YOU CANNOT MAKE GOVERNMENT-INSURED LOANS TO BORROWERS WITH DELINQUENT FEDERAL TAXES!
56,000 FHA insured mortgage originations to borrowers with delinquent federal tax debt. Despite years of damning reports by the GAO and HUD inspector general, HUD is seemingly unable or unwilling to stop providing guarantees on FHA loans to borrowers delinquent with federal tax payments. At some point, it is not hard to envision that some Congressional Committee will figure out how to make hay with the problem. Or perhaps a new sheriff at HUD will demand reforms. And it’s not just HUD. Consider that for such a persistent and obvious problem, how have the collective efforts of the Mortgage Bankers Association, FNMA/FHLMC, HUD, VA, USDA, and the Federal Housing Finance Agency addressed the problem of loan origination and federal tax delinquencies? One might imagine the opportune time to tackle the matter was with the development of the new URLA. After all, what a grand opportunity to ensure that applicants, lenders, and other stakeholders understand the gravity of delinquent federal taxes connected with government-insured loans.
Hopefully, HUD won’t be clarifying the lines of compliance through enforcement actions. However, process changes to FHA-insured loans 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—the underwriter stipulates for proof of no delinquent federal taxes. Would you know how to satisfy that requirement? Some folks think CAIVRS deals with the issue. That is not correct. The system lists the Social Security Numbers of persons with federal debt that is delinquent or in default or who have had a claim paid on an FHA-insured mortgage within the last three years. CAIVRS was developed by the Department of Housing and Urban Development in 1987 as a shared database of defaulted Federal debtors. CAIVRS enables processors of FHA loans to identify individuals who are in default or have had claims paid on direct or guaranteed Federal loans or are delinquent on other debts owed to Federal agencies. CAIVRS only identifies non-tax federal debts. Examples of federal debts may include:
- Previous FHA or Veterans Administration home loans.
- Federal student loans.
- Small Business Administration loans.
- Similar types of debts.
Wouldn’t a merged credit report reveal a tax lien? No, the CRA’s no longer report any federal tax liens. The CRA’s reporting of tax liens began to change back in 2015. Due to legal actions and the need to improve reporting accuracy, the CRA’s began to alter their tax lien reporting practices culminating in the 2018 decision to no longer report tax liens. By April of 2018, all tax liens were no longer reported by the three CRA’s. From Experian, “Both paid and unpaid tax liens were removed from Experian credit reports in the spring of 2018. As a result, tax liens no longer appear in credit reports, and therefore, do not influence credit scores.”
What about the tax return transcript? Nope. The return transcript would not necessarily reveal any actual tax delinquencies. Nor would the tax returns sufficiently rule out tax debt.
What about Section 5 of the new URLA? What of the efforts of all those important stakeholders to bring mortgage origination into the 21st century and improve underwriting? Indeed, the Declarations Section 5 of the URLA could handily clear up any ambiguity on the term federal debts. One of the primary reasons for the recent URLA redesign was to address ambiguities that interfere with underwriting decisions. From the GSE’s – “What are the primary objectives in the URLA redesign? A) to update the URLA form to collect loan application information that is relevant and useful to the industry in making a loan underwriting decision, as well as update the physical format and layout to enhance the collection of information and usability of the form.” Evidently, they ran out of space on the URLA instructions to adequately define the term federal debt. The URLA Section 5b(H) asks, “Are you currently delinquent or in default on a Federal debt?” The 5b(H) instructions for completing the URLA state, “You must disclose if you are delinquent or in default on any debt owed to the Federal government (for example, a Federally-backed student loan, FHA loan, USDA Rural Development loan, Veterans’ Administration loan).” The instructions exclude delinquent federal tax as an exemplar of federal debt. Applicable federal regulations regarding government guarantees specify non-tax and tax debt as federal debt.
How can a borrower justify, or how could the MLO dodge the delinquent tax debt omission? Should the applicant have a delinquent federal tax obligation, the applicant must declare that obligation in Sections 5b(H) and 2c (debts not listed on your credit report). Ask yourself, if tax debt doesn’t belong in Section 2c (debts not listed on your credit report) or Section 5b(H) (delinquent federal debt), where on the URLA should the applicant declare federal tax debt?
Concealing the federal tax debt is mortgage fraud. Carefully review the URLA Section 6(1): Acknowledgments and Agreements of the URLA, 18 USC Chapter 47 Fraud and False Statements 1001, 1006, or 1010. – These are serious mortgage fraud violations. Any intentional or negligent misrepresentation of information may result in the imposition of:
(a) civil liability on me, including monetary damages, if a
person suffers any loss because the person relied on any misrepresentation that I have made on this application, and/or
(b) criminal penalties on me including, but not limited to, fine or imprisonment or both under the provisions of Federal law (18 USC §§ 1001 et seq.).
What then must the MLO do to detect delinquent federal taxes? How should the MLO handle the matter? Next week the Journal unpacks a straightforward approach to verify delinquent federal tax status.
Should Mortgage Brokers be Concerned About the HMDA?
Who will be the next compliance piñata.
Last week, the Journal tackled the problem of identifying the HMDA reporting thresholds. Seemingly, the crux of the matter for mortgage brokers is possibly how the broker manages the “prequalifications” discretely from “preapprovals. Prequalifications do not count towards the reporting threshold of 100 originations. Prequalifications are not reportable originations under Reg C. Preapprovals must be reported and count towards the reporting threshold. The difference between a preapproval and a prequalification is similar but different from the Reg B definitions. Thus, in determining the HMDA coverage, the reporting requirement may boil down to how the broker’s prequalification processes differ from preapproval processes. Keep in mind; generally, if the preapproval becomes a closed loan, the creditor has the reporting obligation.
The CFPB addresses the HMDA term prequalification. From the CFPB official commentary – “A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective loan applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate prequalification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report prequalification requests on the loan/application register, even though these requests may constitute applications under Regulation B for purposes of adverse action notices.”
Thus, the CFPB HMDA definition is somewhat ambivalent in distinguishing preapproval from prequalification, seemingly allowing for identical loan manufacture.
More helpful is the CFPBs official commentary on what constitutes a preapproval under HMDA: “To be a preapproval program as defined in § 1003.2(b)(2), the written commitment issued under the program must result from a comprehensive review of the creditworthiness of the applicant, including such verification of income, resources, and other matters as is typically done by the institution as part of its normal credit evaluation program. In addition to conditions involving the identification of a suitable property and verification that no material change has occurred in the applicant’s financial condition or creditworthiness, the written commitment may be subject only to other conditions (unrelated to the financial condition or creditworthiness of the applicant) that the lender ordinarily attaches to a traditional home mortgage application approval. These conditions are limited to conditions such as requiring an acceptable title insurance binder or a certificate indicating clear termite inspection, and, in the case where the applicant plans to use the proceeds from the sale of the applicant’s present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home.
Regardless of its name, a program that satisfies the definition of a preapproval program in § 1003.2(b)(2) is a preapproval program for purposes of Regulation C. Conversely, a program that a financial institution describes as a ‘preapproval program’ that does not satisfy the requirements of § 1003.2(b)(2) is not a preapproval program for purposes of Regulation C. If a financial institution does not regularly use the procedures specified in § 1003.2(b)(2), but instead considers requests for preapprovals on an ad hoc basis, the financial institution need not treat ad hoc requests as part of a preapproval program for purposes of Regulation C. A financial institution should, however, be generally consistent in following uniform procedures for considering such ad hoc requests.”
Do you have a consistent and structural difference in the way you handle prequalifications and preapprovals? Monikers don’t matter. The regulation addresses specific interactions, conditions, and representations with a prospective borrower. Under an examination, how could an originator define the clear pathways for prequalifications, discrete from preapprovals? Stay tuned for more in next week’s Journal.
Helpful Links
https://www.ffiec.gov/census/default.aspx
https://files.consumerfinance.gov/f/documents/cfpb_2020-hmda-institutional-coverage_03-2021.pdf
Tip of the Week
Negotiation
In last week’s Journal, we tied the importance of rapport to negotiation. There are many approaches to effective negotiation. Anchoring is a technique used by one or more parties to the negotiation. The technique is used to define the parameters of the negotiation. For example, many negotiations proceed as a zero-sum equation. My gain is your loss and vice versa. By creating anchors with the prospect, the MLO can expand the discourse by establishing psychological plumb lines. The plumb line becomes a new benchmark in the prospect’s perception of value.
Everyday anchors could include lender closing cost contributions, the interest rate, and relock terms. In addition, lenders and other stakeholders offer inventive incentives or highlight values the prospect might overlook. The result of expanding the value propositions builds room for better negotiations, resulting in more excellent rapport. For example, a loan officer I worked with owned a moving van that he would allow his customers to use to move into the new home. That was over the top.
Finding ways to expand the negotiation away from the zero-sum equation is vital in maintaining rapport. For example, years ago, I worked with a very successful loan officer who always ended the government-loan prospect pitch stressing loan assumability. At the time, the benefits of assumability were somewhat more dubious than today. Yet he’d have the prospect imagining how they could sell their home faster and for money if they had a below-market fixed rate mortgage, fully assumable to a qualified buyer. What are the chances in two or three years rates are higher than today?
However, some incentives could spell compliance trouble for lenders, from Reg Z (12 CFR 1026.17(c)1(19 commentary) “Rebates and loan premiums. In a loan transaction, the creditor may offer a premium in the form of cash or merchandise to prospective borrowers. . . . Such premiums and rebates must be reflected in accordance with the terms of the legal obligation between the consumer and the creditor. Thus, if the creditor is legally obligated to provide the premium or rebate to the consumer as part of the credit transaction, the disclosures should reflect its value in the manner and at the time the creditor is obligated to provide it.”
Here is another incentive example currently offered by a multi-state lender, from their website “Homebridge Home Rewards Gift Card promotion.” “Eligible borrowers* will receive gift cards issued by MetaBank® up to the amount of $595.00 for a purchase loan or refinance transaction, after a loan closing secured by a first mortgage or deed of trust, minimum loan amount of $100,000, with Homebridge Financial Services, Inc. (“New Loan”), subject to qualification, approval and closing.”
What about the GSEs view of borrower incentives? FNMA does not require lenders to include incentives of less than $500 on the Closing Disclosure. However, in light of Reg Z disclosure requirements (1026.17(c)(1)), it might appear that the APR and Finance Charge should reflect the incentive. Although, in general, an overstated APR and Finance Charge do not violate Regulation Z. Better yet, provide clear and conspicuous written disclosure as to the terms of the incentive. Third-party originators or direct lenders offering incentives should clear that practice with counsel and their fulfillment partners.
So find ways to expand the negotiation and get your stakeholders off their anchors and onto yours. As a result, you’ll close more prospects, enjoy better loan manufacture and reap the benefits of long-lived productive relationships with your customers.
2021 CE – Sneak Preview
Did you know that RESPA Section 8 does not prohibit paying other service providers for leads? However, RESPA and its implementing Regulation X make distinctions between payments for referrals and payments for leads. Trading a thing of value (payment or otherwise) for a referral on a federally related loan will get you in hot water with the law. Join us for the 2021 CE and learn about lawful payments for leads, unlawful payments for referrals, and how the heck to tell the difference!