Compliance & Regulation

A U.S. district court judge in California has denied a motion by JPMorgan Chase Bank to dismiss a lawsuit that alleges the bank illegally reduced a couple's home equity line of credit. Chase argued that the plaintiffs, Jeffrey and Jenifer Schulken, are former customers of Washington Mutual and they should sue the Federal Deposit Insurance Corp. - which approved Chase's acquisition of WaMu - not Chase. But the judge sided with the Schulkens. According to the plaintiffs' attorney Jay Edelson, "Chase's unprecedented position was simple: Chase can harm former WaMu customers with impunity and anyone who suffers damage should sue the FDIC." Chase acquired the troubled WaMu with the approval of the FDIC in September 2008. The bank moved to reduce the plaintiffs' HELOC in March 2009, claiming their income had declined. Plaintiffs claim their income hasn't changed and sued Chase for violating the Truth in Lending Act. If the judge certifies the class act lawsuit, the plaintiffs' attorneys want the class to cover all Chase HELOC customers as well as former WaMu customers. A Chase spokeswoman said the bank does not comment on litigation. Chicago-based KamberEdelson LLC also is pursuing class action litigation against two large institutions that are among Chase's peers for suspending and reducing HELOCs. An FDIC spokesman did not have an immediate comment pending a review of the case by the FDIC's legal team.

Senate Banking Committee Chairman Chris Dodd abruptly abandoned his plan to press ahead with a partisan vote on his regulatory reform bill next month after running into bipartisan opposition. During debate on the legislation Thursday, several panel members said the legislation was not well constructed and nowhere near ready for quick action. Though lawmakers said they generally agreed on the goals of the Connecticut Democrat's legislation, they faulted just about every part of his execution. Republicans were particularly critical, arguing that Dodd was being hasty. But several Democrats also raised objections to the bill's core concepts, including creation of a single banking supervisor. Sen. Michael Bennet, D-Colo., warning of "unintended consequences in the bill," urged Dodd to create a bipartisan product before moving forward.

The National Reverse Mortgage Lenders Association is in the final stages of "publicly naming" an overly aggressive third-party lead generation company which has consistently violated the group's ethics and standards policies. A public naming is the last of six different sanctions that NRMLA can place against its members. The company, which still has the opportunity to appeal, already has been placed on probation, then suspended and finally expelled from the group, according to President Peter Bell, who declined to reveal the identity of the rogue company. "Now we're ready to report (the company) to the authorities and alert our members," he said. Four to six cases a month come before NRMLA's ethics panel, 70% because of problems with their advertising, the NRMLA leader told the conference.

Credit scores on FHA single-family loans have risen steadily over the past three years with the average score reaching 689 at the end of September, a 10% improvement from a year ago. Lenders originated a record $328.1 billion in Federal Housing Administration loans in FY 2009 and 44% of the loans have FICO scores above 680. Only 13% have FICO scores below 620, which is generally considered subprime. In FY 2007, when FHA endorsements totaled $55.5 billion, only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620. (FICO stands for Fair Isaac & Co., which compiles credit scores on consumers.) "The improved credit quality of FHA's recent originations debunks the myths that FHA is being overrun by subprime loans," said Brian Chappelle, a partner in Potomac Partners of Washington. Mr. Chappelle is basing his beliefs on a recent audit of FHA's single-family portfolio and a FHA report to Congress. He noted that loans with FICO scores above 680 perform four-times better than loans with FICOs below 620.

"Several dozen" of the 1,200 to 1,500 fraud investigations currently underway within the Department of Housing and Urban Development's Inspector General's Office involve home equity conversion mortgages, a group of reverse mortgage specialists meeting in San Diego were told. Some cases involve a single loan; others, hundreds of loans, and they run the gamut of industry practitioners - from single loan officers to big companies, according to Michael Stolworthy, the assistant special agent in charge of mortgage crime investigations in the IG's office, which is the law enforcement arm of HUD. "I'm not saying fraud is widespread, but some of these are not just fly-by-night outfits," Mr. Stolworthy told the National Reverse Mortgage Lenders Conference. "This is not an industry permeated with fraud, but it's not perfect either." The mortgage cop didn't name names, but he said one miscreant's name has popped up on straw buyer cases involving more than 300 properties. In another investigation that involved the well-known Crips gang of street thugs, 25 seniors were sold highly inflated properties using the popular HECM for purchase program. Despite these ongoing investigations, Mr. Stolworthy extolled the virtues of reverse mortgages. "I'm a big supporter; HECM is an excellent product," he said. "But an industry that's often on the defensive doesn't need this kind of black eye."

A college professor in Tennessee has been sentenced to a year and a day in jail following her conviction early this year for mortgage fraud. Pamela Gail Holder was convicted by a jury on charges of bank fraud and wire fraud. Holder, a professor of nursing at Middle Tennessee State University, was accused of orchestrating a multi-million dollar mortgage fraud scheme that involved a straw buyer" with a good credit score. This buyer was deceived by Holder into borrowing $2.4 million for the purpose of purchasing a $1.5 million dollar home in Hendersonville, Tenn. Holder helped prepare or send false documents that, among other things, falsely claimed that the straw buyer was president of "Team Fat Man," an automotive-sales business owned by her deceased husband, and greatly inflated the straw buyer's income. The scheme involved loans obtained at Bank of Nashville, Countrywide Home Loans and First Tennessee Bank. The loan went into default and the property was foreclosed upon.

The Department of Housing and Urban Development will soon publish an advance notice of rule making concerning reverse mortgages that the agency's official who oversees the Home Equity Conversion Mortgage program says "a lot of people may find disconcerting." The notice, which is awaiting approval from the Office of Management and Budget, "asks some very serious questions," Meg Burns, the director of the office of single-family program development at the Federal Housing Administration, said at the National Reverse Mortgage Lenders Association's annual conference in San Diego. One "straight out" question that will be asked is whether borrowers should be allowed to pocket the proceeds of a reverse loan and use the money as the basis of an annuity against falling prices. Another question is whether or not a limit should be placed on how the proceeds are used by the borrower, and a third is whether draws should be limited unless the borrower has an immediate need. "We think it's appropriate to ask these questions because these are the issues the come up all the time with lawmakers," Ms. Burns told the conference. She added HUD would soon publish a proposed regulation that would require all reverse mortgage lenders to determine if the income of a would-be borrower is enough to meet his and/or her current obligations. If so, HUD may place restrictions on how much of the loan proceeds a borrower can draw. Yet another idea on the table at HUD is what's called a "HECM Mini" in which borrowers whose equity in their homes was more than needed would tell the lender what percentage of the value they wanted and the maximum claim limits would be adjusted accordingly.

Still bristling from the Federal Housing Administration's decision in late September to cut "principal list factors" by roughly 10% across the board as of Oct. 1, reverse mortgage lenders are now bracing for another haircut, this one probably around Jan. 1. After meeting with FHA Commissioner David Stevens before the start of the National Reverse Mortgage Lenders Association's annual conference in San Diego, NRMLA President Peter Bell seemed resigned to the reality that the FHA would lower the two factors - the borrower's age and the current mortgage rate - that form the matrix used to determine what percentage of the property's value is available to the borrower. But at the same time, he told MortgageWire that his members would not be pleased. "This whole thing with risk management has ruffled a lot of feathers," Mr. Bell said. Changes in the matrix are dictated by the Office of Management and Budget's reading of house prices, which have been falling in most locations. An announcement is expected shortly after the Thanksgiving holiday. "It's really a new day in Washington," he said. "Evidence-based decision making drives the process now." According to a rump survey by the group of the loans booked year-to-date by the three largest portfolio lenders of reverse mortgages, had the Oct. 1 changes been in effect for the entire year, one out of five borrowers would not have qualified for their loans because the amount of equity available to them would have been less than what was still owed on the property.

A former Washington area stripper who ran a foreclosure rescue scam in and around the nation's capitol has been sentenced to 12 years in prison after being convicted of stealing millions from struggling homeowners. Joy Jenise Jackson, former president of Lanham, Md.-based Metropolitan Money Store, also was ordered to pay $16.9 million in restitution. MMS operated as a loan brokerage firm, using table funding from such subprime lenders and New Century Financial Corp. and Argent Mortgage, both of which are no longer in business. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, Jackson co-founded MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others fraudulently promised to help homeowners avoid foreclosure and repair their damaged credit. But instead they took title to their victims' homes, and engaged in an equity skimming scheme that resulted in foreclosure for many. To date, ten defendants have pleaded guilty in the MMS case.

Seven individuals have been charged for their roles in a mortgage fraud scheme that involved more than 100 properties in Northern California. The indictment charges Amy Schloemann, Karim Akil, Wonda Louise Kidd, Michelle McGuire, Kaska Clay, James Ross and Darnell Thomas with conspiracy to commit wire fraud, wire fraud and money laundering. According to Joseph P. Russoniello, U.S. attorney for the Eastern District of California, the defendants, who were unavailable for comment, allegedly participated in a fraud scheme involving the fraudulent purchase of more than 100 properties through the use of straw buyers, real estate appraisers, notaries and escrow agents, and the laundering of profits. The defendants allegedly directed straw buyers to sign loan applications containing false information and allegedly hired notary publics to fraudulently notarize documents. The defendants allegedly increased their profits on the purchase of properties by submitting false documents to lenders. Once the properties were purchased, the defendants allegedly split the proceeds and failed to make payments on the properties, causing lenders to foreclose.