July 11: Thoughts on the paying LOs on profitability, health care costs, productivity, and declining foreclosures

Foreclosures, the CFPB’s enforcement actions & paying on loan profitability, health care costs for lenders, IRS liens, lender productivity… where do we start?


How about the thoughts on the Agency’s foreclosure process? From Colorado I received, “There is an increasing unwillingness on the part of FNMA, Freddie Mac or GNMA to require foreclosure as a remedy in cases where loans are serially non-performing. One can assume that this reluctance to foreclose is politically motivated and is intended to provide a benefit to those parties that are unwilling or unable to make timely mortgage payments. However, I would submit that this benefit must have been identified by lawyers, because any finance person realizes that foreclosure relief violates put-call parity. ‘Put-call parity’ holds that the returns are identical for a party holding a bond and a call option on that asset to those of a party holding the actual asset and a put option on that asset. Using some simple algebra, a loan is simply saying the lender owns the bond and the borrower owns the asset (let’s say a home), has a put option (the right to return the home and stop making payments) and is short a call option (the lender’s right to foreclose). Put/call parity is broken, however, when the lender’s call option can’t or won’t be exercised and the only logical result is that the bondholder will demand a higher return/interest rate in order to compensate for the missing call option. Thus, by trying to help one class of borrowers by offering foreclosure relief, we will all deal with the unintended consequence of higher rates for everyone.


“If you think about credit growth and contingent options a little deeper, the relationship becomes even starker when you consider low levels of credit growth in places that had debtors’ prisons (the ultimate option, calling away someone’s freedom) or more rapid comparative growth in states that were single action states than those that were not single action states…


“I think this logic also applies to how one makes a Sharia-compliant loan. The asset becomes a joint venture with one of the partners effectively owning the income stream (which is effectively the equivalent of the economic ‘rent’ on the asset) and the other owing any asset value increase. The caveat is that if the partner that expects the income stream doesn’t get it, he exercises his call option and takes the part of the joint venture he doesn’t own and the partner that expects the asset price growth can just surrender his share of the asset (by exercising his put option) and stop providing the expected income stream.”


Jeremy R. did a little research and sent, “Regarding IRS liens, they, in most cases, do not have priority even over a future purchase money lien. See link: http://www.irs.gov/pub/irs-pdf/p785.pdf.”


Luke Slivkoff writes, “As I sift through some ongoing training, I began to wonder if Realtors are subject to the same consumer privacy and security laws that lenders are?  I notice more Realtors requesting copies of DU Findings, proof of funds, credit scores, etc. from prospective buyers.  Realtors and/or their sellers seem to want added assurances that the buyer’s finances are in good order to lessen the chances of an escrow falling out; however, I highly doubt that real estate agents have taken any training about GLB, ECOA, and various other laws relating to protecting a consumer’s non-public information.  That being the case, what sort of actions could the government take against such real estate firms if a breach were ever to occur?”


On general lender productivity Adam Stein with LoanTek wrote, “We see plenty of lenders with online marketing budgets, yet they lack the tools necessary to effectively manage their ROI. Optimizing results from mortgage lead and pay per click campaigns requires a ‘Feed or Bleed’ budgeting process. I recommend using Google Analytics to assess the effectiveness of your marketing. Google Analytics is free (I like free). A lender should be using the data from Google Analytics to ask questions like: ‘How much traffic is being referred from source ‘X’? Or, ‘How many leads are resulting from landing page ’Y’ per visit?’ When you get down to it the only things that matter are how many visitors did I get for my marketing dollar and how many converted to actionable leads? The first question is a topline benchmark of your marketing dollar’s efficiency with the given traffic source. The second question is more related to the effectiveness of your creative page, content, and quality of the traffic being referred.”


Pete Mills from the MBA writes, “I read your column this week that highlighted the sharp increase in health insurance costs faced by individuals and employers. This is a major issue for our industry. We see these costs in the industry data we gather, and we hear about the challenges from our members. No matter the size of your company, health care and employee benefit costs pose a major challenge. We have been listening, and that’s why MBA last year rolled out a major new members-only benefit that can help manage those costs.


MBA Health Link is a private benefits exchange offering healthcare and other employee benefits directly to your company. It is made available through MBA’s partnership with Arthur J. Gallagher & Co., a US-based global insurance brokerage and risk management services firm. MBA Health Link enables MBA members to offer more benefit options to better meet the varied needs of employees, while taking control over the associated costs.  It is an HR/Benefits solution that is also key for attracting and retaining talented employees in this competitive market. MBA members can check out MBA Health Link by going to the MBA website. Interested members can also reach out for Tricia Migliazzo or call her (314) 497-6999 to find out more about how Health Link can help control benefit costs.  If you are not an MBA member but want to find out more about Health Link and other MBA benefits, Tricia can also help with that as well.


And Dino Bacelic sent, “I am the Regional Business Consultants at TriNet. I was also a long time wholesale mortgage veteran worked for many years at JP Morgan Chase, BofA, MetLife and Ally Financial. I see that you’d mentioned a rising healthcare cost in your commentary. We can help finance companies address this problem. Through our PEO (Professional Employer Organization) model we help small and medium size companies cut and contain rising medical benefits cost, mitigate employer related risk and help them attract and retain talent. I have taken the liberty of attaching our company flyer to possible share with your audience. Please let me know if you would like to have a brief discussion on how we can help.”


After seeing the recent news about the CFPB’s Consent Order with Guarantee Mortgage, attorney Brian Levy had this to say. “By now, everyone knows that you can’t pay loan originators based on loan profitability. That rule has been in place since 2011.  Notwithstanding that, many industry participants are still getting into trouble for their compensation practices.  The latest (http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-guarantee-mortgage-for-loan-originator-compensation-violations/) involves an apparently defunct company who set up “marketing companies” owned by its originators and producing managers at the branch level.  CFPB alleges that these marketing companies received revenues based on loan profitability of branches (and thus the payments to its owners were an illegal compensation arrangement).  Although not at all clear, it sounds like the company was trying to recreate the financial equivalent of a ‘net branch’, but CFPB felt the structure failed to comply with the LO Compensation Rule. Unfortunately, the CFPB failed to provide clear guidance to explain why this structure was illegal demonstrating again the confusion created by using enforcement as a guide to compliance.


“I have written previously about my frustration with the CFPB’s ‘interpretation through enforcement’ environment. Although not binding on anyone but the defendant, as legal counsel, we try to learn from these enforcement actions to advise our clients about the regulator’s views of what is (and isn’t) permissible. Viewed through the opaque lenses of Consent Orders, however, determining what complies (and what doesn’t) is extremely allegations reflect blatant violations; e.g., the company made payments to its originators based on profitability.  But, to understand the true nature of the violation requires CFPB to provide the details essential to its analysis.  Merely concluding that a violation was found, leaves compliance people in the dark about any specific kinds of compensation structures to avoid. This is a common concern with using CFPB enforcement actions as guidance, and along with some other experienced and equally distressed compliance professionals I did a presentation on what to do about this topic at the American Banker Association’s Regulatory Compliance Conference in Washington DC.


“In the case of the Guarantee Mortgage Consent Order we find another example of this troubling state of affairs for those who want to remain in compliance.  I’d like to be able to tell your readers (and my clients) exactly what the mortgage company did that was wrong, but the CFPB doesn’t tell us in the Order.  I’ve copied the relevant provisions from Section 7 and 8 of the Order below to illustrate.


“7. During the Relevant Period, Respondent paid monthly fees to marketing services entities that were associated with each of its branch offices. Respondent set the fees based on the profitability of the associated branch. The owners of the marketing-services entities then drew the monthly fees as additional compensation. Marketing-services-entity owners included Producing Branch Managers as well as, in some instances, one or more other Loan Originators within the branch.


“8. Under agreements with the marketing-services entities, the fees were not supposed to include income from loans originated by the owners of the marketing-services entities. But as a result of Respondent’s accounting methods during the Relevant Period – specifically, Respondent’s improper allocation of expenses in branch income statements – those fees did include income from originations by marketing-services-entity owners, including their originations of Retail Loans. Retail Loans typically generated more revenue the greater the rate of interest above par. Consequently, owners of marketing services entities received compensation based on the terms of loans they had originated.”


“So, even though the payments to the marketing company owned by the LOs were not supposed to include income from the loans originated by the LOs, such payments were illegal due to ‘improper allocation of expenses in branch income statements’. Of course, that begs the question as to whether there might have been a ‘proper’ allocation of expenses that would have made the structure compliant. Unfortunately, CFPB does not tell us what kind of expense allocations would be proper or give any examples of the types of expenses that shouldn’t have been allocated. Moreover, the Order also fails to even describe how allocation of expenses to branch income statements translated into marketing payments based on loan profitability. Again, this is another example of how enforcement actions are a highly inexact way to provide industry guidance.”





After their 11th child, an Alabama couple decided that was enough, as they could not afford a larger bed.

So the husband went to his veterinarian and told him that he and his cousin didn’t want to have any more children.

The doctor told him that there was a procedure called a vasectomy that could fix the problem but that it was expensive.

“A less costly alternative,” said the doctor, “is to go home, get a cherry bomb, (fireworks are legal in Alabama) light it, put it in a beer can (COORS), then hold the can up to your ear and count to 10.”

The Alabamian said to the doctor, “I may not be the smartest tool in the shed, but I don’t see how putting a cherry bomb in a beer can next to my ear is going to help me.”

”Trust me,” said the doctor.

So the man went home, lit a cherry bomb and put it in a beer can. He held the can up to his ear and began to count!






At which point he paused, placed the beer can between his legs and continued counting on his other hand.

This procedure also works in parts of several other states, but especially well in all of Washington DC.





(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