Thursday, June 14, 2012

The CFPB Wants to Hear from You--Just Before They Destroy Your Business

While some Americans are heading out for a vacation, the Consumer Financial Protection Bureau is hard at work this summer seeking comment on a series of proposals which will further restrict access to credit and depress the housing market. The proposals were issued May 9, 2012, and the public comment period will continue until July, 9.  The rules are expected to be finalized by January 21, 2012.

Since Obama appointed Richard Corday to be the director of the Consumer Financial Protection Bureau, he has been moving steadily forward with his mission of enforcing all of the provisions of the Dodd Frank bill.  These include:

1. Creating a new mortgage disclosure to replace the current Good Faith Estimate and Truth in Lending.  Never mind that the current good faith estimate, although ridiculous, is the result of six years of research and industry round table meetings which resulted in changing the GFE from a one- page form that listed all charges individually, and included an estimated monthly payment with taxes and insurance and the estimated funds to close, to a three-page-form which bundles similar charges together, includes an estimated payment without taxes and insurance and does not show total funds to close anywhere.  The original form also had a signature line, but after six years of round tables and discussion, The Department of Housing and Urban Development decided that borrowers no longer need to sign their estimates.  Still, the Dodd Frank bill requires a brand new disclosure, so after our industry spent much time and money changing all of our systems and retraining to learn how to use the 2010 GFE, the CFPB is determined that we will have new forms--at a new expense of time and money.

2. Setting the guidelines for the qualified residential mortgages, as required by Dodd Frank.  These are extremely critical because these are the only mortgage products that most originators will be allowed to sell in the brave new world of mortgage lending.  Under the current restrictive guidelines, many potential homeowners cannot qualify to purchase or refinance a home, but the new proposed guidelines will eliminate most of even the current qualified applicants from the market.  For a summary of the proposed requirements of qualified residential mortgages see Risk Retention and Qualified Residential Mortgages--The Worst Idea Yet.

3. Revising loan originator compensation, again.  This last item is not required by Dodd-Frank; it's just something that Cordray wants to do on his own.  Part of Dodd Frank required that loan originators be prohibited from steering borrowers into loans where the originator could make more money.  Starting in April of 2011, loan originators had to sign a disclosure that they had provided options to their borrowers including the lowest cost loan or verifying that the loan originator had identical compensation contracts which each investor.  Now, the CFPB wants to clarify "anti-steering rules" to clear up any misconceptions, and they also want to set caps on originator compensation by banning compensation as a percentage of the loan amount and instead implementing compensation as a flat fee.

According to the National Association of Mortgage Brokers, the new changes would initially affect only consumer paid loans.  Therefore, if you are loan originator, whether you originate a $200,000 loan or an $800,000 loan, if the consumer pays your fee, he can only be charged the flat fee.  Since your loan cannot trigger the high cost thresholds, this fee is going to have to be low enough to meet the needs of your $80,000 to $100,000 clients.  (I know that compensation is supposed to be able to vary from loan to loan on a consumer based transaction, but try explaining the disparity to a CFPB auditor.)

The government is opening a real can of worms with this new rule.  First: They are setting up loan originators to be found guilty of violating the anti-steering provisions of their own rule.  If the loan originator can charge only $1500.00 as a flat consumer paid fee, but could make three times that amount under lender paid compensation, chances are that he will choose the lender paid fee every time.  Therefore, he is "steering" the customer into a higher cost loan--no ands, buts or maybes.

Second, the federal government is capping the fees that a private business can earn from its own individual customers. The loan origination industry has been blamed for every problem plaguing the U.S. in the last five years, and so the greater public does not particularly care when we are used as a whipping post.  What other businesses and industries really need to see, however, is that our industry is really being used as a Petri dish for experimental projects on federal micro management of local businesses. Fees should be regulated by market factors--period.   As a loan originator of fourteen years, I can say without reservation that competition is the best deterrent to unreasonable pricing--consumers will actually drive 10 minutes to save $20.00 a month on their payments.  But if the government can tell us what we can charge, they can also tell the super market how to price the lettuce, or the local restaurant how to price the enchilada plate, or the department store how to price the prom dresses.  This is not about consumer protection and it never has been--it is only about control.

The CFPB says that it wants to "engage" with consumers and industry this summer and that they will be setting up a Small Business Review Panel to meet with groups of small financial services providers that would be directly affected by these proposals.  Representatives from "small providers" will be asked to provide feedback to the Small Business Review Panel which will in turn issue a report to the CFPB to consider in formulating its final rules. Each of those steps will likely take place, but I am certain that in the end they will be nothing more than completely meaningless exercises in front of an agency thats only real goal is and always has been to consolidate the mortgage industry into the hands of a few powerful elite banks and eliminate "small providers" entirely.

This past weekend, talking heads on Fox News were complaining that Americans have lost a large percentage of their net worth--including equity in their homes--over the last five years, and that home values are continuing to drop.  Home values are indeed continuing to drop as I can personally verify from appraisals I have seen this week.  The reason that they are is that financing has become so difficult to obtain that desperate sellers continue to reduce the prices of their homes hoping to get them down low enough so that they can find a qualified purchaser.  In the meantime, the CFPB is spending the summer researching ways to further impede small business people and close down the very businesses that could be aiding in the housing recovery. 

Unfortunately, Cordray answers only to the President--the CFPB director is not responsible to Congress at all.  And the President is busy this summer asking for public input on the issue that appears to be closest to his heart--which Hollywood celebrity he should dine with next.

Alexandra Swann is the author of No Regrets: How Homeschooling me a Master's Degree at Age Sixteen. Her newest novel,The Planner , about an out-of-control, environmentally-driven federal government, will be released June 28, 2012. For more information, visit her website at


  1. Alexandra,

    Good stuff. Keep it up!

    Look at the Gestalt - "organized whole" regulatory trend. Without outlawing the brokering of mortgages, which would be smacked-down in court, the regulators are forcing small independent (non-depository) originators into a depository-esque compensation system.

    Licensing requirements? If you work for a depository... Name, rank, and serial number input into the NMLS. Check. Go get’em tiger.

    What if a depository originator wants to come to my shop? Education. Background check. Testing. Fees. Plus… I hope they have some loyal referral partners. And a lot of savings. And 2 or 3 months of fun things to do while on their licensing sabbatical. Or get "creative" with the rules and hope you don't get caught (which would be moronic).

    All of this is in the name of consumer protection?! Sure it is.

    Look at the Gestalt my friend.

    Don't believe me? Look at the most recent regulator PR and rhetoric. Raj Date’s recent comments? Correct me if I'm wrong, but YSP has been credited to the consumer since January 2010? Don’t forget our good friend Jamie Dimon (with his recent ~$9 billion dollar one trade loss) telling the world it was the mortgage broker that damned the world economy… oh, by the way, he forgot to mention that Chase owned 2 of the top 10 subprime lenders.

    They are killing us with crony capitalism. We can pay our people like banks… basis points. Flat fees. Salary. Hourly. Nothing tied to terms or conditions of the loans (i.e. profitability).

    Even the current court ruling in favor of the DOL against the MBA (on overtime and hourly wages) coincides with this trend. Pay like a bank and you won’t get busted.

    Tell me… how can I compete selling a commodity when I can’t lower my fee? What happens when rates go back to 6 or 7 percent? What happens when the market inverts to 80% purchase and 20% refi as a percentage of originations?

    It’s coming. Well have a bunch of originators scrapping for a finite market share. Purchases.

    And our competitor, the bank, makes money on deposits, car loans, credit cards, investments. You get the picture.

    Want an example of absurd? In order to advertise in Angie’s List Monthly Magazine they require us to offer a coupon or discount. We can’t. It’s illegal. We can’t offer a free appraisal or credit report exclusive to Angie’s list subscribers.

    The bank down the road offers a discount on Angie’s list.

    Fair? Show me anyone that isn’t a mortgage broker that gives a d@mn.

    The bank down the road can also lower the borrowers mortgage rate if the borrower agrees direct deposit their pay checks.

    The bank can match a lower fee. They can give a lender credit on page 1 of the HUD. They can give the borrower a $100 Visa gift card at closing. Put that in your flat fee pipe and smoke it.

    Sure, maybe we can survive with hard work, and blood, sweat, and tears. But It sure would be nice to be able to compete fair and square.

    Lastly… why was the compensation rule necessary in the first place? Fannie and Freddie have limited charges to the borrower to no more than 5% for years. Look it up. Investors have capped total yield for years as well (on conforming deals).

    I know, why not just make a regulation that all YSP is credited to the borrower on brokered transactions?

    Oh wait… they did. It is the 2010 GFE!

    Hey…?? Why are they “fixing” something that is already “fixed”...?

    Perhaps Mr. Dimon suggested the idea when President Obama gave him the presidential cufflinks, he so un-casually displayed at the recent Congressional inquiry err... ‘fund raiser’?

  2. You make a lot of good points. The playing field has never been level and it is less level today than every before. This week I am going to write about the new CFPB proposals again. They are shocking when you consider the impact that this will have on the industry as a whole.

    Thanks for such thoughtful comments.