Jan. 31: Notes on the value of APR, pros and cons of bond programs, the value of an LO, lenders educating politicians

Last Saturday the commentary mentioned bond programs and their impact on lenders and LOs. It prompted Bill Cosgrove, chairman of the MBA, to write, “Thank you again for bringing attention to the issue of LO compensation for bond programs. This has been discussed many times with state bond program directors and the CFPB. Today, many lenders do not promote the bond program for this very reason. A second issue outside loan officer compensation is the cap on underwriting fees/lender fees that some states have adopted. This issue has not received the attention it deserves. A few states cap lender fees at $500 or less. When employees want raises (imagine that!) or health care, costs increase. It’s well documented the cost of originating a loan has skyrocketed and capped lender fees make participation or promotion of these programs a nonstarter.”


His note continued. “20 years ago, the bond programs actually created new responsible homeownership by offering an interest rate lower than market by selling bonds. Today, that is not the case. Today, most of the bond programs offer nothing other than down payment assistance. This additional risk profile is assumed by the lender that also accepted much less revenue to originate the loan due to capped lender fees and loan officer compensation that eats up much of the revenue – not very appetizing to most lenders. Today many state bond programs do nothing but compete in the origination space with the private market and do very little to promote new successful homeownership. I do not have the data on my fingertips but from what I see participation in these programs have significantly diminished over the last decade.


“Suggestions or changes could include exempting loan officer comp rules from bond programs, allowing lenders to pay loan officers less for bond loans commensurate with the reduced revenue. Or to remove state regulated underwriting/lender fee caps for the program. And allow the private, competitive market to determine lender fees.” Thank you Bill.


Are LO’s on their way out, soon to be replaced by computers? Not according to several. Manny Gomes, a branch manager with Norcom Mortgage writes, “Rob, I read your report from this past Saturday and simply cannot agree with the statement Technology will replace the function of a loan originator within the next 5 years. I am 31 years old and have been a 100% commission earning originator since 2008.  That is right, I got into the business during the melt down worked hard, and not only survived but thrived! Let me just say the meltdown has been blamed on many things but no one has truly mentioned what I believe to be the only true cause of the meltdown and that is the lack of fiscal education in this country.


“A mortgage product would not exist or at least for very long if there was no consumer demand for it. Now consumers should be smart enough to know how to budget money, pay bills on time, sufficiently save for retirement, and not over extend themselves by locking into a monthly housing payment which puts them in a position where they are living pay check to paycheck. People should have known better than to take on mortgages they did not understand or purchase a home with a monthly payment they never budgeted for. I cannot tell you how many times I have counseled clients with no true savings history who want to purchase a home with 50% to 100% payment shock and when I ask, ‘What makes you think you can meet this new monthly payment each month given your track record for saving money’ the response is almost always the same: ‘We feel we can handle it, we just may need to cut back on a few things’. The reality is most of the time on paper these clients can qualify for a payment they are seeking.”


Manny’s note finished with, “Loan originators have to be more than just an amortization calculator and a rate quoter. We have at the time of loan origination enough information to determine if the consumer is not only fit to purchase a home but also can determine if they are currently financially fit to one day retire with dignity. I am not saying it is our job to be a financial planner but  I do see is as our duty to provide a financial status reality check and plant the seeds of practical financial management in the minds of our clients. This is something technology simply will not be able to do. The simple fact is a very small percentage of Americans have their financial house in order due to the lack of financial education provided to them growing up. Technology may weed out weak originators who do not know how to sell or provide sound advice but I cannot see it replace the function of good loan originators anytime soon.”


And from Northern California was this note from an LO. “I know a handful of extremely motivated LO’s in my marketplace that are in their late 30’s and early 40’s. We know that having an army of solid realtors and other referral partners trumps all other business models. Most of my realtors will not work with clients that are “preapproved” with the Quickens of the world.  As the aging workforce starts to wind down, we will be ready. We will gain significant market share by simply hiring more staff and putting in some serious old fashion hard work.”


While we’re on loan officers, technology is in all of our lives and Lisa writes, “Is the comment about technology reminiscent of how DU will eliminate underwriters? I remember when we could get 8 decisions a day then with DU we cut that in half, paperless is still a challenge for some and rarely see an UW not print already at least part of a package for review and mark up. Love technology and always trying to design the most efficient processes but we’ve still got a long way to go to even accept what we have today. I am waiting for a truly disruptive model to revolutionize our industry.”


On whether or not the CFPB should beef up their ranks with employees having actual lending experience, Allyn M. contributed, “Relevant and real world experience driven. I agree that an experienced AE would be an asset to the CFPB and that the costs of loans are only driven up by extreme oversight and regulatory practices designed to create a more informed consumer. A quality loan officer will certainly make time to explain what the important documents are with in disclosure packages and provide clear ‘milestone’ moments where funds will be spent (like appraisal, credit report costs). Time loss in waiting periods only increases costs for the borrower and other parties involved. If only locks didn’t count weekends and holidays…It was extremely timely that you mentioned the loan re purchase requirement that lenders face. I just was explaining this fear factor to a Realtor. Real Estate sales agents are in our industry but, don’t take the time to listen long enough to understand the ‘why’ and learn more. They want to sell homes…. to everyone but, we have to explain why we have to say “No” to loan applications and why there are conditions for files that aren’t always ‘make sense’ conditions. It kinda goes in one ear and out the other when I explain that we don’t want to re purchase a loan for a deficiency. This means very little to the agent. They just want to close.”


Yes, regardless of what many politicians say about the government leaving lending alone, it won’t happen – which makes for interesting stories. Joe Adamaitis discussed lenders meeting their state senators or congressman. “Recently the new Prez of our local MBA and I went to meet with our Congressman. As part of the presentation, I had printed off the 1888 pages of the CFPB ‘Know Before You Owe’ rules for August 2015, and a sample loan application (90 pages of an FHA loan). We were both surprised to see his reaction in that: (i) he wasn’t aware of the rule and or its 1888 pages of guidelines (similar to another that unfortunately was passed before we got to read it) and (ii) his shock at what borrowers now need to read, sign and pay. We went on to talk about the increase in appraisal costs, compliance, technology, underwriting and processing fees etc., since the CFPB began its quest to reform the system in the name of protecting the consumer.


“I would suggest this to all our peers: Never assume that the state representatives for DC know what’s actually going on and if we all met with our reps (all congressmen, senators and others) it may have some impact especially after the Nov. elections. We cannot give up on reigning in the foolishness of young attys. writing legalese to confuse our business and we should be the ones standing up for the consumers, NOT the CFPB. I urge every local MBA President, FAMP, FAMB presidents to get out there and make the appointment. Get in front of them and take the time and effort to show them what it physically looks like as it really does make an impact.”


Yes, the CFPB’s move toward the consumer turned heads, especially as it ignored the annual percentage rate. And as we know the APR was created to make comparing loan programs easier for the consumer. But often we hear about a “nominal” APR and an “effective” APR. The basic calculation creates an interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. Usually the nominal APR is the simple-interest rate (for a year) and the effective APR is the fee plus compound interest rate, calculated across a year.


It led to…“Rob, are you hearing anyone question the value of the APR? I know that many of the regulators in government are highly educated ivy-league types and came up with a way to compare higher-cost/lower-rate mortgages to lower-cost/higher-rate mortgages.  Spreading the costs over the life of the loan as, essentially, additional interest seemed to be a good way to equate costs with rate and enable a direct, objective comparison.  However, I have two arguments with the mandated use of the APR concept. The first is the seemingly arbitrary inclusion/exclusion of particular costs in the determination of “finance charges” and the inability to determine with certainty whether certain costs actually should be included as “finance charges” together with the failure of the APR concept to have any relevance to ARMs reduce dramatically the usefulness of APR. The second, and more important concern, is that the concept of APR never resonated with consumers!  Consumers don’t understand APR and, when explained to them, they don’t care about it.  They still want to know the rate and the costs so they can weigh the importance of each in their heads and make a decision.  While the GFE is often perused by borrowers, I have yet to see anyone pay any attention to the TIL.  Nevertheless, nothing the government ever does gets cancelled or terminated.  And after decades of focus on APR, it seems that it will never go away because that would be an admission that APR involved decades of wasted time, effort and money.”



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(Copyright 2015 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