Why Haven’t Loan Officers Been Told These Facts?
Last week, the Journal began unpacking the ECOA requirement for adverse action notices. Under ECOA and the implementing Regulation B, the term “application” describes circumstances that denote an application. The Regulation B term “application” mainly pertains to the Notice requirements. Notify the applicant – Approve, decline, or counteroffer the application within 30 days of application. Those application circumstances described in Regulation B describes the lender’s behavior – not the applicants. It is not that the applicant completes the URLA or provides the intent to proceed that defines the application under the ECOA. It is not the six pieces of information that indicate an application under the TILA. It is not the HMDA trigger for a reportable origination that defines an application either. For the Regulation B Notice requirements, it is more likely the MLO’s behavior with the prospect that may define whether or not an application has occurred. Not so much the lenders’ official policies or how any stakeholders might characterize the encounter, e.g., prequalification or preapproval.
Failure to adhere to the Notice requirements is no small matter. The statutory fines are walking around money, $10,000 per offense. However, 12 CFR 1002.16(b) allows for federal civil actions up to five years after the occurrence of the violation. In addition, regulation B allows for punitive sanctions if the federal prosecution finds a pattern or practice of discouragement or denials on a prohibited basis. Civil penalties and punitive fines can lead to the demise of a business.
It is unlawful under the ECOA to discourage a prospective applicant from making an application on a prohibited basis. Prohibitions against discouragement do not include instances when the applicant is unqualified for financing, and the determination is not based on a prohibited factor. For example, the applicant has 5% of the purchase price for down and closing costs and wants to buy a four-unit rental property. The MLO informs the applicant that lenders require 25% down for nonowner occupied four units. The down payment requirement is not based on a prohibited basis. The MLO is providing general credit information. However, suppose the MLO tells the applicant that the lender will decline their application due to insufficient acceptable funds to close. In such cases, that exchange may fall under the rubric of adverse action, and the notice requirements apply.
What Regulation B means by a prohibited basis is for “any creditor to discriminate against any applicant with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program. Here is another example. A prospect receives Social Security disability income in addition to child support payments. The MLO uses a generic “needs list” to communicate the lender’s documentary requirements. The needs list states “proof of employment,” but the list fails to include “proof of income,” leaving the applicant confused and discouraged by the lender’s implication that applicants must be employed to apply for a mortgage. Note that the prohibition against discouraging applicants applies to face-to-face, oral, internet, telephone inquiries, and written applications. Violating the ECOA prohibitions does not require the intent to do so. Keep mindful of the possible effect that your behaviors and procedures have on a prospective applicant.
When does an application occur? The ECOA makes technical distinctions between prequalification and preapproval though it still allows for some ambiguity. For example, suppose an MLO removes the prospective applicant from the assistance path due to negative information about the prospect. Whether the MLO gets the damaging information from the applicant or another party, the lender owes the applicant an adverse action notice. Remember, it may not matter if they completed a URLA or if tax returns and bank statements are in hand. Credit approvals only occur for some lenders when the application is fully processed, and an authorized individual makes the credit approval after carefully considering the applicant’s capacity and credit. Thus, the lender has established how credit decisions occur. On the other hand, suppose the companies MLO’s are in the habit of providing preapprovals over the phone. In that case, the ECOA indicates that the lender’s procedures are to make credit determinations without underwriters or a signed URLA.
Additionally, when the MLO informs the prospect, they will not qualify for particular terms or offers more onerous terms; that is an adverse action. Under Regulation B., there is no such thing as an adverse action on a prequalification. Adverse Action means a refusal to grant credit in substantially the amount or on substantially the terms requested in an application. In the case of counteroffers, the lender does not take adverse action if the applicant accepts the lenders’ counteroffer. However, if the applicant refuses the lender’s counteroffer, then the lender’s counteroffer is an adverse action. If the MLO takes an adverse action, that inquiry becomes an application.
MLO’s may face a quandary in determining whether an adverse action takes place or not. Next week, the Journal will further expound on adverse action and the MLO’s responsibilities in connection with an adverse action.
Behind the Scenes
Loan Servicing, An MLO Wasteland?
Avoid the Appearance of Abandoning Borrowers at Closing
Get Familiar with Regulation X Error Resolution Requirements
Have you heard the expression that “too many cooks spoil the broth?” The term is sometimes associated with the management concept termed “diffusion of responsibility.” The “diffusion of responsibility” is the opposite of “single-point-of-responsibility.” For example, a manager tells Jim that it is his responsibility to ensure that meeting attendees know the ground rules. To some extent, if Jim values his job and relationship with the manager, he will ensure the meeting attendees are aware of the meeting ground rules. But suppose the manager sends a group email to 15 team members, asking if someone can make sure the ground rules are known to the attendees? What is the likelihood that absent more direction, the 15 team members might assume “someone” has the job covered, yet no one takes responsibility for the task? The meeting ground rules task quickly falls through the cracks.
Have you have used the “too many cooks” line to dodge your customer’s loan servicing questions or servicing entanglements? You may want to rethink that approach. Punting the customer’s need downfield is not always inappropriate (such as when the applicants ask legal questions) but may constitute a missed opportunity for MLOs. But, on the other hand, the originator is in a terrific position to get in front of typical customer service or loan servicing issues. And what a golden opportunity for another post-closing follow-up.
The New URLA and the TRID financial disclosures are insufficient to provide substantive information relative to the borrower’s rights regarding mortgage servicing under federal laws. The CFPB Consumer Complaint database illustrates that the loan servicing problem is significant and, consequently, an opportunity for MLO’s to shine. For example, the CFPB mortgage servicing complaints category “Trouble during payment process” outnumbers other mortgage complaints by a three-to-one margin. All that disclosure in the URLA and CD is about what happens when borrowers screw up the covenants. But who informs the borrowers about what to do when the Servicer drops the ball? Why not you!
Regulation X 12 CFR 1024.35 Error Resolution Procedures describe the responsibilities of Servicers when a borrower thinks the Servicer has made a mistake in servicing the mortgage. 1024.35(b) enumerates the procedures specific to Regulation X enumerated error complaints. These are the covered errors under 12 CFR 1024.35(b)
- Failure to accept a payment that conforms to any written requirements that the borrower must follow in making payments.
- Failure to apply an accepted payment to principal, interest, escrow, or other charges under the terms of the mortgage loan and applicable law.
- Failure to credit a payment to a borrower’s mortgage loan account as of the date of receipt, in violation of the prompt crediting provisions.
- Failure to pay taxes, insurance premiums, or other charges, including charges that the borrower has voluntarily agreed that you should collect and pay, in a timely manner as required by the escrow provisions.
- Imposition of a fee or charge that you lack a reasonable basis to impose upon the borrower, which includes, for example, a late fee for a payment that was not late, a charge you imposed for a service that was not provided, a default property-management fee for borrowers who are not in a delinquency status that would justify the charge, or a charge for force-placed insurance in a circumstance not permitted by the force-placed insurance provisions.
- Failure to provide an accurate payoff balance amount upon a borrower’s request within 7 days in violation of § 1026.36(c)(3). (See Section 7 for more on prompt payment crediting and payoff statements.).
- Failure to provide accurate information to a borrower regarding loss mitigation options and foreclosure, as required by the early intervention provisions of this rule.
- Failure to transfer accurately and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer.
- Making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process in violation of the loss mitigation procedures of this rule.
- Moving for foreclosure judgment or order of sale, or conducting a foreclosure sale in violation of the loss mitigation procedures of this rule.
- Any other error relating to the servicing of a borrower’s mortgage loan.
Next week, the Journal will unpack the servicer’s procedural obligations in light of complaint about error resolution.
Tip of the Week
The Prospect Buying Processes
Are your closing attempts more like a Hail Mary pass than a sales success method? In last week’s Tip of the Week, the Journal adopted a few baseball metaphors to unpack the importance of understanding the buying processes. Scoring a run-in baseball can be challenging. Getting on First Base is excellent, yet it hardly means you will score. Your odds of scoring rise exponentially if you can get to a scoring position – Second and Third Base. Accordingly, stop depending on extra-base hits to score a mortgage. Instead, recognize what base you hold and the benefits of advancing to the Gmail – TEST: The LoanOfficerSchoolJournal.com next base. Hence the importance of getting to Second Base and what it takes to get there. Your chance of closing improves when you get to Second.
Second Base: You must do no harm. The prospect must believe you will do them no harm. In mortgage sales, this is gargantuan. MLOs ask stakeholders to entrust them with reputation, housing, finances, and significant commissions. MLOs are not selling toaster ovens or refrigerators. Mortgage sales are a high-stakes environment. For many buyers, the home purchase and mortgage selection are some of the more significant transactions of their consumer lives. Think of pitching referral partners; real estate professionals who work for years to build their reputations and businesses have much riding on the performance of the MLO.
Rapport goes a long way in getting business, but if the real estate agent determines that your technical competence or people skills might hurt them, the deal is off. Your ability to compensate for competition, technical challenges (inexperience), or lack of reputation will directly contribute to your success.
To demonstrate, assume you are presenting the Down Payment Assistance solution for the first time. How do you ensure your solutions and assessment are viable? How do you avoid excluding material considerations? Should you hide your inexperience from your referral partner? Probably not. If you are confident in your capabilities, why would you hide anything?
It is worth mentioning; if you are not confident in your capabilities, you must find your way to confidence. A lack of confidence could be a signal that you have more preparatory work to do. Moreover, remember the value of genuineness and transparency in building relationships. Rather than obscure what may be inexperience with the program, you could demonstrate your professionalism through carefully crafted processes—leveraging subject matter experts, workflows, timing requirements, and risk management. For example, you might make agreements with your mentor, wholesale account rep, or another reliable party to review your work before making the buyer or real estate agent presentation. Don’t struggle alone. Be shameless in getting the help you need.
Especially, anticipate the common concerns and objections of referral partners. Develop understanding and empathy for the needs and wants of the prospect. Deal with the elephant in the room before you get trampled. Referral partners and other prospects are rightfully concerned that you know what you’re doing. Professionals such as Lawyers, Medical Doctors, Engineers have recognized credentials. Even so, consumers of these professional services carefully choose their providers. MLOs do not have much in the way of credentials. An MLO license hardly speaks to competence. Ten years in the business? In the mind of the prospect, those could be ten years of mortgage carnage. Consumers don’t value experience like they used to.
Deal with the elephant in the room. Address the issue directly. You might say, “Mr. Real Estate Agent, I’m sure it’s apparent to you that I’m new to the business. I imagine you might have concerns about my abilities to get the job done. I want to address those concerns. For starters, most folks value transparency, and integrity, so do I. So I avoid shooting from the lip. Instead, I’ll tell you what I know and what I have yet to discover. If I don’t have the answer, I’ll let you know when I’ll get the answer. Mr. Real Estate Agent, Mortgage origination is like dodgeball. It’s the one you don’t see coming that gets you out! Blind spots are always possible. For this reason, before making a mortgage presentation, I have subject matter experts review the presentation for viability and general excellence. While I may not have much experience, I know how to leverage resources and manage expectations. My company and I know how to get the job done. Can I ask you, Mr. Real Estate Agent, what concerns do you have working with an MLO for the first time?” – Aim right between the eyes!
Professionalism. Manage and meet stakeholder expectations. Look and behave like the professional your stakeholders need and expect. It doesn’t matter if you have been in the business for two months or twenty-two years. But, when it comes to marshaling resources so that you may not harm, grab the bull by the horns, be the squeaky wheel that gets the support you need to get the job done. Next week, the Journal heads for Third.