LO Compensation Based on Product Type? Warehouse Banks to Approve Comp Plans? More Views on Gfee Changes

I've been visiting Colorado this week, where some of the conversation involves yesterday's sentencing of two individuals for fraud. "The elaborate scheme involved phony or inflated property appraisals for refinances or purchases, fraudulent mortgage applications, kick-back schemes involving straw buyers and funneling grant funds without disclosing who benefitted." This is exactly the type of story that gives those currently in the mortgage industry a continuing black eye.

Many of us have been through business cycles before, and this one is playing out. My informal information shows pipelines down 20-30% versus six months ago, even though everyone seems incredibly busy dealing with fewer loans. And we'll see margins compress, compensation decline, and companies tighten their belts or else. The MBA's application numbers this morning confirmed the continued slide, with apps dropping over 7% last week. Refi's fell 8%, purchases were down 4%. The percent of refi applications are down to 75%.

But companies are sensing this is a good time to pick up talent. I have been asked to help a very well capitalized, multi-state, privately owned mortgage lender in the Midwest who is seeking a Mortgage Compliance Director. The lender is a multi-billion dollar retail originator and national servicer, fully agency approved, working in the retail channels, and licensed in most states. This is clearly a senior position, managing a staff of 8-10 plus indirect reports, and extensive background in both production and servicing compliance is preferred. Please send confidential inquiries or resumes to me at rchrisman@robchrisman .com.

I received this note from Virginia: "Rob, what is this rumor I hear about warehouse banks requiring that they approve their clients' LO comp plans? Is that madness?" I have heard the rumor of it being bantered about. (Banks, of course, won't have that hurdle if it really comes to pass.) But the trend toward counterparty accountability is unmistakable, and if some regulatory body can shut a mortgage bank down based on LO comp violations, and the warehouse bank possibly suffer a loss due to that, it is not out of reason. But ask your warehouse rep.

Loan officer compensation continues to be a hot button, in spite of it being "spelled out" nearly two years ago. (Remember the concern everyone had leading up to April 1?) I received an e-mail from Oregon: "Rob, do you have knowledge of, and if so can you comment, on paying loan officers based on different products. Meaning can you legally pay a loan officer a higher Commission for FHA loans and a lower commission on conventional loans?" I am not an attorney, but know a few, so I turned the question over to Brad Hargrave of Medlin & Hargrave, who wrote, "I certainly sympathize with your frustration regarding the range of positions taken by mortgage companies in connection with the issue of varying loan originator ("LO") compensation between or across loan products. The reason for this range of positions, in my opinion, is that the issue is not directly addressed in the current version of the LO Compensation Rule (in TILA, Reg. Z and the Official Staff Commentary to Reg. Z) ("the Rule"), and thus mortgage companies have taken positions based, in large measure, on their respective risk tolerances.  My partner and I are of the opinion, however, that the most conservative reading of the Rule is that an LO's compensation should be identical across all products, and thus should not vary between products, including between FHA and conventional loans.  And, I agree with Rob entirely that this is particularly true when the LO possesses the ability to steer the consumer to a product that enhances his/her compensation, such as to an FHA product wherein his "bps" per loan are higher."

Mr. Hargrave continued, "Some of the confusion about this issue derives from an early Federal Reserve webinar in which the speakers suggested that extra effort, or labor, on the part of the LO might merit a higher rate of compensation under the Rule.  This led many to reasonably conclude that since an FHA loan requires more work, more compensation to the LO was justified.  Regrettably, however, there is no textual support for this position in the Rule, and the Fed went out of its way, in that early webinar, to advise the listeners that nothing said therein should be construed as legal advice or relied upon as legal authority.  And, in our opinion, one must rely on "the words on the page," and the words in TILA, Reg. Z and the Official Staff Commentary simply don't support paying an LO more in connection with a loan on which he/she worked harder or longer.

"For what it's worth, an argument can be made under the existing Rule that a loan product or channel which costs the creditor more to originate could be the basis for paying an LO less in connection with that loan product or channel, pursuant to the "legitimate business expense" language in the Official Staff Commentary.  (This legitimate business expense language does not appear in the new amendments to the Rule, however).  Regrettably, though, this language is of no assistance when the creditor, or mortgage company, wants to pay the LO more, which is usually the case, at least in connection with government loans.

"Finally, there are the amendments to the Rule that take effect on January 10, 2014 to consider.  The amendments change the terms "transaction term" and "proxy" for a transaction term.  And these new definitions may justify varying compensation between loan products or channels in certain situations.  However, the new definition of "proxy" is focused on the LO's discretion or control over the term, i.e., if the LO does not or cannot have any control over the issue, such as the state in which the real property security is located, then a variance in compensation could be acceptable.  So, for instance, you could pay an LO more on loans secured by property in State A than on loans secured by property in State B, since the LO can't control where the property securing the loan is situated.  But if he/she does have control, such as whether to put the borrower in an FHA or conventional loan, then his/her compensation should not vary.

As I'm sure you're aware, there are still many unknowns in all of this, most significantly of which is the CFPB's enforcement intentions under both the existing Rule and the new amendments, and thus it's difficult to predict with much certainty what the Bureau might or might not do in the event this sort of variance attracted adverse regulatory scrutiny.  I'm hopeful, of course, that we will all know more in the coming months." Thank you Brad. If you'd like to contact him for legal advice, he can be reached at bhargrave@mhlawcorp .com.

And continuing in this vein, recently the commentary mentioned how a mortgage licensee commented on the Maryland Commissioner's examiners treating Lender credits as lender paid compensation to the broker. I received this note from attorney Steve Lovejoy (Maryland): "Lender credits create issues all around, with GFE and TIL.  Also, some documents software does not know how to handle credits under the new GFE, TIL and HUD-1.  In 2010, I did an extensive research job on how to disclose lender credits and share that with you here. (See attached).  Apparently, the Commissioner is making the assumption that any lender credit involves payment of some of the broker fee as a closing cost. This is especially true if the other prepaid charges do not equal or exceed the credit.  As you can see from my memo, we advise the client that somewhere in the loan documents should appear language that states what the lender credit is paying for.  An optional "itemization of Amount Financed" is a good place for that. My memo and, hence, the above-described recommendation, preceded the LO comp rule, so there are disclosure reasons cited for that conclusion.  But the Commissioner's exam position on this clearly adds another reason why itemizing the lender credits (and, for that matter, seller credits) in writing somewhere in the loan file is advisable." Steve continued, "If the licensee needs help answering the exam findings, George Kinsel and I are available to assist.  I am former counsel to the Maryland Commissioner and George has 33 years' experience in the same office regulating non-depositories." Steve wrote an extensive piece on it; e-mail him for information at lovejoy@shumakerwilliams .com. And no, this is not a paid ad.)

Yesterday the commentary had one person's opinion about gfees, and how the industry and the press should note that higher fees are a tax on new borrowers. I received plenty of comments. "I had to vent my spleen about the writer who whined about the gfee increases. The writer said, 'one group is silently being taxed for the direct subsidizing of another.' The writer is absolutely right - except the group being subsidized is not the group he/she thinks it is. Fannie and Freddie once charged between 12 and 20 bps for years and then, when all hell breaks loose in the financial markets, they became insolvent in about 14 seconds and the taxpayer had to buck up and take $140 billion in loses. The taxpayer wasn't obligated to do that. They did it to save the financial system. And where would 90% of us, in the mortgage industry, be if the taxpayer would have given Fan/Fred the middle finger?  Hint: not frolicking in piles of profits the past few years have brought us. So, are the gfee increases an improper 'tax' or are they both a rational pricing of expected and catastrophic risk and a way to pay back the taxpayer for his benevolence? Who really got subsidized big time?  The mortgage originator - that's who. Further, if gfees are REALLY so high - where is the private sector?  If risk is overpriced, shouldn't private money be tripping all over itself to write credit insurance?  Maybe we should pipe down a bit and take a look at our past few year's P&L's and then ponder what those P&L's would have looked like had the taxpayer let Fan/Fred (and us) die."

And, "The person who wrote you about g-fees isn't entirely correct.  G-fees are for much more than 'the risk premiums paid for the purpose of guarantying (sic) that the investors in an Agency MBS will continue to be paid if the servicer fails.'  GSEs are concerned about whether the borrower will repay the loan, too, which factors greatly into g-fees. G-fee increases will be essential if the private sector is to return to the mortgage market and if the government's footprint in housing is to shrink. There is no getting around it. I think most experts will tell you that the GSEs didn't have sufficiently high g-fees in the mid-2000s for the risk of the loans they were buying. Is there some catch-up going on now? Maybe, but for the most part the GSEs are now trying to do a more calculated job of determining the riskiness of loans."

And lastly, "The g-fee debate made me laugh. When we can't get the public to be concerned about the last 13 years adding $10+ trillion to the nation debt (both R & D admin), the Federal Reserve monetizing MBS & T-Bills beyond that, all causing our gas & food prices to climb, we're going to get them to understand or care about the complexities of g-fee raising rates on the few members of society that can still qualify for a mortgage? Maybe if the g-fee was a charge Idol contestants paid to wear clothing items they'd care..."

Well, the European Central Bank (its equivalent of the Federal Reserve) issued a statement in Frankfurt after the Cypriot parliament voted against levy on bank deposits. "The ECB takes note of the decision of the Cypriot Parliament and is in contact with its Troika partners. The ECB reaffirms its commitment to provide liquidity as needed within the existing rules." There is chatter that Russia will step in somehow. Yes, the developments have reminded us that the problems in Europe have not magically disappeared, and indeed we saw a flight to quality in more stable markets - like ours. Agency MBS lagged, however, as Treasuries rallied sharply again on a flight to quality bid brought on by heightened risks in the euro zone, while mortgage banker supply ramped up. Prices on 30-year Fannie securities improved nearly .250 and our 10-yr T-notes improved nearly .5 in price and closed at 1.91%.

Today the press is continuing to discuss the implications of Cyprus developments, and its finance minister being in Russia, but let's not forget the FOMC meeting going on here. There will be no change in overnight rates, but the statement will be released at 2PM EST, along with the Fed Summary of Economic Projections, and thirty minutes later Chairman Bernanke will hold a press conference. In the early going the 10-yr is slightly worse at 1.92% and MBS prices are off/worse a few ticks.