Enforcement Actions and Litigation Andrew L. Sandler MBA Non-Prime Lending Conference May 2006

1. Enforcement Actionsand LitigationAndrew L. SandlerMBANon-Prime Lending ConferenceMay 2006

2. 1 ________________________________Top Four Issues Today:1. HMDA Pricing.2. Ameriquest Settlement: New Standard for Origination Best Practices?3. Mortgage Servicing Inquiries4. Emerging Focus on Non-Traditional Mortgage Products.

3. 2 ________________________________HMDA________________________________

4. 3 Fed Report - Overview Reports on 8,853 lenders, which account for approximately 80% of all home loans. Approximately 2% of lenders have statistically significant disparities between Minority and White Non-Hispanic trigger rates. �Minority� is defined as Black and Hispanic combined. Fed Report is partially based on data that is not publicly available (date of application) but otherwise can be replicated by the public.

5. 4 Government Use of Fed Report The Fed has referred data from lenders with statistically significant disparities in trigger rates to primary regulators. Referrals have been split between HUD and other financial institution regulatory agencies: OCC FRB OTS FDIC NCUA

6. 5 Government Use of Fed Report DOJ economist studying data for investigation targeting. Redlining/reverse redlining focus Pricing discretion FTC refocuses on Lending State Attorneys Generals State Human Relations Commissions State Banking Departments (e.g., New York)

7. 6 Examination/Investigation Focus Origination Compensation Broker points and fees Discretionary pricing parameters Management of pricing discretion Proactive self-monitoring and action

8. 7 HMDA Pricing: Reducing the Risk Establish a strong and effective fair lending program. Must be able to show emphasis on treating all applicants and borrowers equally at every stage of loan process Program should be documented in writing Program�s main points should be made public Frequent training

9. 8 HMDA Pricing: Reducing the Risk Know your data Conduct privileged statistical analyses of HMDA data and non-triggered loans Focus on disparities Know your policies and practices (written and unwritten) Conduct interviews and determine factors that affect pricing decisions in real world Identify potential causes of any disparities and take steps to address causes where appropriate

10. 9 HMDA Pricing: Reducing the Risk Policy and Practice Considerations Minimize trigger loans Cap broker points and fees Some institutions have prohibited trigger loans Limit fees on small loans with short amortization period Limit and document discretion Require exceptions to rate sheet to be documented Track and limit exceptions

11. 10 ________________________________Ameriquest Settlement: New Standard for OriginationBest Practices?________________________________

12. 11 Ameriquest Settlement Settlement with 49 AGs and D.C. $325 million Allegations of High pressure sales tactics Inadequate disclosures Improper appraisal practices Use of false employment and income information to qualify borrowers

13. 12 Ameriquest Settlement Injunctive Relief includes: Provide borrowers with clear oral and written disclosures of interest rates, discount points, prepayment penalties, and other relevant loan or refinancing terms; Provide the same interest rate and number of discount points to all potential borrowers sharing the same credit risk characteristics; Provide every loan applicant with an accurate Good Faith Estimate;

14. 13 Ameriquest Settlement Injunctive Relief (continued) Maintain documentation that each nonprime refinance loan offered is beneficial to the borrower; Reimburse consumers for any prepayment penalty not timely and fully disclosed Limit the prepayment penalty for all nonprime adjustable rate mortgage loans; Refrain from offering refinancing solicitations to current borrowers during the first 24 months of their nonprime refinance loan, unless the borrower considers or inquires about refinancing;

15. 14 Ameriquest Settlement Injunctive Relief (continued) Use an independent loan closer for all nonprime loan closings Implement an automated, centralized process within each state for appraiser selection to ensure that sales personnel and the branch office cannot select the appraisers; Conduct a second appraisal only if after the completion of an appraisal review process Ameriquest finds the first appraisal to be professionally deficient; Not misstate prospective borrowers� income or assets or encourage potential borrowers to fabricate or inflate their actual income or assets;

16. 15 Ameriquest Settlement Injunctive Relief (continued) Not provide incentives to employees to include a prepayment penalty provision in a loan, increase compensation based on loan closing costs and fees, or quote a prospective borrower an interest rate incompatible with the same rate provision of the settlement agreement; Refrain from requiring employees to complete a minimum number of loan closings or loan applications per month if such a requirement would result in violating the terms of the settlement agreement; and

17. 16 Ameriquest Settlement Injunctive Relief (continued): Implement written policies and procedures to encourage the reporting of suspected improper conduct, preserve the anonymity of a whistleblower, and protect the whistleblower from retaliation. Independent monitor required for 5 years.

18. 17 Predatory Lending Mortgage Servicing Inquiries New round of AG and FTC mortgage servicing investigations. Focus on Fairbanks and Ocwen issues including: Loan boarding Payoff process Forced place insurance Collection practices Foreclosure process and fees Escrow accounts

19. 18 Predatory Lending Focus on Non-Traditional Mortgage Products Regulators announce concerns with non-traditional mortgage products in Interagency Risk Management Guidance. Certain products and practices labeled as risky including: Interest only and payment option features. No document loans. High loan-to-value lending.

20. 19 Predatory Lending Focus on Non-Traditional Mortgage Products Guidance recommends: Rigorous suitability analysis. Clear and conspicuous notice of terms and risks.

21. 20 ________________________________Emerging Issues:Non-traditional Mortgage Products________________________________

22. 21 Focus on Non-Traditional Mortgage Products Proposed Interagency Guidance on Nontraditional Mortgage Products issued in December 2005 Certain products and practices labeled as risky including: Interest only and payment option features No document loans High loan-to-value lending

23. 22 Focus on Non-TraditionalMortgage Products Proposed Interagency Risk Management Guidance recommends: Rigorous suitability analysis Borrowers� capacity to repay loans to be determined by computing payments at fully indexed rate, assuming fully amortizing repayment schedule Concern expressed about �payment shock� Clear and conspicuous notice of terms and risks

24. 23 Focus on Non-Traditional Mortgage Products Interagency Guidance Warning: Some non-traditional mortgage loans have not been tested in a stressed environment Thus, need for enhanced risk management standards, capital levels and loan loss reserves

25. 24 For further information contact: Andrew L. Sandler, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, DC 20005 (202) 371-7400 ASandler@Skadden.com Skadden.com/consumerfinancialservices