In a landmark move aimed at enhancing consumer protection, the Consumer Financial Protection Bureau (CFPB) has finalized a rule to establish a public registry of repeat financial offenders. This registry will primarily target nonbank financial institutions, including mortgage lenders, payday lenders, debt collectors, and credit reporting companies, who have violated consumer protection laws.

The Purpose of the Registry

The central aim of the new registry is to identify and monitor companies that repeatedly violate consumer protection laws. By compiling a public database of these offenders, the CFPB hopes to deter illegal activities by making the consequences of such actions more transparent and accessible to the public. This initiative is a response to the concerning trend of financial firms treating penalties for illegal activities as a mere cost of doing business.

CFPB Director Rohit Chopra emphasized the significance of this rule, stating, “Too often, financial firms treat penalties for illegal activity as the cost of doing business. The CFPB’s new rule will help law enforcement across the country detect and stop repeat offenders.”

Implications for Mortgage Lenders

For mortgage lenders, the establishment of this registry represents both a challenge and an opportunity. The mortgage industry has long been plagued by instances of fraud, predatory lending practices, and other violations that have significantly harmed consumers. By being included in this registry, mortgage lenders will be held to a higher standard of accountability. This transparency can help build trust with consumers who are often wary of the mortgage lending process

Mortgage lenders will be required to register with the CFPB if they have been penalized for violating consumer protection laws. This includes providing an attestation from a senior executive confirming that the company is complying with all legal orders. This requirement underscores the CFPB’s commitment to ensuring that companies are not only aware of the legal consequences of their actions but are actively taking steps to rectify any misconduct.

Benefits for Consumers

The public registry will serve as a valuable resource for consumers, allowing them to make more informed decisions when choosing financial service providers. By accessing this registry, consumers can see if a mortgage lender has a history of violations and decide whether they want to engage with that lender. This level of transparency can prevent consumers from falling victim to companies with a history of unethical behavior.

Advocacy groups like Public Citizen have praised the initiative, calling it a “public rap sheet for corporations” that will help consumers assess the risk associated with particular companies. This aligns with the CFPB’s goal of protecting American families and businesses from the harmful practices of repeat offenders.

Industry Opposition

Despite its potential benefits, the registry has faced opposition from business lobbyists. Six trade groups, including the U.S. Chamber of Commerce, have criticized the registry as burdensome and unnecessary. They argue that “naming and shaming” companies does not necessarily help consumers and could lead to increased litigation. However, the CFPB remains steadfast in its belief that the registry is a crucial step toward greater accountability in the financial industry.

Future Outlook

Starting in January, debt collectors, credit bureaus, payday lenders, and mortgage lenders will be required to report their compliance status to the CFPB annually. This proactive approach aims to ensure that one-time offenders do not become repeat offenders and that those with a history of violations are closely monitored.

For mortgage lenders, this means a heightened need for compliance and transparency. Companies must not only adhere to consumer protection laws but also demonstrate their commitment to ethical practices through regular reporting and executive attestations. Failure to do so could result in their inclusion in the public registry, potentially damaging their reputation and consumer trust.

Conclusion

The CFPB’s new public registry of repeat financial offenders marks a significant step forward in consumer protection. For mortgage lenders, it represents both a challenge to maintain rigorous compliance standards and an opportunity to build greater trust with consumers. By fostering transparency and accountability, the registry aims to create a fairer and more trustworthy financial marketplace. As this initiative unfolds, it will be crucial for all stakeholders to engage actively in promoting ethical practices and protecting consumer interests.

Source:https://www.nysscpa.org/news/publications/the-trusted-professional/article/consumer-protection-agency-to-create-public-registry-of-repeat-financial-offenders-060424

Navigating the complex world of mortgage loans can be daunting, especially when deceptive practices are hidden in the fine print. Recently, the Consumer Financial Protection Bureau (CFPB) issued a warning about such deceptive practices in consumer financial products, including mortgage loans. As a mortgage loan borrower, understanding these potential deceptions is crucial for protecting your financial interests and ensuring your rights are upheld.

The CFPB’s Warning

The CFPB has highlighted a growing concern about the use of deceptive fine print in mortgage contracts. These terms can unlawfully limit consumers’ rights, misleading them into believing they have waived legal protections or agreed to conditions that significantly disadvantage them. This practice is not only unethical but also violates various federal and state laws designed to protect consumers from unfair treatment.

Common Deceptive Practices in Mortgage Contracts

Waivers of Liability

One common deceptive practice involves waivers of liability. Some mortgage contracts may include clauses that attempt to absolve the lender of any responsibility for damages or losses that the borrower might incur. These waivers can be particularly concerning as they may conflict with state laws that are designed to protect consumers from negligence or misconduct by lenders. It’s essential to scrutinize these clauses and understand your rights under state law.

Restrictions on Legal Recourse

Another deceptive practice is the inclusion of terms that restrict a borrower’s ability to seek legal recourse. For example, a mortgage contract might contain a clause that limits your ability to file a lawsuit or participate in a class-action suit against the lender. Such restrictions can undermine your legal rights under federal laws like the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), which provide essential protections and avenues for recourse.

Arbitration Clauses

Many mortgage contracts include mandatory arbitration clauses, which require borrowers to settle disputes through arbitration rather than through the court system. While arbitration can be quicker and less costly than litigation, it often favors the lender and can limit your ability to achieve a fair resolution. Understanding the implications of arbitration clauses is vital before agreeing to them.

The Impact on Borrowers

Deceptive fine print in mortgage contracts can have severe consequences for borrowers. When consumers unknowingly waive their rights or agree to restrictive terms, they may find themselves with limited options for recourse if issues arise. This lack of transparency can lead to financial losses, prolonged disputes, and significant stress.

CFPB’s Role in Protecting Consumers

The CFPB plays a crucial role in protecting consumers from these deceptive practices. By issuing warnings and pursuing enforcement actions against violators, the CFPB helps to uphold fair practices in the financial industry. The agency’s efforts are aimed at promoting transparency, ensuring that consumers can make informed decisions, and holding companies accountable for unethical behavior.

Legal Foundations and Consumer Protections

The CFPB’s warning emphasizes the importance of several key legal protections designed to safeguard consumers in the mortgage market:

Truth in Lending Act (TILA)

TILA requires lenders to provide clear and accurate information about the terms and costs of a mortgage loan. This transparency allows consumers to compare different loans and make informed decisions.

Real Estate Settlement Procedures Act (RESPA)

RESPA ensures that borrowers receive disclosures about the costs associated with closing a mortgage loan. It also prohibits certain practices that can inflate the cost of a mortgage, such as kickbacks and referral fees.

Consumer Financial Protection Act

This act prohibits unfair, deceptive, or abusive acts or practices in the consumer financial market. It provides a broad framework for protecting consumers from exploitation and ensuring that financial products and services are offered in a fair and transparent manner.

Steps to Protect Yourself

To safeguard yourself from deceptive fine print in mortgage contracts, consider the following steps:

1) Read the Entire Contract: Take the time to thoroughly read and understand all the terms and conditions in your mortgage contract. Pay special attention to clauses that limit liability or restrict legal recourse.

2) Ask Questions: If you encounter any terms that are unclear or seem unfair, ask your lender for clarification. Don’t hesitate to seek legal advice if necessary.

3) Stay Informed: Keep up to date with consumer protection news and resources provided by the CFPB and other regulatory agencies. Being informed about common deceptive practices can help you recognize and avoid them.

Conclusion

The CFPB’s warning against deceptive fine print in mortgage contracts is a critical reminder of the importance of vigilance and transparency in financial agreements. By understanding these potential deceptions and taking proactive steps to protect your rights, you can navigate the mortgage process with confidence and secure your financial well-being. As the CFPB continues to advocate for fair practices, consumers must remain informed and assertive in their financial decisions, ensuring a fair and equitable market for all.

Source:https://www.consumerfinance.gov/about-us/newsroom/cfpb-warns-against-deception-in-contract-fine-print/

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.

Source:https://finance.yahoo.com/news/fdic-finds-banks-violated-respa-193716797.html

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.

Source:https://www.fanniemae.com/research-and-insights/perspectives/our-commitment-reducing-appraisal-bias

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.”

Source:https://nationalmortgageprofessional.com/news/wake-nar-settlement-dual-licensing-carries-respa-steering-risks

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.

KEY TAKEAWAYS

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.

Source:https://www.investopedia.com/what-s-prohibited-in-reverse-mortgage-advertising-5235459

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.

Source:https://www.courant.com/2024/01/09/feds-ny-landlords-obtained-50m-in-fraudulent-mortgage-loans-to-build-hartford-real-estate-portfolio/

The U.S. Treasury Department is narrowing an exemption used by some mortgage lenders to offer “no doc” loans. The exemption had allowed certain lenders a way around the Dodd-Frank rules enacted after the financial crisis.

Source:https://www.barrons.com/articles/home-mortgages-cdfi-treasury-rules-13fd0663

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.

Source:https://news.bloomberglaw.com/ip-law/due-diligence-on-fair-lending-helps-improve-m-a-transactions