Is It A Deal Or Chicanery?

According to Redfin, nearly 80% of homeowners have mortgages with rates below 5%, having refinanced during the pandemic. The only borrowers expected to refinance or sell if rates decline in 2024 are those who purchased homes in the past 18 months, which increases the threat of EPO penalties for originators.

Generally, brokers cannot escape EPO penalties once the broker signs a lender’s contract, except by ending their partnership. Some brokers claim negotiation is possible if they generate enough business for the lender. But, those deals are shrouded in mystery, and according to some sources, not to be trusted.

Equal Risk

It may seem as if EPOs are solely a broker problem, but they can come back to bite wholesale lenders as well if their policy frustrates enough of their partners.

A cautionary tale for lenders comes from Christopher Foote, chief growth officer for Milestone Mortgage, who decided not to renew his company’s contract with PRMG Mortgage because of their buyback policy, which includes EPOs.

“Sometimes it can be to your own detriment,” Foote said about refinancing borrowers early. “But you also have to do what’s right for the client. And at the end of the day people need to save money in this economy.”

He said PRMG’s contract states they can force a broker to buy back a loan at any time and for any reason the lender deems necessary. Foote attempted to negotiate, saying that Milestone was PRMG’s top broker partner in Massachusetts, but they still refused to alter the contract. If brokers, like Foote, use their business as leverage to negotiate, it means reducing the amount of loans sent to that lender or canceling the partnership altogether.

“We loved working with them, but not under unreasonable terms,” Foote said. “Because, ultimately, they [EPOs] could bankrupt you.”

PRMG Mortgage did not respond to a request for comment.

Losing one broker partner is not detrimental to a wholesale lender’s business. But, if more top-performing partners decide to leave because they don’t want to be punished for going after refinances, it can negatively impact a lender’s market share.

It may not be feasible for most lenders to simply eat the penalty cost instead of having their brokers pay it, especially if they’re already struggling to maintain profitability in this market. That is why Jonathan Fowler, vice president of business development for American Financial Network Mortgage Inc., said it’s worthwhile for both wholesale and retail lenders to negotiate their EPO policy for top broker partners or top originators.

“If somebody’s sending me a hundred million dollars a month of business, and I lose a hundred thousand dollars one month on EPOs, can I raise their pricing by two basis points and recoup my money without ever causing a problem between the wholesaler and my customer, which is the broker shop? Yeah. It’s probably a better business decision to change it by two basis points than it is to potentially ruin a relationship,” Fowler said.

Years ago, as a top producing originator for Allied Mortgage Capital Corporation’s Texas-based branch, one of Fowler’s investors would waive his EPO penalties, unbeknownst to Fowler.

“I asked the question, ‘I know that this sounds crazy, but why do I never get any buybacks from you?’ And they quite simply put it, ‘You’re sending me a billion dollars a month, why would I ever push a $30,000 buyback on you?’ ” Fowler said, recounting conversations with this investor.

Rocket Pro TPO cuts a deal with their top 20 broker and correspondent partners through its Pinnacle Program, where they don’t have to pay any fees if another originating company pays off the new loan early.

“An EPO is just to protect some of the losses from a lender standpoint,” said Rocket Pro TPO Executive Vice President Mike Fawaz. “The only time our broker is liable within our Pinnacle Program to pay an EPO is when they actively refinanced the loan … as long as you are not the one generating that loan, or the one proactively working that loan, you’re not liable for it.”

Fawaz said more top brokers are now showing interest in Pinnacle’s EPO fee waiver compared to when it initially launched during the previous refinance boom in 2021. He suggested that’s likely because the brokers anticipate the new refinances will be for borrowers who bought their homes more recently, after rates went up, increasing the risk of an EPO.

However, what makes Pinnacle especially unique is that it explicitly states Rocket Pro TPO selectively enforces its EPO penalties, unlike some lenders which have more of a secretive or unspoken agreement with their originator or broker partner, as in the case of Fowler.

Fawaz recognizes that being explicit about the agreement is what protects brokers and makes the deal legitimate. Knowing the Pinnacle program has publicly established guidelines, Fawaz said brokers can trust Rocket to not renege on their promise, unlike what other lenders have allegedly done.

“A key differentiator between Rocket Pro TPO and our competition today is that our Pinnacle program protects the broker community when it comes to EPOs versus, ‘Hey, we’re gonna waive an EPO, but the moment you decide you’re not gonna do business with us, we’re gonna send you these crazy bills’,” said Fawaz. “And that’s not how we do business.”

Backroom Deals

If a lender agrees to negotiate its EPO policy with a broker, it is most likely going to happen without a contract as a kind of backroom deal. That’s not to keep jealousy from stirring between broker partners, though. According to James Brody, compliance expert and senior partner with Garris Horn LLC, lenders won’t put EPO policy negotiations in a contract because it could be seen as a RESPA violation.

“While there has been and always will be an element of special treatment for those companies who can generate a greater volume of good loans, I have only heard unconfirmed rumors with regard to such selective EPO enforcement,” Brody said. “That being said, even if such a policy is not in written form, I would not be the least bit surprised that such was happening on a more de facto basis.”

He said it’s highly unlikely a lender would agree to contracting the deal even if the broker pushed for it.

“I doubt any companies would be brazen enough to have written policies about such selective enforcement, which could be used as evidence of RESPA violations,” Brody said.

Section 8(a) of RESPA prohibits a person from giving or accepting any fee, kickback, or “thing of value” in exchange for a referral related to a real estate settlement service involving a federally related mortgage loan. Under RESPA, a “thing of value” may include a payment, advance, loan, service, or other consideration.

“The thing of value (i.e., the agreement not to enforce EPO Penalties) would be given in exchange for the referral of loans to be closed,” Brody said.

Brokers may enter into backroom deals at their own risk, though, and Fowler believes a deal can be done in a way that protects the broker. He recommends ensuring such an agreement is in writing, preferably in a binding contract that lays out all the terms and conditions.

He also strongly recommends clarifying when the agreement goes into effect and when it expires, otherwise a lender could easily retroactively charge the broker EPO Penalties.

“Just because I don’t enforce or push back that EPO today doesn’t mean I can’t push it back a year from now,” Fowler said.

That is how Loan Factory CEO Thuan Nguyen got into an altercation with United Wholesale Mortgage (UWM) in 2021. After receiving UWM’s ultimatum, stating brokers must either choose to work with Rocket Pro TPO and Fairway Independent Mortgage or UWM, but cannot continue doing business with both, Nguyen’s deal with UWM regarding EPO penalties was reneged upon, even though it was documented through an email exchange.

“They [United Wholesale Mortgage] assured me in writing there would be no EPO,” Nguyen said. “The promise was upheld for 1 year until the Ultimatum. Upon facing the Ultimatum, I realized that they are not a good partner for me. I chose Rocket. Consequently, they sent me an invoice totaling $594,175.50.”

Nguyen showed NMP a screenshot of an email sent from UWM Account Executive Bryan Miller confirming the changes they made to their EPO policy specifically for Loan Factory. The promise Nguyen refers to was that he would not have to return his commission if a borrower refinances early with a different broker.

“Once they see that you are stepping away from them, they will go after you,” Nguyen said. “Even if I show them that I have their written email confirming the agreement that they won’t charge EPO, they still walk past their promise.”

“I tried to sue UWM but I did not,” because UWM dropped its claims, Nguyen said. “After I paid them about $70K, they said it is all settled and I don’t owe them anything.”

UWM did not respond to multiple requests for comment.

Fowler explained why some lenders may get away with charging EPO penalties retroactively, even when the broker received a written promise that they would not get charged.

“So, if I decide today not to push these back and you decide six months from now not to do business with me anymore, it doesn’t mean that I lost my time to push back,” Fowler said. “It can still be done.”

‘Brokers Need Representation’

“Brokers need representation,” said Client Direct Mortgage CEO Ramon Walker, after UWM hit him with more than $124,000 in EPO penalties on 12 different transactions, dating back to 2020. He was given seven days to pay the full sum.

UWM notified Walker of the EPO Penalties in a cease and desist letter sent in December 2023. Walker said this was the first time he’d been notified. In the letter, UWM also took issue with a Facebook group Walker created, UWM Vs. Rocket Pro TPO. Walker said the group allows brokers to freely debate the pros and cons of working with either lender. However, UWM attorneys accuse Walker of “improper use of UWM’s intellectual property” and allowing “defamatory statements” to be made by members in the group.

Walker said his working theory is that UWM knew about those EPOs for years and are only demanding payment now because he created the group.

“Their [UWM’s] gain on sale in 2020 was 300 basis points,” Walker said. “They made $1.5 million off of me that year. In their mind, they’re probably like, ‘Oh, don’t worry about these couple of EPOs. We’ll get him next year.’”

UWM did not respond to multiple requests for comment.

Although Walker expressed that he isn’t afraid of a fight and would “love to get in discovery with UWM,” he believes the broader broker community is too vulnerable against lenders.

“We need an organization that actually protects us, and is not complicit with the individual that’s writing us the contract,” Walker said.

Fowler agreed, saying that brokers are too vulnerable to fight back. If any broker wants to challenge a lender’s demand for repayment or negotiate their contract in advance, hiring an attorney is possible, but not always feasible.

“Brokers don’t have attorneys on speed dial because they cost so much money,” Fowler said. “Even most independent mortgage bankers have weak attorneys for in-house counsel … ”

After receiving a demand notice, Fowler said attorneys for independent mortgage bankers only look to confirm that the banker did the loan and double check the amount the lender is asking for, but rarely do they dispute whether or not the originator should be charged.

“We’re stuck in a David versus Goliath kind of thing,” Fowler said.

“Unfortunately, there are many brokers that are doing business with other lenders, and they are in a bad position because they don’t know what’s gonna happen. They’re always on edge,” Fawaz said. “And that is not a world that anybody should live in.”