Oct. 31: Notes on prequals & pre-approvals in a TRID LE world, credit score based on Facebook friends

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...

I walked by a bar the other day with a sign that said, “Our goal is to bring back daytime drinking.” We all need goals and plenty of companies are spending time planning for 2016: in spite of the MBA, Freddie, and Fannie saying origination volumes won’t be much different than this year, plenty of companies are projecting solid growth. Like double-digit growth. And not everyone is going to achieve that so the market share-grab continues – usually at the expense of small originators or large banks. And anyone with a goal of “ridding ourselves of TILA-RESPA reform” needs to re-focus.

 

Yes, the notes continue about TRID (“The reason I drink”) – some constructive, some not. For a constructive note J. Steven Lovejoy, Esq., with Shumaker Williams, P.C. , wrote, “On two successive Saturday blogs, contributors have complained about or asked questions about the impact of the TRID rules on pre-qualifications. “Prequals” are used in purchase situations either: 1) to give the prospective applicants an idea of the maximum house price for which they can comfortably qualify; or 2) to satisfy a seller (or seller’s listing agent) that the purchasers have the financial wherewithal to complete the sale. Lenders and brokers almost have to offer some sort of prequal in order to be competitive in some markets for purchase money loan business. However, issuing a meaningful prequal generally means that credit must be pulled and some documentation of the prospective applicant’s (the “PA”s) financial characteristics is necessary.  As many are finding out, TRID prohibits a lender or broker from requiring documentation of the six magic application components until a Loan Estimate is issued and accepted by the applicant.

 

“At the beginning of this month I attended a seminar on TRID at the Northeast Conference of Mortgage Brokers and Professionals, conducted by Ken Markison, Esq. of MBA fame, and Richard Horn, Esq., a former CFPBer. Richard was uniquely qualified to lecture on TRID because his job as Senior Counsel at CFPB included overseeing the drafting of the TRID regulation. He spoke to the prequal dilemma by proposing the following solution:

 

“The lender or broker can’t require the PA to provide any verifying documentation before issuance and acceptance of the LE, but there is nothing that says the PA cannot voluntarily provide that documentation. The problem is how to demonstrate that the lender did not so require. Horn suggests that a document be developed disclosing to the PA that documentation cannot be required by the lender and specifically indicating that the PA is voluntarily providing those items solely for purposes of obtaining a prequal.  I have worked on putting together such a document for my clients. There should also be appropriate disclaimers in the prequal letter itself that the prequal is not a commitment to lend.

 

“There continue to be some issues here. For example, when the PA provides all six elements of an “application” under TRID in connection with seeking a prequal, including the property address, the three-day window within which the LE must be provided is triggered, whether or not the borrower wants to apply at that time. However, Mr. Horn did provide a pathway to reconciling the need for a prequal process with the rules under TRID. In my experience, issues with any new regulation seldom surface until the rule is implemented and the industry starts to use it. That is when problems arise and solutions are developed. I fully expect to see some additional tinkering with TRID by the CFPB once all the intended and unintended consequences are fully understood. So, keep ventilating the problems you encounter.”

 

Switching gears to a view from the trenches on the loan process, Miriam Aiazzi, an LO with Security National Mortgage Company in Utah, writes, “Those of us that have survived the Mortgage Industry and the shame and blame game of 2007-2008 have to some extent patted ourselves on the back for being the renegades of the industry, indestructible (like cockroaches) and prided ourselves with the knowledge that if you do things right and treat consumers fairly, you can survive the toughest times an industry is subjected to. We have paid, not just in a monetary sense, but through arduous times where business was scarce, people afraid to buy, and loans difficult to close. We have made it….BUT have we?

 

“It is hard for an industry professional such as me, who prides herself on my word being my bond, to believe that the new FOUR letter regulations passed down October 3rd, known as TRID (TILA RESPA Integrated Disclosure) is not a tool passed down by the Dodd-Frank Law of 2010 to make our lives more difficult than they already are?

 

“I am not in this instance referring to the new forms we have to disclose known as the Loan Estimate and the Closing disclosure, these actually make sense. I also take no objection to waiting three days so that my clients can review my final numbers. Personally my clients know the final number in the first week I receive their purchase contract or refinance information because I endeavor to obtain an estimated HUD from Title so ensure there are no surprises at closing…strange concept. You see CFPB? Some of us actually do shoot straight.

 

“What I am completely in disbelief about is the fact that I as a mortgage professional am being barred from earning the trust of my borrower, and in so doing I am being asked to perform a disservice to the consumer. Let me expand on this aggrieved statement….

 

“Most of my business is referral based, which means the bulk of my transactions are referred to me from past clients. Under TRID I have a consumer contact me to get pre-approved…there is a difference between a pre-approval and pre-qualification which I will expound upon. Under TRID I am not allowed to pre-approve the client…WHY? Because I cannot ask the client to provide proof of income, whether it be pay stubs or taxes, if I have a Self Employed individual because this is considered to be a violation of the TRID rules because a Loan estimate has not been issued. However I cannot issue a loan estimate until I know what the borrower is approved for, but I cannot get them approved without verifying income…..do you see my dilemma? It’s the classic enigma of what came first the chicken or the egg.  In conclusion I can no longer do my job. UNLESS I have the client sign a voluntary Release form agreeing to supply me with the documentation required to get that client pre-approved. Sounds ridiculous, well congratulations, you’re right…IT IS!!

 

“Hence if I want to pre-approve a client that has been told he can trust me, I need to ask him/her to sign a voluntary release form. Let’s see how this plays out:

 

“Me to the client, ‘I am so delighted Bob Smith gave you my information and trusts me with your purchase, however to ensure that you truly trust me, the Federal government requires you to sign a Voluntary Release form placing in writing that you trust me enough to disclose information to me that I otherwise cannot ask for and that furthermore I cannot accurately perform my function of pre-approving you without.’ Where’s the dialogue for this CFPB? You’ve regulated everything else in our industry, want to regulate my freedom of speech as well…That may be next!

 

“So in summary I have to ask a client to sign this form otherwise I can just perform what got us in trouble in 2007 and 2008 and simply have the borrower ‘state’ what they make. I can guess, believe that the client is correct, provide erroneous information to my agent and the seller, and then find out once under contract, when I can review paystubs and bank statement….AFTER the client has signed an E-consent and received their LE…..that they do not make the money they TOLD me they make….This was called subprime ladies and gentlemen when we had the borrower tell us what they made.

“When did I become the bad person? How is looking over a paystub or taxes a coercion. I am not standing in a back alley with a trench coat and a cigarette hanging out of my mouth asking prospective clients to hand over their pay stubs and taxes. I bathe and wear respectful clothing and by gosh I work in an office that advertises we offer home loans. My license is on the wall, I sit behind a desk and I actually know how to do this job. Why am I being asked to perform a disservice to a client?”

 

The Fed recently reported the largest virtual currencies in circulation are: Bitcoin ($2.85B), Ripple ($441.4mm), Litecoin ($43.2mm), PayCoin ($37.8mm), and BitShares ($24.2mm). FinCEN has designated all virtual currency exchanges and administrators as money transmitters. But are the new currencies merely another excuse for fraud?

 

New ways at looking at currency is one thing, but looking at your friends to determine your credit and therefore your prospects as a borrower is another. Steve Brown with PCBB writes, “There is a possibility that Facebook users could eventually find their creditworthiness taken by an algorithm built into the online social network. This particular algorithm, which was originally created by Friendster to try to prevent spam and filter offensive content, is one of several programming patents that were sold to Facebook back in 2010.

 

“Recently, however, it was discovered that a small paragraph within this algorithm’s patent says that it could also be used to help lenders determine the riskiness of extending loans to specific individuals, based entirely on electronic analysis of the people within their individual social network. According to the patent filing, examining and analyzing the credit ratings of the people someone is linked to within their individual social network would provide lenders with better insight into that person’s own ability to repay a loan.

 

“The patent says that, ‘If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.’ So far, Facebook has remained silent about the patent and whether it has any plans to actually implement the algorithm, but news of the patent’s wording has already fueled debate about whether or not it would be practical for lenders to implement it. One also has to wonder whether measuring loan applications in such a way would be any more valuable than the traditional metrics lenders have used to rate borrowers or not.

 

“One obvious problem with such an algorithm is the fact that the average person’s social network has expanded well beyond their closest friends. It now includes everyone from colleagues, to casual acquaintances and even friends of friends. Whether or not such an algorithm could be tweaked to successfully hone in solely on an individual’s core friends remains unknown. Beyond that is the simple fact that just because two people are friends does not mean that they share the same income, spending patterns or overall credit histories.

 

“Thus, labeling loan applicants as risky borrowers may mean lost revenue for banks or increase risks. Given consumers’ fears about having their creditworthiness unfairly judged or tarred by software programs or algorithms, this area will remain an interesting one to monitor for developments. One way community banks can try and differentiate themselves is perhaps by emphasizing ties to real world connections to their customers. While it remains important for community banks to highlight online and mobile banking capabilities, it is perhaps just as important to remind customers that they are viewed as being more than just their credit scores. Doing so will also help customers understand they aren’t just floating around on a digital sea of mindless data.”

 

 

Q: Gals, what does it mean when a man is in your bed gasping for breath and calling your name?

A: You did not hold the pillow down long enough.

 

 

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.)