Thursday, November 6, 2014

Small Commissions, High Costs, No Interest - At the Heart of the First-Time Buyer Problem

No reward for taking on small loans with lots of “headaches”

NAR study shows, after tax incentive expired, first time
homeownership plunged. (NAR 2014)
Theories abound over the causes for first-time and start-up buyers' lack of participation in the housing market. Analysts point to too much student debt, constricted underwriting, and housing prices outpacing affordability. Sociologists say people prefer to rent. The NAR study, which identifies the decline, refutes these propositions. Commonly cited theories ignore the reality of the current mortgage production landscape. Loan officers and mortgage companies have a negative incentive to make loans to a large segment of the first time buyer population. Entry level loans require far more work than other applications. Smaller loan sizes mean smaller revenues for lenders and smaller commissions for loan officers. A look at how regulatory price controls, fee caps and tiered pricing prohibitions affect income and profitability explain the real problem.

Originator Compensation Caps - Another Example of Price Control Failure

Basic economic principles dictate that price controls distort markets and create disincentives. When the Carter administration implemented price controls on consumer goods in an attempt to mitigate the effects of inflation, the supplies of milk predictably dried up. When New York City implemented rent controls to limit the rate of rent growth, the supply of existing rental housing constricted. This same principle goes into effect when the maximum fee on a mortgage loan doesn't cover the structural costs of production.

Fair Hourly Wage Comparison - Originator Compensation 

While many mortgage loan originators strive to earn six figure incomes, earnings at that level normally accrue only to top producers or those fortunate enough to originate in areas of high loan balances. According to the Bureau of Labor Statistics, the 2012 Median Pay for mortgage loan officer was $59,820 per year or $28.76 per hour. Loan officers normally receive commissions, not a salary, so they make business decisions about how to maximize the value of their time.  First time home buyers require much more work than move-up/experienced borrowers.

Figure 1: This shows the amount of time a loan officer spends to originate a first time buyer loan compared to the time spent working with an experienced borrower.  Even if the hours get attributed differently, no loan officer would argue that a first time borrower is LESS work. 

Due to the extra number of hours spent sourcing and processing loans to entry-level or first time borrowers, loan officers have an incentive to avoid these loans and focus on larger loans to more sophisticated and well-qualified borrowers.  Figure 1 reflects the rationale for avoiding loans to first time buyers.  The reward is comparatively low for the amount of work.

The fixed cost nature of the mortgage business makes these loans unprofitable for mortgage brokerage companies, but particularly for mortgage lenders whose fixed infrastructure costs and compliance costs tend to be much higher.  Figure 2 shows that for a $100,000 loan, with a 3% fee structure, these loans actually lose money for the firms.  (Per loan cost basis varies dependent on loan volumes - higher loan volumes bring per loan costs down, but low volumes drive per loan cost up.)

Figure 2: Commission income and loan profitability for small loans decreases markedly. Cost source: Broker - cost Analysis; Lender  (Finklestein 2014) 

The current regulatory system creates massive disincentive for loan originators who work for lenders, because their compensation cannot vary as a result of loan features. In Figure 2, a loan originator who makes an industry standard commission of 60 basis points, working on a ends up with an hourly compensation rate of $12 an hour on small loans for first time buyers.  This, by itself, can explain the structural problems related to stimulating the housing market.

The inflexibility created by Loan Originator Compensation Rule and Anti-Steering Rules, prevents lenders and brokers from adjusting loan pricing to offset the cost of making small loans. These rules impact the compensation of loan officers who work for lenders even more dramatically than brokers, so when you add the higher time investment required for first time buyers, loan officers working for lenders have the greatest disincentive to make these loans. Lenders account for 89% of all mortgage production (Bancroft 2014)

HPML Impact on Small Loans Aggravates Supply Constriction

The Higher Priced Mortgage Loan (HPML) Rule further restricts loans that exceed rate thresholds by increasing lender liability, documentation requirements, scrutiny of appraisals, and limiting the flexibility of underwriting. Many loans with small down payments already trigger the HPML thresholds by virtue of the mortgage insurance costs. The rule's thresholds further limit the fees that a lender can charge to offset the cost of originating smaller loans.

Conclusion - Eliminating Price Controls May Represent Only Solution

Figure 3: While the percentage of buyers purchasing new
homes has declined, the percentage of buyers purchasing
new homes has increased.  This shows builders have adapted
to the new environment.
An extemporaneous loan officer survey reveals that loan officers will only pursue small loans to first time buyers when a referral source specifically requests it. In this situation, these small loans originated at a loss ride for free on the company's profits from larger loans.  This model forces lenders to take the same approach as hospitals who accept patients without insurance. We have to treat you, but we aren't happy about it.

Examining several examples of home builders who specialize in building product for the first time buyer shows they have developed their lending systems to specifically accommodate this model, and rationalize the loan production losses with the profits on the home sale. Figure 3 shows how the the creativity and natural balance in a market where businesses innovate to overcome problems. Builders can focus on a particular segment and design a business model that meets a particular need.  However, the market as a whole cannot overcome a set of regulatory rules designed to affect the entire market.

This ironic situation, where the regulatory structure actually hurts the population it intended to protect, hurts the markets which need financing the most.  The real estate markets which have failed to recover from the 2008 crash exhibit a large percentage of loans impacted by this effect. The constriction on financing exacerbates the slowness of the recovery.

While the issue requires further data analysis, common sense supports this hypothesis. Only loan fee de-regulation will reverse the declining share of first time buyers in the market. Without this, the housing market's regulatory structural defect will prevent any broad, long term resurgence in real estate.

Author:  Thomas Morgan

Bancroft, John.  Mortgage Brokers Gained Market Share in Second Quarter, At Least on GSE Loans. Inside Mortgage Finance. July 10, 2014
Berndt, Antje, Hollifield, Burton and Sand, Patrik. What Broker Charges Reveal about Mortgage Credit Risk, SEC June 2012
Finklestein, Brad. Companies began to increase compliance staff to deal with the new rules and that helped to increase the net cost to originate to $5,171 per loan in the fourth quarter from $4,573 in the third quarter. National Mortgage News, April 2014.
Lautz, Jessica. 2014 Profile of Buyers and Sellers. National Association of REALTORS®, October 30, 2014
National Association of Homebuilders, Housing Market Survey 2012

Wednesday, October 29, 2014

State Examinations - AML/BSA Compliance - Self-Audit Checklist to Ensure Compliance

We know that state examiners focus on a number of specific issues. A recent spate of calls reveals that New York, Indiana, Texas and Pennsylvania have questionnaires and examiners that ask pointed questions about the AML/BSA compliance program for mortgage originators.  To ensure that you are hitting all of the requirements we have compiled a self-audit checklist for you to use to evaluate and collect data.  You should run through this checklist annually.

Use the BSA/AML Self-Audit Checklist for mortgage originators, to ensure you keep all of the information needed for an examination.  Members may download the original form for customization from or

Compliance Officer Training

New York's examination findings sometimes cite a recommendation for the compliance officer to have training.  The FinCEN rule requires training, but does not say that it must come from a certified 3rd party.  FinCEN offers training on its website, and many compliance providers provide training for a fee. Familiarity with the rule - actually reading your policy - also counts as training.

Quality Control and AML

We do not recommend that firms maintain a separate Anti-Money Laundering Plan, but rather that they integrate the AML process with their Quality Control function.  After all, FinCEN wrote the AML rule as a fraud detection/reporting requirement, and that is exactly what the quality control plan should do.  As a consequence, make sure your quality control plan has a robust red flag feature.

Register for the Portal

Your plan loses credibility if your compliance officer isn't even registered with the FinCEN portal.  It implies that you have no intention of participating in the program.  This simple fix will eliminate many citations.

Wednesday, September 17, 2014

Urban Institute Info Graphic - Backsliding on Equal Housing Opportunity

New Info Graphic Paints a Sad Picture of How Far Lending to Under-Served has Fallen

The Urban Institute's Housing Finance Policy Institute launched a year ago with a commitment to bringing unbiased and factual information to the housing debate. This most recent release shows the progress made in understanding what is actually happening in markets today. This info-graphic is a stunning story of America's housing finance system's failure to serve minorities.

Visit the Urban Institute's Info Graphic to drill down 

According to the data, this may represent one of the contributing factors to the sluggish housing recovery.  Taking 13% of the market out of the equation could have that effect.

Interestingly, FHFA just announced the proposed affordable housing goals for Fannie Mae and Freddie Mac. Aside from the fact that these "affordable housing" goals provide a politically correct subtext for lending to minorities, these goals do not increase current objectives substantially, except for targeting low income areas instead of individuals.

A 3% annual increase in Low Income purchases goals is not going to replace
the 13% of the population excluded since the crash. Source Federal Housing Finance Agency

For those involved in primary origination, perhaps this is the signal to develop business models that focus on minority markets. Failure, on the part of the industry, to provide a private sector solution to this problem in today's environment of regulated compensation and higher priced mortgage lending restrictions would acknowledge the real problem; today's regulatory scheme deprives a large segment of the population of access to home ownership.

This data show continued regulatory insistence on consumer protection by stifling private enterprise will ultimately hurt all Americans by creating wealth inequality, and depressing markets broadly.


Bai, B. & George, T. A new view of the housing boom and bust. (2014, September 10). Retrieved September 18, 2014, from

Russell, C., & Johnson, S. (2014, August 29). Affordable Housing Goals for 2015-2017. Retrieved September 18, 2014, from

Wednesday, September 3, 2014

LinkedIn Vulnerability - Group Posting Can Lead to Blocking

If you count on person-to-person networking through LinkedIn Groups, you should consider having a back up plan.  LinkedIn initiated a new protocol this spring where any member can flag any posts to group discussions as spam, which then blocks your posting in ALL of your groups.  This can have an adverse impact on your marketing efforts, as well as your distribution of information such as product bulletins to groups and individuals who have joined LinkedIn for this very purpose.

One of the beautiful aspects of LinkedIn includes the ability to identify people within your vertical market and initiate or join conversations with peers.  No other networking opportunity (with the exception of corporate blogs within an organization) gives you exposure to an engaged audience within your industry.

The problem arises when a competitor or other individual with an axe to grind decides to flag any post as irrelevant or promotional.  LinkedIn makes this easy to do by simply pulling down the carat on the upper right hand side of any post.  Once one post gets flagged, you instantly go into moderation status ACROSS ALL GROUPS, meaning your bulletins, comments, discussions and other contributions immediately go to a queue for manager approval instead of being posted.  This means that your response to a discussion won't post until approved sometimes days or weeks (or NEVER) after you write it, meaning your contributions become irrelevant and you miss participating in industry conversations.

LinkedIn support refutes this citing that group managers can override all moderations. That's LinkedIn's position regarding why they won't change this new approach. But you may find that many groups have a "self-policing" policy where the manager takes a "hands-off" approach. This means your contributions go into a black hole.  A bitter pill, if LinkedIn is an important part of your marketing.

Some alternatives, if you have been blocked - as I have been - might include:

  • Linking to your content in Pulse by following the instructions on LinkedIn's site
  • Use to create a print version of your content, and promote that link on your website and blog
  • Duplicate your content into powerpoints, and use SlideShare and promote that link on your website and blog

Of course LinkedIn designed this innovation to combat spammers. We all hate spammers. However, most people see spam and immediately recognize it. Those spammers get banned. When the spammer realizes he or she has been banned he simply creates a new avatar for himself and starts anew.  These are not people who have actively participated in LinkedIn earnestly and honestly for years building large networks of people.  It TAKES YEARS to add 500 people to your network. A spammer has a small network and a new profile. A spammer doesn't get top contributor status. WHY, then, is LinkedIn seemingly eliminating the utility it has created? For LinkedIn this represents a sad development. The company spent years making itself relevant using groups as a way for people to connect. This new protocol means that era is over.  

The good news is that you can now ban your competitors from posting!

Friday, August 15, 2014

Meet the New Boss - CFPB Mortgage Chief has only Limited Direct Mortgage Experience

Meet Patricia McClung, the new
mortgage chief at the CFPB.
According to an article first appearing in Politico, the Consumer Financial Protection Bureau has appointed Patricia McClung as the new mortgage enforcement chief.  What do we know about her industry experience?

According to her LinkedIn profile, she has 14 months experience as a Senior Policy Adviser at HUD "working in the Single Family FHA front office and partnering with the entire SF organization to work on transforming the business to meet the needs of this challenging housing market and prepare FHA for the needs of the evolving housing market of the future."...

Before that she was a VP of Marketing in charge of marketing the NAR's AVM model.

Before that she worked at Freddie Mac as a VP Product Development/Marketing for 23 years until 2011 and boasts "expertise in leading large scale business/technology projects, product marketing, training and education."  She was involved in customer management at FHLMC and was at the forefront of announcing Freddie's decision to stop buying subprime loans after the housing crisis was well under way. She was also involved in FHLMC technology initiatives such the Uniform Mortgage Data Program (UMDP).

She has been lauded as a workplace diversity champion, according to an article in Diversity Best Practices.  One must applaud her work in advancing women in housing finance.

According to Fairfax County land records, her husband purchased the land their home is on in 1995, so likely has been through the home mortgage process a few times herself. But beyond this, it's hard to see how much direct mortgage industry experience Ms. McClung has.  She seems to have a positive and upbeat personality, and experience with managing issues tangentially related to the industry, and from a very high level, but nothing in the way of an understanding of the intricacies of the business at the consumer level.

My concern is that much of the enforcement and rule-making that has been levied on the industry has come from people, albeit well-meaning, with only peripheral knowledge of the business - what you can garner from first time home buyer websites, federal reserve publications, and real estate articles. Given the punitive and heavy handed approach of the agency with it's "fine first, ask questions later approach", shouldn't we have had some input into our own regulator?

Friday, July 11, 2014

Bulletin: CFPB Does Not Want Table Funders Masquerading as Correspondents

The CFPB has provided the guidance it will use in determining whether correspondents are table-funders or conducting bona-fide secondary marketing transactions:

Does the correspondent have:

  • the net worth to be a warehouse banker
  • underwriting staff
  • multiple investors to sell closed loans to
  • arrangements where it brokers but also funds with an investor/wholesaler
  • multiple lines of credit
  • the ability to sell loans to whomever it chooses vs. captive line
  • understanding of compliance risks associated with funding
  • rigorous approval by warehouse lender

Basically, are you really a lender, or are you a glorified table-funder?  The CFPB guidelines for determining this have been tempered with the idea that a company may be transitioning to correspondent, but that this may not be an artifice for circumventing Dodd-Frank rules re: compensation, disclosure.

Not to Say "We Told You So" But...

Link to LinkedIn Discussion Regarding this

Tuesday, July 8, 2014

Updated: As AML/SAR Rule Anniversary Approaches, Little or No SAR Reporting Activity for Mortgage Brokers

Anti-Money Laundering (AML) and Suspicious Activity Reporting (SAR) for Non-Depository Mortgage Brokers and Correspondents became mandatory in August of 2012.  Two years later, we see little activity. Why?

7/18/14 Updated - New SAR Analysis from FinCEN?

It seems that FinCEN, after requiring so much input from the mortgage industry, but yet not releasing data, felt compelled to release a report.  That analysis is available here:

Click here to download FinCEN SAR Reporting Data 7/2014

Mortgage News Digest began requesting information from FinCEN's press office for statistics at the end of May.  Calls went unreturned, but this data satisfies the request.
From Mortgage News Digest June 2014 "Threats were made, and the industry scrambled to make sense of the procedures required and implement them.  Systems were automated to allow easier online reporting. Yet FinCEN still hasn't released any new data since Q2 of 2012 - almost 2 years later. How does this help us in the field?  Several calls to FinCEN went unreturned, so while there may be information in the works, we haven't seen it yet. (June 2014)
At last we have the data, but it shows anemic reporting data.  No wonder this became a low priority.

Of all product types resulting in filings, Mortgages rank #2 behind only credit cards for incidence rate.  In 2013 there were over 2500 mortgage related reports

Overall, mortgage fraud ranks behind Identity Theft and Credit Card Fraud as reported by Other Financial Institutions.  This is reflective of similar statistics by other regulated institutions, but the scale is much smaller.

Hotspots Revisited

While we knew Southern California, New York and Florida were hotspots, it may come as a surprise that Utah leads the nation in SAR reports.  Why is this?  Tribal Casinos report many transactions where chips are cashed in.  That would not be the case for the other states. 

Reviewing Closed Loans - Wrong Selection Criteria

Although the FinCEN guidelines suggest a strategy of annual audits and loan level audits, such as those conducted for quality control by most lenders, from the perspective of the initiative that spawned this requirement, the audits come too late to have any real benefit.  We have found that most mortgage brokers don't understand their role in this process.  "We haven't had any SARs!" comes the report at the audit.

These words are spoken with pride, but the revelation of NO findings may actually be a trigger for a regulator to look MORE closely, and then discover that the only loans included in the sampling are those which have already passed underwriting muster.  In today's environment brokers and small lenders alike should take the approach that the government has assigned them the role of "watchdog."  Embrace it.  File a SAR today! It's your PATRIOTic duty!

NO SAR may actually trigger an audit.  If your production staff isn't identifying red flags, you can't report.

"Don't Worry - Be SAR-ry!"

As lenders and brokers we also experience the mixed message: "Keep your customer's information private at all costs."  This trust is the foundation of our business.  "If I report this information about my customer to the Federal authorities, am I not breaching that trust? Won't it come back to me through my referral sources?" These concerns have a reasonable basis, but understand this:

  1. There is no direct line from the reporting activity to the investigation and prosecution.  In fact, if it is an isolated incident, it likely will not draw attention to the authorities given the number of enforcement priorities already occupying their attention.  
  2. You are not allowed to disclose the fact that a SAR is in process.  
  3. Your potential criminal and legal liability for being perceived as participating or assisting in perpetrating fraud is far greater if it turns out you did not report something that later gets revealed.

July 4th - PATRIOT Act

The BSA/SAR reporting requirement is based on information derived from the mandatory requirements of the PATRIOT Act (Providing Appropriate Tools Required to Intercept and Obstruct Terrorism). Your prospect may not seem to be a terrorist, but terrorist funding is commonly sourced through illegal activity like real estate investment, cash businesses, medical companies and many self-employed businessmen.  After 9-11, your company mantra - regardless of whether you are a one-man shop or a large lender - should include "If you see something, say something."

Oh, By the Way, Your Annual AML Audit Deadline is Just Around the Corner

If you initiated your AML plan in August, 2012 with everyone else who became subject to the FinCEN rule at that time, you were required to review your AML procedures annually.  Your audit would be due in August. Let us help you with that.  Call or e-mail today.

You can also receive a free, simple self-audit checklist by requesting it here:

Wednesday, June 25, 2014

CFPB Rules Update - The HPML Appraisal Rule and The Concept of Layering

Current Customers can Download HPML Appraisal Policy Here - New Customers, see the site for a copy here.  

After all of the warnings, hyperbole and worry surrounding the CFPB's massive regulation initiative, surprisingly little has changed in the day-to-day of our business.  2014 regulations did not completely re-imagine our process in the way that 2010's GFE reform did. Originator Compensation proved that we will always find a way to create incentives within the system.  But, as always, the devil resides in the details. The CFPB has shown itself to be haphazard in its interpretation AND implementation.

The ABA provided an excellent summary of the CFPBs rules which became effective in 2014
You can download the ABA's entire letter here
One clear example of this can be seen in its regulation of HOEPA. Section 32 loans have always been at the margin of the mainstream mortgage business.

The Counseling Rule - Ubiquitous Requirement Hidden in Margins

Very few lenders breach the High Cost triggers, especially now that QM sets the bar so low.  Combine that with the decrease in business levels, generally, and we can acknowledge that very few HOEPA loans are being made.  But tucked into this very specific, narrow regulation, lurks a very general requirement FOR ALL BORROWERS ON FEDERALLY RELATED MORTGAGES (essentially ALL BORROWERS) to receive a notice of housing counseling.

What happened to simplification? Shouldn't this just be an addendum to the GFE?  That's where it goes from a rational perspective. So that is where we put it in our process flow.

"Where should this go?" the mantra we have continue to repeat at each new rule.  Regulations are sent at us in a "shotgun pellet" manner, ending up all over the place.  If we try and follow the regulator's approach we will have hundreds of different policies isolated from each other - we are bound to fail in that environment. We cannot build our businesses to satisfy a regulator. Rather, understanding that the regulator's lack of appreciation for how their rules must get implemented, should drive us to map our process better. We have to integrate regulations into our overall process flow.

The HPML Appraisal Rule - The Department of Redundancy Department

A perfect example of the overlapping of regulations appears in the HPML appraisal rule.  From a regulatory perspective the rule actually overlaps with the ECOA Appraisal Rule. The CFPB grants this in its small entity compliance guide. You can, in fact, use the same disclosure to satisfy both rules.

In addition, if you are originating Qualified Mortgages, or the HPML loan you are originating qualifies as a Qualified Mortgage, the HPML appraisal rule doesn't apply.  Technically, your HPML Appraisal Policy could be an addendum to your Ability to Repay Policy

The HPML policy itself actually overlaps with secondary marketing, because the loan pricing policy drives whether a loan is classified as HPML.  In fact, movements in the market throughout the day or over a week could change the profile of an entire pipeline from non-HPML to HPML loans.  

Once a loan earns the distinction of HPML, the lender must maintain tax and insurance escrows for five years.  More minutely, however, we note that for HPML loans, appraisers must a.) be licensed and b.) perform an interior inspection and c.) the borrower must receive a copy of the appraisal report 3 days prior to closing. The contents of that appraisal mirror standard requirements, but this should be part of your audit process.

The Devil in the Details - The "Flip" Rule

The pitfall of this process surrounds the purchase transaction where the subject property, unbeknownst to anyone except the seller, is a flip. Our best practices require that the appraiser indicate the date of last transfer, and that we conduct additional due diligence if the property was transferred within the last 12 months.  However, the Flip Rule takes it to a new level.

There are exemptions to the Flip Rule, primarily circumstantial, so that if you encounter a flip in your regular retail business, the rule probably applies.

Rules, Rules, Rules - It looked good on paper... That's why they put it on paper

The ABA provided a nice roundup of all of the changes and if you review their list you will see that you probably have already implemented most of these, or found that they do not apply to you.

If you are a customer of ours, you will recognize some of the major updates: We have been at the forefront of updating operating policies and procedures, so you should be alright if you have been following our alerts.

Thursday, June 19, 2014

Social Media: Compliance Risks of the Emoticon?

A Social Media Policy can help manage the risks: Request a free sample

Corporate concerns with social media may
be over-emphasized when you look at the real utility of social media platforms. For a loan originator using Facebook or other social media platform to try and get business, marketing efforts focus more on developing name recognition and improving search engine placement through search engine optimization efforts than actual customer relationship management.  Potential applicants do not simply seek out mortgage lenders on social media sites.  However, the appearance of a lender or particular loan officer on a search engine result, particularly at a very specific search engine result, can result in new business generation.

Lenders' concerns run from simple compliance to privacy, fair lending and reputation risks.  So, will loan originators use a social media sites to divulge corporate information?  Or could they unintentionally accept a loan application without providing the appropriate loan disclosures in a timely manner?  Or could he or she engaged and prohibited types of communication that may appear to be a discriminatory or expose a lender to other potential compliance risks? 

In fact, the greater risk potential for may exist in the area of reputation.  For example, in the midst of the mortgage crisis, as foreclosure activity soared, activists accessed lenders through their social media. To this point, lenders enjoyed a certain anonymity.1  But as the number of foreclosures escalated, the victims no longer remained faceless.  Mortgage lenders became the enemy and public exposure through blogs and social media sites quickly became a vehicle for the public to pile onto.  Bank of America, which became a target through its purchase of the Countrywide powder-keg portfolio, had to resort to "bot-like" responses simply to keep up with the volume of communication, further inflaming the anti-mortgage sentiment.

Among the compliance concerns, Fair Lending issues may take precedence as social media vehicles give "testers" wide open, anonymous access to originators, in a perfect "matched-pairs" testing environment.2  In this case, disparate impact - today's hot button issue - figures less than a direct correlation to a discriminate act.   A loan originator may simply ignore a request from an individual with a racially specific profile and invite a claim.

By definition, public communication through social media represents a form of advertising.  Ensure any messages have met your requirements for advertising.

The compliance officer and production staff must really understand how social media advances marketing efforts.  Simply, do NOT use it as a bi-directional communication tool, but as a farm for sprouting keywords and relevant topics.

Content shouldn't come directly from loan originators, but a stream of suggestions for content to a central source can achieve this goal.  Allowing or requiring content from employees (particularly originators) creates an unnecessary burden for employees to participate in social media and could create more pressure on non compliant activity than necessary. Even re-posted material should be vetted against an advertising checklist.

Perhaps the best solution revolves around providing a social media content provider - someone who will provide pre-approved content to post on social media sites.  This can add to both corporate search engine optimization benefits as well as allowing individual loan originators to improve their own business results.


Social Media Compliance Training Video - Pay attention to "Listening Technology" @ 21:00

1. Juris, J. S. (2012), Reflections on #Occupy Everywhere: Social media, public space, and emerging logics of aggregation. American Ethnologist, 39: 259–279. doi: 10.1111/j.1548-1425.2012.01362.x
2. "All Other Things Being Equal." : A Paired Testing Study of Mortgage Lending Institutions (Executive Summary). Web. 19 June 2014. <>.

Request a FREE Sample Social Media Policy here

Tuesday, May 13, 2014

Bob Kemp - Mortgage Banker and Exemplary Father - Passes Away at 63

Occasionally you meet someone who does many things well and you wonder how they do it. In the case of Bob Kemp, who passed away suddenly this weekend, it is a story of singleness of purpose and focus on family.

Bob Kemp with son John (Prep 09) was
a fixture at the hockey rink.  Bob was
the Scott Smith Award recipient in 2007. 
Bob was a mortgage banker and, like many of us seasoned pros, had weathered the ups and downs the last three decades have wrought. I remember talking to him at the rink while we both waited to pick our sons up from hockey practice. I shared about my struggles managing the feast or famine cycles, and how the famine of that time (the post-2008 financial crisis) had hit my clients' businesses and mine.  He was sanguine in his response to me: "Every year is tough. Somehow, month after month, we look back at the end of the year, and we managed to make it."

I didn't get it.  Here was this laid back guy, but he had SEVEN (7) kids and was putting them all through private schools.  All of them were successful in their own way as athletes or students.  He didn't seem stressed out at all. I, on the other hand, felt my life in the mortgage business was a continuous stress sandwich... and I only had TWO kids in private school.

I realize now that his lesson was simple: focus on what is in front of you. Take care of the day to day and the big picture will take care of itself.  This bears repeating for those of us who face the seemingly overwhelming pressures of today's business decline. Somehow, month after month, we will manage to make it. So don't worry about it.

Here are several links about Bob:

Bethesda Magazine Article on Kemp Family
Bloomberg Listing on Bob's Career
Washington Post Obituary
Photo and Notice from Notre Dame Lacrosse
John Kemp - All American Goalie at Notre Dame

BK stickers emblazon the helmets of the Georgetown Prep Hoyas in memory of Bob Kemp, in solidarity with his sons who were major players in the program.  
BK on Notre Dame helmets honor the legacy of the Kemp Family
at Notre Dame.
If you wish to memorialize Bob, the family asks that you make a contribution to the Washington Jesuit Academy.

Bob's wake was held Thursday, May 15, 5:00 pm to 9:00 pm at Our Lady of Mercy in Potomac, MD.  If you wish to memorialize Bob, the family asks that you make a contribution to the Washington Jesuit Academy.

Friday, January 31, 2014

Beware of Pirated Manuals

Recently we have received a large number of calls from clients whose policy and procedures manuals are outdated. They are being rejected by their lenders, investors or regulators. Speaking to the customer we learned something shocking.  They recently purchased the products from a consultant who assured them that the product was current.  Not only were the products outdated, but they were stolen, so did not qualify for any warranty or service.

Here's how it happens.  A client orders a product, but they don't want the normal information services we give to customers.  We call and make sure they understand the license - that it can't be transferred - and they state they understand: it's only for their own purposes.  We have a reason we don't sell to consultants - they pirate our product and then don't stand behind it.

Who pays the price?

You do.  You buy a product which was good at the time, but 1/2 year later it is outdated.  You submit your product to an investor, regulator or wholesaler and now you look like you don't know what you are doing. Worse than the wasted time and prestige, you now likely have to fix the problem on your own.

Make Sure Your Product is Not Pirated

Questions to ask:

Is the consultant in the regular business of providing materials, or did the product emanate from a request from you?  If it's not something the consultant does as a main line of business, it is more likely that the consultant borrowed the product from another company.  Beware.
Does the consultant publish examples and samples of the work online?  If the consultant is overly protective of the content before you purchase it, it is likely that the work would be similar to other widely available products, or that it is, in fact, another company's work.  Legitimate companies don't need to hide their content, because they know it changes so much that even if you did borrow a swath of it, you would have to come back for updates later.
Are you getting e-mails from the publisher? Or is there silence after the purchase.  If it's the company's mainline business there is always a stream of information (welcome or not) that accompanies this type of purchase.

Friday, January 17, 2014

The Anti-Kickback Rule - Payment or Receipt of Non-Approved Fees


With the recent spate of enforcement actions surrounding kickbacks, take the time to re-visit your explicit policies and procedures surrounding the anti-kickback rules.

4/30/2015 - Updated filing shows actual money penalties by participants
1/22/2015 - Baltimore CFPB Action
St. Louis CFPB Action
Kentucky CFPB Action
Baltimore Referral Fee Lawsuit

Kickbacks are a problem because they tend to inflate the cost of a transaction.
Kickbacks tend to inflate the cost to the consumer due to the fact that someone else has to get paid for the referral. 

Prohibited - Kickbacks and Referral Fees

Section 8(a) of RESPA prohibits anyone from giving or receiving a fee, kickback, or “anything of value” pursuant to an “agreement or understanding” for the referral of business related to the purchase or financing process. The purpose of the prohibition is to protect consumers from the payment of fees when no additional work is actually performed. Kickbacks tend to increase the cost of the transaction, since the borrower will have to be charged more in order to cover the cost of the referral fee.

All personnel should avoid even the appearance of accepting or paying for non-approved services.

An “Agreement or Understanding” does not have to be a formal agreement, but can be a verbal agreement or even an agreement established through a practice, pattern, or course of conduct.

Prohibited Payment – “Anything of Value”

Payments include, but are not limited to

  • A “Thing of Value”
  • Money
  • Discounts
  • Commissions
  • Salaries
  • Stock
  • Opportunities to participate in a money-making program
  • Special or unusual banking terms
  • Tickets to theater or sporting events
  • Services of all types at special rates
  • Trips and payments of another’s expenses

Prohibited - Fee Splitting 

Fee splitting is when a service provider inflates charges and splits the excess funds with another service provider in exchange for the referral of business.  This is tantamount to a kickback and is a prohibited practice.  Service providers may attempt to circumvent this prohibition by establishing joint ventures or entering into business arrangements that allow referrals between organizations and conceal the fee splitting arrangement.

Permitted – Approved Affiliated and Controlled Business Arrangements

In some cases, there can be fee splitting or referral fees paid under what is known as an “affiliated business arrangement”.  An affiliated business arrangement is where a person who refers settlement services has an “affiliate relationship” or “an ownership interest of more than one percent in a provider of settlement services.”

The payment of reasonable fees is acceptable as long as the relationship is disclosed to the borrower and the referrer actually performs a service – or somehow adds value.  The referral service provider may NOT be a REQUIRED provider of services, such as an appraiser or credit bureau that the lender must select.  An affiliate relationship structured simply to legitimize the payment of a fee is referred to as a “sham”. Affiliates must be a “Bona Fide Provider of Services” to receive a referral fee legally.

Approval Required - Desk Rental Arrangements

Because of the level of oversight, and the potential for the payment of desk rental to masquerade as payment for a referral, all Desk Rental Arrangements must be approved in advance. Provide the following:

·         Copy of the lease/rental agreement
·         Document market value of desk rental services through Craig’s list, square footage analysis or other verifiable source

Approval Required – Joint Marketing Arrangements

Similar to a Desk Rental, partnering with referral sources to advertise or market must also be evaluated for potential conflicts and approved by management. Particularly when this relates to commercial communication, the material must also be reviewed against the Provide:

·         Any advertising agreement
·         Copy of publication or proposed media

Approval Required - Marketing Vendors

Payments to marketing vendors, such as lead generation companies, may create problems if we base the payments on anything but the lead itself.  If there is a payment conditioned upon a certain criteria or threshold, such as confirmed application, underwriting approval or closing, the arrangement may be considered illegal.  For approval provide:

  • Marketing Agreement
  • Fee Schedule for Leads

In addition, the agreement and vendor must be approved to ensure the vendor complies with Fair Lending, Information Security, Customer Privacy and other consumer-facing regulation.

Approval Required - Payments to Counseling Agencies

Payment for services to a non-profit agencies for counseling services performed are permitted.  Provide:
  • memorandum of understanding between the lender and the non-profit agency 
  • establish how payments to vendor are not based on referrals .

Required Disclosures

·         Affiliated Business Arrangement Disclosure (AfBA) – if Applicable
·         Required Provider Disclosure – From LOS
·         Approved Settlement Services Provider List

Operating Areas Affected

·         Origination - Production
·         Compliance

Penalties for Non-Compliance

Penalties for violations of the anti-kickback provision include fines of up to $10,000 and up to one year in prison.