Happy Friday, August 2nd. The U.S. Department of Housing and Urban Development (HUD) notified everyone that its offices are closed today due to government cutbacks. It turns out that although there are no real holidays for the rest of us in August, HUD (and other agencies) have three: 8/2, 8/16, and 8/30. In fact, Congress has the whole month off, as a reward for all of its hard toil. Now they don’t have to deal with that nasty Washington traffic.
Is this the plot of a bad movie? The chairs of the House Financial Services (FSC) and the Oversight and Government Reform Committees are after some ex-CFPBers. The government is very interested in some business relationships four former senior officers of the CFPB have formed since leaving Bureau employment earlier this year. In a letter to CFPB Director Richard Cordray, FSC Chairman Jeb Hensarling (R-TX) and Oversight Chairman Darrell Issa (R-CA) questioned whether the four left CFPB in order to profit from mortgage rules they helped to create! The four (Raj Date, Gary Reeder, Chris Haspel, and Mitch Hochburg) “while serving in senior leadership positions, helped to write a series of rules broadly affecting mortgage lending in the United States”. One such rule, mandated by the Dodd-Frank Act, prohibits a creditor from making a mortgage loan without regard to the consumer’s ability to repay the loan in order for the loan to be considered a “qualified mortgage” for which the law then offers certain protections from liability. Anyone in the industry knows that the combination of higher rates, higher LLPA’s, and increased costs due to the CFPB’s actions on QM all make it tougher for borrowers.
Raj Date formed advisory and investment firm Fenway Summer LLC (Fenway). Fenway focuses on those who do not meet the standards for qualified mortgages as set by the CFPB. Date hired Mr. Reeder, Mr. Haspel, Mr. Hochburg, and other CFPB employees to staff his firm. The letter says, “This conduct raises serious questions about the integrity of the CFPB’s rulemaking process and the conduct of some of its most senior former officials. We are deeply concerned that this close relationship between the CFPB and its former officials ultimately could harm consumers…Although the CFPB is now two years old, it remains ‘something of a mystery to many market participants as it ramps up operations.’ This lack of transparency has apparently incentivized [Raj] Date and other CFPB alumni to create a cottage industry unique to the Bureau’s regulatory agenda.” Whadaya think – William Hurt, Kevin Costner, Benicio del Toro?
Of course, the CFPB is not the only government agency pursuing individuals and companies. Here we have the “SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis” here.
I received this note from the CEO of a mortgage bank in Arizona. “Rob, are LOs liable for their comp plans?” There is a growing feeling that, in this era of accountability, monitoring counterparties, and increased reps and warrants, that loan officers may be partially or wholly liable for their company’s LO compensation plan. Uh oh – this would certainly increase the scrutiny on anything close to a point bank.
It appears that the legal source material for loan originator liability and borrower’s remedies for violations of the Loan Originator Compensation and Steering laws, rules, and regulations can be found in the Truth and Lending Act, as currently amended. For example, Dodd-Frank Act Section 1404 (Liability) establishes predicate for (individual) mortgage originator liability for non-compliance. 15 USC 1639b, says, for residential mortgage loan origination, “…No mortgage originator shall receive…and no person shall pay an originator…compensation that varies based on the terms of the loan…”. And 15 USC 1639b(4)(C) states, “…so long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal)…” Again, it appears that these may establish predicate for individual loan originator liability. See 15 USC 1639b(d) Liability for violations (1) “…For purposes of providing a cause of a cause of action for any failure by a mortgage originator,…” We have 15 USC 1639b(d)(2) that states, “The maximum amount of any liability of a mortgage originator under paragraph (1) to a consumer for any violation of this section shall not exceed the greater of actual damages or an amount equal to 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including a reasonable attorney’s fee.” Later, in 15 USC 1640 Civil Liability (addresses damages and “enhanced” damages), we have, in general, “Notwithstanding any other provision of the law, when a creditor, assignee, or other holder of a residential mortgage loan or anyone acting on behalf of such creditor,…initiates a judicial or non-judicial foreclosure…a consumer may assert a violation by a creditor of paragraph (1) or (2) of section 1639b (c) of this title, or of section 1639c (a) of this title, as a matter of defense by recoupment or set off without regard for the time limit on a private action for damages under subsection (e).”
Section 129B(d) of TILA, as added by the Dodd-Frank Act, permits consumers to bring actions against individual mortgage loan originators for violations of certain provisions of TILA. For example, while LO’s can be held personally liable for receiving compensation in violation of the Rule, they are not personally liable under TILA/LO Comp for failing to maintain the records of compensation required by the rule. The LO Comp Rule, which implements the DFA’s statutory authority confirms this personal liability through its changes to Reg. Z’s definitions. Specifically, the change to § 1026.36 (a) (1) in the LO Comp Rule clarifies the definition of “loan originator” to mean either the individual LO or the company. The following is from the CFPB’s small business compliance guide which seeks to use plain language explanations for the Rule (although it still warns you that you need to see the actual Rule for details): “A “loan originator” is either an “individual loan originator” or a “loan originator organization.” “Individual loan originators” are natural persons, such as individuals who perform loan origination activities and work for mortgage brokerage firms or creditors. “Loan originator organizations” are generally loan originators that are not natural persons, such as mortgage brokerage firms and sole proprietorships”
TILA is confusing for a lot of reasons, but one of the biggest areas of confusion in the LO Comp and Ability to Repay rules are the differing obligations imposed on “Creditors”, “Loan Originators”, and “Loan Originator Organizations”. These definitions are critical in determining who is responsible for any obligation under TILA. LO comp is one of the few times where the obligation extends all the way down to the individual LO, but the liability is potentially huge. I don’t know about the issue from the LO’s perspective (ask an attorney; see below) – does the borrower have a life of loan defense? As best I understand it, the life of loan defense is true as it relates to foreclosure but the remedy is not a free house, it is three years of interest and other fees (loan, attorney) – a monetary judgment. So there shouldn’t be any runs on any particular company.
Attorney Brad Hargrave writes, “Loan originator compensation is one area of Truth in Lending and Regulation Z wherein someone other than a creditor; namely, the loan originator, can also be held liable for a violation. The citation in support of this proposition is found at 15 USC §1639b(d)(1) which provides, in pertinent part, that ‘for purposes of providing a cause of action for any failure by a mortgage originator, other than a creditor, to comply with any requirement under this section, and any regulation prescribed under this section, section 1640 shall be applied with respect to any such failure by substituting ‘mortgage originator’ for ‘creditor’ each place such term appears in each such subsection.’ And, §1640 is that section of TILA that imposes civil liability for various TILA violations, including those sections regarding LO Compensation. (I have not addressed the recoupment and setoff issues in the event of foreclosure in the context of the LO, given that an LO would not be the party initiating the foreclosure; and thus, this section really isn’t applicable to an LO).”
Mr. Hargrave’s note continues, “The penalties are potentially severe. In an individual civil action brought by a consumer, the creditor who paid the violative compensation could be liable to the borrower for actual damages, plus twice the amount of any finance charge in the transaction (capped at $4,000), plus an amount equal to the sum of all finance charges and fees paid by the consumer (unless the creditor can demonstrate that the failure to comply is not material), plus reasonable attorneys’ fees and court costs if the borrower were to prevail. The loan originator’s exposure to such a claim (per 15 USC § 1639b(d)(2))is the greater of actual damages to the consumer or three times the total amount of direct and indirect compensation paid to the LO in connection with the subject loan, plus the costs to the consumer of the action, including reasonable attorneys’ fees. In addition, the CFPB could sue the creditor and the loan originator in Federal District Court and seek any one of a number of remedies, including restitution and/or disgorgement, and appropriate injunctive relief, as to all loans wherein the LO received unlawful compensation. It is also possible that the matter could be referred to another agency for enforcement.”
Interestingly, the CFPB did not take this approach in the Castle Cook complaint filed last week; that is, it decided, apparently, not to name the LO’s who received the allegedly unlawful bonus payments. Although no one is happy to see the CFPB endeavor to sue any mortgage banker out of existence, which might be the case here, it surprised many that not a single LO was named in the complaint. This omission sends the wrong signal, it seems to some, to LOs throughout the industry. It tells them that this entire issue is the problem of their employer, not their problem, and thus that if the employer does not bend to their demands to pay them in a non-compliant manner, they will simply pick-up and leave for a mortgage banker that is willing to break the rules. As we all know, in the real world, competition for high-producing LOs is the primary reason that mortgage bankers feel compelled to take risks in connection with LO compensation compliance. If the LOs understood that they were subject to the same, if not greater, liability as their employers, perhaps they would be a little more inclined to fall in line. Like I said, talk to an attorney.
Yesterday was a not a good day for the fixed income markets. Claims for jobless benefits unexpectedly dropped to the lowest level in more than five years, much lower than expected, and the employment component of ISM Manufacturing increased. And with the Fed’s focus on employment, this is particularly influential. Yes, all rates went up, but with mortgage banker volumes down, and the demand from the Fed still strong, agency MBS prices did somewhat better than Treasuries – if that is any consolation.
The projection for July nonfarm payrolls to was +185-225k, with the unemployment rate at 7.5%. The actual numbers were +162k and 7.4%. The revisions to the prior two months showed a drop. And 7.4% is the lowest unemployment rate in a few years – but it is due to factors such as a drop in the participation rate. Hourly earnings dropped for the first time since October 2012.
In addition to the July Employment Situation released at 8:30 a.m., other releases scheduled for Friday are Personal Income and Consumption (Jun) at 8:30AM and Factory Orders (Jun) at 10AM. The 10-yr, which had a 2.72% close on Thursday, is sitting at 2.63% in the early going, and MBS prices are better by about .250.