Compliance

The House has passed a landmark housing bill that includes a financial backstop for Fannie Mae and Freddie Mac by a 272-152 vote, and the measure now goes to the Senate, where a few Republican stalwarts might delay final passage for a few days. The bill increases Fannie's and Freddie's line of credit at the U.S. Treasury and authorizes the Treasury secretary for the first time to purchase stock in the two government-sponsored enterprises, if necessary. The bill also strengthens regulation of Fannie and Freddie, and passage of the bill should make it easier for the mortgage giants to raise additional capital, according to James Lockhart, director of the Office of Federal Housing Enterprise Oversight. Freddie has pledged to raise $5.5 billion in additional capital. "We are hopeful passage will help them do that quicker," Mr. Lockhart told Bloomberg TV. Once the bill is signed by President Bush, Mr. Lockhart will become the chief regulator for Fannie, Freddie, and the Federal Home Loan Banks. The massive housing bill also updates the Federal Housing Administration mortgage insurance programs and creates an FHA refinancing program to help 400,000 homeowners avoid foreclosure. The foreclosure rescue program will begin Oct. 1. Tax provisions in the bill provide a $7,500 tax credit for first-time homebuyers.

More than 10,000 people with criminal records were allowed to work in Florida's mortgage industry, according to a report in The Miami Herald. Of those, more than 4,000 cleared background checks despite committing crimes that state law requires regulators to screen, including fraud, racketeering, and extortion. The state's chief financial officer, Alex Sink, is calling for an executive order to stop issuing and renewing mortgage broker licenses to convicted felons. He has also requested that Florida's chief mortgage regulator, Don Saxon, step down. Mr. Saxon is commissioner of the Office of Financial Regulation.

The Securities and Exchange Commission has issued an emergency order effective July 21 designed "to enhance protections against naked short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks." Under the emergency order "anyone effecting a short sale in these securities" must "arrange beforehand to borrow the securities and deliver them at settlement." The SEC said its emergency order will terminate on July 29, but "may be extended for no more than 30 calendar days in total duration." The commission said it plans on following up the emergency order with marketwide rulemaking. The SEC can be found at http://www.sec.gov.

The Department of Housing and Urban Development should withdraw its RESPA proposal and work with the Federal Reserve Board in developing "more simplified mortgage and real estate settlement cost disclosure forms," according to a "dear colleague" letter being circulated in the House. Reps. Ruben Hinojosa, D-Texas, and Judy Biggert, R-Ill., are leading the effort to get Housing Secretary Steve Preston to abandon HUD's proposed Real Estate Settlement Procedures Act rule. The two House Financial Services Committee members are urging fellow members of Congress to sign a letter that petitions HUD to immediately commence a joint rulemaking process with the Fed, which is working on improving Truth in Lending Act disclosures for mortgage borrowers. "It is critically important for consumers that any revision to RESPA achieve the following goals: simplify, clarify and reduce the cost of mortgage and real estate settlement processes," the letter to the HUD secretary says. However, HUD's RESPA proposal does not meet those goals, according to Reps. Hinojosa and Biggert. "We are profoundly concerned that HUD's proposed RESPA rule will hinder rather than help the recovery of the housing market." Over a dozen banking, mortgage, and settlement provider trade groups will be lobbying lawmakers to sign the letter.

Even though mortgage fraud for housing "doesn't seem quite as violent" as mortgage fraud for profit, it has its own consequences, according to a representative of the Florida Office of Financial Regulation's Bureau of Financial Investigations. Rui Goncalves told attendees at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla., that fraud for housing is "more of a temptation" because it is easy for people to think they are trying to help someone get into a home. But those who participate might not realize the consequences, even if the loan never goes into default. For example, having unqualified buyers in the market competing for properties drives up prices, and eventually there will be a crash, Mr. Goncalves said. He called on originators to strive for transparency in their dealings and to ask questions of their customers.

Suitability is a key point in determining what might be mortgage fraud, the chief of the Florida state attorney general's mortgage fraud task force told attendees Wednesday at the Florida Association of Mortgage Brokers annual convention in Kissimmee, Fla. R. Scott Palmer, who is also the special counsel for antitrust enforcement, said that under his office's definition of suitability, it is a violation of the state's unfair and deceptive practices act to put someone into a loan if the originator knows the borrower cannot repay it. Questioned by an audience member, Mr. Palmer added that suitability is "a developing concept" that is in its infancy and that case law will likely be developed around it. The real issue, he said, is whether the broker is aware that the information is false. Don Saxon, commissioner of the Office of Financial Regulation, said the concept could be similar to what exists in the securities industry, where (while there is no hard and fast rule) practitioners have to consider the consumer's portfolio as a whole to determine suitability.

The FBI had launched an investigation of IndyMac Bank for possible mortgage fraud shortly before the insolvent Pasadena, Calif.-based thrift was closed by regulators and placed into receivership, according to news reports. The $32 billion thrift, which specialized in alternative-A lending, is apparently one of 21 companies under scrutiny for possible mortgage fraud. "The FBI is currently investigating 21 companies involved in the mortgage/subprime industry," the bureau said in a statement in response to news reports about IndyMac. One month ago, FBI Director Robert Mueller told reporters that his agency had initiated 19 subprime-related corporate fraud investigations. Many of these investigations are coordinated with the Department of Justice and the Securities and Exchange Commission. In testimony July 15, SEC Chairman Christopher Cox told Congress that his agency has over four dozen law enforcement investigations in the subprime area. The Federal Deposit Insurance Corp. is operating IndyMac as a conservatorship and offering banking services to depositors and borrowers.

R&G Financial Corp., San Juan, Puerto Rico, has announced the receipt of notices from Freddie Mac terminating the eligibility of R&G Mortgage Corp. and R-G Premier Bank to sell mortgages to Freddie or to service mortgages for the government-sponsored enterprise. The holding company said it has obtained a temporary restraining order from U.S. district court against the terminations and will appeal the actions. It also reported that Freddie Mac's notice indicated that the terminations were based on concerns about the two R&G subsidiaries' ability to continue to act as a servicer and to meet their obligations to the GSE. As of June 30, Freddie Mac servicing amounted to approximately 42% of R&G Mortgage's servicing portfolio, R&G Financial said, adding that it estimates that an additional 25%-30% of the servicing portfolio could be affected due to contractual commitments related to Freddie Mac seller/servicer status.

Sandler O'Neill Research has reiterated its Sell rating on Home BancShares Inc., citing a disclosure that an internal investigation by the company had uncovered apparent fraud at a subsidiary bank. The alleged fraud by a senior officer was estimated at approximately $2.1 million, but has apparently not resulted in customer losses, the research firm said. While noting that the bank's disclosure was hedged, Sandler O'Neill said the announcement "does not seem to be cause for significant concern." Pointing to Home Bancshares' decentralized system, with local management heading up the bank's subsidiaries, the research firm said it "would not be surprised to see management tighten its oversight of the subsidiary banks." Home BancShares, based in Conway, Ark., owns community banks in Arkansas and Florida.

Fulbright & Jaworski LLP has announced the formation of a Global Subprime and Credit Crisis Practice Group. The law firm said the group would address the needs of financial institutions, brokerage firms, title companies, corporate directors and officers, and public accounting firms. Fulbright said five co-heads from various disciplines have been designated to steer the practice group: Rodney Acker, a financial institutions litigator in Dallas; David Barrack, a bankruptcy litigator in New York; Anne Rodgers, a securities and complex commercial litigator in Houston; Richard Smith, a white collar defense and government investigations litigator in Washington, D.C.; and Chris Warren-Smith, a financial disputes and investigations lawyer in London. "Issues similar to those we now face with the subprime fallout date back to the late 1980s when many of our lawyers were handling litigation involving the failed savings-and-loan industry," said Stephen C. Dillard, the head of Fulbright's Global Litigation Department. "This is an area where we can offer our clients the advice and experience they need to successfully deal with the subprime collapse." The international law firm can be found online at http://www.fulbright.com.

National banks need to deal fairly with all struggling homeowners when it comes to deciding who will qualify for loan workouts and who will slip into foreclosure, according to the comptroller of the currency. "It's important that borrowers aren't being foreclosed on more quickly or denied access to modification programs, because of their race," Comptroller John Dugan said. In the past, fair-lending exams used to be focused mainly on discriminatory lending practices. But now with so many mortgages going into default, banks need to make sure that "similarly situated borrowers who default or become delinquent are treated similarly," Mr. Dugan told an OCC compliance conference. The comptroller also noted that some banks made subprime mortgages that qualified for Community Reinvestment Act. And he called on those banks to continue to make "good loans that will fulfill their CRA obligation."

The Federal Housing Administration is moving ahead with the implementation of risk-based pricing for mortgage insurance premiums on July 14, and HUD officials are urging Congress not to block the move. The RBP conversion was announced by the agency back in April. Steven Preston, the recently confirmed secretary of the Department of Housing and Urban Development, said the FHA is moving ahead with the expansion of the FHA Secure program on July 14. The new lending criteria will allow borrowers who have missed two or three payments in the previous 12 months to refinance into FHA-insured loans. The expanded FHA Secure also requires that premiums be priced according to the borrower's individual credit profile. The FHA currently charges a standard premium for all borrowers. HUD officials are concerned that Congress may impose a moratorium on risk-based pricing as part of an FHA modernization bill pending in the Senate. "That would be a very big mistake," Secretary Preston told reporters. "FHA would have to increase premiums across the board for all its borrowers or seek taxpayer funds in October to cover potential losses."

Florida Attorney General Bill McCollum has sued Countrywide Financial Corp. and its former chairman Angelo Mozilo for allegedly engaging in deceptive and unfair trade practices in originating subprime loans. The AG's lawsuit says the Calabasas, Calif.-based lender failed to ensure that borrowers could repay their loans and even placed prime borrowers into higher interest rate subprime loans. "To foster a culture of loan approvals regardless of a borrower's capacity to pay, Defendants compensated underwriters with bonuses," says the lawsuit filed in Broward Country circuit court. "Defendants' underwriters had incentives to approve as many loans as possible, regardless of credit risk." Countrywide declined to comment on the specifics of the case. The Florida AG filed the lawsuit on June 30, one day before Bank of America completed its acquisition of Countrywide. Attorneys general in Illinois and California have filed similar lawsuits against Countrywide.

Federal Reserve Board staff members are urging staffers at the Department of Housing and Urban Development to work with them in revising key disclosures for mortgage applicants so they don't produce duplicative and inconsistent forms that confuse consumers. "We believe the inconsistencies and other differences between HUD's proposed good faith estimate and the Fed's Truth in Lending Act disclosures are likely to confuse consumers and undermine consumers' ability to make informed shopping decisions and avoid unnecessarily high settlement costs," Fed consumer affairs director Sandra Braunstein said. In commenting on HUD's Real Estate Settlement Procedures Act proposal, Ms. Braunstein points out that the Fed and HUD are on different tracks when it comes to the disclosure of mortgage broker compensation. She says consumers are confused about how brokers are compensated and reports that the Fed's consumer testing raises concerns about the terminology HUD uses to describe broker fees. "Board staff is concerned that the language on the revised GFE will contribute to consumer confusion rather than provide further clarity for consumers," the Fed's consumer affairs director says in the June 13 letter.

The Senate has approved an amendment by Sen. Christopher S. Bond, R-Mo., that requires lenders to provide better consumer disclosures on adjustable-rate mortgages with teaser rates. ARMs with teaser rates "played a large role in our current subprime mortgage crisis," Sen. Bond said recently during debate on a housing reform and foreclosure rescue bill. The new Truth in Lending Act disclosure would require mortgage lenders or brokers to disclose how high the mortgage payments would go once the teaser rate expires. In addition, they would have to disclose that there is "no guarantee" that the borrower will be able to refinance the loan before the initial low rate ends. "Many potential borrowers either did not understand what they were getting into or were falsely assured [that they could refinance and] everything would be OK," Mr. Bond said. The Senate approved the Bond amendment to the housing bill by unanimous consent on June 25.

As senators go home for the Fourth of July recess, supporters of a housing reform and foreclosure rescue bill remain optimistic that the Senate will pass the measure shortly after they return and that a final bill will land on the president's desk before August. "All signs indicate that they will finish the housing legislation before the August recess," said Mike House, executive director of FM Policy Focus. Republicans succeeded in blocking a final vote on the housing bill before the recess, which starts June 28. But test votes show that at least 80 of the 100 senators support the landmark housing bill that would authorize the Federal Housing Administration to refinance 400,000 at-risk homeowners to prevent foreclosures and strengthen regulation of the housing government-sponsored enterprises. The House has passed a similar bill, and observers expect that the House and Senate banking committee leaders will be able to resolve any differences relatively quickly. Meanwhile, President Bush is moving away from previous veto threats. Now he is calling on lawmakers to complete their work on the housing bill when they return to Washington on July 7. "The Congress needs to come together and pass responsible housing legislation to help more Americans keep their homes," Mr. Bush said.

Banks and thrifts holding fairly conservative one- to four-family mortgages would see their risk-based capital requirement jump from a 35% to a 100% risk weighting if the borrower missed three monthly payments under an RBC proposal federal banking regulators call the Basel II "standardized approach." Riskier residential mortgages with higher loan-to-value ratios or stand-alone home equity loans that become 90 days or more past due could end up with a 150% risk weighting, according to Federal Deposit Insurance Corp. officials. The FDIC board has approved the issuance of the proposed standardized approach for a 90-day comment period. The Federal Reserve Board was slated to meet June 26 to consider the notice of proposed rulemaking. The regulators have decided to scrap a Basel Ia RBC rule and move toward the standardized approach that could be adopted by most FDIC-insured institutions. The 11 largest U.S. banking organizations are required to implement the more advanced Basel II approach. The standardized approach incorporates the more risk-sensitive risk weightings for mortgage loans in Basel Ia and adds a surcharge for operational risk based on 15% of net interest income. It also imposes a capital surcharge on nontraditional mortgages to address risks associated with negative amortization. Restructured single-family loans would generally fall into a 100% risk weighting.

Citing a desire to help the mortgage industry combat fraud, Agoura Hills, Calif.-based Interthinx Inc. has announced its integration with MERS, the electronic registry for tracking ownership of mortgage loans and servicing rights. Data from MERS will be integrated into Interthinx's FraudGuard scoring system to detect undisclosed properties, reveal investors claiming owner occupancy, and uncover recently closed loans that could indicate a borrower's intent to commit mortgage fraud. The new feature allows FraudGuard users to automatically access the MERS database of registered real estate transactions to conduct automated searches (during the FraudGuard scoring process) for potential fraud before funding a loan. Interthinx is a provider of risk mitigation, mortgage fraud prevention, and regulatory compliance tools. The companies can be found on the Web at http://www.iterthinx.com and http://www.mersinc.org.

The Illinois attorney general has sued Countrywide Financial Corp. and its chairman Angelo Mozilo for engaging in allegedly unfair and deceptive lending practices that placed borrowers into risky subprime and payment-option mortgages they could not afford. "Countrywide used egregious unfair and deceptive lending practices to steer borrowers into loans that were destined to fail," AG Lisa Madigan said. The lawsuit alleges that Countrywide weakened its lending standards and pushed reduced document loans to qualify more borrowers and increase its loan production. "Through the investigation, we have learned the larger story of how Countrywide created and implemented a corporate strategy that resulted in widespread loan failures," Ms. Madigan said. Countrywide, which is being acquired by Bank of America, had not responded to a request for comment by deadline time. The Illinois AG wants the Cook County Circuit Court to order the Calabasas, Calif.-based lender to rescind or restructure all the loans it originated using the allegedly unfair and deceptive practices.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have announced that six more states will begin using their Web-based mortgage licensing system on July 1, bringing the total to 14. The new additions to the Nationwide Mortgage Licensing System are Connecticut, Louisiana, Mississippi, North Carolina, New Hampshire, and Vermont. The system is designed to automate and streamline state licensing of mortgage lenders and brokers. The states already using the system are Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, Rhode Island, and Washington. More than 5,000 companies and nearly 17,000 loan officers are being managed by the system, the organizations said. "This unprecedented adoption rate is the result of hard work begun several years ago by state regulators as we envisioned a new regulatory framework that would begin to address some of the gaps we experienced in state and federal oversight of the mortgage industry," said Gavin Gee, Idaho's director of finance and chairman of State Regulatory Registry LLC, the CSBS subsidiary that developed and operates the online registry. CSBS can be found online at http://www.csbs.org.