Wednesday, September 26, 2012

CFPB Proposes New Servicing Rules - RESPA

Recently, the Bureau of Consumer Financial Protection (Bureau) issued proposed rules (Proposal) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation.
The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing. 
Specifically, this proposal requests comment regarding proposed additions to Regulation X to address seven servicer obligations:
1) Correct errors asserted by mortgage loan borrowers; 
2) Provide information requested by mortgage loan borrowers;
3) Ensure that a reasonable basis exists to obtain force-placed insurance;
4) Establish reasonable information management policies and procedures;
5) Provide information about mortgage loss mitigation options to delinquent borrowers;
6) Provide delinquent borrowers access to servicer personnel with continuity of contact about the borrower's mortgage loan account; and
7) Evaluate borrowers' applications for available loss mitigation options.
The Proposal would modify and streamline certain existing servicing-related provisions of Regulation X. 
For instance, it would revise provisions relating to:
1) A mortgage servicer's obligation to provide disclosures to borrowers in connection with a transfer of mortgage servicing, and
2) A mortgage servicer's obligation to manage escrow accounts (including the obligation to advance funds to an escrow account to maintain insurance coverage and to return amounts in an escrow account to a borrower upon payment in full of a mortgage loan).
The Bureau proposes 'companion' regulations implementing amendments to the Truth In Lending Act (TILA) in Regulation Z (the 2012 TILA Servicing Proposal). We will provide an outline of the 2012 TILA Servicing Proposal in a subsequent newsletter.
Comments Due: On or before October 9, 2012.
Nine Major Topics
Small Servicers
  • The Proposal generally applies to closed-end mortgage loans, with certain exceptions.
  • Under the Proposal, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded.
  • Under the 2012 TILA Servicing Proposal, the periodic statement and adjustable-rate mortgage (ARM), disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.
  • Reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.
  • The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.
Nine Major Topics
The Proposal covers nine major topics, as follows:
1. Periodic billing statements.
Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use.
The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans and service only mortgage loans that they originated or own.
2. Adjustable-rate mortgage interest-rate adjustment notices.
Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The Proposal contains model and sample forms that servicers could use.

Thursday, September 13, 2012

HUD: Causes of Administrative Actions

The Department of Housing and Urban Development (HUD) has published the Administrative Actions taken by the Mortgagee Review Board (MRB) against certain FHA mortgagees. The issuance, published in the Federal Register on September 10, 2012, covers administrative actions against mortgagees from August 1, 2011 to December 31, 2011.

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

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

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



Preparation is Protection
47 Causes of Administrative Actions


Preparation is Protection

I have said repeatedly that preparation is protection. One way to always be prepared is to consider what other mortgagees did that got them into trouble in the first place.* Learning from the mistakes of others is a proactive way to ensure that we are following up on every aspect of our compliance requirements.

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

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

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

So it is instructive to take note of the causes for administrative action against a HUD-approved mortgagee. Ignorance is a futile defense, when it comes to the causes that can affirmatively contribute to disciplinary action. HUD's position has been consistently clear: actions taken or not taken, that are within our control, are a principal evaluator in determining a mortgagee's culpability.

As Benjamin Franklin said, "an ounce of prevention is worth a pound of cure!"

47 Causes of Administrative Actions

Below is a list of 47 causes that have led to the MRB taking administrative action.

In many cases, the civil money penalties were very large.

1. Falsified and/or conflicting information in the origination of HUD/FHA loans.

2. Failed to ensure loan applications were taken and processed by authorized employees.

3. Failed to ensure that documents were not handled by an interested third party.

4. Failed to adequately document the income used to qualify the borrower.

5. Failed to document the source of funds used for the down payment and/or closing costs; failed to perform quality control on all loans that went into default within the first six months.

6. Failed to timely submit audited financial statements and supplementary reports to HUD.

7. Failed to notify the Department that it had paid a fine to a state banking department.

8. Failed to ensure that only principal owners or corporate officers submit the annual certification report.

9. Submitted a false certification to HUD when it submitted its electronic annual certification for 2011.

10. Submitted false audited financial statements to HUD for Fiscal Year ending April 30, 2010, when it claimed ownership of a residential condominium unit.

11. Submitted audited financial statements to HUD that were not in conformity with Generally Accepted Accounting Principles due to the improper capitalization of a residential condominium unit.

12. Displayed the FHA/HUD logo on its Web site when promoting its FHA mortgage services.

13. Failed to timely submit or complete its audited financial statements for its fiscal year ending December 31, 2011.

14. Failed to pay its annual certification fee.

15. Failed to submit its annual certification for 2010.

16. Failed to notify HUD that it paid a fine to a state banking department to resolve allegations that it had violated the state's lenders licensing laws.

17. Failed to remit mortgage insurance premiums to HUD/FHA on its loans.

18. Failed to notify HUD/FHA within fifteen (15) days of the termination of contracts for mortgage insurance.

19. Failed to notify HUD that it voluntarily surrendered its license to a state banking department.

20. Originated FHA mortgages in a state while it was the subject of an order suspending its lending license in that state.

21. Permitted a non-FHA approved mortgage broker to perform loan origination services on its FHA loans.

22. Approved loans for borrowers who were ineligible for federally insured mortgages due to outstanding delinquent federal debt.

23. Approved FHA loans without adequately documenting the income used to qualify the borrowers.

24. Approved FHA loans without resolving discrepancies in the loan files relating to the borrowers’ income and employment.

24. Failed to document the source of gift funds on FHA loans.

25. Approved a loan when the borrower did not meet the minimum credit required.

26. Approved a loan where it omitted a liability of the borrower in the underwriting analysis.

27. Accepted loan applications from loan correspondents for which it was not an FHA approved Sponsor.

28. Failed to review FHA loans that went into early payment default within the first six (6) months of repayment.

29. Failed to comply with property preservation and protection requirements on HUD-insured homes following foreclosure.

30. Violated HUD/FHA requirements when it approved FHA loans without identifying irregularities and resolving discrepancies and conflicting information in the loan files.

31. Violated HUD/FHA requirements on FHA loans when it failed to adequately document the borrowers’ income.

32. Violated HUD/FHA requirements when it approved FHA loans after failing to ensure that documents were not handled by an interested third party.

33. Violated HUD/FHA requirements on FHA transactions when it failed to document the source of funds used for the borrowers’ down-payments and/or closing costs.

34. Violated HUD/FHA requirements when it approved FHA loans and omitted monthly debt obligations from its underwriting analysis.

35. Violated HUD/FHA requirements when it approved an FHA loan for a borrower who was ineligible because of an outstanding court-ordered judgment.

36. Violated HUD/FHA requirements when it approved a loan for FHA mortgage insurance without ensuring the borrower met the statutory 3.5% minimum investment requirement.

37. Violated HUD/FHA requirements when it approved a loan for a borrower that was over insured, because it had failed to consider the seller’s inducement to purchase.

38. Failed to timely remit mortgage insurance premiums.

39. Failed to notify HUD that the mortgagee and its President were issued a Complaint and Cease and Desist Order from a state banking department that required the mortgagee to pay fines, ordered it to permanently cease and desist from operating and engaging in the business of a lender in that state, required it to immediately surrender its lender's license, and barred its President from serving as an officer, director, or owner of any financial institution in the state.

40. Failed to comply with HUD’s quality control requirements.

41. Violated HUD’s mortgagee employee and staffing requirements.

42. Charged unallowable and unsupported fees.

43. Reproduced the official HUD seal on an advertisement or business solicitation, and disseminated a misrepresentative or misleading advertisement or business solicitation to the public.

44. Failed to ensure that the quality control reviews for early payment defaults were completed.

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

46. Failed to adequately document the stability of income used to qualify the borrowers.

47. Failed to notify HUD/FHA within 15 calendar days of the termination, transfer or sale of mortgage insurance contracts.


Law Library Image

Department of Housing and Urban Development

Mortgagee Review Board: Administrative Actions

Federal Register: 77/175
September 10, 2012

*Jonathan Foxx is the President & Managing Director of Lenders Compliance Group