6.25.26 Land of Opportunity; Alston & Bird’s Stephen Ornstein on RESPA; Fed Stress Tests

Welcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include opportunities that are out there, a primer on the recapture landscape, and my interview with Alston and Bird, Stephen Ornstein, on all things RESPA, as well as how regulation needs to be improved for the modern times we live in. Here, take a listen, do a little preview.

In your opinion, does the in-mortgage industry need more regulation, less regulation, or better regulation? And if you choose that third option, which is a little bit of a call-out, but you explain the ways you think it can be better.

It needs better regulation because if you're the consumer and you're going to a closing, you're overwhelmed with federal and state disclosures. And there's so much disclosure and so much regulation, it's relegated it to something that's meaningless. The new no before you o is a classic example of that. I do think that the ability to repay QM rules have been modified. You've gotten rid of appendix Q and the QM patch. I kind of like the QM patch, but you've got rid of the dreaded appendix Q, and you it's more on a pricing methodology. I think it's more flexible and it has allowed uh the industry to get into the non-QM market. So I think the CFPB, and this is under Craninger and Johnson, it was one of their last acts, was to change the QM definitions. So I think that's an example of smart regulation. Regulation has to be easier to follow. It has to be intelligible. The loan compensation rules are absurd. They're really difficult. The no before you owe, the trig rules are also absurdly complex. I work with the Structured Finance Association and we try to come up with various frameworks to make them easier. But regulation needs to be simplified. It can still be effective, but we need less of it and we need more effective, meaningful regulation. That's going to make everyone a winner.

Thanks to Equifax for sponsoring this week's podcast. With Equifax's suite of mortgage solutions, mortgage lenders can use trusted, independently verified consumer and financial data and analytics to reduce manual processes, accelerate loan decisions, improve accuracy, manage risk, and enhance the borrower experience from initial application through ongoing loan servicing. To learn more, visit Equifax.com slash business slash mortgage. Did you hear they just opened the world's largest Lego store in Las Vegas? People are lining up for blocks. Around the country, originators seem less focused on the housing bill signing ceremony postponement than on opportunity. There are opportunities, but not for every LO. There is the opportunity and goal of senior management to make their company immune from economic and world political turmoil. There's the opportunity to anchor the business to things that you can control, not to things that you can't. Like rates. MLOs have the opportunity to hand a potential borrower a pre-approval letter in minutes, but then explain to that borrower here's why that's not enough. There's always the opportunity to look at other products. Speaking of opportunities, recapture is a big one in this industry. Spend enough time around mortgage conferences, and you'll hear impressive recapture numbers tossed around with surprise and confidence. We have a 70% recapture rate. Ours is even higher. On the surface, those figures suggest the industry has largely solved borrower retention. Sorry, that conclusion starts to unravel as soon as you ask a simple follow-up question. How are you calculating it? Turns out everyone seems to be measuring something slightly different. The next time you're talking to your staff or your peers at a conference, know that part of the confusion stems from the fact that recapture has become a catch-all term. Some lenders count only rate-and-term refinances, others include streamlined government refinances, some measure borrowers who are actively shopping for a new loan. Others begin with every serviced borrower and work backwards from there. Even the numerator and denominator change from company to company, which makes comparisons nearly meaningless. A headline recapture percentage may sound impressive, but without understanding what loans were eligible, which borrowers actually completed refinance, and how many simply sold their homes instead, the number tells us very little about operational performance. It becomes more of a marketing statistic than a management tool. Obviously, servicing portfolios have become significantly more complex than they were even a decade ago. Today's servicers have access to richer borrower data, better analytics, and more sophisticated ways of identifying customers who may benefit from a refinance. Secondly, in our home equity product. And borrowers themselves have become harder to categorize. Some are moving rather than refinancing. Others appear eligible until updated taxes, insurance premiums, or debt obligations change the economics of the transaction. Looking only at the loans that closed overlooks the much more valuable question. Were those the right borrowers to pursue in the first place? If the underlying opportunity set is misunderstood, even the best sales execution will produce misleading conclusions. That's why analytics increasingly sit at the center of the recapture conversation. The objective is no longer to contact every borrower whose rate appears out of market. It's to identify homeowners whose financial circumstances, equity position, and borrowing needs suggest there is a realistic opportunity to improve their situation. Servicing data has become far more than an operational record. It has evolved into a decision-making asset, allowing letters to prioritize meaningful conversations instead of broad marketing campaigns. Ironically, the companies producing the strongest retention results may not be the ones making the most outbound calls. They may simply be asking better questions before they make them. The industry's fixation on recapture percentages begins to feel misplaced when you look at it that way. Retention has never been a contest to produce the highest number on a conference slide. It's an exercise in understanding customers well enough to know when a mortgage is no longer the right solution and when another product or no product at all better serves the homeowner. Until the industry agrees on how success should be measured, debates over who has the best recapture strategy will continue generating more heat than insight. For today's interview, I wanted to welcome to the show Austin and Birds, Stephen Ornstein, to talk about all things RESPA, as well as how regulation needs to be improved for the modern times we live in, and what he makes of the new appointment of a permanent CFPB director. He's co-leader of Alston and Byrd's consumer financial services team, where he concentrates on federal and state mortgage banking, consumer credit, and ancillary services regulatory issues. He counsels national mortgage lenders, servicers, insurers, and secondary market issuers in complying with lending regulations, including RESPA, Truth and Lending Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, Fair Housing, Fair Lending, National Flood Insurance Act, Student Lending Requirements, City Regulations and Licensing and Privacy.

I should start with a little preamble because when we talk RESPA section A, maybe we're just going to give some background. It prohibits giving or accepting any fee kickback or thing of value in exchange for referrals of real estate settlement service business. There's some other stuff you can't split charges. And if I if I miss something that's important, please fill it in. I would also add that it was created in 1974 as part of the original Real Estate Settlement Procedures Act or RESPA. And some would argue that a provision 52 years old at this point may be a little outdated, but just kind of more background on RESPA Section 8 for the audience and how you see it evolving or have you having evolved into the modern context.

Well, there was a Maverick senator, uh William Proxmire from Wisconsin, I believe, and his daughter was buying a house in the Washington area. And Proxmire and his daughter were shocked at the high settlement expenses. And Congress did an investigation and they felt that referral fees and kickbacks were somehow inflating settlement services. So it was very common before the enactment of RESPA that if you were, say, a realtor and you knew friends who were in the lending industry, you know, you referred, you showed somebody a house, and you said, Hey, you know, I I want to introduce you to Robbie, who will get you a loan. And Robbie makes the loan to the person, and Robbie says, Hey, thank you so much for that referral. Here are commander's tickets, or here's $100. And it was felt that those referral fees or the kickbacks in connection with the making of the settlement services inflated the cost because they just passed the costs on to the consumer. So that was the purpose of the statute. But think of how lending has changed since then and how broad settlement services are. And if you think about what is permitted under RESPA, so what is permitted under RESPA? You can pay somebody for services actually performed, unrelated to the referral fee. But that payment has to be reasonable. It has to be a market standard. And Regulation X, which implements RESPPA, this was implemented by the Department of Housing and Urban Development. It was transferred to the Consumer Financial Protection Bureau in 2011. RESPA is not supposed to be a market-setting statute. And back in the day, we used to be able to say, look, there's only one reasonable way to compensate somebody, and it's it's the market. But what we saw with the Consumer Financial Protection Bureau, particularly with Richard Cordray and Roha Chopper, was a very aggressive interpretation of RESPA. And let me give you a few examples of how the statute really hasn't aged well with some of the modern technology. So let's say that I am providing homeowners insurance, and I want to have an ad on a website for an originator. And I want to say to the originator, look, I how do we come up with compensation? The only reasonable way to come up with compensation would be to base the fees I pay you on the number of referrals or the number of policies that I originate by people visiting your site. And that would be a violation of REST Moon's face. I can argue that's the only reasonable way to do it, but what the consumer activists would say, what the CFPB, at least Senator Biden or Obama would say, you can only pay them on something other than the referrals. You know, let me let me give you another example. This is classic. I mean, let's say I'm a realtor and you are a lender, and I say, why don't you have a desk in my office? Because anyone coming and you know, buying a house is going to need financing. And they go to Robbie, who has a desk. And how does Robbie pay me? You know, you're the lender. You're going to want to pay me on the number of referrals or the number of loans closed. That's not permitted under RESPA. Now we can go through the gymnastics of saying, well, you know, I can pay a market rent not based on referrals, but we're getting, again, that's difficult to do. And why not call it what it is? You're you want to get paid on the basis of the market. And the concern of the consumer activists would be, well, in paying those referral fees and making the affirmative, you're influencing affirmatively influencing the consumer's choice, it's inflating costs and it it may be forcing them or you know to use you instead of going to the market, which could be more competitive. You know, another area we see a recipe being complicated is let's say that I'm a lender and I'm concerned about the loan refinancing. This is particularly true when rates are falling. And let's say that the consumer has not opted out of marketing. If they don't opt out, they can get certain referrals. They can get certain offers for refinancing, all sorts of offers. Now, if I am the holder of the loan and I'm the servicer of that loan, particularly the servicer, the servicer doesn't want to give up the servicing of the loan. And if somebody's originating the loan, in the new loan, the servicer is going to want the mortgage servicing rights of the refinance loan. It's just the way it is. So if I make a loan, if I refinance the loan and I give a benefit to the servicer for doing it, that is on its face potentially a RESPA violation because it's a referral fee or some sort of kickback to the servicer for helping to facilitate the origination of the new loan, even though there could be a consumer benefit. So I think the way forward with RESPA is make it a disclosure statute. You know, make the parties disclose what they're paying and the compensation going back and forth rather than having it be a prohibition the way it is now, given the technologies. And I think it is it hews to the market.

Can we talk briefly about how it dovetails with uh reg Z of Tila? And and Reg and Z is meant for more steering violations rather than kickbacks, but they're cousins, sister, you know, siblings. I I don't quite know how to put it. You talk about when one falls into one camp versus the other camp and where we see the lines blurred a little bit. I don't know if that's the right question when it comes to those two, but but just thoughts, thoughts on how they they dump tail and interact.

No, it's it's an excellent question. There is a new regime called tread no before you owe, which hook the good faith estimate and the initial Tila and then the final Tila and the HUD one for most loans, not HELOCs, but for most closed-end loans, you have a loan estimate and a closing disclosure. So fees paid to various settlement service providers are disclosed on the loan estimate. And then they're also disclosed again on the closing disclosure. And there are three types of sets of fees that have either no tolerance, a 10% tolerance, or an unlimited tolerance. So for example, real estate taxes, which are hard to estimate, would have no taxes, would have no tolerance. So they can be an estimate on the loan estimate, and if they change on the closing disclosure, that's okay. But a fee paid to the lender, most loan origination charges have no tolerance. So it dovetails with the kind of fees paid back and forth between the parties. They would have to go on the loan estimate or the closing disclosure. Now, an under-the-table fee, if I'm you know paying you a referral fee for sending me settlement service, that's that's not that's not necessarily going to be disclosed on the loan estimate. You know, the other area where it dovetails are fees paid to loan brokers. So there's a loan compensation uh regulation that arose from Dodd-Frank and the financial crisis regarding fees that can be paid to brokers. For example, brokers can't be paid by both the consumer and the lender. And there are also limitations. I think that many consumer activists and those in Congress drafting Dodd-Frank pointed to loan brokers as the villains of the financial crisis, fair or not. Probably painted them with a broad brush, but this is the loan uh origination compensation restrictions and and regulations are very tough on brokers.

I brought up Rig Z because that's what a lot of the Loan Depot case currently centers around. But but I do want to focus back on section eight to kind of jump back and forth here. Where's it in the news recently? Anything that that's really catching your attention, or you think that the general public should know? And then I would go into this with the assumption that most of our audience are not esteemed legal professionals in the mortgage industry. They're they're originators or capital markets folks, or people that are interested in just learning more in general.

Sure. I mean, every now and again, less with this with the Trump CFPB, uh, which has been some somewhat defanged. But the cordre and Rohit Chopra CFPBs, these were directors under Presidents Obama and President Biden, respectively, were very aggressive with RESPA compensation. So you may have remembered the PHH case, which involved mortgage insurance, among other things. They went after them, Richard Cordier went after PH with a $100 million proposed fine. And I think that ended up getting settled. It actually may have been thrown out by the by the DC circuit because there was a decision by then Judge Kavanaugh. But they do arise. And the the RESPA cases, the Section 8 often are twinned with UDAP. So these would be unfair, deceptive, abusive acts and practices. Because what a consumer activist or what a governmental regulator would say is that the Section 8 is not just a violation of RESPA, but it's an unfair deceptive act or practice, unfair competition. They'll twin it with other claims. So they do arise. Some of the blue state regulators who have jurisdiction over RESPA can also bring Section 8 cases. And you see them periodically. And again, they they will arise over what are alleged to be kickbacks or you know, referral fees. And I think the rejoinder is often, well, actual services were performed that were market standard. But they do arise and it and they're quite common.

You mentioned UDAP and that kind of dovetailing with section. Is there much chatter or movement about updating it, bringing it into the 21st century? Is there much motivation out there, even if there is chatter? Those can be those can be separate or competing uh entities.

Well, Section 8, I mean, it's like the third rail of consumer activists. They will not repeal it and they will not relegate it to just the disclosure statute. The UDAP is a new statute that came out of Dodd Frank. And uh that's kind of you know it when you see it. They're very broad parameters, and this is where an aggressive CFP director like Richard Cordra or Rohit Chopra were all over it. So, for example, both Cordre and Chopra said that marketing services agreements were basically per se illegal under Section 8 of RESPA. That they got to they cut to the chase and they said, look, under these arrangements, you're just paying for the referral. And it's actually something that Kathy Craninger didn't really touch. I mean, she was more middle of the road, and she left the the 2015 directive on marketing services uh agreements more or less alone. So I don't see the statute would have to be amended by Congress. This is it's section eight of a statute that was enacted. The CFEB can interpret it a different way. They could focus as as I've discussed, we've discussed on on you know, market that it's not supposed to be a market setting statute, and this is how you pay people, but to relegate it to just a disclosure statute or to Take the civil and criminal penalties out, you would need a congressional act to do that.

I'm glad you brought up the CFPB because Brian Johnson was just nominated to serve as the permanent director. Thoughts on what a Johnson-led CFPB would, can, will potentially look like.

Well, Robbie, I am very biased because uh he was my law partner, and I think the world of him. He is as smart as a whip. There's no extraneous comments with him. I would assume that he would be tough on consumer compliance, more akin to a Kathy Craninger. He's not going to be as aggressive as Rohit Chopra, but I you know, I think that he would be a steward of the premise of the agency. It is a consumer watchdog. I think that he's very innovative. For example, with the SEC, you get no action letters. So you can have an innovative product. And Brian Johnson tried to do the same thing when he was the deputy manager, and Rohit Chober kind of put it on ice. So I would think that a director Johnson would be interested in innovation. I don't think he would be radical. I think he'd be middle of the road. Um, again, he's tremendously experienced and very, very bright. I think he'd do a great job.

The agency's budget has been cut down, the operational capacity has been cut down. What does a modern CFPB look like? And and obviously you've mentioned Mr. Johnson's very innovative, and so he probably can do more with less. In your opinion, what does a you know a modern CFPB look like with being defanged in some senses, at least financially?

You know, they went to court, and the current director or current acting director had to request money and did for the first part of 2026, the actually the second and third quarters. So they have money. They will be able to be funded. I I you know the agency will exist. You're not going to kill the agency or reduce its employees. I think that that you know there are suits ongoing, and the agency will probably be reconstituted in some form. I think that what you'll have with a director Johnson is a more middle-of-the-road approach, a probably a more innovative, perhaps a more business-friendly approach, but one that's not an unentirely adverse to consumer interests. I mean, I think that he will follow the lead of a Catholic Cranager who I thought did a great job. I thought she was middle of the road. And there were plenty of actions under the Cranager CFPB.

I was going to close by asking you an open-ended question about anything else you're looking at or your thoughts, but I'm going to actually ask you about AI because it's kind of the elephant in the room. We can't get around. We had an ad in the commentary recently for AI compliance. It's now coming for that. Thoughts on on how AI can aid, might replace some of the legal field and more expanding, how you see those dovetailing together to use the operative, operative term we've used today.

I use it every day, um, but you need a human at this at this juncture. I think it will be the friend of the industry because it will make it easier to do the underwriting. It will make it easier for people buying the loans in the secondary market who have just discern compliance with various laws that impose SCD liability or validity of loan. So I think it's going to streamline things. It will make things less expensive, and that should inert ultimately to the benefit of the consumer.

Well, that's good news. I love hearing a positive outlook on it versus a lot of the doom and gloom that's been out there about what am I getting replaced. So, Steve, I more than just that answer, I thoroughly enjoyed this whole interview. I'm very glad we we connected. And uh, for people that don't know, you you were on a bicycle trip in Portugal randomly on the same one that my dad was. And so he he put us together. Very happy he did so, and hopefully we'll speak again soon. Thank you very much.

Great. Thank you for your time. It was great.

U.S. Treasuries and MBS extended their rally yesterday, supported by falling oil prices and strong demand for longer data bonds, pushing the 10-year yield to its lowest level in nearly seven weeks and the 30-year yield to its lowest since early March. While shorter-term yields also declined, they remain near 2025 highs due to ongoing sensitivity to energy-driven inflation concerns. And the market largely shrugged off a softer-than-expected $70 billion five-year treasury auction. On the data front, new home sales decreased 7.3% month over month in May to a seasonally adjusted annual rate of $580,000, well below $627,000 expectations, and a downwardly revised $626,000 in April. The level of sales in May is the second lowest over the last 12 months. On a year-over-year basis, new home sales were down 6.8% due to affordability constraints tied to rising mortgage rates. The West region, home to the highest priced homes, saw the biggest hit to sales month over month. There was also weakness in the more affordable South region, which is the nation's largest home building market. The Federal Reserve's latest stress test reaffirmed the resilience of the U.S. banking system, finding that all 32 large banks maintained capital levels above regulatory minimums, even under a severe recession scenario that included a 10% unemployment rate, a 30% decline in home prices, and a 39% drop in commercial real estate values. While banks were projected to absorb more than $708 billion in losses, including roughly $200 billion in credit card losses and $75 billion in commercial real estate losses, their aggregate capital ratios declined by only 1.6 percentage points, reflecting stronger earnings power and balance sheet strength. The results suggest that major banks remain well positioned to continue lending through economic stress, providing a measure of stability for households, businesses, and the broader financial system, even amid ongoing concerns about credit quality and economic growth. Today's economic calendar kicked off with May personal income up 0.7% versus 0.3% expectations and a prior reading of 0.0%. Personal spending down negative 0.7%, much worse than expected. PCE prices, which were up 0.4% month over month, and 4.1% year over year as expected. Core PCE, which came in up 0.3% month over month, and up 3.4% year over year as expected. Major orders and weekly jobless claims in at 215,000 lower than expected. Woof. Later today brings a treasury auction of $44 billion of seven-year notes. We begin the day with agency MBS prices better than Wednesday's close by about an eighth. The two-year yielding 4.12, and the 10-year yielding 4.39 after closing yesterday at 4.40%. Let's wrap up with a joke and some housekeeping. With Equifax's suite of mortgage solutions, mortgage lenders can use trusted, independently verified consumer and financial data and analytics to reduce manual processes, accelerate loan decisions, improve accuracy, manage risk, and enhance the borrower experience from initial application through ongoing loan servicing.