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 re-
demption. 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.
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.
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.
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.
Burton Embry is the executive vice president and chief compliance officer at Primary Residential Mortgage Inc.
He is responsible for managing the organization’s risk, regulatory and compliance programs, which includes
oversight of quality assurance, licensing, vendor management, compliance and fair lending. Embry has over
40 years of experience in the financial and mortgage banking industry. Reach him at firstname.lastname@example.org
or (801) 359-0993.
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originators setting themselves up for
of choices they are