Compliance & Regulation

The Financial Crimes Enforcement Network and the federal banking agencies have revised the format for the Suspicious Activity Report by Depository Institutions to support a new joint filing initiative, which will reduce the number of duplicate SARs filed for a single suspicious transaction.Recently approved by the Office of Management and Budget, the revised SAR-DI format won't go into effect until June 30, 2007. But the new form is being released now to allow depository institutions subject to SAR filing requirements to begin planning for the June implementation date. As of June 1, depositories will have the option of using either the existing or the revised SAR-DI formats. But as of Dec. 31, 2007, the revised format for filing will become mandatory. The ability to file SARs electronically is currently being finalized. Financial institutions can review and download the PC fill-in version from the FinCEN website under "What's New." The accompanying form instructions contain critical "how-to" information for completing the form. The FinCEN website can be found online at http://www.fincen.gov.

President Bush has signed a tax bill that creates a deduction for mortgage insurance premiums that is designed to help homebuyers in 2007 but could also benefit owners who refinance.The MI deduction becomes effective Jan. 1, and it allows homebuyers with incomes up to $100,000 to take a full deduction for the premiums they pay during 2007. It is understood that homeowners who refinance in 2007 can take an MI deduction, but it has to be based on the original amount paid for the house. "Mortgage insurance has long provided a safe and smart way for families to afford a home," MGIC president Patrick Sinks said. "With this new deduction, it becomes all the more sensible at a time when both interest rates and housing costs are on the rise." The MI deduction is good for only one year, but MGIC and the other MI companies expect Congress to extend it next year. One industry source said consumer disclosures should warn that there is some legislative uncertainty involved.

Industry groups are warning federal banking regulators that any sudden action to expand the nontraditional mortgage guidance to include "2/28" adjustable-rate mortgages could create a "major disruption" in the primary and secondary mortgage markets."For these reasons and others, we believe that a full economic analysis and a notice and comment process is essential before consideration of an expansion of the guidance to hybrid ARMs," says a Dec. 20 letter signed by the nine trade groups. Federal regulators appear to be divided on the issue, but they are under pressure from Congress and consumer groups to clarify that the nontraditional mortgage underwriting guidance applies to hybrids like 2/28 and 3/27 ARMs (which have initial fixed-rate periods of two and three years, respectively). But the trade groups stress that they would have "strong concerns" about such an expansion of the guidance without a careful and deliberative process.

A U.S. appeals court in San Francisco has affirmed lower court decisions that Lehman Brothers, as a warehouse lender, is liable for the actions of a subprime lender that is engaged in fraudulent lending practices."We affirm the holdings of the district court imposing liability on Lehman for aiding and abetting a class-wide fraud perpetuated by First Alliance," Circuit Judge Richard Clifton says in Henry v. Lehman Commercial Paper. First Alliance Mortgage Co. filed for bankruptcy in 2000 to escape class action lawsuits, and a jury found Lehman was liable for $5.1 million in damages as FAMC's sole warehouse lender. The jury concluded that Lehman officials were aware of FAMC's lending practices. The appeals court overturned the $5.1 million award, however, with instructions to the district court to reduce it. Lehman Brothers declined to comment. Nevertheless, the Lehman decision puts wholesale lenders on notice that they have to act if they have knowledge of fraudulent practices. "If you have evidence to suggest that you actually know of a material violation, then you have to act on that knowledge," said Larry Platt, a partner at Kirkpatrick Lockhart Nicholson Graham in Washington.

If the nontraditional mortgage guidance applies to the underwriting of all adjustable-rate mortgages, then Fannie Mae and Freddie Mac may be precluded from purchasing most of the subprime mortgage-backed securities issued by mortgage bankers, according to Friedman Billings Ramsey researchers.The two secondary-market agencies purchased nearly half of all triple-A rated subprime MBS issued in 2005, according to FBR research director Michael Youngblood. He pointed out that a majority of the underlying subprime loans, such as 2/28 ARMs, don't conform to the nontraditional mortgage underwriting guidance, which the Office of Federal Housing Enterprise Oversight recently directed Fannie and Freddie to follow. Two/28 ARMs represent 62% of all subprime lending. "If our reasoning holds, Fannie and Freddie may be precluded from acquiring a majority of subprime securities that they previously purchased," Mr. Youngblood said. "We know as a fact" that the two agencies purchased most of their subprime securities in 2005 from mortgage banking companies that don't have to comply with the recently issued guidance, the FBR researcher said.

The Office of Federal Housing Enterprise Oversight has filed charges against three former Fannie Mae executives, including Franklin Raines, for manipulating earnings to maximize bonuses and for leading the mortgage giant into a $6.3 billion accounting scandal.Along with a notice of charges, OFHEO is seeking $100 million in civil money penalties and disgorgement of $115 million in 1998-2003 bonuses paid to Mr. Raines, a former chairman and chief executive officer; former chief financial officer Timothy Howard; and former comptroller Leanne Spencer. "The notice explains how they submitted six years of misleading and inaccurate accounting statements and inaccurate capital reports that enabled them to grow Fannie Mae in an unsafe and unsound manner," OFHEO Director James Lockhart said. "The misconduct cost the enterprise and shareholders many billions of dollars and damaged the public trust." An attorney representing Mr. Raines said the charges are "false" and called the OFHEO director a "fatally biased regulator."

As the Federal Housing Finance Board prepares to meet Dec. 22, two Democratic congressmen are pressuring the five board members to quickly appoint a full slate of public interest directors for the 12 Federal Home Loan Banks.The incoming House Financial Services Committee chairman, Rep. Barney Frank, D-Mass., and Rep. Paul Kanjorski, D-Pa., are particularly concerned that all the public interest director seats will be vacant after Dec. 31. These independent directors constitute 40% of the FHLBank boards of directors. "We are eager to see all these seats filled as quickly as possible," the two congressmen say in a letter to each of the five Finance Board members. While the Bush administration has blocked the appointment of public interest directors, the letter warns that the Finance Board is responsible for making the appointments under the law and that the regulator "must implement the law." At the meeting, the Finance Board also will take up a controversial capital proposal regarding retained earnings and excess stock that raised considerable industry opposition. The board is expected to withdraw the rules and issue guidance that is more acceptable to FHLBank members, according to sources.

Mortgage lenders could use utility and telecommunication payment histories in their mainstream credit scoring models to qualify more minority and low-income homebuyers without affecting applicants who usually score well, according to a new study by the Brookings Institution.The study discovered that incorporating nontraditional data can open the door for borrowers with "thin files" to gain access to credit at favorable rates. Acceptance rates jumped 22% for Hispanics and 21% for blacks during testing of 8 million credit files run through the VantageScore credit scoring system. Currently, many mortgage lenders use alternative systems to score minorities and borrowers with thin files. But no one knew how it would affect people with established credit, according Alyssa Lee, acting director of the Urban Markets Initiative at Brookings. If the utility and telecommunication data are incorporated into mainstream systems, mortgage lenders "can actually do their job more quickly," she said.

"I never thought it would happen to me ... but after years in the industry I'm living the nightmare of working for a broker involved in substantial loan fraud and forgery."To read more of this posting on the Grapevine, click thread338451.

Six members of the Senate Banking Committee are urging state and federal banking regulators to clarify the recently issued nontraditional mortgage guidance so it applies to subprime "2/28" adjustable-rate mortgages."It is our view that these mortgages have a number of the same risky attributes as the interest-only and payment-option ARMs and, therefore, should be covered by the new guidance," the senators say in a letter to regulators. "We would respectfully request that you issue a timely clarification to that effect." (The 2/28 ARM is a 30-year mortgage that has a fixed rate for the first two years.) The letter explains that subprime borrowers can see their interest rate jump from 8% to 12% when the initial fixed-rate period expires after two years, which is similar to the payment shock faced by IO and option ARM borrowers. Regulators issued the guidance to ensure that the nontraditional mortgage are underwritten at the fully indexed rate so borrowers are not forced to refinance or sell their home when the loan resets. The nontraditional mortgage guidance also addresses risk layering and other practices that "should apply" to subprime 2/28 mortgages, the senators say. Sens. Paul S. Sarbanes (D-Md.), Wayne Allard (R-Colo.), Christopher J. Dodd (D-Conn.), Jim Bunning (R-Ky.), Jack Reed (D-R.I.), and Charles E. Schumer (D-N.Y.) signed the letter.