Why Haven’t Loan Officers Been Told These Facts?
RESPA – The Revised Guidance on Promotional Activities
The LOSJ does not provide legal advice. Instead, our goal is to spotlight matters of importance in the loan manufacture.
Recapping last week’s discussion, a referral is a positive affirmation differing from a lead. Positive affirmations under RESPA are akin to endorsements. Because of inherent complexities in real estate transactions, consumers depend on and trust real estate professionals (including MLOs and Settlement Agents) to shield them from harm and provide valuable counsel, including referrals. This dependency on the real estate professional makes the consumer vulnerable to conflict of interests and hidden double-dealing. Regulation X bans the exchange of a thing of value for a referral to abnegate the corrupting influence of kickbacks on real estate professionals. Indeed, though normal promotions and gifts are allowed, there are significant compliance uncertainties in using promotions to market mortgages and settlement services. However, there is a ray of sunshine. Regulation X narrowly defines permitted “normal promotional and educational activities” directed to a referral source in light of two conditions or tests.
The first test describes patterns that indicate the exchange of a thing of value for a referral. In other words, it may not be so much a single event or occurrence that defines a violation but more of an ongoing practice. Furthermore, in tandem with the frequency of the exchange is the exclusivity of the promotion.
The second test determines if promotional and educational activities involve defraying expenses incurred by persons in a position to make referrals. Does the promotional item or activity involve a good or service that the referral source would otherwise have to pay for themselves?
One area of Section 8 agreement among compliance professionals is that compliance professionals disagree on Section 8 requirements. In that compliance conversation, the missing nexus is often the risk management practices of the covered person. For example, what is the risk that an examiner could interpret your practices as violating Section 8 (probability)? Next, what would happen to you and your business if sued or sanctioned by a regulator for Section 8 noncompliance (impact)?
Regulators who supervise and examine persons subject to RESPA use risk management practices to focus their limited resources appropriately. Because regulators have limited resources, not all persons merit equal supervision. The regulatory focus on more probable and impactful threats is also an element of risk planning.
Minimal risk management in compliance supervision requires qualitative risk analysis, rightly identifying threat risks according to two qualities; probability and impact. For example, a huge consumer direct lender originating its business online represents a significant Section 8 impact threat. That is because of their loan volume. But the probability of Section 8 noncompliance is lower than a branch-based model that depends on referrals. Thus, by necessity, supervision must be weighted to the persons presenting the greatest threat risk due to the nexus of probability and impacts.
High loan volume increases impacts. Relationship-driven business models may also increase the probability of Section 8 violations. Combine high volume and high probability, and that lender should expect enhanced supervision and greater compliance uncertainties.
Naturally, regulators aren’t beholden to analytical risk assessments. Complaints, referrals from other agencies, and violations that are impossible to ignore all command their fair share of attention.
Those businesses and individuals subject to Section 8 must endeavor to appropriately manage the risks attendant with Section 8 compliance. That starts with risk appetite. Suppose there is no appetite for Section 8 noncompliance risk. Risk avoidance is your strategy. Your practices should conform to the most extreme readings of Regulation X. The organization should adopt and implement risk avoidance strategies, even at high costs (lost business, higher business generation costs, loss of brand value, employee retention). At the other end of the continuum, those with a risk appetite might read Regulation X in a different or more balanced light. Those lenders could choose to accept the Section 8 risks or adopt a risk mitigation strategy. Risk mitigation entails reducing the probability and impact of the threat risk.
Let’s apply Regulation X and Consumer Financial Protection Bureau guidance to a few common promotions that fall under the rubric of promotions and gifts. But instead of simple binary compliance labels, using the risk management nexus risk appetite and Section 8 compliance, we can better rate the promotion as compliant or noncompliant for the covered person.
Example 1
Charity Golf Tournaments.
- The lender sponsors the hole every year
- The lender sponsors holes for any real estate broker that asks
- The lender does not defray a cost that the broker is likely to incur
Risk Appetite High – Pass
Risk Appetite Medium – Pass
Risk Appetite Low – Fail
Example 2
Educational event with a catered lunch.
- The lender hosts educational events every quarter
- The event is open to the public. The lender has invited every real estate company in the city
- The lender does not charge for the education but does charge $5.00 for the lunch
Risk Appetite High – Pass
Risk Appetite Medium – Pass
Risk Appetite Low – Fail
Example 3
The lender charters a yacht for a moonlight cruise.
- The lender does this every month over the summer (total four times
- All real estate agents can enter into a drawing for a chance at a seat on the cruise, limited to 100 seats. The lender also provides their top MLO’s with four VIP tickets for use on each of the four cruises
- The lender provides a five-course meal, a dance band, and party favors, including the in-demand online course
“Stage Your Listings To Sell”
Risk Appetite High – Pass
Risk Appetite Medium – Fail
Risk Appetite Low – Fail
If you find these tests and explanations confusing, that is understandable. But, remember this, do your actions do anything to diminish competition or consumer choice?
Understand that gifts and promotions are powerful marketing tools. Get yourself a seat at the table. That’s good. Attempt to exclude competitors from the table and limit consumer choices, not good.
Behind the Scenes
Gentrification in the Mortgage Market?
Last week, the Journal sought to identify specific challenges related to mortgage financing that may exacerbate the national wealth gap. Furthermore, it wouldn’t be unreasonable to suggest that homeownership could be a cornerstone in the fight for equal wealth-building opportunities here in our beloved land.
Yet, the numbers paint a grim picture in a remarkable year for residential real estate and the mortgage industry. In the 2020 Study – Racial Discrimination in the U.S. Housing and Mortgage Lending Markets: A Quantitative Review of Trends, 1976-2016,” Quillian, Lee and Honoré, Northwestern University, the authors posit troubling conclusions about the direction of mortgage discrimination and, subsequently, diminished wealth-building opportunities here in the USA. From the paper, the authors conclude that they “find no evidence of reduced discrimination in the mortgage market over the last 35 years.” The pernicious effects of mortgage discrimination cannot be overstated. The authors make dire conclusions, “Discrimination in the mortgage market makes it more difficult for minority households to build wealth through housing, contributing to racial wealth gaps.” Furthermore, the authors summarize that the relics of bias and racial discrimination significantly persist to this day, stating, “Discrimination in the housing market increases housing insecurity for minority households and contributes to persistent neighborhood segregation. Black homeownership has not increased over the last 35 years.”
As many stakeholders understand, homeownership is the numero uno wealth-building engine for the middle-class, making this mortgage disadvantage comprehensively damaging at the macro and micro levels. With the growing trend in housing insecurity, continued mortgage discrimination will probably lead to costly and otherwise undesirable downstream solutions, including federal and local tax increases coupled with draconian zoning and fair lending laws. Imagine a progressive tax based on profits from the sale of residential real estate. Or zoning regulations that prohibit R-1 zoning unless developers can establish their track record of leveraging affordable housing, Mortgage Revenue Bond loans, or similar programs? Some say a free market is the best market. But is our residential real estate market genuinely free?
You might object to an emphasis on the underserved communities. Some will say, non-VA/USDA mortgage contingencies for zero money down are likely to be a pain in the backside. The listing agent will never accept this offer. The seller will not tolerate minimum property conditions. These are valid concerns. For starters, boil-the-ocean strategies will likely fail. Making inroads is a project. You can’t wait until a buyer calls you for LMIH financing to get rolling. MLOs might grab the bull by the horns and begin to attack the challenge of successful LMIH programs.
Making changes to your business model is probably going to be a project. Therefore, program and project management skills are essential to plan, execute, and manage your efforts more successfully. For starters, it would help if you had a mission first, followed by a strategy to implement the mission. But what if you have no concept of program or project management? And your strategy is to make enough money to pay your mortgage or rent this month? Then, think big, implement incrementally and pay careful attention to the LOSJ series “Project Management Skills for Loan Origination.”
Fortunately, starting this week, the Tip of the Week addresses “Project Management Skills for Mortgage Originators.”
Tip of the Week
Project Management Skills for Loan Origination
Project management skills are a perfect fit for the loan manufacture. Undoubtedly, each loan in itself represents a project.
Projects differ from operations in significant ways. Projects are unique. Though there may be similarities from one loan transaction to the next, each loan manufacture is somewhat unique. The uniqueness varies based on transaction variables such as the loan type, collateral, stakeholders, lender, and timing requirements. The combination of these variables makes for a unique transaction or what may be deemed a project.
Another distinguishing feature of projects is that they are temporary by nature. Thus, once stakeholders achieve the project objectives, the necessity of the project ends. The loan manufacture may appear like a hamster wheel to many originators. Think in terms of how mortgage customers might view the process of mortgage financing. From their perspective, the loan transaction is certainly a project.
Projects also drive change. People are buying homes or seeking to improve the financing they already have. Ponder the relocation buyer, starting a new job, finding their way around a new office, new associates, new home, school, golf course, and friends. For the relocation buyer, would you think finding a home and obtaining financing is a project? Crosstown moves aren’t that much easier.
Because MLOs habitually and necessarily repeat many of the same loan activities every day. Their work does not feel like a project because their projects’ activities never seem to end. And so, the project nature of each loan is obscured due to a lack of awareness. Hence, the MLO treats the loan manufacture more like operational work and less like project work. That might be a mistake, as more formalized project management skills could contribute mightily to better loan outcomes, including more satisfied referral partners and borrowers.
One of the primary factors contributing to loan manufacturing inefficiencies and stakeholder dissatisfaction is treating the loan manufacture like operations work rather than project work.
How does one approach loan manufacture as a project then? Next week the Journal will begin to unpack fundamental project management skills for mortgage origination. Tune in next week.
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