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In 2009 Bank Regulators Adopted Guidance on Prudent Commercial Real Estate Loan Workouts
Bank Regulators Adopt Guidance on Prudent Commercial Real Estate Loan Workouts
On October 30, 2009, the Federal Financial Institutions Examination Council (FFIEC) issued a policy statement that was adopted by the OCC, the Fed, the FDIC and the Office of Thrift Supervision as Guidance on Prudent Commercial Real Estate Loan Workouts (FFIEC’s Guidance under the OCC Bulletin 2009-32). The policy replaced the Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans that banks have been operating under since November 1995. (For a copy of the policy statement, see our earlier posting [link].)
OVERALL TONE
The overall tone of the Guidance is to provide prudent but pragmatic guidance on risk assessment, allowing financial institutions in the present environment to actively engage in CRE workouts without undue fear of reclassification by examiners. For example, the Guidance states:
“Financial institutions that implement prudent loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classification.”
While there are a few hard and fast prohibitions in the OCC bulletin, as a general matter its cornerstone is flexibility and pragmatism in working out distressed commercial real estate credits. Institutions are encouraged to consider both the asset and Borrower/Sponsor capacity for repayment of the credit.
The Guidance establishes protocols encouraging institutions to apply prospective, “forward thinking” to the cash flow analysis of distressed real estate projects. Additionally, it discourages “second guessing” by examiners on such items as assumed cap rates, lease renewal assumptions, lease-up periods and other forward looking market conditions. The Guidance also reinforces, and in some cases clarifies regulatory and GAAP reporting requirements.
KEY POINTS
The Guidance includes the following key points:
- Renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined below the loan balance.
- In general, renewals of maturing loans to responsible borrowers who, because of the present financial crisis, cannot locate a source of refinancing, should not suffer adverse classification.
- Separating a single loan into an “A/B” note structure (with impairment and/or non-accrual hitting the B note only) receives a regulatory “stamp of approval” under appropriate circumstances illustrated in the Guidance.
- Troubled debt restructuring (TDR) contains a two-prong test in which both prongs must be met: (a) the borrower is experiencing financial difficulties (examples of what this means are provided in attachment one of the Guidance) AND (b) the lender grants a concession that it would not ordinarily grant except for the status of the real estate and/or economic conditions.
- “Fair value” vs. “Market value” – Fair value is still required under impairment situations (pursuant to FASB 114) and for properties deemed to be TDR. “Market value” (i.e. predictable future values) can be considered if consistent with the facts and circumstances of the workout.
- Clarifies Allowances for Loan and Lease Losses (ALLL) calculations utilizing fair value; existing guidance remains in place.
- The concepts of “market interest rate” become of paramount importance in: (i) classifying or reclassifying the credit, (ii) going on or off of accrual basis, and (iii) booking losses (examples of what is considered and not considered “market rate” are illustrated in Attachment One to the Guidance). Market interest rate calculations should:
- Take a forward-looking view at the cash flows, rent rolls and property type analysis
- Be influenced by the credit quality of both the borrower and the real estate
- Be adjusted (positively or negatively) by the existence of quality loan guaranties utilizing current financial information
- “Interest only” concessions for periods beyond one year in order to allow the property’s cash flow to service the debt will be frowned upon, and likely not deemed “market.”
- Generally “second guessing” by examiners is discouraged and will be viewed as inappropriate in the analysis of certain specified forward-looking circumstances.
- Overall, the Guidance encourages bank institutions to be proactive and forward thinking in applying their analytics at the property level.
In summary, the Guidance stresses the need to examine each commercial real estate loan on its own merits; examining borrower, sponsor and guarantor credit and payment capacity, as well as the current and projected quality and durability of asset level cash flows. The examples contained in Attachment One to the Guidance demonstrate that this process will inevitably involve subjective judgments. Although there is a definite change of tone, the regulatory construct remains fundamentally unchanged.
It will be interesting to see how banking institutions and their examiners react to the October 30th announcement. Given the general and subjective nature of the subject matter, and that guidance is provided largely through examples, implementation may well prove to be uneven among banking institutions.
As we move into the next phase and begin to work with the Guidance, we encourage you to share your comments and experiences.
False Statements
False Statements
Action Date: June 27, 2011
Location: San Diego, CA
California Bankruptcy Judge Laura Stuart Taylor has joined the ranks of judges who will not tolerate fraudulent documents produced by banks to foreclose. Judge Taylor entered an Order To Show Cause why OneWest Bank, FSB, should not incur “a significant coercive sanction intended to deter any future tender of misleading evidence to any court of this district.” Judge Taylor ordered OneWest to appear before her on July 29, 2011, to show cause as to why it should not be subject to compensatory and/or coercive sanctions, in the case In re Jessie M. Arizmendi, Bk. No. 09-19263-PB13, U.S. Bankruptcy Court, Southern District of California. The case involves a motion for relief from stay filed by OneWest supported with a declaration of Brian Burnett, who declared under penalty of perjury that OneWest was the real party in interest in connection with the Motion because OneWest was the current beneficiary under the terms of a promissory note and Deed of Trust.
According to the Burnett declaration, OneWest received its interest in the Trust Deed pursuant to an Assignment from MERS. The assignment of the Trust Deed and the Note showed the transfer from MERS as nominee for the original lender directly to OneWest in 2010.
At trial, however, OneWest’s witness, Charles Boyle, testified that the beneficiary of the loan was actually Freddie Mac. Based on this conflict, the Court required post-trial briefings.
According to the Court, “OneWest, in its post-trial brief, provided a standing argument based on a new version of the Note, which attached an allonge dated July 24, 2007 evidencing a transfer from Original Lender to IndyMac Bank, FSB and bore an endorsement in blank from IndyMac Bank, FSB. This was new information not presented in the OneWest Declaration and this note was not identical to the note authenticated by the OneWest Declaration and attached to the OneWest Proof of Claim.
This Court is concerned, thus, that OneWest provided false or misleading evidence to the Court and that OneWest did so willfully, maliciously, in bad faith, and/or for an inappropriate purpose.”
According to research by Fraud Digest, Brian Burnett has used many different job titles when signing mortgage-related documents for OneWest, often using different titles on the same day, including:
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Acoustic Home Loans;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Aegis Wholesale Corporation;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for American Brokers Conduit;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Beach First National Bank;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Credit Suisse Financial Corp.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for CTX Mortgage Company, LLC;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for DHI Mortgage Company, Ltd.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Express Capital Lending;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Finasure Home Loans, LLC;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for First Magnus Financial Corporation;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for First Meridian Mortgage;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Flick Mortgage Investors, Inc.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Home Loan Center, Inc. d/b/a LendingTree Loans;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Impac Funding Corp., d/b/a Impac Lending Group;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for IndyMac Bank, FSB;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for LoanCity;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for MortgageIt, Inc.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for NetBank, a Federal Savings Bank;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for New American Funding, a California Corporation;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Opteum Financial Services, LLC;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for OneWest Bank, FSB;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Quicken Loans, Inc.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Sloan Mortgage Group, Inc.;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for Taylor, Bean & Whitaker;
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for TM Capital, Inc.
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for d/b/a Fedfirst Mortgage Corporation; and
- Assistant Vice President, Mortgage Electronic Registration Systems, Inc., as Nominee for UBS AG.
July 29, 2011, may be the day that Brian Burnett and OneWest are held accountable for the thousands of mortgage assignments – with false statements regarding the history and ownership of mortgages – presented to courts to foreclose.
SOURCE: Fraud Digest
Audit Finds GSEs’ Regulator Let Complaints Slip Through the Cracks
Servicers have been ordered to institute a clear resolution process for consumer complaints as part of the robo-signing settlement with federal regulators. Accountability when it comes to dealing with distressed borrowers has become a central focus of mortgage servicing reform, but an audit conducted by the Federal Housing Finance Agency’s (FHFA) Office of the Inspector General (OIG) found that the GSEs’ regulator is itself lacking in this area.
The audit found that the federal agency has let complaints alleging fraud, abuse, and waste, many of which involved possible improper foreclosure actions, slip through the cracks with no oversight of their resolution. The inspector general says FHFA also failed to refer potentially criminal allegations to law enforcement authorities. In response to the OIG report, FHFA has said it will take actions to remedy the issue.
The OIG’s report notes that the current housing crisis has left millions of borrowers, communities, and investors struggling with delinquent and defaulted mortgages, loan modifications, and foreclosures. Consumers suffering from the effects of the crisis have increasingly filed complaints with the GSEs and FHFA, of which about three-fourths directly pertained to Fannie and Freddie. These complaints run the gamut from difficulties obtaining information from the GSEs to allegations of criminal activity, according to the inspector general. The report cites an “increased number of repeat complaints and increased number of consumers” complaining of unresponsiveness over the audit period, from July 30, 2008 (the date FHFA was established) through October 31, 2010.
The OIG says FHFA did not have a “sound internal control” system in place for handling consumer complaints, nor did the agency give complaint processing sufficient priority. FHFA had assigned two individuals from its public relations staff to deal with incoming grievances and did not oversee the resolution process. “As a result, FHFA lacks assurance that complaints, including those alleging fraud, waste, or abuse, such as improper foreclosures, were appropriately addressed in an efficient and effective manner in order to minimize risks,” the OIG report said. FHFA’s practices for processing consumer complaints varied according to the means of their communication and their subject matter.
Written, email, and telephone complaints were processed separately and differently; many telephone complaints were not logged correctly. Because of the inconsistency and lack of documentation, the inspector general said it was unable to get a true grasp on the scope or number of complaints received or resolved. FHFA could not “accurately report – or even provide summary information – concerning the volume or type of written complaints received…, the number of unresolved complaints, the average amount of time to resolve a complaint, or how complaints were resolved,” the report said.
The OIG was able to get its hands on 585 consumer complaints emailed to FHFA during the 27-month audit period. Of these, 115 were retained by the agency for internal processing, which in some cases that constituted a determination of no action, and the remaining 470 complaints were referred to the GSEs. The inspector general also determined that 27 complaints included allegations of fraud and 68 contained allegations of improper foreclosures. The report says it was FHFA’s practice to refer email complaints alleging fraud, waste, or abuse to the Office of General Counsel (OGC), but according to the staff there, no records exist showing how many referrals were sent or their resolution.
OGC confirmed that no complaints were referred to law enforcement authorities during the audit period. In one particularly telling instance, the inspector general found evidence that an investigative reporter emailed FHFA’s predecessor, the Office of Federal Housing Enterprise Oversight (OFHEO), in June 2008, alerting the agency of information from a former Taylor Bean & Whitaker (TBW) employee that the lender was defrauding Freddie Mac. The complaint was neither pursued, nor was it referred to law enforcement authorities for investigation. (OIG says OFHEO senior managers who were aware of the situation became FHFA senior managers when OFHEO was consolidated into FHFA at the end of July 2008 and were in possession of the email after that time).
More than a year later, TBW shut its doors and federal authorities executed a search warrant on the lender’s office, and within the past few weeks, seven high-ranking TBW executives have been convicted on federal charges or pleaded guilty to participating in a multi-billion dollar fraud scheme. FHFA acknowledged that since the housing crisis set in, it has received an “elevated level of public inquiries and complaints” and the agency had “no dedicated staff nor procedures in place to handle the new responsibility.” FHFA also underscored the fact that in 2010, it conducted its own audit.
The final report on this evaluation was received just last month, and FHFA says it is intended to help the agency develop policies and procedures, as well as automated tools to support external communications. FHFA says it will have written policies, procedures, and controls in place; complete a thorough assessment of the staff and resources needed to implement the new functions; and will review unresolved complaints alleging fraud by December 31, 2011.
Treasury Unveils Do-It-Yourself NPV Assessment
The U.S. Treasury on Monday announced the launch of a Web-based tool that allows homeowners themselves to conduct a net present value (NPV) assessment of their mortgage.
As part of a borrower’s evaluation for the Home Affordable Modification Program (HAMP), servicers perform an NPV test to determine if modification is a more financially sound route to take than allowing the loan to proceed to foreclosure.
Oftentimes, the reason a homeowner is denied a HAMP modification is cited as “failed NPV.”
Treasury says homeowners who are turned down for the federal modification program can use the new tool – available at CheckMyNPV.com — to compare their own result against that of their servicer.
Homeowners may also use the site, prior to applying for a HAMP modification, to conduct an NPV self-evaluation using the same underlying formula required of HAMP servicers.
Treasury notes, though, that “due to differences in input data and other industry-related data referenced by the formula, users are informed that CheckMyNPV.com provides only an estimate of a servicer’s NPV evaluation and is intended for use only as a guide.”
Homeowners can complete their net present value calculation in around 15 minutes. The website, which also offers a detailed FAQ document, is designed to be a self-service, self-education tool to encourage homeowners to learn more about HAMP and the NPV evaluation process.
Treasury is encouraging homeowners to share the information provided by the site with their servicer and discuss the factors considered in the NPV evaluation to explore all foreclosure prevention options.
