As usual, we have some keen insights and observations about the residential lending biz worth sharing (along with vendor, agency, and investor updates below)!

Jim N. writes, "How are internet lenders getting away with advertising rates and closing costs on sites like Bankrate that don't even come close to matching the rates and fees quoted on their own sites? A perfect example is Nationschoice Mortgage. Nationschoice is advertising on Bankrate a rate of 4.375% today with no points and no fees (see attached), but when you click on their site and input the same search criteria as used for advertising on Bankrate, this lender shows a point structure of 1.375% points. I'm curious how, with all the new regulations, a company can advertise two completely different pricing models and not have it affect the compensation of their loan officers? This appears to be in violation of CFPB rules as well as Dodd Frank compensation rules. I'm not sour as I have plenty of business of my own, but I just don't understand how this is possible." Me neither.

From Oklahoma, Kent Carter contributes, "Yesterday I represented the OMBA at two NAPMW meetings.  At lunch we had a large crowd to listen to changes in the USDA Rural Development housing program.  On October 1^st the new qualification boundaries will take affect based on the 2010 census.  As you may imagine, a large number of communities will no longer be eligible for this program.  I expect in Washington they are pleased to reduce this program in light of fears of foreclosures based on high LTV's and low down payments.  I have asked the presenters to give me information on default rates (which they contend are low) and other economic information to justify a broader use of the program. I was recently in Tulsa for a NAPMW meeting, and learned that Oklahoma does 49% of the HUD 184 (Native American) loans in the nation. As you may remember from your American history class, many tribes were forcibly removed from their ancestral lands to Oklahoma, and in fact we have 38 tribes headquartered here.  Although this program is administered by HUD, it was not included in the QM exemption.  There are 8 total employees working on this program in D.C. These programs are aimed at low to moderate income borrowers and have a history of good performance.  The legislators and policymakers continue to have 'funny' views of how to stimulate the housing market in a calculated and beneficial way."

Lenders Compliance Group answers the question, "We are reviewing our Quality Control Procedures and our question pertains to our sampling method. Is it adequate to make the 10% sample selection based on a purely random basis?" "No. While simply selecting a random 10% sample of the loans originated each month might be adequate for very small lenders who only originate one type of loan and only have one production office, in general quality control sampling needs to be more detailed in order to produce more meaningful and useful results from the quality control audit program. It is important that the sample of loans selected for audit each month be statistically representative of the lender's total book of business. This will enable a lender to be reasonably assured that a specific finding or error rate, found in the sample of loans audited, also exists at the same rate in the lender's total population of loans originated."

It continues, "For instance, our Post-Closing Quality Control Audit Program uses the Stratified Random Sample Method, whereby we first divide the total loan production for the month into groups.  At a minimum, we "stratify" the loans by loan type (Conventional, FHA, VA, etc.), as well as by Loan Officer and/or Production Office. Additionally, based upon the nature of the lender's business, we also sort the loans by Rate Type (Fixed or Adjustable). Once the loans are stratified by groups, we then use the Systematic Random Sample Method to select a minimum of 10% of the loans from each group, by randomly selecting one of the first five loans from each group and then selecting every tenth loan thereafter. We also use the Discretionary Sampling Method, where needed, and as directed by our clients. This selection method is in addition to the standard 10% sampling method (as described above). The method is used to focus on new types of mortgages and to evaluate the work of particular employees or branch offices. Overall, we believe that these sampling methods and techniques provide the most meaningful and useful results for a viable mortgage quality control program."

Plenty of brokers out there are revising business models with regard to 3% caps and affiliated business models. I received this note, "It's all going to boil down to what the CFPB officially requires to be included in the 3%. Ari Karen (a DC attorney doing lots of webinars on QM and LO comp) was even somewhat intentionally vague on the subject until we get more transparency from the bureau.  The builders and realtors are 'affiliates', but to what extent their retained fees are counted, that is the clincher. The big target is on the back of affiliated title companies, as it seems pretty sure their retained fee is going to be counted. Wouldn't be surprised to see some lenders institute loan amount minimums to prevent originating non-QM loans on accident. It's not discrimination if the factor being used for decision making (i.e., loan amount) is not a 'protected' class.  AHHH, the law of in intended consequences. That could be true - just like the CFPB won't shut down pay day lenders, just make the rules for banks who deal with that segment harsh."

The talk in the commentary about a week ago about marijuana farmers led Tim Ervin, with Rachel Dollar Risk Management, to observe, "Rob, in follow-up to your commentary from Friday, September 13 regarding income generated from growing marijuana, the issue which has not been addressed is that per the FinCEN requirements all lenders including non-bank mortgage lenders (NBML) are required to file Suspicious Activity Reports (SAR) when any "transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or an attempt to disguise funds derived from illegal activity, is designed to evade regulations promulgated under the Bank Secrecy Act, or lacks a business or apparent lawful purpose, the financial institution may be required to file a SAR" (31 CFR § 1020.2320 and 31 CFR § 1029.320). This requirement would include income generated from marijuana growing as marijuana is considered a Class 1 substance under the Federal Controlled Substances Act.  Per the FinCEN BSA/AML requirements, when a financial institution or NBML has a borrower who reports income from a marijuana growing dispensary, a SAR has to be filed or the financial institution or NBML is subjecting itself to violation of the mandatory SAR reporting statute."

Mr. Ervin's note continued, "Financial institutions and NBML's who provide services in the States which have authorized the use of marijuana must address the BSA/AML compliance implications when evaluating transactions involving customers that derive income from their participation in the marijuana cultivation or distribution business.  It is extremely important for non-bank mortgage lenders to realize the civil and criminal exposure that is associated with their BSA/AML programs and if needed, utilize a third-party service like Rachel Dollar Risk Management, Inc. which specializes in the review and audit of the BSA/AML program, including training for the NBML's staff. (As a side note to the original comment about use of income from marijuana growing for underwriting purposes, it raises the issue of how a lender can rely on income from marijuana growing as it is still considered a Federal offense, thus could be looked at by the Feds as illegally derived income...hum, seems to be an underwriting nightmare.  How do you meet the "ability-to-repay" standard if the income you are using is considered legal by the State but still violates Federal statute and yet still be able to justify your decisions upon regulatory review?)"

Regarding the agencies, Jonathan Barnes from VanDyk Mortgage writes, "If I may comment on a recent section within this commentary regarding Fannie Mae and Freddie Mac. There was a line, 'They have more capital'.  While Fannie Mae and Freddie Mac (primarily Fannie Mae) have been profitable of recent, they have very little capital. Other than overhead costs, any profit that could be used to build capital is going towards paying off their debt to the taxpayers and maintenance of their existing obligations. They have the potential to have more capital under their current structure, they have the capital backing of the federal government currently, but they are like a college kids living at home with their parents. Mom and dad still buy the groceries and pay the rent, help put gas in the car and throw the kid $20 to go see a movie on the weekend.  The kids own some clothes, maybe a TV and a computer.  Life as a college student (GSE) isn't so bad now that I think about it..."

But speaking of the agencies, last week the Community Mortgage Lenders of America, NAR, NAHB and several other industry groups sent a letter to the U.S. House of Representatives opposing the GSE reform bill known as the PATH ACT.  Mike McHugh, the Chairman of the  CMLA, said, "We are pleased to join the nation's Realtors and Homebuilders in making the case that the secondary mortgage market is key to economic growth, and key to the future of our nation's small mortgage lenders. These lenders did not cause the subprime crisis, did not get TARP money, and stand ready to help move the nation forward.  But we can't have safe growth if GSE Reform ends up giving more power to the nation's largest banks.   And that's what the wrong kind of GSE Reform will do." The CMLA, which represents independent small to mid-sized lenders, was the only mortgage lender trade group to sign the letter. Find out more about the CMLA on their website (thecmla.com) or by emailing them at membership@thecmla .com.

Let's see some agency and investor updates. As always, it is best to read the full bulletin for comprehensive details.

Freddie Mac has made the full menu of its mortgage relief policies available to borrowers in the Colorado area. The state has been hit by days of flooding that, according to the latest news reports, are likely to have destroyed 11,000 homes. Freddie Mac's disaster relief policies enable servicers to help borrowers with homes in presidentially declared Major Disaster Areas where federal Individual Assistance programs are being made available. Under the directive issued by Freddie Mac today servicers can place borrowers with properties affected by the flooding on forbearance and suspend foreclosures for up to 12 months. This forbearance need not be reported to the nation's credit bureaus.  Servicers can waive late fees assessed against borrowers whose homes were damaged by the disaster. Evictions and lock-outs can also be suspended for up to 90 days.

PHH has updated its policies on Higher Priced Mortgage Loans to clarify that the guidelines apply to all products, including HARP, FHA Streamline refinances, and VA IRRRLs; expand the requirements for evidence of the borrower's ability to repay, including verification of expected income or assets beyond verbal verification; and to revise the requirements for establishing escrow accounts for property taxes and insurance premiums in circumstances where the property is located in a condo community, PUD, or other common interest community requiring participation in an HOA or governing association with a master insurance policy. The basis for the threshold used to define HPML and requirements concerning the cancellation of escrow accounts upon completion of the mandatory five-year period have been added as well.

All PHH transactions in Kansas are required to comply with state law on appraisals, which dictate that loan files must contain either an appraisal performed by a Kansas-licensed or a Kansas-certified within the 12 months before the note date or disclosure of the real estate's total appraisal value in the most recent records of the country tax assessor.  In cases where no appraisal is required or a property inspection waiver can be applied, the borrower should use the tax assessor's documentation to comply with this particular regulation.

M&T Bank has updated its HARP product guidelines to require the verification of the terms of any privately held seconds prior to closing, effective immediately for both Open Access and DU Refi Plus.

With regards to Government products, M&T has updated its FHA mortgage insurance premium requirements for purchase loans whose base amounts are over $625,500 and has added that that Non-Permanent Resident Aliens are not eligible for USDA loans.

M&T has reduced the adjustor for financed mortgage insurance on all Conventional loans from -.25 to 0, effective immediately.

The FHFA has announced that it will be extending HARP to December 31, 2015.

A little boy opened the big and old family Bible with fascination, looking at the old pages as he turned them. Then something fell out of the Bible. He picked it up and looked at it closely. It was an old leaf from a tree that had been pressed in between the pages.

"Mama, look what I found," the boy called out.

"What have you got there, dear?" his mother asked.

With astonishment in the young boy's voice he answered, "It's Adam's suit."