About Jillayne Schlicke

Educator in the field of mortgage lending and real estate. Follow me on Google+

13 Reasons Why 30% of LOs Fail the National Loan Originator Exam

The first time “pass” rate of the national loan originator exam has fallen to 69 percent.  This is an indication that the test is not too easy.  A high pass rate means an exam is too easy.  A low pass rate means an exam is too hard.  The numbers that tell a different story are the repeat test takers.  Test candidates who fail the LO exam the first time and retake the exam pass the exam only 44 percent of the time.  The SAFE Mortgage Licensing Act is working the way it was intended.

This blog post is for loan originators seeking help who are trying to pass the test the second, or third time.  Test candidates must wait 30 days between tests and if they fail after their third attempt, they have to wait 6 months before taking the test again.  I know it sounds unfair, but in all seriousness, not everyone is going to be able to pass this exam. The six month cooling off time is like a forced reflection period for a candidate to either get serious in addressing their repeated fails or get serious about studying.  The SAFE Mortgage Licensing Act of 2008 is only the beginning.  Over the next decade loan originators will slowly transform from being less like retail salespeople and more like professionals. The loan originator exam will never be as easy as it was in 2010.

I teach the SAFE Pre-Licensing course for new to newer loan originators which is a 20 hour course. I also teach an exam prep course for experienced loan originators and have had the opportunity to interact with hundreds of loan originator students. In this blog post I’d like to share some reasons why folks are not passing the exam so those who need help can identify their challenges and meet or reset their goals.  The following reasons are numbered for conversation sake and do not appear in any particular order.

1. One reason why people are not passing the loan originator exam is the same reason why people all over the world don’t pass comprehensive exams: Not enough studying. A 20 Hour pre-licensing course is definitely not enough time to teach and learn all the complex knowledge required to pass the national LO exam.  20 hours could be three, 7-hour days or two, 10-hour days.  Take a look at the test content outline.  There’s NO WAY an average human, who has never been in the mortgage lending industry, is going to be able to learn let alone understand, memorize and apply this content with only 20 hours of education.  One reason the number of classroom hours was set at 20 may have been because during 2010 there were a huge number of experienced LOs who worked at non-depository lenders who needed this course. Two days is plenty of time to spend with an experienced originator but not someone brand new.  In the future, expect the pre-licensing hours to be expanded to a full week of education. Until then, some students will have to spend way more time outside of the classroom studying on their own.

NMLS Resource Center2. “There’s no good study material available”
NMLS-approved course providers are not allowed to take the test only for the purpose of telling everyone what’s on the test.  In fact, we agree to NOT do this.  If we’re caught doing this we lose our ability to teach NMLS approved courses! If you think about it, if it were that easy to cheat on the exam then why bother with the SAFE Act? Why not just give anyone who wants a license a license and not test them.  The Nationwide Mortgage Licensing System (NMLS) does not provide a study guide book. Instead they encourage test takers to seek out study material from course providers….however, slow down a bit and you’ll see right inside the test content outline, NMLS TELLS YOU WHERE THE TEST QUESTIONS COME FROM. Look at page 3 of this pdf.  Those who are seeking good study material don’t have to pay to get it.  It’s all available for free. However, that means you’ll have to actually read it. More about reading soon.

3. Wanting the answers/not wanting to study
Loan originators ask their compliance person for the answer when they have a question about Fannie Mae, RESPA, disclosure requirements, etc.  So in attacking this exam, LOs expect to call a course provider and have that course provider hand them a set of 100 questions that will be on the exam. And by the way, anyone who claims to “have THE 100 questions you MUST know” is probably wrong. Any list of questions floating around out there will eventually make their way to NMLS and I’m sure they’ll pull those questions. Okay, so maybe you don’t expect the answers but you expect someone to sell you a book that tells you what will be on the exam.  That book doesn’t exist either.  What about a book that summarizes the test content outline?  Yes there are books available and I think those books would be very helpful for some folks but no book will tell you the exact test questions you’re going to get! Relying only on a book is a mistake.

4. “I know the material, I just can’t pass the test.”
It’s possible you don’t know the material. Re-read numbers 1-3. Or perhaps you have test anxiety.

5. Test Anxiety
I  have met several LOs who are have a high degree of test anxiety that goes way beyond normal nervousness.  Yes, passing the test is important. In their mind, people with high test anxiety go from “not passing” to “living in a van down by the river” in one heartbeat.  Test candidates get themselves all worked up so they can’t eat, sleep, think, or do anything let alone actually learn and understand the test content.  There’s lots of tips and ideas that have been written about dealing with test anxiety and even a little self-quiz you can take here.  One thing the experts agree on is that a person with high test anxiety isn’t going to be able to learn much while studying.  If you want to pass the LO exam, you must deal with your anxiety first and foremost before taking any exam prep classes.  There is no time in anyone’s classroom to give personalized psychological counseling.  Besides, most of the instructors teaching classes whether they’re live or online specialize in mortgage lending not test anxiety. Your challenge is different. Know thyself….pass the test.  Maybe your anxiety comes from not wanting to be honest with yourself about a possible learning disability.

6. Maybe you have an undiagnosed learning disability.  As I’ve mentioned in other articles, back in the 1970s there were no para-educators available to follow kids around giving rambuncious kids extra support. Instead students survived in other ways. Humans listen and talk at a much faster and higher rate than we read and write.  Some LOs are high functioning talkers but low functioning readers.  Some people are dyslexic or have other bona fide learning disabilities that they know about but don’t want to deal with the stigma associated with being labeled.  Well if you want to pass the LO test this might be that point in your life where you finally are going to have to come out of the closet and get some help.  Repeated on purpose: Most of the instructors teaching classes whether they’re live or online specialize in mortgage lending and not learning disabilities. Ask your primary care physician for a referral to a doctor or counselor who specializes in diagnosing learning disabilities in adults.  The Nationwide Mortgage Licensing System will make reasonable accomodations for people with documented learning disabilities.  See page 14 of the MLO Testing Handbook for more details.

7. Subprime LOs who fell out of the industry during 2008 and are trying to re-enter the business are having a very, very hard time passing this test.  The main reason is because they think they already know how to originate and don’t want to spend the time studying or don’t think they have to study so they repeatedly fail the test. Anyone who entered the industry around 2002, left the industry in 2007 or 2008 and only originated subprime received very little compliance training if any. 2011 is a radically different world compared with 2007. If you still think stated income loans should come back, if you still believe that a pay option ARM is “the right product for the right person” and if you think it’s unfair that people can’t use seller downpayment assistance programs please do not re-enter the industry.

8. “The test contains trick questions!”
Actually, the test doesn’t have any trick questions.  Test writers try very hard NOT to write trick questions. The reason the test question sound tricky is because LOs are not use to looking up answers and reading the statute.  Instead they ask their boss or the compliance person, their processor or the person sitting next to them for the answer and move on.  People use language differently in different parts of the U.S.  Teaching a class in Oklahoma or Idaho is vastly different compared with teaching in Seattle or Virginia.  Test writers can’t use spoken language and coloquialisms from different parts of the U.S. when writing test questions for an exam to be delivered in all 50 states. The only fair way to write test questions is to copy and paste directly from the law.  That’s why the test questions sound and look “tricky” but really the trick is on you. If LOs would simply study directly from the law, the test questions would look very, very familiar. Re-read number 2.

9. You’re ESL
English language learners are my best students. Why? Because they are typically more emotionally mature, know good and well that they have to listen, ask lots of questions, and study over and over again to pass this test.  ESL LOs…you WILL pass the test. Read more here.

10. The test has too many “situational” questions
So you know RESPA. You know TILA.  You’re scoring high on all your practice exams but the test isn’t going to be as easy as just knowing that you have to send out early disclosures within 3 days of the application.  Instead the test will contain situational questions that will require you to understand how and also why TILA and RESPA interact with each other. This requires you to look at a test question and understand what information you DON’T need and cast it aside. Only then will you be able to understand what content the test writer is testing you on.  This means memorizing test questions is a bad way to study. Instead you’re better off studying the laws and rules that govern mortgage lending.  Mortgage loan origination is all situational. These are highly appropriate questions for the exam and I hope we see more in the future.

11. Part Timers
The national LO test sets a bar and asks people who want to originate to show proof of knowledge of a body of information. Loan origination is no longer a sales job. It’s transforming into a profession. It’s really hard to be a part time doctor, lawyer, engineer, dentist, CPA unless that person is entering semi-retirement. The knowledge, skill set, and industry changes are too wide and deep and the consequences of screwing up are too high.  Welcome to mortgage lending in 2011.  You must be on your game full time or no one will want to hire you. And those companies that do hire part timers are going to have huge liability issues supervising you in 2011 and beyond.  Commit to origination as a profession. Now start over and re-read items 1-3. Part timers have a high opinion of their knowledge of mortgage lending and are sometimes too proud to want to hear that they need more basic education on the entire mortgage lending process.

12. Lack of Basic Education
The SAFE Mortgage Licensing Act does not require a high school diploma or equivalent to become a licensed loan originator. Instead, those without a diploma simply must have proof of three years of experience in the mortgage lending industry.  Subsequently, the national LO exam will be that barrier to entry for folks who may have a learning disability or folks who may not have the ability to think, reason, and understand above a 9th grade level. Some of the math questions on the exam will require a basic understanding of 9th grade algebra. Some of the questions will require the ability to understand how two federal laws relate to each other and to the consumer.  Some people only have the ability to understand one federal law at a time.  Mortgage loan origination today requires the ability to multi-think all day long.  My recommendation: Finish high school first.  The discipline required to obtain a GED will be good practice for studying for the LO exam.

13. Learning Style Not Matched with Study Choice
Visual, auditory, tactile, whole body, emotional…These are all learning styles and passing the test means knowing how you best learn. Learning requires understanding. If you can teach another person something, this is a good sign that you know that concept and will be able to select the correct answer on an exam.  Some people have to see pictures. Other students need to hear the content.  Sometimes instructors tell stories about legal cases. Stories evoke emotion which triggers long term memory.  Sometimes students learn best if they get their whole body involved in the learning process. Everyone is different. Choose a course provider that understands learning styles and find one that matches your particular style.  In my experience, most students have a mixed style so find an instructor/course provider that mixes it up for you. One student had me on the phone grilling me with questions about my course for at least 15 minutes. We figured out that we’d be a good match for each other. She attended my course and passed the test the next day.  Don’t be afraid to call course providers and ask lots of questions.

Every test candidate is different. Some people listen at a higher/faster rate than they can read and write. Some people need to simply read through 400 sample test questions and that’s all they’ll need.  Some people have undiagnosed learning disabilities.  If you’ve taken the LO exam and failed, re-evaluate your learning style, the time you’ve spent studying and any of these other ideas and try again.  If you still cannot pass the exam ask yourself how much you love the mortgage lending industry because there are other positions available in lending that do not require an LO license.  And remember, you can always go work at a depository bank.  Bank LOs do not have to pass the exam…..yet.  Someday they will.

New WA State Short Sale Seller Advisory and Licensee Guidance Bulletins

The Real Estate Division of the Washington State Department of Licensing and the Department of Financial Institutions have issued two bulletins about short sales. The DOL  Short Sale Advisory is for home sellers but really should be for both sellers AND their Realtors/real estate brokers.  DFI’s companion advisory is titled “Short Sale Guidance for Licensees” and contains many Q&As for both loan modification and short sale negotiation services. 

The DOL Seller Advisory contains basic education about short sales, the deficiency, “walking away” by letting the home go into foreclosure, options for homeowners in financial distress, warnings about predatory loan mod firms and other scams, and where to go for free help. The DOL Advisory also offers a signature page for the seller. There’s not a place for the real estate listing broker to sign the DOL Advisory.  I’d also like to see the Advisory offered in different languages. From the Advisory:

“FIRST, Understand that a Short Sale May not Discharge the Debt. You should know whether you will still owe your lender money (a deficiency) after the short sale. You should know this BEFORE you close the sale of your home. Even if a lender agrees to a short sale, the lender and any junior lien holders, may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you. For example, a lender may accept the short sale purchase price to “release the lien

Former Loan Originator Eliza Bautista Finally Arrested in Seattle

Liza Bautista worked for a mortgage broker with a strong client base inside her Christian church in Tukwila. After successfully closing several prime loans for folk with A-paper credit, she targeted consumers who were turned down by lenders and created two sets of loan documents.  She submitted the credit history and identity of her prime, A paper clients to the lender funding the loan.  When it was time to sign papers, she forged her A paper client’s names on the loan documents and sent everything in for funding.  For the poor credit clients, she hand carried a second set of documents to be signed and then made a special offer to personally hand carry their mortgage payment to the lender each month.  (Note to consumers, don’t ever agree to this.) Of course, the payments never made it to the bank. Liza kept the money and subsequently, the lender started to foreclose on the A-paper owners, whose name appeared on title as the owners of record. When the A-paper clients were finally contacted by the lender and claimed they did not own said house, Liza started running out of places to hide.  The poor credit clients who were thrilled to be homeowners were obviously upset that their name were not on the title to the home and they were evicted after foreclosure.

From King 5 News:

Eliza Bautista landed herself in handcuffs…four years after the KING 5 Investigators exposed a scheme she orchestrated where she sold homes, loans and promises that were bogus to naïve home buyers.
Mary Pelayo of Bellevue was one of Bautista’s victims in 2006. She was astounded when KING 5 told her that her former mortgage broker had been arrested by federal agents.

“I’m shocked. I would never have thought this day would come. We gave up hope. We thought she got away with it,” said Pelayo.  “I hope she goes away for a long time and has a long time to think about all the hurt that she put our families through. Not just mine but all the other families involved in this.”

Four years ago, Pelayo was featured in a KING 5 News story which showed that the home she thought she and her family had purchased in Shoreline actually wasn’t theirs at all. Three months after moving in, the Pelayos had to move out. “We lived in this house for over three months. We thought this was our home. We started fixing it up. We put a lot of money into it (and) a lot of work. And then to find out it’s not ours!” Pelayo told us.

Unbeknownst to them, their mortgage broker, a polished Eliza Bautista, had secretly stolen another client’s social security number and good credit scores. Bautista used that information to buy a home for the Pelayos, who had shaky credit.

KING 5 found Bautista had done this several times with other unsuspecting clients. After the KING 5 Investigation aired, the FBI and the U.S. Attorney’s office took on the case.

Liza Bautista faces a maximum of 20 years in prison if convicted of the mail and wire fraud charges. Her trial is scheduled to begin in October.

“Feds to local mortgage originator Shawn Portmann: We want our money”

From the Seattle PI:

Alleging a long-running fraud involving a cash-packed safe and a garbage bag stuffed with money, federal prosecutors have asked that a mortgage broker be forced to hand over $102,000 to the government…
Since June 2009, Lord argued, investigators came to believe “that Portmann and two other principals at (Pierce Commercial Bank) Home Loans had devised a scheme involving … materially false representations to induce financial institutions to fund and/or purchase loans.”

Portmann was the loan officer on 5,253 loans, amounting to nearly $1 billion in lent money and about 46 percent of the home loans issued by the bank, the federal prosecutor told the court. Federal investigators contend about half of those loans were obtained through fraud.

In addition allegations that he falsified application information, Portmann is accused of drawing cashier’s checks from his personal bank accounts to show that would-be loan recipients could pay their debts. The checks were printed, but the funds were quickly returned to Portmann’s accounts, Lord told the court.

Federal investigators claim 85 checks totaling about $899,000 were cut from the account between 2006 and 2009, according to the July 30 court filing. For securing the loans, Portmann was paid at least $813,000 in premiums from 2006 to 2008.

Speaking with IRS and FBI agents earlier this year, Portmann’s personal assistant said she withdrew about $500,000 from Portmann’s savings account and deposited the cash in a safe at his home, according to the civil complaint. Another person allegedly involved in the scheme turned over a large garbage bag filled with $102,000 in cash, telling investigators that Portmann had given him a backpack in late January or early February containing $100,000 in bundled $100 bills.”

An avid Rain City Guide reader tipped me off to this story. Thanks also to the PI for the update. My students in the south end ask me about this case every week.

Golf Savings Bank Merges with Sterling Savings Bank

I just received this email from one of my students, a Golf Savings employee:

There have been some exciting changes at Golf Savings Bank. I wanted to take a few moments and give you a brief update on what those changes are and what will be happening over the next few months.
On August 1, 2010, Golf Savings Bank merged with and into Sterling Savings Bank, although we have been sister companies for the last several years. I am excited about this change. We now have access to over 170 bank locations throughout the Northwest, in Washington, Oregon, Idaho, Montana and California including our existing bank office located in Mountlake Terrace.
So who is Sterling Savings Bank? Sterling is one of the largest regional community banks in the western United States, headquartered in Spokane. Since opening its doors in 1983, the bank has grown to over $10 billion in assets and has over 2,400 employees. Sterling offers a wide array of products and services for personal and business customers.
So what’s next? There will be a number of changes occurring over the coming months. On or about September 1, 2010 you will begin to see our signs changing over to the Sterling Savings Bank name.  You may see information from both Sterling and Golf during this time as we work through the transition.
While we have a new name, you will continue to see the same great people you have become used to working with at Golf Savings Bank.

Jillayne here. I’m not so sure “sister companies” is accurate. I always thought Sterling was the parent and Golf, it’s adopted child.  Here’s a link to the Golf press release.

Many people in the mortgage lending industry in the greater Seattle area are familiar with Golf, which started as Lynnwood Mortgage Company with a strong foothold in South Snohomish County and added depository banking later.  This merge seems to be more about helping Sterling raise capital. It sounds like Sterling is 90 percent to its goal of raising needed capital.

Warburg Pincus and THL agreed in May to invest a combined $278 million, for a roughly 40% stake in the bank, bringing the total amount of capital to be raised to at least $720 million. Sterling spokeswoman Cara Coon declined to comment, citing the quiet period around the placement. The company said in its second-quarter earnings release that the “recapitalization process has been challenging and complex.”

“Although there can be no assurance of success, we are leveraging our resources in an effort to bring the recapitalization to a successful conclusion,” it said.  The company posted a net loss of $53.8 million, or $1.12 a share, in the latest quarter, compared with a loss of $29.5 million, or 65 cents a share, in the 2009 quarter.

“We sold a significant number of nonperforming loans as we worked to rebuild and strengthen our balance sheet,” Sterling said.

Golf seems to be doing great on the retail origination side, having recruited many loan origination teams from competitors over the past 18 months.  It will be interesting to see how the two companies merge management teams along with balancing new investor oversights, while keeping the very productive Golf retail origination folks and their customers, Realtors, and builders happy.

Congratulations, Golf and Sterling.  Let’s hope this merger results in a stronger, financially healthy regional bank and mortgage bank.

19 Washington State Lenders Lose FHA Approval

Today HUD released it’s Administrative Actions from the Mortgagee Review Board. Read the Federal Register PDF here.  There were 905 lenders that failed to meet requirements for HUD’s annual recertification for FHA approval.  The Mortgagee Review Board voted to immediately withdraw FHA approval for a period of one year for each of the 905 lenders.  “The Board took this action because the lenders were not in compliance with the Department’s annual recertification requirements.”

Granted, some of the lenders on this list are no longer in business such as MILA or were taken over by other banks like Washington Mutual. Yet 905 is quite a high number and some of the names on the list surprised me. Out of the 905 here are the banks, lenders, or brokers from Washington State:

Bank of Clark County, Vancouver
Callycorp Financial, Vancouver
Capstone, Inc., Vancouver
Compass Mortgage, Edmonds
First Independent Bank, Vancouver
Full Circle Financial, Kent
JD Myers Financial, Lake Stevens
MILA, Mountlake Terrace
Mortgage Broker Associates, Lynnwood
NHI Home Mortgage, Federal Way
Park Place Financial, Redmond
Pierce Mortgage, Tacoma
Puget Sound Mortgage, Edmonds
Response Mortgage, Bellevue
RTL Financial, Bellevue
Top Mortgage Bankers, Bellingham
View Point Lending, Marysville
Washington Mutual
Western States, Bellevue

To check on the current default rate of your favorite FHA lender, check out the Neighborhood Watch website.

How loan originators are compensated and why consumers should care.

The Merkley Amendment to the Wall Street Financial Reform legislation limits loan originator compensation to no more than 3 percent of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator compensation would be limited under the new Dodd-Frank Wall Street Reform Act HR4173

Prohibition on Steering/Loan Originator Compensation – Establishes new anti-steering restrictions for all mortgage loans that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. Would allow compensation to originator (1) based on principal amount of loan, (2) to be financed through the loan’s rate as long as it is not based
on the loan’s rate and terms and the originator does not receive any other compensation such as discount points, or origination points, or fees however denominated, other than third-party charges, from the consumer (or anyone else), and (3) in the form of incentive payments based on the number of loans originated within a specified period of time. Expressly permits compensation to be received by a creditor upon the sale of a consummated loan to a subsequent purchaser, i.e. compensation to a lender from the secondary market for the sale of a consummated loan but creditors in table funded transactions are subject to compensation restrictions.

All fees that enure to the benefit of the lender (the entity funding the loan) as well as any third party mortgage broker, now appear in box 1 of the Good Faith Estimate.  The loan originator rarely if ever is earning the total dollar amount in that box. Instead, the loan origination fee is divided up between different people. If the massive Wall Street Reform law passes, loan origination fees would be capped at 3 percent of the loan amount, with some exceptions: 

3 Percent Limit – Definition in TILA with the following exclusions (1) bona fide third-party charges retained by an affiliate (2) up to and including 2 bona fide discount points depending on interest rate. Also, excludes any government insurance premium and any private insurance premium up to the amount of the FHA insurance premium, provided the PMI premium is refundable on a pro rata basis,
and any premium paid by the consumer after closing

Consumers have ample opportunity to shop for mortgage rates on the Internet and hear radio advertisements all day long for refinance “rates as low as….” however low they might be that day.  We would all hope that consumers are much more savy mortgage shoppers when compared with the peak of the real estate bubble.

Some loan originators believe consumers do not care what their loan originator is paid as long as the consumer receives the lowest possible rate and fees available on that particular day for his/her particular loan needs.  I happen to believe the opposite is true, with one twist. Consumers do care what loan originators are paid, when they are educated as to how to understand LO compensation.  

Some loan originators hold an irrational belief that consumers couldn’t possibly care about their compensation…that consumers ONLY care about getting the lowest rate because their note rate is the single most important thing affecting the monthly payment and their monthly payment is typically a homeowner’s biggest check he/she writes every month.  However, it’s important for LOs to understand that they have a vested interest in keeping consumers in the dark about how and how much LOs are compensated. If consumers were to fully understand LO compensation, consumers would have the ability to better negotiate a lower fee.  Since many consumers roll their closing costs into a refinanced loan, this *does* affect a person’s monthly payment because the consumer is amortizing the loan originator’s fee and paying a little part of it each month.

If consumers were forced to pay their closing costs in cash up front at the close of escrow on a refinance, consumers might suddenly become much more interested in understanding how to shop for all the settlement costs. 

The mortgage industry trained Americans to serial refinance with very little out of pocket expense and to purchase a home using 80/20 loans with sellers paying all their costs.  We’re now requiring more money up front on a purchase money loan but many buyers are still in the driver’s seat asking and getting seller concessions and many consumers still refinance by rolling all their closing costs into the new loan.

There are many different ways loan originators are compensated. Here are a few:

Percentage of the loan amount
If the loan amount is $350,000 and the loan origination fee quoted is 1.75 percent, your loan originator is likely not going to take home a $6,125 paycheck.  Typically a loan originator is going to split that $6125 with his or her company in some way.  It might be a 50/50 split or perhaps some loan originators will get a better split if they are bringing in their own clients. 

On that same transaction, a loan originator may have been able to sell you a slightly higher rate than what you could have received had you known a better rate was available that day.  When a loan originator works for a bank OR non-depository lender such as a mortgage bank (no checking and savings) this is called earning “overage.”  This LO is going to earn an additional .50 percent of the loan amount in extra compensation that he/she does not have to disclose to the consumer.  On our sample transaction, that comes out to be an extra $1750. This may or may not have to be split with the loan originator’s company. 

When a loan originator works for a mortgage broker, all compensation, including any “overage” which is also called “yield” or “yield spread premium” is disclosed to the borrower on line one of the good faith estimate and the consumer is shown, on the GFE that the consumer is choosing a slightly higher rate in order to pay his/her loan originator this extra compensation.

Before the 2010 changes in how compensation was disclosed to consumers on the good faith estimate, loan originators might have earned even more compensation through processing, underwriting, and administration fees. There’s nothing wrong with these fees, provided there was actually an underwriter, processor, and administrator doing work for that fee.  With the new 2010 good faith estimate, all these fees are now disclosed on line one of the GFE.

Besides receiving a split of the origination fee, other ways of LO compensation might be paying LOs based on the total volume of loans and/or total loan amount each month,  an hourly wage with a bonus, a salary, or a combination of different methods.

What’s a fair way for consumers to negotiate loan originator compensation?

Fair can be defined in may different ways. Some LOs prefer to always charge the same percentage of the loan amount:  1 percent, 1.5 percent, 2 percent, and so forth, for all their clients.  Yet some LOs believe that’s not fair.

Why should one customer who’s loan amount is $350,000 pay $6125 (1.75%) and another customer whose loan amount is $600,000 pay $10,500 (1.75%) and another customer with a $100,000 loan pay $1,750 (1.75%) 

Suppose the person’s loan who paid only 1,750 took more time and effort than the person who paid 10,500.

Why should the consumer paying $10,500 help subsidize the price of the loan for the guy who needs constant handholding?

If a loan originator works hard trying to find the best loan program or the absolute lowest rate (so the consumer does not have to spend time shopping) and she put in all kinds of time and effort, this LO is arguably worth more to the consumer.  This is the broker model of originating loans.  The mortgage broker LO acts as a third party middleman, an “agent” for the borrower, and helps the consumer select the best fit from lots of different mortgage money choices.

Conversely, some consumers are anal retentive (nothing wrong with that. Takes one to know one) and like to do all kinds of research, spreadsheets, analysis, interviewing, reading and experimenting on their own, sometimes for many weeks or months.  By the time this person is ready to select a mortgage, the AR borrower has already selected the mortgage product, rate, and company. This obsessive compulsive has even run a background check on the firm and its history of consumer complaints, knows the name of the CEO, where her kids go to school, what type of loan she currently has on her own home, and what paperwork will be asked of him at application.  Arguably this customer has already done most of the loan originator’s job (in his opinion), so why should he have to pay a heft LO fee if he’s just going to fill out an online Internet application, send in a package of paperwork, and close “in as little as 2 weeks?”

Well, anyone in the mortgage lending industry knows that the borrower in the mortgage broker scenario could end up being a bunny file, where the broker/LO only spends 5 hours max on that file whereas mister anal retentive’s file ends up being the nightmare scenario from hell and the low-fee company ends up losing money on that transaction. 

I take these two polar opposites as examples because a loan originator’s real life is some of the above but mostly everything in between.  A loan originator never really knows for sure how much time he/she will spend on a particular file.  This is one of the reasons (I’m sure there are others) why LOs simply revert to a percentage of the loan amount: Because everything washes out in the end.

Today’s consumers are left wondering what the hell happened during the meltdown and really don’t buy any of the crap the industry tries to use to brainwash the world into thinking it wasn’t the industry’s fault. “It was the rating agencies,” or “those greedy Wall Street investment bankers are to blame,” or “It’s the big banks: They are the ones who told us to sell the toxic mortgages.”  Somebody needs to tell the industry that the more the industry tries to shirk all responsibility, the more guilty the industry looks. The more the industry points outward at everyone but itself, the more the politicians and regulators will pass laws and rules like what we haven’t seen since the 1970s which gave us RESPA, TILA, ECOA and FCRA.

There is no doubt in my mind that the mortgage lending industry will find creative ways of compensating those that can bring the business in the door. 

Here is an idea:  Why not pay loan originators by the hour?  Consumers can pay their loan originator the way we pay for an accountant, a lawyer, an engineer, a paralegal, and other traditional professionals. 

In the above example of a $350,000 loan with a 1.75% loan origination fee of $6125, if we estimate that the average number of hours spent with the loan originator was 5 hours, that’s like paying an originator $1225 per hour.  There is no LO on this planet worth over a thousand dollars an hour.  But this isn’t an accurate figure if indeed the $6125 fee is split 50/50 with the originator’s company  So $3063 would be the originator’s compensation….divided by 5 hours means this LO is charging $613 per hour.

That’s a VERY hefty hourly fee for a person who doesn’t even have to hold a high school diploma to become a loan originator.  In fact I have personally now met 5 people who have only finished 8th grade that are originating mortgage loans.  Even a 20 hour education requirement and a national exam will not keep predatory lenders away from the industry.

Charging by the hour for an LOs time would serve two purposes:  1) it would motivate people to be more efficient with their time when working with a loan originator; and, 2) it would separate the men from the boys and the women from the girls. By this I mean loan originators with over 25 years of experience would be worth more because of their vast amount of knowledge: These LOs would theoretically be more efficient and competent and since they’d spend less time per file, they would be worth more. On the other hand, a baby loan originator who just received the license is going to be in training mode for a while and would arguably be worth less per hour.

Imagine an LO saying to his or her client, “Mr. AR, based on our initial consult, I estimate that it will take me and my team X number of hours to originate your file. It could be more or less, I’ll give you a weekly or monthly fee sheet as we go along. You can pay me by the hour…my hourly fee is X, or you can pay me no more than 3% total. Which would you prefer? It might be less if you select the hourly rate but it will never be more than 3%.”  I will bet you 100% of the time the client chooses the hourly rate for the chance that their fee might be lower in the end. 

But will things change all that much if LOs were paid by the hour? Maybe not.  The baby LOs will still end up working for the depository banks and the experienced pros will still end up at the non-depository mortgage banks and mortgage brokerage firms. When the Dodd-Frank Bill passes, our lives will all change once again but it’s still a great way of making a living and I know the majority of us will still be here doing just that.

WA State Real Estate Agents are now Brokers.

On July 1, 2010, real estate salespeople in Washington State will become brokers.  It’s taken the Department of Licensing a total of seven years from initial research to the final implementation having started in 2003 on this project. The revisions passed the legislature in 2008 and the law is now in effect. There are many, many questions still to be answered during the rule-making process which makes the transition challenging but not impossible.  Here are some of the higlights:

  • There are now two levels of licensure for individuals: broker and managing broker.
  • The ‘salesperson’ category has been eliminated. The entry-level license for an individual is now “broker.”
  • A person with three years of experience as a broker will now be able to become a managing broker.
  • The 2010 license law requires the licensing of brokerage firms. A real estate firm is any business entity (including a corporation, partnership, or sole proprietorship) that conducts real estate activities.
  • All real estate services contracts are between the client and brokerage firm, instead of between the client and any individual licensee. A listing agreement is the property of the brokerage firm.
  • A designated broker is responsible for meeting all recordkeeping and trust fund requirements, plus he/she has supervisory responsibility over all the firm’s licensees.
  • All first-time broker license applicants must submit fingerprint identification.
  • Those renewing their licenses must also submit fingerprints and have their backgrounds checked every six years.
  • Educational requirements have been increased for first time broker licensees as well as managing brokers. Existing licensees must take a transition course to update them on the licensing law changes.
  • A broker with less than two years’ experience (remember, I’m talking about a new real estate agent, now referred to as a “broker) is subject to one additional responsibility: working under a heightened degree of supervision. He or she must conduct all brokerage activities under the direct supervision of a designated or managing broker, and submit all signed documents to the designated broker for her review, within five days of the signing, and submit evidence of their required education courses to the designated or managing broker.

There are more changes relating to recordkeeping, trust accounts, the role of firms, and property management. The complete law and its rules can be found here.

I highly recommend all real estate agents brokers and other interested stakeholders join the DOL’s listserve. DOL sends out a new set of Frequently Asked Questions each week and has been doing a great job of keeping us up to date during the transition.

The following links are from the Department of Licensing
Frequently Asked Questions


During the Transition Course, I’ve been asking my students at the end of class if they believe the new law changes will help the industry, hurt, or make no difference.  The majority of students believe the changes will help the industry raise the bar.  The three biggest changes they are happy with are: 1) the increased level of supervision required of new licensees;  2) the mandatory fingerprint/background check; and, 3) the increased level of required prelicensing education for new agents brokers.

As a side-note, I’ve had more than a handful of students ask what kinds of conviction on the background check would dis-qualify them from keeping their real estate license.  For the answer to that question, follow this link and scroll down to the section on “fingerprinting.”

Loan Home Inc. Lead Generation Scam

Loan Home Inc. is a lead generation company telling consumers that they can be paid for the referral of their own transaction, or the transaction of friends and families.

Before we tease apart why consumers should avoid this obvious scam, let’s briefly review what mortgage lead generation companies do.  Loan originators obtain clients from many sources.  Some have built up a strong client base over the years, others make sales calls on Realtors asking for client referrals, others work at a bank and possible customers walk into their branch on a regular basis.  Not all LOs like working with Realtors because they demand high quality service, and not all LOs have a client base. Some LOs work for companies that advertise on the radio.  TILA Mortgage, Paramount Equity, American Equity, and Best Mortgage are some of the companies that advertise on  KIRO 97.3 FM in the greater Seattle area.  Radio advertising is expensive but it works. The phones ring at specific times and the LOs are there to pick up the phone but since the firm is paying for the radio ads, the LOs will typically split the fee income with their firm as they should. 

Lead generation companies troll the Internet for consumer leads, use banner ad campaigns, and/or send out mortgage email spam and then sell these possible homebuyer or refinancing homeowner leads to loan originators who pay a fee to receive that person’s contact information.

I receive all kinds of emails from lead gen companies every week trying to sell me leads (I do not originate loans.) Recently I’ve been responding to the emails and asking if the salesperson can send me samples of the advertising material used to procure the leads.  I’ll bet you’re not surprised to hear that NOT ONE COMPANY has replied to my request.  Why? Because lead generation firms blatantly violate state and federal  lending laws in their advertising.  Loan originators typically won’t talk about lead gen tactics because they might already be addicted to the crack that is also known as mortgage leads and they don’t want to turn in their crack dealer.

Clamping down on lead generation firm advertising is not my personal top priority but it should be a priority of any loan originator who wants to advertise legally.  The more the industry continues to buy leads procured by using deceptive advertising, the more the industry is unable to get their own phones to ring by advertising legally. 

This new scam is quite clever:  Loan Home Inc.  says anyone can “sign up” their own self(!) for this program and when they decide to buy or refinance, Loan Home Inc., will connect them with a “reputable, ethical” mortgage broker or mortgage loan originator and the consumer will be able to get money back (sounds awesome!) after closing. Whoo hoo! Sign me up! The consumer can also sign up friends and family and get money back when they buy or refinance, too!  What could possibly be wrong with this cool-sounding idea?

Well consumers, what’s going to happen is that your name and your friends/family names will be SOLD to mortgage brokers and loan originators who have no clients or who are willing to pay money to Loan Home Inc., for the ability to earn money off your deal. That’s right, you are an object to be bought and sold to the highest bidder. 

Realize that whoever Loan Home Inc., sells your contact information to, is going to have to pay Loan Home Inc. a fee and that fee will be much higher than the money you are going to “get back” from Loan Home Inc. because LHI is going to keep a percentage of that fee to cover its costs as well as to make itself a nice profit.  Next, whoever has purchased your lead is going to increase the fee you pay BY THAT AMOUNT OF MONEY IF NOT MORE. 

In the LHI example, on a $250,000 home loan, consumers are paid $800 for their own home loan lead. If so, then the person who purchased your lead will simply increase the fees consumers pay by……$800.  Since the majority of people do not come in with cash at closing on a refinance, consumers will be financing that same $800 over the term of the loan; not necessarily a good financial decision.  Another way for the lender funding the loan to earn back the money they have to pay LHI and you is to sell you a loan with a higher interest rate. Worst case, the consumer will pay higher fees as well as a higher rate just for the ability to get back $800 on a $250,000 loan.

LHI also sets up a nice-sounding multi-level marketing plan in their powerpoint slideshow. 

I wonder if they hired an attorney who understands Section 8 of RESPA to review their business plan?

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.

Violations of Section 8’s anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

It doesn’t sound like the company owners have a background in mortgage lending.

From their FAQ page:
Q: Will there be additional fees added to my loan?
A: No. The lead generation compensation that Loan Home pays does not constitute an added cost to the loan or the loan process. By paying you, we are taking profits from the mortgage companies and returning them to you!

Oh boy! Let’s stick it to the mortgage companies.  What a great sales tactic. I’m sure the mortgage companies love reading that.  Please do not fall for this, consumers.  There is no way in hell that any mortgage company is going to just give you back its profit.  You ARE paying for the money Loan Home Inc., is giving back to you.  It will be in the form of a higher interest rate or in the form of higher fees or likely both.  There is no such thing as free money.

Please, please do not fall for this scam. Instead find a local loan originator who lives in your community. If you want to shop, then ask for a Good Faith Estimate from three or four sources on the same day:  Your retail bank (where you do your checking and savings), a mortgage banker (a lender that does not offer checking and savings and specializes in mortgage lending), a mortgage broker (who can shop the market for you), or a credit union.

LHI says they are ready to do business in several states (including WA) yet I can find no business license issued to “Loan Home Inc.,” or a license under the name of either of their founders in Washington State. 

Interestingly, when I read the biographies of each of their founders, the name of the web page (look up at the very, very top of the web browser) says “Linda Torres.”  That’s just sloppy webmaster work but it did entice me to bing her name.  Looks like there’s a Linda Torres who’s a loan originator in the Chicago area and the two other founders are from Chicago.  I wonder if the leads are being funneled over to their friend Linda who appears to be one of the other founders of Loan Home Inc.

Merkley Amendment Will Transform LO Compensation

The Senate has passed an amendment to the Wall Street Reform bill that would ban loan originators from accepting compensation based on placing a consumer in a higher interest rate loan or a loan with less favorable terms.  The amendment also requires lenders to underwrite loans to assure a homeowner’s ability to repay the loan.

As you can imagine, loan originators everywhere are outraged.

Imagine not being able to earn extra compensation for selling a higher rate loan! Imagine making sure that homeowners can repay their loans! 

Wait a minute. Isn’t that the world we currently live in right now?

The horror we’re leaving behind if this amendment becomes law was the predatory lending frat parties of 2006.  From what I can tell, most (not all) of that is behind us. What are we really losing with the passage of the Merkley-Klobuchar Amendment?

Mortgage brokers have to disclose all yield spread premium earned as fee income on line 1 of the new Good Faith Estimate.  They will not be losing anything new.  It can be argued that mortgage brokers should have lost the ability to earn yield spread premium because it was horribly misused not by “an unsavory few