Restoring American Financial Stability Act of 2010 

When this new law is fully implemented, it appears that Mortgage Brokers will be limited in what loans they can originate and one wonders if mortgage brokers will even survive this change.  

• One of the provisions of the law requires the lender to retain a percentage of ownership, which clearly will not be possible with brokers, but might work with wholesale lenders, where brokers send their loans. 
• Another provision sets the compensation to a fixed amount, potentially being so low, it’s not worth doing the job.
• The new disclosure requirements are very cumbersome and most borrowers find them to be confusing.

An overview of this law is as follows:    

The Senate approved the Restoring American Financial Stability Act of 2010, S. 3172.  This sweeping legislation overhauls the financial services industry.  Here is the link to the entire bill.

http://thomas.loc.gov/cgi-bin/query/D?c111:2:./temp/~c111vrqzLy::   

 The Senate bill now goes to conference where policy differences will be reconciled with the House bill.  It is now expected that the final bill will be completed and sent to the President by the 4^th of July.

 When will any changes be implemented?

 We do not believe there will be any legislative changes implemented for at least 12-24 months after the bill is enacted into law.  It is also possible that provisions will be modified in conference. 

As we noted in our update last week, it is likely the Federal Reserve will accelerate its process for implementing its final rule on loan officer compensation.  We believe it is possible that the Fed will publish its final rule this Summer with implementation in early 2011. 

What are key changes?

 In addition to establishing a consumer protection “bureau” inside the Federal Reserve which will have authority for all consumer regulations including RESPA, TILA, etc., there are two major provisions in the Senate bill that will affect the mortgage industry. 

 They are:

 Risk retention relief

 The final bill includes an amendment  to the 5% risk retention requirement.   The Landrieu-Hagan-Isakson amendment creates a qualified mortgage exemption.  As long as the mortgage meets the requirements established by the federal regulators, which includes the HUD Secretary, it will be exempt from any risk retention requirement (i.e. holdback of capital of 5% of the loan amount).  The intent of the amendment is to exclude government and GSE loans that meet traditional underwriting criteria from the 5% requirement.

 Mortgage standards: Restrictions on loan officer compensation  and establishment of ability to repay standard

 The bill also includes  a controversial provision on mortgage standards that explicitly puts into law the principal elements of the Federal Reserve’s rule on loan officer compensation.  Publication of the Fed’s final rule on loan officer compensation will likely be accelerated because of this amendment.

 This provision precludes loan officer compensation based on loan terms of the mortgage excluding the loan amount. This provision is slightly better than the Fed’s loan officer compensation rule because it states compensation is permitted based on loan size.  In its preferred approach, the Fed rule excluded the loan amount which would have required flat fee compensation (e.g. $1500 per loan). We assume the Fed will adopt the approach included in the amendment (i.e. permit compensation based on loan size).  (See the discussion of the Merkley amendment and the Fed rule below.) 

 This provision has three principal parts.  They are:

1.       Loan Officer Compensation

  The amendment states:

“no loan originator shall receive from any person and no person shall pay to a loan originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).”

If implemented, a mortgage lender may no longer pay loan officers/mortgage brokers based on interest rate (e.g. overages or YSPs) or product type (as the Fed rule states).  The amendment does permit a lender to pay loans officers or mortgage brokers based on loan size (i.e. basis points).    However, the basis points would likely have to be set  for all loans originated for a period of time (probably at least monthly) regardless of the revenue generated on particular loans. A company would have the discretion as to the basis point levels. 

 As a reminder, the Fed proposed rule would permit companies to pay “loan officers differently than mortgage brokers”.  Your firm could also “pay a loan originator of either type more than it pays another, as long as each originator receives compensation that is not based on the terms of the transactions they deliver” to the lender.    

  The provision also states that the loan officer cannot be paid compensation  indirectly “that varies based on the terms of the loan”.  While we will have to see how the Fed interprets this provision, we assume that would preclude any compensation based on profitability.   We do believe that you could pay higher compensation based on loan officer volume or loan quality.

 It is important to remember that the intent of the legislation and the Fed rule is to remove incentives from the loan officer/mortgage broker from steering borrowers to a product or interest rate that is not in the borrowers’ best interests. 

 2.       Underwriting Standard (Ability to Repay)

 The amendment also includes an ability to repay standard.  The lender must determine that the borrower has a reasonable ability to repay the loan.  We assume government loans would effectively be exempted from this requirement.

 The amendment states:

 “No creditor may make a loan secured by real property or a dwelling unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.”

 “A determination under this subsection of a consumer’s ability to repay a loan described in paragraph (1) shall include consideration of the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.”

 There is a safe harbor (presumption of ability to repay) if the following criteria are met:

 o   The lender verifies income, performs appropriate underwriting as determined by the regulators, etc.

o   The lender determines the borrower ability to repay using maximum rate during first 5 years of the loan.

 Exceptions to the safe harbor (presumption of ability to repay) are for:

 o   Negative amortization and interest only loans

o   Balloon payments twice as large as the average of earlier scheduled payments

o   Total points in excess of 3% of the loan excluding the first point of government insurance. 

o   Fed has advised us that the 3% only applies to direct compensation.  The loan compensation change in #1 above effectively ends yield spread premiums for mortgage brokers and overages for retail loan officers.

 3.       Restructuring of Origination Fee

 A loan originator may not arrange for the consumer to finance through the interest rate any fees except for fees paid to bona fide third-parties or retained by the lender or loan originator.

 This provision does not restrict:

 Payment of servicing release premiums

• Borrower’s ability to finance fees though the interest rate so long as the fees do not vary based on the terms of the loan (other than loan amount)
• Payment of volume incentives to loan originators

 

Merkley Amendment – Mortgage Standards

 SEC. 1074. PROHIBITED PAYMENTS TO MORTGAGE ORIGINATORS.

    Section 129 of the Truth in Lending Act (15 U.S.C. 1639) is amended by inserting after subsection (j) the following:

    “(k) Prohibition on Steering Incentives.–

    “(1) IN GENERAL.–For any consumer credit transaction secured by real property or a dwelling, no loan originator shall receive from any person and no person shall pay to a loan originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).

    “(2) RESTRUCTURING OF FINANCING ORIGINATION FEE.–

    “(A) IN GENERAL.–For any consumer credit transaction secured by real property or a dwelling, a loan originator may not arrange for a consumer to finance through the rate any origination fee or cost except bona fide third party settlement charges not retained by the creditor or loan originator.

    “(B) EXCEPTION.–Notwithstanding subparagraph (A), a loan originator may arrange for a consumer to finance through the rate an origination fee or cost if–

    “(i) the loan originator does not receive any other compensation, directly or indirectly, from the consumer except the compensation that is financed through the rate;

    “(ii) no person who knows or has reason to know of the consumer-paid compensation to the loan originator, other than the consumer, pays any compensation to the loan originator, directly or indirectly, in connection with the transaction; and

    “(iii) the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party settlement charges).

“(3) RULES OF CONSTRUCTION.–No provision of this subsection shall be construed as–

    “(A) limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent purchaser;

    “(B) restricting a consumer’s ability to finance, at the option of the consumer, including through principal or rate, any origination fees or costs permitted under this subsection, or the loan originator’s right to receive such fees or costs (including compensation) from any person, subject to paragraph (2)(B), so long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal) or the consumer’s decision about whether to finance such fees or costs; or

    “(C) prohibiting incentive payments to a loan originator based on the number of loans originated within a specified period of time.

    “(4) LOAN ORIGINATOR.–For the purposes of this section, the term `loan originator’–

    “(A) means any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain, with respect to credit to be secured by real property or a dwelling–

    “(i) arranges for an extension, renewal, or continuation of such credit;

    “(ii) takes an application for credit or assists a consumer in applying for such credit; or

    “(iii) offers or negotiates terms of such credit;

    “(B) does not include any person who is not otherwise described in subparagraph (A) and who performs purely administrative or clerical tasks on behalf of a person who is described in subparagraph (A); and

    “(C) does not include a person that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person is compensated by a lender or other loan originator or by any agent of such lender or other loan originator.”.

   SEC. 1075. MINIMUM STANDARDS FOR RESIDENTIAL MORTGAGE LOANS.

    (a) In General.–No rule, order, or guidance issued by the Bureau under this title shall be construed as requiring a depository institution to apply mortgage underwriting standards that do not meet the minimum underwriting standards required by the appropriate prudential regulator of the depository institution.

    (b) Ability to Repay.–

    (1) TILA AMENDMENT.–Section 129 of the Truth in Lending Act (15 U.S.C. 1639), as amended by section 1074 of this Act, is further amended by inserting after subsection (k) the following:

    “(l) Ability to Repay.–

    “(1) IN GENERAL.–No creditor may make a loan secured by real property or a dwelling unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.

    “(2) MULTIPLE LOANS.–If the creditor knows, or has reason to know, that 1 or more loans secured by the same real property or dwelling will be made to the same consumer,

[Page: S3559]  GPO’s PDF

the creditor shall, based on verified and documented information, determine that the consumer has a reasonable ability to repay the combined payments of all loans on the same real property or dwelling according to the terms of those loans and all applicable taxes, insurance, and assessments.

    “(3) BASIS FOR DETERMINATION.–A determination under this subsection of a consumer’s ability to repay a loan described in paragraph (1) shall include consideration of the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.

    “(4) INCOME VERIFICATION.–A creditor shall verify amounts of income or assets that such creditor relies on to determine repayment ability, including expected income or assets, by reviewing the consumer’s Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets. In order to safeguard against fraudulent reporting, any consideration of a consumer’s income history in making a determination under this subsection shall include the verification of such income by the use of–

    “(A) Internal Revenue Service transcripts of tax returns; or

    “(B) a method that quickly and effectively verifies income documentation by a third party subject to rules prescribed by the Board.

    “(5) PRESUMPTION OF ABILITY TO REPAY.–Any creditor with respect to any consumer loan secured by real property or a dwelling is presumed to have complied with this subsection with respect to such loan if the creditor–

    “(A) verifies the consumer’s ability to repay as provided in paragraphs (1), (2), (3), and (4); and

    “(B) determines the consumer’s ability to repay using the maximum rate permitted under the loan during the first 5 years following consummation and a payment schedule that fully amortizes the loan and taking into account current obligations and all applicable taxes, insurance, and assessments.

    “(6) EXCEPTIONS TO PRESUMPTION.–Notwithstanding paragraph (5), no presumption of compliance shall be applied to a loan–

    “(A) for which the regular periodic payments for the loan may–

    “(i) result in an increase of the principal balance; or

    “(ii) allow the consumer to defer repayment of principal.

    “(B) the terms of which result in a balloon payment, where a `balloon payment’ is a scheduled payment that is more than twice as large as the average of earlier scheduled payments; or

    “(C) for which the total points and fees payable in connection with the loan exceed 3 percent of the total loan amount, where `points and fees’ means points and fees as defined by section 103(aa)(4) of the Truth in Lending Act (15 U.S.C. 1602(aa)(4)), except that, for the purposes of computing the total points and fees under this subparagraph, the total points and fees attributable to any premium for mortgage guarantee insurance provided by an agency of the Federal Government or an agency of a State shall exclude any amount of the points and fees for such insurance greater than 1 percent of the total loan amount.

    “(7) EXEMPTION.–

    “(A) The Board may revise, add to, or subtract from the criteria under paragraphs (5) and (6) and subparagraphs (B) and (C) of this paragraph upon a finding that such regulations are necessary or appropriate to effectuate the purposes of this title, to prevent circumvention or evasion thereof, or to facilitate compliance with this subsection.

    “(B) BRIDGE LOANS.–This subsection does not apply to a temporary or `bridge’ loan with a term of 12 months or less, including to any loan to purchase a new dwelling where the consumer plans to sell a current dwelling within 12 months.

    “(C) REVERSE MORTGAGES.–This subsection does not apply with respect to any reverse mortgage.

    “(8) SEASONAL INCOME.–If documented income, including income from a small business, is a repayment source for an extension of credit secured by residential real estate or a dwelling, a creditor may consider the seasonality and irregularity of such income in the underwriting of and scheduling of payments for such credit.”.

    (2) CONFORMING AMENDMENT.–Section 129 of the Truth in Lending Act (15 U.S.C. 1639), as amended by this Act, is amended–

    (A) by redesignating subsections (k), (l), and (m) as subsections (m), (n), and (o), respectively; and

    (B) in subsection (o), as so redesignated, by striking “(l)(2)” and inserting “(n)(2)”.

    On page 1430, line 8, “

RESPONSE FROM A WHOLESALE MORTGAGE LENDER

PRMG CEO Paul Rozo, Responds to an
Overwhelming Response from Brokers on
Recent Article Brokers! Don’t Jump Ship!
 ………………………………………………………………………………………………………………………………………………..
                                          

As many of you may already be aware, we sent out a recent press release article “Brokers Don’t Jump Ship” last week. Since then, we have had an overwhelming response from brokers and mortgage professionals to the article. Needless to say, I am very pleased to learn that many of you share the same sentiment in that “brokers” should remain as brokers and keep their independence and identity; that net-branching is not the only choice.

That being said, we certainly enjoyed reading many of your responses and testaments to the fact that you believe as we do, that wholesale business remains a strong viable origination channel for years to come.

PRMG’s core mission going forward is to continue to providing education, training and support to our brokers with SAFE ACT / NMLS, and HELP certification classes in an effort to keep them up to date with new requirements and regulatory changes in our industry. Furthermore, we are putting in place a grass-roots effort to reach out to mortgage brokers to help them fully understand the nature and magnitude of the many legislative bills that potentially threaten our wholesale business. Be assured that you will receive a phone call from one of our PRMG wholesale managers to help you navigate these troubled waters and answer any questions you may have while providing you with guidance as it relates to your business, including the necessary course of action in how to stop such threatening bills from passing in our legislation.

Moreover, for those brokers who are literally finding themselves on the verge of “jumping ship”, even after speaking with one of our Sr. Managers, please contact me directly before deciding such course of action, as I would like to provide you with some insight in making such a decision.

Again, I want to thank all you for your positive feedback and continued support to PRMG and look forward to your responses to future articles in the upcoming months.

Sincerely,

Paul Rozo, CEO
Paramount Residential Mortgage, Group, Inc.