thorough and updated, with attention given to differences between borrowers no matter how they came to the bank—but pay
particular attention to how any action by the bank’s mortgage
partners impacts the portfolio.
3. Changes to broker Compensation
Section 8 of RESPA is one of the trickier sections of that law.
Practices that are perfectly legal in other industries and even in
other areas of banking are illegal when the business is mortgage
lending. It’s often the two-part test in Section 8 that trips up
a banker: to be a justified payment to a third party such as a
mortgage broker, ( 1) the broker must do enough to get paid
(meaning take the application and do some additional work for
the applicant) and ( 2) the fee must be reasonably related to the
work the broker does.
Traditionally most broker fees (yield spread premiums, or
YSPs, among them) are calculated based on the amount of the
loan rather than the value of the work done, so how can you
make the argument that the fee is reasonable? You can’t. This is
the problem. Examiners are increasingly looking at broker fees
to determine whether they are excessive or unrelated to the value
provided to the borrower.
Again, this will soon be a moot point, thanks to the Dodd-Frank Act and the Federal Reserve. Dodd-Frank contains a broad
prohibition against compensation to third parties where the
amount is based on any loan term or condition (such as the
interest rate), other than the loan amount, to the originator. This
will put the argument to rest, and most YSPs currently paid by
banks to brokers will be prohibited. However, this provision won’t
become effective until the CFPB enacts final rules.
In the meantime, the Federal Reserve has taken steps toward
an outright ban. A final rule under Reg. Z that takes effect April
1, 2011, restricts many loan originator compensation practices
that the Fed has deemed to be unfair to consumers. The final
rule does three things:
■ ■ It prohibits “loan originators” (which includes mortgage brokers
as well as bank employees) from receiving, and any person from
paying, compensation where the amount is based on any loan
term or condition (such as the interest rate), other than the
loan amount, to the originator. Compensation based on loan
amount must be based on a fixed percentage.
■ ■ It provides that if the loan originator receives compensation
directly from the borrower, no loan originator may receive compensation from any other person in connection with that loan.
■ ■ It prohibits a loan originator from steering a consumer to a
loan where the originator will receive greater compensation
than from other loans the originator could have offered or did
offer, unless the final loan is in the consumer’s interest.
In the meantime, the best practice is to make it clear to any
mortgage brokers the bank uses that fees will be paid only for
actual work performed. This “reasonable fee” practice should be
codified in broker agreements as well as the bank’s own policy.
4. New Appraiser rules
There are three principal regulatory areas to consider when it
comes to appraisers and appraisals: Reg. Z, the Dodd-Frank Act,
and the Home Valuation Code of Conduct (HVCC).
reg. Z developments: The Federal Reserve incorporated
new protections against appraiser coercion when it finalized its
higher-priced mortgage loan (HPML) rules last year. They apply,
however, to all mortgage loans covered by Reg. Z, not just those
that are higher-priced. The simple rule is that lenders may not
coerce, influence, or otherwise encourage appraisers to misstate
collateral values simply to meet a requirement to make the loan.
Some examples of prohibited practices were provided within
the rule, including the following
■ ■ implying that retention of the appraiser depends on the value
■ ■ failing to compensate or retain the appraiser if the appraised
value comes in too low
■ ■ conditioning the appraiser’s compensation on whether or not
the loan closes
These sound simple enough, and the vast majority of banks
don’t engage in these sorts of practices anyway, but a good to-do
here is to put these into your loan/appraisal policy.
In addition, a lender is prohibited from extended credit when
it knows that the appraised value is wrong. This provision shifts
some of the burden to the lender to ensure (or at least have a
process to evaluate) that the value is at least reasonable. So make
sure your process is up-to-date and would withstand scrutiny if
you were accused of accepting an inflated appraisal.
An unrelated side note to the HPML rules requires that lenders
escrow for taxes and insurance on loans that exceed the HPML
threshold. Traditionally many lenders don’t escrow due to expense
and system constraints. Some banks, wishing to continue to make
higher-priced mortgage loans, have contracted with third parties
to provide this kind of service. This is entirely allowable, but as
with any other service provider, proper vendor due diligence must
be performed prior to offering the service.
dodd-Frank regulatory reform: The Dodd-Frank Act
went one better than the Federal Reserve when it comes to appraiser
restrictions. Provisions in Title XIV (the Mortgage Reform and
Anti-Predatory Lending Act) amend TILA in some additional ways.
For loans secured by the borrower’s principal dwelling, appraisal fees must be “customary and reasonable” for similar services
performed in the bank’s market area. Additional requirements,
including the following, are in place for “higher-risk mortgages”:
■ ■ A second appraisal is required if the loan purpose is to purchase the dwelling and the seller had previously purchased the
dwelling within 180 days at a lower price (i.e., is flipping the
house). The cost of this second appraisal may not be passed
on to the applicant.
■ ■ A site visit must be conducted by an appraiser, effectively
eliminating automated valuation models (AVMs) and broker
price opinions (BPOs) for these loans.