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On February 6, Fannie Mae and Freddie Mac each issued selling policy updates through SEL-2019-01 and Bulletin 2019-4, respectively. According to Fannie Mae’s Selling Guide announcement, the Guide has been updated to include (i) a change from the Quality Assurance System to the Loan Quality Connect platform for post-purchase reviews; (ii) changes to reflect the retirement of the Cost of Funds Index in January 2020; and (iii) a clarification that completion escrow accounts, which are required for construction that is not complete when the related mortgage is delivered to Fannie Mae, must be custodial accounts that satisfy the criteria in the Fannie Mae Servicing Guide.
Freddie Mac’s Bulletin included selling updates regarding, among other things, (i) changes to the Condominium Project requirements; (ii) updates to commission income treatment based on tax law changes; and (iii) updates to the Certificate of Incumbency forms for sellers and servicers.
On February 1, Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID) released an outline for a sweeping legislative overhaul of the U.S. housing finance system. Most notably, the plan would end the Fannie Mae and Freddie Mac (GSEs) conservatorships, making the GSEs private guarantors while also allowing other nonbank private guarantors to enter the market. Highlights of the proposal include:
- Guarantors. The GSEs would be private companies, competing against other nonbanks for mortgages, subject to a percentage cap. The multifamily arms of the GSEs would be sold and operated as independent guarantors. Consistent with current GSE policy, the eligible mortgages would, among other things, be subject to loan limits set by FHFA and would be required to have an LTV of no more than 80 percent unless the borrower obtains private mortgage insurance.
- Regulation of Guarantors. FHFA, structured as a bi-partisan board of directors, would charter, regulate, and supervise all private guarantors, including the former GSEs. FHFA would be required to create prudential standards that include (i) leverage requirements; (ii) if appropriate, risk-based capital requirements; (iii) liquidity requirements; (iv) overall risk management requirements; (v) resolution plan requirements; (vi) concentration limits; and (vii) stress tests. Guarantors would be allowed to fail.
- Ginnie Mae. Ginnie Mae would operate the mortgage securitization platform and a mortgage insurance fund. Additionally, Ginnie Mae would provide a catastrophic government guarantee to cover tail-end risk, backed by the full-faith and credit of the U.S.
- Transition. In addition to a cap on the percent of all outstanding eligible mortgages, the legislation would require guarantors to be fully capitalized within an unspecified number of years after enactment.
- Affordable housing. Current housing goals and duty-to-serve requirements would be eliminated and replaced with a “Market Access Fund,” which is intended to address the homeownership and rental needs of underserved and low-income communities.
As previously covered by InfoBytes, on January 29, Chairman Crapo released the Senate Banking Committee’s agenda, which also prioritizes housing finance reform.
Fannie Mae announces updates to multifamily small mortgage loan, hybrid ARM loan, and property inspection protocol
On February 1, Fannie Mae issued Lender Memo 19-02 to provide updated guidance for multifamily lenders. The following adjustments have been made to the Multifamily Selling and Servicing Guide and are effective February 4:
- The maximum small mortgage loan amount eligible for underwriting is increased to $6 million and will apply to all markets.
- The maximum Hybrid ARM Loan amount has also been increased to $6 million.
- Property Inspection Protocols and Financial Analysis of Property Operations associated with small mortgage loans have been updated to align asset management requirements with the increases described above. Fannie Mae noted that quarterly financial reporting will not be required—nor will a waiver be needed—for a mortgage loan secured by a cooperative property or a small mortgage loan provided it is not on Fannie Mae’s watchlist or does not have a rating of 4 or 5 on its most recent property inspection.
On January 29, the Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID), outlined his upcoming committee agenda, which prioritized housing finance. Specifically, Crapo stated “housing finance reform is the last piece of unaddressed business from the financial crisis,” emphasizing that the continued conservatorship of Fannie Mae and Freddie Mac should be addressed with bipartisan legislation to establish better taxpayer protection and increase competition among mortgage guarantors. Crapo also highlighted, among other things, potential legislative needs for (i) capital markets, specifically legislation that would encourage capital formation and reduce burdens for smaller businesses; (ii) data breaches and solutions to provide consumers greater control over their financial data; (iii) credit bureau reform to make it easier for consumers to interface with credit bureaus generally and dispute inaccuracies; and (iv) improvements in the regulatory landscape covering fintech innovation. Crapo also acknowledged the upcoming expiration of the National Flood Insurance Program in May, noting that the program was extended ten times last Congress, and any significant reforms need to balance taxpayer interest with the assistance of consumers.
The Committee will continue to provide ongoing oversight over the federal financial regulatory agencies, including whether the regulations, guidance and supervisory expectations are consistent with the intent of the sponsors of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Additionally, the Committee will (i) continue its review of the “benefits of agencies that have a bipartisan commission, rather than a single director; a Congressional funding mechanism; and a safety and soundness focus,” and (ii) conduct oversight into financial companies’ actions with regard to access to credit, including whether companies withhold access to customers and industries they disfavor.
On January 25, top Democratic Congressional leaders, Maxine Waters and Sherrod Brown, wrote to acting Director of the FHFA, Joseph Otting, requesting that he clarify and expand on his reported remarks concerning the administration’s plan to move Fannie Mae and Freddie Mac (collectively, “GSEs”) out of conservatorship. Specifically, Otting reportedly told FHFA employees that he would soon announce a plan to move the GSEs out from under government control and that he was given a “clear mission” outlined by Treasury and the White House of “what they want to accomplish” with the agency. Waters and Brown expressed concern about Otting’s ability to lead the agency independently based on these comments, as well as a recent filing of the agency with the U.S. Court of Appeals for the 5th Circuit stating that the agency would no longer defend the constitutionality of the FHFA’s structure. (Covered by InfoBytes here.) Waters and Brown also requested that Otting submit by February 1 a copy of the “mission that Treasury and the White House have outlined.” In response, Otting stated that he appreciated the Democratic leaders’ interest in housing finance, outlined the statutory duties of the FHFA, and welcomed input as they “begin the journey of evaluating the Enterprises and developing a framework for ending conservatorship.”
As previously covered by InfoBytes, in June 2018, the White House announced a government reorganization plan titled, “Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations.” The plan covers a wide-range of government reorganization proposals, including a proposal to end the conservatorship of the GSEs and fully privatize the companies.
On January 16, Freddie Mac and Fannie Mae, in consultation with the FHFA, issued additional temporary guidance on selling policies that may be impacted during the government shutdown.
Freddie Mac Bulletin 2019-3 provides revisions to temporary guidance previously announced in Bulletin 2019-1 (see previous InfoBytes coverage here), and notifies sellers of temporary changes to certain Guide requirements to further assist impacted borrowers. Due to the length of the shutdown, Freddie Mac has added a minimum reserves requirement in order to offset the risk associated with a borrower’s interruption of income. Sellers must document the greater of two months reserves or the minimum reserves as required by the Loan Product Advisory and the Guide, for impacted mortgages with application received dates of January 16, 2019 or after. In addition, Freddie Mac will allow flexibility in circumstances where a seller is unable to meet the 10-day pre-closing verification of income and employment requirements for impacted mortgages regardless of the application received date. Freddie Mac also directs sellers of government funded, guaranteed, or insured mortgages sold to Freddie Mac to review government agency requirements.
Fannie Mae Lender Letter LL-2019-2 also provides additional temporary guidance on selling policies that may be impacted during the continued shutdown, and builds upon guidance issued last December. (See LL-2018-06 covered by InfoBytes here.) The additional guidance imposes a minimum liquid financial reserves requirement to offset risk and is applicable to loans with application dates on or after January 16, 2019. The new reserves requirement does not apply to high LTV refinances. Finally, Fannie Mae will provide additional flexibility with regard to verbal verification of employment and paystub age requirements.
On January 11, Freddie Mac and Fannie Mae issued guidance regarding credit reporting during the government shutdown (see Bulletin 2019-2 and Lender Letter 2019-01). The guidance clarifies that servicers have flexibility when reporting the status of a mortgage loan to credit reporting agencies for a borrower affected by the shutdown, and are permitting, but not requiring, servicers to suppress credit reporting in these instances entirely.
On January 8, the Department of Veterans Affairs (VA) issued Circular 26-19-1, which encourages holders of VA-guaranteed loans to extend forbearance to borrowers in distress as a result of the government shut down. It also encourages servicers to waive late charges on loans where borrowers suffered income loss due the shutdown or who may have been affected due to the ripple effect of the shutdown and suspend credit reporting on the affected accounts. The VA also issued Circular 26-19-2, which clarifies that loans for borrowers directly impacted by the government shutdown are still eligible for guarantee by the VA, so long as the lender has obtained all the required documentation and the loan is current. The VA emphasizes that the furlough period should not be considered a break in employment for underwriting purposes provided the borrower returned to work in the same status and provides their furlough letter. Additionally, the VA reminds originators that, even though the IRS Form 4506-T is mentioned in the VA Lender’s Handbook as a condition of the Automated Underwriting Cases feedback certificate, that condition is an investor or lender overlay and the form is not actually required by VA guidelines. Lastly, if the Federal Emergency Management Administration (FEMA) is unavailable for routine certifications or correspondence regarding flood insurance, the VA reminds lenders that non-federal flood insurance policies are acceptable.
On January 9, the U.S. Court of Appeals for the 9th Circuit held that Fannie Mae is not a “consumer reporting agency” under the FCRA and therefore is not liable under the law. According to the opinion, homeowners attempted to refinance their current mortgage loan two years after completing a short sale on their prior mortgage. While shopping for the refinance, lenders used Fannie Mae’s Desktop Underwriting (DU) program to determine if the loan would be eligible for purchase by the agency. Three of the eight DU findings showed the loan would be ineligible due to a foreclosure reported for the homeowners within the last seven years, which was not true. The homeowners sued Fannie Mae alleging the agency violated the FCRA for inaccurate reporting. On cross motions for summary judgment, the lower court determined that Fannie Mae was liable under the FCRA for furnishing inaccurate information because the agency “acts as a consumer reporting agency when it licenses DU to lenders.”
On appeal, the 9th Circuit reviewed whether Fannie Mae was a consumer reporting agency under the FCRA and noted that the agency must “regularly engage in . . . the practice of assembling or evaluating” consumer information, which Fannie Mae argues it does not do. Specifically, the agency asserts that it simply provides software that allows lenders to evaluate consumer information. The appeals court agreed, concluding that Fannie Mae created the tool but the person using the tool is the person engaging in the act. The court reasoned, “[t]here is nothing in the record to suggest that Fannie Mae assembles or evaluates consumer information.” Moreover, the court noted, if Fannie Mae were found to be a consumer reporting agency, it would be subject to other FCRA duties to borrowers, which “would contradict Congress’s design for Fannie Mae to operate only in the secondary mortgage market, to deal directly with lenders, and not to deal with borrowers themselves.”
On December 26, Fannie Mae issued temporary guidance relating to loan origination and loan servicing during the government shut down. According to LL-2018-06, loans are not rendered ineligible for purchase solely because a borrower’s employment is directly impacted by the shutdown. However, the lender must still be able to obtain a verbal verification of employment prior to the time of loan delivery in order for the loan to be eligible for sale to Fannie Mae. For military borrowers, the lender can use a Leave and Earnings Statement dated within 30 calendar days prior to the note date in lieu of a verbal verification. Additionally, among other things, if a borrower is furloughed on or after closing, the loan remains eligible for sale to Fannie so long as the lender has obtained all required documentation, including the verbal verification.
The guidance also addresses government verifications of certain information. For IRS transcripts, Fannie Mae notes that Desktop Underwriter will continue to process tax transcript verification reports received prior to the shutdown, but will not able to access new verification reports for validation. As a result, requests for verification reports may remain in pending status until normal government operations resume. Further, Fannie Mae is temporarily allowing lenders to obtain verification of a borrower’s social security number, if needed, prior to the delivery of the loan. If the number cannot be verified prior to delivery, however, the loan will not be eligible for sale. With respect to flood insurance, Fannie Mae advises that it will purchase loans secured by properties located in Special Flood Hazard Areas so long as the loans meet certain conditions, including proof the borrower has completed an application for the insurance and paid the initial premium. Lenders are obligated to have a process in place to identify any mortgaged properties that do not have proper evidence of active flood insurance, or where an increase in coverage or renewal of existing policies would have occurred during the shutdown, and to make sure coverage is obtained once the shutdown ends. Finally, with respect to loan servicing, servicers are authorized to offer forbearance plans to assist borrowers who cannot make their regular monthly payment as a result of the shutdown
Fannie Mae notes that additional guidance will be released if the shutdown lasts “for a prolonged period.”
On December 19, Fannie Mae issued SVC 2018-10, which describes policy changes to foreclosure time frames and compensatory fee requirements. Specifically, Fannie Mae has revised the maximum number of allowable days within which routine foreclosure proceedings are to be completed in twenty jurisdictions, with some increasing and some decreasing (a complete list available here). Fannie Mae is also replacing the monthly compensatory fee process with a process that focuses on identifying and resolving root causes of the failure to comply with foreclosure time frames. Under the new process, compensatory fees will be assessed if, after a chronic compliance issue is identified and a performance improvement plan is instituted, the servicer still does not meet the terms of the performance plan. The announcement includes a compensatory fee calculation chart and notes that fees will be applied based on the unpaid principal balance of the mortgage loan, the applicable pass-through rate, the length of the delay, and any additional costs that are directly attributable to the delay. The policy changes are effective January 1, 2019.
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program