Compliance

The Office of Thrift Supervision is seeking public comment on what approach it should take in issuing a regulation that addresses "unfair and deceptive" subprime lending practices.The 22-page advance notice of proposed rulemaking contains a list of "targeted practices," such as loan flipping and overages that the OTS might prohibit as part of a regulation on unfair and deceptive acts and practices (UDAP). The OTS also points out that the regulation could take a principles-based approach or prohibit specific practices (as the North Carolina predatory-lending law does). "The ANPR reviews OTS legal authority for issuing a UDAP regulation and discusses various approaches that the agency could take, either individually or in conjunction with other initiatives, in issuing a regulation," the agency said. The OTS is issuing the proposal for a 90-day comment period. OTS Director John Reich directed his staff to draft the UDAP proposal after concluding that Congress wants the regulators to exercise all their authorities to stop abusive lending practices.

Federal Reserve Board nominees Elizabeth Duke and Larry Klane said they support the Fed's efforts to draft a rule that would provide better consumer protections for subprime borrowers and ban certain unfair lending practices."If confirmed, I will put my full energy" into using "all the arrows in the regulatory quiver to protect consumers under the Home Ownership and Equity Protection Act," Mr. Klane told the Senate Banking Committee during a confirmation hearing. The Fed is expected to issue a proposed HOEPA rule before the end of the year. Ms. Duke is a Virginia community banker, and Mr. Klane is a top executive at the credit company Capital One, which has a mortgage subsidiary that makes prime and alternative-A loans. President Bush nominated the two bankers to fill two vacancies on the Federal Reserve Board. The Fed can be found online at http://www.federalreserve.gov.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says he is "very confident" that committee members will be able reach a consensus and pass a Federal Housing Administration reform bill after Congress returns from its August recess.Sen. Dodd wanted to mark up an FHA bill this week. But he indicated that there was not enough time to complete the negotiations with senators about to leave town for the month-long recess. "There are a number of issues outstanding," he admitted. The committee chairman stressed that FHA reform, flood insurance reform, and an extension of the Terrorism Risk Insurance Act will be his main priorities when Congress reconvenes in September. "I hope to get to flood insurance and TRIA very quickly," Sen. Dodd told reporters. Then he wants to turn to the government-sponsored enterprise reform bill to strengthen regulation of Fannie Mae and Freddie Mac.

The Senate Banking Committee has canceled a mark-up of a Federal Housing Administration reform bill after key Republicans complained about the process and wanted more time to work on the bill.A sudden push by committee Chairman Christopher J. Dodd, D-Conn., to mark up an FHA bill on Wednesday did not sit well with several Republican members, according to sources. They said the objections centered "more on process than substance" regarding the FHA bill Sen. Dodd put together with Sen. Mel Martinez, R-Fla. FHA reform supporters say they expect the senators to return from their August recess and approve a bill in September. The House Financial Services Committee has already approved an FHA reform bill.

Senate Banking Committee leaders have drafted a Federal Housing Administration reform bill that cuts the FHA downpayment requirement to 1.5% and raises FHA loan limits, according to a copy obtained by MortgageWire.However, negotiations are still under way over several provisions, and it is unclear whether committee members can reach an agreement in time to mark up and pass an FHA bill on Wednesday. The draft bill gives the FHA the green light to vary premiums based on loan or property type, loan-to-value ratios, and other factors, and to charge upfront premiums of up to 3%. The current limit is 2.25%. However, the bill stops short of allowing the federal mortgage insurance program to charge premiums based on credit scores -- a major reform objective of the Bush administration. In lowering the downpayment requirement from 3% to 1.5%, the bill prohibits seller-funded downpayment assistance on FHA loans.

Street Resource Group Inc., a provider of technology and consulting services for mortgage warehouse lenders, has announced the formation of the Closing Agent Risk Committee, an industry group focused on risks associated with the loan closing process.The committee, a response to "the growing incidence of mortgage fraud and the pivotal role closing agents play in that process," stemmed from discussions at SRG's annual Warehouse Lenders Forum in New York City, where Scott Broshears of the Federal Bureau of Investigation presented mortgage fraud data, SRG said. Tom Holland, senior vice president of Regions Funding, led a discussion on closing agent risk and argued for the formation of a committee of executives from leading warehouse lenders to address the issue. Mr. Holland now heads the committee. Citing the growth of the recently formed Warehouse Information Network, SRG president Stanley Street promised that WIN will form committees on regulatory issues and industry standards and practices.

A House Financial Services subcommittee has approved a 10-year extension of the federal government's terrorism insurance program along with changes to expand the coverage to include nuclear, biological, chemical, and radiological acts of terrorism.The Terrorism Risk Insurance Act extension bill also provides a federal backup for insurers providing group life insurance. Republican amendments to shorten the extension period to two years and then to five years failed, and the subcommittee members approve the bill by a voice vote. The full committee is expected to mark up the TRIA extension bill (H.R. 2761) soon. The Bush administration opposes a 10-year extension and efforts to expand the terror insurance program.

The House has passed a Department of Housing and Urban Development appropriations bill after inserting language that prohibits the department from implementing a rule that would block seller-funded downpayment assistance on Federal Housing Administration-insured mortgages.Reps. Maxine Waters, D-Calif., and Gary Miller, R-Calif., offered the amendment, approved by voice vote, so that downpayment assistance providers like Nehemiah and AmeriDream can continue to assistance low-income families to become homeowners. "With passage of this amendment and the overwhelming support of the House of Representatives, the dream of homeownership for millions of Americans in need of downpayment assistance is alive and well," said Scott Syphax, president and chief executive of Nehemiah Corporation of America, Oakland, Calif. HUD recently proposed to ban seller-funded downpayment assistance, maintaining that it leads to inflated appraisals and high foreclosure rates on FHA loans. The HUD appropriations bill also increases FHA multifamily loan limits in high-cost areas and suspends for one year a cap on the number of reverse mortgages the FHA can insure.

U.S. banking regulators have agreed to kick the Basel Ia risk-based capital proposal aside and give regional and community banks the option of using the "standardized" RBC approach, which many foreign banks have adopted."We are pleased with the recognition of the importance of the standardized approaches, particularly that they offer more flexibility than the earlier Basel Ia proposal," said Wayne Abernathy, executive director of the American Bankers Association. While the largest and most internationally active U.S. banks will move ahead with implementation of the Basel II "advanced" RBC approach, the federal regulators were silent in regard to allowing small banks to continue to operate under the current Basel I rules. But most observers doubt that the regulators would force the small banks to adopt the more complex standardized approach, which has more gradients of risk than Basel I, plus an operational risk component. ABA senior economist Robert Strand noted, however, that some banks strongly supported Basel Ia because of the improvements in the risk weights for residential mortgages. "We will ask that those improvements be allowed as an option under Basel I," he said.

Federal regulators and mortgage lenders were "largely responsible" for the housing and mortgage crisis, which should be remedied by better enforcement of predatory-lending statutes and the adoption of "suitability" requirements and federal licensing standards for lenders, according to a white paper by Weiss Research Inc.The white paper, submitted to the Federal Reserve Board July 19, argues that the crisis is likely to worsen and that the Fed played a role in "further inflating the housing bubble that's at the root of the current crisis." Mike Larson, Weiss's interest rate and real estate analyst and the author of the report, also points the finger at lenders who "debased their standards" rather than accept a decline in lending volume, and at Wall Street, whose "large-scale transformation of mortgages into securities significantly boosted risk-taking." Among other things, the report calls for assignee liability for the secondary market and closer monitoring and prompter action by the Fed to "help avert runaway asset price inflation." Weiss, based in Jupiter, Fla., can be found online at http://www.weissgroupinc.com.

It is difficult for investors to make a monetary recovery from a fraudulent mortgage loan, according to an attorney at an American Securitization Forum seminar titled "Mortgage Fraud Prevention -- Tools and Resources for Secondary Market Participants."Karen Gelernt of Cadwalader, Wickersham & Taft LLP said unless there is a party with deep pockets (which originators generally don't have), investors will not be made whole if they purchase a fraudulent loan. Usually the secondary market is able to resell the loan in "scratch-and-dent" packages to firms with expertise to resolve the situation, but at a deep discount. A problem with using the judicial system as a remedy, Ms. Gelernt told attendees at the July 18 session in New York, is that the investor has to prove intent, which is difficult. "After-the-fact" legal enforcement provides some satisfaction, she said, but the money is not there to make the investor whole. Another issue, Ms. Gelernt said, is that the secondary market has been willing to accept fewer pieces of paper to document the loan file. This makes it easier to perpetrate fraud, because it makes it tougher to verify that the loan actually exists.

The Office of Federal House Enterprising Oversight is pushing Fannie Mae and Freddie Mac to stop their purchases of private-label mortgage-backed securities if the underlying mortgages don't comply with nontraditional mortgage and subprime guidance."We are working closely with the enterprises so that going forward these rules will apply to mortgages they purchase directly and through private-label MBS," OFHEO Director James Lockhart said in a speech to the Exchequer Club. The guidance issued by the federal banking regulators imposes tough underwriting standards on interest-only, payment-option, and subprime mortgages. Fannie and Freddie have agreed to comply with nontraditional mortgage guidance with respect to purchases of whole loans, and they are expected to adopt the subprime guidance soon. After his speech, Mr. Lockhart indicated to reporters that his discussions with the GSEs about their purchases of private-label MBS are going well. He said the talks are focused mainly on implementation issues.

The deterioration in the credit quality of subprime mortgages could result in losses ranging from $50 billion to $100 billion, Federal Reserve Board chairman Ben Bernanke told Congress July 19.The chairman indicated that delinquencies and foreclosures are rising faster than the Fed anticipated only a few months ago. And these problems "likely will get worse before it gets better," he said. Mr. Bernanke also told the Senate Banking Committee that he expects the Fed to issue new Home Ownership and Equity Protection Act regulations to address certain subprime lending practices, such as prepayment penalties, later this year. When asked about Federal Housing Administration reform, the Fed chairman advised the Senate to act cautiously because FHA single-family loans have high delinquency and default rates. "I would suggest moving with some caution to ensure you don't create another source of problems," Mr. Bernanke testified.

"We have a long way to go" in the subprime mortgage crisis, Countrywide chairman Angelo Mozilo told attendees in keynote remarks July 18 at the 35th Annual Western Secondary Market Conference in San Francisco.Pouring cold water on statements by other mortgage executives, including Countrywide Financial Corp.'s own Todd Dal Porto, Mr. Mozilo said the current subprime collapse is causing a paradigm shift that will bring down an avalanche of regulatory scrutiny. While declining to point blame for the subprime collapse in any particular direction, he said, "The Street stepped up to provide liquidity irrespective of underwriting" as New Century and others "went to the market time after time to get more capital" for exotic loans. The mortgage industry itself will be the real victim, Mr. Mozilo said.

Sen. Charles E. Schumer, D-N.Y., has introduced a stand-alone bill to raise the loan limits on Federal Housing Administration single-family loans and offer homebuyers an alternative to subprime loans."My bill will raise the FHA loan limits so that more homebuyers, especially those living in high-cost areas, will have the opportunity to [get] safe and affordable FHA prime mortgages," Sen. Schumer said during a Senate Banking Committee hearing. The New York senator noted that House Financial Services Committee Chairman Barney Frank, D-Mass., supports his bill. The senator said the bill would raise the FHA single-family loan limit from $362,000 to the $417,000 conforming-loan limit in high-cost areas. A copy of the bill was not available at deadline time, but Sen. Schumer's bill is expected to raise the FHA limit in low-cost areas and set the loan limit at the median house price in other areas. These adjustments to the FHA loan limits are contained in a comprehensive FHA reform bill approved by Rep. Frank's committee. Sen. Schumer noted that the inability to get FHA loans in many areas has exacerbated the subprime crisis.

The federal regulators are targeting a few subprime mortgage subsidiaries of bank and thrift holding companies for special consumer protection compliance reviews in the fourth quarter.The feds plan to coordinate with state regulators so the state-licensed mortgage brokers working with those mortgage subsidiaries also come under scrutiny. "Additionally, the states will conduct coordinated examinations of independent state-licensed subprime lenders and their associated mortgage brokers," the agencies said. The Federal Reserve Board, the Office of Thrift Supervision, and the Federal Trade Commission, along with the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, are participating in the pilot program. The nonbank subsidiaries of holding companies are generally overlooked in the examination process. "At the conclusion of the reviews, the agencies will analyze the results and determine whether the project is to be continued," the regulators said.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have issued new subprime lending guidance for state-licensed mortgage lenders and brokers that mirrors the guidance recently issued by federal banking regulators.The two state regulatory groups had previously announced their intention to promote uniform application of the subprime guidance, which requires lenders to underwrite subprime adjustable-rate mortgages at the fully indexed rate. So far, 26 state mortgage regulators have said they will expedite adoption of the subprime guidance. To enhance the subprime lending guidance, the state regulators are planning to issue model examination guidelines that will provide a uniform standard for multistate examinations and enforcement actions. The state regulators also plan to offer training problems for examiners that will be open to quality control personnel and internal auditors at mortgage companies. After the examination guidance is issued later this month, "we will be rolling out a training program," CSBS vice president Chuck Cross said. The organizations can be found online at http://www.csbs.org and http://www.aarmr.org.

The Federal Reserve Board should impose tough restrictions on prepayment penalties in the subprime market, according to an FDIC advisory committee, as a way to prevent mortgage brokers from "steering" borrowers into higher interest-rate loans."Lenders will not pay [an excessive] yield spread premium, which is the incentive structure for steering, unless they have a prepayment penalty," Martin Eakes, chief executive of Self-Help Credit Union, told his fellow members on the advisory board. The Federal Deposit Insurance Corp. advisory committee agreed to send a letter to the Fed urging it to restrict prepayment penalties at the end of all-day discussion on subprime lending problems. In the subprime market, prepayment penalties can equal six months' worth of interest payments. Under the recommendation, lenders could only charge a penalty that recovers the administrative costs of setting up a new loan. The Fed is considering changes to its Home Ownership and Equity Protection Act regulations to ban certain subprime lending practices that it deems unfair or deceptive.

Nearly 90 mortgage lenders have formed an alliance to support passage of legislation to "reinvigorate" the Federal Housing Administration so it can provide safe and affordable financing for homebuyers, as well as a lifeline for subprime borrowers who are in trouble."We believe that a greater FHA presence in the mortgage market could have prevented the recent turmoil and that FHA is well-positioned to offer borrowers in trouble a simple and practical solution that will bring much-needed stability to local real estate markets," the FHA Alliance members say in a letter to leaders of the Senate Banking Committee. The House Financial Services Committee has approved a bill that raises the FHA single-family loan limits and allows the FHA to charge risk-based premiums and offer zero-downpayment loans. The Senate Banking Committee is scheduled to hold an FHA hearing on July 18. The formation of the alliance shows that lenders are "very interested" in the FHA reform legislation and view the changes as "very valuable to the housing finance system," said mortgage banking consultant Brian Chappelle. National companies such Bank of America, Countrywide Financial Corp., and SunTrust Mortgage, as well as regional companies such as Mortgage America, are alliance members.

Ginnie Mae has declared R&G Mortgage Corp. in default under its guaranty agreements as a result of the previously announced withdrawal of R&G's status as a HUD/FHA-approved lender by the Department of Housing and Urban Development, according to R&G Financial Corp., the company's San Juan, Puerto Rico-based parent company.The notification by Ginnie Mae said R&G Mortgage will lose its authority to act as a Ginnie Mae issuer and a servicer of Ginnie mortgage pools within 30 days, and that it may not issue additional Ginnie Mae-guaranteed mortgage-backed securities unless approved by Ginnie Mae. (R&G reported recently that it is currently unable to originate loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs because of the company's failure to submit timely audited financial statements.) The parent company said R&G Mortgage would file an appeal with HUD, and that its subsidiary R-G Premier Bank would apply to be licensed as a HUD/FHA-approved lender. R&G can be found on the Web at http://www.rgonline.com.