As the lending industry evolves, changes are made to credit reporting. The newest of these changes is the emergence of a concept known as “trended credit data”. Equifax, one of the three major credit Read more...
As the lending industry evolves, changes are made to credit reporting. The newest of these changes is the emergence of a concept known as “trended credit data”. Equifax, one of the three major credit bureaus, has called it “the most important tool developed by the credit reporting agencies since the advent of the credit score” (CAMP source). Fannie Mae will be implementing trended data (TD) into its Desktop Underwriter risk assessment and automated loan underwriting software on September 24th, with the launch of DU 10.0.
Currently credit scores provide a picture of consumer behavior at a moment in time—a snapshot of sorts—and do not necessarily demonstrate how a borrower has managed credit over a period of time. The trended credit data provides information over time, attempting to more thoroughly tell the story behind a credit score. There are many questions and concerns with this new system, so we have tried to address many of them here.
How does trended credit data work?
Trended data will typically go back 24 months. Right now trended data just means data on the use, balance, and payment history of revolving credit cards. Other information will likely eventually be incorporated and examined over time, but for now it is essentially an examination of credit utilization and actual payment amounts on these accounts.
What exactly does this mean? With trended data, a viewer of a report will be able to view the way someone manages their credit card accounts in aggregate. Has their balance been slowly decreasing? Do they always pay off their card in full at the end of the month? Does the cardholder spend more seasonally (think summer vacations and holiday shopping)? What does their credit utilization rate (CUR) typically look like?
This information is very useful for two groups of hypothetical loan applicants. First, consider three applicants for a loan. They all have the same credit score—720. Just looking at that number, it would be difficult to determine any difference in risk in lending (if other traditional factors like down payment and income are appropriate for their application). But logically we know those people could have different levels of risk (debt, late or missed payments, etc.). Now let’s say trended data shows us that one of those applicants has an increasing aggregate balance across their cards, one has stayed roughly even and is making payments, and the other is demonstrably lowering aggregate credit card debt over time. Obviously the applicant with rising debt is more risky than the others. Along the same line of thought, the applicant lowering debt is likely the safest—they already have a good credit score, but are following debt management practices that suggest that in the future their score would be even better.
The other group of hypotheticals is the applicant that has good credit, a good application, but shows a high credit utilization rate. This means that their aggregate credit card debt is near their overall credit limit. This is a factor that can lower credit scores and is typically a red flag for approving an application (in the event the credit score is still in an acceptable range). Trended data can show how this debt has been accumulating and what the applicant’s debt management usually looks like. If the applicant is a seasonal credit utilizer that always pays off the debt the next month, then there is far less concern. In this case trended data may help someone get approved that normally would not have at that time.
DU 10.0 will allow underwriting for borrowers without credit scores. Currently this requires manual underwriting, and manual underwriting for these people will continue in some cases. To underwrite, a three-in-file merged credit report and evidence of at least 2 trade lines that stretch back at least 12 months will be required. One of these trade lines must be housing (rent payments), but the other can be anything, such as payments on a cell phone bill. There are more hoops to jump through as far as qualifications (proof of income, bank statements, loan-to-value ratio limits, etc.), but any applicant with no credit score should not expect a traditional process.
What does this mean for consumers trying to qualify for a mortgage?
Applicants with good scores but increasing aggregate balances across their cards are going to have more problems qualifying for loans than they did in the past. Upward trends in this debt indicate measurable, substantial increase in risk. According to the California Association of Mortgage Professionals (via TransUnion), these borrowers are 33-55% riskier (CAMP source) than similar borrowers who pay off their accounts in full every month.
People with decreasing aggregate balances on credit cards are going to fare better in the application process than in the past. These people are considered relatively lower risk and the process of trended credit will help these borrowers prove creditworthiness.
Under this system it is likely that rapid credit fixes (like paying off a credit card) will have an impact on score and likelihood of receiving a loan, albeit a smaller impact than before due to the fact that trended data will be able to determine overall riskiness of debt management, not just focusing on one or two good recent decisions.
While Fannie Mae is changing the way it looks at credit and underwriting, it does not actually anticipate a substantial change in the percentage of approvals. Through better risk assessment they anticipate more accurate approval, but this does not necessarily mean that the number of qualified applicants is lower. It just means that the number of those who would have been approved in the past, but will not now, is roughly equal to the number that would not have been approved in the past, but will now.
Who is NOT Affected by TD?
Other popular sources will not yet be impacted by TD. Freddie Mac will not (yet) be using trended data. FHA and VA applications to DU will not be impacted yet by trended data either. It is quite possible that these programs will all be impacted by TD soon, but at least for now TD is just relevant to Fannie Mae products.
FICO credit scores and VantageScores will also not include trended data in their calculation.
There will also be the same vehicle for borrowers to dispute data as currently exists. Likewise, Adverse Actions and the required disclosures will also be the same.
SOURCES
https://www.fanniemae.com/content/fact_sheet/desktop-underwriter-trended-data.pdf
https://www.corelogic.com/downloadable-docs/trended-data-faq_external.pdf
“Trended Credit Data and DU 10.0”, a webinar presentation, California Association of Mortgage Professionals (CAMP)
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We wrote recently about potential updates to Section 8 housing law in California. S.B. 1053, sponsored by Sen. Mark Leno (D-San Francisco) would have made it illegal for a landlord to deny a housing applicant Read more...
We wrote recently about potential updates to Section 8 housing law in California. S.B. 1053, sponsored by Sen. Mark Leno (D-San Francisco) would have made it illegal for a landlord to deny a housing applicant because they receive Section 8 assistance. This bill failed to move out of the Appropriations Committee, ending the possibility of the bill passing and becoming law.
The California Apartment Association (CAA) had opposed the proposed legislation for a few reasons. Owners and operators working with Section 8 have to abide by a different set of regulations than those strictly governed by state and local law, so CAA thought this regulatory burden should remain voluntary. These landlords must also cooperate with the local housing agency to receive their payment and many landlords believe this complex system (coupled with accusations of government inefficiency in payment) decrease the economic viability of their properties. Lastly, the cost of insurance for Section 8 voucher properties can be higher (as much as 20% higher, according to the CAA).
These concerns prompted the CAA to oppose the legislation. For now, Section 8 policies are unchanged in California.
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A couple of months ago I wrote about the restrictions on the use of drones (also referred to as UAS) for commercial purposes. Some real estate professionals had become interested in aerial photography Read more...
A couple of months ago I wrote about the restrictions on the use of drones (also referred to as UAS) for commercial purposes. Some real estate professionals had become interested in aerial photography and videos for their listings, but without a pilot’s license and a waiver from the Federal Aviation Administration (FAA) any commercial use was illegal. The FAA has now announced finalized rules on commercial use of drones that make operation more accessible. If you are interested in using drones in a real estate business, here is what you need to know:
The pilot’s license requirement is gone. The drone operator must be at least 16 years old and have a “remote pilot certificate with a small UAS rating, or be directly supervised by someone with such a certificate.” This certificate comes with a passed aeronautical knowledge test at an FAA-approved testing center or a Part 61 pilot certificate with a UAS online training course provided by the FAA. This new rule is much less stringent than the old rule, but still requires commercial drone operators to understand the rules of air traffic and and pass a TSA security background check. A real estate professional cannot just buy a drone, attach a camera, and start flying it for commercial purposes or pay someone else to do it unless they also have passed the requisite tests.
There are assorted safety rulesin place—the industry is not being entirely deregulated. Operators of drones must keep them within their line of sight, below 400 feet altitude or within 400 feet of a structure, and at or below 100 mph groundspeed.
UAS may not be operated over any persons “not directly participating in the operation” unless they are under a covered structure or inside a covered, stationary vehicle
Operation is permitted during daylight hours and during civil twilight (30 minutes before official sunrise and 30 minutes after official sunset) with appropriate anti-collision lighting
There is little word on any updates to the fines of violation of this policy. We know from the past that the FAA will fine those that unlawfully use drones for commercial purposes. SkyPan was fined $1.9 million dollars and industry experts expected fines to typically fall in the $1,000-$10,000 range before this rule. There will be a new fine of at least $500 if an operator causes serious injury or property damage with the UAS and does not report the incident to the FAA.
The FAA believes these changes are important to safely “spur job growth, advance critical scientific research and save lives” with impacts ranging from our real estate industry to the ability to “deploy disaster relief”. The FAA cites industry experts who believe the rule could generate more than 100,000 jobs and $82 billion for the economy over the next 10 years.
The next potential regulations will deal with privacy and data collection issues. The FAA does not currently regulate how UAS gather data, instead deferring to local and state privacy laws. It is possible that commercial use regulations will be created to address these concerns.
What do you think about the use of drones in the real estate industry? Is this a fad or will it become more common? Comment below or reach out to me at cody@adhischools.com for any questions or clarifications.
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In what should be exciting news to any Veterans looking to pursue a career in real estate, effective July 1st the initial licensure processing for all honorably discharged Veterans will be expedited.
S.B. Read more...
In what should be exciting news to any Veterans looking to pursue a career in real estate, effective July 1st the initial licensure processing for all honorably discharged Veterans will be expedited.
S.B. 1226 added Section 115.4 to the Business and Professions Code (BPC) and requires that all boards within the jurisdiction of the Department of Consumer Affairs “expedite, and may assist, the initial licensure process” for any applicant that can prove honorable discharge from the U.S. Armed Forces. This includes the licensure process under the California Bureau of Real Estate. The Salesperson Exam/ License Application also provides the details for this expedited process. There is no word yet on how expedited the process will be, but considering the process can currently take several weeks this should be a valuable perk for Veterans.
We at Adhi Schools would like to thank all Veterans for their service and remind our readers that Veterans receive a 25% discount from our live packages if they choose Adhi for their real estate education. We are proud to say that we have many Veteran students who have completed our programs and we always provide the highest quality real estate education to those who have served our country.
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Like any professional license, a real estate licensee can have his or her license suspended or revoked for various reasons. Criminal conduct is one of those, which makes sense considering the responsibilities Read more...
Like any professional license, a real estate licensee can have his or her license suspended or revoked for various reasons. Criminal conduct is one of those, which makes sense considering the responsibilities of a real estate agent. Few people would want to be represented by someone they do not trust while relying on that person for financial advice, showing their home, and handling the paperwork to buy or sell property.
Passing the California real estate exam does not equal an endorsement of one’s character and there are a lot of reasons why trust in your real estate agent is important. The good news is that in California, if a real estate licensee breaks the law there is a possibility that they will have their license suspended or revoked, protecting potential clients.
The California Bureau of Real Estate (CalBRE) runs background checks before granting licenses and reserves the right to deny them if an applicant has been convicted of a “substantially related crime”. Sections 480 and 490 of the Business and Professions Code define this as an act that may be deemed substantially related to the qualifications, functions, or duties of a real estate licensee, with more specific details of applicable conduct available here. Because the background check process involves fingerprinting, CalBRE is notified by the Department of Justice and the Bureau immediately begins an investigation to determine if the crime is substantially related. Disciplinary action can then be taken, including suspension or revocation of the license.
While this seems to be conveniently outlined by the law, below are a few cases that show how broad the phrase “substantially related crime” is. We have pulled real examples of disciplinary action from the CalBRE “Verify a License” section on their website, but have chosen to leave the individuals at the center of these cases relatively anonymous out of professional courtesy and good taste.
Case #1 is relatively straightforward—a real estate broker failed to properly oversee trust funds in his control and negligently allowed a shortage of $111,828.27 to occur. It was determined to not be a case of intentional mismanagement. and the broker license was revoked with a right to a Restricted license. The broker went on (a few years later) to regain a non-restricted broker’s license.
In Case #2 a real estate salesperson was convicted of two misdemeanor counts of cruelty to a child in connection with public intoxication. CalBRE believed that the cruelty to a child convictions were serious enough to revoke the salesperson license because of the threat of substantial injury to the children. Although CalBRE offered a path to a Restricted license, it doesn’t appear that the licensee performed the required steps to obtain this.
In Case #3 a real estate salesperson was convicted of felony assault and his license was revoked as the crime was substantially related to the qualifications, function, and duties of a real estate licensee. In this case there has been no action to restore the license or grant a restricted license to the offender.
What these three cases illustrate is CalBRE’s commitment to maintaining the standards of the real estate profession. The system in place recognizes, assesses, and meets a crime with appropriate disciplinary action. Few would argue that Case #1 and Case #3 should be met with identical punishment and they were not. While there is always the possibility for poor judgment or an appeals court overturning a CalBRE decision (which has happened), the system is in place for a reason and often functions well.
On top of the potential for a loss of license, if an agent or broker is a REALTOR® and is found to be in violation of the REALTOR® Code of Ethics, disciplinary action from the local REALTOR® association can include fines and suspension of REALTOR® membership. Many crimes would result in a violation of this code, so criminal offenses can be met with considerable consequences even if CalBRE or the courts decide that a license will not be suspended or revoked.
As always, for questions or clarifications just leave a message in the comment section or reach out to cody@adhischools.com . We welcome your opinions.
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Illegal immigrants, undocumented workers, illegal aliens—whatever the chosen vocabulary, there are millions of people residing in the United States and California that fall into this category. Illegal Read more...
Illegal immigrants, undocumented workers, illegal aliens—whatever the chosen vocabulary, there are millions of people residing in the United States and California that fall into this category. Illegal immigrants live somewhere and with California’s notoriously high prices, renting is the only option for many. This raises questions for the landlord. Can you ask about immigration status? Do you have to rent to an illegal immigrant if you do not wish to? Are illegal immigrants reliable renters?
California law prohibits a “landlord or any agent of the landlord” from inquiring about the immigration or citizenship status (or compelling a statement about immigration or citizenship status) of a “tenant, prospective tenant, occupant, or prospective occupant of residential rental property”. That same section of code does allow the landlord to request information or documents in order to verify an applicant’s identity and/or financial qualifications.
Remember, illegal immigrants can receive driver’s licenses in California and it is illegal to discriminate in employment or housing because of the nature of a driver’s license. Asking for identification documents might turn up one of these driver’s licenses. The person will not have a Social Security number, making it more difficult to verify information and financial capability. However, credit screening companies can run a credit report without a Social Security number if they have information such as the Individual Tax Identification Number. Because of this the California Apartment Association (CAA) recommends not rejecting applications because they do not have a Social Security number. Rather, they recommend a credit report and allowing the applicant to submit other evidence of financial stability, such as payment history on monthly bills like utilities. If at this point the applicant does not demonstrate adequate financial qualifications, there is significantly less risk in denying the application (as opposed to immediately rejecting the application when it becomes evident the applicant is not a legal resident of the country).
Whatever your screening process for tenancy applicants, put it in writing and follow it consistently. If someone is turned away—whether they are a legal resident of the country or not—and evidence suggests that another person was not turned away despite similar qualifications or lack thereof, it could be viewed as unlawful discrimination. As we discussed in our article about renting to convicted criminals, it is lawful to conduct an “individualized assessment” to determine if an applicant will be accepted for tenancy; what is not permitted is using this process to circumvent policy in a discriminatory manner. To put it into context for this article, if strict financial standards are put in place to rent (which can have legitimate purpose), it would be risky to specifically use individualized assessments to allow only citizens or legal residents of the United States to rent from you in order to weed out illegal immigrant applicants.
The bottom line is if an individual meets all other requirements to rent from you, it is risky to turn them away. If the applicant does not provide a form of identification along with evidence of financial qualifications, they can be rejected without risk (after all, it does not matter where someone is from, if they cannot prove who they are then those financial qualifications only prove someone is qualified to rent). Without a genuine reason (think finances, certain types of criminal record, etc.), however, discriminating against illegal immigrants in the State of California is not an advisable practice.
As always, for questions or clarifications just leave a message in the comment section or reach out to cody@adhischools.com . We welcome your opinions.
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Medical marijuana, the controversial practice that flies in the face of federal legal classifications of the drug, has been a troublesome topic for landlords for some time. While California landlords have Read more...
Medical marijuana, the controversial practice that flies in the face of federal legal classifications of the drug, has been a troublesome topic for landlords for some time. While California landlords have had the right to prevent tenants from smoking in their residences under existing smoking laws, the law lacked the clarity needed to assure landlords of the legality of medical marijuana smoking bans. A new bill working its way through the state legislature would clarify the law.
California Assembly Bill 2300 is authored by Assemblyman Jim Wood (D-Healdsburg) and is sponsored by the California Apartment Association (CAA) and supported by the California Association of Realtors. It specifically states that individuals permitted to smoke medical marijuana may not in “any location at which smoking is prohibited by law or prohibited by a landlord”. Marijuana is essentially being treated much more like tobacco.
This will not give landlords the legal ability to prevent individuals with a medical cannabis card from consumption of marijuana in any noncombustible form, including the use of edibles, oils, pills, patches, or vaporizers. The language of the bill specifically states smoking is prohibited with no language addressing these methods.
AB 2300 passed through the assembly floor on May 5th with broad bipartisan support—of the 80 potential votes, 77 votes yes and 3 were either absent or abstained. It is currently at the first reading stage in the state senate, meaning a vote should occur in the near future. If it passes—which looks probable given its bipartisan success in the assembly—it will move to the governor’s desk to be signed into law or be vetoed.
If a landlord chooses to exercise this right, clear, specific lease agreements are crucial. Just like any other provision of tenancy, landlords should make it clear that they are renting with conditions in mind. If this bill becomes law and landlords can treat marijuana like tobacco, it would still be wise—if for no other reason than convenience down the road—to clearly explain this policy and present it in a leasing agreement. Clear communication is a safe practice.
We will be sure to update our readers as this process unfolds. As always, for questions or clarifications simply comment below or reach out to cody@adhischools.com
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You’re a landlord and you receive an application for one of your vacant units. You get excited, looking forward to the income, but then you learn that the applicant has a criminal record. What do you Read more...
You’re a landlord and you receive an application for one of your vacant units. You get excited, looking forward to the income, but then you learn that the applicant has a criminal record. What do you do?
Maybe it matters what the crime is. You might feel comfortable renting to a nonviolent offender convicted twenty years ago. Maybe mental illness was involved and the convicted individual has demonstrably undergone successful treatment.
But what about a sex offender or someone recently convicted of running a meth lab in their last residence? Obviously the type of crime and amount of time since the conviction will impact your perception of risk. So what do you do? You want to protect your property and other tenants.
Landlords must be careful to ensure that their reaction to these situations is not perceived as unlawfully discriminatory. While no state or federal law prevents discrimination that solely targets criminal offenders, it is illegal for the practice to discriminate against protected groups such as racial minorities, regardless of intent.
On April 4th, 2016 the U.S. Office of Housing and Urban Development (HUD) announced that their interpretation of the Fair Housing Act is that any policy or practice that is “facially neutral” but has a “disparate impact on individuals of a particular race, national origin, or other protected class” is “unlawful”, unless the policy or practice is “necessary to achieve a substantial, legitimate, nondiscriminatory interest”. This is where the type of offense and the period of time since the conviction come into play. While refusing to rent to an arsonist who burned down his last apartment building can be considered legitimate, discriminating against someone with a petty theft conviction may be more difficult to justify. Especially if it turns out that you are turning away members of an otherwise protected class and you don't have uniform standards.
The last requirement is an evaluation of potential, less discriminatory, alternatives. In the event a policy is challenged and upheld as lawful, HUD or the rejected tenant can examine alternatives. The landlord does not need to search for alternatives to their legal policy—this burden falls on HUD (or the potential tenant to recommend a HUD-approved policy). But change could be prompted if HUD finds the necessary interest of the policy “could be served by another practice that has a less discriminatory effect”. This could be a mandate to include an “individualized assessment” that allows the potential tenant to prove good tenant history since the conviction, evidence of rehabilitation, etc. This may not change the decision for the individual appealing the rejection of their application, but in theory it would make the policy less discriminatory over time. And in October of last year HUD allocated $38 million to more than 100 groups to fight housing discrimination. Legal challenges to these policies should be anticipated.
So, unless you end up rejecting candidates in proportions that match your population, you could wind up on the wrong end of allegations of illegal discrimination. Thus, it is important to have a well thought out, comprehensive, consistent standard for these situations. And, if in doubt, contact legal counsel specializing in these issues.
In summary, here are the rules to keep in mind to best protect yourself:
Consider the nature of the crime
Consider how long it has been since the conviction
Apply your standard consistently—exceptions are risky!
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The Section 8 housing voucher program is at the center of recent debates in the California legislature and in the Appellate Division of the Sacramento Superior Court. Section 8 is designed to provide housing Read more...
The Section 8 housing voucher program is at the center of recent debates in the California legislature and in the Appellate Division of the Sacramento Superior Court. Section 8 is designed to provide housing for very low income families, the elderly, and the disabled: the federal government provides the funding and local housing agencies distribute vouchers that essentially guarantee a portion of the rent to a landlord. The Section 8 recipient pays a portion of the rent and the housing agency sends a check for the remainder. Landlords have long chosen whether or not they would participate in Section 8. Federal law does not require landlords to participate, so states typically follow those guidelines. Now, however, arguments are being made that landlords should not be able to reject applications to rent for the reason that their income is from a Section 8 voucher.
The court case of Sacramento Manor v. Morris was of particular importance in this debate. Court proceedings began when Sacramento Manor ended its participation in the program, eventually evicting any remaining Section 8 tenants. The Sacramento Manor cites difficulties receiving payment on time as a significant reason for their intended exit from the program (an issue they blame on government administration of the Section 8 program, not the tenants). A tenant, Dorothy Morris, was sued for eviction and in her appeal claims elderly tenants and Section 8 tenants should be considered protected classes under the Unruh Civil Rights Act.
In February the California Apartment Association (CAA) filed a court brief arguing that participation in the Section 8 Housing voucher program should remain optional for landlords. The CAA claims “a myriad of valid business and policy reasons why owners should not be forced in to the program and why it should remain voluntary as intended under federal law”. In the brief the CAA also argues that the voluntary nature of the program is designed to incentivize people to join the program and that landlords should not be forced into permanent arrangements. Last week the plaintiff chose to drop the Section 8 protected class argument (for which the CAA claims credit), ending the threat to landlords—for now. Without the legal precedent of a court ruling, another person could bring a similar suit to court with a chance of success.
Meanwhile, State Senator Mark Leno (D, Senate District 11) has authored SB 1053, which ,if passed and signed into law, would classify those receiving Section 8 vouchers as a protected class under the Unruh Civil Rights Act, meaning discriminating based on a potential tenant receiving Section 8 vouchers would become illegal.According to Senator Leno, “All tenants should have a fair opportunity to apply for housing, regardless of whether they receive a housing voucher”, receiving support from housing-specific advocacy groups such as Housing California.
This would also mean that the recent developments in the Sacramento Manor v. Morris court case would become irrelevant as the legislature (and subsequently, the governor) settles the issue itself. California’s legislature has a strong Democratic majority and the state also has a blue governor, so it is quite possible that this Democrat-sponsored bill will in fact become law. The bill is currently placed on Appropriations Suspension file, meaning it is waiting to advance to the floor for voting.
Real estate professionals should keep an eye on these proceedings as they could greatly impact the renter’s market in California. There is also the obvious need to understand any and all protected classes in order to avoid discriminatory behavior in your business practices. We will be sure to update our readers as soon as possible when there is a development.
For questions or clarifications, start a discussion in the comments or write to the author at: cody@adhischools.com
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Anyone involved in the real estate industry knows that interest rates are currently near historic lows, which makes sense—the government does not want to slow down spending in a sluggish economy. There Read more...
Anyone involved in the real estate industry knows that interest rates are currently near historic lows, which makes sense—the government does not want to slow down spending in a sluggish economy. There has been speculation for months that the Fed would raise rates (it has to happen eventually) based upon the health of different sectors of the economy. This speculative waiting was put to rest (at least for a moment) on Wednesday (4/27/16) when the Fed announced that it would not be raising its benchmark rate yet. The Fed wants its monetary policy to remain “accommodative, thereby supporting further improvement in labor market conditions”, providing continuing hope for the recovering housing market.
Although the Fed has not changed its rates, Freddie Mac’s Mortgage Rate Survey showed a jump from 3.59% to 3.66% from last week for the average 30-year fixed-rate mortgage. This is a climb from all of April, but no need for alarm. March had higher rates and February spent most of the time right around the 3.66% figure. Last year at this time the average rate on these loans was 3.68%. So disregard any alarmist articles or discussion about the significance of this rate jump.
So what does all of this rate talk mean for the housing market? Well, lower rates tend to free up investment. Some analysts have praised the Fed’s decision, noting that unemployment figures are not yet ideal and the low rate policies have been working. And although mortgage rates have climbed over the last week, they are far from high. We will keep an eye on this situation and report back with any updates, but for now rates do not appear to threaten the housing market.
For questions or clarifications, start a discussion in the comments section or contact the author at: cody@adhischools.com
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