Self-regulation from FNMA

FNMA is shouldering the hefty burden of setting standards that define predatory lending - so it can refuse to buy loans that reflect predatory practices. According to Frank Raines, FNMA's Chairman and CEO, FNMA has "an obligation to define the loans we will not buy, and practices we will not support." He named steering, equity stripping, excessive fees, and prepayment penalties as practices that take away affordable mortgage opportunities from borrowers who need it the most.

Raines identified three basic mortgage consumer rights: the right to access to suitable mortgage credit, the right to the lowest cost mortgage for which the consumer qualifies, and the right to know the true cost of a mortgage.

Among the loans that FNMA will avoid are loans where the borrower was steered away from better alternatives or where it is clear the borrower cannot afford to pay. Raines described these as "loans that harm the borrower." Any such loan will be off-limits for FNMA.

The Practices
In its letter to lenders #LL03-00, FNMA identifies specific standards and guidelines for lenders.

First, FNMA will look for loans that may involve steering applicants to more expensive products. FNMA expects lenders to be alert to steering and to have practices and procedures to offer applicants the full range of products for which they qualify. More than ever, this means that the loan officer should fit the customer to the best product for the customer and not simply seek top dollar. Raines recommends that lenders use FNMA's Desktop Underwriter to ensure that the lender is properly evaluating the applicant and finding the best loan option for the customer.

Policies on steering practices should also include referring better qualified customers up from sub-prime lending entities.
Second, FNMA will look for loans that contain excessive fees. FNMA advises that lenders should have guidelines and policies that address the fees that originators and brokers can charge. FNMA will not purchase loans if the points and fees charged to the borrower exceed 5% except where, because of the small size of a loan, the loan would be unprofitable. In addition, FNMA will not purchase "high cost" loans that meet the definition in Regulation Z (?226.32.)
Third, prepaid single premium credit life insurance policies will prevent a FNMA purchase. If the loan contains such a policy sold in connection with the loan origination, FNMA considers it off-limits. FNMA will purchase loans that have monthly or annual credit life payments.
Fourth, FNMA will only consider allowing prepayment penalties under the terms of a negotiated contract. In addition the lender must: provide some benefit to the borrower for accepting such a penalty agreement. This could be in the form of a reduced rate. However, FNMA expects the lender to also offer the customer a mortgage product that does not contain the prepayment penalty. Customer choice is essential. The lender should also disclose the terms clearly to the customer.
Fifth, FNMA supports full file credit reporting. The lender or servicer should report the borrower's entire payment history to the credit bureaus.
Sixth, FNMA recommends servicing practices that help protect the borrower from default. Specifically, the escrow deposit accounts should not be waived for borrowers with blemished credit records to protect them from additional risk of default.

The Results
These issues are not new. What is new is that looking for evidence of these practices will become part of FNMA's purchase decision. This policy will have a direct effect on what loans a bank will be able to sell. Indirectly, it will affect the bank's lending practices and the bank's portfolio. FNMA isn't the only entity looking at these practices. Several bills aimed at outlawing predatory lending have been introduced in Congress. The bills would amend TIL, ECOA, HMDA, and other laws to prohibit the practices identified in the FNMA letter, and more.

ACTION STEPS

Compare these six fairness criteria with your institution's lending practices. Work to revise or eliminate practices that fail to meet FNMA's standards.
Schedule a meeting with your lending staff to discuss these issues. This is actually training, so document the meeting in your training files.
If your institution is affiliated with a sub-prime lender, conduct an audit to determine whether either entity may be steering customers to higher cost products or failing to refer them to prime products.
Take these issues into account when you set the schedule for fair lending assessment. Be sure you understand how these practices may occur in your bank - and what procedures or controls you have to prevent them.