Tuesday, August 31, 2010

NEW RULES FOR MORTGAGE ORIGINATORS: Reformation and Regulations

by Jonathan Foxx

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

As published in the August 2010 Edition of National Mortgage Professional Magazine.

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WHO’S IN CHARGE HERE?

I never blame myself when I'm not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?
Yogi Berra

Let’s admit it: the tendency to pretend we’re holding somebody or some entity “accountable” for the mortgage crisis, when we’re really not, is just a fashionable avoidance of that unpleasant word: “blame.” Once that label sticks, it’s on to dealing with the nasty culprits!

Blaming is purported to be cowardly, even passive; and being held accountable is lauded as proactive and high-minded. So, the word “accountable” is now in vogue, instead of “blame.” Frankly, the word “accountable” in today’s world is merely politically-correct, euphemistic Newspeak for the fact that “you know you did wrong, I know you did wrong, everybody in the world knows you did wrong, but you’ll pay no penalties whatsoever for doing anything wrong.”

Although the tone-at-the-top mantra of the Obama Administration is “let’s look forward and not look back,” or the Bush Administration’s tactic of retroactively making lawful what was heretofore unlawful (or unconstitutional) remains beyond contest, or the on-going trading of opaque financial instruments seems to continue in an entirely unregulated market, or many government departments and agencies are still remaining reactive at best during a crisis – in the Newspeak of our times, we are assured of accountability, which now apparently means there’s nobody to blame at all, nobody held responsible for the meltdown, nobody to put in jail. Everybody’s free to go and, we’re admonished, it doesn’t do any good to blame anybody for anything, since we can’t fix this mortgage mess unless and until we all can get along, be bi-partisan, be post-partisan, and look to the better angels of our nature!

Accountability these days seems to mean no adverse consequences to the perpetrator and no blame for anybody. If you find a person to blame, that person’s not accountable; and if you find somebody who is accountable, that person is not to blame. While lobbyists, dogmatists, political catechists, and ideologues just make stuff up, they’ve found the culprit for sure, those bad actors portrayed as directly and indirectly culpable, the rapacious mortgage originators: they certainly should be blamed, reined in, re-regulated, and de-incentivized for having largely contributed to the worst financial crisis since the Great Depression!

Portraying mortgage originators as the culprit is a politically useful narrative meant for the consumption of low information voters; but, as we’ll see, there is plenty of blame in this game and, to date, not much real, old-fashioned accountability – the kind that has real world consequences – except, of course, for those who originated the mortgages in the first place.

Results are what you expect,
consequences are what you get.

Anonymous

On Tuesday, June 22, 2010, a Conference Committee met in Room 106 of the Dirksen Senate Office Building, in Washington, to reconcile Senate and House versions of H.R. 4173, known as the Wall Street Reform and Consumer Protection Act. That bill ostensibly was drafted to create a new consumer financial protection “watchdog,” bring about an end to “too big to fail” bailouts, set up an early warning system to “predict and prevent” the next crisis, and bring transparency and accountability to exotic instruments such as derivatives. Led by Representative Barnie Frank (D-MA) and Senator Christopher Dodd (D-CT), the conferees reviewed and voted on new regulations as well as additions, deletions, and revisions of existing regulations.

The list of new regulations and amendments to existing regulations, consisting of thousands of pages, read like the attenuated, convoluted, cross-tabulated Index Section of a Whodunit’s Guide to the Perplexed. Seated around a large, rectangular dais, the Committee’s politicians called one another out, speechified, postured, and legislated to protect their respective constituencies, absolved themselves of ever having allowed their own politics to contribute to the financial crisis, while the Clerk recorded votes, staff members raced around, and lawyers scurried about with various and sundry red-lined versions of financial reform legislation.

On Friday, June 25, 2010, all the backroom, sub rosa, deals were ironed out, all the special interests had their way or lost their sway, and the votes tallied up mostly across party lines: Democrats – Aye; Republicans – Nay. The Ayes had it!

Congratulations filled the conference chamber, Representatives and Senators praised one another, staff high-fived and hugged one another, and President Obama hailed the legislation as the “toughest financial reforms since the ones we passed in the aftermath of the Great Depression." Now only House and Senate approval was needed, and thence the President’s multi-pen signature, to become the law – which it did on July 21, 2010, just before noon. The legislation, now known as the Dodd-Frank Act, became the law of the land.

Among the many features of the legislation, the following was gaveled in:

  • Requiring Lenders to Ensure a Borrower's Ability to Repay: Establishing a “simple federal standard” (sic) for all home loans to ensure that borrowers can repay the loans they are sold.
  • Prohibiting Unfair Lending Practices: Prohibiting the financial incentives for subprime loans that “encourage lenders to steer borrowers into more costly loans,” including the bonuses known as yield spread premiums that “lenders pay to brokers to inflate the cost of loans.”
  • Penalizing Irresponsible Lending: Issuing monetary penalties to lenders and mortgage brokers who don’t comply with new standards by holding them accountable for as high as three-year’s interest payments and damages plus attorney’s fees (if any), and, protects borrowers against foreclosure for violations of the new standards.
  • Expanding Consumer Protections for High-Cost Mortgages: Expanding the protections available under federal rules on high-cost loans -- lowering the interest rate and the points and fee triggers that define high cost loans.
  • Mandating Additional Mortgage Disclosures: Requiring lenders to disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
  • Establishing an Office of Housing Counseling: Establishing a special office within the Department of Housing and Urban Development (HUD) to “boost homeownership and rental housing” counseling.

Download Origination Article (1.75)

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Friday, August 27, 2010

Fannie Mae: Clarifies Undisclosed Liabilities Policy

On August, 13, 2010, Fannie Mae clarified certain aspects of its Loan Quality Initiative requirements stated in its March 2, 2010 Announcement (SEL-2010-01).

In the March update, Fannie "required lenders to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan."

An unintended consequence of Announcement SEL-2010-01 was the interpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing. Indeed, we have worked with lenders that were asked by investors to repurchase loans because the former did not re-underwrite prior to closing for undisclosed liabilities that had led to excessive income ratios - even though, prior to closing, the lenders had not updated credit and had no knowledge that the borrowers had undisclosed liabilities. We successfully rebutted these repurchase demands, but Fannie's update lingered.

Many lenders believed that the March update required a new credit report just before the closing of the loan. The new Announcement (SEL-2010-11) now states that "this was not Fannie Mae's intent."

Fannie Mae has affirmed that lenders are not required to obtain a new credit report just before closing to check whether a borrower has taken out additional debt. If a borrower discloses or the lender discovers additional debt and/or reduced income after the initial underwriting decision was made, lenders are required to determine if a mortgage loan must be submitted for re-underwriting.

A re-underwriting will be required if the borrower discloses or the lender discovers additional debt(s) and/or reduced income after the underwriting decision was made up to and concurrent with the loan closing. The lender is not required to obtain a new credit report to verify the additional debt(s).

Still, a lender would be well advised to notify the borrower not to shop for a loan or take on additional debt between the time of the mortgage application and the closing date.

Effective Date

The new Announcement SEL-2010-11 replaces the undisclosed liabilities policy communicated in Announcement SEL-2010-01.

Compliance with the change is immediate, but must apply on loan applications dated on or after December 1, 2010.


For questions about this matter
or assistance with mortgage compliance,
please contact Jonathan Foxx, Managing Director.


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Highlights

Re-underwriting Requirements

The requirements address when a lender has to re-underwrite a mortgage loan after the underwriting decision has been made up to and concurrent with loan closing for both Desktop Underwriter® (DU®) and manually underwritten mortgage loans, and includes a new re-underwriting tolerance for manually underwritten loans and simplification and expansion of the DU resubmission policy.

Fannie-Reunderwrite (1)

Applying the Re-underwriting Criteria

Fannie requires the following steps to be taken if the borrower discloses or the lender discovers additional debt(s) and/or reduced income after the underwriting decision was made up to and concurrent with loan closing.

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Changes to the DU Resubmission Policy

The following table describes the changes to the DU tolerances and resubmission requirements. The other tolerances in the Selling Guide remain unchanged (decreases to the interest rate, increases in income, changes to assets, and loan amount changes.

Fannie-Resubmission (3)

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Undisclosed Liabilities and Re-underwriting Requirements
Fannie Mae: Announcement SEL-2010-11
August 13, 2010

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Monday, August 23, 2010

Florida Reverses Requirement to License Mortgage Loan Underwriters

Licensing Obligations for Individuals Acting as In-House Underwriters

The Office of Financial Regulation (OFR) has changed its licensing requirements: earlier this year the OFR passed a mandate that mortgage processors and underwriters must become licensed as loan originators. This requirement has been reversed, because "underwriters did not clearly fit [the] description" of a "loan originator."

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On August 17, 2010, the OFR provided a legal opinion (Opinion), issued by Jenny S. Kim, the OFR's Assistant General Counsel, which gave the following clarification to substantially the following question:

Whether individuals employed by Florida-licensed mortgage lenders who exclusively conduct underwriting activities for their employer will be required to be licensed as "mortgage loan originators" on October 1, 2010?

According to the Opinion, effective October 1, 2010, the definition of "loan originator" means:

[A]n individual who, directly or indirectly, solicits or offers to solicit a mortgage loan, accepts or offers to accept an application for a mortgage loan, negotiates or offers to negotiate the terms or conditions of a new or existing mortgage loan on behalf of a borrower or lender, processes a mortgage loan application, or negotiates or offers to negotiate the sale of an existing mortgage loan to a non-institutional investor for compensation or gain. The term includes the activities of a loan originator as that term is defined in the S.A.F.E. Mortgage Licensing Act of 2008, and an individual acting as a loan originator pursuant to that definition is acting as a loan originator for purposes of this definition. The term does not include an employee of a mortgage broker or mortgage lender who performs only administrative or clerical tasks, including quoting available interest rates, physically handling a completed application form, or transmitting a completed form to a lender on behalf of a prospective borrower. [Section 494.001(14), Fla. Stat. - Emphasis Added]

The Opinion indicates that the Florida definition of "loan originator," does not explicitly include underwriting. Section 1503(4) of the S.A.F.E. Act, however, provides that an underwriter "means an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of (i) a State-licensed loan originator; or (ii) a registered loan originator." Section 1504(b) of the S.A.F.E. Act further states that "supervised" underwriters (who do not represent to the public that they perform loan origination activities) are not required to obtain loan originator licenses, while independent contractors "may not engage in residential mortgage loan origination activities as a[n]...underwriter unless such independent contractor is a State-licensed loan originator."

Opinion's Interpretative Conclusions

  • Underwriters who are W-2 employees of licensed mortgage lenders are not required to obtain loan originator licenses with the OFR.
  • If underwriters intend to underwrite exclusively for one employer, they would not be subject to HB 1281's requirement that "loan processors" file declarations of intent to engage solely in loan processing in order to contract with multiple mortgage brokers or mortgage lenders.

Finally the Opinion states that in-house underwriters who work for a licensed lender must be supervised by a licensed loan originator in order to comply with the S.A.F.E. Act and Chapter 494, Florida Statutes.

Our Advice & Summary

Effective October 1, 2010

  • The licensing requirement can be properly effectuated in compliance with both the S.A.F.E. Act and Chapter 494, Florida Statutes by assuring that the originating entity's underwriting manager is licensed, though the underwriters subordinate to the underwriting manager do not need to be licensed.
  • Florida-licensed loan originators who solely act as a loan processor will be permitted to contract with one or more mortgage brokers and/or mortgage lenders, simultaneously. This correction will permit licensed loan originators who work for companies that exclusively perform processing services to process mortgage loans for more than one entity.
  • The term "loan processor" will be defined as an individual who is licensed as a loan originator and who only engages in:

1. "the receipt, collection, distribution, and analysis of information common for the processing or underwriting of a residential mortgage loan"; or

2. "communication with consumers to obtain the information necessary for the processing or underwriting of a loan, to the extent that such communication does not include offering or negotiating loan rates or terms or does not include counseling consumers about residential mortgage loan rates or terms."

  • In order to act as a "loan processor," an individual licensed as a loan originator will provide the OFR with a declaration of intent to engage solely in loan processing activities. The OFR will provide a new form so individuals can declare their intent to engage exclusively in loan processing activities.


For questions about this matter
or assistance with mortgage compliance,
please contact Jonathan Foxx, Managing Director.


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Licensing Obligations for Individuals
Acting as In-House Underwriters

Florida - Office of Finance Regulation
August 17, 2010

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Wednesday, August 18, 2010

Housing Finance Conference: A Case of Extremes

by Jonathan Foxx

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

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Yesterday I went to the Conference on the Future of Housing Finance, held in DC, and hosted by the Treasury. Washington, DC this time of year can be brutally hot and humid - and yesterday was no exception - but the air conditioned conference rooms did little to keep me from getting hot around the collar over the temporizing and equivocating that went on. I guess if you're into photo ops, political peacock preening, media hype, and assorted horse and pony show tactics, it could be considered an entertaining way to spend the day.

But all is not lost. There were some interesting and timely suggestions.

Of course, I was glad to meet friends and acquaintances. But this was not a social event; it was a deadly serious attempt at understanding the deficiencies of the housing finance system, with the goal of seeking ways to prevent future crises. Maybe it's somewhat naive, but I actually expected more from the gathering of such a prestigious and experienced group of industry people, some of whom I have worked with over the years and do admire. There were two large group sessions and several break-out sessions. Sometimes, though, too many powerful vested interests can ruin a good thing!

I want to share with you some observations about the conference in general and Fannie and Freddie (GSE) in particular. In my previous Commentary, I listed a set of core questions that should be considered in any discussion these days about the GSEs. I did not leave the Conference with a strong sense that these questions were answered, or, in some instances, even considered. But it is a worthwhile exercise to highlight some of the suggestions made and the positions staked out by certain participants, if for no other reason than it lets us know the potential direction things may go in the future.

Secretary Geithner stated that the Administration is going to advocate for "fundamental change." High on that list, it seems to me, is the fate of Fannie Mae and Freddie Mac (GSE). Geithner said, and I quote, "We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support."

Of course, this begs the question by not affirmatively stating that it is the implicit guaranty of the government's support which is (1) factored into secondary market pricing, (2) a determinant of securitization values, and (3) at the core of housing policy for the 75 years of the GSEs' existence. Geithner did say that "the challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure." But I find this view to be an equivocation, because it does not adequately consider actual market forces. It is also an indication of the difficulties in harmonizing these competing interests.

Michael Heid, co-president of Wells Fargo Home Mortgage, realizes the central role the GSEs play in establishing a market. In his view, "the maximum use of private capital is essential, but we also believe that an explicit government guarantee will be required to ensure that there's reliable flow of mortgage credit." Spoken like a true mortgage banker!

One suggestion - made by Bill Gross, co-founder of Pacific Investment Management Co. (PIMCO), the world's biggest bond fund - was for the government to provide a "new refinancing program" for GSE mortgages. In this view, the refinance becomes a stimulus to the tune of $60 billion and perhaps an increase of 10% in housing prices. An interesting suggestion. Based on my conversations with some pretty savvy conference participants, it's not going to happen. In my view, this is clearly a position that suggests much greater government involvement.

Mark Zandi, the Chief Economist of Moody's, was a panelist. He took an odd middle-of-the-road view between the extremes of privatizing most aspects of housing finance and nationalization. He pointed to government subsidies, such as the mortgage interest tax deduction, and said that the housing market is "over subsidized." So, he wants to reduce or eliminate some subsidies, while also looking to the government to play a "large role." Is it me, or does anybody else find a contradiction here?

Next to me sat an old friend and client, whose firm handles MBS trading in significant volume. He leaned over to me while Zandi was speaking and said, "do they have any clue, when they talk like this, that this extreme thinking of nationalizing versus privatizing is going to be priced into the market?" We met later in a break-out session, and he was still shaking his head.

On the extreme end of privatizing, Alex Pollack, of the American Enterprise Institute, would like government to be removed from support of housing finance, or so it seems, except for specific programs related to affordable banking such as those available through HUD. Compare that to the suggestion of panelist Lewis Rainieri, the pioneer of securitization and mortgage-backed securities, who noted that there are over 2,000,000 units now on the market and the government should consider supporting rent-to-own financing for qualified borrowers.

I guess things might be more clearly focused if the Dodd-Frank Act had properly addressed the fate of Fannie Mae and Freddie Mac in the first place. But it didn't. Maybe their fate was just too politically hot to handle in that legislation. Maybe having reached 2319 pages, the legislators had to stop somewhere. In any event, the task of saving or re-inventing the GSEs is clearly one of the most important domestic issues now.

In a future Commentary, I will provide my view of the grand plan - or Faustian bargain! - that seems to be emerging about the future structure and role of the GSEs and other housing finance issues.

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


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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Tuesday, August 17, 2010

Reverse Mortgages: Compliance & Reputation Risk

Overview

On August 16, 2010, the federal banking agencies and Federal Financial Institutions Examination Council (FFIEC) issued the attached final guidance (Guidance) reverse mortgages and complex loan products typically offered to elderly consumers.

Institutions are expected to use the Guidance to manage the risks associated with reverse mortgages, including consumer protection concerns, such as counseling requirements, conflicts of interest, related policies, procedures, internal controls, and third party risk management. In addition to legal considerations, the Guidance provides directives regarding:

Key Policy Issues Raised by the Reverse Mortgage Guidance

Consumer Information and Understanding
Existence and Effectiveness of Consumer Counseling
Conflicts of Interest and Abusive Practices
Third-Party Risk Management

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx.

Highlights

Legal Considerations

Consumer protection laws and regulations applicable to both Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgage products, including those required by the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices, the Truth in Lending Act, and other special provisions set forth in HUD regulations.

Key Policy Issues

Consumer Information and Understanding

Borrowers do not consistently understand the terms, features, fees, alternatives to and risks of their loans.

Remedy

  • Provide consumers with clear and balanced information about the relative benefits and risks of reverse mortgage products, at a time that will help them make informed decisions.
  • Review advertisements and other marketing materials to ensure that important information is disclosed clearly and prominently.
  • Ensure that marketing materials do not provide misleading information about product features, loan terms, or product risks, or about the borrower's obligations with respect to taxes, insurance, and home maintenance.
  • Develop promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products.

Existence and Effectiveness of Consumer Counseling

While counseling is mandatory for HECM transactions, it may not be required for proprietary products. Counseling conducted over the telephone, in particular, may not be adequate in all cases.

Remedy

  • Require that consumers obtain counseling from a qualified independent counselor.
  • Adopt policies that prohibit steering a consumer to any one particular counseling agency and that prohibit contacting a counselor on the consumer's behalf.
  • Strongly encourage the consumer to obtain counseling in person, whenever possible, and to attend counseling sessions with family members.

Conflicts of Interest and Abusive Practices

Potential for inappropriate sales tactics and other abusive practices in connection with reverse mortgages is greater where the lender or another party involved in the transaction has conflicts of interest or has an incentive to market other products and services.

Remedy

  • Borrowers are not required to purchase any other financial or other product from the lender or broker in order to obtain the reverse mortgage.
  • Originators do not have an inappropriate incentive to sell other products that may appear to be linked to the granting of a reverse mortgage.
  • Compensation policies guard against other inappropriate incentives for loan officers and third parties, such as mortgage brokers and correspondents, to make a loan.

Third-Party Risk Management

When making, purchasing, or servicing reverse mortgages through a third party, such as a mortgage broker or correspondent, institutions should take steps to manage the compliance and reputation risks presented by such relationships.

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Reverse Mortgage Products
Guidance for Managing Compliance and Reputation Risks
FR, Vol. 75, No. 158, pp 50801-50812 (8/16/10)

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Mortgage Originator Compensation and the Dodd-Frank Act

We now enter the era when the Dodd-Frank Act has become the law of the land. Today's brief review (provided below) is at the advent of this period and introduces some of the many changes resulting from this landmark legislation.

But first a comment.

Consolidation of regulatory authorities will be considerable!

There will be transfer and consolidation of enforcement authorities into the Consumer Financial Protection Bureau (Bureau) over the consumer financial protection functions currently performed by the Federal Reserve's Board of Governors, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA) and the Federal Trade Commission (FTC) - including exclusive authority over all related research, rulemaking, guidance, supervision, examination and enforcement activities.

At least sixteen (16) existing consumer protection laws will be included in the transfer, giving new exclusive rulemaking and examination authority to the Bureau.

I have published articles extensively on this subject; indeed, forthcoming this month, I will publish a 3-part series in the National Mortgage Professional Magazine on the financial reform legislation and its impact on the mortgage industry.

If you want to read more, go PDF 12x12here, PDF 12x12here, here, and here.

For the next few years, we will be seeing numerous announcements implementing the changes required by the Dodd-Frank Act. These issuances will come from various agencies as well as the new Bureau and will affect revisions to existing regulations, enumerated laws, Bureau mandates, and many other implementation requirements.

It is essential that you review and continually monitor for these changes, because there will indeed be many and, in various instances, the statutory requirements are complex, extensive, and interlock or interact with other laws - and violations can be enormously costly.

Because of the many regulatory compliance areas that are affected, we urge you to approach the required compliance proactively, seeking guidance now from a competent residential mortgage compliance professional.

Overview

On August 16, 2010, the Federal Reserve Board announced final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. The Board is publishing these final rules, amending Regulation Z, which implements the Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA).

At this time, lenders may pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a "yield spread premium"). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. The ostensible purpose of this regulation is to prevent loan originators from increasing their own compensation by raising the consumers' loan costs (i.e., by increasing the interest rate or points).

However, loan originators can continue to receive compensation that is based on a percentage of the loan amount.

There is also a prohibition that prevents a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. This new rule requires that consumers who agree to pay the originator directly will not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

The final rule prohibits loan originators from directing or "steering" a consumer to accept a mortgage loan that is not in the consumer's interest in order to increase the originator's compensation.

The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011.

Effective Compliance Date: April 1, 2011.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx.

Highlights

  • Prohibits payments to the loan originator that are based on the loan's interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.
  • Prohibits a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.
  • Prohibits a mortgage broker or loan officer from "steering" a consumer to a lender offering less favorable terms in order to increase the broker's or loan officer's compensation.
  • Provides a safe harbor to facilitate compliance with the anti-steering rule.

The safe harbor is met if:

1. The consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and

2. The loan options presented to the consumer include the following:

  • (A) the lowest interest rate for which the consumer qualifies;
  • (B) the lowest points and origination fees, and
  • (C) the lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.

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Truth in Lending, 12 CFR Part 226, Final rule and Official Staff Commentary, FRB (8/16/10)

Highlights of Final Rules on Loan Originator Compensation and Steering, FRB (8/16/10)

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Monday, August 16, 2010

Good Faith Estimate: Top 10 Broker Mistakes

Since the introduction of the effective implementation date of the new Good Faith Estimate (GFE) on January 1, 2010, we have been working closely with our clients to assure proper disclosure compliance. During this time, we have documented literally hundreds of issues that have required resolution and guidance pertaining not only to the GFE but also the new HUD-1 Settlement Statement (HUD-1).

Even now, these many months into the use of the new GFE, we receive numerous requests from clients seeking a better understanding of this form's nuances and requirements.

Regarding proper implementation of the GFE and HUD-1, we have compiled a database of resolutions and guidelines for regulatory compliance, and will soon make it available to our clients in the first release of our online client website.

However, there are still gaps and we look to the Department of Housing and Urban Development (HUD) for further written clarifications.
There have been eight (8) updates to the New RESPA Rule FAQs (RESPA FAQs) since HUD issued the Final Rule on November 17, 2008: six were issued in 2009, and two were issued in 2010 - with the second (and most recent) issued on April 2, 2010. Although HUD issued a RESPA Roundup in July, that document provided virtually no GFE guidance.

Given that the last RESPA FAQs update was in early April, another update is long overdue. HUD should update the RESPA FAQs soon.

We thought we'd share with you some mistakes made by mortgage brokers and the positions taken by our wholesale lending clients in response to those errors. Obviously, our retail mortgage banker clients have different issues and disclosure concerns. Nevertheless, wholesale lending has certain issues quite unique to the origination and loan flow processes.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx.

Highlights

Top 10 GFE Mistakes Made By Brokers

1. Broker submits a 2009 GFE. The 2010 HUD-approved GFE is the only version acceptable to the lender. Obviously, this mistake was happening during the early transition period, but the percentage of occurrences was inordinately high at the time.

2. Broker submits a 2010 GFE without a complete Service Provider List. All GFEs must include a Service Provider List and must clearly indicate all services that the broker has chosen for the borrower if the broker is selecting the provider. If the borrower chooses from the service provider(s) or if the broker chooses the service provider(s) the 10% tolerance must be adhered to.

3. Broker includes the YSP in Line #1, but leaves Line #2 completely blank. Line 2 should always be the Gross YSP. The adjustment for what the broker wants to make as income and what the broker would like to credit the borrower is adjusted in Line 1.

Here's an example taken from our files:

Scenario-1

4. Broker includes the YSP in Line #2, but fails to include it in Line #1. The adjustment for what the broker wants to make as income and what the broker would like to credit the borrower is adjusted in Line 1.

Here's an example taken from our files:

Scenario-2

5. Broker does not disclose the lender's underwriting fee in Line #1. The lender's underwriting fee should be included in Line #1.

6. Broker leaves Line #1 completely blank or is calculated incorrectly. Line #1 should include all income fees for the broker and lender.

Here's an outline taken from our files:

Chart-GFE-Outline-3

7. Broker does not include 3rd party fees in Line #3. Third party fees, including lender's fees [i.e., Tax Service Fee, Flood Certification Fee, Appraisal Fee (even if it is paid outside of closing), Credit Report Fee, FHA Upfront Mortgage Insurance Premium (MIP) Fee VA Funding Fee, and so forth], should be included in Line #3.

8. Broker does not disclose any and all seller paid items. All fees should be included on the GFE even if the seller is paying closing costs.

9. Broker does not include the transfer tax fees on the GFE in states where transfer tax is a requirement. The transfer tax fees must be disclosed in states where required. If state or local law is unclear or does not specifically attribute transfer tax to a seller or the borrower, the amount to be disclosed by the broker is governed by common practice or experience in the locality. Because not disclosing this fee is in the zero tolerance box, our wholesale lenders charge the broker if not disclosed upfront.

10. Broker does not include all income fees in Box 1 including the lender's underwriting fee. All broker income fees must be included in Box 1 along with the lender's underwriting fee. No additional fees can be added after the initial GFE.

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New Good Faith Estimate and HUD-1 Settlement Statement
RESPA - Final Rule and New RESPA Rule FAQs

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Thursday, August 12, 2010

Housing Trends to 2020

by Jonathan Foxx

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

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I don't think anyone can doubt that the recession of mid-2006 through early-2009 - euphemistically now known as the Great Recession - was the worst downturn in the U.S. residential real estate market since the Great Depression. It's effects linger.

Record-low mortgage rates have encouraged housing affordability and supported home prices. While a high level of housing affordability would reduce downward pressure on home prices, several market indicators still highlight growing weaknesses in the U.S. housing market.

What is contributing to the weakening housing market?

Declining mortgage applications for home purchases,
Fewer existing home sales following the expired tax credit,
An elevated level of distressed and short sales,
A large backlog of distressed "shadow" inventory, and
A high unemployment rate.

About that "shadow" housing inventory, if a flood of shadow inventory does come onto the market over the next few quarters, I think it's axiomatic that home prices might fall further because distressed sales usually involve significant price discounts. Distressed properties are currently selling for an average of 25% to 30% less than non-distressed properties. The major mitigating factor to reducing the impact of the "shadow" inventory are the government programs aimed at keeping homeowners in their homes.

Some factors contributing to deflationary pressures are:

A significant rise in distressed home sales,
An elevated unemployment rate, and
Tighter lending standards.

The Direction of Affordability

US Homeownership & Affordability-Chart (S&P-2010.08)

Housing affordability is on an uptrend, obviously a positive sign, conditioned as it is by low interest rates for mortgage loans as well as the drop in home prices. In some instances, these factors and others have led to home price volatility and pushed home prices down, on average, to 2003 levels. Some homeowners who bought properties before 2003 have seen their investments actually appreciate, at least on average, based on the S&P/Case-Shiller Indices.

Overall, however, a quick check of the U.S. housing futures indicates that home prices will decline an additional 4% or more over the next 12 months. Home prices are key economic trend indicators, and it's simply not credible to assert that the financial markets can recover fully until and unless the housing market recovers.

On the other hand, prices in the S&P/Case Shiller Indices are now at late-2003 levels. Parts of the country have ruinous and morose housing markets. For instance, prices in Detroit are even below their 2000 levels!

It took about three years from late 2003 for home prices to reach their mid-2006 peak, and then another three for prices to fall back again.

So what is the trend?

US Housing Trends-Chart (2010.08-SP)

Standard and Poor produced the chart above which, if followed logically through its trend lines, would indicate an expectation that it will take roughly nine years from now for home prices to climb back to their mid-2006 peak - and that is assuming a home price appreciation rate that is in line with a 4% household income growth rate - meaning that home prices will not be back at their prior peak until closer to 2020!

Affordability and Trends

Home price behavior can affect mortgage interest rates and the availability of mortgages. In my experience, declining home prices act inversely to the LTV ratio - that is, the ratio increases, thereby reducing the availability of refinancing and home equity borrowing options. At the same time, however, lower home prices generally act inversely to the number of home buyers in the market - that is, the lower the price of the home, the larger the pool of potential buyers. And any real volatility in home prices will obviously drive up the cost to borrow (i.e., through higher interest rates), because investors and lenders will require a higher return on their mortgage-related investments.

Comments or Questions?

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I would welcome your comments or questions.

Please feel free to email me at any time.

_____________________________

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Wednesday, August 11, 2010

Obama's "August Surprise"

by Jonathan Foxx

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

Commentary

Is it possible that just days from now a new era will begin in which negative equity will be forgiven and/or refinanced? Where politics and economics intersect, the unexpected can become the new normal!

I want to share some thoughts with you about the possibility - and, at this point it's still a rumor - that forgiving principal and refinancing negative equity are nearer than you think.

All the way back on June 23rd of this year - when Fannie Mae decided to cauterize the growing stream of strategic defaults - who would have thought that by early August both Government Sponsored Enterprises (GSE), Fannie Mae and Freddie Mac, under Treasury's conservatorship, would actively consider ways to provide negative equity refinance, let along offer forgiveness of negative equity?

Less than two months later, the GSEs along with the involvement of the Federal Housing Administration (FHA), are going forward with such options: permitting borrowers to refinance negative equity became a reality on August 6, 2010; and somehow extinguishing negative equity altogether - though still publicized in whispered rumors and political trial balloons - seems to be a forthcoming initiative!

This comes also at a time that Freddie reported "a net loss of $4.7 billion for the quarter ended June 30, 2010, compared to a net loss of $6.7 billion for the quarter ended March 31, 2010," and the Federal Housing Finance Agency (FHFA), the GSEs' regulator and conservator, requested another $1.8 billion from Treasury, and Fannie reported "a net loss of $1.2 billion in the second quarter of 2010, compared to a net loss of $11.5 billion in the first quarter of the year" - and the FHFA requested another $1.5 billion from Treasury.

The so-called "third rail" of housing policy - the Fannie and Freddie debacle - is a persistent dilemma.

With an estimated 15 million mortgages, or 20% of all mortgages, now underwater with negative equity of nearly $800 billion, the Obama administration may now be poised to order the GSEs to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth, but who are nevertheless current on their mortgage payments. In theory, this tactic would put hundreds of dollars a month into the pockets of some of these borrowers. Notwithstanding the obvious political implications within three months of the mid-term elections, this can hardly be considered a bail-out of Main Street - which needs only one thing to pay mortgage payments: income from jobs! And unemployment persists in double digits, including a hiring environment of five to six applicants for every job opening. What is obviously needed is jobs, jobs, and more jobs!

But the stimulus funds are depleting, and the Administration finds itself with fewer options.

A quick back-of-the-envelope calculation shows that there are about 77 million people in the U.S. who are homeowners and the civilian labor force is approximately 154 million. In other words, forgiving negative equity would clearly help a sizable percentage of the homeowners, but that's really just about half of the people needing income or a job or better wages to even afford monthly rent, let alone payments on their mortgages. Thus, realistically, this could hardly be considered a stimulus for Main Street.

I have argued previously both here, here, here, and here, and elsewhere in print, that the HAMP program is obviously failing or certainly not measuring up to the goals set forth by the Obama Administration. The FHA Short Refinance, announced on August 6, 2010, can hardly be considered to offer a robust fix, even if it means negative equity refinance - because the program itself contains the kinds of unlikely eligibility requirements and lender cooperation buy-in that has tanked other government programs, such as the Home Affordable Refinance Program (HARP), which to date has only a small percentage of homeowners.

So, is this the hoped for answer to "strategic defaults" and a special stimulus for Main Street?

I think Barron's has it right in their article, entitled Mortgage Forgiveness? Forget It:

Suddenly changing to make it easy to refinance, either through principal forgiveness or lowering lending standards for Fannie and Freddie, would cause chaos in the mortgage-backed securities market. The Fed, with a massive MBS position, would be a big loser. So would be Fannie and Freddie. And that ultimately means the American taxpayer.

Moreover, a plunge in the MBS market would mean huge losses for other investors, including those with stakes in mutual funds with big MBS exposure. And a plunge in mortgage securities prices could wind up pushing up mortgage rates in the end, conceivably pricing out some prospective buyers trying to get their proverbial foot in the door of their first house.

And politically, it could backfire. There could be many more folks resentful that they couldn't get a special deal to reduce their mortgage because they did the right thing - put down an ample down payment on a house they could afford with a margin of safety.

This is one deus ex machina that won't fix much. As one of my favorite clients likes to say, that dog won't hunt!

Comments or Questions?

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I would welcome your comments or questions.

Please feel free to email me at any time.

_____________________________

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Monday, August 9, 2010

FHA Launches “Underwater” Refinances

On August 6, 2010, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2010-23, which announced the FHA Short Refinance program.

Available on September 7, 2010, the loan product will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth – or “underwater.” The FHA Short Refinance will continue to be available until December 31, 2012.

The Federal Housing Administration (FHA) will offer certain non-FHA borrowers, who are current on their existing mortgage and whose lenders agree to write off at least ten (10%) percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

To be eligible for a new loan, homeowners must owe more on their mortgage than their home is worth and be current on their existing mortgage. Homeowners must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence.

The borrower's existing first lien holder must agree to write off at least 10% of the unpaid principal balance, bringing the borrower's combined loan-to-value ratio to no greater than 115%. The existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75%.

U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishing of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

HUD estimates that between 500,000 and 1,500,000 borrowers will refinance using these enhancements and the net economic benefits will be between $11.774 and $35.322 billion.

Highlights

Eligibility

Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:

1. The homeowner must be in a negative equity position;

2. The homeowner must be current on the existing mortgage to be refinanced;

3. The homeowner must occupy the subject property (1-4 units) as their primary residence;

4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a "FICO based" decision credit score greater than or equal to 500;

5. The existing loan to be refinanced must not be a FHA-insured loan;

6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance;

7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;

8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;

9. For loans that receive a "refer" risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner's total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;

10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;

11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and

12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.

Salient Features of Program

  • Principal Write Off
  • Calculating Mortgage
  • Underwriting Requirements
  • Current Mortgage
  • Acceptable Credit History
  • Combined Loan-to-Value Ratio
  • Permissible Secondary Financing
  • Borrower Certification
  • Mortgage Type and ADP Codes
  • Second Lien Extinguishment and Servicer Incentive

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FHA Refinance of Borrowers in Negative Equity Positions
Mortgagee Letter 2010-23
August 6, 2010

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Thursday, August 5, 2010

Fannie: Launches KnowYourOptions.com

Overview

The Federal National Mortgage Association (Fannie) recently bought the domain name "KnowYourOptions.com" for $50,000 from a domain name consultancy in June.

On August 3, 2010, Fannie launched KnowYourOptions.com™ for consumers to use in order to determine their options when they are behind on their mortgage payments or are facing foreclosure.

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KnowYourOptions-Logo

^^ Click ^^

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Highlights

Know Your Options Features

All options are presented to homeowners within two categories:

1. options for those who want to stay in their home. and

2. options for those who may want to leave.

For each, there's an overview, list of benefits, an explanation of how it works, and next steps.

Important Features

  • A Virtual Assistant to walk homeowners through key sections of the site.
  • An interactive Options Finder to get homeowners to the option that might be right for their situation.
  • Mortgage-Related Calculators to help homeowners know how the various options work.
  • Consistent Call-to-Action on every page - homeowners are encouraged to contact their mortgage company or a housing counselor to get help.

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Materials

Know Your Options Marketing Materials

Know Your Options sample letters and flyers for each option. Professionals can personalize these materials with their own contact information and use when working with homeowners.

Fannie plans to add more marketing materials in the future, such as banner ads, brochures, statement inserts and more.

Know Your Options Borrower Letters
All Options letter
Stay in My Home Options letter
Repayment Plan letter
Forbearance letter
Modification letter
Deed-for-Lease letter
Leave My Home Options letter
Short Sale letter
Deed-in-Lieu of Foreclosure letter

Know Your Options Flyers
All Options flyer
Stay in My Home Options flyer
Repayment Plan flyer
Forbearance flyer
Modification flyer
Deed-for-Lease flyer
Leave My Home Options flyer
Short Sale flyer
Deed-in-Lieu of Foreclosure flyer

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Fannie Mae: KnowYourOptions.com™
Press Release 8/3/10

Monday, August 2, 2010

FinCEN: 2009 Mortgage Loan Fraud

On July 30, 2010, the Financial Crimes Enforcement Network (FinCEN) released its 2009 Mortgage Loan Fraud (MLF) study which found the number of mortgage fraud suspicious activity reports (SARs) filed in 2009 grew 4 percent compared with the number of mortgage fraud SARs filed in 2008.

FinCEN also reported that just looking at the fourth quarter of 2009, mortgage fraud SAR filings increased 6 percent over the same period in 2008.

Consistent with recent years, 9 percent of all SARs filed in 2009 indicated MLF as an activity characterization. However, looking at just the fourth quarter, this proportion rose to 11 percent.

In addition to the increase in SAR-MLF filings, the analysis shows an increase in the prevalence of post origination loan reviews by a variety of mortgage market businesses other than mortgage lenders, such as mortgage loan purchasers, providers of mortgage insurance, insurance certificates.

The importance of quality control reviews through in-house or third-party auditors skilled in detecting potential mortgage fraud or misrepresentations is an important tool.

Highlights

The report also lists where MLF SARs are most common by state, by county, and by metropolitan area (MSA). The following table shows the Metropolitan Statistical Areas with the most SAR MLF filings and the number of mortgage loan fraud SARs that were filed in 2009.

Chart-1-Top10-Fraud (2010.07.30)

The volume of SAR filings in any given period does not directly correlate to the number or timing of suspected fraudulent incidents in that period.

The numbers reported show when the suspicious activity was reported even if the activity occurred prior to 2009. FinCEN's data indicates that almost 75 percent of mortgage loan fraud SARs report suspicious activity that occurred more than one year prior to filing the SAR.

Foreclosures, repurchases, insurance investigations, and enforcement actions appear in SAR narratives as contributing factors to the ultimate discovery and reporting of suspicious activities.

Further Review

This report and related studies should be taken together with May's report entitled Loan Modification and Foreclosure Rescue Scams - Evolving Trends and Patterns in Bank Secrecy Act Reporting, released in June and which examines early results from FinCEN's April Advisory, Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding Loan Modification/Foreclosure Rescue Scams in order to gain a detailed understanding of loan modification and foreclosure rescue scams.

Both of these reports are on our website.

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Mortgage Loan Fraud Update - Suspicious Activity Report Filings from October 1, 2009 to December 31, 2009. FinCEN: July 2010
7/31/10

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.