Compliance

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.

Federal banking regulators are pressing the Office of Federal Housing Enterprise Oversight to exempt federally regulated institutions from proposed appraisal standards Fannie Mae and Freddie Mac agreed to implement under a settlement with New York Attorney General Andrew Cuomo. The appraisal standards or code would "materially disrupt mortgage lending processes and raise costs," according to a joint letter signed by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. Comptroller of the Currency John Dugan previously urged OFHEO Director James Lockhart to withdraw the appraisal code, which would ban the use of in-house or affiliated appraisers on loans sold to the two government-sponsored enterprises. "If not withdrawn, the agreements and code should be revised to exempt federally regulated lenders," the June 19 letter says. Meanwhile, the Senate is likely to vote on an amendment to a major housing bill this week that directs OFHEO to issue regulations that establish appraisal standards for Fannie and Freddie. The appraisal amendment by Sen. Elizabeth Dole, R-N.C., would nullify the appraisal code the GSEs worked out with the New York AG. Senate Banking Committee Chairman Christopher J. Dodd, D- Conn., opposes the Dole amendment.

Former Bear Stearns executives Ralph Cioffi and Matthew Tannin, who managed two subprime hedge funds that collapsed last summer, have been indicted on securities fraud and insider trading in regard to the funds' management. Until recently, little was known about the hedge funds because they were organized under a Bear affiliate, Bear Stearns Asset Management, and incorporated in the Cayman Islands, where bankruptcy laws allow companies to disclose a minimum about their operations. According to the U.S. attorney's office in Brooklyn, where the indictments were handed up, the hedge funds held at least $1.4 billion in investors' money by the end of 2006. In a statement, the U.S. attorney's office said that Messrs. Cioffi and Tannin "believed that the funds were in grave condition and at risk of collapse. However, rather than alerting the Funds' investors and creditors to the bleak prospects of the funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds." (For the full story, see the June 23 issue of National Mortgage News.)

The Federal Bureau of Investigation is undertaking 19 subprime-related corporate fraud investigations, according to FBI Director Robert Mueller. "The majority of these corporate fraud investigations address accounting fraud, insider trading, and the failure to disclose the proper evaluations of the securitized loans or derivatives," Mr. Mueller said at a news conference. "In many of these investigations, we are working with the Securities and Exchange Commission and the Department of Justice to determine the criminal intent of these identified violations." The FBI director added that targets are "relatively large corporations." He declined to comment on when the first indictments would be issued in the cases.

Over 400 individuals have been charged with mortgage fraud as the result of a national "takedown" led by the Department of Justice and the Federal Bureau of Investigation. The law enforcement operation called "Malicious Mortgage" netted real estate agents, mortgage brokers, appraisers, and others allegedly engaged in lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes. So far, the three-month sweep had led to 287 arrests and 173 convictions, and 82 individuals have been sentenced, the DoJ said. The Mortgage Bankers Association and the American Financial Services Association welcomed the crackdown. "We support efforts to prosecute unscrupulous operators who give the mortgage industry a bad name," AFSA president Chris Stinebert said. MBA president Kiernan Quinn said the sweep shows that federal authorities are taking the issue of mortgage fraud seriously. "We will continue to work with the FBI to help them target these kinds of crimes," Mr. Quinn said. The FBI said it has set up 42 task groups and working groups around the country that are investigating 1,400 mortgage fraud cases.

The National Association of Home Builders is supporting the housing bill despite it limitations, and the trade group is urging others to compromise so that the landmark legislation can be passed and sent to the president. "We are urging everyone to stop demagoguing and start compromising for the sake of economy," NAHB chief executive Jerry Howard said. The NAHB wanted a broader homebuyer tax credit and a net operating loss carry-back provision so builders could deduct losses in 2008 and 2009 from their profits in prior years and receive a tax rebate. But the housing bill now under consideration in the Senate limits the tax credit to first-time homebuyers, and the NOL provision has been dropped. Mr. Howard said the organization is willing to support the limited tax credit and expressed hope that "others on Capitol Hill that have a couple of outstanding issues will realize the value and necessity of being flexible, too." Otherwise the most important housing bill since 1992 "could go down the tubes," he said.

Several financial services groups, and even the U.S. Chamber of Commerce, say they support a major housing bill pending in the Senate, but they want a section of the bill dealing with the licensing and registration of mortgage originators dropped from the legislative package. Title VI has "serious faults" and imposes suitability requirements on employees of lending institutions that will create uncertainty in the origination and underwriting process, according to the six industry groups. The American Financial Services Association, the Consumer Bankers Association, the Consumer Mortgage Coalition, the House Policy Counsel of the Financial Services Roundtable, the Mortgage Bankers Association, and the CoC signed the June 17 letter. "We strongly support" the GSE regulatory reforms and the FHA modernization provisions in the housing bill, as well as the FHA foreclosure rescue program, says the letter addressed to Sens. Christopher J. Dodd, D-Conn., and Richard C. Shelby, R-Ala. "Therefore, we urge that Title VI be separated from the rest of the bill and be considered separately once the licensing and registration provisions are perfected," the groups say.

Nine Republican senators are demanding the right to fully debate and amend a major housing bill that Senate leaders may try to bring to the floor Tuesday, but their demands could delay passage of the bipartisan bill until after the July Fourth recess. The bill would "greatly expand access to taxpayer-backed Federal Housing Administration loans for delinquent borrowers," and "reorganize the regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks," according to a June 16 letter the senators sent to Sen. Mitch McConnell, the Republican leader. "Due to the seriousness and complexity of this issue, we ask that you protect our rights to fully debate and amend this legislation." Supporters of the housing bill want to limit debate and amendments. But the nine Republicans, including several Senate Banking Committee members, could stonewall the proceedings when the measure comes up for debate. Meanwhile, sources say that Sen. McConnell wants to move the bipartisan housing bill through the Senate. However, the Republican leader is trying to block other Democratic initiatives, which could also delay legislative action.

The Department of Housing and Urban Development is finding few supporters for its RESPA reform proposal, so three key players are recommending that HUD refocus its efforts on refining the good-faith estimate and add a summary page that highlights key loan terms and payment information. In a joint letter to HUD, the National Association of Realtors, the American Land Title Association, and the Center for Responsible Lending say they have reached an agreement on the summary page, which is attached to the June 12 letter. The CRL wants a more prominent disclosure of the mortgage broker's fee, however. "Our organizations also share the belief that a summarized GFE should be accompanied by a more detailed GFE with explanations of each subcategory of fees to help consumers understand more fully the services and accompanying fees for which they are being charged," the joint letter says. The comment period on HUD's Real Estate Settlement Procedures Act proposal ended June 12, and the NAR and ALTA have urged HUD to withdraw the proposal. The American Bankers Association and the Consumer Bankers Association also want HUD to withdraw it. The Independent Community Bankers of America has said it opposes the rule.

The Federal Housing Administration has added mortgage subsidiaries and outside vendors to its list of entities that are exempt from its 90-day "anti-flipping" rule. The FHA will not insure a mortgage on any property that was owned by the seller for fewer than 90 days before transferring it to a new owner. A waiver exempts properties owned by the FHA, Fannie Mae, Freddie Mac, and state- and federally chartered financial institutions. But to satisfy the anti-flipping rule, many third-party vendors are forced to leave foreclosed properties vacant for 90 days. "This harms neighborhoods, frustrates homebuyers, and delays recovery," FHA Commissioner Brian Montgomery said at the Mortgage Bankers Association's Government Housing and Loan Production Conference in Washington. The exemption allowed for vendors will last for one year, at which time "recovery should be under way," Mr. Montgomery said. The FHA can be found online at http://www.fha.gov.

The new head of the Department of Housing and Urban Development says the short seven months he will have on the job is enough time to "make a profound, powerful difference" in what has become the "American nightmare." In his first public appearance since being sworn in, HUD Secretary Steve Preston told the Mortgage Bankers Association's Government Housing and Loan Production Conference in Washington that "where there's urgency and commitment, there is terrific opportunity." What lawmakers, the administration, and the mortgage business do now to address the rising tide of defaults and foreclosures "can set the market on a firm foundation for future growth," said the former head of the Small Business Administration, who had been on the job at HUD for only four days. Calling on Congress to modernize the Federal Housing Administration and improve oversight of the housing government-sponsored enterprises, he said the "situation demands action now." And noting that the default situation will get worse before it gets better, Secretary Preston asked the industry to "continue to be aggressive" in reaching out to troubled borrowers.