FHA Servicing Compliance The Collingwood Group Conference Call Summary April 12, 2012 Below is a summary of the April 12, 2012 mortgage industry call sponsored by The Collingwood Group. Questions may be sent to questions@collingwoodllc.com, or you can contact Karen Garner, Managing Director of Collingwood s Risk Management and Compliance Division at kgarner@collingwoodllc.com or 202.626.9726. Table of Contents I. Introduction a. Call topic introduction b. Panelists II. Common Findings from the FHA s QAD Compliance Reviews III. Compliance Documentation and Other Actions At This Stage of Delinquency IV. Loss Mitigation Program Eligibility Requirements for Borrowers V. Waterfall Method of Evaluating Loss Mitigation VI. Retention and Litigation Options VII. Indemnification VIII. Questions Received During Call IX. Conclusion
I. Introduction The Collingwood Group established its Risk Management and Compliance Division in response to the many rapid changes coming from HUD, FHA, HUD s Inspector General, Ginnie Mae, state Attorney Generals.and the list goes on. It is critical that companies fully understand, and comply with, the numerous FHA programs, regulations and requirements. This call discussed FHA Servicing Compliance and the options available to borrowers facing foreclosure. HUD has programs in place to help these individuals, but the lender MUST identify the default issue early on and work with the borrower to effectively utilize this assistance and remain compliant with FHA programs. We are hopeful that this call provided a good understanding of FHA Servicing Compliance, and that call participants are now better prepared to look at their company s operations to ensure they are in compliance with FHA requirements. Panelists: BRIAN MONTGOMERY-- Chairman of The Collingwood Group and from 2005 to 2009, served as Assistant Secretary of the U.S. Department of Housing and Urban Development (HUD) and FHA Commissioner. KAREN GARNER Managing Director of The Collingwood Group s Risk Management and Compliance Division. Served for 23 years at HUD, where she held various management positions in the Quality Assurance Division, the Office of Lender Activities and Program Compliance, and served as Director of the Lender Approval Division. Also former Founder and President of GWN Consulting, a firm specializing in Federal Housing Administration (FHA) and Ginnie Mae risk management and quality control. EARL GREER Senior Consultant for The Collingwood Group s Risk Management and Compliance Division. Formerly with GWN Consulting following 24 years with FHA, working in the Quality Assurance Division conducting compliance reviews of loan origination and servicing requirements. Together Karen, Earl, and the rest of the Risk Management and Compliance team brings to The Collingwood Group a combined 200 plus years of FHA experience, including its Mortgagee Review Board. II. Common Findings from the FHA s QAD Compliance Reviews and the Need to Document The majority of QAD servicing reviews deal with lender s compliance with loss mitigation, which is NOT optional. To be compliant, lenders must: Work with the borrower to take them through all eligible loss mitigation programs
During the first three months of delinquency: o As soon as a loan is 30 days delinquent, lender must start to work with borrower. Gather financial information and consider all reasonable means to address the delinquency. Early intervention is best! o During the second month of delinquency: Inform the borrower of available loss mitigation options and the availability of housing counseling. Send the FHA mandated delinquency letter to the borrower and document that the letter was sent! o All defaulted loans must be evaluated no later than the 90 th day of delinquency to determine which loss mitigation option is appropriate. To be compliant at this point, lenders must have already contacted the borrower and have gathered sufficient information about their circumstances (including financial position). Again failure to document efforts to reach the borrower is a common finding. Utilize loss mitigation whenever feasible to avoid foreclosure. Options must be looked at in a Waterfall method, and files must document that each option was considered prior to moving on to the next option. Retention options must be considered first if the reason for default is curable and the borrower is committed to remaining in the home. KEY TAKEAWAY The first 90 days of delinquency early intervention is critical! Contact the borrower by phone and mail and document these actions as well as information obtained from the borrower! III. Compliance Documentation and Other Actions to Take at This Stage of Delinquency Continue monthly efforts and monitor repayment plans or forebearance plans until the default is cured by reinstatement or foreclosure proceedings begin. The lender should encourage the borrower to contact the lender if circumstances change that would allow the borrower to reinstate the loan. Delinquency and loss mitigation actions must be reported through the Single Family Default Monitoring System (SFDMS). Failure to do so could result in the denial of automatic extension for starting foreclosure that the lender is entitled to for attempting loss mitigation. Foreclosure proceedings must be initiated within six months of default unless loss mitigation is being pursued. The file MUST be complete and must document the loss mitigation evaluation and the appropriate codes reported to SFDMS. If the servicer determines the borrower does not qualify for any loss mitigation options, foreclosure must be started. The lender should retain a complete audit trail documenting all collection activities and the borrower analysis so that it is available to FHA reviewers. Document that all loss mitigation options were considered and that the borrower did not qualify for any of the options before initiating foreclosure. Failure to comply with the provisions of the Loss Mitigation Program may result in the loss of incentive compensation and
other benefits, reduced reimbursement of foreclosure and acquisition costs, and interest curtailment related to foreclosure delays. It can also result in a request for indemnification if a claim is paid on the loan. KEY TAKEAWAY It is critical for lenders to pay close attention to these regulations, and that lenders should follow these steps closely. Be sure to act early and proactively, and document every step taken! IV. Loss Mitigation Program Eligibility Requirements for Borrowers Loss mitigation options are intended to provide relief for borrowers who are currently in default for three or more months. Borrowers who are eligible for a Forbearance loss mitigation option are: FHA s Mortgagee Letter 10-04 allows for loss mitigation at the time of initial default or when a determination that a default is imminent. Examples include: o When a borrower becomes unemployed; o When a borrower experiences serious illness or a death in the family. o A verifiable increase in expenses may make a borrower eligible. Examples include: Significant medical bills; Damage to the home s roof during a recent storm; A car accident with insufficient insurance in place. If these types of situations occur, using a forbearance agreement to postpone, reduce or suspend payments would be appropriate. The home must be owner-occupied to qualify for home retention options, and no other property can be owned by the borrower subject to an FHA insurance loan. Documentation of the contact with the borrower is of utmost importance when using the provision of imminent default. KEY TAKEAWAY FHA tries to help borrowers who are dealing with legitimate and difficult situations to stay in their homes. The lender should carefully examine the borrower s situation, identify if the use of a forbearance agreement is appropriate, work with the borrower to help him/her retain the home, and if that is not possible, try to obtain the best option regarding foreclosure. And remember document everything you do!
V. Waterfall Method of Evaluating Loss Mitigation FHA requires that every lender must work with the borrower through any eligible Loss Mitigation program. It s Waterfall Method takes the borrower through the various options based on his or her situation and ability to pay, beginning with home retention options: Type 1 Special Forbearance -- offers a structured plan that allows the borrower to repay a loan delinquency over tie. Typically includes an initial period for financial recovery followed by a payment schedule based on the borrower s ability to repay. Type II Special Forbearance combines a short-term special forbearance plan with a modification or partial claim as a single loss mitigation plan. Mortgagee Letter 11-28 requires lenders to establish a trial payment plan whenever their evaluation determines that the borrower s best option is either a modification or a partial claim. The borrower must make at least three full monthly payments under the Type II special forbearance plan prior to execution of a modification or partial claim. Review the Mortgagee Letter for exceptions to this policy FHA also has two different types of special forbearance options one stand-alone and one that is in combination with either a loan modification or a partial claim. Next in the waterfall order are: A Loan Modification, which is the third option in the Waterfall Method. This is a permanent change in one or more of the terms of a borrower s loan which, if made, allows the loan to be reinstated and results in a payment the borrower can afford. Check Mortgagee Letter 09-35 for details regarding the note rate and other provisions. A Partial Claim is where a lender will advance fund on behalf of a borrower in an amount necessary to reinstate a delinquent loan. This can equal up to 12 months principal, interest, taxes and insurance (PITI). The borrower executes a promissory note and subordinate mortgage payable to HUD. Again, review Mortgagee Letter 11-28 to determine when the combination of a Type II special forbearance and either a modification or partial claim is required and when it is optional. Key Takeaway -- The servicer must discuss all options with the borrower, gain enough information about the borrower s circumstances and finances to see if the borrower qualifies for any of the loss mitigation options and consider each of the options in the order prescribed by FHA. VI. Retention and Litigation Options If home retention is not an option: The servicer must evaluate two litigation options, namely Pre-Foreclosure sale, and Deed-in- Lieu of foreclosure, before initiating foreclosure. The Pre-Foreclosure sale option allows a borrower to sell his/her home and use the sale proceeds to satisfy the mortgage debt, even if the proceeds are less than the amount owe. This option is appropriate for borrowers whose financial situation requires that
they sell their home, but who are unable to sell without FHA relief because the value of the property has declined to less than the amount owed on the mortgage. o Servicers must maintain supporting documentation to demonstrate that a comprehensive review of the mortgagor s financial records was completed and that the mortgagor did not have sufficient income to sustain the mortgage. o Under no circumstances shall the Pre-Foreclosure option be made available to mortgagors who have abandoned their mortgage obligation despite their continued ability to pay. If reviewed, Pre-Foreclosure sales that are clearly a walk-away will be disallowed by HUD. The other litigation option is Deed-In-Lieu of Foreclosure, in which a borrower voluntarily deeds the collateral property to HUD in exchange for a release from all obligations under the mortgage. Though this option results in the borrower losing the property, it is usually preferable to foreclosure because the borrower mitigates the cost and emotional trauma of foreclosure and is eligible to receive borrower s compensation of up to $2,000. Review Mortgagee Letter 02-13 regarding borrower compensation. The closer a lender can get the borrower to the first option which is home retention the better for all parties. It is important that lenders work closely with borrowers to identify which option they qualify for and help them through the process. And always maintain clear and concise documentation. VII. Indemnification Indemnification is calculated by using the difference between the amounts that HUD pays out during a conveyance claim less the amount recovered when the REO property is sold. Indemnification can be requested for several reasons, including: o Unrealistic informal forbearances; o An improper borrower financial analysis; o Failure to evaluate for Loss Mitigation timely or in the required waterfall; o Not providing reduced or suspended payments when financial analysis shows that the borrower qualified for one of the options. o Overstated income or understated borrower debts; o When a Pre-Foreclosure Sale or Deed-in-Lieu was completed without looking at all other retention options. Key Takeaway It is critical for the lender to have a good QC plan in place, and it would be helpful to have an extra review of procedures in place in Loss Mitigation to look at weaknesses and evaluate some of the analysis being performed in all areas. There are many things that can happen that cause indemnification requests the smart lender will be prompt, proactive, and diligent about documenting everything. And always, early intervention is best if the lender or servicer works with the borrower the minute a loan is 30 days delinquent, and takes proactive and decisive action, major problems can be avoided and options can be made available to the borrower to either retain the home or help deal with the loss of it. And DOCUMENT EVERY STEP YOU TAKE!
VIII. Questions & Answers Question #1: There was an FDA requirement to have a face-to-face meeting with the borrower if the property is within 200 miles of the servicer s office. Is this rule still in effect? Answer: The answer is yes. The Handbook 4330.1 Chapter 7 and the regulations at 24 CFR Section 203.604 state that the servicer must make a reasonable attempt to arrange a personal interview when the property is within 200 miles of the servicer s offices. There are exemptions to this rule: If the borrower does not occupy the property If the borrower has clearly indicated that he/or she will not cooperate or if a realistic repayment plan has been agreed to by mail or telephone and the payments under the plan are current. While this is not in the Handbook, the regulations state that if the servicer has made a reasonable effort to arrange a meeting but was unsuccessful, they are also exempt from this rule. A reasonable effort is stated in the regulations as: At a minimum, the servicer must send the borrower a certified letter from the postal service to request the face-to-face interview. If you choose this option, be sure to retain a copy of the letter and the certified mail card in the file for the FHA auditors. According to the regulations, a reasonable effort can also be at least one trip to the property. In our past experience conducting servicing compliance reviews, we have also found it to be acceptable if the property inspector noted that he contacted the borrower at the property and provided the borrower with the servicer s contact information. Question #2: Can you clarify the financial loss to a lender if loss mitigation program options are not considered and documented? Answer: If the Quality Assurance Division conducts a compliance review at your office and they determine you are not compliant, they can request that you refund the incentive claim that you were paid. If you filed a conveyance claim and they find that you violated the loss mitigation program then you may be asked to indemnify HUD, which is a very expensive proposition. Question #3: With relation to Mortgagee Letter 12-3 regarding handling of disputed accounts or collections over $1,000.00 can you clarify the effective date of that provision of the Mortgagee Letter? Answer: FHA issued an update on April 6 that delayed the effective date to case numbers issued on or after July 1, 2012. Question #3: With regards to pre-foreclosure sales and an increased scrutiny by HUD on this type of claim is the increase in sampling real or imagined? Answer: The increased scrutiny is real, not imagined. The reason is that over the past two years, the percentage of pre-foreclosure sale claims that have been filed has almost tripled
from around 3% in fiscal year 2009 to around 8% in fiscal year 2011. So, more pre-foreclosure sales are being reviewed, both by FHA and HUD s Office of Inspector General, primarily because of the increase in the program s use. During the call the following questions were received but time did not allow for us to provide a response. The individuals that posed these questions received an email response and we are now posting those questions for the benefit of everyone. Question #4: What are the top 3 FHA violations most origination shops incur? Answer: The top 3 origination violations are: 1. Quality Control Plan - the plan is deficient, not implemented, no management response or a combination of these; 2. Deficiencies in assets to close, such as insufficient funds or lack of supporting documentation; and 3. Income that is overstated, lacking in supporting documentation, etc. Question #5: Regarding Liquidation Options: Pre-foreclosure sale - when can this option be used if a result of financial support hardship, however the mortgagor vacated the property prior to determination? Deed in lieu of foreclosure - similar to above In both situations, FHA will experience loss less than a foreclosure/conveyance AND property 'blight' can be reduced. Answer: Both Mortgagee Letter 00-05 and 08-43 state that for a pre-foreclosure sale, the borrower must occupy the property as their primary residence except: Non-owner Occupant Exceptions Mortgagees are authorized to grant reasonable exceptions to non-occupant mortgagors when documentation indicates a property was not purchased as a rental or used as a rental for more than 18 months, immediately preceding the approval into the PFS program. (ML 08-43) For a Deed-in-Lieu, Mortgagee Letter 00-05 states the following: Borrower Qualifications: The DIL option may be extended to borrowers who are unable to continue to support the mortgage debt and who occupy the property as a primary residence. Lenders are authorized to grant reasonable exceptions to non-occupant borrowers when it is verifiable that the need to vacate was related to the cause of the default (job loss,
mandatory job transfer, divorce, death), and the subject property was not purchased as a rental investment, or used as a rental for more than 12 months. It is important to remember, that the time frame to initiate foreclosure is shortened when the servicer has knowledge that the property is vacant. HUD regulations at 24 CFR Section 203.355 (b) states: Vacant or abandoned property. With respect to defaulted mortgages on vacant or abandoned property, if the mortgagee discovers, or should have discovered, that the property is vacant or abandoned, the mortgagee must commence foreclosure within the later of 120 days after the date the property became vacant, or 60 days after the date the property is discovered, or should have been discovered, to be vacant or abandoned. So while it is important to examine the loss mitigation options carefully, if you have a vacated property the foreclosure initiation time frame should be carefully monitored or you run the risk of an interest curtailment if you end up pursuing foreclosure when the claim is paid. Conclusion Prevention is the best medicine when dealing with FHA Servicing Compliance. The Collingwood Group can help ensure you understand the issues and are prepared to deal with them. For example, if you are in doubt as to whether or not your company is fully compliant with FHA Servicing and Claims requirements, we would be glad to do mock audits of your FHA files. We offer consulting services around the new rules and regulations, and have extensive experience that will enable you to navigate the ever-changing landscape we all know as FHA Compliance. Again if your question was not addressed or you need more details, we will be following up with you over the next several days. We welcome your questions and comments on this call; in fact, you will be receiving a survey shortly which we hope you will fill out and return. You can also email us at questions@collingwoodllc.com, or call Karen directly at 202.626.9726.