On February 25, 2014, the FDIC released its revised interagency consumer compliance exam procedures for the mortgage rules that became effective with the 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 where the procedures appear to be revamped under the “Lending Compliance Risk” section is the Home Owners Protection Act (“HOPA”), also known as the “PMI Cancellation Act” because the entire Regulation is based around consumers canceling their PMI insurance.
Personal Mortgage Insurance (“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 a few noted here) arises if it is perceived that 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 if a homeowner has experienced problems in trying to cancel PMI. As there were wide arrays of bank and lender criteria for canceling 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 cancelation 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 examiners will be ensuring that internal controls in place adequately monitor HOPA. This could be performed though reviewing policies and procedures, ensuring that loan file documentation is accurate, sufficient training is in place to facilitate HOPA compliance, 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 that 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 – mortgages that have recently obtained PMI, and those that have had it for a while and could potentially be eligible for cancelation. 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 following:
• Initial disclosures for:
• Fixed rate mortgages
• Adjustable rate mortgages
• High risk loans
• Lender-paid mortgage insurance
• Annual notices for:
• Fixed and adjustable rate mortgages
• High-risk loans
• Existing residential mortgages
• Notices of:
• Grounds for not canceling PMI
• Grounds for not terminating PMI
• Cancelation date for adjustable rate mortgages
• Termination date 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.
• Field examiners 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.
- The examiners will likely review a sample of recent written requests (if any) from borrowers to cancel their private mortgage insurance. 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 a consumer based cancelation 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 cancelation. They will test loans that have reached a 78 percent or lower LTV ratio based on the original value of the property and amortization schedules 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 percent or lower LTV based on the original value of the property. They will ensure that the PMI was canceled in a timely manner 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, 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 from the above, 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 an effort to keep atop of an ever-changing regulatory environment.