Apr. 29: Weed, lending, and business – home delivery? Notes on guarding against fraud & bad credit data, vendor mgt. – what is SSAE18?

When I was growing up, as if that ever actually happens with capital markets folks, our small house had a spare bedroom. Over the years, it became the musty receptacle for things that we didn’t want outside and were too nice for the garage. Now we learn that spare bedrooms can be big money makers. Here are the findings from Finder.com’s report on America’s spare bedrooms – an untapped $174.9 billion real estate opportunity.


Let’s get, to the point, let’s roll another joint…


As I mentioned in my commentary earlier this year, “Marijuana remains illegal at the federal level, despite recent moves by about 1/3 of the states to legalize it at the state level. Given FDIC insurance is at the federal level, banks throughout the country risk a lot if they decide to do business with customers whose income is derived from weed or even hemp – even if the state in which the bank is located has legalized it. And thus, banks and lenders remain stuck due to federal laws…”


It is an area attracting a lot of legal attention. “Legal marijuana may be raking in the green right now, but there’s no shortage of sticky issues to weed through and the future of the industry remains hazy. Luckily, we’ve asked the burning questions and rolled up all the answers (and even more fun with puns!) into a handy guide to pot law. We encourage you to pass it around.”


What? Home values can be influenced by pot? According to a study from the University of Mississippi and software technology company FNC Inc., marijuana legalization could drive housing values up.


And some farmers are changing crops. For example, there are now 2,350 acres of farmland in Kentucky devoted in 2016 to the cultivation of hemp, Marijuana’s close relative that has a myriad of industrial uses. That number is up from 922 in 2015. That’s almost a quarter of national production. Perhaps distilling bourbon isn’t the growth business it was in the past.


And the future has been realized in Oregon as 117 retailers were allowed to begin home delivery of marijuana under permits granted by the state’s Liquor Control Commission last year. That’s right: Somewhere in America, you can now order legal marijuana and have it delivered. Could drones one day deliver Primo Express? Let’s see who regulates that.


If you like a little cannabis with your cardio, former NFL running back Ricky Williams is part owner of Power Plant Fitness in San Francisco. Members (you need a medical marijuana prescription to join) will be allowed to toke up, nosh on edibles, and apply topical gels to get high while working out. Blaze on bro. I am assuming income from that gym can be used to qualify for an agency loan.


From Northern California, a few months back Loren Picard sent, “You mentioned cannabis as it relates to mortgages in your commentary earlier this year. As coincidence would have it I had submitted article to American Banker on similar subject and it was posted to AB’s website.

Valerie H. sent, “Great commentary on legal marijuana and banking. I watched the TV series ‘Pot Barons’ back in 2015 based in Colorado and the banking/FDIC issues had my head spinning. It seems like an amazing opportunity and potential gold rush, but the hurdles these enterprises face are almost insurmountable. I was fascinated by their biggest problem of how to handle literal truckloads of cash. Seems like a rough ‘first-world’ problem to have, but they have constant roadblocks finding solutions to things like finding trustworthy security to transport it, where to store it (one owner had to buy a closed bank with a functional vault to store it all), how to pay employees and payroll taxes when it is an all cash business, etc. When the employees are handed their paychecks in cash, more issues sprang up like how are they claiming 1099 income (not many of the employees on the show looked like they had great CPA advice), how do they protect themselves from the shady people robbing them on payday because they know they carry large amounts of cash, and other fun problems. My interest was how are these owners and employees going to report their income so they quality for mortgages.”


Cynthia G. sends, “My rule of thumb: always go federal regulations. At the end of the day, the states receive federal funding. If you receive federal funding or assistance in anyway, regardless of who distributes the funding, you are overseen by the federal regulations. Same with grants, TARP funds, CDBG funds and MCCs. Yes, your state distributes the funds allocated to them but the larger party is federal. The OIG or a division within will be reviewing the funds at some point, you can be sure of it. I have memorized, to a healthy extent, ECFR and U.S. codes.  www.ecfr.gov Well, that’s my two cents for what it’s worth.”


Another wrote, “Your commentary on marijuana has me wondering if the issue of SAR reporting come up yet for the community banks and credit unions? With truckloads of cash entering commerce streams, I’m sure the Feds are keeping busy trying to distinguish between legit businesses, at least at the state level, and launderers stashing cash from illegal sources. It’s like a dog chasing its tail: when you think it is really cool to make all that money, the nightmares that go along could be a big deterrent to new players entering the commercial market. I can’t help but miss one of my favorites, ‘Breaking Bad’!”


Vendor management


For lenders, managing their vendors is more than a full-time job. Not only are employees doing it, but there are vendors who focus on managing other vendors, such as HQ Vendor Management. On that topic, Regina M. Lowrie, CMB, president of RML Advisors, LLC, observed that rule changes have brought the need for robust vendor management into sharp focus. “Third-party vendor management, counterparty risk, and the new SSAE 18 standard should be top-of-mind for all mortgage banking organizations. On May 1, 2017, new SSAE 18 standards go into effect. Beyond changes that must be implemented on the audit side, the biggest changes affect lenders who have subservicing agreements with third-party vendors. Until now, organizations and their vendors have relied primarily on Service Organization Control (SOC) reports.


“Going forward, SSAE 18 will require that more robust monitoring activities be implemented to assess the effectiveness of controls at a subservicing organization, and thereby address vendor counterparty risk. Examples of the monitoring activities suggested by SSAE 18 are numerous, and include: Reviewing and reconciling output reports; holding periodic discussions with the subservice organization; making regular site visits to the subservice organization; testing controls at the subservice organization by members of the service organization’s internal audit function; reviewing Type I or Type II reports on the subservice organization’s system, and monitoring external communications, such as customer complaints relevant to the services by the subservice organization.


“Your reader’s organizations not only need robust third-party vendor management policies and procedures, but also must ensure that those policies and procedures are being followed. When choosing a subservicer do business with, for example, most lenders initially vet a subservice organization very closely. Once a subservice organization is chosen, it is now imperative that your third-party service provider is monitored on an ongoing basis. The methods outlined in SSAE 18 can help lenders mitigate operational and reputational vendor counterparty risk.”


Guarding against fraud, erroneous data, and bad credit reports


Lenders need to be careful out there! Justin Vedder with CastleLine wrote in regarding, “Mortgage Lending Fraud Trends and Prevention Tips.” “The number of cases of mortgage fraud has been on the rise, with originators warned to look out for falsified documents supplied by clients seeking unsuitable loans. Rising rates, increased purchase transactions, and the lack of volume has contributed to added pressure on all parties in the loan origination process. Borrowers don’t want to miss out on the opportunity to get a home and the originators are searching for volume. Pressures like these may result in increased mortgage lending fraud and it is important for lenders to make sure best practices are enforced to help mitigate risk.

“Potential industry factors that could be attributed to the recent rise in mortgage lending fraud may be as a result of the significant shift to a purchase market and rising rates. Rising rates have made it that much harder to get a loan which may lead to borrowers feeling the need to be more creative in their efforts to obtain a loan.


“To help mitigate risk, lenders need to be diligent in their underwriting processes and avoid succumbing to potential pressures from sales departments. They should implement pre-quality assurance processes as a last check before closing a loan, leverage tools to flag potential risks (especially around undisclosed debt) and make sure the loan fits.”


Earlier this week the commentary noted that Bank of the West announced that its mortgage program is now available to international clients who meet certain employment and financial requirements, but have no credit history in the United States.


From a loan officer’s perspective in trying to move a client through the approval process, credit inaccuracies, in this country or overseas, can be game changing. Paul F. sent, “I have had many applicants and personal experience to know that there is so much inaccurate information on a credit report regardless of the repository. FICO doesn’t take into account any of the potential inaccurate or false information at all and rarely makes any changes to the score after the fact either. To correct one’s credit report takes an act of congress and months to have any effect at all. Too many applicant’s just give up and wait to apply again for months or even years because of this. Sure, there is the repository’s 30 days to investigate rule but to even get there to begin is a trial that many don’t realize it’s difficulty.


“Here are some examples. Tax liens: often these are never removed by the agency that imposed them and then to try to force them to release creates another derogatory entry once removed which only starts that 7-year clock ticking again! Is that ‘fair’ to lower a Fair Isaac score once you’ve paid or shown to have paid a lien, sometimes years after?


“Medical Collections: It’s so common to see these. Most of the time these collections are placed by a billing service for said medical service because the applicant’s medical insurance company has not paid the bill soon enough. The borrowers then get dinged with a collection weather paid or not. Yes, it will eventually show up as a paid collection but the damage is done and it remains on the credit report……take a guess…………for 7 years!”


Paul’s note wrapped up with, “There are many other illustrative examples to offer here but my point is clear: FICO is no friend of either their clients who lose customers AND applicants who are unfortunately denied the quality of loan they should be offered because their ‘scores’ are too low for either approval or the better rates available to ‘high scoring’ applicants. So, I sincerely look forward to the demise of FICO and a change in the score modeling.”


QM versus non-QM – another avenue


Lito Gonzales, with HomeXpress Mortgage Corp., a non-QM wholesale lender, writes, “Your commentary on buying leads brought up another change of times. Per Fair lending, and ECOA, if a borrower wants to apply for a loan, and if they are not an Agency Fit, they should not be turned away. Now that I am back in non-QM lending, I still find many loan originators turning the borrowers away if they have complicated taxes, or flat out don’t feel they will qualify and don’t know about our non-QM programs may help their borrower. The non-QM space is growing, and I am here to help any loan originator understand, our non-QM is not too far off from a QM loan: a non-QM residential loan must meet ATR, it has a 30-year term, fixed terms, no prepay, and has full PITI payments.”



“San Francisco hosted the first medical marijuana job fair. The keynote speech was titled, ‘Jobs and How to Avoid Getting One.’” –Jay Leno

“California had its first medical marijuana job fair. Over 2 million people meant to show up.” –Conan O’Brien




(Copyright 2017 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