At the recent Mortgage Bankers Association's Annual Convention, views shared about the top industry challenges varied greatly from the anti-compliance rants of the past several years. It's still a two-word answer, but "embracing regulation," has joined "excessive regulation," among the top trending industry memes.
Denis Brosnan, partner at consulting firm EAG in Columbia, S.C., summed it up well when he said, "Run toward regulation rather than away from it. Compliance is the floor, not the ceiling. Build business practices around that."
The industry has had the opportunity to fix the underlying problems that led to new regulations — not to mention the creation of the Consumer Financial Protection Bureau — and it hasn't done it, Brosnan said. "If you have a business based on providing quality service, you won't have this problem," he maintained.
Vendor management, particularly with technology providers, is a key area for lenders to rely on to keep on the right side of new rules, he added. If lenders have a true partnership with their vendors, "they will take care of it for you."
Gopi Krish, general manager of business integration for Opus Capital Markets Consultants, a Lincolnshire, Ill.-based unit of Wipro Ltd., and David Moffat, president and CEO of Mortgage TrueView in Salt Lake City, gave variations of the same response.
According to Krish, compliance is better than the alternative. "While adherence to complex regulation is burdensome, noncompliance would result in more costly legal fees, operational fees and reputational risk," he said. "Essentially, the industry fears not getting it right the first time."
The industry can overcome its fears of regulation through careful analysis, he added.
"The importance of pre- and post-close quality control and due diligence cannot be understated," Krish said. "Lenders that invest in risk mitigation earlier in the process will better mitigate systemic risk and ensure a more profitable and trusted business."
And embracing compliance can provide lenders and servicers with a range of benefits, particularly in an era of "data-driven" regulators, added Moffat.
"Compliance requires an organization to more fully understand their data and to look at their operations from a new and different perspective," he said. "The expanded understanding can provide a firm with insights that can drive strategic planning and, ultimately, grow revenues and increase the bottom line."
This same pragmatic approach could also be heard from the podium at the MBA Annual.
"The CFPB is here to stay. Anyone who's not reconciled to that fact should get over it," MBA President and CEO David Stevens said during the convention. "Of course, the Bureau's not perfect — neither are we. But they're performing a necessary function with energy and they are devoted to their mission. Our task is to challenge them constructively to make them better, not to automatically drag our heels."
The slew of new regulatory requirements that are taking effect during a period of anemic market activity is a one-two punch that is challenging lenders' ability to remain profitable, said Leonard Ryan, president of QuestSoft, a compliance technology vendor in Laguna Hills, Calif.
Regulation remains "a big threat to lenders," Ryan said, specifically noting the Qualified Mortgage rule and the changes to the Real Estate Settlement Procedures and Truth in Lending acts that will usher in new documents to replace the Good-Faith Estimate and HUD-1 disclosures, beginning in August 2015.
Now, lenders are undergoing the first round of supervisory exams and "can get beaten up on that," Ryan said, adding that state examiners are also getting more aggressive in their examinations of mortgage firms. Lenders need to be aware that training their employees on changes like the new RESPA/TILA disclosures will help them stay in compliance, he added.
The question facing lenders is how to originate a quality loan that they will be proud of and at the same time, passes regulatory muster, said Jeffrey Taylor, a managing partner at Maitland, Fla.-based Digital Risk.
"The biggest fear is regulatory penalty," he said. "The industry is scared to death they're going to make a wrong step and get a huge penalty."
A lack of regulatory clarity, particularly around the question of representations and warranties, creates exposure for lenders, said Digital Risk Chief Operating Officer Omar Quddus. For example, when it comes to originating mortgages insured by the Federal Housing Administration, for instance, "lenders don't understand their risk," he said.
Millennial housing trends is another issue challenging the industry, said David Green, president and CEO of the Stonehill Group in Atlanta. These would-be first-time homebuyers that make up this group are no longer leaving home, or at least are staying home longer than previous cohorts, he said. And they have much less saved up to buy a home, due in large part to rising education costs and student loan debt loads, the result of lenders making money so readily available and colleges increasing their tuitions.
Green also expressed another fear, an old-fashioned one that could have been heard at any MBA Annual over the past thirty years: "A major interest rate rise will flatten us again."
Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of experience to his analyses of the mortgage market.