Compliance

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."

The loss of qualifying special-purpose entity status would have a potentially "catastrophic" impact on the commercial mortgage securitization business, according to Rick Jones, a lawyer with Dechert LLP, an international law firm.Moderating a panel session at the Commercial Mortgage Securities Association's annual convention in New York, Mr. Jones said that, if a vehicle is not considered a QSPE, the entities deemed to be primary beneficiaries of the securitization vehicle would have to consolidate the loans on their balance sheets. This could result in, say, $50 billion of assets and liabilities on their balance sheets that were not there before, Mr. Jones said. In this case, "why would they securitize if they didn't make money?" he asked. According to Mr. Jones, the accountants "don't understand these issues" and are on a "steep learning curve." Lee Cotton of ARCap REIT, a "B-piece" player, said an industry group is also working with the "powers that be" in Washington to persuade them that what the industry has been doing fits in with standards set by Statement No. 140 of the Financial Accounting Standards Board. According to Mr. Cotton, if B-piece buyers had to consolidate the loans, it would make their balance sheets "totally unreadable" and not helpful to investors. Dechert can be found online at http://www.dechert.com.

Securities and Exchange Commission Chairman Christopher Cox says the New York Stock Exchange should put a time limit on Fannie Mae's exemption from having its stock delisted because he doesn't want the GSE's exemption to become permanent."I am not trying to force a delisting," but there should be a penalty for not completing a restatement in a timely manner, Chairman Cox told the Senate Banking Committee. The chairman said the NYSE should reconsider Fannie's special exemption in light of the report by the Office of Federal Housing Enterprise Oversight documenting massive financial fraud at the government-sponsored enterprise. "I want to inform the committee that we have encouraged the New York Stock Exchange to amend its rule to put an expiration date on this exception, so that Fannie Mae -- and its investors -- understand that we expect Fannie Mae, like any other listed company, to remain in full compliance with the NYSE's listing standards," he said. Mr. Cox also called on Congress to mandate that Fannie Mae and Freddie Mac become SEC registrants and be forced to comply with all commission reporting requirements. According to testimony by Fannie Mae president and chief executive Daniel Mudd, Fannie Mae will complete its restatement by the end of this year.

LandAmerica Financial Group Inc., Richmond, Va., has announced the acquisition of MSTD Inc., a Baltimore-based provider of Web-based technology to the mortgage servicing industry.MSTD is an application service provider whose flagship product, BackInTheBlack, combines rules-based decision engines with embedded workflows and integration of all third-party providers and services used by lenders managing delinquent loans. "Our default management clients are increasingly challenged with delinquencies and foreclosures, as well as with an increased focus on regulatory compliance and loss litigation," said Albert V. Will, executive vice president of lender services for LandAmerica. "Blending the capabilities of LandAmerica Default Services with the technology expertise and products of MSTD enables LandAmerica to offer the mortgage industry the best and most integrated servicing solution in the marketplace." LandAmerica can be found online at http://www.landam.com.

The Treasury Department has served notice that its automatic approvals of Fannie Mae's and Freddie Mac's debt issuance is now under review in light of the accounting scandals at the two GSEs and continued weaknesses in their accounting systems, risk management practices, and internal controls."[T]he time is right for Treasury to review its debt approval process to ensure that we continue to act as appropriate custodians of the power that Congress gave us when the charters of Fannie Mae and Freddie Mac were created," Treasury Under Secretary Randal Quarles told a Women in Housing and Finance meeting in Washington. The government-sponsored enterprises issue corporate debt mainly to finance their giant mortgage portfolios, which combined have $1.45 trillion in assets. Limiting GSE debt issuance could effectively reduce or cap the growth of their portfolios. "Since we have not seen any specific proposal to change that process, it would be speculative to comment," a Freddie Mac spokeswoman said. Fannie Mae declined to comment. Mr. Quarles reaffirmed the Bush administration's support for GSE regulatory reform legislation that would require Fannie and Freddie to shrink their portfolios. He pointed out that Fannie has reduced the size of its portfolio by nearly $200 billion with no discernible impact on the housing market.

The National Community Reinvestment Coalition is "extremely troubled" about the mortgage originations market and "problematic brokers," NCRC executive vice president David Berenbaum testified at the Fed hearing in Philadelphia.Mr. Berenbaum said that in 90% of the cases where the group found a problematic situation, there was a problematic broker involved. The NCRC conducted a "mystery shopping" campaign, sending out qualified minority testers and less-qualified white testers. Among the results he shared at the hearing was that 74% of whites were given details regarding fees, while only 31% of minorities were. Whites were offered, on average, 2.6 products, while brokers discussed only 1.3 products with minorities, he reported. Brokers met for an average of 38.6 minutes with the white testers, and just 27.4 minutes with minority testers.

"The structure of today's mortgage market does not serve Latinos well," a housing policy analyst for the National Council of La Raza told a Federal Reserve Board hearing June 9.Speaking at the Fed hearing in Philadelphia, Janice Bowdler said Latino consumers are more likely to choose a provider by relationship than by price. The most popular products in the Latino community are payment-option mortgages, 100% financing, and stated-income loans from subprime lenders, she said, adding that even when prime lenders advertise to Latinos, they are marketing those products and not the conventional products available from Fannie Mae and Freddie Mac. There are products available, but there is no incentive for originators to use them, she said. Ms. Bowdler concluded her remarks by noting that market intermediaries such as mortgage brokers do play an important role, but she said improved accountability standards are needed to protect consumers.

Washington Mutual Inc., Seattle, is being sued in U.S. District Court in Brooklyn, N.Y., by three former employees alleging that the mortgage banker violated the federal Fair Labor Standards Act by not paying them the minimum wage and overtime.The three plaintiffs, Dewone Westerfield of Grand Rapids, Mich., Charlotte Machado of Trussville, Ala., and Patricia Kemesies of East Islip, N.Y., worked at different locations, but all maintain that they worked in excess of 40 hours a week with no overtime. The plaintiffs allege that, if the loans they handled were not approved, they received no pay for the long hours they worked, and that this practice violates the minimum wage law, according to the attorneys that filed the suit, Nichols Kaster & Anderson PLLP of Minneapolis and Outten & Golden LLP of New York. Alan Gulick, a spokesman for WaMu, said the company has not yet seen the lawsuit. "However, we believe our compensation practices are fair and ethical, and we will vigorously defend our company against the allegations made," he said. Nichols Kaster & Anderson has a website, http://www.overtimecases.com, that lists 10 other active cases against nine mortgage lenders.

The patchwork of state anti-predatory-lending laws often prevents consumers, especially those traditionally underserved by financial institutions, from obtaining affordable home equity loans, according to the Washington counsel for the National Home Equity Mortgage Association.In written testimony submitted to a Federal Reserve Board hearing in Chicago on the home equity market, Wright H. Andrews said policymakers "must take great care to ensure that legislative and regulatory changes do not result in unnecessary or unintended adverse impacts on this critically important nonprime segment of the mortgage market." Mr. Andrews said some state laws have had positive effects but have hurt consumers in other ways, such as "limiting loan affordability and access to credit for many high-risk borrowers." He argued that most of the "tougher" state predatory-lending laws have caused lenders to stop offering flexible financing that makes loans more affordable. They have also caused lenders to stop making "high-cost" loans due to the "increased perception of legal and reputational risks" on the part of major nonprime lenders, he said. Mr. Andrews also called for uniform federal mortgage lending standards, arguing that they would "greatly reduce compliance costs, allowing lenders to pass on savings to borrowers by offering lower rates." NHEMA can be found at http://www.nhema.org.

It could be "several years" before the scandal-wracked government-chartered housing enterprises are out of the woods, their safety-and-soundness regulator has told Congress.Even Freddie Mac, which had been thought to have turned the corner on its accounting problems, is still in the doghouse with the Office of Federal Housing Enterprise Oversight, said acting Director James Lockhart, who has been on the job just over a month. "Both companies are several years away from having adequate internal controls" in place, he told the House Financial Services subcommittee on capital markets, insurance, and government-sponsored enterprises on June 6. Mr. Lockhart said the sanctions in place on Fannie Mae in its $400 million settlement with OFHEO, including the freeze placed on the company's portfolio mortgage assets, can be lifted at the sole discretion of the director. But he added that it's "hard to see their total removal for several years." And he cautioned lawmakers that a similar limit on Freddie Mac is not out of the question. That company is "at least two years away from having acceptable accounting and risk management" in place, he told the panel. Subcommittee Chairman Richard Baker, R-La., agreed, saying "we have a long road" to travel before the two GSEs are shipshape. But the ranking minority member, Rep. Barney Frank, D-Mass., reminded the panel that while Fannie and Freddie may be wounded, they are still fulfilling their housing mission.

The chairman of the House Financial Services subcommittee with oversight of government-sponsored enterprises has accused former Fannie Mae chief executive Franklin Raines of perjuring himself before Congress.Holding a hearing on a new federal report that officially accuses the mortgage giant of accounting fraud, Rep. Richard Baker, R-La., said Tuesday that, "There seems to be clear evidence to my mind that Mr. Raines perjured himself." In the fall of 2004, a then-embattled Mr. Raines testified before Rep. Baker's GSE subcommittee, categorically dismissing charges that the company manipulated accounting rules back in 1998 so it could meet (to the penny) an earnings-per-share goal that triggered $27 million in bonuses paid to its top executives. At times defiant, Mr. Raines told members of the subcommittee then that, "This is a serious allegation, and we strongly disagree with it." Mr. Raines and his attorney did not return telephone calls by MortgageWire.'s deadline. Mr. Raines was forced out by Fannie Mae's board in December 2004.