Category Archives: Mortgage Banking

Quicken Loans – A Data Acquisition Business ?

Quicken Loans executives speak at mortgage industry conference in Detroit.

Gilbert says Quicken Loans is more of a “data acquisition business” than mortgage company.

Emerson: Young consumers won’t change how they make purchases with smartphones.

Quicken Loans Inc. founder Dan Gilbert is a mortgage mogul.

Except he doesn’t view his business that way.

“We’re not really in the mortgage business. We’re in the data acquisition business,” Gilbert said Tuesday at a Mortgage Bankers Association conference at the Detroit Marriott at the Renaissance Center. “We acquire data, we curate it and we move it. That’s all we do.”

Gilbert and Quicken Loans’ vice chairman, Bill Emerson, shared the stage Tuesday morning at an opening session of their industry group’s conference, talking about how they see their business differently than its traditionally viewed by outside observers.

They talked about Quicken Loans’ transformation from a paper-intensive residential mortgage business in the 1980s and 1990s — then known as Rock Financial — to a tech-driven company based in downtown Detroit that has leveraged the internet to sell and service home loans faster and at rapidly increasing volume.

Quicken Loans has climbed to the top echelon of the mortgage business, claiming to top, for the first time, industry stalwart Wells Fargo & Co. in volume of mortgage originations in the fourth quarter of 2017. First-quarter 2018 mortgage origination data is not yet available, but Emerson suggested Tuesday that Quicken Loans would retain the top spot in the direct retail mortgage sector.

Without naming competitors, Gilbert said the ability to use a smartphone to make a major purchase like a home threatens the business model of legacy companies and industries.

“If they don’t get on the train, it’s going to be over,” he said. “The writing’s on the wall, right?”

In the future, Gilbert said, the only businesses that will survive are those that “keep up with the speed of the game,” invest time and capital in new ideas and “let people fail.”

“We’re seeing it already,” Gilbert said.

Emerson, who joined Gilbert’s company in 1993, took out his iPhone and noted the smartphone has all of the functions of multiple machines “that Radio Shack would sell — clocks and phones and computers and calculators” to customers just a decade ago.

Radio Shack, which went through bankruptcy 2015 and shuttered nearly all of its stores a year ago, is an obsolete way to shop for the average first-time homebuyer who is 32 years old, Emerson said.

“They’re not going to change the way that they purchase things, they’re not going to change what they do with this little device,” said Emerson, who spent 15 years as CEO of Quicken Loans until becoming vice chairman in February 2017. “If we don’t, as an industry, embrace this, get our brains around it … we’re out of the game.”

Source: http://www.crainsdetroit.com/article/20180417/news/658381/gilbert-were-not-really-in-the-mortgage-business

House Flipping is Back !

Amid saguaro cactuses and yucca plants, Lauren Rosin shows off a house that she’s renovating in Phoenix’s Central Corridor, a pricy neighborhood north of downtown.

“This was actually a courtyard and I blew it out,” she says, pointing to what will now be an extra-large open kitchen with custom cabinets, quartz countertops and chandelier-style lighting. She’ll also upgrade the swimming pool in the backyard.

But Rosin won’t live in the four-bedroom, three-bath midcentury ranch once it’s finished. She and her business partner Brad Pickett are house flippers: Pickett buys the homes, and Rosin leads a crew of contractors to rehab them. They flipped 27 homes last year.

These days, profits are tight, and they face stiff competition.

That’s because a decade after the U.S. housing bubble burst, house flipping is on the rise again. Defined as reselling a house within a year of purchase, flipping is at an 11-year high in the United States and it’s the subject of dozens of TV shows and weekend workshops promising to teach real estate novices how to make a fortune.

New research shows that flippers contributed to the housing crash of the mid-2000s more than economists initially realized. Because some of the same practices from the boom are making a comeback, some market watchers are concerned that the real estate market might once again be nearing a bubble.

But for now, experts say those concerns are overblown, thanks to changes in the mortgage industry and other factors.

The last time this many homes were being flipped was during the housing bubble. Flipping peaked in 2005, when 8.2 percent of all single-family homes sold nationwide were flips, about 344,000 homes, according to Attom Data Solutions, a research firm that collects and analyzes nationwide real estate data.

In areas where the bubble was growing fastest, flip rates were even higher. In Las Vegas and some parts of Florida, the flip rate reached nearly 19 percent. In Phoenix, about 16 percent of homes sold were flips.

A look at the market in Phoenix, considered a bellwether by industry experts, is a good way to see how things have changed or not. More than 8,500 homes — or 8.5 percent — sold in the Phoenix metropolitan area last year were flips, more homes than anywhere else in the country, according to Attom.

Before the crash a decade ago, flippers didn’t need to do much to make money. Financing was easy to get; people with high credit ratings could use no-income, no-asset loans to buy real estate. The housing bubble was inflating so fast, investors could buy, hold — sometimes renting out the properties to make a bit extra, sometimes renting at a loss, sometimes not even bothering to rent — then sell, over and over again.

Then the floor fell out from under the housing market.

Lauren Rosin got into flipping in 2009, during the bust. In Phoenix, the crash was disastrous. Homes on average lost 56 percent of their value. Lenders foreclosed on tens of thousands of families.

To Rosin, the wave of foreclosures meant that there were thousands of houses on the market that needed only a face-lift to net her a tidy profit.

“It was really sad because you’re watching so many friends and family go through losing their homes,” she says. “But I just looked at it as such a great opportunity.”

Ten years into her career flipping houses, Rosin’s operation is much more streamlined and professional. But it’s harder to make money now, she says.

Her profit margins are significantly thinner, typically 10 to 15 percent of the eventual sales price. She has to know exactly which amenities will yield more profit and which to skip, and the fine line between upgrading and going overboard.

New research and data suggest that the practices of house flippers fed the bubble of the early 2000s. Much of the blame for the housing crash has fallen on subprime borrowers and people who bought and lived in homes they couldn’t afford.

But researchers are now coming to understand that a big part of the problem was people with better-than-average credit scores who owned multiple homes — not subprime buyers, but real estate investors, landlords and flippers.

Stefania Albanesi, an economist at the University of Pittsburgh, argues that the rise in mortgage defaults during the housing crash was mostly attributable to real estate investors, including flippers.

During the bubble, about two-thirds of home flips nationwide were financed with loans, according Attom. In places like Phoenix and Florida, that number approached 80 percent.

The problem with that, Albanesi says, is that real estate investors such as flippers are at greater risk of defaulting on their mortgages than normal homeowners.

“If you lose your home that you’re living in, you have to relocate your family, find other housing, and maybe have a longer commute,” Albanesi says. “This is not something that’s there for the investor. Overall, their default probability is much greater.”

Normally, people with above-average credit scores are unlikely to default on their mortgages. But during the crisis, Albanesi’s research shows, it was borrowers with good credit scores who had taken out mortgages on additional properties — mostly investors — who defaulted at historically high rates.

“These borrowers looking to buy their second, third and fourth homes would tend to go to unconventional lenders and would tend to obtain loans through nonstandard products such as adjustable-rate mortgages and so on,” Albanesi says. “These loans are more expensive. They have higher interest rates. And so, other things equal, it’s more likely that these borrowers might default.”

Despite the volatility they can bring to a market, flippers can and do bring value. Many homebuyers don’t have the energy, resources or know-how to renovate a home that needs it. Flippers can help boost the supply of “move-in ready” homes.

“I don’t think there’s anything inherently wrong with flipping itself,” says Steve Swidler, a finance professor at Auburn University. “In fact, flipping has probably given life to the housing markets that were most hurt back in the financial crisis itself.”

Now that the real estate market has stabilized, flippers can’t ride the bubble or scoop up foreclosed properties on the cheap. They have to add real value to turn a reliable profit.

At the height of the bubble in Phoenix, the typical flipped home was originally constructed in the mid-1990s, according to Attom. In other words, people were flipping properties that were only about 10 years old.

Now, the average flipped property is typically about 30 years old.

“They’re older homes, which inherently are going to require more work,” says Daren Blomquist, senior vice president for communications at Attom. “They’re going to actually have to improve the conditions of these homes, which I think is healthy for the housing market. Flippers can step in and actually provide inventory of homes that are somewhat ‘like new’ if they do a good job.”

In areas that didn’t experience the housing bubble as intensely as places like Phoenix, Las Vegas or Florida, flipping rates have stayed more stable, growing slowly over time instead of swinging wildly from boom to bust.

But as flip rates in cities like Virginia Beach, Va., Baltimore and Birmingham, Ala., near 10 percent, some wonder if there is cause for concern.

Real estate experts in Phoenix, where these risk factors are ahead of national levels, say there’s no reason to sound the alarm yet.

During the housing boom, prices were rising so quickly that inexperienced real estate investors could turn a profit despite their lack of expertise, says Mark Stapp, who teaches real estate development at Arizona State University.

“Today, you can’t. It’s harder,” he says. He points to financing and commercial lenders. During the bubble in Phoenix, more than 75 percent of flips were financed with loans. Now, flippers in the area acquire about half their homes with financing, half with cash.

“Commercial lenders have been very disciplined,” Stapp says. “The loan-to-value, loan-to-cost, those kind of metrics, they’re keeping very low and tight control over. The issues we had previously with abuse through manipulating appraisals, that isn’t really happening.”

Simply put, Stapp says, though some of those inexperienced flippers are back, they’re still too small a portion of the market to worry about.

“I think it’s such a small number,” he says. “I don’t think it’s to the point where it so dramatically affects the market that the market gets hurt by it.”

 

 

Inside Scoop on Your Mortgage Lending Competition – FINTECH

A shrinking inventory of affordable housing and rising mortgage rates are making the real estate market even more competitive for homeowners. Those looking for an edge may want to consider getting a loan from a financial technology startup, otherwise known as a fintech.

A new report from the Federal Reserve Bank of New York and New York University issued by the National Bureau of Economic Research found that technology-driven lenders have created efficiencies in the home lending business that give them an edge over traditional lenders. These fintechs are able to process loans quicker, can better handle movements in demand and have fewer loans that end up defaulting. They are also gaining on their traditional brethren, with the study finding that fintech lenders’ market share jumped to 8% in 2016 from 2% in 2010. In 2010, the fintechs originated $34 billion in mortgages. That stood at $161 billion as of the end of 2016. A lot of the growth came from Federal Housing Administration loans.

[Check out Investopedia’s mortgage calculator to find out how much home you can afford.]

In terms of their ability to process mortgage loans, the research revealed that fintechs are doing so about 20% quicker than traditional lenders. “Faster processing does not come at the cost of higher defaults. Fintech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending,” wrote the New York Fed and New York University in the report. “In areas with more fintech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that fintech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.”

The researchers found that around 25% of mortgages issued by fintechs defaulted, which is lower than the industry average. That derails the argument that fintechs engage in lax screening of borrowers and actually implies they are attracting and providing home loans to borrowers who are less risky.

As for who is taking out a mortgage with a fintech over a traditional lender, the study found that the borrowers tend to be from more educated populations and are older, which may be surprising but could be because they are more familiar with the process of getting a mortgage and thus require less hand-holding. What’s more, the study found no evidence that fintechs are going after marginal borrowers and reported that there is no digital divide in mortgage lending.

“Recent technological innovations are improving the efficiency of the U.S. mortgage market. We find that fintech lenders process mortgages more quickly without increasing loan risk, respond more elastically to demand shocks, and increase the propensity to refinance, especially among borrowers that are likely to benefit from it,” wrote the researchers.

Source: https://www.investopedia.com/news/fintechs-give-mortgage-borrowers-edge/

Maybe You Should Contribute to Your Borrower’s Closing Costs

While it’s not quite the same as the down payment assistance that the government-sponsored enterprises used to allow, lenders now have a new way to help borrowers buy a home – closing cost assistance.

Fannie Mae announced this week that it will now allow lenders to contribute to borrowers’ closing costs, as long as the money is a gift and is not used towards a borrower’s down payment.

Over the last few years, Freddie Mac on a larger scale, and Fannie Mae on a smaller scale, allowed lenders to gift money to borrowers that could be used on their down payment on a 3% down mortgage.

Under the programs, lenders would “grant” 2% of the down payment to the borrower. Add that to the borrower’s 1% contribution, and you would have the 3% needed to qualify for the Fannie and Freddie programs.

These programs fell out of favor after some lenders began rolling the “grants” back into the loans themselves in the form of premium pricing, wherein the lender would charge a higher interest rate in exchange for the down payment assistance.

That raised some flags with the Federal Housing Finance Agency, which eventually led to Freddie ending the program last summer.

At the time, the FHFA told HousingWire that it was monitoring the situation and had some concerns about the risks associated with charging certain borrowers higher interest rates in exchange for down payment assistance.

The FHFA told HousingWire that it was concerned that those borrowers might end up paying more over the life of the mortgage than what the lender provided in assistance.

So, the down payment assistance programs ended, at least in terms of the 2% coming directly from the lender and needing to be repaid.

Recently, HousingWire exclusively reported that United Wholesale Mortgage would be ending its 1% down program, in which the lender was gifting the entire 2% of the down payment to the borrower and not pricing the gift into the loan.

But now, lenders who sell their loans to Fannie Mae can begin offering closing cost assistance to borrowers, under certain circumstances.

According to an announcement sent this week by Fannie Mae to lenders, the money must be in the form of a gift and cannot be subject to any sort of repayment requirement.

Additionally, the money must not be used to fund any portion of the borrower’s down payment. The money can be used for closing costs and fees only.

Fannie Mae also said that there is no limit on the amount a lender can give to a borrower, just as long as it does not exceed the total closing cost amount.

“We’re making it easier for borrowers to purchase a home by allowing lenders to fund closing costs and prepaid fees,” Fannie Mae Chief Credit Officer for Single-Family Carlos Perez said in a letter to lenders.

“While there is no limit to the amount of the lender-sourced contributions, the funds cannot be used toward a down payment, cannot exceed the total closing costs, and should not be subject to any form of repayment agreement,” Perez added.

Additionally, Fannie Mae notes in its lender bulletin that the closing cost assistance must come directly from the lender and cannot be passed to the lender from a third party.

And now, for the fine print, taken from Fannie’s lender bulletin:

The amount of the lender contribution should not exceed the amount of borrower-paid closing costs and prepaid fees. Otherwise, the amount of the contribution is not limited except when the lender is an interested party to a purchase transaction as defined in B3-4.1-02, Interested Party Contributions, and in that case, the interested party contribution (IPC) policy applies. Any excess lender credit required to be returned to the borrower in accordance with applicable regulatory requirements is considered an overpayment of fees and charges, and may be applied as a principal curtailment or returned in cash to the borrower.

A spokesperson for Fannie Mae told HousingWire that the program was previously available on a limited trial basis to certain lenders. But now, the GSE is making the option available to all lenders.

According to Fannie Mae, lenders can begin contributing to borrowers’ closing costs under those specified conditions immediately. The change goes into effect now.

Source:https://www.housingwire.com/articles/43022-fannie-mae-now-allowing-lenders-to-contribute-to-borrower-closing-costs

What You Need to Know About TRID 2.0 Coming in October 2018

The amendments to the Know Before You Owe/TILA-RESPA Integrated Disclosure rule issued last month were a long time coming, but overall were worth the wait.

TRID 2.0 addressed many of the pain points that our industry has struggled with over the past two years. The new rule becomes effective 60 days after it is published in the Federal Register, but compliance isn’t mandatory until October 1, 2018.

From a Consumer Financial Protection Bureau-watcher’s perspective, it appears that the Bureau heard and responded to the mortgage industry’s concerns, but there are still a handful of large issues that remain. While the CFPB stopped short of immediately closing the “black hole” that generally prevents lenders from re-setting fee tolerances when a Closing Disclosure has been issued prematurely, it did issue a new proposed amendment to address this problem. Concerned about unintended consequences, the CFPB is asking for comments on the proposed “black hole” fix.

Having said that, industry reaction to TRID 2.0 was mixed. Some lenders expressed disappointment that additional cure provisions for violations were not included, while secondary market investors were pleased that TRID 2.0 addressed many ambiguities in the original rule that could potentially create assignee liability.

Probably the strongest negative reaction came from the title industry. Michelle Korsmo, the American Land Title Association CEO, opined in a press release that the rule still results in consumers not receiving accurate information about title insurance costs. She stated, “While the CFPB’s disclosures have helped homebuyers better understand their mortgage costs, consumers would value their disclosures more if the CFPB showed the accurate costs of title insurance instead of the incremental costs.”

Here are some of the more significant changes contained in the 560-page TRID 2.0 document:

–Clarification of “no tolerance fees.” The new rule makes it clear certain products and services, such as property insurance, impound and escrow amounts, are still excluded from zero and 10 percent tolerances, even if they are paid to an affiliate of the lender. The only caveat is that the original estimates can’t be unreasonably low. Also, the preamble to the amended rule reaffirms that “typographical errors regarding a settlement service…do not subject the charges for such a service to the zero percent tolerance category…” in most instances.

–Construction loan disclosures. The Bureau made a number of additions to Appendix D, and clarified how construction loan inspection and phase-specific fees should be disclosed before and after the project is completed. If the fees are collected after the project is completed, they must now be disclosed in an addendum to both the Loan Estimate and the CD. Additional clarifications were also made regarding how construction costs, existing lien payoffs and unsecured debt payoffs are disclosed.

–Written List of Providers. The CFPB said that changes could be made to Form H-27 without losing safe harbor protections. The amended rule also clarifies when a service is considered “shoppable.” In addition, the Bureau said that a WLP may exclude a list of fee estimates not required by the lender, such as title search, notary, and fees for other administrative services.

–Re-disclosures after Rate Lock. A lender must issue a revised LE after the interest rate has been initially locked if no CD has been issued. Once a CD has been issued, the lender must issue a revised CD if the rate lock makes the CD inaccurate.

–Cost reductions after initial LE. The Bureau clarified that cost reductions of certain items don’t automatically reset tolerances. Tolerance determinations are based on comparisons between “the charge paid by or imposed on the consumer” versus “the amount originally disclosed” or a revised estimate.

Based on our discussions with clients, the overall reaction to these changes seemed to be positive. However, many clients are still working their way through the documents and probably won’t start implementing these changes in their systems and workflows until after the deadline for the GSE’s Uniform Closing Dataset compliance has passed.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)

Source: https://www.mba.org/publications/insights/archive/mba-insights-archive/2016/trid-20-more-clarity-and-a-potential-fix-for-the-black-hole

About to be Audited ? E-Exams are Here !

By Sharif Mahdavian

In the wake of the last decade’s mortgage crisis, state and federal regulators looked to technology to help address the need for more comprehensive mortgage loan reviews. Determining whether an individual loan or a lender’s total production complied with applicable laws and regulations was no small feat. Examiners had to sift through piles of documents to extract data points relevant to various rules. Without technology, reviewing 100 percent of a lender’s production was clearly impractical.

The creation of the National Cooperative Agreement for Mortgage Supervision a decade ago was a major step in improving cooperation and coordination among state regulators. Model examination guidelines developed by the cooperative allowed the use of automated technology for examiners to enable comprehensive loan audits, rather than sample-based manual reviews.

Automated Compliance Tools Regulators Are Using

The electronic examination (e-Exam) process is now being used for both single and multi-jurisdictional examinations. Today, the vast majority of jurisdictions have utilized the e-Exam process.

This platform and the e-Exam format provides users with comprehensive reporting far beyond what is available through manual processes. In addition to federal and state high-cost tests, tests for TRID and QM status can be returned virtually instantaneously. Tests are tailored not only to specific lending guidelines, such as those for the government sponsored entities (GSEs), but also for originator license type.

The Compliance Evolution

Recent announcements from the Consumer Financial Protection Bureau (CFPB) suggest “regulation by enforcement” is going away in favor of a more collaborative environment in which there will be formal rulemaking on which financial institutions can rely. And it acknowledges the current state of play: lenders do not want to violate applicable rules, and regulators want to foster compliant lending.

For regulators, the results of e-Exams can uncover systematic difficulties that lenders face and provide guidance as to which regulations need greater clarification. The existing (and hopefully soon to be corrected) TRID “black hole” is a prime example. In the current rule, well-intentioned lenders cannot amend closing disclosures when acting in good faith if the initial closing disclosure was issued too early. Last August, the CFPB proposed an amendment that will allow creditors to reset tolerances by providing a closing disclosure, including any corrected disclosures, within three business days of receiving information sufficient to establish that a reason for revision applies. The CFPB has sought extensive comments on the proposed fix, but, at the time of this writing, a finalized amendment has yet to be issued.

Another prime example is per diem interest regulations. In California, four of the top 10 non-bank lenders were fined more than $13 million in the last year and a half for violating the state’s per diem interest rule. Today, the automated compliance tool can not only allow regulators to test for such violations, but also enables lenders to test for permissible per diem limits and correct any variances before they become violations.

In addition, automated compliance testing with advanced tools can provide information not only on what limits have been exceeded, but what specific fees, disclosures, or delivery timing sequencing have caused a potential violation. This testing translates into lenders being able to make complaint restitution when appropriate and alter processes to avoid future problems.

 

Source: http://www.mortgagecompliancemagazine.com/technology/past-present-future-e-exams/

How to Tighten Timelines and Streamline the Mortgage Origination Process

Thirty years ago, mortgage origination was a simple process. An application was taken at the local savings and loan branch, documents were prepared within 48 hours, sent to a title company with a note to close, and then the entire deal was sealed within days with a congratulatory handshake to the happy new homeowner.

What once took less than a week to complete now takes approximately 50 days—with plenty of hoops for lenders to jump through. In today’s environment, lenders are responsible for complex data management and hundreds of active compliance regulations, with steep fines if they get it wrong.

To succeed in an environment of increasingly narrow margins, broad competition, and ever-more complex regulation, lenders must take a methodical approach to loan origination, adding dynamic, optimized workflow technology. This need for compliance, data, technology, and management to exist within the same ecosystem is greater than ever. The good news is that, in an increasingly digital world, achieving such operational control is becoming more manageable. Best-in-class solutions are crossbred compliance management systems (CMSs) built by software engineers and maintained by a team of experts well versed in financial law and regulatory compliance knowledge.

For an industry that has been slow to adapt, this emergence of sustainable, smart, and reliable digital compliance ecosystems fosters an environment that can effectively improve the way the industry manages regulatory changes. These expertise-fueled solutions empower financial institutions to respond with agility to the ever-growing regulatory landscape. Alleviating the burden of managing the overwhelming compliance infrastructure frees lenders to focus on profitability and look to the future, instead of over their shoulders.

The key lies in finding the right tool that combines most, if not all, compliance management and delivery needs into a single CMS. As regulation continues to impact the financial services industry with a near-constant cycle of updates, new regulations, and processes, the pressure compresses down to the finance and compliance professionals. In addition to existing job responsibilities, the mortgage banking industry at large balances a myriad of siloed tools that slow them down and lead to decreased productivity across the board.

Today’s comprehensive CMS solutions, however, are designed to keep institutions safe, cost-effective, and on pace with regulators in one seamless platform.

 

Source: http://www.themreport.com/daily-dose/03-12-2018/navigating-mortgage-ecosystem

Update on Fair Lending in Mortgage Originations

The Senate is poised to pass a bill this week that would weaken the government’s ability to enforce fair-lending requirements, making it easier for community banks to hide discrimination against minority mortgage applicants and harder for regulators to root out predatory lenders.

The sweeping bill would roll back banking rules passed after the 2008 financial crisis, including a little-known part of the Dodd-Frank Act requiring banks and credit unions to report more detailed lending data so abuses could be spotted.

The bipartisan plan, which is expected to pass, would exempt 85% of banks and credit unions from the new requirement, according to a Consumer Financial Protection Bureau analysis of 2013 data.

The mortgage industry says the expanded data requirements are onerous and costly, especially for small lenders. But civil rights and consumer advocates say the information is critical to identifying troubling patterns that warrant further investigation by regulators.

“The data operates as a canary in the coal mine, functioning as a check on banks’ practices,” said Catherine Lhamon, chair of the U.S. Commission on Civil Rights. “The loss of that sunlight allows discrimination to proliferate undetected.”

For decades, banks have been required under the 1975 Home Mortgage Disclosure Act to report borrowers’ race, ethnicity and ZIP Code so officials could tell whether lenders were serving the communities in which they are located and identify racist lending practices such as redlining.

But discriminatory practices continued, with the financial industry disproportionately targeting black and Latino borrowers with subprime mortgages loaded with high fees and adjustable interest rates that skyrocketed after the stock market crashed in 2008.

“The experience of the financial crisis taught us that we really need to know more about the loan terms and conditions, not just a borrower’s race,” said Josh Silver, senior advisor at the National Community Reinvestment Coalition.

Lenders were supposed to start gathering extra information about borrowers’ ages and credit scores, as well as interest rates and other loan-pricing features in January.

Congress had charged the Consumer Financial Protection Bureau, an independent watchdog agency formed after the financial crisis, with collecting, analyzing and publishing the data. But White House budget director Mick Mulvaney, named the CFPB’s acting director last November, said the agency plans to reconsider the new requirements and that banks would not be penalized for data collection errors in 2018. He also stripped the bureau’s fair-lending office of its enforcement powers.

The Senate bill would repeal many of the new reporting requirements, exempting small lenders making 500 or fewer mortgages a year from the expanded data disclosure.

“Banks say they don’t treat borrowers differently, but the data shows a different story,” Sen. Catherine Cortez Masto (D-Nev.) said on the Senate floor Thursday. “Redlining remains a major problem for communities of color.”

A February report by the Center for Investigative Reporting showed that redlining persists in 61 metro areas — from Detroit and Philadelphia to Little Rock, Ark., and Tacoma, Wash. — even when controlling for applicants’ income, loan amount and neighborhood, according to its analysis of Home Mortgage Disclosure Act records.

Nevada saw the highest foreclosure rate for 62 straight months during the Great Recession, especially in minority communities, said Cortez Masto, a former state attorney general. More than 219,000 families lost their homes. Whole neighborhoods were hollowed out — with boarded-up homes, for-sale signs and empty lots dotting Las Vegas and Reno, she said.

“With everything we saw 10 years ago, I cannot now believe that we’re considering restricting access to this kind of data,” said Cortez Masto, who has introduced an amendment to preserve the expanded information. “I’ve seen what happens when you don’t have strong enough protections against housing discrimination.”

But 12 of her Democratic colleagues have co-sponsored the bill, which would be the most significant revision of banking rules since Dodd-Frank. Five more from the Senate Democratic caucus voted last week to advance the legislation. Sponsors of the financial regulation rollbacks include 2016 vice presidential candidate Tim Kaine (D-Va.), a former fair-housing lawyer. The bill’s supporters say they don’t think it would widen the door for discriminatory lending, arguing that mortgage data such as race and gender collected before Dodd-Frank would still be gathered.

The mortgage industry says the proposed deregulation would cut costs and help smaller community banks remain competitive, enabling them to make even more loans. The Mortgage Bankers Assn. estimates that expanded data would still be collected on 95% of loans.

“If you want to provide some regulatory relief, it makes sense to do it for these institutions that aren’t making a lot of loans,” said Mike Fratantoni, chief economist for the Mortgage Bankers Assn. “You’re not losing much in terms of your visibility into trends in the market.”

The problem with the former reporting requirements, advocates say, is that banks often blamed racial lending discrepancies on borrowers’ credit scores or other characteristics that were impossible to verify without additional reported data that lenders already collect as part of the mortgage application and underwriting process.

The rollback in reporting requirements would potentially hurt not only minority borrowers, but also older applicants and those living in rural communities and small towns that are disproportionately served by community banks, advocates say.

“Lending discrimination is occurring in real time, and we have to have the tools to be able to address it,” said Vanita Gupta, who headed the Justice Department’s civil rights division during the Obama administration and now is the president of the Leadership Conference on Civil and Human Rights. “It’s not just happening in the context of big banks, it’s also happening in community banks and credit unions.”

CFPB Regulations and Your Compliance Management System

PERSON OF THE WEEK: New rules from the Consumer Financial Protection Bureau (CFPB) require that all mortgage lenders maintain compliance management systems (CMS) – which is not, as some people think, software but rather a set of practices and policies that ensure a lender is meeting regulatory compliance in all areas of federal consumer financial law.

Essentially, a CMS is a plan for how a lender will meet compliance. The plan’s structure is relative to the lender’s business model. And the plan must change as regulations change, are reinterpreted, or as the lender’s business model changes.

Continuity’s software platform is used to automate as many parts of a lender’s CMS as possible – or, put another way, as many parts as the lender wishes – but its purpose is to do so holistically. Among its key features and capabilities is its ability to house hundreds of pre-built procedures spanning dozens of program areas.

It includes procedures for examination areas including consumer compliance, BSA/AML, lending operations, deposit operations, and Community Reinvestment Act and Fair Lending compliance, and also contains a large collection of risk assessments including BSA, Fair Lending, electronic banking, identify theft, and more.

Such tools have become critical in order for lenders to effectively meet compliance because they aid greatly when to comes time for a compliance audit. Because a majority of the tasks associated with compliance are automated and tracked by the platform, it provides a powerful tool for delivering compliance data to examiners.

Such tools also have also enabled lenders to take a much more holistic approach to compliance. So much so, they have led to the development of what Continuity calls the “Unified Compliance Management System” (UCMS) model.

To learn more about this new model, MortgageOrb recently interviewed Pam Perdue, chief regulatory officer and executive vice president for Continuity.

Q: What is this “holistic” approach to regulatory compliance we are starting to hear about?

Perdue: The holistic approach relies on adopting the UCMS model, which allows lenders to quickly adapt to and implement any type of regulatory change. Whether those changes come from the outside, such as the recent HMDA implementation deadline, or are internal adjustments, like the addition of an office or a shift in key personnel, applying the UCMS model ensures nothing falls through the cracks.

An effective CMS includes the preventive, detective and corrective controls a lender needs to have in place. It’s “unified” because everything is in one place, and thought about as part of a process and an integrated framework, rather than scattered on disparate systems with various owners and vague accountability.

The UCMS model starts when a change occurs. First comes an understanding of the risk that a new regulation poses to the organization, then adapting its policies to comply. After re-evaluating organizational policies, building new or updating existing procedures is critical. Implementing technology upgrades and providing training for employees impacted by the regulation comes next. Finally, ensuring that monitoring and audit programs have incorporated the new or revised standards completes the change cycle.

Executing this step-by-step process not just helpful when a new regulation is issued, it promotes efficiency throughout the compliance function. Even if no changes to the rule occur, lenders need to preserve evidence that they have done their best to ensure compliance, in case they encounter future regulatory or legal challenges about their performance. A solid CMS is essential to a lender’s ability to defend itself against allegations or accusations of wrongdoing, whether the source is a single angry consumer, a regulator on the warpath or a group of hungry class-action plaintiffs.

In addition, being able to work backward through the cycle when something goes wrong, is helpful at ensuring thorough remediation. Doing so exposes lapses in monitoring or training that may have occurred, or places where system upgrades may have been to blame. Inspecting procedures and policies to see where they may have contributed to weaknesses in execution ensures the root causes for deficiencies are properly identified and addressed. Again – nothing falls through the cracks using the UCMS Model.

Q: What are some of the common mistakes in lenders’ approaches to regulatory compliance?

Perdue: Common mistakes we see over and over again fall into three categories: over-reliance on one or a few staff; failure to embed compliance into business processes; and lack of standardized compliance processes.

Many lenders exhibit a very disjointed, almost haphazard, approach to managing compliance. These lenders often rely on one or a few mid-level executives to answer for the organization’s compliance program, instead of involving all of upper management to help to build a culture of compliance. Furthermore, placing the entire burden of regulatory interpretation and application in the hands of a select few increases the risk that something will be overlooked or misinterpreted along the way.

A second common mistake is thinking of compliance as an added step. Viewing compliance as a “necessary evil” relegates it to always being an afterthought. The most effective organizations embed the compliance work steps into their processes for originating, funding and servicing loans, so that it is just another step in doing business. Not only does this combination tend to streamline the workflow, it also promotes better compliance outcomes.

Third is standardization. Many lenders have built their compliance programs around the misconception that merely checking the right boxes for individual regulations is enough. Lenders following this reactionary approach to each new regulation tend to have costly and time-intensive practices, since compliance is treated differently each time, and is often not integrated seamlessly throughout the organization. This type of “reactionary” approach relies on time-consuming manual processes that, even if they are accurate, may deliver compliance at too high of a cost.

Consistently applying the unified CMS model reduces the time, energy and expense – as well as the hassle and worry – over addressing and implementing regulatory or other types of change. A poorly executed compliance program can expose the lenders to penalties and the loss of borrowers’ trust.

Q: Since passage of the Dodd-Frank Act, lenders and servicers have had to ramp up staff hiring to keep up with regulatory compliance. Has that helped or has it created a new set of issues?

Perdue: Hiring more people seems like an easy and obvious solution to capacity challenges. However, a peek beneath the surface reveals that adding new staff creates its own series of challenges and constraints.

Of course, there are the obvious distractions of recruitment: finding qualified, competent people in a highly competitive marketplace and given any applicable geographic constraints. But beyond this – and especially during busy periods – training new hires distracts key staff from their own work.

Even though more people may lessen the overall burden over time, these human resources are expensive financially and psychologically up-front, because they consume others’ time. I have observed that combining the right technology and key staff yields a more effective compliance management system than just staff alone. When lenders embrace the idea – however wrong it is – that the only solution to a capacity problem is to add staff, then they have effectively ensured the problem will persist in perpetuity.

Why? Because they have not actually made processes more efficient or outcomes more accurate. Adding technology forces the standardization of consistent and repeatable approaches, which can really ramp up operations in a lean and effective way.

Why You Should Learn About HUD 232 Loans

There are about 75 million people in the baby-boomer generation and about 3 million of them will reach retirement age each year for the next two decades. Many may eventually end up in a senior-housing facility, such as an assisted-living, memory-care or skilled-nursing home.

A commercial mortgage broker advising the owner of a senior-housing facility about financing should know the industry is strong in terms of profitability and that the broker can play a key role in assuring excellent financing terms. The U.S. Department of Housing and Urban Development (HUD) 232 loan program, for example, offers what many believe to be one of the best health care financing vehicles for both refinances and new-construction loans.

The HUD 232 223(f) program is for refinance and acquisition loans, but is most readily used on a refinance. The lending constraints on 223(f) refinancing include the greater of 80 percent loan-to-value (LTV) or 100 percent of the total cost of refinancing the existing debt, and a minimum 1.45 debt-service coverage ratio (DCSR), which is usually based on a 35-year term.

With HUD — more aptly the Federal Housing Administration (FHA) under HUD — insuring a loan for up to 35 years, value is created based on a cash-on-cash equation and an internal-rate-of-return model, and ultimately the amount of net cash flow an owner can take home. In fact, it may be wise to explore two amortization schedules, one using a 30-year loan term and one using a 35-year term.

New rules

The amount of upfront savings using a 35-year term loan are staggering. Throw in the fact that rates on HUD/FHA loans are often 75 to 100 basis points lower than other conventional financing, and you’ve added substantial value with additional dollars your clients can put toward the bottom line, just by advising them on the correct program.

The HUD 232 loan term and amortization are based on a property-condition report. A rule of thumb is that the term of the loan can be up to 75 percent of the remaining useful life of the property. Therefore, the loan term can be up to 35 years so long as the remaining useful life of the property is 47 years. With capital improvements, the useful life of the property also can be extended.

In order to maintain credibility and add value to the process, mortgage brokers should understand what condition their client’s property is in for its vintage, and what is needed to extend the asset’s useful life. Oftentimes, these improvements can bolster the marketability and performance of the property, raising its value.

Additionally, within the past year, HUD revamped the health care financing rules for 223(f). It’s now possible to take out equity from a property without carrying debt for a full two years. To be clear, HUD still does not directly provide cash-out loans, but it will allow less-seasoned debt refinances, and refinances of intermediate bridge loans.

Essentially, the new rules state that 60 percent LTV refinances will be allowed with less than two years of seasoned debt when less than 50 percent of the mortgage proceeds are used for the benefit of the project and repayment of seasoned debt. A 70 percent LTV refinance will be allowed with less than two years of seasoned debt when more than 50 percent of the mortgage proceeds are used for the benefit of the project and repayment of seasoned debt.

To receive a full 80 percent LTV loan, debt on the facility must be seasoned for a full two years and other 223(f) criteria must be met. Experienced owner-operators with multiple facilities are typically sitting on a portfolio that has a large amount of equity tied up in the assets, which can be recouped through HUD refinancing, if processed correctly and managed appropriately with the right lender.

Construction loans

The HUD 232 New Construction and Substantial Rehabilitation program also is an attractive financing option for health care property developers and owners with the requisite amount of experience and financial wherewithal. The HUD program allows for a new-construction loan for a profit-motivated entity that includes the following limits based on a maximum 40-year amortization period: up to 90 percent of replacement cost; 75 percent LTV for an assisted-living building and 80 percent for a skilled-nursing facility; and a 1.45 DSCR.

The HUD construction loan can take some time to close. It’s a construction loan with an interest-only period of typically 18 to 22 months that rolls into an amortizing loan upon cost certification.

As banks continue to get direction from regulators to reduce risk, they have reacted accordingly by limiting new-construction loans and/or leverage levels. This is making the HUD 232 construction-loan program more attractive every day, even with the challenge of time to close. It would be prudent to get together with a solid HUD 232 lender to understand the benefits and drawbacks of this program compared with traditional bank products.

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Commercial mortgage brokers seeking to add value for their clients should contact a HUD expert to better understand the financing terms available for its various products, and help advise their clients on how to maximize the value of their properties in order to achieve the best financing execution.

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