Are LOs Liable for Illegal Comp Plans? You Bet they Are!; Genworth's take on QM/QRM; Builders Tweak Financing

JPMorgan Chase will reportedly exit the student loan market next month, according to a memo obtained by the Washington Post. "We no longer see any meaningful growth in the private student lending market," said Trish Wexler a JPMorgan representative. "We've just decided to invest our resources in our other businesses like auto lending, where we do see a lot of potential."

Builders know a thing or two about growth & potential. "Since you're already in here buying one of our homes, how about you use our mortgage company?" Here's an article from Bloomberg yesterday by Kathleen Howley and John Gittelsohn. "Builders including Lennar and PulteGroup Inc. that typically throw in concessions such as kitchen upgrades are also leaning on their financing units to boost orders as rising mortgage rates sap customer buying power. Those incentives may become more widespread as housing companies seek to avoid cutting prices after the biggest sales drop in three years and a 27 percent stock decline from a May peak."

Not to be out-reported, over at the Wall Street Journal reported on what LOs and pricing groups are seeing - namely that in many places jumbo rates (and let's not forget high balance conforming) are lower than conforming rates due to a "combination of interest-rate volatility, government policy and banks flush with cash that are enjoying lower funding costs, making jumbo mortgages an attractive investment for them." Of course banks rarely want to own assets with more than a 5-year maturity.

Speaking of high balance conforming, there is plenty of chatter about them going away entirely, along with lowering the maximum conforming loan amount - and companies are crunching numbers of recent production to see the impact on their margin and volume numbers if that actually happens. (As we all know, the high balance borrower will be the one that pays.) "Before the housing bubble burst six years ago, jumbo mortgages over the past two decades typically had rates at least 0.25 percentage point above conforming loans, but that widened sharply after 2007, reaching a peak of 1.8 percentage points in 2008, according to HSH. The rate difference between the two stood at 0.5 percentage point as recently as last November. For adjustable-rate mortgages, the disparity between jumbo and conforming loans is even starker. Rates on certain "hybrid" adjustable-rate jumbo mortgages that have a fixed rate for five or seven years are as low as 0.75 percentage point below conforming loans.

What bank wants to own 30-yr fixed rate paper? The article continued, "Conforming loans have become more expensive because federal officials, in a bid to reduce the outsize footprint of Fannie and Freddie, have raised the fees those companies charge to lenders, which translates into higher mortgage rates...Banks have long courted jumbo borrowers because they tend to have deeper pockets. Banks use their relationship with better-off clients to sell them other products, such as brokerage accounts and credit cards." Banks like those clients. And mortgage bank LOs have long complained about the lack of a great jumbo market to compete with against retail bank programs. "Some $8.3 billion in jumbo mortgages were packaged into securities during the first half of 2013, more than in the previous three years combined but just a sliver of the $281 billion in jumbo securitizations in 2005, according to Inside Mortgage Finance."

Genworth US Mortgage Insurance recently produced several documents to help its lenders understand the CFPB's final QM rule, and how the points and fees calculation applies to our mortgage insurance products under the Ability to Repay rule. The MI company also provided a very clear legal analysis of the treatment of LLPAs under the points and fees provision of QRM from the Buckley Sandler law firm. They are available on its homepage of Genworth's customer-facing website. Genworth also recently announced two personnel additions to its senior leadership team of its U.S. Mortgage Insurance (USMI) unit. Paul Gomez recently joined USMI as Chief Operations Officer (COO) and George Reichert joined as Chief Information Officer (CIO). And lastly, Genworth introduced a mobile version of Rate Express, its mortgage insurance rates and comparisons tool. "The free Rate Express mobile application (app) lets loan officers and processors quickly compare Genworth mortgage insurance rates or obtain a rate quote using their smartphone or tablet computer, so lenders can close loans faster."

Many in the industry are paring their workforce. The latest public example is Michigan Mutual, which dropped 20% of its mortgage workforce. In the Cleveland area, Crain's reports that Bank of America is eliminating the jobs of about 700 Cleveland-area employees who process mortgage loans. Nations Lending Corp. in Independence has eliminated dozens of positions, as well as Chase and Wells Fargo. But executives with Third Federal Savings & Loan in Cleveland, First Federal Lakewood and Quicken Loans say they continue to hire on a rolling basis. "Expectations published by the Mortgage Bankers Association are more dramatic. In a forecast dated Aug. 22, it projected that refinances will drop in the third quarter by 40% from the second quarter of this year, to $189 billion from $316 billion. It also projects they will drop every quarter through the end of 2014. The association expects home purchase lending to increase slightly in the third quarter but drop in the fourth quarter before rising again in early 2014. The group's full-year projection for 2013 places purchase loans 23% higher than they were in 2012 and refinances nearly 22% lower."

The public hears about all of the high-profile court cases and settlements, but there are plenty of smaller ones that stay out of the national press. For example, one recently involved TriMavin, and parent corporation Stearns, which are facing a lawsuit from a former chief appraiser who says the companies violated federal regulations and terminated her employment in response to her complaints. "In her complaint against the two companies, Katherine Scheri-chief appraiser at TriMavin from October 2011 to January 2013-alleges that Stearns developed a program to recruit mortgage brokers and loan officers by telling prospective recruits they could provide their own personal list of appraisers to be included on the approved panel for the appraisal process at TriMavin, an appraisal management company (AMC). Regulations under the Truth in Lending Act (TILA) require that employees, officers, and directors in the loan process not be directly involved in selecting, retaining, recommending, or otherwise influencing the choice of who will perform a valuation or who may be included from a panel of approved appraisers."

And here is a relatively large monetary award from June that turned some heads. Jury Returns Large Verdict Against Chicago Title Insurance Company in Breach of Contract Case. It seems that Jeffrey C. Coury won in his breach of contract action against his former employer, Chicago Title Insurance Company. The judgment, rendered in the case of Jeffrey Coury v. Chicago Title Insurance Company, is expected to exceed $20 million once prejudgment interest, attorneys' fees, and costs are added to the jury's award. Mr. Coury served as the CEO of ServiceLink, a leading U.S. mortgage service provider, until it was purchased by Chicago Title in 2005 and later became a division of the company. The employment contracts set forth terms covering his compensation, including his entitlement to certain stock options and stock grants, as well as a severance payment in the event he resigned his employment with good reason or was terminated by Chicago Title without cause. Despite Mr. Coury's enormous success in growing ServiceLink, including the quintupling of its revenues and profits from 2006 to 2011, his employment was terminated without cause by Chicago Title. Chicago Title thereafter refused to pay Mr. Coury the severance and bonus he was owed under his contract. In addition, Mr. Coury discovered after his termination that Chicago Title had not in any year fulfilled its obligation to provide him with the stock options and stock grants to which he was entitled. For you legal eagles out there.

A little lower down the food chain from the CEO, Lenders Compliance Group asks, "What is the salient prohibition pertaining to loan originator compensation?" And then answers, "Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions - the only exception being the correlation of compensation to the amount of credit extended. A loan originator's compensation can neither be increased nor decreased based on the loan terms or conditions." I shake my head when I hear about LO bonuses tied to overages received during the month - what a great way to find oneself up against the CFPB. (Let's not forget the CFPB's complaint against Castle & Cooke Mortgage, LLC and two of its officers for illegally giving bonuses to loan officers who steered consumers into mortgages with higher interest rates. C&C did about $1.3 billion in 2012, is/was licensed in 20+ states, and maintains approximately 45 branches across the country.) Which leads me to...

"Are LOs liable for their comp plans?" Yes they are. This commentary discussed this topic over a month ago, yet I still hear stories about a company "up the street" hiring LOs with thinly disguised point bank systems, appraisals guaranteed to come in at value, or some other method used to "get around" TILA, RESPA, the intent of Dodd-Frank's CFPB rules, and so on. Loan officers may be partially or wholly liable for their company's LO compensation plan - and many legal minds have agreed.

For example, attorney Brad Hargrave writes, "Loan originator compensation is one area of Truth in Lending and Regulation Z wherein someone other than a creditor; namely, the loan originator, can also be held liable for a violation...The penalties are potentially severe. In an individual civil action brought by a consumer, the creditor who paid the violative compensation could be liable to the borrower for actual damages, plus twice the amount of any finance charge in the transaction (capped at $4,000), plus an amount equal to the sum of all finance charges and fees paid by the consumer (unless the creditor can demonstrate that the failure to comply is not material), plus reasonable attorneys' fees and court costs if the borrower were to prevail.  The loan originator's exposure to such a claim (per 15 USC § 1639b(d)(2))is the greater of actual damages to the consumer or three times the total amount of direct and indirect compensation paid to the LO in connection with the subject loan, plus the costs to the consumer of the action, including reasonable attorneys' fees.  In addition, the CFPB could sue the creditor and the loan originator in Federal District Court and seek any one of a number of remedies, including restitution and/or disgorgement, and appropriate injunctive relief, as to all loans wherein the LO received unlawful compensation.  It is also possible that the matter could be referred to another agency for enforcement." You can read the complete write up here.

It was an ugly day for rates yesterday - but not today. Are rates really going up because the economy is picking up steam? If that is true, then fine, but few people like change, and lenders who were based on the refinance business are no exception. Yesterday Treasury yields rose in response to stronger than expected economic data (Initial Claims, Factory Orders, ISM Services), following an encouraging description about the economy via the Fed's Beige Book Wednesday. And if the economy is doing well, the Fed will scale back its asset purchases ($85 billion a month down to perhaps $70 billion a month, cutting $10 in Treasuries and $5 in agency MBS). Taper-schmaper, yesterday MBS prices, the basis of rate sheets everywhere, closed out the day worse by .5-.75, while the 10-yr dropped about that and closed at a yield of 2.98%.

We've had Nonfarm payrolls this morning. The median estimate on NFP was +180k compared to +162k in July, with the unemployment rate holding steady at 7.4 percent. It actually came in at +169k, and July was revised lower. The rate is down to 7.3% - probably due to people dropping out of the workforce (the lowest since 1978). And let's not forget that many people are under-employed. After the news the 10-yr is down to 2.88%, and agency MBS prices are substantially better.

No dictionary has ever been able to define the difference between "complete" and "finished". However, in a linguistic conference, held in London, England, and attended by some of the best linguists in the world, Samsundar Belgian, a Guanese, was the clever winner.

His final challenge was this: "Some say there is no difference between 'complete' and 'finished'. Please explain the difference in a way that is easy to understand."

His response was: "When you marry the right woman, you are 'complete'. If you marry the wrong woman, you are 'finished'. And, when the right one catches you with the wrong one, you are 'completely finished'.

His answer received a standing ovation.