Transcript Dodd-Frank: How will it impact you?

Mortgages: Current Trends in
Fraud and the Law
Jessica Whitney
Assistant Attorney General
Deputy Administrator ICCC
Contact Information
Jessica Whitney
Assistant Attorney General
Iowa Attorney General’s Office
1305 E. Walnut St.
Des Moines, IA 50319
[email protected]
515-281-5926
Caveat
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The opinions expressed today are those of
the speaker and only the speaker. They do
not necessarily represent the opinions of the
Attorney General.
Objectives
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Review of Current Mortgage Fraud
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Origination
Servicing
Foreclosure
Dodd-Frank Mortgage Reform
Origination Fraud
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Led to the Current Financial Crisis
See little of it now with more stringent
mortgage standards
Used to be incredibly common helped lead to
financial crisis
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Appraisal Fraud
Fabricated and Inflated Income Fraud
Bait and Switch of Terms
Servicing
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Who holds the loan? Wrong people filing in
court.
Accounts not being properly credited – either
in or out of modification programs.
Wrong accounts being put into foreclosure.
Lots of folks looking at this on federal and
state level.
Foreclosure Rescue Scams
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A variety of schemes that promise to help a
consumer save their home from foreclosure.
In reality these schemes:
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Strip any remaining equity from the home.
Take badly needed money from the consumer.
In some cases actually take the home.
Targets
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Anyone in foreclosure or in danger of
foreclosure.
Less educated, desperate, minorities, nonnative English speakers.
Perpetrators
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Classic Scam Artists 
Real Estate Brokers
Lawyers
Types of Foreclosure Rescue Scams 3
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Debt Aid/Negotiation Services
Sale/Leaseback
Short Sale
Sale/Investment
For the Future
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Reverse Mortgages
Signs it is a Scam
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“We Buy Homes”
Advertises signs on the street/telephone
poles
Internet Promises to Save the Home
Requires Up Front Fees
Short Sale Done by Other than Realtor
Phrase “Investment”
Buying on Contract (not always, but beware)
Debt Management/Negotiation
Services
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Rescue service usually charge several thousand
dollars or the equivalent of two months mortgage
payments. In return they promise to negotiate with
lender to work out a modification.
Borrower thinks the hefty payment is going to the
mortgage company (hence tying the payment to the
mortgage amount) or that the company is actively
negotiating with the lender.
We have seen this in Iowa a lot. Usually out of state
companies via internet. Fly-by-nights.
Debt Management/Negotiation
Continued
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Usually no work or negotiation is done.
Scammer may make excuses and demand
more money or…
Scammer may just disappear.
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Money Gone.
Reform Under New Name
Debt Management/Negotiation
Services (Cont).
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Takes much needed money from consumer.
Further ruins their credit.
Increases late fees and other charges
Wastes valuable time
Out of HAMP program?
They could negotiate a modification with the
lender themselves.
Sale/Leaseback
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Property is sold to rescue business for the
amount needed to bring the mortgage
current. Bank often not paid off.
Homeowner rents property back from the
rescue purchaser.
Rent equals mortgage payment plus
additional amount.
Sale/Leaseback (Cont.)
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Homeowner has right to repurchase home
for sale amount plus fees.
Failure to make a payment results in eviction.
Sometimes, after enough money is collected,
the rescue lender fails to make the mortgage
payments, and absconds with the money.
The mortgage holder then evicts original
borrower.
Short Sale Scams
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Promises experience with short sale, faster than a
realtor, or maybe working with realtor
Gets title to house either through deed or has
consumer put the house in a trust to avoid the due
on sale clause of mortgage.
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Scammer makes himself executor of trust.
Scammer has consumer sign over beneficiary interest to
scammer.
Usually does not file trust documents – uses them as
leverage over the consumer and for subsequent
transactions.
Short Sales Continued
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Often Bank does not know that the scammer
exists
Kicks Consumer out of house
May put others in the house
Succession of contract sales – often original
mortgage still on house
May sell home with false numbers reported
to the bank, pockets the extra money.
Sale Investment Scams
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Wolford-Type Scams – offer to help seller, sell home often
through real estate option contracts.
The Scammer promises to pay seller’s mortgage, manage the
property, and find a buyer.
Buyers were found who needed credit help, would enter into
contract deals with the scammer, the contract lasts until the
buyer could refinance. The buyer promised credit repair
through monthly on time payments to the scammer.
Often the scammer fails to make seller’s mortgage payments
even though the buyer is paying the scammer money. Even
when the buyer gets refinancing and pays scammer
outstanding money the scammer would not pay off the original
seller’s mortgage
Sale Investment Result
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End result:
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Investors Scammed
Borrowers Out Homes
Titles Messed Up With Multiple Mortgages
Homes Abandoned
Mortgage Companies Suffer
Iowa Mortgage Foreclosure Rescue
Law – Iowa Code 714E
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714E – Debt Management/Negotiation
Prohibits foreclosure consultants from demanding
compensation until contracted services are
performed.
Prohibits foreclosure consultants from prohibiting
borrowers from contacting their lender, servicer,
attorney, or any government entity.
Prohibits foreclosure consultants from charging more
than 8% annually for any loan made to the
homeowner.
714E Continued
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Prohibits a wage assignment or other lien
from the homeowners to secure
compensation.
Requires a written contract with pertinent
legal disclosures.
Provides for a right to cancel.
Provides homeowners and the Attorney
General the right to sue for violations.
714 F – Sale Lease Back,
Reconveyance, Tax Sale
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Prohibits entering into a foreclosure reconveyance
unless the homeowner can make the new lease
payments.
Provides that a closing occur, a written contract be
provided to the homeowner and all legally mandated
disclosures be made.
Provides that the existing mortgage lien holders be
notified.
Right to Cancel.
714 F Continued
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Prohibits commercially unreasonable or
unfair conduct. Including minimum amount
for the house.
Prohibits false or misleading statements.
Prohibits false, deceptive or misleading
conduct.
Provides homeowners and the Attorney
General the right to sue for violations.
General Advice
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If it sounds too good to be true, it probably is.
If it is too easy, especially in buying a home
or home finance, it is probably too good to be
true.
Smell test: if you think it smells fishy, it is.
Use professionals you know or trust. Local is
generally better than someone on the
telephone or via internet!
Dodd-Frank
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The housing and mortgage markets began to show
stresses at least as early as the spring of 2007
Mortgage industry nearly collapsed in August 2007
Housing/mortgage problems spread to the rest of the
economy culminating in a near collapse of the
financial system in September 2008
Background
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Dodd-Frank Wall Street Reform and
Consumer Protection Act
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By far the largest financial regulatory bill enacted
by Congress
 16 Titles
 Certified enrolled bill has
848 pages
Background
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Dodd-Frank
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Multiple effective dates ranging from July 2010
through July 2015
What it will really means is still largely unknown – relies
heavily on rulemaking to implement
243 (by one count) separate rulemakings required to
implement the Act
Requires 67 studies (some counts more like 90)
Current attempts to defund
Title XIV – Mortgage Reform and AntiPredatory Lending Act
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Major Reform to Mortgages
Expands definition of HOEPA loans
Reforms on origination, appraisals, servicing,
foreclosure
Establishes HUD office of Housing
Counseling
Future – Studies, Enforcement, Policy
HOEPA Changes
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Expands definition of HOEPA loans, currently 2 triggers– points and
fees and APR, increases both
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Points and Fees
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APR
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Total Fees and points (not including bona fide 3rd party) cannot exceed 5% for
loans over $20,000 or the lesser of 8% or $1,000 for loans under $20,000
6.5% over average prime rate for first mortgages
8.5% over average prime rate for subordinate liens and for first liens on homes
under $50,000
FRB/DFPB can adjust down to 6% and up to 10% for firsts and down to 8% up to
12% for subordinates
New third trigger “risky loan”
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Currently has prepayment penalties that last more than 3 years or
Prepayment penalties that are more than 2% of amount of the amount prepaid
HOEPA Continued
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Balloon Payments Limited – 2 times the Average Payment
Borrowers Must Receive Pre-Loan Counseling – Counselor Not
Affiliated with Creditor, HUD Approved
Other Misc Prohibitions
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Bans Creditors from recommending default on another debt in
connection with closing on loan, or financing prepayment penalties
in connection with same-creditor refi
Bans modification and deferral fees, and payoff statement fees
(except for a processing fee)
Limits late fees (4% of amount due, not until 15 days, only
assessed once, must be authorized in the loan documents)
Origination Reform – Originators
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Broader definition of “mortgage originator” than TILA
“any person who, for direct or indirect compensation
or gain, or in the expectation thereof, takes a
“residential mortgage loan”: application, assists a
consumer in obtaining or applying for such a loan, or
offers or negotiates the terms of such a loan,
including those who advertise themselves as such”
Excludes: administrative employees, licensed real
estate brokers (acting w/n duties), person who
provides seller-financing for 3 or fewer properties a
year, servicers and servicer employees
Originators Continued
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Compensation Changes
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No Yield-Spread Premiums (“kickbacks”)
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No dual-source compensation (cannot get compensated from both
consumer and creditor)
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Exception for bona-fide third party charges that neither the creditor nor
originator nor affiliates of either will keep
Compensation Based on Principal Amount Still Allowed
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Exception for true no-cost loans, originator gets no compensation from
consumer and consumer does not pay any discount points or
origination fees, other than bona-fide third-party charges
Watch for tactics that inflate the prinicpal
Must be registered and licensed pursuant to SAFE Act and
have a unique id that is on all loan docs
Originators Part Three
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Prohibitions
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Mischaracterizing Borrower Credit History
Encouraging Appraisers to Inflate Appraisal
From Discouraging Borrowers to Seek a More
Affordable Loan
“Predatory Terms and Practices” – to be defined
Origination Reform
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Creditors must consider the ability of a consumer to
repay in Residential Mortgage Loans (no HELOCs)
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Must be documented through looking at consumer’s credit
history, current income, expected income, current
obligations, debt-to-income rations, other financial
resources
Must document the income – IRS statements, payroll
receipts, financial institution records, or other third-party
documents
Safe harbor provision
Bans Forced Arbitration (HELOCs, too)
Origination Reform Continued
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Bans Financing Single-Premium Credit Insurance
Bans prepayment penalties for subprime loans,
ARMs, and all non-safe harbor loans
New all-in-one disclosure, coming soon (HUD-1 and
TILA)
Limits on negative amortization loans
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Increased disclosures
First-time home buyers must have received credit
counseling
Appraisal Reforms
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“Higher Risk” mortgages (defined term, not qualified
and for first mortgages at or below Fannie/Freddie
cannot exceed prime offer by 1.5%, for above 2.5%,
and for seconds 3.5%)
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the creditor must also give the consumer a free copy of
each appraisal report 3 days prior to closing
Appraisal must include physical inspection of home interior
Standards for Appraisal Independence
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Creditor cannot extend credit if it knows there is a violation
of independence, unless the corrupt appraisal does not
materially misstate the dwellings value
Anti-Steering Reforms (Rules to Be
Promulgated)
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Prohibits
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Steering consumer to a loan they cannot afford
Steering to a loan that has predatory characteristics (fees,
terms, equity-stripping)
engaging in abusive or unfair practices that promote
disparities among equally situated consumers
Mischaracterizing consumer’s credit history, property
appraisal or loans available
Steering from “qualified mortgage” to non-qualified
Discouraging consumer for looking elsewhere if cheaper
loan available
Qualified Mortgages – Safe Harbors
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“Qualified Mortgages” have a presumptive ability to repay
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Prepayment penalties ok for qualified mortgages
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No Negative Amortization
No Balloon Payments
Comply w/debt to income ration established by regulation
Income is documented and verified
Maximum 30 year term (except as extended by rule)
No more than 3 years
Limited in amount that declines over time
State law issue
Securitization (exempt from keeping 5% of asset)
Servicing Reforms
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Creditors must promptly credit payments
Creditors must provide periodic statements
Creditors must provide a pay-off amount within 7
days
Escrow mandatory for subprime loans, government
loans and when mandated by state or federal law for
the first five years or until private insurance no longer
required – TILA repayment analysis to include
escrow cost
Servicing – Continued
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New limits on force-placed insurance = when servicers can do it
and what they can charge (must cease after 15 days of learning
of insurance)
Servicers must promptly refund any excess when a loan is paid
off
Establishes new timeline for identifying loan holders
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Prior to this no affirmative duty to disclose the new holder of a loan
Other RESPA amendments
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Qualified written requests shortened timeline for response and no
longer allowed to charge fees if the request is valid (allocation of
charge or final payment)
Increase in damages for RESPA violations
Foreclosure Reforms
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Amends HAMP (Home Affordable Modification
Program)
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Creates a bridge loan program for certain
unemployed homeowners
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Adds website where consumers can see if they qualify for a
modification under HAMP
Mandates the public release of certain data
Funds created for federal program, but can be provided to
state programs as well (idea modeled on one done in PA)
Authorizes $35million to legal services programs to
defend foreclosures and evictions (funds must be
appropriated in other legislation – could be hard)
HUD Office of Housing Counseling
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Counseling Activities
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Mortgage Calculator Software
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Certifies counselors
Standards and Performance Measures
Develops Forms for Counselors
Policy development
Must certify software
If decides existing software insufficient must arrange with private
company for creation of software
Outreach
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$3million for public outreach, 10% of which must be spent on
programs in areas with high foreclosure concentrations
The Future
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Lots of possibilities for the future
Broad authority and rulemaking power
Potential to work closely with states both
regulators and ag offices – more cops on the
beat
Lots of Studies
Attempts to undo some of Dodd-Frank?