DFI Interpretive Letter on Loan Modifications
Jillayne Schlicke on 03 13, 2009
DFI has released a first draft of an interpretive letter on loan modifications for Washington State.
DATE: March 10, 2009
FROM: Deborah Bortner, Director, Division of Consumer Services
RE: Loan Modification Services – License Required under the MBPA or CLA
QUESTION PRESENTED: Must loan modification service providers be licensed to offer services to Washington residents?
BRIEF ANSWER: Yes, under the Mortgage Broker Practices Act (MBPA), chapter 19.146 RCW, or Consumer Loan Act (CLA), chapter 31.04 RCW.
DISCUSSION: The Division has received many inquiries regarding the applicability of the MBPA or CLA to loan modification services. According to callers, individuals are communicating directly with borrowers and lenders in order to negotiate loan modifications. In most of the calls, the caller inquires as to what restrictions are applicable to loan modification services.
For purposes of this Interpretive Statement, “loan modification” means a change in one or more of the loan terms. Loan modifications includes forbearances, repayment plans, modifications of interest rates, loan term (length), loan type, capitalization of arrearages, and principal reduction.
Charging upfront fees are prohibited. If the loan mod doesn’t come together, a broker can ask for (I’m assuming it wouldn’t have been collected upfront) $300 though I’m not sure how they’d go about collecting it.
I’d like to see more interpretation about fees charged. Based on the craigslist ads that I’m seeing, loan modification salesmen are making upwards of $15,000 per month which is drawing in the predatory lenders like Realtors to free food at broker’s opens. I received a call yesterday from a loan originator with 28 years of experience with a Florida phone number. He said he’s here in Seattle now because our market is doing better than Florida. He heard that he has to be licensed to do loan mods so he called me for help in studying for the test. I recommended that he start by reading our state’s law, the Mortgage Broker Practices Act. He laughed and said there’s no way he’s going to read that law and can I just sell him the answers to the test. I explained that I understand Florida is the mortgage fraud headquarters of the world but up here in WA State, there are no test answers for sale. He said he was still not going to read the state law.
If DFI is looking for feedback on this interpretive letter, perhaps we could have Florida-migrating LOs originate loan mods from a holding cell in Olympia after they’ve passed their test so DFI examiners can observe them from behind a two way glass window for 90 days.
So it appears as though our state is going to interpret loan modifications as something other than “the practice of law.” That’s unfortunate. I would have hoped that “negotiating new terms of a legal contract” would have been defined as the practice of law, leading to loan modifications being done ONLY with the assistance of an attorney.
If our state is going to open this pandora’s box, the predatory loan mod salesmen will swarm into our state, putting us right back where we were during the bubble run up, with consumers unable to figure out who’s a good guy and who’s just in it for the fast and easy money. On the up side, this will mean more revenue flowing in to DFI to pay for more state examiners and auditors.
Here is what we can do at the disclosure level for homeowners:
1. Require that the homeowner be told, in writing, that they can obtain a FREE loan modification AT NO COST by working directly with their lender.
2. Require that the homeowner be told, in writing, that they can obtain FREE ASSISTANCE with their loan modification from FREE HUD-approved housing counseling agencies.
3. Require that the homeowner be told, in writing the entire breakdown of the fees charged including a breakdown of commission paid to the loan originator and that this commission is negotiable.
4. Require that any fee earned by the loan originator over and above the work performed be classified as an unearned fee under the tenants of RESPA Section 8 and subject to challenge.
5. Require that the loan originator disclose, in writing, that the homeowner should consult with an attorney prior to closing.
There are no questions on the loan originator exam on loan modifications. Consumer Loan Company LOs don’t even have to take the state test (though this will change soon.) There is nothing in the state laws with the exception of this draft letter, that addresses loan modifications. Perhaps we should require that loan originators receive formal education on how to modify loans. HUD-approved housing counselors have received this training. Attorneys know how to modify legal contracts. Maybe LOs have listened to a live podcast or conference call on how to do loan mods, but most of these are just sales-related training with very little substance. Any LO who says they’re experienced at doing loan mods is lying. No LO was doing these until mid 2008.
Today, homeowners who need a loan mod are better off hiring an attorney. Why? For less than what loan mod salesmen are charging, they receive legal counsel along with their loan mod. Constant reader KLK has taught me that when we only address the mortgage payment, we are typically only addressing half of a homeowner’s financial picture. These homeowners are typically strapped with consumer debt, too and may be better off talking with a Chapter 13 bankruptcy attorney. If the bankruptcy cramdown bill passes at the federal level, this is all the more reason to talk with an attorney instead of a loan mod salesman.
The state can only do so much. When the mortgage industry does a better job at self-regulating their cowboys, maybe I’ll change my mind. Loan modifications are seen as a way to make big money. What happens then, is that mortgage companies are going to attract people who care only about making big money. This is a repeat of the mistakes mortgage brokers made in the subprime lending heyday.
As a gentle parting reminder, let us all recall that loan modifications are redefaulting at a rate of 58% at the 6 month mark. Who are we really helping with a loan mod? The salesmen and the bank, but definitely not the homeowner. This begs the question: When is a loan mod in the client’s best interest compared to other options? These are the kind of questions LOs need help answering.
About the Author: Jillayne Schlicke
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19 Responses to “DFI Interpretive Letter on Loan Modifications”
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Jillayne, what impact do you think Obama’s loan modification program will have on the loan mod industry?
Here’s an idea… why not create a designation similar to LPO for those who want to be a Loan Mod Professional…where they have limited powers to do specific duties for the consumer. Like an LPO, it would take clock hours, training, insurance, etc. and they would be licensed with the State.
Because of the nature of the business, dealing with homeowners in distress, the Loan Mod person should have more training and responsibility.
Have you sent DFI a link to your post?
Hi Rhonda,
Regarding the loan modification part of President Obama’s Making Home Affordable program, it’s like a lottery. If a homeowner is lucky enough to have their loan held by Fannie or Freddie, they have a chance at a modified loan.
Most subprime loans are not held by F&F but are held by lender/servicers in pools of mortgage-backed securities.
Homeowners not winning the lottery are left working with banks where the bank’s participation is voluntary.
I do not believe that the program will have a widespread impact, nationwide. There are just far too many people facing default without stable, verifiable monthly income.
President Obama went on record as saying that he believes we “have to” try and help, and that the role of government is not to stand by and do nothing.”
He did not guarantee that everyone would receive a modified loan.
Good points, Jillayne. I’m still encouraging home owners who are in the “loan mod” camp to call who they make their mortgage payment to first.
Won’t DFI’s efforts stop out of state loan mod companies or at least cause them to be licensed (testing, background checks, revenue for the State….yadda yadda)
Listening to the most recent Mortgage Broker Commission podcast, it sounds like there was legislation proposed this session that addresses companies that want to “modify debt” for a fee and makes this only possible if the company is a non-profit.
We need to find this and take a look at it. DFI was not in favor of pushing this legislation forward at this time and wanted more time to review it.
John Long asked, “Which disclosures are needed for a loan mod?”
GFE
TIL?
Maybe not needed if the payment is just going down. However if the mortgage balance is increasing, these items may be required.
John asked about Fees
Why can’t an upfront fee be held in a trust account, with specific terms upon which it can be released?
Another member of the audience was asking DFI for more guidance on appropriate fees to charge for a loan mod.
Rhonda asks “Won’t DFI’s efforts stop out of state loan mod companies or at least cause them to be licensed (testing, background checks, revenue for the State….yadda yadda)”
Yes, provided they actually *know* that WA State has this requirement.
Look in your spam bin. Many loan mod companies are doing massive sales campaigns to get people signed up to sell-sell-sell loan mods and they’re saying “no state licensing required.”
Jillayne, would DFI be able to go after out of State companies/individuals who are not MBPA/CLA performing loan mods?
Rhonda, I’m going to paraphrase to make sure I understand you. Do you mean companies/individuals who are doing loan mods on property located in WA State….
Not licensed under the MBPA (Mortgage Broker Practices Act)
Not licensed under the CLA (Consumer Loan Act)
and not exempt from licensing (examples of exemptions include licensed attorneys, non profits, banks, etc.)
With limited resources at the state level, I believe DFI would likely investigate companies IF they received consumer or industry complaints.
In past cases of blatant mortgage fraud and egregious predatory lending, at times, DFI received NO COMPLAINTS from anyone.
The limited resources at DFI is a concern…but there are fewer LO’s to regulate…maybe the loan mod’s will be new meat…it should save a few State jobs at DFI.
By the time consumer complaints trickle in…the damage is done.
I’d love it if some sort of campaign could be done to let everyone know when this regulation goes into effect… at the very least for consumers so they know, as you mention in your post, they don’t need to pay for this.
RE: Loan mods for sliced and diced loans – from a WSJ article yesterday, I think they are still working on that. Investors are pushing back hard on what happens with the 2nds. I don’t think investors are speaking with one voice, either. Depending on what side of the bet you are on, you could win or you could lose.
There are definitely going to be losers, and I think some people are starting to realize it’s likely to be them.
Jillayne, it doesn’t surprise me about predatory loan mod salesmen. Anyone who has been around this business awhile can see the progression of where the car salesmen go:
First it was subprime, then when that dried up, the jumped on the Option ARM band wagon. When the Option ARMs dried up, then went to selling condotels. When condotels didn’t pan out, money merge accounts were hot. Now that MMAs aren’t doing anything, now everyone is modifying loans. Meanwhile, all the real professional originators are stuck trying to clean up the trail of destruction and continue to operate under day late and dollar short legislation from the politicians.
Until the real estate industry as a whole (both banks and Realtors) raises the standards of across the board, we will continue to have these problems. These business could survive and do very well without 80-85% of the people in it.
The loan modification was dead on arrival.
I am surprised by how much has happened this year. The value of property, not just price, has dropped like a rock. With all that has gone on in the housing industry who will want to get involved going forward?
The loan modification is just another example of how investors have turned a blind eye to the asset. You have appraisals today that are based on today’s comparable sales, and yet what I believe is that banks, the servicers of loans, are holding tons of unwanted assets on the books.
The term is unwanted assets. People have sent them back to the bank literally. Only short sales, that have gotten much harder to do, show up on the appraisal.
Now there is the question of the seconds. Those are tricky little documents, they have to be paid.
Loan modifications from the bank have been suspect. It seems to me lenders want to continue to do business as usual, and I don’t think they should be allowed to get away with it.
Jillayne,
All states should tighten their disclosure laws to protect consumers and your suggestions look very good. As is well-known today a swarm of so-called loan mod experts are descending all over the country trying to take advantage of the dire mortgage foreclosure situation. A good example is this person your describe in the post.
I was trying to help a former client, who may qualify for a loan mod, under the Obama plan (nope, it’s not Fannie or Freddie)
The lender has a big warning upfront to steer borrowers away from loan mod people, with numbers to call non-profit counselors.
Checked a few other lenders and found the same warning.
That said, I would not trust the bank to operate in the borrower’s best interest, but rather, in their own best interest.
Best to get some kind of outside help.
Everyone is new at this, and for those LO’s that genuinely want to help their clients (AND stay in business) the waters are still very uncertain.
Thankfully, at least for now, I can help most of my clients with an actual refinance to better terms.
Roger, when you try to help your clients with a loan mod, how are you compensated?
“which is drawing in the predatory lenders like Realtors to free food at broker’s opens”
I’m surprised that RE Brokers are still putting on the feedback for agents. Are we talking quality hor’dourves (cocktail weenies with bbq sauce)?, or just chex mix?
[...] must be significant money in this industry to allow these companies to employ these solicitors. I hope our State is agressive in regulating the loan mod industry to protect home owners form predatory [...]
File Under Epic Failure for “Hope Now”….
“As it stands now, we’ve only gotten 752 applications,” Federal Housing Authority spokesman Brian Sullivan told CNN. “And only insured one loan. Needless to say, the program isn’t working terribly well.”
Amazingly, Congress had made available $300 billion for the loans, anticipating as many as 400,000 families would benefit from the program.
Amazing.
The media should definitely keep track of how many people are being helped by the Obama Administration’s “making home affordable” program.