Compliance & Regulation

The Obama administration is expanding its flagging HAMP program to address the two main drivers of foreclosures-job loss and underwater mortgages where borrowers owe more on their loan than the property is worth. Under the new initiative, the Treasury Department will pay incentives to Home Affordable Modification Program servicers for allowing unemployed homeowners to skip three to six months of payments while they look for work. The Treasury also is encouraging servicers to consider principal writedowns for HAMP-eligible borrowers who owe more than 115% of the current appraised value of their home. Incentives will be paid for each dollar of principal writedowns by servicers and investors to bring the loan-to-value ratio below 115% and the monthly payments down to 31%, along with lowering the interest rate and extending the term. Lenders will treat the writedowns as forbearance over the first three years. The principal reduction does not become permanent unless the borrower is current on the modified mortgage for all three years. Treasury also is increasing incentives for investors to writedown or to relinquish their claims on second liens.

Wolters Kluwer Financial Services, Minneapolis, is marketing its new RESPA Post-Implementation Audit Service to banks and credit unions. The company said that since changes to the Real Estate Settlement Procedures Act went into effect on Jan. 1, 2010, financial institutions have found several common compliance challenges, including meeting the new fee tolerance and good-faith estimate redisclosure requirements. Another challenge is the lender responsibility to make certain their mortgage brokers and settlement agents are in compliance as well. The review includes an examination of an institution's lending, compliance, vendor management and staff training procedures. It also includes a loan file review that looks at GFEs and HUD-1 and HUD-1A forms for accuracy and adherence to all RESPA requirements. WKFS highlights any areas of potential concern and suggests ways in which policies, procedures and documentation can be improved.

Growing mortgage foreclosures and unemployment have the National Credit Union Administration expecting losses at corporate credit unions to be higher than the $6 billion originally projected. "The losses are coming in greater than projected," said Melinda Love, chief examiner for NCUA. Fourth quarter losses for investments held by all corporate CUs came in slightly higher than NCUA had projected based on data provided by PIMCO: $307 million, compared to $302 million. But senior NCUA executives expect the bonds held by the corporates, mostly mortgage-backed securities, to continue to deteriorate as mortgage foreclosures rise and unemployment remains at high levels, said Love. What she called the "shadow foreclosure market" is expected to continue to weigh on such securities, she said. "It's not likely that the losses are going to come in less than what is projected now," she told the Credit Union Journal, a sister publication to National Mortgage News. The NCUA chief examiner declined to give an updated loss estimate on the corporate losses, saying the figures have not been shared with the NCUA Board yet. But several independent observers have projected losses on the corporates to be as high as $10 billion.

The newest participant in the government's Second-Lien Modification Program is Citigroup. It becomes the fourth participant in the program, joining Bank of America, Chase and Wells Fargo. "It is our priority and commitment at Citi to help homeowners in need," said Vikram Pandit, chief executive. "The 2MP program will further improve the affordability on mortgages and help families facing financial distress stay in their homes."

The Department of Labor late Wednesday declared that commissioned loan officers are entitled to overtime pay, reversing a 2006 ruling that favored the mortgage firms that employed them. If DOL's declaration stands, it could increase compensation costs for mortgage originators at a time when production volumes are beginning to decline thanks to rising loan rates and expiring tax credits. "If your primary job duty is to sell loans inside an office, then (under this ruling) you are entitled to overtime," said Rachhana Srey, a senior associate at the law firm of Nichols Kaster which represents LOs working for Quicken Loans and Rock Financial. The Quicken/Rock overtime case is scheduled for trial in June. (Nichols Kaster is based in Minneapolis, Quicken and Rock in Michigan.) In its brand new ruling, DOL found that a mortgage loan officer's primary duty is sales, which "falls squarely on the production side of the business." A DOL ruling in September 2006 requested by the Mortgage Bankers Association classified LOs as administrators, which are not entitled to overtime under the Fair Labor Standards Act. "We're obviously disappointed with the Labor Department's ruling," said MBA senior vice President Steve O'Connor. "It has been, and remains our contention that those who fall into the category of mortgage loan officers described in the opinion spend a majority of their time performing exempt administrative or executive duties; thus they should be exempt from FLSA coverage."

CitiFinancial, a nonbank that was once a powerhouse in subprime lending, Wednesday agreed to pay a $1.25 million fine for not correctly reporting its residential origination data to the Federal Reserve via the Home Mortgage Disclosure Act. The settlement, however, was not between the Fed and CitiFinancial but instead was worked out by state banking supervisors who discovered the reporting problems as part of a probe into compliance with consumer protection laws. The deal was worked out between CitiFinancial, an affiliate of Citigroup, and The Conference of State Bank Supervisors/American Association of Residential Mortgage Regulators. (Roughly 35 states were party to the agreement.) The reporting violations occurred on 91,127 loans between 2004 and 2007. Prior to that, the lender was in compliance, regulators said. According to CSBS, CitiFinancial of Baltimore, failed to report the loans in its HMDA filings. The lapse was caused by "internal system errors" at the nonbank, said CSBS. CitiFinancial eventually submitted HMDA reports on the loans in question. Regulators said that even though the loans were omitted by CitiFinancial the lender's behavior "does not in any way demonstrate a pattern or practice of discriminatory lending." The loans accounted for about 10% of CitiFinancial's production volume during the time in question.

A new TARP IG report on servicer performance under the Home Affordable Mortgage Program says that even though loan restructuring efforts improved in recent months, mortgage firms will not be able to sustain the pace. In January and February, residential servicers approved roughly 50,000 permanent loan modifications per month, a vast improvement over earlier efforts. (Roughly 168,700 permanent modifications have been written since August.) However, the Troubled Asset Relief Program IG notes that the number of troubled homeowners starting the three-month HAMP payment trials is declining while at the same time servicers are tightening standards for new entrants. In addition, servicers are concerned that the 835,200 borrowers currently in payment trials include a sizeable number of homeowners who are unable-or unwilling-to make the required payments. Also, it appears that some homeowners are using the HAMP trials to forestall foreclosure. "Several of the servicers interviewed reported concerns about homeowners trying to game the system in this fashion," the report says.

The California Attorney General over the weekend closed two companies engaged in what it calls "fraudulent foreclosure-assistance" scams that gave consumers "false hope after paying upfront fees for nonexistent loan-modification services." In closing U.S. Foreclosure Relief Corp. and H.E. Servicing, Inc., AG Edmund Brown secured $1 million in court ordered restitution against the firms and officers George Escalante and Cesar Lopez. The state had filed suit against the firms in a joint action brought with the Federal Trade Commission. The AG's office said an investigation found that "the defendants used aggressive telemarketing tactics to convince distressed homeowners to pay $1,800 to $2,800 in upfront fees for loan-modification services that included reductions in principal and lower interest rates." The AG claims that in sales calls, H.E. Servicing claimed it had successfully negotiated 10,000 loan modifications. However, a full review of internal records found the company opened only 2,960 loan-modification files and completed only 311. The state says California homeowners accounted for 15% to 20% of the company's opened loan-modification files. The two men could not be reached for comment at press time.

The Senate Banking Committee late Monday passed a financial services regulatory reform bill as Republicans agreed to let the measure go through committee and work with Democrats on a possible compromise before it hits the Senate floor. The panel passed the 1,300-page bill by a 13 to 10 vote along party lines. The legislation -- which includes language on MBS risk retention -- largely resembles the bill that Senate Banking Committee chairman Chris Dodd (D-Conn.) introduced last week. The mortgage industry is lobbying against risk retention language that could crimp a revival of the private label MBS market. Sen. Dodd thanked Sen. Shelby (R-Ala.) for allowing the bill to clear committee this week which was Dodd's major goal in calling the markup. Sen. Shelby said he did not want to turn the markup process into a "long march" by offering hundreds of amendments. "Although I have raised a number of serious concerns I remain optimistic that we can, over time, reach an agreement that will garner bipartisan support," said Sen. Shelby. "I just don't think we are quite there yet."

Fannie Mae and Freddie Mac will not be buyers -- or active sellers -- of mortgage-backed securities while they remain in conservatorship, Treasury secretary Timothy Geithner declared Tuesday. During this conservatorship period, the secretary said Treasury will continue to provide capital for the GSEs, allowing them to support the primary and secondary mortgage markets. The Federal Reserve is slated to stop buying agency MBS at month's end and there had been speculation that the GSEs might become buyers -- if necessary -- to keep rates from spiking. At the same time, Treasury wants to reduce their giant investment portfolios. "Treasury remains firmly committed to ensuring that the GSEs' retained portfolios are substantially reduced," Geithner told the House Financial Services Committee. The secretary also said it would be "irresponsible" to abolish the GSEs today but he favors a redesign of the nation's housing finance system. At the beginning of Tuesday's hearing, committee chairman Barney Frank raised the issue of whether FHA, GNMA, and the FHLBs should be restructured too. Mortgage Bankers Association president Michael Berman told the panel the Obama administration should begin to wind down the GSEs as the housing finance system transfers to a new model. "Measures such as focusing the GSEs on a narrow range of mortgages and winding down their portfolios can be undertaken now," Mr. Berman said. "Additionally, the use of good/back bank strategy would help retain the best people, processes and infrastructure from the GSEs," the MBA president testified.