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» VISIT US ONLINE @ DSNEWS.COM REO, SHORT SALE CFPB OFFERS CLARIFICATION ON QM FRAUD CONTINUE AND SERVICING RULES TO EVOLVE Most mortgage fraud takes place in the short sale and REO space, according to Rob Hagberg, associate director of fraud investigations at Freddie Mac. "This area is ripe with fraud," he said during a webinar hosted by CoreLogic last month. While servicers and others in the industry have adapted to some fraud schemes and put measures in place to detect and prevent fraud, schemes continue to evolve as fraudsters find new ways to manipulate sales. For example, many fraudulent REO and short sale transactions involved the use of a straw buyer who temporarily purchased a home at an undervalued price and then sold it to a third party at a higher price. These transactions would be immediately suspicious to anyone reviewing property records, which would show a home was sold for one price one day and then almost immediately resold at a higher price. Savvy perpetrators are now eliminating the second buyer. Property records will not reveal a middle buyer, but they will reflect a higher price than the servicer agreed to. Another growing trend in short sale fraud is what Hagberg calls the "short sale and stay." This occurs when an underwater homeowner wishes to keep his or her home but wants to lower his or her loan amount. The homeowner will recruit someone— often a friend or family member—to purchase the home through a short sale, and the original owner will remain in the home. Sometimes, a wife will use her maiden name to purchase the home from her husband, and the couple will stay in their home. Both short sale and REO fraud often require fraudsters to convince servicers a home is worth less than it actually is. To accomplish this, fraudsters have attempted to bribe REO brokers, manipulate MLS data to lower the prices of comparable properties, and have engaged in reverse staging to make a property appear in worse condition than it is. In cases of reverse staging, Hagberg has seen cabinet doors removed from kitchen cabinets, garbage left lying around the home, and sometimes old fish hidden behind refrigerators to create pungent scents. Sometimes broker price opinions (BPOs) include false property stigmas such as high crime rates, and in a few instances Hagberg has seen properties undervalued by as much as $40,000 based on inaccurate statements that the home had been a meth lab and would need to be entirely gutted. To assist the industry in the implementation of new mortgage guidelines, the Consumer Financial Protection Bureau (CFPB) recently issued proposed amendments to address questions surrounding its Qualified Mortgage (QM) definition and new servicing standards. "These proposals are part of our commitment to facilitate implementation of the rules issued in January under the Dodd-Frank Act. We at the bureau believe that we have a responsibility not just to write a rule, but to see that it is implemented effectively," CFPB said in a statement to the press. The bureau's proposal addresses five topics: debt-to-income (DTI) ratio under the Ability to Repay rule; contract variances related to purchase or guarantee agreements with government entities; purchase, guarantee, or insurability status under the temporary QM provision; the possible preemption of mortgage servicing regulation by states; and the small servicer exemption. On the Ability to Repay front, CFPB amended the language surrounding requirements that a consumer have "stable income" and solid "probability of future employment" after stakeholders complained that it is too difficult to forecast a borrower's career track. Industry feedback also called into question creditors' ability to evaluate a potential borrower's education, training, and job qualifications. For these reasons, the bureau proposed removing those particular requirements and instead requiring only that creditors confirm current, ongoing employment. Turning to the temporary QM provision— which will qualify loans based on eligibility for purchase or guarantee by the GSEs or for guarantee or insurance by a federal agency— CFPB changed the language to acknowledge the fact that each organization imposes a variety of requirements governing the underwriting, sale, guarantee, or insurance of loans. Specifically, the bureau clarified that because existing guidelines require assessment of a borrower's ability to repay at the time of consummation, GSE or agency requirements related to postconsummation activities should not be relevant to QM status. Also added was an amendment confirming loans meeting eligibility requirements provided in a separate agreement between a creditor and a GSE/federal agency can fall under the QM protections, not just those that follow general GSE or agency guidelines. Furthermore, CFPB proposed changes to make clear which mortgage loans to consider in determining whether a servicer qualifies as "small" (and thus whether or not it is exempt from certain requirements). According to the bureau, the proposed text "clarifies that, in general, a servicer determines whether it is a small servicer by considering the closed-end consumer credit transactions secured by a dwelling that it services." However, reverse mortgages, transactions secured by consumers' interests in timeshares, and loans serviced on a charitable basis will not be included. Finally, based on continued questions posed to the agency, CFPB proposed commentary to "state further that nothing in RESPA [the Real Estate Settlement Procedures Act] or Regulation X … should be construed to preempt the entire field of regulation of the covered practices" regarding mortgage servicers. While the preamble to January's servicing rules addressed that concern, CFPB included additional language to emphasize this point. CFPB plans to issue additional proposed clarifications about the new mortgage rules— including its new national servicing standards and the 2013 Loan Originator Final Rule—this month. 33

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