SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteI Can Close That Loan In 30 Minutes?

December 22, 2022
It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

The mortgage industry has been embracing the concept of speed as a marketing feature in the past several years. The idea that a mortgage loan can transition from application to closing in a flash is something that loan officers and business owners have become convinced will make them more attractive to clients. Hey who doesn’t want to apply for a loan while making their morning coffee and get approved before they have finished their bowl of cereal right? Maybe not.

About twenty years ago, the typical mortgage loan took 45-60 days to close. It was a deliberate process, intensive on paper collection and review, and devoid of many current digital tools that make credit analysis and document collection much more efficient today. Over time the process has become more dependent on technology as lenders have worked to reduce time through automation and operational efficiencies. Ten year ago lenders were touting closings in as little as fifteen days. In the past few years the number has dropped to seven days, then 72 hours and now even a 30 minute mortgage is being promoted. Is the need for speed a good idea? Does it enhance operational risk management as well as the bottom line (loans closed faster means more loan overall). Do consumers even care?

There have been many surveys taken of potential borrowers to determine the top things on their wish list. The key issues on the minds of most borrowers are (a) interest rate, (b) fees and costs, and (c) the complexity of the process (i.e. how hard to I have to work?). The speed from application to closing is not at the top of the list.

The danger of course with speed is that it can be terribly inefficient in the long run, because lending is supposed to be a deliberative process. Besides credit worthiness and collateral value, the lending process is governed by rules which are designed to prevent arbitrary and potential harmful practices that violate HMDA, Fair Lending, RESPA, TILA, and CFPB rules protecting consumers from discrimination and negligent underwriting practices. In addition lenders are much more likely to experience fraud losses, loan defects, repurchases and indemnity situations when they rush a process without ensuring that quality control and risk management are a major focus of their business.

In a mortgage market seeing volume drop 60-70% below this same time two years ago, and 40% less than last year, their is justifiable panic in some quarters. Yet the prize belongs to those who keep a cool head, plan for the long term, and do not change their business model to weaken operations, thereby taking their eyes off of the goal of quality loan production.

Rather than rushing to close the next loan, it might be better to evaluate your current operations and determine if layoffs and downsizing has not forced you to abandon sensible lending practices and operational controls critical to your financial survival.

At Secure Insight we were founded and are operated by mortgage industry insiders. We understand the pressures and stresses of operating in a down market. Ask us how we can help ensure your operations will not be impacted by wire fraud and closing fraud, two areas of great concern today. If you have a need for speed, we can promise you instant reports to provide current risk data so that your closings will never be delayed trying to determine whether a wire should be sent to an unknown party.

Let’s be careful out there folks!

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