Pre-Approval Letters in a TRID World

The LO role is as valued as ever in lending, and the mortgage broker is alive and well in many areas of the United States - and wholesale certainly sees a lot of competition with scores of larger companies going after broker business. (Companies such as Wells and Bank of America, of course, withdrew from wholesale due to compliance risk concerns with managing brokers.) When asked about entering the business, some would say that the broker model is the quickest route with the fewest barriers. As one head of wholesale wrote, "With some of the changes we've seen by way of TRID, the broker is on a level playing field with correspondents from several respects - the most notable being the manner in which broker compensation is disclosed to the borrower on the loan estimate. The costs of compliance for the mini-correspondent continue to increase - which ultimately erodes any pickup that a correspondent might have previously experienced over brokers."

Can a mortgage brokerage business choose different comp plans with 'each' of his/her wholesale lenders? 5 different wholesale lenders ... 5 different comp plans. Is this acceptable to the CFPB?" Any time you're dealing with an agency that sets precedent by using punitive enforcement actions rather than setting out the rules one runs the risk of saying something wrong. Instead I turned to Brad Hargrave with Medlin & Hargrave who responded, "The technical answer under the CFPB Rule on Loan Originator Compensation ('the Rule') is 'yes' - a mortgage brokerage (which is referred to in the Rule as a 'loan originator organization'), may establish different compensation plans with different lenders without violating the Rule. 

 "As a practical matter, however, such an arrangement creates operational problems in that a brokerage that has a variety of compensation plans is now subject to compliance with the Rule's anti-steering provisions on a regular basis.  Those provisions (which are found in the Rule at 12 CFR 1026.36(e)) provide that a loan originator may not steer a consumer to a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered the consumer, unless the loan originator can establish that the consummated transaction was in the consumer's interest.  To determine this, the transaction must be compared to other possible loan offers that were available through the loan originator for which the consumer was likely to qualify. The Rule then sets forth a fairly complicated 'safe harbor' which, if followed by the loan originator, will satisfy the anti-steering provisions. A full discussion of the safe harbor probably isn't necessary here, but in short, the loan originator must, for each type of transaction in which the consumer expressed an interest, obtain specific loan options from a number of creditors with which the originator does business, and the options must include the loan with the lowest interest rate, the loan with the lowest interest rate that doesn't include a balloon payment, and the loan with the lowest total dollar amount of origination points or fees.

 "Because of the operational complexity of the anti-steering safe harbor, and the possibility that it could be violated thus exposing the brokerage to compliance risk, I tend to advise that folks do what they can to set their compensation with every lender at the same commission rate. Doing so effectively makes it impossible to steer a consumer to a product that will enhance the broker's compensation, thus completely eliminating the need for dealing with the safe harbor."

 The volatility in the banking and economic systems around the world has increased, but it is important to keep things in perspective. I received this note from a banking regulator: "Hi Rob - It's nitpicking, but I want to make sure that you realize that the only parties who have lost money in modern American bank failure have been stockholders, some holders of subordinated debt, uninsured depositors, and FDIC's Deposit Insurance Fund (DIF). The U.S. government has not lost a penny since FDIC's formation in 1933. The DIF took some big hits in the recent crisis, but was replenished by premiums assessed on all banks. To the extent that premiums are assessed on deposits, I guess you could argue that the general public pays for bank failures, but it is not a cost that is paid directly, and not paid via taxation per se - thus stronger bank capital protects the DIF and uninsured depositors."

 And thanks to New Jersey's John Hale who sent along a letter that was sent by his partner, James Anzano, to their referral sources. "We continue to receive requests (and sometimes demands) for Pre-Approval Letters and are often told that certain competing firms issue nearly instantaneous Pre-Approvals with ease. There is also the perennial confusion surrounding the meaning and the relative strength of the term, 'Pre-Qualified;' especially as it relates to my firm's Level 3 Pre-Qualification which is based on borrower-supplied, Written Supporting Documentation as well as a Tri-Merged Credit Report. Recently a Realtor asked us for a 'TBD Pre-Approval' and an 'AUS run' as if these documents were needed to insure the buyer's ability to complete a transaction.

 "First, in our opinion, knowing the lender and having previously done business with them, successfully, is by far the most important data point needed when determining whether to rely on whatever type of opinion letter you may receive from a prospective lender. I say this because many different lenders and the loan originators who work for them have taken a range of positions, from aggressive to conservative, on the opinion letters that they issue. Some issue Pre-Approvals with little or no information, hoping to appease the realtors who demand them.  Others, such as my firm, will only issue Pre-Qualifications (albeit with 3 separate levels of analysis & assurance), prior to the borrowers being under contract and having submitted a loan application.

 "Under the TRID guidelines a loan application must be considered received when 6 pieces of information have been provided to the lender including the property address. Once these 6 pieces are received, a borrower must be provided with a Loan Estimate and other application disclosures. Once a borrower accepts the Loan Estimate, only then can a lender require supporting documentation such as income tax returns, paystubs, etc. Prior to receiving and accepting a loan estimate, however, a borrower can volunteer documentation - a fine line to thread by the lender.

 "Some argue that a lender may theoretically issue a Loan Estimate prior to having all 6 pieces of information. If a lender should do so, however, it would then be bound to this Loan Estimate, even if the eventual property address causes any changes such as a change in transfer taxes, etc. which would then become the Lender's problem and expense to cure. Therefore, most prudent lenders will not issue a Loan Estimate without a property address. This does not mean that a lender cannot ask an underwriter to review volunteered information if they have direct access to underwriting which is currently rare in the mortgage industry.

 "This brings us back to the terms TBD (to-be-determined), Pre-Approval, and Pre-Qualification. In our opinion, TBD loan applications are not a prudent way of doing business under TRID guidelines as noted above and therefore, we do not take loan applications until the borrower identifies a property address. Without an application, you should not issue a Pre-Approval because the NJ Department of Banking has told us directly that using the term, 'Approval' is tantamount to issuing a 'Commitment' which comes with legal liability. As a result, we only issue Pre-Qualifications. We have developed 3 Strength Levels of Pre-Qualification, however, as follows:

 [1] Level 1 - Verbal Information and No Credit Report - Highly Unreliable but required to comply with ECOA, Reg B

 [2] Level 2 - Verbal Information and Tri-Merged Credit Report - Better but still based on what the borrower has verbally told us

 [3] Level 3 - Voluntarily Supplied Written Documentation and Tri-Merged Credit Report - Highly Reliable.  Should there be any gray areas in the documentation, our loan officers review these directly with our underwriters.

 "In our opinion, our Level 3 Pre-Qualification is better than most Pre-Approval Letters being issued in the marketplace today. In this instance a borrower has volunteered income and asset documentation for our review and any problem areas have been discussed with our underwriters.  

 "Another problematic issue is the request for an AUS approval. AUS is the automated underwriting system utilized by lenders to determine if a loan conforms to Fannie Mae or Freddie Mac guidelines. The problem is that the data fields are input by people who sometimes rely on verbal information. Therefore the potential exists for a, 'garbage in, garbage out' product result. The other problem is that the AUS decision report includes a great deal of personal borrower information which should not be shared with anyone other than the borrower by the lender. So, if a loan officer shares an AUS findings report directly with a realtor, they may be violating privacy/confidentiality laws."

 Sometimes folks ask me if there are any books out there on how to be an originator. There are, the most recent one being written by Jason Myers. (And no, this is not a paid ad.) "The Successful Mortgage Broker provides an in-depth look at the ever-changing mortgage industry. Whether you are just beginning your journey as a mortgage broker or you're a seasoned veteran, this book is sure to shed some light on both the industry and on your professional practices. Learn about the Three Ps, time-blocked schedules, selling on social media, how to use TRID to your advantage, and much more. The wisdom and insight shared in this book will help you amp up your game and become a top producer both in the current financial climate and for years to come."

 A received a note from an LO about MISMO, asking if she was going to be impacted by it as they have LO comp, TRID, etc. I told that no, she would really not be directly impacted, and that it is actually a good thing in the long run. Originators would only be impacted to the extent that they may see data they enter being transformed to meet the standard as they enter it into an LOS or other software. It helps everyone in the mortgage manufacturing process to have standardized data, which in turns helps pricing and in turn rates for borrowers.

 I turned to the MBA for more information. "The Mortgage Industry Standards Maintenance Organization (MISMO) works on behalf of the industry to provide a common language for the efficient exchange of data in the form of consistent definitions and common formats.  MISMO standards allow lenders, investors, and regulators to lower costs and improve data quality: the more organizations that adopt MISMO, the greater the benefits to each industry participant. 'Now that MISMO standards have been adopted by the GSEs, Ginnie Mae, CFPB and FHA, nearly all organizations in the mortgage finance industry are using MISMO whether they realize it or not' said MISMO President Michael Fratantoni. 'The standards have been developed over time through the persistent efforts of a number of volunteer contributors from lenders, vendors, and other interested parties across the industry. MISMO offers the opportunity for the industry to collaborate on important business implementation issues such as the need for consumer friendly fee names and definitions (think TRID); solutions for the exchange of trended credit data between industry partners; and opportunities to enhance and improve the on-line experience for consumers.  Learn about the organization and the standards at www.mismo.org or reach out to Jan Davis."

 And to finish up the topic, Fannie, Freddie, the CFPB, and others are now requiring in certain cases that data delivered to them utilize the MISMO standard. That is beneficial to lenders. For example, it is easier if every investor and regulator agree on a common definition and format for reporting standard elements like LTV.  With the increase in the volume of regulatory reporting, this has become even more important. The MBA is now offering vendors the opportunity to certify that their products are compliant with the latest MISMO standards, or that they have incorporated the portion of the standard applicable for "Know Before You Owe"/TRID.