safe act 8 hour comprehensive live for all states final ginger's september 20 2012

National 8 Hour SAFE Comprehensive - 2012 Originator Essentials

Welcome

The course consists of three primary sections:

• Understanding Dodd-Frank Act (3 hours)

• Ethics, Fraud and Fair Lending Laws that Affect the Mortgage Industry (2 hours)

• VA Program(2 hours)

• Understanding the SAFE Act (1 hour)

2

Welcome

• This course is designed to guide Mortgage Loan Originators in the development, adoption, and implementation of specific regulatory and fair housing procedures and strategies. In addition, attendees will gain an understanding of VA programs that may not have been previously considered a viable option.

• The comprehensive curriculum will prepare MLOs to deal efficiently and effectively with compliance regulations.

• Participants develop a better understanding of the laws governing mortgage banking, how to remain in compliance, and how to anticipate and prevent violations. MLOs will also gain insight into valuable VA loan programs.

3

About this Course

Approval of this course by state agencies does not constitute an endorsement of the views or opinions which are expressed by the course sponsor, instructor, authors or lecturers. While this publication is designed to be accurate information about the subject matter it covers, it is sold with the understanding that the distributor, author, and publisher are not engaged in rendering legal, accounting or other professional advice. If such advice or other expert assistance is required, the services of a competent professional should be sought. The recipient is cautioned to check with their managing supervisor before acting on any suggestion or recommendation, or before using any sample form contained herein.

4

Class Participation

• Case Studies

• Group Discussion

• Encourage Interaction

5

Classroom Behavior

• No tape recorders will be permitted at any time.

• All cell phones and pagers are to be turned off at the beginning of each class. (At the very least we ask that they be placed on “silent” mode.)

• Students are not allowed to send texts or emails during the course.

• Students are not allowed to read material other than course material while in class (for example newspapers, emails, texts, etc. )

• No “photo” cell phones will be allowed in the classroom.

• Students are expected to conduct themselves in a professional manner.

• Students are required to provide identification upon arrival.

• Time for meals and intermittent breaks may be provided.

6

Steps to Receive NMLS CE Credit

• Sign in

• Verify Identification and provide valid NMLS Number and Name

• Sign out at lunch /Sign in after lunch

• Must be in attendance and participate for entire class

• Cannot be out of classroom, outside of scheduled breaks and/or lunch for more than 5 minutes

• Cannot be more than 5 minutes late either at beginning of course or after scheduled breaks and lunch

• Sign out at completion of course

7

Test

• Test is given at end of class

• Written test

• 30 questions

• Passing score is 70% or higher to receive NMLS Credit

• Will only communicate failures

• If you fail you can take test second time

• The test will be administered via an online link at OnlineEd

• You will need to verify identification when re-taking the test

8

NMLS CE Credit

• Online Ed will Upload Your Information into NMLS.

• 8 Hours of NMLS Continuing Education Credit.

9

Module One – Session One The Dodd-Frank Act

The Dodd-Frank Act – HR 4173

• Provide a better understanding of the Dodd-Frank Act.

• How these changes impact the mortgage industry.

• How the Dodd-Frank Act can help protect consumers.

11

Objectives

1.Identify changes made as a result of the Dodd-Frank Act.

2.List various Titles of the Dodd-Frank Act and how they relate to the mortgage industry.

3.Define the compliance standards regarding the newly appointed Consumer Finance Protection Bureau (CFPB).

12

The Dodd-Frank Act

• H. R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.

• Enacted in July 2010.

• End “Too Big to Fail”.

• Protect consumers from abusive financial services practices.

13

Objective of Dodd-Frank Act

• Impost stricter standards.

• Restore responsibility and accountability in the financial system.

• Prevent future financial collapse.

• Promote consumer education, protection and transparency.

14

Titles in the Law Impacting Industry

• Title IX (Title 9) - Investor Protections and Improvements to the Regulations of Securities

Provides provisions which include authorizing stricter regulation of investors and credit rating agencies.

15


• Title X (Title 10) - The Consumer Financial Protection Act of 2010

Authorizes the creation of the Consumer Financial Protection Board (CFPB), provides for the transition of regulatory authority from other agencies to the CFPB, and outlines the Bureau’s regulatory and enforcement responsibilities.

16


• Title XIV (Title 14) - The Mortgage Reform and Anti-Predatory Lending Act

Includes provisions which apply directly to mortgage loan originators, servicers, and appraisers.

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About this Course

• Cite the provisions of the Dodd-Frank Act.

• Where they are located within the Act.

• Which provisions of the Dodd-Frank Act are amendments to existing laws.

• Reference various sources to assist in explaining this complex law.

18

Title IX (Title 9)

• Title IX, sections 901 to 991 - “Investor Protections and Improvements to the Regulation of Securities.”

• Revises the powers and structure of the Securities and Exchange Commission, (SEC), credit rating organizations.

19

Title IX (Title 9)

•Greater transparency for investors.

•Measures to mitigate conflicts of interest at credit ratings agencies.

•Credit risk retention requirements in Section 941.

20

Subtitle C

“In the recent financial crisis, the ratings on structured financial products have proven to be inaccurate. This inaccuracy contributed significantly to the mismanagement of risks by financial institutions and investors, which in turn adversely impacted the health of the economy in the United States and around the world. Such inaccuracy necessitates increased accountability on the part of credit rating agencies.”

(H.R. 4173 Section 931(5))

21

Subtitle C

• The Dodd-Frank Act assigns the responsibilities of oversight to the Securities and Exchange Commission (SEC).

• Regulatory control will come from the newly established Office of Credit Ratings and the credit rating entities that this office will oversee are Nationally Recognized Statistical Rating Organizations (NRSROs) including Standard & Poors, Fitch, and Moodys.

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Subtitle C

• Does not limit the SEC’s ability to bring forth a fraud action.

• Imposes requirements for NRSROs to submit an annual report to the SEC.

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Subtitle C - Reforms

• Risk retention requirements.

• Credit rating agency reform and conflicts of interest.

• Improved transparency and issuer due diligence.

• Consumer protection.

• Improved monitoring of systemic risks throughout the financial system.

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Subtitle D

• Reduce the risks associated with securities such as Mortgage Backed Securities (MBSs).

• Establishes an incentive for issuers of these securities to perform research and due diligence.

• Risk retention requirements may reduce risks to financial stability arising from earlier securitization participants.

(H.R. 4173 Section 941, adding SEA Section 15G(3)) 25

Law Applies to Originators

• “originators,” defined as a person that “...through the extension of credit or otherwise, creates a financial asset that collateralizes an asset-backed security; and sells an asset…to a securitizer.”

• Includes banks, thrifts, subsidiaries of bank or thrift holding companies, independent finance companies.

(SEA Section 15 G(4))

26

Law Applies to Originators

• Instructs drafting regulations that will “…require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party.”

(SEA Section 15G(b))

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QRM and QM

• Retention of a 5% credit risk in securitized assets.

• The only exception under the rule is the exception for what is referred to as “Qualified Residential Mortgages.”

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QRM and QM

• The task of defining a “Qualified Residential Mortgage” (QRM) has been left to the agencies.

• “…be no broader than the definition ‘qualified mortgage’ (QM) as the term is defined in section 129(c)(2)….”

(SEA Section 15 G (4) (C))

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Why the Change?

• When the originator and the securitizer of Alt-A mortgage-backed securities were affiliated, they were less likely to experience losses.

• The originator of the loan is less likely to sell poorly underwritten loans to its own affiliate for securitization.

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Risk Retention

• May help to avoid deterioration in underwriting standards.

• Prevent a recurrence of credit expansion that led to the mortgage meltdown.

• Could stifle a renewed real estate market.

• Could eliminate all but the best qualified borrowers.

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Defining Qualified Mortgages

• Reasonable

• Good Faith Determinations

32

Defining a Qualified Mortgage

• January 2013 Final Rule Deadline

• Impacts Basic Underwriting Standards

• Building Block for other Dodd-Frank Act Rulemakings

33

Final Rules

• Origination and Servicing Practices

• Loan Originator Compensation

• Anti-Steering Rules

• Restrictions on High-cost Loans

• Escrow Accounts

• Appraisals

• Final Rules – January 21, 2013

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Title X – CFPB

• Creates the Bureau of Consumer Financial Protection (the “CFPB”).

• The CFPB is an independent regulatory agency empowered with broad authority to issue new regulations, supervise depository and non-depository institutions, enforce consumer financial protection laws, and prevent “unfair,” “deceptive,” and “abusive” acts by financial service firms.

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Establishing the CFPB

•The Consumer Financial Protection Bureau (CFPB)

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Independent Director

• Rich Cordray

37

CFPB Structure

38

Independent Budget

• Federal Reserve System

39

Independent Rule Writing

• Write Rules for Consumer Protections

• Consumer Financial Services or Products

40

Protection for Consumers

• CFPB is a compilation of the consumer financial protection functions of a number of federal agencies, including the Federal Reserve and FDIC.

• Designed to prevent unfair, deceptive, and abusive practices.

41

Who Does the CFPB Regulate?

• Extending consumer credit and servicing loans.

• Extending or brokering leases of property that are the functional equivalent of purchase finance arrangements.

• Providing real estate settlement services (other than appraisal of real or personal property).

• Providing payments or other financial data processing products or services to a consumer by any technological means.

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Examination and Enforcement

•Authority to Examine and Enforce Regulations

43

Consumer Protection

Consumer Protection

44

Ability to Act Quickly

Bad Deals and Schemes

45

Educate

Office of Financial Literacy

46

Enumerated Consumer Laws

1. Alternative Mortgage Transaction Parity Act of 1982

2. Consumer Leasing Act of 1976

3. Electronic Fund Transfer Act

4. Equal Credit Opportunity Act

5. Fair Credit Billing Act

6. Fair Credit Reporting Act (FCRA)

7. Homeowners Protection Act of 1998

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1.Fair Debt Collection Practices Act

2.§43(b)-(f) of the Federal Deposit Insurance Act (FDIA) – governing disclosures by depository institutions that lack federal deposit insurance

3.Gramm-Leach-Bliley Act (GLBA)

4.Home Mortgage Disclosure Act of 1975

5.Home Ownership and Equity Protection Act of 1994

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1.Real Estate Settlement Procedures Act of 1974

2.Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)

3.Truth in Lending Act

4.Truth in Savings Act

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1.§626 of the Omnibus Appropriations Act of 2009 – allows states to bring TILA actions and actions under certain FTC regulations regarding mortgage loans

2.Interstate Land Sales Full Disclosure Act

(H.R. 4173 Section 1002(12))

50

Definition of Dodd-Frank Act Terms

• The stated purpose of establishing the CFPB is to implement and enforce “federal consumer financial laws” to ensure that all consumers have access to “consumer financial products and services” and that that these products and services are “fair, transparent, and competitive.”

(H.R. 4173 Section 1021(a))

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Consumer Financial Products and Services

These are financial products and services offered for use by consumers primarily for personal, family, or household use.

(H.R. 4173 Section 1002(5))

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Covered Persons

This includes individuals and entities that offer consumer products or services and their affiliates.

(H.R. 4173 Section 1002(6))

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Federal Consumer Financial Laws

These include the provisions of the Consumer Financial Protection Act of 2010 and the “enumerated consumer laws.”

(H.R. 4173 Section 1002(12))

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Financial Products and Services

The definition of this term includes, but is not limited to extending credit, servicing loans, providing real estate settlement services (except for performing appraisals), modifying the terms of credit, and forestalling foreclosure.

(H.R. 4173 Section 1002(15))

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Module One – Session Two

How will the CFPB Enforce Laws?

• Has the authority to enforce UDAAP and promulgate rules identifying unfair, deceptive and abusive practices.

• Will likely follow established guidelines for what constitutes “unfair” and “deceptive” practices.

• Can pursue both administrative and judicial remedies for violations of such laws, which include civil penalties (ranging from $5,000 - $250,000 - $1 million per day of the violation.)

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Primary Functions of CFPB

•Conducting financial education programs

•Investigating and responding to consumer complaints

•Identifying risks to consumers in the market for consumer financial products and services

•Supervising the compliance of “covered persons” with federal consumer financial laws

58

Primary Functions of CFPB

•Bringing enforcement actions for violations of the law

•Writing rules and guidance documents pursuant to federal consumer financial laws

•Monitoring for risks to consumers from consumer financial products and services

59

Combined Mortgage Loan Disclosure

• The law authorizes the CFPB to “…ensure that the features of any consumer financial product or service are….fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits and risks associated with the product or service….”

www.Knowbeforeyouowe.com

(H.R. 4173 Section 1302(a))

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http://www.knowbeforeyouowe.com/

Consumer Hotline

National Consumer Complaint Hotline

• Single Toll-free Number

61

Accountability

Consumer Protection

62

Works with Bank Regulators

• Prevent Undue Regulatory Burden

• Consults with Regulators before a Proposal is Issued

• Appeal Regulations

63

Clearly Defines Oversight

Protects Small Business

64

The CFPB

65

CFPB Examination Procedures

• Released Supervision and Examination Manual Oct. 2011.

• Guide to how the CFPB will supervise and examine.

• Three parts

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The CFPB Manual

• Module 1 Company Business Model

• Module 2 Advertising and Marketing

• Module 3 Loan Disclosures and Terms

• Module 4 Underwriting, Appraisals, and Originator Compensation

• Module 5 Closing

• Module 6 Fair Lending

• Module 7 Privacy

67

Examiners May Obtain and Review

• Organizational charts and process flowcharts

• Board minutes

• Annual reports, or the equivalent to the extent available

• Relevant management reporting

• Policies and procedures

• Rate sheets

• Loan applications

• Loan account documentation

• Notes

• Disclosures

• Other contents of loan underwriting and closing files

• Operating checklists

• Worksheets

• Review documents

68

Examiners May Obtain and Review

• Relevant computer program and system details

• Wholesale and correspondent lending agreements

• Due diligence and monitoring procedures

• Lending procedures

• Underwriting guidelines

• Compensation policies

• Historical examination information

• Audit and compliance reports

• Management’s responses to findings

• Training programs and materials

• Third-party contracts

• Advertisements

• Consumer complaints

69

Transaction Testing

• Use of a judgmental or statistical sampling.

• Conduct interviews to determine understanding and consistently to follow policies, procedures, and regulatory requirements; manage changes appropriately; and implement effective controls.

• Observing customer interactions.

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Management System

• The goal is to maintain legal compliance.

• Must develop and maintain a sound compliance management system that is integrated into the overall framework for product design, delivery, and administration.

• Supervised entities are also expected to manage relationships with third-party service providers to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided.

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Compliance Management System

• The CFPB expects every regulated entity under its supervision and enforcement authority to have an effective compliance management system adapted to its business strategy and operations.

• Each CFPB examination will include review and testing of components of the supervised entity’s compliance management system.

72

Compliance Management System

• Compliance may be managed on a firm or an enterprise-wide basis.

• Supervised entities may engage outside firms to assist with compliance management.

• The CFPB expects that compliance management activities will be organized within a firm, legal entity, division, or business unit in the way that is most effective for the supervised entity.

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The Compliance Manual

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Supervision and Examination Cycle

http://www.consumerfinance.gov/guidance/superv

ision/manual/supervision-examination-process-

overview/ 75

http://www.consumerfinance.gov/guidance/supervision/manual/supervision-examination-process-overview/








Pre-Examination/Scoping

• Review and Analyze

• Request and Review Documents

• Make the Initial Plan

76

Examination

• Conduct Interviews

• Observation

• Comparisons

77

Conclusions and Required Actions

• Communicated

• Corrective Actions Delivered

• Corrective Actions

78

Monitoring

• Nonbanks - Product and/or Market Analysis

• Banks - Periodic Checks

• Both - Additional Risk Assessments, Review and Status

• Next Exam

79

Three Principles

1. Focus on Consumers

2. Data Driven

3. Consistency

80

Compliance Management System is How a Company…

• Establishes its compliance responsibilities.

• Communicates those responsibilities to employees.

• Ensures that responsibilities for meeting legal requirements and internal policies are incorporated into business processes.

• Reviews operations to ensure responsibilities are carried out and legal requirements are met.

• Takes corrective action and updates tools, systems, and materials as necessary.

81

Compliance Management System Will Provide

•Board and management oversight.

•Compliance program.

•Response to consumer complaints.

•Compliance audit.

82

Compliance Program

• The CFPB advises in its Manual that “A sound compliance program is essential to the efficient and successful operation of the supervised entity, much as business plan.”

83

Compliance Program

A compliance program includes the following components:

•Policies and procedures

•Training

•Monitoring and corrective action

84

Compliance Program

• The CFPB outlines that a supervised entity should establish a formal, written compliance program.

• Program should be a planned and organized effort to guide the entity’s compliance activities.

• Should be a written program that represents an essential source document that may serve as a training and reference tool for employees.

85

Compliance Policy and Procedures

P&P should be documented and in sufficient detail to implement the board-approved policy documents. Examiners will seek to determine whether compliance policies and procedures:

1.Are consistent with board-approved policies.

2.Address compliance with applicable Federal consumer financial laws in a manner designed to prevent violations and to detect and prevent associated risks of harm to consumers.

3.Cover product or service lifecycles.

4.Are maintained and modified to remain current and to serve as a reference for employees in their day-to-day activities.

86

Policy & Procedures

Examiners will also request and review compliance policies and procedures. Examiners will look for the following:

1. Request and review policies and procedures related to consumer compliance, including Federal consumer financial laws and policies and procedures related to offering consumer financial products and services.

87

Policy & Procedures

2. Review policies and procedures for changes management committed to make following recent monitoring, audit, and examination findings and recommendations.

88

Policy & Procedures

3. Review policies and procedures to determine whether and how they address new or amended Federal consumer financial laws and regulations since the preceding examination or since the most recent consumer compliance examination by a state or prudential regulator, if applicable, if this is CFPB’s first examination.

89

Policy & Procedures

4. Request and review policies and procedures to determine whether they cover consumer financial products or services introduced since the preceding examination or since the most recent consumer compliance examination by a state or prudential regulator, if applicable, if this is CFPB’s first examination.

90

Policy & Procedures

5. Review policies and procedures relating to compliance with specific regulatory requirements (such as the privacy of consumer financial information) and their implementing procedures.

6. Review for outdated content, the names of unaffiliated entities, or other indicators that policies are overly general or not tailored to the needs and actual practices of the supervised entity being examined.

91

Policy & Procedures

7. Review policies and procedures for products with features that may inhibit consumer understanding or otherwise pose heightened risks of unfair, deceptive, or abusive practices.

8. Review policies and procedures for products in which employee compensation structures, pricing or underwriting discretion, or other features may pose heightened risk of unlawful discrimination.

92

Policy & Procedures

9. Review policies and procedures designed to ensure that the entity’s third-party service providers comply with legal obligations applicable to the product or service of the examined entity and the provider.2

10. Review policies and procedures maintained by different regional, business unit, or legal entities subject to the same corporate or board-level policies for consistency.

93

Policy & Procedures

11. Review policies and procedures for record retention and destruction timeframes to ensure compliance with legal requirements.

94

Policy & Procedures

12. If compliance procedures are embedded in automated tools or business unit procedures, determine that a qualified compliance officer or contractor reviewed these tools for consistency with policies and procedures and compliance with applicable Federal consumer laws and approved them for the purpose for which they are utilized.

95

Policy & Procedures

13. Draw preliminary conclusions regarding the strength, adequacy, or weakness of policies and procedures, and identify business units, delivery channels, or offices for transaction testing. Test to confirm that actual practices are consistent with strong or adequate written policies and procedures. Test to determine the impact of apparently weak procedures.

96

Basic Monitoring Activities

• New Products/Services

• Events

• Questions

97


• Prudential and State Regulator Examination Reports

• Community Reinvestment Act (CRA) Performance Evaluations

• Current Enforcement Actions

• Call Report Data

• Complaint Data

98


• Home Mortgage Disclosure Act

• Home Affordable Modification Program Data

• SEC Filings

• Licensing or Registration Information

• Reports from the Entity to Prudential or State Regulators

• CFPB Research Analyst Reports

• Institution Website

99

Compliance Training for EVERYONE!

1.Compliance training is current, complete, directed to appropriate individuals based on their roles.

2.Training is consistent with policies and procedures and designed to reinforce those policies and procedures.

3.Compliance professionals have access to training that is necessary to administer a compliance program that is appropriate for that supervised entity and its business strategy and operations.

100

What Will Examiners be Looking for in a Companies Training Program?

• Request and review the schedule, record of completion, and materials for recent compliance training of board members and executive officers.

• Determine the involvement of compliance officer(s) in selecting, reviewing, or delivering training content.

101


• Request and review policies, standards, schedules, and records of completion for compliance-specific training of compliance professionals, managers, and staff, and documents demonstrating that third-party service providers who have consumer contact or compliance responsibilities are appropriately trained.

102


• Request and review samples of the content of training materials and comprehension tests, including training related to new regulatory requirements, new products or channels of distribution, and marketing (including scripts).

• Request and review training developed as a result of management commitments to address monitoring, audit, or examination findings and recommendations or issues raised in consumer complaints and inquiries.

103


• Request and review training developed as a result of management commitments to address monitoring, audit, or examination findings and recommendations or issues raised in consumer complaints and inquiries.

• Determine whether the program is designed to provide training about the specific regulatory requirements relevant to the functions of particular positions, such as the Truth in Lending Act for loan officers.

104


1.Review records of follow-up, escalation, and enforcement for units with training completion rates that do not meet the supervised entity’s standards or deadlines.

2.Request and review the supervised entity’s plans for additions, deletions, or modifications to compliance training over the next 12 months and any plans for changes to the overall training resources and compare actual training activities to prior plans.

105


1.Draw preliminary conclusions about the strength, adequacy, or weakness of the training element of the compliance program, and select lines of business, organizational units, or other areas for more detailed review and testing.

This means that companies will need to have a complete and comprehensive training program in place that not only delivers training but also provides for the accountability to show Examiners content delivered in training programs, who attended and how often training is received.

106

Monitoring and Corrective Action

• Provide elements that offer an organized risk-focused way to identify procedural or training weaknesses.

• Provide a high level of compliance by promptly identifying and correcting weaknesses that may exist within an organization.

107

What is the CFPB Looking For?

1.Monitoring is scheduled and completed and leads to timely corrective actions where appropriate.

2.Determining that transactions and other consumer contacts are handled according to the entity’s policies and procedures.

3.Monitoring and testing consider the results of risk assessments.

4.Monitoring addresses deficiencies

5.Findings are escalated to management and to the board of directors if appropriate.

108

Examiners Will Be Looking For

• Determine the chief compliance officer’s role.

• Request and review the monitoring and testing schedule for the current year or next 12 months, and review the currency of reviews in process against the current schedule.

• Request and review the risk assessments or other documents that led to the monitoring and testing program plan.

• Discuss with the compliance officer or monitoring manager the coverage of third-party service providers that have contact with consumers.

109


• Determine whether and to what extent monitoring includes calculation tools, the content of consumer disclosures and notices, marketing materials, and scripts or guides for employee contacts with consumers.

• Request and review all compliance monitoring, testing and corrective action reports completed.

• Review reports for indications of systemic weaknesses, repeat violations of law and resulting risks or harms to consumers.

• Review a sample of reports and supporting documents covering potential unfair, deceptive, or discriminatory practices or related matters that pose heightened risks to consumers.

110


1.Determine whether monitoring results in corrective action that is timely and appropriate in size and scope.

2.Draw a preliminary conclusion regarding the strength, adequacy, or weakness of the monitoring and corrective action element of the compliance program, and select areas for further review either because of lack of coverage by the monitoring program or to confirm monitoring or corrective action findings.

111

Consumer Complaint Response

• System should ensure responsiveness and responsibility in handling consumer complaints and inquiries.

112

Consumer Complaints

•Weaknesses

– Compliance Management System

– Training

– Internal Controls

– Monitoring

113

Red Flags

• Numerous Complaints

• Omission

• Act

• Deceptive Practice

114

Complaints

• Subsidiaries

• Affiliates

• Third Parties

115

Analysis

• Potential Unfair, Deceptive or Abusive Practices

• Charge-Backs

• Refunds

116

Focus on Consumers

• The CFPB will focus on the risks to consumers when it evaluates the policies and practices of financial institutions.

• Expected that companies will maintain effective systems and controls to manage their compliance responsibilities.

117

Module One – Session Three

Title XIV

• Title XIV of the Act was drafted for the purpose of assuring “that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.”

119

Minimum Standards for Borrowers’ Ability to Pay

• Will require that lenders make a “reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance … and assessments.”

120

Internal Revenue Transcripts

• In order to “safeguard against fraudulent reporting,” lenders are now required to use Internal Revenue transcripts of tax returns or another method that “quickly and effectively verifies income” by a third party who is also subject to the rules promulgated as a result of this legislation.

121

Title XIV - Eight Subtitles:

• Subtitle A: Residential Mortgage Loan Origination Standards

• Subtitle B: Minimum Standards for Mortgages

• Subtitle C: High-Cost Mortgages

• Subtitle D: Office of Housing Counseling

• Subtitle E: Mortgage Servicing

• Subtitle F: Appraisal Activities

• Subtitle G: Mortgage Resolution and Modification

• Subtitle H: Miscellaneous Provisions

122

Definition of Consumer Transactions

•Transactions that are secured by a mortgage

•Transactions that are secured by a deed of trust

•Transactions that are secured by other consensual security interest on a dwelling or on residential real estate that includes a dwelling

123

Application of Title XIV

• Mortgage Loan Originators

• “Entities or individuals earning or expecting to earn compensation by taking residential mortgage loan applications, assisting or offering to assist consumers in negotiating the terms of a mortgage loan, or advertising their services as mortgage loan originators to the public.”

(H.R. 4173 Section 1401, adding TILA Section 103(cc)(2)(A))

124

Table Funding

• The term includes those entities and individuals who table fund residential mortgage loans.

(TILA Section 103(cc)(2)(F))

125

Exclusions

• Those who perform purely clerical or administrative tasks.

• Creditors who provide loan funding

(TILA Section 103 (cc)(2)(C-G))

126

Exclusions

• Licensed real estate brokers who are not compensated by a lender, mortgage broker, mortgage loan originator or the agent of any of these entities or individuals.


127

Exclusions

• A person, estate or trust that provides mortgage financing for the sale of no more than three properties within a 12-month period.


128

Exclusions

• Loan servicers and their employees, including those who renegotiate or modify loan for borrowers who are in default or likely to default on their mortgages.


129

Does NOT Include

•Consumer credit transactions under an open end credit plan

•Extensions of credit for timeshare plans

(TILA Section 103(cc)(5))

130

Subtitle A

• The stated purpose of Subtitle A, “Residential Mortgage Loan Origination Standards,” is “…to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.”

(H.R. 4173 Section 1403, adding TILA Section 129B(a)(2))

131

Subtitle A

This section of the law also creates a duty of care for mortgage loan originators to:

•Complete applicable licensing requirements under state and federal law.

•Include their NMLS unique identifier on all loan documents.

(TILA Section 129 (b)(1)(A-B)

132

Subtitle A and Mortgage Loan Originator Comp

1.A prohibition against incentives for loan originators to earn additional compensation by steering consumers towards particular loans or loans with particular lending terms.

2.Limitations on loan originator compensation.

3.FRB issued a “Compliance Guide”.

133

Anti-Steering

• TILA prohibits certain practices relating to payments made to compensate mortgage brokers and other mortgage loan originators.

• The primary goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators.

134

Rule Does Not Apply to

•Open-end home equity lines of credit (HELOCs).

•Time-share transactions loans secured by real property if the property does not include a dwelling.

Section 226.36

135

Prohibited Acts with Credit Secured by a Dwelling

• Applies to both mortgage loan originators and companies or mortgage brokers. This includes companies that close loans in their own names but use table-funding from a third party. The term “loan originator” also includes employees of creditors and employees of mortgage brokers that originate loans.

Section 226.36

136

Title XIV and the SAFE Act

• Title XIV expands upon the definition of a “loan originator” in the SAFE Act.

• The SAFE Act definition is limited.

• Most of the state laws that implement the SAFE Act define the term to include persons who perform the services in previous slide.

• Title XIV, will cover more individuals than are covered by the SAFE Act.

• Some individuals will be subject to the new TILA restrictions relating to mortgage loan originators but who will not be required to be licensed or registered in accordance with the SAFE Act.

137

Exclusions

• Creditors are excluded from the definition of a “loan originator” when they do not use table funding, whether they are a depository institution or a non-depository mortgage company, but employees of such entities are considered “loan originators.” What this means is that a table-funding lender will be treated as a “loan originator” for purposes of the new TILA restrictions on mortgage loan originators.

138

Exclusions

• The definition of “loan originator” excludes a person who performs purely administrative or clerical tasks for a mortgage loan originator, or an employee of a retailer of manufactured homes, so long as he/she does not advise a consumer on loan terms and a person who performs only real estate brokerage activities and is licensed/registered under state law to do so, so long as he/she is not compensated by a lender, mortgage broker, mortgage originator, or their agents. These exclusions are similar to those contained in the SAFE Act.

139

Exclusions

• Exclusions include loan servicers and their employees and agents. This exclusion is directed toward those who offer or negotiate terms in connection with renegotiating, modifying, replacing and subordinating principal of existing loans for borrowers who are delinquent, in default, or have a reasonable likelihood of defaulting.

140

Mortgage Transactions Terms or Conditions

• Prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other mortgage loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended.

• Prohibits any person from paying compensation to a mortgage loan originator for a particular transaction if the consumer pays the mortgage loan originator's compensation directly.

141

Steering

• Steering rule prohibits a mortgage loan originator from steering a consumer to consummate (fund) a loan that provides the mortgage loan originator with greater compensation, as compared to other transactions the mortgage loan originator offered or could have offered to the consumer, unless the loan is in the consumer's best interest.

• Provides a safe harbor to facilitate compliance with the prohibition on steering.

142

Record Retention

• Creditors who compensate mortgage loan originators must retain records to evidence compliance with Regulation Z for at least two years after a mortgage transaction is consummated.

Section 226.25

143

Understanding the Rule

• Section 1403 of the Dodd-Frank Act adds a new section (§ 129B(c)) to TILA and is designed to prohibit the payment of yield spread premiums “YSPs” and other steering incentives.

• Compensation cannot be increased or decreased.

144

Compensation

• Amount of compensation is not subject to change.

• Does not specify that compensation may be subject to a minimum or maximum dollar amount.

145

Case Study

• Read page____

• Break into groups and discuss the advantages and disadvantages of the loan originator compensation changes that you have experienced in the past year.

146

Third-Party Closing Costs

• Thus, the rule does not prohibit creditors or mortgage loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the mortgage loan originator does not vary based on the transaction's terms or conditions.

147

Payment by Person Other than Consumer

• If a mortgage loan originator receives compensation directly from a consumer in a transaction, no other person may provide compensation to a mortgage loan originator, directly or indirectly, in connection with that particular credit transaction.

148

Prohibition on Steering

• Title XIV prohibits a mortgage loan originator from "steering" a consumer to a lender offering less favorable terms in order to increase the loan originator's compensation.

149

Loan Options Must Include

a. The loan with the lowest interest rate for which the consumer qualifies;

b. The loan with the lowest total dollar amount for origination points or fees, and discount points, and

c. The loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.

150

Safe Harbor

• Mortgage loan originators must obtain loan options from a number of creditors with which they regularly do business.

• The mortgage loan originator may present fewer than three loan options and satisfy the safe harbor rule as long as the loan options presented to the consumer otherwise meet the criteria in the rule.

151

Civil Liability Provisions

Section 1404 of the Dodd-Frank Act adds a new § 129B(d) to TILA, to extend the civil liability provisions of TILA to mortgage originators.

• New § 129B(d) of TILA applies the civil liability provisions of TILA to mortgage loan originators by substituting the term “mortgage originator” for “creditor” wherever the latter term appears in § 130 of TILA.

• Imposes civil liability for actual damages, statutory damages equal to twice the finance charge (with a minimum of $400 and a maximum of $4,000 in an individual action for a credit transaction not under an open-end credit plan that is secured by real property or a dwelling, and a maximum of the lesser of $1,000,000 or 1% of the creditor’s net worth in a class action), costs and reasonable attorneys’ fees.

152

Steering

Subtitle A includes directive to draft rules that prohibit mortgage loan originators from steering consumers to residential mortgage loans that have any of the following characteristics:

• Loans that consumers cannot reasonably repay.

• Loans that have “predatory characteristics.”

• Steering consumers away from “qualified mortgages.”

• Loans with terms based on irrelevant factors such as race, ethnicity, gender, or age.

153

Prohibitions

• Mischaracterizing of a consumer’s credit history.

• Mischaracterizing of the appraised value of property used to secure a loan.

• If unable to offer a consumer a mortgage loan, discouraging the consumer from seeking a loan from another loan originator.

(TILA Section 129(b)(3))

154

Subtitle B and Repayment Ability

• Subtitle B, covers the Minimum Standards for Mortgages

• Also addresses loan suitability and the assessment of a borrowers’ ability to repay.

(TILA Section 129C(a)(1))

155

Determination of Repayment Must Meet

•Verified income

•Credit history

•Existing obligations

•Debt-to-income ratio

•Employment status

•Must be based on a repayment schedule that fully amortizes the loan

(TILA Section 129C(a)(3-4))

156

Non-Traditional Mortgage

• Negative Amortization Loans

• Certain Variable Rate Loans

• Interest-Only Loans

(TILA Section 129C(a)(6))

157

Qualified Mortgage Standards

• Section 1412 establishes a “safe harbor” for compliance with the ability to repay requirements of § 129C(a). A creditor and its assignees may “presume” that a loan meets the ability to repay requirements if the loan is a “qualified mortgage.”

158


• The periodic payments will not result in an increase in the principal balance.

• The borrower cannot defer payment of the principal.

• There are no balloon payments.

• The verification and documentation of the income and financial resources of those who are obligated to repay the loan is complete.

• The underwriting is based on a payment schedule that fully amortizes the loan over the loan term.

• The underwriting is based on the maximum interest rate permitted during the first five years of the loan term and on a payment schedule that fully amortizes the loan over the loan term.

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• The term of the loan does not exceed 30 years.(some exceptions allowed.)

• If a residential mortgage loan meets these characteristics, it is considered as a qualified mortgage, and the creditor can assume that the borrower has the ability to repay the loan.

(H.R. 4173, adding TILA Section 129C(b)(2)(A))

• The loan complies with guidelines, established by the Board, for debt to income ratios or with other measures of ability to pay that the Board establishes.

• The total points and fees for the loan do not exceed three percent of the total loan amount.

160

Authority

• The Dodd-Frank Act provides regulators (the Federal Reserve Board and the CFPB) with the authority to revise the criteria for a “qualified mortgage.”

(TILA Section 129C(b)(3)(B))

161

Standards

• Standards for lenders to comply with its prohibitions against steering and double compensation and its requirement to assess repayment ability by providing that the violation of any of these provisions is a defense in foreclosure actions.

(H.R. 4173 Section 1413, adding TILA Section 120(k))

162

General Ability-to-Repay Standards

• Income and assets

• Employment status

• Monthly mortgage payment

• Monthly payment on a simultaneous mortgage

• Credit history

• Monthly payments on mortgage-related obligations, such as taxes and insurance

• Debt obligations

• Monthly debt-to-income ratios

• Credit history

163

Ability to Repay

• Consumer-Purposed Closed-end Mortgage


167

Does not apply to

• HELOCs

• Loan Modifications

• Timeshare Plans

• Reverse Mortgages

• Temporary Loans


168

General Ability-to-Repay

• No limits on risky features, loan term, and points and fees.

(H.R. 4173 Section 1414, adding TILA Section 129C)

169


• Fully indexed rate or introductory rate, whichever is greater

• Monthly, substantially equal payments that amortize the loan amount over the loan term

• Special calculations for loans with negative amortization, interest only payments, or balloon payments


170


• Higher-priced balloon loan – use balloon payment

• Balloon loan that is not higher-priced – use the maximum payment scheduled during the first 5 years after consummation


171

Consider and Verify

• Income or Assets (other than the home)

• Employment Status

• Mortgage Payment

• Simultaneous Loan

• Mortgage-related Obligations

• Current Debt Obligations

• Monthly Debt-to-Income ratio (DTI) or Residual Income

• Credit History (H.R. 4173 Section 1414, adding TILA Section 129C)

172

Additional Protections

•Restricting onerous lending terms and practices

•Creating new disclosure requirements

•Broadening the enforcement ability of state attorney generals

•Increasing penalties for TILA violations

173

Prohibitions on Prepayment Penalties

• 3% of the outstanding loan balance during the first year of the loan.

• 2% of the outstanding loan balance during the second year of the loan.

• 1% of the outstanding loan balance during the third year of the loan.

• Prepayment penalties are prohibited for any prepayments made after the third year of the loan term. Creditors cannot offer a loan that includes a prepayment penalty provision without also offering a loan that does not include this provision.

(H.R. 4173 Section 1414, adding TILA Section 129C(c))

174

Defining Qualified Mortgages

• Reasonable

• Good Faith Determinations

175

Defining a Qualified Mortgage

• January 2013 Final Rule Deadline

• Impacts Basic Underwriting Standards

• Building Block for other Dodd-Frank Act Rulemakings

176

Final Rules

• Origination and Servicing Practices

• Loan Originator Compensation

• Anti-Steering Rules

• Restrictions on High-cost Loans

• Escrow Accounts

• Appraisals

• Final Rules – January 21, 2013

177

Additional Prohibitions

• Single Premium Insurance

• Arbitration Agreements

• Negative Amortization

178

New Disclosure Requirements

• Notice of Reset of Hybrid ARM

• Truth-in-Lending Disclosures

• Periodic Statement Form

179

• Three business days

• Information on the aggregate cost of settlement charges

• Amounts paid to the creditor

• Total amount of interest paid during the loan terms.

Broader Enforcement Capacity

• The law expands the enforcement authority of state attorneys general to enforce more provisions of TILA.

(H.R. 4173, amending TILA Section 130(e))

180

Subtitle C: High-Cost Mortgages

• Title XIV, Subtitle C of the Dodd-Frank Act amends HOEPA by extending its coverage.

• Creates new restrictions for high-cost home loans. The law today applies to a broader range of loans secured by the borrower’s principal dwelling. These include:

1.Purchase money mortgages

2.Open-end home equity lines of credit • At this time the law does not apply to reverse mortgages.

181

Revised HOEPA Provisions

• Interest Rate Threshold

• Points and Fees Threshold

– $20,000 or more

– $20,000 or less

• Loans with Prepayment Penalties

182

High-Cost Mortgage Counseling

• Creditors cannot offer a borrower a high-cost mortgage until receiving certification from a HUD-approved counselor.

• The certification must state that the borrower has received counseling on the advisability of accepting the mortgage.

• The counselor must be an independent counselor who is not employed by the creditor or by an affiliate of the counselor.

• HOEPA continues to require the disclosures that alert consumers to the risks of accepting a high-cost home loan.

183

Prohibited Terms and Practices

• Prepayment Penalties

• Balloon Payments

• Recommending Default

• Limitation on Late Fees

• No Acceleration after Default

• No Financing of Points and Fees

• No Fees for Loan Modification or Deferral

• Evading Provisions of the Law

(H.R. 4173 Section 1432, amending TILA Section 129(e))

184

Interest Rate Threshold

• The interest rate threshold used to be calculated by determining whether a loan’s interest rate exceeded a set number of points above Treasury securities with a comparable rate. However recent revisions to HOEPA changed that. Now the interest rate threshold is calculated using a new index.

• This new index is the average prime offer rate.

185

Average Prime Offer Rate

• The law defines “average prime offer rate” as the following:

• “…the average prime offer rate for a comparable transaction as of the date on which the interest rate for the transaction is set, as published by the Board.”

(H.R. 4173 Section 1412, adding TILA Section 129C(b)(2)(B))

186

New FFIEC Rate Spread Calculator

• FFIEC “New FFIEC Rate Spread Calculator”

http://www.ffiec.gov/ratespread/newcalc.aspx

187

http://www.ffiec.gov/ratespread/newcalc.aspx

Definition of Points and Fees

• Mortgage loan originator compensation, paid directly or indirectly to the originator.

• Premiums paid at or before closing for any optional insurance products or debt cancellation coverage, other than those fees that are paid in full on a monthly basis.

• The maximum prepayment fees and penalties that the creditor may collect under the terms of the transaction.

• All prepayment fees and penalties that the borrower must pay if the loan refinances a loan made or held by the same creditor or one of its affiliates.

• The recent revisions also include guidelines on excluding from the calculation of points and fees and any bona fide discount points that a borrower knowingly pays in order to reduce the interest rate.

188

Open-End Transactions

• Revisions to the law also provide that HOEPA will now apply to open-end transactions.

(TILA Section 103(c)(2))

189

Subtitle D: Office of Housing Counseling

• Subtitle D is also known as the “Expand and Preserve Homeownership through Counseling Act.” It establishes a new Office of Housing Counseling within the Department of Housing and Urban Development (HUD).

190

Office of Housing Counseling

• Computer software programs for consumers.

• A multimedia campaign that will encourage vulnerable consumers to seek unbiased and reliable homeownership counseling if they are facing default or foreclosure or it they are considering a subprime loan.

• Foreclosure rescue education programs for geographic areas that have high foreclosure rates.

• A mortgage information booklet, which will provide more information than is contained in the current HUD Information Booklet.

• Education materials for vulnerable consumers, including immigrants, minorities, and the elderly.

• HUD is also directed to establish and maintain, along with the CFPB, a database on defaults and foreclosures.

191

Subtitle E: Mortgage Servicing

• Mandatory Escrow or Impound Accounts for Certain Mortgages

• Applies to all first-lien mortgages on a consumer’s principal residence (other than a reverse mortgage). The provisions outline the circumstances in which an escrow account is required, establish that mandatory escrow accounts must continue for five years, and develop the standards for a mandatory escrow account.

192


• Escrow Waiver Disclosure

• Addresses circumstances in which an escrow account is not mandatory and those in which consumers may elect to close an escrow account. Requires loan servicers to provide a disclosure that states the responsibility of the consumer for non-escrowed expenses, such as taxes and insurance, and the consequences of failing to pay these expenses.

193


• RESPA Amendments

• Revisions include new requirements that servicers must meet prior to arranging for force-placed insurance and new penalty provisions. Also shortens the time a loan servicer has to respond to a written request or dispute from a borrower. Servicers must now acknowledge the receipt of letters from consumers within five days of receipt and provide a response to issues raised by consumers within 30 days.

194


• TILA Amendments

• Relates to crediting payments on the date of receipt and providing an accurate payoff balance within seven business days of a written request for the information.

195


• Including Escrow Amounts in TILA Disclosures

• This is applicable to all first-lien mortgages and to subordinate mortgages secured by a consumer’s principal residence. The provisions require payment schedule disclosures to include escrow amounts.

196

Subtitle F: Appraisal Activities

• The Dodd-Frank Act addresses the following concerns regarding appraisals:

• Poor appraisal practices which are associated with higher-risk mortgages, such as high-cost or subprime home loans.

• Interference with the independent and professional judgment of appraisers.

197

Higher-Risk Mortgages

• First lien mortgages with principal amounts that do not exceed the Freddie Mac conventional loan limits, the threshold is 1.5 percentage points above the average prime offer rate for a comparable transaction.

• First lien mortgages with principal amounts that exceed the Freddie Mac conventional loan limits, the threshold is 2.5 percentage points above the average prime offer rate for a comparable transaction.

(H.R. 4173 Section 1471, amending TILA Section 129H(f))

198

Higher-Risk Mortgage Appraisal Requirements

• The appraisal is based on a physical visit that includes examination of the interior of the dwelling.

• A second appraisal must be conducted, at no cost to the borrower, if the transaction involves the resell of a property that the seller purchased within 180 days of the current transaction, and it the current sale price exceeds the amount paid by the seller. The second appraisal must consider factors that have contributed to a cost increase. These may include market changes and property improvements. The purpose of this provision is to discourage property flipping.

• The appraisal must be performed by a certified appraiser in accordance with the requirements the requirements of the Uniform Standards of Professional Appraisal Practice and Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act.

(TILA Section 129H(b)(1-3))

199

Provide Free Copy of Appraisal

Consumer Rights

• The law also requires creditors to provide loan applicants with the following:

•One free copy of the appraisal.

•Notification that the appraisal is for the creditor’s benefit and that the loan applicant can obtain a separate appraisal.

(TILA Section 129H(b)(4)(c-d))

200

Special Remedies for Violations to HOEPA

• A consumer who brings a timely action against a creditor for a violation of rules issued under TILA may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer this is often referred to as “HOEPA damages”, unless the creditor demonstrates that the failure to comply is not material. This recovery is in addition to actual damages; statutory damages in an individual action or class action, up to a prescribed threshold; and court costs and attorney fees that would be available for violations of other TILA provisions.

201


• Third, a consumer has a right to rescind a transaction for up to three years after consummation when the mortgage contains a provision prohibited by a rule adopted under the authority of TILA. Any consumer who has the right to rescind a transaction may rescind the transaction as against any assignee. The right of rescission does not extend, however, to home purchase loans, construction loans, or certain refinancings with the same creditor.

202


• If a creditor assigns a high-cost mortgage to another person, the consumer may be able to obtain from the assignee all of the foregoing damages.

• Consumer may assert a violation of TILA Section 129C(a) as a defense to foreclosure by recoupment or set off.

• There is no time limit on the use of this defense.

203

Compliance

• Creditors who willfully fail to comply with these requirements are liable to the loan applicant or the borrower in the amount of $2,000.

(TILA Section 129H(b)(4)(e))

204

Appraisal Independence

1.Coercing, bribing, extorting, instructing, or intimidating an appraiser or appraisal firm.

2.Mischaracterizing the value of property.

3.Encouraging an appraiser to deliver a target value.

4.Threatening to withhold payment for an appraisal.

(TILA Section 120E(b)(1-4))

205

Prohibitions to Protect Appraisal Independence

The law includes additional prohibitions to protect appraisal independence. These include:

• Appraisers and appraisal companies are prohibited from having a financial or other interest in the property that is subject to the appraisal.

• Creditors are prohibited from extending credit if the creditor knows that the appraisal misstates the value of the principal dwelling securing the loan.

(TILA Section 129E(d) and (f))

206

Setting Professional Standards

• Any mortgage or real estate professional who is involved in a real estate transaction that involves a borrower’s principal dwelling and who has a reasonable basis to believe that an appraiser is failing meet or is violating professional standards or the law is required, by law, to “…refer the matter to the applicable State appraiser certifying and licensing agency.”

(TILA Section 129E(e))

207

Subtitle G: Mortgage Resolution and Modification

• The law defines a “multi-family property” as one with five or more dwelling units. • (H.R. 4173 Section 1481 (a))

• The law specifically directs HUD to create a program that will do the following:

• Encourage “sustainable financing” of multi-family properties

• Preserve federal, state, and local subsidies

• Provide funds for rehabilitation

• Transfer multi-family properties to responsible new owners • (H.R. 4173 Section 1481(c))

208

Mortgage Assistance Program

• Subtitle G also addresses issues related to mortgage assistance programs such as the Making Home Affordable Program and the Home Affordable Modification Program. These programs were established under the Emergency Economic Stabilization Act of 2008. The law prohibits assistance to any individual under these programs who has been convicted within the past ten years for felony, money laundering, or tax evasion if these crimes relate to a real estate or mortgage transaction.

(H.R 4173 Section 1481(d)(1))

209

Requirements Under Subtitle G

• Require mortgage servicers participating in the program to provide the data that was used in performing a net present value analysis to borrowers if their requests for loan modifications are denied.

• Make an NPV (Net Present Value) calculator available on the Internet that homeowners can use to determine whether their mortgages would be accepted or rejected for modification.

• Make reasonable efforts to provide a website that homeowners can use to apply for mortgage modifications.

(H.R. 4173 Section 1482(b)(1-3))

210

Public Access to Information

• The Secretary of the Treasury must release the information each month and must include the following:

• The number of requests of loan modifications.

• The number of these requests that were processed and approved or denied.

• The Secretary must also write regulations regarding data compilation and publication.

(H.R. 4173 Section 1483(b)(1-2))

211

Subtitle H: Miscellaneous

• Chronology

• Inter-agency Study

212

The Road Ahead

• Dodd-Frank Act is to impose stricter standards

• Provide consumer protection and education

213

Treat Customers Fairly

• Broadest power of new Bureau is its ability to regulate “abusive practices”.

• This means ANYTHING YOUR CUSTOMER DOES NOT UNDERSTAND!

214

Module Two – Session One Ethics, Fraud and Fair Lending

Ethics, Fraud and Fair Lending

• Purpose of Ethics in Lending

• Red Flags of Fraud

• Appraisal Independence

216

Objectives

• Identify top red flags for mortgage fraud in the mortgage industry.

• List various types of mortgage fraud.

• Define the new appraisal independence regarding Dodd-Frank Act.

217

Ethics and Compliance

• Ethical framework

• Guidelines and reference to compliance standards

• Goal is to protect the consumer

• Awareness of industry laws and regulations

218

Ethics

• Set of values

• Conduct and principles

• Deliver honest and fair services

• Required 2 hours of annual instruction on Fraud, Ethics and Fair Lending

219

Focus of CFPB

• Provide transparency in lending

• Increased support of fair and honest lending practices

• Result of greed and abuse of power

• Victims left defenseless

• Establish high level conduct in our industry

• Rebuild trust

220

Setting Ethical Standards

• Laws and regulation form solid basis

• Encourage and enforce ethical practices

• Compliance Approach to ethics

221

Committing to Professional Success

• Ethics play building block

• Effective communication

• Fair pricing

• Fair product representation

• Meaningful and compliant marketing

• Compliant team

222

Setting the Example

• Set the standards

• Reasons to practice good ethics

• Reputation of organization

• Reputation of partners, vendors and staff

• Everyone sets the example

223

Establishing a Code of Conduct

224

Honesty and Integrity

225

Professional Conduct

226

Honesty in Advertising

227

Confidentiality

228

Compliance with the Law

229

Disclosure of Financial Interest

230

Making a Change

• Unacceptable ethics leads to regulatory backlash

• Increased regulatory oversight

• 2008 to now experienced lawmakers passing over-reaching laws

• Prevent the recurrence of the mortgage melt-down and Protect consumers

• Fine line between proactive oversight and protection and regulatory overload

231

Best Practice

• Build strong base of industry ethics

• Combined with make sense regulatory oversight

• Transparency is key

• Industry goal – build excellent business practices

• Support highest standards

• Restore faith in our industry

232

2008 FBI Report on Fraud

“Mortgage fraud continues to be an escalating problem in the United States and a contributing factor to the billions of dollars in losses in the mortgage industry. Recent congressional economic stimulus legislation and the proliferation of FHA-insured mortgages are providing funding streams for perpetrators to further exploit this industry. Multiple fraud schemes are being conducted by industry professionals who are in a position to exploit the current depressed housing market. Market conditions are also fueling the use of traditional and emerging schemes which have the potential to multiply across jurisdictions as foreclosures increase, the market contracts, access to credit diminishes, and more homeowners are unable to sell or refinance their homes. Properties affected by these schemes negatively impact neighborhoods; federally insured loan programs; the mortgage, banking, and securities industries; secondary market investors; tax payers; homeowners; and the overall US economy.”

Source: http://www.fbi.gov/stats-services/publications/mortgage-fraud-2008/2008-mortgage-fraud-report

233

http://www.fbi.gov/stats-services/publications/mortgage-fraud-2008/2008-mortgage-fraud-report













FBI Mortgage Fraud SARs

234

Professional Conduct

• Foundation of ethics in lending is enforced with a compliance approach

• Ethics is about fairness, honesty, communication, transparency and full disclosure

• Actions must be right and look right

235

Laws and Regulations

• Build faith & trust

• Actions can bring about new laws & regulations

236

Compliance and Ethics

237

Equal Credit Opportunity Act (ECOA) – Reg B

238

Race

Color

Religion

National Origin

Gender

Marital Status

Age

The fact that all or part of an applicant’s income derives from a public assistance program

The fact that the applicant has exercised any right under a consumer credit protection act

Fair Housing Act

Lending decisions can NEVER be based on…

Race

Color

Religion

National Origin

Handicap

Familial Status

Gender

The Fair Housing Act - sec. 800. 42 U.S.C. 3601 et seq

239

RESPA

• Real Estate Settlement Procedures Act RESPA Regulation X - 24 CFR §3500

• Now Reg X – 12 CFR 1024

• GFE within 3 business days

• HUD-1

• HUD’s Settlement Cost Booklet

• Prohibits kickbacks

• Disclosure of Affiliated Business Arrangements

• Transfer of servicing

240

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=/ecfrbrowse/Title24/24cfr3500_main_02.tpl




TILA

• Truth in Lending Act/Regulation Z (§§ 226.15 and 226.23)

• Disclose APR within 3 business days

• Consumer Handbook on Adjustable Rate Mortgages

• Triggering terms

• Right of rescission

241

Gramm-Leach-Bliley Act

• Financial Services Act of 1999 (P.L. 106-102)

• Allows financial companies to consolidate their services

242


• Financial Privacy Rule (16 CFR Part 313)

• What information will be collected

• How the information will be used and shared

• What procedures the company has to protect the information

• Opt-out option

243


• The Safeguards Rule (16 CFR Part 314)

• Identifying a specific employee who is in charge of the security plan

• Having a program that protects consumer information

• Updating and modifying the security system, as necessary

244


• Pretexting Protection

• Impersonating an individual

• Hacking into file

• Develop procedures and training

245

Ethical Standards

• Consumer

• Appraiser

• Mortgage loan originator

• Lender

• Everyone associated with the transaction

246

What is Mortgage Fraud?

• Fraud for profit

• Involves groups of people

• Initiators receive percentage of profit

• Costs the industry, consumers and public

247

Damages Caused by Fraud

• 72% spike in loan repurchase requests in 1st quarter 2011 – Fannie Mae Report

• Common fraud findings are income exaggerated and credit not fully disclosed – William H. Brewster – Fannie Mae – June 11, 2010

248

2010 Mortgage Fraud Suspicious Activity Reports (SARs)

• 5% increase in reported fraud from the previous year

• 72% involved losses of more than $1 million

• The Financial Crimes Enforcement Network (FinCEN) estimated losses in 2010 at more than $1.5 billion

• Largest portion involves misrepresentation on loan applications and verification of deposits, along with appraisal and valuation issues

• Identity-theft, bankruptcy and income related fraud are on the rise and have been directly associated with mortgage fraud

249

Mortgage Fraud 2010

250

Mortgage Asset Research Institute Report 25% of originated loans and

33% of post-funding investigations included some type of appraisal

fraud and/or misrepresentation.

Misrepresentation on the Application

251

February 2011 Fannie Mae Fraud Findings

252

Mortgage Fraud Definition

Material misstatement, misrepresentation or omission which are relied upon by an enterprise to fund or purchase or not to fund or purchase

a mortgage.

253

Mortgage Fraud affects everyone

Starting with:

Consumers

Servicers

YOU!

254

Fraud for Housing Schemes

1. Perpetrators may include the borrower and/or loan officer

2. Normally involves a single loan 3. Contains loan-level misrepresentations to

qualify 4. Borrower intends to repay – the loan usually

does not default 5. The appraised value is not typically inflated at

origination

255

Statistics

Pending Fraud Investigations in 2011 involve losses of more than $1

million dollars

256

Mortgage Fraud Statistics from the FBI

http://www.fbi.gov/about-us/investigate/white_collar/mortgage-fraud/mortgage_fraud

257






Examples of Fraud for Housing

1. Counterfeit Paychecks 2. Invalid Employment 3. Unintended Co-Borrower 4. Falsifying Information 5. Straw buyer 6. Identity Theft

258

Fraud for Profit Schemes

• Multiple Industry Professionals • Misrepresentations and Omissions • Participants Well Compensated • Straw Borrowers

259

260

Q2 2011 Mortgage Fraud Risk

http://www.interthinx.com/pdf/11_Q2MFRR_FNL.pdf


Q2 2011 Mortgage Fraud Risk


261

Mortgage Fraud Red Flags

• Precautions to take

• Help identify various incidents make you vulnerable to fraud

• Develop programs to help protect you and your company from adverse activities

262

Possible Red Flags of Mortgage Fraud

• Inconsistencies in the loan file tips that file may contain misrepresentations

263

Common Red Flags of Mortgage Fraud

Social Security number discrepancies

No real estate agent reflected on sales contract

Address discrepancies with the file

Verifications (VOE, VOD, VOR, etc..) addressed to a specific party’s

attention. (Should always be addressed to the HR Dept.)

Verifications completed the same day they were ordered

Verifications completed on the weekends or holidays

264

Common Red Flags of Mortgage Fraud

Assets or wages are even dollar amounts

NAL (Non-arm’s Length) transactions

Occupancy on the appraisals is not consistent with the application

Cash out transaction on a recently acquired property

Different handwriting or font styles within a document

Altered looking documents

265

Application Fraud

The borrowers home address, phone number, employer

address and phone number cannot be validated

Marital status and number of dependents are not

consistent with the borrowers Tax Returns or other

documentation

Employers address is a PO Box and not a physical

address

266

Application Fraud

Employers address is a PO Box and not a physical address

Borrower’s education is not consistent with their employment.

Example, borrower states that they went to culinary school, but is

currently working as a bookkeeper

High income borrowers have little or no personal assets

Invalid Social Security Number

267

Straw Borrowers

268

For example, the actual borrower may NOT:

•Qualify for the mortgage

•Intend to occupy the property as a primary residence

•Be eligible for a loan program

•Exist

•Individuals used to serve as a cover

Straw Borrower Red Flag Checklist

269

Builder Bailout Red Flag Checklist

270

Flip Red Flag Checklist

271

Resources

272

Case Study

• Read page 58 of student workbook.

• Break into groups

• Discuss why victims would trust individuals like Nguyen and Eichenberger

• What can consumers do to protect themselves against fraud?

273

Mortgage Fraud Red Flags Checklists

• Some mortgage loan originators end up participating in mortgage fraud unknowingly

• Checklists help to locate possible fraud

• Finding one or more of these items does not necessarily mean there is fraudulent intent

• Red flags may signal the need for a more intensive file review and borrower interview

274

Application Red Flags

275

Credit Report Red Flags

276

Income Red Flags

277

W-2/1099 Red Flags

278

Case Study

• Read page 64 in student workbook.


• Discuss if you feel the penalties were fair

• What can you do to protect against this type of fraud?

279

Tax Returns Red Flags

280

Schedule A Red Flags

281

Schedule B Red Flags

282

Schedule C Red Flags

283

Schedule E Red Flags

284

Employment Fraud Red Flags

285

Asset Fraud Red Flags

“Freddie Mac reports that the loan origination frauds they are witnessing include false documents, property flips with phantom rehabilitation, fictitious assets, and fabricated payroll documents. Fraudsters are also using phantom rehabilitations to increase the property values. However, Freddie Mac has been interviewing borrowers and their neighbors to determine if the rehabilitations are actually occurring. Also, Freddie Mac is reporting that fraudsters continue to use transactional “lenders” such as the “dough for a day” businesses that “loan” potential borrowers money so that underwriters will see they have assets when conducting their “proof of funds” due diligence risk assessment on the loan application.” Source: http://www.mahanyertl.com/mahanyertl/fbi-releases-2010-mortgage-fraud-report/881/

286

http://www.mahanyertl.com/mahanyertl/fbi-releases-2010-mortgage-fraud-report/881/












VOD Red Flags

287

Check Fraud Red Flags

288

Sales Contract Red Flags

289

Case Study

• Read page 70 of student workbook.


• Discuss times you have seen this type of fraud in your business

• What can you do to help protect your customers from this type of fraud?

290

Module Two – Session Two

Escrow/Closing Red Flags

292

Prelim Red Flags

293

HUD-1 Red Flags

294

Appraisal Fraud Red Flags

295

Miscellaneous Red Flags

296

Various Types of Mortgage Fraud

297

Occupancy Fraud

• Red Flags

298

Occupancy Red Flags – Purchase Transactions

Real estate listed on application - Renter

Significant or unrealistic commute distance

Applicant is downgrading

299


Sales Contract is subject to existing lease

Occupancy affidavits reflect applicant does NOT intend to occupy

Presently own an owner occupied property

Recently refinanced an owner occupied property

300


Currently property is listed

Home owners Insurance reflects rental property

Different mailing address for the policy holder

Refinances with multiple rental properties

301


Gifts on investment or second home properties

Purchase of new primary residence, but own multiple properties

302

Occupancy Red Flags – Refinance Transactions

Rental property listed on application is more expensive than subject property

Different mailing address on applicant’s bank statements

303


Different address reported on Credit Report

Significant or unrealistic commute distance

Appraisal reflects vacant or tenant occupancy

304


Occupancy affidavits reflect applicant does NOT intend to occupy

Homeowner’s insurance is a rental policy

Reverse directory does not disclose subject property address

Occupancy Validation

305


Reverse look up (phone number and address) www.411.com

USPS address change

On Purchase, the underwriter may condition for a mover contract

306

Income Fraud

• Checklists for possible income fraud

307

Income Fraud

Fake W2’s, Paystubs, Tax Returns

Working for family, with a great than 10% increase in income over last year

Working for family

Amended Tax Returns

Fake CPA letters

Fake P&L for self-employed borrowers, where income is not consistent with previous year

308

Income Red Flags

Applicant’s job title is generic, i.e., “manager”, “Vice President”

Employer’s address is a P O Box, the property address, or applicant’s current residence

Applicant’s residence is (will be) in location remote from employer

Employer name is similar to a party to the transaction, i.e., utilizes applicant’s initials

309

Income Red Flags

Employer unable to be contacted

Year-to-date or past-year earnings are even dollar amounts

Withholding not calculated correctly (check FICA tables)

Withholding totals don’t foot from pay advice to pay advice

Pay period dates overlap and/or don’t correspond with other documentation

Abnormalities in pay check numbering

310

Income Red Flags

Handwritten VOE, pay stubs, or W-2 forms

W-2 form presented is not the employee’s copy

Employer’s identification number has a format other than 12-3456789

Income appears to be out of line with type of employment

Self-employed applicant does not make estimated tax payments

311

Income Red Flags

High income applicant without paid preparer

Paid preparer signs taxpayer’s copy of tax returns

Interest and dividend income don’t substantiate assets

Applicant reports substantial income but has no cash in bank

312

Credit Fraud

Fictitious/stolen identity being used on the loan application

Borrower’s name, personal identifying information and credit history used without person’s knowledge

313

Employment Fraud

The borrower, claims to be employed, submits a falsified pay stub to document the amount of income earned.

Employment fraud may come in other forms of falsification of documents.

314

Employment Red Flags

Working for family

Verbal VOE’s to friends at work not HR

Verbal VOE’s to cell phones

315

Employment Red Flags

Written VOE’s to a specific person and not a department

VOE’s returned the same day, or done on a holiday

No license for a position that requires a license

316


Invalid Social Security number

Duplicate Social Security

Recently issued Social Security number

Social security alerts

Liabilities shown on credit report

317


Length of established credit not consistent

Credit patterns are inconsistent

All trade lines opened at the same time

Authorized user accounts have superior payment histories

318


Significant differences between original

Numerous recent inquiries

Missing pages

Employment discrepancies

319

Asset Red Flags

Down payment source is other than deposits

Applicant’s salary doesn’t support savings

Applicant doesn’t utilize traditional bank

Investments are not diversified

320

Asset Red Flags

Excessive balance

Dates of bank statements are unusual

Recently deposited funds without paper-trail

Bank account ownership includes unknown parties

321

Asset Red Flags

Balances verified as even dollar amounts

Two-month average balance is equal to present balance

322

Asset Red Flags

Source of earnest money

Earnest money isn’t reflected in account

Earnest money is from a bank or account with no relationship

323

Asset Red Flags

Bank statements do not reflect deposits consistent with income

Assets appear to be out of line with type of employment, applicant age, education and / or lifestyle

324

Failure to Disclose Liabilities

Mortgage loans on other properties

Newly acquired credit card debt, to reduce the amount of monthly debt declared on the loan application

325

Assets / Cash to Close / Large Deposit Red Flags

Signs of straw buyer

Large deposits need to be explained

Assets at closing

326

Asset Fraud

• May be committed by temporarily depositing funds into the loan applicant’s bank account for the time required to qualify for a loan.

• Funds may come from friends or family, or even from mortgage loan originator who is attempting to qualify an ineligible borrower.

• Temporary funds were then withdrawn from the bank account after the loan is approved.

327

Dodd-Frank Act - Dodd-Frank Act -“Appraisal Independence Requirements” (H.R. 4173 Section 1472(a))

• Congress addressed what they felt was the ethical problem of the use of inaccurate appraisals in real estate transactions.

• Dodd-Frank includes an entire subtitle on “Appraisal Activities,” with a subtitle on “Appraisal Independence Requirements”.

328

Covered Transaction

• 12 CFR Section 226. 42(b)(2))

• The rule applies to both open-end and closed-end transactions.

• Precludes creditors, mortgage brokers and loan originators from selecting an appraiser for covered transactions.

329

Covered Person

• 12 CFR Section 226. 42(b)(2))

• The rule defines the mortgage, real estate, and appraisal professionals who are subject to its prohibitions and requirements as “covered persons,” and these include:

– Creditors in a “covered transaction”

– Providers of settlement services

330

Settlement Services

• The rule defines “settlement services” as that term is defined in RESPA and Regulation X. RESPA and Regulation X define “settlement services” to include virtually every service related to mortgage transactions including, but not limited to, taking loan applications, processing and underwriting them, obtaining verifications and appraisals, providing title services, obtaining credit reports, and providing closing services.

(12 CFR Section 226.42(b)(1))

331

Settlement Services

• Creditors

• Mortgage brokers

• Appraisers

• Other persons that perform a valuation of a principal dwelling

• Appraisal management companies

• Real estate agents

• Title insurance companies

• Other persons that offer settlement services

(75 Fed. Reg. 66557)

332

Valuation

• “Valuation” instead of the term “Appraisal

• “Person who Performs a Valuation” instead of “Appraiser”

(75 Fed. Reg. 66558)

333

Valuation

•Real Estate Agents

(Supplement I to Part 226 Section 226.42(b)(3)(1))

334

Valuation

• Valuation Management Function


335

Meaning of Terms

“An estimate of the value of a consumer’s principal dwelling in written or electronic form, other than one produced solely by an automated model or

system.”


• (Supplement I to Part 226 Section 226.42(b)(3)(2))

336

Excluded from term

“…produced solely by an automated model or system.”

(12 CFR Section 226.42(b)(3))

• (Supplement I to Part 226 Section 226.42(b)(3)(2))

337

Valuation Management Functions

•Choosing or retaining a person to perform a valuation

(12 CFR Section 226.32 (b) (4))

338


•Entering a contract or employment agreement with a person to prepare a valuation

(12 CFR Section 226.32 (b) (4))

339


•Managing or overseeing the preparation of a valuation

• Administrative services

• Submitting a completed valuation to creditors and underwriters

• Collecting fees from creditors and underwriters

• Compensating a person that prepares valuation

(12 CFR Section 226.32 (b) (4))

340


•Reviewing or verifying the work performed to generate a valuation

(12 CFR Section 226.32 (b) (4))

341

Consumers

•Serve as a creditor or as a provider of settlement services

(Supplement I to Part 226 Section 226.42(b)(2))

• (Supplement I to Part 226 Section 226.42(b)(2))

342

Interim Final Rule

• Protect valuation independence

• Separation or “firewall”

• Provide rules for who can choose the appraiser and how that choice is made in an unbiased manner

343

Who Can Choose?

• Precludes the following from selecting an appraiser on covered transactions:

– Creditors

– Mortgage brokers

– Mortgage loan originators

344

Why is it this Way?

• Engaging in “Valuation management function”

• Prohibits those performing valuation management functions from having interest in the transaction

345

How to Make an Unbiased Choice of Appraisers

• Must create a “Firewall”

• Create requisite division between those who originate and fund loans from those who appraise the collateral

• AMCs can offer that “Firewall”

346

What is an AMC?

• Appraisal Management Company

• Outsourcing Solution

• Paid by a lender-client to act on the clients behalf to engage an appraisal

347

What is Prohibited?

Four prohibitions under the interim final appraisal rule:

1. Creation of an inaccurate or false appraisal

2. Use of coercion to impact valuation

3. Extension of credit based on a valuation in which coercion or conflict of interest is known to have occurred

4. Use of valuations prepared by a person who has a conflict of interest

348

Prohibition Against the Creation of an Inaccurate or False Appraisal

• “A misrepresentation is material…if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.”

(12 CFR Section 226. 42(c)(2))

349

Prohibition Against Coercion or other Improper Influence

Any of the following actions is illegal when taken against a person that is performing a valuation of a principal dwelling in a covered transaction:

• Pressuring the person to produce a valuation that meets a minimum or maximum threshold

• Withholding or threatening to withhold payment for the valuation if it does not meet a threshold amount

• Implying that future use of the services of the person will depend on his/her/its willingness to produce a valuation that meets a threshold amount

• Excluding a person from performing future evaluations when he/she/it performs a valuation that does not meet a threshold amount

• Conditioning payment for valuation services on whether the loan in the covered transaction is consummated

(12 CFR Section 226.42(c)(1)(i)(A-E))

350

Permitted Actions?

Covered persons are allowed to make the following requests of the person who is preparing the valuation without violating the prohibitions against misrepresentation or coercion:

• Consideration of additional relevant information, such as other comparables

• Explanation or further substantiation of the person’s conclusion regarding the value of the principal dwelling

• Request for a correction of errors made in the valuation

• Use of multiple valuations of the principal dwelling to obtain the most accurate valuation

351

Prohibitions Against Conflicts of Interest

• Prohibits persons that prepare valuations and also those who perform valuation management functions from having “…a direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is or will be performed.”

(12 CFR Section 226.42(d))

352

Prohibitions Against Conflicts of Interest

• In its staff commentary, the Board states that a person who is seeking a mortgage to purchase a home “…has a reasonably foreseeable ownership interest in the property securing the mortgage, and therefore is not permitted to prepare the valuation or perform valuation management functions for that mortgage transaction….”

(Supplement I to Part 226 Section 226.42(d))

353

AMCs Owned by Creditors

• Many appraisal management companies (AMCs) “…are wholly or partly owned by creditors, or may share a common corporate parent with a creditor, and manage appraisals for a sizeable share of the dwelling-secured consumer credit market.”

(75 Fed. Reg. 66563)

354

Firewalls to Segregate Loan Originators and Appraisers

• Creditor has established “firewalls” to segregate loan originators and appraisers.

• Small creditors may “…need to rely on a single in-house member to perform multiple functions, such as, for example serving as both a loan officer and an appraiser.”

(75 Fed. Reg. 66563)

355

Firewalls to Segregate Loan Originators and Appraisers

• it was not the intent of Congress to prohibit staff appraisers from performing valuations as long as the creditor has established “firewalls” to segregate loan originators and appraisers. Citing reports from creditors that in house appraisals are “…of higher quality than appraisals performed by third parties…”

356

What are Safe Harbor Provisions?

• Assets that exceeded $250 million for both of the past two calendar years, and the alternative safe harbor is for employees with assets of less than $250 million for either of the past two calendar years.

• Ensure that there is segregation between employees and affiliates of a creditor that perform valuation functions and those who perform “loan production functions.”

357


Those involved in loan production functions may include:

• Retail sales staff

• Loan officers

• Other employees of the creditor who are responsible for taking loan applications, offering or negotiating loan terms, or those whose compensation is based on loan processing volume

(Supplement I to Part 226 Section 226.42(d)(5)(i))

358


The Board’s staff commentary also provides that the following are not to be regarded as being involved in loan production functions:

• A person whose bonus is not related to specific transactions or to success in closing a specific percentage of transactions

• A person who has a profit sharing plan that benefits all employees

• A person involved in credit administration and risk management, such as loan underwriting, disbursing funds, loan servicing, and monitoring loan performance

(Supplement I to Part 226 Section 226.42(d)(5)(i))

359

Safe Harbor for Smaller Creditors

• Compensation Condition

• Safeguard Condition

360

Compensation Condition

• The employees and affiliates of smaller creditors, like those of large creditors, must be able to show that the compensation earned by the person who performs a valuation or who performs valuation management functions cannot be based on the value assigned to a principal dwelling in a valuation.

361

Safeguard Condition

• Any employee, officer, or director of the smaller creditor who orders, performs, or reviews the valuation for a transaction must abstain from participating in the same transaction by deciding to approve or deny the loan application or to set its terms.

(12 CFR Section 226.42(d)(3))

362

Safeguard Condition

• This safe harbor does not require “…bright-line isolation of the collateral valuation function from the loan production function…” but is intended to help small or rural institutions “…to ensure independent valuations and protect against conflicts of interest in the valuation process….”

(75 Fed. Reg. 666566)

363

Safe Harbor Large Creditors

• Compensation Condition

• Reporting Condition

364

Compensation Condition

• The compensation earned by the person who performs a valuation or who performs valuation management functions cannot be based on the value assigned to a principal dwelling in a valuation.

365

Reporting Condition

• The person who performs a valuation or who performs valuation management functions must report to a person who is not a part of the creditor’s “loan production function.”

• The goal of this condition is to protect those who are involved in valuation from pressure “…from managers or similar authorities whose primary objective is increasing loan volume….”

(75 Fed. Reg. 665675)

366

Selection Condition

• Officers, directors, and employees who are part of a creditor’s “loan production function” cannot directly, or indirectly, select, retain, recommend, or influence the selection of the person who will perform the valuation.

(75 Fed. Reg. 665675)

367

Best Practices

• Develop policies and procedures to identify which positions are and are not part of the loan production function.

(12 CFR Section 226.42(d)(2))

368

Safe Harbor Providers of Multiple Settlement Services

• Providers of multiple settlement services must meet the safe harbor conditions

• Avoid conflicts of interest that might arise when performing valuation management functions, such as ordering and reviewing appraisals, and providing other settlement services, such as title insurance, credit reports, and loan processing.

(12 CFR Section 226.42(d)(4))

369

Prohibition Against Extending Credit Based on a Faulty Appraisal

• If a creditor knows a violation has occurred, extending credit is not prohibited if the creditor “…has acted with reasonable diligence to determine that the valuation does not materially misstate or misrepresent the value of the consumer’s principal dwelling.”

(12 CFR Section 226.42(e))

370

Customary and Reasonable Fees

• Require creditors and their agents to “…compensate a fee appraiser for performing appraisal services at a rate that is customary and reasonable for comparable appraisal services performed in the geographic market of the property being appraised….”

(12 CFR Section 226.42(f))

371

Customary and Reasonable Compensation

372

• The rule allows the marketplace to set rates siting “…be the primary determiner of the value of appraisal services….”

(75 Fed.Reg. 66569) • The rule also states that it is the marketplace in the geographic

area where the property is located that is the proper measure for customary and reasonable compensation. In its staff commentary, the Board states that defining the geographic market of the property being appraised will vary and may include a state, a metropolitan statistical area, a metropolitan division or a county.

(Supplement I to Part 226 Section 226.42(f)(1))

High Cost of Unethical Lending Practices

• CoreLogic estimated $7.4 billion in U.S. residential mortgage loan fraud in 2011

• Ethical lending decisions, transparency and accountability is important now more than ever

373

Module Three – Session One The VA Guarantee Loan

Objectives

• Identify forms used for VA Home Loan.

• Recognize the opportunities of the VA Home Loan.

• Describe the basic guides of the VA Home Loan.

375

What is a VA Guaranteed Loan?

• Began in 1944 – Servicemen’s Readjustment Act – GI Bill of Rights

• Provided veterans with federally guaranteed home

• No down payment

376

Highlights

• Must be for veteran’s own personal occupancy.

• Maximum guarantee is up to 25% of the Freddie Mac conforming loan limit.

• Low or No down payment depending on eligibility

• Ability to finance the VA Funding Fee

• Flexible credit standards

• No mortgage insurance premiums

• Is an assumable mortgage

• Provides right to repay without penalty

377

What the Difference?

• Certificate of Eligibility (COE)

• VA Assigned Appraisal

• Purchase

• Build

• EEM

• Manufactured Home

378

Eligible Loan Purposes

1. To buy or build a home with up to four family units, including townhouses or

condominium units in a VA approved project, where one unit will be owner occupied by the veteran.

2. To buy a manufactured home that is affixed to a permanent foundation and taxed as real estate.

3. To improve a home by installing energy efficient improvements such as solar panels, heating or cooling systems, water heaters, insulation, weather-stripping/caulking, storm window/doors or other energy efficient improvements that are approved by the lender and VA.

4. To refinance an existing home loan to the following:

a. Cash-out refinance

b. IRRRL (Interest Rate Reduction Refinance) to reduce the interest rate.

379

Requirements for Approval

1. The applicant must be an eligible veteran who has available entitlement.

2. The loan must be for an eligible purpose.

3. The veteran must occupy the property as a primary residence within a reasonable period after the loan closes.

4. The veteran must be a satisfactory credit risk.

5. The income of the borrower(s) must be shown to be stable and sufficient to meet the mortgage payments and cover the cost of owning a home while taking care of other obligations and expenses and still have enough money left over to support their family.

380

Who is Eligible for a VA Loan?

•Military members who have served 181 days on active duty or three months during war time

•People who have spent at least a half-dozen years in the National Guard or Reserves

•Spouses of those killed in the line of duty

381

Great Loan Option for Veterans

• Not everyone who is eligible for a VA loan obtains one

• Program allows eligible veterans and active-duty service members to become responsible homeowners

• Today’s VA loan process is streamlined and efficient

382

Certificate of Eligibility

• First must obtain a Certificate of Eligibility (COE) from VA

• Formal Document that certifies VA entitlement and eligibility

• Entitlement is the amount of money the VA will guarantee on the loan

• COE can be requested online by the veteran or the lender

383

Steps for Determining Eligibility

384

How Does a Veteran Get a COE?

• Complete a VA Form 26-1880, Request for a Certificate of Eligibility.

• Submit a completed VA Form 26-1880, Request for a Certificate of Eligibility to the Atlanta Eligibility Center, along with proof of military service.

385

http://www.vba.va.gov/pubs/forms/VBA-26-1880-ARE.pdf






http://www.benefits.va.gov/homeloans/eligibility.asp

http://www.benefits.va.gov/homeloans/eligibility.asp

What is Acceptable Proof of Military Service?

1.If a veteran is still serving on regular active duty, they must include an original statement of service signed by, or by direction of, the adjutant, personnel officer, or commander of their unit or higher headquarters which identifies their social security number, and provides their date of entry on their current active duty period and the duration of any time lost.

386


2. If a veteran was discharged from regular active duty after January 1, 1950, a copy of DD Form 214, Certificate of Release or Discharge from Active Duty should be included with the VA Form 26-1880. If the veteran was discharged after October 1, 1979, DD Form 214 copy 4 should be included.

387


3. If the veteran was discharged from the Selected Reserves or the National Guard, they must include copies of adequate documentation of at least 6 years of honorable service.

388

How Does a Lender Get a COE?

1.The COE can be accessed at https://vip.vba.va.gov under WebLGY online database.

2.The lender inputs the data.

3.Determination is provided within seconds.

389

https://vip.vba.va.gov/

What if Eligibility Cannot be Determined?

1. The lender will receive an “unsuccessful” message which will state that the eligibility determination cannot be made and a reference number will be provided.

2. An “unsuccessful” message indicates that eligibility cannot be determined automatically by the lender. It does not necessarily mean that the veteran is not eligible.

390

Follow One of the Options to Determine Eligibility

391

What Documentation Will Be Needed to Obtain a COE?

392


393


394


To obtain copies of a points statement or other documentation that reflects 6 years of

participating along with evidence of honorable discharge the veteran must contact the following:

Branch Type of Form Telephone

Air Force Reserve Record of Service AF 526, Point Summary Sheet

(800) 525-0102

Air National Guard NGB Form 22, Report of Separation & Records of Service

(800) 525-0102

Army Reserve DARP Fm 249-2E or ARPC Fm 606, Chronological Statement of Retirement Points

(314)592-0123

Army National Guard NGB Form 22, Report of Separation & Record of Service

(314)592-0123

Navy Reserve NRPC 1070-124, Annual Retirement Point Record

(866)827-5672

USMC Reserve NAVMC 798, Reserve Retirement Credit Report

(800)268-3710

Coast Guard Reserve CG 4175, USCG Reserve Retirement Points Statement

(866)735-3897

395

Condition

Condition Condition Description

Active Duty Service Member Valid unless discharged or released subsequent to date of this certificate. A certification of continuous active duty as of date of note is required.

Subsequent Use Entitlement code of ‘5’ indicated previously used entitlement has been restored. The veteran must pay a subsequent funding fee on any future loan unless veteran is exempt.

Regular Military No condition description.

Reservist/National Guard Funding Fee Entitlement is based on service in the Selected Reserve and/or National Guard so increased Funding Fee is required.

One Time Restoration Entitlement previously used for 00-00-0-0000000 has been restored without disposal of the property, under provision of 38 U.S.C. 370b(4). Any future restoration requires disposal of all property obtained with a VA loan.

Refinance Restoration (Cash out) This Certificate of Eligibility is valid only for “cash out” refinance loan and is limited to the basic entitlement available shown on the certificate.

396

What if a Veteran Has Used Their Eligibility Already?

Basic Restoration Special Restoration

Restoration of previously used entitlement is possible if:

1. The VA guaranteed loan which secured the property has been paid in full and

the borrower no longer owns the property.

2. The loan listed was assumed by another veteran, who substituted their entitlement.

Special restoration occurs under the following circumstances:

1. The borrower is refinancing a loan that is listed on the COE as paid in full. This

would be used to get a restoration for refinance only.

2. The prior VA loan has been paid in full but the veteran has not sold the property securing the loan. This is referred to as a “one time restoration.”

Future COEs will indicate ONE TIME RESTORATION.

397

Applying for Restoration

1.Veteran must complete a VA Form 26-1880, Request for a Certificate of Eligibility.

398


2. Send the request to the Eligibility Center either by mail or electronically through WebLGY.

a.Include evidence of payment in full of any prior loans (i.e. HUD-1 Settlement Statement).

b.Any previously issued COEs.

399


3. If the veteran is applying for restoration in order to obtain another VA loan on the same property then the veteran should include a copy of the loan application submitted to the lender along with VA Form 26-1880.

400


4. Un-remarried surviving spouses applying for restoration of entitlement need to complete VA Form 26-1817, supplying the deceased veterans military service data and VA claim file number.

401

Using WebLGY

WebLGY is a VA system that allows lenders to guaranty a loan, determine eligibility or order an appraisal.

402

What Can You Do In WebLGY?

Rea-time guarantees Print duplicate loan guaranty certificates

Electronic 26-1880 to submit requests for COE when a determination cannot be made online

Search by VA loan number Prior loan validation Upload correspondence with COE application

View loan status, loan summary, history, and notification of audit selection

Pre-populates data previously entered into funding fee payment system & appraisal system

View the status of COE application

Submit loan analysis for prior approval loans

Real-time Certificate of Eligibility (COE) determinations

E-mail notification when electronic COE issued

Order an IRRRL case number Order Appraisals Print COE Search COE

403

Step 1

Step 1 Access WebLGY through the Veteran’s Information Portal

404

Step 2

405

Step 3

Step 3 Complete the

veteran’s information. If there is enough

information already in the system the COE

will automatically be generated.

406

Step 4

407

Step 5

408

Step 6

409

Step 7

410

VA IRRRLs

411

Maximum Guaranty on VA Loans

Loan Amount Loan Type(s) Maximum Potential Guaranty

Special Provisions

Up to $45,000 All 50% of the loan amount

Minimum guaranty of 25% on IRRRLs

$45,001 to $56,250 All $22,500 Minimum guaranty of 25% on IRRRLs

$45,251 to $144,000 All 40% of the loan amount, with the maximum of $36,000


Greater than $144,000

Must be for:

Purchase or construction of a home, or

Purchase of a condominium unit, or

Refinancing with an IRRRL

Up to an amount equal to 25% of the Freddie Mac single family conventional conforming loan limit


Any Joint Loans See Lender’s Handbook Section 7.1

Any Energy Efficient Mortgage

See Lender’s Handbook Section 7.3

Any Construction loans on which construction is incomplete

See Lender’s Handbook Section 7.2

Any Supplemental loans See Lender’s Handbook Section 7.5

412

VA does not have a

maximum

loan amount, the county

“limits” must be used to

calculate VA’s

maximum guaranty

amount for a particular

county. These limits

apply to all

loans closed August 6,

2012 through

December 31, 2012.

Ordering a VA Appraisal

• Several key functions of The Appraisal System (TAS), including the requesting of appraisals, and the issuance of Notices of Value (NOVs), have been moved to WebLGY.

• VA now uses WebLGY to order VA Appraisals.

413

Step 1 – Log into WebLGY

414

Step 2 – Click “Request Appraisal”

415

Step 3 – Select “Appraisal Type”

416

Step 4 – Enter Requestor Inforamtion

417

Step 5 – Verify Property Address

418

Step 6 – Review and Accept Responsibility of Terms

419

Step 7 – Print the Request for Appraisal – VA Form 26-1805

420

Step 8 – Upload Sales Contract

421

VA Funding Fee

• VA Funding Fee Tables, have been updated to note the current fees for loans closed November 22, 2011 through September 30, 2016. The changes are a result of Public Law 112-56, signed by the President November 21, 2011.

(38 CFR 36.4312(e))

422

Lenders Responsibilities – VA Funding Fee

• Verify if the veteran may be exempt from the funding fee

• Determine the amount of the funding fee

• Collect the funding fee at closing

• Remit the funds to VA in a timely manner

• Obtain proof of payment online

• Submit proof of payment of funding fee or exemption to VA along with the closed loan package when applicable

423

Exemptions – VA Funding Fee

424

If a Veteran was disabled/discharged

and get re-enlisted they are considered

eligible.

Changed in 2010.

VA Funding Fee Schedule

Type of Veteran Downpayment Percentage for

First time Use

Percentage for

Subsequent Use

Regular

Military

None

5% or more 10% or more

2.15%

1.50% 1.25%

3.3% *

1.50% 1.25%

Reserves/

National Guard

None

5% or more 10% or more

2.4%

1.75% 1.5%

3.3% *

1.75% 1.5%

425

VA Funding Fee – Cash-Out Refi

Type of Veteran Percentage for First

Time Use

Percentage for

Subsequent Use

Regular Military 2.15% 3.3% *

Reserves/National Guard 2.4% 3.3% *

426

VA Funding Fee - IRRRLs

Type of Loan Percentage for Either Type of Veteran Whether

First Time or Subsequent Use

IRRRLs .50%

Manufactured Home Loans (NOT permanently affixed)

1.00%

Loan Assumptions .50%

427

Using FFPS

Enter the Lender ID and Password to log into the system Select the function you wish to perform to complete the action

428

Important Notes

• When inputting a new funding fee, the system will automatically calculate the amount owed.

• After a funding fee payment has been made, a receipt will be available to print off within 24 hours.

• Loans cannot be guaranteed for 24 hours after funding fee payment is made.

• A record needs to be generated for all veterans, exempt or non-exempt.

429

Loan Guaranty Certificates

• Most information will be pre-populated from the Funding Fee Payment System (FFPS) and WebLGY. Be sure to check this data’s accuracy! If the pre-populated data is incorrect, it will have to be corrected at its source (FFPS or WebLGY).

430

Loan Guaranty Certificates

• Reference VA Loan Summary Sheet (26-0286), for the additional information needed.

• Before guaranteeing a loan, a funding fee has to be paid in the Funding Fee Payment System. A record must be established for exempt veterans as well.

• WebLGY will display cases required to be submitted for full review.

• Print duplicate Loan Guaranty Certificates through WebLGY.

431

Modified Guaranty Submission Procedure

1. VA Form 26-0286, Loan Summary Sheet

2. Certificate of Eligibility (VA Form 26-8320)

3. Print out of the Funding Fee Receipt or VA Form 26-8937 if the borrower is exempt

4. Notice of Value

5. Report and Certification of Loan Disbursement (VA Form 26-1820)

6. HUD-1 Settlement Statement

7. Mailing address and e-mail which may be used in requesting file for full review or post audit

432

Module Three – Session Two

VA Origination Fee Requirements

• Processing Fee

• Application Fee

• Document Preparation Fee

• Lender Inspection

• MERS Fee

• Attorney Fees for Document Preparation

• Administration Fee

• Underwriting Fee

• Wire Fee

• Mortgage Broker Fee

• Commitment Fee

• Lock Extension

434

VA Origination Fee Requirements

• VA limits the amount in “our origination charge” to 1% of the loan balance, plus the MERS fee.

• IRRRLs: the 1% is based on the payoff amount of the previous loan, as indicated on the HUD-1.

• Use VA Form 26-8923, IRRRL Worksheet, for the calculation.

435

Itemized Fees and Charges

• The veteran can pay a maximum of the following:

•Reasonable and customary amounts for any or all of the “Itemized Fees and Charges” designated by the VA, plus

•A 1% flat charge by the lender, plus

•Reasonable discount points.

436

Unallowable Charges to the Veteran

• The Pest Inspection is an unallowable charge to the borrower if it is a requirement of the Notice of Value (NOV).

• Fees or commissions charged by a real estate agent or broker in connection with a VA loan

• The lender may not charge the borrower for attorney’s fees. Reasonable fees for title examination work and title insurance can be paid, however, by the borrower.

437

Unallowable Charges to the Veteran

• A veteran cannot use loan proceeds to pay penalty costs for prepayment of an existing lien or penalty costs required to discharge any existing liens on the seller’s property.

• In proposed construction cases in which the dwelling was constructed under HUD supervision, the cost of any inspections or re-inspections must be borne by the builder or sponsor and are not chargeable to the veteran.

438

Seller Concessions

439

Seller Concessions Include

• Payment of the buyer’s VA funding fee

• Prepayment of the buyer’s property taxes and insurance

• Gifts such as a Refrigerator or TV

• Payment of extra points to provide permanent interest rate buy downs

• Provision of escrowed funds to provide temporary interest rate buy-downs, and payoff of credit balances or judgments on behalf of the buyer

440

Seller Concessions Do Not Include

• Payment of the buyer’s closing costs, or

• Payment of points as appropriate to the market.

441

Required Documents

442

Common VA Forms

Form Number Title or Description

26-0285 VA Transmittal List

26-0286 VA Loan Summary Sheet

26-0503 Federal Collection Policy Notice

26-0551 Debt Questionnaire

26-0592 Counseling Checklist for Military Homebuyers

26-1802a HUD/VA Addendum to Uniform Residential

Loan Application

26-1817 Determination of Loan Guaranty Eligibility-Unmarried Surviving Spouse

26-1820 Report and Certification of Loan Disbursement

26-1859 Warrant of Completion of Construction

26-1880 Request for Certificate Eligibility

26-6393 Loan Analysis 26-8497 Request for Verification of Employment

26-8736a Non-supervised Lender’s Nomination and Recommendation of Credit Underwriter

26-8812 VA Equal Opportunity Lender Certification

26-8923 Interest Rate Reduction Refinancing Loan Worksheet

26-8937 Verification of VA Benefits

443

VA Forms are Available Online

444

Prior Approval Loans

• Joint Loans

• Loans to veterans in receipt of VA non service-connected pension

• Loans to veterans rated incompetent by VA

• IRRRLs made to refinance a delinquent VA loan

• Manufactured home loans (except when the manufactured home is permanently affixed to a lot and considered real estate under State law)

• Cooperative loans

445

Joint Loans

A joint loan is made to the following:

– The veteran and one or more non veterans (not spouse).

– The veteran and one or more veterans (not spouse) who will not be using their entitlement.

– The veteran and one or more other veterans (not spouse), all of whom will use their entitlement.

446

Occupancy on Joint Loans

1.A veteran and their future spouse will receive the maximum available guaranty only after they marry. Otherwise, it would be half, in accordance with the joint loan guidelines.

2.Any joint loan for which title to the property will be held by the veteran and any person other than the veteran’s spouse must be submitted for prior approval.

3.Veteran/Non-veteran Joint Loan – Guaranty is limited to that portion of the loan allocable to the veteran’s interest in the property.

447

What Does This Mean?

• Veteran can purchase a home with any individual they choose to, however; VA will only guarantee the portion of the loan attributed to the veteran.

448

Two Certificates

• Cannot double the guaranty or loan amount.

• Calculated based on the loan amount and cannot exceed the $104,250.

449

Underwriting Guides

• Similar to conforming and FHA.

450

Credit

• Will analyze past credit

• Borrower who has made timely payments in last 12 months show their willingness to repay

• Borrower who has continuous slow payments, judgments, etc. is not a good candidate.

451

Judgments

• A VA Home Loan cannot be approved with any unpaid judgments.

• There are instances when the veteran is on an acceptable re-payment plan with an acceptable payment history. You will want to discuss these options with your lender.

452

Federal Debts

• All Federal Debts must be paid in full and in a non-collectable status or have a repayment plan with an acceptable payment history in place.

• Check with your lender for more details and/or requirements.

453

No Credit

• A veteran with a lack of references for credit is not necessarily a reason for not getting approved for a VA Home Loan.

• VA will allow for instances when a veteran may provide references from non-traditional sources of credit as a means of credit verification.

• Check with your lender for additional information and/or overlays.

454

Collection Accounts

• A veteran with an acceptable credit history does not become acceptable simply by paying off collection accounts prior to approval.

• VA considers a borrowers overall credit history and may in fact view collection accounts as un-favorable.

• A borrower with an overall favorable credit history might be considered as acceptable for a VA Home Loan if this is an isolated unpaid collection.

• Check with your lender to determine additional requirements or guidelines.

455

Consumer Credit Counseling

• A veteran who is using a consumer credit counselor should have a 12 month timely payment history.

456

Bankruptcy

• Chapter 13

• In order to be considered for a VA Home Loan, a veteran must have a satisfactory payment history of 12 months and have approval from the court.

• Chapter 7

• VA requires 24 months of timely payments after a Chapter 7 Bankruptcy before they will consider a veteran for a VA Home Loan.

457

Life Events

• Divorce

• VA lender may disregard delinquent payments made after assignment of responsibility has been made to the ex-spouse.

• Short Sales

• In this situation VA looks at this as a loss to the Government. VA will however consider on a case by case basis as the short sale may have been caused by circumstances outside the borrower’s control. Check with your lender for additional information and guidance.

458

Income

• All VA loans must be fully documented. This includes the income of the co-veteran spouse.

• Processed 4506-T transcripts must be reviewed and approved prior to the loan closing/funding on every loan.

• The most recent two years of income must be validated, or as determined by AUS with a minimum of one year verification required.

• If the IRS returns “no transcripts available” for the time period requested, proof of extension and the most recent years’ IRS transcripts available, as determined by the AUS certificate, are required.

459

VA Form 26-6393

• Only verified income can be considered in total effective income.

• The income calculation and analysis performed by the underwriter to determine the veteran’s income must be documented in the file.

• VA Form 26-6393 is used by the underwriter to analyze the veteran’s income, debts and creditworthiness.

•

460

Income

Type of Income General Time Requirement

Standard Income Minimum of 12 months (may include training or related experience)

Overtime or Part-time Minimum of 2 years

2nd Job Income Minimum of 2 years Public Assistance Continuance for at least 3 years

Workers Compensation Continuance into the foreseeable future Seasonal Income Documented history and evidence that the

income will continue into the foreseeable future

VA Pension Contact VA directly. It is unlikely that the

veteran may use this income to qualify VA Educational Allowance Cannot be used as a source of income

461

Standard Documentation

• VA uses standard income documentation when evaluating a borrower for a VA Home Loan.

• Any income that cannot be verified cannot be used.

• A minimum of two years employment history should be verified.

• VA requires an original or certified copy of the borrower’s pay stub.

• Underwriters will compare the pay stub with employment verification for consistency. If a spouse is on the application, the spouse’s income may be used.

462

Alternative Documentation

• Telephone verifications should be obtained and similar in content to the employment verification form. Phone verifications should show the person contacted, their position, phone number and the date they were contacted.

• Furnish the original pay stub(s) covering the most recent 30 day period together with W-2 forms for the previous 2 years.

463

Alternative Documentation

• If documents are questionable in authenticity/consistency, or if the employer is unwilling to provide a verbal verification, then a standard verification of employment form is required.

• Alternative documentation can be used in conjunction with Verification of Employment forms to meet the two-year period requirement.

• “Full” Verification of Employment through “The Work Number for Everyone,” a service of the TALX Corporation. (No pay stub is needed with the “Full” TALX verification.)

• Reference: Lender’s Handbook, VA Pamphlet 26-7, Revised, Change 4, Chapter 4.

464

Reservists, National Guard & Active Duty

• Veterans who have less than one-year remaining time in service (ETS date) must certify that they are going to re-enlist, along with their commander certifying they are eligible to re-enlist. If the applicant does not plan to continue with the military, they must provide a firm job commitment or contract from the new employer verifying the job position, rate of pay, starting date, hours scheduled per week and probability of continued employment.

465

Reservists, National Guard & Active Duty

• The continuation of military pay/allowances must be determined to count as income. If the duration of these pay/allowances cannot be determined then the pay/allowances will only be used to offset intermediate debts of 24 months or less. It is up to the lender to separate the allowances into taxable and tax-free categories.

466

Leave and Earning Statement (LES)

467

LES Dates

• Leave and earnings statements must be no more than 120 days old as of the date of closing on standards loans. LES must be no more than 180 days old on construction loans.

468

Troubleshooting LES

If all zeros or all nines appear in the “ETS” date you must do one of the following items:

1.Provide documentation that they have re-enlisted for a period extending at least 12 months.

2.Provide evidence that the veteran has a firm offer of employment.

3.Obtain a statement from they intend to re-enlist for a period extending at least 12 months. Include a statement from their commanding officer which confirms that they are eligible to re-enlist and that they have no reason to believe that re-enlistment won’t be granted.

469

Self-Employment Income

• Applicant has been self-employed for a period of at least 2 years.

• Must provide copies of the past 2 years business and/or individual tax returns.

• Current year-to-date profit and loss (P&L) statements and balance sheets are required.

• Normal business expenses may be “added-back” to the net profit.

• Business debts that list the names of a Sole-proprietor on a Schedule C must be counted against the veteran on the loan analysis.

• Must furnish a list of primary owners and their percentage of ownership in the business on all partnerships and corporations.

• Taxable income that is listed on the bottom of a corporate tax return (IRS Form 1120) may be divided by the veteran’s percentage of ownership and then used as additional income.

470

Commission Income

• A verification exhibit is needed when a major portion of a veteran’s income is coming from commission. The exhibit must show the year-to-date commissions, the basis for computing the commission and how frequently commissions are paid.

• Commission income should be averaged over a 12 to 24 month period.

471

Rental Income – Multi-family

• Cash reserves totaling 6 months PITI, and

• Documentation of the applicant’s prior landlord or property maintenance experience.

• The amount of rental income used on existing units is based on 75% of the prior verified rent, unless a higher percentage can be documented.

• If the units are proposed property, then VA would require a letter from the appraiser stating the “fair rental value” and a vacancy/operating cost reduction of that rental figure.

472

Rental of Existing Property

1.Both the current and proposed monthly housing expenses must be used to qualify.

2.Must be a positive cash-flow and no indication that the property will be difficult to rent.

3.A copy of the lease should be furnished (when available).

4.When using rental income to “off-set” the mortgage payment, the debt should be listed on the loan analysis but shown as the “rental offset.”

5.If the existing SFR property is located in a weak rental market or has a negative cash flow then the rental income and expenses must be listed separately on the loan analysis.

473

Underwriting

• Underwriter will verify that every aspect of the VA mortgage loan meets the guidelines of the VA Home Loan Guaranty Program.

• All VA loans are underwritten to VA guidelines.

474

Debts and Obligations

ECOA prohibits request for or consideration of, credit information on a spouse

who will not be contractually obligated on the loan except for the following:

• If the applicant is relying on alimony, child support or maintenance payments

from the spouse (or former spouse), or

• In community property states, consider the spouse’s credit information whether

or not the spouse will be personally liable on the note and whether or not the

applicant or spouse chooses to have income considered.

475

Debts and Obligations

476

Assets

The borrower(s) must have sufficient cash to cover the following items:

• The closing costs or points which are not financed in the loan.

• The down payment, if a Graduated Payment Mortgage, and

• The difference between the sales price and the loan amount, if the sales price exceeds the reasonable value established by VA.

477

Debt to Income Ratio

478

What is an IRRRL?

• The Interest Rate Reduction Refinancing Loan IRRRL is the VA’s term for Rate & Term Refinance.

• An IRRRL can be used when a veterans is reusing their entitlement on a VA to VA refinance.

479

Who Qualifies for an IRRRL?

Parties Obligated on the

Current VA Loan

Parties to be Obligated on

the New VA Loan - IRRRL

Is an IRRRL Possible?

Unmarried veteran Veteran and new spouse YES

Veteran and spouse Divorced veteran alone YES

Veteran alone Different veteran who has

substituted entitlement

YES

Veteran and spouse Souse alone (veteran is

deceased)

YES

Veteran and non-veteran join

loan obligors

Veteran alone YES

Unmarried veteran Spouse alone (veteran is

deceased)

NO

Veteran and spouse Divorced spouse alone NO

Veteran and spouse Different spouse alone

(Veteran is deceased)

NO

Veteran and non-veteran

joint loan obligors

Non-veteran alone NO

480

IRRRLs and COE

A Certificate of Eligibility is NOT needed for

IRRRLs.

Lenders will verify a veteran’s active loan through

the Prior

Loan Validation feature under the Eligibility menu

in WebLGY.

http://vip.vba.va.gov/

481

http://vip.vba.va.gov/

Required IRRRL Forms

Required IRRRL Form Checklist

Lender’s cover letter (if used or required by the lender)

VA Form 26-0285 - VA Transmittal List

VA Form 26-0286 - VA Loan Summary Sheet

VA Form 26-8320 - Certificate of Eligibility – (Automated Certificate of Eligibility generated

through WebLGY, or print screen of the Prior Loan Validation through WebLGY.

Print out of the Funding Fee Receipt issued through the on-line Funding Fee Payment System

or VA Form 26-8937, Verification of VA Benefits Form to evidence veteran is exempt.

Statement signed by the veteran acknowledging the effect of the refinancing l oan on the

veteran’s loan payments, interest rate and term of the loan.

1. Statement must show the interest rate and monthly payments for the new loan versus

the old loan.

2. Statement must show how long it will take to recoup all closing costs(both those

included in the loan and those paid outside of closing). The statement should read as

follows: “Your monthly payment decreased by $50; you paid $5,000 in closing costs

and it will take 100 months to recoup the closing costs ($5,000 divided by $50).

3. If applicable, the veteran’s statement may be combined with the lender’s certification

that the veteran qualifies for the new monthly payment that exceeds the previous

payment by 20% or more.

VA Form 26-8923 - IRRRL Worksheet (Includes CAIVRS number)

VA Form 26-1820 - Report and Certification of Loan Disbursement

VA Form 26-8937 – Verification of VA Benefits (if applicable)

HUD-1, Settlement Statement

VA Form 26-0503 – Federal Collection Policy Notice; or URLA and VA Form 26-1802a

Lender’s certification that the prior loan is current (not 30 days or more past due) at the time

of closing.

If loan is submitted more than 60 days after loan closing, a statement signed by a corporate

officer of the lender which identifies the loan, provides the specific reason(s) for late reporting

and certifies that the loan is current.

Documentation of the cost of energy efficiency improvements included in the loan. For cash

reimbursement to the veteran, the improvements must have been completed within the 90

days immediately preceding the date of the loan.

Arm Disclosure (if applicable)

Check with lender for additional requirements.

482

VA Regional Centers

RLC States Covered Phone Email Address

Atlanta GA, SC, NC, TN 888-768-2132 [email protected] PO Box 100023

Decator, GA 30031

Cleveland NJ, DE, PA, OH, IN,

MI

800-729-5772 [email protected] 1240 East 9th

St

Cleveland, OH

44199

Denver AK, CO, ID, MT,

OR, UT, WA, WY

888-349-7541 Vavbaden/[email protected] 155 Van Gordon St

Denver, CO 80228

Houston AR, OK, LA, TX 888-232-2571 [email protected] 6900 Alameda Rd

Houston, TX 77030

Manchester CT, MA, ME, NH,

NY, RI, VT

800-827-6311 [email protected] 275 Chestnut St

Manchester, NH

03101

Phoenix AZ, CA, NV, NM 888-869-0194 Vavbaph/ro/[email protected] 3333 N. Central

Ave

Phoenix, AZ 85012

St. Petersburg AL, FL, MS, PR 888-611-5916 Fl/[email protected] 9500 Bay Pines

Blvd

St. Petersburg, FL

33708

Roanoke DC, KY, MD, VA,

WV

800-933-5499 [email protected] 210 Franklin Rd SW

Roanoke, VA 24011

St. Paul IA, IL, KS, MN, MO,

ND, NE, SD, WI

800-827-0611 [email protected] 1 Federal Dr

St. Paul MN 55111

Hawaii HI 808-433-0481 (Not an RLC. Only handles

HI Loans)

483

Regional Loan Center

484

Module Four Understanding the SAFE Act

485

Course Objectives

• Understand the requirements of the SAFE Act as it relates to licensing as a Mortgage loan originator

• Know the requirements for obtaining and retaining a national license with the Nationwide Mortgage Licensing System and Registry

• Define what the licensing requirements are of a State Licensed Mortgage loan originator and the registration requirements are for a Registered Mortgage loan originator

• Recognize how education, reporting and personal history are important for licensure and consumer protection

Function of Mortgage Loan Originator

• Mortgage loan originators bring together borrowers and lenders

• Typical lenders banks, credit unions, life insurance companies, pension funds, real estate investment trusts, and wholesale lenders who specifically target the mortgage market

Unique Identifier

• One source for registration and/or licensing and registration of residential mortgage originators

• Unique identifier number is required on all 1003’s

Title V of P.L. 110-289

Definition of Mortgage Loan Originator

• A mortgage loan originator is “an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain.”


State-licensed Mortgage Loan Originator

• Must register with NMLS

• Receive Unique Identifier Number

• Submit fingerprints to the Nationwide Mortgage Licensing System and Registry (NMLS) for submission to the FBI for a criminal background check

• Provide authorization for NMLS to obtain an independent credit report. Applicant has demonstrated financial responsibility, character and general fitness

State-licensed Mortgage Loan Originator

• Applicant has met either a net worth or surety bond requirement or paid into a State fund, as required by the State

• Complete 20 Hours of Pre-License Education (PE) (State may require additional PE)

• Successfully pass Federal and State tests with minimum 75% passing grade

• Complete Federal requirement of 8 Hours of Annual Continuing Education (CE)

• Each mortgage licensee must submit to NMLSR a Report of Condition

• State-licensed MLOs must meet any additional state licensing requirements

Registered Mortgage Loan Originator

• Must register with NMLS

• Receive Unique Identifier Number

• Submit fingerprints to the Nationwide Mortgage Licensing System and Registry (NMLS) for submission to the FBI for a criminal background check

Mortgage Loan Originator Does Not Include

• Any individual who is not otherwise described in the previous clause and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause.


• A person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable state law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator.


• A person or entity solely involved in extensions of credit relating to time share plans.

SAFE Act Excludes

• Any individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member of the individual (spouse, child, sibling, parent, grandparent, grandchild, stepparents, stepchildren, stepsiblings, and adoptive relationships) or any individual who offers or negotiates terms of a residential mortgage loan secured by a dwelling that served as the individual’s residence.

Loan Processors

• “an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of—(i) a State-licensed loan originator; or (ii) a registered loan originator.”


The NMLS

• HUD appointed the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry.

History of CSBS and AARMR

• CSBS

• AARMR

• SRR

• NMLS

• Protect consumers

• Improve supervision and enforcement of licensed entities

• Streamline licensing

Intentions of SAFE Act

• Uniform system for license applications and reporting requirements.

• Creation and maintenance of a comprehensive licensing and supervisory database for mortgage loan originators.

• Increased accountability and tracking of loan originator.


• Greater consumer protection and support for anti-fraud measures.

• Easily accessible information, offered to consumers at no charge, including the employment history of originators and any disciplinary and enforcement actions against them.

• Comprehensive training and examination requirements related to subprime mortgage lending.


• Initial responsibility was designated to the (HUD), as of July 21, 2011, - (CFPB).

• Keep records of consumer complaints on behalf of state mortgage regulators.

• Establish a means for originators to be required to act in the best interests of the consumer.

SAFE Act Requirements

• All individuals who originate loans hold a unique identifier.

• Unless with a Federally-insured depository institution, must be registered with the NMLS and licensed with the state(s) in which they do business.

(Title V of P.L. 110-289, the SAFE Act, Section 1503(12))

Minimum Standards

• The applicant has never had a loan originator license revoked in any governmental jurisdiction.

Minimum Standards

• Not been convicted of, or plead guilty or nolo contendere to, a felony in a domestic, foreign, or military court—(A) during the 7-year period preceding the date of application for licensing and registration; or (B) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering.

Minimum Standards

• The applicant has demonstrated financial responsibility, character, and general fitness such as to command the confidence of the community and to warrant a determination that the loan originator will operate honestly, fairly, and efficiently within the purpose of this title. Each state has established their own standards for meeting financial responsibility. It is up to each state regulator to independently review the credit information of mortgage loan originator who is licensed in their jurisdiction. There is not an automated standard or minimum credit score enforced by the NMLS. The SAFE Act established the ability for each state to establish its own standard. It is up to the discretion of each state regulator to develop their own processes and standards for reviewing credit information and determining the financial responsibility of their licensees.

Additional Requirements

• Education

• Pass a written test

• Met either a net worth or surety bond requirement, or paid into a State

Background Check

• Fingerprints, criminal history, and a credit report.

• The credit report items vary by state.

• Visit your state licensing organization’s Web site for more information.

Pre-Licensure Education

• 3 hours Federal law & regulations

• 3 hours ethics, to include fraud, consumer protection and fair lending issues; and

• 2 hours training regarding non-traditional loan products.

• 12 hours elective material

• All courses will be reviewed and approved by NMLSR

• Several States have elected for additional PE requirements

Testing

• State and Federal Testing

• Refer to Appendix B for the National MLO testing handbook, available through the Nationwide Mortgage Licensing System (NMLS) Web site.

Requirements for MLO License

• Keep record in NMLS up-to-date Continuing education (before renewal request)

– 8 hours each year

• 3 hours Federal Laws and Regulations

• 2 hours Ethics

• 2 hours Non-traditional loans

• 1 hour of elective (Check with NMLS to determine if your state has additional requirements)

• Renewal Begins(November 1 – December 1)

• Should be taking your CE before December 1, 2011

NMLS Site

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Professional Standards

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CE or No-CE??

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When Does CE HAVE to Be Completed?

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For Example: The deadline to complete CE is December 31, 2012.

However, MLOs in Alabama are prohibited from submitting an

application to renew their license if they have not completed CE. Since

it may take as long as seven (7) days for a course provider to report a

course completion into NMLS, MLOs are strongly encouraged not to

wait until the last minute to try to complete CE or they may be

prevented from submitting for renewal on time.

Verifing CE

System Checks to Verify CE Completion Prior to Renewal

• Enhanced system functionality was launched in the fall of 2011 to enable a state to choose to prevent an MLO from submitting for licensure renewal if he/she has not completed 8 hours of CE.

• If the system detects that an MLO has not completed CE in any year immediately following PE, the system is will prevent the MLO from renewing their license.

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Education Resources

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How Do My Hours Get to the NMLS?

• NMLS Requires NMLS Approved Course Providers to submit completed hours to the NMLS electronically every week.

• Check your NMLS Records.

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Course Completion Record

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Company CE Report

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Company CE Non-Compliance Report

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State CE

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State CE

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State CE Reporting Example

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Late CE Courses

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Reinstatement Period

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Late CE Courses

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Continuing Education

• 8 hours “shall include at least—(A) 3 hours of Federal law and regulations; (B) 2 hours of ethics, which shall include instruction on fraud, consumer protection, and fair lending issues; and (C) 2 hours of training related to lending standards for the nontraditional mortgage product marketplace.” (Title V of P.L. 110-289, the SAFE Act, Section 1506(b)

State Additional CE and Deadlines

• Many states elected to add additional requirements on top of the minimum requirement of 8 hours. If a mortgage loan originator is licensed in more than one state then they must complete the minimum standards of the 8 core CE requirements plus any additional state required CE hours.

• CE requirements must be completed prior to license renewal deadline on December 31st.

NMLS Course Providers

• NMLS to approve all course providers and courses.

• Refer to state for additional state requirements.

CE Annual Completion

• Many States prohibit licensees from submitting an application to renew their license if they have not completed CE.

• It may take as long as seven (7) days for a course provider to report a course completion into NMLS.

• Many States are encouraging mortgage loan originators not to wait until the last minute to try to complete CE or they may be prevented from submitting for renewal on time.

• Some states, such as Georgia will assess a $100 late fee outside of NMLS if CE is completed after October 31, so be sure to check with your state to determine if there are additional CE deadline, requirements or fees.

Successive Year Rule - Late CE

• Successive Year Rule - The SAFE Act's Successive Year Rule requires originators to complete 8 hours of CE every year and mandates that an MLO may not take the same course two years in a row.

• Late CE - If a mortgage loan originator was required to take continuing education (CE) and failed to do so, must complete a Late CE course in order to satisfy the requirement for licensure.

• Loan originator returning to the industry, requires satisfaction of any CE deficiency for the last year licensed.

License Renewal

• Beginning November 1st of each year licensees can begin the renewal process.

• The renewal process begins at the NMLS site.

• The renewal process includes attesting that you have met the requirements listed in the attestation language.

License Renewal

• To complete the streamlined renewal process in NMLS, attestation must be completed for each jurisdiction before a renewal request can be submitted by you or your sponsoring company.

• Individuals are responsible for submitting a renewal request when they have un-sponsored licenses or when their company has instructed them to do so. Individuals should check with their sponsoring company to determine who will facilitate the renewal process.

Steps to Renewing

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Steps to Renewing

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Steps to Renewing

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Steps to Renewing

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Mortgage Call Report

• The SAFE Act requires that all state mortgage licensees must submit a report of condition as required by the NMLS. The NMLS Mortgage Call Report was developed by state regulators.

Mortgage Call Report

The Standard MCR contains two components:

•Residential Mortgage Loan Activity (RMLA) - This component collects application, closed loan, individual mortgage loan originator, Line of Credit and repurchase information by state.

•Financial Condition (FC) – This component collects financial information at the company level. It does not have to be completed by state.

Requirements for Company License

• Keep record in NMLS up-to-date

• Financials

• Annual report (Check with your State)

• Call report (May 15, August 14, November 14, February 14)

• Surety bond (Check with your State Requirements)

• Renewal Period (Begins November 1st)

MCR Requirements

• Timing

o 45 days after end of calendar quarter

May 15th

August 14th

November 14th

February 14th

• Standard vs. Expanded

o Other Business

Questions About MCR

Questions About MCR (con’t)

Why It’s Important

• The mortgage industry has seen a deluge of regulatory changes over the past few years.

• The SAFE Act brought about standardization for licensing and registration for all mortgage loan originators.

• Also provides transparency which is very important for consumer protection.

Best Practices

Complete your CE early!

State Requirements

Verify Your State Requirements

• Many states have additional requirements in place for continuing education

Check for State Deadlines

• Many states have deadlines in place for CE completing and license renewal that is sooner than the December 31st annual deadline.

Consumer Protection

www.nmlsconsumeraccess.org

http://www.nmlsconsumeraccess.org/

Test Time

• Test is given at end of class

• Written test

• 25 questions

• Passing score is 70% or higher to receive NMLS Credit

• Will only communicate failures

• If you fail you can take test second time

• The test will be administered via online link at OnlineEd

• You will need to verify identification when taking test

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Congratulations!

1. Complete and Submit Survey

2. Complete and Submit Test

3. Verify NMLS Number and Information and Sign Out

4. You will receive an email from OnlineEd within the next 48 hours with a username and password to obtain your CE certificate of completion for your records

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Reporting

• OnlineEd will communicate your CE hours to the NMLS

• Allow for 48 hours for hours to be uploaded into the NMLS site

• Questions contact OnlineEd - [email protected]

• You will receive an email from OnlineEd within the next 48 hours with a username and password to obtain your CE certificate of completion for your records

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mailto:[email protected]

Thank You!

• C2012 Go2Training, ALL RIGHTS RESERVED. Published by Online Ed, Inc. Duplication or transmission is not permitted. United States of America and foreign copyright laws protect this publication. The content of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the copyright holders. Permission is granted to print the material for personal use only.

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safe act 8 hour comprehensive live for all states final ginger's september 20 2012

Economy & Finance