Legal and Compliance Issues You Need to Know

by Roger Fendelman, Esq. and Jeff Walker, J.D. of Interthinx

Staying on top of law changes and new investor interpretations is critical because they are key elements to a lender’s survival in these tough economic times. Increased investor scrutiny is a major issue. Loan quality has replaced origination volume as a primary focus. Repurchase requests due to compliance failures have reached an all-time high as investors look for ways to unload non-performing assets. Heavy attention is now being focused on the APR, “bona fide” discount point exclusions, seller- and lender/broker-paid fees, and more. Even the most innocuous violations now provide an excuse to push toxic assets back on originators, and the cost is staggering.

Changes are expected in HOEPA, Maryland, TILA enforcement. Big anti-predatory changes are in store via the Home Ownership and Equity Protection Act. Beginning in October, a new “Section 35” creates a subprime class of “Higher-Priced Mortgage Loans”, where the APR exceeds the “average prime offer rate” + 1.5% (rate + 3.5% for junior liens) . Based on investor reactions to similar laws enacted on the state level, there is a real possibility that such loans will be un-saleable in the secondary market.

In March, Maryland began enforcing a similar “higher-priced mortgage loan” restriction, and some investors have announced they will not purchase any such loans.

New Truth-In-Lending Act enforcement rules were recently enacted, giving state attorneys general new authority to enforce the provisions of the Act, and giving the Federal Trade Commission authority to assess civil penalties of up to $16,000 per violation. This is a dramatic shift in policy and could open the door for countless actions on the state level.

Consensus is needed on FNMA 5% fee calculation. For the first time, there is a clear difference of opinion as to how the FNMA 5% test is to be calculated. In February, GMAC made a surprise announcement that seller-paid fees must now be included, which can severely limit the salability of profitable purchase-money loans. The GMAC interpretation is arguably in keeping with the vague language in the FNMA lender letters, which describe the test as including any fees charged to the borrower, but is a clear departure from established industry practice. Fannie Mae and Citimortgage also appear to be following this new interpretation. However, as of the time of this writing, no other major investors have made similar announcements; therefore, the issue of whether or not to include seller-paid fees is now dependent on the investor.

Originators, especially those who have been forced to reduce non-core staff, must look to automation.  Most lenders have been forced to cut their IT and compliance personnel, making it difficult to adapt to new law changes. Third-party compliance automation exists to fill this gap, allowing lenders to do more with less. Available compliance systems are less expensive and more efficient than stopgap measures, thereby solving the problems of buyback exposure and limitations placed on overtaxed employees who may not be able to keep up. The flexibility built into these systems allows lenders to easily adapt to ever changing laws and investor guidelines and the accuracy these systems provide cannot be matched by home-grown compliance systems or spreadsheet compliance checklists.

Interthinx is a leading provider of proven risk mitigation, fraud detection, and regulatory compliance tools for the residential mortgage industry. With technology that earned the prestigious 10X Award as a “diagnostic and corrective solution of the highest order”, Interthinx expertise in predictive analytics, data mining, risk scoring and automated regulatory compliance analytics sets the standard for the industry and directly increases the value of client portfolios.

Interthinx compliance services are available through DocuTech’s ConformX  product.