Compliance & Regulation

A "tough" predatory lending bill that Sen. Christopher J. Dodd, D-Conn., planned to introduce Tuesday would impose a fiduciary duty on mortgage brokers and address lending, servicing, and appraisal abuses.Sen. Dodd's bill prohibits yield-spread premiums (which are a broker's main form of compensation) on subprime and nontraditional mortgages such as interest-only and payment-option adjustable-rate mortgages. Lenders would be responsible for faulty appraisals and be required to adjust the mortgage where an appraisal exceeds the market value by 10%. Servicers would be required to publicly report their loss mitigation activities under the bill, which also prohibits servicers from "pyramiding" late fees to generate additional income. Mortgage industry groups are expected to raise strong objections to the bill, which creates new lending standards but does not pre-empt state laws. Under the Dodd bill, homeowners with improperly underwritten loans can go directly to the holder of the mortgage (assignee) to seek a cure or rescission of their loan. Their attorneys can also seek $5,000 in statutory damages, but cannot pursue class actions against assignees. State attorneys general also have certain enforcement powers.

To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages.The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB. Separately, the Internal Revenue Service has issued a ruling that it will not challenge the tax status of real estate mortgage investment corporations if servicers follow the American Financial Services guidelines for freezing resets on subprime ARMs. The MBA can be found online at http://www.mortgagebankers.org.

The Office of Federal Housing Enterprise Oversight has promoted its chief examiner, Christopher H. Dickerson, to head the agency's supervision division.Mr. Dickerson is a 10-year OFHEO veteran, and during that time Fannie Mae's and Freddie Mac's top executives were ousted due to accounting scandals and the two mortgage giants have rebuilt their accounting systems and internal controls. "Chris's in-depth knowledge of Fannie Mae and Freddie Mac -- the people, problems, and progress -- will enhance OFHEO's efforts to ensure the future safety and soundness of these important institutions," OFHEO Director James Lockhart said. The new supervision director replaces Len Reid, who retired recently.

The Federal Reserve Board will issue long-awaited revisions to its Home Ownership and Equity Protection Act regulations in two weeks to address abusive lending practices, a Fed governor has testified.The proposed HOEPA rule will address prepayment penalties, failure to escrow taxes and insurance, stated-income and low-documentation lending, and ability to repay, Fed Governor Randall Kroszner told a congressional panel. The Fed will also propose changes to its Truth in Lending Act rules to require "earlier disclosures by lenders and to address concerns about misleading mortgage loan advertisements," he testified.

The Federal Bureau of Investigation's Washington field office has opened a mortgage fraud task force that will examine residential appraisals and loan practices in the greater Washington, D.C.-Virginia-Maryland metropolitan area.Over the past five years the Washington area has experienced tremendous home price appreciation with some properties doubling in value. A spokesman for the FBI said that on Thursday the agency was hosting a meeting of federal prosecutors that work in the area as well as agents from the Department of Housing and Urban Development and the Internal Revenue Service. The FBI has opened more than 1,200 mortgage-related investigations this year.

Two senior members of the Senate Judiciary Committee support the Bush administration's effort to get lenders and servicers to freeze the interest rate resets on adjustable-rate subprime mortgages, but they still want to craft legislation that would allow the bankruptcy courts to provide relief for distressed homeowners.Sens. Richard Durbin, D-Ill., and Arlen Specter, R-Pa., said they support Treasury Secretary Henry Paulson's plan to increase loan modifications. "It can be done promptly and help people," Sen. Specter told reporters. He noted that it is difficult to pass legislation in the Senate. "We don't do anything fast around here," he said. Secretary Paulson's plan to freeze the interest rate on subprime mortgages will reduce defaults and rising foreclosures, Sen. Durbin said. But allowing bankruptcy judges to reduce the principal amount and interest rate on residential mortgages would provide more relief, he said, and encourage more loan modifications. Efforts to pass a similar bill in the House have stalled. The Illinois senator said he plans to redouble his efforts in working out a compromise with his Republican colleague. Sen. Specter said their talks so far have not produced much progress.

The Bush administration's plan to freeze resets on subprime adjustable-rate mortgages is flawed because it will not provide any relief for borrowers with credit scores above 660, according to the chairman of the House Financial Services Committee.Rep. Barney Frank, D-Mass., the committee chairman, said he welcomes the administration's effort to freeze ARM resets for five years. However, it is a "grave error that there is a cutoff at a 660 FICO score," he said. Rep. Frank argued that a credit score is not a good proxy for income and means that people who were careful with their credit may not qualify for relief. "I think it is a great mistake morally and politically," Rep. Frank said. Senate Majority Leader Harry Reid, D-Nev., called the administration's plan a "positive step" that could help about 200,000 people -- but said more needs to be done. Sen. Reid urged Republican senators to stop blocking a vote on a Federal Housing Administration reform bill that could provide refinancing options for troubled subprime borrowers.

The housing counseling organization NeighborWorks America is urging its colleagues in the Hope Now Alliance to endorse a five-year freeze on resets of adjustable-rate subprime mortgages."We are hoping for at least five years," said Marietta Rodriguez, who serves as NeighborWorks' liaison with the lenders and servicers in the Hope Now alliance. "Three is probably not going to be enough." Treasury Department officials and alliance members are expected to agree on a plan this week to prevent the wave of resets from becoming a wave of foreclosures. The nonprofit organization, which receives federal funding, provides housing counseling services to troubled borrowers who call the Hope toll-free hotline through its network of 245 community originations. NeighborWorks is conducting its own outreach efforts to increase public awareness of the hotline. Ms. Rodriguez noted in an interview with MortgageWire that servicers are responding to the crisis by increasing their capacity to respond to thousands of calls a day from housing counselors and borrowers in distress. But some servicers are "rushing to catch up," she said.

A study by the National Training and Information Centers shows that subprime mortgage defaults nearly doubled in Chicago during the first half of this year compared with the levels recorded in the same period of last year.The Chicago-based organization, which serves as a resource center for community organizations, reported that subprime defaults (loans 90 days or more past due or in foreclosure) jumped to 3,005 in first half of this year from 1,541 last year. "If these families ultimately lose their homes…'for sale' properties will flood the market," the NTIC study says. Defaults on prime loans totaled 2,429 in the first half, up 16% from last year's level. The NTIC study also shows that defaults on "young" subprime loans seasoned less than 24 months doubled to 2,538. Defaults on young loans are "often caused by fraud or abusive lending practices at origination," the study says.

As part of an ever-expanding probe into the mortgage crisis, New York Attorney General Andrew Cuomo has subpoenaed loan underwriting records from a handful of Wall Street firms, according to industry sources.Wednesday morning The Wall Street Journal identified three firms that reportedly received subpoenas: Bear Stearns, Deutsche Bank, and Merrill Lynch. The AG's office has already subpoenaed records from contract underwriting firms, including The Bohan Group, San Francisco, and Clayton Holdings, Shelton, Conn. One executive close to the matter told MortgageWire that "The Street is trying to blame the contractors they used." At deadline time, a spokesman for the AG's office had not commented. Bear Stearns, Deutsche Bank, and Merrill Lynch had not released any statements on the matter.