Nov. 1: Letters about MSAs & RESPA & referrals; Basel III; FHA & MI & alternative credit

As usual, today we have lots of input from people in the industry. Yes, LOs are all dealing with some common issues and these have a ripple effect through the industry and on up to the investors in these mortgages.

A broker from Nevada wrote, “I really don’t understand all the discussion regarding referrals and RESPA. For 30 years I was told RESPA does not allow me to pay for referrals – it hasn’t changed. Real estate companies that have CBAs (controlled business agreements) with lenders had to have very strict rules in the past. When a client refers someone to me, I do not pay them for the referral.  I give the new client the very best pricing and service possible. Then they become a referral source for me. I receive referrals not because I pay for them, but because I provide better pricing and service than they can get anywhere else.”

On the same subject Chris wrote, “Your commentary posted a question from a reader about referral fees, and an answer from an attorney. I promptly heard from both attorneys and compliance staff: stay away from them. J. Steven Lovejoy, Esq., with Maryland’s Shumaker Williams, P.C. wrote, ‘…payment of referral fees to former customers, real estate agents and others, there is nothing likely about the fact that such conduct is exactly what RESPA prohibits. The statute reads, in part: ‘No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C § 2607. Any statement that you should try to avoid paying a referral fee makes it sound like this is a ‘gray’ area. It is not. If you pay referral fees, the CFPB, or class action plaintiffs’ attorneys will be coming after you.  See, In Re: Lighthouse Title consent agreement with the CFPB. Lighthouse paid a $200,000 fine for paying referral fees. There is nothing ‘gray’ about that outcome.’”

“Are the attorneys implying or interpreting the regulation to mean that even within a financial institution a referral fee is illegal?  For instance, a customer comes into a bank seeking a CD and speaks to a Financial Services Rep.  While opening the CD account the FSR learns that the customer is looking to refinance their home so the FSR refers the customer to the bank’s mortgage loan originator.  The bank pays the FSR a $XX referral fee for asking probing questions and referring a lead to another line of business. This happens all the time at many financial institutions.”

1. Steven Lovejoy responds, “RESPA, thankfully, has an exception for bona fide employees. You can pay a referral fee to a bank teller who refers a customer for a mortgage loan. You can also hire marketing people, so long as they are real, supervised employees, to market the company and pay them on commission for successful mortgage referrals to the mortgage department within the company. There are three major exceptions to the anti-referral, anti-kickback rules: 1) you can pay employees for marketing the company (thank the Lord) so long as they are really employees; 2) advertising – for example, you can pay a marketing company for leads so long as the payment is not dependent upon the successful closure of a loan; 3) affiliated business arrangements – somewhat cumbersome and complicated, but they certainly avoid RESPA liability if they operate properly.” Thank you Steve!

Concerning MSA (and Joint Ventures)…”In recent articles you have written about the CFPB position and regard toward MSAs.  I have also heard from many upper management execs that I regard as knowledgeable on such matters state the same concerns about the issues with CFPB as well a HUD. Yet, many/several companies are offering MSAs with ridiculously high monthly amounts and are their main source of origination (mainly Movement Mortgage). The legal departments for them say they are compliant, and CFPB has blessed their model for MSA transactions. But knowing how they operate first hand, (from talking to their branch managers) I find it difficult to believe they are compliant. Let’s be honest, MSAs were conceived to pay Realtors for their business and every loan officer that’s been in the business for over 6 months knows the “game.” Today, I know of several lenders who are getting aggressive with JVs.  At least with a JV, the Builder or Realtor must put up some money and take a management role in the enterprise. But MSAs are all for the Realtor and the lender does all the work; and anyone who says different needs to call me, I have some swamp land in South Alabama for sale.”

And this: “I look forward to the day when the CFPB or HUD or Someone puts an end to this charade and makes the playing field a little more even. MSAs are a financial kickback and should be outlawed. The companies that follow the rules and try to comply with RESPA are at a disadvantage when they go up against the companies that ignore and abuse the rules.”

[Editor’s note: My guess is that in this environment any lender involved in MSAs with other firms has had their attorneys review agreements extensively. Can the consumer be harmed by the arrangement? In its consent order and MSA-related penalty assessed against Lighthouse, the CFPB states that, “…’Marketing Services Agreement’ means an agreement pursuant to which Respondent is to provide any Thing of Value to a person in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan in exchange for marketing or advertising services. This includes agreements that allow Respondent to market or promote Respondent’s services to such a person or its employees or agents, agreements that require a person or its employees or agents to endorse Respondent or Respondent’s services, agreements pursuant to which such a person is to market Respondent’s services to others, and agreements to include references to Respondent in any advertising placed by such a person. An agreement for mass advertising for consumer consumption pursuant to which Respondent is to pay a person who does not provide real estate settlement services to place an advertisement to the public (e.g., an agreement to place an advertisement in a newspaper or magazine or on a television or radio station) is not a marketing services agreement unless the person endorses Respondent as part of the advertisement.”]

Basel III is approaching. The big fear is that it will cause banks, large or small, to shed servicing assets, value servicing at lower levels so that they don’t have to sell it, or tweak their holdings therefore causing market disruption. Steve Brown with Pacific Coast Bankers Bancshares writes, “On a high level, we know that the rule will require more and better capital. There have been projections that most community banks already have sufficient capital for Basel III, but the rule changes how capital levels are calculated. Risk weightings for a number of asset classes will change, the rule narrows the definition of what qualifies as capital, and with the later implementation of the capital conservation buffer (beginning in 2016) a shortfall in the buffer could have a major impact on a bank’s ability to pay dividends and bonuses, or to repurchase shares. There is no question that Basel III will affect community banks…

“Banks also have the ability to classify their securities as Held to Maturity (HTM) and not mark them to market, but this has been something primarily used for long term municipal bonds or other investments that a bank never intends to sell. Typically, a bank uses its investment portfolio as a source of liquidity and therefore holds almost everything in the Available for Sale (AFS) portfolio. But with the increase in the size of the investment portfolio as a percent of assets, some banks have put significant portions of their securities portfolio in HTM in order to avoid market volatility. Given some pickup in demand for loans, would it make sense for a bank to look to the HTM portfolio as a source of liquidity? If a bank wants to sell securities in the HTM portfolio, except for in a few unusual cases, such action would taint the entire portfolio.”

“That means all other securities would then need to move to the AFS portfolio for at least 2Ys, with all securities then marked to market and all subsequent purchases also going into the AFS portfolio. The problem here is that the HTM portfolio is not supposed to be a source of liquidity for the bank. There are exceptions, so called “safe harbors,” which allow the sale of securities, like a significant deterioration in an issuer’s creditworthiness, or a modification in regulatory requirements which change what is considered a permissible investment. The implementation of Basel III raises an interesting question though, as there is a safe harbor allowing a sale from the HTM portfolio in the case of ‘a significant increase in industry-wide regulatory capital requirements that would cause the bank to downsize.’ One would hope with all the discussion surrounding Basel III that no bank would have to resort to shrinking the bank by selling securities in the HTM portfolio in order to have enough capital, but it’s not out of the question. Banks should be carefully assessing what the new capital levels require based on the assets they hold and those they intend to buy in coming years.”

I received this note on the general trend in lending and credit risk weighting. “I still say all the idiots are pushing in the wrong direction. The FHA does not need lower FICO. Or NO down payment. It needs more reasonable MI and alternative credit for those that don’t have good credit scores do to not having credit. You must have something from which to base loan quality. Income and credit are IT. Just don’t use arbitrary source of credit. In today’s world I am unable to refi a good borrower from a 6% FHA loan to 3.75% FHA loan but only because the new MI cost wipes out the interest rate savings.  Does this make sense to anyone with a reasonable level of intelligence? The high MI cost on a monthly basis pushes many good borrowers over the allowable DTI.  No I am not saying increase the DTI level – 43% is reasonable for most circumstances. I am saying lower the MI. Typical of bureaucrats, rather than realize the problem and fix the problem, they simply add more problems. They should also bring back the original stated income for self-employed borrowers. That was NOT a Fannie or Freddie loan, as it was Alt-A, but it was a good for RE.”

The Magic Bank Account (certainly more poignant than humorous)

Imagine that you had won the following prize in a contest: Each morning your bank would deposit $86,400 in your private account for your use.

However, this prize has rules. The set of rules: 1. Everything that you didn’t spend during each day would be taken away from you. 2. You may not simply transfer money into some other account. 3. You may only spend it. 4. Each morning upon awakening, the bank opens your account with another $86,400 for that day. 5. The bank can end the game without warning; at any time it can say, “Game Over!” It can close the account and you will not receive a new one.

What would you personally do?

You would buy anything and everything you wanted right? Not only for yourself, but for all the people you love and care for. Even for people you don’t know, because you couldn’t possibly spend it all on yourself, right?

You would try to spend every penny, and use it all, because you knew it would be replenished in the morning, right?

ACTUALLY, This GAME is REAL … Shocked??? YES!

Each of us is already a winner of this “prize”. We just can’t seem to see it.

The prize is TIME.

1. Each morning we awaken to receive 86,400 seconds as a gift of life.
2. And when we go to sleep at night, any remaining time is not credited to us.
3. What we haven’t used up that day is forever lost.
4. Yesterday is forever gone.
5. Each morning the account is refilled, but the bank can dissolve your account at any time WITHOUT WARNING…

SO, what will YOU do with your 86,400 seconds?

Those seconds are worth so much more than the same amount in dollars. Think about it and remember to enjoy every second of your life, because time races by so much quicker than you think.

Rob

(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.)