Category Archives: Federal Law

Below you’ll find lots of articles about the Federal Housing Authority (FHA)

Obama plans on tighter regulations for mortgage brokers

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From the New York Times

The Obama administration plans to move quickly to tighten the nation’s financial regulatory system. Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.
—
Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

None of this should be a surprise for regular readers of Raincityguide.  I’ve been talking about tighter rules for mortgage brokers since 2001 and here on RCG for two years.   Mortgage brokers will always argue that they are already tightly regulated. In some states, brokers have tougher regulations than consumer loan companies.  Hey, wait a minute.  Is President Obama going to let the consumer loan companies slide by without proposing tougher regulations for them as well?  The top two largest predatory lending lawsuits were against consumer loan lenders Household Finance and Ameriquest. Both companies settled out of court and “admitted no wrongdoing” even though there was lots of evidence that their sales people were meticulously trained by management on how to do wrong. 

Maybe tougher minimum sanctions and penalties are in order as well.  We must also realize that these new regulations mean nothing without enforcement.  I would rather see the states be in charge of enforcement than the federal government (well, with the exception of Florida where they have proven their supreme incompetence.) We need only to look at RESPA and the miserable job HUD has done trying to enforce this massive piece of regulation since 1975.  So if it’s going to be up to the states, then the industry should prepare for a higher cost of doing business as a mortgage broker or consumer loan lender.  This will be passed on to the consumer in the way of higher fees, rates, or both.

Government Intervention in Foreclosure

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This is Part Four of a series of articles on foreclosures.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.
Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from your state Bar Association or through a LOCAL HUD-Approved Housing Counseling Agency.

In this article we will address current government intervention as well as discuss possible future intervention programs. For other preventative measures, check out the other parts of this series:

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

Current government intervention in the foreclosure process has taken many forms. Some states such as California, Florida, New York, New Jersey, Massachusetts, Philadelphia, and Illinois have discussed, proposed, or passed legislation in favor of a foreclosure moratorium.  In order to avoid state mandates, some companies placed a temporary halt on foreclosures over the holidays. These companies include Indymac, Countrywide, WAMU, and loans held in the Fannie/Freddie portfolios.  Recall that during the real estate bubble run-up, government backed loans fell out of favor. Many subprime loans are held by lender/servicers in pools of mortgage backed securities. The foreclosure moratorium didn’t reach those homeowners.

State moratoriums give homeowners more time to possibly refinance into a Hope for Homeowners loan or complete a short sale and the moratorium also gives banks more time to get caught up on all the backlog of foreclosure paperwork. 

Financial Economics Analyst Edward Vincent Murphy, in his Sept 12, 2008 report “Economic Analysis of a Mortgage Foreclosure Moratorium,

Interview with Jillayne Schlicke – Part 2: The SAFE Act

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Earlier this month I shared an interview with Jillayne Schlicke.  Part One addressed LO’s getting ready for 2009.  The second half of my interview touches on The S.A.F.E. ACT which is a part of HR 3221.  The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 is a part of the massive HR 3221.  If you are planning on originating residential mortgage loans in 2009, which is just over a month away, I hope you’ve all ready checked out the NMLS (Nationwide Mortgage Licensing System) site to get your ducks in a row…be sure to have a large bottle of aspirin (or something stronger) handy.  The NMLS states that to assure your information is processed by January 1, 2009, you need to submit the required information to by December 1, 2008.   I just checked the process of my NMLS license and because I filed at 9pm on October 1, 2008, my registration is currently showing as “transition requested” and I’m directed to contact DFI.  DFI is telling me that I registered on October 2, 2008, and they’re working on applicants who applied by October 1, 2008.  I do hope my fellow Washington State Loan Originators were at least a day earlier than I with registering at NMLS to be in compliance with The SAFE Act.   Enough of my griping…my questions to Jillayne are bold and italic.

Which loan originators are impacted by the SAFE Act?

All LOs will be impacted by the SAFE Act, some more than others.  Looking up the chain of command, mortgage brokers and consumer loan lender manager/owners will also be impacted because this adds a layer of administration at the federal level that was previously not in place.  Today, brokers and owners can call their state licensing regulators and receive an answer to their licensing questions in a reasonable amount of time.  Networking with the federal regulators back in Washington DC may or may not offer broker/owners the same level of prompt service and hours of operation for those on the west coast.

Non-depository lenders and brokers must take a 20 hour prelicensing class and 8 hours of continuing education every year.  Some states already have these provisions in place and other states go above and beyond this level.  STates that have pre and post education requirements that are less than what’s required under the SAFE Act must raise their standards to the federal level.

The banks asked for and received exemption from the prelicensing and continuing education requirements mandated by the SAFE Act.  It’s quite possible that FDIC insured banks pointed out they already have ongoing training in place for their employees.

All LOs, no matter where they work, must become registered.

Even with the additional costs and time, this is a step in the right direction for our industry.  It’s time to support the framework that will lead to the eventual repair of consumer confidence in our lending system that must begin at some point.  This is a good place to start.

How will the SAFE Act impact your business?

I’ve been thinking about this for several months.  The 20 hour prelicensing mandate will have very little effect on educators at this time.  There are very few people interested in becoming loan originators right now because the income potential for a new licensee who knows relatively little about the complexities of the industry have dropped dramatically in 2008.

The 8 hours of required continuing education is only 2 more hours per year than Washington State’s 6 hour requirement.

Instead of higher revenues, the changes that will impact continuing education will be that of curriculum development and approval.  It appears right now that the states are going to defer to NMLS to approve our courses and to approve course providers, although this has not been confirmed.  Dealing at the state level is always preferred to dealing at the federal level because the states tend to be more responsive.  We can go to regular scheduled meetings and talk directly to our regulators, we can schedule meetings with them and drive to Olympia if needed, to voice concerns and receive direct answers.

I already see a difference.  When asking questons of the NMLS folks they pawn me off to the states.  The state says to call NMLS.  The whole system is suppose to be ready to go in 2009 yet at no point has the NMLS  communicated to us (course providers) what the guidelines will be for approving providers and courses.

The other problem educators face is the mandate on curriculum.  But that’s another topic for another interview.  🙂

HUD Passes RESPA Reform, New GFE Coming in 2010

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Now I know that true miracles happen. We have all been waiting for RESPA reform for as long as I’ve been in the industry, which has been over 25 years.  Here’s what the new Good Faith Estimate will look like.  Everyone has all of 2009 to get their systems ready because the new form won’t go into effect until Jan of 2010.  The winds of change are blowing in favor of more consumer protection and more duties owed to the consumer by retail mortgage lenders.  Didn’t I just say this was going to happen? From HUD:

Brian Montgomery, HUD’s Assistant Secretary of Housing, Federal Housing Commissioner, said, “We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don’t understand all the fine print of their mortgages and this, in many respects, is at the heart of today’s mortgage crisis.”

Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD’s final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.

What I like about the new three page Good Faith Estimate (GFE):

Page 1:
Important Dates: “your interest rate may change” notice
Loan Summmary: Easy, plain language, Yes or No explanations
Page 2:
Understanding Estimate Charges: explains credits better than most verbal explanations I’ve heard over the past year.
Breaks down other charges that the homeowner can shop for, in order to receive a lower fee
Page 3:
Further explains pages one and two and makes it crystal clear what charges can and cannot change at closing. 

What I do not like about the new GFE:

Where’s the Yield Spread Premium (YSP)? 

Some state laws may not comport with this new federal law and will have to be revised, hence the year waiting period before we begin using the new form.

Links
Housing Wire HUD Revises RESPA Rules
HUD Press Release

Are Washington Consumers Safer Working with DFI Regulated Lenders?

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I’ve always thought so and you may say I’m biased since I work for a company that is regulated by Washington State Department of Financial Institutions.  At the very least, home owners who have been wronged by a loan originator under DFI’s watch can rest assured that the company has much higher odds of having actions taken.  When a borrower contacts me because they want a second opinion or they have a complaint about their lender, the first step is trying to figure out what type of lender they are (mortgage broker, mortgage banker, correspondent lender…) and determine who regulates them.   It’s a mess and there are no innocents.  Bankers are not more ethical than brokers or vice versa.

Here’s an example, from the front page of this morning’s Seattle PI:

In a typical case in late 2002, state bank examiners believed that National City Mortgage was violating the state’s Consumer Loan Act by charging extra fees on mortgages…when asked to explain the costly “discount loan fees, underwriting fees, processing fees and marketing fees,” National City Mortgage sought intervention from federal regulators, records show.

The investigation was stopped by federal decree….the federal Office of the Comptroller of the Currency wrote National City a letter…saying the state had no right to examine or even visit its offices.  Because National City’s parent bank…was chartered with the OCC, the federal agency preempted the state’s authority….

The federal agency didn’t go after the mortgage fee complaint because it had no authority to enforce state consumer protection laws…

Also from this article:

Banks are governed by a patchwork of federal and state laws, which are notably weak at the federal level in areas of predatory lending and consumer protection, according to  to law professors, attorneys and other experts.  Some states…have passed tougher predatory lending laws with provisions holding Wall Street liable for financing bad loans.  But the two federal agencies in recent years have increasingly shielded their chartered banks…from state laws.

What really frustrates me is to hear the media and our elected officials wrongly use the term “mortgage brokers” when discussing the current mortgage crisis we are in.   It’s clear that there was not enough regulation and enforcement for all mortgage originators (regardless of type of institution they are employed by).

The federal OCC took about a dozen formal enforcement actions against banks for “unfair and deceptive practices” in the current decade, agency spokesman Robert Garsson said.  The other federal agency, OTS, took about half as many, in “the five to six range,  OCC Cheif Operating Officer Scott Polakoff said.   States…took 3,694 enforcement actions against mortgage lenders and brokers in 2006 alone…

The feds were set up as rivals.  Bank oversight is “the only place I know where regulated entities get to pick their regulators,”said Kathleen Keest, with the Center for Responsible Lending.

Last year, in a case involving Wachovia, the Supreme Court ruled that “the OCC has the absolute right to insist on exclusive oversight without states intervening.

According to the Seattle PI article, Barney Frank has indicated he might try to overturn the current system…until then, it’s my opinion that consumers are more protected by selecting lenders who are regulated by DFI rather than relying on the Fed or the banks to look out for them.   Our State’s system is not perfect but atleast a consumer can visit DFI’s site and verify on a local level if a loan originator or their company is licensed or has had actions taken against them.

With the recent passage of HR 3221, the SAFE ACT was passed to help protect our nation from unsavory mortgage originators.   Once again there are different rules for originators who work for banks and those who work for state regulated institutions.   On a comment at RCG, “DFI Examiner” confirmed that “LO’s with FDIC insured banks and credit unions need to register, but they don’t need to be licensed.”   Ahh…but that’s a whole post on it’s own!

Predatory Upfront Loan Modification Fees

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I’m troubled by a trend that I’m seeing.  Recently I’ve noticed that mortgage brokers/loan originators have become interested in learning about loss mitigation techniques. When I ask why, they say that they’re hearing there’s good money to be made doing loan modifications.  What? Wait a second. I thought loan modifications were done by the lender for free.

More and more spam is popping up in my spam bin advertising loan modification services, offered by loan originators so I decided to call one of these LOs today after sending an email late last night asking for more information and receiving no reply. 

This particular person goes by the title of “mortgage planner.”  On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out.  The upfront fee charged to the homeowner is $3500.  But the LO assures me that all the work is handled by attorneys, she says.  The borrower’s up front fee is placed into escrow.  If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due.  If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not.  I asked the LO why a homeowner wouldn’t just work directly with an attorney.  She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.

I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep.  Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.”  She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.”  Of course at this point the conversation has turned a tad bit adversarial and she starts to probe deeper into my true intentions. My intentions are only to get closer to what’s really going on here. I need to know if this sort of gig is something that is a viable alternative for Realtors to know about when counseling homeowners in financial distress.  My intentions are to be able to help other loan originators evaluate whether receiving a referral fee on a loan modification is going to get them into trouble.  If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.

In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers.  Fiduciary comes from the Latin word fiducia, meaning “trust.

The Housing Rescue Bill

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Today President Bush signed a housing “rescue” bill HR 3221.  I’m really still absorbing all of this (I think it’s taking me a bit longer after my trip to Inman Connect).   Here are a few quick pointers:

The FHA risked base mortgage insurance pricing (which I’m in favor of) that was to be effective last week is now postponed until September 30, 2009.   FHA can now save some borrowers in trouble with their mortgage if their existing lender will forgive the underlying debt to 85% 90% of the current value of the home.   Gee…risked based MIP might be handy in these cases.

Also with FHA, Seller paid down payment assistance programs are will be gone and the minimum down payment for an FHA insured loan will be 3.5% (which is a very small increase) beginning October 1, 2008.

Jumbo FHA and Jumbo Conforming loan limits will be reduced from the current 125% of median home value to 115% of the median home value beginning January 1, 2009.   As I mentioned, your days of a loan amount of $567,500 are numbered.   The new conforming/FHA jumbo limit may be closer to $520,000.  

First time homebuyers (someone who has not had interested in a property for the past 3 years) are eligible to receive a tax credit…however, it’s really an interest free loan to be paid back over 15 years or from the proceeds when the home is sold (which ever comes first).  This is available only for homes purchased on or after April 9, 2008 and before July 1, 2009.  Income restrictions do apply.   For more information, check out this website.   

Last but not least (and I’m sure I’m missing stuff) Fannie and Freddie have a new regulator: The Federal Finance Housing Agency aka FHFA.   This from James B. Lockhart:

“Today President Bush signed the ‘Housing and Economic Recovery Act of 2008.’ I thank President Bush and Secretary Paulson for their leadership in making government sponsored enterprise (GSE) regulatory reform a reality.

The Act creates a world-class, empowered regulator, the Federal Housing Finance Agency (FHFA), with all the authorities necessary to oversee vital components of our country’s secondary mortgage markets — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — at a very challenging time.  As Director of the new agency I look forward to working with the combined Federal Housing Finance Board (FHFB), Office of Federal Housing Enterprise (OFHEO) and Housing and Urban Development (HUD) GSE Mission teams and with other regulators to ensure the safety and soundness of the 14 housing related GSEs and the stability of the nation’s housing finance system.

For more than two years as Director of OFHEO I have worked to help create FHFA so that this new GSE regulator has far greater authorities than its predecessors.  As Director of FHFA, I commit that we will use these authorities to ensure that the housing GSEs provide stability and liquidity to the mortgage market, support affordable housing and operate safely and soundly.”

Too much to write about in detail for one post…just wanted to throw you some bits.

A+ Mortgage Receives an F from HUD

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I spent part of last week at an FHA conference and had a chance to learn all about their upcoming changes which Rhonda blogged about here.

In the past I have been critical about the lack of HUD auditors regulating their laws.  Regulation has mostly been left up to state agencies. Personally, I’ve only seen a HUD auditor once in my career and that was back in the mid 1980s during a routine FHA audit. I will now retract my criticism of HUD. They have more than made up for it with this searing audit of mortgage broker A+ Mortgage.

As of June 6, 2008, A+ Mortgage had one main Washington State office and 44 branch offices doing business under trade names such as “Kingdom Consulting,” “Resiliant Mortgage,” “Majestic Mortgage,” and “Extreme Home Lending.” HUD audited A Plus Mortgage to find out whether FHA borrowers were being overcharged and if loan originators were W-2 employees of A Plus, which is an FHA requirement. Here is what HUD found:

“A Plus disregarded HUD FHA requirements and provisions of RESPA and engaged in deceptive lending practices to maximize profits for itself and the independent contractors that used A Plus as a conduit for submission of loans for FHA insurance. Although A+ Mortgage informed borrowers that they could receive a lower interest rate on their loans by paying up-front points and fees, A Plus charged loan discount fees to borrowers without reducing interest rates on the mortgages. This practice allowed A Plus to generate high interest rate loans for which A Plus’s sponsor lenders paid A Plus a yield spread premium when the loans closed escrow. As a result, borrowers paid excessive interest and fees for which they received no benefit. In addition, all 28 FHA-insured A Plus loans reviewed were originated by independent contractors, unapproved branches, or other non-FHA-approved mortgage broker firms…A Plus ignored FHA origination requirements and submitted FHA loans originated by unapproved entities in exchange for a percentage of the loan origination fees, loan discount fees, and YSPs.”

HUD is recommending that A+ returned unearned fees totalling $153,110 to consumers, schedule a review of ALL of their FHA loans, and return all loan origination fees totally $32,026 to consumers on all loans that were originated by independent contractors. Recall that FHA loans must be originated by W-2 employees. I’m often asked why.

FHA says that loans originated under its program must be done by people who are under the lender’s exclusive control and supervision. HUD requires FHA-approved lenders to exercise responsible management supervision over its employees, including regular, ongoing, documented performance reviews of their work. By definition, independent contractors are unsupervised. For the reference, see HUD Handbook, 4060.1, Rev-2, paragraph 2-9(D).

National Loan Originator Licensing

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The “Federal Housing Finance and Regulatory Reform Act of 2008” is out. Here’s the PDF and here is the summary of the Dodd amendment. There’s a section inside Senator Dodd’s amendment that calls for national loan originator licensing. The first stop is page 34 where the definition of an LO is provided:

LOAN ORIGINATOR

A) IN GENERAL
The term ‘‘loan originator’’
(i) means an individual who
(I) takes a residential mortgage loan application; and
(II) offers or negotiates terms of a residential mortgage loan for compensation or gain;
(ii) does not include any individual
who is not otherwise described in clause (i) and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause; and (iii) does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator.

(B) OTHER DEFINITIONS RELATING TO LOAN ORIGINATOR.
For purposes of this subsection, an individual ‘‘assists a consumer in obtaining or applying to obtain a residential mortgage loan’’ by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.

This broad definition of “loan originator” means that we’ll be licensing LOs no matter where they work: broker, banker, consumer finance company, or credit union. There will be 20 hours of required, pre-licensing education and a national test delivered by the National Mortgage Licensing System and Registry. 75% to pass.

There’s way more to this bill than Nat’l LO licensing. 387 pages more. But that’s a good start.  Here’s the MBAA recap:

WASHINGTON, DC – Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, today announced that the Committee passed “The Federal Housing Finance Regulatory Reform Act of 2008,