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.

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.

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.

Resources:

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. <http://www.urban.org/publications/1000504.html>.

Request a FREE Sample Social Media Policy here

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.

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.

Sample Ability to Repay Policy

With the degree to which the Qualified Mortgage and Ability to Repay rules have affected the outlook for the mortgage industry, it comes as a surprise that an "Ability to Repay" policy does not represent a bulky and expansive document.  What should it say?  Something fairly simple and straightforward. As with many policies the devil is in the details.  Saying you will comply is a policy.  What is the PROCEDURE for complying?  HOW will you comply? THAT is an effective policy.

Sadly, regulators and investors focus their interest in seeing the policy as opposed to the procedure used to effect the policy.

Here is a sample Ability to Repay POLICY:

2.37 Ability to Repay

For any consumer credit transaction secured by a dwelling, Company Name must ensure that the borrower has the ability to repay the transaction.  Failure to do so could allow the borrower to challenge the validity of the loan.  Some transactions are exempt from Qualified Mortgage Ability to Repay requirements, however, even with loans which are exempt from a rebuttal presumption of repayment ability, we will strive to only make loans which the borrower can repay..

Exempt Transactions

• HELOCs
• Timeshares
• Bridge Loans
• Construction/Construction Perm
• Reverse Mortgages

In addition, some transactions receive an automatic “presumption” of compliance

• Eligible for purchase by Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) (until sunset provision)
• Insured by the Federal Housing Administration
• Eligible for Guarantee by the USDA
• Guaranteed by the US Department of Veterans Affairs
• Originated by or for, or Approved for purchase by any state Housing Finance Agency (HFA)
• Has been found eligible as evidenced by a written letter or certificate from a Department of Housing and Urban Development counseling agency that there is a reasonable expectation of repayment

On all other cases we will follow our normal “full documentation” methods of verifying customer information and qualifying the borrower.  Rather than list all documentation which we could potentially require, we refer you to our checklist of documents that we do require for all applicants, as applicable to their situation.  (See Complete Application Checklist and Pre-Underwriting Document Review Checklist which are updated regularly to reflect changing circumstances and requirements.)

The following sections of our operating policies and procedures thoroughly identify the process for complying with “Ability to Repay.” We believe it is not enough to meet the letter of the law, but to fully implement procedures that allow us to ensure compliance.  These operating procedures are incorporated by reference.

Origination Policies and Procedures

• Loan Qualification/Pre-Qualification Process – we qualify all borrowers based on their ability to repay
• Complete Application Process – identifies ALL potential documentation needed to substantiate a borrower’s ability to repay
• Borrower Checklist of Required Documentation – Allows the borrower to identify all documentation required for qualification and verification of ability to repay
• Points and Fees – identifies our points and fees structures for the purposes of calculating maximum allowable fees.

Processing Policies and Procedures

• Pre-Underwriting Review Process – loan processing is the second stage of loan level ability to repay evaluation. Processing completes the Pre-underwriting review checklist to ensure all documentation to substantiate the borrower’s ability to repay is included in the loan file prior to underwriting evaluation.  Items identified as missing or incomplete are forwarded to the borrower and lender staff prior to proceeding.

Underwriting Policies and Procedures

• Qualified Mortgage Guidelines – Underwriting maintains guidelines and credit policy for reviewing all loans, including the evaluation of whether a loan meets qualified mortgage requirements or not. In the event that a loan is not a qualified mortgage, underwriters will still establish the borrower's ability to repay.  
• Credit Policy for Non-Qualified Mortgages – We and our investors and purchasers of loans determine whether, and under what conditions, loans which do not meet Qualified Mortgage Guidelines will be available and how they are underwritten. 

Quality Control

• Production Quality Control Process – The Audit Process reinforces the production quality control process be re-reviewing a sampling of loans to ensure that appropriate documentation and qualification calculations are retained in loan files

Secondary Marketing

The determination of whether a loan is a qualified mortgage falls initially on secondary marketing when the loan is registered and priced.  Loan Level Price Adjustments and net pricing is presented on a daily basis. As a loan is identified as a non-QM mortgage, secondary marketing must establish that there is a market for the loan, or that the loan will be held in portfolio as non-salable.  Non-salable loans must STILL document ability to repay pursuant to standard practice. 

Determining Ability to Repay – Appendix Q

Property Collateral Not Primary Method of Repayment

Company Name will not rely primarily on the sale or refinance of the collateral in determining the borrower’s ability to repay the offered loan.

Calculation of Ability to Repay

In order to ascertain ability to repay we will always utilize industry standard ratio or residual income calculations:

• Interest Rate - Fixed Rate or Fully Indexed Rate for a maximum amortization period of 30 years.
• All debts, including housing expenses and liabilities, will be included in the calculation as required by Appendix Q of the Ability to Repay rule.

Changed Circumstances

If a borrower’s ability to repay changes, based on updated and revised information, the loan will be re-evaluated to ensure the borrower is still able to maintain ability to repay.

Second Level of Review

As with all credit decisions, should the borrower be deemed ineligible, or unable to repay the loan, the decision will be reviewed by a 2nd level credit review to examine if there are any reasonable alternatives to assist the borrower in obtaining financing.

The Policy Quandary

One problem that remains endemic to process management: listing a few eligible items, and then adding the phrase "...and any other items as may be required" or "but not limited to..."  Do we really think that that there are items that could be presented that we have never seen before?  Why not have a comprehensive list of checklist items?

A POLICY is not a PROCEDURE

This is what we try and reinforce in our discussions.  Don't write a policy just to meet a regulatory need.  Make sure you integrate the way you will comply within the policy.  If you, as a manager or employee, cannot see the clear execution of a policy within the day-to-day activity, then your policy likely requires you to do something that you are not currently doing.  Which is a recipe for non-compliance.