Granted, some of the lenders on this list are no longer in business such as MILA or were taken over by other banks such as Washington Mutual. Yet 905 is quite a high number and some of the names on the list surprised me. 

To check on the current default rate of your favorite FHA lender, check out the Neighborhood Watch website.

Here’s the follow up from questions that were asked in class and more.

There was a request to take a look at a sample Adverse Action form. Here’s one from the FDIC.

There was a question regarding if a consumer loan company does not hold a mortgage broker license, does that company have to follow the MBPA if the consumer loan company decides to broker a loan? The answer is “no.”

Here’s a link to he article on Paramount Equity that I referenced in class.

There was mention of a CNBC special on Enron.

Geoff mentioned the famous Milgram Experiments.

and just for fun…here’s the links to the YouTube videos:
Swagger Wagon
Geico/Honest Abe 

Thanks for a fun class this week. You all impressed me with your knowledge of ethics during day 3

Remember to send me an email if you want access to the practice exams!

Prohibition on Steering/Loan Originator Compensation – Establishes new anti-steering restrictions for all mortgage loans that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. Would allow compensation to originator (1) based on principal amount of loan, (2) to be financed through the loan’s rate as long as it is not based
on the loan’s rate and terms and the originator does not receive any other compensation such as discount points, or origination points, or fees however denominated, other than third-party charges, from the consumer (or anyone else), and (3) in the form of incentive payments based on the number of loans originated within a specified period of time. Expressly permits compensation to be received by a creditor upon the sale of a consummated loan to a subsequent purchaser, i.e. compensation to a lender from the secondary market for the sale of a consummated loan but creditors in table funded transactions are subject to compensation restrictions.

All fees that enure to the benefit of the lender (the entity funding the loan) as well as any third party mortgage broker, now appear in box 1 of the Good Faith Estimate.  The loan originator rarely if ever is earning the total dollar amount in that box. Instead, the loan origination fee is divided up between different people. If the massive Wall Street Reform law passes, loan origination fees would be capped at 3 percent of the loan amount, with some exceptions: 

3 Percent Limit – Definition in TILA with the following exclusions (1) bona fide third-party charges retained by an affiliate (2) up to and including 2 bona fide discount points depending on interest rate. Also, excludes any government insurance premium and any private insurance premium up to the amount of the FHA insurance premium, provided the PMI premium is refundable on a pro rata basis,
and any premium paid by the consumer after closing

Consumers have ample opportunity to shop for mortgage rates on the Internet and hear radio advertisements all day long for refinance “rates as low as….” however low they might be that day.  We would all hope that consumers are much more savy mortgage shoppers when compared with the peak of the real estate bubble.

Some loan originators believe consumers do not care what their loan originator is paid as long as the consumer receives the lowest possible rate and fees available on that particular day for his/her particular loan needs.  I happen to believe the opposite is true, with one twist. Consumers do care what loan originators are paid, when they are educated as to how to understand LO compensation.  

Some loan originators hold an irrational belief that consumers couldn’t possibly care about their compensation…that consumers ONLY care about getting the lowest rate because their note rate is the single most important thing affecting the monthly payment and their monthly payment is typically a homeowner’s biggest check he/she writes every month.  However, it’s important for LOs to understand that they have a vested interest in keeping consumers in the dark about how and how much LOs are compensated. If consumers were to fully understand LO compensation, consumers would have the ability to better negotiate a lower fee.  Since many consumers roll their closing costs into a refinanced loan, this *does* affect a person’s monthly payment because the consumer is amortizing the loan originator’s fee and paying a little part of it each month.

If consumers were forced to pay their closing costs in cash up front at the close of escrow on a refinance, consumers might suddenly become much more interested in understanding how to shop for all the settlement costs. 

The mortgage industry trained Americans to serial refinance with very little out of pocket expense and to purchase a home using 80/20 loans with sellers paying all their costs.  We’re now requiring more money up front on a purchase money loan but many buyers are still in the driver’s seat asking and getting seller concessions and many consumers still refinance by rolling all their closing costs into the new loan.

There are many different ways loan originators are compensated. Here are a few:

Percentage of the loan amount
If the loan amount is $350,000 and the loan origination fee quoted is 1.75 percent, your loan originator is likely not going to take home a $6,125 paycheck.  Typically a loan originator is going to split that $6125 with his or her company in some way.  It might be a 50/50 split or perhaps some loan originators will get a better split if they are bringing in their own clients. 

On that same transaction, a loan originator may have been able to sell you a slightly higher rate than what you could have received had you known a better rate was available that day.  When a loan originator works for a bank OR non-depository lender such as a mortgage bank (no checking and savings) this is called earning “overage.”  This LO is going to earn an additional .50 percent of the loan amount in extra compensation that he/she does not have to disclose to the consumer.  On our sample transaction, that comes out to be an extra $1750. This may or may not have to be split with the loan originator’s company. 

When a loan originator works for a mortgage broker, all compensation, including any “overage” which is also called “yield” or “yield spread premium” is disclosed to the borrower on line one of the good faith estimate and the consumer is shown, on the GFE that the consumer is choosing a slightly higher rate in order to pay his/her loan originator this extra compensation.

Before the 2010 changes in how compensation was disclosed to consumers on the good faith estimate, loan originators might have earned even more compensation through processing, underwriting, and administration fees. There’s nothing wrong with these fees, provided there was actually an underwriter, processor, and administrator doing work for that fee.  With the new 2010 good faith estimate, all these fees are now disclosed on line one of the GFE.

Besides receiving a split of the origination fee, other ways of LO compensation might be paying LOs based on the total volume of loans and/or total loan amount each month,  an hourly wage with a bonus, a salary, or a combination of different methods.

What’s a fair way for consumers to negotiate loan originator compensation?

Fair can be defined in may different ways. Some LOs prefer to always charge the same percentage of the loan amount:  1 percent, 1.5 percent, 2 percent, and so forth, for all their clients.  Yet some LOs believe that’s not fair.

Why should one customer who’s loan amount is $350,000 pay $6125 (1.75%) and another customer whose loan amount is $600,000 pay $10,500 (1.75%) and another customer with a $100,000 loan pay $1,750 (1.75%) 

Suppose the person’s loan who paid only 1,750 took more time and effort than the person who paid 10,500.

Why should the consumer paying $10,500 help subsidize the price of the loan for the guy who needs constant handholding?

If a loan originator works hard trying to find the best loan program or the absolute lowest rate (so the consumer does not have to spend time shopping) and she put in all kinds of time and effort, this LO is arguably worth more to the consumer.  This is the broker model of originating loans.  The mortgage broker LO acts as a third party middleman, an “agent” for the borrower, and helps the consumer select the best fit from lots of different mortgage money choices.

Conversely, some consumers are anal retentive (nothing wrong with that. Takes one to know one) and like to do all kinds of research, spreadsheets, analysis, interviewing, reading and experimenting on their own, sometimes for many weeks or months.  By the time this person is ready to select a mortgage, the AR borrower has already selected the mortgage product, rate, and company. This obsessive compulsive has even run a background check on the firm and its history of consumer complaints, knows the name of the CEO, where her kids go to school, what type of loan she currently has on her own home, and what paperwork will be asked of him at application.  Arguably this customer has already done most of the loan originator’s job (in his opinion), so why should he have to pay a heft LO fee if he’s just going to fill out an online Internet application, send in a package of paperwork, and close “in as little as 2 weeks?”

Well, anyone in the mortgage lending industry knows that the borrower in the mortgage broker scenario could end up being a bunny file, where the broker/LO only spends 5 hours max on that file whereas mister anal retentive’s file ends up being the nightmare scenario from hell and the low-fee company ends up losing money on that transaction. 

I take these two polar opposites as examples because a loan originator’s real life is some of the above but mostly everything in between.  A loan originator never really knows for sure how much time he/she will spend on a particular file.  This is one of the reasons (I’m sure there are others) why LOs simply revert to a percentage of the loan amount: Because everything washes out in the end.

Today’s consumers are left wondering what the hell happened during the meltdown and really don’t buy any of the crap the industry tries to use to brainwash the world into thinking it wasn’t the industry’s fault. “It was the rating agencies,” or “those greedy Wall Street investment bankers are to blame,” or “It’s the big banks: They are the ones who told us to sell the toxic mortgages.”  Somebody needs to tell the industry that the more the industry tries to shirk all responsibility, the more guilty the industry looks. The more the industry points outward at everyone but itself, the more the politicians and regulators will pass laws and rules like what we haven’t seen since the 1970s which gave us RESPA, TILA, ECOA and FCRA.

There is no doubt in my mind that the mortgage lending industry will find creative ways of compensating those that can bring the business in the door. 

Here is an idea:  Why not pay loan originators by the hour?  Consumers can pay their loan originator the way we pay for an accountant, a lawyer, an engineer, a paralegal, and other traditional professionals. 

In the above example of a $350,000 loan with a 1.75% loan origination fee of $6125, if we estimate that the average number of hours spent with the loan originator was 5 hours, that’s like paying an originator $1225 per hour.  There is no LO on this planet worth over a thousand dollars an hour.  But this isn’t an accurate figure if indeed the $6125 fee is split 50/50 with the originator’s company  So $3063 would be the originator’s compensation….divided by 5 hours means this LO is charging $613 per hour.

That’s a VERY hefty hourly fee for a person who doesn’t even have to hold a high school diploma to become a loan originator.  In fact I have personally now met 5 people who have only finished 8th grade that are originating mortgage loans.  Even a 20 hour education requirement and a national exam will not keep predatory lenders away from the industry.

Charging by the hour for an LOs time would serve two purposes:  1) it would motivate people to be more efficient with their time when working with a loan originator; and, 2) it would separate the men from the boys and the women from the girls. By this I mean loan originators with over 25 years of experience would be worth more because of their vast amount of knowledge: These LOs would theoretically be more efficient and competent and since they’d spend less time per file, they would be worth more. On the other hand, a baby loan originator who just received the license is going to be in training mode for a while and would arguably be worth less per hour.

Imagine an LO saying to his or her client, “Mr. AR, based on our initial consult, I estimate that it will take me and my team X number of hours to originate your file. It could be more or less, I’ll give you a weekly or monthly fee sheet as we go along. You can pay me by the hour…my hourly fee is X, or you can pay me no more than 3% total. Which would you prefer? It might be less if you select the hourly rate but it will never be more than 3%.”  I will bet you 100% of the time the client chooses the hourly rate for the chance that their fee might be lower in the end. 

But will things change all that much if LOs were paid by the hour? Maybe not.  The baby LOs will still end up working for the depository banks and the experienced pros will still end up at the non-depository mortgage banks and mortgage brokerage firms. When the Dodd-Frank Bill passes, our lives will all change once again but it’s still a great way of making a living and I know the majority of us will still be here doing just that.

Here’s the follow up from today’s class.

Here’s the link to the Neighborhood Watch website where you too can check the FHA deliquency rate of your own firm.

Here’s that great blog post by Seth Godin about deadlines.

Here’s more about the excellent book Outliers by Malcome Gladwell.

Here’s a link to the NMLS Resource page so you can download and read the MLO Test Candidate Handbook.

…and for Ron, here’s more info about the fantastic book trilogy The Girl with the Dragon Tattoo.  There’s a link to the movie trailer next to the article.

DAY 2

There was a question about when to include/not include a pest inspection charge in the finance charges.  Here’s the answer according to VA.

There was a request for more help in understanding the way different types of mortgages work. Scroll down to the bottom of this page. 

Here’s the story from Seattle Bubble today on the Goldman prediction that Seattle home values will drop by 22%

Here’s more information on the Merkley Amendment limiting loan originator compensation to 3%

Here’s a link to DFI’s WAC Mortgage Broker Rules regarding disclosures required when a borrower parts with money (for example, for a credit report.)

Here’s more info regarding RESPA and builders and possible rule changes

DAY 3

Here more info from HUD regarding adding sexual orientation as one of the protected classes when originating FHA loans:

“WASHINGTON – For the first time in its history, the U.S. Department of Housing and Urban Development (HUD) will require grant applicants seeking HUD funding to comply with state and local anti-discrimination laws that protect lesbian, gay, bi-sexual, and transgender (LGBT) individuals. Today, HUD published a notice detailing the general requirements that will apply to all of the Department’s competitively awarded grant programs for Fiscal Year 2010.

“We‘re using every avenue to shut the door against discrimination,” said HUD Secretary Shaun Donovan. “Today, we take an important step to insist that those who seek federal funding must demonstrate that they are meeting local and state civil rights laws that prohibit discrimination based on sexual orientation or gender identity.”

Traditionally, HUD requires all applicants for competitive grant funding to comply with all applicable federal fair housing and civil rights requirements including those expressed in Fair Housing Act; Title VI of the Civil Rights Act of 1964; Section 504 of the Rehabilitation Act of 1973; and Title II of the Americans with Disabilities Act. Now HUD will further stipulate that applicants and their sub-recipients must comply with state or local laws proscribing housing discrimination based on sexual orientation or gender identity.”

Here’s the follow up Q&As from today’s class.

Although here HUD references that the Special Booklet regarding settlement costs should be provided for purchase money loans, here on this page (#27) HUD says the booklet is to be given out 3 days from the date of the application and doesn’t include or exclude refinance transactions.  Here’s a link to the updated settlement costs booklet.

There was a question regarding TILA’s madate that the broker/lender be sure the borrower can repay the loan. Go to this page and scroll down to prohibited acts:

“(4)  Repayment ability.  Extend credit subject to § 226.32 to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.”

There was a question about the Equal Credit Opportunity Act as to whether the following is in ECOA:

“(6) For purposes of this subsection, the term “adverse action” means a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.”

To read the statute click here and scroll down to Prohibited Discrimination; Reasons for Adverse action.  Go to 701.(d) 6 to read the above sentence.

Also from ECOA there was a question to pls confirm as to how long a creditor must retain the files after adverse action: 25 months as noted on the quiz is correct.  Pls google the phrase “adverse action forms must be retained for 25 months” and you’ll have over 10 pages of possible references.

There was a question regarding the Fair Credit Reporting Act and the consumer being prohibited from seeing the scoring method.  Here you go (link opens PDF.)

See Section 609(a)(1)(B)

and (f)(5)(A)
“the consumer reporting agency shall provide the consumer with the name and address and website forcontacting the person or entity who developed the score or developed the methodology of the score.”

CRAs can refer people to FICO but cannot give the consumer FICO’s algorythm.  They talk about the credit score model again in (f)(7) but notice they are not referring to the methodology.  A subtle but important difference.

One student was not sure that the “authorized user” changes were already in effect regarding ppl letting others use their tradelines to bump up your credit score.  Here you go.

On to the SAFE Act. Go here.  Download Title V of PL 110-289. Questions regarding processors and underwriters are on page 7.  Confirmation that there are only 3 takes before the 6 month waiting period kicks in can be found on page 10.

I did find that email from DFI I referenced earlier and I was wrong about one of the deadlines. If an LO who holds an existing licensed does not complete 20 hours of WA DFI approved education by May 31st, they definitely have to take the 20 hour class and I thought it had to take place right away…instead they’ll have until Dec 31st to take that 20 hour course (plus a 2 hr course on Wa St law.)  In that email, I was hoping I’d find the answer to the great question about producing MBs (who hold an existing MB and also an LO license.) The question is whether MBs need to make sure they take 9 hours of CE sometime between now and the end of 2010.  I am very sure I’ve asked this question before of DFI and I thought I had the answer saved in my email archives but it’s not there….perhaps DFI never got back to me last month, which is why I’m not seeing the answer in my head (wow, listen to how I’m talking. I really do store memories in pictures.)  So I’ve sent a second email to my favorite guy at DFI asking for an answer. I’ll let you know when he responds and I’ll probably put it inside one of my regular monthly email updates for everyone.

That’s all I have on my list of Q&As! Thanks for a fun class today and keep studying!

As you can imagine, loan originators everywhere are outraged.

Imagine not being able to earn extra compensation for selling a higher rate loan! Imagine making sure that homeowners can repay their loans! 

Wait a minute. Isn’t that the world we currently live in right now?

The horror we’re leaving behind if this amendment becomes law was the predatory lending frat parties of 2006.  From what I can tell, most (not all) of that is behind us. What are we really losing with the passage of the Merkley-Klobuchar Amendment?

Mortgage brokers have to disclose all yield spread premium earned as fee income on line 1 of the new Good Faith Estimate.  They will not be losing anything new.  It can be argued that mortgage brokers should have lost the ability to earn yield spread premium because it was horribly misused not by “an unsavory few” but by the vast majority of mortgage broker LOs all across the United States.  For the few LOs who had no problems honestly explaining their full compensation, the change to the new GFE was not seamless but certainly not painful.

Brokers might be fearful that consumers will no longer be able to select a “no cost” refinance.  First of all: THERE IS NO SUCH THING AS A NO COST REFI.  There are costs. Instead, the homeowner is selecting to amortize the costs over the term of the loan instead of coming to the table with cash to pay for the cost to refinance into a lower interest rate loan.   The way I interpret the spirt of the amendment, consumers can still elect to use yield spread premium (YSP) as a credit back from the lender, to cover their closing costs….but broker LOs are prohibited from helping themselves to any leftover YSP as compensation.  This is true today and it would still be true under the amendment. 

Mortgage loan originators who work under a consumer loan company license (They say, “I’m a mortgage banker, I’m a correspondent lender”) or LOs who work at a depository bank can still, at least today, earn hidden compensation called “overage” by selling a higher interest rate than what the homeowner could have received.  Think of it as a retail markup. These LOs may or may not choose to show the consumer the wholesale rate sheet.  This is just the same as yield spread premium but consumer loan company and bank LOs do not have to disclose their overage to the consumer.

The Merkley Klo-bu amendment aims right at the practice of earning “overage” and scores a bullseye.

Someone has been educating the Senators about how to create a level playing field and it’s not me. I’m too busy trying to recover from this delightful carpal tunnel surgery on my right wrist.  I wish you could see me try to eat a bowl of Cracklin’ Oat Bran with my left hand. As it is, I shouldn’t be typing this but don’t tell Dr. McCallister.  For me this short blog post IS taking it easy.

Brokers have been asking for a level playing field. Well the Merkley-Klobuchar amendment creates just that.  Instead of hidden compensation, the way loan originators are paid will transform. We will most likely revert back to a 1 percent loan origination fee.

Here are some new ideas. 

How about we pay loan originators based on customer satisfaction surveys. We’ll call it the Redfin model.  After the transaction is complete, clients would rate a loan originator based on how well they explained the loan program choices and how close the HUD 1 fees matched the initial GFE.  How about we pay loan originators based on the number of hours spent doing origination functions on each loan, and the hourly wage would be set by the employer based on a loan originator’s experience, education, and….loan performance.

That’s another idea. Why not base LO compensation on low default rates? 

Take a look at the national default rate of FHA loans.  You can sort by state, county, company name and so forth.  What the hell is going on at these companies with high FHA default rates?  I’ll bet any of us can find out by simply having a casual water cooler conversation with loan originators at any firm in your city.  Everyone knows which loan originators are scamming the FHA system.  Can we please get rid of these LOs? The only reason they still have a job is because it takes FHA 4 years to hunt them down and between now and then, their bosses can make hundreds of thousands of dollars sending FHA these dog loans and then simply close up shop, pay the fine and move on to another firm. 

The Merkley-can-we-just-drop-the-second-name amendment might just do us all a favor and make it a good business decision for firms to get rid of the people who are sending fradulent, high default loans to FHA.

Now I know we’re going to get some clever LOs to point out that it’s not their fault that a homeowner got laid off or a homeowner decides to walk away from the loan when their 3.5% FHA loan goes negative equity this fall.  Okay fine. I see you two whiny shoulder shrugs and raise you two underwriting screw tightens.  After this amendment passes, underwriting guidelines are going to tighten up fast and lenders will definitely want homebuyers to put more money down.  Both will not give 100 percent assurance that a homebuyer will not default, however, it will be better than the loans we’re currently making. I’m hearing lenders are still making FHA loans where the back end ratio can be 50%.  Today’s FHA loans will not end well.

Loan originators, the best way to assure the future of your industry is to fully disclose ALL compensation to your clients, no matter where you work, and if you can’t justify your compensation, it’s too high so you’d better start re-learning how to create value for your clients or pretty soon you won’t be needed.

A client just called me this week and said a lender called American Interbanc is telling consumers they don’t charge a loan origination fee because they don’t have any loan originators.  I sent then an email requesting to interview someone from American Interbanc but so far they’re being shy.  Well I hope any regulator reading this schedules them for an audit real soon because someone is doing the job described in the SAFE Act as “loan origination” and if they want to slough off the work to their unlicensed processors, well then this is one company to watch. We should watch to see if this is a business model for the future or if it’s a business model that we’ll be reading about in a State Consent Order or HUD Audit. 

I happen to believe loan originators are valuable.  The most valuable LOs I meet today are the ones who have already learned how to clearly communicate their value to their clients.  The Merkley amendment has a good chance at passing.  LOs: Imagine a world where your compensation is much lower than it is today. Many will leave the industry. Many will stay and do more loans for the other’s clients.  You will have to work harder for your compensation but the ones who will choose to stay already love the industry so much it doesn’t feel like work.

Currently, loan originators in WA State who have not been previously licensed are going through the licensing and testing phase which includes the required 20 Hour Course, mandated by the Federal SAFE Act (Secure and Fair Enforcement) Act of 2008.

I have some feedback for folks who are looking at the pass rates of the new national exam (currently 67%)  and wondering who is passing and who is not passing the exam. But first some background.

Prior to 2010, loan originators working under a mortgage broker in some states had to become licensed and pass state exams by scoring at least 70%.  State exam included state law, federal law, mortgage-related mathematical computations and a few questions on ethics.  At the end of 2007 WA State had roughly 14,000 licensed LOs.  In 2008 there was a WA state law change in which the definition of the word “lender” at the state level was brought into line with the federal definition which is basically, “the entity with the money to fund the loan.” Licensed mortgage brokers with a correspondent line of credit with one or more banks were told they had to switch their state license to a consumer loan license (CL) instead of a mortgage broker license. Since, at that time, consumer loan companies were not required to license their loan originators, many LOs who worked under a broker that had to switch their license to a CL license let their loan originator license lapse.  Why pay money for continuing education and to maintain a license that’s not required? A few months later in the summer of 2008, the SAFE Act passed and it would only be a matter of time before the regulators got busy licensing CL loan originators.  Well, two years later here we are. Today WA State has roughly 4,000 licensed loan originators who work under a mortgage broker.

By July 1, 2010, all Washington state loan originators who work under a consumer loan license (correspondent lenders, mortgage bankers, non-depository lenders) must have taken 20 hours of prelicensing education, pass the national and applicable state exams, a background check and submit fingerprints through the Nationwide Mortgage Licensing System. The feds are taking over the bulk of loan originator licensing and education.

For the past 5 months, I have had the pleasure of meeting many loan originators who work under a consumer loan license.  I am happy to share with you that the quality of LOs in 2010 is radically different from the LOs I met in 2007.  Yes readers, there are many differences between mortgage broker LOs and consumer loan company LOs.  But those differences will have to wait for another blog post. Today I’d like to share with you who’s passing the LO exam and who is not passing, and who will need to take the exam more than once and quite possibly more than two times.

Loan originators who have been in the business for at least 11 years

…with no work stoppage time (excluding ordinary parental or other temporary medical leave), entered the industry back in the 1990s, back in the time when the world still believed that federal and state lending laws existed to be followed and we all had managers who cared about the default rates of the loans originated out of their branch. These LOs have seen their share of FHA and VA loans along with sane underwriting guidelines when we actually declined loans.  These folks will and are passing the loan originator exam unless they spent the majority of the 2000s at a brokerage (see below.) Their biggest challenge is to learn the difference between their own company’s policies and procedures and what the law says to do.  Mortgage lending firms can have tougher guidelines than what state or federal law allow but they can’t go weaker than the law.  These LOs just simply need to tease apart the two, and learn THE LAW because the national exam won’t have test questions on any one company’s policies and procedures. 

Loan originators who entered the industry during the bubble run up and predatory lending heydays of the 2000s. 

Loan originators who worked for a mortgage broker during the bubble run up received little, if any  compliance training and very little training on agency product (Agency = the Fs; Fannie, Freddie, FHA).  These loan originators will definitely will need to allocate way more study time than a 20 hour course.  These LOs can and will pass the exam because they have one thing going for them:  Motivation in the form of if they don’t pass, they won’t be able to originate.  Fear and anxiety are powerful motivators and LOs can use this as fuel to prompt them to study. This means actually opening a course book and reading it, taking practice quizzes to test for retention, and repeating for each federal law.  Beyond the required 20 hour SAFE course, I recommend setting aside an additional 20 hours of study time with no distractions. If LOs are distracted while studying, double that to 40 hours. Go off the grid while studying. Trust me.

Loan originators who are brand new to the industry

Loan originators who have never originated but know something about the industry because they’ve worked in another parallel industry will pass the exam. For example, real estate agents know the lingo but know less than they think they do about federal and state law, everyday activities of loan origination, and lending products.  30 additional hours of study time minimum, beyond the 20 hour class.

Loan originators who are brand new with no prior experience in the industry will likely fail the exam the first time with some minor exceptions.  Let’s tackle the exceptions first.  LO candidates with a Bachelors or Masters degree in finance, economics, philosophy, soc/psych, or accounting will do fine on the exam because they understand how to study for exams dealing with complex questions.  In fact, they might feel like the exam was too easy, but they’re going to study anyways because they’re academically mature enough to have learned that studying actually works.  This exception does not apply to anyone with an MBA.   Folks who have taken other difficult licensing exams will also understand how to study in order to pass. These include people who hold a securities license or an insurance license. 

That’s all the exceptions.

Now let’s talk about why brand new LOs will likely fail the first time.  20 hours is not nearly enough classroom time needed to teach all new LO candidates everything they need to learn in order to pass the exam.  I know what you’re thinking, “Jillayne and those educators, they just want more classroom time required so they can make more money.”  Yeah, I know it sounds self-serving. But honestly, it is extremely grueling work bringing someone from zero knowledge of mortgage lending to a point where they can go forth and prosper.  Loan originators reading this, think about how long it took you to really get your sea legs.  I’m not talking about how long it took you to close your first sucker on the phone spoon-fed to you via a radio commercial during a refi boom.  I’m talking about how many days, weeks, months until you felt like you knew enough to be dangerous.  Maybe a couple of weeks?  Maybe you’re humble enough to say you’ll never be finished learning about mortgage lending because guidelines never stay static.  20 hours might be the minimum required but a brand new LO is going to be in training mode for a while.  Ask any loan processor. They’re the ones who end up training new LOs.

Currently the 20 hour pre-licensing courses are filled with experienced LOs from the consumer loan companies.  A baby LO with no experience is left with having to decode TILA, RESPA, ECOA, FCRA, SAFE, and re-insert the meaning of these laws into case study context very quickly because there is so much to cover during that 20 hour class. It’s extremely difficult to teach a course filled with a mix of experienced LOs  and new LOs. Both need to learn the same concepts but the baby LO is at a disadvantage.  Not all course providers are skilled at identifying when students need something different from their educator.

The SAFE Act will eventually be changed to require more hours of pre-licensing education but for now 20 hours is fine because we need to bring the current crop of unlicensed consumer loan company (also known as non-depository mortgage banker) LOs into the system. But those 20 hours fly by leaving baby LOs in the dust. New LO candidates might need to retake their 20 hour course again, and those who have report that the second time around, they retained way more course content.

Loan originators who have not taken a test since high school

If the loan originator falls into the category of a person who has been originating loans pre-2000, these loan originators are going to do fine as long as they study and brush up on their federal laws.  Their mantra ought be “anxiety is my friend.” LOs: Embrace the anxiety and block off downtime to study beyond the 20 hour class. 

Loan originators who fell out of the industry during the hell that was 2008 and are now back

Loan originators who ONLY originated subprime, entered during the boom, never met a Realtor they liked because “Realtors are so demanding” who live only for the refi and are now trying to get juiced to pass the new exam will likely fail the first time.  The test is much more difficult than you imagine and tougher than previous state LO exams. LOs reading this, if you fall into this category, follow my recommendations for “brand new LOs” above.

Loan originators who use to be wholesale reps

Chances are quite high that former wholesale reps with very little experience originating will fail the exam the first time.  LOs reading this, if you fall into this category, follow my recommendation for “brand new LOs” above.

English-learning loan originators

English learning loan originators will pass the exam. It might take them more than once or twice but they will definitely pass.  These students are highly motivated and usually quite extroverted.  They ask for what they need and get it.  For example, sometimes my ESL students ask for the reading material 2 to 3 weeks ahead of time and…bonus! They actually read the material and come prepared with a list of highly detailed questions.  I love having ESL LOs as students because in my experience, they learn English very fast and now we have more bi-lingual LOs who are an asset for the industry as well as the consumer.  ESL loan originators allocate way more study time before their exam and do it without complaining.  ESL loan originators actually read the state and federal laws.  This is why they will pass the exam. 

Loan originators who do not hold a high school diploma or GED

You might be thinking, “Jillayne, are you nuts? Who could do the job of a loan originator without having at least a high school diploma?” Surprisingly, a high school diploma is not currently required at the federal level to receive a loan originator license.  That will change someday.  But for today, yes readers, this is not a requirement for holding a license to assist Americans finance what will probably be the biggest credit decision of a consumer’s life.  As we wait patiently for this law to change, educators are busy helping these students pass their LO exam. 

Let’s jump in the Hot Tub Time Machine and visit the 1970s or 80s. Kids with learning disabilities or emotional problems at home that manifested their way into the classroom may have been passed from grade to grade or even put in a special ed class with hell knows what kind of instruction. Today in the glorious 2010s we have para-educators all over public schools assigned to kids with special needs (at least until the next round of budget cuts hit.) But back then, people who weren’t book-smart or chose to drop out of school for other reasons could easily get a job in many industries and work their way up.  This includes the mortgage lending industry.

There are many different learning styles; auditory, visual, kinesthetic, the whole body learner, the emotional learner, and so forth.  Way back then, our teachers stood up in the front of the class and lectured and we were supposed to just “know” the material from that lecture.  People with a bad experience in school may have simply needed to try learning in a different way or perhaps they had an undiagnosed learning disability. 

I have now met 5 LOs who have only finished 8^th grade.  All are successful, accomplished LOs. There are enablers around them doing the reading and writing and math for them.  These LOs were able to pass any previously required state exam for two reasons: The passing grade was only 70% (it’s now 75%) and there were study guides available with upwards of 750 Q&As.  These LOs just simply memorized all the Q&As.  There is no magic book with all the possible Q&As this time around. 

These loan originators will be able to pass the new national loan originator exam but will need way more support than what’s available out there in the form of a 20 hour course.  This could include seeking out other tutoring from a test prep center that might be able to diagnose a learning disability.

LOs with verifiable learning disabilities can request more time to take the national exam.  See chapter 6 of the NMLS Test Candidate Handbook.

Past experience in the industry originating is not going to help because even though these LOs know how to originate and know the federal laws, they way test writers write test questions is confusing for them. They know the right answer if asked to explain verbally but a complex written question with four possible answers (!) invokes fear of failing and they end up taking an emotional journey back to school when they weren’t able to comprehend middle or secondary school complex test questions. The majority of course instructors are likely not qualified to deliver therapeutic emotional support.

Repetitive learning in a supportive environment will help build confidence for these LO students and re-taking the 20 hour course is highly recommended along with seeking out supplemental reading material and practice exams.  LOs reading this: If this describes you, you are capable of passing the exam. It might take you more than one, two, or even three tries.  Follow the recommendation for “New LOs” above.  And if this blog post inspires you to get that GED, locate a community college near you. They often have evening or online courses for working adults.

In 2008 I attended an Edmonds Community College graduation ceremony for my nephew, an aspie, who was receiving his A.A. At the same time, about 50 people of many ages were receiving their GED. I’ve never seen so much pride and happiness in one place than the looks on the faces of everyone receiving their GED.

Loan originators: The national LO exam will never be easier than it is right now. Over time the exam will get tougher.

Here are the follow up Q&As from Day 1:

There was a question about if LOs in Oklahoma are required to take a course on Oklahoma State law. On the right hand side of this link, click on “state specific edu” to view the PDF. No other courses are needed for OK LOs but you WILL have to pass an OK state specific TEST.

Here’s a link to the NMLS website to view the test content outline for your OK state exam.

Here’s the link to the OK Statute.  MANY of your state law questions are going to come right from this page.”clic

There was a question about whether or not loan originators in OK owe fiduciary duties to their clients.

We were wondering about the word “professional” and the prefix “profess” which reminds us of professor, and the suffix “sion” which reminds us of “confession” or even “compassion.”

Here’s the dictionary.com definition of the word professor:
Origin:
1350–1400; ME < ML pr?fessor  one who has taken the vows of a religious order, L: a public lecturer, equiv. to pr?- pro-¹ + -fet-,  comb. form of fat?r?  to acknowledge, declare + -tor -tor, with tt  > ss

Here’s the definition of the word professional:
Origin:
1740–50 professional
early 15c., of religious orders; 1747 of careers (especially of the skilled or learned trades from c.1793); see profession. Meaning “one who does X for a living” is from 1798; opposed to amateur  from 1851. The noun is recorded from 1811.

The suffix “sion” comes from the word Zion.
Zi·on (z?’?n)  
n.

The historic land of Israel as a symbol of the Jewish people.

 A place or religious community regarded as sacredly devoted to God.

An idealized, harmonious community; utopia.

[Middle English Sion , from Old English, from Late Latin Si?n , from Greek Sei?n , from Hebrew ?iyyôn ; see ?wy ²  in Semitic roots.]

VERY interesting to see that sion could mean “an idealized community” because we often view people who hold professional status as something to admire; doctors, lawyers, and so forth, because of all their advanced knowledge and education. THANK YOU for asking this question. A highly detailed question that taught me something.

Here’s a link to the Neighborhood Watch website where you can check the status of FHA loan delinquencies.

FHA Refinance 4.0% Fixed
$160,000 FHA mortgage for $633/mo. No SSN req. Calculate payments now!
MortgageRefinance.LendGo.com

When clicking through, the lendgo.com lead generation site asks some simple questions like the value of my home, zip code, whether or not I’ve ever filed bankruptcy, etc.  Then I’m asked to provide personal information and assured that I’m dealing with a secure website.  Name address, phone number, etc.  After I click “submit,” I’m told that I will be given four quotes. I clicked ’submit’ after offering them the following:
First Name: Your Ad
Last Name: Violates TILA
But I don’t get a quote. Instead I’m asked even more questions before being told that four lenders will contact me within 24 hours:  Quicken Loans, Onyx Mortgage, Americash Mortgage Bankers (I’m thinking it was a seven beer night when someone decided on that name), and….I’m totally surprised here:  Paramount Equity Mortgage.

So, Quicken, Onyx, Americash, and PEM, Are you aware that the lead generation company you’re using is violating the Truth in Lending Act and probably a handful of state laws by advertising a note rate without conspicuously including APR in that ad? 

I bet someone at these mortgage companies assumed that no one would be able to trace the deceptive ad back to them.  Nah, their chief compliance officer couldn’t be that stupid. Oh wait, maybe they don’t have a chief compliance officer. Or perhaps these big mortgage companies are just making a strategic business decision: Violate TILA and some state laws and if we get caught, we’ll just pay the fine and move on because we’ll be able to earn six times the amount of the fine anyways. 

Regulators:  You’re being tossed under the bus in Washington D.C. this week as banker after banker stands before various congressional committees telling the world that the bank regulators were asleep at the wheel. I’m not going to throw you under the bus. Why? Because there never will be enough money to regulate every single mortgage lending transaction across your area of authority.  You’ve got limited resources and regulators are always trying to balance everyone’s needs and are constantly being pulled in 10 different directions at once. 

So I’d like to give the regulators a helping hand.

If mortgage companies are buying leads from a firm that’s using deceptive advertising, you can write out 5 consent orders and be very efficient with your time.  Just start clicking on all the banner ads!  It will be easy and mildly entertaining for your staff! At the same time, you’ll help consumers avoid getting sucked into doing business with a company that has chosen a business model of attracting consumers who are an easy mark. 

They fell for the click through ad. They believed there was a 30 year fixed rate mortgage available under 4 percent!  If they were stupid enough to fall for this, then that means perhaps the mortgage company can also win all kinds of other shell games with these folks, who probably believe there’s a diet pill that will help them lose those last 10 pounds and that the secret to prosperity and abundance is to think thoughtful thoughts.  Maybe that’s the secret to the housing market recovery: We can just “think” away all those short sale, REOs, and re-defaulting loan mods!

Here’s another one:
3.44% APR – Refinance Now
$200,000 Mortgage for $898/Month! As Featured on CNNMoney & Forbes.
DeltaPrimeRefinance.com

Oh my goodness! This lead generation firm actually quoted APR! Which would be a cause for celebration, until you click through and see that they’re quoting a 5/1 ARM loan, and then they also inform us that this might be a 15 year amortization.  Of course the APR looks awesome. Regulators, it would be interesting to find out exactly how many people, after filling out the online lead generation form, decided to select a traditional 30 year fixed rate loan instead of an ARM loan or a 15 year amortization.  Classic bait and switch.  Like shooting fish in a barrel.

These lead generation companies appear to hold a mortgage broker or lender licenses in various states, yet the consumer information is sold to other licensed brokers or lenders.

Question: Are mortgage brokers, lenders and banks responsible for making sure the leads they purchased are generated by advertisements that do not violate state and federal law?  If the answer is no, then deceptive mortgage lending advertising will continue to grow as long as brokers, lenders and banks are able to skirt law by purchasing these leads.

To the loan originators who regularily purchase these leads: we need to send you to Tiger’s rehab center and wean you off the crack.  Deceptive ads are poison to the system and they make it harder for you to procure clients using advertising methods that are transparent, ethical, and legal.

Maybe the broker/lender/banker willl say “We sign a contract and it’s the lead gen company’s responsibility to make sure the leads are generated according to state and federal law.”  If I was a regulator (and sometimes I like to put on a dark blue suit and high heels and pretend I’m a regulator in the privacy of my own home) I might say, in response, “So what method do you use to be certain that the lead gen companies you deal with are advertising according to state and federal law?” 

Quicken Loans, Onyx Mortgage, Americash Mortgage Bankers and Paramount Equity Mortgage, all a rational, thinking consumer has to do is google or bing your company name with the word “complaints” in the search box like I just did and they’d have all the info they need.  But the rational, thinking consumer is not your target market.

Here’s the follow up from Day 2 of our 3 day class.

Some folks asked for information regarding how a short sale, foreclosure, or bankruptcy affects a person’s credit score.

Here’s Ken Harney’s article on credit scores. And here’s Ardell’s blog post as a follow up. She has a nice visual graph for those of us who think in pictures.

Here’s a link to the FBI website with the story about mortgage fraud we discussed during Day 1:

“Leader of $47 Million Mortgage Fraud Scheme Sentenced to Prison
Mortgage Fraud Scheme Used Web of Companies and False Loan Documents“

More tomorrow….

Day 3

Here is the article I wrote regarding Paramount Equity’s Consent Order.

Here’s the article I wrote regarding the FCIC and how I believe they’re interviewing the wrong people.

Someone asked if I had ever been to a foreclosure/trustee sale auction. Well, actually I filmed an auction here in Bellevue recently.

Here’s the link to Neighborhood Watch, where you, too can check your company’s FHA default rate. Follow the link that says “early warnings.”

There was a question as to whether or not a borrower can pay an appraiser directly v. a borrower paying an HVCC company directly. See question 52 of the Fannie Mae FAQ PDF on HVCC:
“Q52. Are borrowers precluded from providing payment for an appraisal to an AMC?

A: The Code does not prohibit a borrower from providing payment to an AMC; however, the borrower may not pay the appraiser directly for an appraisal.”

Remember: Not all loans are sold to Fannie/Freddie and in that case, HVCC might not apply to those loans.

…and please don’t fall for the media hype regarding rates rising. Take a look at another point of view over at Seattle Bubble.

Here are the Q&As from Day 1.

There was a question about Errors and Omission Insurance available for loan originators. In doing research, I see that carrying this type of insurance is a requirement already in some states and in those states, insurance carriers have stepped up to offer the product. I can forsee a point in the future where lenders will require this in all states.

Here is a link to a good FAQ page on the new WA State Domestic Partnership Law with links to the final bill signed into law.

There was a question regarding whether or not we can originate Pay Option ARMs or ARMs with negative amortization in WA State and David W referenced a 2008 law.  Here’s the RCW. Click on “negative amortization” to read more. See 19.144.050:

“A financial institution may not make or facilitate a residential mortgage loan that includes any provisions that impose negative amortization and which are subject to the interagency guidance on nontraditional mortgage product risks and the statement on subprime mortgage lending.”

To get the full answer, we need to refer to “the interagency guidance on nontraditional mortgage product risks…” located here, that was written way back in 2005.   Interesting that when you read the NTM attachment at the bottom of the page, the FRB specifically excludes reverse mortgages but specifically INCLUDES interest only loans. So are we still doing interest only loans in WA State?

DAY 2

I promised a link to the Financial Crisis Inquiry Commission….and a blog post I wrote to them.

There was a question as to whether a person can still add an ”authorized user” to their account to help improve another person’s credit score. Here’s what the folks at FICO have to say about that.

Here’s a link to HUD’s Frequently Asked Questions PDF on the new RESPA changes. This page also has a link to the new HUD Booklet for the consumer.

…and here’s a link to a page on NAMF that has the links to all the state and federal laws for further review. Remember, for the sake of efficiency, it’s important to know the purpose of each law which is stated in the preamble.

DAY 3

Oh my. I found lots of consumer complaint articles about bankrate.com and some revolve around bankrate blaming the lenders for providing inaccurate info.

There was a request for more information on commercial loan modifications and commercial loan defaults locally and nationally.

There was a request to read more about HVCC (the Home Valuation Code of Conduct.)

Cristy was right. There is more discussion about further limiting loan originator compensation structure.  Here’s a nice summary/testimony pdf. This rule has a better than 50% chance of passing due to the current political climate. We’ll have to keep an eye on this.

Well Nik called with his NMLS number so now you know I’ll be able to sleep tonight, and get ready for FRIDAY! Here’s some web surfing music tonight to keep you company from Muse and SSPU.

Any Realtor who reads the article in its current form will take a direct attack back onto the author, attacking the structure of loan origination fees and the high, predatory, egregious YSPs LOs earned during the bubble run up. 
 
When someone initiates a direct attack,  most people want to steer clear, especially if the way they personally earn a living doesn’t match the stance of the article. For example, a Realtor who may agree that Realtor commission structures could be changed might not want to come out publicly on this side because he/she needs to keep earning a living under that commission structure to feed his/her own family!  A loan originator agreeing that Realtor commissions ought to change may not want to publicly agree because he/she might have many Realtors who refer him/her business on a regular basis.
 
Here’s my honest opinion, FWIW.
 
Everyone has been pointing the finger at everyone else, blaming them for the meltdown.  A direct attack by loan originators on Realtor comissions takes all the anger and points it at the Realtors and their commission thereby relieving the mortgage loan originator of any culpability.
 
In psychology we call this projection. LOs (all the time, in my classroom) tend to project their own issues onto anyone else nearby:  The banks, the wholesale lenders, the Realtors, the builders, the regulators, the greedy wall street investors, and so forth: 
“It was all their fault!”  Projecting outward keeps our own ego intact, so that we don’t have to personally look within (collectively speaking, as an entire nationwide group of LOs) and examine if we actually could have done something as a group, nationwide, to have stopped the mess/meltdown.
 
There are small pockets of people scattered around nationwide who want to raise the bar in the real estate industry and there are folks who want to or already do offer different real estate commission structures and they’re fighting an uphill battle but they are fighting the good fight.
 
I recommend starting from scratch and take a different stance.  Approach the idea of real estate commissions as if you were going to give advice to a young, first time homebuyer who knows nothing about lending.  Let go of the anger because we wouldn’t use an angry tone with a first time homebuyer. Instead, pretend like you’re teaching a class and the person reading your essay is a student.  Teach a new homebuyer how to succesfully negotiate a lower real estate commission. 
 
Now you’re educating and giving some valuable information back to the world.  Now the tone will be less agressive and more about teaching consumers to be assertive (slight but important difference) when hiring real estate agents.
 
As time moves on, LOs will become less angry and will start accepting that industry changes can and do happen but they happen in a much slower way than we’d like.

And then when you’re all done, consider that the same advice you’re giving homebuyers about negotiating Realtor commission, that same person could use your advice to negotiate a lower loan originator commission.  Now how motivated are you to change the world?

Here’s the follow up Q&As from today

 Here is the updated Credit Suisse chart.

There was a question as to whether or not a church can gift the funds for closing on an FHA loan. Here is a link to the HUD manual….

“An outright gift of the cash investment is acceptable if the donor is…

•the borrower’s relative
•the borrower’s employer or labor union
•a charitable organization
•a governmental agency or public entity that has a program providing home ownership assistance to
?low- and moderate-income families
?first-time homebuyers, or
?a close friend with a clearly defined and documented interest in the borrower.”
 Overall 17% of FHA Loans are currently delinquent. That statistic is horrifying. This will not end well.

Here is the interactive map from the New York Times I mentioned. Looks like 30% of the loans originated in Yakima County were subprime. 

and….check out the proposed HUD Rule that was just released today.  Here’s the PDF.  See page 3, number (8)  “(8) Establishing a means by which residential mortgage loan originators would, to the greatest extent possible, be required to act in the best interests of the consumer;”

Didn’t I just say today that this is where we are headed? This moves LOs more on the path toward professionals with fiduciary duties owed to their clients and further away from a retail sales role. We should all carefully watch the debate/comments on this proposed rule.

UPDATE 1

Here’s a link to the FDIC website showing a description of pre-paid finance charges in paragraph 18 (B). I did not see the chart Brandon referred to in class. Brandon if it’s easy to get a hold of that link again, please post it in the comment box. Thank you!

Here is a link to the page where HUD posts updates to the FAQ document regarding all the new RESPA changes (including GFE FAQs). Ooooo, notice that HUD has also updated the “Settlement Costs” Booklet. At the bottom of this same page is a link to submit your comments to HUD.  Now’s your chance to have your voice heard…..who will submit a comment from today’s class?  Hmmm.

Here is a link to an article written by Brian Brady, a mortgage pro located in Calif and a fellow blogger. Brian’s article about the new GFE really jumped out at me.  He says we can use the new GFE to gain clients. Give it a read. 

See you in the morning!

Day 1 follow up:

Here’s the link to the Neighborhood Watch website where you can check on the status of a company’s FHA delinquencies. Follow the link that says “Early Warnings.”

There was a question about the use of the word “firm” in the WA State law Escrow Registration Act. Here’s the link to the definitions section.  See number (7). I can only infer that the meaning has to do with a company’s “doing business as” name, which would be the name of their “firm.”

Here is a link to the NMLS website where they have information on the criminal background checks.

And there were three questions about having to re-take the state exam if you previously took the exam but let your license lapse. I have put an email in to DFI to get an official answer on that one, since the question kept coming up.

and finally, regarding the requirement to disclose the owner’s title insurance policy charge on your GFE, this is from Page 12 of the new FAQ PDF from HUD:

Q: Are charges to the seller listed on the GFE?
A: RESPA requires that only the borrower receive a GFE. The GFE is defined as an estimate of settlement charges a borrower is likely to incur in connection with the settlement. Charges that typically would not be charged to the borrower, but would be charged to another party—such as the seller—do not have to be included on the GFE. If the borrower typically would incur charges for title services and lender’s and owner’s title insurance, the GFE instructions make it clear that those charges are required to be listed regardless of whether, for example, the contract requires the seller to pay for the service. If there is a question about whether the borrower or seller is to pay for a particular settlement service, the charge for that service should be disclosed on the GFE.

Emphasis mine.

Day 2 follow up:

Question from Cathy: Are LOs required to give consumers a list of providers? 
Answer: Found on page 12 of the recent updated HUD FAQs for the new GFE:

GFE – Written list of providers
1) Q: When do loan originators have to provide the borrower with a written list of identified providers?
A: When a loan originator permits a borrower to shop for third-party settlement services, the loan originator must provide the borrower with a written list of settlement services providers at the time of the GFE, on a separate sheet of paper.
2) Q: Does the borrower have to select a settlement service provider from the loan originator‘s written list of settlement service providers?
A: No. If the loan originator permits a borrower to shop for a settlement service provider, the borrower may choose a qualified provider that is not on the originator‘s written list.

You can download the HUD FAQ PDF here.  Ooo, you can also take a look at the new HUD “Settlement Costs Booklet” from this same page. Remember new/newer LOs have a homework assignment to read the Settlement Costs booklet but I will bet that Robert, Ed, Matt, Jenni, Luke, Cathy and Brad will also download and read this. Why? Because these guys are highly attentive to detail.  Follow their lead and read the booklet that you’ll be giving to your customers.  You don’t have to read it tonight, but if I were you, I’d skim-read this before taking the exam.

Next up: What’s deductible? Here’s a link to the IRS website with the answer.  See the link that says “points.” You may have to scroll down a bit after clicking.  Whoa. That answer was so complex, there’s no way (unless my name is Brad) that I’d tackle trying to explain that one.  But maybe I’m just tired.  What would you do?

There was a question: “Is there a difference between simple referral and a referral?”  I see nothing deliniating a difference between the two in the definitions section of the statute.

Joe wanted more reading material (because we know Joe is a big fan of reading) about defaults.  Here are some great articles I found:

Option ARM Recast/Reset Update but what about prime loans? Here you go:

We should also check on the re-default rate of loan mods and the HAMP program. 

Here’s the latest report from TransUnion showing delinquencies over 10%.

Jumbos aren’t doing all that well either.

Dare we check FHA? WTF? Does this report say what I think it says about FHA deliquencies? Quoting CR, “This will not end well.”

Get some sleep and I’ll see you at 9AM!

Day 3 follow up

There was a request for me to send a list of all the Class B Felonies in WA State.  Here you go.

Here is the link to the NMLS Resource Page where you may download and review the SAFE Mortgage Licensing Act.

and Ed had a question regarding the words “non-institutional investor” that appear on page 4 of your Day 3, State Law course packet. Those words are not listed in the defintions section of that RCW. Without knowing DFI’s intent, we are left to take a lay person’s guess that it may mean an individual investor that’s not tied to corporation.  For a precise answer Ed, I suggest contacting DFI direct.

Thank you for the memorable 3 days!

Here’s the follow up from Day 1:

Ken Harney’s column regarding LOs using worksheets to provide a pre-GFE in order to attempt to escape quoting fixed costs on the new GFE.

Link to the Neighborhood Watch website where we can check on the FHA default rate of various companies.  And a related story from the Seattle Times.

Stephen Colbert: Honor Bound.

and this late breaking news tonight about FHA raising standards and raising the mortgage insurance premium.  We should expect continued, gradual tightening at FHA.  It should come as no surprise when standards tighten again during 2010.

Day 2
Different ways of holding title.

There was a question left over from Day 1 regarding the dollar amount of the fidelity bond needed for escrow companies in WA State on the escrow quiz. Confirming the answer, as noted in the quiz is $200,000. Here is the link.

And while we’re on the subject of links, here’s the page we talked about on the NAMF website providing the links to all the laws.  All the NAMF exam prep info will eventually move to this new domain.  And who wants access to the existing practice exams for free before they go away and transition to the new platform? When you’re ready, email me and I’ll send you the logon info.

We keep hearing the bankers say “We need to pay out big bonuses in order to recruit and retain the most talented and brightest workers.”  If indeed that is true, then why didn’t these talented and bright workers lead their banks into the biggest financial crisis of our time?  I’m guessing the bank CEOs need to pay bonuses to the hired help in order to justify receiving their own bonuses. 

Dr. Krugman and CalculatedRisk do a nice job of analyzing day one. CR says the Commission needs to interview the regulators in private and the comission must understand the originate-to-sell model of the mortgage lending business.

If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.

They need to interview the line workers.  Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.

I am willing to bet that if the commission opened up a public comment period for testimony, they would have all the evidence they need to prove all these hoocoodanode banksters definitely did know but their own pay and bonus structure set up an external incentive to keep the dice rolling.  Who wants to be a Debbie Downer CEO and be the first banker to take away the punch bowl when the money party is still going full on?  Anyone? Anyone…Buehler?

Whoever moved first would have run the risk of watching their company lose billions of dollars in revenue at the tail end of the bubble, while their competitors gobbled up the last of the subprime, Pay Option ARM, stated income time bombs and all the bonus income that came with it.  Imagine what it would be like to lose millions, perhaps billions in revenue as your “best and brightest” loan originators (debatable) quit and moved to a competitor because the competing lenders were still selling the subprime/Alt-A/Option ARM drugs to the LO drug dealers who were selling them to the consumer and Realtor junkies. Imagine having to face the board and face the stockholders, trying to explain why you were tightening underwriting guidelines.  The only reason to cut the cord was if consequences started overshadowing the revenue and by then, the damage had been done.  If we continue to reward the bankers for risk taking with no personal consequences we get what we deserve. I’m sure there will still be plenty of people willing to take the helm at corporations; even with more personal liability at stake. 

What would the commission do with hundreds of thousands of comments from mortgage lending industry workers from around the United States? I’d like to find out.

The bank CEOs apparently pre-arranged their stories and flipped a coin to see which one of them would take the Hurricane Katrina angle, and who would say “this stuff happens every 5 to 7 years.”  The thing to do now is to put them in separate rooms and interview them alone.  The Prisoner’s Dilemma teaches us that they will break their agreement if separated and at least one will cave.

The bank CEOs win if they can pretend like this whole mess is nobody’s fault.  This case is not unlike the Space Shuttle Challenger Disaster.  There was one person, an engineer, Roger Boisjoly, who warned that the O-ring seals would fail when temperatures were too low. He was ignored by people in senior positions and the commission decided the accident was nobody’s fault.

There is no reason to ignore the thousands of people out there who warned management.

This means the new national exam is too easy, like I surmised back in June.  Or is it?

What would be more helpful to see in future reports from the NMLS is the number of years experience of the test candidates.  For example, if the LOs who took the new national exam during this first reporting period had 5 to 10 years of experience originating loans, then a 69% pass rate is actually quite dismal, especially since many states have enacted mandatory testing and education over the past few years.  I’d expect it to be higher based on the easy sample test questions NMLS gives us in the candidate handbook. 

10,000 exams taken seems high to me, given the number of LOs who have left the industry.  But divide 50 states by 10,000 and I can easily see 200 people in each state needing to pass that test. If the candidates who took the test were newer to mortgage lending, then a 69% pass rate seems too high.

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Greg and Lisa have lots of money. They’ve always been savvy about knowing when to make a move on a good investment and they believe the housing market has bottomed and now is finally the time to buy.  Unfortunately, they have not been terribly good at making their payments on time.  Their credit reports show a long history of not paying their bills on time, lots of medical collections, a bankruptcy tied to a medical illness, and no real “reestablished credit” after the bankruptcy was discharged…but they have a lot of money in the bank. They can make a 20% downpayment on a home.  What type of loan would best suit this couple?

The seller can contribute up to 4% of the home price for their non-recurring closing costs and impounds.
Veterans must qualify on full income documentation. PITI plus all other debt (second ratio) must be under 43% of their gross monthly income unless they meet the VA residual income qualifications.  Current service members receive an allowance for housing and food and those figures can be “grossed up” 115% for income qualification.

Appraisers are assigned by VA and the lender orders the appraisal. Many lenders participate in a delegated underwriting program but some opt to let the VA underwrite the appraisal.

VA doesn’t have a minimum required credit score though some lenders might have a minimum.  A 12-24 month history of decent and reasonable payment history is required.

Underwriting: All loans will be submitted to DU. Approve/Eligible decision is required. If refer/eligible, the brokers will submit the full credit package to the lender for underwriting.

Minimum FICO for manual underwriting will vary from lender to lender. 

Maximum LTV:
Purchase 100% + funding fee
No cash out refinance 90% + funding fee
Cash out refinance 90% + funding fee
IRRRL(interest rate reduction refinance loan): maximum mortgage calculated based on unpaid principal balance & costs of refinance
Most lenders and mortgage brokers are easily approved to originate VA home loans; sponsorship by a VA-approved lender is all that’s required.

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With the new Good Faith Estimate requiring that all broker and lender fees go on line 1, together with the VA requirement that the loan originator can only earn a 1% fee, it is highly likely that when LOs originate a VA loan, their profit margin is tight if non-existent. 

Should the VA allow for a higher percentage amount to be charged to the Veteran on line 1. of the new GFE? 

How much would be a reasonable amount?  Please break down your estimation with a math example. For example, loan amount is X.  What are the standard fees typically charged with originating a loan that includes ALL lender AND ALSO all broker fees? 

What percentage does that come to?

Do you believe VA will approve a change to allow for the higher amount shown in your math example?

The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.

Many hard money mortgages are made by private investors, generally in their local areas. In the past documenting credit history and income were not as important, as the loan is secured by the quick sale value of the collateral property. Today most hard money lenders require a traditional credit review.

Quick sale value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress and assumes amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe.

1) Common reasons for seeking a hard/private money loan:
a. Homeowner or subject property does not qualify for traditional agency type loan (FHA, VA, Fannie, Freddie)
b. Investor purchasing a home in need of a temporary bridge loan
c. Homeowner wants to stop foreclosure
d. Pull equity out
e. Unusual type of property
f. Borrower needs to establish creditworthiness

2) Typical terms: 
a. 50% to 70% max loan to value
b. Higher interest rates: 12 to 18%
c. Balloon payments
d. First mortgage lien position
e. Higher fees: 4to 8 points
f. Full documentation
g. Detailed appraisal

3) Differences between hard money and private money
a. Hard money lenders are licensed and organized to lend money and private money lenders could be a friend, a family, a business associate.
b. Hard money lenders have set lending criteria with defined loan terms, rates and points all of which are known up front.  Private money is more flexible on all the typical criteria and open to negotiation.
c. Private money lending is often less expensive than hard money loans.   Hard money lenders get their money from private sources so they mark up the rate and fees to make a profit.  When an LO works directly with private sources of capital, you can often negotiate better terms.

4) Hard or Private money borrowers need to plan an exit strategy prior to obtaining the loan. 

Traditional lenders and investors may require a minimum of 6 to 12 months seasoning on title to refinance to the new appraised value. When your clients are using hard money to acquire investment properties you will need prepare them to be in that hard or private money for 12 months.

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Due to each state’s different usury laws, many hard/private money lenders are refusing to loan on residential, owner occupied homes and instead prefer to only make business-related loans or investor loans. Fees on hard/private money loans can be quite lucrative at 5 to 8 points. 

Q: In the mid-1980s when many loan officers worked at a bank and the mortgage broker community was quite small, mortgage brokers were THE source for hard and private mortgage money.  When a person could not get a loan at a bank, consumer finance company, or credit union, they found a broker and the broker was the person who knew where to find mortgage money for that particular person whose situation fell outside of traditional guidelines. Do you believe mortgage brokers will once again become this source or is it still fairly easy to compete against bank loan officers for traditional vanilla mortgage products?

USDA Guaranteed

Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility: Applicants for loans may have an income of up to 115% of the median income for the area. Area income limits for this program are here.   Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.  In addition, applicants must have reasonable credit histories.

Approved lenders under the Single Family Housing Guaranteed Loan program include:

Any State housing agency;
Lenders approved by:
HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities;
the U.S. Veterans Administration as a qualified mortgagee;
Fannie Mae for participation in family mortgage loans;
Freddie Mac for participation in family mortgage loans;
Any FCS (Farm Credit System) institution with direct lending authority;
Any lender participating in other USDA Rural Development and/or Farm Service Agency guaranteed loan programs.

Terms: Loans are for 30 years.  The promissory note interest rate is set by the lender.

There is no required down payment. The lender must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

Standards: Under the Section 502 program, housing must be modest in size, design, and cost.   Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. New Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards.  Existing manufactured housing will not be guaranteed unless it is already financed with an HCFP direct or guaranteed loan or it is Real Estate Owned (REO) formerly secured by an HCFP direct or guaranteed loan.

Approval: Rural Development officials have the authority to approve most Section 502 loan guarantee requests.

USDA 502 Direct

Rural Housing Direct Loans are loans that are directly funded by the Government.   These loans are available for low- and very low-income households to obtain homeownership.  Applicants may obtain 100% financing to purchase an existing dwelling, purchase a site and construct a dwelling, or purchase newly constructed dwellings located in rural areas.  Mortgage payments are based on the household’s adjusted income.  These loans are commonly referred to as Section 502 Direct Loans.

Purpose:  Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility:  Applicants for direct loans from HCFP must have very low or low incomes.   Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically within 22 to 26 percent of an applicant’s income.  However, payment subsidy is available to applicants to enhance repayment ability.  Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories. .

Terms:  Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The promissory note interest rate is set by HCFP based on the Government’s cost of money.  However, that interest rate is modified by payment assistance subsidy.

Standards:  Under the Section 502 program, housing must be modest in size, design, and cost. Modest housing is property that is considered modest for the area, does not have market value in excess of the applicable area loan limit, and does not have certain prohibited features. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards.

Approval:  Rural Development officials should make a decision within 30 days of the Rural Development office’s receipt of the application.

There are other USDA programs beyond Guaranteed and Direct such as rural rehab loans.  Read more here.

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Questions
USDA underwriting guidelines mirror FHA’s UW guidelines. 
With 100% LTV loans still available via USDA, do you believe this program should be used to purchase new construction homes?  See this WSJ article for reference.
If yes, why? If no, why not?

When I ask this question, the room falls silent.  Then maybe a lone person might shout, “honesty.”  Someone else might say “The Golden Rule.”  It’s easier to talk about ethics in smaller groups rather than one large group so when the classroom is divided up into smaller working groups and I charge students to come up with a list of 10 things they learned, or to come up with a list of 10 character traits they admire in people (like honesty, courage, etc.) the task is easier because we have each other to talk with.

The SAFE Act now requires licensed LOs to take an ethics class every single year.  Along with that, course providers like NAMF have to insert additional topic categories inside our ethics class: Consumer protection, fraud, and fair housing.  So you’ll be taking an ethics class….every….single…year.  It might seem irritating that the government is mandating this every year but if you think about it, ethical dilemmas change from year to year and course providers are charged with making sure our courses are current each year.

But the mortgage lending industry doesn’t have a required, mandatory code of ethics which all members must subscribe to.  The codes that do exist are pretty lame and are only voluntary.

So we should ask the NMLS, if we are suppose to think about ethics, whose ethics are we suppose to be learning?  Without direction from NMLS, it would be pretty presumptive to assume that we’re suppose to teach/learn the NAMB, NAMPW, NAMF, MBAA codes of ethics. 

So where does an industry begin to learn how to use ethics to solve their professional ethical dilemmas? For example, if we were to sit down and write a brand new code of ethics for the industry (don’t worry, there’s not enough time to do that for the purpose of this article) we would have to start somewhere and here’s where it is: We’d look to normative moral theory.  (Read a very brief paragraph on descriptive, normative, and analytical ethics here.)  Normative moral theory can be applied to any profession such as law, medicine, and even the emerging profession of mortgage loan origination. If we were to sit down and write a code, we would create that code from elements of Aristotle’s virtue ethics, Kant’s duty-based ethics, and J.S.Mill’s Utilitarianism and apply these theories to ethical dilemmas faced by loan originators.

Someday the industry will be ready for mandatory, prescriptive code. If you’d like to take a look at an industry that’s created a prescriptive code, we can look at the Realtor Code of Ethics.  Make all the Realtor jokes you want to; their code has been around for over 100 years.  To me, this means the Realtor association is 100 years ahead of mortgage lending in terms of promoting the moral development of their profession. 

Ethical subjectivism is one of the many reasons that lead to the subprime meltdown. The industry is still in need of an objective, prescriptive code.  An argument against that position is that as long as we follow state and federal law, we don’t really need anything else to guide us.  That may be true, but then that person is arguing to keep himself/herself about as morally developed as a teenager. 

Assignment:
Consider an ethical dilemma you’ve faced during your time originating loans. If you are a new or newer LO, think about an ethical dilemma you’ve faced in another job position.

Q: What was the dilemma?
Q: How did you solve it?
Q: Do you identify more with Aristotle’s ideas, Kant’s duty-based ethics, or J.S. Mill’s Utilitarianism?  Or maybe your ethical style is a combination of each.

Remember, it’s okay to use intuition, emotion, and religion to start your thinking process but we can’t stop there. For example, our intuitions might be wrong. Emotions (example of fear-based thinking “if I can’t sleep at night I know it’s unethical) are a pretty self-serving way of solving problems, and there are literally thousands of different religions in the world so although it’s fine to reach back and think about the ideals you learn from your religion, once you become a professional, your code of ethics becomes your bible.  Since our industry doesn’t have that mandatory code of ethics just yet, we definitely CAN use normative moral theory to get us started. 

As a result of this policy, individuals in the community were denied equal access to credit, capital, banking services and loan products; and made housing unavailable on a prohibited basis, a clear violation of Fair Housing law. Loan officers repeatedly told shoppers, “We don’t do row houses.” In some cases Novastar and Bell refused loans where the borrowers had more than adequate credit scores, income, financial stability and even low LTV ratios.

When Bell joined with Novastar it was given a Company Program Manual  listing Unacceptable Property Types. Row houses were not listed. Bell also secured an exclusive warehouse credit line from Novastar, agreeing that Novastar would fund all of Bell’s loans. At the time, Bell had several unclosed Baltimore row house loans, which Novastar refused to fund, and warned that using another warehouse line to close those loans would be a violation of their exclusive warehouse agreement. Bell assigned the loans to another lender for a fee. Bell and its staff continued to refuse loan applications on row houses in Baltimore even after being informed that this was a violation of Fair Housing laws.

Plaintiffs sought injunctive relief as well as money damages, cease and desist orders, attorney’s fees, and enjoining Defendants to modify their lending practices to comport with the law.   
The N.C.R.C. and N.A.A.C.P. in their COMPLAINT claimed the following:

I. Defendants policies and practices violated the provisions of the Home Mortgage Disclosure Act by redlining: refusing to grant credit in a community or neighborhood. Their actions have had a disproportionately adverse effect on African Americans and other people of color compared with Caucasian applicants by virtue of denying the financing of the type of property chosen for security purposes. This contributed to the economic destruction of a Baltimore neighborhood, depreciation of property values, higher foreclosure rates, street crime and the creation of housing ghettos.
II. Defendants policies and practices violated The Civil Rights Act of 1964, which prohibits racial discrimination in the formation and issuance of contracts, and intentional interference to pursue and hold real property. Defendants through their willful conduct contributed to racial hatred, and denied African Americans the right to own property.
III. Defendants policies and practices violated the provisions of The Equal Credit Opportunity Act which prohibits a creditor from discouraging an applicant from making application for credit by refusing to consider the security property offered.
IV. Defendants policies and practices, through the disparate impact theory,  a provision of The Fair Housing Act and other legislation by imposing different requirements or conditions on a loan on the basis of elements other than credit, the result of which was racial discrimination.

Before the trial was held, Bell asked the judge for summary judgment,  claiming it was only following the dictates of its “exclusive source of warehousing and funding.” Its agreement required that all loans must be sold to Novastar thus it had no other choice. At trial Novastar raised an unusually large number of issues with respect to the wording of the law, citing numerous cases and questioning the interpretation and meaning of whether or not the law applied to this case.

The lenders denied the accusations and set out these AFFIRMATIVE DEFENSES

I. Type of property. Independent appraisals show that row house properties in Baltimore are in a transitional state. Many are being converted to commercial or mixed-use enterprises. This, not lack of financing, has resulted in value depreciation. Our Company Program Manual at ¶5.3 Unacceptable Property Types reads: Commercial use or a mix of commercial and residential properties. Clearly, many row houses in Baltimore are “mixed use”, as most appraisals point out. This violates our written policy, which was not drawn frivolously. Empirical evidence we have provided demonstrates that losses on this property type exceed those of other type of dwellings. As further evidence of excessive risk, private mortgage insurers have refused to insure loans on row houses.

II. Intentional Interference. We have shown that there are other mortgage lenders in Baltimore and elsewhere that offer financing to row house buyers.  We fail to see how our actions prohibit borrowers from shopping the mortgage market for other sources willing to accept this type of security. Our Company Program Manual at ¶2.3 Regulatory Compliance reads: We comply with all federal and state regulatory requirements in granting mortgage loans. We have provided the court with a recent pipeline and portfolio report showing that a large number of our borrowers are African American and other minorities and the security properties are located in a variety of neighborhoods, towns, and rural areas  . We fail to see how our conduct in these cases intentionally interfered with these borrowers right to contract for the property desired.

III. Discouraging Applicants. We have shown a number of examples where national mortgage lenders regularly publish U. S. Postal zip codes showing geographic areas in which they will not grant credit.   These typically are areas where lending experience has shown that unreasonable business risks have been found through empirical evidence. We ask the court: How does this differ from avoiding row housing? We believe we should have the same right to define when, to whom, and where we will grant credit without the interference of government and claim this right specifically in this case. We deny discouraging borrowers from applying for credit because in every case cited we informed the borrower of our willingness to finance real property in many other locations.

IV. Racial Discrimination. Refusing to accept real property offered as security for a loan is not against the law. The decision to lower lending risk profiles and elect not to finance row houses is racially neutral – it is not directed toward any race –- it is directed toward real property and therefore cannot be found racially discriminatory.  As an example of our neutral policy we refer to our Company Program Manual, at ¶6.2 Minimum Value Requirements. There is no minimum value requirement for Citizens and Resident Aliens with our company because we long recognized that this is discriminatory by its very nature.  (Non-resident aliens and piggybacks are limited to $75,000 because of secondary market considerations not internal company policy). We have provided the court with example after example of lending companies that have loan minimums whose adverse and disparate effect is directly similar to the case at hand. We will make mortgage loans other companies refuse because we understand the need for making capital available in large or small amounts – a racially neutral policy. We contend that minimum loan amounts are also discriminatory but counsel can find no case in the court’s jurisdiction where lenders have been challenged under civil rights statutes.

Trial Notes
Mentioned in this suit is the fact that lenders have been sued by several cities using two theories of “Public Nuisance” In City of Cleveland v. Deutsche Bank Trust Company, et al. Common Pleas. January 10, 2008. The city claimed that lenders were the cause of high foreclosure rates, blocks of unoccupied residences that were more expensive to police and protect against fire damage and empty blocks of neighborhoods decreases property values and loss of revenue

Notes on the defenses raised:

I. Defendants provided audited internal data showing greater-than-average losses on row houses, together with an article from the Baltimore Sun newspaper, which reported that some units in Baltimore’s row houses were being used as boarding houses and even Bed & Breakfast Inns, in violation of the zoning laws. Zoning violations are often considered a default in mortgage lending.

II. The pipeline and application data used were taken from published HMDA reports, and the Mortgage Bankers Association provided data on the number of foreclosures and average losses to member companies in the same geographic region.

III. Copies of advertisements and loan program brochures of other lenders provided information on zip code lending restrictions. It was and is a common practice. Plaintiffs did not refute it.

IV. The disparate theory holds that when an action has a disproportionate effect on some group (racial, ethnic, etc.) it can be challenged as illegal discrimination even if there was no discriminatory intent.

The question is whether someone who does not engage in racial discrimination can violate the federal Fair Housing Act. The claimant need not prove that individuals were treated differently because of their race. Instead, it is enough to show that a neutral practice has a disproportionate effect – that is, a disparate impact – on some racial group.

However, the theory is difficult to apply. Suppose a landlord refuses to rent to people who are unemployed, and it turns out that this excludes a higher percentage of whites than Asians. A white would-be renter could sue. It would not matter that the reason for the landlord’s policy was race neutral and had nothing to do with hostility to whites. He would be liable, unless he could show some “necessity” for the policy. This would hinge on whether he could convince a judge or jury that the economic reasons for preferring the rent to the gainfully employed were in some way essential.

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Questions.

Did Novastar engage in racial discrimination?
Is it possible for a company that does not engage in racial discrimination to still be found in violation of Fair Housing laws?
If yes, how so? If no, why not?
Here is a link to the Fair Housing Laws for your review.