Why Haven’t Loan Officers Been Told These Facts?
Know Before You “Show” – The Loan Estimate
Recapping last week’s Know Before You Show segment, the Journal posited that there are significant challenges attendant with disclosing lender credits. Remember, lender credits for general or specific costs are zero-tolerance items. The credit promised the applicant in the Loan Estimate (LE) must be no less than the exact amount credited to the applicant on the Closing Disclosure (CD) absent a changed circumstance.
Before tackling the topic of lender credits and the TRID disclosures, some high-level discussion of lender credits in the context of communications might be helpful. After all, in addition to protecting consumers from bait and switch, isn’t the Loan Estimate primarily about promoting effective communication?
There are specific risks when disclosing and communicating lender credits to applicants. The term risk may be described as “a relative uncertainty or something unknown.” Risk may be thought of as a continuum rather than a binary risky or non-risky assessment.
Some things are relatively well known and understood in advance, and others not so much. Appraisals are good examples of this risk continuum. A purchase money appraisal for a property in an established subdivision with great comps is lower risk than a cash-out refinance for a unique second home in the Idaho mountains. Generally, the MLO’s appraisal forecast of specific outcomes such as timing, quality, value reconciliation, and lender acceptability would be less confident with the Idaho mountain property than the appraisal for the subdivision home.
In the future, the Journal plans to unpack a fuller exposition of risk management practices in the Project Management Skills for Loan Origination series.
Briefly, risk management begins with identifying specific uncertainties that could impact the loan manufacturers’ complete success. Therefore we assess the probability of the risk event coupled with the event’s impact should it occur. Risk management then addresses how we might manage the specific identified risks and the totality of identified and unidentified risk (unknown unknowns ;)) impacts on stakeholder objectives and satisfaction. Finally, risk management determines how the risks are handled, including; identification, assessment, risk response, and risk monitoring.
The loan manufacture always carries significant risks related to effective communication. The risk of communication gaps in the loan manufacture is well understood. Communication gaps arise when the intended meaning of the message is not the message understood by the consumer. For example, suppose the disclosure is significantly specific, like the LE. Then, it’s difficult not to include technical language and jargon that jeopardize the consumer’s understanding. For example, do consumers understand the nuances of aggregate tolerance requirements? Does the consumer understand the LE nomenclature like Prepaids and how Prepaids differ from Loan Costs or Escrows? If that isn’t rough enough, how about explanations for TILA disclosures such as APR and Finance Charge?
MLO’s may fail to sufficiently comprehend the LE requirements. As a result, a fuzzy grasp of the disclosure coupled with communication gaps leads to confused and misled applicants. Furthermore, even when the MLO is well-versed with the LE, their attempts to clarify the content produce competing or incongruent messages leading to further confusion and stakeholder disquiet. Therefore, in executing the financial disclosure, there is a risk that the lender’s message is obscured, misunderstood, or even rendered noncompliant. Undoubtedly, the fewer times the MLO needs to explain the LE, the better.
In the rulemaking process, the CFPB intended that the TRID regulations (regulation Z) should diminish these communication gaps that lead to confusion and consumer harm surrounding the required use of the financial disclosures. That is unarguably an excellent objective.
It is easy to get caught up in the TRID minutiae and lose sight of the disclosure’s communication utility. Often, lenders use the LE like an invoice. The LE enables a more holistic comprehension of the financing, including areas of uncertainty surrounding the loan manufacture. So, for example, the MLO describes data from the LE, “here is your rate, here is your payment, here is the cash to close.” Instead, the MLO might first describe the LE’s significance to the buyer. “The LE ensures that the applicant understands uncertainty as a range of possibilities. The LE communicates material changes to the estimates in a timely fashion. The LE, when properly deployed, describes the outside of the estimating envelope.” When given a choice, which option is most edifying to the consumer – estimates that lean towards a high, middle, or low estimate range? Generally, the applicants want to know the worst-case scenario.
MLO’s can reduce transaction uncertainties by using high-confidence and high-side estimates. For example, a low-side estimate may require multiple revisions or leave the borrower with unpleasant closing surprises. How do your customers like that outcome? Is a high-side estimate a better way to meet the spirit of the LE – to provide the estimate with the confidence and clarity that enables for better consumer selection?
Next week, the journal demonstrates how MLO’s can improve productivity and increase customer satisfaction by using risk management and communications to SAW Loan Estimate defects in half.
Behind the Scenes
General Qualified Mortgage (QM) loans could present unexpected challenges for Mortgage Brokers and Correspondents
Recapping from last week’s Journal, financial institutions rely on allowable accuracy tolerances to create a compliance buffer, permitting Creditors to disclose somewhat imprecise but still legal APRs to consumers. Nevertheless, Creditors still err on the side of caution and generally choose to overstate the APR by overstating the Finance Charges. Likewise, lenders, including TPOs, sometimes understate the APRs by understating the Finance Charges to appear more competitive. Thus, Creditors overstate the APR, TPOs understate the APR – herein lies the potential disconnect with the APR.
The APR used to define the spread-driven General QM category puts certain transactions at risk of unintended HPML designation. For example, due to complexities in calculating the APR, if the mortgage broker calculates a lower APR than the Creditor, the broker could have nasty mid or late-stream surprises – including adverse action (because the lender does not originate HPML).
If the subject APR is close to the HPML threshold, what risk mitigation might be in order? First, there are more options for purchase money than refinance. Second, low-balance loans give lenders less latitude than larger loans because of the more marginal premiums available to pay loan costs.
When evaluating the prospect’s options, if the solution’s APR is within 50 BPS of the threshold, the MLO should look for ways to lessen the threat risk of exceeding the HPML threshold.
Seller credits are the most obvious solution. Lenders may exclude from the finance charge those items it typically must consider finance charges when paid by the buyer.
From CFPB Official Commentary, Regulation Z 12 CFR 1026.4(c)(5)
1026.4(c)(5)-1 Seller’s points. The seller’s points mentioned in § 1026.4(c)(5) include any charges imposed by the creditor upon the noncreditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price.
1026.4(c)(5)-2 Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower’s behalf by a noncreditor seller. The creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available.
The addition of a prepayment penalty (when permitted) may also allow for better pricing which may enable the lender to squeeze under the APR threshold. Another driver of the APR is the term. The longer the loan term, the lower the APR. For example, if the subject is a 15-year term, recalculate the APR on a 30-year term.
When it comes to APR surprises, you just have to play the hand you’re dealt in many cases. However, failing to proactively and deliberately identify and, when possible, take steps to reduce the probability and impacts of significant risks – that’s just unacceptable and grossly unfair to the stakeholders.
Tip of the Week
Project Management Skills for Loan Origination
Last week, the Journal described the iterative process of identifying stakeholders and how one begins to identify stakeholders. Once we have a list of these stakeholders, then what? The mortgage loan officer must then determine which of the stakeholders are key stakeholders. A common hallmark of key stakeholders is that their opinions greatly matter and effectively determine if the lender and MLO did a great job or not. They are those who define whether or not your efforts were successful, passable, or outstanding. You might think you did a good job, but if a key stakeholder thinks you did a lousy job, you did a lousy job. Additionally, key stakeholders are those you must identify at every phase of the loan manufacture and include those stakeholders that have the power to amplify or derail the success of the loan manufacture.
There are several techniques for classifying stakeholders. One of the most straightforward assessment techniques that increase the probability that you don’t misidentify or fail to identify key stakeholders is called the Power/Interest Grid. One of the advantages of more formal risk management is creating recyclable artifacts, like a stakeholder analysis tool or stakeholder register, which you may reuse on other loan transactions. Specific transaction types will have the same key stakeholders or provide a template for readily identifying key stakeholders for similar transactions. For example, builder purchase money, new build-refi, resale purchase, refinance detached dwelling and refinance condominiums.
The identity of key stakeholders can surprise you. In a sales situation, an excellent example of misidentifying stakeholders is when the MLO originates the loan with one-half of a couple and fails to engage the co-borrower (spouse) because the spouse handled the application process. Or the prospect tells the MLO that his sister MLO is in another state, but she wants to help him review Loan Estimates. The MLO considers the sister a pain in the backside and avoids her calls.
The MLO must identify the decision-makers and those that can propel the successful loan manufacture at appropriate times. The formality of stakeholder identification reduces the chance that the MLO overlooks any key stakeholder.
The Power/Interest approach provides a simple way to prioritize stakeholders to ensure you focus attention on the right stakeholder at the right time. Power describes the relative ability of the stakeholder to set the agenda and impose their will on the loan manufacture. For example, power over which lender to choose, the product and terms, and lock or float decisions are indicative of key stakeholders. Furthermore, power could also describe the stakeholder’s ability to influence and color the opinions of other stakeholders. When an influential stakeholder feels that the loan officer is unhelpful – you have a reputational risk on your hands.
Interest essentially defines how important the loan manufacture is to the stakeholder. The nexus of Power and Interest allows for ranking stakeholders relative to their importance in meeting the loan manufacture objectives. A common approach is to quantify the qualities of Power and Influence by assigning values of 1-5 to describe the relative magnitude of effectively engaging the stakeholders. For instance, Mr. Smith, a mortgage prospect, calls about a purchase money first mortgage. Mr. Smith states that Mrs. Smith has left the mortgage shopping legwork to him but that Mrs. Smith has a finance MBA and also is the one that makes the final decision on matters related to mortgages. Tony, their buyer agent, emailed you that Mr. Smith would be calling. Tony also mentions that Mrs. Smith works for Chase Bank, and Mrs. Smith mentioned that Chase has an employee mortgage benefit she is considering.
Let’s analyze the stakeholders from the example according to the qualities of Power and Interest. You may generate a relative stakeholder ranking from the respective stakeholder scores, the combination of Power and Interest.
Mr. Smith Score 6
2 Power, Interest 3 (2 x 3 = 6)
Mrs. Smith Score 25
5 Power, 5 Interest
Tony Score 12
3 Power, 4 Interest
How would this then inform and direct the MLO? The stakeholder register provides the contact information for each stakeholder. Had the MLO worked to complete the stakeholder register, the MLO would know to engage with Mrs. Smith immediately.
In fact, once you identify the key stakeholders, it’s easier for the MLO to cobble together the appropriate communications management plan, the key stakeholders’ success criteria and then integrate the planning to meet the loan manufacture goals.
It may be a lethal assumption (risk) to surmise that the loan manufacture’s success depends on what the MLO thinks is essential. For example, it may not be enough to close on time within the LE terms. Stakeholder engagement allows for the development of a stakeholder success criterion which then drives effective communications and actions.
Next week the Journal will build on stakeholder assessment and ranking, including creating a stakeholder register. The stakeholder register enables the MLO to efficiently plan communications and elicit the success criteria from critical stakeholders, the first step in effective stakeholder engagement.
2021 CE – Sneak Preview
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