Compliance

In addressing predatory lending, Rep. Maxine Waters, D-Calif., says she also wants to make sure that blacks and Hispanics have access to prime mortgages and are not forced into higher-priced subprime loans."I am very much focused on the fact that we continue to get substantial documentation that people of color pay more for loans," the new housing subcommittee chairwoman told the National Association of Affordable Housing Lenders. "We cannot have African-Americans and Latinos, who earn the same amount of money as a Caucasian, pay their bills equally as well, but they are only offered subprime loans and pay more for their mortgages. That has got to stop." Rep. Waters said the new leaders of the House Financial Services Committee recognize the seriousness of this kind of discrimination. "We are going to fix it," she said.

The Federal Deposit Insurance Corp. has extended for one year a moratorium on the acquisition of industrial loan companies by commercial firms, but opened the door to acquisitions by financial services companies.The FDIC's action prevents Wal-Mart from acquiring an FDIC-insured ILC to process payments and credit cards and eventually get into other banking and lending activities. FDIC Chairman Sheila Bair said the growth of commercial ownership of industry loan companies raises public policy questions about the separation of banking and commerce. "The moratorium will provide Congress with an opportunity to address the issue legislatively while the FDIC considers how best to respond to any safety-and-soundness issues surrounding commercial ownership under existing law," she said. House and Senate banking committee leaders, as well as the American Bankers Association and America's Community Bankers, welcomed the FDIC's decision to extend the moratorium.

Wayne Lee, a 15-year veteran of Ameriquest Capital Corp., is suing the company, alleging that it reneged on a $50 million consulting deal, while its owner -- the current ambassador to the Netherlands -- blocked badly needed operational reforms.Filed late last week, the lawsuit alleges that company owner Roland Arnall (currently an ambassador) "blocked" reforms that might have helped the subprime giant stem allegations that it engaged in abusive lending practices. A year ago Ameriquest agreed to pay $325 million to settle claims with 49 states that it engaged in abusive lending practices. Mr. Lee headed Argent Mortgage, an Ameriquest company, until June 2004 when he was promoted to chief executive of ACC Capital Holdings, where he oversaw both Ameriquest Mortgage (Ameriquest's retail arm) and Argent, a wholesaler. (Argent was not a party to the Ameriquest/ACC settlement.) Mr. Lee resigned 11 months later, agreeing to a $20 million lump sum payment and five installments of $6 million a year. He contends that ACC paid the $20 million, but not the first installment that was due in mid-June of last year. In a statement, Ameriquest's attorney Bernard LeSage called Mr. Lee's complaint a "ridiculous work of fiction." (For the full story, see the Feb. 5 issue of National Mortgage News.

The chairman of the House Financial Services Committee, Rep. Barney Frank, D-Mass., is reworking the GSE affordable housing fund so that Fannie Mae and Freddie Mac would make annual contributions to a National Housing Trust Fund, which the National Low-Income Housing Coalition has advocated for several years.Rep. Maxine Waters, D-Calif., told the National Association of Affordable Housing Lenders about the concept and later told reporters that it is "Barney's idea" and she supports it. Annual contributions by the two government-sponsored enterprises would go to the trust fund, which would distribute grants to states, cities, and local nonprofits that put up matching funds to build and preserve affordable rental housing. The GSE contributions, estimated at $500 million a year, would provide a "substantial basis for the trust fund," said Rep. Waters, the new chair of the housing subcommittee. One source indicated that the legislation to create the National Housing Trust Fund would be on a separate track from the GSE bill to strengthen regulatory oversight of Fannie and Freddie.

Treasury Secretary Henry Paulson says efforts to reach a compromise on a GSE regulatory reform bill are progressing but there is still a long way to go."So far the conversations have been very constructive, but we've got a lot further to go," Secretary Paulson told the Senate Banking Committee during a hearing on China's currency policies. The secretary said he was "encouraged" by the progress that was made late last year in negotiations with Rep. Barney Frank, D-Mass., which involved key provisions to strengthen regulation of two government-sponsored enterprises -- Fannie Mae and Freddie Mac. It is understood that Treasury officials and Rep. Frank agreed on a proposal that would allow a new GSE supervisor to regulate the size and growth of Fannie's and Freddie's investment portfolios. The secretary did not comment on the details of the negotiations.

Adoption of a "suitability standard" would reverse long-standing efforts to increase homeownership and fairness in lending and put pressure on lenders to deny credit in order to protect themselves from liability, according to a position paper issued by the Mortgage Bankers Association."A subjective suitability standard, combined with a private right of action, would be a poison pill for the dream of homeownership for all except the most economically secure Americans," said MBA's top lobbyist, Kurt Pfotenhauer. The MBA has issued the 34-page position paper to marshal legal and economic arguments in an effort to warn Congress about the damage that could be done by inserting a suitability standard into a predatory-lending bill. (Under such a standard, brokers and lenders would be required to provide the loan most "suitable" for each borrower's circumstances.) Consumer groups are pushing for a suitability standard, and their efforts have gained traction on Capitol Hill. The position paper also takes issue with the notion that specific loan products, specifically adjustable-rate subprime loans, are driving foreclosures up. The MBA stresses that its data continue to show that job loss, divorce, medical problems, and other personal difficulties are the main reason for rising delinquencies and defaults. The MBA can be found online at http://www.mortgagebankers.org.

Clayton Holdings, Shelton, Conn., has announced the introduction of fraud detection services designed to protect conduits, Wall Street issuers, and holders of mortgage-backed securities from losses due to origination fraud and breaches of representations and warranties.Clayton said the new services draw upon its "extensive" due diligence and credit risk surveillance experience. They include: high-risk loan identification; expanded fraud reviews; put-back reviews; and trend analysis. "We're drawing on the breadth and depth of our data, experience, and technology to spot issues prior to securitization, and we have the analytics and surveillance tools to identify exceptions that, when cured, enhance bond performance," said Keith Johnson, Clayton's president and chief operating officer. "Our new fraud services not only reduce fraud and early payment default exposure, but increase client efficiency and enhance understanding of this problem." The company can be found online at http://www.clayton.com.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., says he is working on legislation to prevent an "unprecedented" wave of subprime foreclosures and to give homeowners a grace period so they can get back on their feet."This is a homeownership crisis of unprecedented proportions," Sen. Dodd told a group of mayors. He is planning to hold hearings soon, possibly in two weeks. The committee chairman indicated that the legislation might include a rescue fund. "That is a possibility, but it would have to be paid back," he told reporters. Sen. Dodd also told reporters that he wants to move quickly on GSE legislation to strengthen regulation of Fannie Mae and Freddie Mac and pass a bill in the next two months. He said the Senate government-sponsored enterprise bill will be a "little different" from the House bill. And he declined to take a position on raising the GSE loan limits. "I have to be careful about jumping into that," Sen. Dodd said after speaking to the mayors. "I want to talk with my colleagues first."

Wolters Kluwer Financial Services, Minneapolis, and Regulatory Counsel Group, an Atlanta-based provider of regulatory compliance services for mortgage lenders, have announced that RCG will resell the Wolters Kluwer StateLink Web-based compliance tool to its customers.The companies said StateLink provides quick online access to regulatory information on various topics relating to first and closed-end second mortgages for all 51 U.S. jurisdictions, updated continually by Wolters Kluwer attorneys and analysts. "After extensive research, RCG chose to offer StateLink based on its succinct and detailed information, easy-to-navigate format, and the responsiveness of the StateLink support team," said RCG president Scott Scher. The companies can be found online at http://www.wolterskluwer.com and http://www.regulatorycounsel.com.

Illinois Gov. Rod R. Blagojevich has directed the Illinois Department of Financial and Professional Regulations to immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as H.B. 4050.Gov. Blagojevich said the law, designed to curb predatory lending practices (especially in areas with high residential foreclosure rates), "has created uncertainty for lenders, limiting their interest in offering products to consumers." The governor said he was halting the program "until we can find a system that effectively fights predatory lending and protects homebuyers." A recent report from the University of Illinois Urbana-Champaign showed that housing sales in the housing bill ZIP codes have dropped by nearly half from the level recorded last fall. Comparable ZIP codes in which the pilot program is not being applied have seen a decline of only 20%. The report also said the pilot program does not offer borrowers additional consumer protections.

Informative Research, Garden Grove, Calif., has announced launch of a free fraud prevention tool, Credit Score Verifier, that offers to reduce mortgage lender risk and loan fallout.The company said the proprietary Web-based utility was developed to enable a lender to verify credit scores reported by any of the repositories before undertaking the time and expense of underwriting the file or ordering a backup credit report. The tool addresses the risk associated with the increasing popularity of nontraditional loan types that allow for no documentation and stated incomes, where fraud is always a major consideration, according to an Informative Research spokeswoman. The enhanced tool, formerly called Credit Score Validator, provides a way to assure a lender that a paper copy of a credit report has not been altered, Informative Research said. The company can be found online at http://www.informativeresearch.com.

Acting Pennsylvania Banking Secretary Victoria A. Reider has sent a letter alerting the commonwealth's mortgage companies about new guidelines outlining acceptable conduct for the state's 3,000 lenders and brokers.The new guidelines are part of an effort to protect consumers looking for home loans, the department said. They offer examples and definitions of practices considered dishonest, fraudulent, illegal, unfair, unethical, negligent, or incompetent. Companies that fail to conform to the new guidelines could face suspension, revocation, or nonrenewal of their licenses. The Department of Banking said it is also crafting regulations and seeking legislative reforms to better protect consumers. The changes mirror recommendations outlined in a 2005 report to the General Assembly, "Losing the American Dream: A Report on Residential Mortgage Foreclosures and Abusive Lending Practices in Pennsylvania."

Federal regulators have noticed a "modest uptick" in noncurrent construction and development loans, and banks with rapidly growing C&D portfolios need to be careful, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp..C&D lending at banks has been growing at a 30% annual rate over the past two years and regulators generally expect to see "more significant problems" arise as housing markets soften, she told a California Bank Presidents meeting. However, the recently issued commercial real estate guidance should not be "interpreted as supporting a reduction in current volume," Ms. Bair said, so long as loans are prudently underwritten and risk management practices keep up with increasing concentrations. "But we also do not intend to back away from the expectations we have always placed on institutions with rapid growth and high concentrations in this sometimes-volatile line of business," the FDIC chairman said. "To the extent that an institution is already following best practice in this regard, it has nothing to worry about."

Subprime mortgage lenders are facing a "string of bad news," including the shutdown of companies that "could not operate in a slower origination environment," according to a Federal Reserve Board governor.Susan Bies told a credit union meeting that delinquency and foreclosure rates on subprime adjustable-rate products are rising, and many industry observers are blaming "looser" underwriting standards as well as "limited or no verification of borrower income and high loan-to-value transactions." Meanwhile, the regulators are "discussing what can be done to ensure that these types of loans are being originated in a safe and sound manner," she said. (The regulators are expected to propose new underwriting guidance within the next two months.) "It is not uncommon to find margins of 600 basis points or more on adjustable-rate subprime loans after the expiration of the teaser rate," the Fed governor said. She also noted that it would be prudent for lenders to require escrow accounts on subprime loans, or at least to tell borrowers how much they should set aside for taxes and insurance.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., is also planning to hold hearings on subprime and predatory lending and the impact they have on minority and low-income borrowers."For these consumers, the American Dream can truly become a nightmare," Sen. Dodd said at an annual Rainbow PUSH/Wall Street Project summit hosted by the Rev. Jesse Jackson and business leaders. Sen. Dodd said too many subprime borrowers end up paying "unnecessarily high rates and fees and hidden back-end costs. In the worst instances, homebuyers are slowly robbed of their homes' equity until they, and their families, end up in default and foreclosure." The new chairman did not indicate a timetable for hearings. Besides mortgage lending practices, he also wants the committee to examine credit card practices, wage and salary stagnation among working families, affordable housing, and financial literacy.

Rep. Maxine Waters, D-Calif., says she suspects that subprime lending is responsible for rising foreclosure rates, and she is planning to hold hearings soon."Foreclosures are on the rise, and most evidence points to predatory and subprime lending as a major cause," the chairwoman of the House Financial Services subcommittee on housing told a Women in Housing and Finance luncheon. The chairwoman noted there are some areas with high foreclosure rates where economic problems and job losses cannot be identified. "We are really going to have to take a close look at what is going on with these foreclosures," she said. The housing subcommittee's first hearings will focus on housing problems in the Gulf Coast states that are still recovering from the 2005 hurricanes. Rep. Waters is planning to hold a hearing in New Orleans before the end of January.

The interest and principal payments on hybrid adjustable-rate mortgages do not increase by 40% to 50% as alleged by consumer groups, the Mortgage Bankers Association says in a letter to the new Senate Banking Committee chairman."Hybrid ARMs are not 'exploding mortgages'," the MBA says in the letter to the chairman, Sen. Christopher J. Dodd, D-Conn. The interest rate on hybrids generally increase by 2-3 percentage points after the fixed-rate period expires, but most lenders cap the adjustment at 1.5% to 2%. MBA stressed that bringing hybrid ARMs under the nontraditional mortgage guidance is "unwarranted" and will only curtail the availability of credit to homebuyers and borrowers seeking to refinance. Sen. Dodd recently joined with five other senators in urging bank regulators to include subprime ARMs, such as 2/28 ARMs, under the nontraditional mortgage guidance. The MBA can be found online at http://www.mortgagebankers.org.

Industry groups are warning a group of senators that bringing hybrid adjustable-rate mortgages under the nontraditional mortgage guidance could adversely affect existing homeowners with ARMs, increase defaults, and even put downward pressure on home prices.The Consumer Mortgage Coalition has sent the first letter to the six senators who are urging bank regulators to include hybrid ARMs, such as 2/28 ARMs, under the nontraditional mortgage underwriting guidance. Other trade groups are expected to send letters soon. The CMC warns that such an expansion could harm existing ARM borrowers who are trying to refinance. "Some borrowers would be unable to refinance existing loans because they no longer qualify for a loan -- not because the lending industry has changed its mind about their qualifications -- but because the government had made an arbitrary and unjustified decision to require all lenders to tighten their standards," CMC executive directive Anne Canfield says. The CMC contends that lenders have extensive experience in underwriting ARMs and that tighter underwriting standards are "unjustified." The CMC also warns that tightening underwriting on all ARMs could reduce the pool of potential homebuyers and contribute to downward pressures on home prices.

The House should be able to pass a GSE regulatory reform bill by April 2 when Congress leaves for its spring recess, according to Rep. Barney Frank, D-Mass.The new chairman of the House Finance Services Committee said the bill will tighten regulation of Fannie Mae and Freddie Mac but won't mandate a cut in their giant mortgage portfolios. The House bill will require the two government-sponsored enterprises to contribute the equivalent of 5% of their profits to affordable housing, Rep. Frank told reporters after speaking at the National Press Club. And it will include an increase in the GSE loan limit so Fannie and Freddie can purchase mortgages in high-cost areas of California and Massachusetts. As the new chairman, Rep. Frank said affordable housing is his top priority and that he is looking for ways to buy out apartment owners to preserve existing affordable rental housing.

Doral Financial Corp., the troubled mortgage lender based in San Juan, Puerto Rico, has reported a net loss of $28.7 million ($0.34 per share) for the third quarter, bringing itself current on its reporting obligations to the Securities and Exchange Commission.Doral said its net loss for the first three quarters of 2006 total $62.5 million ($0.81 per share). The company said its "greatest liquidity challenge" is refinancing $625 million of floating-rate senior notes. "Doral Financial will need significant outside financing during 2007, principally for the refinancing of these notes that mature in July 2007 and to meet certain other working capital and contractual needs of the holding company," the company said. In September, Doral announced an agreement with the SEC to pay a $25 million civil penalty in connection with a probe of Doral's restatement of financial results for 2000-2004. The restatement slashed $694.4 million from its retained earnings through the end of 2004 to correct the accounting for certain mortgage loan sales and the valuation of its interest-only strips. Doral can be found online at http://www.doralfinancial.com.