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More RESPA Violations – What Not to DO !

Mortgage brokers’ compensation is in the spotlight after a recent Federal Deposit Insurance Corporation (FDIC) test concluded that some financial institutions failed to prove that payments were “reasonably related” to the value of services provided.

In its March Supervisory Highlights, the FDIC stated that many institutions have developed policies and procedures to ensure sufficient mortgage broker services are provided in order to receive compensation, which was the first of a two-part test.

However, the second part of the test revealed that these financial institutions did not develop enough compliance initiatives to determine whether the payments were reasonably related to the services’ value.

The FDIC supervises approximately 3,000 state-chartered banks and thrifts not members of the Federal Reserve System. The current supervisory highlights summarize the overall results of supervised institutions in 2023, when the FDIC conducted about 900 consumer compliance examinations.

Violations involve mortgage broker relationships in cases where financial institutions pay mortgage brokers and when institutions act as mortgage brokers.

Examiners found that institutions had violated Section 8 of the Real Estate Settlement Procedures Act (RESPA) and its implementation rule, Regulation X. In practice, these rules prohibit giving or accepting a thing of value for referrals of settlement services in federal mortgage loans.

The current rules have been applied by the Consumer Financial Protection Bureau (CFPB) since 2011. The CFPB inherited the responsibility to impose statements of policies (SOPs) created by the Department of Housing and Urban Development (HUD) in 1999 and 2001.

These rules state that a mortgage broker performs “sufficient origination work” if it takes the application and performs at least five additional services. (There are some caveats related to counseling services, referrals, and duplicative work.)

“Examiners identified violations involving relationships where mortgage brokers provided fewer than five services, and relationships where mortgage brokers provided more than five services,” the FDIC supervisory highlights states.

Violations identified vary across different stages of the loan process.

Some institutions did not provide the services they listed to examiners, such as helping the borrower clear credit problems or participating in loan closings—professionals did not attend the closing meetings or infrequently participated via phone.

Other institutions also listed some counseling services separately when they should be listed as one item. These services include educating the borrower, explaining the different loan types, and demonstrating monthly payments.

Another example is an institution acting as a mortgage broker that said it provided disclosures to the borrower but only forwarded a link provided by the lender with the document. The same institution also stated that it initiated or ordered appraisals when it added borrowers’ information into a lender’s software.

The FDIC recognizes that technology now has a role in the brokerage firm services provided and can impact its value. The FDIC said in its report that while it reduces time it does not necessarily mean that a service has less value.


Appraisal Bias Risks – Here’s What You Need to Know !

News media reports alleging racial bias in home appraisals have turned a spotlight on the appraisal process in the mortgage industry. Fannie Mae is committed to racial equity in housing, and we take these allegations seriously. As one of the largest consumers of residential appraisals in the United States, we’ve asked ourselves whether we are doing all we can to identify and help prevent it.

Our longstanding policy explicitly states that unacceptable appraisal practices include “…development of a valuation conclusion based on factors that local, state, or federal law designate as discriminatory, and thus, prohibited.” We additionally state that it is unacceptable for an appraiser to develop a valuation conclusion “based either partially or completely on the sex, race, color, religion, handicap [disability], national origin, familial status, or other protected classes of either the prospective owners or occupants of the subject property or the present owners or occupants of the properties in the vicinity of the subject property.”

To help our lender partners identify potential issues with appraisals – which could include bias – we provide our Collateral Underwriter® (CU®) tool to support research and analysis. CU has a robust set of risk flags and messages, including triggers for potential over-valuation risk, appraisal quality risk, and property eligibility risk. CU routinely undergoes fair lending reviews by Fannie Mae’s Fair Lending team, and we hope to enhance CU in 2022 with a new message for undervaluation risk that will help lenders address potential bias issues early in the process.

It is well-established that appraiser demographics don’t reflect the American population – appraisers are 85% white and 78% male1. While many factors can contribute to potential bias in appraisals, having an appraisal workforce that better represents the communities where they work could instill more confidence in the process and mitigate bias.

In 2018, recognizing the benefits of a more diverse appraiser workforce, Fannie Mae collaborated with the National Urban League to launch the Appraiser Diversity Initiative (ADI). The initiative is designed to attract new entrants to the residential appraisal field, overcome barriers to entry (such as education, training, and experience requirements), and foster diversity. The Appraisal Institute and Freddie Mac have since joined forces with us, and we’re proud to say that the ADI is successfully attracting diverse, aspiring appraisers, awarding them education scholarships, and seeing them launch their careers. Jessica Brown and Marcus Knight, two ADI scholarship winners, represent a new generation of appraisers.

We know this is not enough, and we are taking additional actions to understand and minimize appraisal bias. One of the first steps we’re taking is research – we’re leveraging our database of roughly 54 million appraisals to analyze undervaluation that could indicate bias. We believe the results of this research will help identify root causes of undervaluation, and through our industry partnerships, we hope to create solutions that will address them.

We’ve also enhanced our quality control requirements for lender appraisal reviews and stepped up our ongoing appraisal quality monitoring. First, we routinely conduct random and targeted quality control reviews of appraisals on loans we acquire. Second, we have an established Appraiser Quality Monitoring process to identify individual appraisers whose appraisal reports exhibit a pattern of inconsistencies, inaccuracies, or data anomalies, and communicate with them to provide an opportunity to improve their work. We provide tips to state appraisal regulatory boards when we find appraisals with severe deficiencies.

As part of our research efforts, we scanned 14 million appraisals from 2019 and 2020 to determine the extent of appraisers using terms specifically prohibited in Fannie Mae’s Selling Guide. In response to this work, we have taken two actions. First, our June 2021 quarterly Appraiser Update newsletter featured tips on avoiding bias – or even a perception of bias – in an appraisal report, cautioning that “While appraisers may not intentionally factor race, gender, or other protected class information in the valuation, some words or phrases can undermine the credibility of the appraisal by implying that demographics influenced the outcome.” We listed potentially problematic words and phrases to watch out for. Several media outlets have picked up and amplified our message reinforcing that it is unacceptable to use demographic data in determining property value. Second, using our Appraiser Quality Monitoring process, we are sending feedback letters to appraisers who had a high frequency of findings.

Finally – and very importantly – we are listening to what consumers and others are saying about appraisal bias, and we’re engaging with lender partners and other industry stakeholders to identify solutions. We recently convened a group of lender representatives in appraisal management roles to share information about appraisal bias challenges and potential solutions. What started out as a one-time event led to several follow-up sessions continuing the dialogue and developing action items.

In the coming months, we will continue our industry engagement to raise awareness of potential bias in practical ways that lead to positive change. It’s our mission to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. In support of that goal that we live every day, we are firmly committed to doing everything in our power to promote racial equity in housing, including helping all homeowners receive a fair and impartial appraisal.


What are the Lending Risks Associated with the NAR Settlement?

With the NAR settlement pending approval, lenders hot to hire buyers’ agents ought to closely consider all the risks.

In recent weeks, professionals in the housing and housing finance sectors have been speculating on the impacts to the mortgage industry stemming from the National Association of Realtors (NAR)’s $418 million settlement of several real estate commission lawsuits.

In much the same way that eighteen months of mortgage industry consolidation has separated the wheat from the chaff of loan originators, the NAR settlement has the potential to drain a bloated pool of buyers’ agents along similar professional lines. For mortgage companies built on the backs of buyers’ agent referrals, which is many, genuine risks to their referral pipelines exist.

The anticipated reduction has some in the industry, including the Mortgage Bankers Association (MBA), noting a window of opportunity for IMBs to become one-stop-shops for home buying through dual licensing. A growing number of lenders eye buyers’ agents as ideal candidates for dual-licensed loan officer-real estate agents.

“Since the NAR settlement broke, we have received tons of questions from clients that want to implement this model, where they’re hiring real estate agents to be loan officers,” said Daniella Casseres, an attorney who represents independent mortgage banks (IMBs) as partner and head of the Mortgage Regulatory Practice Group at Mitchell Sandler. “I work with independent mortgage companies who rely on buyers’ agents for 90% of their business and I believe the settlement is going to change how they drum up business.”

Mostly, lenders are asking whether it is feasible to hire and pay real estate agents compliantly. Casseres says the answer is “yes,” but spurs additional questions for lenders: What will the real estate agent be doing to get compensated for their services? Are lenders comfortable creating a model where real estate agents are required to take an application?

In December 2022, the Department of Housing and Urban Development (HUD), changed its rules, with restrictions, to allow individuals to serve and be compensated as both the real estate agent and mortgage loan originator for FHA-insured home sales. “Double-dipping” had not previously been allowed for FHA-insured mortgages, given the potential for conflicts of interest to harm borrowers, though it had been for conventional loans. Some states, such as Utah and Louisiana, still prohibit dual compensation for dually licensed individuals, no matter HUD’s rules.

In addition to the phone calls, Casseres has observed mortgage lenders advertising opportunities to bring real estate agents onboard, which serves the interests of both parties because the NAR settlement threatens the supply of future home sale transactions for both.

“Real estate agents are looking for ways to get paid and mortgage companies are looking for ways to compensate them in some way, shape, or form, not so much for the referral, but to keep them in play,” Casseres said. “They’re looking to find other ways to get their leads, and also looking to incentivize real estate agents who are down-and-out or worried about their potential earnings to come over and pay them at their mortgage companies.”

While, in theory, dual licensing stands to benefit both parties, Phil Crescenzo, a Mount Pleasant, South Carolina-based division manager for Nation One Mortgage Corporation, says that he’s rarely seen dual licensing create that optimal situation.

There’s a reason, he says, professional originators are the best at what they do, and the same goes for professional real estate agents. “Lenders going back and forth, I haven’t seen it work too well, at least on a big scale.”

Because of the increased industry chatter, Casseres worries that regulators will listen more closely for questionable arrangements. “If you’re not doing it right, which a lot of mortgage companies won’t,” she said. “I think it could create a significant risk for those companies.”

Crescenzo agrees. “I don’t like the idea or thought of that, at least for myself or my team… I think it significantly diminishes both values versus the risk associated with it.”

Lenders see the value in having employees who know the entire home sale process, and offering an end-to-end service for one fee is an attractive option for borrowers. Casseres anticipates lenders may start encouraging loan officers to get real estate licenses if the “one-stop-shop” becomes a selling point for consumers.

Crescenzo worries that dual licensing can increase confusion for borrowers, though, while that perceived added value and undermining long-built referral partnerships. Brand recognition could also be twice as difficult. Adding an extra service can make the end-to-end home-sale process more complicated – and much more complicated than the agent ever thought it would be.

“Even for seasoned professionals to dip their toes in the water to try to tackle mortgage origination, plus real estate, it’s very difficult to be really good and really effective at both, particularly given the extremely challenging origination market,” he says. “I think that’s going to add more work and then set some agents up to fail in some scenarios where they’re damaging relationships that they spent a long time building. It has happened – I’ve seen it happen.”

For lenders intent on pursuing dual licensing, Casseres says a host of restrictions and compliance questions exist that, if ignored, could draw the ire of regulators.

Lenders can pay W-2 employees for referring loans, Casseres confirmed, but not a third-party, 1099-employee. Just hiring real estate agents as W-2 employees isn’t enough, either, “and this is why I think mortgage companies will get it wrong,” she said. “You’re okay to pay them a referral, but if it’s just a sham where you can’t actually point to any services they’re providing for the compensation you’re paying them then it looks like a kickback.”

Casseres said that “doing it right” is complicated from a regulatory perspective.

“You are allowed to hire them and pay them as a W-2 employee if they’re actually acting as a W-2 employee,” she explained. “But, if you’re just hiring them so that you can pay them for referring customers to you and they’re not actually working as a loan officer, they’re not actually licensed and they’re not actually taking the application, then the government has and will look at this as a sham arrangement, and every payment that you make to them is considered a kickback and is in violation of RESPA.”

In 2014, the Consumer Finance Protection Bureau (CFPB) issued a consent order fining Stonebridge Title Services, a title services provider, $30,000 for illegal kickbacks to referral sources that Stonebridge called W-2 employees but who “did not provide any non-referral service for Stonebridge for which they were to receive compensation,” per the consent order.

“Doing it the right way,” Casseres continued, “would make sure that you have loan officers who are actually licensed, trained, and operating as loan officers – who are also real estate agents – that are actually taking the application, working with the borrower, offering loan options, collecting their information, really acting as any other loan officer would at their company and aren’t just there to be sham employees.”

There are also potential steering and disclosure risks that lenders may not be considering. Separating dually licensed employees real estate activities from loan officer activities can also be challenging when they are working directly with borrowers. To avoid liability for dually licensed, third-party real estate agents hired as loan officers, lenders should ensure that employment contracts are buttoned-up and operational controls are in place.

“This is what I’m afraid of,” Casseres said. “A lot of mortgage lenders are going to try it out without thinking through all the ramifications and the risks.”


Advertising Reverse Mortgages ? Beware !

Seniors, especially older retirees who haven’t worked for years and whose income from savings or investments may be limited, can be house rich but cash poor. They’ve paid off most or all of their home loan. Yet they can find themselves in a financial bind when they need more money than they have available.

A reverse mortgage is a type of mortgage loan that can help those in such circumstances. It’s intended for homeowners age 62 or older with significant home equity.1

With a reverse mortgage, homeowners can borrow money against the value of their homes and take the money in various ways. For example, they can obtain the loan as either a lump sum or a regular and fixed monthly payment. Or it can be delivered to them as a line of credit.

Importantly, the money loaned to them becomes due only after they die, move out of the home permanently, or sell it. [1]

It’s an appealing financial proposition when lack of cash is, or may become, a persistent problem. However, there have been some troubling issues related to how reverse mortgages are advertised.

Read on to learn about the federal and state regulations that have been put in place to protect consumers.


Several federal laws—including the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010—control the way that reverse mortgages can be advertised.

These rules forbid deceptive claims in mortgage advertising and other commercial communications sent to consumers by mortgage brokers, lenders, services, and advertising agencies.

A number of states have also passed laws to control reverse mortgage advertising.

Despite these rules, the Consumer Financial Protection Bureau (CFPB) has raised concerns about how reverse mortgages are advertised.

Consumers should be wary of advertisements for reverse mortgages that present this product as a source of income or a government benefit; reverse mortgages are loans and should be treated as such.

Problems With Reverse Mortgage Advertising

There always seem to be an endless plague of scams that target seniors and their money. Reverse mortgages have been included in these.
That aside, reverse mortgages have inherent risks which every potential borrower must consider. For example, it’s possible that after a homeowner’s death, the remaining spouse or children might lose the family home. Potential fees (closing and ongoing) can affect your liquidity, as well.

Harmful Advertising

However, in addition to the product’s legitimate potential pitfalls, there also have been instances in which reverse mortgages have been described or advertised with false claims.[1]

For example, a California-based reverse mortgage broker falsely told potential customers that a reverse mortgage would mean no payments. The broker further claimed that borrowers would not be subject to costs associated with refinancing a reverse mortgage.[2]

The fact is, people who take out a reverse mortgage do incur a range of costs, including fees for closing, appraisals, title insurance, and property, insurance, and maintenance fees.[3]

Because of consumer confusion, some states have passed laws that prohibit what lenders can and can’t state when they promote reverse mortgages. These rules are in addition to federal regulations that control how mortgages can be advertised.

Moreover, the CFPB has repeatedly raised concerns about how reverse mortgages are advertised. In a 2015 report, the agency stated that after viewing advertisements for reverse mortgages, “consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.”[4]

Federal Laws on Reverse Mortgage Advertising

Mortgage advertising is a heavily regulated part of the financial services market. In part, that’s because property is usually the single biggest purchase that most people will ever make.

Broad Regulation

To prevent unscrupulous lenders from taking advantage of borrowers, mortgage advertising is regulated by federal law. The most important of these laws are the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.[2][5][6][7]

The MAPs Rule, also known as Regulation N, controls the way mortgage services as a whole are advertised, making deceptive claims illegal.[5]

Specific FHA Reverse Mortgage Regulation

In addition, there are rules that apply specifically to reverse mortgages. The vast majority of reverse mortgages in the United States are home equity conversion mortgages (HECMs), which the Federal Housing Administration (FHA) insures.

The FHA regulates the advertising of FHA-backed loans and has specific rules for reverse mortgages. Under FHA rules, lenders must explain all requirements and features of the HECM program in clear, consistent language to consumers.[3]

Federal laws relating to reverse mortgage advertising are overseen by the Federal Trade Commission (FTC) and the CFPB, both of which have taken action against many mortgage lenders for false claims associated with reverse mortgage advertising.[8][2]

State Laws on Reverse Mortgage Advertising

In addition to federal legislation, several states have passed laws that limit the way in which reverse mortgages can be advertised.

Some of these laws, such as those in North Carolina and Tennessee, aim to further restrict the ability of reverse mortgage lenders to misrepresent how these loans work.[9][10]

Others, such as the laws in effect in Oregon, define and require a number of disclosures—important pieces of information that the lender must communicate to the potential borrower—and specify that these must be prominent and not just appear in the fine print.[11]

A number of states, rather than prohibiting certain types of advertising, have sought to protect consumers by enhancing the counseling session that all potential HECM borrowers must attend.[12]

The U.S. Department of Housing and Urban Development (HUD) requires that all prospective HECM borrowers complete this counseling session. HUD requires the counselors to detail the pros and cons of taking out a reverse mortgage.[3][13]

How Does the Government Control Reverse Mortgage Advertising?

Reverse mortgage advertising is relatively strictly controlled, and a number of federal laws prohibit lenders from making deceptive claims in their advertising. These include the Mortgage Acts and Practices Advertising Rule (Regulation N), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

What Is an Example of Reverse Mortgage False Advertising?

The CFPB has found that reverse mortgage advertisements left consumers confused about reverse mortgages being loans, whether they were a government benefit, and whether they ensured that consumers could stay in their homes for the rest of their lives.

Who Regulates Reverse Mortgage Companies?

At the federal level, the CFPB, the Department of Housing and Urban Development (HUD), and the Federal Trade Commission (FTC) regulate reverse mortgage lenders’ activities.[8]
Federal Trade Commission, Consumer Advice. “Reverse Mortgages.”

Additionally, some states have passed laws that control how reverse mortgages are advertised.

The Bottom Line

A number of federal and state laws control the way that reverse mortgages can be advertised. They make it against the law for mortgage brokers, lenders, servicers, and advertising agencies to make deceptive claims in mortgage advertising and other commercial communications sent to consumers.

Despite these rules, the CFPB has been concerned about the way that reverse mortgages are promoted. Therefore, consumers should be wary of advertisements that present this product as a source of income or a government benefit. Reverse mortgages are a loan, and they should be treated as such.


Prevent Mortgage Fraud – Verify, Verify, Verify

Federal prosecutors said the “sheer volume of false documents and material misrepresentations’’ concocted to deceive lenders in the scheme involving cousins Jacob and Aron Deutsch “is staggering.”

in U.S. District Court. Aron Deutsch, 63, of Monsey was fined $1 million and put on probation for five years.

Under their guilty pleas to federal fraud charges, the two men admitted to a scheme in which they acquired 17 multi-family housing complexes across the city between 2016 and 2021 by creating hundreds of phony financial documents to obtain 24 separate mortgages.

Among other things, Jacob Deutsch admitted creating an elaborate ruse that convinced lenders that a empty, 24-unit apartment complex the cousins succeeded in buying at 16 Evergreen Ave. was not only fully occupied, but was occupied by tenants paying inflated rents. The properties ran from Washington Street south of downtown, through the West End and onto Asylum Hill.

“All told, he fraudulently induced numerous victim financial institutions to finance the purchase of assets from which he is now profiting, fraudulently procuring 24 mortgage loans totaling nearly $50 million dollars, and shifting the risk of catastrophic loss onto the victim financial institutions and the secondary markets on which they rely,” the U.S. Attorney’s office said of Jacob Deutsch in a court filing.

Because of the stability of the Hartford retail market over the period of the conspiracy, prosecutors said lenders — four banks and secondary mortgage market players like Fannie Mae — suffered no significant losses.

After realizing they would be prosecuted, the cousins, who operated B H Property Management on Wethersfield Avenue, claimed they were able to sell off the properties at break-even prices, meaning there was no loss to lenders. Federal prosecutors claimed the lenders lost about $3.5 million on $50 million in loans.

The mortgage fraud conspiracy unraveled when federal housing authorities decided that the mortgage application and due diligence materials associated with the 16 Evergreen Ave. purchase were “wildly false,” prosecutors said.

Among other things, the loan application for 16 Evergreen to the lender CBRE Capital Markets contained a rent roll showing gross yearly rental income of $280,000 when, in reality, the complex was empty.

To support the phony application, prosecutors said Jacob Deutsch admitted creating an elaborate — but phony — list of tenants, accompanied with their forged signatures on phony leases and fake moving in dates. He then hired a company to “stage” empty apartments with furniture, clothing and other furnishings before making them available for inspection by the lender.

When the Federal Home Loan Mortgage Corporation, to which CBRE planned to sell the loan, wanted additional proof of occupancy, prosecutors said Jacob Deutsch arranged for an employee to collect dozens of electric utility bills, doctor them to correspond with names on the fake rent roll and send them to CBRE. He was accused of doing the same thing with natural gas bills.

Jacob Deutsch next fabricated a banking record that purported to show deposits to his company’s Evergreen Avenue rent account, complete with copies of money orders, cashier’s checks and stamped envelopes. Prosecutors said Aron Deutsch purchased the cashier’s checks.

Later, the cousins decided to refinance 16 Evergreen Ave. with a new lender and reconciled the new loan application with the phony records associated with the first one.

Similar kinds of frauds were associated with loans for other properties around the city.

Prosecutors said Jacob Deutsch falsely inflated the occupancy rate of another of the partnership’s buildings, at 12 Willard Street, by listing employees as tenants — without their knowledge.

The partnership also lied to lenders about improvements to properties. It created invoices showing $526,000 in improvement at 1650-1680 Broad St., when actual work involved only the installation of a $38,000 boiler system, prosecutors said.

Prosecutors said the cousins used the fraudulent loan proceeds to acquire new buildings and make improvements to those previously acquired.


Fair Lending Compliance in the Midst of Mortgage M&A

Today’s high interest rates and historically low levels of housing availability create a difficult business environment for residential mortgage lenders. This is especially true for non-bank lenders that lack the larger balance sheets and diversified revenue channels of their bank competitors.

Prolonged stress may lead mortgage lenders to consider strategic transactions, whether to raise capital, sell to a strategic buyer, or acquire a distressed competitor. When evaluating these opportunities, lenders should be aware that fair lending scrutiny is rising. They should carefully consider risk profiles of the target and combined institution to minimize post-transaction compliance issues.

Access Priorities

The Biden administration’s position is that federal government “has a critical role to play in overcoming and redressing this history of discrimination and in protecting against other forms of discrimination by applying and enforcing Federal civil rights and fair housing laws.”

Federal agencies with fair lending enforcement authority have been aggressively following this policy directive, including those responsible for supervising mortgage lenders’ compliance.

The Department of Justice “vigorously enforces federal fair lending laws to protect equal access to credit,” and recent enforcement trends confirm that non-banks face multiple areas of heightened fair lending risk.

Perhaps most significantly, in 2021, Attorney General Merrick Garland launched a DOJ initiative to combat redlining—or failing to make credit available in minority communities—in partnership with the Consumer Financial Protection Bureau and other agencies.

The DOJ announced it would expand investigations of “potential redlining to both depository and non-depository institutions,” and made public a consent order resolving redlining allegations against a non-bank—the first of its kind.

Since then, mortgage lenders responsible for complying with fair lending laws have been notified that they must effectively monitor and manage redlining risk to ensure credit is made available in both minority and non-minority communities.

Property valuations are another increased fair lending risk area. In 2021, the Biden administration initiated a task force to combat bias in home valuations. The DOJ made its position clear in a statement of interest it filed in lawsuit brought by individual plaintiffs.

In Connolly v. Lanham, an online mortgage lender allegedly violated fair lending laws by relying on an appraisal conducted by an appraiser who supposedly lowered the home valuation because of the homeowners’ race. The DOJ argued it is illegal for a mortgage lender to rely on an appraisal it knows or should know is discriminatory.

The CFPB most recently reported to Congress that it “focused much of its fair lending supervision efforts on mortgage origination” issues. Such issues include redlining, potential discrimination in underwriting and pricing, steering applicants on a prohibited basis, and integrity of demographic data reported by lenders under the Home Mortgage Disclosure Act.

Fair Lending

Current economic conditions present increased merger and acquisition opportunities for mortgage lenders. With this in mind, lenders must take a proactive approach when assessing fair lending risk. Every buyer of a mortgage lender should prepare to confront increased risk around fair lending in the post-transaction phase as well.

It’s critical to assess the target mortgage lender’s system of managing compliance around fair lending, as the surviving entity will inherit the target’s fair lending problems, if there are any. Such assessments can help identify potential compliance management system weaknesses and enable the surviving mortgage lender to prepare an action plan ahead of the transaction.

Common post-acquisition enhancements to fair lending programs include fair lending training, modifying fair lending policies, implementing statistical fair lending monitoring of underwriting, pricing, product steering, and minority-area lending, and reporting risk to the board.

Best practices also include evaluating any new service area or market areas where the target lender operates, ensuring the acquiring institution can continue serving credit needs of minority and non-minority communities within those areas. Buyers should consider the target lender’s product offerings, loan officers, and physical locations from a fair lending perspective.

They also should ensure the fair lending impacts of any contemplated post-closing discontinuations of products or services, or closures of brick-and-mortar locations, are thoroughly evaluated and documented.

Comprehensive due diligence may include reviewing the target lender’s fair lending monitoring reports on underwriting, pricing, and geographical distribution of mortgage loans. This step can help evaluate trends and anticipate possible adverse impacts on the surviving lender.

When negotiating an acquisition, buyers should seek to negotiate protections into their transaction documents—against fair lending-related issues that might arise between signing and closing, or liabilities that might arise after closing.

Being thoughtful about issues—such as conditions to the buyer’s obligation to close, how and when the purchase price is payable and released, and seller indemnities for post-closing liabilities—can significantly mitigate these risks to a buyer.

Ideally, the buyer’s position on these issues will be informed by comprehensive due diligence on the fair lending risks associated with the target’s existing business, and the anticipated combined organization’s post-closing business plan.

The stress many mortgage lenders are facing in the current environment creates opportunities for strategic investors, opportunistic buyers, and sellers looking for an exit.

When evaluating and negotiating their deals, parties need to bear in mind that fair lending is a government policy priority, and risk is therefore heightened. This risk can be mitigated by careful consideration of fair lending issues during due diligence and proper structuring of the transaction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.


Current State of Housing Market

While the US housing market has remained surprisingly resilient price-wise in the face of 7% mortgage rates, which the Fed has pushed to near-Volcker levels precisely in hopes of accelerating the dis inflationary wave by crushing housing, that single most valuable asset of the US middle class, the reality why prices have not collapsed is that the bid-ask spread for any home currently for sale has ballooned to levels where the market is effectively frozen as there is simply no possibility for the bid and ask to meet somewhere “in the middle” of the range (those who are hoping to buy are already tapped out before being asked to pay even more, while sellers are already wealthy and absent a liquidity crunch see no reason to sell a home at what they view as fires ale prices).

Overnight, real-estate brokerage Redfin calculated just how widespread said paralysis is: it found that just 14 of every 1,000 U.S. homes changed hands during the first six months of 2023. That’s down from 19 of every 1,000 during the same period of 2019 and the lowest turnover rate in at least a decade, since Redfin’s records started. That means prospective homebuyers have 28% fewer homes to choose from than they did before the pandemic upended the U.S. housing market.

Redfin uses turnover as a measure of housing availability; it indicates how often homes change hands in a given area.  This analysis includes overall for-sale housing turnover and breakdowns based on neighborhood type and home type.

The pre-pandemic turnover rate noted above (roughly 20 of every 1,000 sellable homes change hands in the first half of a year) is fairly typical for the modern housing market, but a more active market would have a rate closer to 40 or 50 of every 1,000.

As Redfin adds, the wild pandemic-era housing market has intensified an existing shortage of homes for sale and led to this year’s low turnover rate. In 2018, Freddie Mac estimated that about 2.5 million more homes needed to be built to meet demand, with the shortfall mainly due to a lack of construction of single-family homes. The homebuying boom of late 2020 and 2021, driven by record-low mortgage rates, remote work and a surge in investor purchases, depleted already low inventory levels. Finally, 2022’s soaring mortgage rates–average rates nearly doubled from January to June–exacerbated the shortage by handcuffing homeowners to their comparatively low rates. Some homeowners have opted to renovate their current home, and some are buying another home but hanging onto their first one and renting it out to either a longterm tenant or short-term vacationers. Now, the supply of homes for sale is at a record low.

“The quick increase in mortgage rates created an uphill battle for many Americans who want to buy a home by locking up inventory and making the homes that do hit the market too expensive. The typical home is selling for about 40% more than before the pandemic,” said Redfin Deputy Chief Economist Taylor Marr. “Mortgage rates dropping closer to 5% would make the biggest dent in the affordability crisis by freeing up some inventory and bringing monthly payments down. But there are a few other things that would boost turnover and help make homes more affordable. Building more housing is imperative, and federal and local governments can help by reforming zoning and making the building process easier. Financial incentives, like reducing transfer taxes for home sellers and subsidizing major moves with tax breaks, would also add to supply.”

Suburbs hardest hit

House hunters searching for large homes in the suburbs have seen the biggest drop in their options. Just about 16 of every 1,000 four-bedroom-plus suburban single-family homes sold in the first half of this year, down from 24 of every 1,000 that sold in the same period in 2019. That means buyers of that home type have 33% fewer houses to choose from.

The turnover rate has dropped for every size home in every type of neighborhood over the last four years (though buyers will have an easier time finding something for sale in certain metro areas, as outlined below). That trend can be seen in the chart above, which displays the national post-pandemic housing turnover rate on the left and the pre-pandemic rate on the right. The length of the line between the two dots indicates how much turnover declined from 2019 to 2023, with the biggest declines at the top.

The turnover rate of large single-family suburban homes has shrunk most because that type of home exploded in popularity during the pandemic. Remote workers flocked to the suburbs, untethered from the office, and purchased large properties with space for adults to work from home and children to attend school from home.

“New listings normally hit the market on Thursdays, and I have buyers who are excitedly checking their Redfin app Thursday mornings, only to find nothing new,” said Phoenix Redfin Premier agent Heather Mahmood-Corley. “That goes for buyers in every price range in every type of neighborhood, but what people want most are those move-in ready, mid-sized homes in neighborhoods with highly rated schools. Those are hardest to find because for people to buy one, someone needs to sell one. That’s not happening, because so many of those homeowners have low mortgage rates.”

The turnover rate of condos and townhomes didn’t shrink as much as that of single-family homes during the pandemic, though condo and townhouse buyers are still about 20% less likely to find that type of home than they were in 2019.

Supply of that home type wasn’t depleted as much because there wasn’t as much demand for them during the pandemic. In fact, many remote workers were selling condos and townhouses in favor of single-family homes with more space.

Modestly sized single-family homes in the city are hardest to find: Just 11 of every 1,000 two- and three-bedroom urban houses sold in the first half of this year

Smaller houses in the city have the lowest turnover rate of all the home types in this analysis.  Roughly 11 of every 1,000 two- and three-bedroom single-family homes in urban neighborhoods sold in the first six months of 2023, compared to 14 of every 1,000 during the same period in 2019.

Two- to three-bedroom homes in suburban neighborhoods are essentially tied with their urban counterparts for the lowest turnover rate, with 11 of every 1,000 changing hands this year. That’s down from 16 of every 1,000 in 2019.

Modestly sized single-family homes in all kinds of neighborhoods have long been hard for buyers to find. That’s because builders don’t make many of them anymore, and homeowners tend to hold onto the ones that exist.

Today’s homebuilders tend to focus on the kind of home that’s in demand and profitable: Larger single-family homes, which don’t cost much more to build than smaller ones but sell for more money, and condos and townhouses, which cost less to build. And people who own those starter-type homes often turn them into rental properties rather than selling when they move up to bigger houses.  Homeowners can often cover their mortgage and then some when renting out this type of home, especially in desirable neighborhoods; that income paired with the home’s value increasing over time incentivizes keeping rather than selling.

Homebuyers have the smallest pool of options in the Bay Area: Just 6 of every 1,000 San Jose homes have turned over to a new owner this year

Northern California has the lowest turnover rate in the U.S. Just six of every 1,000 homes in San Jose changed hands in the first half of 2023, the lowest rate of the 50 most populous U.S. metros. It’s followed closely by Oakland, San Diego, Los Angeles, Sacramento and Anaheim, all places where about eight of every 1,000 homes turned over to a new owner.

The pandemic exacerbated the supply shortage throughout California, with the turnover rate dropping by at least 30% in each of those metros from 2019 to 2023.

Zooming in on large, suburban single-family homes, California still has the lowest turnover rate. Six of every 1,000 homes of that type have sold this year in San Jose (-40% since 2019), the lowest rate in the nation. Next come Oakland (7 of every 1,000; -43%), San Diego (8 of every 1,000; -51%), Sacramento (9 of every 1,000; -41%) and Anaheim (9 of every 1,000; -41%).

Homebuyers have the biggest pool of options in Newark, NJ and Nashville, where more than 23 of every 1,000 homes have changed hands this year

Newark, NJ has the highest turnover rate in the U.S., with 24 of every 1,000 homes changing hands during the first six months this year. It’s followed closely by Nashville, TN (23 of every 1,000) and Austin, TX (22 of every 1,000). Nashville and Austin are also two of the three metros (along with Fort Worth, TX) with the highest turnover for large suburban, single-family homes.

Newark buyers still have far fewer homes to choose from than they did before the pandemic, with a 42% drop in turnover since 2019. Only New Brunswick, NJ (-49%) and San Diego (-46%) had bigger declines. Zooming in on large suburban houses, New Brunswick (-55%), Chicago (-54%) and New York (-52%) had the biggest drops in turnover.

But Nashville and Austin are both among the five metros with the smallest declines in turnover since 2019, posting drops of just 10% and 14%, respectively. When it comes to large suburban houses, Nashville and Austin have the second and third smallest declines. That’s partly due to robust new construction in Nashville and Austin: Inventory of single-family homes for sale in both metros is made up of more than 30% newly built homes, compared to 22% nationwide.

Only Milwaukee and Columbus, OH, which both saw overall turnover drop by about 8% from 2019 to 2023, had smaller declines in turnover than Nashville. Indianapolis, IN comes in fourth, with a 14% decline. Milwaukee, Columbus and Indianapolis have relatively stable turnover because they didn’t experience huge homebuying demand swings throughout the pandemic.

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Processing Mortgage Payments – BEWARE

WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued an order against ACI Worldwide and one of its subsidiaries, ACI Payments, for improperly initiating approximately $2.3 billion in unlawful mortgage payments transactions. ACI’s data handling practices negatively impacted nearly 500,000 homeowners with mortgages serviced by Mr. Cooper (formerly known as Nationstar). By unlawfully processing erroneous and unauthorized transactions, ACI opened homeowners to overdraft and insufficient funds fees from their financial institutions. Today’s order requires ACI, among other things, to pay a $25 million civil money penalty.

“The CFPB’s investigation found that ACI perpetrated the 2021 Mr. Cooper mortgage fiasco that impacted homeowners across the country,” said CFPB Director Rohit Chopra. “While borrower accounts have now been fixed, we are penalizing ACI for its unlawful actions that created headaches for hundreds of thousands of borrowers.”

ACI (NASDAQ:ACIW) is a publicly traded firm headquartered in Elkhorn, Nebraska. The company offers payment processing services across a wide range of industries including utilities, student loan servicing, healthcare, education, insurance, telecommunications, and mortgage servicing. ACI counts more than 6,000 firms as customers, and the company claims to process more than 225 billion consumer transactions annually. The company processes mortgage payments through the Automated Clearing House (ACH) network. For 2022, ACI reported revenue of $1.422 billion and net income of $142 million.

Mr. Cooper was one of ACI’s largest mortgage servicing customers until at least 2021. Mr. Cooper services the mortgages of more than four million borrowers and collects their monthly mortgage payments. Many homeowners with mortgages serviced through Mr. Cooper chose to schedule their monthly mortgage payments using ACI’s Speedpay product, which allowed the company to automatically transfer homeowners’ authorized mortgage payments from their personal bank accounts to Mr. Cooper.

On Saturday, April 24, 2021, impacted account holders began noticing inaccuracies in their account balances. Immediately, people began experiencing negative financial consequences. At one bank, for example, more than 60,000 accounts experienced more than $330 million in combined unlawful debits by that morning. Among these account holders, approximately 7,300 had their available balances reduced by more than $10,000—overnight.

The CFPB found that ACI’s actions violated federal consumer financial protection laws, including the Consumer Financial Protection Act and the Electronic Fund Transfer Act and its implementing rule, Regulation E. Specifically, the company harmed homeowners by:

Illegally initiating withdrawals from borrower bank accounts: ACI initiated approximately 1.4 million ACH withdrawals on behalf of Mr. Cooper from homeowners’ accounts on April 23, 2021, without a valid written authorization. This included initiating electronic fund transfers on days when they were not scheduled and initiating multiple transfers from the same accounts on the same day.

Improperly handling sensitive consumer data: As one of the largest global providers of payment services, ACI handles sensitive financial data of millions of homeowners and other consumers. The unlawful transactions, and the subsequent harm they caused, occurred as a direct result of the company’s inappropriate use of consumer data in its testing process. Specifically, the company failed to establish and enforce reasonable information security practices that would have prevented files created for testing purposes from ever being able to enter the ACH network.

This is the CFPB’s first action addressing unlawful information handling practices in processing mortgage payments. Last year, the CFPB issued an enforcement circular describing how shoddy data handling practices can constitute violations of the Consumer Financial Protection Act.

Enforcement Action

Under the Consumer Financial Protection Act, the CFPB has the authority to take action against companies that violate federal consumer financial protection laws, including engaging in unfair, deceptive, or abusive acts or practices. The CFPB also has authority to enforce the Electronic Fund Transfer Act and its implementing rule, Regulation E.

On Friday, April 23, 2021, ACI conducted tests of its electronic payments platform. But instead of using deidentified or dummy data in its tests, ACI used actual consumer data it had received from Mr. Cooper, which included names, bank account numbers, bank routing numbers, and amounts to be debited or credited. During its performance testing, ACI improperly sent several large files filled with Mr. Cooper’s customer data into the ACH network, unlawfully initiating approximately $2.3 billion in electronic mortgage payment transactions from homeowners’ accounts. None of the nearly 500,000 impacted borrowers anticipated, authorized, or were aware of these transactions until after they had been processed by their respective banks.

The order requires ACI to:

Stop its unlawful practices: ACI must adopt and enforce reasonable information security practices, and is prohibited from processing payments without obtaining proper authorization. It is also prohibited from using sensitive consumer financial information for software development or testing purposes without documenting a compelling business reason and obtaining consumer consent.

Pay $25 million in penalties: ACI is required to pay a $25 million penalty to the CFPB, which will be deposited into the CFPB’s victims relief fund.

Read today’s order.

Consumers can submit complaints about mortgage products and other financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their companies have violated federal consumer financial protection laws, including the Electronic Fund Transfer Act and its implementing rule, Regulation E, are encouraged to send information about what they know to To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit


Current Status of Mortgage Rate Buydowns


The housing boom has lasted longer than housing bears have expected, with shares of homebuilders seeing significant gains.

The iShares Home Construction ETF is up 33% for the year and SPDR S&P Homebuilders ETF has a 27% YTD return.

Why won’t the housing market turn when every economic indicator says it should? I’d argue that new home sales have held up largely because of homebuilders offering buyers teaser rates.

Homebuilders are using short-term mortgage buydowns to attract buyers, but this could lead to chaos as payments automatically reset to higher amounts. This is particularly risky for jumbo mortgages.

I estimate that 600,000 to 700,000 households could face rate resets in the next year, which could quietly put pressure on the economy and housing market.

Recent data shows what was a surprisingly strong spring selling season for homebuilders and an existing home sales market that has rebounded in price, even amidst plunging volumes. For shares of homebuilders, this means that the pandemic boom in new construction has carried on longer than most analysts thought it would. The iShares Home Construction ETF (BATS:ITB) is up roughly 33% for the year, and the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) also clocks in at a 27% YTD return. Over the full business cycle, however, publicly traded homebuilders are lousy businesses. Homebuilders are highly leveraged, highly cyclical businesses. Historically, they’ve had poor returns on capital compared with the market at large and tend to go bust during recessions– a fact that is somewhat hidden by survivorship bias when looking at historical returns.

More recently in 2022, this led to the question of whether homebuilders trading for 5x peak earnings or so were good value investments or value traps. I’ve repeatedly taken the position that they’re value traps, but now here we are with homebuilder stocks having rocketed back to all-time highs since the October lows, along with many of the most speculative corners of the market.

The one factor that I massively underestimated was the prevalence of short-term mortgage rate buydowns provided by homebuilders. How these typically work is that builders will buy down borrowers’ mortgage rates for 1-3 years, at which point the mortgage resets to a higher monthly payment. Common forms include 3-2-1 (i.e. 3% reduction in interest in year 1, 2% in year 2, and 1% in year 3), and 2-1.

Research shows that around 75% of builders are using them, with the greatest concentrations of use in Texas and the Southwest. On a $500,000 loan with a 2-1 and prevailing mortgage rates at 7%, the monthly payment would be $2,684 in year 1, $2,997 in year 2, and $3,326 in year 3. By and large, this allowed builders to sell homes that would have piled up by offering teaser payments that reset to levels that are technically legal, but often at rather uncomfortable debt-to-income ratios when combined with property tax increases and skyrocketing utility bills. Throw in some cheap construction and 110-degree summer temperatures, and you have a recipe for potential regret, especially for out-of-state buyers.

Fannie Mae and Freddie Mac restrict buydowns that exceed these thresholds (because of the potential for fraud and abuse), but highly publicized troubles at lenders like First Republic (OTCPK:FRCB) show that the jumbo market has seen some more exotic underwriting. The unspoken implication here is that lenders, real estate agents, and builders are selling these to buyers with the implicit or explicit suggestion that they should refinance down the road and lower their payments, (a.k.a. the infamous “date the rate, marry the house” sales pitch). That works if interest rates go down, but interest rates have actually gone up and the Treasury now has a boatload of deficit-financed debt to sell, which threatens to push mortgage rates above 8% by late summer. Fannie Mae and Freddie Mac at least force buyers to qualify for the payments after they reset, but it’s not clear whether the jumbo market has the same level of protection.

Mortgage buydowns may be innovative for builders, but they’re not newly invented. One of the untold stories of the 2008 financial crisis was the role that homebuilder rate incentives had in fueling the crisis. Adjustable rate mortgages get all the attention for massive balloon payments, but the story in jumbo mortgages was actually quite similar. Many, many buyers who bought in 2005 and 2006 had their mortgages reset in 2008 and 2009 after their rate buydowns expired, and their assumptions about mortgage rates turned out to be wildly wrong. In fact, jumbo mortgage rates hit nearly 8% in early 2009. That’s because jumbo mortgages are heavily dependent on credit, which rapidly tightened then starting in 2007 and also is tightening now. Only after the economy recovered did mortgages start to get cheaper again.

This means that taking out a jumbo mortgage because you think you can refinance it later is riskier than you think! It’s smart for homebuilders to offer these and it extended the business cycle long enough for investors to make profits. However, these rate resets are potentially disastrous for buyers making huge economic bets with scarce information about whether they’ll truly be able to refinance for cheaper rates.

Jumbo Mortgage Rates- 2007-2013

Different data sources on mortgages will generally show slightly different numbers, the main reason being that many mortgage rate surveys don’t count points charged to acquire the loan. But jumbo mortgage rates rose in the early stages of the 2000 recession. And throughout the 2008 recession, we see here that jumbo mortgages actually rose significantly.

So how many people have these rate buydowns? A minority of builders do buy the rate down for the whole 30-year term and a few buyers pay cash, so I think a fair estimate is that roughly 50% of new home buyers have rate buydowns that are 3-2-1 or faster. Roughly 600,000 new homes were sold in 2022, and this year is tracking for about 800,000. Divide by two, and we can ballpark that maybe 600,000 to 700,000 households have rate reset balloon payments coming due over the next couple of years. It may not sound like much, but that’s a figure roughly equal to all of the homes in the US currently listed for sale. Since housing supply for sale is low compared to the size of the overall housing stock, it could change the supply/demand dynamics considerably. My guess is that this will start to quietly become a problem for new homeowners, as we’re just now starting to see rates reset from last summer when mortgage rates first hit 6%.

For jumbo buyers, these can amount to payment hikes of $1,000 to $2,000 per month. Jumbo buyers aren’t likely to get much sympathy from the Fed or Treasury either, as encouraging marginal holders to sell is part of the process of bringing supply and demand back into balance. The strategy of taking out a mortgage and trying to refinance is somewhat better for those buying lower-priced homes with conventional mortgages. At lower mortgage amounts, the government is more likely to intervene to help you if things go south. Still, I wouldn’t expect a whole lot of help without unemployment rising sharply, in which case many buyers will need to sell anyway, driving down prices. Now add student loans restarting, with 40 million borrowers affected. Interesting times indeed.

The Cure For High Prices Is High Prices

While homebuilders have done well, the looming oversupply in rental housing and falling margins for homebuilders will continue to accelerate. If current trends hold, new homes could soon be cheaper than existing homes, which almost never happens. Builders are aggressively discounting homes, including using rate buydowns, and it’s allowing them to offload houses.

But as a recent report from Reventure Consulting shows, much of this new construction is far out from existing cities, which may help explain why there has been relatively little pressure on the existing home sales market so far. For example, this is a map of new construction in North Texas, where much of the new construction is an hour or longer drive to the city itself. In the 2008 real estate bubble, these kinds of homes were the hardest hit, particularly in areas like Arizona, Las Vegas, and the Inland Empire of California.

But with the median prices of new homes falling from $497,000 at the pandemic peak to $416,000, it’s only a matter of time before buyers start responding in earnest to the market signal they’re being given. As prices for new construction continue to fall, it’s going to pressure the existing home sales market because the two are nearly perfect substitutes. And ask yourself, with new home prices already falling to near the levels of existing homes, who’s going to buy the next 1.7 million units under construction, and at mortgage rates of 7% or more?

Homebuilders clearly had some hefty profit margins to work with in 2022 when they began discounting inventory. But the next 1.7 million houses under construction will be a much tougher proposition to sell or rent. Rents are now falling, interest rates continue rising, and there’s little long-term demographic demand for housing in excess of what’s already been pulled forward. While housing market bears may have been early in calling a downturn, underlying demographic trends likely mean they won’t be wrong about the ultimate destination.

With these in mind, I’m highly skeptical of stocks like Lennar (LEN) now trading for 10.5x earnings, D.R. Horton (DHI) trading for 11.5x earnings, and even from Toll Brothers (TOL) trading for 7.8x. If builders want to buy down mortgages for the full 30-year term for borrowers it’s fine, but doing so affects margins similarly to how price cuts would. When most of the industry is offering short-term teaser rates to new home buyers, the very clear risk is that the houses they sell come back onto the market when the mortgages reset, just like they did in the 2000s, but on a smaller scale. This, combined with the massive wave of construction hitting the market means homebuilder profit margins likely won’t stop falling when they hit 0%.

Key Takeaways

The housing market has been surprisingly strong in 2023, despite the ratio of a typical mortgage payment to a typical wage reaching a level surpassing the 2000s housing bubble.

One reason that the housing market hasn’t turned down as sharply as feared may be due to widespread mortgage rate buydowns by builders.

Many buyers are rolling the dice and betting that they can refinance in a couple of years for a lower interest rate before their payments reset, but jumbo mortgage rates in particular tend to rise, not fall during a recession.

Will home buyers who bought in 2022 with mortgage buydowns sell en masse when their payments reset this year and next? We’ll see.

It remains to be seen whether the economy will achieve a soft landing, but the widespread existence and adoption of mortgage rate buydowns are likely to exacerbate the swings of the business cycle. Count this as one more data point suggesting a soft landing is less likely than pundits think.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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