multi-state mortgage committee report to state …...using data from the expanded nationwide...

MULTI-STATE MORTGAGE COMMITTEE REPORT TO STATE REGULATORS

2012

2012 Leadership 2013 Leadership Charlie Fields, NC-Chairman Charlie Fields, NC-Chairman Anne Balcer Norton, MD-Vice Chair Anne Balcer Norton, MD-Vice Chair

2 Multi‐StateMortgageCommittee|ConferenceofStateBankSupervisors

TABLE OF CONTENTS 3 Message from the Chairman 5 Composition of the MMC 6 Nationwide Cooperative Protocol and Agreement 6 Servicing Settlement 8 Servicing Examinations 8 Monitoring Committee 8 Limited Scope Electronic Examinations 10 Risk Profiling 10 Multi-state Examiner in Charge School 11 Anti Money Laundering Module 11 SAFE Examination Guidelines 12 MMC Operating Procedures 12 CFPB Coordination 13 MMC Information Sharing Protocol with CFPB 13 Summary


Message from the Chairman The Multi-State Mortgage Committee (MMC) continues to play a key role in ensuring that state mortgage regulators remain relevant. During 2012, the MMC focused and continues to work diligently on a number of important issues, which include: mortgage servicing, licensee risk profiling, and multi-state examination tracking and coordination. The MMC devoted a considerable amount of time and resources to the mortgage loan servicing area. Notably, this effort culminated in a $25 Billion historic settlement with the five largest servicers in the country after close to two years of intensive examinations and negotiations. The settlement itself is a testament to the strong partnership state mortgage regulators now have with the State Attorneys General, and a myriad of federal agencies. In short, this agreement will help many homeowners avoid foreclosure and stay in their homes through loan modifications. Additionally, many homeowners whose mortgages exceed the value of their homes can tap into a fund of $3 billion to refinance their mortgages. Lastly, $4 billion was dedicated to the states, to be utilized to fund housing counselors, legal aid, and various cash payments to borrowers who experienced servicing abuses. The MMC has also been spending significant time on developing and enhancing a profiling model that will use company specific metrics to determine the degree of risk inherent in a company’s operations. Using data from the expanded Nationwide Mortgage Licensing System (NMLS) Mortgage Call Report and in collaboration with the State Regulatory Registry (SRR) staff, a risk analysis of 281 companies resulted in several conclusions. First, significant data quality concerns existed for some companies due to erroneous filing or not filing at all, and second, the metric scheme developed by the Risk Profiling Group (RPG), a workgroup of the MMC, to identify effective risk weights appears to be quite accurate. This tool will eventually be available to all states mortgage regulators to effectively prioritize scheduling and better risk scope the industry. Technology continues to be a focal point for the MMC. Discussions about an enhanced web share site began in early 2012, because the existing site, though better than methods previously used, was not as user friendly as MMC members would have liked. Development began on a website designed to increase both the efficiency of the MMC’s work, as well as add significant accountability to the examination process. During the website development a wish list of sorts was created, and a plan was drafted and approved by the Executive Committee of the Conference of State Bank Supervisors (CSBS) to move forward on the development of a website that would be utilized by the MMC, state mortgage examiners, and Commissioners and Deputies. The new Examinations Home Page, rolled out in January 2013, enables examiners to see and work with their multi-state examinations in real time and will add accountability to the overall process. Announcements about next conference calls, deadlines on various tasks, and the ability to see which states have completed their assignments will all be viewable. This level of tracking


and coordination has already proven beneficial in the latest group of multi-state mortgage examinations. The MMC continues to refine the processes that enable many states to come together and complete examinations of the mortgage companies that bridge state borders. With that goal comes inevitable struggle. This year has seen great advancement, and measurable achievements. Accountability, notably, will continue to be paramount. In striving to enhance systems that measure efficiency, the MMC has and will continue to improve the overall system of state mortgage supervision. Thank you for your support.

Charlie Fields Chairman


Composition of the Multi-state Mortgage Committee The MMC is made up of ten members, five appointed by the board of CSBS and five from the board of AARMR. Each member enjoys a two year term. The composition of the committee is considered important from the standpoint of ensuring diverse geographic representation. Decision making is largely determined after significant deliberations, with an eye toward building coalitions that will strengthen the state mortgage regulatory stance. The ten states representing the committee serve as a portal through which information is received, and shared both among the states themselves and external stakeholders. They also serve as the main coordinating body for the state mortgage regulatory system. As a single point of contact of sorts, the MMC is able to efficiently channel information to the Commissioners and Agency Heads and carry out their directives on a national level. Iowa stepped off the committee, as its term expired, and Tennessee became a member of the committee in 2012. Mike Igney representing the Tennessee Department of Financial Institutions replaced Rodney Reed, serving a two year term.

2012 Multi-state Mortgage Committee

North Carolina Charlie Fields – Chairman Maryland Anne Balcer Norton – Vice Chair Illinois Michael Garvin Louisiana Darin Domingue Massachusetts Gregory Short Mississippi Traci McCain New York Helen Hodge Pennsylvania Donald Debastiani Tennessee Michael Igney1 Washington Rick St. Onge

The MMC meets at least once every week, as the environment seemed to have dictated that frequency in 2012. Sub committees for servicing examinations and other specialties tended to meet equally as frequently, as decisions on many different fronts necessitated action throughout the year. Between three and five meetings were held most weeks to refine protocols, manage examinations, strategize for pending negotiations, and develop new processes to improve state mortgage regulation. In December the MMC held their annual meeting at the offices of CSBS. The committee meets once yearly to discuss the most pressing issues confronting mortgage regulators, and to formulate 1InDecember2012,MikeIgneyresignedfromtheMMCduetoothercommitments.CSBSreplacedMr.IgneywithKirstenAndersonoftheORDivisionofFinanceandCorporateSecurities.Ms.AndersonbeganservingtheremainderofMr.Igney’stermattheMMC’sDecemberannualmeeting.


an agenda to create processes that will enable state mortgage regulators to operate more efficiently over the upcoming year. The comprehensive one and a half day meeting encompasses policy improvement and creation as it relates to multi state examinations, committee composition, examination troubleshooting and refinement, and strategic direction. Many members of the committee are also presenting and teaching at various regulatory and trade events throughout the year. Anne Balcer Norton, the Deputy Commissioner from Maryland also sits on the Monitoring Committee representing Maryland, and is integral to keeping the state mortgage regulators informed on how mortgage servicers are performing under the terms of the settlement agreement as detailed further below. Insight provided by Maryland to both the MMC and the state mortgage regulators is key to remaining connected to the mechanics of the industry. Nationwide Cooperative Protocol and Agreement

By early 2009, State Mortgage Regulators began signing the Nationwide Cooperative Protocol and Agreement for Mortgage Supervision (the Agreement) outlining a basic framework for the coordination and supervision of multi-state mortgage entities. The initiative established the Multi-state Mortgage Committee (MMC) as the oversight body charged with implementing and directing processes under the Agreement. The MMC strives to achieve the following goals: (a) protect consumers; (b) ensure the safety and soundness of MMEs; (c) identify and prevent mortgage fraud; (d) supervise and examine in a seamless, flexible and risk‐focused manner; (e) minimize regulatory burden and expense; and (f) foster consistency, coordination and communication among the State Regulators. Servicing Settlement After beginning an examination of the largest state licensed servicers in 2010, the MMC played a key role in reaching a historic settlement in 2012. What started out as a narrow, focused and targeted examination verifying document accuracy, became an exercise that exposed great


deficiencies in the servicing industry’s operational framework. Robo-signing, as it became widely known, served to bring to light the lack of controls employed by many of the largest servicers in the country. Documentation deficiencies were egregious, and were discovered using techniques that state mortgage regulators used during the mortgage crisis. False signatures and documentation falsely remanufactured after it was initially lost were used to foreclose on borrowers that could not meet their obligations. Improper crediting of accounts and payments led to many people incurring bad credit ratings through no fault of their own. The settlement attempted to make the industry realize change was necessary, and that a new standard must be employed to ensure that in the event foreclosure was necessary, that it be done in a way that was legally permissible. Among the main highlights of the settlement are:

• Requires the five banks to allocate $17 billion for assistance to borrowers who have the wherewithal to effect a modification

• At least 60% of the $17 billion must be allocated to principal reduction for borrowers in or at risk of default

• Allocates $5.2 billion for other forms of homeowner assistance including short sales and relocation assistance for borrowers unable to qualify for a modification, deficiency balance forgiveness, and blight prevention

• Offer refinance programs totaling at a minimum $2 billion for borrowers who previously could not refinance due to negative equity

• Benefits for service members forced to sell their homes at a loss due to a Permanent Change in Station

The settlement sets forth a new set of standards for the industry. The main objectives of the standards are to:

• Stop many past foreclosure abuses, such as robo-signing, improper documentation and lost paperwork through new mortgage servicing standards

• Require strict oversight of foreclosure processing, requiring a single point of contact for borrowers, and adequate staff to handle calls

• Mortgage servicers will have to evaluate homeowners for other loan mitigation options first, making foreclosures a last resort

• Restrict banks from foreclosing while the homeowner is being considered for a loan modification

• Sets procedures and timelines for reviewing loan modification applications, and gives homeowners the right to appeal denials

As the settlement takes effect, and relief is given to those that qualify for it, the MMC believes this event will aid in the stabilization of the housing market. More information on the settlement may be found at www.nationalmortgagesettlement.com.


Servicer Examinations Several additional loan servicing companies have been examined by state regulators and found to have essentially the same degree of operational deficiencies as the large servicers encompassed in the national settlement mentioned above. These companies do not have the same financial size nor scope of the larger servicers, and as such a plan to correct their deficiencies will need to be substantively different. Currently the MMC is leading negotiations that will attempt to incorporate most of the servicing standards included in the National settlement, while attempting to bring relief to as many borrowers as possible. Anne Balcer Norton, Charlie Fields and Michael Garvin are leading discussion with these servicers. Monitoring Committee In order to measure compliance with the Servicing Settlement, the participants of the National Mortgage Settlement (Settlement), appointed former North Carolina Commissioner Joseph A. Smith as the Monitor. Mr. Smith is tasked with not only measuring the degree to which the servicers meet the terms of the settlement, but in the event that they do not, he is required to make recommendations on how they may satisfy the requirements of the agreement. Additionally, in the event that a servicer does not comply with the agreement, Mr. Smith may recommend additional corrective action. Further non-compliance on the part of a servicer would invite the D.C. District Court to impose monetary penalties of up to $1 million per violation of the standards, or up to $5 million in the event of a repeat violation, and/or injunctive relief. Mr. Smith, as the Monitor, reports to a Monitoring Committee, composed of state attorneys general, state mortgage regulators, the U.S. Department of Justice, and the U.S. Department of Housing and Urban Development. Commissioner Mark Kaufman represents the state of Maryland on the monitoring committee. The MMC is active in monitoring the servicer settlement through its Vice Chair Anne Balcer Norton’s representation of Commissioner Kaufman. Through this process Ms. Balcer Norton feeds back information regarding what is working well, and what may need to be amended in future servicing settlements. The Monitor is required to file periodic public reports that will identify any quarter in which a servicer did not meet the standards set forth in the settlement. Limited Scope Electronic Examinations Introduced in 2011, fifteen examinations were undertaken using a largely technologically driven examination platform. These fifteen Limited Scope Electronic (LSE) examinations focused on using the compliance software to determine what degree of compliance violations may exist


within the entity’s loan portfolio. Of the fifteen examinations begun, nine were finished and closed completely. Six of those nine were closed satisfactorily, while the remaining three were resolved differently. One examination was closed satisfactory pending compliance with violations of state law, another company elected to relinquish its licenses and dissolve, and a third was recommended for a full scope examination. The remaining six examinations are presently in various stages of resolution, ranging from closing satisfactorily after delays induced by Hurricane Sandy, to beginning full scope examinations as a result of findings in the LSE. LSE examinations should by their nature be predominately abbreviated in the time taken to complete. However, delays arose when companies had difficulty uploading their loan batch files in a format acceptable to the examiners. Significant to this group of examinations was the realization that many companies do not follow through with accurate data input after the loan is closed. Small dollar changes that occur in the normal course were not reflected in the data given to examiners in many instances and as a result the overall compliance profile of the company was skewed. As examiners began reviewing certain files to verify the validity of the data they realized that some of the data was inaccurate. This issue required a slight change in the approach taken by the examiners regarding how they applied the technology. In cases where there appeared to be significant numbers of “false positive” compliance violations, the examiners approached the companies and explored the option of having the company correct the data. In those cases where that was not viewed as a viable course of action, in order to be reasonable and cognizant of the burden it may place on certain companies, the examiners took a sample and manually entered the loan files to run through the compliance software. In other situations, the examination team recommended that the LSE examination be converted to an expanded or full scope examination. As both the examiners and the companies worked through this issue, the manual entry became a very good method to accomplish a thorough compliance review of the loan files. Examiners were actually able to enter loan files into the software in a fraction of the time it would have taken to complete a manual compliance review. While this was beneficial in reducing the time it takes to review a loan file, it did not provide the goal of reviewing 100% of the loan portfolio. The MMC will continue to stress the need for accurate data entry and follow through in order to accomplish a complete review of a company’s loan portfolio. In terms of examination findings, finance charges tended to be an area that had substantive inaccuracies. The LSE routinely exposed mistakes in this area and refunds were quite substantial for many borrowers, ranging from several hundred dollars to several thousand, up to $6500.00 at one mortgage company. Charging prohibited fees was another area that showed significant violations, resulting in one company refunding many borrowers on average over $500.00. Other companies reflected a similar lack of controls over this area, however refunds were typically significantly less. Other typical operational deficiencies and violations identified in this group of examinations are listed below:


• RESPA disclosures not provided within three day timeframe • Failure to itemize HUD 1 charges • Failure to re-disclose the APR • Failure to meet minimum records requirements • Excessive credit reporting fees • Failure to provide rate lock agreements

As mentioned earlier in this section, some of the LSE examinations have or will move to full scope examinations. It is anticipated that while undergoing full scope examinations, the examiners will depend on technology to assist them in determining the compliance posture of the companies they review. The MMC feels strongly that the sampling techniques used in the past are insufficient to examine large portfolios of loans, and that through technological advancements a complete review of a lender’s loan portfolio is the most effective way to ensure a strong and vibrant lending industry. Risk Profiling The Risk Profiling Group (RPG) has been working on a risk profiling tool designed to assess an institution’s risk against its peer group based on an analysis of Mortgage Call Report (MCR) data. The tool, currently under development by NMLS will assist in the scheduling of mortgage companies identified as having an elevated level of lending risk. Current plans are for the tool to be available to state regulators in 2013. In developing the risk profiling metrics, the RPG analyzed MCR data for 281 companies holding licenses in more than 15 states. An unexpected result of this analysis showed that only 10 of the 281 companies had data integrity high enough to be considered acceptable for profiling purposes. These data quality concerns warranted notice to those companies informing them that they needed to rectify their filings, as they were in violation of state laws implementing the federal SAFE Act. The MMC also sent a letter to each mortgage regulator informing them of the issue. The majority of the companies immediately responded and ultimately filed amended call reports of improved quality. Multi-state Examiner in Charge School AARMR in conjunction with CSBS held an Examiner in Charge School dedicated to running a multi-state examination. Nearly one hundred examiners participated, and according to the feedback forms thought the program was excellent. Aspects of the multi-state process such as


financial analysis, pipeline assessment, managing an examination staff that spans many states, and presenting to management at an exit interview were covered. Kicking off the school was a presentation that gave perspective and historical thinking behind the formulation of the MMC. The MMC Examination Manual was presented as the examination guide for multi-state exams, and enforcement actions were covered in order to give the group a sense for how the MMC would proceed under different scenarios. There were presentations on servicing as well as the technology used in the LSE examinations. Examples of what would be expected in terms of report generation, time frames proposed, and decision making protocols were discussed at length. Loan portfolio risk metrics and overall company risk profiles gave the examiners a solid understanding of how they should analyze a multi-state mortgage entity. Both Charlie Fields, Chairman for the MMC, and Donald Debastiani, MMC member representing Pennsylvania presented during the school. Anti-Money Laundering Examination Module FinCEN’s rule applying the Bank Secrecy Act and Anti-Money Laundering requirements to the mortgage industry became effective April 16, 2012 with a compliance date of August 13, 2012. Accordingly, the MMC assembled a working group to create an examination work program aimed at assisting examiners in their review of residential mortgage loan originators. The focus of the program is to determine that internal controls, policies, and procedures have been established, well implemented and provide adequate compliance with BSA/AML regulations and fraud prevention procedures, as outlined in 31 CFR §1029.210. Seven volunteer states led by the MMC proceeded to create a five part examination module that was incorporated into the larger mortgage manual. The module is based on the four pillars of the BSA/AML program consisting of: Internal Controls and Procedures; Designation of Compliance Officer; Training, and Independent Testing. SAFE Examination Guidelines The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) calls upon the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and administer the Nationwide Mortgage Licensing System and Registry (NMLS). The SAFE Act also established minimum standards for Mortgage Loan Originator (MLOs) licensing. To assist examiners in assessing MLO licensing compliance, the MMC created a working group to craft guidance. The MMC working group begun in 2011, completed the SAFE Act Examination Guidelines (SEGs) and released the guidelines in February of 2012 for use by state non depository mortgage regulators.


Primarily, the SEGS will help examiners ensure that all individuals acting as MLOs are properly licensed and registered in the states in which they are conducting business. The SEGs provide a previously nonexistent standardized set of examination procedures, and while not required, state agencies and industry should benefit from their implementation and use. Industry compliance departments are encouraged to use the guidelines as a way of not only preparing for an examination, but to more comprehensively ensure compliance with SAFE. The SEGs were incorporated into the MMC Examination Manual, adding a chapter to the examination tool. MMC Operating Procedures Increasingly complex examination formats and multifactorial decision making over a wide range of issues necessitated the formalization of a set of procedures under which the MMC would consistently operate. The overriding purpose of these procedures is to affirm the policies and procedures governing the administration of the MMC, and the conduct of activities in support of the MMC’s mission. The Operating Procedures cover a broad range of issues that the MMC deals with including the composition of the committee, members terms and structure, the overall responsibilities of the committee, electing a chairman and vice chair, and their terms, responsibilities, and authority. Also addressed in the document are voting protocol, MMC workgroup establishment and responsibilities, MMC meeting rules, information sharing, a protocol for supervisory actions, and administrative support for the committee. Consumer Financial Protection Bureau Coordination The MMC continues to be the primary point of contact with the Consumer Financial Protection Bureau (CFPB) for state mortgage regulators. Throughout 2012 MMC representatives met regularly with varying representatives of the CFPB to ensure that the relevant aspects of examination scheduling and information sharing continued to occur efficiently. The CFPB routinely distributes its schedule of targeted entities to the MMC for distribution to the affected states. Regular meetings continue to occur to avoid the regulatory burden that would take place if examinations were occurring on a haphazard basis. These meetings provided the necessary lines of communication enabling a coordinated schedule of several multi-state entities that were examined by both state regulators and the CFPB. While there is not a joint examination program currently in place, examinations were effectively scheduled to maximize information sharing between the CFPB and the states. Through a concurrent process,


examinations occurred with minimal burden on the entities under review, and resources on the state side were conserved. Although this effort was successful, both the state mortgage regulators and the CFPB agreed that a more defined protocol is necessary to allow for an all-encompassing sharing of information. While the CFPB-CSBS Memorandum of Understanding entered into between 58 state regulators and the CFPB provides a good foundation, it does not alleviate all of the difficulties inherent in managing such documentation sharing and examination management. The MMC continues to work toward the goal of seamless examinations, utilizing clear communication to identify the responsibilities of all parties in order to minimize the burden on industry. MMC Information Sharing Protocol with CFPB Significant to the effort of streamlined and efficient regulation is effective information sharing among state mortgage regulators and their federal counterparts. To this end, the MMC established a protocol enabling a process of secure information sharing between the CFPB and Joint Examination State Regulators. The MMC has been the primary point of contact between the CFPB and the state mortgage regulators, and in many instances this entailed crafting elaborate and cumbersome schemes to enable the sharing of examination planning, and examination and enforcement information. This protocol will eliminate the time consuming aspects of acquiring every states’ approval to share information, with an approval by participating state mortgage regulators to share examination information at the commencement of an examination. Language within the invitation to participate in a multi-state examination will clearly state that the participating agency consents to the MMC sharing confidential supervisory information with the CFPB. This process began September 1, 2012. The MMC believes this protocol will create efficiencies in timing, as well as a reduction in resources required to carry out these sharing exercises when certain information is shared by the states with the CFPB. Likewise, when disseminating information provided by the CFPB to all effected state regulators is necessary, a smooth process is anticipated. Summary The MMC will continue to devote significant time to the servicing industry this year, as the implementation of standards will improve the methods by which consumers that experience trouble paying their mortgage are processed by servicers. Additional loan servicing providers are currently under review, and it is anticipated that the new set of industry standards detailed in the recent settlement agreement will find application there as well.


As servicer operations improve, loan modifications, where applicable, will be more forthcoming. Stabilization of the housing market is viewed as paramount to the national economic recovery, and the stabilization of housing finance equally so. The MMC believes that a servicing industry that is well run and fairly regulated will play a tremendous part in that recovery. The MMC is committed to fair and reasonable, efficient and coordinated mortgage regulation. The implementation of more Limited Scope Electronic examinations will continue to decrease burden on industry, while at the same time providing the regulators with a more robust view of a licensee’s risk level. At the same time, work will continue to leverage the data from Mortgage Call Report analytics in order to capture a sense for the risk inherent in the entire industry. The MMC sees training as integral to successful mortgage regulation, and as such will continue to organize training sessions to improve state mortgage examinations. Schools that not only encompass the technical aspects of mortgage examinations, but focus on how to orchestrate and manage geographically diverse examinations comprised of many examiners from different backgrounds are in development. Efficient management is key to successful multi-state mortgage regulation. Process improvement, as well as process development will continue to be a main theme of the MMC. Working with the CFPB will encompass new challenges for the states. Clearly there will be a need for prescriptive coordination. The foundation for this effort has been laid, and professional relationships forged. The “state laboratories of innovation” will work toward continuing to successfully and creatively regulate the mortgage industry fairly and with minimal burden.

multi-state mortgage committee report to state …...using data from the expanded nationwide...

Documents