Aug. 15: Letters & input regarding the legality of MSAs, TRID and originators, the coming zero tolerance for appraisal costs

For me the last few weeks have involved visiting Hawai’i, Southern California, and Texas (with Nashville and Kansas City coming up) meeting with some great residential mortgage folks, and certain topics continue to arise. Appraisals, the cost of TRID & other regulations and the impact on brokers & borrowers, the legality of MSAs… where do we start? Alphabetically.

Here’s a little education: it is rumored that the size of Texas counties was established so that residents could get to the county seat (center of government) for business within a ‘day’s ride’. Or maybe that was a ‘day’s walk’. Hopefully that is not urban myth. Speaking of education, I received this note. “Is the CFPB aware of the exorbitant rates currently being charged across the nation for appraisals? On 10/3/15, the Appraisal Fee becomes a ‘zero tolerance’ item. That means the lender is stuck with what is quoted on the Loan Estimate. If they quote $600 and the appraiser charges $1,200… the lender must pay the difference. It’s going to get really ugly.” Well, I am not going to defend appraisal costs – it is a matter of supply and demand, right? And to become a licensed appraiser one needs a 4 year degree and then X period of time of “indentured servitude” with an appraiser willing to take the college grad on. So the number of appraisers is dropping. So if I remember my economics correctly… And yes, supposedly the CFPB is aware of this impact on consumers. But investors want that certainty of value, right?

Is TRID going to change the cost of doing business for everyone in, or related to, the lending business? You bet it will, and that cost will be passed on to the consumer of course although whether or not that impacts regulators’ decision making is debatable. For example, here’s an interview with Brian Coester on its impact on the appraisal business. Asked about TILA-RESPA, many believe that the new rule would benefit larger title insurances companies. Of course you don’t want one of your counterparties saying something like, “Oh yeah, TRID… we gotta take a look at that.” My guess is that the rule should reinforce with lenders a desire to do business with best-in-class partners with robust risk management capabilities.

A residential originator writes in from out in California saying, “With all the talk about how great is it to be a broker these days, it seems that the new TRID may be a major hindrance to them. As you stated, every wholesale lender will have a different interpretation of timing for the various parts of this deal, and they will have to keep track of them, and then also deal with changes if the loan starts at one lender and then ends up with another. Sounds like a lot of extra work for them. But, I think it’s going to be a lot of extra work for all lenders and it will slow down closing times and increase costs, all of which damage the consumer in the long run. And now we have to try and get our realtor clients to understand by closing a loan in 30 days (let alone 21 days) will not be more difficult, and possibly impossible due to these changes. I like the new forms, but the compliance side of it is ill thought out and cumbersome at best. What cracks me up were all the people blasting me on how good it is to be a broker and how, if you work for the right company, you won’t have the issues I mentioned about poor service, long turn times, lack of communication, etc. And they may be right in many instances, but I have worked for 7 or 8 mortgage broker firms over the years and my experiences were normally not what they said. So I still believe being a banker is better today. And with these new changes, I think it will be even a better choice.”

Yet an educated source at Freedom Mortgage countered. “Any broker who is concerned and possible confused has every right to feel that way. The process will be extended out. Just for the CD, going from the closing date backwards, it is going to be typical to require an average of 7 days from the receipt of the closing request before the closing date. That’s just the delays at the end of the transaction.

“Your wholesale channel readers should remember that the LE process will vary from one lender to another, and in some cases the process will be pretty smooth and should not really add delays if it’s done right. Their challenge will be remembering each lender’s process, policies and procedures, and yes, many will be different.  It does appear the majority of the Lenders will require the Broker to generate the LE through the Lenders site to insure fee accuracy, so in this case, the Broker will have to select a lender much earlier in the process than they may have in the past.    Lenders policies on if and how a loan would be transferred from one Lender to another will vary and will have some strict rules around it.

“Back to the CD, The actual # of days may be one or two more or less than 7, but likely more. The variables include the impact of Sunday in the 3 day counting rules, applicants’ timing of the acceptance of the CD since that is hard to control, and asking questions like, ‘Does the Mail Rule have to be used? Does wholesaler require mail rule or do they have E-Signature? Do applicants have email accounts and will they be willing and/or able to execute using it?’ Lastly, wholesalers’ required turn time to generate the CD from the time they get the closing request. Remember this has to be done in concert with the title company and unlike the previous HUD-1, the CD has to be delivered 100% accurate and acknowledged by applicants 3 days before closing. And unlike the HUD, the CD is the responsibility of the Lender, NOT the title company. For the Broker, one of the benefits is their Broker (Reg-Z) Comp does not appear on the LE, so the playing field is a bit leveled at least during the origination process.  Broker Comp does however get disclosed on the CD.”

I received this letter from a broker in the West. “With TRID, what will happen to individuals that have a private business for processing? I have an NMLS MLO #.   With that I am allowed to operate a processing business and charge for my services on the HUD. I am also licensed by my state. I originate my own loans, and process for 2 other brokers.   I think TRID will put me out of business on the processing side. And has anyone confirmed that the CFPB knows what a short sale is, and how the short sale system works? Personally, I just don’t see how TRID can work with the short sale scenario/transaction. It is not so much the Rule, but the lack of guidance on the implementation and how industry is assuming that the current game plan is correct. Under TILA a broker or someone acting as a broker is a creditor. If I have to do a GFE/LE on the lenders site, am I now out of compliance since I, the broker, did not give the consumer my GFE/LE? I have more questions about TRID daily than I have answers.”

Sometimes the CFPB actually addresses things like this. The CFPB’s regulatory implementation page with its supporting materials is a good place to start. These go into great depth to explain the rule, especially the small entity compliance guide. Remember that TILA does not make a broker the creditor.  TILA allows the broker to act on behalf of the creditor to provide the consumer with the GFE/LE if the broker receives the 6 pieces of information that defines an application. Brokers should contact the lender that they work with to determine what the lender’s process is going to be after the effective date on whether or not the lender will allow the broker to provide the LE or if the lender will do it themselves.

MSAs are a hot topic, with attorneys and compliance personnel weighing in both sides of the “Are they legal or are they not?” question – and unfortunately the CFPB is still not providing actual guidelines but instead rules by enforcement action. Attorney Ari Karen, with Offit & Kurman, weighed in recently. “By now everyone knows that at least two (and probably a third) major lenders have pulled out of marketing services agreements with realtors following the CFPB’s recent enforcement actions and decisions. Moreover in connection with these announcements, the CFPB’s spokesperson applauded the moves as “an important step for the mortgage industry” adding that the agency was “concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.” Of course, this has caused a bit of a panic and led many to reevaluate their positions on marketing agreements.

The CFPB has had many opportunities to dictate a policy that MSAs are now unlawful. However, the agency chose not to do so. Instead, the agency reiterated officially what we all knew – that the CFPB is suspicious of and does not necessarily view MSAs favorably. Of course, there are many common practices the CFPB does not view favorably, but that are very much tolerated and permitted when undertaken responsibly and appropriately. Moreover, the business decision of two (or three) large lenders to cease their MSA relationships does not require that others follow suit. Many larger lenders will continue to take more conservative approaches to MSAs and other practices than what is legally required. For those lenders, they have clearly made a business decision, but that is far from a conclusion that MSA’s are now per se illegal.

No doubt, the CFPB’s recent enforcement actions and decisions should give lenders pause about whether and how they maintain their MSA relationships. Further, lenders that wish to continue in MSAs must begin to adopt and strenuously adhere to best practices with respect to entering into, negotiating, monitoring, tracking and terminating MSA relationships and training employees on RESPA. After the CFPB Director’s decision in the PHH case, those requirements have become stricter requiring potential modification to existing MSA practices. In its PHH decision, the CFPB indicated that even agreements to pay fair market value for services can violate RESPA, if the arrangement is otherwise predicated in part on the understanding to provide referrals.

The CFPB has clearly indicated through enforcement, that lenders are required to carefully develop and observe systemic policies to ensure that MSAs involve payments for actual marketing services, and are consistently treated as such. Nevertheless, for those lenders willing to undertake these steps, one could argue that the vacuum created by these exits have opened the doors to MSAs – not closed them. Over the last 14 days, two major decisions were announced that may have profound impacts to the way lenders having been doing business. First, the CFPB decided that RESPA Section 8 violations could be found even when fair market value was paid for services rendered if the relationship was in part predicated on referrals. Put another way, paying fair market value is not necessarily enough to protect you from a RESPA violation. If the CFPB determines that the relationship was in part based on an agreement to make referrals it is illegal.”

THE ORIGINAL TEXT

Hi Bob,

This is Alan next door. I’m sorry buddy, but I have a confession to make to you. I’ve been riddled with guilt these past few months and have been trying to pluck up the courage to tell you to your face, but I am at least now telling in text as I can’t live with myself a moment longer without you knowing.

The truth is I have been sharing your wife day and night when you’re not around. In fact, probably more than you, particularly in the mornings after you’ve left for work.

I haven’t been getting it at home recently, but that’s no excuse I know. The temptation was just too much….I can no longer live with the guilt and I hope you will accept my sincerest apologies and forgive me. I promise that it won’t happen again. Regards, Alan.

THE REACTION

Bob, feeling enraged and betrayed, immediately went into his bedroom, grabbed his gun, and without a word, shot his wife twice killing her instantly.

He returned to the lounge where he poured himself a stiff drink and sat down on the sofa to contemplate his next move.

He took out his phone to make the call to the police and saw he had another message.

THE SECOND TEXT

Hi Bob, this is Alan next door again. Sorry about the slight typo on my last text, I expect you worked it out anyway, but as I’m sure you noticed, my predictive text changed ‘WiFi’ To ‘Wife’. Technology hey?!? Hope you saw the funny side of that. Regards, Alan.

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.)