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On February 25, 2014, the FDIC
has released its revised interagency consumer compliance exam procedures for
the mortgage rules that became effective with Dodd-Frank Act. The focus of the issuance
of the procedures is part of the FDIC's efforts to inform affected banks about
bank regulatory developments in hopes of creating a better dialogue between the
FDIC and the institutions it monitors. As a firm, our various department heads
and Subject Matter Experts have reviewed the procedures to relay to our clients
the areas of interest from the release.
An area that the procedures
appear to be revamped under the “Lending Compliance Risk” section of the
procedures is the Home Owners Protection Act (HOPA), also known as the “PMI
Cancellation Act” because the entire Regulation is based around consumers
cancelling their PMI insurance.
Personal Mortgage Insurance (or
PMI) is a type of indemnity that protects lenders from the risk of default and
foreclosure. PMI allows prospective borrowers who for whatever reason do not provide
noteworthy down payments to obtain mortgage financing at affordable rates. PMI is
used primarily to grant loans where the loan to value ratio exceeds eighty
percent, thus causing a higher risk for the lending institution. With the
insurance in place, a lender is better positioned to recoup some of the costs
that are accrued when a property is foreclosed upon, and the lender attempts to
resell it. Interest payments, taxes, insurance, and other expenses involved
can be covered.
The problem (one of several noted
here) arises if it is perceived the lender is charging what can be considered
“excessive” PMI, as it benefits only the lender, and leaves the consumer with a
higher payment. Another major issue is that if a homeowner has experienced
problems in trying to cancel PMI. Because
there were wide arrays of bank and lender criteria for cancelling PMI during
the recent crisis, it became a major issue.
The Act, once established, protects consumers by disallowing PMI
coverage that was “life of loan” (in other words, no termination, regardless of
LTV risk). It also clears the muddied waters by laying out uniform procedures
for both cancellation and termination of PMI policies.
By reviewing the guidance and
updated procedures, we noted several areas that are sure to be a part of any
The examiners will be ensuring that internal
controls in place to adequately monitor HOPA. This could be performed though
reviewing policies and procedures, ensuring loan file documentation is
accurate, sufficient training is in
place to facilitate HOPA compliance,
adequate training is in place, and any software product is up to the job
of HOPA monitoring. There may be other areas that are dug into, but
essentially, those practices are the life blood of any satisfactory compliance
function. It may be a prudent time to review your HOPA controls to ensure you
have the proper tools in place for the additional scrutiny that may be coming.
- A great deal
of this examination will cover two types
of sampling – those mortgages that have recently obtained PMI, and those that
have had it for a while, and could potentially be eligible for cancellation.
These samples will include those serviced by the bank, not just those within
the portfolio. The examiners will be
ensuring that written initial disclosures for fixed and adjustable rate
residential mortgage transactions that require PMI reflect the HOPA
requirements and are properly distributed to a consumer.
The forms tested can include the
Initial disclosures for:
Annual notices for:
and adjustable rate mortgages
- high-risk loans
will be utilizing the sample they picked to ensure that borrowers are not
charged for any of the required notifications or disclosures that have to be
issued because of HOPA.
for not canceling PMI
for not terminating PMI
date for adjustable rate mortgages
for lender paid mortgage insurance
Again, this is a good time to
ensure that any disclosures or documents issued in regard to PMI are up to date
and meet all regulatory requirements.
The examiners will likely review a sample of recent
written requests (if any) from borrowers to cancel their private mortgage
insurance (PMI). In this area, they will
ensure that the bank has an established process in place to handle such
requests. A strong process is required for consumer based cancellation request,
as this was the main focal point of consumer complaints in the past. Clearly outlined procedures of what is
required of a borrower (updated appraisal, etc.) in order to facilitate this in
a timely manner are a must. This can save an institution from complaints of
discrimination or bad business practices.
- They will also review a sample of “non-high risk”
PMI residential mortgage transactions where the borrower did not request
cancellation. They will test loans that have reached a 78% or lower LTV ratio
based on the original value of the property, amortization schedules and that
are current. They will then verify that
the PMI was terminated according to HOPA, and in a timely manner.
- If applicable, they will be testing any defined
“high risk” PMI residential mortgage transactions that have reached a 77% or lower
LTV based on the original value of the property. They will ensure that the PMI was cancelled timely
based on the appropriate amortization schedule.
- Finally, they will review loans that have had PMI
canceled or terminated. For PMI loans
canceled upon the borrowers’ requests.
In such instances, they will ensure that the lender did not collect PMI
payment(s) beyond 30 days of the borrower satisfying the evidence and
certification requirements to cancel PMI. This also applies for loans that were
automatically terminated due to amortization. This is where an effective
tickler or software system comes into play, and why the regulators require that
this be monitored as an effective control.
As you can see, the examination
process can be become quite detailed in its implementation. Many institutions
have mitigated the risk of this area by limiting these types of high LTV ratio
loans in their portfolio. If not, a
thorough review of all controls and documents related to HOPA should be
performed in a timely manner, (either internally or by an appropriate third
party) and periodically going forward in a effort to keep atop of an ever
changing regulatory environment.