AAA Facts about Bad Loans
AAA Facts about Bad Loans
How significant a risk is noncompliance with consumer protection laws?
The mortgage industry as a whole is struggling to comply with consumer protection laws. A remarkable report published by the FDIC Office of the Inspector General reveals that during 2005 (which was the peak year of the mortgage boom measured by number of loans originated), 83% of federally supervised banks that made loans were cited for patterns of "significant compliance violations." The percentage was presumably higher for state-licensed, non-depository lenders who were responsible for originating 52% of subprime mortgages and are subject to a much broader patchwork of state regulation. Violations of consumer protection laws can result in rescission (effectively canceling the loan), defense against foreclosure, fines, penalties and (both civil and criminal) damages that can exceed the original principal balance of the loan. You may download the report (Report Number 06-024) from the FDIC website
There are also additional reputational risks associated with charges of predatory and discriminatory lending. Investors - including anyone in the chain of title for whole loans and the securitization trust for securities - can be liable, even though the violator was the broker or originating lender. In other words, the investor can be held liable and suffer damages for actions outside its control and for which had no knowledge.
What consumer protection laws do a Forensic Loan Audit cover, and how are these compliance requirements applied to a mortgage loan?
Forensic Loan Audits provide a comprehensive analyzes of electronic loan data to determine whether a mortgage transaction complies with over 300 federal and state consumer protection laws related to mortgage lending. Specifically, Forensic Loan Audits review mortgage loans for compliance with the following consumer credit issues: truth-in-lending disclosures, usury, predatory lending, impermissible fees, interest rate accrual restrictions (such as negative amortization and balloons payments) and prepayment penalty enforceability.
It is important to understand that any number of laws may apply to a particular mortgage transaction. Knowing which laws apply is not a simple task, since It this depends on how the lender is licensed or chartered. Licensed lenders operate under the licensing authorities of the various states with which they do business. Most states have multiple licenses granting lenders the authority to make loans. Each such license imposes different substantive requirements governing loan terms. For instance, certain licenses allow subordinate lien loans while others govern loans with higher interest rates.
In some states, more than one license may authorize lenders to make the same loan, although subtle differences in the consumer protection requirements apply to the loan terms. Forensic Loan Audits determine if a lenders and brokers are properly licensed (and in good standing) or exempt, and then applies the correct laws based on that licensing status. It does this by leveraging a proprietary nationwide licensing database.
Chartered financial institutions—such as state and national banks and federal savings banks—are subject to different regulatory requirements. For instance, most chartered institutions “export” interest rates from their home state to the target state in which the loan is made. This results in a complex synthesis of both the home state’s and target state’s consumer protection laws—an analysis that is difficult to perform efficiently without automation. Likewise, chartered institutions may in certain cases preempt states laws and in other instances must observe them. Again, Forensic Audits base the review on how an institution is chartered and what permissible regulatory elections it is making.
Once the lender’s license or charter authority is known, as well as its elections, the review must consider the specific transaction terms—such as the APR, interest rate, loan balance, lien position, occupancy type, etc.—to determine which out of the several laws that might apply to the lender govern a particular mortgage loan.
No other automated compliance solution provides this degree of detail and precision to its analysis, and this is the reason no other provider equals our quality.
How significant a risk is noncompliance with consumer protection laws?
The mortgage industry as a whole is struggling to comply with consumer protection laws. A remarkable report published by the FDIC Office of the Inspector General reveals that during 2005 (which was the peak year of the mortgage boom measured by number of loans originated), 83% of federally supervised banks that made loans were cited for patterns of "significant compliance violations." The percentage was presumably higher for state-licensed, non-depository lenders who were responsible for originating 52% of subprime mortgages and are subject to a much broader patchwork of state regulation. Violations of consumer protection laws can result in rescission (effectively canceling the loan), defense against foreclosure, fines, penalties and (both civil and criminal) damages that can exceed the original principal balance of the loan. You may download the report (Report Number 06-024) from the FDIC website
There are also additional reputational risks associated with charges of predatory and discriminatory lending. Investors - including anyone in the chain of title for whole loans and the securitization trust for securities - can be liable, even though the violator was the broker or originating lender. In other words, the investor can be held liable and suffer damages for actions outside its control and for which had no knowledge.
What consumer protection laws do a Forensic Loan Audit cover, and how are these compliance requirements applied to a mortgage loan?
Forensic Loan Audits provide a comprehensive analyzes of electronic loan data to determine whether a mortgage transaction complies with over 300 federal and state consumer protection laws related to mortgage lending. Specifically, Forensic Loan Audits review mortgage loans for compliance with the following consumer credit issues: truth-in-lending disclosures, usury, predatory lending, impermissible fees, interest rate accrual restrictions (such as negative amortization and balloons payments) and prepayment penalty enforceability.
It is important to understand that any number of laws may apply to a particular mortgage transaction. Knowing which laws apply is not a simple task, since It this depends on how the lender is licensed or chartered. Licensed lenders operate under the licensing authorities of the various states with which they do business. Most states have multiple licenses granting lenders the authority to make loans. Each such license imposes different substantive requirements governing loan terms. For instance, certain licenses allow subordinate lien loans while others govern loans with higher interest rates.
In some states, more than one license may authorize lenders to make the same loan, although subtle differences in the consumer protection requirements apply to the loan terms. Forensic Loan Audits determine if a lenders and brokers are properly licensed (and in good standing) or exempt, and then applies the correct laws based on that licensing status. It does this by leveraging a proprietary nationwide licensing database.
Chartered financial institutions—such as state and national banks and federal savings banks—are subject to different regulatory requirements. For instance, most chartered institutions “export” interest rates from their home state to the target state in which the loan is made. This results in a complex synthesis of both the home state’s and target state’s consumer protection laws—an analysis that is difficult to perform efficiently without automation. Likewise, chartered institutions may in certain cases preempt states laws and in other instances must observe them. Again, Forensic Audits base the review on how an institution is chartered and what permissible regulatory elections it is making.
Once the lender’s license or charter authority is known, as well as its elections, the review must consider the specific transaction terms—such as the APR, interest rate, loan balance, lien position, occupancy type, etc.—to determine which out of the several laws that might apply to the lender govern a particular mortgage loan.
No other automated compliance solution provides this degree of detail and precision to its analysis, and this is the reason no other provider equals our quality.
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