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 upcoming exam.
The forms tested can include the following:
Initial disclosures for:
Annual notices for:
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.
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.
Manager, Lending and Lending Compliance
Thomas LaChac is Manager of P&G Associatesâ€™ Lending and Lending Compliance team, and brings a wide range of experience in regulatory underwriting, quality assurance, regulatory compliance management and the banking and mortgage industries.