National Association of Mortgage Fiduciaries

Loan Modification Fees: Is it Justifiable for a Fiduciary to Charge for a Free Service?

mf — Wed, 03 Sep 2008 20:52:47 +0000

Mortgage brokers and loan originators have become curious in learning about loan modifications. When I ask why, they say that they’re hearing there’s good money to be made doing loan mods. What? Wait a second. I thought loan modifications were done by the lender for free.

More and more spam is popping up in my spam bin targeted at LOs and selling “loan modification referral programs,” so I decided to call one of these LOs after sending an email late last night asking for more information and receiving no reply.

This particular person goes by the title of ”mortgage planner.” On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out. The upfront fee charged to the homeowner is $3500. But the LO assures me that all the work is handled by attorneys, she says. The borrower’s up front fee is placed into escrow. If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due. If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not. I asked the LO why a homeowner wouldn’t just work directly with an attorney. She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.

I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep. Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.” She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.” If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.

In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers. 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. 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. All fees earned must be disclosed to the consumer. The fact that this mortgage planner/LO felt uncomfortable discussing his portion of the $3500 and the actual work performed is a big red flag.

Loan modifications are performed by a lender with no fee to the homeowner. HUD-approved Housing Counseling Agencies perform loss mitigation/loan modification services for free. These agencies are supported by our tax dollars.

I suppose the argument is this: “Well the loan servicing departments are really busy and by paying our $3500 fee, you have a 93% chance of getting your loan modified.” But doesn’t the homeowner still have that same 93% chance going at it alone or with the help of a housing counselor?

If I had $3500 to spend, then I think I’d rather spend the whole $3500 on legal counsel, instead of just $1500. How many homeowners headed toward foreclosure have $3500 to be paid up front? One of the hallmarks of a sham operation listed on the FDIC website is if a lender requires an upfront fee, before any service is performed.

Loan originators, a fee for services rendered is fine, but what are those services being performed? This particular person shows zero experience in loan modifications and admitted to me that the attorneys are doing all the work. Is “gathering papers together” worth $2,000? A fee earned that is not commesurate with services rendered has been catagorized as an illegal kickback via RESPA’s Section 8. Loan Servicing companies are also subject to the provisions of RESPA. All lenders are subject to RESPA whether or not the LO owes fiduciary duties to consumers. Any amount over what’s considered normal and customary for services rendered is considered a junk fee and subject to challenge.

Sigh. I suppose we need to consider that we’re coming out of a mortgage orgy where LOs actually did just gather together some papers, threw them on the processor’s desk, and picked up a fat paycheck. Why wouldn’t they believe this could be their ticket back to the good old days?

Loan Originators, before you begin earning these referral fees for basically doing nothing and handing the file over to an attorney, consider what would happen if the homeowner did not feel that he or she was well served.

Your regulator ends up with a phone call, which turns into an investigation. Perhaps you’ll end up having to refund all those fees back to the consumer. It could happen.

Loan originators, my advice is to refer your financially distressed homeowners to legal counsel and free HUD counselors. Loan modifications are performed free of charge by lenders.

WA State residents: Governor Gregoire just appropriated 1.5 million of your tax dollars to housing counseling agencies all across the state that can help WA State residents FOR FREE.

As a fiduciary, is it possible to justify charging anything above zero when you know free services are available for your client?

Okay all you banker types. Help me analyze this trend. If banks/servicers are offering upwards of $3500 to outsource loss mit/loan mods, that can mean several things. It surely means that a large percentage of these people who are receiving a temporary interest rate freeze on their ARMs will be back in 3 to 5 years with their hand out again, asking for another loan mod; IF they even make it that far. 40% of recent loan mods have already re-defaulted. Random, desperate loan mods without common sense underwriting means we’re just pushing this whole mess further down the road, delaying the eventual recover until many years into the future.

Apparently one of these companies coming to town in September to sell this system to LOs immediately following the WAMB convention. They’re charging LOs a pretty hefty set-up and monthly fee to participate in their referral program. Someone is definitely getting rich quick off of desperate LOs.

If you’re interested in learning what it really takes to process loan modifications, I’ve been teaching Realtors how to successfully negotiate Short Sales for 8 years. Attend one of NAMF’s Short Refi classes (yes, this is approved for CE credits) and you’ll get a better feel for if loan mods are worth the time and effort.

National Loan Originator Licensing coming….For ALL LOs

mf — Thu, 31 Jul 2008 20:13:43 +0000

Tucked inside the Foreclosure Rescue Bill signed by the President yesterday is a provision calling for all loan originators to be licensed. Bankers, brokers, consumer loan lenders, and credit unions; it doesn’t matter where you work. If you’re an LO you must pass a competency test that will be developed by the National Conference of State Bank Supervisors and pass with a 75% or higher, and ALSO, ALL NEW licensees will be required to take a mandatory 20 prelicensing course. For many of you reading my emails, you know my opinion on this: This is GOOD for our industry. Some companies train their LOs well. Others, not so well. In order to start rebuilding consumer trust, the mortgage lending industry as a whole must start with the relationship between the LO and the consumer. Some companies will have to be dragged kicking and screaming into higher standards, some clearly are already there. Obviously, I’m biased for more education because I’m an educator and this will bring more income to my firm. Yet we should all prepare for tougher exams, more required pre AND continuing education for many years to come. If you took the ethics class from my company, you heard us predict this all throughout 2007. My prediction today: Even tougher standards are on the horizon. You will owe higher duties to the consumer and will also have more liability. This is a natural narrative path for any emerging profession. Congratulations, LOs, you’re on your way to becoming professionals. Who remembers the last step towards achieving professional status? Whoever the first person is to email me with the correct answer, I’ll let you attend a continuing ed class at no charge. Answer posted in next month’s newsletter and on the NAMF blog as soon as it happens.

Update: Mike England from The Money Store was the first person to email me the correct answer:
A highly specific code of ethics along with industry self-regulation of ethical conduct. (Remember, a simple, vague code with NO enforcement is meaningless.)

FHA Training Resources

mf — Thu, 31 Jul 2008 20:02:07 +0000

I’ve been fielding many calls this summer asking for ideas on how to train staff on originating FHA loans. Here’s my advice:

If you’re newly approved by FHA, your very best option is to take the class taught by HUD called “FHA Lender Training.” These classes are typically three full days: Day 1 Processing, Day 2 Underwriting and Day 3 Appraisals. When I attended the HUD training in June put on by the Wash Mortgage Lenders Assoc, the cost was $315 and included lunch. High value for the price. The FHA trainers were very good. I HIGHLY recommend this option. The next FHA training in the Northwest is scheduled for Portland this coming week. Go here for more info:
http://www.hud.gov/offices/hsg/sfh/events/events.cfm

Wholesale lenders have been offering free FHA classes all around town and even inside your office. When scheduling these classes, look for a trainer with many years of experience in underwriting FHA loans. If the classis taught by the Account Exec, I would query as to their number of years of experience with the FHA insurance program.

For Online FHA training, I recommend one of my competitors, Susan Williams. I get no referral fee for sending you here. I just highly admire the quality of her distance learning products. Here’s her website. Look for the course titled 151, FHA Lending Guidelines. Bonus: Her class is approved for continuing ed credits in many states.
http://www.schoolofmortgagelending.com

For live classroom FHA training here locally, you can choose from three courses. This month we are offering the FHA Originating Basics course on August 13th in Tukwila. This course works well for new-to-FHA originators, processors, and underwriters and are taught in four hour blocks, typically from 9AM to 1PM, perfect for LOs who can’t sit in a classroom for more than half a day :) These classes are all approved for WA state continuing ed credits.
Read more here:
http://mortgagefiduciaries.com/mortgage-continuing-education-topics/fha-loans/

Finally, I have been working with Bellevue Community College to put together a series of classes on FHA lending. Your staff can earn college credits toward an AA degree, the classes are in the evenings, and we will use the HUD manual, taking the student from processing through origination, underwriting, and appraisals during an 8 week session. This will be great for your processing staff.

S.A.F.E. Mortgage Licensing Act

mf — Thu, 10 Jul 2008 20:51:29 +0000

Today I’m following the passage of bill HR 3221, the Foreclosure Prevention Act of 2008. I believe from this point, it will go back to the House for their approval of the Senate’s revisions. There are a lot of provisions inside the bill, but this one caught my eye:

Inside is a provision for the S.A.F.E. Mortgage Licensing Act:

S.A.F.E. Mortgage Licensing Act. The bill requires that all residential mortgage loan originators
be licensed, provide fingerprints, a summary of work experience, and consent for a background
check to authorities. States are given 12 months to develop licensing standards to ensure that
applicants meet the following minimum criteria: (1) No felony conviction involving an act of fraud, dishonesty, a breach of trust, or money laundering (no other felony seven years prior to application); 2) No similar license ever revoked; (3) A demonstrated record of financial responsibility; (4) Meet minimum net worth or bonding requirement (set by state); (5) Successful completion of education requirements (20 hours of approved courses, to include at least 3 hours related to federal laws, 3 hours on ethics and consumer protection in mortgage lending, and 2 hours on the subprime mortgage marketplace); and (6) Passage of a written exam (a minimum score of 75 percent is required to pass). If states do not comply, the Housing and Urban Development (HUD) Secretary is empowered to quickly develop the national database and license, generating revenue for its implementation through fees to license applicants.

If the bill passes, there will be money set aside for a new FHA program to help refinance an estimated 400,000 homeowners in default, and an increase in FHA loan limits.

I found this buried on page 8:

The bill requires that disclosures be provided no later than 7 days prior to closing so
borrowers can shop for another loan if not satisfied with the terms.

Indymac Wholesale

mf — Mon, 07 Jul 2008 03:25:37 +0000

ML Implode is reporting that there’s an announcement forthcoming tomorrow morning about the fate of Indymac Wholesale and it doesn’t sound good.

Surely no one reading this blog will be surprised but it does eliminate a player in the wholesale lending game.

Fiduciary Duties for Mortgage Brokers and LOs

mf — Fri, 20 Jun 2008 03:57:40 +0000

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.

National Loan Originator Licensing

mf — Wed, 18 Jun 2008 05:08:09 +0000

The “Federal Housing Finance and Regulatory Reform Act of 2008? is here. Read the PDF if you’re feeling ambitious or here is the summary of the Dodd amendment. There’s a section inside Senator Dodd’s amendment that will give us national loan originator licensing. On page 34, the definition of a loan originator is as follows:

LOAN ORIGINATOR

A) IN GENERAL
The term ‘‘loan originator’’
(i) means an individual who
(I) takes a residential mortgage loan application; and
(II) offers or negotiates terms of a residential mortgage loan for compensation or gain;
(ii) does not include any individual
who is not otherwise described in clause (i) and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause; and (iii) does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator.

(B) OTHER DEFINITIONS RELATING TO LOAN ORIGINATOR.
For purposes of this subsection, an individual ‘‘assists a consumer in obtaining or applying to obtain a residential mortgage loan’’ by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.

This broad definition of “loan originator” means that we’ll be licensing LOs no matter where they work: broker, banker, consumer finance company, or credit union. There will be 20 hours of required, pre-licensing education and a national test delivered by the National Mortgage Licensing System and Registry. 75% to pass.

There’s way more to this bill than Nat’l LO licensing. 387 pages more. But that’s a good start. Here’s the MBAA recap:

WASHINGTON, DC – Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, today announced that the Committee passed “The Federal Housing Finance Regulatory Reform Act of 2008,” legislation which includes major efforts to help prevent the rising number of foreclosures, to create more affordable housing for Americans, and to reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system. The legislation passed by a vote of 19-2.

The Mortgage Banker’s Assoc has lots more to say to policymakers in regards to how ginormously specialer they are than mortgage brokers. Bankers don’t want to be lumped in together with brokers, especially with any law that will require fiduciary duties. According to Housingwire, MBAA says that “any legislation of a fiduciary relationship tied to borrowers should extend only to brokers and not to bankers, because brokers are an intermediary working with bankers on borrowers’ behalf; it also suggests that fee-level disclosures and limits on some forms of broker compensation, including yield spread premiums, need not apply to bankers’ own origination activities, because bankers are subject to greater supervision and regulation than brokers.”

Wait, didn’t a fair number of lenders on the implode-o-meter hold a banking charter?

Interestingly MBAA rolled over and gave in to loan originator licensing for LOs who work at a bank. See the bullet points at the end of this press release.

Along with national LO licensing, the act brings the “Hope Now” program which has been voluntary, into law, gives President Bush the government-sponsored entity reform he’s been looking for, and extends a hand to the affordable housing coalitions.

Distressed Property Law

mf — Wed, 18 Jun 2008 05:01:28 +0000

Mortgage Brokers and Loan Originators are exempt from becoming a “Distressed Home Consultant” when helping Distressed Homeowners refinance, unlike real estate agents who are subject to increased liability under the new Distressed Property Law. My question is, SHOULD mortgage brokers and loan originators be exempt? Please read this blog post and share your opinion. I know that no brokers or loan originator is going to automatically jump up and vote for increased liability, but do you see a possible loophole for LOs to target market and prey on distressed homeowners? Have you heard of anything like this happening in your market area?

WA State Cracks Down on Title Insurance Company Inducements

mf — Wed, 18 Jun 2008 04:09:31 +0000

Mortgage brokers, loan originators, and real estate agents have all been warned NOT to accept any inducements from title insurance companies. Giving OR receiving an item of value in exchange for a referral of a federally related loan is already illegal under RESPA. However, HUD auditors do not routinely wander around inside real estate offices and mortgage companies checking out the latest title insurance company give-a-ways. A law without inforcement is basically like having no law at all. Most of the enforcement has been left up to state regulators. Read this blog post for more details.

Do you believe this new law will help level the competitive playing field within the title insurance industry? If yes, why? If no, why not?

HUD Audits A Plus

mf — Wed, 18 Jun 2008 03:54:37 +0000

Please read this brief blog article on the A+ Mortgage recent HUD Audit.

Analyze the A Plus Mortgage response to HUD’s findings on pages 19-24, and HUD’s comments which follow.

Question: You’ve just been hired to manage the loan originators at A Plus. What’s your action plan?

Reverse Mortgage Loan Originations Caught up in New State Law Changes

mf — Tue, 17 Jun 2008 21:37:09 +0000

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

mf — Sat, 14 Jun 2008 01:22:25 +0000

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.

Fee Splitting

mf — Sat, 14 Jun 2008 00:49:56 +0000

I recently wrote about a common question I often receive in which an unlicensed LO asks a licensed LO to act as the originator on a transaction, and pass part of the origination fee back to the unlicensed LO. Read the story here.

What are the possible consequences for the licensed LO, the unlicensed LO, the consumer, the mortgage broker, and the lender?

If you were the consumer on a transaction like this, would you want to know about this sort of fee-splitting arrangement? How much would you say would be a reasonable amount to pay the unlicensed LO and the licensed LO…if YOU were the consumer?

Solutions to the Mortgage Lending Crisis

mf — Fri, 13 Jun 2008 03:31:35 +0000

The mortgage industry crisis is a gift. Mortgage lending can emerge from this mess and transform itself. I have been co-writing about predatory lending and the ambiguous professional status of retail mortgage salespeople for over 7 years. The industry has traded consumer respect for massive profits. It does not matter where you work: banker, broker, credit union, consumer finance company. It does not matter what you call yourselves: Loan officer, loan originator, loan consultant, mortgage planner. The average consumer does not understand the differences.

Solution number 1
All retail mortgage salespeople, no matter where they work: bank, broker, credit union, consumer finance company, should owe fiduciary duties to consumers, just like a doctor or a lawyer does. The process of purchasing or refinancing a home has become more and more complex over the past 20 years. This major financial decision is no less important than a medical procedure or legal matter.

Solution number 2
Let’s stop dancing around the ambiguous behavior we call “predatory lending” and define it. We use to call such actions “fraud.” There are now 24 states that have passed anti-predatory lending legislation. This means multi-state brokers must deal with a patchwork of state regulations. A federal solution is in order, but we must also make sure that funds are set aside to regulate any new federal law. An un-regulated federal law is useless.

Solution number 3
If the industry does not like paying higher costs associated with more state and federal regulations, the industry has another choice: Self-regulation. Any industry is far better of self-regulating rather than letting the government regulate for you. The last time the mortgage industry had to swallow government forced regulation, we ended up with RESPA and the Truth-in-Lending Act. Oh, yes, these are such fine pieces of federal legislation and so easy to understand that the industry joyfully and voluntarily steps up to the plate every day to willfully comply with these two gems.

Every time I ask mortgage brokers the following question, I get the same answer, 100% of the time: “If you accidentally messed up and violated a federal or state law, would you want one of the competitors in your marketplace to give you a call and say, for example, ‘Hey there, I think you missed the APR on that piece of advertising’ or would you rather have your competitor turn you in to your state’s regulator?” Everyone would rather have their competitor place a direct, friendly call to them. There’s this really cool guy named Kant who came up with one way (well he came up with many ways but we’ll just focus on one right now) to help us figure out how to act ethically. He said that if we want something for ourselves (a courtesy phone call) then we must also want it for the other person. “But, but,” you ask, ”what if that other person is our competitor?”

Self-regulation means that the industry understands that consumer respect is only as high as it’s LOWEST player. Self-regulation is a sign that an industry is moving forward and growing up. Yes, it will mean requiring more pre and post education, tougher exams, and higher duties owed to consumers, but moving into the realm of professional status also means more prestige, less government oversight, and the fees emerging mortgage professionals will charge for their services and knowledge will be higher because their knowledge and duties will be worth more. If you regularly argue for less government intrusion and you are pro-business, you understand the value in self-regulation.

There are now four national professional associations where retail mortgage salespeople can voluntarily choose to act with professional status, or at least pledge a higher level of honesty than the existing industry associations. Members of NAMB must simply look like they’re honest.

Retail mortgage salespeople who join the Mortgage Professor’s Upfront Mortgage Brokers Association will guarantee, in writing, a fixed price for their services up front. Members also pledge to put their client’s interests above their own.

The National Association of Mortgage Professionals has a Code of Ethics that is better than NAMB, MBAA or NAPMW.

The Certified Mortgage Planners have a more detailed Code of Ethics. However, all a person has to do is attend a 3 day class and pass a test and I’m not sure I agree with their premise: To help consumers plan how to use their home equity. This organization has some work to do in its intentionality. Interestingly, a regular raincityguide.com reader sent me an entire slew of articles that catch lead Mortgage Planner instructor Barry Habib with his pants down recommending consumers choose subprime products, take their equity out of their home and invest it, and other “advice.” Looks like CNBC hasn’t asked him for advice for a couple of months.

The National Association of Mortgage Fiduciaries Code of Ethics is prescriptive and detailed. We are the only professional organization whose code of ethics prescribes fiduciary duties and we are open to all people in the mortgage lending industry.

Ameriquest and Household Finance, two consumer loan lenders were forced by way of court settlement to cease rewarding their retail mortgage salespeople for steering trusting consumers into high cost, high rate loans. In contrast, Mike Dodge recently penned an Inman Guest Perspective in which his company, Internet Brands, voluntarily adopted a twelve point, detailed, home borrower’s Bill of Rights.

Solution Number 4
Require ratings agencies to do proper due diligence on pools of mortgage backed securities and dis-allow ratings agencies to be paid by the investment bankers; a conflict of interest that certainly should have been caught long ago.

Solution Number 5
Ban downpayment assistance programs which artificially inflate sales prices and are nothing more than seller money laundering according to Tanta.

Solution Number 6
Require that mortgage companies that purchase leads be held accountable for the advertising used to harvest those leads. Deceptive mortgage spam, deceptive radio ads, deceptive lead generation websites only serve to circumvent an ethical mortgage company’s attempts to advertise in accordance with state and federal laws.

Some view the mortgage industry meltdown as a threat. I see it as an opportunity to put the industry back on track ethically, to help retail mortgage salespeople transform into emerging professionals, rope predatory lending back into where it came from: the fraud corral, and open a national dialogue on self-regulation. What do you see? What solutions would you add to this list?

What the Space Shuttle Challenger Disaster Can Teach Us About the Current Mortgage Lending Crisis

mf — Fri, 13 Jun 2008 02:59:15 +0000

In this mortgage ethics article about allegiance to rule-following, I will compare the mortgage industry crisis with a classic business ethics case study.

The space shuttle Challenger accident has frequently been used as a case study in the study of engineering safety, the ethics of whistleblowing, communications, and group decision-making. With Challenger, an O-ring eroded on earlier shuttle launches. Morton Thiokol (MT) managers believed that because it had not previously eroded by more than 30%, that this was not a hazard. During a pre-launch conference call with NASA, the MT engineer most experienced with the O-rings, Roger Boisjoly, pleaded with management repeatedly to cancel or reschedule the launch. He raised concerns that the unusually cold temperatures would stiffen the O-rings, preventing a complete seal. MT senior managers overruled him and allowed the launch to proceed. Challenger’s O-rings eroded completely as predicted by Boisjoly resulting in the disintegration of Challenger and the loss of all seven astronauts. Boisjoly concluded that the caucus called by managers who decided to launch, was an unethical decision-making forum which came about because of intense customer intimidation. “Roger Boisjoly and the Challenger Disaster: The Ethical Dimensions” from the Journal of Business Ethics 8 (April 1989). Everyone followed the rules, and the ensuing investigation determined the accident was nobody’s fault. Boisjoly concludes that the Challenger accident occurred because of the existing institutional system and allegiance to the rules of protocol.

In real estate and mortgage lending, we all follow state and federal laws (rules), yet some consumers ended up with a mortgage loan they did not understand and were not qualified to pay back. Pressure was applied to many people all up and down the line in mortgage lending. For example, appraisers being strong-armed to hit a value or else risk losing referrals. Some real estate agents and mortgage brokers still apply pressure to banks and lenders to approve loans fast, now and immediately, or else risk losing referral business, and a mortgage company’s culture has a remarkable influence over corporate workers.

Let’s follow the origination of a random mortgage loan and see if we can spot all the possibilities for system failure.

Lead generation companies such as NextTag, Lending Tree, and lowermybills.com scoop leads off of their deceptive banner ads and sell them to hungry mortgage retail salespeople. Leads are also generated and sold by using deceptive mortgage spam, direct mail, direct home fax, deceptive radio ads, and so forth.

A real estate agent or Realtor is not suppose to become involved in the mortgage side of the transaction because it means the agent has stepped outside his or her area of expertise. Attorneys advise real estate agents that an agent increases liability when this line is crossed. Some agents are comfortable taking on this liability, others are not. Many let the homebuyer’s chosen lender take the lead on explaining the structure, consequences, and results of loan products.

Homebuyers and refinancing homeowners on average know very little about mortgage lending and spend little time reading required disclosures. Mortgage retail salespeople have no mandatory ethical duties to the homebuyer or refinancing homeowner to put the client’s interests above his or her own interests to make as much money as possible off a trusting consumer. Obviously there are some mortgage retail salespeople who do look after the best interests of their clients. But how is a consumer supposed to know where to find these folks? Relying on the referrals of trusted friends and family shifts the responsibility off the self and on to another person.

Government disclosure forms such as the Good Faith Estimate and the Truth in Lending Reg Z forms are confusing to the consumer. Predatory lenders use these forms to deceive a refinancing homeowner or homebuyer. This is well documented in both Household Finance and Ameriquest settlements. There never has been nor will there ever be enough government resources to police every single transaction written by every single retail mortgage salesperson.

When a loan is brokered to a bank, the bank owes no duty to the consumer to make sure that the loan was not originated using deceptive or predatory lending sales tactics, or generated by advertising that did not comply with federal Truth-in-Lending laws. A bank’s duties are to its shareholders (to follow mortgage lending laws and to make a profit.) Wholesale lenders and banks underwrite loans to guidelines set down by investors. Profits are made by pooling loans and selling them as mortgage backed securities. Hypercompetition to be the biggest and best wholesale lender led to paying higher and higher incentives to mortgage brokers to sell higher and higher yield (and now morally out-of-fashion) interest only, pay option, negative-am, adjustable rate mortgage loan with and without prepayment penalties to consumers, regardless of if the consumer understood how the loan product worked. The selling point from wholesale lender to broker was: “when the rate adjusts, you can solicit them to refinance and earn another 4 points for yourself.” An entire breed of retail mortgage salespeople knows nothing but this business model.

Consumers are given standard state and federal disclosures to read, explaining how the loan product works, and some people argue that if a consumer signs documents he or she does not understand, then it is the consumer’s fault. Mortgage lending is complex. Here is an analogy: A person had to undergo surgery and the doctor hands the patient a set of medical books and tells the patient to read the books and make a decision.

Appraisers owe duties of good faith to mortgage banks and lenders. Problems with the relationship between the appraiser and the retail mortgage sales people were one of the first signs of O-ring failure in the space shuttle organizational structure called mortgage lending. To their credit, the appraisal industry made a full frontal assault against pressures levied by retail mortgage salespeople, and they are now the first to once again work on solutions.

Escrow closers are at the end of the line. When a homebuyer or a refinancing homeowner is feeling uncomfortable about rates, fees, or terms of a loan, an escrow closer must remain neutral. Escrow closers are in a perfect position to see blatant and ongoing abusive lending practices. However, if they file a formal, public complaint, the business consequences are grave. Most state and federal agencies will not take anonymous complaints.

When wholesale lenders sell loans to Wall Street securities dealers, the dealer’s concern begins and ends with the contract: were state and federal laws followed, and what’s the rate of return on investment. Pension fund managers, insurance companies and other institutional investors have no way of knowing if loans in a pool of mortgage-backed securities were originated using deceptive and abusive lending practices.

The institutional and structural systems of mortgage lending are broken in many places. The subprime problems and the resulting defaults are a major O-ring failure. Now the system failure has spread to Alt-A loans and prime ARMs. Nobody wants to look up in the sky and admit that the shuttle is disintegrating. Well, perhaps if YOUR customers aren’t defaulting, then I guess there’s not a problem.

In the Challenger case, everyone followed proper institutional protocol and adhered to existing laws. Engineers like Roger Boisjoly work inside all our institutions. They are the loan processors, escrow closers, fellow mortgage retail salespeople, and others who know exactly what’s going on but believed they were powerless to make a difference, or chose not to make an anonymous complaint due to possible grave personal and/or professional consequences.

We’re going to have more state and federal laws before this entire mortgage industry crisis is behind us. The question then becomes, will those in the trenches stay silent again?

The Giant Pool of Money, by TAL and Chicago Public Radio

mf — Fri, 13 Jun 2008 02:41:31 +0000

This NPR radio episode runs just under 54 minutes. Click on the “download” button; it will take several minutes to download. While you’re waiting, browse through some of our other articles on Ethics in Mortgage Lending!

In order to better understand why we are currently facing massive mortgage loan defaults of epic proportions, this radio program takes us back in time and helps us understand how investors looking for high yields created a groundswell demand for risky mortgage loan products.

So are these investors to blame for the mortgage industry crisis?

It’s safe to assume that no wholesale lending reps held guns to the heads of loan originators and demanded that the LOs originate pay option ARMs.

Perhaps it is a choice. There is at least one bank that decided not to participate in subprime loans and now that bank is not seeing record default ratios on their residential loans, though their story has not yet been told in relation to commercial development loans and construction loans.

Are Mortgage Loan Originators Professionals?

mf — Fri, 13 Jun 2008 02:27:17 +0000

When I ask the question “Are loan originators professionals?” to a group of loan originator students in ethics classes, almost everyone says “yes.” Anyone can do their job in a professional manner (adjective,) but not everyone is a Professional (noun.) Is your barista at Starbucks or the person who bags your groceries a professional? If you answer “yes,” what makes a barista different than a lawyer? When we use the word Professional as a noun, there’s a classic definition that we refer to here:

A Professional:

Has specialized knowledge in his or her field. (Update: This body of knowledge is generally agreed-upon by those in the industry and is typically described within state and federal law.) This person knows way more than the average random consumer about his or her area of expertise;
Is required to complete a minimum amount of formal, academic education;
Is tested for competency;
Is licensed;
Must maintain that license with mandatory continuing education;
Subscribes to a mandatory code of ethics in an industry that is self-regulating. This is different from state or federal government regulatory oversight. The industry itself regulates ethical conduct over and above state and federal law;
The self-regulating body enforces their code of ethics with sanctions for violations;
Owes fiduciary duties to clients. This means the professional has the highest prescribed duty of loyalty to the client, to put the client’s interests above his or her own interests.

Here is how loan originators (LOs) measure up against the above list:

LOs, there is a power imbalance between you and the consumer. You know way more about how the machine we call mortgage lending works than the average random consumer will ever know.
In many states, including WA, no education is required to begin originating loans. (However, this may be changing at the federal level.)
Testing LOs for competency finally began in 2007 for LOs in WA state
Licensing of LOs is currently not required in all states and for originators employed by all types of lending institutions.
Continuing education requirements are very low if they exist at all (WA state only requires LOs to take two classes per year.)
There is no mandatory code of ethics for mortgage lenders. What codes exist at the national trade level, are voluntary and offer insufficient guidance.
Currently there is no ethical oversight in mortgage lending by the industry. There may be individual company codes of ethics for employees. Were you asked to read and sign a company code of ethics before or during the hiring process?
Fiduciary duties are now required for mortgage brokers and loan originators as of June 12, 2008.

One of the ways we can better understand the current crisis facing the mortgage industry is that loan officers, loan originators, mortgage planners, loan consultants, or whatever their job title, had absolutely no duty to put their client’s interests above their own. The relationship between a loan originator and the consumer was (and still is in many states) a retail relationship. During the mortgage-lenders-gone-wild days, many consumers (based on countless interviews held by regulators, consumer advocacy groups and even the mainstream media) held a false belief that a loan originator is a “professional” and owes a duty to the consumer not to harm him or her.

Loan originators are classified as an “emerging profession.” We are living through a historic, transformational phase. On the other side of the transformation, which could come sooner than some people think, I believe LOs, no matter where they work, will owe fiduciary duties to consumers, even with LOs who work at a bank. If you look at the narrative history of any profession you would see, over time, a steady increase in the number of continuing education classes required, more mandatory pre-licensing education, an elevation of duties owed to clients, more expansive ethical codes, and tougher licensing exams. Loan originators, no matter where they work, will eventually transform into professionals, though some will have to be dragged kicking and screaming.

Many brokers believe fiduciary duties means higher liability. However, if done right, this may actually have the reverse effect by lowering the mortgage broker’s liability.

The Subprime Meltdown

mf — Fri, 13 Jun 2008 01:20:20 +0000

When I entered the mortgage industry in 1985, Conventional loans were only for those who could put down 10%. Most folks opted for an FHA or VA loan. There was no risk-based pricing. Everyone received the same interest rate on their mortgage loan whether they had great credit or a few late payments. Homeowners with very poor credit, lack of job stability, zero cash reserves, and unverified source of funds to close, were not approved for a mortgage. It was a very big deal to decline a loan. As a mortgage loan underwriter, I was told our job was to make loans, not decline loans. We had to try our very best to help our company figure out a way to help the homebuyer. Declining a loan was serious. We had to state rational, good reasons why a homebuyer did not qualify. That all changed with the introduction of risk-based pricing into the mortgage lending market.

20% down
10% down
5% down use to be considered very risky.
3% down buyers were directed to FHA loans
0 down use to only be available to Veterans
Then came 0 down with seller-paid closing costs
Finally we had 0 down, seller-paid closing costs combined with a variety of exotic mortgage products that were previously only offered to the most credit worthy and financially savvy borowers.

Hard money lending was re-named subprime lending and moved into the mainstream as the mortgage brokerage industry grew to originate over 50% of all mortgage loans in the U.S. Subprime started out years ago with high interest rates along with a large downpayment. As Greenspan lowered interest rates, competition heated up and we saw a relax of credit standards in the same direction. This pushed a huge amount of homebuyers into the market, and infused the industry with a tremendous amount of job growth in the lending, banking, title, escrow, appraisal, and real estate agent arena. Corporations must earn a profit (within the bounds of the law) so corporations continued to push for profit growth. It doesn’t matter which political party holds power: Democrats or Republicans. BOTH parties push homeownership onto the American public as the dream every person in America ought to be able to achieve. Downpayment assistance homeownership programs sprung up all over the country and on a side note, it’s interesting to see FHA blasting these programs as having high default rates; high enough to possibly bring down FHA.

With little regulatory oversight in existence for mortgage brokers and consumer loan companies, (although they argue that they are HEAVILY regulated) the mortgage brokers, consumer loan companies, and the wholesale lenders had a field day with profits during the bubble run-up years of 2002 through 2006. All the real estate agents I talk to, and I meet thousands of real estate agents every year, with regards to predatory lending considered this a problem of the mortgage lending industry, acknowledging that there “could” be effects on the real estate market, but without actually feeling any of those effects it was always someone else’s problem. It has been pointed out that real estate agents also made lots of money with the relaxation of credit standards and the resulting housing boom.

Our state regulators DO have money set aside to go after the most egregious cases of predatory lending and mortgage fraud. However, government was never intended to police every single deal written by mortgage brokers and consumer finance companies. There is just not enough government re$ources available to do this, and there never will be.

In March of 2007, I predicted that every one of us in the industry WILL feel the effects of the subprime meltdown. Now that the subprime defaults have spilled over into Alt-A, prime ARMs, and HELOCs, we have a major national financial crisis that has resulted in an official housing recession. A full blown economic recession is underway with the FDIC preparing for bank failures and the FBI shifting its focus toward mortgage fraud. The mortgage industry will continue to see defaults rise into 2009 as more pay-option ARMs reset. Underwriting guidelines will continue to tighten until the loans we are originating today can be proven to have lower default rates than the current vintage of Residential Mortgage Backed Securities.

Some mortgage lenders have seen an increase in loan applications from homeowners seeking to refinance into fixed rate mortgage loans, but not all of these borrowers qualify under today’s tightening underwriting guidelines. Mortgage companies that blatantly ripped off consumers will not see repeat business. Those customers will go elsewhere, as they should. Mortgage brokers who have ONLY done subprime will find it challenging to become approved as an FHA lender as FHA has many rules to follow including the requirement for loan originators to be W-2 employees (many brokers pay their originators as contract workers.) Consumers are sick and tired of bait and switch advertising and hopefully won’t fall for it this time around. Those companies will go down, their loan originators finding jobs scarce since their only training has been hard-core, script-memorizing, pressure-laden sales tactics. They specifically chose to be in subprime for the money and only the money. Former mortgage lending workers are reporting that they’re having trouble finding jobs in other industries and are being blackballed by recruiters. The recruiters say employers want all candidates screened out if they were previously in the mortgage industry.

Treating home buyers (and refinancing homeowners) only as a tool to maximize profits is one business model that is no longer growing profits at previous rates. These companies are refi machines built on marginally to blatantly deceptive direct mail, email spam, deceptive radio ads, or by purchasing leads generated off of deceptive advertising and they exist in every market in the United States. This market is now seeing a decline in profitability and in a capitalist system, profit drives morality: what’s profitable is good, what’s not profitable is bad.

Brokers, lenders, and banks that have always operated their business with a foundation of treating consumers with respect will survive and thrive. By respect, that means declining some loans because sometimes this is the most respectful thing to do.

It is way past time for a mortgage market correction and I am hopeful that the current crisis of epic proportions will lead us to a better place in the mortgage lending industry.

We should expect to see at least four more federal laws directly targeting the mortgage lending industry, similar to the wave of consumer protection legislation that swept the U.S. in the 1970s. There have now been many laws introduced, some have passed the house but not the senate, some have passed committees, and who knows if anything at all will happen during these last few months before and after the next presidential election. Therefore we should also expect to see many, many states jump up to enact legislation aimed at the mortgage industry.

Watch for underwriting guidelines to continue to tighten, back to what they were like in 1985. Watch for interest rates to up, up UP! Because banks have to try and offset their foreclosure losses by…what else? Making new loans. The industry underpriced risk for subprime borrowers, offered loan products to borrowers who did not fully understand how the product worked, and rewarded loan originators for selling the most risky products to the most credit-unworthy borrowers. Instead of blaming everyone but themselves, the industry would do better to look within, systemically, for the solution.

Interesting insight on defaults of downpayment assistance program loans from the recent FHA training

mf — Sat, 07 Jun 2008 00:12:46 +0000

I attended an FHA training this week sponsored by the Washington Mortgage Lenders Association. There were about 100 people in the training. A large percentage of the audience was not from the greater Seattle area. People had come from as far away as eastern Washington, Idaho, Montana, Oregon, California, New Mexico, and even Guam. Most of the attendees were processors and underwriters. Many of the underwriters had experience underwriting conventional and subprime loans but no experience underwriting FHA. What I found interesting is that there were very few loan originators in the room. Maybe if they had offered continuing ed credit, they would have had a larger turnout.

Interesting insight: An FHA representative said that if there was one thing that could “bring down” the titanic (referring to the titanic that is, of course, FHA) it is the downpayment assistance programs. The FHA representative made no apologies for his absolute disdain of those programs, none of which were mentioned by name, and gave no statistical analysis of default statistics to back up his concerns, just that “defaults are dismal” under these programs. This would be an interesting area for further research.

There was no mention of the recent scathing HUD audit of local broker A Plus Mortgage.

Consumers now have access to wholesale mortgage pricing

mf — Fri, 06 Jun 2008 20:00:32 +0000

Inman news is doing a three part series on a group of websites devoted to providing consumers with wholesale mortgage rate pricing.

Part 1 reviews LendingArt.
Part 2 reviews RateWindow and Mortgage Marvel which are widgets that run on other websites. Part 3 will review MortgageGrader.

Federal Housing Finance Regulatory Reform Act of 2008

mf — Tue, 20 May 2008 22:45:29 +0000

The new bill from Senator Dodd is out. Here’s the PDF and here is the Dodd amendment. The original bill is 387 pages long and contains provisions for national loan originator licensing, puts a limit on golden parachutes, establishes a “federal housing finance agency,” and a big bucketfull of other changes including helping out the affordable housing agencies. From Yahoo news:

The Senate Banking Committee today is opening the door to opportunity for millions of Americans with its approval of the Federal Housing Finance Regulatory Reform Act of 2008. Senator Dodd and Senator Shelby have embraced the bipartisan principle that encouraging private investment in housing markets in general, and in affordable housing markets and low-income communities in particular, can go hand-in-hand with sound regulation. The inclusion of Senator Reeds Capital Magnet Fund will encourage continued innovation and maximize the impact of private investment in opportunity markets across the country.

However, I’m way more interested in the national loan originator licensing section. The section is inside Senator Dodd’s amendment.

LOAN ORIGINATOR

A) IN GENERAL
The term ‘‘loan originator’’
(i) means an individual who
(I) takes a residential mortgage loan application; and
(II) offers or negotiates terms of a residential mortgage loan for compensation or gain;
(ii) does not include any individual
who is not otherwise described in clause (i) and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause; and (iii) does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator.

(B) OTHER DEFINITIONS RELATING TO LOAN ORIGINATOR.
For purposes of this subsection, an individual ‘‘assists a consumer in obtaining or applying to obtain a residential mortgage loan’’ by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.

To me this reads that we’ll be licensing LOs no matter where they work: broker, banker credit union, or consumer finance company. Other news: 20 hours of required, pre-licensing education and a national test delivered by the National Mortgage Licensing System and Registry. 75% to pass.
Incredible. I am placing my bets that this will ultimately become law.

Live from the WA Mortgage Broker Commission Meeting

mf — Tue, 13 May 2008 17:06:34 +0000

I’m here at the Washington State Mortgage Broker Commission Meeting in Bellevue.

Licensing update: back in February of 2008 we had 1900 brokers in WA state with about 1700 branch offices. Now as of May 2, 2008 we are at 1500 licensed broker main offices with 1700 branch offices.

In February 2008 we had 13,000 licensed loan originators. Now, as of May 2nd, we have 7500 licensed LOs.

WA State new Licensing Program Manager Berri Leslie comes from Oregon.

Jim Brussleback, in charge of enforcement, was asked about complaints in relation to the industry’s hope that the “bad apples” were leaving the industry. The hope from the commission is that consumer complaints would fall as these bad characters left mortgage lending. Jim reminded the commission that even though a company or LO voluntarily surrenders their license, DFI may still decide to pursue action against that person or company.

Steve Bozik asks about the complaints regarding LOs. Jim says the majority of the enforcement actions revolved around the LOs license application and not necessarily regarding LO conduct.

Update on the May 7 Mortgage Broker Commission Meeting and SB 6471

mf — Thu, 08 May 2008 05:56:02 +0000

At the beginning of every law, there’s a preamble and then a set of definitions. Many of you know this: A mortgage broker is not a lender.
A lender is defined by federal law, RESPA, as an entity that makes loans. This means the entity has the money to fund the loans.

Brokers, by definition do not loan their own money. Instead, they’re middlemen who go out and find the mortgage money. The entity funding the loan is the “lender.” This definition comes to us via RESPA. Nothing has changed here, and I predict state law will mirror federal law.

In terms of state law, and in particular, SB 6471, it should now be made crystal clear to the consumer that a MORTGAGE BROKER IS NOT A LENDER.

Okay, fine. We got it. However, there’s one small problem. As I addressed in my four part series on the differences between a banker, broker, consumer finance company, and a credit union within the realm of licensed mortgage brokers we have a hybrid. A “correspondent lender” is an entity currently licensed as a broker, but they have their own warehouse line of credit with a bank. They can fund their own loans, and they can also broker out to other lenders, if they so choose.

Most correspondent shops are very well run, with onsite underwriting, training, auditing, and compliance departments. Currently, many hold a mortgage broker license. Some of these entities are exempt from holding a mortgage broker license because DFI has granted them an exemption certificate because they have direct Fannie Mae/Freddie Mac approval. Unfortunately, these companies with the exemption certificate, (DFI estimates that we have about 300 brokers with exemption certificates,) have been largely unsupervised at the state level. Senate Bill 6471 was supposed to close this loophole and bring all exempt brokers under the Consumer Loan Act.

Many correspondent lenders also broker loans in addition to closing them with their own warehouse line of credit. This leaves the correspondent lenders with a dilemma. Correspondent lenders have the option now of holding two state licenses, or just one. They can keep their license under the Mortgage Broker Practices Act and they also now must operate with a Consumer Loan license, or they can decide to just hold the consumer loan license.

This change affects only correspondent lenders.

Pure mortgage brokers, entities that ONLY broker ALL their loans, are not affected by SB 6471.

Correspondent lenders are mad as hell and many showed up at today’s meeting to express their shock and awe at having to pay an assessment to the state at .000180271% of their annual volume. Depending on the breakdown of correspondent-funded loans v. brokered loans, estimates provided by the correspondents at today’s meeting range from an additional $20,000 to $60,000 per year in fees that the correspondent lender will have to pay to the state of Washington each year.

Existing consumer loan lenders already pay this assessment. Realize though, that many consumer loan lenders loan money at much higher interest rates and charge much higher fees than traditional mortgage companies. Correspondent lenders argue that these higher fees will be passed on to the consumer. One lender present testified that he plans on adding this fee on to the consumer’s fee schedule on the Good Faith Estimate, calling it a “State Tax.” Guys: I’m pretty sure that you cannot honestly present a fee imposed on you, as a “tax.”

Correspondent lenders are also mad as hell for another reason: They must now swim in the same pool with Consumer Loan Companies…..those who we do not speak of. Those bastards that mortgage brokers look down upon. If there’s a hierarchy, it looks like this:

Banks look down on

Mortgage Banks

Who are seen as “less than” because most don’t carry bank deposits. Mortgage Banks look down on:

Correspondent lenders

Who are seen as baby mortgage banks, not fully grown up and ready to play hardball.

Correspondents are always looking down on:

Mortgage Brokers,

Who sneer in disgust as throw up a little in their mouths when they think of:

Consumer loan lenders

Who are seen as nothing more than pawn shops, payday lenders, and one step above the mafia.

Consumer loan lenders have been originating mortgage loans for quite some time. Ameriquest, Household Finance, Paramount Equity, American Equity, are all names of lenders licensed under the Consumer Loan Act who originate mortgage loans.

Now correspondent lenders and consumer loan lenders are swimming in the same pool. Correspondents must take care not to drink the water the CL lenders have peed in and avoid their floating turds.

And now they BOTH have a new punching bag: Brokers have now been classified as the pond scum, right? Wrong.

Because there’s a problem with this new hierchy.

Instead…….BROKERS actually take a step UP above correspondents, because brokers have stricter licensing requirements under the Mortgage Broker Practices Act.

So the hierarchy now looks like this
Banks
Mortgage Banks (what’s left of them)
BROKERS
Correspondents and consumer loan lenders

This is all about ego and money.

Correspondents: It’s now time to get busy figuring out how to separate yourself from your competition. In today’s meeting, over and over again, correspondents told the mortgage broker commission that they bring a great deal of service enhancements OVER pure brokers to the consumer. If that is so, then correspondents should not have a problem in the free market. If this is not the case, if correspondents do not bring added value, then the state legislature has called your bluff. Personally, I believe correspondents DO bring value to consumers.

I can think of at least five different ways to market this change to consumers in a positive way to gain market share. This is nothing but business at it’s finest. Government intervenes, and businesses must find a way to survive and grow. Correspondents will survive this change.

Most memorable moment:

After testimony from a correspondent who reamed consumer loan companies and called them “loan sharks,” Consumer Services Director Deb Bortner stood up, waved her hands in the air and reminded the audience that there are many, many fine consumer loan lenders licensed in WA state and one of them happens to be sitting right there in the room….on the Mortgage Broker Commission. Don Burton from Evergreen Home Loans smiled. John Porter from Mortgage Masters asked, “So Don, tell us the down sides of being regulated under the Consumer Loan Act.” Don said, ‘Well, I can’t think of any.”

DFI’s goal is to have definitions and a preliminary set of rules out for us to review by May 16^th.

Washington State Mortgage Broker Commission Meeting May 7, 2008

mf — Wed, 07 May 2008 00:57:31 +0000

There’s a Washington State Mortgage Broker Commission meeting tomorrow, May 7th at the Renton Community Center to discuss the impact of State Senate Bill 6471. This legislation ammends the Consumer Loan Act and Mortgage Broker Practices Act requiring all lenders to become licensed under the Consumer Loan Act (except those licensed under RCW 63.14)

This change in the state law was put in place to close a loophole. Some mortgage brokers were issued an exemption certificate by their regulator, DFI, because they had received approval as a Fannie Mae/Freddie Mac direct lender. Though still subject to the MBPA, these lenders, an estimated 300, were operating with no state regulatory oversight. This loophole is now closed.

Mortgage brokers are complaining loudly that this change will cost their firm lots of money. I would like to see the raw numbers on their estimates.

I will be attending tomorrow’s meeting, and if I can catch a wifi signal, I will blog live.

This does not appear to be a “closed” meeting since DFI is indicating that the room capacity is 100. I received no notice about this meeting, which is odd, since DFI is always very good about notifying all of us via their listserve.

Time: 1:00 PM
Location: Renton Community Center
Address: 1715 Maple Valley Highway, Renton 98057
Driving Directions

WA State Legislative Changes: SHB 2770, SB 6471, SB 6381

mf — Thu, 01 May 2008 00:50:08 +0000

The Washington State Legislature has passed three new laws that will go into effect June 12, 2008.

SHB 2770
Governor Gregoire’s legislation implementing the recommendations of the Homeownership Task Force. This legislation impacts Banks, Credit Unions, the Consumer Loan Act (CLA), and the MBPA. The bill addresses prepayment penalties, negative amortization loans, the federal guidance on nontraditional mortgage products and subprime lending, and makes mortgage fraud a class B felony.
SHB 2770 PDF
SHB 2770 Summary
SHB 2270 Final Bill Report

Interesting highlights from the Final Bill Report:

The DFI must adopt a disclosure summary understandable to the average person that includes:
• the fees and discount points on the loan;
• the interest rate of the loan;
• the broker’s yield spread premium;
• the presence of any prepayment penalties;
• the presence of a balloon payment;
• whether or not property taxes and property insurance is escrowed; and
• other key terms and conditions of the loan.

A residential mortgage loan may not be made unless the summary is provided by a financial institution to a borrower within three days of a loan application. If the terms of the loan change, a new summary must be provided to the borrower within three days of the change or at least three days before closing, whichever is earlier.

Steering
A person subject to licensing under the MBPA or the Consumer Loan Act may not steer, counsel, or direct any potential borrower to accept a residential mortgage loan with a risk grade less favorable than what the borrower would qualify for under the lender’s existing underwriting standards. The licensee must prudently apply the underwriting standards to the information provided by the borrower.

Prepayment Penalties
A financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty that extends beyond 60 days prior to the initial reset of an adjustable rate mortgage.

Negative Amortization
A financial institution may not make or facilitate the origination of a residential mortgage loan
that is subject to the Guidance and Statement if the loan includes any provisions that result in
negative amortization for a borrower.

SB 6471
This legislation amends the CLA and MBPA. All lenders, except those making loans under chapter 63.14 RCW, must have a license under the Consumer Loan Act. Lending is no longer allowed under the MBPA. Read the FINAL BILL REPORT link below. There is a lot of concern and confusion over this change. More info is forthcoming at the next Mortgage Broker Commission meeting on May 13, 2008.

SB 6471 PDF
SB 6471 Summary
SB 6471 Final Bill Report

SB 6381
Establishes a fiduciary duty relationship between a mortgage broker and his or her client.

SB 6381 PDF
SB 6381 Summary
SB 6381 Final Bill Report

Other links:
Here’s a quick overview from the Wash State Housing Finance Commission.