Hope to See You There

ABA National Conference for Community BankersFebruary 17-20, JW Marriott Orlando, Grande Lakes, Orlando, FL

I will be on a panel Mortgage Reform and Your Bank.  We will be providing an complete update on all the latest CFPB issued regulations.
I will be talking about how to be ready and how to implement all the new regulations and upcoming changes.

QuestSoft Christmas Video Addresses ‘Dodd-Frank Syndrome’

Do you suffer from Dodd-Frank Syndrome, which is defined as “the disease that strikes mortgage compliance officers overwhelmed by the flood of rules passed in 2010?” Well, there’s no need to call the doctor – QuestSoft, a mortgage compliance software provider based in Laguna Hills, Calif., addresses this unique syndrome in its annual Christmas comedy video.

According to the company, the video highlights a team of holiday carolers presenting a parody of a PBS telethon raising funds for the Compliance Officer’s Relief Fund. In five minutes, the “Compliance Carolers” manage to squeeze all of the major rules into a handful of revised Christmas carols. Or, according to Questsoft, “Think ‘Carol of the Bells’ built on a litany of abbreviations.”

This year’s video is available to view online. QuestSoft is also offering a complimentary special combo DVD/CD pack that contains all of the songs from this year’s and last year’s Christmas videos combined into a single set.

Agencies Announce Increases in Dollar Thresholds in Regulations Z and M For Exempt Consumer Credit and Lease Transactions

The FRB (Board) and the Consumer Financial Protection Bureau (CFPB) today announced  increases in the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) for exempt consumer credit and lease transactions. These increases are consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amendments to the Truth in Lending Act and the Consumer Leasing Act to adjust these thresholds annually by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Transactions at or below the thresholds are subject to the protections of the regulations. The adjustments to the thresholds reflect the annual percentage increase in the consumer price index as of June 1, 2012 and will take effect on January 1, 2013.

Based on the adjustments announced today, the protections of the Truth in Lending Act and the Consumer Leasing Act  generally will apply to consumer credit transactions and consumer leases of $53,000 or less in 2013. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.

Although the Dodd-Frank Act generally transferred rulemaking authority under the Truth in Lending Act and the Consumer Leasing Act to the CFPB, the Board retains authority to issue rules for certain motor vehicle dealers. Therefore, the agencies are issuing these adjustments jointly.

In addition, the CFPB is separately adjusting the dollar amount that triggers additional protections for certain home mortgages under the Home Ownership and Equity Protection Act of 1994 (HOEPA), as required by statute. Consistent with the increase in the consumer price index, the dollar amount of the HOEPA fee trigger will increase to $625 for 2013.

Federal Register – Regulation Z

Federal Register – Regulation Z

Federal Register – Regulation M

CFPB Extends Effective Date for new Mortgage Disclosures

On November 16, 2012 CFPB announced that disclosure requirements will be integrated into final mortgage disclosure forms instead of taking automatic effect on January 21, 2013.

This final rule disclosures extension will give the industry extra time to provide certain new disclosures required under the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to allow a more seamless integration with other mortgage disclosures that have been proposed by the Bureau. Per today’s announcement, industry will not be required to provide those disclosures until after the Bureau’s previously proposed mortgage disclosure rules are finalized.

“Considering these disclosures on the same timeline will ensure that consumers receive clear, concise, and consistent information,” said CFPB Director Richard Cordray. “By seeking public comment and conducting consumer-testing for these disclosures together, we can avoid the duplication and inefficiency that existed in the past.”

The Dodd-Frank Act required that the CFPB integrate certain disclosures from the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). For decades, TILA and RESPA have required lenders and settlement agents to give borrowers different, but overlapping disclosure forms in connection with applying for and closing most mortgages loans. This duplication has long been recognized as inefficient and confusing for consumers and industry. In July, the CFPB proposed new Loan Estimate and Closing Disclosure forms after months of qualitative testing and the Bureau’s Know Before You Owe mortgage initiative.

In addition to requiring the integration of TILA-RESPA disclosures, the Dodd-Frank Act also establishes additional new mortgage disclosure requirements, which would automatically take effect on Jan. 21, 2013 unless other action was taken. These new requirements include disclosures on cancellation of escrow accounts, on a consumers’ liability for debt payment after foreclosure, and on the creditor’s policy for accepting partial payment. The CFPB integrated many of these new requirements into the Bureau’s proposed forms that were released in July 2012.

Though no deadline was mandated for finalizing the TILA-RESPA integrated proposal, the Bureau anticipates that the final rules will be published next year.

Just Posted – November Issue MBAC’s Bottom Line

The Mortgage Bankers Association of the Carolinas, Inc. (MBAC) represents companies that participate in the mortgage lending industry within North and South Carolina.

MBAC members include residential and commercial mortgage bankers, mortgage brokers, wholesale lenders, savings & loan associations, commercial banks, credit unions, government agencies, non-profit organizations, and companies that provide affiliated services to mortgage bankers.

The annual meeting was held in September and I had the privilege of speaking there on the CFPB.

In the newly posted newsletter I also contributed on the new RESPA TILA Integrated Rule   (see page 27).


For those of you in the North Carolina and South Carolina area please consider becoming involved in MBAC. You will be glad you did.

CFPB Releases Proposed LO Comp Rule

Today the Consumer Financial Protection Bureau (CFPB) released proposed rules on   MLO Compensation. These rules, which the CFPB is seeking comment on will be finalized by January 2013.  According to the CFPB the proposed changes were made in an effort toward greater accountability to the mortgage market.  They also published a Summary of Proposed Rule of the 369 page rule.

“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act places certain restrictions on the points and fees offered with most mortgages and the qualification and compensation of loan originators. Most notably, without this rulemaking, the Dodd-Frank Act would prohibit payment of upfront points and fees for most mortgages even where a consumer prefers a loan with a lower interest rate and some upfront costs.

The CFPB is seeking public comment on a proposal that would:

  • Require Lenders to Make a No-Point, No-Fee Loan Option Available: Under the proposed rule, creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan.
  • Require an Interest-Rate Reduction When Consumers Elect to Pay Upfront Points or Fees:  The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point or fee.

In addition to regulating upfront points and fees, the CFPB is proposing changes to existing rules governing mortgage loan originators’ qualifications and compensation.

The rules the CFPB is proposing would:

  • Set Qualification and Screening Standards: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.

The proposed rule includes:

  • Character and Fitness Requirements
  • Criminal Background Checks
  • Training Requirements
  • Prohibit Payment of Steering Incentives to Mortgage Loan Originators
  • Place Restrictions on Arbitration Clauses and Financing of Credit Insurance

The public will have 60 days, until October 16, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January 2013.


CFPB Publishes Semi-Annual Rulemaking Agenda

On July 16, 2012 the CFPB published their CFPB Semiannual Regulatory Agenda 2012 Spring.   The agenda lists proposed and finalized rules.  Also included are rules classified as “prerule stage”  These are rules that:

(1) require registration of certain nonbanks, with an advance notice of proposed rulemaking (ANPRM) to be issued in January 2013,

(2) coordinating the supervisory authority of the CFPB and prudential regulators over depository institutions, with further action expected in September 2012, and

(3) addressing HMDA data collection requirements, with further action expected in April 2013.

The proposed rules include both those already issued and several that have not been issued.  On Servicing CFPB states that, in addition to implementing Dodd-Frank requirements, it “also is considering whether to propose additional requirements for early intervention and continuity of contact for troubled and delinquent borrowers, and for servicers to adopt reasonable information management policies and procedures.” The CFPB also notes that it is involved in an interagency process with other federal regulators “to consider broader issues regarding national servicing standards.”

The final category is long term actions.  The agenda includes 27 items, a clear indication that we will be busy with implementation of new requirements for a long time.

The Best Preventive Medicine: Pre-Sale Audits of Loan Portfolios

Can you really be certain that there are no toxic problems lurking within your portfolio?

By: Penny A. Showalter

An edited version of this article was originally published in the May 2012 issue of Secondary Marketing Executive

Risk & Reward In The Mortgage Loans Secondary Market

The dramatic increase in forensic reviews and repurchase requests in recent years has rendered the mortgage loans secondary market dangerous to those who follow either of two tactics:

  1. Those who operate on a “business as usual” basis, assuming their loan qualification processes meet industry and legal standards  and are being assiduously  followed by their staffs, are in danger of being fiscally savaged by a buyer pushing back on them an overwhelming number of loans because of significant, trivial, or even irrelevant violations.
  2. Those fearful enough of such a catastrophic possibility that they refuse to participate in the selling of mortgage loans are in danger of unnecessarily surrendering the considerable economic advantages the secondary market offers.

There is, however, a third strategy that mitigates the dangers of selling mortgage loans, protecting sellers from being ambushed with repurchase demands months or years after the completion of a transaction and allowing even cautious managers to both reap the rewards of the secondary market and sleep soundly at night:. Pre-sale audits can identify and eliminate hidden flaws in the methodology of an institution’s mortgage processes and its execution of those processes to prevent those imperfections from becoming time bombs in ones portfolio.

The Pre-Sale Audit Effect On Loan Purchasers

Auditing your portfolio prior to selling the loans not only protects you but also provides purchasers evidence of the quality of your product.

Moreover, those potential buyers most likely to garner assurance from the knowledge that you care enough about the quality of your loans to invest in an independent, third-party review are likely to be your  most desirable customers – i.e., those searching for mortgages that have been produced by careful guidelines and thus have reliable and calculable outcomes. Such buyers may, in fact, consider mortgages constructed under these conditions to be a premium product worth a premium price.

On the other hand, a potentially antagonistic purchaser, i.e., one looking for groups of loans produced with less care in hopes that consequent process errors could ultimately be used to justify repurchase requests for any loans that might default (whether the process errors are pertinent or not), is unlikely to view a pre-sale audit as a positive sales point. I would hold that the decreased attractiveness of audited mortgage loans and any subsequent loss of sales to this category of client is a major benefit of performing such audits.

The Pre-Sale Audit Process

A pre-sale audit informs you whether the proper loan origination policies and procedures have been followed, as well as whether guideline and credit parameters have been met.

As a consequence of the pre-sale audit and the resulting corrective actions, you know that the documentation of your delivery package will be correct, and, should questions later arise about an individual loan, you will already have the necessary answers.

A comprehensive pre-sale audit involves five areas of review:

  1. Documentation
  2. Regulatory Compliance
  3. Guideline Adherence
  4. Borrower Forensics
  5. Appraisal Review

Every loan undergoes the first three categories of review: Documentation, Regulatory Compliance, and Guideline Adherence.  Borrower Forensics and Appraisal Review are completed on a random sample of the files with the sample size calculated by taking into account various parameters, such as number of loans in the portfolio, credit grade of the pool, seasoning of the files, number of files current and number delinquent, … .  If government loans are included, MIC and Guaranty Status are also relevant.

Documentation:  The audit assures all requisite documentation is in the file.  Missing documentation is a major source of repurchase demands that can be easily avoided.  Your audit firm should provide a Documentation Checklist that indicates not only if the documents are present but whether the documents were accurately completed and if all necessary signatures were obtained.

Searching for trailing documents months or years after loans have closed and the sale is complete is not only time-consuming and expensive but demoralizing as well. Nor is there any guarantee that such belated rectification efforts will be successful.  Deficiencies identified at this point are more economically and efficiently correctible than several months after the sale.

Regulatory Compliance:  The Statement of Work for the audit should require that all loans undergo examination for Regulatory Compliance with

  • TILA
  • MDIA
  •  Fair Lending
  • All State Compliance Requirements

And do yourself a favor:  formally request that HMDA information be double-checked.

Again, it is far less onerous to correct an error at this point in the process – and far less expensive than buying back a loan.

A pre-sale audit can prevent that innocent typo in a date on a Notice of Right to Cancel from coming back to bite you two years down the line.

Guideline Adherence:  It is essential to provide the appropriate origination guidelines and your policies for approving exceptions to guidelines to your audit firm. Exceptions to guidelines are a red flag; the ability to demonstrate that any exceptions were accurately documented and approved is key.

By the same token, if a deficiency is found, any needed approval signatures and supporting documentation can be obtained   and added to the file.

Borrower Forensics:  My personal experience in the field have convinced me that a sampling of borrowers,  based upon originating office, the specific loan officer, or some other criterion, should have their employment status, income figures, and other critical data re-verified. . The key point is conducting your own forensic review BEFORE one is mandated.

By employing fraud detection techniques ahead of the loan sale, you once again provide an extra layer of comfort for the prospective buyer of the loan pool.  And, as a seller you will have the information required to calculate a price and determine if specific loans should be pulled from the pool.

Appraisal Review:  A sample of appraisals should be checked as well.  Have the validity of the appraiser’s license confirmed, especially if you have originations in states that have a history of problems with the quality of appraisals.

This is not a job for amateurs. Ask your audit firm if they have an appraisal review specialist on their staff and, if so, how much experience he or she has.  Have some appraisals reviewed on a “challenge” basis, looking for questionable valuation conclusions.  Make sure that the appraiser has correctly identified the market trends for the specific area, and verify that the sales used as comparables were in fact good comps.  Again, applying this forensic approach in advance of the sale and before problems declare themselves is far more cost-effective than attempting to do so under the pressure of a repurchase demand.

Pre-Sale Audit As A Quality Assurance Component

The pre-sale audit will not only benefit you at the time of the pending loan sale, but the audit results will give you information to enable you to fine-tune your processes going forward.  Identifying deficiencies now will give you an opportunity to take remedial action before the sale, or time to identify compensating factors that you can provide to minimize the impact of the problem to the buyer.  In the worst case, you will learn ahead of time that you have a loan that has to be pulled from the pool and shelved until seasoning compensates for the problem or you have a buyer willing to take on loans with such issues.  Once again, correcting errors at this point is more effective, economical, and efficient than doing so when questions or legal issues arise later.

The audit also identifies recurring problems, providing you with the opportunity to revise your training programs and methods and bring your Policy and Procedures manual up-to-date if necessary.  Depending upon the criteria used to select loans for review, the audit results could also be used to assist in performance evaluations.

The primary benefit, in fact, of the pre-sale is as one integrated component of Quality Assurance.  You, your employees, and your buyers have concrete evidence that you reliably generate a high quality product. Not only will that improve the prices of that product, but it will also enhance the relationship with your most favored buyers, and bring increased sales opportunities.

Buyer-initiated Pre-Sale Audits Initiated

While this article has been presented from the perspective of the seller of loans, the advantages of a pre-sale audit accrue to the buyer of portfolios as well.  Buyers who commission their own pre-sale audit can determine if the loans being offered are flawed with guideline or regulatory violations.    Audit findings provide not only warning of increased risk but also the data needed to calculate the cost of corrective actions and readjust the price to reflect lower quality loans. Buyer-initiated pre-sale audits include all the procedures outlined above and the following steps:

  1. BPO: In addition to the Appraisal Review, a BPO should be obtained on all files to verify current values.  The market has changed throughout the country, areas and buyers need to be alert to potential problems that could arise in the future if a loan defaults and becomes subject to foreclosure.  The value of the property is crucial to the funds that can be recouped by its sale if it becomes an REO.
  2. Corrective Analysis: Buyers not only need to know if a compliance issue exists but also if correction is possible, the means by which a correction would take place, the time and money required for that correction. Only with this information can a buyer render an informed decision on the pricing and ultimate purchase of a file.
  3. Service History Review: When considering the purchase of a seasoned portfolio or pool, a review of the servicing history is essential.  This goes beyond the current loan status and reflects the payment history over the life of the loan.
  4. Comprehensive Guideline Review: Buyers should ensure that guidelines presented cover all timeframes of the lending process of the loans in the pool and that the policies governing exceptions to those guidelines are fully documented.

An audit done prior to purchase informs the buyer about the nature of the product independent of the seller’s potentially skewed description and enables the buyer to determine a price that takes into account the risk being assumed.

The Pre-Sale Audit: How To Start

Whether you are the buyer or seller of mortgage loans,  the pre-sale audit is a necessary element of a strategically sound transaction that maximizes profit, manages risk, and enhances the efficiencies  of not only those directly involved in the sale and the mortgage market as a whole.

The checklist below covers many of the points raised in this article and can serve as a starting point for those considering a pre-sale audit.

Checklist for Review