© 2006 LogicEase Solutions Inc. All Rights Reserved.

2006

Mortgage Compliance Outlook

March 1, 2006

Moderated by: David GirlingExecutive Vice PresidentComplianceEase

Presented by: Donald C. LampePartnerWomble Carlyle Sandridge & Rice, PLLC

Discussion Topics

• State of mortgage compliance 2006• Specific compliance issues (state and

local; settlements; federal activity; litigation)

• The compliance burden, automated compliance systems, and ComplianceEase

• Q&A

State of Compliance 2006

Setting the Stage• State legislatures and regulators, and even cities

and counties, are passing more and more laws and regs covering mortgage lending

• Include: privacy, security, servicing, credit reports, licensing, fees, loan terms and disclosures

• The biggest issue in recent years: anti-predatory lending laws, regulations and ordinances

What are the Challenges?

• New regulations and legislation every year

• Complicates origination and securitization process

• Compliance resources of lenders strained, as burden increases dramatically

• Secondary markets have stricter requirements and are testing more

Federal Law “APL” HOEPA

• Federal “high-cost” home loan law• Home Ownership and Equity

Protection Act of 1994• Regulation Z Section 32 (1995)

– As amended eff. 10/1/02 – lower thresholds

• Threshold or “trigger”-based law• Special assignee liability provisions

State and Local Laws

• Follow HOEPA, as threshold-based

• Thresholds lower or calculated more generously

• Additional prohibitions, limitations and/or disclosures

• Assignee liability and severe remedial provisions

The “Design” of State Laws• HOEPA-based, using thresholds or

“triggers”• Triggers are lower than federal law and

harder to determine• If exceed “triggers,” becomes a “high-cost

home loan” under state law (or even a “predatory loan”)– Then, restrictions, limitations and prohibitions

apply– Violations are unfair and deceptive trade

practices– Assignees are liable too!

The Design of State Laws (cont’d)

• ALL LENDERS/ORIGINATORS COVERED – “shotgun” approach; if you make or purchase mortgage loans, must comply with these laws

• Federal preemption has limited use, to federally-chartered institutions who originate

Recent Legislation and Regulation

• “Rumors of demise greatly exaggerated” – we predicted in 2004, few new APL laws for the future

• We were wrong: though 2005 was relatively quiet, significant developments then and now

• 2005 brought Illinois PL database statute and Montgomery County ordinance

• A shift to fair lending, with HMDA price disparity data available and driving the debate

Fair Lending Becomes Central

• The “morphing” of the APL debate• HMDA data release and analysis,

showing potential discrimination, based on price of loans and borrower characteristics

• Risk-based pricing comes into question• 3/1/06 data could be “worse” due to

flat yield curve

Fair Lending Becomes Central (cont’d)

• Illinois PL database law intended to show discrimination in parts of Cook County

• Montgomery County ordinance began as anti-“predatory lending” but was enacted as anti-discrimination amendment

• Recent court decisions and lawsuits saying that predatory lending = discriminatory lending

• Fair lending compliance becomes origination-level compliance and vice versa

Specific Issues

Issues for 2006

• Settlements with regulators and the future of enforcement actions

• State/Local legislative and regulatory developments

• Congressional action and a “single federal standard”

• Litigation and private actions against originators and securitizers

Regulatory Enforcement

• Federal agencies include HUD, FTC and OCC

• Federal enforcement against “predatory lending” will continue, as regulators are under pressure to act

• Active HMDA investigations by banking agencies right now – price disparity data

Regulatory Enforcement (cont’d)

• The states, through Attorneys General, taking a lead role

• AG’s may initiate action even if no laws are (technically) violated, using unfair and deceptive trade practice claims

• May mirror private class actions or class actions may follow

State Enforcement in 2006?

• Will we see more actions, especially in subprime?

• Doubtful – AG’s have completed several settlements and may be moving on

• Household settlement may be closer to what regulators want – e.g., NM AG inquiry

• What the HMDA data presents is “sexier” for state (elected) officials – e.g. AG Spitzer sought HMDA data last fall

State and Local Legislation• 2006 turning into a big year for APL

introductions in the states

• Not just new laws, but toughen existing ones – e.g., ME, PA, MD

• Bills in AZ, IL, IA, MS, OH, TN, MO

• Closer regulation of mortgage brokers –OH, CT

State and Local Legislation (cont’d)

• Fair lending – IL, MD (counties)

• Foreclosure in focus – assumed that “predatory lending” causes foreclosures

• Studies from IL, OH, ME, NC (pending), elsewhere by advocates and regulators

• Foreclosure reform, along with mortgage fraud, being tied into the PL debate

What’s Hot Now in States/Localities?

• Montgomery County “anti-discrimination” amendments, Bill No. 36-04

• In a court challenge now, but may not be enjoined in time for effective date of March 8, 2006

• Reaction: lenders, particularly wholesale side, pulling out – vague standards, enormous liability, reputation risk

What’s Hot Now? (cont’d)

• Mont Cty ordinance based on the assumption that subprime loans are disproportionately made to “protected classes”

• Some say: nothing new, not to worry, it only outlaws what is already illegal

• Also, no assignee liability per se –Fannie and Freddie have not reacted

Illinois Database Law

• HB 4050, unique in the whole USA

• Establishes a “predatory lending” database, requiring submission of detailed borrower information

• State regulator will decide whether borrower needs counseling

• Limited to certain zip codes in Chicago

Illinois Database Law (cont’d)

• The zipcodes have been set, interim rules have been issued; waiting on regulator to develop database tools and to declare effective date – when in ‘06?

• Legislative efforts to amend are failing

• Big concern: technical requirements, violation means mortgage is VOID

What’s Going on in Congress?

• A “single federal standard,” e.g., Ney-Kanjorski?

• The bills look to amend and expand HOEPA

• Ney-Kanjorski bill is stalled• Miller-Watt bill creates no national

standards or preemption – “worse than nothing”

What’s Going on in Congress? (cont’d)

• Clay bill intro’ed in House late in ‘05, as a compromise (?) bill

• Congress still not finished with GSE reform or Katrina Relief

• Privacy, info security, Katrina Relief, GSE reform all appear to be ahead of amending HOEPA

• What about the Senate?

Expanding Litigation Climate• Borrowers become plaintiffs under state

HCHL and related laws• Plaintiffs’ attorneys trying to create

“predatory lending” as actionable of and unto itself

• Theories of conspiracy among lenders, brokers, settlement agents – WVA Supreme Court in Herrod v. First Republic (late ’05)

Expanding Litigation Climate (cont’d)

• “Predatory lending” is discriminatory –McGlawn case in Philadelphia

• Class actions based on large number of loans

• Emerging (and established) theories of assignee liability under HOEPA, other laws

• Industry challenges: Montgomery Cty, MD

The Compliance Burden• Traditional compliance methods not designed for

the flood of new laws, in a high-production environment

• Manual review, spreadsheets, sampling and internal research not enough to handle velocity of production and plethora of law changes

• Secondary market players more focused on compliance and are using more sophisticated tools

The Compliance Burden (cont’d)

• Assignee liability and Wall Street –expectation of testing and “knowing”

• Staffing limitations at lenders –resources already maxed out

• More need to “keep current” across multiple states (and cities, counties)

• What is to be done?

Automated Compliance Systems (ACS)

• First developed in late ’90’s• Several companies in the space –

ComplianceEase is market leader• Integrated approach permits testing of

ALL LOANS in production• Loan-based testing, pre- or post-

closing, as well as pool-level testing of closed loans

What To Consider In ACS?

• What is the functionality – what tests are run?

• Technology – robust platform, with ease of integration into existing workflow?

• Who is behind it – management, investors, strategic partners?

• Track record and experience in the industry –is it “core business” of ACS provider?

What To Consider In ACS? (cont’d)

• Rules development – how transparent, can you “look under the hood?”

• Available through major LOS and document preparation platforms?

• Is this ACS vendor mortgage-to-technology or technology-to-mortgage?

• Cost, efficiency and value – benefit to originator, purchasers, Wall Street?

Importance to Secondary Market• ACS widely accepted in secondary markets and

becoming more so• Rating agencies are aware and look favorably on

ACS• Test results may be transmitted electronically to

investors and relied upon by purchasers• Secondary market purchasers are already using

ACS in due diligence so originators not doing so too may get “caught short”

Q & A

Contact

• Donald C. Lampe

• Womble Carlyle Sandridge & Rice, PLLC

• 301 South College Street

• Charlotte, NC 28202

• (704) 350-6398

• dlampe@wcsr.com

THANK YOU

FOR YOUR PARTICIPATION!