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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2018

Viewpoint: Mortgage Companies Seek a Level Playing Field

Dodd-Frank Act rules already allow regulators to ease the burden on nonbanks

All mortgage companies, including nonbank lenders, are looking for ways to survive in this margin-compressed, compliance-heavy market. Ideas are flowing as to how to cut costs, optimize operations, increase market penetration and on and on.

Compliance across such a “fragmented state- regulatory landscape” can cost millions of dollars for lenders, not to mention the time devoted to these efforts, which can result in lost business opportunities, according to a recent U.S. Department of Treasury report. Mortgage companies, including small and midsize nonbank lenders, also must comply with regulatory requirements across all of the states in which they operate, pay fees and prepare staff for multiple state examinations.


Key Points

Assessing the regulatory landscape
  • Compliance is costly and time-consuming.
  • The Dodd-Frank Act increased regulatory burdens.
  • New regulations have not been applied equitably.
  • Mortgage companies face state and federal regulations.
  • Dodd-Frank allows for risk-based supervision discretion.

All of that inhibits the ability of these mortgage lenders — particularly smaller independent nonbanks — to innovate and to scale their operations nationally, according to the Treasury report. With this outlook, if federal regulations are already in place to help midsize and small nonbank mortgage lenders relieve the pressures of compliance costs, shouldn’t those rules be implemented?

Breathing room

Many look at the Dodd-Frank Act from a perspective of heavy compliance and cost burdens that need to be changed to provide midsize and small lenders some breathing room. Most of what is discussed deals with reform, elimination and starting over, rewriting as well as a number of other “fixes.”

It’s obvious that the regulatory movement in Washington is not the fastest in the world. Time is of the essence, however, when trying to reduce costs and eliminate unnecessary expenses for the smaller lenders, especially those that are independent mortgage bankers — or nonbanks.

Midsize and small nonbanks have a few things going against them that traditional banks and credit unions do not when it comes to mortgage lending. For one, nonbanks do one thing, and that is assist their communities in obtaining mortgages.

Nonbanks do not provide checking, savings and mutual-fund accounts; or offer credit cards, auto loans and boat loans; or take in deposits to offset the costs involved with mortgage lending — as do traditional banks and credit unions. They do not have the ability to borrow money at the same rates as traditional banks. Nonbanks do one thing: mortgages.

For another, the capital in their companies typically comes from individual investors (often their own savings) without the fallback of Troubled Asset Relief Program (TARP) bailouts, or other means of government assistance when problems arise. They do not have a large pool of public shareholders, Wall Street investment bankers or other big-money sources investing in their companies. Nonbank owners are building their own American dream on their own backs.

It is their family’s welfare on the line every day, no matter what the market is doing. Every decision has a direct impact in terms of food on their table, bills being paid and maintaining their companies.

Redundant regulations

Contrary to what has been written and publicized by some media outlets and think tanks, nonbanks are regulated and supervised by every state in which they do business, and redundantly regulated by the Consumer Financial Protection Bureau (CFPB) with respect to federal consumer mortgage laws.

In addition, these nonbanks face regular audits from federal agencies as well as from the other lenders they might work with, such a warehouse and correspondent lenders. In essence, many of these companies are actually regulated by those being regulated as well as the regulators themselves.

This is a form of regulatory overkill in terms of the multiple audits and preparation needed for small companies. The crazy part of it all is that midsize and small independent mortgage bankers have to maintain the same compliance standards as mega-Wall Street banks, while competing midsize and small traditional banks and credit unions are exempt.

The Dodd-Frank Act exempted 99 percent of traditional banks from CFPB’s supervision, based on concerns about such dual regulation. So, why aren’t nonbanks being treated the same?

The CFPB should be encouraged to adopt a formal policy or rule that exempts smaller nonbanks from being subject to CFPB exams or audits.

Borrowers also suffer from increased compliance costs foisted on nonbanks. Fees over the past several years have continued to rise to try and offset the costs of maintaining standards above those of similar-sized financial institutions, which results in a clear competitive disadvantage for an independent mortgage banker versus a traditional financial institution.

The additional costs of preparing for CFPB exams (on top of state exams) and of staying up to speed with CFPB rules interpretations that may differ from state regulators has a disproportionate impact on smaller nonbanks. That’s because smaller lenders simply don’t have the compliance economies of scale of larger lenders.

The costs of dual regulation contribute to many damaging consequences, such as consolidation, which is bad for competition and bad for borrowers; higher fees, which borrowers have to bear; and fewer programs to offer because of the additional compliance costs — in addition to tighter margins overall.

Additionally, nonbanks also have other regulatory requirements, including licensing and qualifications for all individual mortgage originators. With each new rulemaking effort comes a new set of complications and costs, triggering a ripple effect as nonbank lenders are forced to make the choice between adapting their operations or leaving the space entirely. So, to say independent mortgage bankers are not regulated, is simply not true.

Another option

The irony is that the CFPB, under Dodd-Frank, has a statutory requirement to exercise risk-based supervision discretion that takes into account a nonbank’s size, volume, product risk and the extent to which the lender is subject to oversight by state authorities for consumer protection. This is spelled out under subsection 1024(b)(2) of the Dodd-Frank Act.

Full implementation of this subsection would immediately reduce compliance costs for the midsize and smaller mortgage companies. That’s because it would spare them from preparing for redundant federal audits and allow these nonbanks to build their staff resources in other areas.

This is not to say nonbanks should be totally exempt from all regulation. Each state and any agency dealing with these companies has the authority to refer them to the CFPB for audit and corrective actions, should violations be found. If the Dodd-Frank risk-based provisions were to be fully applied, however, the CFPB would not have to take on day-to-day regulatory responsibility for overseeing nonbanks — just like they now do not have such responsibility under Dodd Frank with respect to other similar-sized traditional banks.

In June 2017, the Treasury Department released a detailed report on regulatory issues, which highlighted unnecessary regulatory burdens, with recommendations to address them. A major conclusion of that report was that the CFPB’s supervisory authority is duplicative and unnecessary. 

Treasury’s report noted that CFPB supervisory authority extends to state-licensed nonbanks that neither enjoy special status under federal law, “nor is regulation needed to address moral hazard created by deposit insurance,” given nonbanks don’t take in deposits.

The report underscores the effectiveness of state oversight, noting that state supervisors “were often leaders in identifying consumer-protection problems during the financial crisis and have a unique perspective into the financial services available and needs in their communities.”

The report concluded by calling on Congress to repeal the CFPB’s duplicative supervisory authority, recommending that “supervision of nonbanks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.”

•  •  • 

The CFPB should be encouraged to adopt a formal policy or rule that exempts smaller nonbanks from being subject to CFPB exams or audits. In addition, the industry should urge the CFPB to adopt a policy or rule that limits its authority to take enforcement action against smaller nonbanks unless one of their state regulators or another federal regulator provides a referral to investigate and take action.

Congress doesn’t need to act in the case of easing regulatory burdens on nonbank lenders. The industry just needs to ensure the CFPB is fully adhering to the statutory requirements of the Dodd-Frank Act.


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