Why Haven’t Loan Officers Been Told These Facts?
Sex Education from the Consumer Financial Protection Bureau and HUD
President Biden’s executive order 13988 extends the applicability of sex discrimination to the LGBTQ community.
Last week, the Journal reviewed HUD’s response to President Biden’s Executive Order 13988. This executive order requires federal agencies responsible for regulations prohibiting sex discrimination to promulgate a new definition of “sex discrimination.” This week, the Journal takes a detour before evaluating the CFPB’s response and the implications of the novel sex discrimination definition under Regulation B.
This brief detour is helpful to comprehend the term discrimination as found in the fair lending laws. The issue is not what it might appear to be on the surface. Loan Officers and other stakeholders sometimes fail to comprehend the term discrimination related to the ECOA and FHA. The word discrimination is frequently understood to mean prejudicial treatment. Terms like animus, racism, bigotry, misogyny, and homophobia go hand in hand with the contemporary use of the term discrimination. However, the ECOA and FHA distinguish two primary forms of discrimination. Under those laws, prejudicial biases related to unequal treatment along protected class lines fall under the rubric of discriminatory intent.
Yet perhaps the more widespread form of discrimination violations falls under a different doctrine of discrimination called discriminatory effect, resulting in disparate impact.
From the Code of Federal Regulations, which administers and implements the FHA:
“24 CFR 100.500(a) Liability may be established under the Fair Housing Act based on a specific policy’s or practice’s discriminatory effect on members of a protected class under the Fair Housing Act even if the specific practice was not motivated by a discriminatory intent.”
Similar to Regulation B
12 CFR 1002.2(n) Discriminate against an applicant means to treat an applicant less favorably than other applicants.
12 CFR 1002.4(a) Discrimination. A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.
12 CFR 1002.4(a)-1 Disparate treatment on a prohibited basis is illegal whether or not it results from a conscious intent to discriminate.
This doctrine can be confusing. For example, how does one unintentionally treat a community or an applicant prejudicially? Unconscious bias (biases affecting our thinking yet hidden from our awareness) is more psychological than legal doctrine. Sensitivity training addresses bias issues.
The challenge of the psychological bias may overlap the legal doctrine known as discriminatory impact. Yet, despite any nexus between bias and discriminatory effect, the Journal shall attempt to bifurcate the two topics for the sake of clarity.
Next week the Journal looks at how the CFPB came to adopt the legal doctrine of discriminatory effect and why the doctrine is not going away. And eventually, how the CFPB responded to President Biden’s Executive Order.
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 :).
Leveraging Adverse Actions and Unqualified Prospects – Rehabilitation & Remediation
In some cases, rehabbing your relationship with the stakeholders is the first order of business. If the stakeholders blame you for their predicament, you need rapport rework.
There is always room for improvement. First, ask the referral source and the applicant if they feel you could have done more to serve them better. Listen, don’t defend or argue! Then, grab the bull by the horns. Acknowledge what they have communicated. Thank them for their feedback. If you made mistakes, consider the Asoh defense. Let them know you won’t rest until the buyer becomes a homeowner. Ask for another opportunity to help them pursue their goals. See the LOSJ V2I2.
Use the exchange to rebuild the stakeholder’s impression of you. Go for trust and rapport. See the LOSJ V1I19 on influence and communications.
Demonstrate that you care. You are not perfect, but you are up to the task. Finally, go back to the buying process. Revisit the buying process series beginning in the LOSJ V1I5.
Return to the basics. Your objective is to serve the stakeholders by regaining buy-in from the applicant and the referral source—no charge to “sign-up” for your farm team. Again, reinforce the concept that financing is not if but how and when.
The next step is to show them The Plan.
1) Identify the primary obstacles to homeownership or financing.
2) Diagram the workflow necessary to produce the deliverables needed to overcome the obstacles.
3) Create a schedule with key milestones aligned to the deliverables from the workflow.
The Plan affords the step-by-step process from no to go and should include a workflow diagram and schedule. Ideally, the schedule should map the fulfillment of financing objectives (deliverables) on a timeline using milestones. The workflow outlines the activities necessary to produce the deliverables essential to the loan approval. Specific deliverables might include:
- Secured credit cards
- Rebuilding credit scores
- Establishing traditional credit
- Building and leveraging nontraditional credit
- Credit repair
- Financial Counseling
- Homeownership counseling
Some MLO’s do a reasonable job of mapping the path to homeownership. Unfortunately, many more don’t do well when remedial workflow and revised schedule mapping become necessary. Turndowns require MLO leadership. Your leadership of the necessary remediation involves sound communication, specificity, clarity, and accountability.
Additionally, don’t limit remediation to your failed applications. Instead, broaden your outreach to include prospecting failed applicants from other sources. Become – the Act II Mortgage in your community. Collect failed applicants from other lenders. Now and then, you will get a failed application that was mishandled. Accordingly, the applicant is viable and ready to go now. In broadening your remediation to failed applicants from other lenders, you can simultaneously collect referral sources and buyers.
By facilitating the applicant’s involvement with a structured remediation program, you assist the referral source in preserving their relationship with the buyer. At the same time, you give a hurting prospect hope and another chance at homeownership. In doing so, you position yourself to turn the latest addition to your farm team into a referral machine. Not for just one or two months, but the next one or two years.
There is nothing like the demand for immediate gratification to land a turd in the punch bowl. Hoping to uncover some silver bullet to meet their want of immediate gratification, stakeholders could bombard you with “what-ifs.” Expect this when getting new team members settled into the farm team.
Your farm team could become an enormous drain on your time and patience. Be the leader you need to be. They want gratification first and then hope. You can give them both. Not by making odds, guessing at percentages, or commenting on all the scenarios the stakeholders drum up. Avoid prognostications. Follow The Plan.
The gratification comes when they watch you put your finger on the timeline and tell them, “when we get here, you’ll need to get ready to find your new home.” They will experience gratification and accomplishment as they check off the tasks necessary to produce the deliverables. These deliverables become the stepping stones to homeownership.
Next week the Journal further unpacks the financing deliverables, the stepping stones to get from No to Go.
Tip of the Week
The Loan Presentation and the Importance of Options
How to Improve the Buying Decision with a Meatball (a Softball first)
When presenting options to the consumer, keep neutral about which option you think is best.
When MLOs tell the applicant what loan is best, the MLO may short circuit the cognitive process of the applicant in discerning the best loan option. The applicant’s ah-ha moment and ensuing buy-in come from their comprehension of discrete solution benefits. If the applicant relies on the MLO to tell them what to do, they bypass this step. Therefore, if asked your opinion on which financing is best, don’t be so eager to sound off.
Applicants may appear to want the MLO to tell them what to do. That’s because they have a lazy- brain. Lazy-Brain is the natural organic defense against cognitive overload. They have a lot on their plate and prefer to avoid the additional work of analyzing your LE or fee sheet. MLO’s should resist the temptation to accept the applicant’s abdication from considering the options. The applicant’s buy-in or lack of buy-in bears positively or negatively on the loan process, the solution, the lender, and the MLO!
The applicant needs options to determine the best mortgage solutions: no options = second thoughts, insecurity, and doubt about the selected financing, lender, and the loan officer.
Presenting options is also salesmanship 101. It is far more difficult for the prospect to give the intent to proceed with only one solution presented. It is far easier on the prospect’s emotions to give them a choice. The “best mortgage” is only identifiable in a comparative analysis. Don’t make the prospect go to your competition to get the options necessary to advance the loan.
First, it’s a good idea to provide a “stinker” (a.k.a. the Meatball) in the presentation mix. The Meatball is a viable solution but is inferior to the other solutions. Before evaluating more competitive comparisons, start with a Meatball for warmups. It attunes the prospect’s intellect to pick the right loan by providing an easy comparison. A good stinker is a 30 year fixed rate loan with a couple of discounts (points to buy down the interest rate) or an ARM with a minimal discount to the 30 year fixed rate. Have them compare the Meatball to the fixed rate at one plus zero.
The stinker enables the applicant to better comprehend the concepts of trade-off and ARM discount (the difference between the ARM introductory rate and a 30 year fixed rate) at the same time. Once you get them warmed up, they can better sort through more nuanced comparisons.
The trade-off, sometimes known as “premium pricing,” is a mortgage structure that allows the lender to generate a premium for delivering a higher interest rate to the investor. The lender then uses that premium for profit, obviating the broker’s need to charge the applicant an origination fee to generate gross profits. See the CFPB Toolkit page 9.
Include these two options for every loan presentation. 1) A 30 year fixed rate with a 1% loan origination fee 2) A 30 year fixed rate with no loan origination fee (if the borrower expresses a preference for 15 year fixed, substitute the 30 to 30 with a 15 to 15 comparison).
For example, let’s assume the applicant goes for a gross loan of $492,100. The loan payment at 2.75% equals $2009, with a one-point origination fee of $4921. Instead of the 2.75% rate, we can offer the applicant a 3.00% rate, resulting in a “0+0” quote – no origination fee/no discount. The difference in monthly payments between the 2.75% and 3.00% rates is about $66.00 per month. Which is the better deal? Don’t tell, ASK!
Assume the applicant saves $4921 at closing with the 3.00% rate. If the applicant is in the property for three years, the higher 3.00% rate costs ($66 x 36) $2376 more interest than the 2.75% rate. However, with the higher 3.00% rate, the applicant saves the $4921 Origination fee. Despite the higher rate, the applicant nets a savings of $2545 over the three years at the higher rate ($4921 – $2376 = $2545). ASK – Which of these structures makes more sense? WATCH AND LISTEN to their response. Let them tell you WHY one solution is better than the other. Then, if it is beneficial and you know how to present opportunity costs (alternative uses of the origination fee) – add that to the mix.
The 30-year rate structure is a helpful baseline that allows the applicant to quantify the benefits of other solutions like the 5/1 ARM or 15 year fixed rate. For example, why should an applicant accept the uncertainty attendant with the 5/1 ARM? “Compared to the 30-year fixed-rate 1 + 0 option, you could save $7,125 over five years.” “Why would I go with a $1000 higher monthly payment? “Because you then own your house free and clear in just 15 years.”
Be mindful most consumers tend to overweight the interest rate’s significance and benefits compared to the closing costs.