Are Landing Platforms Like Privlo in Compliance with the SAFE Act?

[Corey Dutton]

Privlo is a new lending platform that connects homeowners who can’t qualify at the bank, with private money lenders. But once the website actually launches, will Privlo be in compliance with new regulations under the SAFE Act?

Depending on which State the property is located in, if it is classified as residential 1 to 4 units, Privlo may be skirting a new licensing requirement under the SAFE Act. For example in California, even if you’re lending your own money on residential real estate, 1 to 4 units, you must run your loans under a licensed California broker.

Privlo, a California If Privlo is a licensed real estate brokerage in the State of California, they can make a commission or flat fee on transactions fused on their website for properties located in California. So what about all of these other lending platforms? Are they in compliance with the SAFE Act? Probably not. Depending on which State the property is located, if it’s a residential property 1 to 4 units, there may be a licensing requirement for brokering such a transaction, even if it takes place online. So what will lending platforms like Privlo do about the requirements for licensing under the SAFE Act? With over $2 MM in funding, Privlo better get clear on this before it launches to the world. (Read the full article here: http://www.inman.com/2013/05/02/privlo-lands-2-1m-in-seed-funding/)

[Bill Gulley]

David, it's not as simple as that, in the origination process DTI, qualifying ratios, verifications of assets, income and liabilities are determined and the determination is made as to the borrower qualifying for a particular loan program. Originators come in different forms as to their duties, responsibilities and liability in generating loans. If an originator has loan authority the may accomplish underwriting, these are generally senior originators. There are loan processors, prior to the new regs, that took applications and pre-qualified applicants, some knew the regs better than the loan officer but usually their job was simply to process, not to give a commitment. Processors are the entry level to the mortgage origination business. A LMO does do underwriting functions, good ones do. But today, I agree with you in that most are not really qualified.

What happens in say secondary market loans is that originators, be them broker or bank types, do field underwriting and originate the loan per the mortgage wholesaler's guidelines and send it to a second stage of underwriters in the wholesale organization. At the second stage it's more of a double check of what the originator did, ratios, docs are complete, no real brain damage as initially the files are reviewed by assistants, then the file is passed off to the underwriter with loan authority, they make the decision if the loan will be made or purchased.

The originating office is basically selling the loan to a wholesaler, while the have different motivations, each wants to make money and they need to operate on the same page. I've had some really good arguments, I think I mostly won, with wholesale underwriters who were not that experienced and often went over their heads with some.

Here is the problem. During the late 80s mortgage operations popped up like weeds, very little regulation. The industry relied on self governance as wholesalers, banks and other institutions buying or making loans were prudent, especially in secondary markets. Regs changed allowing investment banks and commercial banks to merge operations in the 90s. This allowed more leeway in portfolio holdings and selling seasoned loans in securities. Basically the flood gates opened to investors for securitized mortgages creating a greater demand for originations. All kinds of mortgage products began hitting the streets, like the no-income verification type products.

The role of the mortgage originator became more mechanical in checking off program requirements which got easier. Wholesale underwriters also got off easy and to fill the pipe line underwriting got very lax. It got so lax that new hires with no financial experience were placed in underwriting offices to simply follow a book of instructions in some operations. This continued through the next decade to the crash.

What we have now are old car salesmen who got into mortgage originations, Wal-Mart employees hired into lending operations years ago, whose experience is that learned from their organization or what they picked up, mostly from a marketing point of view to sell a financial product filling a pipe line. Not saying there aren't financially astute originators or underwriters now, saying that most have really had narrowly defined operations experience and there are many that have no formal financial training out there.

Now, take these types who are accustom to meeting written loan policies, checking of a list of requirements, have them take a test with a few hours of classroom training and you have today's LMO. You still have some small banks, brokerages and origination offices hiring as they have for the past twenty years. Not bad folks, just not qualified as they were once required to be. There is a lot of nepotism in banking and in mortgage businesses as well, certainly a good ole boy aspect.

The other issue is that regulators and lawmakers are only aware of square holes, the secondary market, prudent lending practices based on statistical evidence of large populations. Conventional lending is all they have to relate to. So they set the bar a little lower making the existing square hole a little larger allowing more applicant to fit through.

What they don't understand is individual underwriting, that is the round peg, while some will slide through that square hole, most won't.

Underwriting seller financing is not about meeting certain guidelines today, it's about determining the degree by which buyers miss qualifying standards, it's not about bad, but how bad. It's about determining the likelihood of a borrower improving over time to meet conventional guidelines. It's backward planning from the date an obligation matures to the present, looking into the future and assessing the ability of a buyer to perform, their motivation and how high the hurdles are. This is not taught and it would be difficult to teach.

You certainly can't underwrite a seller finance deal unless you can underwrite a conventional loan, by underwrite I mean determine a successful loan with a great deal of certainty. It's an objective and subjective process. You may find that most LMO will claim to have knowledge to underwrite, ask them if they would buy the loan at the UPB in the event of default, doubt they have that much confidence. I did that for almost 15 years, had the only loan guarantee for seller financed transactions like it in the country as I was told, it was a loan purchase arrangement, but that's another subject. Still have several of those loans going as well.

The SAFE Act has made seller financing a hard pill to swallow for sellers, especially the amortization requirements. With new laws pertaining to loan servicing, only a fool would service their own loan without an extensive servicing background, things are fine when all is well but when things go bad, they can end up really bad.

The liability involved for a LMO is now huge in a seller financed or cash loan, one crash can end their world, it's going to take either a really sharp originator or a really brave one willing to roll the dice and they may be unaware of the issues. Most LMOs work under a sponsor an institution and about all will not allow them to originate anything that is not their product or any third party arrangement. In fact, the old third party originations are not allowed now.

There is also the CFPB, a new cop on the block, they will be looking at big players and pretty busy, but if someone coughs out there they could come down on any individual or private deal that is in violation.

Back on topic, as I said, I'll bet the firm mentioned will have a compliance officer, I can't see something at that magnitude not being compliant or at least attempt to be. I'll stop my morning ramblings now, all being IMO. :)