May 3: Input on LO comp on reverse mortgages, buyback litigation, changes in appraisal policies, Section 8 violations

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...

Once again, we have a lot to talk about with valuable contributions from readers for which I am thankful. After all, the more we all know, the better off the industry is, right?

 

NAMB, The Association of Mortgage Professionals, has created a video for members to share with referral partners or colleagues to spread a reminder message on RESPA when it comes to Section 8 violations.  A copy of the 90 second video can be found here: http://youtu.be/LeNP9PKeNGw. “This is not directed toward any specific group or Affiliated Business Arrangements properly following disclosure and ethical requirements.  This is simply directed toward the housing industry as we see this as a growing problem between both mortgage and real estate companies, both of which are liable for violations should the CFPB be alerted. The marketing agreements out there are of course as creative as possible to try to skirt around the rules, but consumers need choices. This is also a big concern with some builders as it pertains to steering for hidden revenue as the motivating factor, but something everyone needs to hear and comply with to improve the ethics in the housing industry.  It is a shared belief by regulators and ethical industry professionals that the referring party should be offering approximately 3 sources for consumers to compare when terms or conditions apply.”

 

And this note. “One of our clients works for a large home builder, and wants to purchase an investment home from it for her son to occupy. He will not be on the loan, he’s in college. I guess FNMA says it’s a non-arm’s length transaction because the mom is employed as a sales agent by the builder/seller. Okay, we let the deal go – nobody would touch it. I do understand the builder ‘could’ sell homes to their employees and run their prices up, and then compensate the employee later on. On the flip side, I just lost a deal to a builder’s lender, quoting 3.75% for a 30 year fixed and giving the buyer $15k towards closing costs if the borrower use the builder’s preferred lender. What the heck is the difference? That kind of incentive is also a way for the builder to keep/run their home values up, isn’t it? How could this not be ‘steering? You know the incentive is part of the sales price, right?”

 

 

I received this note from an LO in Nebraska. “Rob, what are you hearing about changes in appraisal policy? My compliance gal really put the hammer on us.” I am indeed hearing similar things out there. Guidelines might be loosening, but that doesn’t mean that investors are ignoring the basic information that constitutes credit decisions. Lenders, based on recent discussions with Freddie, Fannie, and the big investors concerning Appraiser Independence Requirements (“AIR”), are tightening things up. It is not a long-term recipe for success for a lender to be out of compliance with Dodd-Frank, Fannie/Freddie Guidelines and requirements, as well as investor requirements. So I am seeing lenders say that the appraisal cannot be ordered by the LO or LOA – it can only be ordered by the processor or a designated employee who is in a “non-production” position. Some lenders are saying that all production personnel are prohibited from having any direct communication with the appraiser or the AMC, and thus only underwriting personnel are authorized to have direct communication with the appraiser or AMC. And further, all requests to have the value “reconsidered” must be submitted to an underwriting manager. AIR prohibits Production Employees from recommending specific appraisers to be added to any AMC – hey, you can always go straight to the source: https://www.fanniemae.com/singlefamily/appraisers.

 

Christine F. asks, “I recently received an email inquiring about the new appraisal rules. Specifically, when, and what version, a borrower needs to be provided with in order to remain compliant. As a reminder, under ECOA Valuation Rule, loan applications received on or after January 18, 2014, a creditor must provide an applicant with a copy of the appraisal and other written valuations “upon completion, or three business days prior to consummation of the transaction, whichever is earlier”. The originator does not need to provide the borrower ALL versions of the appraisal, only a copy of the LATEST version. However, if the borrower receives a copy of an appraisal, or written valuation, which is then revised, a copy of the updated version must be sent. So this was on your post. My question is if they change a typo does the lender need to send a copy? The second part so we wait the 3 days again?

 

I passed it along to Michael Simmons, SVP at Axis in San Rafael, CA (michael@axis-amc.com) who contributed, “I think that with many granular questions, regulations (and regulators) all too often never address them specifically. This one is an exception. Here’s the specifics: An applicant (read: borrower) may waive  the right to receive a revised report 3 days before consummation based on meeting 5 criteria: (1) the revision be solely to correct clerical errors, (2) have no impact on estimated value, (3) have no impact on the calculation or methodology used to drive the estimate, (4)  it’s received prior to consummation or account opening, and (5) the applicant has previously received the valuation being corrected promptly or 3 days before consummation or account opening, whichever is earlier. By the way, such a waiver may be written (via email) or oral (phone call) or some other means (no clue what that might entail). Here’s the actual text: http://www.consumerfinance.gov/f/201401_cfpb_compliance-guide_ecoa.pdf.”

 

Mr. Simmons’ note continued. “There is an exception to the waiver rule however. It involves an appraisal done for a Higher Priced Mortgage Loan (HPML Appraisal Rule): http://www.consumerfinance.gov/regulations/appraisals-for-higher-pricedmortgage-loans. There is no waiver option for appraisals covered under this rule. Perhaps as importantly for the consumer though, is what’s not addressed about how this new information is delivered. Can it just be so buried anywhere in the new appraisal report that it might be missed even if you’re looking for it? Or should there be some standard; i.e., all changes appear in a separate dated addendum page that acts as a reference guide for the location of any changes?  If the real goal is to better help the consumer understand, this might be a welcome standardization.”

 

LO compensation… think of how much time and effort has been put into this issue in the last few years – big bucks by hundreds of companies. And yet the questions continue. I received this clarifying note. “Further to Brad Hargrave’s very good Saturday comments on the LO Comp Rule, I had occasion to ask the CFPB if an LO could be compensated differently for originating a HECM (reverse) mortgage vs. a forward mortgage. Like purchase money vs. refi, discussed by Brad, there does not appear to be any incentive for the LO to ‘step’ the applicant to a higher cost product here because HECMs and forward loans are not really interchangeable. The CFPB gave me their informal, oral view that because the loan ‘type’ (HECM vs forward) was considered to be a ‘loan term,’ different compensation for HECM vs. forward was unequivocally prohibited by the Rule. It did not matter to the CFPB that the purpose of the rule was not being served by the interpretation. In my humble opinion, both the HECM vs. Forward and the refi vs. purchase merit exceptions from the LO Comp Rule, and I challenge Paul Mondor (the author of the Rule) to explain why not. Other than regulated monopoly utilities, mortgage origination is the only industry of which I am aware that the government prohibits paying compensation to an employee based upon the profitability of their work.” Thank you to J. Steven Lovejoy, Esquire, with SHUMAKER WILLIAMS, P.C. for this note (lovejoy@shumakerwilliams.com).

 

But we’re not done with comp issues. What about referrals between LOs – are they “legal”? The CFPB made a point to mention that actions aimed at circumventing the rules would not be permissible: http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-national-association-of-attorneys-general/. Lenders could find themselves in trouble if they permit loan officers to refer loans to one another in such a way that a company could utilize such referrals to circumvent the LO comp laws. If you have questions, start with the CFPB’s Lo comp guide: http://files.consumerfinance.gov/f/201306_cfpb_compliance-guide_loan-originator-compensation-rule.pdf. Over and above that, write to the CFPB. Lenders should consider the circumstances and controls in place to avoid internal referrals that could undermine the LO comp rules. This is particularly true where a lender has different comp plans in place corresponding to different pricing. In these contexts, the practice of internally referring loans amongst loan officers can become an issue. Most believe that one branch in one state referring a loan to another branch in another state, or a referral when a loan officer is about to go on extended leave, may be completely permissible.

 

I received this letter from attorney James Brody with AMLG. “As the list of settlements between loan investors/aggregators and the Federal Housing Finance Agency continues to grow, it is now more likely that loan investors/aggregators will turn their attention to seeking deficiencies from their past correspondent lenders. Consequently, while certain large-scale investors may slow the pace of their litigation filings, American Mortgage Law Group (AMLG), suspects that litigation is likely to increase over the next year as more investors actually jump into the litigation fray in order to strengthen their financial books.  AMLG is currently defending a number of suits brought by RFC and Lehman Brothers and has had success in a number of suits by asserting that the statute of limitations on these claims has expired, most recently in a decision handed down this week in Colorado that dismissed the investors claims with prejudice. Lehman Brothers Holdings, Inc. v. First California Mortgage Corporation, Case 1:13-cv-02113-CMA-KMT, Doc. 33 (D. Colo. April, 30, 2014) (holding that Lehman’s claims were time-barred based on New York’s “borrowing statute”); see also Wells Fargo Bank, N.A. v. JPMorgan Chase Bank, N.A., 12 CIV. 6168 MGC, 2014 WL 1259630 (S.D.N.Y. Mar. 27, 2014) (holding that the statute of limitations on an indemnification claim started running not when the actual demand was made, but when the plaintiff “first could have made its demand”).”

 

Mr. Brody’s note went on. “AMLG thinks, however, it is unlikely that this will deter loan investors/aggregators from bringing lawsuits. In addition, AMLG has recently noted that Bank of America (BOA) has become exponentially moreaggressive in its posturing and pursuit of claims against its correspondent lenders for those loans sold to Countrywide Home Loans.  While it previously used a formula for pursuing global settlements based on projected losses to be paid to Fannie Mae and Freddie Mac, this has changed.  BOA is now seeking to refill its coffers by informally demanding pro rata contributions from its past correspondent lenders, all the while refusing to disclose how it determines those amounts.  BOA has thus far refrained from filing lawsuits, however.  It remains to be seen who will settle with BOA without the threat of litigation, and whether defendants in future litigation can assert that California’s four-year statute of limitations on contracts has expired on any claims BOA could possibly bring.  See Irvine v. Bossen, 25 Cal.2d 652, 658 (1944) (the statute of limitations commences to run “from the time a cause of action accrues and it invariably accrues when there is a remedy available.”) (By the way, if you have specific questions, contact James at jbrody@americanmlg.com.In addition, for anyone interested, AMLG is hosting an upcoming webinar entitled “CFPB’s Rules Have Taken Effect – 120 Days and Counting”, wherein CFPB compliance issues will be addressed and discussed.  It will be held on May 15 – register for the webinar by clicking this link.)

 

 

When God created Adam and Eve, He said: “I only have two gifts: one is the art of piddling while standing …” And then Adam stepped forward and shouted: “ME! ME! ME! I would love it please … Lord, please, please! Look, it will make my life substantially easier. I want it!” Eve nodded, and said those things did not matter to her. Then God gave Adam the gift and he began to shout for joy. He ran through the Garden of Eden and used it to wet all the trees and bushes, ran down the beach to use his gift to make drawings in the sand…. Well, he would not stop showing off. God and Eve watched the man crazy with happiness and Eve asked God: “What is the other gift?” God answered, “Eve…a brain…and it is for you.”

 

 

Rob

(Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)