We have a very good Saturday set of reader & expert thoughts and facts regarding current events. So without further ado…
“Rob, the rating agencies are still rarely mentioned when it comes to the credit crisis. And your readers may recall S&P downgrading our government’s debt. What has happened since the downgrade?” The USA was downgraded by S&P in August of 2011 from a top rating of AAA to AA+. At the time of the downgrade, the USA had been AAA rated for 70 years. The yield on the 10-year note closed at 2.57% on 8/05/11. The yield on the 10-year note closed at 2.73% on 4/17/14. So much for the cost of credit going up based on S&P’s opinion.
“I am trying to find out if there have been many changes in Mortgage Loan officer’s compensation structures. Do the lending institutions pay different amounts of incentives for “Purchases” vs “Refi”? Do you have any insight about the incentives that a LO would earn for production between $500k-$1MM, $1MM-$1.5MM, and lastly for the really good ones if they produce more than $2MM per month? Do other lending sources provide a base salary and benefit package, or does the LO have to pay for those benefits?”
These are still common questions – you’d think that the CFPB would have spelled out exactly what lenders can and cannot do, and what they won’t be fined for a year from now. I turned to Brad Hargrave of Medlin & Hargrave ([email protected]; http://www.mhlawcorp.com/contactus.html). Brad sagely observed that lenders, and their attorneys, are charged with divining the mind of the CFPB from vaguely worded definitions that are to be applied on a case-by-case basis, and that it would be helpful if the CFPB’s LO Compensation Rule (“Rule”) actually provided advance notice of what the Bureau deems is, or is not, lawful, rather than requiring us to guess as to the meaning and application of words like “term” and “proxy,” both of which we’re told will be determined by the Bureau based on ‘objective facts and circumstances indicating that compensation would have been different if a transaction term had been different.’”
Mr. Hargrave continued. “Varying a loan originator’s commission rate between purchases and refinancing transactions is likely to be deemed by the CFPB as basing compensation on a proxy for a term, and thus is inadvisable, in our opinion. Of course, the definition of ‘term’ in the Rule would appear to have no application whatsoever to whether the subject covered loan is a refinancing or a purchase transaction, and thus it would be reasonable, in our opinion, to conclude that varying the rate of compensation between refinancings and purchase transactions should be permissible, given that such a variance is not based on a ‘term.’ (We’re told in the Rule that a ‘term’ includes such things as the interest rate, the APR, the collateral type and the existence of a prepayment penalty, as well as certain fees and charges if required to be disclosed on the GFE. We are told nothing, however, about refinancings vs. purchase transactions). But, the definition of a ‘proxy’ for a term could be applied to such a compensation variance. The Rule informs us that a factor that is not itself a term is a proxy for a term if the factor consistently varies with a term over a significant number of transactions AND the LO has the ability, directly or indirectly, to influence that factor. Given that there could be some outside possibility that an LO might be able to influence the consumer’s decision to refinance her existing home or to purchase a new home, one could argue that the fact of the repurchase versus the purchase transaction was a proxy for a term. And having now sat across the table for hours with enforcement counsel for the Bureau, I can tell you that such a strained interpretation of the Rule is not beyond the realm of possibility.”
Lastly, “As to the second question, it is always acceptable under the Rule to base compensation on an LO’s overall volume, and thus one may pay an LO, and an LO may receive, a higher commission rate once a certain predetermined volume target has been satisfied. (Note, however, that one may not, under the Rule, vary commission rates based on the dollar value of the principal). And finally, the writer should check with local employment law counsel with respect to compensation structures in his particular state, as these issues are generally driven or informed by state employment and labor laws. As a general rule, however, it is always best, in our opinion, to ensure that an LO is paid a minimum base salary of at least minimum wage as a guaranteed draw against commissions.” Thank you very much Brad.
Earlier this week I received a note from Ken Perry, President/CEO of the Knowledge Coop ([email protected]). “Hey Rob, I had a great conversation with the CFPB this morning. Of course everything they tell you is not “Legal advice” but they have given me some great verbal guidance over the last couple of years. My conversation this morning dealt with RESPA and loan originators offsetting the expenses of real estate professionals by giving them free services that are paid for by the mortgage company. Here is a common scenario: Mortgage originator pays $360/month for a marketing program that gives them the ability to add 360 real estate agents into the program. The originator then charges each real estate agent $1/month. According to this morning’s conversation two things may be a problem here. 1. Does the originator actually have 360 people paying $1/per or maybe 10 agents have signed on? If 10 agents have signed on then we need to have each one pay $36/month to get close to being compliant. 2. What would that real estate agent pay if they went directly to the marketing company? That is the amount they should be paying to the LO for the system. He also made it clear that their investigators are extremely busy working through all of their cases and we should expect to see quite a few more cases to break this year. My encouragement here is for each company to analyze any of these marketing arrangements to make sure they aren’t offsetting costs typically incurred by somebody in a position to refer business!”
The CFPB turned some heads this week with electronic closing information, and informing the industry what it already knew: borrowers are drowning in trivial paperwork by lenders afraid to miss a document for fear of a class action lawsuit four years from now. David L. opines, “When we do a Good Faith and there cannot be any or very little “FEE Tolerance”, then the customer is coming to the closing with virtually what they were told in the first place. There should ONLY be anxiousness if the lender is way out of bounds and I just don’t see how that can happen. Maybe the CFPB can expand their research into Realtors and how they set expectations for closings as well. Heck – have the CFPB investigate title companies that do the pre-lim work and then drag their feet once they have docs in hand to turn the HUD out in a timely manner. Of course I am being a little facetious on this BUT the mortgage person is NOT always the only culprit in the customer’s ANXIETY. Wow…our society is bringing up a bunch of ‘Take care of me, I can’t think for myself’ group of people.”
And Steve B. from Texas contributes, “For Director Cordray to presume that ‘mortgage closings are often fraught with anxiety’ that requires the government to step in and ‘fix it’ is absurd. There is no question that overregulation has added paperwork, and yes, lenders are terrified to make a mistake. But have the CFPB ‘fix’ it? Their track record suggests otherwise.
“I have attended hundreds of loan closings since 1992. I have made loans to first-time homebuyers, government employees, blue collar workers, engineers, pilots, attorneys, teachers, and executives, etc. In Texas where I work, nearly every closing has a professional Escrow Officer and the buyer’s real estate agent right there at the table to explain documents and answer questions. I’m mostly window dressing, but most of the papers are loan related, so I go 1) to answer questions as needed, and 2) to keep others from talking about me.
“Case in point: yesterday I had a 26-year old, single woman who just finished school and is now in her first full-time job sign papers on a new FHA (read, more documents) loan. She took 29 minutes, start to finish, and this was between cleaning house and packing to move. She was NOT ‘fraught with anxiety,’ and was NOT overwhelmed by the stack of paperwork and complexity of the documents.
Here is a portion of text from Cordray’s ‘Mortgage Closings Today’ message: ‘Buying a home is one of the biggest financial decisions most people will make in their lifetimes, but navigating the closing process can be a challenge. We are well aware of the frustrations that consumers feel when they walk into their mortgage closing and face a tall stack of detailed documents. I have heard these concerns during my time as Director of the CFPB and while in public office in Ohio – and I have experienced them myself as a homeowner. To quote my friend Neal Wolin, former Deputy Secretary of the Treasury and a particularly knowledgeable consumer, when he vividly described his closing: ‘The documents are literally impenetrable…Here I was—former general counsel of the Treasury, former general counsel of a Fortune 100 financial services company—asking my lawyer to help me through 100 pages of incomprehensible, turgid gobbledygook.’ (The New York Times: http://www.nytimes.com/2010/04/18/business/18regs.html?pagewanted=all&_r=1&3.) This much is clear to me: the package of closing documents is too large, and the process is overly complex and stressful for consumers. The CFPB is committed to work on improving the process for everyone involved.’”
Steve’s note finishes, “Seeing the published remarks of these two gentlemen reflecting the difficulty they both have had with a loan closing really makes me wonder. I certainly feel like I’m in good hands.
And taking a refreshing step back from the day to day mortgage life in the trenches, Brad Nease with Silvergate Funding ([email protected]) scribes, “Does your firm have Core Values? Are they explicit or implicit? In other words, do your leaders live and teach the Core Values? Core Values are the foundation on which great organizations are built. Are your Core Values a foundation of solid granite or sinking sand? Core Values are not strategies, policies and procedures, or competencies. Core Values guide business’ policies and procedures; they help govern your personal relationships; they clarify who we are and what we stand for; they guide us on what and how to teach; they guide us in making decisions. They can be positive or negative. They can be committed solely to making money or they can be a commitment to innovation, sustainability, and excellence. Does your management, leadership, C-level executives, guide the organization and you with a concise set of Core Values and do they personally live by them? Or…are they just a list of nice sayings management can put on a poster so they can put them up on the wall. The best way to let people know who we are is by the decisions we make. People are watching…carefully. When we join our every day decisions to our Core Values, we shape our corporate culture and the people that work with you.”
It’s a slow day in the small town of Pumphandle and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.
A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.
As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.
(Stay with this….. and pay attention)
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.
The guy at the Co-op takes the $100 and runs to pay his debt to the local lady of the evening, who has also been facing hard times and has had to offer her “services” on credit.
She rushes to the hotel and pays off her room bill with the hotel owner.
The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.
At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.
No one produced anything. No one earned anything. However, the whole town now thinks that they are out of debt and there is a false atmosphere of optimism and glee.
And that, my friends, is how a “stimulus package” works!
(Copyright 2014 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.)