its 20th issue of the SAR Activity Review - Trends, Tips, and Issues. The publication provides information about SARs and Remote Deposit Capture risks, Organized Retail Crime, Health Care Fraud, Elder Financial Exploitation, and more.

Of particular interest is a section devoted to the U.S. Trustee Program's (USTP) civil enforcement activity targeting bankruptcy-related mortgage fraud and mortgage rescue schemes. The USTP is a unit in the Department of Justice (DOJ) responsible for overseeing the administration of bankruptcy cases and private trustees. In that capacity, it also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

In this SAR Activity Review, USTP provides information regarding its role in combating these schemes, and, importantly, provides tips to financial institutions on detecting such unlawful activity.

The following outline provides:

A Brief statement
Financial Consultant Schemes (Red Flags)
Sale-Lease Back and Property Transfer Schemes (Red Flags)
Reverse Mortgage Schemes
Library – Download Issuance

A Brief Statement

Bankruptcy-related mortgage fraud and mortgage rescue schemes use know how to exploit the federal bankruptcy court system.

Perpetrators of mortgage foreclosure rescue fraud schemes use these courts as a means to defraud vulnerable consumers in jeopardy of losing their homes to foreclosure or eviction.

Here's a strategy used by perpetrators:

1) The filing of a bankruptcy case triggers an automatic stay.
2) This filing then immediately stops all collections actions.

Point 1: Perpetrators often take advantage of the automatic stay, using it to give consumers the impression that the perpetrators' false promises of saving their homes are true since collection activities cease - at least temporarily.

Point 2: In some of these schemes, perpetrators use the courts by recommending to consumers that they file bankruptcy to eliminate their unsecured debt and thereby position themselves to buy back their houses as part of a sale-lease back scheme.

Point 3: Sometimes the perpetrators themselves file bankruptcy to discharge the debt they incurred as part of their mortgage fraud schemes.

Financial Consultant Schemes

This is the most common mortgage rescue frauds encountered in bankruptcy. In this scenario, the perpetrators falsely tell desperate homeowners that, for a fee, they can help the homeowners save their homes by working with their lenders to stop foreclosure and modify or refinance their loans. Perpetrators identify homeowners through advertising on TV, on radio, in local newspapers, or on the Internet; through connections with churches and other affinity-based ethnic groups; or through foreclosure lists available from local governmental agencies. Homeowners are told to make their mortgage payments to the perpetrators or are required to pay the perpetrators a monthly consulting fee, or both. Of course, the perpetrators do not contact the lenders. Instead, they file serial fraudulent bankruptcy cases in the homeowners' names, sometimes without the homeowners' knowledge or consent, to use the automatic stay to stop the foreclosure.
Here's a variation: homeowners are directed by the perpetrators to quitclaim fractional interests in their homes to fictitious individuals or businesses. Bankruptcy cases are then filed serially in the names of the fictitious individuals or businesses to continue the operation of the automatic stay. A third variation involves the perpetrators transferring fractional interests to unsuspecting individual debtors with pending bankruptcy cases without their knowledge or consent. Under any of these scenarios, because collection activity has been suspended, homeowners mistakenly believe that the perpetrators have fulfilled their false promises, and the homeowners' continue to pay the perpetrators.

Red Flags

Mortgage payments stop being made.

Mortgage payments abruptly stop with no contact from the homeowner and/or default occurs on the mortgage within a month or two after the loan is made.

The foreclosure process is stayed by a bankruptcy filing.

The filing of the bankruptcy case may be in tandem with the sudden failure to make regular mortgage payments.

The debtor in the bankruptcy case that stayed the foreclosure is not the borrower.

The debtor does not disclose a fractional interest and/or other ownership in real property in his/her bankruptcy documents.

Failure to disclose such interests may indicate a fractional interest or property transfer scheme.

Serial bankruptcy cases are filed and/or numerous lenders file motions seeking relief from the automatic stay to proceed with foreclosure and/or eviction actions.

Where the perpetrators file serial bankruptcy cases, especially those involving fractional interest schemes, financial institutions should expect to see other lenders filing motions seeking relief from the bankruptcy automatic stay as well.

Sale-Lease Back and Property Transfer Schemes

In this scheme, the perpetrator gains control of an individual's home and skims real or manufactured equity from the property. The perpetrator tells the homeowner that the home can be saved by selling it to a third-party purchaser chosen by the perpetrator - also known as a "straw purchaser" - and then renting it back from the purchaser for an amount less than the homeowner's current mortgage payment. Frequently the perpetrator promises that the homeowner can buy the home back within a certain period of time at the same price at which it was sold, thus protecting the homeowner's "equity." (In some schemes, the perpetrator persuades the homeowner to file bankruptcy in order to repair the homeowner's credit and place the homeowner in a better position to obtain financing to buy back the home.)
The perpetrators of these schemes profit by gaining control of the properties and obtaining fraudulent loans in the straw purchasers' names based on inflated appraisals of the properties' value. The inflated sales price creates a significant amount of "fake" equity that the perpetrators take through fees that are included in the closing payoffs. Moreover, the perpetrators may arrange to have any remaining sales proceeds signed over to them, rather than to the homeowners. The straw purchasers usually receive some money at closing for each property purchased. Eventually the straw purchasers file bankruptcy to discharge the mortgage debt incurred in their names. Usually, they do not disclose payments received at closing in their bankruptcy documents. In the end, the homeowners lose their homes.
A version of this scheme involves renters. Homeowners desperate to sell their homes are persuaded to "sell" their property to the perpetrators based on false promises that the perpetrators will obtain new loans to pay off the homeowners' existing mortgages. The perpetrators do not get financing, but instead put renters in the properties and collect the rents. No mortgage payments are made and the financial institutions are not notified of the title transfer. To further the scheme, the perpetrators may file incomplete serial bankruptcy cases in the homeowners' and/or renters' names without their knowledge or consent for purposes of obtaining the automatic stay to stop the collection actions.

Red Flags

The bankruptcy documents are incomplete.

The lack of complete documentation may indicate a potential for fraudulent activity. In some cases, the bankruptcy filings are not in the name of the borrower.

The debtor does not disclose that property was transferred just before the bankruptcy filing and/or does not disclose owning any property.

Despite this failure to disclose the property transfer or ownership, the debtor's residential address is listed as the address of the property subject to the mortgage.

The debtor claims that the bankruptcy case was not authorized and/or was not aware that a bankruptcy was filed on his or her behalf.

This may indicate that a fraudulent filing was made in the debtor's name by another party.

The bankruptcy case is not pursued by the debtor and is short-lived.

As a result, financial institutions may find it difficult to gather detailed information beyond the filing information about the debtor or the suspected perpetrators.

The debtor's bankruptcy documents show the purchase of multiple properties over a relatively short period of time without the income or assets to support such purchases.

This may indicate that the debtor was a straw purchaser in a mortgage or mortgage fraud rescue scheme.

Reverse Mortgage Schemes

This pernicious scheme is becoming more widespread and involves federally-insured home equity conversion mortgages (HECMs), reverse mortgages that are available to individuals who are 62 years of age or older. Perpetrators of bankruptcy-related HECM schemes may be organized rescue fraud rings, neighbors, or members of the homeowner's family. In many cases, the borrowers are in poor health and may suffer from memory loss. These vulnerable homeowners are persuaded to sign paperwork prepared by the perpetrator, including power of attorney authorizations.
Once the perpetrator obtains the necessary signatures, the perpetrator takes control of the borrowing process and elects to receive the home equity loan proceeds in a lump sum. If the homeowner does not have equity in the home, the perpetrator typically generates a false appraisal to manufacture equity. The perpetrator pockets the loan proceeds, and the homeowner loses the equity and may be unable to retain the home.
In some situations, the perpetrator may also file bankruptcy on behalf of the homeowner to extinguish unsecured debt the perpetrator may have incurred in the homeowner's name or to stop other related collection activities.

LIBRARY

Financial Crimes Enforcement Network

The SAR Activity Review
Trends Tips & Issues
Issue 20

October 2011

Plethora of Languid Foreclosure Prevention Programs

2011-10-12T14:00:00.001-04:00

Keeping foreclosures down and homeownership up has been the stated goal of policy makers for the last few years. The record shows that nearly all of the promulgated programs have failed to provide much relief to lenders or borrowers. And even if there were a chance for them to succeed, the obstacles to their viability are daunting.

I think a brief review of such programs is in order.

My list is not meant to be complete, but it is indicative of the success of presumptive remedies to the foreclosure crisis.

The Land of Cockaigne

I don't think many Americans ever really bought the 'spiel' about "a car in every driveway," "a chicken in every pot," "a salary for every able-bodied person," and "a house for every citizen." But it's not as though they weren't given plenty of reasons to pursue the so-called American Dream - at least the homeownership version. Presidents and their Administrations have equated owning a home with being as American as Apple Pie. Congress followed the narrative and fortified the burgeoning real estate industry with seemingly infinite funds boosted by and through the GSEs. The Federal Reserve did its part. But it was all trumped-up! Unsupported by the fundamentals of economic theory, dream-thinking nevertheless entrenched itself.

In the 13th century, a French poem described the "pays de cocaigne," which is Middle French for "The Land of Cockaigne." A fair translation of the poem portrays Cockaigne as a country where "the houses were made of sugar cakes, the streets were paved with pastry, and shops provided goods for nothing." (My translation.) Later, in the 16th century, the Dutch artist Pieter Bruegel the Elder depicted Cockaigne as an imaginary land of self-indulgent luxury and idleness, a utopia of gluttony, complacency, instant gratification, and physical excesses, where the lowly and beleaguered peasants could finally be free of their oppressive, daily struggles to survive.

In effect, Cockaigne was a medieval peasant's dream. But it was a chimera!

This is not to say that the modernized version of Cockaigne, perhaps our own American Cockaigne, was meant to curry the favor of people who were gluttonous or complacent in return for their votes. It is not to say that Americans are peasants in the fashion of medieval peasants. And it is not to say that we should run away from our dreams. But living a dream has consequences.

So, let's take a look at some of those consequences. Let's see how foreclosure prevention programs have fared in mending the harm caused by our own version of Cockaigne.

The "Job's Bill"

The Obama Administration has proposed a plan to provide $15 billion to fix foreclosed and vacant properties. The idea is to provide a means to revitalize communities blighted by foreclosures. It would also offer a boost to construction jobs. Is there anybody reading this who actually believes that this bill, at least in its current form, will receive even a scintilla of Congressional approval anytime soon?

Converting Vacant and Foreclosed Homes to Rentals

The Administration has asked for proposals to convert foreclosed houses into rental properties. This would reduce the oversupply of foreclosed properties and reduce the demand causing rising rents for existing rentals. As far as I know, no politically viable proposals have been publicly announced. However, some statistics indicate that benefits could be outweighed by adverse consequences.

Principal Reduction

In effect, this approach asks banks to adjust the total amount owed on a mortgage, based on the post-bubble value of a home. However, this could lead to strategic foreclosures and perhaps an incentive for borrowers to take out riskier loans. I get that this remedy is supposed to be a way to deal with the $800 billion overhang, that is, the amount that borrowers owe above the value of their homes.

These so-called "underwater" mortgages are being just left out there dangling away! It seems to me that principal reduction could work, given the right methodologies. For instance, most mortgages are either owned or guaranteed by Fannie and Freddie, so the overall public could benefit through principal reduction.

However, here's the nasty secret: the FHFA, the regulator overseeing Fannie and Freddie, will not even consider principal reduction, because it would adversely impact the GSE's bottom line. Even after being bailed out, the GSEs are $141 billion in the negative. So, a decision to keep the losses off the books leads principal reduction into a dead end.

Bailout Money

At least President Obama recently admitted that his Administration had not made "enough progress" on dealing with the foreclosure crisis and he is "going back to the drawing board." This is how many years since the bubble burst? Going "back to the drawing board?"

With what money? After all, $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.

Making Home Affordable

This program was supposed to encourage servicers to lower mortgage payments. Political pundits labeled it the "homeowner bailout."

It began in the spring of 2009 and was meant to assist four million homeowners who were facing foreclosure. But MHA is a major malfunction. Servicers were thrown into backlogs, improperly processed cases, made numerous errors, all while regulators did very little to prevent this debacle. As of August 2011, as I have reported previously, only about 816,000 homeowners had received loan modifications through MHA - which is less than 25% of those who applied for MHA assistance!

Here's yet another nasty secret: the government is expected to spend about $7 billion of the $46 billion in bailout funds that were set aside to help homeowners. Consequently, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit. Yes, that would be those same $30 billion I mention above, meant to address the foreclosure crisis, and will instead likely be spent to pay down the deficit.

Home Affordable Refinance Program

This is the program that permits homeowners to refinance their mortgages at lower interest rates. It is another program from 2009. With much fanfare, the Administration estimated that five million homeowners would be served. As of June 2011, just 838,000 homeowners had refinanced through the program.

But where is this program going? The FHFA stands in the way, since refinancing is deemed to be more risk to Fannie and Freddie, which happens to own or guarantee about 5 million mortgages that are underwater.

President Obama has stated that he would increase the number of homeowners in the program. How is that supposed to happen, given that the FHFA's professed mission now is to further protect Fannie and Freddie from taking on any new risk?

Emergency Homeowners' Loan Program

The basic concept of this program is to loan money to jobless homeowners so they can avoid foreclosure. I fail to see how this is a solution at all to foreclosure. At best, maybe it postpones it. As promulgated in 2010 and commenced in June 2011, the program consists of $1 billion and is supposed to affect 30,000 families, by offering interest-free federal loans of up to $50,000 to qualifying homeowners. Essentially, to be qualified for this program, the borrower must have lost income because of unemployment or a medical condition. To date, only 10,000 to 15,000 of the 100,000 applicants have actually qualified for these loans.

But here's the catch: there is a deadline of September 30, 2011 for lending out money to eligible homeowners before the unused funds are to be returned to the Treasury. So, the application period has now expired. At this point, it is estimated that only half the allotted funds will be spent.

States Foreclosure Prevention Programs

The notion of giving funds to states to remedy the foreclosure epidemic goes back to February 2010, when the Administration promised almost $8 billion to finance "innovative" programs. The money was supposed to go to the states that had the worst foreclosure problems.

But reports issued in July indicate that only $478 million of the government's $8 billion had been actually loaned. I have read several reports that some of these states have failing programs due to burdensome enrollment procedures. In Arizona, for instance, 4,000 homeowners were to be assisted through principal reduction. But recent news reports indicate that Arizona only approved three homeowners for this remedy. And, again, banks and the GSEs do not want to participate in principal reduction, a particular feature of that state's "innovative" program.

Bankruptcy Protection

I seem to recall that candidate Obama expressed a willingness to permit bankruptcy judges the power to lower mortgage payments. The modern vernacular calls this a "cramdown." Banks were against cramdown from the start. Members of Congress, particularly some Democrats, tried to pass legislation permitting cramdown. But the legislation was defeated. And, anyway, President Obama's very own economic advisers rejected it. At this point, the Obama Administration has virtually abandoned it as a remedy.

Cockaigne Redux

Pieter Bruegel the Elder lived during the time of the famed Dutch Revolt. There is much symbolism in his painting, "The Land of Cockaigne." That symbolism, according to some authorities, refers to the failure of leadership, the effects of complacency, and the proclivity of the people to become dependent on their formidable abundance, while being unwilling to take risks that would bring needed systemic change.

I wonder: is the American Cockaigne a dream from which we refuse to wake up?

Loan Originator Compensation: NEW Examiner Guidelines

2011-10-10T08:55:00.002-04:00

On October 7, 2011, the Multi-State Mortgage Committee (MMC), a ten-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), issued examiner guidelines (dated 10/6/11) as a tool for consistent implementation of the Federal Reserve Board's final rules for closed-end credit under Regulation Z.

The MMC guidelines (Examiner Guidelines), apply to residential mortgage loans, are intended to assist state regulators of non-depository mortgage loan originators and creditors in their review of licensee policies and practices for compliance with the Federal Reserve Board's final rule (Rule).

To date, the MMC State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule constitutes the most explicit and comprehensive examination analysis of the Loan Compensation Rule, which placed restrictions to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits "steering" consumers to loans to receive greater compensation.

Please feel free to contact us at any time to discuss our loan originator compensation audit and examination reviews.

Preparation is Protection

FAQs Outline - Loan Originator Compensation
400 FAQs (128 Pages)

Independent Audit: MMC Examiner Guidelines

Task Force

The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z - Truth in Lending, including the Rule.

These guidelines were developed by the MMC to provide examiners in the field with a standardized set of procedures for evaluating basic compliance with the rule. The Examiner Guidelines state that the guidelines themselves are not intended to be binding or restrictive on a state's autonomous determination and sovereign authority to take supervisory action.

These revised procedures supersede the Regulation Z interagency examination procedures. Although limited, for uniformity and consistency, the interagency procedures are included within the Examiner Guidelines.

These Examiner Guidelines supplement the interagency procedures and are intended to assist state regulators of nondepository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.

Setting a Standard

These Examiner Guidelines clearly are intended to provide state examiners with a standard set of examination tools to determine institution compliance with certain "bright line" areas of the Rule.

The actual Rule is both complex and nuanced and the Examiner Guidelines state that the subject guidelines are not intended, nor able to provide instruction for every scenario that may arise.

The purpose of these guidelines is to provide the examiner with a standardized set of procedures for reviewing institutions for basic compliance with the Rule. The examiner should consider the facts of each unique situation and apply judgment appropriately.

Three Scopes and Three Modules

1. Full Scope: Pre-exam completion of Modules 2 and 3 followed by completion of Module 1 through documentation review, onsite transaction testing, and interviews of institution staff or other parties.

2. Limited Scope: Completion of Module 1, excluding transaction testing and interviews, based on the institution's responses to Modules 2 and 3.

3. Limited Scope with offsite testing: Combine the Limited Scope approach with an offsite sampling of transaction documents and/or telephone interviews of institution staff or other parties.

Module 1 consists of questions intended to guide the examiner for specific review.

Much of the checklist can be completed from a thorough, off-site review of the institution's responses to Modules 2 and 3.

Other sections require transaction-level review and interviews of institution staff and others.

Outline

I. INTRODUCTION
II. BACKGROUND
III. DEFINITIONS
IV. REVISED INTERAGENCY EXAMINATION PROCEDURES

V. MMC GUIDELINES FOR EXAMINATION OF THE REGULATION Z LOAN ORIGINATOR COMPENSATION RULE

APPLICATION AND COVERAGE

MODULE 1 - EXAMINER CHECKLIST

A. REVIEW OF POLICIES AND PROCEDURES

B. COMPENSATION

C. STEERING

D. OPERATIONAL MANAGEMENT

MODULE 2 - INSTITUTION INFORMATION REQUEST

MODULE 3 - INSTITUTION QUESTIONNAIRE

APPENDIX A to the STATE NONDEPOSITORY EXAMINER GUIDELINES FOR REGULATION Z - LOAN ORIGINATOR COMPENSATION RULE

APPENDIX B - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM - Revised Interagency Examination Procedures for Regulation Z (3/18/11)

LIBRARY

Multistate Mortgage Committee (MMC)

State Nondepository Examiner Guidelines for Regulation Z
Loan Originator Compensation Rule

October 6, 2011

FHA Expands Lending Areas

2011-10-04T16:17:00.001-04:00

We have received many inquiries from clients, colleagues, and the media regarding the Federal Housing Administration's (FHA) recently issued Mortgagee Letter 2011-34 (September 23, 2011), specifically with respect to single family lending areas.

In order to provide some details regarding this revision, we are offering the outline contained herein.

There are other significant changes in ML 2011-34. To learn more about other important changes and guidance given in ML 2011-34, please download and review this mortgagee letter from our Library.

Brief Synopsis

Briefly put, the significant change through this issuance is that lenders can now originate FHA loans nationwide without each branch being approved, but lenders must comply with local and state licensing and loan origination requirements.

The change to the single family lending area became effective on September 23, 2011.

Single Family Loan Origination Lending Area

FHA has expanded the single family origination lending area of each home office and registered branch office to include all HUD field office jurisdictions. This origination lending area is also known as a lender's Area Approved for Business (AAFB). It is maintained at the HUD field office jurisdiction level in FHA's system for implementation with any Credit Watch Terminations.

As stated above, lenders must meet each state's origination requirements.

In actuality, then, the "Single Family Originating Lending Areas" of HUD Handbook 4155.2 is rescinded.

Geographical Restrictions Removed

For purposes of any Credit Watch Terminations, the AAFB will be maintained at the HUD field office jurisdiction level.

Thus, this change eliminates the geographical restrictions previously imposed upon approved lenders, which limited an approved lender's FHA origination activity to the designated lending areas for each home office and registered branch office.

Before and After

Before this issuance:

A specific HUD approved office could only make loans in a geographically designated lending area, provided that the lender met the loan origination requirements of each state in which the loans were made.

After this issuance:

An FHA single-family lender may originate loans nationally from a home or branch office, provided that the lender meets the loan origination requirements of each state in which the loans are made.

LIBRARY

Department of Housing and Urban Development

Revised Lender Approval Requirements
Federal Housing Administration
Mortgagee Letter 2011-34

September 23, 2011

Resecuritizing the RMBS Portfolio

2011-09-30T12:11:00.000-04:00

The Comptroller of the Currency (OCC) has recently concluded that the resecuritization of certain residential mortgage-backed securities by a bank is permitted through its subsidiary.

In its Interpretive Letter # 1133 (September 2011), the OCC determined that a bank could consummate a certain type of structured transaction in order to enhance the marketability of the underlying interests and its liquidity position and to address regulatory concerns relating to its exposure to non-investment grade securities.

The OCC's consent was based, among other things, on the petitioning bank's representations that it would adhere to prudential requirements and supervisory guidance on safe and sound banking practices and that it would establish and maintain, to the OCC's satisfaction, "an adequate and effective risk measurement and management program."

Re-Packaging Risk

Here is a brief overview of this resecuritization plan:

A real estate mortgage investment conduit (REMIC) is one type of vehicle used for securitizing mortgage loans, and it is subject to a specialized set of tax rules. [A Re-REMIC (Re-REMIC) transaction involves the resecuritization of the residential mortgage-backed securities (RMBS) issued by the REMIC. Re-REMIC transactions can have structural differences.]

The Re-REMIC Transaction would involve a bank transferring the RMBS to a limited purpose subsidiary of that bank.

This limited purpose subsidiary would form several trusts and transfer several RMBS to each trust.

Each trust would then issue new securities backed by the RMBS (Re-REMIC Securities) to the limited purpose subsidiary.

Thereafter, through its limited purpose subsidiary, the bank would hold the Re-REMIC Securities to maturity, but would have the ability to sell them if market conditions improve. It is believed that the Re-REMIC Securities, on the whole, would be more marketable and liquid than the original RMBS.

A "nationally-recognized statistical rating organization" would rate the Re-REMIC Securities based on a credit and cash flow analysis of the underlying loans, rather than based on the RMBS.

Analysis

The OCC determined that the bank could consummate the transaction and hold the Re-REMIC securities resulting from the transaction. According to the OCC's Interpretive Letter, a bank's authority to securitize assets it holds includes the authority to securitize assets that are securities.

The Interpretative Letter states that a bank may securitize the RMBS through a Re-REMIC Transaction and hold the resultant Re-REMIC Securities.

The letter further states that there is no distinction between securitizing internally generated assets and securitizing other permissibly held assets.

The OCC also concluded that a bank may hold the investment-grade Re-REMIC securities as Type V securities. (A Type V security is a security that is rated investment grade; marketable; not a Type IV security; and fully secured by interests in a pool of loans to numerous obligors in which a national bank could invest directly. The aggregate par value of Type V securities held by the bank that are issued by any one issuer may not exceed 2% of a bank's capital and surplus.)

By restructuring its assets in the Re-REMIC transaction, a bank would enhance the marketability of the underlying assets, improving its liquidity position and reducing its amount of non-conforming assets.

The purpose of the Re-REMIC Transaction, then, is to allow for a "better reflection of the true economic value of the nonperforming and nonconforming RMBS as economic conditions improve," and to thereby enhance the marketability of the RMBS assets and the bank's liquidity position.

Some Notes

It should be noted that the Re-REMIC Transaction is not entered into for the purpose of obtaining "capital relief," and, accordingly, a bank would still hold capital against the RMBS (rather than the Re-REMIC Securities) for so long as the RMBS remain on the bank's balance sheet.

Also noteworthy is that the petitioning bank expects, based upon previous discussions with nationally recognized debt rating agencies, that "the aggregate book value of the non-investment grade Re-REMIC Securities will be substantially less than the aggregate book value of the investment-grade Re-REMIC Securities at the commencement of the Re-REMIC Transaction."

The OCC said that this transaction was a "modern variation" of the type of asset restructuring long recognized as permissible for national banks.

LIBRARY

Comptroller of the Currency (OCC)

Resecuritization of Certain
Residential Mortgage-Backed Securities

Interpretive Letter #1133

September 2011

Mortgage Fraud Report: Upward Trend

2011-09-29T11:41:00.000-04:00

The Financial Crimes Enforcement Network (FinCEN) has reported in its Second Quarter 2011 Analysis of mortgage loan fraud suspicious activity reports (MLF SARs) that financial institutions filed 29,558 MLF SARs in the second quarter of 2011 up from 15,727 MLF SARs reported in the same quarter of 2010.

The report, issued on September 28, 2011, shows the continuation of the upward trend in mortgage fraud.

We have reported on FinCEN's MLF SARs analyses.

A large majority of the MLF SARs examined in the second quarter involved mortgages closed during the height of the real estate bubble.

In other words, these SARs are filed on activity that occurred more than two years ago. Many SARs are being filed because financial institutions are uncovering fraud as they sift through defaulted mortgages.

Upward Spike

The upward spike in second quarter MLF SAR numbers is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Omitting these particular submissions, 2011 Q2 MLF SAR numbers would be down 3% from the prior year.

FinCEN noted that 81% of the MLF SARs filed during the quarter involved suspicious activities that occurred before 2008, and 63% involved suspicious activities that occurred four or more years ago. For both 2011 Q2 and 2010 Q2 filings, a majority of reported activities took place between 2006 and 2008.

The report contains a section on reported mortgage fraud activities 90 or fewer days old, with emphasis on so-called "debt elimination" scams, identity theft, Social Security Number (SSN) fraud, and false statements.

2011 Q2 Sample SAR Statistics
Suspicious Activities Described by Filers

The FinCEN report shows the following areas of fraud:

Misrepresenting income, occupancy, debts assets
Debt elimination scams
Scams involving the fraudulent use of social security numbers
Identity theft
False statements and false documents
Fraud involving short sales and appraisals
Forged rescission of notice of default
Advance fee scams
Buy and bail schemes
Money laundering

Mortgage Loan Fraud SAR Filings
Relative to All SAR Filings

In 2011 Q2, filers submitted 29,558 Mortgage Loan Fraud SARs (MLF SARs), an 88% increase over the previous year.

The total number of all SARs filed in 2011 Q2 increased by 16%.

And 15% of all SARs filed in 2011 Q2 indicated MLF as an activity characterization, up from 9% in 2010 Q2.

Visit Library for Issuance

FinCEN: Mortgage Loan Fraud Update

Suspicious Activity Report Filings
In 2nd Quarter 2011
September 28, 2011

Riding the Horse Backwards

2011-09-26T09:48:00.002-04:00

At a DC conference, dauntingly titled Mortgage Regulatory Forum, Barney Frank, the Congressman from Massachusetts whose name eponymously joins Dodd in the landmark Dodd-Frank Act, spoke about a "revolt" against the risk retention regulations embodied in the Qualified Residential Mortgage rules required by that Act.

We've heard about this risk retention requirement by its euphemistic cognate, rather barbarically described as to "keep skin in the game." I will be publishing a comprehensive article soon about the Act's provision regarding this "skin in the game" mandate. And I will see that you get a copy of the article. For the time being, though, maybe we should reflect a bit on Congressman Frank's worries.

But first, before speculating on Frank's musings about a revolution, let's begin with a story.

Snideley Whiplash and Dudley Do-Right

You might remember the cartoon character Dudley Do-Right of the "Dudley Do-Right of the Mounties" series, a part of the Rocky and Bullwinkle show. Dudley was forever saving Nell Fenwick, Mountie Inspector Fenwick's beautiful daughter, from the machinations of the evil Snideley Whiplash and Tuque, his equally nefarious sidekick. Whereas Dudley is garbed in the bold red uniform with shiny gold buttons of the Royal Canadian Mounted Police, Snidely wears black on black: suit, cape, stove pipe hat, boots - even a black, twisted, handlebar moustache.

Snidely was bent on doing naughty things to the hapless Nell, like tying her to a railroad track. And Snideley's arrogance was only exceeded by his sheer joy when conniving some evil exploit to be perpetrated on the innocent.

But Dudley would save Nell, usually just by dumb luck, free her from the railroad tracks, and boldly stand before her in a puffed-up, prideful "my hero" pose. And then Nell would thrillingly come running into Dudley's open arms, thanking him profusely for saving her!

Actually, no. Nell never did run into Dudley's arms. That just never happened. Not even once!

In fact, Nell would show her gratitude not to Dudley but to Dudley's horse, aptly named Horse, also dressed up like a Mountie. Dudley often rode Horse backwards, galloping boldly to the scenes of Snideley's pernicious schemes.

Even when Dudley had freed Nell from the chains holding her to the railroad tracks, she would hardly notice him. Instead, she gently stroked Horse's snout and elicited his big, charming, toothy smile. For the most part, Nell ignored Dudley, even when he saved her from Snideley's perilous plans.

Poor Dudley Do-Right! He really never did get the grateful recognition he thought he deserved. He never did win Nell's hand in romance. And yet Dudley never gave up on seeing himself as the bold hero responding with courageous alacrity to Nell's call of distress!

"Skin in the Game"

In a proposed rule issued by federal financial regulators, and pursuant to Dodd-Frank, there will soon be a requirement for sponsors of certain asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities. For "asset-backed securities" read mortgage securitizations. This is being referred to as "risk retention," or that "skin in the game" phrase I mentioned above.

According to those in favor of risk retention, the purpose of this rule is to coalesce underwriting guidelines into an incentivized alignment with securitizers and investors, through promoting a certain set of underwriting standards. The risk retention provision would exempt asset-backed securities that are collateralized exclusively by residential mortgages that are eligible as "qualified residential mortgages," now known, of course, as QRMs.

Many regulators have signed on to the QRM and risk retention provisions, since their view essentially is that "credit risk retention," the name given to the QRM concept, should be required because they believe it encourages prudent underwriting and securitization.

However, consider this: it is simply not known if 5% is even the appropriate amount of risk to be retained in order to align incentives! Indeed, there is scant statistical support for any such percentage whatsoever.

From a Distance

From a high altitude of consideration, the composite criteria of a QRM are the "plain vanilla" variety perfectly familiar to residential mortgage loan originators: 80% LTV; 20% down payment plus closing costs; 28% front-end ratio, and 36% back-end ratio.

Underwriting to the QRM guidelines means that securities backed by QRMs will not require securitizers to retain credit risk. Of course, there's far more to what constitutes a QRM and how it is structured.

Recently, I spoke with a supervising prudential regulator, an old friend, and asked if QRM will crowd out the development of other products that could serve the consumer. His view was that the QRM criteria allow for innovation and, in any event, if they adversely affect a consumer's access to credit, then QRM standards may need to be changed. I must admit, I do not find that response very satisfying.

Markets are active, not passive. Much too often, though, regulatory requirements tend to be reactive, rather than responsive, mostly due to politicians catering to their constituencies and lobbyists. Since when did politicians and regulators so fully replace market action or override underwriting models that lenders undertake as part of making a market, pricing in risk, and developing loan products that respond to consumer needs?

"Revolt"

Congressman Frank seems to have concluded that the recent economic meltdown was largely caused by the housing bubble - presumably, that would be the housing bubble that he declared would never take place. So, "credit risk retention" is now being advanced as a policy that can help to avoid another housing bubble.

Here's the prevailing narrative: in 2008 and 2009, we went into the Great Recession, and now we're experiencing high unemployment and weak growth. Was the housing bubble the ultimate cause?

Most people seem to think so. They believe that the housing bubble burst in 2006 and led to a severe financial crisis in 2008, intensifying a recession that had begun in December 2007. And the Fed did what it could, through targeting inflation to prevent the crash, but could not stem the tide.

Here's another narrative, one actually supported by facts: the housing crash did not lead directly to a recession or high unemployment, although it seems to have been a proximate cause.

More than two-thirds of the decline in housing construction happened between January 2006 and April 2008. During that period, though, the unemployment rate rose only slightly, from 4.7% to just 4.9%. And statistics demonstrate that most of the workers who lost jobs in housing construction were subsequently reemployed in other fields. It wasn't until October 2009 that unemployment soared to 10.1%, with job losses spread out across almost all sectors of the economy.

Indeed, the financial crisis did have its roots in the housing bubble, and there were consequent systemic failures of financial institutions, yet for some odd reason this situation did not set off alarm bells at the Fed until much too late.

There is a world of difference between a proximate cause and the ultimate cause.

Bottom Line: monetary policy failed to predict the problem and the Fed did not respond soon enough.

Fallacy of the "Blame Game"

The assumptions of the first narrative have dominated politics and have led to the QRM remedy.

Thus it is that we have this statement from Mr. Frank:

"I am disappointed at this revolt against risk retention that was so clearly at the center of this."

"All the other problems we had ... they all centered on the system for selling to other people loans that shouldn't have been made in the first place."

"It's simply not possible with any conceivable number of regulators to monitor every loan. If the people making the loans do not have an incentive not to lend to people who can't repay, there is no way we will prevent those kinds of loans from being made." (My emphasis.)

That sweeping statement is certainly not supported by the facts. I have discussed this fallacy of the "blame game" in detail elsewhere, for instance in my three-part series on the Dodd-Frank legislation.

Yet the "revolt" is not just coming from lenders. Consumer advocacy groups want to ensure homeownership for qualified borrowers among low and middle income families, without having to be turned away due to a market that has been deincentivized from lending to them.

Nell and the Horse

Maybe there was a really good reason why Nell preferred to show her gratitude to the Horse, rather than to drape herself around Dudley Do-Right's neck in gleeful appreciation and unbounded thanks.

I wonder if you could suggest what Nell's reason might have been.

What do you think?

Please feel free to comment!

Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.

Ability-to-Repay: The Basics and a Chart

2011-09-23T09:21:00.000-04:00

Commentary By: Jonathan Foxx
President and Managing Director of Lenders Compliance Group

On May 11, 2011, the Federal Reserve Board (FRB) issued a proposed rule (Rule) to implement ability-to-repay requirements for closed-end residential loans.[i] The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank).[ii] Comments on the Rule are to be received by no later than July 22, 2011.[iii] Having published the proposed Rule, the FRB retired from its involvement in this matter and handed over its rulemaking authority in the subject statute to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.[iv]

As a revision to Regulation Z (the implementing regulation of the Truth in Lending Act), the Rule requires creditors to determine a consumer’s ability to repay a mortgage before making the loan and would also establish minimum mortgage underwriting standards. The Rule applies to any consumer credit transaction secured by a dwelling, except an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan or ‘‘bridge’’ loan with a term of 12 months or less. [v] It appears that the Rule applies to purchase money and refinances, but not modifications of existing mortgages. There is a prohibition on prepayment penalties unless the mortgage is a prime, fixed rate, qualified mortgage - and unless the amount of the prepayment penalty is limited.

The Rule sets forth limits on prepayment penalties, the lengthening of the time creditors must retain records evidencing compliance with the ability-to-repay and prepayment penalty provisions, a prohibition to evading the Rule by structuring a closed-end extension of credit as an open-end plan, the delineation of new terms, procedures, and their resulting implications, and, very importantly, the means by which the Rule claims to offer tools to prevent likely default and mitigate risk for creditors and others who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain.

Complying with the requirements of the ability-to-repay Rule is essential, because borrowers in a foreclosure proceeding will likely claim that the creditor failed to comply with the Rule as a defense by way of recoupment or set off, without regard to the normal statute of limitations under the Truth-in-Lending Act (TILA).[vi] A violation of the Rule subjects the creditor to the TILA civil monetary penalties, plus the same enhanced civil remedies that apply to violations of TILA’s high-cost loan rules,[vii] and TILA also would authorize state attorneys general to bring actions for violations of the Rule for a period of up to three years.[viii]

A loan that is a covered transaction must qualify, among other things, as a “qualified mortgage” if the creditor wishes to include a prepayment penalty in the loan.

The Rule provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a ‘‘qualified mortgage,’’ which does not contain certain risky features and limits points and fees on the loan. Furthermore, one feature of a higher-risk mortgage loan (i.e., subject to enhanced appraisal requirements under Dodd-Frank § 1471) is the loan may not be a qualified mortgage.[ix]

There are four (4) options to the determination of compliance with the Rule. The Rule refers to these origination options as “methods” and equips each method with a description of (1) limits on the loan features or term, (2) limits on points and fees, (3) underwriting requirements, and (4) payment calculations.

Option # 1: General Ability-to-Repay Standard

A creditor can meet the general ability-to-repay standard or test by:

Considering and verifying the following eight (8) underwriting factors:

1. Income or assets relied upon in making the ability-to-repay determination;

2. Current employment status;

3. The monthly payment on the mortgage;

4. The monthly payment on any simultaneous mortgage;

5. The monthly payment for mortgage-related obligations;

6. Current debt obligations;

7. The monthly debt-to-income ratio, or residual income; and

8. Credit history.

Underwriting the payment for an adjustable-rate mortgage based on the fully indexed rate.

Comment: This is an option that will be carefully reviewed by plaintiff’s counsel in an action to challenge a creditor’s compliance with the Rule. Consequently, enforcing compliance with the Rule will require fully vetted, tested, and continually updated, written procedures to govern every aspect of the application and underwriting process. Without clear and unambiguous policies and internal enforcement of appropriate policies and procedures, the creditor is allowing exposure to such a challenge. This option contains rigorous underwriting criteria and requires unmitigated, fact-based evaluations. Option # 1- the ability-to-repay test - is somewhat unstable (due to the invariant rigors of procedural compliance) though a relatively favorable methodology for the creditor, even if the loan flow process leaves very little room for error.

Option # 2: Qualified Mortgage (QM)

A creditor can originate a “qualified mortgage,” which provides special protection from liability. Two alternative definitions of a “qualified mortgage” are being considered by the CFPB:

Alternative # 1: Provides a legal safe harbor and defines a “qualified mortgage” as a mortgage for which:

· The loan does not contain negative amortization, interest-only payments, or a balloon payment, or a loan term exceeding 30 years;

· The total points and fees do not exceed three (3%) percent of the total loan amount;

· The income or assets relied upon in making the ability-to-repay determination are considered and verified;[x] and,

· The underwriting of the mortgage (a) is based on the maximum interest rate that may apply in the first five years, (b) uses a payment scheduled that fully amortizes the loan over the loan term, and (c) takes into account any mortgage-related obligations.

Alternative # 2: Provides a rebuttable presumption of compliance and would define a “qualified mortgage” as including the criteria listed under Alternative # 1 (above) as well as additional underwriting requirements from the general ability-to-repay standard (see Option # 1). In any event, under Alternative # 2, the creditor would also have to consider and verify:

· The consumer’s employment status;

· The monthly payment for any simultaneous mortgage;

· The consumer’s current debt obligations;

· The monthly debt-to-income ratio or residual income; and

· The consumer’s credit history.

Comment: Two alternatives are given: in Alternative # 1, to obtain a legal safe harbor, the creditor must consider and verify the borrower’s current or reasonably expected income or assets to determine the borrower’s repayment ability; and, in Alternative # 2, to obtain a rebuttable presumption of compliance, the creditor must consider and verify the borrower’s current or reasonably expected income or assets (i.e., other than the value of the dwelling in question), the borrower’s current employment status (assuming the creditor relies on employment income), the borrower’s monthly payment on any simultaneous loan, the borrower’s current debt obligations, the borrower’s monthly DTI or residual income, and the borrower’s credit history. It should be noted that the second alternative is for the most part similar to the ability-to-repay test.

There are some important aspects of Option # 2 that should be considered. With the safe harbor alternative, the Rule would provide that a QM will be deemed to have complied with the ability-to-repay test; therefore, the only way that the borrower can get past the safe harbor is by proving that the loan is not a QM. If this occurs, the burden will shift to the creditor or assignee to demonstrate that the loan meets the ability-to-repay test. With the presumption of compliance alternative, the Rule would provide that a QM is presumed to have complied with the ability-to-repay test; which means that, even if the mortgage is a QM, the borrower can rebut the presumption of compliance with evidence that the mortgage did not meet the ability-to-repay test. Part of the basis of the proposal is to determine, through public comments, which conditions should apply, either the safe harbor or the presumption of compliance.

Creditors and similarly situated entities would probably favor the safe harbor approach because of the protection from liability that it will afford. On the other hand, consumer advocacy groups and plaintiff’s bar will favor the presumption of compliance, because that offers the opportunity to challenge the ability-to-repay for any mortgage, particularly those in imminent foreclosure.

Option # 3: Balloon-Payment Qualified Mortgage

This option is obviously meant to preserve access to credit for consumers located in rural or under-served areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in a portfolio.

Under this option, a creditor may make a balloon-payment qualified mortgage with a loan term of five (5) years or more by:

· Complying with the requirements for a qualified mortgage; and

· Underwriting the mortgage based on the scheduled payment, except for the balloon payment.

Comment: This option is meant to preserve access to credit for consumers located in rural or under-served areas.[xi] This kind of QM is a loan that generally qualifies as a QM but also includes a balloon payment. The creditor is permitted to underwrite a balloon loan using the maximum payment scheduled during the first five years after consummation. This approach would not capture the balloon payment for a balloon loan with a term of five years or more.[xii] This option is subject to certain requirements to which all QMs are subject; for instance, there must be regular periodic payments that do not result in an increase in the principal balance, the loan term may not exceed 30 years, the total points and fees may not exceed the permitted percentage of the total loan amount, and the loan must satisfy the same underwriting and verification requirements.

Option # 4: Refinancing of a Non-Standard Mortgage

A creditor may refinance a “non-standard mortgage” with “risky” features into a more stable “standard mortgage.” It has been asserted that this option is meant to preserve a consumer’s access to a streamlined refinance that “materially” lowers the mortgage payment.

Under this option, a creditor complies by:

· Refinancing the consumer into a “standard mortgage” that has limits on loan fees and that does not contain certain features such as negative amortization, interest-only payments, or a balloon payment;

· Considering and verifying the underwriting factors listed in the general ability-to-repay standard, except the requirement to consider and verify the consumer’s income or assets; and

· Underwriting the “standard mortgage” based on the maximum interest rate that can apply in the first five years.

A non-standard mortgage is a covered transaction that is an ARM with an introductory fixed rate for a period of one year or more (i.e., a 2/28 ARM), an interest-only loan, or a negative amortization loan. Dodd-Frank refers to a “hybrid mortgage,” but the Rule uses the term “non-standard mortgage.”

A standard mortgage is a covered transaction which, among other things, does not contain negative amortization, interest-only payments, or balloon payments, and limits the points and fees. Essentially, the standard mortgage structure provides regular periodic payments that do not cause the principal balance to increase,[xiii] does not allow the borrower to defer repayment of principal, and does not result in a balloon payment; the total points and fees do not exceed the permitted percentage of the total loan amount (see above: Alternative 1 or Alternative 2); the loan term does not exceed 40 years; the interest rate is fixed for at least five years after consummation (this includes step-rate mortgages without a variable rate feature); and, the loan proceeds are used solely to pay off the outstanding principal balance on the non-standard mortgage and closing costs (including escrow amounts).

Option # 4 is available when (1) a non-standard mortgage is refinanced into a standard mortgage, and (2) the following conditions are met:

(1) the creditor for the standard mortgage is the current holder or servicer of the non-standard mortgage;

(2) the monthly payment on the standard mortgage is materially lower than the monthly payment on the non-standard mortgage; [xiv]

(3) the creditor receives the borrower’s written application for the standard mortgage before the non-standard mortgage is recast;

(4) the borrower has no more than one payment more than 30 days late on the non-standard mortgage in the 24 months before the creditor receives the borrower’s written application for the standard mortgage;

(5) the borrower has no payments more than 30 days late in the six months immediately before the creditor receives the borrower’s written application for the standard mortgage;

(6) the creditor has considered whether the borrower is likely to default (a lower standard than “imminent default”) on the non-standard mortgage once it is recast; and,

(7) the creditor has considered whether the standard mortgage will prevent the borrower’s default.

Comment: The Rule introduces a new term to replace a term that has been in use for ARM adjustments for many years. Specifically, for adjustable-rate mortgages with low, fixed introductory rates, the term ‘‘reset’’ has typically meant the time at which a low teaser rate converts to a fully indexed rate, resulting in significantly higher monthly payments for homeowners. According to the Rule, the term ‘‘recast’’ is henceforth to be used in reference to the time at which fully amortizing payments are required for interest-only and negative amortization loans, on the basis that the term ‘‘reset’’ is more frequently used to indicate the time at which adjustable-rate mortgages with an introductory fixed rate convert to a variable rate.[xv] Consequently, the Rule uses the term “recast” to cover the conversion to less favorable terms and higher payments not only for interest-only loans and negative amortization loans but also for adjustable-rate mortgages. [xvi]

Other Provisions

There are other provisions incorporated into the Rule,[xvii] such as:

· Implementing the Dodd-Frank Act’s limits on prepayment penalties.

· Lengthening the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions.

· Prohibiting evasion of the Rule by structuring a closed-end extension of credit as an open-end plan.

POINTS AND FEES

Embedded in the QM requirements is a test for Points and Fees, the purpose of which is to determine what does or does not constitute a QM. The Rule would limit the total points and fees to a specific percentage of the total loan amount in order to create a threshold to identify a QM.

Loan Originator Compensation and Third-Party Charges

As it relates to the QM points and fees test, the following should be noted regarding the role played by the recent revisions to TILA with respect to loan originator compensation.[xviii] Compensation to loan originators is included in the points and fees. However, compensation to a loan originator that cannot be attributed to a particular loan at the time of origination is not included in the points and fees. Examples of excluded compensation are compensation based upon the long-time performance of the loan originator, compensation based on the overall quality of the loan originator’s loan files, and the base salary of a loan originator who is the employee of the creditor.

CHART
ABILITY-TO-REPAY

Published in National Mortgage Professional Magazine
September 2011 (Volume 3, Issue 9)

[i] Federal Register, Vol. 76, No. 91, Wednesday, May 11, 2011, Proposed Rules, 12 CFR Part 226, Regulation Z - Truth in Lending Act. [Regulation Z; Docket No. R–1417]

[ii] H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act, 111th Congress (2009-2010): "A bill to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." Sponsored by Representative Barney Frank (D-MA) and Senator Christopher Dodd (D-CT)

[iii] It is worth noting that the Consumer Financial Protection Bureau (CFPB) received rulemaking and examination authority over the “enumerated laws” on the transfer date of July 21, 2011, the Designated Transfer Date. See Designated Transfer Date, Bureau of Consumer Financial Protection, Federal Register, Vol. 75, No. 181 (09/20/10). Accordingly, this rulemaking will become a proposal of the CFPB and will not be finalized by the FRB.

[iv] For a detailed analysis of the Ability-to-Repay rule, see Foxx, Jonathan, Ability-to-Repay: Regulating or Underwriting (Part I), National Mortgage Professional Magazine, June 2011, Volume 3, Issue 6, pp 26-30; and, Foxx, Jonathan, Ability-to-Repay: Regulating or Underwriting (Part II), National Mortgage Professional Magazine, July 2011, Volume 3, Issue 7, pp 20-42

[v] Also, includes a closed-end home improvement loan on a vacation residence.

[vi] Op. cit. 2 § 1413

[vii] Under the Home Ownership and Equity Protection Act (HOEPA), a consumer has a right to rescind a transaction for up to three years after consummation when the mortgage contains a provision prohibited by a rule adopted under the authority of TILA § 129(l)(2). Any consumer who has the right to rescind a transaction may rescind the transaction as against any assignee. See: TILA §131(c). The right of rescission does not extend, however, to home purchase loans, construction loans, or certain refinancing with the same creditor. See: TILA § 125(e).

[viii] Op. cit. 2, §§ 1416, 1422

[ix] Mortgages covered by the HOEPA amendments have been referred to as ‘‘HOEPA loans,’’ ‘‘Section 32 loans,’’ or ‘‘high-cost mortgages.’’ The Dodd-Frank Act now refers to these loans as ‘‘high-cost mortgages.”

[x] Does not define a ‘‘qualified mortgage’’ to include a requirement to consider the consumer’s debt-to-income ratio or residual income.

[xi] A county is “rural” if it is not in a metropolitan statistical area (MSA) (or a micropolitan statistical area), contains no town with 2,500 or more residents, and is (a) either not adjacent to any metropolitan statistical area (or a micropolitan statistical area) or (b) is adjacent to an MSA with fewer than one million residents (or adjacent to a micropolitan statistical area).

[xii] TILA § 129D(d) authorizes an exemption from escrow requirements for certain creditors operating predominantly in rural or underserved areas and providing an exemption from escrow requirements for transactions secured by shares in a cooperative.

[xiii] The safe harbor offered requires that a 10% or larger reduction in the monthly payment will meet the “materially lower” standard in reducing monthly payments.

[xiv] Op. cit. 13

[xv] The term “recast” is to be used in order to accommodate the proposed Regulation Z §§ 226.43(c) and (d)

[xvi] For instance, an ARM recasts upon the expiration of the period during which payments based on the introductory fixed rate are permitted. An interest-only loan recasts upon the expiration of the period during which interest-only payments are permitted. A negative amortization loan recasts upon the expiration of the period during which negatively amortizing payments are permitted.

[xvii] Op. cit. 4, Part II, inter alia

[xviii] Regulation Z § 226.36(a)