Compliance & Regulation

The deterioration of the mortgage market and rising foreclosures and delinquencies is expected to cause increasing losses on billions of dollars of mortgage-backed securities being held by corporate credit unions, according to the National Credit Union Administration. The prediction comes as NCUA revealed it has pumped almost $20 billion into U.S. Central FCU and WesCorp FCU over the last six months to keep these two corporate CUs afloat. Scott Hunt, director of NCUA's Office of Corporate CUs, said current estimates are that U.S. Central will have a loss of $1.7 billion and WesCorp a loss of $5.7 billion on their mortgage securities, but agency officials expect those numbers to be even higher because of the ongoing deterioration in the market.

Pennsylvania Governor Edward G. Rendell signed a pair of bills to combat mortgage fraud by strengthening communication between homeowners and their lenders and encouraging employees at mortgage companies to report illegal activity. "These bills will provide increased protection for Pennsylvania consumers shopping for a mortgage or refinancing their homes," said Governor Rendell. "They represent a critical step forward in our strategy to combat mortgage lending fraud and abuse in Pennsylvania." The first law, Senate Bill 170, will prohibit a mortgage broker or originator from being the sole recipient of communications from lenders. This will help ensure that consumers receive monthly statements and other notices intended for them by their lenders. The second measure, House Bill 985, will shield mortgage company employees who report illegal activity or take part in an investigation from retaliation through reduced salaries, termination or other actions taken by their employer. Both bills take effect in 60 days.

The General Accountability Office is urging the Department of Housing and Urban Development to increase its monitoring of housing counselors who provide information about FHA reverse mortgages to senior citizens. GAO auditors secretly participated in 15 counseling sessions and discovered that counselors did not cover all the topics required by HUD. Seven of the 15 counselors did not discuss required information about alternatives to Federal Housing Administration reverse mortgages, which are known as 'home equity conversion mortgages.' GAO also noted some claims made by counselors are potentially misleading. One potentially misleading claim is that seniors are told they will "never owe more than the value of your house." HUD had approved this claim at one time, but later said it is not true in all situations, GAO said. "A borrower or heirs of a borrower would owe the full loan balance — even if it were greater than the value of the house — if the borrower or heirs chose to keep the house when the loan became due," said Mathew J. Scire, director of financial markets and community investment, in prepared testimony released Monday. The report also recommends that other federal regulators need to be "vigilant about emerging consumer protection risks" in the reverse mortgage market.

Alshawntus Beck of Plainfield, Ill., Michelle Parker, Steven Corbett, Kevin Keller, Jimmie D. Johnson and Otis Robinson III, all of Chicago, were charged with allegedly engaging in a $3 million mortgage fraud scheme in the Chicago area. According to Patrick J. Fitzgerald, U.S. attorney for the Northern District of Illinois, the indictment alleges that between February and December 2006, Mr. Beck operated three companies that purported to be in the business of buying, repairing and reselling real estate. Through his companies and with the alleged help of the other defendants, Mr. Beck allegedly purchased several Chicago properties through fraudulent means, including recruiting straw buyers, submitting loan applications and documents with false and fraudulent information and creating false real estate appraisals. The indictment seeks forfeiture of $3 million from the defendants. Arrest warrants were issued for all six defendants, who were unavailable for comment. They will be ordered to appear for arraignment at a later date.

The U.S. Supreme Court has ruled state attorney generals have the right to bring judicial enforcement actions against nationally chartered banks. However, the court also ruled, in the case Cuomo v. Clearing House, that they do not have the right to issue subpoenas for information. The case began when then-New York Attorney General Eliot Spitzer asked a number of national banks to provide nonpublic information about their lending practices as it applied to fair lending laws. The case was pursued by his successor, former Housing and Urban Development secretary Andrew Cuomo. The Office of the Comptroller of the Currency opposed the move, along with the Clearing House Association. The ruling overturns in part two lower court decisions in favor of OCC. In a statement, the Council of State Bank Supervisors said "Statements that state enforcement is an inconsistent 'patchwork quilt' are unfounded and were effectively deemed unconvincing by the Court's decision today. State law enforcement authorities work in concert with officials from other agencies and states to bring enforcement actions that protect consumers." John Cooney, a partner at the law firm Venable LLC and former assistant solicitor general, said "The decision means that national banks will be subject to a greater risk of investigations and enforcement actions by State Attorneys General, unless they can persuade Congress to overturn the decision and grant the OCC express authority to preempt the states from applying their own fair lending and consumer protection statutes to national banks."

Growing uncertainty about Federal Reserve Board Chairman Ben Bernanke's role in pushing Bank of America Corp. to go through with its deal to buy Merrill Lynch & Co. is likely to delay regulatory restructuring plans and give ammunition to those seeking to prevent the central bank from receiving more power. According to a report in American Banker, the White House said it hopes to finalize by yearend a regulatory revamp that would give the Fed sweeping new powers over the country's largest firms. Also on the drawing board is the creation of a new consumer protection agency that would have oversight over most mortgage origination laws and regulations. Meanwhile, lawmakers from both parties said they were unwilling to give the Fed more authority until questions over Bernanke's role in the Bank of America-Merrill deal were answered. BoA is now the nation's second largest mortgage banker, thanks to its purchase last year of Countrywide Financial Corp.

Two Congressmen have introduced legislation that would place an 18-month moratorium on the Home Mortgage Valuation Code of Conduct, a Fannie Mae/Freddie Mac edict that — among other things — bans loan brokers and loan officers from directly ordering appraisals. The bill specifically directs the Federal Housing Finance Agency to suspend the HVCC that went into effect May 1 for 18 months. The National Association of Mortgage Brokers claims the HVCC is delaying closings and costing it business. Brokers also have complained about being forced to pay high fees to appraisal management companies. "This ill-thought out code is basically damaging the economy. It will rob consumers of the low rates that are available now," said NAMB executive director Roy DeLoach. However, it's unclear where the bill goes from here. The legislation was introduced on Thursday night by Rep. Travis W. Childers, D., Miss., and Rep. Gary G. Miller, R., Calif.

An Ohio man has been charged with mail fraud in connection with a scheme to fraudulently obtain mortgage loans. According to William J. Edwards, U.S. attorney for the Northern District of Ohio, from August 2003 through January 2005, Paul R. Tomko of Middleburg Heights, among others, allegedly executed a scheme to defraud lenders in connection with 12 mortgage loans totaling nearly $1.2 million on properties located in the Cleveland area. Mr. Tomko, who could not be reached for comment, also allegedly caused fraudulent loan applications to be processed through mortgage brokers. He's also alleged to have used straw buyers to purchase properties and to obtain financing in their names and cause fraudulent appraisals to be prepared that artificially inflated the properties' true values. The loan application packages that were submitted to the lenders allegedly included false and fraudulent documentation and information. It is further alleged that the lenders sustained significant losses as these mortgage loans went into default and the properties were sold through foreclosure.

House Financial Services Committee chairman Barney Frank, D-Mass., wants his committee to move quickly and pass a bill that creates a new agency to regulate mortgage lending and protect consumers from financial abuse. The chairman said he plans to mark up a consumer finance protection agency bill in July and act on other regulatory reforms proposed by the Obama administration when Congress returns from its August recess. Chairman Frank also indicated that he wants to curb the Comptroller of the Currency's broad powers to pre-empt state banking laws. And he wants to craft a pre-emption provision that would become part of the consumer protection agency bill. "I have spoken to the secretary of the Treasury and initiated conversations with the Comptroller of the Currency, the state attorneys general and state bank supervisors," Rep. Frank said at a committee hearing. The chairman said the pre-emption provision may render a pending Supreme Court case moot. The high court is expected to issue a decision soon in a case where the New York AG was blocked from investigating national banks for possible discriminatory subprime lending practices.

The Federal Housing Administration insured $27.3 billion in single-family mortgages in April — up 8% from the previous month due to higher mortgage purchase volume. Mortgage purchase volume rose $1.6 billion to $11.7 billion, while refinancings crept up by $350 million to $15.6 billion, according to an FHA monthly activity report. Lenders One Mortgage Cooperative reported that FHA-insured mortgages comprised 40% of its members' loan production in the first quarter. A national cooperative of 135 mortgage lenders originated $17.3 billion single-family loans in the first quarter, up from $9.2 billion in the previous quarter. Meanwhile, FHA servicers ramped up their loss mitigation efforts and completed 7,366 loan modifications in April, up from 4,837 in March. But this didn't stop a 24 basis point increase in the FHA seriously delinquent rate in April and the percentage of FHA loans 90 days or more past due hit 7.32%.