Apr. 13: Letters on margin control & the lender’s role in the mortgage process; state law changes

Earlier this week I spent some time with a senior loan officer who was telling me about a friend at a collection agency. The friend was telling the LO that “business has never been better,” and that, collection agencies have found, there is often a 3-4-month lag between collections increasing and economic woes of one degree or another. Would lenders rather have a strong economy or lower rates? On to remarks I’ve received on the general state of things.

I received this note from a scholar in an oil state. “If you are old enough, do you know where you were when you heard President Kennedy had been assassinated? What about when the Murrah Building was bombed? How about on 9/11? All these years later I can recount each of those events and the feelings I experienced during those defining times.

“It has been more than ten years since Lehman Brothers failed on September 15, 2008. Few realized the breadth and depth of the coming global credit crisis. Worldwide financial markets crashed. Housing pricing plummeted. Homeowners became unable to make their house payments, and their most precious asset went into foreclosure. For millions of Americans, it was devastation.

“Besides countless families losing their homes, their stability, and their dreams, those in the real estate finance industry saw our world upended. A relatively small number within our industry treated consumers unfairly by promoting risky loans that were hard to repay. That behavior caused all of us to lose the trust of the American people. For my entire industry to be viewed as untrustworthy was crushing to those of us who had spent a lifetime helping families realize the American Dream of homeownership.

“After receiving forgiveness from most whose lives were rocked during those times, I still feel frustration and anger on several levels. To combat the uncertainty of the markets, the federal government took actions designed to restore confidence and to ensure consumers were treated with fairness and transparency. Banks deemed ‘too large to fail’ received federal money to assist them past the crisis. Congress passed the Dodd Frank Act of 2010. That 23,000-page document revised previous rules and regulation governing those working within financial industries. To enforce the new rules the Consumer Financial Protection Bureau (CFPB) was created as an additional regulator. It had broad powers beyond Congressional control to interpret and enforce Dodd Frank by levying fines on guilty parties.

“Mortgage lenders were unsure how to comply with many rules. They created or drastically expanded Compliance Departments to assist in operating within the new standards. Those departments had explosive growth to interpret and train lenders to do business in a compliant manner. Many medium to small lenders became ‘too small to comply’ with the additional cost of doing business. Some became extinct.

“Fear influenced most decisions by lenders. Underwriters were hesitant to approve loans with any questions about the ability to repay. Credit was tightened. Low to moderate income applicants were most affected. Their dreams of buying a home to provide stability and become involved in neighborhoods, schools, and communities were unattainable.

“With the recent increase in interest rates and a smaller pool of customers, lenders are looking for ways to remain in business. Profit margins after costs are thin. The competition for customers has created a red sea effect. Lenders have become like sharks who aggressively churn the waters for any parcel of business.

“As a result of this panic to remain in business, mortgage products outside qualified mortgages have resurfaced. Fewer restrictions on income and credit are providing opportunities for loan originators to market riskier products. Those products make the lenders and originators money in a tough market. Realtors, builders, appraisers, title companies, and other industry partners are enjoying the closings. I fear some of these products are a precursor of helping borrowers not prepared to be homeowners get in trouble.

“Lack of qualifying income, a credit history of trouble paying bills on time, and little to no money to put down on a purchase contributed to the mortgage meltdown ten years ago. Yes, some lenders treated consumers unfairly. When applying for a home loan, some consumers did not take responsibility and understand the paper work they were required to sign at closing. Some will argue it is not our place to prohibit borrowers from buying a home if an aggressive loan product exists. I contend it is our responsibility to assist every borrower in understanding their roles in the mortgage process. They must have enough income to make the payments, demonstrate the ability and willingness to manage their finances, and be willing to save enough money to have ‘skin in the game.’ Those factors lessen the risks of default.

“The heartbreak of losing a home, the disruption that causes families and neighborhoods, and the unintended consequences of loan default could cast a shadow on my industry. It could cause the loss of trust we worked so hard to restore. Industry professionals should consider the consumer when deciding to offer products that might not serve them and their families. Making a living for our families is a necessity. We can’t provide for those we love without loan closings. Professional choices have become hard.

“It remains imperative to keep two things in mind. First, it is our honor to help folks realize the American Dream of homeownership. Second, it is our duty to ensure they benefit from our efforts – now and in the future. Ten years later we must not forget the consequences of purchasing a home with risky products to reach short term goals.”

And this note from Kevin Gillen. “I retired from the banking industry after a great and diversified career. My last assignment was to manage the US consumer lending business for a top 8 North American bank whose size, reputation, franchise, distribution, cost structure, margin and strategies were not commensurate with the success of the rest of the organization. From a technological, people, regulatory, strategic perspective, capital, margin and cost structure, etc., I cannot think of a business undergoing more change than mortgage lending. I thoroughly enjoyed the experience.

“I immediately joined a preferred vendor of the bank and am now seeing the industry thru another fascinating lens. Your messages are loud, clear and consistent. This is a tight margin business under enormous change to better serve the changing buying and servicing experience of the Customer and leverage new technology. From a bank’s perspective, the mortgage is by far the most emotional product offered. Get it right, and you retain or expand your share of wallet and more than likely set yourself up for repeat and referral business. Get it wrong and you are cursed.

“There are many providers no longer in business or who have been acquired or merged. There are those who are managing the expenses with an eagle eye to optimize their margins.

“I speak to 60 + businesses a day. Sadly, I wish I had a nickel for every conversation I have had with an operations manager who does not think like an owner or shareholder. Many have NO interest in cost optimization. We hear, ‘We’re good,’ ‘not interested,’ ‘I do not know what my costs are,’ ‘I am too busy’ to consider an opportunity to improve costs. As I speak to so many people in the industry, one may get the impression they really are not aware of the number of companies out of business, merged, been acquired and are changing their business model.

“This is a dynamic, exciting and emotional business. The banks and credit unions have a great advantage from their customer base, multiple distribution channels and a low household penetration rate. They also have the benefit of self-funding loans they originate and hold. Conversely, the mortgage companies and FinTech’s can solely focus their investments to the mortgage product and process where the banks and credit unions will compete for investment budget dollars among the other product owners every year.”

State laws a’ changin’

Here’s a little trivia (remember when we actually knew stuff rather than just look it up using a search engine?) for Monday morning with your co-workers. There are four states in the United States that call themselves commonwealths: Kentucky, Massachusetts, Pennsylvania, and Virginia. (The United States has two other commonwealths, Puerto Rico and the Northern Mariana Islands, but they are not states and have only a nonvoting representative in Congress. While residents of these islands have U.S. citizenship, they pay no federal taxes.)

The Commonwealth of Virginia modified its provisions relating to licensing requirements for mortgage loan originators effective on July 1, 2019. The amendment adds a section that provides that “a mortgage lender or mortgage broker that employs an individual who is deemed to have temporary authority to act as a mortgage loan originator pursuant to this section shall be subject to the requirements of this chapter and Chapter 16 (§ 6.2-1600 et seq.) to the same extent that such mortgage lender or mortgage broker would be subject to such requirements if such individual were a licensed mortgage loan originator.”

Similarly, “an individual who is deemed to have temporary authority to act as a mortgage loan originator and acts as a mortgage loan originator is subject to the requirements of this chapter to the same extent as if such individual was a licensed mortgage loan originator.” The amendment also added a new subsection that provides that pre-licensing education courses are subject to such expiration rules as may be established by the Registry except as otherwise provided by the Commission and that “expired courses shall not count toward the minimum number of hours of pre-licensing education required by subsection A”.

Nebraska amended some provisions regarding its Uniform Power of Attorney Act and Residential Mortgage Licensing Act. Check out Legislative Bill 146 and Legislative Bill 145. These provisions are effective on September 6, 2019 (or 3 months following adjournment of the current legislative session). The amendment under Legislative Bill 146 allows a person to bring an action or proceeding to mandate the acceptance of an acknowledged power of attorney. In such an action, a person found liable for refusing to accept such power of attorney is subject to liability to the principal and to the principal’s heirs, assigns, and personal representative of the estate of the principal in the same manner as the person would be liable had the person refused to accept the authority of the principal to act on the principal’s own behalf.

Montana amended its provisions relating to its Mortgage Act that include, but are not limited to, adding capital requirements for mortgage servicers; adding net worth requirements for mortgage lenders; revising designated manager and branch office requirements; and revising surety bond requirements. These provisions are effective on October 1, 2019.

The amendment under Section 1 adds capital requirement for mortgage servicers and provides that a mortgage servicer that is wholly owned and controlled by one or more depository institutions regulated by a state or federal banking agency may apply to the Department of Administration (Department) to waive or adjust one or more of the capital requirements in subsections (2) and (3) of Section 1.

Section 4 of the amendment provides that the Department may not issue or renew any mortgage broker, mortgage lender, mortgage servicer, or mortgage loan originator license if the applicant has failed to meet the mortgage servicer capital requirements provided in Section 1 or has failed to meet the minimum mortgage lender net worth requirements provided in Section 2.

Section 5 of the amendment revises designated manager and branch office license requirements and provides that a designated manager may be responsible for more than one location and that the designated manager is responsible for the mortgage origination activity conducted at each office to which the designated manager is assigned in the NMLS (National Mortgage Licensing System.)

Section 6 amends the surety bond requirements and provides that “the amount of required surety bond for a mortgage servicer must be calculated on the mortgage servicer’s total unpaid principal balance of residential mortgage loans as of December 31.” The amendment also provides the amount of the surety bond that must be provided.

Section 7 allows service by common courier with tracking capability for legal service of process. The amendment under Section 8 and 11 provides for rule making authority regarding false, deceptive, and misleading advertising, internet and electronic advertising, and allows the Department to adopt rules regarding the mortgage servicer capital requirements provided in Section 1 and to define supervisory requirements for designated managers.

Section 9 of the amendment provides for penalties and restitution from service providers who have violated any of the provisions of the Act or who have failed to comply with the rules, instructions, or orders promulgated by the department. The amendment also authorizes investigations of service providers under Section 10 and allows the Department to disclose information about service providers to licensees under Section 12.

Montana also amended its provisions relating to reporting requirements for escrow businesses effective on October 1, 2019. The amendment allows annual reports of escrow businesses to be reviewed by an independent public accountant every odd-numbered year and considers that the department of administration has complied with the legal service of process by common courier with tracking capability

A woman rushes into her house one morning and yells to her husband, “Dom, pack up your stuff. I just won the lottery!”

“Shall I pack for warm weather or cold?”

“Whatever. Just so you’re out of the house by noon!”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “MBS Liquidity: A Real Trooper.” 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.


(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of 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 2019 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.)

Rob Chrisman