All posts by Synergy

Changes to LO Compensation on the Horizon ?

The year 2019 will bring big changes to the financial services industry. Kathy Kraninger’s recent confirmation as Director of the Consumer Financial Protection Bureau understandably raises hopes that that this year will see a rebalancing of the key mortgage regulations to expand credit availability and maintain key protections for consumers, while lessening burdens on industry. The MBA has outlined many such changes in our responses to the Bureau’s requests for information or RFIs. That exercise also made clear that changes to the LO Comp rule should be the Bureau’s top priority this year.

Loan Originator Compensation (LO Comp)

The original impetus for the LO Comp rule was to protect consumers from steering. In the current regulatory environment, the harm associated with steering—borrowers agreeing to a loan they do not understand and cannot repay—is less likely. The LO Comp rule obviously plays a part in this, but so does the other regulatory actions adopted following the passage of the Dodd-Frank Act. After more than five years under the rule, it is clear that certain limited changes should be made to retain core consumer protections while enabling a more competitive and transparent market.

The LO Comp rule, while well-intentioned in conception, is causing serious problems for industry and consumers because of its overly-strict prohibitions on adjusting compensation, and the amorphous definition of what constitutes a “proxy” for a loan’s terms or conditions. These harms are felt when borrowers are unable to obtain lower interest rates from their lender of choice when shopping for a mortgage, or when lenders are unable to hold loan officers accountable for errors in the origination process.  Consumers are also harmed when lenders limit their participation in special programs designed to serve first-time and low- to moderate-income borrowers. Three important changes could address these problems:

Change One: The Bureau should allow loan originators to voluntarily lower their compensation in response to demonstrable competition in order to pass along the savings to the consumer.

The Bureau’s rule provides that a loan originator’s compensation may not be increased or decreased once loan terms have been offered to a consumer. This provision is designed to eliminate financial incentives for a loan officer to steer a consumer to a higher interest rate or a higher-cost loan.

However, the rule as implemented has the effect of prohibiting reductions in compensation that could otherwise be passed along to the consumer in the form of a lower-priced, more affordable loan. This also has the effect of reducing the consumer benefit that comes from shopping across multiple lenders in order to negotiate the best interest rates and other terms.

Currently, in such situations, a lender must decide between lowering the interest rate, fees, or discount points to meet the competition (and thus possibly originating an unprofitable loan with the fixed loan originator compensation), or declining to compete with other loan offers. The requirement to pay the loan originator full compensation for a discounted loan creates a strong economic disincentive for lenders to match interest rates. For the consumer, the result is a more expensive loan or the inconvenience and expense of switching lenders in the midst of the process. This anti-competitive feature impedes loan shopping and discourages price competition. Clearly this is contradictory to the stated aims of the Bureau’s Know Before You Owe/RESPA-TILA Integrated Disclosure rulemaking, which seeks to encourage shopping and empower the consumer to negotiate.

To address this unintended outcome, we urge the Bureau to amend the rule to permit lenders to respond to demonstrable price competition with other lenders by allowing the loan originator to voluntarily reduce his or her compensation in order to pass along the savings to the consumer. This change would significantly enhance competition in the marketplace, helping lenders to compete for more loans, while also benefiting consumers who may receive a lower interest rate or lower-cost loan offer.

Change Two: The Bureau should allow lenders to reduce a loan originator’s compensation when the originator makes an error.

The LO Comp rule currently prevents companies from holding their employees financially accountable for losses that result from mistakes or intentional noncompliance with company policy when they make an error on a particular loan. As it stands, a loan originator who is responsible for an error may not bear the cost of that mistake when the loan is originated. This result runs directly contrary to the central premise of the Dodd-Frank Act amendments to TILA that led to the LO Comp rule, compensation is the most effective way to incentivize loan originator behavior.

The inability to tie compensation to the quality of a loan originator’s work on a given loan severely restricts the creditor’s ability to manage its employees and disincentivize future errors. Effectively, the creditor is left with two extreme options in response to the mistake: fire the loan originator, or pay them full commission despite the error. This binary choice does not serve the interests of consumers, creditors, or loan originators. Ultimately, greater accountability on the part of loan originators will incentivize them to reduce errors and consistently comply with regulatory requirements and company policy, leading to a safer and more transparent market for consumers.

Change Three: Lenders should be allowed to alter loan compensation in order to offer loans made under state and local housing finance agency (HFA) programs.  

TILA now states that “no mortgage originator shall receive from any person and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).” The LO Comp Rule broadly prohibits compensation based on loan terms or proxies for loan terms, while providing a short list of expressly permissible compensation factors. In practice, this requirement is understood to forbid varying compensation for different loan types or products, including loans made under housing finance agency (HFA) programs.

However, the assistance provided through these programs is not without costs.  The robust underwriting, tax law-related paperwork, yield restrictions, and other program requirements make HFA loans more expensive to produce. HFAs also frequently cap lender compensation at levels below what a lender typically receives on a non-HFA loan. Covering these expenses is particularly difficult given that many HFA programs include limits on the interest rates, permissible compensation, and other fees that may be charged to borrowers. In the past, lenders would address this challenge by paying loan originators a smaller commission for an HFA loan than for a non-HFA loan. The inability to do so today reduces the ability of companies to offer HFA loans, particularly when producing these loans results in a loss. HFAs report that some lenders have left their programs and others have limited the volume of their participation. The Bureau should address this dilemma through an exemption in the LO Comp rule for HFA loans.

These loans encourage homeownership in a responsible and well-regulated manner. HFA programs provide participants with much-needed access to credit, along with housing counseling and financial education. HFA loans and partnerships with HFAs are important tools to ensure increased access to credit through Fannie Mae and Freddie Mac under the conservatorship of the Federal Housing Finance Agency. HFA programs are particularly important for first-time homebuyers and low- to moderate-income (“LMI”) families who are often underserved and encounter difficulty gaining access to credit elsewhere. In 2016, the latest year for which comprehensive data is available, the median borrower income for all HFA program loans was $49,598, 14 percent below the national median income for the year.

The inability to reduce loan originator compensation to offset HFA production costs under the current LO Comp Rule harms consumers by reducing the availability of these vital programs. Companies that wish to offer these loans do so at a loss. This has the effect of limiting the number of loans they can make and thereby reducing competition, and raising prices, for loans in LMI communities. The Bureau should address this by creating an exemption or alternative path to compliance loans made under local bond or HFA programs.

The rule’s rigidity makes HFA loans less available to consumers in LMI communities, a perverse result given that the rule was intended in part to protect LMI consumers from being steered into expensive loans with higher rates or fees. These unintended consequences need to be addressed. Similarly, CFPB has exempted loans directly originated by HFAs from the High-Cost mortgage rule and classified all HFAs as “small servicers” under its mortgage servicing rule, regardless of the size of their servicing portfolios.


The LO Comp Rule remains a top priority for MBA going into 2019. Industry and consumers would be better served if targeted changes were considered after five years of experience with the rule. We hope that Director Kraninger considers doing so at the beginning of her tenure.


The Latest Compliance Requirements for TRID and TRID 2.0

Although it had been several years since the housing crises, in the third quarter of 2015, residential mortgage backed securitizations were still sailing into headwinds as the private label securitization market was still a fraction of its former self. Lenders were finally getting a firm footing after the Dodd-Frank based regulatory changes effective starting with loan applications received January 10, 2014, most significantly introducing the Ability to Repay testing and modifying the federal high cost testing under the Home Ownership and Equity Protection Act.

Lenders were preparing for the TILA-RESPA Integrated Disclosure Rule (TRID), effective with loan applications as of October 3, 2015. The 1,888 pages of TRID meticulously rewrote the mortgage disclosure process with thoughtful detail, with the intention of making the mortgage origination process more transparent with easier to understand disclosures for consumers. The new disclosure requirements, also referred to as Know Before You Owe, were developed by the Consumer Financial Protection Bureau (CFPB) to help consumers understand the loan terms, loan features, and charges to facilitate shopping for loans they were considering. Two new disclosures, the Loan Estimate and Closing Disclosure, replaced the existing Good Faith Estimate, Initial TIL Disclosure, Final TIL Disclosure and Settlement Statement. Lenders were unaware of the severity of the storm coming over the horizon.

Despite the entirety of the mortgage origination industry focusing its efforts on defining the origination requirements of TRID, the secondary market was left to focus on defining the liability surrounding these new disclosure obligations that was not abundantly clear, specifically attempting to quantify the risk that the investor may face in the event that investor purchased a loan that contained a violation of TRID. The uncertainty surrounding the potential liability was compounded by the extreme scrutiny being placed on the disclosure timing and content that resulted in the perfect storm of compliance exceptions being identified on loans evaluated for secondary market acquisition.

The loans being reviewed were evaluated under a microscope with every misstep by the originating lender rendering an exception on the loan cited by the third-party review (TPR), firms as a material exception that required remediation, if remediation was available. It was more than a single rogue wave. The market liquidity for residential loans slowed to a standstill as aggregators, TPR firms, creditors, lawyers, and rating agencies tried to distinguish between significant compliance exceptions and others that could be included in securitizations. Anyone on the boat at that time was sure to put on their life jacket while bracing against the waves and winds that effectively stopped forward progress and threatened to capsize the market.

As a result, the Structured Finance Industry Group (SFIG), the trade association to the capital markets, through the SFIG RMBS 3.0 due Diligence, Data and Disclosure Workgroup took on the challenge of tying each and every provision of TRID to the specific liability provision of TILA with the primary goal of creating a uniform testing standard as a result of a consistent Truth-In-Lending Act liability interpretation according to their understanding of prevailing legal precedent and informal written guidance and webinars offered by the CFPB, as it applies to the Know Before You Owe/TILA RESPA Integrated Disclosure Rule.

This workgroup included individuals representing prominent law firms, TPR due diligence companies, rating agencies, issuers, and other industry participants. This SFIG effort resulted in the first version of the RMBS 3.0 TRID Compliance Review Scope© published on June 15, 2016, understanding that the conclusions set forth therein do not necessarily reflect how courts and regulators, including the CFPB, may view liability for TILA violations presently, or in the future. The first version of the SFIG TRID Compliance Review Scope proved to be the catalyst that the secondary market needed to confidently commence purchasing loans subject to TRID, providing much needed liquidity to the origination market. Since June of 2016, the rating agencies, TPR firms, and the capital market investors have confidently followed the SFIG TRID Compliance Review Scope effectively placing the private label securitization marketplace back on a strong footing.

On October 18, 2018, the SFIG RMBS 3.0 Due Diligence, Data and Disclosure Working Group published an updated version to the RMBS 3.0 TRID Compliance Review Scope© (v2) based on the Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (Regulation Z) as published in the Federal Register [82 FR 37656] on August 11, 2017, (with an optional compliance date of October 10, 2017, and a mandatory compliance date of October 1, 2018), the updates related to the Black Hole that were effective June 1, 2018, and the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted on May 24, 2018.

The RMBS 3.0 TRID Compliance Review Scope v2, as it reflects the amendments made by TRID 2.0, have included additional clarity. The guidance and clarifications made by the CFPB, with TRID 2.0 and the subsequent Black Hole Amendment, effectively reinforced the risk previously identified by the original RMBS 3.0 TRID Compliance Review Scope©, and now with 2.0, this reduced some testing requirements, reduced the materiality of certain tests, and the addition of a few tests. The impact of v2 will be fewer material compliance exceptions with the associated grading that would have otherwise, previously, prevented loans from being purchased by an investor, whereby the mortgage was targeted for a rated transaction.

SFIG, and its membership that participated in the drafting of the original RMBS 3.0 TRID Compliance Review Scope and in the updated v2 scope created a new standard in transparency in aiding the entire mortgage lending industry in translating and navigating the complicated mortgage lending regulatory regime with an eye toward building confidence in the secondary market ensuring that high quality mortgages can make their way into rated securitizations, thereby providing the necessary liquidity to the marketplace, and making homeownership a reality for more consumers.

Although over two years passed between the initial version of the SFIG RMBS 3.0 TRID Compliance Review Scope and the recently published v2, further refinements will be forthcoming in 2019, as SFIG continues the ongoing standardization of the TRID review scope while incorporating additional feedback from market participants, CFPB enforcement actions, regulatory clarifications, or caselaw. The v2 scope document is part of the ongoing output of the SFIG work groups to bring consistency to the due diligence reviews performed as part of securitization reviews.

In addition to working with market participants, SFIG is actively working directly with the CFPB to share the concerns and impediments to future securitizations based on regulatory uncertainty to attempt to obtain regulatory updates as well as informal guidance to ensure compliant loans are flowing into ongoing securitizations to foster a robust private label securitization for RMBS transactions.

There is a common reference regarding the calm before the storm, but the real calm comes after the storm has been faced. One would be remiss to think only smooth sailing lies ahead, but the winds have shifted and with the breeze at our backs and smooth water ahead, the SFIG workgroup strives to see the private label securitization of RMBS under full sail.


TRID 2.0 and Compliance Risk Mitigation Strategies

(As published in ABA Bank Compliance magazine in Janary 2019)

We’re now a few months past the mandatory effective date of “TRID 2.0,” and many mortgage lenders may be lulled into thinking it’s back to business as usual. However, with a regulatory initiative as massive as TRID, now is an ideal time to circle back and ensure your implementation efforts hit the mark, are in compliance, and that your disclosures match your actual policies and practice.

This article will review the TRID 2.0 amendments with an eye towards a few disclosure requirements that represent potential compliance risk. It will also discuss potential enhancements to TRID and future regulatory change. Could TRID 3.0 be on the horizon?

Setting the Stage

Compliance with the July 2017 amendments to the TILA-RESPA Integrated Disclosure (TRID) rule became mandatory on October 1, 2018. Dubbed TRID 2.0, these amendments provide technical corrections, clarifications and substantive changes to the original TRID rule that went into effect in October 2015.

At this juncture, much has been said and written about TRID 2.0 implementation. From a regulatory perspective, the Bureau of Consumer Financial Protection (“bureau”) itself has chimed in. The TRID 2.0 final rule contains a preamble that spans hundreds of pages and offers detailed discussion regarding compliance expectations. In addition, the bureau updated both the Small Entity Guide and the Guide to Forms to reflect the TRID 2.0 changes.
Clearly the industry is well-positioned to know “what” TRID compliance requires. Now the tide turns to managing the “how” and ensuring steps are taken to limit the risk of noncompliance.

TRID 2.0 Compliance Risk

Cooperative Units: TRID 2.0 provides much-needed clarification regarding mortgage loans secured by a cooperative unit. It creates a uniform rule whereby all closed-end consumer credit transactions (other than reverse mortgages) secured by a cooperative unit are covered—regardless of whether the unit is considered real or personal property under state law. Most TRID loans secured by a cooperative unit now trigger a Loan Estimate, a Closing Disclosure, the Special Information Booklet, and the record retention requirements.

Risk Management Considerations:  If you classify a cooperative unit as personal property for other purposes, ensure that your workflows and software systems are updated for TRID coverage. Also verify that staff is trained and understands the TRID impact on loans secured by a cooperative unit. Finally, ensure that you do not mix and match disclosures, for example, providing a non-TRID Good Faith Estimate or other early disclosure with a TRID Closing Disclosure.

Subordinate Lien Housing Assistance Loans: Currently, certain housing assistance loans may be exempt from TRID if six specific criteria are satisfied. TRID 2.0 modifies one of the criteria regarding costs payable by the consumer. The modification provides that transfer taxes, along with recording, application, and housing counseling fees, may be payable by the consumer. In addition, recording fees and transfer taxes are now excluded from the one percent cap on total costs payable by the consumer at consummation.

Risk Management Considerations:  If relying on an exemption from TRID, ensure that evidence of compliance is retained documenting the limit on the types of costs payable by the consumer and adherence to the cap on total costs payable by the consumer. This documentation should be retained in the loan file for examiner review and is not required to be provided to the consumer.

Also, verify that your organization has determined which Truth-in-Lending disclosures it will provide for such housing assistance loans. Although housing assistance loans may be exempt from TRID disclosures, they are nonetheless federally related mortgage loans that are otherwise covered by Regulation Z. This means that the “Fed Box” disclosures as outlined in section 1026.18 of Regulation Z would apply. In lieu of the “Fed Box” disclosures, lenders have the option of providing the TRID disclosures.

Right of Rescission: TRID 2.0 clarifies that with respect to the Closing Disclosure, only disclose the consumer’s name and mailing address under “Borrower.” The Commentary now specifically provides that the term “consumer” is limited to parties to whom the credit is offered or extended. While other parties to the transaction may have rescission rights because they’ve offered property as security for a loan, those rights do not create “borrower” status.

Risk Management Considerations:  Although not necessarily a new concept, ensure that staff is trained to understand the difference between a “borrower” and a party with   rescission rights only. Labeling a party with just rescission rights as a “borrower” may infer repayment obligations and could be deemed deceptive.

Remember that rescission provisions are independent of the TRID disclosure timing requirements. Those with the right of rescission have three business days to rescind the transaction, typically starting from the date the final Closing Disclosure is provided. Ensure your closing workflows and timelines reflect the three-day right of rescission.

Fees and Tolerances: TRID 2.0 clarifies that for purposes of meeting the “good faith” standard, certain charges paid to an affiliate of the creditor are an unlimited tolerance item. These certain charges are prepaid interest, property insurance premiums, amounts placed in impound accounts, charges paid to a third-party service provided selected by the consumer that were not included on the lender’s Written List of Providers, and charges for third-party services that are not required by the lender.  Note that while subject to unlimited tolerance standards, the above charges must be disclosed in good faith using the best information reasonably available.

In addition, TRID 2.0 addresses the tolerance threshold for a non-compliant Written List of Providers. TRID requires that the providers disclosed on the written list correspond to the required settlement services for which the consumer may shop, as disclosed on the Loan Estimate. If you fail to provide a compliant, Written List of Providers, fees that would have otherwise been in the “no tolerance” category because the borrower selected their own provider, will instead fall in the 10 percent category and, potentially, the zero percent category if paid to an affiliate.

Risk Management: Regularly train staff on the importance of disclosing fees that are legitimate, using the best information reasonably available. Tolerance violations may trigger costly cure provisions. In addition, failure to disclose fees and/or disclose a compliant, Written List of Providers could be deemed a Regulation Z violation.

Post Consummation Notices:  As required pursuant to other Regulation Z provisions, certain loans trigger a notice in connection with the cancellation of an escrow account and a disclosure regarding the partial payment acceptance policy in a mortgage loan transfer notice.  TRID 2.0 clarifies that if such post-consummation notices are required, they must be provided regardless of the loan application date. Previously, the post-consummation notices were only required for covered transactions if the application was received on or after October 3, 2015 (TRID effective date).

Risk Management Consideration:  Verify that workflows and documentation systems are updated to address the post-consummation notices for all covered loans, regardless of the application date.

Total of Payments Tolerance: TRID 2.0 now subjects the Total of Payments (TOP) disclosure to tolerance testing. The Total of Payments disclosure will be considered accurate if the amount disclosed is overstated or if the amount is understated by no more than $100. This is the same accuracy standard used in calculating and disclosing the finance charge.

Risk Management Consideration:  Ensure that you regularly perform tolerance testing. Understatements of the TOP that are greater than $100 violate Regulation Z and may extend the right of rescission time period.

Numerical Rounding: TRID 2.0 provides for a new requirement when rounding percentages.  Disclosures involving a percentage must be rounded at three decimal places, with all trailing zeroes to the right of the decimal place dropped. So, for example, a 2.4999% APR will be rounded to and disclosed as 2.5%, while a 7.000% APR will be disclosed as 7%. With respect to dollar amounts, several disclosures must be rounded to the nearest whole dollar. And when it comes to disclosures involving a zero amount, note that in the “final” column of the Cash to Close table, if the calculation yields a zero, that should be disclosed as a single digit—i.e. $0, not $0.00.  However, for prepaid interest in the “Other Costs” table—if no prepaid interest will be collected at consummation, the amount should be disclosed as “$0.00.”

Risk Management Consideration: It’s a picky point, but the rounding provisions do vary within the TRID rule and within the Loan Estimate versus the Closing Disclosure. Ensure that your systems are generating figures that reflect the proper rounding requirements, and periodically audit your calculations.

Tolerance Cures and Principal Curtailments: TRID 2.0 clarifies how principal curtailments (reductions) may be disclosed, and it allows for the disclosure of such a reduction instead of a lender credit when providing a tolerance cure. Such principal reductions may be disclosed in the Summaries of Transactions table on the standard Closing Disclosure or in the Payoffs and Payments table on the alternative Closing Disclosure. In either case, curing the violation with a principal reduction will trigger additional disclosures.

Risk Management Consideration: There is some confusion over whether a principal reduction should be disclosed on line K4 or K5-7 of the Summaries of Transactions table. This confusion stems from the fact that one regulatory provision covers both line K4 and K5-7, and it doesn’t specify use of one line over the other or prohibit the use of one line over the other. However, given the “adjustments” title prior to lines K5-7, it seems these lines should be limited to contractual adjustments between borrower and seller and principal reductions should be disclosed on line K4. Confirm with your compliance team and documentation provider how your organization will handle the principal reduction disclosure. .

Revised Disclosures: TRID 2.0 addresses both revised Loan Estimates and revised Closing Disclosures. With respect to the Loan Estimate, if you issue a revision after the consumer indicates an intent to proceed with the transaction, you do not need to complete the expiration of closing costs date and time fields on that revised Loan Estimate.

In addition, TRID 2.0 makes clear that a revised estimate may be provided merely for informational purposes versus a revised estimate used to reset fee tolerances. Note, however, that any revised Loan Estimate—whether to reset tolerances or for informational purposes—must update all fee disclosures using the best information reasonably available.

On the Closing Disclosure side, if the Closing Disclosure becomes inaccurate post‐closing, and the only reason for the inaccuracy is due to per diem interest, then a corrected Closing Disclosure is not required. If the Closing Disclosure is inaccurate post‐closing for reasons other than the per diem interest, and the per diem interest is likewise inaccurate, then the per diem must be accurately disclosed on the corrected Closing Disclosure.

Finally, in addition to TRID 2.0, the Bureau issued a final rule closing the “Black Hole” when using a Closing Disclosure to reset fees. Here’s the scenario: Once the initial Closing Disclosure has been issued, a revised Loan Estimate can’t be issued. The Closing Disclosure may be used to reset tolerances. However, the revision of fees must be done within three business days of learning of the event that triggered the revision.  Furthermore, a disclosure that revises fees must be provided no later than four business days prior to consummation. The “black hole” is the gap between the end of the three business days period after learning of a change event, and the start of the four business days period prior to consummation. To make a long story short, the  “Black Hole” final rule removes the four business days prior to consummation limitation when using a Closing Disclosure to reset tolerances.

Risk Management Consideration: If you provide an informational revised Loan Estimate, ensure that the entire revised estimate is updated. Also monitor change events and the impact on fees carefully. Ensure staff understands that a Closing Disclosure may be used to reset tolerances without regard to the four business days prior to consummation limitation. Resetting tolerances where permitted can help avoid implementing cure provisions and potential Regulation Z violations.

On the Horizon

While TRID 2.0 provided a fairly good clean-up of TRID 1.0, areas of uncertainty and contention remain. At the top of the list are construction loans. TRID 2.0 does provide much needed guidance regarding how to disclose a construction loan, including updates to Appendix D and a section dedicated to compliance in the Small Entity Guide. However, many in the industry continue to struggle with disclosure of such loans. Lenders are asking the Bureau for an exemption from TRID requirements for single-family residential construction loans. Citing consumer confusion and disclosure burden that is forcing many lenders out of the construction loan market, the industry is asking that at a minimum, the Bureau reduce liability enforcement.  From there, lenders hope the Bureau would consider adopting a more streamlined disclosure process whereby lenders can disclose basic information using a format of their choosing.

Along the lines of enforcement, the industry is also asking that the Bureau expand the ability to cure minor TRID errors. While TRID does provide measures for revising fees and resetting tolerances, many believe provisions to “fix” a problem are too burdensome and complex and must be simplified. The industry is also requesting an amendment that would extend the time to cure a violation after consummation. Such an extension would provide lenders more time to carefully review loan documentation post-consummation and make necessary corrections and refunds. While the Bureau may consider such requests, there is regulatory concern that additional cure provisions could reduce the incentive to comply with the TRID rule.
Needless to say, the industry hasn’t heard the last word on TRID as compliance requirements and expectations will continue to evolve. There is talk of repealing the Dodd-Frank Act altogether and thereby repealing TRID. Despite the new administration and a change in the bureau’s leadership, this might be wishful thinking at best. Institutions have dedicated significant resources toward TRID compliance, and who knows what might take its place if it were repealed. In the meantime, organizations should understand that compliance implementation is an ongoing process requiring continuous document review, policy and procedure audit and staff training. And despite political rumblings, institutions must stay the course and carefully manage TRID compliance and risk.



Sue Burt is a senior compliance consulting specialist with Wolters Kluwer. Her thorough knowledge of the bank regulatory environment is based on more than 30 years of industry experience. In her role with Wolters Kluwer, Burt uses her expertise to assist financial institutions in addressing compliance and other operational risk management issues.


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Buyback Risks Are Shifting – Mortgage Compliance

Virtually every step in the mortgage process has been impacted by new and evolving regulations, with hefty fines imposed for noncompliance. The sheer breadth of loan quality problems continues to adversely affect manufacturing productivity and production costs.

We can all surely remember when lenders were simply doing post-close audits on loan samples as required by the government-sponsored enterprises. Then TRID came along, putting any lender that produced an inaccurate disclosure at risk, followed by the new Home Mortgage Disclosure Act requirements — and things got even tougher.

But the demands for loan quality aren’t just coming from regulators and the GSEs. Your secondary market partners and investors don’t want to be left holding the bag if the loans you create have quality issues. Gone are the days of “ship and hope.” When investors buy loans, there’s a huge liability attached. Investor scrutiny has increased so much, in fact, that investor requirements can seem as strict as regulators’. This has heightened the quality mandate and placed more emphasis on post-closing, shipping and delivery.

Whether you realize it or not, the game has changed. The slow accumulation of new requirements and mandates created by the GSEs, TRID, HMDA, investors — as well as the onset of other risks such as False Claims Act charges and class action lawsuits — have pushed the stakes so high that conventional approaches to loan quality do not apply. That means lenders can no longer ensure loan quality by looking backwards, through post-close sampled audits or any other method. They need to address loan quality issues where they happen — in production.

Loan quality is now a loan-by-loan event that is best performed as loans are created, not after the fact. The regtech market is taking off because lenders are realizing they need to tackle loan quality issues as they happen, from the very point they begin gathering information to create a loan file. Regtech enables lenders to electronically view, validate and verify all the loan data and documentation as it’s introduced, lowering risk and saving money by increasing both processor and underwriter productivity.

The bottom line is that lenders just don’t have the luxury of going back in time to fix bad loans after they’ve already closed. Nor can they simply hope that their loan origination systems or staff caught every problem. Today’s loans must be done right the first time. The game has changed, and lenders need to play it differently before it’s too late.

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Housing Market Outlook – Theory 2

Economic growth is expected to slow in 2019 leading to stabilized home sales and mortgage rates, according to Fannie Mae‘s economic and strategic research group.

A widening trade deficit and moderation of business investment growth have Fannie Mae’s team predicting that full-year gross domestic product growth (GDP) will slow to a 2.3 percent increase — down from this year’s projected 3.1 percent increase.

Consumer spending will continue to be the largest driver of growth, but in the third quarter of 2018 business investment growth slowed significantly. It could be even further impacted by higher tariffs, uncertainty around trade deals and rising interest rates.

“We expect full-year 2018 economic growth to come in at 3.1 percent — an expansion high — before slowing markedly to 2.3 percent in 2019 and 1.6 percent in 2020,” Doug Duncan, Fannie Mae’s chief economist said in a statement. “Fading fiscal policy, worsening net exports, and moderating business investment all contribute to our projection that GDP growth will begin to slow in 2019.”

Purchase mortgage originations are expected to climb in 2019, but a substantial decline in refinanced mortgages is expected, which should overall result in a small drop in total origination volume, the research team said. Stabilizing mortgage rates — along with expected strong job growth — should give more prospective homeowners a chance to adjust to the new rates, the report states.

“If mortgage rates trend sideways next year, as we anticipate, and home price appreciation continues to moderate, improving affordability should breathe some life into the housing market,” Duncan said.


Housing Market Outlook – Theory 1

The housing market over the last five years have been marked by a shortage of homes for sale and ever-rising prices. This dynamic has been especially prevalent in coastal markets like New York, San Francisco, and Los Angeles, which tend to be expensive anyway.

Expectations were that this was going to continue, but in 2018, the market started to cool. This past summer—usually a busy season for homebuying—was suppose to be “the most competitive housing market in recorded history,” according to one realtor, with prospective buyers engaging in bidding wars over the few houses that were for sale.

That didn’t pan out, suggesting that home prices have finally risen beyond what people can actually pay; wages have risen at a much slower clip than home prices. The housing market follows the old economic principle of price being a function of supply and demand, and demand is strong with the economy doing well and older millennials finally entering stages of life that lead to buying a home.

Coming out of the summer on the West Coast, homes that were expected to spark bidding wars instead lingered on the market, leading to huge spikes in inventory for sale. San Francisco, San Jose, and Denver—some of the hottest markets over the last five years—were among the cities that saw the biggest inventory jumps.

This fall, those same markets saw median listings prices drop considerably. It’s important to distinguish the difference between a listings price and a sale price, because listings prices can still be bid up, but usually listings prices are leading indicator as to where home prices are headed.

If that holds true, 2019 could see West Coast home prices drop, which other than a few exceptions like 2008 rarely happens.

Speaking of the 2008 housing collapse, one might naturally be alarmed by the prospect of a housing slowdown, given the financial calamity that occurred as a result of the last housing slowdown. But conditions today are almost the complete inverse of conditions in 2008.

For example, most of the ills of the housing market leading up to 2008 were marked by lending practices that ranged from irresponsible to downright reckless. Ill-advised mortgages were spread through the entire global financial system via complex financial instruments, and when defaults started to rise, the system collapsed. But lending today is incredibly strict, so strict in fact that some in the industry believe the lessons of 2008 were over-learned.


Home prices have finally hit a wall on the West Coast
West Coast home prices are primed to drop. Here’s why.
10 years after the financial crisis, is the housing market still at risk?
There was also a housing surplus in the years prior to 2008. Regional home building companies had recently consolidated to form large national builders, which pumped out houses at dizzying pace. When the housing bust happened, the surplus of housing made price drops worse. But as mentioned, today there’s a housing shortage, even with the recent jumps in homes for sale. This means any type of slowdown would have a hard floor as far as home prices go.

It’s also possible that instead of home prices dropping, the pace at which they go up merely slows down or even flat lines. The overall strength of the economy remains strong, despite the recent stock market selloff. Unemployment remains remarkably low, and the U.S. is still gaining jobs. Wages continue to rise. The general conditions for the housing market to do well remain, even if a few high-priced markets went up a little too fast. Stay tuned.


Relaxed on Compliance ? Beware !!

Servicers can’t slack on compliance as states step up oversight: S&P
While the foreclosure crisis is over and federal regulators are being less assertive on enforcement actions, mortgage servicers can’t let their guard down about compliance, according to Standard & Poor’s.

That’s because lax federal oversight is being supplanted by state regulators and attorneys general stepping up enforcement activities.

Some of the recent positive news for the “beleaguered industry” included: acting Consumer Financial Protection Bureau Director Mick Mulvaney’s statements at the Mortgage Bankers Association annual convention, the Senate Banking Committee’s approval of Kathy Kraninger for the permanent job, the dropping of Real Estate Settlement Procedures Act cases against PHH and Zillow, and Brett Kavanaugh’s elevation to the U.S. Supreme Court.

“While we believe the regulatory landscape has changed and that these actions offer some promising developments for servicers, this overture could still prelude some hurdles,” said the report, written by Steven Frie and Mark Shannon. “Additionally, since servicers have invested considerable capital — both financial and human — we expect them to continue to follow industry best practices despite the possibility of loosening regulations.”

But as the CFPB backs off from the level of enforcement under former director Richard Cordray, some state regulators are looking to fill the void. New Jersey hired Paul Rodriguez to be director of the Division of Consumer Affairs and turn it into a state-level CFPB. Pennsylvania Attorney General Josh Shapiro created a Bureau of Consumer Protection.

Other state attorneys general have also said they will step up their enforcement. Plus the Multistate Mortgage Committee remains active, pointing to a 2017 settlement with PHH on legacy servicing issues.

“We believe that the regulatory environment will remain uncertain as the CFPB establishes its regulatory routines and enforcement protocols with servicers,” the report said. “State governments and the MMC remain challenges for servicers as new state-level consumer protection units take form and as states continue to work together to investigate and bring about enforcement actions. Therefore, servicers will likely still be diligent in identifying possible regulatory issues at the federal, state, or municipal levels.”

Servicers also need to be concerned about reputational risk if some companies backslide into prior practices.

“If anything, a continuing trend of even minor violations of the law will have an unfavorable effect on a servicer’s reputation and could invite scrutiny by federal or state regulators, regardless of loosening regulations,” the report said.

There is $10.2 trillion of mortgage debt outstanding as of the second quarter, up from $9.4 trillion on March 31, 2016, according to the MBA.


The Latest on HMDA

The Calm After the Storm: Regulatory Relief in the Wake of HMDA

It’s no secret that mortgage regulations impact smaller lenders to a greater degree than they do larger ones. The time and expense of collecting, analyzing and submitting Home Mortgage Disclosure Act (HMDA) data for fewer than 500 loans can negatively impact a smaller lender’s profitability and efficiency.

In recognition of the specific needs of smaller lenders, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which was signed into law in May. Section 104(a) of the law addresses HMDA compliance, granting institutions originating fewer than 500 closed-end mortgage loans in each of the two preceding calendar years with a partial exemption to reduce the regulatory burden.

Understanding the HMDA Exemptions

At the time mandatory HMDA compliance took effect in January, the number of required data fields more than doubled from 44 to 110.

For smaller banks and credit unions, efficiently managing these requirements can be very tedious, often requiring additional staff and higher compliance technology expenses. The partial exemption reduces the required data fields to be reported by smaller financial institutions, which, in turn, means that freed-up resources can be reallocated to customers.

In all, 26 data points are currently covered by partial exemptions. Because of that, The Bureau of Consumer Financial Protection in August released an interpretive and procedural rule to help affected institutions gain authoritative clarification and guidance regarding how to comply with these changes to HMDA, made by section 104(a) of the act. This rule should allow institutions that have these allowances to decide how to proceed with data collection and reporting.

These allowances should help partially exempt banks and credit unions alleviate the stress that comes with compliance changes, in turn, allowing loan officers to put their members and customers first and eliminate potential delays in the loan process. Note that for non-depository lenders of any size, this bill will not provide any additional relief.

Most Lenders Should Still Track Exempted HMDA Data
Most small credit union and bank lenders will still need to collect the new HMDA data, even if it is not required for the annual submission. One primary reason is that preparations for expanded data collection have already been done. Every major loan origination system has already rewritten their systems to include the new data fields, and vendors won’t create specific versions that exclude those fields.
Smaller banks and credit unions must also realize that while the exempted fields are not required for submission, fair lending reviews may still request all 110 data fields required under the new HMDA rules. Lenders that didn’t collect all the data may find it more time-consuming to verify that information in the heat of an exam than it would have been to collect the data upfront.

Also, if lenders anticipated being under the threshold for the year but end up exceeding 500 loans, they may find it difficult to retroactively obtain the required data fields for reporting.

Another consideration is the possibility of selling loans down the road. Financial institutions are required to report all 110 data fields for all purchased loans, even if the institution closes less than the 500-loan threshold. Therefore, if an institution sells one or more loans to another financial institution, the loan will no longer fall under that exemption rule, and the data that was at one point unnecessary then becomes a requirement for the completion of a HMDA submission.

It may be in the best interest of all parties to continue to collect all 110 data fields even though they may not all be required for the institution originating the loan.

Ultimately, the HMDA exemptions for credit unions and banks that close fewer than 500 loans per year can be beneficial. The submissions will be simpler with fewer data fields to scrub, and institutions can focus their resources on the loan business pipeline.
However, most lenders should still collect the expanded data to assist in fair lending reviews and simplify the sale of loans on the secondary market to investors that will need the additional data for their own compliance.


What To Do When You are Audited ?

Don’t Lose Your Cool When You Get Audited
There are ways to survive and thrive a gut-wrenching process
By Phil Mastin, assistant vice president and director of regulatory affairs, United Wholesale Mortgage; and Jeff Midbo, senior vice president and chief compliance officer/deputy general counsel, United Wholesale Mortgage | bio
You’re going to be audited. Those five words will make the hair on the back of any mortgage originator’s neck stand up.

Originators know they can be audited at any time and have come to expect it as part of their profession. Given current market trends and the climate of the Consumer Financial Protection Bureau right now, originators need to be more vigilant when it comes to examinations, both at the national and local levels.

For the first time in a long time, the industry is functioning as a true purchase market, with purchases making up over 70 percent of mortgage originations. That has cranked up the competition for business in a big way, which means intensified monitoring by national and state regulators to ensure that borrowers are protected.

Now, more than ever, it’s especially important for originators to be well-prepared and proactive in their compliance efforts. Following is an overview of what mortgage originators can do to make sure they remain compliant in today’s purchase-heavy market.
Key Points
Surviving your next audit
Build a relationship with the auditor.
Prepare ahead of time for the exam.
Be organized and diligent.
Show proper exam etiquette.
Determine the best person to answer key questions.
Ask lenders for an assist.

Prepare and organize
Mortgage originators know that relationships matter, both with their borrowers and real estate partners. They should take a similar approach with their regulators.

Regulators are not the “bad guys.” They are there to help professionals in the industry be successful the right way. Their rules are in place to protect the reputation and legal standing of businesses just as they are protecting consumers’ best interests.

Don’t be afraid to communicate with them. Regulators want originators to reach out if they have questions so they can get them the information they need. Regulators aren’t going to give you legal advice, but they will frequently provide feedback as to how they approach the various rules.

Set yourself up for success. Every originator is going to be subjected to an examination at some point, so be prepared. The 11th hour is not the ideal time to start focusing on compliance.

Originators need to prioritize compliance from the moment they are licensed to avoid being in scramble mode while preparing for an examination. Don’t hope for the best when it comes to exams. Being prepared is half the battle.

Make sure that you are organized. During an exam, there is always a back and forth between originators and examiners. Be diligent about what documentation you’re providing and what’s requested of you.

This ensures that you’re not missing things and you’re fulfilling all of your obligations to the regulator. Make sure you know where your loan files are, make sure they’re organized, and make sure you can provide a clean set of documentation to the regulator. If you give them everything in a timely, organized fashion, and it’s compliant because you’ve been doing due diligence all along, it’s going to make everyone’s life easier, especially yours.
Seek the right answers
When an exam is in progress and regulators are at your office, things can be a little awkward. But they don’t have to be. Being pro-active in communicating with your examiners will go a long way toward ensuring things go smoothly.

When the regulators are communicating with you, respond in a timely and accurate fashion. If they ask for something, and you don’t have it at your fingertips, let them know you’re working on it.

By showing a sense of urgency, you show the regulators that you’re taking the exam seriously. If you don’t, how do the regulators know that you’re giving compliance in general the attention it deserves when they’re not in your office?

When it comes to compliance, don’t try be a hero if you don’t have the cape. Meaning, if you’re not the best person at your company to handle compliance, then find somebody who is. It can be another originator, an office manager and so on.

You don’t need to be an attorney to be aware of how the business is being conducted, but it is important that someone is identified who can stay on top of it. Originators need to understand their strengths and weaknesses when it comes to compliance and act accordingly, so they’re set up for success when examinations occur.

If you have questions about any of the topics covered in this article, your lender may be able to point you in the right direction. Keep in mind, lenders cannot provide actual legal advice when it comes to compliance. As a trusted business partner who typically has more resources at their disposal, however, your lender can be a good source of information. Think of it this way: A lender can provide originators with the “why” behind the way things are done. They just can’t tell you how to handle those things.


Discounting Your Mortgage Rates ? BEWARE

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Citigroup may face sanctions after it failed to offer mortgage discounts to minority customers despite offering the discounts to many other borrowers, a possible breach of fair-lending standards, according to a report by Reuters.

Three people familiar with the regulatory examination told Reuters that the Office of the Comptroller of the Currency (OCC) is mulling a penalty against the company. In case of a finding of wrongdoing, the OCC may impose a fine or place the company under tighter oversight, among other sanctions.

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According to the sources, Citigroup self-reported the “relationship pricing” issues to the OCC after it was uncovered in the company’s review of its compliance with fair-lending standards. Citigroup’s program allows a half-percentage point off the interest rates for customers with $1 million in deposits or investments. Some minority borrowers were not offered those discounts.

Citigroup told the regulator that the pricing discrepancies were inadvertent and that it had acted to resolve the problem, according to Reuters’ sources.

Drew Benson, a spokesman for the company, acknowledged the pricing issues. However, he said Citigroup believes it did not engage in discrimination or violate fair-lending laws.

“In 2014, Citi self-identified errors implementing its relationship pricing program which affected a small percentage of our mortgage customers,” Benson said in a statement provided to Reuters. “We conducted a comprehensive review, reimbursed affected customers, and have strengthened our processes and controls to help ensure correct implementation going forward.”


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