Inman Real Estate News announced their list of Real Estate’s Most Influential Thought Leaders for 2013 and Jillayne Schlicke of CE Forward and The National Association of Mortgage Fiduciaries was on the list! What an honor to be named alongside many of the people whose work I admire and read on a daily basis. Thanks so much to Brad Inman and everyone at Inman Real Estate News for this fantastic shout out!
featured
Teaching Realtor Clock Hour Classes: Three Steps
I’m writing this post because I am often asked how to get started teaching Realtor clock hour classes. There are a million ways to answer this question. Do you want to know what the state requirements are? I can easily point you in the direction of Washington State’s required forms but the form won’t tell you how to get up and running. This form will tell you how to get yourself approved as an instructor. Getting up and running is a different question and that’s the question I will answer in this post. I have found that the best way to help people is to start at the end.
What’s your end game? Do you want to teach Realtor clock hour classes because you want to make a lot of money? Maybe you don’t care about the money because you have some other job where you already make pretty good money but instead want to use the classes as a way to get in front of Realtors so you can show them how awesome you are…so they will refer business to you. I have found the latter to be the most common reason why people want to begin teaching Realtor clock hour classes. But let’s talk about money first.
Money
There isn’t a whole lot of money in teaching live classes because…well…because there are so many vendors who are willing to teach low quality CE classes for free. There are also many large companies willing to send one of their full time employees to teach classes and at conventions for free. These instructors have full time jobs in management, sales, law, tech, etc., and teach classes or at conventions as a public relations maneuver for free, or for a very, very low fee. There’s a word for it. I call it sales-ucation. Big conventions only pull out big paychecks for the big name draw convention speakers. I’m assuming you’re not a big name convention keynote speaker if you’re reading this article so I’m going to tell a secret to the rest of you who are not sales-ucation speakers. There always IS a budget of some sort and they always WILL pay you something—if you ask.
Money, continued
Three Puzzle Pieces: Teaching, Writing, Warm Butts
If you are looking to teach Realtors as a career, AND you can write your own classes you’re on your way. The last piece of the puzzle will be—how are you going to get warm butts in chairs? You need to be able to do all three: Teach a kick-ass awesome class, constantly write new material, and have a marketing machine that delivers students into the classroom. Most people who want to teach….want to teach and that’s it. They want to walk into a classroom filled with students and walk out with a paycheck. If that’s all you want to do, your value to a real estate school is really, really low. But that’s okay, and there are real estate schools out there who may hire you but don’t expect to be paid much per hour or per class.
Vendors and The Numbers Game
Maybe you’re a vendor and…well, now don’t be offended if I call you a vendor. You might be thinking…..I’m a loan originator! I’m an appraiser! I’m an attorney! I’m an escrow officer! I hate to be the one to break the news to you but to a Realtor you’re just another vendor. Check your ego over there on the edge of the computer screen and don’t get offended if I call you a vendor. So vendors typically want to use the classroom as a way to grow their business. It’s a numbers game. You get in front of X number of Realtors each month will translate into X number of referrals which will translate into X number of leads which will translate into X number of deals which will translate into X number of closed transactions which, on average, will net you X number of before-tax dollars per month.
This is a great strategy and it is doomed to fail. I will hire no one to work at my company if all Realtors are to you is a dollar sign or a lead in a grand master plan. People aren’t objects. Students aren’t there to be used and even if you (please don’t) teach your class for free, the Realtors are still paying with their time. Their time is valuable and if all you are doing is a sales song and dance about how much you know and how awesome you are you will fail. This is what gives Realtor clock hour classes a bad name. Instructors are in the classroom to help people learn. They are not there to sell.
Magic is Mystery
So here’s the magic. As a vendor, I know you want deals. Everybody knows you want deals but if you go in there with your deal-wanting pants on, everybody’s going to know it. Instead, you need to approach teaching like a good book. Nobody goes right to the end of a good book to find out what happened. It’s a mystery. That’s what makes reading so enjoyable. If you really want to find success in the classroom, and by success I mean meeting your math goals in the previous paragraph, you need to let go of the outcome and instead focus on teaching an awesome, kick-ass class. A class better than any class they’ve ever had from your competitor. If you teach an awesome class, they will call you. You get to pick and choose who you want to work with. That’s right. At the end of a 4 hour class, you will know which Realtors you want to work with and which Realtors you don’t want to work with.
The Good News
Title insurance, mortgage lending, home inspections, escrow, all of these vendors have reputations for delivering “free” classes that are god-awful boring. That’s the good news. The bar for free vendor classes has been set terribly low. All you have to do is to teach even a marginally decent class and they’ll think it’s the best class they’ve ever taken.
So what’s the difference between a god-awful boring class and a kick-ass awesome class? A class where the instructor DOES NOT lecture.
It’s Hard But It’s Also Easy
The most difficult thing for most all clock hour instructors to get their heads wrapped around is that your mouth doesn’t have to be moving the entire time. Unless you attended a fancy prep school in your younger days, most of us attended school where the teacher did most of the talking and we think we have to do that to teach Realtors. That “teacher knows everything” archetype is embedded in our psyche. That’s not what adult learners want from their clock hour instructors. Adult learners want to get involved with their learning and that means you don’t have to be the one talking all the time. This is hard but also easy.
Step 1
The first step is to get into the right Instructor Development Workshop. Find out who is in charge of the workshop, who is teaching it, how long they’ve been teaching Realtor clock hour classes and how familiar they are with the facilitation model of adult learning. There are many IDWs out there. Some are cheaper than others, some are online. You do get what you pay for. Shop around and ask questions. Will the instructor answer all your questions about getting up and running during the workshop? Will the instructor help you fill out your state-required paperwork? Will the instructor give you the opportunity to try out the facilitation style of learning so you can get a feel for how it really works? Find the very, very best Realtor clock hour instructor you know who teaches a lot of interactive, fun classes and ask that person for a recommendation on where to take an IDW.
Step 2
The second step is to figure out if you’re a writer. If you don’t know how to write classes, don’t want to write classes, or don’t have time to write, then you’ll need to hook up with a real estate school that already has classes written that you can use but remember, no school is going to let you teach their material for free. There will always be a fee involved but you can let the students pay that fee if you don’t want to pay it. Real estate schools like mine can also help you write something completely unique and brand new. The class must be written to allow the instructor to give the students lots of things to do. The old-style class just gives the instructor lots of things to SAY. That is a recipe for a boring class. Just mailing a set of powerpoint slides to the Dept of Licensing won’t cut it. They want specific learning objectives. Real estate schools know how to write classes that the Dept of Licensing will approve.
Step 3
The third step is to figure out how you’re going to get warm butts in chairs. The easiest way vendors think they will meet this goal is to offer free classes. Unfortunately when you teach for free you are telling the Realtors what you have to teach them has no value. Unless YOU own the real estate school and you own your own courses, you OR the students will be paying another real estate school a fee to use their school and courses. Having your own school is also an option but you still haven’t solved the warm butts in chairs problem. So until then, make a list of possible marketing partners such as a local Association of Realtors or other vendors that also sell to Realtors. Whatever real estate school you’ll be working with can also help you with marketing ideas. You can have a great class and know how to teach an interactive class and then end up with nobody showing up. The marketing piece is crucial to meeting your goals. Marketing takes time and money. Just sending out a flyer to your email database of 500 Realtors might net you 5 students. If all you have is emails, you need BIG numbers to net 10 students. If you don’t even have a database of Realtors you’ll need to buy one or partner with someone who has one.
Other Options
In closing, teaching Realtor clock hour classes is a big time commitment. Not everyone can meet that time commitment, but they still want to attempt to meet their goals. Another option, without actually taking the time commitment needed to be an instructor, is to just sponsor a clock hour class through your local Realtor association. You bring in some healthy food like fruit and protein bars (can we ditch the donuts and muffins and bagels? All those simple carbs are increasing the LDL cholesterol levels of Realtors as I write this. Enough of that crap already) and then you have a few moments to address the audience. This is an option for you to create some face time but that’s all it is. Most vendors don’t stay for the whole class. Drop and go is the status quo and I’m sure the ROI is not very high. But it DOES make you feel like you’re accomplishing something if a “feeling” is the goal.
For those who want to learn how to facilitate instead of just “teach.”
For those who want help creating an interactive class
For those who want to exceed their goals instead of just meet them…
Call me.
Jillayne Schlicke
206-931-2241
LATE CE Classes are now available for 2012-2013 license renewal
Late CE Classes are now available for loan originators who did not renew their license at the end of 2012 and need to take the required CE class in order to renew.
NAMF Approved Course Provider 1400068
LATE CE 8 Hr SAFE LO CE #3247
LATE CE 1 Hr Wa Law CE #3246
This is a live, instructor lead class. There is no end-of-course test required in order to earn your continuing education certificate. Attending the class and participating is the only requirement. Read more about the course content here
2013 schedule
Jan 7
Jan 17
Jan 24
Feb 1
Feb 13
Feb 26
To register click through from the schedule page
OR
call Jillayne 206-931-2241
OR
email Jillayne:
jillayne at ceforward dot com
Regulators propose new mortgage disclosure forms
Goal is ‘restoring trust in the mortgage market’
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
The Moral Terrain of Mortgage Lending
General ethics applies to everyone in all spheres of life; in contrast, professional ethics is usually memorialized by written code and is intended to apply only to those individuals who have been identified as professionals in their field. For example, in the legal industry, both lawyers and paralegals are considered professionals and must abide by certain written ethical codes, while legal secretaries and law clerks are not considered professionals and are not held to the same professional standards (although certainly the employers they work for can require it). In the healthcare industry physicians owe specific moral duties that are captured by various ethical codes; in contrast, orderlies and certain other lower level functionaries are not considered professionals and do not have to abide by these codes of ethics, although they follow directives that are patterned after the applicable codes.
The essence of professional status requires one to take a licensing exam which tests substantive knowledge and codified standards of practice. Currently, the mortgage origination industry is in a state of transformation because, although loan originators working under a mortgage broker and non-depository lender must pass licensing exams, loan originators who work for depository banks are not required to do so. A brief historical review of standards of practice indicates that the designation of mortgage originator is moving towards a clearly identifiable status as a profession. We in the industry can now move mortgage originators clearly into professional status by implementing competency exams for all LOs and disciplinary procedures, once a code of ethics with sanctions is formally put into place. Until then, we revert to using general ethics in the workplace.
General ethics attempts to provide a rational framework for answering the paramount moral question “What ought I do?” We all struggle with this question every day in all contexts, and we attempt to find answers through emotion, intuition, authority figures, religion, and hopefully, reason. In answering these questions, we attempt to construct common and objective frameworks of values in order to solve these problems in a consistent fashion. This gives our lives coherence and unity as we strive toward ethical ideals. In contrast, the problems of professional ethics in a business setting, emerges from highly unique structural domains and thereby carry with them modified sets of values. For example, in the criminal justice system there are specific players that play specific roles in that structure and the overlying value for lawyers is to protect the constitutional rights of clients. In the healthcare industry physicians have duties of informed consent to patients, and while doing no harm to the patient, they must also respect patients’ rights to self-determination.
We infer that anyone who is officially designated as a professional also has fiduciary duties toward his client. Fiduciary duties arise in any circumstance where one person has greater authority, power, or knowledge than their client. This carries with it the duties to act in the highest good faith and to never put one’s own interests above the interests of any client with regard to the subject matter of their contractual arrangement. Being designated as a professional carries correlative burdens and benefits. One benefit is that a professional has greater industry prestige and greater earning power. A corresponding burden of this fiduciary duty is that there is a greater responsibility to protect the interest of clients.
At this point in time, we cannot assume a mortgage originator is a) a professional (which triggers a different set of ethical considerations than general ethics and b) is a fiduciary and as such owes duties of the highest good faith to his client. Furthermore, this would imply that the mortgage originator also has the affirmative duty to ensure his subordinates are also protecting those fiduciary duties. In some states, laws have been passed that designate a mortgage brokers and the loan originators licensed under the broker to owe fiduciary duties to their clients but this is not the case in all 50 states for all loan originators no matter where they work. Instead we would classify loan originators as an emerging profession.
It is not clear that an individual not officially designated as a professional owes fiduciary duties to clients, though many courts have held loan originators to a fiduciary standard during the last decade as borrowers attempted to balance the scales of justice after becoming victims of predatory lenders. (See “Mortgage Brokers-What Fiduciary Duties Exist? By Andrea Lee Negroni, Mortgage Banking Magazine Oct 1, 2007.) Typically non-professionals deal at arm’s length with their clients. In this case, consumers do not expect that their mortgage loan originator is not self-interested in their dealings, which necessitates the need for broker shopping in order to get the best deal, yet many borrowers did believe the loan originator was working on behalf of the borrower when no such duty existed.
If a mortgage originator does not have professional status that results from national competency examinations and being held to a code of ethics with sanctions, then there is no good reason for a consumer to expect any kind of special duties above and beyond those prescribed by law. The expectation again is that both parties are operating at arm’s length and the consumer must be held accountable for his choice in mortgage originators. In situations where the mortgage originator does not have official professional status, the operative rule continues to be “caveat emptor.” In contrast, in situations where the mortgage originator has official professional status, the operative rule shifts to “caveat venditor.”
Frequently, all professionals face conflicts between professional obligations and their own personal senses of morality. For example, a pharmacist may have to respect his clients wish to purchase a Plan B Emergency Contraception even though he is personally opposed on moral grounds. While we do not intend to provide any definite answers to these sorts of conflicts that occur, we can offer some account of some of the moral considerations that go into thinking through these sorts of conflicts.
There are two ways that professionals can approach ethical problems. One is called holism and the other is called separatism. Holism is an approach that implies that one has an absolute set of standards that applies to all contexts and domains of one’s life. In contrast, separatism means that a moral agent separates and isolates the moral domains of his life. He does not have one single set of moral standards that applies in all contexts. He may have a different set of standards for strangers, a different set of standards for home, and an even different set for work, especially because there may be a written code of ethics at work to which he must abide.
For example, many states have consumer protection statues within their mortgage loan originator licensing laws requiring a duty of honesty to all parties. By becoming a loan originator that person agrees to abide by that absolute rule. In comparison, that very same person, in his personal life, may have adopted a rule concerning telling the truth that allows occasional deviations if the consequences so warrant. This person then is adopting the strategy of separatism because he is rigidly separating moral domains of his life with different moral rules. Another individual, however, could follow the approach of holism by maintaining an absolute rule of lying in all contexts of his life if it is in his best interest to do so. If one’s professional, ethical standards are vague and ambiguous, it is difficult, if not impossible to be a separatist. This is so because there is no clear rational way to separate one’s professional moral obligations from one’s general moral obligations. This, then, throws one into a holist approach, which leads to subjectivism and thereby risks an “anything goes” policy. Moral chaos ensues.
Due to what we believe was a deficient motivational structure, rampant violations and the resulting public outcry, mortgage originators are now facing severe externally-imposed federal regulations which are quickly worsening the situation of a typical mortgage originator and business owner.
The National Association of Mortgage Broker Code of Ethics, while it mandates that members shall conduct business in a manner reflecting honesty, does not go far enough in clarifying what honesty means. This allows a wide number of interpretations of honesty and unfortunately, because there is no precise definition of honesty there is no objective standard to which members can be held. This is the very problem in this industry. Because code provisions are expressed with great ambiguity they are susceptible to moral subjectivism, which means that ultimately just about anything goes and the “anything goes” policy has caused huge amounts of political and legal machinery to gear up to create external regulations of our industry. Laws come with far more serious sanctions than we would mandate through continuing education, disciplinary proceedings with retraining, and so forth, which we believe will be less efficient and will decrease industry profits. The mortgage lending industry has a choice: We can either proactively, internally regulate ourselves with the attempt to educate, train, and improve the moral fiber of mortgage originators, or else we will risk constant and even greater external regulation by various legal bodies.
We believe the best way to elevate the moral fiber of any industry is to develop and provide an ethical structure of motivation for our industry that is not dependent on external rewards or punishments but instead helps loan originators develop a system of internal rewards based on ethical virtue, duty, and consequences.
NAMF is writing such a code. Contact Jillayne Schlicke for more information: 206-931-2241
Portions of the above article were originally published in Mortgage Originator Magazine in 2001 and authored by Kevin Boileau, Ph.D., and Jillayne Schlicke, M.A.
8 Hour SAFE Comprehensive Continuing Ed Course Plus 1 Hour WA State Law CE
8 Hr SAFE Comprehensive NMLS Approved Course Number 21461 Hr WA State Law CE NMLS Approved Course Number 2089
Course Description:
4 Hours Federal Law
2 Hours Ethics, Consumer Protection, Fraud, Fair Housing
2 Hours Non-Traditional Lending
1 Hour WA State Law
4 Hours Federal Law
2 Hours Ethics, Consumer Protection, Fraud, Fair Housing
2 Hours Non-Traditional Lending
1 Hour WA State Law
In this course we will review the Federal Reserve Board’s rules on loan originator compensation prohibitions and the Dodd-Frank Reform Act including the new Consumer Financial Protection Bureau, LO compensation limits coming under Dodd-Frank, and definitions of non-standard loans, high risk loans, and qualified residential mortgages (QRMs). In addition we will:
Learn why overages and yield spread premiums have been deemed unfair
Become aware of how unethical business practices can result in legal consequences
Understand the new “duty of care” required by loan originators
Learn about the most recent HUD Fair Housing proposed protected class
Schedule of upcoming classes
End of Course Evaluations from previous years:
“As always…awesome! You make it fun and interesting and I always learn something new.”
“I liked the class participation, open discussion and quizzes. This kept us engaged and time flew.”
“The best part about this class is that it went by really fast and we got all our CE hours done in one day!”
“Jillayne is informative and keeps the class moving. Simply an exceptional instructor.”
“Great class. I honestly dreaded coming today thinking class was going to drag on but time flew by, we actually had fun learning all the regulations and getting this over and done with in one day feels great.”
“Excellent class. Good case studies, good dialogue among students.”
“This is the most comprehensive class out there for mortgage lending. Not only is the instructor informative and up to date but she also teaches in a fun and motivating way. Thank you for being an LO advocate.”
“I have always enjoyed your classes and this one was outstanding.”
“I am very happy that I now understand the new RESPA and TILA rules. Ethics is always a pleasure and court cases seemed unjust toward the loan originator at first but now I understand why the LO/Broker was sued.”
“Enjoyed learning more about non-traditional lending. As a broker that generally handles only conventional loans, this information was very informative.”
“Ms. Jillayne helps me to understand and remember TILA and RESPA. She is always energetic and there are no dull moments. I always return for her classes.”
Federal Reserve Board Rules on LO Compensation Prohibitions Aim to End Predatory Lending
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.
Secondary Marketing Fraud Question from an Anon Caller
Question from an anonymous phone caller:
“I work at retail bank. When rates were dropping, I asked my processor to lock several FHA loans. All the paperwork to lock was completed and sent to management. Management did not lock the loans, hoping to ride the wave down and earn extra yield for the bank….rates rose and many of my customers lost the ability to lock at the rate we promised. They were furious and not surprisingly took their refinance business elsewhere. I lost the ability to earn income on those loans and my company also lost interest and fee income. I feel horrible for those customers and I have all kinds of emails saved showing our company promised to lock their loans. I complained to management and I was fired. What can I do to report this? I don’t want to have this happen again to customers at that bank.”
A: Is the bank state or federally chartered? If the bank is state chartered you can file a complaint with DFI. If the bank is federally chartered, find out the name of their federal regulator from the bank’s website. The FBI also takes whistleblower complaints on cases like this as the FBI is HUD’s enforcement arm: http://seattle.fbi.gov/ I ran this by our local Seattle FBI Field Office and Jim Siwek, Assistant Special Agent in Charge, HUD-OIG Investigations, says to contact the Seattle FBI office here: (206) 220-5390 or the direct HUD-OIG hotline: 1-800-347-3735. Other ways of contacting HUD:
Mail:
HUD OIG Hotline
451 7th Street, SW
Washington, DC 20410
FAX: (202) 708-4829
Email: hotline@hudoig.gov
Why Some LOs are Not Passing the National LO Exam
The first time “pass” rate of the national loan originator exam has fallen to 59 percent. This is an indication that the test is tough. A high pass rate means an exam is too easy. A very low pass rate means an exam is too hard. The numbers that tell a different story are the repeat test takers. Test candidates who fail the LO exam the first time and retake the exam pass the exam only 42 percent of the time. The SAFE Mortgage Licensing Act is working the way it was intended.
This blog post is for loan originators seeking help who are trying desperately to pass the test the second, or third time. Test candidates must wait 30 days between tests and if they fail after their third attempt, they have to wait 6 months before taking the test again. I know it sounds unfair, but in all seriousness, not everyone is going to be able to pass this exam. The six month cooling off time is like a forced reflection period for a candidate to either get serious in addressing their repeated fails or get serious about studying. The SAFE Mortgage Licensing Act of 2008 is only the beginning. Over the next decade loan originators will slowly transform from being less like retail salespeople and more like professionals. The loan originator exam will never be as easy as it is in 2010.
I teach the SAFE Pre-Licensing course for new to newer loan originators which is a 20 hour course. I also teach an exam prep course for experienced loan originators and have had the opportunity to interact with hundreds of loan originator students. In this blog post I’d like to share the reasons I believe people are not passing the exam so those who need help can identify their challenges and meet or reset their goals. The following reasons are numbered for conversation sake and do not appear in any particular order.
1. One reason why people are not passing the loan originator exam is the same reason why people all over the world don’t pass comprehensive exams: Not enough studying. A 20 Hour pre-licensing course is definitely not enough time to teach and learn all the complex knowledge required to pass the national LO exam. 20 hours could be three, 7-hour days or two, 10-hour days. Take a look at the test content outline. There’s NO WAY an average human, who has never been in the mortgage lending industry, is going to be able to learn let alone understand, memorize and be able to take a test on all these topics. One reason the number of required classroom hours is only “20 hours” was because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Twenty hours is plenty of time to spend with an experienced originator but not someone brand new. In the future, I hope the pre-licensing hours will be expanded to a full week of education. Until then, some students will have to spend way more time outside of the classroom studying.
2. “There’s no good study material available”
NMLS-approved course providers are not allowed to take the test only for the purpose of telling everyone what’s on the test. If we’re caught doing this we lose our ability to teach NMLS approved courses! No thanks. If you think about it, if it were that easy to pass the test, then why bother testing people? Why not just give anyone who wants a license a license and not test them.
Those who are seeking good study material don’t have to pay to get it.
It’s all federal law and available for free! <–Scroll to the very end of that link to see the list of laws. However, that means you’ll have to actually read all the federal laws. More about reading soon.
3. Wanting the answers/not wanting to study
Anyone who claims to “have THE 125 questions you MUST know” is probably wrong. Any list of questions floating around out there will eventually make their way to NMLS and I’m sure they’ll pull those questions. Okay, so maybe you don’t expect to find the exact questions, but you expect someone to sell you a cheap set of practice quizzes. The exact test questions will never be available in the public domain. Relying only on practice quizzes is a mistake. All you’re doing is memorizing the answer to those quiz questions, and you don’t really understand the material. Those quiz questions will never be on the test. The best way to maximize your chance of passing is to study.
4. I know the material, I just can’t pass the test.
It’s possible you don’t know the material. Re-read numbers 1-3. Or perhaps you have test anxiety.
5. Test Anxiety
I have met several LOs who are have a high degree of test anxiety that goes way beyond normal nervousness. Yes, passing the test is important. if you don’t pass, XYZ will happen. Test candidates get themselves all worked up so they can’t eat, sleep, think, or do anything let alone actually learn and understand the test content. There’s lots of tips and ideas that have been written about dealing with test anxiety and even a little self-quiz you can take here. If you want to pass the LO exam, you must confront your anxiety first. I have found that the best way to alleviate anxiety is to study.
6. Maybe you have an undiagnosed learning disability. Back in the 1970s there were no para-educators available to follow kids around giving the special needs kids extra support. Instead students survived in other ways. Humans listen and talk at a much faster and higher rate than we read and write. Many LOs are high functioning talkers but low functioning readers. Some people are dyslexic or have other bona fide learning disabilities that they know about but don’t want to deal with the stigma associated with being labeled. If you want to pass the LO test this might be that point in your life where you finally are going to have to get some help. Most of the instructors teaching classes whether they’re live or online specialize in mortgage lending and not learning disabilities. Ask your primary care physician for a referral to a doctor or counselor who specializes in diagnosing learning disabilities in adults. If you have a diagnosed learning disability, you can ask The NMLS for extra time to complete your licensing exam. See page 12.
7. Subprime LOs who fell out of the industry during 2008 and are trying to re-enter the business are having a very, very hard time passing this test. The main reason is because they think they already know how to originate and don’t want to spend the time studying or don’t think they have to study so they repeatedly fail the test. Anyone who entered the industry around 2002, left the industry in 2007 or 2008 and only originated subprime received very little compliance training if any. It’s a radically different world compared with 2007. Your best foot forward is to consider yourself brand new.
8. The test contains trick questions!
Actually, test writers try very hard NOT to write trick questions. The reason the test question sound tricky is because we don’t talk the way lawyers write law. People use language differently in different parts of the U.S. Teaching a class in Oklahoma or Idaho is vastly different compared with teaching in Seattle or Virginia. Test writers can’t use spoken language and coloquialisms from different parts of the U.S. when writing test questions for an exam to be delivered in all 50 states. The ONLY fair way to write the test questions is to copy and paste directly from the law. That’s why the test questions sound and look “tricky” but really the trick is on you. If LOs would simply study directly from the law, the test questions would look very, very familiar. Re-read number 2.
9. You’re Learning English as a Second Language
English language learners are my best students. Why? Because they know good and well that they have to listen, ask lots of questions, and study over and over again to pass this test. ESL LOs…you WILL pass the test.
10. The test has too many “situational” questions
You’re scoring high on all your practice exams but the test isn’t going to be as easy as just knowing that you have to send out early disclosures within 3 days of the application. Instead the test will contain situational questions that will require you to understand how and also why TILA and RESPA interact with each other. This requires you to look at a test question and understand what information you DON’T need and cast it aside. Only then will you be able to understand what content the test writer is testing you on. This means memorizing test questions is a bad way to study. Instead you’re better off studying the laws and rules that govern mortgage lending. Mortgage loan origination is all situational. These are highly appropriate questions for the exam and I hope we see more in the future.
11. You’re only working part time
The national LO test sets a bar and asks people who want to originate to show proof of knowledge of a body of information. Loan origination is no longer a sales job. It’s transforming into a profession. It’s really hard to be a part time doctor, lawyer, engineer, dentist, CPA unless that person is entering semi-retirement. The knowledge, skill set, and industry changes are too wide and deep and the consequences of screwing up are too high. Welcome to mortgage lending. You must be on your game full time or no one will want to hire you. those companies that do hire part timers are going to have huge liability issues supervising you.. Commit to origination as a profession. Now start over and re-read items 1-3.
12. You did not finish high school
The SAFE Mortgage Licensing Act does not require a high school diploma or equivalent to become a licensed loan originator. Subsequently, the national LO exam will be that barrier to entry for folks who may not have the ability to read, think, reason, and understand above a 9th grade level. Some of the math questions on the exam will require a basic understanding of 9th grade algebra. Some of the questions will require the ability to understand how two federal laws relate to each other and to the consumer. Some people only have the ability to understand one federal law at a time. Mortgage loan origination today requires the ability to multi-think all day long.
13. You have a complex learning style
How do you best learn? Visually, auditory, tactile, whole body, emotional? These are all learning styles and passing the test means knowing how you best learn. Learning requires understanding. If you can teach another person something, this is a good sign that you know that concept. Some people have to see pictures. Other students need to hear the content. Sometimes instructors tell stories about legal cases. Stories evoke emotion which triggers long term memory. Sometimes students learn best if they get their whole body involved in the learning process. Everyone is different. Choose a course provider that understands learning styles and find one that matches your particular style. In my experience, most students have a mixed style so find an instructor/course provider that mixes it up for you. One student had me on the phone grilling me with questions about my course for at least 15 minutes. We figured out that we’d be a good match for each other. She attended my course and passed the test the next day. Don’t be afraid to call course providers and ask lots of questions.
Every test candidate is different. Some people listen at a higher/faster rate than they can read and write. Some people have undiagnosed learning disabilities. If you’ve taken the LO exam and failed, re-evaluate your learning style, the time you’ve spent studying and any of these other ideas and try again. If you still cannot pass the exam ask yourself how much you love the mortgage lending industry because there are other positions available in lending that do not require an LO license. And remember, you can always go work at a depository bank. Bank LOs do not have to pass the exam…..yet. Someday they will.
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.
The Financial Crisis Inquiry Commission is Interviewing the Wrong People
The Financial Crisis Inquiry Commission is currently interviewing bank CEOs in order to examine the cause of the current financial crisis. So far, it sounds like the bankers are very concerned about their bonuses and are shirking off the cause of the financial crisis as a nothingburger.
We keep hearing the bankers say “We need to pay out big bonuses in order to recruit and retain the most talented and brightest workers.” If indeed that is true, then why didn’t these talented and bright workers lead their banks into the biggest financial crisis of our time? I’m guessing the bank CEOs need to pay bonuses to the hired help in order to justify receiving their own bonuses.
Dr. Krugman and CalculatedRisk do a nice job of analyzing day one. CR says the Commission needs to interview the regulators in private and the comission must understand the originate-to-sell model of the mortgage lending business.
If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.
They need to interview the line workers. Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.
I am willing to bet that if the commission opened up a public comment period for testimony, they would have all the evidence they need to prove all these hoocoodanode banksters definitely did know but their own pay and bonus structure set up an external incentive to keep the dice rolling. Who wants to be a Debbie Downer CEO and be the first banker to take away the punch bowl when the money party is still going full on? Anyone? Anyone…Buehler?
Whoever moved first would have run the risk of watching their company lose billions of dollars in revenue at the tail end of the bubble, while their competitors gobbled up the last of the subprime, Pay Option ARM, stated income time bombs and all the bonus income that came with it. Imagine what it would be like to lose millions, perhaps billions in revenue as your “best and brightest” loan originators (debatable) quit and moved to a competitor because the competing lenders were still selling the subprime/Alt-A/Option ARM drugs to the LO drug dealers who were selling them to the consumer and Realtor junkies. Imagine having to face the board and face the stockholders, trying to explain why you were tightening underwriting guidelines. The only reason to cut the cord was if consequences started overshadowing the revenue and by then, the damage had been done. If we continue to reward the bankers for risk taking with no personal consequences we get what we deserve. I’m sure there will still be plenty of people willing to take the helm at corporations; even with more personal liability at stake.
What would the commission do with hundreds of thousands of comments from mortgage lending industry workers from around the United States? I’d like to find out.
The bank CEOs apparently pre-arranged their stories and flipped a coin to see which one of them would take the Hurricane Katrina angle, and who would say “this stuff happens every 5 to 7 years.” The thing to do now is to put them in separate rooms and interview them alone. The Prisoner’s Dilemma teaches us that they will break their agreement if separated and at least one will cave.
The bank CEOs win if they can pretend like this whole mess is nobody’s fault. This case is not unlike the Space Shuttle Challenger Disaster. There was one person, an engineer, Roger Boisjoly, who warned that the O-ring seals would fail when temperatures were too low. He was ignored by people in senior positions and the commission decided the accident was nobody’s fault.
There is no reason to ignore the thousands of people out there who warned management.