Thursday, November 2, 2023

Gramm-Leach-Bliley FTC Safeguard Rules Updated 6/2023 - Regulators asking lots of questions

Changes published in 2021 went into final effect in June 2023. Now, regulators are stepping up their review.

We've been seeing the impact of the updated CyberSecurity examinations prompted by the December 2021 FTC rule revisions. Regulators are dumping massive checklists into the exam load, and most companies don't have the bandwidth to address it. It's a hefty load, but it's worth going through to establish a baseline. 



Click here for the updated rule 

Click here for the CSBS Model Examination Form for non-banks 

The word you will see the most in an examination citation is "implementation." This means that, no matter how good your model policy is, if you're not doing - or have evidence that you can do - the things the rule requires, you'll likely be cited. 

Like every good compliance program, policies and procedures are simply part of a complete IT Security Plan. There are 4 pillars of every compliance program: 

  1. a compliance officer, 
  2. policies and procedures
  3. training, and 
  4. testing/auditing. 
Most of the policies we've seen are precisely that - policies. There is very little procedure. In other words, the model form says, "We will comply," but doesn't say, "This is how we comply." This is the most significant difference between our products and those written by lawyers or compliance experts. 

Location of IT Security Questionnaire Items in 2-9 IT/CyberSecurity Plan

 

States Strictly Enforcing GLB Compliance

  • DC
  • Maryland
  • Massachusetts
  • Virginia
  • Texas
  • New York

Remember to add those non-policy items

  • List of hardware (investor)
  • List of software and cloud services
  • List of vendors (investors, office tech, processors, etc. )
  • Cyber Insurance Policy

Tools for Self-Training



Tools for Self-Audit



Wednesday, May 17, 2023

The problem with the flip flop - Anti- Steering and Loan Originator Comp

Broker companies are creating compensation plans with flexibility for lowering the compensation of broker loan originators by switching from lender paid to borrower paid. It appears legal, by taking the Safe Harbor of "borrower's best interests" to allow pricing discretion and reduced commission to loan originators. However, this changing commission is based on loan terms (or proxy) because it results from the change of fees. Seen this way, the practice is prohibited under the anti-steering rules. Why? Because if you can reduce pricing by switching, you can achieve the inverse, too. 

This is precisely what is happening today; loan originators go to the prospect with one price based on lender-paid fixed compensation plans. Then the prospect comes back with a competing offer and the loan originator now tries to beat it. Since it's impractical to change pricing under LO comp rules under lender paid on a case-by-case basis, they switch the pricing to borrower paid where there is flexibility to reduce the charges. Now, the compensation is in the hands of the broker-company, not the wholesale lender. This is done under the auspices of "borrower's best interests" Safe Harbor. 

It should be clear that, unless you have a loan amount-based compensation plan, the temptation to flip a borrower from Borrower Paid to Lender Paid and INCREASE commission is inherent in the "flip to borrower paid" structure. 

I think any regulator will see this as flying in the face of the LO Comp/Anti-steering rule because it gives the LO pricing power with discretion to decrease his or her commission. The argument goes; it benefits the borrower - which is a SAFE Harbor. The main flaw in this thinking is that it doesn't consider that the inverse is also true; a loan originator could switch from borrower paid to lender paid at a higher commission. In a word - steering. 

Perhaps the fact that compensation is capped at a QM level of 2.75 points as a maximum commission provides a sense of no variable compensation. 

I am not sure why this has escaped scrutiny for so long. We tell our customers that we recommend a flat commission rate based on loan amounts, not a percentage of the of the fee, to avoid the appearance of steering.

The problem for the industry is that the good actors who lead with their best price in compliance are having their production poached by participants who allow loan originators to adjust pricing to "get the deal." While that seems to benefit the customer by creating a competitive market, remember that the whole idea of the rule was to regulate this practice because the pricing was opaque to the consumer. The consumer has minimal knowledge of the market, rates, and pricing, while loan originators are very knowledgeable and are extremely motivated to increase their income.  


Monday, April 10, 2023

Are Pre-Qualifications Masquerading as Pre-Approvals Illegal? DFI Says "Yes"

DFI Says "Yes" - it's a "Misleading and Deceptive Act." CFPB calls it "deceptive."

  • "I issued a pre-approval for a buyer and the lender wouldn't do the loan, so they had to pull the contract."
  • "I've been told a pre-qualification is worthless."
  • "If I have DU approval and docs, I can do a pre-approval."

As refinance volume dwindles and the spring housing market goes into full overdrive, these good questions increase. This is a minefield for brokers. It comes down to literal definitions. And, where it previously was an ethical issue, states now will cite brokers for pre-approvals that were not backed by a lender's approval. 

From the WA DFI



A Pre-approved mortgage means approved before the property, NOT approved before underwriting. If a loan is ready to close subject to an appraisal, that is a pre-approval. As you know, AUS approval doesn't mean ready to close. Approved means you, as a banker, are prepared to lend the money. Everything else is a pre-qualification.

Consequences of Fictitious Approvals

Some regulators will cite you - as a broker with no warehouse line or funds to make a loan - for approving a loan. You can also be sued by a seller or buyer for misrepresentation if the loan is delayed due to approval issues. In this market, where people submit contracts without a financing contingency, this becomes even more worrisome. 

Specifically, buyers expose themselves to legal action if they cannot perform under a contract. Though brokers are not parties to the contract, if their representations cause the action, then they become culpable.

Do the work up-front and get the loan approved by the lender (TBD) before you send the borrower out shopping. If your lender doesn't approve loans without an appraisal (TBD), find another lender who does pre-approvals. 

There IS Value in Pre-Qualification

Incorrect use of the term "pre-approved" connotes approved, subject to underwriting approval, which is contradictory. Pre-approval actually means "approved, subject to an acceptable property." (AKA TBD approval) The real estate industry has driven this confusion by recognizing that a pre-approval is better than a pre-qualification to satisfy a seller deciding between two offers; choose one with or without approval. Agents demanding instant pre-approvals have pushed originators to call a pre-qualification a pre-approval. Without underwriting, however, this is a fabrication.

A pre-qualification can include: "We have reviewed the documents and have received an automated underwriting approval; however, the loan request is still subject to lender approval." We suggest this because even with automated underwriting, without a review of the underlying documents, changes can invalidate automated underwriting approval. For instance, if the originator uses a salary for the income when the wages are actually variable, automated underwriting results will change accordingly. 

Does this mean pre-qualifications are useless? NO! Prequalifications are very valuable, but they represent an earlier stage in the process, the first step. The pre-qualification process allows the originator to address a customer's realistic expectations for affordability. Once you address any customer issues, you can request pre-approval and submit an application for approval through a lender's underwriter. Once approved, you can send the borrower into contract negotiations with financing contingencies waived.

Furthermore, brokers should maintain loans not submitted to lenders in their "prospect" pipeline as pre-qualifications to avoid triggering reporting requirements and excess regulatory responsibilities. The fact that an applicant has triggered the requirement for a Loan Estimate does not automatically mean the loan is an "application." It can still be a pre-qualification.

Ethical or Illegal?

While this is primarily an ethical issue, not a legal one, the CFPB is focusing more on "deceptive acts and practices" and saying a loan is approved when it is not falls into this category. It does not rise to a civil legal matter until someone cannot deliver on a "pre-approval" and the loan does not close. Then the consumer, and anyone else who relied on the misrepresentation, can take action under breach of contract, fraud, etc., because they have a cause of action. Some states (such as Virginia and Washington) have mandated that the term "pre-approval" be accompanied by an actual loan offer. What that means is subject to interpretation. It is often difficult to prove misrepresentation when there is no harm - e.g. the customer doesn't take action. 

Ethically, calling a loan approved when it is not ready to close - or the conditions precedent to closing have not been stipulated in a way that could be met by a reasonable person - is a misrepresentation and a deceptive act. 

TBD - Property to Be Determined

The term TBD is the industry jargon for approved, subject to property. That is a correct term.

There is no distinction between which origination channel - e.g., retail lender or broker - that makes calling a pre-qualification a pre-approval right. It's a misrepresentation if the loan isn't ready to close as described. However, a lender who can make loans from its own proceeds certainly can "chance it" based on internal criteria knowing that a loan is "approvable" if AU is correctly applied. A broker cannot "make" a loan - they are brokers. A broker's approval "subject to" is the lender's institutional letter of approval, not the broker's. Technically and logically, a broker could expose him or herself to liability when acting as a lender when, in fact, a broker - e.g., "making loans." A case in Iowa brought this to a head when a broker failed to deliver a loan after issuing a pre-approval.