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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2018

Learn From the Ghosts of the Past

Post-recession regulations remain in place despite what may feel like lax enforcement

Learn From the Ghosts of the Past

A decade after the housing crisis, the resulting economic downturn and the onset of significant financial reform, the mortgage industry finds itself, once again, caught in the ebb and flow of shifting political tides. The past several years have ushered in a change in political-party control in Washington, which has impacted the current appetite for financial regulation enforcement.

This apparent easing in oversight has prompted some in the mortgage industry to push the compliance envelope further than they might have only a short time ago, regardless of the fact that most post-recession regulations still remain substantially intact. In an environment rife with regulatory boundaries, but seemingly light in supervisory enforcement, should mortgage originators and the lenders they work with settle into a relaxed-compliance comfort zone, or should they remain vigilant in their internal processes and protocols?

In Charles Dickens’ classic story, “A Christmas Carol,” readers journey along with Ebenezer Scrooge — a miserly, miserable man who spends a transformative evening following three ghostly guides down a self-reflective path to redemption. In a moment of clarity, Scrooge ponders the nature of fate, “Men’s courses will foreshadow certain ends, to which, if persevered in, they must lead. But if the courses be departed from, the ends will change.”

In essence, Dickens was teaching his readers that certain actions have predictable consequences and, if you wish to avoid specific outcomes, you must change your behavior. Or, more simply, you must learn from your mistakes, make amends and move on.

Are mortgage originators setting themselves up for unwanted scrutiny tomorrow because of choices they are making today? Has the mortgage industry learned from its past mistakes, made sufficient amends and thoroughly moved on, or is it still haunted by the ghosts of regulation past, present and future? In order to answer these questions, it’s important to first reflect on the road that led us to this point.

Recession fallout

In the years leading up to the Great Recession, the mortgage industry operated under very little federal oversight by agencies that weren’t particularly aggressive in their enforcement of regulatory guidelines. The more pressing concern for mortgage originators was following state regulations, but even under those restrictions, overall financial monitoring was still fairly lean.

It was under these conditions that the mortgage industry was sucked into the most shocking financial crisis the country had seen in decades. The shock wasn’t that the housing industry experienced a downturn — a normal phase of the cyclical economic process. The true surprise was the magnitude of the crisis, the depth to which the housing industry fell and the length of time it took the economy to recover. In other words, this was the tsunami of cyclical changes, and nobody was prepared for the severity of the impact.

The fallout from the Great Recession was devastating, and the country wanted someone to blame. Congress took action swiftly, and the financial industry underwent an unprecedented transition that included the development of the Consumer Financial Protection Bureau (CFPB), a federal oversight agency; and the adoption of a wide swath of policy reforms, including the Dodd-Frank Act — which led to the implementation of rules and regulations that significantly altered the landscape of mortgage banking.

Are mortgage originators setting themselves up for unwanted scrutiny tomorrow because of choices they are making today?

The goal was to ensure nothing like this would ever happen again. As a result, many mortgage originators found themselves scrambling to do business in an altered professional landscape. They bolstered their compliance teams, established compliance-management systems and overhauled their internal policies to avoid being caught in the crosshairs of regulators. The problem was that many mortgage originators didn’t know what the new regulatory limitations were or how to comply with them.

This compliance confusion, lack of transparency and seemingly random enforcement of rules by regulators like the CFPB led to inadvertent violations, resulting negative actions and other unintended consequences. The expected industry standard seemed to be perfection at all costs, a price that was simply too high for some companies to pay, and one that ultimately drove many independent mortgage originators out of business.

It was survival of the fittest. The choice was simple — learn to adapt or perish.

Policy overreach

Although well-intentioned and necessary to a degree, the severe and extensive policy response to the housing crisis overshot the mark in some areas. The Loan Originator Compensation Rule, for example, prohibits rate upselling by requiring commissions to remain the same regardless of a borrower’s interest rate, a rule that is critical to ensuring equal-lending treatment. This means lenders make less, however, or even lose money on certain types of loans, which may discourage mortgage originators from offering particular loan programs — thus leading to restricted lending for borrowers in certain demographic groups.

Another example of extended regulatory reach is the Equal Credit Opportunity Act Valuations Rule, which limits mortgage originators from having direct contact with an appraiser. The upside to this regulation is that it prohibits a quid pro quo arrangement that can lead to a misrepresentation of appraisal value. The downside is that in order to comply, many small and midsize lenders are required to use an appraisal management company, which adds more to the cost of appraisals, either decreasing the profit margin on the loan or amassing more fees for borrowers.

Despite concern over the increased cost of doing business because of mounting regulations, hints of potential financial deregulation began to take shape as congressional power shifted to Republican control in the 2014 midterm elections. The hope for a rollback in oversight became even more of a reality in 2016 when President Donald Trump was elected president.

Ultimately, the final piece of the puzzle fell into place when President Trump appointed Mick Mulvaney to step in as acting director of the CFPB, replacing Richard Cordray, who had been at the helm of the agency since its conception in 2011. Mulvaney’s appointment seemed to be the signal many in the mortgage industry were looking for — an indication that the attitude, focus and direction of the CFPB was going to shift.

With Republicans in control of Congress, the White House and the CFPB, the winds of political change started to blow in favor of financial deregulation, yet again. That promised to create a new oversight landscape for the mortgage industry.

Compliance indifference

Interestingly, since these changes have taken place, there hasn’t been a vast rollback of financial regulation as some analysts predicted. It’s true that there have been minor modifications, such as revisions to the Home Mortgage Disclosure Act (HMDA) and the recent elimination of the TILA-RESPA Integrated Disclosure (TRID) “black hole,” which have marked key wins for the mortgage industry.

The most significant regulatory modification, however, has actually been a decreased level of enforcement from federal financial watchdogs — and not a monumental change in the law. In light of this new development, some mortgage originators have adopted an attitude of compliance indifference, swapping out fear for apathy. It may be enticing to fall into the belief that the CFPB is toast, a relic of the past, something with which the industry no longer has to contend, but this is a false sense of security that could prove detrimental to lenders and originators in the long term.

The fact remains that the CFPB is still alive and well. It’s still performing audits and undertaking examinations. Despite dropping its old “gotcha” mentality and aggressive behavior, the bureau is still responsible for enforcing regulations, which are also still on the books.

Additionally, many state regulators view the CFPB’s lack of inaction as apathy, and feel it’s their responsibility to step in and make sure lending practices are being appropriately monitored. This belief has caused some states to augment their financial regulations in an effort to cover a perceived lack of federal supervision. This burgeoning of state-level oversight may have significant impact on some mortgage originators’ business operations.

Many states view the CFPB’s lack of inaction as apathy, and feel it’s their responsibility to step in and make sure lending practices are being appropriately monitored.

Considering these realities, lenders should be wary of the temptation to toss out the rulebook simply because regulatory enforcement feels lax. Savvy business leaders will remember that the past informs the future and, if there’s one thing the mortgage industry can learn from its past, it’s that political-party control will inevitably change and, when it does, the appetite for federal financial oversight may as well.

Ethical practices

So, what will the future bring for mortgage lending? Which political party will emerge as the victor in this year’s midterm elections, in 2020 and beyond? Who will be the next head of the CFPB? What will federal financial oversight look like over the next decade? Will states step up and fill the perceived regulatory enforcement void? How can lenders and originators adequately plan for the unknown?

While the answers may vary, the formula for success remains the same. Prepare for the future by learning lessons from the past. Mortgage professionals who continue to follow the rules and regulations governing the industry, regardless of current enforcement standards, stand to gain far more in the long run than those looking for loopholes in the system.

In the words of Spanish-American philosopher, George Santayana, “Those who cannot remember the past are condemned to repeat it.

 There’s no need to replicate the mistakes of the past. Ultimately, mortgage originators and others in the industry who operate on a foundation of unwavering ethical business practices will be better positioned to weather the political and regulatory storms that may be gathering on the horizon.  

Information contained in this article does not constitute legal, financial, or other professional advice or services and should not be used as a substitute for professional advice. The reader accepts full responsibility for the use of the information contained herein. Primary Residential Mortgage Inc. (NMLS 3094) is an Equal Housing Lender


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