Oct. 19: Letters on electronic signatures, cyber threats, LOS, staying abreast on compliance; SOFR transition updates

Greetings from London. Parliament will be “sitting” on a Saturday for the first time in 37 years, and I decided to come here to watch the Brexit vote. Okay, I am here, but it is just a coincidence that this vote is happening today. The streets are packed with protestors and people watching the protesters. Prime Minister Boris Johnson spent yesterday trying to convince MPs to support his Brexit deal ahead of a close vote. The Ministers of Parliament will gather “in the Commons” for the main debate and then the vote on the deal. The issue is more complicated than GSE reform (now titled “housing finance reform” in case you missed that memo) so I am not going to go into the details, but this place is certainly buzzing over it. If Brexit occurs without a transition agreement, UK financial-services firms could end up in regulatory limbo as EU regulation ceases but the UK hasn’t enacted legislation to fill the void. The takeaway for the U.S. mortgage market? Worldwide markets never like uncertainty.

Before we jump in, congrats to Richard Payne, a new board member of Wells Fargo. (Yes, another tough name to grow up with.) And along those lines, how about TMC’s blog with the 25 top mortgage names in the biz?

LIBOR transition update: SOFR

FHLBank Chicago has the latest. It would appear that the “liabilities” side of the balance sheet continues to march forward, whereas the “asset” side, namely lenders converting adjustable rate programs and documents for loans, has lagged. I’ve received comments about eventual potential lawsuits from borrowers placed into a LIBOR-based index despite the lender knowing it is sunsetting. But that is a question for your attorney.

If you’d like, here is a SOFR Primer by SIFMA Insights. “The publication of LIBOR is not guaranteed beyond 2021. Much work lies ahead in order to implement a successful reference rate change, and time is of the essence. In this primer, SIFMA Insights provides an overview of the LIBOR transition, as well as an actionable checklist, with a focus on the proposed US alternative reference rate, Secured Overnight Financing Rate (SOFR).

Moody’s Investor Service reports that, “The credit quality of certain structured finance sectors would face higher risks from certain adverse cash flow changes that are possible with the potential discontinuation of London Interbank Offered Rates (Libor). Instruments in certain sectors, including US student loan asset-backed securities ABS), UK residential mortgage-backed securities (RMBS), and US collateralized loan obligations (CLOs), would be more susceptible. The discontinuation of Libor could result in notable reductions in payments on transaction assets relative to their liabilities via fixed/floating rate mismatches, significant new basis risk, or disruptions from embedded derivatives.”

Yet the Bank of England says Libor’s continued use poses a financial stability risk and is considering introducing policy tools in Q4 to accelerate the transition. The BoE says the tools “could be deployed by authorities to reduce the stock of legacy Libor contracts to an irreducible minimum ahead of end-2021.”

The Bank of China sold $350 million worth of SOFR-based three-year floating rate bonds, the first offering of its kind from Asia’s private sector. Bank executives say the deal should help open the door for other borrowers to enter the market.

Libor-based derivatives contracts should include language allowing an alternate rate to be substituted automatically if Libor is officially declared to be unrepresentative of the underlying market, said David Bowman, a senior adviser to the Federal Reserve board of governors who is helping lead the transition away from Libor.

Bank of Japan deputy governor Masayoshi Amamiya called for concerted collective action on the transition away from Libor. He told ASIFMA’s annual conference that the discontinuation of Libor is among the “most significant events in global financial history”.

Bank of China’s Hong Kong subsidiary has become the first financial firm to issue financing in China or Hong Kong benchmarked to the US Secured Overnight Financing Rate. The company has not disclosed the client, the counterparty bank or the size of trades.

How’s your loan origination system (LOS)?


MortgageBusiness99@gmail.com writes, “Do you have counter party risk with your Loan Origination System? During a recent regulatory exam, we were covering vendor management when a question that never occurred to me was raised which was: ‘If your LOS raised your prices by 100% what you would do?’

“I have always taken vendor management questions with a grain of salt. What if Experian, Equifax and Transunion did anything? Like failed a cyber-security test, increased prices YOY, or sell your prospect data to your competitors? How about ‘all of the above.’ The credit bureaus of course have a monopoly and in time there will be an alternative.

“Changing credit vendors would be simple compared to changing LOS. Changing LOS is no easy job, it can take over a year and require the massive cost of implementation, change of staff and adoption learning curve. I like many others use the industry standard LOS and I like many of my colleagues recently received my renewal with a 25-41% increase. I think they are counting on our inability to act in a collective manner. Quite frankly there is no fear of loss. Are you going to change?

“In addition to the increase that seem to be universal I am getting constant reports from my vendors that they are being squeezed to pay for access to the system. 15% of the revenue generated. Closing agents, appraisers, hedge advisors and CRM. My increase was over $200,000 annually. Considering the number of others, I have corresponded with the increase was ubiquitous and of course blamed on bringing in top talent to make the software more efficient. If memory serve me correctly, they just laid off 10% of their work force. (Reminds me of a guy named Martin Shkreli.) What may we as a group do to protect ourselves? The unfortunate part of being parasite is that the host needs to live.” (Feel free to write to the author, email above, about their opinions.)

Electronic signatures, compliance notes

Occasionally the question comes up whether all states, and Freddie & Fannie, will accept the digital closing and online notary, a great idea. Jeremy Potter has an answer. “Fannie and Freddie simply require the lender to ensure all regulations and compliance are met. So it does go back to state law, if state law allows it, F&F accept it on delivery. All states will accept electronic signatures but not all recording offices are capable of accepting fully electronic docs/data.

“At this point, most states will accept electronically executed and notarized closings but not all states have approved the notary being online instead of in person. 19 states have either gone live with online notary, or have approved it but the effective date is still pending. 4 states are currently considering legislation. The other 27 states have not proposed legislation and do not allow the notary to be entirely online for the closing yet. Many in the industry anticipate the fully online notary (not physically present with the borrower) will take another year or two. The bottom line is that almost all states allow for electronic closings (where notary is presenting the borrower a tablet or computer) but not all recording offices can handle it. Majority of states are still working on passing fully online closing laws.” Thank you, Jeremy!

The Depository Trust & Clearing Corp. has postponed the introduction of its blockchain-based derivatives post-trade system, though it did not set a new date for the release. Reasons for the delay include anticipated Brexit complications and a need for more testing of the trade-information warehouse.

Each state has a different set of laws addressing security breaches. There is a trend, however, toward mimicking California’s set.

“Rob, can you think of any particular site or sites I can have my staff review each day for the latest on compliance, origination issues and legal news?”

Ken Perry, the President/CEO of The Knowledge Coop, suggests, “You may want to join RegList. It’s a free email communication chain that lets you ask and answer questions about compliance matters to a group of compliance people all over the nation. To join the RegList go to https://reglist.org. You can learn a ton there. You can also join the Knowledge Coop as an individual to get all of our content. That can be done here.

And Mike Steer with MQMR ventured, “Many companies subscribe to AllRegs, leverage attorney firms such as Ballard Spahr/K&L Gates/Weiner Brodsky/Alston Bird/ (and other law firms which I’m probably missing) who put out compliance newsletters and news alert notifications, register directly to receive state/FHA/Fannie/Freddie/CFPB updates directly with those respective websites, MBA/state MBA membership announcements if you’re a member, FDIC/OCC and other regulatory updates, and leverage compliance firms, such as MQMR to keep abreast of changes. Attending conferences, such as MBA Legal Issues/MBA RMQA/MBA Compliance/state specific compliance/regulatory conferences and other banking conferences is also good for staying current. Here’s also a free compliance update calendar provided by Aces Armco which I’ve found helpful in terms of aggregation of various changes, and Mortgage Compliance Magazine.”

Steve Spies updated me with, “Rob, I just wanted to let you know after 22 years of leading Fannie Mae’s QC and Risk management efforts I left this summer to start my own risk management consulting practice, SWS Risk Advisory LLC. I recently published an article in Mortgage Compliance Magazine on preventing mortgage origination fraud that I think your readers might really benefit from.”

Which companies have reported security breaches and cybercrimes? Here you go.

And how about a checklist for executives? “11 Steps Executives Should Know to be Prepared for Cyber Threats.”

Researchers found that the Biostar 2’s database was unprotected and unencrypted, granting the security analysts access to 27.8 million records, and 23 gigabytes worth of data. I’d say that those affected are advised to secure and change their passwords, but in this case they’d be fairly hosed: Biostar 2 is a biometric lock system for secure entrances to office buildings and warehouses in 1.5 million locations worldwide, one that uses facial recognition and fingerprints that are inextricably linked to employees as keys. The exposed data included fingerprints, facial photos, facial recognition data, unencrypted passwords, clearances and personal details.

Criminals are finding innovative ways to use technology to target banks, said Colin Bell, chief compliance officer at HSBC Holdings. “We see innovation on the criminal side at a tremendous pace, and there is no question they are using technology against us, and they are doing it in a way that isn’t hampered or harnessed by privacy legislation, cross-border legislation and so on,” he said.

Does your state’s Department of Motor Vehicles do anything with all the “private” information you give them? According to this article, DMVs sell it to private investigators.

Deepfakes, the technique that uses artificial intelligence to perpetuate visual and audio hoaxes, could be the next frontier of lawyer-focused phishing scams, Frank Ready reports. It hasn’t happened yet, but fraudsters could clone the voices of clients or law firm leaders to fake out unsuspecting attorneys who believe they’re talking to the real deal. Gatekeepers who screen calls, like receptionists, make law firm offices tougher targets for scammers, but the rise in attorneys conducting business on their cellphones mean lawyers should keep deepfakes in mind.

“Lexophile” describes those that have a love for words, such as “you can tune a piano, but you can’t tuna fish”, “To write with a broken pencil Is pointless.” An annual competition is held by the New York Times to see who can create the best original lexophile. Recent submissions.

A will is a dead giveaway.

With her marriage, she got a new name and a dress.

Police were summoned to a daycare center where a three-year-old was resisting a rest.

Did you hear about the fellow whose entire left side was cut off? He’s all right now.

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, “How Productive is Your Origination Team?” 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