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

Collateral Underwriter - AMCs an Incomplete Solution to AIR Compliance

Collateral Underwriter Emergence a Prescription for AMC Appraisal Quality Failure

The Appraiser Independence Rule (AIR) became effective in October, 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Essentially, this rule codified the principles of the Home Valuation Code of Conduct (HVCC), which went into effect in May, 2009 (but applied only to FNMA/FHLMC loans), into law which now applies to all loans.  Many industry participants looked to so-called Appraisal Management Companies (AMCs) to solve the operational problems of complying with the rule. Unfortunately the AMC paradigm only solved one element of the rule.  Lenders have found that they still carry a huge burden with respect to appraisals.  In addition, as is evidenced by the recent introduction of Fannie Mae's "Collateral Underwriter", AMCs did little to improve appraisal quality.

Appraisal Management Service - Never a Complete Solution

Many lenders and brokers believed that an appraisal management service solved the compliance problem.  Unfortunately, while it does provide an arm’s length appraisal ordering service, it does not manage the other problems in the mortgage process:

• How does an individual loan originator establish value for pre-qualification purposes?  What are the permissible means for obtaining value estimates when a transaction’s feasibility is pending property valuation?
• In ordering appraisals from an Appraisal Management Service, how are how are problems with incorrect appraisal, billing, or contact coordination appropriately handled?
• How are approved/disapproved appraisers managed internally?
• How do lenders quality control an appraisal ordering process they don’t control?
• How does third party management allow the lender to ensure the borrower receives a copy of the appraisal three days prior to closing?

Because of this, we have developed a system that can be applied to all production and deals with all areas of AIR, predatory lending laws and state lending laws. 

• Production Use of non-AVM Value Estimates
• AIR Appraisal Ordering Process
• Appraiser Approval Process
• Appraisal Quality Control
• Underwriting Review of Appraisals
• Effect on Industry Procedures

We have suggested a policy that allows the company to maintain control of an independent appraisal ordering process, but provides the disconnection of all production personnel from substantive interaction with valuation service providers.

In addition the policy we recommend doesn’t leave the originator or sales person without any process by which he or she can obtain any confirmation of a value estimate for the purposes of structuring a new transaction. 

The updates for the modules are available on the download page

Implementing the Appraiser Independence Rule (AIR) Changes in Your Business

Quality Control, Policies and Procedures Modules Affected:

Origination Process – Estimating value without appraisers, Pre-Qualification without Value Acknowledgement Form, Originator Acknowledgement

Processing – Random Selection, No Communication of Value on Request Form, Checking Approved Appraiser for Outside investor, Appraisal Copy Delivery Process

Underwriting – Appraiser Approval Process, Random Appraiser Selection Process, Appraiser Denial Process, Appraisal Review Process, Multiple Appraisal Policy

Closing – Appraisal Copy Process

Admin-Operations – Appraiser/Vendor Approval Process, Random Appraiser Selection Process, Appraisal Payment Process, Identity of Interest verification

Quality Control – Appraisal Review Process, 10% Random Selection, Appraiser Approval, Random Appraiser Assignment

The Audacity of ... CFPB's Misleading Marketing Tool

Instead of "Playing Lender" the CFPB Should Teach Consumers How to Rate Shop

Considering the number of blows the mortgage industry has patiently withstood at the hands of well-intentioned but misinformed regulators, it may seem surprising to some at the level of affront taken over the "Check interest rates for your situation" (the checker) on the Consumer Financial Protection Bureau (CFPB) webpage. All of the industry professional associations have launched attacks against the checker.

Much of the criticism of the tool surrounds the apparent opacity of the checker.  "It leads people to believe they would be eligible for a loan based on no other information." (Mortgage Broker)  Specifically, credit score only driven modeling doesn't account for many other features of a credit history that makes you ineligible for financing, such as recent bankruptcy, credit counseling, co-signed loans, insufficient trades and others.  In addition, missing are: 1.) APR, 2.) Mortgage Insurance Costs, 3.) Doesn't distinguish or provide Government loan options.

The CFPB has defended the site against industry complaints, saying a customer who is aware that interest rates are different from lender to lender is 50% more likely to shop, and the page remains active.  Perhaps the CFPB feels the protest shows they have struck a nerve - exactly what they wanted. Sadly, though, this agency has taken a page out of online marketers' playbook, and walks a fine line between information and deception to create engagement. The checker goes down the same "bait and switch" path that many online lead generation sites engage in.  The message a lender would take from the regulator's site:"It's okay to provide misleading rate options if enough remains unknown so you can be sufficiently vague."

The Checker reveals another clear misunderstanding of the business rule the Bureau has set into place. It ignores a fact of life for mortgage lenders and brokers alike; under the Anti-Steering Rules, you cannot change your pricing based on any feature of the loan.  The customer CAN'T negotiate with a lender because the lender CAN'T change the price. Period. The CFPB sets up the consumer to believe that they CAN negotiate the price. One can see the frustration the consumer will experience when, after providing all the information the lender has required to issue a price quote, a rate negotiation results in no price improvement and will wonder "what was all that about?"

Another flaw in the CFPB's mandate that customers shop; many lenders require a hard credit pull to quote rates. The impact of a single inquiry may not have a deleterious effect on your score, but two or three in succession may drop your score enough to negatively impact your rate.   

Deceptive and (Honestly?) Useless

I myself have been through this Unfair, Deceptive and Abusive Act and Practice several times after seeing a great rate on a marketing website. Ultimately, there was always a reason that the advertised rate was unavailable to me.  Self-employment, length of employment, asset sufficiency or sourcing, the property's characteristics or other impediment get pulled from a panoply of potential barriers. I'm in the industry - these are legitimate barriers - but they don't excuse holding out a rate that may not be available to the public. The checker's functionality does LESS than the lead generation sites.   

The site acts as if rates exist at some place in time.  The reality is that rates are very fluid and change from moment to moment.  Intraday rate changes are common.  If, as a consumer, you shop rates over the course of a few days, you may select a higher rate that seems good because rates have decreased over that time.  Conversely, you may miss an opportunity to lock in if interest rates rise while you shop. The MOST common error consumers make when shopping is to compare lenders when they are not in a position to lock in - because they do not yet have a signed sales agreement.  The CFPB should provide real instruction on rate shopping, such as what we have provided below.

A Homebuyer's Guide to Rate Shopping

Purchasing a home is probably one of the largest financial decisions you will ever make. You want to make informed choices, but the mortgage process is complex, and it’s hard to even know the right questions to ask.  Financial alternatives exist and you have choices for where you can go to get financing to buy a home. But before you even know how and where to shop for a mortgage, you should know the right time WHEN to shop.

I shopped for a pre-approval so, I should stick with that lender for my mortgage. 

False	True
Once you have talked to one lender, you have to use that lender for your loan.	You can talk to as many lenders as you like about pre-approval and pre-qualification.  You can also apply with different lenders or lock in with different lenders.  By working with a few lenders, you can negotiate more effectively. NOTE:  The CFPB regulates compensation, so lenders and brokers are no longer able to "negotiate" on pricing as in the past. Most companies offer a fixed price.

Be careful how many times you have your credit report pulled by a lender or broker.  For the purposes of a pre-qualification, most lenders or brokers will take the credit report you can get for yourself from the credit bureaus (like annualcreditreport.com).  This is cheaper, too.  The lender will want what is called a Three Bureau Merge (Tri-Merge) with all three repositories.

Whether face-to-face or online, you should talk with a few lenders and ask for recommendations to find the best fit for your situation. While the interest rate is a big factor, it is not the only factor. Consider the different types of loan options available; get a written estimate of closing costs and fees. Find out their policies for locking in interest rates. 

When to shop for a mortgage

Wrong	Right
You just started shopping for a home and you are looking in a neighborhood.  You figure your price range is $200,000 to $225,000.	You have a sales contract, signed (or about to be signed) by the seller, which details a sales price, your down payment, the closing date and any costs that the seller will pay for you. You may have been through the pre- approval process

You have been told that you need to shop around for a mortgage. So you do, calling lenders asking for rate quotes and comparing offers.  More than likely, you are finding that you have more questions than answers. If you find yourself in this position, it’s because you didn’t do some of the earlier steps, like getting pre-approved or pre-qualified. More importantly though, is the timing right when it comes to the bigger picture? 

Do you have a contract to purchase a home?  If yes, then you should shop for a mortgage.  If you don’t have a contract, the information that the lender gives you is not accurate. Without a sales contract, you don’t have the correct loan amount and settlement date you must have to meet the requirements of your legally binding sales contract. If you don’t have a contract, the lender cannot guarantee your interest rate, which is known as locking in.

After you find the home then you can lock-in your rate

False	True
A lock-in can be given at any time.  Once a lender has your loan application, you are locked in.  The lock-in is only for the points because the rate continues to float until closing.	A lock-in of your rate includes a guarantee of the interest rate, loan type, loan amount, and any points you must pay. These expire on a specific date, so in order to get the terms of the lock-in, you must close before the expiration of the guarantee.

Lenders are often accused of “bait and switch” tactics; offering one rate at the beginning then giving another one at the end. The reality is that many things can change the interest rate lock-in, like pricing adjustments for your credit, the type of property you are buying, and how much you are putting  in your down payment. It is likely that in order to lock-in your rate accurately, you will have to provide your social security number, along with the information from your contract. 

What loan terms are you shopping for?

Wrong	Right
I’m shopping for a mortgage.  What’s your best rate?	I’m looking for your interest rate quote for a 30-year fixed rate loan with a loan amount of $145,000, a down payment of 10%, closing in 45 days, with no points.

Here’s an example. If you go to a Ford dealer and say, “I want the best price you have on a car”, the salesman will take you all the way to the beginning of your decision-making process and start to ask you about what kind of car you want. You should already have this information. To accurately shop, give the lender the most specific request you can.

When should I call to check interest rates?

Wrong	Right
I can call any time, day or night, and compare rate quotes over the course of a week or two.	I need to check rates between a few lenders I’m considering between 11:00 am and 4:00 pm.

Rates change ALL THE TIME. Even over the course of the day sometimes. Most lenders publish their rates sometime after the bond markets open and when the direction of rates is clear.  That’s usually around 10:00 AM Eastern Time. While some lenders hold their pricing overnight, there is no guarantee that a quote you receive at 11:00 AM will be valid after 5:00 PM.  Wrap up your shopping by 4:00 of the same day so that you can compare and call the lender with the best price before the close of business. 

Am I dealing with a broker or a lender?

Broker	Lender
·         Cannot guarantee a rate or approve a loan directly – Get a copy of confirmation of lock or approval from investor. ·         Can shop multiple investors for the best rate. ·         May have special products	·         Can lock a rate directly ·         Can approve loans directly ·         Cannot shop on your behalf ·         Limited selection of products

Banks, savings banks, and credit unions usually make loans from their own funds, so they CAN commit to giving you a loan at a specific interest rate.  Mortgage lenders have the ability to approve and fund loans using money generated from selling loans into the secondary market. Brokers arrange financing by surveying many lenders in a specific marketplace and finding the most competitive programs, flexible guidelines, and reliable service, but CANNOT fund or approve loans.

You can begin your search online, but also ask your friends, family, and co-workers for referrals as well. Your real estate agent can also recommend at least three local lenders who have a track record of being honest and reliable.

Other Rate Checker Articles

Ken Harney's Article

TRID - It's Not Just a Disclosure, it's a Process

Update - 7/29/2015 - Corrections to Integrated Disclosure Rule continue!

The CFPB's newest "final" rule amended the TILA-RESPA Integrated Disclosure (TRID) Rule.

Changed the timing requirement for the issuance of a revised Loan Estimate resulting from a rate lock event to align with the timing requirement for all other changed circumstances - the third business day after the triggering event (the rate lock).

The rule announced yesterday also added

1.) Optional disclosure to the Loan Estimate for certain construction loans that are expected not to close until after more than 60 days from issuance of the Loan Estimate,
2.) Added the LE and CB to the list of documents requiring Loan Originator names and NMLSR IDs.

Disclosure AND Timing - 10/3/2015 Loan Estimate Process

While you have some time before you HAVE to be ready, the deadlines are quickly approaching.

Policy and Procedure Implementation Issues

Highlights of Actual Changes From GFE to Loan Estimate Process

TRID - Truth-in-Lending and RESPA Integrated Disclosure
LEAP - Loan Estimate Application Procedure

While many industry compliance experts toll the warning bells loudly and repeatedly that the sky is falling, the reality emerges that the new loan estimate process represents a refinement of the 2010 GFE process and the elimination of the TIL. Regulators should receive some credit for the difficult task they have accomplished involving combining two completely different laws into one unified customer facing document. Here we take the time to step backward and look at the real changes, and see where our actual policies and procedures will have to change to ensure and prove compliance.

First, from a conceptual framework, the process itself hasn't changed.  The industry has and continues to provide RESPA and TIL disclosures, and the procedure for resolving changes and errors remain the same.  The difference is that, because of the unified form, instead of having two separate paths (TIL and RESPA) we now have one. The benefits of a single track outweigh potential complications from misunderstanding.  Examining GFE 2010 and TIL/MDIA, and then identifying the components required from each, provides a framework for implementation.

Loan Estimate Differences
GFE 2010	TIL/MDIA	Loan Estimate 2015	Description
Six Items and anything else needed	Application Received	Six Items ONLY – cannot refuse to issue based on "Additional Info Needed"	Consumer Name Consumer Address Consumer Social Property Address Property Value Mortgage Amount
Intent to Proceed		Intent to Proceed	No Change
3 Days/3 Days	3 Days/3 Days and 7 Days	3 Days/3 Days and 7 Days	7 Business days before consummation is the TIL Requirement
Changed Circumstance within 3 Days		Changed Circumstance within 3 Days	Cannot be based on information provided earlier, Revised Estimate within 3 business days
Lock in – Changed Circumstance	Reissue New TIL on lock date	Reissue LE within 24 hours of Lock-in	Financing Agreement signed FIRST, then revised Loan Estimate
HUD-1		Closing Disclosure	4 Business Days prior or mail 7 calendar days
HUD 1 prepared by Settlement Agent/Lender Review		Closing Disclosure prepared by Lender	7 days prior
Tolerance 0/10/100	1/8th or ¼ or	0/10/100 Costs and 1/8th or ¼ APR	No Change here, but if one or the other change, must issue. You must disclose at least 1 service provider
Initial Disclosure Provided by Broker and Lender	Creditor including Broker OR Lender	Creditor ONLY	Broker can issue, but becomes creditor, impossible in some states
Pre-Qual -Non-GFE Cost Estimate		“New Language”	“Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”
30/60 days to correct		30/60 days to cure	30 days to issue corrected closing disclosure 60 days to refund funds and corrected disclosure to cure

Document Preparation

Much of the concern and perception of upheaval comes from the complete reinvention of two of the forms we see most often; the GFE and TIL. We have less to worry about in regards to completing the new loan estimate and closing disclosure because the burden of integrating these falls on our Loan Origination Systems (LOS) and Doc Prep vendors. 

Ellie Mae is one vendor who has proactively addressed the Integrated Disclosures and has already completed its input screen and benchmark re-builds.  Examining their courses with respect to the updates, you can see only a few fields got added to account for the changes and record-keeping purposes. 

Integrating your Systems into Procedure

If your LOS or Doc Prep vendor has not provided you a roadmap for these elements, note that the compliance deadline nears.  You should allow yourself 60 days to update your procedures and alert your staff to several new definitions, as well as conducting some dry runs to ensure you can execute on August 1, 2015.  Working backwards, this means that your LOS and Doc Prep vendors should have information to you at least 60 days in advance of this. That means your vendors should have your products updated by April 1, 2015.  

Sample Procedures - Click here to Download Sample Policy & Procedure

Adopting this new regulatory scheme, unless your business focuses on reverse or home equity lending, means that the old TIL disclosure procedures take a distant back seat.  To amend your existing procedures, you will overwrite your GFE application process.  

Lenders will have to establish a proactive closing disclosure review process as a result of the need to deliver it 7 days prior to closing.  Operationally this simply means that the HUD-1 Review Process which normally happened in conjunction with the closing/funding process is 

If you do not have a 2010 GFE estimate procedure, or a HUD-1 review procedure, you need to address this matter separately, but the updates to Policies and Procedures can be be quickly amended by ensuring the following:

Loan Estimate Process

1. Cost Estimate process (must state NOT a Loan Estimate - and look different)
2. Deliver Loan Estimate and Settlement Providers within 3 days
1. Property/transaction NOT mobile, Reverse, HELOC
2. Customer provides 6 items
3. Application received
3. Intent to Proceed
1. Customer acknowledges intent to proceed
2. 10 Days pass - Loan Estimate expires
4. Change of Circumstance
1. Application Date > 8/1/2015? 
2. Deliver Revised Loan Estimate within 3 days
5. Lock-in 
1. Application Date > 8/1/2015?
2. If AT Application, Loan Estimate within 3 days
3. If AFTER Application Deliver Revised Loan Estimate WITH Lock-in/Financing Agreement
6. Closing Preparation 
1. Application Date > 8/1/2015?
2. 7 Days since Initial Estimate
3. 4 Days since revised estimate received by customer
4. 7 Days Prior Closing Cost Disclosure Review and Deliver to Borrower and Settlement Agent
5. 24 hours prior deliver Final Closing Cost Disclosure
7. Closing Audit 
1. Application Date > 8/1/2015?
2. Completed within 30 days
3. Funds refunded (if necessary) with revised cost disclosure within 60 days
8. Retention
1. Application Date > 8/1/2015?
2. Retain ALL documents for 5 years from date of consummation

If you do not have a procedure for GFE or Closing Docs Review to edit, we can provide this as part of our Lender or Correspondent Packages - or contact us for a stand-alone process document which we will issue in February.  

Additional Resources


Buckley & Sandler TRID Resource Center (Legal Perspective)
ProClose 10 Things (Doc Prep Vendor's Perspective)
Housing Wire Readiness Assessment
Dodd-Frank Update - Howard Lax Article

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

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

NAR study shows, after tax incentive expired, first time

homeownership plunged. (NAR 2014)

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

Originator Compensation Caps - Another Example of Price Control Failure

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

Fair Hourly Wage Comparison - Originator Compensation 

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

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

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

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

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

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

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

HPML Impact on Small Loans Aggravates Supply Constriction

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

Conclusion - Eliminating Price Controls May Represent Only Solution

Figure 3: While the percentage of buyers purchasing new

homes has declined, the percentage of buyers purchasing

new homes has increased.  This shows builders have adapted

to the new environment.

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

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

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

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

Author:  Thomas Morgan

Citations
Bancroft, John.  Mortgage Brokers Gained Market Share in Second Quarter, At Least on GSE Loans. Inside Mortgage Finance. July 10, 2014
Berndt, Antje, Hollifield, Burton and Sand, Patrik. What Broker Charges Reveal about Mortgage Credit Risk, SEC http://www.sec.gov/divisions/riskfin/seminar/berndt091312.pdf. June 2012
Finklestein, Brad. Companies began to increase compliance staff to deal with the new rules and that helped to increase the net cost to originate to $5,171 per loan in the fourth quarter from $4,573 in the third quarter. National Mortgage News, April 2014.
Lautz, Jessica. 2014 Profile of Buyers and Sellers. National Association of REALTORS®, October 30, 2014
National Association of Homebuilders, Housing Market Survey 2012