LenderNews by Rob Chrisman
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Oct. 1: Letters from readers on lenders buying banks, regulators, risk-sharing, and on-line mortgage applications

October 1, 2016

Bank or non-bank, residential lenders live in a regulated world. And given the media, government, and consumer awareness of the financial industry, this facet of the business is not going away.
 
Addressing that, and specifically the differences between banks and non-banks, I received this note from Wayne Watkinson, Esq., a Principal with Offit Kurman. “Although I agree that careful consideration should be given before acquiring a bank, and that (a lender buying a bank) is not a ‘no brainer,’ the level of regulation of the lending activities of independent mortgage companies is substantial and should not be minimized. Whereas a depository typically has one prudential regulator, its home state or the OCC, a nationwide independent lender must be licensed in each state, dealing with differing regulatory requirements in each. For such companies, at least one state examination is almost always in process. 
 
“Further, although both are subject to NMLS and the SAFE Act, the independent mortgage company must license its loan originators, which involves education and testing, whereas the banks and their subsidiaries are subject to the less rigorous registration process, which is not state specific. The move toward transitional licensing is one step toward levelling this playing field. Most of the other bank regulators cited in your September 9 commentary, such as the Department of Justice, HUD, VA, the CFPB, Fannie, Freddie and Ginnie, also have regulatory authority over independent mortgage companies. It is not a ‘no brainer,’ however, because the bank is subject to regulation by the FDIC, among others, in areas outside of lending such as deposit taking, capital requirements, credit cards, etc. Independent mortgage companies entering this space will need a differing expertise. Further, depending upon its corporate structure such as through a holding company, its affiliated businesses will be limited by regulators such as the Fed. Accordingly, although not a ‘no brainer,’ many nationwide lenders are considering moving toward a banking platform, and we believe that considering such a move has merit in many instances.”
 
While we’re on banks and regulations, Jonathan Foxx of Lenders Compliance Group has a second article on the Wells Fargo scam, entitled “First thing we do, let’s kill all the regulators!” In his first article, “Wells Fargo, A Predator’s Tale,” he wrote about how the lack of systemic accountability is at the core of illegal banking practices. In this new article, he writes about the “circular firing squad” that has followed in the wake of disclosure of the bank’s actions. An insight that Jonathan contributes is how the scam could have gone unnoticed by the regulators, a feature of regulatory review that opens a loophole, which he calls a “money-making loophole that for years was exploited by Wells Fargo for all it was worth.”
 
Scott Olson, Executive Director of the Community Home Lenders Association (CHLA), sent a note addressing up-front risk sharing discussing the message sent by the CHLA to the FHFA (which oversees Fannie & Freddie.) “This big concern is the longstanding Congressional concern about ‘vertical integration’ – that the large Wall Street banks could use their securities power and expertise to leverage the domination of the GSE mortgage origination market – thus hurting consumers and small and even mid-sized lenders. The letter explains in detail why these are serious concerns. Regarding specifically up-front PMI risk sharing – CHLA is opposing – unless there are formal protections for community lenders – such as a prohibition on volume discounts.
 
“The CHLA has submitted detailed recommendations and comments to the Federal Housing Finance Agency (FHFA) in response to FHFA’s June Request for Input (RFI) on Credit Risk Transfers by Fannie Mae and Freddie Mac. CHLA submitted these comments as the only national association that exclusively represents non-bank mortgage bankers.
 
“The CHLA comment letter extensively lays out the problems with up-front risk sharing – including the lack of transparency, long-time Congressional concerns about vertical integration, and the harm up-front risk sharing poses to consumers and small lenders. The letter also notes that up-front risk sharing would undermine a “level playing field,” an objective stated in FHFA’s RFI. And it points out that the GSEs could accomplish risk sharing goals of reducing taxpayer risk exclusively through back-end risk sharing without harming consumers and small lenders.  
 
“The CHLA laid out 3 main recommendations in the letter. First, CHLA’s main recommendation is that FHFA should not permit any Up-Front Credit Risk Transfers by the Enterprises. CHLA believes this is needed to ensure competitive access for all mortgage originators in order to maximize consumer choices and competition and lower mortgage rates and fees.
 
“Second: if, however, the Enterprises are permitted to engage in up-front Credit Risk Transfers, this should be limited to loan level risk sharing through guarantors [e.g., private mortgage insurers (PMIs)] – which MUST include three market protections: (a) a prohibition against volume discounts, (b) a requirement that any guarantor/PMI must serve all approved seller-servicers, and (c) full pricing transparency.
 
“Third, additionally, if the Enterprises are permitted to engage in any up-front Credit Risk Transfers, such use should be conditioned on periodic certifications by FHFA, based on objective evidence, both that: (a) a fully competitive cash window exists to serve all origination market needs, and (b) mortgage originators can securitize loans on a fully competitive basis with vertically integrated mega-banks and other aggregators that structure and execute up-front risk sharing securitizations. And there should be complete transparency by the Enterprises with respect to G Fees, buy-up and buy-down grids, LLPAs, or any other mechanism that provides for pricing variability."
 
“The letter goes on to state that, ‘These recommendations reflect bipartisan concerns raised during debate on the 2014 Senate GSE Reform bill that vertical integration poses the significant risk that the major Wall Street banks could use securities affiliates to monopolize or dominate Enterprise loan origination – which in turn led to provisions effectively barring such practices that use securitization-based Credit Risk Transfers.’
 
“The letter also questions whether so-called ‘collateralized recourse’ transactions were truly recourse, pointing out that many of the up-front risk sharing transactions done to date appear to involve third party risk sharing – as opposed to risk retained by the actual mortgage originator.  This raises concerns about vertical integration and about the ability to maintain a competitive GSE mortgage origination market.” Thank you Scott.
 
And Hunter Dodson, with Pierpont Communications, Inc., sent along a note for borrowers titled, “Eight Reasons not to Fear Online Mortgage Applications.” And even though it is directed to retail consumers, LOs and brokers can learn a thing or two from reading it, and actually use some of this information to improve their service levels.
 
“For some, the prospect of applying for a mortgage on their computer or phone is a daunting one. Even at this late date on the technological timeline, there are still those who either don’t understand the benefits of getting their mortgage electronically or who are worried about the process itself. If you are one of those people here are eight very good reasons why you should fear not!
 
You can get an online mortgage on any device. Regardless of how you connect to the internet, you will be able to do a full mortgage application electronically. While at one time it was only possible to apply using your personal computer, the introduction of phone apps for this purpose means you can connect with a lender on the device of your choosing. In addition, electronic security measures make an online application as safe as handing a written document over to a lender.
 
“You can get an online mortgage at any time. The days of visiting an office to apply for a mortgage are long in the past, meaning you are not constrained to someone else’s schedule anymore. Nor do you have to worry about the hours a call center might be open so you can talk to a mortgage broker directly. The electronic process puts the time choice in your hands. If that means you want to apply on a Sunday afternoon or in the middle of the night on a Wednesday, it’s your call. Yes, your application will be reviewed during normal business hours, but when you apply is up to you.
 
“Applying for a mortgage online is very efficient. Because there is nobody sitting in front of you while you fill out your application, you can take as long as you like. That means you have the time to research your answers. Also, because you are more than likely applying from home, you have all the resources available to do that research.  When you apply in person, you are invariably going to forget to bring certain documentation with you. The result is that applying online is, ultimately, a more efficient process. Because your application is bound to be more complete than if you did it in person, the decision makers can act more quickly because they are less likely to have to go back to you for clarifications.
 
An online mortgage application reduces chances of mistakes. Anytime a second person has to do the data entry on your application, there is the possibility of error. It is simply human nature. In transferring your written application into an electronic version, mistakes are possible. With an online application, you, the borrower, are inputting your information directly into the system, greatly lessening the chances of typos and errors of omission.
 
“Online mortgages give the borrower more protection. Lending regulations have changed dramatically since the unpleasantness at the end of the previous decade. There are now many laws in place that exist to protect borrowers from the predatory lending practices of the past. The nice thing about an electronic application is that it must, by law, detail all the particulars of the loan for which you are applying. There is more transparency now than there ever was, so, for instance, if your loan of choice includes a balloon payment, the mechanics of how it works are very clearly spelled out for you in writing. In the electronic environment, you can no longer be verbally told one thing and then given another.
 
“In-person and online mortgage applications are the same in the eyes of the regulators. The Equal Credit Opportunity Act requires a lender to give online applicants the same consideration they would give to a would-be borrower who applies in person. There is no advantage gained by visiting with the lender face to face. 
 
“There is no sales pressure with an online mortgage. By removing the human element from the application process itself, there is no chance that a lender will try to upsell you on a plan you don’t particularly want or need. Because it is you pressing the buttons, it is you who are in control!
 
“Applying for an online mortgage is easy. The prompts on a typical online mortgage application are very obvious, so there is no way to mess it up — even if you are not an especially computer savvy person. Furthermore, you can bail at any time during the application process if you decide not to apply. And that includes after you’ve hit send. That’s right: submitting your application is not binding.”
 
Hunter’s note to borrowers wrapped up with, “Now the time has come to embrace the concept and make it work for you. Put the old ways behind you and apply for your next mortgage electronically! Amplify Credit Union is a member-owned financial cooperative with more than 57,000 members, serving Austin, Texas since 1967.”
 
 
(Thanks to Penn P. for this one.)
A Girl Potato and Boy Potato had eyes for each other, and finally they got married, and had a little sweet potato, which they called ‘Yam.’
Of course, they wanted the best for Yam.
When it was time, they told her about the facts of life. They warned her about going out and getting half-baked, so she wouldn’t get accidentally mashed, and get a bad name for herself like ‘Hot Potato,’ and end up with a bunch of tater tots.
Yam said not to worry, no Spud would get her into the sack and make a rotten potato out of her! But on the other hand she wouldn’t stay home and become a Couch Potato either.
She would get plenty of exercise so as not to be skinny like her shoestring cousins.
When she went off to Europe, Mr. And Mrs. Potato told Yam to watch out for the hard-boiled guys from Ireland and the greasy guys from France called the French Fries. And when she went out West, to watch out for the Indians so she wouldn’t get scalloped.
Yam said she would stay on the straight and narrow and would not associate with those high class Yukon Golds, or the ones from the other side of the tracks who advertise their trade on all the trucks that say, “Frito Lay.”
Mr. And Mrs. Potato sent Yam to Idaho P.U. (that’s Potato University) so that when she graduated she’d really be in the Chips.
But in spite of all they did for her, one-day Yam came home and announced she was going to marry Tom Brokaw. 
Tom Brokaw!
Mr. And Mrs. Potato were very upset.
They told Yam she couldn’t possibly marry Tom Brokaw because he’s just……
A COMMONTATER
 
 
If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “The Fed’s QE: Help or Hindrance to Lending?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)