Feb. 16: Letters on forecasts for 2019, the role of appraisals, False Claims Act policy, and LO comp

I know Monday is a national holiday, like Thanksgiving or the 4th of July, so who’s checking emails this Saturday? Darned if I know, but it’s a quick read. (When I was a kid, we had both Lincoln’s and Washington’s birthdays off – those were the days!) There continue to be lots of issues in residential lending, so let’s get going.

LO Comp: the issue that just won’t go away

That whole LO comp thing is “all put to bed,” right? Wrong. I am still hearing that there are issues out there, ranging from companies trying to fine tune their own plans all the way to finger pointing and name calling at other companies, and saying things like, “I heard that some attorney said point banks are just fine!” In a timely note mortgage attorney (who also does company-specific training) Brian Levy with Katten & Temple LLP cabled, “Rob, TILA’s Loan Originator Compensation Rule is a regulatory disaster, but it’s helping to put my kids through college (RESPA is too). LO Comp is an ill-conceived, overly restrictive, anti-capitalist regulation which hamstrings the mortgage industry in unintended and complicated ways. Designed to address the steering concerns of the subprime era, LO Comp wildly swings an axe where a surgeon’s scalpel is needed (or perhaps just some aspirin) by entirely prohibiting the ability of sales organizations to incentivize or disincentivize salespeople based on loan profitability or any proxy for profitability.

“Fundamentally, LO Comp runs counter to the sales culture of most mortgage companies, pitting compliance against business instincts. The Rule assumes that any variation in LO compensation results in steering the consumer to a bad loan choice, regardless of whether, in fact, the loan is better, worse or indifferent. So, the Rule requires loan officers to be paid the same for every loan regardless of the revenue that may result to the mortgage company. Originator compensation, however, is the biggest single expense for all mortgage companies.  As a result, the mortgage industry has been complaining about LO Comp (and seeking ways around it) since the Rule was initially implemented in 2011. The issues are particularly acute today due to margin compression forcing lenders to look for ways to remain competitive with commission rates while at the same time maintaining profitability on a wide range of products.

“There are many ideas that, if properly structured and implemented, can mitigate some of the adverse effects of the Rule, but smart lawyering alone will not solve many of the fundamental and common concerns. With leadership at CFPB now more willing to hear industry concerns, the Mortgage Bankers Association recently sent a letter to the CFPB practically begging them to amend LO Comp to enable some common-sense items that LO Comp currently prohibits. Specifically, MBA asked for relief on things like paying less for state housing and bond loans and to allow LO’s to reduce commissions to provide consumer discounts and to pay for errors. At this time, although CFPB representatives have verbally expressed sympathy for the industry’s concerns, no official response has been forthcoming. No doubt, the MBA would not bother to send such a letter to CFPB requesting changes if smart lawyers could simply find ways around the challenges.

“Yet, I hear on almost a daily basis that ‘others’ in the industry are not waiting for the CFPB to act. For example, some lenders appear to be seeking to justify reducing commission rates on certain types of loan products by assigning the loan to the ‘house/company generated channel.’ Ironically, the same product-based “logic” could be used to increase commission rates for subprime loans (that, of course, was the ‘whole enchilada’ LO Comp was intended to prohibit). Meanwhile, giving LOs pricing flexibility by reducing commissions (or having any kind of a “point bank”) are clearly prohibited and have been the focus of all CFPB enforcement actions to date.

“To be sure, the self-generated vs. house/company generated distinction can work to vary commissions in some key instances, but it requires evidence of the loan’s source being different from the LOs normal business generation activity. Varied compensation programs such as the house channel idea, however, need to be able to survive the second prong of the ‘proxy rule’ articulated in the CFPB’s 2014 Rule. So, for the house channel idea to work, the company must be able to show that the LO had no influence over how the loan came in the door. A product selection or type of loan is simply unlikely to be seen as a ‘channel.’ Contrast that analysis with the proxy rule’s application to purchase transactions vs. refinances. It seems virtually impossible for an LO to influence the borrower’s choice between refinance or purchase: e.g., ‘No Mr. & Mrs. Smith you shouldn’t buy that new house, you should refinance your existing home instead.’ I have heard that CFPB has changed its previous position on the application of the proxy rule to the purchase vs. refinance distinction, but there has been no official statement on that issue.

“The penalties under LO Comp are governed by TILA and include statutory damages, attorneys fees (class action) and the claims can extend for the life of the loan. CFPB, state regulators, consumer class action attorneys, your own whistleblowing employees (especially former employees) and even warehouse lenders may all raise LO Comp concerns, so hoping violations will avoid detection is a dangerous strategy. Moreover, since LOs can be held personally liable for damages, if the employer is out of business, originators could be left holding the LO Comp bag.  Be careful out there.” Thanks Brian!


This week news broke from the DOJ and HUD settled a claim with Sierra Pacific Mortgage under the False Claims Act by “agreeing to pay the United States $3,670,000 to resolve allegations that it violated the False Claims Act by falsely certifying compliance with Federal Housing Administration (FHA) mortgage insurance requirements in connection with certain loans.” The release finally ended with, “The claims settled by this agreement are allegations only and there has been no determination of liability.”

Sierra Pacific reacted: “As you know, a number of larger lenders have also settled claims with the government under this act. The False Claims Act has been used as a tool by the DOJ to punish lenders for alleged abuse during the housing crisis of 2007 – 2008. HUD reviewed nearly 200 loan files originated between 2007 and 2012 and found alleged issues with 16 loans. We have aggressively, contested these claims, but rather then enter into a protracted legal dispute with the Federal Government, we decided to settle this claim admitting to NO wrong doing. Sierra Pacific Mortgage has always originated quality and compliant loans that serve our customers and meet the requirements of our secondary market investors. We will continue to do so.”

I received this opinion letter from an industry vet. “Sierra Pacific joins the growing list of DOJ victims! The DOJ wins only, and I mean only, because it has access to taxpayer assets to hold hostage and black mail good companies throughout the U.S. It is truly a travesty of our America. Without any regard to the occasional human mistake, this group of terrorists are allowed to continue this practice.

“I wonder how this would proceed if DOJ was obligated to pay exorbitant fines for useless processes. It is sad how this has worked into the business world without cause. Through my position I know of several lenders who wanted to contest the proceedings. All were informed, off the record, ‘Go ahead and fight us, we (the DOJ) will drag it out over enough time to put you out of business.’ The strangest part was that each settlement was an amount firstly from the balance sheet of the client without any basis of wrong doing other than what amount can they afford to pay. Seriously no kidding.”


On appraisal trends and bifurcated appraisals, from New York James Scholl with Aaron Appraisal writes, “Appraisers are the only firewall in real estate and we are removing them from the homes? Our appraisal inspection takes about an hour on average for a simple home and most appraisers take about 100-125 photos. The home is carefully measured according to standards such as ANSI. We note condition, materials, upgrades, smells (pets, etc.), floor plan. We do a thorough inspection of the lot and the neighborhood as well.

“Now we are told anyone can do the inspection. Really? If they prefer real estate agents, they should read NAR’s Danger Report. If they prefer Home Inspectors remember Home Inspectors get most of their work from agent referrals who are paid when the home closes.

“Why don’t the lenders and regulators want the appraiser in the home? If appraisers don’t go to the homes and neighborhoods their expertise will atrophy over time. The pay for appraisers per bifurcated appraisals is $25-$50. Appraisers will be going out of business in record numbers if the product grows in acceptance. Some say appraisers will simply do many more appraisals to make up the difference. Where will these extra appraisals come from? The number of homes sales and refinances won’t grow any larger so, again, where would these appraisals come from?

“If the real goal is faster, cheaper appraisals change the scope of work. About 2005 an appraisal took about 4 hours on average and now it takes about 9 hours. So perhaps modernize Fannie Mae’s old 2055 form (Rev. 1996) and reduce the scope of work at the same time.

But if the real goal is to do away with the only firewall in real estate over time by making the job untenable, unprofitable or an anachronism God help us all. Years ago 10,000+ appraisers signed an online petition to halt the excesses prior to and during the last meltdown. There is a new one on change.org and there are already over 5000 signatures. Finally, why don’t the lenders and regulators want the appraiser in the home?”


Talking about guarantee fees from the 1980s is so… passé. What are folks saying about 2019’s environment and beyond?

Will talking about something make it happen? The likelihood that the US will go into a recession in the next 12 months rose to 25% this month, compared with 20% in January, according to a Reuters poll of economists. Most of the respondents said they expect the Federal Reserve to leave interest rates unchanged at its March meeting.

For interest rates, “What changes to interest rates are expected for 2019? What influence might those rate changes have on lender purchase and refinance volumes? Exactly how much would lending rates need to decline in order to spur a significant pickup in refi activity? Get ahead of the curve with answers to these important questions and more in MCT’s Economic & MBS Market Outlook for 2019, a data-driven forecast from Director of Analytics, Bill Berliner. (There’s an MCT webinar, “5 Ways To Improve Profitability” on February 20 at 11AM PT. “Receive actionable tactics that address both short and long-term profitability and an electronic summary of Jim Deitch’s new book, ‘Strategically Transforming the Mortgage Industry.’”)

Dr. Rick Roque has his thoughts on the present and future state of retail mortgage banking. Addressing the competitive nature of mortgage banking today, Rick noted, “Companies are hurting today, especially largely conventional mortgage banks or upper Midwest firms that are either wholesale lenders attempting to do retail, or under-capitalized mortgage banks struggling to compete. And often, owners of such companies either become humble and open to change or they dig down and point the finger of blame at the market, certain leaders in the company or some other outside factors – they blame everyone else but themselves. This is the time to be innovative and be humble regarding the future direction of your company. The way you ran your company in the last 10 years is NOT the way you should run your company in the next 10 years. Those companies resisting change will only suffer.”

Rick’s note went on to discuss companies his thoughts Virginia’s Atlantic Coast Mortgage (ACM), a regional lender who Rick believes will become a “national player” in residential mortgages. “Interestingly, in my opinion ACM is one of the most innovative mortgage banks that I’ve come across, having a platform truly setup to support top producing loan officers and branch managers. ACM was founded by Timur Tunador, who, with his partners Jon Coy and Patrick Collins, have built a company where Loan Officers can thrive and take their business to the next level. I find Timur’s group to be forward thinking and very practical in the way they run their business. ACM’s platform is unique as they have set up 24-hour branch support which is vital for Branch Managers when changing platforms. Their benefits, including their 401K matching, are better than I have seen in any independent mortgage bank and AMC’s product offering is much wider than the competition along the East Coast. I am really impressed with them.

“To be competitive, you have to have be well capitalized and have mature systems like a depository, but close loans like a mortgage bank. ACM is not looking to be the biggest, but simply the best in any market they enter. Quality versus quantity is what matters to the group at ACM. They have become a one of the top mortgage banking operations in one of the most competitive markets in the country and I think they will be a force to reckon with as they move into different markets.” (Rick is a retail mortgage banker whose efforts between 2015-2018 has helped to identify, add, and onboard more than $2.8B in production for companies he has consulted with. He is a national speaker on US mortgage market trends and retail mortgage banking growth strategies and execution.)

Lastly, XINNIX passed along that The Mortgage Collaborative shared the results of its annual conference survey, revealing the top 20 issues mortgage lenders believe will have the biggest impact on their business in 2019. The survey was completed by over 250 mortgage professionals, mostly leaders, across the nation.

A man is applying for a job in a circus. The interviewer asks, “So what can you do?”

“I can do a really good bird impression,” replied the man.

“Oh we already have people who do that here, we won’t be needing you for that.”

“Oh well,” the man said sadly, and flew away.

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, “How are You Going to Compete.” 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.


(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of 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 2019 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