Quality & Compliance Alert Highlights and Analysis of Mortgage Lending Quality Control and Regulatory Compliance

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1 SEPTEMBER 2017 VOLUME 31 NUMBER 9 Quality & Compliance Alert Highlights and Analysis of Mortgage Lending Quality Control and Regulatory Compliance Home Mortgage Disclosure Act CFPB TWEAKS THE HMDA RULE TO TEMPORARILY EXEMPT SMALL LENDERS FROM REPORTING HELOCS The Consumer Financial Protection Bureau (CFPB) has issued a few last minute changes to the Home Mortgage Disclosure Act (HMDA) rule, Regulation C, before it becomes effective on January 1, The 2017 final rule exempts small lenders that make fewer than 500 home equity lines of credit (HELOCs) in either 2018 or 2019 from collecting or reporting HMDA data on those HELOCs. Lenders that make 500 or more HELOCs in either 2018 or 2019, must begin to track HELOCs for 2020 HMDA reports. The CFPB has temporarily raised the threshold from its original proposal of 100 HELOCs in each of the previous two years. It says this extension will give it time to consider the appropriate threshold for data collected beginning January 1, If it takes no action by 2020, the temporary threshold will revert to 100 HELOCs. Two Loan-Volume Thresholds The 2015 HMDA final rule established two loanvolume thresholds for reporting HMDA data, one for closed-end mortgage loans set at 25, and the other for HELOCs, originally set at 100, but now, temporarily at 500. These thresholds determine which lenders must report HMDA data and the types of transactions they must report. To be covered by the HMDA rule, a lender must meet either the closed-end or open-end threshold. If the lender meets the threshold, it is required to report data on its closed-end mortgage loans only if it meets the closed-end threshold, and, must report data on its open-end lines of credit only if it meets the open-end threshold. The CFPB revised the HMDA regulation in 2015, with a long period for implementation before the IN THIS ISSUE Home Mortgage Disclosure Act CFPB Tweaks the HMDA Rule To Temporarily Exempt Small Lenders from Reporting HELOCs FFIEC Issues Uniform Guidelines for Examiners from All Bank Regulatory Agencies To Follow in HMDA Exams Reverse Mortgages CFPB Cautions Senior Homeowners To Consider Risks Before Using Reverse Mortgage To Delay Social Security HUD/FHA-Insured Mortgages HUD Highlights HECM Servicing Requirements in Final Regulations that Take Effect this Month HUD IG Details Results of Financial Freedom HECM Claims Servicing Investigation and Settlement HUD Reminds Servicers That There Is a 90-day Moratorium on Foreclosures for Hurricane Harvey Victims HUD Increases Initial MIP and Limits Amounts Seniors Can Borrower in an Revisions to HECM Program VA-Guaranteed Mortgages VA Reminds Servicers about Increased Appraisal Fees and Updates Bill of Collection Remittance Instructions VA Encourages Servicers To Extend Forbearance to Borrowers Affected by Severe Storms in Nebraska VA Encourages Servicers To Extend Forbearance to Borrowers Affected by Severe Flooding in West Virginia Fannie Mae Mortgages Fannie Mae Provides Answers to Frequently Asked Questions about the Flex Modification Program Fannie Mae Updates Servicing Guide on Fidelity Bond, E&O Insurance and Other Servicer Requirements Fannie Mae Imposes 90-Day Suspension of Foreclosures and Evictions of Hurricane Affected Borrowers Fannie Mae Requires Use of New MERS Mortgage Assignment Form for MERS Registered Mortgages in Maine Freddie Mac Mortgages Freddie Mac Revises Rental Income Requirements for Long- Term and Short-Term Income Sources Freddie Mac Expands Automated Collateral Evaluation Eligibility To Include Purchase Transactions New Guidance and Issuances Recent Compliance and QC Documents Edited by William L. Caldwell and Suzanne McQueen, Members of the District of Columbia Bar

2 January 2018 effective date for most provisions. That rule made major changes in HMDA reporting including in addition to mandatory reporting of HELOCs. The focus of the rule changed from the purpose of the loan to whether it is secured by a dwelling. The 2015 rule changed reporting requirements to include preapproval requests for home purchase loans that were approved by the lender but not accepted by the borrower. The lender must report the age of the applicant or borrower, the credit score, automated underwriting system information, the unique loan identifier, the property value, the application channel, points and fees, borrowerpaid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier. The lender must say how they collected information on ethnicity, race or sex, whether visually or by surname, if the person chooses not provide the information for an application taken in person. All of this reporting will be done electronically using a web-based submission tool. The CFPB expects its HMDA platform to be available to users in the third quarter of The additional revisions in the 2017 rule allow lenders to use a geocoding tool for reporting census tract information. That tool will be on the CFPB s website. There are also clarifications on how to report a borrower s gross income, definitions of multifamily dwellings and more examples Published by THE CALDWELL GROUP, INC., 4660 Broad Branch Road, N.W., Washington, D.C Editors: William L. Caldwell and Suzanne McQueen Website: MortgageRegs.com. publications@mortgageregs.com. Phone: Quality & Compliance Alert is published 12 times a year. The subscription price is $545. It highlights changes and trends in mortgage lending, with emphasis on quality control and regulatory compliance in processing and servicing HUD, VA, Fannie Mae and Freddie Mac loans. It is not legal or accounting advice. Inquiries concerning Quality & Compliance Alert should be directed to the editor. For subscriptions please visit our website at MortgageRegs.com or call of temporary financing that would not be reported. For further information see, Final Rule, Home Mortgage Disclosure (Regulation C), 82 Federal Register, No., p., Consumer Financial Protection Bureau, September, This is the pre-federal Register publication version issued by CFPB on August 24, This final rule is in the Quality Control Reference Service, September 1, FFIEC ISSUES UNIFORM GUIDELINES FOR EXAMINERS FROM ALL BANK REGULATORY AGENCIES TO FOLLOW IN HMDA EXAMS For the first time, the federal agencies that supervise financial institutions that report Home Mortgage Disclosure Act (HMDA) data have issued uniform guidelines for their examiners to use when they test for the accuracy of HMDA data. Those agencies, the Federal Reserve Board, CFPB, FDIC, OCC and the NCUA, collaborated to issue the Federal Financial Institutions Examination Council (FFIEC) HMDA Examiner Transaction Testing Guidelines for all financial institutions that report HMDA data. The guidelines will apply to the examination of HMDA data collected beginning in 2018 and reported beginning in The guidelines instruct examiners on how to validate the accuracy of HMDA data collected beginning on January 1, 2018, and the circumstances in which examiners may direct institutions to correct and resubmit HMDA data. Examiners may also direct an institution to change its policies, procedures, audit processes or other aspects of its compliance management system needed to prevent the reoccurrence of errors, even if the number of errors does not exceed the thresholds. Accuracy Verifications Examiners will verify the accuracy of the data in the entries in the HMDA loan application register (LAR) sample transactions to verify the accuracy of HMDA data. If the examiner finds that the number of errors in the sample exceeds certain thresholds, the institution must correct and resubmit its HMDA data. The thresholds allow tolerances for some of the data fields and to allow a 10 percent 2

3 field error resubmission threshold for lenders reporting 100 loans or less. The examiner selects a random sample of loans to compare with the institution s reporting on its LAR. The size of this total sample depends on the number of loans in the LAR. The examiner then selects a subset of loans, the initial sample, for review. The HMDA Table in the guidelines sets the sizes of the total sample and the initial sample, as well as the thresholds that apply. If the lender has listed 190 loans on its LAR, for example, the total sample would be 56, and the initial sample for review would be 29. There are thresholds for errors in each data field and if the initial review finds fewer errors than the threshold levels, the exam team may conclude the testing. If the number of errors on the initial sample meets the thresholds, examiners expand the review to the whole sample. In that stage, they review all data fields that had one or more errors. If the total errors in any data field reaches the resubmission threshold, examiners direct the institution to correct and resubmit the full HMDA LAR. Some differences between the HMDA data and the loan files are not errors that count toward the thresholds. These include loan amounts that are inaccurate up to $1,000, dates that are off by up to three days, and rounding errors. For further information see, Guidelines, FFIEC HMDA Examiner Transaction Testing, Federal Financial Institutions Examination Council (FFIEC), August 10, These guidelines are in the Quality Control Reference Service, September 1, Reverse Mortgages CFPB CAUTIONS SENIOR HOMEOWNERS TO CONSIDER RISKS BEFORE USING REVERSE MORTGAGE TO DELAY SOCIAL SECURITY The Consumer Financial Protection Bureau (CFPB) has warned that senior homeowners should consider the risks before taking out a reverse mortgage to put off the date to start collecting Social Security benefits. For most people, eligibility for full Social Security benefits is between age 66 and 67, depending on the year the person was born. Alternatively, a person can start to collect benefits as early as age 62, but by choosing to claim early, the monthly benefits may be reduced as much as 30 percent. Delaying and claiming at age 70 produces the maximum monthly benefit. Some financial professionals are increasingly promoting the idea that older homeowners with few other resources should consider a reverse mortgage loan at age 62 in order to delay collecting Social Security. They suggest using the proceeds from the loan to replace the Social Security benefits that the homeowner would otherwise receive if he or she had started collecting Social Security at age 62 until the full benefits age. CFPB looked at different scenarios involving older homeowners for whom their home and Social Security are their main resources and found that generally they are better off if they take their Social Security benefits early rather than taking out a reverse mortgage. This is true because, in general, the cost of a reverse mortgage loan will exceed the additional amount of increased Social Security benefits the homeowners would collect over their lifetime. That's because the interest and fees increase each month, and over time those costs wipe out the additional benefit obtained by delaying. The reverse mortgage is secured by the equity in the home. The homeowner incurs a debt for the principal amount as well as interest, mortgage insurance premiums (MIP) and monthly servicing fees that the lender adds to the principal balance each month. Origination and closing costs are often added to the loan balance since most homeowners choose to finance these costs using the reverse mortgage proceeds. Over time, the balance of the loan increases as a result of compounding interest and MIP and fees. The increasing loan balance slowly reduces the available home equity, which can be a problem where the homeowner later wishes to sell the property and move. CFPB finds that, in general, the reverse mortgage loan costs will exceed the additional amount of 3

4 money in lifetime Social Security benefits the homeowner will realize by using this strategy. For example, a homeowner with an expected monthly benefit of $910 at age 62 who delays claiming Social Security benefits until age 67 will get a higher benefit of $1,300 per month. Given that the average life expectancy of a 62 year old today is about age 85, this homeowner is likely to receive a cumulative lifetime benefit that is $29,640 more by age 85 if she claims at 67 than an average 62-yearold would receive if she claimed at 62. The reverse mortgage loan costs generally exceed the cumulative amount gained by collecting full Social Security benefits (i.e., claiming benefits at the full retirement age). This is specifically the case if the loan is repaid by the average length of a reverse mortgage (approximately seven years, or age 69 for a loan borrowed at age 62), or by the average life expectancy (age 85). For a homeowner who has the option, working past age 62 is usually a less costly way to increase their monthly Social Security benefit than borrowing from a reverse mortgage. The extra years of work often provide people more time to save for retirement and pay off debts. The extra years of work may also result in an increase in Social Security benefits separate from the increase that arises from deferring the start of benefits by replacing years with low or no earnings from the person's earnings record. For further information, see, Issue Brief, The Costs and Risks of Using a Reverse Mortgage To Delay Collecting Social Security, Consumer Financial Protection Bureau, Office for Older Americans, August 23, This document is in the Quality Control Reference Service, September 1, HUD/FHA-Insured Mortgages HUD HIGHLIGHTS HECM SERVICING REQUIREMENTS IN FINAL REGULATIONS THAT TAKE EFFECT THIS MONTH HUD has highlighted servicing requirements in the Strengthening the Home Equity Conversion Mortgage (HECM) Program final rule, which takes effect for case numbers assigned on or after September 19, It is calling attention to the notification process the servicer must use where there has been a default for unpaid property charges. It notes that the rule addresses the amount HUD will accept when the borrower, an eligible non-borrowing spouse, the borrower s estate or the borrower s heir is satisfying a due and payable HECM for less than the total loan balance. It also outlines the cash-for-keys or relocation incentive available where the servicer pays an incentive to the borrower or other party with a legal right to dispose of the property in connection with a deed-in-lieu transaction within six months of the due and payable date. Rule on Default for Unpaid Property Charges Under the regulations that take effect as of September 19, 2017, if the borrower fails to pay the property charges on time and has not elected to have the servicer make the payments, the servicer may make the payment and charge the borrower s account if there are funds available. If the borrower has a pattern of missing payments, the servicer may establish procedures to pay the property charges from the borrower s funds as if the borrower elected to have the servicer pay the property charges. Where there are no available HECM funds from to make payment, within 30 days of receiving notification of a missed property charge payment, the servicer must give the borrower a written notice and also notify HUD that the borrower has not performed an obligation of the mortgage. The borrower has 30 days to respond to the servicer to explain the circumstances that resulted in the nonpayment. The servicer may provide the borrower with any permissible FHA loss mitigation. If the borrower is unable or unwilling to repay the servicer the funds advanced to pay property charges outside of a life expectancy set-aside (LESA), the servicer must submit a due and payable request to HUD. 4

5 New Guidance on Property Charge Default HUD has, in the new mortgagee letter, provided that if the borrower is unable or unwilling to repay the servicer for funds the servicer advanced to pay property charges, the servicer must submit a due and payable request within 30 calendar days of the later of: (1) receipt of the borrower s response to the servicer s written notification that the borrower failed to meet an obligation of the mortgage or (2) the expiration of the borrower s 30-day response period to the notice. This guidance updates the Notice to HUD for Due and Payable HECMs and Notice to Mortgagor of HECM in Due and Payable Status for Reasons Other than Death sections of Mortgagee Letter and notifies servicers that the permissive loss mitigation described in Mortgagee Letters and remains in effect. HUD says that nothing in this guidance confers any right to a borrower or a nonborrowing spouse to any action on the part of HUD or the servicer. Sale of Property Securing a Due and Payable HECM Where the HECM is due and payable, the borrower, an eligible non-borrowing spouse, the borrower s estate or the borrower s heirs may sell the property for a minimum of 95 percent of the appraised value. The net proceeds of the sale must be applied towards the outstanding loan balance. The new rule provides that the closing costs may not exceed the greater of 11 percent of the sales price or a fixed dollar amount HUD has published in Federal Register notice. For this purpose sell includes the transfer of title by operation of law. Cash for Keys Incentive and Relocation Incentive Under the new rule, HUD may provide a financial incentive of up to $3,000 to the servicer to reimburse its payment of a cash-for-keys or relocation incentive. HUD allows this payment where the servicer pays the borrower or another party with a legal right to dispose of the property in connection with a deed-in-lieu transaction so long as the property was deeded to the servicer within six months of the due and payable date. The servicer may also pay a financial incentive to a bonafide tenant who vacates the property prior to an eviction that the servicer initiates. For further information, see, HUD, Implementation of HUD s January 2017 Home Equity Conversion Mortgage (HECM) Final Rule, Mortgagee Letter 17-11, August 24, This mortgagee letter is in the Quality Control Reference Service, September 1, HUD IG DETAILS RESULTS OF FINANCIAL FREEDOM HECM CLAIMS SERVICING INVESTIGATION AND SETTLEMENT The HUD inspector general s office has announced that on May 16, 2017, Financial Freedom entered into a settlement agreement with the federal government to pay $68,274,944 to avoid the delay, uncertainty, inconvenience and expense of lengthy litigation. Financial Freedom also paid HUD more than $21,000,000 related to the covered conduct through HUD s supplemental claims system, for a total settlement value of $89,274,944. The government alleged that Financial Freedom sought to obtain insurance payments for debenture interest from HUD and did not disclose on the insurance claim forms that the lender was not eligible for the interest payments. The settlement was neither an admission of liability by Financial Freedom nor a concession by the United States that its claims were not well founded. The IG alleges that as a result of Financial Freedom s conduct, lenders on the HECMs it was servicing obtained additional debenture interest that they were not entitled to receive. HUD in turn incurred substantial losses when it paid additional debenture interest on HECM claims on the loans covered by the settlement agreement. Of the total $89,274,944 settlement, the FHA received $41 million, and the remaining amount was paid to other federal entities. For further information, see, IG Memorandum, Final Civil Action: Financial Freedom, a Division of CIT Bank, N.A., Settled Allegations of Failing To Comply With HUD s Federal Housing Administration Servicing Requirements for HECM Claims, Office of Inspector General, HUD, August 21, This memoran- 5

6 dum is in the Quality Control Reference Service, September 1, HUD REMINDS SERVICERS THAT THERE IS A 90-DAY MORATORIUM ON FORECLOSURES FOR HURRICANE HARVEY VICTIMS HUD has reminded servicers that as a result of the presidential declaration of a major disaster area (PDMDA) in designated counties in Texas due to damage caused by Hurricane Harvey, FHA-insured mortgages secured by properties in the disaster area are subject to a 90-Day moratorium on foreclosures following the disaster. HUD provides the servicer with an automatic 90-day extension from the date of the moratorium expiration date to begin or restart a foreclosure action or evaluate the borrower under HUD's loss mitigation program. It has recommends that the servicer consider FHA's 203(h) Mortgage Insurance for Disaster Victims, which provides FHA mortgage insurance for victims of a major disaster who have lost their homes and are in the process of rebuilding or buying another home, and 203(k) Rehabilitation Mortgage Insurance Program, which insures mortgage financing or refinancing including the cost of home repairs, both structural and non-structural, into the loan amount. For further information, see, HUD, Guidance for FHA-Approved Mortgagees and Servicers Regarding Presidentially Declared Major Disaster Areas, FHA Info 17-35, August 28, This guidance is in the Quality Control Reference Service, September 1, HUD INCREASES INITIAL MIP AND LIMITS AMOUNTS SENIORS CAN BORROWER IN AN REVISIONS TO HECM PROGRAM HUD says that to ensure the continued viability of the Home Equity Conversion Mortgage (HECM) program, it is revising both the HECM initial and annual mortgage insurance premium (MIP) rates, and the HECM principal limit factors (PLFs). It says that these revisions are necessary to help stabilize the HECM program, improve its financial health, and ensure that it remains a resource for senior borrowers. The MIP rates and PLF revisions are effective for all HECMs with FHA case numbers assigned on or after October 2, Initial MIP Currently, HUD charges an initial MIP of 0.50 percent of the maximum claim amount (MCA) when the borrower's initial disbursement limit or the borrower's advance is 60 percent or less of the principal limit. It charges an initial MIP of 2.50 percent of the MCA when the borrower's initial disbursement limit or the borrower's advance is greater than 60 percent of the available principal limit. It has now changed the initial MIP rate to two percent (2.00%) of the MCA. This new initial MIP rate applies to all borrowers and is no longer associated with disbursements made to or on behalf of the borrower at closing or during the first 12-month disbursement period. Annual MIP HUD has also changed the annual MIP rate from the existing one and one-quarter percent (1.25%) to one-half of one percent (0.50%) of the outstanding mortgage balance. Principal Limit Factors It has also revised the PLF table to reduce the potential for future defaults when economic drivers such as house price appreciation or interest rates change. Under these new requirements borrowers will face new limits on how much they can borrow from their homes. Currently, limits are based on interest rates and the age of a borrower. Now a 62-year-old with an interest rate of five percent for the loan would be able to obtain about 41 percent of the equity in their property, down from 52 percent under the previous requirements. An 82-year-old would be able to access 51 percent of the equity, down from nearly 60 percent. For further information, see, HUD, Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factor, Mortgagee Letter 17-12, August 29, This 6

7 mortgagee letter is in the Quality Control Reference Service, September 1, VA-Guaranteed Mortgages VA REMINDS SERVICERS ABOUT INCREASED APPRAISAL FEES AND UPDATES BILL OF COLLECTION REMITTANCE INSTRUCTIONS VA has reminded servicers that effective Friday, September 1, 2017, liquidation appraisal fees will increase in the District of Columbia, Kentucky, Maryland, Virginia, and West Virginia. On that date these changes will be updated and reflected on the VALERI Fee Cost Schedule. VA has also updated the Bill of Collection Payment Remittance instructions located on the VALERI website and changed the name of the document to ALAC Bill of Collection Remittance instructions. The updated instructions include information regarding an electronic payment option through Fedwire. For further information, see, VALERI Servicer Newsflash, Important Information, Appraisal Fee Changes; Bill of Collection Payment Remittance Update, Veterans Benefits Administration, Department of Veterans Affairs, August 21, This notice is in the Quality Control Reference Service, September 1, VA ENCOURAGES SERVICERS TO EXTEND FORBEARANCE TO BORROWERS AFFECTED BY SEVERE STORMS IN NEBRASKA VA is encouraging servicers to extend forbearance to borrowers affected by severe storms, tornados and straight-line winds in Nebraska. VA requests that the servicer establish a 90-day moratorium, from the date of the disaster declaration, on initiating new foreclosures on affected loans. VA allows additional interest on a guaranty claim when termination has been delayed due to circumstances beyond the control of the servicer, such as VArequested forbearance. Because of the widespread impact of the severe storms, tornadoes and straight-line winds in Nebraska, the servicer should review all foreclosure referrals before deciding that a borrower has not been affected significantly enough to justify delay in referral. VA also suggests late charge waivers and the suspension of credit reporting for the affected loans. For further information, see, VA Circular , Special Relief Following Nebraska Severe Storms, Tornados, and Straight-line Winds, Veterans Benefits Administration, Department of Veterans Affairs, August 4, This notice is in the Quality Control Reference Service, August 15, VA ENCOURAGES SERVICERS TO EXTEND FORBEARANCE TO BORROWERS AFFECTED BY SEVERE FLOODING IN WEST VIRGINIA VA is encouraging servicers to extend forbearance to borrowers affected by severe flooding, landslides and mudslides in West Virginia. VA requests that the servicer establish a 90-day moratorium, from the date of the disaster declaration, on initiating new foreclosures on affected loans. VA allows additional interest on a guaranty claim when termination has been delayed due to circumstances beyond the control of the servicer, such as VArequested forbearance. Because of the widespread impact of the severe flooding, landslides and mudslides in West Virginia, the servicer should review all foreclosure referrals before deciding that a borrower has not been affected significantly enough to justify delay in referral. VA also suggests late charge waivers and the suspension of credit reporting for the affected loans. For further information, see, VA Circular , Special Relief Following Severe Flooding, Landslides, and Mudslides in West Virginia, Veterans Benefits Administration, Department of Veterans Affairs, August 22, This notice is in the Quality Control Reference Service, September 1,

8 Fannie Mae Mortgages FANNIE MAE PROVIDES ANSWERS TO FREQUENTLY ASKED QUESTIONS ABOUT THE FLEX MODIFICATION PROGRAM Fannie Mae has provided answers to commonly asked questions including how the servicer should evaluate a borrower who submits an incomplete borrower response package (BRP) prior to the 90th day of delinquency and subsequently completes the BRP after the 90th day of delinquency. It addresses whether where the borrower submits a complete BRP prior to the 90th day of delinquency but the servicer received the complete BRP after soliciting the borrower for a Flex mod, the borrower is eligible for the Flex mod based on the borrower s submission of the complete BRP and the associated 40 percent housing expense-to-income (HTI) ratio target. It also addresses whether the borrower has to request mortgage assistance to be offered a Flex mod, or is the servicer be able to send a proactive offer after the 90th day of delinquency as they do today for the streamlined modification. Incomplete Borrower Response Package On the question of how the servicer should evaluate a borrower who submits an incomplete borrower response package (BRP) prior to the 90th day of delinquency and then completes the BRP after the 90th day of delinquency, Fannie Mae says that because the borrower s complete BRP was not submitted prior to the 90th day of delinquency, the servicer must first provide principal forbearance until it achieves a 100 percent post-modification mark-to-market loan-to-value (MTMLTV) ratio using the interest-bearing principal balance. If necessary, the servicer must continue forbearing principal until it achieves a 20 percent payment reduction but must not forbear more than an amount that would create either a post-modification MTMLTV ratio less than 80 percent using the interest-bearing principal balance, or 30 percent of the gross post-modification UPB of the mortgage loan. The evaluation would not include the 40 percent housing expense-to-income (HTI) ratio review because the borrower did not submit a complete BRP prior to the 90th day of delinquency. Complete Borrower Response Package The date the borrower submitted a complete BRP is the date the borrower sent the complete BRP to the servicer, evidenced by a post mark or electronic timestamp. On the question of how the servicer should respond to the BRP submission if the borrower submits a complete BRP on or after the 90th day of delinquency, Fannie Mae says that the servicer must evaluate the borrower for all Fannie Mae workout options. It must begin evaluating the borrower for Flex modification in lieu of standard modification and streamlined modification as of the date the servicer implements Flex mod, but no later than October 1, Once the servicer implements the Flex mod, if the loan is 90 or more days delinquent when the borrower submits a complete BRP, and the borrower is eligible for the Flex mod, the modification offer will target a 20 percent payment reduction, but the servicer will not evaluate the borrower for the 40 percent HTI ratio because the borrower did not submit a complete BRP prior to the 90th day of delinquency. BRP Received after Flex Mod Solicitation Where the borrower submits a complete BRP prior to the 90th day of delinquency but the servicer received the complete BRP after soliciting the borrower for a Flex mod, the borrower is eligible for the Flex mod based on the borrower s submission of a complete BRP and the associated 40 percent HTI target because the borrower submitted a complete BRP prior to the 90th day of delinquency, assuming the loan satisfies the other Flex mod eligibility criteria. Streamlined Disaster Modification When the Flex mod is implemented, Fannie Mae will remove the streamlined modification postdisaster forbearance from the Servicing Guide and incorporate it within the Flex mod program. The Flex mod doesn t include the multiple term options previously available with the standard mod 8

9 and streamlined mod for loans with MTMLTVs less than 80 percent, including the streamlined disaster mod. Proactive Flex Modification Offer As with the streamlined mod, if a loan is 90 days or more past due, the borrower is not required to submit a complete BRP to be evaluated for a Flex mod. The same applies where the loan is 60 or more days past due and it was previously modified into a mortgage loan with a step-rate feature, an interest rate adjustment occurred within the last 12 months, and the mortgage loan became 60 days delinquent after the interest rate adjustment. The servicer is required to offer a Flex mod trial period plan to an eligible borrower between the 90th and 105th day of delinquency; or between the 60th and 75th day of delinquency if the mortgage loan was previously modified into a mortgage loan with a step-rate feature, an interest rate adjustment occurred within the last 12 months and the mortgage loan became 60 days delinquent after the interest rate adjustment. The servicer may continue to offer the Flex mod trial period plan to an eligible borrower throughout the delinquency. The terms of the Flex mod offer at this stage of delinquency will target a 20 percent payment reduction but will not target the 40 percent HTI ratio. The servicer may not offer it to the borrower where the property has a scheduled foreclosure sale date within 60 days of the evaluation date, if the property is in a judicial state, or where the property has a scheduled foreclosure sale date within 30 days of the evaluation date, if the property is in a non-judicial state. For further information, see, Fannie Mae Frequently Asked Questions Servicers, Flex Modification, Fannie Mae, August 2, This FAQ is in the Quality Control Reference Service, August 15, FANNIE MAE UPDATES SERVICING GUIDE ON FIDELITY BOND, E&O INSURANCE AND OTHER SERVICER REQUIREMENTS Fannie Mae has removed content from several topics in Servicing Guide, Part A, Doing Business with Fannie Mae, pertaining to general contract terms, indemnification provisions, and Fannie Mae trade name and trademarks. These revisions involve no policy changes. Earlier this year Fannie Mae consolidated the requirements for fidelity bond and errors and omissions insurance into the Selling Guide and has since updated the Selling Guide to reflect numerous changes to the fidelity bond and errors and omissions coverage requirements. Fannie Mae encourages servicers to implement these policy changes immediately, but they must implement them by October 1, Fannie Mae has updated the servicing policies to reflect a future change in the commitment and servicing calculation of ARM margins for whole loans. Fannie Mae currently allows the amount remitted for a post-rate adjustment to be calculated as the index plus the required net yield of the ARM product. It will change the ARM margin calculation to require the post-rate adjustment remittance to be the index plus the net margin of the loan. It has also revised the servicing policies to provide that the servicer must base the mortgage insurance termination eligibility criteria for a modified mortgage loan on the terms and conditions of the modified mortgage loan, including the amortization schedule of the modified mortgage loan. Indemnification Provisions Fannie Mae says that it is adopting a more consistent and comprehensive approach to indemnification after reviewing its current indemnification requirements. It has incorporated and standardized the process provisions from the standalone indemnification agreement into the Selling Guide in order to provide increased transparency concerning the requirements and a shorter standalone agreement and Software Subscription Agreement Master Terms and Conditions (SSA). The process require- 9

10 ments will apply to all indemnification claims. It will incorporate the indemnification requirements from the SSA to provide consistency around the indemnification requirements. It has also eliminated references to Fannie Mae s sole discretion with regard to determination of Fannie Mae Losses. Fidelity Bond and E&O Insurance Requirements Fannie Mae has updated the Selling Guide requirements to introduced a fidelity bond coverage amount cap of $150 million and has added an errors and omissions coverage amount cap of $30 million for seller/servicers that have single-family and multifamily mortgage loan portfolios. Previously, Fannie Mae had coverage cap requirements that only addressed single-family mortgage loan portfolios. It has clarified that fidelity bond and errors and omissions insurance coverage must be equal to a percentage of the greater of the seller/servicer s annual total UPB of single-family and multifamily mortgage loan annual originations or highest monthly total UPB of single-family and multifamily servicing of mortgage loans that the seller/servicer owns, including mortgage loans owned by the seller/servicer and serviced by others. It has increased the maximum allowed deductible for fidelity bond and errors and omissions insurance to 10 percent for mortgage loan portfolios less than $1 billion or 15 percent for mortgage loan portfolios greater than or equal to $1 billion. It has clarified when it will consider a captive or reinsurance arrangement for fidelity bond and errors and omissions insurance, eliminated a surety bond requirement and updated fidelity bond and errors and omissions insurance coverage requirements for master servicers and subservicers to clarify that master servicers are responsible for maintaining coverage for any loans serviced by others on their behalf. Fannie Mae has changed the requirement for when the seller/servicer must notify Fannie Mae of a fidelity bond or errors and omissions insurance loss from 10 business days from the date of the loss event to within 30 days from discovery. It has also clarified the provisions related to Fannie Mae s rights under a seller/servicer s fidelity bond and errors and omissions insurance policy and eliminated the annual requirement for a seller/servicer to provide a copy of the fidelity bond or errors and omissions insurance policy upon Fannie Mae s request. For further information, see, Fannie Mae Servicing Guide Announcement SVC , Servicing Guide Updates, Fannie Mae, August 16, This announcement is in the Quality Control Reference Service, September 1, FANNIE MAE IMPOSES 90-DAY SUSPENSION OF FORECLOSURES AND EVICTIONS OF HURRICANE AFFECTED BORROWERS Fannie Mae has notified servicers that effective immediately, the servicer must suspend any foreclosure sale on a property located within the FEMA-declared disaster area eligible for individual assistance as a result of Hurricane Harvey for 90 days from the date the disaster is declared. Also, Fannie Mae is imposing a 90-day eviction suspension on REO properties located within the FEMA-declared disaster area as a result of Hurricane Harvey. The suspension covers all steps of eviction during this period. When applicable, the servicer must receive pre-approval by the mortgage insurer or guarantor to avoid jeopardizing benefits of any applicable insurance or guaranty. For further information, see, Lender Letter LL , Servicing Policies for Mortgage Loans Impacted by Hurricane Harvey, Fannie Mae, August 29, This announcement is in the Quality Control Reference Service, September 1, FANNIE MAE REQUIRES USE OF NEW MERS MORTGAGE ASSIGNMENT FORM FOR MERS REGISTERS MORTGAGES IN MAINE On March 7, 2017, Fannie Mae announced that it was suspending the use of the MERS as Original Mortgagee authorized change to the Maine secu- 10

11 rity instrument (Form 3020) in response to judicial developments in Maine challenging MERS' role as nominee for lenders and their assignees and the absence of a legislative remedy that addresses prospective foreclosures and other mortgage-related enforcement actions. For mortgage loans secured by a property located in the state of Maine, with a note date on or after January 1, 2018, and that are to be registered with MERS the lender must use the new Fannie Mae/ Freddie Mac MERS Mortgage Assignment (Form 3749) to assign such loans to MERS. Mortgages with a note date on or after January 1, 2018, secured by a property located in Maine are ineligible for delivery to Fannie Mae if the Maine security instrument (Form 3020) has been modified to name MERS as the original mortgagee of record solely as nominee for the lender, or if the loan has been assigned to MERS using an assignment form other than Form Lenders may begin using the new MERS Mortgage Assignment form immediately. As a reminder, the new assignment form must be used with the standard Maine mortgage form, and may not be used with a Maine mortgage form that has been modified to include the MERS-as-original-mortgagee authorized change. For further information, see, Fannie Mae Selling Guide Announcement SEL , Selling Guide Updates, Fannie Mae, August 29, This announcement is in the Quality Control Reference Service, September 1, Freddie Mac Mortgages FREDDIE MAC REVISES RENTAL INCOME REQUIREMENTS FOR LONG-TERM AND SHORT-TERM INCOME SOURCES Freddie Mac has revised the requirements for the use of rental income to support the mortgage application. Among the revisions are expanded requirements, additional specificity and guidance to support the determination of stability, reasonable expectation of continuance and calculation of rental income, resulting in continued support of purchase certainty. These changes are required for mortgages with settlement dates beginning February 9, 2018, but Freddie Mac encourages the lender to implement them immediately. Rental Property Owned in the Prior Calendar Year Where the borrower is relying on rental income and the transaction is the refinance of a mortgage on a property the borrower owned in the prior calendar years, the changes apply to transactions on a two- to four-unit primary residences, a one- to fourunit investment property and a non-subject investment property. Freddie Mac has added requirements and guidance to address the stability of rental income derived from short-term rental income sources such as rental income from a source where there is no lease, to support evolving housing industry trends in the rental market. It requires a two-year history of rental income from a short-term source. The income must be documented on Schedule E and the property must have been used for the purposes of producing rental income for this period of time. Short-term rental income is typically fluctuating so the lender must make a historical analysis of the associated degree of volatility or irregularity to determine whether the income is stable. Freddie Mac has also updated requirements for traditional rental market income sources such as where the rental income is from a one- year lease. Since a one-year term lease lends support to income stability and continuance, a one-year history of rental income reported on Schedule E is acceptable. Also, the lender may determine that rental income is stable without obtaining a current lease where it is evident that the source of rental income is not short term based on the documentation provided. Rental Property Not Owned in the Prior Calendar Year For a borrower who does not have a documented one-year history of investment property manage- 11

12 ment experience, the lender may only consider net rental income in an amount up to 30 percent of the sum of the net rental income and all other stable monthly income that is used to qualify the borrower. Accessory Units Freddie Mac s now allows the borrower to qualify using rental income from an accessory unit in a one-unit investment property whether or not the mortgage is on the investment property. The transaction must meet any rental income requirements and appraisal requirements. Leases If there is a lease evidencing the rental income, it must be current and fully executed, with a minimum original term of one year. After the first year the term can be month-to-month if in the lease is in the automatically renewable stage. Net Rental Income Calculations Freddie Mac has revised the rental income calculation for income on a one- to four-unit investment property to reflect the net rental income less the mortgage payment rather than the net aggregate calculation. This calculation takes the monthly mortgage principal payment into account. It has introduced a new Form 92, Net Rental Income Calculations - Schedule E, for use when calculating the net rental income using Schedule E. Investment Property Freddie Mac has removed the requirement to verify the operating expenses where the borrower is not using rental income to qualify and will allow reliance on income from a non-residential investment property. IRS Form 8825 When using IRS Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, Freddie Mac now requires that the lender must treat all rental real estate held in a partnership or S corporation as self-employed income, regardless of the borrower s ownership interest in the business. Self-Employment Income Freddie Mac has made changes to the self-employment income requirements, which are effective immediately. It has changed the name of the form from Income Analysis Form to Income Calculations, added a line item to add back depreciation reported on IRS Form 8825 and added a reference to updated Guide requirements for mortgages and notes payable in less than one year. It has removed line items not often used for self-employed borrower income calculations, such as IRS Forms 4797, 6252 and 2106, and updated line items with current IRS terminology, including travel and entertainment, W-2 on line 7 of IRS Form 1040, schedule names. It has included line items for deduction of corporate dividend income for IRS Form 1040 (to prevent double counting) and deduction of travel and entertainment expenses for IRS Form It has replaced instructions with Guide section references to improve accuracy, added lines to include the borrower s name and business name and updated the format to include a separation of and subtotals for each income and business type and to include an income summary page. Additionally, Freddie Mac has made minor changes to the Guide that add specificity, but do not represent a change in requirements. It specifies that for rental real estate held in a partnership or S corporation, the requirements for borrower debt paid by the business do not apply to business rental property. It has updated language concerning Form 91 from an alternative form that provides the same information to a similar alternative form and from analysis on Form 91" to calculations on Form 91" since the purpose of Form 91 is to calculate income. For further information, see, Freddie Mac Bulletin , Revisions to Rental Income Requirements, Freddie Mac, August 9, This announcement is in the Quality Control Reference Service, August 15,

13 FREDDIE MAC EXPANDS AUTOMATED COLLATERAL EVALUATION ELIGIBILITY TO INCLUDE PURCHASE TRANSACTIONS Freddie Mac has expanded the automated collateral evaluation (ACE) eligibility and has updated the list of mortgages ineligible for ACE, effective September 1, Initially Freddie Mac provided the lender with the option to waive appraisal requirements for certain Loan Product Advisor mortgages but applied it only to no-cash-out refinance transactions. It has now expanded eligibility of this option to include purchase transactions. Ineligible Mortgages The list of mortgages that are ineligible for an ACE appraisal waiver included non-arm s length transactions, purchases of REO properties, Texas Equity Section 50(a)(6) mortgages and mortgages with an estimate of value or purchase price greater than $1,000,000. Additionally, the lender may not accept the appraisal waiver offer if it is aware of adverse physical property conditions identified in the sales contract, property inspection or disclosure from the borrower that warrant an appraisal being obtained. For further information, see, Freddie Mac Bulletin , Automated Collateral Evaluation Eligibility, Freddie Mac, August 23, This announcement is in the Quality Control Reference Service, September 1,

14 RECENT COMPLIANCE AND QC DOCUMENTS Home Mortgage Disclosure Act Final Rule, Home Mortgage Disclosure (Regulation C), 82 Federal Register, No., p., September, 2017, Consumer Financial Protection Bureau. [p. 2] Guidelines, FFIEC HMDA Examiner Transaction Testing, Federal Financial Institutions Examination Council (FFIEC), August 10, [p. 3] Reverse Mortgages Issue Brief, The Costs and Risks of Using a Reverse Mortgage To Delay Collecting Social Security, Consumer Financial Protection Bureau, Office for Older Americans, August 23, [p. 4] HUD/FHA-Insured Mortgages HUD, Implementation of HUD s January 2017 Home Equity Conversion Mortgage (HECM) Final Rule, Mortgagee Letter 17-11, August 24, [p. 5] IG Memorandum, Final Civil Action: Financial Freedom, a Division of CIT Bank, N.A., Settled Allegations of Failing To Comply With HUD s Federal Housing Administration Servicing Requirements for HECM Claims, Office of Inspector General, HUD, August 21, [p. 5] HUD, Guidance for FHA-Approved Mortgagees and Servicers Regarding Presidentially Declared Major Disaster Areas, FHA Info 17-35, August 28, [p. 6] HUD, Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factor, Mortgagee Letter 17-12, August 29, [p. 6] VA-Guaranteed Mortgages VALERI Servicer Newsflash, Important Information, Appraisal Fee Changes; Bill of Collection Payment Remittance Update, Veterans Benefits Administration, Department of Veterans Affairs, August 21, [p. 7] VA Circular , Special Relief Following Nebraska Severe Storms, Tornados, and Straight-line Winds, Veterans Benefits Administration, Department of Veterans Affairs, August 4, [p. 7] VA Circular , Special Relief Following Severe Flooding, Landslides, and Mudslides in West Virginia, Veterans Benefits Administration, Department of Veterans Affairs, August 22, [p. 7] Fannie Mae Mortgages Fannie Mae Frequently Asked Questions Servicers, Flex Modification, Fannie Mae, August 2, [p. 9] Fannie Mae Servicing Guide Announcement SVC , Servicing Guide Updates, Fannie Mae, August 16, [p. 10] Lender Letter LL , Servicing Policies for Mortgage Loans Impacted by Hurricane Harvey, Fannie Mae, August 29, [p. 10] Fannie Mae Selling Guide Announcement SEL , Selling Guide Updates, Fannie Mae, August 29, [p. 11] Freddie Mac Mortgages Freddie Mac Bulletin , Revisions to Rental Income Requirements, Freddie Mac, August 9, [p. 12] Freddie Mac Bulletin , Automated Collateral Evaluation Eligibility, Freddie Mac, August 23, [p. 13] 14