44 Days Until R-1366 is a R-EALITY


You might be asking yourself, “Has this guy finally flipped his lid?  R-1366?  Sounds like an experimental drug – this is supposed to be a MORTGAGE blog.”  My friends, R-1366 could indeed be viewed as an experiment – one that will reshape the residential home finance industry and possibly bring large chunks of it to its knees.  You’re probably already familiar with it by its trade name – the Loan Originator Compensation Rule.

I discussed the LO Compensation Rule at length in a previous post the day after it was released, so I’m not going to rehash it in this post.  However, in case you haven’t been following the biggest story in the industry since the collapse of the subprime market, you can catch up with the details here.  The bottom line is that there are multiple legal interpretations on how this rule will affect businesses and LOs – on what is legal and what is not legal – and to date the government has provided minimal guidance to help the industry understand how to remain compliant.

There is some good news, however.  As I write this, representatives of the National Association of Mortgage Brokers are on Capitol Hill testifying in hearings on the implementation of the Dodd-Frank bill.  Additionally, the House Financial Services Committee issued its oversight plan for this session of Congress and has included a hearing on loan officer compensation.  The committee has stated that it has some concern that the “rules will have an adverse impact on small businesses who originate mortgage loans and their ability to remain in business.”  While this is just a hearing on the rule, it is good news and a big step in the right direction.  It shows that an organized call to action can have some effect.  NAMB will be in Washington on March 14 and 15 holding its 2011 Legislative and Regulatory Conference, which will include a day of advocacy on Capitol Hill.  Many concerned mortgage professionals will be present to make their voices heard.

Now, regardless of what happens with the Fed rule, there WILL still be opportunities in the mortgage business.  People will always need money, and money is what we sell.  Even if the compensation rule goes into effect with no changes, those of us still in the mortgage business are in a good position.  Under the new rule, however, where you work will become just as important as how you work.  The truth is that you have 44 days until the way you earn a living changes.  Yes, there are continuing efforts to delay or overturn the rule, but you cannot count on them being successful.  Do you understand your employer’s upcoming compensation plan? Does your employer even have a plan?  Do your employer’s lenders and/or investors have a plan?  If so, do you know what those plans are?  Now is the time to ask the tough questions well in advance of April 1.  No one else is going to look out for your business or your income if you don’t.

Federal Reserve Board Issues Final Rule Implementing MLO Compensation and Anti-Steering Provisions of the Dodd-Frank Act



On Monday afternoon, the Federal Reserve Board issued a final rule effectively implementing the sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act dealing with loan originator compensation and the prohibition against loan steering.  The word “effectively” is used because essentially, this is a modified version of a proposed rule issued last August 26th (which is well before the Dodd-Frank Bill was even debated on Capitol Hill).

The new rules will become mandatory on APRIL 1, 2011, although if past rulemaking is any indication, many banks/investors will begin to implement changes sooner to ensure that loans made under the existing rules are closed before the deadline.

Here are some key details:

  • All loan originators will no longer be permitted to receive compensation based on the loan terms (interest rate, etc.), but will be allowed to be compensated based on a fixed percentage of the loan amount.  Based on the language in the Act and in the rule, it would appear that YSP is effectively eliminated as of April 1st.
  • On a given transaction, loan originator compensation may come from the consumer OR a third party (i.e. a bank in a brokered transaction), but NOT BOTH.
  • Loan originators will be explicitly prohibited from steering borrowers to loans that are “not in their interest” in order to receive more compensation.
  • It establishes a “safe harbor” tolerance for the steering prohibition, saying that no steering is deemed to have occurred if:
    • The Loan Originator presents the Consumer with loan offers for each product in which the consumer states they have an interest AND
    • The loan options that are presented include the lowest rate that the consumer is qualified for on a loan with no high-risk features like a prepayment penalty or negative amortization as well as the lowest origination fees and points that the consumer is qualified for on that loan.

The text of the final rule, which contains all of the provisions and requirements including in-depth detail on safe harbor, can be found at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816d1.pdf

In the actual text of the rule, the Federal Reserve Board gives some very specific examples of compensation that would and would not be permitted under the new rule.  A thorough reading of pages 100 – 107 of the rule may prove helpful to loan originators, managers and company owners alike.

New Legislation – What’s Next For Loan Originators? (Part 2)

IT’S OFFICIAL.  President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law last Wednesday as expected.  As we mentioned in our first report on the legislation, this massive (2300 page) new law contains a subsection called the “Mortgage Reform and Anti-Predatory Lending Act”, which imposes wholesale changes on the mortgage lending industry and may have a direct impact on your day-to-day business and bottom line. 

This is the second in a series of reports on what’s in the law, what’s not in the law, what we know and what we don’t.  Considering that massive amounts of new powers were given to the new “Consumer Financial Protection Bureau” to create a structure of regulations (that carry the force of law) to implement the requirements of the Act, details are sketchy on many of the items addressed in the legislation, but we’ll do our best to share as much as possible with you. 

In this update, we will discuss the requirement for creditors to consider a borrower’s ability to repay a loan before making it, and the exemption from that requirement given to a new category of “qualified mortgage loans.”

Title XIV, Subtitle B, Section 1411 of the Act prohibits creditors from making a residential mortgage loan without making “a reasonable and good faith determination based on verified and documented information” that the consumer “has a reasonable ability to repay the loan … and all applicable taxes, insurance … and assessments.”  This determination would specifically have to include consideration of the following items:

  1. Credit history
  2. Current income
  3. Expected income the consumer is reasonably assured of receiving
  4. Current obligations
  5. Debt-to-income ratio, or the residual income the consumer will have after paying mortgage and non-mortgage debt
  6. Employment status
  7. Other financial resources other than the equity in the subject property

Note that the law does not say which of the factors above must be prioritized, as long as all of them are considered.  Given the perceived intent of the 7 items above, it is ironic that there is also a provision in the Act that would permit the originator to “consider seasonal and irregular income” in underwriting. 

The Act also contains guidelines directing creditors how to calculate the monthly principal and interest payment for purposes of determining the borrower’s ability to repay.  We can expect these guidelines to be added to the applicable Selling Guides for FNMA and FHLMC in the near future, we’ll omit a discussion of them here for the time being.

The final item we’ll go over in this update is the “safe harbor” provision of the Act that says that a borrower is presumed to have the ability to repay a “qualified mortgage loan.”  This will essentially give lenders an automatic defense against any lawsuits brought for violation of the “ability to repay” requirement for loans that meet the criteria.  Although the Act defines what a “qualified” loan is, it gives power to the Bureau to issue regulations changing the definition, so we can’t yet know what the final definition will look like.  However, as of now, a “qualified mortgage loan” is defined as a loan in which all of the following apply:

  1. The payments of the loan may generally not result in an increase of the principal balance
  2. The terms of the loan do not result in a balloon payment, except for certain limited exceptions
  3. Any income and financial resources relied upon to qualify are verified/documented
  4. For a fixed rate loan, underwriting is based on a fully amortizing payment and includes applicable taxes and insurance
  5. For an ARM loan, underwriting is based on a fully amortizing payment at the maximum rate the loan can attain during the first 5 years, including taxes and insurance
  6. The loan complies with any guidelines the Federal Reserve Board establishes regarding Debt-to-Income ratios or residual income requirements
  7. The total points and fees payable in connection with the loan do not exceed 3 percent of the total loan amount (with the FRB to issue regulations for “smaller” loans)
  8. The loan term does not exceed 30 years, except in limited circumstances

For the purposes of computing “points and fees” for number 7 above, include all charges paid to the originator or an affiliate of the originator (in the case of a broker, this means that lender fees would be included in this calculation), including the maximum prepayment penalty (if any) and any upfront credit insurance premiums.  Third party fees not retained by the originator or an affiliate are excluded, as are up to two (2) “bona fide discount points” in many circumstances.  The wording of this section, while certainly not friendly to the mortgage lending industry, is much more favorable than the wording in the original Senate bill which would have included a portion of the FHA MIP or VA funding fee.  Given that the Act specifically gives the new Consumer Financial Protection Bureau the power to amend/change these requirements in the future, it is possible that these rules may change significantly and may become even more restrictive. 

A key concern raised by the safe harbor is whether banks will make loans that are NOT “qualified” loans, or whether they will pull out of that space altogether.  Such a result would resemble the initial market response to Section 32 high cost loans when HOEPA went into effect.  When you combine these provisions with the effective elimination of Yield Spread Premiums (to be discussed in the next update), it is reasonable to expect that mortgage brokers and table-funders will be impacted by these requirements much more than correspondent lenders or chartered banks.

New Legislation – What’s Next For Loan Originators? (Part 1)

On July 15th, Congress passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” and President Obama is planning to sign the bill into law sometime next week.  A main purpose of this act is to increase regulation of investment banks, hedge funds and other large financial institutions.

However, the 1700-plus page bill contains provisions for new rules, regulations and mandates that will likely impact the entire mortgage lending industry and, perhaps, your bottom line.  Over the course of the next several weeks, we will deliver periodic emails with information on the mortgage lending related provisions in the act, along with a discussion of how and when you may see them impact your business. We hope you find these communications helpful as we continue to strive to bring relevant industry information to students of the Real Estate Institute.