July 19: Yes, point banks are against the regulations; Wells, PNC, & Cole Taylor lay-offs and transition; more on 3% cap and fees

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

When my wife says, “I need to talk to you,” every bad thing I’ve ever done flashes before my eyes. All humor aside, at some stage of the game, point banks are going to come back to haunt companies. I received this note from Vermont: “Rob, I thought that current LO comp rules forbid point banks. But my LOs continue to tell me stories of competitors having them. And we are having trouble hiring LOs when the guy up the street is supposedly offering them, or something with a similar name. What’s the scoop?”

 

Hey, with the CFPB able to fine companies $1 million a day for reckless and knowing violations, does a company want to take a chance? Both MBA’s Summary and the LO rule itself are clear that point banks, or anything like them but with a catchy name, are prohibited. The CFPB considered allowing an exemption for point banks in discussions with the small business review panel.  Based on the feedback received, point banks remain prohibited. From the LO Rule at page 85 in the non-Federal Register version: “Based on numerous inquiries received, the Bureau considered proposing commentary language addressing whether there are any circumstances under which point banks are permissible under § 1026.36(d). The Bureau received and considered the views of SERs participating in the Small Business Review Panel process as well as the views expressed by other stakeholders during outreach. Based on those views and the Bureau’s own considerations, the Bureau believes that there are no circumstances under which point banks are permissible, and they therefore continue to be prohibited.”

 

Taking a step back, the main idea behind a “point’s bank” is to adjust the LOs compensation going forward for performance. Companies set a benchmark number of bps that they will pay their LOs. Let’s say 100. Chrisman Mortgage pays them this amount on every loan for the first period. During that period I keep track of the number of lock extensions, GFE tolerance cures, decreases to my standard interest rate, lender credits, or anything else that I want to track and in which the LO deviates from company policy. Now, for each of these items I assign a point value; let’s say 1 point for each. Then I set a threshold for the period. Let’s say if the LO gets 0-10 points they get a 5pbs bonus for the next period. If they get 11-15 points their bps stay the same for the next period. If they get 16-20 they take a 5 bps hit and I continue that up to the maximum number of bps hits I will allow.

 

Apparently companies view their policy as not being impacted by regulations, or the intent of those regulations. They might say that the way you set up the points is very important for compliance with the rule. They might not look at deviations in revenue as a point calculation, and perhaps set loan quality indicators, for example, and come up with an approximation of how many bps it takes to average out those deviations. Maybe they justify it by saying that the LOs comp stays the same for all loans over the period. So if the LO is getting 100 bps but they have a $5000 Good Faith Estimate error, the LO still gets the 100 bps and depending on how a point system is set up the points may not be equivalent to the actual loss on the file.

 

A couple years ago the Federal Reserve Board stated that the loan officer compensation rule doesn’t allow loan officers to lower their commission to cover a concession, and the mortgage industry presented a proposal to create “point banks” that loan officers could solicit to grant price concessions to borrowers. The Fed officially rejected the idea, which would involve taking 10 basis points per loan transaction and putting the cash in a “point bank.” The proposal would also have allowed loan officers the option to use overages to offer borrowers a better deal. The Fed concluded that overages are tied to the terms and conditions of the loans, and since that indicated a violation of the new compensation rule, the answer was “no.” According to the senior attorney for the Fed, Paul Mondor, the rule would be compromised because the loan officer is bearing the cost of the price concession and taking 10 bps from each transaction amounts to spending the loan officer’s previously earned compensation. Elaborating a few years ago Mondor said, “We have yet to hear a variation on the theme of point banks that we think really can succeed under this rule.” Other issues with the proposal included possible conflicts with RESPA, as the interpretation makes it harder for managers to penalize loan officers for errors. The Fed has ruled previously that mortgage companies cannot dock a loan officer’s compensation if they incorrectly calculate closing costs and exceed the boundaries of the RESPA good faith estimate.

 

CFPB had looked at this last year, and supposedly even brought it up in the SBREFA hearing on MLO Comp. It was unanimously trounced. Many believe that it might actually violate the MLO Comp Rule when Lender Paid is used – but I am no attorney. One can easily see it as steering the profit from a MLO on one loan into a pool to be able to use the funds to correct blemishes on another loan. In reality the lender is responsible for the cure. In essence this concept was opposed to the CFPB view of protecting the unsophisticated borrower from the sophisticated because the educated guy would know that the pool could be used to buy down his loan whereby the unsophisticated borrower might not.

 

Folks tell me that they are seeing point banks primarily at net branch companies. Of course, there is a school of thought out there about why we still have net branches, or MLOs paying for desk space. But that is fodder for another conversation on another day.

 

Yes, Wells Fargo’s lay-offs made the newspaper: http://blogs.desmoinesregister.com/dmr/index.php/2013/07/18/higher-mortgage-rates-slow-refinancing-spurs-wells-fargo-layoffs/article.

 

And yes, PNC’s did as well, closing 78 branches in the second quarter on its way to a planned 200 for the year: http://www.post-gazette.com/stories/business/news/pnc-doubles-quarterly-profit-695918/.

 

And lastly, on the personnel and transition side of things, I was having trouble with Constant Contact yesterday, and had to cut and paste each paragraph from my original. Unfortunately some of the e-mails did not include a note from the president of Cole Taylor Mortgage:

 

On Monday, July 15, I sent you all a message regarding the merger between Cole Taylor Bank (CTB) and MB Financial Bank (MB). I also included information regarding activities related to our ongoing strategy and growth. I am now able to provide more information regarding those discussions. As noted yesterday, from the beginning, we have worked together with CTB executive management to determine the best course of action to optimize the opportunity for CTM, CTB, and our growing client base. Earlier this year, we jointly recognized that based on future growth opportunities for CTM, as well as market trends including a migration towards significant non-bank market participants, broader discussions with potential financial partners outside of CTB were an appropriate next step. We have been in discussions with a significant number of non-bank investors, more specifically private equity funds. These discussions have progressed and we are currently in more detailed discussions with several private equity funds. With the growth in the non-bank mortgage banking segment, it is an exciting time to pursue these opportunities. At the same time, the merger between CTB and MB results in a much larger financial institution where there will be opportunities for CTM to grow. Therefore, we have also initiated discussions with MB executive management regarding CTM’s operation and strategy. I realize that there may have been some information in the market earlier this week that may have given you some pause. Let me assure you—we are here for you. We highly value the relationship with all of our business partners and stand ready to deliver on our commitments. We will keep you posted as the situation evolves.” Thank your clarifying!

 

Yesterday I provided documentation on just what was included in the 3% cap starting in January. The commentary noted, “Thomas Black, managing partner of Black, Mann & Graham, LLP (BMandG) writes, “Here is the formula page from my speech on QM’s.  Lender-paid fees are excluded because the cost is recovered through interest rate which is excluded from the points and fees. Seller-paid fees are excluded except where expressly included (e.g. upfront MI that exceeds 1.75%).”

 

Formula: Total Loan amount x Percentage >=

  1. 1.    + Non-interest Finance Charges under 1026.4(a).
  2. 2.    + 1026.4(c) charges where lender, broker, or affiliate retains a portion of the fee.
  3. 3.    – a bona fide third party charges not retained by creditor (unless expressly included)
  4. 4.    + any excess discount points
  5. 5.    + all compensation paid to a loan originator other than the employee of a creditor that can be attributed to the transaction.
  6. 6.    + prepayment penalty.

  (The legal passage above refers to Regs1026.)

I received several notes. First, from Thomas Black, “Rob, # 1 should be ‘+ Non-interest Finance Charges under 1026.4(a) and (b) – (b) includes origination fees.’

 

And this one: “I just wanted to clarify a point from the commentary. It read: ‘Second, with respect to mortgage insurance, the only addition to points and fees is the amount charged up front, and only to the extent it is private mortgage insurance charging in excess of government-backed mortgage insurance.’ That applies only if the up-front amount is refundable on a pro rata basis and the refund is automatic. If the up-front amount is nonrefundable…which most of the borrower-paid singles that have are used today are…then the entire amount will count toward the 3% cap. Everything I have ever read is nonrefundable the entire amount counts; refundable (if prorated and automatic) up to the FHA up-front doesn’t count; anything above does. In April the CFPB put out a 45-page clarification. Page 33 reads: ‘Private mortgage insurance (PMI) premiums: Exclude monthly or annual PMI premiums. You may also exclude up-front PMI premiums if the premium is refundable on a prorated basis and a refund is automatically issued upon loan satisfaction. However, even if the premium is excludable, you must include any portion that exceeds the up-front MIP for FHA loans.’”

 

And this opinion from a very reputable source: “The statement ‘Seller-paid fees are excluded except where expressly included (e.g. upfront MI that exceeds 1.75%)’ uses the upfront MI example incorrectly, which indicates a misunderstanding of how the proposed seller’s points exclusion works.  Essentially, MI is only included in points and fees because it is included in the finance charge, and points and fees is defined to include everything included in the finance charge.  The points and fees definition then provides that the upfront portion of MI that does not exceed the FHA amount may be excluded from points and fees (provided that the charge is refundable on a pro rata basis and the refund is automatic when the loan is paid in full), however the upfront portion of MI that exceeds the FHA amount must be included as a finance charge. The CFPB’s proposal provides that seller’s points may be excluded from the finance charge portion of the points and fees definition to the same extent seller’s points are excluded from the finance charge generally. Since the upfront MI that exceeds the FHA amount is only included in points and fees under the finance charge portion of the points and fees definition in § 1026.32(b)(1)(i), the seller’s points exclusion may apply to that charge.”

 

The note went on, “As for the formula breakdown, it does not provide a precise breakdown of the points and fees definition. The points and fees definition is very nuanced, and a careful and precise breakdown of the definition is required to determine what is included in points and fees. The breakdown provided appears imprecise and incomplete because, for example, it does not provide the details on when and how bona fide discount points may be excluded and what ‘excess discount points’ then must be included. In addition, the statement that points and fees include ‘1026.4(c) charges where lender, broker or affiliate retains a portion of the fee’ is incorrect.   First, it is important to specify that § 1026.4(c)(7) charges are included in points and fees, not the charges included in all of § 1026.4(c). Second, such charges are included when the creditor receives direct or indirect compensation in connection with the charge, the charge is paid to an affiliate of the creditor, or the charge is unreasonable, not when such charges are retained by those parties.”

 

Thank you for those comments. My advice is to talk to a reputable attorney if you have precise questions about the 3% rule. From what I am hearing there is, as with most things that the CFPB is restructuring or that is impacted by QM changes, a lot of confusion in the industry, and that hopefully yesterday’s and today’s commentary helped to clear up some of it.

 

The markets pale in comparison to all this. The Index of Leading Indicators was unchanged in June. Philadelphia Fed survey’s index of current activity increased to 19.8 in July from 12.5 in June. Maybe if anything moved the market it was the news that the Senate Banking Committee had approved the nomination of Mel Watt to head the FHFA led to some selling – early payoffs, modifications, and refis may pick up with a new HARP cutoff date. (He still has to pass the full Senate.) By the close, prices on agency MBS were worse about .250, and the 10-yr was at 2.53%.

 

Today there is nothing on the economic or events calendars, and the 10-yr yield is nearly unchanged at 2.52% as are MBS prices.

 

Classics…

 

Dear Abby,

I’ve suspected that my husband has been fooling around, and when confronted with the evidence, he denied everything and said it would never happen again.

 

Dear Abby,

Our son writes that he is taking Judo. Why would a boy who was raised in a good Christian home turn against his own?

 

Dear Abby,

I joined the Navy to see the world. I’ve seen it. Now how do I get out?

 

Dear Abby,

My forty year old son has been paying a psychiatrist $50.00 an hour every week for two and a half years. He must be crazy.

 

Dear Abby,

I was married to Bill for three months and I didn’t know he drank until one night he came home sober.

 

Dear Abby,

My mother is mean and short tempered I think she is going through mental pause.

 

 

Rob

 

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