2014 Loan Originator CE Courses

Hi Everyone!
Loan Originator CE course schedule can be found here.

This classroom course meets the requirements set forth in the SAFE Mortgage Licensing Act for loan originator license renewal.
The 8 Hour Course is good for LO CE in all 50 states
This course ALSO includes the required 1 Hour of Washington State CE

Note: If you took the CE course from me last year, this is a completely new course.  There is no rule against using the same course provider every year. Instead, LOs may not take the same course year after year. The 2014 courses are all new with new course numbers!

Course Outline:
3 Hours Federal Law
2 Hours Ethics, Consumer Protection, Fraud, Fair Housing
2 Hours Non-Traditional Lending
1 Hour Undefined: CFPB Proposed Rules on LO Compensation
also included at no extra cost:
1 Hour WA State Law
For 2014 we will cover the following and more:
  • Dodd Frank Appendix Q
  • 3% Points and Fees Calculation In The Qualified Mortgage Rule
  • Ability to Repay Exemptions
  • Expanded Definition of a Loan Originator
  • Three New Qualification Duties of Non-Licensed (Registered) LOs
  • Seven Permissible LO Compensation Methods Plus Profits-Based Comp Methods
  • New Rules for Seller Financing
  • ECOA Rules Regarding Written Valuations
  • SARS/AML Trends
  • The 2014 Draft of a Professional Code of Ethics Written and Edited By LOs
  • Fair Housing Case Studies, and a Local Mortgage Fraud Case

To the Students from the mid-June LO CE Classes

Hi Everyone,

Here’s the follow up from the LO CE class you attended last week:

Here’s the news story about predatory lender Emeil Kandi, from the Tacoma area.

Here is a link to the CFPB Consumer Compliant database. There’s a menu running across the page, not at the top but near the top. It’s inside a gray table.  It says “Data By Product.”  For the dbase we played around with, click on “mortgages”

For branch managers, here’s the link to the proposed Social Media Guidelines. See the link at the bottom of the press release.

If anyone is interested in using these upcoming 2014 changes to be a trusted advisor w/your Realtors, here’s the new 2014 combined GFE/ TILA and also the new HUD 1. I think it would be helpful to Realtors to know about this change.

Here’s a link to the CFPB website with more info on all the Dodd-Frank rules and when they will go into effect.

Q: How is the Total Interest Percentage on page 3 of the new GFE calculated?
A: The Total Interest Percentage disclosure is mandated under Section 1419 of the Dodd Frank Act so the CFPB does not have the option to exclude it.

First figure out the total interest paid over the life of the loan as follows:
Principal and Interest x the loan term
761.78 x 360 = $274,241.

Now take the total interest paid over the life of the loan and subtract out the principal amount of the loan:
$274,241. – 162,000 = $112,241.

$112, 241 represents the total interest paid over the life of the loan.
Now take the total interest paid over the life of the loan and divide by the principal loan amount:

112,241 / 162,000 = 69.28%

This doesn’t quite match the GFE example given to us by the CFPB. So what’s missing? Prepaid interest. Add that in as part of the interest and your math should match.

Here  is a link to the website from our non-traditional lending case study: Net Life Financial.

 

To the Students from the LO CE class on May 21, 2013 at Guild Mortgage Kent

Hi Everyone,

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

Here’s the article I wrote about NACA as published on Seattle Bubble. NACA is the org that’s bringing their zero down loan to town soon.

Here is a link to the CFPB Consumer Compliant database. There’s a menu running across the page, not at the top but near the top. It’s inside a gray table.  It says “Data By Product.”  For the dbase we played around with, click on “mortgages”

For branch managers, here’s the link to the proposed Social Media Guidelines. See the link at the bottom of the press release.

If anyone is interested in using these upcoming 2014 changes to be a trusted advisor w/your Realtors, here’s the new 2014 combined GFE/ TILA and also the new HUD 1. I think it would be helpful to Realtors to know about this change.

Q: How is the Total Interest Percentage on page 3 of the new GFE calculated?
A: The Total Interest Percentage disclosure is mandated under Section 1419 of the Dodd Frank Act so the CFPB does not have the option to exclude it.

First figure out the total interest paid over the life of the loan as follows:
Principal and Interest x the loan term
761.78 x 360 = $274,241.

Now take the total interest paid over the life of the loan and subtract out the principal amount of the loan:
$274,241. – 162,000 = $112,241.

$112, 241 represents the total interest paid over the life of the loan.
Now take the total interest paid over the life of the loan and divide by the principal loan amount:

112,241 / 162,000 = 69.28%

This doesn’t quite match the GFE example given to us by the CFPB. So what’s missing? Prepaid interest. Add that in as part of the interest and your math should match.

There was a question about the stand alone UST:
Q: If I take the UST can I just let those test results sit there on the shelf as having “passed” and then make up my mind to activate my license in one or all of those states (that recognize the UST) at a later date?

A: I answered that you’d have to license right away….but I was only 98% sure of my answer and I like to be 100% sure so I asked the NMLS this question last night and they responded. here is her response:

“Hi Jillayne Per the 5 Year Test Retake rule in the SAFE Act: Test results do not expire, unless an MLO fails to maintain (or achieve) a valid license in at least one state or Federal registration for a period of five years or more.  More on this will be coming next year as that is when this rule will be become relevant.”

So that means after you pass the stand-alone UST you will need to activate the license in at least one additional state within 5 years of having passed the test. This matches the 5 year test-retake rule in the SAFE Act.

To the Students from the May 15, 2013 Guild Mortgage LO CE class in Bellevue

Hi Everyone,

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

Here’s the article I wrote about NACA as published on Seattle Bubble. NACA is the org that’s bringing their zero down loan to town soon.

Here is a link to the CFPB Consumer Compliant database. There’s a menu running across the page, not at the top but near the top. It’s inside a gray table.  It says “Data By Product.”  For the dbase we played around with, click on “mortgages” and have fun geeking out with the data!

Here’s the link to the proposed Social Media Guidelines. See the link at the bottom of the press release.

Here’s the new 2014 combined GFE/ TILA and also the new HUD 1

Q: How is the Total Interest Percentage on page 3 of the new GFE calculated?
A: The Total Interest Percentage disclosure is mandated under Section 1419 of the Dodd Frank Act so the CFPB does not have the option to exclude it.

First figure out the total interest paid over the life of the loan as follows:
Principal and Interest x the loan term
761.78 x 360 = $274,241.

Now take the total interest paid over the life of the loan and subtract out the principal amount of the loan:
$274,241. – 162,000 = $112,241.

$112, 241 represents the total interest paid over the life of the loan.
Now take the total interest paid over the life of the loan and divide by the principal loan amount:

112,241 / 162,000 = 69.28%

This doesn’t quite match the GFE example given to us by the CFPB. So what’s missing? Prepaid interest. Add that in as part of the interest and your math should match.

There was a request for an update on the local real estate fraud case against Michael Mastro. There are so many interesting news stories I think it might be fun for you to scan the headlines so just google “Michael Mastro” fraud crime seattle 2013″ and you’ll see several interesting headlines

There was also a request for an update on what’s happening, if any to build a case against Kerry Kilinger of failed bank WaMu. This is the latest story I could find.

Statement by Jillayne: Mortgage closing costs actually decreased since the introduction of the 2011 GFE, replacing the old 1974 form.  Here is the link to one of several different articles that explained just what one you said….lenders got more accurate with their GFEs.

4 Hour Washington State Law Pre-Licensing Class Is Now Approved

Hi Everyone,

Just wanted to let everyone know that I have received approval from the NMLS for my new 4 Hour WA State Law Pre-Licensing class which means when April 1, 2013 rolls around, I am ready to help all loan originator candidates who need the 20 Hour Loan Originator Pre-Licensing Class along with the new, updated requirement to also take 4 hours of education on Washington State Law.  YES this class will help loan originator candidates prepare for the new Uniform State Test.

Call or email me with questions!
Jillayne Schlicke
206-931-2241
jillayne@ceforward.com

NMLS Approved Course Provider 1400068

20Hr SAFE LO Pre-Licensing Course Number: C-1167

4 Hr Wa Law Pre-Licensing Course Number: C-3430

 

New SAFE MLO Test with Uniform State Component Plus More LO Pre-Education to Start April 1

Washington State has adopted the new uniform SAFE loan originator licensing exam and our state will begin delivering this new exam April 1, 2013.  Read more here.

This means loan originator candidates will take just one exam instead of a federal exam and then another Wa State specific exam.

In moving to the Uniform State Exam, Washington State Dept of Financial Institution has adopted new rules to increase the number of pre-licensing hours of education for new loan originators.

The way it is today:
20 Hours of Pre-Licensing Education (to prepare you for the National Exam)
2 of which are Wa State Law (to prepare you for the Wa State Exam)
OR
some course providers offer the 20 hour class plus a separate 2 hour class on Wa Law.

The way it will be April 1, 2013 for Wa State LO candidates:
22 hours of Pre-Licensing Education (to prepare you for the National, Uniform State Exam)
4 of those hours on Wa State Law
OR
some course providers will offer the 20 hour class plus a separate 4 hour class on Wa Law.

How I will do it:
I have a stand alone 20 Hour Pre-Licensing class which is approved for all 50 states.
I have a stand alone 2 Hour Pre-Licensing Wa Law class.
I will write a separate 4 hour course on Wa State Law for new LO students who will be able to take this course as of April 1st to meet the new requirement.

The national exam will be tougher than it is today and we should always expect standards for licensing, pre-education, continuing education, and exams to continue to rise.

I sent detailed feedback to Wa DFI with my recommendations for even more classroom time needed for people who are brand new to the industry, and I also recommend less classroom time for people who currently work for a depository bank and just need to take the class and pass the test to make a switch to a non-bank lender or mortgage broker.  But I don’t get to make the rules.

At the present time I teach a 2 day class. In 2010 I taught the pre-licensing class as a 3-day class and had many, many requests to squeeze it all into 2 days.  Two, 10-hour days and soon, Two, 11-hour days is just plain nuts for a brand new person yet most new people do not want to take 3 days off from their existing job/life to take the course.  Arguably expenses for a trainer are higher with a 3 day course. Think room rental fees and lost opportunities to make money elsewhere on that third day.  So I will keep the class as a 2-day class for now but it is definitely a LOT of info to cover in 2 days.

Recommended reading:

SAFE 20-Hour Pre-Licensing and Exam Prep

Why some loan originators are not passing the national exam

FAQ about the pre-licensing class

 

 

 

Jillayne Schlicke: Inman’s 2013 Most Influential Thought Leaders

DSCN0334Inman Real Estate News announced their list of Real Estate’s Most Influential Thought Leaders for 2013 and Jillayne Schlicke of CE Forward and The National Association of Mortgage Fiduciaries was on the list! What an honor to be named alongside many of the people whose work I admire and read on a daily basis. Thanks so much to Brad Inman and everyone at Inman Real Estate News for this fantastic shout out!

Teaching Realtor Clock Hour Classes: Three Steps

I’m writing this post because I am often asked how to get started teaching Realtor clock hour classes.  There are a million ways to answer this question.  Do you want to know what the state requirements are? I can easily point you in the direction of Washington State’s required forms but the form won’t tell you how to get up and running. This form will tell you how to get yourself approved as an instructor.  Getting up and running is a different question and that’s the question I will answer in this post.  I have found that the best way to help people is to start at the end.

What’s your end game? Do you want to teach Realtor clock hour classes because you want to make a lot of money? Maybe you don’t care about the money because you have some other job where you already make pretty good money but instead want to use the classes as a way to get in front of Realtors so you can show them how awesome you are…so they will refer business to you.  I have found the latter to be the most common reason why people want to begin teaching Realtor clock hour classes. But let’s talk about money first.

Money

There isn’t a whole lot of money in teaching live classes because…well…because there are so many vendors who are willing to teach low quality CE classes for free.  There are also many large companies willing to send one of their full time employees to teach classes and at conventions for free. These instructors have full time jobs in management, sales, law, tech, etc., and teach classes or at conventions as a public relations maneuver for free, or for a very, very low fee. There’s a word for it. I call it sales-ucation.  Big conventions only pull out big paychecks for the big name draw convention speakers.  I’m assuming you’re not a big name convention keynote speaker if you’re reading this article so I’m going to tell a secret to the rest of you who are not sales-ucation speakers.  There always IS a budget of some sort and they always WILL pay you something—if you ask.

Money, continued
Three Puzzle Pieces: Teaching, Writing, Warm Butts

If you are looking to teach Realtors as a career, AND you can write your own classes you’re on your way. The last piece of the puzzle will be—how are you going to get warm butts in chairs?  You need to be able to do all three: Teach a kick-ass awesome class, constantly write new material, and have a marketing machine that delivers students into the classroom.  Most people who want to teach….want to teach and that’s it.  They want to walk into a classroom filled with students and walk out with a paycheck.  If that’s all you want to do, your value to a real estate school is really, really low.  But that’s okay, and there are real estate schools out there who may hire you but don’t expect to be paid much per hour or per class.

Vendors and The Numbers Game

Maybe you’re a vendor and…well, now don’t be offended if I call you a vendor.  You might be thinking…..I’m a loan originator! I’m an appraiser! I’m an attorney! I’m an escrow officer!  I hate to be the one to break the news to you but to a Realtor you’re just another vendor. Check your ego over there on the edge of the computer screen and don’t get offended if I call you a vendor.  So vendors typically want to use the classroom as a way to grow their business.  It’s a numbers game.  You get in front of X number of Realtors each month will translate into X number of referrals which will translate into X number of leads which will translate into X number of deals which will translate into X number of closed transactions which, on average, will net you X number of before-tax dollars per month.

This is a great strategy and it is doomed to fail. I will hire no one to work at my company if all Realtors are to you is a dollar sign or a lead in a grand master plan. People aren’t objects.  Students aren’t there to be used and even if you (please don’t) teach your class for free, the Realtors are still paying with their time.  Their time is valuable and if all you are doing is a sales song and dance about how much you know and how awesome you are you will fail.  This is what gives Realtor clock hour classes a bad name.  Instructors are in the classroom to help people learn.  They are not there to sell.

Magic is Mystery

So here’s the magic. As a vendor, I know you want deals. Everybody knows you want deals but if you go in there with your deal-wanting pants on, everybody’s going to know it. Instead, you need to approach teaching like a good book.  Nobody goes right to the end of a good book to find out what happened. It’s a mystery. That’s what makes reading so enjoyable.  If you really want to find success in the classroom, and by success I mean meeting your math goals in the previous paragraph, you need to let go of the outcome and instead focus on teaching an awesome, kick-ass class.  A class better than any class they’ve ever had from your competitor.  If you teach an awesome class, they will call you. You get to pick and choose who you want to work with. That’s right. At the end of a 4 hour class, you will know which Realtors you want to work with and which Realtors you don’t want to work with.

The Good News

Title insurance, mortgage lending, home inspections, escrow, all of these vendors have reputations for delivering “free” classes that are god-awful boring. That’s the good news. The bar for free vendor classes has been set terribly low.  All you have to do is to teach even a marginally decent class and they’ll think it’s the best class they’ve ever taken.

So what’s the difference between a god-awful boring class and a kick-ass awesome class? A class where the instructor DOES NOT lecture.

It’s Hard But It’s Also Easy

The most difficult thing for most all clock hour instructors to get their heads wrapped around is that your mouth doesn’t have to be moving the entire time. Unless you attended a fancy prep school in your younger days, most of us attended school where the teacher did most of the talking and we think we have to do that to teach Realtors.  That “teacher knows everything” archetype is embedded in our psyche.  That’s not what adult learners want from their clock hour instructors. Adult learners want to get involved with their learning and that means you don’t have to be the one talking all the time.  This is hard but also easy.

Step 1

The first step is to get into the right Instructor Development Workshop.  Find out who is in charge of the workshop, who is teaching it, how long they’ve been teaching Realtor clock hour classes and how familiar they are with the facilitation model of adult learning.  There are many IDWs out there.  Some are cheaper than others, some are online. You do get what you pay for. Shop around and ask questions.  Will the instructor answer all your questions about getting up and running during the workshop? Will the instructor help you fill out your state-required paperwork? Will the instructor give you the opportunity to try out the facilitation style of learning so you can get a feel for how it really works?  Find the very, very best Realtor clock hour instructor you know who teaches a lot of interactive, fun classes and ask that person for a recommendation on where to take an IDW.

Step 2

The second step is to figure out if you’re a writer.  If you don’t know how to write classes, don’t want to write classes, or don’t have time to write, then you’ll need to hook up with a real estate school that already has classes written that you can use but remember, no school is going to let you teach their material for free. There will always be a fee involved but you can let the students pay that fee if you don’t want to pay it.  Real estate schools like mine can also help you write something completely unique and brand new.  The class must be written to allow the instructor to give the students lots of things to do. The old-style class just gives the instructor lots of things to SAY.  That is a recipe for a boring class.   Just mailing a set of powerpoint slides to the Dept of Licensing won’t cut it. They want specific learning objectives. Real estate schools know how to write classes that the Dept of Licensing will approve.

Step 3

The third step is to figure out how you’re going to get warm butts in chairs.  The easiest way vendors think they will meet this goal is to offer free classes.  Unfortunately when you teach for free you are telling the Realtors what you have to teach them has no value.  Unless YOU own the real estate school and you own your own courses, you OR the students will be paying another real estate school a fee to use their school and courses. Having your own school is also an option but you still haven’t solved the warm butts in chairs problem.  So until then, make a list of possible marketing partners such as a local Association of Realtors or other vendors that also sell to Realtors.  Whatever real estate school you’ll be working with can also help you with marketing ideas.  You can have a great class and know how to teach an interactive class and then end up with nobody showing up.  The marketing piece is crucial to meeting your goals. Marketing takes time and money.  Just sending out a flyer to your email database of 500 Realtors might net you 5 students. If all you have is emails, you need BIG numbers to net 10 students.  If you don’t even have a database of Realtors you’ll need to buy one or partner with someone who has one.

Other Options

In closing, teaching Realtor clock hour classes is a big time commitment.  Not everyone can meet that time commitment, but they still want to attempt to meet their goals. Another option, without actually taking the time commitment needed to be an instructor, is to just sponsor a clock hour class through your local Realtor association. You bring in some healthy food like fruit and protein bars (can we ditch the donuts and muffins and bagels? All those simple carbs are increasing the LDL cholesterol levels of Realtors as I write this.  Enough of that crap already) and then you have a few moments to address the audience.  This is an option for you to create some face time but that’s all it is. Most vendors don’t stay for the whole class.  Drop and go is the status quo and I’m sure the ROI is not very high.  But it DOES make you feel like you’re accomplishing something if a “feeling” is the goal.

For those who want to learn how to facilitate instead of just “teach.”
For those who want help creating an interactive class

For those who want to exceed their goals instead of just meet them…

Call me.

Jillayne Schlicke
206-931-2241

LATE CE Classes are now available for 2012-2013 license renewal

3247Late CE Classes are now available for loan originators who did not renew their license at the end of 2012 and need to take the required CE class in order to renew.

NAMF Approved Course Provider 1400068

LATE CE 8 Hr SAFE LO CE #3247
LATE CE 1 Hr Wa Law CE #3246

This is a live, instructor lead class. There is no end-of-course test required in order to earn your continuing education certificate.  Attending the class and participating is the only requirement.  Read more about the course content here

2013 schedule

Jan 7
Jan 17
Jan 24
Feb 1
Feb 13
Feb 26

To register click through from the schedule page
OR
call Jillayne 206-931-2241
OR
email Jillayne:
jillayne at ceforward dot com

 

Regulators propose new mortgage disclosure forms

Goal is ‘restoring trust in the mortgage market’

BY ANDREA V. BRAMBILA

TUESDAY, JULY 10, 2012.

Inman News®

DSCN0334After a year and a half of research and review, the Consumer Financial Protection Bureau released simplified mortgage disclosure forms Monday that it hopes will make it easier for borrowers to understand the terms and costs of their loans and therefore be a step toward “restoring trust in the mortgage market” after the housing bubble.

As part of the bureau’s “Know Before You Owe” mortgage project, the bureau received tens of thousands of comments and conducted 10 rounds of testing with consumers and industry participants over the course of 18 months to come up with the proposed forms.

The public has until Nov. 6, 2012 to comment on most of the proposal. The bureau will review the comments before issuing the final rule, the CFPB said.

Consumers currently get two disclosure forms whenever they apply for a mortgage, and two more at the closing table.

Loan applicants get one loan disclosure form aimed at satisfying Truth in Lending Act requirements (the “TILA” form), detailing loan terms like annual percentage rate (APR).

Another form — the good faith estimate, or GFE — is required by the Real Estate Settlement Procedures Act (RESPA), and is intended to help borrowers evaluate their complete loan package, including closing costs like title insurance.

At closing, consumers get another TILA disclosure detailing the terms of their mortgage, and a HUD-1 Settlement Statement itemizing additional closing costs.

Lenders and groups representing consumers and the real estate industry have complained that having two sets of loan disclosures is confusing to borrowers.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the bureau with creating a single, unified form for loan applicants — a Loan Estimate — and a single, unified form for homebuyers closing a deal — a Closing Disclosure— that satisfy both TILA and RESPA requirements.

“When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal,” said CFPB Director Richard Cordray in a statement.

“Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home.”

According to the bureau, the new forms are simpler than the old forms, and allow consumers to compare the estimated and final terms and costs of different loan offers more easily. The forms also highlight key costs associated with a loan, including interest rates, monthly payments, the loan amount, and closing costs and how these might change over the life of the loan.

“Overall, I think the form is a vast improvement over the existing Good Faith Estimate and the existing Truth in Lending disclosure,” said Jillayne Schlicke, CEO of real estate continuing education company CE Forward Inc. and founder of the National Association of Mortgage Fiduciaries.

“The old Truth in Lending form is absolutely awful. The two things borrowers care most about are nowhere on the old form, that is, the loan amount and … their interest rate. Instead, the government gives us the bizarre things like ‘amount financed,’ which is not the loan amount, and APR, which is not the loan rate.”

The Dodd-Frank Act holds loan originators to a higher standard, she added.

“For example, before the real estate meltdown, loan originators could give borrowers the disclosure forms and that was it. It’s different now. Loan originators need to make sure that the borrowers understand what’s on the form,” she said.

The proposed forms will “help loan originators discharge their duties,” she said, because they will also be able to more easily understand the terms outlined within.

“With the old Truth in Lending form, many loan originators — not all — could not properly explain what was on that form,” she said.

Schlicke teaches prelicensing courses on mortgage lending law to prospective loan originators. She said her students love the proposed forms “hands down,” though, at first glance, they “kind of freaked out” about a couple of items on the forms, she said.

One was the “total interest percentage,” which spells out the total amount of interest that the borrower will pay over the loan term as a percentage of the loan amount. The sample figure in the form is just above 69 percent.

It helps the borrower see “if you made Payment One all the way to Payment 360, that’s a huge sum of money. I don’t think the average random consumer is visually aware of that when they sign their loan docs,” Schlicke said.

“I really like that feature,” because it helps the consumer make a more informed decision, which is “really what disclosure forms are all about,” she added.

The other item that gave her students pause was the lender’s “approximate cost of funds.”

“It helps the borrower see that banks make money by charging interest,” Schlicke said.

“The bank may have received the money at 1 percent but is lending to us at 4 percent, so that’s the bank’s profit margin right there.”

The proposed forms also warn consumers about some risks, such as prepayment penalties and negative amortization, which is an increase in the loan balance should the borrower make payments that don’t cover the interest owed.

Under a proposed rule that explains how the forms should be filled out and used, lenders would be required to give consumers a Loan Estimate within three business days of their loan application and a Closing Disclosure at least three business days before closing on a loan. The rule would also limit the circumstances under which consumers would be required to pay more for closing costs than was stated on their Loan Estimate.

“This will allow consumers to decide whether to go ahead with the loan and whether they are getting what they expected,” the bureau said.

In a letter to the bureau about a year ago, the Mortgage Bankers Association said the loan disclosures proposed by CFPB at the time were inconsistent with tolerance requirements currently in place under RESPA, which limit how much some loan fees can differ from initial estimates.

The MBA declined to comment specifically on the new proposed rule Monday, noting the rule comes in at more than 1,000 pages.

“We welcome the CFPB’s efforts to simplify mortgage disclosures so that borrowers have the most complete picture of the terms and costs of the mortgage they are applying for or signing for. It is critical we give borrowers all the information they need in an easy to digest way,” said David Stevens, the association’s president and CEO, in a written statement.

“Changing the disclosures will also impose massive change on the industry, who will need to implement the new forms, rules and processes into their mortgage processing, so we will be working with the CFPB to make sure the forms, and the rules surrounding them, are best for borrowers and lenders alike.”

American Land Title Association CEO Michelle Korsmo called the rule “a step in the right direction,” but said the groups was disappointed that the bureau has proposed keeping tolerances in place.

“Regrettably, the bureau continues to use a tolerance concept that has resulted in consumers receiving inflated estimates and prevents title and settlement agents from competing fairly with one another,” Korsmo said in a statement.

Currently, settlement agents are required to provide the HUD-1 and lenders are required to provide the TILA form. In the proposed rule, the CFPB asks for comment on who should be responsible for providing the new, unified Closing Disclosure, proposing that either the lender be responsible for delivering the form or that the lender rely on the settlement agent to provide the form, but with the lender remaining accountable for the accuracy of the form.

“ALTA believes lenders should continue to have responsibility and liability for preparing the part of the disclosure related to the loan costs, while settlement agents should continue to have responsibility and liability for preparing the part of the disclosure related to the settlement costs,” Korsmo said.

“We should remember title insurance and settlement companies didn’t cause the housing crisis and didn’t take advantage of consumers and investors. Consumers deserve an independent, third-party at the settlement table and this rule should ensure this role remains in the real estate transaction.”

Diane Cipa, general manager of title insurance firm The Closing Specialists, said she had not had a chance to read through the new proposed rule, but considered the last version of the new disclosures she had seen “workable.”

“As an old timer in this business I know we have to adapt and go with the flow. The RESPA 2010 changes to the HUD and GFE have proven to be wonderful tools for keeping the lending process honest. Will the new disclosures be an improvement? I doubt it,” Cipa said.

“I expect loads of confusion as an industry which is weary of the whirlwind of changes to laws and regulations tries to conform. We’ll try, though, and I expect in the end we’ll succeed. We have to. I am simply hopeful that the consumer will be better served in the end. I know that’s the goal of CFPB and that’s our goal, too.”

Also Monday, the CFPB proposed a rule that would expand consumer protections mortgage loans considered “high cost” based on their interest rates, points and fees, or prepayment penalties. The rule would ban balloon payments generally and would completely ban prepayment penalties. It would also ban fees for modifying high-cost loans and limit late fees as well as fees charged when consumers ask for a statement that tells them how much they need to pay off their loan.

The rule would require some loan applicants receive housing counseling, including those applying for high-cost mortgages and first-time buyers whose loans permit negative amortization. The rule would also require all applicants be provided with a list of housing counseling agencies.

The public will have 60 days, until Sept. 7, 2012, to comment on most of the proposed rule. The bureau will issue the final rule in January 2013.

 

****
This article appeared on Inman News July 10, 2012

 

The Moral Terrain of Mortgage Lending

General ethics applies to everyone in all spheres of life; in contrast, professional ethics is usually memorialized by written code and is intended to apply only to those individuals who have been identified as professionals in their field.  For example, in the legal industry, both lawyers and paralegals are considered professionals and must abide by certain written ethical codes, while legal secretaries and law clerks are not considered professionals and are not held to the same professional standards (although certainly the employers they work for can require it).  In the healthcare industry physicians owe specific moral duties that are captured by various ethical codes; in contrast, orderlies and certain other lower level functionaries are not considered professionals and do not have to abide by these codes of ethics, although they follow directives that are patterned after the applicable codes.

The essence of professional status requires one to take a licensing exam which tests substantive knowledge and codified standards of practice. Currently, the mortgage origination industry is in a state of transformation because, although loan originators working under a mortgage broker and non-depository lender must pass licensing exams, loan originators who work for depository banks are not required to do so.  A brief historical review of standards of practice indicates that the designation of mortgage originator is moving towards a clearly identifiable status as a profession.  We in the industry can now move mortgage originators clearly into professional status by implementing competency exams for all LOs and disciplinary procedures, once a code of ethics with sanctions is formally put into place. Until then, we revert to using general ethics in the workplace.

General ethics attempts to provide a rational framework for answering the paramount moral question “What ought I do?”  We all struggle with this question every day in all contexts, and we attempt to find answers through emotion, intuition, authority figures, religion, and hopefully, reason.  In answering these questions, we attempt to construct common and objective frameworks of values in order to solve these problems in a consistent fashion.  This gives our lives coherence and unity as we strive toward ethical ideals.  In contrast, the problems of professional ethics in a business setting, emerges from highly unique structural domains and thereby carry with them modified sets of values.  For example, in the criminal justice system there are specific players that play specific roles in that structure and the overlying value for lawyers is to protect the constitutional rights of clients. In the healthcare industry physicians have duties of informed consent to patients, and while doing no harm to the patient, they must also respect patients’ rights to self-determination.

We infer that anyone who is officially designated as a professional also has fiduciary duties toward his client.  Fiduciary duties arise in any circumstance where one person has greater authority, power, or knowledge than their client. This carries with it the duties to act in the highest good faith and to never put one’s own interests above the interests of any client with regard to the subject matter of their contractual arrangement.  Being designated as a professional carries correlative burdens and benefits.  One benefit is that a professional has greater industry prestige and greater earning power. A corresponding burden of this fiduciary duty is that there is a greater responsibility to protect the interest of clients.

At this point in time, we cannot assume a mortgage originator is a) a professional (which triggers a different set of ethical considerations than general ethics and b) is a fiduciary and as such owes duties of the highest good faith to his client.  Furthermore, this would imply that the mortgage originator also has the affirmative duty to ensure his subordinates are also protecting those fiduciary duties.  In some states, laws have been passed that designate a mortgage brokers and the loan originators licensed under the broker to owe fiduciary duties to their clients but this is not the case in all 50 states for all loan originators no matter where they work. Instead we would classify loan originators as an emerging profession.

It is not clear that an individual not officially designated as a professional owes fiduciary duties to clients, though many courts have held loan originators to a fiduciary standard during the last decade as borrowers attempted to balance the scales of justice after becoming victims of predatory lenders.  (See “Mortgage Brokers-What Fiduciary Duties Exist? By Andrea Lee Negroni, Mortgage Banking Magazine Oct 1, 2007.) Typically non-professionals deal at arm’s length with their clients. In this case, consumers do not expect that their mortgage loan originator is not self-interested in their dealings, which necessitates the need for broker shopping in order to get the best deal, yet many borrowers did believe the loan originator was working on behalf of the borrower when no such duty existed.

If a mortgage originator does not have professional status that results from national competency examinations and being held to a code of ethics with sanctions, then there is no good reason for a consumer to expect any kind of special duties above and beyond those prescribed by law.  The expectation again is that both parties are operating at arm’s length and the consumer must be held accountable for his choice in mortgage originators.  In situations where the mortgage originator does not have official professional status, the operative rule continues to be “caveat emptor.” In contrast, in situations where the mortgage originator has official professional status, the operative rule shifts to “caveat venditor.”

Frequently, all professionals face conflicts between professional obligations and their own personal senses of morality.  For example, a pharmacist may have to respect his clients wish to purchase a Plan B Emergency Contraception even though he is personally opposed on moral grounds.  While we do not intend to provide any definite answers to these sorts of conflicts that occur, we can offer some account of some of the moral considerations that go into thinking through these sorts of conflicts.

There are two ways that professionals can approach ethical problems.  One is called holism and the other is called separatism.  Holism is an approach that implies that one has an absolute set of standards that applies to all contexts and domains of one’s life.  In contrast, separatism means that a moral agent separates and isolates the moral domains of his life.  He does not have one single set of moral standards that applies in all contexts.  He may have a different set of standards for strangers, a different set of standards for home, and an even different set for work, especially because there may be a written code of ethics at work to which he must abide.

For example, many states have consumer protection statues within their mortgage loan originator licensing laws requiring a duty of honesty to all parties.  By becoming a loan originator that person agrees to abide by that absolute rule.  In comparison, that very same person, in his personal life, may have adopted a rule concerning telling the truth that allows occasional deviations if the consequences so warrant.  This person then is adopting the strategy of separatism because he is rigidly separating moral domains of his life with different moral rules.  Another individual, however, could follow the approach of holism by maintaining an absolute rule of lying in all contexts of his life if it is in his best interest to do so.  If one’s professional, ethical standards are vague and ambiguous, it is difficult, if not impossible to be a separatist.  This is so because there is no clear rational way to separate one’s professional moral obligations from one’s general moral obligations.  This, then, throws one into a holist approach, which leads to subjectivism and thereby risks an “anything goes” policy.  Moral chaos ensues.

Due to what we believe was a deficient motivational structure, rampant violations and the resulting public outcry, mortgage originators are now facing severe externally-imposed federal regulations which are quickly worsening the situation of a typical mortgage originator and business owner.

The National Association of Mortgage Broker Code of Ethics, while it mandates that members shall conduct business in a manner reflecting honesty, does not go far enough in clarifying what honesty means.  This allows a wide number of interpretations of honesty and unfortunately, because there is no precise definition of honesty there is no objective standard to which members can be held.  This is the very problem in this industry. Because code provisions are expressed with great ambiguity they are susceptible to moral subjectivism, which means that ultimately just about anything goes and the “anything goes” policy has caused huge amounts of political and legal machinery to gear up to create external regulations of our industry.  Laws come with far more serious sanctions than we would mandate through continuing education, disciplinary proceedings with retraining, and so forth, which we believe will be less efficient and will decrease industry profits.  The mortgage lending industry has a choice: We can either proactively, internally regulate ourselves with the attempt to educate, train, and improve the moral fiber of mortgage originators, or else we will risk constant and even greater external regulation by various legal bodies.

We believe the best way to elevate the moral fiber of any industry is to develop and provide an ethical structure of motivation for our industry that is not dependent on external rewards or punishments but instead helps loan originators develop a system of internal rewards based on ethical virtue, duty, and consequences.

NAMF is writing such a code. Contact Jillayne Schlicke for more information: 206-931-2241

Portions of the above article were originally published in Mortgage Originator Magazine in 2001 and authored by Kevin Boileau, Ph.D., and Jillayne Schlicke, M.A.

Mortgage Folks: Stop Blaming Fannie, Freddie and the CRA for the Meltdown

Hi Everyone,

When the topic of blame comes up, lots of us in the mortgage lending industry always seem to want to point towards someone else instead of taking a look at our own role as loan originators, processors, underwriters, and so forth.  One thing I constantly hear is how it was the fault of Fannie Mae and Freddie Mac for lending money to subprime borrowers. First of all, Fannie and Freddie don’t lend money and second, that myth has already been debunked here and here.

Michael Bloomberg publicly blames Congress for passing laws encouraging Fannie and Freddie to do the same.  Read how ignorant that position is right here.

Others blame the Community Reinvestment Act saying the Act forced banks to make mortgage loans to subprime borrowers. Sorry folks, the CRA has been around since the 1970s and is not to blame for the real estate bubble and the meltdown.  Read why here. Most of the subprime loans made were originated by people not subject to the CRA.

It’s beyond time to stop blaming others and to take accountability for what we can do as a collective group of individuals so we can move forward.

8 Hour SAFE Comprehensive Continuing Ed Course Plus 1 Hour WA State Law CE

8 Hr SAFE Comprehensive NMLS Approved Course Number 2146
1 Hr WA State Law CE NMLS Approved Course Number 2089
 
Course Description:
4 Hours Federal Law
2 Hours Ethics, Consumer Protection, Fraud, Fair Housing
2 Hours Non-Traditional Lending
1 Hour WA State Law

In this course we will review the Federal Reserve Board’s rules on loan originator compensation prohibitions and the Dodd-Frank Reform Act including the new Consumer Financial Protection Bureau, LO compensation limits coming under Dodd-Frank, and definitions of non-standard loans, high risk loans, and qualified residential mortgages (QRMs).  In addition we will:

Learn why overages and yield spread premiums have been deemed unfair
Become aware of how unethical business practices can result in legal consequences
Understand the new “duty of care” required by loan originators
Learn about the most recent HUD Fair Housing proposed protected class

Schedule of upcoming classes

End of Course Evaluations from previous years:
“As always…awesome! You make it fun and interesting and I always learn something new.”
“I liked the class participation, open discussion and quizzes. This kept us engaged and time flew.”
“The best part about this class is that it went by really fast and we got all our CE hours done in one day!”
“Jillayne is informative and keeps the class moving. Simply an exceptional instructor.”
“Great class.  I honestly dreaded coming today thinking class was going to drag on but time flew by, we actually had fun learning all the regulations and getting this over and done with in one day feels great.”
“Excellent class. Good case studies, good dialogue among students.”
“This is the most comprehensive class out there for mortgage lending.  Not only is the instructor informative and up to date but she also teaches in a fun and motivating way.  Thank you for being an LO advocate.”
“I have always enjoyed your classes and this one was outstanding.”
“I am very happy that I now understand the new RESPA and TILA rules. Ethics is always a pleasure and court cases seemed unjust toward the loan originator at first but now I understand why the LO/Broker was sued.”
“Enjoyed learning more about non-traditional lending. As a broker that generally handles only conventional loans, this information was very informative.”
“Ms. Jillayne helps me to understand and remember TILA and RESPA. She is always energetic and there are no dull moments.  I always return for her classes.”
 

Federal Reserve Board Rules on LO Compensation Prohibitions Aim to End Predatory Lending

funny pictures of cats with captionsUnder the final Federal Reserve Board’s loan originator (LO) compensation rule, effective April 1, 2011, an LO may not receive compensation based on the interest rate or loan terms. This will prevent LOs from increasing their own compensation by raising the consumers’ rate. LOs can continue to receive compensation based on a percentage of the loan amount and consumers can continue to select a loan where loan costs are paid for via a higher rate. The final rule prohibits an LO who receives compensation directly from the consumer from also receiving compensation from the lender or another party.

The final rule also prohibits LOs from steering a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the LO’s compensation.

Though a lawsuit has been filed to stop the changes from going into effect, there has been legal research conducted by the FRB over the course of many years.

The FRB’s research found that consumers do not understand the various ways LOs can be compensated such as yield spread premiums (YSPs), overages, and so forth, so they cannot effectively negotiate their fees. Yes, some LOs spend many hours educating their borrowers but this is not true for all LOs.

YSPs and overages create a conflict of interest between the loan originator and consumer. For consumers to be able to make an educated choice, they would have to know the lowest rate the creditor would have accepted, and determine that the offered rate is higher than the lowest rate available. The consumer also would need to understand the dollar amount of the YSP to figure out what portion will be applied as a credit against their loan fees and what portion is being kept by the LO as additional compensation. Currently, mortgage broker LOs must do this, but LOs who work for non-depository lenders or depository banks are not required to disclose their overage.

LOs argue that consumers ought to read their loan docs and take personal responsibility for negotiating a good deal on their mortgage yet facts related to LO compensation are hidden from consumers when working with depository banks and non-depository lenders.

The FRB’s experience with consumer testing showed that mortgage disclosures are inadequate for the average random consumer to be able to understand the complex mechanisms of YSPs when working with mortgage broker LOs. Consumers in these tests did not understand YSPs and how they create an incentive for loan originators to increase their compensation.

For example, an LO may charge the consumer an LO fee but this may lead the consumer to believe that the LO will act in the best interest of the consumer. The FRB says: 

“This may lead reasonable consumers erroneously to believe that loan originators are working on their behalf, and are under a legal or ethical obligation to help them obtain the most favorable loan terms and conditions.”

Consumers may regard loan originators as ‘‘trusted advisors’’ or ‘‘hired experts,’’ and consequently rely on originator’s advice. Consumers who regard loan originators in this manner are far less likely to shop or negotiate to assure themselves that they are being offered competitive mortgage terms. Even for consumers who shop, the lack of transparency in originator compensation arrangements makes it unlikely that consumers will avoid yield spread premiums that unnecessarily increase the cost of their loan.

Consumers generally lack expertise in complex mortgage transactions because they engage in such mortgage transactions infrequently. Their reliance on loan originators is reasonable in light of originators’ greater experience and professional training in the area, the belief that originators are working on their behalf, and the apparent ineffectiveness of disclosures to dispel that belief.

The FRB believes that where loan originators have the capacity to control their own compensation based on the terms or conditions offered to consumers, the incentive to provide consumers with a higher interest rate or other less favorable terms exists. When this unfair practice occurs, it results in direct economic harm to consumers whether the loan originator is a mortgage broker or employed as a loan officer for a bank, credit union, or community bank.”

Mortgage broker LOs have been forced to show all their compensation on line 1 of the GFE since Jan 2010. Mortgage Broker LOs will have very little difficulty in making the transition on April 1st. LOs who work for a non-depository lender or depository bank who are currently earning overage by selling the consumer a higher rate will need to make the ostensibly painful transition to full transparency.

* LOs who argue that consumers should take more responsibility for their mortgage loan ought welcome the FRB rule.

* LOs who argue that predatory lending was bad for consumers and bad for the mortgage industry should support the FRB rule. 

* Mortgage broker trade groups who have been screaming for a “level playing field” should celebrate the FRB rule and reconsider wasting membership dollars on a lawsuit.

Remember, the FRB rule does not limit LO compensation. Instead the FRB is imposing LO compensation prohibitions. The three percent rule on compensation will come later, with the Dodd-Frank Act.

The two doods from TBWS have put out  a series of entertainment videos that ought be taken with a grain of salt. Mike Anderson from Louisiana posted a youtube video meant to incite Realtors to earmark political action donations to fight off this new rule by telling viewers Realtor commissions might be next! And after that….used car salesmen and all commision salespeople. “This is a David v. Goliath story! Unprecidented! This is America, people.  We need donations now!”  Oh please. What a sorry-ass way to use fear to manipulate. 

Rhonda Porter, whom I highly respect, says the FRB rule is bad for consumers because an LO would not be able to lower his/her commission to help pull a transaction together.  The problem with all this talk of “this is bad for the consumer” is that nobody seems to have taken the time to read WHY the FRB rule was strutured this way

The FRB says the reason why LOs will not be able to lower their fees if needed is because LOs bring their own subjective decisions into which customers are able to receive this “I’m going to help you by lowering my commission” gift, and which customers would not be offered this same gift. The Rule aims for fairness and takes the subjective decision out of the hands of loan originators.   Maybe if I wear a button-down shirt and wave my hands around and video tape myself talking like a TBWS dood I’d get heard: Federal regulators don’t trust LOs.  I know this sounds harsh, LOs but the industry did this to themselves.  And don’t even get me started on the argument that all the predatory lenders are gone.  I. Think. Not. They’re still around, laying low doing loan mods, short sale negotiating or predatory mortgage litigation scams waiting until the market turns.

Yes, I know the FRB Rule means banks and lenders will increase their rates to make up for the increase in their own cost of doing business.  Yes, I know the big banks will be able to keep their profits.  Oooo, I iz so scarrrred of the evewl banksters.  To that I say, don’t like it? Then go open a bank.  This is still America and last time I checked you can still start a business anytime you’d like.  And besides, the last time I checked the banks are still funding the loans you’re making LOs, so stop talking out of both sides of your butt.  If bankers are the devil, then perhaps you could find someone else to fund your loans. Let me know how that works out.

The Federal Reserve Board Rule prohibitions on loan originator compensation attack predatory lending.  Consumers will receive more protection and for that consumers will have to make a trade: Rates and fees will be higher.  Count me in favor of the new FRB rule.  Four years ago I outlined solutions to the subprime lending crisis:  “Let’s stop dancing around the ambiguous behavior we call “predatory lending” and define it”The FRB rule does just that.

Mortgage loan originators who embrace the new FRB Rule and can make the transition to this new consumer-protection wave of legislation heading our way will survive and thrive.  Yes, even mortgage brokers will survive just fine. The FRB Rule is a speck of dust compared to what’s coming our way with The Dodd-Frank Act.

Secondary Marketing Fraud Question from an Anon Caller

Question from an anonymous phone caller:

“I work at retail bank. When rates were dropping, I asked my processor to lock several FHA loans.  All the paperwork to lock was completed and sent to management.  Management did not lock the loans, hoping to ride the wave down and earn extra yield for the bank….rates rose and many of my customers lost the ability to lock at the rate we promised.  They were furious and not surprisingly took their refinance business elsewhere. I lost the ability to earn income on those loans and my company also lost interest and fee income. I feel horrible for those customers and I have all kinds of emails saved showing our company promised to lock their loans.  I complained to management and I was fired.  What can I do to report this? I don’t want to have this happen again to customers at that bank.”

 A: Is the bank state or federally chartered? If the bank is state chartered you can file a complaint with DFI.  If the bank is federally chartered, find out the name of their federal regulator from the bank’s website.  The FBI also takes whistleblower complaints on cases like this as the FBI is HUD’s enforcement arm: http://seattle.fbi.gov/ I ran this by our local Seattle FBI Field Office and Jim Siwek, Assistant Special Agent in Charge, HUD-OIG Investigations, says to contact the Seattle FBI office here: (206) 220-5390 or the direct HUD-OIG hotline: 1-800-347-3735. Other ways of contacting HUD:

Mail:
HUD OIG Hotline
451 7th Street, SW
Washington, DC 20410
 FAX: (202) 708-4829
 Email:  hotline@hudoig.gov

Why Some LOs are Not Passing the National LO Exam

The first time “pass” rate of the national loan originator exam has fallen to 69 percent.  This is an indication that the test is not too easy.  A high pass rate means an exam is too easy.  A low pass rate means an exam is too hard.  The numbers that tell a different story are the repeat test takers.  Test candidates who fail the LO exam the first time and retake the exam pass the exam only 44 percent of the time.  The SAFE Mortgage Licensing Act is working the way it was intended. 

This blog post is for loan originators seeking help who are trying desperately to pass the test the second, or third time.  Test candidates must wait 30 days between tests and if they fail after their third attempt, they have to wait 6 months before taking the test again.  I know it sounds unfair, but in all seriousness, not everyone is going to be able to pass this exam. The six month cooling off time is like a forced reflection period for a candidate to either get serious in addressing their repeated fails or get serious about studying.  The SAFE Mortgage Licensing Act of 2008 is only the beginning.  Over the next decade loan originators will slowly transform from being less like retail salespeople and more like professionals. The loan originator exam will never be as easy as it is in 2010.

I teach the SAFE Pre-Licensing course for new to newer loan originators which is a 20 hour course. I also teach an exam prep course for experienced loan originators and have had the opportunity to interact with hundreds of loan originator students. In this blog post I’d like to share the reasons I believe people are not passing the exam so those who need help can identify their challenges and meet or reset their goals.  The following reasons are numbered for conversation sake and do not appear in any particular order.

1. One reason why people are not passing the loan originator exam is the same reason why people all over the world don’t pass comprehensive exams: Not enough studying. A 20 Hour pre-licensing course is definitely not enough time to teach and learn all the complex knowledge required to pass the national LO exam.  20 hours could be three, 7-hour days or two, 10-hour days.  Take a look at the test content outline.  There’s NO WAY an average human, who has never been in the mortgage lending industry, is going to be able to learn let alone understand, memorize and be able to take a test on all these topics.  One reason the number of classroom hours was set at 20 may have been because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Two days is plenty of time to spend with an experienced originator but not someone brand new.  In the future, expect the pre-licensing hours to be expanded to a full week of education. Until then, some students will have to spend way more time outside of the classroom studying.

2. “There’s no good study material available”
NMLS-approved course providers are not allowed to take the test only for the purpose of telling everyone what’s on the test.  In fact, we agree to NOT do this.  If we’re caught doing this we lose our ability to teach NMLS approved courses! No thanks.  If you think about it, if it were that easy to cheat on the exam then why bother with the SAFE Act? Why not just give anyone who wants a license a license and not test them.  The Nationwide Mortgage Licensing System (NMLS) does not provide a study guide book. Instead they encourage test takers to seek out study material from course providers….however, slow down a bit and you’ll see right inside the test content outline, NMLS TELLS YOU WHERE THE TEST QUESTIONS COME FROM. Look at page 3 of this pdf.  Those who are seeking good study material don’t have to pay to get it.  It’s all available for free. However, that means you’ll have to actually read it. More about reading soon.

3. Wanting the answers/not wanting to study
It is the nature of the loan originator to go ask a compliance person for the answer when he/she has a question about Fannie Mae, RESPA, disclosure requirements, etc.  So in attacking this exam, LOs expect to call a course provider and have that course provider hand them a set of 100 questions that will be on the exam. And by the way, anyone who claims to “have THE 100 questions you MUST know” is probably wrong. Any list of questions floating around out there will eventually make their way to NMLS and I’m sure they’ll pull those questions. Okay, so maybe you don’t expect the answers but you expect someone to sell you a book that tells you what will be on the exam.  That book doesn’t exist either.  What about a book that summarizes the test content outline?  Yes there are books available and I think those books would be very helpful for some folks but no book will tell you the exact test questions you’re going to get! Relying only on a book is a mistake. Some people will need to do more.

4. I know the material, I just can’t pass the test.
It’s possible you don’t know the material. Re-read numbers 1-3. Or perhaps you have test anxiety.

5. Test Anxiety
I  have met several LOs who are have a high degree of test anxiety that goes way beyond normal nervousness.  Yes, passing the test is important. if you don’t pass, XYZ will happen. In their mind, people go from “not passing” to “living in a van down by the river” in one heartbeat.  Test candidates get themselves all worked up so they can’t eat, sleep, think, or do anything let alone actually learn and understand the test content.  There’s lots of tips and ideas that have been written about dealing with test anxiety and even a little self-quiz you can take here.  One thing the experts agree on is that a person with high test anxiety isn’t going to be able to learn much while studying.  If you want to pass the LO exam, you must deal with your anxiety first and foremost before taking any exam prep classes.  There is simply NO time in anyone’s classroom to give personalized psychological counseling.  Besides, most of the instructors teaching classes whether they’re live or online specialize in mortgage lending not test anxiety. Your challenge is different. Know thyself….pass the test.

6. Maybe you have an undiagnosed learning disability.  As I’ve mentioned in other articles, back in the 1970s there were no para-educators available to follow kids around giving the special needs kids extra support. Instead students survived in other ways. Humans listen and talk at a much faster and higher rate than we read and write.  Many LOs are high functioning talkers but low functioning readers.  Some people are dyslexic or have other bona fide learning disabilities that they know about but don’t want to deal with the stigma associated with being labeled.  Well if you want to pass the LO test this might be that point in your life where you finally are going to have to come out of the closet and get some help.  Repeated on purpose: Most of the instructors teaching classes whether they’re live or online specialize in mortgage lending and not learning disabilities. Ask your primary care physician for a referral to a doctor or counselor who specializes in diagnosing learning disabilities in adults.  The Nationwide Mortgage Licensing System will make reasonable accomodations for people with documented learning disabilities.  See page 14 of the MLO Testing Handbook for more details.

7. Subprime LOs who fell out of the industry during 2008 and are trying to re-enter the business are having a very, very hard time passing this test.  The main reason is because they think they already know how to originate and don’t want to spend the time studying or don’t think they have to study so they repeatedly fail the test. Anyone who entered the industry around 2002, left the industry in 2007 or 2008 and only originated subprime received very little compliance training if any. 2011 is a radically different world compared with 2007. If you still think stated income loans should come back, if you still believe that a pay option ARM is “the right product for the right person” and if you think it’s unfair that people can’t use seller downpayment assistance programs please do not re-enter the industry.

8. The test contains trick questions!
Actually, test writers try very hard NOT to write trick questions. The reason the test question sound tricky is because LOs are not use to looking up answers and reading the statute.  Instead they ask their boss or the compliance person, their processor or the person sitting next to them for the answer and move on.  People use language differently in different parts of the U.S.  Teaching a class in Oklahoma or Idaho is vastly different compared with teaching in Seattle or Virginia.  Test writers can’t use spoken language and coloquialisms from different parts of the U.S. when writing test questions for an exam to be delivered in all 50 states. The ONLY fair way to write the test questions is to copy and paste directly from the law.  That’s why the test questions sound and look “tricky” but really the trick is on you. If LOs would simply study directly from the law, the test questions would look very, very familiar. Re-read number 2.

9. You’re ESL
English language learners are my best students. Why? Because they know good and well that they have to listen, ask lots of questions, and study over and over again to pass this test.  ESL LOs…you WILL pass the test. Read more here.

10. The test has too many “situational” questions
So you know RESPA. You know TILA.  You’re scoring high on all your practice exams but the test isn’t going to be as easy as just knowing that you have to send out early disclosures within 3 days of the application.  Instead the test will contain situational questions that will require you to understand how and also why TILA and RESPA interact with each other. This requires you to look at a test question and understand what information you DON’T need and cast it aside. Only then will you be able to understand what content the test writer is testing you on.  This means memorizing test questions is a bad way to study. Instead you’re better off studying the laws and rules that govern mortgage lending.  Mortgage loan origination is all situational. These are highly appropriate questions for the exam and I hope we see more in the future.

11. You’re only working part time
The national LO test sets a bar and asks people who want to originate to show proof of knowledge of a body of information. Loan origination is no longer a sales job. It’s transforming into a profession. It’s really hard to be a part time doctor, lawyer, engineer, dentist, CPA unless that person is entering semi-retirement. The knowledge, skill set, and industry changes are too wide and deep and the consequences of screwing up are too high.  Welcome to mortgage lending in 2011.  You must be on your game full time or no one will want to hire you. those companies that do hire part timers are going to have huge liability issues supervising you in 2011 and beyond.  Commit to origination as a profession. Now start over and re-read items 1-3.

12. You did not finish high school
The SAFE Mortgage Licensing Act does not require a high school diploma or equivalent to become a licensed loan originator. Instead, those without a diploma simply must have proof of three years of experience in the mortgage lending industry.  Subsequently, the national LO exam will be that barrier to entry for folks who may have a learning disability or folks who may not have the ability to think, reason, and understand above a 9th grade level. Some of the math questions on the exam will require a basic understanding of 9th grade algebra. Some of the questions will require the ability to understand how two federal laws relate to each other and to the consumer.  Some people only have the ability to understand one federal law at a time.  Mortgage loan origination today requires the ability to multi-think all day long.  My recommendation: Finish high school first.  The discipline required to obtain a GED will be good practice for studying for the LO exam. 

13. You have a complex learning style
How do you best learn? Visually, auditory, tactile, whole body, emotional? These are all learning styles and passing the test means knowing how you best learn. Learning requires understanding. If you can teach another person something, this is a good sign that you know that concept.  Some people have to see pictures. Other students need to hear the content.  Sometimes instructors tell stories about legal cases. Stories evoke emotion which triggers long term memory.  Sometimes students learn best if they get their whole body involved in the learning process. Everyone is different. Choose a course provider that understands learning styles and find one that matches your particular style.  In my experience, most students have a mixed style so find an instructor/course provider that mixes it up for you. One student had me on the phone grilling me with questions about my course for at least 15 minutes. We figured out that we’d be a good match for each other. She attended my course and passed the test the next day.  Don’t be afraid to call course providers and ask lots of questions.

Every test candidate is different. Some people listen at a higher/faster rate than they can read and write. Some people need to simply read through 400 sample test questions and that’s all they’ll need.  Some people have undiagnosed learning disabilities.  If you’ve taken the LO exam and failed, re-evaluate your learning style, the time you’ve spent studying and any of these other ideas and try again.  If you still cannot pass the exam ask yourself how much you love the mortgage lending industry because there are other positions available in lending that do not require an LO license.  And remember, you can always go work at a depository bank.  Bank LOs do not have to pass the exam…..yet.  Someday they will.

LO Compensation Limits Coming in 2011!

In order to understand all the whining taking place by loan originators (LOs) about compensation limits under the Dodd Frank Wall Street Reform Act as well as the Federal Reserve Board that go into effect in 2011, it’s important to lay down some background for consumers.

During the predatory lending days (which I like to fantasize about as being in the past) some loan originators would frequently mis-use the government mandated disclosure forms to deceive consumers as to the amount of compensation earned on a typical mortgage loan.  LO fee income was put on the wrong line, left of the forms altogether, bait-and-switch was a common practice, and there are ample cases of flat out mortgage fraud to last us a lifetime.  It is no longer a matter of IF it was done.  Evidence of loan originators making six figures a year income with no training, no high school diploma, and no experience  attracted more of the same “get rich quick” mentality.  It happened in communities all over the United States by loan originators who worked at all different types of institutions: depository banks, non-depository lenders, consumer loan companies and mortgage brokerage firms.  Because it happened is one of the logical reasons and there are others, why LO compensation limits will be put into place.

For consumers reading this blog post, it is important to understand the three main ways mortgage companies are regulated. A loan originator can work for a retail depository bank that accepts checking and savings deposits, an LO can work at a non-depository mortgage lender which has the ability to fund their own loans but does not offer retail banking, and a loan originator can work under a mortgage broker.  A broker does not have the ability to fund their own loans. For a fee, a broker “finds” the mortgage money on behalf of the consumer.  To make things slightly more complex, a loan originator working for a bank or lender might also be able to broker a loan out to another lender.  There are other ways to originate such as working at a credit union, an insurance company, etc., but the three main ways, broker, banker, or lender are historically the most common.

Loan originators are compensated in many ways.  LOs can earn a percentage of the loan amount, LOs can charge extra fees such as an administration fee, application fee, processing fee, and so forth, and take some or all of those extra fees as income.  In Jan of 2010 changes in the federal law RESPA requires all compensation that inures to the benefit of the loan originator to be shown on line 1 of the Good Faith Estimate. This includes compensation to a loan originator who works for a mortgage broker as well as a loan originator who works for a non-depository mortgage lender and also a loan originator who works for a retail depository bank.  Everyone’s compensation is now shown on line 1 of the Good Faith Estimate. The federal government’s intentions with this change to RESPA was to help consumers shop for the lowest cost loan.

During the predatory lending days, many LOs put their fee income on all different lines of the Good Faith Estimate (GFE) and consumers were unable to compare costs.  Some predatory lenders simply left fees off of the GFE to make the consumer believe they were the lowest cost choice only to have the fees re-appear at closing (definitely a violation of many state laws because consumers are not given a chance to question the suddenly higher fees.) 

There is no question that many LOs who worked under the mortgage broker system enjoyed earning lots of extra compensation by charging the consumer a little bit (or a lot) higher interest rate than what the consumer could have received.  This extra fee income is called Yield Spread Premium. This is similar to when a retail store marks up the cost of goods or services from its wholesale price.  The difference between wholesale and retail markup might be pure profit but it also might cover costs.  There’s nothing wrong with a mortgage broker charging a higher rate for services rendered….provided the extra compensation income is disclosed to the consumer.  MANY predatory lenders simply decided not to disclose their extra fee income!  Yield spread premium income wasn’t on the GFE at all or it was disclosed in a way that was in violation of state and federal law. Why? I suppose we could argue that all day but for the most part, LOs who blatantly violated YSP disclosure rules did so because…they could.  We had too many LOs, too many loans being written, too much money being made by everyone, too many funding lenders teaching LOs how to earn lots of money this way and not enough regulatory oversight.  Predatory lending was happening all across the spectrum, not jut on the mortgage broker side, from as early as 1999, the first year I really took notice of the problem.  The brokers were the first ones to really get shot down for their extra YSP compensation when GFEs and HUD 1 closing statements were scrutinized in the courtroom.  Fast forward to 2010 and today instead of LOs up-selling interest rates and helping themselves to extra compensation, all LO compensation must show on line 1 of the GFE. So they can still do it, provided it’s disclosed to the consumer.

In 2009 and throughout 2010, LOs have fled the mortgage broker model and were recruited to work for the non-depository mortgage lenders (they also like to call themselves mortgage bankers.)  Why? Well one reason is because RESPA exempts a lender with the ability to fund its own loans from disclosing extra compensation (similar to YSP but we call it overage at a mortgage bank) from up-selling a higher rate. LOs who work at a depository bank are also exempt from disclosing this “overage” income.  So how much money are we talking about? It varies from company to company and from lender to lender and is based on a percentage of the loan amount.  One LO tells me that his income could drop as much as 42 percent once the provisions of Dodd-Frank Wall Street Reform come into play in the spring of 2011:

  • A loan originator may not receive compensation that is based on the interest rate or other loan terms
  • However, loan originators can continue to receive compensation that is based on a percentage of the loan amount
  • A loan originator receiving compensation directly from the consumer may not receive additional compensation from the lender or another party
  • Loan originators are prohibited from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the loan originator’s compensation.

This last bullet point eliminates yield spread premium income from LOs who work under a mortgage broker AND ALSO eliminates “overage” income from LOs who work for a retail bank as well as LOs who work for a non-depository lender. This will force all LO compensation onto line 1 of the Good Faith Estimate. 

I recently reviewed a Good Faith Estimate for my cousin who lives in another state.  The LO was charging .50% loan origination fee and $1800 dollars in junk fees: processing fee, underwriting fee, administration fee, application fee showed up on a supplimentary worksheet. In addition, the LO quoted a higher rate than what my cousin could have obtained for that same loan from another lender. Since the lender fell into the catagory of “non-depository lender” that LO was earning even more compensation than what was shown on the GFE.  After LO compensation limits of Wall Street Reform go into effect, all this LO compensation will be forced onto line 1 of the GFE, hopefully giving my cousin and other consumers the ability to shop for the lowest rates and lowest cost loan. 

LOs who argue “customers don’t care about how much I make, they just care about the rate and the payment” are missing the point. Consumers DO CARE about your compensation when it means they will be paying your compensation EVERY SINGLE MONTH in the form of a higher rate and a higher payment.  LOs who have no problems justifying their fee income will survive and thrive.

LOs who argue “the banks are the ones who win with the compensation limits because they can hire “phone officers” to just take a loan application and pay loan processors way less money than a loan originator to finish up the file.” Indeed that is very true having met many of these phone officers already.  Phone officers are completely worthless, which is why I firmly believe there is a place in the future of mortgage lending for mortgage brokers and non-depository mortgage lender originators.  LOs who are able to justify their compensation will survive and thrive.  These are people with 15 or more years of experience who know their loan programs, know state and federal law, and know how to counsel their clients.  LOs who are brand new are going to have a much harder time justifying high fees.  Maybe that’s the way it should be: We separate the men from the boys and the women from the girls.  Just like baby attorneys fresh out of law school make way less per hour than a 20 year courtroom veteran. 

LOs will argue: “No one will originate loans under $100,000 because nobody can earn a living on such low fee income per deal.”  Guess what? I’ve met HUNDREDS of loan originators who will GLADY originate that loan. 

LOs who argue: “People are going to leave the industry because they can’t earn enough money.”  To that Red Forman would say, don’t let the door hit your ass on the way out. 

LOs don’t even have to hold a high school diploma to originate loans.  That should change and will.  Until then the only requirement is to take a measly 20 hour class (that’s two, 10 hour days), pass a national and state exam and not have any felony convictions….over the last 7 years. Yes that’s right a convicted felon can still originate loans unless the felony conviction was a financial-type crime.  This is a VERY low barrier to entry but it has only now been put into place in 2010.  LOs: Your income at entry level should never have been as high as it was.  The government is correcting what the industry refuses to do: Take away the motivation to treat the consumer as an object to maximize your own income.   

The winds of change are blowing in favor of more consumer protection, more reponsibility of disclosure placed onto the loan originator and less wide open territory for LOs to “earn six figures, no experience necessary” which was a common way of recruiting LOs on craigslist during the 00s.  Oh wait, here’s an “earn six figures” ad from today!  The LOs that will survive are the LOs who already work for a mortgage broker!  Mortgage brokers are already disclosing ALL their income on line 1 of the GFE.  A consumer has the most transparency already with mortgage broker LOs.  The LOs that survive and thrive will be those who can transform themselves from salesperson to counselor, who can transform from “helping customers” into serving clients. Treating a person as a client is a radically different mindset. Indeed many LOs never fell into the catagory of “predatory lender.” Those LOs are still around today originating and they will gladly serve the clients of LOs who choose not to make the transition from hidden compensation to full disclosure. 

With Dodd-Frank Wall Street Reform, the government is doing what the mortgage industry has refused to do: transform loan originators from salespeople into something a little bit more than that.  LOs who never engaged in predatory lending behavior don’t have to make any radical changes.  LOs with no problems justifying their compensation will do just fine under Dodd Frank Wall St Reform. They’re already livin’ the dream.

Who is and Who is Not Passing the New Loan Originator Exam

I’ve had a chance to meet many loan originators during the past 5 months while teaching the required 20 Hour SAFE Comprehensive Pre-licensing and Exam Prep Course.

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 8th 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.

Mortgage Lead Generation Firms Continue to Violate Federal and State Laws

So here we go again.  Now that mortgage rates are headed up, the deceptive lead generation ads are crawling back onto the web.  Here’s a great example from a Google ad:

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.

LOs Who Attack Realtor Commissions Might Want to Look Inward

I was just asked to proof a very agressive manifesto penned by a mortgage broker who was attacking the, in his words, “outrageous” commissions Realtors make when helping people buy and sell a home.  It made me wonder why the LO was so angry with Realtors in general. 

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?

The Financial Crisis Inquiry Commission is Interviewing the Wrong People

The Financial Crisis Inquiry Commission is currently interviewing bank CEOs in order to examine the cause of the current financial crisis.  So far, it sounds like the bankers are very concerned about their bonuses and are shirking off the cause of the financial crisis as a nothingburger.

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.

Paramount Equity Consent Order

Paramount Equity has settled their case with the Washington State Department of Financial Institutions. Read the Consent Order here.  The Statement of Charges outlined many, many violations of state and federal law:

  • Using the term “mortgage bank” in their radio ads. Paramount Equity is not a bank and they are not permitted to use the words bank, mortgage bank, or in-house bank in connection with their business. (This should serve as a warning to other consumer loan companies who also like to call themselves mortgage banks.)
  • Misrepresenting the availability of advertised interest rates and the APR, misrepresenting that interest rates were fixed when they were adjustable.
  • Paramount Equity, in the smooth-as-caramel Hayes Barnard voice, advertised “We’ll even pay for your home to be appraised” when the cost of the appraisal was being covered by charging borrowers processing, administrative, and underwriting fees totaling more than $1700.
  • Paramount Equity, in the getting-on-my-nerves Hayes Barnard voice, advertised “We’ll beat any written competitor’s rates and fees or pay you $500” without fairly explaining the nature, limitations, and conditions of this guarantee in the radio ad.

There is so much more in the final consent order including mis-using Google ad words and making inaccurate and misleading historical rate claims, and this is only the advertising portion of the Statement of Charges.  Let’s move on to Deceptive Fees. Again, this is from the Statement of Charges:

  • Paramount Equity disclosed its mortgage broker fee on lines 801 and 802. 

Jillayne here. An average consumer would not know how mortgage brokers are suppose to disclose their fee (Line 808.) Consumers are expected to use the government forms to shop for a mortgage, but when the people who complete the government forms either don’t know how to use the form, are trained improperly, or coached to mis-use the form, then how can the government expect consumers to make informed decisions about their mortgage costs? In any event, Paramount Equity sometimes closes loans on their own credit line, and sometimes they might decide to broker a loan. In either case, their fee is disclosed on different lines. This means a consumer loan company must have systems in place to make sure their loan originators are completing the forms correctly, depending on if they were acting as a consumer loan company or as a broker. 

  • Hiding a significant portion of the closing costs paid to Paramount Equity by instructing their title agent, Ticor Title, to place the fees on a different page and only transferring the subtotal to the HUD-I.  This means homeowners would be less likely to challenge the high fees.
  • Collecting unearned fees: Disclosing a loan origination fee on line 801 of the Good Faith Estimate when the loan was going to be brokered.  Paramount Equity kept the unearned loan origination fee as part of its mortgage broker fee, a violation of state and federal law.
  • Unearned discount points: When Paramount Equity decided to broker the loan instead of closing it on their own credit line (their mortgage banking operation!) Paramount Equity kept the discount points as their fee and did not lower the consumer’s interest rate!
  • Unearned underwriting fees: When a mortgage company brokers a loan, the LENDER is the underwriter.  Paramount Equity collected an underwriting fee for itself when no underwriting services were performed. 

There are 10 separate sections describing disclosure violations.  The State reviewed 43 files.  Some of the violations occurred in 41 of the 43 files reviewed. In 2007, there were 16 unlicensed loan originators who originated at least 52 residential loans in Washington State. 

In signing the Consent Order, Paramount Equity admits no wrongdoing.  But the world knows they did wrong by consumers, their regulator, and their industry. 

However, there’s another way to look at this. We can look at the Paramount Equity case from the viewpoint of the corporation. The corporate mind says, “My competitors and I all agree to abide by these rules (Consumer Loan Act, Mortgage Broker Practices Act, RESPA, etc.) If I know that the majority of us will comply, then I can break the rules and while I’m breaking them, I can make hundreds of thousands of dollars.  There is a chance that I will get caught. If that happens, what can I settle for? I mean, heh heh, there’s NO WAY we’ll ever go to court because the evidence against us will be overwhelming. If I can settle a state investigation for X, and I can make way more than X, then it is worth it to break the rules, if all I care about is profits.  Further, I know that my state regulator will want to settle because they want my company’s revenue from our renewal fees and loan originator licensing fees.”  From the corporate mindset, there was no wrongdoing. It was all a shrewd, clever business decision.

You may be thinking that I am wishing for harsher penalties.  That’s not on my mind. Anytime punishment is harsh all that does is externally motivate the offenders to work even harder at not getting caught.  Here is what I wish, though some would call me terribly idealistic. 

I wish the mortgage industry, and by that I mean the competing consumer loan companies, the banks who grant credit lines to Paramount Equity, their mortgage broker competitors, the title and escrow companies who earn hundreds of thousands of dollars off of Paramount Equity to refuse to do business with Paramount Equity until they can prove, by way of a written, third party audit on ALL their locations in various states, that Paramount now has systems in place to train their people, compliance systems to properly disclose all fees, and that whoever was in charge of compliance and training is fired and replaced with someone of competence.  Is there a board of directors at Paramount Equity? Then they should be asking who made the decisions to run the deceptive ads over and over and over again.  Paramount Equity needs to set aside some of their gold to pay a competent attorney to review their radio ads and anyone who makes money off of Paramount Equity should demand this. 

Paramount Equity is a member of the National Association of Mortgage Brokers. NAMB: Paramount Equity has violated 5 of the 6 provisions of your code of ethics.  NAMB members should bring an ethics complaint against Paramount Equity. If I come back a year from now and see that NAMB is still collecting dues from Paramount Equity then perhaps, as we already know, the NAMB Code of Ethics is meaningless. 

What do you think of their radio tag line, “Paramount Equity: Lending with Expertise!” Is this now in itself deceptive advertising?  Perhaps they should formulate a new tag line. I’m sure some of our readers will offer suggestions.

Fiduciary Duties for Mortgage Brokers and LOs

In October of 2007, Andrea Negroni wrote an article for Mortgage Banking Magazine titled “Mortgage Brokers–What Fiduciary Duties Exist?” Negroni provides a framework for mortgage brokers to begin learning about case law already on the books where courts have imposed fiduciary duties on brokers.

The National Association of Mortgage Brokers has been quite insistent that brokers cannot and should not owe fiduciary duties to their clients.  However, the court cases that exist begin with the application of the principal-agent relationship.

“Agency is a fiduciary relationship that results from the consent by one person (the principal) to another (the agent) that the other (the agent) act on his/her behalf or subject to his/her control.  An agency relationship can be created either expressly by oral or written agreement, or it may be implied through conduct.  For a practical example, when a mortgage broker tells a prospective borrower that he or she will obtain the best loan or the best rate and the borrower relies on him to do so, an agency relationship may result from the broker’s conduct.” 

Fiduciary comes from the Latin word fiducia, meaning “trust.” A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. A fiduciary is said to have substiantially more knowledge and expertise in his or her area of specialization. A fiduciary is held to a standard of conduct and trust above that of a random person. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client.

For example, a mortgage broker must consider the best loan product for his or her client and not sell loan products on the basis of what brings him or her the highest commission. The best interest of the client must be primary, and absolute honesty is required of the fiduciary.

John Long sums it up in this Scotsman Guide article. In regards to Senate Bill 6381, mortgage brokers:

  • Must act in borrower’s best interests with the utmost good faith and fair dealing toward them;
  • Must disclose any and all interests to borrowers that are used to facilitate their request.  That is, brokers must explain and determine that borrowers understand how everyone in the process benefits from the transaction;
  • Must disclose to borrowers all material facts known to the broker that might reasonably affect their rights, interest or ability to receive the intended benefit; and,
  • Must not steer or direct borrowers to accept a loan with a less-favorable risk grade than the grade they would qualify for under prudent underwriting standards. This is permitted, however, if borrowers are offered loan products within the risk catagory and choose the higher-risk-grade product after consideration.

Reverse Mortgage Loan Originations Caught up in New State Law Changes

This memo was sent to me by a member of the National Reverse Mortgage Lenders Association:

Member Alert: NRMLA Trying to Resolve Licensing Issues in Washington State
June 2, 2008

Washington state recently passed legislation (SB 6471) that may impact non-depository lenders, as well as the correspondents, subsidiaries and affiliates of depository lenders who make reverse mortgage loans in that state. SB 6471 requires that all non-exempt lenders doing business in Washington be licensed by the Department of Financial Institutions under the Consumer Loan Act (CLA) by June 12, 2008. As of June 12th, lending will no longer be permitted under the Mortgage Broker Practices Act (MBPA). Lender entities generally exempt from this change are those operating under Washington or federal law as banks, trust companies, thrifts, and credit unions–but not their subsidiaries, affiliates or correspondents. A bill synopsis is available here.

The change in licensing administration impacts the reverse mortgage sector as the CLA requires its licensees to use the simple interest method (RCW 31.04.125(2)) to calculate interest, which according to Washington Administrative Code (WAC 208-620-010) expressly precludes the compounding of interest, or negative amortization. Since negative amortization is a key term of all reverse mortgages currently in the marketplace, we are concerned that implementation of this law would adversely impact reverse mortgage lending.  We believe this is a result neither the legislature intended nor one that serves the best interest of Washington’s expanding senior population.
In fact, we believe this is an oversight on the part of Washington state legislators’ and are diligently working with the state legislators and the Department of Financial Institutions (DFI) to seek an emergency clarification that would exempt reverse mortgages from the CLA requirement that prohibits the compounding of interest. The DFI has been very receptive to our concerns and we hope for a quick and positive outcome to this issue.
In the interim, we recommend lenders who do business in Washington consult with legal counsel to discern how this change may impact your ability to continue doing business in the State, and we strongly encourage affected members to submit their CLA licensing application to the DFI prior to the June 12th effective date.
We will keep you appraised as things progress.
Erin Gulick
Policy Associate
202.939.1745

Mortgage Industry Codes of Ethics

Read the Code of Ethics from these three trade organizations.  Don’t worry; it will be a very fast read.

National Association of Mortgage Brokers
National Association of Mortgage Women

For the Mortgage Banker’s Code, follow this link and click on “cannons” from the menu on the left.

What’s missing?
Could some of these phrases be re-worded?  If so how? 

For example from the Mortgage Broker’s Code, the phrase “Mortgage brokers shall conduct their business in a manner reflecting honesty.”  This could mean brokers simply have to look like they’re being honest.  I would re-word this to say something like, “brokers shall be honest when conducting the business of mortgage lending.” 

It seems to me that they all sound the same. I wonder if they all just copied and pasted from the Mortgage Banker’s Code.  Now let’s take a look at some of the newer trade associations.

Upfront Mortgage Brokers Association
National Association of Responsible Loan Officers
Certified Mortgage Planners

National Association of Mortgage Fiduciaries (link coming soon)

Can you see how the industry is beginning to transform?

Do you have a code of ethics at your company? If so, please provide the link in the comment box.  If not, ask your manager why and tell us what he or she says.