“Today, small-business lenders are potentially facing increased costs for expanded data requirements.”

Since the late 1970s, banks and other lenders have been reporting key pieces of information regarding lending practices to regulatory authorities under requirements of the Community Reinvestment Act (CRA) and Home Mortgage Disclosure Act (HMDA). The goals of these programs are to increase transparency in lending and to ensure that banks are meeting the needs of the communities in which they are located.

Today, small-business lenders are potentially facing increased costs for expanded data requirements. The Consumer Financial Protection Bureau (CFPB) has issued a proposed rule for Section 1071 of the Dodd-Frank Act that, when finalized, would require financial institutions to collect and report more information about small-business credit applications.

The draft of the regulation released last year states that the new rules are intended to provide a comprehensive view of small-business lending, and to make sure that banks and nonbanks are serving small businesses fairly. The new rules also call for reporting on minority-owned, women-owned and LGBTQ-owned businesses.

The prospective rules to Section 1071 face various legal challenges, some of which argue that the proposal is too burdensome and expensive. At the same time, there is a congressional push to block the CFPB’s proposal, with the House and Senate recently passing a joint resolution to overturn the new Section 1071 rules. President Joe Biden reportedly intends to veto the legislation.

Automation efficiencies

Whatever the final rule requirements end up being, it appears that more scrutiny of small-business lending data is on the way. This has resulted in many bank and nonbank lenders turning to data validation automation as an alternative to scaling up compliance and quality control teams.

Recent legal challenges may have put the timing of the final ruling in flux, but preparation is still crucial for financial institutions. They must address increased regulatory requirements in a challenging macroeconomic environment that also demands finding creative ways to cut costs and become more operationally efficient.

Confidence in data accuracy is key for the preparation to comply with Section 1071. Bank and nonbank lenders should assess their current workflows, identify any gaps — including their ability to collect data — and identify any limitations in their current business systems. It is vital to understand the capacity, constraints and requirements for 1071 reporting while also understanding the organization’s banking systems and how data is currently collected and stored.

A common challenge for mortgage lending workflows is having an efficient way to request and organize borrower documents into a loan origination system (LOS). Automation can ease the inefficiencies tied to document organization by automating the classification step. This will help ensure that documents are in the right place and allows the system to automatically place documents in folders, repositories or loan origination systems. Many times, documents are received and combined into one file, such as a large PDF format, that must be broken down into individual sections and filed into their correct digital folders.

Furthermore, loan processes often require manual “stare and compare” of borrower documents. In other words, mortgage professionals are forced to look at documents side by side and visually discern the differences. This method leads to mistake-prone loan documents, frustrated borrowers and lengthy processing times.

Decreasing manual steps

Automation drastically decreases the time spent on manual labeling, sorting, stacking and reviewing of loan packages, and it eliminates manual data entry. It provides a lift for the underwriting team by automatically extracting key information from small-business financial documents, including tax returns, and allows for faster credit decisions.

Automated loan processing and onboarding, in addition to the collection and validation of data, simplifies downstream audits such as preclosing and post-closing checks. It will also help with compliance audits from HMDA, CRA and the expected regulations in Section 1071 of the Dodd-Frank Act.

Machine learning can automatically extract key data from loan packets, check for missing information or signatures, and compare it to the system of record. It can also make sure the data is congruent across both the systems and final loan package.

The automation process can take these audits even further by triangulating data points across multiple sources. For example, in the case of a compliance audit, data validation processes will be expanded to look at the documents, the LOS, a document repository and, ultimately, a compliance report such as the CRA loan application register or a future Section 1071 loan application register. The method ensures higher-quality reporting, storage of documents and accurate data across multiple systems.

The typical time and cost savings from automated commercial mortgage lending improves margins by cutting expenses on a per-loan basis. As time spent on tasks decreases dramatically, so can the cost per loan. This will allow financial institutions to position themselves to be fully prepared for audits, changes in the market and expansion opportunities. It will also speed up the adoption of changes in regulatory requirements by creating a completely scalable compliance review and reporting process.

Managing labor costs

To satisfy upcoming CRA modernization and Section 1071 requirements, commercial mortgage lenders are faced with the option of greatly increasing the size of their teams (and adding the associated costs) or investing in automation for a fraction of the cost. Not only can automation easily find, consolidate and track reported data points under the expected requirements to comply with Section 1071, but it also allows lenders to retain key compliance employees while attracting new and experienced compliance professionals.

Compliance professionals carry the heavy burden to report accurate data, which can lead to mountains of manual data reviews. Such work can create a vicious cycle of burnout and rising costs. There is a significant amount of change management required for institutions to train commercial mortgage originators, underwriters and others to ensure all data points are collected at application.

The use of automation drastically reduces human errors, providing data integrity and confidence in meeting regulatory requirements. Consequently, compliance professionals can focus on higher-value tasks and lenders can avoid investing in additional compliance personnel in a challenging labor market. Efficiencies created by automation bring cost savings across the commercial mortgage lending process, supporting loan growth without the need to hire additional employees.

Avoiding risk

The legal fight involving Section 1071 will most likely be decided by the U.S. Supreme Court. However the case ends, there still exists a ticking clock for commercial mortgage lenders to prepare their data for the level of accuracy required to meet government regulatory criteria. If the data is not properly managed, prepared and presented, it could adversely affect lenders through reputational risk and large fines.

Risk mitigation is undoubtedly the most important aspect of increased compliance regulations. Future-proofing with automation allows for a full loan review instead of having to use a risk-based approach of sampling. Automation reduces false positives by limiting human interference, so humans only look at exceptions instead of all documents, further decreasing risk for the institution.

The automation of compliance with CRA and Section 1071 regulations ensures high rates of accuracy. Consequently, financial and reputational risks are mitigated by ensuring that fair lending analyses are conducted with accurate and timely data.

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As lenders cautiously prepare for future regulations, a solid foundation of automation will provide them with the confidence needed to emerge from the new regulatory requirements with more efficient methods of operation. Financial institutions owe it to their customers and employees to be ready for the changing regulatory environment. Those that adapt with new ways of solving challenges will emerge with a competitive advantage in the world of small-business lending. ●

The post Solving the Compliance Enigma appeared first on Scotsman Guide.

One reason for this is the homeownership gap between Black and white families, with homes accounting for so much personal wealth. The homeownership rate for Black families is about 45% compared to nearly 75% for white families.

“If the cost of compliance is too high, we are going to see banks cutting growth again to stay below that threshold.”

The National Association of Real Estate Brokers (NAREB), a network of Black real estate professionals, recently released its 10th annual State of Housing in Black America (SHIBA) report. NAREB president Courtney Rose Johnson spoke to Scotsman Guide about the report and her group’s Building Black Wealth Tour, which includes events in 100 cities on April 13 to highlight Black homeownership potential.

The Black homeownership rate reached nearly 50% before the Great Recession. Will it surpass this mark in the near future?

It’s definitely possible, but some things would have to change. First, we have a tremendous housing inventory shortage. Our ability to be able to place a buyer in a home that’s affordable is a challenge.Second, there’s a lot more education and financial literacy that has to happen. The SHIBA report has shown continuously that there are over 2 million potential Black mortgage-ready homebuyers. Why haven’t they purchased? Is it the downpayment? Is it that they don’t know that they’re mortgage ready?

Federal policies helped to create this situation and you’re calling for federal policies to fix it. What are you hoping happens?

We all know a lot of discrimination was basically policy driven. So, we’re asking, for example, for Fannie Mae and Freddie Mac to look at their pricing grids and move toward more accurate, up-to-date credit-score models. Using just one type of credit-score model is not necessarily advantageous for Black and brown borrowers. If you look at the average African American, the VantageScore versus FICO is usually higher because of some of the things that VantageScore uses.

There’s a lot of things that the federal government could do to increase housing stock. How are cities using their Community Development Block Grants? Can some of the regulations, zoning and building requirements in certain cities be made more flexible? A lot of things that can happen from the government side would make homeownership more achievable for us.

Are you surprised that housing is not more of a conversation in an election year?

Housing affects everybody. As the pricing goes up around the country, the conversation about affordable housing isn’t just about low- to moderate-income families. I like to use the phrase “workforce housing,” meaning somebody that goes to work every day — teachers, firefighters, police officers, etc. — being able to buy housing in their price range. Housing production, interest rates, all these things are not just affecting Black and brown communities but affecting all of the communities out there.

Another worrisome issue is the number of homes purchased by Black borrowers that are vulnerable to climate change, right?

This is our second year in a row bringing this issue up. There’s a map in the report that shows the Black population in the country is in more highly populated areas in the South, Northeast, etc. Those same areas fall along the coastline, areas more susceptible to flooding and things of that nature. So, it’s something we are very conscious of as we push to increase homeownership. We’re also focused on home preservation, setting up Black homeowners in situations where they can sustain themselves as global warming and environmental challenges increase.

What are you hopeful for in the future?

We have launched the NAREB Building Black Wealth Tour as a response to the State of Housing in Black America. We’ve also launched the NAREB Black Developers Academy to help our members that are real estate developers scale and increase their production to be able to help with the housing shortage. We’re excited that Black consumers are coming out to get the information to figure out how they can become homeowners. ●

The post Q&A: Courtney Johnson Rose, National Association of Real Estate Brokers appeared first on Scotsman Guide.

All is moving in the right direction until 10 unexpected loan buyback requests come in from Fannie Mae, costing a total of $1 million. The impetus for the repurchases are loan defects that were never caught during the prefunding stage of the fulfillment process.

“The process can be akin to roaming every thread of a spiderweb to find defects, but it’s worth it to take careful steps.”

Lenders always face some risks of buybacks, but Fannie Mae’s recent tightening of its prefunding quality control requirements is designed to prevent these types of scenarios. A lender must now conduct prefunding reviews on 10% of its closed loans or up to 750 loans per month (whichever is the lesser number).

This is a significant change for mortgage originators, who were not previously required to audit a set number of loans prior to funding — steps that can add unwanted time to the processing cycle. Fannie Mae took action after observing a sizable increase in eligibility violations for loans acquired during the year ending in April 2021. These violations frequently fell into key defect categories such as incorrect income calculations, the borrower’s unemployment status and undisclosed liabilities.

Detailed review

A prefunding quality control review is an audit that is completed on a sample of loans prior to closing, thus ensuring they’re free from defects. As part of the process, originators must document their review procedures and address four aspects — timing, loan selection, verification of data and documents, and reporting.

If they choose, lenders can complete a combination of full-file reviews and component reviews. In the latter case, quality control will focus on specific areas of a loan that pose a unique or elevated risk, such as a high loan-to-value (LTV) or debt-to-income (DTI) ratio.

 “Lenders should also be diligent about post-funding reviews, since Fannie Mae has imposed additional guardrails there too.”

Moreover, lenders must conduct reviews independently of their production department whenever possible. The people who complete these tasks cannot be involved in processing or underwriting decisions. The lender should design a plan to identify and address defects before a closing takes place. And they should allow adequate time to select loans, review them and communicate changes to production personnel.

According to Fannie Mae’s Selling Guide, lenders should target areas where a higher risk of fraud, mistakes or misrepresentation exist. These may include loans with complex income calculations (commonly involving self-employed borrowers or those who derive income from rental property); loans with multiple layers of credit risk (such as high LTV or DTI ratios); and loans secured by properties in areas that have high delinquency rates or are currently experiencing rapid changes in real estate values.

Strategic value

Fannie Mae and Freddie Mac have up to three years after buying a loan to request a repurchase, and each buyback can result in an average estimated loss of $100,000. Meeting agency requirements should help lenders avoid losses when they least expect them.

In today’s market, lenders are struggling to stay profitable and simply cannot afford this. Indeed, according to a survey from the Mortgage Bankers Association, IMBs and mortgage subsidiaries of chartered banks had an average pretax net loss of $1,015 on each loan originated in third-quarter 2023 alone.

The safeguards that quality control reviews incorporate are intended to keep such losses to a minimum. The process can be akin to roaming every thread of a spiderweb to find defects, but it’s worth it to take careful steps.

Quality control isn’t just about weeding out errors to protect lenders. It’s also a strategic process of turning data into insights. This will help the lender solidify its market position while maximizing its financial performance through improved revenues, profits, customer service and brand reputation.

Through targeted samples of loans prior to funding, for instance, operational leaders might discover that an originator has been steadily increasing their percentage of high-LTV loans. This could lead to a much-needed update of the company’s underwriting guidelines to manage balance-sheet risk and help prevent future losses.

The lender also might discover that newer loan officers are repeating the same mistakes, indicating a need for additional training or supervision. Linking the purpose of quality control to these broader outcomes is pivotal to a lender’s continued growth and vibrancy.

Best practices

How can lenders carry out quality control reviews to reap all the potential benefits? On the prefunding side, they should approach the task as an opportunity to map out the story of every loan. Knowing what they’ll need at the end, they should get the right data and documents in place, chapter by chapter, to align with their automated underwriting system’s guidelines and overlays.

Lenders should also be diligent about post-funding reviews since Fannie Mae has imposed additional guardrails there too. They must now complete a full post-closing review cycle within 90 days, rather than the 120 days they used to have. Again, this isn’t just an opportunity to detect errors; it’s another chance to identify any errant patterns that can be linked to specific roles, processes or people.

Finding the best ways to leverage these strategic opportunities can be challenging for IMBs. They may be struggling to decide whether to hire new people, reassign existing staff or outsource their quality control processes.

Two factors complicate the decision. First, as previously mentioned, is that the personnel who conduct the prefunding reviews must be independent of processing and underwriting decisions. This is designed to prevent any subjectivity that could lead someone to minimize or justify certain findings.

The second factor is that origination activity is not always steady, which is certainly true today. If a lender doesn’t have the financial ability to bring on new staff members — or the luxury to pay them accordingly during slower or busier times — they may want to take an “on-demand” approach and outsource the quality control review functions. Either way, when the mortgage market improves, the lenders that fully capitalize on the power of quality control will be in a better position to make the most of the upturn. ●

The post Prevent the Dreaded Loan Buyback appeared first on Scotsman Guide.

A nonwarrantable condo is part of a development that falls short of meeting eligibility standards set by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, as well as government-backed programs from the Federal Housing Administration and U.S. Department of Veterans Affairs. These standards exist to minimize risk for lenders and ensure that loans supported by these entities remain secure investments.

“Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies.”

Understanding whether a condo is warrantable or nonwarrantable holds immense importance as it directly impacts the borrower’s ability to secure financing. Mortgage originators who know the differences between warrantable and nonwarrantable condos can gain a competitive edge in their markets, especially if they work with lenders that are willing to finance nonwarrantable units.

Undesirable designation

Typically, nonwarrantable condos falter in meeting one or more criteria set by the GSEs or government agencies. For instance, at least 50% of the units in a condo community must be owner-occupied. A failure to meet this threshold means that the community will be labeled as nonwarrantable.

If a substantial portion of the condo complex is designated for commercial use, it might lose its warrantable status. If a project includes hotel, motel or resort elements like a booking desk, the GSEs might not endorse it.

If at least 25% of the condo owners aren’t up to date on their homeowners association (HOA) dues, the complex may become nonwarrantable. When HOAs fail to allocate 10% of their revenues toward reserve funds, the GSEs may remove their warrantable designation.

Condo complexes embroiled in unresolved legal disputes might be deemed nonwarrantable. When a condo complex lacks sufficient insurance coverage or faces an open insurance claim, these can prove to be roadblocks to the warrantable tag.

Potential advantages

Many mortgage lenders hesitate to lend on nonwarrantable condo purchases because Fannie Mae and Freddie Mac won’t underwrite these loans. But other lenders, armed with portfolio loan products for a nonwarrantable condo, may step in to provide financing.

This can be advantageous to a borrower. A nonwarrantable condo may sell for less than market value, depending on the issues that are causing it to be considered nonwarrantable. Therefore, if the issues are resolved and the property may be treated as warrantable in the future, the value and future resale appeal could increase significantly. Nonwarrantable condos also may provide the unit owner with access to better amenities and increased security, especially if it’s part of a resort or hotel.

Still, nonwarrantable condos tend to be riskier for lenders due to their noncompliance with GSE guidelines. Consequently, obtaining a mortgage for a nonwarrantable condo can be more challenging and often comes with additional financing costs.

Lenders may impose higher interest rates to counter the heightened risk associated with a nonwarrantable condo. They also might require borrowers to make a more substantial downpayment, often surpassing the standard 20% for a conventional loan. Nonwarrantable condos may restrict the borrower’s selection of lenders, as not all financial institutions are willing to underwrite loans for such properties.

Well-versed professionals

A borrower contemplating the purchase of a nonwarrantable condo must be well prepared. They will need the advice of an experienced originator and, preferably, a real estate agent who are well versed in nonwarrantable transactions.

Originators should work with lenders that have expertise in financing nonwarrantable condos. Savvy originators can guide clients through the lending process and secure favorable terms. They should thoroughly scrutinize the HOA documents to identify potential concerns like pending litigation or delinquent dues. Originators can also investigate alternative financing avenues such as portfolio lenders or private lenders, which may be more open to funding a nonwarrantable unit.

Selling a nonwarrantable condo also requires a nuanced approach. Given the potential financing hurdles for buyers, it’s essential for an owner to understand that interest in their property may be limited. Experienced real estate agents and originators can be a valuable resource, connecting these sellers with lenders that cater to nonwarrantable condos.

Lawmakers, both locally and nationally, have been working to protect condo buyers. The city of Chicago, for instance, has revised its municipal codes to bolster consumer protections. Key changes include enhanced rights for prospective buyers, who now receive a straightforward, standardized disclosure document that contains critical information about the condo.

Developers are legally obligated to furnish this document when offering condos for sale, whether during open houses or other presentations. Tenants who reside in buildings undergoing conversions into condos also enjoy expanded rights under this rule. Chicago’s ordinance stipulates that a developer overseeing a conversion must formally notify existing tenants through both mailed correspondence and prominently displayed postings.

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Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies. If you’re working with a client who is contemplating such a purchase, diligently prepare them and be ready to address potential challenges on their path to homeownership. With your guidance, they can confidently navigate the realm of nonwarrantable condos and make informed decisions. ●

The post Condominium Expertise Can Pay Dividends appeared first on Scotsman Guide.

“If the cost of compliance is too high, we are going to see banks cutting growth again to stay below that threshold.”

Regulators aim to help people, but rule setting could affect the behaviors of institutions and individuals, said Jacelly Cespedes, an assistant professor of finance at the University of Minnesota. She has studied previous revisions of the 1977 law.

“Any regulation is going to help some people, but the regulations are going to also distort the behavior of the banks,” Cespedes said. “I’m very interested in how those distortions, or those unintended consequences, hurt the communities that banks serve.”

Banks are still digesting the final rule, which runs nearly 1,500 pages. The effective date for the new rule is Jan. 1, 2026, but reporting requirements won’t begin until Jan. 1, 2027. Cespedes spoke to Scotsman Guide about what could happen with the revisions.

Is this solely for banks or will it affect nonbank lenders?

The CRA applies only for banks. Right now, more than 50% of mortgages are originated by nonbanks, so people (early in the process) were expecting that the new CRA was going to was going to address nonbanks. But nonbanks are exempt from the CRA. Intermediate banks are going to be subject to more comprehensive lending tasks. Those are banks with assets higher than $600 million. The second major thing is that now they are providing more metrics about what the CRA means and what sufficient lending to underserved neighborhoods means.

Intermediate banks are facing CRA scrutiny now?

Yes. There are three categories: small banks, which are banks with assets lower than $600 million; intermediate banks, which are banks with assets between $600 million and $2 billion; and large banks are the ones with assets higher than $2 billion. The main difference with the 2005 reform is that now intermediate banks are subject to a more comprehensive lending test.

Could community banks choose to stay small rather than grow and be governed by these regulations?

I have a paper looking at the 1995 reform in which a $250 million threshold was imposed. What we found is that some banks close to that threshold decided to stay small. They started cutting their assets. Those banks that tried to stay small to avoid a more strict evaluation had a smaller share of business. This had a negative effect on mortgages and also independent innovation. They will need to build the infrastructure to assess loans to comply with the CRA, so that is going to be a cost. Those banks close to $600 million in assets are going to weigh the benefits and the costs of being intermediate. If the cost of compliance is too high, we are going to see banks cutting growth again to stay below that threshold.

Are the revisions doing anything else?

They are changing how assessment areas are determined. It’s not only where banks have their branches but also where they are lending. This is just to address online lending and the increase in online banking.

How else could the Fed encourage more lending in low- and moderate-income communities without these changes?

I don’t have a clear answer for that because what we have seen is that, probably, without the CRA, some communities would be underserved. So, it’s not that the CRA is completely bad, it’s just that the rule, as with any regulation, can create distortions. ●

The post Q&A: Jacelly Cespedes, University of Minnesota appeared first on Scotsman Guide.

“Before sprinting off to initiate a 1031 exchange, the property owner should be wary not to overstep the boundaries, however broad they may be.”

The tax exchange is a complex strategy that must be understood completely before attempting and requires the help of a qualified professional. It has the potential of deferring both capital gains and any gains received from the sale of depreciated capital property that must be reported as income. Commercial mortgage brokers should be familiar with the 1031 exchange and how it works so they can better advise clients on whether they should use it to defer real estate taxes.

Deferred taxes

The 1031 exchange allows a property owner to “swap” one asset for another that is considered “like-kind.” Since the money never graces the investor’s pocket, any capital gains tax is suspended until the gains are eventually cashed in.

This scenario can be used repeatedly, with the seller rolling over the gain from one investment property to another. Even if there is a profit on each swap, the taxes are deferred until the buyer sells for cash at some point in the future.

This is a simplified explanation, and there are many nuances to the IRS regulation that must be understood, but it illustrates the basic function. By postponing tax payments, investors can trade with the full value of their properties — as long as they keep in mind that the IRS will eventually be owed the deferred gains.

As every investor knows, money now is always better, because a dollar in hand is a dollar that can be invested to grow wealth. Tax dollars will forever be tax dollars, but if they can be put to work for the investor before they go to Uncle Sam, so much the better.

Crucial details

A common question involves which types of property qualify as like-kind in a 1031 exchange. The term is ill-defined, but it essentially describes a tax-deferred transaction that allows for the disposal of one asset and the acquisition of another similar asset. Fortunately for the investor, the definition is quite open-ended. For something to be like-kind in real estate, it only needs to be some form of real estate, although primary residences do not qualify.

Before sprinting off to initiate a 1031 exchange, the property owner should be wary not to overstep the boundaries, however broad they may be. While most real estate is like-kind to most other real estate, it is like-kind only to real estate. For instance, the program doesn’t cover securities (such as stocks, bonds or notes), other evidence of indebtedness or interests in a partnership.

The 1031 exchange program has many rules that must be closely followed. For instance, in most cases, the process is classified as a delayed exchange in which one party will sell a property and then store the proceeds with a qualified intermediary, who is an independent and neutral party with no ties to any of the other parties involved. The intermediary holds the relevant money in an account that the seller cannot access.

Within 45 days of the sale of the first property, the former owner must designate the replacement property to the intermediary. The seller must then close on the replacement property within 180 days of disposing of the first property. Money left over from the transaction is taxed as partial sales proceeds. To offset the potential tax bill, the property buyer needs to demonstrate debt equal to or greater than what was paid off upon sale of the relinquished property.

Dubious connections

Due to the potential for tax avoidance, there are extensive guidelines in the tax code that require an expert’s guidance concerning “related parties” who enter an exchange. This term has a wide definition, ranging from family members to partnerships, corporations, trusts and entities in which more than 50% of the stock or capital interest is directly or indirectly owned by the taxpayer.

It is possible for related parties to use a 1031 exchange, but there are strict rules governing the procedure and it’s usually not advisable. Generally, buying property from a related party and selling it to an unrelated party is not allowed.

For related parties to qualify, they need to follow three conditions: They must hold the properties for a minimum of two years following the exchange; transaction details such as the sales price and rental income must be at prevailing market rates; and the taxpayer must be able to prove that the transaction did not result in tax avoidance through an income tax basis swap. There are other exceptions, but any property owner looking to avoid the prohibitions should seek professional help to make sure their financial plan is legal.

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For those in the business of real estate investments, 1031 exchanges can be a vital tool to defer capital gains and taxes, freeing up money for current ventures. It’s crucial for mortgage brokers to recommend that clients find qualified advisers and thoroughly understand the process to avoid running afoul of the IRS. Doing so can mean the difference between financial growth and legal trouble. When it comes to the IRS, due diligence is always a must. ●

The post Understanding the 1031 Exchange appeared first on Scotsman Guide.

Let’s start with how and why AI is used. The “how” is pretty simple. There are multiple AI services available, including ChatGPT, Claude and Jasper. You might already be using Grammarly, which bills itself as a free AI writing assistance tool.

“There are benefits to AI. If you have writer’s block when putting together a social media post on reverse mortgages, this might be a way to break it.”

Once you create an account (many are free), you can teach it to learn your writing style. Simply type in something to the effect, “Do you want to learn how I write?” The prompt is no more complicated than an internet search bar.

Now for the “why.” AI has been publicized as being wickedly smart and a true timesaver due to its ability to learn and grow in the future. There are specific concerns about AI’s use in mortgage and business lending. These include the potential to insert bias in the mortgage process, as well as possible security and privacy risks. The late physicist Stephen Hawking even warned about AI as a would-be threat to humankind, although these existential worries are thankfully not as immediate.

Overly informal

Setting aside these concerns, ChatGPT was given a writing example and a prompt to produce marketing materials on a loan program. The prompt stated, “Using an informal tone and a humorous example, write a social media post about reverse mortgages.” Here’s what the AI tool produced (emojis were removed):

Hey, peeps! Let’s talk about reverse mortgages, or as I like to call ‘em, “The Robin Hood of Mortgages”! Picture this: You’re retired, living it up in your dream house, but your bank account is starting to resemble a dried-up raisin. Reverse mortgages are like that lifeboat you didn’t even know you had!

Here’s the scoop, without the snooze-fest: Instead of sending your hard-earned cash to Mr. Banker every month, the bank sends YOU a check! It’s like they’re saying, “Thanks for being a homeowner; here’s some cash for your troubles!”

Let’s get down to brass tacks with a hilarious example: Meet Aunt Edna. She’s 75, loves her cozy cottage, and is always up for bingo night. But Edna’s wallet is flatter than a pancake, and she’s thinking, “How can I afford more bingo and maybe a fancy hat collection?”

Enter the reverse mortgage! Edna turns her humble abode into a cash cow. The bank coughs up some dough, and she can keep living in her cottage, rent-free, until the cows come home. The best part? Aunt Edna doesn’t have to pay back a dime until she’s sipping her morning coffee in the great bingo hall in the sky.

But before you start dreaming of all the fancy hats you could buy, remember to chat with a mortgage wizard to understand the ins and outs. Reverse mortgages have some twists and turns you need to know about! So there you have it, folks! Reverse mortgages can be your golden ticket to financial freedom in your golden years. Just remember, with great mortgage power comes great mortgage responsibility! #ReverseMortgageWins #CashForLife

Omitted specifics

First, the obvious: Yikes. Among other things, it’s a very rare occasion that one would address older clients as “peeps.” That writing style is more in line with a teenager trapped in high school in 1995 than a professional mortgage originator’s writing style.

That said, there are benefits to AI. If you have writer’s block when putting together a social media post on reverse mortgages, this might be a way to break it. The technology also wrote the post in about 10 seconds. Reportedly, it does learn a user’s writing style as more examples are put in. In the example above, it might not have had enough previous content to match the requested writing style.

There are pitfalls to AI content too. How was it generated? Is it unique content or does it plagiarize a post from elsewhere? If it’s original, who owns the content? A mortgage originator is potentially on the hook from the Consumer Financial Protection Bureau (CFPB) for advertising unsubstantiated content.

It is also incorrect in stating that “Aunt Edna doesn’t have to pay back a dime until she’s sipping her morning coffee in the great bingo hall in the sky.” With a reverse mortgage, if Aunt Edna dies and her spouse is still living, in an eligible circumstance, they get to continue living in the home as their primary residence. The post also doesn’t speak to the fact that Aunt Edna isn’t allowed to convert the home into an investment property. In most situations, if she moves out, the loan becomes due.

What about using AI to produce a shorter post on X, formerly Twitter, to help drum up reverse mortgage interest? The simple prompt of asking ChatGPT to write a Twitter post on reverse mortgages produced this result:

Considering a #ReverseMortgage? It’s like tapping into the hidden treasure chest of your home equity! But remember, with great power comes great responsibility. Before you dive in, consult a financial advisor (sic) and weigh the pros & cons. Your home, your future! #Retirement

Falls a little flat, doesn’t it? How many likes or shares will that post get? Likely, the inside of a doughnut.

Regulatory caution

What about lead generation? AI companies boast about the ability of these tools to help mortgage originators find leads. Below is what ChatGPT says when prompted, “Write about using AI to bring in new mortgage leads and how to communicate with clients.”

The AI Wand: Turning Data into Leads. Imagine AI as the magician’s wand, waving over a sea of data, and voila — out pops a list of potential clients. AI has the incredible power to sift through massive amounts of information faster than a blink of an eye. It identifies prospects who are actively looking for mortgages, like a hawk spotting its prey from miles away.

The Rabbit Hole: Where AI Finds Your Leads. But where does AI find these leads, you ask? Well, it’s a bit like a scavenger hunt. AI scours social media platforms, real estate websites, and even good old Google to discover people who have shown interest in buying a home. It’s like finding Easter eggs — except instead of candy, you get valuable leads.

AI vs. Manual Search: The Tortoise and the Hare. Now, let’s talk speed. Imagine manually searching for leads as being the slow and steady tortoise, while AI is the speedy hare. The tortoise may eventually find a few leads, but AI has already raced ahead and gathered a bouquet of them. AI saves you time, and as we all know, time is money in the mortgage game.

That all sounds well and good. But if you use AI to bring in leads, are you sure that you aren’t taking an action that potentially discriminates against some clients based on their race, religion, sex or other characteristics?

Meta (formerly Facebook) already landed in trouble with the Federal Housing Administration over discrimination with its targeted advertising system that uses AI. And CFPB Director Rohit Chopra has warned that more regulation is called for with AI-based lending decisions.

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Bottom line, artificial intelligence can be and will be a timesaver for originators and many other mortgage professionals. Originators can rely on AI to create content, but the person using the content is responsible for what’s published. Be brave, but be careful. ●

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With about half of all U.S. homeowners entering their 60s or 70s, one of the options is sure to be the Home Equity Conversion Mortgage (HECM), the reverse mortgage program from the Federal Housing Administration (FHA). HECMs enable homeowners to draw on a portion of their home equity and use it for maintenance, repairs or general living expenses.

“HECMs already account for 90% of all reverse mortgages. But with the FHA guarantee comes a number of conditions and requirements.”

Although reverse mortgages have been marketed heavily in past cycles, the popularity of the HECM comes from the fact that it’s fairly flexible and, more importantly, insured by the FHA. Just as some would consider the FHA purchase mortgage the “workhorse” of the Great Recession period, the HECM could well become a workhorse loan in a competitive market for an aging population of homeowners.

In fact, HECMs already account for 90% of all reverse mortgages. But with the FHA guarantee comes a number of conditions and requirements. Mortgage lenders succeed, in no small part, by staying compliant and understanding the requirements and risks of the loans they make.

As origination volume increases, product offerings expand and the temptation to quickly ramp up sales of different mortgage types grows, lenders and the originators who work with them should be clear in their understanding of the FHA’s specific requirements for a HECM. This goes beyond the rules governing the origination process and includes a number of requirements in the closing and settlement phases of the transaction that differ from those of other reverse or purchase mortgages.

Clear requirements

The U.S. Department of Housing and Urban Development (HUD) has set forth a number of clear requirements on the origination side of a HECM. The borrower must be at least 62 years old. They must live in the home that is backing the mortgage, stay current on taxes and insurance, and maintain the property.

There are other elements to a HECM, however, that may not be so clear. Taking out this type of loan, for example, can sometimes negatively affect the borrower’s ability to qualify for Medicaid or Supplemental Security Income. And just as with a conventional purchase mortgage, a HECM borrower must pay off the loan should they choose to sell the home.

Additionally, criminals have been known to target reverse mortgage borrowers and lenders with an ever-evolving array of scams and fraud attempts. Lenders and closing companies need to be on the lookout for new schemes and they should proactively educate their HECM borrowers.

Most lenders that choose to offer HECM products are aware of these requirements and risks. But not every HECM provider is clear on the HUD requirement of preclosing counseling for the borrower.

This is mandated to ensure the borrower is clear about the responsibilities and risks that could apply to their HECM loan. The loan will not be approved without proof of counseling.

Additionally, the counseling may only be performed by HUD-certified counselors. Mortgage lenders seeking to produce greater HECM volume would be wise to work with third-party service providers (such as closing companies or notaries) that are familiar with HUD’s requirements. Service providers should also have ample experience and might even employ specially designated HECM experts. If these companies don’t directly employ trained HECM counselors, they should have close-knit partnerships with these professionals.

Extensive scrutiny

In addition to HUD’s requirements for HECM lenders and borrowers, there are practical ramifications when lenders fail to thoroughly vet their potential partners — especially if they intend to lean on the expertise of these partners. Notaries, for example, can play a key role in the HECM closing.

Simple errors are frequently seen from notaries who are not trained or experienced with the requirements and details of closing a reverse mortgage. These mistakes often include an inadequately signed HUD addendum; a failure to procure the HECM counseling certificate; or failing to obtain documents that are not collected at closing, such as a death certificate if one of the homeowners on the title has died.

The vetting and selection process for choosing a HECM partner is important for the mortgage lender seeking to enter this market. Robust and updated procedures should be put in place and monitored. The partner should be in lockstep with the lender, especially on matters of closing procedures and fraud prevention.

Continuous training and consistently documented oversight are also advisable — especially considering that reverse mortgages tend to receive extensive scrutiny from compliance agencies due to the potential for fraud and the vulnerability of the typical HECM borrower. The HECM is not a typical mortgage, so lenders, originators and service providers should be extremely transparent and proactive with education and explanations.

Because of the increased potential for error or omission, HECM-trained notaries are usually held to a higher standard than the notaries who perform conventional purchase closings. From a lender perspective, having an experienced HECM partner can also mean a smoother borrower experience. HECM-trained closing experts can usually better explain the nuances of the closing and are prepared to take the small, extra steps that can accompany this type of transaction.

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Expect to hear a lot more about HECMs in the coming months and years. Executed properly, this loan program could prove to be a significant revenue stream at a time when lenders are battling for market share. For lenders willing to go the extra mile to ensure a smooth experience for the borrower, HECMs may, in fact, prove to be a true competitive advantage. ●

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First enacted in 1977, the CRA is a federal law aimed at encouraging banks to meet the needs of a full spectrum of borrowers, including those in low- and moderate-income areas. Among other things, the act, originally passed to curb discriminatory lending and redlining, mandated that institutions insured by the Federal Deposit Insurance Corp. (FDIC) receive evaluations from federal regulators on whether they offer nondiscriminatory credit services in all communities where they do business. Unsatisfactory evaluations may cause lenders to receive a poor CRA rating, which could bar them from certain corporate activities, including mergers and acquisitions.

The CRA currently defines the area in which banks do business via their physical footprint, taking into account the locations of branches and deposit-taking facilities. But with the rise of online and mobile banking (and the dwindling use of physical depositories), the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency sought to update that definition, initiating the reform proposal last year.

The new rule, which is set to take effect in January 2026, will extend the evaluation areas where lenders have concentrations of mortgages and small-business loans, which will be labeled as “Retail Lending Assessment Areas.”

That’s the biggest change in the new framework, and it’s a potentially seismic shift. Banks and industry groups spoke out against when it was first proposed, arguing that it could cause institutions to avoid lending in low-income or lightly populated areas to dodge wider assessment zones.

But David M. Dworkin, president and CEO of the National Housing Conference, applauded the shift.

“I haven’t been into a physical bank branch in years, but I visit my bank’s app on my mobile phone every week to make deposits or withdrawals,” Dworkin said. “The original statute in 1977 doesn’t require that branches be constructed out of bricks and steel. Branches today are often constructed out of ‘0s and 1s’ instead but serve the same purpose. My app is my branch, and the final regulation acknowledges this transformation, aligning the CRA with the 21st century.”

Dworkin called the regulation “the result of more than a decade of consultations with community and banking groups and years of work by regulators to get it right.”

“They got it right,” Dworkin quipped. “While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo, and leaves room for ongoing clarification and adjustment over a 24-month implementation period [before the final rule is officially enacted in 2026].”

Other reforms in the new framework include tiered evaluation standards based on bank size; upgraded support to institutions geared toward minority lending and community development; and greater transparency and clearer metrics in the application of CRA regulations.

“To help ensure that the CRA can continue to play its vital role in supporting economic opportunity in low- and moderate-income and other underserved communities, the agencies have worked together to modernize the framework and I am pleased that those efforts have culminated today,” Federal Reserve Chair Jerome Powell said in a prepared statement.

“The final rule will better achieve the purposes of the law by encouraging banks to expand access to credit, investment, and banking services in low- and moderate-income communities; adapting to changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type.”

Rob Nichols, president of the American Banking Association (ABA), also released a statement. He praised the intent of the new rule while reserving judgment on whether his organization agrees on its implementation.

“ABA and our members have long supported the goals of the Community Reinvestment Act to make sure people in every corner of the country have the chance to succeed,” Nichols said. “In demonstration of that commitment, banks of all sizes invested $287 billion in capital in low- and moderate-income areas in 2021 alone. We have also strongly supported modernizing the Community Reinvestment Act rules to reflect the realities of modern-day banking. The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with Congressional intent.

“We are still reviewing the nearly 1,500-page final rule released today, including changes from the proposed rule, to assess whether it meets our criteria. We are also closely examining whether the final rule can be reconciled with other major regulatory changes in play, including the Basel III capital proposal. Feedback from our members will guide us moving forward.”

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Census data shows the national homeownership rate was 65.9% as of second-quarter 2023, up a full 3 percentage points since 2016. But challenges remain. The National Association of Realtors found that the gap in the homeownership rate between Blacks and whites is the biggest in a decade.

“When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers.”

And a report this past June from the National Association of Homebuilders showed that while wage gains boosted affordability at the start of this year, the trade group’s first-quarter 2023 affordability index was still significantly lower than one year earlier.

When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers. But now that interest rates have skyrocketed, protecting people from glitches in consumer protections should be more of a priority than ever.

This past summer, the Community Home Lenders of America released its Consumer Mortgage Bill of Rights. This document identifies specific areas where consumer protections need to be strengthened. Mortgage professionals should advocate for these positions to ensure a fair and thriving mortgage market.

Pricing policies

One consumer right should be robust competition in the mortgage services market. For instance, the opposition of the Federal Trade Commission (FTC) to the Intercontinental Exchange (ICE) purchase of Black Knight was a meaningful step. One company with quasi-monopoly power over mortgage origination software services should not increase its market share.

The divestitures of Black Knight’s Empower and Optimal Blue platforms were designed to win FTC approval and helped to ease the deal’s many problems. The merger approval facilitates vertical integration of mortgage origination and servicing tasks.

There are ways that a company like ICE with such a large market share can impose anti- competitive measures on the mortgage industry. For instance, it charges so-called “user seat” fees based on the number of loan originators who use its software. By increasing these fees as originator numbers go up but not reducing them as numbers go down artificially inflates the costs of the mortgage process.

“Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices.”

Pressuring lenders into buying discretionary services (what’s known as tying and bundling) just to continue using the basic mortgage origination software service also increases costs. The same goes for charging junk fees — so-called “click fees” — to electronically access various vendor information such as the appraisal, credit report, title insurance and flood certification.

Inflated fees caused by these practices will inevitably be passed along to consumers. These practices should be scrutinized as a merged ICE-Black Knight entity grows. For example, the Consumer Financial Protection Bureau (CFPB) should monitor and address consumer mistreatment.

A different area that includes not only a dominant market power, but an actual monopoly, is credit scores. In November 2022, FICO raised its fees for credit scores by 400% — with the exception of an arbitrary and select group of about 50 mortgage lenders. The lenders pay these fees directly, but they’re ultimately passed along to borrowers, since a credit score is a required element of a mortgage. Underserved borrowers are hurt the most. This creates a disincentive for mortgage originators to work with and improve the scores of underserved borrowers with credit blemishes, since the 400% price hike will be compounded over multiple credit pulls.

The long-term solution is to create competition. Sandra Thompson, director of the Federal Housing Finance Agency, is trying to do this by initiating a process for conforming lenders to use VantageScore. Until there is real competition, however, FICO should rescind its 400% price hike and scale it back to something that resembles its true inflationary costs.

Abusive practices

Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices. So, another right should be the option for consumers to say no to trigger lead solicitations. Too often, when a loan originator pulls a credit report on a mortgage application, the borrower is immediately inundated with an avalanche of intrusive texts, emails and phone calls.

There are powerful financial forces that will fight any effort to end or limit trigger lead solicitations. A simple solution would be to create a credit-reporting portal so that consumers can be given the power at the time of the loan application to decide whether or not they want to receive trigger lead solicitations.

Another non-price-based consumer protection deals with so-called “dual compensation,” in which an individual acts as both the agent on the purchase or sale of a home and as the loan originator on the purchase mortgage for that home. Reasonable people disagree on whether this is a good or bad idea, but no one should disagree on basic protections for consumers.

Consumers should have three basic protections in regard to this practice. First, an individual representing the property seller should not simultaneously serve as the loan originator for the buyer. Second, there should be uniform nationwide disclosures. Third, a loan originator who also makes money from the real estate transaction should be licensed.

In fact, this licensing requirement should be universal for all registered mortgage originators. The CFPB should use its authority under the Dodd-Frank Act requirement that all loan originators must be “qualified.” This would close the loophole under which bank-based originators do not have to pass the Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act test, pass an independent background check or complete eight hours of continuing education each year.

Uniformity of rules should also apply to the loan originator compensation requirements under the Truth in Lending Act. This rule prohibits originator compensation to vary from borrower to borrower, but independent brokers can evade it by using different channels to charge different fees to similar borrowers who utilize the same type of loan. This loophole should be closed or enforced as appropriate.

Unfair premium

Finally — and yes, this may not technically be a consumer protection — but borrowers should have the right to have their mortgage insurance premiums canceled when their loan-to-value ratio reaches 78%.

This right actually exists in the 1998 Homeowner Protection Act statute, but not for loans through the Federal Housing Administration (FHA). The agency used to adhere to this, but in 2013 it changed the policy and the FHA now charges premiums for the life of the loan (unless the borrower made a downpayment of at least 10%).

Ten years ago, this might have made sense as a temporary step to help the FHA build up capital after the 2008 housing crisis. But the FHA is now flush with capital, and with today’s skyrocketing mortgage rates, the exit option to refinance with Fannie Mae or Freddie Mac has closed for many homeowners. ●

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