To root out appraisal bias, dismantle the system?

To root out appraisal bias, dismantle the system?
To root out racial bias in the U.S. appraisal system, some experts say there’s no point in nibbling at the edges. Instead, they suggest tearing the system down and starting fresh. 

“I think not many people understand how this byzantine system works,” Rohit Chopra, the Consumer Financial Protection Bureau (CFPB) director, said Tuesday. 

Chopra spoke during the first-ever Federal Financial Institutions Examination Council’s Appraisal Subcommittee (ASC) hearing, which focused on appraisal bias.

The CFPB director borrowed the term byzantine from a report released in January 2022, commissioned by the Appraisal Subcommittee and led by the National Fair Housing Alliance. The report’s main conclusion is that the appraisal industry essentially regulates itself, in contrast to other sectors in housing finance.

It happens because the Appraisal Foundation, an industry-run private nonprofit, establishes standards and criteria for appraisers, which are then adopted by each state. However, appraisers, lenders, banking institutions and industry trade groups dominate the seats on the Foundation board. There are no consumers or fair housing advocates.

During the hearing, Craig Steinley, president of the Appraisal Institute, said that individual appraisers do not pay fees for the Appraisal Foundation. “It’s not a membership organization of individuals. It’s a membership organization of other organizations. We do [pay fees] by the standard materials from the Foundation.”

In response, Chopra said: “I think it’s something we need to think about whether it is appropriate for this type of fee structure and for there to be payments, including related to governance. I think that raises a lot of questions: for this Subcommittee, for the regulators and potentially for future hearings.”  

Increasing accountability to decrease appraisal bias

While Congress tasks the Appraisal Subcommittee with monitoring and reviewing the Appraisal Foundation, it has no enforcement authority. 

The Subcommittee is an independent executive branch with seven members on the board, including representatives from the Federal Reserve and the Office of the Comptroller of the Currency. The Subcommittee has authority over the state programs on appraisals.  

“We conduct regular compliance reviews of the state programs to determine their level of compliance with the Appraisal Foundation and other federal requirements,” Jim Park, the ASC executive director, said during the hearing. “If a state is found to be out of compliance, the ASC has the enforcement authority to ensure they return to compliance.” 

Park added, “However, the ASC oversight authority over the Foundation is limited to monitoring and reviewing their work. The ASC has no enforcement authority as it relates to the Foundation or its boards.”

According to Junia Howell, visiting assistant professor of sociology at the University of Illinois Chicago, there’s a “moral” problem with the current structure.

“As Director Park said at the beginning, there’s not a single other regulatory structure like this in the country, and maybe even in the world,” Howell said. “I would suggest that there needs to be a different structure that possibly increases some accountability.” 

The Mortgage Bankers Association (MBA), the trade group representing mortgage lenders in the discussion, agrees with the need for changes.

“The MBA would support reforms which would lead to more independent oversight of appraisers,” Michael Fratantoni, MBA’s senior vice president of research and technology and chief economist, said. 

UWM gave brokers big discounts to play with. It could be risky

UWM gave brokers big discounts to play with. It could be risky
United Wholesale Mortgage‘s (UWM) aggressive moves to gain an edge on the competition tend to provoke controversy.

The ‘ultimatum’ it imposed two years ago effectively prohibited broker partners from also doing business with two of UWM’s rivals. It quickly prompted antitrust lawsuits. The lender’s price reduction by 50 to 100 basis points across all its loans last year led to accusations that UWM was making it impossible for some lenders to do business in the space. The strategy forced competitors to exit the space entirely, arguably weakening the channel overall.

Two weeks ago, UWM announced that it would be giving 125 basis points to brokers as a discount to be used on any loans, with up to 40 basis points per loan. 

“Sometimes 10-20 basis points is all an LO needs to win over a real estate agent or get creative on a borrower’s loan,” the lender said in a statement. 

Mortgage compliance attorneys interviewed by HousingWire said the program, dubbed “Control Your Price,” raises potential areas of concern across three subjects: rules that govern loan officers’ compensation; fair lending; and unfair, deceptive and abusive acts and practices. These areas of compliance fall under the umbrella of regulators such as the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Housing and Urban Development (HUD). 

“The program raises the potential for violations,” said Troy Garris, co-managing partner at Garris Horn LLP. “It’s a risk management issue: some clients would say, ‘I understand there are some gray areas, but I’m willing to take the risk.’ Others would say, ‘This feels too risky to me, so I’m not going to do it.’”  

Colgate Selden, a former lawyer with the CFPB and current partner at the law firm Blank Rome LLP, agrees: “I think there’s a way you can do it to reduce your risk. But nothing is risk-free.”  

In a statement, Jeff Midbo, UWM’s deputy general counsel and chief compliance officer, defended the initiative and said there are “no unique regulatory risks with this program.”

Attorneys interviewed by HousingWire said nothing appeared to be clearly over the legal line with the Control Your Price initiative. However, some elements could prompt review from regulators, as explained below.

LO compensation 

Regulation Z under the Truth in Lending Act protects Americans when they use consumer credit. It prohibits a lender to pay its brokers based on a mortgage transaction’s terms or conditions and LOs from steering borrowers to loans that would result in more compensation, even when it means lower mortgage rates to customers. 

“The UWM program is great news because the borrower gets this more advantageous loan, maybe with a lower rate,” said a top mortgage compliance lawyer who requested anonymity to speak candidly about the UWM initiative. “But the rule doesn’t want loan originators, like brokers, to be able to play around on a case-by-case basis with their compensation, even though it could be a great thing for the consumer.”

The same lawyer added, “The industry has been trying to convince the CFPB to allow more compensation concessions, and the CFPB has refused or declined to do so.” 

According to Selden, the rule is clear. If UWM is not reducing brokers’ compensation to change the mortgage pricing, the initiative is only a pricing discretion, which would be permissible under the law. However, it requires monitoring. 

“Now, let’s say the LO uses its full pool of discounts. Then the next quarter the company reduces the broker’s compensation to account for that,” Selden said. “The CFPB does forensic accounting. That’s how they caught several of the alleged violations in the past by going through and matching later quarters to what happened in prior quarters.”

Midbo told HousingWire that the program does not impact brokers’ compensation.  

Disparate impact and UWM’s broker flexibility

Regulation B under the Equal Credit Opportunity Act, which protects applicants from discrimination in credit transactions, brings the “disparate impact” concept into focus. It occurs when a lender employs neutral policies or practices, but they have an adverse effect on a member of a protected class, even when there’s no intention. (When there’s intention, it’s called disparate treatment.) 

The exclusion is when the lenders’ policies and practices meet a legitimate business need. To illustrate, using credit scores could be considered a disparate impact because borrowers from specific races and ethnicities often have lower scores. Ultimately, they would be denied access to mortgages. But lenders justify using credit scores with the need to guarantee they will have their money back – a legitimate business need.

The Fair Housing Act and other similar laws in states also enforce fair lending in the housing sector.  

According to the lawyers, giving salespersons flexibility in discounts could inadvertently result in fair lending discrimination if not handled correctly. 

“If you take a group of people and say: ‘Here’s a bag of discounts. Go give them to whomever you want to,’ then you run the risk that they will give them only to people in a certain category of race, ethnicity or other prohibited basis,” Garris said. 

But the lawyers agreed that proper monitoring can prevent disparate impact discrimination. 

“I would advise any lender to conduct a risk assessment, monitor the use of that flexibility going forward and train the salespersons, remind them of their fair lending obligations,” said the mortgage attorney who requested anonymity. “It’s not necessarily a problem. But that’s certainly something that fair lending regulators see as a red flag.” 

On this subject, Midbo said that UWM “rigorously conducts fair lending testing on a quarterly basis, and should any irregularities arise, they will be addressed immediately.” 

UWM & the unexplored unfair practices question

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 covers unfair, deceptive, or abusive acts or practices (UDAAP). It happens, for example, when the practices interfere with a consumer’s ability to understand a product’s terms or conditions, such as its costs and risks.  

“It is an area of law that is mostly unexplored,” Garris said. “But the current director of the CFPB, Rohit Chopra, has incorporated into its exam manuals, fair lending concepts and has suggested, making public statements, that a fair lending violation, in addition to being a fair lending problem, is also a UDAAP violation.”

According to Garris, in UWM’s case specifically, the discounts are so “broad and unclear” that somebody could say the customer doesn’t realize that the broker has discounts to give them. In addition, the customer doesn’t have clear information and can’t make a clear choice based on what’s being disclosed. 

“It’s not necessarily true that any particular consumer is going to be mistreated under such a program,” said the lawyer who requested anonymity. “But it does seem kind of unfair if, under any circumstance, the broker is offering these great, innovative pricing flexibilities, but the next person who comes in looking for a loan doesn’t get those options.” 

The lawyer continued, “The counterargument is, as long as borrowers are obtaining the disclosure of all the terms that they’re agreeing to, and they’re shopping around the way a smart consumer would, they’re giving the terms that they bargained for.”  

On this subject, UWM said that unlike retail LOs, wholesale LO originators are required to disclose all pricing details, including broker compensation. “It’s also important to note that as a wholesale lender, the LOs we partner with do not work for UWM. While we provide training and have oversight, mortgage brokers are independent entrepreneurs.” 

Following the leader

Lawyers mentioned that one of the main reasons to discuss the regulatory risks of the Control Your Price initiatives is that other lenders may want to copy it. They are right. 

Tennessee-based First Community Mortgage, Inc. (FCM) has started to study how to implement a similar program, according to the company’s CEO, Keith Canter. 

“Well, I just asked our wholesale leader today if we could do this, and she said yes,” Canter said during an interview. “We are looking at if it’s something that would benefit our business partners and certainly contemplating implementing something along those same lines.” 

A wholly subsidiary of a bank, FCM has a “solid balance sheet” and “sits in a very nice cash position” to engage in these programs, Canter said. 

According to the lawyers, the big question is whether other lenders will have the risk assessment and controls in place to adopt a program like this. 

According to them, lenders are more likely to assume risk when the market is slowing down to gain market share – or to avoid closing doors. 

“The Bureau and the state regulators amp up their oversight during these periods because they know there’s a heightened risk of consumer harm,” Selden said. “When markets are down, there’s a high risk; and when the markets are up, there’s a heightened risk because everyone’s just trying to turn the volume through the door as fast as they can get it. And that’s when they make mistakes.”  

Ubitquity hires first chief AI officer

Ubitquity hires first chief AI officer
#Realestate #blockchain-secured platform #Ubitquity, LLC, has found its first chief #artificialintelligence #AI officer. She will spearhead efforts to use AI in cutting down on many redundancies in the #housingindustry.

Inside Real Estate acquires BoomTown

Inside Real Estate acquires BoomTown
#Realestate software company #InsideRealEstate has acquired #cloud-based sales and marketing platform #Boomtown. Company leaders say the deal will improve client #support.

Old Republic celebrates 100th anniversary

Old Republic celebrates 100th anniversary
#OldRepublic is celebrating its #100thanniversary under the banner of #100 Years of Excellence. Old Republic has reportedly produced a 12.5 percent annual total #shareholder return over the last 55 years.

Rocket eliminates about 50 jobs in its second round of layoffs for 2023

Rocket eliminates about 50 jobs in its second round of layoffs for 2023
Rocket Companies eliminated about 50 positions last week amid the industry rightsizing with layoffs in the higher-rate environment.

“As is common practice in all companies, Rocket regularly looks at the priorities of the business and what roles are needed to achieve those goals,” Aaran Emerson, a Rocket spokesperson, said in a statement. The eliminated positions represent less than one-quarter of one percent of the roles in the company, Emerson added.

Positions that were affected include software engineers at Rocket Central and Rocket Mortgage, according to LinkedIn posts from affected employees.

“Unfortunately, I count to be one amongst those 10% employees cut down at Rocket Mortgage. On 01/18/2023, I got impacted with [a] mass layoff at Rocket Mortgage. Marks a day, The Wednesday!,” a former software engineer at Rocket Mortgage wrote on LinkedIn. 

“I’ve unfortunately been included in the Rocket Central layoffs and am looking for my next opportunity,” according to a LinkedIn post from a former senior software engineer at Rocket Central.

The recent layoffs mark the second round of job cuts at the Detroit-headquartered company. The prior round took place the first week of this year when a reorganization at Rocket Central’s marketing team led to about 20 positions being eliminated, the company confirmed.

Rocket, like other originators, struggled to maintain volumes as rates rose over the course of 2022. In the third quarter, Rocket Mortgage originated $25.6 billion in production, losing its title as the country’s largest mortgage originator. Arch-rival United Wholesale Mortgage overtook Rocket.

In its latest effort to drum up business for its mortgage business, Rocket Pro TPO recently began offering credit reports at no cost to brokers when closing through the Detroit lender. It is also providing 7,500 in credits for first-time homebuyers in underserved communities 

After reporting a financial loss in the third quarter, the Detroit company has been emphasizing itself as a fintech company and has been aggressive in trying to capture potential homeowners through its platform.

That effort includes Rocket Rewards, a loyalty program that distributes points toward financial transitions across the Rocket platform, which was launched in November.

“As we navigate and adjust to the current environment, we’re continuing our long-term strategy of investing in our platform with an eye toward the future,” Brian Brown, Rocket’s CFO, told analysts in its recent earnings call.

New American Funding partners with EasyKnock on sale-leaseback program

New American Funding partners with EasyKnock on sale-leaseback program
California lender New American Funding has partnered with EasyKnock, a New York startup that buys homes and rents them back to sellers, allowing clients to access their home equity through non-traditional means. 

About a quarter of American homeowners are unable to access the equity in their homes because of strict lending standards, and EasyKnock said the partnership will “improve housing stability for our mutual customers, providing them liquidity, flexibility and control in their finances.”

Homeowners can convert their equity to cash by selling their homes to EasyKnock and staying on as renters. 

“EasyKnock makes money from fees and rent,” Kessler said in a written email response about their business model. In a typical sale-leaseback transaction, EasyKnock receives a processing fee from the initial home sale and then receives monthly rent after the customer becomes a tenant, he said. 

The majority of its revenue comes from rents, set at market rates by using third-party data.

Under its Sell & Stay program, which charges an annual option fee, clients have the right to repurchase the home or to direct a third-party sale at any time. If the home value appreciates, customers get to keep the difference. 

EasyKnock, which was founded in 2016, operates in 50 states with more than 120 employees and targets middle-class homeowners. 

Broker Solutions, doing business as New American Funding, was ranked as the 32nd-largest mortgage lender, according to Inside Finance Mortgage. The lender originated $14.9 billion in volume in 2022, a decline of more than 50% from its 2021 production of $30.5 billion, mortgage data platform Modex showed.

Founded in 2003 by Rick Arvielo and his wife Patty Arvielo, the lender offers conventional, government, adjustable-rate and non-qualified mortgages. Licensed in Washington, D.C. and 50 states, Broker Solutions has 156 active branches across the country and 1,621 sponsored loan officers, according to the NMLS. 

The company added more than 4,000 employees in 2020 and 2021 when rates were record-low levels. It eliminated at least 940 positions in 2022 in multiple rounds of layoffs in an effort to right-size the company.