Aug. 25: Letters from the trenches on LO comp, LO role, rules & regulations – don’t let them disappear

Lots of peoples like lists and rankings. Sometimes there are awards that go along with them, sometimes not. There won’t be any awards doled out by Terminix for this list of “The Top 25 Cities for Mosquitoes” in honor of National Mosquito Day earlier this week. Foggy and windy San Francisco made the list? I don’t rank commentaries, but if I did, last Saturday’s garnered an unusual amount of comments. Let’s look at a few to give us a read to what originators are thinking about.

From the Atlantic Seaboard this broker writes, “I am pleased to see that many in the industry are repulsed by the dishonest. It kills competition and issues a negative sigma on the industry professionals. I do not disagree with anyone. On Ken Perry’s observations, he’s correct on his observations but he is missing a key point that I have been harping about for 9 months.

“There is one constant these days, we have no idea what the electorate is going to do. If the house swings to DNC any technical changes to CFPB stop and it will be, in my eyes, the largest political and economic failure of the GOP in history. The lending industry learned from the PHH fines that the CFPB, given a Democratic leadership, will look back many years. Today’s CFPB is merely lulling industry into a false sense of security to be slammed by the next administration.

 

“Regarding the value of a company versus what is paid to loan officers, I fully agree with his buying a company assessment. The numbers don’t work. But on the MLOs he makes a very common mistake. MLOs are, in essence, self-employed regardless of the 1099 vs. W2 bull. If the MLO doesn’t bring in loans they do not get paid and the company loses earnings. It’s a balance.

 

“If the MLO were not there, would the company get a loan? On TPO transactions I view the wholesaler as my back office. I have numerous options they don’t. If the wholesaler or mortgage banker fails to perform, the broker or MLO will go elsewhere. Sometimes it only takes one bad experience to cause alienation.

 

“Back in the early 1990’s there was a retail banker down the street from me, they had about 100 MLOs. The owner sold it to a bank for, as I recall, about $30 million and he had to stay on for three years. The bank came in and told everyone that things would be the same or better. Told them the whole gamut. They broke for lunch. When they came back after lunch it was the former owner and one rookie MLO. The guy sat at his desk alone for 3 years.”

DL sent, “I must respectfully disagree with Ken Perry’s notion that a strong regulator keeps the industry clean. In response, I have two words…Wells Fargo. Its retail group’s bad behavior magnified under the ever-watchful eye of a strong regulator. The CFPB, and all its oppressive rules, smothered the small banking industry while emboldening the larger ones to commit some of the biggest crimes in banking. And for those business that take the law seriously, the onerous regulations were toxic to a vibrant industry forced to devote more and more resources towards compliance and away from service.

“The small banking industry had been anything but healthy. Mulvaney has restored life to Main Street banks and credit unions who can finally breathe and maybe even compete again. This is good news for small business and community builders and even better news for borrowers seeking a humane, personal financial partnership.

 

“In the meantime, consolidation continues, giving borrowers less to choose from. Small nonbanks cannot keep up with the larger ones who can scale their operations to dilute the 18% increase in regulatory costs posed by the CFPB regs. When small business cannot survive because of strangulating regulations, the industry is actually sick, not healthy.”

 

“We may all lament the entry of Zillow into our space, but they may very well come to regret it as well. They are spurning their core constituency to grab a slice of an ever-shrinking pie. This business isn’t for the faint of heart. I wish them well. At a minimum they may force everyone to up their game which can only benefit the consumer in the long run.”

Burton E. sent a note about his own opinions. “Hi Rob! Wanted to tell you your Saturday column was one of the best and most spot on columns I have read. I hope people in the industry are reading it, listening and reacting accordingly. It is frustrating because some of us are out preaching this and no one is listening. Good people are going to lose their jobs, companies will close or merge, and they are going to wonder why.

“As usual, Ken Perry is spot on! The Cordray regime went way too far with regulating the industry. The pendulum swung way too far to that side and it is extremely difficult to play a game when the people responsible for letting you play the game will not tell you the rules and instead say, “Just read the Consent Orders and follow them.” And if you don’t that is essentially compliance malpractice. Not a great way to have to do business and try to protect your company and the consumer.

“I have been responsible for compliance at the companies I have worked for since the Stone Age and I can tell you, that while Cordray made my job relevant, I sure didn’t want that in that way. Having businesses be fearful of the regulators and fearful of making a loan that may have a trivial error in it that may cause substantial losses to the lender is not a recipe for wanting to credit available to consumers.

Here we are today, however, and the pendulum has gone way too far in the opposite direction. While I give Mick Mulvaney credit for making some needed changes to the Bureau and to some of the regulations (i.e. TRID), the Bureau’s hands-off approach is having a severe impact on lenders and consumers alike. Some lenders are saying the BCFP is dead and there is no longer any fear of being held accountable, so it has become the wild west all over again.

As we recruit new LOs into our company we frequently run across noncompliant loan officer compensation plans. ‘Why can’t we pay differently on FHA vs VA vs Conventional loans’ we’re asked. ‘Why do we have to pay the same on state housing loans?’ We don’t make any revenue on them as it is, but we hear how their former company allegedly allowed it.

“Bottom line, these lenders have no fear of being caught. We need to find a happy medium. What scares me the most though is what happens in 2021 if we are looking at a Democratic President, a Democratic Congress and lenders who must come face-to-face with Elizabeth Warren. In that situation, she will be a force to be reckoned with (not that she isn’t today) and she doesn’t like us to start with. It will get much worse. I guess some will say we need to get through 2018 and 2019 first before we worry about that. I have to worry about today, tomorrow, next week, next month, next year, etc. I can see that train coming. And the words ‘false claims act’ still ring in my head.

“Dual employment continues to be an issue and it didn’t help any when FHA pulled most of their guidance from the 4155 when issuing the new 4001 Handbook. I guess this goes back to the former administration not wanting to tell anyone the rules, so it makes it easier to fine lenders and enter into Consent Orders. The most puzzling thing here though is why FNMA/FHLMC are silent on this issue. Being employed as a Realtor and an LO and acting as both on the same transaction is a conflict of interest in its basic terms and yet neither of these agencies prohibit a person from acting in both roles in a loan transaction. Mindboggling!

 

“As we all know, and your observer accurately points out, we are back to putting people with low credit scores and high DTIs into houses with no skin in the game whatsoever. We are back at 2006-2007 again. Dodd-Frank was supposed to make sure that didn’t happen again, but here we are.

 

“Finally, the comments about LO compensation, risk and profitability could not be more accurate. It is not sustainable. I doubt the correction that will come will be anywhere near what we saw in 2007-2009, but make no mistake, some lenders will go out of business or have to merge with other more stronger lenders. It won’t just be small lenders, I think there will be some large ones too. And then we will start this process all over again!” Thanks Burton!

From out west a veteran LO wrote, “Regarding the CFPB, I want the regs at the top, not at the bottom. Banks and Wall St. make the loan programs and set the rates. They make the underwriting rules. Remember the ‘NOTHING’ loans? What entities created that c**p and then sold it? What we need are realistic regulations that are enforceable. I believe that the basic rules (RESPA, etc.) were never truly enforced. We don’t need TRID, which is filled with poorly written and irrelevant forms, and a system that is worthless for adding value to the consumer.

“As an MLO I am self-employed. I have a license that must hang on a broker’s wall. The broker provides an address and list of approved wholesale lenders. I do the rest. I find the client, process the loan, find a wholesale lender (from broker list), get the loan closed, and make sure the broker fee is deposited with broker. Only then am I paid.

“I have no guaranteed income. No company provided insurance. No paid vacation. My office supplies, my vehicle, my gas, my this, my that. Yet, I must be paid on a W-2, so I am not able to deduct my legit business expenses. This is wrong. Broker agents are the same as real estate agents. RE agents are exempt from the W-2 rigamarole. Broker agents should be the same. Unfortunately, there are no non-discrimination laws for self-employed.”

From John S. is, “In reading Saturday’s commentary, one comment’s ignorance struck a nerve with me: ‘That said, in my experience, an LO who wants to get realtor license (or sell insurance or financial planning etc.) is usually not a great LO and is just looking to find more ways to profit off fewer customers rather than growing their lending business.’

“If this was a common theme 3 years ago, I would agree with this statement. But the market today is an entirely different animal and good LOs are bleeding out. From 2002-2009 I averaged 140-210 closed loans per year with no assistants. After 2009, it has been a few amazing years followed by a few bad years – averaging 75 closings per year. Last year closing 25, and my year to date for 2018 is… wait for it… 5 closed loans!

“I have colleagues that still call me for mortgage advice that I haven’t worked with in years. I have past clients calling me every month and referring friends and family to me. Everyone that speaks with me about a mortgage understands very quickly that I have a thorough and professional understanding of mortgages and I operate on a higher level than other LOs they speak with. But no one I speak with is fitting well into a viable loan product.

“I’m realizing today is not about what you know, but rather who you know. Or how deep your pockets may be! Not knowing the right people is leaving me to believe this industry is not currently economically viable. Unfortunately, I am left to do one of the options you stated above and having to soak up information about another industries product to supplement what mortgages won’t provide. I’ll leave it at that and still remain optimistic, I have another client calling.”

(A collection of cow-isms, for lack of a better term.)

SOCIALISM

You have 2 cows.

You give one to your neighbor.

COMMUNISM

You have 2 cows

The State takes both and gives you some milk.

FASCISM

You have 2 cows.

The State takes both and sells you some milk.

BUREAUCRATISM

You have 2 cows.

The State takes both, shoots one, milks the other and then throws the milk away.

TRADITIONAL CAPITALISM

You have two cows.

You sell one and buy a bull.

Your herd multiplies, and the economy grows.

You sell them and retire on the income.

VENTURE CAPITALISM

You have two cows.

You sell three of them to your publicly listed company, using letters of

credit opened by your brother-in-law at the bank, then execute a debt/equity

swap with an associated general offer so that you get all four cows back,

with a tax exemption for five cows.

The milk rights of the six cows are transferred via an intermediary to a

Cayman Island Company secretly owned by the majority shareholder who sells

the rights to all seven cows back to your listed company.

The annual report says the company owns eight cows, with an option on one more.

AN AMERICAN CORPORATION

You have two cows.

You sell one and force the other to produce the milk of four cows.

Later, you hire a consultant to analyze why the cow has dropped dead.

A FRENCH CORPORATION

You have two cows.

You go on strike, organize a riot, and block the roads, because you want three cows.

AN ITALIAN CORPORATION

You have two cows, but you don’t know where they are.

You decide to have lunch.

A SWISS CORPORATION

You have 5,000 cows. None of them belong to you.

You charge the owners for storing them.

A CHINESE CORPORATION

You have two cows.

You have 300 people milking them.

You claim that you have full employment and high bovine productivity.

You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION

You have two cows.

You worship them.

A BRITISH CORPORATION

You have two cows.

Both are mad.

AN IRAQI CORPORATION

Everyone thinks you have lots of cows.

You tell them that you have none.

Nobody believes you, so they bomb the crap out of you and invade your country.

You still have no cows but at least you are now a Democracy.

AN AUSTRALIAN CORPORATION

You have two cows.

Business seems pretty good.

You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION

You have two cows.

The one on the left looks very attractive.

A GREEK CORPORATION

You have two cows borrowed from French and German banks.

You eat both of them.

The banks call to collect their milk, but you cannot deliver so you call the IMF.

The IMF loans you two cows.

You eat both of them.

The banks and the IMF call to collect their cows/milk.

You are out getting a haircut…

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “With Regulations, Be Careful What You Wish For.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2018 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