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Monday
Mar192012

Mortgage Banker's New Four Letter Word - Compliance

Last week Corky was in Orange County, California and Cameron was all over the state of Indiana and Orange County, California.  The photo below was taken in Bruceville, Indiana, which prides itself as being home of the big peach.  The big peach invites travelers from off the rural road to visit its large farm stand.  The fresh produce and fruits were amazing.

Bruceville, Indiana - Home of the Big PeachWe received the following email over the weekend from one of our blog readers:
“These compliance checks are killing my productivity.

The environment is crazy.  I just got a repurchase demand on a loan that we bought THREE YEARS AGO and then subsequently sold in a small servicing sale.  The servicer who purchased the loan identified an under disclosure on the TIL of $117 and is demanding repurchase for non-compliance with Federal disclosure law……..!!!  THREE YEARS AGO!!!! 

How are we supposed to operate with that kind of foolishness going on…..!?! 

 

We’ve always talk about trailing risk and how important it is for a mortgage banker to understand what trailing risk their Company is exposed to.  Every loan a mortgage banker sold in the past and sells in the future is a loan sold with recourse.  Mortgage bankers have continuous risk they might have to repurchase a loan because of a major or even minor defect.  In fact, if a loan is in default or delinquent, chances are the servicer or investor will do a deep audit to see if there is any issue with the loan enforceable under the repurchase clause in the Loan Sale Agreement.  Investors/servicers don’t want to deal with a delinquency or a loan default, and it is better to pass the issue onto the original seller and let him/her deal with it. 

We know it’s tough and it’s probably going to get tougher.  If you are a mortgage banker, you know what the new four letter word is: Compliance.  Investors, regulators and consumers are using compliance violations as a way to extort money from mortgage bankers or exert profound pressure in regards to trailing liability.  This is Darwinism at its best.  Some mortgage bankers will adjust, adapt and prepare for it and some will complain, ignore and die.  I know this is harsh, but these changes create opportunities for mortgage bankers to exploit the dramatic changes evolving from the mortgage meltdown.  Companies that adjust will survive and thrive.  Companies that don’t adjust will lose money and give up, creating more market share for the remaining players.

Many companies we’ve visited recently have hired a full time compliance officer to manage and monitor loan and corporate level compliance.  Loans are reviewed during various processing stages to ensure there is loan level compliance.  It is not just a post funding compliance review, but an in-process compliance review.  This might be a good solution, but it can be expensive.

Others are outsourcing compliance reviews to third party partners.  The cost is variable and every loan is reviewed to ensure a loan is in compliance.  For many small to midsized mortgage bankers we like the outsourcing variable cost approach.

Adapting to change is a must for mortgage lending participants today.  The head winds are too strong to fight it.  Embrace compliance and make it a way of life in your organization.

C. M. "Corky" Watts, CMB
408.497.3135
corky@cwattsmcs.com


Cameron Watts, CMB
415.722.0369
cameron@cwattsmcs.com

 

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Reader Comments (1)

This story seems crazy, but it is the environment we are in. I think the compliance issues and the future changes we'll see from Dodd-Frank implementation are going to put a lot of pressure on the small banks who only have one person looking at compliance while doing other functions. Will the small mortgage bank owners get to a place where they have to choose between maintaining their historic profit margins, paying the compliance costs, or just shutting down as the risk is too great?

May 13, 2012 | Unregistered CommenterTom Tousignant
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