Why Haven’t Loan Officers Been Told These Facts?
VA “Temporary Fix”
Permits Buyer Broker Charges
In response to the upheaval of residential real estate commissions and ongoing legal wrangling, the VA has published a temporary local variance for charges related to real estate broker or agent (buyer-broker) compensation. The current and longstanding VA loan policy dictates what buyer-paid closing costs are allowable and which are not. Buyer-paid real estate commissions are unallowable closing costs. Where does that leave VA buyers?
VA Nonallowable Charges
VA regulations limit charges “made against or paid by” the borrower. They do not restrict the payment of nonallowable fees and charges by other parties. However, excessive seller-paid charges can become concessions.
A seller concession is anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide, like the novel buy-side real estate commissions. Seller concessions do not include payment of the buyer’s closing costs or payment of points appropriate to the market.
VA permits seller concessions as long as the total amount of any seller concession or combination of concessions does not exceed four percent of the established reasonable value of the property. Over four percent is considered excessive and unacceptable for VA-guaranteed loans.
The New VA (Vague and Ambiguous) Policy
Concerning the VA variance language, it is uncertain which locales are affected and how the lender can determine reasonable and customary commission payments for yet-to-be-implemented commission practices. To qualify for the variance, in the circular, VA states, “The home the Veteran is purchasing is an area where listing brokers are prohibited from setting buyer-broker compensation through multiple listing postings, or buyer-broker compensation cannot be established by or flow through the listing broker.”
The National Association of Realtors (NAR) has stated, “NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS. This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals.” . . . Our settlement requires NAR to implement the practice changes no later than the date of class notice. Through the preliminary settlement approval process, we now know the earliest date of class notice is August 17, 2024.” Additionally, to comply with NAR’s mandatory national MLS policies, REALTOR® MLSs must implement the practice changes by August 17.
Does the NAR announcement not mean that, in August, all areas in which the MLS is governed by NAR are eligible for the variance? Are there any independent MLSs or real estate brokers who plan to go the other way and continue to fix buyer-side commissions? Probably not if they want to avoid lawsuits.
Some stakeholders have opined, “In most markets, there will be no seachange in real estate commissions. The status quo has been and shall remain 3% to the buyers.”
Huh? Really? Is not that sort of fixed pricing the very thing antitrust laws and the relevant rulings intend to attenuate?
As the lawsuits intended, there is no longer a reasonable and customary buyer-side commission. Apparently, the VA, like other stakeholders, is not ready for primetime with the commission change. The VA policy ambiguity could put stakeholders in a spot when determining reasonable and customer buyer-side commissions. The last thing needed now is more governmental SNAFU.
VA LGY, our Veterans and Servicemembers are Counting on You!
Instead of the ambiguous “reasonable and customary” standard, and under the circumstances, at least temporarily, why not specify a buy-side commission limit of up to 3% nationwide so as not to throw a monkey wrench in the works? Or, like payment for bug reports, perhaps LGY will task the VA Regional Loan Centers with these determinations and announcements. But, hey, August is around the corner.
Excerpted From the NAR
In addition to the financial payment, NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS. This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals. Offers of compensation help make professional representation more accessible, decrease costs for home buyers to secure these services, increase fair housing opportunities, and increase the potential buyer pool for sellers. They are also consistent with the real estate laws in the many states that expressly authorize them.
Further, NAR has agreed to enact a new rule that would require MLS participants working with buyers to enter into written agreements with their buyers. NAR continues, as it has done for years, to encourage its members to use buyer brokerage agreements that help consumers understand exactly what services and value will be provided, and for how much. These changes will go into effect in mid-July 2024.
Veterans Benefits Administration Circular 26-24-14
Department of Veterans Affairs June 11, 2024
Temporary Local Variance for Certain Buyer-Broker Charges
(The Circular is effective August 10, 2024, and is valid until canceled)
1. Purpose. The Department of Veterans Affairs (VA) is publishing this Circular to announce a temporary local variance for charges related to real estate broker or agent (buyer-broker) compensation.
2. Background. VA regulates fees and charges that may be made against or paid by a Veteran who is using the VA-guaranteed home loan benefit. While VA’s regulation specifies that, generally, a Veteran cannot pay for real estate brokerage charges, the Under Secretary for Benefits (USB) may authorize, in advance, charges that are appropriate for Veterans to pay as proper local variances. Through this Circular, VA is announcing a temporary local variance that will allow Veterans to pay for certain buyer-broker charges. The USB has determined this temporary variance is appropriate to ensure Veterans remain competitive buyers in the rapidly
shifting real estate brokerage market. VA will develop a more permanent policy, through a new notice-and-comment rulemaking, as the real estate brokerage market restabilizes and new practices take hold.
3. Temporary Local Variance for Buyer-Broker Charges. VA is authorizing a temporary local variance that allows Veterans to pay reasonable and customary amounts for any buyer-broker charges (including commissions and any other broker-related fees), subject to the following:
a. The home the Veteran is purchasing is an area where—(1) listing brokers are prohibited from setting buyer-broker compensation through multiple listing postings; or
(2) buyer-broker compensation cannot be established by or flow through the listing broker.
b. Buyer-broker charges are not included in the loan amount.
c. Buyer-broker charges paid or to be paid by the Veteran are to be considered in determining whether the Veteran has sufficient liquid assets to close the loan.
d. An invoice is not necessary to support the buyer-broker charge; however—(1) The total amount paid, if any, by the Veteran is to be recorded in lines 1 through 3 of section H (“Other”) on the Closing Disclosure, and
4. Important Information Related to Brokerage Charges.
a. VA encourages Veterans to negotiate the amount to be paid to their buyer-broker, whether the Veteran or seller pays the amount.
b. The temporary variance announced by this Circular does not prevent the seller of the home from paying for the Veteran’s buyer-broker charges.
c. As a reminder, VA does not treat the seller’s payment of buyer-broker charges as a seller concession.
Current State (The Future-State Circular is effective August 10, 2024, and is valid until canceled)
VA Lenders Handbook M26-7
Chapter 8: Borrower Fees and Charges and the VA Funding Fee
Topic 3: Fees and Charges the Veteran Borrower Cannot Pay
c. Brokerage Fees
Fees or commissions charged by a real estate agent or broker in connection with a VA loan may not be charged to or paid by the veteran purchaser.
While use of “buyer” brokers is not precluded, veteran purchasers may not, under any circumstances, be charged a brokerage fee or commission in connection with the services of such individuals. Since property information available for purchase and financing options is widely available to the public from a variety of sources, VA does not believe that preventing the veteran from paying buyer-broker fees will harm the veteran.
NAR FAQ
- NAR’s mandatory MLS policy changes, which implement the settlement’s required practice changes, will take effect on August 17, 2024.
- Our settlement requires NAR to implement the practice changes no later than the date of class notice. Through the preliminary settlement approval process, we now know the earliest date of class notice is August 17, 2024.
- Additionally, to comply with NAR’s mandatory national MLS policies, REALTOR® MLSs must implement the practice changes by August 17.
- NAR shared these practice changes in early May to provide a three-month window for NAR members and MLSs to prepare to implement these changes.
The Confusing Dog Days of Summer
VA may anticipate further legal wranglings over the NAR implementation, which could impact local markets. It might be prudent to check with risk management and underwriting to determine where and when the variance is warranted and how to make the reasonable and customary variance determination.
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BEHIND THE SCENES – Goodbye Medical Collections
WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today proposed a rule that would remove medical bills from most credit reports, increase privacy protections, help to increase credit scores and loan approvals, and prevent debt collectors from using the credit reporting system to coerce people to pay. The proposal would stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information. The proposed rule is part of the CFPB’s efforts to address the burden of medical debt and coercive credit reporting practices.
“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” said CFPB Director Rohit Chopra. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”
In 2003, Congress restricted lenders from obtaining or using medical information, including information about debts, through the Fair and Accurate Credit Transactions Act. However, federal agencies subsequently issued a special regulatory exception to allow creditors to use medical debts in their credit decisions.
The CFPB is proposing to close the regulatory loophole that has kept vast amounts of medical debt information in the credit reporting system. The proposed rule would help ensure that medical information does not unjustly damage credit scores, and would help keep debt collectors from coercing payments for inaccurate or false medical bills.
The CFPB’s research reveals that a medical bill on a person’s credit report is not a good predicter of whether they will repay a loan. In fact, the CFPB’s analysis shows that medical debts penalize consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages that consumers would repay. Since these are loans people will repay, the CFPB expects lenders will also benefit from improved underwriting and increased volume of safe loan approvals. In terms of mortgages, the CFPB expects the proposed rule would lead to the approval of approximately 22,000 additional, safe mortgages every year.
In December 2014, the CFPB released a report showing that medical debts provide less predictive value to lenders than other debts on credit reports. Then in March 2022, the CFPB released a report estimating that medical bills made up $88 billion of reported debts on credit reports. In that report, the CFPB announced that it would assess whether credit reports should include data on unpaid medical bills.
Since the March 2022 report, the three nationwide credit reporting conglomerates – Equifax, Experian, and TransUnion – announced that they would take many of those bills off credit reports, and FICO and VantageScore, the two major credit scoring companies, have decreased the degree to which medical bills impact a consumer’s score.
Despite these voluntary industry changes, 15 million Americans still have $49 billion in outstanding medical bills in collections appearing in the credit reporting system. The complex nature of medical billing, insurance coverage and reimbursement, and collections means that medical debts that continue to be reported are often inaccurate or inflated. Additionally, the changes by FICO and VantageScore have not eliminated the credit score difference between people with and without medical debt on their credit reports. We expect that Americans with medical debt on their credit reports will see their credit scores rise by 20 points, on average, if today’s proposed rule is finalized.
Under the current system, debt collectors improperly use the credit reporting system to coerce people to pay debts they may not owe. Many debt collectors engage in a practice known as “debt parking,” where they purchase medical debt then place it on credit reports, often without the consumer’s knowledge. When consumers apply for credit, they may discover that a medical bill is hindering their ability to get a loan. Consumers may then feel forced to pay the medical bill in order to improve their credit score and be approved for a loan, regardless of the debt’s validity.
Specifically, the proposed rule, if finalized would:
- Eliminate the special medical debt exception: The proposed rule would remove the exception that broadly permits lenders to obtain and use information about medical debt to make credit eligibility determinations. Lenders would continue to be able to consider medical information related to disability income and similar benefits, as well as medical information relevant to the purpose of the loan, so long as certain conditions are met.
- Establish guardrails for credit reporting companies: The proposed rule would prohibit credit reporting companies from including medical debt on credit reports sent to creditors when creditors are prohibited from considering it.
- Ban repossession of medical devices: The proposed rule would prohibit lenders from taking medical devices as collateral for a loan, and bans lenders from repossessing medical devices, like wheelchairs or prosthetic limbs, if people are unable to repay the loan.
The CFPB began today’s rulemaking in September 2023 with the goals of ending coercive debt collection practices and limiting the role of medical debt in the credit reporting system. The CFPB additionally published in 2022 a report describing the extensive and debilitating effects of medical debt along with a bulletin on the No Surprises Act to remind credit reporting companies and debt collectors of their legal responsibilities under that legislation.
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