Compliance Monitor

Fannie Mae Launches "EarlyCheck" Business Process

2012-01-08T09:54:00.001-05:00

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

2011-12-27T16:47:00.000-05:00

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:

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.
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.
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.
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.
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
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:
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.

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.
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

2011-12-13T09:44:00.004-05:00

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

2011-12-06T10:59:00.001-05:00

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.

The plaintiff must first prove that the "practice caused, causes, or will cause a discriminatory effect on" a protected group. (76 FR 70925)
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.
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

2011-11-28T11:04:00.002-05:00

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

Freddie Mac Updates Stable Monthly Income Guidelines

2011-11-21T14:57:00.000-05:00

by Sarah Lagattolla
Assistant Vice President

On November 4, 2011 Freddie Mac issued Bulletin 2011-21 regarding changes made to Section 37.13 of the Single Family Seller/Servicer Guide. Updates and additions have been made to this section of the Guide to provide clarification and changes to the topic of stable monthly income. The changes will become effective February 12, 2012 however these changes can be implemented immediately. Some of the changes and addition to Section 37.13 as described below.

Freddie Mac Bulletin 2011-21 can be viewed in its entirety in AllRegs:
http://www.allregs.com/ao/main.aspx?did2=4f04a4cd23b74fd69630a4cd1182c390

Temporary Leave

Freddie Mac has added temporary leave income as an eligible source of qualifying income under the category of employed income. The temporary leave income used to qualify the borrower for the new mortgage will depend on when the borrower is expected to return to the employment/position held prior to the temporary leave.

If the borrower WILL be returning to their employment prior to the new mortgage's 1st payment due date, the lender may qualify the borrower using the expected earnings upon the borrower's return to their employment.
If the borrower WILL NOT be returning to their employment prior to the new mortgage's 1st payment due date, the lender may qualify the borrower using the borrower's gross monthly employment income received during the temporary leave. In some instances, a borrower may receive reduced income or no income from the employer while on temporary leave. The borrower's qualifying income can then be supplemented by or qualified with any temporary leave income sources, such as short-term disability insurance, as well as available liquid assets. The combination of temporary leave income sources and/or available liquid assets may not exceed the gross monthly income the borrower is expected to earn upon return to their employment.

Income received from temporary sources must be adequately documented to verify the amount, consistency and duration of the temporary income if it is to be used to qualify the borrower. Any available liquid assets used as an income supplement must be documented in accordance with Sections 37.22 and 37.23 of the Seller/Servicer Guide. The assets used for a qualifying income source may not be assets needed for the transaction. These funds would include assets needed for down payment, closing costs, prepaid expenses, reserves, etc. The Seller must provide a written analysis of the temporary income calculation and rational used to qualify the borrower.
In both instances, the Seller must obtain from the borrower a letter of confirmation stating the intent to return to work and the expected date of return. In addition, the Seller must verify with the borrower's employment and income prior to the temporary leave. The borrower's employer must verify the borrower's right to return to work, the expected wages upon returning as well as the agreed date of return. The borrower's leave is no longer considered temporary it if is determined or revealed that the borrower does not intent to return to their employment or if the employer does not commit to the borrower's right to return to work. Application for or receipt of long-term disability does not constitute temporary leave. Long-term disability benefits may be use to qualify the borrower in accordance with Section 37.13(c).

Other Income (non-employed/non-self employed income)

Freddie Mac has provided clarification regarding other income sources and the acceptability of the income for qualifying. Generally, borrowers should be able to demonstrate a 2 year history of receipt of the other income as well as demonstrate a likelihood of continuance of at least 3 year. Depending on the type of other income, a 2 year history of receipt is not required in order to use the income for qualifying the borrower, however there must always be a reasonable expectation of continuance for at least 3 years. Freddie Mas has identified eight factors for determining the likelihood of continuance for other income.

Are the payments received as a result of a written agreement, court decree or law?
How long have the payments been received?
Are the payments received on a regular basis (for example: monthly, biweekly or weekly frequency)
Are the payment amounts received consistent?
Are there procedures available to compel payments?
Have full or partial payments been made?
If payments made are for support for minor a child, what is the age of the child?
Is there any eligibility criteria for the continued receipt of the income?

Four categories of other income have been added to Section 37.13(c) to provide additional detail on eligibility and documentation required. These categories are: Retirement, Survivor and Dependent Benefit Income, Long-term Disability and Social Security Supplemental Security Income. Evidence of receipt of these 4 types of income need only be documented for the most recent two months rather than a two year history. The type, source, amount and duration of these sources of other income must be documented in the loan file. Long-term disability and Social Security Supplemental Security Income may be contingent upon re-evaluation of medical eligibility however this is not considered an indication that the benefit payments will not continue. The Seller must determine, as with all other sources of other income, that there is a likelihood of continuance for at least 3 years. If the benefit payments reflect an expiration date or have an insufficient balance remaining to maintain payments for at least 3 years, the income should not be considered stable monthly income for qualifying the borrower.

Fannie Mae Announces Updates to Refi Plus and DU Refi Plus

2011-11-17T10:47:00.000-05:00

by Ellen Brody
Assistant Vice President

As a result of recently announced changes to the Home Affordable Refinance Program (HARP) made by the Federal Housing Finance Agency (FHFA), Fannie Mae (FNMA) is implementing changes to Refi Plus and DU Refi Plus. The announcement was made in SEL-2011-12: Updates to Refi Plus™ and DU Refi Plus™ (11/15/11).

In addition to the changes discussed below, lenders should also review the Selling Guide, B5-5.1-05, DU Refi Plus and Refi Plus Eligibility, regarding Representations and Warranties as there are a number of exceptions associated with these programs and changes have been made to Refi Plus mortgages with application dates on or after December 1, 2011.

Maximum LTV Ratios and Eligible Products

Effective for Refi Plus mortgage loans with application dates on or after December 1, 2011, FNMA is removing the maximum LTV ratio limit for loans secured by fixed rate mortgages with terms up to 30 years. There is no change in the LTV limit of 105% for those loans with terms greater than 30 years up to 40 years, or for ARMs with initial fixed periods greater than or equal to five years and terms up to 40 years (as permitted by the ARM plan).

For DU Refi Plus mortgage loans, the changes to the LTV ratio limit will not be permitted until DU is updated in March 2012. Therefore, DU loan case files that receive an Ineligible recommendation due to an LTV ratio over 125% will not be eligible for delivery.

Changes to Underwriting Requirements for Refi Plus

The following changes are effective for Refi Plus mortgage loans with application dates on or after December 1, 2011.

In regard to the mortgage being refinanced, mortgage delinquencies during the most recent six month period are not allowed. Furthermore, no more than one 30 day delinquency in the prior 7 to 12 month period is allowed.
If the principal and interest payment increases by more than 20% of the current contractually obligated payment under the note, the borrower must be re-qualified. If the note provides for more than one payment option, the lender must use the lowest payment option to determine whether the increase exceeds 20%.
Requalification guidelines are as follows: minimum representative credit score of 620; maximum DTI of 45%; Verification of income sources and amounts in accordance with the Selling Guide, Chapter B3-3 Income Assessment; and Verification of assets to close in accordance with the Selling Guide, Chapter B3-4, Asset Assessment.
The bankruptcy and foreclosure policies will no longer apply. Therefore the borrower on the new loan will not be required to meet the standard waiting period and reestablishment of credit criteria following a bankruptcy or foreclosure. Also, the original loan does not need to have met the bankruptcy and foreclosure policies in effect at the time the loan was originated.
FNMA is updating the borrower benefit criteria to add the following: a reduction in the interest rate or a reduction in the loan amortization term . This change applies to both Refi Plus and DU Refi Plus mortgage loans.

Loan Level Price Adjustment for Refi Plus and DU Refi Plus

For all Refi Plus and DU Refi Plus whole loans purchased on or after January 3, 2012 and for mortgage loans delivered in to MBS with issue dates on or after January 1, 2012, the following changes apply:

The cap applicable to the sum of the LLPAs and the Adverse Market Delivery Charge (AMDC) on HARP mortgage loans with amortization terms less than or equal to 20 years is being reduced to 0.00%. As a result, all delivery fees are effectively eliminated for this category of loans.
The cap applicable to the sum of the LLPAs and the AMDC on HARP mortgage loans with amortization terms greater than 20 years is reduced to 0.75%.

Permissible Refinance Solicitation Practices

Effective for solicitations that occur on or after December 1, 2011, FNMA is adding the following policies by which lenders can solicit borrowers.

Lenders must apply the same advertising and solicitation activities to borrowers of mortgage loans with LTV ratios greater than 80%, regardless of whether the mortgage is owned or securitized by Fannie Mae or Freddie Mac.

Lenders must apply the same advertising and solicitation activities to all mortgage loans with LTV ratios greater than 80% and serviced for a particular GSE, regardless of whether the lender or a third-party owns the associated Fannie Mae MBS pools or Freddie Mac PC pools.

If lender's solicitation or advertising material includes a reference to a GSE, then the communication must include the following language:

"Freddie Mac and Fannie Mae have adopted changes to the Home Affordable Refinance Program (HARP) and you may be eligible to take advantage of these changes."
"If your mortgage is owned or guaranteed by either Freddie Mac or Fannie Mae, you may be eligible to refinance your mortgage under the enhanced and expanded provisions of HARP."
"You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the following websites: www.freddiemac.com/mymortgage or www.fanniemae.com/loanlookup/."

The Announcement can be viewed at the following AllRegs link:
http://www.allregs.com/ao/main.aspx?did2=af84a1f05f3441ea8a4dd6082368e944

Freddie Mac Updates Electronic Transaction Requirements

2011-11-10T15:40:00.000-05:00

by Anna DeSimone
President & Founder

On October 1, 2011, Freddie Mac amended its requirements for servicing mortgages. The Single Family Seller/Service Guide, Volume 2, Section 50.3.1: Acknowledgment and consent to electronic transactions.

Requirements will become effective on January 1, 2012. Key points to the amendments are summarized below:

Electronic transactions conducted between Servicer and Borrower

In lieu of having the Servicer or Borrower, as applicable, prepare, sign and send, return, or submit paper documents, such as Form 710, Uniform Borrower Assistance Form, explanation letters, solicitation letters, evaluation notices and other forms and documents in connection with consideration for a reinstatement, relief or workout option the Servicer may either:

Mail, fax or electronically transmit copies of the loss mitigation documents (excluding letters a Borrower must provide) to a Borrower or permit a Borrower to copy, print or download a copy of the loss mitigation documents via a secure Servicer-provided Internet web site and permit the Borrower to complete, sign and fax copies (or e-mail copies) of the signed loss mitigation documents to the Servicer (Note: Under some State laws, an individual may not be required to transmit his/her Social Security number over an unsecured electronic channel), or
Give the Borrower a secure means of access through which a Borrower may prepare and electronically sign loss mitigation documents (including letters a Borrower must provide) and submit them to Servicer.

In the event the Servicer permits Borrowers to provide any of the loss mitigation documents as Electronic Records, the Servicer:

May create an electronic substitute for Form 710 and any other required forms, provided that the information requested is the same information requested on Form 710 and the other required forms
Must comply with all applicable requirements in the Guide and other Purchase Documents, including, but not limited to, Section 1.3
Must consult with its legal counsel to determine that the Servicer's use of fax and/or electronic copies of loss mitigation documents, complies with the requirements of the federal Electronic Signatures in Global and National Commerce Act (E-Sign) and/or the Uniform Electronic Transaction Act (UETA), as enacted in the jurisdiction in which the property securing each Mortgage is located, as applicable, and all other applicable laws
Must use security measures, processes and procedures that protect the confidentiality and privacy of the Borrowers' personal and financial information in accordance with all applicable laws, including, without limitation, the Gramm-Leach-Bliley Act and its implementing regulation
Must securely store and maintain all such Electronic Records for the same period of time as required by the Guide and other applicable Purchase Documents for paper forms and other loss mitigation document
Represents and warrants to Freddie Mac that the loss mitigation documents prepared, signed and submitted by a Borrower electronically are authentic and enforceable against the Borrower
Must provide Borrowers with fax numbers, e-mail addresses, web site addresses and/or other electronic destinations specifically dedicated to the secure receipt and, if applicable, storage of such Electronic Records

The Servicer must acknowledge and agree that Freddie Mac's above consent to the Servicer's engaging in electronic transactions with Borrowers is limited to electronic transactions and communications between the Servicer and Borrowers in connection with the preparation, execution and submission of loss mitigation documents. The Servicer must continue to provide loss mitigation documents and information to Freddie Mac in the manner required by the Guide and other Purchase Documents. The Servicer may not permit Borrowers to submit any loss mitigation documents directly to Freddie Mac electronically without Freddie Mac's express written consent.

Servicers must obtain a Borrower's express consent in accordance with E-Sign before permitting a Borrower to use Electronic Records and Electronic Signatures in connection with the execution and/or delivery of any loss mitigation documents, communications or other servicing documents.

In addition, Servicers must continue to provide and accept all loss mitigation documents on paper for Borrowers who choose not to use Electronic Records and Electronic Signatures. Under no circumstances may a Borrower be required to use Electronic Records and Electronic Signatures.

The announcement may viewed at the following link in AllRegs: http://www.allregs.com/ao/main.aspx?did2=0057e46f-6ef0-497d-ad45-29e8b37a56d6

Form 710, Uniform Borrower Assistance Form may be viewed at the following link in AllRegs:
http://www.allregs.com/ao/main.aspx?did2=a6c586de6aa84889b85da76202c8140f

HUD Issues Revisions to Mortgagee Approval Process

2011-10-03T09:41:00.000-04:00

by Anna DeSimone
President & Founder

September 23, 2011 HUD issued Mortgagee Letter 2011-34 to announce changes to the requirements for FHA lender approval and operations. These changes are effective immediately and supersede specific sections of HUD Handbooks 4060.1 REV-2 and 4155.2. The Letter applies to all FHA approved lenders and Applicants for lender approval.

Modified lender approval requirements include Identifying Officers, Identifying Owners, Office Facilities, and Conversion of FHA Lender Approval Type. Modified lender operational requirements include Prohibited Branch Arrangement, Single Family Loan Origination Lending Area, Business Changes Subsequent to Approval, Doing Business As (DBA) Names, Office Changes, and Ownership Changes.

Below is the AllRegs link to the Mortgagee Letter:
http://www.allregs.com/ao/main.aspx?did2=b0abfa80790740a1a4d034a6118562d7

Lender Approval Requirements

Applicants must list all Corporate Officers on Form HUD 92001-A and must provide a credit report and resume for each individual listed. Applicants must also list the appropriate owners for their business form. All office and home facilities must comply with state licensing requirements; however HUD is no longer regulating branch offices facilities.

Applicants are no longer required to submit evidence of acceptable home office facilities; however the Department will verify compliance through any on-site visits. Lenders that wish to change their FHA approval type must re-apply and pay a new $1,000 application fee.

Please refer to Section 6.16 of Handbook 4155.2:
http://www.allregs.com/ao/main.aspx?did2=0bca738ff1814c558e6a6f5c1be9acda

Lender Operational Requirements

Approved mortgagees must pay all operational expenses directly and may not engage in "net branching" arrangements. The single family origination lending area or a lender's Area Approved for Business (AAFB) has been expanded to include all HUD field office jurisdictions. Mortgagees must remain compliant to maintain approval. Therefore, mortgagees must now notify HUD within 10 business days if the mortgagee (or any affiliate thereof) has been suspended, convicted, is under governmental review, or is in violation of the Secure and Fair Enforcement (SAFE) Act or any state law.

The deadline for mortgagees to report any sanctions, exclusions, fines or penalties has been amended to 10 business days. Further, lenders must register all of their DBAs. The FHA Connection now allows up to 6 registered DBAs for each branch. Lenders must submit any additional DBA names and supporting documentation to the HUD address provided. FHA lenders must also report any changes to Corporate Officer identities and ownership to FHA.

Please refer to Section 2.19, A-B of Handbook 4155.2:
http://www.allregs.com/ao/main.aspx?did2=c8c043db3cd34bee9c45ead2a68863b5

Handbook Requirements Being Modified or Superseded

The chart below reflects specific sections of HUD Handbook 4060.1, Rev 2, "FHA Title II Mortgagee Approval Handbook," and Handbook 4155.2 "Lenders Guide to Single Family Mortgage Insurance Process" being modified or superseded by Mortgagee Letter 2011-34.

*Type of Requirement*	*Subject*	*Handbook Section*
*Type of Requirement*	*Subject*	4060.1	4155.2
Lender Approval Requirements	Identifying Officers	2-9.B
	Identifying Owners	3-3
	Office Facilities	2-11 & 3-2.A.9
	Conversion of FHA Lender Approval Type	6-16
Lender Operational Requirements	Prohibited Branch Arrangement	2-14.B
	Single Family Loan Origination Lending Area	2-19 A&B and 5.8C	12.E.2
	Business Changes Subsequent to Approval	6.1 & 6.26
	Doing Business As (DBA) Names	6-9
	Officer Changes	6-11
	Ownership Changes	6-13

Ownership Changes

The handbook was amended to require FHA approved lenders to report all ownership changes, including new owners and changes in ownership interests, in accordance with the ownership requirements for their business form as detailed in lender approval requirements section of this mortgagee letter. The Mortgagee Letter revises the requirements for obtaining, maintaining, and utilizing an entity's FHA lender approval. The FHA Resource Center is available to answer any related questions at 1-800-CALL-FHA. HUD's Notification Address for FHA Approved Mortgagees has been provided:

HUD's Notification Address for FHA Approved Mortgagees

U.S. Department of Housing and Urban Development
Office of Lender Activities and Program Compliance
Attn: Director, Lender Approval and Recertification Division
451 7th Street, SW Room B-133/P3214
Washington, DC 20410

FHFA & FHFA-OIG Privacy Act Implementation: An Overview of the Interim Final Regulation

2011-09-01T14:11:00.002-04:00

by Margaret Wright, Esq.
Associate Counsel
margaret@bankersadvisory.com

The Federal Housing Finance Agency (FHFA) has issued an interim final regulation implementing changes to its Privacy Act policies and procedures under which an individual may make a request for information contained in a FHFA or FHFA Office of Inspector General (FHFA-OIG) system of records. Under the Privacy Act, the FHFA is required to publish regulations describing its Privacy Act policies and procedures.

In 2009, when the FHFA issued their original final regulation on the Privacy Act, the FHFA-OIG was not yet in existence. In 2010, the FHFA-OIG was established to provide evaluation and review of FHFA's programs relating to FHFA's supervision and regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The current interim final regulation has been issued to amend FHFA's previous Privacy Act regulation to include policies and procedures as applicable to the more recently established FHFA-OIG.

Per the Federal Register notice: "The changes... primarily cover how the FHFA-OIG will implement the Privacy Act and make clarifying and general updates to the existing regulation, but do not fundamentally change the regulation's nature or scope." (76 FR 51869)

Privacy Act Compliance

The Interim Final Regulation will revise 12 CFR Part 1204, Privacy Act Implementation. The purpose of the regulation is to:

Implement the Privacy Act as required for Federal agencies which collect and maintain private information about individuals;
Establish rules applicable to FHFA and FHFA-OIG's systems of records and procedures for requesting information or amendment;
Inform potential requestors of the automatic processing of a request for record access; and
Inform potential requestors that the only information and services provided by the FHFA or FHFA-OIG under this section are those as entitled to under the Privacy Act.

Privacy Act Request Procedure

Sections 1204.3 through 1204.7 explain the procedures to be followed when a valid request for records or information is made by an individual under the Privacy Act. The information requested must be contained in the FHFA or FHFA-OIG's system of records which is "a group of records... from which information is retrieved by the name of an individual or by... other identifying particular assigned to the individual." (76 FR 51872)

A valid request can only be made on the requestor's own behalf, on behalf of another as their legal guardian or on behalf of another with their written consent authorizing the requestor to do so. The requestor's identity must be verified. The request must be made in writing and must describe the record requested with specific details to allow the FHFA or FHFA-OIG to reasonably locate the applicable information.

Basic information to include on a record request is:

Time period of the record;
Name of the system of records in which requested information is kept;and
The date, title, author, recipient or subject matter of the record.

A request may also be made to amend or correct a FHFA or FHFA-OIG record. The procedures for requesting an amendment or correction are the same as a request for information; however the request must also describe the amendment or correction and include information as to why the record is not correct or why amendment is needed. Additional documentation may be submitted along with the request to support the need for the requested change.

Privacy Act Response Procedure

Using the information provided in the record request, the FHFA or FHFA-OIG will search the applicable system of records to locate the requested record or to determine if the record is not available. The FHFA or FHFA-OIG will generally respond within 20 days of receipt of a valid record request, or in the case of an amendment or correction request, within 10 days after receipt. The regulation allows for the response time periods to be extended if additional time is needed under certain circumstances, including obtaining records which are not stored locally.

Once the FHFA or FHFA-OIG has completed the applicable review and record search, the written response will contain:

Determination to grant or deny the request and the supporting reasons;
The amount of the fee charged, if any, as per section 1204.6;
If access is granted, the record will be made available; and
If amendment or correction is granted, the description of the changes will be included and notification of the right of the requestor to obtain a copy of the record.

An adverse determination may also be issued in which the record requested will not be made available. An adverse determination occurs when:

The requested record is withheld in whole or in part;
The amendment or correction request is denied in whole or in part;
Request to provide an accounting of disclosures is declined;
The requested record does not exist or cannot be located; or
The record requested is not subject to the Privacy Act.

In the written adverse determination response, the FHFA or FHFA-OIG must also identify the person responsible for the adverse determination, state that the adverse determination is not a final action of the FHFA or FHFA-OIG and notify the requestor that they may appeal the determination.

Section 1204-5 outlines the appeal procedure and the FHFA or FHFA-OIG required response. Appeals must be made in writing by the requestor within 30 days of the date of the adverse determination notice. The appeal must clearly identify the adverse determination which is being contested. Once a complete appeal is received, the FHFA or FHFA-OIG will generally respond within 30 days. The FHFA or FHFA-OIG response will include a determination of whether the appeal is granted or denied and the supporting reasons for the decision. If the appeal is granted, the response will be same as a granted request as outlined above. If the appeal is denied, the response will advise the requestor of the right to file a Statement of Disagreement within 30 days of the denial. The Statement of Disagreement will be placed in the system of records that contains the disputed record. If the disputed record is subsequently disclosed, the Statement of Disagreement will also be provided along with the record. (76 FR 51874)

Privacy Act Exemptions

Under the Privacy Act, the FHFA and the FHFA-OIG are authorized to exempt information or records from some Privacy Act requirements. Potential exemptions include records containing information compiled for the purpose of criminal law enforcement investigations or the purpose of "determining suitability, eligibility or qualifications for Federal civilian employment or Federal contracts" where "revealing the identity of a confidential source could impede future cooperation by sources, and could result in harassment or harm to such sources." (FR 76 51875). If an exemption has been claimed "the system of records notice will identify the exemption and the provisions of the Privacy Act from which the system is exempt." (76 FR 51874).

Employee Responsibility under the Privacy Act

Section 1204.10 outlines the responsibilities of a FHFA or FHFA-OIG employee under the Privacy Act. The employee shall:

Collect only relevant information about an individual from the individual directly;
Inform individuals from whom information, including social security numbers, is collected of:

The legal authority to collect the information and whether providing is voluntary or mandatory;
The principal purpose of the collection of the information;
The use the FHFA or FHFA-OIG will make of the information;
The effects, if any, on the individual of not providing the information.

Ensure that a system of records is not maintained without public notice and notify the appropriate officials of the existence or development of a system of records;
Maintain records with accuracy, relevance, timeliness and completeness to ensure fairness and to ensure that the record is accurate before release;
Maintain accounting where required;
Prevent unauthorized disclosure of records; and
Notify the appropriate official of any record that contains information that the Privacy Act does not permit the FHFA or FHFA-OIG to maintain. (76 FR 51875)

Section 1204.8 requires the FHFA and FHFA-OIG "establish administrative and physical controls to prevent unauthorized access to their systems of records, unauthorized or inadvertent disclosure of records and physical damage of destruction of records." (76 FR 51875)

Interim Final Regulation Effective Date and Comment Period

The Privacy Act Implementation Interim Final Regulation is effective as of August 19, 2011. Comments on the regulation will be accepted by the FHFA until October 18, 2011.

The FHFA list system of records may be viewed here:
http://www.fhfa.gov/webfiles/21682/List%20of%20Government%20Wide%20System%20of%20Records%20Notices%20July%202011.pdf

FTC Publishes Final Rule on Mortgage Advertising: Prohibited Representations under Mortgage Acts & Practices

2011-08-29T11:48:00.017-04:00

by Margaret Wright, Esq.
Associate Counsel
margaret@bankersadvisory.com

On July 22, 2011 the Federal Trade Commission (FTC) published the Mortgage Acts and Practices - Advertising Final Rule "relating to unfair or deceptive acts and practices that may occur with regard to mortgage advertising". 76 FR 43826.

The Mortgage Acts and Practices- Advertising Rule (MAP Rule) amends Title 16, Code of Regulations by the addition of Part 321. The MAP Rule applies to mortgage lenders, brokers, servicers and others who engage in mortgage advertising such as real estate agents or advertising agencies. The Rule does not apply to banks, savings and loan institutions, federal credit unions and other entities that are excluded from the FTC's jurisdiction. Previously, mortgage lenders have been subject to advertising regulation through other regulations including the Truth in Lending Act (TILA), the Home Ownership and Equity Protection Act (HOEPA) and state specific requirements.

The MAP Rule "prohibits any material misrepresentation, whether made expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product." 76 FR 43833. The Rule adopts the FTC's standing definition of a deceptive act as occurring "if there is a material representation, omission or practice that is likely to mislead consumers acting reasonably under the circumstances, where the information is material if it is likely to affect a consumer's choice of, or conduct regarding a product." 76 FR 43826.

Section 321.3 of the MAP Rule outlines a list of 19 areas in which mortgage advertising misrepresentations have been prevalent and in which false or deceptive claims would result in Rule violation. This listing is not meant to be all encompassing but meant to instead "provide clarity and guidance" in determining a deceptive misrepresentation under the Rule. 76 FR 43833. The list includes misrepresentations regarding loan terms, fees and costs, the consumer's potential for savings or approval and additional services or affiliated providers.

MAP Rule examples arising under the Loan Terms category include misrepresentations regarding:

The interest charged for a mortgage credit product
This section explains that interest misrepresentations include the total amount owed each month, be it included in the payments, loan amount or total amount due, well as the interest owed each month that is notincluded in the payments, but instead is added to the total amount due. (321.3(a))

The APR, simple annual rate, period rate or any other rate, including payment rate
In the Discussion of the Final Rule, the FTC indicated that there has been an increase in deceptive rate claims and included an example of claims which had arisen where originators understated the true rate by more than 100 percent. (321.3(b))

Any pre-payment penalty
This section includes misrepresentations concerning not only the existence of a pre-payment penalty but also the nature, amount or terms. (321.3(f))

The variability of interest, payments or other terms
Under this section use of word "fixed" will not be allowed when the interest, payments or other terms are actually variable or will only stay unchanged for a limited amount of time. (321.3(g))

The type of mortgage credit product offered
This section gives the example of a misleading claim that the product offered is fully amortizing when it is not. (321.3(i))

The potential for default
Consumers must be made aware that the potential for default includes not only mortgage nonpayment default, but also potential default for nonpayment of taxes or insurance, failure to maintain the property or default as a result of not meeting other required obligations. (321.3(l))

The right to reside in the subject dwelling
The right to reside in the home arises as an issue when the product is a reverse mortgage and there are misrepresentations as to how long and under what conditions a consumer will be able to live in the home. (321.3(p))

Examples of deceptive claims relating to Fees and Costs under the MAP Rule include misrepresentations about:

The existence, nature or amount of fees or costs associated with any mortgage credit product
A statement cannot be made that there will be no fees charged, when in fact the fees and costs will be incorporated in the loan amount or total amount due from the consumer. The fees charged include any fees collected over the life of the loan, not just at origination. (321.3(c))

The taxes or insurance associated with a mortgage credit product
The terms, amounts and payments of taxes or insurance requirements may not be misrepresented. Specifically, the requirements for tax and insurance payments to be included consumer's monthly mortgage payments and the extent to which the tax and insurance payment will be included in the loan amount or total amount due from the consumer. (321.3(e))

The consumer's ability to obtain any mortgage product or term
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any product or term. (321.3(q))

The consumer's ability to refinance or modification of any mortgage product or term
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any refinancing or modification. (321.3(r))

Deceptive claims as to Payments and Consumer Savings under the MAP Rule include misrepresentations regarding:

Comparison between rates or payments
This section includes false and misleading comparisons using a rate or payment that will not be available for the full term of the loan and also any deceptive claims that consumers will save money by accepting a credit offer. (321.3(h))

The amount of the obligation or existence, nature, or amount of cash or credit the consumer would receive from the loan
The examples provided for this section include false claims that the consumer will receive an amount of cash by obtaining HELOC or receive a credit through a purchase money loan. (321.3(j))

The existence, number, amount of timing of any minimum or required payments
In the case of reverse mortgage where there is no monthly mortgage payment but there are taxes and insurance payments required, it may not be advertised as having no payments without clear clarification. (321.3(k))

The effectiveness of product in helping consumers resolve problems paying debts
This section includes false or misleading claims that a product can reduce, eliminate or restructure a debt or any other obligation. (321.3(m))

Misrepresentations regarding Additional Products or Services offered and Affiliated Services, optional or otherwise, include:

The terms associated with additional products or features sold along with the mortgage credit product
This section includes false claims regarding credit insurance, credit disability insurance, car loans, or other additional optional features. (321.3(d))

The association between the mortgage credit product or provider and any other person or program
Misrepresentations under this section include false claims that the provider is or is affiliated with any organizational or government program, benefit or entity. Also included are misrepresentations by using logos, forms or symbols that resemble those used by other entities, organizations or programs which the product is not or for which the provider is not affiliated. The Final Rule Discussion clarifies that government logos may be used as required or allowed, including advertising FHA programs if they are offered. (321.3(n))

The source of commercial communications
This section includes false claims that the communication with the consumer is made by or on behalf of the consumer's current mortgage lender or servicer. (321.3(o))

The availability, nature, or substance of counseling services or any other expert advice offered to the consumer
A deceptive claim regarding the qualifications of those providing services under this section is not allowed. However, this section does not prohibit truthful, non-deceptive references to valid professional designations. (321.3(s))

The prohibited acts and practices as described above, arise from numerous FTC enforcement actions and trends that have emerged in advertising practices found to be misleading to consumers.

In ensuring MAP Rule compliance, it should be noted that only false or misleading advertising under the 19 above examples are prohibited. The rule does not prohibit advertising using these 19 items in advertising as long they are not used deceptively or falsely. For example, if a mortgage lender offers a certain desirable loan program, they may advertise as such. If a mortgage lender chooses to use a disclaimer to clarify an advertisement claim, it must shown as clearly and conspicuously as the claim itself.

The FTC's Final MAP Rule may be viewed at:

http://ftc.gov/os/fedreg/2011/07/110719mortgagead-finalrule.pdf

The MAP Rule will be effective as of August 19, 2011.

OCC Interim Final Rule republishing OTS Regulations: Highlights of Provisions related to Savings Associations' Mortgage Lending Activities

2011-08-23T16:13:00.000-04:00

By Marissa Aquila Blundell, Esq.
Vice President & Senior Counsel
marissa@bankersadvisory.com

On August 9, 2011, the Federal Register published the Office of the Comptroller of the Currency (OCC) interim final rule republishing certain Office of Thrift Supervision (OTS) regulations. This rule is one in a series of interim final rules being issued on the heels of the July 21, 2011 transfer date marking several significant transitions of power pursuant to the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). One such transition was the transfer of responsibility for the ongoing examination, supervision, and regulation of federal savings associations from the OTS (which will be abolished 90 days from the July 21, 2011 transfer date) to the OCC, thus necessitating this rulemaking.

Although Dodd Frank transferred OTS rulemaking authority for all savings associations (federal and state) to the OCC, the FDIC retains certain rulemaking authority with respect to state savings associations and a separate FDIC republication of OTS rules is also expected. Where the FDIC lacks independent rulemaking authority for state savings associations, the FDIC will enforce applicable OCC regulations as necessary. Therefore some, but not all, of the OCC's republished OTS regulations contained in this interim final rule will apply to state savings associations.

In addition, the OCC has chosen not to republish certain OTS consumer-related rules including, for example, rules issued pursuant to the SAFE Act, Privacy, and certain sections of the FCRA. Although the OCC possesses the authority to enforce such rules for federal savings associations and national banks with less than $10 billion in total assets, Dodd Frank transferred rule-writing authority for those rules to the Consumer Financial Protection Bureau (CFPB); therefore, the CFPB rules will supersede the corresponding former OTS regulations.

Industry comments regarding this proposed interim rule may be submitted until October 11, 2011. Below are highlights of the OCC republication of the OTS regulations which specifically relate to savings associations' mortgage lending activities.

Nondiscrimination Requirements in Lending and Other Services, Applications, and Advertising

Savings associations may not deny a loan or other service, discourage or refuse to allow, receive, or consider any application, request or inquiry on the basis of: age or location of the dwelling, race, color, religion, sex, handicap, familial status, marital status, age, national origin of the prospective borrower. A savings association shall inform every inquirer of his or her right to file a written application and to receive a copy of the association's underwriting standards.
Association advertising may not imply or suggest a policy of discrimination or exclusion and must contain the required equal housing lender logo. Use of the Equal Housing Lender Poster is also required.
Associations must file a Home Mortgage Disclosure Act Loan Application Register with the OCC and must enter the reason for denial with respect to all loan denials.

The OCC nondiscrimination regulations bar arbitrary refusals to consider loan applications on prohibited bases and prohibit discrimination in fixing the amount, interest rate, duration, application procedures, collection or enforcement procedures, or other terms or conditions of housing-related loans. In furtherance of its nondiscrimination goals, the OCC provides supplementary guidelines to aid the development and implementation of nondiscriminatory lending policies which address: loan underwriting standards, discriminatory practices on the basis of sex or marital status, discrimination on the basis of language, income of husbands and wives, supplementary income, applicant prior histories, income level or racial composition of area, age and location factors, and marketing practices.

Real Estate Lending Standards

Associations must also adopt and maintain written policies establishing limits and standards for extensions of credit secured by liens on or interests in real estate. Policies must establish loan portfolio diversification standards, prudent underwriting standards, loan administration procedures, and documentation, approval and reporting requirements to monitor compliance with the association's policies.

The Interagency Guidelines for Real Estate Lending Policies are incorporated in this rule and an association's establishment of real estate lending standards should reflect consideration of the following as set forth in the guidelines:

Underwriting standards such as: capacity of the borrower, value of mortgaged property, borrower overall creditworthiness, equity invested, secondary repayment source and additional collateral;
Levels of acceptable risk, based on maximum loan amounts, maturities, and loan to value limits; and
Excludable transactions, such as loans guaranteed or insured by the US government or its agencies as well as exceptions to general lending policies.

Fair Credit Reporting - Identity Theft Red Flags

Associations must establish and maintain a plan to identify, detect and respond to Red Flags. These identity theft prevention programs must be evaluated and updated periodically and must reflect consideration of the Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation.

Flood Disaster Protection Act

Associations are not permitted to make, increase, extend, or renew any loan secured by a building or mobile home that is located in a special flood hazard area in which flood insurance is available under the National Flood Insurance Act, unless the security is covered by flood insurance for the term of the loan.
Lenders must provide borrowers whose security is located in a special flood hazard area, and servicers of such loans, with a written notice which includes: a FEMA warning that the building or mobile home is or will be located in a special flood hazard area; a description of the flood insurance purchase requirement; and statements regarding the availability of flood insurance and federal disaster relief assistance. This notice must be provided to the borrower within a reasonable time before the completion of the transaction and to the servicer as promptly as practicable, but no later than, the association provides similar notices to the servicer concerning hazard insurance and taxes.

Federal Preemption

In accordance with the provisions of Dodd Frank holding that the Home Owner's Loan Act does not "occupy the field" in any area of state law, the OCC removed OTS regulation language which incorporated "occupation of the field" statements regarding federal preemption. In this rule, the OCC has also incorporated the Dodd Frank requirement that federal savings associations and national banks be subject to the same federal preemption standards. The preemption standards applicable to national banks were set forth in an earlier OCC final rule which was published in the Federal Register on July 21, 2011.

The August 9, 2011 OCC interim final rule also republished OTS regulations applicable to: examination and hearing procedures; association incorporation, organization, conversion, mergers, dissolution; fiduciary powers; deposits; insurance sales, federal stock associations; capital requirements; recordkeeping requirements for securities transactions; and safety and soundness guidelines, which were not addressed in this article. The entire interim rule may be viewed here: http://www.occ.treas.gov/news-issuances/bulletins/2011/bulletin-2011-33a.pdf

Freddie Mac Updates its Credit Underwriting Guidelines

2011-08-19T09:52:00.005-04:00

by Aisling Brady
Executive Vice President
abrady@bankersadvisory.com

Freddie Mac Bulletin 2011-15 dated August 16, 2011 announces a number of changes in Mortgage Eligibility and Credit Underwriting guidelines.

Second Homes and Investment Properties

The Seller/Servicer Guide on Second Home Mortgages (Section 22.22) and Investment Property (Section 22.22.1) have been updated to not allow the borrower to have any affiliation with or relation to the builder, developer or the property seller for mortgages for newly constructed homes that are purchase transactions. These changes are in immediate effect.

Second home mortgages must meet the following special underwriting requirements:

Each borrower individually and all borrowers collectively must not own and/or be obligated on more than four 1- to 4-unit financed properties, including the subject property. Ownership of commercial or multifamily (five or more units) real estate is not included in this limitation.
Rental income from the borrower's second home or 1-unit primary residence may not be considered as stable monthly income in the credit qualification analysis.
The housing expenses related to a borrower's current primary residence must be used in computing the borrower's monthly housing expense-to-income ratio.
The monthly housing expense on the second home must be considered in calculating the borrower's monthly debt payment-to-income ratio.
The borrower must have a) reserves equal to two monthly payments of principal, interest, taxes and insurance (PITI) for the mortgaged premises, and b) reserves equal to two monthly payments of PITI for each other financed second home and 1- to 4-unit investment property in which the borrower has an ownership interest or on which the borrower is obligated.

Investment property mortgages must meet the following special underwriting requirements:

The expenses related to the borrower's current primary residence must be used in calculating the borrower's monthly housing expense-to-income ratio.
Each borrower individually and all borrowers collectively must not own and/or be obligated on more than four 1- to 4-unit financed properties, including the subject property. Ownership of commercial or multifamily (five or more units) real estate is not included in this limitation.
Borrower funds must not include gifts from a related person or gifts or grants from an Agency as described in Section 26.2.
Regardless of whether rental income from the mortgaged premises is used in qualifying, the borrower must have: a) reserves equal to six monthly payments of principal, interest, taxes and insurance (PITI) for the mortgaged premises that could be used to supplement payments during vacancies and make regular and emergency repairs to the subject property as necessary, and b) reserves equal to two monthly payments of PITI for each other financed second home and 1- to 4-unit investment property in which the borrower has an ownership interest or on which the borrower is obligated.
The aggregate negative rental income from all rental properties must be treated as an obligation and considered in calculating the borrower's monthly debt payment-to-income ratio.
Whenever rental income is to be used in qualifying, the borrower must have rent loss insurance on the investment property for at least six months of gross monthly rent.
If rental income is not used for qualifying, the mortgaged premises PITI plus operating expenses must be used in calculating the monthly debt payment-to-income ratio.

Other Income Documentation

Streamlined Accept Documentation requirements (Sections 37.22) and Standard Documentation requirements (Sections 37.23) of the Seller/Servicer Guide have been updated. Previously, Freddie Mac addressed "income continuance." Effective immediately, all guidelines referring income continuance have been deleted.

Self-Employed Income

Section 37.13(b) Self Employed Income of the Seller/Servicer Guide has been updated to remove the existing option of obtaining a letter from an accountant to confirm that the use of business assets for funds to close will not have a detrimental impact on the business. This change is in effect for mortgages with delivery dates on or after 12/1/2011.
When business assets are used for down payment and closing costs, financing costs, pre-paids/escrows and reserves, the assets must be verified in accordance with Freddie Mac's documentation requirements and must be related to the business that the borrower owns that is documented in the mortgage file.

The borrower's withdrawal of assets from a sole proprietorship, a partnership or a corporation may have a negative impact on the business' ability to continue operating, therefore the impact of withdrawal must be considered in the lender's analysis of the borrower's self-employed income.

As part of the analysis, the lender must document a cash flow analysis for the borrower's business using the individual and/or business tax returns, as applicable. The lender may perform the required analysis using any format that enables the lender to determine that the withdrawal of the funds for the down payment and closing costs, financing costs, pre-paids/escrows and reserves will not have a detrimental effect on the business. The mortgage file must contain the lender's written cash flow analysis and conclusions.

Owner-Occupancy of a Primary Residence

Section 22.16 of the Seller/Servicer Guide has been updated to remove the statement "to the best of the Seller's knowledge and belief" relating to whether the borrower is occupying the mortgaged premises as a primary residence. This change goes into effect for mortgages with delivery dates on or after 12/1/2011.

A mortgage will not qualify to be an owner-occupied property mortgage unless the borrower is an individual or individuals, and at least one of the borrowers is, as of the delivery date, occupying all or part of the mortgaged premises as a primary residence.

For manually underwritten mortgages and A-minus mortgages, when the LTV ratio is greater than 90 percent, each borrower whose income or financial strength was used for qualification purposes must, as of the delivery date, occupy all or part of the mortgaged premises as a primary residence. When the LTV ratio is equal to or less than 90 percent, a non-occupying borrower is permitted, but the occupant borrower must be able to qualify for the mortgage in accordance with Sections 37.15 and 37.16. Freddie Mac requires that the occupant borrower make a down payment in accordance with Section 26.7.

For Accept mortgages, a non-occupying borrower is permitted provided the occupant borrower makes a down payment in accordance with Section 26.7. Freddie Mac does not require a specific room/person ratio for the mortgaged premises.

Freddie Mac Relief Refinance Mortgages - Open Access

Section B24.2 of the Seller/Servicer Guide has been updated to allow Freddie Mac-owned mortgages with a pool insurance credit enhancement to be refinancing as Freddie Mac Relief Refinance mortgages - Open Access. This change is in effect for LP submissions on or after 9/1/2011. Mortgages being refinanced as Relief Refinance Mortgage - Open Access must:

Have a Freddie Mac settlement date on or before May 31, 2009
Be a first lien, conventional mortgage currently owned by Freddie Mac, in whole or in part, or securitized by Freddie Mac
Be seasoned for at least three months (that is, the Note date of the mortgage being refinanced must be at least three months prior to the Note date of the Relief Refinance Mortgage - Open Access)
Have a mortgage payment history that indicates the mortgage has not been 30 or more days delinquent in the most recent 12 months or, if the mortgage is seasoned for less than 12 months, since the mortgage Note date
Mortgages being refinanced as a Relief Refinance Mortgage are ineligible if the mortgage being refinanced was a re-structured mortgage or if the mortgage being refinanced was sold to Freddie Mac with recourse, indemnification or another negotiated credit enhancement.

Freddie Mac Updates its Quality Control Requirements

2011-08-17T09:58:00.014-04:00

by Anna DeSimone, President

Freddie Mac has updated Chapters 46 and 48 of the Seller/Servicer Guide regarding pre- and post-closing quality control. The changes take effect for loans closed on or after December 1, 2011. Information regarding the QC changes were announced in the August 16, 2011 Bulletin 2011-15.

Pre-Closing Quality Control Requirements

Freddie Mac has added a new requirement for pre-closing quality control reviews. While they have not prescribed specific requirements for pre-closing QC steps, they have created a "best practices and guidance" in a new Section called Pre-closing Quality Control Reviews Section 48.8.

The pre-closing quality control program must include a process to perform quality control reviews on a sampling of mortgages prior to closing. This will provide lenders with the opportunity to identify and address deficiencies prior to loan closing. The goal of an effective pre-closing review process is to monitor origination policies, ensure the accuracy of the mortgage data and prevent the closing of mortgages with deficiencies such as fraud, inaccurate data and insufficient documentation. The pre-closing quality control process should operate independently of the mortgage origination and underwriting departments when operationally possible. The best practices published by Freddie Mac are as follows.

Procedures

The pre-closing review process should include procedures for:

Sample selection and timing that permits reviews to be completed prior to closing
Reporting deficiencies and taking appropriate corrective measures
Documenting the resolution of defects
Canceling or postponing settlement when the pre-closing review reveals deficiencies or when the review cannot be completed prior to the scheduled settlement

Sample selection

The sampling process should include mortgages that are representative of the full scope of the lender's product line and production process. Lenders must regularly assess its sampling methodology to ensure that its pre-closing quality control process is effective. Additionally, lenders should target samples, as needed, in order to:

Review the work originated by a new branch office, employee or third-party originator
Validate that a new product or offering is being originated in accordance with the lender's policies and procedures
Evaluate the work of a particular employee or mortgage transaction participant when there is a reason to suspect fraud

Validation and re-verification

An effective pre-closing quality control review process should include validation or re-verification of:

Data entered into Loan Prospector
Social Security number provided by each borrower
Income documentation and calculation
Employment
Assets required to close or meet reserves requirements
Appraisal report or property valuation data
Adequate mortgage insurance coverage
Whether additional credit was granted and considered in qualifying when the Borrower's credit report reveals inquiries within the previous 120-day period

Post-Closing Quality Control

Effective with loans closed on or after December 1, 2011, Freddie Mac has made changes to its requirements for post-closing quality control reviews. Key changes are explained:

Sample Selection

The post-closing quality control sample must, at a minimum, consist of three sample types: random, targeted and discretionary.

Random -- Mortgages in the random sample are randomly selected from the population so that every mortgage has an equal chance of selection. Loan Prospector mortgages must make up a representative portion of the lender's quality control sample. The QC sample requirements can reflect any of the following populations:

10% of the total annual production (or)
10% of the total secondary market production (or)
10% of the total Freddie Mac mortgage production

Any mortgages excluded from the quality control sample selection process are not eligible for sale to Freddie Mac. QC must be scheduled so that every mortgage within the selected population has a chance of being selected for review within 90 days of the Note Date. Lenders must assign quality control personnel the authority to conduct additional reviews at their discretion and warrant that over the course of each 12-month period, the selected samples are representative of the full scope of the lender's product line and production process within the selected population.

The full scope of a lender's product line and origination process includes all of the following: mortgages from all product lines; mortgages from all States of operation; mortgages from each third party involved in the origination process and mortgages with high-risk characteristics (for example, high loan-to-value (LTV) ratios, adjustable-rate Mortgages, 3- to 4-unit properties, Manufactured Homes, cash-out refinance Mortgages, Investment Property Mortgages and Caution Mortgages).

A Freddie Mac Seller with a total annual production volume in excess of 5,000 home mortgages may substitute a statistically based sampling methodology that is of sufficient size to ensure a confidence level of 95% and a margin of error not to exceed 2% on an annual basis based on the defect rates for mortgages recently reviewed by the lender's quality control.

Targeted -- Each month, the lender must select all mortgages sold to Freddie Mac that become 60 days or more past due in the first six months following the Note Date. These mortgages must be carefully evaluated to determine the presence of any fraud or other deficiency.

Discretionary -- Mortgages in a discretionary sample are selected on a non-random basis from a specific population. Discretionary samples must be selected to evaluate the work of a particular employee or mortgage transaction participant when there is a reason to suspect fraud. Discretionary samples should also be selected as needed in order to review the work of a new branch office, employee or third-party originator, validate that a new product or offering is being originated in accordance with the policies and procedures, or to comply with a request from Freddie Mac to review loans in a specific population.

Quality Control Re-verifications

Effective with loans closed on or before December 1, 2011, lenders must make certain re-verifications on Loan Prospector® and Non-Loan Prospector mortgages selected for post-closing quality control review. The purposes of the re-verification process are to evaluate the validity and quality of the information used in the original underwriting decision and to protect Freddie Mac Sellers against fraud and misrepresentation. Lenders should begin re-verifying the information listed in this section as soon as possible after the sample selection to facilitate the mortgage file review. Re-verifications may be in written or verbal form. All re-verification documentation must be retained in the mortgage file.

Verifications of employment, income and sources of funds

For post-closing quality control reviews, lenders must re-verify all employment, income and sources of funds used in the original underwriting process and based on the minimum documentation required at the time of origination. Copies of the original verifications should be submitted to the issuers with a request that they confirm the accuracy of the documentation. Any verbal re-verifications of employment, income and source of funds must be documented in writing. The written documentation must:

Identify the name of the quality control reviewer who made the contact
Identify the name of the business (employer, bank, etc.)
Identify the name and title of the individual who provided the verification (employer contact, gift donor, etc.)
Show the date(s) of the contact
Confirm that the information in the original verification was accurate or identify any inaccuracy
Identify the phone number for the individual contacted. The phone number must be obtained from an acceptable third-party source.
Identify the name of third-party source used to obtain the phone number (phone book, internet, 411 information services, etc.)

Lenders must obtain the Internal Revenue Service (IRS) income information using Form 4506-T (or an alternate form acceptable to the IRS that collects comparable information) for each mortgage selected for quality control review. The IRS form does not need to be resubmitted to the IRS if a response was received during the origination process.

Borrower's Social Security number

For mortgages included in post-closing quality control samples, the lender must validate the Social Security number provided by each Borrower.

Credit reports

For Loan Prospector Mortgages, the lender is not required to obtain a new credit report. Lenders must verify that the identifying information for any Borrower (name, current and previous address and Social Security number) is true, complete and accurate and that it was properly input into Loan Prospector on or before the Note Date. Any credit information obtained from sources other than Loan Prospector must be reviewed.

For Loan Prospector Accept Mortgages and A-minus Mortgages, lenders are not required to review the Loan Prospector-provided credit reports to determine that the credit report was properly underwritten, or that it is in compliance with credit underwriting guidelines, except as noted: for Accept and A-minus Mortgages, the lender must verify that the Loan Prospector-provided credit reports are for the correct Borrower; for A-minus Mortgages, the lender must review the Loan Prospector-provided credit reports to determine compliance with Sections C33.3 and 37.11 of the Guide.

For one out of every 10 Non-Loan Prospector mortgages selected for post-closing quality control review, lenders must obtain either a new Residential Mortgage Credit Report or a three-repository merged in-file credit report. For the remaining Non-Loan Prospector Mortgages in the Lender's post-closing quality control sample, the Lender must obtain new in-file credit reports containing information from one or more of the national repositories. The new credit report should be ordered from a source other than the original reporting agency. The new credit report must be compared with the credit report used when the mortgage was originated.

For Manually Underwritten Mortgages, lenders must re-underwrite the credit and continue to review the mortgage file documents to determine that the mortgage was underwritten to Freddie Mac's requirements. For all mortgages selected for post-closing quality control review, the lender must determine whether additional credit was granted and considered in qualifying when the Borrower's credit report reveals inquiries within the previous 120-day period.

Verification of owner-occupancy

For all mortgages secured by Primary Residences that are selected for post-closing quality control review, lenders must verify that the Borrower is occupying the mortgaged premises as a Primary Residence.

Appraisal, inspection & the Property Inspection Alternative (PIA)

For post-closing quality control reviews, lenders must select from the following options:

Option 1 - Of every 10 mortgages selected for quality control review, one must be a field review and the remaining nine mortgages may be desk reviews

Option 2 - Of every 10 mortgages selected for a quality control review, three must be a field review. No desk reviews are necessary for the other seven mortgages

For purposes of performing field reviews, the following quality control requirements apply:

If the mortgage is secured by a 1-unit property and was originated using an appraisal report, the lender must obtain a field review with the results reported on a field review report, such as a Freddie Mac Form 1032, One-Unit Residential Appraisal Field Review Report.
If the mortgage is secured by a 2- to 4-unit property, the lender must obtain a field review with the results reported on a field review report, such as Freddie Mac Form 1072, Two- to Four-Unit Residential Appraisal Field Review Report.

The lender does not need to obtain a field review during the quality control review if one was obtained during the origination process. The field review must:

Be prepared by a qualified appraiser not affiliated with the original appraiser or appraisal firm
Either concur with, or provide a different opinion regarding, the value and marketability of the Mortgaged Premises as of the effective date of the original appraisal and not as of the date of the appraisal review
Be used to evaluate the quality of the original appraisal report
Include an exterior review of the subject property and comparables
Include a review of the accuracy of the factual data in the original appraisal report

When a desk review of the original appraisal or inspection report is required for the remaining mortgages in the lender's post-closing quality control sample, the reviewer need not be an appraiser. However, the reviewer must be familiar with the subject's market area and be qualified to address the appropriateness of the data presented in the report, address the appropriateness of the comparable sales (as applicable) and conclude that the appraiser's rationale for the final reconciliation of value was supported (as applicable).

Data Integrity Review

Effective with loans closed on or after December 1, 2011, a lender's post-closing quality control review procedures for all mortgages must include a review of the completeness and accuracy of the information obtained in the mortgage origination process. The data integrity review of the information must include a process for checking data fields entered in Loan Prospector® and ensuring that all data submitted is valid.

Lenders must perform a data integrity review on all mortgages sampled to ensure that the loan data is accurate and consistent. Source documentation to be reviewed includes:

Uniform Residential Loan Application(s) (Form 65)
Employment and income verification
Sales contracts
Tax return
Credit data
Asset documentation
Appraisal and inspection report
Mortgage delivery data, including the Key Number when applicable

If during a post-closing quality control review, a lender determines that the Key Number for a Loan Prospector Mortgage is missing or is inaccurate, the lender must notify Freddie Mac within 30 days of the finding.

Reporting Requirements

The quality control program must provide that all pre-closing and post-closing quality control activities be fully documented in writing and reviewed by management on a regular basis. The results of quality control reviews must be reported in writing to the lender's senior management within 90 days of selection of the mortgage files for review. The lender must thoroughly analyze findings affecting the acceptability or eligibility of mortgages and initiate any necessary corrective actions. Freddie Mac Sellers must notify Freddie Mac in writing within 30 days of determination that a post-closing quality control finding affects the eligibility of a mortgage sold to Freddie Mac, except that findings related to fraud or possible fraud must be reported in accordance with Section 7.3 of the Guide.

Retention of Quality Control Records

For at least three years from the date of the pre-closing or post-closing quality control review, lenders must retain all records of its quality control findings, along with documentation of any corrective action taken. These records must be made available to Freddie Mac upon request and must be included in the information provided to the new Servicer if a Transfer of Servicing occurs. Lenders should review the revised requirements in Chapter 48 to ensure that they have clear understanding of all changes.

http://www.allregs.com/ao/main.aspx?did2=e3135ef6a92b4ddeb84ed0a3a320a517

FTC Issues Final Rule on Mortgage Advertising

2011-08-08T16:19:00.000-04:00

by Margaret M. Wright, Esq.
Associate Counsel

On July 22, 2011 the Federal Trade Commission (FTC) published the Mortgage Acts and Practices- Advertising Final Rule "relating to unfair or deceptive acts and practices that may occur with regard to mortgage advertising." 76 FR 43826. The Mortgage Acts and Practices- Advertising Rule (MAP Rule) amends Title 16, Code of Regulations by the addition of Part 321.

The MAP Rule applies to mortgage lenders, brokers, servicers and others who engage in mortgage advertising such as real estate agents or advertising agencies.

The Rule does not apply to banks, savings and loan institutions, federal credit unions and other entities that are excluded from the FTC's jurisdiction. Previously, mortgage lenders have been subject to advertising regulation through other regulations including the Truth in Lending Act (TILA), the Home Ownership and Equity Protection Act (HOEPA) and state specific requirements.

The MAP Rule "prohibits any material misrepresentation, whether made expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product." 76 FR 43833. The Rule adopts the FTC's standing definition of a deceptive act as occurring "if there is a material representation, omission or practice that is likely to mislead consumers acting reasonably under the circumstances, where the information is material if it is likely to affect a consumer's choice of, or conduct regarding a product." 76 FR 43826.

Section 321.3 of the MAP Rule outlines a list of 19 areas in which mortgage advertising misrepresentations have been prevalent and in which false or deceptive claims would result in Rule violation. This listing is not meant to be all encompassing but meant to instead "provide clarity and guidance" in determining a deceptive misrepresentation under the Rule. 76 FR 43833. The list includes misrepresentations regarding loan terms, fees and costs, the consumer's potential for savings or approval and additional services or affiliated providers.

MAP Rule examples arising under the Loan Terms category include misrepresentations regarding:

The interest charged for a mortgage credit product
This section explains that interest misrepresentations include the total amount owed each month, be it included in the payments, loan amount or total amount due, as well as the interest owed each month that is not included in the payments, but instead is added to the total amount due. (321.3(a))

The APR, simple annual rate, period rate or any other rate, including payment rate
In the Discussion of the Final Rule, the FTC indicated that there has been an increase in deceptive rate claims and included an example of claims which had arisen where originators understated the true rate by more than 100 percent. (321.3(b))

Any pre-payment penalty
This section includes misrepresentations concerning not only the existence of a pre-payment penalty but also the nature, amount or terms. (321.3(f))

The variability of interest, payments or other terms
Under this section use of the word "fixed" will not be allowed when the interest, payments or other terms are actually variable or will only stay unchanged for a limited amount of time. (321.3(g))

The type of mortgage credit product offered
This section gives the example of a misleading claim that the product offered is fully amortizing when it is not. (321.3(i))

The potential for default
Consumers must be made aware that the potential for default includes not only mortgage nonpayment default, but also potential default for nonpayment of taxes or insurance, failure to maintain the property or default as a result of not meeting other required obligations. (321.3(l))

The right to reside in the subject dwelling
The right to reside in the home arises as an issue when the product is a reverse mortgage and there are misrepresentations as to how long and under what conditions a consumer will be able to live in the home. (321.3(p))

Examples of deceptive claims relating to Fees and Costs under the MAP Rule include misrepresentations about:

The existence, nature or amount of fees or costs associated with any mortgage credit product
A statement cannot be made that there will be no fees charged, when in fact the fees and costs will be incorporated in the loan amount or total amount due from the consumer. The fees charged include any fees collected over the life of the loan, not just at origination. (321.3(c))

The taxes or insurance associated with a mortgage credit product
The terms, amounts and payments of taxes or insurance requirements may not be misrepresented. Specifically, the requirements for tax and insurance payments to be included consumer's monthly mortgage payments and the extent to which the tax and insurance payment will be included in the loan amount or total amount due from the consumer. (321.3(e))

The consumer's ability to obtain any mortgage product or term
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any product or term. (321.3(q))

The consumer's ability to refinance or modification of any mortgage product or term
Misrepresentations under this section include claims that the consumer has been pre-approved or guaranteed for any refinancing or modification. (321.3(r))

Deceptive claims as to Payments and Consumer Savings under the MAP Rule include misrepresentations regarding:

Comparison between rates or payments
This section includes false and misleading comparisons using a rate or payment that will not be available for the full term of the loan and also any deceptive claims that consumers will save money by accepting a credit offer. (321.3(h))

The amount of the obligation or existence, nature, or amount of cash or credit the consumer would receive from the loan
The examples provided for this section include false claims that the consumer will receive an amount of cash by obtaining HELOC or receive a credit through a purchase money loan. (321.3(j))

The existence, number, amount of timing of any minimum or required payments
In the case of reverse mortgage where there is no monthly mortgage payment but there are taxes and insurance payments required, it may not be advertised as having no payments without clear clarification. (321.3(k))

The effectiveness of product in helping consumers resolve problems paying debts
This section includes false or misleading claims that a product can reduce, eliminate or restructure a debt or any other obligation. (321.3(m)

Misrepresentations regarding Additional Products or Services offered and Affiliated Services, optional or otherwise, include:

The terms associated with additional products or features sold along with the mortgage credit product
This section includes false claims regarding credit insurance, credit disability insurance, car loans, or other additional optional features. (321.3(d))

The association between the mortgage credit product or provider and any other person or program
Misrepresentations under this section include false claims that the provider is affiliated with any organizational or government program, benefit or entity. Also included are misrepresentations by using logos, forms or symbols that resemble those used by other entities, organizations or programs which the product is not or for which the provider is not affiliated. The Final Rule Discussion clarifies that government logos may be used as required or allowed, including advertising FHA programs if they are offered. (321.3(n))

The source of commercial communications
This section includes false claims that the communication with the consumer is made by or on behalf of the consumer's current mortgage lender or servicer. (321.3(o))

The availability, nature, or substance of counseling services or any other expert advice offered to the consumer
A deceptive claim regarding the qualifications of those providing services under this section is not allowed. However, this section does not prohibit truthful, non-deceptive references to valid professional designations. (321.3(s))

The prohibited acts and practices as described above, arise from numerous FTC enforcement actions and trends that have emerged in advertising practices found to be misleading to consumers.

In ensuring MAP Rule compliance, it should be noted that only false or misleading advertising under the 19 above examples are prohibited. The rule does not prohibit advertising using these 19 items in advertising as long they are not used deceptively or falsely. For example, if a mortgage lender offers a certain desirable loan program, they may advertise as such.   If a mortgage lender chooses to use a disclaimer to clarify an advertisement claim, it must shown as clearly and conspicuously as the claim itself.

The FTC's Final MAP Rule may be viewed at:

http://ftc.gov/os/fedreg/2011/07/110719mortgagead-finalrule.pdf

The MAP Rule will be effective as of August 19, 2011.

CFPB Rule for Alternative Mortgage Transaction Parity Act

2011-07-29T14:55:00.000-04:00

by Marissa Aquila Blundell, Esq.
Senior Counsel & Vice President
marissa@bankersadvisory.com

On July 22, 2011, the Consumer Financial Protection Bureau (CFPB) issued an interim final rule which preserved the ability of state housing creditors to make alternative mortgage transactions notwithstanding state law prohibitions. However, the rule incorporates amendments to the Alternative Mortgage Transaction Parity Act (AMTPA), required by the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) and implemented in Regulation D, which significantly change aspects of the alternative mortgage transaction landscape. These changes include a revised definition of an "alternative mortgage transaction" as well as the narrowing of the scope of AMTPA's preemption provisions.

In order to avoid a regulatory gap the provisions of this rule are effective immediately; however, compliance with the new provisions governing the origination of alternative mortgage transactions are only effective immediately for those state housing creditors relying on AMTPA's preemption provisions to make, purchase or enforce alternative mortgage transactions prohibited by state law. In addition, certain transactions such as fixed-rate loans with interest-only payments no longer fall within AMTPA's definition of "alternative mortgage transactions". Consequently, all state housing creditors making such transactions (beginning with applications received on or after July 22, 2011) must comply with any state law applicable to that transaction.

These CFPB rules are also applicable to federal housing creditors as authority with respect to alternative mortgage transactions transferred to the CFPB from the OCC (and OTS) and NCUA on July 21, 2011. For federal housing creditors, there is a one year grace period for compliance with this interim final rule, during which time compliance with previously applicable federal laws governing alternative mortgage transactions is deemed sufficient. The following are key points regarding the CFPB's interim final rule, industry comments may be submitted until September 22, 2011.

Alternative Mortgage Transaction Definition

For application received by creditors on or after July 22, 2011, a transaction qualifies as an "alternative mortgage transaction" if the loan, credit sale or account is: (1) secured by an interest in a residential structure containing one-four units, if it is used as a residence; (2) made primarily for personal, family, or housed purposes; and (3) a transaction in which the interest rate or finance charge may be adjusted or renegotiated.

Transactions such as adjustable rate mortgages, shared equity and shared appreciation mortgages, and fixed-rate balloon loans where the creditor has made a commitment to renew but reserved discretion to adjust the interest rate at renewal continue to be "alternative mortgage transactions" under the revised definition. HELOCs and subordinate lien mortgages which otherwise meet the revised definition also qualify as alternative mortgage transactions. However, the new alternative mortgage transaction definition excludes formerly covered transactions such as fixed-rate loans with an interest-only period; negative amortization; or graduated payment features, and fixed-rate balloon loans where the lender does not make a commitment to renew the loan. Therefore, state housing creditors must comply with any state laws applicable to such transactions.

Preemption Provisions

Even for loans which are considered alternative mortgage transactions under the revised definition, state housing creditor obligations have changed as a result of the narrowing of AMTPA preemption standards.
Under this new standard, state housing creditors may make, purchase, and enforce alternative mortgage transactions notwithstanding any provision of state law that restricts the ability of the housing creditor to adjust or renegotiate an interest rate or finance charge so long as the transaction is made in accordance with the CFPB's substantive requirements governing alternative mortgage transactions. The rule also clarifies that the state housing creditors may also change the amount of interest or finance charges included in regular periodic payments as necessary following such adjustment or renegotiation.

State laws which regulate mortgage transactions generally, including restricting prepayment penalties or late charges, but do not prohibit state housing creditors from adjusting or renegotiating rates or finance charges are no longer preempted by AMTPA and are now applicable to all transactions made, purchased and enforced by state housing creditors. Likewise, state housing creditors must now comply with state law disclosure requirements regardless of whether the law applies specifically to alternative mortgage transactions, since such requirements do not prohibit the state housing creditor from adjusting or renegotiating an interest rate or finance charge.

CFPB Rules Applicable to Alternative Mortgage Transactions

Following the transfer of authority regarding alternative mortgage transactions to the CFPB, both federal housing creditors and state housing creditors relying on AMTPA's provisions to make alternative mortgage transactions must satisfy the CFPB's substantive requirements governing the origination of such transactions.

Creditors making alternative mortgage transactions must adjust interest rates in accordance with either an index outside the creditor's control or a formula or schedule identifying the amount by which the interest rate or finance charge may increase and under what circumstances the change may be made. For open-end HELOCs, creditors must comply with the requirements set forth in Regulation Z section 226.5b.

In addition, for renewable balloon-payment mortgages creditors must provide a written commitment to renew the transaction at specified intervals throughout the amortization period. The rule does provide for limited instances in which a creditor would not be required to renew the transaction in spite of the existence of this written commitment. If an alternative mortgage transaction is also a high cost or higher priced mortgage loan, creditors must comply with Regulation Z sections 226.32 and 226.35.

Federal and state housing creditors must also comply with Regulation Z restrictions with respect to prepayment penalties. As discussed above, state laws governing prepayment penalties are no longer preempted under AMTPA, thus state housing creditors may need to comply with both Regulation Z and state law prepayment penalty provisions in certain circumstances.

Creditors may always decrease the interest rate or finance charge on an alternative mortgage transaction.

Timing for Compliance with CFPB's Requirements for Origination of Alternative Mortgage Transactions

Since this rule was effective prior to the opportunity for public comment, the CFPB provides federal housing creditors with a one-year grace period, until July 22, 2012, for compliance with its new standards for originating alternative mortgage transactions, so long as such transaction are made consistent with other applicable federal laws, including any requirements imposed by chartering agencies and TILA high-cost and higher-priced mortgage loan requirements. In addition, state housing creditors which do not rely on AMTPA preemption provisions for the authority to make, purchase or enforce alternative mortgage transactions may continue to make such loans in accordance with other applicable federal law and state law during the one year grace period for compliance.

State housing creditors making alternative mortgage transactions in reliance upon AMTPA's preemption authority however, must comply with the CFPB's standards for origination of alternative mortgage transactions immediately.

The CFPB's interim final rule is available in its entirety here:

http://www.gpo.gov/fdsys/pkg/FR-2011-07-22/pdf/2011-18676.pdf

Fair Credit Reporting Act Risk-Based Pricing Regulations Update

2011-07-13T14:22:00.000-04:00

by Marissa Aquila Blundell, Esq.
Senior Counsel & Vice President
marissa@bankersadvisory.com

On July 6, 2011, the Federal Reserve Board (FRB) and Federal Trade Commission (FTC) published a final rule adding requirements to the Fair Credit Reporting Act (FCRA) Risk-Based Pricing regulations which were effective January 1, 2011. This article highlights the new requirements implemented in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and reviews FCRA risk-based pricing notice (RBPN) requirements which continue to generate questions.

Pursuant to the FCRA, a consumer must receive a RBPN if a consumer report is used in connection with an application, grant, extension or other provision of credit and, based in whole or in part on the consumer report, the credit is granted, extended, or provided on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers.

The form, content, timing and manner of delivery of the required RBPN were addressed by the FRB and FTC in early 2010. That first rulemaking provided two alternative means by which mortgage lenders may determine when they are engaged in risk-based pricing. For the purposes of this discussion, let us assume the creditor engages in risk-based pricing, defined as the practice of setting the price and/or other terms of credit offered to a particular consumer to reflect the risk of nonpayment by that consumer.

As required by Dodd-Frank, the rule published last week requires creditors to include additional disclosures in the RBPN if a consumer's credit score is used in setting the material terms of credit.

Below are key points regarding the RBPN requirements generally, the newly required additional disclosures, and the exception to the general rule for loans secured by residential real property if a proper Credit Score Disclosure Exception Notice is provided to all applicants. Additional RBPN requirements for credit card issuers are not addressed in this article.

Risk Based Pricing Notice

When Notice is Required

The RBPN must be provided if a person uses a consumer report in connection with credit primarily for personal, family, or household purposes; and, based in whole or in part on the consumer report, provides credit to that consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers.

Determining which Consumers Must Receive the Notice

In order to determine which consumers have received credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers, and therefore must receive a RBPN, creditors may utilize one of the following methods:

Case by Case Basis
This method requires creditors to compare material terms offered to each consumer and the material terms offered to other consumers for a specific type of credit product.

Credit Score Proxy
This method requires creditors to determine the credit score that represents the point at which approximately 40% of the consumers to whom it grants, extends or provides credit have higher credit scores and approximately 60% of the consumers to whom it grants, extends or provides credit have lower credit scores, and provide a notice to each consumer to whom it grants, extends or provides credit whose credit score is lower than the cutoff.

Tiered Pricing
Creditors who place consumers within one of a discrete number of pricing tiers for a specific type of credit product, must provide a risk-based pricing notice to each consumer who is not placed within the top pricing tier or tiers (if four of fewer tiers, all who do not qualify for placement in top tier - i.e. lowest price); if five or more tiers, all who do not qualify for placement in top two tiers.

Content
Model forms are located in the appendix of the FCRA, the use of which provides a safe harbor for compliance. The RBPN must include eight specific statements providing information about consumer reports, the practice of risk-based pricing and certain consumer rights. For the complete list of requirements see Regulation Z, 12 CFR § 222.73(a) (1) (i-viii). Model Form H-1 contains this required information. Use of this model RBPN is appropriate when no consumer credit score is used to set the material terms of credit.

The most recent rulemaking requires the RBPN contain the following additional content if a consumer's credit score is used in setting the material terms of credit:

The credit score used by the person in making the credit decision;
The range of possible credit scores under the model used to generate the credit score;
All of the key factors that adversely affected the credit score, which shall not exceed four key factors, except that if one of the key factors is the number of enquiries made with respect to the consumer report, the number of key factors shall not exceed five;
The date on which the credit score was created;
The name of the consumer reporting agency or other person that provided the credit score;
A statement that a credit score is a number that takes into account information in a consumer report, and that a credit score can change over time to reflect changes in the consumer's credit history.

For the purposes of this rule, a "credit score" includes a propriety score developed by creditors if the score is used to predict the likelihood of certain credit behaviors, including default. Some propriety scores, such as insurance scores or scores used to predict the likelihood of false identity are excluded from the definition of "credit score."

A new Model Form H-6 has been provided, the use of which provides a safe harbor for compliance. This form contains the additional credit-score related disclosures which must now be included with the original RBPN content in cases where a consumer's credit score was used to set the material terms of credit.

When the RBPN is Not Required

The RBPN need not be provided if the consumer applies for specific material terms and is granted those material terms, or if the consumer is provided with an adverse action notice. In addition, an exception exists for loans secured by residential real property as described in the following section.

Credit Score Disclosure Exception Notice for Credit Secured by Residential Real Property

In lieu of providing the RBPN to some consumers as set forth above, for credit that is or will be secured by one to four units of residential real property, the creditor may opt to provide an exception notice to every consumer requesting a product for which the creditor uses risk-based pricing, even if the consumer would not otherwise receive a risk-based pricing notice. The notice contains supplemental information which must be provided on or with the Credit Score Disclosure already required by the Fair and Accurate Credit Transactions Act (FACTA).

When Consumers Must Receive the Exception Notice

The Credit Score Disclosure Exception Notice must be provided at the same time as the Credit Score information and Notice to Home Loan Applicant already required by the FACTA (as soon as reasonably practicable).

Content

The exception notice provided on or with the Credit Score Disclosure must include, among other items, the following information:

A consumer report is a record of the consumer's credit history;
A credit score is a number that takes into account information in a consumer report;
A credit score can affect whether the consumer can obtain credit and what the cost of that credit will be;
A distribution of credit scores among consumers who are scored under the same scoring model that is used to generate the consumer's credit score, in the form of a bar graph meeting certain specifications, or a clear statement informing the consumer how his or her credit score compares to the scores of other consumers;
A consumer is encouraged to verify the accuracy of the information contained in the consumer report;
Federal law gives the consumer the right to obtain copies of his or her consumer report directly from the consumer reporting agencies;
Contact information for the centralized source from which consumers may obtain their free annual consumer report; and
Web sites of the Federal Reserve Board and the Federal Trade Commission for more information about consumer reports.

Model Form H-3 contains the required language for the Credit Score Disclosure Exception notice. The most recent rulemaking did not change the timing or content of this notice.

The July 6, 2011 rule and new model forms are available at:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110706a1.pdf

The original RBPN rules and the model form Credit Score Disclosure Exception notice are available at:
http://edocket.access.gpo.gov/2010/pdf/E9-30678.pdf

Dodd Frank Issues Rule on Adverse Action Notices

2011-07-08T11:49:00.001-04:00

by Marissa Aquila Blundell, Esq.
Senior Counsel & Vice President
marissa@bankersadvisory.com

The Federal Reserve Board (FRB) and Federal Trade Commission (FTC) issued a final rule on July 6, 2011 requiring creditors to provide additional information in adverse action notices if a credit score is used in making the credit decision. The new rule is effective 30 days from its publication in the Federal Register, which is expected shortly.

The Fair Credit Reporting Act (FCRA) requires creditors taking adverse action based on a consumer report to provide an adverse action notice containing the name of the credit reporting agency, notice of the consumer's right to request a free credit report, and notice of the consumer's right to dispute the accuracy of the report's content. The Equal Credit Opportunity Act (ECOA) requires creditors to provide consumers with the specific reasons for a denial, or a notice informing a consumer of the adverse action taken and his or her right to request a statement of specific reasons from the creditor.

In accordance with the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank), the FRB and FTC rule revises model forms contained in Regulation B which satisfy adverse action notice requirements under both FCRA and ECOA. Specifically, Dodd Frank requires adverse action notices issued under FCRA to disclose the credit score used in taking the adverse action and additional information relating to the score.

Below are the key points regarding the new requirements for the Notice of Adverse Action:

If a credit score is used in taking any adverse action, in addition to the previously required disclosures, the creditor must also provide:

1- The numerical credit score used;

2 - The range of possible scores under the model used;

3 - Key factors that adversely affected the credit score;

4 - The date on which the score was created; and

5 - The name of the person or entity that provided the score.

Recognizing that creditors may use a consumer report but not an actual credit score in taking adverse action, the rule provides that if no credit score is used in making the decision, then no credit score or related information needs to be included in the Notice of Adverse Action.

The FCRA requirement to provide the credit score and additional information is independent from the ECOA requirement to provide specific reasons for the adverse action. Thus, where creditors opt to provide Borrowers with a Notice of Adverse Action taken and a notice of the Borrower's right to request specific reasons for the denial, the credit score and related information must also be included. It is not permissible to wait until a Borrower exercises his or her right to request specific reasons for the credit denial to provide the credit score used, if any, and additional information.

The rule specifies that providing the credit score and additional information, specifically the key factors adversely affecting the credit score, does not satisfy the requirement to provide specific reasons for the adverse action under ECOA. Although the key factors adversely affecting a credit score and the specific reasons for the adverse action may certainly be related, the FRB believes that disclosure of both the key factors and specific reasons are necessary. Despite the existence of a particular credit score adversely affected by the key factors disclosed, an adverse action may be based on reasons unrelated to the score, such as the consumer's income, employment or residency.

For the purposes of this rule, a "credit score" includes a propriety score developed by creditors if the score is used to predict the likelihood of certain credit behaviors, including default. Some propriety scores, such as insurance scores or scores used to predict the likelihood of false identity are excluded from the definition of "credit score."

The provision of a Credit Score Disclosure Exception notice in lieu of a Risk Based Pricing Notice does not satisfy the FCRA requirement to provide the additional information related to the credit score in an Adverse Action Notice.

The final rule, which includes the complete model forms, is available at:
http://www.federalreserve.gov/newsevents/press/bcreg/20110706a.htm

Combating Mortgage Fraud in the Trenches

2011-06-27T10:18:00.000-04:00

Proposed Suspicious Activity Report Requirements for Non-bank Residential Mortgage Lenders and Originators

by Margaret Wright, Esq.
Associate Counsel
margaret@bankersadvisory.com

Proposed Regulation

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) is in the process of establishing the requirement for Suspicious Activity Report (SAR) filings for non-bank residential mortgage lenders and originators.Currently under the Bank Secrecy Act (BSA), only banks and financial institutions are required to file SARs.

In December 2010, FinCEN published a Notice of Proposed Rulemaking in the Federal Register with the intent to extend the SAR requirement to include non-bank residential mortgage lenders and originators. In the past, the Mortgage Bankers Association (MBA) has worked to this end in the development of a Suspicious Mortgage Activity Report, or SMARt Form, for non-bank mortgage lenders and other mortgage professionals not currently covered under the BSA's financial institution SAR filing requirement.

Now however, FinCEN is seeking to bring the reporting requirement to the non-bank mortgage lenders and originators through the existing BSA SAR filing programs and once again the MBA has been providing assistance in the ultimate shaping of the final rule to best accommodate mortgage professionals.

The inclusion of non-bank residential mortgage lenders and originators in the SAR requirement has arisen from review of FinCEN's suspected mortgage fraud reports which have indicated that many of the SAR filings concerning mortgage related fraud were initiated by non-bank mortgage lenders and originators.

(http://www.fincen.gov/news_room/nr/html/20090715.html)

The notice of proposed rulemaking in the Federal Register explains "[r]esidential mortgage lenders and originators (e.g., independent mortgage loan companies and mortgage brokers) are primary providers of mortgage finance--in most cases dealing directly with the consumer--and are in a unique position to assess and identify money laundering risks and fraud while directly assisting consumers with their financial needs and protecting them from the abuses of financial crime." (75 CFR 76677)

Proposed Applicability

The proposed rule incorporated many of the same guidelines as the current SAR filing requirements for other financial institutions, however much of the BSA anti-money laundering provisions have not been included. The streamlining of the requirement is meant to be less burdensome to mortgage lending professionals and allow for customization specific to the mortgage lending industry.

The proposed rule is set to apply to loan or finance companies, limited at this time to residential mortgage lenders and originators. Under the proposed rule, a residential mortgage lender is defined as "[t]he person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement." A residential mortgage originator is defined as a person who "takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain." (75 CFR 76677)

Under the current definition, a SAR filing is required when: "A loan or finance company ... knows, suspects, or has reason to suspect that the transaction: (i) Involves funds derived from illegal activity or is intended or conducted to hide of disguise funds or assets derived from illegal activity; (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business of apparent lawful purpose; or (iv) involves the use of the loan or finance company to facilitate criminal activity." (75 CFR 76677)

The rulemaking process concerning the mortgage lending SAR requirement is ongoing. Once the rule has been finalized, FinCEN will provide further guidance and instructions concerning applicability and compliance with the resulting new regulations.

Proposed Form

Although the initial comment period on FinCEN's December notice of proposed rulemaking has ended, the Mortgage Bankers Association has continued to follow up their submitted comments by most recently developing a model SAR form. In accordance with the February 2011 comments submitted by the MBA, the proposed SAR form has been drafted to specifically reflect suspicious activity that has arisen in a mortgage lending situation. The form is intended to be used within FinCEN's online SAR filing system as eventually SAR filings will be exclusively submitted electronically. The MBA intends to submit their model form to FinCEN staff for consideration.

The MBA proposed electronic SAR filing form consists of six sections, including two sections specifically tailored to mortgage lenders and originators. Using the existing financial institution SAR form as the base, the MBA has re-ordered a few sections for cohesion and two mortgage lending specific sections.

New additions to proposed SAR form for Mortgage Lenders

The Loan Information section (Part VI) is a new section added specifically for this proposal. When filling out this section, lenders and originators will provide basic loan information including the loan number, property address, loan type and purpose, property type and occupancy information. Also included in this section will be the contact information for the real estate agent or broker, appraisal company, mortgage broker/loan officer and their NMLS identifier information, the title company used and their settlement agent, and the names of the buyers and sellers.

The Suspicious Activity Information section (Part V) included a new drop down menu for submitters to choose mortgage lending specific fraud categories and a summary characterization of the suspicious activity. The 32 suggested categories of fraud include: Advance Fee Schemes, Buy and Bail, Distressed Homeowner, Double Sold Note, Equity Skimming, various False Documentation, Foreclosure Rescue Scheme and Strawbuyer among others. Part V also included the section to enter the loan amount and the amount of the current loss as well as the potential loss arising from the fraudulent activity.

View the MBA's original February comments submitted to FinCEN in response to the Notice of Proposed Rulemaking here:

http://www.mortgagebankers.org/files/Advocacy/2011/MBACommentLetteronSARsforNonbankProposedRule.pdf

Proposed Results

The information contained in SAR filings by financial institutions has been instrumental in identifying trends and increases in mortgage fraud and in assisting in both regulatory and criminal investigations. The proposed rule outlined the benefit of a mortgage lender and originator SAR requirement as "potentially expand[ing] the kinds of activities being reported to FinCEN's Bank Secrecy Act database, thereby giving [FinCEN's] regulatory and law enforcement partners a more complete picture... of mortgage-related financial crimes." (75 CFR 76677)

View the most recent FinCEN fraud trend reports:

http://www.fincen.gov/news_room/rp/files/MLF_Update_3rd_Qtly_10_FINAL.pdf

View the most recent Mortgage Asset Resource Institute (MARI) fraud report:

http://img.en25.com/Web/LexisNexis/MortgageFraudReport-13thEdition.pdf

New Rules for USDA Rural Housing Loans Take Effect August 1, 2011

2011-06-21T10:21:00.000-04:00

by Anna DeSimone, President
anna@bankersadvisory.com

On May 31, 2011, The Department of Agriculture Rural Housing Service issued a final rule to implement two changes in the regulations for the Rural Housing Service (RHS) Section 502, Single Family Housing Guaranteed Loan Program (SFHGLP). The first change eliminates a lender's published Department of Veterans Affairs (VA) rate for first mortgage loans with no discount points as an option for a maximum interest rate on loans. The second change allows the Secretary to seek indemnification from the originating lender if a loss is paid under certain circumstances. The rule is published in the Federal Register (7 CFR Part 1980) and takes effect August 1, 2011.

In the spring of 2009, the Inspector General completed an audit of the controls over lending activities in the SFHGLP. The audit evaluated the systems and processes to ensure that lenders a) submit accurate and legitimate borrower eligibility data and b) set interest rates on loans within Agency guidelines. The audit report made a number of recommendations for what the SFHGLP can do to streamline operations, prevent fraud, and improve efficiency in its mission. As a result of the audit a proposed rule was published in the Federal Register on May 19, 2010.

Under the existing SFHGLP regulation, lenders may set an interest rate for a loan that does not exceed the higher of the Lender's published rate for VA first mortgage loans with no discount points or the current Fannie Mae posted yield for 90-day delivery plus six-tenths of 1 percent for 30-year fixed rate conventional loans, rounded up to the nearest one-quarter of 1 percent. The effect of the August 1st change will create a more uniform, simpler standard for interest rates under the SFHGLP, whereby lenders will always use the current Fannie Mae rate as the rate ceiling.

To access the Federal Register Update (76 FR 31217) on All Regs, click on the following link: http://www.allregs.com/ao/main.aspx?did2=46cdd473b53a4b8e8229d094929e345e

Lender Participation in Guaranteed Rural Housing Loans

Summarized below are the eligibility guidelines for lenders to participate in the USDA Rural Housing Program. These guidelines are published for lenders in the Rural Housing Service Policy Guide. The following information is comprised from Section §1980.309.

Qualification

The following Lenders are eligible to participate in the RHS guaranteed RH loan program upon presentation of evidence of said approval and execution of the RHS Lender Agreement.

Any state housing agency;
Any Lender approved by HUD as a supervised or non-supervised mortgagee for submission of one to four family housing applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities;
Any Lender approved as a supervised or non-supervised mortgagee for the VA;
Any Lender approved by Fannie Mae for participation in one to four family mortgage loans;
Any Lender approved by Freddie Mac for participation in one to four family mortgage loans;
An FCS institution with direct lending authority; and
Any Lender participating in other RHS, Rural Business- Cooperative Service, Rural Utilities Service, and/or Farm Service Agency guaranteed loan programs.

Lender Approval

Lenders meeting the requirements listed above must request a determination of eligibility in order to participate as an originating Lender in the program. Requests may be made to the state office serving the state jurisdiction or to the National office when multiple state jurisdictions are involved.

Lenders must provide the following information to RHS:

Evidence of approval, as appropriate, for the criteria under paragraph (a) of this section, which the Lender meets.
The Lender's Tax Identification Number.
The name of an official of the Lender who will serve as a contact for RHS regarding the Lender's guaranteed loans.
A list of names, titles, and responsibilities of the Lender's principal officers.
An outline of the Lender's internal loan criteria for issues of credit history and repayment ability and a copy of the Lender's quality control plan for monitoring production and servicing activities.
An executed certification regarding debarment, suspension, or other matters-primary covered transactions. The certification will be obtained using a form prescribed by RHS.

Lenders must agree to:

Obtain and keep itself informed of all program regulations and guidelines including all amendments and revisions of program requirements and policies.
Process and service RHS guaranteed loans in accordance with Agency regulations.
Permit RHS employees or its designated representatives to examine or audit all records and accounts related to any RHS loan guarantee.
Be responsible for the servicing of the loan, or if the loan is to be sold, sell only to an entity which meets the provisions of paragraph (a) of this section.
Use forms which have been approved by FHA, Fannie Mae, Freddie Mac, or, for FCS Lenders, use the appropriate FCS forms.
Maintain its approval if qualification as an RHS Lender was based on approval by HUD, VA, Fannie Mae, or Freddie Mac including maintaining the minimum allowable net capital, acceptable levels of liquidity, and any required fidelity bonding and/or mortgage servicing errors and omissions policies required by HUD, VA, Fannie Mae, or Freddie Mac, as appropriate.
Operate its facilities in a prudent and business-like manner.
Assure that its staff is well trained and experienced in loan origination and/or loan servicing functions, as necessary, to assure the capability of performing all of the necessary origination and servicing functions.

For additional qualifying information about the Rural Housing Service program and to view the policy guide in its entirety in AllRegs, click on the following link:

http://www.allregs.com/ao/main.aspx?did2=5e3a771e6994451d9bbd25c01ed8a74f

Freddie Mac Clarifies and Updates Underwriting Guidelines

2011-06-17T12:53:00.000-04:00

by Sarah Lagattolla
Director, Credit Risk
sarah@bankersadvisory.com

Freddie Mac issued Bulletin 2011-10 on May 25, 2011 updating selling requirements pertaining to mortgage and property eligibility and credit underwriting as well as selling and servicing requirements for mortgages registered with MERS.

Assets as a basis for mortgage qualification

Freddie Mac has updated their selling guide to allow for the use of eligible borrower assets as a source of income for qualifying. Eligible assets include retirement, lump-sum distributions and proceeds from the sale of a business. Chapters 37.13, 37.22 and 37.23 of the Freddie Mac Seller Servicer Guide have been updated to reflect the following:

Retirement assets

The retirement funds must be in an account recognized by the IRS (401k, IRA, etc.)
The borrower(s) must be the sole owner of the account
The account must be immediately accessible in its entirety
The account funds may not be subject to a penalty
The borrower's right to the funds must be fully vested

Lump-sum distribution of funds (not deposited to an eligible retirement asset)*

Funds must be derived from a retirement account recognized by the IRS (401k, IRS, etc.) and must be deposited in a non-retirement brokerage or depository account
A borrower must have been the recipient of the lump-sum distribution funds
Borrower(s) must be the sole owner(s) of the account holding the funds from the lump-sum distribution (individuals not obligated on the Mortgage may not have ownership in the account)
Proceeds from the lump-sum distribution must be immediately accessible in their entirety
Borrowers must sign IRS form 4506-T, provide most recent 3 months personal depository or brokerage account statements, employer distribution letter and/or check stubs to evidence receipt and type of lump-sum distribution and IRS 1099-R (if received)
Lump-sum distribution proceeds must not have been or current be subject to a penalty

*if the lump-sum distribution funds have been deposited to an eligible retirement asset, the requirements for retirement assets should be followed

Sale of borrower's business

Borrower(s) must be the sole owner(s) of the proceeds from the sale of the business that were deposited
Proceeds must be deposited into a non-retirement brokerage or depository account
Borrower(s) must be the sole owner(s) of the account holding the proceeds from the sale of the business (individuals not obligated on the Mortgage may not have ownership in the account)
Proceeds from the sale of the business must be immediately accessible in their entirety
Borrowers must sign IRS form 4506-T, provide most recent 3 months personal depository or brokerage account statements, fully executed closing documents evidencing final sale of business to evidence sale price and net proceeds, copy of contract for sale of business and most recent business tax return prior to sale of the business
The sale of the business must not have resulted in the following:

Retention of business assets and/or existing secured and unsecured
Ownership interest or seller held notes to the buyer of the business

How to calculate the monthly qualifying income from eligible assets

Borrowers may be qualified for the mortgage using 70% of the eligible asset balance divided by 360.

For example: Asset balance = $100,000 x 70% = $70,000 / 360 = $194.44/mo
Any funds that are to be used to complete the mortgage transaction (down payment, closing costs, prepaids/escrows, etc.) must be subtracted from the asset balance prior to calculating 70% of the balance.

For example: Asset balance = $100,000 however $20,000 will be used as down payment $100,000 - $20,000 = $80,000 x 70% = $56,000 / 360 = $155.56/mo

Restrictions and eligibility requirements

In order to use the eligible assets as a basis for mortgage qualification the borrowers must meet all of the following:

The mortgage is secured by a 1 unit primary residence or 2nd home. (2-4 unit and investment properties are not eligible)
The mortgage transaction must be either a purchase, no cash out refinance or Relief Refinance (cash out refinance transaction are not eligible)
The maximum LTV/TLTV/HTLTV is 70%

Payment of mortgage application fees with credit cards, cash advances and unsecured lines of credit

Chapter 26.6.4 of the Freddie Mac seller guide has been updated to reflect an increase in the maximum amount that can be charged/advanced from a credit card, cash advance or unsecured line of credit to pay for fees associated with the mortgage.   As of May 25th, borrowers may charge/advance the greater of 2% of the mortgage amount or $1500. The previous guideline limited charges/advances to 1% of the mortgage amount. The provision limiting the amount that may be charged/advance for appraisal and credit report fees has been deleted as well.

Earthquake insurance requirements for California condominium units

Freddie Mac requires earthquake insurance for a condominium unit where the condominium complex is located in a "high risk" zip code. The earthquake insurance requirement may also apply to units in condominium complexes in "moderate risk" zip codes based on the Risk Management Solutions (RMS) Earthquake Insurance Requirements Matrix. The Earthquake Insurance Requirements Matrix takes into consideration characteristics of a complex such as year built, construction class, parking type and number of stories in the determination of earthquake insurance requirements for a unit in a condominium complex in a "moderate risk" zip code. A lender may contact Freddie Mac at 1-800-FREDDIE and provide the zip code and required characteristic information to verify if earthquake insurance will be required. Freddie Mac will advise the seller of the requirements and send a written confirmation of the classification.   Copies of the RMS Earthquake Insurance Requirements Matrix and zip code list will no longer be provided to Sellers upon request.

Property description and analysis

Freddie Mac has made updates to Chapter 44 that become effective for mortgages with settlement dates on or after September 1, 2011. With the updates to Chapter 44, specifically 44.2 and 44.15, Freddie Mac is reminding Sellers that the adequacy of the subject property as collateral for the loan requires as much emphasis as the borrower's creditworthiness.    The updates to the Seller/Servicer Guide provide additional detail on Freddie Mac's requirements for review of the data contained in appraisal reports as well as clarify requirements for acceptability of residential properties and incomplete improvements. Some highlights of the updates to Chapter 44.2 include the requirement of the collateral to represent the highest and best use as improved or as proposed per plans and specs. With regards to incomplete improvements, clarification is provided to reflect the Seller or Servicer must control disbursements from accounts established for completion escrow as well as specifying completions inspections must be completed by appraisers on Form 442 and the report must be retained in the mortgage file.   It is noted that the requirements for incomplete improvements do not apply to incomplete energy conservation improvements.

Chapter 44.15 provides additional detail and clarification regarding the review of the data contained in the property description and analysis sections of the appraisal report. Specific sections updated with addition detail of required information include the Subject, Contract, Neighborhood, Site and Improvements sections. Some highlights of these changes and updates include placing the responsibility on the Seller to provide the appraiser with a complete contract for sale of the subject property regardless if the appraisal was ordered by the Seller or another lender. The Site section now requires that the appraisal report not only provides the zoning classification but also a description of the classification as well.   Chapter 44.15 addresses Freddie Mac's requirements for appraisal reports that are required to be completed using Uniform Appraisal Dataset (UAD) with respect the appraiser's responsibility for reporting the condition and quality of the property.

Manufactured home eligibility

Freddie Mac has added 2 additional eligibility requirements for manufacture homes.

If any portion of a 1 unit dwelling is a manufacture home, regardless of any structural modifications, the mortgage must meet the requirements of Chapter H33 (Manufactured Homes) and be delivered as a mortgage secured by a manufactured home
A mortgage secured by a manufactured home that was previously occupied or installed on a permanent foundation and later moved is ineligible for purchase by Freddie Mac

MERS requirements

The Seller/Servicer guide has been updated to address responsibilities relating to mortgages registered with MERS. (Chapters 4.14, 6.11, 16.8 and 22.13 have all be revised to reflect these changes)

A Servicer must promptly notify Freddie Mac upon any termination of its MERS membership, whether voluntary or involuntary. For each MERS-registered Mortgage being serviced for Freddie Mac and promptly upon such termination, the Servicer must prepare an assignment of the Mortgage from MERS to itself, have the assignment executed and, where required by law, record the executed assignment in the public land records.

A Seller/Servicer that chooses to register a Mortgage with MERS must use reasonable best efforts to register such Mortgage prior to delivery to Freddie Mac

A Servicer, upon the deactivation of a Mortgage from MERS, must prepare an assignment of the deactivated Mortgage from MERS to itself, have the assignment executed and, where required by law, record the executed assignment in the public land records

A Seller must warrant that MERS is the mortgagee of record (either by being named in the Security Instrument as nominee for the Seller, or by being named as the assignee in a recorded assignment of the Security Instrument), or where applicable, that MERS is not the mortgagee of record for purposes of iRegistration

A Seller must ensure that the MIN is delivered to Freddie Mac along with all Mortgage data and other information required by the Purchase Documents, and the MIN must be further indicated on the Security Instrument and related documents

A Seller/Servicer must provide its Document Custodian with sufficient information to enable a Transferor Servicer and Freddie Mac to determine whether a Mortgage that is included in a Subsequent Transfer of Servicing is registered with MERS at the time of the Transfer of Servicing

Sarah Lagattolla is Director of Credit Risk Services for Bankers Advisory. She is an FHA D.E. underwriter and a senior member of the Quality Control services division.

The New Consumer Financial Protection Bureau

2011-06-15T09:53:00.000-04:00

by Rachel Horman, Esq.
Assistant Vice President & Senior Counsel
rachel@bankersadvisory.com

The Consumer Financial Protection Act of 2010 (Title X of the Dodd-Frank Act) ("the Act") established the Bureau of Consumer Financial Protection. On July 21, the rulemaking powers for most consumer financial protection laws will be consolidated and transferred from the following agencies to the Bureau:

Board of Governors of the Federal Reserve
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
Office of Thrift Supervision
National Credit Union Administration
Federal Trade Commission
Department of Housing and Urban Development

On May 31, 2011, the Consumer Financial Protection Bureau (CFPB) released a proposed list of rules it will enforce beginning on July 21, 2011. This list is intended to be a convenient reference and does not impact the scope of the CFPB's enforcement authority or affect which parties are subject to its rules. Public comments regarding the proposed list must be received by June 30, 2011.

The following is the list of rules:

Federal Reserve Board:
- Equal Credit Opportunity Act (Regulation B)
- Home Mortgage Disclosure (Regulation C)
- Privacy of Consumer Financial Information (Regulation P)
- Fair Credit Reporting (Regulation V)
- Truth in Lending (Regulation Z)
Office of the Comptroller of the Currency:
- Adjustable Rate Mortgages
Office of Thrift Supervision:
- Adjustments to Home Loans
- Alternative Mortgage Transactions
National Credit Union Administration:
- Loans and lines of credit to members
Federal Trade Commission:
- Mortgage Assistance Relief Services
HUD:
- RESPA
- Investigations in Consumer Regulatory Programs
- Civil Money Penalties: Certain Prohibited Conduct

In addition, the CFPB recently released first drafts of a combined RESPA and TILA disclosure. The goal is to eliminate the often confusing and overlapping content of the current RESPA and TILA disclosures and create one streamlined consumer disclosure. The CFPB believes the combined disclosure will provide more relevant information for borrowers as well as reduce the regulatory and system costs incurred by lenders.

The Mortgage Bankers Association strongly supports the idea of the combined disclosure and requests Congress and other agencies suspend the current differing modifications to TILA and RESPA disclosures until the CFPB has finalized the new form, so as to minimize the costs incurred by lenders to comply.

The CFPB understands that costs incurred by lenders in complying with these new disclosures are ultimately passed on to borrowers and that any changes must take this into account. The proposed disclosure attempts to provide all the relevant information to the borrower regarding the particular mortgage loan on one easily understandable and explainable form. Key loan terms, cautions regarding the loan type and any changes that could occur, comparisons to other products, projected payments over the life of the loan, estimated closing costs, escrow and mortgage insurance information, as well as an explanation of the adjustable terms if applicable are all included on the sample forms. The forms also answer questions regarding future servicing of the loan as well as the borrower's right to a copy of the appraisal and the expiration date of the loan features and costs.

The CFPB invites consumers and industry professionals to vote on the two sample forms as well as give public comment in order to create a simplified and cost-effective disclosure that improves borrower comprehension of the loan product without significantly increasing lenders' implementation costs. The website to view the forms is: http://www.consumerfinance.gov/knowbeforeyouowe.

New Uniform Appraisal Dataset (UAD) Rules

2011-06-10T08:43:00.002-04:00

by Anna DeSimone, President
anna@bankersadvisory.com

Effective for residential property appraisals with an effective data (date of inspection) on or after September 1, 2011, appraisal reports must be completed in compliance with the Uniform Appraisal Dataset (UAD). The rule applies to all conventional mortgage loans sold to Fannie Mae or Freddie Mac.

The UAD is a component of the Uniform Mortgage Data Program, jointly established by Fannie Mae and Freddie Mac under the direction of their regulator, the Federal Housing Finance Agency to provide common requirements for appraisal and loan delivery data.

UAD defines all fields required for an appraisal submission for specific appraisal forms and standardizes definitions and responses for a key subset of fields. UAD was formulated to improve the quality and consistency of appraisal data on loans delivered to the Government Sponsored Enterprises.
UAD does not change the look of the existing appraisal forms, but some fields on the forms are being extended to include additional information. Appraisal software forms providers and licensed appraisers are expected to have their systems and procedures updated to incorporate the UAD prior to the implementation date.

Fannie Mae and Freddie Mac Uniform Appraisal Dataset Requirements

Fannie Mae and Freddie Mac have created the UAD Specification document to provide business and technical requirements for implementation of the UAD. The UAD includes all data elements required to complete the following appraisal report forms (collectively referred to as the "four UAD appraisal report forms"):

Uniform Residential Appraisal Report (Fannie Mae Form 1004)
Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073)
Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Fannie Mae Form 1075)
Exterior-Only Inspection Residential Appraisal Report (Fannie Mae Form 2055)

The UAD also standardizes the input values for certain elements (e.g. specific date and dollar amount formats) and standardizes the definitions for select key appraisal data elements (e.g. property condition and quality of construction) on the four UAD appraisal report forms.

The UAD is required for appraisals with effective dates on or after September 1, 2011 that are completed on the four UAD appraisal report forms. Only conventional mortgages sold to Fannie Mae that are accompanied by one of the four UAD appraisal report forms must meet this requirement.

Other appraisal report forms may be completed using the standards contained in the UAD Specification to the extent those standards are applicable to that particular form. In addition, although not required, the UAD may be used for appraisal reports with effective dates prior to September 1, 2011.

Uniform Appraisal Dataset and Uniform Collateral Data Portal

Effective for all conventional mortgage loans for which an appraisal report is required and with application dates on or after December 1, 2011 and delivery dates on or after March 19, 2012, the following appraisal report forms, including all exhibits, addenda, and photographs, must be submitted to UCDP before the delivery date of the mortgage loan to Fannie Mae. This includes the four UAD appraisal report forms and four additional forms:

Uniform Residential Report (Fannie Mae Form 1004)
Manufactured Home Appraisal Report (Fannie Mae Form 1004C)
Small Residential Income Property Appraisal Report (Fannie Mae Form 1025)
Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073)
Exterior-Only Inspection Report (Fannie Mae Form 2055)
Exterior-Only Inspection Individual Condominium Appraisal Report (Fannie Mae Form 1075)
Individual Cooperative Interest Appraisal Report (Fannie Mae Form 2090)
Exterior-Only Inspection Individual Cooperative Interest Appraisal Report (Fannie Mae Form 2095)

Freddie Mac Bulletin 2010-31: UAD and UCDP Requirements (12/16/10)

Freddie Mac issued Bulletin 2010-31: UAD and UCDP Requirements on 12/16/10. The bulletin reiterated the joint policy with Fannie Mae regarding the Uniform Appraisal Dataset and Uniform Collateral Data Portal Requirements. Key points to the bulletin are provided:

Uniform Appraisal Dataset

The UAD is required for appraisals that have effective dates on or after September 1, 2011 and are completed on the appraisal report forms listed below. Only conventional Mortgages sold to Freddie Mac must meet this requirement. The UAD includes all data points required to complete the following four appraisal report forms:

Uniform Residential Appraisal Report (Freddie Mac Form 70)
Individual Condominium Unit Appraisal Report (Freddie Mac Form 465)
Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Freddie Mac Form 466)
Exterior-Only Inspection Residential Appraisal Report (Freddie Mac Form 2055)

The GSEs have created the Uniform Appraisal Dataset Specification ("UAD Specification") to provide business and technical requirements for the implementation of the UAD. Other appraisal report forms may be completed using the standards contained in the UAD Specification to the extent those standards are applicable to that particular form. In addition, although not required, the UAD may be used for appraisals with effective dates prior to September 1, 2011.

The UAD Specification may be amended from time to time. The current version of the UAD Specification can be found on www.freddiemac.com.

Uniform Collateral Data Portal

For conventional Mortgages that require appraisal reports and have residential loan applications dated on or after December 1, 2011 and Delivery Dates on or after March 19, 2012, the appraisal report forms listed below, including all exhibits, addenda and photographs, must be submitted to the UCDP before the Delivery Date of the Mortgage. This includes the four appraisal report forms addressed by the UAD and two additional forms.

Uniform Residential Appraisal Report (Freddie Mac Form 70)
Manufactured Home Appraisal Report (Freddie Mac Form 70B)
Small Residential Income Property Appraisal Report (Freddie Mac Form 72)
Individual Condominium Unit Appraisal Report (Freddie Mac Form 465)
Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Freddie Mac Form 466)
Exterior-Only Inspection Residential Appraisal Report (Freddie Mac Form 2055)

Eligibility for Ginnie Mae Approval

2011-06-06T11:19:00.012-04:00

by Anna DeSimone, President
anna@bankersadvisory.com

On May 18, 2011, the Government National Mortgage Association (Ginnie Mae) updated Chapter 7, Application for Approval as A Ginnie Mae Issuer, in Ginnie Mae's Mortgage-Backed Securities Guide 5500.3, Rev. 1.    On the same date, Ginnie Mae revised Chapter 6 of the Handbook, Fees, which describes the fees the Issuer must pay under the MBS program.

New Ginnie Mae Issuer Application Form

This article summarizes the recent revisions to Ginnie Mae's eligibility requirements and application procedures.   Institutions that wish to apply to become a Ginnie Mae Issuer are required to use the new Form HUD-11701, "Application for Approval - Ginnie Mae Mortgage-Backed Securities Issuer."

Institutions seeking to become FHA lenders must use the new Form HUD-92001-A, "FHA Lender Approval Application." The previous version of Form HUD-11701 dated November 2008, which was a joint application form for applying for either Ginnie Mae or FHA approval, or both, will no longer be available for a dual application.    The two forms can be found on AllRegs: Agency Guidelines / Ginnie Mae / Memoranda / Memo 10-05: New Ginnie Mae Issuer Application Form (05/21/10) or by accessing the following link:
http://www.allregs.com/ao/main.aspx?did2=c07e077cea82431cb33e0e19163d95b0

Summarized below are the general requirements for application as a Ginnie Mae Issuer:

Background disclosures regarding any adverse incident for each person who serves on the company's board of directors or is an authorized signatory.
Board of Resolutions of Board of Directors, Certificate of Authorized Signatures; resumes of other named persons.
Annual financial statement for the last three fiscal years audited and certified by an Independent Auditor (IA) meeting the requirements of the Audit Guide.
Insurance certificates, fidelity bond, mortgagee E&O along with Ginnie Mae loss payee and other endorsements.
Written certification from an officer that the company has in place a written quality control program for the underwriting, origination, and servicing of loans in Ginnie Mae MBS pools and loan packages and for secondary marketing.
Most recent quality control audit, including the date of the audit, and must include a written statement of the action taken as a result of the findings.
A written statement of the dollar value of loans to officers, directors, or affiliates; or confirm in writing if there are no loans of this type.
A written statement of the dollar value of pledged assets; or confirm in writing there are no pledged assets.
A list of any affiliates that are already participating in the Ginnie Mae MBS Program as Issuers and their four-digit Ginnie Mae Issuer identification number. ; or confirm in writing there are no affiliates participating.
If any affiliate of the applicant is already participating in the Ginnie Mae MBS Program as an Issuer, a Cross-Default Agreement between the applicant and each such affiliate must be completed, stating the name and Ginnie Mae Issuer identification number of each affiliate that is a party to it.
A written statement of the name, address, telephone number, and contact person for each mortgage insurance company, warehouse lender, and investor with whom the applicant is currently doing business.
Payment to Ginnie Mae, via pay.gov, of $2,500. This payment represents the Issuer application fee and is for review and analysis. It is earned when paid and is non-refundable.
Before issuing securities under any Program, an Issuer must also submit to Ginnie Mae's PPA the following additional documents:

(a) For the Issuer's proposed central P&I custodial account, a Master Agreement for Servicer's Principal and Interest Custodial Account, form HUD 11709 (Appendix III-2), unless the Issuer proposes to use as its central P&I custodial account a P&I custodial account for which a valid form HUD 11709 is already on file.

(b) For the Issuer's proposed central P&I custodial account, an ACH Debit Authorization, form HUD 11709-A (Appendix I-6).

Applicants That Are Not Fannie Mae- or Freddie Mac-Approved

Institutions that are not approved by either Fannie Mae or Freddie Mac must submit the following additional documents:

1. A brief description of the applicant's history including operating and business plans.

2. A written statement of the volume of mortgage loan origination during the three years preceding the filing of the application, broken down by loan type (conventional, FHA, VA) for each of the following categories: single family residential, manufactured housing, and multifamily.

3.     A list of investors for whom the applicant is servicing loans, the number of loans being serviced for each investor, and the aggregate remaining principal balances of the loans. Subcontract servicing must be identified and broken out separately using the same format.
4.     A list of investors for whom the applicant has sold mortgages over the prior 12-month period.
5.     Resumes for at least three full-time officers and one additional full-time employee, all of whom will have the responsibilities of performing the obligations of the Ginnie Mae Issuer. One of the resumes must be for the officer responsible for mortgage servicing and securities administration. Another must be for the full-time officer in charge of day-to-day operations.

Other Eligibility Requirements and Agreements

Chapter 2 of the Guide, Eligibility Requirements: Approval as a Ginnie Mae Issuer, was updated on 11/1/11. Chapter 2 outlines the custodial, servicing and sub-servicing requirements of an approved Issuer. Section 2 includes links to the Appendices that are submitted along with Form 11701. These documents can be found on All Regs / Agency Guidelines / Ginnie Mae / Chapter 2 or using the following link:
http://www.allregs.com/ao/main.aspx?did2=52c21c8c0e3c4e6da353d359f080cbf3

Increase in Net Worth Requirements

Ginnie Mae has changed the financial requirements for institutions participating in the Single Family Program. The changes include an increase in the net worth requirement and new liquid asset and capital asset requirements. This information can be found on All Regs / Agency Guidelines / Ginnie Mae / Memo 10-17, New Financial Requirements, Single Family Issuers 10/22/10) or by accessing the following link:
http://www.allregs.com/ao/main.aspx?did2=6b34a6fa3e7c449eb859f1363b0cc043

Ginnie Mae is increasing the base net worth requirement for Single Family Program participants from the current $1 million base net worth requirement to $2.5 million. In addition, the formula for calculating the additional net worth required above the base net worth requirement is changing. Currently, additional net worth is calculated as 1% of Remaining Principal Balance (RPB) plus the amount of available commitment authority between $5 million and $20 million, plus .2% of RPB greater than $20 million. With this change, additional net worth will be calculated as .2% of the Issuer's RPB, plus the amount of available commitment authority.

Program	Current Net Worth Requirement		New Net Worth Requirements
	Base	Additional Net Worth	Base	Additional Net Worth
Single Family	$1,000,000	Add 1%, of RPB plus the amount of available commitment authority that is greater than $5 million and less than $20 million, Plus .2% of RPB plus the amount of available commitment authority that is greater than $20 million	$2,500,000	.2% of RPB plus the amount of available commitment authority

Effective immediately, institutions that are seeking Issuer approval will be required to meet the new minimum net worth requirements. Existing Issuers will have until October 1, 2011, to meet the new net worth requirements.

Liquid Asset Requirements

Ginnie Mae is also instituting a new liquid asset requirement. Ginnie Mae will require that Issuers eligible for its Single Family Program have liquid assets of 20 percent of Ginnie Mae's net worth requirement. The new liquid asset requirement will help to ensure funds are available when there is a need for cash to fund loan buyouts and/or to pay for potential indemnification requests from insuring agencies. Single Family Issuers will have until October 1, 2011, to meet the new liquid asset requirement.

Institution-Wide Capital Requirements

Ginnie Mae is adopting institution-wide capital requirements. The capital requirement provides better assurance that Issuers have sufficient capital to cover their financial risks on an institution wide basis. The capital requirements are as follows:

Banks and Thrifts Well Capitalized Under Federal Banking Regulations	Non Banks, Credit Unions & Subsidiaries
1. 5% of Tier 1 Capital/Total Assets 2. 6% of Tier 1 Capital/Risk Based Assets 3. 10% of Total Capital / Risk Based Assets	1. 6% of Total Equity / Total Assets

The new capital requirements will be effective on October 1, 2011, for all Single Family Issuers.

For background information about Ginnie Mae and information on how to become a Ginnie Mae Issuer: visit the following link: http://www.ginniemae.gov/issuers/how.asp?subTitle=Issuers#req

Fannie Mae Clarifies and Updates Underwriting Guidelines

2011-05-26T10:34:00.000-04:00

by Sarah Lagattolla
Director of Credit Risk
sarah@bankersadvisory.com

Fannie Mae Mae has just issued an update to the Selling Guide (SEL-2011-04) that affects underwriting of loans as follows:

Deferred Student Loans

While it has been Fannie Mae's policy to include payments for deferred student loans in the DTI, Fannie Mae has required verification of the payment amount. Effective immediately, if the payment is not documented in the file, Fannie Mae will allow lenders to use 2% of the balance as the qualifying payment.

Retirement Accounts

Fannie Mae is no longer requiring lenders to verify the terms of withdrawal from a retirement account in order to use the asset as reserves, however it appears lenders are still required to verify the conditions under which withdrawals may be made. If the retirement account does not allow for withdrawal for reasons other than termination, retirement (unless borrower is of retirement age) or death, then lenders may not use the account for reserves. Fannie Mae has not changed their policy regarding using only 60% of the vested balance for qualifying purposes to account for taxes and penalties of early withdrawal. Evidence of liquidation of the retirement account is not required unless the funds are needed for closing. This update is effective immediately and may be manually applied until the DU related message is updated on a future release.

Resubmission to DU after Closing

Fannie Mae has established new policies regarding how and if a loan can be resubmitted to DU after closing, these changes are effective immediately.

A Casefile ID may not be used to underwrite more than one loan with DU.
The initial submission of a loan to DU may not occur after the loan has closed.
Resubmission is allowed if there are changes in the attributes of the closed loan that exceed the tolerances permitted by DU and the loan has not yet been delivered to Fannie Mae
A new credit report may be obtained after closing for the purpose of resubmitting the Casefile to DU as long as it complies with the Fair Credit Reporting Act with regard to the purpose and nature of the inquiry. If the new credit report reflects different information than what is reflected on the final signed application, the lender must provide a new updated application (borrower signature is not required) along with the signed final application.
If the original Casefile ID cannot be accessed by the lender for resubmission, a new Casefile ID may be obtained provided that:

the above lender responsibilities are met, including the updating of the final loan application, if applicable
the loan has not been delivered to Fannie Mae
the loan has the same information (same borrowers and property) as had previously been underwritten through DU prior to closing using another loan Casefile, and the previous Casefile received an eligible recommendation
the lender retains the DU Underwriting Findings Report from the original loan Casefile ID in the loan file
the DU submission using the new loan Casefile occurs no more than 60 days after the Note date

Significant Derogatory Credit Events

The selling guide has been updated to clarify the policy regarding maximum LTV ratios for borrowers with a prior pre-foreclosures sale or deed-in-lieu of foreclosure. All reference to "maximum LTV" refers to LTV, CLTV and HCLTV ratios.

Non-applicant Debts

The DU findings will identify potential non-applicant debt. If these debts are included on the loan application, DU will include the debts in the DTI ratios. If the lender provides evidence that the debts do not belong to the borrower(s) they may be removed from the loan application. If the debts are removed from the loan application, DU will not include the debts in the DTI ratios upon resubmission.

This announcement also notifies lenders that the seller guide has been updated to incorporate Announcement SVC-2011-04 with regards to prohibition of certain mortgage insurance agreements that may adversely affect Fannie Mae Mae's interest in its mortgage loans.

MERS

Fannie Mae has also clarified with regards to MERS-registered loans that :

Document custodians must be able to identify MERS registered mortgages
Lenders must have controls to readily identify MERS registered mortgages
MERS cannot be named as the insured or loss payee on title or property insurance policies
By delivering the MIN, the lender warrants that the mortgage is properly registered in MERS and names the lender as the investor

Click on the following links to access the Fannie Mae Announcements in AllRegs:

SEL-2011-04
http://www.allregs.com/ao/main.aspx?did2=1af811fd0a5f48ad8a05593ba3e9ac96

SVC-2011-04
http://www.allregs.com/ao/main.aspx?did2=db5bee03365d449f981cef9e67fe4cde

Sarah Lagattolla is Director of Credit Risk Services for Bankers Advisory. She is an FHA D.E. underwriter and a senior member of the Quality Control services division.

Dodd Frank QRM - Proposed Alternative Definitions

2011-05-19T17:44:00.001-04:00

by Marissa Aquila Blundell
Senior Counsel & Vice President
marissa@bankersadvisory.com

The Dodd Frank Act prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith, verified determination that the consumer has a reasonable ability to repay the loan. This determination of a consumer's ability to repay must be based on the following factors: the consumer's current and expected income, and other financial resources excluding equity in the dwelling which secures the loan; employment status; payment of the loan based on a fully amortizing payment schedule and the fully-indexed rate; payment of any simultaneous liens; payment of applicable taxes, insurance and assessments; the consumer's current obligations; the consumer DTI ratio or residual income; and the consumer's credit history.

Dodd Frank also provides for a presumption of compliance with the ability-to-pay requirement for a "qualified mortgage." However, due to ambiguity with respect to whether or not this presumption of compliance was intended to serve as a safe harbor or rebuttable presumption, two alternative definitions of the term "qualified mortgage" have been proposed by the Federal Reserve Board. Below are key points regarding the rule's two alternative proposed definitions of the term "qualified mortgage". The comment period ends July 22, 2011 and final rules will be implemented by the new Consumer Financial Protection Bureau.

Qualified Mortgage Definition Providing Safe Harbor for Creditors

Pursuant to the first alternative definition, a creditor will be considered compliant with the Ability to Repay rule if a covered transaction is a "Qualified Mortgage" (QM).
QMs are defined as loans which provide for regular periodic payments that do not: result in an increase of the principal balance; allow the consumer to defer repayment of principal; or result in a balloon payment.
In addition, a QM may not have a loan term exceeding 30 years.
The total points and fees payable in connection with a QM may not exceed a tiered-based threshold. Two alternative tiered-based thresholds have been proposed.

Tiered-Based Threshold alternative 1:

For a Loan Amount of $75,000 or greater 3% of total loan amount
For a Loan Amount of $60,000 or greater and Less than $75,000 3.5% of total loan amount
For a Loan Amount of $40,000 or greater and Less than $60,000 4% of total loan amount
For a Loan Amount of $20,000 or greater and Less than $40,000 4.5% of total loan amount
Loan Amount of less than $20,000 5% of total loan amount

Tiered-Based Threshold alternative 2:

For a loan amount equal to or greater than $75,000: 3% of total loan amount
For a loan amount equal to or greater than $20,000 and less than $75,000 in accordance with the following formula:
Total loan amount - $20,000 = $Z
$ Z x.0036 basis points = Y basis points
500 basis points - Y basis points = X basis points
X basis points x.01 = % of total loan amount allowable points and fees
For a loan amount of less than $20,000: 5% of total loan amount
QMs must be underwritten using a period payment of principal and interest based on the maximum interest rate that may apply during the first 5 years after consummation, and those period payments would fully repay either the loan amount over the loan term or the outstanding principal balance as of the date the interest rate adjusts to the maximum rate. The creditor must also account for any mortgage-related obligations when underwriting the loan in accordance with this provision.
The creditor must also consider and verify the consumer's current or reasonably expected income or assets in connection with the making of the loan.

Qualified Mortgage Definition Providing Rebuttable Presumption of Compliance for Creditors

Under the second alternative definition of QM, a creditor will be presumed compliant with the Ability to Repay requirement if the loan transaction qualifies as a QM.
QMs are defined as loans which satisfy each requirement set forth in the proposed alternative definition above and, in addition, the creditor must consider additional factors.
The additional factors the creditor must consider include: the consumer's employment status, any simultaneous loans, the consumer's current debt obligations, and the consumer's credit history.
Even if the loan is a QM in accordance with this definition, the consumer may rebut the presumption of compliance with evidence that the loan did not comply with the general ability to repay requirements.

The two alternative proposed definitions also contain special provisions related to balloon payments which were not discussed in this article. The entire proposal is available on the FRB's website: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

HUD Clarifies and Updates Refinance Guidelines

2011-05-18T10:22:00.000-04:00

by Aisling Brady, Executive Vice President
abrady@bankersadvisory.com

Recently, HUD has issued Mortgagee Letters 2011-11 regarding refinance transactions. The purpose of the Mortgagee Letters was to clarify and update guidance to mortgagees regarding FHA refinances. The following rules apply to FHA Case Numbers assigned on and after April 18th, 2011:

All Refinances

If a borrower has re-occupied their investment property within the last 12 months prior to refinancing, the max LTV is 85%. The date of the 1003 must be used to determine the twelve month time period.
3-4 family purchase guidelines now apply to all refinances. The property must be self-sufficient where the monthly rent received for all units minus the FHA vacancy factor must cover the PITI. Borrower must have 3 months PITI in reserves.

Streamline Refinances

Net tangible benefit is now a 5% reduction in P&I and MIP. Taxes and insurance are no longer factored into the comparative measure.
Short / abbreviated version of the 1003 loan application is again okay for streamlines
Certification of employment and income are no longer required for streamlines
FHA's AUS, TOTAL system must not be used for streamlines. Also, the D.E. underwriter's CHUMS # must be used on the 92900LT and the 92900A (not ZFHA).
Mortgagees cannot use a property appraisal valuation to increase the insurable mortgage balance above the sum of the outstanding principal balance and new UFMIP. Mortgagees cannot add closing costs, pre-paids or items such as late fees into new loan balance.

Cash-Out Refinances

A Six (6) month payment history is required before borrowers are eligible for cash-out.

Clarification of Existing Guidance

Current status of the mortgage being refinanced:
Example: If the refinance closes in April 2011, the April payment may be included in the mortgage payoff amount. The March payment must have been paid on time during the month of March. It is permissible to include interest for 30 days (since interest is paid in arrears) plus interest to closing, not to exceed 60 days interest in payoff. The payoff statement must be in the file.
CLTV must include the maximum accessible credit limit and the entire lien must be subordinated.
Cash-Out - borrower must be current and with no lates in the past 12 months.

Streamline Refi

On the date of the FHA case #, at least 6 payments must have been made; at least 6 full months must have passed since the 1st payment was made, and at least 210 days have passed from the closing date of the mortgage being refinanced.
If required to close, assets must be documented but are not required to be shown on the application.

About the Author

Aisling joined Bankers Advisory in January of 2002 and oversees the company's pre- and post-funding quality control services. She is the primary developer of the firm's quality control software prog

rams and risk monitoring systems. For more information on the topic of Quality Control, FHA retail or wholesale requirements or Fannie Mae's Loan Quality Initiative, contact Aisling at abrady@bankersadvisory.com

Borrower Repayment Ability is on the Radar

2011-05-02T11:45:00.006-04:00

by Anna DeSimone, President

The Federal Reserve Board has proposed a Rule to implement a provision of the Dodd-Frank Act that prohibits lenders from originating mortgages without regard to the borrower's ability to repay the loan. Creditors must make a reasonable and good faith determination of that repayment ability, based on verified and documented evidence.

The Proposed Rule provides four options for complying with the "ability-to-repay" requirement. The first option has 8 underwriting factors that must be considered, such as reasonable expectation of income, employment status, qualifying ratios and credit history.

The second option allows a credit to refinance a "non-standard mortgage" into a "standard mortgage" in order to provide the borrower with a more stable loan program. This option is associated with streamlined refinances without credit qualifying guidelines.

The third option allows creditors to originate a "qualified mortgage." The Proposed Rule has two alternative definitions of a qualified mortgage as a mortgage which does not contain certain features such as negative amortization, interest only, balloon payments or loan terms exceeding 30 years. Other features include a 3% cap on the total points and fees, fully verified income and assets and loan underwriting approval is based on the fully indexed rate in five years, and other amortization factors. The second alternative provides a rebuttable presumption of compliance.

The fourth option pertains to small creditors in rural or underserved areas where mortgages may contain certain features such as balloon payments and other amortization features otherwise not permitted under the Rule.

Below is a matrix of anti-predatory laws as of 5/1/11 across the United States that include specific rules regarding borrower Ability to Pay.   If you don't see all 50 states in this email, please let me know and I will send you the complete matrix.

State Matrix of Anti-Predatory Lending Laws

BORROWER REPAYMENT ABILITY
State	All Loans	High-Cost Loans
AK	The state of Alaska has not enacted Anti-Predatory Lending Laws.	Alaska has not enacted provisions specifically tailored to high-cost/covered loans.
AL	The state of Alabama has not enacted any Anti-Predatory Lending Laws.	Alabama has not enacted provisions specifically tailored to high-cost/covered loans.
AR		At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property.
AR	While Arkansas has enacted anti-predatory legislation under the Arkansas Home Loan Protection Act (AHLPA), the provisions of the AHLPA only apply to loans that meet the definition of a "high-cost home loan."
AZ	The state of Arizona has not enacted any Anti-Predatory Lending Laws.	The state of Arizona has not enacted Anti-Predatory Lending Laws.
CA	Division 1.6 of the Financial Code	At the time a covered loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. If the loan is an ARM, the fully indexed rate of the loan must be used to determine a borrower's repayment ability. If the loan is a Stated Income, the income stated by the borrower and all other information in the lender's possession must be used to determine a borrower's repayment ability. A borrower with a DTI of 55% or less is presumed to be able to make payments on the loan.
CA	While California has enacted anti-predatory legislation under Division 1.6 of the Financial Code, the provisions of Division 1.6 only apply to loans that meet the definition of a "covered loan."
CO	Colorado Consumer Equity Protection Act	A lender may not make a covered loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, and employment. If the loan is a Stated Income, a borrower's repayment ability must be based on the income stated by the borrower and all other information in the lender's possession.
CO	Mortgage loan originators licensed under the Mortgage Loan Originator Licensing and Mortgage Company Registration Act have a duty to: 1. make a "reasonable inquiry" concerning a borrower's current and prospective income, existing debts and obligations, and any other information; and 2. make the loan originator's best efforts to recommend, broker, or originate a residential mortgage loan that takes the borrower's information into consideration. A loan originator's duty to make a "reasonable inquiry" requires the loan originator to recommend appropriate mortgage products. Appropriate mortgage products may only be recommended after a reasonable inquiry has been made in order to understand the borrower's current and prospective financial status. A reasonable inquiry requires the loan originator to interview and discuss current and prospective income with borrowers, including the income's source and likely continuance, and may not require the loan originator to verify such income.
CT	Connecticut Abusive Home Loan Lending Practices Act	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed, or at the time of the first rate adjustment if there is an introductory rate, is presumed to be able to make payments on the loan.
CT	While Connecticut has enacted anti-predatory legislation under the Connecticut Abusive Home Loan Lending Practices Act (CAHLLPA), the provisions of the CAHLLPA only apply to loans that meet the definition of a "high cost home loan."
DC		At the time a covered loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. If the loan includes a balloon payment, the lender's determination of the borrower's ability to make the final payment may include the borrower's equity in the property and the borrower's ability to refinance the loan based on current market conditions.
DC	While the District of Columbia has enacted anti-predatory legislation under the Home Loan Protection Act of 2002 (HLPA), the provisions of the HLPA only apply to loans that meet the definition of a "covered loan."
DE	The state of Delaware has not enacted any Anti-Predatory Lending Laws.	Delaware has not enacted provisions specifically tailored to high-cost/covered loans.
FL	Florida Fair Lending Act	A lender may not make a covered loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, and employment.
FL	While Florida has enacted anti-predatory legislation under the Florida Fair Lending Act (FFLA), the provisions of the FFLA only apply to loans that meet the definition of a "high-cost home loan."
GA	The Georgia Fair Lending Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans.	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan.
HI	The state of Hawaii has not enacted any Anti-Predatory Lending Laws.	Hawaii has not enacted provisions specifically tailored to high-cost/covered loans.
IA	The state of Iowa has not enacted any Anti-Predatory Lending Laws.	Iowa has not enacted provisions specifically tailored to high-cost/covered loans.
IA	The state of Idaho has not enacted any Anti-Predatory Lending Laws.	Idaho has not enacted provisions specifically tailored to high-cost/covered loans.
IL		At the time a high risk home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed, or at the time of the first rate adjustment if there is an introductory rate, is presumed to be able to make payments on the loan.
IL	A person licensed under the Residential Mortgage Lending Act of 1987 may not make, provide, or arrange for a residential mortgage loan without verifying the borrower's reasonable ability to pay the principal and interest, real estate taxes, homeowner's insurance, assessments, and mortgage insurance premiums. The borrower's income and financial resources must be verified by tax returns, payroll receipts, bank records, or other reasonably reliable methods. Stated income should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of ability to repay. For loans in which the interest rate may vary, the borrower's repayment ability must be determined based on the "fully indexed rate." For loans that allow for negative amortization, the principal loan amount must be calculated by including the maximum amount the principal balance may increase due to negative amortization under the terms of the loan.
IN	The Indiana Home Loan Practices Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans.	A lender must make a high cost home loan with due regard to the borrower's repayment ability by following commercially reasonable practices in determining the DTI. Commercially reasonable practices include using a DTI of 41% or less and the residual income guidelines established by VA.
KY	Kentucky Anti-Predatory Lending Law	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on the borrower's income, obligations, employment status, and financial resources other than equity in the property. The lender must verify the borrower's: 1. reasonable ability to pay all scheduled payments of principal, interest, taxes and insurance; and 2. income and financial resources through tax returns, payroll receipts, bank records, or other similar documents. A borrower is presumed to be able to make payments on the loan if, at the time the loan is closed: 1. the borrower has a DTI of 50% or less; 2. the loan has been approved by an automated underwriting service offered by Fannie Mae or Freddie Mac; 3. the lender verifies and documents that the borrower has liquid assets equal to 50% of the principal loan amount; or 4. the borrower has sufficient "residual income" as defined in the guidelines established by the VA.
KY	While Kentucky has enacted anti-predatory legislation, the provisions of Kentucky's Anti-Predatory Lending Law only apply to loans that meet the definition of a "high-cost home loan."
LA	The state of Louisiana has not enacted any Anti-Predatory Lending Laws.	Louisiana has not enacted provisions specifically tailored to high-cost/covered loans.

Ability to Pay Laws - States M-Z

State	All Loans	High-Cost Loans
MA	Predatory Home Loan Practices Act	At the time a high-cost home mortgage loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. There is an automatic presumption that a borrower will be able to make payments if at the time the loan is closed, and based on payments calculated with the index plus the margin if there is an introductory rate, the borrower has a DTI of 50% or less and sufficient residual income under VA guidelines.
MA	While Massachusetts has enacted anti-predatory legislation under the Predatory Home Loan Practices Act (PHLPA), the provisions of the PHLPA only apply to loans that meet the definition of a "high cost home loan."
MD	Maryland Anti-Predatory Lending Law	A lender may not make any mortgage loan (including a covered loan) without giving due regard to the borrower's ability to repay the mortgage loan in accordance with its terms, including the fully indexed rate of the mortgage loan, if applicable, and property taxes and homeowner's insurance.
MD	While Maryland has enacted anti-predatory legislation, the provisions of Maryland's Anti-Predatory Lending Law only apply to loans that meet the definition of a "covered loan." Note, however, that the Maryland Mortgage Lender Law and the Maryland Mortgage Originator Law contain "refinancing" provisions applicable to all residential mortgage loans. While not expressly designated as "anti-predatory legislation", the provisions are discussed herein due to the similarity to "refinancing" provisions contained in the Anti-Predatory Lending Laws of other states. See Refinancing Restrictions for further information. In addition, Maryland general law contains counseling disclosure provisions applicable to all "mortgage loans." While not expressly designated as "anti-predatory legislation," the provisions are discussed herein due to the similarity to counseling disclosure provisions contained in the Anti-Predatory Lending Laws of other states. See General Disclosures for further information.
ME	The Maine Truth in Lending Act does not contain provisions regarding borrower repayment ability that are applicable to all residential mortgage loans.	A higher-priced mortgage loan may not be extended without regard to the borrower's ability to repay the loan, including: 1. the borrower's current and expected income; 2. employment; 3. assets other than the collateral; 4. credit history; 5. debt-to-income ratio; 6. current obligations; and 7. property taxes, mortgage insurance premiums (required by the lender) and similar expenses. The amount of income or assets and current obligations relied on to determine the borrower's repayment ability must be verified. Compliance with the above provisions is presumed if the lender: 1. verifies the borrower's repayment ability; 2. determines repayment ability using the largest payment of principal and interest scheduled in the first 7 years taking into account current obligations and mortgage-related obligations; and 3. assesses the borrower's repayment ability taking into account at least: a. the total debt to income ration; or b. the income the consumer will have after paying debt obligations.
MI	The Consumer Mortgage Protection Act does not contain provisions regarding borrower repayment ability.	Michigan has not enacted provisions specifically tailored to high-cost/covered loans.
MN	A person licensed or required to be licensed under the Minnesota Residential Mortgage Originator and Servicer Licensing Act, and any person exempt from licensing, may not make or arrange for a residential mortgage loan without verifying the borrower's reasonable ability to pay the scheduled payments of principal, interest, real estate taxes, homeowner's insurance, assessments, and mortgage insurance premiums. The borrower's income and financial resources must be verified by tax returns, payroll receipts, bank records, or other similarly reliable documents. The above restrictions do not apply to a state or federally chartered bank, savings bank, or credit union, an institution chartered under the Farm Credit Act, or to a person making or arranging a residential mortgage loan originated or purchased by a state agency or a tribal or local unit of government.	Minnesota has not enacted provisions specifically tailored to high-cost/covered loans.
MO	The state of Missouri has not enacted any Anti-Predatory Lending Laws.	Missouri has not enacted provisions specifically tailored to high-cost/covered loans.
MO	The state of Mississippi has not enacted any Anti-Predatory Lending Laws.	Mississippi has not enacted provisions specifically tailored to high-cost/covered loans.
MT	The state of Montana has not enacted any Anti-Predatory Lending Laws.	Montana has not enacted provisions specifically tailored to high-cost/covered loans.
NC	North Carolina Anti-Predatory Lending Law	High-Cost Home Loans At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan. Rate Spread Home Loans A lender may not make a rate spread home loan unless the lender reasonably believes that the borrower has the ability to repay the loan based on the borrower's credit history, current and expected income, current obligations, employment status, and other financial resources other than equity in the property. The lender must take reasonable steps to verify the accuracy and completeness of information provided by the borrower using tax returns, payroll receipts, bank records, reasonable alternative methods, or reasonable third-party verification.
NC	While North Carolina has enacted anti-predatory legislation, the provisions of North Carolina's Anti-Predatory Lending Law only apply to loans that meet the definition of a "high-cost home loan" or a "rate spread home loan."
ND	The state of North Dakota has not enacted any Anti-Predatory Lending Laws.	North Dakota has not enacted provisions specifically tailored to high-cost/covered loans.
NE	The state of Nebraska has not enacted any Anti-Predatory Lending Laws.	Nebraska has not enacted provisions specifically tailored to high-cost/covered loans.
NH	Nondepository Mortgage Bankers and Brokers Act References	New Hampshire has not enacted provisions specifically tailored to high-cost/covered loans.
NH	The state of New Hampshire has not enacted any Anti-Predatory Lending Laws.
NJ	The New Jersey Home Ownership Security Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans.	The New Jersey Home Ownership Security Act does not contain provisions regarding borrower repayment ability.
NM	A lender may not make a home loan without documenting and considering the borrower's reasonable ability to repay that loan pursuant to the loan's terms. In addition, a lender may not make a home loan that does not require a determination of the borrower's reasonable ability to pay the following costs: 1. principal; 2. interest; 3. real estate taxes; 4. property insurance; 5. property assessments; 6. mortgage insurance premiums; and 7. other scheduled long-term monthly debt payments. The borrower's ability to repay must be demonstrated through reasonably reliable documentation that may include payroll receipts, tax returns, bank records, asset and credit evaluations, mortgage payment history or other similar reliable documentation. In the case of an adjustable rate residential mortgage loan, the reasonable ability to pay must be determined based on a fully indexed rate and repayment schedule that achieves full amortization over the life of the mortgage loan.	The Home Loan Protection Act does not contain provisions regarding borrower repayment ability.
NV	A lender may not knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower (including without limitation, a low-document home loan, no-document home loan or stated-document home loan) without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the loan. The Mortgage Lending Division has issued a Division Letter stating that the above provision does not prohibit any specific mortgage products or documentation types. The Mortgage Lending Division has also issued a "Commercially Reasonable Means or Mechanism Worksheet" which may be used to demonstrate compliance with the repayment ability requirements.	A lender may not knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower (including without limitation, a low-document home loan, no-document home loan or stated-document home loan) without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the loan. The Mortgage Lending Division has issued a Division Letter stating that the above provision does not prohibit any specific mortgage products or documentation types. The Mortgage Lending Division has also issued a "Commercially Reasonable Means or Mechanism Worksheet" which may be used to demonstrate compliance with the repayment ability requirements.
NY	New York Anti-Predatory Lending Law	At the time a high-cost home loan is closed, the lender or broker must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. There is a presumption that a borrower will be able to make payments if at the time the loan is closed, or at the time of the first rate adjustment if there is an introductory rate, the borrower has a DTI of 50% or less and sufficient residual income under VA guidelines.
NY	While New York has enacted anti-predatory legislation, the provisions of New York's Anti-Predatory Lending Law only apply to loans that meet the definition of a "high-cost home loan."
OH	Predatory Lending Act	A lender may not make a covered loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, and employment. A lender may not make a covered loan where the borrower's DTI will be more than 50% unless the borrower submits both verification that the borrower received pre-purchase counseling and a signed disclosure that acknowledges the risk of entering into the covered loan.The counseling may be provided by a nonprofit counseling service approved by an agency of the federal government or credit counseling services approved by HUD to assist borrowers in understanding and obtaining FHA or VA loans, provided the counseling service does not make or broker such loans through an affiliate.
OH	While Ohio has enacted anti-predatory legislation under the Ohio Predatory Lending Act (OPLA), the provisions of the OPLA only apply to loans that meet the definition of a "covered loan."
OK	Oklahoma Home Ownership and Equity Protection Act References	A lender may not make a subsection 10 mortgage loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, and employment. A borrower with a DTI of 55% or less at the time the loan is closed is presumed to be able to make payments on the loan.
OK	While Oklahoma has enacted anti-predatory lending provisions under the Uniform Consumer Credit Code, these provisions only apply to loans that meet the definition of a "subsection 10 mortgage."
OR	The state of Oregon has not enacted any Anti-Predatory Lending Laws.	Oregon has not enacted provisions specifically tailored to high-cost/covered loans.
PA	Mortgage Bankers and Brokers and Consumer Equity Protection Act References	A lender may not make a covered loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, employment, and other financial resources. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan. This does not apply to borrowers whose income is greater than 120% of the median family income.
PA	A mortgage lender or broker licensed under the Mortgage Loan Industry Licensing and Consumer Protection Act may not offer a loan without having reasonably determined that the applicant will have the ability to repay the loan in accordance with the loan terms and conditions by final maturity at the fully indexed rate, assuming a fully amortized repayment schedule. In performing an analysis to determine whether an applicant will have the ability to repay an offered loan, a lender or broker must consider, verify and document: 1. the income of the applicant; and 2. the fixed expenses of the applicant.
RI	The Rhode Island Home Loan Protection Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans.	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. There is a presumption that a borrower will be able to make the payments on the loan if the borrower has a DTI of 50% or less at the time the loan is closed.
SC	The South Carolina High-Cost and Consumer Home Loans Act does not contain provisions regarding borrower repayment ability that are applicable to all consumer home loans.	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. If the loan is an ARM, the analysis of the borrower must include an evaluation of the ability to repay by final maturity at the fully indexed rate assuming a fully amortizing repayment schedule. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan.
SD	The state of South Dakota has not enacted any Anti-Predatory Lending Laws.	South Dakota has not enacted provisions specifically tailored to high-cost/covered loans.
TN	While Tennessee has enacted anti-predatory legislation under the Tennessee Home Loan Protection Act (THLPA), the provisions of the THLPA only apply to loans that meet the definition of a "high-cost home loan."
TN	Tennessee Home Loan Protection Act References	At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan.
TX	The Texas Anti-Predatory Lending Law does not contain provisions regarding borrower repayment ability that are applicable to all home loans.	A lender may not make a high-cost home loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, employment, and other financial resources.
UT	While Utah has enacted anti-predatory legislation under the Utah High Cost Home Loan Act (UHCHLA), the provisions of the UHCHLA only apply to loans that meet the definition of a "high-cost mortgage."
UT		The Utah High Cost Home Loan Act does not contain provisions regarding borrower repayment ability.
VA	Virginia's "anti-predatory lending provisions" do not address borrower repayment ability.
VA	Virginia Anti-Predatory Lending Law	Virginia law does not contain provisions regarding borrower repayment ability with respect to high-cost/covered loans.
VT	While Vermont has enacted anti-predatory legislation, the provisions of Vermont's Anti-Predatory Lending Law only apply to loans that meet the definition of a "high rate loan."
VT	Vermont Anti-Predatory Lending Law References	Vermont law does not contain provisions regarding borrower repayment ability with respect to high rate loans.
WA	The Washington Anti-Predatory Lending Law does not contain provisions regarding borrower repayment ability that are applicable to residential mortgage loans.	Washington has not enacted provisions specifically tailored to high-cost/covered loans.
WI	While Wisconsin has enacted anti-predatory legislation under the Responsible High-Cost Mortgage Lending Act (RHCMLA), the provisions of the RHCMLA only apply to loans that meet the definition of a "covered loan."
WI	Responsible High Cost Mortgage Lending Act	A lender may not make a covered loan based on a borrower's collateral without regard to the borrower's repayment ability, including current and expected income, current obligations, and employment.
WV	The state of West Virginia has not enacted any Anti-Predatory Lending Laws.	West Virginia has not enacted provisions specifically tailored to high-cost/covered loans.
WY	The state of Wyoming has not enacted any Anti-Predatory Lending Laws.	Wyoming has not enacted provisions specifically tailored to high-cost/covered loans.

Dodd Frank QRM - Proposed Rules for Credit Risk Retention

2011-04-26T09:37:00.011-04:00

by Marissa Aquila Blundell
Senior Counsel & Vice President

Amid the frenzy surrounding implementation of new Loan Officer Compensation rules, on March 29, 2011 the mortgage industry received the first of two major regulatory proposals issued in accordance with the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). The proposed rule is a first look at details of the hotly debated "skin-in-the-game" requirements included in Dodd Frank. Pursuant to these requirements "sponsors" of asset-backed securities must retain 5% of the credit risk associated with a security's collateral. In addition, Dodd Frank exempts certain types of securitization transactions from these risk retention requirements – among them, securities collateralized exclusively by "qualified residential mortgages." The proposal also sets forth definitions for such key terms as "qualified residential mortgage" with which the mortgage lending industry is particularly interested.

Importantly, the proposed risk-retention rules permit "securitizers" to allocate a portion of the credit risk which must be retained to the originators of the securitized assets. Because this definition of "originator" refers to the person that creates a loan, only the original creditor of a loan (not a subsequent purchaser) is an originator for the purpose of this rule. As a result of the potential allocation of risk to original creditors, the mortgage lending industry has a vested interest in the final rules governing risk-retention requirements and should take the opportunity to review the proposal in its entirety and submit comments. Below are key points regarding the proposed definition of "Qualified Residential Mortgage" which, since no risk will be allocated to the originator of such assets, is of particular concern to creditors seeking to avoid risk-retention altogether.

Qualified Residential Mortgage (QRM)

Dodd Frank requires the definition of QRM to be "no broader than" the definition of "qualified mortgage" set forth, ironically, in the later proposal issued on April 19, 2011, which will be the subject of a series of additional All Regs' articles.
Since sponsors of asset-backed securities collateralized exclusively by QRMs will be exempt from risk-retention requirements entirely, the proposed definition is intended to ensure that such mortgages are of very high credit quality.
Whether a residential mortgage is a QRM will be determined at or prior to origination of the mortgage loan. The proposal allows for modification of an individual QRM loan after securitization without jeopardizing the QRM status of the loan in order to promote appropriate loan modification.
QRM eligible loans must be a closed-end first lien mortgage or refinance of a one-to-four family property (at least one unit must be the borrower's principal dwelling).
A mortgage loan may qualify as a QRM only if the originator verifies and documents within 90 days prior to closing that the borrower satisfies the following credit history requirements: not currently 30 or more days past due on any debt obligation; not 60 or more days past due on any debt obligation within the preceding 24 months; and not a debtor in a bankruptcy proceeding, not subjected to property repossession or foreclosure, not engaged in a short sale or deed-in-lieu of foreclosure, and not subject to a federal or state judgment for collection of unpaid debts within the preceding 36 months.
QRM eligible loans may not contain any of the following payment terms: terms allowing interest-only payments or negative amortization; any balloon payment; terms allowing the annual rate of interest to increase in excess of 2% (200 basis points) in any twelve month period and 6% (600 basis points) over the life of the mortgage transaction; and any prepayment penalty.
QRM eligible loans' LTVs may not exceed a proposed ratio cap of 75% on rate and term refinances and 70% for cash-out refinances. For purchase transactions, the proposal requires borrowers to provide a cash down payment in an amount equal to at least the sum of: closing costs payable by borrower; 20% of the lesser of estimated market value determined by appraisal or the purchase price; and if the estimated market value determined by appraisal is less than the purchase price, the difference between those amounts.
A mortgage loan may qualify as a QRM only if the transaction is supported by a written appraisal that conforms to generally accepted appraisal standards, as evidenced by the USPAP, the appraisal guidelines of the federal banking agencies, and applicable laws.
QRM eligible loans' front-end ratios may not exceed 28% and back-end ratios may not exceed 36%. Originators must verify and document a borrower's monthly gross income, monthly housing debt, and monthly total debt in accordance with the verification and documentation standards of the HUD Handbook.
QRM eligible loans' total points and fees payable by the borrower in connection with the mortgage transaction may not exceed 3% of the total loan amount.
QRM eligible loans may not be assumable by any person who was not a borrower under the original mortgage transaction.
QRM eligible loans' documents must contain a provision obliging the creditor to have servicing policies and procedures to promptly initiate activities to mitigate risk of default on the mortgage loan and to take loss mitigation actions.

This proposed rule contains extensive additional provisions governing permissible methods for retaining required risk, treatment of government-sponsored entities, and additional proposed exemptions for other types of securitization including an exemption for federally-insured or guaranteed residential, multifamily, and health care mortgage loan assets. Comments regarding this proposed rule must be received by June 10, 2011.

LO Comp Rules Now in Effect - Fed and HUD Provide Clarification

2011-04-06T12:18:00.003-04:00

by Marissa Aquila Blundell
Senior Counsel & Vice President

The Federal Reserve Board's new rules governing originator compensation are now in effect. After a five day court-imposed administrative delay, the United States Court of Appeals denied a request to further delay implementation of the rule. In March, the industry received additional guidance related to the new loan originator compensation rules effective April 6, 2011. Attorneys for the Federal Reserve Board of Governors held an online webinar on Thursday, March 17, 2011, and on Friday, March 18, 2011, HUD released a newsletter addressing GFE related-questions which have arisen as new compensation structures form. Highlights from both the Federal Reserve Board webinar and the HUD newsletter are included below:

Federal Reserve Board Webinar Highlights

· The loan originator compensation rules will be enforced by whichever authority examines an institution. For any entities that are not examined by an agency currently, the new Consumer Financial Protection Bureau will have extensive examining authority, including the authority to examine non-depository institutions.

· The FED has not found any scenario where "point banks" are used to permit loan originators to offer pricing concessions to borrowers to be permissible under the new rules. According to the FED, the point banks constitute originator compensation which may not be reduced based on terms or conditions of a loan. Pricing concessions must be made by the Creditor.

· GFE tolerance violations for a particular loan are not a permissible factor to consider when determining loan originator compensation. If closing costs must be reduced to satisfy RESPA tolerance requirements the creditor, not the loan originator must bear this cost.

· There is no Safe-Harbor - "disclosure requirement." Although the most logical method of documenting the provision of loan options required to qualify for the protection of the Safe-Harbor will involve some type of written document, the rule does not contain a "disclosure requirement." The rule prohibits steering and one method available to originators seeking to demonstrate compliance with the anti-steering rule is to qualify for the safe-harbor protection by satisfying the requirements set forth in that provision of the rule.

· Factors related to a loan's "profitability" are problematic if used as a basis for setting originator compensation. According to the FED, only a very unusual definition of "profitability" would not turn upon a term or condition of the loan.

· One remaining unanswered question set forth by the FED involves a loan for which the yield disclosed as a credit in GFE Block 2 is larger than the Borrower's closing costs. This could result in a scenario whereby the consumer pays the broker but the lender pays the consumer, which is problematic. To date, HUD has not commented on this issue.

HUD "RESPA Roundup" Newsletter Highlights

· According to HUD, the guidance contained in its official FAQs (latest revision April 2010) anticipates various compensation scenarios, including where compensation is based on factors other than the loan's interest rate - such as a flat rate or a fixed percentage of the loan amount.

Therefore, for mortgage brokers, GFE Block 1 will continue to include the fixed amount of Broker compensation even where the Broker's compensation is lender-paid. GFE Block 2 will continue to include the net payment from lender to mortgage broker, represented as a credit to the Borrower, even though this amount is no longer determined by the interest rate.

· HUD refers to lender-paid mortgage broker compensation as "indirect compensation"; however, this lender-paid compensation is not indirectly paid by the Borrower which would violate the FRB rule prohibiting dual compensation. HUD clarifies that the indirect compensation to which it refers in this scenario is entirely lender-paid.

· HUD recognizes that the zero-tolerance requirement applicable to GFE Block 1, Block 2 and Line A disclosures will require "timely and effective communication amount the lender, its loan officers, and mortgage brokers to establish policies and procedures to ensure accurate calculation of compensation and credits in compliance with RESPA, as well as under the FRB compensation rule."

· Additionally, HUD made the following comment related to volume-based compensation: "If a lender is basing its compensation to mortgage brokers on loan volume as described in the new FRB rule, please not that RESPA Section 8 prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors."

To review both the Federal Reserve Board webinar and the HUD newsletter, each in its entirety, use the following links:

http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/2011/031711.pdf

http://www.hud.gov/offices/hsg/rmra/res/mlocomplrodup31811v2.pdf

Fannie Mae Clarifies Loan to Value Ratios in the Selling Guide

2011-04-05T11:27:00.001-04:00

by Anna DeSimone
President & Founder

On March 31, 2011 Fannie Mae updated the Selling Guide clarify policy changes made regarding the calculations of ratios. The Selling Guide contains a number of references to the calculation of LTV, CLTV, and HCLTV ratios and the vast majority of these references indicated that ratio calculations were to be based on the "loan amount." However, in other instances, the Guide referenced "unpaid principal balance" to be used in calculations.

Fannie Mae has updated the Guide in an effort to provide consistency and clarity within the Guide and to match Fannie Mae's current loan delivery requirements. The Selling Guide now reflects "original loan amount" in all references to these ratio calculations. Lenders should refer to Fannie Mae's Eligibility Matrix for allowable CLTV ratios.

Calculation of the Loan-to-Value (LTV) Ratios

The maximum allowable LTV ratio for a first mortgage is based on a number of factors including, the representative credit score, the type of mortgage product, the number of dwelling units, and the occupancy status of the property. Fannie Mae publishes the following table to describe the requirements for calculating LTV ratios for a first mortgage transaction. The result of these calculations must be truncated (shortened) to two decimal places, then rounded up to the nearest whole percent. For example:

• 96.01% will be delivered as 97%

• 80.001 will be delivered as 80%

The rounding rules noted above also apply to the CLTV and HCLTV ratio calculations. Lenders' systems must contain rounding methodology that results in the same or a higher LTV ratio.

click the chart to enlarge

Sales Price and Appraised Value Used by Desktop Underwriter® (DU)

DU uses information in the online loan application to obtain the sales price and appraised value it uses to calculate the LTV, CLTV, and HCLTV ratios. To determine the sales price and appraised value, DU uses the amounts entered in the following data fields:

Sales price = Line a + Line b + Line c in Section VII, where:

• Line a = Purchase price (the sales price for purchase transactions, or the cost of construction for construction transactions).

• Line b = Alterations, improvements, repairs (for HomeStyle Renovation transactions, the cost of alterations, improvements, or repairs).

• Line c = For construction transactions, the cost or value of the land if the borrower acquired the lot separately.

Appraised value = Property Appraised Value in the Additional Data screen.

Note: If the estimated value that was submitted to DU differs from the actual value, the lender must correct the information in DU and resubmit the loan case file.

Loan-Level Price Adjustments (LLPA)

An LLPA may apply to certain mortgages based on the LTV ratio and representative credit score. These LLPAs are in addition to any other price adjustments that are otherwise applicable to the particular transaction. Lenders must refer to the Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge (AMDC) Information.

Calculation of the CLTV Ratio

For first mortgage loans that are subject to subordinate financing, the lender must calculate the LTV ratio and the CLTV ratio. The CLTV ratio is determined by dividing the sum of the items listed below by the lesser of the sales price or the appraised value of the property.

• the original loan amount of the first mortgage,

• the drawn portion (outstanding principal balance) of a HELOC, and

• the unpaid principal balance of all closed-end subordinate financing. (With a closed-end loan, a borrower draws down all funds on day one and may not make any payment plan changes or access any paid-down principal once the loan is closed.)

Note: For each subordinate liability, in order for the lender to accurately calculate the CLTV ratio for eligibility and underwriting purposes, the lender must determine the drawn portion of all HELOCs, if applicable, and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

If the borrower discloses, or the lender discovers, new (or increased) subordinate financing after the underwriting decision has been made, up to and concurrent with closing, the lender must re-underwrite the mortgage loan. Lenders should refer to the Eligibility Matrix for allowable CLTV ratios.

Home Equity Combined Loan-to-Value (HCLTV) Ratios

For first mortgages that have subordinate financing under a HELOC, the lender must calculate the HCLTV ratio. This is determined by dividing the sum of the items listed below by the lesser of the sales price or appraised value of the property.

• the original loan amount of the first mortgage,

• the full amount of any HELOCs (whether or not funds have been drawn), and

• the unpaid principal balance of all closed-end subordinate financing.

Note: For each subordinate liability, in order for the lender to accurately calculate the HCLTV ratio for eligibility and underwriting purposes, the lender must determine the maximum credit line for all HELOCs, if applicable, and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

If the borrower discloses, or the lender discovers, new (or increased) subordinate financing after the underwriting decision has been made, up to and concurrent with closing, the lender must re-underwrite the mortgage loan. Lenders should refer to the Eligibility Matrix for allowable HCLTV ratios.

Federal Reserve Clarifies Loan Officer Compensation Rules

2011-03-22T10:42:00.000-04:00

Dear Reader,

March has been an exciting month for Bankers Advisory.   We have exhibited at the New Jersey Regional Mortgage Bankers Conference and are now heading to the Mortgage Bankers Association Annual Fraud Conference in Fort Lauderdale.   We'll be exhibiting again at the American Bankers Association's Real Estate Lending Conference April 10-12th in Baltimore.

On April 21st you'll see us at the Great American Credit Union Show in Boxboro, Mass. The annual credit union event is hosted by The Warren Group who recently featured Bankers Advisory in a full-page story about our compliance monitoring services in the February 28th issue of Banker and Tradesman.   You can view the story on our website or link directly to B&T:

http://www.bankerandtradesman.com/news143071.html

                                             Anna DeSimone
                                             anna@bankersadvisory.com

Federal Reserve Clarifies Loan Officer Compensation Rules
by Marissa Aquila Blundell, Esq.
Vice President and Senior Counsel

Last week the industry received additional guidance related to the new loan originator compensation rules, effective April 1, 2011. Attorneys for the Federal Reserve Board of Governors held an online webinar on Thursday, March 17, 2011, and on Friday, March 18, 2011, HUD released a newsletter addressing GFE related-questions which have arisen as new compensation structures form. Highlights from both the Federal Reserve Board webinar and the HUD newsletter are included below:

Federal Reserve Board Webinar Highlights

·       The loan originator compensation rules will be enforced by whichever authority examines an institution. For any entities that are not examined by an agency currently, the new Consumer Financial Protection Bureau will have extensive examining authority, including the authority to examine non-depository institutions.

·       The FED has not found any scenario where "point banks" are used to permit loan originators to offer pricing concessions to borrowers to be permissible under the new rules. According to the FED, the point banks constitute originator compensation which may not be reduced based on terms or conditions of a loan. Pricing concessions must be made by the Creditor.

·       GFE tolerance violations for a particular loan are not a permissible factor to consider when determining loan originator compensation. If closing costs must be reduced to satisfy RESPA tolerance requirements the creditor, not the loan originator must bear this cost.

·       There is no Safe-Harbor - "disclosure requirement." Although the most logical method of documenting the provision of loan options required to qualify for the protection of the Safe-Harbor will involve some type of written document, the rule does not contain a "disclosure requirement." The rule prohibits steering and one method available to originators seeking to demonstrate compliance with the anti-steering rule is to qualify for the safe-harbor protection by satisfying the requirements set forth in that provision of the rule.

·       Factors related to a loan's "profitability" are problematic if used as a basis for setting originator compensation. According to the FED, only a very unusual definition of "profitability" would not turn upon a term or condition of the loan.

·       One remaining unanswered question set forth by the FED involves a loan for which the yield disclosed as a credit in GFE Block 2 is larger than the Borrower's closing costs. This could result in a scenario whereby the consumer pays the broker but the lender pays the consumer, which is problematic. To date, HUD has not commented on this issue.

HUD "RESPA Roundup" Newsletter Highlights

·       According to HUD, the guidance contained in its official FAQs (latest revision April 2010) anticipates various compensation scenarios, including where compensation is based on factors other than the loan's interest rate - such as a flat rate or a fixed percentage of the loan amount. Therefore, for mortgage brokers, GFE Block 1 will continue to include the fixed amount of Broker compensation even where the Broker's compensation is lender-paid. GFE Block 2 will continue to include the net payment from lender to mortgage broker, represented as a credit to the Borrower, even though this amount is no longer determined by the interest rate.

·       HUD refers to lender-paid mortgage broker compensation as "indirect compensation"; however, this lender-paid compensation is not indirectly paid by the Borrower which would violate the FRB rule prohibiting dual compensation. HUD clarifies that the indirect compensation to which it refers in this scenario is entirely lender-paid.

·       HUD recognizes that the zero-tolerance requirement applicable to GFE Block 1, Block 2 and Line A disclosures will require "timely and effective communication amount the lender, its loan officers, and mortgage brokers to establish policies and procedures to ensure accurate calculation of compensation and credits in compliance with RESPA, as well as under the FRB compensation rule."

·       Additionally, HUD made the following comment related to volume-based compensation: "If a lender is basing its compensation to mortgage brokers on loan volume as described in the new FRB rule, please not that RESPA Section 8 prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors."
To review both the Federal Reserve Board webinar and the HUD newsletter, each in its entirety, use the following links:

http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/2011/031711.pdf

http://www.hud.gov/offices/hsg/rmra/res/mlocomplrodup31811v2.pdf