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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2014

10 Tips for Small Lenders

Put a little perspective on the big picture

History shows that strength can be forged during the tough times that follow a crisis. Outcomes may be dramatically impacted by our perspective, especially when beliefs lead to action. 

With more than a dozen different federal regulatory entities and tens of thousands of pages of laws, it might be the understatement of the century to suggest that the financial services industry is one of the most regulated business sectors in the world.

On the heels of the subprime mortgage crisis, no one should have been surprised by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was quite a challenge for Congress to so quickly design mortgage regulations that addressed the practices that harmed consumers without inhibiting lending to otherwise creditworthy borrowers.

As they did prior to the “Year 2000 crisis,” many analysts thought the sky would fall on the mortgage-lending system when the new rules went into effect under Dodd-Frank this past January. No one will likely forget the unprecedented level of new guidelines that impacted the industry and the intense debate over their impact to organizations and borrowers. There were hundreds of new rules spanning thousands of pages, with the resulting unparalleled oversight and authority hitting everyone at warp speed.

Most of these changes were not simple, and the costs of understanding, implementing and complying with them posed a challenge for institutions of all sizes. Many suggest that the impact of these regulations and other reforms on the horizon will be particularly devastating to community-based lenders because smaller organizations are less able to absorb the cost of the regulatory burden.

You value the relationships you've built with your customers
and they value you as their trusted financial advisor.

Some go so far as to say that Dodd-Frank provides a further competitive advantage for larger lenders. Is this true? On the surface it seems that a $200 million community bank is less able to prepare for the regulatory burden than a $1 trillion national bank. Or, did the subprime meltdown and subsequent inundation of new regulations actually open the door for community-based institutions? The answer may be a resounding yes. According to The Wall Street Journal, smaller mortgage entities have dramatically increased their share of the origination market, accounting for as much as 60 percent of the market in late 2013, a 21 percent increase from 2009.

This environment presents many challenges, but provides big opportunities for community-based lenders as well. Here are 10 tips highlighting key areas that are critical in helping small institutions rise above the competition and succeed in this highly regulated environment.

1. Pursue strategic alliances

Although you might not have hundreds of compliance employees at your disposal, plenty of excellent companies offer high-quality, outsourced compliance solutions for reasonable fees. There also has been a resurgence of outsourced underwriting and fulfillment providers. Dodd-Frank has actually ignited innovation in this particular area. Explore these shared services to help minimize your fixed costs.

2. Leverage nimbleness

You may not have tremendous resources at your immediate disposal, but you can bring key people together quickly to tackle obstacles.

Think about what it will take to implement the 1,900-page regulations integrating the Truth in Lending Act and Real Estate Settlement Procedures Act by August 2015. You can put your loan production manager, chief credit officer and CFO in the same room with your compliance, training and IT teams in an instant. Start now.

3. Start the recruiting engine

For various reasons related to compliance, risk management and regulatory action, many large lenders have downsized their mortgage operations. Many small lenders can offer job stability, competitive pay and a quality work experience. One community bank that has been around for 150 years used the slogan: “Not accepting government bailout money since 1881” in their advertisements a few years ago. Many solid lending professionals are on the move and would love to call a place with that kind of longevity home.

4. Advocate on industry issues

Believe your voice is powerful within the industry, because it is. Community-based institutions actually made a difference in the Dodd-Frank debate in multiple areas, including the final version of the ability-to-repay (ATR) rule. There is strength in numbers and you must be visible to impact the outcomes. Be more active than you have ever been within your trade associations. Join committees, run a political action committee campaign, get your employees involved and attend events.

5. Understand GSE reform

Although it hasn’t yet made it to the Senate floor for a vote, the Johnson-Crapo bill to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, proposes some features that may help level the playing field. The current version of this bill creates more options for small lenders to sell their loans one-by-one to issuers. The bill is not perfect, but the authors are contemplating including a thoughtful wind-down of the current system. Monitor the developments, evaluate the strategic implications for your organization and be ready for action

6. Be proactive with regulators

With the unprecedented level of regulatory change underway, remember that all the stakeholders — even regulators — are climbing the learning curve. As a result, collaboration has never been more important. Reach out to your stakeholders early and often to identify priority areas and hot spots. Ask questions and be a partner. Do you know what they expect from your compliance program? Find out.

7. Serve niche markets

Regulators crafted a temporary qualified mortgage (QM) exemption for certain types of institutions that hold loans in portfolio, have assets under $2 billion and originate fewer than 500 total mortgage loans annually.

Are you leveraging this advantage? If you don’t make the cut for the exemption, do you plan to offer loans that meet the general ATR standard but not the QM standard? These loans have, for the most part, historically performed as well or better than secondary market loans. It is likely that most of the underwriting factors in the ATR rule have been in place in your organization for years. Make necessary adjustments and go help your customers. They need you.

8. Build relationships of trust

You know your borrowers and they know you — by name. You know the names of their children and their pets. You value the relationships you’ve built with your customers and they value you as their trusted financial advisor, coming to you first for their financial needs. With all the negative press recently about lenders, bankers and mortgage industry representatives, this trust matters. Your borrowers trust you won’t create a situation where they can’t repay a loan or lose their house. Build on that trust.

9. Educate your borrowers

All finger-pointing aside, perhaps the greatest lesson from the subprime meltdown is that lenders must take this opportunity to improve borrowers’ financial literacy. Informed borrowers make good decisions, pay mortgages on time and come back again. Use training, marketing and process to demonstrate that you are Main Street, not Wall Street. Set your borrowers up for success by helping them obtain full approvals in advance of taking the drive to shop for home.

10. Tell your story

Why are you here? Is it for financial reward or do you have a broader mission? Many times lenders are seen only as the wall that stands between a home purchaser and closing on a house. You need to change the story. If you’re involved in community-based volunteer efforts like Habitat for Humanity or a local soup kitchen, you are part of the lifeblood of the community you serve. Tell that story.

•  •  •

In the big picture, no matter how big or small you think you are, what you decide to believe will make the difference between winning and losing. Leverage your strengths, stay nimble, take part in your local community and the industry, and go share your perspective. 


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