SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteWhy Compliance And Fraud Prevention Are Critical For Mortgage Lenders Right Now

February 9, 2023
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

Compliance is important to mortgage lenders because it helps ensure that they are following federal and state regulations related to lending, consumer protection, and fair lending practices. This helps minimize legal risk and protects the lender’s reputation, while also ensuring that borrowers receive fair and transparent loans.

Compliance is equally important regardless of the state of the business, whether it is doing well or facing difficulties. Failing to comply with regulations can result in legal and financial consequences, which can be even more severe when the business is struggling. Moreover, maintaining a good reputation for compliance can enhance the credibility and trust of the business, which is crucial for attracting and retaining customers, especially during tough times. Hence, compliance should always be a priority, regardless of the state of the business.

With statistics reflecting the rise of fraud in down economic markets, there are big risks to eliminating or scaling back fraud prevention and deterrence tools when revenue is down.  This is especially true for lenders where they have an obligation to protect consumers from fraud that can cause serious harm to them during a mortgage transaction.

Mortgage fraud can have serious consequences for consumers, including:

Financial loss: Consumers may lose their homes or their savings if they become victims of mortgage fraud.

Credit damage: Fraudulent mortgage activity can harm consumers’ credit scores, making it more difficult and expensive for them to obtain loans in the future.

Stress and emotional harm: The process of dealing with mortgage fraud can be stressful and emotionally draining for consumers, who may feel violated and vulnerable.

Legal trouble: Consumers may face legal action if they are found to have participated in or unknowingly facilitated fraudulent mortgage activity.

Overall, mortgage fraud can have a significant negative impact on consumers’ financial security, reputation, and well-being.

For those lenders committed to fighting fraud and protect consumers from harm, the decision then becomes how to do it effectively and affordably.  A critical point when making this determination involves the differences in the quality of data used for risk management. Some of the factors that can affect the quality of data include:

Data accuracy: The data used for risk management should be accurate and up to date to ensure that it reflects the current state of the business or market.

Data completeness: Data used for risk management should be complete and cover all relevant aspects of the business or market being analyzed.

Data consistency: The data used for risk management should be consistent, meaning that it should use the same definitions and units of measurement across different sources.

Data reliability: The data used for risk management should be reliable, meaning that it should come from trustworthy sources and be free from errors or biases.

Data relevance: The data used for risk management should be relevant to the specific risk being analyzed and provide actionable insights to help manage that risk.

Quality of data is important for effective risk management as it directly impacts the accuracy and reliability of risk assessments and decision-making.

Beyond the quality of data, what about the process used to evaluate and report on the risks associated with the data being managed?  If it acceptable to outsource?  Is it risky to outsource where the functions of data analysis and risk evaluation are conducted overseas?

Outsourcing itself involves little risk if a lender properly investigates the vendor, its process and its reliability in delivering the promised results. Outsourcing data to overseas companies however can pose several business risks, including:

Data privacy: Foreign companies may not be subject to the same privacy laws as those in the country where the data originates, which can put sensitive information at risk.

Cybersecurity: Outsourced data may be vulnerable to cyber-attacks, especially if the foreign company does not have robust security measures in place.

Data breaches: A breach of sensitive data at an overseas company can have serious consequences for the company and its customers, as well as damage its reputation.

Loss of control: Outsourcing data to a foreign company means giving up control over the data, which can limit the ability to manage the data or access it when needed.

Compliance: Foreign companies may not be subject to the same regulations or standards as those in the country where the data originates, which can make it more difficult to ensure compliance with regulations such as data protection laws.

Reliability: There may be concerns about the reliability of the foreign company, such as the ability to deliver quality services or meet contractual obligations.

In summary, outsourcing data to overseas companies can expose businesses to a range of risks, from data privacy and security to reliability and compliance, and it is important to carefully assess the risks and benefits before making a decision.

What then about ROI?  Many lenders view compliance as a drain on their budget and not a revenue enhancement.  Decisions are often made to trim fraud tools when revenue is off, perhaps because the risk of a fraud loss outweighs the need to maintain cash flow.  Yet that decision can ultimately be fatal to a company’s existence.

The return on investment (ROI) of operational risk management is the increase in financial performance or cost savings that result from implementing an effective operational risk management program. Yet, the ROI of operational risk management can be difficult to quantify, as it depends on a variety of factors, including the size and complexity of the organization, the nature of its operations, and the specific risks being managed.

However, some of the benefits of operational risk management that can contribute to a positive ROI include:

Cost savings: By identifying and mitigating risks before they materialize, organizations can reduce the costs associated with losses, legal fees, and other expenses.

Improved efficiency: An effective operational risk management program can help organizations streamline their processes and improve their overall efficiency.

Better decision-making: With a better understanding of the risks they face, organizations can make more informed and effective decisions.

Enhanced reputation: Organizations that are seen as responsible and risk-averse can enhance their reputation and increase customer trust.

Ultimately, the ROI of operational risk management will depend on how well the program is designed and implemented, as well as the specific risks and challenges faced by the organization.

The bottom line is this: lenders cannot simply turn off or turn away from compliance, especially compliance that involves fraud prevention and deterrence when revenue is off.  Often the key to maintaining your business in a down market is compliance and fraud prevention.  Reduced cash flow only makes a lender more vulnerable to financial harm and even insolvency when a fraud event occurs.

While fraud tools are not immediate revenue enhancers, they are always revenue protectors, preserving lenders’ hard earned profits from poaching by criminal elements, and from depletion from fines and penalties for regulatory non-compliance.

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