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

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1 APRIL 2017 VOLUME 31 NUMBER 4 Quality & Compliance Alert Highlights and Analysis of Mortgage Lending Quality Control and Regulatory Compliance Home Mortgage Disclosure Act CFPB TAKES ACTION AGAINST NATIONSTAR MORTGAGE FOR FLAWED MORTGAGE LOAN REPORTING The Consumer Financial Protection Bureau (CFPB) has ordered Nationstar Mortgage LLC to pay a $1.75 million civil penalty for violating the Home Mortgage Disclosure Act (HMDA) by consistently failing to report accurate data about mortgage transactions for 2012 through The action is the largest HMDA civil penalty the CFPB has imposed and, according to the CFPB, it reflects Nationstar s market size, the substantial magnitude of its errors and its history of previous HMDA violations. CFPB says that Nationstar had been on notice since 2011 of HMDA compliance problems. In addition to paying the civil penalty, the lender must take the necessary steps this time to improve its compliance management and prevent future violations. According to 2014 data, Nationstar was the ninthlargest HMDA reporter by total mortgage originations, the sixth largest by applications received, and the 13th largest by money lent. From 2010 to 2014, Nationstar s number of HMDA mortgage loans increased by nearly 900 percent. The HMDA requires mortgage lenders to collect and report data about their mortgage origination to the appropriate federal agency and make it available to the public. Federal regulators, enforcement agencies, community organizations and state and local agencies can use the information to monitor whether the financial institution is serving housing needs in its community. It also helps direct public-sector investment to attract private investment to areas where it is needed. The data also helps identify possibly discriminatory lending patterns, and compliance with the Equal Credit Opportunity Act, the Fair Housing Act and the Community Reinvestment Act. As part of its supervision of larger banks and nonbank mortgage lenders, the CFPB reviews the accuracy of HMDA data and the adequacy of HMDA compliance programs. In 2013, it issued a bulletin putting mortgage lenders on notice about the IN THIS ISSUE Home Mortgage Disclosure Act CFPB Takes Action Against Nationstar Mortgage for Flawed Mortgage Loan Reporting Fair Housing Act HUD Approves Settlement of Mortgage Discrimination Redlining Case Against Alpine Bank & Trust Homeowners Protection Act Third Circuit Rules that Loan Modifications Do Not Reset Value for Cancelling Mortgage Insurance Equal Credit Opportunity Act CFPB Proposes To Provide Lenders More Flexibility in Collecting Information and Adopting New Forms HUD/FHA-Insured Mortgages CFPB Proposes To Provide Lenders More Flexibility in Collecting Information Adopting New Forms HUD IG Criticizes HUD Allowance of Lenders Originating FHA Loans with HFA Downpayment Assistance Urban Institute Calls IG Criticism of HFA Borrower Downpayment Assistance Program Misplaced HUD Announces Effective Date for Implementation of the New FHA Loan Review System Freddie Mac Mortgages Freddie Mac Updates Policies on Collateral Representation and Warranty Relief and Appraisals Fannie Mae Mortgages Fannie Mae Updates Processes for DU Validation Service Reports and Day 1 Certainty Based on CU Risk Scoring RHS-Guaranteed Mortgages RHS Revises Policies on Real Estate Broker Fees and Calculating Net Tangible Benefit in a Refinance New Guidance and Issuances Edited by William L. Caldwell, Member of the District of Columbia Bar

2 importance of submitting correct mortgage loan data. It has conducted HMDA reviews at dozens of bank and nonbank mortgage lenders, and has found that many lenders have adequate compliance systems and produce HMDA data with few errors. However, in its supervision process, the CFPB found that Nationstar s HMDA compliance systems were flawed and generated mortgage lending data with significant, preventable errors. The company failed to maintain detailed HMDA data collection and validation procedures and failed to implement adequate compliance procedures. It also produced discrepancies by failing to consistently define data among its various lines of business. For further information, see, Consumer Financial Protection Bureau, In the Matter of Nationstar Mortgage LLC, Consent Order, Administrative Proceeding 2017-CFPB-0011, March 15, This consent order is in the Quality Control Reference Service, April 1, Published by THE CALDWELL GROUP, INC., 4660 Broad Branch Road, N.W., Washington, D.C Editor: William L. Caldwell Website: MortgageRegs.com. publications@mortgageregs.com. Phone: Fair Housing Act HUD APPROVES SETTLEMENT OF MORTGAGE DISCRIMINATION REDLINING CASE AGAINST ALPINE BANK & TRUST HUD has approved a conciliation agreement settling a complaint brought by the HOPE Fair Housing Center of Wheaton, Illinois, alleging that Alpine Bank & Trust, a Northern Illinois-based 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 lender, discriminated against African American and Hispanic mortgage applicants. HOPE Fair Housing Center filed a complaint with HUD claiming the lender s business service areas excluded majority African-American and Hispanic neighborhoods. It alleged the bank s lack of a presence in majority African-American and Hispanic communities in the Rockford area made financial products less available to potential applicants based on their race and national origin and that the lender provided white applicants with better information and offered them more favorable terms and conditions than African American and Hispanic applicants. Alpine Bank & Trust denies all of the allegations and admits no wrongdoing but agreed to settle the claim in the underlying action by entering into the conciliation agreement. In the settlement Alpine Bank will establish a $1 million loan program to increase mortgage lending to residents in majority African-American and Hispanic areas in the Rockford metropolitan area, pay $75,000 to HOPE, offer targeted community outreach to minority areas and provide fair lending training for its mortgage lending staff. For further information, see, HUD, Title VIII Conciliation Agreement between Hope Fair Housing Center and Alpine Bank & Trust, Approved by the FHEO Regional Director of HUD, FHEO Case No , March 10, This agreement is in the Quality Control Reference Service, March 15, Homeowners Protection Act THIRD CIRCUIT RULES THAT LOAN MODIFICATIONS DO NOT RESET VALUE FOR CANCELLING MORTGAGE INSURANCE The Third Circuit Court of Appeals ruled that no matter what the GSEs or HAMP might require, a loan modification does not change the value used for terminating mortgage insurance under the Homeowners Protection Act (HPA). This case arose after JPMorgan Chase (Chase) modified a mortgage under the Home Affordable Mortgage Program (HAMP) and recalculated the termination date for private mortgage insurance. 2 Quality & Compliance Alert Copyright 2017 by THE CALDWELL GROUP, INC

3 The HPA requires that private mortgage insurance must be terminated when the loan to value ratio reaches 78 percent. The issue before the court was whether the calculation of the termination date should be based on the original purchase value of the property or the adjusted value of the property at loan modification. Fannie Mae s Servicing Guidelines tell servicers to calculate mortgage insurance termination date by using the amortization schedule of the modified mortgage loan and the property value at the time of the mortgage loan modification. The Guidelines allow servicers to use either a broker s price opinion (BPO) or a new appraisal to establish the property value. Chase used a BPO to modify the loan as HAMP required, and then relied on the BPO s lower value to revise the termination date, as the Fannie Mae Guidelines allowed. In this particular case, the borrower, Ginnine Fried, bought a home in 2007 for $553,330, appraised at $570,000. The loan of $497,950, had a loan to value ratio above 80%, so Chase required private mortgage insurance that was scheduled to reach 78 percent ($431,597) and therefore terminate in March Chase and the borrower agreed to the loan modification that reduced the principal to $463,737. The rub, according to the court, was that Chase extended Fried's mortgage insurance premiums an extra decade to Home Owners Protection Act The HPA treats loan modifications and refinances differently. Refinances are new loans, replacing a previous loan by paying it off and creating a new obligation, a new property value and a new loan value. The HPA provides that in a refinancing servicers use the appraised value to calculate when the mortgage insurance must terminate at 78 percent. The Third Circuit pointed out that the HPA treats loan modifications differently. A loan modification does not create a loan or a new purchase value. Rather than replacing the existing loan, it modifies the terms of the loan. The HPA does not permit a servicer to update the appraised value to recalculate the length of a homeowner's mortgage insurance obligation. Instead, the termination of mortgage insurance remains tied to the initial purchase price of the home. The HPA says that if a borrower and servicer agree to a modification of the terms or conditions of a loan in a residential mortgage transaction, the cancellation date, termination date, or final termination shall be recalculated to reflect the modified terms and conditions of such loan. 12 U.S.C. 4902(d). The court analyzed what the modified terms and conditions were that the parties agreed to. The parties agreed to an amortization schedule modified to reflect the reduced principal. As a result, according to the court, the borrower s outstanding principal balance would reach 78% of her home's original value ($431,597) in July This date would have been two years earlier than the original termination date. After the modification, and in response to the borrower s inquiries, Chase informed the borrower that the mortgage insurance would automatically terminate on November 1, 2026, ten years later than her original mortgage insurance termination date (and twelve years later than the date based on her lower principal). Her monthly mortgage insurance premium was approximately $252.83, so a ten-year extension of those premiums would cost her an additional $30, Chase based this new date on a BPO of $420,000, that was much smaller than the original purchase price of $553,330, and as a result, the borrower would not pay down her outstanding principal balance to 78% of the BPO (78% x $420,000 = $327,600) until November 1, Home Affordable Mortgage Program Chase explained that because HAMP required a BPO as a condition for the loan modification, Chase was entitled to substitute the BPO for the original purchase price to recalculate the borrower's termination date. The court found that although HAMP rules required a BPO, they did not require Chase to substitute that value for the original value that the HPA relies on to compute the mortgage insurance termination date. Chase argued that it would not have modified the loan 3

4 without first getting an updated property valuation. The court found that such a precondition does not allow Chase to ignore the requirement of the HPA to rely on the modified loan provisions that the parties agreed to. Agency Deference The court agreed with Chase that the Fannie Mae Servicing Guidelines would permit what Chase did, but said that the HPA explicitly overrides them. The court added that Fannie Mae s interpretation of the HPA is not entitled to deference since it is not a federal administrative agency, but rather a market participant interpreting laws for the benefit of its shareholders. In addition, the court pointed out that the Consumer Financial Protection Bureau (CFPB), one of the administrative agencies that enforces the HPA and is entitle to deference, has issued a bulletin on Private Mortgage Insurance Cancellation and Termination. The CFPB cautioned servicers that investor guidelines cannot restrict the mortgage insurance cancellation and termination rights that the HPA provides to borrowers. For these reasons, the court found that Chase violated the HPA. For further information, see, Fried v. JP Morgan Chase & Co., United State Court of Appeals for the Third Circuit, Opinion, Ambro, J., March 9, This opinion is in the Quality Control Reference Service, April 1, Equal Credit Opportunity Act CFPB PROPOSES TO PROVIDE LENDERS MORE FLEXIBILITY IN COLLECTING INFORMATION AND ADOPTING NEW FORMS The Consumer Financial Protection Bureau (CFPB) has proposed to amend Regulation B, the Equal Credit Opportunity Act (ECOA) regulations, to provide additional flexibility for mortgage lenders in the collection of consumer ethnicity and race information. The CFPB believes that the proposed amendments will provide greater clarity to lenders regarding their obligations under the law, while promoting compliance with rules intended to ensure consumers are treated fairly. ECOA is a federal civil rights law that protects against discrimination in the financial marketplace. Regulation B, the CFPB s rule implementing ECOA, includes restrictions regarding the lender s ability to ask the mortgage applicant about his or her race, color, religion, national origin or sex. The only exception is in circumstances that require collection of the federal record-keeping information for some mortgage applications under Regulation B. Compliance Flexibility The CFPB s proposal would provide compliance flexibility for individual mortgage lenders, and would also support the broader mortgage industry s ability to use consistent forms and compliance practices. Under the proposal, the mortgage lender would not be required to maintain different practices depending on its loan volume or other characteristics. This would allow the lender to adopt application forms that contain expanded requests for information regarding a consumer's ethnicity and race, including the revised Uniform Residential Loan Application. The proposal also includes other amendments to Regulation B and its commentary to facilitate compliance with Regulation B s requirements for the collection and retention of information about the ethnicity, race, and sex of applicants seeking certain types of mortgage loans. The CFPB seeks input from a wide range of stakeholders and invites the public to submit written comments on the proposal. The proposal will be open for public comment for 30 days after its publication in the Federal Register. For further information, see, Consumer Financial Protection Bureau, Amendments to Equal Credit Opportunity Act (Regulation B) Ethnicity and Race Information Collection, Proposed Rule with Request for Public Comment, March 24, This proposed rule has not yet been published in the Federal Register. The pre-publication draft is in the Quality Control Reference Service, April 1,

5 HUD/FHA-Insured Mortgages HUD IG CRITICIZES HUD ALLOWANCE OF LENDERS ORIGINATING FHA LOANS WITH HFA DOWNPAYMENT ASSISTANCE The HUD inspector general (IG) audit of FHA concludes that HUD failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed down payment assistance to ensure compliance with HUD requirements, putting the FHA mortgage insurance fund at unnecessary risk. Between October 1, 2015 and September 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that the IG suggests may contain questioned assistance. While governmental entities are not prohibited sources of down payment assistance, the assistance provided through these programs did not comply with HUD requirements, according to the IG because FHA borrowers were required to obtain a premium interest rate and so, therefore, repaid the assistance through higher mortgage payments and fees. Despite the prohibition against similar sellerfunded programs, HUD s requirements appeared to have enabled the growth of these questioned programs, according to the IG. In addition, HUD did not adequately track these loans and review the funding structure of these programs. IG Reasoning The IG is referring to governmental agency programs in which a state housing finance agency (HFA) provides home ownership assistance such as assistance with closing costs or rehabilitation. A majority of these programs include providing funding to borrowers for the FHA minimum cash investment. The down payment assistance is usually provided in the form of a grant or secondary loan. Although HUD doesn t approve down payment assistance programs, such programs and the lenders using them must make sure that funds provided comply with FHA requirements and guidance. Funds used to cover the required minimum cash investment, as well as closing costs and fees, must come from acceptable sources and be verified and properly documented. The IG argues that while down payment assistance from governmental entities, such as HFAs, is not prohibited, the structure of the assistance provided through these programs did not comply with HUD requirements. FHA borrowers were required to obtain a premium interest rate for this assistance and, therefore, repaid the assistance through higher mortgage payments and fees. This occurred because HUD lacked strict controls over government entity down payment assistance. Despite the prohibition against similar seller-funded programs, HUD s requirements and guidelines appeared to have contributed to and enabled the growth of these questionable HFA borrower-financed down payment assistance programs. In addition, HUD did not adequately track these types of loans and did not review the actual structure of down payment assistance programs from government entities. The IG says that despite the concerns it had raised, HUD s guidance, interpretations and a recent deputy secretary s decision failed to protect FHA borrowers from the higher monthly mortgage payments and higher fees imposed on them, which also increased the risks to the FHA insurance fund in the event of default. IG Recommendations The IG recommends that HUD reconsider its position on allowing borrower-financed down payment assistance programs. It wants HUD to develop and implement policies and procedures to review loans with down payment assistance and develop requirements for lenders to review down payment assistance programs. It says that the HUD should require the lender to obtain a borrower certification that details the borrower s participation and make sure that the lender enters all down payment assistance data into FHA Connection. The IG also recommends that HUD implement data fields where it would require the lender to enter specific down payment assistance information. For further information, see, Office of HUD Inspector General, FHA-Insured Loans with Borrower- Financed Downpayment Assistance, Audit Report Number: 2017-LA-0003, Office of Audit, Region 9 Los Angeles, California, March 3, This audit report is in the Quality Control Reference Service, April 1,

6 URBAN INSTITUTE CALLS IG CRITICISM OF HFA BORROWER DOWNPAYMENT ASSISTANCE PROGRAM MISPLACED The Urban Institute, a Washington D.C.-based think tank that carries out economic and social policy research, has taken on the HUD inspector general s criticism of state down payment assistance programs calling them misplaced. See preceding article. The HUD IG has renewed its criticism of an FHA program that allows state housing finance agencies (HFAs) to offer down payment assistance to borrowers. But the Urban Institute argues that these down payment assistance programs are valuable and present minimal risk to FHA s finances, so the criticism is perplexing. The Urban Institute takes issue with the IG s two main points. First, the IG asserts that borrowers pay for the assistance through higher rates, in violation of FHA rules. Second, it asserts that these loans pose an unnecessary economic risk to the mutual mortgage insurance (MMI) fund. According the Urban Institute (UI), its research indicates that both of these claims appear mistaken. No Indication These Programs Are a Problem Several factors make it reasonable that, on average, borrowers participating in these programs pay higher rates than those who don't. These borrowers are more likely to be higher risk, which often leads to a higher rate. They are more likely to be cash constrained and more likely to finance their closing costs. State housing finance agency-assisted loans tend to be smaller than other FHA loans, making the closing costs a larger percentage of the loan amount. For example, if a borrower is rolling closing costs of two percent into the rate, this can easily add 50 to 60 basis points (0.5 to 0.6 percent) to the rate. UI argues that to determine whether participants in these programs pay higher rates because they are participating, one would need to parse out these independent factors but the IG hasn t done this. Instead it infers that the higher rates are attributable entirely to the participation. UI says that this is a mistake. Also, the IG appears to infer that because these loans present a higher risk, they are more economically problematic. This, too, is a mistake. Posing a slightly higher risk is not economically problematic, as long as pricing adequately covers that risk. The FHA Actuarial Report for 2016 scores government down payment assistance since 2011 as contributing positively to the MMI fund. It remains unclear what problem the IG finds in these programs, as the data do not suggest either that the higher rates paid by these borrowers are tied to the program or that these loans are economically problematic for the FHA. UI suggests that if there is a negative impact, it is tiny The IG states that between October 1, 2015, and September 30, 2016, 80,664 loans with an original balance of nearly $12.9 billion were originated with down payment assistance from a government source. It said that these 80,664 loans may have contained questionable borrower-financed down payment assistance, while admitting that the amount could be lower given the limitations and lack of HUD data. UI asserts that most of these mortgages had note rates well within normal limits. The FHA found the average rate on state down payment assistance loans in 2016 was 26 basis points (0.26 percent) over those with no such assistance, in line with UI's earlier results. It found less than 10 percent of the loans had note rates at or above 80 basis points (0.8 percent) over the benchmark mortgage rate, versus 4 percent of the non down payment assistance loans. So the number of loans the IG is concerned about is at most a little over 8,000, but is likely closer to 4,800. Its suggestion that 80,664 loans may be at issue is incorrect. Why does this matter? UI argues that this issue is important is because the program is important. Part of the FHA s mission is to ensure that families the mainstream mortgage market does not well serve can become sustainable homeowners. Because the down payment is often the most significant barrier to entry for such families, programs that can help them in a manner that doesn't pose unnecessary risk to them or the FHA 6

7 should be supported. UI fears that the IG is instead undermining one. For further information, see Urban Institute, The HUD Inspector General's Criticism of State Down Payment Assistance Programs Is Misplaced, Urban Wire: Housing and Housing Finance, Response to HUD IG Audit Report, Urban Institute, March 16, This document is in the Quality Control Reference Service, April 1, HUD ANNOUNCES EFFECTIVE DATE FOR IMPLEMENTATION OF THE NEW FHA LOAN REVIEW SYSTEM HUD has notified lenders that the implementation date of FHA s Loan Review System and the effective date of changes to the related sections of HUD Handbook , FHA Single Family Housing Policy Handbook, is May 15, This is a change to the effective date to handbook sections, which HUD had originally announced as April 1, 2017 to May 15, The new loan review system will be used to manage Title II single family loan reviews, Title II single family mortgagee monitoring reviews, and mortgagee self-reporting of fraud, misrepresentation and other material findings. HUD has also updated the related process guidance in HUD Handbook , Single Family Housing Policy Handbook. As the system development is ongoing, HUD will confirm the effective date in a subsequent mortgagee letter but the date will be no earlier than March 1, The guidance applies to all FHA Title II single family programs. The loan review system builds on recent efforts by FHA to align the documentation of loan review results across various divisions and it incorporates the single family housing loan quality assessment methodology (defect taxonomy). HUD will use the loan review system to process the review of test cases that lenders submit when applying for unconditional direct endorsement (DE) approval, as well as in various post-endorsement Title II loan reviews, Title II mortgagee monitoring reviews, and other reviews currently conducted by FHA s processing & underwriting and quality assurance divisions. It will not use the loan review system to manage any aspect of FHA s standard (non-test case) loan origination or endorsement processes. For further information, see, HUD, Effective Date of Implementation of the Federal Housing Administration s Loan Review System, and Change in Effective Date for Timeframe for Conducting Pre-Endorsement Mortgage Reviews for Unconditional DE Authority, Mortgagee Letter 17-08, March 23, This mortgagee letter is in the Quality Control Reference Service, April 1, Freddie Mac Mortgages FREDDIE MAC UPDATES POLICIES ON COLLATERAL REPRESENTATION AND WARRANTY RELIEF AND APPRAISALS Freddie Mac has revised the eligibility requirements for collateral representation and warranty relief and also updated the requirements related to property eligibility and appraisals. The changes address comparable sales selection for properties located in new subdivisions or projects, properties in planned unit developments (PUDs) and reconciling multiple opinions of market value. Freddie Mac has also revised Guide Form 1033, One-Unit Residential Appraisal Desk Review Report, to address the revisions to the requirements for reconciling multiple opinions of market value. Collateral Representation and Warranty Relief Effective for mortgages evaluated through the Selling System on and after April 3, 2017, and processed through Loan Advisor Suite (Loan Collateral Advisor and Loan Product Advisor), Freddie Mac will not exercise its remedies, including the issuance of repurchase requests, in connection with a breach of the lender s selling representations and warranties related to value, condition and marketability of the property. To qualify for collateral representation and warranty relief the lender must submit the mortgage to Loan Product Advisor. It must be a purchase or no-cash out refinance transaction secured by a one-unit dwelling. The borrower must be an indi- 7

8 vidual or a living trust. Following the assessment of the appraisal, Loan Collateral Advisor must return the Uniform Collateral Data Portal (UCDPR) feedback message FRE0000 indicating the appraisal is eligible for collateral representation and warranty relief or return the Loan Collateral Advisor indicator that the appraisal is eligible for collateral representation and warranty relief. On submission, Loan Product Advisor will also provide a corresponding collateral representation and warranty relief message in the feedback certificate. Risk classifications of accept and caution are eligible to receive relief. The lender must deliver the mortgage as a Loan Product Advisor mortgage (identified by entering the LP AUS key) in the Selling System and the final submission to the Selling System must indicate the collateral representation and warranty relief status is Y or Yes. Ineligible Mortgages Mortgages that are ineligible for collateral representation and warranty relief are mortgages secured by a condominium unit, manufactured home or leasehold estate, cash-out refinance mortgages or special purpose cash-out refinance mortgages, Texas Equity Section 50(a)(6) mortgages, Freddie Mac Relief Refinance Mortgages Same Servicer or Freddie Mac Relief Refinance Mortgages Open Access, construction conversion or renovation mortgages, mortgages that Freddie Mac and the seller/servicer have agreed are subject to any credit enhancement other than primary mortgage insurance and mortgages with funding dates more than 120 days from the note date. Representation and Warranty Relief Exceptions Freddie Mac will not grant relief from its enforcement of remedies from the requirement that when applicable, the lender must have obtained a certification of completion or completion report verifying that an outstanding condition of the appraisal has been satisfied, or the requirement that the property must not be subject to a pending legal proceeding for condemnation. With respect to a property affected by a disaster, it will not grant relief from enforcement related to the lender s awareness of conditions or circumstances that would adversely affect the value or marketability of the mortgage. Appraisals: Comparable Sales Selection Freddie Mac has updated the policy on comparable sales requirements for properties located in new subdivisions, units in new PUDs and units in new or recently converted condominium projects effective March 22, The appraiser may now use a sale by the builder or developer of the property for the required comparable sale from inside the new subdivision or project. It also will permit the use of pending sales from the subdivision or project where the property is located when there are no closed or settled sales available from within the subdivision or project to establish marketability. This is in addition to the requirement that three comparable sales must be settled or closed sales. Appraisal Desk Review Reports Freddie Mac is expanding the availability of Form 1033, One-Unit Residential Appraisal Desk Review Report, which allows the lender to obtain an appraisal desk review in lieu of ordering a subsequent appraisal or field review. Freddie Mac has expanded the availability of the appraisal desk review option from negotiated-only appraisal reviews to all lenders. The lender is not required to obtain an appraisal desk review. If a lender chooses to obtain an appraisal desk review, it must use Form 1033 to deliver the opinion of value to Freddie Mac. Reconciling Multiple Opinions of Market Value Freddie Mac is removing the requirement that the lender use the lower value when it considers multiple appraisals to be equally accurate and well supported. In the appraisal review and reconciliation process, it requires the lender to rely on the most accurate and supported opinion of market value. For further information, see, Freddie Mac, Bulletin , Collateral Representation and Warranty Relief and Appraisal Requirement Updates, March 22, This bulletin is in the Quality Control Reference Service, April 1,

9 Fannie Mae Mortgages FANNIE MAE UPDATES PROCESSES FOR DU VALIDATION SERVICE REPORTS AND DAY 1 CERTAINTY BASED ON CU RISK SCORING Fannie Mae has updated the DU Validation Service to clarify that lenders may obtain a verification report for use with the Desktop Underwriter (DU) validation service directly from a report supplier that generates the report and sends the data electronically to DU, or from a report distributor that obtains the report from an authorized report supplier. It has also revised the Day 1 Certainty relief from property value representation and warranties to provide that the eligibility of the enforcement relief requirements are based solely on the appraisal receiving a CU Risk score of 2.5 or below, regardless of underwriting method or DU recommendation. DU Validation Service Fannie Mae says that in response to requests from lenders, it has clarified that the lender may obtain a verification report for use with the Desktop Underwriter (DU) validation service directly from a report supplier that generates the report and sends the data electronically to DU, or from a report distributor that obtains the report from an authorized report supplier. It has changed the term vendor report to verification report throughout the Guide. It has removed references to specific report suppliers from the Guide. The DU Validation Service Verification Report Vendors list on the Fannie Mae website provides a listing of authorized report suppliers and distributors. Fannie Mae has also Guide paragraph B3-2-02, DU Validation Service, to require that the lender must review each verification report and reconcile any conflicting or contradictory information and must take appropriate steps to determine the acceptability and impact of retirement and business accounts for asset validation. It also notes that military income is not eligible for income or employment validation. These clarifications are effective immediately. Property Value Representations and Warranties In December 2016, Fannie Mae began offering Day 1 Certainty relief from representations and warranties on property value for eligible loans. This program applies to DU loan casefiles where the appraisal receives a Collateral Underwriter (CU) risk score of 2.5 or lower and the loan receives an approve/eligible recommendation from DU. Effective with CU Version 4.1, the eligibility of the loan for enforcement relief is based solely on the appraisal achieving a CU Risk score of 2.5 or below, regardless of underwriting method or DU recommendation. Fannie Mae has updated the Selling Guide to align with this policy. This change was effective for loan casefiles submitted to DU or appraisals submitted to CU on or after December 10, For further information, see, Fannie Mae, Selling Guide Updates, Selling Guide Announcement SEL , Fannie Mae, March 28, This announcement is in the Quality Control Reference Service, April 1, RHS-Guaranteed Mortgages RHS REVISES POLICIES ON REAL ESTATE BROKER FEES AND CALCULATING NET TANGIBLE BENEFIT IN A REFINANCE RHS has revised Chapter 6 of Handbook HB-1-355, the program handbook for the Single-Family Housing Guarantee program, to remove the real estate agent or broker administrative fee as a prohibited loan purpose, and to clarify that the minimum $50 net tangible benefit for a streamlined assist refinance transaction must be a result of a reduction to the principal, interest or annual fee monthly payment. Real Estate Broker Fee Previously, the RHS policy on reasonable lender fees included the requirement that the payment of other fees, charges or commissions, such as finder s fees or placement fees for the referral of a 9

10 prospective applicant to the lender or administrative fees charged to the buyer by the realtor, was prohibited. The new policy is that the it is the lender s responsibility to ensure that the Consumer Financial Protection Bureau (CFPB) requirements are met. The amount of a finder s fee or placement fee for the referral of an applicant to the lender still may not be included in the loan amount. Net Tangible Benefit Previously, the policy on streamlined assist refinances included the requirement that the borrower must receive a tangible benefit from the refinance and it defined a tangible benefit as a $50 or greater reduction in the borrower s principal, interest, taxes and insurance (PITI) which includes the annual fee payment on the new guaranteed loan when compared to the existing PITI including the annual fee payment. The revised policy restates the requirement to state that a tangible benefit is defined as a $50 or greater reduction in the borrower s principal, interest, and annual fee monthly payment compared to the existing principal, interest and annual fee monthly payment. For further information, see, USDA Rural Housing Service, SFH Guaranteed Origination, Handbook HB Revisions, Procedure Notice 495, USDA Rural Development Single-Family Housing Guarantee Program, March 15, This notice and revised chapter are in the Quality Control Reference Service, April 1, RECENT COMPLIANCE AND QC DOCUMENTS Home Mortgage Disclosure Act Consumer Financial Protection Bureau, In the Matter of Nationstar Mortgage LLC, Consent Order, Administrative Proceeding 2017-CFPB-0011, March 15, [p. 2] Fair Housing Act HUD, Title VIII Conciliation Agreement between Hope Fair Housing Center and Alpine Bank & Trust, Approved by the FHEO Regional Director of HUD, FHEO Case No , March 10, [p. 2] Homeowners Protection Act Fried v. JP Morgan Chase & Co., United State Court of Appeals for the Third Circuit, Opinion, Ambro, J., March 9, [p. 4] Equal Credit Opportunity Act Consumer Financial Protection Bureau, Amendments to Equal Credit Opportunity Act (Regulation B) Ethnicity and Race Information Collection, Proposed Rule with Request for Public Comment, March 24, [p. 4] HUD/FHA-Insured Mortgages Office of HUD Inspector General, FHA-Insured Loans with Borrower-Financed Downpayment Assistance, Audit Report Number: 2017-LA-0003, Office of Audit, Region 9 Los Angeles, California, March 3, [p. 5] Urban Institute, The HUD Inspector General's Criticism of State Down Payment Assistance Programs Is Misplaced, Urban Wire: Housing and Housing Finance, Response to HUD IG Audit Report, Urban Institute, March 16, [p. 7] HUD, Effective Date of Implementation of the Federal Housing Administration s Loan Review System, and Change in Effective Date for Timeframe for Conducting Pre-Endorsement Mortgage Reviews for Unconditional DE Authority, Mortgagee Letter 17-08, March 23, [p. 7] Freddie Mac Mortgages Freddie Mac, Bulletin , Collateral Representation and Warranty Relief and Appraisal Requirement Updates, March 22, [p. 8] Fannie Mae Mortgages Fannie Mae, Selling Guide Updates, Selling Guide Announcement SEL , Fannie Mae, March 28, [p. 9] RHS-Guaranteed Mortgages USDA Rural Housing Service, SFH Guaranteed Origination, Handbook HB Revisions, Procedure Notice 495, USDA Rural Development Single-Family Housing Guarantee Program, March 15, [p. 10] 10