Why Haven’t Loan Officers Been Told These Facts?

Mortgage Loan Originators (MLOs) spend much time explaining, informing, and generally assisting prospective loan applicants in making informed use of credit. One specific MLO activity serves as a common gateway to homeownership. The prequalification and preapproval. In practice, stakeholders may use these terms interchangeably. In some instances, the preapproval term denotes a more refined process or one that renders a more reliable verdict on the applicant’s qualifications. However, the lack of formality associated with prequalification and preapproval belies the technical meaning of the terms as found in specific laws. Consequently, this informality leads to one of the more ubiquitous compliance missteps in the business. This widespread noncompliance is no small matter. Treating preapprovals and prequalifications as one and the same or failing to distinguish between the processes attendant to those deliverables can violate the ECOA, HMDA, The Fair Housing Act, the Fair Credit Reporting Act, and Title X of Dodd-Frank – Unfair, Deceptive or Abusive Acts and Practices (UDAAP).

The lines of compliance with the ECOA and HMDA can be confusing. For example, the difficulty of recognizing when an “origination” takes place as defined under the Home Mortgage Disclosure Act. The Journal tackled this challenge in previous editions. The definition of an application according to the Equal Credit Opportunity Act differs from the HMDA. With HMDA preapprovals, the nexus defining a reportable transaction is the loan manufacture (was the applicant’s capacity and will to pay determined in a manner such as that used for a loan commitment) and the specificity of approval conditions.

Both the HMDA reporting requirements and the ECOA notification requirements have disquieting degrees of ambiguity. However, the requirements for adverse action notification are one of the more plainly stated ECOA requirements. Recognizing when an adverse action occurs can be challenging. It would be understandable for an MLO to think that adverse actions only occur when an underwriter declines an application or makes an unaccepted counteroffer to the applicant. However, the ECOA doesn’t limit the notice requirements to an underwriter’s decision.

Under the ECOA, an application means an oral or written request for an extension of credit. Consequently, taking adverse action is not exclusive to underwriters. Instead, it is often the MLO. An adverse action occurs when the applicant makes application following a lender’s procedures for the type of credit requested. The term “procedures” refers to the ACTUAL PRACTICES followed by a lender for making credit decisions as well as its stated application procedures. For example, suppose a lender’s stated policy requires all applications to be in writing on the lender’s application form. Still, the lender also makes credit decisions based on oral requests received over the telephone. In that case, the lender’s procedures are to accept both verbal and written applications. Could you explain why your prequalifications are not an application under the ECOA? How do you know if an adverse action has occurred? If you do not know the answers to these questions, stay tuned for next week’s Journal.

The Scuttlebutt

The New General QM (NGQM) Category is Already in the Crosshairs of Powerful Stakeholders Including the NAR – Anticipate Risk.

Could downward adjustments to the new General QM price threshold threaten equal credit opportunities for low-balance loan applicants?

A lack of stakeholder interest in expanding QM safe harbor and HPML QM loans will directly correlate to lesser credit opportunities for low-balance loans and should raise fair lending questions. Case in point, the CFPB’s General QM Final Rule. There is a persistent flaw in the thinking of many stakeholders who oppose the current price thresholds, suggesting that lower APR spreads under the rule may be better for consumers. These are the same sort of stakeholder concerns that suggested throwing the baby out with the bathwater in the subprime meltdown. For example, in a letter from the Center for Responsible Lending signed by numerous influential stakeholders, the stakeholders assert that if the CFPB lowers the APR spreads, that will somehow translate into better credit opportunities for low-balance loans.

But, as the sun rises in the east, the consequence of forcing lower APR spreads will ultimately increase the number of loans ineligible for QM protections. Instead, stakeholders could focus on sustainably increasing loans eligible for the safe harbor or at least the rebuttable presumption of compliance by advocating for higher APR spreads. Like the evisceration of credit opportunities for sub-prime borrowers after the 2008 mortgage crash, lower APR spreads will elevate noncompliance risks to stakeholders interested in serving low-balance mortgage markets, causing some stakeholders to abandon that market segment. Thus, lower APR spreads will cause market participants to avoid low-balance lending due to the loss of the Safe Harbor or a rebuttable presumption of compliance with the ATR laws. Increased risk and less competition result in higher prices and lesser credit opportunities.

Excerpt from the Center for Responsible Lending letter to the CFPB: “We believe that the CFPB should evaluate whether the APR thresholds for small loans are too high and will contribute to discriminatory outcomes for borrowers and communities of color. We are particularly concerned that the Final Rule’s threshold appears too high for loans backed by site-built houses with balances below $66,156.”

See the article here: https://nationalfairhousing.org/wp-content/uploads/2021/04/Consumer-Group-QM-Letter-to-CFPB_2021-04-05_FINAL.pdf

For a more erudite treatment of the topic, see the Urban Institute’s article from the link below. In the article, the Urban Institute convincingly argues “that increasing the safe harbor and QM thresholds to 200 and 250 basis points would cause an additional 105,000 mortgages a year to be designated more favorably while keeping defaults very low.”

See the article from the link below:


Tip of the Week

The Prospect Buying Processes

The prospect’s process to buy things will vary, driven by the domain, products, and services offered. B2B, consumer products, professional services are all different mixes in the decision to buy. In the mortgage business, we encounter various buyer types such as real estate agents, builders, financial planners, relocation companies, consumers, and investors. Though somewhat different from end-buyers, MLOs also sell to internal management, processors, underwriters, and closers. It’s not difficult to lose sight of the buying and focus on the selling, thereby misunderstanding and confusing the buying processes.

The common thinking is that to get a sale; selling comes before “the” buying decision. In practice, it’s the other way around; buying decisions precede the sale. Note that buying decisions are plural, as in there are more than one before ringing up the sale. Fortunately for salespeople, there is a recognizable general sequence and process to buying. However, the buying process is composed of many little decisions. To positively impact these buying decisions, the MLO must become a student of the prospect by being attentive to their needs AND emotional state. By gaining an awareness of the buying processes, the MLO is equipped to study the buyer and is alert to the profound impact of the prospect’s changing emotional states and stated needs.

MLOs can identify where the buyer is in the buying process and how they feel when making the little decisions that move the prospect forward. Unfortunately, it is easy to miss this logical sequence or fail to grasp that the buying decision is a process and not an event. Try a mind reboot. Rather than selling, think of the mission as facilitating the buying processes. How do you help the prospect to make the buying decisions necessary to get what they need? It would help if you first recognized these buying decisions. True, the buying decision has certain variables based on the buyer type. Yet, there are common denominators.

To create a workable model, assume three primary and consistent buying drivers—likability, harmlessness, and value. The game of baseball might provide a useful metaphor for the buying process. First, Second and Third Bases refer to elements necessary to increase the probability of favorable buying decisions. Like scoring a baseball run, your chances of scoring a sale increase when you have a runner on base. In contrast, home runs are always possible, but most scoring occurs when the offense is batting with a runner on base and, even better, having a runner in scoring position (Second or Third base). So perhaps, first and foremost, how to get to First Base?

Getting on First is largely dependent on rapport – they must like you. Psychologist Robert Cialdini demonstrated that people would buy even when they don’t like the salesperson. However, this buying response may be somewhat unique when the buyer feels a sense of obligation (think of gifts) to reciprocate and reward the salesperson’s generosity. Though possible to score without getting to First (double, triple, or home run), the odds of succeeding decrease. If you have to depend on extra-base hits (Doubles, Triples, or Home Runs) to score, your offensive output will suffer, and so will your ability to close games successfully (close the buyer). Extra-base hits are tough to come by against a good defense. So how does the buyer come to like you?

We call chemistry those hard to describe or unseen factors and dynamics that make people attractive to us. How to engender positive chemistry with a wide variety of people types is challenging. The right chemistry revolves around how the prospect feels about the salesperson and perhaps as important, if not more importantly, how the salesperson feels about the prospect. The right chemistry engenders rapport and feelings of attraction. For example, people may associate transparency and genuineness with trustworthiness. Enthusiasm is another behavior that can powerfully influence the buyer. Folks often associate enthusiasm with expertise. Appropriate humor also tends to humanize the buyer-seller relationship. Communication skills are enormous. Building influence with the buyer often revolves around the seller’s ability to “speak the buyer’s language.” As the Journal described in previous issues, effective listening skills and courtesy go a long way to indicate your care and concern for the buyers’ well-being. If the buyer knows that you care for them, most will feel you like and respect them. It is hard not to like someone who loves and respects you. Now, getting to First Base is excellent, but it hardly means you will score a run—your odds of scoring rise exponentially if you get to a scoring position – Second Base. Stop depending on extra-base hits to score. So, in next week’s Tip of the Week, we’ll unpack the move to Second Base.