By: E. ROBERT LEVY
Having had the benefit of interacting with mortgage banking regulators from around the country, I see a few distinctive trends that could change the way in which mortgage banking is done in the future. One trend that appears to be in its earliest phase is and is not likely to have been recognized by most in the industry is the leaning toward safety and soundness requirements and examinations. In this regard, New York may be the furthest along in terms of safety and soundness examinations but other states are looking at the potential for such exams as well.
As with any regulation the starting point should not be the development of safety and soundness criteria but, rather, a determination as to what the goal or end result is to be achieved. The regulatory requirements should then be structured to achieve the goal. Frankly, I have not seen the goal being articulated in those states looking at the issue, leaving one to wonder what the safety and soundness effort is designed to achieve. Without knowing that, it will be extremely difficult for companies to fully comprehend what their obligations are in safety and soundness terms. It is also likely to create an ambiguous context for the regulations and their interpretation. Examiners looking at the financial data for a particular company could well have differing opinions on what is considered a sound company versus a company that needs regulatory assistance or guidance.
The difficulty I have with safety and soundness when applied to a mortgage banker or broker is that mortgage bankers are not depository institutions, from whence safety and soundness requirements derived in the first place. It is fully understandable that when an institution is taking deposits that are not insured because they exceed the FDIC insured maximums regulators have every right to be concerned about the potential failure of an institution and its inability to pay back its depositors (or protecting the FDIC's funds where insured deposits are concerned). In the case of a mortgage banker, there are no deposits and it is the mortgage banker providing funds to the borrower not the reverse. The question then becomes is there a time when borrowers could be hurt due to the insolvency of a mortgage banker? The answer is that this can occur with loans that are in the pipeline or about to close when a mortgage banker is no longer able to fund them. However, this is a relatively narrow window in terms of potential consumer harm when it comes to the totality of mortgage loans being made by lenders in New Jersey and elsewhere. Furthermore, it has been the experience in the industry that the borrowers in such cases have their loans closed because other companies step in and take over the loans in the case of an insolvent mortgage company.
When consideration is given to the fact that state regulatory agencies have limited resources, limited staff, and truly need to focus on the enforcement of existing laws, is it beneficial to utilize resources and staff to impose and enforce safety and soundness requirements? In this regard, would safety and soundness requirements provide meaningful insurance so that consumers would not experience problems due to lender insolvency in the future? The answer is probably not and the costs to a company in having to apply new requirements for safety and soundness as well as to respond to examination reports that raise concerns regarding a company's solvency may not be warranted when the benefits of such requirements are balanced against all of the detriments both from a regulatory and a consumer cost standpoint (more cost to lenders for compliance means more cost to consumers). This is not to say that existing net worth or bonding laws or regulations should not be continued (although some would argue that net worth has little benefit for consumers when a company fails). At least in the case of a net worth requirement there is a relatively simple calculation to determine whether a company's net worth meets the regulatory standard as contrasted with the complex and sometimes subjective analysis of safety and soundness in the same manner that banks are examined. For example, examiners would have to look at what the company is doing with its own funds, what investments it may be making, what percentage of a pipeline is not covered, how the pipeline is hedged, and many other factors which can be complex and require a good deal of sophistication to fully comprehend (and even then there can be differences of opinion).
As should be apparent, safety and soundness as applied to mortgage lending should not be an issue which is overlooked until state regulators have created a body of regulations or proposals that have gone so far down the road that their adoption is all but inevitable. It should be recognized that many regulators believe that safety and soundness requirements are meaningful and worth doing so that the industry should provide input to show why these requirements would not be appropriate or beneficial versus the utilization of regulatory resources in a more productive fashion.
In sum, our industry must become proactive when the early signals are there regarding such trends and begin educating regulators and legislators early in the process since that is what the consumer groups have been doing quite successfully. The industry cannot come in long after consumers and regulators have reached conclusions concerning the value of concepts such as safety and soundness for mortgage lenders and brokers. The time to act is now.
