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.

 
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

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.