Why Haven’t Loan Officers Been Told These Facts?
Making Better Loan Presentations
Many mortgage loan originators (MLOs) have heard management express concerns that some MLOs act more like order takers than knowledgeable advisors or guides. On the other hand, there are “financial expert” MLOs who often dictate to prospects what actions they should take. These MLOs may even claim to predict the direction of interest rates. The common issue with both approaches is that they fail to establish a strong foundation for consumer buy-in.
Lenders prefer their loan officers to present three options for several reasons. First, offering multiple choices helps protect the lender from liability claims related to steering. When mortgage loan officers (MLOs) provide a reasonable variety of viable options, it creates a reasonable basis for the lender to assert that the borrower made their loan selection independently, without any inappropriate influence.
Secondly, a clear presentation appropriately educates the consumer and highlights the trade-offs between options, aiding the applicant in making an informed decision.
Finally, a comparative analysis involves the consumer in the process. When consumers understand why one loan is more suitable for them than another, they are more likely to feel satisfied and return for future business.
Understanding a presentation through a comparative analysis helps the prospect recognize the relative benefits of their selected option—essentially, identifying “the best loan for them.” This process encourages “buy-in,” meaning the prospect acknowledges the advantages of their preferred choice. It’s also an essential part of due diligence.
A prospect cannot accurately assess the superiority of an option in isolation; that’s why a comparative analysis enables a more informed credit selection and instills a greater sense of comfort with the loan, loan officer, and lender.
It’s crucial to encourage the prospect to review the presentation and ask questions. The prospect’s questions or objections are closing opportunities.
Beyond Delighted Customers: Why It Matters
If a lender closes a subprime loan and the applicant later claims that the lender steered them into the transaction, violating Regulation Z (12 CFR § 1026.36(e)(1)), the lender must establish several facts in their defense.
§1639b (c)(3)(B) Prohibition on unlawful steering
The Bureau shall prescribe regulations to prohibit mortgage originators from steering any consumer from a residential mortgage loan for which the consumer is qualified that is a qualified mortgage (as defined in section 1639c(b)(2) of this title) to a residential mortgage loan that is not a qualified mortgage;
12 CFR § 1026.36(e)(1) General. In connection with a consumer credit transaction secured by a dwelling, a loan originator shall not direct or “steer” a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer’s interest.
Perilous Waters
If the loan originator received higher compensation from a subprime transaction than they would have from prime financing options for which the borrower might have qualified, this raises a concern. For example, if the lender placed the applicant into a subprime loan, resulting in a commission of 400 BPS instead of the 200 BPS that would have been available with prime financing, it could be problematic for the lender. This situation is concerning unless it can be demonstrated that the applicant would not have qualified for better financing options or that the subprime financing better met the applicant’s needs compared to the prime offerings.
To avoid a steering violation, the lender must clearly demonstrate that the borrower was unqualified for the originator’s prime financing or provide evidence that the borrower voluntarily selected a subprime loan instead of a prime loan. If the lender cannot prove that the borrower deliberately chose the subprime option over presented prime offerings, the lender may face compliance issues. For a borrower to choose a subprime option over prime financing, the borrower must have viable alternatives available. Often, matters are more complex, and this example is oversimplified for illustration purposes. However, Regulation Z offers a safe harbor for mortgage brokers who may encounter this challenging situation.
Steering Safe Harbor
Regulation Z provides a compliance safe harbor against steering accusations when the lender offers a reasonable selection of viable options for the prospect to choose from. The Regulation Z term “loan originator” may apply to individual originators, mortgage brokers, and correspondents.
Under 12 CFR § 1026.36(e)(1), a loan originator may not direct or steer a consumer to consummate a transaction based on the fact that the loan originator would increase the amount of compensation that the loan originator would receive for that transaction compared to other transactions, unless the consummated transaction is in the consumer’s interest.
To assess whether a completed transaction benefits the consumer, it should be compared to other loan offers available from the originator, if any, that the consumer was likely to qualify for at the time the transaction was presented.
Possible loan offers are available through the loan originator if they can be obtained from a creditor with which the loan originator regularly does business.
Section 1026.36(e)(1) does not require a loan originator to establish a business relationship with any creditor with which the loan originator does not already do business. To be considered a possible loan offer available through the loan originator, an offer need not be extended by the creditor; it need only be an offer that the creditor likely would extend upon receiving an application from the applicant, based on the creditor’s current credit standards and its current rate sheets or other similar means of communicating its current credit terms to the loan originator.
An originator need not inform the consumer about a potential transaction if the originator makes a good faith determination that the consumer is not likely to qualify for it. As required by safe harbor provisions, the loan originator must have a good faith belief that the options presented are loans for which the consumer likely qualifies.
The ABCs Establishing Safe Harbor § 1026.36(e)(3)(i)
The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate
The loan with the lowest interest rate for which the consumer likely qualifies is the loan with the lowest rate the consumer can likely obtain, regardless of how many discount points, origination points or origination fees the consumer must pay to obtain it. To identify the loan with the lowest interest rate, for any loan that has an initial rate that is fixed for at least five years, the loan originator uses the initial rate that would be in effect at consummation.
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.
(C) The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees).
The language of Regulation Z is technical and complex, and often needs interpretation. For matters related to legal issues and compliance, consult appropriate counsel.
Compliance liability is not eliminated; it is merely resting. However, adherence to the rule of law is always necessary.
She filled the folks in Munchkin land with terror and with dread
‘Till one fine day from Florida way a hurricane caught a house
That brought the wicked, wicked witch her doom
As she was flying on her broom
For the house fell on her head and the African coroner pronounced her dead
And thru the town the joyous news was spread
Ding-dong, the Bureau’s dead! Which old witch? The wicked witch
Ding-dong, the Bureau’s dead
Wake up, you crooks, and charlatans, rub your eyes, get out of bed
Wake up, the wicked Bureau’s dead!
Sung to the tune of, “Ding Dong! The Witch Is Dead ” The Wizard of Oz
BEHIND THE SCENES – CFPB Seeks to Vacate Abusive, Unjust Case Against Townstone
The Alternate Universe (Greetings from Ingsoc)
From the CFPB (No Lie) “A small business complained about skyrocketing crime in Chicago, CFPB made their life hell”
WASHINGTON, D.C. – Today, the Acting Director of the Consumer Financial Protection Bureau (CFPB) Russ Vought is seeking to vacate the settlement the CFPB extracted from Townstone after a seven-year harassment saga. Using a “redlining screen” based on an arbitrary number of mortgages, CFPB set out to destroy a small Midwest firm with about ten employees and a radio program called Townstone Financial. After a thorough review, the CFPB is seeking to make Townstone whole by returning the six-figure penalty they were forced to pay.
“CFPB abused its power, used radical ‘equity’ arguments to tag Townstone as racist with zero evidence, and spent years persecuting and extorting them – all to further the goal of mandating DEI in lending via their regulation by enforcement tactics. The more we uncover at CFPB, the more we see how this agency was weaponized against targeted Americans,” said Acting Director Russ Vought.
“This was a flagrant misuse of government resources to destroy a small business that did nothing wrong. For the crime of protected political speech, this firm was targeted and harassed for years by this rogue agency. We are righting this wrong and protecting the First Amendment,” said Senior Advisor Dan Bishop.
Background
The investigation was not prompted by any actual or perceived harm, but by pure quota-style statistics. CFPB ran a “redlining screen” that caught 22,000 companies and then winnowed it down to a handful with unexplained “qualitative research.” Townstone was targeted because it was a small firm (<10 employees) and had a radio show that touched on political topics, making it easy for the CFPB to bully. To reiterate, no one came forward to complain about Townstone, they were “drawn out of hat” by a computer model run by DEI-driven CFPB bureaucrats.
To CFPB, a disparity automatically equaled discrimination. CFPB targeted Townstone not based on any act of discriminatory conduct, but solely on perceived racial disparities in mortgage application and origination statistics. That disparity? An agency-defined “shortfall” of just 31 applications from “majority-minority” areas, out of 876 total applications in a three-year period. CFPB wanted a de-facto mortgage quota, a policy aligned with the views of radical DEI proponents like Robin DiAngelo and Ibram X Kendi. Townstone had even hired loan outreach officers to go to minority communities, but this did not satisfy the CFPB, who claimed they weren’t the right type of minority. In 2022, CFPB Director Rohit Chopra said “racial equity,” was a “cross-cutting priority,” and Townstone was internally tagged as a target important for that priority.
Townstone was targeted for their protected free speech. CFPB used an audio mining software to search Townstone’s radio show and podcasts finding that they engaged in political speech critical of the Bureau. They identified 16 minutes out of nearly 79 hours of radio content (.33%) that they deemed “disconcerting” and that “could be interpreted as inappropriate, incorrect, or insensitive.” What was so disconcerting? Talking about local crime, political issues around freedom of speech, supporting local law enforcement, and telling people to check out a neighborhood before buying a home. CFPB used novel regulation-by-enforcement to trample on decades of First Amendment jurisprudence.
There is no evidence of any potential customers reporting Townstone to CFPB or finding them offensive. In a survey of black respondents conducted by a consumer testing firm paid for by Townstone to persuade CFPB to break off its unrelenting attack, not one person took offense to Townstone’s radio show. One respondent even said that Townstone’s comments on crime were “reliable and helpful.” CFPB’s own assessment found that Townstone encouraged programs to help disadvantaged populations and recognized that the “disparities” weren’t explained by any business plan, office location, or targeted advertising.
CFPB subjected Townstone to years of harassment. “They twisted innocuous statements about crime into something nefarious and then tried to use it to ruin my reputation and destroy my business,” Townstone’s owner told the Washington Free Beacon. “When a federal agency with an unlimited budget and army of lawyers comes after your business and smears you as a racist, you’re forced to give in and take it or choose an uphill fight.”
The process was the punishment, in addition to an egregious fine. CFPB lawyers wrote in an internal memo that Townstone could be penalized $28,906 per day for four years, a total of $42,202,760 for alleged violations of civil rights law. All for 16 minutes of radio banter that were not racial in nature. CFPB now seeks to right this wrong and is asking the court to refund the monetary penalty that the Bureau imposed on Townstone and to dismiss the case.
The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees of Ingsoc, but to make all other modes of thought impossible. – The Principles of Newspeak, George Orwell
Tip of the Week – Be Joyful, Even in Adversity
There is much to be joyful about. Take time to recognize the things you are grateful for in your life, and meditate on those blessings. The adage “count your blessings” is a great way to find joy, even when life becomes challenging.