Secure Insight Mortgage Industry Blog

The ongoing discussions in Washington regarding a second COVID stimulus package, involving over $1 Trillion in funding and $2000 individual payments, which follows the previous $600 individual payments in December, masks a growing foreclosure crisis that should be a concern for mortgage lenders. COVID forced all “non-essential” business into hibernation and caused widespread unemployment, underemployment and financial instability on “Main Street.”

Perhaps forgotten in the hubbub surrounding the 2020 Presidential election and the US Capitol incident is the fact that since March 2020, millions of Americans have been suffering severe financial stress. Increased unemployment benefits, the PPP loan program, and the two completed government recovery payment initiatives have not fully and permanently solved the problems facing many Americans. Defaults are up, due to the ending of mortgage forbearance programs, rents are seriously delinquent, commercial properties remain vacant, small business continue to close, and there is only so much government funds and cash-out refinances to go around.

The mortgage industry has been insulated from these facts because lenders and their employees have been the beneficiaries of the largest mortgage boom in over 15 years. With historically low interest rates, loans are being refinanced over and over again to lower costs and raise cash giving the illusion that the rise in financial transactions (and the attendant healthy revenue received by lenders) is a sign of overall economic good health. In addition, ambitious programs planned by the incoming Biden Administration will clearly require an increase in both corporate and personal taxes to cover the cost, which means that much of the financial gains seen by the industry and their employees may be redistributed to cover Trillions in expected government expenditures.

I recently spoke to a neighbor who has been out of work and took advantage of the mortgage forbearance program. They stopped paying their mortgage. They received the increased unemployment benefits and government payments and spent the money to cover food, clothing, medicine and other necessary living expenses. They did not place mortgage payments in reserve. Two weeks ago they received a 30 day demand to cure the unpaid balance of over $30,000 in mortgage payments, which they are unable to do, thus triggering a foreclosure action. They are confused and upset because they clearly did not understand the nature of forbearance, which is not the same as forgiveness. The same personal consequences are occurring with respect to rent abatement and debt collection freezes. We have seen this scenario play out before.

After the boom period of 2002-2005 the mortgage industry saw tremendous financial gains evaporate in foreclosures, buy backs and make-whole demands surrounding massive defaults. There is no evidence yet that the extent of the current crisis will match the old one however lenders are urged to show caution and prudence in future business planning. The nightmarish consequences of foreclosure fraud, straw buyer fraud, short sale fraud, builder bailout fraud, and repurchases are an oft repeated cycle that may be on the horizon although it is not yet clear.

What is clear is that regulatory scrutiny will soon ramp up and there will be increased audit risk in the months ahead. Lenders need to ensure proper credit risk assessment is taking place, regulatory and compliance departments are engaged and effective, and that compliance policies and procedures are measured and followed. Now is not the time to manage future risk by simply “originating more loans.”

Lastly, third party vendor risk must be a top priority to protect lenders from loss of funds and deter the type of fraud that can result in unwanted agency and investor repurchase demands. It is not prudent business practice to wait until loss mitigation to discover that your attorney or title agent facilitated fraud while you were too busy to notice.

For the past four years lenders have experienced a relaxation of rules and regulations governing the banking industry, as well as a significant reduction in aggressive audits. That appears about to change.

If their public statements are any guide, the new President and Vice President will likely increase the pressure on lenders regarding consumer protection, fair lending, race-based credit bias, and anti-fraud measures. Under President Trump, the Consumer Financial Protection Bureau (CFPB) had departed from its previous aggressive stance on compliance issues and we saw a big drop off in public investigations and consent orders. This hands-off atmosphere obviously permitted banks to focus squarely on origination and not so much on risk and compliance issues. As with the boom period from 2002-2005, the approach to risk and fraud deterrence has often been “originate more loans.” Success has a way of taking our collective eyes off of the fraud ball and instead kicking the problems of defective loans, theft of funds, and fraud for housing and profit schemes down the road to be “addressed later.”

As Bloomberg reported back in August 2020, “[Kamala] Harris’s political rise was paved with a strong post-crisis stand against big mortgage lenders as California attorney general in talks that forced lenders including Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. to pay $18 billion to settle claims they improperly foreclosed on borrowers.” Should we expect a Vice President Harris to be less aggressive after January 2021?

On November 30th, Real Clear Markets reported that “If [President-elect] Biden replaces the director of Senator Warren’s brainchild the CFPB with her ideological kin, it will renew its war on the subprime-credit industry…. [resulting in] expanding government’s role in and regulation of banking.” Already there is talk about moving credit reporting to the CFPB, relaxing lending standards, and addressing race bias in credit decisions through new rule-making. A Biden Presidency will see more regulation, not less.

Then there is the economy. If it stays strong, perhaps the recent lending gravy-train will continue unabated. But if the economy falls, we could see a period of defects and defaults that rival the 2008-2010 period when investors rolled bad loans back downhill expecting immediate repurchases, state courts could not keep up with the bankruptcy and foreclosure volume, and Washington was dictating rules regarding forbearance, foreclosure alternatives and loan modifications. In that case all the profits made in the past few years may evaporate.

So what does the future hold for mortgage lenders with the pending change in administration? If history is our guide, enhanced regulations, increased oversight, more investigations, new consent orders and fines, and a lending environment that will force compliance tools and risk management back to the foreground and out of the shadows. Lenders take care of your compliance employees and risk management vendors, because if these predictions hold true you will need to rely on them once again!

Mortgage fraud rises when volume drops after a sustained period of financial growth as we are experiencing now.

It is safe to state that mortgage lenders may have never had it so good. Despite the tremendous negative effects of the COVID-19 pandemic on most of the economy, low interest rates and a shift in demographics from cities to urban and rural areas have fueled lending business at levels not seen since the heady days of 2002-2005.

The effect of this boom on business, besides an increase in revenue, profits and demands for more operations staff to handle the high volume, has caused some lenders to avoid adopting any new technology to enhance their quality control and risk management obligations lest it disrupt the gravy train. To a degree this is certainly understandable because while everyone is drinking from a fire hose it is very difficult to pause and take a breath let alone prepare staff to onboard a new process or procedure. In addition, there is a tendency which I noticed during the last boom period, to treat the risk of QC and fraud losses as a “cost of doing business” when a few bad loan losses can be easily made up with more volume.

The problem occurs when business starts to slow down, which it will, and those who are profiting greatly from this period of high volume realize that they may not be able to sustain their current lifestyle. As we saw in 2005-2009, the drying up of pipelines can often lead to creative ways to keep the business going. This includes creative ways to make loans work (fraud for housing) and criminal efforts to take advantage of relaxed origination and lending practices (fraud for profit).

Some of the scams we saw in the past included straw buyers, fake title companies, fake settlement firms, undisclosed parties at the closing table, valuation fraud, renovation fraud, and if the economy turns sour, short sale and foreclosure fraud.

Having been around the mortgage industry for more than twenty years I have recognized that our business is cyclical. There are periods of lows followed by periods of highs. Right now we are at the highest peak, however inevitably that will change. Because fraud is always just around the corner, lenders are encouraged to avoid the inclination to put off adopting new or improved quality control and fraud prevention tools internally so that they are better prepared when the time comes, and it will, when the fraud boom follows the mortgage boom.

What are you doing now, today, to prepare for an increase of fraud tomorrow?

The Company allegedly violated the following sections of the state regulation:

• 500.02 (Cybersecurity Program) by failing to conduct risk assessments for nonpublic information stored and transmitted within its system, including in its database and web application;
• 500.03 (Cybersecurity Policy) by not (i) maintaining and implementing data governance and classification policies and (ii) maintaining an “appropriate, risk-based policy governing access controls” for its application;
• 500.07 (Access Privileges) by not implementing reasonable access controls and instead allowing unauthorized remote users to gain access to nonpublic information in the Company’s database;
• 500.09 (Risk Assessment) by not conducting a risk assessment sufficient to inform the Company’s cybersecurity program, particularly given the Company’s alleged “failure to identify where [nonpublic information] was stored and transmitted through its Information Systems” and the availability and effectiveness of its controls;
• 500.14(b) (Training and Monitoring) by not providing adequate data security training to the Company’s personnel responsible for identifying and uploading sensitive documents to the Company’s database and using its web application; and
• 500.15 (Encryption of Nonpublic Information) by failing to implement controls, including encryption, and adopt compensating controls required to be approved by the Company’s CISO to protect nonpublic information.

A hearing is scheduled to commence on the matter on October 26, 2020 and hear evidence whether the title company violated the regulation.  If violations are found, the company could face severe civil monetary penalties. Since it is alleged than more than 350,000 records may have been compromised, and the Regulation allows the NYDFS to assess a penalty of up to $1,000 per violation, a fine could be very significant.

For more information see this article in Compliance Week, which does name FATCO as the target.  https://www.complianceweek.com/cyber-security/first-american-first-charged-with-nydfs-cyber-regulation-abuses/29221.article

Just when you thought it was safe to swim in the mortgage industry regulatory waters, and it seemed that the CFPB’s teeth had been ground down by legal challenges and political winds, news emerges that the risk of aggressive oversight remains a concern for many.

In May the Consumer Financial Protection Bureau (CFPB) issued an investigative demand letter to Rocket Homes, the real estate brokerage affiliate of Quicken Loans (of “Rocket Mortgage” fame).  Industry news outlets are reporting the focus of this investigation will be on potential RESPA violations seemingly connected to the cozy relationship between the realtor side and the mortgage lending side of the Quicken business model.

While there is no reason to believe that Quicken and its affiliates violated any laws or regulations, the fact that they have fallen under scrutiny shows that the CFPB is not averse to scrutinizing affiliate relationships nor are they concerned about taking on large lenders with high profiles.  Recall that Quicken recently took steps to launch an IPO and become a publicly traded company.  Whether that placed the company in the cross hairs of the regulatory giant or  not is not known, however the CFPB has been historically shown to pay close attention to very large lenders and the business operations that made them a national success.

The key takeaway to this news is that the CFPB is alive and well and willing to send you an investigative demand letter.  Regulatory and compliance issues especially related to affiliates and vendor management remain important and deserve your continued focus, no matter the size and footprint of your lending business. In addition, if you are allowing an affiliate to act as a vendor, you have an even greater obligation to establish an independent oversight and vendor management process to assure regulators that these relationships are as secure and proper from a consumer viewpoint as your relationship with non-affiliates.

For more information check out The American Banker and Housing Wire for full coverage.

Today the United States Supreme Court, in a 5-4 decision, declared that the structure of the directorship of the Consumer Financial Protection Bureau (CFPB) is unconstitutional.  The decision addressed the “only for cause” removal provision created by Congress which had effectively made its single-directorship above checks and balances because it prevented the Executive Branch, namely the President, the ability to remove the CFPB director at will.

The majority decided that there was an unconstitutional violation of separation of powers in a structure that concentrated enormous power in a single person who could not be removed except in extreme circumstances.  Although the issue has been brewing for years, having been raised early on during civil litigation proceedings by lenders who were subject to significant fines and penalties following a  CFPB audit or investigation, the matter became more significant when Presidential Donald Trump attempted to replace the agency head with his own pick, Nick Mulvaney, without alleging the “for cause” basis but as a matter of right.

Lenders seeing today’s headline might be rejoicing in a false interpretation of the ruling should they believe this means the death of the agency itself.  It does not. The Supreme Court separated the issue of the directorship removal clause from the balance of the provisions creating the agency, leaving it fully functional and intact.

Accordingly no lender should expect that any ruling or directive previously issued by the CFPB governing their operations will now suddenly become moot.  Compliance officers can rest easy, as they are still a valuable asset to lenders in interpreting and managing CFPB regulatory and compliance expectations and rules governing mortgage and banking operations.

This blog normally focuses on mortgage industry issues relating to fraud.  Today, however, I wanted to talk about an issue that is more personal and near to my heart, knowing some close friends who are dealing with severe anxiety and depression during these times.  They call their difficult days “COVID down days.”

COVID “down” day is a day you wake up and cannot seem to overcome the anxiety caused by another day in “lock-down.” It is the fear of even traveling outside your home with with mask and gloves because who knows if that will prevent the disease from infecting you or your loved ones. It’s the sadness of not being able to see friends, family, acquaintances and missing significant events such as weddings, graduations, birthdays and anniversaries. It is the sinking feeling that this crisis may never end, and that it will simply go up and down like a roller coaster and you will never feel safe anymore. It is confusion over statements from “experts” who say one thing one day (masks good) and the opposite another day (masks bad). It is concern that life will never be “normal” again and that “new normal” is not something you can accept.

If you or anyone you know has any or all of these feelings you are not alone. Depression and anxiety are real emotions felt by many people today around the world who are living life like an animal locked in a cage in a zoo. People who feel these emotions are not “crazy” or “sick.” They are experiencing real pain that requires us to be patient, loving, reassuring and supportive.

If you are feeling this way do not hide your feelings or mask them with drugs or alcohol. Reach out to your partner, a family member or a friend you can trust and talk it out. Talking heals. Hugging heals. Listening heals. Kind words heal. 

If you are a person of faith (and even if you are not) consider taking out a Bible and reading some passages that offer comfort, such as John 14:1-7, 27; Isaiah 43:1-3; 2 Corinthians 4:8, 9 16-18; 1 Peter 5:7-11; Psalm 46; Psalm 28:7; and Psalm 91:1-8. Reading these words you will soon realize that you are blessed and loved by God. Don’t let your heart be troubled, for He is with you and will never forsake you. Trust Him and take your cares to Him and your prayers will be heard.

LOVE TO YOU ALL!

Even the best laid plans and the most stringent controls cannot prevent every fraud loss.  When a loss does occur, where do you turn to mitigate your damages? Insurance and fidelity bonds provide a measure of recovery when losses occur; CPLs are not insurance policies as we have covered before and are not included in this post for that reason.

Interestingly there is no national mandate, rule, law or other directive which requires all settlement agents to obtain and maintain insurance.  A few states have errors and omission insurance requirements and even more have very limited fidelity bond requirements, but that’s it.  Most attorneys in the United States have no obligation to purchase insurance! This means that a lender can never under any circumstances simply assume the company or individual handling its money and documents has an insurance or a bond to covers mistakes or bad acts.

In addition to who is covered, it is important to understand what is covered and for how long.  The bond and insurance worlds are unique unto themselves. Agents for insurers offer various policies and products which are filled with jargon and terminology foreign to most people.  Policy coverage clauses are offset by limitations and outright omissions which, if you are not trained to decipher, may mean when an event occurs you have no legal right to file a claim and receive a recovery.

All errors and omissions and malpractice policies are “claims-based” meaning that a policy must be in effect when a claim is made, and prior coverage later canceled or suspended offers no recourse.  Even more daunting for lenders who try to manage insurance verification is the typical practice of  financing premium payments.  This means that coverage can be bound on an initial deposit, but later withdrawn and canceled when a payment is missed.  Unless a lender is tracking payments, there is no way to know if coverage remains in effect.

Recently insurers have been making significant and material adjustments to insurance policies, carving out previously covered areas or clarifying certain exclusions to omit liability for losses from wire fraud, email hacking and cyber fraud, and even any lender representation that would involve following closing instructions as a fiduciary of the bank and not just a representative of the borrower.  For example, we have seen insurers in Massachusetts carving out from coverage wire fraud incidents in policies covering real estate attorneys.

Another phenomenon that has come to light, because insurers are charging higher premiums for anyone acting as a settlement agent for a lender, are attorneys notifying banks that in any real estate transaction they will not act for the bank, will not follow closing instructions and will restrict all of their responsibilities to the borrower aspects of the closing.  We were obliged to notify a lender just recently that an attorney to whom they were going to wire funds, send the closing package, and bind to written closing instructions, was refusing any duty to act on their behalf at the closing table.

Because the CPL offers little to no relief when a lender is victimized by fraud at a closing, it is imperative that lenders use a tool or develop a process internally that obtains, evaluates, and manages insurance and bond coverage for all settlement agents to whom it delivers a funding wire and closing package.

At Secure Insight we verify insurance and bonds at the source of issuance, track payments and cancellations, and evaluate coverage to uncover unusual carve-outs, limitations and omissions from coverage.  This is only one of the reasons that for nearly 10 years we have successfully managed millions of loan closings without a lender loss.

The current COVID-19 health crisis presents the mortgage industry with a unique dilemma when it comes to risk management and crisis leadership.  For those of us who lived through the 2008 financial meltdown, this feels very different.  In fact it is a lot different.

In 2008 banks and mortgage lenders faced somewhat unprecedented losses when a combination of a bear market on Wall Street, a sour economy, rising interest rates, and increased unemployment caused massive foreclosures.  Lenders were overwhelmed with loss mitigation efforts.  It felt like the industry had burst a success bubble that had been growing and growing for 5-7 years on the backs of a mini economic boom and great rates.  Relaxed lending standards and high risk loan products further fueled the growth until it all collapsed.  The result, which triggered the Wall Street Reform/Dodd-Frank Act, was very different than today.

The problems of the 2008 collapse were somewhat centralized.  While the consequences did effect other nations and other industries it was not universal. Banks needed propping up and some sectors of the population faced financial stress however not everyone felt the pain.

COVID-19 is a threat to the entire world.  As of today 184 nations have reported the health threat in their populations.  The threat is the same to everyone, every industry has been impacted, every community has faced the threat, and the risks have been medical, financial, supply chain, economic, and psychological.  The risk has been a moving target, so that the normal approach to risk management (identify the risk, assess the consequences to your business, and manage a response to mitigate losses) has been difficult if not impossible.

Whereas in 2008 the issues on Main Street boiled down to “will I save my house?”, and for lenders,  “will I regain my profits?,” today they are more dramatic.  Today the worries for many people are “will I survive?, “when can I leave my house and get back to a normal life?”, and “do I have enough food to feed my family?”

Still, a crisis demands crisis leadership.  It requires us to apply a systematic approach, to adapt and overcome through innovation and creativity, and to embrace forward thinking.  The current situation has inspired a multiplicity of effective responses:

• Businesses had to establish key priorities to allow them to continue to conduct business as an essential industry.  Many lenders addressed this by (a) creating remote work environments, keeping folks employed, keeping business going and adapting to new workflow and operational processes based on all available technology platforms.
• Companies have been forced to embrace innovation and create new ways of doing things.  Digital mortgages have been around for years but never received the love they are getting right now.  The rush to embrace eMortgages and eClosings has been overwhelming to many of the providers of these services.  Overnight they have become important and they are responding.  Likewise remote notarization, a concept that gained little traction nationwide before COVID-19 is now taking off, with several states simply issuing executive orders allowing something they never permitted before this crisis.  The rush to train and prepare closing agents for a digital mortgage world is ongoing and important.
• Government intervention was needed which included the executive orders previously mentioned, Federal Reserve intervention, small business assistance, and tax and income assistance are all positive responses to the economic gut punch this “silent enemy” has driven into the American economy.
• Business leaders have had to adjust to a “new normal.” High stress, high stakes executive leadership  where the focus is to overcome as well as one possibly can making the best decisions in a changing environment without precedent and without a clear picture of an end game. Will this last a few more weeks?  Will it take a few more months?  Could it last a year?  The healthcare and economy experts all differ in their responses, which does not give business owners much comfort.

Some of you may be familiar with the “Stockdale Paradox,” named after Vietnam prisoner of war and Medal of Honor recipient Admiral James Stockdale (also Ross Perot’s VP running mate for trivia buffs).  During his imprisonment Admiral Stockdale won praise from fellow prisoners for establishing and maintaining a crisis communications process to maintain morale and discipline under very trying circumstances.

The Stockdale Paradox looks at crisis communications as a fine balance between honesty and hopefulness.  It employs a combination of clear and open honesty of circumstances, expressing realities and avoiding false hope, while on the other hand projecting a basis for rational hope and positive thinking (“we will all get through this”).

Business leaders in the mortgage industry can easily adopt the Stockdale Paradox approach by establishing regular communication channels.  Many lenders open each work day with a teleconference with key managers to review the previous day’s work, to discuss issues and problems and to solicit and discuss ideas to move their companies forward.  These events help to keep employees calm, focused, informed, organized and supportive.  The key managers are encouraged to take the overall message back to their departmental employees thereby maintaining a line of communication from the very top throughout the entire company.

Beyond good communication what else can leaders in crisis do to help their businesses and their employees?  Continue to lead.  Make decisions through keen and careful observation of the current circumstances.  Be innovative.  Be flexible.  Remain confident while also being on guard for unexpected consequences and unplanned events.  No one knows what the near and far term holds for us all, yet we must keep moving forward.

Lastly, do not neglect your employees as they are fearful and rightly so.  Encourage them with emails.  Plan morale building activities (send in photos outside your window, guess the baby picture are just two I have heard about among your peers) and send them a care package to let them know that even if they are remote and out of sight they are not out of your mind as a leader.  We sent each employee a bag of chocolate covered pretzels last week.   This was a small gesture to be sure, but one which was appreciated by every employee because the gift, with a short note of thanks and encouragement, was a pleasant interruption from the daily routine at home.

Lastly, remember your core business values.  These concepts that have guided your organization for years do not stop when employees work from home, nor should they be abandoned in this time of crisis.  I might argue that the opposite is true: core values are most important when times are stressful, difficult, and uncertain.  These values are a foundation for resilience and continued success.

Be well.  Be strong.  Please remember we are all in this together!

Recently we have heard about states rushing, by way of executive order or rule change (NY, NH, CT) and with hastily passed legislation (NJ), to permit remote online notarization in their states.  The motives are clear and the intentions are good: the ability to close loans while limiting human interaction is critical at this time of the COVID-19 health crisis.

However in the rush to do something to help the mortgage industry continue to thrive and close loans, there is some fallout occurring.

First, because the rules and laws are state-determined there is no uniform consent nor uniform approach to how eNotarization, eClosings and RON may occur in each state. Thus lenders who lend in multiple states need to research whether these transactions are permitted where they are lending, whether there are  qualified settlement professionals in the state to conduct them, and whether they have the right technology platform to manage the process.  With the already disrupted work flow, this is straining compliance departments who are struggling to get up to speed on the legal and operational differences between eNotarization and RON for example, who has the best tool to deliver the documents, and just who is going to manage, supervise and verify that these processes are taking place properly.

Second, because eNotarization and RON impact the legality of important recorded instruments and documents, beyond whether a state will permit the process, title underwriters and their agencies must agree to insure title where electronic and remote notarization occurs. The State of Connecticut’s new rule changes, for example, which  essentially “deputizes” “every attorney in that state as a RON seems to have caught  many people by surprise, not the least of which are the real estate attorneys themselves who may not even know what RON even means. Furthermore, it is unclear whether title insurers have immediately flipped the switch to allow these professionals to conduct RON on documents they must record and insure in CT.

Third, a key part of the mortgage manufacturing process is the end game of selling loans to the secondary market.  This means in states with fast changing rules, investors must be up to speed and also be willing to accept a loan package where deeds, mortgages and notes are executed with non-traditional notarization when they have never seen those appearing in loan packages up to now.

Eventually, as with most things that see drastic change, the people and the processes will catch up and the industry as well as the consumers they serve will be better for it.  One thing is certain, when this crisis is over the way lenders close loans will likely change forever.

Here at Secure Insight we remain committed to doing our part to help lenders adapt to these changes.  Our staff continues to verify which of the professionals in our nationwide database are eNotries, RON trained and have eClosing experience and that information is being added to our agent profiles.  Beginning next week our clients will see these new designations to help them search and locate trained, licensed and qualified people who can assist them as they transition to electronic transactions.

If you are not a client and wish to gain access to our database please reach out.