Compliance

Lender Technologies Corp., a wholly owned subsidiary of the Mortgage Bankers Association, has released the final request for proposal for the creation of a national database to help prevent and detect mortgage fraud. Respondents will have until Nov. 6 to review and respond to the RFP. LTC said the primary focus of the project is to develop and maintain a database that will improve a mortgage lender's ability to identify and stop fraud at the point of origination. The project will be implemented in phases. "The database will allow lenders to better protect themselves -- as well as consumers, taxpayers, and communities -- from the substantial costs associated with mortgage fraud," said MBA chairman Kieran P. Quinn. "Lenders, servicers, and investors will be able to interface with the database directly as well as through authorized agents."

EMC Mortgage Corp. has agreed to $28 million settlement with the Federal Trade Commission for allegedly engaging in "unlawful" servicing practices, abusive collection practices, and charging unauthorized fees. The FTC conducted a multiyear investigation of the Lewisville, Texas, servicing company and found that the subsidiary of Bear Stearns & Co. "allegedly paid inadequate attention to the integrity of consumers' loan information" and made inaccurate claims on consumers. "Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due is really the amount due," said Lydia Parnes, the FTC's director of consumer protection. "Consumers have a right to expect accuracy from the company that collects their mortgage payments." The $28 million will be distributed to homeowners affected by EMC's practices. JPMorgan Chase & Co. acquired Bear Stearns and EMC last May following the collapse of Bear Stearns. The settlement does "not apply" to JPMorgan Chase, the final order says. JPMorgan Chase declined to comment on the settlement. EMC serviced $86.5 billion in mortgage loans as of March 31.

Home equity lenders need to do some deep soul-searching, or consumer-friendly lawmakers in Washington will do it for them, according to a high-ranking official in the Office of the Comptroller of the Currency. Timothy Long, senior deputy comptroller for bank supervision policy and the OCC's chief banking examiner, told the Consumer Bankers Association's annual Home Lending Conference in Austin, Texas, that as lenders work their way through the current crisis, they also need to perform a "lessons-learned" evaluation. "You need to take an introspective look at what you did wrong and make some fundamental changes," he said. Mr. Long said the national banks overseen by the OCC can expect "stronger guidance" from the agency, especially regarding underwriting. He also said lenders can expect changes in how the Federal Reserve Board looks at unfair and deceptive practices, particularly concerning suitability. And he warned that Congress could get in on the act, too. "There is an overall sense in Washington that there has been a lot of victimization -- that borrowers have been taken advantage of and need protecting," the OCC official said.

The Mortgage Bankers Association is hoping to open up a dialogue with the Federal Housing Finance Agency on reducing guarantee and delivery fees charged to Fannie Mae and Freddie Mac seller/servicers. In an interview with MortgageWire, new MBA chief John Courson said, "We'll encourage the new conservatorship management to take a fresh set of eyes" to both types of fees, especially those charged on mortgages with high loan-to-value ratios. According to company figures, the average g-fee on a newly delivered Fannie Mae loan was 27.8 basis points in the second quarter. The charge on Freddie loans were much lower -- 22 bps, which indicates that the company was having a harder time passing on costs to its lending customers. The MBA says the two government-sponsored enterprises had also been tacking on delivery fees in the range of 25-50 bps. One executive, requesting that his name not be used, said some delivery fees were as high as 100 bps.

Denver-based idBusiness, a provider of information security systems for small to medium-size businesses, has announced the launch of the Red Flag Compliance Module. The module is designed to enable mortgage companies to meet the requirements of the so-called red-flag rules under the Fair and Accurate Credit Transactions Act, idBusiness said. "A mortgage banker or broker is facing about 20 serious challenges to his business every day, one of which is red-flag compliance," said idBusiness chief executive Scott Brooks, himself a mortgage professional. "With the Compliance Module, we created a simple tool that achieves compliance first, but second, gives you a tool to build your business in a tough market." The module goes beyond the 26 identity theft "red flags" outlined by the legislation, providing customers with 37 potential signs of identity theft and integrating them into the day-to-day functions of a mortgage company's employees, idBusiness said. The company can be found online at http://www.idbusiness.com.

Downey Financial Corp., Newport Beach, Calif., has announced that the company and its subsidiary, Downey Savings and Loan Association, have agreed to consent orders with the Office of Thrift Supervision relating to regulatory capital and real estate disposition, among other things. Downey said the orders "to a large extent, formalize certain measures previously announced by the company to enhance the bank's financial strength." As a result of the orders, Downey also announced the sale of certain noncore real estate assets that produced aggregate cash proceeds of $110 million, adding that it expects to report a net pretax gain of approximately $68 million from the sale. The gain, combined with a dividend to the bank from a wholly owned subsidiary, will result in an increase of approximately $109 million in the bank's regulatory capital, Downey said. Downey chairman Michael Bozarth said the orders "reflect a number of measures that Downey has already taken and, in some cases, is close to completing." The company can be found online at http://www.downeysavings.com.

First American Field Services and First American Real Estate Tax Service have announced the availability of a new vacant-property registration service aimed at helping lenders and servicers comply with changing municipal ordinances. The service identifies properties in a lender's servicing or real-estate-owned portfolio that require vacant-property registration and then manages the registration process, including the disbursement of fees. "As new ordinances are passed in various jurisdictions, our vacant-property registration database is updated and we are able to revise the registration information on behalf of our clients as needed," said Paul Dauterive, president of First American Field Services. ".... This new service reduces the lender's risk of compliance-related penalties by ensuring that all necessary properties remain properly registered throughout the default process." The First American Corp., the Dallas-based parent company of the two units, can be found online at http://www.firstam.com.

Lenders and servicers choosing to participate in a special Federal Housing Administration refinancing program will have to worry about "second guessing" by FHA, which has a reputation for seeking indemnification for losses when loans go into default, according to mortgage banking attorney Laurence Platt. "Presumably, lenders that closely follow the new underwriting requirements developed by the [Hope for Homeowners Oversight] Board will be insulated from attack by FHA," the K&L Gates partner says in a Mortgage Banking Alert to clients. However, the Hope program loans are expected to have high default rates because lenders will be refinancing subprime borrowers that have defaulted or are expected to default. "It will be interesting to see how 'squishy' the new underwriting guidelines are, because the risk of second-guessing is greater when the standards are more ambiguous," the Sept. 2 alert says. Meanwhile, the House Financial Services Committee is holding a hearing Sept. 17 to see if FHA and the oversight board will be ready to launch the Hope program by Oct. 1. Committee chairman Barney Frank, D-Mass., also wants to know if servicers are holding off on foreclosures for borrowers who might be refinanced through the Hope program.

Interthinx, Agoura Hills, Calif., has launched specific FHA Requirement Solutions to help lenders ensure compliant Federal Housing Administration lending programs. Interthinx said its features and services -- such as income verification, identity validation, occupancy status, automated regulatory compliance checks, and third-party certifications -- provide data validation to meet many requirements to support the rapidly growing share of FHA business. For training purposes, a multitude of Interthinx Red Flags have been mapped to specific FHA requirements to help underwriters understand exactly what loan information needs further scrutiny. For example, the company noted, section 4155.1 of the FHA handbook states that the FHA will insure owner-occupied principal residences only -- at least one borrower must occupy the property. Interthinx provides a minimum of 11 Red Flag alerts around the issue of occupancy that, under various circumstances, will trigger and notify an underwriter of potential fraud or risk. The company can be found on the Web at http://www.interthinx.com.

State Farm's federally chartered thrift can use the insurance company's independent agents to market residential mortgages and home equity loans without complying with state licensing requirements, according to a U.S. appeals court. However, the circuit judges noted that their decision may be moot once a new federal law goes into effect that sets registration and licensing requirements for all mortgage originators. The 6th Circuit Court of Appeals ruled that operations of State Farm Bank are not subject to an Ohio law that would require the independent agents to be licensed as mortgage brokers. "We reach this conclusion because the Ohio Act's application to State Farm Bank's exclusive agents fits within the categories of state laws that are expressly preempted by OTS regulations," the appeals court said. Banking attorney Steven Kaplan, a partner at K&L Gates, said, "We have to see how this plays out with the new federal [licensing] law. But at the moment, it is a significant victory for federally chartered entities. It allows them flexibility in how and to whom they solicit customers." The NAMB can be found on the Web at http://www.namb.org.

Reported incidents of residential mortgage fraud in the United States increased by 42% in the first quarter from the level recorded a year earlier, according to a new report from the Mortgage Asset Research Institute. Florida led the states in mortgage fraud, accounting for 24% of all properties with material misrepresentation for loans originated in the first quarter, according to the MARI Quarterly Fraud Report. California ranked second, followed by a three-way tie for third place among Illinois, Maryland, and Michigan. The top fraud incident type was in general application misrepresentation, followed closely by misrepresentations related to income and employment, MARI said. The report is based on data submitted by MARI subscribers about loans originated in the first quarter that have since been classified as fraudulent. MARI, a ChoicePoint company, can be found online at http://www.marisolutions.com.

Nonprofit housing groups and the National Association of Home Builders are forming a coalition to press Congress to reverse a ban on seller-funded downpayment assistance on Federal Housing Administration-insured loans. "We would like to see it happen this year, but the prospects are bleak," said Jerry Howard, executive vice president and chief executive of the NAHB. Nevertheless, the builders will be talking to the presidential candidates and their campaigns along with senators and congressmen to "make sure we can move this bill early next session," Mr. Howard said. Congress passed a major housing bill in July that bans seller-funded downpayment assistance on FHA loans starting Oct. 1 because of high defaults rates and losses to the FHA insurance fund. The builders are working with Nehemiah Corporation of America, AmeriDream, and other nonprofit housing groups on a grassroots effort to pass a bill sponsored by Rep. Al Green, D-Texas. The Green bill protects the insurance fund by allowing the FHA to charge higher premiums on DPA borrowers with low credit scores.

To encourage more loan modifications, the Federal Housing Administration will allow servicers to increase the interest rate on the loan to reduce the investor's loss when it is sold or repooled. The FHA set the maximum interest rate increase at 200 basis points above the 10-year Treasury rate, according to FHA mortgagee letter 2008-21. Mortgage servicing consultant Bob Lyons noted that it is difficult to sell modified loans at par in today's market environment and that servicers have to consider that in deciding to do a loan modification. The FHA is "trying to give them a little more latitude," he said, provided the borrower can afford payments and it results in a performing loan. Mr. Lyons' firm, Lyons McCloskey, is based in Fairfax Station, Va. The FHA is also encouraging servicers to undertake loan modifications even after the borrower has filed for foreclosure. According to the mortgagee letter, servicers can add legal fees and other expenses related to a canceled foreclosure action into the principal amount of a modified loan.

North Carolina Gov. Mike Easley has signed a bill that bars lenders from paying yield-spread premiums on subprime mortgages starting Oct. 1. North Carolina is the first state to ban YSPs, which is a form of mortgage broker compensation that is based on the interest rate of the mortgage. Consumer groups like the Center for Responsible Lending supported passage of House Bill 2188, and they contend that YSPs provide brokers with an incentive to steer borrowers into higher-interest-rate subprime mortgages. "By getting rid of yield-spread premiums, we are eliminating one of the root causes of the foreclosure crisis," said CRL senior counsel Chris Kukla. Roy DeLoach, executive director of the National Association of Mortgage Brokers, noted that the North Carolina law simply allows the lenders to pocket the YSP without disclosing it to the consumer. "Consumers are going to pay more money in the long run," Mr. DeLoach said.

The Department of Housing and Urban Development says it intends to move ahead with RESPA reform and provide homebuyers with better disclosures of mortgage terms and costs even though 243 members of Congress have petitioned HUD to withdraw its rule. "The current housing finance situation has dramatically highlighted the need to move forward responsibly and expeditiously with measures to help American homebuyers," HUD Assistant Secretary Sheila Greenwood said in a letter to Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill. "This response is unacceptable," Rep. Biggert said. "Our concerns are serious, and they are shared by a broad, bipartisan coalition of industry and consumer interests." A majority of the House of Representatives signed a letter circulated by Reps. Hinojosa and Biggert that says HUD's Real Estate Settlement Procedures Act proposal is too complex and would confuse consumers and hurt small businesses. The HUD assistant secretary for congressional relations stressed that HUD is "carefully considering" the comment letters by industry groups, consumer groups, and other interested parties and that HUD "will make appropriate modifications and improvements to the rule."

Due to lax underwriting on four defaulted Federal Housing Administration loans, the HUD inspector general is recommending that Wells Fargo Home Mortgage indemnify the FHA for the full unpaid balance on the loans -- $816,000. "Wells Fargo could not provide justification for the [Delaware] branch office's noncompliance with Department of Housing and Urban Development requirements," the auditors' report says. The IG auditors found that Wells Fargo's branch office approved the underwriting of two loans without verifying the rental payment histories of borrowers and another loan that overstated the borrower's overtime income. On an FHA 203(k) rehabilitation loan, part of the loan proceeds paid for labor performed by the borrower, which violates FHA rules. The four loans were in default within two years of origination. HUD officials can accept, amend, or reject the HUD inspector general's recommendations. As one of the largest FHA lenders, "we are audited periodically by the Office of Inspector General," Wells Fargo said. When loan-level issues are uncovered, Wells Fargo, OIG, and HUD officials "arrive at the appropriate resolution, such as indemnification or reimbursement."

An attorney who spoke at the Western States Loan Servicing Conference in Las Vegas predicts that the Federal Trade Commission will produce a "significant enforcement action" involving a major mortgage servicer within the next several months. Anand Raman, a partner at Skadden, Arps, Slate, Meagher & Flom, said the FTC has broad authority to scrutinize loan servicing practices under its broad authority to address "unfair and deceptive trade practices," and that even practices that are not "manifestly illegal" may get servicers into trouble. Issues the FTC and other regulatory agencies are likely to investigate include internal documentation, monthly billing statement information, and customer service, he said, noting that regulators are under political pressure to get tough with the mortgage industry. "There is a lot of pressure to bring home scalps," Mr. Raman said during a panel session at the conference, which was sponsored by the California Mortgage Bankers Association. "Unfortunately, those servicers that are not operating at a best-practices level make easy targets."

Over 240 members of Congress are urging the Department of Housing and Urban Development to withdraw a proposed RESPA rule and undertake a joint rulemaking effort with the Federal Reserve Board to improve mortgage disclosures. The 243 lawmakers signed a letter circulated by Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., that says HUD's Real Estate Settlement Procedures Act proposal fails to improve and simplify disclosures of mortgage terms and settlement costs. "We are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market," says the letter to HUD Secretary Steve Preston. Over a dozen housing groups lobbied members of Congress to sign the letter, which was circulated a few weeks ago. "When an overwhelming bipartisan majority in the U.S. House of Representatives asks you to withdraw your rule, it's time to listen to your critics and go back to the drawing board," said Kurt Pfotenhauer, executive vice president of the American Land Title Association. Earlier this year, when HUD first issued the RESPA proposal, the industry groups succeeded in getting 140 members of Congress to sign a petition requesting a 60-day extension of the public comment period. HUD agreed to a 30-day extension.

LIUNA is calling on Fannie Mae and Freddie Mac to exercise greater scrutiny of mortgages originated by corporate homebuilders, saying the economy faces a ticking time bomb set to go off in 2010 when five-year adjustable-rate mortgages start resetting. In a new report, the Laborers' International Union of North America said over a third of all mortgages originated by lending subsidiaries of Richmond American, Lennar, and KB Home in 2005 and 2006 in Maricopa County, Ariz., are five-year ARMs that will reset in 2010 and 2011. The report says many homeowners will be unable to refinance before the rates reset due to high loan amounts and falling home values. According to the report, home values in the area have declined an average of over $50,000 in the past year. "We need real and immediate action to help struggling homeowners, to bring the creation of good jobs back to the construction industry, to protect our retirement security from tainted investments, and to stabilize the mortgage and housing industry," said Terence M. O'Sullivan, LIUNA's general president. ".... Congress and regulators must scrutinize those who helped cause this crisis -- including corporate homebuilders -- and consider action to both defuse this ticking time bomb and prevent a recurrence." The construction union can be found online at http://www.liuna.org.

Connecticut Attorney General Richard Blumenthal is the latest state AG to file suit against Countrywide Financial Corp. for allegedly pushing consumers into deceptive, unaffordable loans and workouts, and allegedly charging homeowners in default unjustified and excessive legal fees. Mr. Blumenthal's lawsuit, filed in Superior Court in Hartford, seeks restitution of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws. "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare," Mr. Blumenthal said in a statement. "When consumers defaulted, the company bullied them into workouts doomed to fail. Countrywide crammed unconscionable legal fees into renegotiated loans, digging consumers deeper into debt." A spokeswoman for Bank of America, which now owns Countrywide, said in a statement: "While we cannot comment on pending litigation, we will respond to the AG in due course."