July 19: Notes on auditing social media, MI changes, recent CFPB proposals, and managing operational risk

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

Too early to start your Christmas Shopping? They’ve almost thought of everything – and a reader from Utah contributed, “Someone has invented “Selfie Toast”.

 

There is a lot of money flying around with fines and settlements – where is it coming from and where is it going? “While Citi will soon pay $7 billion to settle with the DOJ over mortgage abuses, and BNP Paribas just paid $9 billion for violations of US sanctions, and recently JP Morgan paid $13 billion over various residential-backed mortgage securities, the problem is bankers don’t do time! These fines, large as they are, have simply become a cost of doing business. Unless future settlements involve jail time, these abuses will continue.” So wrote Elliot F. Eisenberg, Ph.D. And as we know, the cost of doing business is passed on to borrowers. The Justice Department will issue more news soon on residential mortgage-backed securities cases, says Tony West, associate attorney general.

 

“My company’s compliance department is circulating rumors that it is going to audit the social media of every LO. Are others companies doing that?” You bet they are – and just think of the cost of doing this which is in turn, of course, passed on to the borrower. Rules and regulations regarding social media websites are a big deal – just think if you’re a Wells or a Bank of America keeping tabs on every LO. Compliance department reviews are usually broken out into Regulations: DD, B, Z, and E, and the acts that are covered are The Fair Housing Act, Truth in Lending Act, Real Estate Settlement Procedures Act (RESPA), Fair Debt Collection Practices Act, UDAAP, Deposit Insurance or Share Insurance, Gramm-Leach-Bliley Act, CAN-SPAM Act, Children’s Online Privacy Protection Act, and the Community Reinvestment Act (CRA). And company social media sites, especially those of banks, are reviewed for compliance with the new social media guidance issued by the FFIEC with a nod to the FTC. Compliance folks will look at Facebook, Twitter, LinkedIn, YouTube, and a search engine is used to perform a search on all LOs.

 

Regarding the proposed mortgage insurance changes proposed by the FHFA, I received this note from an industry insider. “The GSEs have a laudable goal of avoiding losses and making sure MI companies can pay in periods of stress. Most agree, in fact, it is not an unreasonable request if done properly. Unfortunately this rule does not do that.   While it accomplishes the goal of no deferred payment obligations (DPO), and ensuring  liquidity, it goes far in excess of what is needed. It is an odd combination of statutory and GAAP accounting mixed with some cash flow analysis, resulting in a needless over capitalization of the industry. Since all the legacy insurers have said they can be compliant and the newer insurers have indicated likewise, it is not a question about if one MI has an advantage over another. If there is no advantage, all companies remain eligible and expect to do so in the future.  Rather the rule needs to be modified to have proper balance.  It is also interesting, I think, that the GSEs are putting in place rules for regulated insurance companies like the MIs but have no similar protocol for evaluating counterparties for the capital market and other insurance deals they do. It seems logical that all counterparties that take credit risk for them should be evaluated similarly.”

 

The note finished up with, “It is important to note that only a limited premium on a declining basis is included (when premiums are a contractual obligation, not to mention CCAR and FHA consider future premiums/revenues), the assets factors do not consider seasoning (so an MI company must keep stress level capital regardless of how old a loan is), the proposal is pro-cyclical as it calls for more assets as loans go delinquent as expected even though at time of origination an mi must hold stress capital. Further it does not count legitimate assets such as investments in subs and unearned premium. There are probably a number of ways to achieve their goal without the potential consequences of increasing cost to the borrower, decreasing availability of credit to the borrower, increasing taxpayer risk and reducing incentives for private capital.”

 

And this from an attorney in Vermont. “Your readers should remember the original intent of the Consumer Finance Protection Bureau. The CFPB should only create programs to educate consumers about loans, pass regulations to ensure that lenders follow existing laws and prosecute businesses that don’t treat borrowers honestly. The Dodd-Frank law requires these actions, and no more. The CFPB seems to believe that it knows better than the consumers that want to be able to choose certain programs, lenders, who exist in certain channels, or state legislators who legalized them. The CFPB was not created to protect consumers from themselves.”

 

From the Atlantic Seaboard comes, “Have you read the CFPB guidance on mini correspondents? I found the guidance ill-conceived and too open to individual interpretation. When you have time, read it! The first thing I saw as an error was the lack of noting the licensing. Brokers cannot by definition lend. So let’s assume we are dealing with bankers that are also brokers. My concerns last year and still today are who directly employs the underwriter and two what is it a legitimate warehouse line of credit. Or better yet, when is it a legitimate line of credit. These questions were asked of CFPB and I really do not see the answers. Basically, CFPB needs to do everything to prevent restrictions on businesses from transitioning.  Some might contend that the Rule and guidance impacts the RFA restriction on access to credit, although I disagree. At the end of the day, CFPB needs to define in plain language what they believe is a mini-corr vs a correspondent. I don’t think that CFPB has accomplished that challenge concisely.”

 

From one of the Great Lake states I received this note on the treatment of the mini-correspondent channel by the CFPB. “About the developing ‘mini-corr story’ stemming from the CFPB statement late last week…  See my comments below in italicsAs a ‘mini-corr’ with just a year under my belt in that channel (albeit with 15 years in the industry), I’m taking this new ‘policy’ as an insult to all the hard work and money I have poured in to my company to become a banker. (In this state we have some of the highest standards for mortgage banker licenses in the nation.) And all of this gibberish from an unregulated, pseudo-federal agency that can’t even remodel their own building without spending NEARLY TRIPLE what they originally planned to????

 

“The guidance sets out some of the questions the CFPB may consider in evaluating mortgage transactions involving mini-correspondent lenders in order to understand their true nature. This evaluation involves examining how the mini-correspondent lender is structured and operating, for example:

 

1. Whether it is continuing to broker loans;Who cares if we are still brokering loans in addition to our banker channel? As long as we are following appropriate regulation for broker channel loans when originating in that channel, who care if we operate in both simultaneously…  Should we give up brokering loans all together and tell a client to go away just because I don’t have a correspondent channel to deliver their loan which just so happens to have some unique circumstance?  Is this really good for the consumer?

 

2. Its sources of funding whether it funds its loans through a bona fide warehouse line of credit; I can somewhat understand the point of captive warehouse lines, but our line(s) are from completely unrelated entities to who we are selling loans through to – at the end of the day though, who cares where the money comes from? If I close a loan in my own name, with money that I am on the hook for if the loan is not purchased, and subject myself to repurchase risk, why does it matter? 

 

3.  Its relationship with its investors; Why does it matter whether we sell to one investor or to multiple different investors?  I could sign up with 5 other investors and still only deliver to one.  Alternatively, I could spread my pipeline out amongst a bunch of different lenders, but which investor is going to give me good pricing and service if I only deliver a couple loans a month to each of 10 different investors? It could be argued that any big aggregator ONLY SELLS TO FANNIE (Maybe they don’t sell to Freddie too) and therefore THEY only sell to one ‘investor’. (i.e. Fannie).

 

4. And its involvement in mortgage origination activities such as loan processing, underwriting, and making the final credit approval decision; Underwriting and Final credit approval decision?  Don’t multiple parties essentially underwrite ever single loan?  When I sell a loan to an investor in a min-corr model, I underwriter the loan to make a decision about whether the loan will be purchased by the investor to whom I’m selling it. Then they underwrite it to make sure they can sell it to Fannie, which then underwrites it to make sure they will purchase it from the aggregator I sold it to. Even after that Wall Street underwrites MBS pools to make sure they will purchase them.

 

Finally, what is the ‘final credit approval decision’? Is it my decision to close a loan knowing that my investor will purchase it?  Is it my investors’ decision to purchase the loan from me because an AU system says that Fannie will purchase the loan?  Is it when Fannie actually purchases said loan?  It could be argued that only Fannie/Freddie makes the ‘final underwriting decision’ because they are essentially the ones that buy the loan.”

 

Switching gears to compensation for compliance personnel, Becky Walzak writes, “I am concerned that with the requirements coming from the regulators, the industry will see this as a regulatory issue when in fact it is a RISK MANAGEMENT issue.  Remember that the regulations say that you must have a Management System in place, yet from all the discussions I have had with lenders they are separating the processes related to regulations from the processes that produce loans.  This is a foolish endeavor and will ultimately lead to confusion and poor origination practices.  Operating in silos has proven over and over to be ineffective. The industry needs to become more cognizant of the fact that these regulatory issues are actually imbedded into the origination and servicing processes.

 

“In order to make sure that these regulations are fulfilled according to the requirements, the processes have to be tested in conjunction with the regulations. This is what a quality control function, properly developed and managed, is supposed to do. Now that Fannie Mae, at least, has released the stranglehold around QC, lenders can begin to develop an Operational Risk Management program that actually works for them. With this focus, those individuals who really are operationally oriented and can develop and manage a comprehensive program should be compensated accordingly. IT should be equivalent to a senior production staff with bonuses based on amount of risk controlled, rather than loans produced. It is an anathema to regulators to pay these folks based on volume, but they should be held accountable for their failure to control operational risk.

 

“And speaking of risk, with the uptick in RMBSs highlighted in your columns, why have we not changed the ‘Due Diligence’ process for these transactions. Many of the same companies that failed to identify the numerous flaws in the product that drove the financial collapse are continuing to do the same thing again. I get tired of hearing people say it was ‘risky’ products that caused the crash. While they certainly were one issue, the primary and over-whelming cause was the failure of operational controls. How can anyone stand up and say they had control over their processes when as much as 90% of the loans produced by them contained process flaws. Interestingly enough, very few, if any, of these loans had regulatory flaws that caused them to default. But that’s another story. Anyway, since you are at the secondary, please ask how they are going to prevent these bad loans from being securitized this time. My hunch is they will either refer back to the products or full documentation or mention a new focus on regulations.”

 

 

A man was driving when he saw the flash of a traffic camera.

He figured that his picture had been taken for exceeding the limit, even though he knew that he was not speeding.

Just to be sure, he went around the block and passed the same spot, driving even more slowly, but again the camera flashed.

Now he began to think that this was quite funny, so he drove even slower as he passed the area again, but the traffic camera again flashed. He tried a fourth time with the same result. He did this a fifth time and was now laughing when the camera flashed as he rolled past, this time at a snail’s pace.

Two weeks later, he got five tickets in the mail for driving without a seat belt.

 



Rob

 

(Copyright 2014 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.)