June 21: Letters on the lending biz, regulators (pro & con), 228 loans, QM for VA, RESPA & RealtySouth case

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...

In honor of the summer solstice today we have lots of opinions this week about the general state of the market, simplifying the borrower experience, the role of the LO, LOs running other businesses, RESPA, and in support of the CFPB.

 

An industry vet from Northern California writes, “The quick analysis on home and rent affordability is this: Adopting a policy of nearly zero percent interest rates in conjunction with a pullback in loan eligibility standards has pushed lower end buyers out of the market and increased the demand for residential rentals. The net result is that the rich (those who can borrow at cheap rates) become richer while the poor are punished. The solution is to let the market clear. Long term intervention is damaging the economy.”

 

Also California, Tom C. chips in, “Student loans are government driven while credit card debt is driven by real demand by individuals. Millennials will buy homes when we get real growth, the jobs they can get pay a good wage/salary, offer an semblance of security,  and all based on a return to free unencumbered capitalism/free enterprise economy. None of this will happen under the kind of government we have had that wants bigger government, more taxes, and more regulations.”

 

From New Jersey comes, “Sadly, QMs impact will never be quantified, since most MLOs just will not originate borderline loans. Most lenders are hard-lined on 45% DTI, community banks are at 36/42 DTI. FHA is grossly expensive. MLO Comp has been cut to 2.625-2.75; no one wants to get close to 3.00 so smaller loans are often overlooked. QM is compounded by the Fannie limits (e.g., 6 month’s reserves on some loans, LLLPA that are excessive on marginally lower credit score borrowers). The industry has been openly warning the regulators about this for 5 years. In my humble opinion, as someone who actually originates mortgages, none of what has been done by the Federal Government over the past 5 years will make the consumer any safer, in fact I believe they are in a greater position to be harmed by lack of knowledge today than they were in 2007. Why is simple: the mortgage application has become so egregious with non-straightforward disclosures and the process has become so convoluted with waiting times, the consumer has become oblivious. Between a GFE that no one understands, to state forms that replicate the GFE, on to so many random disclosures it has become overwhelming. Frankly, the CFPB should scrap it all and start over, and simplify everything. Let’s have the borrower sign ONLY the old 1003, the 4506, a mortgage broker fee agreement (one page) or income disclosure (for all companies) and the original GFE.  Then have the borrower go onto the CFPB website and take a 5-10 min video and a simple quiz of the disclosures for both the Fed and State. The borrower will receive a Certificate of Completion. The loan cannot be approved without the certificate.”

 

And this from the West Coast: “Once again, the industry is faced with groups of borrowers with no credit scores. We checked, and it appears F&F will not do someone without a FICO score. And we have been unsuccessful finding agency product (with agency rates) that will use alternative credit, or use the spouse’s credit rating. The FHA will, as will peripheral lenders, but it is so expensive it kills the deal. If the industry is putting its hopes in the Millennial generation to become first-time home buyers, and a sizeable percentage of them don’t believe in credit cards, what are we going to do?”

 

(Editor’s note: two months ago the commentary discussed how parents can help establish credit for their youngsters. Page down a few times.)

 

Andy Harris contributes, “I personally don’t trust regulators will understand the deep analytics of borrower vs. lender-paid and what that means to the borrower and disparate impact/fair lending (and what it should not mean), so our company has used the same lender-paid margin with all our investors with no changes (and we do not offer borrower-paid since it would then not be relevant).  HOWEVER, at the recent NAMB legislative conference, a CFPB representative confirmed with the attendees in the room several times that they “can” certainly lower borrower-paid comp below the creditor-paid comp agreement %.  As we all know this is vague and we need more details, but this is coming directly from the CFPB which he claimed was confirmed on several occasions internally.  This contradicts what many of us understand pertaining to the attorney feedback below, but it sounds like we need more open dialog with the CFPB and the entire industry to be on the same page.

 

I believe this should be tied more to covering unexpected circumstances such as a cost that arose or situation out of our control that is well documented (the CFPB has confirmed their intention was to allow for this).  For example, let’s say an unanticipated rate lock extension or LLPA change cost of 0.25% applied to consumer so the brokerage agrees to reduce compensation (borrower-paid) from 2% to 1.75% well documented with explanation.  If brokerage firms, however, just throw numbers out on compensation there is a concern with disparate treatment of consumers, HMDA data results over time, etc.  Just keep it clean and organized and carry a fair and sustainable lender-paid fixed margin of course based off loan amount exclusively with no other fees.  It makes things much less complicated.  Using a pricing engine is a must for documenting and tracking investors rate sheets and anti-steering and simply excellent for operations and execution.  I believe the CFPB will have more focus on those using both correspondent lines and brokering and still paying originators differently for brokering, which they cannot do with concerns on both compensation rule violation and anti-steering (in addition to variance of rate sheet to consumer per LO comp, SRP, fair lending, etc.).  Certainly, the above noted suggestions make it very simple for brokerages to comply with these regulations.

 

With regard to how we got here in the first place, From New England Matt Lind writes, “With respect to the comment, ‘I’ve never seen a bad mortgage product. I’ve seen perfectly good mortgage products misused by unscrupulous people,” I must disagree. Was the 228 subprime product a bad product? I’d say yes! Did LOs who originated 228 loans understand the risks inherent in the product for the borrower if home prices dropped or inflated much more slowly? I suspect that most did but viewed the risk as small compared to the potential benefit for the homebuyer. And, of course, their personal interest was in selling the product. But I’m sure that most did not see themselves as ‘unscrupulous.’ I think it was a bad product because it was premised on continuing home inflation large enough to allow the loan to be rolled over into a new 228 with an increased mortgage amount sufficient to cover borrower origination costs.”

 

His note went on. “As to the collective guilt of LOs, some seem to think that a small number of unscrupulous LOs/lenders and borrowers are at fault; hence, the regulatory backlash is harming the many for the sins of the few. My personal exposure to LOs is that most are order takers, not advisors. And because they are unable or unwilling to provide advice, borrowers wind up in products that may be unsuitable for their circumstances, especially future circumstances. I cannot recall a single instance across many mortgages my wife and I have done where an LO asked me about future factors that might affect the affordability of loan for me, e.g., was my spouse likely to exit the work force, did I have kids entering college, was I planning to retire, etc. So, to the extent that the regulatory backlash winds up upgrading the skills and advisory tools available to LOs, it will have been a good thing.”

 

“Rob, what do hear about VA and QM?” Funny you should ask – the MBA just published a story on its efforts in that sector.

 

I for one am happy to see the CFPB doing what one would expect of them when it comes to real estate affiliations. We have real estate companies that preprint the name of their title company on the contract with the verbiage the buyer chooses them. Regardless of the contract I advise buyers to consider other options. Builders historically have done the same thing. I had a buyer a few years back who used a different title company, but the builder STILL insisted the closing take place at their title company AND charged the buyer anyway. The title company that did the work did it for free! Amazing this could have ever been happening! Larger builders in our area have always insisted buyers use their lender (for a price discount or upgrades) and their title company. These naive buyers got put into ARMS, charged higher costs, and who knows if they REALLY got a discount. One stop shopping is a terrible idea for a buyer.” Thank you, Dora Ann Griffin, of D A Griffin Financial, LLC.

 

Attorney Brian Levy with Katten & Temple has a say on recent developments on RESPA. “The RealtySouth Consent Order is another example of the need to read the tea leaves to really understand how to interpret mortgage regulations such as RESPA (the Loan Officer Compensation Rule comes to mind as well).  A strict reading of the findings of law in the Consent Order shows a simple matter: RealtySouth’s form of Affiliated Business Arrangement (AfBA) disclosure was found inconsistent with the statutory form.  It would be dangerous, however, to conclude that had they strictly adhered to the statutory disclosure form that CFPB would not have raised an issue.

 

“What really seems to be RealtySouth’s problem was the fact that for about a year they had a pre-printed contract sale form that basically required use of an affiliated title company.  For example, Paragraph 5 of that contract stated, “Title Insurance. Seller agrees to furnish Buyer a standard form owner’s title insurance policy issued by TitleSouth, LLC in the amount of the purchase price.” Couple that with a modified AfBA disclosure that is supposed to tell consumers they are free to shop around and you run into a problem with the RESPA referral fee prohibition safe harbor for affiliated businesses.  Namely, you cannot require the consumer to use the affiliate.  RESPA Section 8(c)(4) provides, in relevant part, that affiliated business arrangements are permitted as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charge or range of charges generally made by the provider to which the person is referred (ABA Disclosure) is provided, (2) the consumer is not required to use the affiliated business, and (3) the only “thing of value” received as a result of the arrangement is limited to a return on an ownership interest. 12 U.S.C. § 2607(c)(4). [emphasis added]

 

The hairsplitting, however, begins when you start trying to define what “require” actually means on the continuum from a “friendly suggestion” to an “offer you can’t refuse”.  HUD tried to issue a rulemaking a few years ago to define what it meant to “require” use of the affiliate, but that rulemaking has been apparently abandoned.  RealtySouth’s preprinted form didn’t say the consumer is “required” to use the affiliate and I assume had the parties lined out Title South and inserted another company it would have been fine.  It seems apparent that after raising the pre-printed contract form issues in the statement of facts, CFPB chose not to engage in the hairsplitting over whether that was sufficient evidence of a “required use”.  Instead it seems CFPB simply found that the AfBA disclosure was problematic on its face to justify the penalty.

 

“By the way, as long as no referral fees are being paid there is nothing wrong under RESPA with requiring the use of a particular unaffiliated provider.  For example, lenders get to select the appraiser. One needs to be careful about over generalizing the point beyond RESPA, however, because other laws, including state laws on attorney selection, may be implicated.” Thank you Brian.

 

 

The baseball All Star game will be here before we know it, and here are some Yogi Berra-isms: quotes from a favorite ballplayer/philosopher.

“It ain’t over ’til it’s over.”

“Never answer an anonymous letter.”

“I usually take a two hour nap from one to four.”

“It’s deja vu all over again.”

“When you come to a fork in the road….take it.”

“I didn’t really say everything I said.”

Yogi on the 1969 NY Mets: “Overwhelming underdogs.”

“When asked what time is was – you mean now?”

“I want to thank you for making this day necessary” Yogi Berra Day in St Louis, 1947.

On why NY lost the 1960 series to Pittsburgh: “We made too many wrong mistakes.”

“You can observe a lot by watching.”

“The future ain’t what it used to be.”

“It gets late early out here.”

“If the world were perfect, it wouldn’t be.”

“If the people don’t want to come out to the ballpark, nobody’s going to stop them.”

Lastly, on a popular restaurant: “Nobody goes there any more, it’s too crowded.”

 

 

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.)