Category Archives: Mortgage Banking

Protect Yourself – Mortgage Fraud is on the Rise

The risk of fraud in mortgage application increased at the end of the second quarter, according to the latest quarterly Mortgage Fraud Risk Index released by CoreLogic on Thursday. CoreLogic said that the index rose to 149 for the second quarter, trending up 12 percent from the same period last year and rising 3 percent from the previous quarter.

The report said that Q2 2018 was the seventh consecutive quarterly increase in mortgage fraud risk. The Mortgage Fraud Risk Index is calculated from the aggregation of individual loan application fraud risk scores during the previous quarter.

Compared to 62 percent in Q1, purchase applications accounted for 72 percent of all transactions in Q2, the report indicated, as purchase volumes rose during the spring season. However, it found that refinances were at the lowest level since the index started reporting these trends in 2010, CoreLogic said.

“There is an increase in borrowers applying for loans on multiple properties,” the report said. “While the tight housing inventory and competitive market likely play a role, data also shows investors purchasing multiple properties concurrently and at times dividing loan applications across lenders.”

The index also found an increase in identity discrepancies. It also noted red flags on income reasonability during the quarter.

Regionally, Florida led the states with the most number of metros with the highest fraud risk. In fact, the Lakeland-Winter Haven metro area had the most significant increase in the fraud risk index at 20 percent. According to the report, the increase was due to high-risk flags in this region that included investors rapidly acquiring multiple rental properties, and the potential use of owner-occupant financing to obtain these properties.

Other Florida regions on the list included Miami-Fort Lauderdale-West Palm Beach; Tampa-St. Petersburg-Clearwater; Deltona-Daytona Beach-Ormond Beach; and Orlando-Kissimmee-Sanford.

Oklahoma City, Oklahoma saw a quarter-over-quarter drop in mortgage fraud risk by 24 percent. Memphis, Tennessee also saw a decline of 10 percent.


Interesting Overview of the Current Housing Market


Median incomes have lagged home price increases in hot West Coast markets, raising fears of a housing bubble.

Rents have been falling while prices continue to rise, driven by irresponsible lenders in the jumbo market.

Summer is traditionally the best time to sell a home, but recent headlines show sales activity is starting to slow in markets across the country.

Over the last seven years, home prices in California, Nevada, Oregon, and Washington have surged. Unfortunately, these price surges are the result of speculative activity and not based on consumers’ ability to afford homes over the long run. You can read my first round of analysis from earlier this month here on the United States and Canadian real estate markets.

Rents Are Falling, But Prices Are Surging

Sam Dogen at the Financial Samurai recently showed that rent prices have held steady and even fallen in hot markets such as San Francisco and Seattle over the last year or two. Prices have risen further, while rents have not. This isn’t a good sign.

The question I would pose to readers is this: If the housing market is so unstoppable, why are rents not going up anymore? Maybe, more of the surge in housing prices is due to speculation and less due to consumers’ ability to afford the homes. Falling rents should be a flashing red signal for informed buyers. In spite of this, the housing market has continued to charge higher because of loose standards in the jumbo market. I believe the culprit is a new crop of lenders who are outside of Fannie Mae and Freddie Mac regulations on FICO scores and DTI. For example, San Francisco lender Social Finance (SoFi) is offering up to 3 million dollar loans with 10 percent down and “flexible DTI.”

Firms like SoFi are the engine driving the madness in the California housing market. SoFi was founded in 2011, right at the start of the new housing boom, and by 2014, they started making jumbo mortgage loans for only 10 percent down. Here’s what Michael Tannenbaum, former Vice President of SoFi, had to say about their loans in 2016, “Sixty-five percent of the business we do is first-time home buyers; it’s a big deal we’re opening up to the jumbo first-time market.” A year later, he was gone. Other gems from the San Francisco Chronicle article – SoFi’s average loan at the time was $800,000 and two-thirds were in California. I shudder to think what their average loan size and DTI is now. Also, in addition to not being big fans of debt to income ratios, SoFi isn’t big on using other traditional measures like FICO scores to evaluate borrowers. In 2016, they declared their company a “FICO Free Zone” in a press release. Said a former business development associate, “The volume of applications coming in was crazy.” Other sources reported on the wild sex culture at the firm. As for their underwriting practices? As long as housing prices went up, they were more or less irrelevant. But, if prices go down, SoFi and their backers stand to lose a lot of money.

The housing market is typically strongest in the summer. So why are all these negative headlines piling up?

Savvy real estate investors and home buyers know the best time to sell residential property is from late spring through summer, and the best time to buy is during the period from Thanksgiving through the end of January – the dead of winter. There is some interesting psychology to this. The average days on market for properties are much higher in the winter than during the summer, so you have more motivated sellers and fewer buyers. Also, sellers, including banks, are more likely to accept offers further below asking price during this period. It might be that buyers don’t see the potential of properties in snow-covered cities like Chicago and Minneapolis. But you also see the same effect occur in places with milder winters, like Dallas-Fort Worth and San Francisco. Conversely, the best time to sell a property is during the summer. Most buyers with school-age children won’t even consider moving them during the school year, and homes and yards look their best during the summer.

Portland is seeing properties start to pile up at higher price points. Seattle is reporting a “slight slowdown.” Listings are piling up in Orange County, California, and foreclosures are up. The Wall Street Journal put out an article two days ago titled, “Housing Market Stumbles at Beginning of Summer.” Pending home sales just hit a 4-month low, and the National Association of Realtors justifies it by blaming it on “low inventory,” rather than a lack of buyers willing and able to pay asking prices.

You can deny that the media is accurately reporting on this, but you can’t deny that the headlines are changing. In the last couple of years, instead we would be seeing headlines like “6 Ways to Win a Bidding War,” or “Good Luck Buying a Home in This Hot Housing Market.” All these new and negative articles are from markets that I predicted would see the most trouble and have the greatest discrepancies between prices and incomes. Here’s the map I showed in the first article again. Note that all these article headlines that are specific to a metro area are coming from relatively unaffordable markets. My theory is that the West Coast markets that have appreciated so much have done so not because they are great places to live, but because there are jumbo lenders with lax standards and buyers for the loans in the mortgage-backed securities market. The markets with a higher percentage under Fannie and Freddie’s conforming loan limits have risen more in line with median incomes, influenced by stricter underwriting guidelines that ensure that home buyers can actually afford the homes they are buying.

U.S. Home Prices, 2012-2017. Core Logic

The general mood is that the market is softening right now, especially at the high end. As interest rates continue to rise beyond buyers’ ability to qualify for mortgages, listings will pile up further and prices will fall. Also, the effects of last year’s tax bill will start to be noticed among consumers, many of whom have yet to figure out that they won’t be able to deduct the majority of their state and local income/property taxes. SALT is now limited to $10,000. Consumers have noticed their paychecks are bigger, but if I know the American consumer like I think I do, that money is being spent and not socked away to pay their higher after-tax deduction property bill.

I’m not predicting the end of the world. For property prices to go down an inflation-adjusted 15-20 percent from peak to trough is a perfectly normal market cycle. It does sting, though, if you put 10 percent down on a two million-dollar home and have to turn around pay money at closing when selling 3 years later.

The first domino that would cause housing prices to fall 15-20 percent in real terms is for mortgage rates to normalize. However, Donald Trump has expressed concern that the Federal Reserve is hiking rates too quickly and is putting pressure on the Fed to top short-term rates out at 2.5 percent. Trump obviously understands how rate hikes affect the real estate market. He has a good point. If the Fed only hikes rates by 50 basis points from here and mortgage rates follow suit, then housing prices will stay higher than they would be if the Fed hiked aggressively. Instead, if they hike 150-200 basis points, then I estimate that housing prices will fall more than 15-20 percent. With over 75 percent of California buyers financing their purchases and DTI ratios already stretched, mortgage rates are of paramount importance to buyers. The risk with the first approach is that inflation runs higher and negatively effects the economy. But, keeping interest rates low and letting inflation run a little higher will serve to give home buyers more equity in their homes and hide the drop in home prices relative to incomes. If the Federal Reserve takes this course, the decline in home prices will not be as severe. However, all bets are off if the Fed decides to aggressively hike rates. Homebuilders, mortgage companies, and small to mid-size banks with concentrated West Coast exposure are still best avoided, as the market does not seem to be adequately accounting for the risks of rising rates, or just how bad their business practices have been.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.\


How Much Do You Know About OFAC Compliance For Mortgage Companies ?

While OFAC may not be included in the top 10 issues facing your company, how familiar are you with the requirements? Are you confident that your company’s OFAC program is robust or, at least, meeting minimum requirements?

OFAC, an office of the U.S. Treasury, administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals, and it acts under Presidential wartime and national emergency powers to impose controls on transactions and to freeze assets under U.S. jurisdiction.

All U.S. persons, must comply with OFAC’s regulations. Financial regulators evaluate OFAC compliance programs to ensure compliance with the sanctions. In the creation and implementation of an OFAC compliance program, a risk-based approach is what is expected. The basic requirements are to block accounts and other property of specified countries, entities, and individuals and prohibit or reject unlicensed trade and financial transactions with specified countries, entities, and individuals.

Of special note, in2009, OFAC issued a final rule entitled “Economic Sanctions Enforcement Guidelines” to provide guidance by explaining the procedures that OFAC follows in determining the appropriate enforcement response to apparent violations of its regulations. As noted in the FFIEC BSA/AML Examination Manual (2014), “some enforcement responses may result in the issuance of a civil penalty that, depending on the sanctions program affected, may be as much as $250,000 per violation or twice the amount of a transaction, whichever is greater. The Guidelines outline the various factors that OFAC takes into account when making enforcement determinations, including the adequacy of a compliance program in place within an institution to ensure compliance with OFAC regulations.”

As we commonly see in compliance news, OFAC issues penalties for noncompliance and the outcomes are financially and reputationally damaging. Remember that violations can result in criminal penalties for willful violations and fines may range up to $20 million and imprisonment of up to 30 years. Take special note of the following:

Civil penalties for violations of the Trading With the Enemy Act can range up to $65,000 per violation;

Civil penalties for violations of the International Emergency Economic Powers Act can range up to $250,000 or twice the amount of the underlying transaction for each violation; and

Civil penalties for violations of the Foreign Narcotics Kingpin Designation Act can range up to $1,075,000 for each violation.

So, knowing all of this, there are pitfalls to avoid. Being familiar with OFAC requirements is good; however, a comprehensive understanding of how OFAC intersects with your company’s operations is something else. And, this ‘something else’ is where we should be or heading towards. Take a look at the list below and see if your company’s OFAC compliance program needs any fine tuning.

Responsibility: Has your company defined and documented roles and responsibilities to specific staff members? Have appropriate noncompliance consequences been documented and communicated to appropriate staff members?

Policies and procedures: Yes, you’re hearing this once again. Does your company have an established OFAC policy as well as procedures and processes to adequately meet OFAC compliance program requirements?

Monitoring: This process needs to occur internal and external to your company. Internally, how often is your company measuring its risk appetite with OFAC? How often is the OFAC risk assessment reviewed, updated, and presented to the Board? From an external perspective, how often does your company evaluate the effectiveness of any vendors that assist with OFAC compliance?

Connection to other BSA requirements or elements: Important crossovers exist, such as:

CIP: How effective and comprehensive are OFAC processes within the CIP process at your company?

Beneficial Ownership Rule: Have procedures and processes been updated to include the identification of beneficial owners of your company’s business entity clients in the OFAC process?

Independent reviews/audits: Whether an internal or external review is performed, how thorough is the audit in determining your company’s compliance with OFAC requirements?

Avoiding the pitfalls is crucial. Taking the right steps will help:

Proper oversight by the Board and senior management. Tone from the top and adequate employee training are must haves.

Strong BSA compliance policy and effective internal controls aid in compliance with OFAC requirements.

Since much of BSA is a risk-based approach, review and update at least annually the BSA and OFAC risk assessments and adjust the compliance programs accordingly.

Keep current with changes to the SDN list and sanctions communicated by OFAC. Do not rely on vendors at face value. Due diligence is a must.

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Around the Industry:

Effective Now

The Fed, FDIC, and OCC jointly issued a statement detailing rules and associated reporting requirements that are immediately affected by the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The Fed also issued a statement describing how the Board will not take action to enforce certain regulations and reporting requirements for firms with less than $100 billion in total consolidated assets.


Still Confused about the New HMDA Law ? Here’s the Latest Help

By Leslie A. Sowers & J. Eric Duncan

January 1, 2018, marked the official start of a new and complex regulatory era for financial institutions subject to the Home Mortgage Disclosure Act (HMDA) and Regulation C. On that day, the majority of the amendments to Regulation C under the Bureau of Consumer Financial Protection’s October 2015 and September 2017 final rules took effect. Those amendments, collectively referred to herein as the “New HMDA Rule,” were sweeping. They dramatically altered the coverage of institutions subject to HMDA, the loan transactions and applications that must be reported, and the data points that must be collected, recorded, and reported to the appropriate federal regulator.

In the six months that have passed since these changes went into effect, mortgage lenders and other covered institutions have faced a number of common implementation issues, from open questions and ambiguities not addressed by the New HMDA Rule to challenges caused by the volume and complexity of the new requirements. We discuss some representative examples of these issues below.

Moving Targets

One of the biggest implementation challenges presented by the New HMDA Rule results from the manner in which the Bureau is issuing instruction and guidance. Unlike the Bureau’s other rules, the statute, implementing regulation, and official staff commentary do not provide all of the information HMDA reporters need in order to comply. Among various other documents and tools issued by the Bureau, HMDA reporters must also consult the Filing Instructions Guide (FIG), a 151-page document that provides the file, data, and edit specifications required for reporting HMDA data, including the possible values and other information that may be reported for each data point. Before the New HMDA Rule, Appendix A to Regulation C and the related commentary contained much of this information, including the various “codes” that related to each data point.

Why is this shift in approach noteworthy? Removing this information from Regulation C allows the Bureau to issue and change this information without going through the time-consuming notice and comment rulemaking process. While this approach allows the Bureau to make adjustments timelier, which is beneficial, these adjustments are made without requesting public comments and without helpful explanation as to the purpose of the changes. In fact, the Bureau has revised the 2018 FIG seven times since it was first issued in January 2016, the most recent of which occurred in February. Is your HMDA team keeping up with each of these revisions and how it may impact your HMDA collection and reporting process?

For example, under the New HMDA Rule, institutions must report the name of the automated underwriting system (AUS) used to evaluate the application and the result generated by the system, if applicable. In cases where a company uses more than one AUS to evaluate an application or the system or systems generate two or more results, the New HMDA Rule lays out a complex waterfall approach for deciding which results to report. Additional questions arise in the context of particular AUS types, such as the USDA’s Guaranteed Underwriting System (GUS). GUS results can be a challenge to report because GUS generates two separate results for each file, and those results may correspond to more than one code available (e.g., Accept/Unable to Determine), but an institution may report only one AUS result per AUS reported.

The Bureau changed the codes available for reporting AUS results in the most recent revision to allow lenders reporting GUS results to use “Code 16 – Other.” The FIG instruction to “Code 16 – Other” states that more than one AUS result may be entered in the free-form text field, as applicable. The Bureau’s only explanation of this change was: “Updated allowable codes for AUS results produced by the Guaranteed Underwriting System (GUS).” This comment fails to explain what prompted this change and what it means for reporters; this is particularly troubling since the Bureau previously gave informal advice to report only one of the GUS results before it issued the February FIG revisions.

Will the Bureau continue to modify the FIG this year? All reporters must record the data collected for HMDA on a loan/application register within 30 calendar days after the end of each calendar quarter in which final action is taken. Therefore, if more changes are made to the FIG, each reporter will be required to update its recorded entries and revise its procedures (and/or systems) going forward for each change.

Regardless, you should be expecting additional changes that may impact your recorded entries and your process. We are still awaiting the Bureau’s release of additional reporting tools, including the geocoding tool, which provides institutions that use it correctly with a safe harbor when reporting the census tract. In addition, the Bureau announced in December 2017 that it intends to open a rulemaking to reconsider various aspects of the New HMDA Rule such as the institutional and transactional coverage tests and discretionary data points, and the latest regulatory agenda indicates that this process is not scheduled to begin until 2019.

Rate-Set Date for Calculating Rate Spread

For loans and approved but not accepted applications that are subject to Regulation Z (other than an assumption, a purchased loan, or a reverse mortgage), institutions must report the Rate Spread, which is the difference between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set. A number of questions arise when trying to determine the appropriate rate-set date to use for purposes of this calculation.

For example, which rate-set date should an institution use for an approved not accepted application that had a floating interest rate? In such cases, the interest rate was arguably never “set.” While some institutions have concluded the most defensible approach is to use the date on which the applicant was provided the early disclosures required under Regulation Z, the New HMDA Rule does not directly address the question. Complications can also arise in identifying the rate-set date for “repriced” transactions and transactions in which a borrower changes from one loan program to another program that is subject to different pricing terms. The requirements for these situations are complex and potentially ambiguous and can trip up companies that have not sufficiently thought through their approach to such scenarios.

What Data to Report

What data an institution must report often depends on the action taken on the file and whether the institution relied on the information as part of the credit decision made. In particular, the reporting requirements associated with counteroffers demonstrate the complexity involved in implementing this aspect of the New HMDA Rule.

Suppose an institution makes a counteroffer to lend on terms different from the applicant’s initial request. If the applicant declines to proceed with that counteroffer or fails to respond, the institution reports the action taken as a denial based on the original terms requested by the applicant. On the other hand, if the applicant agrees to proceed with consideration of the counteroffer, the institution reports the action taken as the disposition of the application based on the terms of the counteroffer. In such cases, how the file is reported may also depend on whether the institution’s conditional approval is subject to only customary commitment or closing conditions or also includes any underwriting or creditworthiness conditions. Companies must have procedures and systems that address all of the potential scenarios to ensure accurate reporting and update them as needed when unique scenarios arise.

Collection of Expanded GMI Data

The New HMDA Rule significantly expanded and complicated the requirements for collecting Government Monitoring Information (GMI) data regarding an applicant’s race, ethnicity, and sex. As a result, institutions have faced certain issues in updating their collection procedures and forms to ensure they offer applicants appropriate options, such as the ability to select one or more race or ethnicity subcategories even if the applicant has not selected a race or ethnicity aggregate category. These requirements can pose challenges depending on how a company’s existing systems or processes were designed, especially in the context of online applications, where forms may be coded to automatically trigger the selection of a main category when a subcategory is selected.

Does the New HMDA Rule require online application forms to allow an applicant to skip these questions entirely? Is it permissible to structure the electronic interface to require the applicant to make at least one selection in order to move on to the next page, even if only by checking a box to specifically indicate they do not wish to provide the information? The New HMDA Rule fails to directly address these questions, and institutions must make decisions on the best way to proceed based on their own operations and the regulatory language and then apply a consistent, reasonable approach.

MLO NMLSR Identifier

The New HMDA Rule added a requirement to report an individual mortgage loan originator’s (MLO) National Mortgage Licensing System & Registry identifier (NMLSR ID) for a loan or application. Questions often arise in this context when multiple MLOs are involved in a single transaction because, for example, an MLO leaves the company or multiple MLOs work on an application together as part of a team. In those cases, which individual’s NMLSR ID must be reported? The New HMDA Rule requires the company to report the NMLSR ID of the MLO with primary responsibility for the transaction as of the date of action taken. The regulation does not provide additional guidance with respect to what constitutes primary responsibility, but instead provides a company some discretion to develop reasonable policies to make that determination.

In order to address these situations, an institution should establish and follow a reasonable, written policy for determining which individual MLO has primary responsibility for the reported transaction as of the date of action taken. When creating that policy, companies should also consider the requirements under various other federal and state laws that have requirements for identifying the MLO(s) for a transaction, such as Regulation Z’s requirement to disclose the primary loan originator’s name and NMLSR ID (if any) on certain loan documents, as those other requirements may influence this determination.

Final Thoughts

As the common issues described above illustrate, there is still much to consider and work through in implementing the New HMDA Rule during its first year. You should be putting in the extra time and dedicating extra resources to audit your information and to identify questions and pain points. Institutions should have already recorded their first quarter data for 2018 under the new requirements. Use this opportunity to carefully test and review that data and the relevant internal processes for the issues above as well as any other potential gaps or questions unique to your own operations.

In situations where there are open questions and multiple reasonable interpretations, the key is consistency. Develop a well-reasoned, consistent approach based on the language in Regulation C, the commentary, and the FIG. Review the other guidance available on the Bureau’s website, submit questions to the Bureau, and consult with counsel. Document your analysis process to demonstrate your good faith efforts to comply. Any identified issues should be addressed as soon as possible so you can have a consistent approach moving forward and only have a few months of past entries to correct. If you wait until 2019 to review, you will have to correct an entire year’s worth of entries retroactively should you find any issues.


The Latest on Home Flipping and FHA Buyers

Home flippers often claim that the renovations and repairs they do on homes before selling them preps the property for a new first-time homebuyer, but that’s becoming less and less the case.

According to new data from ATTOM Data Solutions, the percentage of home flips that were sold to homebuyers who secured financing through the Federal Housing Administration (FHA)—which are predominantly first-time homebuyers—dropped to 15.9 percent in the first quarter of 2018, a 10-year low.

Rising home prices have made home flipping a lucrative practice, as the total dollar volume of home flips has been more than $10 billion every quarter since 2016. But it’s also gradually priced out many of the first-time homebuyers home flippers claim to serve. The median price of a home flip rose to $215,000 in the first quarter of 2018, the highest since prior to the housing bust in 2008.

The FHA, a division of the Department of Housing and Urban Development (HUD), provides insurance on mortgages for qualified borrowers, typically people with lower credit scores or those without the means for a down payment. The FHA insures mortgages with as little as a 3.5 percent down payment. This helps expand credit to lower income buyers or first-time buyers.

FHA buyers aren’t always first-time homebuyers, and first-time homebuyers aren’t always FHA buyers, but there’s considerable overlap. So far in 2018, 82 percent of buyers who purchased single-family homes through the FHA were first-time buyers, according to the HUD.

So while the percentage of home flippers who sold to FHA borrowers isn’t a perfect measure for first-time homebuyers, it serves as a good barometer, particularly when looking at the general trend.

The percentage of home flippers who sold to FHA buyers fell below 5 percent during the housing bubble in 2005, as the same easy credit that inflated the bubble and caused it to burst made securing FHA insurance on a mortgage unnecessary; mortgage lenders were more than willing to offer financing to practically anyone with a pulse.

After the bubble burst in 2008 and mortgage lending ground to a halt, home flippers sales to FHA buyers peaked at 34 percent in the second quarter of 2010, as FHA insurance was one of the few ways to lure a lender into a mortgage.

The steadily declining rate at which home flippers sell to FHA buyers certainly has something to do with mortgage credit getting more relaxed over the past few years. If borrowers have other attractive financing offers, some will take it. But as home prices rise, so does the premium home flippers can charge, and many first-time buyers will inevitably get left behind.


The Latest Developments at the CFPB

The acting director of the Consumer Financial Protection Bureau (CFPB) often says that the only reason he hasn’t burned the agency down is because it’s illegal.

Mick Mulvaney, the staunchly conservative White House budget director, has taken extensive steps to restrain and reform the CFPB while insisting he would do just enough to meet its legally mandated actions. He has worked to undo years of the bureau’s most controversial rules while laying the groundwork for a massive reduction in the CFPB’s reach and authority, including calling on Congress to strip its powers.

Just this week, Mulvaney dismissed the members of three CFPB advisory boards, including a consumer advocate panel he’s legally required to meet with twice each year.

Here are five ways that Mulvaney, who fought against the CFPB’s creation as a member of the House, has transformed it from within during his six months atop the agency.

Structural changes and political hires

Mulvaney has used his vast power and independence to sway the CFPB by pairing career bureau staffers hired for policy chops with highly paid political appointees. He’s also rearranged the bureau’s structure, making a broad array of powers subject to his appointees’ control.

Mulvaney’s top aides have overseen efforts to slim down the bureau and make it more responsive to the financial services industry.

The acting director brought on Brian Johnson and Kirsten Sutton Mork in senior roles, giving them oversight of most day-to-day bureau functions. The former aides to Rep. Jeb Hensarling (R-Texas), the House Financial Services Committee chairman, were key to his legislative and investigative efforts to tame the CFPB.

Hensarling led the House GOP’s push to repeal most of the CFPB’s powers and launched probes of the bureau’s regulatory actions through his subpoena power.

Mulvaney, a former Financial Services panel member, said the arrangement mirrored other federal agencies and balanced out a staff composed mainly of Democratic Sen. Elizabeth Warren’s (Mass.) acolytes.

Mulvaney also stoked rage among the CFPB’s progressive supporters and some small financial institutions when he dismissed this week the members of three key advisory groups.

CFPB officials downplayed the furor among consumer advocacy groups and insisted that board members only cared about “their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau.”

Board members called the claim outrageous and some offered to cover their own expenses.

“We give two days of our time working, sitting at our table from morning until night, digging into these weighty issues,” Josh Zinner, the CEO of the Interfaith Center on Corporate Responsibility, said Wednesday. “They have no actual rationale for dismissing these boards, and now they’re just resorting to name calling. It’s absurd.”

Retreat on payday lending crackdown

Mulvaney has reversed the CFPB’s wide crackdown on short-term, high-interest loans.

The acting director opposes the bureau’s October 2017 rule targeting “payday” loans and sought to delay it through several means. He delayed the compliance date for the first portion of the rule in January, and started the lengthy regulatory process to rewrite it.

The CFPB filed a joint motion with a group of payday lenders suing against the rule, asking the court to delay its effective date until their case is completed.

Mulvaney has also dropped several cases against payday lenders but insists the bureau is pursuing several others under its legal mandate to enforce fair lending laws.

But his step back from the CFPB’s efforts to tackle payday lending has enraged the bureau’s liberal allies and its former director, Richard Cordray, who issued the payday rule shortly before stepping down to run for Ohio governor.

Call for complaints about CFPB’s own actions

The CFPB has issued several formal requests for complaints on almost every aspect of its own regulatory and enforcement actions.

Banks, lenders and financial services firms have griped for years about the bureau’s aggressive oversight. But the official call for complaints will give the CFPB a wealth of documented rationale meant to justify major reversals in bureau policy.

The requests target the ways the CFPB crafts regulations, begins investigations, issues subpoenas and penalizes firms it believes have violated laws.

“Regulation by enforcement is done,” Mulvaney said in April. “Financial services providers should be allowed to know what the law is before being accused of breaking it.”

Cost-cutting measures

The 2010 Dodd-Frank Act empowers the CFPB director to request from the Federal Reserve as much money as they deem necessary each fiscal quarter, and the Fed is obligated to provide the funding.

Mulvaney requested $0 during his first fiscal quarter in charge of the bureau, saying he’d instead use the CFPB’s $177 million emergency reserve account with the Fed’s New York branch.

The fiscal hawk former congressman is mulling ways to slash the CFPB’s expenses, including personnel changes or relocations. He’s also floated reducing the amount of outside scholarship conducted by CFPB employees the bureau sponsors.

Rebranding push

Mulvaney has tried to drag the CFPB as far as possible from its roots as Warren’s brainchild. He’s insisted the agency should be called by its formal legal name, the Bureau of Consumer Financial Protection, despite the frequent use of shorter names by other federal entities.

The acting director has said he wants to bring the CFPB in line with noncontroversial regulators, such as the Federal Deposit Insurance Corporation.

“I don’t want us to be Elizabeth Warren’s baby, because as long as you’re associated with one person, be it me or her, you’re never going to be taken as seriously as a bureaucracy, as an oversight regulator as you probably should,” Mulvaney said in April.

The bureau has also adopted a less flashy, more traditional logo, though its website still sports Cordray-era neon green.


Loan Officer Back to Basics Refresher

Low numbers of homes for sale have made the current housing market very competitive. For prospective buyers, this has meant it is more important than ever to be in the strongest position possible when making an offer.

Unfortunately, the market isn’t always the only barrier to home ownership. Nearly one in 10 borrowers gets denied for a mortgage, according to recent analysis by LendingTree. We pinpointed the biggest reasons mortgage applications were denied.

Here are five things that can torpedo your mortgage application.

1. Your past credit history

A poor credit history is the overarching reason that can lead to your mortgage loan being denied. In our study, one in four denied borrowers (26%) were turned down because of their credit history. The good news is that you are continually updating your credit history and can take steps to improve it if there are disadvantageous items.

Review your credit report on or through a monitoring service like My LendingTree to ensure it is accurate. Work to address any adverse records before applying for the loan.

2. Cutting it too close on debt-to-income

A lot of the trouble from the financial crisis was because borrowers were put into homes they could not pay for on a sustainable basis. As a result, mortgages since then have adhered very strictly to income requirements. Stretching to buy your dream home is not advisable. Lenders are unlikely to approve borrowers whose debt-to-income ratios exceed 36%. DTI is your total monthly debt obligations divided by your gross monthly income. It was the cause of 26% of mortgage denials in our study.

3. Taking out new credit before closing

Most borrowers know to avoid applying for new accounts in the run-up to their mortgage application. That advice still applies once you are approved and are on the way to closing on a home. The length of time between initial application and closing is about 45 to 60 days. Lenders will check your credit again just prior to closing, and material changes could affect the cost of the loan or even lead to an approval being reversed. Avoid new applications for other credit during this time.

4. The property is not worth the price

The lending decision evaluates two things: the borrower and the property, which is the collateral the lender will receive in the event the borrower defaults. In our analysis, collateral was the third-leading cause of mortgage denials, indicating the home was not worth enough to justify the financing requested. Make sure you have a look at the property and have a trusted home inspector look it over, too.

5. Sloppiness and lack of documentation

The days of loans with little to no documentation are long gone. Make sure everything in your application, from your tax records to your employment history, is accurate and you have documentation. Be proactive and gather all the typical documentation you’ll need before you apply, so you aren’t denied a loan or delayed in closing.

Tendayi Kapfidze is LendingTree’s chief economist. He oversees the online lending exchange’s analysis of the U.S. economy with a focus on housing and mortgage market trends. 


Secrets of Quicken Mortgage Loans Success

Quicken Loans recently overtook embattled Wells Fargo to become the leading direct-to-consumer mortgage lender in the nation.

It is the first time a Detroit-based firm has ever held that title.

Yet being No. 1 in mortgages is a lot different than being tops in other industries, such as automotive. In the highly fragmented mortgage sector, where prospective borrowers can visit some 30,000 bank branches and credit unions across the country for a home loan, Quicken commands a market share of just 5.4 percent.

“Every time we start to get a big head, I remind our people, ‘You know that 19 out of 20 people who wake up this morning and get a home loan aren’t coming here?’ ” Dan Gilbert, 56, Quicken’s founder and chairman, said in a one-on-one interview in the firm’s bright downtown headquarters with windows facing the Renaissance Center and the Detroit River. “We’ve got a long ways to go.”

Gilbert said he thinks Quicken can grow to 10 percent of the market — perhaps even 20 percent or more. The key, he said, is to keep improving Quicken’s edge in technology and customer service.

“That’ll take time,” Gilbert said from his 10th floor office in One Campus Martius, previously known as the Compuware building, in Detroit. “But we have the platform and infrastructure in place to do that. We really think we do.”

Such a feat is rare and hard to achieve. Few lenders ever capture more than 10 percent of the retail mortgage market, a category that excludes loans made through brokers, according to Guy Cecala, CEO and publisher of Inside Mortgage Finance, which produces closely followed lender rankings.

Wells Fargo, in fact, still holds the top ranking for mortgage originations in a broader category that includes loans from brokers and those bought from other lenders.

“It is a lot more of a challenge if you are an online or direct-to-consumer lender like Quicken,” Cecala said. “They are going to need to keep up the advertising, they are going to need to be a lender of choice.”

Major employers are important in any city. However, Quicken’s success has had an outsize impact on Detroit, which is  recovering from decades of disinvestment and a 2013-14 municipal bankruptcy.

If Gilbert’s mortgage machine ever sputters out, so could the city’s rebound.

Quicken says it employs nearly 13,000 people in Detroit, making it one of the city’s largest employers. The mortgage firm accounts for close to three-quarters of the total head count in Detroit for all businesses within Gilbert’s family of companies.

Those businesses number more than 100 and range from real estate firm Bedrock to StockX, an online stock market for sneakers, sports apparel and other goods. Gilbert’s real estate holdings include more than 100 buildings and new development projects in and around downtown.

Quicken, though, “is still the absolute flagship, most important business — most people, most revenue, most profit,” Gilbert said.

Don’t say ‘nonbank’

Many in the financial industry now classify Quicken as a so-called “nonbank.” That distinguishes the firm from traditional banks that take deposits, offer checking accounts and have ATM machines.

Gilbert absolutely hates the term.

He feels that “nonbank” gives the wrong impression of Quicken’s business model — and the quality of the $20.4 billion in residential mortgages it originated in the first quarter — as being riskier. Mostly, he thinks it strange to define Quicken by something it is not.

“You know, I’m a non-zebra talking right now — it’s just the weirdest thing,” Gilbert said. “In what other category in the world is someone a non-something? It’s an irrelevant term for both bank and nonbank as it refers to mortgages.”

Quicken is the first nonbank to become the top retail mortgage lender since the 2008 financial crisis.

Gilbert says Quicken has achieved its success through an obsessive focus on customer service, a company culture centered on constant improvement, and the innovative online selling and processing of “very vanilla” mortgages — none of the free-wheeling loan products that led to last decade’s market meltdown.

About 95 percent of all Quicken’s mortgages have explicit government backing through Fannie Mae, Freddie Mac, Ginnie Mae or the Federal Housing Administration, which generally insure loans against homeowner defaults.

Most of Quicken’s other loans are so-called jumbo mortgages, Gilbert said, which are those above $453,100 in value (or $679,650 in higher-cost regions) and therefore aren’t eligible for government backing.

Defending the title

How long Quicken can stay No. 1 could depend on its adjustment to the mortgage industry’s shift away from mortgage refinancings. The number of refinancings has been plummeting nationwide as interest rates inch up.

The shift also has resulted in lower mortgage origination volume across the industry.

The Mortgage Bankers Association forecast that refinancings will fall another 30 percent this year, following a 33 percent year-over-year drop in 2017. The rate on a 30-year, fixed-rate mortgage was 4.56 percent Thursday, up from 3.94 percent a year ago, according to Freddie Mac.

Quicken’s strong first-quarter results, achieved in a purchase-oriented mortgage market, suggest that it is making the transition.

“They managed to thrive in a home purchase market, which would suggest (the refinancings fade) is not an issue,” Cecala said. “But it will be easier to tell after 2018 is in the record book.”

Quicken also has gotten more involved in the business of servicing mortgages, which generates revenue for the firm. Servicing involves collecting payments from homeowners on behalf of the owners or investors in the mortgage.

“They are the seventh largest servicer in the country now and that is phenomenal given that they really weren’t servicing loans six years ago,” Cecala said.

Gilbert said Quicken has no plans to loosen its lending standards to compensate for lost refinancing business.

“We won’t,” he said. “Our reputation is not worth any short-term money that you might make from that.”

No subprime

Gilbert has long insisted that Quicken did not partake in the subprime mortgage boom that culminated in last decade’s market crash. He points to the company’s survival through that era when numerous lenders, such as No. 1-ranked Countrywide Financial, disappeared.

“That’s why we’re alive,” he said.

He recalled the significant industry pressure at the time to extend loans to unqualified borrowers.

“I remember our guys bringing us stuff, our guys being our bankers, saying, ‘Hey look, Countrywide is offering 100% loan-to-value loans for 580 (credit) score borrowers with no income verification. I said, ‘We’re not doing these loans,’ ” Gilbert said.

“You have to look at it through the eyes of ‘would you loan your money.’ That’s how I ask people to look at it,” he added. “Because even if you could make some money in the short term and sell (the mortgage) off, we still have reps and warranties that we make, by the way, to whoever we sell to. And secondly, it’s not the right thing for the customer.”

More recently, Quicken has been battling the U.S. Department of Justice in federal court in a False Claims Act case alleging that, from 2007 through 2011, the firm fraudulently approved borrowers for Federal Housing Administration-backed mortgages.

Gilbert has strongly denied the allegations and, unlike other lenders, has refused to settle the case with a big payout to the government. A trial on the merits of the government’s claims isn’t expected to start until mid-2019 at the earliest.

Quicken continues to participate in the FHA mortgage program. Other lenders have scaled back or stopped doing FHA loans in recent years.

“The problem in this country is, if you’re going to treat the bad guys the same as the good guys, you’re not going to have a lot of good guys left,” Gilbert said earlier this year.

Rock to Rocket

Gilbert started Quicken Loans, then known as Rock Mortgage, in 1985 with his brother and a friend. Back then, business involved “bringing doughnuts into real estate offices and hoping they give you a referral,” he said.

Quicken became one of the first online mortgage lenders in the late 1990s and started shuttering its brick-and-mortar branches.

 More recently, through its new Rocket Mortgage mobile and online brand, the firm has shortened the time to closing a mortgage to as few as 16 days for a purchase and eight days for refinancing.

Quicken has won eight consecutive annual J.D. Power awards for client service in mortgage origination and four for mortgage servicing.

Out of suburbia

The start of Detroit’s rebound can be traced to Gilbert’s decision a decade ago to move Quicken’s headquarters from the suburbs and into downtown, bringing thousands of young employees.

Gilbert said he doesn’t consider the Detroit move as any sort of charitable act. Had Quicken stuck to the suburbs, today its workforce might be inconveniently spread across multiple buildings, separated 5 or 6 miles apart.

“There is no way we would be the company we are today spread out in the suburbs,” he said. “It’s been very profitable for us to be a business in the city.”

How it works

Unlike traditional banks, Quicken can’t rely on a base of customer deposits to make mortgages. Instead, it can either borrow the money for the loans from banks, tap lines of credit or use its own cash, Gilbert said.

“We carry quite a bit on our balance sheet,” he said.

Quicken runs the majority of the mortgages through the underwriting systems for the government-backed entities such as Fannie Mae. It then pools the mortgages and bundles them into securities, which Quicken goes on to sell into the secondary market.

It is common for all mortgage lenders — banks and nonbanks — to process and sell their mortgages that way.

Some market observers have raised concerns about the possible risks and dangers of nonbank mortgage lenders, contending that such firms are vulnerable to sudden dry-ups in their short-term credit lines.

Gilbert insists that Quicken is well-capitalized and less risky than many banks.

“We have more assets than 94 percent of FDIC-insured banks,” he said.

Moody’s Investors Services upgraded Quicken’s bond rating by a step in December, saying that “while profitability has declined from the exceptional levels of 2015 and 2016, we expect the company to continue to generate very strong profitability over the next several years.”

Gilbert also disputes claims that nonbanks are under-regulated. He says Quicken is actually more closely regulated than many traditional banks because it is overseen by regulators in all the 50 states where it makes mortgages, plus by government agencies including the Consumer Financial Protection Bureau and the government-backed mortgage entities.

Cecala of Inside Mortgage Finance said that few in the industry are worried about Quicken.

“Despite those general concerns about nonbanks, most people don’t have the concern about Quicken, just by their sheer size,” he said. “They are the largest nonbank by far, and even though they are privately held, everyone knows that they certainly have the wherewithal to make good on anything they need to.”


Have Housing Prices Peaked ? Here is the Latest

The early stages of a housing bubble are fun for pretty much everyone. Homeowners see their equity start to rise and feel smart for having bought; home seekers have to pay up, but not too much, and fully expect their new home to keep appreciating. People with modest incomes feel a bit of pinch but can still afford to stick around.

But later on, the bad starts to outweigh the good. Existing homeowners still enjoy the ride, but would-be buyers find themselves priced out of their top-choice neighborhoods. And residents who aren’t tech millionaires find that they can no longer afford to live where they work. Consider the plight of a teacher or cop pretty much anywhere in California these days:

Drew Barclay has a master’s degree in education and three years of experience as an English teacher, but, like most new teachers in Davis, he can’t afford to live there.

Instead, Barclay, 31, shares a rental in Sacramento that costs him $950 a month – about 40 percent of the $2,550 he brings home each month after taxes.

He is so certain that he won’t be able to qualify for a loan for a home in Davis on his $47,000 annual salary that he hasn’t bothered to house hunt. The median price for a house in the city in March was $682,500, according to tracking firm CoreLogic. Renting also is prohibitive, with the average rent in Davis about $2,500 a month, according to Zillow, a real estate website.

Davis Joint Unified officials hope to get a little help from state legislators. Last week, the state Senate voted 24-8 to waive the annual school district parcel tax of $620 for teachers and other employees of the Yolo County school district.

Davis school board member Alan Fernandes said that about two-thirds of the district’s teachers live outside Davis where housing is less expensive. He said the bill would encourage more of the district’s teachers to live in the community they serve.

Davis Joint Unified regularly passes parcel taxes to keep class sizes down and to support classroom programs. In 2016, 71 percent of Davis voters approved Measure H, a yearly tax of $620 on each parcel of taxable real property in the district for eight years. The measure raises $9.5 million a year to support math, reading and science programs and reduced class sizes for elementary grades.

But the roughly $50 a month exemption isn’t likely to help Davis Joint Unified teachers enough to make buying a house affordable. The teachers are some of the lowest-paid educators in the region, with some of the highest health care costs.

Barclay said he knows teachers 10 or 15 years older than he is who are renting rooms in other educators’ homes to get by. He said some teachers have weekend jobs to make enough money to pay their bills.

“Because I’m fairly certain I can’t put down permanent roots here, I don’t see this position as a permanent one,” Barclay said of his job as an English teacher at Davis Senior High School.

California school districts have responded by offering signing bonuses, housing stipends, computers and free tuition to educators who sign up with their districts.


AML / BSA for Mortgage Lenders – Are You Compliant ?

BLOG VIEW: The U.S. Department of the Treasury, through the Financial Crimes Enforcement Network (FinCEN), issued a final rule in February 2012 requiring nonbank residential mortgage lenders and originators to establish anti-money laundering (AML) programs and to report suspicious activities under the Bank Secrecy Act (BSA). The BSA is designed to alert law enforcement of criminal and terrorist activity. The BSA requires U.S. financial institutions (including non-bank residential mortgage lenders/brokers) to assist U.S. government agencies in detecting and preventing money laundering.

Despite the issuance of this final rule more than six years ago, many nonbank mortgage lenders/brokers are not complying with the requirements of the BSA and, as a result, regulators are beginning to take note in their examinations.

A compliant AML program for a residential mortgage lender/broker includes: 1) designating a competent individual to serve as the company’s BSA/AML compliance officer; 2) conducting an AML Risk Assessment; 3) drafting and implementing written internal policies and procedures; 4) establishing an ongoing training program; and 5) conducting an independent audit of the company’s AML program every 12 to 18 months. An AML program must also include the maintenance of a “red flags” program and a customer identification program, the filing of suspicious activity reports (SARs), when required, and compliance with Section 314 of the U.S. Patriot Act and Office of Foreign Assets Control (OFAC) regulations.

Most mortgage companies have designated a BSA/AML compliance officer and have an AML policy and procedure in place; however, many mortgage companies do not comply with one or more of the other AML requirements.

For example, more often than not, mortgage companies are not conducting an AML risk assessment. This needs to be completed at least every 12 to 18 months, and lenders should be modifying identified activities based on the company’s operations and growth. The risk assessment should consider the current and future state of items such as the company’s size, products, customer base and geographic area of operation. The Conference for State Bank Supervisors (CSBS) has issued a tool to assist mortgage companies in completing such risk assessments. This tool can be found at

Another BSA requirement that is frequently lacking or unfulfilled is ongoing training. Mortgage companies must train their personnel at least annually in all applicable aspects of AML regulations. A best practice for lenders is to provide AML training to all new employees within 30 days of hire.

Additionally, the BSA/AML compliance officer must receive periodic training that is relevant and appropriate given changes to regulatory requirements, as well as the activities and overall AML risk profile of the company. All AML training needs to be adequately tailored to a company’s operations. For example, mortgage companies should specifically train their personnel on the types of suspicious activity and “red flags” they are likely to come across, such as mortgage fraud related items.

Finally, mortgage companies must document their training programs by maintaining training and testing materials, the dates of training sessions and attendance records. Lenders that are not conducting this annual training should immediately do so, and there are a host of vendors that can assist in providing AML training and tracking tools at a fairly reasonable cost.

Another aspect lenders seem to be overlooking is independent testing/audits. Although the specific nature of the testing will be somewhat dependent on the company’s size and risk profile, the AML audit can be performed by an independent third party or an employee of the company, provided the employee has no role whatsoever in the AML functions being tested (including reporting to the BSA/AML officer), and possesses enough knowledge of BSA regulations to be qualified to perform the audit.

By far, the area of most noncompliance by mortgage companies pertaining to AML requirements is with regard to the filing of SARs. FinCEN highlights the importance of SAR filing by mortgage companies indicating that mortgage companies are the, “primary providers of mortgage finance … and are in a unique position to assess and identify money laundering risks and fraud.”

The BSA lists several situations where a mortgage company must file a SAR. A SAR requires basic company information, information about the individuals involved and information about the suspicious activity or transaction. FinCEN requires all filings to be submitted electronically through its website.

Many mortgage companies take the view that transactions are only reportable only if they involve currency. Not only is this view incorrect, it’s also quite risky. While many of the requirements for the filing of a SAR involve currency, there is also a requirement for a transaction to be reported if a mortgage company knows, suspects or has reason to suspect that a transaction involves the use of the loan or company to facilitate criminal activity.

Given this, mortgage companies must file a SAR every time they suspect fraud – whether it is income, employment, occupancy or some other type of fraud. If a mortgage company has not filed any SARs, or only a few, in the past six years, it could be a sign that the company does not have a compliant AML program or a weak one for that matter.

As such, it is not uncommon for an examiner to ask to review any adverse action notices for the past several years or to speak with the underwriting department to discuss whether they have denied any transactions for suspected or known fraud. In most instances, such fraudulent or suspicious situations are reported to an employee’s manager and not the BSA/AML compliance officer.

It is not surprising that these companies are often the ones that either do not conduct AML training or do not customize their AML training to specifically discuss mortgage fraud, rather than just situations involving large money laundering schemes and currency. Furthermore, it is a best practice for the BSA/AML compliance officer to review all QC reports in an effort to identify any activity that could require the filing of a SAR.

There are many mortgage companies with strong AML programs in place. These companies expend the resources, time and money to ensure they comply with all the BSA requirements. Given the substantial civil and criminal penalties set forth in the statute and the significant increase in state examination questions related to AML items, it is recommended that lenders take a long, hard look at their AML programs and ensure all requirements are properly satisfied.

Michael Barone is executive director of compliance for MQMR, where he oversees all compliance and regulatory guidance with clients and prospective clients.

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