As we do the final countdown to April 1, 2011, when the Federal Reserve's new rules on loan originator compensation go into effect, we now find ourselves nine days away from implementing a rule that few, if any, of us really understand. In my office we have received letters and new broker agreements from each of our lenders explaining that we need to choose our type (consumer or lender-paid) of compensation and the amount of compensation we will be receiving. We have all undoubtedly attended numerous webinars about following the new rules regarding compensation. But two parts of the new rule seem to remain amazingly cloudy no matter how many webinars or trainings we attend--the anti-steering provisions and the suitability provisions of the new rule. Today I want to talk about anti-steering, and the next post will deal with "duty of care" and "suitability."
One of the changes to the Truth in Lending Act going into effect April 1, 2011 is that it prohibits the loan originator from steering a consumer into a transaction where the loan originator would be receive a higher amount of compensation as compared to another loan transaction unless the loan is in the consumer's interest. A independent loan originator (formerly called a mortgage broker) must provide the consumer with "a significant number of" choices--at least three if he works with at least three different lenders--and he must allow the consumer to choose from among loans with the lowest interest rate, the lowest interest rate without a balloon or demand feature or interest only payments or a prepayment penalty, and the lowest origination fees and discount points. One of my lenders provided us this week with a certification form that we and the borrowers are to sign verifying that they have selected among their various options for the loan with the interest rate and fees which are best suited to their situation. At the bottom of the form is the following certification: "I certify that the Broker provided me with options of available loans of all types in which I expressed an interest and that I selected a loan product that I believe to be in my interest. I acknowledge and understand that the Broker need not inform me about potential loan product examples if the Broker made a good faith determination that I would not qualify for it."
So we are to choose from among at least three lenders with whom we have broker agreements to give the borrower a quote as to the interest rates and fees. There are a couple of obvious problems with implementing this in the real world. When HUD introduced the 2010 Good Faith Estimate, they informed us that the good faith estimate is a binding contract and that we are not to be changing it. So presumably, we have to use a fees worksheet to work up the fees and the interest rates from various lenders and then provide the consumer with the good faith estimate based on the costs/interest rate combination he chooses. We are to show the consumer the loan with the lowest interest rate, and the lowest costs. Presumably, the lowest interest rate is the lowest thirty year rate available among our lenders. (Does lowest mean the lowest rate sheet rate or the lowest rate with the maximum discount points possible? Nobody has clarified that point for me.) The lowest fees and points would come from the lender with the lowest costs. Before the new good faith estimates were introduced, I had a template programmed for each of my lenders, with their updated administrative costs. After I met with the borrower, I selected the lender template for the lender I wanted to use and I generated an estimate based on those fees. If something happened that I had to change lenders, I could simply select another template and reissue the good faith estimate, but since there was normally only a slight variation in lender fees this usually was not necessary.
Today, however, we cannot do that. Remember that a changed lender is not a changed circumstance, so we cannot reissue the good faith estimate now just because we change lenders. When GFE 2010 was introduced, we no longer had the option of raising any of the lender fees by even one dollar, since the origination fee block could not increase even slightly. I did what I suspect many other originators did; I used the lender with the highest fees for my good faith estimate and then I raised my processing fee slightly so that my estimate was padded a little. That way, if a lender fee had changed, I had enough money quoted in the origination fee to cover any slight variances and the borrower could still close. And that system worked really well for me--in almost 15 months of using the new GFEs I have not had a problem because my fees were always quoted high enough that when we closed the actual borrower charges were equal or less than my quotation. I was able to stay in compliance and the borrower left happy.
Two weeks from now, all of that is going to change again. The borrower must be presented with different loan pricing options, and unless we are receiving our compensation from the consumer, we as brokers cannot "cure" any shortages. I can no longer charge a processing fee, or any other fee, directly to the consumer, and I cannot use any part of the compensation that the lender pays me to credit the borrower. So how do we comply?
It seems to me that we are going to have to go back to the old lender-template policy and update it frequently. Lender fees have risen sharply in the last six weeks as the industry gets ready to make this change, so originators are going to have to watch very carefully to make sure that we have correct, updated fees for each lender since we do not have ability to fix any mistakes. Once the borrower selects a loan, and we issue the good faith estimate, we are then locked into those terms. So if our lender turns down the borrower's loan, and he selected the lender with the lowest closing costs, we will not be able to send him to a different lender with higher closing costs since we cannot reissue the good faith estimate.
This whole business of providing quotations from different lenders creates another problem. As we receive our lender-paid compensation agreements, we have the option of selecting various compensation percentages from each lender. Therefore, it would be possible to have an agreement that lender A will pay us 1% on each transaction, lender B will pay us 1.5% on each transaction, and lender C will pay us 2%. We are supposed to provide each borrower with a quote from each lender. But what if we routinely send twice as much business to Lender C as we do to Lenders A and B? In such a scenario, we can be accused of violating the anti-steering provisions of the rule because the rule is supposed to ensure that the loan originator will not steer the borrower into a loan which provides greater compensation for the originator. I have been told that if we can justify the decision to use Lender C based on service or underwriting superiority or speed in closing, we will not have a problem, but it seems to me that this would be a tough sell. Remember also that we may not just be defending our decisions to a compliance auditor from the Consumer Financial Protection Bureau--we could actually be defending our actions before a judge since our method of compensation and whether we have complied fully with the new rules can be the basis for the borrower claiming life of loan defense to foreclosure starting this July. For that reason, it seems safer to me to have the same level of compensation with all lenders in a lender-paid compensation agreement so that no borrower can accuse the originator of steering the transaction.
What is most interesting to me is that when I have asked wholesaler reps about these issues, their responses have basically been that they don't know the answers yet. The wholesalers are so quick to tell me that they cannot give me legal advice that they actually cannot address any of the greater issues with trying to comply with the new rule. And each piece of information we get generates more questions than answers.
I am very interested to see how others in the origination community are preparing to deal with these issues. Please post your comments below. I would love to read them.
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