May 31: Lending to non-U.S. citizens; Fair Lending on small loan amounts; changing comp on borrower-paid transactions

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...

The NSA says releasing records about Snowden’s employment status “would constitute a clearly unwarranted invasion of personal privacy.” Does anyone see the irony in that statement? On May 6th the CFPB proposed a new rule which they hope will promote more effective privacy disclosures from financial institutions to their customers. The rule would allow companies that limit their consumer data-sharing and meet other requirements to post their annual privacy notices online rather than delivering them individually. The rule would benefit companies that limit consumer data-sharing. The Gramm-Leach-Bliley Act generally requires that financial institutions send annual privacy notices to customers. These notices must describe whether and how the financial institution shares consumers’ nonpublic personal information. If the institution does share this information with an unaffiliated third party, it typically must notify consumers of their right to opt out of the sharing and inform them of how to do so. According to the CFPB, the benefits of the proposed rule include: constant access to privacy policies, limited data sharing, comparison shopping, and should be cheaper for companies to notify consumers of privacy practices.

 

If we consumers have any privacy, which is debatable, can the CFPB look at all of our information? And have you received a check yet from the CFPB? Me neither, but given their arguably unlimited funding source (the bureau is an independent unit located inside and funded by the United States Federal Reserve, with interim affiliation with the U.S. Treasury Department), it has the ability to send out quite a few. C.D. writes, “Did you now the CFPB is sending out $5 surveys to consumers that have closed loans – securing potential audits I am sure.

 

The CFPB published a notice in yesterday’s Federal Register which states that the CFPB is seeking approval from the Office of Management and Budget of its plans to conduct a national telephone survey of 1,000 credit card holders as part of its study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services.  The new notice follows the CFPB’s June 2013 notice in which it indicated it was seeking OMB approval for such a survey.  At that time, it was contemplated that after the CFPB received comments on its initial proposed survey, it would provide a 30-day period for comments on a revised proposed survey.  Accordingly, we can expect the revised survey which is the subject of the new notice to be available for review soon, if not already.

 

But in a move toward transparency, the CFPB is opening the CAB advisory meeting to the public. This is the advisory board that had no non-banks and was under a lot of contention. There is a rumor that the CFPB told interested parties that there were loan brokers on the board, but it turned out they were realtors.

 

Let’s get on with some recent letters!

 

John C. asks, “Do you know how Fannie and Freddie and Investors have been approaching the Dream Act Residents? They fall under the Deferred Action for Childhood Arrivals (DACA) ruling. Many wholesale higher-ups I’ve inquired with, as well as our own underwriters, are not sure how to consider their likely future residence status. As far as I can tell Fannie and Freddie will allow residential lending to such borrowers. Still, their status with regard to lending is ‘no’ meaning ‘we have no idea, so no.’ Dream Act residents arrived as children illegally with their parents so, they have no VISA. With a few rules Dream Act residents can obtain a US Employment Authorization permit. If they leave the country they cannot return without a VISA (recall VISAs are only issued outside the country.) As long as they meet a few requirements however, the DACA – Employment Permit is renewed almost automatically by mail or web. What do you hear?”

 

This topic is covered in the Fannie Mae Selling Guide, Part 2, Section 2-02 which reads, “Fannie Mae purchases and securitizes mortgages made to non–U.S. citizens who are lawful permanent or non-permanent residents of the United States under the same terms that are available to U.S. citizens. Fannie Mae does not specify the precise documentation the lender must obtain to verify that a non–U.S. citizen borrower is legally present in the United States. The lender must make a determination of the non–U.S. citizen’s status based on the circumstances of the individual case, using documentation it deems appropriate. By delivering the mortgage to Fannie Mae, the lender represents and warrants that the non–U.S. citizen borrower is legally present in this country.”There is an excellent tutorial available on Fannie’s website that walks viewers through the requirements for non-citizen borrowers. Viewers are able to print or download the slides if they want to take notes or retain the details.

 

Increasing efficiencies and data reliability through various methods is always important. Shyam Sundar with Quatrro writes, “Some of the key elements in the Bulk purchase due diligence are the need for speed, cost efficiencies and collaborative workflow. There are several players from the buyer’s and seller’s side who need to simultaneously view the Loan files during the deal process/ due diligence. Further the buyer needs to validate the data tape provided by the seller with actual loan files in the pool.  Currently in most cases the loan files exist in the form of book marked PDF files and the data tape in an Excel file. These formats hinder collaborative workflow between parties during the process of curing any deficiencies in the loan file, drive pricing discussions, risk evaluation, and compliance assessments. The PDF Files and Excel data tapes in most cases are not in a secured shared environment but move to local environments between seller and buyer. The issue is aggravated by version control as the loan files get cured for deficiencies. All these need to be accomplished within a matter of few weeks, which in turn drive the costs up. Quatrro Mortgage Solutions has deployed a cost effective comprehensive solution to meet these very needs of the Bulk purchase due diligence market.” (If you are interested please contact shyam.sundar@quatrro.com.)

 

From North Carolina I received, “What is your understanding of this under the Fair Lending Act?   It’s a violation if we intentionally disparately impact a group but also don’t want to book loans that are not profitable. Fair Lending does gives us a safe harbor if we determine that we can have a minimum loan amount out of ‘business necessity’ but also states that we could still be in violation. Any words of wisdom? For example, we have determined that any loan below $40K is a not profitable so we prefer not to do loans below this amount. We are not publicizing this and don’t have a policy that sets a minimum loan amount. We encourage all applicants to apply but how do we get around the Fair Lending when they apply for a loan for $39,000?

 

Attorney Ari Karen stepped in. “A defense to fair lending is that the lender had a business necessity for imposing minimum loan amounts. Avoiding monetary losses on a service is a business necessity. Hence, if you can show that you cannot earn sufficient income below a minimum loan amount to cover your costs, that would be a clear business necessity defense.”

 

KS writes, “I read the article below and as an appraiser, one sentence seemed to jump out at me: “But we’ve run into a snag – a bad appraisal”. In the current climate, when a property is valued and the resulting appraisal report supports a value lower than what is needed for the loan, why is the appraisal always referred to as a bad appraisal?  In the case of a refinance, the appraiser is not given any information regarding the value needed to do the loan.  I know that the appraiser is the easiest target but isn’t it about time that mortgage companies and their LOs, consumers and in many cases Realtors become educated about appraisal requirements?  About how appraisals are compiled and the guidelines that appraisers have to follow in order to be compliant?

 

“In the case of purchases, it is mind boggling how many agents haven’t a clue how an appraisal is compiled let alone how to read one.  I have personally asked agents how they arrived at a listing price and 9 times out of 10 they are unable to provide any basis for their pricing.  When an appraisal is completed and perhaps does not meet their purchase price, inevitably, they are unable to provide closed sales that are similar when completing their rebuttal.  More often than not, I am sent active or pending listings or superior sales that they assume that can be adjusted down to inflate the value. My point in all this is that it is easy to blame an appraiser for a deal falling through however it is absolutely incumbent upon those involved in the process to have a realistic idea of where the value of the property stands before the appraisal is orders.  Thus realistic expectations can be set for the borrower or homeowners.”

 

Regarding recently developments in appraisals, Joan Tice, the CEO of Clearbox writes, “Tony Pistilli and Peter Christensen and I wrote the first TPO white paper 6 months before the OCC issued their bulletin. We have also delivered 2 TPO Summits and published a 4 inch thick binder. I also built a company on the importance of appraiser selection, Clearbox. The OCC states ‘Appraiser selection is the single most important part of the appraisal process. No amount of QC or review trumps it.’ We are the only available national fee survey to assist lenders and AMCs with compliance of Customary & Reasonable fees. This has been a very contentions issue and one the regulators are finally enforcing. Additionally we have created a roster of AMCs. There are 529 at present. Everyone thinks the number is shrinking but it is growing. We are in the process of creating an AMC profile to assist lenders with Third Party Oversight.

 

“Rob, I was wondering if you can put out something that might get CFPB to respond in writing. On a borrower paid transaction (and I rarely do them), can the compensation be lowered to be more competitive? We are now, in essence, 3 years into the MLO Compensation Rule and we continually are getting different interpretations, right and wrong, and statements of fear.  This is the latest scenario on a TPO transaction: this is a Borrower Paid Transaction. Broker initially discloses to the borrower on the GFE a broker fee of 2%, with no credit to the borrower. The disclosure is with the loan going to the Lender at par.  File is submitted to underwriting and time passes. Broker locks the loan and decides to lower their compensation to 1.5% cost to the borrower. Some lenders are now saying that once the loan is disclosed by the broker at a higher compensation, upon locking the broker must earn the same compensation.  I believe CFPB had corrected this ill theory in industry meetings.”

 

First, one can always write to the CFPB and ask it questions like this. But I passed the question along to attorney Brad Hargrave (of Medlin & Hargrave) who kindly replied, “While we certainly empathize with the writer’s frustration in divining the LO Compensation Rule’s applicability to ‘real world’ scenarios, this particular question is a little more straight-forward than others.  In short, whether the transaction is borrower-paid or creditor-paid, the loan originator’s compensation must be fixed at the time the creditor offers to extend credit with specified terms, and may not thereafter be increased or decreased.

 

Brad’s note went on. “In our opinion, the Official Interpretation of Regulation Z is reasonably clear on this issue. When a creditor offers to extend credit with specified terms, the amount of the loan originator’s compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated. (See, Comment 1026.36(d)(1)5).  Moreover, this same Comment thereafter provides that ‘a loan originator organization may not agree to reduce its own compensation in a transaction where the loan originator organization receives compensation directly from the consumer…’ which would appear to be directly on-point with respect to the writer’s question. And while there are, indeed, certain ‘permitted decreases’ in loan originator compensation that are now available under the CFPB Rule that took effect in January, those are narrow in scope, and should be evaluated carefully before making any such reduction in a loan originator’s compensation.” Thank you Brad!

 

 

(Rated PG: Parental Guidance advised.)

A Yankee walks into a bar in the back woods country, Alabama and orders a cosmopolitan. The bartender looks at the man and says, “You’re not from ’round here are ya?”

“No” replies the man, “I’m from New Hampshire.” The bartender looks at him and says, “Well what do you do in New Hampshire?”

“I’m a taxidermist,” says the man. The bartender looks bewildered, so the man explains, “I mount dead animals.”

The bartender stands back and hollers to the whole bar, “It’s OK, boys! He’s one of us!”

 

 

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.)