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
There is a memorable scene in the old holiday movie, “It’s A Wonderful Life,” when Jimmy Stewart as George Bailey, president of the Baily Savings and Loan, welcomes the Martini family to their new home which he just presumably funded for them. He makes a speech on the front steps offers gifts of salt and wine to welcome them. Whenever I spoke to new MLO classes as a lender management consultant, I would recount this scene and explain that this is what consumers expect from our industry: personal and caring service at an exciting yet stressful time in their lives. Somehow, I would add, our industry has forgotten to care about the consumer in the quest to sell loans at any cost.
The implementation of Dodd-Frank and the birth of the Consumer Financial Protection Bureau (CFPB) were, in part, a legislative effort to make sure we never forget that the consumer is the heart of our business. This is the heart of QM and ATR, and the vendor management rules our company helps lenders implement and manage.
This year will be the year of the consumer, and lenders need to make sure that they implement policies and procedures, or amend existing ones, to ensure that they are consumer-centric. From better quality origination and ability to repay safeguards, to vendor management and data privacy and security, lenders will be on the hot seat more than ever over how consumers are treated by them. It will not be long before we read about large fines and penalties against a lender for failing to heed this warning.
Some of the key areas expected to face scrutiny in audits and regulatory oversight this year include:
- Third party vendor management, specifically closing agents. The CFPB is currently gathering data from the public and other interested parties about the closing table experience that will likely result in more specific guidance about managing closing risk for consumers later this year.
- Affiliated business relationships. The affinity relationship between lenders and title agents, lenders and appraisers and lenders and real estate agents is being examined. The CFPB understands that almost every professional involved in the mortgage process is driven to the consumer not by free will but through referrals and steering. There is an understandable concern that these methods can drive up costs, ignore quality, and hide kickbacks.
- Minority inclusiveness. Consumers get the best deal when there is fair competition, free choice, and more choices for services. Like HMDA seeks to gather data and explore how lenders make loans to all consumers, there is a movement to ensure that lenders are doing business with vendors owned by men and women of all races and ethnicities. Expect to see some directives and guidance in hiring women and minority vendors later this year.
- Title insurance costs and fees. There have been claims by consumer groups that there is not enough competition and that costs are much higher than the risks being insured, especially in the digital and computer age where property ownership, tax and lien information is readily available and losses from title claims nationwide are relatively small. ALTA has been doing a good job of addressing these claims however we may see movement in this area this year.
The key takeaway for lenders is that anyone not making an effort to design their business around the consumer, rather than viewing the consumer as a means to an end, may very well being paying a price for it sometime this year. The CFPB is on a mission, and as George Bailey reminded Old Man Potter, “borrowers are human beings not just cattle… they deserve better!”