Compliance & Regulation

A group of state and federal officials met in Washington to discuss trends and improve coordination in the efforts to combat mortgage fraud. Treasury Secretary Timothy Geithner hosted Attorney General Eric Holder, Housing and Urban Development Secretary Shaun Donovan, Federal Trade Commission Chairman Jon Leibowitz, Financial Crimes Enforcement Network Director Jim Freis and attorneys general from 12 states. They also spoke about proactive strategies to combat fraud against consumers in the housing markets as well as best practices to bolster coordination across state and federal agencies. This meeting follows up on an announcement by the Obama Administration in April of a multi-agency crackdown on foreclosure rescue scams and loan modification fraud designed to protect homeowners from predatory financial practices. "A clear lesson of this financial crisis is that American consumers need better protection against fraud," said Mr. Geithner, adding that government agencies "will not wait for problems to peak before we respond." Treasury, FinCEN and DOJ, HUD and FTC are working on taking proactive measures to curb abuse by coordinating information and resources across agencies to maximize targeting and efficiency in fraud investigations. Secretary Donovan announced that HUD has requested $37 million in its 2010 budget to combat fraud. FTC Chairman Leibowitz announced two new law enforcement actions in a continuing crackdown on mortgage foreclosure rescue and loan modification scams, bringing to 22 the number of these cases the Commission has filed since the housing crisis began. The FTC also announced developments in similar pending mortgage-related actions, several of which have involved coordinated casework from FinCEN.

Residential Credit Solutions is the winner of the first FDIC Legacy Loan sale involving $1.3 billion in residential mortgages from the failed Franklin Bank in Houston. RCS, a residential mortgage investor and servicer based in Fort Worth, Texas, bid $64.2 million in cash to purchase a 50% equity stake in a limited liability company that will own the troubled assets. The Federal Deposit Insurance Corp. said the pilot sale was "very competitive" and it expects to recover 70% of the outstanding balance on the nonperforming loans. "The bid received from RCS for the financed sale of assets to the LLC using 6-1 leverage was determined to be the offer that would result in the greatest return to the [Franklin] receivership of all competing bids," FDIC said. RCS will manage the LLC portfolio and service the loans under the Home Affordable Modification Program. The company could not be reached for comment.

Charles E. Townsend of Columbus, Ohio, pleaded guilty to money laundering in connection to a mortgage fraud scheme that exaggerated the values of properties in primarily low income neighborhoods in Columbus in order to secure funding from investors. According to William E. Hunt, acting U.S. attorney for the Southern District of Ohio, Townsend helped two co-conspirators, Aryeh Schottenstein and Jeffery Lieberman, fraudulently secure funding from Stillwater Investments Group of New York for real estate transactions involving Columbus properties. Townsend grossly exaggerated the value of properties in order to induce Stillwater to fund the real estate transactions and falsely promised to use certain funds provided by Stillwater to renovate houses involved in those transactions. In some of these transactions, Townsend also retained funds as purported "consulting fees" when no services were performed. Schottenstein pleaded guilty in May 2008 and was sentenced to 42 months in prison, followed by three years of supervised release. Lieberman pleaded guilty in April 2008 and was sentenced to 16 months in prison, followed by three years of supervised release. Sentencing for Townsend has not yet been scheduled.

The Internal Revenue Service and Treasury Department have issued new regulations related to certain modifications of commercial mortgages held by real estate mortgage investment conduits. The new regulations, which were not expanded to include mods of commercial mortgages held by investment trusts as some in the industry have proposed, would allow lenders to modify commercial real estate loans held by REMICs in some cases without incurring tax penalties. The IRS and Treasury Department said they would continue to consider whether the new regulations should also be expanded to investment trusts. The Real Estate Roundtable has been a proponent of the REMIC change.

When banks modify a mortgage to make the payments more affordable, it is not only considered a troubled debt restructuring by the federal banking regulators, the regulators also expect banks to increase their allowances for loan losses. "It could result in more significant allowances for TDRs," said Kathy Murphy, chief accountant for the Office of the Comptroller of the Currency. The OCC official told the certified public accountants at their annual banking conference that most banks don't have a history of doing loan modifications. Nevertheless, banks are expected to do a Financial Accounting Standard 114 analysis of future cash flows on modified loans using current market trends to determine the appropriate impairment, she said. "Trends right now don't look like real estate is recovering," OCC's chief accountant said. Tom Kelly of PriceWaterhouseCoopers told the CPAs that a lot of firms are struggling with the complexity of FAS 114 and TDRs. "It is complex from an accounting standpoint and from an operational aspect," Mr. Kelly said.

The mortgage and finance company subsidiaries of bank holding companies will now be subject to consumer compliance reviews by the Federal Reserve Board. "The policy, which takes effect immediately, also provides for investigation of consumer complaints against nonbank entities," the Fed said. The Fed is the primary supervisor of bank holding companies but it has traditionally taken a hands-off approach to nonbank subsidiaries. There have been exceptions, however. Fleet Finance, the Atlanta subsidiary of a BHC, was charged and settled state allegations of predatory lending in 1992. Under chairman Ben Bernanke, the Fed initiated coordinated exams of nonbank subs with the Federal Trade Commission and state regulators in 2007. The new policy "builds on the pilot program and responds to a need for more effective supervision and consumer protection," the Fed said.

The House of Representatives late Tuesday approved legislation to beef up the Federal Housing Administration program — including a provision that encourages the Obama administration to provide support for warehouse lending. The "21st Century FHA Housing Act" gives the Department of Housing and Urban Development secretary more flexibility to appoint and fix the compensation for FHA personnel and to fund technology projects to replace FHA's aging information systems. Passed on a voice vote, the bill (H.R. 3146) also says that the Treasury Department, HUD and the Federal Housing Finance Agency should work together to provide financial support and assistance to increase warehouse lending capacity to nonbanks. The National Association of Home Builders, National Association of Realtors and Mortgage Bankers Association supported the bill.

Former top executives at Fannie Mae, PMI, and Countrywide have launched and are seeking to expand a new advocacy group that will lobby on behalf of what it calls "independent, community and regionally-based" mortgage banking firms. The Community Mortgage Banking Project already has 26 members and is talking to eight more, said group founder, Glen Corso, a former senior vice president for The PMI Group, a mortgage insurance firm. His partners in the project include Robert Engelstad, a former senior vice president at Fannie, and Pete Mills, who was Countrywide Financial Corp.'s top lobbyist in Washington. In an interview with National Mortgage News Mr. Corso said his group would not compete with the Mortgage Bankers Association per se but would be involved in lobbying, and legislative and regulatory analysis on behalf of its members. Mr. Corso noted that the CMBP is a "not-for-profit company" but for tax purposes will not be filing as a nonprofit (which enjoy certain federal tax breaks). The MBA, by contrast, is a (Form 990) nonprofit organization with annual results that are publicly available. He said the CMBP would stay away from holding trade shows and getting involved in educational programs — two major sources of revenue for MBA. Mr. Corso is a founding member of The Warehouse Lending Project. That group has been lobbying regulators for government help with efforts aimed at increasing warehouse-lending capacity for nonbanks.

The Shadow Financial Regulatory Committee is "sympathetic" to the Obama administration's plan to consolidate the consumer protection function of banking regulators into a new agency that would set the rules for depositories and non-banks alike. The academic group noted that the federal banking regulators did not do a "great job" of protecting consumers during the subprime lending crisis, and consumer protection will never be a "core mission" for the bank regulators. It will always take a "back seat" to safety and soundness concerns, committee member Robert Litan said. The Brooking Institutions senior fellow noted, however, that his group would make several changes to the Consumer Financial Protection Agency bill that has been introduced in the House. One important change would give the CFPA's lending rules preemption over state rules. The current bill allows the states to enact and enforce tougher rules. "At least in rulemaking, there ought to be [federal] preemption," Mr. Litan said. The bill also gives the CFPA authority to prevent unfair and deceptive and abusive practices. According to Mr. Litan, unfair and deceptive practices are well defined in case law, but abusive practices is new and should be dropped. "We think it is unnecessary and gives too much discretion to the agency," he added.

A federal grand jury has returned an indictment against a Mississippi real estate investor in connection with an allegedly fraudulent mortgage loan scheme. According to Stan Harris, U.S. attorney for the Southern District of Mississippi, Earline Y. Rawls is accused of devising a scheme that began in August 2006 and continued through March 2007, involving the purchase of four residential properties in Madison and Hinds County. The indictment alleges that the primary objective of the conspiracy was to induce approval, funding and distribution of more than $1 million in loan proceeds through the deceptive submission of fraudulent representations to Merchants and Farmers Bank, Community Bank of Mississippi and BancorpSouth. Prosecutors say Ms. Rawls, doing business as Heavenly Homes, manufactured fraudulent documents indicating business revenues of $1.3 million and a profit of $271,530 from January 2006 through November 2006. Ms. Rawls, who could not be reached for comment, allegedly submitted this information in furtherance of her scheme with non-indicted co-conspirators.