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CFPB Issues Principles for the Future of Loss Mitigation
On August 2, the CFPB released consumer protection principles for mortgage servicers to use as they develop new foreclosure relief solutions in anticipation of Treasury’s Home Affordable Modification Program’s (HAMP) upcoming expiration date (CFPB Principles). The CFPB Principles echo those summarized in FHFA’s, HUD’s, and Treasury’s recently published white paper, “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” As previously covered in InfoBytes, the white paper recommends that future loss mitigation programs promote accessibility, affordability, sustainability, transparency, and accountability. The CFPB Principles address accessibility, affordability, sustainability, and transparency, and cite to separate CFPB mortgage servicing rules for standards concerning accountability. In its press release, the CFPB notes that the four principles “do not establish binding legal requirements but instead are intended to complement ongoing discussions among industry, consumer, groups, and policymakers.”
FHA Updates Initial and Annual Lender Certification Language
On August 1, HUD announced that FHA updated its lender-level certification statements. Pursuant to the Single Family Housing Policy Handbook 4000.1, all lenders seeking FHA approval must complete the Initial Certification as part of the online application process, and all FHA-approved lenders must complete the Annual Certification at each fiscal year’s end thereafter. As outlined in FHA INFO 16-51, use of the revised certifications is mandatory beginning August 1, 2016. After that date, all new LEAP recertification packages will reflect the revised Annual Certification statements, and all lenders applying anew for FHA approval must complete the revised Initial Certification statements. FHA INFO 16-51 further notes that the revised language “may also affect some in-process applications.” FHA released separate documents for supervised/non-supervised mortgagees and investing and government mortgagees to outline the changes implemented. The changes included in the certification statements range from rewording, reformatting, and the refining of policy citations to adding instructions, new requirements, and certain exemptions/qualifiers.
Agencies Issue White Paper Regarding Loss Mitigation Programs
On July 25, FHFA, HUD, and Treasury published a white paper titled “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” The paper examines the effect of the 2008 financial crisis on the mortgage servicing industry with a focus on loss mitigation programs. Under the 2009 Making Home Affordable (MHA) program, foreclosure alternatives were established to address the needs of homeowners and to improve the mortgage servicing industry’s loss mitigation practices. According to the paper, between April 2009 and the end of May 2016, 10.5 million modification and mortgage assistance arrangements were completed through government programs and private sector efforts. The paper further notes that, as a result of FHFA’s, HUD’s, and Treasury’s programs, regulatory actions, and private sector initiatives, the mortgage industry is “generally better prepared now to provide assistance to struggling homeowners than it was before the crisis.” The improvement “is due, in part, to the adoption of certain homeowner engagement standards including continuity of contact, solicitation timeframes, and certain notice and appeal processes required by the [CFPB].” At the end of 2016, MHA programs, such as HAMP, will come to a close. Based on the agencies’ collective experience with MHA programs, the paper identifies five guiding principles for loss mitigation programs: (i) accessibility, guaranteeing homeowners a simple process for obtaining mortgage assistance; (ii) affordability, “providing homeowners with meaningful payment relief that addresses the needs of the homeowner, the servicer and the investor, to support long-term performance”; (iii) sustainability, offering long-term solutions intended to resolve delinquency; (iv) transparency, “[e]nsuring that the process to obtain assistance, and the terms of that assistance, are as clear and understandable as possible to homeowners, and that information about options and their utilization is available to the appropriate parties”; and (v) accountability, ensuring sufficient oversight of the process to obtain mortgage assistance.
FHA Ed Golding Issues Follow-Up Letter Regarding DPA Programs
On July 18, FHA’s Edward Golding issued a letter sharing HUD Secretary Nani Coloretti’s statement regarding recent events surrounding down payment assistance (DPA) programs. As previously covered in InfoBytes, Golding sent a letter on May 25 to stakeholders informing them that HUD had “determined that finance agency [DPA] programs are legal and consistent with the National Housing Act.” According to the recent July 18 letter, Secretary Coloretti wishes to make clear that HUD does not endorse unlawful practices. She also noted that the HUD Office of Inspector General (OIG) continues to investigate alleged inappropriate practices and that HUD will look separately into “the extent to which government-sponsored Down Payment Assistance (DPA) programs fully informed borrowers of the loan terms, or imposed inappropriate fees or costs, or enabled steering or any other coercion of borrowers.” Coloretti also reiterated that HUD supports DPA Programs and that they “enable access to credit that allows American families to purchase homes.”
FFIEC and HUD Release HMDA Filing Guides; CFPB Updates Resources for HMDA Filers Page
On July 13, the CFPB announced that the FFIEC and HUD had published new resources for financial institutions required to file data pursuant to the Home Mortgage Disclosure Act (HMDA) and Regulation C, as amended by the CFPB’s October 2015 final rule, which revised and expanded the scope of HMDA reporting requirements. Accordingly, the CFPB updated its “Resources for HMDA filers” page to include the following new FFIEC and HUD resources: (i) a Technology Preview, which provides an initial summary for how HMDA filers will interact with the HMDA Platform, a web-based data submission and edit-check system that filers will use to submit HMDA data collected in or after 2017; (ii) Filing Instructions Guide (FIG) for HMDA data collected in 2017, which outlines changes to the submission process for data collected in 2017, 2017 file specifications, and 2017 edit specifications; and (iii) FIG for HMDA data collected in 2018. The 2018 FIG includes field definitions for the many additional or modified data points required for data collected in 2018 and 2018 file format and edit specifications. The technical specifications in the FIG will allow lenders and vendors of HMDA data-preparation software to begin making the systems changes needed to collect data in 2018 for submission in 2019. The CFPB’s HMDA resource page also includes FFIEC HMDA FAQs and reminds financial institutions to visit the FFIEC website for resources to submit data collected in or before 2016.
HUD Announces Changes to Distressed Asset Stabilization Program
On June 30, HUD announced a series of changes to its Distressed Asset Stabilization Program (DASP). Last year, HUD updated DASP to (i) extend the time period preventing foreclosure after the note is sold from six months to one year; (ii) require servicers to evaluate borrowers for the Home Affordable Modification Program (HAMP) or a substantially similar modification; and (iii) implement non-profit only sales. In accordance with the most recent changes to DASP, “[c]ertain families with distressed mortgages insured by the [FHA] may soon be eligible for a reduction of their outstanding loan amounts should their mortgages be sold through DASP.” In addition, HUD’s fact sheet for the recent changes announces that DASP will, among other things: (i) limit interest rate increases to no more than one percent per year after a five-year period where the rate is fixed, thereby implementing payment shock protection and ensuring consistency with HAMP; (ii) prohibit purchasers from “walking away” from vacant properties; (iii) revise the 120-day delinquency notice to advise borrowers that their loan may be sold; (iv) set a goal to sell 10 percent of assets to non-profits and local governments; (v) release performance and outcome data on a pool level (instead of a sale level); (vi) release demographic data on sales; (vii) strengthen requirements for investors to obtain Neighborhood Stabilization Outcome (NSO) credit when selling to non-profits; and (viii) target loans for DASP sales based on non-profit and local government interest.
HUD Settles with North Carolina Commercial Lender Over Alleged Fair Lending Violations
On June 8, HUD announced a conciliation agreement with a North Carolina-chartered commercial lender to resolve allegations that, as the successor of a merger with a South Carolina-based bank, it denied mortgage loans to African American, Latino, and Asian American applicants at a disproportionately higher rate than white applicants in violation of Section 804(b) and 805 of the Federal Fair Housing Act. After conducting an analysis of mortgage loans originated by the South Carolina bank between 2010 and 2011, the Department found that the bank demonstrated preferential treatment of white mortgage loan applicants through the retail channel via manual override of its automated underwriting system. Under the terms of the settlement agreement, the commercial lender, having cooperated with HUD’s investigation, must among other things, (i) provide nonprofit organizations with $140,000 to use toward credit and housing counseling, financial literacy training, and related programs for first-time homebuyers in South Carolina; (ii) spend an aggregate amount of $20,000 on positive marketing, advertising, and outreach to residents in majority-minority census tracts in South Carolina; (iii) partner with a non-profit organization or community groups involved in financial education to conduct, at a minimum, 24 financial education programs in South Carolina for individuals and small business owners; (iv) hire three mortgage banker market specialists to “focus on diverse lending in Charleston-North Charleston-Summerville, Columbia, and Greenville-Anderson-Mauldin metro areas”; (v) require fair housing training for all employees and agents substantially involved in manual underwriting of mortgages; and (vi) implement “a new standardized and objective set of guidelines for a second review of retail channel residential loan applications initially denied by the automated underwriting system.”
HUD Determines Down Payment Assistance Programs Eligible for FHA Insurance
This week, FHA Principal Deputy Assistant Secretary for Housing and Head of FHA, Edward Golding, issued a letter informing stakeholders that “HUD has determined that housing finance agency down payment assistance programs are legal and consistent with the National Housing Act.” We note that the letter was not a Mortgagee Letter nor was it published in the Federal Register and may be considered informal guidance.
In the letter, Golding advised that:
- Government entities may provide borrowers with funds for down payments on FHA loans; and
- Loans that include down payment assistance (DPA) provided by state and local housing finance agencies (HFA) continue to be eligible for FHA insurance.
Golding’s letter emphasized the benefits of DPA programs, commenting that such programs facilitate access to homeownership for low- and moderate-income families. Still, Golding noted that FHA will continue to monitor and mitigate any potential risk associated with DPA programs: “[w]e will work diligently to reduce the impact of these risks on our portfolio. We know it is possible to accomplish this as the research shows carefully designed programs perform better.”
Golding’s letter purports to resolve a matter of dispute regarding DPA between FHA and the HUD Office of Inspector General (OIG). Last year, HUD OIG audited an Arizona-based mortgage lender and issued a report concluding that the lender originated FHA loans that included gift DPA that did not comply with FHA rules and regulations. Specifically, the audit found that, among other things:
- The lender inappropriately allowed premium pricing to be used as a source for the borrowers’ down payments, which were not true gifts and were indirectly repaid by the borrowers through a higher premium rate;
- The lender used programs that had a circular funding mechanism (i.e., the program was structured to generate revenues through the sale of mortgage-backed securities); and
- The lender did not perform due diligence to ensure DPA was eligible.
After the audit, Golding issued a letter to reaffirm FHA’s support of certain DPA programs. Golding’s letter also stated that “[t]he intent of [FHA] rules regarding down payment assistance is clear and allows HFAs the discretion necessary to fund these programs appropriately.” HUD’s General Counsel (GC), Helen Kanovsky, also issued a memorandum to Golding regarding DPA programs concluding that:
- Governmental entities are a permissible source of funds for down payments on FHA loans;
- FHA does not place limitations or prohibitions on how a government entity raises funds for its DPA program; and
- FHA rules on premium pricing are not violated if the borrower and the lender agree on interest rates in relation to DPA programs.
The memorandum also noted that it did not support OIG’s audit conclusions that FHA rules regarding premium pricing or gift DPA were violated. We note that, similar to Golding’s letter from this week, the letter and the memorandum were not issued as Mortgagee Letters and were not published in the Federal Register.
Notwithstanding Golding’s letter after the audit and HUD GC’s memorandum, HUD OIG continues to audit lenders and issue reports on this issue.
The Obama Administration also responded to the DPA uncertainty earlier this year by releasing the FY 2017 Budget Proposal, which would amend the National Housing Act to clarify that “down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
Despite Golding’s letter this week, a news website has reported that David Montoya, HUD’s Inspector General, “strongly disagree[s]” with HUD’s assessment of DPA programs. Specifically, it has been reported that Montoya issued the following statement: “we believe this specific aspect, where external lenders are originating FHA loans with ineligible down payment assistance gifts and secondary financing and agree to inflate the interest rate on the borrowers’ FHA loans, violates the law and harms borrowers.” A spokesperson noted that an OIG audit of a lender using funds derived from premium pricing to pay for gift DPA is still underway.
FHA Proposes Revisions to Reverse Mortgage Program
On May 18, HUD announced that the FHA proposed a new rule that is intended to “strengthen” its Home Equity Conversion Mortgage (HECM) Program by reinforcing reforms that have taken place in the past two years, and by adding new consumer protections. New revisions to the HECM program outlined in the proposed rule include, but are not limited to, (i) ensuring that required HECM counseling occurs before a mortgage contract is signed; (ii) amending the definition of “property charges” to include utilities as a borrower responsibility; (iii) capping lifetime interest rate adjustments for adjustable interest rate products at 5%; (iv) requiring as a condition of eligibility for loan assignment that the HECM mortgage be in lien status prior to homeowners association and condo association liens; and (v) creating a “cash for keys” program to “incentivize parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” Comments on the proposal are due by Monday, July 18, 2016.
DOJ Settles with New Jersey Mortgage Lender Over False Claims Act Violations
On April 15, the DOJ announced a $113 million settlement with a New Jersey-based mortgage company to resolve allegations that the mortgage lender violated the False Claims Act. According to the DOJ, the mortgage company – acting as a direct endorsement lender in HUD’s Federal Housing Administration (FHA) program – knowingly originated and accepted FHA-insured mortgage loans that did not properly comply with HUD origination, underwriting, and quality control requirements. As part of the settlement agreement, the mortgage company agreed that it failed to (i) meet HUD underwriting requirements from January 1, 2006 through December 31, 2011; (ii) adhere to FHA’s quality control requirements between 2006 and 2008 by not sharing with production and underwriting management its early payment default quality control review; (iii) perform timely quality control reviews or perform audits of early payment defaults between 2008 and 2010; and (iv) report improperly originated loans between 2006 and 2011. The DOJ’s investigation further found that, after conducting a review of FHA loans underwritten between 2007 and 2012, the mortgage company self-reported to HUD only one of hundreds of loans that the company identified as not meeting FHA mortgage insurance requirements. Per the settlement agreement, the mortgage company must make an initial payment of $26 million by May 2, 2016.