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Brian Benjamin

MAY 22, 2012 10:10am ET


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CFPB Needs to Fix SRP, YSP Definitions

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The Consumer Financial Protection Bureau, by its mere name proclaims its sole purpose is to protect the

consumers interest in financial matters. But what happens when the rules and regulations designed to benefit the

borrower actually harm the borrower?

As anyone in the mortgage industry is acutely aware, the mortgage industry has failed to operate on a level

playing field since the early 1990s. From the moment that HUD required mortgage brokers to disclose all their

fees there has been a disparity. Dont misunderstand this statement; I find no fault in a mortgage broker, or any

one in a brokerage capacity that does not have to disclose their fees. Where the disparity manifests itself is when

one aspect of an industry attempts to utilize the disclosure to a personal advantage at the express expense of the

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consumer.

In a recent court case it was acknowledged by a federal regulator that compensation from yield-spread premiums

and servicing-released premiums are the same compensation. If the issueas expressed by some U.S. senators

and congressmenis that the yield-spread premium is a hidden kickback, logic would dictate that servicing-

released premiums are also a hidden kickback. Recently we are seeing a number of consumers harmed by the

Federal Reserve Boards rule on mortgage originator compensation.

One might wonder how a parity conflict between banking and nonbanking might negatively impact the ability ofthe CFPB to protect the consumer. Lets take a look at the oldest government lending backstopFHA.

The following may sound currently relevant, but its from the Federal Housing Administration website on the

history of the founding of the FHA.

The housing industry was flat on its back: two million construction workers had lost their jobs and terms were

difficult to meet for homebuyers seeking mortgages. Mortgage loan terms were limited to 50% of the propertys

market value with a repayment schedule spread over three to five years and ending with a balloon payment.

America was primarily a nation of renters. Only four in ten households owned homes.

The FHA has historically been utilized to bring mortgage money to places where there is a lack of availablefunds, from the inner city or the heartland. A cheap alternative option available for the local and regional banks

has been to utilize nonbanks, i.e., mortgage brokers and bankers, in areas the banks cannot reach with branches

due to costs and lack of a return on their investments. The goal was for the bank to discount the cost of the

mortgage and allow the nonbank to make a profit.

As the Alternative Mortgage Transaction Parity Act (1982) opened the mortgage banking world to a host of

available options to the consumer and industry, banks were no longer restricted to just lending on conventional

fixed-rate mortgages. It also initialed large growth in the secondary mortgage markets.

Arguably, the one of the best aspects for the consumer of the FHA mortgage programs is the streamline

refinance. Until recently it afforded a low cost means of refinancing with limited costs and restrictions. But whathappens when a viably necessary federally Insured mortgage program with decades of history conflicts with a

new regulatory rule, the FRB rule on mortgage originator compensation? Again, the industry sees consumers

being harmed by the unintended consequences of the FRB rule on mortgage originator compensation that was

designed explicitly designed to protect the borrower from excessive fees.

This is one just of thousands of recent real-life scenarios where the borrower was harmed by the rule. An FHA

loan is originated and approved for an FHA streamline. The broker/banker uses lender paid with a contract

payment of 2%, to comply with the FRB rule on compensation.

The borrower needs a mortgage rate of 3.625%. On the day the borrower is ready to lock the loan, the 3.625%

interest rate is paying -1.95. This is not sufficient to meet the lender paid contract price. The broker cannot

adjust their contract or they and the lender have violated the FRB rule.

To change the loan to a consumer paid has two drawbacks. One, the lender would take from three to six hours

to complete the change, at which time in a volatile market the interest rate is gone. Second, on a consumer paid

loan the borrower must physically bring the broker compensation. It cannot be included in the loan amount.

In fact, the interest rate did jump, the borrower not only lost his interest rate, the file subsequently expired and

had to be re-underwritten. This has cost thousands of dollars in losses for the lender via underwriting a file two

times, the broker putting together two separate files without compensation and most importantly the borrower

who lost the lower mortgage payment. It is time to end the use of the FRB rule for conventional and government

mortgages. The CFPB has the legal charge to protect the consumer.

The original argument many in D.C. were making was that mortgage originators were placing viable prime

borrowers into subprime loans. The CFPB needs to move the usage of the loan officer compensation rule to


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cover only nontraditional and subprime mortgages. Removing the FRB rule on compensation from applying to

conventional and government loans adds as a further inducement to the industry as a whole to utilize the prime

loans over the nontraditional and subprime loans.

If, in fact, there were a standardized national mortgage broker fee agreement required for every mortgage, why

would there be the need for this failed experiment?

Brian Benjamin is senior partner at Two River Mortgage, Red Bank, N.J.

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about an hour ago- RT @bcynicWKFS senior manager Kris Stewart says when her colleague printed

the 1,888 page RESPA-TILA rule it weighed 12 lbs.! bit.ly/1aDszsX

about 2 hours ago- Nor are many of these #MiniCorrespondentlenders "prepared or able to buyback

a loan," warns MGIC's Lloyd San mgic-marketing.squarespace.com/blog/a-new-fad

about 2 hours ago- "many of these mini-correspondents ... are NOT prepared for any compliance

issues such as completing HMDA reports" mgic-marketing.squarespace.com/blog/a-new-fad

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CFPB Needs to Fix SRP, YSP Definitions_National Mortgage News

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