Consumer Financial Protection Bureau Finalizes Mortgage Origination Examination Procedures

by Marissa Aquila Blundell, Esq.
Senior Vice President  &  General Counsel

On January 11, 2012, the CFPB updated its Supervision and Examination Manual to include its Mortgage Origination Examination Procedures. Previously, the CFPB released its general examination procedures for large depository institutions and non-bank financial services providers which stressed the importance of an effective compliance management system.

According to the CFPB, a compliance management system should: establish compliance responsibilities; communicate responsibilities to employees; ensure that business processes incorporate compliance responsibilities; review operations to ensure compliance responsibilities are satisfied; and take corrective action as necessary.  A supervised entity's compliance program should include policies and procedures, training, monitoring and corrective action, and responding to consumer complaints. 

The general compliance management system review includes an examination of policies and procedures for, among other things: changes management committed to make following recent monitoring; audit and examination findings and recommendations; coverage of new consumer financial laws, or new products; compliance with specific regulatory requirements and procedures; and outdated content or other indicators of overly general untailored policies.

In conjunction with the general compliance management system review, specific mortgage origination examinations will cover one or more of 7 possible modules:

Module 1 - Company Business Model
Module 2 - Advertising and Marketing
Module 3 - Loan Disclosures and Terms
Module 4 - Underwriting Appraisals and Originator Compensation
Module 5 - Closing
Module 6 - Fair Lending
Module 7 - Privacy

To complete these examination modules examiners may utilize an entity's organizational charts, annual reports, policies and procedures, rate sheets, disclosures, loan files, operating checklists, computer system details, wholesale and correspondent lending agreements, underwriting guidelines, compensation policies, historical examination information, audit and compliance reports, and management's responses to findings.

Complete information for each module of the Mortgage Origination Examination is available at: http://www.consumerfinance.gov/pressrelease/consumer-financial-protection-bureau-releases-mortgage-origination-examination-procedures.

The following are key points regarding the Mortgage Origination Examination Module 3 - Loan Disclosures and Terms, Module 4 - Underwriting, Appraisals and Originator Compensation, and Module 5 - Closing. 

Module 3 - Loan Disclosures and Terms

RESPA
The RESPA review includes whether the GFE and Settlement Cost Booklet were provided. For mortgage brokers, examiners review whether the entity agreed to provide the GFE and Booklet and if so whether it is carrying out that responsibility adequately. For mortgage lenders, the review includes whether the RESPA Special Information Booklet, GFE, and affiliated business arrangements provisions are satisfied; and the final Settlement Statement is reviewed to assess compliance with RESPA disclosure requirements and tolerance limits on settlement charges.

TILA
The TILA review assesses compliance with disclosure provisions regarding the amount financed, annual percentage rate (APR), and payment schedule or rate and payment summary table as applicable; disclosure provisions for the appropriate calculation of finance charge and APR; high cost mortgage loan requirements; reverse mortgage loan requirements, HPML requirements; required escrow account requirements and prepayment penalty restrictions.

Additional Regulations
The ECOA review includes a determination of whether Adverse Action Notices were provided when required; the FCRA review assesses compliance with Adverse Action and Risk-Based Pricing Notice requirements; and the HOPA review includes whether the entity provided a notice to the borrower of borrower's ability to terminate PMI, if required.

Review of Potential Risks to Borrowers
The Loan Disclosures and Terms examination module also includes file reviews to assess other risks to borrowers such as whether alterations to or forgeries of loan documentation exist, and review of rate lock practices to determine whether consumers lose their rate locks prior to expiration resulting in those consumers receiving more expensive mortgage products.

Module 4 - Underwriting, Appraisals and Originator Compensation

Underwriting
Examiners review high cost loans and HPMLs to assess compliance with requirements to establish borrower's repayment ability.  An entity's underwriting policies and guidelines are reviewed for inclusion of verifiable standards for qualifying borrowers, including standards for debt ratios, credit scores, and LTV ratios.  The entity's processes and bases for approving exceptions to underwriting standards are also reviewed.

Examiners assess the independence of the underwriting unit from the sales unit and determine whether underwriter compensation structures affect incentives concerning speed and quality of underwriting.

Appraisals
The examiner reviews policies and procedures for obtaining appraisals and interviews employees regarding any relationships with independent third party appraisers to determine whether there are conflicts of interest.  The entity's compliance with TILA's valuation independence provisions and ECOA's provisions requiring provision of the appraisal to applicants is assessed.  An entity's oversight of its appraisers and safeguards against appraisal fraud are also reviewed.

Originator Compensation
Policies and procedures regarding originator compensation are reviewed and employees are interviewed to confirm the entity complies with its own policies.  Compliance with the TILA prohibition against lender-paid compensation based on terms or conditions of loan, the prohibition against dual compensation and the steering prohibition is assessed.

Module 5 - Closing

Completion of the Closing examination module includes review of written procedures governing the provision of disclosures such as Final TIL, HUD-1, Servicing Transfer Disclosure, PMI cancellation notice and the privacy and opt out notices.  In addition, examiners determine whether entity allows borrower to choose their settlement agents.  Borrower receipt of the initial escrow account statement and rescission notices, if applicable, is confirmed. 

An entity's policies are reviewed to determine whether loan terms are explained deceptively, or whether
closing practices obscure key loan terms or provisions.  Initial RESPA and TIL disclosures are compared to the HUD-1 Settlement Statement and Final TIL disclosure for evidence of bait and switch and closing files will be reviewed for evidence of coercion of or fraud against borrower.

To view the complete CFPB Supervision and Examination Manual, including the new Mortgage Origination
Examination Procedures visit: http://www.consumerfinance.gov/guidance/supervision/manual

FinCEN Requires Anti Money Laundering and SAR Filing for Non-bank Lenders

by Anna DeSimone
President & Founder

On February 7, 2012, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, finalized regulations that require non-bank residential mortgage lenders and originators to establish anti-money laundering (AML) programs and file suspicious activity reports (SARs).

This requirement parallels FinCEN's requirements of depository institutions and continues the effort to close the regulatory gap between the two types of mortgage lenders.   According to FinCEN Director James H. Freis, Jr., "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."

President Obama created the Financial Fraud Enforcement Task Force by Executive Order in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys' Offices and State and local partners, it is the broadest collection of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.

Since its formation, the Task Force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among Federal, State and local authorities.   Task force members have charged a record number of mortgage fraud cases in the past two years, trained more than 100,000 professionals responsible for awarding and overseeing Recovery Act funds.

Based on FinCEN's ongoing work directly supporting criminal investigations and prosecutions, including connection with the Financial Fraud Enforcement Task Force and the Residential Mortgage-Backed Securities Working Group, FinCEN believes that the new regulations will help mitigate some of the risks and minimize some of the vulnerabilities that criminals have exploited in the non-bank residential mortgage sector.

Analysis of SARs reported in FinCEN's annual, quarterly and special fraud reports, shows that independent mortgage lenders and brokers originated many of the mortgages that were the subject of bank SAR filings.

Among the many mortgage related scams FinCEN has identified in its reports are:

• false statements
• use of straw buyers
• fraudulent flipping
• flopping
• identity theft

The new regulations likely will significantly increase the number of mortgage related SAR filings; give law enforcement and regulators more comprehensive data on specific crimes; and provide government and industry a more complete perspective on mortgage related crime trends nationwide.

Fannie Mae Launches "EarlyCheck" Business Process

by Anna DeSimone
President & Founder

As a continuing part of its Loan Quality Initiative (LQI) Fannie Mae has launched a new optional service called EarlyCheck.™  EarlyCheck will enable lenders to identify and correct potential eligibility and/or data issues as early in the loan origination process as possible.  

The program is available across all underwriting methods - for DU loans, manually underwritten loans, and non-DU AUS loans.   Lenders will be able to access the EarlyCheck service at any point in their processes prior to delivery.  Potential process points to consider include:

• Underwriting
• Prior to loan closing
• Prior to funding correspondent loans
• Part of the post-closing/secondary marketing process

Types of delivery checks included

When first released, EarlyCheck was focused on the Loan Quality Initiative (LQI) delivery edits specified in LL-2010-03: An Introduction to Fannie Mae's Loan Quality Initiative.  EarlyCheck includes checks for:

• SSN checks
• Occupancy checks
• Address checks
• Unit number checks
• DTI checks; loan limit checks
• DU Compare  (comparison of loan application input with the most recent DU submission)
• Checks for required delivery fields
• Other basic eligibility and data integrity checks

EarlyCheck does not include product eligibility checks (loan terms, mortgage insurance coverage, etc.), customer contract and commitment pricing checks, or pooling rules.  There may be slight differences in the checks available for each access option due to differences in data available in the input data formats.

EarlyCheck provides real-time, loan-level results in a user-friendly report or data file. The results contain messages that highlight the issues that need to be resolved (i.e., failed checks); the corresponding delivery severities, and key result data (including key calculated values and the standardized property address for the subject property).

For DU loans, the results also show a comparison of the input loan data with the data used in the most recent DU submission, as well as key DU Underwriting Findings information. Fannie Mae has held a long-standing policy that the last DU submission must match the loan delivery data. Currently, there is a post-delivery reconciliation process that is cumbersome for lenders and carries risk if the loan was ineligible or priced incorrectly. Lenders can perform these same checks at any time in the loan process using EarlyCheck.

A management reporting capability will assist lenders in monitoring usage of the EarlyCheck access options for loans prior to closing and help identify recurring potential eligibility and/or data quality issues that may need to be addressed.  

Prior to a loan closing, lenders currently have two EarlyCheck access options:

Directly integrated with a lender's LOS -  This option is a Desktop Underwriter® (DU-like integration solution) that  takes a 1003 flat file or MISMO AUS 2.3.1 file as input and returns viewable results and/or a result data file).  
                
Web-based user interface - This option enables a user to import loan data in a 1003 flat file format (which can be exported from most loan origination systems) or the MISMO AUS 2.3.1 file format, run the checks, and view the results.

To support loans in the post-closing through pre-delivery stage, lenders can access EarlyCheck via the Loan Delivery system.   A new version of EarlyCheck, EarlyCheck 2.0, will be released in 2012 which will accept both the 1003/MISMO AUS file format and the loan delivery XML file format for ULDD.

EarlyCheck is an optional service; lenders are not required to use it but it is highly recommended. EarlyCheck is currently available to approved Fannie Mae sellers only and there are no service fees.  Lenders who have already signed the Fannie Mae Software Subscription Agreement and the Shipping and Delivery Applications Schedule and can register users immediately through Technology Manager (if activated), Profile Access Manager or by completing registration forms located on the EarlyCheck page on eFannieMae.com.

Fannie Mae Updates Refi Plus and DU Refi Plus

by Ellen Brody
Assistant Vice President


Fannie Mae (FNMA) recently announced Selling Guide updates in SEL-2011-13 (12/20/11) which reflect many changes detailed in prior Announcement SEL-2011-12, Updates to Refi Plus and Du Refi Plus.  The Selling Guide has also been updated to reflect clarifications/changes in regard to Refi Plus and DU Refi Plus loans.  Of note is the following which are effective immediately:

1. For Refi Plus loans, the lender is no longer required to determine the borrower has a reasonable ability to repay the mortgage based on a review of the new loan application.
2. A loan may now be converted from DU Refi Plus to Refi Plus if the lender is the current servicer of the loan and the loan meets all Refi Plus requirements.
3. When a lender believes that the DU Refi Plus property fieldwork waiver must be overridden, the lender should obtain an inspection. If the inspection reveals physical deficiencies or adverse environmental conditions, the lender must obtain a full appraisal (based on an interior and exterior property inspection) and may not exercise the DU Refi Plus property fieldwork waiver offer. If the inspection does not reveal physical deficiencies or adverse environmental conditions, the lender may choose to exercise the DU Refi Plus property fieldwork waiver, or it may obtain the minimum level of property fieldwork as specified by DU.
4. Laws and regulations regarding the use of appraisals and automated valuation models may vary. The lender is responsible for compliance with all federal, state and local laws, rules and regulations. When the lender is required by law to obtain an appraisal, the lender must comply with such requirements, but may still exercise the DU Refi Plus property fieldwork waiver.
5. The lender no longer needs to confirm the hazard, flood, liability and fidelity coverage on mortgage loans secured by units in projects and underwritten to the Refi Plus guidelines.  (The lender's original project review would have confirmed required coverages and the servicing guidelines require that such coverages remain in force.)
   
   Temporary Leave Income
   
   
6. FNMA has updated the requirements regarding qualifying income for borrower on temporary leave. The guidelines from the Selling Guide are shown below.
   
   The borrower's employment and income history must meet standard eligibility requirements as described in Section B3-3.2, Salary, Commissions, and Other Sources of Income.
   
   
   • The borrower must provide written confirmation of his or her intent to return to work and the agreed upon date of return as evidenced by documentation provided by the employer or a designee of the employer. (For example, an employer may use the services of a third party to administer employee leave.
   • The lender must receive no evidence or information from the borrower's employer indicating that the borrower does not have the right to return to work after the leave period
   • The lender must obtain a verbal verification of employment in accordance with B3-3.1-02, Verbal Verification of Employment (12/20/2011). If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed.
   • The lender must verify the borrower's income in accordance with Section B3-3.2, Salary, Commissions, and Other Sources of Income. The lender must obtain:
   • the amount and duration of the borrower's "temporary leave income" which may require multiple documents or sources depending on the type and duration of the leave period, and
   • the amount of the "regular employment income" the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus).  Note: Income verification may be provided by the borrower, by the borrower's employer, or by a third-party employment verification vendor.
   
   
7. Requirements for Calculating Income Used for Qualifying are as follows:
   
   
   • If the borrower will return to work as of the first mortgage payment date, the lender can consider the borrower's regular employment income in qualifying.
   • If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than his or her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve Requirements (09/20/2010)).
     
     To calculate supplemental income: 
     
     Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
     
     
   • Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
   • Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
     
     To calculate total qualifying income:
     
     Total qualifying income  =  supplemental income  + temporary leave income
     
     The total qualifying income that results may not exceed the borrower's regular employment income.
     
     Example:
     
     Regular income amount: $6,000 per month
     Temporary leave income: $2,000 per month
     Total verified liquid assets: $30,000
     Funds needed to complete the transaction: $18,000
     Available liquid reserves: $12,000
     First payment date: July 1
     Date borrower will begin receiving regular employment income: November 1
     Supplemental income: $12,000/4 = $3,000
     Total qualifying income: $3,000 + $2,000 = $5,000
     
     Note:   These requirements apply if the lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if he or she intends to take leave in the future.

Condo Project Requirements

FNMA has clarified its requirements for property hazard insurance in the Selling Guide, B7-3-04 as detailed below.  Of particular note is the change in the requirement regarding HO-6 policies  from 20% of the condo unit's appraised value to an amount, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event.

The lender must review the entire condo project insurance policy to ensure the homeowners' association maintains a master or blanket type of insurance policy, with premiums being paid as a common expense. The insurance requirements vary based on the type of homeowners' association master or blanket insurance policy as follows:

"Single Entity" policy:

The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the homeowners' association. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. The amount of coverage must be sufficient to restore the condo unit to its condition prior to a loss claim event. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event.

"All-In" (sometimes known as an "all-inclusive") policy:

The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the homeowners' association. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event.

"Bare Walls" policy:

This policy typically provides no coverage for the unit interior, which includes fixtures, equipment, and replacement of interior improvements and betterments. As a result, the borrower must obtain an individual HO-6 policy that provides coverage sufficient to repair the condo unit to its condition prior to a loss claim event, as determined by the insurer.

Master or Blanket Insurance for Unaffiliated Condo Associations or Projects

FNMA is now permitting master or blanket insurance policies that combine insurance coverage for multiple unaffiliated condominiums or other residential or substantially residential projects that are unaffiliated as long as the coverage meets certain specific criteria as described in the Selling Guide as follows

Any company, group, sponsor, individual, or administrator providing these types of policies that has never been rated by A.M. Best, Standard and Poor's, or Demotech must be licensed to sell insurance or have a principal or officer of the company licensed to sell insurance within the state or territory where its corporate headquarters are subject to supervision and regulation by a federal or state insurance agency.

The lender must obtain the insurance policy as well as all of the necessary schedules, endorsements, statements of value, or other associated documents needed to appropriately evaluate the insurance policy.  The lender must ensure the policy meets all of the following requirements:

The insurance policy coverage limits must meet the higher of:   greater than or equal to 50% of the total insurable replacement value for all condo projects and other residential or substantially residential projects insured under the policy; or  greater than or equal to 150% of the total insurable replacement value for the single largest condo project or other residential or substantially residential project insured under the policy, but not more than 100% of the total insurable replacement value for all condo projects and other residential or substantially residential projects insured under the policy.

1. The policy endorsements must:
   
   • clearly state that insurance is being provided under a master or blanket insurance policy that combines insurance coverage for multiple unaffiliated condo projects or other residential or substantially residential projects;
   • clearly state that loss limits apply per occurrence and loss claims will be paid per occurrence;
   • reinstate the original per occurrence coverage limit after each loss occurrence or claim so that the full original per occurrence limit is immediately available for any subsequent loss for any perils required by Fannie Mae;
   • include a Coinsurance Waiver; and
   • clearly state that each condo project and residential or substantially residential project is a named insured.
   
   
2. The policy or endorsements cannot contain an aggregate (or policy term) loss limit for any perils required by Fannie Mae.

Fannie Mae Publishes Recommendations for Quality Control

by Anna DeSimone
President & Founder

In October 2011, Fannie Mae published a new booklet named "Beyond the Guide" that provides a more comprehensive description for recommended best practices for pre- and post-funding quality control.  Since launching the Loan Quality Initiative (LQI) in September of 2010, Fannie Mae has listened to feedback from both lenders and QC vendors and has spelled out ideas and concepts to enhance quality control beyond the minimum standards.

The guidebook includes illustrations, suggested report and action plans and some practical "do's and don'ts".   Summarized below are Fannie Mae's suggested Key Control points of the quality assurance program:

Control Point #1
Internal and Third-Party Data and Fraud Tools

Data and fraud tools can help ensure that loan application data is validated as early as possible in the origination process to catch errors and/or identify intentionally misrepresented information.

• By using third-party or internal tools, a lender can spot bad data beginning at the point of application.
• Lenders should compare loan application data to their origination, servicing, or other customer databases to identify issues such as multiple applications, occupancy concerns, or erroneous or fraudulent social security numbers.
• Loan officers should be trained to be a vital part of the data-gathering and validation process and encouraged to ask the borrower for additional information when appropriate.
• Proper use of data validation tools reduces a lender's exposure to adverse selection, misrepresentation, and fraud. 

Control Point #2
Underwriting and Eligibility

Underwriters are not only responsible for making credit decisions on the data presented, they also play a key role in ensuring the file information is accurate and complete. Underwriters should be fully empowered to act on red flags and stop or delay processing if all required documents are not in the file.  While underwriters can suggest valuable solutions for loan roadblocks, "no" should be an acceptable decision. It should be just as valued as a "yes" if it stops a defective loan from closing, and can help alleviate the pressure on underwriters to approve loans.

• An underwriter's role is not only to ensure the validity of individual pieces of information but also to make a decision considering all information in the file.
• The underwriter should take a big picture view of inconsistent data and ask broad questions.
• If a data element looks erroneous or inconsistent, it may need more support.
• The Desktop Underwriter or Automated Underwriting output is only one step in the underwriting process. AU recommendations are only as good as the accuracy of the underlying data.
• Consider integrating a document control with your automated underwriting system. Often, one missing document triggers a red flag or the need for more documents.
• Consider underwriters as the traffic cops for production and empower them accordingly.
• Avoid, whenever possible, collecting documentation at closing as there is little or no time to review for inconsistencies.
• When a value is questionable, there is a tendency to just ask the appraiser for another comparable that supports the value. Before doing this, the underwriter should clearly identify what about the existing comparables makes the value suspect and state why the additional comparable will overcome the issue.
• Sound underwriting requires having the right information from independent sources to validate data or statements. An explanation letter alone may not be sufficient.  For example, asking the borrower for a statement that they intend to occupy a property does not necessarily resolve an occupancy question.
• Scorecards that objectively evaluate an underwriter's assessment of a file have proven to be an effective feedback and training tool.

Control Point #3
Pre-funding Quality Control 

Pre-funding Quality Control (PFQC) brings QC to the forefront of the loan manufacturing process. Effective PFQC can provide a substantial return on your QC investment because it prevents closing loans with defects.

Note: Fannie Mae does not specify how lenders should conduct their PFQC activities. The following ideas for building effective PFQC are based on what we have currently observed as best practices being utilized by Fannie Mae's lenders.

• PFQC can have significant impact on quality and profitability.  It usually is customized to the lender's business model.
• PFQC should evaluate all origination channels while targeting specific risk concerns such as incomplete asset documentation, income calculation errors, or manual workarounds. It also should test remediation activities.
• Lenders should guard against having PFQC performed by someone with a vested interest in a loan closing.
• Independent oversight of PFQC results is vital.
• PFQC evaluates the whole file, not just the raw data as reviewed in Control Point 1.
• Optimally, PFQC is performed after file approval, but before closing.
• There should be separate reporting for PFQC activities, which should include results from data validation tools and provide feedback to individuals and units that have a role in the origination process including underwriters, appraisers, loan officers, processors, and branches.
• PFQC allows problems to be corrected before closing, but PFQC personnel should also have authority to stop loans from closing.
• Pre-funding review methodology should mirror post-closing QC and inform post-closing QC of possible areas of investigation. There should be active sharing of information and data between the two functions.
• Post-closing QC results can drive pre-funding QC targeting.
• There should be a mix of random and discretionary selection of loans for a full file review before closing.
• PFQC should be a series of defined activities embedded into the loan process.  
• Expectations should be set for production staff and the borrower that QC activities are necessary steps that may add additional time to the closing date.
• A brief sample of effective PFQC activities include:  4506 transcript before underwriting; appraisal, red flag checklist, clearing of anti-fraud alerts prior to approval and proof of liquidation of assets that are to be the source of funds for closing.

Control Point #4A
Pre-closing Document Review

Fannie Mae's research shows that many curable defects occur during the closing process, yet they have seen a noticeable lack of controls during closing.  FNMA strongly suggests that lenders dedicate resources to provide an independent QC review of the closing package.  Even though the Selling Guide provides a checklist for evaluating the closing documents after closing (See D1-3-07), this validation should also take place before closing. The Selling Guide's closing documents checklist can help with this.

The closer should be inquisitive, asking questions like:

• Do you have the right property?
• Do you have the right parties?
• Does the title information align with the loan information?
• Is cash back to the borrower excessive for the transaction? Are other parties getting money disbursed to them who should not be?
• Will the borrowers pay more money at closing than verified or disclosed?
• Has the sales contract changed since completion of underwriting? If so, the loan should be stopped and sent back for underwriting.
• Occupancy, Occupancy, Occupancy - make sure it is right.
• Are insurance elements correct? Do you have MI? Does the homeowner's policy match the transaction? Is flood insurance required and adequate coverage provided?

Other important considerations include:

• Many things can occur just before closing that result in changes in the loan amount, such as payoff differences or a change in the down payment. These require redrawing the closing documents or possibly re-underwriting the loan.
• Sometimes payoff amounts on refinances are larger than estimated. Does the borrower need to bring funds to closing, and were those funds verified?
• Review the HUD-1 thoroughly. Review the seller side of the HUD-1 just as thoroughly as the buyer's.
• Changes may occur at many points during processing of a loan that might alter the terms of the transaction. Never assume underwriting is aware of a change. Always inform and secure the necessary approvals.
• Closing is time-sensitive and pressure-filled. Provide the closer with sufficient time to make an accurate assessment as well as the authority to stop or delay closing to get it right.
• Limiting items to be collected at closing may help reduce errors.

Control Point #4B
Post-Closing Document Review

The post-closing Quality Control process answers the question, "Is the loan you closed, the loan you thought you closed?" If the loan is not exactly as expected, (i.e., if any errors are detected), the lender has a responsibility to remediate the loan and take action to eliminate errors on future production.  Management should first make sure the company and the staff know why QC is necessary. Quality control is essential not just to comply with Fannie Mae's Selling Guide, but because QC is one of the lender's most valuable loss-prevention controls. Don't make the mistake of underfunding and understaffing quality control. It is wise to put some of your most experienced people in QC because of their ability to identify issues.   Effective QC:

• Tells you whether you correctly originated a specific loan.
• Ensures all mistakes are captured. Severity and accountability should not be debated at this stage.
• Is embraced by the lender's culture because the discovery of errors is a way to improve quality. And the culture should not create anxiety over retribution if errors are surfaced.
• Determines if the credit decision was correct.
• Tells you the loan quality of your entire book of business and your exposure to repurchase risk.
• Will be one of the primary tools to drive improvement in your loan origination process and is vital to effective management of third-party originations.
• Alerts you to whether your policies and procedures are being followed, if your staff needs training, and if prefunding controls are working.
• Can confirm the effectiveness of any previous remediation efforts.
• Distinguishes random sampling from discretionary or targeted sampling. Random sampling.
• Provides statements about entire populations of loans. Discretionary or targeted sampling is used to test suspected high-risk or adverse populations. It should almost always include first and early payment defaults, and will likely have higher finding rates than random samples.
• Evaluates the ability of your staff and other participants in the loan manufacturing process, including appraisers, title companies, and others.
• Is timely. Effective lenders select and review loans well within Fannie Mae's minimum requirements and address issues as soon as possible.
• Almost always finds something. If your QC is not consistently discovering errors or only reports minor findings, then your file reviews may not be thorough enough.

Control Point #5b
Reporting

Robust reporting is the mechanism for communicating with those directly involved or overseeing
the loan manufacturing (origination) process. It transforms data into meaningful information useful in analysis, decision-making, and taking remedial action. When reports are effective and QC is part of the culture, the Board of Directors and senior management are as interested in QC reports as those directly involved in the QC function.

• Effective reporting leads to improved quality and loss prevention.
• Thorough loan level reviews are the foundation for reporting. However, QC reports that provide only loan-level information and do not evaluate the entire origination process, are not effective tools for management action.
• QC reports should have trending information to be of utmost value.
• Effective reporting compiles loan review data into meaningful information that can lead to continuous improvement and fewer defects.
• Effective reports measure the quality of originations, evaluate performance against requirements and goals, confirm compliance with policy and procedures, addresses the effectiveness of controls, identifies actionable items, tracks the effectiveness of action taken, feeds individual compensation and performance and predicts risk exposure.
• Reporting is typically unique to each lender, reflecting the desired credit culture, defect rate goals, and specific risks, including those reflected in their products, origination channels, third-party partners, and geographical markets.
• Lenders that outsource their QC to contractors (vendors) should still take the lead in report design to provide meaningful information for all levels of employees up to senior management and the Board of Directors. These lenders also need to develop reports that facilitate the evaluation of the QC contractor.
• Reporting is the venue to help understand severity of findings and distinguish between compliance and credit findings. Therefore, these should be reported and assessed separately.
• Proactive lenders develop expanded reports that consider the personnel involved in the loan manufacturing process and their needs specific to quality. They identify the information that users need (content) and how often they need it (frequency).

Control Point #6
Action Plan

If no action is taken to remediate observed defects and prevent recurring defects, then repurchase and other risks will persist. Without a formal process for acting on QC results, the lender's QC program is incomplete and ineffective.

• Identify the root cause of each defect. For example, was income calculated incorrectly due to a lack of understanding of the right calculation components, or was it due to a flaw in the calculation process itself?
• With each defect, should a specific individual be part of the remedial action? Untrained staff or staff and third parties who intentionally misrepresent information create a significant source of defects that must be addressed.
• If a specific individual is the issue, one-on-one training may be appropriate. If the issue occurs more broadly among staff, classroom training should be a part of systematic changes to address the root cause.
• Were there indications that a specific process, policy, control, or system is flawed? Look first for the possibility of system-wide changes in controls, processes, or policy to fix the issue(s).
• Provide loan quality performance scorecards to each origination channel and origination unit (branch, region etc.).
• Provide loan quality performance scorecards to each individual in the origination process, including loan officer, processor, underwriter, appraiser, closer, and funder. These scorecards should affect both performance review and compensation for that individual.
• Include guidance on how to prevent quality issues in procedure manuals.
• Report to Quality Control on the remediation action taken.
• Quality Control should test and report on the effectiveness of remedial actions.
• Senior management should evaluate the effectiveness of the remedial actions and direct changes if the actions are not working. Management actions should be documented.

HUD Proposes Amendments to Fair Housing Act's Discrimination Standards

by Margaret Wright, Esq.
Assistant VP & Senior Counsel

The Department of Housing and Urban Development (HUD) has issued a proposed rule amending the Fair Housing Act in order to "establish uniform standards for determining when a housing practice with a discriminatory effect violates" the Act.  The proposed amendments arise from the need for uniformity of application of the discriminatory effects theory of liability under the Fair Housing Act.  The additions will "establish a uniform standard of liability for facially neutral housing practices that have a discriminatory effect". (76 FR 70923)

Under the Fair Housing Act there need not be a finding of intentional discrimination in order to base liability on the discriminatory effects of a housing policy or procedure.  HUD has specified that the Fair Housing Act "is violated by facially neutral practices that have a disparate impact on protected classes" and also violated by facially neutral "practices that create, perpetuate, or increase segregated housing patterns". (76 FR 70922) The proposed rule will be applicable to both public and private entities.

Prohibiting Discriminatory Effects

The proposed rule intends to add a new Subpart G to the Fair Housing Act which would "confirm that the Fair Housing Act may be violated by a housing practice that has a discriminatory effect,... regardless of whether the practice was adopted for a discriminatory purpose". (76 FR 70924) A discriminatory effect is further defined as occurring "where a facially neutral housing practice actually or predictably results in a discriminatory effect on a group of persons or on the community as a whole." (76 FR 70924)

Disparate impact occurs where a practice or policy results in a discriminatory effect on a group of persons on the basis of race, color, religion, sex, handicap, familial status or national origin.  The proposed rule supplementary information discusses a few examples of where disparate impact may arise including zoning ordinances restricting multifamily housing construction to certain areas, the provision and pricing of homeowner's insurance, mortgage pricing policies that give lenders or brokers discretion to impose additional charges or higher interest rates unrelated to a borrower's creditworthiness, credit scoring overrides provided by a purchaser of loans and credit offered on predatory terms. (76 FR 70924)

Perpetuation of Segregation occurs where a practice or policy results in a discriminatory effect on the community as a whole by creating, perpetuating or increasing segregated housing patterns on the basis of race, color, religion, sex, handicap, familial status or national origin. The proposed rule supplementary information discussion outlines some examples, such as a multifamily housing being restricted to a largely minority neighborhood "having the effect of perpetuating segregation 'by restricting low-income housing needed by minorities to an area already 25% minority'" and where towns had banned or restricted certain developments resulting in keeping minorities out of the towns which populations were already over 90% non-minority. (76 FR 70925)

Legally Sufficient Justification

The proposed rule further explains that a practice or policy found to have a discriminatory effect may not be a violation of the Act as long as there is a "legally sufficient justification."  A legally sufficient justification is defined as existing where the "practice or policy (1) has a necessary and manifest relationship to the defendant's legitimate nondiscriminatory interests and (2) those interests cannot be served by another practice that has a less discriminatory effect." (76 FR 70925)

However, if intentional discrimination is alleged, the proposed rule states that legally sufficient justification may not be used as a defense. (76 FR 70927)

Three-step Burden-Shifting

The proposed rule outlines a "three-step burden-shifting" approach to determining which party bears the burden of proof at each step of the process.

1. The plaintiff must first prove that the "practice caused, causes, or will cause a discriminatory effect on" a protected group. (76 FR 70925)
2. After the plaintiff has proven their prima facie case, the burden then shifts to the defendant to prove that there is legally sufficient justification for the disputed practice.
3. Once the defendant has proven the practice is necessary and legitimate, the burden shifts once again to the plaintiff to show that the defendant's interests may be "served by a policy or decision that produces a less discriminatory effect." (76 FR 70924) If the plaintiff can prove this last portion, the defendant will still be liable under the Act even though they have proven their legally sufficient justification.

This three-step approach has been used in the past by HUD to determine liability in administrative decisions under the Fair Housing Act. The three-step burden-shifting approach has also been used for actions arising under the Equal Credit Opportunities Act (ECOA), often jointly with claims under the Fair Housing Act.  The proposed rule will allow this burden of proof approach to be applied uniformly.

Amended Prohibited Conduct

In addition to Subpart G, the proposed rule seeks to amend existing Fair Housing Act sections to include further examples of prohibited conduct:

Section 100.65 Discrimination in terms, conditions and privileges and in services and facilities adds a prohibition on "providing different, limited, or no governmental services such as water, sewer or garbage collection" that results in a discriminatory effect.

Section 100.70 Other prohibited conduct is amended to include the implementation of "land-use rules, policies, or procedures that restrict or deny housing opportunities in a manner that" have a discriminatory effect.

Section 100.120 Discrimination in the making of loan and in the provision of other financial assistance is amended to include further examples of prohibited practices such as "failing or refusing to provide any person... information regarding the availability of loans or other financial assistance, application requirement, procedures or standards for review and approval of loans or financial assistance, or providing information which is inaccurate or different from that provided others because" that person is a member of a protected class.  Additionally prohibited is "providing loans or other financial assistance in a manner that results in disparities in their cost, rate of denial, or terms or conditions, or that has the effect of denying or discouraging their receipt on the basis" of being a member of a protected class.

Comment Period

Comments on the proposed rule are due by January 17, 2012.

View the entire Proposed Rule on AllRegs:

http://www.allregs.com/ao/main.aspx?r=31663679-7a4a-4d40-805c-0a2635c5098c

VA Implements Funding Fee Changes

by Barbara Cameron
Assistant Vice President

Recently VA has issued a series of Circulars regarding VA Funding Fee changes.  There was some confusion over VA loan funding fees as a result of the changes (VA Circular 26-11-15 and VA Circular 26-11-16) - especially regarding the short term changes.  VA also provided in  VA Circular 26-11-16,  guidance for refunds of overages paid when a Good Faith Estimate was issued prior to the enactment of the law reestablishing rates at a higher level.  VA Fee changes are listed over a series of dates below.  Most importantly are the changes on or after November 18, 2011.

Proper Funding Fee Charges:   November 18, 2011 - September 30, 2016

• Loans closed November 18 through and including November 21, 2011: Funding fees for loans closed during this period will be the lower fees cited in the Department of Veterans Affairs (VA) Circular 26-11-12, dated September 8, 2011
• Loans closed November 22 through and including September 30, 2016: Funding fees for loans closed during this period will be the same as those that existed prior to October 1, 2011. See Exhibit A attached for a complete breakdown of current fees.
• Interest Rate Reduction Refinancing Loans and Assumptions: Funding fees for these loans remains at 0.50 percent.

Proper Funding Fee Charges:    October 1, 2011 - November 17, 2011

Department of Veterans Affairs (VA) Funding Fee Payment System (FFPS) has been updated to calculate the funding fee changes noted in Circular 26-11-15.   Lenders may now submit payments for all loans, including those closed on or after October 1, 2011. Procedures for obtaining a refund of excess fees are also described below.

Loans closed October 1, 2011 through and including October 5, 2011:

Lenders may submit payments at this time and VA FFPS will automatically calculate the funding fee due, using the lower funding fee structure that was in effect from October 1 through October 5. Lenders who closed loans during this period, and who submitted funding fee payments prior to October 8, 2011 (the date VA FFPS was updated), would have been charged an incorrect (higher) fee.

To generate a refund of any excess fees paid, lenders can access the record in VA FFPS, select "Correct" and resubmit. It is not necessary to change any data. By submitting the funding fee payment again, VA FFPS will automatically recalculate the correct fee. VA staff will then process any refund due, and funds will be deposited into the lender's VA Financial Management System (FMS) account. Upon receipt of the refund, lenders are encouraged to re-review the loan closing documents to determine whether or not the Veteran is entitled to receive any/all of the refund amount. Refunds due to Veterans should be applied directly to the principal balance of the loan.

Loans closed on or after October 6, 2011:

For loans closed on or after October 6, 2011, VA FFPS will calculate the higher fees noted in VA Circular 26-11-15. In cases where a Good Faith Estimate (GFE) was issued prior to enactment of Public Law 112- 37, VA will waive the difference in fees between the lower October 1 fees and the higher Public Law 112-37 fees. This waiver will be in the form of a refund to lenders via FFPS. To obtain a refund, lenders must first submit the funding fee in FFPS. Once that task has been completed, lenders should scan and email a legible copy of the GFE to william.white1@va.gov.

Lenders should always label the subject header of the email "Funding Fee Refund," as this will enable timely processing. The refund will be processed in VA FFPS by VA staff, and funds will be deposited into the lender's VA FMS account. Upon receipt of the refund, lenders are encouraged to re-review the loan closing documents to determine whether or not the Veteran is entitled to receive any/all of the refund amount. Refunds due to Veterans should be applied directly to the principal balance of the loan.

Refund / Remitting Procedures

Waiver of the Difference in Funding Fees
For cases in which lenders have closed loans based on lower funding fees cited in the Good Faith Estimate (GFE) rather than the higher fees provided in HR 2646, the Secretary, under existing authority, will waive the difference in the fees. Specifically, VA will waive the right to collect the difference in fees (between the lower October 1 rates and the higher H.R. 2646 rates) for loans for which a GFE was prepared prior to October 6 based on the lower fees, and that was closed after the enactment of H.R. 2646.

Procedures for Remitting Higher Funding Fees than Required 
Lenders who disclosed higher funding fees on closing documents based on anticipation of Congressional action, will have to refund the difference to the Veteran borrower, either in the form of a principal curtailment for financed funding fees, or a check for funding fees paid at closing.

Links
VA - 26-11-12
http://www.allregs.com/ao/main.aspx?did2=73577f65a7e04b63b9c4c7327cd1bec2

VA - 26-11-15 - Exhibit A
http://www.allregs.com/ao/main.aspx?did2=ff2b0fc36ab74de58f50c3c91fe65829



About the Author
Barbara is Assistant Vice President at Bankers Advisory.  She is a certified FHA D.E. and VA LAPP.    Have a VA question?  E-mail Barbara directly at barbara@bankersadvisory.com