the LIBOR rate has spiked in recent weeks.

What is the LIBOR and why is something your clients should be concerned about?

From a report on Bloomberg this week..
“The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers’ Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent.”

LIBOR is short for London Bank Inter Offered Rate. It is a rate index that is set by the British Bankers’ Association.

Created in the mid 80′s the index became widely used in the mid to late 90′s in the US mortgage markets as the preferred index for adjustable mortgages. Most subprime and about 40% of conforming adjustable rate loans are based on a LIBOR index.

Becasue the LIBOR is set by the British Bankers’ Association these loan rates cannot be controlled by the FED.

If the LIBOR’s recent increases continue this means that the adjustable rate mortgage payments that are tied to the LIBOR could more than double at adjustment time.

In the last 5+ years the LIBOR rate has been a safe haven for borrowers looking for the lowest payment.

Most LIBOR based loans are tied to the 6-month index. This means that the rate is a rolling 6 month average. So will a short term spike cause rates to jump? No. But an ongoing increase will.

If you have past clients in a LIBOR rate keep a very close watch on the monthly rate.

This would be a great opportunity to make contact with these clients and make them aware of the possibility and to alert them that they should not wait for the rate to spike before they have an exit strategy.

I have yet to see one of these banks named in any marketing information.

They use the F.S.B.’s exemption from state licensing laws as the basis for this ability.

It is true that a federal charter grants the bank an exemption from many state lending laws.

The problem is that HUD, not the states regulate the origination of HUD supervised loans – FHA and VA.

HUD is a federal agency.

So the question is can working for a bank as a net branch allow you to originate loans anywhere in the country?

That is what everyone is being told, that is the way many of the recruiters are attracting good people. If it was true life would be good. You could originate loans in California, Pennsylvania, Florida, Texas, Utah, anywhere that you can get an application. It would be nice. It would be better than nice. It would be great.

That is why many people are considering this type of opportunity.

There is only one problem. It’s only one problem

But it’s a big one.

According to HUD a bank’s Federal charter does not exempt the bank from HUD rules for originating FHA loans.

There is an FHA term called “Area of authority”. According to HUD this applies to all originating entities, brokers, lenders or banks. This is the geographic area that a branch or loan officer is authorized to originate from within.

I emailed HUD with a simple question.
—
From: Lee Walsh [mailto:xxxxxx@yahoo.com]
Sent: Thursday, June 26, 2008 11:26 AM
To: FHALender
Subject: net branch question

Hi,

I am writing to ask about several “net branch” companies who are marketing that they are a division of a bank with a federal charter. They are advertising that as one of their loan officer or branch managers that I would be exempt from the state licensing and HUD branch restriction concerning states I can originate in from my home state.

They are telling me that because of their federal charter I can originate in all states from my home state.

Is this true?

Thank you for your assistance

Lee Walsh
—–

Here is the answer I received from HUD.

RE: net branch question
Thursday, June 26, 2008 7:04 PM
From: “FHALender”
To: xxxxxxxx@yahoo.com

It is true that States exempt banks from their State licensing requirements. It is not true FHA allows a bank to originate anywhere it wants.

So, please read over our FAQs on branches and see if they help. If you want to write us again, please provide the bank’s FHA ID number and who you are talking to.

—–
Here is the FAQ information HUD forwarded with the reply.

In order to take FHA loan applications in a State, you must first meet all requirements of the State (either have a State license, exempt from having a license or State doesn’t require a license) and have that State in the FHA lending area of your home office or a branch office that is registered with FHA.

Each lender office’s “Lending Area” is composed of the State that the office is located in plus all adjacent States where a FHA registered branch or its home office. This geographic restriction does not apply to streamline refinance loans. In the FHA Connection, a lender can see the lending area of each of its registered branches and its home office under the section entitled AAFB (Areas Approved for Business). The AAFB is a listing of all HUD field offices located in the States within the lending area and is located under the Institutional Profile tab in the Lender Approval section..

See this link for HUD’s list of “Lending Area’s” based on the state where you are located.

So the question you have to be asking (I asked myself the same question) is: If it is not legal how are they doing this?

This answer is an easy one. They (the bank) have not done their due diligence to determine if this practice is legal. It took me one simple email to HUD.

I don’t think that any major banks are doing business this way. They are smaller banks that have the federal charter.

For more information please visit NetOriginator.com

I learned about this from a prospective branch manager when I asked if she was considering other companies. I asked what is was about the other company that she liked – she mentioned the ability to originate in all other states without getting the normally required licensing.
Naturally I wanted to know more, so I asked for the URL.

Sure enough there it was right on their front page. Originate in all other states – licensing not required!

When I read the details I was amazed at how they are doing this.

They are paying the originator as a 1099 contract processor on the loan.

I know as an originator that sounds good. The ability to make loans in all states right now with out going through licensing, compliance, continuing education, back ground checks, etc.

But take a minute a think it through – according to RESPA, HUD, and every state that requires licensing and / or has lending laws on the books fees must be reasonable.

Let me ask the question this way; If you were an auditor from HUD or any state agency would you consider it a reasonable fee for a processor to be $3,500 of a $4,000 total fee?

Would you consider that a fair fee for a mortgage originator who does the lions share of the work?

I feel pretty confident that your answers are No to the first question and Yes to the second question.

This falls into the same category as paying loan officers as 1099 contractors or paying an LLC to avoid income taxes. Is it legal? No. Are companies doing it? Yes.

If you are a professional in this business and you are planing on being around for the long haul. Participating in these business practices will only guarantee a quick and painful end to your business.

It will only take one unhappy employee to blow the whistle on these practices and then everyone involved will in it knee deep.

If you have questions about being paid with a 1099 instead of as a W-2 employee see the first post on this topic.

I always appreciate subscribers and welcome comments and questions.

For more mortgage net branch information visit: NetOriginator.com