Federal Law

Regulators propose new mortgage disclosure forms

Goal is ‘restoring trust in the mortgage market’

TUESDAY, JULY 10, 2012.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LO Compensation Limits Coming in 2011!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dodd-Frank Wall St Reform Act Will Limit Loan Originator Compensation

The Merkley Amendment to the Wall Street Financial Reform legislation limits loan originator compensation to no more than 3 percent of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator compensation would be limited under the new Dodd-Frank Wall Street Reform Act HR4173

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To the Students from the May 21, 2010 Exam Prep Course in Renton, WA

Hi Everyone,

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

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

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

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

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

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

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

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

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

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

“nothing in this paragraph shall be construed to require a consumer reporting agency to disclose to a consumer any information concerning credit scores or any other risk scores or predictors relating to the consumer.”

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

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

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

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

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

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

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.

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.

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.

HVCC

Alright, here’s your chance to talk about the effects HVCC is having on you and your clients. Technically, HVCC is not a federal law but the result of a joint agreement between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency, and the New York State Attorney General. More on HVCC basics here. Yet this has been implemented nationwide.

The idea behind HVCC was to help ensure appraiser independence and to protect the integrity of the appraisal valuation process. HVCC was a settlement. Instead of the NY Attorney General suing Fannie Mae, Freddie Mac, WaMu and First American’s e-Appraise-it appraisal management company, we ended up with HVCC.

From the New York Attorney General’s press release:

“For more than a year, the Attorney General’s office has conducted an industry-wide investigation into mortgage fraud. On November 7, 2007, Cuomo announced he had issued Martin Act subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the companies purchased from banks, including Washington Mutual, the nation’s largest savings and loan. The subpoenas also sought information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.

The subpoenas came on the heels of the filing of a lawsuit by the Attorney General against First American and its subsidiary eAppraiseIt. The lawsuit, announced on November 1, 2007, detailed a scheme in numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual. The lawsuit is still pending, and the industry-wide investigation into mortgage fraud continues.”

Here’s the NAMB resource page for HVCC.

Here is the bill that’s been introduced that would put a temporary moratorium on HVCC.

Tell us about your experiences living through the transition to HVCC, and how things are going presently. For example, has HVCC harmed you or your clients or prevented you from conducting business?

FERA

From MGuire Woods:

“On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA). The new law is intended to expand the federal government’s capability to prosecute mortgage fraud, securities and commodities fraud, and other frauds related to federal assistance and relief programs, such as the Troubled Assets Relief Program (TARP). A brief discussion of some of FERA’s anti-fraud provisions appears below.

Additionally, FBI Director Robert Mueller recently stated that the FBI is discussing with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) the issue of requiring the private sector to take a more proactive approach to combating mortgage fraud. There are reports that one proposal would extend current anti-money laundering (AML) requirements to compel non-bank mortgage lenders to submit Suspicious Activity Reports (SARs)…”

Continue reading the McGuire Woods article here.

_____
Questions.

This law was signed in May of 2009. What changes have you seen take place since this law went into effect? For example, are lenders tightening up their review processes for potential fraud? What about at the originator level? What changes have been made at the third party broker LO level to make sure that loans are originated within the boundaries of this new federal law?

SAFE Act

From the NMLS: “Title V of P.L. 110-289, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), was passed on July 30, 2008. The new federal law gave states one year to pass legislation requiring the licensure of mortgage loan originators according to national standards and the participation of state agencies on the Nationwide Mortgage Licensing System and Registry (NMLS). The SAFE Act is designed to enhance consumer protection and reduce fraud through the setting of minimum standards for the licensing and registration of state-licensed mortgage loan. Mortgage loan originators who work for an insured depository or its owned or controlled subsidiary that is regulated by a federal banking agency, or for an institution regulated by the Farm Credit Administration, are registered. All other mortgage loan originators licensed by the states.

The SAFE Act requires state-licensed MLOs to pass a written qualified test, to complete pre-licensure education courses, and to take annual continuing education courses. The SAFE Act also requires all MLOs to submit fingerprints to the Nationwide Mortgage Licensing System (NMLS) for submission to the FBI for a criminal background check; and state-licensed MLOs to provide authorization for NMLS to obtain an independent credit report.”

Loan originators who work under a broker or consumer loan company will be referred to as licensed mortgage loan originators. Loan officers who work at a bank (see next paragraph for how SAFE defines a bank) are exempt from testing and education but will still be registered within the Nationwide Mortgage Licensing System and will receive a unique identifier.

LOs who work for an insured depository or its owned or controlled subsidiary that is regulated by a federal banking agency, or for an institution regulated by the Farm Credit Administration, are registered LOs. All other MLOs are to be licensed by the states.

Please note that while the SAFE Act requires NMLS to fulfill certain responsibilities associated with providing educational services or ensuring background checks are completed, it is individual state law that determines when a state-licensed MLO is required to pass the SAFE Mortgage Test, complete pre-licensure or continuing education training, and when state-licensed MLOs are required to complete their background checks. All state info located here.

Read the SAFE Act here.

__________
Questions
1) The SAFE Act was passed during the height of the 2008 meltdown. Do you believe that if this federal law was in place in 2001, that it would have prevented the current mortgage lending crisis? If yes why, if no, why not? Carefully read the SAFE Act (don’t worry, the act itself is not very long) before writing your reply.
2) Are there things inside this law that don’t belong?
3) Did the government miss anything that should have been inside this law?

RESPA Changes

RESPA Amendments Summary, 2009
Please note, the author of this blog post is Gordon Schlicke with edits and additions by Jillayne Schlicke
Copyright 2009

1. Effective Dates:
Mandatory use of the revised HUD-1 and 1A is effective the earlier of January 1, 2010, or whenever the revised GFE is first used for the loan transaction. Any settlement service provider who delivers the new GFE prior to January 1, 2010, will be subject to all of the requirements related to the new GFE, including compliance with the tolerance provisions and use of the required HUD-1 and 1A.
Here is the press release issued by HUD stating that HUD will exercise restraint (regarding taking enforcement actions) during the first 120 days of 2010 to give everyone time to adjust to using the new GFE, provided companies are making a good faith effort to comply.

2. New Mortgage Broker Definition. “…a person (not an employee of a lender) or entity that renders origination services and serves as an intermediary between a borrower and a lender in a transaction involving a federally related mortgage, including such a person or entity that closes the loan in its own name in a table funded transaction. An approved FHA loan correspondent is a mortgage broker for purposes of this part. Under the previous definition an employee and an exclusive agent of a lender were excluded from the definition. This removes the exclusion for an exclusive agent of a lender.

3. New Definition of “Origination Service. “…any service involved in the creation of a mortgage loan, including but not limited to the taking of the loan application, loan processing, and the underwriting and funding of the loan, and the processing and administrative services required to perform these functions.”

4. New Approach to Disclosing Mortgage Broker Compensation & Lender Fees. Both the GFE and HUD-1 contain three related consumer disclosures including any lender-paid compensation to the broker: “Our origination charge,” “Your credit or charge (points) for the specific interest rate chosen,” “Your adjusted origination charge.”

5. Our Origination Charge (#1, GFE page 2) includes all charges that loan originators will receive except for any points paid for the rate chosen.
Originators may not charge any additional fees for getting the loan.
The 0% tolerance applies to this charge.
Disclosed on block #1 page 2, GFE, and Line 801 of the HUD-1.

6. Download a PDF of the new GFE and read it here.
Here’s a link to the HUD RESPA page which also contains instructions for how to complete the new GFE.

Biggest changes: Everyone’s fees will go on line 1. For example, if you are a mortgage broker and routinely charge 1% mortgage broker fee and also an administration fee or a processing fee, now the total sum of these fees will go on line 1. The same rule applies for a banker: If the bank loan officer typically charges a 1% loan origination fee and an underwriting fee, the total sum of those fees will go on line 1.

Yield Spread Premium is now shown on line 2 and will always belong to the consumer (if you think about it, this really isn’t a change. We should have always been explaining the choices and uses for YSP. Since many LOs did not clearly, fairly, and honestly explain YSP to the consumer, the government is now making the decision for you to always make YSP the property of the consumer.) So YSP is not going away! instead, the consumer must agree to give you what’s left over (after using some of the YSP to pay for closing costs.) So for example, if you’d like to earn a 1% mortgage broker fee and a 1% YSP then broker LOs will quote a 2% fee on line 1 of the new GFE.

7. HUD Good Faith Estimate Tolerance Rule

Charges that cannot increase at settlement
Our origination charge
Your credit or charge (pts) for the specific interest rate chosen after you lock your interest rate.
Your adjusted origination charge after you lock your interest rate.

Charges that can increase up to 10% at settlement
Required services that we select
Title services and lender’s title insurance (if we select them or you use companies we identify)
Owner’s title insurance (if you use companies we identify)
Required services that you can shop for (if you use companies we identify)
Government recording charges

Charges that can change at settlement
Required services that you can shop for (if you do not use companies we identify)
Title services and lender’s title insurance (if you do not use companies we identify)
Owner’s title insurance (if you do not use companies we identify)
Initial deposit for your escrow account
Daily interest charges
Homeowner’s insurance

Violations/Penalties. Currently no statutory damages or penalties are available for violations. HUD plans to request that Congress revise RESPA to add damage and penalty provisions to various requirements. Originators can cure tolerance violations between GFE and HUD-1 by reimbursing the borrower any excess within 30 calendar days after settlement.

8. Application means the submission of a borrower’s financial information in anticipation of a credit decision related to a federally related mortgage loan, which shall include
A specific property address
Borrower’s name
Social Security Number
Monthly income
Applicant’s best estimate of property value
Loan amount sought.
Receipt of the above information from a consumer triggers the GFE disclosure.
Remember, some state laws have tougher trigger rules for the early disclosures (GFE, TILA, Settlement Costs Booklet.)

9. Good Faith Estimates (GFE). On RESPA-related purchase and refinance transactions, a (GFE) must be delivered or placed in the mail not later than the third business day after the creditor receives the consumer’s written application.
When a Mortgage Broker receives an application and provides the GFE, the lender is not required to provide an additional GFE.
The lender or broker may not require, as a condition for issuing a GFE, that an applicant submit supplemental documentation to verify the information provided on the application.
Lenders may not impose a fee for preparing the GFE other than a fee limited to the cost of a credit report.
When a GFE is mailed, the applicant is deemed to receive the GFE three calendar days after mailing, exclusive of Sundays and legal public holidays.
Information an applicant provides before the issuance of a GFE may not later be used to establish “changed circumstances” that is an exception to the tolerance limits on fee changes unless the loan originator can demonstrate that the information changed, the information was inaccurate, or the loan originator did not rely on the information.

10. Loan Terms Availability. The estimate of all settlement service charges must be available for at least ten (10) business days except for:
The interest rate
Interest rate-dependent charges, which consist of: The credit or charge for the interest rate chosen; The adjusted origination charges, and; The per diem interest.
If the consumer does not express intent to continue with an application within 10 business days, or such longer time as may be specified by the originator, then the loan originator is no longer bound by the GFE.
The new rule does not address whether the loan originator can require that the intent be expressed in a certain manner, such as a written statement, within the 10 days.
HUD contemplates that if a GFE is issued before the rate is locked, a revised GFE would be issued once the rate is locked to show the revised information.
If the interest rate is locked, then the rate and rate-dependent charges may not change during the lock period, subject to changed circumstances and other exceptions.
The GFE binds the loan originator unless, based on changed circumstances or other exceptions, the loan originator provides a revised GFE within three business days of the applicable event, or the originator rejects the loan.

11. Changed Circumstances.
Acts of God, war, disaster or other emergency.
New borrower information not previously relied upon in providing the GFE.
Boundary disputes; flood insurance requirement; environmental problems.
Information about credit quality, loan amount, property value, etc. that changes or, in the course of loan processing, is found to be inaccurate after the GFE has been provided to the borrower.

12. Items Not Considered Changed Circumstances
The specific items listed in #1, Application are the minimum items that must be received by originators to provide a GFE and originators are presumed to have relied on such information when issuing a GFE, therefore, the items may not form the basis for a change in circumstance unless the information changes or is found to be inaccurate.
Market price fluctuations by themselves. For example: an appraiser raises its prices by $50 after the originator issue the GFE for the loan.

13. Managing Changed Circumstances
If changed circumstances result in higher costs that exceed allowable tolerances; result in the borrower not being eligible for the loan sought, or the borrower requests changes, to avoid being bound by the most recent GFE, then the originator must provide a revised GFE within three business days of receiving information sufficient to establish the changed circumstance.
When the settlement of a newly constructed home is anticipated to occur more than 60 days from the time a GFE is provided, the originator may provide the GFE with a clear and conspicuous disclosure stating that at any time up until 60 days prior to closing the originator may issue a revised GFE. Failure to provide such separate disclosure precludes the originator from issuing a new GFE under the new home exception.

14. Required Provider Disclosure is eliminated. Under the previous rule if the lender required the use of a particular provider for a settlement service, certain information regarding the provider had to be disclosed. There is an alternative method in the new rule.

15. Seller-Paid Fees. If a seller pays for a charge that was shown on the GFE, the charge must be listed in the borrower’s columns on page 2 of the HUD-1. The charge must then be offset by listing a credit to the borrower in the amount of the charge on one of the blank lines in lines 204 to 209 and the charge must be included as a seller charge on one of the blank lines in lines 506 to 509.

16. P.O.C. Items The settlement agent must show the party making the payment outside of closing.

17. The Required Use Issue Background: Homebuilders conditioned the sale price on whether or not the consumer would use the builder’s own mortgage company. In some states lenders sued under various legal theories. The National Association of Homebuilders (NAHB) then brought suit to assert the right of its members to require the use of any affiliate. It is very difficult to obtain a ruling that restricts the owner of real estate from using sales incentives such as legitimate consumer discounts. Further, RESPA does not prevent a settlement service provider or anyone else from offering a discount for the use of an affiliate. HUD applauds the use of affiliated and preferred businesses if the costs of using these services are lower than the costs associated with similar services from other providers, a fact not lost on the NAHB. The issue was: Can a homebuilder tie a discount to the use of one of its affiliates.
The New Approach. The new final rule limits tying such a discount to the use of an affiliated settlement service provider. HUD narrowed the definition of required use: “Required use means a situation in which a person’s access to some distinct service, property, discount, rebate or other economic incentive, or the person’s ability to avoid an economic disincentive or penalty, is contingent upon the person using or failing to use a referred provider of settlement services. In order to qualify for the affiliated business arrangement exemption, a settlement service provider may offer a combination of bona fide settlement services at a total price (net of the value of the associated discount, rebate or other economic incentive) lower than the sum of the market prices of the individual settlement services and will not be found to have required the use of the settlement service providers as long as
The use of any such combination is optional to the purchaser; and
The lower price for the combination is not made up by higher costs elsewhere in the settlement process.
This definition may mean that a seller cannot require that an Owner’s Policy be issued by a particular title company, even if the seller pays for the policy, and may prohibit builder incentives entirely, including non-cash incentives.

Because of the controversial nature of this topic, lenders must monitor court decisions and additional changes in HUD rules to remain current. The department has a mixed record in clearly communicating changes to the industry.

18. Average Charge Pricing.. An average charge may be used (when preparing the GFE) by any settlement service provider that secures a service from a third party on behalf of the borrower or seller. A settlement service provider may define a class of transactions based on the period of time [no less than 30 days nor more than six months], type of loan, and geographic area. For example, a settlement service provider might calculate an average charge for all purchase money mortgages in the States of Georgia and South Carolina in a specified period of time. Alternatively, a settlement service provider could establish the class of transactions in which it would use a single average charge broadly, e.g., all transactions in engages in for a period of time, regardless of loan type or location.

The settlement service provider must recalculate the average charge at least every six months, and must use the same average charge for every transaction within the class. The average charge shall be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider. The total amounts paid by borrowers and sellers based on an average charge may not exceed the total amounts paid to the providers of the service for the particular class of transactions.
An average charge may not be used if the charge is based on the loan amount or value of the land, such as transfer taxes, daily interest charges, reserves or escrow, and all insurance (e.g mortgage insurance, title insurance, and hazard insurance). The settlement service provider making use of an average charge must maintain all documents used to calculate the average charge for at least three years after any settlement with an average charge.

19. Volume Discounts. HUD will give “further consideration” to a change allowing negotiated and volume discounts provided they adequately protect consumers and provide adequate market flexibility and consideration to small business concerns. There was not anticipated date identified.

20. New Definition of Title Service. Any service involved in the provision of title insurance including but not limited to title examination, evaluation, preparation, policy issuance, processing and administrative services required tp perform those functions. The term also includes the services of conducting a settlement. Certain clarifications are needed in those states where Title Agents are used.

21. New Servicing Disclosure. The revised Servicing Disclosure Statement eliminates the need to deliver the Statement at the time of application in the case of a face-to-face interview; eliminates the requirement that each applicant sign an acknowledgment of receipt of the Statement and provides that the Statement does not have to be issued if the application is denied within three business days of receipt. It contains the following model provisions based on different situations:
We may assign, sell, or transfer the servicing of your loan while the loan is outstanding.
We do not service mortgage loans of the type for which you applied. We intend to assign, sell, or transfer the servicing of your mortgage loan before the first payment is due.
The loan for which you have applied will be serviced at this financial institution and we do not intend to sell, transfer, or assign the servicing of the loan.

22. HUD-1 Settlement Statement Instructions

This material is for educational purposes only. Nothing herein is intended or should be construed as legal advice or legal opinion applicable to any set of facts or to any individual or entity’s general or specific circumstances. The course instructor is not an attorney.

———-

Questions

1) Will the new GFE help the industry, hurt the industry, or make no difference?
2) Will the new GFE help consumers, hurt consumers, or make no difference?
3) What are your company’s plans for complying with the new GFE?

TILA-MDIA

Truth-in-Lending Amendments
Regulation Z, Subpart C, Closed End Credit, Section 226.17,
General Disclosure Requirements
Effective July 30, 2009

Please note, the author of this blog post is Gordon W. Schlicke

Sec 226.2
General Business Day Definition. With regard to the timing of mandatory disclosures, the definition of a general business day is: “A day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. This definition is also is used for purposes of the rule prohibiting the collection of a fee (other than a fee for obtaining a consumer’s credit history) before the consumer receives the early disclosures. However, for purposes of rescission under Sec.226.15 the term means all calendar days except Sundays and the legal public holidays.
Consumer Fees. Prohibits consumer fees in connection with the consumer’s application for a mortgage loan before receiving the GFE disclosure. Permits a fee for obtaining the consumer’s credit history before the consumer has received the GFE provided the fee is bona fide and reasonable in amount.

Sec. 226. 17
GFE Redisclosure. If closed-end credit disclosures are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the creditor shall disclose before consummation: (1) any changed term, unless the disclosure was based on “best known information at the time” and labeled as such, and (2) all changed terms, if the APR at time of consummation varies from the APR disclosed earlier by more than .125% in a regular transaction (FRM) and .250% in an irregular transaction (ARM).

Sec. 226.19
GFE Timing. On RESPA-related purchase and refinance transactions, requires the Good Faith Estimate (GFE) be delivered or placed in the mail not later than the third business day after the creditor receives the consumer’s written application. If the GFE is mailed, the consumer is considered to have received it three business days after mailing. There are no further rules regarding the delivery of disclosures by overnight courier, electronic transmission.

An application is received when it reaches the creditor in any of the ways applications are normally transmitted–by mail, hand delivery, or through an intermediary agent or broker. If an application reaches the creditor through an intermediary agent or broker, the application is received when it reaches the creditor, rather than when it reaches the agent or broker.

Seven Business Day Waiting Periods. The creditor shall deliver or place in the mail the good faith estimates required of this section not later than the seventh business day before consummation of the transaction. The seven business-day waiting period begins when the creditor delivers the early disclosures or places them in the mail, not when the consumer receives or is deemed to have received the early disclosures.

For example, if a creditor delivers the early disclosures to the consumer in person or places them in the mail on Monday, June 1, consummation may occur on or after Tuesday June 9, the seventh business day following delivery or mailing of the early disclosures.

If the APR disclosed is not accurate then the creditor must make corrected disclosures of all changed terms including the APR so that the consumer receives them not later than the third business day before consummation.

Assume consummation on a FRM is scheduled for Thursday, June 11 and the early disclosures for a regular mortgage transaction disclose an APR of 7.00%. However, the lender learns that the APR at consummation will be 7.15%. The creditor must make sure the consumer receives new disclosures on or before Monday, June 8. If re-disclosure occurs after this day, the consummation date must be moved into the future.

Waiver of Disclosure Waiting periods. If a consumer determines that an extension of credit is needed to meet a bona fide personal financial emergency, the consumer may shorten or waive the waiting period after the consumer receives accurate TILA disclosures that reflect the final costs and terms. To shorten or waive a waiting period, the consumer must give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all the consumers who will be primarily liable on the legal obligation. Creditors may not use pre-printed forms for this purpose.

For example, a consumer might receive the initial early disclosures with the expectation of closing the loan within 60 days. However, the consumer’s financial circumstances might change in the interim, creating a need to consummate the loan immediately. If the APR stated in the early disclosures is no longer accurate, after receiving a corrected disclosure the consumer can provide a signed statement describing the financial emergency in order to waive the three-business-day waiting period and close.

Consumer Notice. Required disclosures in this section now must contain the following language:
You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.
Imposition of fees. Neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer’s application for a mortgage transaction before the consumer has received the disclosures required this section. A fee may be imposed for obtaining the consumer’s credit history before the consumer has received the disclosures required provided the fee is bona fide and reasonable in amount.

Sec. 226.24
New Advertising Rules. The new standard complements the existing clear and conspicuous standard that applies to open-end credit disclosures. Advertisements may include only the simple annual interest rate, or the rate at which interest will accrue along with and not more conspicuously than the disclosed APR. Additionally, if an advertisement includes a simple annual interest rate, such as a teaser rate, and more than one rate may apply to the loan’s term, the advertisement must include
• Each simple annual rate of interest that will apply
• The time period for which the rate will apply; and
• The loan’s APR

If an advertisement states any payment amount, the ad must include
• The amount of each payment that will apply during the loans’ term, including any balloon payment
• The period of time each payment will apply; and
• The fact that the payments do not include taxes and insurance premiums if a first-lien loan

Prohibited Advertising Practices include unfair, deceptive acts or anything associated with abusive lending practices or otherwise not in the borrowers best interest. These are
• Using the term “fixed” when advertising a variable–rate loan transaction with a planned payment increase without including information about the time period for which the rate or payment is fixed and stating “ARM” if applicable.
• Comparing the advertised rate or payment to an actual or hypothetical rate of payment without disclosing the rates or payments that will apply during the entire loan’s term and that they do not include taxes and insurance, if applicable.
• Misrepresenting that a loan is government endorsed.
• Using the name of the borrower’s current lender without including the actual advertiser’s name and disclosing that the current lender is not associated with the advertisement.
• Making a misleading claim that debt will be eliminated or waived rather than replaced.
• Using the term “counselor” to refer to a for-profit mortgage broker or creditor
• Providing an advertisement in one language while providing required disclosures in another.

A New Category: Higher-priced loans. Definition: A consumer credit transaction secured by a consumer’s principal dwelling with an annual percent rate (APR) that exceeds the average prime mortgage offer rate for a comparable transaction as of the date the interest rate is set by

• 1.5 or more percentage points for loans secured by a first lien on a dwelling, or 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling
In this new category, loans are priced higher than prime mortgage loans and priced between prime and Section 32 loans. The section prohibits creditors from extending credit based on the value of the property (equity loans) without regard to the consumer’s repayment ability as of consummation of the loan, including the consumer’s reasonably expected income, current obligations, employment, assets other than the collateral, and mortgage related obligations. Requires creditors to verify income and assets relied upon in making the loan. Prohibits prepayment penalties except under limited conditions. Requires creditors to establish escrow accounts (for first lien loans) for taxes and insurance, but permits creditors to allow borrowers to opt out of the escrows 365 days after loan consummation (this is effective April 1, 2010 and October 1, 2010 for manufactured homes.)
The new category should not be confused with existing HOEPA loans, often referred to as Section 32 loans. Higher-priced loans have lower triggers than HOEPA loans and therefore encompass more loans. Additionally, the rule for higher-priced loans applies to purchase money mortgages, which are excluded from HOEPA’s coverage. But like, HOEPA, the final rule for higher-priced loans excludes home equity lines of credit (HELOC’s) and construction and reverse mortgage loans.

Sec. 226.32
Prepayment Penalty Rules. A mortgage transaction subject to the high-priced loan section may provide for a prepayment penalty if, under the terms of the loan:
• The penalty will not apply after the two-year period following consummation;
• The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor;
• At consummation, the consumer’s total monthly debt payments (including amounts owed under the mortgage) do not exceed 50 percent of the consumer’s monthly gross income;
• The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.

Sec. 226.34
Borrower’s Repayment ability. Prohibits lenders from extending mortgage credit to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.
Reserve Accounts. Defines mortgage-related obligations as property taxes, premiums for mortgage-related insurance required by the creditor as set forth in §226.35(b)(3)(i), and similar expenses.
Requires verification of repayment ability. Lender must verify amounts of the consumer’s income or assets that it relies on to determine repayment ability, including expected income or assets, by the consumer’s Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.
Requires verification of the consumer’s current obligations. Lender must determine the consumer’s repayment ability using the largest payment of principal and interest scheduled in the first seven years following consummation of the loan and take into account current obligations and mortgage-related obligations; the ratio of total debt obligations to income, or the income the consumer will have after paying debt obligation.

Sec. 226.35(b)(3)
Establishing Escrow Accounts for principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. Also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence.
Administration of escrow accounts requires creditors to establish before the consummation of a loan secured by a first lien on a principal dwelling an escrow account for payment of property taxes and premiums for mortgage-related insurance required by creditor.
Optional insurance items. Does not require that escrow accounts be established for premiums for mortgage-related insurance that the creditor does not require in connection with the credit transaction, such as an earthquake insurance or debt-protection insurance.
Limited exception. A creditor is required to escrow for payment of property taxes for all first lien loans secured by condominium units regardless of whether the creditor escrows insurance premiums for a condominium unit.

Sec. 226.36(a)(b) effective 10/1/2009
Mortgage broker defined. The term “mortgage broker” means a person, other than an employee of a creditor, who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person, even if the consumer credit obligation is initially payable to such person, unless the person provides the funds at consummation out of the person’s own resources, out of deposits held by the person, or by drawing on a bona fide warehouse line of credit.
Appraiser defined. An appraiser is a person who engages in the business of providing assessments of the value of dwellings. The term “appraiser” includes persons that employ, refer, or manage appraisers and affiliates of such persons.

Prohibited Acts: Misrepresentation of value of consumer’s dwelling.
In connection with a consumer credit transaction secured by a mortgage, no creditor or mortgage broker, or affiliate of a creditor or mortgage broker shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.

Examples of actions that violate this paragraph include:
• Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling;
• Excluding an appraiser from consideration for future work because the appraiser reports a value of dwelling that does not meet or exceed a minimum threshold;
• Telling an appraiser a minimum reported value of a consumer’s principal dwelling that is needed to approve the loan;
• Failing to compensate an appraiser because the appraiser does not value a dwelling at or above a certain amount; and
• Conditioning an appraiser’s compensation on loan consummation.

Examples of actions that do not violate this paragraph include:
• Asking an appraiser to consider additional information about a dwelling or about comparable properties;
• Requesting that an appraiser provide additional information about the basis for a valuation;
• Requesting that an appraiser correct factual errors in a valuation;
• Obtaining multiple appraisals of a principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
• Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract;
• Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

A creditor who knows, at or before loan consummation, of a violation of this section in connection with an appraisal shall not extend credit based on such appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling.

______

These changes apply to all lenders equally: bank, broker, consumer finance company, credit union.
Questions:
1) In your own opinion, why has the federal government handed down these new rules?
2) These rules went into effect Oct 1, 2009. So far, have these new rules had a negative or positive effect on your clients? What about your own business?
3) With the more stringent rules for loans that fall into the High Priced Loan category, are underwriting guidelines getting tougher, weaker, or staying the same?

LO Education Requirements under the SAFE Act

2009 is a transition year for course providers. The National Mortgage Licensing System (NMLS) folks in WA DC will eventually take over licensing, testing, and education as per the SAFE Mortgage Licensing Act. Course providers approved by WA State DFI will still be offering courses during the fall of 2009. However, it is very important for LOs and brokers to be aware that course providers must make sure the courses we deliver for 2009 renewal are in compliance with the education requirements set forth in the SAFE Mortgage Licensing Act. Here’s what LOs need for 2009 renewal:

3 hours of federal law
2 hours of ethics, fraud, consumer protection, and fair housing
2 hours of non-traditional lending
1 hour of undefined instruction.
Brokers must take one additional hour.
If you’d like to read more about the continuing ed course topics, I have a page set up on the NAMF website.

Last year, LOs had to take two 3-hour classes for a total of six hours. Only new brokers and LOs were required to take ethics. This year you’ll need to take 8 hours (9 hours for brokers) and the classes you take will need to fall into the above topic categories. In WA State, our DFI rules say that continuing ed classes must be at least 3 hours in length. Now let’s talk about different options for how LOs can take these courses. Last year I polled LOs in Nov and Dec and most everyone said they wanted to take all 8 hours in one day. The downside to this idea is that we’ll have to start at 8AM and go all the way to 5PM. All day classes don’t work for everyone so watch for combination classes. For example you might decide to take three, 3 hour classes or one 3 hour class and one 5 hour class. I plan to experiment with all options. I’ll throw some budget-priced classes in the mix like last fall, but class prices will be higher because of the costs NMLS is charging course providers. If you’d rather take your CE all in one day, email me at jillayne at ceforward dot com and if I get lots of requests, I’ll put something on the calendar for Sept.

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.

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

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

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

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

Federal Housing Finance Regulatory Reform Act of 2008

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

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

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

LOAN ORIGINATOR

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

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

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

CE Forward Inc., dba National Association of Mortgage Fiduciaries