Compliance

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."

Training of employees is one of the keys to preventing mortgage fraud, and companies need to hold internal presentations to arm them with information, according to an expert on the topic who addressed the SourceMedia Mortgage Fraud Conference.Matt Holland, assistant vice president and residential mortgage fraud manager for Sovereign Bank, added that people need to attend such seminars and take information back to their companies to "share the knowledge." This, he said, helps to "contain a problem that is out of control." Lenders need to talk with their brokers and correspondents and tell them that policies to deter fraud are being implemented. This at least puts them on notice, or might even deter them from committing fraud, Mr. Holland said. It is also important, he said, to talk with other industry professionals and share the names of those committing fraud.

Lenders must band together to bar fake loans from coming in their doors, an admitted rookie to the mortgage business said at the SourceMedia Mortgage Fraud Conference in Las Vegas.Mark Nelson, who became senior vice president of risk management at JPMorgan Chase Bank less than a year ago, said lenders should follow the lead of the credit card and deposit industries by sharing data with each other. "If we put our collaborative brains together, we could put a big dent in what's happening to the industry," he said. While stressing that he's not a lawyer, Mr. Nelson said the perception among lenders that they cannot share data is wrong. Gramm-Leach-Bliley specifically allows data sharing as long as certain controls are put in place, he said, urging lenders to join industry coalitions aimed at fighting what by all accounts is a massive and growing billion-dollar-a-year problem. According to Jeffery Taylor, managing director of Digital Risk, Dallas, the number of mortgage fraud reports has jumped six-fold in the last five years, from 3,500 in 2000 to 27,000 in 2005. And that's just what's been reported, he emphasized, noting that much of what's taking place is slipping under lenders' radar screens. Mr. Taylor also pointed to another sobering statistic: That according to the FBI, roughly 80% of the losses attributed to fraud involve either collaboration or collusion by industry insiders. "If that's true," he commented, "it doesn't speak well for what we have in place to combat the problem."

The FBI says it feels the pain of every good mortgage business citizen who has ever turned suspicious activities into the agency for investigation and received no response, even months later."We share your frustration," G-man Bill Stern said at SourceMedia's Mortgage Fraud Conference in Las Vegas. "Agents who devote hundreds of hours investigating cases that aren't prosecuted are frustrated, too." Mr. Stern's mournful statement was in answer to a participant who wanted to know why he never heard back from the FBI after his company had spent hundreds of thousands of dollars to investigate possible corruption. A supervisory special agent who is the mortgage fraud point man in Washington that decides how the FBI's 56 field offices can best focus their limited resources, Mr. Stern didn't have a direct answer for the questioner, who asked what it takes to get the agency to investigate a possible crime. The man said that while his company lost $6.2 million, the state was able to gain six felony plea agreements with the perpetrators. Mr. Stern responded that the amount of the loss seemed sizable enough to warrant the FBI's interest. But he said he wasn't familiar with the case and couldn't provide a more specific answer, other than to note that "all cases can't be prosecuted."

The latest statistics from the Federal Bureau of Investigation confirm that mortgage fraud is on the upswing."We can't find a chart that doesn't show up in a big way," Special Agent Bill Stern said at SourceMedia's Mortgage Fraud Conference in Las Vegas. In even worse news, the FBI's mortgage fraud coordinator in Washington said the trend is moving away from rogue individuals who pull off the scams and toward members of organized crime. "Mortgage fraud is now a criminal enterprise that puts dollars in the hands of people who also are involved in such other crimes as drugs, murders, and gangs," he told the conference. As of early December, the number of suspicious activity reports concerning mortgage fraud is up 62%, from 21,994 to 35,617. Also up are the number of pending cases, the number of charges and convictions, and the amount of cases in which losses against financial institutions, the government and individuals exceed $1 million, "We are now prosecuting new cases at the rate of one a day," the G-man told the conference. As of the first week of December, he reported, 54% of the losses attributed to mortgage fraud were more than $1 million. Noting that the FBI must focus on these larger cases because it doesn't have the resources to pursue every suspect, Mr. Stern called on the mortgage business to work hand-in-hand with law enforcement officials at the state and federal levels "so we can leverage off your expertise."

First American Title Insurance has completed its one-millionth order for FACT, the company's accelerated title and settlement product that protects home equity lenders against losses resulting from undisclosed liens, poor legal descriptions, fraud, and forgery.Introduced in 2003, FACT helps lenders complete same-day closings while also mitigating their risk. Because a pre-closing title search is not required, "FACT speeds the origination process," said Paul Dorman, equity division director at First Am Title's Lenders Advantage. With mortgage fraud on the rise, FACT's insuring provisions are particularly useful for lenders operating highly automated, "low-touch" origination channels, Mr. Dorman said. A recent enhancement includes fraud prevention notification prior to closing. First American Title is a subsidiary of First American Corp., which can be found on the Web at http://www.firstam.com.

Countrywide Home Loans has agreed to improve its pricing on mortgage loans to blacks and Hispanics as a result of an investigation by New York Attorney General Eliot Spitzer into the giant lender's Home Mortgage Disclosure Act data."This agreement should serve as a model for other lenders who, like Countrywide, seek to eradicate racial and ethnic disparities in mortgage lending," Mr. Spitzer said. Based on an outside analysis of Countrywide's pricing, the New York attorney general concluded that black and Latino borrowers paid more than whites on average, especially for loans generated by mortgage brokers. Countrywide has agreed to compensate minorities who "improperly" received subprime and alternative-A loans in 2004 and to implement a $3 million consumer education program in New York. Countrywide disputed the AG's findings and conclusions but cooperated with the inquiry. "Countrywide and Attorney General Spitzer share a common goal: to assure that all individuals who apply for a mortgage loan receive equal treatment, and any pricing differences should be based on credit, property, and other risk factors," Countrywide senior managing director Rick Wentz said.

Fannie Mae and Freddie Mac may face restrictions on purchases of interest-only and payment-option mortgages if the Office of Federal Housing Enterprise Oversight decides to move ahead and issue nontraditional mortgage guidance for the two government-sponsored enterprises."We are looking at putting out a guidance similar to [that of] the other bank regulators," OFHEO Director James Lockhart said -- referring to nontraditional mortgage guidance recently issued by federal banking regulators. The guidance is expected to cover GSE purchases of private-label securities with underlying nontraditional mortgages and whole loans. But OFHEO officials declined to provide any specifics about the guidance. "OFHEO's NTM guidance for the GSEs will have sweeping market impact, although the extent of this impact will vary depending how aggressive OFHEO is in its guidance," according to Federal Financial Analytics, a Washington consulting firm. Mr. Lockhart revealed his nontraditional mortgage initiative in responding to a question about the GSEs' purchasing subprime mortgage securities that could have abusive or predatory features. "I agree, we have to be careful that they are not exploitative," the GSE regulator said at a Women in Housing and Finance symposium.

Treasury Department officials and key House members have reached an agreement on regulating the size and growth of Fannie Mae's and Freddie Mac's giant mortgage portfolios, and the House may vote on the new portfolio language during the lame-duck session, sources say.The agreement does not call for a reduction of the $700 billion portfolios, which has been the cornerstone of the Bush administration's push for government-sponsored enterprise reform. However, the new GSE regulator would "establish standards by which the portfolio holdings, or rate of growth … will be deemed to be consistent with mission and safe and sound operations," the compromise language says. The House passed a GSE regulatory reform bill (H.R. 4161) by a 331-90 vote in October 2005, and the Treasury still has objections to several provisions, including an increase in GSE loan limits. Nevertheless, House Financial Services Committee leaders are trying to arrange for another vote on H.R. 4161 with the new portfolio language later this week. Treasury officials are meeting with key senators to line up support. However, passage of H.R. 4161 by the Senate is very unlikely, sources say, since one senator can block consideration. But the Treasury/House agreement improves the chances of passing a GSE reform bill next year.

The anti-predatory lending ordinance of Montgomery County, Md., has been declared unconstitutional by a state court and permanently enjoined from enforcement.In American Financial Services Ass'n v. Montgomery County, Circuit Court Judge Michael Mason said the Maryland Constitution vests the power to enact laws principally in the state legislature. "No matter how noble the purpose, a 'general' law is beyond the authority of the county to enact and is unconstitutional," the judge wrote. The ruling is good news for current and prospective homeowners, the AFSA said in response to the judge's decision. "It resolves uncertainty that has surrounded Montgomery County's mortgage market since last year and preserves borrowers' access to mortgage credit." The AFSA, along with a group of lenders, filed suit in February seeking injunctive relief. The plaintiffs argued that the bill was beyond the county's authority to enact and said the state has pre-empted the authority of the county to enact legislation that affects lending. They said the bill was vague and violated the lenders' rights to due process. According to the AFSA, courts have consistently ruled that regulatory authority for mortgage lending lies at the state level.

The next chairman of the House Financial Services Committee wants to restructure a Federal Housing Administration reform bill so that riskier borrowers don't have to pay higher mortgage insurance payments.Rep. Barney Frank, D-Mass, who is virtually certain to be the next chairman of the panel, said he is working on a bill that raises the FHA loan limit to the median house price in high-cost areas and allows the FHA to serve riskier subprime borrowers. Rep. Frank estimated that the FHA, by serving richer communities, will generate more revenues that can be recycled to cover the higher loan-loss rates associated with subprime lending. As a result, the FHA borrowers won't have to pay risk-based premiums. It would make money for the FHA or be a "wash," Rep. Frank told a Women in Housing and Finance symposium. He also told reporters that the FHA loan limit would be similar to a proposal in a House-passed government-sponsored enterprise reform bill that raises the Fannie Mae and Freddie Mac loan limit to the median house price in high-cost areas. The GSE bill caps this increase at 150% of the current conforming loan limit.