Apr. 11: Notes on unused borrower credits, brokers vs. bankers, “free” credit scores, and the cost of compliance

Although lenders saw a solid February, many record-setting March’s, and pipelines portending strong Aprils and Mays, there are still issues out there of concern.


A loan officer sent, “I have a Fannie refi that just fell apart. The borrowers had a short sale 4.5 years ago. But their ‘free credit score’ says 740 FICO. When I pulled from Credit Plus, all 3 scores are between 680 and 690. What gives?” I am hearing a fair amount of this, and once again borrowers are seeing things or reading things that set unrealistic expectations. And it is usually the LO or broker that is the bearer of bad news. The critical issue shouldn’t be the short sale, although it certainly does matter, but the fact that there are different FICO scores for ever borrower, from car dealers and mortgage companies, and the free stuff is frankly false and deceptive advertising for a financial profit.


One New Jersey broker wrote to me saying, “I keep going back to the TV ad with the woman in the bank looking at the MLO asking, ‘What can you do for me, I have the 745 FICO?’ The fact is that the 745 FICO is a farce that she got for free. I guess this is really a case of you get what you pay for.”


David H. asked, “I have to ask if you have heard anything more about the new scoring models the credit bureau’s proposed end of last year. I have run 3 more client credit reports this week that had small ($35-50) medical collections that just ruined their credit scores. The average drop was 60 points. By the way, they were isolated incidents – the rest of their credit was perfect. When is this madness going to stop? Why should these clients with “excellent” credit keep getting punished for one “trivial” event? Meanwhile they will now pay thousands of dollars more in interest and MI if they do not have 20% to put down.


And a recent story from the Wall Street Journal echoes that borrowers are indeed coming back: After Foreclosures, Home Buyers Are Back.  As their credit improves, borrowers who defaulted get reprieve. And there are lenders willing to lend to them in order to increase business.


Here is a note on rankings published this week by Bloomberg, and the importance of using the correct term. “It’s amusing that our industry continues to confuse ‘originations’ from ‘issuance.’ PennyMac ‘originates’ almost no loans. It buys most of its loans after other lenders close (originate) them. Wells buys a huge amount of its loans from other lenders as well. Some of the loans those companies buy have been sold a few times before they get to them. Does that mean that loan was ‘originated’ 3 or 4 times?  Of course not. Loans are originated only once. Correspondent production needs to be backed out of any ‘origination’ figure. Or, the correct label of ‘issuance’ could be used and then numbers like this would be accurately reflected.”


Plenty of small companies are upset about the cost of “compliance,” but it is hard to remember any politician or regulator that lightened up on things based on it. What about the big guys? Leah C. passed along this note. “Here’s an interesting number I just saw on FiveThirtyEight’s Significant Digits for Thursday, April 9th: $730 million. That is the amount spent by J.P. Morgan Chase & Co. on hiring more compliance personnel, including for an internal surveillance operation to try to prevent the next London Whale or some other expensive incident of employees rigging markets.” And of course those costs are passed on in the cost of doing business.


I received this note from a broker in California. “One issue continues to arise as we recruit loan officers from other mortgage companies who have a different perspective than us on unused borrower credits. When disclosing rate and lender credits to a borrower on a GFE, what are you required to do with un-used credits at closing? We’ve always provided a principal reduction to the borrower. However, some of our recruits from nationally recognized companies say that they only quote rate on the 1003 and left the credit amount off the GFE until they have the actual amount of the closing costs. Then they disclose a credit equal to the closing costs, and nothing more. The borrower is interested in a “no-cost” loan and they are quoted the nearest rate to cover all of their costs. This is not an exact science however, and inevitably there will be a residual amount. Do these amounts need to be applied to a principal reduction?  This is a major issue within the industry, with seemingly no clear answer from CFPB.”


On the subject of borrower credits I turned to Brian Levy with Katten & Temple LLP. “This is a good question reflecting common misunderstandings created by our patchwork of overlapping complex regulations. Here, you have both RESPA’s GFE rules and TILA’s LO Compensation Rule (LO Comp) to balance to determine compliance. Additionally, the confusion is enhanced because analysis of this issue is different for mortgage brokers than for mortgage bankers (the question appeared to be from a mortgage banker). For mortgage bankers, as long as it is (i) properly disclosed, (ii) not shared with the LO and (iii) you have a consistent non-discriminatory policy, the lender can keep or give back the excess as a principal reduction.  Lurking in the background of this question, however, is the possibility that the “recruits from nationally recognized companies” are playing the dangerous game of locking with the consumer, but floating the company.  For the purposes of my response, however, I’m going to set that issue aside and assume that the loan is actually locked with the mortgage company at the time of application.


“RESPA is a disclosure statute, while the LO Comp limits how you can pay originators (including mortgage brokers). Neither RESPA nor LO Comp requires a mortgage banker to give any excess premium back to the consumer, but LO Comp prohibits a lender from increasing or decreasing the LO’s compensation out of any excess (or shortage). The 1003, on the other hand, is just an investor required document, so quoting the rate on the 1003 does absolutely nothing for your regulatory disclosure obligations (although it may serve as evidence of what was quoted to the consumer).


“Meanwhile, the GFE requires you to fill it in with numbers using your best estimate at the time it is prepared.  There is no option on the GFE to just say “zero cost”.  So a company that fails to provide an estimate of the lender credit amount on the GFE for a locked loan has not provided an accurate GFE.  To the extent a regulator or consumer could prove that the lender was not using good faith in estimating amounts to provide on the disclosure, a case for a RESPA violation could be made.  This would be fairly easy to do if the lender was regularly issuing updated GFE’s with lender credits that “magically” match the exact amount of the closing costs when no such credit appeared on the original GFE.  Remember that even if there are no consumer damages, regulators still can cite you for a compliance violation under RESPA such as a practice of issuing inaccurate GFE’s.” Thanks Brian!


“Rob, a realtor presented the following scenario to me. A family member (uncle I believe) purchased a home all cash for a nephew. The uncle secured a private note against the property and set up a payment plan for the nephew. He wants to help the nephew build credit. My thought was if the payments went through a loan servicing company and then reported to the bureaus, the nephew could build a documented mortgage payment history for his credit. Do you think this is possible? If so, can you recommend a loan servicing company that would service 1 private loan?”


My guess is that plenty of subservicers will service one loan – for a price. But in this case I turned to Tracy Sanderson with Banner Bank who responded, “Most escrow companies in my area can set up a ‘contract collection,’ which is similar to what you described. A seller of a property owns it free and clear and wants to receive monthly payments.  This will not help build a ‘traditional’ credit history that is reportable. It will document that regular payments are made and help the payee stay organized on amortization, etc.  From a lending perspective, this would be a ‘non-traditional’ credit reference. A friend of mine used to work for LoanCare, a subsidiary of Fidelity National Financial Company. If I remember correctly, they service individual loans AND they report to the bureaus.  I would start with them.”


The question of brokers and bankers is always there. Steve Kaye wrote, “Hi Rob – I would like to comment on the Nevada LO’s comments regarding APR. While there are some valid comments shared – I agree with the points made about the GFE and the APR as these provide no value to the typical borrower due to the confusion they bring – I strongly disagree when it comes to the broker’s comments and obvious misperception of mortgage bankers.


“He mentions that his job ‘is to provide solid information so my client can make an informed decision as to what works best for them,’ and with this I agree. WE, as originators, are the experts and it is our responsibility and obligation to ensure that our borrowers understand all of their options as well as the costs of the transaction. However, the LO goes on to add, ‘The bank offers one deal, and that is geared for the most profit to the bank. Same with a mortgage banker.’


“Um…say what??!! That’s quite the assumption – and misperception. Being a mortgage banker – as I am – does NOT limit me to one deal and it certainly isn’t – and can’t – be geared to the most profit to the bank (or mortgage banker). First, we are on fixed compensation plans; there is nothing I can do to manipulate the loan to make it more profitable to me or the company. And as for the comments about “They have big buildings and fancy offices to support, along with large staffs”; this very likely is true. However, these things are paid through a thing called volume.

Look, I get it; mortgage Brokers need to find justification for their business platform and my feelings are, if it works for you, fantastic.


“But most mortgage brokers – certainly not all – delude themselves when it comes to feeling they have a competitive edge or that they are providing a better platform for the client. So, let’s see about that. I am able to offer extremely competitive pricing through a number of lending options – both through our correspondent banking relationships AND through other, niche Broker options. The Mortgage Broker also is able to provide various lender options; however he/she also needs to ensure compliance by always offering the borrower the best available option and not simply the best one based on the contractual compensation agreement, since these will vary. In addition (And I KNOW several who do not do this – if the can go with a lender that provides greater profitability, they do); I order the appraisal – typically several days to at least a week before the Broker can, since the Broker isn’t the one doing the ordering as it ordered by the selected lender – and only after (a) the file is submitted to them and (b) they have disclosed properly, and (c) the borrower has received the disclosures. Edge: Banker.


“I have internal underwriting and can underwrite the loan based on several banking/lender options; the Broker has to rely on the one lending option he has selected to submit the loan to. Edge: Banker. Once a loan has final approval, docs/fundings are handled internally – with docs going out either same day or the following day. The Broker has to rely on the turn timeframes established by the selected lender. Edge: Banker. We can fund the same day we get docs back…the Broker, again, has no control over this process. Edge: well…you know who has the edge.


“This is not a knock on mortgage brokers — I know several very good ones and have great respect for how they conduct their business and their ability to close loans. What it all comes down to is the LO himself and the support team he has behind him. For the Nevada LO, he clearly does not fully understand or appreciate the role of the mortgage banker, with disrespectful comments and assumptions. I congratulate him on the service he boasts about providing to his clients, however there is nothing outstanding or out of the ordinary that any good LO – Broker or Banker – could and should be providing as well. And, yes, that includes sharing rate pricing.”



Mother Nature bats last – even on the golf course.





(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.)


Rob Chrisman