May 21, 2010

Dear NAMB Member,

Last night, the Senate passed S. 3217, the “Restoring American Financial Stability Act of 2010,” by a vote of 59-39, sending it to Conference Committee, where members of both chambers of Congress will work to reconcile this bill and House passed bill H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009.”  NAMB will continue advocating on behalf of its members to protect their profession as the legislative process moves forward.  

I.          FAQ

1.      As a mortgage broker, can I still offer zero cost loans?

YES.  As currently written, the legislation does not restrict originators from offering zero cost loan products.  The mortgage originator may receive their compensation via an increase in the par rate but no additional compensation is permitted.  This is the direction the new Federal Reserve Board regulation was taking.  NAMB expressed our concerns with this approach as we did when the FRB issued their proposed rule.  Also remember, on the new GFE it can be argued mortgage brokers disclose all their compensation in Block 1 and the consumer receives a credit for the higher interest rate that can be used as they see fit.   What is being removed from the system is mortgage originator (mortgage brokers and loan officers at a bank or lender office – overages are banned) pricing discretion and incentive payments for a particular loan type (the regulators must deal with incentive payments to lenders from Wall Street, which remain permissible).

2.      How will this legislation affect YSP (Merkley (D-OR)/Klobuchar (D-MN) Amendment)?

Provisions in the Merkley (D-OR)/Klobuchar (D-MN) amendment will prohibit the total amount of direct and indirect compensation paid to mortgage originators from varying based on the terms of a loan.  The compensation can be based on the amount of the loan.  To be consistent with the RESPA Final Rule, mortgage brokers will have the ability to receive compensation (either all upfront or all on the backend) since indirect compensation and other costs of the closing is fully credited to the borrower on the GFE.  One could argue that HUD has solved the problems that this amendment seeks to correct.  There are also issues of concern for small loan amounts ($150,000 and below) created by the 3% safe-harbor provisions of this amendment.  The 3% safe harbor (consumers “ability to repay”) for fees and expenses will hurt low-income, minorities, first-time home buyers and rural areas since these property prices tend to be lower than $150,000.  There are also concerns with this amendment in terms of affiliated business arrangements and steering.  Consumer advocates could argue that all transactions between affiliated businesses are suspect of steering and violate this amendment.  

3.      Is the term “loan originator” defined as individuals, or does it include companies?

As currently written, the term “loan originator” is defined as a “person,” which under TILA includes companies, and is not confined to only individuals.  NAMB is advocating for the “loan originator” definition to be consistent with the definition included in the S.A.F.E. Mortgage Licensing Act, which defines “loan originator” as the individual.   

4.      The Casey (D-PA) Amendment to sunset the HVCC and create strong appraisal independence rules was not included, what now?

Language already exists in the House passed bill, H.R. 4173, offered by Reps. Kanjorski (D-PA), Childers (D-MS), Miller (R-CA), Manzullo (R-IL), and Bachmann (R-MN).  NAMB is advocating that these provisions should be retained in Conference Committee during reconciliation of the House and Senate bills.  NAMB, alone, fought for these provisions in the House passed bill and will continue to fight to keep them in the conference report.

5.      Why did the Senate vote on H.R. 4173 yesterday evening instead of S. 3217?

Procedurally, H.R. 4173 was offered but stripped completely and replaced with the language included in S. 3217.   

6.      What happens next?

The House and Senate will enter into Conference Committee to reconcile differences between S. 3217 and H.R. 4173.  Once a single bill is agreed upon in Conference, it is sent back to both the House and Senate for a final vote.  If passed by both chambers, the bill is enrolled and sent to the President to be signed into law.   

7.      Who will be chosen for the Conference Committee?

House Committee on Financial Services Chairman Barney Frank (D-MA) is expected to preside as Chairman over the Conference Committee.  House leadership has not indicated when they’ll announce conferees officially, but some have speculated as early as next week.  Conferees are likely to include senior members of the House Financial Services Committee along with some members from the House Agriculture Committee, to address the derivatives component of the bill.  We expect at least twelve Senate conferees to be officially announced Monday, with five Democrats and four Republicans from the Senate Committee on Banking, Housing, and Urban Affairs, and two Democrats and one Republican from the Senate Committee on Agriculture, Nutrition, and Forestry.  Chairman Frank (D-MA) and Chairman Dodd (D-CT) have made it clear that they would like to get a reconciled bill the President by July 4^th.

II.        More information on NAMB concerns:

1.       Conflicting underwriting standards created by inconsistencies between the Merkley (D-OR)/Klobuchar (D-MN) and Landrieu (D-LA)/Isakson (R-GA) amendments.  

Under the present construct with the two amendments, a loan could be exempt from the 5% risk retention requirements but not pass the ability to repay safe harbor section of the Merkley/Klobuchar amendment.  Creditors will have conflicting underwriting standards with which they must comply being written by two different agencies and banking regulators.  A resolution to this issue would be to create a safe harbor in the Merkley/Klobuchar amendment for having met the ability to repay standards if the mortgage meets the criteria for qualified residential mortgages as defined in the Landrieu/Isakson amendment.  This approach will remove any chance of a conflict between loan products referenced under the Landrieu/Isakson amendment and loan products referenced in the Merkley/Klobuchar amendment.  Rule writing should be left with the banking agencies as set forth in the Landrieu/Isakson amendment.

2.      Provisions to sunset the HVCC and strengthen appraisal independence standards are not included.

NAMB supported an amendment offered by Senator Casey (D-PA) that would have, upon enactment, sunset the controversial HVCC prior to its expiration date and replaced it with a more coherent and workable appraisal independence solution.  It also required the GAO to conduct a study on the effects the HVCC has had on mortgage brokers, other small business professionals and consumers.  The amendment would have also created strong appraisal independence rules; imposed greater scrutiny on industry participants in the appraisal process; provided greater protections to consumers who engage in the mortgage process; and provided strong federal standards for the AMCs.  Language already exists in the House passed bill, H.R. 4173, offered by Reps. Kanjorski (D-PA), Miller (R-CA), and Childers (D-MS).  NAMB believes these provisions should be retained in Conference Committee during reconciliation of the House and Senate bills. 
CONTACT YOUR SENATORS IMMEDIATELY to protect your profession and stay in business! 

American Banker  |  Tuesday, May 11, 2010

By Kate Berry

In its efforts to support the housing market’s tenuous recovery, Fannie Mae took on slightly more risk with the new loans it bought or guaranteed in the first quarter.

The $116 billion of single-family mortgages the government-sponsored enterprise acquired during the period had a higher average loan-to-value ratio and a lower average FICO score than last year’s crop of loans. Riskier features, such as interest-only periods, adjustable rates and investment properties as collateral, were also more prevalent than in 2009, albeit nowhere near as common as during the bubble years.

And 11.9% of the new loans were made under the government’s Home Affordable Refinancing Program, which allows for loan-to-value ratios as high as 125%.

“Generally, their underwriting today is pretty strong, but they are taking on some additional risk on the margins,” said longtime Fannie critic Ed Pinto, a consultant and former Fannie chief credit officer. “The additional risk is not huge, but it bears watching if it starts bleeding through to their core business.”

Accordingly, Fannie charged lenders more to compensate for the added risk.

It said the average guarantee fee on new acquisitions increased 5.9 basis points from a year earlier, to 26.9 basis points in the first quarter. The rise was “primarily due to an increase in acquisitions of loans with characteristics that receive risk-based pricing adjustments,” Fannie said.

To be fair, Fannie is not returning to the most egregiously risky loan types of the past decade. For example, the last time it touched a negatively amortizing loan was in 2007.

Also, 78.5% of the loans Fannie added to its book of business last quarter were refinancings, which are generally considered a safer bet than home purchase loans, since an existing homeowner already has a track record of making payments. That’s well above the 48% refi share in 2006, the height of the boom.

Indeed, one-third of first-quarter refis were made under Fannie’s Refi Plus program for borrowers who are already in the GSE’s portfolio and are current on loan payments. But Fannie also said refis made under the administration’s Harp program — whose share of its purchases more than doubled from 3.8% in 2009 — “may not ultimately perform as strongly as traditional refinance loans.”

“If you’re refinancing someone that is heavily underwater, it’s likely they will redefault, so are we really helping the homeowner or subsidizing the banks?” asked Dean Baker, a co-director of the Center for Economic and Policy Research.

Fannie also said Monday it had asked the Treasury Department for another $8.4 billion of funding after losing $13 billion in the first quarter. With the housing market and economy still weak, loan losses remained high during the period, the GSE said.

“They are continuing to take losses on loans from the precrisis period, and they are going bad at higher rates than anticipated,” Baker said.

Unlike Freddie Mac, which said last week that a new accounting rule was the primary reason its first-quarter net worth was negative, Fannie said the new standard actually increased its net worth by $3.3 billion.

But after its eleventh straight quarterly loss, Fannie’s net worth remained in the red, at negative $8.4 billion, creating the need for an additional infusion on top of the $75 billion Fannie has already received from the government.

Fannie also reported that it made servicers buy back or reimburse it for losses on $1.8 billion of loans, 64% more than a year earlier. It was the first time the GSE disclosed the volume of its repurchase demands. Previously Fannie only acknowledged that such demands had been on the rise since 2008 as delinquencies worsened.

In February Fannie announced a “loan-quality initiative” designed to reduce loan-repurchase requests. The initiative will begin next month. Among other changes, lenders will have to pull a second credit report just before a loan closes to check if the borrower has taken on additional debts since submitting the mortgage application.

But Fannie in its Monday filing described the initiative as a “longer-term strategy” that will take time to bear fruit. It reiterated that it expects repurchases to remain high for the rest of this year.

American Banker  |  Tuesday, May 18, 2010

By Kate Berry

State supervision of nonbank mortgage lenders — an industry group that was a key part of the “shadow” financial system widely blamed for the crisis — is becoming as tough as federal oversight of depositories. And in some ways, tougher.

Many nonbank lenders recently learned that, under a little-known provision of the 2008 Safe and Fair Enforcement for Mortgage Licensing Act, they will soon have to file call reports like the ones banks and thrifts prepare quarterly.

And under a multistate examination that 30 states began doing this year, a lender must upload the files for every single mortgage it originated during the exam period to an automated system. The software reviews the loans for potential violations of federal and state laws and spits out a report in minutes. This goes well beyond the random samplings of loans that federal bank supervisors typically examine.

“It is a brave new world,” said Costas Avrakotos, a partner at K&L Gates LLP. Though, as an industry lawyer, he opposes some things the states are doing, “I give them credit for envisioning something and putting it together. … What they’ve undertaken, I don’t think anybody thought was possible just a few years ago.”

By establishing minimum nationwide state licensing requirements for mortgage lenders, the Safe Act is intended to prevent fraud and unscrupulous sales tactics by originators.

All 50 states will be on board with the new multistate exam by early next year, said Chuck Cross, the vice president of regulatory policy at the Conference of State Bank Supervisors, the trade group coordinating the states’ efforts.

“The biggest thing we can do is bring uniformity and modernization to the exam process,” he said.

The call reports would include a quarterly breakdown of a company’s lending activity by state, including first and second liens and loans foreclosed on or in delinquent status, as well as the lender’s financials.

In March, the conference requested public comments on the plan by May 14. No date has yet been specified for quarterly reporting to begin.

Currently, 38 states require that nonbank mortgage lenders file annual reports, and 42 states require that lenders submit standardized financial information.

“If they start requiring quarterly, it will be a lot more work,” said Elizabeth Steinhaus, the general counsel at Fairway Independent Mortgage Corp. in Sun Prairie, Wis., who said she was just finishing up state exams for New York, Massachusetts and Tennessee when New Hampshire regulators stopped in her office for a surprise audit.

“Between the annual reports, the quarterly reports and multistate exams, we’re under a lot more scrutiny as a lender,” she said.

Nanci Weissgold, a partner in K&L Gates, described the quarterly call reports as a “hidden provision” of the Safe Act.

It got little attention until recently, she said, because “there’s so much going on for lenders with limited resources who just got through Respa” — a Real Estate Settlement Procedures Act rule that took effect Jan. 1 — “and are knee-deep in the Safe Act licensing of loan originators. They’re overwhelmed with that.”

Because states are sharing more information through the multistate exams, if a lender is in trouble with one state, the problem has the potential to grow into a national one, lawyers and lenders said.

However, Steinhaus said she expects the workload will drop once multistate exams become the norm. She and others also said they expect that, once nonbanks are filing quarterly call reports, the states will use the reports to determine which lenders to audit.

The automated compliance system in the multistate exam screens for violations of the Home Mortgage Disclosure Act, Truth in Lending Act, Home Ownership and Equity Protection Act, and Respa, as well as state laws and the government-sponsored enterprises’ requirements.

Mark Pearce, North Carolina’s chief deputy commissioner of banks, said state-level loan reviews “would increase the gap between what states and federal regulators do on consumer protection.” Federal regulators “don’t look at individual loan files,” he said.

(”Because of the large volume of mortgages, you can’t look at every one,” said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency. Banks’ mortgage units “get daily supervision,” he said, and random loan sampling is just one technique the OCC uses.)

The market has changed since the states began developing uniform state licensing and multistate exams in response to the subprime lending boom. At that time, states were concerned about regulating large nonbank lenders like Ameriquest Mortgage Co. and New Century Financial Corp., neither of which is operating today. About 70% of residential loans are originated today by the top four banking companies, none of which is subject to state oversight.

“They’re chasing yesterday’s problem,” said Rebel Cole, a professor of finance at DePaul University in Chicago. “Now nonbank lenders are at a competitive disadvantage because banks are originating the majority of loans.”

States’ efforts to examine tens of thousands of mortgage loans in minutes, scanning for every state and federal violation, could prove to be a breakthrough, particularly if federal agencies adopt similar technology.

“I think if we are doing this effectively on the state side and demonstrating tangible results, they’ll have no choice but to adopt similar technology,” said Steve Antonakes, the Massachusetts banking commissioner.

Avrakotos, the industry lawyer, said he thinks the state regulators group is overstepping the Safe Act’s authority by asking nonbanks for financial information in the call reports. Far fewer nonbank mortgage lenders exist, he said, because many got federal bank licenses at the height of the crisis.

“There might be fewer still after they see what they have to put into the system and the extent of mortgage reporting,” he said.

May 17, 2010

Re: Legislative Alert: Amendment Offered to Sunset the HVCC

After months of hard work and meetings with Congress, NAMB is pleased to announce it was successful in getting an amendment offered to S. 3217, the “Restoring American Financial Stability Act of 2010,” that would create new appraisal independence standards and SUNSET the HVCC.  Senate Amendment 4007 , introduced by Senator Casey (D-PA), would, upon enactment of S. 3217, sunsets the HVCC prior to its expiration date and replaces it with a more coherent and workable appraisal independence solution.  It also requires the GAO to conduct a study on the effects the HVCC has had on mortgage brokers, other small business professionals and consumers. The amendment would  create strong appraisal independence rules; impose greater scrutiny on industry participants in the appraisal process; provide greater protections to consumers who engage in the mortgage process; and provide strong federal standards for the AMCs.

NAMB applauds Senator Casey and staff for their hard work on this amendment.  Continue to monitor your email and NAMB’s website (www.namb.org) for updates on this amendment’s progress. 

For a copy of the amendment, click here.

The filed appraisal independence/sunset the HVCC amendment number is 4007.  NAMB urges you to call your Senators immediately, asking them to support the Casey amendment 4007 – “the appraisal independence amendment that sunsets the HVCC.”    

To find your Senators’ contact information, click here.

American Banker  |  Friday, May 14, 2010

By Stacy Kaper

WASHINGTON — While the odds of passage remain strong, the process behind the regulatory reform legislation is increasingly chaotic.

Senate Banking Committee Chairman Chris Dodd took to the floor Thursday to beg his colleagues on both sides of the aisle to stop adding more amendments, warning the process is in danger of spinning out of control.

In a rare spectacle, Dodd rebuffed another senior retiring Democrat, Sen. Byron Dorgan of North Dakota, and argued his plea to debate yet another amendment was threatening the legislation.

“I’ll be very candid with my friend from North Dakota, it complicates my job,” Dodd said. “They all have amendments they want to bring up. … We run the risk of losing this bill.”

But Dorgan was not convinced, invoking “The Terminator” and vowing to press his case.

“I’m sorry that I can’t get this pending at the moment,” he told Dodd. “But as Gov. Schwarzenegger said in a previous life, ‘I’ll be back,’ and soon.”

The exchange between Dodd and Dorgan illustrates the complexity in trying to get 100 senators to agree on a sweeping bill to reform the financial system.

Senate Majority Leader Harry Reid convened a Democratic caucus lunch Thursday to discuss with colleagues how to handle the rest of the debate on financial reform, telling them that the Senate has other work it needs to finish before the Memorial Day recess.

A spokesman for Reid said that the Nevada Democrat would likely file cloture on Monday, a procedural motion that would set up a Wednesday vote to end debate.

But going into the meeting several members, including many Democrats, said they still wanted to see changes to the legislation ahead of a final vote.

Sen. Evan Bayh, D-Ind., expressed frustration that more issues had not been addressed during the Banking Committee vote on the bill.

“We didn’t debate any of these things,” he said. “Had no amendments on anything. It was actually kind of a travesty. I think it’s important that these issues get debated fully and fairly and voted on, otherwise we don’t have a legislative process here.”

Sen. Sheldon Whitehouse, D-R.I., said he was angling for a vote on his amendment to repeal the exportation of interest rate rules to other states.

“I’ve been pressing Sen. Reid and Sen. Dodd for a vote since the beginning and nothing about that is going to change,” he said. “We have a lot of support. I’m not sure what the exact whip count is. I would certainly be reluctant to close off debate until my amendment has had a chance to be heard.”

Sen. Carl Levin, D-Mich., said that he still hoped to include his amendment to strengthen the Volcker Rule ban on proprietary trading.

Sens. Ted Kaufman of Delaware and Sherrod Brown of Ohio said that they wanted to see a vote on the Levin amendment as well as a measure from Sens. Maria Cantwell, D-Wash., and John McCain, R-Ariz., to reinstate the separation of commercial and investment banking that was repealed in 1999.

“There are some good amendments out there we ought to think about doing, such as the Levin-Merkley amendment,” Kaufman said.

Despite frictions expressed by several senators from both parties who still want to leave their stamp on the legislation, many acknowledged that momentum for the bill is undeniable and Republicans conceded that even without significant changes, the bill is likely to pass.

“I think the bill is going to pass and I think every person on our side of the aisle thinks the bill is going to pass, but I think many of us who had worked hard hoping for a good bill realize that is probably not going to be the case,” said Sen. Bob Corker, R-Tenn. “We are going to end up with a bill that the American people don’t deserve. It doesn’t address many of the core issues and at the same time its a vast overreach.”

Corker was not the only Republican to signal that the necessary votes to pass the bill were already in hand.

Sen. Richard Shelby, the top Republican negotiator, said that he could not support the bill in its current form, but predicted at least some other GOP lawmakers would.

“I wouldn’t think many of them would support this bill,” the Alabama lawmaker said.

When asked if enough Republicans would vote for it — Democrats only need one if they hold their own caucus together — Shelby said yes, “at the end of the day.”

So far, Republican Sens. Chuck Grassley and Olympia Snowe have cast decisive votes in Democrats’ favor during critical votes on the bill.

They each voted with the Democrats to reject a GOP alternative to a proposed consumer protection bureau from Shelby, and they voted in favor of blocking a GOP substitute on the derivatives section of the bill that would have removed the requirement that banks spin off their swaps desks.

Snowe has also succeeded in convincing Dodd to accept several of her amendments on the floor, including protections for small businesses and seasonal businesses in Maine.

Grassley said Thursday that he did not have any concerns with the bill as it currently stands and was working to preserve provisions he supports, including the swaps measure.

“For right now, I don’t have any concern, but that doesn’t mean I won’t have concerns between now and the last amendment being adopted,” the Iowa Republican said.

But Grassley stopped short of pledging to support the final product. “Let’s wait till you get down to the end, I’m not going to make that judgment now.”

Sen. Scott Brown, R-Mass., is another Republican who signaled he wants to support the bill and is considered likely to vote for it even if Dodd fails to strike a bipartisan deal with Shelby.

“There are Democrats and Republicans working in a bipartisan manner offering legitimate amendments in an effort to make this the best possible bill for the American people and for American businesses, and to address the very real concerns that we all have,” Brown said in an interview. “I’m playing a very active role.”

By Kenneth R. Harney

Saturday, May 15, 2010; E01

If you’re thinking about applying for a home mortgage, here’s some important news: Beginning June 1, your lender is likely to order a second full credit screening immediately before closing.

The last-minute credit report will be designed to find out whether you have obtained — or even shopped for — new debt between the date of your loan application and the closing. If you’ve made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card, you name it — the closing could be put on hold pending additional research by the lender.

If you’ve actually taken out new loans that are sizable enough to affect the debt-to-income ratio calculations used in your original mortgage approval, the whole deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget.

The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and fraud by borrowers. Fannie’s “loan quality initiative” will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers.

“There’s an almost irresistible urge” for many mortgage borrowers, said Don Unger, chief executive of Advantage Credit of Evergreen, Colo. “The lender says, ‘Okay, you’re approved for the loan,’ and you immediately think about shopping for all the things you need for the house. You go to Home Depot” or other major retailers, “and you put in an application.”

In the past, that might not have raised an eyebrow — or even been detected. But under the new double-check policy, when the Home Depot application shows up as a “hard,” or borrower-initiated, inquiry on a credit report, Unger said, the lender “is going to have to contact” the merchant and determine whether credit was extended, in what amount, and how this might affect the applicant’s home financing transaction.

Marc Savitt, president of the National Association of Independent Housing Professionals and a mortgage broker in Martinsburg, W.Va., said it’s not an uncommon scenario. “Most often the new debt involves furniture or other goods for the house,” Savitt said. “However, we have seen debt for new cars and other major purchases.”

Terry Clemans, executive director of the National Credit Reporting Association, recalls one case in which the home buyers “went out and gorged on $40,000 worth of new furniture and all types of stuff” after their loan approval — incurring monthly payments far beyond what they could possibly afford. Under the new policy, they would likely be shot down before closing.

Fannie Mae spokeswoman Janis Smith said lenders “will have to look for things like new credit accounts, increased credit lines, increased balances on existing accounts, undisclosed or newly recorded liens, second mortgages — anything that may have changed since initial application that might impact a borrower’s debt-to-income ratio.”

As a practical matter, some lenders are likely to ask their credit reporting vendors to perform the actual investigations when new debts or inquiries pop up on borrowers’ files. Fannie Mae’s instructions say that “lenders must determine that all debts of the borrower incurred or closed up to and concurrent with the closing” are considered in the final loan analysis.

Unger, however, said all this may not be as straightforward as it sounds. For example, if the credit report is pulled immediately before closing to comply with the “up to and concurrent” requirement, there may not be sufficient time to check out inquiries — especially those in which no actual drawdown of debt has been reported to the national credit bureaus. He also questioned whether entire loan packages might need to be re-underwritten — a time-consuming process — based on credit data discovered at the eleventh hour.

In that event, poof goes your closing.

How should home buyers and refinancers prepare for the new credit check procedures? Lenders and credit reporting company executives say everybody needs to follow just one basic rule: abstinence. Between your application for a mortgage and the date of closing — which might be a span of 45 to 60 days or more — resist the irresistible.

Don’t apply for new credit unless you discuss it in advance with your lender and get a green light.