March 5, 2008
Filed under: HR 3915, S.2452 — admin @ 5:17 pm
Ruth Lee
Yield Spread Premium:
YSP: Section 123: Prohibition on Steering Incentives: Amount of Originator Compensation Cannot Vary Based on Terms: No mortgage originator may receive from any person, and no person may pay to any mortgage originator, directly or indirectly, any incentive compensation, including yield spread premium or any equivalent compensation or gain, that is based on, or varies with, the terms (other than the amount of principal) of any loan that is not a qualified mortgage.
In the last sections of Title One, HR 3915 the Act doesn’t proscribe all YSP, it specifically allows Yield Spread Premiums only on “Qualified mortgages ”as defined in Title Two of the Act. While it doesn’t specifically refer to SRP, the language “equivalent compensation” is blurry at best and will ideally be clarified before passage. The “Qualified and Qualified Safe Harbor” highlights include: all FHA and VA loans, ability to repay, net tangible benefit, and a reduction in APR calculations. These definitions are explored under HR 3915: Changing the Framework of TILA. These definitions are important as they relate to YSP, but much more so as they relate to rebuttal presumption and creditor/assignee/securitizer liability, which will be explored later.
Because only Qualified Mortgages are eligible for YSP, it is interesting to note that the Federal Banking Agencies are authorized to “jointly prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage and a qualified safe harbor mortgage, to the extent necessary and appropriate to effectuate the purposes of this subsection, to prevent circumvention or evasion of this subsection…” What is unclear here is whether “they” will be able to amend the percent above index for APR compliance.
S 2452 takes a very different approach. It just lumps almost everything into APR points and fees. It would amend TILA to define loans as prime, non-traditional and subprime loans. The APR percentages of 3% and 5% and the yield indexes (yield on comparable treasuries and Conventional mortgage rate spread) that used are the same as HR 3915, but in S 2452 they are only used as a means to qualify mortgages as subprime and are subject to that set of restrictions and liability concerns.
S 2452 then continues with a re-definition of High Cost Mortgage – which is 8% on first lien…much the same as now, right? In closer examination, the real issues begin to reveal themselves when examining the change to the definitions of points and fees. These definitions will now include:
- all standard points and fees PLUS YSP
- premiums for credit life
- maximum prepayment penalties charged or collected under the terms of the loan, and
- all prepayment penalties incurred by the customer when the loan refinances through the same company as the original transaction.
After adding in all those fees, any loan that qualifies as Section 32 is ineligible for YSP and cannot have a provision to accelerate (exclusive of default). Additionally, S 2452 seems to indicate that all of these fees AND standard points must be paid in cash….they CANNOT be financed directly or indirectly into the loan. To sum it up, Section 32 loans would be almost impossible to execute which I believe is their end goal.
February 29, 2008
Filed under: HR 3915 — admin @ 10:50 am
Ruth Lee
A continuation of my analysis of HR 3915 from here and here.
Over the last decade, the debate over licensing used what many thought to be the rational distinctions of broker, banker, lender, FHA-approved lender and depository institution in determining the minimum standards of state licensure. Some states employed legislation that tiered and parsed amongst the definitions to establish their regulations based on some very substantial and some pretty flimsy differences between originators. HR 3915 establishes minimum standards that delete every distinction except depository (registration) or non-depository (state-licensing and registration) from the debate. It covers every single originator and requires a unique identifier number for the purpose of tracking the originator. It will be interesting to see if they employ MERS for assistance in tracking and streamlining the process… 78 character MERSMIN FTW!
HR 3915 defines an originator as anyone who:
“takes a residential loan application; assists a consumer in obtaining or applying to obtain a residential mortgage loan; or offers or negotiates terms of a residential mortgage loan, for direct or indirect compensation or gain, or in expectation of direct or indirect compensation.”
Depository institutions are subject to some pretty profound regulatory standards and auditing. So HR 3915 directs the Fed to establish registration only. This registration is limited to fingerprints and background checks on any loan originator, most obtain these in hiring anyway, so it shouldn’t be too onerous. Registration for all originators will be founded in the Nationwide Mortgage Licensing System (NMLS) that went live in early January of this year. Not every state has signed on for participation, but HR 3915 would require that all do so in the future.
NMLS: a mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for the State licensing and registration of State-licensed loan originators and the registration of registered loan originators or any system established by the Secretary under section 108.
In creating the distinction of depository and non-depository, HR 3915 makes any flavor of originator that has enjoyed exemption additional regulatory requirements, such as FHA approval, a moot point. All will be required to obtain state licensure - but there is a lot more. They will also be required to obtain that licensure based upon the minimum standards established in the legislation. These standards are considerably higher than many states’ broker standards, so another winner amongst our industry partners will be companies offering mortgage education. Fortunately for those of us that have had to obtain licensing in several different states, the courses will be standardized and approved by the NMLS, making it substantially easier to comply and potentially much less expensive.
All states will be required to amend or pass legislation within a 1-2 year period, depending on their legislative cycle, that conforms to drastically different standards of licensure and eliminate any exceptions or exemptions available for many mortgage lenders. These new standards include: fingerprints and background checks (including a credit report), no license revocation for the past five years, no felonies for the past 7, at least 20 hours of education (to include 3 hours on federal law and 3 hours on ethics), 8 hours of annual continuing education, and a test to be developed by the NMLS.
While HR 3915 does specifically define and exempt employee loan processors and underwriters, it does require that “ a loan processor or underwriter may not work as an independent contractor unless such processor or underwriter is a State-licensed loan originator or a registered loan originator. An interesting aside is the impact this could have on mortgage insurance companies and their contract underwriting, unless they qualify for a different exemption… The last part of the clause suggest that the independent contractor might be eligible for registration only – fingerprints and background; however, it would be interesting to find out how they are going to track them as well, will their unique identifier number be in a different field for reporting?
A big concern is about the efficacy of placing the entire mortgage industry and their livelihood into a virtually untested database. HR 3915 does include language that allows the Fed to replace the NMLS if it is ineffective; and there have been numerous other platforms that perform much the same service. I would imagine that the technology won’t be the downfall; rather It is the data entry that is of greatest concern, especially in light of the volume of transactions. Being placed on a list that could potentially wrongfully denude you of your license is a grave responsibility. On the other hand, for those that play by the rules and do spend a lot of time and money maintaining licensure, it could be a welcome relief.
January 30, 2008
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 6:30 am
Ruth Lee
Fiduciary and Agent Status:
Both of these standards of care have been roundly opposed by mortgage originators. Some of the arguments against specifically reference the inability of the originator to determine all factors considering that ECOA proscribes certain questions or their consideration in making the loan.
fiduciary
- 1) n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty.The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stockbrokers, title companies or anyone who undertakes to assist someone who places complete confidence and trust in that person or company.Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. He/she/it must avoid “self-dealing” or “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it.For example, a stockbroker must consider the best investment for the client and not buy or sell on the basis of what brings him/her the highest commission. While a fiduciary and the beneficiary may join together in a business venture or a purchase of property, the best interest of the beneficiary must be primary, and absolute candor is required of the fiduciary.
- 2) adj. defining a situation or relationship in which a person is acting as a fiduciary for another.
fiduciary relationship
- n. where one person places complete confidence in another in regard to a particular transaction or one’s general affairs or business. The relationship is not necessarily formally or legally established as in a declaration of trust, but can be one of moral or personal responsibility, due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling.
agent
- n. a person who is authorized to act for another (the agent’s principal) through employment, by contract or apparent authority. The importance is that the agent can bind the principal by contract or create liability if he/she causes injury while in the scope of the agency. Who is an agent and what is his/her authority are often difficult and crucial factual issues.
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 12:26 am
For many years now, there have been quakes and tremors in the mortgage industry over the words “duty of care,” “fiduciary” and “agent” as they relate to legislative and regulatory language. Why do the matter? Specifically, they matter because they define the context of the relationship between the originator and the borrower. This context establishes the legal recourse that the borrower has against the originator, as defined by the nature of their relationship.
There are three standards at issue, with the least restrictive being:
- HR 3915: Federal Duty of Care: The originator maintains a federal “duty of care.” This means that both the “duty of care” standard under legal precedent must be met, as well as the conditions laid out within HR 3915. Under the lesser standard of a federal duty of care, the originator is expected to take all reasonable precautions to not be negligent in their dealings with the consumer. Under HR 3915, the federal duty of care specifically excludes the terms “agent” and “fiduciary” from the definition of the relationship.
duty of care
- n. a requirement that a person act toward others and the public with the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would use. If a person’s actions do not meet this standard of care, then the acts are considered negligent, and any damages resulting may be claimed in a lawsuit for negligence.
Requirements to satisfy “Federal Duty of Care” under HR 3915
1. Licensing and registration for all originators, as applicable under State or Federal law, referencing new standards and definitions under Subtitle A.
Notable clauses:
- a. National Mortgage Licensing System: The Nationwide Mortgage Licensing System will streamline the licensing process for both regulatory agencies and the mortgage industry by providing a centralized and standardized system for mortgage licensing. The NMLS initiative was begun by state mortgage regulators in 2004 in response to the increased volume and variety of residential mortgage originators and the need to address these changes with modern tools and authorities. The NMLS was created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). It is owned and operated by the State Regulatory Registry LLC (SRR), a wholly owned subsidiary of CSBS. The system has been built and maintained by the Financial Industry Regulatory Authority (FINRA), who operates similar systems in the securities industry.
- b. Requirement that all originators and loan documentation are must demonstrate the originator’s original and unique identifier number.
- c. Clarification of Supervised and Independent processors and underwriters: whereby only Independent processors and underwriters are required to obtain licensing and registration
2. Suitability – a concept borrowed from the securities industry which demands the broker have a reasonable expectation that the recommendation of an investment is suitable to the client. In making the assessment for securities, the broker must consider risk tolerance, other holdings, objectives, financial needs etc… Under this legislation, the suitability is tailored to address three areas:
- a. Net tangible benefit
- b. Ability to repay
- c. No predatory characteristics outlined within
3. Compliance
- a. Full, timely and accurate compliance with all disclosure requirements
- b. Certifying lender’s compliance to mortgage origination requirements
Next installment: Fiduciary vs. Agent
January 24, 2008
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 6:58 pm
Ruth Lee
As I mentioned in my previous post, there are two bills in Congress today that could have a major impact on the way that mortgage loans are originated and sold across our market.
The first bill, HR 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007 was passed through the House on Nov 15, 2007 by a roll call vote of 291 Ayes, 127 Nays, 14 Present/Not Voting. The bill is sponsored by Rep Bradley Miller and co-sponsored by 27 others, including Rep Barney Frank.
Following introduction of the bill to the Senate on Dec 3 2007, Senator Chris Dodd introduced his own brand of mortgage reform legislation, The Homeownership Preservation and Protection act of 2007. On Dec 12, 2007, this bill was referred to the Committee on Banking, Housing, and Urban Affairs.
Both bills address many facets of the industry, to include compensation, licensing, regulatory governance, predatory lending and HOEPA triggers, appraisals and general due diligence. In reviewing each of the bills, I will explore some of the high points and comparisons between the two. Stay tuned - more to follow…
Filed under: HR 3915, Mortgage Industry Legislation, Quality in Lending, S.2452 — admin @ 2:54 pm
Ruth Lee
I spend a lot of time attempting to maintain a solid, working knowledge of the events, milestones and issues facing the mortgage world. However, yesterday, I was humbled when a client asked me about the new legislation being proposed. His specific question was about the difference between the House Resolution 3915 and the new Senate version S. 2452. At that moment, I realized that although I have read about and spoken about both of these bills, other than big-hand, little map analysis, a la’ primetime news… I really just had rumor, innuendo and “sound bytes” to offer.
The real question is: how will the most substantive legislative reform EVER proposed impact our industry? Which one offers what, and how does that impact our ability to execute our work as mortgage originators?
Unfortunately, upon going back to do a little research, I came away with many more questions than answers… As such, I would like to explore some of these topics… lay out a little bit of fact, dig into the meaning behind cleverly worded language.
Some of the most interesting topics of our day are addressed in the legislation, and I would like to address them here: is YSP finished? Are mortgage brokers going to survive? What regulatory agencies will be affected, empowered or denuded? What cottage industries will arise to support the new legislation? What industries will be shut down in the wake of the legislation?
More to come over the next several weeks!
