Trial Payment Plans for Loan Modifications and Partial Claims

On August 15, 2011, the U. S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (2011-28), entitled Trial Payment Plan for Loan Modifications and Partial Claims under Federal Housing Administration's Loss Mitigation Program.

The purpose of the trial payment plan is to confirm a borrower's readiness and ability to make regular monthly mortgage payments and avoid re-default.

This Mortgagee Letter (ML) identifies circumstances under which borrowers must successfully complete a trial payment plan, prior to the lender executing a loan modification or a partial claim action under the Federal Housing Administration's (FHA) Loss Mitigation Program.

In addition, the ML announced the time requirements for lenders to complete permanent loan modification and partial claim documents in order to receive an incentive fee.

• Additionally, the ML provides Appendix A: Reporting Requirements for Type II Special Forbearance / Trial Payment Plans.

• This ML supersedes Mortgagee Letters 2000-05 and 2002-17 with respect to guidance pertaining to trial payment plans.

• Relevant Mortgagee Letters: 2000-05, 2002-17, 2003-19, 2006-15, 2008-21, and 2009-35.

Effective: October 1, 2011

PREREQUISITES

The ML requires successful completion of a trial payment plan as a prerequisite for a lender executing a permanent standard modification and/or partial claim in the following situations:

• If a borrower has been delinquent (30 or more days) twice or more in the preceding 12 months;
• If a borrower has been delinquent for 90 days or more (three or more consecutive payments past due) in the preceding 36 months;
• If a borrower has defaulted within 90 days of a previous loss mitigation retention option (special forbearance, loan modification, and partial claim) executed in the past 12 months;
• If the financial analysis reflects a borrower has a net surplus income of less than 20 percent of total net income;
• If less than 14 months have elapsed since the origination of the loan;
• If the amount added to the loan balance in a loan modification or the amount of the partial claim exceeds 10 percent of the unpaid principal balance;
• If the borrower failed a trial payment plan for FHA's Making Home Affordable Program (FHA-HAMP); or
• If the borrower determines that a trial payment plan is necessary to demonstrate the borrower's ability to sustain the modified payment.

TRIAL PAYMENT PLAN GUIDELINES

The trial payment plan should be for a minimum period of three (3) months and the borrower should make at least three (3) full, consecutive monthly payments prior to final execution of the loan modification or the partial claim.

Reporting requirements are outlined in Appendix A of the ML.

In addition, under no circumstances may a lender include language in any loss mitigation documents which requires borrowers to waive their rights to be considered or approved for a loss mitigation option.

Loan Modifications

The rate for the trial payment plan and the permanent modified mortgage must be in compliance with Mortgagee Letter 2009-35, which defines the Market Rate to be "no more than 50 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date the permanent modification is executed. The weekly survey results are published on the Freddie Mac website. The Federal Reserve Board includes the average 30-year survey rate in the list of Selected Interest Rates that it publishes weekly in its Statistical Release H.15 (See Here).

The final payment under the permanent modification must be the same or less than the trial mortgage payment.

Accordingly, this ML amends the aforementioned Mortgagee Letter 2009-35 by requiring the permanent rate to be established when the trial payment plan is approved by the servicer.

The approval date is the date the servicer offers the trial payment plan to the borrower.
In addition, mortgages in Ginnie Mae's Mortgage Backed Securities (MBS) must meet Ginnie Mae's repurchase requirement(s), prior to executing final modification documents. See Here.

Partial Claims

For partial claims, the monthly payment during the trial period must be the same as the regularly scheduled payment.

The lender must service the mortgage during the trial period in the same manner as it would service a mortgage in forbearance.

TRIAL PAYMENT PLAN FAILURE

Foreclosure action must be suspended during trial payment plans.

In the event a trial payment plan fails, an additional 90-day extension is provided in which the mortgagee must commence or recommence foreclosure or initiate another loss mitigation option.

If the trial payment plan fails, before commencing or continuing a foreclosure, the lender must re-evaluate the borrower's eligibility for other appropriate loss mitigation actions.
A trial payment plan is considered to have failed and is deemed broken when any of the following occurs:

• The mortgagor vacates or abandons the property; or
• The mortgagor does not make the scheduled trial plan payment within 15 days of the trial payment plan due date.

AUTOMATIC EXTENSIONS

If a borrower is unable to complete a trial payment plan within the initial six-month time limit from the date of default (see 24 CFR § 203.355), the lender is allowed a 90-day extension of the foreclosure deadline provided the initiation of a loss mitigation option (including a trial payment plan) was begun prior to the expiration of the initial six month period.

Therefore, if there have been no other intervening delays (such as bankruptcy) this "automatic" extension will extend the six (6) month deadline to initiate foreclosure by 90 days.

To qualify for the automatic extension, the lender must have completed the loss mitigation evaluation required by 24 CFR § 203.605 and approved the appropriate loss mitigation action.

Documentation of this analysis must be maintained in the claim review file.

In addition, the loss mitigation initiative must be reported via the Single Family Default Monitoring System (SFDMS).

Dodd-Frank Act – Reformation and Regulations

Part I of a Three-Part Series on Financial Reform Legislation
By: Jonathan Foxx, President and Managing Director 
Published in National Mortgage Professional Magazine
First Published: August 2010

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."[1] Now only House and Senate approval was needed,[2] 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.

And, most significantly, the legislation’s centerpiece: the creation of a new agency, tucked into the Treasury and clearly under its purview:

· Bureau of Consumer Financial Protection (Bureau): Creating a regulatory and supervisory authority to examine and enforce consumer protection regulations with respect to all mortgage-related businesses, large non-bank financial companies, and banks and credit unions with greater than $10 billion in assets.

Some of these policies have been worthy of consideration, although others seem to be the result of reactive, political triage, and short-sighted (if not also short-term) fixes, without having given much thought to consequences, unintended or otherwise, on the consumer and the mortgage industry.

The Spinmeisters have already begun their Ode to Financial Reform! In this article, the first in a series of articles on the “landmark” legislation, we will un-spin and unpack the new law and seek to learn more about exactly what the Dodd-Frank Act (Act) has wrought for the mortgage industry.

Housing bubble? What housing bubble?

“Homes that are occupied may see an ebb and flow
in the price at a certain percentage level,
but you’re not going to see the collapse that you see
when people talk about a bubble.”
Barnie Frank (D-MA) June 27, 2005[3]

The Act spans to 2,319 pages and affects almost every aspect of the financial services industry in the United States. Just the sheer size of the Act is indicative of the complexity and detailed, interlocking, regulatory authorities and mandates involved.[4] Compare this with the 31 pages of the Federal Reserve Act which became law almost one hundred years ago. The law’s size also should be taken to reflect the enormous increase in regulations in the intervening years that must be factored into or subsumed under the Act. Consider the following chart:[5]

 

Major Financial Legislation
Number of Pages

Perhaps it would ultimately be worth all the effort put into such a prodigious and voluminous legislation if its purported objective – prevention of another financial crisis – could be expected to result from enforcement of this law. Unfortunately, it won’t!

The Act does very little to prevent the next financial crisis because, among other things, it side-steps the “too big to fail” issues, for instance, by not imposing size limits on any financial institution; offers virtually no resolution to the dysfunctional operations of the GSEs, Freddie Mac and Fannie Mae; and, fails to reinstate the Glass-Steagall Act’s wall of separation between “utility” and “casino” banking. Although it will not prevent the next financial tsunami or Black Swan,[6] implementation of the regulatory requirements of the Act will dramatically and permanently affect the way residential mortgages are originated in this country.

And if ineptitude, complacency, and failure to implement existing regulations were hallmarks of the regulatory environment prior to the Act, how will we know in advance how things are going with all these new regulatory requirements? After all, thanks to an unnoticed provision in the Act, the Securities and Exchange Commission (SEC) is now declaring itself exempt from Freedom of Information Act (FOIA) requests, one of the bulwarks of government transparency. Perhaps other government entities involved in the Act’s implementation will stake out similar positions.[7] Of course, there are periodic reports to Congress on many issues and programs; however, Congress is the domicile of politicians and they often find ways to underplay failures and exaggerate successes.

Residential Mortgage Loan Provisions
- New Rules -

 

Analyzing this vast financial and mortgage reform legislation is a daunting prospect. Over this series of articles, we will highlight many of the Act’s components. The articles in this series on the Dodd-Frank Act are meant to provide an overview. However, this legislation is extremely detailed and extensive. Therefore, for guidance and risk management support, I recommend that you consult a residential mortgage compliance professional in developing policies and procedures to implement the Act’s requirements.

Essentially, the following matrix provides a generalized outline of the salient provisions of the Act that directly affect residential mortgage loans originations.

For the remainder of this article, we will be reviewing the Mortgage Loan Regulatory Provisions and, where relevant, its integration into other parts of the Dodd-Frank Act.

Coordinating Consumer Complaints

On August 12, 2011, the Consumer Financial Protection Bureau (CFPB) announced that it had entered into an agreement with the Federal Trade Commission (FTC), allowing the CFPB to access consumer complaints within the FTC's Consumer Sentinel system.

This agreement implements a Dodd-Frank Act provision that requires the CFPB to share consumer complaint information with the FTC and other state and federal agencies. In addition, the CFPB will share complaint information that it receives from consumers with the Sentinel database, subject to appropriate privacy protections and access restrictions. 

According to the CFPB, the "goal is to make sure agencies coordinate their enforcement of consumer financial protection laws."

Consumer Sentinel

The FTC's Consumer Sentinel is used by law enforcement to track and respond to consumer complaints. It is an online database of consumer complaints maintained by the FTC. The complaints in the database touch on many financial matters, from advance-fee loans to credit scams, from debt collection to credit reports, and more. The database is accessible only to law enforcement.

Among the government entities that are using Consumer Sentinel are several state Attorneys General (including Idaho, Michigan, Mississippi, North Carolina, Ohio, Oregon, Tennessee, and Washington State), the U.S. Postal Inspection Service, and the FBI's Internet Crime Complaint Center.

Non-governmental organizations include the Lawyers' Committee for Civil Rights, MoneyGram International, the National Consumers League, Publishers Clearing House, Xerox Corporation, and the Better Business Bureaus.

Visit Library

Consumer Financial Protection Bureau
Coordinating Consumer Complaints
Kent Markus
Deputy Director/Enforcement
August 12, 2011

HUD: Administrative Actions - Avoiding the Mortgagee Review Board

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

The Department of Housing and Urban Development (HUD) has published the Administrative Actions taken by the Mortgagee Review Board (MRB) against certain FHA mortgagees. The period covered in the issuance is October 23, 2009 to February 7, 2011.

The MRB has the authority to issue Settlement Agreements, Civil Money Penalties, Withdrawals of Federal Housing Administration (FHA) Approval, Suspensions, Probations, Reprimands, and Administrative Payments.

Or to put this in more modern parlance, the MRB is empowered to enforce administrative sanctions, including reprimand, probation, suspension or withdrawal of approval, cease-and-desist orders, and civil money penalties

Trust me - you don't want to go there!

What May Yet Happen

In representing clients before the MRB, I can vouch for the exhaustive due diligence that is virtually mandated, the considerable costs involved, the experienced legal counsel and requisite regulatory compliance expertise that is needed, and the significant adverse impact on an FHA lender's ability to conduct or even continue in business.

It's easy to get lulled into a sense of false confidence by thinking that some violations are minor. But if the MRB gets involved, those minor violations will become a part of the causes for administrative action, and even in some instances the proximate cause of the administrative action.

Nothing should be considered a "minor" violation, when originating HUD/FHA mortgage loans.

So it is instructive to take note of the causes for administrative action against a HUD-approved mortgagee. Ignorance is a futile defense, when it comes to the causes that can affirmatively contribute to disciplinary action.

It should also be noted that the MRB withdrew FHA approval from 123 mortgagees because those lenders were not in compliance with HUD's annual recertification requirements.

Below is a list of 50 causes upon which the MRB has taken administrative action. In many cases, the civil monetary penalties were very large.

50 Causes of Administrative Actions
A Very Partial List

1) Failed to maintain and implement a Quality Control Plan.

2) Failed to implement and follow HUD/FHA's Home Equity Conversion Mortgage (HECM) program requirements.

3) Charged borrowers excessive and duplicative fees.

4) Failed to disclose all charges to borrowers on the Good Faith Estimates.

5) Submitted a false certification to HUD on its Title II annual Verification Report.

6) Failed to timely notify HUD that one of its officers had been indicted for an offense that reflected upon AMC's responsibility and integrity and its ability to participate in HUD programs.

7) Failed to timely notify HUD that a state banking department suspended the mortgagee's mortgage origination license.

8) Failed to provide a disclosure of a Controlled Business Arrangement when a settlement service provider was involved in the loan transaction with whom the lender had an ownership or other beneficial interest.

9) Failed to report serious violations identified during a QC review.

10) Failed to ensure that HUD/FHA's Construction-Permanent Mortgage Program requirements were met.

11) Failed to ensure that maximum mortgage amounts were properly calculated, resulting in over-insured mortgages.

12) Failed to ensure that there were no discrepancies between disbursements and/or sales prices on HUD-1 settlement statements or documents used to calculate loan amounts.

13) Failed to ensure that appraisal report findings were consistent or otherwise acceptable; and failed to ensure that properties located in Special Flood Hazard Areas were properly covered with flood insurance.

14) Approved loans with debt-to-income ratios that exceeded HUD/FHA standards without significant compensating factors.

15) Failed to properly calculate and/or document the income used to qualify borrowers.

16) Improperly omitted recurring liabilities from underwriting analyses.

17) Failed to properly document the source of gift funds or assets; failed to ensure that the maximum insured mortgage amount was properly calculated, resulting in an over-insured mortgage.

18) Charged unallowable fees to mortgagors and collected processing fees from borrowers which it then paid directly to a contract processing company.

19) Failed to include mandatory elements in its adopted QC Plan.

20) Failed to conduct mandatory QC servicing reviews.

21) Failed to timely notify HUD of changes in the mortgagor and/or servicer of FHA-insured loans.

22) Failed to timely notify HUD and terminate insurance after FHA-insured loans were paid in full.

23) Failed to properly report loan statuses and reasons for default into HUD's Single Family Default Monitoring System.

24) Failed to notify HUD within ten days of its entrance into two consent orders with a state banking department.

25) Failed to notify HUD within ten days of changes affecting its standing as an approved institution.

26) Submitted false certifications to HUD in connection with transactions in which the mortgagee allowed non-employees to originate FHA loans.

27) Violated HUD/FHA minimum staffing requirements by allowing one of its branch offices to operate without a branch manager.

28) Implemented a written employee policy and executed contractual agreements that violated HUD/FHA requirements.

29) Processed a HECM loan prior to the borrower's receipt of HECM counseling.

30) Failed to file Home Mortgage Disclosure Act and Regulation C-compliant reports for calendar certain years.

31) Failed to ensure that loan applications were processed by authorized employees who worked exclusively for the mortgagee.

32) Distributed an advertisement that misrepresented HUD/FHA's HECM program requirements in a mailer envelope that simulated a government form.

33) Failed to notify HUD that the mortgagee had ceased its business operations.

34) Approved a loan that exceeded HUD's maximum mortgage amount.

35) Failed to comply with a condition of the mortgagee's FHA approval and submitted false and misleading information to HUD in connection with the mortgagee's application for FHA approval.

36) Failed to adequately document the income used to qualify the borrower.

37) Used conflicting information in originating and obtaining HUD/FHA mortgage insurance.

38) Failed to document the source of funds used for the down payment and/or closing costs.

39) Omitted liabilities from the underwriting analysis without adequate documentation.

40) Failed to analyze borrowers for loss mitigation in a timely manner.

41) Failed to perform management/foreclosure reviews.

42) Failed to input accurate codes into HUD/FHA's Single Family Default Monitoring System.

43) Failed to foreclose on properties in accordance with HUD/FHA guidelines.

44) Failed to ensure QC reviews were completed for early payment defaults.

45) Engaged in a prohibited branch arrangement by allowing a separate mortgage company to function as a branch office.

46) Failed to uphold its agreement with HUD to only originate direct mortgages through its direct lending branch.

47) Failed to register a branch office.

48) Posted the HUD seal on a website maintained by a loan officer.

49) Failed to notify HUD of reportable business changes.

50) Failed to ensure that documents were not signed in blank.

LIBRARY

Department of Housing and Urban Development

Mortgagee Review Board: Administrative Actions

Federal Register: 76/146

July 29, 2011