HUD expected to increase fraud claims with FHA refi changes

Via HousingWire
Original Article: http://www.housingwire.com/article/hud-expected-increase-fraud-claims-fha-refi-changes

Changes to the Federal Housing Administration streamlined refinance process is expected to benefit homeowners with a mortgage originated before June 2009.

However, an analyst at the Royal Bank of Scotland warns that the Department of Housing and Urban Development will likely increase its indemnification demands for lenders that, it feels, wrongfully wrote the new mortgage.

“We expect HUD to be more active in seeking claims for fraud,” said mortgage securities analyst Jeana Curro in an email to clients, “while HUD has always had indemnification rules in place, it has made few claims in the past.”

Curro adds the statute of limitations for indemnification is five years, and it generally takes around one year for the insurance claim to get paid after a foreclosure. Consequently, lenders could be dis-incentivized to refi anything originated before 2008, since doing so would “restart the clock” on the statue of limitations.

“HUD strengthened and standardized its lender indemnification requirements, effective Feb. 24, 2012,” Curro adds. “Specifically HUD will demand indemnification for an insurance claim if the mortgagee lender “knew or should have known” that fraud or misrepresentation was involved and lenders will no longer be able to negotiate claims.

Curro concludes that refinancings will be concentrated in mortgages originated between the two mentioned timeframes, after 2007 and before June 2009. Therefore, prepayment risk will changes for those mortgages wrapped into Ginnie Mae bonds.

“We expect 2008 to 2009 higher coupons to be the most negatively impacted, while lower coupons and post June-2009 endorsements may actually benefit,” from the changes, Curro said.

The changes to the FHA streamline allow the borrower to pay 55 basis points in annual mortgage insurance premium on the refinancing down from the 120 to 150 bps. The upfront mortgage insurance premium is also nearly eliminate for mortgages that qualify.

OCC Enforcement Actions

Via OCC
Original Article: http://www.occ.gov/news-issuances/news-releases/2012/nr-occ-2012-41.html

The Office of the Comptroller of the Currency (OCC) today released new enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with national banks and federal savings associations.

All Cease and Desist Orders, Civil Money Penalty Orders, and Removal/Prohibition Orders are issued with the consent of the parties, unless otherwise indicated as a Decision and Order issued by the Comptroller of the Currency.

Copies of the final actions are available for download by viewing the searchable database of all public enforcement actions taken since August 1989 at http://apps.occ.gov/EnforcementActions/.

You may also submit a request electronically to obtain copies through the OCC’s online FOIA site, https://appsec.occ.gov/publicaccesslink/. Fax requests should be sent to (202)-874-5274. You can also obtain copies by writing to the Comptroller of the Currency, Communications Division, Mail Stop 2-3, Washington, DC 20219. When ordering, specify the appropriate enforcement action number.

Cease and Desist Orders
No. Name/Bank/City Date
California
2012-018 Community West Bank, National Association, Goleta 1/26/2012
Delaware
2012-019 Sovereign Bank, National Association, Wilmington 1/26/2012
Pennsylvania
2012-020 Liberty Savings Bank, F.S.B., Pottsville 2/21/2012
2012-021 Eagle National Bank, Upper Darby 2/6/2012
South Dakota
2012-022 Bank 360, Beresford 2/13/2012
Wisconsin
2012-023 Associated Bank, National Association, Green Bay 2/23/2012

Civil Money Penalty Orders
No. Name/Bank/City Date
Illinois
2012-024 John Baer, The First National Bank in Tremont, Tremont 2/21/2012
2012-025 Connie Boyle, The First National Bank in Tremont, Tremont 2/21/2012
2012-026 Jerome Green, The First National Bank in Tremont, Tremont 2/21/2012
2012-027 Jim Shafer, The First National Bank in Tremont, Tremont 2/21/2012
2012-028 David Snider, The First National Bank in Tremont, Tremont 2/21/2012
2012-029 James Sommer, The First National Bank in Tremont, Tremont 2/21/2012
2012-030 Sherri Weer, The First National Bank in Tremont, Tremont 2/21/2012
Kansas
2012-031 Charles Allphin, First National Bank, Hays 2/1/2012
2012-032 Michael McClellan, First National Bank, Hays 2/7/2012
2012-033 Kathlene Perrigo, First National Bank, Hays 2/1/2012
2012-034 Randy Schmidtberger, First National Bank, Hays 2/7/2012
2012-035 Alan States, First National Bank, Hays 2/7/2012
2012-036 Carolyn States, First National Bank, Hays 2/7/2012

Formal Agreements
No. Name/Bank/City Date
Illinois
2012-037 Mutual Federal Bank, Chicago 2/17/2012
Iowa
2012-038 Lee County Bank & Trust, National Association, Fort Madison 2/16/2012
North Carolina
2012-039 Bank of America, National Association, Charlotte 2/27/2012
Ohio
2012-040 JPMorgan Chase Bank, National Association, Columbus 2/22/2012
South Dakota
2012-041 Citibank, National Association, Sioux Falls 2/24/2012
2012-042 Wells Fargo Bank, National Association, Sioux Falls 2/22/2012

Removal / Prohibition Orders
No. Name/Bank/City Date
California
2012-043 Cheryl Baccei, City National Bank, Los Angeles 2/22/2012
Delaware
2012-044 Richard Rozhik, Sovereign Bank, Wilmington 2/17/2012

Terminations of Existing Enforcement Actions
No. Type/Bank/City/Old EA# Date
Arizona
2012-045 FA, Credicard National Bank, Tucson (EA# 2009-082) 1/23/2012
Michigan
2012-046 C&D, Edgewater Bank, St. Joseph (EA# CN 09-40) 2/2/2012
Minnesota
2012-047 FA, First National Bank in Mahnomen, Mahnomen (EA# 2011-069) 2/8/2012
Nebraska
2012-048 C&D, The First National Bank of Wayne, Wayne (EA# 2010-243) 2/27/2012
New Mexico
2012-049 FA, Bank of The Rio Grande National Association, Las Cruces (EA# 2010-056) 2/8/2012
Pennsylvania
2012-021 FA, Eagle National Bank, Upper Darby (EA# 2009-177) 2/6/2012
2012-050 C&D, Liberty Savings Bank, F.S.B., Pottsville (EA# NE 10-19) 2/21/2012
South Dakota
2012-051 C&D, Bank 360, Beresford (EA# CN 10-09) 2/14/2012

Obama unveils new foreclosure measures to resuscitate housing market

Via The Washington Post
Original Article: http://goo.gl/qAs47

President Obama has begun embracing housing policies that administration officials earlier thought unwise or unworkable as he embarks on his most aggressive push to address the nation’s foreclosure crisis and depressed real estate market since the first months of his tenure.

Obama has unveiled more than half a dozen plans in recent months to help millions more Americans refinance their mortgages at low rates, to reduce the debts owed by struggling homeowners and to expand existing programs to broaden the pool of borrowers eligible for government aid. The latest initiatives, announced this week, seek to help members of the military and Americans who have government-insured mortgages.

The administration had previously rejected some of these efforts on the grounds that they were wrong on the merits, risky for taxpayers or could not be done. For instance, administration officials in the past had said they didn’t want to bail out speculators or people who had taken on far too much debt. Now, under certain circumstances, the administration is willing to do both.

What’s more, in recent months Obama has used his bully pulpit to discuss housing far more than earlier in his term. After rarely mentioning the nation’s housing problems for several years, the president is directly confronting the issue, which he has called the “most stubborn” of his presidency.

The new actions come after waves of criticism from Democratic groups, community activists, lawmakers and economists, who have argued that the administration was far too slow to deal with the worst housing crisis since the Great Depression.

By addressing housing with such force lately, Obama has been able to draw a contrast with his Republican presidential rivals, who generally have favored a hands-off approach to the foreclosure crisis. He has also been able to salve wounds in his relationship with liberals.

“They have really started to step up and recognize that economic progress is going to be much slower unless you address the housing crisis,” said John Taylor, head of the National Community Reinvestment Coalition, an activist group, and a frequent critic of the administration.

Obama’s aides say the president has urged his staff to release the new proposals as fast as possible. This aggressive push reflects a heightened concern that weakness in the housing market, with millions of people owing more than their properties are worth, remains one of the preeminent drags on the fledging economic recovery, aides say.

They say the recent proposals represent a natural outgrowth of a policy reexamination that has been continuous throughout the president’s tenure.

FDIC sues insiders at failed Freedom Bank

Via AJC
Original Article: http://www.ajc.com/business/fdic-sues-insiders-at-1375100.html

Twelve former directors and officers at a failed North Georgia bank are being sued for gross negligence in their handling of loans made during the go-go days of the building boom that regulators claim resulted in millions of dollars in losses.

The Federal Deposit Insurance Corp. sued the former insiders of Commerce-based Freedom Bank last week in U.S. District Court in Atlanta, seeking at least $11.05 million in damages.

It is the sixth such civil suit filed against failed bank insiders in Georgia, which leads the nation with 77 bank failures since mid-2008. The FDIC is trying to recoup losses to its Deposit Insurance Fund.

A lawyer for the Freedom Bank defendants said the agency is overreaching.

“Our view is that this is the latest example [of] the FDIC trying to blame small-town community bankers for the financial crisis,” said Theodore Sawicki, of the Atlanta firm Alston & Bird. Sawicki said his clients “acted reasonably and in good faith.”

Among the defendants at Freedom Bank are: Vince Cater, former bank president and CEO; Bruce Grout, a former Freedom loan officer; James S. Purcell Sr., a former senior loan officer; and Ronald R. Silva Jr., a former chief operating officer and senior credit officer.

Grout, who was not a director, was specifically singled out in the lawsuit for releasing collateral properties a borrower pledged to the bank so the borrower could sell them to pay his income taxes. That borrower was a partner with Grout in a separate real estate company, and the suit said Grout had no authority to okay the release.

Freedom pursued a fast-growth, high-risk strategy centered on commercial real estate and land acquisition and development loans, the suit said.

The FDIC suit cites 21 loans made with “inadequate, incomplete or outdated” financial statements for borrowers and loan guarantors, “resulting in loans advanced to borrowers with no apparent ability to repay or otherwise service the loans.”

The bank, which operated in Banks, Barrow and Jackson counties, also was criticized for lending outside its market.

As of last month, the FDIC board has authorized lawsuits against 427 individuals nationwide, including the 12 Freedom defendants, seeking damages of more than $7.82 billion. Not all of the authorized suits have been filed.

More than 400 banks have failed nationwide since January 2008, and the pace of failures accelerated in 2009, said Kevin LaCroix, an attorney, failed bank litigation expert and executive vice president with Oakbridge Insurance Services in Beachwood, Ohio.

In deciding whether to sue, the FDIC weighs the chances of winning and how much the agency might collect from insiders or bank insurance policies, LaCroix said. The agency must sue within three years of the failure.

Most of the Freedom defendants were members of the bank’s loan committee. Also named in the suit are directors Richard Adams, Keith Ariail, Claude Philip Brown, Harold C. Davis, Thomas H. Hardy, Verlin Reece, Donald S. Shubert and Harold L. Swindell.

The Freedom suit also accuses the bank insiders of negligence and breach of fiduciary duty.

A federal judge recently ruled in another failed bank case that Georgia’s business judgment rule protects bank directors and officers against claims of ordinary negligence in the course of business. The rule essentially protects insiders from liability for business decisions made in good faith that eventually went bad.

Brookings: 5% of underwater borrowers eligible for write-downs

Via HousingWire
Original Article: http://www.housingwire.com/article/brookings-5-underwater-borrowers-eligible-write-downs

A calculation by a Brookings Institution economist narrowed down the pool of underwater homeowners to 500,000 who could qualify for principal reduction from the $25 billion mortgage settlement.

Using the parameters of the settlement, Ted Gayer found just 5% of the nation’s 11.1 million underwater borrowers could get the principal reduced on their mortgage, first reported by The Washington Post.

About $10 billion of the settlement, in the form of credits, will go toward principal write-downs made by the five banks. Only homeowners delinquent on their mortgages are eligible.

Gayer eliminated others according to underlying requirements, including Fannie Mae or Freddie Mac loans and homes not owner-occupied.

It’s a rough calculation, Gayer warned, and he made some assumptions in the process. He eliminated any loans not held on the banks’ balance sheets, as well as any with a second loan. Mortgage bondholders may not take kindly to principal write-downs, he said.

The Office of Iowa Attorney General Tom Miller, which played a key role in the mortgage servicing settlement, said the report issued a “very rough estimate, which is likely based on additional layers of rough estimates and assumptions.”

A spokesperson for Miller said, “While we understand that there is an interest in a definitive number of borrowers who might quality for principal reduction, we don’t yet have that solid number and cannot confirm the author’s estimate. I also note that there are other elements to the settlement that the author has not taken into account.”

FHA to review new condo restrictions

Via HousingWire
Original Article: http://housingwire.com/article/fha-review-new-condo-restrictions

The Federal Housing Administration may revise recent regulations some say are hurting purchases and refinances for condominiums.

Last year, the FHA implemented several new restrictions on condo loans it would guarantee. At least half of the units must be owner-occupied for projects built longer than a year ago, and one investor can own no more than 10% of the units. The FHA also forbids refinancing for developments with more than 15% of the units more than 30 days past due.

Rep. Robert Dold, R-Ill., questioned FHA Commissioner Carole Galante on the new restrictions Tuesday at a House subcommittee hearing. Dold said those who cannot unload REO or rent space quickly are unnecessarily shut out of financing.

“I will commit to you here that some of these I think we can make some adjustments. There are others where we have to walk an important line here to assure that FHA loans are stable and operating, because there is a concern about that for th FHA fund,” Galante said, referencing the fragile capital reserve accounts.

A group of Democrats sent a letter to Department of Housing and Urban Development Secretary Shaun Donovan in October, claiming condo associations struggled to meet the guidelines.

The FHA endorsed more than $1.7 billion in condo loans from October to December, less than half of the $3.7 billion guaranteed in the same period the year before.

“Since I came in, we’ve looking at these issues very closely,” Galante said.

Here’s Why A Bugatti Is Always Parked In Front Of The World’s Most Expensive Store

Via BusinessInsider

Original Article: http://articles.businessinsider.com/2011-12-12/news/30506951_1_bugatti-veyron-bijan-pakzad-business-insider/a>

We got an up close look at the Bugatti owned by now-deceased designer Bijan Pakzad, which is parked in front of his House of Bijan boutique and has become a landmark on Rodeo Drive. Iranian-born Bijan died back in April after suffering a massive stroke. Since then, either the manager or the designer’s son has parked the $1.7 million car in front of the store in tribute to Bijan, a spokeswoman told us.

Shopping at the boutique, which is billed as the most expensive store in the world, is by appointment-only. On a video on his website Bijan proclaims: “I happen to be the most expensive clothing designer in the world. I’m sorry for that.”

His clients include Presidents Ronald Reagan, Barack Obama, both Bush presidents, Russian President Vladimir Putin and British Prime Minister Tony Blair, Arnold Schwarzenegger, Michael Jordan, Oscar de la Renta, Tom Ford, Jay Leno and others.

A month after his death, Bugatti released a one-off custom car, the Bijan Bugatti Veyron Grand Sport, which was a collaboration between Bijan and Bugatti, in the designer’s signature yellow. Before he died Bijan also commissioned a Rolls Royce Phantom Drophead Coupe.

According to the Bijan website, the Bugatti Veyron parked outside was produced in Molsheim, France; boasts a 1001 horsepower 16-cylinder engine; and is equipped with four turbo chargers. It can go from zero to 253 mph in less than one minute.

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FHA tightens rules, penalties for mortgage lenders

Via HousingWire
Original Article: http://www.housingwire.com/2012/01/20/fha-toughens-rules-penalties-for-mortgage-lenders

The Federal Housing Administration will toughen its standards for approving lenders that insure mortgages on its behalf and force more of them to buyback defaulted loans.

FHA Commissioner Carol Galante said the upcoming rule changes will help the agency protect its Mutual Mortgage Insurance Fund, which, according to some, is in danger of needing a bailout. The fund slipped to a 0.24% capital ratio in the fiscal year 2011, down from 0.5% the year before.

The rule was initially proposed in October 2010 and finalized Friday.

The rule changes apply to lenders authorized to insure mortgages for the FHA without first submitting documents to the agency. Roughly 80% of all FHA-insured mortgages are done this way.

The FHA will make it tougher to get approval for the coveted status. According to the new rule, a lender must hold a serious delinquency rate at or below 150% of the program’s average for the two years prior to its application. This rate will apply to all states in which the lender does business.

Also, the final rule forces lenders to indemnify – or reimburse FHA for an insurance claim – if the lender “knew or should have known” of any fraud or misrepresentation involved. Lenders would be on the hook for indemnification if the loan defaults within five years of origination.

Some commentary from the industry asked it to be shorted to a two or three year window, because problems that occur after then are due to job loss or divorce rather than decisions made at origination. FHA wouldn’t budge and said adopting the shorter timeframe “would be inconsistent with proper risk management practices.”

Others wanted clarification on whether or not the FHA would judge nationwide lenders with others operating within a smaller geographic area when determining approval or renewal of the status. They recommended larger lenders be held to a claim rate up to 150% of the national average, rather than just the states in does business in.

FHA didn’t amend the rule based on these comments either.

In a separate proposal, the FHA is changing the maximum allowable amount of seller concessions, or how much the seller contributes to the down payment or closing costs. The FHA said it will be reduced because the current level creates incentives to inflate the appraised value of the home.

Galante said the FHA will “continue to strike a balance” between managing its risk and continuing to provide support to a still struggling housing market.

“Taken together, the changes announced today will protect FHA’s insurance fund from unnecessary and inappropriate risks while offering clear guidance to lenders regarding HUD’s underwriting expectations,” Galante said.

Loan Originator Compensation: The Regulatory Examination

Via National Mortgage Professional
Original Article: http://nationalmortgageprofessional.com/news28068/loan-originator-compensation-regulatory-examination

Since April 6, 2011, the mortgage industry has been required to implement the new loan originator (LO) compensation rules (Rule). The Rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011.1 The Rule placed restrictions on residential mortgage loan transactions in order to protect consumers against the unfairness, deception, and abuse that can arise with certain loan origination compensation practices, generally prohibits payments to loan originators based on loan terms and conditions, eliminates dual compensation to originators by consumers and any other person and prohibits “steering” consumers to loans to receive greater compensation.

I have extensively explored the features of this Rule, unraveling its complexity in articles, newsletters, presentations, and panels.2 Indeed, I have even published a compendium of analysis, called the FAQs Outline–Loan Originator Compensation, which, as of this writing, consists of more than 400 Frequently Asked Questions and reaches in excess of 130 pages.3 These are deep and narrow waters, and considerable caution is needed in order to navigate their many demanding twists and turns.

The development of these rules, from a regulatory perspective, stretches back to August 26, 2009, when the Federal Reserve Board (FRB) published a Proposed Rule in the Federal Register pertaining to closed-end credit; to July 21, 2010, when the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)4 enacted Title XIV into law, which amended the Truth-in-Lending Act (TILA) to establish certain mortgage loan origination standards; then to Aug. 16, 2010, when the FRB published its Final Rules amending Regulation Z (TILA’s implementing regulation); on through Sept. 24, 2010, as the FRB issued final rulemaking and official staff commentary with respect to the loan originator compensation rules and anti-steering provisions (Rule); and finally coming to a virtual full stop on Jan. 26, 2011, when the FRB issued its “Compliance Guide for Small Entities on Loan Originator Compensation and Steering.”5 After that, the FRB offered some conference calls, a Webinar—which cleared up some confusion, while causing still other confusion—and occasional updates of the oral, rather than the written, official variety.6

When April 6, 2011 arrived, the mortgage industry was still scrambling to understand the Rule, how to implement it across various origination channels, and, most importantly, how to integrate it into operational, logistical, and financial components. Vendors provided considerable updates and integration features. Nevertheless, for months afterward the Rule continued to perplex and frustrate, particularly with respect to properly implementing disclosures and compensation plans. It still causes considerable consternation.

As we all know, generally there is no regulation issued—whether the statutes are at the federal or state level—that does not have a corresponding regulatory examination to assure enforcement. And so it goes: on Oct. 6, 2011—exactly six months to the day when the Rule became effective—the first examination guidelines for loan originator compensation were promulgated.7

In the “State Non-Depository Examiner Guidelines for Regulation Z—Loan Originator Compensation Rule,” hereinafter “Examiner Guidelines,” issued by the Multi-State Mortgage Committee (MMC), we now have a pretty good idea of the direction that federal and state regulators will be taking in their regulatory examinations for loan originator compensation. The MMC is a 10-state representative body created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR).8

Are these examination guidelines perfectly worked through? Not really. Not yet. After some field testing, we should expect revisions. But as a first stab at a complex issue, they are helpful in giving a sense of the kind of information and documentation that examiners will be reviewing. These are revised procedures and they supersede the Regulation Z Interagency examination procedures. The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) has approved interagency examination procedures for Regulation Z—Truth-in-Lending, including the Rule. The Examiner Guidelines supplement the Interagency procedures and are intended to assist state regulators of non-depository mortgage loan originators and creditors in standardized and uniform reviews of the Rule.

When the aforementioned Examiner Guidelines were issued, my firm re-set our audit and due diligence reviews for the Rule to accord with them, even in the midst of actual reviews of loan originator compensation compliance that we were then conducting for our clients.

Expect the unexpected
As I have said many times, preparation is protection. Don’t wait for the regulator’s Document Request letter to implement any regulatory requirement. If you wait, by then it’s often too late. Remember, most examinations are look-backs, reaching to the previous examination, or a stated timeframe previous to the current examination. Most examiners have a “No Tolerance” view of firms that cannot provide supporting documents and information in a timely manner. The “record speaks for itself” is the inflexible standard! Our audit and due diligence reviews are the property of our client, and as fully confidential as if the client conducted its own review, with its internal resources—which, of course, is certainly a viable option. So, there really is no excuse for not being prepared for a regulatory examination for loan originator compensation or any other examination.
In my view, undertaking preparedness action for a loan originator compensation examination should consist of the following basics.9 My remarks include some of my firm’s audit and due diligence practices as well as certain features of the recently issued Examiner Guidelines.

Preparation is protection
Review construct
►It is critical to set forth the bounds of the review. Indicate a research range that utilizes an audit sequence which, in part, incorporates federal Interagency procedures and guidelines implemented prior to the effective date of the Rule, as well as federal Interagency procedures and guidelines effective after the date of the Rule, as promulgated by the MMC examiner guidelines, any federal agency, and, when issued, state government agencies.

►A significant portion of the review should be devoted to (1) completing the Institution Information Request and Institution Questionnaire provided in the Examiner Guidelines, (2) assembling items required in a Document Request, (3) providing information asked for in an Audit Checklist (whether specifically designed or Interagency), and (4) including independent review criteria through documentation review, on-site transaction testing (if required), off-site sampling of transaction documents, and interviews of institution staff or other parties.

Review components
►Report of findings
►Review of policy and procedures
►Institution information request
►Institution questionnaire
►Document request
►Auditing of sampling indicia

Methodology
There are several ways to go about preparing for a regulatory examination of loan originator compensation.

Prior to determining the most suitable procedures to follow, three Modules should be outlined, as follows:

Module 1: Examiner checklist
This consists of certain kinds of questions that would be expected to guide the examiner throughout the course of the examination. It is important to be familiar with the criteria that will be applied.

Module 2: Institution information request
The information that we would seek does not apply to dates prior to April 6, 2011. However, this module does take into consideration a very comprehensive review of all information and documentation that affect loan originator compensation.

Module 3: Institution questionnaire
This module is meant to save time and resources. We usually incorporate this in every Document Request, and, unless we direct otherwise, we expect this questionnaire to be completed and returned to us prior to our audit and due diligence review. Most clients know to support their answers with documentation. Certain questions, though, may be answered with a Yes or No response, but most questions require comprehensive, fully documentable responses.

Scope
There are, essentially, three options in fulfilling the scope of exam preparedness, each of which consists of one or more of the aforementioned modules.

Full scope
The Full Scope requires the completion of Modules 2 and Module 3, followed by completion of Module 1 through a documentation review, on-site transaction testing, and interviews of institution staff or other parties.

Limited scope
A Limited Scope only requires completion of Module 1, and it excludes transaction testing and interviews, based on the institution’s responses to Modules 2 and 3.

Limited scope with off-site testing
This review combines the Limited Scope with off-site sampling of transaction documents and/or telephone interviews of institution staff or other parties.

Caveat: Before moving on to the next section, I want to mention that the appropriate risk management approach vis-à-vis the selection of the scope depends on a financial institution’s type, size, complexity, and risk profile. Conferring with a risk management professional would be helpful to determining which scope is most suited to providing the level of exam preparedness needed.

Information questionnaire
Please give earnest consideration to the following questions, as these will come up in one form or another during an examination of loan origination compensation. The financial institution may or may not know the answers to all the questions, but that very fact demonstrates weakness in policies, procedures, and compliance enforcement. When my firm issues a Document Request, the Information Questionnaire is now always included. Prior to the examination, it is unlikely that the examiner will provide information about appropriate answers to these kinds of questions. While some of the questions may seem relatively simple on the surface, they are not really simple at all. The answers are either clearly stated or they are not, and if they are not stated or incorrectly stated, this in itself alerts the examiner to the financial institution’s level of preparedness, its management competence, its implementation awareness, and the additional information and documentation that may be need to be requested for the examination.

1. How are loan originators compensated? Provide details of all compensation procedures and calculations.

2. What incentive plans are offered to loan originators? Provide details.

3. Are loan originators ever compensated based on:
a. The interest rate or Annual Percentage Rate obtained on a loan?
b. The loan to value obtained on a loan?
c. Originating a loan with a prepayment penalty?
d. The amount of loan fees paid to the institution or creditor?

4. Are credit scores a determining factor in the amount of compensation earned by a loan originator? Explain.

5. Is debt to income a determining factor in the amount of compensation earned by a loan originator? Explain.

6. Are loan originators allowed to receive reimbursement for third party costs (i.e., appraisal, credit report, et cetera)?

7. Are loan originators allowed to charge more for third party costs than the actual cost of the service and retain such costs as compensation? Explain.

8. Are loan originators allowed to charge for services other than loan origination services that are performed by the originator? For example: loan processing, document preparation, inspection fees, and so forth.

9. Is the loan originator compensated any differently when price is increased by the creditor or employer to offset loan costs?

10. Is loan originator compensation ever reduced in order for the institution to compete on loan terms? (For example: the institution reduces its rate by 50 basis points to induce a shopping consumer to stay with the institution, and the loan originator’s compensation is reduced accordingly.)

11. Are loan originators able to deliver loans to more than one affiliate or subsidiary of the institution’s parent company? If so, are loan originators compensated differently based on which affiliate the loans are delivered to?

12. Are loan originators allowed to receive compensation (including yield spread premium or similar compensation) from both the consumer and any other person on the same transaction?

Brokered loans: Questions 13 through 18 must be answered by both mortgage broker loan originators originating loans and creditor institutions receiving brokered loans.
13. Does the institution allow loan originators to “steer” consumers to transactions where the loan originator receives more compensation and the loan is not in the consumer’s interest? Explain.

14. Does the institution require or use the steering Safe Harbor provision under the Rule?10

15. During the examination period or the last three years, in how many transactions has the institution required or used the steering Safe Harbor provision under the Rule? Institution may answer with a number or the percentage of total loans originated.

16. Does the institution require third party originators to use the steering Safe Harbor provision?

17. If a creditor, what action does the institution take to monitor third party compliance with the steering Safe Harbor provision?

18. If the institution does not require or use the steering Safe Harbor provision what methods does it use to determine that steering has not and will not occur?

19. How long does the institution retain compensation agreements?

20. How long does the institution retain records of actual compensation?

21. How long does the institution retain records that support the options offered under the steering Safe Harbor provision?

Documents and information
I would like to end this article with a brief overview of the kinds of documents that should be involved in a thorough review involving loan originator compensation. The list I am providing is not meant to be complete, since each financial institution differs in many ways. This is a general list that we would require in a Document Request. A financial institution should be prepared to provide the documentation and information virtually immediately. If a lot of time is needed to get the documents together, the financial institution is, unfortunately, simply not prepared for the examination and should expect the examiner to notice the lack of preparedness.

In addition to the Institution Information Request and Institution Questionnaire that I have described, expect to provide Employment Agreements for Loan Officers, Sales Managers, Producing Branch Managers, and Non-Producing Branch Managers. If the Compensation Plans are not part of the Employment Agreements, but separately attested to, then expect to provide them for these same individuals. A list of affiliates will be required (i.e., title companies), if applicable.11

Wholesale channels must be able to deliver the Wholesale Broker Agreement, Compensation Plan, and any Announcements. Indeed, any origination channel must be ready to provide Presentations and all relevant Announcements.

Examiners will audit certain areas of interest that directly impact actual loan originations. In this regard, expect to provide the loan application register for all applications taken from April 6, 2011 to the date stipulated in the examiner’s Document Request letter. For that same period, also expect to provide Monthly Production Reports, and Rate Sheets.

Finally, the examiner will test the data provided against a complete analysis of loan originator specific data, such as the loan number, loan originator’s name, and borrower’s name, as well as the subject property state, each MLO’s compensation payments, and each MLO’s date of employment or affiliation.

Final words of advice
Most of our clients know that I tend to be a Mother Hen when it comes to taking care of their mortgage compliance needs. I admit it wholeheartedly. In my opinion, each institution should appoint its own version of a Mother Hen in order to assure that examination preparation for loan originator compensation is properly vetted and readied.

The penalties for violations are steep and could be catastrophic, not only with respect to the so-called “traditional” penalties, such as actual damages, statutory damages (up to $4,000 for each individual action and potential class action), and attorneys’ fees and costs, but also there is “enhanced” liability for creditors, such as refunding all finance charges and fees paid by the consumer (unless the creditor demonstrates that the failure to comply is not material). Loan originators are exposed to penalties of the greater of actual damages or three times the compensation or gain on the loan (i.e., liability even if there are no damages); a longer “statute of limitations” for loan originator compensation and certain other violations so that actions may be brought until the end of a three year (i.e., not a one year) period from the date of the violation; and, state Attorneys General are authorized to enforce violations of loan originator compensation and certain other requirements.

Given the penalties for violations of the loan originator compensation guidelines, now is the time to prepare, in advance, and be continually ready for the inevitable notice of the forthcoming regulatory examination.

A Housing Bottom? What Are They Thinking?

Via Business Insider
Original Article: http://www.businessinsider.com/robert-shiller-housing-2012-1

I spoke with Yale professor Robert Shiller in Davos earlier this week.
Shiller has correctly identified two major price bubbles in recent decades–the stock market bubble of the late 1990s and the housing bubble of the late 2000s.

One of the key attributes of most bubbles is that, when they finally burst, prices tend to “overshoot” on the downside, crashing well below fair value until all the exuberance is wrung out of the system.

So is that what’s going to happen to house prices this time? Or, as many people think, are house prices finally “bottoming” and getting reader to blast higher again?

BLODGET: A lot of people have just called the bottom in the housing market in the United States, and there’s been some ok data recently. Is that your take? That finally housing prices are bottoming?

SHILLER: When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level.

BLODGET: One thing that people are saying is that we have finally absorbed the excess inventory, and with just the general growth of the population and families in the United States, we’re getting close to where we are meeting supply and demand. Is that true?

SHILLER: Well, one simple model of home prices is the construction-cost model. Traditionally, home value was about 15% land and 85% construction costs. The land component has gotten bigger with the bubble. That might be kind of a long run equilibrium. If you believe that, that’s an oversimplified model, then it probably suggests we’ll just stay where we are.

BLODGET: And where are house prices relative to long-term historical trends? I’ve tracked at a lot of measures and it looks to me like we’re finally starting to close in on fair value. But it’s not as though we’ve crashed way below fair value.

SHILLER: It depends what you mean by fair value. If you take account of the very low interest rates, you might think that housing prices should be higher than historically. But then on the other hand, that model hasn’t worked very well historically. That would be like the Fed model applied to housing. But it doesn’t seem to fit. But I think the construction costs model says that housing should track the costs of construction. It doesn’t depend on interest rates, doesn’t depend on the economy. That’s a model, I’m not saying it’s the only model.

BLODGET: And what about price-to-income and price-to-rent?

SHILLER: Those things have come down a lot. I don’t know exactly where the middle is but it’s not like we’re overpriced anymore. Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.

BLODGET: And you’re an expert in bubbles and I’ve looked at some on your work going back several hundreds of years on housing. Have you ever seen a bubble where there wasn’t a major overshoot?

SHILLER: Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics. We’d like to be statisticians but in fact the world is always changing on us. So we end up having to use judgment. We’re not very good at that.

BLODGET: Going back to the point about interest rates… People make a huge to-do about the affordability of houses. In your research on house prices, do interest rates actually matter? Or is mortgage finance such a new concept in the history of home ownership that you just don’t have enough data?

SHILLER: I think historically, if you look at it, interest rates don’t seem to matter very much in determining home prices. In terms of forecasting, which you’re asking me to do, to forecast the change, the big thing in forecasting home prices is momentum. It’s different than the stock market. So if it’s been going up it will continue going up and if it’s been going down it will continue going down. By that model, which is the most successful forecasting model for home prices, prices will keep going down.

BLODGET: That’s encouraging! And what about stocks? You pioneered or at least have really popularized the “cyclically adjusted price-earnings ratio,” which looks at prices relative to smoothed earnings over ten years. Recently, over the last few years, a lot of people have come back and said, oh no, it should be sixteen years or it should be five years. Your friend Jeremy Siegel says no, you shouldn’t normalize them at all and so forth. Are you still comfortable with the CAPE as a good measure of base value?

SHILLER: It’s a powerful predictor of the market. John Campbell and I, my former student who is now the chair of the econ department at Harvard…

BLODGET: Congratulations, you taught him well!

SHILLER: That’s why I am proud of my former students! We found that price divided by ten year average earnings predicts price changes. It really does. Over a long time. It may not say what will happen next year. Right now that ratio is kind of high in the United States and that is a suggestion that its not the greatest, but it’s not super high. So if you look at what our model predicts, it would still predicts positive, good substantial returns, better than the 2% on ten-year Treasuries.

BLODGET: A lot of people argue to me that the CAPE includes 2009 which was a terrible year and includes other aberrational years and that’s skewing the average somehow. Is that not the case?

SHILLER: The analysis Campbell and I didn’t include that year because we did it in 1996. But you have to look at the anomalous years. They have to be part of the analysis. Sometimes you have very big movements in one year.

BLODGET: And that’s the whole point of the analysis–to smooth it out.

SHILLER: Right. I don’t know why people keep using one year earnings. That is the time it takes the earth to go around the sun. I don’t see any other significance.

BLODGET: Part of your argument there is that profit margins tend to regress to means and right now we’re at an all-time high profit margin or very close. Do you think that profit margins can continue going up for U.S. companies?

SHILLER: Profits have been very volatile over the last ten years. They look much more strongly mean-reverting than in the past. So that suggests that the current strong profits might turn out to be misleading.

BLODGET: When you think about smoothed earnings as a way of predicting prices, do you think about it as a predictor of what the price is going to do or is it better to think about it as the likely ten year return for the market is ‘x’ at this particular price?

SHILLER: You could go either way… I think that the returns that we could see going forward are not lousy, they’re low…

New FHA Program Seeks to Speed Approval Process of Low-Income Housing Tax Credits

Via National Mortgage Professional
Original Article: http://nationalmortgageprofessional.com/news28346/new-fha-program-seeks-speed-approval-process-low-income-housing-tax-credits

The Federal Housing Administration (FHA) has unveiled a new pilot program to test an accelerated approval process for the purchase or refinancing of multi-family rental properties assisted through the Low-Income Housing Tax Credit (LIHTC) Program. In launching this pilot program in Chicago, Detroit, Boston and Los Angeles, FHA’s Office of Multifamily Housing Programs believes it can cut the time needed to review and approve financing applications for LIHTC-assisted transactions from approximately one year to just 90-120 days. The Hubs will process LIHTC loans for all of their related program centers.

Reducing the time required to review and approve applications under FHA’s Section 223(f) Program helps align FHA-insured financing with the LIHTC Program standards including the need to meet strict time deadlines. Expediting FHA review and approval is needed since failure to meet bond closing or other LIHTC performance deadlines may result in forfeit of the credit allocation or bond reservation and may impair the borrower’s ability to secure tax credits for future transactions. Read FHA’s Housing Notice for details of this pilot program.

“It has become clear that we need to rethink our process at FHA if we hope to leverage LIHTC to the maximum degree possible,” said FHA’s Acting Commissioner Carol Galante. “This pilot program will test our ability to significantly cut our review process so we can put people in affordable homes and provide unique financing options for developers.”

The Housing and Economic Recovery Act of 2008 (HERA) required FHA to streamline mortgage insurance applications for projects with equity from the Low Income Housing Tax Credit (LIHTC) program. Last year, FHA endorsed approximately $561 million in firm commitments for LIHTC projects, a 35 percent increase over Fiscal Year 2010. This new pilot should help to increase those numbers even more.

“If we can successfully cut the time it takes to approve these lower risk LIHTC projects in these four cities, we have the potential to dramatically increase the production of affordable rental projects nationwide,” said Marie Head, HUD’s Deputy Assistant Secretary for Multi-family Housing.

Nonbank mortgage lenders required to file fraud reports

Via HousingWire
Original Article: http://www.housingwire.com/article/nonbank-mortgage-lenders-required-file-fraud-reports

Nonbank mortgage lenders will be required to establish anti-money laundering programs and file suspicious activity reports beginning later this year, according to rules finalized by the Financial Crimes Enforcement Network.

These firms, which also came under Consumer Financial Protection Bureau supervision this year, will now be forced to assist law enforcement agencies with fraud detection just as larger financial institutions are required to do.

“Suspicious activity reports are a critical source of information to law enforcement and regulatory agencies in their investigation and prosecution of mortgage fraud and a wide range of other financial crimes,” said FinCEN Director James Freis.

In November, FinCEN also issued a proposal requiring Fannie Mae, Freddie Mac and the Federal Home Loan Banks to develop the anti-money laundering programs and file fraud reports with the network.

FinCEN found false statements, the use of straw buyers, evidence of fraudulent flipping real estate, flopped short sales and identity theft from these reports.

The rule will give law enforcement and regulators more data on specific crimes, FinCEN said, and provide “a more complete perspective on mortgage related crime trends nationwide.”

According to law firm Ballard Spahr, the impact to nonbank lenders will be extensive. “This means that non-bank mortgage lenders and originators will have to establish AML programs, designate a compliance officer, develop training programs, etc,” said the firm in an email.

“Compliance is looking to be both complex and costly,” the note added.

Fed Unveils Slew of Key Dodd-Frank Rules

Via American Banker
Original Article: http://www.americanbanker.com/issues/176_245/dodd-frank-section-165-systemically-important-too-big-to-fail-1045034-1.html/

Federal regulators unveiled a highly-anticipated proposal Tuesday that details how they plan to regulate the largest domestic financial firms, including new capital and liquidity requirements.

The Federal Reserve Board’s 173-page proposal — considered by industry analysts to be the core of new rules required by the Dodd-Frank Act — would apply to all bank holding companies with more than $50 billion of assets as well as nonbank financial firms designated as systemically important by the Financial Stability Oversight Council.

The plan touched on several critical areas governing bank regulation, including risk-based capital and leverage requirements, resolution planning and concentration limits.

Regulators opted to roll out risk-based capital and leverage requirements in two phases. First, firms will be required to follow the Fed’s November guidelines to capital planning, which require companies to conduct stress tests and maintain adequate capital, including a Tier 1 risk-based ratio of greater than 5%, both under expected and stress conditions.

As part of the second phase, the Fed will issue a proposal to implement a risk-based capital surcharge for systemically important firms based on principles already agreed upon by the Basel Committee on Banking Supervision.

It is not clear exactly which institutions will face a surcharge. The largest 8 U.S. banks have already been targeted by international regulators for a surcharge of between 1% to 2.5%.

But Fed Gov. Dan Tarullo has previously suggested that all firms with greater than $50 billion of assets could face at least a “modest” surcharge. Fed officials did not provide any further information Tuesday on what kind of surcharge such firms would pay.

The Fed also opted to provide multiple phases for firms to fulfill new liquidity requirements. Firms will initially conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk based on guidance issued in March 2010. In the second phase, banks will comply with Basel III liquidity rules, which have not been finalized yet by global regulators.

Stress testing will be conducted each year using three economic and financial market scenarios as previously announced by the central bank. The results of that testing will be made public. Holding companies will have to meet those requirements shortly after the rule is completed.

Under the proposal, firms must also limit credit exposure to a single counterparty as a percentage of the firm’s regulatory capital. Credit exposure between the biggest banks will be subject to a tighter limit, according to the Fed.

Separately, the central bank proposed early remediation requirements in order to address any financial weakness at an early stage. Regulators listed a number of triggers for remediation including capital levels, results of stress tests and risk-management weakness.

Savings and loan holding companies, generally, will not be subject to the requirements in the proposal, except to adhere to the Fed’s stress test requirement. The Fed will issue a separate proposal later to address issues if enhanced standards should be applied to those firms.

The proposal would apply to more than 30 U.S. banks, which have total assets of more than $50 billion and are already supervised by the Fed. Nonbank financial firms will be subject to the same set of rules once they are designated by the Financial Stability Oversight Council.

Fed officials said they would show some flexibility on how the rules would apply to nonbank financial firms once they are designated.

The Fed opted to postpone its proposal governing regulation of foreign banks, which will also be subject to additional capital rules, until later, given the number of outstanding issues that still need to be resolved. Roughly 100 foreign banks could potentially be subject to the rule, according to Fed officials.

Given the complexity and the breadth of the rule, Fed officials offered to give industry more than 90 days to comment on the proposal. The comment period is set to close on March 31, 2012.

New FHA standards will increase Ginnie Mae prepayment risk

Via HousingWire
Original Article: http://www.housingwire.com/article/new-fha-standards-will-increase-ginnie-mae-prepayment-risk

The Federal Housing Administration’s recently announced plans to tighten its standards for approving lenders will increase prepayment risks for investors who own Ginnie Mae-backed securities, say analysts at Barclays Capital ($24.47 0.04%).

The agency’s plans to eliminate the consderation of a lender’s compare ratio when deciding whether to streamline-refinance its loans will accelerate refinancing activity, they say, causing higher prepayment speeds, and, in turn, reduce investor profits.

The compare ratio is the serious delinquency rate of all loans originated by a lender during a two-year period relative to the average of all lenders operating in the same region. Higher coupon and seasoned loans have a weaker credit and greater default risks, therefore, streamline-refinancing them could lift ratio passed 150%. And if it does, the lender could lose the ability to originate FHA-backed loans.

The change is part of a larger attempt by the FHA to protect its Mutual Mortgage Insurance Fund, which many say is in danger of requiring a multibillion dollar government bailout.

Disregarding a lender’s compare ratio calculation creates an incentive for streamline-refinancing higher-risk borrowers, analysts say. This will speed up Ginnie Mae prepayments, particularly on higher coupons and pre-2009 originations since these have the worst credit quality.

“That said, we expect the effect on speeds to be modest,” they say. “We believe that this plan will be implemented and has the potential to raise GNMA speeds by a few CPR.”

The effect should be even less for pre-2010 vintages because their much better credit quality suggests they have not been constrained by the compare ratios.

Data from the Department of Housing and Urban Development suggest that the compare ratios of most national lenders are now significantly below the 150% threshold.

In December, HUD Secretary Shaun Donovan, said as a result of an October analysis by an independent actuary of FHA’s insurance fund, HUD plans to announce how it will address premium prices in its fiscal year 2013 budget proposal.

Since then, Congress has enacted a 10 basis-point increase to the FHA annual mortgage-insurance-premium, and President Barack Obama has called on the FHA to shoulder a larger role in helping responsible home owners and the housing market.

“Given the circumstances, we think more changes to the FHA program could be in the works, and since the budgetary proposal should be released over the next few weeks, the timing is peculiar,” they said. “Therefore, Ginnie Mae faces heightened risks in the near term.”

Here Are The 17 Radical Ideas From Google’s Top Genius Conference That Could Change The World

Via BusinessInsider

Original Article: http://www.businessinsider.com/here-are-the-17-radical-ideas-from-googles-top-genius-conference-that-could-change-the-world-2012-2

Google just hosted a series of super high-level talks and invited about 50 entrepreneurs, innovators, and scientists to the deluxe CordeValle resort in the mountains south of San Jose.

They were going through some pretty radical ideas. The kind of stuff that could change the world.

It was called Google’s “Solve For X” conference, a series of talks where some of the smartest people in the world tried to tackle some of the world’s biggest problems.

Google invited them to introduce radical ideas for solving the world’s most complicated problems, like water scarcity and recycling electronics without creating hazardous waste.
So what were they talking about?

“Imaging the mind’s eye”
Mary Lou Epson, founder of Pixel Qi Corporation

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