Encompassing Regulatory Compliance, Risk Management & Operational Excellence in Mortgage Banking
May 2019 WITHOUT A RISK CONTROL FRAMEWORK, IT ALL FALLS
Alternative Home Financing page 24
QUALITY CONTROL GUIDE
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SUBSCRIPTIONS A FEATHER This publication is for the benefit of the Legal, Regulatory Compliance, Risk Management, and Quality Assurance mortgage industry professionals. If you are a Legal, Regulatory Compliance, Risk Management, and/or Quality Assurance mortgage industry professional and you do not currently receive Mortgage Compliance Magazine, please go to www. MortgageComplianceMagazine.com and subscribe. Mortgage Compliance Magazine is a digital monthly magazine FLOCK that is sent directly to professionals' computers. The subscription is FREE to all Legal, Regulatory Compliance, Risk Management, and Quality Assurance mortgage industry professionals. For TOGETHER additional copies for your colleagues and co-workers, please visit our website at www.MortgageComplianceMagazine. com and complete the online subscription form or send an email with your first and last name, company name, telephone number, your title, and your email address to SUBSCRIPTIONS@ MortgageComplianceMagazine.com. To opt-out of receiving Mortgage Compliance Magazine, please send your request, to “UN-SUBSCRIBE” with your name, company name, and address to SUBSCRIPTIONS@ MortgageComplianceMagazine.com.
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2 May 2019
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www.thewbkfirm.com CONTENTS May 2019
PUBLISHER Ben Slayton [email protected] Cover Story MANAGING EDITOR Brian Honea 10 FRAMEWORK: A risk control [email protected] framework in the life of a loan SENIOR EDITOR Jill Emerson Quality life-of-loan model [email protected] Steve Spies OPERATIONS DIRECTOR Dawn Slayton [email protected] Features ADVERTISING David Hoierman 20 Fannie Mae Backs "Dreamers" [email protected] James Brody PRODUCTION Henry Suchman [email protected] 24 Regulatory Considerations for Alternative Home Financing DIGITAL MEDIA Eric Souza [email protected] Programs James Milano COLUMNISTS & CONTRIBUTING AUTHORS James Brody James Milano Steve Spies 32 Alternative Data Chitra Dorai Bob Niemi Caroline Stapleton Taylor Hildenbrand Tobias Peter Jonice Gray Tucker and Fair Lending Face Off Mitch Kider Colgate Selden The Relationship is Complicated Jonice Gray Tucker and MCMag ADVISORY BOARD Caroline M. Stapleton ANNEMARIA ALLEN SAMUEL B. MORELLI PRESIDENT EXECUTIVE VICE PRESIDENT & THE COMPLIANCE GROUP CHIEF COMPLIANCE OFFICER Thinking About Joining TOMMY DUNCAN PRIMESOURCE MORTGAGE 36 PRESIDENT the Non-QM Queue? QUALITY MORTGAGE DEBRA STILL SERVICES PRESIDENT AND CEO Here are Some Compliance MALINDA EDWARDS PULTE FINANCIAL SERVICES STAFF INTERNAL AUDITOR Considerations to Keep in Mind STATE FARM MICHAEL TALIEFERO Colgate Selden H. BURTON EMBRY PARTNER SENIOR VICE PRESIDENT COMPLIANCETECH PRIMARY RESIDENTIAL MORTGAGE JOHN VONG 42 Rise of AI in Regulatory Compliance MITCH KIDER PRESIDENT Chitra Dorai CHAIRMAN AND COMPLIANCE EASE MANAGING PARTNER WEINER BRODSKY KIDER PC MICHAEL WALDRON 46 The Looming Threats from CHIEF COMPLIANCE OFFICER KEN MARKISON KEN MARKISON BAYVIEW LOAN SERVICING Today’s “Improved” Mortgage ADVISORS LLC JOSHUA WEINBERG Manufacturing Process BENJAMIN MADICK PRESIDENT EXECUTIVE VICE PRESIDENT Tobias Peter MORTGAGE QUALITY FIRST CHOICE LOAN MANAGEMENT & RESEARCH SERVICES, INC. Mortgage Servicing Compliance Visit us at 52 Keeping the Pace: A Servicer’s Four www.MortgageComplianceMagazine.com Biggest Takeaways from the FHA's for additional content and articles from leading compliance leaders, and photos from regional & national compliance March 2019 Update to HB 4000.1 conferences. Taylor Hildenbrand
4 May 2019 CONTENTS May 2019 10 42
24 Departments 6 Editor's Foreword 8 Events Calendar 9 Sponsors Corner 13 Quality Control Guide 56 Legal Counsel 60 The 'Om-Bobs-man' 61 The Mortgage Counselor 32 36 62 State Reglatory Issues Update 63 Mortgage VIPs 65 White Papers & Webinars 66 Police Blotter 67 MBA Calendar of Events 68 Compliance Alphabet Soups 69 ComplianceGAMES 70 Ask The Compliance Experts 71 Compliance Whiz 72 Business Services Directory
May 2019 5 EDITOR'S FOREWORD
LEGAL ISSUES AND REGULATIONS: THE MORE THINGS CHANGE. . . Typically that cliché is completed with, “the more they stay the same.” When it comes to legal issues and regulatory matters for the mortgage industry, however, the adage should read, “The more things change, the more challenging it is to comply.”
Things definitely do not stay the same as more regulations are constantly changed or added, and compliance does become more challenging. Hence, thousands of industry professionals will gather in New Orleans on May 5 through 8 at the MBA's Legal Issues and Regulatory Compliance Conference to discuss how the most re- cent regulatory changes are affecting their business and how to handle the latest compliance challenges.
If you can't make it to the Big Easy but you want to know the latest legal and regulatory de- velopments, look no further than this issue of Mortgage Compliance Magazine. This issue is packed with industry experts orating on such hot regulatory topics as implementing a strong quality management process (Steve Spies of Fannie Mae) how Fannie Mae is handling the uncertainty of mortgage loans made to DACA immigrants (James Brody of Johnston Thomas Law Firm); the growing popularity of AI in regulatory compliance (Chitra Dorai of Atasii.com) regulatory considerations for alternative home financing programs (James Milano of Wein- er Brodsky Kider) what happens when alternative data and fair lending collide (Jonice Gray Tucker and Caroline Stapleton of Buckly LLP); and, compliance considerations for any lender thinking about making non-QM loans (Colgate Selden of PromonTech).
What are some of the legal issues and regulations you find most challenging in your day-to- day operations? Drop us a line and let us know. Contact us on social media (facebook.com/ mortgagecompliancemagazine) or via the email address below.
Brian Honea Managing Editor [email protected]
Mortgage Compliance Magazine welcomes your feedback. If you have comments, questions, criticisms, praise, or information to share with us and our readers, please write us at [email protected].
6 May 2019
CALENDAR OF EVENTS
Calendar of Events 2019
8 May 2019 SPONSORS CORNER SPONSORS Corner Many thanks to these sponsors for supporting our mission of bringing you a magazine dedicated to informing and educating mortgage banking professionals about regulatory compliance, risk management and operational excellence. FRAMEWORK: A risk control framework in the life of a loan Quality life-of-loan model BY STEVE SPIES
mple- be effective. The Risk Control Framework menting In this installment we lay graphic (opposite page) traces a strong out what a culture of quality the mortgage loan process Iquality man- looks like. It will come as no from first customer contact to agement pro- surprise that if the CEO is not a comprehensive post-closing cess will help passionately committed to analysis and action plan to ensure you’re quality, then any attempts to improve the quality of future getting the build a culture of quality will loans with nine critical control Steve Spies most from your be in vain. Therefore, as the points in the QC life cycle: quality control graphic points out, hold the CEO 1. Validating Application Data (QC) program. A good place to accountable for quality and the [Internal/Third-Party Data and start is by looking at your compa- rest will fall into space. Build this Fraud Tools] ny’s risk management procedures operational discipline first before and culture. Unless the culture of tackling the nine control points 2. Underwriting and Eligibility the entire organization is com- on the framework that will be 3. Appraisal and Collateral mitted to it, no QC program will highlighted in future issues. Assessment
10 May 2019 4. Prefunding Quality Control QC RISK CONTROL FRAMEWORK FRAMEWORK: 5. Pre-Closing Document Review 6. Post-Closing Document A risk control framework Review 7. Post-Closing Quality Control in the life of a loan 8. Reporting 9. Action Plan to Prevent Future Defects Quality life-of-loan model Some of these control points are managed by QC personnel and some by operations personnel. Regardless of the person completing the reviews and checks, lenders that have these or similar controls in place will ensure active management of loan quality. The control points will be discussed in more detail in future articles, following this review of some foundational principles for good risk management. culture of quality will motivate • Document Control − Good procedures and a those who first touch the loan Fannie Mae has observed a strong risk management culture to focus on the accuracy of widespread lack of control will also provide a clear and information in the file. While in the management of file accessible escalation process documents. A lender’s failure when staff or management have a rigorous prefunding QC to either obtain all required concerns. In Beyond the Guide, process should become the documents to support an we provide ideas on how to lender’s most powerful tool underwriting decision or to reach maximum effectiveness for over time, the cornerstone maintain copies of those each control point. of an effective QC program documents in the loan file is an accurate process for • Good Data − The lack of has led to a significant measuring, analyzing, and a robust control process number of QC findings. We reporting on loan quality. The for verifying file data is cannot over-emphasize the organization can determine a common gap in QC need to implement processes programs. Control point #1 the need for action only if and require accountability focuses on ways to confirm standards are in place to to ensure that all documents the accuracy of loan data. identify a defect. The lender are obtained before closing must empower staff to stop • Continuous Feedback and properly stored for for Improvement − The a loan from processing or later retrieval. Compliance QC process should drive a closing when a significant activities also have a critical continuous feedback loop that defect is found; otherwise, the role in a QC program. Given results in improvement to the QC program will lack “teeth” the targeted and specific origination process. A strong and not be effective. nature of compliance reviews, ∆
May 2019 11 they are not addressed in errors have demonstrated concern about the “cost of Beyond the Guide, which the best performance related quality” to appreciation for the
focuses on manufacturing to loan quality. Enforcing a “return on quality.” MCM quality. discipline related to tracking, A loan file with a missing monitoring, and testing document is like a jigsaw action plans builds in a Steve Spies is Fannie Mae’s puzzle with a missing piece. continuous improvement Vice President of Loan Quality. Get more ideas on how to loop and helps these risk He leads their Loan Quality reduce missing docs. organizations have lower Center which conducts over level of defects that are 100 thousand loan level quality • Taking Action − At each sustainable over longer time control point, the lender control reviews every year. His periods. should assess the accuracy role also includes developing, implementing and monitoring of loan information and, if Identify the defect a Loan Quality standards, as well a defect exists, take action. Cure the loan-level defect a In our own internal QC as oversight for lender quality Address the root cause processes and in our industry control effectiveness. Steve observations, we’ve seen Finally, once all the QC conceived and co-authored that organizations with a components are correctly Fannie Mae’s Beyond the Guide, disciplined approach to implemented, the lender should highlighted in the April and remediation of defects and be able to transition from subsequent issues. Write? Right!
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12 May 2019
QUALITY CONTROL GUIDE QUALITY CONTROL GUIDE
KEY PERSONNEL & CONTACT INFORMATION Dru Jacobs, President 1-800-888-0456 [email protected] www.adfitech.com BUSINESS SERVICES & PRODUCTS Performing oversight from application to payoff, Adfitech, Inc. offers review service products to meet every need. Post closing Quality Control that meets the requirements of Fannie Mae, Freddie Mac, FHA and VA, as well as, Non-QM/ATR products. Pre-Funding Quality Control to review the accuracy and quality of the loan application and approval before funding. Mortgage CORPORATE PROFILE Fulfillment to handle the delivery of a complete closed loan file to an investor or collateral package to custodian with imaging Since 1983, Adfitech, Inc. has been the go-to source and/or file storage options. Servicing Quality Control Reviews for premier post-closing and pre-funding quality control consisting of several distinct QC programs based on the areas services for more than five hundred mortgage lenders, of servicing in which you wish to identify and control operational banks, and credit unions throughout the United States. risk. Mortgage Due Diligence that is rating agency reviewed and Located in the heartland of America, Adfitech, Inc. is offers Pre-Securitization, Private Transfer, and NPL / RPL reviews. known for concierge-level service in delivering trustworthy KEY BENEFITS & VALUE results, expert regulatory oversight, and improving overall Experience Counts! With 35 years of service, Adfitech, Inc. is loan quality for the clients we serve. Adfitech, Inc.’s committed to providing timely response to all inquires as well as online reporting and rebuttal platform is the easiest, most proactive solutions in order to meet client specific demands. Our transparent online rebuttal process the industry has to innovative approach to client satisfaction allows us to remain agile offer. Our simple per-file pricing eliminates the need for in an ever-changing industry as we continually work to exceed long-term and minimum contracts, enabling Adfitech, Inc. expectations of our partners. With no long-term or minimum contracts to operate as your company’s full-service quality control and competitive and simple per-file pricing, Adfitech, Inc. gives your partner. For more information or to schedule a demo, company a full-service quality control department as well as a variable- please visit us at www.adfitech.com. price solution based on your company’s production volume.
KEY PERSONNEL & CONTACT INFORMATION Nick Volpe Chief Strategy Officer 1-800-858-1598 [email protected] www.armco.us
CORPORATE PROFILE BUSINESS SERVICES & PRODUCTS More than one in three of the nation’s top lenders and ARMCO’s product line includes loan quality enterprise software, services, data and analytics. Its flagship product, ACES Audit servicers, as well as over half of the top 20 mortgage Technology™, has set the bar for user-definability in its lenders, choose ARMCO (ACES Risk Management) as category. It is used at virtually every point in the mortgage their risk management software provider. The leader lifecycle, as well as for a wide range of risk-prone business in enterprise financial risk management solutions, operations outside traditional mortgage origination and ARMCO offers an array of quality control and compliance servicing. ARMCO’s consultative approach to customer technology, including ACES, its award-winning auditing relationships leverages 25 years of mortgage risk intel. platform. KEY BENEFITS & VALUE Every ARMCO client benefits from our hands-on consultative ARMCO clients benefit from our robust profit-enhancing tools approach that leverages the company’s decades of industry and our Client Success team of experts who are constantly expertise. ARMCO’s free services include the quarterly ensuring each client reach their goals, bring value to their organization and deliver ROI. Among the long list of awards ARMCO Mortgage QC Industry Trends Report and the we have earned throughout the years are MBA Tech All Star, Compliance Newshub, an online credit and compliance HousingWire Top Tech 100, HousingWire Vanguard and resource library. HousingWire Insiders.
14 May 2019 QUALITY CONTROL GUIDE
KEY PERSONNEL & CONTACT INFORMATION Martin Drake Managing Partner/ Owner 214-551-5578 [email protected] www.thecomplianceshop.net
BUSINESS SERVICES & PRODUCTS TCS’s product line includes a complete customizable Compli- ance Management System (CMS), for brokers, mini-correspon- dents, and correspondent lenders. The CMS includes a com- CORPORATE PROFILE plete QC Policy, LO Comp Policy, Online Training Modules for As originating loans becomes more difficult and federal entire staff that meet or exceed SAFE Act rules, and a full Social agencies are slow to give clear answers to new regulations, Media Review to ensure compliance. Additional services in- you need to protect your business, your loan officers and clude: Post Closing QC File Reviews, Prefunding Loan Reviews, AML/BSA Reviews, Federal and State Regulatory Reviews, yourself. We are dedicated to helping mortgage brokers, HMDA Reports, and Audit Preparation. mini-correspondents, correspondent lenders, and small banks of all sizes comply with regulations, manage risk, and seamlessly integrate compliance into day-to-day KEY BENEFITS & VALUE operations. With a combination of technology and one-on- We work closely with all the state regulators, so we always know one training, we will ensure you, your business and your what the state hot buttons are. The importance of maintaining employees and are in full compliance. With our secure a fully compliant shop cannot be overstated. Stop cutting and website, your employees can log on 24/7 from their home, pasting regulations together, and start mitigating your risk With office, or tablet and take training modules, upload files, 21 years in the mortgage industry, the question isn’t can I afford get answers to questions, and access your company’s QC this service, the question you should be asking is, can I afford to policy. not have this service?
KEY PERSONNEL & CONTACT INFORMATION Linda Bomar Senior Vice President 214-515-0848 [email protected] www.indecomm.net
BUSINESS SERVICES & PRODUCTS AuditGenius™ is Indecomm’s next generation SaaS solution for loan audits and mortgage risk management, leveraging technology to enable automation and simplify the loan audit process for effective risk management. AuditGenius™ CORPORATE PROFILE automates document identification and indexing, then compares data across the loan file to identify exceptions. This Indecomm is a leading provider of business services allows you to focus on areas that need attention rather than and technology for the mortgage industry, with over the whole loan file, dramatically increasing your efficiency thus two decades of experience helping mortgage lenders reducing the cost of audits. manage their risk and quality control. Our outsourced risk management solutions bring together mortgage industry KEY BENEFITS & VALUE veterans and our robust next generation audit technology Indecomm offers Quality Control solutions for every step of to provide a unique suite of solutions. When you partner the loan process to ensure delivery of quality loan files to your with Indecomm, we become an extension of your risk investors, including: Initial Package Submission Audit, Pre- management team. We start by discussing your goals, Funding Quality Assurance, Pre-Closing Audit, Post-Closing Quality Control, Compliance Audit, Pre-Delivery Audit, HMDA workflow, and needs. Feedback and recommendations review and AuditGenius™, Indecomm’s proprietary audit are then provided to ensure best practices are followed to technology that provides a real-time view of files, with business render delivery of quality loan files to your investors. intelligence, reports and dashboards.
May 2019 15 QUALITY CONTROL GUIDE QUALITY CONTROL GUIDE
KEY PERSONNEL & CONTACT INFORMATION Claudia Duncan, President 615.591.2528 ext 124 [email protected] www.qcmortgage.com
BUSINESS SERVICES & PRODUCTS QMS delivers reports and analytical tools that assist clients in as- sessing loan quality and maintaining organizational compliance. Our audit reviews are in line with agency requirements and QC services include: Post-Closing, Pre-Funding, Federal Regulato- CORPORATE PROFILE ry, Pre-Purchase/Due Diligence, Early Payment Default, Denials, Quality Mortgage Services, LLC (QMS) is a well-established Servicing, Repurchase Defense, HMDA, Anti-money Laundering leader of mortgage quality control audit solutions and and MERS® audits. Additionally, QMS offers a secure reverifi- cation platform, QCVerify, and our MARS QC software can be proprietary mortgage auditing software, MARS (Mortgage leased to manage QC efforts inhouse. Analyst Review Software). With over 20 years of experience and specialized knowledge in the mortgage banking KEY BENEFITS & VALUE industry, QMS is a boutique risk management and mortgage quality control solutions company that provides Audits, QC plans and verification solutions that meet today’s full service mortgage loan analysis results for banks, credit organizational compliance needs…. We guarantee 4-6-week report delivery. At QMS we are progressive in nature, committed unions, lenders, brokers and housing authorities. to service, and always evolve to better assist our clients in meeting industry requirements and their unique needs. All QMS is a proven industry partner, with a dedicated solutions are competitively priced and supported by our MARS commitment to our clients. The QMS vow is to shine in software, providing transparency to every phase of the quality customer service, responsiveness, support and flexibility. control process.
KEY PERSONNEL & CONTACT INFORMATION Matthew Reich SVP, Business Development & Client Relations 919-747-8197 [email protected] www.questadvisors.com
CORPORATE PROFILE BUSINESS SERVICES & PRODUCTS Quest Advisors, Inc. is a leader in the mortgage quality Quest provides a wide variety of mortgage quality assurance assurance industry, providing expert services, including QC services including, but not limited to: Post Closing QC Reviews, audits, federal and state regulatory compliance reviews, Prefunding Loan Reviews, Adverse/Denied Loan Reviews, consulting and other quality control offerings to mortgage Early Payment Default Reviews, Federal Regulatory and State lenders and servicers. Our customized solutions provide Compliance Reviews, Audits (Servicing, Branch, Operational, clients with options for streamlining their mortgage quality AML/BSA), QC Plans and General Consulting. and compliance processes to favorably influence profitability. Since our inception in 1995, we have partnered with our clients to improve their loan quality as they navigate within the ever- changing mortgage environment. We work closely with our KEY BENEFITS & VALUE clients to communicate key changes and to provide valuable Quest is entering its 25th year in business. We work closing advisory support in a variety of quality and compliance areas. with clients on all aspects of their quality assurance programs We tailor our services to our clients’ needs and provide and strongly believe that with the proper guidance and support, advanced portal-based technology featuring real-time results Quality Assurance can be a profit center rather than a cost and reporting. Through the shifting landscape and challenges center. Our longevity and expertise in the mortgage industry of the mortgage industry, we have been a stable force for separates us from others, and we welcome the opportunity to nearly 25 years. Reach out to www.questadvisors.com for a show you how we partner with our clients in their Quest for superior quality assurance experience. Quality.
16 May 2019 QUALITY CONTROL GUIDE QUALITY CONTROL GUIDE
KEY PERSONNEL & CONTACT INFORMATION Betsy Reynolds President 205-536-7715 [email protected]
BUSINESS SERVICES & PRODUCTS Pre-Funding QC • Post-Closing QC • Servicing QC Early Payment Default Reviews • Denied/Rejected File Reviews HMDA Scrubs • Lending Compliance Our pre-funding and post-closing loan review process meets CORPORATE PROFILE and exceeds agency requirements and includes a complete analysis of credit, collateral, closing and compliance. Pre- Regulatory Solutions is an industry leader in mortgage quality funding reviews are performed in 24 hours allowing you to control and lending compliance. Our growth has propelled identify and reduce errors before closing. Our servicing reviews us into one of the premiere mortgage quality control service cover all facets of servicing. We specialize in HMDA scrubs and providers in the country. Our management team has over a have developed proprietary software which allows us to scrub century of combined experience in the banking, mortgage your HMDA with accuracy and efficiency. lending, and investment industries and includes former bank regulatory examiners, compliance officers, experienced KEY BENEFITS & VALUE We work with clients nationwide. Use us on a monthly basis or for mortgage loan quality control and audit professionals, overflow during peak months. Our online communications portal underwriters, and attorneys. allows clients to interact and communicate with us electronically throughout the review process. Reports are easy to read and can Regulatory Solutions has been a Certified be customized for your needs. Management is easily accessible Women's Business Enterprise since 2012. to respond to your quality control and compliance questions.
KEY PERSONNEL & CONTACT INFORMATION Kathryn Anderson & Tom McDonough, Nat'l Bus. Dev. TENA Companies, Inc. 800.255.8362 (TENA) [email protected] BUSINESS SERVICES & PRODUCTS TENA’s audit services and SecondLook software provide the information required for early detection of aberrations along with tools to mitigate them. SecondLook can be licensed by firms that perform QC in-house and TENA’s outsource audit divisions provide a variety of quality control audit services, including: • Pre-funding • Post-closing • Servicing • Consumer loan CORPORATE PROFILE origination • Consumer loan servicing • TENA Web Services For over 37 years, TENA has provided accurate audits and • Compliance • Loss Mitigation • Foreclosure • MERS strong customer support to over 700 lenders and servicers nationwide. TENA prides itself on its ability to adapt to the KEY BENEFITS & VALUE • Dedicated expert support representatives for each client. fast-paced and constantly changing lending industry. • Flexible and scalable QC services will meet the needs of all types of lenders and servicers. TENA’s knowledgeable staff is available to answer client • Audit testing scripts are maintained by TENA and meet agency, questions about many different aspects of the mortgage and federal and state compliance requirements. consumer lending and servicing processes. TENA strives • SSAE-16/SOC 2 compliant. for excellence when it comes to supporting its customers • An array of prebuilt and customizable reports are available to and ensuring all their questions are answered and their meet each client’s unique business requirements. expectations are exceeded. • Customized Selection Methodologies.
May 2019 17 ADVERTORIAL
THOUGHT LEADER
Remember to Comply with these Requirements When Designing New Marketing, Websites, or Technologies process. Many of these laws have to enter into referral arrangements not kept pace with technological with other players in the market, advancements and can insert which may be commonplace in themselves in the process in other industries. unintuitive ways, putting up Section 8 of RESPA generally roadblocks to the efficiencies and prohibits payments of kickbacks or consumer-friendly workflow you any “thing of value” in exchange are trying to achieve. Violations for referrals of settlement service can result in administrative business. Section 8 is drafted penalties and borrower lawsuits. very broadly, and it has not been We will briefly discuss just two of updated in decades. Especially the laws here, but there are many. considering the fast pace of technological changes, this 1. TRID. The TILA-RESPA inte- prohibition may have uncertain grated disclosure rule (the “TRID” applicability to many new types of rule) requires a lender or mortgage relationships in the industry. broker to provide a Loan Estimate There are some exemptions (or “LE”) within three business Richard Horn, Managing Member from this prohibition that days after receipt of a consumer’s [email protected] companies may utilize, such as for “application,” which is only these Whether your company is a marketing services agreements six items: (1) name; (2) income; (3) new Fintech start-up or an existing (“MSAs”) or affiliated business social security number to obtain a mortgage lender, if it is creating arrangements. But there are very credit report; (4) property address; new technology, mobile apps, specific criteria companies must (5) estimated property value; and meet to satisfy these exceptions. tinkering with its advertising in the (6) desired loan amount. Requiring If your company has or desires any mortgage market, or finding new any other information from a con- arrangements or joint ventures business partners, you may be sumer before providing an LE, or with other players in the real asking how you can improve the failure to provide a timely LE after estate or mortgage industry in consumer experience, or speed up obtaining these six items, can be a which referrals are made, it should the application process? violation. obtain legal counsel to ensure it is But there are important The rule also prohibits questions your company should imposing fees, except a bona compliant with RESPA. also ask to prevent legal risk, fide and reasonable credit report This is only a very brief such as whether and when it fee, before the consumer receives summary of two federal laws collects information that triggers the LE and indicates an “intent that apply to marketing and the requirements under federal laws, to proceed” to the lender. In application process. There are such as TRID, RESPA, HMDA, or addition, the rule requires a many other federal and state law ECOA? Or how can you balance specific disclaimer to appear on requirements that may apply. a simple borrower experience with the top of any consumer-specific these federal consumer protection estimates of loan terms and costs. Please contact me if you would laws? like Garris Horn PLLC, a new These are important questions 2. RESPA Section 8. Many new “virtual” financial services law firm, because there are many federal entrants to the mortgage and real to advise your company regarding laws that apply to your company’s estate markets do not realize that its marketing or application marketing and application RESPA greatly restricts the ability process.
18 May 2019 Connect Better. Close Faster.
Let our technology improve your relationships, shift your expectations, and deliver a flawless digital experience.
connect-better-scotsman-compliancemag.indd 1 2/26/2019 9:25:16 AM FANNIE MAE BACKS “DREAMERS” BY JAMES BRODY
ver this last year, there appears to As early as the second half of have been an unannounced shift 2018, lenders started becoming very in the various agency requirements concerned about the DACA status of forO DACA [Deferred Action for Childhood potential borrowers. In a letter to FHA Arrivals] Visa Status borrowers. DACA Commissioner Brian Montgomery, the status is a Visa status that was offered to Mortgage Bankers Association (MBA) children who were brought to the U.S. il- noted the uncertainty of the DACA legally by their parents and who have now program and how lenders were particularly been here for the majority of their lives. James Brody hesitant to offer mortgages to individuals Many of these “children,” also known as with deferred status and expired renewals. Dreamers, have lived in the U.S. for many As early as the The MBA pointed out that the Handbook second half of years and are now well into their adult- contains three categorizations of non-U.S. 2018, lenders hood. As these Dreamers are technically started in the U.S. illegally, DACA was created as citizen residency status, including lawful becoming very a way for the Dreamers to obtain a Visa permanent resident aliens, non-permanent concerned resident aliens, and non-U.S. citizens about the status that would allow them to work in without lawful residency. As a result, the DACA status the U.S. despite their immigration status, of potential at least until Congress is able to come MBA recommended HUD provide clear borrowers. to an agreement on what to do with this guidance as to which category DACA particular segment of the population. Un- participants should fall. der DACA, Dreamers are protected from Thereafter, in February 2019, the status deportation and given a work permit. of Dreamers was thrust into the limelight
20 May 2019 of national media outlets, as a political bargaining more specific on the matter, Fannie Mae provided chip, which only served to exacerbate the great four example scenarios, with one of those scenarios uncertainty that those affected persons had with specifically dealing with DACA borrowers. If the regard to their home buying options. Fannie Mae listed criteria are met, Fannie Mae The most common argument that has been considers that Dreamer’s mortgage to be eligible made as to why DACA borrowers were not eligible for purchase. However, Fannie Mae did include the for mortgage financing has been because the caveat that "(l)enders retain discretion as individual guidelines of the FHA as well as those of Fannie borrower situations differ." For underwriting Mae and Freddie Mac, state that a U.S. citizen decisions, “(l)enders can continue to decide what borrower must be legally present in the United type of documentation is appropriate and what can States. Investors following FHA guidelines would be retained as part of the loan file to show that a argue that because DACA does not confer a Lawful borrower is legally present." Of course, recognizing Permanent Residence Status, according to the the reality of the situation, Fannie Mae added that USCIS definitions, DACA borrowers are not eligible with all its policies, subsequent changes to the law for mortgage financing. Namely, these individuals and its application "may cause us to reevaluate our are considered temporary residents, which fall under policy on this matter prospectively." non-U.S. citizens without lawful residency in the U.S. Pete Mills, Senior Vice President of Member and are not eligible for FHA insuring at this time. Engagement and Residential Policy with the MBA, HUD stated in a recent letter that it has a “... noted that the Fact Sheet says that Fannie Mae longstanding policy regarding eligibility for non- "will not seek a loan repurchase solely based on a U.S. citizens without lawful residency. Those policies change in the borrower's immigration status after have not been altered.” According to HUD’s letter, closing." Mills added that the MBA expects Freddie “... non-U.S. citizens without lawful residency in the Mac will follow shortly and that the MBA will U.S. are not eligible for FHA-insured mortgages.” continue to urge FHA to follow the same framework. This claim comes despite the fact that according to The bottom line is that without clear and the U.S. Citizenship and Immigration Services (UCIS) definitive information from HUD and the FHA office within the Department of Homeland Security about whether they are backing DACA mortgages, (DHS), DACA recipients are still able to renew their both investors such as Fannie Mae and lenders are grant of deferred action under DACA, although the taking matters into their own hands to ensure the agency is not accepting new requests. mortgages they originate will have a buyer when it Fortunately for Dreamers, this interpretation is all said and done. To assist in making these types is wrong and Fannie Mae is stating that loud and of decisions, there are a few things a lender should clear. On March 26, 2019, Fannie Mae issued a consider. clarification stating, “[w]e have a longstanding The first thing a lender should do is gather policy on eligibility for non-U.S. citizen borrowers. information from their investor outlets regarding Fannie Mae purchases and securitizes mortgages this issue. This due diligence will not only assist to non-citizens who are lawful permanent or non- lenders in their policy-making process, but it may permanent residents of the United States under also provide them with documented evidence that the same terms available to U.S. citizens.” Further, they followed proper protocol in attempting to Fannie Mae went onto state that it is not changing get an answer. Once the lenders have gathered its existing policies. Rather, the purpose of issuing the information, then the executive teams will the bulletin was to provide “additional guidance need to consider the consequences of offering to help lenders determine eligibility for non- or not offering mortgage loans to DACA status U.S. citizen borrowers” in response to customer borrowers. feedback on the issue. Next, lenders should seek out their legal If those criteria are met, the borrower’s loan counsel’s opinions, as they will need to be able to is eligible to be purchased by Fannie Mae. To be defend their thought process. Legal risks that each ∆
May 2019 21 lender will now have to consider include dealing remain compliant while the agencies continue to
with the False Claims Act and fair lending practices. determine where that status quo actually is. MCM For instance, will the decision of whether to offer mortgages with DACA Visa Status affect the fair https://www.housingwire.com/articles/48374-hud- lending risk of investors? This is an area where good to-lenders-we-are-not-denying-mortgages-to-daca- legal advice is highly recommended. dreamers In seeking the advice of counsel, lenders should also conduct some of their own due diligence in https://www.mba.org/mba-newslinks/2018/july/mba- researching what other competing lenders are newslink-friday-7-20-18/mba-asks-fha-for-additional- offering or not offering. If everyone else offers clarity-guidance-on-fha-handbook DACA status loans and you do not, then the https://www.uscis.gov/archive/frequently-asked- question will always be “why”? When dealing questions with disparate treatment concerns, which is part of your counsel’s fair lending analysis, the advice will likely be that lenders should always ensure James Brody is the Chairman of the Mortgage their guidelines and policy reference only criteria Banking Practice Group. His experience centers on that would not be considered discriminatory on a those legal issues that arise during and through loan prohibited basis. originations, loan purchase sales, loan securitizations, So, while HUD and investors are touting foreclosures, bankruptcies, and repurchase and processesA Must are status quo, Have lenders should for review all Complianceindemnification claims. He Officerscan be reached at policies and processes to ensure their own practices [email protected].
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Making the Appropriate Selection Regarding Anti-Deficiency Laws on the Closing Disclosure and Arizona Anti-Deficiency Laws
The lender must choose either (1) factors such as the purpose of the there “may” be anti-deficiency loan, whether the loan was a refinance protection; and (2) there is “not” anti- transaction and the purposes for the deficiency protection. refinance, whether there was a “cash The regulation and Official out” transaction, whether the loan was Interpretations direct the lender a construction loan or for the purpose to make this choice after analyzing of home improvement, whether a the applicable state law. Reg. house was constructed, whether a Z § 1026.38(p)(3). The Official builder is the borrower and other Interpretations add that if the state issues. There are factual scenarios law provides "any type of protection," in which anti-deficiency protection other than a statute of limitations, clearly does not apply. then the regulation requires a Because there are scenarios statement that state law "may" in Arizona in which anti-deficiency protect the consumer from liability protection clearly does not apply, the for the unpaid balance.1 Therefore, lender cannot have a policy of always the lender must make this selection selecting the "may" box. If the lender based upon a thorough analysis and chooses the "may" box, and a court understanding of state law. subsequently rules that there was In Arizona, the anti-deficiency no anti-deficiency protection, there Carolyn Goldman, Managing Partner laws are complex. An analysis of may be adverse consequences to the [email protected] whether anti-deficiency protection lender. The CFPB or other regulator The lender is required to advise applies to an Arizona loan requires may cite a violation of the regulation the borrower in the Closing Disclosure consideration of various statutes and and a UDAAP/unfair, deceptive or whether anti-deficiency protection court decisions. The answer depends abusive act or practice. The borrower exists under applicable state law if upon several factors such as whether may assert a claim for damages based there should be a foreclosure. Reg. Z a non-judicial or judicial foreclosure is upon the argument that checking the § 1026.38(p)(3). State anti-deficiency done, the type of property and the size "may" box was a misrepresentation by laws provide certain protections to of the property involved and whether the lender upon which the borrower a borrower from a lender pursuing a the loan is considered “purchase relied to his detriment in accepting judgment for the amount by which money” under the statutes and court the loan. Ultimately, the best practice the sums due under the loan exceed decisions. See, for example, A.R.S. is to have a thorough understanding the value of the property following §§ 33-814 and 33-739. Whether the of the anti-deficiency laws of all foreclosure. As set forth in the Model loan is considered “purchase money” states in which loans are originated, Form below, the lender must select is the subject of many Arizona Court and in Arizona, to make a case-by- one of two boxes on the CD in the of Appeals and Arizona Supreme case analysis whether anti-deficiency “Liability after Foreclosure” section. Court decisions and depends upon protection exists for each loan. Carolyn Goldman is a member Liability after Foreclosure of Goldman & Zwillinger PLLC in Scottsdale, Arizona. She acts as an Arizona Responsible Individual, advises regarding compliance issues and is a litigator.
1 The Small Entity Compliance Guide 2.0 confirms that the lender fulfills this obligation by checking the box on the CD. Liability after Foreclosure, Comment 38(p)(3)-1.
May 2019 23 REGULATORY CONSIDERATIONS FOR ALTERNATIVE HOME FINANCING PROGRAMS BY JIM MILANO
ith mortgage volume down and Description of Types of Programs margins compressed, lenders Equity Access or Purchase Money may be looking for other pro- Augmentation Programs gramsW to offer in order to enhance their There are several different alternative own mortgage loan offerings or augment home finance or equity access programs company revenue. Since the financial available to homeowners in the crisis, many alternative home finance marketplace today. The programs can and home equity access programs have broadly be categorized as purchase entered the home finance market. This transactions (or more appropriately, Jim Milano article addresses some of those programs options to purchase), sale-leasebacks, and gives a brief overview of the regula- equity share contracts and leases with an The tory considerations for offering and part- option to purchase. Below is a description importance of nering with such programs. of a few of the features of some of those categorizing It is often said that lawyers like to a program’s programs. legal structure “think in boxes.” That is to say, lawyers is to identify like to categorize information into OPTION TO PURCHASE PROGRAMS which set segments in order to better analyze Under one type of option program, of laws will information. In looking at alternative home an investor either makes an investment apply and, finance and home equity access programs, in a consumer’s home or augments thus, which one of the initial questions to ask is “what the purchase price of the home under regulatory box does it fit into?” Basically, a program a tax-deferred investment of cash in issues should could fit into one of four “boxes”: 1) a exchange for a share of the home’s future be considered. loan, 2) an investment, 3) a purchase, or appreciation. Some programs have an 4) a lease. Some programs could be a advance limit, such as up to the lesser of combination of these categories, such as a $200,000 or 15 percent of a home’s value. lease with an option to purchase. Other programs’ advance limits are higher. The importance of categorizing a Typically, there is a transaction fee of a program’s legal structure is to identify couple of percentage points, an appraisal which set of laws will apply and, thus, fee, and an escrow fee that is deducted which regulatory issues should be from the homeowner’s funds. The investor considered. uses a deed of trust and memorandum ∆
24 May 2019
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© 2019 Indecomm Global Services ● 379 Thornall Street, 2nd Floor, Edison, NJ 08837 ● 732-404-0081 ● www.indecomm.com of option that is recorded in the county recorder’s the first three to five years of the option contract. office. Some of these programs are offered with both Thus, under these option programs, the investor owner-occupied and investment properties, and achieves its return on investment when one of the can take a second or even a third lien position. For following events occurs, and the homeowner can those programs that allow investor properties, the elect any one of these options at any time during homeowner does not have to live in the home, but the term of the contract without penalty: under some programs there is a penalty imposed at • The homeowner chooses to unwind the option the end of the term if the property was not a rental and “buy out” the investor based on the at the beginning of the agreement. appraised fair market value of the home at that Under these types of programs, the investor time; normally is not added to the title of the property at • The homeowner chooses to finance out the the outset of the transaction, although contractually investor with a HELOC, home equity loan, or it is contemplated that the investor will go on title reverse mortgage based on the appraised fair at the exercise date of the option. The homeowner market value of the home at that time; maintains possession, occupancy, and control over • The homeowner sells the home; in which case, the home. The homeowner also remains responsible the investor shares in the sales proceeds based for all the costs of homeownership, and the investor on its investment percentage, and, at the has no responsibility for property taxes, insurance, or homeowner’s option, the investor may be paid homeowner association fees in connection with the off directly from the sale’s closing escrow; or home. The investor is named an additional named • The end of the term is reached, in which case, insured on the homeowner insurance policy. the investor shares in the sales proceeds based The homeowner can remodel the home, but on its investment percentage based on the there are limits on adding additional debt to the appraised fair market value of the home at home to pay for remodeling or for other purposes, the end of the term. In this case, also, at the and the investor will share in any increase in property homeowner’s option, the investor may be paid value due to remodeling changes. Some programs off directly from the sale’s closing escrow the provide an adjustment in value of the home in favor homeowner repays the investor. of the homeowner for such remodeling or additions Under one program, the ending (final) home to the property. value at the maturity of the option contract is There are no monthly payments under these determined not based on the actual value of the option contracts, and no interest is charged to the home, but on the Case-Shiller Home Price Index. homeowner in return for the investor’s investment. Further, under some programs, the homeowner The investor obtains its return by sharing in the agrees to pay back to the investor the investor’s appreciation, sometimes up to a set cap, but also original investment amount plus a predetermined stands to lose if the value of the home depreciates percentage of the home’s appreciation, usually during the term of the option. between 25 to 40 percent. If there is an event of The homeowner can “unwind” the option prior default, the investor can exercise the option and to the end of its term and “re-purchase” his or her initiate a sale process. equity any time during the term, which term can range from 10 years under some programs, or up LEASE WITH AN OPTION TO PURCHASE to 30 years under others. Typically, a homeowner Under some types of lease-to-own financing will unwind the option by use of a refinance loan programs, a provider arranges with a local or a home equity loan. If the homeowner sells the government or non-profit agency to purchase a home, the investor will share in the sales proceeds home, the provider finances the home on behalf at the rate of the specified investor’s investment of the agency, and the home is leased to the percentage, typically in the range of between 25 to consumer. These programs typically include an 40 percent of the home’s price appreciation. There assumable 30-year mortgage, with a fixed interest are no pre-payment penalties with most programs; rate that the consumer can qualify to assume however, some programs require an “early when ready, under which the consumer takes over termination fee” for contracts that are un-wound in the remaining payments. Such programs afford a
26 May 2019 27
∆ May 2019 The lease automatically renews if the if renews The lease automatically of owning the home, such as The responsibilities to repurchase A consumer also has the option If the consumer wants to move, several program providers If the consumer defaults on their rent, Some programs impose no minimum home equity home equity impose no minimum Some programs to the homeowner but do require requirements, Some under the lease. ability to pay rent have the is typically closing fee, which a charge providers of the home, such as 2 of the value a percentage closing costs. along with traditional percent, Under these in good standing. homeowner remains on the rate is typically based the rental programs, homeowner’s for similar homes in the market rent has a 12-month term, a lease Normally, region. up to five years. Rent is for and can be renewed typically rent market rates, and based on current of 2.5 percent annually by the greater increases an appraiser or the CPI. Under some programs, rate by is used to determine a fair market rental that have similar properties considering local rental home, such as characteristics to the homeowner’s general condition, and number of footage, square and bathrooms. bedrooms taxes, HOA fees, or expenses associated property of normal and wear as a result required with repairs but the homeowner tear pass to the lease provider, for basic maintenance like lawn care, is responsible and appliance repairs. snow removal, to own it again, their home if they decide they want allow the consumer to control and some programs the listing agent. the timing, asking price, and even if the consumer wants to Under some programs, they must the home within the first year, repurchase home purchase, pay the amount funded in the initial Each such as 5 percent. plus a percentage, price can increase. subsequent year the re-purchase after the the annual increase Under one program, per year. first year is 2.5 percent on the will assist with placing the home providers market, and once the home is sold, after certain fees, the consumer is allowed to keep the remainder of the equity in the home if the value of the home has increased. the consumer with a notice and will afford is not reached, If a resolution opportunity to cure. in the consumer being such defaults can result if the however, evicted. Under some programs, consumer is evicted and the home sold, a consumer some or most of the equity in the may still receive Sales leaseback programs provide provide Sales leaseback programs There is no down payment and low move- is no down payment There fixed, monthly payment is The consumer’s lease the If after the first two years of the At the end of the lease, the consumer has Under one such program, the provider the provider such program, Under one homeowners an opportunity to sell their homes in the home. Under for cash while remaining makes a purchase a provider one such program, less money, and the homeowner receives offer, fees. any lien balances on the home and realtor SALE-LEASE BACK PROGRAMS in costs, with the lowest purchase option price option price lowest purchase in costs, with the cost, plus over the home’s starting at 1 percent fee. A consumer must also an underwriting including costs, purchase pay the typical home if the a home inspection and an appraisal, match the negotiated home price does not appraised value. if the property and only goes up during the lease taxes, homeowners insurance, homeowner’s dues, or other similar costs increase. a portion of credits the provider Additionally, on-time monthly lease payments the consumer’s assumption of the loan the ultimate toward of the home. The purchase and corresponding the home at any time, consumer can purchase of the lease term. regardless the home, consumer wants to move out of can prior to the lease ending, the consumer will days’ notice and the provider 60 provide them in their work with the consumer to assist move out of move. If the consumer wishes to of the lease, the home during the first two years will assist in finding a sub-tenant the provider for a small fee. If the new occupant qualifies, they can be a substitute for the consumer and the lease from the consumer will be released obligations. sell, trade in, or move out of the option to buy, If the consumer needs the home without penalty. time, it may be possible to extend the lease more term, which is initially a term of two to five years. approves payments to a maximum of 50 percent maximum of 50 percent payments to a approves less household income gross of the consumer’s whichever or 38 percent, other debt obligations, is less. consumer with the ability to live in a home that to live in a home with the ability consumer own while building wishes to the consumer future. in the its purchase equity for property after the provider has recovered unpaid has been the predominate reverse mortgage rent, the selling costs, and any legal fees associated program in the marketplace. However, more with the eviction. recently, several non-FHA-insured reverse mortgage programs have been introduced and soon may SHARED APPRECIATION CONTRACTS overtake the HECM program on a dollar volume Another alternative to debt financing is a basis. These reverse mortgage programs will be the program that allows a consumer to augment the subject of a future article. purchase price of a home or access their home equity under a co-investment contract whereby an Legal Considerations investor invests in the consumer’s home. Some of Sale vs. Loan these programs, while evidenced by a note and One risk for option programs is the risk that the security instrument, are structured as an investment program will be recharacterized as a loan. The risk contract and not a loan, and have no monthly of recharacterization as a loan includes having state payments or interest charges. Like option contracts mortgage lending licensing and other mortgage described above, the cost to the consumer is based requirements apply, as well as fee or interest rate on the home’s future appreciated value. Unlike the limits under state law. In analyzing any program, option or sale-leaseback programs, however, the one must determine into which “box” it most investor does not take an ownership stake in the appropriately fits. home and does not share in ownership of the home. In analyzing whether a transaction is a sale Thus, these types of programs do not contemplate versus a loan, where a real estate transaction claims a sale of the home. on its face to be a sale, a sale and lease back, or However, similar to the option contracts, there a conditional sale, the typical threshold question are no monthly payments. One such program allows a court will address is whether the transaction a consumer to augment their down payment for the was meant simply as security for a preexisting or purchase of a home or convert up to 20 percent of contemporaneous debt. their home equity into cash. However, the ultimate Courts generally have taken the position amount the homeowner may access is based on any that where there is no prior or contemporaneous mortgage loan on or to be placed on the property, debt, there can be no equitable mortgage, and the homeowner’s credit profile and other factors where there is a prior or contemporaneous debt determined by the investor, such as expected home between the parties, the transaction is likely to be a price appreciation. There may be various origination mortgage. There is a presumption in favor of such a and other fees associated with these programs. finding once sufficient evidence has overcome the In exchange for an investment, the investor is presumption that an instrument is in substance what generally entitled to repayment of their investment, it purports to be on its face. plus a pre-agreed upon portion of the appreciation Upon satisfying itself of the existence of a prior value of the consumer’s home, upon the occurrence or contemporaneous debt between the parties, of a terminating event, which includes when the before a court will exercise its equitable powers in consumer sells the home, prepays the contract, or recharacterizing a purported sale as an equitable passes away. If the home price has increased, the mortgage or loan, it reviews the entirety of investor will share in the appreciation of the home. circumstances surrounding an agreement, including If the home price has gone down, the investor may parol evidence, according to these factors: (1) absorb a share of the loss. the intentions of the parties; (2) the adequacy of REVERSE MORTGAGES consideration; (3) the retention of possession by the In addition to the above non-debt-based equity grantor; and (4) the satisfaction or survival of the access programs, a loan (debt) based program debt. No single factor is dispositive, and because that allows homeowners either to purchase a the introduction of parol evidence contradicting home or access the equity in their home are the terms of a written agreement is in derogation reverse mortgages. Since the financial crisis until of the general rule against such, such evidence approximately a year ago, the FHA-insured Home must be strictly construed. Further, no subsequent Equity Conversion Mortgage (or HECM) program debt or occurrence can change the nature of
28 May 2019 the agreement, whether a sale or mortgage, as first question is whether the mortgage company that agreement’s nature is fixed at the time of its will offer these products or merely partner with creation. In actually deciding equitable mortgage companies that offer these alternative programs. cases, courts often consider the financial position If alternative finance companies allow third party of the seller, or equitable mortgagor, at the time participation and the mortgage company will offer the transaction was consummated, as the relative such programs as an originator, it must consider bargaining strength of the parties is an animating whether additional regulatory approvals and other force behind the equitable mortgage doctrine. requirements will apply. If a mortgage company will Where a court fails to find an equitable mortgage, partner with alternative finance companies, it must it appears neither state nor federal lending laws, consider which regulatory issues might apply. including state usury laws, will apply. An option program should be analyzed under Licensing the above criteria in order to assure that the option For the shared appreciation contracts, some program is a precursor to a purchase transaction companies reportedly plan to offer such programs and not a loan. under mortgage lending licenses. For the option contracts, the alternative home equity access Lease Issues companies typically hold realtor licenses. However, One legal risk of a lease transaction is if mortgage companies will partner with and refer recharacterization as a sale or a loan. If the rental contracts, mortgage companies must consider payments equate to fair market rental value and whether they also need state realtor licenses. In not a purchase price that would be paid under an some states, merely acting as a finder for a real installment sales contract, then it is more likely not estate contract, even for compensation, does not to be recharacterized as a sale or loan. Another rise to the level of licensable realtor activity. “stress point” is allocating which party, the landlord ∆ Nonetheless, if a mortgage company will only or tenant, is responsible for real estate taxes and property insurance. The landlord should remain responsible for these items in order to reflect a true lease. Some lease programs offer an option WHAT ARE YOU SEARCHING FOR? to purchase. Such features will not cause a risk of recharacterization as long as rental payments equate to a fair market rental value and the option payment for purchase is not nominally low. Securities and Tax Issues While a discussion of securities and tax issues QUALITY CONTROL is beyond the scope of this article, the shared appreciation contracts discussed above are not designed to be loans. However, such contracts also are not typically structured as real estate purchase or option to purchase contracts. Therefore, one should consider what legal and regulatory regime such contracts fit under. The applicability of these laws may turn on whether the property is the home of the consumer and owner occupied, and/or whether the return to the investor is based on the appreciation of the home, or some external measurement, such as a home price appreciation index. Regulatory Considerations For mortgage companies that wish to become involved in or partner with these alternative home purchase or home equity access programs, the
May 2019 29 offer mortgage loans alongside such alternative Fair Housing Act home purchase or home equity access contracts, For instance, the federal fair housing laws the mortgage company may nonetheless want to apply not only to the offer and granting of credit know what laws will apply to its business partner. to purchase homes, but also to the sale and In addition to state laws issues on real estate and rental of homes. In offering or partnering with leases, federal consumer credit laws might also be providers of alternative home equity access considered. programs, mortgage lenders should be cognizant of these laws and regulations not only in their own Federal “Alphabet Soup” operations, but also those of its business partners. One of the hallmarks of such federal laws as the federal Truth-in-Lending Act (and Regulation Z), FCRA the Equal Credit Opportunity Act (and Regulation Further, some companies that offer alternative B), the Real Estate Settlement Procedures Act (and home equity access programs order credit reports on homeowners as part of the origination and Regulation X), and the Home Mortgage Disclosure offering of such programs. Of course, in doing so, Act (and Regulation C) is that credit must be the federal Fair Credit Reporting Act would apply. involved. Under TILA, for instance, “credit” is defined CONCLUSION as “the right granted by a creditor to a debtor to With mortgage volume down and margins defer payment of debt or to incur debt and defer compressed, mortgage lenders may wish to look its payment.” Under ECOA, a “creditor” means any into other programs in order to enhance their person who regularly extends, renews, or continues operations. Alternative home finance and equity credit; any person who regularly arranges for the access programs may be one such viable and extension, renewal, or continuation of credit; or any additional option. In considering such alternative assignee of an original creditor who participates programs, lenders may already have infrastructure in the decision to extend, renew, or continue in place to support such programs; however, credit. “Credit” is defined as the right granted by the legal and regulatory issues outlined above a creditor to a debtor to defer payment of debt or are some of the items mortgage lenders should to incur debt and defer its payment or to purchase contemplate when entering into or partnering with property or services and defer payment therefor. such programs. MCM RESPA applies to “federally related mortgage loans” offered by “creditors.” Creditor is defined with reference to TILA, which describes such term James M. Milano is a partner with the law firm of Weiner Brodsky Kider PC, based in Washington, in part as a person who both (1) regularly extends D.C. Jim represents and advises mortgage and consumer credit which is payable by agreement finance companies on issues such as: (i) responding in more than four installments or for which the to federal and state regulatory audits and payment of a finance charge is or may be required, enforcement actions; (ii) state regulatory approvals; and (2) is the person to whom the debt arising from (iii) lending and servicing programs; (iv) state laws the consumer credit transaction is initially payable and regulations concerning loan disclosures, on the face of the evidence of indebtedness. Under allowable fees, servicing and prohibited practices; RESPA, there is a “cooperative broker” exclusion (v) federal laws and regulations including, but not from the anti-kickback (or referral) provisions; limited to, TILA, RESPA, ECOA, FDCPA, HMDA, however, such an exception should only need to FCRA, and GLBA (privacy); and (vi) implementation come into play if a federally related mortgage loan of the Dodd-Frank Act and CFPB regulations. He is involved in the first place. can be reached at [email protected]. Arguably, if the underlying alternative contracts are not “credit,” then some of these federal This article is for informational purposes only, is “alphabet soup” laws would not apply. not a solicitation of for legal advice, and does However, other federal laws might apply to not represent the views of the law firm of Weiner alternative home equity access programs. Brodsky Kider PC or its clients.
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analytical models. For other, less 3. Establish an approval review regulated industries, this is a good process where LOs can submit thing. Unfortunately for the mortgage unique marketing collateral for industry, regulators tend to view approval or leverage existing, pre- targeted marketing campaigns as approved materials. This can be a discriminatory in nature rather than a daunting task, given that someone savvy business development strategy. can easily create a Facebook, Even if lenders’ intentions are Twitter or LinkedIn account in a noble (after all, who doesn’t want to matter of minutes, but remember, increase access to homeownership all a regulator has to do before for minorities, Millennials, and performing an examination is other underserved groups), the disparate impact litmus test still Google your name, a team name, puts these efforts on the wrong a D/B/A name, or a MLO name side of Fair Lending laws. Case in from the comfort of their desk. point – HUD is pursuing Facebook for What’s more, marketing and discriminatory advertising practices advertising are two of the many and has compelled Facebook to compliance areas covered by MQMR’s make immediate changes regarding Monthly Compliance On-Demand how real estate companies can target Service. For a flat, monthly fee, marketing on the Facebook paid lenders can access MQMR’s internal Michael Steer advertising platform. team of mortgage compliance President, MQMR & Subsequent QC Furthermore, the vast majority experts to get answers on any and [email protected] of mortgage marketing aimed at all compliance questions on an as- In the current operating consumers happens at the branch and MLO level. When one factors needed basis, including guidance on environment, generating new marketing, advertising, website and business is more important than in the speed and reach of social media in particular, keeping on social media content. ever, which means mortgage loan top of marketing and advertising With the need for new business at originators (MLOs) are ramping up compliance is a full-time endeavor an all-time high, lenders simply cannot marketing to attract new borrowers that many lenders are ill-equipped to afford not to market themselves, yet and drive loan volume. However, manage on their own. the cost of a marketing compliance lenders must be mindful of the misstep can easily wipe out hundreds marketing and advertising materials 1. Whether it’s in the employment being distributed by MLOs, as both contract, MLO compensation of thousands of dollars in profit via state and federal regulators continue agreement or a specific social fines. Get the help you need to to keep a sharp eye on how mortgage media/advertising P&P, outline gain market share while staying on lenders market to consumers. do’s and don’ts for advertising regulators’ good side – contact us at One of the biggest risks lenders requirements along with [email protected] face in this area is running afoul of contractual obligations to which to get started. Fair Lending regulations and the the MLO must adhere. Unfair, Deceptive, or Abusive Acts or 2. Conduct on-going training and Also, subscribe to our free Practices Act (UDAAP). With the rise monitoring of social media and bi-weekly mortgage compliance of digital marketing strategies and advertising, using identified FAQ, which covers a wide range of social media use, it is now easier than violations as an opportunity to compliance issues, and stay tuned for ever for businesses to zero in on their reinforce what’s been previously our next white paper on “The Seven target audiences using sophisticated outlined as permissible. Deadly Social Media Sins.”
May 2019 31 Alternative Data and Fair Lending
FACEThe Relationship is ComplicatedOFF
BY JONICE GRAY TUCKER & CAROLINE M. STAPLETON
hinking of getting into a relationship In connection with consumer with alternative data? You’re not lending, alternative data may present a alone. Use of “alternative data,” a mechanism for enhancing loan marketing, Tterm broadly used to describe consumer underwriting, and pricing as well as means information gathered from non-conven- for opening credit markets to consumers tional sources, is becoming increasingly at- who may not have qualified for certain tractive to mortgage lenders, their service financial products or services if alternative providers, and even consumers who lack data had not been considered. However, traditional evidence of creditworthiness. Jonice Gray Tucker as illustrated by the government actions In recent years, there has been a dramatic and private litigation that have impacted increase in access to large volumes of consumer data, much of which is being Facebook and certain other early users mined from digital sources. On a paral- of alternative data within high-powered lel track, technological advances have models, use of this information may be enabled companies to rely on machine accompanied by significant legal and learning to interpret and then use data in compliance risks, including the possibility sophisticated models, providing a path for of violating anti-discrimination laws and more efficiently using such information in laws prohibiting unfair, deceptive or Caroline M. Stapleton business analytics. abusive acts and practices. These risks
32 May 2019 are pronounced in the financial services industry, consumers who are Black or Hispanic, and people as compared to other industries insofar as such who live in low-income neighborhoods.”2 The companies are regulated by tighter legal structures. significant potential benefit of expanded access to Managing fair and responsible lending risk on credit through the use of alternative data also was this new frontier is anything but straightforward, recognized in a Government Accountability Office particularly given that many seemingly neutral (GAO) report in December 2018.3 data points may, in fact, be proxies for a protected Simultaneously, however, regulators have characteristic or membership within a class of raised concerns about the potential for fair lending consumers who may be especially vulnerable. For violations arising from the use of data from non- this reason, mortgage lenders thinking of leveraging traditional sources. For example, the 2017 CFPB alternative data first should carefully consider RFI asked for public input on whether there are the potential implications on fair and responsible “specific challenges or uncertainties that market lending compliance, and take steps to mitigate the participants face in complying with ECOA and applicable risks. As we discuss below, relationship Regulation B with respect to the use of alternative between lenders and alternative data or modeling techniques.”4 data can be complicated. Similarly, the Board of Governors The use of alternative data of the Federal Reserve System ARE REGULATORS OPEN has implications for regulatory TO RELATIONSHIPS WITH (Federal Reserve) issued a ALTERNATIVE DATA? compliance under a variety of newsletter in 2017 that noted The use of alternative data consumer protection statutes the potential for new data to serve as a proxy for a protected has implications for regulatory and regulations. compliance under a variety of characteristic, resulting in a consumer protection statutes situation where “some data may and regulations. These include the Fair Housing Act not appear correlated with race or national origin (FHA), Equal Credit Opportunity Act (ECOA), the when used alone but may be highly correlated prohibitions on unfair, deceptive, and/or abusive with prohibited characteristics when evaluated in acts and practices (UDAAP/UDAP) in the Federal conjunction with other fields.”5 Trade Commission Act (FTC Act) and the Consumer Moreover, in a particularly notable recent Financial Protection Act (CFPA), and state corollaries development, the New York Department of to these laws. Specifically, alternative data may Financial Services NYDFS) weighed in on the trigger risk in connection with compliance with risks of using alternative data in life insurance these laws because it is being used to change underwriting. The agency issued guidance that the way consumer lenders market, underwrite, could be a potential harbinger of the agency’s and price loans, with the potential for unintended expectations for lenders. The guidance contains a discriminatory or unfair impacts on protected, or discussion of issues that should be considered to otherwise vulnerable populations. mitigate potential differential treatment, including Fortunately, regulators acknowledge that ensuring there is “a valid explanation or rationale alternative data, when used properly, can benefit for the differential treatment of similarly situated consumers, including populations protected by applicants” arising from the use of external fair and responsible lending laws. In connection data sources.6 The NYDFS also advocates for with a request for information (RFI) on alternative transparency in consumer disclosures where there data in 2017, the Consumer Financial Protection has been use of external data sources, noting Bureau (CFPB) said that using alternative data that the failure to adequately disclosure material could provide access to credit to consumers with elements of an “accelerated or algorithmic insufficient credit histories.1 According to the underwriting process, and the external data sources CFPB, “[t]his problem disproportionately impacts upon which it relies” could be an unfair practice. ∆
May 2019 33 BAD MARRIAGES CAN LEAD TO The recent Facebook cases are seminal for GOVERNMENT ACTION AND financial institutions because they bring the PRIVATE LITIGATION intersection of alternative data, modeling, and On March 28, 2019, the Department of alleged discrimination in housing to the forefront Housing and Urban Development (HUD) filed a for the financial services industry. Prior matters formal charge of discrimination against Facebook involving Facebook had focused on alleged 7 alleging multiple violations of the FHA. HUD’s discrimination in marketing and employment theory of discrimination is predicated on practices at non-financial institutions, because Facebook’s alleged use of user data gathered lenders have been hesitant to use such data for fear from its own social media platform to customize it will produce outcomes that violate fair lending advertisements for housing-related services, laws and regulations. However, as alternative data including ads for mortgage loans. In some becomes more ubiquitous in other industries, instances, this customization was requested by we can expect that lenders seeking to innovate advertisers, while in other and expand consumer access instances Facebook’s algorithm may begin incorporating it limited the audience receiving The recent Facebook cases are into their own marketing, the advertisement without the seminal because they bring underwriting, and pricing advertiser’s knowledge. HUD the intersection of alternative strategies. As this transition alleges that these practices data, modeling, and alleged occurs, financial institutions resulted in some advertisements can expect to see increased being shown to Facebook users discrimination in housing to the regulatory scrutiny, especially based on their sex and/or other forefront for the industry. where use of alternative data in data serving as proxies for mortgage and other consumer protected characteristics, such as a user’s location, lending transactions holds the potential to result in religious dress, or use of a service animal.8 unfavorable treatment of, or impact on, consumers HUD’s notice of charges is the latest in a string protected under the FHA, ECOA, and state anti- of similar discrimination allegations arising from discrimination laws and/or vulnerable populations Facebook’s use of alternative data brought by state subject to UDAAP protection under the FTC Act, actors, advocacy groups, and private litigants.9 CFPA, and similar state laws. In July 2018, Facebook settled allegations by the Washington Attorney General that the company’s PREVENTING AN UNHAPPY SEPARATION: advertising platform permitted “ethic affinity A FEW BEST PRACTICES targeting” that violated the state’s prohibitions on The advent of our digital society means that unfair acts and practices and discrimination based alternative data is here to stay. The question on protected class status.10 The settlement required mortgage lenders face is how to use it to their Facebook to make improvements to its advertising advantage without running afoul of fair lending platform, including no longer providing tools that and other consumer protection laws. The GAO could be used to discriminate based on race, creed, report recognized that regulators have yet to color, national origin, veteran or military status, provide meaningful official guidance on the use sexual orientation, or disability status.11 Similarly, of alternative data in credit transactions,13 but we in March 2019, the ACLU and its co-plaintiffs offer the following pre-marriage counseling for reached a settlement with Facebook requiring those seeking a healthy and happy relationship with it to implement limitations on advertisement alternative data: targeting options, perform additional reviews of • Develop clear policies, procedures, and training advertisements, and engage in future studies on regarding the use of alternative data, including the potential for unintended biases in Facebook’s required protocols for approval of the nature 12 algorithmic modeling. and way in which data is used.
34 May 2019 • Involve compliance and legal in the Jonice Gray Tucker is a founding partner with development and use of new data sets and Buckley LLP and a member of the firm’s governing models. board. Ms. Tucker specializes in work with banks, non-bank financial institutions, and other companies • Understand external data sources, validate providing financial products and services. Ms. integrity, and confirm that a third party did not Tucker focuses a substantial portion of her practice use prohibited criteria in its creation. Consider on escalated supervision matters, investigations, in particular whether the data could be a close and enforcement actions. She can be reached at proxy for membership in a protected class. If so, [email protected]. are there other data points that could be used in lieu of those that may be viewed as proxies? Caroline M. Stapleton is counsel with Buckley LLP. • Ensure the data has a clear nexus with an Ms. Stapleton represents financial services providers applicant’s creditworthiness. According to in federal and state regulatory and enforcement the Federal Reserve, “[g]enerally, the more matters. Her consumer lending practice includes speculative the nexus with creditworthiness, the advising clients on issues related to mortgages, higher the fair lending risk.”14 home equity credit, credit cards, and student lending. She can be reached at cstapleton@ • Test the data, and the interaction between buckleyfirm.com. attributes being run through models to evaluate potential for negative repercussions for members of protected classes or other vulnerable population.15 If they exist, evaluate END NOTES the business justification for continuing to 1 Press Release, “CFPB Explores Impact of Alternative Data on Credit Access for use data or a model that generates different Consumers Who Are Credit Invisible” (Feb. 16, 2017), available at https://www. consumerfinance.gov/about-us/newsroom/cfpb-explores-impact-alternative-data- outcomes for otherwise similarly-situated credit-access-consumers-who-are-credit-invisible/. applicants. 2 Id. 3 “Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of • Perform initial and ongoing validation of models Alternative Data,” GAO-19-111 (“GAO Report”), at *2 (Dec. 2018). using alternative data. 4 Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process, 82 Fed. Reg. 11183, 11190 (Feb. 21, 2017). 5 Federal Reserve System, Consumer Compliance Outlook (“Federal Reserve • If using of a new source of data, a new type of Newsletter”), 2d issue (2017). data, or a new model, consider a pilot before 6 NYDFS Insurance Circular Letter No. 1, “Use of External Consumer Data and -full launch of the new program or practice. Information Sources in Underwriting for Life Insurance” (Jan. 18, 2019). 7 HUD v. Facebook, Inc., FHEO No. 01-18-0323-8 (Mar. 18, 2019) (citing violations • Consider whether adverse actions resulting of 42 U.S.C. § 3604(a)–(c)). 8 from the use of alternative data should include Id., at *4. 9 See e.g. NFHA v. Facebook (alleging that Facebook made it possible for information about the data used and the source housing advertisers to exclude certain home seekers from seeing their ads on a protected basis); Mobley v. Facebook (alleging that Facebook allowed businesses of the information. to target individuals for housing opportunities, among other things, in a manner that discriminates against certain races); Communication Workers of America v. T-Mobile US (claiming that employers, including T-Mobile, Amazon.com, Cox While the practices described above can help Communications, and Cox Media Group routinely exclude older workers from receiving employment and recruitment ads on Facebook, thereby denying older in this effort, the best defense against a potential works job opportunities). fair lending or consumer protection claim is being 10 In re Facebook, Case No. 18-2-18287-5, at *1–3 (Jul. 24, 2018). proactive by implementing compliance measures 11 Press Release, “AG Ferguson Investigation Leads to Facebook Making Nationwide Changes to Prohibit Discriminatory Advertisements on its Platform” in advance of a product’s launch, and continuing (Jul. 24, 2018), available at https://www.atg.wa.gov/news/news-releases/ag- with these measures throughout its lifecycle. This ferguson-investigation-leads-facebook-making-nationwide-changes-prohibit. 12 Press Release, “Facebook Agrees to Sweeping Reforms to Curb Discriminatory requires comprehensive analysis and application of and Targeting Practices” (Mar. 29, 2019), available at https://www.aclu.org/news/ tried and true compliance management principles facebook-agrees-sweeping-reforms-curb-discriminatory-ad-targeting-practices/ 13 GAO Report, at *45–46. modified to mitigate risk on this new frontier. Best 14 Federal Reserve Newsletter. MC wishes for a happy union. M 15 Id.
May 2019 35 Thinking About Joining the Non-QM Queue? Here are Some Compliance Considerations to Keep in Mind BY COLGATE SELDEN
few years ago, only a handful of trillion in assets. intrepid originators, aggregators, Last year, Nomura estimated non-QM investors, and issuers were actively lending volume could grow to more than participatingA in non-QM lending. The rest $100 billion within 10 years. Other observ- of the market watched from the sidelines, ers have since suggested the addressable convinced non-QM lending brought sig- market for non-QM products could be as nificant potential liability, was hard to learn high as $200 billon. Increasingly, non-QM and easy to get wrong, or was not worth the effort when there was an abundance securitizations are becoming a growing Colgate Selden of refinance business to be done. part of the private-label RMBS market. Today, non- Several years of declining volume and S&P expects non-QM securitizations to QM lending is intense margin compression on traditional double in 2019 from $10 billion to $20 widely viewed loans, combined with a newly-receptive billion. as one of the investor community, are changing the mar- Recent changes in banking law have few growth made it easier for mid-size and smaller areas left in ket’s perception of non-QM lending. the market Today, non-QM lending is widely banks to originate products that used to and one that is viewed as one of the few growth areas fall into the non-QM category. And, new attracting more left in the market and one that is attract- investors and different approaches to due lenders and ing more lenders and issuers. Overall, diligence are helping banks and origina- issuers. this is good news for previously under- tors get more comfortable with non-QM. served market segments: the 16 million But, despite the growing acceptance and self-employed consumers in the U.S., interest in non-QM, there are challenges the millions of borrowers who have been inherent in the product, particularly the repairing their credit since the mortgage increased risk of buybacks, due to under- crash, and even the aging cohort of baby writing defects and real compliance issues boomers who are sitting on nearly $30 that remain.
36 May 2019 It’s still too early to determine whether this new option makes non-QM lending more attractive to banks, but it certainly gives commu- nity banks more perma- nent leeway in originat- ing products that used to be portfolio staples before the mortgage market downturn and subsequent recession. Similarly, it should help them serve the mort- gage needs of high- net worth, retired, and self-employed custom- WHAT MAKES A LOAN NON-QM? ers who had been disadvantaged by QM rules. A Generally speaking, a first mortgage can be strong case can be made that broader relationships classified as non-QM for several reasons: a debt- with these customers put banks in a better position to-income (DTI) ratio above 43 percent; an interest to make credit decisions with alternative documents only (IO) or balloon structure; rates and fees above like checking accounts, credit cards, auto loans, etc. three percent; or, the use of alternative docu- Prudent bankers that want to take advantage ments in its underwriting. Adjacent products, such of the new portfolio lending option will most likely as expanded credit, asset depletion, and some want to originate products that could eventually be fix-and-flip loans are usually included in the non- sold to non-QM issuers. This means staying abreast QM category. Non-QM loans, similar to their QM with the evolving private non-QM market category, counterparts, must include a determination of the its guidelines, and this market’s zero-tolerance ap- borrower’s ability to repay (ATR). proach to compliance. For the past five years, the “GSE patch” (QM Banks that are used to “portfolio-ing” loans or safe harbor for loans eligible for purchase by Fannie selling to the GSEs may be surprised by the rig- Mae or Freddie Mac) has allowed lenders to avoid ors of the due diligence processes being used by non-QM classifications on high DTI loans and, to non-QM issuers. Depending upon the asset types, date, more than 54 percent of the GSEs’ purchases it is very common for non-QM issuers to do due exceed the 43-percent threshold. The patch, how- ever, is an option only while the GSEs remain in diligence on 100 percent of the loans in a secu- conservatorship and is set to expire in 2021, regard- ritization, not just a sample. At a recent industry less of GSE conservatorship status. conference, a ratings agency showed a sample In 2018, the Economic Growth, Regulatory due diligence exceptions report for a non-QM/ Relief, and Consumer Protection Act changed the non-agency private-label deal. The sample pool of non-QM playing field for banks with assets below 2,581 loans had three open exceptions for property, $10 billion. Now far more mortgages, regardless 89 for credit, and 6,805 for compliance! of compliance with Appendix Q of the ATR rule, While many of these exceptions were eventually DTI and credit characteristics, can be deemed QM cleared, the process was most likely time consum- loans, if the bank holds them in portfolio. ing, expensive, and painful. ∆
May 2019 37 COMPLIANCE CONSIDERATIONS identified TRID errors, lenders entering the non-QM From a compliance standpoint, a non-QM loan market must still have good controls in place and is generally subject to the same regulations as a consistent compliance. TRID disclosure timing and QM loan, including TRID, HOEPA, Fair Lending, disclosure error correction issues continue to per- and state and local regulations. sist, even for current, seasoned, private secondary Lenders participating in the private secondary market participants. market since the TRID rule effective date will most Additionally, there are QM (and non-QM) re- likely have better discipline for preventing TRID er- lated ATR issues that have not yet been clarified by rors than their counterparts participating only in the the CFPB and could impact loan program under- GSE and FHA markets. writing guidelines. Arguably, there are more issues Incentives to review and correct errors in the in the QM space than in the non-QM market, given private secondary market are immediate. Loans some of the vague income qualification require- with material TRID errors can be rejected from the securitization pool, leaving the lender holding a po- ments in Appendix Q and the liberal use of GSE tentially unsalable loan. Or alternatively, the loan is underwriting guidelines by some lenders to meet accepted but only with a lender guarantee or a set- perceived “gaps” in Appendix Q. As a practical aside to mitigate future devaluation from compli- matter, loans or loan programs intended to be QM, ance losses. But, even then, only larger lenders with but with structural defects causing them to not be substantial capital and wherewithal in the market- designated QM, may still comply with the ATR rule, place are typically permitted by ratings agencies, without the safe harbor status. issuers, or underwriters to use these options. For non-QM loans, complying with the ATR While the CFPB has promulgated TRID “clean rule’s eight borrower repayment factors is the only up” rules, which have had the effect of reducing concern. ATR rule compliance can be easier to ∆
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INSIDE + ESSENTIAL LEADERSHIP SKILLS FOR GROWTH LEADERSHIP ASK THE EXPERTS
38 May 2019 Elevate A Letter from the President The Mortgage Compliance Professionals Association of America (“MCPAOA”) was founded in August, 2016 to provide a forum for members to enhance their professional skills and keep up with current trends. On January 1, 2019, I took over as the President of the Association following in the steps of one of the founders, Burton Embry. Burton has distinguished himself as a judicious steward of the Association and an invaluable resource and professional in the compliance arena. I would be remiss if I did not thank him for his contribution to the Association, representing our profession at numerous trade conferences and for his personal impact on my compliance career. When I thought I was alone in some of the daily challenges in this realm, Burton quickly assured me that I am not alone and talked me off the proverbial ledge. Most of you know me by the name “Flea”. I inherited that moniker over 30 years ago when the board of the bank I worked for thought I was annoying; always bugging them to fix things, CRA responsibilities, new laws and yes, TILA is here to stay. I’ve been a Compliance officer for 40 years. I prefer to state I am “seasoned”. I hope you will join the organization (it’s free!) www.mcpaoa.org JOIN US for an informative conference call on May 22, 2019. The call will touch on recent activities of a very large lead generator immediately followed by an insightful presentation on the Temporary (aka Transitional) licensing effective November 24, 2019. Haydn Richards, Jr., Partner with the law firm of Bradley Arant Boult Cummings, LLP, will lead the discussion. Haydn will discuss what this new law means for the mortgage industry for registered loan originators and licensed loan originations and how the NMLS will accommodate this new status. Watch for an email announcement soon. Make sure you’ve joined the organization to receive the announcement. The session is FREE. We’re also planning our next member conference. More details will follow soon. Make sure you are on the mailing list to receive information. We have a lot of great topics to discuss. Plus we will be scheduling additional quarterly conference calls. Call or send me an email on the topics keeping you awake at night so we can track down the SME for future calls. I look forward to talking, working with and generally, lending a listening ear to anyone who needs it.
Felecia Bowers “Flea” President, MCPAOA Chief Compliance Officer Homeowners Financial Group USA, LLC 480-305-8509 [email protected] prove as a de facto matter for older non-QM loan They tended to fall into the non-QM category due programs with large data sets, which establish low to their size, DTI ratio, or structure: balloons, IOs, historical default rates, so long as the lender con- etc. But, the products are now rapidly evolving as siders and documents the eight ATR factors. the industry gets more comfortable with alternative However, the ATR rule also has gray areas documentation (bank statement), expanded credit when it comes to non-QM loans. For example, how and rental loans. The issuers are also changing. No should a lender consider repayment factor 7 (vii) for longer is non-QM the province of specialty ag- the “consumer’s monthly debt-to-income ratio or gregators, REITS and private equity players; now, residual income” for an asset depletion loan where insurance companies, asset managers, and major there is no income? The CFPB specifically contem- money center banks are bringing new private-label plated certain non-dwelling asset-based loans when offerings, backed by non-QM assets, to market. issuing the ATR rule but factor 7 (vii) is in direct con- To help keep pace with new product options flict with Factor 1 (i). Factor 1 (i) of the rule provides and the ever-changing underwriting guidelines, that the creditor must consider “the consumer’s some originators, including non-depositories, banks current or reasonably expected income or assets, and credit unions, are outsourcing non-QM under- other than the value of the dwelling, including any writing to recognized and experienced third-party real property attached to the dwelling, that secures fulfillment providers for loans to be sold on the the loan.” If the loan is underwritten solely based secondary market. This approach can provide com- on assets, there is less certainty for how to comply fort for the originator and the investor. Both parties with factor 7 (vii). are subject to TILA liability and buyback demands. If designed properly, asset depletion loans By using these fulfillment providers, some less- have strong repayment track records, especially experienced or smaller originators may find it easier for retirees with large asset holdings but minimal to obtain approval from investors and warehouse income derived from those assets or other sources lenders for participation in non-QM programs. of income; for instance, large quantities of treasury Investors, including the GSEs, are also moving bond holdings without enough total yield to sup- loan reviews and due diligence closer to the point port DTI ratios. Borrowers plan to sell off assets of sale. In the non-QM space, several active inves- on an “as needed” basis at irregular intervals to tors are using third-party underwriting fulfillment support monthly loan payments. Asset depletion service providers to conduct pre-loan sale under- loan programs often require that borrowers hold writing reviews on the non-QM loans they buy. The enough assets to support at least five years or more process is used to identify and clear conditions. of monthly payments, depending on loan type Recently, larger correspondent and wholesale lend- and features. The proceeds from these types of ers have also begun to do bank statement income sporadic asset sales often cannot be characterized calculations for their correspondents and brokers. as income. In some cases, the borrower’s monthly These initiatives, and others like them, are giving income could be $0 with $0 residual income. In both originators and investors greater confidence to originate and purchase non-QM loans. These others, the borrower has an insufficient amount efforts also help to reduce the number of scratch- of monthly fixed government program income to and-dent non-QM loans in the market. support loan payments. In either situation, however, Since the QM rule went live in 2014, the industry the borrower clearly has the ability to repay as a de has been waiting for the non-QM market to fully dev- facto matter given the amount and liquidity of the elop. 2019 is shaping up to be the year it does. MC assets. M NEW SOLUTIONS TO BUILD CONFIDENCE AND REDUCE DEFECTS Colgate Selden is the Managing Director and Head The first generation of non-QM loans were, for of Regulation and Compliance for Promontory Mort- the most part, super prime and fully documented. gagePath.
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socialengineering n A Case Study: Implementing SunriseRecon for Strategic Risk Management analysts’ progress, and there ciency improvements across the was no mechanism to “lock“ custodial reconciliation process: submitted reconciliations to • 69% reduction in FTE hours prevent further changes. required for the entire custodial • Limited repeatability and reconciliation process scalability: Process variations • 82% decrease in time needed across loan types made it dif- for data gathering and import ficult to train new FTE’s and complicated the conversion of • 60% reduction in time required acquired loans. for researching and resolving outages The Opportunity The bank saw the adoption • 62% decrease in hours needed of a new custodial reconciliation to conduct quality control on a process as an opportunity to submitted reconciliation, increase efficiency and reduce • 64% reduction in time required risk, with three potential areas for to train a new FTE Christian van Dijk, Founder significant improvement: SunriseRecon automated To overcome the challenges • Automation: By automating most aspects of what had been a and risks of an Excel-based custo- data collection and data input, mostly manual process, making dial reconciliation process, a lead- the bank could eliminate errors the process much more efficient ing regional bank recently turned and reduce FTE hours required and accurate. The application’s to Integra Solutions. Implement- for multiple aspects of the pro- real-time dashboards and stream- ing our SunriseRecon platform cess. lined reporting have also made it easy to proactively address has increased efficiency by more • Outage resolution: A more than 69% and reduced the risk of efficient process would give potential issues and understand write-offs and audit findings. analysts more time to research previously hidden operational constraints. And now that the cus- The Challenge and resolve outages, and to todial reconciliation process has The bank’s former custodial perform proactive activities like been standardized across loan reconciliation process was mostly trend analysis. manual, with numerous human types, the bank is poised to grow • Audit readiness: Introducing through loan acquisition. touchpoints and few built-in built-in controls would stream- controls. The process presented line audit preparation, decreas- To learn more about how multiple issues of open concern to ing the risk of audit findings internal and external audit partners: SunriseRecon can help your and reducing unnecessary business overcome the challenges • Errors and inefficiencies: Data write-offs. of custodial reconciliation, please was manually collected and en- The Results contact Christian van Dijk, founder tered, requiring many FTE hours Implementing SunriseRecon of Integra Solutions, at christian. and increasing the risk of errors. represented a complete transfor- [email protected] or • Lack of visibility and controls: mation of a key business function visit online at www.integradelivers. Managers had no way to track and resulted in dramatic effi- com/case-studies.
May 2019 41 Rise of AI in Regulatory Compliance BY CHITRA DORAI
he exciting ABCs of technology of it ought to be debunked. There is in this decade have been AI (Ar- widespread confusion about exactly what tificial Intelligence), Blockchain, AI can and cannot do. andT Cloud! AI, in particular, is igniting our imagination in terms of all the things WHAT IS REALLY AI? artificially intelligent computer systems Having spent more than can do on our behalf, from engaging three decades in AI Research and with customers and employees, deliver- Development, there is now sufficient Chitra Dorai ing new insights from data analysis to evidence to note that we’re indeed at automating business processes. Much has an inflection point of AI adoption due There is been written about the promise of AI for to a number of drivers: explosive digital widespread solving problems ranging from mundane data growth that makes it impossible confusion to the profound to reimagining our work for humans to make sense of it all about exactly and lives. with manual analysis alone; maturity what AI can of machine learning and AI algorithms and cannot do. Before describing how AI is being used to transform regulatory compliance, (e.g., deep learning) that can analyze I like to start with a question. “What’s unstructured digital data such as text, similar between Einstein’s Theory of image, and speech at scale and with Relativity and AI?” accuracies comparable to human levels; The simple answer is that just like and, advances in computational power the Theory of Relativity, very few people (GPUs) needed to train and build data- really understand AI while most claim intensive intelligent solutions. to! Therefore, a lot has been written Before we delve into how AI adoption and claimed about the magic of AI, the can transform regulatory compliance, panacea for all the problems and most especially in the mortgage industry where
42 May 2019 lenders and servicers alike look to technology to process all kinds of data, understand what is in ease their regulatory burden and reduce costs, we the data and having understood what is present need to start with a basic understanding of what in the data, they can reason and decide what to Machine Learning (ML) and AI can do, in order to do with the observed patterns. For the mortgage understand their potential and how they may be industry, this means AI can help analyze, validate, used in simplifying and automating human work in and interpret volumes of rich data available risk and compliance. ranging from customer data, loan documents, and appraisal notes to customer call recordings MACHINE LEARNING (ML) and regulatory publications; thus, transforming ML refers to a collection of statistical data how work is performed in the mortgage industry analysis techniques for pattern recognition that from customer service, loan processing and will allow you to analyze all kinds of data, including underwriting to servicing, compliance monitoring quantitative and unstructured data such as text, and risk management. This also means that AI speech recordings, and images to make data- may help to automate tasks requiring analysis and driven predictions and discovery. insights, tasks that are beyond repetitive, ‘swivel- A well-known example of an ML-based system chair’ work which has been automated typically is face recognition. One that allows Facebook to with desktop automation or Robotic process help tag photographs that are uploaded on its site. automation (RPA) technologies. Another example is the use of ML in a self-driving AI systems can enable ordinary people to be car to sense and decipher what is on the road, extraordinary. With the support of AI systems, all of recognize lane markings, stop signs, etc. us can now perform at the highest level! Machine learning is primarily about probabilistic recognition and prediction of patterns RISK AND COMPLIANCE TRANSFORMED based on past historical data. Compliance and risk management in banking, including mortgage lending, has largely relied on ARTIFICIAL INTELLIGENCE (AI) people until now. Continued increase in regulatory Machine learning is a subset of AI. It is just reporting requirements are driving up risk and not enough to recognize patterns of what's compliance activities in organizations, with global present in data. You must take actions also based spending on compliance estimated to be about on recognition of patterns. This means that one $270 billion a year for the banking industry. It is must reason what to do, schedule, and plan what also leading to an unsustainable level of demand happens next. for compliance professionals hired to implement For example, a self-driving car not only and monitor ongoing compliance. It is time for recognizes that there are markings on the road the industry to step away from adding more and for pedestrians as it drives itself on the road, but more compliance staff to “check-the checkers” and also recognizes what or who is on the road at adopt a more modern, technology-led approach the crossing. Based on that, it must reason about to tackle manual processes, rising costs, and stopping or continuing on the road, plan what regulatory burden. needs to happen to make the stop if it decides to, Typical activities in managing regulatory and act to stop before reaching the crossing. compliance are about tracking high volume AI includes techniques such as knowledge of regulatory change announced by oversight representation, reasoning, planning, and agencies, determining scope and materiality scheduling to support these aspects of intelligence needed for carrying out advanced tasks. of published changes, identifying impacted policies, procedures, and controls within the WHAT CAN AI SYSTEMS DO? organization, creating a holistic view of compliance AI systems using ML techniques and requirements, and training the staff. The image ∆ knowledge representation, reasoning, etc., can below shows an informal analysis of how the
May 2019 43 • Provide a knowledge repository with search and query-answering capabilities; and • Map clauses of regulations to internal controls, which can be used for reporting, gap identification, and policy management. To do this, the AI system employs advanced document parsing and NLP techniques to extract clauses, reference entities and intent compliance workload is distributed across these from policies to extract, and rank obligations that activities in a typical mortgage servicing unit. The need to be met. ML techniques are then used to reality is that limited resources, such as lawyers establish semantic similarity patterns between and risk professionals spend about 28 percent of obligations before and now, and to continuously their time engaged in “highly complex,” routine learn how those obligations have been modified, tasks, such as tracking regulations in terms of what dropped, etc. changed from the previous year or from the last AI systems are also able to discover new release, interpreting these changes, and amending obligations that have appeared in the document! policies inside the organization, and monitoring So, now you have an AI system that crawls through whether the operations are compliant with these thousands of pages of policy manuals and is able changed regulations! to discover new policy verbiage and changes in How do we reduce the thousands of hours the existing policies in a matter of minutes. every year of tedious yet high-level manual labor With AI, compliance officers can now monitor and decrease costs, yet maintain high levels of regulatory changes that impact their businesses regulatory compliance? faster. These AI-enabled systems can aggregate key changes in regulations for human review; thus, AI TO THE RESCUE expediting the compliance document tracking The power of natural language processing and monitoring process. This reduces the human (NLP) and ML capabilities of AI are beginning to effort allocated to reading and interpreting huge play a significant role in streamlining many manual volumes of documents and simplifies compliance activities in the regulatory compliance space. We review given the complexity of dealing with have AI systems that can: different jurisdictions, products, and oversight • Read through thousands of documents - institutions. regulatory policy releases, guidelines, and BEYOND NLP IN RISK AND COMPLIANCE updates provided by different oversight The NLP capabilities of AI are well suited to agencies; analyzing regulatory documents and the potential • Track updates and amendments to current is even more. Instead of doing data validation and regulations; QC with a sampled loan population, AI systems
44 May 2019 can automate and support QC reviews of every single loan in the set. They can also be applied to monitoring internal employee conduct and SIT communication to clients, areas that have emerged as hot button issues recently. Predictive modeling and scenario analysis are BACK & other significant AI capabilities that have emerged to provide better decision support in credit risk Catch Up management and profitability forecasting in mortgage lending. Speech recognition and text analytics are further examples of advanced AI capabilities that are beginning to be used in the mortgage industry to analyze huge volumes of conversations from call recordings, chats, emails, and loan notes; thus, enhancing call quality assurance and detection of unusual customer and employee behavior for proactive mitigation of Click on the covers for behavioral risk. content to advance your career!
AI ADOPTION IN MORTGAGE LENDING
For Legal, Regulatory Compliance, Risk Management & Quality Assurance Professionals For Legal, Regulatory Compliance, Risk Management & Quality Assurance Professionals While the banking industry has moved fast October 2016 July 2016 to adopt many of the modern advances in AI, Marketing & Appraisals the mortgage industry must pick up its pace of Advertising Best Practices to stay embracing AI to take the strain out of managing its Regulatory Compliant
SEE YOUR NEW ever-increasing burden of regulatory obligations. COMPLIANCE PROFESSIONALS ASSOCIATION
Keeping in mind that AI is not a “silver bullet,” page 30 it is still important for the mortgage industry From a SEE THE
SECTION to anticipate the impact of AI technology on Regulatory page 22 modernizing how the business is done and to stave Perspective? of the risk of being left behind in today’s fintech era. For Legal, Regulatory Compliance, Risk Management & Quality Assurance Professionals A successful way forward for a mortgage August 2016 company is to plan for a well-thought out data WORK analytics and AI program underlined by a careful, incremental approach and internal policy and guidelines to harness greater value out of the company data with responsible adoption of AI. FLOW
MCM
How To Make Your Work SEE THE
Flow Work For You - p.16 SECTION page 20 Dr Chitra Dorai is the Founder of Atasii.com, an AI-First Company assuring Accountability, Responsibility, and Transparency. She can be reached at [email protected].
May 2019 45 The Looming Threats From Today’s “Improved” Mortgage Manufacturing Process BY TOBIAS PETER
or a number of years, the mortgage the impression that risk is more than underwriting industry has touted adequately managed, default rates are both substantial improvements in the only low because of the almost seven Fmortgage manufacturing process and the year-long house price boom that offers elimination of many risky product types, troubled borrowers an escape route such as interest only, negative amorti- through refinancing or selling their home. zation, or balloons. While the industry However, when this housing cycle turns, believes that these changes will lastingly as it eventually will, it will expose the Tobias Peter improve loan performance, this singular focus on the underwriting process and subprime risks and unsustainable home price appreciation that have been building This singular risky product types ignores the looming focus on the threats for the industry that come with the in the system. underwriting high risk associated with many plain vanilla Despite the absence of risky product process and loans today. features and an improved manufacturing risky product Understandably, much of the industry process, much of what is being produced types ignores the looming is not particularly focused on these today are still high-risk, subprime-like threats for the lending outcomes because most of loans. Low or no down payments, debt- industry. what is originated today receives the to-income ratio (DTI) above 43 percent, or government’s stamp of approval as a a credit score below 660 are common as Qualified Mortgage (QM). And while documented by AEI’s National Mortgage today’s low default rates may give Risk Index (NMRI), which covers over 99
46 May 2019 percent of agency mortgages. Often times, these QM Patch was announced, the Federal Reserve risky product features are layered on top of each started its third round of Quantitative Easing (QE3), other in the same loan, which make them even which pumped massive amounts of money into the more risky, especially when combined with a slowly economy through purchases of mortgage backed amortizing 30-year loan term. According to the securities. Around that time, the housing market NMRI, in December 2018, 42 percent of all agency also switched from favoring buyers to favoring purchase loans were high risk. This is up from 36 sellers, in part because of the Fed’s stimulus. During percent in December 2012. a seller’s market, when demand outstrips supply, The increase in risk has been driven by adding yet more demand by either bringing new misguided government housing policies: Fannie borrowers into the market, equipping existing Mae and Freddie Mac (the GSEs) were allowed borrowers with more money to spend, or both, by their regulator, the Federal Housing Finance without changing supply will result in higher house Agency, to again originate mortgages with a 97 prices. That is basic economics. percent combined loan-to-value ratio (CLTV), which Because of continuing monetary easing and have the highest likelihood of default under stress.1 looser lending standards, today we find ourselves The Consumer Financial Protection Bureau (CFPB) in yet another rip-roaring housing boom almost announced the QM “Patch” in January 2013, which seven years in the making. This boom has occurred allowed the GSEs and the Ginnie Mae agencies to despite an improved loan manufacturing process exceed the 43 percent QM DTI ratio limit. and the elimination of risky product features. The worst offender on risk by far is the Federal While it is true that overall housing risk is currently Housing Administration (FHA) as the NMRI shows. nowhere near the level that it was during most of In December 2018, 60 percent of the purchase the 2000s, inflation-adjusted house prices are near loans it insured had a DTI ratio in excess of 43 the level they were in 2006. Furthermore, the rate percent (it allows up to 57 percent) and an effective of house price appreciation during the first six years down payment of 98.2 percent. Virtually all FHA of the current boom has matched the rate of house loans had slowly amortizing 30-year loan terms. price appreciation during the same first six years of Their median credit score was 663. To make matters the last boom. This is especially troubling, since we worse, often times, FHA’s mortgages includes have learned the hard way that what goes up, must down payment assistance and a seller concession come down, especially when the up is inflated by raising the CLTV even further. The NMRI indicates misguided lending practices. that almost 30 percent of FHA borrowers would be While some may argue that the level of expected to default under severe stress and this mortgage risk is still manageable, the issue is that number is climbing every month. this risk is heavily concentrated geographically. But it is not just the FHA’s process that AEI data show that lower priced, entry-level manufactures risky loans. Fannie Mae, in order to neighborhoods with high concentrations of lower- meet its affordable housing goals, is increasingly income and often minority buyers are exhibiting the competing with FHA for risky loans. While Freddie highest risk levels, the tightest seller’s markets, and has so far been watching from the sidelines, therefore the fastest rise in house prices.2 On the it coincidentally missed its affordable housing other hand, move-up neighborhoods with relatively goals in 2017. This shortcoming will only create safe lending and somewhat more supply have more pressure for Freddie to join the rumble. If experienced more moderate house price increases. this sounds familiar, it should, because it reeks Coincidence? I don’t think so. of a repeat of the 1990s and 2000s, when these When the housing cycle eventually turns, three entities were engaged in a similar battle for borrowers that entered the market late, and subprime loans. therefore took on the highest debt burdens, What made matters worse was that federal will be the first to default. These defaults will be entities did not coordinate their policies. As the heavily concentrated in neighborhoods with the∆
May 2019 47 greatest levels of housing risk. For lenders and guarantors heavily exposed to such borrowers and neighborhoods, the servicing costs and loan losses could be catastrophic – especially the longer the current boom continues. And while recently many pundits have proclaimed the end of the current housing boom, this was premature. With the spring buying season in swing now, we are already seeing a pick-up in house price appreciation, especially for entry- level homes, which was to be expected. On the demand side, mortgages rates have fallen back below 4.50 percent and markets expect a more cautious Federal Reserve due to global economic headwinds and lower than expected inflation. At offs in the grocery store. When steak becomes the same time, government agencies continue too expensive, instead of not eating, shoppers to provide more leverage month after month, substitute beef for steak. Similarly, most prospective especially for first-time buyers. On the supply side, home buyers will continue to purchase homes, data from Zillow show that despite some loosening, albeit at a slightly lower price or with a slightly inventories remain very tight, mostly for entry- higher down payment. Only a smaller fraction will level buyers. Absent any significant pick-up in new continue to rent or stay put in their current home. construction activity, the current seller’s market Government agencies have created a machinery will likely continue. It is therefore entirely plausible that underwrites high risk mortgages while that for the next year or two, the current housing promoting unsustainable house price booms. The boom—and the increase in risk—will continue. potential downfalls of such policies—as we have To prevent major harm in the future, the seen a decade ago—are simply too great for the government needs to take immediate action. The industry to simply go along with them. While the most obvious target is DTI ratios. According to industry has, and continues to work hard to bring the NMRI, Ttoday, almost 40 percent of agency the mortgage manufacturing process into the 21st purchase mortgages exceed the 43 percent QM century, it should also pay close attention to the limit. Since DTIs place a natural constraint on the quality of the lending—namely plain vanilla loan amount borrowers can borrow, they act as friction specifications such as DTIs, CLTV, loan terms, or on house price appreciation during periods when credit scores. MC house prices rise faster than incomes. Therefore, M the CFPB should immediately announce that the GSE QM Patch will be allowed to lapse in 2021 as Tobias Peter is the Senior Research Analyst at AEI scheduled. FHA should simultaneously lower its DTI Housing Center. He can be reached at Tobias. limit to 50 percent. [email protected]. This should be welcome news for the industry. Such a policy will create a more stable housing market by reducing lending risk and slowing the unsustainable rate of house price increases. END NOTES 1 See for example statement of Melvin L. Watt Director, FHFA Before the U.S. Importantly, the downside will be smaller than House of Representatives Committee on Financial Services on 1/27/2015 expected. A lower DTI limit will not eliminate a (https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-Melvin-L-Watt- Director-FHFA-Before-the-US-House-of-Representatives-Committee-on-Financial- large share of potential buyers from the market. Services-1272015.aspx) Rather, it will force these home buyers to make 2 See for example slides 16 or 22 in AEI’s National Housing Market Indicators release for Q2 2018 (https://www.aei.org/publication/national-housing-market- trade-offs, just like households make trade- indicators-release-for-q2-2018/)
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business Desk monthly valu e e purchasin fixed now interest real relationships Rentallendeoriginator distinctr levelsrendered providers may rates overall g Combating Margin Compression Through s Productive Strategic Relationships The Benefit of Strategic Relation- an ABA structure. ships: All strategic relationships and From the standpoint of the lender services agreements with potential ABA partner, it also becomes more business sources should be a catalyst productive through the funding or pur- for collaborating to create a more ef- chase of mortgage ABA entity loans, ficient and compliant process, more at appropriate levels. And the Lender timely closings and a better customer ABA partner should offset internal costs experience. In so doing, a lender can by properly charging the mortgage differentiate from other providers, ABA entity for any services rendered on brand who they are and what they do in its behalf, using a fully-costed versus in- the industry, and compete for and win cremental cost approach. more purchase business. Success with this approach can then be marketed to Marketing or Advertising Services other potential business sources, which Agreement (“MSA” or “ASA”) and / can drive even more volume. or Office Sublease / Desk Rental: An Now, let’s look more closely at MSA, ASA and / or Office Sublease / strategies for combating margin com- Desk Rental can drive volume, as well, pression for the most popular types of from a better, differentiated process Mark L Meyer, Founder and CEO strategic relationships and agreements. resulting from effective collaboration MLinc Solutions [email protected] Affiliated Business Arrangement and convenience. A lender purchasing (“ABA”): While a mortgage ABA entity the services from the potential business The rather dramatic decrease in is more time-consuming to establish, source may also be able to use “in- lender profit margins over the past year the ABA has the distinct advantage of house” loan originators at consistent, and a half can be attributed to a variety driving more origination volume. Not lower commission rates to handle con- of industry trends and market conditions only does the business source ABA sumer leads generated from an MSA occurring simultaneously. We will offer partner have a vested interest in the some countermeasures that can help or ASA web site. Lenders and other profitability of the enterprise, but the settlement providers can certainly im- stem the tide. More specifically, we will partner may also tie normal sales incen- explore how properly constructed stra- prove cost structure and better man- tives to the use of the mortgage ABA age downturns in volume by converting tegic relationships can improve overall entity. And, with the sales incentive, the some fixed cost to variable expense productivity with positive short term mortgage ABA entity pricing can be through outsourcing, as mentioned and longer term profitability impact. competitive, but does not need to be earlier. Finally, an MSA or ASA can be A Confluence of Factors Has Nega- under the market, to generate desired one of the most cost-effective ways for a tively Influenced Margins: A lower volume levels. The mortgage ABA en- level of housing inventory available tity should staff necessary origination provider to advertise its services, brand- for sale, home affordability, interest functions internally, but can do so at a ing itself in a real estate environment rate volatility and homebuyer qualifi- level of fixed cost appropriate for a min- that is fertile with potential customers cation issues have all contributed to a imum expected monthly volume. Turn- predisposed to need the services. And, decrease in home sales and mortgage ing some fixed cost into a variable, vol- because of regulatory pressures, partici- demand. Fierce competition for fewer ume driven expense can help an entity pants are, in most cases, setting adver- mortgage origination opportunities better manage cost per loan. There are tising fees below fair market value. has resulted in aggressive pricing and now very cost-effective, offshore alter- Summary: Properly established strate- less revenue from the secondary mar- natives for outsourcing technical origi- gic relationships can offer a better cost ket. Stuck with too much fixed cost nation, administrative and compliance structure and process for differentiation, and lower volumes, many lenders have tasks paired with onshore communica- branding, driving volume and improv- struggled to remain profitable. As a re- tion for optimal customer service. In ad- sult, some have left the industry while dition, loan originator commissions can ing overall profitability. others have been acquired or restruc- be set at lower, consistent “in-house www.mlincsolutions.com tured in a way that is removing excess business” rates, to account for the ben- [email protected] mortgage origination capacity. efits to the loan originator inherent to 214-553-1002
May 2019 49
A Servicer’s Four KEEPING THE Biggest Takeaways from the FHA's March 2019 Update to HB 4000.1 PACEBY TAYLOR HILDENBRAND
pring in Oklahoma brings many (MLs) issued since December 2016, exciting things. Aside from torna- the last release of 4000.1, which, of does, freak hail storms, and bipolar course, includes the now-infamous PACE weatherS patterns, spring brings all the (Property Assessed Clean Energy) Program runners out from their winter hiding places announcements (ML 17-06 and 17-18). and out onto the sidewalks and park trails Aside from just keeping “PACE” en masse. And as any runner could tell with the 2017 and 2018 policy updates, you, keeping up with "last year's pace" is the FHA included many other updates Taylor Hildenbrand usually the goal. (i.e. changes) with significant impacts The FHA did something similar by to FHA business partners. Given that issuing an update to HB 4000.1 on March these updates span the spectrum of 27, 2019. The primary objective was the mortgage industry and are buried to incorporate the Mortgagee Letters across 63+ sections and 1,031 pages, a
52 May 2019 servicing-specific summary seems appropriate. This • Added a step to the Evaluation of the article will race through the high points to kickstart Borrower's Financial Condition: Servicers the flurry of change implementation projects must now review and validate (as in "perform that are sure to follow given that all changes are it and document") the borrower's financial effective immediately. Note: Content from prior information to determine there is no deliberate MLs is effective as previously announced in the manufacturing or misrepresentation of their corresponding Letter. financial information or of their qualifying status. WHAT'S NEW FOR SERVICERS IN THE III.A.2.i.iii(A)(1) LATEST VERSION OF 4000.1? • Stronger guidance on Restricted Aside from the normal ML inclusion, revisions Participation: The FHA's not playing. You really to loss mitigation evaluations, claims' required do have to check against these criteria and documents and calculations, and assumption retain proof prior to allowing the borrower(s) to processing guidelines were announced. Other participate in HUD's Loss Mitigation Program. policy areas were left virtually untouched. There are still blanket requirements and option- 1. PACE REQUIREMENTS ADDED; LOAN specific requirements, but both have changed. MODIFICATION REMOVED. III.A.2.j.ii(C)(1) All requirements in ML 17-06 are now included o FHA-HAMP in-line with all other formal FHA policies. So, • CAIVRS: GSA’s SAM exclusion list technically, this isn't “new.” While HUD did reverse has been replaced by CAIVRS as the course 11 months after the release of ML 17-06, required list for purposes of FHA-HAMP. HUD never changed its mind about the servicing requirements for PACE, only that FHA would • Unresolved delinquent Federal Debt: If no longer endorse cases with PACE obligations the borrower has any delinquent federal starting January 2018 (ML 17-18). PACE-related non-tax debt, they're not eligible for requirements touch nearly all aspects of servicing, FHA-HAMP. FHA’s Origination guidance from payment application, PFS/ DIL/ CWCOT (II. A. 1. B. ii. (A) (10)) must be followed appraisals, and the Foreclosure Management for all FHA-HAMP evaluations. The Review process. Therefore, the line-level updates exclusion doesn’t apply to the borrower’s into 4000.1 (as denoted by the FHA in yellow mortgage associated with the loss highlights) are widespread and worth another look. mitigation attempt. FHA’s beloved “Loan Modification” Loss o Program-wide (applies to all options) Mitigation Option is not just extinct; it’s been removed from the fossil record. All mentions of • Ownership in other FHA-insured this defunct workout tool have been deleted and property: There must be no ownership subsequent sections have been renumbered. in other FHA-insured property, unless subject to an exception, to consider 2. LOSS MITIGATION GUIDANCE RE: the borrower eligible. While not “new,” FINANCIAL REVIEW, RESTRICTED the guideline now has clear, prominent PARTICIPATION, AND SIGNED placement. AGREEMENTS HAVE A STRONGER BITE. There's quite a bit of movement in this section, • Previous loan with a paid FHA Claim: primarily because the FHA finally removed all No borrower can have previously been mention of their traditional modification and a borrower on another FHA loan where included everything PACE-related. Aside from a Claim had been paid, unless the Claim those "spring cleaning" exercises, the FHA made was paid three years ago or more from serious updates to common processes within loss the date of the evaluation. Certain mitigation. Here goes: conditions apply. ∆
May 2019 53 • Strict Enforcement of FHA-HAMP default "here is the list of documents HUD expect during status: Servicers must ensure the loan is at least a claims review"). The FHA has also gone into three payments down (61 days past due) at the extensive detail about how to calculate timelines, time the modification is executed. If this doesn't debenture interest, and other fee recovery given happen, you can't file an incentive claim either. certain scenarios. These are very helpful clarifications III.A.2.k.v(B)(1) to some long-lingering confusion in the claim filing • Strong language on Signed Agreements. protocol where one or more foreclosure timelines are You must receive a signed formal forbearance missed. These clarifications may hold some financial agreement or TPP. The counter-signed impact and all of the FHA’s yellow highlights should document must be in the Claims Review be thoughtfully reviewed. File. While this isn't “new,” any "repayment/ forbearance" plan greater than three months • A total of 16 new documents required in the must include signatures from both parties. Claims Review File. IV.A.1.c.i III.A.2.k.ii(B) • New cutoff date for claiming interest on escrow advances if you missed FLD or RDT. If missed, Other noteworthy changes, include: you can only claim up to the date of the missed timeline, not the date the claim was filed, which • Closing the loophole of "may" vs. "must" and "are" vs. "refer to" for forbearance plans. The in some cases can be a LONG time. IV.A.2.a.ii(C) FHA has officially ended the quasi-debate on (2)(a) the optional nature of forbearance plans due to • Attorney fees capped to 75 percent of maximum them not being incentivized. Forbearance plans allowable if, after first legal is filed, borrower are a required step in the waterfall evaluation completed a DIL, PFS, or a bankruptcy petition process and an "informal/formal forbearance" was filed. IV.A.2.a.ii(K)(1)(a) by any other name is still a forbearance. III.A.2.k.ii(B) • Timeframe for Debenture interest calculation on Parts C, D, and E is now much clearer for when • Partial Claim funds can't be used to bring the timelines are missed. IV.A.2.a.i(A)(2)(b)(ii) new payment below the target. Technically, this isn't new. However, it seems too many • Timeframe for debenture interest calculation for servicers have been incorrectly applying the failed SFB plans revised. IV.A.2.a.i(C)(1)(c) Waterfall and this clarification is now in the • Bankruptcy fees are payable according to the Decision Point table itself. No portion of same restrictions as Foreclosure attorney fees. the Partial Claim funds can be used to bring the post-modified payment below what you IV.A.2.a.ii(K)(1)(a) calculated your target payment to be. This is • You can't file your claims via fax anymore. the FHA’s strongest attempt yet to enforce a IV.A.1.a.vii(C)(2) long lineage of poor interpretation that took the • Updated address to send your paper claim maximum allowable partial claim amount to find submission. IV.A.1.a.vii(C)(6) the resulting PITI payment, even if it was below the “target.” Always follow the Waterfall. III. A. 4. ASSUMPTIONS SCENARIOS FORMALLY 2. j. iii. ADDRESSED. 3. CLAIMS' REQUIRED DOCUMENT LIST Assumption processing is typically a manual IS BEEFED UP ALONG WITH CERTAIN process given that so few are done and therefore CALCULATION CLARIFICATIONS. prime for error. Both of the scenarios addressed by The FHA has significantly updated its list of the changes warrant special attention to ensure your required documents for a Claims Review File (i.e. team’s checklists and procedures are in order.
54 May 2019 • Payoff Letter from Novad at completion. prevention, and most importantly, itself. Before considering the Assumption complete, Incorporating it's 2017's PACE guidance you must get a "Partial Claim payoff letter" and removing the mention of the defunct from HUD's Servicing Contractor. This "modification" was a massive undertaking, but one pre-supposed that you’ve reviewed and that results in a unified document for FHA servicers have determined that a partial claim is on to rely on. We are cautiously optimistic that the account and you’ve been servicing it quarterly updates to 4000.1 will continue. accordingly. III.A.3.b.v Overall, the FHA's new guidance yields several key takeaways for the mortgage servicer’s Loss • Mandatory disclosure re: PACE. Technically, Mitigation, Claims and Assumptions departments this falls under PACE changes from ML 17- that should be thoughtfully considered. Given the 06, but it is eerily similar to the first bullet in immediate effective date, it looks like it's time to that the Seller must fully disclose the PACE lace up those running shoes and pick up the pace obligation to the buyer. This also implies that on the change implementation! the servicer is actively reviewing to determine Follow this link to the full version of 3.27.19’s if a PACE lien is attached to the property in copy of handbook 4000.1. MCM question. III.A.3.b.viii
CONCLUSION Taylor Hildenbrand is the Director of Compliance The FHA's update helps the Department keep and Relationships for BridgeRM. He can be reached "pace" with common questions/ loopholes, fraud at [email protected].
May 2019 55 LEGAL COUNSEL
Regulatory Compliance Lawyers
These attorneys are universally recognized by their peers as setting the highest standard for the legal profession, excelling in all fields – knowledge, analytical ability, judgment, communication, and ethics.
Richard J. Andreano, Jr. Terry C. Frank Carolyn Goldman Partner Chair of Consumer Finance Managing Partner [email protected] [email protected] [email protected] 202-661-2271 804-771-5745 602-315-6526
Richard J. Andreano, Jr., is the Practice Terry is a partner with Kaufman & Carolyn Goldman represents Leader of Ballard Spahr’s Mortgage Canoles’ and Chair of its Consumer mortgage companies, banks and other Banking Group. He has devoted 30 Finance Practice Group. She businesses in regulatory compliance, years of practice to financial services, concentrates her practice in litigation complex litigation and administrative mortgage banking, and consumer and regulatory compliance issues related proceedings. For the past 20 years, finance law. to mortgage banking and consumer Ms. Goldman has provided the service finance, and her clients consist of large of acting as an Arizona “Responsible Mr. Andreano advises banks, lenders, national banks, mortgage companies Individual (RI),” and in connection brokers, home builders, title companies, and servicers, investors, regional banks with that service, has provided legal and credit unions. Terry is admitted real estate professionals, and other advice regarding Arizona laws to practice in all state, federal and settlement providers on regulatory and regulations and guidance and compliance and transactional matters, bankruptcy courts in Virginia and North Carolina, as well as the Fourth Circuit representation in examinations by Federal Housing Administration (FHA) Court of Appeals, and has defended over the Arizona Department of Financial issues, and administrative examinations, 350 cases in state and federal courts. She Institutions (AZDFI). Ms. Goldman enforcement actions and investigations. is a frequent guest speaker and lecturer also represents mortgage companies, He also works with litigation counsel on at consumer finance industry conferences which have not retained her as their RI, devising strategies for defense of class and state and local bar associations. and have been charged with violations action and other lawsuits involving Terry has also published works on of laws in administrative proceedings. regulatory claims. Mr. Andreano is the finance,mortgage and consumer credit Ms. Goldman has been honored to be principal contact for the firm in its role issues. appointed by the Superintendent of the as federal consumer regulatory counsel AZDFI to its testing committees and to the Real Estate Services Providers her firm was recently appointed to the Council, Inc. (RESPRO). AARMR Advisory Council.
56 May 2019 LEGAL COUNSEL
Regulatory Compliance Lawyers
These attorneys are universally recognized by their peers as setting the highest standard for the legal profession, excelling in all fields – knowledge, analytical ability, judgment, communication, and ethics.
Richard Horn Mitchel H. Kider John Levonick Principal Managing Partner Special Counsel [email protected] [email protected] [email protected] 917-696-1525 202-557-3511 212-808-2758
Richard Horn is the former CFPB Senior In his 35 years as a practicing John V. Levonick is special counsel in Counsel and Special Advisor who led attorney, Mitch has represented banks, the Financial Services Practice Group of the TRID rule, and the design of the mortgage companies, residential Pepper Hamilton LLP. TRID disclosures. Richard is a founding homebuilders, real estate settlement Mr. Levonick's practice focuses on member of Garris Horn PLLC. service providers, credit card issuers, consumer financial services regulatory Richard has extensive federal and other financial service companies compliance and technology. Specific government experience from his time at in a broad range of matters. Mitch areas include consumer lending asset the CFPB and as a Senior Attorney at represents clients in investigations origination, servicing, and asset the FDIC. While at the CFPB, Richard and enforcement actions before the purchase and sale transactions; and led the final TRID rule and worked Consumer Financial Protection assisting creditors, servicers, investors, on other mortgage regulatory issues. Bureau, Department of Housing and and service and technology providers While at the FDIC, Richard worked on Urban Development, Department with regulatory issues. supervision and enforcement matters of Veterans Affairs, Department of Mr. Levonick also supports financial involving many different consumer Justice, Federal Trade Commission, institutions and technology service finance laws, including TILA, RESPA Ginnie Mae, Fannie Mae, Freddie providers (FinTech and RegTech) section 8, UDAP, and fair lending. Mac, and various state and local with the regulatory compliance Richard advises clients of all sizes on all regulatory authorities and Attorneys implications of emerging technology, federal and state mortgage regulatory General offices. such as blockchain technology, compliance and enforcement matters. In addition, Mitch acts as outside general counsel artificial intelligence, machine learning, Richard also provides on-site TRID cryptocurrencies and cloud computing. training and compliance reviews. to smaller companies and special regulatory and litigation counsel to Garris Horn PLLC is the next evolution Fortune 500 companies. of the financial services law firm. As a “virtual” law firm designed for the information age, we offer a streamlined and cost-efficient approach.
May 2019 57 LEGAL COUNSEL
Regulatory Compliance Lawyers
These attorneys are universally recognized by their peers as setting the highest standard for the legal profession, excelling in all fields – knowledge, analytical ability, judgment, communication, and ethics.
Kenneth Markison Melissa Richards, CMB Phillip L. Schulman Of Counsel Partner Partner [email protected] [email protected] [email protected] 202-557-3530 415-874-4263 202-263-3021 Ken Markison recently joined the law Melissa Richards, CMB is a California Phillip Schulman is a partner in Mayer firm of Weiner Brodsky Kider PC in licensed attorney specializing in Brown’s Washington DC office and a Washington DC as Of Counsel in its mortgage compliance and licensing, member of the Consumer Financial regulatory compliance practice. His enforcement defense, and enterprise risk Services group. His practice focuses on management matters. mortgage indus- clients include lender and vendor a range of matters related to real estate tries. Ms. Richards has almost 30 years companies, trade associations and other finance, mortgage banking and consumer of both General Counsel and private finance in both the primary and secondary organizations that draw on Ken’s broad practice experience. Most recently, she experience and expertise and the strong markets. He represents companies in the served as the Chief Legal & Risk Officer mortgage lending, title insurance and WBK team. of CMG Financial, a national mid- real estate industries in connection with size independent residential mortgage Until September 30, 2017, Ken was Vice administrative and regulatory compliance banker. At CMG, she actively managed President and Regulatory Counsel of all legal, corpo-rate governance and matters, including those involving the the Mortgage Bankers Association in real estate matters for the company. Ms. Consumer Financial Protection Bureau Washington, DC. At MBA, he worked on Richards also established the com- (CFPB), the US Department of Housing and represented the mortgage industry on pany’s formal compliance, licensing, and Urban Development (HUD), the US a very wide range of legal and regulatory risk management and QC programs. Department of Veterans Affairs (VA), issues. These include the Wall Street Ginnie Mae, Fannie Mae and Freddie Reform and Consumer Protection Act Ms. Richards has served in leadership Mac. Mr Schulman also defends False for the California Mortgage Bankers (Dodd-Frank) and other laws governing Claims Act matters before the US Association, both as a three-term the mortgage industry including the Department of Justice. Mr Schulman Director (1997-2006) and as its also defends False Claims Act matters Real Estate Settlement Procedures Act General Counsel (2002-2008). For the (RESPA), Truth in Lending Act (TILA), before the US Department of Justice. Mortgage Bankers Association, Ms. He advises clients on matters related Fair Housing Act, Home Mortgage Richards received her CMB designation to approval, origination and servicing Disclosure Act (HMDA) and the SAFE in 2009 and serves on multi-ple requirements under the US Federal Mortgage Licensing Act. committees. Housing Administration’s single-family loan programs.
58 May 2019 LEGAL COUNSEL
Regulatory Compliance Lawyers
These attorneys are universally recognized by their peers as setting the highest standard for the legal profession, excelling in all fields – knowledge, analytical ability, judgment, communication, and ethics.
Anastasia D. Stull Jonice Gray Tucker Attorney Partner [email protected] [email protected] 850-269-8858 202-349-8005
Anastasia D. Stull is a financial Jonice Gray Tucker represents clients in services regulatory attorney at Clark government investigations, enforcement If you are a Partington whose practice focuses actions, and examinations as well as on compliance, enforcement, and in private civil litigation. Ms. Tucker mortgage corporate matters, including cannabis also counsels clients on compliance legal consulting. Tasia is licensed with consumer protection laws and compliance conducts internal investigations. She in Florida and Washington, DC and has been recognized in Chambers previously held positions in private USA as a leading lawyer in the area of lawyer, this practice at BuckleySandler LLP, Financial Services Regulation: Banking in-house at the Consumer Bankers (Enforcement & Investigations), where space is Association and Merrill Lynch she has been described as “very well International Bank’s in London, UK connected in the regulatory world”, reserved for advising on complex banking and “very knowledgeable in the area,” and mortgage-related issues. a “go-to person for matters relating to you. the CFPB.” Ms. Tucker also has been Tasia was honored to serve as the recognized by Best Lawyers in the areas President and General Counsel of of banking and finance law and has been Women in Housing & Finance, Inc. named to the Super Lawyers list in the and was on the board’s executive areas of banking, consumer law, and committee for seven years. She’s a civil litigation defense. Ms. Tucker serves FINRA Industry Arbitrator and a on the Board of Regents of the American College of Consumer Financial Services Certified Regulatory Compliance Lawyers and is the incoming Chair of Professional (CRCP). the American Bar Association’s Banking Law Committee.
May 2019 59 THE 'OM-BOBS-MAN'
From the Desk of the ‘Om-Bobs-man’ "Om-Bobs-Man" is the nickname Bob Niemi earned while serving as the NMLS Ombudsman in 2014 and 2015. Bob is a former Ohio state regulator and now an expert consultant on NMLS and state regulatory matters. Bob can be reached at [email protected]. Growth in the Face of Loss The NMLS Resource Center 12/31/17 12/31/18 posted the Mortgage Industry Licensed MLO’s 158,199 165,240 +7,041 Report for the fourth quarter of Licensed Companies 16,966 17,572 +606 2018. The report is published Registered MLO’s 9,491 9,196 (295) quarterly and compiles NMLS Registered Comp 421,743 415,291 (6,452) data on mortgage entities, 'branches' and mortgage loan and even predicted in this column The Mortgage Call originators who were state- a year ago. So, it was expected. Report data did corroborate licensed or registered. The report During 2017, the number the downturn as mortgage was anticipated to compare the of state-licensed mortgage originations by state-licensed reaction of lenders to the reduced companies grew by 3.8% and the companies decreased by 10.9 paced of originations as a result number of state-licensed MLOs percent over the third quarter and of rising interest rates throughout increased by 8.9%. Perhaps by 16.5 percent over 2017. The the year. first quarter 2019 data will show reduction of consumer demand State-licensed mortgage the impact of the constriction, for refinancing followed with companies struggled during the since year end 2018 also showed refinance volume down by over second half of 2018 in response increase over 2017. 40 percent in 2018. Originations to four increases to target interest The true impact may not be for purchase mortgages only rates. The impact of rising realized as MLO’s would still be decreased by 3.0 percent but was rates and reduced consumer active on the last day even if not the first decrease in six years. This demand was reported by the renewed, or mortgage companies information is generated from MBA Vice President, Marina have been hesitant to reduce data as reported by state-licensed Walsh, in a March 26th posting, payrolls during the holiday season. mortgage companies. "Independent mortgage bankers The same was not true for License growth, perhaps continued to struggle in this very banks and credit unions. Their spurred on by the completion of competitive mortgage market impact was reductions of both the Uniform State Test adoption, environment, with the average staff and depository institutions. grew in 2018 as well. The pre-tax net production income The overall impact across the 165,240 state-licensed MLOs per loan reaching its lowest level mortgage industry was still a net held 594,041 licenses on the last since the inception of our report gain of 589 MLOs after balancing day of year, or about 3.5 licenses in 2008.” the increase in state-licensed per MLO. In 2017, that number The press release also stated MLOs over decrease in the was also just over three and a half that both independent mortgage depository MLOs. While not a licenses per MLO. Licenses grew, bankers and bank mortgage direct accounting, the expected but not at a reduced pace. subsidiaries reported net losses retraction across the mortgage Now that winter has passed, for loans originated in the fourth industry in response to reduced will the spring drop in interest quarter. Consolidation and originations and compression of rates deter or just defer the cutbacks have been the headlines margins was not validated. consolidation? MCM
60 May 2019 THE MORTGAGE COUNSELOR
The Mortgage Counselor Mitchel H. Kider is the Chairman and Managing Partner of Weiner Brodsky Kider PC, a national law firm specializing in the representation of financial institutions, residential homebuilders, and real estate settlement service providers.
Seeing the CFPB Through New Eyes I have been thinking lately view political issues superficially, that it has posed for our indus- about perspective. If we could, almost tribally. To many of them, try, my goal was to teach these as Proust suggested, see the consumer protection regula- future attorneys that when they universe through the eyes of an- tion is “good” and therefore the become lawyers, they will need other, or of one hundred others, CFPB must be right, and those to think first and foremost about what would we learn about the who oppose it, wrong. When the rule of law, and take politics things we take for granted in our you educate them on the details, out of the equation. These bright work and in our lives? however, their response shifts. young students were able to I had the privilege recently of Learning the extent of the broad take a step back from their initial, teaching financial regulatory en- powers that are vested in a single politically-driven response, and forcement, and about the CFPB director, and putting that to- to fairly and productively grapple in particular, to classes of law gether with what they have been with policy challenges for which students at two different universi- learning in law school about our there are no easy answers. ties. They are smart and accom- Constitution and the separation Reflecting on this experience, I plished, and many of them were of powers that it enshrines, the believe that we all, in this indus- still growing up when our indus- students quickly see their as- try and in our country, lawyers try went through the last financial sumptions complicated. Looking and non-lawyers alike, could crisis. What, I wondered, was at the facts, rather than taking think more about the structures their perspective on the debates sides, they understand that not and institutions that preserve our concerning the Bureau’s structure everything is properly viewed freedom, rather than about which and its actions? through a narrow political lens of political “tribes” support or op- What I found was a group of liberal versus conservative. pose a given policy, and guard thoughtful young people who are Beyond teaching them about ourselves against the impulse to
part of a generation that tends to the CFPB and the challenges take sides. MCM
May 2019 61 STATE REGULATORY ISSUES UPDATE
STATE REGULATORY ISSUES UPDATE
ARKANSAS MONTANA Fair Mortgage Lending Act – Arkansas Notary Provisions – Effective has passed Senate Bill 188, the provisions October 1, 2019, the state of Montana of which become effective August 9, 2019 amended provisions relating to its (SB 188). Revised Uniform Law on Notarial Acts that include electronic records, remote notarization and the use of electronic notarization systems and communicating KENTUCKY technology (HB 370). Notary Provisions – Kentucky has enacted several provisions pertaining to notaries. Section 3 NORTH DAKOTA under the new provision provides a list of acts that may Foreclosure Provisions – The State be performed by a notarial officer. These provisions are of North Dakota has enacted Senate effective January 1, 2020 (SB 114). Bill No. 2205, an act relating to abandoned property and foreclosure of real estate (SB 2205). NEBRASKA Notary Provisions – North Dakota has enacted House Uniform Power of Attorney Act Bill No. 1110 relating to the adoption of the Revised – The State of Nebraska amended Uniform Law on Notarial Acts. This section has been its provisions relating to its Uniform updated to include requirements concerning remote Power of Attorney Act under Legislative Bill 146 and notarial acts utilizing communication technology (HB Legislative Bill 145. These provisions are effective on 1110). September 6, 2019 or 3 months following adjournment of the current legislative session (LB 145 and LB 146). Residential Mortgage Licensing Act – The State OKLAHOMA of Nebraska amended its provisions that include Fees – The Oklahoma information relating to licensing requirements under its Department of Consumer Credit Residential Mortgage Licensing Act. Provisions in this bill has published its annual changes range from effective on September 6, 2019, or, 3 months in dollar amounts for 2019. Generally, the revised dollar following adjournment of the current legislative session, amounts are effective on July 1, 2019 (2019 Chart). to becoming operative on January 1, 2020 (LB 355).
62 May 2019 MORTGAGE VIPs
increased the effec- tiveness of loan origina- tions while mitigating risk and con- trolling costs through the Elliot Salzman development of a strong Congratulations, Elliot Salz- LoanLogics LoanHD® platform departmental structure, policy, man, on being selected Mort- to deliver a more comprehensive and procedures. As a strong gage Compliance Magazine’s approach for ensuring loan qual- leader known for implementing Mortgage Compliance Profes- ity. His duties also include over- and maintaining high standards, sional of the Month – May 2019! sight of the organization's Credit integrity, creative thinking skills, As Chief Credit/Compliance and Compliance Policies and and strong work ethic, Elliot has Officer at LoanLogics, Elliot Salz- Procedures. With his thought developed and influenced mul- man is responsible for enhancing leadership and expertise of more tiple technology platforms within and managing both the credit and than 26 years in the mortgage the Retail and Correspondent compliance policy functions for industry, Elliot has consistently space. Way to go Elliot! MCM
THE MOST READ ARTICLE CONGRATULATIONS APRIL 2019 ISSUE Phil McCall LOAN QUALITY IN THE ERA For writing the most read article OF ULDD AND URLA in the April 2019 Issue of One of the more pressing initiatives over the past Mortgage Compliance Magazine. year relates to the updates to the Uniform Residen- tial Loan Application (URLA) and the Uniform Loan Delivery Dataset (ULDD). For the first time in about 20 years, the URLA is getting a major overhaul and Phil McCall is the President it isn’t just cosmetic. The URLA has a whole new and Chief Operating Officer format, with new fields, data points, and require- of ACES Risk Management ments. With the initiatives going into effect in Feb- ruary 2020, it’s high time that lenders take a look Corp. (ARMCO). at how they will impact the industry’s approach to loan quality going forward.
If you would like to read the full article, CLICK HERE
May 2019 63 FREE Subscription Register Online
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May 2017 Legal Issues & Regulatory Compliance Mortgage Software Is Only as Efficient as Your Workflow
BY JORGE SAURI
echnology plays a preeminent role with features or even surveying the in making the mortgage transaction FinTech landscape. It should begin by faster, less expensive and more ac- looking inward. The key to discovering Tcurate. But even premium mortgage soft- how technology can improve your ware will fail to improve the transaction if organization’s efficiency begins by it is paired with a conflicting workflow. At a thorough understanding of two best, incongruent workflows make great components of your company’s workflow: software unimpressive and, at worst, it it’s internal operations and borrower’s Jorge Sauri adds unnecessary steps for employees. experience. Mortgage software is most useful when it not only improves the INTERNAL OPERATIONS Even premium borrower experience and internal Generally speaking, the mortgage mortgage operations, but reduces the labor of all transaction is a 30-day process. While software will fail parties involved in the transaction. To there are various requirements for different to improve the loan products, each mortgage contains transaction if it accomplish this, however, the software is paired with solution must meet the strategic needs the same six stages: pre-qualification, a conflicting of the company and the regulatory application, verification, processing, workflow. requirements put in motion by the underwriting, and closing. Before it is Consumer Financial Protection Bureau possible to improve your workflow with (CFPB). The full benefits of technology technology, it is necessary to understand partners are only realized when they how your company currently operates in complement a financial institution’s each stage of the mortgage transaction. strengths, provide reinforcement in their Without evaluating and analyzing your weaknesses and anticipate compliance current processes—and thoroughly demands. understanding your opportunities for When seeking new software vendors, improvement—it is not possible to know your mortgage company should which software features are best for your not begin by becoming enamored company. ∆
10 August 2016
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May 2019 65 POLICE BLOTTER
Lynn CPA Pleads Guilty to Mortgage and Tax Charges
BOSTON – A Lynn accountant pleaded then converted into condominiums. conspired to fraudulently obtain Home guilty today in federal court in Boston The co-conspirators recruited other Equity Conversion Mortgage (HECM) to assisting a multi-year mortgage borrowers to purchase the individual – also known as reverse mortgage – fraud scheme by creating fraudulent condominium units, which were also proceeds by submitting inflated and tax returns and submitting fraudulent financed by fraudulent mortgage loans. fraudulent documentation to various letters to lenders. victim banks to influence their decision David Plunkett, 53, of Lynn, pleaded Two New Jersey Men to approve and fund HECMs. Peralta guilty to one count of bank fraud and and Puccio recruited a conspirator to one count of aiding in the submission Arraigned In Reverse prepare inflated real estate appraisals of false tax returns. U.S. District Court Mortgage Scheme that falsely increased the value of Judge Richard G. Stearns scheduled the properties securing the HECMs, sentencing for June 25, 2019. TRENTON, N.J. – A Passaic County, thereby influencing each lender’s George Kritopoulos, 46, of Salem, New Jersey man and a Bergen County, decision to provide loans in amounts one of the alleged leaders of the New Jersey man have been arraigned greater than what would otherwise be mortgage fraud scheme, was indicted for their respective roles in a reverse available. in September 2018, and has pleaded mortgage scheme that took advantage Peralta and Puccio also caused the not guilty. Co-conspirator, Joseph of several elderly homeowners, U.S. submission of false and fraudulent Bates III, 38, of Lynnfield, pleaded Attorney Craig Carpenito announced loan documents that actively concealed guilty in October 2018 to one count of today. the disbursement of loan proceeds conspiracy, three counts of wire fraud Rafael Peralta, 46, of Clifton, New to Peralta, Puccio, and entities they affecting a financial institution, and two Jersey and Philip Puccio Jr., 40, of owned and controlled. The diverted counts of bank fraud. Mahwah, New Jersey were indicted loan proceeds were deposited into According to the charging documents, Feb. 8, 2019, by a federal grand jury bank accounts controlled by Peralta from 2006 through 2015, Bates and on one count of conspiracy to commit others engaged in a scheme to defraud bank fraud and six counts of bank and Puccio and used for their personal banks and other financial institutions fraud. They were arraigned March 15, benefit and to further the conspiracy. by causing false information to be 2019, before U.S. District Judge Anne The conspiracy to commit bank submitted to those institutions on behalf E. Thompson in Trenton federal court. fraud and bank fraud charges carry of borrowers – people recruited to According to documents filed in this a maximum potential penalty of 30 purchase properties – located primarily case and statements made in court: years in prison, a fine of $1 million, or in Salem. The properties were usually From November 2007 through twice the gross pecuniary gain by the multi-family buildings with two-to- December 2010, Peralta and Puccio, defendants or twice the gross pecuniary four units, which the co-conspirators home repair contractors, allegedly loss to others, whichever is greater. MCM
66 May 2019 MBA CALENDAR OF EVENTS
Education & Training Calendar May 2019
Date Course Name Dates Link
May 1 CFPB Exams, and Trends May 1 https://www.mba.org/store/events/webinar/ce-cfpb- in State Examinations exams-and-trends-in-state-examinations
May 2 Key Considerations of May 2 https://www.mba.org/store/events/webinar/key- RMBS Programs considerations-of-rmbs-programs
Remote Online Notarization- May 2 https://www.mba.org/store/events/webinar/remote- Understanding Technical Standards online-notarization-understanding-technical-standards
May 7 Introduction To May 7 - 21 https://www.mba.org/store/events/instructor-guided- Mortgage Banking online-course/introduction-to-mortgage-banking-may-2019
Steps Warehouse Lenders May 7 https://www.mba.org/store/events/webinar/steps- Must Take in Today's Market warehouse-lenders-must-take-in-todays-market
May 8 Payoff Statement Requirements May 8 https://www.mba.org/store/events/webinar/ce-payoff- for Mortgage Servicers statement-requirements-for-mortgage-servicers
May 14 School of Mortgage Banking I May 14 - 17 https://www.mba.org/store/events/school-of-mortgage- banking-i/school-of-mortgage-banking-i-may-2019-chicago-il
School of Mortgage Banking II May 14 - 17 https://www.mba.org/store/events/somb2/school-of- mortgage-banking-ii-may-2019-chicago-il
May 15 ECOA Case Law: May 15 https://www.mba.org/store/events/webinar/ce-ecoa-case- Past, Present, & Future law-past-present-and-future
May 22 Regulatory Considerations May 22 https://www.mba.org/store/events/webinar/ce-regulatory- for HELOCs considerations-for-helocs
Cyber Liability Insurance for the May 22 https://www.mba.org/store/events/webinar/cyber- Mortgage Finance Industry liability-insurance-for-the-mortgage-finance-industry
May 23 The Latest in Vendor May 23 https://www.mba.org/store/events/webinar/ce-the-latest- Management Regulations in-vendor-management-regulations
May 28 False Claims Act Update May 28 https://www.mba.org/store/events/webinar/ce-false- claims-act-update
May 29 Update on Recent Activity & May 29 https://www.mba.org/store/events/webinar/ceupdate-on- Managing Consumer Complaints recent-activity-and-managing-consumer-complaints
Conferences/Conventions Instructor Guided Online Course (IGOL) MBA Research Events Other
Classroom Course Webinar MISMO Events
May 2019 67 COMPLIANCE ALPHABET SOUPS
Compliance Alphabet Soups Each month we will serve up cans of Alphabet Soup applicable to the mortgage industry. Each flavor of Alphabet Soup will include the soup’s acronym and its actual name, and a hyperlink to the regulation, law, or rule from the agency that administers it. It’s all right here; relax and enjoy reading your favorite bowl of Mortgage Compliance Alphabet Soup.
FLOOD INSURANCE RULES Flood compliance has been challenging historically, and it has become more complex with implementation of a new flood check form, flood changes included in the CFPB’s mortgage servicing rules, and the promulgation of the Biggert- Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). The National Flood Insurance Program (NFIP) is administered primarily under two statutes: the National Flood Insurance Act of 1968 (1968 Act) and the Flood Disaster Protection Act of 1973 (FDPA). The FDPA requires federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending, or renewing a loan secured by improved real estate or a mobile home located or to be located in a standard flood hazard area (SFHA) in a community participating in the NFIP unless the property securing the loan is covered by flood insurance. Flood Law Reforms The Biggert-Waters Flood Insurance Reform Act of 2012 is a law passed by Congress and signed by the President in 2012 that extends the National Flood Insurance Program (NFIP) for five years, while requiring significant program reform. In early 2014, the Homeowner Flood Insurance Affordability Act of 2013 was signed into law. The law delays some sections of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) to prohibit the Federal Emergency Management Agency (FEMA) Administrator from providing flood insurance to a prospective insured at rates less than those estimated for any property purchased after the expiration of a designated six-month period (currently, any property purchased after July 6, 2012). The law includes the following: • Reinstates lower flood insurance premium rates for grandfathered properties repealed by Biggert-Waters; • Extends the effective date for new escrow rules under Biggert-Waters from July 6, 2014, to January 1, 2016; • Sets the effective date for the escrow requirements to loans closed on or after January 1, 2016; and • Makes flood insurance premium escrows optional for: o Junior liens (when the proper coverage is maintained with the first lien); o Condo and co-op loans (when the Residential Condominium Building Association Policy (RCBAP) is covered by flood insurance); o Home Equity Lines of Credit (HELOC); o Commercial purpose loans secured by a residence; o Nonperforming loans; and, o Loans with a term less than 12 months (typically construction or temporary financing).
68 May 2019 COMPLIANCE ALPHABET SOUPS
Certain aspects of the law became effective January 1, 2016: • Escrow required as of January 1, 2016 – Under HFIAA, regulated institutions will be required to escrow flood insurance premiums and fees secured by residential improved real estate or mobile homes that are made, increased, renewed or extended on or after January 1, 2016, unless the loan qualifies for a statutory exemption or the institution itself is exempt because it has total assets of less than $1 billion and meets certain other criteria. • Options for borrowers as of January 1, 2016 – HFIAA requires non-exempt institutions to provide borrowers of residential loans already on the books as of January 1, 2016, the option to escrow flood insurance premiums and fees. Effective July 1, 2019, financial institutions are required to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act. Financial institutions will also be allowed to accept flood insurance provided by private insurers that does not meet the statutory definition of private flood insurance, subject to certain conditions. In addition, financial institutions are permitted to accept certain flood coverage issued by mutual aid societies.
http://www.fema.gov/national-flood-insurance-program
The Compliance GAMES
Find these words that Compliance Professionals use on a AI LOAN daily basis. Who says compliance can’t be fun? ALTERNATIVE LOOMING CONTROL MANUFACTURED DATA PACE DREAMERS PROGRAMS FAIR REGULATORY FANNIEMAE RISE FRAMEWORK HOME RISK JOIN SERVICING LENDING THINK LIFE THREAT
Solution to last month's puzzle
May 2019 69 ASK THE COMPLIANCE EXPERTS
ASK THE COMPLIANCE EXPERTS Burton Embry Lisa Klika Josh Weinberg Felecia Bowers
I was hoping to get your opinion on this scenario. A loan is denied, and an adverse action notice is generated, can we re-activated the same loan number under a new loan program?
In a circumstance where a credit decision has been made and an adverse action communicated to the borrower, that file has reached a final disposition and should remain a denied loan. Reinstating a previously denied loan causes concern and issues with ECOA and especially HMDA. You may only have one disposition per loan file, so you cannot report both a denial and an approval on the same loan transaction. That being said, to promote Fair Lending, support the purpose behind the ECOA, and to provide every borrower an opportunity to qualify, it is highly encouraged to include a second review process for all loans recommended for denial, prior to an adverse action being sent to the consumer. Your scenario seems like the ideal candidate for an Underwriter to provide a counter-offer. If the borrower accepts the terms of the counter-offer, the loan may proceed under the new terms, however if the borrower rejects the counter-offer, then you should deny the loan on the original terms requested but be sure to document that a counter-offer was presented.
Got Questions? We Got Answers! Send your compliance questions to [email protected]
The Compliance Experts are not lawyers and the answers which are given are not to be taken, construed or interpreted as legal advice. You should consult with your attorney for your legal advice. The answers the Compliance Experts provide are based upon their own professional experience, knowledge, and expertise, which they have acquired while working as leaders in the mortgage compliance field for many years.All answers herein are the answers of the collective group of experts and not just one individual expert answering each question.
70 MarchMay 2019 2017 COMPLIANCE WHIZ
Compliance WHIZ WHAT DID YOU LEARN ABOUT REGULATORY COMPLIANCE?
Win the New Google Home! There will be a drawing every three months. Each month every person who scores 100% gets their name placed into the drum for the drawing. This means that it’s possible for one of our readers to have their name placed into the drum three (3) times for each quarterly drawing. A reader who scores 100% on each Quiz during the quarter could have an advantage over others by having their name placed into the drum 3 times. The winner will be featured with their photo and bio published in Mortgage Compliance Magazine along with a photo of the prize. Send a copy of this page along with your answers to [email protected].
Circle the best answer to each question based on the articles in this month’s Mortgage Compliance Magazine:
1. This operational discipline must be 5. ______is a program that 8. According to this article, investors, established first in order to build a allows a consumer to supplement including GSEs, are moving loan culture of quality. (Pages 10-11) the purchase price of a home or reviews and due diligence closer to A. Reporting access their home equity through an the point of sale. (Page 36-40) B. Validating application data investor investing in the consumer’s A. True C. Ensuring CEO accountability home. (Pages 24-30) B. False D. None of the above A. Lease-to-own financing B. Option to purchase C. Sales-leaseback program 2. DACA is VISA status that was D. A co-investor contract offered to children who were 9. ______and brought to the U.S. illegally by their ______are significant parents and have now been here 6. Which of the follow issues must be AI capabilities that provide better in the U.S. ______. considered when exploring ways decision support in credit risk (Pages 20-22) to augment company revenue management and profitability A. For the majority of their lives and/or to enhance mortgage loan forecasting in mortgage lending. B. For at least 10 years offerings? (Pages 24-30) (Page 42-45) C. For six months A. Legal A. QC reviews; predictive modeling D. None of the above B. Lease B. Scenario analysis; QC reviews C. Securities and tax C. Predictive modeling; Scenario D. Regulatory analysis 3. HUD and the FHA have provided E. All of the above definitive guidance that they are D. None of the above backing DACA mortgages. (Pages 20-22) 7. Which of the following is considered A. True a best practice regarding the use of alternative data? (Pages 32-35) B. False 10. According to the article, the A. Develop clear policies, procedures, FHA process along with Fannie and training 4. A loan program’s structure is Mae’s competition leads to the important to categorize because, in B. Involve marketing in the manufacturing of risk loans. doing so, a lender is able to identify development and use of new data (Page 46-48) applicable laws and regulatory sets and models A. True requirements to consider. C. Ensure the data has a clear nexus B. False (Pages 24-30) with an applicant’s demographics A. True D. Perform initial validation of models B. False using alternative data
Send Answers to: [email protected] Name:______Title:______Company:______State:______Phone:______Mobile:______Email:______
May 2019 71 BUSINESS SERVICES DIRECTORY
B2B BUSINESS SERVICES DIRECTORY
Michael Whipple Chenoa Fund is an affordable housing program provided Vice President through CBC Mortgage Agency (”CBCMA”), a uniquely michael.whipple@ created and organized government institution. CBCMA is chenoafund.org a public-purpose driven governmental entity specializing 208.250.9132 in providing 100% financing for loans guaranteed by the FHA, with a focus on under-served borrowers. Our mission is to provide funding for affordable housing opportunities in communities nationwide. CBCMA partners with quality mortgage lenders on a correspondent basis to provide down payment assistance for qualified home buyers in the form of second mortgages and gifts. All assistance is provided in compliance with FHA guidelines.
Mike Taliefero ComplianceTech delivers superior tools and insights Practice Leader to manage fair lending compliance and maximize the [email protected] penetration of untapped markets through industry 202.832.3800 intelligence. Lenders and federal agencies use our cloud-based software products, LendingPatterns™and Fair Lending Magic™, to identify, monitor, and mitigate fair lending compliance risk. LendingPatterns™ easily provides fair lending performance of a single lender against its peers. Fair Lending Magic™combines HMDA with LOS "Plus" data to generate descriptive statistics, regression and matched pair reports.
Steve Ribultan DocMagic is the leading provider of fully-compliant loan Director of Business document preparation, compliance, eSign, eDelivery Development and comprehensive eMortgage services for the mortgage industry. Founded in 1987 and headquartered in Torrance, [email protected] California, DocMagic develops software, mobile apps, 951.676.8675 processes and web-based systems for the production and delivery of compliant loan document packages. The company’s compliance experts and in-house legal staff consistently monitor legal and regulatory changes at both the federal and state levels to ensure accuracy. For more information, visit www.DocMagic.com.
Britt Haven HQVM provides vendor management oversight to mitigate Business Development risks inherent with the use of third party vendors. HQVM's info@hqvendormanagement. audit and monitoring process, combined with its customized com technology solutions, enables a lender to easily assess its 818.940.1200 Ext. 104 vendor's compliance with applicable regulations and to ensure a vendor conducts its business in a manner consistent with the lender's core values.
72 May 2019 BUSINESS SERVICES DIRECTORY
B2B BUSINESS SERVICES DIRECTORY
[email protected] Global DMS is a leading provider of commercial and www.globaldms.com residential real estate valuation solutions catering to lenders, 877.866.2747 – option 5 servicers, AMCs, appraisers, and other real estate entities. The company’s solution set is cost effectively delivered on a Software-as-a-Service (SaaS) transactional basis that ensures compliance adherence, reduces costs, increases efficiencies, and expedites the entire real estate appraisal process. The solution set includes its eTrac® Enterprise valuation management platform, eTrac Web Forms, Global Kinex®, AVMs and data analytics products, BPO management platform, the Mismo Appraisal Review System (MARS®), ATOM (Appraisal Tracking on Mobile), and AMCmatch.com.
Kristi Helmlinger Radian ensures the American dream through industry-leading Vice President mortgage insurance and a comprehensive suite of mortgage, Enterprise Sales, risk, real estate, and title services. With the combined expertise Mortgage and of the entire Radian family—including Radian MI, Clayton, Real Estate Services Green River Capital, Five Bridges Advisors, Independent [email protected] Settlement Services, Red Bell Real Estate, LLC and Radian 215.231.1230 Title Services—we are a single trusted partner, delivering unparalleled value and efficiency across the mortgage and real estate spectrum. Visit www.radian.com to see how Radian is shaping the future of mortgage and real estate services.
Mitchel H. Kider Weiner Brodsky Kider PC is a Washington, D.C.-based firm Managing Partner with a national practice focused on compliance, regulatory, [email protected] transactional and litigation matters related to financial services 202.557.3511 concerns. We represent a broad client base, from start-up businesses to Fortune 500 companies, throughout the United States.
Terry Sadowski At Wolters Kluwer we provide customers worldwide with risk Leader, National Sales and regulatory compliance solutions. Through our unique [email protected] blend of consulting, regulatory intelligence and technology, we help customers manage operational, compliance, and financial risk as well as complex regulatory reporting requirements to help them successfully navigate regulatory complexity, optimize risk and financial performance. Check out our newly launched VanceoTM Mortgage, an easy-to-use software that creates a highly intelligent and compliant end-to-end loan origination workflow. It's uniquely designed to isolate role-based tasks while enhancing visibility of the entire loan origination process. Peer tested and approved, Vanceo takes a user-centric approach to compliance. Intuitive dashboards and role-based workflows help you narrow in on critical action items and swiftly address potential issues. wolterskluwerfs. com/vanceo
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