Feb. 8: Letters on bank vs. non-bank LO licensing, early pay off penalties, the difference between rules and laws, etc.

Will Rogers reportedly said, “The difference between death and taxes is that death doesn’t get any worse when Congress meets.” Derek B writes, “I am wondering if anyone else thinks the statement ‘…the CFPB has issued a final rule that amends the Equal Credit Opportunity Act…’ is cause for concern. I thought only the Congress could amend laws. I understand that the CFPB operates without Congressional oversight (which is another concern) but is it the ‘new normal’ that an agency of the Executive Branch now has legislative power?  If so, has Congress become irrelevant and is the industry been so intimidated by the CFPB that it won’t fight back?  It seems to me that lending in general is in a slow death spiral caused by ever increasing draconian regulation. It seems to me that what is going on can only be described as the R.R.O.B. principle.  Restrict, Regulate, Outlaw and Ban!”


[Editor’s note: I am no attorney, but as I understand it, the main difference between rules and laws is the consequences associated with breaking them and how penalties are assessed. The weight of a law is much heavier than the weight of a rule: laws are enforced by a higher governmental office, usually the police, prosecutor’s office, or court, whereas rules are often enforced, and penalties assessed, by the institution that makes them. According to the internet, where everything is true, “An act is an official copy of a statute or regulation that is initially presented in the form of a bill and after being verified it is passed in the process of a legislature. An act is enforced in a legal manner. In context to an act, rules define the guidelines that must be followed for the successful implementation of the act.”]


I am still wondering what the thought process is with the CFPB’s lack of enforcement requiring Loan Officers with bank owned mortgage companies becoming licensed.  As a regional manager, I have interviewed LO candidates who failed their test or background checks for licensing and then they walk down the street to a bank owned lender and go to work.  So how does working for a bank lender make an LO a better qualified LO?  But the more important question I have for the leaders of bank owned mortgage companies; if your bank is committed to providing the best trained loan officers in the mortgage business why doesn’t your bank require your LOs to pass the licensing test, and the same background requirements that each state requires to become licensed?  Why does a government agency have to mandate or make it a regulation for a bank lender to require LO testing if they truly want to provide their customers with the most ethical, knowledgeable and best trained loan offers? All Realtors have to be licensed and all appraisers have to be licensed, so what is the thinking with excluding loan officer with depository lenders?  The issues that brought about Dodd Frank and the CFPB were not restricted to just non depository lenders; the bank lenders were right in the middle of it too.  I think we all want a level playing field and the goal should be to provide the most ethical and knowledgeable loan officer so our consumers are protected! The CFPB is supposed to be all about protecting the consumer; not protecting the banks.”


[Editor’s note: banks, and bank employees, have their own set of rules, background checks, testing, and so on. And they will often argue that their standards are higher than a mortgage banks. But you do bring up a great point, and Dave Stevens, in a speech two days ago, mentioned that reconciling business-specific LO discrepancies is on the MBA’s agenda for 2014. So stay tuned!]


And from Alabama: “I truly believe the extinction of the independent lenders would be detrimental to consumers if the commercial banks were the only source for mortgage lending. I have worked for both, and have been in the board rooms at the quarterly bank meetings. Trust me the commercial bank executives do not understand mortgage lending.  But no one has a stronger lobby than the banks, and with the MBA being so fragmented, the National Board of Realtor Association is our best hope.  That is kind of scary!”


A producing branch manager from Florida writes, “I have a very good understanding of all the new and older regulations that have “wounded” our industry for the past several years. There are two specific items that I just can’t get my arms around and both concern Dodd/Frank. Issue one is LO compensation where a 100% commissioned loan officer is willing to take a commission reduction based on a consumer shopping rates. To be clear, why can’t an LO offer up some of the compensation when trying to get their next deal? It seems to me that the entire purpose of Dodd/Frank was/is to help consumers get the best rate/price on every transaction. As the market becomes even more competitive and LO’s fighting over deals based on price, 70% of commission earned is better that 0%. In this scenario, the consumer wins as they will most likely get a better rate as the company may be more inclined to close the loan with less revenue know they do not have to pay full commission.


Issue #2 involves not being able to ‘hit’ a LO for various things that may have been disclosed incorrectly (non-collection of required fees or initial mistakes in disclosing costs at disclosure). Correct me if I am wrong but if the loan is ‘under-disclosed’, the LO still receives full commission and the company takes the monetary hit (100%) to their bottom line. To make this EVEN MORE crazy, I know for a fact that many, if not all mortgage bankers have built in ‘re-capture’ language in their various compensation plans recovering commissions paid out to LO’s for early payoffs and early payment defaults. This seems totally against Dodd/Frank especially when a client pays off early or a loan goes bad. The LO did NOT underwrite the file nor issue the final loan commitment. The file was and is underwritten by a series of “folks” as it goes through the process and yet when the loan defaults, the LO is charged back their commission (they are being penalized monetarily on a transaction).


“The last segment of my narrative concerns Fair Lending. If an LO knows up front that a consumer will be paying off their new first mortgage in six months or so, they run the risk of having their commission recaptured by their company. Doesn’t this (EPO penalty) run counterintuitive to Fair Lending in that an LO most likely would persuade a client NOT to make an application for fear of spending hours of time to get the loan closed only to have it taken back when the loan is paid off early? The above questions seem to be part of the risk of being in the mortgage business and yet the ultimate loser is the commissioned LO on the street trying to make a living.” In other words, in the event of a drop in rates where the consumer benefits from refinancing, the LO may not recommend the borrower refinance since the LO and lender will be assessed a penalty – an interesting take on the situation.


“Rob – you may want to remind your readers that most of the EPOs that are pushed to them are only because those of us that sell directly to the Agencies are under a pretty severe premium recapture arrangement – and get this – the broker only has to pay back the net price – the Agency KEEPS the LLPA you have paid – in other words – you sell FNMA a loan for 105.00, but there are -3.00 LLPA so your net sale is 102.00 – if that loan EPO’s – FNMA charges 105.00!  We lose big time. Here is the link that explains FNMA’s position on recapture: https://www.fanniemae.com/content/faq/premium-pricing-recapture-fees-faqs.pdf.”


From Texas: “Hi Rob, Just wanted to comment on the mortgage broker unhappy about the early payoff requirements. You say there is no coercion, but each and every wholesale lender has this buyback policy in their broker agreements. If you are a mortgage broker, you have absolutely no choice in the matter. Either you sign the agreements and hope you do not have any early payoffs, or you get out of the business. There are no other options. These broker agreements also make you liable for any fraud that may occur in the loan process INCLUDING the appraiser (you have no idea who this person even is until the report is completed and the lender gives you access to the report, all of the Wholesale Lenders employees including their underwriters and anyone else who might have a hand in the transaction!  Sure, no one wants that early payoff and the lender does not care who solicited the refinance or even reason for payoff without refinance. We had one years ago where the borrower was a CPA, his mother died, leaving him a nice inheritance. He did the math and concluded it was in his best interest to pay off the mortgage loan. He paid off within a few days of that early payoff period. Of course, the lender asked for their money back. We chose to send a written letter to the lender explaining the circumstances and asked for a waiver. The account rep refused. We chose to end the lender relationship rather than forfeit well-earned funds. To give the other broker benefit of the doubt, they probably had no idea the loan was going to pay off.”


A broker from Southern California wrote, “I am a Broker who has paid off 3 EPO’S in the last 6 months from 3 different lenders. In all cases they were from 5 to 6 months old. I did not give in to the demand and was able to negotiate with all 3 lenders and cut the EPO by half or a 3rd of the demand. I am not sure if this was because the loan was closer to 6 months or perhaps it was the volume we did with the lender?”


And, “Most of the major lenders allow you to buy out of the EPO’s for a fee per loan.  For example, Wells Fargo charges us 1 basis point on all of our production to eliminate the EPO.  Chase charges 2 basis points to waive the EPO and 2 to waive the EPD. Obviously if you have a poor pull through rate or a high payoff rate, you won’t get this or you will pay substantially more.  But people should ask their lenders for it.”


And, “While I understand the reasoning behind the penalty, I recently had an investor tell me that I would have to pay the penalty for lack of two days. I offered to pay the interest for two days, was told no, but they would split the fee with me. I sent this investor more than $220Million in loan volume during a two year period and felt like this was an indication of how little they valued the relationship. In this situation, our borrower was selling his home. Fortunately, he was buying another one; we were doing his mortgage, and he worked with us to reschedule his closing for a few days later.”


“On the EPO topic, I have been told the FNMA is tracking prepay speeds down to the TPO or even originator level. My main investor sells mostly to FNMA, and apparently I have come up on one of their ‘reports’ for this type of activity.  (Not that this practice is illegal, and it is completely within the letters of the agreements, but if a loan pays off on the 181st day, it does cost the investor money.)  I keep a very accurate database of my clients and their mortgage positions, so it is natural that I will reach out to a client whenever there is an opportunity to restructure their loan. Even if a client can shave 3/8th off of their rate and not incur any expense to do it (not rolling costs in to their loan, but covering them from the premium) it is ALWAYS worth it. With that said, I do foresee a future where pricing to a particular TPO will vary based upon the prepay speeds of the loans that they originate.”


Lastly, “All these broker loan officers who complain about EPO back charges don’t understand the business of long term lending.  Mortgage loans are priced for long term profits, yet originators only see their short term profits.  They need to understand they are not selling cars, or houses.  The profits on acquiring and servicing a mortgage are not realized in 6 months or a year.  EPO’s are a cost of doing business.”



A man and a woman were having a quiet, romantic dinner in a fine restaurant. They were gazing lovingly at each other and holding hands.

The waitress, taking another order at a table a few steps away, suddenly noticed the man slowly sliding down his chair and under the table but the woman stared straight ahead.

The waitress watched as the man slid all the way down his chair and out of sight under the table.

Still, the woman stared straight ahead.

The waitress, thinking this behavior a bit risqué and that it might offend other diners, went over to the table and, tactfully, began by saying to the woman, “Pardon me, ma’am, but I think your husband just slid under the table.”

The woman calmly looked up at her and said, “No he didn’t, he just walked in the door.”



(Copyright 2014 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