Compliance

Federal Housing Administration mortgage volume could get a boost from regulatory reform, because loans insured by government agencies are fully exempt from the bill's risk-retention requirement.

Morgan Stanley & Co. Thursday afternoon agreed to pay $102 million to Massachusetts homeowners and the state, settling allegations that it aided and abetted subprime lender New Century Financial Corp. in taking advantage of consumers. State attorney general Martha Coakley, announcing the settlement at a press conference, said Morgan provided billions of dollars in credit lines to New Century "which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to repay." She added that some Morgan executives referred to New Century as Morgan's "partner" in subprime lending. The Irvine, Calif.-based NCFC filed for bankruptcy in early 2008. For much of the decade it was one of the largest subprime lenders in the nation, according to figures compiled by National Mortgage News. As part of the settlement, Morgan agreed to "change its business practices" and to provide the AG's office with "information and materials" as part of its ongoing probe of subprime lenders and the securitization process. In a court filing AG Coakley notes that other Wall Street firms are under investigation regarding their securitization practices. Morgan agreed to the deal without admitting or denying any wrongdoing.

The Office of Thrift Supervision's watchdog said the agency was ineffective in regulating BankUnited -- a major player in the payment option ARM market -- before the thrift's 2009 failure and improperly allowed the Florida lender to backdate a capital infusion. The Treasury Department's inspector general said in a report that while the $13 billion-asset thrift's failure stemmed largely from high-risk lending, the OTS failed to clamp down on BankUnited's aggressive strategy. "OTS did not impose limits or restrict BankUnited's concentration and growth in high-risk option" adjustable-rate mortgages, said the report, which was made public Thursday. The inspector general report, which was required because the failure caused a "material loss" to the Deposit Insurance Fund, said the OTS also "did not adequately assess" poor underwriting at the thrift and failed to address BankUnited's "inaccurate risk-weighting." "We also found that OTS improperly directed the thrift to backdate a capital infusion from its holding company," the IG said. The report followed past criticism of the agency for allegedly encouraging backdating at troubled thrifts, which forced the dismissal of two senior OTS officials, former West Regional Director Darrel Dochow and former Senior Deputy Director Scott Polakoff.

Morgan Stanley & Co. Thursday afternoon agreed to pay $102 million to Massachusetts homeowners and the state, settling allegations that it aided and abetted subprime lender New Century Financial Corp. in taking advantage of consumers. State attorney general Martha Coakley, announcing the settlement at a press conference, said Morgan provided billions of dollars in credit lines to New Century "which used Morgan funds to target lower-income borrowers and lure them into loans that consumers predictably could not afford to repay." She added that some Morgan executives referred to New Century as Morgan's "partner" in subprime lending. The Irvine, Calif.-based NCFC filed for bankruptcy in early 2008. For much of the decade in was one of the largest subprime lenders in the nation, according to figures compiled by National Mortgage News. As part of the settlement, Morgan agreed to "change its business practices" and to provide the AG's office with "information and materials" as part of its ongoing probe of subprime lenders and the securitization process. In a court filing AG Coakley notes that other Wall Street firms are under investigation regarding their securitization practices. Morgan agreed to the deal without admitting or denying any wrongdoing.

Web-based LOS Avista Solutions has integrated with verification service company Kroll Factual Data. This integration was done at the request of joint clients to allow Avista Solutions' customers to pull credit through Kroll without leaving the Avista Agile LOS. The Avista Agile platform lets users create loan applications online through the system or import applications from external loan origination software. The consumer website portal allows lenders to provide their customers online loan application, status updates, loan officer webpages and online disclosure. Now Avista users will have access to Kroll's credit service, which provides reports in both PDF and text file formats.

Some nonbank mortgage lenders that pass the state LO tests required under the SAFE Act plan to market their expertise and use it as a competitive advantage against commercial banks. "It's definitely a plus in our favor," said Marc Savitt, a former past president of the National Association of Mortgage Brokers. "We can wave that piece of paper around and say, 'Hey, we're certified.'" Bodhi Kraus, for one, said his company, Priority Lending Mortgage Corp. in Santa Rosa, Calif., plans to highlight the fact that its loan officers are licensed on its business cards and mailings, and may even tout the licensing in its radio advertisements. "We advertise and make the phones ring," said Kraus, Priority's vice president. "We just don't have the employees to take" the calls. Under the Secure and Fair Enforcement Licensing Act, part of the Housing and Economic Recovery Act of 2008, loan officers working for state-supervised mortgage firms must now meet minimum standards for licensing and registration, including several hours of education and passing a test. Nonbanks say the requirements can be costly and time consuming, which puts them at a disadvantage to depositories, which are exempt from the SAFE Act. But Glen Corso, managing director of the Community Mortgage Banking Project, a trade group for independent lenders, said a number of companies he works with plan to use the licensing as a competitive tool, as a way to tell consumers that their loan officers are well qualified.

In the wake of a criminal indictment against the owner of Taylor Bean & Whitaker, the inspector general for the Department of Housing Urban Development is projecting at least $3 billion in losses for the government, perhaps more. In a brief interview with National Mortgage News, HUD IG Michael Zerega said the nonbank lender "cooked their books," adding "they called loans performing when they weren't." The IG's office has been investigating Ocala, Fla.-based TBW since 2008. The nonbank was a top-ranked FHA lender, and GNMA issuer. It pledged MBS and other assets as collateral for warehouse lines of credit made by commercial banks. On Wednesday, just after the Securities and Exchange Commission announced that it had filed a civil suit against TBW CEO and owner Lee Bentley Farkas, the Justice Department filed a 16-count indictment against him. The criminal allegations echo charges in the civil complaint, namely that TBW, under Farkas, created $400 million of "fake mortgages," and then sold them to its chief warehouse lender, Colonial Bank. (Last spring TBW tried to buy a controlling stake in Colonial using borrowed money and TARP funds. The deal eventually fell apart with both companies failing.) The indictment says Farkas "and others" carried out a "massive fraud," saying at least $1.9 billion in losses have already occurred. An attorney for Farkas said his client would plead not guilty.

The Justice Department is now investigating 3,000 cases of reported mortgage fraud nationwide, more than double its caseload of two years ago. At a press conference Thursday, Attorney General Eric Holder gave a tally of "Operation Stolen Dreams," a 100-day-old task force whose work has resulted in 1,215 criminal indictments and 191 civil enforcement actions. "The breadth of the fraud is truly astonishing, which is why we launched an unmatched effort to fight it," said Holder. "The staggering totals from this sweep highlight the mortgage fraud trends we are seeing around the country. We have seen mortgage fraud take on all shapes and sizes-from schemes that ensnared the elderly to fraudsters who targeted immigrant communities. We have seen cases that have resulted in dozens of foreclosures and millions in losses, as well as fraudsters who have bankrupted entire companies and national lenders who were not playing by the rules." DOJ has requested $178 million in its fiscal-year 2011 budget to fight mortgage fraud, an increase of more than $18.4 million.

The Securities and Exchange Commission Wednesday accused the former owner of Taylor Bean & Whitaker with orchestrating a massive equity and MBS fraud tied to his firm's warehouse borrowings from Colonial Bank, a depository it tried to take control of last summer using TARP money. In a civil complaint, the SEC says TBW owner and CEO Lee Farkas created $1.5 billion worth of "fictitious" whole loans and impaired MBS which were pledged to the bank's balance sheet and served as collateral for warehouse lines of credit. The government says the nonbank ran into "liquidity problems" and began over-withdrawing on its warehouse lines which led to the equivalent of a check "kiting" scheme at the bank. The agency says the scam predated TBW's attempted takeover of Colonial, a troubled bank, by about 18 months. In the spring of last year TBW tried to buy a controlling stake in the Alabama-based warehouse lender, using $200 million of its own money (most of it borrowed using servicing rights as collateral) and $100 million from private investors. These investors included several nonbanks that also were warehouse clients of Colonial. The bank, which failed last summer, was at one point the nation's largest warehouse provider. Using TBW's $300 million investment, Colonial had applied for $550 million of Troubled Asset Relief Program funds to stabilize its capital position. Farkas could not be reached for comment. TBW filed for bankruptcy protection last fall.

Language in the "base text" document of the regulatory reform bill could allow residential borrowers to sue their lender—without a statute of limitations—if the mortgage banker violates the anti-steering provisions of the law. According to an analysis of the base text conducted by K&L Gates, "in the case of judicial or nonjudicial foreclosure or any other action to collect on a loan, it appears that a consumer has a perpetual federal right to assert such a violation by a creditor as a matter of defense by recoupment or set off in an amount equal to the monetary damages that could be asserted against the original creditor." The base text is an amalgamation of the House and Senate versions of the bill. The law firm notes that several provisions from the House bill pertaining to residential mortgage lending that were not in the Senate Bill are included in the initial base document. The anti-steering language is designed to prevent lenders from pushing borrowers into certain loans—regardless of their ability to repay—because the loan officer might receive higher compensation for delivering such a loan. The law firm is telling clients, "There is a lot to be digested in the base document, but it is important to stress that it is the starting point for negotiations among the conferees."

The House of Representatives Thursday afternoon overwhelmingly passed an FHA reform bill allowing the agency to triple annual premium payments to 150 basis points, a move designed to bolster the insurer's wobbly finances. The measure also mandates that seller/servicers repay the government for any losses on mortgages funded using delegated underwriting. If fraud is discovered on an FHA loan, the agency could hold the lender liable in full. Among other things, the legislation gives a break to FHA homebuyers who purchase properties with a downpayment of 10% or greater. "For any mortgage involving an original principal obligation that is less than 90% of the appraised value of the property, this premium may be required to be paid for the first 11 years of the mortgage." If the downpayment is less than 10%, the premium will be assessed over 30 years. (The values are subject to appraisal confirmation.) The final tally on the vote for the FHA Reform Act (H.R. 5072) was 406-4. In a statement, HUD secretary Shaun Donovan said the bill would enable the Federal Housing Administration to "reform its current mortgage insurance premium structure by shifting some of the upfront cost to the annual premium—a move that will increase FHA's capital reserves and reduce risks" to the government insurance fund. With the House bill passed, the Senate must come up with its version of the measure.

A bipartisan panel has issued a subpoena to Goldman Sachs & Co. after the investment banker failed to comply with a documents request and a request for interviews. Chairman Phil Angelides and vice chairman Bill Thomas of the Financial Crisis Inquiry Commission, who made the announcements regarding the subpoenas, stressed the commission's commitment "to using its subpoena power if there is a lack of, or delay in, compliance." They added: "Failure to comply with a commission request is viewed with the utmost seriousness, as the commission will not be deterred from getting desired information." In an e-mailed statement, a Goldman spokeswoman said, "We have been and continue to be committed to providing the FCIC with the information they have requested." Goldman is under investigation on several fronts for selling subprime CDOs to clients while playing a role in helping short sellers bet against the same securities. Meanwhile, renowned banking analyst Dick Bove said Tuesday that Goldman CEO Lloyd Blankfein should resign.

Roughly 71% of loan officers pass the national test to become qualified mortgage professionals the first time they take the exam, according to new figures released by the Nationwide Mortgage Licensing System. The state (first-time) pass rate is even better: 78%, according to NMLS. The results reflect tests administered between July 30 of last year and April 30, 2009. "Everyone seems to be passing these days," said Christopher Cruise, a continuing education trainer based in Maryland. The tests, which feature multiple choice questions, are required under the SAFE Act.

Bank of America has agreed to pay the Federal Trade Commission $108 million to cover foreclosure-related servicing abuses by Countrywide Home Loans, the mega lender/servicer that it purchased almost two years ago. Overall, the settlement will benefit more than 200,000 consumers who were charged excessive fees while facing foreclosure or trying to save their homes from bankruptcy. Countrywide profited from failed loans and "illegally extracted the last dollar out the pockets of the most desperate consumers," FTC chairman Jon Leibowitz said in announcing one of the largest settlements in FTC history. "To have a major servicer like Countrywide piling on illegal and excessive fees is indefensible," he added. B of A bought Countrywide Financial Corp., the parent of CHL, in August 2008 and "took responsibility for fixing the problems," Leibowitz said. "Bank of America did step up to the plate." The FTC worked with bankruptcy trustees to investigate allegations that CHL made inaccurate claims to the courts on the amounts mortgagors owed on their loans. "Countrywide's outdated computer systems made the records incredibly difficult to sort out. But we believe thousands of borrowers in bankruptcy ended up overpaying," the FTC chairman said. He also noted that Countrywide used affiliates to provide default services such as property inspections and lawn mowing, charging excessive fees in the process. "Countrywide's mortgage contracts prohibited these inflated charges but that didn't stop Countrywide from passing on those markups in violation of the FTC Act," Leibowitz said.

The Department of Housing and Urban Development is taking another stab at preventing abuses by builders and others that entice consumers with bogus discounts that require them to use affiliated title and mortgage companies. HUD issued a proposal to address the issue of "required use" under its Real Estate Settlement Procedures Act rulemaking authority. The comment period ends September 1. "It is our intent to keep an open mind on how to approach this vexing question over what is, and what is not, required use," said HUD assistant secretary David Stevens. In early 2009, the National Association of Home Builders sued to block HUD from enforcing a newly adopted RESPA rule that banned builders from offering discounts to homebuyers that use affiliated settlement service providers. It is not uncommon for builders to offer borrowers cash discounts or upgrades on a house if the buyer agrees to use affiliated vendors. RESPA issues occur when the builder charges the consumer higher settlement costs (including the rate) than other non-affiliated providers. "HUD has received complaints that some homebuyers are committing to use a builder's affiliated mortgage lender without sufficient time to research their contracts or to comparison shop," HUD says in its proposal.

A group of Hudson Valley Federal Credit Union borrowers filed a class action lawsuit against the lender, claiming it illegally collected thousands of dollars in mortgage recording taxes from them at closing, ratcheting up the stakes in the CU's own legal fight with New York over the same levy. The suit was filed in federal court, as opposed to state court, which just two weeks ago rejected HVFCU's challenge to the recording tax, an assessment of one-half percent, or 50 basis points, on every mortgage, amounting to thousands of dollars on each home loan. "Because of the pass-through nature of it, the person who bears the loss is the person who is paying the mortgage," said Mark Kindall, a lawyer with the Hartford, Conn., firm of Izard Nobel LLP. In its challenge in state court, the credit union asserted that the Federal Credit Union Act, which defines federally chartered (but not state chartered) credit unions as "instrumentalities of the federal government" exempts all federal credit unions from state taxes. In an odd way, the borrowers' lawsuit may end up aiding the credit union's own case, which asserts that a federal charter exempts Hudson Valley FCU from paying the tax. (In CU parlance, customers of a credit union are often referred to as members.) Two weeks ago, in the CU's case, a state court ruled that the tax is not assessed on the federal entity, but on the act of the transfer of property. Potential members of the class include not only the thousands of members of Hudson Valley FCU who paid the tax, but millions of New Yorkers who took out mortgages through a federally chartered credit union.

Lawyers for Hudson Valley Federal Credit Union said they plan to appeal the recent New York court ruling rejecting its challenge to the state's mortgage recordation tax. "Yes, we will appeal," said Dale Lois, an attorney representing the $2.8 billion former IBM employees credit union located in nearby Poughkeepsie. The credit union's lawyer said the speedy decision by the state Supreme Court may work to their favor by getting them to the state's appeals court faster to decide the decision, which could save credit unions millions of dollars in taxes. (The case was filed in November 2009.) The state court ruled that even though federal law defines federally chartered credit unions as instrumentalities of the federal government and thus exempt from state taxes, the mortgage recordation tax is not a tax on credit unions or a tax on borrowers, but on the "privilege of recording" a mortgage, as was argued by the state's Department of Taxation and Finance. The stakes are big for credit unions which pay millions of dollars in mortgage recording taxes to the state each year. Hudson Valley has requested a rebate of $1.8 million of taxes paid over the last three years.

Citigroup Inc. sold a series of mortgage-linked securities without disclosing that Morgan Stanley helped shape them while betting they would fail, according to a report by Bloomberg News. The news service, quoting "two people with knowledge of the matter," reported that marketing documents for the $205 million Jackson Segregated Portfolio, underwritten by Citigroup Securities in 2006, do not say who picked the underlying mortgage bonds. A Morgan Stanley unit helped select the bonds, the people said, speaking anonymously because the deal was private, Bloomberg reported. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million, data compiled by Bloomberg show. Citi said in the Jackson marketing documents that its interests in the deal "may be adverse" to those of investors in the CDO bonds. "We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors," said a Citigroup spokeswoman. "Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved." Morgan Stanley spokesman Mark Lake said he could not comment.

A Utah mortgage broker has been charged with altering applications for mortgage loans provided to two state credit unions, one of which went bust in 2008 in the face of big losses on its mortgage portfolio. Joshua Butcher, a 28-year-old broker for Envision Lending Group in Utah, allegedly altered loan applications he sent on to TransWest Credit Union and Salt Lake Credit Union, which was merged into Mountain America Credit Union as losses were growing on its RE portfolio. Butcher, without the knowledge of the borrowers who would have been ineligible for the loans otherwise, overstated incomes and assets and even misstated that the borrower intended to occupy the house, even when the homes were bought on speculation for resale, according to a federal grand jury indictment handed down Wednesday. The charges are the latest in a growing number of cases where the state's inflated real estate markets were used to secure credit unions and bank loans, then caused big losses once the market soured. Lawyers for Butcher did not return phone calls seeking comment.

Nine mortgage industry groups along with the U.S. Chamber of Commerce are urging the Department of Labor to reconsider and withdraw its recent ruling that requires residential lenders to pay overtime to certain loan officers. "The interpretation constitutes a sharp break from existing law that will result in both very considerable costs to, and adverse effects on, employers and employees alike," the industry groups say in a letter to DOL's director of Wage and Hour Division. On March 24, DOL issued an interpretation that requires lenders to pay overtime to retail loan officers that work in an office. There are currently 110,000 retail mortgage loan officers and they are "well compensated by commissions and frequently work irregular hours," the May 19 letter states. The trade groups contend DOL made the new interpretation without notice and it represents a "sharp break" with the department's 2004 interpretation. "The interpretation should be withdrawn and the department should embark on a new rulemaking with notice and comment if it wishes to change policy or implement new requirements in this area," the joint letter says.