Why Haven’t Loan Officers Been Told These Facts?
Time for a Change
The Unnecessary Challenges In Underwriting the Self Employed
From Congress, Dodd-Frank TILA ATR
15 USC 1639b(a)(2) It is the purpose of this section and section 1639c of this title to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.
15 USC 1639c(a)(1) In accordance with regulations prescribed by the Bureau, no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.
In the last few weeks, the Journal’s editor has heard from a number of loan officers on the subject of underwriting the self-employed.
The question that keeps coming up is what is the difficulty or risk with self-employed underwriting especially over at the GSEs? This is a great question! A few asked, what is a P & L. One told me lenders don’t require P & Ls anymore. We will tackle the later comments another time.
As was mentioned last week, the GSEs lost their ATR magic wand and now have to follow the ATR requirements just like the rest of us. The GSE patch is dead. No more magic for loans delivered to the GSEs after August 31 of last year. So if you saw a self-employed credit tightening last summer, the move away from the GSE Patch policies was part of the issue. There is still some magic, but no more special (GSE Patch) QM magic.
You’d think the TILA Congressional directive to the CFPB to develop something that fleshes out the term “reasonably reliable” wouldn’t have to be such a hot potato. Accordingly, the definitions, interpretations, and application of the term “reasonably” are at the heart of the industry’s conundrum over credit risk management.
Did Congress intend for the term “reasonably reliable” to become the ATR North Star? Think of the interpretation challenge like this problem – how do you like your steak prepared? The solution is cooked. Not much help to the waiter or the cook. That’s the challenge of unpacking the term “reasonably reliable” from the TILA. Congress is the steak-eater, the CFPB is the waiter, and the mortgage industry is the cook. But maybe The Man intended the ambiguity. Should not the steak-eater be the consumer?
However, the CFPB’s promulgation on the meaning “reasonably reliable” has not been reliable or sufficiently clear enough to give the industry much comfort. As a result, stakeholders could lay this promulgation breakdown at the feet of the CFPB. The ambiguity and lack of safe harbor from the uncertainty of the term reasonably is one of the reasons for the flaccid return of subprime financing. It is tough to sell these loans on Wall Street when risk is ill-defined, and the investor could find themselves party to a predatory lending complaint. Maybe that is by design.
Maybe the Man wants to stack the deck while they figure out how to play the GSE conservatorship. On the other hand, maybe I’ve been inside too long!
A Brief But Timely Detour
From Willie Nelson
Just substitute Pre-Covid-Life for Willie’s darlin’
“Hello walls, (hello) (hello)
How’d things go for you today?
Don’t you miss her
Since she up and walked away?
And I’ll bet you dread to spend
Another lonely night with me
But lonely walls, I’ll keep you company
Hello window (hello) (hello)
Well I see that you’re still here
Aren’t you lonely
Since our darlin’ disappeared?
Well, look here, is that a teardrop
In the corner of your pane?
Now don’t you try to tell me that it’s rain
She went away and left us all alone
The way she planned
Guess we’ll have to learn to get along
Without her if we can
Hello ceiling, (hello) (hello)
I’m gonna stare at you awhile
You know I can’t sleep
So won’t you bear with me awhile?
We must all stick together or else
I’ll lose my mind
I’ve got a feelin’, she’ll be gone a long, long time”
Maybe darlin’ is a healthy subprime market. But come on guys, it has been almost ten years now. It’s time to drop the base deal and play from the top of the deck. It might be good for consumers if Congress or the CFPB would refine the ATR requirements with greater specificity and more appropriate risk management. There are more ways than a wooden cash flow analysis to determine the ability to repay.
Where is the Love? No 10K Run/Fundraiser for the Self-Employed
Can we speak frankly? Do you think that so many of these consumers are such absolute rubes that they need the government to hold their hand and tell them what they can afford? Sir, that soda is too big for you. Drop the soda, Sir! Ice cream again, pandemic hell, put down the spoon! She’s got a candy bar. Get on the ground! Put down the application!
I feel warm inside knowing our trusted Congress and its army of lawyers are taking care of us.
Please, give me a break. This risk management is hypocritical and nonsensical at the same time. Congress has few qualms about putting marginal borrowers into entry-level housing. Should there be different risk management for first-time homebuyers? Should there be latitude for homebuyers that demonstrate financial acumen?
Most people accrue wealth and high credit scores through disciplined financial management. For example, an experienced homebuyer, no income verification, 25% down 789 credit score with 36-month reserves (sourced and acceptable). Two appraisals. Why not? Compare the risk of that transaction to an FHA with 38/48% ratios, no savings, no reserves, 640 scores, and top-of-the-market home value. Which loan represents more significant risks?
The industry still makes crappy subprime loans every day under government guarantees. For the investor, GNMA turns the ugly duckling into a swan (like the ATR magic wand). Them with the rules, make the gold! Another magic wand.
We might be ready to surrender our free speech but don’t mess with our property rights. 😉
Perhaps it is time to fine-tune ATR. Maybe it is time to consider enhanced risk stratification for homebuyers? Yes, the first-time homebuyer is subject to the total weight of current ATR provisions. Experienced homebuyers with at least 10% down, or first-time buyers with 20% down, qualify for reduced ATR standards. An experienced buyer with no reserves, 680 scores, yes, full weight ATR. 36 months reserves, 25% down, no ATR. Riskier loan features require certified MLOs to handle riskier reduced ATR loans. No system is without defects, but it is time for some adjustments—a return to responsible lending.
Hats off to the CFPB for the Seasoned QM effort. But seriously, three years of portfolio seasoning? 30 year fixed rate? Many marriages don’t last three years. That’s almost a cynical jab by the CFPB at “innovation.” The Seasoned QM restrictions drive significant portfolio and rate risks to potential lenders. What lender can pursue a lending course that may result in a portfolio of underperforming unsaleable 30 year fixed rate loans? Thus, the CFPB continues to narrow the market and consequently drives up consumer costs. Innovative?
Yes. Effective? No.
Dropping the three years to one-year seasoning would be a considerable improvement. Including a well-structured 5/1 or 7/1 ARM would also make the innovation more plausible.
We need a little less of the federal government’s “help” with “affordability” determinations. Pursuing consumer protection is a worthy and necessary cause. However, the government has created an underclass of consumers with fewer homeownership options. For many in this underclass, they are unnecessarily overpaying for their mortgages. Self-employed people deserve equal credit opportunities with the employed.
The consequences of inaction can be catastrophic. So many households are being shut out of the primary wealth engine for the middle class. The last thing the country needs is to accelerate the problem. The time for attenuation is now.
Exacerbating the challenge of sustainable homeownership is pretty much un-American.
Overpaying for the mortgage does not help consumers. Instead, fewer options and higher mortgage costs increase repayment risk. Not suitable for the borrowers, not good for the industry. Not right for the country.
Next week, the self-employed discussion continues as we unpack a few challenges that current regulations present.
Behind the Scenes
The CRAs – Teed-Up for Another Non-Compliance Whoopin!
Uh-oh, in a recent report on the CRAs (Equifax, Experian, or TransUnion), the CFPB alleges that the CRAs have mishandled credit reinvestigations.
FCRA – 15 USC 1681i(a)(1)(A) “. . . . if the completeness or accuracy of any item of information contained in a consumer’s file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly, or indirectly through a reseller, of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file in accordance with paragraph (5), before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer or reseller.”
The Fair Credit Reporting Act (FCRA) requires the CRAs to investigate (called reinvestigation in the FCRA) consumer complaints of reporting inaccuracies. The CFPB has found some problems with the CRAs reinvestigation implementations.
From January 2020 to September 2021, the CFPB received more than 800,000 creditor consumer reporting complaints. Of these complaints, more than 700,000 were submitted about Equifax, Experian, or TransUnion.
In 2020, Equifax, Experian, and Trans Union changed how they respond to complaints transmitted to them by the CFPB. The CFPB’s analysis reveals that the CRAs are closing these complaints faster and with fewer instances of relief. In 2021, the CRAs reported relief in less than 2% of complaints. That is down from nearly 25% reported complaint relief in 2019.
In their complaints to the CFPB, consumers describe harms stemming from their failed attempts to correct incomplete and inaccurate information on their credit reports:
- Consumers are caught in an automated system where they are unable to have their problem addressed
- Consumers waste time, energy, and money to try to correct their reports
- Consumers are caught between furnishers and the NCRAs (National Credit Reporting Agencies – Equifax, Experian, and TransUnion)
Next week, the LOSJ will look at the FCRA and the CRAs issues as reported by the CFPB. And importantly, what you can do to help customers struggling with credit remediation.
Tip of the Week – Don’t Piss-Off Your Regulator
What Has Your Regulator So Pissed OFF?
The Devil Is In The Details
Watch Your P’s and Q’s (and the rest of the disclosures)
When filing or amending the MU4, it is understandable that an MLO may experience some trepidation about revealing their past failures. However, licensees must remember that concealing even marginally material information can have severe consequences.
Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act)
Licensees are responsible for keeping their NMLS record (MU4 for individuals) updated.
If the answer to any MU4 disclosure question becomes a “YES,” when previously disclosed as “NO,” provide complete details of all events or proceedings. Updates include answers that the licensee changes from “YES” to “NO” and vice versa.
The NMLS directs licensees to send the details of any MU4 amendments to the jurisdictions where they are licensed or requesting licensure. Pay careful attention to the timing requirements. Individuals must update their Disclosure Questions when their circumstances change per state law or within 30 days, whichever is shorter.
If the licensee thinks the disclosure jeopardizes your license, comprehend the possible effect of non-disclosure on any license determination. The non-disclosure may be the straw that breaks the camel’s back. The character determination demanded by the SAFE Act requires the states to make subjective judgments. Make it more challenging for the regulator to say no to licensure by conducting yourself as worthy of the license.
The state regulator attempts to comply with the SAFE Act when making the character determination. As implemented by Regulation H, the SAFE Act requires the state to determine that the licensee meets and will continue to meet the SAFE Act requirements for MLOs.
Will the originator act honestly, fairly, and efficiently? If the licensee cannot figure out how to correctly complete and amend the MU4, maybe that is not someone who should deal with vulnerable consumers. Perhaps the individual doesn’t belong in a class of professionals facilitating consequential consumer decisions. This is not terrible logic.
§ 1008.105(c) “Has demonstrated financial responsibility, character, and general fitness, such as to command the confidence of the community and to warrant a determination that the loan originator will operate honestly, fairly, and efficiently, under reasonable standards established by the individual state.”
Suppose the licensee withholds material information relevant to the state’s qualifications determination. For example, character and general fitness are ambiguous terms. However, honesty is not. Consequently, when a licensee intentionally leaves off essential details necessary to determine a person’s honesty, it should be difficult for the state to grant licensure.
Suppose the applicant pleads that they did not know what they were doing or misunderstood the process? That certainly does not inspire confidence that the MLO can efficiently handle the complexities and consumer vulnerabilities attendant with mortgage manufacture.
Remember the “F” in SAFE Act? “F” stands for “fair.”
Suppose a licensee does run into licensure headwinds? Like anything else, the licensee must fight by challenging the state’s adjudication or determination. Regulators can make mistakes. Furthermore, the regulator may have little to lose by erring on the side of caution.
When the licensee challenges the regulator’s process or determination, appreciate that the state must make its case that the licensee does not meet the requirements. This is how and when the licensee appropriately makes their case for licensure. But, again, before stripping someone of their livelihood, there should be an appropriate process and significant demands for evidentiary standards. But the process requires that the licensee put the cards on the table and plead their case.
Consequently, should life happen, and you think you may have a problem with licensure, get competent counsel to assist you with the MU4 amendment and anticipated reverberations. Handling problems the right way demonstrates to the state sound judgment and honesty. That might be what is needed to get over the hump.
In the following case study, the regulator demonstrates mercy to the licensee.
From Our Friends At The CA-DFPI
“On August 27, 2021, Complainant applied to the Commissioner for a mortgage loan originator (MLO) license under the CRMLA.
In his initial application filing, Complainant failed to disclose employment terminations from financial services firms in 2015 and 2020 in response to Form MU4 question (Q)(1).
Complainee agrees that during the 12-month period from the effective date of this Consent Order as defined in paragraph 23 (Probationary Period), if the Commissioner finds that Complainee has violated or is violating any provision of the CRMLA or any rule, regulation, or law under the jurisdiction of the Commissioner, the state of California, the United States of America, or any state or foreign government or political subdivision thereof, the Commissioner may summarily revoke or deny any license held by or applied for by Complainee.
During the Probationary Period, Complainee shall report to the Commissioner any disciplinary investigation or action against him by any licensing agency; any criminal investigation, prosecution, or conviction; or any civil judgment against him no later than 30 days after discovering such investigation, proceeding, action, or judgment. Complainlicensurequired to report any traffic citations.”
Don’t roll the dice with licensure. The licensee in the case study dodged a bullet and got a second chance. Don’t make it easy to say no. Even regulators are capable of mercy!