Scott Olson is executive director of the Community Home
Lenders Association (CHLA). CHLA is the only national
association exclusively representing independent mortgage
bankers and is comprised of small and midsized
community-oriented mortgage lenders and servicers.
Reach Olson at email@example.com.
It’s Time for a New
More balanced oversight is required to ensure
fair competition in the mortgage industry
By Scott Olson
Ten years ago, Lehman Brothers went bust, followed in short order by a collapse of our nation’s housing markets and the worst economic downturn since the Great Depression. Congress responded with sweeping new mortgage rules, with the goal of permanently putting
an end to shoddy mortgage practices and ruinous
These new mortgage rules generally apply to
all lenders, whether independent mortgage lenders, banks, or credit unions. They include the Ability
to Repay and Qualified Mortgage (QM) standards
designed to end no-doc loans and faulty underwriting; prohibitions against steering borrowers to
higher-priced loans; and more detailed servicing
requirements. They come on top of long-time protections like the Real Estate Settlement Procedures Act
(RESPA), which prohibits kickbacks, and consumer-disclosure regulations like the Truth in Lending Act.
A review of these regulatory changes shows that
they have worked reasonably well. Unfortunately, we
continue to see a trend toward regulatory policies
that don’t reflect the comparative risks of smaller and
large lenders and that don’t treat traditional banks and
non-depository independent mortgage banks (IMBs)
comparably. This has undermined the competitiveness of IMBs, particularly smaller ones.
Why is this important to consumers? Because IMBs
have led the way since the 2008 housing crisis in providing mortgage access as well as personalized, localized servicing. IMBs’ market share of Federal Housing
Administration (FHA) loan-origination volume grew
from 57 percent in 2010 to 85 percent in 2016, and
their growth in Ginnie Mae market share grew from
18 percent in 2009 to 78 percent in 2018, according to
Community Home Lenders Association data. Similar,
though less dramatic, trends can be found with respect
to Fannie Mae and Freddie Mac loans.
In that context, the time has come for a more even-handed approach to mortgage regulation — a new
paradigm if you will — that puts the focus on borrowers; bases the extent of regulation on a lender’s size
and borrower impact; and targets regulatory relief to
all lenders, not just banks.
Mortgage regulatory policies should be borrower-centric. The emphasis should be on key consumer protections — such as requiring borrowers to have the
ability to repay a loan, prohibiting steering of borrowers to higher priced loans, prohibiting kickbacks and
high standards to ensure that all mortgage loan originators are qualified.
Borrowers are not well served, however, when
mortgage rules become so numerous and supervision
so duplicative that only the largest lenders (whether
banks or IMBs) have the economies of scale to absorb
compliance costs. Over-regulation hurts smaller IMBs
(and smaller banks) much more than larger IMBs
(and larger banks). As mortgage profit margins shrink,
we are seeing smaller IMBs selling out to larger lenders, affiliating with banks to gain deposit insurance
or reduce compliance requirements and, in some
cases, even closing up shop. IMB-industry consolidation and concentration is bad for competition, which,
in turn, is bad for borrowers.
Mortgage policies should not be based on a sector’s
lobbying strength. Unfortunately, all too often this is
the case. When Congress created the Consumer
Financial Protection Bureau (CFPB), for example, it
exempted 98 percent of banks (those below $10 billion in assets) from CFPB supervision, but exempted
no IMBs. More recently, bank lobbyists were able to
get Congress to exempt small banks from QM rules
for portfolio loans — creating the anomalous result
that a key Dodd-Frank Act consumer protection is now
dependent on which type of lender a borrower uses.
Core consumer mortgage protections should not vary
based on whether a mortgage lender is a bank or a
nonbank lender. One of the most critical consumer
protections is the establishment of strong qualification requirements for the mortgage “loan originator”
— the personal point of contact with the borrower.
Just before the September 2008 financial crisis
took hold, Congress enacted the Secure and Fair
Enforcement for Mortgage Licensing Act (SAFE Act),
which established rigorous qualifications requirements for every mortgage loan originator who works
at an IMB. To get a license, a mortgage originator at an
IMB must pass a SAFE Act test (with real teeth and a
30 percent failure rate); pass an independent background check; and complete 20 hours of SAFE Act
pre-licensing courses. An IMB loan originator also must
complete eight hours of annual continuing education.
Congress failed to apply any of these qualifications
requirements to mortgage originators who work at
banks, however. In fact, there are some 1,500 individuals registered to be loan originators at banks who
actually failed (and never passed) the basic SAFE Act
test, and we have no idea whether the hundreds of
thousands of bank mortgage originators that never
took the test are qualified. Since licensing costs can
be significant, this regulatory disparity also creates a
major cost disparity between banks and IMBs. More
importantly, it allows borrowers to potentially be
served by unqualified individuals.
Regulatory policies should be based on tiered regulation tailored to a lender’s size, borrower volume,
product risk and extent of supervision by its regulators. To listen to the recent warnings of a few think
tanks in Washington (in part, funded by banks), the
biggest mortgage risk we face today is from IMBs,
because of their strong growth in market share over
the last decade.
Over the last decade, we witnessed some large
banks being forced to pay tens of billions of dollars in
fines because they misled investors about risky mortgage loans; failed to follow FHA underwriting guidelines; fraudulently engaged in “robo-signing” large
numbers of borrowers into foreclosures; and failed to
carry out required loss mitigation to avoid foreclosure
and keep people in their homes. Yet, somehow, we are
supposed to believe the biggest risk we face today is
posed by IMBs.
Unlike banks, which have taxpayer backing for
deposits through the Federal Deposit Insurance Corp.,
IMBs pose no direct taxpayer risk for the simple reason that neither an IMB’s assets nor its liabilities are
“The time has come
for a more even-handed approach
regulation — a
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