Dear Old 1003, I'm sorry. I didn't know how good you were...

We have updated our Quality Control Data Validation checklist to conform to the organization of the redesigned URLA, which was required for use after 4/1/2021. 

Best Practice - Send for Signature, Not in Blank

The new Uniform Residential Loan Application (1003) form is required for SUBMISSION to Fannie Mae. It is NOT useful as a form to be sent to an applicant to collect information. In fact, there are areas in the form which explicitly state "TO BE COMPLETED BY LENDER" which belies the actual intent of the form. 

Send this document to your customer for completion at your own peril.  The reality is you will NOT send a blank application to the borrower to fill out. Instead, you should capture the information in your LOS, and send the completed form to the borrower for signature. If you want to put data collection responsibilities on the borrower, use the pre-application kit process. 

PROBLEM 1 - Too Complex, Too Long

That is the biggest problem with this product - asking a (single) applicant to parse THIRTEEN pages of application forms correctly, in most mortgage industry participants' experience - means it won't be returned. If it is, it will not be correct. 

Recommended Procedure - Only Sign in Final Form

For those of you who grew up with the old HUD-2900, you will remember that the HUD Application was only signed once the underwriter had approved the loan. This is the same approach. 

1.) Collect application data using LOS or Pre-Application Kit

2.) Enter information into LOS

3.) Generate form for signature

We are NOT advocates of having loan originators or consumers completing this form directly as it is extremely inefficient and fraught with problems, particularly since the representations and warrants on the application form are SO STRINGENT that sending out an application, other than the final verified application, is risky. Our recommended approach is to utilize the LOS screens to complete the form, and have the printed form reviewed by a senior processor or underwriter prior to release. 

The URLA is not necessary to begin an "application" as defined under other regulations

ECOA, TRID, and other regulations that are triggered by an "application" are not referring to this specific form. The regulations DO NOT require the use of the new URLA 1003 form to establish an application, so you can use any method you like to assemble the information (including obtaining a credit authorization). In fact, for AUS Data Submission, (DU/LP/Catalyst-TOTAL/GUS) the system is not calling for the form, simply the underlying data. Once the application is complete and ready for underwriting submission, you can send the compiled application. 

Our recommended process

1.) For customer facing data collection, use a pre-application kit or web form, with EDI to the LOS

2.) Download a re-configured data integrity review checklist aligned with the new 1003 here

Pre-Application Kit Sample

URLA Review Checklist Sample

Comment - Why all the fuss for a few small changes? Only several new fields added.

Once you dive down into the changes, you can see how minute they are. The new form doesn't add significantly to the collection of data and could have been added to the old form. 

For instance, the addition of a cell phone capture. Honestly, the cell phone could replace the Home Phone, which no one uses anymore. And since each co-borrower now has his or her own application, this actually represents the unique identifier of the loan. 

A litany of pre-filled choices... and then, still, "other"... drives me nuts. Simplification or obfuscation. 

Here is the updated URLA Policy and Procedure - depending on which module you review it goes in the following sections:

3-0 Origination - 3-51-5 Complete Application Process

4-0 Processing - 4-61-2 Using the Application as a Data Validation Tool

The Practical Guide to Loan Processing - Chapter 6 - Underwriting Submission

The Loan Officer's Practical Guide to Residential Finance - Chapter 7 - The Application Process

Updated Regulatory Compliance One-Pager

Mortgage Compliance One-Pager - Desk Reference/Study Guide for laminating

Updated 3/17/17

I recently re-took the NMLS' National Test with Uniform State Component. I neglected to take the Uniform State Test add-on when it first came out, but thought that if I needed to add additional licenses later, it wouldn't be so bad to re-take the National Test. I worried that I might have a problem because the last time I took it, I really struggled with the intricate test questions, puzzling over three or possibly four correct answers to decide which one was the "best right answer." This time, I found the test questions much more straight-forward. The bad news: I didn't score 100. What did I get wrong?

I should have studied my own mortgage compliance guide!

I have found that people don't really like to read pages and pages of material. "Can't you cook it down for me?" they ask. So we did. We authored a series of "QuickNotes" (QuickStart: QuickNotes... get it?) which have helped thousands cram and pass the national test. These one page "cheat sheets" boil the material down to its most fundamental level.

Regulatory Compliance Matrix - Click to Download

Document Not Clicking? Try this link.

Loan officers love our cheat sheets. Compliance trainers and regulators hate them. "There's not enough content!" they complain. But the infographic tells it all. Sure you can study MORE, but loan officers aren't attorneys. We get lost reading 3000 pages of code. Just like an attorney or compliance officer would get lost reading 3000 rate sheets and program guidelines a day.

We use this methodology in our new loan originator training, too. Instead of 2000 words describing how to to something, we give an illustrated form, a checklist, or a reference tool like this one which highlights Ability to Repay Guidelines.

Ability to Repay and Mortgage Knowledge Tools - Click to Download

Click here to download these tools at no cost or obligation. Also, feel free to provide feedback.

What I THINK I got wrong...

• PMI Cancellation @78% 
• Do Not Call from 8am to 9pm
• Balloon Payment Qualifying
• Section 32 (High Costs) max Debt Ratio is 50%
• Confusing question on Finance Charges with options I would consider ALL to be finance charges. (I think they wanted the recording fee, still not sure)

These items are ALL on the study guides, so my advice is to study these all. I knew I was going to pass, but I was surprised about how many questions I had to review at the end.

A Novel Solution to Loan Officer Certification

Solving the Need for Loan Officer Product Knowledge Training

In teaching our Loan Officer Boot Camp, I have always thought (if we had unlimited time) that we should start with the Foreclosure Process; If we, as loan officers, do a bad job, that's where the borrower ends up, after all. But we don't have unlimited resources. Training new loan officer's is hard and expensive.

When you say "FREE" online, you get banned!

Most e-mail spam filters are set up to recognize "FREE" as a scam. But in the mortgage industry, when it comes to training, that's what we want; something FREE.

If I told you I had just discovered a free answer to one of the most pernicious problems in the mortgage industry you would want to know about it, wouldn't you?

Training and developing new mortgage loan originators remains one of the most challenging aspect of the industry. We don't have time to develop a comprehensive curriculum. If you find an individual with good character and willingness, you still have somebody who is completely new without any exposure to the mortgage language and process; not just with loan products but also the entire spectrum consumer financial analysis. Add to that the fact that it takes 6 - 12 months until the loan officer is comfortable enough with the process to be effective in dealing with customers and referral sources, usually too long to make enough money to succeed.

This is because there are three areas in which our industry is completely ill-equipped to train and support new entrants:

Content - We don't have the curriculum mapped out, so when we train someone it is ad-hoc
Revenue - Knowing that only 10-20% of new originators succeed, we don't want to risk the expense of training. In addition, we can't afford to pay someone's salary while they learn
Time - The constant time demands of the new originator mean we have to put aside tasks in order to focus on their needs.

Isn't there a related industry which specializes in developing these individuals? There is: housing counselors.  The best part is IT'S ENTIRELY FREE.

Step 1: Complete the HUD Housing Counseling Curriculum

Available on the Housing Counseling Website, this free program provides in-depth preparation on all the general financial skills and sensitivities that an originator must possess.

Step 2: Participate in Housing Counseling for a Non-Profit or Debt Management Counseling Agency

What a great opportunity to start developing some customer relationships. These firms are government sponsored lead mills. Think about it. Every single housing related website points to housing counseling. Pre-purchase counseling is a great tool to start working with some agents.  After the counselor has spent 6 - 12 months working with customers, that individual has more customer focused experience than many seasoned originators. Most housing counseling agencies provide a salary during this learning period. Introductory positions yield a salary of $30,000 to $45,000 a year.

Step 3: Identify Individuals who want a career with higher earnings potential

We know that many individuals don't have the drive or personalities to source their own business. This process weeds those individuals out. Someone who is satisfied with a $45,000 salary won't make a top producing loan originator.

Step 4: Use FREE industry programs to fill in the niches

Even experienced housing counselors, there is in invariable need for additional skills type training. But the industry provides this for free as well! Just look at the list:

Associations: Providing sponsor underwritten training
Wholesalers: Providing product specific training
Private Mortgage Insurers: Among the deepest curricula of the industry providers, with everything from processing issues to sales and marketing.

When we formed lendertraining.com, in the mid-1990's, there was very little industry training. We filled the gap between compliance/licensing training (NMLS) and niche training with a resource which includes the foundational loan originator skills of mortgage math, product comparison and complete application methodology that doesn't exist anywhere else. In addition, we provide loan officer marketing methodology. Our programs cost between $55 and $159.

The Housing Counselor Training solution doesn't replace us, it just puts us in the correct context of the training universe.

Processor Boot Camp: Training Processors no Longer Means Re-Inventing the Wheel!

A goldmine of pre-developed training by industry leaders means you no longer have to pay to train new processors

Beginning in 1996 we ran Loan Processor Boot Camp classes as an answer to the fact that there was no real training in the area of processing. Over the last 20 years, the industry grew so much, and so many resources were deployed to use training as a sales tool, we can now benefit from vast libraries of pre-developed material when designing a training program. And the best news is that you can now use these tools to deploy your own pre-developed training program for new processors that you do not have to pay for.

We have often called processing the "life blood" of the industry. We live and die on the quality of our customer service, and so much of that service delivery depends on the processor doing his or her job well. While the processor must have some key skills - attention to detail, ability to multi-task - the industry has a very steep, though not long, learning curve to understand the business. Once a processor has achieved basic competency, the tasks become routine. The individual can start to rely on intuition and internal procedures to smoothly manage a pipeline. Once in place, companies almost forget that they have this critical resource in place. Like a finger, you don't realize how much you depend on processing until it's gone.

It takes some sort of upheaval, like a surge in volume or a raid from a departing manager, to cause the company to initiate the search for new processors. That's when you discover there aren't any. This presents the next choice - training one from scratch. But you don't have a training program. 

Fortunately, we have developed the template for you. But this remains a good opportunity to refine the way your company works. Going through the process of developing the program can really help you understand where the weaknesses in your production system are.

Step 1: Take Inventory of Necessary Skills

The first step in designing a training program involves making a detailed inventory of the key skills it should deliver. In the case of processing, looking at the duties as defined in a job description should provide the key components. If you or your company doesn't have a detailed job description, this may be at the heart of your processing problem.  We have provided a sample overview, but you really should have the detailed step-by-step for the job function, such as we provide here in your processing policies and procedures. 

Step 2: Assess the Training Needs

The training needs involving matching the specific skill with a deliverable, or a topic, that can be quantified in a training program. Sometimes these needs really don't need a whole training program because it's really a step-by-step process performed uniquely in your environment. But then there are elements which everyone in the industry needs to know which require some explanation. These form the core of your training program.

• Introduction to the business
• Basic Skills - Loan Origination System
• Basic Skills - Loan File Set Up
• Basic Skills - Credit Reports
• Basic Skills - Income/Assets
• Basic Skills - Income Calculation
• Basic Skills - Appraisals
• Basic Skills - Purchase Contract Review
• Basic Skills - Submission
• Workflow Management
• Advanced Skills

When you look at this, you realize this represents the core "boot camp" with a focus on all of the general knowledge a processor needs to effectively do the job anywhere. The only thing left is to identify the courses that meet these requirements and assign the individual to take them.

Step 3: The No-Cost Curriculum Assembled

When we began updating our processing courses, we started having the distinct feeling that we were reinventing the wheel. In fact, it was true. Most of the core material in our boot camp was available in the public domain. We just needed to pull it together.

This template covers all of the content in the standard New Loan Processor Initiation Course

You can download the curriculum here as a template, and feel free to edit and share as you see fit.

Other Training Resources - Behind the Registered User Login

Many other training resources exist to supplement your training program for mortgage processors, but many of these are hidden behind password protected areas of a company's site. All of your vendors, however, offer training as part of their bundle of services; some is a value-added service, but some has a cost associated with it.

• LOS provider - Calyx is the only provider that offers open source training to the public, but all of the LOS providers have training of some sort, much of it hidden behind the login screen. Ask your provider for access.
• Investors and wholesalers - Many account executives will provide live on-site training. Utilize this to augment your training. But for each of your wholesalers, ensure someone goes through their offerings to determine if there is a catalog of past on-line webinars that can be added to your library.
• Associations and Agencies - for advanced training, in particular, the agencies and associations often provide needs based training. The associations use this as a tool to drum up membership, so while it may be no-cost, it may be limited to members only.

The Practical Guide to Loan Processing - Still Relevant

Despite this, we still think our Practical Guide to Loan Processing is relevant as a foundational tool that allows an individual to independently learn all of the keys to the loan processing position. We offer hundreds of "job-based" tips and tools that cannot necessarily be provided in a service providers training. In addition, no one addresses the issue of role management and career advancement.

In addition, for companies, the detailed work of identifying process flow, synchronizing forms to ensure that the myriad compliance, quality control, agency and investor rules do integrate into the process mean that a detailed policy and procedure is much more important than the general knowledge that is in the public domain. 

Recent Fine Points to the Need for a Documented Training Policy

New Day Financial received a $5.2 million dollar fine from the Conference of State Banking Supervisors (CSBS) for systemic violations in its licensing training program. Although the CSBS's condemnation of New Day Financial's training program management system stopped short of using the word "fraud," it's astonishing to see the scope of misrepresentation perpetrated by compliance personnel and company leadership.  This incident reminds us that we often have to state the obvious, because in a high paced environment you can often lose perspective in the interest of expediency. But what happened at New Day caused a gasp at the audacity and scope; specifically the practice of having others take your training for you.

SAFE Act Training - It's Here... Deal With It

It's true that most mortgage professionals consider Nationwide Mortgage Licensing System approved pre-licensing and continuing education a fruitless, nuisance exercise. Much of the 8 or 20 hours of mandated material could easily be covered in 1 hour. Compliance training in all fields gets characterized in this way, whether it's nurses, plumbers, real estate agents, insurance agents and all of the rest of the regulated industries. But as mortgage professionals we usually buck it up and take our medicine as the price of admission. That's why no one in the industry has much sympathy for the New Day perpetrators. But the case raises some other interesting issues.

Compliance training isn't real learning. But that is by design. It advances a certain regulatory agenda, namely the idea that days spent mulling countless pages of federal law (much of it obfuscated by lawyerly wordsmithing) will make a commissioned salesperson (loan originator) an ethical and law-abiding industry participant. The New Day case provides more evidence that more compliance training doesn't mean more compliance. Loan originators especially dread the continuing education and pre-licensing training is perceived as largely useless with new entrants requiring weeks or months of vocational training to learn the job. Delivering it with more "engagement" simply means more "work" for the students. Because the material has such a low perceived value, participants naturally minimize the amount of time and effort expended.

While it doesn't excuse the actions of the individuals who cut class, it's likely the class cutters already knew the material being delivered in the "mandatory" continuing education. Like any long time industry professional, one is aware of the regulatory compliance requirements; many long-timers could teach the course (and do!). So, in part, the fault for the fact that people go to such extremes to avoid taking courses on the same old federal regs - the same regs that we talk about ad nauseum all day long - can be laid at the foot of the regulators who constrict the course materials. The Nationwide Mortgage Licensing System (NMLS), a subsidiary of the Conference of State Banking Supervisors (CSBS), mandates the content. It micromanages the approval of licensed training as if it were the holy grail of compliance. If you want professionalism and continuing education, we recommend the regulator de-regulate continuing education training. This will allow individuals to acquire learning in an area which they have some motivation and some diversity of topics.

Pre-Licensing Education and Testing - A Different Paradigm

Again, the intent of requiring pre-licensing education is good. But the idea that a new entrant can sit in a class for 20 hours and understand the mortgage industry is disingenuous. Similarly, the NMLS' recent statement that the 20 hour class cannot simply contain test-preparation material is also disingenuous; the focus of these classes clearly is preparing for the licensing test.

It's Fraud, Though, Isn't It?...

The New Day personnel who allowed others to take licensing courses and tests clearly crossed a line. How that misrepresentation is not fraud on an individual level is not clear. Perhaps there is another suit to follow.

Oddly, NMLS Worried About the Wrong Thing

The action provides more insight into the peculiar mindset of the CSBS and the NMLS. What provoked the Multi-State Mortgage Committee (MMC) most was the so-called "cheating" on the test by the copying of exam questions and sharing them with others. For anyone who has taken the tests, knowing the questions and answers really doesn't provide any advantage. The NMLS believes that the questions have real value, where a test-taker has to really parse each question to understand what the question is asking. The questions on the NMLS exam do not really test knowledge, but more the test taker's cognition and skill at multiple choice. Remember, multiple choice tests PROVIDE YOU WITH THE CORRECT ANSWER. The test taker has to choose which answer is the most correct.

This belies the issue. The test questions - the content matter - scope is so narrow that the same questions get asked again and again in different forms. Learning management specialists tinker with a battery of approximately 600 potential multiple choice questions and provide a range of partially correct answers, with enough "distractors" (technical learning specialist term where a seemingly correct answer incorrect answer is presented) to throw off a seasoned compliance officer. The board reviews the tests result macro data, and if too many people are failing or passing the test, they tweak the questions to make them slightly easier or harder, until they get into the 20% fail rate area. The idea that the questions themselves have any value at all simply reflects the regulator's misunderstanding of the user experience.

Still, the questions are NMLS property. The MMC does have everyone who logs into the NMLS sign a code of conduct that says they won't copy questions and reveal details about the test. We can complain about the absurd nature of the questions and the subjectivity of the "Best" right answer, but rules are rules.

The Need for a Training Policy and Procedure

The pinnacle of shame in the New Day debacle remains the statement of the COO who asserted he had no idea that his employees were taking his CE for him. That he didn't know he was not exempt from the hours is a tribute to willful ignorance, or a level of isolation reserved for reclusive terrorists.

This draws attention to the need for clear policies and procedures with respect to training. What makes a good policy and procedure? This example taught us that we needed to amend our SAFE Act policy to state the obvious - that each licensed or registered (covered) employee must take his or her own CE; that sharing answers and questions on tests is a prohibited practice.

NMLS has to Acknowledge its Part

The mortgage training industry needs to get honest about the problem of redundant training. Here is an opportunity to get creative. Be willing to step outside the box and challenge the NMLS' education department to approve more wide-ranging topics. Understand that compliance training in a vacuum doesn't help anyone except the regulators. De-regulate topics and provide a more dynamic system where the discussion can change based on the headlines of the day and the needs of the current market.

By creating an environment which stifles innovation in favor of conformity, the NMLS' system has condemned the industry to lowest common denominator, homogeneous training. The poor quality and low value of the NMLS content means that people participate ONLY because they have to. The format and content mean that people essentially check in and check out - Zombie Training - present in body but not in mind. If people can find a way around it, they will, as the New Day incident proves. If the NMLS believes that this is the only incidence of short cuts in the CE process, I am certain they are mistaken.

In order to FORCE engagement, the NMLS has mandated that individuals must take a quiz at the end of the class. Originally, these quizzes were not graded, so it was part of the training process. Now, these quizzes are graded as a way of gauging how much the student paid attention. REALLY? Why not have a really good class, where students participate and put their hands on something, question, fail and learn? Socrates would shoot himself if he saw what we were doing.

As further evidence of the difficulty the NLMS creates for students, it recently announced a mandate that SAFE Act CE had to be taken all at once - in one day - instead of the possibility of spreading the training out over a year.  How does this benefit anyone except the NMLS? What could the exception to ongoing training possibly be? Did they just want to avoid clogging up the database with multiple partial credits?

Whoops - How Much is that Whistle-blower's Payday?

Of course, you never know how much a whistle-blower gets paid, unless he or she files a lawsuit to collect. According to various law firms, the payday for a whistle-blower in a government action can be anywhere from 5 to 35% of the fine or recovery. 10% of $5.28 MM is $520,000 - not a bad payday.

Training Policy Sample Here

MortgageManuals customers already have a training policy embedded in their Policies and Procedures manuals. For instance, Originator training is in the Origination Manual; Processor training is in the Processing Module; Compliance training is in the Mortgage Regulatory Compliance Module.

Other Recent Articles

4/21/2015 - HUD's April Lender Insight
4/21/2015 - FinCEN SAR Reporting Statistics for 1st Quarter 2015
4/1/2015 - CFPB's Homebuyer Finance Guide

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 Issuu.com 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!

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.

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.

Really? That's all you've got??

"Could use some insight here with what makes one Mortgage Broker better than the next....

Had a client ask me today what I thought differentiates one mortgage broker from the next and, honestly, I didn't have an answer other than the boiler plate response of "integrity, honesty, etc.". Was just curious if I could get some feedback in this group so I could give her good advice. Thanks. D"

I'd be worried about a business that doesn't have a competitive value proposition. If you can't answer the question "Why should I do business with you?" you are in trouble. 

Saying "I give excellent service" is what we call a "claim" - you're saying it, but there is no way to prove it. It's like trying to define "quality". Saying "we have integrity and honesty" is also a claim.  In these cases an unproven claim is worse than nothing at all, because it reinforces the opposite impression in the buyer's mind.  They think "you're bringing it up, so it must be a problem."  So when you say "I'm honest" they think "He's a liar."  When you say "We have excellent service" they think "I'll never get to closing."  Stick with statements that are factual and that you can prove.

Ask me the question! My crib sheet:

As a broker - compared to other brokers - I help you:

1.) make better decisions by evaluating your options completely using my "pre-qualification system", which means you can borrow with confidence 
2.) make sure you get to closing on time by using my "complete application system" which ensures all documentation that could possibly be required is obtained upfront. This also means that you get a better rate, because the lenders know my files are complete, they approve my loans more quickly and offer me better pricing. 3.) get extra value by leveraging my "referral network system" business relationships to choose better vendors offering better prices 

That's for starters!

If you are a true broker, though, you should really leverage your value proposition by searching for financing sources outside of those offered by traditional warehouse/correspondent relationships. If all you offer is agency product, you are at a competitive disadvantage and will compete only on price. As a broker-owner my 2nd biggest job (behind business development) is finding brokered product that no one else has. For instance:

1.) A local bank that offers a special product (I am always surprised to find banks offering high ltv, and low rates, without PMI as well as other niches which they don't advertise - they are their own best kept secrets) 
2.) local life or casualty insurance companies looking for mortgage investments, 
3.) industrial loan associations,
4.) private lenders 

You generally have to work with borrower paid comp on these, but THIS IS THE BROKER BUSINESS MODEL - assembling a suite of products that one lender couldn't possibly assemble.

Finally, national lenders can't be as flexible in building a business around the local needs as a broker can. For instance: 

1.) you are near a military base: "We are the experts in providing financing for servicemembers"
2.) your market has a lot of 1st time buyers/renters: "We are the experts in FHA/HomePossible programs." 
3.) you market has an industrial component: "we have hundreds of programs for self-employed business owners." 

Obviously, these are simply examples, but you should think this through as it applies to you. It should roll off your tongue without having to think about it. 

Imagine going to a bank and asking for a loan for your business; why should I lend you money. It's the same thing with a customer, referral source, business partner: Why should I do business with you?

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.

Angry About Absurd Nature of NMLS Licensing Exam Content?

Who IS the man behind the curtain? Good luck getting a straight answer. The issue of NMLS testing remains one of the most irksome in the new regulatory scheme. While you generally only have to pass through this gauntlet once, a recently post on the NMLS USER FORUM on LinkedIn raised these questions again. Given that we are now in CE season, I thought it would be useful to post.

"Does anyone know who creates the NMLS test questions? Or, how to contact whichever regulator agency created the test?

I've been a registered originator so haven't had to sit through the 20 hour class or test until this week. I've actually got a really good study software that includes 600 practice questions and what's even better is when you get a question wrong they tell you why.

Problem with that is they are now showing that whoever created these test questions is likely not a mortgage professional or has no understanding of underwriting guidelines. At least two of the questions I got "wrong", THEIR answer was actually 100% incorrect and that is based on underwriting guidelines.

Many of their other questions are simply trick questions. Frankly, I'm sick of these kinds of tests where they are written specifically to try and make the test-taker fail and I'm ready to make an official complaint.

I have no problem being tested on my industry knowledge, but I have a huge problem with the way these are being asked."

The Answers

There is a committee which writes and approves questions and answers. It's true that not all of the authors are "mortgage industry pro's", but on the committee there are several mortgage professionals. Several thoughts:

Right and Wrong:

1.) Reading the questions again, often you realize that the question is a "trick", or what learning industry professionals call a "distractor", that is designed to make you think the question is about something else. I'm with you - dirty pool. But when I go back and look at it I slap my forehead - technically, the question is requiring the correct answer and it's not the one I chose.

2.) Some of the questions that you get wrong are "test questions". There are usually 5 or 10 (no more than 10%) in any test and they are used to try new questions out on the public to see how they work, whether they are too hard, or whether the content is appropriate. They don't count in your total score. Unfortunately, you don't know which of these are "test questions" and which count, so you leave the exam scratching your head...

It is specifically prohibited (and it can get you banned from the NMLS) to discuss specific questions you saw on a test with someone else, or to publish or re-distribute that information. Be careful how you share your vitriol on this matter.

I had the same experience AND I'M A PE/CE INSTRUCTOR!!!! You would expect me to get 100% (I did) so I was surprised when I barely passed (87%). I did better on the state exam which was more straight-forward.

If you want to have something to be cynical about consider this: The authors tweak the exams regularly to make them "harder" or "easier" based on the percentage of people who are passing/failing. If I recall, they are targeting an 80% pass rate (there is a citation of the exact amount somewhere, but I don't have time to look it up, so forgive me if I'm incorrect on the number - the point is the same regardless), and will review a pool of pass-fails on a monthly or quarterly basis. If there are too many people failing, they make the test easier because they don't want it to be impossible to get a license. Take the example of the NEVADA test in 2010 when it was rolled out. Most people taking it were failing - like 70-80%. The NMLS and the State HAD to change it.

Philosophically, it comes down to the same problem with all regulation of knowledge - it re-enforces the status quo, allows the regulator to place a barrier to entry, but it does not achieve an end. People who pass the test and get their license aren't necessarily equipped to do the job. AND a 20 hour Pre-licensing education class cannot prepare you to do a job which most people report takes 6-24 months to achieve proficiency. Many people who are very good at the job can't pass the test or meet the licensing requirement. One of the reasons I got out of the PE/CE business is that we FUNDAMENTALLY DISAGREE on the principals of mortgage education SO MUCH that I no longer wanted to subject myself to having to defend every vocational principal in my programs - programs that had been proven to have the most successful outcomes of any in the industry.

My recommendation for the industry is a system of tutelage similar to that of the trades - you work as an apprentice for several years before you can do the job on your own.

I SO SO SO agree with you on your feelings on this matter, but it sounds like you passed, too. Let it go, Don Quixote!

If you are just joining the world of licensed MLO's, get ready to feel the pain of 8 hours of Continuing Education representing EXACTLY the same content that you have taken for the last 10 years...

Deciding About an In-House Training Program

Is it the end of contract private training companies in the mortgage industry?

The advent of the Nationwide Mortgage Licensing System (NMLS), and the incumbent centralized education approval that it includes, presents a tremendous opportunity for companies with multiple employees to develop their own internal training programs for certification purposes.  The legacy 50 state licensing ad-hoc system with its patchwork quilt of requirements made the education certification process difficult even for full time compliance companies.  The new protocol makes it easier for smaller companies to have a state or even national certification education program.  

While the state licensing systems previously in place now have a uniform “overlay”, the states are still in charge of licensing.  But the new system forces states to “get out of the education approval business.”  The SAFE Act requires that the NMLS approve course material and certify that federally mandated minimums are included.  Some states, such as Utah and Texas, have robust and heavy education requirements and are very invested in the review process.  These states may maintain their own separate additional requirements.  Most states, however, see that having a separate state education approval function is a duplication of effort.  These states are more than happy to turn over the education certification function. 

This means that in the future it will be much simpler to get an instructor, a course or course material approved.  In addition, unlike virtually every other piece of legislation spawned by the housing finance crisis, the cost is substantially reduced.  Under the old systems, multi-state course licensing meant a training company would have to spend over $28,000 just to get a course approved nationally.  In the new system the cost is $600. 

Generating Your Own Program – Is it Worth it? 

The question of internal training program feasibility is a calculation that will vary as the market determines the per person cost of the comprehensive curriculum.  With as few as 3 employees, it makes sense to have an internal training program.

Unfortunately, it is never that simple.  This model does not take into account the cost of developing a course, the application and approval process, and having an instructor to run the course.   

Of these impediments, course development is the most troubling.  A course book can be 400 pages long and, particularly these days, the content is a constantly moving target and a challenge to update.  Otherwise, filling out the application form is easy to do internally.  As to the instructor, most companies have a manager or senior person who enjoys teaching, so that’s not a problem either.  

This means that, if you purchase or lease a course, you can arrange a training program for your employees at a substantial cost savings while getting all of the other benefits of an in-house training program at the same time.  Does it still make sense? 

What is clear from this calculation is that, if you have at least 11 originators, it makes sense to at least consider an in-house course. 

What are the benefits of an in-house training program?

Control the Message - One of the most frequent complaints regarding outside trainers is that they do not understand how your company runs.  Combining an in-house program with other vocational training can reinforce your company’s standard procedures, values and methods.  In addition, regular meetings can be used as time to deliver required training topics that would be covered as a matter of the course of business.   

Manage the Time – The most expensive part about training origination personnel isn't the cost of the training, it’s the time spent away from phones or sales related activity.  In an in-house program, compliance training can be combined with vocational skills training.  This means your origination staff spends less time in training and more time doing what you pay them to – bring in business. 

When and Where you Want It – Instead of having to coordinate a far clung event at an outside party’s convenience, you can provide training at a moment’s notice, at whatever location is convenient.  Having a company meeting?  Schedule some training as part of the event.