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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2014

Take Calculated Steps Toward Banking

Don't underestimate the magnitude of transitioning from broker to mini-correspondent lender

Take Calculated Steps Toward Banking

For a multitude of reasons, many mortgage brokers nationwide are taking the plunge into mortgage banking. As mini-correspondent lenders, these emerging bankers face a different set of regulatory guidelines, as well as a number of considerations that they may not have anticipated before undertaking the transition.

Making the move from broker to banker can be advantageous for your business, but success in this field takes a lot more than good marketing and a warehouse line. If you’re thinking about making this move, five specific factors demand particular consideration.

Moving from mortgage brokering into mortgage banking is a transition that should not be taken lightly. Careful planning is a must if you hope to make your move a good one, and in this respect, a number of areas warrant particular thought and consideration. More specifically, be sure to take a close look at each of the following topics.

1. Legal ramifications

First and foremost, hire a lawyer or retain a firm that specializes in mortgage-banking compliance. The assistance of an attorney or law firm may be critical in ensuring proper licensing and, just as important, can help you avoid being considered a “table funder.”

When it comes to the latter topic, a surprising number of companies that enter  the mortgage-banking arena proudly announce that they’re using a “captive  facility” — i.e., a warehouse facility in which the investor is performing most of the  processes associated with the bank’s loans. You should know, however, that some of the best mortgage-focused law firms in the country have opined that captive facilities potentially violate the new ability-to-repay rule’s qualified mortgage provision, the Real Estate Settlement  Procedures Act and more.

Some warehouse lenders or correspondent lenders may unintentionally provide you with inaccurate information regarding this funding issue. So, go beyond what sales executives tell you and rely on your own attorneys. After all, should some legal liability arise, the warehouse lender will  simply stop issuing lines. Your company, however, will own any civil penalty liability with loans that are closed in your name.

2. Repurchase risks

Five years ago, mortgage organizations could make many loans without having to worry about financial consequences, provided those loans weren’t done fraudulently. The same contractual covenants signed for five years ago still exist today, but in the current regulatory climate, they’re strictly enforced. These include early pay-off penalties, early- and late-stage delinquency, compliance with all state and federal lending regulations, and penalties for inadequate documentation.

Arguably, the greatest risks to today’s mortgage bankers are legacy issues with loan documentation. In today’s market, customers who experience a life event  resulting in delinquency or foreclosure are often likely to seek retribution against their mortgage originators and challenge the  legal disclosures and documentation of their loan files. Just because the investor made the underwriting decision and purchased the loan does not preclude the liability of your company from legal disclosure and documentation defects.

The consequences of these defects extend well beyond repurchasing a loan. Five years ago, a small-cap mortgage bank faced with repurchasing loans could consider bankrupting the company and then starting again. Although this option may still exist, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Deposit Insurance Commission and a number of state attorneys general have demonstrated that they are prepared to extend enforcement to include civil or criminal penalties that would thwart the aforementioned strategy.

Quality control and compliance have become two of the most important concerns for mortgage banks in the market today. Although regulations can be costly for businesses, they’re paramount to ensuring that consumers are adequately protected. Whether you’re an emerging banker or an established one, your company must have well-documented quality-control and compliance policies and procedures in place.

With that in mind, be prepared to designate a compliance officer who is knowledgeable of current mortgage regulations. This person must have the discipline to audit and document reviews within the company and then  report that information to executive management. In addition, this person must have the authority to enforce your organization’s policies and procedures. In preparation for this function, it can be particularly useful to document compliance policies that are applicable to unfair, deceptive  or abusive acts or practices (UDAAP),  appraisal management, licensing, security, vendor management, and fraud.

Many companies engage a quality-control company to review and test their loans. In this case, be sure to conduct your due diligence on your chosen quality-control vendor to ensure that it’s qualified, provides timely reports and delivers objective results.  Ultimately, compliance should be viewed as an investment. It protects your assets and your employees, and it’s also crucial when it comes to ensuring a positive customer experience.

3. Selecting investors

Before making your transition, carefully interview and select the prospective investors to whom your loans will be sold. In recent quarters, many mortgage-banking companies have reported net losses, as some smaller aggregators are offering to purchase loans with little to no profit on the transaction for the purpose of aggregating servicing. Playing the price game is always a short-term strategy, however, regardless of which business you’re in.

Similarly, you should understand your investors’ endgame. Are they simply conduits to regional or large banks, or are they  Fannie Mae and Ginnie Mae issuers? The  latter group will likely have their own servicing portfolios and will have a vested interest in the entire lifecycle of your customers’ loans. These companies typically have  stronger balance sheets and are better  positioned to ride the volatility of mortgage banking. Just as they must approve you, your company also should perform its due diligence and approve them.

4. Finding warehouse lenders

Brokers should know that the best warehouse lenders will provide intellectual  capital and resources well beyond warehouse financing, resources which will help you grow your business. Look to partner with warehouse lenders that will enable you to make good use of their business acumen. Does your warehouse relationship manager understand hedging, compliance and finance, or does that manager simply pass you off to an industry colleague?

Warehouse lending is financing, and  financing represents a cost to any business. Considering that, you should not expect to earn positive interest income on your warehouse line. As with anything, if it’s too good to be true, it probably is.

On that note, if a lender’s price is one of the lowest in the market, don’t expect it to last. At the least, expect other fees and  assessments to be concealed in the details.  Related, when interest rates rise, your low-priced warehouse lender will be the first to experience tighter margins and the first to raise its prices or start cutting lines.

5. Choosing the right LOS

Whether you’re originating 20 loans per month or 200 loans per month, a critical  factor to your success is the loan-origination system (LOS) you use. Many systems give you the flexibility to migrate from broker to banker. Even so, an LOS program’s analysis must extend well beyond this to include the elements of the entire loan cycle, from a loan’s origination to its sale into the secondary market.

Be prepared to compare two or three different systems and evaluate their features and benefits relative to your business model. If a company has both broker and banker options but owns a large percentage of the broker market, chances are that the broker segment is that company’s core competency. Some systems interface with, or have, integrated compliance features, advanced analytic features, pricing engines and secondary-market modules. These are all important features associated with being a successful mortgage banker.

Generally, the installation and costs associated with vertically integrated systems are admittedly high. Still, you should avoid sticker shock and create your own return-on-investment model and break-even analysis when evaluating which system to purchase.

Often, many emerging bankers will intend to continue the use of their simple broker LOS and then migrate to a more robust system when their business grows. This strategy, however, underestimates the difficulty of transitioning when the new lending company becomes much larger. It’s easier to convert a few employees to a new system today than it is to convert several departments and  multiple offices tomorrow.

•  •  •

Mortgage banking isn’t for everyone. It requires planning, discipline and cash. If your company is ready for that next step, begin your research and make the leap. If not, consider waiting until you are ready. Being a mortgage broker can still be a profitable profession, and making the decision that’s right for you will be appreciated by your employees, clients and community alike.  


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