Why don't more community banks partner with mortgage brokers?
Most of our clients are community banks. Most of these community banks avoid partnerships with mortgage brokers. Lately, we've seen a trend towards reconsideration. Should compliance concerns slow this down?
In light of compliance and other risks, does partnering with a mortgage broker make common sense for a community bank? For some community banks (and with the right mortgage broker partner), we think maybe it does. Note: We recognize them being the "right" partner is a big qualification!
We're seeing clients in the following pickle:
With $1-2 billion in assets and an appetite for residential loans, the Bank wants to boost mortgage originations. For one reason or another, the Bank struggles to attract and/or retain high-performance originators. They're considering bringing on a couple of top producers at 100BP plus signing bonuses. They're also considering whole loan purchases. The Bank staffed up during the refinance boom but has little use for the skilled processors, underwriters, and others in the proverbial back room. Do they lay these people off? Is there another option?
On the other hand, we have broker contacts who-again, for one reason or another- have no problem originating loans, even in the same geographic area. In fact, they seem to have a healthy amount of unconventional product they simply can't find homes for ... often
referring it away as a mere courtesy, making nothing on the transaction.
So our community bank clients are asking ... Why don't we partner with the mortgage broker? Isn't that a win-win?
This idea seems contrary to conventional community bank wisdom, "Why would we pay a broker for something we can do ourselves
(and better)?" Well, true. If your bank considers itself a strong mortgage originator, working with a mortgage broker might not make sense. But with employee loan originators today getting paid 100BP commissions and big signing bonuses, to what extent does it make more sense to use an independent mortgage broker than it did yesterday?
What will you get?
Realistically, community banks would probably get more portfolio
lending than conforming product. A small community bank probably won't compete in price with big box shops ... Santander can likely offer better rates (but then again, who knows!). What the typical community bank will get out of this relationship is less traditional lending ... non-conforming (but high quality) product. Examples: Construction loans, non-warrantable condos, maybe even super-jumbos, loans that are non-QM (but maybe QM under the Small Creditor exception). While a huge national wholesaler might not have any interest in a 44% DTI jumbo ... what small bank wouldn't love this as an 800 FICO if it's right in their hometown?
What do you need?
No doubt you'll need a high-functioning back room ... you'll need qualified people to handle this challenge.
A mortgage broker would certainly be an important vendor, so you'll need to meet certain vendor management requirements:
Risk assessment. The FDIC lists 7 potential risks that your risk assessment should cover. The point of this is to empower the Board and senior management with enough knowledge to determine whether this is a smart move for your bank. (By the way, entering into business with an important vendor, such as a broker, should require Board approval).
A service agreement, The point here is for the contract to clarify what the Bank expects from the broker. The regulators (see the link above) list specific criteria that should be addressed in this contract.
Due diligence. Someone should physically inspect the broker's main office, and the Bank should collect and review standard information, such as audited financials, history of complaints, continuity of staff, and management competencies.
Procedures on monitoring. Vendor management is about more than vetting a vendor up-front ... it's also important to monitor the vendor's performance and compliance with your policies and all applicable regulations.
You'll also need to make some operational decisions: When will you set rates- daily, weekly? How will you register and lock rates (is there a form, use e-mail)? How will you submit files- by secure e- mail, paper-only? If the Bank has a closed attorney list, does the broker have attorneys it wants to have added? Will the Bank accept loans from outside its CRA area? Will this be a broker or correspondent relationship (this question addressed below)?
Pros + Cons
A final concern is simply the reduced control over origination, and the additional work it will take to ensure quality. Thomas Pinkowish writes, "The strongest negative factor to wholesale lending is the issue of quality control. ... Many wholesale lenders have addressed the issue by dealing only with well-established, reputable brokers[.] ... They face the need of increased spot- checking of appraisals and verification's in order to manage quality." Residential Mortgage Lending, Principles & Practices, Sixth Edition ©2012
Broker versus Correspondent?
For several reasons (not least of which is the CFPB's recent "guidance" (i.e. a new rule we have to follow) on so-called mini-correspondents), it appears that a broker relationship (as opposed to a correspondent) relationship is the smart play. In a broker relationship, the Bank will close the loan in its own name. Notably, if the Bank is a "small creditor," the mortgage broker can originate to this more relaxed set of underwriting requirements (it could not take advantage of a community bank's small creditor status in a correspondent relationship). So- instead of struggling to find a home for a 44% jumbo with 800 FICO, the mortgage broker can place such a loan with a small community bank partner. See the mutual benefit here? But Note: Keep in mind the mortgage broker's compensation is going to be included towards the QM Points & Fees test.
In other news:
While we're on the topic, here's a post from a notoriously snarky blog arguing that community banks need to be more aggressive, and giving 4 ideas on how to do so.
Calculating QM Points & Fees? Remember that "affiliate" for QM purposes is much different than "affiliate" for RESPA purposes. Just because the closing attorney is on the Board of Directors (and you need an affiliated disclosure), this does not mean that the closing attorney is an "affiliate" so as to include her fee towards the Points & Fees calculation.
Today is the final day for comments on the CFPB's HMDA rule, whereby it would collect even more detailed information. Wonder if we'll see any comments from the "1984 was a warning, not an instruction guide" crowd.
"In its first action alleging violations of the new mortgage servicing rules, the Consumer Financial Protection Bureau (CFPB) ordered Flagstar Bank to pay a $10 million fine and provide $27.5 million to customers."
We've discussed before how important TRUST is to our business, here at Spillane Consulting, our personal relationships-indeed, to everything we do. We try to build trust by under-promising and over-performing. Here is an excerpt from FYI: A Guide for Development and Coaching, by M. Lombardo and R. Eichinger ©2009, on how to build trust as a member of a team:
Self-centered? Put the team first. Use "we" instead of "I." Use "the team," "us," and "together," more. Say "Let us." "Let's get together." "We can do it." "We're all in this together." Signal that you are thinking and acting as a "team." To the extent that you legitimately can, spread the credit throughout the team. Always try to share the credit and spread the rewards around. Do you promote the careers of others as well as your own? Do you help other people get ahead with the same vigor as you promote yourself? Be more of a mentor and coach to people with the right stuff who need help to grow and prosper. People will trust you more if they view the relationship as a long-term one rather than something you're just doing because you have to for a few years.
"Not finance. Not strategy. Not technology. It is teamwork that remains the ultimate competitive advantage, both because is it so powerful and so rare. . . .If you get all the people in an organization rowing in the same direction, you could dominate any industry, in any market, against any competition, at any time.”
-Patrick Lencioni, in “The Five Dysfunctions of a Team”
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