CFPB cracks down on Kickback scheme disguised as MSA

http://http://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-prospect-mortgage-pay-35-million-fine-illegal-kickback-scheme/

 

This is fantastic! A lot of crooked real estate agencies (which is a frighteningly large percentage of them) lean in on lenders and require that lenders pay into what are known as Marketing Services Agreements (MSAs). Essentially they are supposed to be agreements where the lender and the real estate office split the costs of advertising and marketing. Think of those postcard mailing campaigns that you’ve glanced at and chucked into the recycling bin or open houses with banners, signs and swag. On its face it seems to make sense, two companies or two sales people go in together to generate business. Of course, in real life, things are rarely so easy.

See, there’s a very important law – RESPA, the Real Estate Settlement Procedures Act of 1974. The relevant part of RESPA is Section (a): the prohibition against kickbacks and unearned fees. This covers “referral” fees and “buying the business.” Essentially the law prohibits any one in the real estate industry from paying other parties for referrals or making payment for services rendered contingent on the closing of a real estate transaction (financing, sales, etc). So your real estate agent can’t get paid for sending you to his “preferred” lender. Ever since the law was passed and with every passing update, clarification and revision the real estate industry has tried to find ways to circumvent the law. MSAs and ABAs (affiliated business arrangements) have been the preferred vehicles for these extralegal gymnastics.

So what happens is that instead of obviously well-spirited advertising campaigns and events, companies set up relationships wherein, for example, a lender “leases” a desk at a real estate brokerage’s office. That lender pays well-above market rates for that “privilege,” say $2500/month for a desk and a chair. That lender, of course, expects something for his/her generosity. They want loans that they can close and make money. This isn’t in the spirit of serving the consumer mind you, this is about the $$$. The real estate office is seeking to either defray it’s rental expenses or generate a profit and the lender is seeking an easy path to deals. Now, paying above-market rent for a desk is questionable but not as questionable as the further perversion of these kinds of arrangements: varying the rent each month and making it dependent on how many deals were sent to the lender. Yes, this is very common. It is not what happened in the linked story but this kind of action gladdens me deeply since I am tired of being approached by crooked real estate agents to set up MSAs and hearing about how other, less scrupulous, lenders are “in-house” or “preferred” with a particular real estate office.

TRID! And other ingredients of Alphabet Soup…

This week we are closing our first loans under the new disclosure rule known as TRID. It became effective October 3rd of this year. TRID is the result of the Dodd-Frank Act of 2008 and the creation of the Consumer Financial Protection Bureau (CFPB). It is a result of rule making that called for there to be an integrated disclosure that addressed the regulatory requirements of the Truth-in-Lending Act (TIL , TILA or TILDA) and the Real Estate Settlement Practices Act (aka RESPA). In fact that is what TRID stands for, TILA-REPSA Integrated Disclosure. Gone are Good Faith Estimate (GFE, we sure do love our acronyms in the mortgage industry) and the Truth-in-Lending disclosure. Those are not things any more. The information contained in both those forms has been cleaned up, condensed and polished into the new Loan Estimate (LE) form. A sample of which can be foundĀ here.

Dodd-Frankly (see what I did there?), I like the new form. It addresses many of the issues I had with the GFE form. I believe the LE to be cleaner, more concise and, most importantly, clearer to the consumer (I also like alliteration). It deemphasizes the hogwash metric of APR which can be manipulated and lacks transparency to the average consumer and focuses on the questions most likely to be asked: Rate, Term, Payment and Cash-to-close. It clearly states the lock status of the loan and breaks down fees in reasonable manner. In fact I only really have three qualms about the form:

  1. It introduces another hogwash metric: Total Interest Percentage (TIP, see what I mean about acronyms?) which shows “The total amount of interest that you will pay over the loan term as a percentage of your loan amount.” This will generally be a very large percentage on a 30 year loan, something in the neighborhood of 60%-80%. While I do believe it is important for a home buyer to understand the cost of financing over a long term I believe that this percentage is somewhat misleading as it makes some very broad and unrealistic assumptions; e.g. that not a single dollar of additional principal is paid, ever, and that the loan is carried to term (that is, never paid off early due to refinance or sale). I’m just guessing here but I don’t believe that those two conditions apply to more than 1/10th of a percent of home buyers nationwide.
  2. In section G it refers to the funding of the escrow (aka impound) account as “Initial Escrow Payment at Closing” which is a seemingly cumbersome manner of labeling it. I believe that the term “Payment” should not be included there as it could be mistaken with the actual “Payment” on the loan. Perhaps, Initial Deposit into Escrow Account would have been clearer.
  3. It highlights whether a given loan has a Prepayment Penalty or a Balloon Payment (both of which are important to know) without allowing for a Negative Amortization feature or an Interest Only feature. In a world of Qualified Mortgages (QM, more on that in a latter post) I know that it is unlikely that we will see those for primary residences (which I have decidedly mixed feelings about) but I think that we might see some variations on those products for Investment Properties but the LE is simply not equipped to deal with such products. This speaks of the narrow mind-set by the rule makers and the general nanny mentality that seems to be prevalent at the CFPB and in legislature. But enough of my opinions…\

TRID also brings us a new closing form, the Closing Disclosure (CD). I will be discussing that in my next post.

If you have any TRID or LE questions, please comment below or on Facebook (see sidebar), otherwise; thanks for reading!