Mortgages: Current Trends in Fraud and the Law

1. Mortgages: Current Trends in Fraud and the Law Jessica Whitney Assistant Attorney General Deputy Administrator ICCC

2. Contact Information Jessica Whitney Assistant Attorney General Iowa Attorney General’s Office 1305 E. Walnut St. Des Moines, IA 50319 Jessica.Whitney@iowa.gov 515-281-5926

3. Caveat • The opinions expressed today are those of the speaker and only the speaker. They do not necessarily represent the opinions of the Attorney General.

4. Objectives • Review of Current Mortgage Fraud • Origination • Servicing • Foreclosure • Dodd-Frank Mortgage Reform

5. Origination Fraud • Led to the Current Financial Crisis • See little of it now with more stringent mortgage standards • Used to be incredibly common helped lead to financial crisis • Appraisal Fraud • Fabricated and Inflated Income Fraud • Bait and Switch of Terms

6. Servicing • Who holds the loan? Wrong people filing in court. • Accounts not being properly credited – either in or out of modification programs. • Wrong accounts being put into foreclosure. • Lots of folks looking at this on federal and state level.

7. Foreclosure Rescue Scams • A variety of schemes that promise to help a consumer save their home from foreclosure. • In reality these schemes: • Strip any remaining equity from the home. • Take badly needed money from the consumer. • In some cases actually take the home.

8. Targets • Anyone in foreclosure or in danger of foreclosure. • Less educated, desperate, minorities, non-native English speakers.

9. Perpetrators • Classic Scam Artists  • Real Estate Brokers • Lawyers

10. Types of Foreclosure Rescue Scams 3 + 2 • Debt Aid/Negotiation Services • Sale/Leaseback • Short Sale • Sale/Investment • For the Future • Reverse Mortgages

11. Signs it is a Scam • “We Buy Homes” • Advertises signs on the street/telephone poles • Internet Promises to Save the Home • Requires Up Front Fees • Short Sale Done by Other than Realtor • Phrase “Investment” • Buying on Contract (not always, but beware)

12. Debt Management/Negotiation Services • Rescue service usually charge several thousand dollars or the equivalent of two months mortgage payments. In return they promise to negotiate with lender to work out a modification. • Borrower thinks the hefty payment is going to the mortgage company (hence tying the payment to the mortgage amount) or that the company is actively negotiating with the lender. • We have seen this in Iowa a lot. Usually out of state companies via internet. Fly-by-nights.

13. Debt Management/Negotiation Continued • Usually no work or negotiation is done. • Scammer may make excuses and demand more money or… • Scammer may just disappear. • Money Gone. • Reform Under New Name

14. Debt Management/Negotiation Services (Cont). • Takes much needed money from consumer. • Further ruins their credit. • Increases late fees and other charges • Wastes valuable time • Out of HAMP program? • They could negotiate a modification with the lender themselves.

15. Sale/Leaseback • Property is sold to rescue business for the amount needed to bring the mortgage current. Bank often not paid off. • Homeowner rents property back from the rescue purchaser. • Rent equals mortgage payment plus additional amount.

16. Sale/Leaseback (Cont.) • Homeowner has right to repurchase home for sale amount plus fees. • Failure to make a payment results in eviction. • Sometimes, after enough money is collected, the rescue lender fails to make the mortgage payments, and absconds with the money. The mortgage holder then evicts original borrower.

17. Short Sale Scams • Promises experience with short sale, faster than a realtor, or maybe working with realtor • Gets title to house either through deed or has consumer put the house in a trust to avoid the due on sale clause of mortgage. • Scammer makes himself executor of trust. • Scammer has consumer sign over beneficiary interest to scammer. • Usually does not file trust documents – uses them as leverage over the consumer and for subsequent transactions.

18. Short Sales Continued • Often Bank does not know that the scammer exists • Kicks Consumer out of house • May put others in the house • Succession of contract sales – often original mortgage still on house • May sell home with false numbers reported to the bank, pockets the extra money.

19. Sale Investment Scams • Wolford-Type Scams – offer to help seller, sell home often through real estate option contracts. • The Scammer promises to pay seller’s mortgage, manage the property, and find a buyer. • Buyers were found who needed credit help, would enter into contract deals with the scammer, the contract lasts until the buyer could refinance. The buyer promised credit repair through monthly on time payments to the scammer. • Often the scammer fails to make seller’s mortgage payments even though the buyer is paying the scammer money. Even when the buyer gets refinancing and pays scammer outstanding money the scammer would not pay off the original seller’s mortgage

20. Sale Investment Result • End result: • Investors Scammed • Borrowers Out Homes • Titles Messed Up With Multiple Mortgages • Homes Abandoned • Mortgage Companies Suffer

21. Iowa Mortgage Foreclosure Rescue Law – Iowa Code 714E • 714E – Debt Management/Negotiation • Prohibits foreclosure consultants from demanding compensation until contracted services are performed. • Prohibits foreclosure consultants from prohibiting borrowers from contacting their lender, servicer, attorney, or any government entity. • Prohibits foreclosure consultants from charging more than 8% annually for any loan made to the homeowner.

22. 714E Continued • Prohibits a wage assignment or other lien from the homeowners to secure compensation. • Requires a written contract with pertinent legal disclosures. • Provides for a right to cancel. • Provides homeowners and the Attorney General the right to sue for violations.

23. 714 F – Sale Lease Back, Reconveyance, Tax Sale • Prohibits entering into a foreclosure reconveyance unless the homeowner can make the new lease payments. • Provides that a closing occur, a written contract be provided to the homeowner and all legally mandated disclosures be made. • Provides that the existing mortgage lien holders be notified. • Right to Cancel.

24. 714 F Continued • Prohibits commercially unreasonable or unfair conduct. Including minimum amount for the house. • Prohibits false or misleading statements. • Prohibits false, deceptive or misleading conduct. • Provides homeowners and the Attorney General the right to sue for violations.

25. General Advice • If it sounds too good to be true, it probably is. • If it is too easy, especially in buying a home or home finance, it is probably too good to be true. • Smell test: if you think it smells fishy, it is. • Use professionals you know or trust. Local is generally better than someone on the telephone or via internet!

26. Dodd-Frank • The housing and mortgage markets began to show stresses at least as early as the spring of 2007 • Mortgage industry nearly collapsed in August 2007 • Housing/mortgage problems spread to the rest of the economy culminating in a near collapse of the financial system in September 2008

27. Background • Dodd-Frank Wall Street Reform and Consumer Protection Act • By far the largest financial regulatory bill enacted by Congress • 16 Titles • Certified enrolled bill has 848 pages

28. Background • Dodd-Frank • Multiple effective dates ranging from July 2010 through July 2015 • What it will really means is still largely unknown – relies heavily on rulemaking to implement • 243 (by one count) separate rulemakings required to implement the Act • Requires 67 studies (some counts more like 90) • Current attempts to defund

29. Title XIV – Mortgage Reform and Anti-Predatory Lending Act • Major Reform to Mortgages • Expands definition of HOEPA loans • Reforms on origination, appraisals, servicing, foreclosure • Establishes HUD office of Housing Counseling • Future – Studies, Enforcement, Policy

30. HOEPA Changes • Expands definition of HOEPA loans, currently 2 triggers– points and fees and APR, increases both • Points and Fees • Total Fees and points (not including bona fide 3rd party) cannot exceed 5% for loans over $20,000 or the lesser of 8% or $1,000 for loans under $20,000 • APR • 6.5% over average prime rate for first mortgages • 8.5% over average prime rate for subordinate liens and for first liens on homes under $50,000 • FRB/DFPB can adjust down to 6% and up to 10% for firsts and down to 8% up to 12% for subordinates • New third trigger “risky loan” • Currently has prepayment penalties that last more than 3 years or • Prepayment penalties that are more than 2% of amount of the amount prepaid

31. HOEPA Continued • Balloon Payments Limited – 2 times the Average Payment • Borrowers Must Receive Pre-Loan Counseling – Counselor Not Affiliated with Creditor, HUD Approved • Other Misc Prohibitions • Bans Creditors from recommending default on another debt in connection with closing on loan, or financing prepayment penalties in connection with same-creditor refi • Bans modification and deferral fees, and payoff statement fees (except for a processing fee) • Limits late fees (4% of amount due, not until 15 days, only assessed once, must be authorized in the loan documents)

32. Origination Reform – Originators • Broader definition of “mortgage originator” than TILA • “any person who, for direct or indirect compensation or gain, or in the expectation thereof, takes a “residential mortgage loan”: application, assists a consumer in obtaining or applying for such a loan, or offers or negotiates the terms of such a loan, including those who advertise themselves as such” • Excludes: administrative employees, licensed real estate brokers (acting w/n duties), person who provides seller-financing for 3 or fewer properties a year, servicers and servicer employees

33. Originators Continued • Compensation Changes • No Yield-Spread Premiums (“kickbacks”) • Exception for true no-cost loans, originator gets no compensation from consumer and consumer does not pay any discount points or origination fees, other than bona-fide third-party charges • No dual-source compensation (cannot get compensated from both consumer and creditor) • Exception for bona-fide third party charges that neither the creditor nor originator nor affiliates of either will keep • Compensation Based on Principal Amount Still Allowed • Watch for tactics that inflate the prinicpal • Must be registered and licensed pursuant to SAFE Act and have a unique id that is on all loan docs

34. Originators Part Three • Prohibitions • Mischaracterizing Borrower Credit History • Encouraging Appraisers to Inflate Appraisal • From Discouraging Borrowers to Seek a More Affordable Loan • “Predatory Terms and Practices” – to be defined

35. Origination Reform • Creditors must consider the ability of a consumer to repay in Residential Mortgage Loans (no HELOCs) • Must be documented through looking at consumer’s credit history, current income, expected income, current obligations, debt-to-income rations, other financial resources • Must document the income – IRS statements, payroll receipts, financial institution records, or other third-party documents • Safe harbor provision • Bans Forced Arbitration (HELOCs, too)

36. Origination Reform Continued • Bans Financing Single-Premium Credit Insurance • Bans prepayment penalties for subprime loans, ARMs, and all non-safe harbor loans • New all-in-one disclosure, coming soon (HUD-1 and TILA) • Limits on negative amortization loans • Increased disclosures • First-time home buyers must have received credit counseling

37. Appraisal Reforms • “Higher Risk” mortgages (defined term, not qualified and for first mortgages at or below Fannie/Freddie cannot exceed prime offer by 1.5%, for above 2.5%, and for seconds 3.5%) • the creditor must also give the consumer a free copy of each appraisal report 3 days prior to closing • Appraisal must include physical inspection of home interior • Standards for Appraisal Independence • Creditor cannot extend credit if it knows there is a violation of independence, unless the corrupt appraisal does not materially misstate the dwellings value

38. Anti-Steering Reforms (Rules to Be Promulgated) • Prohibits • Steering consumer to a loan they cannot afford • Steering to a loan that has predatory characteristics (fees, terms, equity-stripping) • engaging in abusive or unfair practices that promote disparities among equally situated consumers • Mischaracterizing consumer’s credit history, property appraisal or loans available • Steering from “qualified mortgage” to non-qualified • Discouraging consumer for looking elsewhere if cheaper loan available

39. Qualified Mortgages – Safe Harbors • “Qualified Mortgages” have a presumptive ability to repay • No Negative Amortization • No Balloon Payments • Comply w/debt to income ration established by regulation • Income is documented and verified • Maximum 30 year term (except as extended by rule) • Prepayment penalties ok for qualified mortgages • No more than 3 years • Limited in amount that declines over time • State law issue • Securitization (exempt from keeping 5% of asset)

40. Servicing Reforms • Creditors must promptly credit payments • Creditors must provide periodic statements • Creditors must provide a pay-off amount within 7 days • Escrow mandatory for subprime loans, government loans and when mandated by state or federal law for the first five years or until private insurance no longer required – TILA repayment analysis to include escrow cost

41. Servicing – Continued • New limits on force-placed insurance = when servicers can do it and what they can charge (must cease after 15 days of learning of insurance) • Servicers must promptly refund any excess when a loan is paid off • Establishes new timeline for identifying loan holders • Prior to this no affirmative duty to disclose the new holder of a loan • Other RESPA amendments • Qualified written requests shortened timeline for response and no longer allowed to charge fees if the request is valid (allocation of charge or final payment) • Increase in damages for RESPA violations

42. Foreclosure Reforms • Amends HAMP (Home Affordable Modification Program) • Adds website where consumers can see if they qualify for a modification under HAMP • Mandates the public release of certain data • Creates a bridge loan program for certain unemployed homeowners • Funds created for federal program, but can be provided to state programs as well (idea modeled on one done in PA) • Authorizes $35million to legal services programs to defend foreclosures and evictions (funds must be appropriated in other legislation – could be hard)

43. HUD Office of Housing Counseling • Counseling Activities • Certifies counselors • Standards and Performance Measures • Develops Forms for Counselors • Policy development • Mortgage Calculator Software • Must certify software • If decides existing software insufficient must arrange with private company for creation of software • Outreach • $3million for public outreach, 10% of which must be spent on programs in areas with high foreclosure concentrations

44. The Future • Lots of possibilities for the future • Broad authority and rulemaking power • Potential to work closely with states both regulators and ag offices – more cops on the beat • Lots of Studies • Attempts to undo some of Dodd-Frank?