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.
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.”