Enforcement Actions and Litigation Andrew L. Sandler MBA Non-Prime Lending Conference May 2006

1. Enforcement Actionsand LitigationAndrew L. SandlerMBANon-Prime Lending ConferenceMay 2006

2. ________________________________Top Four Issues Today:1. HMDA Pricing.2. Ameriquest Settlement: New Standard for Origination Best Practices?3. Mortgage Servicing Inquiries4. Emerging Focus on Non-Traditional Mortgage Products.

3. ________________________________HMDA________________________________________________________________HMDA________________________________

4. Fed Report - Overview • Reports on 8,853 lenders, which account for approximately 80% of all home loans. • Approximately 2% of lenders have statistically significant disparities between Minority and White Non-Hispanic trigger rates. • “Minority” is defined as Black and Hispanic combined. • Fed Report is partially based on data that is not publicly available (date of application) but otherwise can be replicated by the public.

5. Government Use of Fed Report • The Fed has referred data from lenders with statistically significant disparities in trigger rates to primary regulators. • Referrals have been split between HUD and other financial institution regulatory agencies: • OCC • FRB • OTS • FDIC • NCUA

6. Government Use of Fed Report • DOJ economist studying data for investigation targeting. • Redlining/reverse redlining focus • Pricing discretion • FTC refocuses on Lending • State Attorneys Generals • State Human Relations Commissions • State Banking Departments (e.g., New York)

7. Examination/Investigation Focus • Origination Compensation • Broker points and fees • Discretionary pricing parameters • Management of pricing discretion • Proactive self-monitoring and action

8. HMDA Pricing: Reducing the Risk • Establish a strong and effective fair lending program. • Must be able to show emphasis on treating all applicants and borrowers equally at every stage of loan process • Program should be documented in writing • Program’s main points should be made public • Frequent training

9. HMDA Pricing: Reducing the Risk • Know your data • Conduct privileged statistical analyses of HMDA data and non-triggered loans • Focus on disparities • Know your policies and practices (written and unwritten) • Conduct interviews and determine factors that affect pricing decisions in real world • Identify potential causes of any disparities and take steps to address causes where appropriate

10. HMDA Pricing: Reducing the Risk • Policy and Practice Considerations • Minimize trigger loans • Cap broker points and fees • Some institutions have prohibited trigger loans • Limit fees on small loans with short amortization period • Limit and document discretion • Require exceptions to rate sheet to be documented • Track and limit exceptions

11. ________________________________Ameriquest Settlement: New Standard for OriginationBest Practices?________________________________

12. Ameriquest Settlement • Settlement with 49 AGs and D.C. • $325 million • Allegations of • High pressure sales tactics • Inadequate disclosures • Improper appraisal practices • Use of false employment and income information to qualify borrowers

13. Ameriquest Settlement • Injunctive Relief includes: • Provide borrowers with clear oral and written disclosures of interest rates, discount points, prepayment penalties, and other relevant loan or refinancing terms; • Provide the same interest rate and number of discount points to all potential borrowers sharing the same credit risk characteristics; • Provide every loan applicant with an accurate Good Faith Estimate;

14. Ameriquest Settlement Injunctive Relief (continued) • Maintain documentation that each nonprime refinance loan offered is beneficial to the borrower; • Reimburse consumers for any prepayment penalty not timely and fully disclosed • Limit the prepayment penalty for all nonprime adjustable rate mortgage loans; • Refrain from offering refinancing solicitations to current borrowers during the first 24 months of their nonprime refinance loan, unless the borrower considers or inquires about refinancing;

15. Ameriquest Settlement Injunctive Relief (continued) • Use an independent loan closer for all nonprime loan closings • Implement an automated, centralized process within each state for appraiser selection to ensure that sales personnel and the branch office cannot select the appraisers; • Conduct a second appraisal only if after the completion of an appraisal review process Ameriquest finds the first appraisal to be professionally deficient; • Not misstate prospective borrowers’ income or assets or encourage potential borrowers to fabricate or inflate their actual income or assets;

16. Ameriquest Settlement Injunctive Relief (continued) • Not provide incentives to employees to include a prepayment penalty provision in a loan, increase compensation based on loan closing costs and fees, or quote a prospective borrower an interest rate incompatible with the same rate provision of the settlement agreement; • Refrain from requiring employees to complete a minimum number of loan closings or loan applications per month if such a requirement would result in violating the terms of the settlement agreement; and

17. Ameriquest Settlement Injunctive Relief (continued): • Implement written policies and procedures to encourage the reporting of suspected improper conduct, preserve the anonymity of a whistleblower, and protect the whistleblower from retaliation. • Independent monitor required for 5 years.

18. Predatory Lending Mortgage Servicing Inquiries • New round of AG and FTC mortgage servicing investigations. • Focus on Fairbanks and Ocwen issues including: • Loan boarding • Payoff process • Forced place insurance • Collection practices • Foreclosure process and fees • Escrow accounts

19. Predatory Lending Focus on Non-Traditional Mortgage Products • Regulators announce concerns with non-traditional mortgage products in Interagency Risk Management Guidance. • Certain products and practices labeled as risky including: • Interest only and payment option features. • No document loans. • High loan-to-value lending.

20. Predatory Lending Focus on Non-Traditional Mortgage Products • Guidance recommends: • Rigorous suitability analysis. • Clear and conspicuous notice of terms and risks.

21. ________________________________Emerging Issues:Non-traditional Mortgage Products________________________________

22. Focus on Non-Traditional Mortgage Products • Proposed Interagency Guidance on Nontraditional Mortgage Products issued in December 2005 • Certain products and practices labeled as risky including: • Interest only and payment option features • No document loans • High loan-to-value lending

23. Focus on Non-TraditionalMortgage Products • Proposed Interagency Risk Management Guidance recommends: • Rigorous suitability analysis • Borrowers’ capacity to repay loans to be determined by computing payments at fully indexed rate, assuming fully amortizing repayment schedule • Concern expressed about “payment shock” • Clear and conspicuous notice of terms and risks

24. Focus on Non-Traditional Mortgage Products • Interagency Guidance Warning: • Some non-traditional mortgage loans have not been tested in a stressed environment • Thus, need for enhanced risk management standards, capital levels and loan loss reserves

25. For further information contact: Andrew L. Sandler, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, DC 20005 (202) 371-7400 ASandler@Skadden.com Skadden.com/consumerfinancialservices