Compliance

Three major housing trade groups want to stop the Office of Federal Housing Oversight from moving forward with a proposed formula that could trigger a decline in the conforming loan limit in 2009 if house prices decline by 1% or more this year.In a letter to Congress, the Mortgage Bankers Association, the National Association of Home Builders, and the National Association of Realtors warn that a reduction in the $417,000 confirming loan limit could be "detrimental" to the economy, homebuyers, homeowners, and the housing industries. "[W]e respectfully request that you encourage OFHEO to withdraw the proposed guidance," the trade groups say in a letter to the ranking members of the House and Senate banking committees. OFHEO's formula would allow a decline in the conforming loan limit as house prices decline, but with a one-year lag. So a possible decline in house prices this year would not affect Fannie Mae and Freddie Mac mortgage purchases until 2009. The CLL also serves as a benchmark for loan limits on Federal Housing Administration-insured and Department of Veterans Affairs-guaranteed loans.

Fannie Mae and Freddie Mac say they will stop purchasing interest-only and payment-option mortgages on Sept. 13 if the loans do not comply with the nontraditional mortgage guidance issued last fall by federal banking regulators.The mortgage giants are taking this action at the direction of their regulator -- the Office of Federal Housing Enterprise Oversight -- and they issued notices to their sellers about the coming changes. "It is Freddie Mac's expectation that sellers will comply with the guidance, and that regulated sellers will do so in a manner consistent with their regulators' interpretation and application," the government-sponsored enterprise said. Fannie Mae also notified its sellers about the guidance and served noticed that OFHEO expects the GSEs to adopt the subprime guidance next. "Accordingly, we expect to issue a subsequent announcement related to the Subprime Guidance in the near future," Fannie said. The federal banking agencies issued the subprime guidance on June 29. OFHEO Director James Lockhart predicted that Fannie's and Freddie's actions will force unregulated lenders that sell nontraditional and subprime loans to the GSEs to comply with new standards. "This is a significant step," Mr. Lockhart said.

Rep. Spencer Bachus, R-Ala., has introduced a subprime lending reform bill that would establish a national registry for all mortgage originators -- including loan officers at federally insured banks and their wholly owned subsidiaries.The bill "creates a national registration and licensing standard for mortgage originators to enhance accountability and professionalism within the industry," according to a statement issued by Rep. Bachus. The Fair Mortgage Practices Act also restricts prepayment penalties on adjustable-rate 2/28 and 3/27 mortgages and requires escrow accounts on all subprime mortgages. Rep. Bachus worked with several Democrats last year in developing a bipartisan anti-predatory-lending bill, but those talks broke down last fall. House Financial Services Committee Chairman Barney Frank, D-Mass, is currently working on a predatory-lending bill. "I am optimistic we can do a bill this fall," Rep. Frank said.

R&G Financial Corp., San Juan, Puerto Rico, has reported that its status as a HUD/FHA-approved lender has been withdrawn by the Department of Housing and Urban Development because of R&G's failure to submit timely audited financial statements.As a result, R&G said it is currently unable to originate loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. The company said its subsidiary R&G Mortgage will file an appeal with HUD, and its subsidiary R-G Premier Bank will apply to be licensed as a HUD/FHA-approved lender. "As a licensed bank lender, R-G Premier would not be subject to the audited financial statement requirements applicable to R&G Mortgage," R&G said. The company also reported that it has received "notice of non-objection" from the Federal Reserve Bank of New York and the Federal Deposit Insurance Corp. to "engage in what amounts to the last of its 'unwinding' transactions with other Puerto Rican financial institutions resulting from the restatement of its audited consolidated financial statements." R&G can be found on the Web at http://www.rgonline.com.

The Federal Reserve Board is working "expeditiously" on crafting proposals to protect consumers from unfair subprime lending practices, but there is no timetable for the issuance of a Home Ownership and Equity Protection Act rule, according to a Fed governor."I can't give you a timetable," Fed Governor Randall Kroszner told a meeting of the New York Bankers Association in Washington. One of the bankers, New York Federal Home Loan Bank President Alfred DelliBovi, told the Fed governor that he senses a lot of "anger" in Congress about the subprime mortgage situation and rising foreclosures. Mr. Kroszner stressed that the board is "very sensitive" to the plight of subprime borrowers who have lost their homes and others that are facing resets on adjustable-rate mortgages. The Fed is devoting a lot of resources to the issue, he said. On July 11, the House passed a resolution (H. Res. 526) that calls for "government action" to protect homebuyers "from unscrupulous mortgage brokers and lenders."

The Department of Housing and Urban Development is creating a new fair-lending division to handle an increasing number of investigations into discriminatory mortgage lending practices."We have launched a record number of investigations this year," said HUD Assistant Secretary Kim Kendrick. It is understood that HUD is investigating several subprime lenders for pricing disparities based on Home Mortgage Disclosure Act reports. The new fair-lending division will also oversee Fannie Mae and Freddie Mac to ensure that their underwriting policies and practices comply with fair-lending laws.

At the request of Congress, the Department of Housing and Urban Development has extended the comment period on a proposed rule to ban seller-funded downpayment assistance on FHA loans.HUD extended the comment period 30 days, till Aug. 10, at the request of Reps. Maxine Waters, D-Calif., and Gary Miller, R-Calif., who said they are "opposed to an expedited rulemaking process in the absence of further congressional review." The two House Financial Services Committee members also demanded that HUD turn over internal documents related to its efforts to improve the performance of Federal Housing Administration single-family loans with downpayment assistance provided by nonprofit groups. Scott Syphax, president and chief executive of Nehemiah Corp., welcomed the extension. "The additional 30 days ensures Congress will have the necessary time to properly review the role downpayment assistance programs play in providing access to homeownership for tens of thousands of low- and moderate-income borrowers each year," he said.

The Office of Thrift Supervision is in the very early stages of a rulemaking process that could lead to the issuance of a regulation that bans certain "unfair and deceptive" lending practices.An OTS spokesman said agency officials are preparing to solicit industry and consumer groups soon for input on certain abusive practices. After reviewing the responses, the OTS plans to issue a notice of proposed rulemaking for public comment. Federal banking regulators are under pressure from Congress to curb irresponsible subprime lending, and the Federal Reserve Board is considering significant changes to its Home Ownership and Equity Protection Act regulations. But the OTS also has the authority to define "unfair and deceptive" lending practices. One thrift industry official welcomed the agency's initiative, saying that the OTS has the experience to develop a rule that provides consumer protections without unnecessarily curbing the availability of credit.

The 11th Circuit Court of Appeals has reaffirmed its position in a 12-year-old legal battle that lender-paid fees to mortgage brokers are proper unless consumers can prove the amount is excessive."In summary, the borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable … in light of market standards and the subjective facts of their mortgage transactions," the circuit judges ruled in Culpepper v. Irwin Mortgage Corp. The appeals court stressed that the courts should use the Department of Housing and Urban Development's two-part test in evaluating yield-spread premiums, which are paid by the wholesale lender to the broker at closing. This test requires a case-by-case inquiry into each mortgage transaction, the appeals court said in affirming a lower court decision to decertify class action status in the Culpepper case. The 11th Circuit Court had upheld class certification in 2001, and the mortgage industry was afraid it would be engulfed in class action lawsuits. But the appeals court reversed itself after HUD issued a clarification of its YSP test.

The Office of the Comptroller of the Currency is proposing to give national banks more "flexibility" in selecting indices for adjustable-rate mortgages as part of a proposed rule to reduce regulatory burdens and update OCC regulations."Specifically, the amendment permits national banks to use a combination of indices to which changes in the interest rate will be linked, in addition to a single index," the proposed rule says. The agency is also making it easier for national banks to apply to use ARM indices that are not already permissible under OCC rules. The 36-page OCC regulatory relief proposal appeared in the July 3 issue of the Federal Register. It addresses various regulatory areas, including permanent capital, electronic banking, and community development investments. The comment period ends Sept. 4. Separately, the OCC has posted on its website illustrations of consumer information for nontraditional mortgage products in Spanish and English that can be downloaded and printed for easy production. The OCC can be found on the Web at http://www.occ.treas.gov.

With interest rates on millions of adjustable-rate mortgages predicted to reset in Pennsylvania and nationally over the next two years, Pennsylvania Gov. Edward G. Rendell is urging homeowners with these types of loans to prepare for possibly significant increases in their monthly payments."Many working families are facing tough situations as their monthly payments increase," Mr. Rendell said. "Homeowners with adjustable-rate mortgages should contact their lenders to confirm when, and by how much, their payments will increase." The Pennsylvania Banking Department wants to change the regulations to require mortgage originators to qualify borrowers under the fully indexed rate and amortized repayment schedule. "This would help to protect consumers from being put into loans they can't afford to pay back," he said. "There also needs to be clearer disclosures to help borrowers better understand their loans." Consumers can learn more about Pennsylvania's Homeowner's Emergency Mortgage Assistance Program by calling a toll-free help line, 800-PA-BANKS, or visiting the banking department's website at http://www.banking.state.pa.us.

In finalizing the subprime mortgage guidance, federal banking regulators rejected industry requests for flexibility in helping subprime borrowers by refinancing them into another adjustable-rate 2/28 mortgage.The guidance, issued June 29, suggests that workout arrangements should provide permanent affordability, and that lender/servicers might consider converting ARMs into fixed-rate mortgages to provide "financially stressed borrowers with predictable payment requirements." Comptroller John Dugan said the emphasis is on putting borrowers into loans they can afford. "It doesn't do any good to keep putting people into loans that they can't repay," he said. In underwriting subprime 2/28 ARMs, regulators expect lenders to qualify borrowers at the fully indexed rate, "regardless of any interest rate caps that limit how quickly the fully indexed rate may be reached." The payment schedule should be fully amortizing over 30 years, unless it is a balloon loan.

Federal financial regulators have issued final subprime guidance cautioning against the use of stated-income and reduced-documentation mortgage loans unless there are "documented mitigating factors that clearly minimize the need for verification of a borrower's repayment capacity."The Statement on Subprime Mortgage Lending calls for "a fully indexed, fully amortized qualification for borrowers" and "prudent" consumer protection standards. The standards should include "clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for customers to refinance prior to the expiration of the initial fixed interest rate period without penalty," the statement says. The Mortgage Bankers Association characterized the guidance as "a strong statement that will help curb abuses" but that will likely "constrain consumer credit choices." The association urged Congress to do two things. "First, quickly pass FHA modernization in order to restore affordable credit options for worthy borrowers, and second, refrain from passing legislation that will further constrain credit by forcing lenders to deal with rigid underwriting standards and litigation risk," the MBA said. "Instead, Congress should focus on legislation to improve transparency and accountability throughout the mortgage transaction."

In response to growing demand for reverse mortgages, Wolters Kluwer Financial Services, Minneapolis, is equipping lenders with a new line of electronic documents they can use to help comply with regulatory requirements tied to Home Equity Conversion Mortgages.A HECM, the most common form of reverse mortgage in the United States, allows borrowers aged 62 or older to convert the equity in their homes into income through a lump sum, monthly payments, or a line of credit offered by lenders. The WKFS line of electronic upfront disclosures and closing documents for HECMs allows lenders doing business in the top 10 states underwriting HECMs to create compliant document packages. The top 10 states are: California, Florida, Texas, New York, Michigan, New Jersey, Colorado, Illinois, Massachusetts, and Pennsylvania. The company plans to expand its HECM document line to other states based upon lender demand. WKFS can be found on the Web at http://www.wolterskluwerfs.com.

The Pew Charitable Trusts has announced a $1 million investment with the Center for Responsible Lending aimed at curbing abusive subprime home loans by strengthening underwriting standards.Pew noted that federal financial regulators are poised to issue guidance on subprime lending, but that more than half of subprime mortgages are issued by lenders not subject to such guidance. "With Pew's support, the Center for Responsible Lending will work to protect all subprime borrowers by urging other federal and state policymakers with jurisdiction and industry leaders to adopt basic, much-needed standards," the organization said. Pew said its two-year investment in CRL is intended to strengthen underwriting standards by pushing lenders to verify a borrower's income and ensure that borrowers can repay the loan after scheduled interest rate increases. The organization can be found on the Web at http://www.pewtrusts.org.

Sen. Charles E. Schumer, D-N.Y., wants to impose a fiduciary duty on mortgage brokers and the initial lender that funds a subprime loan under a bill he is trying to get through the Senate Banking Committee."We need a fiduciary duty" that applies to nonbank lenders that are not federally regulated, Sen. Schumer told reporters. "If we did that, the vast majority of abuses would be cleaned up without affecting the functioning of the subprime market." The National Association of Mortgage Brokers contends that there are many problems with this approach -- since relationships between businesses and consumers are usually addressed at the state level. "The idea that imposing a fiduciary/agency relationship is going to fix everything is a fallacy, and it is not well thought out," said NAMB executive vice president Roy DeLoach. The Schumer bill (S. 1299) also requires lenders to underwrite loans at the fully indexed rate and requires escrow accounts on all subprime loans. Sen. Schumer told reporters that he plans to talk to banking committee Chairman Christopher J. Dodd D-Conn., about holding a mark-up of the bill. "The sooner the better," he said.

Fidelity National Title Group, Jacksonville, Fla., has announced the introduction of a new product offering (in partnership with Experian Consumer Direct) aimed at helping its customers protect themselves against mortgage fraud.Under the partnership, Experian will offer Fidelity customers one year of credit monitoring, fraud resolution assistance, and a credit report at no cost. "We recognize that mortgage fraud and identity theft are a growing concern not only for our industry, but for our customers as well," said Randy Quirk, co-president of Fidelity National Financial, the parent company of Fidelity National Title. ".... Now, when our customers purchase title insurance from participating locations of our companies -- Fidelity National Title, Chicago Title, Ticor Title, Security Union Title, or Alamo Title -- they will receive a one-year membership to Experian Consumer Direct's CreditCheck Basic at no cost." The companies can be found online at http://www.fnf.com and http://www.experian.com.

New York Attorney General Andrew Cuomo has initiated several investigations focused on lender relationships with mortgage brokers and appraisers, according to an attorney who specializes in fair-lending litigation."As expected, Attorney General Cuomo has commenced a number of active investigations related to various aspects of mortgage lending," Andrew Sandler told MortgageWire. "Specifically, he has a number of active investigations pending involving pricing and underwriting issues, as well as inquiries focused on predatory lending." The partner at Skadden Arps described the level of scrutiny the New York AG is applying to the mortgage industry as unprecedented. "There are currently more inquiries out of the New York AG than I have ever seen from any individual enforcement agency at any single point in time," Mr. Sandler said. The NY AG's office has not responded to inquiries about its mortgage industry initiatives.

Unlike in past downturns, mortgage lenders are trying to hold mortgage brokers responsible for buybacks, but there are ways that brokers can protect themselves, according to Douglas Lowell Davies, an attorney with Lane Powell Attorneys and Counselors.Speaking at the National Association of Mortgage Brokers annual conference in Seattle, Mr. Davies said he has successfully represented several mortgage brokers that have been sued by lenders to pay for buybacks that investors have pushed back to the lender. He predicted that this is a trend that is likely to escalate and force brokers out of business if they are held liable in some cases. Mr. Davies advised brokers to come up with a short, one-page disclosure detailing all of the pertinent loan terms in plain English for each of their borrowers to sign. For stated-income loans, Mr. Davies added that brokers should have borrowers sign a document swearing, under penalty of law, that the income provided in the application is accurate.

A proposal by the Department of Housing and Urban Development to eliminate seller-financed downpayment assistance on FHA-insured loans has run into bipartisan opposition in the House.During a House Financial Services subcommittee hearing, Republicans and Democrats urged HUD to drop the proposed rule and improve its regulation and monitoring of downpayment assistance programs run by nonprofit organizations. Subcommittee Chairman Maxine Waters, D-Calif., suggested adding language to a Federal Housing Administration reform bill that would override HUD's proposed DPA rule. Rep. Waters also suggested that HUD extend the July 10 comment period deadline on the proposal for another 30 days. Rep. Gary Miller, R-Calif., urged the FHA to improve its underwriting standards on loans with DPA to improve their performance. The foreclosure rate on FHA loans with downpayment assistance provided by nonprofits is 16%.