Wednesday, July 27, 2011

Winning the Future - Losing the Past

Foxx_(2009.04.02)
Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.Separater-Grey
“Winning the Future!” By now, most of us have heard President Obama's new slogan for his 2012 re-election campaign. 
But for the mortgage industry and consumers, it seems like something very vital is at stake: causes of the recent financial meltdown are creeping and clawing their way back. 
Perhaps we are not so much Winning the Future as Losing the Past.
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Famous Last Words
Here are the very last words of the 1616 page Senate's amendments to the House's financial reform bill, which together formed the basis of the Dodd-Frank Act (Dodd-Frank):
Amend the title so as to read: An Act 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. (My Emphasis) 
The nomenclature "too big to fail," otherwise known by the acronym TBTF, was placed into the legislative language right then and there!
But that phrase "too big too fail" itself never actually made it into the 2319 page Dodd-Frank Act.
Did it just disappear forever or merely reappear with a make-over?
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What’s In A Name
Dodd-Frank saw to it that the pesky and politically unpopular term "too big to fail" disappeared, but the concept was craftily replaced with a shiny new term, known as a "systemically important financial institution," also prestigiously having an acronym of its very own: "SIFI." (Pronounced in the same way as you would pronounce SciFi!)
Is the SIFI a different kind of indomitable beast than the TBTF monstrosity?
Let's take a closer look, by reading some Dodd-Frank descriptions of this SIFI creature:
  • Entities that are systemically important or can significantly impact the financial system of the United States.
  • The terms 'systemically important' and 'systemic importance' mean a situation where the failure of or a disruption to the functioning of a financial market utility or the conduct of a payment, clearing, or settlement activity could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States.
And here is one of several factors that may be taken into consideration, when deciding to protect us from the flailing SIFI:
  • The effect that the failure of or a disruption to the financial market utility or payment, clearing, or settlement activity would have on critical markets, financial institutions, or the broader financial system.
Now you might argue that TBTF is a somewhat colloquial expression, a political and journalistic tool, but its successor, SIFI, is now enshrined into law along with certain actionable remediation. Conceptually, however, I see very little light between the meaning of the two terms.
So did Dodd-Frank conquer the "too big to fail" beast, wrestling the TBTF to the ground, casting it into chains, pulling off its griftopic mask, and finding underneath the "systemically important financial institution," that rapaciously attenuated SIFI?
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Are We Safe From The SIFI?      
Let us presume that Dodd-Frank actually provides viable regulatory remedies for keeping this SIFI chained up. As you may know, I have written extensively about the breathtaking lack of formidable brakes in Dodd-Frank to avoid the SIFI debacle. Indeed, certain markets are still exposed to systemic failure, as that term is defined by Dodd-Frank. In some cases, certain markets are inadequately addressed by or they are not even regulated through Dodd-Frank.
In any event, let us just suppose that somehow Dodd-Frank actually has all the regulatory remedies it needs to keep the SIFI under control. What may happen in another meltdown?
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Systemic Risk
One of the determinants of the effectiveness of protection from SIFIs is best described in a recent report from Standard and Poor's. It is entitled "The U. S. Government Says Support For Banks Will Be Different 'Next Time' -- But Will It?" Link Here – PDF
Although the title speaks for itself, or begs the question, the report offers the one and only factor that really counts when it comes to SIFIs running loose: government intervention inevitably will crowd out a regulatory framework and trumps everything else! So, inevitably, this is the outcome that may happen.
And I quote:
It would seem "too big to fail" has ended. But, has it really? Standard & Poor's Ratings Services believes that the primary goal of DFA is to make banks less risky and better capitalized so the need for extraordinary support is reduced. However, given the importance of confidence sensitivity in the effective functioning of banks, we believe that under certain circumstances and with selected systemically important financial institutions (SIFI), future extraordinary government support is still possible. The U.S. government has a long track record of supporting the banking system. But the government's authority to regulate and supervise hasn't always prevented bank failures or the need for selected bailouts or tailored assistance. Time and time again, the U.S. government has found ways - many times reluctantly - to contain systemic risk and limit economic fallout when large financial institutions are on the brink of failure. 
And then, referring to Dodd-Frank, comes this conclusion:
This legislation, in our view, has not addressed the demand side of risk, risk-mitigation efforts, or the fact that a two-tier regulatory system will likely continue to move risks into the loosely regulated shadow-banking system.
(My Emphasis)
Translation: S&P understands regulatory risk. The TBTF monster has shape-shifted into the SIFI monster and continues to have the hidden powers to destroy the country’s economic stability at some unspecified time in the future. The government will be expected to prop up the "too big to fail" financial institution, irrespective of the regulatory safety net.
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Mortgage Industry Nemesis
Near its height, mortgage brokers alone accounted for more than 500,000 people, and originated between 68% and 70% of residential mortgage loans. Then came the wave of predatory lending accusations, attacks on the yield spread premium as a compensation source, allegations of mortgage fraud and steering, and so forth. This was accompanied by foreclosures that eclipsed the Great Depression.
By early 2010 more than 1 million homes were seized, defaults soared to more than 10% percent and foreclosures reached record numbers – in the first quarter alone! Along the way, the number of mortgage brokers shrank to 246,900 by the middle of last year, which is a drop of over 50% from its high. But this was not a shaking out of "bad" brokers over "good" brokers. Many believe that the decline had been due, in part, to more restrictive compliance standards.
And that is just a snap shot of what mortgage brokers have been going through, not to mention the regulatory burdens placed on mortgage bankers, banks, investors, and servicers - each with its own brand of significant and often costly challenges, just to survive and also comply with new regulatory compliance laws.
Wall Street operates by different standards, as it likely should - each market often marches to the beat of a different drummer. But the Credit Default Swap - the "shadow banking" favorite – has not gone away at all; in fact, the CDS market is bigger, more entrenched and far more pervasive than ever.
Other than a devastated mortgage industry and a legitimately wary consumer, and a blizzard of new regulations purportedly in response to the economic crisis, what has actually changed to fully prevent systemic failure?
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Straddling Two Worlds
In my recent 2-part article, Ability-to-Repay: Regulating or Underwriting?, I discuss how this one area of legislation alone causes a substantial increase in government encroachment on underwriting, with the effect - intended or unintended - of rationing credit. My conclusions, based on a detailed analysis of this law, is:
1) There is gradual nationalizing of underwriting guidelines.
2) The imposition of an ability-to-repay requirement as a regulatory mandate is an assertion that market forces cannot discipline lenders or incentivize lenders to act in their own self-interest.
3) There is a substantial shift in liabilities, because this mandate shifts the burden of compliance to the lenders in order to assure that their contractually bound borrowers can pay back their loans.
4) The law imposes a new kind of theory for a regulatory framework.
5) This law infantilizes lenders by making them comply with a regulator's ad hoc way of rationing the extension of credit.
6) Rationing of credit leads to the diminution of arms-length, contractual counterparties.
7) The law changes the dynamics in the inherent, due diligence tension among the parties to a residential mortgage transaction and raises serious issues about the systemic consequences soon to be engendered.
And yet, the Mortgage Bankers Association sent an extensive letter to the Federal Reserve Board (dated 7/22/11 - one day after the CFPB received its statutory authority over the subject legislation - Link Here) which corroborates my aforementioned conclusions. Nevertheless, the MBA letter also manages to support the concept of the Ability-to-Repay provisions:
  • MBA has long supported establishment of an ability to repay requirement for mortgage loans. However, since the requirement will apply broadly and bring considerable liability to lenders and assignees for any violations, it is essential that the rule's QM requirements include unambiguous definitions and means of compliance. Clear "bright line" requirements will ensure the provision of sustainable mortgage credit to the widest array of qualified borrowers at affordable costs.
  • If these requirements are implemented incorrectly, however, we are deeply concerned that far too many borrowers will be excluded from affordable mortgage credit and/or will be subject to unreasonably increased financing costs, in turn harming the very people Dodd-Frank was intended to protect and undermining the nation's economic recovery.
Personally, I prefer clear and “unambiguous definitions;” however, the MBA's position seems too embracing, even if it recognizes the effect such legislation could have on rationing credit.
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Losing The Past
The dramatic changes that the mortgage industry has gone through are partly of its own doing and partly due to the economic downturn caused by many macro- and microeconomic issues. Some legislation that has been made into law, such as Dodd-Frank, is supposedly a means to prevent another economic meltdown.
Without a stronger real estate market, there really cannot be much of a recovery. We are experiencing a recession that is being made worse by the lack of consumer demand. This is not a recession caused simply by the lack of consumer confidence. If the consumer does not have spending money, or feels the need to sit on the sidelines, the recession will become an ever expanding morass, lasting many years. Despite what the government and political leaders authoritatively proclaim, the recession did not really end, except in the most abstruse technical sense. Nothing could be more obvious! 
Laws that promise to prevent the spawning of TBTFs, or their progeny, the SIFIs, or whatever you want to call them, but also institute the wide-ranging set of regulations that are now clogging up the mortgage industry, only economically hurt the consumer, due to higher pricing, pressure on origination efficiency, and impediments to innovation. Many mortgage market participants must pass on their costs, due to the burden of higher overhead and lower profit margins.
Sometimes, over-regulating may be just as ineffective as under-regulating - especially when, in many cases, existing regulations just need to be enforced.
I am privileged to run the first mortgage risk management firm in the country. We navigate regulations day in and day out for our valued clients. Regulations are important to the safety and soundness of a financial institution and protect the consumer. But it is better to have a few, new, smart regulations than a plethora of mediocre regulations.
There is no way to really win the future by not looking back, gaining insights, correctly identifying errors, and then carefully, incrementally, intelligently, providing regulatory remedies that help to preserve the mortgage industry.
"Winning the Future" may be a catchy phrase. But an overbearing approach to regulatory risk will not win the future, though it may assuredly lead to losing the past.
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What do you think?
I would welcome your comments.
Please feel free to join the forum below.

Monday, July 25, 2011

Alternative Mortgage Transaction Parity Act (AMTPA)

On July 22, 2011, the Bureau of Consumer Financial Protection (CFPB) published in the Federal Register for public comment an Interim Final Rule implementing amendments to the Alternative Mortgage Transaction Parity Act (AMTPA) made by the  Dodd-Frank Act (Dodd-Frank).
AMTPA authorizes state-licensed or state-chartered housing creditors (state housing creditors) to make alternative mortgage transactions in compliance with federal rather than state law, in order to establish parity and competitive equality between state and federal  lenders.
Effective July 21, 2011, Dodd-Frank amended AMTPA to transfer rule-writing authority to the CFPB and to narrow the scope of federal preemption.
After July 21, 2011 Dodd-Frank provides that state housing creditors may only make alternative mortgage transactions under AMTPA if they comply with rules issued by the CFPB, even though Dodd-Frank does not vest the CFPB with authority to issue such rules before that date.
Accordingly, CFPB interim rules are needed immediately in order to avoid a suspension in the operation of AMTPA, which would prevent state housing creditors from making variable rate loans and other alternative mortgage transactions in states where such loans are otherwise prohibited by state law.
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OVERVIEW
Accordingly, CFPB interim rules are needed immediately in order to avoid a suspension in the operation of AMTPA, which would prevent state housing creditors from making variable rate loans and other alternative mortgage transactions in states where such loans are otherwise prohibited by state law.
Essentially, the CFPB apparently does not believe that Congress intended its amendments to AMTPA to create a regulatory gap that would interrupt access to credit.
Indeed, in the Federal Register the CFPB states that there is good cause to issue this interim final rule without notice and comment and effective immediately in order to avoid the risk of disrupting mortgage markets, placing state housing creditors at an "inappropriate competitive disadvantage," and reducing consumers' access to credit.
In particular, the CFPB is concerned that failure to issue an interim final rule addressing the modification of existing AMTPA loans could create uncertainty and discourage such modifications.
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ADVANCE NOTICE
In advance of issuing this Interim Final Rule, the CFPB issued a Public Bulletin, on June 27, 2011, alerting state chartered and licensed lenders and other interested parties that:
(1) the Dodd-Frank amendments to AMTPA are to take effect on July 21, 2011; and,
(2) the amendments affect what laws apply to mortgage loans issued by state chartered or licensed lenders after that date, by narrowing the statutory definition of "alternative mortgage transaction" and the scope of preemption under AMTPA.
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Alternative Mortgage Transaction Parity
(Regulation D)
Interim Final Rule with request for public comment.
Federal Register: 76/141
July 22, 2011
Amendments to the
Alternative Mortgage Transaction Parity Act
CFPB Bulletin 11-1
June 27, 2011
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Thursday, July 21, 2011

Ability-to-Repay: Regulating or Underwriting? Part II

Foxx_(2009.04.02)
Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.
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Click below to download my article:
ABILITY-TO-REPAY:
REGULATING OR UNDERWRITING?
Part II
It has been published in the National Mortgage Professional Magazine - July 2011.
I am providing this article to you as a courtesy, for your personal use. I hope you enjoy it.
Please feel free to contact me at any time.
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EXCERPT # 1
It seems to me that the imposition of an ability-to-repay requirement as a regulatory mandate is an admission that market forces cannot discipline lenders or incentivize lenders to act in their own self-interest. 
This is an obvious shift in liabilities, because this mandate shifts the burden of compliance to the lenders in order to assure that their contractually bound borrowers can pay back their loans. Parties to any contract can become adversaries! 
In other words, the relationship between the creditor and the borrower is innately affected and extensively undermined by this Rule, inasmuch as it imposes a new kind of theory for a regulatory framework and, in my estimation, infantilizes lenders by making them comply with a regulator's ad hoc way of rationing the extension of credit.
ABILITY-TO-REPAY:
REGULATING OR UNDERWRITING?
Part II
Download Article-Grey-1
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EXCERPT # 2
If the rationing of credit is meted out through this regulatory construct, it can be legitimately asserted as well that lenders are not arms-length, contractual counterparties; that is, lenders now will have a duty to assess a prospective borrower's ability to repay, irrespective of collateral value and securitization.
This change in the dynamics between and the inherent, due diligence tension among the parties to a residential mortgage transaction raise serious issues about the systemic consequences soon to be engendered.
ABILITY-TO-REPAY:
REGULATING OR UNDERWRITING?
Part II
Download Article-Grey-1

Tuesday, July 19, 2011

Adverse Action and Risk-Based Disclosures (Final Rules)

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Our previous notification relating to this rule was on 7/7/11, on 3-2-11, and 1-3-11.
The Rules amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements. 
If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).
The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.
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REGULATION B (ECOA)
Adverse Action Notice
Section 701 of the Equal Credit Opportunity Act (ECOA) requires a creditor to notify a credit applicant when it has taken adverse action against the applicant. The ECOA adverse action requirements are implemented in the FRB's Regulation B.
Section 615(a) of the Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when the person takes an adverse action against a consumer based in whole or in part on information in a consumer report.
Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes.
The FRB is amending these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.
The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Effective: August 15, 2011
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REGULATION V (FCRA)
Fair Credit Reporting Risk-Based Pricing Regulations 
On January 15, 2010, the Board and the Commission published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA).
The final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.
The FRB and the Commission are amending their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.
These final rules reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Effective: August 15, 2011
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LIBRARY
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Equal Credit Opportunity
Regulation B
Adverse Action Notice
FRB: 12 CFR Part 202
Final Rule
July 15, 2011
Fair Credit Reporting
Regulation V
Fair Credit Reporting Risk-Based Pricing Regulations
FRB: 12 CFR Part 222
FTC: 16 CFR Parts 640 and 698
Final Rules
July 15, 2011

Monday, July 18, 2011

Opening a Dialogue: Elizabeth Warren and the Mortgage Industry


  Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.
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According to news reports, Elizabeth Warren will not be chosen as the Director of the Consumer Financial Protection Bureau (CFPB).
Since September 2010, Professor Warren worked diligently and reliably to "stand up" the CFPB in accordance with the specified requirements of the Dodd-Frank Act.
Whether or not Professor Warren remains with the CFPB in some capacity or moves on to other venues, the views and vision that she brought to the creation of the CFPB will likely remain the standard by which the CFPB will be judged to have served its mission.
With this in mind, I would like to share my just published interview with Professor Warren, entitled:
Opening a Dialogue: Elizabeth Warren and the Mortgage Industry
The article is published in the July 2011 edition of the National Mortgage Professional Magazine, which is available to you, compliments of the magazine. (A one year free subscription is offered.)
This interview, which includes questions posed by leading mortgage industry organizations, offers a deeper insight into how the CFPB's mission may affect state law, the mortgage industry, mortgage brokers, and even educational opportunities for mortgage loan originators.
The article also contains a section, entitled In Her Own Words, which provides additional insight into Professor Warren's views about consumer financial protection.
OPENING A DIALOGUE:
ELIZABETH WARREN
AND THE MORTGAGE INDUSTRY
Download Article-Grey-1
As many in Congress seem bent on immobilizing the CFPB, it will be important to determine the extent to which the new agency lives up to the standards and mission which Professor Warren hoped it would achieve.
I want to take this opportunity to thank Professor Warren, her friendly and cooperative staff, and leaders of the many industry organizations that took part in this project. It was a pleasure working with you all.

Friday, July 15, 2011

FRB: Mortgage Rulemaking Chart 2008 - 2011

Yesterday, we notified you about the testimony given by witnesses in the hearing held by the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."
The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets.
During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs, provided written testimony containing a table entitled "Summary of Federal Reserve Board Mortgage Rulemakings - 2008 through 2011."
I have removed the table from the written testimony and featured it separately in our Library.
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MORTGAGE RULEMAKINGS - 2008 THROUGH 2011
FINAL RULES
  • Home Ownership and Equity Protection Act (HOEPA): Final Rule
  • Mortgage Disclosure Improvement Act, Part I: Final Rule
  • Mortgage Disclosure Improvement Act, Part II: Interim Final Rule
  • Helping Families Save Their Homes Act - Mortgage Transfer Disclosure: Final Rule
  • Loan Originator Compensation: Final Rule
  • Dodd-Frank Act - Appraisal Independence: Interim Final Rule
  • Dodd-Frank Act - Escrow Account: Final Rule
PROPOSED RULES
  • Regulatory Review of Disclosure Rules for Closed-end Mortgages (Phase I)
  • Regulatory Review of Disclosure Rules for Home Equity Lines of Credit (HELOCs) (Phase I)
  • Regulatory Review of Mortgage Disclosure Rules (Phase II)
  • Dodd-Frank Act - Escrow Account Disclosures
  • Dodd-Frank Act - Ability to Repay/Qualified Mortgages
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LIBRARY
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Summary of Federal Reserve Board Mortgage Rulemakings
2008 through 2011
Statement of Sandra F. Braunstein, Director
Division of Consumer and Community Affairs, Federal Reserve System
Insurance, Housing, and Community Opportunity Subcommittee
(Committee on Financial Services)
July 13, 2011

Wednesday, July 13, 2011

Hearing: FRB Testimony on LO Compensation

On Wednesday, July 13, 2011, the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."
The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets. 
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During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs seemed to state that the loan officer employees of loan originators (i.e., brokers) would not be required to be paid only by a salary on consumer-paid transactions, but may also be paid "bonus" commissions.
Her testimony today actually supports my understanding of her statement to this Subcommittee.
[See page 8-9 of Director Braunstein's submitted testimony in our Library.]
Under the new TILA loan compensation rule, if a loan is brokered and the consumer is paying the broker fee, then the branch manager, the loan officer, and all the other employees may only be paid a salary or hourly wage.
Similarly, bonuses and referral fees to tellers, processors, and other staff are not be permitted for a brokered loan when the borrower pays broker fees or other origination fees to the broker.
Perhaps I did not understand fully Director Braunstein's remarks. But if that aspect of the Rule is changed, then this would be a significant relief to mortgage brokers
In any event, the details and facts must be considered. So further clarity will be needed to determine if this is actually a change in FRB policy.
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 HEARING
The hearing consisted of two panels.

The full text of the testimony of each witness may be found in our Library.

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 WITNESSES
Panel I

Sandra F. Braunstein, Director of Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System
Teresa Payne, Associate Deputy Assistant Secretary, Regulatory Affairs, Department of Housing and Urban Development
Kelly Cochran, Deputy Assistant Director for Regulations, Consumer Financial Protection Bureau , Department of Treasury
James R. Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examination Council
William B. Shear, Director of Financial Markets and Community Investment, Government Accountability Office
Anne Norton, Maryland Deputy Commissioner of Financial Regulation, on behalf of the Conference of State Bank Supervisors
Panel II

Steve A. Brown, Executive Vice President, Crye-Leike, on behalf of the National Association of Realtors
Henry V. Cunningham, Jr., CMB President, Cunningham & Company, on behalf of the Mortgage Bankers Association
Tim Wilson, President, Affiliated Businesses for Long & Foster Companies, on behalf of the Real Estate Services Providers Council, Inc.
Anne Anastasi, President, Genesis Abstract and President, American Land Title Association
Mike Anderson, President, Essential Mortgage, on behalf of the National Association of Mortgage Brokers
Marc Savitt, President, The Mortgage Center, on behalf of the National Association of Independent Housing Professionals
Sara Stephens, President Elect, Appraisal Institute
Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform
Janis Bowdler, Director, Wealth-Building Policy Project Office of Research, Advocacy, and Legislation, on behalf of the National Council of La Raza
Ira Rheingold, Executive Director, National Association of Consumer Advocates

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 Library
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Insurance, Housing and Community Opportunity Subcommittee
(Committee of Financial Services)
"Mortgage Origination: the Impact of Recent Changes 
on Homeowners And Businesses"
 
Witness Testimony - Two Panels
July 13, 2011

CFPB: The Headless Horseman

Foxx_(2009.04.02)
COMMENTARY: by JONATHAN FOXX
Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.
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At this writing, we are almost a week away from the Designated Transfer Date - the date on which the Consumer Financial Protection Bureau (CFPB) receives its enumerated authorities - and nobody has been chosen, appointed or nominated to head the new agency. Several suggestions for the principal position abound, primarily Elizabeth Warren.
How can such a monumental lack of political discipline, by Democrats and Republicans alike, be accounted for?
CFPB: Laws
The CFPB, created by the Dodd-Frank Act, on July 21st it will receive authority over:
-Alternative Mortgage Transaction Parity Act (AMTPA)
-Community Reinvestment Act (CRA)
-Consumer Leasing Act (CLA)
-Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)
-Equal Credit Opportunity Act (ECOA)
-Fair Credit Billing Act (FCBA)
-Fair Credit Reporting Act (except with respect to sections 615(e), 624 and 628) (FCRA)
-Fair Debt Collection Practices Act (FDCPA)
-Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)
-Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)
-Home Mortgage Disclosure Act (HMDA)
-Home Ownership and Equity Protection Act (HOEPA)
-Real Estate Settlement Procedures Act (RESPA)
-S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)
-Truth in Lending Act (TILA)
-Truth in Savings Act (TISA)
-Omnibus Appropriations Act- Section 626 (OAA)
-Interstate Land Sales Full Disclosure Act (ILSFDA)

In just a few days, the CFPB is going to have authority over the above-stated enumerated laws through rulemaking, orders, guidance, interpretations, policy statements, examinations, and enforcement actions.
The CFPB will be assigned primary authority to enforce the aforementioned laws, but other federal regulators, including the Department of Housing and Urban Development (HUD), the banking agencies, and the Federal Trade Commission, will retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General will be empowered to enforce federal laws under the CFPB (subject to any existing limitations in the laws to be transferred to the CFPB's authority). State consumer financial protection laws would not be preempted, except to the extent that they are inconsistent with federal law (although such state laws could be stricter than the federal laws, in which case they would not be preempted by federal law).
CFPB: Products
The CFPB will have oversight over many financial products and services, including, but not limited to, credit extension; credit counseling; loan servicing; Credit Reporting Agencies, their agents and affiliates; real property leases; real estate settlement services; real estate appraisals; depository accounts; financial advisory services; exchange of funds and transmittal of funds; consumer custodial fund services; so-call "stored value cards;" check cashing; debt management, settlement, and collection services; payment processing services; and, a catch-all "other products and services" (as the CFPB so defines).
CFPB: New Offices
There will be various units and offices: a research unit to monitor the consumer financial products and services market, and a unit to collect and track complaints; three new offices to be established within one year of the Designated Transfer Date, an Office of Fair Lending and Equal Opportunity, an Office of Financial Education, an Office of Service Members Affairs; and, an Office of Financial Protection for Older Americans, which must be established within 180 days after the Designated Transfer Date. Furthermore, there will be a Private Education Loan Ombudsman to process complaints from borrowers of private education loans.
CFPB: Staff
In addition to the CFPB's responsibility to build its own staff and administrative operations, it will collaborate with the federal banking agencies and HUD to choose employees to be transferred from their agencies to the CFPB. All such employee transfers are to be fully effectuated not later than 90 days after the Designated Transfer Date.
CFPB: Director
The Director must establish all units and offices within specific time frames, include various coordinating and administrative mandates, provide for reporting requirements to Congress, and must see to it that the various components of the CFPB function through interacting participation within and across all CFPB units and, where applicable, certain federal and state agencies and regulators.
In addition to the foregoing, the Director must also establish the Consumer Advisory Board and appoint its members. By July 21st, as well as its receiving other authorities pursuant to Dodd-Frank, the CFPB must, among other things, conduct research relating to consumer financial products and services, develop its nationwide consumer complaint response center, plan and take steps to implement the risk-based supervision of non-depository entities, and prepare for the opening of outreach offices.
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"You say yes, I say no / You say stop and I say go, go, go"  (Beatles)      
Whatever your political persuasion these days, it is irrefutable that this new agency is soon coming into its powers!
Some people believe that the Director should be industry friendly; others believe the Director should be consumer friendly. Does it occur to any of them that these predilections are not mutually exclusive?
Some legislators want to defund the CPFB or "defang" it (as one Congressperson has opined); others want it to have full funding and all the enforcement powers granted by Dodd-Frank.
But defunding an agency that is set to receive all the enumerated laws is entirely counterproductive, inasmuch the industry will depend on it for oversight of these laws. And the CFPB, as required by Dodd-Frank, that is deprived of enforcement powers is virtually no agency at all: this is to "defang" it without regard for the consequences.
Every compliance officer knows that compliance means nothing without enforcement!
"I say high, you say low / You say why, and I say I don't know" (Beatles)
We all know that the President cannot make a recess appointment if Congress is not in recess, notwithstanding the "pro forma sessions" that may be conducted in order to keep the Congress "in session." Essentially, the tactic is for opposition legislators - primarily Republicans - to prevent an appointment of anybody at all to the CFPB unless the CFFB is changed.
As to confirming an appointment, at this time the President has put forth almost 300 civilian appointments this year, but fewer than 100 of them have been confirmed by the Senate - and these are instances where there is no opposition! Indeed, there are 15 judge nominees who have already been unanimously approved by the Senate Judiciary Committee, but their nominations have not even been sent to the floor of the Senate.
Importantly - and, at this late date, inexplicably - President Obama has not even announced his choice for the Director! How can consumers or industry expect congressional action when the President himself won't choose?
At this time, Elizabeth Warren is standing up the CFPB. She is the very person who devised the idea of a consumer financial protection agency and then advocated in the halls of Congress, in speeches, lectures, and interviews throughout the United States, for its creation. Since September 17, 2010, she has been building the CFPB in accordance with the requirements of Dodd-Frank.
While proponents and opponents lambast each other, and a Director is not appointed, the stakes for the mortgage industry continue to grow ever higher and perilous. The many enumerated laws being fully empowered into the CFPB on July 21st affirmatively require substantive, continuous, and very careful oversight.
The individual who manages that agency matters!
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Headless Horseman      
  • "The dominant spirit, however, that haunts this enchanted region, and seems to be commander-in-chief of all the powers of the air, is the apparition of a figure on horseback, without a head. It is said by some to be the ghost of a Hessian trooper, whose head had been carried away by a cannon-ball, in some nameless battle during the Revolutionary War, and who is ever and anon seen by the country folk hurrying along in the gloom of night, as if on the wings of the wind."
    - Washington Irving, "The Legend of Sleepy Hollow"
The principal character in "The Legend of Sleep Hollow" is Ichabod Crane, a school teacher. Sleepy Hollow is believed to have been located in the area of Tarrytown, NY. Ichabod is killed quite dramatically when the headless horseman, a ghost - and it is believed that ghosts can't cross water! - throws his severed head across a bridge, over the water, and hits poor Ichabad off his horse. The next morning, Ichabod's hat is found nearby, and beside it is a shattered pumpkin. Ichabod was never seen in Sleepy Hollow ever again. In Irving's story, one is led to conclude that the headless horseman was really no ghost at all, but Abraham van Brunt (aka "Brom Bones"), Ichabod's rival for the hand in marriage of Katrina van Tassel, the beautiful daughter of a rich farmer.
Any agency without a head is crippled, but, given the mandates arrogated to the CFPB, not to have a Director immediately is especially debilitating to consumers and mortgage industry participants alike.
Instead of being rivals, like Ichabod Crane and Brom Bones, it is in the interest of both consumers and industry to lobby for a strong CFPB, under the direction of a wise, knowledgeable, and experienced leader.
This is not a job for a career bureaucrat. It requires a Director with considerable managerial, legal, political, and financial knowledge, all of which ideally would be expressed through a balanced temperament, a focused and incisive mind, a fierce consumer advocacy, and sophisticated communication skills.
It seems that Sleepy Hollow has relocated to the Congress of the United States.
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What do you think?
I would welcome your comments.

Tuesday, July 12, 2011

HUD: Updates RESPA

On July 11, 2011, the Department of Housing and Urban Development (HUD) issued updates to the Real Estate Settlement Procedures Act (RESPA).
This is a final rule (Rule) which makes technical corrections and certain clarifying amendments to HUD's RESPA regulations promulgated by a final rule published on November 17, 2008.
The majority of the regulations promulgated by the November 17, 2008, and became applicable on January 1, 2010.
Effective Date: August 10, 2011.
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SALIENT AMENDMENTS
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Good Faith Estimate (GFE) and Intent to Proceed
The applicant borrower must express an intent to continue with the application process.
The Rule amends § 3500.7(a)(4) and (b)(4) to provide that the applicant borrower must indicate an intention to proceed with the loan covered by the GFE received by the applicant borrower from the lender or mortgage broker before the lender or mortgage broker may charge additional fees.
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Good Faith Estimate (GFE)
Tolerances
Currently the applicable provision states that a loan originator is bound "within the tolerances provided in paragraph (e) of this section, to the settlement charges and terms listed on the GFE provided to the borrower, unless a [revised] GFE is provided prior to settlement consistent with this paragraph (f)."
However, the introductory paragraph inadvertently omits that the GFE does not remain binding indefinitely but expires 10 business days after the GFE is provided to the borrower if the borrower does not express an intent to continue with an application provided by the loan originator that provided the GFE, or expires after such longer period as may be specified by the loan originator pursuant to § 3500.7(c).
Although the expiration period of the GFE is clearly stated in paragraph (f)(4) of § 3500.7(f), HUD finds that clarity is enhanced by also adding this language to the introductory paragraph of § 3500.7(f).
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Changed Circumstances
Currently the applicable provision addresses changed circumstances affecting settlement costs, provides that the revised GFE may increase charges for services listed on the GFE but only to the extent that the changed circumstances actually resulted in higher charges.
However, the currently the applicable provision, which addresses borrower-requested changes, inadvertently omits that the revised GFE may increase charges listed on the GFE only to the extent that changed circumstances affecting the loan, or the borrower's requested change, actually increased those charges.
This rule therefore adds language that clarifies this limitation.
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Locked Interest Rate
HUD clarifies that whenever the borrower's interest rate is locked, a revised GFE must be provided to the borrower showing the revised interest rate-dependent changes and terms within 3 business days.
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Construction Loans
In revising § 3500.7(f)(6) of RESPA, HUD is adding the word "construction" to the phrase "new home purchases" so that it reads "new construction home purchases."
HUD believes that the content of this paragraph is clear that new home purchases refers to purchases of newly constructed homes, not simply any home that is new to a borrower. This interpretation is supported by the preamble to the November 17, 2008, final rule in which this regulatory provision was discussed.
While HUD believes the meaning of paragraph (f)(6) is clear, to remove any possibility of ambiguity the word "construction" is inserted between the words "new" and "home purchases."
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HUD-1 or HUD-1A Settlement Statements
Appendix: HUD-1 Instructions for Page 3
The instructions for the HUD-1, found at 73 FR 68243 of the November 2008 final rule, provide that the HUD-1 form is to be used as a statement of the actual charges and adjustments. If the borrower, or a person acting on behalf of the borrower, does not purchase a settlement service that was listed on the GFE (e.g., owner's title insurance), there should be no amount entered for that service in the corresponding line on Page 2 of the HUD-1, and the estimate of the charge from the GFE should not appear on the comparison chart on Page 3 of the HUD-1.
HUD has determined that the current instructions are not sufficiently clear on this point. Allowing loan originators to include on Page 3 of the HUD-1 charges from the GFE for settlement services that were not purchased could both induce loan originators to discourage consumers from purchasing settlement services (e.g., owner's title insurance) in order to gain padding in the 10 percent tolerance categories, and encourage loan originators to pad the 10 percent tolerance categories on the GFE with estimates of services that the consumer will not need in the transaction. HUD has previously addressed and clarified this issue in informal guidance.
Therefore, HUD is revising the first paragraph of the instructions for Page 3 of the HUD-1 to clarify that the amounts to be inserted in the comparison chart are those for the services that were purchased or provided as part of the transaction, and that no amount should be included on Page 2 of the HUD-1 for any service that was listed on the GFE, but which was not obtained in connection with the transaction.
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LIBRARY
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HUD: Real Estate Settlement Procedures Act (RESPA)
Technical Corrections and Clarifying Amendments
Federal Register - Vol. 76, No. 132
Monday, July 11, 2011
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