page contents Mortgage News Digest: 2013

Wednesday, October 23, 2013

Sample Ability to Repay Policy

Mortgage Ability to Repay Sample PolicyWith the degree to which the Qualified Mortgage and Ability to Repay rules have affected the outlook for the mortgage industry, it comes as a surprise that an "Ability to Repay" policy does not represent a bulky and expansive document.  What should it say?  Something fairly simple and straightforward. As with many policies the devil is in the details.  Saying you will comply is a policy.  What is the PROCEDURE for complying?  HOW will you comply? THAT is an effective policy.

Sadly, regulators and investors focus their interest in seeing the policy as opposed to the procedure used to effect the policy.

Here is a sample Ability to Repay POLICY:

2.37 Ability to Repay


For any consumer credit transaction secured by a dwelling, Company Name must ensure that the borrower has the ability to repay the transaction.  Failure to do so could allow the borrower to challenge the validity of the loan.  Some transactions are exempt from Qualified Mortgage Ability to Repay requirements, however, even with loans which are exempt from a rebuttal presumption of repayment ability, we will strive to only make loans which the borrower can repay..

Exempt Transactions


  • HELOCs
  • Timeshares
  • Bridge Loans
  • Construction/Construction Perm
  • Reverse Mortgages

In addition, some transactions receive an automatic “presumption” of compliance


  • Eligible for purchase by Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) (until sunset provision)
  • Insured by the Federal Housing Administration
  • Eligible for Guarantee by the USDA
  • Guaranteed by the US Department of Veterans Affairs
  • Originated by or for, or Approved for purchase by any state Housing Finance Agency (HFA)
  • Has been found eligible as evidenced by a written letter or certificate from a Department of Housing and Urban Development counseling agency that there is a reasonable expectation of repayment


On all other cases we will follow our normal “full documentation” methods of verifying customer information and qualifying the borrower.  Rather than list all documentation which we could potentially require, we refer you to our checklist of documents that we do require for all applicants, as applicable to their situation.  (See Complete Application Checklist and Pre-Underwriting Document Review Checklist which are updated regularly to reflect changing circumstances and requirements.)

The following sections of our operating policies and procedures thoroughly identify the process for complying with “Ability to Repay.” We believe it is not enough to meet the letter of the law, but to fully implement procedures that allow us to ensure compliance.  These operating procedures are incorporated by reference.

Origination Policies and Procedures

  • Loan Qualification/Pre-Qualification Process – we qualify all borrowers based on their ability to repay
  • Complete Application Process – identifies ALL potential documentation needed to substantiate a borrower’s ability to repay
  • Borrower Checklist of Required Documentation – Allows the borrower to identify all documentation required for qualification and verification of ability to repay
  • Points and Fees – identifies our points and fees structures for the purposes of calculating maximum allowable fees.

Processing Policies and Procedures

  • Pre-Underwriting Review Process – loan processing is the second stage of loan level ability to repay evaluation. Processing completes the Pre-underwriting review checklist to ensure all documentation to substantiate the borrower’s ability to repay is included in the loan file prior to underwriting evaluation.  Items identified as missing or incomplete are forwarded to the borrower and lender staff prior to proceeding.

Underwriting Policies and Procedures

  • Qualified Mortgage Guidelines – Underwriting maintains guidelines and credit policy for reviewing all loans, including the evaluation of whether a loan meets qualified mortgage requirements or not. In the event that a loan is not a qualified mortgage, underwriters will still establish the borrower's ability to repay.  
  • Credit Policy for Non-Qualified Mortgages – We and our investors and purchasers of loans determine whether, and under what conditions, loans which do not meet Qualified Mortgage Guidelines will be available and how they are underwritten. 

Quality Control

  • Production Quality Control Process – The Audit Process reinforces the production quality control process be re-reviewing a sampling of loans to ensure that appropriate documentation and qualification calculations are retained in loan files

Secondary Marketing

The determination of whether a loan is a qualified mortgage falls initially on secondary marketing when the loan is registered and priced.  Loan Level Price Adjustments and net pricing is presented on a daily basis. As a loan is identified as a non-QM mortgage, secondary marketing must establish that there is a market for the loan, or that the loan will be held in portfolio as non-salable.  Non-salable loans must STILL document ability to repay pursuant to standard practice. 

Determining Ability to Repay – Appendix Q




Property Collateral Not Primary Method of Repayment

Company Name will not rely primarily on the sale or refinance of the collateral in determining the borrower’s ability to repay the offered loan.

Calculation of Ability to Repay

In order to ascertain ability to repay we will always utilize industry standard ratio or residual income calculations:


  • Interest Rate - Fixed Rate or Fully Indexed Rate for a maximum amortization period of 30 years.
  • All debts, including housing expenses and liabilities, will be included in the calculation as required by Appendix Q of the Ability to Repay rule.


Changed Circumstances

If a borrower’s ability to repay changes, based on updated and revised information, the loan will be re-evaluated to ensure the borrower is still able to maintain ability to repay.

Second Level of Review

As with all credit decisions, should the borrower be deemed ineligible, or unable to repay the loan, the decision will be reviewed by a 2nd level credit review to examine if there are any reasonable alternatives to assist the borrower in obtaining financing.

The Policy Quandary

One problem that remains endemic to process management: listing a few eligible items, and then adding the phrase "...and any other items as may be required" or "but not limited to..."  Do we really think that that there are items that could be presented that we have never seen before?  Why not have a comprehensive list of checklist items?

A POLICY is not a PROCEDURE

This is what we try and reinforce in our discussions.  Don't write a policy just to meet a regulatory need.  Make sure you integrate the way you will comply within the policy.  If you, as a manager or employee, cannot see the clear execution of a policy within the day-to-day activity, then your policy likely requires you to do something that you are not currently doing.  Which is a recipe for non-compliance.



Monday, September 9, 2013

Broker v. Lender: Lender's Perspective - Trying to Make Sense of QM Pricing Model

The Qualified Mortgage (QM) points and fees and Higher Priced Mortgage Loan rule (HPML) threshold calculation looks like an MC Escher drawing where you go around an infinite staircase.  While brokers face QM comp issues, lenders have an even more daunting challenge: trying to calculate allowable discount points, LLPAs, MI, and LO Comp, and still keep loans below HPML thresholds.  In anticipation of the January, 2014 QM and Loan Originator Compensation Rule (LO Comp) implementation dates, the industry as a whole struggles to make sense of the regulatory scheme.

Lenders face even greater challenges with the conundrums and complexities of the rule in its implementation. The HPML adds wrinkles to the equation.  Even with a clear understanding, a practical solution to meeting both a borrower's financing needs and maximizing lender compensation may represent two incompatible objectives.

The Objective:  A Qualified Mortgage


Remember, the whole point behind this set of pricing exercises is to limit lender liability.  QM removes the borrower's ability to pursue a claim that the lender did not consider his or her ability to repay under the Qualified Mortgage Ability to Repay Rule (ATR).  As long as the loan meets Appendix Q requirements a court necessarily might dismiss the action. However, with an HPML, the lender loses rebuttal presumption exposing himself to risk if a borrower chooses legal recourse to challenge the mortgage.  Even if all other elements of ATR fall into line, the lender still takes risk when exceeding HPML thresholds because of the borrower's right to challenge.  Of course, the lender can still rebut the borrower's assertion but must prove ATR conclusively. (** See Blog Comment Below - attorneys may find a way around rebuttal presumption.)

When trying to parse out the various permutations of QM and HPML, it helps to look at specific examples. The biggest concern for many is the effect of the Loan Level Price Adjustments (LLPA) on the cost and rate structure. Since LLPAs are secondary market loan sale eligibility fees, and not specifically profit or pricing gain, it seems unfair, to lenders and borrower alike, to have had them included in the calculation of points and fees. One potential solution: "adjust out" the loan level pricing by adding to the coupon rate - effectively buying out the LLPA upfront cost.  While for brokers the regulatory scheme may simply limit fees and create triggers for HPMLs, for lenders the rules create a minefield of quandaries.


Quandary 1:  What is the price?




If you cannot see the embedded spreadsheet above, then click on the link to the right.

To determine whether a loan will trigger HPML and how much discount you can charge to offset LLPAs, you need to work backwards into a price in a calculation similar to borrower pre-qualification.

You may download a copy of this spreadsheet to work on by clicking here.  If you have found another resource, feel free to share it and we will post it on our updates page.

Until you have loan level price adjustments factored in you have no way of knowing the final price of the loan, and no way of knowing whether you can charge an adequate discount to offset the LLPA. Naturally, you can always increase the interest rate, tantamount to buying out the LLPA fees.  But this may be of little comfort if it triggers HPML.

Quandary 2:  Limits to Buy-ups and Prepays?


If the most you can charge, net of compensation, is two discount points (provided you keep your rate within 1% of the Average Prime Offered Rate (APOR)), a higher LTV, lower credit score borrower could potentially price himself out of the lenders rebuttal presumption for QM.  It may not be possible to charge enough fees to cover all of the upfront cost of the LLPAs.  To deal with this the lender may solve this problem by "buying up" the rate to "zero out" or minimize the upfront LLPA.

The problem: The buy-up/buy-down cost formulation has always had an options seller's position built in. From par, buying down the rate with points costs progressively more and buying up the rate yields progressively less.  The more you are out of the money, the less that option is worth (or the more the insurance costs).  You may essentially "run out of rope" as you move up coupon rates to offset the cost.  This is particularly true on ARM loans, which offer a much more restricted rate "buyup".

5.500103.375
5.375103.000
5.250102.625
5.125102.250
5.000101.875
4.875101.500
4.750101.000
4.625100.500
4.500100.000
4.37599.500
4.25099.000
4.12598.500
4.00098.000
3.87597.375
3.75096.750
3.62596.125
3.50095.250
3.37594.375
3.25093.500
Buy-Up Rate to Reduce LLPA Fees - it gets expensive and you eventually run out of rope.

Quandary 3:  Bought up the rate, now the loan is HPML


Secondary has always experienced the added prepayment risk from loans priced with high yield spreads. The higher the coupon relative to the market, the higher the prepay rate. Lenders offset this risk by adding prepayment penalties.  However, if the coupon is high enough to make the loan an HPML you may not be able to offset with a prepayment penalty because the Higher Priced Mortgage Loan rule prohibits these features.


This calculation shows how compensation, when combined with LLPAs for even moderately priced loans can create HPML Status.  In addition, high LLPAs can create HPML loans by their very nature.  Will the market accept the risk of not having presumptive rebuttal status?

Quandary 4:  You can't get there from here - APOR's artificiality


The regulatory scheme seems to imagine the mortgage market as some sleepy backwater drifting along oblivious to the machinations of global credit markets.  A loan with steep LLPAs already looks like a candidate for triggering HPML status.  The features of the APOR as an index calculation can make avoiding this impossible.

The APOR index looks at last week's data.  Because of this, depending on when an originator looks to lock a loan, APOR's relation to current market can be as much as two weeks old.  In addition, because this survey represents a range of lender pricing we don't know the extent to which the surveyed rate has been impacted by hedging strategies and pricing concessions.  One only needs to look at the rate surveys posted in local daily newspapers to see how bottom fishing originators may skew this data.

Because we confer QM status at the time of lock-in, the APOR index, with market conditions moving as they have in the past year, could potentially create a pipeline of HPMLs for loans with even moderate LLPAs.

Brokering Doesn't Sound so Bad Now...


Considering this complexity, the broker's limit of 3% compensation seems like an attractive option for avoiding issues in the regulatory scheme instead of the inverse.  Again, we ask the question:  Does mini-correspondent solve the broker's problem, or just add a set of additional problems.  For lenders, who carry the risk of liability, the questions are more dire than compensation.

When we overlay the pricing reality against the regulatory construct of QM, it seems clear that many more loans will achieve HPML status than originally conceived.  Will the market for these transactions shut down and add further inertia to a fledgling economic recovery?  Or will lenders accept the risk of no rebuttal presumption and continue make HPMLs.  During the 80's lenders originated 95% LTV loans using qualifying ratios of 25/33.  Certainly, if there is a place for HPMLs, they will have very restrictive guidelines.  

Thursday, September 5, 2013

Broker v. Lender: The Drive to Mini-Correspondent - Rational Response or Over-Reaction?

The question over Broker Compensation causing loans to be classified as HPML has caused some disruption in the business. It is at the heart of a movement driving current mortgage brokers to adopt the lender business model by becoming "mini-correspondents" to avoid adverse selection. The question posed: Is this a real cause or imagined? If it is real, is it worth the correspondent risk for brokers?

The Issue


On the face of it, the confluence of two rules does appear to create a problem. The first rule - The Truth-in-Lending Higher Priced Mortgage Loan rule (HPML) - requires that loans exceeding a certain interest rate have a number of consumer protections. The interest rate trigger which drives this provision involves calculating the Annual Percentage Rate (APR) which takes into account upfront and monthly lender fees. This calculation is compared to the Average Prime Offered Rate (APOR) which is a WEEKLY index compiled by Freddie Mac in what's known as the Primary Mortgage Market Survey. The rule considers any loan exceeding this calculation by 1.5% a Higher Priced Mortgage Loan requiring extra due diligence and disclosure. To this point all mortgage industry participants must play by the same rules. The conflict occurs when the Truth-in-Lending Originator Compensation Rule is considered.


The second rule creates the problem. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) initiated reforms to the Truth-in-Lending Act, known as the Anti-Steering Rule (LO Comp). This rule constrained loan originator compensation to 3% of the loan amount.
The possibility of triggering Higher Priced Mortgage Loan requirements is exaggerated on mortgage broker originated transactions potentially limiting borrower choice.
In reality, a very small sliver of loans could create a comparative disadvantage. To start with, only those in which the loan starts out as marginally HPML triggered could be an issue. This is the case when you have PMI, MIP or a lot of overlays. In these cases, lenders will run a nearly equal risk of triggering HPML requirements. Once you do have this higher APR present, then you must more carefully measure the transaction. Only then do you have to consider the magnitude of the broker's compensation and its effect on APR - the larger the broker's compensation, the more likely to trigger HPML relative to the same lender's transaction.

Consequences - Limited Choices for Consumers = Higher Costs


For consumers, the compliance risk associated with HPML means fewer lenders willingly offer these loans. Brokers, who can provide alternatives and drive down costs, may be selected out of comparison if the transaction falls into the narrow range of transactions that would be considered HPML if originated by a broker but not by a lender.

In this case you can see how, with a higher APR to start with, the liklihood of triggering HPML requirements is exacerbated by the inclusion of the originator's compensation.  This inclusion exaggerates the APR of the broker originated transaction, which could limit borrower choices in seeking home financing, ultimately costing consumers more.  


But how much of an injury is this?


Take a rational view of the HPML requirements and you realize these already exist in the non-HPML world. Most lenders require escrows, particularly on loans with MIP or PMI, which are the loans most likely to be HPML. We always have to give borrowers copies of appraisals. We already consider ability to repay on all transactions. The limitations on loan types - no prepayment penalties, negative amortization or balloons, are already considered for most of the industry's loans. How is a broker limited if a loan should be categorized as HPML? The truth: the broker doesn't experience a negative impact.

Most of the consequences of tagging a mortgage as HPML have already been incorporated into other requirements - ability to repay, Qualified Mortgage, Appraisal Independence.


The Rush to Correspondent

As a mortgage service provider, there are legitimate reasons to elevate your business to correspondent:

  • An investor offering a specialty product ONLY through correspondent channel 
  • The ability to control generating closing documents locally and improve service delivery 

But when measured against the substantial risks correspondents take, is it really worth it simply to avoid this one small regulatory wrinkle? The NAMB has provided a great TWO PAGE overview of the risks associated with small firms taking on correspondent responsibilities.

  • Repurchase risk 
  • Audit risk 
  • Compliance risk 
  • Liquidity risk 

Slow Down There Big Fella! 


For brokers the APOR/APR issue seems to be problematic, but the broker starts at a lower APR then adds fees. How likely are you to trigger HPML on most transactions that you wouldn't trigger if you were a lender? Small chance - you have same overlays/MI, etc. It is not worth taking on correspondent risk to avoid the relatively rare occasion when a broker transaction would carry an APR so much higher than a lender transaction to trigger HPML. Plus, borrower paid transactions are excluded from this entire debate. Plus, what really happens when a loan becomes HPML? You can't have prepays balloons or negam, you have to qualify, and you have to give the borrower a copy of the appraisal, right? WE DO THAT ANYWAY!

Tell me if I'm wrong. The furor is causing a lot of disruption among small brokers. Much of this concern has been caused by wholesalers who want to differentiate their service offering, so have stirred the pot over this debate.  Warehouse lenders have also chimed in on the importance of having a warehouse line.

Holy Secondary Conflict, Batman!


There are bigger problems with the HPML rule. APOR is set once a week. We have seen major fluctuations in pricing to the upside, and when this happens simple market movement can cause EVERY LOAN IN YOUR PIPELINE to be HPML. Maybe the day is here where we simply assume each loan will be HPML, and move forward from there. We are doing it anyway.

Additional Resources

Bankers Online HPML Checklist - You can document that you determined whether a loan was HPML or not, and then what you did to comply. 

Thursday, August 29, 2013

Secondary Marketing: Hedging is Half Science, Half Art

There are two elements of secondary: 1.) the actual process of pricing, locking and delivering loans (and the unfortunate loss mitigation from buybacks), and 2.) hedging strategy.

You have to separate these two elements because the secondary process is pretty much standardized - we have been able to template it out.

Hedging, however, is a developing science - even an art form.  So when an investor, regulator or agency asks you for a hedging policy you will be mixing a cocktail that runs from

1.) 100% hedged through forward commitments,
2.)  a combination of best-efforts and mandatory whole loan delivery contracts
3.)  a hedging/options adviser using options strategies - like one of the many advising firms that specialize in this.
4.)  naked! (don't tell the regulator if this is how you are hedging...)

Strategies 1 and 2 are covered in the template process.  If you are using an options broker to hedge pipeline, that broker will provide you with the strategy they are utlizing, and can provide the financial performance model for your lock/loan/product mix.  Include your broker's hedging strategy as an addendum when providing your secondary marketing policy to a regulator, agency, warehouse bank or investor.

Having a good broker can also help you. You should get recommendations, but here is one to start with (Anthony used to be a wholesale/correspondent representative, so understands your business):

Anthony Ianni
Lender Services - MCT Trading
aianni@mctrade.net
Phone 610-742-1816 (mobile)

Additional Resources:

Article - Everything You Ever Wanted to Know About Hedging... - Schell//Hopson, 2007
Book - Demystifying Mandatory - Jennifer Fortier

Take a look at our secondary policy here:

Secondary Marketing Policy and Procedure Manual table of contentsSecondary Marketing Policy and Procedure Manual Table of Contents page 2

Thursday, August 22, 2013

Association Membership – The Ultimate Professional Network

Inexplicably, many pass on this industry benefit, which adds resources, credibility and a powerful network


It is an astonishing fact that many loan officers, processors, closers and underwriters do not belong to their local or national association.  In an ad-hoc survey of state mortgage broker associations, executives reported that membership percentages hover between 18 – 26% of companies.  State mortgage banker associations report somewhat higher numbers on average, but this is due to the fact that they are more selective in whom their target members are.  If the mortgage bankers associations looked at all mortgage finance professionals, they would see similarly small numbers of members.

The mortgage broker conventions also tell a story of low participation.  At a recent state convention, more than one attendee noted that there were more wholesale reps than members.

This can be attributed to apathy and the general lack of commitment to mortgage origination functions as a career.  Compare the mortgage profession to the Real Estate industry.  REALTOR – membership in the National Association of Realtors – is synonymous with the real estate agent, even though not every agent is a member of the national association of Real Estate Agents.

Political Action


Despite this apparent lack of support, we still have all benefited from the role of the associations even if we did not participate.  Political action committees and lobbyists “have our backs” while we go about our business.  Unfortunately, most mortgage personnel are not even aware of the issues that could affect their businesses so dramatically.  Association lobbyists are in the trenches every day fighting against excessive regulation, mitigating attempts to change our business for the worse, and preventing outside players from creating more competition.

“There’s Nothing In It For Me?”


Of course, it always comes down to the benefit to the individual in participating, because there is a small cost involved in being a member.  Associations do a relatively poor job of marketing the benefits of membership.  Largely, they seem to believe in the principle of attraction instead of marketing.  The associations don’t tout some of the benefits of membership, because there are contradictory interests between constituent groups – companies and individuals.

Education


Associations provide the most consistent source of information flow. They create ability for many different companies and individuals to attract speakers and programs that a single entity could not.  As a consequence, costs for education through the association are substantially reduced from market prices.

For example, the price of live training in the marketplace is between $125 - $250 per person, per day.  The average price of association provided training is $79 per person, per day.  This is a substantial difference that can offset the cost of membership.

Networking


We talk about networking as if it were, in itself, a benefit.  Knowing people, without an understanding of how that can help you, isn’t a benefit.  The iconoclastic culture of the mortgage broker business is that we are all sort of “lone rangers” – we don’t like to ask for help and we don’t need help.  Harvey MacKay, author of “Swim with the Sharks”, wrote another less well known book called “Dig Your Well BEFORE You Get Thirsty”.  The wrong time to ask for a favor is when you desperately need one.  Examples of relationships paying off in this way:

Help from a wholesaler to quickly get signed up for a new product
Finding out from other brokers or lenders how to deal with a specific situation
Ability to refer a troubled transaction to someone who can help

The best references on new products and investors come from these networking functions.  Asking another attendee about a particular investor or transaction may yield the opinion that the investor is slow or disorganized, inflexible in underwriting, or has a penchant for declining loans when interest rates rise.  This may dissuade you from using that investor, or may confirm that your experience was not an anomaly.

Some benefits of networking accrue to individuals, but not necessarily to the companies.  Networking makes it much easier to find a job, hire someone, or learn of opportunities in a marketplace.  No one says that these networking events are tantamount to open air employment fairs, but that is the subtext of networking.

Industry Resources


Often, membership in a state association will convey benefits from a national association.  These resources include databases, research, economic analysis, business trends, and other industry information that we use to plan our business strategies.

Financial Gains


We have all seen the “affinity programs” associations tout that really aren’t anything other than envelope stuffers – discounts on car rental, overnight delivery, or phone services.  However, many associations do bundle services from affiliate members – credit bureaus, bonding companies, health/disability/liability insurance and even PMI programs that can result in a financial benefit to the members.

Conventions and Meetings


Aside from being exciting and energizing events, conventions and meetings have broad opportunities in other areas.  Often, higher level executives attend meetings, which help leverage a career or business venture.  Combining travel to a business event with family or pleasure travel can make part of the expense deductible – if only more conventions were held in Las Vegas, Hawaii, or Orlando!

For smaller companies, association meetings or events can serve the double role of also being the member company’s “annual meeting”, chairman’s club or award event.  The celebration – cost of food and drinks – can be absorbed by a benevolent sponsor’s hospitality suite, which saves the member company money.  This may seem like a “cheap-o” strategy, but everyone wins.  The wholesaler or vendor gets more exposure and the small member company reaps the benefits that accrue to all attendees; AND the member company gets to hold a productive meeting.

Credibility and Accountability


One of the most frequently overlooked benefits of association membership is the credibility it lends to the member.  It is also the most important benefit for smaller, less established companies.  Including a mortgage broker and/or mortgage banker association logo on all company materials, advertising, business cards, and correspondence infers compliance with the highest professional and ethical standards.

As a customer, seeing this credibility gives me comfort that I am not going to be taken unfair advantage of.  Investors and wholesalers understand that member is striving for best practices and is willing to be held accountable, making it more likely that the investor will approve the member.  Most importantly, a regulator knows that the member adheres to ethical standards and will receive the benefit of the doubt if a complaint is lodged.

Recommendations for Mortgage Associations to Add Value


I recently taught a Continuing Education class for over 150 mortgage bankers and brokers.  The class comprised of mostly senior people.  80% of the attendees had over 10 years of experience; 90% had over 5 years.  Compared to past years when these classes consisted of people with less than 5 years experience, the message struck me clearly:  We need to bring new people into the industry.

Associations need to be at the center of community services.  Volunteerism and membership accrue benefits to membership as a whole.  By pooling resources members gain competitive advantage in providing services, like education, recruiting, and public relations in addition to their accepted role in political action lobbying.  In addition, the association can perform a self-regulatory function, providing customers, vendors and referral sources with a mediation and arbitration source that does not involve legal and criminal sanctions.

Other Articles and Resources on Association Membership

9/2013 -  Eric Kujala's Article on the Michigan Mortgage Lenders Association

Friday, August 16, 2013

Broker v. Banker: Regulation Forces Consumers to Choose Higher Priced Loan Options

Double Counting of Fees and Misleading Disclosure Rules Lead Consumers to Choose Higher Priced Mortgage Options


Due to "double counting" of fees under the Dodd/Frank final rule, published in the Federal Register June 12, 2013, effective January 10, 2014, consumers will be driven to choose higher priced loan options when selecting between independent originators and lenders.  "Double counting" in this description, defines what occurs when compensation is included in the rate AND the concurrent originator compensation for the purposes of calculating disclosures and regulatory limits.  

Higher Rates for Consumers


this shows that mortgage lenders and mortgage brokers compensation affects the disclosure of rate that consumers receive
This example is based on 1.5% loan originator compensation.  While the Dodd-Frank Rule intends to create transparency, it only impacts loans originated by a small percentage of originators, leading consumers to choose higher rate mortgages.  The mathematics of this issue are discussed in detail on the IMMAAG website here.


Consumer confusion causes the customer to choose between the higher of two identical loans.   This scenario offers a moderate comparison of the costs; at 5%, the total payments are $347,860 while at 5.125% the total payments are $352,847 - a difference of $4,967 in extra costs to the borrower.

Higher Fees for Consumers

This chart shows how undisclosed mortgage lender compensation results in higher costs for consumers
The mathematics of the compensation rule and the challenges posed are discussed in detail on the www.thefutureofmortgagelending.com website


Consumers are forced to choose higher priced mortgage options under the new rules.  This is required by the disclosure of originator compensation under the CFPB Final Rule, and limits of compensation under Qualified Mortgage Standards (Truth-in-Lending Act, Regulation Z), by including non-borrower paid costs in the disclosures and limits.

The Devil is in the Details


These illustrations represent the facts and not exaggerations.  As clear examples of unintended consequences, one can see that the issue results from misunderstanding the technical details of the workings of the mortgage business.  In attempting to regulate every aspect of the mortgage industry at a granular level, the well-meaning Congress and the Consumer Financial Protection Bureau have lost sight of their goal: "How do we help consumers?"  

"If it Ain't Broke..."


The pre- Dodd-Frank Reform disclosures did this effectively for 50 years.  The pre-2010 Good Faith Estimate allowed consumers to see the interest rate, the loan terms and the bottom line costs.  A consumer could choose between two competing offers and decide which one suited his or her needs best. 

One reform helped all industry participants.  HUD's "Lock-in" of closing costs, once disclosed, ended the practice of giving one disclosure initially that bore no resemblance to the final closing costs.  Congress, HUD, Sean Donovan, and the CFPB could have stopped there and declared victory.  

Today's disclosures do more to conceal costs than they do to illustrate them. The 2010 Good Faith Estimate does not provide a breakdown of the total monthly payment.  It includes costs that the borrower or buyer does not pay, and excludes costs and fees that borrowers do pay.  The new Truth-in-Lending disclosure rules require advanced algebra to understand.  I am a mortgage industry professional, an instructor and author - I have a hard time understanding the rules.  How does this help consumers?  

Congress has an opportunity to roll-back these provisions before they become effective.  Contact your Congressman and Senator and express your disappointment at the new rules.  If he or she is an advocate of transparency and fairness, they will support HR 1077 and S.949.  In addition, they should advocate for the abolition of the Qualified Mortgage under Dodd-Frank, as it simply costs consumers too much money.  

Thursday, August 8, 2013

FNMA QC Plan Requirement - Seller's Guide Section D Revision


FNMA has updated its Seller's Guide effective 1/1/2014 in its July 30, 2013 announcement.  FNMA's quality control guidance has grown more specific since reaching the saturation tipping point on loan buybacks.  Its new corporate philosophy hinges on the concept of "we told you so," instead of "buy this loan back."

The updated seller's guide's section dealing with quality control begins at page 1145 and extends to 1183 for a total of 38 pages.  If you expect more than basic guidelines from this section, you should manage your expectations down.  The requirements are quite general and still require the lender to make additional efforts above and beyond the stated requirements in order to ensure capturing deficiencies. Considering that our Quality Control Procedures are over 100 pages long, when all exhibits are included, industry best practices are still a better benchmark for your QC program than any single investor's idea of a plan.

Major New Requirements

While the announcement (FNMA Seller's Guide Update Announcement here) lists three pages of updates and clarifications, there are really only a few major changes, and these are not so much changes to industry best practices, but added responsibilities for sellers/originators that FNMA hopes will increase transparency in lender's processes. Effective 1/1/2014:


  • You must provide monthly reports to FNMA as to your quality control results, findings and remediation. 
  • You must report any defect resulting in an unsalable loan 
  • You must establish target defect rates identifying what threshold will trigger your company taking corrective action beyond the loan level remediation.  This includes identifying process, personnel or product changes.
  • You can no longer use another 3rd party to review your 3rd party reviewer.  Vendor reviews MUST be conducted internally.

We have provided updated policies and procedures to insert into your quality control plans MortgageManuals.com's Updates and Downloads page.

A cautionary note of interest:  FNMA recognizes some of the QC technology providers by name, and encourages lenders to use these technologies to AUGMENT their internal procedures.  They clearly state that these measures, by themselves, do not meet requirements.  FNMA wants lenders to take an active responsibility for ensuring quality, not delegate it.

It's In There


This matrix shows the changes FNMA has made to its QC plan requirements and links them to the section of the MortgageManuals.com quality control plan we have updated.
This chart links the FNMA requirements to where they should exist within an industry
standard quality control plan.  MortgageManuals.com customers receive these updates
as part of their plans.
While an update from Fannie Mae, or any GSE, prompts a flurry of attention, please note that FNMA has stated many of the changes announced represent "clarifications."  For customers of MortgageManuals.com, your plans already include these requirements as they represent industry best practices.  The elements that are not currently in our plans are those in which FNMA has requested specific verbiage acknowledging the reps and warrants of sellers/lenders.


Solution Template - Lenders Must STILL Determine Their Own Percentages and Procedures


We have provided a template procedure, which includes the development of reports to use in evaluating your QC reviews for patterns and identifying when targets/tolerances have been exceeded.  We recommend using your LOS for capturing this data, as you can drill further down into the loan file information, and use the utilities included from most major platforms for ordering, tracking and reporting on re-verifications and conditions.

What is Your Target?

The best indication of your target defect rate is not some arbitrary computation based on industry statistics.  You must examine your own experience.  Break the results from your past audits down into their components.  Do you have a lot of clerical errors? (4506 incorrectly completed, UDAP not submitted)  What percentage of your loans get kicked back in pre-purchase reviews from your investors?  Is it documentation, compliance, financial issues?  Have you had any fraud, misrepresentations or substantial changes that made loans ineligible?  These are the questions that should make your target defect rate obvious.

Mistakes happen, but if you embrace this process your company will come to grips with the idea of process improvement and you will benefit, not only in improved loan sale activity, but in productivity as redundant mistakes get worked out of your production systems.



Wednesday, July 31, 2013

Learning to Love Appendix Q - Ability to Repay Part 2

Inside the Box - It's a tight fit...


In Part 1 we talked about the benefits of Appendix Q, how having clear guidelines on how to make loans and what was acceptable for Qualified Mortgages might be a good thing.  When you dive into Appendix Q, which is the regulation that codifies those underwriting guidelines into law, you start to see the box of loans that might get approved as QMs getting smaller.  At the same time, some ambiguities still exist that a smart loan officer, processor or underwriter might use to help a borrower stretch.

Ability to Repay Cheat Sheet (QuickNotes)

This is a one page version of the 172 pages of qualified mortgage ability to repay for mortgage compliance training purposes
Download and review the cheat sheet and use it to discuss the regulations
with your staff.  Download the ABILITY TO REPAY study guide.

We have included our first draft one-pager to GoogleDocs for you to download and comment on.

Our intent is to try and take some of this massive regulation and cook it down into a manageable piece of information.  This sort of contraction works to allow us all to see the larger picture.  It does contain some shorthand for mortgage professionals, but we act in brevity in order to not waste time on flowery details.  There's plenty of time for flowery details in the CE Class.

More than anything, we want to start to look at tools we can use to work with this data  in a way that helps loan originators help customers qualify for a loan.  This is, after all, what the rule was designed to assist with.

Notable Omissions and Questions

When you review the actual text of the rule, it is clear that it has been cribbed from FHA guidelines.  They state this within the regulation, but in reviewing it clearly have failed to completely edit it, including references to "endorsement" when establishing time frames.  Obviously, this doesn't apply to the mortgage industry in general but only to direct endorsement loans.

Other references come from someone's dated recollection of the products in the mortgage marketplace.  For instance, there are multiple references to the "Two Step" loan, which Appendix Q defines as a loan with an interest rate that changes on a fixed schedule.  This was a hybrid product in the 80's, but I haven't seen a Two Step, the way it is defined within Appendix Q, since then.  The more recent definition of the Two Step was the ARM alternative to the balloon, which was fixed for 5 or 7 years, and then permanently modified to a fixed rate.  But this is not what Appendix Q refers to.

When calculating net rental income from the subject property, one area states "use the 25% vacancy factor" when another area specifies you cannot use income from a rental property when it is the subject property.

Income Quandaries in Appendix Q


The biggest trouble spot deals with variable and self-employment income, where conservative underwriting seeks to exclude any risk without defining situations that may be beneficial for the borrower.  On the pro- side, shorter than 2 years self-employment is allowed under certain circumstances.  However, Appendix Q does not specify how much a borrower's income can vary when you have declining income in an averaging scenario.  Declining income, in any situation, makes the loan ineligible.

In addition, self-employed borrowers must be compared to other similar businesses in the area.  If the other businesses are in decline the loan is ineligible.

Residual Income?  Still Not Defined


Ratios and residual income are referred to synonymously, but there is no qualification rubric for anything except for the 43% total debt ratio.  This is a hopeful sign, in that the use of a residual income computation mechanism can be applied in lieu of a ratio when circumstances dictate.  

We will examine residual income and asset depletion models in our next Appendix Q Issue - Learning to Love Appendix Q - Calculating Residual Income Methods

Thursday, July 25, 2013

Banker v Broker: Future of the Broker Business is its Past

We Are In the Same Business - Why the Divide?


In the conversations, news, editorials and blogs I follow I see a real philosophical divide between brokers and bankers. It grows more pronounced as rates rise and the regulatory dust settles revealing all the implications of the new rules.  Bankers (correspondent lenders and banks) have a derisive view of brokers that seems to spring from a perception of unethical marketing practices.  Brokers feel that bankers have an unfair regulatory advantage with respect to compensation.  As expected, the position you take on these issues depends where you sit.

Sample mortgage broker advertisement from the Willmar Tribune, circa 1895
Advertisement in the Willmar Tribune
November 18, 1895

The Future of Mortgage Brokering


To contemplate "survival" or the "future of the mortgage broker" you must have a clear understanding of the roles these distinct business models play in the marketplace.  Before there were institutional mortgage lenders who arranged financing by selling securities into the capital markets, banks, sellers and private lenders provided  the sources for home financing.  This financing often carried draconian terms; call provisions, short term balloons, and rarely extended more than 5 years.  If your property was mortgaged, you had considerable worry about your ability to renegotiate at maturity, or whether the bank or seller would demand payment unexpectedly.  To deal with these exigencies there was the mortgage broker, "mortgage agent" or "loan agent."

The sources for loans - banks, insurance companies, private lenders - weren't always easy to locate.  These institutions also didn't necessarily have the capacity or desire to deal with the consumer.  If the institution did go directly to the consumer, just as is true today, the borrower didn't have the expertise to negotiate and query loan terms to identify a good deal. The market need for someone to play the role of mortgage broker - an intermediary between lenders and customers - demonstrated itself in the media of the time.

What Value Does the Mortgage Broker Add? - A Marketplace of Transparent Terms and Customer Choice


Beyond simply facilitating the loan process, brokers should add value by seeking out products not necessarily available in a particular market.  As the advertisement in the Willmar Tribune (Nov 12, 1895) shows, the loan agent proves value by showing the customer that there are multiple programs available from many different lenders; the broker brings new products to market.

In addition, the broker allows the customer to comparison shop the available terms.  The unspoken advantage for the customer dealing with the loan agent here is that IT'S THE BANK that is likely to take advantage of you, so you should work with a broker who will be transparent. How DID THIS get turned around?  Today the popular perception is that it's the broker who is dishonest.  Clearly, this is where today's brokers have fallen furthest in delivering their value to the marketplace.  Undisclosed fees, lack of process transparency, bait and switch loan offers all have contributed to this perception.  Sadly, some of the outcry over unfair regulation stems from a desire to hold on to these less than transparent practices which, frankly, provoke understandable suspicion.

Advertisement from
the front page of the Dodge City Times - 4/18/1888
In the post-Civil War reconstruction period (1865-1885) credit demand grew, spawned by economic growth and investment.  In these excerpts you see images and methodologies that are not that different from the solicitations you see today.

The creation of the government guaranteed mortgage and FNMA in the 1930's changed that, heralding the entry of a new business model - the mortgage banker - who competed with the banks to provide this financing.  The first S&L crisis (when rates went to 18%, driving S&Ls with portfolios of 4% mortgages into insolvency) exposed the value of the mortgage banker's business model, selling fixed rate securities and passing interest rate risk on to the long-term investor.  But the mortgage bankers are not really lenders.  They are "proxy-lenders" who can make loans intended for resale on a delegated basis.

The Value-Added Service for Mortgage Bankers and Correspondents


Technically, the mortgage banker provides the same value as the mortgage broker, in terms of transparency: to be competitive with a set of proxy products, you have have to have a sharp price.  In the secondary market where these proxy loans are sold, the pricing moves second by second and an entire year of marginal gains in loan sales can be wiped out in one bad day.  For this reason, a mortgage banker's true cost - total net price when considering origination fees, points, servicing premiums and net warehouse interest margin - is irrelevant at the loan level. Some days you are ahead, and some days you are behind.  Then there are expenses that you cannot quantify at the loan level:  deficiencies, buybacks, insurance and hedging costs. The only true measure of your profitability is your ability to offer products in a relatively similar band as other proxy lenders.  With this risk, why do mortgage bankers even want to be in this business?

The answer lies in the production of loan servicing and servicing rights.  If a lender has the right to collect 0.375% - 0.50% annually on its portfolio of serviced loans, then the company can have long term viability regardless of the origination climate.  $1 Billion in mortgages can generate $3.75 million in cash flow, which can support operations when originations start to flag.

The advantage the mortgage banker provides - in addition to a sharp price competitive with other proxy lenders - is the ability to control a transparent process.  Lenders control the underwriting and funding process internally, whereas brokers have to rely on their correspondents for service delivery.  Technically speaking, a mortgage banker should never lose the service delivery competition (who can close the loan faster?) to the mortgage broker.

Two Completely Different Business Models - There IS No Competition


If both business models adhere to their market derived functions, no conflict should ever exist between broker and mortgage banker.  In fact, there should be an easy symbiosis:  brokers should refer borrowers who are ideal proxy lender candidates to the proxy lenders - lenders should refer borrowers who need a variety of products outside the proxy lender's range to the broker.

Conflict only arises when the lender tries to act as a broker or the broker tries to act as lender.

In the early '00's many mortgage bankers used the secondary market to create a fictitious price-for-risk model allowing them to place outside the-box exceptions and sub-prime borrowers.  This was not "proxy lending" as clearly defined by the guidelines in place, but was a manipulation of the due diligence cycle for short term gains.  We all understand this now.  As these loans came into wide distribution in 2005 and 2006, institutional investors began to push back as the poor loan quality was revealed.  American Home Mortgage, the largest proxy lender at the time, literally collapsed in May of 2007 within 2 months of the completion of the quality control cycle.  The remainder of the story we have all lived through.  This short term manipulation of the due diligence cycle signaled lenders acting as brokers: trying to provide a market solution that didn't exist.  Brokers, on the other hand, have been placing hard to qualify, credit impaired borrowers as a market defined business model.

On the other side, brokers capitulated to the proxy lender's behavior.  Brokers began to represent themselves as "lenders" and "correspondents" using faux processes such as table-funding to create the illusion that the customer was dealing with a proxy-lender.  Brokers used this illusion to justify inflating or concealing their origination fee income to the customer, while holding themselves out to customers as offering the "best price."  While the principle of "buyer beware" should guide a consumer to vigorously validate market terms, customers do not possess the broker's expertise.  When brokers act as lenders they abrogate their market role, which is to provide a transparent alternative to proxy lenders and product alternatives to bank lenders.

The 2007-09 contraction in the broker business, where 90% of brokers closed or went to work at banks or mortgage bankers, simply reflected this abrogation of duties.  Brokers acting as lenders cannot subsist long term.  It is a capitalist paradigm that your business model must follow its optimality. In times of high refinancing activity it may appear possible because the broker provides the excess origination capacity that proxy lenders cannot afford to invest in.

To survive in the future brokers should look at the business model's successful past.  Seek out products that are not widely available through lenders. Provide service niches. When providing proxy-lender products such as conforming loans, prepare to offer them at the sharpest possible price.  "Be true to yourself" is a life aphorism for success.  Brokers should not focus on their unnatural existence of the past 10 years, but on the future and innovating to meet the challenges of higher rates, tighter guidelines and regulation.  Brokers were a force 150 years ago, long before the proxy-lenders existed.  In a world of GSE reform, they may survive past them, too, if they are true to themselves.

Tuesday, July 23, 2013

Learning to love Appendix Q - Part 1


For those of us who have prided ourselves in our knowledge and ability to navigate borrower qualification guidelines  the advent of the Qualified Mortgage and Ability to Repay provisions known as Appendix "Q" strike cold fear in our hearts.  We distinguish ourselves in our ability to fit a round peg in a square hole, working each nuance, arguing around the edges with underwriters, and find a way to get loans approved that others can't while still giving those borrowers the very best rates.  To us, the fact that these guidelines have now - for the first time in mortgage history - been codified into law represents the end of the utility of our long years of study to know every nook and cranny of lending rules.  But if we can look at it from another perspective, we can find some advantages to the black and white approach of the regulation.

Consistency


We know too well how one underwriter allows certain elements, and another treats things differently.  While we can sometimes take advantage of these discrepancies, when a loan ends up in the wrong hands it can also create disruptions in your pipeline.  Remember your battles with the underwriter over what percentage of non-taxable income could be counted, or whether we could accept a borrower who had only been self-employed for a year?  Appendix Q removes the ambiguity of these circumstances and allows us to accept applications with less concern over eligibility.

Shortened Learning Curve


As a new loan officer you face the biggest hurdle in learning loan plan specifications for, potentially, hundreds of different investors.  In the past, we have shortened this hurdle by saying "learn FHA, Fannie and Freddie and VA, and then learn how the other programs are different."  Great!  But that was still  FOUR completely different sets of guidelines.  With appendix Q, a new loan officer must just learn ONE set of guidelines as a starting point to our origination career.

FHA Guideline Overview
Sample Loan Plan Specification

Finally, A Practical Continuing Education Application


How many times can we study RESPA, TIL and ECOA in our annual CE?  The addition of lending guidelines to the regulatory construct allows us to open the area to discussion in "for credit" education.   We study loan guidelines on a daily basis as a matter of course - now lets do it for CE credit!

A Starting Point - FHA


Our lesson, at the highest level starts with understanding FHA lending guidelines, since Appendix Q extracts underwriting guidelines from the HUD-4160.2

As we go through the process of understanding these guidelines more intimately we will try and assemble them into a concise collection of QuickNotes - easy reference tools for us all to compare to.  See the FHA Guidelines we have assembled here:

Thursday, July 18, 2013

E-SIGN Policy and Procedure - Free to Download and Comment

How do I Know That my Customer Actually Signed That Document?

Click here to access the E-SIGN Policy Template - Read, Review, Comment, Download - Be part of defining best practices.  

This is one of those pernicious questions.  How do you know?  For compliance managers, investors and regulators alike, the issue is fraught with peril.

FNMA has been ready for e-mortgages since 2007
While FNMA, FHLMC and other agencies have generally accepted and provided guidelines for E-SIGN for mortgages they purchase, they have combined to purchase a paltry number of completely electronic loans. In fact, the law states that E-Signatures are equally as valid as live signature.  The difficulty in implementing E-SIGN technology surrounds the fact that, since the signature itself is not present to persist in perpetuity, or as long as records must be retained, we must retain the entire architecture and underlying records of the E-SIGN technology in order for the e-signature to be completely valid.  Because of the difficulties with this, some of which may not yet be foreseen, many lenders persist in requiring live, or “wet”, signatures or a facsimile thereof.

The Electronic Signatures in Global and National Commerce Act (E-SIGN) was implemented in 2001, supplementing the Uniform Electronic Transactions Act (UETA).  Due primarily to difficulty in affirming electronic signatures for note and security instrument purposes, but also to the legacy of paper processing,  “wet”, or live, signatures continue in prevalent use.

Among the exhibits in the loan files, electronic facsimiles have become ubiquitously acceptable - credit reports, appraisals, income and asset documentation can all be accepted.  The last major barrier to embracing E-SIGN was the IRS' refusal to accept E-SIGN for tax transcripts (4506-T) required a live signature until January 2013.  With this impediment removed a groundswell of lenders have begun to accept fully electric files.

With this in mind, we need to complete the circle of our understanding of this part of the process:

1.)  How DO you know its your borrower?  Do you have a policy in place to ensure compliance?
2.)  What happens when a customer opts out of E-SIGN?  Which forms have to be re-signed?

There are many other questions and we should discuss them here.

For MortgageManuals customers you can download the template on our Updates and Downloads page

Wednesday, July 17, 2013

Response to HUD/FHA's Request for Comment on Quality Control Procedures - TAKE ACTION

FR–5723–N–01 Federal Housing Administration (FHA): Single Family Quality Assurance- Solicitation of Information on Quality Lending Practices

HUD has requested feedback from the industry on revisions it needs to make to its quality assurance process.  It is important to weigh in on this.  WE DO NOT WANT ANOTHER 4060.1 (REV 2)!  What we need is clarity on what FHA is finding that is causing problems so we can incorporate those issues into our current quality control plan.  WE DON'T WANT TO HAVE 2 or 3 DIFFERENT PLANS.  We want to have one plan that we can use to insure that our loans meet ALL guidelines.

PLEASE RESPOND TODAY that we need clarity, not a new bureaucracy.  Submit your response by copying and pasting the last paragraph of my response below.  If you don't act now, we will all pay the consequences.

"
July 17, 2013

As a participant in, and subsequently a consultant to, the mortgage lending industry I applaud FHA/HUD for taking this proactive approach to risk management through production quality control.  

OBSERVATION

The industry has made substantial strides in updating mortgage quality assurance standards.  Both FNMA and FHLMC issued detailed guidance communicating with real transparency their expectations for the level of review and the things that will cause a loan to be defective.  Their updates came at a time when the ability and appetite of the industry to absorb putbacks had evaporated.  Lenders no longer simply capitulated to indemnification demands but challenged them because of the opacity of the GSEs requirements. 

In our business we review the 4060.1 REV-2 to help prepare a lender for mortgagee approval.  The quality control measures prompted in the 4060.1 REV-2, when adhered to the letter, expose the lender to substantial risk of omission.  The guidelines show FHA's laser focus on a few narrow areas, and then silence on everything else.  Lenders who follow these quality guidelines to the letter will have defects: the requirements are too open-ended to provide real direction. 

For this reason, we insist lenders install a comprehensive "production quality control process" which includes peer quality control review of the application, processing, underwriting and closing for EVERY loan, in addition to hiring/management.  These functions are "re-reviewed" in the post-closing sampling.  This proactive checklist system can evolve if we discover additional findings.

RECOMMENDATION

PLEASE DO NOT create another 4060.1 REV-2 type manual.  FHA should disseminate a list of defects it has found on loans (like a FAQ) that lenders must use to screen their files pre-underwriting and pre-endorsement.  FHA should work to align its process requirements WITH industry best practices instead of a "special" track.  Change fatigue will impair adherence to "new" requirements."


A Comprehensive QC Checklist will go much further in improving loan quality
than another manual.
Our quality control plans include extensive editable checklists that allow your personnel to address potential loan quality issues BEFORE they become buybacks or declined loans.  Let's have a discussion of best practices to insure we are catching everything.

I have attached a sample of a comprehensive QC checklist for production.  (It is an older version, because the current version is one we sell - I don't want to cannibalize our product)  Please feel free to comment or talk to us directly about implementing a complete quality process.

Friday, June 28, 2013

Vendor Management Policies - What's Really Involved?


Click here to download a copy of the vendor management approval process
checklist.  Comment below or in the blog and learn how to get an up-to-date policy
for your company that gets maintained for free.
Free Vendor Management Checklist

We make the assumption that our business partners all comply with the rules and regulations of our common business.  If they don't, we have been used to the idea that we can simply say "Not my fault!"  Unfortunately, while the idea of "plausible deniability" seems comforting,  the industry no longer allows us to blame someone else for ignorance.  We now need to manage our vendors.

Participate in the Vendor Management Survey here 


Don't Fall Prey to Regulatory Paranoia


In the same way that some compliance firms use the fear of CFPB audit as a marketing prompt, Vendor Management occupies that same space in mortgage industry participants' chest of fears.

This is the News Flash that wasn't:  CFPB requires financial entities to oversee their vendors for compliance. "We need to have vendor management policies and procedures?  That is such a compliance burden!"  Wait a second.  Don't we already do this?  The answer, for firms who have already initiated standard mortgage industry operating procedures, is yes.  Vendor management has long been a function in the branch operations process.  We have always approved appraisers, title/escrow companies, couriers, PMI companies and credit bureaus, to name a few.  For those of us who are in wholesale, we have always approved our brokers and correspondents.  Since we do this anyway, it is important to examine whether we are doing it correctly.

I Have Covered the Basics - Who Am I Missing?


This depends greatly on your business model.  Who is customer facing?  Who presents an information security risk?

The easiest way of ensuring you have captured all of your vendors is to go through your accounts payable register and your office correspondence.  Is there anyone there who looks at your customer's information?  Do they have access to your office?  Do they ever interface with your customers?  At a minimum
  • Title Companies/Escrow/Settlement
  • Appraisers
  • Credit Bureaus
  • Mortgage Insurance Company
  • Courier/Delivery
  • Mortgage Brokers
  • Mortgage Wholesalers
  • Lead Generation
  • Office Cleaning
  • Temporary Staffing
  • Accountant/Bookeeping
  • Web/Network Hosting
  • Document Destruction
  • Records Management
  • Consultants
  • SOFTWARE (SaaS)
  • Sub-Servicer

What Am I Checking Them For?


Again, depending on the provider and the scope of its business you will address different elements.  Customer facing vendors have to comply with the same laws we do, while all vendors should have basic elements in place:

Background and Reputation


You should consider the background and reputation of ALL providers regardless of the level or type of service it provides.  At a minimum, check the internet, BBB, and the agency disbarred lists including FinCen, FNMA, FHLMC, and LDP as well as others you regularly check.  Individuals should have a background check of the court records in their jurisdiction.  The provider should be prepared to allow you request enough information to make a meaningful search.  Consider the difficulty of conducting a check without the name and address information of the principals.
  

THEIR Compliance Program


Consumer Facing/Access - Tier 1 or 2 depending on the type of information vendor has access to:

Even though LOS/Credit SaaS vendors are not consumer facing, they have access to the customer's information, so should provide this information as to customer identifying information.  
  • Truth-in-Lending Act
  • Real Estate Settlement Procedures Act
  • Flood/Disaster Protection
  • Right to Financial Privacy Act
  • Credit Practices Rule
  • Fair Housing Act
  • Equal Credit Opportunity Act
  • FACT Act
  • SAFE Act
  • Appraiser Independence

Non-Consumer Facing - Low Risk Tier 3


  • Information Security 
  • Criminal Background Checks

Do I have to hire someone to manager my vendors?


Vendor management simply means the process of monitoring things that are being done on our behalf.  You do not have to hire someone.  In fact, if you do hire someone you have to vet that contractor as well!  In addition, much of the work done to manage this information is borne by the client since the company has the access to the customer information.

Order our Vendor Management Policy and Procedure and receive free access to updates as you provide feedback!

Companies Offering Vendor Management Services


Fortrex Technologies - David Bedard
Vendor Audit - Lenders Compliance Group
Appraiser Management - Global DMS, Melissa Key