REQUIRED READING: April 13, 2012 – remember that date, because the game may have changed significantly for warehouse lending on that day!
Specifically, it was on that date that the Consumer Financial Protection Bureau (CFPB) announced, ‘Financial institutions under bureau supervision may be held responsible for the actions of the companies with which they contract. The bureau will take a close look at service providers' interactions with consumers. It will hold all appropriate companies accountable when legal violations occur.’
This is a fairly sweeping pronouncement that appears to be designed to protect the consumer from the dealings of unscrupulous or incompetent service providers. Indeed, the robo-signing scandal is still fresh in the public consciousness and has served as a staging point for reform on the servicing side.
The CFPB announcement, however, could be taken to include more than just traditional mortgage servicers. It is not yet entirely clear just where the line will be drawn in the definition of ‘service providers.’ For this reason, warehouse lenders are holding their collective breath.
The typical warehouse lender, in fact, relies on a number of partners and businesses every day to originate and service its loans. Many of them could potentially be considered ‘service providers.’ Will a mid-sized warehouse lender now be required to closely monitor dozens to hundreds of individual mortgage brokerages, correspondent lenders and servicers? If so, a watershed moment may be at hand for the industry.
It is likely that the industry will get more guidance on the extent of the announcement, its parameters and guidelines, in the coming weeks and months. Until then, the warehouse lending segment is left to worry and wonder.Â
A strict liability approach – or something approaching that – could mean costs that could drive many out of business. Additionally, should the CFPB's guidance come in the form of enforcement and precedent, what lender wishes to be the first ‘example’ for others to learn from? Assuming the broadest definition of "service providers" and strictest levels of enforcement, the consequences for the warehouse lender could be severe.Â
It is hard to believe that there was a time, not too long ago, when the typical purchase mortgage closed within about 30 days. Today, encumbered by dozens of new rules, regulations and guidelines, the origination process is anything but efficient and fast. The CFPB mandate could lead to an even longer origination process, and that will have ripple effects through the warehouse chain.Â
Imagine the typical warehouse lender's initial response to the new standards of liability. The reaction would be to consolidate the number of ‘service providers’ used to limit liability and increase the lender's ability to monitor and control. For a business relying on hundreds or even thousands of independent mortgage brokerages or correspondents, this is not a pretty scenario.
Those ‘service providers’ making the cut would likely need to go through a tougher and more laborious vetting process. It is probably fair to predict that there would be more paperwork, more reporting, more guidelines and more auditing. All of these requirements would probably divert resources away from the focus of serving the customer.
Perhaps the loan, at each stage, will need to be reviewed somehow by the warehouse lender, who would now be liable for the actions of its ‘service provider.’ The possibilities are endless, and they do not bode well for the quick and easy transaction that most consumers expect.
Warehouse lenders will have to plan for this new level of quality control over myriad providers without any clear guidance as to how much will, in essence, be enough. Will the CFPB issue universal standards describing where the lender is liable for the actions of a mortgage broker and where it is not? And at what point will the lender be accountable?Â
Furthermore, how deeply will the lender have to have pried into a partner's business before the lender is off the hook for the illegal actions of, say, an unscrupulous broker with no criminal history and a talent for hiding his or her indiscretions? Will accounting audits be necessary? Most importantly, how long will warehouse lenders have to get compliant before the CFPB begins enforcement?
Paying the piper
Additional compliance guidelines always bring increased costs in any number of ways, and this announcement will be no exception. It seems likely that technology and personnel costs will increase for warehouse lenders, who rarely have large quality control or operations staff. More than likely, these costs will be passed along to the ‘service providers’ for whom that lender is responsible. And, ultimately, they'll find their way back to the consumer who is presumably being protected by the CFPB.
Now that we've added time and cost to the transaction, let us consider the logical consequences. Many of the ‘service providers’ working with warehouse lenders are small businesses – especially on the correspondent lending and independent brokerage level.
How many will be able to take on even more costs (in time and cash) to stay compliant with the increased demands of warehouse lenders? How many will walk away or perish in the effort to keep their heads above water?
Also, will it be easier for the largest fish in the ocean (e.g. Wells Fargo, Bank of America) to simply abandon the warehouse segment and focus on retail? Such a conclusion would seem logical, especially where the retail line allows for more control and centralization for the large lender, as opposed to the duty to micromanage hundreds or thousands of ‘service providers.’Â
As those bigger fish leave the sea rather than face the prospect of a logistical compliance nightmare, what happens to the service providers who are left behind? Consolidation? Failure? We cannot be sure right now, but it does not look encouraging.
Holding lenders responsible for the actions of their service providers will undoubtedly resonate with the consumer. After all, the easy ‘bad guy’ of the entire mortgage meltdown and subsequent recession was the Big Bad Bank. What's not to love about making the lender liable for the actions of its sinister ‘service providers’?Â
However, in an environment with fewer brokers, fewer lenders willing to take any chance on non-vanilla loans, and fewer lenders, the consumer's effort to obtain a mortgage will become more difficult. When he or she does qualify for that mortgage, it will take longer to close and be more complex and more cumbersome. It will also most certainly be more expensive.
But, then again, I guess that is the price that consumers have to pay for being protected by the CFPB!
Bob Rubin is principal of The Business Loan Connection, based in Southfield, Mich. He can be reached at bobr@tblnc.com.
