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On June 24, Fannie Mae and Freddie Mac issued additional guidance related to a coding issue that impacted approximately 12 percent of credit scores earlier this year. As previously covered by InfoBytes, a consumer reporting agency informed lenders and industry members that it experienced a coding issue when it changed some of the technology to its legacy online model platform.
After making a determination that the underlying credit report data errors resulting from the coding issue “are not considered to be material erroneous credit data errors under Selling Guide B3-2-09,” Fannie Mae issued LL-2022-02 to provide requirements applicable specifically to impacted loans. Specifically, lenders are not required to obtain an updated credit report and re-underwrite the impacted loan “by resubmitting the loan to Desktop Underwriter® (DU® )” nor are they required to “re-assess the underwriting decision for non-DU loans, based solely on this issue.” An inaccurate credit score used at the time of underwriting will not render the loan ineligible for purchase, Fannie Mae stated, adding that a “repurchase request will not be issued based solely on this issue.” Guidance related to obtaining corrected credit scores and making data corrections, as well as information concerning loan-level price adjustments, post-closing quality control review, and representation and warranty relief is also provided in the lender letter.
Freddie Mac issued Bulletin 2022-14 to provide similar guidance to sellers about their credit reporting and data correction responsibilities, and stated that it will also “not issue a repurchase based solely on an inaccurate credit score used in the underwriting of a mortgage.”
The guidance is effective immediately.
On June 8, Fannie Mae and Freddie Mac (GSEs) released their Equitable Housing Finance Plans for 2022-2024 (available here and here), affirming their commitment to addressing racial and ethnic disparities in homeownership and wealth. The plans were developed following FHFA’s September 2021 request for public input, which invited comments to help the GSEs prepare their first plans and to aid FHFA in overseeing the plans (covered by InfoBytes here). Among other things, the plans (which will be updated annually) include activities to (i) address future consumer education initiatives for renters and homeowners; (ii) help tenants build credit profiles and enable better access to financial services; (iii) expand counseling services to support housing stability; (iv) launch technology to increase access to sustainable credit and fair home appraisals; and (v) deploy Special Purpose Credit Programs to address barriers to sustainable homeownership, focusing particularly on consumers living in formerly redlined and underserved areas with majority Black populations. FHFA’s press release also announced the establishment of a new pilot transparency framework for the GSEs, which will require Fannie and Freddie to publish and maintain a list of pilot programs and “test-and-learn activities” on their public websites to help FHFA determine whether such activities address disparities identified in the plans.
Earlier in the week, FHFA released its inaugural Mission Report describing housing finance activities taken in 2021 by the GSEs and Federal Home Loan Banks related to targeted economic development and affordable, equitable, and sustainable housing. The report highlighted, among other things, that the gap between mortgage acceptance rates for minority and white borrowers “remains persistent,” with Black and Latino borrowers representing 6.3 percent and 14.2 percent of all mortgages purchased by the GSEs, respectively, in the fourth quarter of 2021. The report also discussed fair lending geographical trends as well as data on multifamily and single-family loan acquisitions.
Recently, a consumer reporting agency (CRA) informed lenders and industry members that it experienced a coding issue when it changed some of the technology to its legacy online model platform. As a result of the issue, the CRA advised that the miscalculation impacted approximately 12 percent of credit scores, although credit reports were not affected.
In response, on June 1, Fannie Mae issued a notice regarding the coding error. Fannie Mae reminded lenders “of their obligations under the Selling Guide to correct erroneous credit data, ensure the accuracy of the credit data submitted to Desktop Underwriter® (DU® ) at the time of loan sale, and to provide any corrected information to us.” Freddie Mac issued a similar notice advising lenders of their credit reporting and data correction responsibilities. Both Fannie Mae and Freddie Mac are monitoring the situation and may issue additional guidance regarding the coding issue.
On June 1, the FHFA announced a final rule requiring Fannie Mae and Freddie Mac (GSEs) to submit annual capital plans and provide prior notice for certain capital actions “consistent with the regulatory framework for capital planning for large bank holding companies.” As previously covered by InfoBytes, in December 2021, FHFA issued the noticed of proposed rulemaking. These capital plans must include several mandatory elements, including (i) “[a]n assessment of the expected sources and uses of capital over the planning horizon that reflects the [GSE]’s size, complexity, risk profile and scope of operations, assuming both expected and stressful conditions”; (ii) “[e]stimates of projected revenues, expenses, losses, reserves and pro forma capital levels,” along with any additional capital measures the GSEs deem relevant; (iii) “[a] description of all planned capital actions over the planning horizon”; (iv) a discussion of stress test results and how the capital plans will account for these results; and (v) a discussion of any anticipated changes to a GSE’s business plan that may likely have a material impact on the GSE’s capital adequacy or liquidity. The final rule noted that the FHFA intends to review the capital plans for comprehensiveness, reasonableness, and relevant supervisory information, and plans to review the GSE’s regulatory and financial reports, as well as the results of any conducted stress tests and any other information required by FHFA or related to the GSE’s capital adequacy. Should the GSEs determine that there has been or will be a material change to their risk profile, financial condition, or corporate structure since the submission of the last plan (or if directed by FHFA), they must resubmit their capital plans within 30 days. The final rule also incorporates the determination of the stress capital buffer into the capital planning process, which will be provided to the GSEs by August 15 of each year, along with an explanation of the results of the supervisory stress test. The final rule is effective 60 days after publication in the Federal Register. Under the final rule, each GSE will submit its first capital plan by May 20, 2023.
On May 26, Freddie Mac announced new automated underwriting capabilities that will allow mortgage lenders to verify assets, income, and employment using borrower-approved bank account data. The new functionality is available starting June 1, through Freddie’s asset and income modeler (AIM) within the Freddie Mac Loan Product Advisor. According to Freddie’s announcement, the automated underwriting capability “provides the borrower’s current employment status using borrower-approved bank account (direct deposit) or payroll data obtained from designated third-party service providers” in order to give “lenders a more efficient option than obtaining oral or written verification of employment prior to closing.” Freddie cited a recent study, which found that adopting offerings like AIM helps lenders “significantly boost efficiency and shorten cycle times by as much as 15 days.” These efficiencies, Freddie said, “translate into a 30 percent reduction in loan origination costs, greater customer satisfaction, and an increase in applications being completed and closed.” The announcement also noted that Freddie recently released the industry’s first automated-assessment of direct deposit income, which enables AIM to access additional fixed income or alternative income sources such as retirement, Social Security, Veteran Affairs benefits, alimony, and child support, as well as income from an applicant’s tax return for self-employed individuals.
On May 26, FHFA announced a final rule that amends the Enterprise Regulatory Capital Framework by introducing new public disclosure requirements for Fannie Mae and Freddie Mac (GSEs). The final rule adds new quarterly quantitative and annual qualitative disclosures related to risk management, corporate governance, capital structure and capital requirements and buffers under the standardized approach. The final rule also aligns the GSEs’ disclosure requirements with many of the public disclosure requirements for large banking organizations under the regulatory capital framework adopted by banking regulators, and is intended to ensure the GSEs operate in a safe and sound manner “in particular during periods of financial stress.” “By allowing market participants to assess key information about the [GSEs] risk profiles and associated levels of capital, this final rule will promote transparency and encourage sound risk management practices at the [GSEs],” acting Director Sandra L. Thompson said.
On May 3, FHFA announced that Fannie Mae and Freddie Mac (GSEs) are requiring lenders to use the Supplemental Consumer Information Form (SCIF) as part of the application process for loans that will be sold to the GSEs. According to the announcement, the SCIF is intended to collect information on the borrower’s language preference, and on any homebuyer education or housing counseling that the borrower received, so that lenders can increase their understanding of borrowers’ needs throughout the home buying process. The changes will require lenders to present the SCIF questions to borrowers and to report any data collected from the SCIF to the GSEs purchasing the loan. Lenders will be required to adopt these changes and reporting requirements for loans with application dates on or after March 1, 2023. The announcement also noted that response by borrowers on the preferred language question in the SCIF will be voluntary. The SCIF will be available via Mortgage Translations later this summer.
On April 11, the Biden administration released a Fact Sheet regarding an initiative to decrease “malicious” and “predatory” billing and collection practices related to medical debts, including holding medical providers and debt collectors “accountable for harmful practices.” According to the Fact Sheet, the administration has ordered several agencies to take actions intended to “lessen the burden of medical debt and increase consumer protection.” The Fact Sheet provides “guidance to all agencies to eliminate medical debt as a factor for underwriting in credit programs,” and states, among other things, that the: (i) FHFA is reviewing the credit models that Fannie Mae and Freddie Mac use; (ii) USDA is discontinuing “the inclusion of any recurring medical debts into borrower repayment calculations”; and (iii) VA is reviewing its underwriting guidelines to ensure it minimizes or eliminates medical debt reporting as a proxy for creditworthiness. Additionally, the Fact Sheet noted that the Department of Health and Human Services is requesting data from over 2,000 providers on medical bill collection practices, lawsuits against patients, financial assistance, financial product offerings, and third party contracting or debt buying practices. The Fact Sheet also noted that the CFPB “will investigate credit reporting companies and debt collectors” in regard to “patients’ and families’ rights,” which includes targeting “coercive credit reporting” and determining whether medical debts should be included in consumer credit reports.
On April 6, FHFA announced that servicers with mortgages backed by Fannie Mae and Freddie Mac are required to suspend foreclosure activities for up to 60 days if the servicer is notified that a borrower has applied for mortgage assistance under the Treasury Department’s Homeowner Assistance Fund (HAF). As previously covered by InfoBytes, the HAF was created to provide direct assistance for mortgage payments, property insurance, utilities, and other housing-related costs to help prevent delinquencies, defaults, and foreclosures after January 21, 2020.
On April 1, HUD published a proposed rule in the Federal Register to increase the maximum term limit allowable on loan modifications for FHA-insured mortgages from 360 to 480 months. According to the proposed rule, the update would allow mortgagees to provide a 40-year loan modification option to borrowers who may not qualify for loss mitigation options and is intended to help borrowers experiencing a financial hardship, including those impacted by the Covid-19 pandemic, obtain affordable monthly payments. The proposed rule noted that “[i]ncreasing the maximum term limit to 480 months would allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Additionally, the proposal would align FHA with Fannie Mae and Freddie Mac, “which both currently provide a 40-year loan modification option.” Comments are due by May 31.