An industry of change: Mortgage brokers can expect more changes that will affect their process and procedures of loan production and operations
As you know, in 2008, several compliance changes occurred that will affect the broker operations in 2009. In the month of May, two new changes, the Red Flag Rules and the Home Valuation Code of Conduct (HVCC), go into affect unless otherwise postponed or retracted. As you may know the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Association and the Federal Reserve Board have provide guidance not only on the Red Flag Rules but also, HVCC called the Proposed Interagency Appraisal and Evaluation Guidelines which apply to the majority of real estate loan transaction occurring in today’s market.
Many brokers have not completed their initial assessment of their business operation for the Red Flag Rules, as well as not looking for an Appraisal Management Company (AMC). Some larger lenders are forcing brokers to use their preferred or vetted AMCs. On the other hand, the regional or smaller lenders are leaving the decision of choosing an AMC to the brokers. At this point, very few lenders are requiring loan correspondents a copy of their Red Flag Rules Report or Assessment. In 2009, brokers may see lenders requesting a copy of their Quality Control (QC) Plan and Red Flag Rules Plan. The lenders will not be an enforcer of the Red Flag Rules, however they may require a copy of the Red Flag Plan as part of their vetting of brokers when applying or renewing broker packages. This requirement from the lenders will bring brokers in compliance with the Federal Trade Commission ruling on Red Flag Rules. By June of 2009, brokers will be forced to choose an AMC or use a lender’s preferred AMC and provide a copy their Red Flag Rules Plan as part of establishing or maintaining a relationship with lenders.
The National Mortgage Licensing System (NMLS) registry is in full swing in some states. Not all states are ready for the NMLS, but some are on board with the registration. Overall, this may prevent some bad apples from receiving their license and deter others due to background checks and other screening systems, but it will not prevent mortgage misrepresentation or mortgage fraud. The banks, at this time, are not required to participate in the NMLS. This will probably change sometime in late 2009 because of the appearance of discrimination toward financial organizations. Registry requirements should be the same for all loan originators. The next question is how far will NMLS go? The NMLS has the potential to require processors and underwriters to register and maintain a license and professional education requirements similar to the loan originator. There are many mortgage cases where the processor and or the underwriter was involved with or conspired in mortgage fraud. I do not see any current indicators that the industry will require the registration of processors and underwriters in 2009, but as increased mortgage fraud investigations continue to reveal gaps in the mortgage process as a result of the infamous mortgage days of the past, I believe processors and underwriters may have some form of registration, licensing and continued education requirements.
I personally want to congratulate the great state of Georgia for becoming the first state that will prosecute mortgage fraud. At this time, there is no federal law solely written for mortgage fraud. If convicted, one will not be convicted of mortgage fraud, but will be convicted of mail, wire fraud or other federal statutes. At this time, Georgia is ranked as one of the highest states with reported mortgage fraud. I believe the reason they were ranked as one of the top states is because Georgia is prosecuting mortgage fraud. Uncovering mortgage fraud schemes has brought to light more visibility and an increase in the number of known mortgage fraud incidences. If states were to pursue mortgage fraud, Georgia would no longer be ranked in the top percentile. The FBI is shifting gears to learn how to investigate mortgage fraud in order to move aggressively against mortgage fraudsters. We will see other states follow Georgia’s footsteps in order to stamp out mortgage fraud in their state. This will have a trickle-down effect to the mortgage broker and lender causing the broker to use verification systems in order to prevent misrepresentation on mortgage loans.
State examiners are not trained in fraud detection systems, as underwriters are in wholesale operations. Most state examiners are functional in regulatory types of audits, therefore limiting a state’s ability to uncover mortgage misrepresentation. I do not see any indicators at this time that states are prepared to take on mortgage fraud investigation however, over time, I believe states will take a more active role in mortgage fraud investigation due to the adverse economic impact mortgage fraud has on cities and communities. The FBI will not entertain a mortgage fraud case unless it is $1 million or more which leaves the rest of the cases not prosecuted. At best, the states will revoke the license of loan originators, appraisers and real estate agents, and add their names in a disbarment database. Congratulations Georgia!
Lenders are now ordering 100 percent income verifications from 4506-T when underwriting a loan. Brokers may see the lender passing the underwriting condition or stipulation back to the broker and requesting tax return transcript from the IRS. When originating a loan, the broker requests income documentation from the borrower because the loan programs may require full documentation, such as pay stubs and W-2s as part of the credit package. In the future, the lender may require the broker to provide a tax transcript from the IRS as to the validity of the income. The question is who will pay for the IRS tax transcripts? Eventually, the borrower will, but it may also take from the broker’s net income. The Real Estate Settlement Procedures Act prohibits a charge on the HUD-1 Settlement Statement … a POC (Paid Outside of Closing) for 4506-T charge.
Home Equity Conversion Mortgages (HECMs) are a new product that few brokers know how to originate. HECMs have been around since 1982 and are very quality control-driven. As long as the broker who originates the HECM stays within the checklist steps, their loan should be uneventful. Some gaps with the HECM underwriting are identity and legal documentation. Identity verification is relatively the same for any other identity process like the use of Death Master however; there are a number of legal documents that can be maneuvered in order to swindle money from the homeowner. For example, there is a mortgage fraud case where the daughter of an 85-year-old woman had a full power-of-attorney and was a signer on her mother’s bank account and basically passed herself off as her mother. The daughter was 63-years-old and qualified for the loan legally by age because of the age requirement of 62 years. The mother had no idea of her daughter’s actions. The daughter felt she had the right to the property because of kinship. The power-of-attorney was falsely executed and the executing attorney was a bogus name. The mortgage professional assumed the legal documents were valid. The flaw at this time with HECMs is there are no Red Flag systems in place similar to Freddie Mac’s Best Practices Red Flags to assist processors, loan officers and underwriters to discern potential misrepresentation. In the future, we can expect more robust Red Flag indicators for HECMs. As the industry produces more HECM loans, the probability of misrepresentation will increase as the industry discovers more fraud in them. It will be another four to six years before we see any changes to HECM quality control measures.
Loan modifications are on the rise in 2009. At this point, there is no regulation governing businesses or individuals assisting homeowners with modifying their loans. Attorneys are the only permissible representation between the homeowner and the lender. Other than attorneys, there is no licensing requirement of individuals who promote, counsel, process homeowners on loan modifications. This does not include lenders and other organizations like HOPE NOW Alliance who are reaching out to distressed homeowners. Until law enforcement or regulatory agencies becomes knowledgeable and trained in this niche of the mortgage industry, we will not see any oversight until after the homeowner is taken in by some false promise a of a mortgage rescue through mortgage modifications. I recommend all homeowners to speak with and validate the attorney who will represent their mortgage to the lender before engaging in any upfront payment contract with a loan modification representative.
There will be change in 2009, and now it is up to the industry organizations such as the National Association of Mortgage Brokers and the Mortgage Bankers Association to take our industry into new areas of regulation, compliance and fraud prevention without fracturing certain mortgage operations with additional costs in overhead. Some organizations acted quickly in response to the mortgage crisis and implemented plans in order to correct some of the problems whether one agrees with the change or not. Now is the time to correct the mortgage culture to the relative times of today and the future, in order to preserve the mortgage industry and protect homeowners.
Tommy A. Duncan is executive vice president of Quality Mortgage Services LLC. He may be contacted at (615) 591-2528, ext. 124.
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