Compliance

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.

Calyx Software has expanded The Calyx Network with an interface update that provides links to new compliance, fraud prevention and verification vendors. The Calyx Network allows users of the Calyx Point LOS application to connect directly with lenders and mortgage service providers, automating data exchange. The May update contains a new connection to three new mortgage service providers including fraud detection and compliance vendor Interthinx Inc., product and pricing vendor Mortgage Pricing System and verification services T Transcript Processing. The Calyx Network interface update is automatically installed into Point versions 7.0 and higher when users open their software and connect to the Internet.

The Senate Tuesday rejected an attempt to strike from the regulatory reform bill new authority for state attorneys general to take enforcement actions against national banks for violations of federal consumer protection laws. The amendment by Sen. Bob Corker, R-Tenn., to keep state AGs out of national banks failed on a 55-43 vote. Corker also wanted to strike a section of the bill (S. 3127) that rolls back the Office of the Comptroller of the Currency's powers to pre-empt state consumer protection laws. The Senate went on to pass an amendment by Sen. Tom Carper, D-Del., that clarifies the state AG has the authority to enforce rules promulgated by the proposed Consumer Financial Protection Bureau which will have oversight over residential lending. "It preserves the state attorneys general role in protecting their citizens from abusive practices," said Sen. Chris Dodd, D-Conn. The Carper amendment clarifies that the AGs can enforce the CFPA rules to prevent unfair, deceptive and abusive lending practices, but AGs cannot use their own interpretations of the underlying statutes. The Senate approved the Carper amendment by an 80-18 vote.

Federal prosecutors in Newark are negotiating guilty pleas with at least three more executives of U.S. Mortgage/CU National Mortgage in the fraudulent sale of $140 million of credit union mortgages to Fannie Mae, according to sources close to the case. Court records in last week's guilty plea by Leroy Hayden, the former servicing manager at U.S. Mortgage, name three other co-conspirators who have yet to be charged in the case. Sentencing for Michael McGrath, the company's president who allegedly masterminded the huge fraud, has been delayed until July while other suspects negotiate guilty pleas, several sources told The Credit Union Journal. Hayden told authorities that he provided reports to credit unions falsely stating that loans that had been sold were still in the credit unions' portfolios. He also allegedly falsified records, at McGrath's direction, to conceal these fraudulent sales. Hayden also admitted that he modified data in U.S. Mortgage's servicing system to help carry out the scheme. As many as 28 CUs in the mid Atlantic stand to lose as much as $125 million in the case and are frantically negotiating with Fannie Mae for the return of their mortgages. CUJ is an affiliate of National Mortgage News.

The former servicing manager of U.S. Mortgage Corp./CU National Mortgage has pleaded guilty to conspiring to defraud credit unions and Fannie Mae in the $140 million mortgage scandal. Leroy Hayden, 47, was convicted of conspiracy to assist U.S. Mortgage/CU National president Michael McGrath in his scheme to fraudulently sell Fannie Mae mortgages that the company was servicing on behalf of credit unions. "Frauds of this magnitude don't happen without someone to cook the books and push the paper," said U.S. Attorney Paul Fishman of Newark, N.J. "Leroy Hayden had to decide whether to go along with his boss' fraud or alert law enforcement to the scheme. Unfortunately, he made the criminal choice." Hayden told authorities he provided numerous reports to credit unions falsely stating that loans that had been sold were still in the credit unions' portfolios, and falsified records, at McGrath's direction, to conceal these fraudulent sales. Hayden also admitted that he modified data in U.S. Mortgage's servicing system to help carry out the scheme. As many as 28 credit unions in the Mid Atlantic states stand to lose as much as $125 million in the case and are frantically negotiating with Fannie Mae for the return of their mortgages. Several of the credit unions are also in litigation with their insurer, CUNA Mutual Group's CUMIS Insurance Society over coverage of the fraud. McGrath pleaded guilty last June and is scheduled to be sentenced in July.

The National Credit Union Administration, as liquidating agent for the failed Heritage West Federal Credit Union, has filed suit against several member/borrowers of the defunct Salt Lake City CU, claiming they defaulted on millions of dollars in speculative real estate loans only to buy the properties back at steep discounts in foreclosure sales. The suits, removed to a federal court, are the latest in a variety of legal actions surrounding a troubled Salt Lake City residential development called Castle Stone Homes that was tied closely to the one-time $330 million credit union. Dozens of the project's borrowers, who were promised high returns, obtained loans through the credit union, which was acquired by Virginia's Chartway Federal Credit Union in a December supervisory merger engineered by NCUA. The case is reminiscent of those involving two big credit union failures: Norlarco Credit Union, and Huron River Area Credit Union, that financed speculative real estate projects in Florida's Gulf Coast. In the Salt Lake City case, the members claim that HeritageWest engaged in a variety of schemes to make loans readily available for the residential development. According to various courts documents, between 2005 and 2007 Castle Stone solicited individual investors with high credit scores to participate in their residential development designed to appeal to first-time investors that would provide big profits. After one of the initial lenders for the project, America First CU backed out, HeritageWest agreed to provide capital for the investors. Lawyers for Castle Stone did not return phone calls. NCUA declined to comment, saying it does not discuss cases in litigation.

Beginning June 1, lenders originating mortgages being sold to Fannie Mae will have to pull a second credit report just before the loan closes. The new quality control requirement is designed to prevent a type of mortgage fraud called "shotgunning," but the guidelines could occasionally send lenders on wild goose chases. By pulling a second credit report, lenders can find out whether other creditors have recently requested information about the mortgage applicant-a red flag indicating someone might be trying to obtain several loans (from multiple, unwitting lenders) on the same property. Typically, a shotgun fraudster skips town with the proceeds of all his loans. Most of the lenders do not recoup a cent because their mortgages are subordinate to the first one recorded and the home will not fetch enough in a sale to cover the junior liens. Will Dillard, a vice president of operations at SettlementOne Credit Corp., a San Diego reseller of credit data, told American Banker that pulling a second credit report would help stop such frauds but that lenders might also waste time checking out false alarms. "If they see another inquiry, Fannie would like to see lenders query those creditors," Dillard said. "If you're at the funding table ready to fund and you see a new inquiry popping up, the question is, do you send your underwriter out...to track down Honda Motor if the borrower is also trying to buy a new car?"

A risk analysis firm said it is helping mortgage professionals access tax return amendment data that more common industry tax form verification efforts do not include in order to head off a growing fraud concern. The National Credit-Reporting System Inc. (NCS)/Credit Central, Egg Harbor, NJ, said it has added to its report that summarizes tax return transcripts a summary of the IRS's Record of Account transcript. The IRS Tax Return Transcript more commonly used by the industry does not provide information on amendments to returns, said Cecil Bowman, an NCS senior vice president and former IRS senior manager. The company instead recommends data from the Record of Account transcript that does include this information along with taxpayer identification number verification.

Fannie Mae during 2008-2009 found the highest amount of fraud was in the Southeast at 32%, followed by the Midwest, California and the Northeast. "The Northeast region has increased dramatically in the last couple of years. We've seen rings with inflated values, undisclosed liabilities or 'shot-gunning,' and fraud involved with closings and settlement companies," Amy Heinz, director, mortgage fraud program, at Fannie Mae told attendees at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago. Florida accounts for more fraud than in any single region, she said. Fannie also is seeing a trend toward back-to-back property flips perpetrated by individuals who buy low and then convince lenders to sell at inflated prices. After these sales, the properties default, Heinz said.

The full Senate is closer to taking up the financial services regulatory reform bill now that Sen. Richard Shelby, R-Ala., has declared an impasse in his negotiations with Sen. Christopher Dodd, D-Conn. Sen. Shelby noted that the Dodd bill goes too far in regulating derivatives and creating a consumer protection agency with "unchecked authority." But he can no longer expect his fellow Republicans to block consideration of the bill by the full Senate. "Now that my negotiations with chairman Dodd have reached an impasse, I thank my Republican colleagues for their support and defer to their individual judgments on whether the Senate begins debate on this bill," Sen. Shelby said. Senate Democrats tried three times this week to bring the Dodd bill to the Senate floor and start the amendment process but the Republicans blocked it. Senate debate on the reform bill is slated to start Thursday afternoon. "It has been obvious for some time that we are going to have a banking bill this year and this moves it one step closer," said lobbyist Jim Butera of Butera & Andrews.

Residential originations rose last year and along with them, the industry experienced an uptick in appraisal and valuation fraud, according to LexisNexis Mortgage Asset Research Institute. The most troubling fraud trends include fake tax returns and income and application misrepresentation, the company said in its annual fraud report. Speaking at a press conference during the Mortgage Bankers Association's fraud show, LNMARI noted that Florida is leading the nation in suspected fraud followed by New York and California. In 2009, 33% of all reported frauds involve appraisal misrepresentation, up from 22% in 2008. States experiencing noticeable gains in fraud include Arizona, New Jersey and Virginia. "Loss mitigation distractions have opened the door for opportunistic fraudsters to take advantage of desperation, confusion and complacency," said Denise James, director of real estate solutions for LNMARI. "As lenders try to stave off mounting losses on nonperforming loans, they are trying to modify loans that have been falling into default," said James. "Fraudsters are taking advantage of desperate and confused consumers." Foreclosure rescue and loan modification scams are increasing, and the company is seeing a significant rise in short sale scams.