Compliance & Regulation

The Justice Department is seeking a permanent injunction against Lend America and a top executive who controlled the company, Michael Ashley-but no monetary penalties-for defrauding the Federal Housing Administration. A privately held nonbank based in Melville, N.Y., Lend America closed its doors in December, though it has not filed for bankruptcy protection, an event expected by many vendors and third parties that once did business with the company. "Rather than seeking monetary relief, the United States seeks equitable relief barring Lend America from engaging in conduct to defraud the United States," said assistant U.S. attorney John Vagelatos of the Eastern District of New York in a new "notice of motion for default judgment." In a civil suit filed last October, Vagelatos' office won a preliminary injunction to stop Lend America from originating FHA-insured loans. The U.S. Attorney's office is now seeking a default judgment because Lend America and its principals have not appeared for hearings or hired attorneys to represent them. If Lend America does not contest the default judgment by April 30, Vagelatos will ask the judge to impose a permanent injunction on Lend America, its agents and employees from originating, underwriting or endorsing FHA-insured loans. (However, for all intents and purposes, Lend America has no employees left and is out of business.) The AUSA also will ask the court to permanently enjoin those individuals from "advertising, marketing to the public or otherwise soliciting business to originate or otherwise make federally related loans or federally-insured home loans, including but not limited to, those loans defined in the Real Estate Settlement Procedures Act." Vagelatos filed the motion for default judgment on April 19 with the U.S. District Court for the Eastern District of New York.

Lenders would be exempt from risk retention ratios on MBS issuance if they originate low-risk, fully documented mortgages under an amendment Senator Johnny Isakson, R-Ga., plans to offer when the Senate takes up the regulatory reform bill. Under the amendment, "qualified mortgages" would be exempt from a 5% risk retention requirement when a lender sells loans in the secondary market. Qualified mortgages could not have interest-only payments, balloon payments or negative amortization. In addition, any mortgages with loan-to-value ratios exceeding 80% must have private mortgage insurance. The subprime mortgage crisis resulted from "shoddy underwriting," Sen. Isakson said. Qualified mortgages would mark a return to the "gold standard" and the "good old days" when mortgages were well underwritten, he added. Mortgage funders and investment bankers would have to retain 5% of the credit risk on riskier mortgages, however. Borrowers that take out safer loans "should not have to pay the higher interest rates that would result from across-the-board risk retention," said Glen Corso, managing director of the Community Mortgage Banking Project. Industry groups are concerned that risk retention will increase the cost, and reduce the availability of credit to homebuyers. For over a year the industry has been seeking support for a qualified mortgage exemption.

The American Bankers Association is warning that passage of a financial services regulatory reform bill by the Senate would overburden community banks and threaten their future. In a letter to members of the Senate, ABA president and chief executive Ed Yingling says the reform bill would impose 27 new or expanded regulations on banks that would have a "dramatic negative impact" on community banks. The Independent Community Banks of America hopes the Senate will start debate on the regulatory reform bill this Thursday. ICBA wants some of the regulatory burden shifted to nonbank lenders, which potentially would include residential funders. "If there is no bill, all of that heavy burden will continue to fall on community banks and not fall on the nonbanks. That's the world we are living in now," said ICBA's top lobbyist Steve Verdier. Senate majority leader Harry Reid, D-Nev., needs 60 votes on Thursday to start the debate and amendment process on the regulatory reform bill but there are only 59 Democratic senators. Sen. Reid must get at least one Republic senator to cross the aisle. So far, Senate minority leader Mitch McConnell, R-Ky., has done a good job of keeping all 41 Republicans in line, one lobbyist said.

Mortgage brokers will no longer have to go through the expense of an audit to originate Federal Housing Administration loans. For the rest of this year, they can coast without paying a certified public accountant to verify their net worth. "Mortgage brokers already approved by FHA will be authorized to continue to originate FHA-insured loans through the end of the calendar year." Starting January 1, brokers will have to team up with FHA-approved direct endorsement lenders to originate FHA-insured single-family loans. These changes are all part of a long-awaited final rule that eliminates Federal Housing Administration's approval process for mortgage brokers. After three years, HUD will raise the net worth requirements again. Beginning May 20, 2013, "approved lenders and applicants to FHA single-family program must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million," the final rule says. The final rule caps the maximum worth requirement at $2.5 million. HUD originally proposed a $2.5 million net worth for all FHA-approved lenders. (See related story.)

The Department of Housing and Urban Development Tuesday morning published its final rule that sets higher net worth requirements for Federal Housing Administration-approved lenders. Starting May 20, 2011, most FHA-approved lenders must have a minimum net worth of $1 million, four-times the current requirement of $250,000. Non-supervised FHA-approved lenders that qualify as small businesses have to meet a $500,000 net worth standard. HUD estimates there are 260 small-business non-supervised approved lenders with net worth less than $500,000. In three years, HUD plans to raise the net worth requirements again. Beginning May 20, 2013, "approved lenders and applicants to FHA single-family program must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million," the final rule says. HUD capped the maximum worth requirement at $2.5 million. The department originally proposed a $2.5 million net worth for all FHA-approved lenders.

The nation's GSE regulator wants more information about the Federal Home Loan Bank of Seattle's capital restoration plan before it lifts the bank's "undercapitalized" designation. The Federal Housing Finance Agency is giving the Seattle bank 120 days to develop and submit the requested material. "During this period, FHFA will maintain the Bank's 'undercapitalized' classification absent further developments, and the accompanying restrictions will remain in place," said the GSE regulator. Under the restrictions, the Federal Home Loan Bank cannot pay dividends to member institutions or redeem or repurchase member stock. FHFA reaffirmed the Seattle bank's 'undercapitalized' status in November 2009 even though the FHLB met all statutory and regulatory minimum capital requirements in the third quarter. Acting director Edward DeMarco noted the institution's earnings have been hurt by its investments in private-label MBS and expects those losses could continue. The Seattle FHLB reported a $162 million loss in the fourth quarter.

Enforcement of fair lending laws is a "top priority" of the Justice Department, a top DOJ official told a Senate panel on Tuesday. Assistant attorney general Thomas Perez noted that the agency's civil rights division is working on 39 lending discrimination cases -- 29 of which were referred to DOJ by the federal banking regulators. In the Obama Administration, the civil rights division formed a special Fair Lending Unit, appointing Eric Halperin, a former chief litigator for the Center for Responsible Lending, to head the effort. In March, DOJ reached a $6 million settlement with American International Group to settle allegations that AIG allowed mortgage brokers to charge African Americans "excessive fees" on home mortgages. Mr. Perez testified that this "landmark case" sends a "clear signal to lenders that they must take steps to ensure that brokers with whom they partner do not engage in discrimination."

Goldman Sachs, its image tarnished by a new subprime-related legal action brought by the government, on Monday made additional comments on the case, including a revelation that it too lost money on the CDO transaction in question. Goldman now claims the firm lost more than $90 million on the deal, which is still paltry compared to almost $1 billion in estimated losses suffered by investors. In answering allegations levied by the Securities and Exchange Commission, the Wall Street firm says it made "extensive" disclosures to investors IKB, a large German Bank, and ACA Capital Management, which it called "sophisticated CDO market" participants. Goldman says the "risk associated with the securities was known to these investors." On Friday the SEC accused Goldman and an executive involved in the transaction of misleading clients on a subprime bond known as ABACUS 2007-AC1. Goldman marketed the offering in 2007. The SEC accused the firm of civil fraud, saying it created the CDO with the help of a hedge fund that was shorting the same bond but did not disclose the relationship to investors.

The second half of this year will bring continued challenges for the housing market, according to two Wells Fargo Securities economists, who expect higher mortgage rates and new home price declines. "The housing market will not return to a position of strength until late next year or in 2012," said Mark Vitner and Adam York. In their April "Housing Chartbook," they note that the housing recovery so far has been based on tax incentives, artificially low mortgage rates and "unprecedented" assistance for struggling homeowners. The Federal Reserve stopped buying agency MBS at the end of March and the homebuyer tax credit is set to expire late in the Spring. "We have significant concerns about the sustainability of the housing recovery once the stimulus is removed from the marketplace," the economists say, adding that an excess supply of 2 million unsold homes will continue to exert downward pressure on prices. "We estimate housing prices could fall an additional 6% to 8% from their current levels before they ultimately bottom out," York told National Mortgage News. But he noted that most of the drop in prices will come from sales of higher-end homes.

A new regulatory report says the collapse of Cal State 9 Credit Union of Concord, Calif., was caused by the lender's ill-fated foray into subprime residential lending, which eventually comprised more than 92% of its loans. "Specifically, management committed an exorbitant percentage of the credit union's assets in an indirect 'Home Equity Line of Credit' program without adequate controls in place to oversee and manage the risks in the program's operations," according to a "material loss review" conducted by the National Credit Union Administration's Office of Inspector General. Virtually all of the indirect HELOCs were of the subprime variety that included loans with stated income, high loan-to-value ratios, and negative amortization second liens, most of which were made to borrowers with low credit scores. More troubling, according to the report, was that the risky loan program even jeopardized at least three nearby credit unions and one bank with the sale of $190 million in non-recourse loan participations to those four institutions. The report on the collapse of the $440 million asset Cal State 9-the biggest credit union failure ever in California-comes as the Senate Subcommittee on Permanent Investigations is planning additional hearings on the collapse of Washington Mutual, the biggest depository failure ever which was also caused by subprime lending. Like Washington Mutual, Cal State 9, failed in 2008. Its demise will cost the NCUA insurance fund $206 million, making it the costliest credit union failure to date.