What do FHA approval and LO compensation have in common?

We are seeing a pattern in the way regulators are communicating their policies to the industry. First let’s look at the FHA lender approval changes. FHA has said that wholesalers are responsible for monitoring that all ‘sponsored correspondents’ (the new term for non-FHA approved companies) are in compliance with FHA requirements. This is a very broad statement and every wholesaler is behind closed doors trying to determine exactly what requirements they will impose. The account managers want everyone approved who can fill in a 1003 and the QC department wants to duplicate FHA’s full requirements for audited financials, minimum liquid reserves, QC audits and a fully operational QC plan. FHA continues to say, it is up to the wholesaler to determine the procedures and process that are needed. They do not want to give any specific examples because anything they say will become the ceiling (or floor depending upon how you look at it). Therefore, wholesalers will develop their own policies based on their ability to defend their position in an audit. No two approval or monitoring procedures will be the same. This archetype is true with federal regulators when it comes to the LO compensation requirements in TILA that are expected by 4/1/2010. As more and more lenders discuss various compensation arrangements, numerous questions arise not the least of which is how to prove the company provided a loan that is in the ‘customer’s interest’. There is not a one size fits all approach to determine what is in the customer’s interest as it too has a very broad range of possibilities. How will lenders weigh the value of the interest rate, product characteristics, underwriting criteria, closing date, lock expiration, documentation and all of the other unpredictable factors in a loan? No two loans will be the same. Lenders will need customized procedures that fit with their business channels, client base, regulator and systems designed to insure they can defend their position in an audit. The anti-steering provisions open up a new set of criteria that must be managed to identify any violation of TILA. The common message from FHA and FRB is that the risks are yours to identify and manage. They’ll give you the stadium with a field and a partial book of rules. You have to determine where the boundaries are and how to run the right plays to stay in bounds. PS: The referee isn’t going to blow the whistle until you’ve stepped out of bounds. Some companies will test the boundaries and others will play down the middle of the field. We’ll all watch to see who gets the first flag thrown and what the penalty will be. Alice helps companies identify risk and implement policies and procedures to keep lenders compliant and efficient.