REMINDER: Phase 2 of HUD Adjusted Net Worth Requirement Goes Into Effect 5/20/13

If you cannot comply:

If at any time the net worth or liquid asset requirements fall below the required minimum, the lender or mortgagee must notify the Lender Approval and Re-certification Division within 30 days, and provide a Corrective Action Plan describing steps taken to correct the net worth or liquid asset deficiency.  Lenders and mortgagees non-compliant with net worth or liquidity asset requirement must notify HUD by sending an e-mail to recert@hud.gov. The e-mail should contain a letter signed by a corporate officer describing the corrective action that has been taken to correct the net worth or liquid asset deficiency.  The e-mail should also contain a copy of the lender or mortgagee’s un-audited financial statements for the most recent quarter certified by management.  The letter should be addressed to:

Director, Lender Approval and Recertification Division

451 7^th St SW, Room B133/P3214

Washington, D.C. 20410

Failure to comply is grounds for an administrative action by the Mortgagee Review Board.  

Phase Two of the net worth requirement was published in Mortgagee Letter 2010-20 dated June 11, 2010.  The requirement is provided below:

·         Participation in Single Family Programs. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA single family programs must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million.  Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs with Engagement in Mortgage Servicing. The final rule provides that, irrespective of size, all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

·         Participation in Multifamily Programs without Engagement in Mortgage Servicing. The final rule provides that all applicants for approval and lenders and mortgagees with FHA approval as of or after May 20, 2010, that wish to participate in FHA multifamily programs, and that do not engage in mortgage servicing, must possess a minimum net worth of not less than $1,000,000 plus an additional net worth of one half of one percent of the total volume in excess of $25 million of FHA multifamily insured mortgages originated, underwritten, or purchased during the prior fiscal year, up to a maximum required net worth of $2.5 million. Not less than 20 percent of a mortgagee’s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

In Textbook First Case, CFPB Shows its Willingness to Prosecute Even Small RESPA Anti-Kickback Violations

Click on this image or this link to read the entire 

consent order detailing the kickback scheme 

employed in Texas

In pursuing, investigating and prosecuting a case involving a relatively small builder in Texas, the Consumer Financial Protection Bureau (CFPB) finally puts some teeth into one of the most pervasive corruption schemes in real estate.  Kickbacks, where one party pays a fee for the referral of business, purportedly occur with high regularity according to ad-hoc interviews I have conducted with mortgage industry participants.  If you believe that the small size of your company or number of transactions makes you too small small of a fish to appear of the radar of the CFPB, perhaps you should think again.

This mechanism of policing is reminiscent of the "Broken Windows"1 policies of many urban police departments when attempting to corral the escalation of crime.  In this case the CFPB is cracking down on smaller schemes to stop the pervasive use of shams to avoid the law.

When I was breaking into the mortgage business as a loan originator I was regularly offered business conditioned upon matching the referral fee my competitors paid.  Fortunately for me, I worked on a very thin margin and the amounts that these individuals demanded often exceeded what I would receive as compensation. But this illustrates the moral and legal problem with the Kickback Scheme:  You have to increase your fees to cover the cost of the payment.  Who pays for the referral fee?  Though indirectly, the borrower pays, through a higher rate or fees charged to offset the higher commission needed to pay the referral.

Anyone who has taken a continuing education course in mortgage lending knows that the creation of affiliated business referral business, while legal, must provide a legitimate service and add value to a transaction.  HUD developed a ten point test to determine if an affiliated business was legitimate or a "sham"; an artifice designed to serve as a mechanism for kickbacks.

When you read the findings in this case it would be clear, even to a novice, that the Texas builder's mortgage subsidiary was a sham.  It had no employees, did not advertise, did not maintain a separate office and the only business it ever conducted consisted of the referrals the builder made.

The saddest part of stories like this is that, in addition to paying a higher price, these borrowers and real estate professionals were deprived of the real value of the loan officer's services.  When I conduct CE or PE licensing, business development or new loan originator training classes I always talk about the value the loan originator adds to the business of his or her referral sources:

1. A good loan officer is a pipeline manager: By qualifying prospects, I save my real estate/builder referral source's time by identifying borrowers who can go purchase now so he or she can focus on a qualified customer.  This is his or her current business.  Many loan originators stop here.  More importantly, I can work with those customers who are not capable of acting right now and make sure they get the counseling and help they need to achieve their goals in the future.  This is their pipeline of future business.  
2. A good loan officer helps you close more business: Not just getting to closing, but getting the customer to commit to a transaction as part of the sales process.  Often, the major impediment to a customer writing a contract is fear of the unknown.  By providing loan options counseling and exposing all of the costs the customer has less fear of the unknown, allowing him or her to write an offer with confidence.  
3. A good loan officer is a business development resource: For all of the business loan originators develop through referral sources, between 40 and 80% of a loan officer's referrals are self generated from his or her own networks and book of business.  We refer our for sale by owner customers and first time buyers to our agents. We refer. A single real estate transaction referral is worth far more monetarily than an 1/2 point kickback, it is much more sustainable relationship as it is built on trust, and it doesn't cost the customer a thing.  

Thinking back to my early days as a loan officer and the kickbacks solicited from me, I noticed a certain character to the individuals and businesses engaged in these practices.  They represented the margins and lower echelons of real estate and often seemed to struggle for survival.  On further reflection I am even happier that I did not participate in this practice because if these players were that desperate for 1/2 a point what else would they do (like perpetrate fraud) to earn money?  It's important to evaluate your business partners beyond one transaction.  Failing to do so might land you in jail.

1  The Broken Windows theory was introduced in a 1982 article by social scientists James Q. Wilson and George L. Kelling. The theory states that maintaining and monitoring urban environments in a well-ordered condition may stop further vandalism and escalation into more serious crime.

FNMA Quality Control Plan Review Checklist and Worksheet

While we provide written plans that allow companies to perform QC reviews, this tool provides a context for all of the information we give. There are additional worksheets for determining whether your sampling methodology is correct, and general counseling to provide hints for things that might be useful additions, such as training for employees. 

Overall, this is the single, most comprehensive tool I have ever seen any of the agencies issue. Whether you are a company executive, compliance manager, operations or quality control manager you should pull this down and review.

MMBA Annual Meeting on May 9

The MMBA held its annual meeting on Thursday, May 9, at the Columbia Doubletree Convention Center. Between 200-300 mortgage professionals attended, along with 30 exhibitors and sponsors. The group held 3 panel discussions with distinguished representatives from regulatory agencies - DLLR, CFPB, the state Senate - as well as GNMA, with other high level executives from the lending, real estate and homebuilding industries. The theme of the event was that, if you were in that room, you were a survivor. And it's true - we are all survivors at the center of one of the most complete economic upheavals in recent history. 

Looking forward, among the the challenges the industry faces is the wall of regulatory compliance, but on a more subtle level, populating the industry with younger professionals arose as a top priority for the industry. In this vein, I saw that this presented an opportunity for the training industry to step up and help rebuild the business. 

Also, the addition of Ability to Repay as a Federal regulation allows the compliance training industry to finally address practical business matters in the scope of PE/CE. 

I was so impressed with the professionalism and value of the event, which was organized by Kevin Michno and Dennis Sullivan. It inspired me to plan events in conjunction with the association to bring more people into the organization. Training is a great way of doing that.

Don't Call Me Until They Define QRM...

As an industry we are all understandably shaken by the uncertainty presented by the seeming double edged sword of QM/QRM.  Unfortunately the Qualified Mortgage Rule, with its ancillary restrictions on product types, costs and guidelines, and is now defined and will be effective in January 2014. Now we must wait for the OCC and other regulatory agencies to define the Qualified Residential Mortgage which will affect securities issuers and the secondary market if the rule is substantially different than the QM standards.

(Still not sure what I am talking about?  Check out this summary.)

Regardless of how this rule is defined, how will the mortgage process change with the advent of QM or QRM?

It won't.

We are already verifying every aspect of the borrower's ability to repay, which is the crux of the 800 pages of QM rules. Most underwriting guidelines already barred pre-payment penalties, and required qualifying offsets for borrowers taking adjustable rate mortgages and interest only loans.  How many negative amortization, balloon and 40 year loans have you seen in the last 5 years?  When these loans were offered, they weren't meant to be delivered to anyone - only those most qualified?

The shocker?  Most of these restrictions are common-sense.  The theme I have heard repeated by those companies who survived the crash:  "We never did any of those hybrids and no-docs."

So wake me up when QRM gets defined.

Is the Compliance Industry Using Fear-Mongering to Extract a Pay Raise?

An article in a recent Housing Wire report titled "The CFPB's Gonna Audit You.  Deal With It." repeats a current theme seen much more frequently in the last 1 1/2 years, since the Consumer Financial Protection Bureau has staffed up with auditors and launched investigations.  In my view the spectre of an unannounced CFPB audit might be fear-mongering on the part of the compliance industry in search of a headline to stir up business.   The CFPB's radar is directed to a certain segment; large non-federally regulated multi-state lenders, those companies marketing high risk products on a national basis, and lenders whose names appear too frequently in the complaint database.

The message is that an ounce of prevention is worth a pound of cure.

From my perspective the really large, multi-state lenders are not in denial and have made great strides to prepare for CFPB audits.  Some that I have spoken with have already experienced an examination.  In fact, we owe them a debt of gratitude because these lenders have spent a huge amount of time and effort educating the regulators - many of whom are not familiar with the mortgage business - and correcting many basic misapprehensions.

One of the biggest misapprehensions the CFPB had was that these lenders represented a vast population of completely unregulated and unsupervised businesses who did whatever they wanted without any oversight.  We know that is far from true.

This doesn't mean smaller lenders should be complacent.  While it is true that the CFPB does not announce an examination schedule substantially in advance, the degree to which you must prepare should be tempered by one fact:  Most non-bank lenders deal with a multitude of state regulators whose audits are far more frequent, selective and in-depth.  If your company has been examined by Texas, Utah, Washington, Oregon or a host of other hyper-vigilant regulators, you know what I mean.  In addition, FNMA/FHLMC and FHA audits/examinations also provide insight into the standards they expect from many areas of operation that overlap with the CFPB's audit scope.

Here is the take-away for all non-bank lenders - small and large alike:  The state regulators now have the CFPB examination playbook, in addition to the ARMR and CSBS examination guides.  YOU WILL BE AUDITED BY YOUR STATE LICENSING AUTHORITY.  If your compliance budget doesn't contain five or six figures and you want to be prepared, read these guides and take a look at how your operating policies and PROCEDURES address the areas these guides reference.

One suggestion is that, if you are a FNMA or FHA lender, go through the operational audit process making sure your operating plan is as comprehensive as the one we lay out.