Compliance

Key senators and consumer groups are urging Congress to wait for a Government Accountability Office study before taking legislative action on Federal Housing Administration reforms -- but don't expect the study to be completed anytime soon."We haven't received the formal request, and we haven't initiated anything," a GAO official said. A spokesman for the Senate Banking Committee said a letter requesting the report would be sent to the GAO by the end of the week. At a June 20 hearing, Sen. Wayne Allard, R-Colo., said he is asking the GAO to conduct a study on the Bush administration's FHA single-family reform proposals and wants the GAO to recommend the "most viable options FHA can pursue to serve additional low-income and first-time homebuyers." Senate Banking Committee Chairman Richard Shelby, R-Ala., recently urged Senate appropriators not to include the FHA reforms in a Department of Housing and Urban Development appropriations bill, and FHA reform was kept out of the bill. "We have commissioned a study by GAO to examine the implications of the reform proposal," Sen. Shelby said in a July 17 letter. "We believe that it would be premature to legislate without this additional information."

The Securities and Exchange Commission has launched an inquiry of a senior executive of Bayview Financial, Miami, who is accused of altering loan credit data that affected his sales commissions.A top official at Bayview told MortgageWire that the event "is not material" from a financial standpoint and said the company is cooperating fully with the SEC. The official said the executive in question -- who is described in SEC documents as a "senior salesperson, managing director and limited partner of the firm" -- has been fired. The official said the executive "had been manipulating data for years." Bayview says the salesman's actions -- which entailed altering FICO scores -- have caused the privately held firm to repurchase or substitute $66 million in residential loans, or about 3% of its book of business. Bayview Financial pools mortgages and then packages the loans into mortgage-backed securities. On July 14 Bayview received a letter from the SEC indicating that its staff had launched an inquiry into the matter.

Treasury Secretary Henry Paulson wants his team to develop a debt approval process that would allow his department to stop Fannie Mae and Freddie Mac from financing the growth of their portfolios, according to a Treasury official.The secretary has "instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority, should that become necessary," Treasury Under Secretary Randal Quarles told a Reuters panel on government-sponsored enterprise reform on July 19. Mr. Quarles told reporters that the Treasury is still reviewing its approval process for GSE debt issuance and just had its first meeting with Fannie and Freddie executives. "There are a lot of issues that need to be thought through" before there is a "decision as to whether or not this is something we want to do," the Treasury official said. He stressed that Secretary Paulson would prefer a legislative solution to reducing Fannie's and Freddie's giant portfolios. It appears that the new Treasury secretary will wait to see whether Congress can pass a GSE regulatory reform bill before deciding whether he wants to take the next step.

Senate appropriators have put off a decision on FHA single-family reforms advocated by the Bush administration until they go to conference with the House on a Department of Housing and Urban Development appropriations bill."We will look at it in conference," a Senate staffer said. The senators don't want to go into conference with the Federal Housing Administration reforms "when there are significant issues that still need to be discussed," he said. Sen. Christopher Bond, R-Mo., the chairman of a Senate Appropriations subcommittee, and Senate Banking Committee Chairman Richard Shelby, R-Ala., harbor serious concerns about the FHA reforms, which would raise FHA loan limits and allow the FHA to charge risk-based insurance premiums and offer zero-downpayment loans. The House has already passed a HUD appropriations bill with the FHA reforms. But Sen. Bond's subcommittee approved a HUD appropriations bill July 18 that eliminates a loan cap on FHA reverse mortgages but does not include the FHA single-family reforms.

HUD General Counsel Keith Gottfried is working on a compliance assistance process that would allow lenders and settlement service providers to seek legal guidance on Real Estate Settlement Procedures Act issues."We want the industry to be innovative, and they can't be innovative if they have to worry about an enforcement action," Mr. Gottfried said in an interview. The general counsel is drafting a proposed rule that will allow the Department of Housing and Urban Development to issue no-action letters -- signaling that the department will not take enforcement actions against a company that is trying to make the homebuying process more transparent and less burdensome. "I have already drafted about 24 pages of this regulation," he said, and it is being circulated within the department. HUD has to start acting more like a regulatory agency, he said, by putting out guidance, staff bulletins, and interpretations on a timely basis. Besides RESPA, compliance assistance would be provided on fair housing, public housing, and other issues under HUD's jurisdiction.

A proposed rule by the Federal Housing Finance Board would not improve the current regulatory capital framework, and it would make Federal Home Loan Bank membership less attractive, according to Standard & Poor's.The capital proposal to restrict excess stock would "pose a severe limitation" on the FHLBanks' ability to deliver low-cost advances to their members and to provide them with an attractive dividend on their stock, S&P says in a research paper. The Finance Board's proposal would end the practice of paying dividends in the form of excess stock and would mandate a high level of retained earnings. "Should this proposed regulation be adopted as it is currently written, Standard & Poor's will have to monitor any negative impacts to the liquidity profile of the individual banks, core business dynamics, and membership trends," S&P says. The rating agency can be found online at http://www.standardandpoors.com.

Freddie Mac has announced that it is now in compliance with the Federal Reserve Board's revised Payments System Risk policy, ahead of the July 20 implementation deadline.In September 2004, the Fed revised its daylight credit policies for payments into the Fedwire system, effective July 20, 2006. (Fedwire handles all the interest and redemption payments on securities guaranteed by Freddie and Fannie Mae.) The revised policy requires Freddie Mac to fully fund its accounts in the system to the extent necessary to cover payments on its debt-and mortgage-related securities each day. Freddie said it began testing its new business practices in April 2006, and has implemented a strategy that aims to fully fund the company's daily payment obligations by 11 a.m. ET.

The Office of Federal Housing Enterprise Oversight has placed the expansion of Fannie Mae's acquisition, development, and construction lending program on hold, the company's chief executive has told MortgageWire.Fannie president and CEO Daniel Mudd said OFHEO raised concerns about the adequacy of the ADC program's controls and processes, and he agreed to make improvements. Once OFHEO is satisfied that Fannie Mae has "the right routines and controls in place, we will expand the ADC program," Mr. Mudd said in an interview. At a homebuilders' conference in January, Mr. Mudd announced plans to expand the ADC pilot program and purchase $10 billion in ADC loans over 10 years. Mr. Mudd characterized his company's relationship with OFHEO as "positive" and "challenging" during the interview. "I would put them in the tough-but-fair category," he said.

Treasury officials are starting direct talks with Fannie Mae, Freddie Mac, and the Federal Home Loan Banks regarding the Treasury Department's process for approving the issuance of debt by the three government-sponsored enterprises.Senior level meetings are scheduled for the weeks of July 10 and July 17 with executives of Fannie, Freddie, and the Office of Finance, which issues consolidated debt obligations for the 12 FHLBanks. The meetings were first reported by the Wall Street Journal. Treasury Under Secretary Randal Quarles served notice four weeks ago that the automatic approval of GSE debt issuance is under review in light of the accounting scandals at Fannie Mae and Freddie Mac and problems with their accounting systems, risk management, and internal controls. Fannie and Freddie issue corporate debt mainly to finance their giant mortgage portfolios, which have $1.45 trillion in assets combined. The Bush administration supports legislation to reduce those portfolios. Limiting their debt issuance could effectively reduce or cap the portfolios. The FHLBanks issue debt mainly to finance loans to their member banks and thrifts.

In a big win for lenders, the Louisiana Recovery Authority has decided that assistance grants going to homeowners with hurricane-damaged properties should be placed in escrow accounts."Compensation to the homeowners with mortgages will be disbursed at closing directly to an escrow account with the homeowner's lender," LRA spokeswoman Catherine Heitman told MortgageWire. Mortgage lenders and servicers have urged Louisiana and Mississippi to require escrow accounts as a way to ensure that the Community Development Block Grant funds appropriated by Congress are used for repairs and rebuilding. Mississippi decided to disburse the grant assistance directly to homeowners. Louisiana is going with escrow accounts. "We want the money to be used to rebuild and repair homes," Ms. Heitman said. LRA officials are still discussing whether homeowners who own their homes outright and don't have a mortgage should be required to have escrow accounts. About 120,000 Louisiana residents are expected to receive assistance grants.

W Holding Co., Mayaguez, Puerto Rico, has reported that its bank subsidiary, Westernbank Puerto Rico, recently bought additional rights from San Juan, Puerto Rico-based Doral Financial Corp. and its affiliates to perfect the acquisition of mortgage loan pools purchased since 1995.The pools have an aggregate unpaid principal balance of $937.3 billion, the holding company said. The purchases of the loan pools were originally accounted for as sales of the loans by both parties, but Westernbank later determined that it had to recharacterize the transactions on its balance sheet as commercial loans secured by mortgages. Westernbank and Doral then agreed to restructure the transactions. "As a result of this transaction, the bank will record the loan acquisitions as 'true sales'," said Freddy Maldonado, W Holding Co.'s president and chief investment officer. "Thus, the bank will record the mortgage loans as its own, rather than a financing transaction with Doral." Under the terms of the restructuring, the bank received a net compensation of $42.8 million, he said. Westernbank can be found online at http://www.wbpr.com.

House Financial Services Committee Chairman Michael Oxley, R-Ohio, says proposed capital changes could "actually harm" the Federal Home Loan Banks, and he has announced plans to hold a hearing on the Federal Housing Finance Board proposal in September.The committee's ranking Democrat, Rep. Barney Frank (Mass.), joined Rep. Oxley in raising concerns about the proposed rule, which would require the FHLBanks to increase their retained earnings and buy back excess stock. "We are concerned that the proposed changes may go too far and actually harm the FHLBank System more than protect it," Reps. Oxley and Frank say in a letter to Finance Board Chairman Ronald Rosenfeld. The June 30 letter poses seven questions the congressmen expect the regulator to answer when the committee holds the hearing. "The fact that the proposal has been criticized by the leadership of all 12 FHLBanks and key industry trade groups indicates to us a need for a pause," the two ranking committee members say.

Ellie Mae, Dublin, Calif., has announced the formation of a partnership with ComplianceEase, Burlingame, Calif., to offer free, automatic compliance audits to mortgage brokers using Ellie Mae's Encompass Mortgage Automation System.The compliance check, which is free of charge with every loan submission to one of the 45-plus lenders available on the ePASS Network, will work to ensure that loans comply with federal regulations and state and municipal predatory-lending laws, Ellie Mae said. (The acronym stands for Electronic Processing and Submission System.) "Compliance is essential these days, so having a compliance check built into a loan origination system provides great benefits to mortgage brokers," said Jonathan Corr, Ellie Mae's chief strategy officer. The compliance check provides an easy-to-understand "pass" or "fail" designation, but originators who want additional details on loans that failed can get an instant, in-depth report for a nominal fee, Ellie Mae said. The companies can be found online at http://www.elliemae.com and http://www.complianceease.com.

The House has passed a flood insurance reform bill by a 416-4 vote that eliminates subsidized premiums on vacation and second homes and commercial buildings -- affecting an estimated 450,000 properties.Federal flood insurance premiums on those properties would increase 15% a year until they reach the "applicable risk premium rate." During congressional debate, the House also agreed that homes built before 1975 (known as pre-FIRM homes) should not enjoy subsidized premiums if they are purchased after enactment of the bill. "My amendment would simply require any purchaser of a pre-FIRM residential home to pay a phased-in, actuarially correct flood insurance price," Rep. Scott Garrett, R-N.J. said. The flood bill (H.R. 4973) also increases penalties on mortgage lenders who fail to require the purchase of flood insurance or allow coverage to lapse during the life of the mortgage. The Flood Insurance and Modernization Act raises the penalties for lender noncompliance from $350 to $2,000 per violation, with a $1 million cap. The bill also requires notice of availability of flood insurance and escrow for flood insurance in RESPA good-faith estimates.

The Federal Reserve Board has terminated an enforcement order against Citigroup's subprime lending unit that was imposed two years ago for lending violations and for "misleading" examiners during an investigation of the company's lending practices.In May 2004, CitiFinancial Credit Co., Baltimore, agreed to pay a $70 million civil money penalty to the Fed for alleged violations of the Equal Credit Opportunity Act and the Home Owners and Equity Protection Act. The Fed also cited the subsidiary of the giant New York banking company for "alleged actions to mislead examiners in connection with their interview of CitiFinancial employees." The Fed examiners found that CitiFinancial required co-signers on loans to increase sales of joint insurance. The Fed also alleged that CitiFinancial engaged in unsafe and unsound underwriting and lending practices with respect to high-cost HOEPA loans. CitiFinancial agreed to take corrective actions and to pay restitution to borrowers who were harmed by its lending practices.

Federal regulators have revised the Uniform Standards of Professional Appraisal Practice that banking institutions are required to follow in commercial and residential real estate transactions.The 2006 revisions place "greater emphasis on the appraiser's process of problem identification and development of an appropriate scope of work," the regulators say in a joint announcement. The 2006 USPAP also provides a set of minimum standards for all appraisal, appraisal review, and appraisal consulting assignments for the first time. "This simplifies understanding of the development process," according to the regulators. While the 2006 USPAP revisions go into effect July 1, regulators insist that appraisers can easily make the adjustment. "The Scope of Work Rule has no requirements that were not in USPAP before," they note in the announcement. "It's a matter of emphasis." In related news, the Appraisal Institute has released a new practice guide on using the Small Residential Income Property Appraisal Report that is required by Fannie Mae and Freddie Mac.

If there is a theme to Harry Dinham's term as the new president of the National Association of Mortgage Brokers, it is continuity.Elected at the NAMB's annual convention, the 39-year mortgage industry veteran from Plano, Texas, said he aims to maintain the good works of his predecessors. "I firmly believe in continuity from president to president," Mr. Dinham told the convention. One initiative planned by the new NAMB leader is a "serious effort to address the abuses that exist in some affiliated business arrangements." Such schemes "injure consumers because they inhibit and at times outright prevent them" from shopping for the best rates and terms, the soft-spoken Texan said. "We are against the use of affiliated business arrangements as a veil to coercive lending tactics," he said. On another front, the new president said he hopes to expand his group's educational efforts and certification initiatives. Along that line, it will soon pilot a new entry-level professional designation -- the General Mortgage Associate, or GMA.

The Coalition Against Broker Fraud has created a "comprehensive database" on brokers and other finance business insiders known or suspected to have been involved in fraudulent activity.Being on the list is not tantamount to an immediate indictment, the database's co-founders, Mitch Freifeld and Ron Litt, said at the National Association of Mortgage Brokers' convention in Philadelphia, where they formally introduced their effort. Some people could be listed in error or out of retribution, they admitted. But a listing should be enough to give pause to anyone considering using someone whose name is registered, they added. Seeing a name on the list is a "red flag that you need to go a little deeper into the resume," said Mr. Freifeld, who is president of Global Net Branch Solutions, Clearwater, Fla. "We've got to act aggressively," he said. "We have to attack it." The co-founders said fraud against loan brokers goes much deeper than the $86 billion in losses estimated by the FBI in 2004. "It's putting entire companies out of business," Mr. Freifeld said. "And not just little mom-and-pop companies, either. Nobody is immune." Mr. Freifeld, who has been arrested on numerous charges, including credit card fraud and bouncing at least one check, said the coalition is his way of atoning for his past transgressions.

The National Association of Mortgage Brokers has updated both its Code of Ethics and Best Business Practices statement to condemn the use of pressure tactics between mortgage brokers and other service providers.At a news conference June 24 during the NAMB's annual convention in Philadelphia, NAMB past president Joe Falk said "we abhor" any effort to influence another professional because it ends up hurting the consumer. But pressure goes both ways, and mortgage brokers should not be pressured "to lower our standards," he continued. While mortgage brokers should not pressure another provider, they still have a duty to their customers to correct problems, Mr. Falk said, including the right to review an appraisal and point out any errors and to help clean up any problems with the title. Mr. Falk is currently the chairman of the NAMB's Legislative Committee. The organization can be found online at http://www.namb.org.

State regulators are working on underwriting guidance for interest-only and payment-option mortgages and they are soliciting comments on a federal proposal from state-licensed mortgage lenders and brokers.The Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators support the proposed federal guidance on nontraditional mortgage products and CSBS and AARMR are developing guidance for state non-bank licensees, Chuck Cross of the Washington Department of Financial Institutions told a Federal Reserve Board hearing. (Mr. Cross is the department's director of consumer services). The Fed is holding public hearings on abusive lending practices, nontraditional mortgage products, and the need for better consumer disclosures. "We agree with the proposed guidance that lenders who choose to underwrite nontraditional products with less stringent income and asset verification requirements must be governed by policy guidance," Mr. Cross said at the June 16 hearing in San Francisco. Federal banking regulators are expected to issue final guidance later this summer. The Washington state regulator also said the current Truth-in-Lending Act disclosure system "does not work" and it only protects lenders who "accurately complete the forms."