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

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

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

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

It won't.

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

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

So wake me up when QRM gets defined.

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

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

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

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

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

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

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

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

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...

New Products! MortgageManuals Now Offering Individual Policies/Procedures

MortgageManuals.com, which is also known as Mortgage Management Systems, has announced that it will begin selling individual policies and procedures in addition to modular packages of complete operational procedures.  The company is extracting the individual policies from its complete packages.

If the company already has a comprehensive set of loan production policies and procedures and simply needs to fill a gap, these represent the perfect solutions.  The policies will cost approximately $145 to $245, depending on the depth and scope of the product.  They are designed to provide an affordable alternative to some publishers who are charging as much as $895 for individual policies. 

We want our customers to ascribe to the value of having a complete set of policies and procedures in place.  That is our value proposition.  For the cost of a single policy from some other providers, you can purchase an entire set of operating procedures which include compliance, policy, operating procedures, forms, training instructions and other organizational material.  If you purchase a less expensive single policy, you can upgrade to the entire package at a later date and receive credit for your purchase.  

Visit the individual policies page at http://www.mortgagemanuals.com/single-policies.html

CFPB (Consumer Financial Protection Bureau) Examination Matrix

There has been much talk and many questions about whether or how our products help our customers manage the risks associated with a CFPB examination.  Although the risks of an examination by the CFPB in the near future are low, state regulators and FDIC examiners are also using the CFPB examination guide. 

To assist you in

1.)    evaluating whether your current procedures are sufficient, and

2.)    providing your examiner a reference tool to review your procedures

we have compiled a CFPB Examination matrix which you should keep as part of your Quality Control Plan documents.  It should be referenced in examination preparation. 

For your reference, we have included a copy of this on our Consumer Financial Protection Bureau page at http://www.mortgagemanuals.com/CFPB.htm 

For Document Management Customers

If you have the live template, this update has already been uploaded to Quality Control/Forms.  See your available downloads at

https://mortgagemanuals.sharefile.com/