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
Being a sales oriented business, mortgage lending resists anything that creates roadblocks, no matter how temporary, to the loan closing. The attitude is understandable, however short sighted it might be when facing a crisis or potential crisis. Some might say in fact that the industry ignored warning signs of potential financial liability and consumer harm before the last banking crisis. The passage of Dodd-Frank and the creation of the Consumer Financial Protection Bureau (CFPB) were reactions to that widespread belief.
The inability to recognize danger and do something about it is frequently referred to as the “Titanic Syndrome.” As one commentator explained it, “OK so say the world was about to explode. Instead of trying to do something about it, you spent the night partying, getting drunk, and just having fun….”
Next year is going to be a game changer for many lenders. Those unable or unwilling to play by the CFPB’s new rules will find it difficult to survive. The one-two punch of QM’s 3% costs and fees rule together with the need to adopt more compliance and risk management functions could very well result in a winnowing of the industry where only the strongest, best managed, quality originators survive. To make it worse, the market is down thanks to rising interest rates, the death of the refinance boom, and low inventory of homes for sale nationwide.
The choice then, for many, becomes this: do we spend the money and effort in a down market to adopt procedures and acquire tools to prepare for CFPB in January , or do we cut costs, get down and dirty and hope we fly under the radar? Do we don the life vests offered through compliance tool vendors and quality control firms and “check the box” for CFPB compliance despite the short term costs, or continue to party like its 1999 and hope that the ship stays afloat long enough for us to get back to a better balance sheet before incorporating regulatory changes? The risks may to be too great to wait.
The CFPB has made it clear that they have no intention of delaying the rollout of final rules, especially for QM. In addition the agency has shown that it is serious about audits and enforcement penalties. In the past 12 months there have been more than $600 Million in fines and penalties assessed or agreed to following CFPB enforcement actions.
How can a lender avoid the Titanic Syndrome and save their business in 2014?
- Educate yourself and your staff about the new rules
- Conduct a front to back (origination through closing) analysis of risk and compliance holes. Enterprise risk management needs to be your new watch-word.
- Adopt a written operating plan incorporating the appropriate policies, procedures and third party tools to assist in filling those risk and compliance holes.
- Contract for third party verification of best practices, QC and compliance. Auditors will want to know: how are you evaluating your own performance?
- Spend the money now, a worthwhile investment, to prepare for January 2014. The dollars spent today may very well guarantee you will be around to enjoy the fruits of the next year’s business cycle.
Don’t go it alone. Find a risk management partner. At SSI, we not only provide our clients
with a life jacket and a boat we actually do the rowing for them too!