Category Archives: Mortgage Banking

Have You Considered These Compliance Issues When Originating Non-QM Loans ?

A few years ago, only a handful of intrepid originators,  aggregators, investors, and issuers were actively participating in non-QM lending. The rest of the market watched from the sidelines, convinced non-QM lending brought significant potential liability, was hard to learn and easy to get wrong, or was not worth the effort when there was an abundance of refinance business to be done.

Several years of declining volume and intense margin compression on traditional loans, combined with a newly-receptive investor  community, are changing the market’s perception of non-QM lending.

Today, non-QM lending is widely viewed as one of the few growth areas left in the market and one that is attracting more lenders and issuers. Overall, this is good news for previously nderserved market segments: the 16 million self-employed consumers in the U.S., the millions of borrowers who have been repairing their credit since the mortgage crash, and even the aging cohort of baby boomers who are sitting on nearly $30 trillion in assets.

Last year, Nomura estimated non-QM lending volume could grow to more than $100 billion within 10 years. Other observers have since suggested the addressable market for non-QM products could be as high as $200 billon. Increasingly, non-QM securitizations are becoming a growing part of the private-label RMBS market. S&P expects non-QM securitizations to double in 2019 from $10 billion to $20 billion.

Recent changes in banking law have made it easier for mid-size and smaller banks to originate products that used to fall into the non-QM category. And, new investors and different approaches to due diligence are helping banks and originators get more omfortable with non-QM. But, despite the growing acceptance and interest in non-QM, there are challenges inherent in the product, particularly the increased risk of buybacks, due to underwriting defects and real compliance issues that remain.


Generally speaking, a first mortgage can be classified as non-QM for several reasons: a debtto-income (DTI) ratio above 43 percent; an interest only (IO) or balloon structure; rates and fees above three percent; or, the use of alternative documents in its underwriting. Adjacent products, such as expanded credit, asset depletion, and some fix-and-flip loans are usually included in the non-QM category. Non-QM loans, similar to their QM counterparts, must include a determination of the borrower’s ability to repay (ATR).

For the past five years, the “GSE patch” (QM safe harbor for loans eligible for purchase by Fannie Mae or Freddie Mac) has allowed lenders to avoid non-QM classifications on high DTI loans and, to  date, more than 54 percent of the GSEs’ purchases exceed the 43-percent threshold. The patch, however, is an option only while the GSEs remain in conservatorship and is set to expire in 2021, regardless of GSE conservatorship status.

In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act changed the non-QM playing field for banks with assets below $10 billion. Now far more mortgages, regardless of compliance with Appendix Q of the ATR rule, DTI and credit characteristics, can be deemed QM loans, if the bank holds them in portfolio.

It’s still too early to determine whether this new option makes non-QM lending more attractive to banks, but it certainly gives community banks more permanent leeway in originating products that used to be portfolio staples before the mortgage market downturn and subsequent recession. Similarly, it should help them serve the mortgage needs of highnet worth, retired, and self-employed customers who had been disadvantaged by QM rules. A strong case can be made that broader relationships with these customers put banks in a better position to make credit decisions with alternative documents like checking accounts, credit cards, auto loans, etc.

Prudent bankers that want to take advantage of the new portfolio lending option will most likely want to originate products that could eventually be sold to non-QM issuers. This means staying abreast with the evolving private non-QM market category, its guidelines, and this market’s zero-tolerance approach to compliance.

Banks that are used to “portfolio-ing” loans or selling to the GSEs may be surprised by the rigors of the due diligence processes being used by non-QM issuers. Depending upon the asset types, it is very common for non-QM issuers to do due diligence on 100 percent of the loans in a securitization, not just a sample. At a recent industry conference, a ratings agency showed a sample due diligence exceptions report for a non-QM/ non-agency private-label deal. The sample pool of 2,581 loans had three open exceptions for property, 89 for credit, and 6,805 for compliance!

While many of these exceptions were eventually cleared, the process was most likely time consuming, expensive, and painful.


From a compliance standpoint, a non-QM loan is generally subject to the same regulations as a QM loan, including TRID, HOEPA, Fair Lending, and state and local regulations.

Lenders participating in the private secondary market since the TRID rule effective date will most likely have better discipline for preventing TRID errors than their counterparts participating only in the GSE and FHA markets.

Incentives to review and correct errors in the private secondary market are immediate. Loans with material TRID errors can be rejected from the securitization pool, leaving the lender holding a potentially unsalable loan. Or alternatively, the loan is accepted but only with a lender guarantee or a setaside to mitigate future devaluation from compliance losses. But, even then, only larger lenders with substantial capital and wherewithal in the marketplace are typically permitted by ratings agencies, issuers, or underwriters to use these options.

While the CFPB has promulgated TRID “clean up” rules, which have had the effect of reducing identified TRID errors, lenders entering the non-QM market must still have good controls in place and consistent compliance. TRID disclosure timing and disclosure error correction issues continue to persist, even for current, seasoned, private secondary market participants.

Additionally, there are QM (and non-QM) related ATR issues that have not yet been clarified by the CFPB and could impact loan program underwriting guidelines. Arguably, there are more issues in the QM space than in the non-QM market, given some of the vague income qualification requirements in Appendix Q and the liberal use of GSE underwriting guidelines by some lenders to meet perceived “gaps” in Appendix Q. As a practical matter, loans or loan programs intended to be QM, but with structural defects causing them to not be designated QM, may still comply with the ATR rule, without the safe harbor status.

For non-QM loans, complying with the ATR rule’s eight borrower repayment factors is the only concern. ATR rule compliance can be easier to prove as a de facto matter for older non-QM loan programs with large data sets, which establish low historical default rates, so long as the lender considers and documents the eight ATR factors.

However, the ATR rule also has gray areas when it comes to non-QM loans. For example, how should a lender consider repayment factor 7 (vii) for the “consumer’s monthly debt-to-income ratio or residual income” for an asset depletion loan where there is no income? The CFPB specifically contemplated certain non-dwelling asset-based loans when issuing the ATR rule but factor 7 (vii) is in direct conflict with Factor 1 (i). Factor 1 (i) of the rule provides that the creditor must consider “the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan.” If the loan is underwritten solely based on assets, there is less certainty for how to comply with factor 7 (vii).

If designed properly, asset depletion loans have strong repayment track records, especially for retirees with large asset holdings but minimal income derived from those assets or other sources of income; for instance, large quantities of treasury bond holdings without enough total yield to support DTI ratios. Borrowers plan to sell off assets on an “as needed” basis at irregular intervals to support monthly loan payments. Asset depletion loan programs often require that borrowers hold enough assets to support at least five years or more of monthly payments, depending on loan type and features. The proceeds from these types of sporadic asset sales often cannot be characterized as income. In some cases, the borrower’s monthly income could be $0 with $0 residual income. In others, the borrower has an insufficient amount of monthly fixed government program income to support loan payments. In either situation, however, the borrower clearly has the ability to repay as a de facto matter given the amount and liquidity of the assets.


The first generation of non-QM loans were, for the most part, super prime and fully documented. They tended to fall into the non-QM category due to their size, DTI ratio, or structure: balloons, lOs, etc. But, the products are now rapidly evolving as the industry gets more comfortable with alternative documentation (bank statement), expanded credit and rental loans. The issuers are also changing. No longer is non-QM the province of specialty aggregators, REITS and private equity players; now, insurance companies, asset managers, and major money center banks are bringing new private-label offerings, backed by non-QM assets, to market.

To help keep pace with new product options and the ever-changing underwriting guidelines, some originators, including non-depositories, banks and credit unions, are outsourcing non-QM underwriting to recognized and experienced third-party fulfillment providers for loans to be sold on the secondary market. This approach can provide comfort for the originator and the investor. Both parties are subject to TILA liability and buyback demands. By using these fulfillment providers, some lessexperienced or smaller originators may find it easier to obtain approval from investors and warehouse lenders for participation in non-QM programs.

Investors, including the GSEs, are also moving loan reviews and due diligence closer to the point of sale. In the non-QM space, several active investors are using third-party underwriting fulfillment service providers to conduct pre-loan sale underwriting reviews on the non-QM loans they buy. The process is used to identify and clear conditions.

Recently, larger correspondent and wholesale lenders have also begun to do bank statement income calculations for their correspondents and brokers. These initiatives, and others like them, are giving both originators and investors greater confidence to originate and purchase non-QM loans. These efforts also help to educe the number of scratchand- dent non-QM loans in the market.

Since the QM rule went live in 2014, the industry has been waiting for the non-QM market to fully develop. 2019 is shaping up to be the year it does.

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Anti-Money Laundering – The Red Flags You Need to Know

Suspicious activity reporting is the cornerstone of the Bank Secrecy Act (BSA), according to the Federal Financial Institutions Examination Council (FFIEC). And, the FFIEC also states that “(i)t is critical to the United States’ ability to utilize financial information to combat terrorism, terrorist financing, money laundering, and other financial crimes.” Before a Suspicious Activity Report (SAR) is filed, it’s critical to first understand the process of how suspicious activity is identified.

While financial institutions utilize various methods to identify unusual or suspicious activity, such as automated and/or manual transaction monitoring systems, law enforcement inquiries, or National Security Letters. Perhaps the best method is you, the employee. Do you know what red flags to watch for as you interact with customers during the loan process? Do you know your financial institution’s procedures for reporting the identification of unusual or suspicious activity?

Red Flags

Red flags can be considered as examples of potential suspicious activity. However, it’s important to note that just because you may identify a red flag, it doesn’t necessarily mean that criminal activity has occurred. What does mean is that further scrutiny may be necessary. Your responsibility is simply to report the suspicious activity according to your organization’s procedures. More than likely, the BSA compliance officer or a committee will determine if a SAR should be filed.

Based on the FFIEC BSA/AML Examination Manual, Appendix F, here are examples of red flags of which you need to be aware as you work with loan customers and/or process loan transactions.
Customers Who Provide Insufficient or Suspicious Information

A customer uses unusual or suspicious identification documents that cannot be readily verified. A customer provides an individual taxpayer identification number after having previously used a Social Security number. A customer uses different taxpayer identification numbers with variations of his or her name.

A business is reluctant, when establishing a new account, to provide complete information about the nature and purpose of its business, anticipated account activity, prior banking relationships, the names of its officers and directors, or information on its business location.

A customer’s home or business telephone is disconnected.

Lending Activity

Loans secured by pledged assets held by third parties unrelated to the borrower.
Loan secured by deposits or other readily marketable assets, such as securities, particularly when owned by apparently unrelated third parties.

Borrower defaults on a cash-secured loan or any loan that is secured by assets which are readily convertible into currency.
Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.
To secure a loan, the customer purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments.

Loans that lack a legitimate business purpose, provide the bank with significant fees for assuming little or no risk, or tend to obscure the movement of funds (e.g., loans made to a borrower and immediately sold to an entity related to the borrower).


Employee exhibits a lavish lifestyle that cannot be supported by his or her salary. Employee fails to conform to recognized policies, procedures, and processes, particularly in private banking. Employee is reluctant to take a vacation. Employee overrides a hold placed on an account identified as suspicious so that transactions can occur in the account.

Other Unusual or Suspicious Customer Activity

Customer repeatedly uses a bank or branch location that is geographically distant from the customer’s home or office without sufficient business purpose. The stated occupation of the customer is not commensurate with the type or level of activity. A customer obtains a credit instrument or engages in commercial financial transactions involving the movement of funds to or from higher-risk locations when there appear to be no logical business reasons for dealing with those locations.

Reporting Identified Red Flags

Your responsibility is simply to report the suspicious activity. Do you know what to do? What is the process to notify the right person? Be sure to know your financial institution procedures. The key is report, not prove that an activity or person is suspicious. You may even see a red flag outside of what the FFIEC has documented in Appendix F. Or, you may have a ‘hunch’ that something’s not right. The key is to report!

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Around the Industry:

Happening Now

The OCC posted its Semiannual Risk Perspective for Spring 2019. Highlights include:

Credit quality is strong when measured by traditional performance metrics, but successive years of growth, incremental easing in underwriting, risk layering, and building credit concentrations result in accumulated risk in loan portfolios.

Operational risk is elevated as banks adapt to a changing and increasingly complex operating environment. Key drivers for operational risk include persistent cybersecurity threats as well as innovation in financial products and services, and increasing use of third parties to provide and support operations that are not effectively understood, implemented, and controlled.

Compliance risk related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) is high as banks remain challenged to effectively manage money laundering risks.

Interest rate risk and the related liquidity risk implications pose potential challenges to earnings given the uncertain rate environment, competitive pressures, changes in technology, and untested depositor behavior.


CFPB & Recent RESPA Violation Fines – Learn From Another’s Mistakes ?

The CFPB recently announced that it settled with a large mortgage servicer for the servicer’s alleged violations of the Consumer Financial Protection Act of 2010, RESPA, TILA, and their implementing regulations. Under the terms of the consent order, the servicer must, among other provisions, pay a civil money penalty of $200,000 and pay restitution to affected customers estimated to be at least $36,500.

Most of the loans the company serviced are owned by Fannie Mae and Freddie Mac, and approximately 21% of the serviced loans were 60 days or more unpaid. Further, the servicer offers loan modifications to eligible borrowers suffering economic hardships under proprietary programs offered by Fannie and Freddie and, until December 2016, the Department of Treasury’s Home Affordable Modification Program (HAMP).

The CFPB alleges that the servicer violated the above-mentioned statutes by:

Handling mortgage servicing transfers with incomplete or inaccurate; loss mitigation information, which resulted in failures to recognize transferred mortgage loans with pending loss mitigation applications, in-process loan modifications, and permanent loan modifications; escrow information, which resulted in untimely escrow disbursements; Inadequately overseeing service providers, which resulted in untimely escrow disbursements to pay borrowers’ property taxes and homeowners’ insurance premiums;

Failing to promptly enter interest rate adjustment loan data for adjustable rate mortgage (ARM) loans into its servicing system, which resulted in the issuance of monthly statements to consumers that sought to collect inaccurate principal and interest payments; and Maintaining an inadequate document management system that prevented the servicer’s personnel or consumers from readily obtaining accurate information about mortgage loans.

In addition to its civil money penalty and restitution payments, the servicer must also: (i) update “its oversight and compliance management systems to promptly identify and correct potential servicing errors and violations of Federal consumer financial laws;” (ii) within 120 days of May 29, 2019—the date on which the Consent Order was issued—establish and maintain a comprehensive data integrity program to ensure the accuracy, integrity, and completeness of the data for loans that it services; (iii) “implement an information technology plan appropriate to the nature, size, complexity, and scope of the servicer’s operations;” and (iv) within 120 days after the implementation of the data integrity program and the information technology plan, obtain an assessment and report from a qualified, independent, third-party professional acceptable to the Enforcement Director which evaluates said program and plan according to specified factors. Additionally, the servicer must not voluntarily transfer or acquire servicing for loans in loss mitigation or with a loss mitigation application pending, subject to a long list of exceptions.


URLA & ULDD – The Latest Compliance Challenges

One of the more pressing initiatives over the past year relates to the updates to the Uniform Residential Loan Application (URLA) and the Uniform Loan Delivery Dataset (ULDD). For the first time in about 20 years, the URLA is getting a major overhaul and it isn’t just cosmetic. The URLA has a whole new format, with new fields, data points, and requirements. With the initiatives going into effect in February 2020, it’s high time that lenders take a look at how they will impact the industry’s approach to loan quality going forward.


Before we jump into the implications of these two initiatives, let’s do a quick review of the ‘whats’ and ‘whys’. The URLA has seen virtually no changes for the past 20 or so years. Why is it being changed now? Good question. In short, it’s because this should have happened a long time ago. This change was inevitable. We can’t go on conducting business he way we did 20 years ago when our industry has changed so dramatically and technology has evolved so much. Think about what personal computing was 20 years ago, and where we were with data collection and analysis. We’re capable of so much more. Our industry needs to start implementing a way to leverage the technological capabilities that are now at our fingertips. And the ULDD and URLA help us do just that.



From a quality control (QC) and compliance perspective, the big stressors are about data integrity, which, technically speaking, isn’t terribly recent news. The new URLA enhances the type of data collected and the placement of that data within the loan application. That means anytime you deliver a dataset to the GSEs, you need to have that dataset in a specific format, one that’s been laid out and mapped out in a certain way. But more importantly, you need to make sure of the integrity of that data.

This is one thing that lenders regrettably forget. They’re so concerned with how to deliver the new data, that often they forget about the quality of the data itself. This can be a costly mistake, because data quality has been a big industry focus the last couple of years as both Fannie and Freddie have been very critical on data integrity issues. You also have CFPB, which monitors the industry for data integrity issues with HMDA. Now that they’re asking for new data, you can rest assured they’ll be checking to be sure that data is accurate, not merely delivered in the proper format.

A critical focus with the new URLA and the updated ULDD, with their enhanced data sets, is making sure that the data is accurate. A real push has been around how to perfect that data—where the systems are and who’s delivering the data. The LOSs are all getting up-to-date with providers creating testing models with the URLA included. Their goal is to have this fully integrated by sometime this summer with the new URLA being required in February of 2020. Lenders should rest assured that most LOS platforms will cover these updates. However, lenders do need to be prepared for an even deeper data integrity review. That’s how you eliminate the problems that come out of core data.

When it comes to the ULDD, one of the big changes is the capture and reporting of the new HMDA required data fields. So, it’s not only about making sure that data is in the right field or correct format, but even more importantly, making sure the data is accurate. One of the focal points for the ULDD changes is fair lending. If it’s important enough to add a way to collect this data, you can bet that accurately reporting your data is vital. So now that we’ve established that data integrity is of the utmost importance, we need to figure out how lenders can most effectively accomplish that.


The way lenders approach QC for ULDD and the new URLA will determine a lot about whether or not they thrive as the industry moves into more robust data collection and analysis.

Can lenders survive with their old processes when the ULDD and URLA go into effect? Sure. But I’m not sure for how long. Lenders that want to thrive and succeed in the new era need to be proactive in assuring data accuracy. If you’re still asking whether you should use technology to verify and validate data, or if you can get away with doing it manually utilizing the “stare and compare” method, the same process as they have for past 20 years, you should prepare for other more proactive lenders to pass you by.

Manual processes are risky and using technology to merely identify data integrity issues is short changing your potential for success. The real question you should be asking is whether the data in your system is accurate, and more importantly, how technology can help assure that data is accurate. Focus on the number of errors found within the data and identify the root cause of the data integrity issues. Then implement corrective action planning to track and correct these data issues once and for all. This will turbocharge your QC and risk management path into true proactive operations, a key component of industry leading lenders.

Using technology that requires manual processes, when a more advanced alternative exists, is risky. Lenders need as systemic a process as possible for data validation. One of the big things we see repeatedly is that lenders have all this data, all this information, but the systems don’t talk to each other. They receive an abundance of the required documents to support a mortgage loan, but often fail to obtain the digital data that created the document. One of the great things about utilizing the abundance of digital data that is at our fingertips is, when technology is utilized  to its full extent, this digital data allows systems to talk to each other. Otherwise, at some point along the manufacturing process, somebody needs to go back and review that actual document and verify that the data in that document was actually brought into the system accurately. It’s always best to use technology that enables all systems to communicate and share data. Otherwise, you’re risking errors and even fraud.

The appraisal is a good example of this data vs. document process. The vast majority of loans these days have some form of an appraisal to provide a verifiable opinion of value. Most all appraisals come with the actual XML data file attached. Some tech providers offer the ability  to conduct a form of data validation using that data file, and not require a person to handle the appraisal or input data points into the LOS. Without that technology, each data point is typically manually entered into the LOS by a loan processor. And of course, every time you key in a data field, you have an opportunity for error.

If you want to be proactive in improving data integrity, the key is to bring as many data fields as possible into your LOS in a digital  format. And if you bring in the data digitally from your actual source document, the appraisal in this case, you’ll know the data fields on that appraisal are 100 percent accurate. Authority documents can be used to help validate data fields from other documents referencing the appraised  value. Technology allows lenders to compare  and validate all the data within their LOS and other key documents to that authority document with a click of the button


Data quality has always been important, but the ULDD and URLA initiatives are only going to make it more so. It’s important for the lending community to be even more critical of their data integrity. Don’t make the unfortunately all-too- common mistake of believing that delivering data in accordance with the ULDD assures that your data is right. In reality, the ULDD makes sure all their data fields are there, but does not validate the data is accurate.

Financial risks are high when compromising data integrity. Inaccurate data can cause a multitude of problems, from delays in loan delivery, extended warehouse dwell times, and, in many cases, pricing adjustments. In the worst cases, repurchase obligations result. If you think the GSEs won’t say they don’t want to buy a loan because the data you provided doesn’t match what you indicated you were selling, guess again. It’s the worst-case scenario, but it happens. Regulators, like the CFPB, for example, aren’t going away anytime soon. They’re closely scrutinizing HMDA data and have already levied numerous fines, some in the millions, for data validation errors.

So, no matter what changes are coming in  May for the ULDD and in early 2020 for the URLA, a critical piece in preparation is to make sure your data is accurate. Technology can relieve a number of loan delivery headaches while bringing  a substantial reduction in overhead. You just need to decide whether you will accomplish your goals by reacting to market conditions, or by proactively managing them.

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Strategies for TRID Compliance and Eliminating Tolerance Cures

The CPFB’s TILA-REPSA Integrated Disclosure (TRID) Rule went into effect on October 3, 2015, following a two-year period of consternation and anticipation on the part of mortgage industry professionals, particularly lenders and originators. When the CFPB initially released the final rule on TRID in late 2013, the rule contained more than 1,900 pages.

In an effort to make the mortgage settlement process smoother for the borrower, TRID combined four disclosures into two. The Good Faith Estimate (GFE) and initial Truth-in-Lending disclosures combined to form the Loan Estimate, and the HUD-1 and final Truth-in-Lending disclosures combined to form the Closing Disclosure. At the same time, the CFPB shifted the onus of accurate settlement forms from the settlement service provider to the creditor, thus creating numerous compliance and quality control challenges for mortgage creditors.

It has been more than three years since TRID launched. The CFPB has made changes to the rule along the way, but lenders and originators still find it challenging to comply with parts of the TRID rule. Mortgage Compliance Magazine recently sat down with Belinda Kraus, Vice President of Risk and Compliance at Trelix™, an Altisource Business Unit, to discuss what challenges she is seeing in the industry and what to do about them.

MCM: Is there any way we could have seen this coming when TRID went into effect?

Belinda Kraus: In 2015, had you asked me to forecast quality control issues three and a half years into the future I would not have anticipated we would still be dealing with TRID issues. If I choose the top three quality control trends I currently see the industry struggling with, the top two relate to TRID compliance.

The first trend is in regards to fee tolerance violations on the Closing Disclosure. Documenting the Loan Estimate requires each fee to be placed in one of three different categories– a zero tolerance, 10 percent cumulative tolerance, or no tolerance bucket depending on the fee and whether or not the borrower is allowed to shop for the service provided. The zero tolerance and no tolerance categories sound as though they would have similar requirements; however, they are subject to two different thresholds. Zero tolerance refers to those fees or services that the creditor does not allow the borrower to shop for. The no tolerance category is unlimited, or those fees that the creditor does not have control over, meaning the borrower chose to shop and selected a third-party provider that was not recommended by the creditor. Keep in mind, though, creditors are always required to make a good faith effort to accurately estimate the fee utilizing the best information reasonably available at the time. The 10 percent cumulative tolerance bucket is for charges or fees that relate to recording of legal documentation and the third-party services the creditor recommended and the borrower selected. As the loan manufacturing process progresses, services and fees are selected causing fees to potentially move from one bucket to another. This is where the industry is getting tripped up and fee tolerance violations are occurring.

MCM: What can lenders do to counteract this?

Kraus: The best practice to curtailing TRID fee tolerance violations is to utilize industry compliance technology. Use it early and often. I recommend that lenders run the compliance tool a minimum of four times during the lifecycle of the manufacturing process. Run the tool before the borrower is given the Loan Estimate, run it on any revised Loan Estimates, run it before the Closing Disclosure is given to the borrower and again if there are any revisions to the Closing Disclosure. It is cheaper to run your compliance engine multiple times throughout the process than it is to continually pay tolerance violation fees.

MCM: What else are lenders still having trouble with as far as TRID compliance?

Kraus: The second TRID violation trend relates to the timing of the Loan Estimate and the creditor requesting the borrower’s intent to proceed. The rule specifies the borrower must receive the Loan Estimate first, and then the creditor can ask the borrower for their intent to proceed. How the creditor receives the intent to proceed is also dictated by the rule. Intent to proceed can be done verbally or as a written communication. The written communication can be in an email or a pre-printed form from the lender wherein the borrower signs indicating, “Yes, I have received the Loan Estimate, and now I’m indicating my intent to proceed with this loan.” Borrower silence is not indicative of an intent to proceed. The lender must ensure the intent to proceed communication received from the borrower is retained in the file. There are a couple of ways that this can happen, but the biggest hurdle can be retaining proof that the borrower received the Loan Estimate prior to the loan officer asking the borrower to give their intent to proceed.

MCM: Is technology the solution in this area as well?

Kraus: Yes. Utilizing technology is a way to ensure loan officers don’t put the cart before the horse. If you build a hard stop into your technology that requires proof of Loan Estimate delivery before unlocking the intent to proceed field, then the loan officer can’t get overzealous and do the whole process at once. The lender must retain a record of the intent to proceed. So, what happens if the loan officer received verbal intent to proceed? Program your technology to include a date and time stamp field in the notes section, so you can still prove the Loan Estimate was delivered before the loan officer received the intent to proceed from the borrower. The CFPB really wants to see those two distinct steps.

MCM: That takes care of the two common struggles with TRID compliance. What else have you seen the industry struggling with outside of TRID?

Kraus: The third most common compliance issue is erroneous income and asset calculations. The industry seems to continuously struggle with these calculations, which boggles my mind a bit since we have all of this great technology that can do the work for us. Even an Excel workbook can be programmed to accept data input that will complete the calculations.

MCM: That sounds like a simple enough solution. Is there more to it?

Kraus: A formulated spreadsheet in Excel is the simplest use of technology for this purpose, but technology continues to progress and now optical recognition is becoming more commonplace in the mortgage industry. Ideally, a lender automates as much of the manufacturing process as they can. If the loan officer can scan income and asset documentation into optical recognition software at the onset of the application process, errors will be reduced on the front end. It boils down to whether or not the lender can justify the cost of technology over the cost of correcting the errors that occur.


TRID 2.0 Compliance – What You Need to Know About Service Providers

When it comes to consumer shopping for third party settlement service providers, the TILA-RESPA Integrated Disclosure (TRID) rule contains several compliance requirements.  These requirements include specific disclosures and impact the fee tolerance thresholds.  This article addresses some common questions regarding the service provider shopping provisions.

What does it mean to “shop” for a service?

Page two of the loan estimate contains disclosures regarding the closing cost details of the transaction.  Under Loan Costs, sections B and C disclose those services that consumer may and may not shop for.  A consumer shops for a service provider when he/she she is free to select the provider of his/her choice.  Lenders may impose reasonable requirements on the service provider’s qualifications, such as ensuring the settlement provider is appropriately licensed. However, requiring that a provider use a certain type of software would not be considered a reasonable requirement. Any lender provider requirements should correspond to the ability of the provider to perform the service in a competent manner.

In contrast, a consumer is considered not to have the ability to shop for a provider if the lender selects the provider and offers the consumer no other alternative.  Note that if the lender limits the service provider choices to a list selected by the lender, the consumer is not considered able to shop.

Are lenders required to allow service provider shopping?

Lenders have considerable leeway in determining which services may or may not be shopped for.  On one end of the spectrum, a lender could select all settlement service providers and not allow any consumer shopping. Typically, lenders allow consumers to shop for some but not all service providers.  Note that state law may require that a borrower be able to select their own attorney, which would mean the borrower must be able to shop for that provider. And remember, fees for required services that may not be shopped for are subject to the zero-fee tolerance threshold.

What is the Written List of Service Providers?

If the consumer may shop for a settlement service provider, the lender must provide a written list of service providers (written list). The written list is a separate disclosure that must also be provided within three business days of receiving an application.

From a disclosure perspective, the written list must identify at least one provider per service that may be shopped for and include detailed contact information for each provider. The providers disclosed on the written list must correspond to those services disclosed on page two of the loan estimate, in section C. The written list must also state that the consumer is not required to select the provider disclosed on the written list. Note that the TRID rule provides a model form for the written list; however, lenders may create their own document but it must track the model form.  In addition to disclosing services the consumer may shop for on the written list, lenders may also disclose those services that may not be shopped for. And, the lender may include a statement that it is not endorsing any provider disclosed on the written list.

What are the fee tolerances for services that may be shopped for?

At the Loan Estimate stage, fees for services that may be shopped for are included in the 10 percent tolerance category. This tolerance may or may not shift at the closing disclosure stage, depending upon whether the consumer chooses a provider from the written list.

If the consumer selects a provider from the written list, the fee for that service remains in the 10 percent cumulative tolerance category. If the consumer selects a provider that is not on the written list, the fee for provider shifts to the no tolerance category.  As long as the service provider fee is disclosed on the written list is in good faith, increases in that fee will not be subject to any tolerance restrictions.  Because of the potential shift in tolerance, it’s important to monitor consumer shopping activity.

What are the consequences for failing to comply with the written list requirements?

Failure to comply with the written list requirements may result in changes to fee tolerances and may constitute a Regulation Z violation. If the lender fails to provide the written list, but the facts and circumstances indicate the consumer was permitted to shop, the fees for the service are subject to the 10% cumulative tolerance standard. However, if those fees are paid to the lender or an affiliate, they are subject to the zero tolerance standard. Note that even if the consumer is considered permitted to shop, failure to provide the written list would be considered a Reg Z violation.

With respect to errors or omissions on the written list, if the consumer is not prevented from shopping and the fees are not paid to the lender or an affiliate, the fees are subject to the 10% cumulative tolerance standard. If the error or omission does prevent the consumer from shopping, the charges are subject to the zero tolerance standard. Determining whether the error or omission prevents the consumer from shopping is based on all of the relevant facts and circumstances.

While TRID compliance often focuses on the loan estimate and the closing disclosure, it’s important to train staff on the written list of service provider requirements.  Potential shifts in tolerance thresholds and compliance violations can certainly add up over time.

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What Are PACE Loans ? … Why You Need to Know

CFPB indicates PACE regulations are on the horizon

The Consumer Financial Protection Bureau (CFPB) has issued an advance note of proposed rulemaking on Property Assessed Clean Energy (PACE) loans, signaling its intention to increase oversight on the divisive financing program.

PACE financing allows homeowners to pay for energy-efficient retrofitting through their property-tax assessments. In some states, these loans can take lien priority over the property’s primary mortgage — a rule that has drawn the ire of the mortgage industry. Another target of the mortgage industry’s criticism is that the PACE program faces fewer regulations than other types of financial services.

For a few years, mortgage and real estate industry groups have been urging the CFPB for tighter oversight of PACE loans. Nine trade organizations, including the American Bankers Association (ABA), the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) co-signed a letter to the CFPB this past October, asking for PACE-loan subordination to established lien priority standards, as well as incorporating the PACE program into the Truth in Lending Act’s “overall mortgage protections.”

It seems the CFPB has taken notice.

Specifically, the CFPB’s notice calls for mandating ability-to-repay requirements, which are currently in place for residential mortgages through the Truth in Lending Act. That mandate was put in place last year by the Economic Growth, Regulatory Relief and Consumer Protection Act, which eased regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Kathleen Kraninger, director of the CFPB, called the issuance “the next step in the Bureau’s efforts to implement the Economic Growth, Regulatory Relief and Consumer Protection Act as expeditiously as possible.”

New rules could hamper the rising popularity of PACE loans, which has mounted as buyers have become more interested in green-building and energy-efficiency strategies. The U.S. Department of Housing and Urban Development announced in 2016 that the Federal Housing Administration would guarantee mortgages accompanied by PACE liens, which helped the PACE program grow during the tail end of the Obama administration. That move, however, was met by widespread disapproval from the mortgage industry and the Trump administration reversed the policy in December 2017.


How to Make Your Mortgage Business Recession Proof

The mortgage industry has taken a beating in the past year.
Some lenders are expected to loosen their credit standard to improve profits.
But JPMorgan Chase is ceding market share — intentionally.
Anticipating recession, the bank has been reinforcing its mortgage business to make it recession-proof — even if it means sacrificing market share and profits in the near term.
“It is a tough time to be in the mortgage business,” Gordon Smith, the CEO of Consumer and Community Banking at JPMorgan Chase, said Tuesday at the bank’s investor day.

Indeed, the mortgage industry has taken a beating in the past year amid intensifying competition, rising costs, and dwindling home sales.

At JPMorgan Chase, one of the largest US residential mortgage lenders, originations fell 29% to $79 billion in 2018.

That in part caused mortgage production revenue to drop sharply to $370 million — less than half of the $640 million tally in 2017 and a third of the $850 million it earned in 2016. Overall mortgage fees declined 22% to $1.25 billion in 2018 from $1.61 billion in the previous year.

Because JPMorgan is the largest US bank, its every pivot and parry is closely watched by competitors and the business community writ large.

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But anyone expecting executives discussing these figures at the investor day to don a gloom-and-doom demeanor or unveil a battle plan to reclaim market share and profits were dearly disappointed.

To the contrary, JPMorgan signaled it was perfectly content to cede market share to competitors and in fact had done so on purpose.

“Where we’ve lost share, it’s been intentional,” the bank’s chief financial officer, Marianne Lake, said.

To what end? Count up the roughly dozen times senior execs said “recession” or “downturn” during their presentations and you get a clue as to what’s driving their strategy.

The bank is taking great pains to make its mortgage business recession-proof — even if it means sacrificing market share and profits in the near term.

“We’re not waiting for a recession and then to act on the recession,” Smith said. “We monitor credit performance hourly, daily, weekly, monthly.”

As Smith explained, JPMorgan has been preoccupied with “de-risking” its mortgage business. It has rebalanced its portfolio, focusing on prime loans to borrowers with top-notch credit scores.

So, while originations and revenue have fallen, so have delinquencies on the mortgages they hold or service. Their delinquency rate on servicing declined 28% in 2018, and the bank recovered more delinquent loans than it charged off — something that didn’t happen in the preceding four years.

JPMorgan 2019 investor day screen shot
JPMorgan Chase
This isn’t necessarily the tack every mortgage lender is taking. Moody’s wrote in a report this month that in the face of the industry’s economic headwinds, residential mortgage originators are expected to “loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances.”

Amid the loosening, Moody’s expects loan delinquencies, which have been hovering near postcrisis lows, to increase modestly over the coming year.

Much of this loosening will come from smaller companies that specialize in home lending, according to Warren Kornfeld, a senior vice president covering financial institutions at Moody’s. Global behemoths like JPMorgan have the flexibility, given their business diversity, to back off if they spot foreboding economic storm clouds.

“They have a greater ability to step back from a market if profitability and risk/reward opportunities are subpar,” Kornfeld said.

Grasping for profits by reaching down the credit spectrum is a double-edged sword. Looser lending standards mean a greater risk that some of those loans don’t get paid back and turn red on the income statement.

JPMorgan isn’t willing to let that happen.

“Given the expense, plus headline risk, banks really do not want to service delinquent loans, especially on loans that they own,” Kornfeld said. “The common thread in the market is that banks are focusing on their core customers with residential mortgage lending.”

Read more:
Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing
JPMorgan Chase shared a slide with investors that explains why mortgage lenders are getting smoked
Home sales continue to get whacked, falling to a 3-year low, and an increase in mortgage delinquencies is looming
Rust-belt cities that got killed in the recession are making comeback, and they’ve become the best places for millennials to buy a home

The Latest Regulations on Your Appraisal and Evaluation Review Program

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was a law enacted in response to the savings and loan crisis of the 1980s. Interestingly, FIRREA accomplished significant changes in the areas of deposit insurance and federal regulation of the savings and loan industry at the time. Let’s hone our focus on the area of appraisals.

Reviewing the Old

No doubt, FIRREA has been around for quite some time. And, we have seen guidelines produced by federal regulators to ensure understanding and compliance of the requirements. Are you aware that FAQs were published in October 2018 to assist us as we deal with appraisals? While no new content was introduced with the FAQs, a review of the them may trigger for you a need to know more about this topic. Here are a few questions posed from the FAQs published by the FDIC, OCC, and FRB. To review the entire FAQ document, click here.

Question #6: What cost-effective actions can a smaller financial institution take to implement an appraisal and evaluation review program that meets the standards for independence in the agencies’ appraisal regulations?

Answer: A small financial institution with limited staff should implement practical safeguards for reviewing appraisals and evaluations when absolute lines of separation between the collateral valuation program and loan production process cannot be achieved. Small financial institutions could have loan officers, other employees, or directors review an appraisal or evaluation, but those individuals should be appropriately qualified, independent of the transaction, and should abstain from any vote or approval related to such loans.

To the extent that a financial institution is involved in real estate transactions that are complex, out of market, or otherwise exhibit elevated risk, management should assess the level of in-house expertise available to review appraisals or evaluations associated with these types of transactions. If the expertise is not available in-house, the financial institution may find it appropriate to evaluate alternatives, such as outsourcing of the review process, for ensuring that effective and independent reviews are performed.

For transactions subject to the IFR on Valuation Independence, institutions must comply with the provisions of that rule (See 12 CFR 1026.42(d)).

Question #8: Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially?

Answer: No. A financial institution may use an existing appraisal or evaluation to support the renewal of an existing loan at the financial institution when the market value conclusion within the appraisal or evaluation remains valid.

Validating the market value conclusion of the real property is a fact-specific determination, based on market conditions, property condition, and nature of the transaction. As described in the Valuation Guidelines, a financial institution should establish criteria for validating an existing appraisal or evaluation in its written valuation policies. The criteria should consider factors that could impact the market value conclusion in the existing appraisal or evaluation, such as: the volatility of the local market; changes in terms and availability of financing; natural disasters; supply of competing properties; improvements to the subject or competing properties; lack of maintenance on the subject or competing properties; changes in underlying economic and market assumptions, such as capitalization rates and lease terms; changes in zoning, building materials, or technology; environmental contamination; and the passage of time. Regarding this last factor, there is no provision in the agencies’ appraisal regulations specifying the useful life of an appraisal or evaluation.

The financial institution must also consider whether an appraisal or an evaluation is required for the transaction. The agencies’ appraisal regulations require an evaluation for transactions involving an existing extension of credit at the financial institution when either (1) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection after the transaction, even with the advancement of new money, or (2) there is no advancement of new money, other than funds necessary to cover reasonable closing costs. Alternatively, a financial institution could choose to obtain an appraisal, although only an evaluation is required. For example, an institution may choose to obtain an appraisal to achieve a higher level of risk management or to conform to internal policies.

In the context of renewal transactions, whether there has been a material change in market conditions may affect both whether an appraisal or evaluation is required and whether an existing appraisal or evaluation remains valid. A financial institution can assess whether there has been a “material change” in market conditions by considering the factors detailed above for validating an existing appraisal or evaluation. When there has been an obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection, the existing appraisal or evaluation is no longer valid. In such situations, if no new money is advanced, a financial institution must obtain a new evaluation, or may choose to satisfy the agencies’ appraisal regulations by obtaining a new appraisal.

However, if new money is advanced, a financial institution must obtain a new appraisal unless another exemption from the appraisal requirement applies. Refer to the following examples, assuming no other exemption from the appraisal requirement applies.

Example 1. A financial institution originated a revolving line of credit for a specified term, and at the end of the term, renews the line for another specified term with no new money advanced. The financial institution’s credit analysis concluded that there had been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an evaluation, rather than an appraisal, because no new money was advanced, even though the financial institution concluded there is a threat to the adequacy of the collateral protection. Alternatively, the financial institution could choose to obtain a new appraisal, although only an evaluation would be required.

Example 2. A financial institution originated an ADC loan and, at maturity, renewed the loan and advanced new money that exceeded the original credit commitment. The financial institution’s credit analysis concluded that a material change in market conditions or the physical aspects of the property threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an appraisal to support the transaction, because the financial institution advanced new money and concluded there is a threat to the adequacy of the real estate collateral protection.

Example 3. Consider the same scenario in Example 2 above; however, the financial institution’s credit analysis concluded that there had not been a material change in market conditions or physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, a financial institution could choose to obtain a new appraisal, but a new appraisal would not be required.

Example 4. A financial institution originated a balloon mortgage secured by a single-family residential property. At the end of the term, the financial institution renews the balance of the mortgage for another term, with no new money advanced. The financial institution’s credit analysis concluded that there had not been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require the financial institution to obtain an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, the financial institution could choose to obtain a new appraisal, although a new appraisal would not be required.

Financial institutions should consider the risk posed by transactions that do not require new appraisals or evaluations and may consider obtaining a new appraisal or evaluation based on the financial institution’s risk assessment. In addition, financial institutions making HPMLs must ensure compliance with the HPML Appraisal Rule, 12 CFR 1026.35(c)(2)(vii).

Question #20: May an appraisal be routed from one financial institution to another financial institution via the borrower?

Answer: A financial institution should not accept an appraisal from the borrower. However, the borrower can inform the financial institution that there is an existing appraisal. Prior to accepting an appraisal from another financial institution, the institution should confirm that the appraiser is independent of the transaction, the appraiser was engaged directly by the other financial institution, and the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable.

Knowing the New

In April 2018, the federal agencies (FDIC, OCC, FRB) jointly published an amended rule titled Real Estate Appraisals, with the following issues of which to be aware:

Under current thresholds, all real estate-related financial transactions with a value of $250,000 or less, as well as qualifying business loans secured by real estate that are $1 million or less, do not require appraisals. Qualifying business loans are business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
For real estate-related financial transactions at or below the applicable thresholds, the interagency appraisal regulations require financial institutions to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices, but does not need to be performed by a licensed or certified appraiser or meet the other Title XI appraisal standards.
The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal requirements.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was signed by the president on May 24, 2018. Title I, Improving Consumer Access to Mortgage Credit, covers many topics one of which amends FIRREA. Section 103 of the EGRRCPA added Section 1127 to the FIRREA, which details when an appraisal is NOT required:

The real property or interest in real property is located in a rural area, as described in section 1026.35(b)(2)(iv)(A) of Regulation Z;
Not later than 3 days after the date on which the Closing Disclosure relating to the federally related transaction is given to the consumer, you have contacted not fewer than 3 State certified appraisers or State licensed appraisers, as applicable, on the mortgage originator’s approved appraiser list in the market area and have documented that no State certified appraiser or State licensed appraiser, as applicable, was available within 5 business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments;
The transaction value is less than $400,000; and
The mortgage originator is subject to oversight by a Federal financial institution regulatory agency.

Around the Industry:

Effective Now

Recently, the CFPB published the 2019 list of rural and underserved counties and a separate 2019 list that includes only rural counties. Also, note that the CFPB updated the rural and underserved areas website tool for 2019. The lists and the tool help creditors determine whether a property is located in a rural or underserved area for purposes of applying certain regulatory provisions related to mortgage loans.


Remember the Tom and Jerry cartoons from long ago? Well, check out one of the most read articles from 2018 regarding cybersecurity and see for yourself this cat and mouse game of secure authentication.


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.


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