Why Haven’t Loan Officers Been Told These Facts?

Do you have a program for prospective borrowers who are not ready for prime-time financing?

Time to start a farm team. That’s right, watch your players start in the High-A league and move up to Double-A. Then on to Triple-A where their dreams are in sight. Culminating with playing in the Big League. Your own fantasy league or the real deal?

Imagine the satisfaction and joy of coaching your players to the Big League. Providing the tools, encouragement, and guidance to take part in the number one wealth-building opportunity for the middle-class – homeownership. Rooting for the underdog to win. As a result, good coaches enjoy prestige, financial rewards, the satisfaction of a job well done, and even joy.

Yes, a farm system for loan officers is an excellent idea, more on that later. But, had you thought about a farm system for failed borrowers? Rarely does a momentary credit decision constitute a lifetime ban from mortgage financing. Is it in anyone’s interest to suggest to these folks that they keep their nose clean for a few years and give a call when they straighten up?

Are you throwing away future business? Living advertisements for your service? Consider this, could the adverse actions be a goldmine under your nose? He who is forgiven little loves little – but the one who is forgiven much greatly loves the one who forgave him.

Think of the possibilities. In most cases, these failed borrowers could be rehabilitated into future borrowers and, better yet, raving fans. Contemplate the regular interactions and follow-ups with these folks, their friends, family, neighbors, and co-workers.

ECOA Notice Requirements under Regulation B (12 CFR 1002.9) stipulate that once a creditor has obtained all the information it typically considers in making a credit decision, the application is complete. Then, the creditor has 30 days to notify the applicant of the credit decision.

The truth be told, many Mortgage Loan Originators (MLOs) fail to comprehend the ECOA definition of “application” and, therefore, neglect the Regulation B notice requirements. These are not harmless compliance boo-boos (if there is such a thing). On the contrary, the failure to facilitate an application and efficiently handle the loan manufacture is one of the more frequent and pernicious everyday origination failures. Furthermore, forsaking less promising applications can lead to violations of the Home Mortgage Disclosure Act (HMDA) and ECOA.

And don’t forget the ever-present Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank. Expressly, Section 1031, commonly referred to as UDAAP. UNFAIR, DECEPTIVE, OR ABUSIVE ACTS OR PRACTICES – UNFAIRNESS – the act or practice causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers. ABUSIVE ACTS – FAILURE TO ACT IN THE BEST INTEREST OF THE CONSUMER – a betrayal of the reasonable reliance by the consumer on a covered person to act in the consumer’s interests.

What is your loan manufacturing workflow? For example, assume an MLO informs the prospect, “no, you don’t qualify for that.” How does a responsible person know when or what credit decisions MLOs in their charge are making? What if the MLO doesn’t know the job? A grave disservice occurs when the MLO makes the qualification judgment in error. Is there a safety net to ensure that turndowns are appropriately reviewed? How do the responsible persons know when their representative says “no.” Are all MLOs capable of making competent determinations that the loan is unapprovable? Are you able to control the loan manufacture or is your manufacture out of control? Never mind, the Journal has a framework for your consideration.

Kill Two Birds With One Stone

Lenders that recognize the application event and deliberately take adverse action could have an opportunity to rehabilitate the prospect or launch a remediation plan. And at the same time, the lender satisfies the regulatory requirements. That’s a win-win.


Behind the Scenes
The Taper Tantrum
Watch Those Refinances, No On and Off Switch for Rate Changes

Leveraging a Blue Ocean Strategy to Grow Your Business

To Explore Strange New Worlds, to Seek Out New Life and New Civilizations, to Boldly go Where no Person has Gone Before :).

Last week, the Journal outlined a few challenges facing MLO’s asking for business from their borrower customers. This class of referral sources can be the numero uno source of consistent quality referrals.

You are going to improve your referral process by leveraging the power of specificity. By suggesting specific actions to your borrower customers, you will improve referral volume. “Mr. and Mrs. Applicant, do you know any teachers or firefighters? Great. Would you please pass these cards along? I can email you the information if that is easier for you to get to someone that might need it. XYZ Mortgage provides special financing for educators and first responders. That includes police, firefighters, and teachers. The card contains a few highlights of the unique financing benefits available to these folks. The card is also a voucher redeemable by the persons you refer to us. Would you mind giving these to someone that could benefit? It doesn’t matter if they plan on buying a home or not. Just to ensure they have a mortgage professional when they need one. By the way, here is a $100 voucher for you too.”

Automate your marketing from the beginning. Most of the mail distribution vendors have in-house or access to graphic artists. You will need some marketing collateral.

You will need to run two batches of postcards—one for mail service distribution to your base—the other for you to distribute to your new customers/applicants. You’re going to create eight different postcards. Each postcard describes special financing for particular people. Instead of asking, “do you know anyone that might need a mortgage?” You are asking your borrower customers, “do you know any teachers, families in crisis, professionals, or growing families – give them this $100 voucher so they have a contact with someone in the mortgage business.”

The batch mailing to your base requires a print run for each discrete mailer. For example, 2,000 contacts. Mailer 1 x 2000 = Order 1, 2000 postcards for the early January run. Mailer 2 x 2000 = Order 2, 2000 postcard order for the late February run.

You will launch two discrete simultaneous distribution campaigns.

First – Distribution campaign for your existing base

Every 45 days, mail the voucher card. That is eight mailers over 12 months. For example:

  • Mailer 1 – Teachers, Firefighters, and Law Enforcement
  • Mailer 2 – First time Home Buyers
  • Mailer 3 – Professionals (CPA, Doctors, Lawyers)
  • Mailer 4 – USDA RD
  • Mailer 5 – Families in Crisis, Divorce, and Separation
  • Mailer 6 – Reverse Mortgage, Retirees and Seniors
  • Mailer 7 – Growing Families
  • Mailer 8 – Veterans and Servicemembers

Repeat, substitute, adapt.

Second – Distribution campaign for new prospects

Your first print run also requires eight discrete cards sufficient to cover any applicants or prospects you anticipate over the next two months. For example, if you anticipate talking to 50 prospects in the next two months, you need no less than 400 total cards. 50 for each mailer type.

For every prospect/applicant, you will distribute all eight cards during the loan manufacture.
For example:

Mailer 1 hand-delivered to prospect at an open house.

Mailer 2 email with the fee sheet.

Mailer 3 emailed with the Loan Estimate.

Mailer 4 hand-delivered with the loan application

Mailer 5 email with the appraisal

Mailer 6 emailed at the mid-point

Mailer 7 emailed with the Closing Disclosure

Mailer 8 hand-delivered with the $100 voucher at closing

The objective – meet the people referred to you before they have a felt need for a mortgage. If they happen to need a mortgage when you make contact, no problem there. Your goal is to become a resource for anything mortgage-related. Just like people benefit from knowing CPAs, lawyers, and physicians – they need to know a mortgage professional – before they need one!

Be aware that the $100 voucher is probably a term of the legal obligation between you, the lender, and the recipient of the voucher. As such, it might be best to disclose the voucher on the Early and Final disclosures (e.g., Loan Estimate and Closing Disclosure).

From Regulation Z – 12 CFR 1026.17(c)(1) General disclosure requirements (1) The disclosures shall reflect the terms of the legal obligation between the parties. 1026.17(c)(1) Comment 19. Rebates and loan premiums. In a loan transaction, the creditor may offer a premium in the form of cash or merchandise to prospective borrowers. Similarly, in a credit sale transaction, a seller’s or manufacturer’s rebate may be offered to prospective purchasers of the creditor’s goods or services. 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.

Lender credits for general or specific costs are zero-tolerance items. The credit promised the applicant in the Early disclosure (Loan Estimate or GFE/TIL) must be the exact amount credited to the applicant on the Final disclosure (Closing Disclosure or Final TIL and HUD-1) absent a changed circumstance or principal reduction. Regulation Z disclosure rules 1026.17(c)(1) likely demand that lenders reflect their obligations in the early financial disclosures. An inducement such as a $100 gift card could undoubtedly fall under the rubric of a legal obligation as detailed in the Regulation Z official commentary 1026.17(c)(1)-19. With the Early and Final disclosures, exactly where and how the lender might disclose the gift card or a Paid Outside of Closing (POC) item could be debated. General credit on the Early disclosure and POC general credit on the Final disclosure is probably a good bet. Get yourself, appropriate legal counsel.

The holiday spirit of giving has caught on at the Journal. We hope that the New Year is a good year for you. May God richly bless you. Thank you for subscribing to the Loan Officer School Journal.

Here is to 2022. May you sow, reap and harvest sooner, more fully, more frequently, and ultimately with tremendous success.


Tip of the Week
Loan Presentations – KIS the Prospect

When presenting financing options to the applicant, highlight quantified benefits (dollars and cents) to articulate the difference between options. Ambiguous language may confuse the prospect. A lack of specificity is a lack of clarity.

For example, here are a few before and after presentations.

1) The payment is lower with this option.
2) The fees are lower with this option.
3) This is your best option.

1) Two options. Option A and Option B. Option A affords the lowest principle and interest payment. The principle and interest payment for Option A is $1,939. The principle and interest payment for Option B is $2,003. The principle and interest difference between Option A and Option B are $64.00 monthly.

2) Option A carries a 1% Origination fee, or $4750. Option B is sans origination fee. Therefore, on the closing day, Option B saves you $4750 compared to Option A.

3) At first glance, Option A’s lower monthly payment will recover the 1% Origination fee in just over six years. However, the actual recovery period is longer. To square Option A’s higher initial cost with Option B lower upfront cost, here is a better comparison:

Option A = $475,000 – 30 year fixed rate term @ 2.75%
1 point Origination Fee, $1939 P&I

Option B = $470,250 (L/A – Orig Fee) – 30 year fixed rate term @ 3.00%
Zero Origination fee, $1983 P&I

Therefore, Option A saves $44 off the monthly P&I at the cost of $4750. When factoring in the lost opportunity of the Origination fee, the time to recover or break even is nine years.

Please keep it simple. In terms of mortgage presentations, buy-in describes the prospect’s intellectual grasp of the relative goodness of a given solution. Buy-in develops from understanding through comparative analysis. But it is not intellect alone that fosters buy-in. Discovery through intellectual comprehension coupled with positive emotions engenders enthusiastic support. The prospect’s discovery itself might stimulate the desired Ah-Ha moment. The presenter might further contribute to the buy-in by acknowledging the discovery and enthusiastically praising the prospect for their diligence in seeking the best financing.

The degree of buy-in of the applicant is highly dependent on their comprehension of the differences between mortgage options AND appreciation of the option’s benefits.

When you present the options to the prospect, get excited, share your enthusiasm. Their emotional prism anchors their logic and reason, and emotions are contagious.

The applicant’s degree of buy-in is highly dependent on their comprehension of the differences between mortgage options, appreciation of the option’s benefits, and state of mind.

Underestimate the importance of emotions at your peril. This comparative analysis constitutes a form of shopping for the mortgage and helps satisfy the applicant’s sense of due diligence.

There are two chief concerns in gaining the loan prospect’s buy-in. First, dollars and cents quantify their perception of value. Less obvious, their perception of risk. Risk, in this case, can be defined as uncertainty. Typical forms of prospect uncertainty involve the MLO, the solution, the lender, or the process. Confusion is a type of uncertainty. Confusion and uncertainty are usually antithetical to the buy-in. Keep It Simple. Easy to say, often challenging to accomplish. The principle is a good one. As much as possible, keep it simple.


2022 CE – Sneak Preview

Watch for topical updates as LoanOfficerSchool.com develops the 2022 CE over the next several months.