Realtor's In-House Lenders & Builder/Lender Offices; FinCen compliance; Are Non-Competes Valid?
One can have a lot of fun with statistics. If I own one dog, and adopt another, my dog population has gone up 100%. The same can be said for the context in which foreclosure numbers are produced, exemplified by this story about how some state's foreclosure numbers have increased dramatically.
The FHA turned heads with the release of three Mortgagee Letters, and see Guild's notice in the investor section below), prompting one industry vet to opine, "The FHA has come out with a new program for those who are out of work. What the heck is FHA doing? First, I cannot imagine a lender that will fund this SI loan. Many states have laws that prohibit SI loans. Second, instead of trying to drum up more subprime business with a SI program, the FHA should go back to the old rules of solid borrowers with good credit. Alternative credit is allowed. If it lowered the MI, so more 'good' borrowers choose FHA rather than FNMA with PMI, that will make the program stronger and last longer. Am I missing something, or has FHA totally lost its collective bureaucratic mind?"
"Hi Rob. Have you heard anything about the CFPB reviewing the arrangements between a real estate broker 'renting' space to an in-house lender? I have heard stories of some lenders paying huge 'rental fees' every month and the R/E broker 'suggesting' to their realtors that all loans go through that lender. I do not see how this arrangement is a benefit for the borrower." I have not heard of the CFPB reviewing the arrangement, although I am sure that it is doing so, or has done so. This arrangement is fairly common. My guess is that if it is fully disclosed, transparent, above board, and there is no steering or arm-twisting of the borrower and open competition can occur, that it will stand. (It is a concern out there, and this is a typical note that I have received within the last few days: "I was wondering, regarding the CFPB and marketing agreements, when are they going to look at the in house lender situation? That is the one where the real estate office makes mucho bucks, and is a detriment to the borrower since the lender has to charge more in order to make sure they are making enough to pay the real estate office their piece of the pie." True or not, it is a concern.)
And regarding shuttering builder/lender offices, I received two e-mails from highly placed folks. "I have no idea where this notion that CFPB will require all builders to close their lending divisions is coming from - I have never heard of it." And the second wrote, "The CFPB won't be shutting builder or realtor owned mortgage companies. There are affiliate fee caps and disclosures, but it is less of an issue for mortgage lending and more for title."
"Rob, I know that you are not an underwriter, but what have you heard about a borrower with lots of assets and lower income being able to obtain a conventional loan?" First, you're right - I know very little about underwriting. But as best I understand it, FNMA (and probably Freddie Mac) does have an asset depletion calculation. FNMA calls it Employment-Related Assets as Qualifying Income. It can be used for purchase or no cash out refi's, for principal residence and second homes only. I don't know the precise details, but I believe you take the sum of eligible assets minus any funds that will be used for closing or required reserves. Subtract 30% of the remaining value of any stock, bonds or mutual fund assets. Divide that number by 360 and that can be used as monthly income.
As a reminder, the Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") finalized a Rule in 2012 which defines non-bank residential mortgage lenders and originators (RMLOs) as loan and finance companies, for the purpose of requiring them to establish anti-money laundering programs and report suspicious activities. The compliance date for meeting this Rule was August 13, 2012. This new Rule (now one year old) requires that an Anti-Money Laundering (AML) program include an independent AML audit. An audit of the AML policy is referred to as one of the "four pillars" of an effective anti-money laundering program and is designed to test the RMLO's program for compliance with relevant regulatory requirements and mandates as well as its own internal AML policy. The scope and frequency of the testing is commensurate with the risks posed by the company's products and services, though most firms elect to be audited annually. An officer or employee may conduct the audit if he or she is independent from the firm's compliance department; otherwise a competent third party must conduct the audit.
(Occasionally I am asked about compliance training on this topic, as it is often outsourced to a vendor. One example is EA Compliance, Inc., a supplier of Anti-Money Laundering compliance training and AML audit services to the mortgage lending and mortgage origination industry. They conduct independent, online AML audits without the need for a site visit. To learn more visit their website: or contact Larry Schneider at email@example.com.)
Let's turn to job transitions. Elliot Eisenberg notes, "A healthy labor markets consist of many things including low rates of involuntary termination and high rates of hiring. Usually they're highly correlated - but not now. First time unemployment insurance claims at 332,000/week are at levels last seen in 11/07 before the Great Recession. Yet total hires at 4.2 million in June are now where they were in late 2008, during the worst of the Great Recession; 25% below the 11/07 level!"
The number of mortgage employees "on the move", voluntarily or involuntarily, is increasing. One of the common questions asked by those who are let go by their employer is, "What does this do to my non-compete agreement that I signed when I started work?" The answer, of course, is not simple, and it often depends on the state in which you are employed. Attorney Ari Karen wrote me, saying, "Employees need to know what to do and not to do when changing jobs. It is not just about employment agreements but also fiduciary duties that employees can violate when getting ready to make a move. Violations of these duties can often become their new employer's problem. Fortunately, violations can be pretty easily avoided if people simply learn the do's and don'ts and think about the risk/benefit of certain actions. I frequently see employees (and their new employers) become mired down in trouble by doing something of minimal benefit because they just never thought about it first." (If you have questions about retaining an attorney to help with legal questions on labor law, there are many attorneys, but Ari can be reached at firstname.lastname@example.org.
As Phil Stein, an attorney who represents numerous mortgage companies across the country, points out, the flip side of this issue is that "the companies losing employees need to think about whether they are doing everything they can to protect themselves when key employees leave to join a competitor. In addition to enforcing non-compete agreements that may be in place, they should think about whether the departing employee may be using customer lists, or other kinds of "trade secret" information or processes that rightfully belong to the company. There is also the issue of whether a departing employee is attempting to recruit other key personnel to leave with him or her. Getting good legal advice about how to protect your company in all of these situations really is critical." You can reach Phil at email@example.com.
Lastly, Texas attorney John Fleming writes, "This does vary from state to state. Moreover, these agreements are not necessarily uniform. Some impose a strict 'time out' within a restricted geographical territory. Others restrict soliciting or contacting existing or former customers or prospects, and often prohibit recruiting other employees of the former employer. Even if there are no formal non-competition agreements, most jurisdictions are going to recognize the common law doctrines relating to misappropriation of trade secrets and proprietary information. We tend to think of 'trade secrets' as secret formulas or technical secrets. But in many instances trade secrets will be deemed to include lists of current and former customers (borrowers) and prospects, and other business information that many mortgage professionals do not think of as trade secrets. Again, this can vary from state to state. The new employer needs to be as concerned about this as the moving employee. The new employer may also be subject to a suit for damages or injunctive relief. And, like my old criminal law prof said, 'You might beat the rap, but you can't beat the ride.' I recommend to my clients that they ask new employee hires if they are subject to any restrictions by their past employers, and if so, to have the agreements reviewed. (John can be reached at firstname.lastname@example.org.)
Yesterday the commentary mentioned the CFPB and some updates late last week on the ability to repay (QM). Hopefully not lost in the shuffle was the CFPB's release of the second update of its exam procedures in connection with the new mortgage regulations issued in January 2013, most of which go into effect in January 2014. The update covers Ability-to-Repay/Qualified Mortgages, high-cost mortgages, and appraisals for higher-priced mortgage loans, as well as new amendments related to the escrows rule. The update also covers recent changes to credit card rules. The exam procedures now cover the mortgage origination rules issued through May 29, 2013, and mortgage servicing rules issued through July 10, 2013. Here is a good write up on the material.
As noted above, the FHA released three letters that caught everyone's attention. (Read More: Back to Work / Extenuating Circumstances)
It was an ugly day, price-wise, for fixed income securities (and stocks, again) on Monday, and half the e-mails during the afternoon were price changes. Most are guessing that the MBA Application out tomorrow will show a continued decline in numbers, although the percentage of purchases will be up. Thomson Reuters and Tradeweb reported that, "Originations were a tame $1+ Billion at last check, with 4s more dominant than 4.5s in coupon...The 30-yr stack heads toward the 5pm close lower (worse) .250-.50..."
It is too early to know if we'll see much of a bounce on Tuesday, given that there are no scheduled economic releases to push the market, and no speeches from any Fed officials. The 10-yr.'s yield closed on Monday at 2.88%. And yes, it is certain that higher rates will put a damper on lending - but the question is when. For now, housing inventory, sales, and prices, are still showing strength - and that is what the Fed, and politicians, see.
Perks of reaching 50 and beyond! (Part 2 of 2)
11. You no longer think of speed limits as a challenge.
12. You quit trying to hold your stomach in no matter who walks into the room.
13. You sing along with elevator music.
14. Your eyes won't get much worse.
15. Your investment in health insurance is finally beginning to pay off.
16. Your joints are more accurate meteorologists than the national weather service.
17. Your secrets are safe with your friends because they can't remember them either.
18. Your supply of brain cells is finally down to a manageable size.
19. You can't remember who sent you this list - you just wish the list had larger print.