Nov. 16: Update on vendor management from OCC; letters on issues impacting lending including monitoring counterparties; Wells cuts 3/1 ARM program

The other day I was trying hard to get the ketchup out of the bottle. During my struggle the phone rang so I asked the 4-year-old daughter of a friend to answer the phone. I heard her say, “He can’t come to the phone to talk to you right now, he’s hitting the bottle.” Sometimes this residential lending environment makes us want to hit the bottle. I received this exasperated note from a veteran LO in Nevada: “Why don’t we just say ‘no more loans’ for anyone? It is impossible to prove every single thing in a person’s life, and to guarantee nothing will ever happen to change someone’s life situation. Great potential borrowers wind up paying cash due to excessive UW criteria. We are nearing Ogden Nash’s quote: ‘One rule which woe betides the banker who fails to heed it…Never lend any money to anybody unless they don’t need it.’ I LOVE what I do.  I HATE the system.”


As companies swivel their focus to the purchase market, it is important to keep some things in mind. I received this note from Dawn Peck, Sales Manager with Guild Mortgage: “I attended your panel of speakers for the MBA National conference ‘Optimize your move to the purchase market.’ I thought I’d give you my opinion as it was apparent I was only 1 of 2 loan officers sitting in your audience. I’m often shocked at the lack of involvement of the SALES force at the conferences the MBA hosts that provide efficient training and knowledge with regards to quality assurance and the secondary market. So as I listened to your panel and their understanding the cost of loan origination, my first thought was ‘SEND your loan officers to Underwriting and industry based events!’ I’m known in my market area as NostraDAWNus by having attended conferences that reflect the regulatory changes and the point of sale quality requirements. I so badly wanted to say to your panel that having an efficient sales force will help the quality of loan origination and a guarantee to customer service. Somehow the top of the ladder rungs have forgotten the benefits of a loan officer that begins the underwriting process at ‘HELLO Mr. Buyer. How can I help you navigate through the home loan industry?’” Thanks for the note Dawn – I think that many in the industry are hoping that over time the quality assurance standards would be a requirement at point of sale to minimize costs associated with future risk. 


(Speaking of industry events, the MBA is presenting its second-annual Independent Mortgage Bankers Conference next month in Florida “…designed to address the myriad challenges facing the non-bank lender and to provide critical information, strategies and connections needed to get an important leg up in both today’s and tomorrow’s markets.” Sessions include a panel of warehouse lenders, an open discussion with warehouse lenders and independent mortgage bankers, a special networking reception to connect warehouse lenders and independent mortgage bankers, and Industry Outlook featuring leading independent bank leaders focusing on business challenges, including refocusing on production efforts. For more information go to


Continuing on with notes from around the nation, Tim Duncan of Cambridge Financial (formerly with the CFPB) writes, ““You have been making some excellent points on the Castle & Cooke controversy.  I am wondering if there is more to come for the firm.  First, attorneys for the borrowers might be able to take action – perhaps in the form of a class action. Second, the FHFA and the GSEs have been under pressure from the Inspector General (see for the GSEs to begin to monitor counter parties (e.g. lenders) compliance with consumer protection laws.  Given this and the publicity surrounding the CFPB’s actions and the settlement, it’s hard to see how the GSEs can just look the other way assuming they have a been buying a significant percentage of C&Cs flow during the time in question.”


From the Southeast I received this note about the pickle the lending industry is in. “I have been 20 years in the industry, and a member of various MBA committees. The intentions have always been good, but it is not hard to see how the role of government has increased in our business – just look at our conferences. The reality that Elizabeth Warren, the Bush’s, Mel Watt, Ed DeMarco, and others are the keynote speakers/meetings, I’m not so sure the mortgage industry realizes that they’re now hooked into the mortgage welfare state, like a poor person is to SNAP.  To me, the industry looked like they were resolute in becoming further entwined with the government. In short the gov’t led the conference.  It is absolutely clear to me, there are hundreds of massive glorified warehouses “aggregators” that probably aren’t worthy of the moniker “investor”. There was no “post GSE” vision, from the top banks, or “investors” we met with. To me, sadness was my parting thought, as I feel atrophy, asphyxiation are closer than the industry thinks.”


And moving on to the CFPB, and confusion over the points and fees calculation, I received, “There were panel members who were commenting on the CFPB Affiliate Business rules that go into effect in January and their calculation of the fees generated by those affiliates and the impact on point & fees calculation of QM.  Some indicated the fee was only that portion the lender retained. Recently I attended the MBA Residential Loan Production Committee meeting here in DC and CFPB Associate Director David M. Silberman specifically addressed that question, bluntly stating that THE ENTIRE fee charged by the affiliate (title or appraisal affiliate) is to be included in the 3% points & fees calculation of QM. I thought you might wish to provide this to your readers since there seems to be interpretation otherwise, which is not consistent with the CFPB’s.”


On the subject of monitoring counterparties, the Collingwood Group writes, “Following suit with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) published guidance ( on third party vendor management. The guidance, which was prompted by recent enforcement actions, reiterates the OCC’s existing expectations for third party vendor management.  The OCC outlined a new category of ‘critical activities’ related to risk management, revised its recommended risk management life cycle and underscored other peripheral expectations. The OCC expressed concern that many of the existing risk management processes employed by banks for vendor relationships inadequately address compliance risks.  Correspondingly, the guidance highlights critical activities that necessitate heightened caution and scrutiny.”


The Collingwood ( note continued, “The list of critical activities include any actions, processes or relationships that: 1. Involve significant bank functions; 2. Involve significant shared services; 3. Could cause a bank to face significant risk; 4. Could have significant customer impacts; 5. Require significant investment in resources to implement a third party relationship; 6. Could have a major impact on bank operations. The OCC outlined suggested risk management processes and added new steps that should be incorporated into a bank’s risk management life cycle if that bank is working with a third party provider. According to the guidance, effective risk management should include: 1. Strategic plans that highlight areas of risk and third party management; 2. Written contracts that detail the responsibilities of vendors; 3. Third party due diligence; 4. Third party monitoring; 5. Contingency plans for terminating vendor relationships; 6. Defined roles for overseeing vendor relationship; 7. Documentation and reporting to ensure vendor oversight and accountability; 8. Independent reviews. In light of perceived shortcomings in vendor management, the OCC also underscored other important aspects of vendor management.  The OCC emphasized the risks related to transitioning from one service provider to another.  Due diligence for customer-facing service providers should be particularly thorough.  The OCC also stated that risk management should evolve over time to respond to new risks and concerns.”


There was this note from an East Coast mortgage banker. “With the news about third party vendor management heating up, I wanted to share an experience we had recently that validates for us the need to scrutinize the backgrounds of settlement agents before doing business with them.  Our company requires all vendors, including settlement gents, to be vetted by Secure Settlements.  The process is embedded in our loan process and requires an agent to be run against the SSI database before we wire funds.  If the agent is not in the database we pay for them to be vetted.  Occasionally we get heavy pushback from an agent, usually attorneys, sometimes title agents, who claim there is no need to check them out, or that they are licensed already so what’s the need?  In nearly every single instance of pushback we have found the company or individual has serious background issues.  Just last week we held up a closing because the agent refused to be vetted.  They went so far as to have the borrower call the PA Department of Banking and complain.  We asked SSI to just do a public records search of the agent.  The result?  They had been disciplined in May 2013 for mishandling trust funds and we refused to do business with them.  The borrower had no idea, nor did we and since they were FNMA approved for REOs, neither did FNMA. In our experience vetting has saved us from potential losses several times, and these results prove to me that objections to vetting are more than often grounded in fears by an agent of having risk issues exposed.


(Yes, it is not enough for every residential lender to monitor itself – they must also monitor every one of their counterparties. This certainly helps the government regulators, since watching over everything is becoming increasingly expensive. Well, it is pretty close to the truth, and Andrew Liput, president & CEO of Secure Settlements (, writes, “The OCC, like the CFPB, is making it clear to all banks and non-bank lenders that comprehensive vendor management, with ongoing risk monitoring, is expected.  Having met with the OCC in DC last year and laid out our program to them we are not surprised by the OCC’s bulletin. With January 2014 fast approaching all lenders must address this regulatory requirement and we are prepared to help them do it.”)


Taking a quick look at aggregator, bank, and agency news…


Wells Fargo told its correspondent clients that, “The Consumer Financial Protection Bureau (CFPB) has adopted a rule that implements the Ability-to-Repay/Qualified Mortgage (ATR/QM) provisions of the Dodd-Frank Act. Among other requirements, the ATR/QM Rule requires that ARM loans qualify at the maximum rate permitted during the first five years after the date of the first periodic payment. In response to this change, Wells Fargo Funding will no longer purchase 3/1 ARM loans. It is effective December 9.


Highlands Bancorp Inc. has announced that its wholly-owned subsidiary, Highlands State Bank, has entered into an agreement to acquire the mortgage banking company Secured Lending Solutions Inc. (SLS) of Glen Rock, N.J. SLS will be operated as a wholly-owned subsidiary of the bank


The FHA has published a notice about transactions with gift funds that have received a TOTAL Scorecard “Accept” recommendation that turns into a “Refer” upon applying for insurance.  After investigating reports from lenders, it was concluded that the switched recommendation was a result of user input errors, i.e. the gift source and/or amount was missing or the entire amount being received by the borrower was not accurately reflected in the AUS.  As a reminder, all gift funds must be identified regardless of whether or not they have been deposited into the borrower’s account.


Until the VA and Department of Justice provides more comprehensive guidance, the VA will be reviewing applications for the home loan guaranty benefit submitted by same-sex couples on a case-by-case basis to determine if both spouses’ incomes can be used to qualify for a VA loan.  The loan file should include documentation disclosing the date and state where the marriage took place, the state of residence at the time of marriage, the subject property state, the current state of residence, and the estimated date of the loan closing.




(10) Your annual breast exam is done at Hooters.

(9) Directions to your doctor’s office include “Take a left when you enter the trailer park.”

(8) The tongue depressors taste faintly of Fudgesicles.

(7) The only proctologist in the plan is “Gus” from Roto-Rooter.

(6) The only item listed under Preventative Care Coverage is “an apple a day.”

(5) Your primary care physician is wearing the pants you gave to Goodwill last month.

(4) “The patient is responsible for 200% of out-of-network charges,” is not a typographical error.

(3) The only expense covered 100% is: Embalming.

(2) Your Prozac comes in different colors with little M’s on them.


(1) You ask for Viagra, and they give you a Popsicle stick and duct tape.





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Rob Chrisman