PROFESSOR OF LAW
COLUMBIA LAW SCHOOL
By Richard Smith
BY DARRICK MENEKEN
There’s plenty of talk about the advantages of electronic mortgages. Here’s the rub: It’s of-
ten easier to say “e-mortgage” than to originate and close one. Using e-mail rather than a fax
machine doesn’t scratch the surface of e-mortgage intricacies. Ronald Mann, a legal financial
expert and Columbia Law School professor who researches e-mortgage infrastructure and fa-
cilitation, explains more.
The FinePrint rint
EXAMINING THE QUESTION OF COMPENSATION
What’s holding up a full-bore transition to e-mortgages?
Before you can shift from the traditional paper-based mortgage-note industry to a wholly electronic one, you have to have the legal infrastructure to ensure that the electronic documentation
works. you also need the practical infrastructure necessary to consummate the transactions
electronically in a way that they can reliably keep track of title to the underlying instrument over
time in a way that works for mortgage brokers, originators, homeowners and the courts.
Like many mortgage originators, I believe one of the
more-damaging changes included in recent regulatory
actions affects how we can be paid. These changes —
found in the Federal Reserve Board’s rule on compensation, set to take effect april 1, and the Dodd-Frank Wall
Street Reform and Consumer Protection act — may be
damaging for consumers as well as for originators, brokerage companies, wholesale lenders and the housing
industry as a whole.
It seems like we’re talking about two different things here — notes and mort-
gages. Is it easier to “go electronic” with one or the other?
yes. The notes are much easier. There’s no reason notes couldn’t be wholly electronic pretty
quickly. The biggest problem is, traditionally, if you wanted a home-mortgage note to be a negotiable instrument, it had to be on a piece of paper. That has changed. you can have wholly
electronic notes, and MERS [Mortgage Electronic Registration Systems] has been doing that
for some time.
Basically, many legislators and regulators are convinced that mortgage originators as a whole contributed to the mortgage crisis by steering consumers
into loans that weren’t in their best interests. This was
believed to have been motivated by steering incentives paid by wholesale mortgage lenders — i.e., yield
spread premiums or ySPs.
The problem is much harder for mortgages. The basic idea of an electronic mortgage is difficult to reconcile with the paper-based filing system the counties have. If we have 3,000
counties and mortgages have to be recorded with the counties, then it’s hard to have all
mortgages be electronic.
Where does that leave us?
The most you can easily do is have a system where you can make transfers of the notes electronically and immobilize the paper documents in the hands of somebody like MERS. That got
a lot of market traction during the last decade, when the overwhelming majority of mortgages
that were going to be securitized went into that system.
This is a complete misunderstanding of ySPs and the
compensation system that worked for decades to
create an efficient and low-cost home-financing system. The loss of this compensation likely will result in
greater consumer costs and reduced consumer choice,
and it will add to the strains already hurting small-busi-ness mortgage-origination companies.
Do e-notes cause an increase in legal cases in which borrowers claim no one can
produce the mortgage note necessary to foreclose?
Generally, those cases are exacerbated by the complexity of ownership. The same note might
be pooled into one group of securities, but then there are several tiers of collateralized-debt
obligations behind the pool and those investors all hold derivative interest in the same note.
That increases the concerns people have about the difficulty of ensuring you can point at who
actually owns the equitable interest in the note. you must be able to document that you’re the
person who owns the interest in a promissory note.
Specifically, the compensation provisions in the Fed
rule and the Dodd-Frank act require originators to receive compensation from either the borrower or the
lender, but not both. The rule and act allow originators
to receive compensation that varies on the loan size and
loan volume, but compensation prohibitions include:
• Basing compensation on the rate or other loan terms
(e.g., margin and prepayment penalty);
• Increasing compensation by increasing loan costs;
• Steering borrowers to a loan that is not in their best
interest to receive increased compensation.
How extensive is the problem of not being able to say who owns certain notes?
We don’t know. We may never know. you could tell a story that a lot of the record-keeping difficulties are simply the inadequate shift to electronic documents.
Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or email@example.com.
5 YEARS AGO
From February 2006’s
The Leading Resource for Mortgage Originators
Supporters indicate that compensation for all originators will be the same, meaning that bank and nonbank
mortgage originators will be paid according to these
guidelines. The changes seem to include mortgage-broker companies under the classification of originator,
however. This means that the “all upfront” or “all lender
premium” compensation restriction applies to the brokerage company, in addition to the individual originator,
therefore placing mortgage brokerages under a distinct
competitive disadvantage in loan pricing and loan-officer retention. although others see things differently,
I believe this could harm small mortgage brokerages.
“Fraud prevention begins with education.
Teach your staff that fraud comes in all
shapes and sizes. In addition, educate your
staff members on the red flags of fraud
that they need to watch for during their daily routines. Keep in mind that the presence
of one or more red flags in a file does not
confirm fraud, but it should signal a more
detailed review of that file.”
“What’s the most
you could read
Wholesale lenders also are in the process of establishing their loan-originator and broker-compensation policies. They are trying to balance adequate compensation
with regulatory compliance. It is possible, though, that
the wholesale mortgage-lending industry will also become a victim of these compensation changes.
NaMB — the association of Mortgage Professionals
has circulated a petition to stop or delay implementa-
tion of the mortgage-loan-originator compensation rule.
Find it here: sctsm.in/NaMB_petition.
— JERRY BARRON, NATIONAL CIT Y
“It’s your House — Lock It Down”
View this article and others in our free article archive
MILA MORTGAGE INVES TMENT LENDING ASSOCIATES®
Volume 13 • Issue 2
Richard Smith is a loan originator with Churchill Mortgage in
Chattanooga, Tenn. He had been the retail manager with american acceptance Mortgage Inc. for 15 years. He lends in Tennessee
and Georgia. He has originated government, conventional and
jumbo loans since 1994. Smith writes a monthly column on regulatory and legislative issues for Scotsman Guide. Reach Smith
at (423) 899-6898 or at firstname.lastname@example.org.
Visit www.richardsmithhomeloans.com for more information.