FHA rescinds strict credit restrictions Critics said mortgage policy tilted the scales too heavily in favor of creditors

June 29, 2012 11:00AM By Kenneth R. Harney

In a policy switch that could be important to thousands of applicants seeking low-down-payment home mortgages, the Federal Housing Administration has rescinded tough new credit restrictions that had been scheduled to take effect July 1.

The policy change would have affected borrowers who have one or more collections or disputed-bill accounts on their national credit bureau files, where the aggregate amounts were $1,000 or greater. Some mortgage industry experts estimate that if the now-rescinded rules had gone into effect, as many as one in three FHA loan applicants would have had difficulty being approved.

Under the withdrawn plan, borrowers with collections or disputed unpaid bills would have been required to “resolve” them before their loan could be closed, either by paying them off in full or by arranging a schedule of repayments. In effect, if you couldn’t resolve the outstanding credit issue, you might not be able to obtain FHA financing. The rescinded policy would have replaced more lenient rules allowing loan officers to discuss the accounts with applicants, and determine whether they represented material risks that the borrower might fail to make the mortgage payments.

Disputed bills are commonplace in many consumers’ files, but may not indicate serious credit risk. Rather, they might simply be a disagreement between merchant and customer over price, quality of the product or the terms of the credit arrangement. Open collection accounts are also common but tend to be viewed more ominously by lenders since they often indicate nonpayment over an extended period. Unpaid creditors frequently charge off unpaid accounts, then sell the files to collection agencies who pursue the customer and report nonpayments to the national credit bureaus – Equifax, Experian and TransUnion.

Critics of the policy complained that it tilted the scales too heavily in favor of creditors and disproportionately harmed FHA’s traditional core borrowers – low- to moderate-income families, first-time buyers and minority groups. Other critics argued that the policy would not help FHA weed out serious credit risks since private lenders already are doing so by imposing their own credit score and other restrictions on applicants, known as “overlays” in the mortgage industry.

Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif., noted in an interview that although FHA accepts FICO credit scores as low as 580 – FICO scores run from 300 to 850 with lower numbers portending higher risks of default – many large lenders require 640 scores or higher. Why? Because they are super-cautious in the post-bust marketplace and don’t want to be required by FHA to “buy back” a mortgage that had a marginal FICO score at application, then went to foreclosure.

As it is, FHA’s recent average scores are far higher than historical norms. According to an analysis by Ellie Mae LLC, a company that tracks conventional and FHA loan originations, the average FICO score for an FHA-approved loan to purchase a house in May was 713. Though down slightly from March, when average FICOs for purchases hit 724, according to Ellie Mae, both scores suggest a strong trend toward financing applicants who have relatively fewer issues in their credit files. This contrasts with the agency’s long-standing tradition of helping “low to moderate wage earners and the underserved” – often minorities – to buy homes, says Ziroli. During much of the last decade, FHA routinely financed borrowers with credit scores in the low to mid 600s.

Deputy Assistant Secretary Charles Coulter says the FHA’s ongoing interest in re-evaluating its credit policies – such as the rescinded collections and disputes rule – is “to find a balanced yet flexible approach to promote access to affordable credit while protecting the mortgage insurance fund.” FHA plans to issue a new rule “soon,” agency sources said, that addresses collection accounts and disputes separately rather than lumping them into a single standard. Meanwhile if you plan to apply for an FHA loan and you think you have collections or disputes on file, here’s the good news: You won’t be forced to pay off or resolve the accounts before closing, but you are likely to have your application referred for “manual” underwriting, where a loan officer takes a hard look at the facts and circumstances of your collections or disputed accounts. This, in turn, will almost certainly slow down your approval. There are exceptions, according to the agency, such as when the disputed account is both less than $500 and more than 24 months old.

But beware lenders’ overlay practices. They may get you turned down even if FHA’s more generous rules say you are acceptable.

CFPB Finalizes Its Own Confidentiality Rule as Legislative Effort Stalls

By Joe Adler JUN 28, 2012 5:24pm ET

WASHINGTON – Although banks are still seeking a bill that would protect privileged information they give the Consumer Financial Protection Bureau, the agency finalized its own rule Thursday meant to assure institutions of confidentiality.

The rule, which is unchanged from a March proposal, states that a financial institution’s transfer of privileged information to the CFPB does not damage the confidential nature of that material. It also protects the confidentiality of that information if the bureau shares it with another federal or state agency.

“We are committed to safeguarding the confidential information of the institutions we supervise to ensure the bureau is best equipped to do its job and protect consumers,” CFPB Director Richard Cordray said in a press release. “This new rule supports the free flow of information that is essential to an effective supervision program.”

Yet the industry may not be satisfied with just a regulation by the new agency.

The bureau has said the Dodd-Frank Act gives the CFPB enough authority to ensure confidential treatment of banks’ information obtained through the supervisory process. Yet banks and attorneys worry that authority has limits. Typically, information given to a third party loses attorney-client privilege, and prior legislation formally exempted the other bank regulators from that rule. But Dodd-Frank did not expressly include the CFPB in that exemption.

The CFPB has lent support to pending legislation that would afford it the same formal exemption as other agencies. Yet it reiterated in the final rule that its own authority is sufficient.

“Although the bureau has expressed support for legislation codifying the bureau’s view that the submission of privileged information to the bureau does not result in a waiver” of attorney-client privilege “the bureau does not believe such legislation is necessary,” the rule said.

The legislation has strong bipartisan support, but has been held up by Sen. Bob Corker, R-Tenn., among other senators, who is hoping for passage of a larger bill that would make several technical changes to Dodd-Frank.

GAO Report Raises Concerns About Appraisals

By Kevin Wack JUN 28, 2012 2:43pm ET

WASHINGTON – A new government study raises tough questions about both the growing role of appraisal management companies in the mortgage market as well as the government’s oversight of the appraisal industry.

In a report released Thursday, the Government Accountability Office was critical of the federal arm that is responsible for overseeing state regulation of appraisers. That arm, known as the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, has yet to fulfill certain duties it was given under the two-year-old Dodd-Frank Act, according to the report.

The study, which was released in connection with a House hearing on the appraisal industry, also expressed concern that the appraisal management companies, known as AMCs, have hurt the quality of appraisals.

“Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence,” the GAO stated.

The rise of appraisal management companies can be traced back to housing bubble-era concerns about inflated appraisals and conflicts of interest with lenders. The firms have taken greater market share following the enactment of an industry of code of conduct that was developed by New York officials.

Concerns about the negative impact of the management companies were echoed by both lawmakers and industry participants during a Thursday hearing of the House housing subcommittee.

Rep. Gary Miller, R-Calif., said that the companies are often sending appraisers to properties where they have little knowledge of the local real-estate market.

“You’re getting them in areas sometimes they don’t have expertise,” Miller said.

Karen Mann, a California appraiser who was testifying on behalf of the American Society of Appraisers, said that the management firms are squeezing margins for appraisers.

“The problem is that the experienced appraisers don’t prefer to work with the AMCs because the fees are so low,” she said.

Don Kelly, executive director of the Real Estate Valuation Advocacy Association, a trade group for the appraisal management companies, defended the industry’s role in reforming the appraisal industry.

“Importantly, by acting as the sole point of contact between the lender and appraiser, AMCs insulate the individual appraiser from any influence or coercion by the lender,” Kelly said in written testimony.

The GAO report also blamed federal banking regulators, including the Consumer Financial Protection Bureau, for failing so far to establish minimum standards for appraisal management companies to be used by the states, which are responsible for registering the firms.

“Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals that AMCs provide,” the report stated.

CFPB Suit Faces Long Odds, But May Still Have Impact

By Kevin Wack JUN 22, 2012 6:05pm ET

WASHINGTON – Supporters of the Consumer Financial Protection Bureau are dismissing a new lawsuit that seeks to abolish the agency as a political stunt, and even bank industry insiders who would like the case to succeed are privately calling it an uphill battle.

But despite what appear to be long odds, the suit could have an impact on the CFPB’s operations in a more indirect way. The litigation could drag on for years, and the case could force the agency to make public statements that have the effect of curtailing its power, observers said.

“Even if the complaint is not successful, it’s possible that in responding to the complaint, the CFPB will make statements acknowledging certain limitations on what it can do – so that it could have an impact, a real-world impact, even if it does not ultimately prevail,” said Joseph Barloon, a bank industry lawyer at Skadden Arps in Washington.

The case has drawn headlines for its assertion that the CFPB violates the Constitution because the agency lacks sufficient checks and balances on its power, but it also makes two additional attacks on the Dodd-Frank Act.

The plaintiffs allege that the Financial Stability Oversight Council is also unconstitutional. It also argues that the recess appointment of Richard Cordray as the CFPB’s director violates the U.S. Senate’s constitutional power over presidential nominations.

The case was filed Thursday by a Texas community bank, State National Bank of Big Spring, and two national conservative groups – the Competitive Enterprise Institute and the 60 Plus Association, which positions itself as a conservative alternative to the AARP.

The suit sprung from conservative legal circles in Washington. But the involvement of the Texas bank is critical because a bank can make a more plausible argument for how it has been harmed by parts of the 2010 financial reform law – and therefore for why it should be allowed to sue – than the Beltway conservative groups can make.

The lawsuit comes in the wake of a push by congressional Republicans to reel in CFPB by altering the agency’s structure. The GOP last year fought to subject the agency to the congressional appropriations process, to replace its director with a five-member board, and to make it easier for the agency’s decisions to be overruled.

But congressional Republicans lost their leverage for those demands when President Obama used a recess appointment to install Cordray as the CFPB’s chief.

That context led consumer advocates to dismiss the suit Friday as political sour grapes.

“It looks like opponents of the agency have been shopping a lawsuit to raise the same ideological concerns that they raised in Congress,” said Travis Plunkett, legislative director for the Consumer Federation of America. “They’re hostile to the notion, and in most cases hostile to specific proposals, to establish an agency focused on consumer financial protection.”

Deepak Gupta, a Washington appellate lawyer who formerly served as a CFPB attorney, said that the suit merely recasts political arguments against the agency as constitutional arguments.

“I don’t think that these are serious legal theories, and I don’t think a court is likely to see them as serious legal theories,” he said.

Bank industry lawyers took a different view, saying the case raises substantive legal issues and shouldn’t be dismissed out of hand.

“Whether or not they will win, they have an argument,” said Oliver Ireland, a partner at Morrison Foerster.

Another industry lawyer who asked not to be identified said, “These are serious issues. What I suspect is that one court may take up one or two of these issues and dismiss the rest of it.”

“They’ve raised a lot of questions, and you never know what’s going to stick.”

Observers also noted that initial legal judgments, even from experts, can be wrong. In the health-care realm, the argument that the individual mandate is unconstitutional was at first largely dismissed by the legal establishment, and that issue is now seen as a close call at the Supreme Court.

In order to have a chance to make their constitutional arguments, the plaintiffs will first have to establish that they have suffered harm, and therefore have the legal standing, to sue.

In the complaint, the plaintiffs allege that State National Bank of Big Spring has suffered two specific harms related to the CFPB. The bank states that it stopped offering remittance services to its customers as a result of a February 2012 rule issued by the CFPB regarding international remittance transfers.

The bank also alleges that it exited the mortgage business because of regulatory uncertainty stemming from what it calls an open-ended grant of authority to the CFPB.

The Texas bank’s argument for how it has been harmed by the Financial Stability Oversight Council is less direct.

The bank alleges that the Council’s ability to designate certain nonbanks as systemically important will convey to investors that those firms are too big to fail, which will give them a funding advantage in the marketplace over small institutions such as State National Bank of Big Spring.

If the plaintiffs are able to show that they have been harmed by the two new financial regulatory agencies, they would then need to show that the agencies violate the Constitution because the law does not place enough checks on their power.

The complaint makes numerous arguments as to why the authority granted to CFPB and FSOC is too broad.

For example, it alleges that the CFPB has power to regulate and enforce rules against unfair, deceptive and abusive lending practices, but without any clear definition of those terms. It also argues that Congress has no power over the CFPB’s budget, and the judicial branch’s ability to oversee the bureau’s work is limited, among other arguments.

“Those features combine to create something that is both unprecedented and unconstitutional,” said Adam White, a lawyer at the Washington law firm Boyden Gray & Associates, which is representing the plaintiffs. “At some point those add up to something that the Constitution just doesn’t abide.”

The issue of whether the authorities granted to the CFPB are unprecedented has been the subject of political debate ever since the agency was established.

Last July, the Senate Banking Committee held a hearing where the U.S. Chamber of Commerce argued: “The Bureau’s current structure confers on its Director unprecedented unchecked power of extraordinary breadth, far beyond that wielded by any other federal regulator of individuals and businesses.”

At the same hearing, Adam Levitin, a Georgetown University law professor, countered that the CFPB has numerous checks on its power, including three that no other financial regulator are subject to: a cap on its budget, the ability of a supermajority of the Financial Stability Oversight Council to veto its regulations, and an annual audit by the Government Accountability Office.

Levitin dismissed the lawsuit Friday as “right-wing claptrap.”

“This is basically a rehash of after the-fact arguments that Republicans who are sore about having lost the financial regulatory reform debate are now trying to get a second bite at the apple,” he said.

Even some who said the case should be taken seriously were skeptical of the claim that the CFPB has an unconstitutional delegation of authority. “If that’s true, the Fed is unconstitutional,” Ireland said.

White, the plaintiffs’ lawyer, acknowledged that the Fed has considerable autonomy, but added: “All we’re saying is that even the Federal Reserve isn’t as reserved from checks and balances and oversight as the CFPB is.” (White declined to say who was funding the lawsuit.)

He also noted that the Supreme Court has recently ruled that Congress can violate the Constitution by granting too much authority to an agency. In a 2010 decision, the Supreme Court found that members of the Public Company Accounting Oversight Board needed to be made subject to removal by the Securities and Exchange Commission.

But that court-ordered change was relatively minor in comparison to the changes that congressional Republicans have sought to the structure of the CFPB.

The complaint filed Thursday in the U.S. District Court for the District of Columbia does not seek any specific changes to the structure of the CFPB and FSOC. Instead, it asks the court to declare unconstitutional the portions of Dodd-Frank that create the two agencies, and to prevent the agencies from using any of the powers granted to them.

The courts could presumably rule in favor of the plaintiffs and still impose a less severe remedy, however.

Another question remains whether the bank has legal standing to challenge Cordray’s recess appointment. Republicans argue the Senate was not technically in recess, thus preventing Obama from making a legal appointment.

Even if that’s true, it’s unclear whether the bank is affected by it. Most industry lawyers agree the CFPB had the power to oversee banks with or without a Senate-confirmed director. By contrast, however, the agency clearly lacked the authority to supervise nonbanks without a leader in place.

Although Cordray’s appointment gives nonbanks a potential legal challenge, it’s uncertain if banks can also claim the president’s move affected them.

Still, several observers said that issue remains the strongest part of the overall lawsuit.

“They claim Cordray is an invalid recess appointment,” Ireland said. “It looks to me like there’s probably an issue there.”

Low appraisals that don’t reflect rising markets are ruining deals Real estate professionals say appraisals sometimes come in thousands of dollars below the price that home buyers and sellers have agreed upon.

By Kenneth R. Harney June 24, 2012

WASHINGTON – Are some appraisers failing to see the improvements in real estate values underway in local markets that have recently bottomed out and turned positive? When multiple bids push a house price thousands of dollars above what the seller is asking – not unusual in neighborhoods where demand is particularly robust – are appraisers still coming in with values below the agreed-upon price?

Appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions, say a growing number of mortgage loan officers and realty agents. In a new poll of its members, the National Assn. of Realtors found that 33% of their salespeople reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle to seeing a real recovery.

Even appraisal experts concede that this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property – exposing lender clients to costly “buy-back” demands by Fannie Mae or Freddie Mac, or future litigation.

One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official of the firm sent it back immediately with instructions to “revisit” the upward adjustment – in other words, get rid of it.

Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn., mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.”

He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon sales price, endangering or blowing the deals. In one case, the buyer offered $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.

“Appraisers are scared to death” to report rising values, Petrowsky said. “I talk to them and they are beside themselves. They feel they have to [deliver] appraisals they know should be higher.”

Much worse, though, is the effect on sellers and buyers. When appraisals comes in much lower than the mutually agreed-upon price, buyers may need to revise their loan requests or renegotiate the purchase price with unhappy sellers.

Dennis Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example in which a client saw a bidding war – four offers that pushed the price from the listed $350,000 to $375,000 – but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.

Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes – whether positive or negative – if they can be verified with authoritative and accurate data.

How can buyers and sellers guard against the see-no-appreciation problem? Tops on the list: Make sure the realty agents on both sides of your transaction have assembled accurate data on comparable sales or pending sales that demonstrate how the market has changed in the last six months or less. Then make sure the appraiser sees the data.

Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have – or chooses not to collect – all the relevant recent facts.