Time to review Compliance for Efficiency (and maximize any exemptions available)?
Mortgage lenders mostly survived these past several years of regulatory overhaul. Survival was the first challenge. So congrats!
New Challenge
But the challenge now is to operate effectively and efficiently, with strong customer service, and do all those other things that we should be doing. This goes beyond mere compliance.
To do this, I think many lenders are ripe to revisit some of the decisions made with survival-only in mind. To be fair, survival over this period has required quick decisions with imperfect information. The regulations changed again and again, systems vendors tweaked technological tools until midnight of the last hour, and business managers struggled to understand how to correctly revise department processes and structure. As a result, any institution that survived probably made some decisions that were over-conservative, unnecessarily affecting customer service and/or efficiency.
So let's set to work revisiting processes, policies, etc. with an eye towards this new challenge. Why now? Well, we have better interpretations on regulations, more information from all sorts of parties, and more time than before.
Specific Example: Small Creditor QM
So you don't think this is just theoretical nonsense, let's look at one specific issue. Let's look at the regulatory exemption for Small Creditors regarding the Ability-to-Repay/Qualified Mortgage Rule implemented in 2014 under the Truth- in-Lending Act.
Many institutions have disregarded this exemption. Now, armed with better information and more time, those institutions should look to maximize this exemption (if available) to improve efficiency and customer service.
Obviously you understand the ATR/QM Rule, but just a basic reminder. Imagine a traffic law that required drivers to travel at a "reasonable" speed, with stiff penalties for exceeding that limit. What might be considered reasonable is highly subjective - it's hard to know when you're safe. Imagine also the law protects drivers that travel at 43 miles per hour or slower, guaranteeing that such a speed will be considered "reasonable." Well that's how the ATR/QM Rule works. You don't need the protection of QM, but you sure want it!
With the ATR rule prohibiting any mortgage loan that the borrower cannot reasonably afford, several different categories of QM provide a clear safe zone from violations of this vague standard. The regular QM category requires both adherence to a maximum debt-to-income ratio of 43% and a rigorous set of underwriting standards found in so-called appendix Q. But there is another QM category available to smaller lenders only that requires neither; it is much easier to satisfy. Avoiding appendix Q frees underwriters to use common sense underwriting, resulting in more effective and efficient loan decisions, better customer service, and maybe even a few more loans. Avoiding the 43% cap also helps.
So why aren't all Small Creditors using this exemption to the fullest? Why would a Small Creditor ever self-impose Regular QM requirements on portfolio loans? Why are so many institutions originating so-called "non-qualified mortgages" and assuming the additional regulatory and civil liability risks associated with them instead of following Small Creditor standards?
Years ago when lenders "survived" the ATR/QM Rule, I think the decision to "play it safe" by avoiding the Small Creditor exemption was reasonable given the need to make quick decisions with imperfect information. But on closer look, in an effort to go beyond mere survival and start to thrive again, this is the type of decision we need to rethink to survive this next challenge.
P.S. - Note that the original ATR/QM Rule was changed so more institutions will qualify as Small Creditors. The current limits are $2.06 billion and 2,000 first lien mortgages originated per year (but only sold loans count, portfolio loans are not included in the 2,000 count). The original rule limited originations to 500.
In Other News
How do you underwrite AirBNB homes? Will you include that as income? Do you still classify it as a residential dwelling? As analyzed in this article, some lenders may look very negatively upon this, making it hard to refinance. Of course, there's also the question of whether the borrower is actually reporting any such income, but note the IRS doesn't require you to report AirBNB income if you rent it out less than 15 days per year, see here.
Did you see the CFPB LendUp enforcement action?
The mortgage industry is buzzing over yesterday's PHH v CFPB ruling. What do you think? Still processing it, but not sure I see how big an impact this will have. And as far as the judge's political support (because this is not the Supreme Court), keep in mind he was Ken Star's assistant on the Clinton indictment.
Did the Court find the CFPB unconstitutional? Yes. They basically said the CFPB Director has too much power. BUT, that didn't make as much of a difference as you might think - it just means that now the President will be able to fire the Director more easily (currently he's very much independent from the President). I wouldn't be doing my job if I didn't share something from this highly interesting case, so try this on for size:
"The independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government. They exercise enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances."
In honor of Wells Fargo making the rest of us look TERRIBLE, I thought I could share some portions of the 2013 District Court Mass. case Hennings v. Wells Fargo.
This case involved a stated income mortgage loan. The borrower alleged that Wells Fargo (actually a bank it purchased) underwrote the loan by ignoring his many business expenses. Had they considered these costs, he argued his true DTI was 94.5%. He also argued that he had never received a GFE or TIL. Ultimately, Wells Fargo won on a technicality (that I don't believe is important to discuss), with the court having this to say:
And so, Wells Fargo wins on a technicality. The Court never addresses the merits of this case and expresses no opinion thereon. Still, it is appropriate to point out that, were Henning to prove his case on the merits, the conduct of Wells Fargo would be shown to be nothing short of outrageous. On the other hand, perhaps if Wells Fargo addressed the merits, its conduct would be vindicated by fair-minded American jurors. A quick visit to Wells Fargo's website confirms that it vigorously promotes itself as consumer friendly, Loans and Programs, page within Home Lending ... a far cry from the hard-nosed win-at-any-cost stance it has adopted here.
The technical (and now obsolete) preemption defense upon which Wells Fargo relies is an affirmative defense which can be waived... The disconnect between Wells Fargo's publicly advertised face and its actual litigation conduct here could not be more extreme. These facts lead this Court to inquire whether Wells Fargo wishes to address Henning's claims on the merits. After all, it may be that Wells Fargo has done nothing wrong.
"You've done something I've never seen in 10 years: You have united this committee -- and not in a good way."
~ Senator Jon Tester said to Wells Fargo CEO in reference to the Senate Banking Committee
