Wednesday, March 30, 2011

FinCEN: 2010 Mortgage Fraud Report

On March 28, 2011, FinCEN issued its Mortgage Loan Fraud Update (Report) for the period January 1, 2010 to December 31, 2010.
This update to FinCEN's prior Mortgage Loan Fraud (MLF) studies looks at Suspicious Activity Report (SAR) filings in CY 2010, with a particular emphasis on the 4th Quarter of CY 2010 (Q4). It provides new information on reporting activities, geographic locations, and other filing trends in Q4 and CY 2010. 
As in previous updates, this update also includes tables and illustrations of various geographies that compare Q4 and CY 2010 filings based on the dates on which the suspicious activities are reported to have begun.
A review of the full year data shows the number of suspicious activity reports (SARs) involving mortgage loan fraud (MLF) increased 4 percent in 2010 to 70,472 compared with 67,507 MLF SARs filed in 2009.
The report also shows that the growth rate of MLF SARs began to slow over the last two to three years. Looking at just the 2010 fourth quarter, filers submitted 18,759 MLF SARs, a 1 percent decrease from the 18,884 filings over the same period in 2009.
FinCEN also reported that all types of SARs filed by depository institutions in 2010 fell 3 percent to 697,389 compared with 720,309 SARs filed by depository institutions in 2009. 
However, the total number of SARs filed in 2010 by all types of financial institutions covered by the Bank Secrecy Act grew nearly 4 percent to 1.3 million SARs up from 1.9 million filed in 2009.
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Since 2001, the number of MLF SARs filed has shown a consistent upward trend, albeit at a slower rate of growth in recent years.
Trend-SARs (2001-2010)
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The Report found that references to bankruptcy have steadily increased over time in MLF SAR filings. In 2010, 6 percent of all MLF SARs contained a key term related to bankruptcy in the SAR narrative, compared to 1 percent in 2006 and 2007.
In 2010, mortgage loan fraud was cited in 54 percent of all SARs referencing bankruptcy fraud, up from 42 percent in 2009. Some MLF SARs specified the type of bankruptcy filing, most frequently Chapter 7, which was cited in 27 percent of 2010 reports citing both bankruptcy and MLF.
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Flopping occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who quickly sells the property at a higher price and pockets the difference. Anecdotal feedback on this practice from law enforcement and industry sources suggests that the volume of related MLF SARs is much lower than the actual number of suspected flopping incidents. The increasingly dated activities reported on SARs suggests a lack of emphasis on this type of current activity.
Filers in their SARs also called attention to debt elimination scams as one of the emerging practices. 
Debt elimination scams were cited in nearly 1,300 MLF SARs in 2010. In these SARs, filers noted subjects sending a variety of documents or bogus payment methods to financial institutions, in attempts to eliminate or satisfy mortgage obligations. SAR filers over the course of 2010 explicitly referenced "flopping" in 112 SARs last year. This compares with relatively stable occurrences of suspicious activity involving broker price opinions and short sales in 2010.
Flopping-SARs (2010)-B
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5 Highest MSAs Per Capita - MLF SAR Filings
The Report contains data of state, county, and metropolitan statistical area (MSA) by total number of and per capita filings of MLF SARs.
Nevada had the highest number of MLF SARs per capita in 2010, followed by Florida, California, Illinois, and Georgia.
The 5 MSAs with the highest per capita filings of MLF SARs in 2010 were Miami; Las Vegas; San Jose, CA; Riverside, CA; and Los Angeles.
The 5 counties with the highest number of MLF SARs per capita were Miami-Dade, Gwinnett in Georgia, Broward and Orange in Florida, and Nassau in New York.
SARs-TOP 10 (2010)
In both CY 2010 and 2010 Q4, California and Florida were the highest ranked states based on total numbers of subjects, followed by New York and Illinois. These four states consistently had the highest rankings every quarter of 2010.
For both the quarter and year, Nevada had the highest number of MLF subjects per capita, followed by Florida, California, and Illinois.
This was a change from 2010 Q3, when Florida was 1st in MLF subjects per capita and Nevada 3rd. In addition, Hawaii jumped in the Q4 rankings to 10th in MLF subjects per capita, up from 13th in Q3 and 26th in Q2.
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"Other" Suspicious Activity
Nearly half of the filings involved debt elimination scams, while 13 percent included misrepresentation of income or employment.
Another 13 percent were for Social Security number misuse and 9 percent loan modification fraud.
Other-SARs (2010)
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FinCEN: Mortgage Loan Fraud Update
SARs from January 1, 2010 to December 31, 2010
Issued: March 28, 2011

Monday, March 28, 2011

Lawsuit Gets An Assist! (Loan Originator Compensation)


Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

Since the National Association of Independent Housing Professionals (NAIHP) and National Association of Mortgage Brokers (NAMB) filed their separate lawsuits against the FRB three weeks ago, respectively on 3/7 and 3/9, the FRB moved to consolidate them, which the Court granted. The NAMB then moved for a reconsideration of the consolidation, which the Court denied. See: Archive for previous Commentaries.

An important Amicus Brief was filed on March 24, 2011 by the Community Mortgage Banking Project and the Community Mortgage Banking Research Fund (collectively, the "CMBP") in support of the NAIHP's and NAMB's application for a temporary restraining order and preliminary injunction.
Amicus Brief Arguments - A Salient Selection 
This Commentary offers a brief outline of selected arguments against the TILA Loan Originator Compensation rule (Rule). I am leaving out citations, where possible, for ease of reading. This outline is not meant to be comprehensive, authoritative, or relied upon for legal advice. It offers only a brief synopsis of the argumentation. For citations, exhibits, and argumentation, please read the Amicus Brief. (See Below)
Amicus Brief     
A word about the nomenclature "Amicus Brief" (otherwise known as "amicus curiae," which is Latin for "friend of the court"). Essentially, a court may decide to admit a brief, to wit, a legal opinion offered by someone who is not a party to the subject litigation itself, but whose views express support on behalf of a litigant and, obviously, in favor of its own views. Criteria for an Amicus Brief include: (1) must not be a party to the case, (2) nor an attorney in the case, and (3) must have some knowledge or perspective that makes the expressed view valuable to the court, such as commenting on a point of law, providing additional information, or emphasizing particular areas of the litigation that the court should fully consider. In this article, I will refer to the Amicus Brief filed by the CMBP as "CMBP" or "CMBP Brief."
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Radical New Rules     
The CMBP claims that, in advance of losing its authority over residential mortgage practices to the Consumer Financial Protection Bureau (CFPB), the FRB announced "radical new rules that upend the manner in which industry professionals are compensated." Of course, the CMBP is referring to the Loan Originator Compensation Rule and Anti-Steering Rule. (My emphasis.)
Notably, the Rule comes two years after the FRB's own commissioned, consumer testing study found that no new rules were necessary with respect to loan originator compensation.
Indeed, states the CMBP, the FRB:
  • "fails to reference anything that has changed in the intervening period or any new information that compels a different conclusion."
The FRB "inexplicably ignores" its own findings!
In this section of the CMBP Brief, it is claimed that the Rule:
(1) circumvents strict rulemaking procedures that Congress, in Dodd-Frank, vested with the new CFPB;
(2) exceeds the FRB's authority under the Home Ownership and Equity Protection Act (HOEPA);
(3) violates well-settled requirements of the Administrative Procedure Act (APA).
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Who will Speak for the Mortgage Bankers?
Mortgage brokers and affiliates (such as companies that are established as affiliated business arrangements) are not the only entities adversely affected by the Rule. The NAIHP and the NAMB largely represent the brokerage community.
But, as the CMBP points out, independent mortgage bankers are also adversely impacted by the Rule because
"unlike any known regulation of an entire lawful industry, [it] micro-mandates the terms of employment of individual loan originators employed by mortgage bankers" by mistaking "ordinary profit in lending transactions for unfair and deceptive practices."
The CMBP claims the Rule causes mortgage bankers to lose control over basic employment terms, such as incentives based on company profitability, used over the years to attract and maintain competent employees.
Specifically, the Rule
"prevents mortgage bankers' employees from offering to consumers the full range of competitive loan pricing options," by "not only prohibit[ing] loan originators from arranging loan terms that result in higher consumer costs, [but also applying] the same prohibition to offering consumers LOWER cost mortgage loans to meet competition and to save the consumer money." (Emphasis in original.)
Thus, according to the CMBP, the Rule results in discrimination against lending programs designed to benefit low-to-moderate income (LMI) borrowers.
The CMBP claims that the FRB has come to the following erroneous conclusion:
"[a]llowing compensation to vary with loan type, such as loans eligible for consideration under the [Community Reinvestment Act] would permit unfair compensation practices to persist in loan programs offered to consumers who may be more vulnerable to such practices."
The CMBP completes its assertions with the view that, "given the severe, loan-by-loan and class action remedies that may accrue" under the Rule, "retail mortgage bankers will encounter new, undefined and virtually limitless legal and economic risks under the Final Rule." (My emphasis.)
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Argument # 1
Congress gave the CFPB exclusive authority
over loan originator compensation practices.
Dodd-Frank vests the CFPB with exclusive rulemaking authority to implement federal consumer financial law. Indeed, Section 1022 of Dodd-Frank "heightens the standard for promulgation of rules" and requires that courts defer to the CFPB regarding "the meaning or interpretation of any provision of a Federal consumer financial law," notwithstanding actions by other federal agencies.
Thus, Congress intended to bestow the CFPB with authority to:
(1) promulgate loan originator compensation rule according to heightened rulemaking standards, and
(2) have exclusive and final say as to how such compensation practices are to be regulated.
Furthermore, Dodd-Frank amends TILA through the new Section 129B - the provision that addresses residential mortgage loan origination and compensation practices - in order to "assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive."
Dodd-Frank expressly prohibits steering incentives, stating that "no mortgage originator shall receive from any person and no person shall pay to a mortgage originator . . . compensation that varies based on the terms of the loan (other than the amount of principal)."
Yet, as the CMBP rightly observes,
"prior to the enactment of the Dodd-Frank Act, TILA did not address loan originator compensation or anti-steering practices. The [FRB] was not granted authority to regulate loan originator compensation generally. That power falls solely to the CFPB. It is notable, as well, that the Final Rule differs from the Dodd-Frank Act in significant respects. In fact, the very definition of "loan originator" in the Final Rule conflicts with the Dodd-Frank Act definition of this term ("mortgage originator")."
(Actually, as CMBP references, Dodd-Frank does not even empower the CFPB, much less the FRB, to promulgate any regulation under the new law prior to the Congressionally-imposed "designated transfer date." And that transfer date is July 21, 2011.)
Additionally, the FRB, by its own admission, has not complied with Dodd-Frank's enhanced rulemaking standards, as evidenced by its own disclosure that the Rule does not fully implement all the substantive requirements that Dodd-Frank sets forth for loan originator compensation in Section 129B. This is noted in  the FRB's Federal Register issuance of the Rule:
"The Board has decided to issue this final rule on loan originator compensation and steering, even though a subsequent rulemaking will be necessary to implement Section 129B(c)." (My Emphasis.)
Hence, the Rule "fails to adhere to both the procedural and substantive requirements" that Congress intended for loan originator compensation regulations.
Fatal to the FRB's position is the fact that the FRB has "already conceded that it must defer to the CFPB." In fact, the FRB "recently elected to take no further action on all of its other pending rules" that would amend mortgage lending regulations under TILA, except this one. (Emphasis in original.)
Bottom Line: the FRB has created a risk that
(1) either "conflicting loan originator compensation rules could soon exist"
or (2) the "industry will be forced to comply with a loan originator compensation rule that is incomplete and doomed to be short-lived."
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Argument # 2
FRB violated the APA by exceeding its authority under HOEPA.
The FRB's authority is constrained to the promulgation of rules that prohibit unfair, deceptive, or evasive practices as to certain defined loans, to wit, "discretion was to be limited to the prohibition of acts and practices in connection with mortgage loans and refinancing mortgage transactions; it was not to be exercised carte blanche to police every possible practice inherent to the mortgage industry, such as creditor compensation to employees." (My emphasis.)
Indeed, the FRB's enactment of the Rule is inconsistent with TILA itself, because in the Rule the FRB creates new classes of regulated parties that are not even defined by TILA. (My emphasis.)
Consequently, pursuant to the APA, the Rule must be set aside.
(Please allow me a needed digression. The CMBP Brief cites a well-known case in support of its view that the FRB has overstepped its statutory authority. The 1984 case was Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., and is known as "Chevron." It was decided by the U. S. Supreme Court. Chevron provides a legal test for a court to determine whether to grant "deference," (i.e., "administrative deference" or often now termed "Chevron deference") to a government agency's interpretation of a statute which it administers. The deference standard is needed because the Constitution did not set a limit on how much federal authority can be delegated to a government agency but, instead, allows for limits on the authority granted to a federal agency within the statutes enacted by Congress.
Chevron offered a two-step test to determine if an agency has exceeded its statutory authority, quoting the court decision itself, as follows:
(1) "whether Congress has spoken directly to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court as well as the agency must give effect to the unambiguously expressed intent of Congress;" and,
(2) "[I]f the statute is silent or ambiguous with respect to the specific question, the issue for the court is whether the agency's answer is based on a permissible construction of the statute.")
The FRB has overreached because HOEPA - primarily a statute that addresses creditor disclosures - specifically states:
"The Board, by regulation or order, shall prohibit acts or practices in connection with (A) Mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) Refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower."
The statute refers, generally, to "mortgage loans" and "refinancing of mortgage loans;" therefore,  claims the CMBP Brief, "Congress did not intend to grant the [FRB] open-ended authority to prescribe new business practices and limit existing business practices that had been accepted in the residential mortgage lending industry."
Importantly, the CMBP claims that the FRB has disregarded its mission under HOEPA by prescribing "an extremely broad rule to mandate wide-ranging business practice changes under the assumption that consumer protection would follow." Example: rather than merely targeting the use of YSPs for mortgage broker compensation, the FRB "declared generally that relying on ordinary company profits to compensate loan originators is unfair and deceptive."
And notwithstanding Congress' intent, the Rule is not limited in its reach to unfair or deceptive credit products or practices. In fact, the FRB has imposed an "an entirely novel, comprehensive regime over a new class of parties known as "loan originators."
But TILA grants remedies to consumers against creditors who violate TILA and its implementing regulations, though not to rights of action against parties that variously may be called "mortgage brokers" or "loan originators." (My emphasis.)
Consequently, the FRB has exceeded its authority under HOEPA.
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Argument # 3 
Violates the Administrative Procedure Act
Under the APA, a Court must "hold unlawful and set aside agency action, findings, and conclusions found to be ... arbitrary, capricious, and an abuse of discretion, or otherwise not in accordance with law" or "in excess of statutory jurisdiction, authority, or limits, or short of statutory right."
This argument has three parts that, taken separately and collectively, constitute allegations of FRB's loan originator compensation, rulemaking actions to be violations of the APA. In this section of the CMBP Brief, a thorough analysis is provided which scrupulously outlines that the FRB has failed to:
  • Supply a reasoned analysis for departing from its longstanding position on loan originator compensation, with respect to compensation to mortgage brokers and compensation by creditors to their own employees;
  • Supply a reasoned analysis for its conclusion that loan originator compensation is an "unfair" practice;
  • Offer reasoned explanations for rejecting reasonable alternatives.
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Preserving a Competitive Market
In its Press Release on March 25, 2011, the CMBP stated that the Rule, "despite being positioned as pro-consumer, will instead have the perverse effect of denying consumers who comparison-shop for mortgages the opportunity to obtain a lower cost mortgage."
Glen Corso, the CMBP's Managing Director, believes:
"The Fed rule was supposed to address the issue of loan officers who raise the cost of a mortgage in order to increase their compensation, but it has ended up depriving loan officers of the ability to discount the mortgage rate to the consumer and absorb the cost of that discount by reducing their compensation. That's a competitive choice and what a healthy market is all about. Independent community mortgage lenders want to be able to vigorously compete on cost, but in a bizarre twist of poorly conceived regulation, the Fed rule prevents that."
And, in the same Press Release, Scott Stern, Chairman of the Community Mortgage Lenders of America (CMLA), states:
"Consumers in the market for a new mortgage regularly comparison-shop to get the best price. Loan officers, especially those affiliated with independent community mortgage lenders, regularly reduce their compensation in order to discount the price of a loan to be competitive."
Other "compensation variations" that benefit consumers are also adversely impacted by the rule. For an example, Mr. Corso points out that "bank-affiliated lenders often pay incentives to encourage their loan officers to originate more complex, difficult-to-originate loans, such as those eligible for credit under the Community Reinvestment Act (CRA). The Rule, however, specifically prohibits the payment of such incentives for CRA loans."
Concludes Mr. Corso: "Rather than drafting rules focused exclusively on eliminating inappropriate compensation incentives for loan officers, the Fed 's rule instead prohibits any variation in compensation to loan officers based on loans terms - even when it benefits the consumer."
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Wheels of Justice
The CMBP implores the court to set aside the Rule, or, alternatively, delay the effective date of the Rule to permit the properly empowered agency, the CFPB, to take action as prescribed by Congress.
I have provided a cursory outline of the CMBP Brief. Although it is only 28 pages, it is compactly worded, carefully and concisely reasoned, and it succinctly sets forth cogent grounds for delaying the Rule.
Often, the wheels of justice turn slowly, maybe too slowly. The Motion for Hearing is imminent and the Rule's effective date is just a few days away. Perhaps this time the need for celerity and relief will be forthcoming.

Friday, March 25, 2011

Mortgage Call Reports - Get Ready!


Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

I think you will be interested in reading my newest article.
It is published in the March edition of the National Mortgage Professional Magazine, the publication that is considered the premier mortgage industry magazine for mortgage originators.
This article provides FAQs for filing the NMLS Mortgage Call Report (MCR). It also provides an in depth outline and includes charts.
MCR filing will now be required, commencing with the first calendar quarter of 2011. It is being fully activated on the Nationwide Mortgage Licensing System & Registry (NMLSR) website.  
I am pleased to share this article now with you, our valued clients and colleagues. Our monthly compliance clients received an Advance Copy one month ago. 
We provide expert guidance in all areas of residential mortgage compliance.
If you are not yet a client, shouldn't you become one?
We are the first full-service, mortgage risk management firm in the country devoted exclusively to residential mortgage compliance.
Jonathan Foxx
Lenders Compliance Group
President and Managing Director

Filing of the MCR is required by the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act or Act) - the same Act that requires licensing and registration of Mortgage Loan Originators (MLOs)  - as codified in the following provision:
"MORTGAGE CALL REPORTS -- Each mortgage licensee shall submit to the National Mortgage Licensing System and Registry reports of condition, which shall be in such form and shall contain such information as the Nationwide Mortgage Licensing System and Registry may require."  (My emphases)
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Thursday, March 24, 2011

Loan Originator Compensation: Good Faith Estimate (GFE)

On March 18, 2011, the Department of Housing and Urban Development (HUD) issued its RESPA Roundup, this issue being devoted to completing the Good Faith Estimate (GFE)  in order to disclose loan originator compensation pursuant to the new TILA Loan Originator Compensation rule (Rule). [75 F.R. 58509 (September 24, 2010)]
HUD's guidance addresses the following issues:
(1) Mortgage broker transactions where the broker is compensated indirectly from the lender by means other than an amount that is computed based on the interest rate, such as by a flat fee or an amount that is based on any other computation;
(2) No cost transactions where the credit for the interest rate chosen covers third party settlement charges;
(3) Using a credit/charge calculation prior to completing Block 2 on the GFE; and
(4) Payments by lenders to borrowers to correct tolerance violations in wholesale transactions.
I will simplify the technical aspects of this HUD issuance, in order to clarify how to complete the GFE.

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(1) Mortgage Broker Transactions
(Flat Fee Compensation)
Block 2 instructions state: "[f]or a mortgage broker, the credit or charge for the specific interest rate chosen is the net payment to the mortgage broker from the lender (i.e., the sum of all payments to the mortgage broker from the lender, including payments based on the loan amount, a flat rate, or any other computation, and in a table funded transaction, the loan amount less the price paid for the loan by the lender)."
Illustration: Flat Fee Compensation
a) Flat Fee to Mortgage Broker is $4,000 (to be paid by the lender).
b) The lender charges $500 for processing and administrative fees. 
GFE: Block 1 reflects a charge of $4,500. (Block 2 has a credit of $4,000, adjusted origination charge of $500 in Block A.)

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(2) No Cost Transactions
(Interest Rate Covers Originator

or Third Party Settlement Charges)
Only Originator Fees: Line A would show a zero (0) charge as the adjusted origination charge. 
Originator Fees and Third Party Charges: All third party fees must still be itemized and listed in Block 3 through Block 11 on the GFE. 
NOTE (1): Block 1 includes lender and mortgage broker compensation as well as all other charges that the lender and mortgage broker will receive. Thus, Block 1 provides total compensation to lender and mortgage broker.
NOTE (2): Block 2 is used for the credit or charge for the interest rate chosen. 
(A) If "no cost" refers to only the lender and mortgage broker's fees, Block 2 offsets Block 1 resulting in $0 on Line A.
(B) If "no cost" refers to both Block 1 and the third party settlement charges (itemized in Blocks 3-11), the credit in Block 2 covers Block 1 and Blocks 3 through 11, resulting in $0 for the sum of Lines A and B.
No cost loan covering only lender and mortgage broker charges (i.e., not third party settlement charges). 
In the following GFE, the total compensation for the lender and mortgage broker is $4,500, as reflected in Block 1. Borrower is locked in an interest rate of 6.375% such that the credit for the interest rate chosen results in a credit of $4,500. Thus, Block A results in $0.


No cost loan covering lender, mortgage broker and third party settlement charges.
In the following GFE, the total compensation for both the lender and mortgage broker is $4,500, as reflected in Block 1. The borrower has locked in an interest rate of 7.375% such that the credit for the interest rate chosen results in a credit of $7,500. Block A results in a credit of $3,000 to offset the total of all third party charges in Block 3 through Block 11.


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(3) Using a Charge or Credit Calculation
Prior to Completing Block 2 of the GFE 

RESPA provides: "[w]hen the net payment to the mortgage broker from the lender is positive, there is a credit to the borrower and it is entered as a negative amount in Block 2 of the GFE. When the net payment to the mortgage broker from the lender is negative, there is a charge to the borrower and it is entered as a positive amount in Block 2 of the GFE." 
NOTE: the Rule prohibits a loan originator (as defined by the FRB) from receiving compensation directly from the consumer when it has received compensation from any person other than the consumer in connection with the transaction.
Example: Charge in Block 2
a) Principal balance is $250,000.
b) Lender charges $1,000 for processing and administrative fees.
c) Broker's compensation is $2,000, fully paid by the lender.
In the following GFE, the total origination charge in Block 1 is $3,000. The interest rate chosen a $2,000 credit. Pricing adjustments result in a $2,500 charge. The resulting $500 charge is placed in Block 2 and box three would be checked. The sum of Block 1 and Block 2 results in an adjusted origination charge in Line A of $3,500.

Example: Credit in Block 2
a) Principal balance of $250,000.
b) Lender charges $1,000 for an origination fee.
c) Broker receives $2,000 in indirect compensation from the lender.

In the following GFE, the total origination charge in Block 1 is $3,000. The interest rate chosen has a $2,000 credit. Pricing adjustments result in a $1,500 charge. The resulting $500 credit is placed in Block 2 and box two would be checked. The sum of Block 1 and Block 2 results in an adjusted origination charge in Line A of $2,500.

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(4) Payments by Lenders to Borrowers for
Tolerance Violations in Wholesale Transactions
HUD restates the RESPA statute by emphasizing that regulations impose tolerance levels on charges disclosed on the GFE. Where actual charges to the borrower exceed these thresholds, mortgage brokers and lenders may cure to avoid a tolerance violation.
Advice given by HUD: timely and effective communication among the lender, its loan officers, and mortgage brokers to establish policies and procedures to ensure accurate calculation of compensation and credits in compliance with RESPA, as well as under the FRB compensation rule and any other applicable federal or state statute.
In other words, in HUD's view tolerance violations remain the burden to cure, though HUD provides no further guidance.

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Some Observations
Changed Circumstances: The FRB's compensation rule will go into effect on April 1, 2011 and absent other factors cannot be considered a basis for a changed circumstance to revise the GFE pursuant to 24 C.F.R. §3500.7(f).
Volume Based Compensation: If a lender is basing its compensation to mortgage brokers on loan volume, as described in the new FRB compensation rule, it is nevertheless necessary to comply with RESPA Section 8 (12 U.S.C. 2607), which prohibits the payment of things of value or kickbacks in exchange for the referral of business to settlement service providers, including creditors.
Company Name Disclosed in Section F of the HUD-1: The name of the company originating the loan should be placed in Section F of the HUD-1. The name of any individual loan officer or mortgage broker is not disclosed.

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Compliance Guidance for RESPA's Good Faith Estimate:
FRB's MLO Compensation Rules
HUD - RESPA Roundup,
March 18, 2011

Wednesday, March 23, 2011

NAILTA Supports Goliath (Loan Originator Compensation)

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

Rarely is there a significant controversy surrounding a government agency's work, especially where litigation is involved, when nearly all industry groups array on one side and the agency is alone to fend for itself on the other side. The FRB has now received support  for its promulgating and interpretation of the TILA Loan Originator Compensation rule (Rule) from an important industry organization, with respect to the Rule as it relates to affiliate compensation.
In its letter of March 17, 2011, the National Association of Independent Land Title Agents (NAILTA), an organization representing independent title insurance agents and independent real estate settlement professionals, came out in support of the FRB's definition of the term "affiliate" as a "single person" for the purposes of the Rule.
Let's now consider NAILTA's point of view, as expressed in its letter (NAILTA Letter).
NAILTA Letter's Arguments - A Salient Selection
This Commentary offers a brief outline of selected arguments against the TILA Loan Originator Compensation rule (Rule). I am leaving out citations, where possible, for ease of reading. This outline is not meant to be comprehensive, authoritative, or relied upon for legal advice. It offers only a brief synopsis of the argumentation. For citations, exhibits, and argumentation, I suggest that you read the NAILTA Letter. (See Below)
On March 3, 2011, I notified you about a joint letter sent to the FRB from the most prominent organizations (hereinafter, "trade associations") in the residential real estate finance industry (Letter). [FRB: Mangles Affiliate Compensation]
Dated February 28, 2011, the Letter contests the FRB staff's interpretation relating to affiliate compensation and offers two alternatives.
According to the Letter, the FRB "would consider all lending affiliates of an originator as one person as stated in the [R]ule, but that [the FRB] also would consider fees paid to a mortgage company's affiliated real estate brokerage and title/settlement service companies as one person, meaning that fees paid for the fair market value of services performed by these affiliated companies could be considered as loan compensation." (My emphasis)
This is the "single person" construct, a feature that prevents "dual compensation."
Dual Compensation: A Syllogism    
Allow me to provide the following syllogism outlining the FRB's position on dual compensation
(1) The Rule prohibits payment to originators based on loan terms or conditions;
(2) The Rule prohibits "dual compensation" of loan originators, such as compensation received by entities for brokering loans to loan originators;
(3) An "affiliate" is a "single person;" therefore, as such and by extension,
(4) An affiliate is subject to the "dual compensation" prohibition.
Here's the essential logic: just as the FRB is attempting to prevent "circumvention" of the final rule by prohibiting a producing branch manager from participating in profits because they are derived from the rates and terms of loans (i.e., cannot be a basis for loan originator compensation), by extension, the same criteria applies to other participants in the loan origination, including affiliates, and for much the same reasons.
I have already discussed elsewhere this "dual compensation" dilemma in various contexts.
NAILTA Sees Things Otherwise  
NAILTA takes the position that the trade associations have "stifled competition in the real estate settlement marketplace, eliminated healthy competition and stymied consumer choice when it comes to the selection of a real estate settlement service provider." 
In the NAILTA Letter, the following claim is advanced:
"Since the 1980's, each of the trade associations who authored the February 28th correspondence have benefited from a coordinated effort to consolidate and steer the services of all real estate settlement providers, including title insurance, to one source called a 'one-stop shop' in the hopes of dominating local, regional and national real estate service markets." (My emphasis)
To use the word "steer" is rather bold. For an affiliate to avoid "steering," among other things, it must comply with RESPA Section 8, which governs conduct between settlement service providers and makes it a crime for providers to pay and for real estate sales associates or brokers to receive fees for the referral of settlement service business.
Indeed, RESPA's anti-kickback provisions occur when real estate practitioners and lenders establish joint ventures called affiliated business arrangements or AfBAs. To take advantage of the AfBA exemption, partners must satisfy a four-part, safe-harbor test under Section 8(c)(4) of RESPA.
So to allege that the trade associations are steering is tantamount to alleging that they are violating RESPA.
One-Stop Shop
It is interesting the NAILTA Letter specifically points to the "one-stop shop" feature as deleterious to competition, the very feature that was mentioned in the trade associations' Letter as a "successful and long-established affiliated business model...that offers consumers one-stop shopping, which Congress had expressly authorized in a 1983 amendment to the Real Estate Settlement Procedures Act (RESPA)."
According to the NAILTA Letter, a "byproduct" (sic) of the "one-stop shop" process, is that real estate firms, mortgage companies and banks "have stretched out into all areas of the real estate settlement service field in an attempt to consolidate such services as title insurance, surveying, mortgage origination, homeowner's insurance, and appraisals into their 'one-stop shops.'"
On the face of it, this would seem to be the case. After all, and in contradistinction, in the trade associations' Letter it is clear that what NAILTA believes is disadvantageous to the consumer (i.e., one-stop shopping) is held out by the trade associations as advantageous to the consumer, as indicated by the following statement:
"According to the independent real estate research firm REALTrends, Inc., 285 of the nation's 500 largest residential real estate brokerage firms -- which were involved in 30% of all home purchase transactions in 2007 -- offer mortgages, and 240 of the top 500 firms offer title, closing or escrow services. According to a 2010 survey of home buyers by Harris Interactive, the parent of Harris Poll, 29% of recent home buyers used a one-stop shopping service in 2010 compared to 20% in 2002 - an increase of 45%."
The percentage of growth and number of firms involved in AfBAs seem to buttress NAILTA's point of view.
But does the growth of the "one-stop shop" processes reflect some kind of "coordinated effort" to "steer" services or the best and most efficient way to serve the interests of the consumer by effectively delivering settlement related services?
NAILTA Takes A Stand
The following may sum up NAILTA's position:
  1. NAILTA rejects the trade association argument that the rule harms consumers or competition.
  2. NAILTA advises the FRB to do the same.
Furthermore, NAILTA claims:
  1. Even by the trade associations' own data, consumers lack an understanding of "one-stop shops."
  2. An overwhelming majority of consumers do not believe there is any real benefit to using an AfBA.
  3. NAILTA can provide a "plethora of national examples of actual anti-competitive market practices perpetrated by the trade associations and their members in real estate transactions across the United States, whether from strong-arm steering of consumers to their affiliate 'one-stop shops' or by referral sources unilaterally preventing independent real estate service providers from acting as real estate settlement mediums." (My emphasis)
Is "Single Person" Correctly Construed?
NAILTA supports the FRB's definition of the term "affiliate" as a "single person" for the purposes of the Rule.
An AfBA, according to NAILTA's view, is a single entity and, accordingly, should be subject to the "single person" compensation requirements. Indeed, the trade associations refer to the "affiliate" as a "one-stop" shop. 
Therefore, treating them differently for purposes of the Rule "ignores their own intent - a single location for all real estate settlement services."

Tuesday, March 22, 2011

FAQs - Loan Originator Compensation (Now Available!)

Our FAQs Outline - Loan Originator Compensation is now available to the public!
Effective Date: April 1, 2011 –
Loan Originator (Officer) Compensation
The Effective Date of the Loan Originator Compensation requirements is April 1, 2011 and the mortgage industry has been scrambling to implement new policies and procedures, automated responses, new disclosures, compensation plans and employment agreements, and seeking out educational venues to determine appropriate actions.
The FAQs Outline offered by Lenders Compliance Group covers virtually all areas affected by the amendment to the Truth in Lending Act (TILA), as it relates to mortgage loan originator compensation.
The fee is very low - it hardly covers our costs and overhead - but providing the FAQs Outline to loan originators should be done for the sake of the industry. And that's enough motivation for us! This is not a time to 'jump on the bandwagon' and make a few extra bucks.
With no time to lose and the April 1, 2011 effective date rapidly approaching, having a tool like the FAQs Outline can immediately clarify information and provide ways and means to implement this new TILA requirement.
FAQs Outline: Antidote to Ambiguity!
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FAQs Outline – Now Available!
  • This document is proprietary.
  • To date, it has been only available to our monthly compliance administration clients. 
  • We're providing the FAQs Outline to the mortgage industry because it is imperative to provide as much support as possible to loan originators at this critical time.
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Contents and Coverage
  • CONTENTS section now consists of 4 pages with 142 Questions, all of which are answered throughout with 142 Answers.
  • Total Pages: 35
  • Updates: FAQs Outline will continue to grow, as needed
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  • $125
  • Includes the document itself PLUS all updates for 12 months.
  • Sent to your Inbox!
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Press Release
FAQs Outline - Loan Originator Compensation
Lenders Compliance Group
March 21, 2011