Aug. 23: The BofA settlement won’t help investors return; mini-corr legal update; can employees receive bonuses on closings?

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...

Elliot F. Eisenberg, Ph.D., writes, “Housing sales peak in spring/summer, with price gains doing so as well. However, distressed sales, of which there have been many, occur relatively evenly all year. Therefore, distressed sales are highest as a percentage of all sales in fall/winter, thereby dragging down house prices and amplifying normal seasonal patterns. Distressed sales are now declining, but seasonal adjustment factors take years to adjust. Be very leery of seasonally adjusted house prices.”

 

The Bank of America settlement prompted a slew of e-mails. A prominent participant in the PLS (private label security) market noted, “So BAC settles for $16.65 billion for duping ‘investors.’ According to the WSJ, ‘$9.65 billion goes to the Justice Dept., six states, and other government agencies, including the SEC’…and $7 billion goes to ‘struggling consumers.’ I did not see how much was going to the investors, which was the reason for the lawsuit. This settlement follows Citi’s $7 billion settlement in July in which $4.5 billion goes to the Justice Department and various government entities and five states, and $2.5 billion goes to ‘consumer relief.’ According to Bloomberg, the Citi ‘settlement resolves claims from the DOJ, and several state AGs that it misled investors about the quality of mortgage securities it sold in the run-up to the financial crisis.’

 

This is exactly why the biggest former triple-A investors are not returning to the PLS market. They got ‘the short end of the stick’ when they bought the securities, they got ‘the short end of the stick’ in the settlements (such as this BAC settlement and the big $25 billion Attorney General settlement in which the banks were able to modify mortgages that they only serviced but did not own – or mortgages that serve as the collateral for the securities owned by the investors), and then they have to be concerned to about various communities using eminent domain to seize the collateral that backs their investment in PLS. The Treasury and others can focus lots of energy on trying to fix PLS reps and warranties, structures, alignment of interests, reducing conflicts etc…but when investors (who did nothing to contribute to the PLS debacle) continually get the short end or really no stick at all, there should be no surprise that the biggest triple-A investors have not participated in the fledgling PLS 2.0 market and they are not likely to participate in the future. Without their return, it will be very difficult for the government to reduce its participation in the mortgage market and we will be stuck with a very high level of government involvement for a long time.”

 

From Nevada came, “There is a lot of talk about Angelo Mozilo, and if he oversaw LOs offering and closing products that were readily accepted by investors and rated as golden by the rating agencies, and the investors could/should have done the due diligence on huge pools of loans but didn’t, which one of those parties should go to jail? And the CEO of WAMU, and LOs of WAMU, and of EMC, and of Indymac, and of…. The rating agencies really should have been shut down, but my point is that no one is above the law. If you have participated in criminal activity, then you go to jail. If you didn’t, then you don’t. The upfront money was just too enticing. In order to keep the ball rolling, they just kept lowering the standards to bring in more buyers. I honestly believe the crisis would not have happened if the CEOs and other high company officers were using their own money.  When you are using someone else’s money, it is much easier to use and abuse. One doesn’t have to go far back in history for examples like the S&Ls in late 80’s, the energy guys (ENRON) and others in mid and late 90s. But people, especially Americans, have no sense of history. We simply don’t learn from the past. I believe it is because making money is the only important thing. Please don’t misunderstand me.  I am totally committed to capitalism – just not what capitalism has become.”

 

“Rob, it is interesting to see the CFPB’s announcement for research on eClosings. When did it become part of CFPB’s curriculum to establish the best practices in the market place? The CFPB’s critics say that it knows no bounds, and given that its role is to protect the consumer, and that every transaction has a consumer involved, doesn’t that mean that it should regulate every financial event? Its own website notes, ‘Our mission is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.’ Will it regulate the size and color of currency? After all, shouldn’t the size and color of bills be different based on denomination? Can the CFPB regulate the quality of the wheat used in various cereals, since the consumer is impacted? I could go on, and I doubt that the CFPB will step on too many other agencies in their regulating efforts, but you see my point.”

 

From Nevada I received, “Where is the line drawn between business development and discrimination?   If I give a long time client a break on cost, because of the long time business relationship, that is considered discrimination. I call it business development.  In a capitalist/free market system, how can you have everyone pay exactly the same for everything?  How can the CFPB allow banks to charge different interest rates, and different fees?” Good question – I don’t have an answer for you. Practically every other business allows it.

 

“Rob, can a mortgage processor, on staff and on a salary at a depository institution, receive a bonus on a per closing basis in addition to their salary. For example, every loan that the processor closes they would receive $100 per file, regardless of term, program or rate. Is this legal?”

 

I turned to attorney David Medlin (Medlin & Hargrave) for this one, and he replied, “The question posed here is an interesting one. The quick answer is that such an incentive compensation plan is legal. Federal law does not prohibit such an arrangement, nor do the laws of some states such as California. Before implementing such a plan, however, it would be prudent to first develop policies and procedure to ensure that loan processing volume is not increased at the expense of quality. Systems and safeguards should be established to ensure that the quality of the loan processing is maintained. This is more important than ever, given the Ability to Repay requirements of the Truth in Lending Act (‘TILA’) and the consequent demands of regulators, warehouse lenders and investors. In this regard, consideration might be given to tying any bonus to a concurrent quality requirement, e.g., only those loan files which meet a minimum objective quality standard are eligible for a bonus. And, of course, as always, such policies and procedures must be reduced to writing and fully integrated into the company’s overall Compliance Management System.

 

Dave’s advice continued. “Finally, one collateral issue to keep in mind is that whenever setting policies and procedures for loan processors, or any other unlicensed staff, it is important to ensure that each loan processor, and each supervisor, fully understands the permitted limits of loan processing and when (and which) activity does, and does not, constitute licensed activity and/or acting as a loan originator. This is important, not only for state licensing laws, but also for staying outside of TILA’s Loan Originator Compensation Rule (‘LO Comp Rule’). It is not the job title or even the job description which ultimately matters.  It is what the individual actually does which determines whether or not he/she is a ‘loan originator,’ both for purposes of licensing laws and compliance with the LO Comp Rule. Unfortunately such a determination can sometimes require careful analysis since the definitions of licensed activity under the LO Comp Rule, on the one hand, and under state licensing laws, on the other hand, are not always identical.” (If you’d like to contact Dave for additional consultation, write him at dmedlin@mhlawcorp.com.)

 

In response to the CFPB’s Policy Guidance concerning mini-correspondent lending, Gregg & Valby, PC has written a series of articles to “share our thoughts and reflections about the Policy Guidance with our customers and friends in the mortgage industry. As you read these articles, Gregg & Valby would like to remind you that: (1) the Policy Guidance is only a ‘non-binding policy guidance’ articulating the CFPB’s considerations in its exercise of supervisory and enforcement authority; therefore, the Policy Guidance does not rise to the level of a law or regulation and is subject to change by the CFPB at any time; (2) even though the CFPB has set forth some principles about how it plans to evaluate a mini-correspondent loan transaction for possible RESPA/TILA violations with respect to broker compensation, there is still uncertainty in how the CFPB will apply the principles in exercising its supervisory and enforcement authority; (3) the CFPB seems to indicate that it will take a holistic approach in evaluating the true nature of each mini-correspondent loan transaction in question in accordance with the principles set forth in the Policy Guidance; therefore, one can reasonably infer that any investigation or enforcement action by the CFPB will be intensely fact-specific and largely dependent upon the circumstances surrounding each loan transaction and the nature of the relationships among the originating mini-correspondent, its investor, and the warehouse lender; and (4) in writing these articles, Gregg & Valby has made certain inferences, conjectures, and conclusions solely based on our subjective interpretation of the Policy Guidance and without the benefit of relevant facts in any reader’s particular circumstances; therefore, please do not treat the articles or any portion thereof as legal advice.  If you have any questions or comments about these articles, please do not hesitate to contact Brad Luo.

 

“To read the series of articles regarding the CFPB’s Policy Guidance, please click on the following links.  We hope you find them helpful and informative. Part I – Overview of the CFPB’s Policy Guidance   . Part II – Brokers and Lenders Beware. Part III – Investors Beware.

 

While on the CFPB, Jonathan Foxx recently wrote an article titled, “Consumer Complaint Database and Public Narratives” that is certainly worth a read. The Comment Period ends September 22, and responses can be posted electronically here: http://www.regulations.gov.

 

Are onerous regulations limiting lending? Yes, but everyone will admit that shoring up compliance is something that needed to happen. But I received this note on the overall cost of compliance hurting the borrower. “The CFPB must be ‘chomping at the bit’ over this one, and their actions will have a negative impact on many small businesses. What I found great was that the average collection was at $8,000 which implies these people were about 3+ years into the loans. So it wasn’t that they couldn’t afford the loan, they had a change in lifestyle or income. But the CFPB fails to understand the need for disposable income. My example on this is, if you were lending your own money, would you rather do a full income loan with 5% down from the borrower and 1 months reserve or a no income loan for a Self Employed borrower with 20-25% down, a .5% higher interest rate and 9 months reserves?”

 

And this note about market service agreements. “Rob, I now believe MSAs are the new norm, they do pay for referrals and we all know it, but they are here to stay. My suggestion for lenders is to start providing desks to Realtors; specifically the 80% of Agents who do 20% of the business! They pay the most for a desk and get leaned on the most to use in- house financial services by their brokers! The 20% who do 80% of the business pay the least and don’t mind telling the broker to stick it when they get leaned on! I think many would come join us! They would be given support, able to offer their listing and buyer clients a lower commission (making them more competitive against the awesome 20%). Why not? Level the field by allowing lenders to become brokers too and call off the class action suits! The CFPB does not know how close these in-house relationships are to organized crime! It will take years for them to figure it out. What’s really funny to me is how the brokers scream RESPA every time they sense lenders getting creative to find inroads to Agents. Leave it all alone & Let me offer my agents a better deal than they have now. We could create relationships with Realtors again and place our resources with Agents who appreciate those resources! We have the room. Fewer of us are around each year! Signed, “Sick of the gamesmanship by Brokers and Blindness of the CFPB!”

 

 

In this horrific video, a squirrel suit daredevil meets his demise in South America. It is not for the faint-hearted. 🙂

 

 

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.)