Aggressive and Compliant Revenue Growth Strategies

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1 Aggressive and Compliant Revenue Growth Strategies Ari Karen Principal, Offit Kurman Founder and CEO, Strategic Compliance Partners

2 MSA and JV Arrangements Can be done legally and with minimal risk if Lenders strictly comply with the law and do not overreach 2013 Offit Kurman, P.A. All rights reserved. 2

3 Regulatory Background RESPA Section 8 Real Estate Settlement Procedures Act (RESPA) prohibits referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. 12 CFR (b) Employee exception An employer s payments to its own employees for referral activities is permitted under Section 8 Exception for services actually performed No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed Offit Kurman, P.A. All rights reserved. 3

4 Marketing Services Agreements Cannot be used to circumvent RESPA s prohibition on kickbacks No thing of value for referrals No exclusivity No direct marketing Payment based on fair market value of services actually rendered Not on a per lead basis or based on referral potential 4

5 CFPB Stonebridge Title Services, Inc. Consent Order Stonebridge Independent Salespeople referred business to Stonebridge and received a percentage of title insurance premiums as a commission CFPB found these commission payments violated RESPA Section 8 Illegal kickbacks/referral fees to non-employees (independent contractors) payment for unearned fees (salespeople did not perform any title services for commission) CFPB states: [a]lthough Independent Salespeople received Form W-2s during this period, they were not employees Offit Kurman, P.A. All rights reserved. 5

6 MSA Enforcement Lighthouse Title $200,000 fine to title company regarding MSAs with brokers, etc. Lighthouse set MSA fees according to the number of loans referred Repeated payments "connected in any way with the volume or value of the business referred... [are] evidence that [the payments are] made pursuant to an agreement or understanding for the referral of business." 12 C.F.R (e). Valuation procedures are key Policies & procedures for termination/pricing adjustments Monitoring services is key Other payments to the realtor 2013 Offit Kurman, P.A. All rights reserved. 6

7 MSA Enforcement Cornerstone Mortgage HUD Audit Mortgage Company/Realtor MSAs Recommended HUD action against mortgage company and realtors Exclusivity clauses limit borrower choice 2013 Offit Kurman, P.A. All rights reserved. 7

8 Compliant MSAs Avoid direct marketing Avoid exclusivity Fair market value Fee adjustments 2013 Offit Kurman, P.A. All rights reserved. 8

9 Compliant MSAs Negotiation and review Third party due diligence Unlicensed origination activities Monthly monitoring Compliance v. production Evidence Compliance approval before accounting 2013 Offit Kurman, P.A. All rights reserved. 9

10 Monitoring MSAs Negotiation and review of Fair Market Value Regular auditing of services rendered Website screenshots, pictures of display racks, examples of open house flyers, etc. Procedures surrounding changes in payment Documentation of any payments outside of the MSA scheduled payments Carefully outline services in agreement 10

11 JOINT VENTURES Joint Venture Example: mortgage lender and title company form a mortgage brokerage Issue: sham relationships designed to mask payments for referrals/kick-back schemes Enforcement actions CFPB v. Borders & Borders Carter v. Wells Bowen 2013 Offit Kurman, P.A. All rights reserved. 11

12 HUD 10 Factor Test 1. Services 2. Staff 3. Initial capital/net worth 4. Business management 5. Employees 6. Internal functions 7. Contracted services 8. Payment to contracted third parties 9. Competing in market place 10. Referrals 2013 Offit Kurman, P.A. All rights reserved. 12

13 RESPA JV Compliance Remember impact on QM cap on points and fees if an affiliate RESPA exception for Affiliated Business Arrangements AfBa disclosure No required use Return on ownership interest 2013 Offit Kurman, P.A. All rights reserved. 13

14 Keys to Proper Formation Valid formation Valid change in ownership Valid termination Sharing of revenue must be limited to equity only Do not attempt to equate compensation to referrals Do not adjust based on referral levels 2013 Offit Kurman, P.A. All rights reserved. 14

15 Keys to Proper Formation Recognition that will have to accept risk of non-performing partners Recognition that agreement has to protect against RESPA violations by setting up protocols that make direct violations difficult Can still provide adequate incentives and use generic common protocols for business formation 2013 Offit Kurman, P.A. All rights reserved. 15

16 Keys to Formation Even with good operating agreements, need strong independent compliance review Must ensure that actions are consistent with agreements and that even if consistent are not being done in a manner to circumvent RESPA Recognition that you WILL be audited and should prepare as if happening tomorrow Offit Kurman, P.A. All rights reserved. 16

17 MARKETING RELATIONSHIPS 2013 Offit Kurman, P.A. All rights reserved. 17

18 Free Marketing for Referrals May Violate RESPA JPMorgan, Wells Fargo and Individual loan officer ordered to pay $37.5million by CFPB Title company purchasing, analyzing, and providing data on consumers and creating letters with the banks logos in return for title referrals 18

19 Joint Marketing Joint Marketing Open house flyers; sponsorship opportunities; website advertisements; preferred lender designations No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. RESPA Section 8(b) Must pay for your pro rata share of advertisement Section 8 permits [n]ormal promotional and education activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto. Compliance Controls TILA, MAPs, UDAAP, state requirements 2013 Offit Kurman, P.A. All rights reserved. 19

20 Preferred Lender Relationships Builder offering closing cost discounts to borrowers if they use a preferred lender Ensure that no thing of value is given to builder for offering this incentive Incentive must be given directly to consumer If affiliated business or JV, no thing of value other than returns on ownership interest 20

21 Office Space/Desk Rentals Fair market value for rental of space in the area Supporting documentation Licensing considerations may apply Clear signage Information security provisions in lease 21

22 BRANCH/CREDIT UNION PARTNERSHIPS 2013 Offit Kurman, P.A. All rights reserved. 22

23 What services will they provide? Will they be the LO of record on the loan? Are your investors ok with third party paper? RESPA considerations Must pay for actual services provided 23

24 Compensable Loan Origination Services a) Taking information from the borrower and filling out the application; (b) Analyzing the prospective borrower's income and debt and pre-qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford; (c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product; (d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process; (e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit); (f) Initiating/ordering requests for mortgage and other loan verifications; (g) Initiating/ordering appraisals; (h) Initiating/ordering inspections or engineering reports; (i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower; (j) Assisting the borrower in understanding and clearing credit problems; (k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed; (l) Ordering legal documents; (m) Determining whether the property was located in a flood zone or ordering such service; and (n) Participating in the loan closing. 24

25 Consider TRID As of August 1, 2015, certain activities are prohibited prior to Loan Estimate Disclosure and Intent to Proceed Payment/payment information for appraisals Requiring verification documents Will partner provide initial disclosures? 25

26 Partnership Disclosures Partner should provide disclosure Disclosure to consumer of business relationship with lender Payment for services Services provided Partner has not committed to extend credit 26

27 Partner Due Diligence Complaints Licensing BSA/AML LO Comp Annual review 27

28 Team Branding Is your company clearly and conspicuously displayed as the lender? Signature blocks Business cards Website reviews NMLS information Disclosures Guarantees 28

29 SOCIAL MEDIA 2013 Offit Kurman, P.A. All rights reserved. 29

30 Social Media Lenders can not ignore social media, but its risks are significant and difficult to navigate. Well thought out protocols, policies, and the proper use of compliance technologies can substantially diminish these risks 2013 Offit Kurman, P.A. All rights reserved. 30

31 Social Media UDAAP RESPA Prohibitions against fee splitting, kickbacks 3-day disclosures TILA 3-day disclosures triggering terms, clear & conspicuous, actually available terms ECOA/FHA Chilling effect Preferences Information Collection Notice of action 2013 Offit Kurman, P.A. All rights reserved. 31

32 Social Media FCRA Prescreening Recordkeeping requirements Prohibition on collecting medical information Risk Based Pricing & Notice to Home Loan Applicant GLBA Privacy Data Security 2013 Offit Kurman, P.A. All rights reserved. 32

33 Social Media Defamation/Lanham Act Trade Secrets/Copyright Safe Act Consumer Protection State Laws 2013 Offit Kurman, P.A. All rights reserved. 33

34 Social Media Compliance Clear policy of what has to be included/excluded in social media Social media employee training Written procedures for posting, reviewing and addressing social media Monitoring Compliance content review Searching for unauthorized use Liable unless outside scope of employment Corporate ownership of company websites 34

35 Social Media Compliance Managing third party relationships Customer testimonials 16 CFR 255.2(c) Advertisements presenting endorsements by what are represented, directly or by implication, to be actual consumers should utilize actual consumers in both the audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product 35

36 AMERISAVE No disclosures just through hyperlinks Targeted advertising should be sent only when product likely applies to majority of recipients Ensure that advertising describes who qualifies for scenario 2013 Offit Kurman, P.A. All rights reserved. 36

37 Banking Compliance Perspective Clear policy of what has to be included/excluded in social media Employee social media training Written procedures for posting, reviewing and addressing social media Reviewing content is critical no unauthorized/un-reviewed posts unless preapproved But how about unauthorized actions of rogue employees? Is it your responsibility? 2013 Offit Kurman, P.A. All rights reserved. 37

38 Banking Compliance The problem with claims in social media is that the post is there forever and once its up there is nothing to debate. If there is violation Lender has to pay While regulators may be open to the how can I stop this explanation in some cases, it will generally not excuse Lenders from liability to third parties unless the employee was acting outside the scope of employment 2013 Offit Kurman, P.A. All rights reserved. 38

39 NLRA Employer conduct that retaliates against employees for discussing terms, conditions, and other matters concerning employment with other employees Also prohibits rules that have the effect of chilling such conversations even if that is not the expressed intention In practice overall monitoring of social media may be ok if it involves employer s equipment or is generally available to the public However, employer needs very clearly delineated and extremely specific policies. Moreover, anything that provides subjective assessment is scrutinized and usually found unlawful 2013 Offit Kurman, P.A. All rights reserved. 39

40 NLRA May discover information you cannot use or that could give basis to other claims by Employee that otherwise might not exist What happens when learn information that you want to take action on but legally cannot (e.g. Queen of the Skies) Many good reasons not to monitor social media from employer perspective without extremely delineated lines and reasons and subjective standards will not be favored 2013 Offit Kurman, P.A. All rights reserved. 40

41 Solution Provide or support business related as opposed to personal pages where Employee can post business related messages Employer can monitor these more readily without typical concerns (although still need policy) Employer can utilize technology that stops the posts before they go up and automatically reviews Result: More control, fewer legal headaches, avoids the problem before it starts 2013 Offit Kurman, P.A. All rights reserved. 41

42 NonQM Loans If proper procedures are put in place NonQM Lending can be as safe if not safer than normal QM Lending and substantially more profitable 2013 Offit Kurman, P.A. All rights reserved. 42

43 Regulators E. Warren: The potential liability associated with writing non-qm loans is relatively small, and in good times, lenders can compensate for those possible losses with higher rates or fees R. Cordray: Nothing about their traditional lending model has changed, and they should continue to offer such mortgages to borrowers whom they evaluate as posing reasonable credit risk whether or not they meet the criteria to be classified as qualified mortgages 2013 Offit Kurman, P.A. All rights reserved. 43

44 What Is Required of Lenders Good Faith Belief that the Borrower Can Repay the Loan In reality this will be a default finding if there are problems with representations, steering, omissions

45 Ability to Repay Must be a reasonable and good faith determination Evidence demonstrating not in good faith/reasonable includes: Defaulted short time after consummation or after recast; Creditor used underwriting standards that have historically resulted in comparatively high levels of delinquency and default during adverse economic conditions; Creditor applied underwriting standards inconsistently or used underwriting standards different from those used for similar loans without reasonable justification; Creditor disregarded evidence that the underwriting standards it used are not effective at determining consumers' repayment ability; Creditor consciously disregarded evidence that the consumer may have insufficient income/assets Creditor disregarded evidence that the consumer would have the ability to repay only if the consumer subsequently refinanced the loan or sold the property securing the loan.

46 Third Party Opinion Key to success because it changes question from correctness to legitimate reliance Given the deference courts have afforded employers who have relied on legal advice, we find Delta's reliance constituted good faith as a matter of law. Baker v. Delta Airlines Inc. 6 F.3d 632, 645 (9th Cir. 1993)

47 Third Party Opinion The Court believes that the opinions given by Mr. Thoreson and Mr. Griswold were not correct, but the Court does find that a reasonable party, in Plaintiffs' position, given this advice of experts, would have a good faith belief such that the decision was substantially justified. Commercial Development Co. v. Abitibi- Consolidated Inc., 2008 WL (W.D.Wash )(emphasis added)

48 Residual Income At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-toincome ratio or residual income; and (8) credit history Offit Kurman, P.A. All rights reserved. 48

49 Residual Income Analysis Finally, the Bureau acknowledges arguments that residual income may be a better measure of repayment ability in the long run. A consumer with a relatively low household income may not be able to afford a 43 percent debt-to-income ratio because the remaining income, in absolute dollar terms, is too small to enable the consumer to cover his or her living expenses. Conversely, a consumer with a relatively high household income may be able to afford a higher debt ratio and still live comfortably on what is left over. Unfortunately, however, the Bureau lacks sufficient data, among other considerations, to mandate a bright-line rule based on residual income at this time. The Bureau expects to study residual income further in preparation for the five-year review of this rule required by the Dodd-Frank Act Offit Kurman, P.A. All rights reserved. 49

50 Improving origination Process Provide borrowers more practical information early on in process Empower borrowers to make more informed choices as opposed to being lead by the nose Don t ask or rely on loan officers to do this Utilize methods to provide supervision to negate he-said she said aspects of process 2013 Offit Kurman, P.A. All rights reserved. 50

51 Increased Documentation Currently if a borrower brings a claim 3 years later: No notes in file No documentation No loan officer 2013 Offit Kurman, P.A. All rights reserved. 51

52 Increased Documentation Puts lender in position of defending claims that LO: Put them in a different loan Did not explain the product Promised different terms Promised refinance Filled out papers that were signed blank Steered borrower No benefit to borrower 2013 Offit Kurman, P.A. All rights reserved. 52

53 Increased Documentation Undisputable documentation of Borrowers knowledge, understanding and consent to the terms and the loan Oversight to ensure no misrepresentations or omissions Sustainable documentation that is not selfserving or difficult to understand or reproduce 2013 Offit Kurman, P.A. All rights reserved. 53

54 Increased Documentation Technology Innovations that will create documentation of what was and was not said to borrower Use the borrowers own words as opposed to mere confirmations Timing get the information in the normal course and scope of the loan origination 2013 Offit Kurman, P.A. All rights reserved. 54

55 Thank You Ari Karen Principal, Offit Kurman Founder and CEO, Strategic Compliance Partners