Reverse Occupancy

QUESTION

As a result of an internal audit, we just found out about two reverse occupancies. It turns out that our investors were already aware of this happening and were about to send us repurchase requests. We received the repurchase requests and it seems we have no way out but to do the repurchases. What could we have done to prevent this from happening in the first place?

ANSWER

To some extent, this situation can be avoided. However, when it comes to mortgage fraud, nothing is foolproof. A “reverse occupancy” occurs where a borrower buys a home as an investment property and lists rent proceeds as income in order to qualify for the mortgage, but instead of renting the home the borrower occupies the home as a primary residence.

Typically, these schemes have certain markers. Here are the most salient:

• Subject properties are sold as investment properties;
• Purchasers are first time home buyers with minimal or no established credit;
• Purchasers have low income but significant liquid assets that are authenticated by bank statements;
• Purchasers make large down payments;
• The appraisal has a comparable rent schedule (to show expected rental income from the subject property);
• Purchasers present “rent free” letters stating they are not paying rent to live in their primary residence.
• Ethnic commonality among the purchasers and other parties to the transaction; and
• Transactions occurring in a specific geographic location. 

Just because one or more of these are present in a mortgage loan transaction does not necessarily mean that the transaction is a reverse occupancy scheme.

If the financial institution is going to prevent this type of mortgage fraud, the best approach is to ensure prudent origination, processing, and underwriting practices, with an emphasis on “Red Flags” that may occur in the loan documents. For instance, closely reviewing liquid assets as compared to income and the source of qualifying income can identify a potential reverse occupancy scheme. I would further recommend that training be given not only to the operations staff but also to loan officers. In our training on Identity Theft Prevention and Anti-Money Laundering – such training being statutorily required of financial institutions – we discuss many Red Flags.

Ultimately, if this kind of mortgage fraud is to be prevented, the following initiatives would be advisable:

• Periodically conduct vendor compliance procedures of third-party originators
• Train, Train, and Train, either through in-source or out-source
• Establish a “Zero Tolerance” policy for preventing mortgage fraud
• Share information through sales and operations meetings
• Report all suspicious activity through established channels
• Perform a quarterly audit of loan transactions of investment properties
• Ensure that quality control does audits for investment property transactions 

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Documentation for a UDAAP Exam

QUESTION

Thank you for these weekly FAQs! My staff and I find them very informative. I am with the compliance department of a bank. We offer a full range of loan and savings products. We are preparing for a regulatory examination that will include UDAAP compliance. I was hoping you could let us know some review areas that we should include in our risk assessment. Specifically, what documentation should we be reviewing for our UDAAP risk assessment?

ANSWER

We appreciate your kind words about our weekly FAQs. We receive many questions and try to choose the ones that may be broad enough for our large readership. Thank you for submitting your question!

Preparing a risk assessment for Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) requires a great deal of focus not only on the material subject to review but also a concerted effort by all stakeholders. I have written extensively on UDAAP, most recently in connection with advertising compliance. You might want to read my eBook on advertising compliance (viz.,visit our website), which includes a discussion on UDAAP.

Generally, there are four examination areas that regulators seek to audit. The examiner wants to determine whether the financial institution:

1. Avoids unfairness, deception, and abuse in the context of offering and providing consumer financial products and services;
2. Assesses the risk of its practices being unfair, deceptive, or abusive;
3. Identifies unfair, deceptive or abusive acts or practices; and
4. Understands the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection statutes.

A risk assessment of the financial institution should take into account its marketing programs, product and service mix, customer base, and other factors, as appropriate. This risk assessment is extensive. In responding to the posed question, only the aspects involving certain documentation is here provided. For more information, review the CFPB’s Examination Manual on UDAAP.

The following is a list of documentation areas that should be compiled and reviewed for the purposes of a UDAAP risk assessment:

• Training materials.
• Lists of products and services, including descriptions, fee structure, disclosures, notices, agreements, and periodic and account statements.
• Procedure manuals and written policies, including those for servicing and collections.
• Minutes of the meetings of the Board of Directors and of management committees, including those related to compliance.
• Internal control monitoring and auditing materials.
• Compensation arrangements, including incentive programs for employees and third parties.
• Documentation related to new product development, including relevant meeting minutes of Board of Directors, and of compliance and new product committees.
• Marketing programs, advertisements, and other promotional material in all forms of media (including print, radio, television, telephone, Internet, or social media advertising).
• Scripts and recorded calls for telemarketing and collections.
• Organizational charts, including those related to affiliate relationships and work processes.
• Agreements with affiliates and third parties that interact with consumers on behalf of the entity.
• Consumer complaint files.
• Documentation related to software development and testing, as applicable. 

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Do Not Call for Multiplatform Institutions

QUESTION

We are a large mortgage banker with several origination platforms, a servicing entity, and a few affiliates. Recently, we were cited for a violation of the Telemarketing Sales Rule as a result of not complying with the Do Not Call rules. How do these rules apply across our origination platforms?

ANSWER

Financial institutions with multiple origination platforms, including their servicing units, are particularly vulnerable to Do Not Call violations. Years ago, in 1995, the original Telemarketing Sales Rule (“TSR”) contained a provision that prohibited calls to any consumer who previously asked not to get calls from or on behalf of a particular seller. Amendments to the TSR since then retain that provision, but now also prohibit calls to any numbers consumers have placed on the National Do Not Call Registry maintained by the Federal Trade Commission (FTC).

The FTC amended the TSR in 2003, 2008, 2010 and 2015. Like the original TSR issued in 1995, the amended Rule gives effect to the Telemarketing and Consumer Fraud and Abuse Prevention Act (TCFPA).

The multiplatform vulnerability to TSR violations often occurs due to violations of the so-called “Entity-Specific Do Not Call Provision.” According to this provision, it is a TSR violation to call any consumer who has asked not to be called again. This means that a telemarketer may not call a consumer who previously has asked not to receive any more calls from or on behalf of a particular seller (or charitable organization). It also is a TSR violation for a seller that has been asked by a consumer not to call again to cause a telemarketer to call that consumer.

Sellers and telemarketers are responsible for maintaining their own individual Do Not Call lists of consumers who have asked not to receive calls placed by, or on behalf of, a particular seller. Calling a consumer who has asked not to be called potentially exposes a seller and telemarketer to a civil penalty of $40,000 for each violation.

But what if a consumer asks a specific division of a corporation not to call?

Does a call from a different division violate the TSR?

Distinct corporate divisions generally are considered separate sellers under the TSR. Factors relevant to determining whether distinct divisions of a single corporation are treated as separate sellers include, but are not limited to, whether there is substantial diversity between the operational structure of the divisions and whether the goods or services sold by the divisions are substantially different from each other.

If a consumer tells one division of a company not to call again, a distinct corporate division of the same company may make another telemarketing call to that consumer. Nevertheless, a single seller without distinct corporate divisions may not call again, even if the seller is offering a different good or service for sale. For a multiplatform institution, it is necessary to have clear, distinct, and separate demarcations between its corporate divisions, units and affiliates in order to avoid violations of the TSR.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Limits on Points and Fees

QUESTION

We are a mortgage banker. Our policy is to place limits on points and fees in our residential mortgage loan transactions. But an applicant complained to the CFPB that we denied the application because of our limits on points and fees. Our regulator has told us that a lender does have limits on points and fees based on certain guidelines. What are those guidelines?

ANSWER

At a rudimentary level, the CFPB expects lenders to (1) document the loan transaction, and (2) determine the consumer’s ability to repay the loan. Depending on the loan transaction, the ability-to-repay feature – which offers certain standards for demonstrating a good faith effort to determine that the consumer is likely to be able to pay back the loan – may have some bearing on the points and fees concern.

If a consumer does not have the ability to repay the loan, the lender may not offer the credit extension. In fact, some lenders may choose to comply with the ability-to-repay rule by making only “Qualified Mortgages,” which do have caps on upfront points and fees.

Certain loan features are not permitted in Qualified Mortgages, such as an “interest-only” period, negative amortization, balloon payments, loan terms that are longer than 30 years, a limit on how much of the consumer’s income can go towards debt, and no excess upfront points and fees. If the consumer applies for a Qualified Mortgage, there are limits on the amount of certain upfront points and fees the lender can charge. These limits will depend on the size of the loan. Not all charges, like the cost of a credit report, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.

The reason for the CFPB’s position is clear: the consumer needs protection from paying very high fees; therefore, a lender making a Qualified Mortgage can only charge up to the following upfront points and fees:

• For a loan of $100,000 or more: 3% of the total loan amount or less.
• For a loan of $60,000 to $100,000: $3,000 or less.
• For a loan of $20,000 to $60,000: 5% of the total loan amount or less.
• For a loan of $12,500 to $20,000: $1,000 or less.
• For a loan of $12,500 or less: 8% of the total loan amount or less.

The foregoing loan amounts reflect the initial statutory base. There have been annual adjustments to these tiers. Under the CFPB’s rules, only Qualified Mortgages have a limit on points and fees. But, lenders are not required to make Qualified Mortgages, so they can charge higher points and fees if they so choose.

Jonathan Foxx 
Managing Director 
Lenders Compliance Group

USA Patriot Act Disclosure Form and the Freedom Act

QUESTION

We are a lender with a client that is very passionate about NOT signing the Patriot Act Disclosure that is included in our initial closing package. He is a permanent resident alien and claims that the Patriot Act has not been in existence since June 2015 and that a lender should not be requiring him to sign the U.S. Patriot Act Information Disclosure form. The client has no difficulties with providing the identification documents we require, but he feels that the disclosure form is a legal document which is inaccurate, as it is now the Freedom Act that governs. Is the client correct and how should we respond?  

ANSWER

Actually, the client is incorrect. He is operating under a common misconception that the entire USA Patriot Act expired. In reality, the vast majority of the Act, including Title III, which carries a great majority of the requirements for financial institutions, remains in effect. Thus, financial institutions are still required to (1) monitor for customers and transactions that could be related to terrorist activities through section 314(a) & (b); (2) verify the identity of customers through a customer identification program under section 326; and (3) have an established AML Program under section 352.

The sections that “expired” were section 215, which included the so-called “Lone Wolf” and “Roving Wiretap” provisions. The “Lone Wolf” provision allowed U.S. intelligence and law enforcement agencies to target surveillance at suspected terrorists who are not part of any group and without direct ties to terrorist groups. The “Roving Wiretap” provision permitted the monitoring of a specific person regardless of the devices used. The National Security Agency used section 215 as a basis for the mass collection and monitoring of phone records of millions of Americans who were not necessarily under investigation, a program Edward Snowden exposed in 2013. The USA Freedom Act essentially restored and amended section 215 through 2019.    

It is not clear which version of the USA Patriot Act Disclosure form you are using.  However, in all likelihood, just above the signature loan there is a statement to the effect of “By signing the form, you acknowledge receipt of this disclosure”. So, the client’s difficulty with acknowledging receipt of the form is difficult to grasp. If you are keeping the loan in portfolio, depending on your policies, you could have a documented exception, as there is no legal requirement that it be signed.

Joyce Wilkins Pollison 

Director/Legal & Regulatory Compliance 

Lenders Compliance Group