July 25: Letter from a bank CEO ending lending; TRID & construction-to-perm loans; IRS transcripts; Greek bailout explained (snort)

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...

“Rob, I am the CEO and owner of a privately held bank in the Southeast. Over 90% of my and my family’s, net worth is tied up in this institution. Through your commentary I have continued to follow the enforcement actions, penalties, and fees levied by the CFPB, HUD, and other government regulators. As the months have gone on I find it harder and harder to defend my bank originating loans and subjecting my family’s hard-earned capital to potentially being swept away by a regulator. In discussing this situation with other owners of banks and credit unions, I have found that I am not alone in my thinking. Yes, compliance and regulation are needed in a logical manner that protects the consumer. But to run the risk of potentially bankrupting my family based on the vague nature of enforcement actions by the CFPB rather than stating rules, or recent disparate impact rulings, makes little sense to me. As we cease offering mortgages to our depositors, I wish the remaining lenders the best of luck.”

 

“Rob, can someone be a Realtor and an appraiser at the same time? Isn’t that a complete conflict of interest, and one that wouldn’t be allowed?” I don’t know – they certainly exist and aren’t hard to find. For example, out in California MJ Roney appears to be both a real estate sales person for Decker Bullock Sotheby’s International Realty and has her own licensed appraisal company in Marin County. I imagine there are examples everywhere and I am not singling her out, and it highly unlikely that reputable Realtors and/or appraisal organizations would allow this if it wasn’t legal. Right?

 

Diversification and crossing-over may be the name of the game. Don’t forget that in June Nationstar Mortgage Holdings (a lender), launched Xome – a digital and mobile service. “The one stop shop for home buying & selling from search to close.” And plenty of builders own lenders, title companies, and the like.

 

John M. asks, “Can you share some insight as to how you see TRID affecting banks that offer construction loans, especially construction-to-perm? I am hearing that more lenders are pulling out due to the regulation environment and the inability to accurately disclose to the consumer.” In answer, one compliance chief wrote, “Well, even the top LOS isn’t prepared for Construction-Perm. What this industry needs is more people who know how to manually calculate everything; from an APR, to a P&I payment… to how much the borrower needs to close the transaction. THEN, figure out how to make the software perform the needed calculations. With all of the new rules, there’s too much focus on what goes on which line and what can and cannot be shown. Just one example:

 

  1. Calculating Cash to Close
  2. Deposit 1026.37 (h)(1)(iv) commentary: Requires disclosure of a deposit in a purchase transaction. Deposit to be disclosed is any amount that consumer has agreed to pay to a party identified in the real estate purchase and sale agreement to be held until consummation of transaction, (earnest money deposit). For purchase transaction in which there is no such deposit or in any other type of transaction, the creditor must disclose $0.
  3. Adjustments and Other Credits 1026.37 (h)(1)(vii) commentary: Amounts expected to be paid by third parties not involved in transaction, such as gifts from family members, developer or builder providing a credit, prorations for property taxes and homeowner’s association dues

So where are we supposed to credits (like deposits to builder or items that have already been paid for) if the loan’s not a purchase? We’re just supposed to make sure they receive it. Never mind that the consumer might want to see it on the “official form”.

 

“I think that for many vendors Const-Perm is an afterthought… or no thought at all. Twice now, we’ve prepared to convert to a new system and the vendor springs on us (at the last minute) they don’t support Const-Perm. Seriously… two weeks from the go live date?

 

“I am spending entirely too much time trying to figure out a way to be compliant AND give the consumer the information they need AND make sure an investor will buy the finished product. Ellie Mae is sending a team in for us. But I can’t get Encompass to work for a simple transaction (purchasing a lot, putting 20% down, plain vanilla fixed rate). We had planned to launch SmartGFE on August 1 to ensure fees quoted are accurate (at a cost of $5 per file) and we found out last week they don’t support Const-Perm.”

 

Editor’s Note: LOS providers, including Ellie Mae, are at somewhat of a disadvantage. For example, Ellie Mae noted, “To date, there has been limited guidance in the TRID rule on construction-permanent loans. There have been are no samples provided to technology companies to leverage in order to understand how to ensure their lenders are compliant on construction loans, and there is limited reconciliation of Appendix D and its impact on the sections of the TRID rule that dictate how the projected payments table should be completed on the new disclosures. We have heard that some industry organizations are pulling their construction-perm loan products from the market due to the lack of detailed regulatory guidance. As a key compliance and technology partner for our lenders, we do not want to expose them to significant regulatory risks. Without any definitive guidance from regulators, we question how any provider can ensure proper support until there is better guidance provided.”

 

Certainly plenty of companies offer construction to permanent loans: SunTrust, BB&T, Wells Fargo, Merrill Lynch, the list of banks goes on and on.

 

There is a lot of furor over the IRS and tax transcripts. It is best to check with investor and agency account executives to find out the documentation and underwriting policies. Before diving into the notes, know that Fannie doesn’t require that the 4506-T be executed with the IRS prior to closing. Fannie does require that the borrower complete and sign the 4506-T prior to closing. The lender then must execute the form with the IRS if the loan is selected for post-closing QC.  The agency flagged a selling guide clarification that we put out just before the 4th, and supposedly hears a lot of confusion about its requirements for tax transcripts and subsequently unreimbursed business expenses, so has tried to provide some clarity to lenders.

 

Fannie wrote to me saying, “For example, we’ve heard that some lenders were requiring the 4506-T to be executed with the IRS before closing a loan in order to confirm whether or not the borrower had unreimbursed business expenses, which could cause an unnecessary delay. Here are the basics. As mentioned before, we do not require a 4506-T to be executed with the IRS prior to closing, we simply require the borrower to complete and sign the 4506-T prior to closing. If a loan is selected by the lender to be part of its QC process (after closing), only then do we require the 4506-T to be executed with the IRS. As of the announcement above, we have clarified further that we do not require lenders to consider unreimbursed business expenses for borrowers using salary, bonus, overtime or commission income of less than 25% of monthly income to qualify, regardless if they are identified on the tax returns or tax transcripts.

 

“In case it’s useful, we have a short statement from Jude Landis, Vice President of Credit Policy & Risk Management at Fannie Mae: “We wanted to provide lenders with confidence that they could underwrite these borrowers (who qualify based on salary, bonus or overtime income, or commission income < 25% of qualifying income) without getting tax returns.  We do not require lenders to execute form 4506-T with the IRS prior to closing; when they execute the 4506-T as part of post-closing QC, they can request only the transcript for Forms W2 or 1099, as applicable. We hope the changes to our Selling Guide regarding unreimbursed employee expenses will help lenders underwrite these borrowers with confidence, without unnecessarily reducing qualifying income or adding dozens – or sometimes hundreds — of pages of tax returns for these borrowers whose income type does not require it.”

 

James S. contributes, “We’ve had clients experience the ‘transcripts rejected’ issue that you mentioned in your post. In their notification received from the IRS, there was also a number included for the ‘IRS Identity Protection Unit at 800.908.4490’. Not sure if that number will work for all rejection reasons or codes, but hey, it’s worth a shot for your clients, right?”

 

A credit risk manager in the South West sent, “Several times the IRS Tax Transcript issue has come up in your publications. No agency requires IRS transcripts. This is entirely an OVERLAY by investors. Fannie, Freddie, FHA and VA DO NOT require anything other than W-2s or tax returns (in some cases) and an EXECUTED 4506T.  All of the investors appear to be using more common sense in what is required since overlays have been going away and we have been having this issue with the IRS.

 

“It stands to reason that when every investor arbitrarily started requiring IRS transcripts for two years on every single borrower for no good reason it is going to severely tax the system. Compound that with the easy access that lenders needed in order to comply with this requirement and of course this leads to an open availability for fraud. The IRS has openly told several of our borrowers that the reason they cannot get their transcripts is because of lenders and the IRS has no staff to be able to keep up with this demand (and that lenders need to STOP asking for these transcripts on every single file). If everyone in the business would focus on getting the investors to take away their overlays on this (with other new policies to help prevent fraud) it would go a long way to assisting this situation.”

 

From Colorado Mike B. sent, “I have a client that filed an extension and of course the return transcript was delayed. I sent him to the Denver office to obtain a stamped copy. They advised him and directed him to the pre-printed information, that they do not provide those in person and if they did, they wouldn’t stamp it for him (item 10 in the pdf). They did advise him that he can obtain them online or by telephone. Furthermore, they advised him that mortgage companies are not required to obtain the tax transcript and are allowed to use other means to verify income (screenshot). He was successful in receiving them via a phone call and a fax. We closed yesterday!”

 

 

The Greek bailout explained:

It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted.

Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.

The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the tavern.

The publican slips the money along to the local “lady of ill repute” drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit. The escort provider then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism.

 

 

Rob

 

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