Mini-Corr Risks for Brokers; Will Joint Ventures and Affilated Relationships be Banned? Do QM Loans Mean no Lawsuits?
August was not a pleasant month for many lenders, and September may not be much better. Sure, volumes are down, and staffing is down in most shops - and we can expect more mergers: if two friendly companies doing $100 million a month need two compliance staffs, but if volumes at each are down to $50 million a month each, why not join forces and pay for one compliance staff? (More on this below, along with NAMB's thoughts on mini-corr business.)
Brokers through the wholesale channel now account for less than 10% of the mortgage pie - but plenty of investors are chasing that 10%. Retail lending, on a relative basis, is doing okay. On the correspondent side, volumes have dropped 20-40%, in some cases more if a correspondent division's clients have opted to service their own loans and are going directly to the agencies. (Interestingly, correspondent divisions with smaller clients who don't have agency approval are doing better, speaking relatively, since they're continuing to sell to the aggregator.) And the fabled mini-corr channel? Well, any business model designed for a lender/broker to "get around" regulations is often not a panacea: check out this flyer on the risks of the program from NAMB. Even though some programs require a net worth of $75k or less, brokers need to have their eyes open!
As a reminder, since banks have so much to keep track of, in eighteen months ago the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a Final Rule requiring non-bank residential mortgage lenders and originators (RMLOs) to comply with the provisions of the Bank Secrecy Act by establishing anti-money laundering programs. The Final Rule stated that RMLOs must have a compliant AML program established on or before August 13, 2012. The Final Rule contained "4 pillars" that an AML program must contain, one of which was qualified AML training for all employees. Specifically, there must be provisions for initial, new hire and ongoing training; an adequate system to verify that each employee took the training; and that records be kept documenting the type of training, the presenter, the material covered and the test results. And banks have outsourced this training to various companies. Exchange Analytics, Inc., for example, is a supplier of Anti-Money Laundering compliance training services to the mortgage lending and mortgage origination industry. It offers a web-based AML training course designed specifically for employees of RMLOs, which can be viewed here. Exchange Analytics' services also provide for the specific documentation and record-keeping requirements of an AML program. To learn more contact Larry Israel at firstname.lastname@example.org.
Last week the commentary, in discussing QRM and QM, noted, "...in this litigious environment lenders want to stay away from potential lawsuit liability years down the road. So banks mortgage banks are going to lend in a box that keeps them from being sued in some class action lawsuit." Attorney Brian Levy wrote, "I think you're right about class actions, but maybe not for the reason you suggest. In fact, having a loan meet the QM standards does not prevent the lender from being sued. I think this is a common misunderstanding out there. QM simply makes it easier for the lender to prove that they met the ability to repay standard (ATR). On a QM loan, the borrower can still sue and claim that the lender miscalculated something, such as the DTI or the points and fees test. If the court decides that a loan meets the QM standard, however, then the borrower loses the claim that the lender failed to meet the ATR test. That's what the safe harbor means: you've met the ATR test if the loan is a QM. On the other hand, if the loan doesn't meet QM's standards, the lender still has the opportunity to prove that it made a reasonable and good faith determination of the borrower's ability to repay the loan. That's a subjective standard, but there are ways to document compliance that should be effective to prove ATR in the absence of QM. The interesting thing, too, is that it will be very difficult to have any class actions around ATR because, by its nature, it will always be an individualized analysis not conducive to class action treatment."
"Rob, what are you hearing about joint ventures between banks and real estate companies? Recently Wells Fargo has been retreating from these ventures. Are other entities as well? If so, is it due to regulatory changes? A few days ago you address marketing service agreements and the need to clearly identify the value of services. Can you address the future of joint ventures as well?"
Lots of mortgage companies are affiliated, to one degree or another, with other related things - builders, title companies, financial planning, and so on. LOs are in a great place to see borrower's finances, and often see gaps. (For example, Deloitte research finds 58% of Americans do not have a formal retirement income and savings plan in place and only 30% say they feel very secure about retirement. Meanwhile, those who had a retirement plan were 400% more likely to feel very secure. Perhaps sitting down with customers to discuss this is a good way to spark some business.) Of course, many LOs are going after Realtors. And some of the big bank aggregators offer not only Realtor business, but also wealth management services...
Let's see what the MBA has to say about it. President Dave Stevens observed, "The risk of affiliated business arrangements utilizing a JV model has been highlighted with an exclamation point by the recent announcement of the final closing of the largest of JV's at Wells Fargo. Clearly affiliated business arrangements will remain in well controlled environments, primarily where the business model requires it. Home builders, large Realtors, and lenders will continue to offer their own affiliate mortgage and title services in select environments. This is done when central to their revenue model but also viewed as a fundamental requirement as a means to insure overall customer satisfaction.
The note went on: "The risks of Affiliated Businesses, Joint Ventures, or marketing agreements, are significant and it is important to insure the business is well managed for multiple reasons: 1) The points and fees limitations under QM require affiliate fees to be calculated into the 3% cap versus non affiliates; 2) The RESPA disclosure requirements are explicit regarding the disclosure of affiliated business arrangements and need to be clearly compliant in the loan disclosures, the real estate contract, and in the settlement documents. Having run a large real estate firm, I can tell you that mistakes here can happen frequently. Individual Real Estate Agents will sometimes use older contract forms, settlement agents will make a mistake in the final settlement documents and mis-disclose the affiliates, or there will simply be a mistake in the process of document preparation; 3. Private, civil, rights of action have been deployed across the country. Class action lawsuits against all the companies related to the affiliate agreements, especially if a Joint Venture, have been tried in courts claiming that the JV was a 'sham' or using legal basis under RICO and other provisions to claim overcharging, steering, or wire/mail fraud. The costs of defense can far outweigh the benefits if the relationship is not nightly controlled; and 4) Regulatory oversight is increasing its scrutiny over these relationships. Whether at the federal or state level, concerns about 'kick backs' or "steering" (otherwise called required use) have increased the risks of additional regulatory audits of practices, fees, firewalls, fee for service and more."
Finally, "My recommendation is to make sure that anyone exploring a marketing agreement, JV, or the creation of an affiliated business within a company, employ a good RESPA lawyer on retainer, keep a third party review of all materials, documents, marketing, flyers, emails, and all other communications deployed by the sales staff, and make sure a compliance manager is put in charge of reviewing all materials and processes used or the risk of error could be too great to consider."
We closed out last week with the "benchmark" 10-yr sitting at 2.75%. Although the financial press seems to have shifted its attention to possible military action in Syria from tapering, reducing fixed-income purchases is still an issue. Will it happen this month? And perhaps more importantly, how will it be done, and how much? Who knows...in the meantime, the economic data released last week was split between positive and negative surprises. Second quarter GDP, for example, was revised higher from 1.7% to 2.5%. But the Durable Orders data showed a large decline. Consumer Confidence and Consumer Sentiment increased, while Pending Home Sales fell. By the end of the week, for all the jawboning, rates were about where they were the Friday before!
It's a new week and already Tuesday! Today we'll have the ISM Manufacturing Index and Construction Spending, tomorrow are the trade balance figures and the Fed's Beige Book, Thursday is Initial Jobless Claims, ISM Services, ADP Employment, Productivity, and Factory Orders. And finally Friday: the unemployment numbers. Is the economy ready for real growth?
As mentioned, the 10-yr closed Friday at 2.75%. But with the lack of open conflict in Syria, the "flight to quality" has ebbed and bond prices have dropped, pushing rates higher. The 10-yr is sitting around 2.83%, and agency MBS prices are worse about .250.
A little boy was in a relative's wedding.
As he was coming down the aisle, he would take two steps, stop, and turn to the crowd. While facing the crowd, he would put his hands up like claws and roar. So it went, step, step, ROAR, step, step, ROAR, all the way down the aisle.
As you can imagine, the crowd was near tears from laughing so hard by the time he reached the pulpit.
When asked what he was doing, the child sniffed and said, "I was being the Ring Bear."