We’re halfway through October. Ever wonder why, or did it cross your mind, why the name “October,” the actual 10th month, is Oct., which signifies “8”? And (Nov)ember is the 9th, and December, which is the 12th month, is “Dec” which is 10? Here you go – a short video that is good for kids to watch. Or adults to watch and then appear smart to their kids – always a challenge for me.
This week the proverbial mailbag was filled with discussion of the PHH v. CFPB ruling in the appeals court.
Steve Lovejoy of Shumaker Williams, P.C., sent, “The CFPB responds that nothing, including the 1997 letter, gave regulated entities such as PHH a reason to rely on HUD’s interpretation…. We therefore find this particular CFPB argument deeply unsettling in a Nation built on the Rule of Law. When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed. (PHH Corporation v. CFPB, Slip Op @ pg.87, D.C. Cir. Ct. App., October 11, 2016.)
K&L Gates sent out, “This week the D.C. Circuit has held that a bona fide payment by one settlement service provider to another does not violate Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) if the payment is reasonably related to the market value of the goods, services, or facilities provided. We think the implications for the consumer financial industry are limited. Except for the decision regarding PHH and RESPA, no previous decision or rule made by the CFPB was overturned or impacted by the decision. The Director’s authority to act in the future was not impacted in any way nor did the court change the way the CFPB is funded. It still gets its funding through the Fed and not directly from Congress.
“The next President will be able to replace Director Richard Cordray once they take office but we think that is unlikely if Hillary Clinton is elected. We think Donald Trump might fire Cordray if he wins the election but we think the chances of a Trump victory are remote. Furthermore, the decision probably hurts legislative efforts to change the CFPB’s structure since the CFPB’s defenders can now argue that there is additional oversight over the CFPB and more checks and balances than existed prior to the ruling. The decision plus the recent WFC news makes it virtually certain, in our view, that there will be legislative changes to CFPB over the next two years.”
Attorney Brian Levy with Katten & Temple opined, “While the Constitutional issues in the PHH case are kind of fun for lawyers to debate, outside of your dutiful readers, it’s hard to imagine many Americans rising up against an oppressive government over a mere RESPA issue. Yet, the 3 judge panel on the DC Circuit made an impassioned case about how not only does the CFPB’s unaccountable structure violate the basic foundations of our governmental system, but that it also acted with disregard for fundamental principles such as fair notice and the rule of law. In fact, they even called the CFPB’s position that no statute of limitations applied to their administrative actions ‘absurd.’ In a footnote they basically said that Cordray was a good guy and this wasn’t about him personally, but it was an unmistakable dress down of the agency and its actions. The court cured the structural flaw, however, by declaring that the CFPB Director is now removable by the President at will.
“Meanwhile, the court also got into the meat and potatoes of RESPA and the 8 (c)(2) services rendered exception to Section 8(a)’s referral fee prohibition, dealing a strong rebuke to Director Cordray’s interpretations. As many will recall, Cordray had claimed in his administrative appeal decision against PHH that 8 (c)(2) was not a safe harbor and that use of the services rendered exception also required the absence of a referral agreement. In other words, Cordray said that it’s not enough to pay reasonable value (and make sure services are delivered), but you must also prove that no referral agreement exists between the parties. Simply put, the court disagreed with Cordray, saying that CFPB’s interpretation is inconsistent with the plain meaning of RESPA and as long as you pay no more than reasonable value, RESPA is clear that 8(c)(2) is a safe harbor.
“So what now? First, congratulate all of PHH’s lawyers and the trade group representatives and their lawyers for a job well done. Those lawyers, however, will have more work ahead, however, as it seems likely that CFPB will seek to appeal one or more aspect of the decision either to the entire DC Circuit or to the US Supreme Court. Uncertainty will continue until that is finally resolved, so we should all keep an eye on developments in the case as it continues. Nevertheless, while not exactly nationally enforceable precedent (we need SCOTUS to weigh in for that), the DC Circuit decision does offer strong support for the industry’s positions that should temper future CFPB enforcement using the overturned interpretations (no statute of limitations and the 8 (c)(2) interpretation specifically).
“That said, the court also reinforced the RESPA requirement to not pay more than reasonable value in purchasing goods and services from referral sources (they sent the case back to the CFPB to make sure that PHH did not pay more than reasonable value). Not paying more than reasonable value isn’t new advice, so industry players would be wise to review operations to confirm that in all paid relationships with referral sources (such as MSAs, office leases, joint or web-marketing, sponsorships and the like) that you are only paying reasonable value and getting what you pay for.”
Scott Olson, the Executive Director of the CHLA, observed, “Rob – good summary Wednesday of the court ruling on the CFPB-PHH case. CHLA is encouraged by the ruling in terms of increasing accountability regarding the CFPB’s governing structure. But the other issue you highlighted on the PHH penalty is also critical – an issue that CHLA has been pressing the CFPB for some time in letters and other forums. And that is the need for more balanced protections regarding the potential for CFPB enforcement actions against small IMBs.
“Almost all groups have been calling for more specific CFPB guidance on TRID and other mortgage rules. But CHLA has also been calling for a policy where CFPB gives small IMBs a chance to correct compliance problems when identified – before the CFPB takes enforcement action. Large banks have economies of scale and legions of lawyers and lobbyists to decipher the details of CFPB compliance complexities (and small banks are exempt from CFPB primary enforcement). Thus, it is small IMBs that disproportionately shoulder the financial and other risks of divining how CFPB interprets a broad range of mortgage rules.”
Scott’s note wrapped up with, “The ultimate goal of mortgage rules is compliance, and giving IMBs the opportunity to fix compliance problems before the CFPB assesses fines or takes enforcement action would still achieve that goal – while mitigating the risk IMBs get something wrong while acting in good faith. Hopefully Wednesday’s court decision will increase the focus on this important issue.”
Switching gears, I received this note from Dave Stevens, President and CEO of the Mortgage Bankers Association, on interest rates, production, and change. “Rob, when I first started my career in 1983 as a loan representative for a savings and loan, fixed rate mortgages were 16%. Adjustable rate mortgages were just being introduced. They came with different names because the market had not established common terms. ALM, VRM, GPARM, ARM and more. They were offered with different indexes and different annual and life cap structures making the creation of a secondary market impossible.
“Back then, instead of a real secondary market, lenders would take their accumulated portfolios of relatively small batches of originated mortgages and their secondary teams would send out term sheets to potential buyers who would then come in and actually go through the individual loan packages to review them and pull out what they would buy and what they would not.
“It was antiquated and non-uniform, and left significant market exposure to lenders if they could not ultimately sell their ‘pipelines.’ Nevertheless, in a world of high rates and temporary buy downs, short term ARMs made the market. My first ARM product was a 6-month adjustable rate at 10.5% and 1.5 points. It was the hot product for a while.
“Today, our industry, particularly those who have shorter histories or memories, is dependent on this sub 4% world. Rob, you and I both remember thinking that 7% was the lowest rates would ever go…many years ago. We have built a national infrastructure of lending that is rate-dependent, with some companies originating north of 70% of their business in refinance.
“The reasoning is simple. Any increase now, even something in the 25-50bps range, will result in sharp reduction in refinance activity. MBA forecasts that 2017 will see an average 30-year interest rate of 4.2% vs the 2016 average today of 3.6%. As a result, we forecast mortgage origination volume to drop to $1.5 trillion from $1.8 trillion in 2016.
“The well-known simple business book, ‘Who Moved My Cheese’ highlights the long term risk of innovation shortfalls. As I look around the country, I pay close attention to companies focused on, and succeeding, in the purchase market vs. refinance. While refinancing can bring short term revenue gains, this song will certainly end and when it does, those that have established firmer access to point of sale either through personal, individual relationship-building strategies with realtors or builders, or have created market disruption technologies or processes to get to prospective home buyers before they engage with the home purchase process, will have a first to market advantage when the rate shift occurs.
“I was asked recently about how I might value a potential acquisition of a branch of LOs and their manager. I suggested that the refinancing volume should be eliminated or reduced by a significant percentage in the valuation, and the acquirer should solely look at the aggregate purchase volume. I would carefully review each LO’s purchase production to review the retention priorities should a deal be made.
“Markets shift, and even if rates rise, we are in for a decade-long growth in purchase volume. MBA forecasts that mortgage purchase volume will grow during the years of 2016, 2017, 2018 from $981 billion, to $1.085 trillion to $1145 trillion. If you are a long term purchase mortgage lender, you have a strong positive environment ahead.
“The good news is that if you are not, there are many tools you can leverage from technology, training, recruiting, and more to examine your business, and strategically focus on what changes need to be made.
“On a bit of a self-serving front, MBA can help with that. From our Peer Group Roundtables with STRATMOR, which allow you to benchmark your company against others, to our education programs and recruiting efforts targeted to younger talent, to learning about technology innovations, contact MBA first to see what options are available. There are many MBA Associate Members as well who are eager to help.
“But regardless, one day soon, when rates do rise, there will be no cheese at the end of the maze for those that simply chose not to explore – strategize and reposition. And without another Brexit or QE, the purchase market is an all but guaranteed winner. As my mentor in the business always said to me, ‘Worry most when things are best,’ and when making a change, ‘do it now.’” Thanks Dave!
Talking about the future, a decent chunk of home buyers is young. Kristin Messerli wrote, “The majority of homebuyers, especially Millennials, do extensive research online and on their mobile devices before making any purchase, particularly for a purchase as large as a home. According to the National Association of Realtors, 89% of new home shoppers use a mobile search engine at the onset and throughout their research. Secondly, homebuyers today expect convenience in every purchase. A PWC study identified that 1 out of 2 homebuyers want to know how apps can assist them in streamlining the mortgage process. (That statistic is undoubtedly higher for Millennials).
“Lastly, and most importantly, young and diverse homebuyers are less trusting of the financial services industry. Data collected from Facebook users indicates over 60% of Millennials would like to trust their bank, but more than a third would describe them as ‘closer to a used car salesman or aggressor than a friend.’ Building a reputation around trust, convenience, and expertise is key to reaching Millennials.
“That’s why my team and I at Cultural Outreach have compiled an extensive report on the top mobile apps for homebuyers, so that professionals have an easy resource to provide customers and referral partners. Loan officers can gain a competitive edge as a guide in the buying process by sharing digital resources that will improve efficiency, convenience and service for their consumers.”
Halloween: Tis the season for pranks, costumes, and ghosts. This short video of a clever prank is pretty funny. (The reactions improve as you go along.)
(Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)
- Dec. 31: Rates, the Fed, world economies, affordability, and the shutdown – all tied together - December 31, 2018
- Dec. 29: FEMA reverses flood ruling; cybersecurity notes; observations on general housing trends - December 29, 2018
- Dec. 28: Doc automation product; FHA & VA changes around our biz; Agency deals continue to share risk - December 28, 2018