The Fed and HUD Drop New Bombshells
We are just days away from the April 1st effective date of the Fed’s Rule on LO Compensation and recently several bombshells have been dropped adding to the confusion. With liability now extending down to the originator, it’s vital you know what compensation is compliant and how to protect your bottom line.
Two Major Bombshells
1. Last Thursday the 17th, on their webinar the Fed clearly confirmed that “seller paid concessions” will be considered consumer direct payments.
2. Last Friday the 18th, in its guidance to the industry, HUD confirmed their position that volume bonuses paid by creditors would be considered a Section-8 violation of RESPA.
Seller Concessions Bombshell
What the Fed said is that “Seller Concessions” are in the consumers’ control so therefore would be considered a “Consumer Direct Payment.”
What this means is if a broker received consumer direct payments, then they can not compensate their loan officers based on a commission or a split. This would mean in these cases MLOs working for brokers would have to be paid salary or hourly. This will change the purchase money marketplace in dramatic ways.
What HUD said was if a Lender is basing compensation to mortgage brokers on loan volume (volume bonuses), as described in the new FRB compensation rule, RESPA Section 8 prohibits the payment of things of value in exchange for a referral of business, including creditors.
This is a huge warning to the industry; especially since many creditor compensation plans include volume based bonus money.
To further emphasize this point, in the GPO publication announcing Standard Operating Procedure (SOP1999-1) HUD states the following;
“The Department (HUD) generally has held that when payment is based on the “volume” or value of business transacted, it is evidence of an agreement for the referral of business…”
What this means is while the Fed does allow volume based compensation in the new rule, HUD does not. This is quite a bombshell because there are compensation plans rolling out to the industry from creditors that will put the loan originator in jeopardy.
Paul F. Donahue with Abacus Mortgage
March 18, 2011 Federal Reserve Board Responds to consolidated lawsuit
In a 43 page response to the NAIHP and NAMB lawsuits the Federal Reserve Board filed its response on Friday, 3/18/11.
In what contains no surprises and continues the Board’s unsupported rhetoric relying on existing TILA authority claimed to be provided by Section 129(l), the Board takes the expected stance that the plaintiffs are without cause in the matter.
After a 16 page background statement which repeats the now monotonous claims:
1) that the rule relies on authority under the HOEPA section 129(l) provisions of TILA to regulate unfair, deceptive and abusive practices related to mortgage loans,
2) that the Dodd-Frank Act, which clearly provides regulatory authority to the new Bureau and only extremely limited residual rule making authority to the Board, none of which relates to what they have done, the Board continues to argue the codification of the rule in a total irrelevant spin on reality,
3) that make a misguided and self-serving attempt to explain the relationship between originators, yield spread and consumers and how that drives the Board’s motives to protect,
4) that somehow consumers need to know the manner in which lenders “spend” the revenue paid by consumer. No apparent recognition that the revenue generated by the stated interest IS the consumer cost. The response ignores that how it is used has no bearing on consumers,
5) that the Board has made sweeping and deep attempts to do the research necessary to find alternatives including repeating its continued misrepresentation of consumer advocate groups urging a ban during the 2006 HOEPA hearings. (As many of you know, IMMAAG has read all 1,259 pages of the transcripts of both the 4-2006 hearings and the June 2007 hearing. There were no such urgings in any of them. Yet the Board knows (or thinks) we don’t have the resources to dispute the fabrication.
6) that focus groups and interviews consisting of 35 people constitute in depth consumer testing that proves consumers can’t use disclosures effectively; then the Board omits the conclusion made by its own testing group, MACRO ICF who in their final conclusion, state that disclosures were found to be effective at communicating for the purpose of shopping, [From the MACRO study -“Versions which included this advice prominently did seem to effectively communicate the importance of shopping.” In the name of full disclosure they do go on to state it was hard to determine this for sure because the latter group already understood shopping – so does that strike any one as fairly useless testing, particularly since the final group represented over 30% of the entire test group population?]
7) that the Board, after issuing the proposed rule in August 2009, and without references any of the 6,000 responses received during the comment period, concluded consumers needed protection so it followed with a final rule ten moths later.
After 16 pages without supporting evidence of any kind, the Board finally begins its response to the lawsuits. Its response is unworthy of spending a lot of time detailing. It basically just pushes the burden onto Plaintiff, a fair legal tactic, but of little value except to add demonstrable opportunity for the NAIHP and NAMB lawyers to gather more evidence of the Board’s combined arrogance and ignorance or to prove teh Baord’s motive is to serve its own sense of omnipotence and being above the law.
The Board presents one basic argument:
“The Plaintiffs have failed to make the necessary showing requisite to obtaining extraordinary relief.” The response explains that Plaintiffs must demonstrate:
1) irreparable harm to the Plaintiff if the TRO is not granted
2) the likelihood of success on its merits
3) that the balance of equities “tips in his favor” and
4) that the injunction is in the public’s interest.
The ensuing twenty-seven pages of the Board’s response repeat the same rhetoric we have read and heard from the Board since the industry began responding to the vague and inappropriate rule.
They basically claim the harm is not proven, the harm is based on conjecture and absent real and quantifiable proof and is not a basis on which the Plaintiff can prevail. We find it ironic that the Board who has demonstrated absolutely nothing in support of their over reaching control of an industry would have the audacity to respond in such a way.
They close the irreparable harm defense by citing that Plaintiffs waited seven months to file the lawsuit. If irreparable harm were imminent Plaintiffs would have acted much sooner. Given the Board’s track record since September 2010 with repsect to reposne and guidance, IMMAAG withholds comment on this ludicrous defense.
Succeed on Merits
It is interesting that the Board leads its defense of the “success on its merits” requirement with the statement that in order to succeed Plaintiffs have to show that the Board’s action was arbitrary or capricious, an abuse of discretion or otherwise not in accordance with law. From Plaintiffs’ standpoint — didn’t the Board just state the facts as most of us perceive them?
The Board repeats it claimed TILA authority. It even states the courts owe agencies deference in the case of allegations of capricious acts. Yet the Board disregards the simple fact that its TILA 129(l) authority has been exceeded and any Dodd-Frank authority vests in the Bureau not the Board.
In spite of its total failure to assess number of small businesses that are affected, and the fact that the Board states the small businesses will feel significant impact and in spite of its meager testing and its fabrication of what was said in the 2006 and 2007 hearings to support its rule, the Board repeats it is reasonable in prohibiting “conflicts of interest”.
It closes this defense by stating the Board’s action is rational. The Board asserts that it has reasonably determined dual compensation is unfair. It further states that its has “fully” complied with the Regulatory Flexibility Act in spite of the fact it refused to do any work to determine the population of small business affected by its action, has failed to comply with the requirements to produce a simple, useable user guide and refuses to formally provide written response or clarification to what during its two hour webinar is stated were possibly thousands of questions asked only two weeks before implementation. Does that feel disingenuous to anyone besides IMMAAG?
Balance of Equities is ignored and
Serving the Public’s Interest is as one might expect, a one paragraph that says the problem has been around for years and must be stopped.
The Board’s full response is available through a link on our home page at www.immaag.com.
Federal Reserve Board Webinar + 2 Hours =
Undefined and does not = The Board
If you were one of the 10,000 plus people (per Board’s public affairs office prior to the call) registered for the “Federal Reserve Board’s” webinar discussing the final mortgage loan originator compensation rule does it surprise you to learn that you DID NOT HEAR ANYTHING FROM THE BOARD during the webinar.
Yes, in spite of statutory requirements for guidance and a groundswell of industry demand for clarification, if you spent just under an hour and a half listening to Mr. Paul Mondor and Ms. Nikita Pastor read from 20 slides and a half hour listening to them answer a few selected questions, you received no information or opinions from the Board. You simply heard two attorneys offering opinions that are not binding on the Board.
At the outset, Mr. Mondor made it clear that he and co-host Ms. Pastor did not speak for the Board. Every one of the 20 slides carried the disclaimer that “The opinions expressed in this presentation are intended for informational purposes, and are not formal opinions of, nor binding on, the Board of Governors of the Federal Reserve System.”
So, as of March 17th (14 days before AF-Day) the industry still has nothing more than about 30 pages of rule and commentary, four pages of “cut and paste” excerpts from the rule as a guide and 120 minutes of hearing words to the effect that what we tell you isn’t official, but here’s what we think or we’re not saying this is the only solution and basically it’s up to you to determine what does and doesn’t comply, from two attorneys who could not speak officially for their boss.
We did learn:
The lowest interest rate apparently is a moving target that includes “discount” points to buy down the rate????????
Consumers “qualify” for interest rates – We always thought they qualified for programs and negotiated rates, but I guess we’re wrong.
A “Significant number” is not really a number it’s kind of, like maybe, something dependent on each originator and broker and something you have to figure out for yourself. Kind of like, maybe, sort of, you’ll know it when you see it.
Changing the compensation plan may occur at just about any frequency as long as that frequency isn’t too frequent. We learned that we’ll need to figure out what that means on our own.
Figuring out how complying with this rule may affect complying with other Federal laws like RESPA and the Fair Labor Standards Act is up to us.
Even though the Board was not represented at the Board’s scheduled event we also learned that we should be concerned about the chance that our unguided interpretations could lead to civil penalties driven by this and other Federal Rules and we should make sure we comply to avoid those penalties
TRY TO SELL YOUR COMPANY – Mr. Mondor expressed his non-Board-binding opinion that a long standing traditional company valuation method used by Fortune 200 as well as “mom and pop” shops could not be used by a mortgage broker to sell their company because if the sales agreement contained a provision for future compensation (and that implies the present value of future cash flows as well) based on profit it would violate the rule.
It is Mr. Mondor’s (remember this IS NOT THE BOARD) opinion that a broker company (Loan Originator by definition) can’t pass along the payment received from a consumer intended for one of its employed or contracted loan originators and must pay its LO in the form or salary or hourly rate when consumers pay the broker directly. However, if the wholesale lender agrees to do it, the consumer can pay the lender and then the lender can pass along the payment in what essentially becomes a lender paid transaction. Then the broker’s LO may be paid on a non-salary/hourly basis. Mr. Mondor said this with a straight face (at least that’s what we took from the inflection in his voice.)
And, it sure felt like we learned that the presenters had nothing to do with drafting the rule; they were simply brought in sometime to interpret someone else’s words. So, they could address issues by not answering since, after all, it was not something they participated in writing.
So, what’s next?
There have been several letters to Chairman Bernanke from Congress, industry groups (including IMMAAG), and the SBA Office of Advocacy all imploring the chairman to intercede and delay this obscene abuse of power.
There are at least two civil lawsuits seeking the same delaying result.
April 1st is only two weeks away.
Even though the industry has been treated with a level of disrespect unparalleled in recent memory the future does not have to be bleak.
Yes, if the rule is not delayed we will all have to absorb a least some period of adaptation. But, IMMAAG will turn our attention to two remaining opportunities to change this unauthorized, unfair and abusive Board action:
1) IMMAAG will immediately expand the efforts it has already begun with the Bureau and focus efforts on turning the Bureau’s attention to amending Reg Z to undo the ludicrous changes imposed by an agency grossly overstepping its authority in an obvious attempt to harm small business in a swan song act of power and
2) We will simultaneously continue the already begun effort of finding one or more Congressional champions to amend the Prohibitions Section of the Dodd-Frank Act to require a study to empirically prove if a correlation between MLO compensation and consumer abuse, deception or unfair practices exists and to modify the Act and subsequent rule-making by the Bureau based on the outcome of that independent study.
Draft language of an amendment has already been provided to several congressional members and senators. IMMAAG will provide this language to the hundreds of people who have expressed a willingness to help. We will complete sending packages this weekend and will send updated packages to those who received the earlier campaign focused on getting the House Financial Services Committee to escalate its review of the rule, which was successful in as much as over 30 committee members signed a letter this week to Mr. Bernanke.
Obviously, the Board (strike that noun) two attorneys employed by the Board were absolutely underwhelming in providing useful, operational information or assisting in the effort to drive a standard implementation of the rule. I suspect that outcome was not a surprise to the thousands who registered and followed along.
Maybe there will be some comfort in the fact that several of the items in the presentation may provide additional proof of the Board’s disregard for statutes, consumers and the industry and may serve as justification for a judge to act in our favor at one or both of the civil proceedings. (The disclaimer and the sale of a company opinion by Mr. Modnor strike us as remarkable.) If the court ordered delay does not occur, we still have a plan of attack.
In closing this update, as we said in a recent alert, repeating Yogi Berra, now more than ever,
“It ain’t over ‘til it’s over!”
Note: The Board employee moderating the call indicated the audio will be available on the Outlook Live site in “a couple days”. That site is at:
IMMAAG has placed the slide show on its home page at www.immaag.com
We do plan to offer a more “summary of the presentation” update over the weekend.
Name of Company*: US Bank
City and State of the Company*: Denver, Colorado
Origination Platform: Bank : How do they compensate their Loan Officers?*:
$2000.00 A month Guaranteed Draw against Commissions
$600,000.00- 1,million 45BPS
$1 to 1.5 million 55bps
$1.5- 2 million 60bps
$2 million and above 65bps
Total by volume- No YSP and SRP
How Competitive are their Rates?: Good
Benifits?*: Health Insurance, 401K
Loan Origination Software that they use!: Thier Own
Does the company pay for DU/LP and Credit Reports?: No
What kind of Office Space do they provide?: Depends- everything from office in a Bankto work at home
Marketing materials that are they offer: Has Website for Marketing Materials
Pro’s for the company:: Might set you up in a Bank location or other lead producing area’s to help with your production
Cons for this company:: Expect you to bring in 75% of your own Business.
Contact Person for the Company*: Jason Kragel 303-521-0015
Mike Anderson, CRMS
2009/2010 NAMB Broker of the Year
Essential Mortgage Company, A Latter & Blum Realtors Company
Past president Louisiana Mortgage Lenders Association and Legislative Chair, National Association of Mortgage Brokers Southeast Chair 2008, National Association of Mortgage Brokers PAC Chair 2009/2010, National Association of Mortgage Brokers Chair of Government Affairs 2010/2011, National Association of Mortgage Brokers Board of Directors 2010/2011, Board member of RESPRO, Member of the Reality Alliance Mortgage Partners
Board member RML Office of Financial Institutions,
Loan Originator Compensation Update
TWO IMPORTANT ITEMS – ONE FOR CONSIDERATION AND ONE FOR ACTION
Potomac Partners shares new, frightening wrinkle in compensation interpretation – please read everything to see IMMAAG’s interpretation and response – then read on to the Call to Action
The information below is an excerpt of a portion of an email that was sent to members of the industry by Potomac Partners and Brian Chappelle on February 9, 2011.
Following the excerpt is a copy of an email sent from IMMAAG to Mr. Chappelle offering a different interpretation of the same section of the Board’s final rule.
IMMAAG is sharing this with its users simply to Read the rest of this entry »
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