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Lessons from the Ameriquest Settlement

Randy Carey, BOL Guru

If you have any responsibility for mortgage lending at your organization and you haven't spent some time studying the $325 million legal settlement earlier this year involving ACC Capital Holdings Company, which is more commonly known as Ameriquest Mortgage, you should probably set aside a couple of hours. It would be in your best interest to not only review the settlement, but review your mortgage operations to ensure there is no common ground between your operation and the practices for which Ameriquest was criticized.

The settlement is unprecedented in the mortgage industry and consists of $295 million for payment of restitution to borrowers and an additional $30 million for attorney's fees for the States involved in the settlement. It should be noted that Ameriquest entered into this settlement without an admission of guilt.

If you are a subprime lender, a review of this settlement is imperative. Even if you do not engage in subprime lending, a review will serve as a reminder that solid disclosure and internal control processes may save your organization from potential legal actions.

Additionally, the injunctive requirements of the settlement should be viewed as a warning shot regarding areas that have potential for increased action by the various regulatory agencies. Some of the actions required of Ameriquest to conduct their future mortgage business set very bad precedents for both the mortgage and banking industries as a whole.

Disclosure of Loan Terms and the Loan Application Process
One of most disturbing requirements of the settlement includes the requirement for Ameriquest to make specific oral disclosures to loan applicants. The disclosures are to be made to loan applicants after obtaining pricing for the loan based on the applicants' credit information and prior to submitting the application for processing and in no event later than the ordering of an appraisal or loan documentation.

Sales personnel have to orally state the specific terms of the loan that is being discussed using specific language supplied in the settlement or substantially similar language. Disclosures required include items such as interest rates, terms, payment amounts, whether it is a fixed rate or not, whether there are any prepayment penalties, whether there are any discounts points involved, how the discount points impact the interest rate, and that loans may be available without discounts points but possibly at a higher interest rates and increased loan payments.

If the loan application is not submitted orally but is written or electronic, Ameriquest is required to provide the above disclosures in writing within 3 days of the receipt of the application.

The sudden fabrication of requirements to make specific oral disclosures regarding mortgage loan terms to applicants establishes a very bad precedent for the industry. The settlement is very serious concerning this requirement as it also calls for Ameriquest, if at any time they discover that a sales person has failed to make these disclosures, to take prompt corrective action, up to and including termination of the responsible personnel.

As a matter of principal, all mortgage lenders should be trained regarding the provision of clear and consistent communication to applicants of the specific terms and conditions of the loan for which they are submitting an application.

More Disclosures
An additional written disclosure burden was also created. This written disclosure, which is in addition to any other State or Federal disclosure requirements such as those required by Regulation Z or RESPA, must be delivered within three days after submitting the loan for processing, ordering an appraisal or loan documentation, whichever comes first. It is a one page disclosure that addresses the specific terms of the loan being proposed to the customer.

If one or more material changes in terms occurs subsequent to making the initial disclosure, a new disclosure is required to be mailed not less than six days before closing, or delivered by courier, facsimile transmission, e-mail or website access at least 3 days prior to closing. Additionally, a copy of the final disclosure form must be the first document presented and signed by the borrower at the loan closing.

This, too, sets a precedent for the industry, because under current Federal regulations, there are no provisions for any re-disclosure prior to loan closing and there are currently no signature requirements on early disclosure documents.

Misrepresentation
The settlement also prevents Ameriquest personnel from making any claims or representations to loan applicants that could be deemed not true. This includes making representations that terms are "better" or "lower" than, or "competitive" with other mortgage lenders. This also includes suggesting to the applicants that they will be able to refinance the loan at better terms at a later date, unless Ameriquest is contractually bound to do so in the future.

This is sure to increase the overall scrutiny of terms used and claims made by mortgage lenders during the application/sales process. Organizations should be diligent in their training efforts with sales personnel to ensure that they are not using exaggerated or false claims during their conversation with loan applicants.

Same Rates Available for Similar Applicants
Ameriquest utilized a loan pricing model based on the applicants' credit history. The settlement establishes a threshold of a 30% exception rate from the model pricing during any 90 day period as providing a rebuttable presumption of unfair pricing practices.

Under current fair lending standards, lenders are required to account for any difference in treatment by pointing out a specific difference between the applicants' qualifications, or some factor not captured in the application but that legitimately makes one applicant more or less attractive to the lender, or some non-prohibited factor related to the processing of their applications. The difference identified by the lender must be one that is important enough to justify the difference in treatment.

The establishment of a specific threshold for an exception rate, whether it represents a rebuttable presumption or not, is not really in step with standard fair lending philosophies. Mortgage lenders should be on guard for any attempt by the regulatory agencies to begin to use exception rates as a presumptive gauge for fair lending practices.

Good Faith Estimates
Ameriquest agreed not to disparage, discredit, or otherwise encourage potential borrowers to disregard the GFE. For example, the Ameriquest Parties agreed not to represent to a potential borrower that the GFE is incorrect, reflects the worst case scenario, is not the true Loan proposal, or reflects terms that are higher or lower than the actual terms the potential borrower will receive.

All organizations should periodically review their Good Faith Estimates to ensure that they represent true good faith estimates of final loan closing charges. A comparison of the early disclosures and final disclosures should be performed on a random sample of loan transactions to ensure that differences in disclosed loan costs are reasonable and explainable and do not represent a pattern or practice that could be construed as creating a deceptive practice.

Borrower Benefit Assessment/Repeat Refinancing
Ameriquest must also document how each subprime refinance loan benefits the customer and maintain such documentation in a readily retrievable format. They also may not solicit borrowers with existing subprime loans for refinancing within twenty-four (24) months of the loan closing date unless certain conditions are met.

Organizations should review their specific underwriting standards to ensure that qualified borrowers have both the capacity and willingness to pay the mortgage loan being offered.

Additionally, organizations engaged in both subprime and non-subprime lending should ensure they have adequate controls in place to ensure that loan personnel are not engaged in mortgage flipping or other equity-stripping schemes. Any marketing materials and approaches should be thoroughly reviewed to ensure that they do not encourage abusive lending practices.

These types of requirements have been a focal point of recent attempts by states to regulate predatory lending practices. With the national focus on this settlement, it would not be surprising if these issues bubble to the surface at the federal level.

Prepayment Penalty Provisions
Beyond having to refund some prepayment penalties already assessed to borrowers, Ameriquest may not make false, misleading or deceptive representations regarding a Prepayment Penalty provision.

Organizations would be well advised to ensure that whenever selling any loan product which involves a prepayment penalty, clear and accurate communications regarding the possible impacts of the prepayment penalty are made to the loan applicants.

Independent Loan Closers
Ameriquest must now use independent closers on all of their subprime loan closings. Additionally, the loan closer must send a written report to designated Ameriquest senior management if the Independent Loan Closer discovers unfair, deceptive, misleading or unlawful behavior by any Ameriquest Party employee in connection with any loan. It also provides for whistleblower protection for the independent closer.

Again, organizations should review their closing procedures and ensure that procedures are in place that allow the closing agent enough time to thoroughly explain and answer any questions presented by the borrowers during the closing process. The role of sales personnel in the closing process should be reviewed to ensure that they do not rush or obstruct a closer from thoroughly performing their duties.

Appraisals
There is much discussion in the settlement regarding the independence of the appraisal process. The majority of the independence requirements imposed on Ameriquest are no more onerous than the current Federal banking interagency requirements for independent appraisal and evaluation functions. There was a real focus on the quality of appraisals for refinance transactions.

However, there were a couple of interesting points. Ameriquest agreed to review the greater of 10 appraisals or 15% of the total number of appraisals submitted to the organization by each appraiser in the last 6 months. If an appraiser had submitted fewer than 10 appraisals, all appraisals were to be reviewed. Any past disciplinary action from a state licensing authority involving dishonestly or appraisal quality automatically disqualified them. Ameriquest established a centralized appraisal department to handle any claim by sales/lender personnel that an appraisal is deficient. The centralized area will perform a second review and either agree or disagree. If they agree, the central department will work with the appraiser to resolve or order a second appraisal. If an appraiser hits a certain threshold of second reviews, the appraiser's work is audited and a decision is made whether to retain the appraiser on the approved list. They also established an appraisal monitoring process that involves the review of 20% of all refinance appraisals.

While organizations may not wish to emulate the depth of the reviews required of Ameriquest, they should take an opportunity to compare the structure of their appraisal process with the one outlined in the settlement.

Employee Compensation Programs
Organizations should review their employee compensation programs for use of any of the three specific components that were cited in the Ameriquest settlement. Organizations would be wise to refrain from any incentives that encourage its employees to include a prepayment penalty provision in a loan, to quote a potential borrower an interest rate inconsistent with the same rate available for similarly situated applicants, or to otherwise increase compensation based on loan fees or closing costs.

Conclusion
While there are numerous other requirements listed in the settlement, the above appear to be the issues from which every organization engaged in mortgage lending can learn. Thorough training, adequate internal controls, and the establishment of sound and fair business practices are keys to not following the path of Ameriquest.

Bankers and mortgage lenders should realize that such settlements only bring more focus on the real estate lending industry from public interest groups, Federal regulatory agencies, and ultimately the legislative bodies. The mortgage and banking industries need to begin to police themselves to ensure that practices that may be perceived as abusive or predatory by the public or regulatory agencies are eliminated. As with much regulatory legislation, examples of egregious abuse have a tendency to breed intervention by the regulators or even Congress. The banking industry was subject to this in the late 1980s with the advent of the Expedited Funds Availability Act due to actions of specific banks that were mainly located on the east and west coasts. More recently, we have seen similar reactions from the regulatory agencies with the update of Truth-in-Savings Act regulations in response to some banks' overdraft "bounce protection" product promotional practices.

This settlement suggests the possibility of breaking new ground in real estate lending regulatory requirements. Both the mortgage and banking industries would be well advised to heed this warning shot. Short term gains afforded by the continued use of any practice that could be termed abusive or predatory may lead to a future full of regulatory misery.

Read the Settlement Agreement (50-page PDF file)

First published on BankersOnline.com 9/12/06

First published on 09/12/2006

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