Assessing the regulatory landscape
All mortgage companies, including non- bank 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.
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
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 Wash-
ington 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 lend-
ers, 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 invest-
ment 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.
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?
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.
Ed F. Wallace Jr. is the executive director of The Community
Mortgage Lenders of America (CMLA), a Washington,
D.C.-based advocacy group focused solely on the concerns
of midsize and small mortgage lenders. Reach Wallace at
Seek a Level Playing Field
Dodd-Frank Act rules already allow regulators to ease the burden on nonbanks
By Ed F. Wallace Jr.
n;Compliance is costly and time-consuming.
n;The Dodd-Frank Act increased regulatory
n;New regulations have not been applied
n;Mortgage companies face state and federal
n;Dodd-Frank allows for risk-based supervision
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