Compliance

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.

Top executives at LandAmerica Financial Group approved the use of "personal information" about a Colorado insurance regulator to undermine her investigation of the title insurance company's payments to builders and lenders through captive reinsurance arrangements, according to a House Financial Services Committee report.Colorado Deputy Insurance Commissioner Erin Toll was also involved in negotiating a multistate captive reinsurance settlement with LandAmerica, which the title insurer was resisting in late 2005 and early 2006. "The company had personal information regarding Ms. Toll's family background and relationships and raised it with several other state insurance regulators, threatening to 'go public' and get 'real stinky real quick' if Ms. Toll continued her efforts," the committee report says. The information was supposed to show that Ms. Toll had conflicts of interest and was biased against LandAmerica because two sisters and an ex-husband had worked for the title insurer. At an April 26 committee hearing, Ms. Toll testified that she felt "threatened" by LandAmerica's actions, and the committee chairman launched an investigation. The committee report describes captive reinsurance arrangements as sophisticated "kickback" schemes. "LandAmerica appeared more interested in discrediting a state regulator than in addressing legitimate concerns about its business practices," the report concluded. LandAmerica officials could not be reached for comment by MortgageWire's deadline.

The Federal Housing Finance Board has ditched a controversial capital proposal that would have required Federal Home Loan Banks to cut dividends by 50% if they did not meet a high level of retained earnings.Finance Board Chairman Ronald Rosenfeld agreed with critics that the proposal was "flawed" and said he is now committed to working on a way to tie the level of retained earnings to the risk profile of the individual FHLBanks. As originally proposed last March, FHLBanks had to maintain retained earnings of a least $50 million plus 1% of non-advance assets, which created widespread opposition from banking trade groups and the FHLBank community. Board members Allan Mendelowitz and Geoff Bacino said they are committed to strengthening retained earnings, but not in a way that restricts dividends. "Whatever route we choose, it is this board member's opinion that the Finance Board should use dividend limitations only in extreme circumstances," Mr. Bacino said at a Dec. 22 board meeting. The Finance Board did approve a watered-down capital rule at the meeting. The final rule simply prohibits FHLBanks from paying dividends in the form of stock if they have excess stock that exceeds 1% of their assets. This rule will affect only the Cincinnati FHLBank, one FHFB staffer said.

The Financial Crimes Enforcement Network and the federal banking agencies have revised the format for the Suspicious Activity Report by Depository Institutions to support a new joint filing initiative, which will reduce the number of duplicate SARs filed for a single suspicious transaction.Recently approved by the Office of Management and Budget, the revised SAR-DI format won't go into effect until June 30, 2007. But the new form is being released now to allow depository institutions subject to SAR filing requirements to begin planning for the June implementation date. As of June 1, depositories will have the option of using either the existing or the revised SAR-DI formats. But as of Dec. 31, 2007, the revised format for filing will become mandatory. The ability to file SARs electronically is currently being finalized. Financial institutions can review and download the PC fill-in version from the FinCEN website under "What's New." The accompanying form instructions contain critical "how-to" information for completing the form. The FinCEN website can be found online at http://www.fincen.gov.

Industry groups are warning federal banking regulators that any sudden action to expand the nontraditional mortgage guidance to include "2/28" adjustable-rate mortgages could create a "major disruption" in the primary and secondary mortgage markets."For these reasons and others, we believe that a full economic analysis and a notice and comment process is essential before consideration of an expansion of the guidance to hybrid ARMs," says a Dec. 20 letter signed by the nine trade groups. Federal regulators appear to be divided on the issue, but they are under pressure from Congress and consumer groups to clarify that the nontraditional mortgage underwriting guidance applies to hybrids like 2/28 and 3/27 ARMs (which have initial fixed-rate periods of two and three years, respectively). But the trade groups stress that they would have "strong concerns" about such an expansion of the guidance without a careful and deliberative process.

A U.S. appeals court in San Francisco has affirmed lower court decisions that Lehman Brothers, as a warehouse lender, is liable for the actions of a subprime lender that is engaged in fraudulent lending practices."We affirm the holdings of the district court imposing liability on Lehman for aiding and abetting a class-wide fraud perpetuated by First Alliance," Circuit Judge Richard Clifton says in Henry v. Lehman Commercial Paper. First Alliance Mortgage Co. filed for bankruptcy in 2000 to escape class action lawsuits, and a jury found Lehman was liable for $5.1 million in damages as FAMC's sole warehouse lender. The jury concluded that Lehman officials were aware of FAMC's lending practices. The appeals court overturned the $5.1 million award, however, with instructions to the district court to reduce it. Lehman Brothers declined to comment. Nevertheless, the Lehman decision puts wholesale lenders on notice that they have to act if they have knowledge of fraudulent practices. "If you have evidence to suggest that you actually know of a material violation, then you have to act on that knowledge," said Larry Platt, a partner at Kirkpatrick Lockhart Nicholson Graham in Washington.

If the nontraditional mortgage guidance applies to the underwriting of all adjustable-rate mortgages, then Fannie Mae and Freddie Mac may be precluded from purchasing most of the subprime mortgage-backed securities issued by mortgage bankers, according to Friedman Billings Ramsey researchers.The two secondary-market agencies purchased nearly half of all triple-A rated subprime MBS issued in 2005, according to FBR research director Michael Youngblood. He pointed out that a majority of the underlying subprime loans, such as 2/28 ARMs, don't conform to the nontraditional mortgage underwriting guidance, which the Office of Federal Housing Enterprise Oversight recently directed Fannie and Freddie to follow. Two/28 ARMs represent 62% of all subprime lending. "If our reasoning holds, Fannie and Freddie may be precluded from acquiring a majority of subprime securities that they previously purchased," Mr. Youngblood said. "We know as a fact" that the two agencies purchased most of their subprime securities in 2005 from mortgage banking companies that don't have to comply with the recently issued guidance, the FBR researcher said.

"I never thought it would happen to me ... but after years in the industry I'm living the nightmare of working for a broker involved in substantial loan fraud and forgery."To read more of this posting on the Grapevine, click thread338451.

Six members of the Senate Banking Committee are urging state and federal banking regulators to clarify the recently issued nontraditional mortgage guidance so it applies to subprime "2/28" adjustable-rate mortgages."It is our view that these mortgages have a number of the same risky attributes as the interest-only and payment-option ARMs and, therefore, should be covered by the new guidance," the senators say in a letter to regulators. "We would respectfully request that you issue a timely clarification to that effect." (The 2/28 ARM is a 30-year mortgage that has a fixed rate for the first two years.) The letter explains that subprime borrowers can see their interest rate jump from 8% to 12% when the initial fixed-rate period expires after two years, which is similar to the payment shock faced by IO and option ARM borrowers. Regulators issued the guidance to ensure that the nontraditional mortgage are underwritten at the fully indexed rate so borrowers are not forced to refinance or sell their home when the loan resets. The nontraditional mortgage guidance also addresses risk layering and other practices that "should apply" to subprime 2/28 mortgages, the senators say. Sens. Paul S. Sarbanes (D-Md.), Wayne Allard (R-Colo.), Christopher J. Dodd (D-Conn.), Jim Bunning (R-Ky.), Jack Reed (D-R.I.), and Charles E. Schumer (D-N.Y.) signed the letter.

The Office of Federal Housing Enterprise Oversight has directed Fannie Mae and Freddie Mac to comply with the federal banking regulators' nontraditional mortgage guidance when purchasing and securitizing interest-only and payment-option mortgages.The two housing government-sponsored enterprises are expected to take immediate action and develop policies that are consistent with the bank regulators' underwriting guidance on nontraditional mortgages and report back to OFHEO by Feb. 28. "Adoption of this guidance by the two housing GSEs should serve to enhance the overall level of underwriting standards, risk management practices and consumer protection throughout the mortgage market," OFHEO Director James Lockhart says in separate letters to the top executives of Fannie Mae and Freddie Mac. It is understood that the guidance also extends to the GSEs' purchases of private-label securitizations that contain IO and option adjustable-rate mortgages. A company spokesman said Freddie Mac is reviewing OFHEO's letter and had no further comment. Fannie said it supports prudent lending practices and will be talking to its customers to help understand the impact of the guidance. "We believe we will be able to respond fully to OFHEO by Feb. 28, 2007," a spokesman said.

The lending industry must embrace a licensing initiative by state banking and mortgage regulators to keep from crumbling under the weight of fraud and mismatched incentives, a proponent of the project said at SourceMedia's Mortgage Fraud Conference in Las Vegas.A national residential licensing system "has the potential to transform today's mortgage industry and imbue it with a level of professionalism and accountability that will make it easier for responsible mortgage companies to operate and harder for unethical companies to compete," said Tim Doyle, vice president of industry and agency relations at the Conference of State Bank Regulators. The CSBR, together with the American Association of Residential Mortgage Regulators, is building the system so the states can work together more effectively in supervising licensees as they move from one jurisdiction to another. But not everyone favors the system. One major opponent, the 27,000-member National Association of Mortgage Brokers, which speaks for the originators of some 60%-70% of all home loans, maintains that its members will be singled out unfairly by the system, which is due to begin operations in 12 months. All originators, not just brokers, should be covered by the system, the group contends. "It just doesn't make sense to include some and not others, because all consumers should benefit regardless of the distribution channel chosen," says NAMB president Harry Dinham, a Plano, Texas, broker. But Mr. Doyle said the initiative would "make a profound impact on addressing fraud."