TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/106030
cover story lender bringing in $5 billion a month, and, say, Wells Fargo. It is just the next step in an evolution that started back in the 1980s with the birth of the mortgage broker. "Now you are seeing the proliferation of the small mortgage banker come into vogue," he says. "If you really boil it down, the Supremes of the world are the exact same thing as Wells Fargo, just smaller. But Quicken is getting into the level of Wells Fargo. I think the more savvy consumers understand that." Everett believes there is long term opportunity for growth for non-bank lenders. But he finds that many non-banking lenders aren't prepared to deal with the new regulations. And in his opinion, the new regulations will have a huge impact. "It truly goes to my belief that the industry is going to consolidate a lot, lot more," he says. "If you don't have a minimum of $10 million net worth, it is going to be a challenge because you are not going to have the infrastructure and the staff to handle all those changes that need to be done." "We probably have a little more latitude in terms of being able to write loans in today's very difficult lending environment." Size Doesn't Matter W ith just two locations, Carrington Mortgage Services is a small company providing residential mortgage loan services to borrowers and investors. Founded in 2007, the company is a subsidiary of Carrington Holding Company LLC. Like other non-bank lenders, Rick Sharga, Carrington's EVP, believes the large banks pulling out of residential mortgages offers his company a golden opportunity. He admires how Quicken and Costco have used their established brand names to take advantage of the market. "They are trying to leverage How are non-bank lenders preparing for the Consumer Financial Protection Bureau's evaluation process? veryone in the mortgage industry was well aware that the Consumer Financial Protection Bureau (CFPB) was designing new industry regulations that would define the types of loans that can be offered, who can receive those loans, and loan terms. Even more important, everyone also knew the CFPB would be conducting company evaluations that can only be described as hardcore banking examinations. For non-bank lenders, that is a totally new level of scrutiny. Getting ready for it requires doing your homework and then doing your homework again. 24 | The M Report be on the compliance management system, corporate governance and board roles and responsibilities, documented and approved policies and procedures, training, complaint gathering and review systems, thirdparty service providers audit and supervision, marketing and advertising, and privacy. Scott Everett, president of Supreme Lending in Dallas, is not leaving anything to chance in making sure his company will be ready as possible for the CFPB. He has hired a law firm to put Supreme through a pre-audit in preparation for the CFPB's evaluation. In addition, the company has hired both external and internal auditors and added new software. And he's still concerned. "Yes, there are concerns because you don't know what you don't know," he says. "I think what you do is read the facts about what they stated they are going to audit and consciously try to run a business that you believe is run efficiently and honestly. I think we do that. I just think you try to capture as many loopholes as you can and hope that the people auditing you see it as you see it," he says. Carrington Mortgage Services has actually met face-to-face with CFPB representatives for detailed discussions about the examination. The company has also completed a preliminary audit. Carrington has been a Home Affordable Modification shop, so the company has an understanding of what CFPB will be checking. "In a sense, we've been preparing for this sort of evaluation for a while," says Rick Sharga, EVP of the California-based company. "We've also talked to firms that have been through the audit, and we feel that we will do well." That said, Sharga, like Everett, admits some concern because you can't know what you don't know. "We're as comfortable as you can be under the circumstance," he says. "If you are a lender and you are trying to do the right thing and color inside the lines, you should be OK." — Rick Sharga, Carrington Mortgage Services Final Exam E those brands to move more meaningfully into the mortgage space," he says. "And from a consumer marketing standpoint, that makes an awful lot of sense." Still, he's happy being a smaller player only because it may actually work to Carrington's benefit. Smaller companies, he believes, may not be subject to the same level of regulatory control as the bigger non-bank lenders. "We probably have a little more latitude in terms of being able to write loans in today's very difficult lending environment," he says. Because of that environment, borrowers are searching for a partner to help work through the byzantine process of qualifying for a loan. They are willing to try new and different things, especially technology. They like the idea of filling out a mortgage application from their desk at work or home. "The mortgage process and real estate in general is one that really cried out for the simplification that you can deliver with online processes," he says. "Nobody should go through what you have to go through to do a mortgage." The future for Carrington and other small non-bank lenders may well depend on how stringently the CFPB decides to enforce its regulations. "My hope is that CFPB will see that the last couple of years of loans are performing better than historical averages and will basically say, OK, stay within these prudent underwriting guidelines that you have been following," Sharga says. "The whole market is really going through some pretty dramatic changes. Whether these are permanent, long-term changes or a transitional period while everyone figures out what the new rules are is yet to be seen." Robert Bostrom, a former general counsel to Freddie Mac and now in corporate, securities, and financial institution practices with Greenberg Traurig LLP in New York, says the best place for non-bank lenders to start is by establishing company policies and protocols that will ensure the CFPB team receives full and complete cooperation from all employees. The company should also review the CFPB's Examination Manual and conduct a compliance audit to identify and remediate any gaps in compliance. Bostrom says the focus of that internal audit should