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september 2005
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TABLE OF CONTENTS
*
Appraisal Fraud: Growing Concern
*
What to Expect from a State Mortgage Examination
*
Position Yourself to Achieve MBBA-NH Loan Originators Award
*
Truly Successful New England Mortgage Banking
Conference in Providence, Rhode Island
*
When You're Right, You're Right: So Write!
* Program Schedule
Preprinted with permission from Andrew Cadorette
Appraisal Fraud: Growing Concern
by Peter Stanhope, Certified General
Appraiser
The return to more
traditional sales and refinance levels in 2005 has placed
significant economic pressure on mortgage origination,
brokers, and providers of appraisal services. There is
overwhelming evidence that this environment has resulted in
some individual mortgage originators/brokers and appraisers
conducting themselves to their mutual economic benefit while
violating both professional ethical standards as well as
state and federal law.
When over 10% of licensed/certified
appraisers nationally petition Congress to take action
against this conduct, there is clearly a problem with
appraiser fraud. Single practitioners and small appraisal
firms who rely ostensibly on a few or a single lender have
been some of the most vocal.
The problem may not be easily corrected as
demonstrated in the comments of the Appraisal Institute’s
Vice President Don Kelly when he pointed out it is not an
easy problem to solve stating, “pressure on appraisers is
often subtle and not easy to prove.” That is further
reinforced by statements of Thomas Martin from the National
Mortgage Complaint Center, “You’re selling loans to the
secondary market. You really don’t care. The
higher the value, the better.” Beyond the obvious,
risk of financial loss for collateral being underwater
resulting from inflated appraisals, an even greater concern
is the bubble affect on the market. By example, if a
$300,000 property is inflated by 10% by an appraiser using
superior comparables or by ignoring physical deficiencies,
it becomes a comparable at $330,000. Assuming that sale is
then used as a comparable and is used to inflate another
property’s sale price by 10%, the value jumps to $363,000
creating one more overvalued comparable. Extending the math
for 1-2 more transactions in a so-called hot market and you
can support an annual appreciation rate of over 30%.
How serious is the problem? Kimberly Ortiz an
examiner writing in the Federal Reserve's Fourth District
Conditions Publication noted a “menacing trend in the
mortgage business, specifically appraisal fraud” and
referred to the 2004 suspicious activity report’s (SAR’s)
data.
The Appraisal Institute representative
testifying to Congress cited appraisers are under increased
pressure from lenders, mortgage bankers, and real estate
agents to “hit their number.” The Stanhope Group
provides between 2,000 and 3,000 appraisals annually.
We have begun to log each incident of unreasonable pressure.
Some examples of requests to modify appraisals have included
the following, “We use your firm a lot and want to continue
to and need some help with this value.” “I can’t
live with the description of the interior and make the deal.
Please redo the appraisal as a drive-by, and don’t mention
the condition of the interior.” Or worse, “I
need your appraiser to increase the value by $15,000, and
remove the statement about the leaking roof and rotting
deck.” As an extreme, a respected contemporary
recently shared with me that they had been threatened with
physical harm if they did not make the deal.
This was reported to and pursued by the proper authorities.
It should be noted that it is not unreasonable to request an
appraiser to reconsider their conclusions, and, in fact, the
Veterans Administration has just such a formal procedure for
appealing an appraiser’s conclusions.
Do we need federal or state intervention to
solve this problem? It seems likely, based on New York
Attorney General Switzer's political success in pursuing
fraud in the financial markets that this issue could attract
the attention of politicians. The alternative is a strong
proactive response by the mortgage banking and appraisal
professions.
Some suggestions that are already in place
with a number of regional and national lenders include:
·
Exclude the mortgage originator, real estate
agent, or borrower from the appraiser selection
process;
·
Rotate the selection of appraisers off of a
pre-approved list with an adequate number of
appraisers, so no appraiser is always paired with the same
originator or real estate agent;
·
Restrict any communication between the
appraiser and the originator, or outsource the appraisal
selection by the use of an appraisal management company that
has staff appraisers reviewing
appraisals.
From the regulatory side of the equation,
encouraging aggressive appraisal audit of both lenders and
appraisers by the various regulatory authorities would
identify those symbiotic relationships that breed fraud.
Additionally, the office of Federal Housing Enterprise
Oversight can demand Fannie and Freddie ensure the risk
management that Federal Chairman Alan Greenspan has called
for by ensuring business volume is balanced with higher
appraisal standards to ensure the quality of underlying
mortgage collateral.
Simple adherence to the March 22, 2005,
Federal Regulators Interagency Statement on Independent
Appraisal and Evaluation Function available online would go
a long way to solving the majority of the appraisal fraud.
When a mortgage transaction closes, the
lender, originator, real estate agent, buyer/borrower, and
seller all achieve financial rewards. The appraiser cannot
ignore that economic reality. Absent reasonable
protection from these transactional pressures, the problem
will not cure itself. The financial health of the
mortgage banking industry will be better served by an
independent and impartial appraisal professional.
Peter Stanhope is a Certified General
Appraiser and Chief Appraiser with The Stanhope Group, a
multi office firm offering residential, commercial, and
litigation appraisal services throughout northern New
England.
 
What to Expect from a
State Mortgage Examination
 On Wednesday, September
14, 2005, at the Radisson Hotel in Manchester, Kim Griffin,
Supervisory Examiner, State of New Hampshire Banking
Department, presented a seminar on the mortgage examination
process. The following is a recap of that seminar.
“The New Hampshire
Banking Department (the Department) is an executive agency
of the New Hampshire state government charged with
protecting the public interest by securing the safety and
soundness of banks and credit unions, and by licensing
non-bank consumer loan lenders and loan brokers.”
There are two divisions
in the Department:
1)
Banking Division: banks and
credit unions;
2)
Consumer Credit Administrative
Division: Non-bank consumer loan lenders and loan brokers;
The Department performs
three primary types of examinations of mortgage brokers and
lenders:
1)
Periodic examinations ensure
compliance with state and federal rules and regulations and
take place every 18 months;
2)
Special examinations are
generally conducted as the result of serious issues found in
a regular examination. An examination takes place, again, to
ensure licensed entity has implemented proposed changes for
compliance with state and federal rules and regulations;
3)
Regular examinations are the
most frequent type of examination and are required to
examine the condition and management of financial
institutions at least every 18 months.
 Four to five weeks before
examinations, a certified letter is mailed from the
Department, announcing the date of the examination, where
the examination will be taking place, and requests a list of
the company’s loan files if the examination is conducted at
any location other than your principal location. The
Department has the ability to perform the examination any
where it sees fit. Examinations can take place at licensed
locations, registered agent’s office, or at the Department.
Previous regulations stated that the Department had to
perform regulations in specific places – for example,
examinations had to take place in the office of the New
Hampshire agent, if the corporate headquarters of company is
located in another state and does not maintain a licensed
branch in New Hampshire.
Examinations can be
announced or unannounced. An unannounced examination is
that which the examiner(s) do not send notice in advance,
but arrive at the licensee’s principal location to conduct
the exam.
Who conducts the
examinations?
 In a typical examination,
there is one Examiner in Charge (EIC) and generally not more
than two Assisting Examiners. If the company has a high
loan volume, then more time is dedicated to the examination
with an increased number of examiners.
The following outlines
the duties and responsibilities of the EIC and the Assisting
Examiners:
1)
The Examiner in Charge (EIC)
a.
Performs the preliminary
interview
i. Determines the scope of the
examination
ii.
Determines document review
iii.
Determines work assignments for
assisting examiners
b.
Conducts exit interview
c.
Submits written report findings
2)
The Assisting Examiners
a.
Performs tasks assigned by the
EIC
b.
Assists the EIC in data
compilation
c.
Provides recommended findings
to the EIC
 How are examinations
conducted?
1)
A brief review of all documents
from origination to closing is performed. You must
demonstrate how you go from one step to the next.
Financial records are looked at, but compliance is the
priority.
2)
Your company must also
demonstrate financial integrity.
a.
Audited financial statements
b. Internally prepared statements
c. Tax returns (federal and state)
d. SEC filings (10K, 10Q, 20F)
3)
Operating and escrow accounts
(benchmarks to determine financial integrity)
4)
Legal actions and
administrative actions – A sampling of foreclosures will be
reviewed, and the examiner will look into any civil actions
against the company, if any.
5)
Corporate filings – It is
required that the company file annually with the NH
Secretary of State and the NH Department of Banking. If
you’re not filed with one or two of these entities, please
let the examiner know beforehand.
a.
Home state registration
b.
NH Secretary of State Foreign
Registration
c.
Trade name certificates
d.
Certificate in good standing
 What are the new
modules?
The Department has recently implemented modules.
After the initial letter is mailed, which gives you the name
of the EIC and the examination date, the EIC will perform an
oral interview to determine the focus of the examination and
what documents are required for the examination. The EIC
will select modules based on that pre-determined focus.
Every examination has to
comply with modules. It is your responsibility to maintain
and provide records to the examiner, and you are required to
provide the documents by a specified date. The examiners
try to limit the amount of time expended on the examination,
as the expense of the exam is billable to and payable by the
licensee. The expense of the exam is dictated by statutes,
in which a “per diem” is calculated. This is the cost of
one examiner per day. Currently the per diem is $421 for
each examiner.
At the end of the
examination, the EIC will conduct an oral exit interview
with regard to major findings of the exam. This is an ideal
time for you to “pick the examiners brain” to find out how
to resolve the problem(s).
At the end of the
examination, the EIC will give you a written report of the
examination. Kim Griffin said that he reads every written
report before it is mailed. An invoice for the examination
will be attached to the written report. You have 30 days by
statute to respond to the report in writing.
The examiner(s) will test
at the next examination to determine if you have implemented
the changes outlined in your response.
Why modules? To
determine compliance; conduct a targeted, limited in scope
examination; assists the examiner in focusing the exam; and
aids in keeping the exam expense to a minimum.
The following is a list
of the modules:
1)
State module (The Core Module)
-
For compliance
with RSA 397-A
-
Will be reviewed
every examination
-
Verification of
all information that has been filed with the
Commissioner
-
Verification that
required disclosures are provided to the consumer
-
Verifies proper
licensing
-
Recordkeeping
-
Advertising
-
Consumer
Complaints
2)
Federal modules
a.
The Real Estate Settlement
Procedures Act (RESPA) and Regulation X
i.
GFE
ii.
HUD
iii.
Affiliated Business Arrangement
Disclosure
iv.
Mortgage Servicing Disclosure
v.
Escrow Account Disclosures
vi.
The Special Information Booklet
b.
The Truth in Lending Act and
Regulation Z
i.
The Consumer Handbook on
Adjustable Rate
Mortgage (CHARM)
ii.
TIL Disclosure (APR, Finance
Charge, payment
amount, prepayment penalties)
iii.
Right of Rescission
iv.
High Cost Mortgage and required
disclosures
c.
The Equal Credit Opportunity
Act and Regulation B
i.
Application taken
ii.
Notice of right to receive
appraisal
d.
Fair Credit Reporting Act
i.
Credit reports requested and
used for specified
purposes under the Act (604)
e.
Gramm Leach Bliley Act
i.
Privacy Notices (at beginning
and annually)
ii.
Opt-out notices
iii.
Information Security Programs
iv.
Employee training
f.
Credit Practices Rule
i.
Notice to co-signers
g.
Fair Housing
i.
Notice to consumers at
application for variable rate loans (increase in rates)
h.
Flood Insurance
i.
Standard flood hazard
determination form
ii.
Notice to consumer if property
in a special flood area
iii.
Recordkeeping
iv.
Fee for making determination
must be reasonable
v.
The insurance is renewed and
maintained throughout life of loan
i.
Bank Secrecy Act
i.
Know your customer
There are some steps the
licensee can take to expedite the examination. 
1)
Make sure that the loan files
are complete from origination to closing, and maintain each
file with the same stacking order;
2)
If any of your procedures are
questionable to the examiner, make sure that you have a
company policy in place to ensure consistency and explain
why the procedure was executed in that way;
3)
Have all requested documents
available on the first day;
4)
Wait for the EIC to ask you
questions. Refrain from asking the EIC, every 15 minutes,
if he/she has any questions. You can check in with the EIC
twice a day;
5)
Prepare a list of questions
that you would like to ask the EIC at the exit interview.
After the examination you
will have an exit interview with the EIC. A smattering of
the most serious issues will be communicated to you and a
written report will be issued. The Department will request
a plan of action and timeline to correct any deficiencies
noted. You will have 30 days to respond to the written
report. If you agree that you will rectify the issues, then
the written report will be filed.
Position Yourself to
Achieve MBBA-NH Loan Originators Award
 The
Loan Originators Awards Program recognizes loan originators
who demonstrate excellence in mortgage banking through
his/her production, continuing education, involvement with MBBA-NH, and professional ethics. Production is based
on three categories: gold, platinum, and diamond. Volume
requirements may change to appropriately reflect the 2005
real estate market.
Other requirements include a senior production officer of
the loan originator's company verifies his/her production
volume figures; two letters of reference: one from the
loan originators supervisor and one from a Realtor; and a
total of four (4) points for attending at least two MBBA-NH
education programs and two MBBA-NH social events each
calendar year. Each education program counts as one
point and each social event counts as one point.
However, five points (two points for education and three
points for social) may be earned by attending the two-day,
February 2006 Joint Mortgage Conference, or two education
points may be earned by attending the second day of the
conference only. Points earned may be applied toward MBBA-NH's Certified
Mortgage Professional designation (CMP).
How will my loan originator award be recognized? Your
name will be publicized in prominent New Hampshire
newspapers in the spring and MBBA-NH's monthly newsletter,
listed in MBBA-NH's Web site, and recognized at a
special awards ceremony at MBBA-NH's annual dinner in May.
You will received a logo, suitable for use on your business
cards, representing either the gold, platinum, or diamond
award. The award year will be listed on the logo.
For more information on the Loan Originators Award program,
click here to download an information brochure and
click
here to download the application form.
Truly Successful
New England
Mortgage
Banking Conference Providence
The New England Banking Conference (NEMBC)
continues to offer more and more each year to its attendees.
The conference attracted over 3,000 mortgage industry
professionals from the six New England states. This
year's conference was brimming over with things to do from
social events, cultural activities, networking, to
educational. There was something for everyone . . .
Attendees strolled the exhibit hall (190 exhibitors) this
year to find out about new mortgage products, met a company
representative in person for the first time, or collected
those free give-a-ways that they could not live without.
Daytime hours at the conference also offered a wide range of
educational workshops: New England regulators panel,
compliance, P & S., technology, commercial lending, Fannie
and Freddie update, etc. Other programs were tailored
to the loan originator with well-known, national sales
presenters Tim Braheem and Sue Woodard.
Cultural activities for the attendees included a Johnson &
Wales Museum tour and a hands-on cooking demo at this famous
culinary college. If you wanted to learn more about
the making of wine, there was a trip to Westport Rivers
Vineyards, and, for those who enjoy seeing Providence from the
water, a ride aboard the Dutch sailing ship Brandaris was
available, too.
The luncheon speaker at the conference has always been a
highlight. This year Cokie Roberts, the well-known,
news commentator, addressed the luncheon attendees. It
was interesting to hear about Cokie's experiences as a
member of the media for many years.
The evening brought lots of food, drink, and dancing at
Providence's Cafe Nuovo and Bella Vista Restaurants, as well
as a Studio 54 themed nightclub and casino at the Biltmore
Hotel. If the gamers at the casino played with real
money, there would have been many winners leaving with wads
of cash in their pockets!
As you know this is quite a large conference. The
conference planning committee will begin talking about the
2006 NEMBC in January! We welcome your input on this
year's conference and, of course, for next year's
conference. How can we improve it? Please send
your comments to Meg at
info@mbba-nh.org. Thank you!
When You're
Right, You're Right: So Write!
MBBA-NH actively seeks articles related
to the mortgage industry to be published online and in the
newsletter.
A brief bio at the end of your article
will give you widespread exposure to the New England
mortgage industry, name recognition, and make your business
more renowned.
Articles to be considered must be
educational, timely, and well-written. Below is a
sample list of article topics:
Credit Scoring
Housing Bubble
Reverse Mortgages
Choosing a Lender
Lead Generation
Sales Strategies
Enhancing Productivity
Lending Tech
Second Mortgage Market
Ethics
Legislation
Tips for Brokers
Events that may Affect the Industry
Marketing Tips
Web site Design/Origination
Fraud
Net Branches
Home Equity Lines
Networking
Home Improvement Loans
New Hampshire Housing Bubble
Contact Meg at
info@mbba-nh.org,
if you're interested in submitting an article for
publication in the newsletter.
Your article may also be considered for
publication by local newspapers and national magazines!
Programs Schedule
September 8, 2005 - 14th Annual Golf
Extravaganza at the Stonebridge Country Club to benefit
first time home buyers.
Click here for more
information, to register, and pay by credit card.
October 19, 2005 - Condo's:
Warrantables and Non-Warrantables with Fannie Mae, Freddie
Mac, mortgage insurance company, and investor at the Center
of New Hampshire, Radisson Hotel, 700 Elm Street,
Manchester, New Hampshire, from 8:30 A.M. to 12:00 P.M.
Continental breakfast and registration is from 8:30 A. M. to
9:00 A.M. Cost to attend is $45/member and
$70/non-member.
Click here for more information, to register, and pay by
credit card.
November 9, 2005 - (Tentative) Reverse
Mortgages. Date, time, and place to be determined.
December 13, 2005 - Holiday Get-Together at
the Manchester Country Club.
February 8 and 9, 2006 - Annual Mortgage
Conference at the Center of New Hampshire/Radisson Hotel,
Manchester, New Hampshire. New location and format:
Marketplace from 3:00 P.M. to 7:00 P.M. on Wednesday,
February 8, 2006, and full day of educational sessions on
Thursday, February 9, 2006. Three prices, instead of
one, will be offered: One price to attend full
conference, an affordable price to attend the marketplace
only, and another price to attend the educational sessions
on Thursday. This new format will attract
mortgage bankers, mortgage brokers, and bankers. More
information will be available in November/December. |
