The Trump administration on Tuesday called for a series of changes to the country’s financial and mortgage ecosystems that, if enacted, would supercharge the financial industry’s technological revolution, upend the current regulatory environment, and potentially change the face of mortgage lending.
The proposed changes come in the form of a broad-ranging report released Tuesday by the Department of the Treasury, which looks at nonbank financial institutions, fintech, and fostering innovation.
In the report, the Trump administration calls for the establishment of “regulatory sandboxes,” wherein regulators would work directly with the companies they regulate to help firms innovate new products and services without fear of a regulatory smackdown.
But that’s not all. Far from it, in fact.
The report also calls for a series of changes to the mortgage lending and servicing industries, including increased adoption of fully digital mortgages, a further push into automated property appraisals, widespread acceptance of electronic notarization, plus changes to the way the government uses the False Claims Act to police Federal Housing Administration lending, new industry-wide standards for mortgage servicing and loss mitigation, and much more.
The report is lengthy and goes into much detail about each of those areas highlighted above (click here for the full report), but here’s a brief look at some of the changes the Treasury is recommending. It should be noted that some of these changes could only come via congressional or states’ actions.
The report contains a sizable section on the adoption of fully digital mortgages, including “acceptance of digital promissory notes, recognition of modern digital notary standards, and automated property appraisals.”
In the report, the Treasury recommends that Ginnie Mae (and therefore the FHA, Department of Veterans Affairs, and the Department of Agriculture) pursue acceptance of eNotes (electronic promissory notes).
As the report notes, FHA is “limited” in its ability to improve its technology due to its budget. Therefore, the Treasury calls for Congress to approve the FHA funding called for in President Donald Trump’s 2019 budget proposal, a portion of which would be used to “improve the digitization of loan files” at the FHA.
Additionally, the report recommends that the FHA, VA, and USDA explore sharing technology platforms, including “certain” origination and servicing activities.
Along those same lines, the Treasury also recommends that Congress consider changes to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act, which governs property appraisals.
Specifically, the reports calls for changes to the appraisal laws that would increase the prevalence and acceptance of automated or “hybrid” appraisals conducted with the help of an automated valuation model.
“While Treasury acknowledges that automated valuation engines and appraisal waivers should apply to a defined and limited subset of loans, and that they may compete with traditional appraisers, these innovations offer borrowers upside through lower cost originations and faster closings, without sacrificing accuracy,” the report states. “However, further application of digital, automated property valuations must be carefully monitored and integrated with rigorous market standards where they are used in lieu of traditional appraisals.”
Additionally, the Treasury recommends that the FHA and other government loan programs develop “enhanced automated appraisal capabilities to improve origination quality and mitigate the credit risk of overvaluation.”
According to the report, these programs “may also wish to consider providing targeted appraisal waivers where a high degree of property standardization and information about credit risk exists to support automated valuation, and where the overall risks of the mortgage transaction make such a waiver appropriate.”
The report also calls for the increased adoption of electronic notarization, including pushing states that have not pursued eNotary rules to do so.
Currently, only a handful of states allow their notaries to perform online notarizations, although that number is growing.
“Despite state-level progress toward wider recognition of electronic notarization, the absence of a broad statutory acceptance across the country and uneven standards for remote and electronic notarization implementation has created confusion for market participants, slowing adoption of digital advances in mortgage technology by limiting the ability for lenders to complete a digital mortgage with an eClosing,” the report states.
“Treasury recommends that states yet to authorize electronic and remote online notarization pursue legislation to explicitly permit the application of this technology and the interstate recognition of remotely notarized documents,” the report continues. “Treasury recommends states align laws and regulations to further standardize notarization practices.”
The report also calls on Congress to consider establishing a “minimum uniform national standard” for electronic and remote online notarizations that would help facilitate nationwide adoption of electronic notarizations.
False Claims Act
As FHA Commissioner Brian Montgomery recently stated, the Trump administration appears to be taking a different view of the False Claims Act than its predecessor.
Montgomery recently said that the Trump administration is scaling back the use of the False Claims Act in order to bring more lenders back into FHA lending.
In recent years, many of the nation’s largest banks moved away from FHA lending, scared off by the government’s increased use of the False Claims Act as a means to extract massive settlements from lenders.
The rise of the False Claims Act being used as a weapon against FHA lenders took place during the Obama administration, with the Department of Justice accusing a number of lenders of violating the False Claims Act by knowingly originating and underwriting mortgages that did not meet FHA standards.
Under the Obama administration, lenders of various sizes, including some of the nation’s largest, agreed to pay out billions of dollars in settlements under the auspice of the False
And as Montgomery previously laid out, the Treasury Department report calls for a different way of utilizing the False Claims Act moving forward. Namely, the Treasury report recommends that HUD “establish more transparent standards in determining which program requirements and violations it considers to be material to assist DOJ in determining which knowing defects to pursue.”
From the Treasury list of recommendations:
FHA clarify the remedies and liabilities lenders and servicers face, which could include, where appropriate, remedies such as indemnification and/or premium adjustments. Remedies should be correlated to the Defect Taxonomy.
FHA should continue to review and refine its lender and loan certifications and its loan review system, including the Defect Taxonomy. Lenders that make errors deemed immaterial to loan approval should receive safe harbor from a denial of claim and forfeiture of premiums. Lenders should receive a similar safe harbor for material violations that are cured based on remedies prescribed by FHA absent patterns which indicate a systemic issue.
HUD, in determining the appropriate remedies for violations of its program requirements, should consider the systemic nature of the problem, involvement or knowledge of the lender’s senior management, overall quality of the originations of a specific lender, and whether or to what extent the loan defect may have impacted the incidence or severity of the loan default.
The Treasury report also calls for changes to the servicing rules surrounding FHA mortgages. “Treasury recommends HUD continue to review FHA servicing practices with the intention to increase certainty and reduce needlessly costly and burdensome regulatory requirements, while fulfilling FHA’s statutory obligation to the Mutual Mortgage Insurance Fund,” the report states.
Additionally, the Treasury report recommends that the FHA “explore changes to its property conveyance framework to reduce costs and increase efficiencies by addressing the frequent and costly delays associated with the current process.”
The full report contains much more on each of the above sections and other suggestions.