An AML program includes at a minimum:

Establishing internal policies, procedures and controls including a process for collecting suspicious activity information, identifying reportable events and filing suspicious activity reports (SAR)

• Designation of a compliance officer – this will be the person responsible for filing the SAR
• Establishing ongoing employee training programs. Annual training will be enough for an average shop – the training must cover an explanation of your procedures and red flags
• Independent audit function to test programs
• The size of the company is taken into consideration when determining the extent of the plan

Individual registration is required so we can issue certificates and you can prove to the CFPB who attended the training.   The cost is $79 per person.
Need procedures too?  Our AML/SAR procedure manual for residential lenders is ready!  Don’t pay too much for a manual with banking regulations you will have to delete to prove to the CFPB these are your procedures.  Our procedures provide real examples and coordinate with the training program we offer.   The cost for the AML/SAR Program for Lenders is $250.   Contact Alice Alvey to order.

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Servicers No Longer Require Licensing In MI

Good news for servicers of Michigan loans came yesterday when the House passed SB 908 on a 107-0 vote to delete the reference to loan modifications in the Mortgage Loan Originator Licensing Act. A marked up version is attached and illustrates the changes to the current law.

Page 3 of the Act shows that reference to loan modifications is being crossed out and therefore individuals who handle loan modifications are not required to be licensed under the state MLO act. Other technical corrections were also made to the bill. The governor is expected to sign this shortly.

The Michigan Mortgage Lenders Association (MMLA) played a role in seeing the bill through. Together we can make a difference!

1) Expansion in operations is harder when a job description has multiple skill sets required. It’s harder to find the right mix of qualities when hiring. The break point seems to be when the company needs more than 4-5 of this position (for some 3-4 is the break point). First of all there may not be a hiring pool of people with combined talents. In addition, there becomes a break point when training and ‘on boarding’ is taking more than 6-8 weeks for someone to get around the curve. Typical on boarding for these positions should be around 4-6 weeks. The longer the on boarding process, the more inefficiency in the mean time.

2) The skills required are very different for these positions: Processors need to be people oriented with excellent customer service skills whereas a shipper doesn’t require this level of skill. You pay for skill so the pay is higher for combination positions. This is a cost decision for the company business model based on staff costs in your market. Job descriptions should be written to illustrate the tasks and therefore the skills for the position. When you actually write down what each position must handle on a daily basis the disconnect when combining everything from processing through shipping becomes very clear.

3) Priorities are tough to manage when closing is combined with any other function with different daily priorities. Closers have tight deadlines. Processor/closers stop processing when loans have to close.

4) Managing valleys in the business cycle and not wanting layoffs, seems to be why some companies like combined job descriptions. In other cases, it just ended up that way because of the talent in the office and the reality is the staff is stressed out trying to wear multiple hats. You might be able to buffer the down cycles with combined jobs but it is a challenge when growing.

5) Continuity of knowledge within the file is a valuable part of combining processing and closing positions. So you must weigh the talent pool with the pace of growth you wish to accomplish. In most cases the value of the continuity of knowledge is quickly outweighed by the plans for growth. You just need to have the right checklists and systems to maintain the same level of quality.

That’s my 5 cents.

Alice Alvey, CMB | President | Mortgage U, Inc

• The seller is permitted to pay an amount to offset actual closing costs up to the greater of 3 percent or $6,000. The 3% is based on the lesser of the sale price or appraised value. There is a note with Table G in the federal register that states ‘except for 203(k) where the appraised value is to be used’.

• The definition of acceptable concessions permits payment of actual costs to close the loan including pre-paids, payment of UFMIP and/or fund an interest rate buy down.

• The seller or other interested third party is not permitted to pay condominium associations fees, mortgage interest payments and mortgage payment protection plans. HUD is trying to eliminate sellers paying incentives such as a year’s worth of homeowner association fees, 6 month’s worth of mortgage interest or mortgage payment protection plans.

• The cap applies to any contribution by an interested party. HUD has clarified this definition to be: “Seller or other interested party such as a real estate agent, builder, developer, mortgage broker, lender, and/or settlement company.” However there is a statement in the table defining the 3% rule that lender paid closing costs as a result of premium pricing are not considered in the 3%. I believe this wording triggers several questions! We will be addressing this topic with HUD to make sure it is clear how broker paid costs or a last minute waiver of fees will be viewed.

Some important notes:

• The loan amount after which the 3 percent of the property value is greater than $6,000 is $194,930 with a sale price/value of $200,000. Therefore, any sale price/value above this amount will be limited to the 3% maximum.

• The $6,000 is not static but tied to an index. The dollar limitation may increase annually and at the same percentage rate as the FHA national loan limit floor, rounded up or down within $100.

• In the previous federal register notice, FHA was also asking for comments related to manual underwriting rules. The proposal for the manual underwriting rules has not been included with this posting. We should expect a separate request for comments on this subject in the coming months.

• The actual federal register notice can be found at: http://www.gpo.gov/fdsys/pkg/FR-2012-02-23/pdf/2012-3934.pdf

Remember this is a request for comments about seller concessions and is not a final rule. Here is the link to post a comment: http://www.regulations.gov/#!submitComment;D=HUD-2010-0063-0908

FHA is planning a conference call with the MBA FHA Subcommittee of which I am a part of. Please feel free to send me your questions and concerns and I’ll make sure we get answers during the meeting.   Stay tuned!

All through the TSG are references that a loan meets FHA credit and capacity requirements with an Approve/Accept rating. So do lenders really need to manually underwrite the DTI even with an AUS approval?

Back in 2008 when the ML was published there were a few bloggers concerned that FHA could pull the rug out from an Approve/Eligible loan due to a high DTI. Even today, lenders watch the DTI to be sure the compensating factors make sense with the amount of monthly debt the borrower will carry, even with the Total approval. This is prudent underwriting but can cause heartache to an LO who has already told the borrower the closing is set for Friday! Let’s answer the question by looking first at what is clearly stated in the guide:

A loan is eligible for FHA insurance endorsement if:

• The TOTAL Mortgage Scorecard rated the mortgage loan application as an ‘accept” or “approve;” or “refer” was issued and the DE Underwriter manually underwrote and approved the mortgage application; and
• The data entered into the AUS is true, complete and accurate; and
• The entire loan package meets all other FHA requirements except for those specifically not required because the loan application was evaluated by TOTAL and an “accept” or “approve” was issued.

FHA will honor the Total approval and the approved DTI, as long as they see the data and the documentation the same way the underwriter did. However, not all underwriters and auditors see eye to eye. In an audit, FHA may determine a different amount for monthly income or a monthly debt, re-score the loan using TOTAL’s emulator in a post closing environment and potentially receive a ‘refer’. Even a small change in the income can move the decision, as you all know. If FHA’s review results in a ‘refer’, the waivers for credit and capacity just flew out the window and the lender will be asked to defend the DTI based on manual underwriting criteria. This is tough to do in cases where Total has approved a DTI of 50%.

Rest assured if the documentation clearly supports the borrower works 40 hours per week and earns $35 per hour with full time earnings for two straight years, FHA will use $6,066 per month just like the underwriter will. As with all FHA rules, the catch is when you get to the word ‘however’.

Download Copy Of The FHA Total Scorecard Guide 2011

As you may know FHA released a new FHA Total Scorecard Guide (TSG) with some pretty significant changes. Our team sat down and scrubbed the new TSG to identify and relay the changes to you on our blog. The details will most certainly be incorporated into our FHA Practical Guide and the rest of our FHA training programs with additional angles of analysis. We found more than a dozen important issues and reminders (not including the many minor text changes). Here are the important changes and updates we spotted:

New FHA Total Scorecard Guide Summary Of Changes

1) System Overrides: The System Overrides requirements have been expanded to include a critical new “Review Rule”. These rules require the loan application to be downgraded to a ‘refer’. New on the list is ‘excessive qualifying ratios’. Many lenders have established a maximum DTI regardless of the AUS decision but others still work with the old adage that if the system issued an approve/eligible it must be OK. This is risky business and now the TSG clearly gives FHA the upper hand in determining what is considered a high DTI based on the other factors in the file and what should have been downgraded to a manual underwrite. (page 13)

2) The guide layout is completely changed in that it only states the documentation requirements for approve/accept loans. This layout change is good because now it is very clear that a refer loan will always follow the documentation requirements of the 4155.1.

3) There are two underwriting issues that occur as a result of publishing the TSG with only ‘approve/accept’ documentation requirements:

a) Alimony and child support: Previously the TSG allowed alimony and child support income to be verified using only a 3 month history when a loan received a ‘refer’. The elimination of this documentation exception from the TSG clearly indicates that refer loans require a full 12 months of verification before using alimony or child support income. Until now, most underwriters were requiring the 12 month history for ‘refer’ loans anyway but the guideline allowing 3 months gave them some latitude to make exceptions. The change means underwriters should not be making any exceptions for shorter or spotty payment histories from the ex spouse.

b) Judgments: The TSG remains the same and states “Obtain evidence of payoff for any outstanding judgments shown on the credit report” for approve/accept loans. There is still no reference in the TSG to the exception noted in the 4155.1 that allows the underwriter to accept an agreement with the creditor for regular payments and verify the borrower has made the payments on time. In my opinion, the underwriter still has the ability to choose to manually underwrite the loan and use this exception.

However with the new TSG format it appears clear that you are either using an automated decision and following all of its rules or using manual underwriting guidelines. If the borrower has an agreement and is not paying off the judgment then the loan is considered manual underwriting. This is a credit factor AUS can’t assess and accepting a payment arrangement is not what the ‘approve/accept’ is dictating will happen.

If the loan has to fall into a full manual underwriting mode the representations and warranties disappear and DTI and other issues change. I have not confirmed this with anyone directly at FHA yet but my experience in audits sees that underwriters should be very cautious and not layer other risks when considering accepting a court ordered judgment with a payment arrangement on ‘approve/accept’ loans.

4) Energy Efficient Mortgages: The new TSG adds specific certifications the DE underwriter must make on the HUD 29900 LT.   The underwriter should note on the LT something along this line:
I have reviewed and certify the following items:

•   The calculations associated with energy efficient improvements are correct
•   The acceptability of the improvements have been declared energy efficient
•   This transaction meets all FHA EEM program requirements

The previous TSG referenced this in part but did not specifically list all three bullet points that must be covered by the DE underwriter on the LT. (pg.8-9)

5)  Misc. Documents:  The new TSG adds a few documentation requirements that are probably already in place at most companies but worth   pointing out:

•   Commission earnings require IRS verification in all cases
•   IRS transcripts are to be reconciled with the tax returns prior to APPROVAL
•   If the borrower does not hold the deposit account solely, all non-borrower parties on the account must provide a written statement that the  borrower has full access and use of the funds

6)   Disputed Accounts/Collection and Public Record:   The old TSG states:   “If the credit report reveals that the borrower is disputing any credit accounts or public records, the application must be referred to a DE underwriter for review.”   The new TSG incorporates an April 28th 2011 HOC reference guide email from Jerry Mayer that added guidance regarding disputing credit accounts.  It is very clear that a disputed account is cause for a manual downgrade unless ANY of the following circumstances apply (meaning the lender has to confirm at least one of these requirements can be met):

•   The disputed account has a zero balance
•   The disputed account is marked as “paid in full” or “resolved”
•   The disputed account is BOTH less than $500 AND more than 24 months old

Keep in mind that FHA does not state a DE underwriter has to be the one to clear this requirement. (pg.15)

7)  Borrowers Employed by Family Members:  This topic has its own section now to remind lenders to check the 4155.1 for requirements and that AUS will not factor in the risks associated with this type of employment. (pg.17)

8)  Tolerance Requirements:   The tolerance requirements permitted per ML 05-15 have been added. (pg.10)

9)  Reminders:   There are several items in the TSG we want to remind you of:
• An occupant borrower that has no credit score and is supported by a non occupant borrower with a credit score must be manually underwritten.
• Cash out refinances for self employed borrowers require business tax returns even with an approve/eligible
• A gift can be used as reserves
• Consumer credit counseling is acceptable for approve/accept loans and requires no additional documentation

The items listed here are being incorporated into our FHA Practical Guide and are an example of the added organization and detail you get with the guide when compared to the 4155.1 or other reference publications. Our FHA and VA Practical Guides are available in book format from the MU website and on line through Allregs.

If you have found something unclear in this write up or in the TSG please send me an email!aalvey@mortgage-u.com

We are always researching and comparing FHA policies to help you determine what is the right risk and the right process for your organization.

Realtors and sellers constantly struggle with trying to identify if a pre-approval letter is worth the paper it is written on. The costs and delays associated with accepting an offer from an unqualified or marginal buyer can be significant. Even a good loan originator can have a problem when buyers change their financial condition during processing or investors change underwriting requirements before closing. But these changes are legitimate extenuating circumstances that can cause a genuine denial of a previously approved loan. With a legitimate denial, the buyer is entitled to a refund the earnest money deposit. However, in many cases a change in circumstance does not constitute a denial and the lender must be careful to stay within the requirements of the Equal Credit Opportunity Act (ECOA).

Assuming there is a fairly standard purchase agreement, the buyers are only entitled to a refund when the buyer is denied based on the terms and conditions requested. In this article I’ll review a few scenarios to test your knowledge of when a buyer is truly entitled to a refund of the earnest money deposit due to a denial of the loan application.

Let’s start with a basic scenario: The buyer applies for a conventional loan of $80,000 to purchase a home with a price of $100,000. The buyer has stable income, acceptable qualifying ratios, acceptable credit and over $35,000 in the bank for funds to close. The loan originator provides a pre-approval letter subject to an appraisal. However, two weeks later the appraiser determines a value of $95,000. Is the borrower approved or denied? If you’ve been in the business a long time you have a thousand questions that all start with the words ‘that depends’ or ‘what if’. Don’t over think this. Straight up the borrower has enough funds to close, has acceptable credit and qualifies. However, the maximum loan amount without private mortgage insurance will change due to the low appraisal. This is a counter offer to the buyer and the original approval terms are not available. Therefore, there is a legitimate denial based on insufficient collateral.

Now that the easy appraisal problem scenario is out of the way, let’s just look at borrower issues. In this scenario you have a fully qualified borrower purchasing 123 Main St. and the recent paystub becomes outdated during processing. Just before closing, the buyer finds their dream home on North Ave. at a steal and wants to back out of the 123 Main St. contract. In this scenario the borrower still qualifies and there is not a legitimate reason to issue a denial notice just because the paystub is outdated. The buyer will have to forfeit the EMD on the Main St. contract if they want to put in an offer on the dream home.

The same problem occurs when a buyer floats the interest rate at application and then locks later at the best rate in town on a 30 year fixed but doesn’t get to closing on time. If rates increase and the buyer still qualifies, there may not be a legitimate reason under ECOA to issue a denial. Each case has to be assessed to identify the causes for the rate expiration but in a lot of cases the lender and the borrower need to come to an agreement because ‘I didn’t get the rate I wanted’ is not a reason for denial.
Lenders have an obligation to stay very factual about the circumstances surrounding the loan applications and not fall for the emotional plea from the buyer to try to get a refund of the EMD.

Supervised and Non Supervised Mortgagees ONLY:

The net worth requirements were changed with ML 10-20 however authorized activities for a mortgagee, as published in the 4060.1 Rev. 2, were not changed.

Per the 4060.1 Rev. 2 “…these entities have the ability to originate, underwrite, purchase, hold, service, and sell FHA insured mortgages and submit applications for mortgage insurance. ” (This includes funding and closing in the name of the mortgagee.)

Approved mortgagees have the ability to pursue Direct Endorsement (DE) underwriting authority. The key is that an approved mortgagee is not required to obtain DE authority.

An approved mortgagee can be sponsored by a DE approved mortgagee and the DE mortgagee can conduct the underwriting. The originating approved mortgagee can still fund and close in their name, as permitted by the DE mortgagee. Essentially a mortgage without DE approval, can be a ‘sponsored originator’.

Perhaps we change our definition of ‘mini eagle’ now. In the past a mini eagle meant you were a loan correspondent and able to originate and process FHA but could not obtain underwriting authority. Today, fully approved mortgagees can sit without underwriting wings through sponsors.

Sponsors should keep in mind that they still have full liability for the quality of the mortgagee’s loan. If I read my FHA cards right, FHA has full authority to go after both entities if there was a problem.

Sponsored Originators – entities without mortgagee approval:

Companies that are sponsored originators and are not an approved mortgagee can take FHA applications and process the loans however they do not have authority to underwrite or close in their name. A sponsored originator without mortgagee approval is a broker in the true sense of the definition.

Authorized Agents:

ML 10-20 clearly changed how Principal-Authorized Agent Relationships work. The ML established that only unconditionally approved DE lenders were permitted to enter into principal agent relationships. Many companies used this avenue in the past to have another lender underwrite on their behalf. This was a great option for small to mid-sized companies who could not afford a full time DE underwriter.

Under the new process, a company must obtain their mortgagee approval and pass the test case phase for DE approval before a Principal-Authorized Agent Relationship can be established. So the ultimate question is why would a lender need an agent? Why not just stay at the new mini eagle level? If your only goal is to get FHA loans closed, then the new mini eagle is right for you. However, many companies do earn DE authority and then need a solution in the event they become short staffed due to increases in volume or leave of absences. The fact remains that sponsored originator status and authorized agent relationships both serve a purpose and allow a fully approved mortgagee to serve customers based on their business model and circumstances.

Section 3(j) of the Act defines “Loan modification activities” as:
(i)
Collecting or receiving payments, including payments of principal, interest, escrow amounts, and other amounts due, on existing residential mortgage loans due and owing to a mortgagor or mortgage servicer, when the borrower is in default or in reasonably foreseeable likelihood of default.
(ii)
Working with a borrower described in subparagraph (i) to collect data concerning the borrower’s residential mortgage loan or loans.
(iii)
Making any decisions necessary to modify, either temporarily or permanently, certain terms of the residential mortgage loan or loans of a borrower described in subparagraph (i) or to otherwise finalize collection through the foreclosure process. These decisions may include changing the principal amount, the rate of annual interest charged, or the term of a residential mortgage loan; waiving any fees or charges, including late charges, a borrower is obligated to pay; deferring residential mortgage loan payments; or making similar adjustments to a borrower’s residential mortgage loan or the borrower’s obligations under the loan.

A full copy of the notification can be found here:
http://www.michigan.gov/documents/lara/Mortgage_Modifiers_MLO_License_Required_355891_7.pdf

MU offers the full 2O hour SAFE ACT Approved course MLO’s need in order to become licensed. This course is approved by the NMLS for all states. We include free access to a practice exam and instructor support via email after the course. We are committed to helping you succeed in becoming licensed! Check our current schedule for the next available 20 hour program. If you have a group and need your own training dates please contact us to arrange for a customized program 800-278-0200.

Rescission: There is a proposed new ‘Notice of Right to Cancel’ form . The form will have a ‘tear off’ part at the bottom that is given to the borrower. Lenders will only have to give out one copy and won’t have to worry about who is entitled to two copies.

In addition, the term ‘material disclosures’ will be expanded to include information about the interest rate and terms of the loan. Today material disclosures issued with the right of rescission include the mortgage and final TIL.

Under this rule, creditors will have to respond to a borrower within 20 days if the borrower rescinds.

The proposal desires to put clear wording in place that states waiving the three day right of rescission cannot occur due to the expiration of a discount offering. This appears to imply that expiration of the interest rate not an adequate reason to waive the right of rescission.

Modifications: Modifications will be subject to new TILA disclosures if the interest rate or monthly payment change, if the loan amount will increase, if the lender charges a fee or if the loan changes to an ARM or has other risky features. This is new paperwork in particular for TX and NY where modifications are used instead of refinances to avoid paying tax stamps.

Modifications would be subject to the high priced mortgage loan test and protections under HOEPA.

High priced mortgage loan: This section proposes to have the industry stop using the APR in comparison with the Average Prime Offered Rate (APOR) for determining if a loan is a high priced mortgage loan. Instead the rule creates a ‘coverage rate’ that is not disclosed to the customer. The coverage rate is calculated using the interest rate, and origination charges as the finance charges. This will create a consistent number used by all companies to determine if a loan is a HPML. Today, we have differences in the APR calculation which means lenders are not consistent in reporting HPML’s.

Refund of application fees: Borrowers will be allowed three days to rescind the application after receiving the TIL and will require a full refund of any fees paid. This includes the appraisal fee, even if the lender has incurred the cost.