Feb. 1: Letters on EPO penalties, compensation schemes, HARP revisions, and so on

It is tough to find any TV character ever had it better than Thomas Magnum. On Magnum P.I. his loaner car was a Ferrari 308, he drank at his buddy’s bar, and he lived in the guest house on a Hawaiian estate, all for free! These things might explain why I grew a mustache back in ’86, and drove a ’79 Datsun 210 Hatchback – the next best thing. Cool cars and cool facial hair aside, Robin Masters’ estate, commonly known as the Anderson Estate (it has been owned for decades by former local politician Eve Glover Anderson), or Pahonu to locals, went on the market at the beginning of the year. List price: $15.7 million: http://www.cbpacific.com/m/IDXDetail.aspx?mlsnum=201400772&city=Waimanalo&address=41505-Kalanianaole-Highway&state=HI&page=3&mlstableid=CBPACIFICPROPS&sp=y&segmentid=3656570&uid=64453.


“Rob, we are a mortgage broker and have been forced to sign an ‘early payoff penalty’ clause with all our lenders in which we will pay all YSP back to lender if a loan is paid off for any reason within 6 months of closing. In recent case, a loan is paid off 10 days short of 6 months and I have to pay the lender several thousand dollars. What is your opinion on this? Are lenders having an EPO penalty with Fannie and/or Freddie? If yes, is that 6-month? It is really unfair to a broker like us! Could we bring it to the attention to the CFPB?”


First off, yes, you can always report anything to the CFPB. Just Google “CFPB Whistleblower.” But I doubt if you’ll go very far. I have heard numerous cases of this, so you are not alone. Let’s start with your term “forced”. Courts have agreed that brokers sign agreements because they believe the advantages of doing business with a particular lender outweigh the disadvantages, and they enter into agreements without coercion. In other words, brokers knew the risks, and accepted those in order to take advantage of pricing or products or service offered by the counterparty. It is also doubtful that “all” lenders operated in concert with each other. Any investor bringing a loan onto their books prices that loan believing they will earn the servicing income for a given period. My guess is that six months is not in their assumptions, and to pay a broker 1 or 2 points for six months of income on .25% (divided by half, since it is only half a year) makes no economic sense whatsoever, and therefore the penalty. Regarding the 10 days – well, that is arguable, but if you were the one that refinanced it, it was poor planning. Sorry to be blunt.


DJ writes, “Regarding the ‘pick a pay’ comments.  If my memory serves me correctly, on the (only) conference call that the Federal Reserve had to try to explain the (stupid / ill conceived – OK, I’m being snarky) LO comp scheme, the lawyer for the Fed answered a direct question about whether 2 loan officers sitting next to each other at the same company could be on different comp plans with a YES.  In practice, since all lenders make each broker select a comp plan for most or the entire broker company, it is difficult to actually do this, but I’m not sure it would actually be against the LO comp rules. Now, if we get into disparate impact testing for discrimination, any broker shop might risk action for allowing  loan officers to vary much from any others on the basis of anything other than seniority, specialization in a particular product line (like construction / perm or 203K loans), geography,  or some other defensible reason.”


“Hi Rob, I have written to you a number of times about the shortsightedness of HARP 1&2, both from the restrictions of the programs and the anti-small business manner in which they were instituted. It was my humble opinion that HARP 1&2 were less to aid the consumer and more to aid the servicer. After 26 years of originations, management, observations and directly interacting with regulators I have come to understand that everything that emanates out of DC is in the name of good, but with ulterior motives, sadly. It is often at the expense of the consumer and small business, although it is quite often that this sector is the political talking and rallying points. Look at HARP 1&2, both excluded HELOCs. HAMP excluded second homes, but included investment properties. Why? Getting back up on the soapbox here, HELOCs are the neutron bomb of this century: they take out the borrower and leave the homes. I believe the HELOCs are as much to blame for the collapse as the sub-prime. I saw payments triple in months.  If Mr. Watt truly wants to institute a change that will impact the masses of American homeowners still in difficult positions, the following must be included in any revision to HARP: all loans originated prior to 6/1/2011 including but NOT limited to GSE loans, i.e., those that were put in portfolios or packages, HELOCs must be allowed to be included, allow refinance of prior HARP loan refi’s,  no LLPA, no DTI restrictions if the loan has been current for 12 months and common sense underwriting. I am still hearing about individuals liquidating retirement accounts to supplement their income to meet their mortgage obligations. Now some might view this as responsible individuals, however, this is nothing more than pushing the problem down the road to a different sector of the government when these people need to retire.”


Last Saturday the commentary noted, “After a discussion that I had with two CFPB officials yesterday, my view is that it appears that nowhere is it written that consumer/borrower paid compensation may not be different than lender/creditor paid compensation. Removing the double negative leads to borrower paid compensation may be different than lender paid compensation.”


Daniel M. Shlufman, Esq, with Classic Mortgage LLC writes, “Rob: With respect to amounts paid on LPC vs. BPC, though I can’t say how the CFPB will eventually decide or change this, I am pretty confident on the way it should be decided based on the intent of the Anti-Steering provisions. That is, that these two types of compensations should be treated differently.  The Anti-Steering provisions were designed to prevent brokers from raising interest rates on the borrowers in order to obtain additional compensation (previously, accurately called Yield Spread Premium due to their impact on the rate) from lenders. These anti-steering provisions were not designed to limit the fees that the brokers could make in a properly disclosed agreement with a borrower.


“If a broker was charging a fee to the borrower (and not collecting a fee from the lender) as long as the borrower agreed to the amount of this fee (and it was not so high as to create a high cost loan or violate any other law) it was permissible.  Note, the Qualified Mortgage Rule has changed this slightly with the 3% cap on all broker/lender fees. But, even prior to QMR, lenders generally capped the BPC fees at 2.5-3.5% in any event. The incongruity, however, is that no matter how much of a fee the broker receives and whether it is higher or lower in BPC or LPC the amount due to the MLO based on the Loan Officer Comp rules will be the same. For example, on a $200k loan, with the loan officer comp at .75, the MLO receives $1,500 whether the broker gets paid 2% (or $4,000) on LPC or 3% (or $6,000) on BPC! So, these distinctions between LPC and BPC will never benefit the MLOs. They generally will be purely related to increased profitability of the mortgage brokerage company!”


His note wraps up, “The irony is that Dodd Frank and the regulations thereunder will actually end up hurting the very people who are the source of the business relating to the companies’ profitability!  The mortgage industry may now be the only business where the ‘rainmakers’ are mandated by law to potentially be inversely rewarded for increased profitability of their company (and vice-versa)! Beyond ridiculous! So, all that said, I believe that under the law the amounts paid on LPC and BPC are permitted to vary.” Thank you Dan.


On a similar topic, And Steve K. writes, “I am going to take issue with your interpretation of the compensation regulations and, to be more specific, your comment, ‘There is no rule that says all transactions must pay the LO the same amount/way.’ While I ‘think’ I understand the literal interpretation of that comment, the reality is that the rules are in place to ensure that ALL borrowers are treated equally when it comes to lender compensation. If you have a system that allows a broker to go to Lender A, where pricing allows him to make ‘x’ amount of money, or offer a lower rate due to a compensation differential than he would by going to Lender B, then we are back at square one, with brokers allowed to use a specific lender, or charge a different rate, based on compensation.


“In fact, one of the main reasons for our rules these days when it comes to compensation is to create an environment that avoids the statement you made. Yes, loan officers who want to be able to earn a certain amount of money per transaction, thus opting for a specific compensation bucket (let’s say 175bps), will price himself out of jumbo loans because he has to be paid on the same compensation plan regardless of loan type or size. To combat that, however, the LO is also allowed to place a compensation CAP on his earnings ($10,000 as an example). So rather than having to price out a $1M loan that gives him $17,500 (175bps), thus removing himself from a competitive rate, he may only earn the $10K. This allows him to select a more competitive rate while remaining true to the compensation regulations. It is true that brokers may elect to earn different compensation for different wholesale lenders, but the LO is still restricted to the same compensation, regardless of the pricing/comp plan agreement between the lender and broker.”


And this note on what promises to be a very hot topic in some markets: builder incentives. Look for more on this next week, but I received this note. “What really bothers me is the practice of homebuilders offering a ‘credit’ to the buyer IF they use their mortgage company. How can that not be coercion and an obvious kickback to the buyer for using in-house services? I thought that the buyer was supposed to be able to select his own lender without incurring any harm? Isn’t the builder supposed to offer a benefits package to encourage buying the home only, regardless of financing? Should Buyer ‘A’ suffer because he wanted to use his lender, while buyer ‘B’ gets $10,000 in upgrades ‘free’  by using the in-house lender? Now…I have no problem with this IF the in-house lender is able to meet another lender’s rate/cost. Of course, that is rarely available (either the lender ultimately matches it at the end due to pressures or the buyer, too afraid of losing out on the home, doesn’t hassle it). I say, let’s start seeing more heads roll and then, maybe, we will start seeing some of this stuff go away – just like we’ve started to see more and more mortgage companies backing off the ‘creative utilization’ – aka kickbacks in the form of bonuses to loan officers who continue to keep pricing overages ‘in house’ (aka, creatively in their pocket).”



Language discrepancies naturally arise in different geographic regions, like the raging “pop” vs. “soda” debate. But the South undoubtedly takes the cake. Conversations in the South might befuddle anyone not born there, and here is part 5of 5 of some of the more “interesting” Southern sayings with explanations.

13. “He’s got enough money to burn a wet mule.”

In 1929, then-Governor of Louisiana Huey Long, nicknamed “The Kingfish,” tried to enact a five-cent tax on each barrel of refined oil to fund welfare programs. Naturally, Standard Oil threw a hissy fit and tried to impeach him on some fairly erroneous charges (including attending a drunken party with a stripper). But Long, a good ole’ boy, fought back. He reportedly said the company had offered legislators as much as $25,000 for their votes to kick him out of office — what he called “enough money to burn a wet mule.” Northerners may not know what that means, but at least know where it comes from.

14. “Y’all better get on that like a duck on a June Bug”. When asked what that meant, “Y’all better hurry”! Apparently, ducks really like June Bugs, a beetle that is prevalent in the summer and they chase after them.

15. Bless Your Heart

Almost everyone knows Southern women drop this phrase constantly. But it might not mean what you think it means. In reality, the phrase has little to do with religion and more to do with a passive-aggressive way to call you an idiot. Depending on your inflection, saying “bless your heart” can sting worse than any insult.

16. Lastly, Brandie Y. sent: http://www.joe-ks.com/archives_feb2003/Yallbonics.htm




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Rob Chrisman