Mortgage Crisis Commission: Tragedy or Farce?

Here we go again! A commission. The politician's way of seeming to do something, though really doing nothing, all the while defusing criticism and dispersing risk. *

Three years late and stunted politically at its very inception, this year's version of a Truth and Reconciliation Commission will likely do little to uncover any truths which we don't already know and reconcile nothing that would not have been reconciled in any event without a commission.

Let's take a close look at the new special investigations unit, already being dubbed the Mortgage Crisis Commission.   

• Marching Orders
• The Players
• Chairman
• Chairmen
• Predators and Prey
• Gambit
• Quis custodiet ipsos custodes?

Marching Orders

The following 'marching orders' are from President Obama's State of the Union Address 2012, given on January 24, 2012:

"And if you're a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can't afford with confusing forms and deceptive practices are over."

"And tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans."

The Players

The "special unit" mentioned by the President is an office of Mortgage Origination and Securitization Abuses. Special units don't have Chairpersons, but this one does. So, let's just stick to the word "commission" for the time being. Its chairman is to be Eric Schneiderman, the Attorney General of New York. This investigation unit is to be part of the Financial Fraud Enforcement Task Force.

In addition to Eric Schneiderman, the commission will be co-chaired by Lanny Breuer, Assistant Attorney General at the Criminal Division of the Department of Justice; Robert Khuzami, the SEC's Director of Enforcement; John Walsh, the U. S. Attorney in Colorado; and Tony West, the Assistant Attorney General of the DOJ's Civil Division.

According to the White House, "the goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation's history."

Chairman

Eric Schneiderman has been developing a reputation as a fighter against tax cheaters. More to the point, he has been opposing a bank foreclosure deal - which has been strongly backed by the Obama Administration - arguing that the settlement would place a limit on investigating wrongdoing on the part of banks. He has come under intense pressure from the Administration and its functionaries, such as Shawn Donovan of HUD, and many Attorneys General, to support the settlement. In fact, Mr. Schneiderman was kicked off the AGs' negotiating committee. The big stumbling block in the settlement has been that, in exchange for the banks' agreeing to a settlement, the Attorneys General who are participating in the settlement would have to agree to sign broad releases preventing them from bringing further litigation on matters relating to improper bank practices. The price tag was $20 billion.

Interestingly, quite recently there has been news about a potential settlement after all. Under this proposed settlement, banks would agree to follow existing laws against abusive foreclosures and set aside $25 billion to help homeowners who are underwater on their homes or who were wrongfully foreclosed. We still need to learn the full details regarding the level of legal immunity granted to banks accused of wrongdoing as well as the scope of violations covered by the settlement.

The cynical amongst us might think that AG Schneiderman has held out long enough against mighty Administration pressure and has been offered now some national prominence by being named the Chairman of this commission. After all, Mr. Schneiderman sat near First Lady Michelle Obama at the State of the Union speech and he issued the following statement: "I would like to thank President Obama for his leadership in the creation of a coordinated investigation that marshals state and federal resources to bring justice for the victims of the misconduct that caused the mortgage crisis."

Controlling Credit Risk

We begin 2012 with the certain knowledge that many new regulations and responsibilities have made significant and costly demands on lenders, servicers, mortgage brokers, banks, investors, and mortgage securitizers to revise and strengthen plans to assure their economic survival. Many compliance departments throughout the country have set forth robust compliance calendars in order to monitor, test for, and implement federal and state guidelines. [*]

The primary source of revenue for the aforementioned companies (collectively, “financial institutions”) is the negotiating, extending, administering, and packaging of credit. Extension of credit and credit risk are really inseparable features of mortgage loan originations – one does not exist without the other.

Credit risk is quite measurable, especially with respect to any activity that poses a risk to earnings and capital. It is no secret that inadequate risk management is a leading cause of the failure of financial institutions. Just as credit risk and extension of credit are inseparable, so also are they inseparable from risk management. Only to the extent that credit risk and appropriate risk management procedures are identified, analyzed, established, and implemented may financial institutions claim to have safe and sound lending practices.

Risk management (often referred to, generically, as Compliance) should not formally come under the rubric of the so-called “Best Practices” section of corporate governance. In my view, risk management is not an elective, a negotiable issue, a good operating practice, a mere technique consistently providing superior results, a Six Sigma template, or a business management strategy. Rather, risk management is, and ought to be, an inherent and essential, evaluative and ministerial function reaching to virtually all intrinsic aspects of a financial institution’s business model. This is why I coined the term “Mortgage Risk Management,” because it stands on its own, a specialization that provides a firm foundation to the residential mortgage loan flow process – from point of sale to securitization. Put otherwise, it is the one and only “fail-safe” means by which a board of directors may ensure that management effectively implements internal processes designed to identify, measure, monitor, and control credit risk. [†]

Close consideration of appropriate risk management practices is vital to a financial institution’s stability, most especially in the outset of a new year and at all other times. But what is risk management? And, how does risk management affect a financial institution’s way of doing business?

In this article I will provide a brief outline of two key areas where credit risk review and risk management conjoin directly to impact a financial institution’s capability to conduct business and manage a thicket of regulations. Drawing on my own experience in working with our clients, I will offer an overview of what risk management entails, whether conducted internally or through external resources.

To get a sense of a typical approach involved in evaluating credit risk and the concurrent role played by risk management, I will outline the following areas: Quantity of Risk and Quality of Risk Management.

In a penultimate section, entitled Implementing Risk Management, I will offer some guidance about how to use credit risk information effectively to fortify a financial institution.

Quantity of Risk

I define quantity of risk as the level of credit risk associated with the credit portfolio of a financial institution.

Generally, there are three levels for quantity of risk: low, moderate, or high.

In evaluating credit risk, there are nine areas of review that should be undertaken.

1) Risk Level

• Consider in the analysis the size of the exposure associated with each of the areas bulleted below, their risk profiles, credit quality indicators, amounts, volatility, and trends:
  • delinquencies
  • criticized and classified loans
  • nonaccrual or nonperforming loans
  • losses
  • other credit quality metrics used by the financial institution (i.e., weighted average: risk grade or default probability)
  • underwriting standards
  • exceptions to policy

2) Risk Implications

• There are two areas in particular that are determinative with respect to risk implications:

• Significant growth in the size of a credit risk exposure, including whether such growth might be masking deterioration in credit quality indicators, and

• Material changes in policies, procedures, or underwriting standards.
  

CFPB: Nonbank Supervision Program

On January 5, 2012, the Consumer Financial Protection Bureau (CFPB) launched its nonbank supervision program.

This program has the goal of implementing supervisory audits and reviews of nonbanks, such as mortgage loan originators, lenders, mortgage bankers, mortgage brokers, servicers, and loan modification or foreclosure relief services (including also payday lenders and private education lenders).

This nonbank supervision program is in many ways an extension of the development of CFPB's bank supervision program that began last July.

We have issued several newsletters about certain aspects of the bank and nonbank supervision programs and I have written several articles about the CFPB.

Six days after the CFPB launched its nonbank supervision program, on January 11, 2012 the CFPB began its very first investigation of a nonbank mortgagee, PHH Corp. of Mount Laurel, NJ. The allegations against PHH Corp. involve violation of RESPA, with respect to the prohibitions against kickbacks. Although there is no mention of the PHH Corp. investigation on the CFPB website, nor is there a press release from the CFPB, we know of the investigation because PHH Corp. filed notice about it with the Securities and Exchange Commission.

Our firm is committed to providing comprehensive audit and due diligence reviews in preparation for the CFPB's nonbank and bank Supervision and Examination Manual (Manual), a basic tool in the CFPB's supervision programs.

Our audit and examination group provides an independent and thorough due diligence review of the CFPB examination requirements, offering corrective actions for enforcement.

I would urge you to contact us and find out about preparing for a CFPB examination.

In this newsletter, I would like to give you a brief overview of the CFPB's nonbank supervision program.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

• Scope of the Nonbank Supervision Program
  
• Supervision Process
  
• Supervision and Examination Manual
  
• Examinations
  
• Staffing and Training
  
• State Coordination
  
• Future Plans
  
• Library

Scope of the Nonbank Supervision Program

By the term "nonbank," the CFPB refers to a financial institution that is not a depository, but offers or provides consumer financial products or services. The nonbank does not have a bank, thrift, or credit union charter.

Nonbanks include, but are not limited to, mortgage lenders (i.e., mortgage bankers), mortgage servicers, loan modification or foreclosure relief services, payday lenders, consumer reporting agencies (CRAs), mortgage loan originators, debt collectors, money services companies, lenders (i.e., creditors), mortgage brokers, and private education lenders.

The CFPB also has authority to supervise any nonbank that it determines is posing a risk to consumers.

Under the law, the CFPB has the authority to oversee nonbanks, regardless of size, in certain specific markets.

The CFPB can also supervise the larger players, or "larger participants."

Please read our newsletter on the "larger participant" supervision.

Supervision Process

Similar to the bank supervision program, the CFPB's nonbank supervision program is designed to ensure that nonbanks comply with federal consumer financial laws. It assesses risk to consumers arising from these businesses.

The nonbank supervision program includes conducting individual examinations, while also requiring reports from companies that determine where companies need to put greater focus.

Protecting Tenants at Foreclosure

The Protecting Tenants at Foreclosure Act (PTFA) went into effect in May 2009. The PTFA provides protections to tenants in foreclosed properties.

The PTFA is found in the Helping Families Save Their Homes Act of 2009 (a document of 1632 pages). Originally set to expire (or "sunset") on December 31, 2012, Dodd-Frank extended the expiration date of the PTFA to December 31, 2014. 

Under this legislation, the immediate successor of interest (generally the purchaser) of a foreclosed property must provide all tenants with at least 90 days notice prior to eviction because of foreclosure.

Additionally, tenants must be permitted to stay in the residence until the end of the lease, with two exceptions:

• The property is sold after foreclosure to a purchaser who will occupy the property as a primary residence, or

• There is no lease or the lease is terminable at will under state law.

Even if these exceptions apply, the tenant must be given at least 90 days notice prior to eviction. The rights of Section 8 tenants are also protected under the PTFA.

In this newsletter, we should like to direct you to further information on the PTFA.

• Protecting Tenants at Foreclosure Act

• Dodd-Frank extends the PTFA

• National Housing Law Project

• Library

Protecting Tenants at Foreclosure Act

The Protecting Tenants at Foreclosure Act (PTFA) is Title VII of the Helping Families Save Their Homes Act of 2009.

We have extracted the relevant section and placed it in our Library.

Dodd-Frank extends the PTFA

The PTFA was extended and clarified by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

We have extracted the relevant section and placed it in our Library.

National Housing Law Project

The National Housing Law Project (NHLP) has materials that can help housing counseling agencies understand the PTFA's provisions and help tenants exercise their rights under the law.

NHLP's materials include sample letters that tenants can use to inform their landlords, as well as sample letters that advocates can use to inform the courts and public housing authorities. 

These materials are available on the National Low Income Housing Coalition website.

LIBRARY

Protecting Tenants at Foreclosure Act (PTFA)
Title VII of the Helping Families Save Their Homes Act of 2009

PTFA Extension and Clarification -
Dodd-Frank Wall Street Reform and Consumer Protection Act

OCC - Correcting Foreclosure Practices

On December 20, 2011, the Office of the Comptroller of the Currency (OCC) updated its announcement regarding correcting foreclosure practices. We have previously issued newsletters here, here, and here on this subject and also related matters regarding foreclosure processing.

Earlier in 2011, on April 13, 2011, the OCC, the Board of Governors of the Federal Reserve System (FRB), and the Office of Thrift Supervision (OTS) announced enforcement actions against 14 large residential mortgage servicers and two third-party vendors for unsafe and unsound practices related to residential mortgage servicing and foreclosure processing. The enforcement actions were based on interagency examinations conducted in the fourth quarter of 2010.

Through those enforcement actions (consent orders), federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

In this newsletter, we will consider several aspects with respect to implementation of the consent orders.

• Independent Foreclosure Review
• Mailings to Consumers
• Deadline for Review Requests
• Independent Foreclosure Auditor
• Eligibility for Review
• Notifying the Public
• Engagement Letters
• Interim Report
• Library

Independent Foreclosure Review

Under the consent orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers.

Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

Mailings to Consumers 

As part of that program, the 14 mortgage servicers covered by the enforcement actions were required to begin mailings to consumers on November 1, 2011, continuing to December 31, 2011.

The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the special Independent Foreclosure Review website for more information about the review and claim process. Telephonic assistance is given at this website.

Deadline for Review Requests

 Review requests must be received by April 30, 2012.

Independent Foreclosure Auditor

An independent foreclosure auditor must be a third-party. The independent foreclosure auditor will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers.

Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Wage Theft Prevention Act (WTPA) - NEW YORK STATE

As you may know, we audit for compliance with respect to the new TILA loan originator compensation rule. In the course of doing such audits for New York companies, we look for compliance with the Wage Theft Prevention Act (WTPA) and its implementing regulations. These WTPA requirements are administratively cumbersome.

The Wage Theft Prevention Act (WTPA) annual notice requirement is effective as of January 1, 2012 and must be complied with by February 1, 2012. Thus, the implementation period is exceedingly short.

If you are a New York company or have affiliates and branches in New York or own companies in New York, you must comply with the current notification requirement of the WTPA.

Please be sure to discuss this matter with your firm's accountant or financial adviser. Be prepared to implement the WTPA procedures immediately.

Even if you are not a New York company or subject to this regulation, a review of the notification requirement provides a useful tool in implementing the TILA loan originator compensation rule.

• Requirements

• Deadlines

• Examinations

• Exemption

• Overtime

• Forms and Processing

• Penalties

• Library

Requirements

Employers must provide all New York employees with an annual written notice known as a Notice of Pay Rate and Payday (Notice) beginning January 1, 2012. 

Previously, employers were required to provide this notice only to new employees when certain changes in compensation were made.

Now all employees must receive this notice on an annual basis and it must be signed every year as it is an annual requirement.

Deadlines

The Notice must be provided between January 1 and February 1 of each year beginning in 2012.

The form must be signed by the employee and dated prior to the deadline of February 1, 2012. The signature is necessary as proof that the employee received the Notice.

The employer must sign as preparer, and complete the information in box one of the Notice.

In addition, the employer must retain the signed and dated original copy for six (6) years.

Examinations

New York's Department of Labor will be conducting random compliance audits, in which very significant penalties for failure to comply will be assessed.

It is also possible that this Notice will be either called for or referred to in a banking department examination or a CFPB state-affiliated audit for compliance with the TILA loan originator compensation mandates.

Exemption

There is no exemption for small employers.

As long as a business has a single employee in New York State, the Notice is required.

Independent contractors are not covered by this law.

Overtime

Regardless of an employee's method of compensation and entitlement to overtime, the Notice must be provided. This means that all employees, both exempt from overtime requirements and non-exempt, must receive the Notice.