Compliance News

In First American's Compliance News Archive you will find easy access to our library of GSE announcements, court findings, legislative changes, specific changes to state requirements, governmental guidance on issues that directly affect the mortgage document industry and more.

January 2007

Fannie Mae Announcement 06-27 (December 29, 2006) (156 Kb)

A new Single-Family MBS Master Trust Agreement (“Trust Agreement”) for both fixed and adjustable rate MBS pools was announced, in addition to servicing requirements for MBS mortgage loans. An effective date has not yet been set for the Trust Agreement and related servicing enhancements.

HUD Mortgagee Letter 2007-01 (January 3, 2007) (75 Kb)

The Federal Housing Administration (“FHA”) announced the 2007 maximum mortgage limits for loans endorsed for insurance on or after January 1, 2007, and insured under the following sections of the National Housing Act: Sections 203(b)(FHA's basic one to four family mortgage insurance program), 203(h)(mortgages for disaster victims), 203(k)(rehabilitation mortgage insurance), 223(e)(properties in declining areas), and 234(c)(condominium units). For Section 255 (Home Equity Conversion Mortgages), the new loan limits will be effective for all loans closed after January 1, 2007. Mortgagee Letter 1995-27 is hereby rescinded.

Federal Reserve Board

December 26, 2006 (17 Kb)

The Federal Reserve Board announced that the revised Consumer Handbook on Adjustable-Rate Mortgages (“CHARM Booklet”) (5 Mb) is available. The CHARM Booklet includes substantially revised information regarding interest-only and payment option mortgages. Use of the revised CHARM Booklet is mandatory by October 1, 2007.

Nevada

Assembly Bill 334 (effective January 1, 2007) (26 Kb)

No person or governmental agency may require a person to include the social security number of a person on any document to be recorded, filed or otherwise submitted to a governmental agency, unless the social security is required pursuant to a specific state or federal law, for the administration of a public program or for an application for a federal or state grant.

A governmental agency may require a person who records, files or otherwise submits any document to the governmental agency to provide affirmation that the document does not contain the social security number of any person and may refuse to record or file any document that does not contain such affirmation.

Rhode Island

Emergency Banking Regulation 3 (December 30, 2006; Mandatory compliance by February 1, 2007) (14 Kb)

The Rhode Island Department of Business Regulation, Division of Banking (“Department”) promulgated Emergency Regulation 3 (“Regulation”) to implement the Rhode Island Home Loan Protection Act (“Act”), discussed in our December 19, 2006 Legislation Update. While the Regulation is effective immediately, the Department will not take any enforcement actions related to the use of the required disclosures until February 1, 2007.

The Regulation addresses the following three areas: (1) record-keeping requirements; (2) mandatory disclosure requirements; and (3) clarification of certain provisions of the Act. Each will be discussed individually below.

Record-keeping requirements

Persons subject to the Act must maintain records for each and every loan file supporting and substantiating the “Tangible Net Benefit” and/or “High Cost Home Loan” analysis performed during the transactions, including a list of all loans in which the “Tangible Net Benefit and/or High Cost Home Loan” has been assented to by the borrower. The analysis performed regarding whether the borrower has a “Tangible Net Benefit” and whether the Home Loan is a “High Cost Home Loan” must be accurate and reflect verified information and must be provided to the borrower pursuant to the disclosure requirements of the Regulation. These records must be available to the Department for review at all times.

Disclosure Requirements

There are four new disclosures required under the Regulation:

1) Prohibited Acts and Practices Disclosure Regarding All Home Loans
2) Prohibited Acts and Practices Regarding High-Cost Home Loans
3) Tangible Net Benefit
4) High-Cost Home Loan

These exact disclosure forms must be utilized and may not be altered or changed in any manner. Loan brokers, lenders and applicants must sign and date all four disclosures and fully-executed copies of such forms must be maintained in each loan file.

All applicants must be provided with Disclosures (1) and (2) within 3 days of application. And while the text of the Disclosures indicates that the Disclosures should be given within 3 “business days” of application, Section 5(A)(iv) of the Regulation requires the Disclosures to be given within three “days of application”. Until this ambiguity is resolved, First American Nationwide Documents will comply with timing requirements dictated in the Regulation.

Disclosure (3) must be provided to all applicants as soon as the determination is made that the applicant may fall under the prohibition against “flipping a home loan”, but in no event later than 10 business days prior to the closing of the loan.

Disclosure (4) must be provided to all applicants as soon as the determination is made that the Home Loan is a “High-Cost Home Loan”, but in no event later than 10 business days prior to the closing of the loan.

First American Nationwide Documents will have all four disclosures available to our clients by the February 1, 2007 mandatory use date.

Clarifications of the Act

The Regulation clarifies numerous provisions of the Act, including the following:

“Bona Fide Discount Points” is an amount knowingly paid by the borrower for the express purpose of reducing, and which in fact does result in a bona fide reduction of, the interest rate applicable to the Home Loan; provided the undiscounted interest rate for the Home Loan does not exceed the conventional mortgage rate by 2 percentage points for first lien Home Loans and 3.5 percentage points for subordinate liens. The Regulation requires that the amount of the interest rate reduction purchased by the discount points must be reasonably consistent with established industry norms and practices for secondary market mortgage transactions.
“Bona Fide and Reasonable Fees” include tax payment services fees, flood certification fees, pest infestation fees, appraisal fees, inspection fees, credit report fees, survey fees, attorney fees, notary fees, escrow charges, title insurance premiums and flood, fire and hazard insurance premiums, if such charges are substantiated, preferably by an invoice and the charge does not exceed the invoiced amount.
A “Creditor” is any person who, within any consecutive 12-month period, originates or extends more than one Home Loan.
“Current Note Rate”, which is used to determine whether the interest rate reduction test is met when establishing the existence of a tangible net benefit, is calculated for adjustable rate mortgages by giving effect to the maximum interest rate adjustment on the previous Home Loan that would take effect within the 12-month period following the date of application based on market conditions as they exist as of the date of application.
“Excluded Points and Fees” are the items listed in the Act and may not exceed an amount equal to 3% of the total loan amount.
“Fully Indexed Rate”, for any Home Loan, is the maximum contract interest rate provided in the loan documents, taking into account any adjustable rate feature. For adjustable rates, the contract interest rate must be calculated using a fully indexed rate taking into account the maximum adjustments permitted under and in accordance with the timing required by the loan documents and using a value of the index used for interest rate adjustments in effect within the 45 day period immediately preceding the consummation of the home loan. The principles used in calculating the annual percentage rate for a loan with an adjustable rate feature may be applied in calculating the fully indexed rate.
“High Cost Home Loan” thresholds –
- Rate threshold is determined by using the fully indexed rate and referencing the statistical release H.15 to determine whether the loan meets or exceeds the applicable rate threshold.
- Points and Fees threshold is determined by using the fact amount of the loan for closed-end credit and total line of credit for open-end credit as the total loan amount.
In connection with a High-Cost Home Loan, no creditor shall directly or indirectly finance any points or fees that which total is greater than 5% or $800.00, whichever is greater.
For the purposes of determining whether a “tangible net benefit” exists, as required to avoid the prohibition against “flipping a Home Loan”, a Creditor must examine the prior 60-month period from when the existing Home Loan was consummated (including the first day of consummation of the loan and the last day of the 60th month.)
A violation of the Regulation or the Act is grounds for the Department to revoke the license of a licensee subject to its authority.
The Act’s prohibition against loan document provisions that require a borrower to waiver any claims or rights does not include a waiver of the Rhode Island Homestead exemption.

Interagency Guidance on Nontraditional Mortgage Products (108 Kb)

On September 29, 2006, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift supervisions and the National Credit Union Administration issued a final inter agency guidance on nontraditional mortgage product risks ("Guidance") to clarify how institutions can offer nontraditional mortgage products in a safe and sound manner and in a way that clearly discloses the risks a borrower may assume. The Guidance defines nontraditional mortgage products to include all interest-only products and negative amortization mortgages, with the exception of home equity lines of credit and reverse mortgages.

There are three primary areas addressed in the Guidance: loan terms and underwriting standards, portfolio and risk management practices and consumer protection issues. Each will be addressed individually below.

Loan Terms and Underwriting StandardsTo ensure that loan terms and underwriting standards are consistent with prudent lending practices, financial institutions should:

Consider a borrower's ability to repay the debt by maturity at the fully indexed rate, assuming a fully amortizing repayment schedule, including potential negative amortization amounts.
Consider a borrower's need to rely on sale or refinancing once amortization begins. A loan to a borrower who does not demonstrate capacity to repay from sources other than the collateral is generally "unsafe and unsound".
Establish clear policies for reduced documentation.
Demonstrate that mitigating factors support the underwriting decision and the borrower’s ability to repay, when loan features are layered (i.e. interest-only loan with reduced documentation).
Not consummate simultaneous second lien loans that have a payment structure allowing for delayed or negative amortization without significant risk mitigating factors.
Consider the spread between introductory and fully indexed rates to minimize the likelihood of disruptive early recasting and extraordinary payment shock.
Follow the interagency guidelines on subprime lending when offering mortgages that target subprime borrowers.
Qualify borrowers financing non-owner occupied investment properties based on their ability to service the debt over the life of the loan.

Portfolio and Risk ManagementTo ensure risk management practices keep pace with portfolio growth and changing risks of nontraditional mortgage loans, financial institutions should:

Set acceptable levels of risk in operating practices, accounting procedures and policy exception tolerances, reflective of appropriate limits on risk layering. Risk management tools should include tools for risk mitigation.
Monitor systems and risk management practices by keeping track of concentrations in key segments including loan types, third party originations, geographic area, property occupancy status as well as key portfolio characteristics, high loan-to-value ratios, negative amortization, lower credit scores, risk layered and non-owner occupied properties. Failure to effectively monitor systems and practices will result in elevated supervisory attention.
Establish quality controls, compliance and auditing procedures that include monitoring and training regarding accruals, customer service and collections.
Create and maintain strong systems and controls to monitor the quality of third party originations. If problems are discovered, financial institutions should take immediate action, including termination of the third party relationship.
Establish and adhere to comprehensive, formal strategies for managing risks including repurchase of defaulted mortgages.
Maintain capital levels that reflect characteristics.
Perform sensitivity analysis on key portfolio segments.

Consumer Protection To assure consumers understand product terms, risks as well as benefits in a timely manner, financial institutions should:

Assure that communication with consumers is "clear and balanced".
Assure that all offered products comply with applicable laws and regulations.
Provide information at crucial decision points, when consumers are shopping for loans and deciding acceptable monthly payments.
Provide in promotional materials and other product descriptions information about costs, terms, features and risk.
Apprise consumers of the maximum monthly payment a consumer would be required to pay with a hypothetical loan example once amortizing payments are required and the interest rate and negative amortization caps are reached.
Apprise consumers of the potential for increasing principal balances and decreasing home equity, as well as possible difficulties in refinancing.
Provide information on prepayment penalties.
Provide information on the cost of reduced documentation loans including any pricing premiums attached to them.
Provide information in monthly statements on option adjustable rate mortgages that allow consumers to make informed payment choices.
Avoid practices that obscure significant risks.
Develop and utilize strong controls to monitor whether actual practices are consistent with policies and procedures for employees and third party originators.

Proposed illustrations, which may be used voluntarily by financial institutions, were published simultaneously with the Guidance.

Currently, the following states have adopted the Guidance: Connecticut, Georgia, Hawaii, Iowa, Kentucky, Montana, New Hampshire, South Dakota, Texas, Vermont, Washington and Wyoming.

Wisconsin

Assembly Bill 912 (effective January 1, 2007) (41 Kb)

If a third party requests access to a consumer report on which a security freeze is in effect, the request is in connection with a credit application or other use and the consumer does not allow his or her consumer report to be accessed for that period of time, then the third party may treat the consumer's application as incomplete.

Georgia

House Bill 1282 (effective January 1, 2007) (41 Kb)

Any party to a settlement that will convey legal or equitable title to real estate or any interest therein or create any lien thereon may file a "Notice of Settlement" with the clerk of the county in which the real estate is situated. The notice is effective for 30 days from the date of filing and may be extended for an additional thirty days, if necessary.

Illinois

House Bill 4519 (effective January 1, 2007) (22 Kb)

A mortgage lender that pays property tax from an escrow account may provide to the borrower, annually, a means of communication for the borrower to access the necessary information regarding the tax payment in lieu of the written notice required within 45 days after the tax payment. Prior law did not require the alternative notice to be provided annually.

First American Nationwide Documents “Illinois Mortgage Escrow Account Act Notice” has been amended to reflect this change.

Ohio

Am. Financial Servs. Ass'n v City of Toledo, Ohio St. 3d (December 20,2006)

On December 20th, the Supreme Court of Ohio ruled that the city of Toledo's predatory lending ordinance is invalid. Citing its November 20^th decision in Am. Financial Servs. Ass'n v. Cleveland, the Court held that the Toledo ordinance violated the home rule provisions of the Ohio Constitution because they impose stronger restrictions on lenders than those enacted by the Ohio General Assembly.

The “Ohio Consumer Protection Disclosure”, which contains the disclosures required under the Toledo ordinance, will be removed from First American Nationwide Documents loan packages.

Oklahoma

Senate Bill 1748 (effective January 1, 2007) (19 Kb)

Pennsylvania

Senate Bill 180 (effective January 1, 2007) (18 Kb)

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