Feb. 27: Information on originator licensing, applications/LEs/CDs, and brokers and early payoff penalties

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...

How can regulators and the industry agree on much unless the question of what constitutes an application, pre-approval, or in what situation an LE can be created under TRID is 100% clear for everyone? Recently this commentary once again brought this up, and plenty of folks wrote in.

 

One industry vet contributed, “The guy from Calyx is pretty much correct in that it’s the regulations and the system that are flawed. A good general understands that well-conceived battle plans go out the window with the first shot. A great general has a number of calculated contingency plans as soon as the first shot is fired. Right now we have seen shots that were fired, things have not gone as planned, and there is no one general to deal with the splintered lender and regulatory situation. I did loans with 5-6 different lenders these past few weeks. Almost everyone had a different LE process, procedure, and forms. This in itself is uninformative for the consumer and frustrating as the have to sign excessive forms that may or may it apply to their specific loan. And it is not hard to see why lenders have multiple CD forms in loan files.”

 

Jeremy Potter, General Counsel and Chief Compliance Officer with Norcom, writes, “In response to the comment about the ‘Level 3 PreQualification’ being ‘better than most Pre-Approval Letters,” I would agree with the commenter’s assessment of the market but remind everyone that the CFPB has repeatedly stated that it is less interested in what an agreement or letter is called/titled and more interested in how it actually operates. So I would argue that establishing levels of pre-qualification or drawing technical distinctions around the name of the program is less important than whether a consumer is being told they are able to ‘shop’ for a home of a certain value or not. The CFPB is much more concerned with the message being sent to consumer and real estate agent and less interested in the name someone gives to the program itself. I agree that the program you mentioned sounds more like a prequal program than a written pre approval program because an underwriter is not looking at the credit file, but CFPB is worried about substance over form and I thought it was worth noting.”

 

From New Jersey Debra Leone contributed, “As we settle in with TRID, we have begun to re-examine the definitions of application for purposes of turn time tracking. The one conclusion that we have reached is that the submission of the six pieces of information is a ‘request for disclosures’ only. If consumers are doing what the CFPB envisioned, they are shopping amongst providers. The government has built 10 days into this shopping time and the lender cannot initiate traditional processing practices during this period. Therefore the period between initial LE and intent to proceed (ITP) should not be included in turn time equations. We are now utilizing the ITP date as the commencement of the loan process and as the basis for turn time and other productivity metrics. We measure against the industry by utilizing the Ellie Mae Insight numbers and wondered if they were doing the same. We had a phone conference to discuss the measurement data fields with Ellie Insight but at the conclusion of the call weren’t clear on their metric milestones. If applications without intent are included in volume, pull through and turn time numbers they could be double or triple counting and overstating application volume, understating pull through rates and elongating true app to close times. We are simply seeking clarity.”

 

Yet on this topic of pre-approvals and applications from the Midwest comes, “Rob, your readers should read what the CFPB wrote on the TILA-RESPA rule changes to gain a better sense of what it expects from lenders. One quick thought on this whole preapproval policy, which even the CFPB has addressed: I don’t care whether or not an MLO has the property address. And just because a client knows the address and the asking price, that doesn’t mean that the MLO is going to magically know how much of a loan amount the client is going to seek. It seems very logical to me that we don’t need to issue the LE until the client calls us back and says, ‘I received an accepted offer on 123 Elm street with a purchase price of X and I would like to take out a loan amount of Y…”

 

The writer from the Midwest continued. “And here is some information that readers should know:

 

The Receipt of an Application

Q: The definition of application does not include loan term or product type. What if a consumer submits the six elements listed in the rule, but does not specify the type of product or term?

If a consumer submits an application, a requirement to provide the Loan Estimate is triggered under § 1026.19(e). An application is defined as the submission of six pieces of information: (1) the consumer’s name, (2) the consumer’s income, (3) the consumer’s Social Security number to obtain a credit report (or other unique identifier if the consumer has no Social Security number), (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought.

 

“Secondly, with regards to requiring documentation… Although we may not be able to compel a client to provide us with income/asset documentation until AFTER an LE is issued, I sure as hell can tell a client that no preapproval will be issued until they can provide documentation.  Keep in mind that at that point, I have NOT received and application from the client, and therefore the rules that pertain to requiring documentation have not yet kicked in.

 

“Under the TRID guidelines a loan application must be considered received when 6 pieces of information have been provided to the lender including the property address. Once these 6 pieces are received, a borrower must be provided with a Loan Estimate and other application disclosures. Once a borrower accepts the Loan Estimate, only then can a lender require supporting documentation such as income tax returns, paystubs, etc. Prior to receiving and accepting a loan estimate, however, a borrower can volunteer documentation – a fine line to thread by the lender.”

 

With rates heading down and the chance of refinancing going up, it was no surprise to receive this question from a broker. “Do the paybacks to a brokerage company on an early payoff of a loan violate the MLO Comp Rule? If it were to a banker, I’d say unequivocally no. Cynics would say that brokers wish they could churn loans and avoid EPO penalties by claiming LO Comp protects them. But some view the brokerage company and the MLO as virtually the same. So on a lender-paid amount there might be an issue. So you have a contractual obligation to pay it back, but might violate the Rule and as such TILA. Help!” With rates down many originators have questions recently involving how LO Comp might be used as a “shield” to protect originators rather than as a sword to prevent certain compensation practices.  I would say this question falls into that category, but, unfortunately for the broker (fortunately for any investor getting churned) my read is that LO Comp offers no protection to the broker (or an individual LO) from contractual early payoff penalties.

 

I shot this over to attorney Brian Levy with Chicago’s Katten & Temple, LLP who offered this response.  “I don’t think the question of whether early payoff chargebacks are permitted under LO Comp was directly answered in the Rule or its commentary. Keeping in mind that all LO Comp questions are extremely fact based inquiries and given CFPB’s penchant for only telling you what they don’t like, it can be risky to assert that any interpretation of something not expressly spelled out in the Rule is unassailable.  With those caveats in mind, here’s my take:  Since whether the borrower refinances the loan prior to expiration of the EPO period is not a term or condition of the loan (such as interest rate or fees), the question needs to be analyzed under LO Comp’s “proxy rule” which says that a factor (here an EPO) causing a change in compensation (the EPO penalty) is a proxy for the transaction’s terms if two conditions are satisfied: ‘(1) the factor consistently varies with a term over a significant number of transactions; and (2) the loan originator has the ability to, directly or indirectly, add, drop, or change the factor when originating the transaction’ (emphasis added).  Both conditions must be met to meet the proxy definition.

 

“Here, EPO’s will most certainly vary with a term of the transaction (interest rate) thus satisfying the first condition, but there is no way at the time of origination that the LO could have any influence over the direction of interest rates after origination to cause the borrower to decide to refinance within the EPO period.  Without the LO being able to influence the factor at the time of origination, the second condition is not met.  Accordingly, the EPO penalty a not proxy under the CFPB’s LO Comp Rule and is permitted.”

 

Pete Mills from the MBA writes, “Rob, just a quick further note on LO licensing and testing.   As you know, MBA supports uniform testing requirements for all LOs, a position MBA took three years ago.  The creation of the Uniform State Test, which MBA has taken the lead in getting adopted in 44 (and counting) states so far, provides the foundation for a single national test for all LOs, nonbank and bank alike.  MBA approached the Bureau two years ago about mandating testing for Bank LOs.  Unfortunately, but the Bureau advised they do not have statutory authority to do so. While we might quibble with their conclusion, they do not appear likely to change it any time soon.

 

“We will continue to pursue this over the long term, but to address the immediate problems created by the inability of nonbank lenders to fairly compete in the labor market for talented LOs, MBA has spearheaded support for amendments to the SAFE Act to require states to provide a transitional authority to originate for a nonbank lender while the LO completes the testing and education requirements. HR 2121 has more than 40 bipartisan cosponsors, and has been refined in and improved with the help of the Conference of State Bank Supervisors.  In addition, similar provisions for transitional licensing are in the Shelby regulatory relief bill.  MBA is seeking Congressional action on this issue in 2016, and it will be a centerpiece of MBA’s National Advocacy Conference and Lobby Day on Capitol Hill this April 12-13.  We would urge all IMBs with an interest in this issue to attend the conference and visit your Congressional Representatives.”

 

 

(Warning: don’t read if easily offended by religious tones. Thank you to Wendy V. for this one.)

A man is stumbling through the woods, totally drunk, when he comes upon a preacher baptizing people in the river. He proceeds into the water, subsequently bumping into the preacher. The preacher turns around and is almost overcome by the smell of alcohol, whereupon, he asks the drunk, “Are you ready to find Jesus?”

The drunk shouts, “Yes, I am!”

So the preacher grabs him and dunks him in the water. He pulls him back and asks, “Brother, have you found Jesus?”

The drunk spits out some water and replies, “No, I haven’t found Jesus!”

The preacher, shocked at the answer, dunks him again but for a little longer. He again pulls him out of the water and asks, “Have you found Jesus, brother?”

The drunk garbles, “No, I haven’t found Jesus!”

By this time, the preacher is at his wits end and dunks the drunk again — but this time holds him down for about 30 seconds, and when he begins kicking his arms and legs about, he pulls him up.

The preacher again asks the drunk, “For the love of God, have you found Jesus?”

The drunk staggers upright, wipes his eyes, coughs up a bit of water, catches his breath, and says to the preacher, “Are you sure this is where he fell in?”

 

 

Rob

 

(Copyright 2016 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.)