Resecuritizing the RMBS Portfolio

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

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

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

Re-Packaging Risk

 Here is a brief overview of this resecuritization plan:

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

Some Notes

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

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

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

LIBRARY

Comptroller of the Currency (OCC)

Resecuritization of Certain
Residential Mortgage-Backed Securities

Interpretive Letter #1133

September 2011

Mortgage Fraud Report: Upward Trend

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

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

We have reported on FinCEN's MLF SARs analyses.

A large majority of the MLF SARs examined in the second quarter involved mortgages closed during the height of the real estate bubble.

In other words, these SARs are filed on activity that occurred more than two years ago. Many SARs are being filed because financial institutions are uncovering fraud as they sift through defaulted mortgages.

Upward Spike

The upward spike in second quarter MLF SAR numbers is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Omitting these particular submissions, 2011 Q2 MLF SAR numbers would be down 3% from the prior year.

FinCEN noted that 81% of the MLF SARs filed during the quarter involved suspicious activities that occurred before 2008, and 63% involved suspicious activities that occurred four or more years ago. For both 2011 Q2 and 2010 Q2 filings, a majority of reported activities took place between 2006 and 2008.

The report contains a section on reported mortgage fraud activities 90 or fewer days old, with emphasis on so-called "debt elimination" scams, identity theft, Social Security Number (SSN) fraud, and false statements.

2011 Q2 Sample SAR Statistics
Suspicious Activities Described by Filers

The FinCEN report shows the following areas of fraud:

• Misrepresenting income, occupancy, debts assets
• Debt elimination scams
• Scams involving the fraudulent use of social security numbers
• Identity theft
• False statements and false documents
• Fraud involving short sales and appraisals
• Forged rescission of notice of default
• Advance fee scams
• Buy and bail schemes
• Money laundering

Mortgage Loan Fraud SAR Filings
Relative to All SAR Filings

In 2011 Q2, filers submitted 29,558 Mortgage Loan Fraud SARs (MLF SARs), an 88% increase over the previous year.

The total number of all SARs filed in 2011 Q2 increased by 16%.

And 15% of all SARs filed in 2011 Q2 indicated MLF as an activity characterization, up from 9% in 2010 Q2.

Visit Library for Issuance

FinCEN: Mortgage Loan Fraud Update
 
Suspicious Activity Report Filings  
In 2nd Quarter 2011  
September 28, 2011

Riding the Horse Backwards

At a DC conference, dauntingly titled Mortgage Regulatory Forum, Barney Frank, the Congressman from Massachusetts whose name eponymously joins Dodd in the landmark Dodd-Frank Act, spoke about a "revolt" against the risk retention regulations embodied in the Qualified Residential Mortgage rules required by that Act.

We've heard about this risk retention requirement by its euphemistic cognate, rather barbarically described as to "keep skin in the game." I will be publishing a comprehensive article soon about the Act's provision regarding this "skin in the game" mandate. And I will see that you get a copy of the article. For the time being, though, maybe we should reflect a bit on Congressman Frank's worries.

But first, before speculating on Frank's musings about a revolution, let's begin with a story.

Snideley Whiplash and Dudley Do-Right

You might remember the cartoon character Dudley Do-Right of the "Dudley Do-Right of the Mounties" series, a part of the Rocky and Bullwinkle show. Dudley was forever saving Nell Fenwick, Mountie Inspector Fenwick's beautiful daughter, from the machinations of the evil Snideley Whiplash and Tuque, his equally nefarious sidekick. Whereas Dudley is garbed in the bold red uniform with shiny gold buttons of the Royal Canadian Mounted Police, Snidely wears black on black: suit, cape, stove pipe hat, boots - even a black, twisted, handlebar moustache.

Snidely was bent on doing naughty things to the hapless Nell, like tying her to a railroad track. And Snideley's arrogance was only exceeded by his sheer joy when conniving some evil exploit to be perpetrated on the innocent.

But Dudley would save Nell, usually just by dumb luck, free her from the railroad tracks, and boldly stand before her in a puffed-up, prideful "my hero" pose. And then Nell would thrillingly come running into Dudley's open arms, thanking him profusely for saving her!

Actually, no. Nell never did run into Dudley's arms. That just never happened. Not even once!

In fact, Nell would show her gratitude not to Dudley but to Dudley's horse, aptly named Horse, also dressed up like a Mountie. Dudley often rode Horse backwards, galloping boldly to the scenes of Snideley's pernicious schemes.

Even when Dudley had freed Nell from the chains holding her to the railroad tracks, she would hardly notice him. Instead, she gently stroked Horse's snout and elicited his big, charming, toothy smile. For the most part, Nell ignored Dudley, even when he saved her from Snideley's perilous plans.

Poor Dudley Do-Right! He really never did get the grateful recognition he thought he deserved. He never did win Nell's hand in romance. And yet Dudley never gave up on seeing himself as the bold hero responding with courageous alacrity to Nell's call of distress!

"Skin in the Game"

In a proposed rule issued by federal financial regulators, and pursuant to Dodd-Frank, there will soon be a requirement for sponsors of certain asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities. For "asset-backed securities" read mortgage securitizations. This is being referred to as "risk retention," or that "skin in the game" phrase I mentioned above.

According to those in favor of risk retention, the purpose of this rule is to coalesce underwriting guidelines into an incentivized alignment with securitizers and investors, through promoting a certain set of underwriting standards. The risk retention provision would exempt asset-backed securities that are collateralized exclusively by residential mortgages that are eligible as "qualified residential mortgages," now known, of course, as QRMs.

Many regulators have signed on to the QRM and risk retention provisions, since their view essentially is that "credit risk retention," the name given to the QRM concept, should be required because they believe it encourages prudent underwriting and securitization.

However, consider this: it is simply not known if 5% is even the appropriate amount of risk to be retained in order to align incentives! Indeed, there is scant statistical support for any such percentage whatsoever.

From a Distance

From a high altitude of consideration, the composite criteria of a QRM are the "plain vanilla" variety perfectly familiar to residential mortgage loan originators: 80% LTV; 20% down payment plus closing costs; 28% front-end ratio, and 36% back-end ratio.

Underwriting to the QRM guidelines means that securities backed by QRMs will not require securitizers to retain credit risk. Of course, there's far more to what constitutes a QRM and how it is structured. 

Recently, I spoke with a supervising prudential regulator, an old friend, and asked if QRM will crowd out the development of other products that could serve the consumer. His view was that the QRM criteria allow for innovation and, in any event, if they adversely affect a consumer's access to credit, then QRM standards may need to be changed. I must admit, I do not find that response very satisfying.

Markets are active, not passive. Much too often, though, regulatory requirements tend to be reactive, rather than responsive, mostly due to politicians catering to their constituencies and lobbyists. Since when did politicians and regulators so fully replace market action or override underwriting models that lenders undertake as part of making a market, pricing in risk, and developing loan products that respond to consumer needs?

"Revolt"

Congressman Frank seems to have concluded that the recent economic meltdown was largely caused by the housing bubble - presumably, that would be the housing bubble that he declared would never take place. So, "credit risk retention" is now being advanced as a policy that can help to avoid another housing bubble.

Here's the prevailing narrative: in 2008 and 2009, we went into the Great Recession, and now we're experiencing high unemployment and weak growth. Was the housing bubble the ultimate cause?

Most people seem to think so. They believe that the housing bubble burst in 2006 and led to a severe financial crisis in 2008, intensifying a recession that had begun in December 2007. And the Fed did what it could, through targeting inflation to prevent the crash, but could not stem the tide.

Here's another narrative, one actually supported by facts: the housing crash did not lead directly to a recession or high unemployment, although it seems to have been a proximate cause.

More than two-thirds of the decline in housing construction happened between January 2006 and April 2008. During that period, though, the unemployment rate rose only slightly, from 4.7% to just 4.9%. And statistics demonstrate that most of the workers who lost jobs in housing construction were subsequently reemployed in other fields. It wasn't until October 2009 that unemployment soared to 10.1%, with job losses spread out across almost all sectors of the economy.

Indeed, the financial crisis did have its roots in the housing bubble, and there were consequent systemic failures of financial institutions, yet for some odd reason this situation did not set off alarm bells at the Fed until much too late.

There is a world of difference between a proximate cause and the ultimate cause.

Bottom Line: monetary policy failed to predict the problem and the Fed did not respond soon enough.

Fallacy of the "Blame Game"

The assumptions of the first narrative have dominated politics and have led to the QRM remedy.

Thus it is that we have this statement from Mr. Frank:

"I am disappointed at this revolt against risk retention that was so clearly at the center of this."

"All the other problems we had ... they all centered on the system for selling to other people loans that shouldn't have been made in the first place."

"It's simply not possible with any conceivable number of regulators to monitor every loan. If the people making the loans do not have an incentive not to lend to people who can't repay, there is no way we will prevent those kinds of loans from being made." (My emphasis.)

That sweeping statement is certainly not supported by the facts. I have discussed this fallacy of the "blame game" in detail elsewhere, for instance in my three-part series on the Dodd-Frank legislation.

Yet the "revolt" is not just coming from lenders. Consumer advocacy groups want to ensure homeownership for qualified borrowers among low and middle income families, without having to be turned away due to a market that has been deincentivized from lending to them.

Nell and the Horse

Maybe there was a really good reason why Nell preferred to show her gratitude to the Horse, rather than to drape herself around Dudley Do-Right's neck in gleeful appreciation and unbounded thanks.

I wonder if you could suggest what Nell's reason might have been.

What do you think?

Please feel free to comment!

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

Ability-to-Repay: The Basics and a Chart

Commentary By: Jonathan Foxx
President and Managing Director of Lenders Compliance Group

On May 11, 2011, the Federal Reserve Board (FRB) issued a proposed rule (Rule) to implement ability-to-repay requirements for closed-end residential loans.[i] The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank).[ii] Comments on the Rule are to be received by no later than July 22, 2011.[iii] Having published the proposed Rule, the FRB retired from its involvement in this matter and handed over its rulemaking authority in the subject statute to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.[iv]

As a revision to Regulation Z (the implementing regulation of the Truth in Lending Act), the Rule requires creditors to determine a consumer’s ability to repay a mortgage before making the loan and would also establish minimum mortgage underwriting standards. The Rule applies to any consumer credit transaction secured by a dwelling, except an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan or ‘‘bridge’’ loan with a term of 12 months or less. [v] It appears that the Rule applies to purchase money and refinances, but not modifications of existing mortgages. There is a prohibition on prepayment penalties unless the mortgage is a prime, fixed rate, qualified mortgage - and unless the amount of the prepayment penalty is limited.

The Rule sets forth limits on prepayment penalties, the lengthening of the time creditors must retain records evidencing compliance with the ability-to-repay and prepayment penalty provisions, a prohibition to evading the Rule by structuring a closed-end extension of credit as an open-end plan, the delineation of new terms, procedures, and their resulting implications, and, very importantly, the means by which the Rule claims to offer tools to prevent likely default and mitigate risk for creditors and others who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain.

Complying with the requirements of the ability-to-repay Rule is essential, because borrowers in a foreclosure proceeding will likely claim that the creditor failed to comply with the Rule as a defense by way of recoupment or set off, without regard to the normal statute of limitations under the Truth-in-Lending Act (TILA).[vi] A violation of the Rule subjects the creditor to the TILA civil monetary penalties, plus the same enhanced civil remedies that apply to violations of TILA’s high-cost loan rules,[vii] and TILA also would authorize state attorneys general to bring actions for violations of the Rule for a period of up to three years.[viii]

A loan that is a covered transaction must qualify, among other things, as a “qualified mortgage” if the creditor wishes to include a prepayment penalty in the loan.

The Rule provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a ‘‘qualified mortgage,’’ which does not contain certain risky features and limits points and fees on the loan. Furthermore, one feature of a higher-risk mortgage loan (i.e., subject to enhanced appraisal requirements under Dodd-Frank § 1471) is the loan may not be a qualified mortgage.[ix]

There are four (4) options to the determination of compliance with the Rule. The Rule refers to these origination options as “methods” and equips each method with a description of (1) limits on the loan features or term, (2) limits on points and fees, (3) underwriting requirements, and (4) payment calculations.

Option # 1: General Ability-to-Repay Standard

A creditor can meet the general ability-to-repay standard or test by:

• Considering and verifying the following eight (8) underwriting factors:

1. Income or assets relied upon in making the ability-to-repay determination;

2. Current employment status;

3. The monthly payment on the mortgage;

4. The monthly payment on any simultaneous mortgage;

5. The monthly payment for mortgage-related obligations;

6. Current debt obligations;

7. The monthly debt-to-income ratio, or residual income; and

8. Credit history.

• Underwriting the payment for an adjustable-rate mortgage based on the fully indexed rate.

Comment: This is an option that will be carefully reviewed by plaintiff’s counsel in an action to challenge a creditor’s compliance with the Rule. Consequently, enforcing compliance with the Rule will require fully vetted, tested, and continually updated, written procedures to govern every aspect of the application and underwriting process. Without clear and unambiguous policies and internal enforcement of appropriate policies and procedures, the creditor is allowing exposure to such a challenge. This option contains rigorous underwriting criteria and requires unmitigated, fact-based evaluations. Option # 1- the ability-to-repay test - is somewhat unstable (due to the invariant rigors of procedural compliance) though a relatively favorable methodology for the creditor, even if the loan flow process leaves very little room for error.

Option # 2: Qualified Mortgage (QM)

A creditor can originate a “qualified mortgage,” which provides special protection from liability. Two alternative definitions of a “qualified mortgage” are being considered by the CFPB:

Alternative # 1: Provides a legal safe harbor and defines a “qualified mortgage” as a mortgage for which:

· The loan does not contain negative amortization, interest-only payments, or a balloon payment, or a loan term exceeding 30 years;

· The total points and fees do not exceed three (3%) percent of the total loan amount;

· The income or assets relied upon in making the ability-to-repay determination are considered and verified;[x] and,

· The underwriting of the mortgage (a) is based on the maximum interest rate that may apply in the first five years, (b) uses a payment scheduled that fully amortizes the loan over the loan term, and (c) takes into account any mortgage-related obligations.

Alternative # 2: Provides a rebuttable presumption of compliance and would define a “qualified mortgage” as including the criteria listed under Alternative # 1 (above) as well as additional underwriting requirements from the general ability-to-repay standard (see Option # 1). In any event, under Alternative # 2, the creditor would also have to consider and verify:

· The consumer’s employment status;

· The monthly payment for any simultaneous mortgage;

· The consumer’s current debt obligations;

· The monthly debt-to-income ratio or residual income; and

· The consumer’s credit history.

Comment: Two alternatives are given: in Alternative # 1, to obtain a legal safe harbor, the creditor must consider and verify the borrower’s current or reasonably expected income or assets to determine the borrower’s repayment ability; and, in Alternative # 2, to obtain a rebuttable presumption of compliance, the creditor must consider and verify the borrower’s current or reasonably expected income or assets (i.e., other than the value of the dwelling in question), the borrower’s current employment status (assuming the creditor relies on employment income), the borrower’s monthly payment on any simultaneous loan, the borrower’s current debt obligations, the borrower’s monthly DTI or residual income, and the borrower’s credit history. It should be noted that the second alternative is for the most part similar to the ability-to-repay test.

Consumer Financial Protection: Bureau or Bureaucracy?

Part III of a Three-Part Series on Financial Reform Legislation
Dodd-Frank: Legislation - Reactive or Proactive
Author: Jonathan Foxx
Published in National Mortgage Professional Magazine
First Published: October 2010

Although Elizabeth Warren has left the Consumer Financial Protection Bureau, her views continue to provide inspiration to its management and staff. Perhaps it would be wise to read the article I wrote last October, outlining the CFPB, its mandates, and its prospects.

__________________________________________

Society is founded not on the ideals but on the nature of man

and the constitution of man rewrites the constitutions of states.

But what is the constitution of man?[i]

Will and Ariel Durant

In the first two parts of this 3-part series,[ii] we have explored the basic structure of the new financial reform law, known as the Dodd-Frank Act (“Act”), as it affects residential mortgage loan originations.[iii] We have already given consideration to the many mortgage loan regulatory provisions that the Act covers[iv] and especially to the Mortgage Reform and Predatory Lending Act, a primary component of this landmark financial legislation.[v]

Now, we will turn our attention to the very core of the Act itself vis-à-vis the mortgage industry and consumer financial protection: the Bureau of Consumer Financial Protection (known also as the “Consumer Financial Protection Bureau,” or “CFPB,” and hereinafter as “Bureau”).[vi]

But first, a Thought Experiment.[vii]

A vast, entangled array of very small and sleek wires, super strong magnets, and very wide and long cables extend out omnidirectionally – all of which lines and circuits are laid throughout a network of interlocking, electrically generated devices that are held in place in their respective positions on a shaky iron scaffold by fraying, single-knotted ropes. The devices are needed to power vital and critical services to a community. But, due to wear and tear on their bindings, some devices are about to break free, threatening to pull down with them the entire array of wires, magnets, cables, and other devices. Any device can plummet at any time. Before it is too late, all the lines must be disentangled, traced to each of the devices, and rerouted to a new and more stable grid; plus, the devices themselves must be transferred, one by one, to the new grid without damaging them, and then reconnected to their lines. But the collapse can take place at any time. A “crisis” looms!

So, how are you going to accomplish this heroic task quickly and effectively?

Now let’s consider this analogue: the energy source is Constitutional authority; the grid is the financial regulatory framework; wires and cables are the ways and means that implementing regulations affect one another; magnets are the legal foundations (i.e., case law precedents (stare decisis), statutes (federal and state), Constitutional laws or rights) on which all subject enumerated laws (see below) rest; devices are the existing regulations; and ropes are the various governmental agencies that are charged with enforcement of and monitoring compliance with specific implementing regulations.

By the end of this article, I hope you will have decided how best to solve the above-described and admittedly convoluted “crisis.” This article and the preceding articles in this series outline how Congress decided!

Please keep in mind that this series on the Dodd-Frank Act is meant to provide an overview. However, the legislation itself is extremely detailed and extensive. Therefore, for guidance and risk management support, I strongly recommend that you consult a risk management firm, residential mortgage compliance professional, or regulatory counsel to develop policies and procedures to implement the Act’s requirements.

One Bureau, Many Bureaucrats

Nothing is more destructive of respect for the government

and the law of the land than passing laws

which cannot be enforced.[viii]

Albert Einstein

There are numerous existing consumer protection laws that will be included in the transfer to the Bureau by July 21, 2011, the Designated Transfer Date,[ix] thereby giving it exclusive rulemaking and examination authority.[x]

These “enumerated laws” include:[xi]

• Alternative Mortgage Transaction Parity Act (AMTPA)[xii]
• Community Reinvestment Act (CRA)[xiii]
• Consumer Leasing Act (CLA)[xiv]
• Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)[xv]
• Equal Credit Opportunity Act (ECOA)[xvi]
• Fair Credit Billing Act (FCBA)[xvii]
• Fair Credit Reporting Act (except with respect to sections 615(e), 624 and 628) (FCRA)[xviii]
• Fair Debt Collection Practices Act (FDCPA)[xix]
• Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)[xx]
• Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)[xxi]
• Home Mortgage Disclosure Act (HMDA)[xxii]
• Home Ownership and Equity Protection Act (HOEPA)[xxiii]
• Real Estate Settlement Procedures Act (RESPA)[xxiv]
• S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)[xxv]
• Truth in Lending Act (TILA)[xxvi]
• Truth in Savings Act (TISA)[xxvii]
• Omnibus Appropriations Act– Section 626 (OAA)[xxviii]
• Interstate Land Sales Full Disclosure Act (ILSFDA)[xxix]

As I have discussed elsewhere, the Bureau would 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, would retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General would be empowered to enforce federal laws under the Bureau (subject to any existing limitations in the laws to be transferred to the Bureau's authority).[xxx] And 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).[xxxi]

Lenders Compliance Group Adds Two New Directors

I am pleased to inform you that Lenders Compliance Group, Inc. today joined forces with Abrams Garfinkel Margolis Bergson, LLP. 

Together, our two firms will build on existing tools, processes, risk assessment analyticals, and resources to provide a "best practices" approach to residential mortgage compliance.

This strategic alliance will offer the most comprehensive, hands-on, mortgage risk management guidance to the mortgage industry. 

I would like to tell you more about this exciting alliance.

Strategic Alliance

Lenders Compliance Group (LCG) is a nationwide risk management firm, and Abrams Garfinkel Margolis Bergson (AGMB) is a national law firm.

Both firms offer regulatory guidance to members of the real estate and banking industries.  

LCG is a national company that is widely known to be a pioneer in outsourcing and auditing solutions for residential mortgage compliance. The organization consists of Directors, Group Administrators, Attorneys, Compliance Consultants, Former Federal and State Regulators, Credentialed Auditors, and Subject Matter Experts in all areas of mortgage risk management.

And Lenders Compliance Group provides a suite of services for all areas of mortgage banking, such as loan audit analytics, research, regulatory compliance guidance, loan origination channel and product development, mortgage quality control, and due diligence reviews.

AGMB has extensive experience in representing its clients in all aspects of residential and commercial real estate and lending transactions.  A significant portion of AGMB's practice is dedicated to advising its clients on compliance, licensing and regulatory issues. In particular, Abrams Garfinkel Margolis Bergson represents mortgage banks, mortgage brokers, and real estate brokers on the vast array of laws and regulations which affect their businesses.

Two New Directors

Neil Garfinkel, named partner of AGMB and the head of its real estate and banking practices, is joining LCG as a Director of Legal and Regulatory Compliance and Real Estate Brokerage Compliance.

Michael G. Barone, head of regulatory compliance for AGMB, is joining LCG as a Director of Legal and Regulatory Compliance.

Comments: Neil Garfinkel

"After working with Jonathan Foxx on a variety of matters through the years it is clear that Jonathan and LCG provide a wealth of information and unprecedented access to mortgage risk management support within the mortgage banking and mortgage brokerage industries.

The procedures and requirements for originating residential mortgage loans are experiencing enormous changes and will continue to do so for many years to come. This alliance ensures that AGMB and its clients are well versed and represented, with respect to all regulatory compliance issues affecting their businesses.

We are excited to bring together our resources and provide the mortgage industry with 'best practices' solutions that strengthen our clients and the industry."

Comments: Jonathan Foxx

"Abrams Garfinkel is a well-respected leader in providing legal and regulatory counsel.
The mortgage banking and mortgage brokerage industries have needed appropriate, affordable resources to implement compliance solutions that reflect reliable and accurate best practices.

So this kind of alliance is somewhat unique to mortgage banking and mortgage brokerage. It offers a 'best practices' approach for our respective clients: top legal talent at AGMB who are experienced in mortgage banking and mortgage brokerage combined with top risk management professionals at LCG who are experienced in all areas of regulatory and mortgage banking compliance.

Our suite of auditing and due diligence services further supports these cost-effective efforts."

Some Thoughts on Best Practices

We all know that best practices are used to maintain excellence through self-assessment or benchmarking. But it is far more than that: to effectuate change a cultural shift often must take place within a business. Our clients respect best practices and seek ways to implement them. Compliance support and best practices are at the basis of bringing about a healthy and vibrant business environment.

However, the mortgage banking industry should continue to invigorate its commitment to best practices with respect to compliance solutions. It was with this purpose in mind that I founded the Association of Residential Mortgage Compliance Professionals, now at over 325 members. The ARMCP provides a forum for advocacy as well as a means to strengthen the mortgage industry from within. And I developed the CORE® matrix, now an industry standard that is used to evaluate the effectiveness of a financial institution's regulatory compliance implementation.

In this new stage in the continuing growth of Lenders Compliance Group, I am pleased to join forces with Abrams Garfinkel Margolis Bergson, and I welcome Neil Garfinkel and Michael Barone, our two new Directors.

Together, we will continue to work toward providing the most reliable, residential mortgage compliance support to our clientele as well as to support the growth and stability of the mortgage industry.

Press Release

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

MERS, Fraudulent Practices, and TILA Time Limits to Foreclosure

A recent ruling by the U.S. Court of Appeals (Ninth Circuit), on September 7, 2011, rejected a claim by consumers to have been the victims of fraudulent mortgage loan practices because they were unable to avoid the effects of the statute of limitations on their Truth in Lending Act (TILA) claims.

The essence of the consumers' charges was that they were never properly informed of the operations of the Mortgage Electronic Registration System (MERS) and that some of MERS's activities were fraudulent. Their efforts to invoke equitable tolling and equitable estoppel were both rejected by the Court.

This class action lawsuit, Cervantes (et al) v. Countrywide (et al), is available in our Library.

The following outline is a brief description of this case.

Synopsis

• Spanish speaking consumers who were given mortgage loan documents in English were not entitled to have the statute of limitations on the Truth in Lending Act claims tolled.

• Equitable tolling was possible only for consumers who exercised due diligence but still were unable to discover the basis of their claims.

• There was no reason the consumer could not have obtained a translation of the loan documents at an earlier time.

MERS

This class action challenges origination and foreclosure procedures for home loans maintained within the Mortgage Electronic Registration System (MERS).

It is worth noting the lengthy and detailed description of MERS that the Court provides in its finding.

MERS was described by the court as a private electronic database used by lenders and servicers to track the assignment of changes in loan ownership and servicing rights.

MERS becomes the legal owner of the mortgage loan and tracks successive assignments of the loan's beneficial ownership in the database so that it is unnecessary to record the later assignments in the county land records.

However, according to the consumers, this practice impermissibly separated the trust deed or other security instrument from the loan note.

They also claimed that MERS' asserted beneficial ownership of the security instrument was a "sham" because MERS had no financial interest in the instrument. This prevented MERS from being involved in any foreclosure activities.

In addition to their state-law (Arizona) claims objecting to the foreclosure, the consumers asserted claims under the Truth in Lending Act.

Statute of Limitations in TILA

TILA claims are subject to a one-year statute of limitations that begins to run when the loan documents are signed.

According to the Court, the lawsuit had not been filed until three years after the loans were made. 

This meant that the suit was untimely unless there was some reason to excuse the lateness.

The consumers put forward two theories for this tardiness:

• equitable tolling, and 
• equitable estoppel.

Equitable Tolling

The statute of limitations could be tolled - that is, suspended - for a period during which the consumers were unable to obtain information vital to their claims despite making appropriate efforts.

According to the consumers, equitable tolling was appropriate because they spoke only Spanish and were given loan documents only in English.

The court rejected this position because they had not described any circumstances beyond their control that prevented them from having the loan documents translated.

Equitable Estoppel

Equitable estoppel could have actually helped the consumers if they could show that the mortgage companies being sued had engaged in conduct over and above the claimed fraudulent scheme that prevented the consumers from filing suit within the one-year limit, the court said.

However, the consumers had merely claimed that the lenders had fraudulently misrepresented and concealed the "true facts." They had not described what those "true facts" were or how the concealment or misrepresentation exceeded the basis of their TILA claims.

As a result, the Court decided that the TILA claims were time-barred.

Subprime Crisis of Regulations

A report issued by the Federal Reserve early in August should receive far more attention than it has received to date.

According to this FRB study, neither the Community Reinvestment Act (CRA) nor the affordable housing goals of the federal government sponsored enterprises (GSEs) were significant causes of the recent problems in the subprime mortgage market.

Although this report offers "tentative" conclusions, it is remarkable nonetheless to use empirical data to look for a direct link between the applicable regulations and loan performance - and find nearly no link at all!

So, does a link exist between these programs and subsequent mortgage performance?

Superficial Association

Generally speaking, the CRA and the GSEs have been blamed for causing or at least contributing to the subprime crisis. After all, both favor lending to borrowers in lower-income census tracts which accounted for a disproportionate share of the growth in lending during the subprime buildup, as well as a disproportionate share of higher-priced, piggyback, no-income, and high-PITI lending, and elevated mortgage delinquency rates.

But the report concludes that "superficial association may be misleading." This view represents the empirical analysis caution, best stated in the probability dictum: correlation is not causation.

Let's take a closer look at the report.

"With few exceptions, the evidence is scant."

The FRB study is entitled The Subprime Crisis: Is Government Housing Policy to Blame? Written by FRB Senior Economists Robert B. Avery and Kenneth P. Brevoort, the paper, described as "tentative," notes the existence of studies with contrary findings, but says that these studies were based on "associations between aggregated national trends" rather than empirical data.

Visit Library for the Copy

The paper concludes that "with few exceptions, the evidence is scant" that the CRA or even the affordable housing initiatives of the GSEs actually caused the subprime market implosion.

Housing Policy and Regulations

The study was untaken to examine a growing body of literature suggesting that housing policy, embodied by the CRA and the affordable housing initiatives of the GSEs, may have caused the subprime crisis. But, according to the authors, the conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends.

The study found that there is:

"...little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis."

Indeed, the quantitative tests conducted actually indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending.

And so-called "threshold tests" show no evidence that either program had a significantly negative effect on outcomes.

FTC Adopts New Rules Banning Deceptive Mortgage Advertisements

The Federal Trade Commission (FTC) has adopted the Final Rule (Rule) that bans deceptive claims in mortgage loan advertisements.

According to the FTC, the Rule covers all entities that are under the agency's authority that advertise mortgages, including: mortgage lenders, brokers and servicers; real estate agents and brokers; advertising agencies; and home builders. Financial institutions such as banks, thrifts and credit unions are not covered.

The FTC has substantial law enforcement experience with unfair or deceptive practices involving mortgage advertising practices or violations of Truth in Lending Act mortgage advertising.

Advertising includes, but is not limited to:
Print advertisements
Unsolicited e-mails
Direct mail marketing
Internet advertisements and Web sites
Telemarketing
In-person sales presentations

Effective: August 19, 2011

Claims and Violations

Alleged violations have included deceptive claims - often made to subprime borrowers - about key terms and other aspects of the loans, such as:

• Misrepresentations of the loan amount or the amount of cash disbursed.
• Claims for loans with specified terms, when no loans with those terms were available from the advertiser.
• Claims of low "teaser" rates and payment amounts, without disclosing that the rates and payments would increase substantially after a limited period of time.
• Misrepresentations that rates were fixed for the full term of the loan.
• Misrepresentations about, or failure to adequately disclose, the existence of a prepayment penalty or large balloon payment due at the end of the loan.
• Claims about the monthly payment amounts that the borrower would owe, without disclosing the existence, cost, and terms of credit insurance products "packed" into the loan.
• Claims that the loans were amortizing, when, in fact, they involved interest-only transactions.
• Claims of mortgage payment amounts that failed to include loan fees and closing costs of the kind typically included in loan amounts.
• False or misleading savings claims in high loan-to-value loans.
• False or misleading claims regarding the terms or nature of interest rate lock-ins.
• False claims that an entity was a national mortgage lender.
• Failure to disclose adequately that the advertiser, not the consumer's current lender, was offering the mortgage.
• False or misleading claims to consumers that they were "pre-approved" for mortgage loans.

Outline of Final Rule

• Covers misrepresentations about interest charged for the product, including, but not limited to, misrepresentations about (1) the amount of interest owed each month that is included in the consumer's payments, loan amount, or total amount due; or (2) the interest owed each month that is not included in the payments but is instead added to the total amount due.

• Bars misrepresentations about the APR, simple annual rate, periodic rate, or any other rate, including, but not limited to, a payment rate.

• Bars misrepresentations about the existence, nature, or amount of fees or costs associated with any mortgage credit product. It also prohibits false or misleading claims that no fees are charged.

• Covers misrepresentations about terms associated with additional products or features that may be sold in conjunction with a mortgage credit product.

• Covers misrepresentations relating to the taxes or insurance associated with a mortgage credit product.

• Bars misrepresentations about the existence or amount of any penalty for making prepayments on the mortgage.

• Prohibits misrepresentations pertaining to the variability of interest, payments, or other terms of mortgage credit products, including, but not limited to, misrepresentations using the word "fixed" when terms are, in fact, variable or limited in duration.

• Bars false or misleading comparisons between rates or payments, including, but not limited to, comparisons involving savings.

• Prohibits misrepresentations about the type of mortgage credit product being offered (i.e., false claims that a mortgage is fully amortizing).

• Bars misrepresentations about the amount of the obligation or the existence, nature, or amount of cash or credit the consumer could receive from the loan.

• Prohibits misrepresentations about the existence, number, amount, or timing of any minimum or required payments.

• Prohibits misrepresentations about the potential for default on the mortgage credit product, including, but not limited to, misrepresentations about the circumstances under which the consumer could default for nonpayment of taxes or insurance, failure to maintain the property, or non-compliance with other obligations.

• Bars misrepresentations about the effectiveness of the mortgage credit product in helping consumers resolve problems in paying debts.

• Prohibits misrepresentations about the association between a mortgage credit product or a provider of such product and any other person or program, including, but not limited to, any affiliation with an organizational or governmental program, benefit, or entity.

• Covers misrepresentations about the source of the mortgage credit product and the commercial communications for it, including, but not limited to, claims that the communication is made by or on behalf of the consumer's current mortgage lender or servicer.

• Prohibits misrepresentations about the consumer's right to reside in the dwelling that is the subject of the mortgage credit product, including, but not limited to, false or misleading claims about how long or under what conditions a consumer can stay in the dwelling.

• Bars misrepresentations about the consumer's ability or likelihood to obtain any mortgage credit product or term, or a refinancing or modification of any mortgage credit product or term. This includes false or misleading claims about whether the consumer has been preapproved or guaranteed for any such product or term.

• Bars misrepresentations about the availability, nature, or substance of counseling services or any other expert advice offered to the consumer regarding any mortgage credit product or term, including, but not limited to, the qualifications of those offering the services or advice.