Recovering from Reform

By Becky Rhodes, MBA, CFP®, loan officer at RPM Mortgage

The team building event at the bank retr...
Recovering from Reform

Good Faith Estimate (GFE)                        1
Subtotal of additional forms from M.D.I.A.     ...
Recovering from Reform

Now, loan officers wait for written estimates from escrow which
means an extra day or more turn ar...
Recovering from Reform

property. Therefore there were two different locks; seven pages
for each ‘incident’; for a total o...
Recovering from Reform


Recently, a lender forced a loan officer to pay a $1,296 transfer fee
because he omitted transfer...
Recovering from Reform

Recently, a first time homebuyer walked out in anger, refusing to
proceed with the initial loan ap...
Recovering from Reform


Comments or inquiries to brhodesMtgPlan@gmail.com




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Recovering from Reform4

  1. 1. Recovering from Reform By Becky Rhodes, MBA, CFP®, loan officer at RPM Mortgage The team building event at the bank retreat wasn’t going well. Underwriters were snapping the loan officers: “Now that lending process has been reformed, how many Appraisal Waiver Forms does a loan officer have to provide in a No-Appraisal refinance? Answer: Three!” I didn’t say bank retreats are funny. The mortgage industry and, with us, realtors, home-buyers, and those seeking to refinance are living through the reform response to the credit crisis. To recap: In May 2009, new appraisal legislation, the Home Evaluation Code of Conduct, “HVCC,” was implemented, changing how appraisals are ordered and delivered. In July 2009 the “Mortgage Disclosure Information Act” (MDIA), mandated certain timing restrictions and calculation requirements around the Annual Percentage Rate (APR). In January 2010, the third phase, “RESPA Reform,” also called the 2010 GFE, took effect. So, how many forms have these Federal law changes added to the already 53-page Disclosure package a loan applicant must sign? HVCC – May 2009 Acknowledgement of Right to Receive Appraisal 1 Receipt of Appraisal Confirmation 1 3-day Waiver of Receipt of Appraisal 1 Subtotal of forms from HVCC/appraisal reform 3 3 MDIA – re-disclosure of final "APR" Truth in Lending (TIL) 1 1
  2. 2. Recovering from Reform Good Faith Estimate (GFE) 1 Subtotal of additional forms from M.D.I.A. 2 2 RESPA reform - 2010 GFE Settlement Fee Request Form 1 Notice of Intent to Proceed w/ Loan Application 1 Acknowledgement of Receipt of GFE 1 Certification of Changed Circumstance 1 Subtotal of new 2010 GFE Reform Forms 4 4 Total of Additional forms added to Residential 9 Real Estate Transaction since May 1, 2009 That is nine additional forms since May 2009. Excessive forms were an issue when I completed a No-Appraisal refinance (no cash out). The homeowners specifically requested, and were qualified for, this type of no-appraisal loan because their loan-to-value was low, and they had high credit scores and low debt-to-income. Not only was this couple required to sign an additional waiver of their right to an appraisal, they had had to incur an additional $76 fee to certify they were aware that no appraisal had been performed, thus making the loan eligible for resale into the secondary market. But their entire reason for choosing that loan product was to avoid paying and waiting for an appraisal! So, do 9 additional disclosure forms add “transparency” to the consumer transaction, or merely confusion, expense and delay? Prior to the January 2010 reform, loan officers were able to estimate third-party closing costs from title and escrow tables in about ten minutes. After reform, however, the loan officer must issue a good faith estimate of third party fees, accurate within 10%, even though the loan officer cannot choose, influence or control the title or escrow generating the settlement charges in a purchase transaction (seller chooses escrow). 2
  3. 3. Recovering from Reform Now, loan officers wait for written estimates from escrow which means an extra day or more turn around. Escrow requests an estimate from Title, which Escrow must receive before, in turn, replying to the loan officer. And because of the HVCC, the appraisal cannot be ordered before the borrower sees that Good Faith Estimate, even if the borrower wants to proceed quickly. Since loan officers must, under the new January law, pay for these 3rd-party Settlement fees (Title/Escrow) if the final result exceeds the initial estimate by more than 10%, the tendency is to overestimate. As many issues in a transaction are unknown in advance, even with written estimates, still undiscovered facts may upset the calculation. The new RESPA law’s rigidity recalls a 40-year old Soviet joke from the 5-Year Plan era when output was measured and quality ignored: A factory worker whispers to his comrade: “They pretend to pay us and we pretend to work.” The obvious “cure” for such dilemmas is to inflate estimates to avoid under-estimating, or to wait until Escrow responds with the written estimate. This not only imposes cost on consumers, it tends, on average, to give the consumer less accurate information. Ironically, then, regarding a “good faith” estimate, good faith is punished, bad faith rewarded. No good deed unpunished, I recently drove downtown from Manhattan Beach to secure a borrower’s signatures on the “Redisclosure” forms, because I had re-locked him at an interest rate lower than the original quote. The Doc Drawer required the redisclosure forms for the change in loan structure before he would publish the final loan documents. I returned to the office with 28 pages of “Redisclosure” on a $300,000 loan transaction. The borrower was within 4 days of closing on a 3% down payment loan for teachers with a 17% silent second trust deed. This advantageous loan from the state of California is structured as two individual loans on the same 3
  4. 4. Recovering from Reform property. Therefore there were two different locks; seven pages for each ‘incident’; for a total of 28 pages for the single transaction. All 28 of these pages must, in turn, pass through several levels of review to insure that the loan package is “compliant” for sale into the Secondary market. At some point, it just becomes easier to “Fulfill the Plan”, that is, produce “disclosures,” rather than waste time arguing. On this 2-loan CalSTRS transaction, I saw my compensation arbitrarily cut by $570, because the transaction fell into the “High Cost” category of the January law. The borrower had a “low” credit score” under CalSTRS guidelines, so CalSTRS assessed a $9,700 origination fee (this was known in advance). Under the January 2010 RESPA law, origination fees on this loan fell into the “High Cost” category, and so my fee had to be cut if the loan was to proceed. I’m the one who did the substantial work to complete this loan in 30-days, not CalSTRS. Yet, CalSTRS was paid and I was shorted so the loan could be complaint. The new RESPA Disclosure form also differs from its ancestral GFE in that all costs to complete the transaction must be disclosed irrespective of who pays. Under the pre-January 2010 GFE, by contrast, just costs to the borrower were disclosed. This utopian “all-costs” approach falls short of its advertised purpose, to make loan shopping easier, since most borrowers are only interested in what they themselves must pay. The extra (irrelevant) information tends only to confuse and overwhelm many. The new form, for example, requires transfer taxes to be disclosed, or again, the loan officer pays. But the convention is that the seller pays the transfer taxes. A check-box on the Residential Purchase Contract specifically identifies whether Seller or Buyer pays the transfer tax. Even if the “Seller” box is checked on a Residential Purchase Contract, indicating that the buyer was never responsible for the fee, the loan officer will still --if transfer taxes are not properly disclosed -- pay. 4
  5. 5. Recovering from Reform Recently, a lender forced a loan officer to pay a $1,296 transfer fee because he omitted transfer taxes on the borrower’s GFE. The lender withheld approval until the loan officer was assessed in compliance with the new January 2010 law. Yet, when borrowers see these transfer taxes in the new 2010 Good Faith Estimate, they are easily confused. They have little interest and, often, less ability to grasp which costs the seller incurs. This is, after all, why the borrower/buyer hires a realtor, to represent the buyer’s interests. The underappreciated consequence of the GFE requirement is the emergence of an entirely new compliance industry and, with it, a new layer of costs to manage the risks of non-compliance. Our bank, for example, invested significant hours in training loan officers to be able to complete these forms correctly and in software upgrades and enhancements to comply with, for example, the “Notice of Changed Circumstance.” This Notice kicks in, for example, when locks are changed or extended, an otherwise ordinary occurrence which now requires detailed regulatory compliance. Processors, Underwriters, Doc Drawers, Funders--the entire chain of loan production--had to be trained to read, understand, and verify the new 2010 GFE in relation to specific transactions. In early February, our “doc drawers” produced merely two loans per day simply because of such onerous compliance complexity. This compares with 8 loans per day prior to January. We have since reverted to normal processing volumes by hiring additional staff. Compliance is the new growth industry. And pity the borrower whose lender would forego the “luxury” of locking him into a lower rate simply because the extra time spent in compliance and exposure to “compliance risk” discourages the effort. 5
  6. 6. Recovering from Reform Recently, a first time homebuyer walked out in anger, refusing to proceed with the initial loan application package for his $189,000 purchase. Closing costs figure disproportionately higher for $189,000 loans, than for $300,000 or $417,000 loans, since all loans require a minimum of underwriter, escrow, title and county recording cost, or no loan will result. He was disgruntled because the loan officer refused to “bargain” over closing costs, notwithstanding that we don’t choose or control for purchase transactions [seller chooses escrow/title]. And this first time homebuyer was singularly unimpressed with the 9 new forms, or that our bank had hired, trained and staffed an entirely new department called the “GFE Analyst” to comply with the new regulatory environment. He was uninterested that, if the loan officer failed to properly disclose the 3rd-party fees (escrow, title, county recording) adequately, the loan officer could pay more in penalties than the loan officer could earn on this $189,000 loan. Nor did he entirely grasp that, if the loan officer failed to fill out all these forms or comply with all these regulations, his loan would be ineligible for resale in the secondary market. As a result, he would lose the historically low rates on the historically low property value that made the transaction available to him. All possible fees to the transaction were fully-disclosed to this borrower. And this borrower is free to shop for lower fees. But he isn’t going to find them. The same costs and compliance burden exist for $189,000 transactions as for a $729,000 transaction. This borrower will need to find a shop which is willing, as the joke goes, “lose money on every transaction, but make it up in volume.” This buyer failed to find new consumer protection in the reforms. Nor did the reforms appear to give him greater insight into the process. Isn’t this the issue reform was supposed to address? 6
  7. 7. Recovering from Reform Comments or inquiries to brhodesMtgPlan@gmail.com 7

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