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CFPB Convenes Small Business Mortgage Panel and Updates Mortgage Disclosure Prototypes
On February 21, the CFPB announced the formation of a small business panel to provide feedback on the Bureau’s mortgage disclosure form initiatives, as required under the Small Business Regulatory Enforcement Fairness Act. That law requires that federal agencies gather small business input to help the agencies fulfill the related legal requirement that regulations avoid significant economic impact on a substantial number of small firms. The panel will provide feedback on small business compliance burdens related to the CFPB’s proposed mortgage disclosures and related proposed regulations. The CFPB’s announcement included the release of several documents that will be shared with the panel, including a detailed overview of the mortgage disclosure proposals under consideration, a fact sheet summarizing the review process, and an outline of questions the panel will address. In a related blog post, the CFPB also sought public comment on the proposals to be considered by the small business panel. The formation of the panel follows the CFPB’s recent release of another round of prototype integrated mortgage disclosures. After several rounds of previous testing, the CFPB provides in this most recent release a prototype loan estimate and settlement disclosure. At this stage, the CFPB no longer is offering multiple versions to compare, but is still testing the prototypes in person while seeking broader public feedback online. The CFPB promises that this is the last round of testing before it turns to crafting a proposed rule.
HUD Withdraws Rule Proposed to Allow Farm Credit System Institutions to Participate in FHA Mortgage Insurance Program
On February 13, HUD withdrew its proposed rule that would have allowed Farm Credit System direct lenders to participate in FHA mortgage insurance programs as FHA-approved mortgagees and lenders in an effort to increase housing credit available in rural areas. The withdrawal notice states that the rule would conflict with the Obama administration’s policy of reducing the FHA’s market share and bringing private capital back into the housing finance market.
HUD Clarifies Requirements Regarding Closing a Loan in the Name of an FHA-Approved Mortgagee Acting as a Sponsored Third Party Originator
On February 10, HUD issued Mortgagee Letter 2012-2 to clarify the requirements for the origination, closing, and submission for FHA insurance endorsement of loans via the sponsored third-party origination process. The Letter states that all third-party originators must be sponsored by an FHA-approved Direct Endorsement lender, and that sponsoring lenders are responsible for ensuring that the originators they sponsor adhere to FHA requirements. Sponsored third-party originator compliance failures may result in administrative action against the sponsoring mortgagee. Moreover, compliance failures by an FHA-approved mortgagee acting as a third-party sponsored originator may result in administrative action against both the sponsoring mortgagee and the FHA-approved mortgagee.
Federal Government Obtains Settlement of False Claims Act Claims Against CitiMortgage
On February 15, HUD and the U.S. Attorney for the Southern District of New York announced that CitiMortgage, Inc. had agreed to settle the government’s claims that CitiMortgage violated the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act by failing to comply with certain requirements of the Fair Housing Administration’s Direct Endorsement Lender Program. According to the press release, the defendant submitted certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not, causing HUD to unnecessarily incur losses when those loans defaulted. As part of the settlement, which was approved by the United States District Court for the Southern District of New York, CitiMortgage agreed to pay $158.3 million in damages to the United States.
Special Alert: Report on NMLS Annual User Conference and Training
The Nationwide Mortgage Licensing System and Registry (NMLS) held its fourth annual NMLS User Conference and Training (the Conference) in Scottsdale, Arizona from February 6-9, 2012. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry. This special report includes a summary of key topics addressed at the meeting as well as announcements regarding important state licensing initiatives, including: (i) enhancements to the NMLS system to expand its use for licensing of non-mortgage financial services companies, (ii) issuance of SAFE Act examination guidelines, and (iii) the announcement of efforts to develop a uniform mortgage loan originator state test.
The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Deborah Bortner, Director of the Non-Depository Division of the Washington Department of Financial Institutions, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on "leveling the playing field" between depositories and non-depositories by suggesting various means to allow a more efficient flow of mortgage loan originators (MLOs) from a federally-registered MLO status to a state-licensed MLO status. Suggestions included "transitional licensing", which would allow a federally registered MLO that moves to a state-licensed entity to continue operating for a period of 120 days, during which the individual would complete education, testing and other requirements in order to secure licenses within the transitional approval. Another suggestion was to allow federally registered MLOs to complete state education, examination, and other approval requirements prior to moving from a federal registrant to a state licensee. During a later panel, the Consumer Financial Protection Bureau (CFPB) indicated that there are no immediate plans to amend the requirements applicable to federal registrants.
Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, are available on the NMLS website. A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.
The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS. Specifically, various sessions covered the following issues:
- The CFPB’s supervision of the mortgage industry and the direction that the CFPB is taking with respect to depository and non-depository financial services, including a discussion with CFPB staff regarding issues of interpretation and implementation of state licensing, NMLS and the rules implementing the SAFE Act. Of particular interest, the CFPB indicated that it has started planning its first set of exams of non-depository financial institutions and that the CFPB will select institutions for examination based on size, volume, type of product or service offered, extent of state oversight, patterns of complaints, and other factors.
- Industry views on the regulation of and the future of the mortgage industry.
- Updates regarding the Mortgage Call Report, including a review of preliminary data, how it is used by regulators, and a review of additional changes and updates to assist with the compliance process.
- Review of the NMLS federal registration process and a discussion on how to improve the process.
- NMLS testing and education discussion, with a focus on understanding the desire from industry for increasing the available continuing education topics in order to provide a better learning experience for MLOs.
- NMLS federal examination and third party compliance management, including a discussion of best practices that institutions can consider to efficiently and effectively implement policies and procedures to ensure third parties are properly licensed and/or registered.
- Credit and criminal background checks for MLOs, control persons, and branch managers, which included discussions of expanding the criminal background check process from MLOs to also include branch managers and control persons.
- Potential modifications to the NMLS to accommodate state pre-notification filings for changes in control, changes in branch manager, or other changes in corporate structure or operations that require prior notice.
- Federal and state rules implementation, including ability to repay, loan officer compensation and TILA/RESPA disclosure conflicts.
- Discussion of important FHA rule changes for 2011 and upcoming changes in 2012.
- Surety bonds necessary to comply with state and federal law, including underwriting considerations, risk mitigation, and claim resolution.
In addition to the above general sessions, the Conference covered several major changes and new initiatives announced by the Conference of State Bank Supervisors (CSBS), including:
- System Enhancements and Expansion of NMLS to Cover Additional Financial Services Companies. The CSBS announced plansto expand the use of the NMLS to include nonbank, non-mortgage financial service providers, including consumer lenders, money services businesses, and debt collectors. Following this expansion, these other nonbank firms will be obligated to alter their compliance programs in order to apply for, amend, and renew state licenses using the NMLS. Entities that previously obtained and maintained relevant licenses via hard-copy applications and filings will be required to transition onto the NMLS, a process which could prove difficult as licensee's struggle to learn the new system and which may allow the state agency an opportunity to vet anew its licensees. While the electronic application and related processes will be centralized and uniform, entities that use the NMLS to obtain and maintain their licenses still will be subject to various unique state-specific requirements, which must be dealt with outside of the NMLS. For many participants in the mortgage industry, the mandated use of the NMLS has brought with it heightened compliance costs and increased reporting requirements, particularly as states increased disclosure and other application requirements to become more consistent with other states. Non-mortgage state licensed financial institutions should be mindful of this experience and be prepared to review their licensing compliance procedures and resources following transition to the NMLS. At a minimum, licensees should carefully monitor developments regarding licensing requirements during and after the transition to the NMLS.Through expansion of the system state bank regulators expect to see improved efficiency, and regulated entities can expect enhanced supervision and increased public access to license, registration, and supervisory information. The expansion is scheduled to begin in April when at least 12 states will begin transitioning their exiting licensing and registration systems to the NMLS.Further, the April expansion and update will include other changes and enhancements in an effort to improve the system overall:
- New Workflow – the changes and enhancements to the system require a new "license management workflow" (i.e., online navigation and information contained in the uniform plans) to support the new Business Activities section. The new workflow will (1) introduce a new navigational landing page in the Company (MU1), (2) combine the selection of licenses and entry of transition numbers into one step, and (3) introduce new navigation items onto the License/Registrations page.
- Amended Forms – the uniform mortgage forms (i.e., MU1 and MU3) will be amended to "Company Filing" and "Branch Filing", respectively, in anticipation of the expansion of the system to cover non-mortgage related industries.
- Business Activities – expands this section of the Form MU1 to allow users to identify a broader range of business activities conducted by the user (e.g., loan modifications, seller of money orders) based on definitions developed by the states.
- Approvals and Designations – introduces new approval and designation types, and allows users to add approval or identification numbers.
- Disclosure Explanation – in addition to updated company, branch and individual disclosure questions, a new disclosure explanation feature will allow users to add explanations to each disclosure question that has a “yes” answer in conjunction with submitting a filing.
- Document Upload – users will be able to upload specific materials into the NMLS to be shared by state regulators, thereby eliminating the need to send certain materials via hard copy outside the system. The type of materials that may be uploaded may include business plans, certificates of good standing, fidelity bonds, errors and omissions insurance, and other materials generally provided in the application and renewal process.
- Criminal Background Check for a Control/Qualifying Individual – all state licensed individuals will be required to complete a criminal background check via the NMLS.
Copies of the updated forms and "Business Activities Description" are available on the NMLS under News & Events.
Upon implementation of the new forms in April, existing NMLS users should be aware that in order to submit any new applications, address updates, addition of officers, or other general maintenance items, the company will be required to complete all new Company Filing fields, and the company's control persons and qualifying individuals must complete additional questions and information requests.
- SAFE Act Examination Guidelines. The Multi-State Mortgage Committee (MMC), a ten-state representative body created by CSBS and AARMR, issued SAFE Act Examination Guidelines (SEGs) for use by state non-depository mortgage regulators. The SEGs are not required guidelines for state agencies, but utilization of SEGs is intended to allow state agencies to determine compliance with the SAFE Act and provides consistent and uniform guidelines for use by institution in-house compliance and audit departments conducting SAFE Act and state compliance reviews. The SEGs are presented in a question and answer format and are “modular,” such that state mortgage regulators may easily use part or all of the SEGs as they see fit.
- Uniform MLO State Test. The CSBS announced that efforts are underway to develop content for a uniform MLO state test. Currently, an MLO is required to take the state component of the SAFE Act mortgage loan originator test for each state in which he or she intends to be licensed. With the introduction of a uniform MLO state test, an MLO will meet the testing requirement for multiple states by passing a single test that includes content representative of all of the states.An ad hoc committee composed of state regulators has been charged with researching the feasibility of developing a uniform MLO state test. In coordination with industry subject matter experts and test consultants, the committee has completed its initial feasibility studies and test development is now underway. Later this year, the committee plans to present a uniform test proposal to state regulators.
A message that pervaded the Conference was that with the completion of several multi-year NMLS initiatives responding to the requirements of the SAFE Act (e.g., the introduction of the NMLS Mortgage Call Report), NMLS is turning its attention to implementing changes to and expanding the NMLS. While the changes are ultimately intended to streamline the NMLS process, current NMLS users should prepare for additional oversight and regulation, and licensees transitioning onto the system should prepare for heightened compliance costs and increased reporting requirements.
For more information about NMLS, visit the NMLS Resource Center, About NMLS.
FinCEN Finalizes New Anti-Money Laundering Rules for Nonbank Mortgage Lenders and Originators
On February 7, the Financial Crimes Enforcement Network (FinCEN) released a final rule that subjects nonbank residential mortgage lenders and originators to certain anti-money laundering (AML) regulations already applicable to other types of financial institutions. Under the new regulations, nonbank lenders and originators will be required to establish anti-money laundering programs and file suspicious activity reports (SARs). This final rule follows a proposed rule issued in December 2010. FinCEN noted that this requirement will close a regulatory gap, as well as mitigate some of the money laundering risks and vulnerabilities that have been exploited in the nonbank residential mortgage sector.
The Bank Secrecy Act (BSA) requires FinCEN to promulgate AML rules for “financial institutions,” including “loan or finance companies.” While the BSA does not define “loan or finance company” and the legislative history is silent, FinCEN believes the term should be construed to extend to nonbanks. Based on that interpretation, the final rule, which is substantially similar to the definition included in the proposed rule, alters the existing regulatory definition of “financial institution” to include nonbank residential mortgage lenders and originators. The final rule is intended to cover initial purchase money loans and traditional refinancing transactions facilitated by nonbank lenders and originators. Mortgage servicers are not categorically excluded from the rule and may be covered if they engage in these types of transactions. Notably, this expanded definition is the first step in an incremental approach through which FinCEN eventually will extend the BSA-required AML regulations to other nonbank consumer and commercial loan finance companies.
Under this final rule, a covered nonbank will be required to develop an AML program that includes (i) internal policies, procedures, and controls; (ii) a designated compliance officer; (iii) ongoing employee training; and (iv) a process for independent audits. A covered firm also will have to file a SAR within thirty days of becoming aware of a transaction that (i) involves funds derived from illegal activity or are conducted to hide funds or assets derived from illegal activity; (ii) is designed to evade BSA requirements, (iii) has no business or apparent lawful purpose; or (iv) involves the use of the company to facilitate criminal activity. The rule does not require covered nonbanks to comply with certain other BSA requirements, including currency transaction reports.
The regulations take effect sixty days after being published in the Federal Register. Covered firms will have 180 days after publication to comply. FinCEN now will turn to finalizing a similar proposed rule applicable to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
If you have questions about the final rule and its implications for your organization, or if you would like help implementing compliance programs to meet the new requirements, please contact a member of our Anti-Money Laundering & Bank Secrecy Act practice group.
Obama Administration Expands Housing Recovery Plans
On February 1, President Obama unveiled a plan to expand government support for the housing market, including a broad-based refinancing plan. The plan, announced during the President's State of the Union Address, combines changes to existing programs and creation of new initiatives, some of which will require congressional action. First, the President will ask Congress to enact legislation to allow the Federal Housing Administration (FHA) to provide government support for the refinancing of non-Fannie Mae and non-Freddie Mac mortgages. The $5 to $10 billion program would be funded by a fee imposed on the largest financial institutions. For borrowers with Fannie Mae or Freddie Mac loans, the legislation would further streamline existing refinance programs and create incentives for borrowers to accept shorter loan terms to build equity. Second, the administration will continue its work to create new mortgage origination and servicing standards in an effort to create a Homeowner Bill of Rights. Third, the Federal Housing Finance Agency (FHFA) will conduct a pilot program through which it will sell foreclosed properties to be transitioned into rental housing. Finally, the President's upcoming budget will include a national program to put unemployed construction workers back to work refurbishing vacant and foreclosed properties.
The President also highlighted the work of the recently-formed Residential Mortgage-Backed Securities Working Group, and reviewed the success of existing government efforts (e.g., those related to unemployment forbearance). Further, the announcement incorporated a Treasury Department move last week to enhance the Home Affordable Modification Program (HAMP) by (i) extending HAMP's deadline through December 31, 2013, (ii) expanding borrower eligibility for HAMP, and (iii) encouraging use of principal reduction for loans insured or owned by Freddie Mac or Fannie Mae. In response, the FHFA reiterated its opposition to use of principal reduction by Fannie Mae and Freddie Mac.
Fannie Mae Announces Multiple Selling Guide Updates
On January 31, Fannie Mae issued Selling Guide Announcement SEL-2012-01, which provides updates and changes regarding (i) Construction-to-Permanent Financing; (ii) effective quality control plans, and (iii) other miscellaneous Guide topics. The changes to the Construction-to-Permanent Financing provisions aim to more closely align the policies related to such financing with standard requirements for other refinance transactions. The updates to the requirements for the lender to have an effective quality control plan do not establish any new policies, but seek to clarify requirements for lenders' post-closing quality control process. These and most of the other updates provided in the Announcement are effective immediately.
New York Amends Mortgage Origination Law Regarding Payments to Home Improvement Contractors
On January 27, New York enacted AB 8909, which changes the state banking law to exclude from existing payment restrictions certain home improvement loans insured by the Federal Housing Administration (FHA). Current state law prohibits mortgage brokers from directly paying home improvement contractors, which conflicts with FHA guidelines that allow a home improvement contractor to be paid directly by a mortgage broker. Under state law as amended by AB 8909, such direct payment will be permitted for specified FHA loans.
CFPB Seeks Third Round of Feedback on Mortgage Closing Forms
On January 24, the CFPB announced a third round of testing of prototype mortgage closing forms as part of its Know Before You Owe campaign. In this round, the CFPB asks the public to compare two versions of its prototype closing forms and consider how each works with the prototype initial disclosure form the CFPB previously developed. The CFPB asks consumers to consider certain specific questions, including whether changes to loan terms or costs are easily identifiable from initial disclosure to closing. The CFPB also seeks comment on whether the disclosures are easy for lenders and settlement agents to use and explain. As with prior rounds of testing, the CFPB will travel to local communities to review the forms with the public. A fourth and final round of testing is expected next month.