Current Issues

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
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FAQ about the pre-licensing class
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Why Some LOs are Not Passing the National LO Exam

The first time “pass” rate of the national loan originator exam has fallen to 59 percent.  This is an indication that the test is tough.  A high pass rate means an exam is too easy.  A very 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 42 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 required classroom hours is only “20 hours” was because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Twenty hours is plenty of time to spend with an experienced originator but not someone brand new.  In the future, I hope the pre-licensing hours will 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.  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 pass the test, then why bother testing people? Why not just give anyone who wants a license a license and not test them.

Those who are seeking good study material don’t have to pay to get it.
It’s all federal law and available for free! <–Scroll to the very end of that link to see the list of laws. However, that means you’ll have to actually read all the federal laws. More about reading soon.

3. Wanting the answers/not wanting to study
Anyone who claims to “have THE 125 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 to find the exact questions, but you expect someone to sell you a cheap set of practice quizzes.  The exact test questions will never be available in the public domain.  Relying only on practice quizzes is a mistake. All you’re doing is memorizing the answer to those quiz questions, and you don’t really understand the material.  Those quiz questions will never be on the test. The best way to maximize your chance of passing is to study.

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. 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.  If you want to pass the LO exam, you must confront your anxiety first. I have found that the best way to alleviate anxiety is to study.

6. Maybe you have an undiagnosed learning disability. 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. If you want to pass the LO test this might be that point in your life where you finally are going to have to get some help.  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. If you have a diagnosed learning disability, you can ask The NMLS for extra time to complete your licensing exam. See page 12.

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. It’s a radically different world compared with 2007. Your best foot forward is to consider yourself brand new.

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 we don’t talk the way lawyers write law.  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 Learning English as a Second Language
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.

10. The test has too many “situational” questions
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.  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..  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. Subsequently, the national LO exam will be that barrier to entry for folks who may not have the ability to read, 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.

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 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.

Merkley-Klobuchar Amendment Creates Level Playing Field

The Senate has passed an amendment to the Wall Street Reform bill that would ban loan originators from accepting compensation based on placing a consumer in a higher interest rate loan or a loan with less favorable terms.  The amendment also requires lenders to underwrite loans to assure a homeowner’s ability to repay the loan.

As you can imagine, loan originators everywhere are outraged.

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

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

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

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

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

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

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

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

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

Here are some new ideas. 

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

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

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

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

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

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

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

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

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.

To the Students from the March 29-31 Prelicensing Class in Bellevue, WA

Hi Everyone,

Here are the Q&As from Day 1.

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

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

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

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

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

DAY 2

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

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

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

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

DAY 3

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

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

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

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

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

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.

New National LO Exam Pass Rate 69%

The pass rate of the new national LO exam is 69%.  Between July 30, 2009 and November 30, 2009:
10,421 national exams were taken and 7,219 passed the exam. The report PDF is available here.

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

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

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

Will Currently Licensed LOs Have to Take the New National LO Exam?

The National Mortgage Licensing System (NMLS) will be taking over licensing at the end of July 2009.  The old LO exam will phase out and new LOs will also take a new state exam with new test questions on WA State laws.  NMLS chose the same test vendor, Promissor, recently purchased by Pearson Vue.  The national exam will contain 100 questions and LOs must pass with a 75%.  In addition, the WA State component of the exam will be around 50 to 60 additional questions.

Will existing licensed LOs (LOs licensed under a broker) have to take the new national exam?  It depends.  If your score on the existing state exam was not 75% or higher the answer is yes.  When you left the testing center, your Promissor form didn’t give you your score.  However, DFI DOES know your score. At one of the spring commission meetings, the commission was talking about doing some outreach phone calling to LOs so that LOs will know whether or not they will need to take that new exam.  But you will have until Dec 31, 2010 before you have to take the new exam.  Likewise, you will have until that same date to make sure that your continuing ed credits equal 20 hours.  Here’s more about the exam from NMLS:

Deadlines for Licensing, Testing, and Education Under the SAFE Act

Deadlines for WA State Mortgage Brokers and LOs. Other states may have different deadlines:

July 30, 2009
LOs licensed under a broker who take/took the (existing) LO test before this date don’t have to pass the new test with 75% until the end of 2010. You can also add up the continuing ed classes you’ve taken over the past few years to make sure that you hit 20 hours of CE prior to the end of 2010. Sweet!

July 31, 2009
New LOs working at a company licensed under the Mortgage Broker Practices Act OR the Consumer Loan Act must complete 20 hours of pre-licensing education by the end of Dec, 2009 and pass the new exam prior to becoming licensed.

Dec 31, 2009
Mortgage Broker LOs must complete 8 hours of continuing ed and renew through the NMLS system.
New MB LOs will have to take 20 hours of CE to renew if they were licensed after 7/31/09.
Consumer Loan Company LOs licensed after July 31, 2009 must complete 20 hours of pre-licensing in order to renew.

I see a potential problem for newly licensed LOs (licensed after 7/31/09) who put off their prelicensing education until December and then freak out trying to find 20 hours in a hurry.

I see a potential loophole and here it is:

July 1, 2010
This is the deadline for Consumer Loan Company LOs to be licensed, to pass the test, and to finish their 20 hours of pre-licensing. Given the nature of many salespeople to put things like this off until the last minute, why would a Consumer Loan Company LO get licensed in 2009 when he/she can procrastinate until mid 2010?

Links for more information:
NMLS
WA State DFI

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.

DFI Speaks Out on Loan Modifications

From the Washington State Department of Financial Institutions:

DFI Advises Homeowners To Verify The Licenses Of Anyone Offering Loan Modification Services Before Hiring Them

OLYMPIA – The Washington State Department of Financial Institution’s Consumer Services Division advises homeowners who are delinquent on their mortgage to be cautious about using the services of someone offering to help them work with their lender to modify the terms of their home loan.

The Department of Financial Institutions (DFI) has received a number of inquiries regarding the legality of providing this service in this state. While there is nothing inherently illegal about this business, those providing this service in the State of Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies and be overseen by the Department of Financial Institutions. Additionally, under applicable law, the loan modification provider associated with mortgage brokers have a fiduciary relationship with the borrower and must act in their best interest.

“DFI is concerned that homeowners in desperate situations may pay substantial fees for loan modification services and not take advantage of the HUD-approved counseling services offered for free by numerous non-profits,” DFI Director Scott Jarvis said. “The non-profit providers can often negotiate better deals because they have formed working relationships with many of the lenders.”

“We are concerned because loan modification businesses are using high-pressure tactics to get people to pay for their services, in some instances claiming a 100 percent success rate in negotiating their loan,” warns Deborah Bortner, DFI’s Director of the Consumer Services Division. “The truth is, not every loan is fixable.”

DFI advises homeowners to make sure loan modification providers are licensed as a loan originator before using these services. Verify a license at www.dfi.wa.gov or by calling 1.877.RING.DFI. DFI is also warning consumers to be especially wary if one of these companies asks for a fee up front. Consumers may also wish to seek free homeownership counseling. For more information, visit www.homeownership.wa.gov or call 1.877.894.HOME.

The unanswered question remains: Is helping a consumer negotiate the modification of a deed of trust the unauthorized practice of law?

If the answer is “yes,” then the nominal, paperwork intake performed by an LO must stop at some point and the file handed over to a local attorney.

I’ve submitted an inquiry to the WA State Bar Assoc on this issue asking for an “unauthorized practice of law” opinion.

Attorneys do not split their fee with non-attorneys. This means the consumer could choose to pay the LO a nominal fee for work performed such as counseling and gathering the homeowner’s information and then the consumer will pay a licensed attorney a separate fee.

I’m not sure why a consumer would choose to pay an LO a fee for doing what could be performed for free by working directly with their lender or by working with a HUD-approved Housing Counseling Agency. If a consumer does decide to pay for loan modification help, it seems more rational to just hire an attorney direct. I’ve surveyed 10 attorneys and so far almost all of them are quoting in the $1500 range for a loan modification. Some charge more if there are more liens on title. Why pay that fee, along with a separate fee to an LO?

Why pay a loan mod salesmen $3500, $4000, and upwards of $5,000 for something you can get for $1500 from a person with a law degree whose conduct is heavily regulated by the Bar?

The percentage of loan originators who know anything about loan modifications is at about one half of one percent right now because nobody up until a few weeks ago was doing them. Instead, the industry just refinanced people over and over again. 

Mortgage brokers and LOs are fiduciaries. This means they must put their client’s interests above their own interests.  There can be no undisclosed secret fee splitting. The consumer must be told everything, including fully disclosing and explaining your fee. Brokers and LOs are still coming to grips with what it means to be a fiduciary.

True story from the classroom this week:

I was delivering a 20 min lecture on fiduciary duties. One loan originator sitting in the front row with his arms crossed was not taking any notes while his colleagues were feverishly writing down everything on the board. At the conclusion he raised his hand and said, “My broker has an agreement that we have all our customers sign and in that form, it says that we are not their fiduciary so I don’t have to know any of this stuff.” 

It’s going to take a while before some mortgage brokers and LOs choose to fully embrace these higher duties. Sooner if we end up with a court case.

Just take a look at this craigslist ad: Make $15,000 per month doing loan modifications….no experience necessary.

There are many options for getting help with a loan mod. Prices range from free to predatory. Washington state Licensees ought take great care before moving in this direction. 

In closing, it’s worth mentioning that Indymac loan modifications are re-defaulting at a rate of 58% at the six month mark. This begs the question of whether a homeowner is well-served with a loan modification. This is something fiduciaries would ask themselves as well as disclose and discuss with their clients before recommending this option.

MILA’s Bankruptcy

The bankruptcy trustee in charge of MILA’s Chapter 11 case says there is evidence that MILA’s founder and CEO allegedly collected $32 million from MILA during the years before its demise, “improperly draining the Mountlake Terrace company’s assets as its fortune declined.”

From the Seattle Times:

“I think the executives at MILA knew by 2004 that this bubble was bursting and did their best to take out as much money as they could before it became obvious to everyone else,” says Brian Esler, who represents the bankruptcy trustee in the suit.

The suit claims Sapp, who owned about 90 percent of MILA, paid himself more than $10 million in dividends in 2004 and 2005 when the company was already “functionally insolvent,” meaning it had insufficient capital to continue normal operations and should have been preserving cash.

It also alleges he took $11.5 million in salary for each of those years, though “by March 2005, MILA was already delaying payments, even to important customers, to conserve cash.”

The trustee’s suit also claims that Sapp damaged MILA — and its creditors — in other ways:

He “surreptitiously seized” the mortgage software MILA developed and had another of his companies bill MILA for using it; charged MILA exorbitant amounts for his private yacht and business jets; and, in a “theft of corporate opportunity,” created separate companies to own a four-story office building and a parking lot that were leased to MILA, rather than having MILA buy the properties.

Sapp’s attorney, Jack Cullen, declined to discuss the allegations in detail but said: “We consider the claims nonsense. We don’t think they are founded in law or fact.”

Sapp did not return a call to his Hunts Point home.

Esler is asking the court to freeze $12 million in cash belonging to Sapp, to keep it available to creditors.

Bankruptcy Trustee Esler’s plan is to convince the court that MILA was technically insolvent for over two years before the company abrubtly closed it’s doors in April of 2007.  Esler cites improper accounting and a  twelve-fold increase in the number of loans MILA was required to repurchase from 2002 to 2004.

To protect creditors, the suit says, as early as 2005 “Sapp should have attempted to sell, liquidate or reorganize MILA at a time when it still had significant value, instead of continuing to manipulate and loot it for personal gain for another two years.”
The suit also takes a microscope to transactions among the various entities owned by Sapp. One example: The company that owned his 130-foot yacht billed MILA $395,374 over two years — although “MILA used that yacht only twice for asserted business reasons,” the suit says.

MILA’s creditor claims have ballooned up to 2 billion dollars.  By asking the court to freeze Layne’s personal assets, is the Bankruptcy Trustee is gathering evidence to try and make a case that the corporate veil was pierced? This means Layne might have co-mingled corporate assets with personal assets.  An example of that would be if personal expenses were paid for with corporate funds. This will be an interesting local case to follow.

Bankruptcy Trustee:
Miller Nash
Brian Esler
206-622-8484
Lisa Peterson or Bruce Rubin
360-699-4771

MILA Legal Counsel:
Jack Cullen
Foster Pepper
(206) 447-4689

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

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

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.)

National Loan Originator Licensing

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

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

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? 

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

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. 

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

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 16th.

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

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.