Hello, LOs!
On Wednesday, I asked you guys to share your thoughts on EPOs and if changes should be made to existing chargeback policies. I got so many responses, so let's go over a few.
One LO in North Carolina said he agreed that it should be a shared risk.
"Even if the client paid 4-5 months we get hit with the full EPO when [the] lender paid comp. Some lenders will also hit us with a 1% EPO even if the borrower paid the comp, which is a slap in the face considering the client paid our commission and not the lender."
He believes the EPO should be pro-rated.
"For example: Lender paid broker $9,000 on a loan that's $1,500 monthly, client pays out 4 month later, broker should only pay back $3,000 back and not the entire amount, after all the lender did collect payments during this time."
A broker in Florida told me he wants to see what the actual loss numbers for the lender are when the loan is paid off during the EPO period.
"You paid us $5,000 in commissions, but what is your real cost of the loss and what they are factoring into this figure?" he asked. "Maybe if that cost is $744, then they just recoup that number, then I could decide if I want to recoup from my employee or just have an expense on my P&L."
A retail branch manager in Maryland said he had "mixed feelings" about EPOs, similar to the conflict he feels about the foreclosure/eviction moratorium.
"I feel for the occupants, but the landlords are people too. Because the investors are buying yield, they get stung when loans payoff early. But shouldn't that be part of the risk of the buyer? The answer should be, 'Yes', but the value of a mortgage is largely impacted by risk. So, if we elect to eliminate or modify the EPO penalty, it will have to show up in the pricing. And that's where it will ultimately reside."
A production manager on the West Coast told me that he uses a script to communicate the penalties the LO faces:
"Mr/s borrower, you don't have any prepayment penalty on your loan and nothing will happen to you if you pay your loan off early, but I have my 'lottery clause' I like to mention – if your loan is paid before you've made 6 payments, we get hit with some pretty steep penalties – so if you're lucky enough to win the lottery in the next couple months, if you could make those 6 payments before paying it in full, it would be greatly appreciated on my end."
He said the script was effective – none of his clients have ever balked at it.
One broker in California said he had four suggestions to "solve" the EPO issue.
1) An EPO fee to borrower similar to no-cost equity lines...
2) A contractual agreement that for a specified period....paying off the loan for something other than sale of property, will result in a fee added to the loan balance for any money above LO compensation used as lender credit UNLESS the originating LO is the one generating the new refinance..it will force a LO to have to pass on a new opportunity or decide if retaining a client is more valuable and paying the EPO penalty.
3) Eliminate the large rebate pricing
4) Factor in the cost of losing a loan to EPO into your pricing module...it is going to happen and as often as not...beyond the control of the broker."
An executive at a retail lender told me that EPOs have been a source of contention "on both sides of the fence for a long time." The reality is that most lenders have factored in a runoff number that is built into their pricing models to account for some level of EPO, he said.
"One of the challenges is that there are some Bad Actors that churn loans for nominal benefit to the borrower that impact mortgage pool valuations regarding prepay speed. Perhaps a model that treats the reason for an EPO would be more equitable. Example: sale of home vs refinance."
We're going to be doing a feature on HW+ about the issue later this month, so please send me your thoughts/experiences with EPOs by emailing me anonymously at jkleimann@housingwire.com.
Also, quick programming note: We will not be sending LendingLife on Monday due to the Labor Day holiday. The newsletter will return on Tuesday.
James Kleimann
Managing Editor, HousingWire
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