Thanks to the Dodd-Frank Wall Street Reform Act, 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 contol 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 decreased originations, unavailability of lines of credit, the increase requirement for a mortgage bankers’ net worth requirements by GSEs and agencies and the swift compliance changes and laws, the exposure of mortgage bankers to repurchase risk from investors, mortgage bankers may be forced to restructure or organize operations as mortgage brokers to survive. Another pitfall of a broker is compensation combined with the new mortgage originator Truth in Lending Act risk and unable to produce significant origination volumes may be harmful, and smaller mortgage brokers may be forced to move to larger and more stable operations.
In the past years we have examined risk from a post closing review or audit. Now that buybacks and repurchase are applied to individual loans regardless of pools based on fraud, poor underwriting and even the slightest violation of a federal or state regulation Quality Mortgage Services is providing compliance solutions to reduce operational risks through it audits, repurchase rebuttals and repurchase defense, and trend analytics that are used by mortgage banker and the industry.
For the brokers to obtain the origination volume necessary to survive and be successful, they need to work with lenders that have an efficient mortgage quality control program. Post closing quality control is an easy solution for the broker’s efficiency. Post closing audits provide the lender with the necessary controls that validates 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 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.
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 and the limiting of mortgage originator compensation, the lender most likely will push quality control down to the origination or broker level in order to make brokers more efficient with the act.