Monday, October 31, 2011

Learning to Play the HARP

A week ago the Obama Administration announced revisions to the Home Affordable Refinance Program (HARP).
Better late than never! Actually, coming three years belatedly, a change to HARP may bring some relief to homeowners and the economy.
But is it a viable solution?
As you may know, I have written extensively about the failure of both the Home Affordable Modification Program (HAMP) and HARP.
Is the new and improved version of the two-year old HARP a quick fix or yet another boondoggle in the making?
Real Estate and Jobs
Last week's announcement stems from the revisions developed by the Federal Housing Finance Agency (FHFA), the GSE's overseer, with feedback from lenders, mortgage insurers and other mortgage industry participants. In a sense the revisions are a patent admission that the economy simply will not regain its strength without a robust real estate market; or, put another way, jobs will not return unless a strengthened real estate market returns.
The linkage of real estate to jobs has roots in the MBS World, a murky realm way below the revisions contemplated by the Administration and the homeowners' needs.
The Federal Reserve has a central place in the MBS World, since it is permitted to participate in the agency MBS financial instruments, and not permitted to participate in buying equity, real estate, or corporate debt.
Remember: MBS yields are the primary trigger in the formation of mortgage rates. The safest financial instruments, of course, are Treasuries; so, relative to Treasuries, the margin or spread between mortgage rates and yields on 10-year Treasuries has continued to move upward. When the Fed makes its MBS purchase, it thereby reduces mortgage interest rates, compressing those relative margins. Operationally speaking, then, a so-called target for mortgage rates is set in this manner.
Ostensibly, lower mortgage rates lead to refinances and the concomitant diminution of financial pressure on homeowners who have been trapped in the housing crisis with underwater mortgages, because such reduction both lowers the cost of debt service through refinance and supports purchases of houses, which creates demand - and thus an increase in pricing - for housing.
What Went Wrong?
To date, a tiny percentage of seemingly eligible borrowers have refinanced through HARP.
In my estimation, these are the factors that led to the HARP failure:
-Resistance: the refusal by some second lienholders to subordinate themselves to the first mortgagee.
-Fear: the GSEs might "put back" the new loans if they subsequently move into default, which causes constrained underwriting.
-Restrictions: the original MI being applied to the new loan, particularly if the new loan has a different servicer.
-Reluctance: homeowners afraid of being rejected, lack of public awareness, and insufficient news about program information.
Also, it is common knowledge that lenders have rejected all but the most creditworthy borrowers from taking advantage of HARP, out of reluctance to take on the risk of existing representations and warranties; however, this may yet find a solution (see below).
Plans and Suggestions
In this latest version of HARP, there is an extension of the program's mandates through December 2013. As a quick overview, I think it's fair to describe HARP as a temporary program by the GSEs, the primary goal of which is to permit borrowers whose loans are currently guaranteed by the GSEs to be refinanced, despite the fact that these loans are significantly higher than 80LTV.
There are some important revisions, perhaps the most important being the removal of the 125LTV ceiling. In addition, in many cases a new appraisal is eliminated, fees to borrowers are lowered, and the GSEs are waiving some lender representations and warranties (about which we will know more by November 15, 2011, when the program guidelines are issued).
I think the revisions to representations and warranties are needed and justified, inasmuch as all loans eligible under HARP have been seasoned for more than three years, and defects in a loan usually show up in the first few years of the loan. So, the risk - and the implications for representations and warranties - is certainly much lower at this point.
As to homeowners' reluctance and lack of information, although the HARP revision does not require it, I think the GSEs should communicate with potentially eligible borrowers and let them know that their loans are eligible under HARP at current mortgage rates.
With respect to the resistance of second lienholders, many studies suggest that second liens are no longer a major barrier to refinancing. It is very important that second lienholders participate in the program, because refinancing the first lien ameliorates the condition of the second lien, due to the fact that it frees up funds that can be used for second lien servicing.
The MI issue is a thorny one. The fact is, notwithstanding the foregoing, borrowers with MI will have fewer options than others to refinance. It remains to be seen how the proposal to waive aspects of the representations and warranties will incentivize servicers to resolve the MI debacle.
A Macroeconomic Solution
So, can revamping HARP bring new jobs and stabilize the real estate market?
One study I have read, a CBO research paper, estimates that a revised HARP, structured along the lines I've outlined above, would (1) result in $428 billion additional refinancings with annual savings to households of $7.4 billion, (2) would have a small positive effect on the GSEs' net worth, and (3) would have a small net cost to the government of less than $1 billion (which, in any event, is subsumed by the Fed's prepaid MBS portfolio).
The overall effect is to create a stimulus, since HARP beneficiaries will have higher marginal means to create demand, that is, their consumption will more than offset the opposing demand from existing MBS investors (i.e., financial institutions). Based on the studies I have read, if HARP increased GDP by as little as $1 billion per year for two or three years, the additional tax revenues would significantly exceed the costs. So, the macroeconomic effect would be net positive and stimulative.
Finally, if mortgage rates were sustained by the 2% to 2.5% range that has been a trending indicator, when combined with the HARP revisions, there would be a very substantial boost of mortgage loan originations, perhaps enough of a boost to a sizeable part of the GSE portfolio. Such an impetus would mean a re-set of trillions of dollars in asset value, and a yearly reduction in household interest expenses into the many billions.
The Fed's Role
As I see it, the Fed can weigh in forcefully in supporting the HARP revisions.
For instance, if the Fed purchased as much as $2 trillion of new MBS, then existing MBS holders would be displaced into investing that $2 trillion elsewhere. Hence, such re-investment would lead to an increase in stock prices, reduction in debenture yields, increase in real estate values, and higher foreign currency values.
A recent study, conducted by the San Francisco Fed, clearly shows that Fed purchases upward of 2$ trillion would increase GDP by more than 2% in two years and create 3 million new jobs. If the HARP refinance revisions are factored in, the overall stimulative effect would be much larger, perhaps as high as creating 4 million new jobs.
Moving forward robustly with the HARP revisions would surely lead us to conclude that the new and improved version, though coming about belatedly, is not too little, too late.
What do you think?
Please feel free to comment!

Tuesday, October 18, 2011

FRB Issues Flood Insurance FAQs and Proposed Revisions

The federal agencies that supervise banks, thrifts, and credit unions, and the Farm Credit System, on October 14, 2011 announced that it published guidance that updates the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009 (see 74 FR 35914-35947).
On October 17, 2011, the Federal Register published the guidance concerning the Loans in Areas Having Special Flood Hazards, Interagency Questions and Answers Regarding Flood Insurance.
The federal agencies participating in this guidance are the Office of the Comptroller of the Currency, Treasury (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA), (collectively, the Agencies).
The guidance finalizes two questions and answers that had been previously proposed. The first relates to insurable value. The second relates to force placement of flood insurance. The Agencies withdrew another question regarding insurable value.
The two final questions and answers supplement the Interagency Questions and Answers Regarding Flood Insurance (Interagency Questions and Answers), which were published on July 21, 2009 (74 FR 35914).
  • Effective Date - Final questions and answers: October 17, 2011.
  • Effective Date for Comments: December 1, 2011.
It is the intention of the Agencies that, after public comment has been received and considered and the guidance has been adopted in final form, the Agencies will issue a final update to the 2009 Interagency Questions and Answers Regarding Flood Insurance. The final update will continue to supplement other guidance or interpretations issued by the Agencies and the Federal Emergency Management Agency.
The Agencies request comment on three additional proposed updates to questions and answers relating to force placement of flood insurance. Two answers have been significantly and substantively changed. The third change, regarding force placement of flood insurance, revises a previously finalized Question and Answer for consistency with the proposed changes.
The Agencies are requesting comment on the proposed changes to the Interagency Questions and Answers Regarding Flood Insurance and, more generally, on other issues and concerns regarding compliance with the federal flood insurance statutes and regulations. Comments are due 45 days after publication in the Federal Register.
Based on comments received, the Agencies also have significantly revised two questions and answers regarding force placement of flood insurance that were initially proposed on July 21, 2009, and are now proposing revision to a previously finalized question and answer. These three revised questions and answers are being proposed for comment.
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Federal Reserve System - Interagency    
Loans in Areas Having Special Flood Hazards
Interagency Questions and Answers Regarding Flood
Federal Register - 76/200
October 17, 2011

Monday, October 17, 2011

CFPB Issues Supervision and Examination Manual

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is the first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.
The Manual is divided into three parts:
Part 1: Describes the supervision and examination process.
Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations.
Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.
Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.
However, we have created a Directory and Compendium.
At this time, Part 1 and Part 2 are only available as website pages.
Part 3 is available in PDF.
In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's text and website links. There are over 700 pages in this compendium.
Our compendium provides:
  • Directory: All Sections
  • Contents: Links to Compendium Text
  • Contents: Links to CFPB Website Text
We are pleased to share this compilation with you for free.
Due to the huge size of the compendium - over 13 MBs - it must be downloaded from our secure Extranet. If you are interested in obtaining this compendium, please request it and we'll send you the download instructions.
Supervision and Examination Manual - Version 1.0

Part I - Compliance Supervision and Examination
Supervision and Examination Process
Part II - Examinations Procedures
Compliance Management Review
Unfair, Deceptive or Abusive Acts or Practices
    Examination Procedures
Equal Credit Opportunity Act
    Examination Program
    Interagency Fair Lending Examination Procedures
    Interagency Fair Lending Examination Procedures – Appendix
Home Mortgage Disclosure Act
    Examination Procedures
    Home Mortgage Disclosure Act Checklist
Truth in Lending Act
    Examination Procedures
    Appendix A: High-Cost Mortgage (§ 226.32) Worksheet
Real Estate Settlement Procedures Act
    Examination Procedures
Homeowners Protection Act
    Examination Procedures
Consumer Leasing Act
    Consumer Leasing Act Examination Procedures
    Consumer Leasing Act Checklist
Fair Credit Reporting Act
    Examination Procedures
Fair Debt Collection Practices Act
    Examination Procedures
Electronic Fund Transfer Act
    Examination Procedures
Truth in Savings Act
    Examination Procedures
Privacy of Consumer Financial Information (GLBA)
    Examination Procedures
    Examination Procedures Attachment
Mortgage Servicing Examination Procedures
Part III - Examination Process Templates
    Entity Profile
    Risk Assessment
    Supervision Plan
    Examination Scope Summary
    Examination Report
    Examination Report cover
    Examination Report cover letter
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Consumer Financial Protection Bureau
Supervision and Examination Manual
Version 1.0
October 13, 2011

Thursday, October 13, 2011

FinCEN: Fraud and Mortgage Rescue Schemes

The Financial Crimes Enforcement Network (FinCEN) has just released its 20th issue of the SAR Activity Review - Trends, Tips, and Issues. The publication provides information about SARs and Remote Deposit Capture risks, Organized Retail Crime, Health Care Fraud, Elder Financial Exploitation, and more.
Of particular interest is a section devoted to the U.S. Trustee Program's (USTP) civil enforcement activity targeting bankruptcy-related mortgage fraud and mortgage rescue schemes. The USTP is a unit in the Department of Justice (DOJ) responsible for overseeing the administration of bankruptcy cases and private trustees. In that capacity, it also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.
In this SAR Activity Review, USTP provides information regarding its role in combating these schemes, and, importantly, provides tips to financial institutions on detecting such unlawful activity.
The following outline provides:
  • A Brief statement
  • Financial Consultant Schemes (Red Flags)
  • Sale-Lease Back and Property Transfer Schemes (Red Flags)
  • Reverse Mortgage Schemes
  • Library – Download Issuance
A Brief Statement
Bankruptcy-related mortgage fraud and mortgage rescue schemes use know how to exploit the federal bankruptcy court system.

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

Here's a strategy used by perpetrators:

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

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

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

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

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

Red Flag (18x22)-1Mortgage payments stop being made.
Mortgage payments abruptly stop with no contact from the homeowner and/or default occurs on the mortgage within a month or two after the loan is made.
Red Flag (18x22)-1The foreclosure process is stayed by a bankruptcy filing.
The filing of the bankruptcy case may be in tandem with the sudden failure to make regular mortgage payments.
Red Flag (18x22)-1The debtor in the bankruptcy case that stayed the foreclosure is not the borrower.
Red Flag (18x22)-1The debtor does not disclose a fractional interest and/or other ownership in real property in his/her bankruptcy documents.
Failure to disclose such interests may indicate a fractional interest or property transfer scheme.
Red Flag (18x22)-1Serial bankruptcy cases are filed and/or numerous lenders file motions seeking relief from the automatic stay to proceed with foreclosure and/or eviction actions.
Where the perpetrators file serial bankruptcy cases, especially those involving fractional interest schemes, financial institutions should expect to see other lenders filing motions seeking relief from the bankruptcy automatic stay as well.
Sale-Lease Back and Property Transfer Schemes
  • In this scheme, the perpetrator gains control of an individual's home and skims real or manufactured equity from the property. The perpetrator tells the homeowner that the home can be saved by selling it to a third-party purchaser chosen by the perpetrator - also known as a "straw purchaser" - and then renting it back from the purchaser for an amount less than the homeowner's current mortgage payment. Frequently the perpetrator promises that the homeowner can buy the home back within a certain period of time at the same price at which it was sold, thus protecting the homeowner's "equity." (In some schemes, the perpetrator persuades the homeowner to file bankruptcy in order to repair the homeowner's credit and place the homeowner in a better position to obtain financing to buy back the home.)
  • The perpetrators of these schemes profit by gaining control of the properties and obtaining fraudulent loans in the straw purchasers' names based on inflated appraisals of the properties' value. The inflated sales price creates a significant amount of "fake" equity that the perpetrators take through fees that are included in the closing payoffs. Moreover, the perpetrators may arrange to have any remaining sales proceeds signed over to them, rather than to the homeowners. The straw purchasers usually receive some money at closing for each property purchased. Eventually the straw purchasers file bankruptcy to discharge the mortgage debt incurred in their names. Usually, they do not disclose payments received at closing in their bankruptcy documents. In the end, the homeowners lose their homes.
  • A version of this scheme involves renters. Homeowners desperate to sell their homes are persuaded to "sell" their property to the perpetrators based on false promises that the perpetrators will obtain new loans to pay off the homeowners' existing mortgages. The perpetrators do not get financing, but instead put renters in the properties and collect the rents. No mortgage payments are made and the financial institutions are not notified of the title transfer. To further the scheme, the perpetrators may file incomplete serial bankruptcy cases in the homeowners' and/or renters' names without their knowledge or consent for purposes of obtaining the automatic stay to stop the collection actions.

Wednesday, October 12, 2011

Plethora of Languid Foreclosure Prevention Programs

Keeping foreclosures down and homeownership up has been the stated goal of policy makers for the last few years. The record shows that nearly all of the promulgated programs have failed to provide much relief to lenders or borrowers. And even if there were a chance for them to succeed, the obstacles to their viability are daunting.
I think a brief review of such programs is in order.
My list is not meant to be complete, but it is indicative of the success of presumptive remedies to the foreclosure crisis.
The Land of Cockaigne
I don't think many Americans ever really bought the 'spiel' about "a car in every driveway," "a chicken in every pot," "a salary for every able-bodied person," and "a house for every citizen." But it's not as though they weren't given plenty of reasons to pursue the so-called American Dream - at least the homeownership version. Presidents and their Administrations have equated owning a home with being as American as Apple Pie. Congress followed the narrative and fortified the burgeoning real estate industry with seemingly infinite funds boosted by and through the GSEs. The Federal Reserve did its part. But it was all trumped-up! Unsupported by the fundamentals of economic theory, dream-thinking nevertheless entrenched itself.
In the 13th century, a French poem described the "pays de cocaigne," which is Middle French for "The Land of Cockaigne." A fair translation of the poem portrays Cockaigne as a country where "the houses were made of sugar cakes, the streets were paved with pastry, and shops provided goods for nothing." (My translation.) Later, in the 16th century, the Dutch artist Pieter Bruegel the Elder depicted Cockaigne as an imaginary land of self-indulgent luxury and idleness, a utopia of gluttony, complacency, instant gratification, and physical excesses, where the lowly and beleaguered peasants could finally be free of their oppressive, daily struggles to survive.
In effect, Cockaigne was a medieval peasant's dream. But it was a chimera!
This is not to say that the modernized version of Cockaigne, perhaps our own American Cockaigne, was meant to curry the favor of people who were gluttonous or complacent in return for their votes. It is not to say that Americans are peasants in the fashion of medieval peasants. And it is not to say that we should run away from our dreams. But living a dream has consequences. 
So, let's take a look at some of those consequences. Let's see how foreclosure prevention programs have fared in mending the harm caused by our own version of Cockaigne.
The "Job's Bill"
The Obama Administration has proposed a plan to provide $15 billion to fix foreclosed and vacant properties. The idea is to provide a means to revitalize communities blighted by foreclosures. It would also offer a boost to construction jobs. Is there anybody reading this who actually believes that this bill, at least in its current form, will receive even a scintilla of Congressional approval anytime soon?
Converting Vacant and Foreclosed Homes to Rentals
The Administration has asked for proposals to convert foreclosed houses into rental properties. This would reduce the oversupply of foreclosed properties and reduce the demand causing rising rents for existing rentals. As far as I know, no politically viable proposals have been publicly announced. However, some statistics indicate that benefits could be outweighed by adverse consequences.
Principal Reduction
In effect, this approach asks banks to adjust the total amount owed on a mortgage, based on the post-bubble value of a home. However, this could lead to strategic foreclosures and perhaps an incentive for borrowers to take out riskier loans. I get that this remedy is supposed to be a way to deal with the $800 billion overhang, that is, the amount that borrowers owe above the value of their homes.
These so-called "underwater" mortgages are being just left out there dangling away! It seems to me that principal reduction could work, given the right methodologies. For instance, most mortgages are either owned or guaranteed by Fannie and Freddie, so the overall public could benefit through principal reduction.
However, here's the nasty secret: the FHFA, the regulator overseeing Fannie and Freddie, will not even consider principal reduction, because it would adversely impact the GSE's bottom line. Even after being bailed out, the GSEs are $141 billion in the negative. So, a decision to keep the losses off the books leads principal reduction into a dead end.
Bailout Money
At least President Obama recently admitted that his Administration had not made "enough progress" on dealing with the foreclosure crisis and he is "going back to the drawing board." This is how many years since the bubble burst? Going "back to the drawing board?"
With what money? After all, $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.
Making Home Affordable
This program was supposed to encourage servicers to lower mortgage payments. Political pundits labeled it the "homeowner bailout."
It began in the spring of 2009 and was meant to assist four million homeowners who were facing foreclosure. But MHA is a major malfunction. Servicers were thrown into backlogs, improperly processed cases, made numerous errors, all while regulators did very little to prevent this debacle. As of August 2011, as I have reported previously, only about 816,000 homeowners had received loan modifications through MHA - which is less than 25% of those who applied for MHA assistance!
Here's yet another nasty secret: the government is expected to spend about $7 billion of the $46 billion in bailout funds that were set aside to help homeowners. Consequently, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit. Yes, that would be those same $30 billion I mention above, meant to address the foreclosure crisis, and will instead likely be spent to pay down the deficit.
Home Affordable Refinance Program
This is the program that permits homeowners to refinance their mortgages at lower interest rates. It is another program from 2009. With much fanfare, the Administration estimated that five million homeowners would be served. As of June 2011, just 838,000 homeowners had refinanced through the program.
But where is this program going? The FHFA stands in the way, since refinancing is deemed to be more risk to Fannie and Freddie, which happens to own or guarantee about 5 million mortgages that are underwater.
President Obama has stated that he would increase the number of homeowners in the program. How is that supposed to happen, given that the FHFA's professed mission now is to further protect Fannie and Freddie from taking on any new risk?
Emergency Homeowners' Loan Program
The basic concept of this program is to loan money to jobless homeowners so they can avoid foreclosure. I fail to see how this is a solution at all to foreclosure. At best, maybe it postpones it. As promulgated in 2010 and commenced in June 2011, the program consists of $1 billion and is supposed to affect 30,000 families, by offering interest-free federal loans of up to $50,000 to qualifying homeowners. Essentially, to be qualified for this program, the borrower must have lost income because of unemployment or a medical condition. To date, only 10,000 to 15,000 of the 100,000 applicants have actually qualified for these loans.
But here's the catch: there is a deadline of September 30, 2011 for lending out money to eligible homeowners before the unused funds are to be returned to the Treasury. So, the application period has now expired. At this point, it is estimated that only half the allotted funds will be spent.
States Foreclosure Prevention Programs
The notion of giving funds to states to remedy the foreclosure epidemic goes back to February 2010, when the Administration promised almost $8 billion to finance "innovative" programs. The money was supposed to go to the states that had the worst foreclosure problems.
But reports issued in July indicate that only $478 million of the government's $8 billion had been actually loaned. I have read several reports that some of these states have failing programs due to burdensome enrollment procedures. In Arizona, for instance, 4,000 homeowners were to be assisted through principal reduction. But recent news reports indicate that Arizona only approved three homeowners for this remedy. And, again, banks and the GSEs do not want to participate in principal reduction, a particular feature of that state's "innovative" program.
Bankruptcy Protection
I seem to recall that candidate Obama expressed a willingness to permit bankruptcy judges the power to lower mortgage payments. The modern vernacular calls this a "cramdown." Banks were against cramdown from the start. Members of Congress, particularly some Democrats, tried to pass legislation permitting cramdown. But the legislation was defeated. And, anyway, President Obama's very own economic advisers rejected it. At this point, the Obama Administration has virtually abandoned it as a remedy.
Cockaigne Redux
Pieter Bruegel the Elder lived during the time of the famed Dutch Revolt. There is much symbolism in his painting, "The Land of Cockaigne." That symbolism, according to some authorities, refers to the failure of leadership, the effects of complacency, and the proclivity of the people to become dependent on their formidable abundance, while being unwilling to take risks that would bring needed systemic change.
I wonder: is the American Cockaigne a dream from which we refuse to wake up?

Monday, October 10, 2011

Loan Originator Compensation: NEW Examiner Guidelines

On October 7, 2011, the Multi-State Mortgage Committee (MMC), a ten-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), issued examiner guidelines (dated 10/6/11) as a tool for consistent implementation of the Federal Reserve Board's final rules for closed-end credit under Regulation Z.
The MMC guidelines (Examiner Guidelines), apply to residential mortgage loans, are intended to assist state regulators of non-depository mortgage loan originators and creditors in their review of licensee policies and practices for compliance with the Federal Reserve Board's final rule (Rule).
To date, the MMC State Nondepository Examiner Guidelines for Regulation Z - Loan Originator Compensation Rule constitutes the most explicit and comprehensive examination analysis of the Loan Compensation Rule, which placed restrictions to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person, and prohibits "steering" consumers to loans to receive greater compensation.
Please feel free to contact us at any time to discuss our loan originator compensation audit and examination reviews.
Preparation is Protection
FAQs Outline - Loan Originator Compensation
400 FAQs (128 Pages)
Independent Audit: MMC Examiner Guidelines
Task Force
The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z - Truth in Lending, including the Rule.
These guidelines were developed by the MMC to provide examiners in the field with a standardized set of procedures for evaluating basic compliance with the rule. The Examiner Guidelines state that the guidelines themselves are not intended to be binding or restrictive on a state's autonomous determination and sovereign authority to take supervisory action.
These revised procedures supersede the Regulation Z interagency examination procedures. Although limited, for uniformity and consistency, the interagency procedures are included within the Examiner Guidelines.
These Examiner Guidelines supplement the interagency procedures and are intended to assist state regulators of nondepository  mortgage loan originators  and creditors in standardized and uniform reviews of the Rule.
Setting a Standard
These Examiner Guidelines clearly are intended to provide state examiners with a standard set of examination tools to determine institution compliance with certain "bright line" areas of the Rule.
The actual Rule is both complex and nuanced and the Examiner Guidelines state that the subject guidelines are not intended, nor able to provide instruction for every scenario that may arise.
The purpose of these guidelines is to provide the examiner with a standardized set of procedures for reviewing institutions for basic compliance with the Rule. The examiner should consider the facts of each unique situation and apply judgment appropriately.
Three Scopes and Three Modules
1. Full Scope: Pre-exam completion of Modules 2 and 3 followed by completion of Module 1 through documentation review, onsite transaction testing, and interviews of institution staff or other parties.
2. Limited Scope: Completion of Module 1, excluding transaction testing and interviews, based on the institution's responses to Modules 2 and 3.
3. Limited Scope with offsite testing: Combine the Limited Scope approach with an offsite sampling of transaction documents and/or telephone interviews of institution staff or other parties.
Module 1 consists of questions intended to guide the examiner for specific review.
Much of the checklist can be completed from a thorough, off-site review of the institution's responses to Modules 2 and 3.
Other sections require transaction-level review and interviews of institution staff and others.
APPENDIX B - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM - Revised Interagency Examination Procedures for Regulation Z (3/18/11)
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Multistate Mortgage Committee (MMC) 
State Nondepository Examiner Guidelines for Regulation Z
Loan Originator Compensation Rule
October 6, 2011

Tuesday, October 4, 2011

FHA Expands Lending Areas

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

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

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

Brief Synopsis

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

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

Single Family Loan Origination Lending Area

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

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

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

Geographical Restrictions Removed

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

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

Before and After

Before this issuance:
A specific HUD approved office could only make loans in a geographically designated lending area, provided that the lender met the loan origination requirements of each state in which the loans were made.
After this issuance:
An FHA single-family lender may originate loans nationally from a home or branch office, provided that the lender meets the loan origination requirements of each state in which the loans are made.

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Department of Housing and Urban Development
Revised Lender Approval Requirements
Federal Housing Administration
Mortgagee Letter 2011-34
September 23, 2011