PFI Notice 2014-3 October 15, 2014 Effective Date: Immediately, unless otherwise noted. Special Attention: PFI MPF Program Management, Origination Management, Underwriting Management and Quality Control Management Note: The changes announced in this PFI Notice effect all MPF Program Products as noted Subjects: E&O and Fidelity Bond Insurance and Deductible Requirements MPF Bank Funded Mortgage (MPF 100) Title Endorsements and Exceptions for Oil, Gas, Water, or Mineral Rights PFI s in House Quality Control Program Suspended Counterparties Anti-Money Laundering and Bank Secrecy Act Regulations Maximum Age of Documentation Changes will affect the following Origination and Underwriting Guide Chapters: Origination Guide Chapter 5.1 Fidelity and E&O Insurance Requirements Origination Guide Chapter 7.4 MPF Bank Funded Mortgage (MPF 100) Origination Guide Chapter 28 Origination Guide Chapter 31.2.2 Underwriting Guide Chapter 2.23 Underwriting Guide Chapter 4.8.2 Underwriting Guide Chapter 7.4 Underwriting Guide Chapter 8.2.5.1 Underwriting Guide Chapter 8.8.1 Servicing Guide Chapter 103.1 Servicing Guide Chapter 103.3.7 Servicing Guide Chapter 107.4 PFI s In-House Quality Control Program Anti-Money Laundering and Bank Secrecy Act Regulations (New) Suspended Counterparties Maximum Age of Documentation Title Endorsements Oil, Gas, Water, and Mineral Rights Servicer Responsibilities Foreclosure Administration PFI Notice 2014-3 Page - 1
Description of Changes: E&O and Fidelity Bond Insurance and Deductible Requirements (Origination Guide Chapters 5.1, 5.2, 5.3, and 5.4) The Fidelity Bond and E&O Insurance coverage and deductible requirements have been updated and clarified as described below. These new requirements are effective immediately and must be documented in all Fidelity Bond and E&O Insurance policies the earlier of October 15, 2015 or the date of policy renewal. Specific information that must be included on the insurance certificate Provisions that must be included in the policy (when the provisions can be obtained) Included insurer actions that require notification to the MPF Banks Updated the requirements for a direct surety bond Redefined the Base Definition as follows: The total portfolio of all first-lien 1-4 family and multi-family residential Mortgages serviced by the PFI for itself and others. This includes Mortgages serviced on the PFI s behalf by a sub-servicer or designated an affiliate servicer. Updated the E&O Insurance coverage amount requirement. The E&O Insurance coverage amount must be equal to the Fidelity Bond coverage amount. Added provisions for when the policy provides E&O Insurance coverage per mortgage. Updated the deductible requirements as follows: Fidelity Insurance: The greater of $100,000 or five percent (5%) of the actual amount of insurance in force E&O Insurance: For policies that provide coverage per mortgage, the maximum deductible amount for each mortgage cannot be more than five percent (5%) of the insurer s liability per mortgage. For policies that provide coverage per aggregate loss, the highest deductible permitted is the greater of $100,000 or five percent (5%) of the actual amount of insurance in force. Added requirements for the reporting of an Fidelity Bond and Errors and Omissions event as follows: The occurrence of a single fidelity bond or errors and omissions policy loss that exceeds $100,000. The receipt of a notice from the insurer regarding the intended cancellation, reduction, nonrenewal, or restrictive modification of the lender s fidelity bond or errors and omissions policy. PFI Notice 2014-3 Page - 2
MPF Bank Funded Mortgage (MPF 100) (Origination Guide Chapter 7.4) This chapter has been removed from the origination guide as this product is no longer eligible for delivery under the MPF Program. (Underwriting Guide Chapter 7.4) The policy regarding late charges has been rewritten to reflect more clearly the following MPF Program policies: The monthly payment due date must be the first (1st) calendar day of the month. 5% is the maximum amount that a servicer can charge a borrower for a late fee during the time the MPF Bank or any other investor under the MPF Program holds the mortgage. If applicable law does not allow a late charge as high as 5%, the maximum allowed late charge should be used. The servicer may collect a late charge on a monthly payment received after the end of the fifteenth (15th) calendar day of the month. In addition, the contents of Chapters 7.4.1 and 7.4.2 have been moved into Chapter 7.4 for easier reference by PFIs. Title Endorsements and Exceptions for Oil, Gas, Water, or Mineral Rights (Underwriting Guide Chapters 8.2.5.1 and 8.8.1) The requirements for exceptions to the title insurance policy for outstanding oil, gas, water, or mineral rights have been expanded to include additional options when ALTA endorsements are not available. PFI s In-House Quality Control Program (Origination Guide Chapter 28) The MPF Program is making several clarifications to the requirements of the PFI s In-House Quality Control Program. The specificity provided below will help PFIs as they perform the monthly duties under the requirements of Origination Guide Chapter 28. Below is a summary of the clarifications that have been made. PFIs should read the corresponding updates of Origination Guide Chapter 28 for the complete details. Chapter 28.1 (PFI s Quality Control Program, Quality Standards and Measures) 28.1 (PFI s Quality Control Program, Pre-Closing Quality Control Plan Requirements) 28.6.2 (Reverifications of the Sources of Funds) Policy Clarification/Update The minimum requirements for setting a target defect rate is required for the highest severity level for postclosing, random quality control (QC) samples. Target defect rates are not required, although recommended, to be set for lower severity levels, pre-closing QC reviews, or discretionary reviews. Regarding mortgages acquired from a third party, the PFI s written pre-closing QC plan must include a review of a sample of its loans prior to acquisition. Clarified that although some financial institutions may assess a fee for providing a reverification of assets, the reverification must still be obtained regardless of any fees that may be incurred. PFI Notice 2014-3 Page - 3
Chapter 28.6.4 (Post-Closing Review of Appraisals and Oversight of Appraisers) 28.11 (PFIs Internal Reporting Requirements) Policy Clarification/Update Clarified that the requirement for a 10% field review is based on loans in the post-closing random sample that have an appraisal. PFIs are required to complete a desk review to evaluate the appraisal for the remaining 90% of mortgages that are selected for a QC review as part of its random sample. Clarified that PFIs must perform the appropriate due diligence to determine that a reasonable basis exists to conclude that false representation or suspected fraud may have occurred prior to notifying the MPF Provider of any such matters. Suspended Counterparties (Underwriting Guide Chapter 2.23 and Servicing Guide Chapter 103.1) To help address the risk presented by individuals and entities with a history of fraud or other financial misconduct, the Federal Housing Finance Agency (FHHA) has established a Suspended Counterparty Program (SCP). Under this program, FHFA may suspend an individual or entity from doing business with the Federal Home Loan Banks and other FHFA-regulated entities. FHFA maintains a list of each person and entity currently suspended under this program on its website (Suspended Counterparty Program). In addition to checking the U.S. General Services Administration (GSA) Excluded Party List and the HUD Limited Denial of Participation List (LDP List) as part of its and its third party originator s hiring processes, PFIs must now also check the SCP list and may not allow any individual or entity on the SCP list to be directly involved in activities related to the origination or servicing of mortgages delivered under the MPF Program. The policy of checking the SCP list is also required prior to engaging the services of a contractor or vendor for any origination or servicing activities. Anti-Money Laundering and Bank Secrecy Act Regulations (Origination Guide Chapters 28.11 and 31.2.2 (New) and Servicing Guide Chapter 103.1) As a follow-up to the PFI Advisory published August 22, 2014 (Anti-Money Laundering and Bank Secrecy Act Regulations), the suspicious activity reporting and related internal policies, procedures, and controls requirements have been added to the MPF Guides. Maximum Age of Documentation (Underwriting Guide Chapter 4.8.2) This chapter has been updated to reflect a change in policy regarding the age of credit documentation. For existing mortgages, the credit documents must be no more than four (4) months old on the date the note is signed. The policy has also been clarified to reflect that the most recent document is used to determine whether it meets the age requirement when consecutive credit documents are present in the mortgage file. PFI Notice 2014-3 Page - 4
Additional Updates Servicing Guide Chapter 107.4.1 (Foreclosure / Alternative to Foreclosure Initiation) The chapter has been updated to reflect the current requirements PFIs are following under CFPB regulation regarding the commencement of the foreclosure process. Underwriting Guide Chapter 7.1.1 and OG3 Form (MPF-Approved Mortgage Insurers) The OG 3 form has been updated to include Arch Mortgage Insurance Company (formerly CMG Mortgage Insurance Company) as an approved mortgage insurer. In addition, the Origination Guide has been updated with this information, including the prohibition against mortgage insurance from certain mortgage insurer subsidiaries for mortgages delivered under the MPF Xtra product as announced in the PFI Advisory dated February 14, 2014 (MPF Program Approved Mortgage Insurers). Underwriting Guide Chapter 7.1 (Mortgage Insurance Ratios and Amounts) Added a notation that mortgage insurance coverage must be under the mortgage insurance company s master policy, and its associated endorsements and forms, that were effective October 1, 2014 or the most current master policy, endorsements, and forms issued thereafter. See the PFI Advisory dated September 26, 2014 for details. Guide Revisions: The following Guide changes can be found on the AllRegs website. Links are on fhlbmpf.com or may be accessed directly at http://www.allregs.com/ao//main.aspx. Origination Guide Chapter 5- Changed text is highlighted in AllRegs Chapter 7 - Changed text is highlighted in AllRegs Chapter 28 - Changed text is highlighted in AllRegs Chapter 31 - Changed text is highlighted in AllRegs Form OG3 Loan Presentment Request Form Underwriting Guide Chapter 2 - Changed text is highlighted in AllRegs Chapter 4 - Changed text is highlighted in AllRegs Chapter 7 - Changed text is highlighted in AllRegs Chapter 8 - Changed text is highlighted in AllRegs Servicing Guide Chapter 103 - Changed text is highlighted in AllRegs Chapter 107 - Changed text is highlighted in AllRegs If you have any questions about these changes, please contact your MPF Bank Representative. PFI Notice 2014-3 Page - 5