The mortgage industry is fortunate to have so many veterans of the industry still playing in the game. But the drawback is that we as veterans can easily make decisions from memory and not pay attention to the rules of today. Every month we have millions of dollars in errors based on that thinking. We also have a constant level of frustration against any current employer for “making life more difficult as it was never like this in the past”, while the realities of the fully Regulated Mortgage Industry are what truly drives the pain. I aim to explain to you now the harsh and clear realities WE ALL are facing in this new business that has been chosen for us.
2014 will be the year we all get to know what CFPB, QM and ATR really mean! For starters the Consumer Federal Protection Bureau is an assembly of all the previous departments at the federal level who enforced pieces of federal laws rolled into one very powerful department enforcing one new law singularly focused as their name says on Consumer Protection. They believe anytime there is incentive paid to employees who are deciding what financial terms a borrower should receive, bad things can happen and the borrower’s best interests are not being served. So the burden of proof is on us to prove otherwise.
We need to understand that all these new rules have been created for the specific reason of protecting the consumer. The consumer doesn’t know, or want to know, in some cases, to be protected, but this 14,000 page legislation is thoroughly wired to do so and with massive authority to enforce it. Our job is to understand these rules and explain their existence and purpose to the consumer so that they will assist us in complying so we protect them.
In January we are leaving the land of little margin, and going to the land of no margin, for error. New clear rules for our business go into place along with the increased ability to enforce them. Virtually all power shifts to the CFPB and we enter the world of Ability to Repay (ATR) and Qualified Mortgage (QM). At Mortgage Network, we are fortunate here that we have always, as a corporate culture, lived by ATR. For any loan to be moved beyond the frontline for exceptions everyone knows they will be asked “can the borrower afford this loan? Are we improving their financial life?” We asked all sorts of things one should know about the customer that weren’t on the 1003 to get a better profile of the situation. This new ATR Federally expects you to do the same. If we know something that’s not on the application that has a material effect on the borrower’s ability to repay we are legally required to use that in our decision on the loan. So treat every borrower as closest friends and family as we have always preached. No games, no caving to pressure from those who don’t get this new world yet. Just do the right thing.
So we will be 100% sure the borrower can repay but we will also aim to sell them Qualified Mortgages. QMs are safe products that are wired to be safe and transparent. So NO neg-am, interest only, balloon, no documentation , pre pays, 40 year terms, big payment shocks, qualifying at discounted start rates, etc. type programs. But also the government wanted to draw a bright line around what is too much debt for a household to handle. They decided upon 43% DTI after analyzing the performance of many folks who have been foreclosed upon. The good news is that they have decided that all loans that fit Fannie/Freddie or Govie standards are automatically QM, which includes loans over 43% DTI. But you will see the automated engines and rules from the Agencies move behind the scenes down closer to 43% as they adjust their layers of risk measurements. It will be vital that we interpret Fannie/Govie guides correctly as loans then falling out of meeting guides are now potentially non-QM. Because even if the loan meets the guides the 1003 only sees so much, so we are expected to be smarter than DU.
So what are the penalties for not getting this right? The TILA penalties to borrowers include statutory damages equal to sum of all finance charges and fees paid by the consumer in addition to actual damages, and court costs and attorneys' fees. The statute of limitations is 3 years from the date of violation. Defense in a foreclosure action can be used against whoever tries to foreclose (not just against the originator-thus assignee exposure). There is no time limit on the use of this defense, but the consumer cannot recover more than first 3 years of finance charges & fees plus actual damages & fees (including reasonable attorney's fees). These risks are all Life of Loan risks so anybody for any reason can come back to you and accuse you of not making a QM/ATR loan and you have to defend yourself. So we will all need to clearly document what went into our decision that we could ensure the borrower could afford this loan and it was the right loan for them. I know you all hate documentation but it has become even more serious. Loan Officers remember it’s your number that follows this loan for life.
We also will be under the intense focus of meeting Fair Lending, HPML (High Priced Mortgage = more than 3 points and fees which is still being negotiated and what is APOR=Average Prime Offered Rate), and UDAAP which is an overlying rule of ensuring that you are not engaging in Unfair and Deceptive Practices. Our constant ability to show that we are “reasonable and in good faith” in our business practices is essential to staying on the right side of the law. You will be required to complete trainings and master these new rules over the coming months and years. Please do not fight it, embrace it, and realize how many won’t and will therefore leave the industry for the guys wearing the white hats like us.
Welcome to your new job in your new industry! We should feel confident that we have the right team and systems in place to compete compliantly in this new world and more importantly we have the right culture to ensure we will act “reasonably and in good faith” at all times. The rules and implementation of them are so serious that a massive cleansing will take place. Sadly I do think some good companies will get swept up in the firestorm, and the consumer will bear the large burden of the costs, but we will be a much more vigilant industry attuned to the true needs of the consumer.