Why Haven’t Loan Officers Been Told These Facts?
Spotlight on Mortgage Brokers
HUD Clarifies, Lenders are Culpable for Tier 1 (Most Severe) Violations for Third Party Origination Fraud
Note that HUD reminds Mortgagees that they are responsible for fraud and any misrepresentations of sponsees. Fraud and material misrepresentations apply to loan files in addition to program eligibility.
From HUD
“Based on this update, FHA will seek life-of-loan indemnification from Mortgagees when there is evidence of fraud or material misrepresentation involving a sponsored TPO [Third Party Originators], regardless of whether FHA identifies specific red flags that should have been questioned at underwriting.” Mortgagees are responsible for the actions of their sponsored TPOs under 24 CFR § 202.8(a)(3) and Handbook 4000.1 Section I.A.5.a.v.
24 CFR 202.8 (a)(3) Sponsored third-party originators.
Each sponsor shall be responsible to the Secretary for the actions of its sponsored third-party originators or mortgagees in originating loans or mortgages, unless applicable law or regulation requires specific knowledge on the part of the party to be held responsible. If specific knowledge is required, the Secretary will presume that a sponsor has knowledge of the actions of its sponsored third-party originators or mortgagees in originating loans or mortgages and the sponsor is responsible for those actions unless it can rebut the presumption with affirmative evidence.
Sponsored third-party originator. A sponsored third-party originator is authorized to originate Title I direct loans or Title II mortgage loans for sale or transfer to a sponsor or sponsors, as defined in this section, that holds a valid Title I Contract of Insurance or Title II Origination Approval Agreement and is not under suspension, subject to the sponsor determining that the third-party originator has met the eligibility criteria of paragraph (b) of this section.
24 CFR 202.8 (b) Eligibility to originate loans to be insured by FHA.
A sponsored third-party originator may originate loans to be insured by FHA, provided that:
(1) The sponsored third-party originator is working with and through an FHA-approved lender or mortgagee; and
(2) The sponsored third-party originator or an officer, partner, director, principal, manager, supervisor, loan processor, or loan originator of the sponsored third-party originator has not been subject to the sanctions or administrative actions listed in § 202.5(j), as determined and verified by the FHA-approved lender or mortgagee.
24 CFR 202.5(j) Ineligibility (Applies to Sponsor and Sponsee)
For a lender or mortgagee to be eligible for FHA approval, neither the lender or mortgagee, nor any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the lender or mortgagee shall:
(1) Be suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under 2 CFR part 2424 or 24 CFR part 25, or under similar procedures of any other federal agency.
(2) Be indicted for, or have been convicted of, an offense that reflects adversely upon the integrity, competency, or fitness to meet the responsibilities of the lender or mortgagee to participate in the Title I or Title II programs.
(3) Be subject to unresolved findings as a result of HUD or other governmental audit, investigation, or review.
(4) Be engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility.
(5) Be convicted of, or have pled guilty or nolo contendere to, a felony related to participation in the real estate or mortgage loan industry:
(i) During the 7-year period preceding the date of the application for licensing and registration; or
(ii) At any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust or money laundering;
(6) Be in violation of provisions of the Secure and Fair Enforcement (SAFE) Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of state law; or
(7) Be in violation of any other requirement established by the Secretary.
Mortgagee Letter 2024-14
To better align the Defect Taxonomy with these existing requirements and mitigate risk to the MMIF [Mutual Mortgage Insurance Fund], FHA is updating the Defect Taxonomy to include fraud or material misrepresentation involving a sponsored TPO as one of the “knew or should have known” conditions used by FHA to determine whether a Tier 1 severity classification is appropriate.
APPENDIX 8.0 – FHA DEFECT TAXONOMY (08/19/2024)
All Findings of fraud or materially misrepresented information are referred to the Office of the Inspector General (OIG), regardless of LRS [Loan Review System] severity tier or remedy provided by the lender.
A) Findings of fraud or materially misrepresented information can fall into one of two severity tiers:
• Tier 1: the lender knew or should have known.
• Tier 4: the lender did not know and could not have known.
B) FHA determines if the lender knew or should have known based on whether:
• An employee of the lender was involved and/or
• Red flags in the loan file should have been questioned by the underwriting lender.
New Requirement, Appendix 8.0
FHA Defect Taxonomy IV. Fraud or Misrepresentation
B) FHA determines if the Mortgagee knew or should have known based on whether:
- An employee of the Mortgagee or sponsored Third-Party Originator was involved.
- Red flags in the loan file should have been questioned by the underwriting Mortgagee.
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BEHIND THE SCENES – The CFPB Chalks Up Another Appellate Court Win
Regulation B ECOA Interpretation Protecting Prospective Applicants From Unlawful Discrimination Upheld on Appeal
Excerpts From The Appellate Court Ruling
“In July 2020, the CFPB brought this action against mortgage lender Townstone Financial, Inc. (“Townstone”) and its co-founder and chief executive officer, Barry Sturner. The CFPB alleged that Townstone and Mr. Sturner had discouraged black prospective applicants from applying for mortgage loans with Townstone, in violation of Regulation B, by making, over a period of years, several statements on their long-form commercial advertisement radio show.
Townstone and Mr. Sturner filed a motion to dismiss, and the district court granted the motion. The district court held that the ECOA does not authorize the imposition of liability for the discouragement of prospective applicants.
For the reasons set forth in the following opinion, we take a different view. When the text of the ECOA is read as a whole, it is clear that Congress authorized the imposition of liability for the discouragement of prospective applicants. Regulation B’s prohibition on discouraging prospective applicants is therefore consistent with the ECOA’s text and purpose. We accordingly reverse the decision of the district court and remand for proceedings consistent with this opinion.”
Background
Townstone is a non-depository mortgage lender or mortgage broker engaged exclusively in mortgage lending. Mr. Sturner is the cofounder, sole owner, and sole director of Townstone. He also serves as Townstone’s president and chief executive officer. Incorporated in Illinois and headquartered in Chicago, Townstone operates in four other states: Indiana, Michigan, Wisconsin, and Florida. Most of its mortgage lending and brokering activity occurs in the Chicago-Naperville-Elgin Metropolitan Statistical area (the “Chicago MSA”). The population of the Chicago MSA is approximately 9.46 million persons. About 1.6 million (17%) of those persons are black.
Beginning in 2014 or earlier, Townstone started broadcasting its own radio show and podcast, called “The Townstone Financial Show.” The show is co-hosted by Mr. Sturner and another senior loan officer in a format often referred to as a “long-form commercial advertisement.”
During the Townstone Financial Show, the hosts discuss mortgage-related issues, take questions from prospective applicants, and discuss their work at Townstone. When the hosts take a commercial break, the radio show plays shorter advertisements for Townstone. The Townstone Financial Show was originally broadcast on AM radio to the Chicago MSA. It has also been available in podcast form on Townstone’s website, streamed on Facebook Live, and advertised on various social media platforms.
According to the CFPB’s complaint, the hosts of the Townstone Financial Show regularly have made statements that would discourage black prospective applicants from applying for mortgage loans. The complaint identifies five such instances.
First, in January 2014, a caller from Markham, Illinois, a municipality in Cook County with a population that is predominantly black, asked the hosts how he and his wife could improve their credit scores. In response, one of the hosts responded: “[You’ve] got to keep those women in line over there in Markham. … [S]top spending freaking money [on your wife] and tell her to get a better job.” The host then discussed Markham generally and made statements such as “it’s crazy in Markham on weekends” and “[y]ou drive very fast through Markham, … and you don’t look at anybody or lock on anybody’s eyes in Markham.”
Second, again in January 2014, the hosts informed listeners that it was a “great time” to buy, sell, and rent, and recommended that those doing so should “take down the Confederate flag.”
Third, in June 2016, Mr. Sturner stated that the South Side of Chicago is “hoodlum weekend” between Friday and Monday, and that the police are “the only ones between that [area] turning into a real war zone and keeping it where it’s kind of at.”
Fourth, in January 2017, Mr. Sturner described a Jewel-Osco grocery store in downtown Chicago as “Jungle Jewel.” He described the store as “a scary place” because the store’s patrons “were people from all over the world.”
Fifth and finally, in November 2017, when discussing one host’s recent skydiving experience, another host stated that a person “walking through the South Side at 3AM [would] get the same rush” as they would skydiving.
In addition to these five instances, the CFPB’s complaint also provides statistical information supporting its view that Townstone’s business acts and practices led to less black prospective applicants applying for credit from Townstone than would have been the case in the absence of these
discriminatory practices. The CFPB alleges that, during the years 2014 through 2017, when compared to its peer institutions operating in the Chicago MSA, Townstone received fewer mortgage applications from black applicants, fewer mortgage applications for properties in neighborhoods with a high-black population (defined as neighborhoods in which 80% or more of residents are black), and fewer mortgage applications for properties in neighborhoods with a majority of black residents.
The Discussion
“An analysis of the text of the ECOA as a whole makes clear that the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit. Congress vested the Board (and later the Bureau) with the authority to issue regulations “necessary or proper to effectuate the purposes of this title” or “to prevent circumvention or evasion thereof.” 15 U.S.C. § 1691b(a). In endowing the Board with authority to prevent “circumvention or evasion,” Congress indicated that the ECOA must be construed broadly to effectuate its purpose of ending discrimination in credit applications. Moreover, other provisions of the ECOA strongly confirm that discouraging applications for credit constitutes a violation of the statute.
When Congress amended its civil liability provision so that the regulatory agencies responsible for enforcing the ECOA would be required to refer a case to the Attorney General whenever the agency believed a creditor “has engaged in a pattern or practice of discouraging … applications for credit in violation of section 1691(a) of this title,” 15 U.S.C. § 1691e(g), Congress thus confirmed that discouraging an application for credit is a violation of the ECOA.
The Conclusion
We hold that Regulation B’s prohibition on the discouragement of prospective applications is consistent with the plain text of the ECOA. We do not, however, express an opinion on the underlying merits of the CFPB’s claim. Such analysis is best left for the district court to address on remand.
For Additional Background, see the LOSJ articles here:
LOSJ V3 I36
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