Just recently, the US Attorney for Eastern District arrived at a settlement with a mortgage lender based in California to resolve allegations of fraudulently originating government-backed loans that FHA insured. This action by the lender resulted in the government incurring losses when borrowers defaulted on their loans. The case was brought to light by a whistleblower who claimed that the lender was negligent by knowingly failing to perform quality control as required by law.
This is not an isolated mortgage fraud and malpractice incident, as there have been several similar cases across various states. Unsurprisingly, state regulators are becoming more vigilant in combating these malpractices, including through policy changes to strengthen mortgage state audits.
This piece discusses mortgage fraud and highlights 5 things to know about mortgage state audits.
What Is Mortgage Fraud?
Mortgage fraud is the deliberate misrepresentation of facts to deceive one party in the mortgage loan. To combat mortgage fraud, states perform a mortgage audit which is an in-depth review of loan documents and disclosures aimed at uncovering overcharges and miscalculations by lenders on loan balances, interest, amortization or monthly payments.
For instance, in 2012, the Financial Crimes Enforcement Network (FinCEN) released a rule subjecting non-bank residential mortgage lenders and originators to AML regulations that were previously applicable to other financial institutions. Under this new rule, these additional lenders are required to establish AML programs and file suspicious activity reports. This rule was intended to close a regulatory gap and mitigate mortgage fraud risks previously being exploited in non-bank residential mortgage lenders.
Covered non-bank mortgage institutions now have AML programs that outline a process for independent mortgage audits. There are several types of mortgage state audits that you can be subjected to. These include:
- HUD audit
- FDIC audit
- FNMA/FHLMC
All these types of mortgage audits aim to stop fraud and improve compliance in the mortgage industry. When selected for any of these types of state mortgage audits, there are several emerging aspects that you must comply with. Let’s look at them in detail.
5 Things to Know About Mortgage Audit
As state regulators shuffle up their deck of cards, mortgage companies should keep abreast of all federal and state regulatory aspects they’re expected to comply with. Here are the 5 things to know about mortgage audits for your company.
1. TRID Disclosure Audits
When the Dodd-Frank Wall Street Reform and Consumer Protection Act were adopted, you may or may not have noticed that contained therein were the TILA-RESPA Integrated Disclosure audits. This audit requires companies that offer mortgage loans to combine the Real Estate Settlement Procedures Act with Truth in Lending Act information.
The TRID audit requirement is a huge challenge since it applies to most closed-end mortgages. It is necessary to comply with these requirements fully to avoid any red flags when a state mortgage audit is conducted on your company.
2. Home Ownership Protection Equity Act (HOPEA)
Today, mortgage companies are required to provide additional info to borrowers who purchase high-cost homes as provided by the Home Ownership Protection Equity Act passed by Congress in 2013. HOPEA covers a series of mortgages, including:
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- Refinance
- Closed-end home equity loans
- Purchase-money
- Open-end credit plans
In addition to this act, mortgage companies must also be aware of the rules each state has that apply to lending involving high-cost homes.
3. State Consumer Credit and Fee Restrictions
Are you aware that states often pass consumer credit laws to curb predatory mortgage lending? These rules contain fee restrictions and control licensing regulations. Mortgage companies operating in different jurisdictions can be easily caught off guard during state mortgage audits in complying with many of these state laws.
4. HMDA Filings and Data Analysis
According to the Home Mortgage Disclosure Act (HMDA), mortgage companies must report data showing whether or not they offer credit services within the geographical location of their office to their regulators. Government agencies also utilize this data to target investments in areas that need growth.
5. Flood Zone Determination
With rapid climate change bringing out disastrous floods across states in the US, one of the sectors on direct collision paths is the classic home loan. To discourage homeowners from living in flood-prone areas, the state regulator passed the Flood Insurance Reform Act with higher premiums for these property owners.
The act requires lenders to use flood insurance maps to identify the location of a property to be bought by borrowers and assert if it’s in flood-prone areas. If this is the case, the borrower must also purchase flood insurance to safeguard their investment.
That said, most of the current state mortgage audits are honing in on these 5 key points, and many companies are being caught on the wrong side of the law. If you can’t handle all that state regulators are throwing at you at the moment, Mortgage Defense offers consulting on all aspects of the mortgage industry with heavy emphasis on compliance implementation and review.