Thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Acts, the federal government is making it virtually impossible to be a mortgage broker. By extending the application of the Truth in Lending Act to include mortgage brokers (formerly limited to "creditors") and clearly defining, and otherwise limiting, how brokers can be compensated (YSP is dead), the act is forcing brokers to rethink the way that they do business. For mortgage brokers to survive, they need access to wholesale lenders and must establish relationships with select retail lenders. For Lenders to survive, they need to meet strict quality and delivery guidelines that insulate mortgage securitization issuers from the act's risk retention requirements. These guidelines include, but are not limited to, increased underwriting obligations, changes to the HOEPA thresholds, additional disclosure requirements and asset verification and validation requirements. These strict quality guidelines are necessary to insure that the assets that are purchased by mortgage securitization issuers adhere to the risk retention safe harbor requirements, and in return, the issuer can confidently provide liquidity to the lender, that is necessary to keep funding loans that the brokers are selling.
As a result of the diminished origination volume in the residential lending industry, attrition of the availability of lines of credit, the increase in mortgage bankers' minimum net worth requirements by states, GSEs and agencies and the constant barrage of new compliance laws and requirements that expose the mortgage bankers to significant repurchase risk from their investors, mortgage bankers are forced to shut down operations and recreate themselves as mortgage brokers to survive. Taking into consideration the act's noteworthy limitations on broker compensation combined with the new mortgage originator Truth in Lending Act risk, broker's unable to produce significant origination volumes may become financially crippled, and as a result, the smaller mortgage brokers will be forced to move in-house to captive loan originators.
"The culmination of new laws and regulations over the past few years has now made it a requirement to upgrade technology to include strong compliance," says Leonard Ryan, president of QuestSoft, a California-based mortgage compliance company. "Where in past years you examined risk primarily based on a pool of loans, today buybacks are applied to individual loans regardless of pools based on fraud, poor underwriting and even the slightest violation of a federal or state regulation."
For the brokers to obtain the origination volume necessary to survive and be successful, they need to work with lenders that have an efficient origination technology solution permitting a streamlined approach to the traditionally time consuming loan submission and approval process thus allowing the brokers to effectively reduce costs and overhead. This technology solution must not only be easy to use and maximize the broker's efficiency, but it must provide the lender with the necessary controls to meet the strict qualified residential mortgage underwriting guidelines and guarantee to the asset-backed securitization issuer that each of the loans delivered meet the qualified residential mortgage guidelines. Asset-backed securitization issuers must also unequivocally establish that each loan sold or conveyed through the issuance of an asset-back security is a qualified residential mortgage. A securitization containing a single nonqualified residential mortgage will expose the issuer to the strict risk retention requirements of the act.
The act will also expose brokers to a considerable amount of regulatory risk and asset liability by expanding the Truth in Lending Act to include brokers in the definition of "mortgage originator," revising what was traditionally limited to and defined by TILA as a "creditor." The definition of a "mortgage originator" would change to include any person (individually or as an organization) that, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain:
1. Takes a "residential mortgage loan" application.
2. Assists a consumer in obtaining or applying to obtain a residential mortgage loan.
3. Offers or negotiates terms of a residential mortgage loan.
The act also amends TILA to enhance liability for mortgage loan originators that fail to comply with the applicable new requirements such as mortgage originator steering prohibitions, prepayment penalty restrictions and the repayment ability determination. The expanded penalties include an extension of the statute of limitation for civil actions from one year to three years, and the modification of damage cap for class action lawsuits is increased to the lesser of $1 million or one percent of the creditor's net worth. The act provides that for purposes of providing a cause of action for any failure by a mortgage originator that is not a creditor to comply with the new requirements (i.e., qualification requirements, unique identifier requirements, anti-steering, restructuring of compensation), Section 130 will be applied. The act can simply be read as to take the term "creditor" in the current section and replace it with "mortgage originator," that now includes mortgage brokers.
Taking into consideration the additional risk as detailed above and the limiting of mortgage originator compensation, the lender is best suited to shoulder the costs of the technology to strive to make their brokers more efficient as the act does not extend the limitation on mortgage originator compensation to the lender's margins when selling the loan into the secondary market.
Under the act, the following types of compensation would be available to the mortgage loan originator:
• A flat fee, paid by the consumer.
• A fee that varies based on the principal loan amount, paid by the consumer.
• A fee, paid by the consumer, based on any factor other than the loan terms (e.g., loan type).
• An origination fee or charge from someone other than the consumer, as long as the fee does not vary based on the terms of the loan (other than the amount of the principal), the originator receives no compensation from the consumer, and the consumer does not make an upfront payment for origination fees.
The success of the broker model demands the creation of an entirely new broker lending paradigm that is a hybrid of the traditional wholesale and retail lending concepts and is supported by a comprehensive loan origination platform where the broker can, through a single portal, submit qualified loan scenarios and obtain approval in an efficient and concise manner to support the required volumes necessary for survival. This new broker lending paradigm shall permit brokers access to competitively priced products with significant volume incentives. Brokers need access to a single, efficient, quality-driven, centralized technology platform to permit each party, the broker, the lender and the issuer to meet the overwhelming individual obligations in the most efficient manner to preserve their roles in the loan origination lifecycle individually and to collectively preserve the broker model as a viable lending platform.
The Dodd-Frank Wall Street Reform and Consumer Protection Acts shall usher in a brave new world of mortgage lending, forcing the mortgage broker industry to adapt by creating the efficiencies necessary to deliver quality loans in order to survive.
Tim Counterman is director of compliance at Mortgage Cadence. He has more than 15 years' experience in data quality analysis, operational risk/control, audit and compliance having worked with such companies as Wells Fargo and Chase Manhattan Mortgage Corp.
