Aug. 3: Reader comments on Castle & Cook, current volumes, point banks, and the definition of an application

I am hearing this similar refrain from everywhere in the nation: “I note the rosy news from the second quarter moved interest rates to a remarkable spike. It will be a while before the Fed and Wall Street see what is happening at my desk. I am a loan originator and I had to notify most of my first time buyers they no longer qualify at home prices they were originally approved.  They must set their sights on significantly lower home prices.  I have always been conservative in my pre-approvals, but an increased mortgage interest rate of 1.25% can mean a buyer in my area must earn $350-650 more income per month to qualify for the same home!  Furthermore, the refinance originations have all but stopped. The change at my desk and the desks of local escrow offices is like night and day.”


But the news this week continued to be mixed. The Case/Shiller 20-city Composite Home Price Index, for example, rose by 12% from May 2012 to May 2013 and rose 2.45% from April to May. The data supports a recovering housing sector as the year-over-year 12% gain was the biggest increase since March of 2006.  On the foreclosure front, Corelogic reported that completed foreclosures fell by nearly 20% from June of 2012 (68,000) to June of 2013 (55,000).  Before the housing market blew up in 2007, completed foreclosures averaged 21,000 per month.  In addition, there were approximately 1 million homes across the nation in some type of foreclosure, down from 1.4 million a year ago. Using this metric, the housing market continues to improve.


Yet Consumer Confidence dropped, and if consumer confidence lags, retail sales will drop, and the economic engine will slow. And yesterday we learned that employers added fewer workers than anticipated in July even as the U.S. jobless rate dropped to 7.4 percent. The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated. On top of that, workers spent fewer hours on the job and hourly earnings fell for the first time since October. Many “experts” now believe that rates may trend slowly downward – although I have heard no one say they will go back to where they were six months ago.


I keep looking for a good place to mention this, but haven’t found one. Happy birthday, CFPB, and who, in the public, wouldn’t like this agency?


Let’s move on to reader comments on a wide variety of topics – there is a lot going on!


In response to the comments about Castle and Cook’s CFPB Enforcement Action, attorney Brian Levy noted, “While I wouldn’t rush to judgment against Castle & Cooke simply based on the CFPB’s allegations (there are two sides to every story), there are some critical lessons for originators (and LO’s) to learn from the CFPB’s enforcement action. First, (if you didn’t understand or believe it before) CFPB is firm in its belief that point banks and anything like it where the originator is somehow credited for producing more profitable loans are illegal; whether in writing or not. CFPB appears to believe C&C needs to prove that its bonus plan was not a disguised “point bank” to prevail (as opposed to the burden of proof being on CFPB to prove that it was a point bank). Second, CFPB will not believe you just because you say bonuses were for things you can compensate for, such as quality or pull through, unless you can prove it with prior documentation. CFPB will assume any hindsight justifications are a cover-up. Third, everyone should have written compensation agreements with their LO’s that detail the basis for any compensation (using only legally permissible compensation methods) and must document any bonus calculations against permitted measures at the time the bonus is calculated.  Simply failing to have records showing how compensation was calculated is a separate violation of LO Comp.


“The C&C enforcement action also provides context to some of the potential consequences of LO Comp violations. For example, I do a lot of work in the repurchase area and I would be very concerned about the repurchase implications of the CFPB’s complaint on loans sold.  Due to the potential for TILA claims and foreclosure defenses, investors may be tempted seek repurchase on affected loans regardless of default or loss status. Terms of representations and warranties and other provisions in loan sale agreements may be critical in determining how those issues get resolved.  Meanwhile, perhaps an equally troubling risk is the question of potential TILA liability for individual or class claimants.  Direct liability to consumers is not just a concern for the originating company, because under Dodd Frank, TILA liability for an LO Comp violation may now also be imposed on any individual LO’s who received the illegal payments. With personal liability on LO’s for violations, any shops that are clinging to the old methods of compensation based on profitability because “the LOs are demanding it” are really not doing them any favors.” (Brian can be reached at


There has been a significant number of comments involving point banks (and similar structures with different names) and LO compensation – amazing after the tax payer time and money spent by the CFPB trying to clarify it. “I wanted to take a moment to add /share my thoughts on the ‘point bank’ discussion. While there are still those companies who either (a) are blatantly disregarding the fed’s policy on point banks, believing that they are too small and are flying under the radar, or (b) those companies that feel they have a creative solution to this, the reality is that every company, in some form or another, utilizes a point bank type of system without calling it that. However there is a difference in execution. The prevailing attitude is that you cannot utilize accrued overage (i.e., a point bank) to pay bonuses or any other form of direct income to the loan officer. However, non-direct compensation, in the form of payment for marketing expense, office space, etc., is something that many firms feel is allowable and is keeping within the framework of the rules.”


The contributor continued: “Another use of Accrued Funds is to help offset pricing issues if a loan officer needs to be a little more competitive on a loan. Because the branch assumes this pricing ‘loss”, and no additional funds are paid to the LO (he/she still receives the comp plan commission), this again is viewed as staying within the rules. The branch absorbs the loss. Clearly, overage funds are being utilized in creative ways and it is foolish or extremely naïve to believe that they are not. At the same time, I do not feel that there is anything wrong with this, or is in violation of the intent of the rules – as long as the client is not being pushed into a higher rate in order to increase the overage (of course, we are talking about Bankers and not Brokers, since in the Broker world all overage goes to the consumer). This is that fine line that companies need to be cautious of. If a rate of 4.000%, as an example, has .250% in overage, the LO has the option of paying some fees or allowing that overage to go to the company. In effect, potentially creating some ‘cap space” to help offset some of the aforementioned uses down the road – although there are no assurances of this. However, if the client is given a rate of 4.125% solely to increase that overage to, say, .975%, then this is clearly a violation of the rules. The client still needs to receive the best available priced rate. If overage exists, and it almost always will, I see nothing wrong with the company electing to use these funds to help offset expenses or losses. As long as the LO is not directly compensated – and I do believe that quarterly bonuses fall into this category – then the company should have the right to determine how to spend their money.”


Glen T writes, “Just thought you would appreciate this. You mentioned below that there is about 270 billion in outstanding auto loans – just in the top ten.  I suggest that none of that money should have to be paid back due to modern thinking on the subject,  especially considering the Richmond, CA announcement about threatening to use (and actually intending to use) eminent domain to relieve underwater borrowers. I contend that auto loans are underwater from about the minute you drive the car off the lot.  Further, the rate of depreciation is about equal to your monthly car payment since once the car is paid off it basically has no value.  Therefore, each month the lender should be writing off an amount equal to your car payment.  After 60 months of these wash-outs, the car is yours free and clear!”


Joel Veenstra with Titan Capital Solutions observed, “Hi Rob – I was reflecting on the date of 8/1 and thinking back 6 years ago in 2007.  In my opinion, it was one of the most significant days in capital markets and mortgage banking history. As I recall, August 1, 2007 was the day when all private trading of MBS’s froze.  I recall speaking to our trade desk that morning and learned that there were no private trades happening and that it was deadly quiet throughout the industry.  As we all know, this sector of our industry has not recovered fully since. 8/1/07 will be a day that I remember throughout my lifetime.  I for one am glad to see the private securitization market becoming healthy again and I am optimistic we will continue to see positive growth and restoration to this sector!”


Steven Lovejoy, with Shumaker Williams, chimed in on the definition of applications, “Hey, you haven’t talked about state law definitions of ‘application.’ For example, Maryland law, applicable to non-depository loan origination companies licensed by the State, says you have an application when the applicant requests that the licensee obtain a mortgage loan for him or her, and the licensee agrees to so. However, the Maryland examiners start their exam analysis by treating the pulling of a credit report as the date of the application. Pennsylvania has, in the past, taken the position that if you collect enough information to pull a credit report, you have taken an application.  These state definitions are important because ‘taking an application’ requires that the individual be licensed as a LO through NMLS, and may also trigger deadlines for providing state-mandated disclosures and agreements to the applicant. So, the federal side is only half the story.” Excellent points, and thank you. No wonder we’re all confused.”


A VP of mortgage compliance and QC of a well-known west coast investor contributed, “I read with interest the commentary on the need for a clear definition of application.  Given the significance of the application date in terms of disclosure delivery and waiting periods, a clear and uniform definition would be helpful.  Much has been said regarding the RESPA definition and  the six pieces of information, however, what is often overlooked in the definition is a seventh item; ‘and any other information deemed necessary by the loan originator.’   As you can image this really muddies the waters. Another important aspect of this discussion is how the lender documents the date at which they have an application.  The general consensus is the application date is the date entered by the LO on the loan application. You would be amazed how many initial applications we see that are not signed by the LO and/or not dated.  LOs continually fail to see the relationship between this date and compliance with RESPA and TILA.  [RESPA 1024.2 Definitions Application means the submission of a borrower’s financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower’s name, the borrower’s monthly income, the borrower’s social security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application.]”


“The CFPB went over the definition of an application about a year ago, when it was trying to figure out where loans came from. (The CFPB seemed stunned – I think they just thought you ran an ad and the phones rang.) I do not believe the CFPB understands the importance of Pre Approvals for the borrower, realtor and seller, or the difference between a pre-qual and a pre-approval. Sure it’s just an opinion, but if the LO is good and the borrower honest and forthcoming, the process saves time and money for the buyer and sellers. Since almost all loans are F&F, FHA, VA or USDA, why don’t they just mandate an ‘application’ as the completion of a 1003 and the appropriate disclosures (listing the disclosures)? It is a public relations mess, from my perspective. What other industry can’t define the most basic process like this? The government wants to do away with Fannie and Freddie, but have mortgage lending rely even less on the government and more on private sources…we all look to the government to define ‘application’ and they have a half a dozen interpretations, not even counting state-level differences. And this helps the borrower how?”



Newlyweds Boudreaux and Marie on their honeymoon trip from their little village on the bayou in south Louisiana. They are nearing Breaux Bridge when Boudreaux puts his hand on Marie’s knee.  Giggling, Marie says, “Mais, Boudreaux, we married now.  You can go farther dan dat if you want to.”

So Boudreaux drives to Lafayette.




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Rob Chrisman