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THE
TRUSTED
Compliant Business Systems: Part I of III By Don DeRespinis
Federal laws now require every “covered business” to have a compliant system in place at all times. Covered business includes mortgage brokers and lenders. Mortgage originators are also required by law to have compliant systems for the origination of mortgage loans. When I started my business 15 years ago, I began a mission of defining and using a “Compliant System.” This has resulted in the establishment of my company’s “Business Operating Principals.” One of the main principals is the “Principals of Compliance.”
Principals of Compliance
that govern some aspect of the mortgage origination business. The following laws required increased compliance for businesses that have access to non-public personal information:
USA Patriot Act (USAPA) 2001 The Patriot Act requires every company to identify, through appropriate documentation, the actual identity of a person.
SAFE Mortgage Licensing Act 2008
Trust But Verify: Understanding the Wholesale Lender Mindset on Broker Credit By Greg Schroeder
JUNE 2010
continued on page 12
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NEW YORK MORTGAGE PROFESSIONAL MAGAZINE
Trust is imperative in today’s lending environment. However, the adage “trust but verify” promises to dictate the relationship between third-party originators and their wholesale lenders. Brokers need to understand and adapt to the conditions that define this all-important relationship, not by becoming passive, but by becoming better informed. With consumer confidence at an ebb and investors in a state of extreme caution, and in consideration of the U.S. Department of Housing & Urban Development’s (HUD’s) recent memo regarding third-party originator (TPO) due diligence and management, the onus is on wholesale mortgage bankers to verify beyond a shadow of a doubt their TPO/broker partners’ trustworthiness. It follows, then, that to achieve a competitive advantage and enhance their overall appeal as a mortgage lending partner, brokers need to be acutely aware of the criteria wholesalers are using to evaluate potential TPO partners. They must also be prepared to negotiate additional consideration when the criteria used gives an incomplete or misleading picture. When determining whether a mortgage professional (i.e. a broker) should, in fact, be trusted, there are several areas of that professional’s background that wholesale lenders typically investigate. Among the most obvious and telling are the broker’s licensing status and loan performance history. Thanks to the SAFE Act and the creation of the Nationwide Mortgage Licensing System (NMLS), mortgage broker licensing is now the norm rather than the exception. However, everyone knows that a broker’s licensing status can change in the blink of an eye. Many lenders are adopting a policy of conducting ongoing checks of brokers’ license status, knowing that a spotty licensing history could signify big trouble. Additionally, wholesalers are zeroing in on brokers’ loan performance history. Granted, given the tsunami of foreclosures resulting from the current financial crisis, a couple of blemishes on an otherwise pristine record will not necessarily tank a potential relationship. However, a history of loans with high EPDs, FPDs or fraud is a clear indicator to wholesalers that a broker should not be admitted to their list of trusted mortgage professionals. Therefore, brokers should be especially diligent in executing advanced quality control protocols on their loans to “weed out” the bad loans. Okay, verifying licenses is reasonable and tracking loan performance makes sense, but what about personal credit history? Should brokers be surprised that some wholesale mortgage bankers view their personal credit problems as a huge red flag? Maybe yes, maybe no. The point is that wholesale lenders are under pressure on several fronts (investors and regulators are particularly inquisitive about wholesalers’ broker relationships) to thoroughly vet and err on the side of caution when considering a broker relationship. A credit report is a treasure trove of insight, to be certain. There is common sense in the notion that a debtburdened broker is at greater risk than a financially-stable broker, especially if evidence of the debt burden co-exists with recent loan problems. However, counterintuitive as it may sound, basing a partnership decision on a broker’s personal credit history alone could be bad business—for the lender. It is important that brokers understand the wholesaler’s need to know as much as possible, but in the event a broker believes their credit report is working against them, it is advisable to respond proactively with a well-articulated explanation. Of all the mortgage industry, brokers have been, without a doubt, the most adversely affected personally by the sub-prime meltdown. Both from within and outside of the industry, experts, critics, politicians and the media have all been eager to deposit blame primarily on brokers’ shoulders for a systemic failure. As
NationalMortgageProfessional.com
The SAFE Act mandates that all states enact laws “According to federal governing the qualifications and licensing of all laws, every mortgage originator has a legal state-licensed and regisresponsibility to deter, tered mortgage loan orig1. Safe handling of all detect and defend the inators. The individual states are in the process documents; information of every of implementing the spe2. Well-documented comperson they serve. cific requirements over munications between This requires compathe course of the coming all parties; nies to closely follow year. In addition, the U.S. 3. Safe handling of all Department of Housing electronic documents, all relevant laws cov& Urban Development e-mails, faxing and ering the operation of (HUD) has published the texts received and sent; their business.” proposed rule for mini4. Well-documented polimum standards as mancies and procedures; 5. Generally Accepted Accounting dated by the SAFE Act in order to faciliPrinciples (GAAP)-compliant finan- tate the responsibilities placed on HUD under the Act. State laws passed during cial controls; 6. Training and oversight of opera- 2009 and 2010 place requirements on all mortgage loan originators to comply tions; and with both federal and state laws. The 7. A Red Flags procedure. education and testing requirements of Every mortgage broker or lender the new laws make it clear that an business in the country must do some- understanding of the laws, are the minthing about implementing such a sys- imum requirement for entry into the tem. I would like to establish a starting profession. It is the implementation of point by which a small company would the SAFE Act that provides states with the authority to enforce compliance embark on such a mission. According to federal laws, every with the laws. mortgage originator has a legal responsibility to deter, detect and Real Estate Settlement defend the information of every per- Procedures Act (RESPA) son they serve. This requires compa- RESPA now requires a new Good Faith nies to closely follow all relevant laws Estimate (GFE) and HUD-1 form that covering the operation of their busi- requires lenders to make certain that ness. At this time, excluding individ- the actual costs disclosed on the GFE at ual state laws, there are about 75 major federal laws and regulations continued on page 9 According to the many consumer protection laws, a compliant operation has a system in place to document and apply the following:
MORTGAGE PROFESSIONAL