Why Haven’t Loan Officers Been Told These Facts?

Try your hand at a few obscure but essential laws

Answers from last week’s questions

As adopted by most states, the Interagency Guidance on Subprime Financing (CSBS Subprime Statement) provides guidance on offering subprime loans to consumers. Which of the following typifies the practices required in the guidance?

1) Lenders must provide timely disclosure of the existence of any balloon payment and the consequences attendant to the uncertainties surrounding balloon payments.

2) Consumers must obtain neutral housing counseling before applying for loans with balloon features.

3) Lenders must not offer loans with risky features to first-time homebuyers.

4) Prepayment penalties must be optional to the consumer.

From The Subprime Statement:

Page 4 – . . . risks are increased if borrowers are not adequately informed of the product features and risks, including their responsibility for paying real estate taxes and insurance, which may be separate from their monthly mortgage payments. The consequences to borrowers could include: being unable to afford the monthly payments after the initial rate adjustment because of payment shock; experiencing difficulty in paying real estate taxes and insurance that were not escrowed; incurring expensive refinancing fees, frequently due to closing costs and prepayment penalties, especially if the prepayment penalty period extends beyond the rate adjustment date; and losing their homes.

Page 8 & 9 – Information provided to consumers should clearly explain the risk of payment shock and the ramifications of prepayment penalties, balloon payments, and the lack of escrow for taxes and insurance, as necessary. The applicability of prepayment penalties should not exceed the initial reset period. In general, borrowers should be provided a reasonable period of time (typically at least 60 days prior to the reset date) to refinance without penalty.

Similarly, if borrowers do not understand that their monthly mortgage payments do not include taxes and insurance, and they have not budgeted for these essential homeownership expenses, they may be faced with the need for significant additional funds on short notice. Therefore, mortgage product descriptions and advertisements should provide clear, detailed information about the costs, terms, features, and risks of the loan to the borrower.

Consumers should be informed of:

  • Payment Shock. Potential payment increases, including how the new payment will be calculated when the introductory fixed rate expires.
  • Prepayment Penalties. The existence of any prepayment penalty, how it will be calculated, and when it may be imposed.
  • Balloon Payments. The existence of any balloon payment.
  • Cost of Reduced Documentation Loans. Whether there is a pricing premium attached to a reduced documentation or stated income loan program (a 21st Century version might substitute “alternate income documentation” such as bank statement loans).
  • Responsibility for Taxes and Insurance. The requirement to make payments for real estate taxes and insurance in addition to their loan payments, if not escrowed, and the fact that taxes and insurance costs can be substantial.

See the entire statement here or check with your state regulator:

https://finance.mo.gov/Contribute%20Documents/CSBS-AARMR-NACCAStatementonSubprimeLending.pdf

Regulation Z prohibits the “steering” of a consumer to consummate a transaction because the loan officer or the business (mortgage broker) will receive greater compensation from the lender. However, if the originator can prove that the selected financing is in the consumer’s interest, directing a consumer to a lender or loan product that pays more compensation does not violate Regulation Z. Which of the following instances more likely provides evidence that the loan was in the consumer’s interest?

1) The loan has a higher interest rate than other offers and pays more compensation to the originator, but with no prepayment penalty

2) The loan has a higher interest rate than other offers and pays more compensation to the originator, and the lender closes loans fast

3) The loan has a higher interest rate than other offers and pays more compensation to the originator, and the lender is more reliable

4) The loan has a higher interest rate than other offers and pays more compensation to the originator, and offers biweekly mortgage payments

Reg Z 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.

i. In determining whether a consummated transaction is in the consumer’s interest, that transaction must be compared to other possible loan offers available through the originator, if any, and for which the consumer was likely to qualify, at the time that transaction was offered to the consumer. Possible loan offers are available through the loan originator if they could be obtained from a creditor with which the loan originator regularly does business. Reg Z 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.

Reg Z does not require a loan originator to direct a consumer to the transaction that will result in a creditor paying the least amount of compensation to the originator. However, if the loan originator reviews possible loan offers available from a significant number of the creditors with which the originator regularly does business, and the originator directs the consumer to the transaction that will result in the least amount of creditor-paid compensation for the loan originator, the requirements of § 1026.36(e)(1) are deemed to be satisfied. In the case where a loan originator directs the consumer to the transaction that will result in a greater amount of creditor-paid compensation for the loan originator, § 1026.36(e)(1) is not violated if the terms and conditions on that transaction compared to the other possible loan offers available through the originator, and for which the consumer likely qualifies, are the same.

Assume a loan originator determines that a consumer likely qualifies for a loan from Creditor A that has a fixed interest rate of 7 percent, but the loan originator directs the consumer to a loan from Creditor B having a rate of 7.5 percent. If the loan originator receives more in compensation from Creditor B than the amount that would have been paid by Creditor A, the prohibition in § 1026.36(e) is violated unless the higher-rate loan is in the consumer’s interest. For example, a higher-rate loan might be in the consumer’s interest if the lower-rate loan has a prepayment penalty, or if the lower-rate loan requires the consumer to pay more in up-front charges that the consumer is unable or unwilling to pay or finance as part of the loan amount.

 

Industry Insights – HUD to the Rescue!

HUD Addresses Stability of Income Issues for Employed and Self-Employed Applicants impacted by COVID-19

HUD has clarified acceptable deviations from the current 4001.1 related to Mortgagee flexibility for applicants impacted by COVID-19. The sweeping deviations apply to any applicant impacted by COVID-19. That includes self-employed applicants.

The HUD Mortgagee Letter changes effects TOTAL and manual underwriting and will be included in future editions of the 4000.1.

From HUD
July 07, 2022
Mortgagee Letter 2022-09

This Mortgagee Letter (ML) is to instruct Mortgagees how to calculate Effective Income for Borrowers who were affected by gaps in employment, which led to reductions or loss of income due to COVID-19 Related Economic Events. This policy will allow industry partners additional opportunity to utilize flexible underwriting guidance to help Borrowers qualify for homeownership.

The provisions of this ML are effective for all case numbers assigned on or after September 5, 2022; however, Mortgagees may begin using the policies announced in this ML immediately.

Due to the restrictions imposed by the COVID-19 National Emergency and in compliance with state and local government directives, many businesses throughout the country had to reduce the scope of their operations or completely closed their doors. Mortgagees are therefore experiencing challenges as they attempt to determine income stability for employed and self-employed Borrowers.

In recognition of these and other challenges that Mortgagees are experiencing during these unprecedented times, FHA is updating its income requirements for employed and self-employed Borrowers to qualify for FHA-insured Mortgages. These measures are expected to mitigate or offset potential risk of default that results in a claim against the Mutual Mortgage Insurance Fund (MMIF), while maintaining FHA’s countercyclical role in the market.

x. Self-Employment Income (TOTAL) (3) Exception Due to COVID-19 Related Economic Event

The Mortgagee may consider self-employment income if the Borrower has an aggregate self-employment history before and after the COVID-19 Related Economic Event totaling two years.
If the Borrower has an aggregate self-employment history before and after the COVID-19 Related Economic Event totaling between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two years. For self-employed Borrowers with a COVID-19 Related Economic Event that have since regained income at a level less than 80 percent of their income prior to the COVID-19 Related Economic Event, the Mortgagee must downgrade and manually underwrite.

(C) Required Documentation (3) Exception Due to COVID-19 Related Economic Event

For self-employed Borrowers with a reduction of income due to a COVID-19 Related Economic Event, the Mortgagee must provide the following documentation in addition to the current Self-
Employment Income Required Documentation:

    • Letter of explanation for the time period of income loss or reduction
    • The Borrower’s business tax returns for the most recent two years; and either of the following:
      • An audited year-to-date P&L statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the case assignment date; or

      • An unaudited year-to-date P&L statement signed by the Borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the case assignment date, and three of the most recent business bank statements no older than the latest three months represented on the year-to-date P&L statement. Monthly deposits on the business bank statements must support the earnings on the unaudited year-to-date P&L.

(D) Calculation of Effective Income (2) Exception Due to COVID-19 Related Economic Event

For self-employed Borrowers with a COVID-19 Related Economic Event that have since regained income at a level greater than or equal to 80 percent of their income prior to COVID-19 Related Economic Event for a minimum of six months, the Mortgagee must calculate gross Self-Employment Income by using the lesser of:

    • The average gross Self-Employment Income earned over the previous two years prior to the COVID-19 Related Economic Event; or

    • The average gross Self-Employment Income earned over the previous six months after the COVID-19 Related Economic Event.

See the Circular here:
https://www.hud.gov/sites/dfiles/OCHCO/documents/2022-09hsgml.pdf

 

Tip of the Week – Speak With Precision When Communicating With Applicants

Sex and Familial Discrimination
Maternity Leave Wakeup Call
HUD Reminds an Individual MLO and their Employer About Unlawful Discrimination

This regulation (24 CFR Subtitle B, Chp I, Part 100) is issued under the authority of the Secretary of Housing and Urban Development to administer and enforce title VIII of the Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988 (The Fair Housing Act).

(The Fair Housing Act Regulation) 24 CFR § 100.120 Discrimination in the making of loans and in the provision of other financial assistance.

Providing, failing to provide, or discouraging the receipt of loans or other financial assistance in a manner that discriminates in their denial rate or otherwise discriminates in their availability because of race, color, religion, sex, handicap, familial status, or national origin.

(The Fair Housing Act Regulation) 24 CFR § 100.130 Discrimination in the terms and conditions for making available loans or other financial assistance.

It shall be unlawful for any person or entity engaged in the making of loans or in the provision of other financial assistance relating to the purchase, construction, improvement, repair or maintenance of dwellings or which are secured by residential real estate to impose different terms or conditions for the availability of such loans or other financial assistance because of race, color, religion, sex, handicap, familial status, or national origin.

The Complaint and Resolution

Complainants alleged that (Redacted) and its agent, loan officer (Redacted) (jointly, “Respondents”), discriminated against them on the basis of sex and familial status in violation of subsections 804(a) and 804(b) and Sections 805 and 818 of the Fair Housing Act as amended, 42 U.S.C. 3601 et seq. (“the Act”) by refusing to approve Complainants for a home loan until after Complainant returned to work from maternity leave.

Respondent agrees to maintain its existing policies and procedures under which applicants on temporary leave, including parental leave, may qualify for a home loan without first returning to active work status, assuming they meet all qualifying requirements. Respondent further agrees to maintain its existing policies and procedures prohibiting employees in lending-related roles from discouraging an applicant from applying due to any prohibited basis, including plans for parental leave, or suggesting that applicants return to work from parental leave prior to applying for a home loan. It is understood that Respondent has provided documentation to the Department showing that it already maintains such policies.

Respondents agree to comply with all applicable provisions of the Act and the Department’s regulations set forth at 24 CFR Part 100 et seq. Respondents specifically agree that they will provide full and fair access to all home loan products regardless of an applicant’s race, color, religion, sex, disability, national origin, or familial status. It is understood that familial status includes any person who is pregnant or is in the process of securing legal custody of any individual who has not attained the age of 18 years.

It is understood that Respondent provides fair lending training courses to its newly hired employees in lending-related roles and provides annual training to its current employees in lending-related roles in manners consistent with applicable law, including the Act and the Equal Credit Opportunity Act. Respondent agrees to continue providing fair lending training to show compliance with paragraph H17, employees in lending-related roles and annual training to its current employees in newly hired
lending-related roles, including training on its policies and procedures under which applicants on temporary leave, including parental leave, may qualify for home loan products without first returning to active work status, assuming they meet all qualifying requirements.

My people are destroyed for lack of knowledge
From the 4000.1

II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
A. Title II Insured Housing Programs Forward Mortgages
4. Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL)
(C) Addressing Temporary Reduction in Income
For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrower’s current income as Effective Income, if it can verify and document that:

    • The Borrower intends to return to work;
    • The Borrower has the right to return to work; and
    • The Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstance

For Borrowers returning to work before or at the time of the first Mortgage Payment due date, the Mortgagee may use the Borrower’s pre-leave income as Effective Income.

For Borrowers returning to work after the first Mortgage Payment due date, the Mortgagee may use the Borrower’s current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrower’s pre-leave income as Effective Income. The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the Borrower’s intended date of return to work.

Next week the Journal examines FNMA’s guidance on temporary leave (very similar to the HUD rules on the matter).