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
§ 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 . . .
Last week the Journal continued our series on the Regulation Z safe harbor from steering violations afforded to loan originators making cogent loan presentations and generally doing a workmanlike job. So what is a safe harbor, and how does the provision benefit third-party originators?
Black’s law dictionary states, “The provision in a law or agreement that will protect from any liability or penalty as long as set conditions have been met.”
If you originate subprime loans, you may need a safe harbor more than you would if you are strictly a QM originator. Yet, Regulation Z steering safe harbor is not only applicable to instances of subprime lending but also to everyday QM originating. The safe harbor applies to any consumer mortgage transaction for which Regulation Z applies.
The last decade has been the era of fixed-rate prime financing. As the industry increases the use of riskier loans to increase market participation, questions about the financing being in the consumer’s best interest will arise more frequently. Just because the consumer wants the financing does not mean it is in their best interest to deliver what they want. We’ve already been down this road.
Caveat venditor is the term that describes consumer mortgage disclosure. Let the seller beware. The opposite of caveat emptor, let the buyer beware. Blacks law dictionary describes caveat emptor as the doctrine that places the burden on buyers to reasonably examine property before purchase and take responsibility for its condition. Whereas caveat venditor in Roman law is a maxim, or rule, casting the responsibility for defects or deficiencies upon the seller of goods and expressing the exact opposite of the common law rule of caveat emptor.
Even though the buyer may be all in and full steam ahead, unless the seller has at the very least, evidence of full disclosure, the seller bears liability for providing a product or service that either does not work for or is otherwise inappropriate for the buyer.
As lenders increasingly turn to ARMs and subprime financing solutions, the risk of inappropriate loan selection and unlawful steering will increase.
If your financing solution involves an ARM or subprime financing, you’d better make damn sure the applicant understands the costs and risks attendant with such financing compared to less risky prime loans a.k.a 30 year fixed-rate prime financing.
What are the consequences of a steering violation? If you have ever been a party to or seen the aftermath of a federal lawsuit or enforcement action, that in itself is more than an ample consequence. Forget about winning or losing. Investigations and lawsuits are more than a headache. It’s a fight for survival. And if the adjudication goes sideways or against you, it’s double the fun. It’s like getting sick from Monkey Pox and COVID on the same day.
For the major lenders of the world, lawsuits and sanctions are par for the course. Not so much for us little guys. The risk of premature or forced career changes is very real in this venue. Coupled with ruinous sanctions and reputational damage, stakeholders should pursue necessary course alterations to mitigate these risks.
Appreciate that enforcement actions generally begin at the top and roll downhill from there. Of course, if an individual contributor is the source of business-level sanctions, the regulator may take disciplinary action against the individual licensee in addition to the business. Then, if the business terminates the individual MLO for noncompliance or ethical failures, that is a turd rolling downhill that individual MLOs must avoid. MLO terminations for unethical or noncompliant practices demand the MU4 declaratory amendment. “MU4(Q) Have you ever voluntarily resigned, been discharged, or permitted to resign after allegations were made that accused you of: (1) violating statute(s), regulation(s), rule(s), or industry standards of conduct?”
An affirmative declaration to MU4(K) or (Q) sections may not mean the end of the road, but it is potentially an axle-busting pothole for originators.
How fulfillment partners fail to demand evidence of proper loan presentation is nothing short of stupefying. Regulators can hold wholesale lenders responsible for inappropriate steering by third-party originators. Remember Dodd-Frank, Title X? Title X is a war cry for regulators and even state attorney generals.
Remember the Alamo! (v2008)
(Title X) 12 USC 5536(a)(3) (paraphrased) “For any person to knowingly or recklessly provide substantial assistance to a covered person in violation of the UDAAP provisions, the provider of such substantial assistance to a UDAAP violator shall be held accountable and shall be deemed to violate the UDAAP to the same extent as the person committing the offense.” Translated, the same can o’ whup-ass for the enabler of a Title X violation as the offender. By comparison, the UDAAP battleax empowers state and federal enforcers to apply a beating that can make TILA noncompliance actions look like after-school detention.
Regulation Z safe harbor covers times such as these. Many MLOs do an excellent job presenting the best viable options and use financing illustrations to inform prospective borrowers of their options.
Suppose the consumer makes an unwise decision after adequate disclosure. In that case, that is their failure. The borrower owns any ensuing mortgage problems. However, when people get injured or face losses, they often blame others for their plight. The safe harbor helps you avoid ending up like a human pinata.
Many brokers and correspondents spend a lifetime providing valuable services to their communities. Unfortunately, it takes but one unprincipled attorney, lender, or borrower to unravel years of hard work.
The problem for many MLOs and businesses is not the act of doing their job and shopping. Instead, the problem is documenting that they did their job. Therefore, the lender should document the loan shopping, the compliant consumer loan presentation, and the consumer’s selection of a given loan after detailed loan disclosure.
A few suggestions. It may be difficult to mount a good defense when key artifacts fail to comply with the most rudimentary requirements. Ensure the MLO and business NMLS identifiers are conspicuously and appropriately disclosed. For example, regulation Z requires the NMLS ID on the LE and URLA. It stands to reason that the identifiers should indicate the person that provided the all-important safe harbor disclosure.
Regulation Z fails to provide any express guidance relative to documentary standards or format for the safe harbor disclosures.
Regulation Z examples of the safe harbor loan presentation (paraphrased):
“Assume a loan originator determines that a consumer likely qualifies for a loan from Creditor A that has a fixed interest rate of 7 percent, but the loan originator directs the consumer to a loan from Creditor B having a rate of 7.5 percent. If the loan originator receives more in compensation from Creditor B than the amount that would have been paid by Creditor A, the steering prohibition is violated unless the higher-rate loan is in the consumer’s interest.
Document – Can a higher rate be in the consumer’s best interest?
For example, a higher-rate loan might be in the consumer’s interest if the lower-rate loan has a prepayment penalty, or if the lower-rate loan requires the consumer to pay more in up-front charges that the consumer is unable or unwilling to pay or finance as part of the loan amount.”
In all these instances, it stands to reason that the MLO must preserve a paper trail. Significantly, for a subprime candidate, can originators produce sufficient documentation to establish that the consumer CHOSE the selected financing AFTER being AWARE of the costs and risks of the loan relative to prime fixed-rate financing?
Disclosure that covers the risks attendant with adjustable-rate mortgages, balloon financing, interest-only, negative amortization, and prepayment penalties is essential. Applicants should affirm that they understand these risks and that prime fixed-rate financing does not have these features.
The applicant should further attest that they choose to move forward with the financing despite the stated risks. Therefore, the file should contain fee sheets or similar financing illustrations that satisfy the Regulation Z loan presentation requirements and adequate disclosure warning of the consequences of risky features. Otherwise, how does the originator evidence that the consumer knew the risks attendant with subprime financing?
Remember that the three options in the presentation are relative to the consummated loan. In other words, for a two-step loan manufacture, the first step is prime financing with three options. Then, after prime financing is ruled out, the originator presents the three subprime options.
The general record retention requirements for MLO compensation and steering are three years. Three years from when is a good question. A compliance professional once told me he doubled the most burdensome record retention period to cover the timing milestones. In other words, if the regulation requires record retention for three years, they kept the records for six.
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.
Behind the Scenes
Opportunities to Serve the Underserved
Positive Rent Payment History in Desktop Underwriter
Using Automated Underwriting Systems (AUS) to evidence timely rent payment
Is asset verification a positive for underbanked communities or more FNMA compliance window dressing? Will asset validation make a significant difference in today’s market? Hey, if you are the broker or borrower on one of these deals – hell yes! Small steps are often good steps.
The DU programming adjustment is a smart move from the FNMA to unlock sustainable homeownership opportunities. Asset validation is an exciting fintech improvement in expanding AUS capabilities and efficiency.
There is no question that some fintech efficiencies leave creditworthy prospective borrowers in the dust. Can the GSEs fix some of these problems that leave credit-worthy applicants behind with fintech solutions? Absolutely. Automated asset validation is a start.
The efficiency at all costs approach to loan manufacturing has disadvantaged many households. In particular, low-moderate income households bear disparate negative impacts from today’s efficiencies more than non-low-moderate income households.
Before the preponderance of AUS, general underwriting practices placed great weight on timely rent payments, housing shock, and disposable income. Even during draconian periods of wooden ratio analysis, underwriters could often make a case for applicants with a history of timely rent payment and accrued savings. Ah, the days of rational underwriting.
Don’t get me wrong. I would not wish for a return to manual underwriting as the norm. However, before AUS, no additional stigma or liability was attached to manual underwriting. If only we could pair the best of both worlds. What if the GSEs did away with reps and warrants for low-moderate income manual underwriting? Better yet, perhaps the AUS could evaluate other nontraditional credit lines, such as timely insurance, child support, and utility payments.
I hope someone mentioned expanding the AUS criteria in FNMA’s recent RFI (Request For Information is a technique to develop solutions and providers from outside the performing organization) for racial equity solutions. These guys at FNMA pretend to scratch their heads about why people of color have higher percentages of adverse actions than white folks. Really? Can you say reps and warrants? People of color are overrepresented in the manual underwriting milieu. Consequently, people of color experience adverse action and onerous terms more frequently than their white counterparts.
Suppose the GSEs fail to adjust the seller rules for manual underwriting and AUS. What’s convenient for the GSEs will continue to disadvantage underbanked communities. Expanding the AU criteria to evaluate nontraditional credit is helpful. Lowering the lender’s risk attendant to manually underwriting folks from underbanked communities would make a big difference.
The Urban Institute reported that Fannie Mae claimed that by the end of 2021, 1,000 initially denied loan applications were approved once rent history was factored into the AU decision. Now we don’t have the data behind that assertion. But 1000 approvals is a substantive start.
From FNMA, 2021
“We are making a groundbreaking update to our automated mortgage underwriting system, Desktop Underwriter®, to allow lenders to consider a history of recurring rent payments in assessing eligibility. It seems obvious that if someone is paying rent consistently it’s likely they could and would pay their mortgage consistently, too. Yet we believe this will be the first time any large-scale automated mortgage underwriting system will leverage electronic bank statement data to consider positive rent payment history.
This is one important step in correcting housing inequities and encouraging the housing system to develop new ways to serve all of society safely and fairly. While credit history is a key element in evaluating a borrower’s ability to make a mortgage payment, building credit in the United States is not an equitable endeavor. Most ways to establish credit involve student loans, credit cards, or parental co-signers. But, people of color are statistically less likely to use these forms of credit to manage their financial lives.
As a result, people of color are disproportionately represented among the 20% of the U.S. population having little to no established credit history. Our National Housing Survey® found that Black consumers identify insufficient credit score or credit history as their single biggest obstacle to getting a mortgage – and do so at a much higher rate than white consumers (29% to 18%).”
How It Works
For rent payments of $300 or more per month, DU will attempt to identify consistent payment amounts from the 12 months of transaction data appearing on the verification of asset (VOA from a qualified provider) report obtained by the lender that aligns with the rent amount provided on the DU loan application. Split rents and rents paid to a roommate will also work. As long as the verification amount is no less than $300, the AU counts it as a positive.
This is a positive-only change. Rent payments absent from the asset report will not be counted against a borrower because DU cannot determine if payments were missed or if the borrower paid through a different method, such as cash, for a given month.
First-time homebuyers with a limited credit history or a fair or poor credit score may be more likely to benefit from a positive rent history (DU only looks for on-time payments, not late payments).
To be eligible, at least one borrower must:
- Be a first-time homebuyer purchasing a principal residence
- Have a credit score of at least 620 (nontraditional credit is not permitted),
- Have been renting for at least 12 months
- Have rent payments of $300 or more per month, and
- Have bank accounts that document the most recent 12 months of recurring rent payments
Asset validation may also enable DU to analyze large deposits, cash to close, reserves, and gift funds. Look for available fintech services to increase efficiency and better leverage origination opportunities.
The FHLMC Is Onboard
The FHLMC recently announced the ability to consider rental history within its AUS (LPA) using the Asset and Income Modeler (AIM) solution.
See the FAQ from FNMA here: https://singlefamily.fanniemae.com/originating-underwriting/faqs-positive-rent-payment-history-desktop-underwriter?_ga=2.105415555.1807819321.1655832730-2127684237.1655832730
IT’S SUMMERTIME; CAN YOU AFFORD TO STOP LEARNING?
Time to up your game with the Tip of the Week
Reason Your Way to Success
One thing is for sure. The more things change, the more they stay the same. Over the next few weeks, the Loan Officer School Journal hopes to provide readers with a few outside-the-box origination opportunities.
Unfortunately, ideas alone are cheap and hold little or no value. It is the nexus of action + ideas = value. I am a fan of using small steps to get big things done. And so, this particular angle permeates much of what we will examine. As the Journal provides some perspective on novel and old business development plans, please keep the necessity of action in mind.
One of the ways you can moderate your ideas and plans is to begin planning with action first. Then add the great ideas. Yet people sometimes confuse “great ideas” for value. Really, it is a simple math equation. Watch this:
Great Idea + No Action = No value
Crappy Idea + Action = Value
Now think about this, if the required action is beyond the capacity of the one providing the action, there is no value to the idea. In reality, ideas without action have a negative value. The idea factory or fantasy takes the place of something of value. In other words, it is a zero-sum game. When you are doing one thing, you are not doing another. In finance, that is known as opportunity costs. Beyond the opportunity costs, guilt, frustration, and even defeatism can develop when your ideas go repeatedly unfulfilled. That can be some bad Juju.
Go back to the equation. Action is indispensable. Rather than start with the idea, begin with action. Then produce the idea. For example, what can you do between now and this time next week to prospect new business? Better yet, break down the time you can commit to the endeavor daily. A simple way to do this is by scheduling the activity on your calendar like you do anything meaningful—the old-fashioned time block.
A real estate agent I worked with many years ago was one of the most disciplined prospectors I’d ever met. Whether it was a closing crisis, a beautiful day, or a lunch invite with someone he’d been trying to schedule time with, he fought to keep to his one-hour daily prospecting calls.
Can you carve one hour a day from your schedule? How about 30 minutes? Put that time on your calendar to do something you are not doing right now to prospect business.
If you commit just 30-60 minutes a day to something new, get ready to increase your productivity. The question now is the commitment to action and then the idea or activity. Stay tuned for more.
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.