Brokers You Didn’t Stand a Chance!
Many of you have probably wondered why the broker community ended up with fees earned in their points and fees calculations and not the creditor. I found this process very enlightening and I think you will too. I’m not sure why brokers became demonized, but clearly they are. I was there before, during and after the meltdown and it seems to me that every category of lender was misbehaving. Every one of us knows good and bad apples in each part of the lending chain. Being a banker doesn’t make you better than a mortgage banker and being a mortgage banker doesn’t make you better than a mortgage broker. After all, how many mortgage bankers started out as mortgage brokers? And why did mortgage banking start to begin with? The bankers didn’t handle the clients well and the mortgage bankers took over. At the end of day, we should all stand together or our industry will truly suffer.
I believe the goal should be to ferret out the bad guys who prey on consumers. If you are a good banker, mortgage banker or broker, welcome. If not, get out so we can get back to business!
Exact words from the latest guidance:
“In developing the final rule, the Bureau consulted with several Federal agencies, as required by section 1022(b)(2)(B) of the Dodd-Frank Act. Three agencies, the Federal Deposit Insurance Corporation (FDIC), HUD, and the Office of the Comptroller of the Currency (OCC) submitted formal comment letters. The FDIC and HUD submitted a joint comment stating their view that compensation paid to mortgage brokers should be included in points and fees whether the consumer pays such compensation directly through up-front charges or indirectly through the creditor and funded through the interest rate. They also stated that a netting approach would create incentives for transactions to include both up-front origination charges and YSPs because the up-front charges could be netted against the YSPs to reduce or eliminate the loan originator compensation that would be included in points and fees. The FDIC and HUD argued that evidence shows that transactions with both up-front charges and “back-end” payments tend to be the most costly for consumers and are the most difficult for them to evaluate when shopping for a mortgage.
The FDIC and HUD supported the proposal to exclude compensation paid by a mortgage broker to its employees but argued that the Bureau should also exclude compensation paid by a creditor to its employees. The FDIC and HUD argued that including in points and fees compensation paid by a creditor to its employee would increase compliance costs and make it difficult for them to create compliant systems by the January 2014 effective date. They also stated that including such compensation in points and fees could result in variations in points and fees for loans with identical costs to the consumer, merely because, for example, one transaction involved a high-performing loan officer. They argued that excluding from points and fees compensation paid by a creditor to its employees would not compromise the consumer protection goals of the points and fees provision because of the loan originator compensation restrictions in § 1026.36(d). They noted that employees of creditors have no ability to choose among creditors, further reducing the risk that consumers would be steered toward more costly loans.
The OCC also submitted a comment stating its support for excluding from points and fees loan originator compensation paid by a consumer to a mortgage broker when that payment already is included in points and fees as part of the finance charge; excluding from points and fees compensation paid by a mortgage broker to its employees; excluding from points and fees compensation paid by a creditor to its employees; and using an additive approach to include in points and fees both origination charges paid by a consumer to a creditor and loan originator compensation paid by a creditor to a mortgage broker.”
I become highly perplexed when I read things like “employees of creditors cannot choose between lenders”? If you are a correspondent lender, funding the loan, I do believe you are the creditor. As a correspondent, you certainly deal with more than one end lender.
So, the bottom line for the brokers is that the opinions were stacked against you to begin with based solely on the process. Now is anyone surprised by the results? It made perfect sense to me when I read this! P.S. This is my personal opinion and not necessarily that of Optimal Blue……as all things are on this blog, I only speak from my observations.
Fantastic Synopsis of QM/ATR and How it Will Affect Your Business!
Thank you K&L Gates for this very informative document!
Finally! The Ruling in Full Detail! And Still I find myself seeking clarity!
So, if you are a broker, the compensation paid to your company must be included in the points and fees calculation. However, you do not have to count the compensation that that the broker paid to their originator. Okay, that sounds good. This way we don’t double count compensation.
Yet, if you are a “creditor” then you can exclude the loan originator compensation from the points and fees calculation?
So what does this mean? Brokers need to count their fee and “creditors” do not because the structure offers protection to the consumer and it would be hard to establish what the compensation is at the time of lock in? I’d say it is hard to determine compensation at the time of lock in for a broker or creditor considering how quickly files change.
While I appreciate the bureau’s attempt at equalizing pricing, I do not think this approach is accurate, nor does it level the playing field for the consumer.
Am I missing something or is this a tactic to put the broker at a market disadvantage? Many of you do correspondent lending. How do you think this will affect your business?
At this time, I won’t even open up the Fair Lending implications of this. I’ll save that for another day!
“The final rule excludes from points and fees loan originator compensation paid by a
consumer to a mortgage broker when that payment has already been counted toward the points
and fees thresholds as part of the finance charge under § 1026.32(b)(1)(i). The final rule also
excludes from points and fees compensation paid by a mortgage broker to an employee of the
mortgage broker because that compensation is already included in points and fees as loan
originator compensation paid by the consumer or the creditor to the mortgage broker.
The final rule excludes from points and fees compensation paid by a creditor to its loan
officers. The Bureau concluded that there were significant operational challenges to calculating
individual employee compensation accurately early in the loan origination process, and that
those challenges would lead to anomalous results for consumers. In addition, the Bureau
concluded that structural differences between the retail and wholesale channels lessened risks to consumers.
The Bureau will continue to monitor the market to determine if additional
protections are necessary and evaluate whether there are different approaches for calculating
retail loan officer compensation consistent with the purposes of the statute.
The final rule retains an “additive” approach for calculating loan originator compensation
paid by a creditor to a loan originator other than an employee of creditor. Under the additive
approach, § 1026.32(b)(1)(ii) requires that a creditor include in points and fees compensation
paid by the creditor to a mortgage broker, in addition to up-front charges paid by the consumer to
the creditor that are included in points and fees under § 1026.32(b)(1)(i).”
Can I Pay My Loan Officers Differently Per Mortgage Product?
I’ve had this discussion with many lenders recently and the bottom line is that anyone can choose to do what they would like……However, that doesn’t mean it is the Pandora’s Box that you want to open.
A legal expert will tell you that “technically”, you can pay differently, based on loan product IF you have a business justification to support that practice. For instance, you have to spend more time on one product versus another. The problem is the amount of data that you need to gather to document this as a true business justification. For instance, do you have studies that show the amount of staff time spent on each time of loan product? That is just one example of the multiple ways you will need to document to support this justification. This is why the leading legal experts are telling their lenders not to pay loan originators differently per product type.
If you choose this practice, how do you defend against any steering allegations? One reason that the CFPB is so against this practice is consumer protection. They do not want any lender to offer any potential incentive to an originator to steer a consumer into one product over another.
In my opinion, it is not worth the risk. If your business justification fails and you have to defend a steering claim, those who have done that will tell you it does not make financial sense. Penalties, fines, legal defense and consultants will rack up a huge cost. Instead, consider other ways to work within the compensation guidelines that do not involve incentive to sell one loan over another.
One final note: If you are an OB user you know that our system allows for this configuration. The reason for this is that many lenders requested it from us. As a technology provider we are paid to deliver the functionality required by a client. However, that does not mean we recommend this configuration.
Can I Offer Different LO Comp Programs or Pricing Per Branch in The Same MSA?
Unless you have some fantastic business justification for offering the same program at a different price/rate/closing cost, you may want to revisit this issue. Pricing Disparity occurs when, without a business justification backed by lots of empirical data, you offer the same loan to a similar borrower at a different price/rate/closing cost.
For instance, due to the LO Comp program in one branch, or the pricing they receive, one branch can offer the same product to a similar borrower at a different price/rate/closing cost than another.
So, let’s assume that one branch is located in a mainly “non-protected” class area, and the other is in a mainly “protected class” area. Two borrowers at your company do business with your company. One borrower applies in one branch and one borrower applies in the other branch. From a risk profile they are basically the same type of client, and one receives a higher interest rate or closing costs than the other. That is pricing disparity. If the client who received the higher interest rate and closing costs is a protected class, versus the lower rate/price/closing costs for the non-protect class client, then that is Disparate Treatment. That practice will cost your company A LOT of money!
This might be a good time to take a look at this scenario per MSA to see what you are dealing with. There is nothing worse than a surprise finding from an examiner! Better that you investigate the issue and correct it first!
Think You’ve Got What It Takes? It May Not Be Enough In Today’s Fair Lending Environment!
Rule number one in mortgage banking today; continue to stay aware of the new changes! Boy oh Boy do we have them now. If you are in compliance (or an executive listening to compliance methodology) you may be lost in “this is the way it has always been done” syndrome. Legal expert after legal expert are warning against this mentality. Why? Because they see the future unfolding with the new regulatory climate and the extreme deficiencies in what lenders deem to be “enough information”.
Also, I talk regularly with lenders who have gone through an exam, been fined, or are under monitoring. The biggest lesson they are learning is that “fair lending monitoring and effective compliance management systems need to occur sooner than closing”.
Monitoring fair lending and disparate impact requires far more than the outdated technologies that you may currently be using. To see if you have what it takes, evaluate what you have now:
•Is your software system based on closed loan data?
•Is it fairly limited to the HMDA data?
•Are you using traditional regression analysis?
If you answered “yes” to either of those questions, you probably do not have what it takes for today’s world. If you answered “yes” to these questions you do not have enough data to prevent fair lending and disparate impact accusations and that is why you see so many settlements. So you spend thousands of dollars a year on data that will not assist you completely!
Let’s take a look at what the legal experts and lenders are experiencing.
- How do you document the loan options/rates/price given to a loan originator for each client?
- How do you document the loan options/rates/price as they change throughout the processing of the loan? And, how do you document the reasons for the changes?
- How can you go back in history with the client data and see exactly what was available for that client on that lock date? If you cannot do that electronically and try to pull out a bunch of rate sheets from that day……well just multiply that task by 1000 loans or more. Historical loan search/price/rate = easy and ACCURATE regression analysis. Let the regulators perform a traditional regression and you will almost always look guilty, especially with Disparate Impact!
- How do you set up alerts to your secondary marketing department that lets them know a loan is outside of pricing policy, or that an exception needs to be tracked?
- HMDA data after a loan closes only give the regulator part of the story. If you really want to protect your company, you have to show them the WHOLE story.
So, now you know why I was brought to Optimal Blue. Many of our clients (both large and small) have gone through exams, monitoring and penalties. They said “we need this” and we responded. Those lenders who have been through the process asked us to develop a “real time” solution based on the pricing engine data (more than enough fields to document why a client received a certain rate/price) AND to allow them to go back in time to “prove” any offerings to a client. Traditional software and traditional regression analysis failed them and it will fail you too.
So, if you are convinced you “already have a software for that”, you might want to take a look at what others who have been before you, are using so that you don’t have to learn the hard way. Data, data compilation and data analysis are the way of our regulatory future. Do you know that the CFPB has “Data Scientists”? I’m not sure what the position is, but I do know that shows they are serious about data.
You don’t take a pen knife to the sword fight! You bring the OB Blue Shield of Protection because you do not have time or money to waste!
The CFPB Fair Lending Exam-Advertising and Marketing
Okay folks, here we go. This is the last set of questions that are part of the Fair Lending exam. However, remember that any “no” answers to any of the items will trigger more questions and more review. These questions will be used for all types of advertising, including social media.
I’m sure that you can see the big task involved for developing procedures, policy, training and monitoring to pass this exam. This is why you cannot wait until you get a letter of examination. You simply will not have the time to put all of this in place. Not only that, you will not look very good to the examiner, if you did not start any of your practices until after the letter was received.
Like the other posts, the CFPB question is first and my comments are below that.
•Does the institution have procedures to ensure that it does not:
•State racial or ethnic limitations in advertisements?
Sounds impossible, right? You would be surprised by what is still out there.
•Employ words or use photos in advertisements that convey racial or ethnic limitations or preferences?
As an example, a photo of a “happy white family” used to market in a predominantly ethnic area gives the impression that the offer is for a “happy white family”. If you use photos of people make sure the people look like they could be any race or ethnicity.
•Place advertisement that a reasonable person would regard as indicating minority consumers are less desirable?
Defining a “reasonable person” is, in my opinion, like trying to describe a “normal person”. It is these subjective areas that may harm you. Perhaps you can set up an internal focus group that includes people of varying backgrounds, and get their anonymous opinion. Too many negative responses from the group and the ad gets changed. Your focus group is a great way to show a compliance process. At the very least it shows you are trying.
•Advertise only in media serving predominantly minority or nonminority areas of the market?
If you are going to advertise then advertise in all areas of your MSA.
•Conduct other forms of marketing differentially in minority or nonminority areas of the market?
Keep it generic! You do not want to advertise FHA in ethnic areas and jumbo loans in non-minority areas.
•Market only through brokers known to serve on racial or ethnic group in the market?
As the lender you are responsible for your broker fair lending practices. You are also responsible for offering your products to diverse market sectors. This includes real estate agents and builders.
•Use a prohibited basis in any prescreened solicitation?
Age, gender, race, ethnicity. If they fall within a protected class this should not be included in your consideration for credit. If there is limitation to the program, like a reverse mortgage, identify that as a loan requirement, not your requirement.
•Provide financial incentives for loan officers to place applicants in non-traditional products or higher-risk products?
I call this the hornet’s nest. I strongly advise you not to incent your loan officers differently on product type, unless you are willing to spend a lot of money trying to validate your business justification. Chances are good that you will spend a lot of money and still lose. Any practice that hints of steering will cause you more pain than it could possibly be worth.
One final note! I am the messenger, not the creator of the rules. My goal is to help you understand what you need to do in your business, to avoid the agony of those who have had these exams before you. Any of them would tell you it is not easy to pay penalties, suffer reputational damage and be under constant scrutiny. Yet I feel so profoundly honored that they have shared their experience so that I can pass it on to you.
So You Think You Can Pass The Test?
So You Think You Can Pass The Test?
I have seen quite a bit of attention on the proper underwriting (Ability to Repay) in order for a file to qualify as a QM. However, I believe there is a disconnect because of the “testing”, beyond just the underwriting, that must occur. An approval based on FNMA, FHLMC, FHA, VA and USDA guidelines is a huge part of the market, so we are all excited that they receive the “Auto QM” stamp of approval under the Ability to Repay (ATR). The problem is that QM qualifications do not stop there. That is just one line item!
Below are some other tests that the loan needs to pass to be a QM:
1. APR to APOR (Average Prime Offered Rate) Comparison. If your APR is 1.5% or higher than the APOR this triggers a high cost loan; which is not QM qualified. Last Monday the APOR was 3.59% for a 30 year fixed. If your quoted APR is 5.09% or higher you just triggered a high cost mortgage (provided the loan was a first lien and over 100K). Now one may think this is not too bad of a test, based on what we know today about finance charges included in the APR. It is what we do not know about finance charges that are really going to present an issue. These have and are changing even more. In fact, we are still waiting on how to include LO Comp into the finance charge, among other clarifications. Until all inclusions are clarified we can only focus on the concept.
2. Bona Fide Discount Points: They must actually result in a Bona Fide reduction in interest rate. What we do not know is the metric for this. We know the LLPA’s are to be included in the finance charge, but how? Is it the price/rate offered directly to the LO from the company they work for? Is it based on what the end lender offers as the rate/price to the correspondent? When we do have that clarification, then we will still need to apply another test.
If the interest rate without any discount (still waiting to see what that metric is) does not exceed the APOR by more than 1% then you can exclude 2 discount points from the points and fees calculation. If no discount points have been excluded in the finance charge then you are limited to 1 discount point paid by the consumer; if the interest rate without any discount does not exceed the APOR by more than 2 points.
I believe the CFPB is trying to define our charges so that when a consumer goes to any lender they are the same. A discount point used to be a direct reduction in rate. We have so many varying names for fees that the consumer gets very confused. Even I get confused by some of the names this industry comes up with!
3. Affiliate Fees: I hate to be the messenger to those of you who have spent money and time on affiliated relationships. However, if you have them as defined by (Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) then you will need to put all of the affiliate costs for that transaction into the finance charge. This does not mean the differential cost between what your affiliate charges versus what a third party charges. This means ALL of it. Throw that into your 3% pot and it will suddenly overflow. Not to mention, your APR will be higher than your competitors which will cost you loans when consumers shop. It appears the writing is one the wall with this one. The CFPB does not have sufficient data to believe that affiliated relationships are in the best interests of the consumer.
I like what one of the attorneys said in a recent webinar. “ATR rule consists of very complex “machinery” for compliance, 100’s of data points, determinations, comparisons & decisions –Vectoring through “the flowchart from Hell”. I think that about sums it up!
CFPB Loan Originator Compensation Summary
Well it looks like quite a bit is figured out however; we are still in proposal mode and waiting on final ruling as to the definition of what is loan originator compensation.
Until then, we know how you can pay a loan originator. There are 2 Categories:
1. Loan Originator: If you close 11 or more loans per year, you are a loan originator. It does not matter if you are just an originator, a producing branch manager or the owner of a large company. If you personally closed 11 or more loans, you fall into the loan originator compensation bucket. Loan originators are subject to the loan originator compensation rules.
2, Not a Loan Originator: Anyone who is not a loan originator (you close 10 or less loans per year), can be compensated as has been customary and acceptable. Examples include, non-producing branch managers, regional managers, area managers and other production executives. Also, none of these positions are limited to the 10% non-deferred compensation limits. If you want to get really fancy, you can call this the “de minimus origination exception threshold”. Say that at your next meeting and you will sound really smart!
Now that everyone knows what category they fit in, below is a summary of ways you can compensate a loan originator;
- Salary
- Hourly-Based on number of hours worked on a file. Be careful with this one, it is very tricky to document and documenting this is a must.
- Flat fee for every loan originated-Be careful this could cause redlining.
- Fixed % of the loan amount. Experts are recommending minimum and maximum levels to avoid redlining. You can also use Flat BPS per volume, but for reasons I outlined in previous posts, I do not think this will serve you well in today’s regulatory environment.
- Deferred Bonus Programs-Annual or Periodic-i.e. 401K programs.
- Non-deferred Bonus Programs-May not exceed 10% of the total yearly compensation. The 10% is the cumulative dollars of any compensation below.a. Equity interests, dividends on equity holdings, stocks are tricky and should only be attempted with great legal counsel. The biggest issue is how they are tied to the transactions. If you want to read through this part of the legislation, let me know and I will send it to you.
b. Performance Metrics
c. Existing customer bonus
d. % of loans submitted that closed
e. Mortgage loan quality
f. Awards of merchandise, services, trips or similar prize or incentive-Cash Value
- If you have business units that are not mortgage related and have separate business accounting for those units, your originator is not subject to the 10% threshold for just those products. If the income is from the mortgage origination business unit it will be subject to the 10% threshold.
Reductions in commission:
An originator may reduce their compensation for unanticipated settlement costs. However, they may not reduce their commission to give someone a better rate/price. The lender must do that and you cannot reduce their commission if you do offer the concession. It doesn’t matter if they made a mistake or not.
Next Up: The QM (Qualified Mortgage) and the ATR (Ability to Repay). If you are confused now, just wait, this one will really spin your mind around!
Clarification Still Needed on CFPB LO Comp Rules
I attended a webinar today held by the MBA regarding the new LO Comp rules. I am happy I was able to confirm my interpretations on LO Comp with their team. However, there were a few tidbits of information that I found interesting, so I want to bring them to you attention.
1. I have had several questions specifically regarding branch manager compensation and the new regulations. After reading the LO Comp rule, I did not see this addressed beyond the definition of a producing manager versus a non-producing manager.
The CFPB defines a producing manager, as someone who closes eleven or more loans per year. A non-producing manager closes ten or less loans per year. Absent of this mention in the rules, there seem to be no other changes from rules previously implemented. So, it seems that the compensation plans that are presently compliant may remain compliant. For instance, if the manager is presently receiving overrides on branch volume, the webinar leaders believe this is still okay. They further defined branch production as inclusive of the branch manager production. Since none of us like to assume, the MBA is seeking clarification.
My personal opinion is that the CFPB will allow overrides on the branch production, minus the personal production of the branch manager. It seems clear to me that a loan originator cannot be compensated twice on the same loan. If you include the producing branch manager’s volume in the total branch volume and then compute overrides, the producing branch manager receives commission twice on that production. Just my humble non-attorney interpretation!
2. Loan originators may be pulled into potential litigation (ability to repay) by the defendant for 3 years after the closing of the loan. The potential cost would be the actual loss to the client or 3x the LO’s compensation. So for any of you insurance entrepreneurs out there, you may have a new venture in malpractice insurance. If you make millions on that idea, please don’t forget me!
3. The attorneys on the call interpreted that anyone who talks to the consumer and “refers” that client to a mortgage loan originator (i.e. bank teller), would be considered a loan originator. Certainly we all see that as problematic and are seeking clarification on that issue.
4. Record retention has been bumped from 2 to 3 years. The record retention requirements are more expansive and the clock starts ticking when the commission was paid, not when the loan was locked or closed.
5. If you give a different commission to a broker versus a commission from your own source, the webinar attorneys believe that may be problematic and will trigger a proxy issue. That seems like a BIG issue for many, so I’m looking forward to clarification.
6. The MBA is also requesting clarification on a point I brought up in another posting regarding LO Comp tracking. In this posting I asked the question, if the LO Comp is set at the time of lock, yet the cumulative volume of the loan originator triggers a higher commission base 2 months later, how can you track that? Since we cannot exceed the 3% points and fees, is it possible that this scenario will trigger a violation?
7. There was another question I liked regarding “bona fide” business expenses such as cell phones. It was the opinion of the webinar leaders that these expenses could still be reimbursed because they are not tied to the transaction. My concern is that although they are not tied to the transaction, are they part of the 10% non-deferred bonus. That could make a big difference and as such needs further clarification.
It is clear that much thought, conversation and clarification still needs to occur before policies and procedures are rolled out to your staff. I will do my best to keep you apprised of the various conversations and interpretations as they unfold. In the meantime feel free to jump in and express your opinions! tbutler@optimalblue.com
optimalbluefairlending
Tammy Butler, Master CMB
Fair Lending Compliance 