By Taylor Stork, President CHLA and EVP, COO Developer’s Mortgage Company and Kelly Welch, Executive Vice President, Equity Resources, Inc.
When a consumer goes into the market to obtain a mortgage loan, they enjoy consumer protections that are arguably more extensive and specific than any other financial product.
A few examples: TRID requirements for disclosures which hold lenders to early fee estimates, RESPA prohibitions against charging for services not provided, and LO Comp prohibitions on loan originators steering loans or varying their fee based on how much they think the borrower would pay.
The same is true for the servicing of mortgage loans. Servicers must follow detailed rules, and for the two-thirds of loans that are “federal agency loans” (FHA, GSE, VA, RHS), must offer loss mitigation assistance to keep borrowers in their home when they default on a loan.
But all is not perfect in this world of mortgage consumer protections. Loopholes — practices that work between the lines — and outright bad actions create minefields for borrowers that they may not even be aware of. To address such gaps, the Community Home Lenders of America released a “Consumer Mortgage Bill of Rights,” – suggesting areas where consumer protections should be strengthened.
The most obvious consumer abuse is trigger lead solicitations. When a family starts a mortgage loan application and the lender pulls their credit file, the family is usually unaware that they may be subjecting themselves to an immediate onslaught of dozens of abusive loan solicitations by text, email, or phone.
The rules say these must be a “firm offer of credit.” In most cases, there is no firm offer of credit but rather a bait-and-switch tactic to market their own array of mortgage products and confuse the consumer.
So, CHLA took the unusual step of calling out individuals in our own industry. Our solution is simple and workable: Instead of an opt-out process that doesn’t work, why not create an opt-in where the consumer decides whether they want to receive trigger lead solicitations?
Another area is the costs associated with originating a mortgage loan. Last year FICO — which has somewhat of a monopoly on credit reports — announced a 400% increase in the cost of credit reports. On top of that, they gave significantly preferred pricing to only a handful of the biggest mortgage lenders and consumers they serve.
CHLA suggested that FHA or the GSEs could prohibit these outrageous price increases on the loans they insure and buy. However, the simplest solution is for FICO to simply roll back this outrageous price hike.
A related area is mortgage services in conjunction with a mortgage loan — an unseen, but not insignificant, cost component of a mortgage loan. We are on the verge of a monopoly here too, with ICE Mortgage Technology having over 50% of the market, which could go much higher if it completes its purchase of Black Knight.
This market dominance leads to excessive pricing power and potentially tying lenders to services they don’t want or need. Fortunately, the FTC is trying to block this ICE purchase of Black Knight. Let’s hope they succeed.
Another area we are involved in is consumer protection standards. FHA recently removed their guidance surrounding “dual compensation” which caused an immediate level of confusion in the industry. Now a mortgage loan originator can also receive compensation in a related real estate transaction.
Fannie Mae and Freddie Mac also don’t have any opposing guidelines that ban this.
CHLA is not opposed to this; however, there needs to be some logical oversight. Thus, CHLA is asking the CFPB to establish specific consumer protections when there is dual compensation.
Some items we recommend are, first, an individual should not be able to receive fees on a mortgage loan for the purchase of a home where they are simultaneously representing the seller of the property. This is a clear conflict of interest as knowing the borrower’s mortgage borrowing capabilities could compromise their role in negotiating a home purchase price.
Second, every individual receiving dual compensation should be fully licensed as a mortgage loan originator under the SAFE Act.
Lastly, while some states require disclosures related to this practice, the CFPB should establish uniform nationwide disclosures to make sure consumers are aware.
The reference to licensing brings up what is clearly the biggest loophole in our nation’s consumer mortgage protection laws. In 2008, Congress adopted the SAFE Act, requiring all non-bank mortgage loan originators to: (1) pass the basic SAFE Act qualifications test, (2) pass an independent criminal background check, (3) complete 20 hours of pre-licensing courses, and (4) complete 8 hours of continuing education each year.
When the SAFE Act was developed, the focus was on non-bank mortgage lenders, so it only established these requirements for non-banks and it exempted loan originators at banks. The 2008 crisis, and its aftermath, exposed the extent to which the big banks played a major role in the crisis. To reconcile this, Congress passed Dodd-Frank in 2010 which established the requirement that all loan originators must be “qualified.”
However, requirements for banks continues to be different than non-banks. CHLA believes that the CFPB can strengthen these provisions by requiring all loan originators to pass an independent background check, pass a test, and complete continuing education annually — as every other housing and mortgage professional is required to do.
We repeatedly see loan officers that cannot get “licensed” begin working in a bank as a “registered” loan officer. A consumer has no idea that there are separate requirements for both.
A similar loophole exists with respect to the LO Compensation prohibition against steering or varying loan originator fees based on what a loan originator believes the borrower might be willing to pay. Loan originators at mortgage banks must strictly follow these rules. But mortgage brokers can effectively evade this requirement by using their different loan originator channels to vary pricing or steer loans.
Finally — and maybe this falls more into the policy category rather than consumer protection — Congress prohibited mortgage insurance premiums to be charged on loans after the loan is paid down to 78% loan to value (LTV). This was a great move! However, FHA moved the other way and in June 2013, FHA began charging premiums for the life of the loan.
FHA premiums are not quite like mortgage insurance premiums; however, the fact is by the time a borrower hits 78% they have already paid around 10% in fees cumulatively on a loan – far exceeding the risk of their loans. Thus, CHLA continues to call on FHA to end its Life of Loan premium policy so that it may be consistent with the consumer protections borrowers enjoy on conventional loans.
Everyone in the mortgage industry has a vested interest in consumers having complete confidence in the fairness and integrity of the mortgage loan process. With a few simple common-sense solutions, we can make that process even better.