Why Haven’t Loan Officers Been Told These Facts?
Know Before You “Show” – The Loan Estimate
Let’s briefly recap the Journal series on disclosure and communication issues surrounding the TRID disclosures. In particular, the challenge of clear communications in connection with premium pricing and lender credits.
Premium pricing is the term that describes the practice of increasing the interest rate to provide for the investor yield requirements. When exceeding the mandatory yield, the investor structures the purchase in a way that generates a premium for the mortgage seller. Yield refers to the investor return and is a product of the interest rate and loan amount. The yield is higher by increasing the interest rate or discounting the loan value at the sale.
From FNMA, “Premium pricing refers to situations when a borrower selects a higher interest rate on a mortgage loan in exchange for a lender credit. The lender credit cannot be used to fund any portion of the borrower’s down payment, and should not exceed the amount needed to offset the borrower’s closing costs.
Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges, and may be applied as a principal curtailment or returned in cash to the borrower.”
The advantages of premium pricing, particularly on shorter-term financing, are unassailable. For example, it rarely profits the borrower to structure financing with an origination fee, let alone a discount on loans with 15-year terms. Furthermore, consumer awareness and demand for no or low-cost mortgages necessitate more efficient disclosure practices. Consequently, MLO’s should always provide an example of premium pricing. However, as was noted before, communication gaps may arise when promoting no closing costs, lender credits, and other technical terms or jargon when communicating with the applicant.
In any event, the MLO should always provide an example of premium pricing and thus better inform the applicant of appropriate and viable mortgage solutions. Providing an example of premium pricing also takes one of the necessary steps in presenting options to the consumer for mortgage brokers who are seeking safe harbor from steering complaints.
Regulation Z Prohibition on steering. A transaction does not violate the prohibition against steering if the lender presents the consumer with loan options that meet the 1026.36(e) Safe Harbor provisions for each type of transaction in which the consumer expressed an interest.
1026.36(e)(3)(i)(C) The loan with the lowest total dollar amount of discount points, origination points or origination fees (one of three presented options allowing for Safe Harbor from the steering violation).
The Journal suggested some form of Qualitative Risk Analysis to identify the relative uncertainty involved in accurately estimating discrete fees listed under Loan Costs and Other Costs from page two of the Loan Estimate. A simple probability/impact analysis resulting in risk scores gets the analytical juices flowing.
Otherwise, MLO’s may rely on their own experience to assess the probability and impact of underestimated costs without any deliberation or perspective other than their own. In fact, risk assessment is highly subjective and given to error. Accordingly, the appropriate stakeholder involvement in the risk assessment reduces subjectivity and oversights. The idea here is that approaching uncertainty can be deliberate and disciplined. The formality of qualitative analysis requires greater awareness and focus. The proper focus reduces oversights, defects, and rework.
At the same time, risk assessment through simple brainstorming techniques is an excellent technique to promote buy-in and efficiently engage stakeholders. For example, ask your boss or processor (these are stakeholders) their unvarnished opinion about the uncertainties and impacts of under disclosure and where under disclosure is most impactful (e.g., rework, wasted time, customer dissatisfaction).
When involving stakeholders in the risk assessment, you increase their buy-in (cooperation). Most people like it when you demonstrate that you value their input.
This deliberate risk assessment and scoring enables MLO’s to manage communication risks and compliance issues with greater assurance. Being more mindful of potential under disclosure is the first step in mitigating the issue.
Once you have a qualitative assessment of the risk inherent with discrete fees, you can now build a better LE.
For lender credits, rather than offset the low and moderate risk fees, choose to absorb these costs. Lenders may omit absorbed fees from the LE. That simplifies the disclosure. Fewer disclosed fees equal less confusion than cluttered LE’s. The decluttered LE provides a more relevant picture of the offering. Plus the fewer the fees, the lower the probability of revisions.
When absorbing the costs, there is no need to itemize the absorbed fee on the LE. However, the CD must itemize any lender payments on behalf of the borrower. See the CFPB FAQ excerpt below.
Next, identify the high-risk fees. For these fees, rather than absorb these uncertain fees, use offset to apply any remaining lender credit to high-risk fees. When using lender credits to offset specific or general costs, the lender must disclose the fees discretely on the LE. The lender must then appropriately disclose lender offsets on the LE and Closing Disclosure as general or specific credit.
Removing unnecessary disclosure is a minor improvement, but consider how modest improvements may launch virtuous cycles. SAW that CRAP (Confusion, Revisions, Aggrievement, Pain) in half. Simplicity, Avoid errors, and Wipe out needless revisions.
From the CFPB FAQ on Lender Credits:
Q. Is a creditor required to disclose a closing cost and related lender credit on the LE if the creditor will absorb the cost?
A. No. The TRID Rule does not require disclosure of a closing cost and a related lender credit on the Loan Estimate if the creditor incurs a cost, but will not charge the consumer for that cost (i.e., the creditor will “absorb” the cost). In such cases, the absorption of the cost or charge would not “offset” an amount paid by the consumer. However, a creditor must disclose a closing cost and related lender credit on the Loan Estimate if the creditor is offsetting a cost charged to the consumer. Comment 1026. 37(g)(6)(ii)-2.
Q. Is a Creditor required to disclose a closing cost and related lender credit on the CD if the creditor will absorb the costs?
A. Yes, if the closing cost is a cost incurred in connection with the transaction. A creditor must disclose on the Closing Disclosure a closing cost it incurs even if the consumer will not be charged for the closing cost (i.e., the creditor will “absorb” the cost). If a creditor absorbs a cost incurred in connection with the transaction, the creditor must disclose such cost on the Closing Disclosure in the “Paid by Others” column in the Loan Costs or Other Costs table, as applicable.
The TRID Rule requires that the Closing Disclosure include all costs incurred in connection with the transaction. 12 CFR §§1026.38(f) and 1026.38(g). For example, such costs include all real estate brokerage fees, homeowner’s or condominium association charges paid at consummation, home warranties, inspection fees, and other fees that are part of the real estate closing but not required by the creditor. Comment 38(g)(4)-1.
Behind the Scenes
Fair Lending Laws Have a New Target – Discriminatory Appraisal Practices, Regulators Take Aim
Who is the Appraisal Subcommittee (ASC) and how will they impact your mortgage originations?
Last week the Journal provided some background on the evolution of appraisal standards and federal requirements for state supervision of residential appraisers. From the ASC, “One of the ASC’s core functions is to monitor the requirements established by the States for certification and licensing of appraisers qualified to perform appraisals in connection with federally related transactions. Title XI as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) expanded the ASC’s core functions to include monitoring of the requirements established by States that elect to register and supervise the operations and activities of appraisal management companies (AMCs).”
How then is the ASC connected to the residential appraisal standards? Again from the ASC, “The Appraisal Foundation, is a not-for-profit corporation formed in 1987. It serves as the parent organization for two boards: the Appraisal Standards Board (ASB) which is responsible for promulgating and maintaining the Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraiser Qualifications Board (AQB) which establishes minimum credential criteria for appraisers performing work for federally related transactions, the Real Property Appraiser Qualification Criteria (AQB Criteria).
The ASB and AQB are independent boards of the Foundation which serve as the congressionally-authorized sources for establishing appraiser qualifications and appraisal standards for federally related transactions. In monitoring the Foundation, the ASC attends AQB, ASB and Board of Trustees (BOT) meetings. The ASC also provides comments on proposals when needed and reviews all final published documents regarding AQB Criteria and USPAP. ”
Now you about some of the stakeholders. How does this connect with the topic of appraisal discrimination? Read on.
From the CFPB Fair Lending Director, Patrice Alexander Ficklin:
As the Bureau’s Fair Lending Director, I am pleased to highlight that the CFPB has prioritized resources to focus on the role of racial bias in home appraisals, a growing topic of conversation within our communities.
Home ownership is a key building block of wealth. It is illegal to discriminate against someone because of race at any stage of the mortgage process, including property appraisals. When a home is improperly undervalued by an appraiser, that hurts the homeowner and the surrounding community. Undervaluation of homes based on race helps drive the racial wealth divide.
At the same time, overvaluation of homes can also put family wealth at risk and lead to higher rates of foreclosure. Ensuring that the appraisals used to make lending decisions are accurate and free from bias is essential if families of all races and income levels are to prosper and pursue successfully the American dream of homeownership.
The CFPB recently hosted a roundtable to look closer at the role of racial bias in home appraisals, a growing topic of conversation within our communities. We were joined at the roundtable by our partner agencies from the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Department of Housing and Urban Development (HUD). We listened to civil rights activists, consumer advocates, and local leaders who see these biases in their communities every day. They offered valuable insights and creative ideas, sparking important conversations across the Federal government about how we can work together with stakeholders to tackle racial bias and other inequities in housing. We also heard from experts about how unconscious biases can play out in the appraisal process.
Last month, President Biden announced a new interagency initiative to address inequity in home appraisals, designating HUD to lead the effort. The Bureau is pleased to participate in this important interagency initiative, and I am pleased to represent the CFPB on this initiative. I am also pleased to note that we have dedicated additional resources to evaluate tools and approaches to address inequities in home appraisals.
If you feel you have been a victim of appraisal bias, you can submit a complaint with HUD’s Fair Housing and Equal Opportunity office to get help.
You may also contact the Appraisal Subcommittee Appraisal Complaint National Hotline to submit a complaint.
If you believe a lender discriminated against you, including by using an improper appraisal, you can submit a complaint to the CFPB.
In September 2021, Freddie Mac published a finding from their study on appraisal discrimination.
Exhibit 1 – (see image at top). Based on data for more than 12 million appraisals for purchase transactions submitted to Freddie Mac from January 1, 2015, to December 31, 2020 through the Uniform Collateral Data Portal (UCDP),shows that properties in Black and Latino tracts receive appraisal values lower than the contract price more often than those in White tracts.
We identified several candidate factors and explored them in isolation, including comp distance, comp reconciliation, comp variance, and purchaser overpayment.
Stay tuned. The verdict is still out on the root causes of appraisal discrimination and how to reduce discriminatory treatment in appraisal methodologies and practices.
Tip of the Week
Project Management Skills for Loan Origination
Recapping last week’s discussion. Mortgage Loan Originators (MLO) must be economical with their time. Rightly assessing the key stakeholders and their success criteria is essential to your accomplishments. You can’t afford to neglect the key stakeholders.
Once you have identified the stakeholders and assessed the key stakeholders, it’s time to plan the communications. The communications management plan is intended to determine how to manage effective communications with the greatest efficiency. This efficiency entails knowing precisely the communications that are needed. In addition, efficiency includes when and how to distribute communications.
The process of developing a communications management plan is usually no more complicated than developing a checklist.
The extra value derived from developing a communications management plan, like many project management artifacts – reusability. Like checklists, the communication management plan provides a working model for your current and future communications management. The plan also serves as a prototype for discussions with other stakeholders and a benchmark for future work with the same stakeholders.
For each key stakeholder, determine their communication needs. What information do they need? What is the frequency of the communication? Who needs to communicate with who? What are the means of communication?
For example, the buyer’s agent is usually a key stakeholder. The stakeholder’s success criteria might surprise you. The stakeholder’s success criteria are input to your communications management plan. Find out what information they need. Communications needs include reports, privacy requirements, minutes from applicant meetings, appraisal assignment, the applicant’s responsiveness to documentary requirements, Loan Estimate revisions, and underwriting decisions.
The art of getting the stakeholder to open up and express their success criteria, including communication needs, is called elicitation. But, unfortunately, getting information from some folks can feel like prying open a clam with a toothpick.
If you fail to ask the right questions, discovering the communication needs is elusive. To illustrate – Instead of asking, “what are your communication needs?” Use storytelling to help the stakeholder better comprehend their communication options. For example, “Most of our customers prefer a weekly status call on Friday or Saturday. Which of those days is best for you? What time of day is better, morning or afternoon?” Think of communication gaps and communication success examples from your own experience or stories you’ve heard.
Another elicitation technique is visualization. For example, “Ms. Buyer Agent, the week after closing, if the loan process exceeds your expectations, what one thing about would you thank me for the most? Often, the answer is “no surprises,” or something along those lines. Folks, that refrain summarizes stakeholder engagement through effective communication.
Another example: “Mr. Buyer Agent, think about the worst communication gap you’ve ever had with an LO and please tell me what happened.” Alternatively, “Ms. Buyer Agent, if there is one thing in the loan process that keeps you up at night, what might that be?”
You don’t necessarily have to steer the questions to communications or use the word communication in your line of inquiry. But, believe it or not, most of the LO failures and stakeholder dissatisfaction will come down to failed communication.
Communication is so central and preeminent to successful stakeholder engagement. The Journal will pick up on the subject of the communication next week with “manage communications.”