May 2016 - Rise and Fall

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48 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Compliance Investments Send Loan Defects Packing Index shows errors down 5 percent over last year. M ortgage loan defects, which can lead to fraudulence and misrepresentation in loan applications, are quickly leaving the industry as companies make sound investments in regu - latory compliance technology. The recently released First American Financial Corporation's Loan Application Defect Index declined for the seventh consecutive month by 1.3 percent in February 2016 and is down 5.1 percent year-over-year. The defect index now stands at 76, the lowest it has been since inception. According to First American, the index value is based on the frequency with which defect indicators are identified, and it moves higher as greater numbers of defect indicators are identified. An increase in the index indicates a rising level of loan application defects. The index, nationally and in all markets, is benchmarked to a value of 100 in January 2011. Therefore, all index values can be interpreted as the percentage change in defect frequency relative to the defect frequency identified nationally in January 2011. The report said that it is difficult to know what a "normal" level of defect risk is, but the 76 value is significantly lower than the three years between 2011 and 2013, when it was consistently above a value of 90. It is also down 26.5 percent from the all-time high in October 2013 and has declined 3.8 percent over the last three months. "The continued decline in loan application and mortgage defect risk is indicative of the benefits the in - dustry is accruing from investments in technology and improved production standards," said Mark Fleming, Chief Economist at First American. "The investments to improve compliance are produc - ing real benefits in the form of higher quality loan manufacturing processes with fewer defects and less misrepresentation." Refinance transaction defects fell 1.5 percent month-over-month and are now 9.7 percent lower than a year ago, according to the report. Meanwhile, the index for pur - chase transactions was unchanged month-over-month, and is down 4.5 percent compared to a year ago. "We are excited about the further clarification to the market by the Federal Housing Finance Agency that the GSEs will use an independent dispute resolution (IDR) process to resolve repurchase disputes as a result of loan application defects and fraud," Fleming stated. "Based on the improving defect and fraud risk profile of recent loan applica - tions, we expect the need for the IDR process to decline in the coming years as well." CFPB Offers Lenders a Helping Hand Ruling expands qualifications for small and rural lending privileges. T hanks to a new ruling by the Consumer Finan- cial Protection Bureau (CFPB) in March, more lenders will now qualify for small, rural crediting provisions. According to the CFPB, the Bureau has officially moved to implement Congress' re - cent HELP Act, which stands for Helping Expand Lending Practices in Rural Communities. The act expands the guidelines for what "small creditors" are and will allow more lenders to take advantage of special lending pro - visions on CFPB mortgage rules set forth in January 2014. Since the initial implementa- tion of these rules, the CFPB has made several moves to expand the definitions of "small creditor" and "rural area," but before the HELP Act, smaller lenders were only eligible for special provisions if more than half its loans were in rural or underserved areas. Now, with the HELP Act in place, creditors have access to special provisions if they originate just one mortgage loan on a prop - erty in a rural or underserved area in the previous calendar year. The CFPB has said it will monitor the results of these changes and adjust the rules as needed in the future. One of the special provisions available to these newly qualified "small lenders" allows creditors to originate Qualified Mortgages with balloon payments, despite the CFPB's Ability-to-Repay rule, which disallows balloon payments and other risky loan features on QM loans. The special provi - sions also allow small creditors to originate high-cost mortgages with balloon payments, and they are not required to establish escrow accounts for those loans either. CFPB Director Richard Cordray explains: "The Consumer Bureau today has acted to implement the recent law that extends to more small creditors the specific provi - sions for operating in rural or underserved areas. This rule pro- vides broader eligibility for lenders serving in those areas to originate balloon-payment qualified and a high-cost mortgages." The new rule officially went into effect March 31. "Clarifying that we are inter- ested only in errors that would have altered a decision to approve the loan should put to rest any confusion regarding FHA compli - ance policy," Golding said. Golding also pointed out two ad- ditional changes to the certifications: • Changes that clarify the lender is certifying to what they know to be true to the best of their knowledge. The certifica - tion is not intended to hold lenders responsible for mistakes or fraud committed by a third party that the lender did not or could not have had reason to know of. Our goal is to make sure that lenders make every effort to obtain accurate information and to validate that information but also recognize that due to the complexity of putting a home loan together, minor errors in information may occur from time to time. • Additionally, we have removed references to the pre-endorse- ment review requirement and have made the certification consistent with the policies in our updated FHA Handbook. "Revising the lender-level certi - fication in this manner responds to concerns that changes made to the loan-level certification had the unintended impact of weakening HUD's enforcement authority," Golding explained. "That is not, nor has it ever been, our inten - tion. None of the changes to either of the certifications hinders or undermines our ability to take action against any bad actors in the industry." He continued, "Overall, these certifications increase clarity and protect FHA, taxpayers and lenders. We also believe that im - proved clarity makes compliance easier for lenders and strengthens our ability to hold them account- able. We are confident that the proposed revisions to the loan- level and lender-level certifica- tions reflect a significant step forward for the FHA program and responsiveness to industry concern." Continued from page 44

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