ABA Bank Compliance - November/December 2010

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 returned

■ ■ 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.