Compliance and Fraud

Click here for a FREE Compliance and Fraud Newsletter.

Florida Attorney General Bill McCollum has sued Countrywide Financial Corp. and its former chairman Angelo Mozilo for allegedly engaging in deceptive and unfair trade practices in originating subprime loans. The AG's lawsuit says the Calabasas, Calif.-based lender failed to ensure that borrowers could repay their loans and even placed prime borrowers into higher interest rate subprime loans. "To foster a culture of loan approvals regardless of a borrower's capacity to pay, Defendants compensated underwriters with bonuses," says the lawsuit filed in Broward Country circuit court. "Defendants' underwriters had incentives to approve as many loans as possible, regardless of credit risk." Countrywide declined to comment on the specifics of the case. The Florida AG filed the lawsuit on June 30, one day before Bank of America completed its acquisition of Countrywide. Attorneys general in Illinois and California have filed similar lawsuits against Countrywide.

Federal Reserve Board staff members are urging staffers at the Department of Housing and Urban Development to work with them in revising key disclosures for mortgage applicants so they don't produce duplicative and inconsistent forms that confuse consumers. "We believe the inconsistencies and other differences between HUD's proposed good faith estimate and the Fed's Truth in Lending Act disclosures are likely to confuse consumers and undermine consumers' ability to make informed shopping decisions and avoid unnecessarily high settlement costs," Fed consumer affairs director Sandra Braunstein said. In commenting on HUD's Real Estate Settlement Procedures Act proposal, Ms. Braunstein points out that the Fed and HUD are on different tracks when it comes to the disclosure of mortgage broker compensation. She says consumers are confused about how brokers are compensated and reports that the Fed's consumer testing raises concerns about the terminology HUD uses to describe broker fees. "Board staff is concerned that the language on the revised GFE will contribute to consumer confusion rather than provide further clarity for consumers," the Fed's consumer affairs director says in the June 13 letter.

The Senate has approved an amendment by Sen. Christopher S. Bond, R-Mo., that requires lenders to provide better consumer disclosures on adjustable-rate mortgages with teaser rates. ARMs with teaser rates "played a large role in our current subprime mortgage crisis," Sen. Bond said recently during debate on a housing reform and foreclosure rescue bill. The new Truth in Lending Act disclosure would require mortgage lenders or brokers to disclose how high the mortgage payments would go once the teaser rate expires. In addition, they would have to disclose that there is "no guarantee" that the borrower will be able to refinance the loan before the initial low rate ends. "Many potential borrowers either did not understand what they were getting into or were falsely assured [that they could refinance and] everything would be OK," Mr. Bond said. The Senate approved the Bond amendment to the housing bill by unanimous consent on June 25.

As senators go home for the Fourth of July recess, supporters of a housing reform and foreclosure rescue bill remain optimistic that the Senate will pass the measure shortly after they return and that a final bill will land on the president's desk before August. "All signs indicate that they will finish the housing legislation before the August recess," said Mike House, executive director of FM Policy Focus. Republicans succeeded in blocking a final vote on the housing bill before the recess, which starts June 28. But test votes show that at least 80 of the 100 senators support the landmark housing bill that would authorize the Federal Housing Administration to refinance 400,000 at-risk homeowners to prevent foreclosures and strengthen regulation of the housing government-sponsored enterprises. The House has passed a similar bill, and observers expect that the House and Senate banking committee leaders will be able to resolve any differences relatively quickly. Meanwhile, President Bush is moving away from previous veto threats. Now he is calling on lawmakers to complete their work on the housing bill when they return to Washington on July 7. "The Congress needs to come together and pass responsible housing legislation to help more Americans keep their homes," Mr. Bush said.

Banks and thrifts holding fairly conservative one- to four-family mortgages would see their risk-based capital requirement jump from a 35% to a 100% risk weighting if the borrower missed three monthly payments under an RBC proposal federal banking regulators call the Basel II "standardized approach." Riskier residential mortgages with higher loan-to-value ratios or stand-alone home equity loans that become 90 days or more past due could end up with a 150% risk weighting, according to Federal Deposit Insurance Corp. officials. The FDIC board has approved the issuance of the proposed standardized approach for a 90-day comment period. The Federal Reserve Board was slated to meet June 26 to consider the notice of proposed rulemaking. The regulators have decided to scrap a Basel Ia RBC rule and move toward the standardized approach that could be adopted by most FDIC-insured institutions. The 11 largest U.S. banking organizations are required to implement the more advanced Basel II approach. The standardized approach incorporates the more risk-sensitive risk weightings for mortgage loans in Basel Ia and adds a surcharge for operational risk based on 15% of net interest income. It also imposes a capital surcharge on nontraditional mortgages to address risks associated with negative amortization. Restructured single-family loans would generally fall into a 100% risk weighting.

Citing a desire to help the mortgage industry combat fraud, Agoura Hills, Calif.-based Interthinx Inc. has announced its integration with MERS, the electronic registry for tracking ownership of mortgage loans and servicing rights. Data from MERS will be integrated into Interthinx's FraudGuard scoring system to detect undisclosed properties, reveal investors claiming owner occupancy, and uncover recently closed loans that could indicate a borrower's intent to commit mortgage fraud. The new feature allows FraudGuard users to automatically access the MERS database of registered real estate transactions to conduct automated searches (during the FraudGuard scoring process) for potential fraud before funding a loan. Interthinx is a provider of risk mitigation, mortgage fraud prevention, and regulatory compliance tools. The companies can be found on the Web at http://www.iterthinx.com and http://www.mersinc.org.

The Illinois attorney general has sued Countrywide Financial Corp. and its chairman Angelo Mozilo for engaging in allegedly unfair and deceptive lending practices that placed borrowers into risky subprime and payment-option mortgages they could not afford. "Countrywide used egregious unfair and deceptive lending practices to steer borrowers into loans that were destined to fail," AG Lisa Madigan said. The lawsuit alleges that Countrywide weakened its lending standards and pushed reduced document loans to qualify more borrowers and increase its loan production. "Through the investigation, we have learned the larger story of how Countrywide created and implemented a corporate strategy that resulted in widespread loan failures," Ms. Madigan said. Countrywide, which is being acquired by Bank of America, had not responded to a request for comment by deadline time. The Illinois AG wants the Cook County Circuit Court to order the Calabasas, Calif.-based lender to rescind or restructure all the loans it originated using the allegedly unfair and deceptive practices.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have announced that six more states will begin using their Web-based mortgage licensing system on July 1, bringing the total to 14. The new additions to the Nationwide Mortgage Licensing System are Connecticut, Louisiana, Mississippi, North Carolina, New Hampshire, and Vermont. The system is designed to automate and streamline state licensing of mortgage lenders and brokers. The states already using the system are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, Rhode Island, and Washington. More than 5,000 companies and nearly 17,000 loan officers are being managed by the system, the organizations said. "This unprecedented adoption rate is the result of hard work begun several years ago by state regulators as we envisioned a new regulatory framework that would begin to address some of the gaps we experienced in state and federal oversight of the mortgage industry," said Gavin Gee, Idaho's director of finance and chairman of State Regulatory Registry LLC, the CSBS subsidiary that developed and operates the online registry. CSBS can be found online at http://www.csbs.org.

Federal banking regulators are pressing the Office of Federal Housing Enterprise Oversight to exempt federally regulated institutions from proposed appraisal standards Fannie Mae and Freddie Mac agreed to implement under a settlement with New York Attorney General Andrew Cuomo. The appraisal standards or code would "materially disrupt mortgage lending processes and raise costs," according to a joint letter signed by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. Comptroller of the Currency John Dugan previously urged OFHEO Director James Lockhart to withdraw the appraisal code, which would ban the use of in-house or affiliated appraisers on loans sold to the two government-sponsored enterprises. "If not withdrawn, the agreements and code should be revised to exempt federally regulated lenders," the June 19 letter says. Meanwhile, the Senate is likely to vote on an amendment to a major housing bill this week that directs OFHEO to issue regulations that establish appraisal standards for Fannie and Freddie. The appraisal amendment by Sen. Elizabeth Dole, R-N.C., would nullify the appraisal code the GSEs worked out with the New York AG. Senate Banking Committee Chairman Christopher J. Dodd, D- Conn., opposes the Dole amendment.

Former Bear Stearns executives Ralph Cioffi and Matthew Tannin, who managed two subprime hedge funds that collapsed last summer, have been indicted on securities fraud and insider trading in regard to the funds' management. Until recently, little was known about the hedge funds because they were organized under a Bear affiliate, Bear Stearns Asset Management, and incorporated in the Cayman Islands, where bankruptcy laws allow companies to disclose a minimum about their operations. According to the U.S. attorney's office in Brooklyn, where the indictments were handed up, the hedge funds held at least $1.4 billion in investors' money by the end of 2006. In a statement, the U.S. attorney's office said that Messrs. Cioffi and Tannin "believed that the funds were in grave condition and at risk of collapse. However, rather than alerting the Funds' investors and creditors to the bleak prospects of the funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds." (For the full story, see the June 23 issue of National Mortgage News.)