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