May 28, 2013: Mortgage jobs; readers weigh in on compensation based on channel and source, and QM & ATR
Think you have problems? Try being involved in the Mexican mortgage and builder business: “Mexican mortgage institute Infonavit, which originates the majority of the country’s home loans, is withholding disbursements to three of the country’s largest builders in adherence to court orders while creditors fight to collect payments. The embargo, which has been in effect since last week, means that (the three builders) can still title homes through Infonavit but can’t collect payment on those new home sales for the unforeseeable future, said Infonavit spokesman Alfonso Martinez. The embargo is a dire development for the builders, which are struggling to operate with dwindling cash while attempting to restructure obligations with creditors.” Here you go: http://blogs.wsj.com/moneybeat/2013/05/24/mexicos-top-mortgage-lender-withholds-payment-to-big-3-builders/.
Lenders here are in better shape, and many continue to expand. PMAC Lending Services, Inc. is looking for wholesale Regional Sales Managers in Northern California, LA County, Orange County, and the Pacific Northwest. PMAC is a direct lender and servicer supplying conventional and government products throughout the U.S., is Fannie Mae, Freddie Mac, and Ginnie Mae approved, and has fulfillment operational centers nationwide. The ideal candidate must have the capability of growing their sales team quickly with a proven track record of success in managing high volume sales teams. Interested candidates should submit resumes to firstname.lastname@example.org.
And in America’s heartland, “Tired of the mortgage roller coaster rides on the coasts and other big cities in America? Want stability and a more conservative/calm way of life? How about relocating to a city with little to no commute time?” St. Louis-based DAS Acquisition Company, LLC, d/b/a/ USA Mortgage is expanding its operation further in the Midwest and is seeking a COO for its corporate headquarters. DAS is a “dominant lender in St. Louis, is Missouri’s largest independently owned mortgage banker in Missouri with over $1.75 billion closed in 2012, is licensed in 10 states, is a three time recipient of the INC. 5000 fastest growing Company (and is expecting 2013 to be their fourth), a two time recipient of the Ernst & Young Entrepreneur of the Year Midwest Finalist, and one of the largest privately held companies in St. Louis.” In addition, DAS is looking for additional branch locations to enhance their current origination business in the region. Please submit resumes to email@example.com.
In Saturday’s edition of the commentary, the question was raised by CG from Wisconsin regarding paying loan officers different rates based on different origination sources. (“I will pay the loan originator, 'X' number of basis points on files that THEY bring in the door but I will pay them 'Y' basis points on loans that are provided 'by the house'. I don't see this being a violation of LO comp as the final terms to the client will not be any different, and the difference in originators pay will not be related to ANYTHING related to the terms of the loan. Can I do this?”) Is it “legal”?
Terry F. wrote, “Rob, per our counsel, and the MBA meetings I attended back in 2010, lenders cannot differ the commissions based on the source if you are working with the same loan officer. For this to work, you have to have distinct channels, different loan officers: phone jockey and regular. You can pay the phone jockey working on House Leads less of course; pay the regular loan officer a regular commission. The source of the loan is not considered a term of the loan, but the regulators felt that tracking it would leave a way open to vary the commission, if memory serves me.”
Barbara Werth, with Mortgage Training Today, chimed in. “Rob, in reply to CG from Wisconsin on loan originator compensation, I believe that the law permits the compensation to vary based on the where the business comes from as long as that is not based on any other factors that are prohibited. Examples of compensation not based on transaction terms or conditions are important to keep in mind. The following are only illustrative examples of compensation methods that are permissible (unless otherwise prohibited by applicable law), and not an exhaustive list. Compensation is not based on the transaction's terms or conditions if it is based on, for example: i. the loan originator's overall loan volume (i.e., total dollar amount of credit extended or total number of loans originated), delivered to the creditor; ii. The long-term performance of the originator's loans; iii. An hourly rate of pay to compensate the originator for the actual number of hours worked; iv. Whether the consumer is an existing customer of the creditor or a new customer. This is from http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=c61c7908533ddb628572526d6e93b39d&rgn=div9&view=text&node=12:188.8.131.52.184.108.40.206.63&idno=12.”
Brian Levy, an attorney with Katten Temple, opined, “While it’s unclear whether the method for analyzing whether something is a “proxy” offered by the new LO Comp Rule applies before the effective date (January 10, 2014), I believe that CG from Wisconsin probably can pay his LO’s differently based on the source of the loan if the plan is properly designed and executed.”
Mr. Levy continued, “As everyone knows, to prevent ‘steering’, the LO Comp rules prohibit originators from paying loan officers compensation based on the terms of the transactions for consumers (interest rate, APR, fees, amortization term, etc.) or based on a ‘proxy’ for such terms. Under the new rule (effective January 10, 2014), something is a ‘proxy’ if 1) the factor consistently varies with a transaction term over a significant number of transactions; and (2) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. Since loan source is clearly not a term of the transaction the analysis shifts to proxy question. Presumably, loan source would not impact a transaction term, so it probably wouldn’t be a proxy under the first prong of the test (consistently varies with a transaction term). Even if it did vary with a transaction term, however, it probably would not qualify under the second prong as the originator really can’t control the reason why a customer came to that company in the first place.
“The foregoing may be somewhat theoretical because, mechanically, it may be difficult to isolate and track the actual source of a loan to maintain proper records of compliance. For example, what is the ‘source’ of a loan if a person who speaks to an originator because of a radio advertisement later refers his brother-in-law to the same originator for a refinance? How would this “source” information be maintained for each loan to evidence the proxy analysis?
That said, if an originator can determine loan source with certainty and can maintain adequate records of the loan source, they can probably execute a plan like the one proposed by CG. Remember, the Rule is not clear cut on this issue and the CFPB expects some interpretations to differ and evolve over time. Each compensation plan and situation is unique, but the penalties for violations are severe, so consult with a lawyer before designing and implementing a plan that deviates from the CFPB’s clear guidance.”
And in commentary on the general industry thoughts on LO compensation and its impact on borrowers, T.F. from Texas writes, “How can someone say that LO comp has no impact in the rate charged to borrower? This ‘cost to produce’ is an origination company's single largest per loan expense and therefore has a significant impact on upfront margin and thereby rate. This is one major reason a bank paying commissions of 40 basis points will have a more competitive rate than a non- bank originator paying 125 bps in commission.”
And on state laws versus QM guidelines, another reader wrote, “While it is correct that state laws may also limit certain kinds of loans, it sounds like people may be confusing QM with TILA’s Ability to Pay Rule (ATR). ATR applies to virtually all owner occupied home loans and requires lenders to make a ‘reasonable and good faith’ determination of ability to repay. Since ‘reasonable’ and ‘good faith’ are terms that are extremely squishy, QM facilitates compliance with ATR through a ‘safe harbor’ designed to enable lenders to be absolutely certain that they have met the reasonable and good faith standard (assuming they have, in fact, followed the QM requirements).”
The writer continued, “A loan can still meet the ATR requirements, however, even if it doesn’t qualify for QM; it just gets harder to prove after origination. While QM’s requirements for analyzing income essentially prohibit any stated income loans from qualifying for the safe harbor, ATR is actually the rule that makes stated income lending a TILA violation, because it is virtually impossible to make a reasonable and good faith determination of ability to repay without some kind of verification. That said, I believe there will be many opportunities to lend in the space between QM and ATR if the risks are understood and managed.”
By the way, in the wake of the CFPB’s skepticism regarding the lending practices of payday and deposit advance loans last month, the OCC and the FDIC recently proposed guidance that could effectively terminate the later. They want banks to have written underwriting policies that include conditions and limitations on: the number of advance loans in a two month period, deposit account duration of at least six months, outstanding delinquencies on customers credit, considerations on “ability to repay”, consecutive loan offerings. The Federal Reserve Board declined to join the OCC and FDIC and instead provided a general warning that such loans need to be thoughtfully structured and lawfully provided. Comments on the OCC and FDIC proposals must be submitted no later than 30 days after their publication in the Federal Register.
Turning to the economy and rates, last week certainly left a certain number of borrowers and originators wondering if they should have locked the week before. Hindsight is always 20-20, and the big market movers included continued decent housing and job news, in addition to the chatter from the Fed about the eventual tapering off of Quantitative Easing 3. Wells Fargo’s Economic Group writes, “Chairman Bernanke’s testimony to the Joint Economic Committee of Congress on Wednesday gave no indication that he is ready to ease up on the QE gas pedal anytime soon. While acknowledging some recent improvement in the economy, the Chairman’s testimony continued to make the case for extraordinary policy accommodation. Chief among his reasons continues to be a labor market that ‘remains weak overall.’ In addition, he stressed the drag from current fiscal policy and the risks of premature tightening.”
That certainly doesn’t seem so bad, does it? Well, Wells’ economic write up went on: “Yet, even as the Chairman gave no indication of scaling back asset purchases, comments from William Dudley, Vice Chairman of the FOMC, indicated it could be possible for tapering to begin in the fall.” So, “We believe that unless the economy grows at a substantially faster pace over the next few months than currently anticipated, the Committee will likely wait for data to show that economic growth does not falter over the summer and that Congress can effectively address the debt limit before altering policy.”
But no one can ignore the housing and real estate news that we’ve seen for the last six months. Existing and new home sales numbers continue to improve, prices are on their way up, and distressed property are accounting for lower and lower percentages of total sales. In fact, nationwide, the median new home price in April reached a new record high and is up 15 percent from a year earlier.
For this week, yes, it is Tuesday already! For scheduled news today we have Consumer Confidence (a survey of 5,000 households). Everyone likes it when the stock market rallies, right? We’ll also have the Case-Shiller 20-city index, with its two-month price lag. On Thursday we’ll have the usual jobless claims but also Gross Domestic Product (GDP), giving us an update on the broadest measure of economic activity, and Pending Home Sales. And on Friday, May 31st, while funders are scrambling, we’ll have the Personal Income and Spending/Consumption duo, the Chicago Purchasing Manager’s Index, PCE Prices, and a University of Michigan Consumer Sentiment survey. We’ll see if rates can slip back down, but that may not happen today. The U.S. 10-yr.’s yield closed Friday at 2.01% and this morning we’re up to 2.03% and agency MBS prices are down/worse about .125.
Pregnancy Q&A (part 1 of 2)
Q: Should I have a baby after 35?
A: No, 35 children is enough.
Q: I’m two months pregnant now. When will my baby move?
A: With any luck, right after she finishes college.
Q: What is the most reliable method to determine a baby’s sex?
Q: My wife is five months pregnant and so moody that sometimes she’s borderline irrational.
A: So what’s your question?
Q: My childbirth instructor says it’s not pain I’ll feel during labor, but pressure. Is she right?
A: Yes, in the same way that a tornado might be called an air current.
If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, “Mortgage Backed Securities: Life After QE3." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.
(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)