Tuesday, June 17, 2008

Reps Gone Wild: New Act Seeks to Eliminate FHA Approval Requirements

Temporary FHA Direct Endorsement Lender Participation Act of 2008

Just when you thought it was safe to go into the mortgage water again, California Representative Gary Miller [R] along with California Representatives Joe Baca [D] and Brad Sherman [D] introduce H.R. 6254 to the House which would allow non FHA approved mortgage brokers to originate FHA loans. Click here to view H.R. 6254.

What H.R. 6254 proposes is to amend Section 202 of the Economic Stimulus Act of 2008 to temporarily allow non FHA approved lenders and mortgage brokers to originate and close FHA loans in their own name upon filing an application for FHA participation approval. However, the lender or mortgage broker would not have to comply with FHA's requirement of submitting a financial statement.

Still, mortgage brokers can already participate in the FHA program as borrower agents, consultants, and representatives on FHA forward and reverse mortgages with the restriction of not being allowed to originate, process, or close the loan in the non-approved brokers name. Instead, the loan must be originated by a FHA approved lender or broker. Furthermore, non approved brokers may not be compensated by anybody other than the borrower and cannot receive yield spread premiums. This is as much for the safety and best interest of the borrower as it is FHA.

Of course, NAMB applauds the FHA Direct Endorsement Lender Participation Act which allows their members to circumvent FHA guidelines in order to originate loans and receive undisclosed yield spread premium payments from lenders without meeting FHA's approval criteria. You can view NAMB's press release here.

According to NAMB President, George Hanzimanolis:

“If signed into law, this is a victory for all consumers who need access to the FHA program to refinance into a more affordable loan". “We thank Representatives Miller, Sherman and Baca for their leadership in addressing the importance of making FHA programs more available to homeowners."

Well, that sounds all well and good until you realize that NAMB is consumer enemy #1 by opposing RESPA compliance, disclosure of yield spread premiums by mortgage brokers, and mortgage broker fiduciary duty. NAMB also opposes mortgage broker disclosure of relationship and duty. Is this really the organization you think should be the spokesperson for what is best for consumers?

Reps Miller, Baca, and Sherman are openly and notoriously cowing to special interests to the detriment of the FHA program and the public that they serve. This is an obvious breach of civil duty and a complete outrage that they would seek to compromise the integrity and solvency of the FHA program by circumventing necessary minimum approval standards.

Of all the colossally bad ideas that have been tossed around of late, this is an award winning worst. FHA approval criteria is there for a reason, and allowing non approved entities who have not been adequately screened by FHA to originate, process, and close loans in their name is an invitation for trouble and abuse.


Anonymous said...

Hi Krista,
I find your comments a little harsh. There are many mortgage brokers who give folks like me, a mortgage broker, a bad name. I do not know your background on whether or not you started a company as I did, but I have been not able to give my clients the loans they are looking for or their clients because I am not an approved FHA broker. Personally, I do not know how one can be a mortgage originator and a real estate agent at the same time, I feel that goes overboard and you can not give your client accurate and fair advice. Our industry was better when realtors sold homes, title folks didn't have aba's and just did title, and mortgage folks just wrote loans.
I think it would be a great thing it it were passed, it is up to the sponsoring lender as to whether they should allow the broker to do so.
This is what is coming between my way of life and my daughters as well. It is a shame as to what has happened to our industry, but what is worse is that there are plenty of good brokers who will be out of work because of the work of those who are greedy.

Krista Railey said...

Hi Anonymous,

I wholeheartedly agree that my comments are harsh- as well they should be. As a member of the industry and a taxpayer, I am fed up with abuse- including abuse at the hands of regulators, elected officials, and lobbyist groups that put their own interests above those they serve.

While I understand your need to make a living, you already have access to FHA as a borrower agent and can receive compensation without compromising the FHA program. Therefore, it is not FHA approval requirements that are not preventing you from making a living, but moreover, a lack of information.

Although the industry needs access to FHA, the industry also needs to be responsible and should not have unbridled access to FHA. FHA's delinquency rate is already through the roof and rising steadily. According to statistical data, FHA is in desperate need of reform- not modernization. Although I agree that there are many good brokers who wouldn't abuse the program, there are many more that would, and the minimum requirements are there to protect the FHA program and taxpayers.

Perhaps you might consider contacting NAMB and asking them why they don't support mortgage brokers as agents and fiduciaries and why they are not aggressively demanding equal treatment of borrower agent compensation from FHA. To date, the only issue with borrower agents is the fact that the compensation must be paid directly by the borrower without offset from YSP, seller credit, or loan proceeds (unless it is a reverse mortgage).

If NAMB spent their time garnering support for their members under existing laws and guidelines rather than attempt to circumvent FHA guidelines, the program would have greater access for borrowers and brokers alike. However, I’ve yet to see any indication that NAMB will support anything that acknowledges the mortgage broker’s role as an agent and fiduciary- despite the fact that many of their members are held to that duty under the laws of their state.

Explain to me why NAMB should not support all mortgage brokers whether they are intermediaries or fiduciaries. Please also explain to me why mortgage brokers who hold themselves out as agents and advisors should not be held to that standard? Please also explain why mortgage brokers shouldn’t disclose to the borrowers they are advising whether or not they represent that borrower and owe them a fiduciary duty? And please explain to me why the FHA guidelines should be circumvented just so mortgage brokers aren't held to a fiduciary standard or a modicum of RESPA compliance?

Now, if you are truly interested in how you can legitimately participate in the FHA program as a borrower agent, please review my FHA blog and contact me if you have any questions.

Krista Railey said...

Anonymous said...
Personally, I do not know how one can be a mortgage originator and a real estate agent at the same time, I feel that goes overboard and you can not give your client accurate and fair advice. Our industry was better when realtors sold homes, title folks didn't have aba's and just did title, and mortgage folks just wrote loans.

Personally, I do not know how one can originate real estate loans without having actual real estate knowledge. How does one competently advise a borrower on a real estate issue (yes, a mortgage is a real estate issue) if one has no knowledge as to real estate and related matters?

Perhaps the lack of real estate knowledge is why mortgage brokers are advising younger co-owners to quit claim their interest in order to obtain a reverse mortgage (stupid advice), or advise borrowers to refinance into a recourse loan rather than seek debt counseling, bankruptcy protection or possible short sale. Even worse is to advise borrowers to simply walk away in the event of imminent default (really stupid advice).

This must also be why many brokers consistently advise borrower’s to quit claim their interest without a written agreement, advise borrowers to take their properties out of trust, take cash out to complete a private divorce settlement or other property settlement, take cash out to complete improvements without obtaining permits, add people to title to qualify for loans, waive property repairs and termite reports to close escrow, remove homesteads, or purchase multiple (investment) properties owner occupied via stated income fraud on properties with negative capitalization rates.

In California, mortgage brokers licensed by the Department of Real Estate hold a real estate broker’s license. Before I even became a loan set up in this industry, I had completed at least half of the requirements for my California real estate broker’s license and passed my real estate salesperson test. Knowing how real estate knowledge has helped me excel as a processor, QC manager, underwriter and then finally as an originator, agent and office broker, I have no idea how other professionals function in this industry without real estate knowledge and expertise.

Perhaps its this lack of training that has led to the mortgage industry’s ignorance of agency and contract principals and why many mortgage brokers are unwittingly on a crash course with legal liability via implied agency and breach of duty.

Being a real expert and advisor entails so much more than crunching some numbers, completing a 1003, and processing a loan.

Jessica Buck said...


Have you read the Hud mortgagee approval handbook? I think that you are confused on the requirements and the abilities of non-approved brokers. There is a very fine line for non-approved broker involvement and right now, with the immense attention and scrutiny on the mortgage industry, no trustworthy broker is going to take the risk of testing where that line is drawn.

HUD's letter on the subject said that non-apporved brokers could not do anything except "assist" in finding a HUD-approved lender. This is where you are getting your term "borrower's agent", but if you are aware of RESPA, you know that "assisting" the consumer is really just a referral and you shouldn't be paid anyway. Your lack of concern for consumers is proven when you make the statement that brokers can already be "borrowers agents", because in that case the consumer would be charged an unfair fee for the "assistance" in finding another broker.

NAMB is by far the best tool that consumers have in this industry. NAMB has worked to require exams, federal background checks, education, experience, registration and much more for mortgage professionals across the nation. NAMB works hard to rid of the bad apples in the industry. The good brokers, like those involved in NAMB, don't mind all of the extensive requirements that we are now facing because we know that it benefits the consumers.

The true misfortune is that consumers are being misinformed and misguided by articles like this one. It is apparent that your true objective is not to help the consumer at all because this Act would help consumers immensely. The Act would create better access to FHA programs for consumers. There is so much new legislation that protects consumers from dishonest brokers so that consumers can finally feel more confident when making one of the biggest financial decisions of their lives. The brokers that remain in business after all requirements are met have proven themselves to be the good apples and therefore, the emlimination of a financial audit will make absolutely no difference except to limit the availability of FHA products to consumers who need them.

Krista Railey said...

Jessica, you bring up some valid points. However, with all due respect, your comments indicate that you are unfamiliar with compensable duties as per the infamous IBAA letter referenced in HUD’s 1999-1 RESPA Statement of Policy.

They also indicate that you are not familiar with agency principals and duties and do not know the difference between an agent and an intermediary. I am not saying this as an insult to you, but moreover, to point out common misperceptions and an overall lack of industry awareness of the mortgage broker as an agent and fiduciary.

For clarification, some mortgage brokers are intermediaries and others are agents. Because agents owe borrowers a fiduciary duty and are held to highest standard of care under the law, their role and duties differ from that of an intermediary.

An agent represents the borrower whereas intermediaries represent themselves. While a FHA approved lender is always the agent of the lender, approved brokers are typically an intermediary to the borrower.

Because the FHA approved broker is an intermediary to the borrower and an agent to the lender, a disparity exists. Not only is there a lack of representation, but a lack of disclosure as well. Consider that It is this lack of mortgage broker fiduciary duty and relationship disclosure as well improperly disclosed YSP that tops the list of abusive practices.

In regard to compensable services, in addition to reading Mortgagee Letter 08-17 (on forward mortgages), ML 08-14 (on reverse mortgages), FHA’s unsigned, unofficial bulletin that was posted on their website Oct 2007, and HUD’s 1999-1 RESPA Statement of Policy, you might also want to check out the Code of Federal Regulations, primarily 24 CFR 203.27 (e): which states:

"Nothing in this section will be construed as prohibiting the mortgagor from dealing through a broker who does not represent the mortgagee, if he prefers to do so, and paying such compensation as is satisfactory to the mortgagor in order to obtain financing."

The operative words here are “dealing through a broker who does not represent the mortgagee”. Of these words, the most important word is “represent”. What does represent mean? Let’s look it up in the legal dictionary:

represent v. 1) to act as the agent for another. 2) to act as a client's attorney. 3) the state something as a fact, such as "I tell you this horse is only four years old." 4) to allege a fact in court, as "I represent to the court, that we will present six witnesses," "We represent that this is the final contract between the parties." (See: representation)

Because the FHA approved borrower is the agent of the lender, the borrower is permitted to deal through their own exclusive agent. The fact that Commissioner Montgomery, FHA, and HUD remain coy on the subject of mortgage broker fiduciary duty and agency is cause for concern especially considering the history of proposed reform where HUD has repeatedly acknowledged the varying roles of mortgage broker and the need for disclosure of mortgage broker relationship.

Unfortunately, FHA failed to provide detailed guidance as to compensable duties of non FHA approved borrower agents, therefore, I refer you to the IBAA list of compensable services as outlined in HUD's 1999-1 Statement of Policy on RESPA.

You will note that the list includes clerical type duties and consultant type duties- although the list is said not to conclusive. While some duties are for the lender and some are for the borrower, HUD states that all duties inure to the benefit of the borrower and the lender in that they make the loan possible.

However, here is a basic list of compensable duties for a borrower's mortgage broker who is the borrower's agent (note: does not include duties of the HUD approved broker who originates and processes the loan):

1. Educating the borrower and going over their loan options. (Item C on the IBAA list)
2. Going over interest rate and closing costs options and explaining YSP and how it can be used to reduce costs. (Item C IBAA list)
3. Helping the borrower prepare for the application by advising the borrower what documentation to provide the approved lender/broker. (Assists borrowers with part of A and D on IBAA list)
4. Provide alternatives from at least 3 other lenders. (Per IBAA noted on HUDs 1999-1 SOP)
5. Provide borrowers with information on home buyer education, budget and credit counseling, and legitimate non-profit and government programs. (part of item C on IBAA list)
6. Help resolve credit issues by assisting the borrower with credit disputes. (item J on IBAA list)
7. Help the borrower resolve title issues such as lien releases, subordination requests, prepayment penalty waivers, short payoffs, unrecorded reconveyance, etc. (advisory service not listed on IBAA list)
8. Review credit and appraisal with borrower and answer questions and make recommendations. (advisory service not listed on IBAA list)
9. Review Goodfaith Estimate, Truth in Lending, and other disclosures with borrower and answer questions, make recommendations, and note inaccuracies.(advisory service not listed on IBAA list)
10. Review the final 1003, HUD 1, and loan documents for accuracy and explain the documents to borrower prior to borrower signing (advisory service not listed on IBAA)
11. Review the final HUD-1 and the starting impound balance for compliance. (advisory service not listed on IBAA)
12. Provide the borrower with loss mitigation assistance. (advisory service not listed on IBAA)
13. Advise the borrower as the borrower's agent and owe the borrower a fiduciary duty. (regrettably, not listed).

In regard to NAMB, any organization that actively fights to prevent the implementation of a fiduciary standard for mortgage brokers- especially those that hold themselves out as agents and advisors is unsavory at best.

I am at a complete loss to understand why mortgage brokers shouldn’t be held to the same standard that they represent to their clients. Or do you think its okay for agents to fill an “Advisor” or “Consultant” role yet have no duty to put the borrower’s interests above their own? What about YSP disclosure and rampant RESPA abuse? Should these same “Advisors, Agents, and Consultants” be able to earn thousands of dollars in improperly or undisclosed YSPs and unearned fees?

As long as NAMB lobbies against honest disclosure of YSP and mortgage broker fiduciary duty, they will remain an anti-consumer organization.

The mere fact that NAMB would rather lobby to circumvent FHA guidelines rather than work with FHA in clarifying the borrower agent roles only shows that NAMB is not interested in what is best for FHA, borrowers, or the industry, but moreover, in what makes their members the most money and curtails the most liability.

NAMB is about as consumer oriented as Mc Donald’s french fries are non-fattening. To pretend that this is to “help more consumers” and not about “making a buck” is either deceptive or naive. Furthermore, I view NAMBs educational and testing recommendations as weak, and are clearly for the benefit of implementing national licensing to ease the burden for multi-state brokerages- and not for the benefit of borrowers.

Allowing non approved brokers and bankers unadulterated access to FHA does nothing for borrowers or the industry and would compromise the integrity of the FHA program. If anything, FHA should be tightening the FHA approval requirements.

FHA approval guidelines are there for a reason, and non approved brokers can participate as borrower agents or they can obtain their FHA approval by complying with FHA approval requirements. Unfortunately, many brokers snub their nose at participating as borrower agents because it does not allow the broker to the keep the YSP or manipulate the loan process.

Jessica said...


I commend your knowledge on legislation. I am VERY aware of the duties referred to in the IBAA letter. In fact, that letter was my exact reference for my comment. I do not disagree that there is documentation for this, but (like I said) I am not about to test that water right now. And what is the real issue with this topic? Isn't it a matter of ethics and not statute?

My very SIMPLE point, no matter how complex you would like to make it, is that it is not ethical for a broker to act as the "borrower agent". All of the items that you listed are normally included in the service of any professional and ethical HUD-approved broker. Not only would an ethical broker provide these services, but he wouldn't charge an additional fee.

Perhaps you should step back and look at the big picture. Assuming that all mortgage brokers must only be interested in the undisclosed YSP is saying that you too are only interested in that. You are a broker correct? So is it fair to ask for you to step down for the soap box and admit that there may possibly be other ethical brokers in the industry? I can't speak for anyone else, but I know that I DO put the borrower's interests above my own. That is my job. That is why I disagree with acting as a borrower's agent and not providing a true service that would not otherwise be given to them. I have provided these services to borrowers many times, but I do not charge additionally for it.

I think that it is important to note that the percentage of NAMB members that are not already HUD approved is probably about .25%. I only say that because I do not know a single member that is not approved. Therefore, why would this be such a motivation to them if it wasn't for the consumer? Do you think that they are going to waste their few political opportunities on something that would only create more competition for them?

Your consumption in this topic could be argued to be the result of your own greed. Perhaps you are threatened by the availability of FHA loans to your competitors and that could be detrimental to your business and your pocketbook. I personally don't think this is necessarily the case, but do you see how it would be a well supported arguement since there are bigger issues at hand to be writing about?

I agree that YSP should absolutely be disclosed, and it is why it is required to be disclosed by RESPA Sec. 7. It seems that you are arguing nonexistent issues. The associations and the governement have been constantly evolving the past year to improve consumer protection. I would think that you would be applauding the increased change in standards in this industry. If you have been in business for 20 years you absolutely understand that this is all much overdue and you surely know that we wouldn't be in the mess that we are in had legislation worked this hard to monitor brokers 5 years ago.

You should be writing about all of the new requirements for licensing, registration, exams, education, etc. so that your consumers can understand that the majority of changes right now are NOT bad. You and other honest, professional, and ethical brokers left will benefit from these changes. So don't get caught up on insignicant issues. Look at the big picture, and welcome the much needed transformations in the mortgage and real estate industry.

They are hard to find, but there are allies in this industry, Krista. We are not all enemies.

Krista Railey said...

Jessica, I am at a complete loss. On one hand, you are extremely intelligent and make well thought out, informed points which I enjoy reading. Yet on the other hand, you seem to be innocently unaware of agency principles and the difference between the legal roles and duties of an agent versus an intermediary (middleman).

To put it kindly, I find it ironic that you find it unethical to represent a borrower as their agent when a non agent can easily do the work.

Let’s go with that logic, and look at what non agents are getting paid for the work they do. While contract processing companies will process FHA loans all day long and twice on Sunday for less than $800, borrowers are often charged 2% to 4%. That equates to $6000 to $12,000 on a $300,000 loan. $6,000 to $12,000 to process a loan? No wonder you don’t believe that borrowers should have agents.

While you state its a difference between “ethics” and not “statute”, I’d argue most attorneys and judges would disagree. Because fiduciaries are held to the highest standard under the law, borrowers have greater recourse than they would if they dealt through an intermediary. In California, which is an agency state, if a broker misrepresents or fails to clearly disclose all compensation upfront, they could lose their license and owe the borrower a refund of the difference between what was initially disclosed and what was received.

No matter how complex you make it, agency representation and YSP disclosure are in the best interests of borrowers as is the right to hold their agent legally accountable for breach. Simply put, a borrower has greater legal recourse against an agent than a merchant. Arguing that fiduciary duty is contrary to the best interest of the borrower is like arguing that the world is flat.

Everything I see from NAMB sidesteps fiduciary duty, and curtailment of recognition of mortgage brokers as agents. Hence, they diminish the role of agents, and increase liability via a lack of industry cooperation. You need to go back further than the last few years and take a good hard look at the history of reform, and NAMB and the MBA’s role in curtailing meaningful reform.

You must be aware that NAMB applauds the Federal Reserve for the withdrawal of mortgage broker disclosure of YSP with the final HOEPA rule and they demand the immediate withdrawal of HUD’s proposed RESPA rule that calls for clearer YSP and mortgage broker compensation disclosure.

We both know clear disclosure of YSP and all fees and charges are required upfront. We also know that under RESPA and HUD’s prior statements of policy, that YSP is indirectly paid for by the borrower and is allowable when used to offset borrowers costs. Hence, it has to be disclosed.

Instead of fighting about the fact that banks and lenders (who aren’t third parties) don’t have to disclose YSP, they could have been working on creating a workable YSP disclosure. Instead, there goes another failed chance at meaningful reform.

As far as greed goes, I have stepped out of the industry, terminated our HUD approval, and am closing my office rather than operate in this environment. Instead, I offer commentary and expose the type of BS that drove me to the sidelines. So no, I have nothing to gain but my own satisfaction and the opportunity to inspire change.

I do not think all brokers are bad, and agree that most brokers are good. Just because a broker doesn't hold an agency title doesn't mean that they don't perform to that standard. I have many friends on ML Implode that exemplify integrity. Those aren't the brokers that created this mess, and they aren't the ones that are sending FHA's delinquency rate sky high. They also aren't the ones viciously fighting against fiduciary duty and compensation disclosures. Most good brokers are already in the practice.

But again, we are looking at a FHA delinquency rate of over 16.81% and climbing. That's 1 out of every 6 single family FHA borrowers whose loans had amortization periods beginning between 6/06 and 5/08 that are currently delinquent.

Like Senator Bunning put it, you think giving them a bigger bat will fix the problem?

As far as YSP disclosure goes, meaningful disclosure is too easy. Here is an example: