LMI Mortgage Lending: Road Less Traveled

The Federal Deposit Insurance Corporation's (FDIC's) Advisory Committee on Economic Inclusion (given the catchy name "ComE-IN") will meet on Wednesday, March 2, 2011 to discuss principles for low and moderate income (LMI) mortgage lending (as well as supporting financial education).

Committee members will discuss "responsible ways to restore LMI mortgage lending and sustainable homeownership in the wake of the mortgage and housing crisis." Observing the obvious, the FDIC's announcement states that "borrowers' opportunities for homeownership have diminished as the availability of mortgage credit has contracted" and "market disruptions have been particularly difficult for lower-income borrowers, who have been disproportionately affected."

LMI has not quite been in the forefront of community lending for awhile. The subsidies associated with LMI are responsive to the Community Reinvestment Act (CRA) requirements designed to promote home ownership. Chase, for instance, currently provides an LMI program for 1 - 4 Units, Condo, PUDs or New York Co-ops, loan amounts up to $400,000, primary/purchases only, and a maximum subsidy that is the lesser of $1,500 or .75% of the loan amount. Chase also offers a Correspondent LMI Subsidy Eligibility tool.

Of course, geographic locations matter in CRA loans, so banks determine eligibility using the property location as an eligibility factor.

LMI and CRA – Controversy

The CRA was designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory ("redlining") credit practices against low-income neighborhoods. In recent years, CRA lending has been accused of contributing to the mortgage meltdown in 2008, the assertion being that such loans were inherently unsafe.

In point of fact, the FRB has examined the statistical evidence and concluded that their empirical research did not validate any relationship between the CRA and the 2008 financial crisis.

In 2008 the FDIC's Chair Sheila Bair - who is also addressing the forthcoming meeting - noted that the majority of subprime loans originated from lenders were not regulated by the CRA. She asserted that CRA was a "scapegoat," and stated: "I want to give you my verdict on CRA: NOT guilty."

Whatever your thoughts - whether you think CRA encouraged a loosening of lending standards or dispute that CRA was a significant cause of the subprime crisis - LMI did not go away, and the FDIC now clearly wants to explore its strengths and weaknesses in an effort to "restore LMI mortgage lending and sustainable homeownership."

Meeting

• FDIC: Advisory Committee on Economic Inclusion (ComE-IN) 

• Conference: "Principles for LMI Mortgage Lending, Teaching Financial Education, and Policy and Projects Updates"

• Agenda: Speakers and Documents

• Date: March 2, 2011

• Location: FDIC Headquarters, 550 17th Street N.W., Washington, DC
  
• Webcast: Presentation
  
  

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FDIC: Advisory Committee to Discuss Principles for Low- and Moderate-Income Mortgage Lending and Supporting Financial Education
Press Release
February 24, 2011

FRB: "Jumbo" Escrow Accounts - Final & Proposed Rules

On February 23, 2011, the Federal Reserve Board (FRB) issued a final rule and requested public comment on a second rule under Regulation Z to revise the escrow account requirements for certain home mortgage loans.

The revisions to the regulation, which implements the Truth in Lending Act (TILA), are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The final rule implements a provision of the Dodd-Frank Act that increases the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, "jumbo" mortgage loans. (Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac, as specified by the legislation.)

In July 2008, the Board issued final rules requiring creditors to establish escrow accounts for first-lien higher-priced mortgage loans (HPML). A first-lien mortgage is considered an HPML if its APR is 1.5 percentage points or more above the current average prime offer rate.

Under the final rule, the escrow requirement will apply to first-lien jumbo loans only if the loan's APR is 2.5 percentage points or more above the average prime offer rate.

The APR threshold for non-jumbo loans remains unchanged.

The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011.

Proposals

PROPOSAL: Expanding the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans from one to five years, and longer under certain circumstances, such as when the loan is delinquent or in default. (The proposed rule would provide an exemption from the escrow requirement for certain creditors that operate in "rural or under served" counties, as authorized by the legislation.)

PROPOSAL: Implementing new disclosure requirements contained in the Dodd-Frank Act. Disclosures would be required at least three business days before consummation of a mortgage loan to explain, as applicable, how the escrow account works or the effects of not having an escrow account if one is not being established.

PROPOSAL: Requiring consumers to receive disclosures three days before an escrow account is closed. (The FRB is soliciting comment on the proposed rule for 60 days after publication in the Federal Register, which is expected shortly.)

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FRB: Truth in Lending, Proposed rule, Request for Public Comment
February 23, 2011
FRB: Truth in Lending, Final rule - Official Staff Commentary
February 23, 2011
FRB: Summary of Findings: Design and Testing of Escrow Disclosures
January 28, 2011

Compensation: Coming or Going?

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

Prophecy is above my pay grade, but if I were a betting man - which I'm not! - I would bet on a postponement of the TILA loan officer compensation requirements currently scheduled to go into effect on April 1, 2011. Rarely have I seen such a messy roll out of a regulatory change that actually affects virtually all aspects of the mortgage banking industry in general, and mortgage brokers in particular.

Because I'm not a betting man, I hope for the best outcome for industry stability, but will prepare for the "alternative." Our clients will be as prepared as possible, whatever the situation, come April 1, 2011!

Perfect Storm - Exhibit 1: Congress

The Senate's Committee on Banking, Housing, and Urban Affairs, chaired by Tim Johnson (R-SD), is concerned that "regulators are not allowing adequate time for meaningful public comment on their proposed rules. We also believe that regulators are not conducting rigorous analyses of the costs and benefits of their rules and the effects those rules could have on the economy."

Dated February 15, 2011, the letter was sent by ten members of the Committee to Timothy Geithner of the Treasury, Gary Gensler of the CFTC, Sheila Bair of the FDIC, Ben Bernanke of the FRS, Mary Schapiro of the SEC, and John Walsh of the OCC.

In their letter, the Senators observe what has become abundantly obvious to most industry members: "the unprecedented scope and pace of agency rulemakings under the Dodd-Frank Act make it more important than ever that agencies engage in deliberative and rational rulemaking."

The letter enumerates five questions for the recipients to answer, and here is my abbreviated version:

1. Will the respective agencies provide at least 60 days for public comment on all proposed rules and studies required by the Dodd-Frank Act?

2. What steps are being taken to ensure that the rules you adopt under the Dodd-Frank Act are the least burdensome way to achieve the statutory mandate. (Provide how those steps satisfy the obligations under the Administrative Procedure Act and other applicable statutes to conduct cost-benefit and economic impact analyses.)

3. What steps are being taken to ensure that all empirical data and economic analyses submitted by commenters are thoroughly considered before a final rule is adopted.

4. What steps are being taken to ensure that the respective agency is acting in coordination with other agencies charged with adopting related rules? (How is this coordinating being established?)

5. Given the importance of rigorous cost-benefit and economic impact analyses and the need for due consideration of public comments, would additional time for adoption of the Dodd-Frank Act rules improve the respective agency's rulemaking process and the substance of its final rules?

Perfect Storm - Exhibit 2: SBA Office of Advocacy

The SBA Office of Advocacy has written not one, but two letters to the FRB, expressing concern that the "Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)" and recommending that the FRB prepare an initial regulatory flexibility analysis (IRFA).

The result of the first letter, dated January 13, 2011, brought forth from the FRB a "compliance guide" on January 26, 2011.

I put that FRB issuance in quotes, because (as previously noted) it is 'inadequate, incomplete, and regurgitates most features of the "already known" aspects of the Regulation Z final rule amendments affecting loan officer compensation.' Best as I can tell, the "compliance guide" seemed meant to be a rush-job response to SBA's January 13, 2011 letter. In other words, this "compliance guide" is 'a transparent attempt to satisfy a regulatory requirement, though the dubious result adds little to an overall resolution.'

In response to the FRB's "compliance guide," the SBA issued a second letter on January 26, 2011 to the FRB, noting specifically that the "guide may not meet the requirements of the Small Business Regulatory Enforcement Fairness Act (SBREFA)." The SBA letter points up the flaws in the "compliance guide," suggests that revisions should be made to it, and requests postponement.

The FRB's response to the SBA's second letter is, essentially, silence.

Perfect Storm - Exhibit 3: Lawsuits and Consternation

Several industry groups have expressed an intention to sue the FRB, or pursue some form of judicial recourse, with the aim of preventing implementation of the loan officer compensation rule on April 1, 2011. As but one example, the National Association of Independent Housing Professionals (NAIHP) is threatening to sue the FRB within the next few days. NAIHP has invited the NAMB to join them in their suit against the FRB. 

According to a statement posted on the NAIHP website, the organization has been preparing legal action against the FRB for almost 2 months. Marc Savitt, the organization's President, states that preparation for their lawsuit has included "interviewing law firms, lining up expert witnesses, research, countless hours of planning and most importantly, raising funds."

In December, the Mortgage Bankers Association (MBA) sent a 19 page, carefully written and comprehensive letter to the FRB's Ben Bernanke  and Sandra F. Braunstein of its Consumer and Community Affairs Division. Under the rubric of "Questions on Federal Reserve Loan Originator Compensation Rule," the MBA lists 42 (sic) topics, plus sub-topics, of concern, confusion, and uncertainty, mixed with requests for clarity, interpretive guidance, and statutory support.

The Impact Mortgage Management Advocacy & Advisory Group (IMMAAG) has been very involved in seeking to "delay implementation until the appropriate impact studies have been concluded "or at least delay implementation to allow for a 'real' guide to be published and to allow the industry to absorb it and get questions answered."

The National Association of Mortgage Brokers (NAMB) has weighed in mightily and has intimated their interest in pursuing a legal remedy if nothing else will work. The NAMB is also threatening now to take "legal action." (Video)

In January, Michael J. D'Alonzo, President of the NAMB sent a letter to the FRB's Bernanke and Braunstein, requesting a delay in implementation of the loan officer compensation requirements, based in part on alleging that the FRB "has no legal basis for treating mortgage broker companies differently than other firms  carrying out the same or substantially similar business operations" and expressly seeking "clarification as to why the Rule permits  one class of mortgage market participants to: (1) receive incentive compensation based upon the type of loan originated; (2)  reduce their own compensation or income in order to capture more business; and (3) remain exempt from restrictions and  prohibitions set forth in the Rule, while other classes of market participants are held to significantly different standards."

Perfect Storm or Safe Harbor

The new loan officer compensation requirements have produced a plethora of webinars, lectures, training videos, questionnaires, surveys, so-called automated solutions, breakout sessions, magazine and news articles - a virtual cottage industry of Google Ads proclaiming "End-to-end mortgage automation solution for bankers and lenders," and "Confused About Dodd-Frank Changes? Sign Up For Onsite/Webinar Training."

In many of the aforementioned venues, speculation is a proxy for regulatory fact. Having a famous speaker or bigwig compliance professional opining on uninterpreted and unclarified TILA statutes makes me uneasy. There just is no replacement for regulatory guidance. Period!

Here's the reality: the largest loan originators and creditors will fend for themselves in this de facto unregulated environment, and all others will fall in line, unless and until the FRB provides clarification or delays implementation. Otherwise, the notion that the large originators get to make the interpretation of federal statutes, in the absence of the FRB interpreting them concisely, unambiguously, and cogently, is all a bit too Darwinian for my taste!

This is precisely why FRB regulations are promulgated: to assure a stable market and to avoid large companies determining for all the other companies what the FRB means. Furthermore, impact of the new loan officer compensation rules on the industry is a fundamental feature of any such foundational change to the residential real estate finance market. How is it even conceivable that such a change can be implemented without comprehensive impact studies required by federal statutes?

This is not a wave, but a tsunami of confusion with no safe harbor in sight - yet!

I am not a prophet, but betting on a delay seems like a good bet!

Be prepared to implement the loan officer compensation rules on April 1, 2011 - and be sure to consult competent compliance professionals for guidance - even if this dynamic environment continues to cause confusion and ambiguity. But, in the absence of the FRB adequately responding to its role in this debacle it is also wise to do what you can to stand up for the greater good of all market participants.

What do you think?

I would welcome your comments.

Please feel free to email me or leave your comments below.

FinCEN: Elder Abuse - Red Flags

On February 22, 2011, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to assist the financial industry in reporting instances of financial exploitation of the elderly, a form of elder abuse.

Financial institutions can alert appropriate authorities to suspected elder financial exploitation. We have previously provided notification about the increase in elder abuse in financial transactions. And FinCEN has notified the public about this upward trend, using SARs as an important method to identify this form of financial exploitation.

There are important RED FLAGS relating to financial exploitation of the elderly, and we provide a list below and suggest appropriate action to implement them. 

FinCEN's Advisory states:

• In the instances where elderly individuals experience declining cognitive or physical abilities, they may find themselves more reliant on specific individuals for their physical well-being, financial management, and social interaction.

• Although anyone can be a victim of a financial crime such as identity theft, embezzlement, and fraudulent schemes, certain elderly individuals may be particularly vulnerable.

SUSPICIOUS ACTIVITY

Financial institutions may become aware of persons or entities:

Perpetrating illicit activity against the elderly through monitoring transaction activity that is not consistent with expected behavior of elderly customers.

ILLICIT ACTIVITY

Financial institutions should evaluate indicators of potential financial exploitation in combination with other red flags and expected transaction activity being conducted by or on behalf of the elder. Additional investigation and analysis may be necessary to determine if the activity is suspicious.

RED FLAGS

Erratic or unusual banking transactions, or changes in banking patterns:

• Frequent large withdrawals, including daily maximum currency withdrawals from an ATM;

• Sudden Non-Sufficient Fund activity;

• Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;

• Debit transactions that are inconsistent for the elder;

• Uncharacteristic attempts to wire large sums of money;

• Closing of CDs or accounts without regard to penalties.

Interactions with customers or caregivers:

• A caregiver or other individual shows excessive interest in the elder's finances or assets, does not allow the elder to speak for himself, or is reluctant to leave the elder's side during conversations;

• The elder shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker;

• The financial institution is unable to speak directly with the elder, despite repeated attempts to contact him or her;

• A new caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the elder without proper documentation;

• The customer moves away from existing relationships and toward new associations with other "friends" or strangers;

• The elderly individual's financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual;

The elderly customer lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.

ACTION

A financial institution's Identity Theft Prevention Program - Red Flags (Program) should be updated immediately to include red flags that may indicate the financial exploitation of elderly customers.

• Although the subject FinCEN issuance does not specifically require revision to the Identity Theft Prevention Program - Red Flags, the 26 Red Flags listed in 12 CFR Part 41, Supplement A to Appendix J are not meant to be comprehensive, and assume all applicable federal laws and regulations.
• The Program's goal is to detect and identify Red Flags, and establish, implement, maintain, and update reasonable policies and procedures to identify, detect, and mitigate identity theft through a financial institution's own efforts and those of its loan originators, affiliates, and third party vendors.
• A component of the Program is to ensure that it is updated, as needed and as appropriate to the specific financial institution, to reflect changes in the law, changes to the risks to customers, and to the safety and soundness of the financial institution from identity theft. 
• Since forms of identity theft can occur in the financial exploitation of the elderly, it is important to update the Program for red flags involving such financial exploitation immediately.

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Advisory to Financial Institutions on Filing Suspicious Activity Reports
Regarding Elder Financial Exploitation
FIN-2011-A003
February 22, 2011

OCC: "Foreclosure Irregularities"

In his testimony today to the Senate Committee on Banking, Housing, and Urban Affairs, Acting Comptroller of the Currency John Walsh discussed implementation of initiatives required by the Dodd-Frank Wall Street Reform and Consumer Protection Act before.

There are several areas of interest to the residential mortgage originations community. However, Mr. Walsh's statement about the "Foreclosure Processing Irregularities" merits attention. 

The following is a brief outline of the Acting Comptroller's testimony on Dodd-Frank Initiatives.

DUE DILIGENCE REVIEW

Policies and Procedures

Examiners determined if the policies and procedures in place ensured adequate controls over the foreclosure process and that affidavits, assignments, and other legal documents were properly executed and notarized in accordance with applicable laws, regulations, and contractual requirements.

Organizational Structure and Staffing

Examiners reviewed the functional unit(s) responsible for foreclosure processes, including staffing levels, qualifications, and training programs.

Management of Third-Party Service Providers

Examiners reviewed the financial institutions' governance of key third parties used throughout the foreclosure process.

Quality Control and Internal Audits

Examiners assessed foreclosure quality control processes. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities, and institutions' self-assessments to determine the adequacy of these compliance and risk management functions.

Compliance with Applicable Laws

Examiners checked compliance with applicable state and local requirements as well as internal controls intended to ensure compliance.

Loss Mitigation

Examiners determined if servicers were in direct communication with borrowers and whether loss mitigation actions, including loan modifications, were considered as alternatives to foreclosure.

Critical Documents

Examiners determined whether servicers had control over the critical documents in the foreclosure process, including appropriately endorsed notes, assigned mortgages, and safeguarding of original loan documentation.

Risk Management

Examiners determined whether institutions appropriately identified financial, reputation, and legal risks, and whether these risks were communicated to the board of directors and senior management.

FINDINGS

In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors.

These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole.

By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner.

Despite these deficiencies, the examination of specific cases and a review of servicers' custodial activities found that loans were:

-seriously delinquent
-servicers maintained documentation of ownership
-servicers had perfected interest, thus legal standing to foreclose.

Case reviews evidenced that servicers were in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications.

A small number of foreclosure sales should not have proceeded because of an intervening event or condition, such as the borrower:

(a) being covered by the Servicemembers Civil Relief Act;

(b) filing bankruptcy shortly before the foreclosure action; or

(c) being approved for a trial period modification.

While all servicers exhibited some deficiencies, the nature of the deficiencies and the severity of issues varied by servicer.

STANDARDS AND CORRECTIVE ACTIONS

Handling borrower payments, including applying payments to principal and interest and taxes and insurance before they are applied to fees, and avoiding payment allocation processes designed primarily to increase fee income.

Providing adequate borrower notices about their accounts and payment records, including a schedule of fees, periodic and annual statements, and notices of payment history, payoff amount, late payment, delinquency, and loss mitigation.

Responding promptly to borrower inquiries and complaints, and promptly resolving disputes.

Providing an avenue for escalation and appeal of unresolved disputes.

Effective incentives to work with troubled borrowers, including early outreach and counseling.

Making good faith efforts to engage in loss mitigation and foreclosure prevention for delinquent loans, including modifying loans to provide affordable and sustainable payments for eligible troubled borrowers.

Implementing procedures to ensure that documents provided by borrowers and third parties are maintained and tracked so that borrowers generally will not be required to resubmit the same documented information.

Providing an easily accessible single point of contact for borrower inquiries about loss mitigation and loan modifications.

Notifying borrowers of the reasons for denial of a loan modification, including information on the NPV calculation.

Implementing strong foreclosure governance processes that ensure compliance with all applicable legal standards and documentation requirements, and oversight and audit of third party vendors.

Not taking steps to foreclose on a property or conduct a foreclosure sale when the borrower is in a trial or permanent modification and is not in default on the modification agreement.

Ensuring appropriate levels of trained staff to meet current and projected workloads.

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Testimony of John Walsh, Acting Comptroller of the Currency,
before the Committee on Banking, Housing and Urban Affairs, U. S. Senate
February 17, 2011

Compensation: One Statute Too Many?

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

As I've previously notified you, I am writing an article on the loan officer compensation requirements that are due to go into effect on April 1, 2011. While I have been writing the article, in the current environment some of our clients seem to be forming a sort of siege mentality.

And I can't blame them, since there is so much confusion and, more substantively, the actual reading of federal staff commentaries to specific statutes in the revised TILA are causing them quite a bit of consternation.

We'll look at just one of the more controversial provisions!

Going too far?

Let's read the following passage together, slowly, carefully, attentively. 

Below I will deconstruct it.

We are going to consider the FRB commentary on a TILA section, entitled "Compensation in connection with a particular transaction" [§ 226.36(d)(2)]:

"If any loan originator receives compensation directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction. ... The restrictions imposed [under this section] relate only to payments, such as commissions, that are specific to, and paid solely in connection with, the transaction in which the consumer has paid compensation directly to a loan originator.

Thus, payments by a mortgage broker company to an employee in the form of a salary or hourly wage, which is not tied to a specific transaction, do not violate [this section] even if the consumer directly pays a loan originator a fee in connection with a specific credit transaction.

However, if any loan originator receives compensation directly from the consumer in connection with a specific credit transaction, neither the mortgage broker company nor an employee of the mortgage broker company can receive compensation from the creditor in connection with that particular credit transaction."

Interpolation & Interpretation

Now, permit me to unpack this language and render it in less ambiguous terms:

First, let's recognize that the terminology and phrasing in this provision are somewhat mangled. For interpretive ease, staying within the context of the commentary itself, it seems entirely clear that the "loan originator" is a mortgage broker, a company or employer.

Second, I will use some literary license and call the employee of a mortgage broker a "loan officer."

So, here goes my interpolation and interpretation:

Compensation tied to Transaction

Text: If any loan originator receives compensation directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction. ... The restrictions imposed [under this section] relate only to payments, such as commissions, that are specific to, and paid solely in connection with, the transaction in which the consumer has paid compensation directly to a loan originator.

Interpolation: When a mortgage broker is directly compensated by a consumer, no other compensation may be provided to the mortgage broker from another source, directly or indirectly.

Interpretation: When the consumer directly compensates the mortgage broker in a transaction, the mortgage broker may not receive additional compensation from any other source, directly or indirectly; but, the text does not restrict the mortgage broker from paying a portion of such compensation to the loan officer.

Example

Text: Thus, payments by a mortgage broker company to an employee in the form of a salary or hourly wage, which is not tied to a specific transaction, do not violate [this section] even if the consumer directly pays a loan originator a fee in connection with a specific credit transaction.

Interpolation: The mortgage broker may pay salary or hourly wages to a loan officer for originating loans that are not tied to a specific loan transaction, although a consumer may pay a fee to the mortgage broker to originate a specific loan.

Interpretation: Salary and hourly wages are incidental to loan officer compensation, when not tied to a specific loan transaction, irrespective of whether a mortgage broker receives direct compensation from a consumer for a particular transaction.

Source of Compensation

Text: However, if any loan originator receives compensation directly from the consumer in connection with a specific credit transaction, neither the mortgage broker company nor an employee of the mortgage broker company can receive compensation from the creditor in connection with that particular credit transaction.

Interpolation: When a mortgage broker is directly compensated by a consumer in a transaction, no other compensation may be paid to the mortgage broker and the loan officer by the creditor.

Interpretation: Compensation paid directly by the consumer to the mortgage broker on a transaction concomitantly causes the elimination of the mortgage broker's and loan officer's ability to receive compensation by the creditor.

Does the FRB disagree with itself?

One would think that the plain meaning of the text - such as it may be derived in its own context - is sufficiently clear to make sense of the FRB's actual position on loan officer compensation, at least with respect to compensation directly paid to mortgage loan originators by consumers.

However, some of our clients have contacted me about an alleged position unofficially circulated by the FRB itself, which seems to contradict my aforementioned interpretations. Various industry and media organizations are stating that the FRB allegedly holds that loan officers can be paid only salary or hourly wages on loan transactions where mortgage broker compensation is directly received by the consumer. Supposedly, this view is alleged to be held by certain industry organizations and some lawyers who are offering legal opinions.

Perhaps I am in the minority, but the plain meaning of the text - as I see it - does not prevent a loan officer from receiving compensation from a mortgage broker on specific loan transactions where compensation to the mortgage broker is directly paid by the consumer, so long as the above-mentioned constructs are fully met. If it were otherwise, certain TILA statutes - and numerous RESPA statutes, and various provisions in the Dodd-Frank Act - would become incoherent.

I don't think I've got the wrong interpretation. Maybe the FRB should read its own statutes and then revise its own commentary.

And if the allegation is true, is the FRB asserting that some kind of "dual compensation" would take place if mortgage brokers shared a portion of their commission with their loan officers? I think that conclusion would be contrary to a fair reading of the above-outlined provision.

An official clarification would be nice!

Until that happens - and I expect it to happen! - let's keep in mind that the rampant confusion in the mortgage industry, caused in no small part by the revised loan officer compensation requirements, is just one more reason why the implementation date of April 1, 2011 should be delayed.

Postpone Implementation

The FRB needs to provide credible, clear, and unambiguous information for the entire residential mortgage industry in order to expect systemic compliance with foundational changes.

Here are two recent newsletters we have sent out on this subject.

SBA - 2nd Request to Postpone New LO Compensation Rules (2/1/2011)

FRB's Loan Officer Compensation "Guidance" (1/31/2011)

Until the mortgage industry:

(1) adequately understands its Regulation Z (TILA) enforcement obligations and loan officer compensation requirements; and

(2) has been given the statutorily mandated findings of the overall economic impact on the industry of the aforementioned provision, among others; and

(3) receives a complete and comprehensive mortgage compliance guide from the FRB, containing the requisite outline provided by the SBA's Office of Advocacy;

and until, that is, other planning requirements are met, I don't see how compelling the implementation of the loan compensation requirements on April 1, 2011 can be viewed as anything but disruptive, if not destructive, to the livelihoods of mortgage loan originators.

Fannie & Freddie: Administration To "Wind Them Down"

Today, the Obama Administration has delivered a 32-page report to Congress that outlines plans to "wind down Fannie Mae and Freddie Mac and shrink the government's current footprint in housing finance on a responsible timeline."

Released jointly through the Treasury and HUD, it is entitled Reforming America's Housing Finance Market - A Report to Congress, February 2011, the report is meant to lay out reforms to continue fixing the "fundamental flaws in the mortgage market" through stronger consumer protection, increased transparency for investors, improved underwriting standards, and other critical measures. 

It provides guidelines to provide "targeted and transparent support to creditworthy but underserved families" that want to own their own home, as well as affordable rental options.

We will be analyzing the various policy suggestions in this report and publish an outline in the near future, especially as it affects residential mortgage compliance.

Overview of Report

1. Wind Down Fannie Mae and Freddie Mac and Help Bring Private Capital Back to the Market.

Phasing in Increased Pricing at Fannie Mae and Freddie Mac to Make Room for Private Capital, Level the Playing Field.

Reducing Conforming Loan Limits.

Phasing in 10 Percent Down Payment Requirement.

Winding Down Fannie Mae and Freddie Mac's Investment Portfolios.

Returning Federal Housing Administration (FHA) to its Traditional Role.

2. Fix the Fundamental Flaws in the Mortgage Market.

Helping Consumers Avoid Unfair Practices and Make Informed Decisions About Mortgages.

Increasing Accountability and Transparency in the Securitization Process:

Creating a More Stable Mortgage Market.

Servicing and Foreclosure Processes.

Forming a New Task Force on Coordinating and Consolidating Existing Housing Finance Agencies.

3. Better Target the Government's Support for Affordable Housing.

Reforming and Strengthening the FHA.

Rebalancing the Housing policy and Strengthening Support for Affordable Rental Housing.

Ensuring that Capital is Available to Credit-worthy Borrowers in All Communities, Including Rural Areas, Economically Distressed Regions, and Low-income Communities.

Supporting a Dedicated Funding Source for Targeted Access and Affordability Initiatives.

4. Longer-Term Reform Choices.

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Obama Administration Plan Provides Path Forward for Reforming America's Housing Finance Market, Winding down Fannie Mae and Freddie Mac
Press Release
Treasury, 2/11/11

Reforming America's Housing Finance Market - A Report to Congress
February 2011
Treasury and HUD, 2/11/11