LENDERS CANNOT MAKE GOVERNMENT-INSURED LOANS TO BORROWERS WITH DELINQUENT FEDERAL TAXES!
Last week, the Journal exposed HUD’s ongoing tension with two heavy-weight government watchdogs; HUD’s Inspector General and the U.S. Government Accountability Office (GAO). Despite efforts by the GAO going back to 2012 and HUD’s own Inspector General’s damning reports, the FHA, despite being aware of the out-of-control numbers of FHA insured mortgage originations to federal tax debtors, HUD has been unable or unwilling to end the practice of guaranteeing loans to borrowers with delinquent federal taxes. Federal agencies are not supposed to process loans to federal debtors that have failed to resolve their federal debts. As a result, there is the potential for severe legal and civil penalties to program participants – all stakeholders are in jeopardy; lenders, MLOs, and borrowers alike!
For such a persistent and obvious problem, why have the collective efforts of the Mortgage Bankers Association, FNMA/FHLMC, HUD, VA, USDA, and the Federal Housing Finance Agency failed to ameliorate the problem of loan origination and federal tax delinquencies? Once the HUD whip starts cracking, lenders will be swift to make process changes that could be sudden and unexpected, leaving MLO’s ill-prepared for new overlays or underwriting conditions. Imagine, after weeks of processing, the loan gets to the underwriter, and the underwriter stipulates for a clean IRS account transcript. What is an IRS Account Transcript? Or worse, can you imagine the underwriter stipulating that the borrower pays off the IRS tax debt with an acceptable source of funds the week of closing. This type of thing is perfect for a prefunding audit. Could these nightmare scenarios occur on your loan? Absolutely.
The inability, ineptitude, or unwillingness of lenders to detect delinquent taxes is concerning. How can MLOs ensure they are not jeopardizing their company’s standing or putting the applicant at risk? Next week, we will examine the new URLA to see if the update helps identify applicants with delinquent federal taxes. Lenders and MLOs must proactively safeguard their companies and customers from potential violations of federal laws that may result in prosecutions, debarments, and sanctions!
Stay tuned for more in next week’s newsletter.
Why Should Mortgage Brokers and Bankers be Concerned About the HMDA? Who will be the next compliance piñata.
Last week, the Journal examined reportable activities under the HMDA Regulation C. Keep in mind, Reg C uses the term “originated” in a way most stakeholders might not use the term. Nondepository mortgage lenders are also required to report their HMDA data just like banks. Thus, institutions have three primary burdens under Regulation C.
- Collect mortgage applicant demographic data
- Report the data to the appropriate federal agency
- Make it known to the public that the institution’s HMDA data is available on request
If a business is a “financial institution” under Regulation C, the business must comply with the HMDA requirements. Whether the business is a financial institution depends in part on whether the institution originated at least 100 closed-end mortgage loans in each of the two preceding calendar years. There is a separate test for open-end loans. In addition to the loan volume threshold test, there is a location test. The location test determines if the institution has a home or Branch Office in a Metropolitan Statistical Area (MSA) or the Metropolitan Division (MD) of an MSA on the preceding December 31. The phrase “preceding December 31” refers to the December 31 immediately preceding the current calendar year. A nondepository lending institution is deemed to have a branch office in an MSA or an MD in one of two ways. The first way is based on the physical location of the branch offices where loan applications occur. The second way involves loans on properties in the MSA or MD. If the business originated five or more covered loans related to properties located in an MSA or MD in the preceding calendar year, it meets the location test.
The location test is relatively black and white. The loan volume threshold test gets complicated in defining what constitutes a reportable transaction, one that also counts towards the threshold.
Misconceptions about reportable transactions and failure to capture the reportable data could land you in hot water. In the June 2021 CFPB Supervisory Highlights, the CFPB states a root cause of HMDA noncompliance as “deficiencies in the institutions’ CMS (a compliance management system is the institution’s holistic approach to compliance). The CMS deficiencies included the institutions’ board and management oversight, policies and procedures, training, monitoring and audit, and the institutions’ service provider oversight.” “Many of the widespread or systemic errors were caused by misinterpretation of Regulation C requirements or the institution’s specific policy.”
The loan volume threshold is less clear than the location test. The Regulation C reporting transaction threshold includes preapprovals not accepted or denied, applications withdrawn, applications closed for incompleteness, applications resulting in a counteroffer. If the lender reports – you don’t. If there is no lender for these originations, they are yours to report or at least count towards your loan volume threshold.
Under Reg C, the difference between a preapproval and a prequalification is similar but different from the Reg B application definition. Thus, in determining the HMDA coverage, some of the murkier concerns for nondepository lenders could hinge on two factors. 1) Loan origination volume and 2) How the originator’s prequalification processes differ from preapprovals.
Tune in next week for more on distinguishing the covered and not covered transactions
Tip of the Week
Negotiation – Anchoring
In last week’s Journal, the Tip of the Week focused on building rapport and the importance of active-listening in establishing rapport. Assuming we’ve rightly understood the prospect, negotiation deals with closing the gap between what the MLO needs and wants and what the prospect needs and wants. The reason why prospects feel the need for excessive lender shopping is often due to the lack of rapport or ham-handed negotiation techniques. Not that shopping lenders and loans is a negative thing. But why do some prospects feel the need to continue shopping well past the point of diminishing returns? Some people have difficulty with decisions. But is that always the case? What prevents you from closing them for the intent to proceed and deposits? The buying decision is outside the scope of this newsletter segment. But one of the reasons they don’t want to buy from you is a lack of rapport. Rapport suffers when tension arises from unresolved conflict and unanswered questions. Keep in mind; prospects don’t have an MBA in mortgage shopping. They may depend on the MLO to lead the process. Leadership is a topic we hope to unpack in future newsletters. Poor negotiation skills can torpedo your rapport with the prospect.
Anchoring refers to the impact of setting your terms before the opposing party states theirs. Years ago, sales trainers pushed the idea that the party to name a price first loses the negotiation (party-poopers). Recent research indicates that generally, the opposite is true. Anchoring posits that the first person to set the terms takes the psychological upper hand in the negotiation. Even when the anchor is unreasonable, the anchoring effect can still be powerful. A great example of anchoring is listing prices in the Multiple Listing Service. A borrower might think they are getting a good deal if they get the seller down by 5% from the listed price, like getting 5% off a Louis Vuitton handbag. It’s a technique as old as the hills. Sellers anchor the price (anchor) in such a way to psychologically tie the prospect to where they want to begin the negotiation. Likewise, MLOs can use anchoring to broaden the negotiations, improve rapport and manage stakeholder expectations better.
More on negotiation in next week’s newsletter.
2021 CE – Sneak Preview
The HMDA data collection requirements can be confusing to originators. For example, what data to collect and when it should be collected is far from obvious. Furthermore, if your organization determines it has a reporting obligation, the data integrity must be sound.
Know that the HMDA data is an essential element in the fight to expand sustainable homeownership opportunities. Particularly to those communities in danger of being left behind financially. Owning your own home isn’t just a part of the American dream. It’s the number one wealth generation vehicle for what is left of the middle-class. Mortgage brokers and bankers have an individual and collective responsibility, ethically and legally, to do our share in closing the wealth gaps. The integrity of the HMDA data is a step in the right direction.
Attend our 2021 CE for a deep dive into HMDA data collection from the MLO’s perspective.