New Century Overview in LA Times

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The Los Angeles Times does a pretty good job of capturing the problems at New Century that led to its demise without being overly harsh or painting the activity as criminal. The writers capture a lot of the good things that New Century did while becoming an established fixture in Orange County. The founders did give a lot of money to local charities and they did employ a lot of people. Unfortunately, their poor decisions in lending practices are going to end up disenfranchising a lot more people than they helped with their charity donations.

There is one major inaccuracy in the article:

Account executives offered brokers bonuses of 1% of each loan, Arce said, so that a $500,000 loan would generate a $5,000 premium on top of other commissions, which vary depending on a loan’s terms. (Oberhelman, the company spokeswoman, said New Century had stopped the use of such bonuses in recent years.)

These bonuses that were given to the brokers were given as recently as January, and were being touted by New Century account executives right up until the day they closed. In fact, as New Century’s volume fell, the account executives used this selling point more aggressively to capture more business.

This article just mentions bonuses to brokers, but there are also incentives to correspondent lenders which were also in effect right up until the close of the operation.

A little more background on these bonuses. There are two ways to work with a bank like New Century; either as a broker, or as a correspondent lender.

When you work as a broker, a third-party to the mortgage transaction, all fees, whether paid by the bank or by the borrower at closing have to be listed on the settlement statement (known as a HUD-1). So if you look at a New Century loan on the HUD-1 statement and look around line 812 on the document you can see if the broker was paid one of these bonuses. It would look like this (using the example from the article):

Yield Spread Premium (YSP) $5,000 (POC)

Then there would be no money listed under the charges to borrowers column of the statement. That is how the bonus would look on your loan closing documents.

If the loan is closed by a correspondent lender to New Century then the HUD-1 would not show the name New Century anywhere on the document. All the fees and charges would be in the name of the correspondent lender. The money would be delivered to the correspondent lender after the loan was sold to New Century (usually 5 to 14 days after the loan closed).