Why Haven’t Loan Officers Been Told These Facts?
Regulation Z Steering Safe Harbor – Loan Shopping
(Paraphrased) A transaction does not violate the steering prohibition if the lender presents the consumer with appropriate loan options for each type of financing in which the consumer expresses an interest.
The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest . . .
My mama told me, you better shop around
Ooh yeah, you try to get yourself a bargain son.
Don’t be sold on the very first one. – Berry Gordy Jr
Regulation Z tells me, you better shop around.
§ 1026.36(e)(3)(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business . . .
Regulation Z provides a safe harbor from noncompliant steering for mortgage brokers following specified presentation requirements. Regulation Z incentivizes loan originators with the carrot and the stick approach. The carrot is that if the broker shops around and presents more competitive mortgage terms to the consumer, then the originator is presumed to comply with the TILA prohibitions against inappropriate steering. The stick is that if the broker fails to evidence appropriate shopping and loan presentation, the noncompliance door is open for a host of negative consequences, including UDAAP and TILA violations.
Regulation Z requires brokers to shop with lenders they already are already in business with. How many lenders must you shop to gain a sense of a competitive quote? Brokers are experts at loan shopping. Competition forces brokers to shop. That is what the Regulation requires, to shop for the best deal from lenders with which the broker regularly does business.
Additionally, the regulation requires brokers to obtain options from a “significant number” of lenders with whom the broker does business with. What do the terms “obtain loan options,” “significant number,” and “regularly does business with” require?
Regulation Z loan shopping requirements are easily misunderstood. Regulation Z does not require that the MLO must present quotes from different lenders. Instead, Regulation Z requires the broker to evaluate a significant number of creditor offerings according to the type of financing for which the consumer expressed an interest before selecting the appropriate loan options for presentation. All three options can be sourced from a single lender if the presented options meet the Regulation Z criteria (lowest rate, lowest fees, lowest rate without risky features).
Unfortunately, the term “significant number” is a bit of a mystery. However, Regulation Z provides a deductive path to unpacking a “significant number” whereby the originator can narrow the number of the lenders they must survey.
To effect the Regulation Z safe harbor, the originator must select options from lenders with which the originator organization regularly does business with.
Regulation Z fleshes out the term “regularly does business” with adequate specificity.
A loan originator regularly does business with a creditor if:
i. There is a written agreement between the originator (the business) and the creditor governing the originator’s submission of mortgage loan applications to the creditor
ii. The creditor has extended credit secured by a dwelling to one or more consumers during the current or previous calendar month based on an application submitted by the loan originator; or
iii. The creditor has extended credit secured by a dwelling twenty-five or more times during the previous twelve calendar months based on applications submitted by the loan originator. For this purpose, the previous twelve calendar months begin with the calendar month that precedes the month in which the loan originator accepted the consumer’s application.
As for the Regulation Z qualification for regular business relations, most origination organizations “regularly do business” with a handful of lenders. Therefore, for many origination businesses, this eliminates many lenders to survey.
The term “significant number” is vague. It could imply a majority of the lenders you regularly do business with or some arbitrary number. The key here may be forethought, consideration, and consistency.
If you regularly shop five lenders on most deals, but you shopped two lenders on another deal, that might look bad.
How hard is it to price loans with five lenders if you regularly do business with five lenders? However, shopping five lenders is still a significant survey if you regularly do business with ten lenders.
For larger origination organizations, shopping benchmarks may be more nebulous and complex. The organization should maintain and provide a “shopping list” for individual MLOs to consider.
Does the term “significant” relate to a fixed number of lenders or a percentage of the lenders falling within the “regularly does business with” rubric? When crafting compliance policies, a legal opinion may go a long way in demonstrating an appropriate compliance management system.
The consumer loan presentation must include options for which the consumer likely qualifies. To qualify under the safe harbor, the loan originator must have a good faith belief that the loan options presented to the consumer are transactions for which the consumer likely qualifies. Remember that the safe harbor applies to the consummated loan.
In other words, no harm if you use the safe harbor template to present prime options for which the consumer is unlikely to qualify. However, inform the consumer of the probability of adverse action. Otherwise, your presentation could appear to be a bait and switch. For example, “Mr. Applicant, the probability that you will meet the credit criteria for these loans is uncertain because of the challenges we have discussed. However, the presented options establish a vital baseline in establishing a range of competitive mortgage options. In addition, if prime financing is not an option, you can better comprehend the costs and risk associated with subprime options relative to the prime mortgage baseline.”
The loan originator’s belief that the consumer likely qualifies should be based on information reasonably available to the loan originator at the time the loan options are presented. In making this determination, the loan originator may rely on information provided by the consumer, even if it subsequently is determined to be inaccurate.
The originator is not expected to know all aspects of each creditor’s underwriting criteria. But pricing or other information that creditors routinely communicate to loan originators is considered to be reasonably available to the loan originator, for example, rate sheets showing creditors’ current pricing and the required minimum credit score or other eligibility criteria.
For many MLOs, there is little compliance burden adhering to the Regulation Z steering safe harbor requirements – you already do it! The problem for many MLOs and brokers is not the act of shopping. Instead, the common compliance problem is documenting compliant loan shopping and subsequent compliant loan presentations.
The Journal plans to unpack Regulation Z documentary standards next week.
And don’t forget, the Loan Officer School’s 2022 CE tackles Regulation Z safe harbor challenges head-on in a simple hands-on presentation.
Down Payment Assistance Programs (DAP)
Is it time yet?
Down Payment Resource
It shouldn’t be too long before residential sales slow to the point that sellers and their agents become more receptive to more onerous financing contingencies and closings. That means down payment assistance and other affordable lending initiatives should gain legs in the coming months.
Expanding the customer base is essential in weathering market contractions. Mortgage originators cannot expect to compete well by pursuing the same business as everyone else—especially third-party originators going head to head with mortgage giants. Competing against mortgage providers with resources and leverage you don’t possess is not playing to your strengths.
If you haven’t yet stumbled on the organization Down Payment Resource now might be a good time to take a look. The organization is a leading proponent of down payment assistance plans providing tools for lenders and loan officers to winnow DAP solutions from the best programs and providers.
In a recent study, Down Payment Resource analyzed HMDA data and concluded lenders could reverse many adverse actions by leveraging the appropriate down payment assistance program.
Some of the key takeaways from the analysis are as follows:
- A large share of declined loan files were eligible for homebuyer assistance. 33% of all declined purchase mortgage loan applications were declined for either insufficient cash-to-close or disqualifying DTI ratios and also eligible for homebuyer assistance at the time of declination. The large share of loans potentially recoverable with homebuyer assistance highlights a significant, low-cost opportunity for lenders to increase purchase volume.
- Declined loan applications were typically eligible for multiple programs. On average, declined loan applications were eligible for 10 homebuyer assistance programs, indicating there are often multiple options available to homebuyers financing with homebuyer assistance.
- Many declined loans could have been recovered with homebuyer assistance. Applying homebuyer assistance to eligible declined loan applications would have reduced LTV by an average of 5.85%, making many of the loan applications recoverable. Lowering LTV can open the door to better and more affordable first mortgage scenarios, including conventional (rather than FHA) financing, reduced mortgage insurance costs and better interest rates.
Are declined loans a possible source of business for you? Look beyond your loan manufacture. Why not prospect turndowns from other lenders? When an MLO gets in over their head and ends up in a jackpot, they are often only too happy to have the transaction just go away. You can help these MLOs by providing an efficient handoff.
Even if the applicant is not a current financing candidate, they may be a prospect for future financing, not to mention an opening to new referral partners.
Leave no meat on the bone.
IT’S SUMMERTIME, CAN YOU AFFORD TO STOP LEARNING?
Time to up your game with the Tip of the Week
In November of last year, with financial storm clouds on the horizon, the Journal editor thought about originating in a time of war.
Some of you are beginning to understand what a market contraction feels like. Of course, everyone understood that the end of the refi boom would come, and when it did, it would be impactful. But the feelings that arise during the experience may differ from the specter of the event.
Expect to win. Train to win.
You are in a fight. Perhaps a war. Not a barroom brawl, but a more choreographed and significant fight. More like a professional boxer in a make-it-or-break-it match.
The Journal is in your corner. Every fighter needs a trainer.
Market Contractions Mean War
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” The Art of War – Sun Zu
Remember, the banks, big mortgage companies, credit unions, and big servicers have established relationships, leverage, and resources you do not have. Plus, those guys have the means to make money outside of originations which they can use to keep afloat. They have the ability to wage war by absorbing thin margins on low volume. You can’t. Or you can’t for long. Most third-party originators cannot successfully fight that fight.
You must scrap for the bread and butter business, but your strength differs from the big guys. First, your agility enables you to pivot and pursue new business lines, a weakness of the heavyweights.
Agility is powerful, but keep in mind, that you are the difference in the fight. You can bring commitment, grit, and resourcefulness to the fight in a way the bigs do not. The bigs driving the big lending machines are hardly going to suffer. Boohoo, my bonus will be less than 5M this year.
The need to win is also powerful. Commitment. The bigs don’t care about mortgages or homeownership as we do. It’s just another portfolio. The business is our livelihood and our profession. That too is our strength. The banks can pivot to other business lines and portfolios.
Nimble originators are better suited to capturing fleeting or emerging opportunities. Slices of the business that are inconsequential for bigs.
Stay afloat, keep your chin up and use this time to hone your essential skills and develop a better business model. Take a peek at the Journal Blue Ocean Journal series starting with Volume I Issue 17. Uncover non-customers. Take a peek with the link below.
2022 CE – Sneak Preview
2022 CE has begun!
LoanOfficerSchool.com is excited to provide a sneak peek into our 2022 CE offering. The LOSJ series on subprime financing and servicing underserved markets borrows heavily from the 2022 CE 2 Hour nontraditional mortgage product market segment.
We will cover key knowledge points necessary to implement a subprime program from soup to nuts. In addition, the course covers subprime underwriting requirements, how to prove that the subprime loan is in the consumer’s best interest, best efforts requirements, steering safe harbor, residual income calculation, recognizing loan risk, and the competencies necessary to shop your loan and get your customer the best price.
Dodd-Frank and the implementation of Regulation Z have had some negative and unintended consequences for American consumers. Coupled with the Fed’s monetary policies, runaway housing costs, and the management of the GSEs, we have an ugly housing storm brewing. As a result, the growing subprime industry may be well-situated to address the needs of many consumers falling into the remnants of the 2008 housing cracks.