This year has impressed some of the smartest people I know as the biggest regulatory year in mortgages, ever. Ain’t that the truth? Who’s not exhausted from implementing new truth-in-lending and disclosure rules?
The U.S. government held sway over our industry in 2015 like never before, and our marketplace evolved dramatically.
Here is a look back at four significant events in 2015, three trends that emerged in our marketplace and, just for fun, two events that were expected to happen in 2015—but didn’t.
The Truth in Lending Act (TILA)–Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID) was a biggie—and not in name only. As an industry this year, we changed the disclosure package that borrowers see and sign, reset the timing of many of our processes and developed an audit trail to prove our compliance. This made us revamp our training, recode our technology, change our interactions with borrowers and re-examine our vendors.
Some were ready in time for the initial deadline for implementation in August. Others were ready by the extended date in October. Some aren’t ready yet. The fallout and impact of this on market share is still playing out. There is pressure on regulators not to enforce. Is that a good thing or a bad thing? Does their enforcement stance really matter if borrowers now have the ability to sue (as the new rules explicitly state)? Also, there appear to be gray areas in how to apply the rules. Tightening up and pinning down applications of the rule will be 2016’s tasks.
Lender Compensation Scrutinized
Regulators have zeroed in on lender compensation as a potential motivation to steer borrowers into risky, higher-cost loans. Marketing service agreements have received specific attention, and the Consumer Financial Protection Bureau (CFPB) has been communicating its position. Sourcing origination volume is the beachhead of the market-share battle. Even small changes in incentives or relationships can have material impact on how business is done.
HMDA data collection and reporting requirements increased in terms of reworking data flows and driving logistical and process change, the coming implementation of the new Home Mortgage Disclosure Act (HMDA) rules is second only to TRID. The devil is always in the details, and this change could be exceptionally challenging for mortgage originators that use disparate vendor systems. Some lenders are coping with this by applying brute force: opening up closed loan files and collecting and verifying data. There is a better way, but implementing technology and process changes can take time. In the meantime, lenders must remain in compliance.
Disparate Impact Redefined
The U.S. Supreme Court this past summer confirmed that intent is not a required basis for claims of disparate impact to succeed. But it also imposed limitations on such claims. A specified business practice must not only have a disproportionate effect on a protected class group but the practice must also be found to lack a sound business reason. This generated a whole other round of data-capture retooling and data analysis for mortgage lenders, as they sought to mitigate the risk of unknowingly discriminating against protected-class groups and opening themselves to fair lending enforcement actions.
Then, in the fall, a New Jersey bank settled with the government over redlining allegations. Both of these events helped frame and refine standards for identifying fair lending problems. This is a key focus for the government. Lenders are responding by buying technology and setting up internal programs to review their aggregate lending with statistical tools to stay out of trouble. While lenders earnestly declare they are fair, the footprint of their marketing actions must be unassailable. These two events helped draw this line a bit brighter.
Many of the trends that emerged in the mortgage marketplace in 2015 were driven in whole or in part by recent government actions. Here are a few.
Non-Bank Originators Win Market Share
Non-bank mortgage originators came roaring back in 2015, capturing material market share. Increasing regulatory capital requirements for banks is one cause, but there are many others. Is it easier to adapt to the new rules of the game if you are not a bank? There is not a lot of evidence of that, because banks have driven most recent compliance innovation. Still, the growth for non-banks has been impressive. Perhaps the stabilization of mortgage credit standards by Fannie Mae and Freddie Mac has helped produce this resurgence, along with the government-sponsored enterprises’ (GSEs’) efforts to clarify mortgage putback risk in cases of faulty origination documentation. Whatever it is, all market participants have taken notice.
FHA-Insured Origination Market Share Falls
Perhaps stung by the government’s strong use of the False Claims Act leading to large-scale settlement payments in 2014 and 2015, bank origination of loans insured by the Federal Housing Administration (FHA) has decreased in 2015 and overall FHA market share has dropped. It used to require much more effort to underwrite and properly document an FHA loan. The gap in ease of origination between conventional loans and FHA loans has narrowed materially in 2015 as ability-to-repay requirements have made properly documenting conventional loans more demanding. In addition, lenders that originate FHA loans have gone a long way to improve their documentation quality and ability to detect process problems earlier. Will 2016 produce a more robust volume of FHA loans? The public policy aspect of the FHA program is too valued by the government for it to be allowed to fade.
Cybersecurity Increasing as a Government and Regulatory Concern
The demands of fair lending, full disclosure and determining ability to repay, among others, have increased mortgage originators’ reliance on electronic data and document images. The industry is a web of originators, vendors and other market participants. Cybersecurity is increasingly on the minds of everyone in our industry, and that includes the government. This trend is growing, and its impact will be felt for years to come.
Two Things the Pundits Got Wrong
Last year at this time, pundits were looking into their crystal balls and predicting certain events would take place in 2015. Well, they were wrong about some things. Here are a couple of them.
Interest Rates Did Not Materially Rise
As of this writing, the Federal Reserve hasn’t made the move that many market watchers expected to take place in 2015. Low interest rates are generally good for mortgage origination volume. This non-event probably had the largest impact on the mortgage marketplace in 2015.
GSE ‘Reform’ Didn’t Happen
The folks at the GSEs have been busy and productive in 2015. GSE critics seem to have stepped off their soapboxes. Massive proposed changes to the GSEs, including complete privatization, have not been pressed. Are these “reforms” necessary? The focus has been elsewhere. Are the GSEs to go on in this state? Maybe so. The impetus for immediate change certainly reduced in 2015.
2015 has been a year of change, adjustment and re-engineering for the mortgage industry. Substantial shifts took place. We are not the same. Are we better? We hope so.