June 13: 1099 vs. W-2 for LOs, union programs, and defending the broker model; more MBS litigation ahead for lenders?

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...

An LO writes in defense of title companies: “’We mortgage companies’ jam up title companies with docs the morning of closing or the night before closing then expect the title agents to whip up HUDs on the car ride to closing or at the crack of dawn. We don’t exactly put them in the best position. I am annoyed by TRID as much as the next loan officer but I’m not for a second going to pretend that title companies are to blame or that we are perfect.”

 

And regarding union programs, I received this note from an official source. “Wells Fargo took over the actual ‘union program’ from Chase a few years back. There were no rate concessions or upfront closing cost discounts (chase Used to do one or both) what Wells offers is a gift card after closing $500 and the union itself offers a mortgage protection/insurance policy. If a union member is on strike or out of work the mortgage protection covers their mortgage payments. The gift card was for union members or their children/parents and the protection was only for the actual union member.”

 

I received this question from a lender in California. “I am reaching out to see what information you or your readers might have regarding the CFPB’s stance on loan originator compensation and whether it can be via 1099 or W-2. Recently, I have noticed a surge in advertising by mortgage brokers promising to pay mortgage loan originators via 1099 instead of W-2. Their justification for doing this is that the originators are ‘independent contractors’ since they’re working for a broker.  Now, as many of us know, the determination of whether someone is truly an ‘independent contractor’ or an ‘employee’ ordinarily requires a detailed factual analysis; it is determined on a case by case basis. There would be much more to the analysis than the mere fact that one is working for a broker. In our industry, the determination is no less complex, but the question is when, if at all, we get to that question in the first place when it comes to loan originators.

 

“In 2006, HUD issued a ‘Mortgagee Letter 2006-30’ which requires that all employees’ compensation be reported on form W-2. But they provide little practical guidance on when said ‘employees’ must be utilized and under what circumstances (if any) independent contractors can be utilized. Since this letter was published, there have been many changes in our industry. As a result, we have received conflicting information on this topic from numerous sources, including the CFPB. Therefore, the question many of us would like answered is: Do we have any current direction on this subject from the CFPB? In other words, can we even consider hiring originators as contractors? Is the Mortgagee Letter from 2006 still a valid tool for those of us seeking guidance? If not, and without further rules/guidance from the CFPB, one can only suspect that we are to go back to square one (i.e. pay originators via 1099 only if they truly qualify as an independent contractor under applicable state law). But, further clarification is warranted.

 

(For the next several days I am doing some bicycling and traveling in Croatia. During this time several “guest writers” are doing the bulk of the 6-day a week commentary, some queued up in advance but in random order, and I hope that readers enjoy the change of pace as well as the interesting perspectives. I am sure everyone understands that there could be considerable delays in me responding to any e-mails, and you can write to the contributors directly.)

 

Today’s contribution comes from attorney Phil Stein with Bilzen Sumberg Baena Price & Axelrod LLP.

 

Two related recent developments greatly increase the likelihood that residential mortgage-backed securities (RMBS) litigation, and resulting mortgage loan repurchase and indemnification claims against loan originators, are not likely to disappear or even significantly decrease anytime soon.  The related developments are a general recent trend of investors filing suits against RMBS trustees, and a specific ruling in a case of that type by an influential federal judge in Manhattan.

 

Judge Shira Sheindlin of the U.S. District Court for the Southern District of New York recently ruled that HSBC Holdings cannot escape three lawsuits by investors.  Those lawsuits allege that the bank tried to hide defects in residential mortgage-backed securities from them before the financial crisis.

 

Plaintiffs BlackRock Inc., Allianz SE’s Pacific Investment Management Co., and TIAA-CREF, claim that HSBC breached its duties as the trustee in 283 trusts, causing more than $34 billion in losses when the crisis hit in 2008.

 

Scheindlin wrote in her decision that it was “plausible” to infer that HSBC knew about the breaches. According to court papers, the mortgage-backed securities in the lawsuit were issued during a four-year period from 2004 to 2008.

 

In late March, Scheindlin denied HSBC’s motion to have the suits by the investors dismissed. HSBC had argued that the complaints should be dismissed based on lack of subject matter jurisdiction. Beyond permitting the plaintiffs to pursue the breach of contract suits against HSBC, Scheindlin ruled that they could pursue a conflict of interest claim against the bank.  Plaintiffs allege that a conflict of interest led HSBC to refuse to expose loan servicers who engaged in misconduct.

 

The court did, however, dismiss some claims of negligence.  The plaintiffs were allowed 30 days to amend the complaints. A follow-up conference has been scheduled for June 24. This is merely the latest in a recent string of suits if this type brought by the plaintiffs’ bar against RMBS trustees.  Notably, plaintiffs have not been able to sustain their claims against early dismissal efforts in some of those cases.  For example, plaintiffs BlackRock, Allianz, and TIAA-CREF filed a similar suit that was dismissed in May by U.S. District Judge Katherine Forrest in Manhattan. In that suit, the plaintiffs accused Bank of America and U.S. Bancorp of failing in their duties as trustees for 843 mortgage-backed securities totaling about $778 billion in collateral. Forrest ruled that the claims were not pleaded correctly on 33 of the trusts and that the remaining 810 trusts did not fall under her jurisdiction.

 

Two immediate take-aways from recent and pending cases are that: (1) banks that served as trustees (or had some other prominent role in the administration of RMBS trusts) should be on high alert that they may soon be in the crosshairs, threatened with legal action, if they have not been there already; and (2) loan originators and sellers have every reason to expect that the inevitable (but usually very weak) “downstream” claims against them by issuers and trustees associated with the RMBS trusts at issue will follow.  It should be remembered that trustees, issuers, and, in particular, correspondent lenders who had no involvement in the securitization process all potentially have numerous sound defenses against investor claims, and those defenses by no means are limited to the statute of limitations.  As a veteran of many such lawsuits, I urge affected banks and mortgage companies to make sure that they are fully aware of the entire array of their possible defenses before being intimidated into expensive settlements of threatened or actual claims.

 

Two Saturdays ago the commentary had some comments related to TPO/broker business. I received several notes. Mat Ishbia, president and CEO of United Shore, wrote, “As the 2nd largest of wholesale lenders, I must say that I’m frustrated by the comments written about wholesale lenders not caring about brokers.  Our whole business model is helping brokers grow and succeed, and we know if we do a great job… we will grow with them as well. I do agree that brokers are all that keeps wholesale lenders in business, however, to say that we don’t care or understand what happens in the trenches is a misconception. Lenders in general all have the same end goal: to close loans and help people get into homes. There are lenders that don’t do as good of a job, and the beauty of being a broker, is you get to CHOOSE who to work with.  When you are in retail, you are stuck or set with 1 team the whole time.

 

“At the end of the day, the facts are these. The best place for a loan officer to work is a broker shop, and the best place for a borrower to get a mortgage is a broker shop.  WHY?  – Loan officers have more options at broker shops, instead of 1 product set, and 1 set of UW turn times, and 1 pricing strategy, they get 20 or even more.  Every lender (retail or wholesale) have days that they back off on pricing, or are backed up in UW, and in retail… you have no choice, you have to keep working with that lender.  In wholesale, you just find another wholesale lender that is better that day and that can take great care of your clients. This is not an opinion, this is fact.  20 options is better than 1, every time.  And for consumers, it is the same thing.  Why would they go to a bank or a place that has only one option. Brokers shop on behalf of the borrower and find the best lender/loan that meets their needs.

 

“There are wholesale lenders that use brokers to fill up their servicing and then turn loans over to their retail or portfolio retention teams… those lenders should not be worked with in wholesale and are what has caused a lot of negativity around broker business.  Brokers should not work with these wholesale lenders, as they are in direct competition with them. True wholesale lenders are out there, and working with a lender that cares about your growth and success as a broker is key!  United Wholesale Mortgage supports the brokers and there are other wholesale lenders out there that do as well.” Thank you Matt.

 

And Paul Rozo, CEO and President of PRMG, asks, “Are Mortgage Brokers making a strong comeback? Could 20% of all mortgages be originated in the wholesale channel in 2015?”

 

He goes on to answer, “If you recall, mortgage origination volume was reported to be elevated significantly in all three major production channels (retail, wholesale and correspondent) during the second and third quarter of 2014.  Again, it was the Mortgage Brokers that took the biggest leap by growing nearly 29 percent, and taking close to 11.3 percent of the market share.

 

Today, according to the recent statistics reported, Mortgage brokers accounted for almost 13 percent of originations packaged into Fannie Mae and Freddie Mac securities in the first quarter of 2015, up nearly 2 percent from where we stood at the end of 2014.

 

I was very excited to report that not until the last quarter of 2014, Mortgage Bankers operating in the correspondent channel originated 35 percent of the loans securitized by Fannie Mae, Freddie Mac and Ginnie Mae, up slightly from the first two quarters of 2014.  This outcome was largely attributed to being a direct correlation to the many Mortgage Brokers who have transitioned to become emerging bankers in the correspondent channel thereby making the overall growth of wholesale that much more impressive! Certainly, these were clear indications of what I personally believed to be true all along—that Mortgage Brokers play a vital role and the wholesale channel will remain viable throughout 2015 and beyond!

 

So the question remains, will Brokers account for 20% of all mortgage originations in 2015?

 

If you examine the recent growth reported and apply a simple rule of +/- 2% growth per quarter, it is quite possible that Mortgage Brokers could account for percentages of up to and even north of 20% of the market share by the end of 2015.  There seems to be strong indications along with a general consensus of optimism among analysts that a revival for brokers and wholesalers is eminent.

 

However you may look at it, we at PRMG have always been, and will remain very dedicated and committed to the wholesale channel.  To that end, we help our brokers and originators every step of the way by providing continued training and education through our very own PRMG University. Whether it be recent updates on TRID, CFPB or mandatory recertification of NMLS SAFE Class training, our extensive curriculum is specifically designed to provide progressive education and the most advanced support to all of our brokers and originators. If you haven’t visited our PRMG University website, please do yourself a favor and click here to learn about the many ways PRMG is not only helping to build and sustain the wholesale broker channel, but to provide continued education and support to our valued customers– the Mortgage Brokers.” Thank you Paul.

 

 

A man walked into a cafe, went to the bar and ordered a beer.

“Certainly, sir, that’ll be one cent.”

“One cent?” the man exclaimed.

He glanced at the menu and asked, “How much for a nice juicy steak and a bottle of wine?”

“A nickel,” the barman replied.

“A nickel?” exclaimed the man.

“Where’s the guy who owns this place?”

The bartender replied, “Upstairs, with my wife.”

The man asked, “What’s he doing upstairs with your wife? The bartender replied, “The same thing I’m doing to his business down here.”

 

 

Rob

 

(Copyright 2015 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.)