Free Market Dogma

QUESTION 

I am a former employee of a lender whose president is a hard-core hater of the CFPB. He believes that our government is out of control and the CFPB has been overreaching for years. He is glad that the CFPB is being shut down. I was a paralegal in the legal department. After having to put up with his railing and cursing about the government in general and the CFPB in particular, I decided to resign. Since then, I have been with a law firm and continue to attend law school. 

It's not as if his mortgage company has been in trouble with the CFPB. It complies with all the rules and regulations, and every audit by states and the CFPB itself has shown that the company complies adequately. There have been no administrative actions or fines. 

From what I can tell, the CFPB is a kind of anti-scam police. They are also involved in protecting consumers' financial interests with respect to financial products and services. I can't figure out why this is such a bad thing that it should be destroyed. I thought regulating on behalf of consumers is what good government is supposed to do. We can debate what overreach and unnecessary regulations are, but destroying the agency that actually helps consumers seems really dangerous. 

My former boss takes the position that any government involvement in the free market is an attack on free enterprise, which to him means running his business the way he wants to run it. And, any agency, like the CFPB, that regulates his company is an attack on its survival. I think that's really very extreme. I got tired of trying to convince him otherwise. 

I know this is controversial. I want to widen the lens a bit. You have always been willing to discuss controversial subjects. My former president reads every post you've written for years. I'm sure he will recognize me as the questioner, though I didn't tell you his name or company name. It may bother him that I am writing to you. Fortunately, I am no longer an employee. 

He often discusses your views and interpretations of the law. I have subscribed for years. I think you are a reliable resource for regulatory guidance. I want to know your view. It would really help! 

Is government involvement in free markets justifiable? 

COMPLIANCE SOLUTION 

Management Tune-up 

RESPONSE 

I respond to controversial subjects as they may relate to many aspects of regulatory compliance. I make no apologies. I know they are controversial because we predictably get a small tranche of unsubscribes whenever I discuss a topic that bugs the unsubscribers. Sometimes, the unsubscribers write to me, and we have enjoyable correspondence. 

We offer this newsletter as a labor of love. It's free! All are welcome. However, I discuss the regulatory landscape with all its ups and downs, controversies, and wrangling, and always try to ensure that compliance with the law is clarified. My goal is to educate and offer some helpful guidance. 

Anyone who does not recognize that the government partners with markets, be it mortgage or any other economic market, exhibits a view that borders on willful ignorance. I have taught graduate classes on market action relating to mortgage origination, and one obvious factor we discuss is the "free market" concept, which is the thesis that markets should not allow government involvement (often framed as "government interference"). 

"Free market" lingo wears several masks, such as "free trade" and "free enterprise," but the notion that any economic market is free of government involvement is belied by the fact that the government must be involved in ensuring and monitoring its legal and regulatory framework. 

Now, for a dose of reality: 

There has never been a free market in the history of the world.

Never. Nowhere. Not now. Not ever. 

The concept indirectly stems from an economic theory called "laissez-faire" – which, in French, means "allow to do" – which is a financial concept that purports to inform free markets and capitalism. In that scenario, the government does not regulate business, taxes, or tariffs. Instead, it proposes that a market self-regulates through the economic mechanism of supply and demand of products and services. And, it asserts that individuals drive markets through self-interest, which, somehow, leads to social and economic benefits.  

There are economists of certain schools who reframe laissez-faire as a "hands-off" approach to market activity. The motto: Let the chips fall where they may, irrespective of the outcome, because, magically, it will all work out for the better! 

The attempt at minimal government intervention historically and economically leads, among other things, to income inequality and the lack of protection for workers (i.e., the middle class). In that sense, the free market theory is, by extension, a tool of class warfare. Sure, laissez-faire can promote economic growth, but it can also exacerbate social problems. 

Can you guess when laissez-faire was most prominent in the United States? The answer is it was most notable as a policy during the Gilded Age, the age of the Robber Barons, in the late 19^th and early 20^th centuries. These days, three individuals collectively are worth more than the bottom half of the population of our country.[i] This inequality is obviously not sustainable. Clearly, free market thinking is utopian thinking but does not pertain to human action. 

In terms of economic theory, a hypothetical free market leads to monopolies. For instance, a successful supplier tends to get bigger and more powerful. It then buys up smaller competitors or puts them out of business. This tendency is an evolution toward monopoly. Therefore, what might seem to be a theory that can favor small businesses is actually one that destroys them. This is the case in many markets, and governments have had to put in place regulations to avoid monopolistic and predatory practices.

Monthly Mortgage Compliance - Semi-Annual Opportunity

Message from Jonathan Foxx, Ph.D., MBA 
Chairman & Managing Director
Lenders Compliance Group.

________________________________

Twice each year, we open our doors to new clients to join our family of clientele that use our monthly mortgage compliance support. 

During this discount enrollment period, we discount our already low monthly flat fee. The timeframe to take advantage of this offer ends on March 31st. 

We offer the discount as an expression of our mission. Let me explain.

When I started Lenders Compliance Group in 2006, there were virtually no other mortgage compliance and risk management companies around. My idea was to offer a team of the top compliance experts at a fraction of the cost it would be to retain any of them individually. At first, it was rough going, because companies had become grudgingly dependent on high fees and high payroll costs. One by one, they joined us and in time Lenders Compliance Group became the preeminent compliance firm in the country.

Of course, soon the copycats popped up, jumping onto what they thought was a big money-making bandwagon. But I said then, as I say now, 'I welcome competition.' The hybridization of compliance firms mystified me at first, such as firms that offered boilerplate policies and procedures for next to nothing but slammed lenders with excessive monthly fees, law firms that previously had no mortgage compliance departments all of a sudden sprung up with their various "compliance divisions," and quality control firms that had no real mortgage compliance experience except for providing QC auditing yet parleyed their client list. Unfortunately, and inevitably, many lenders were chiseled, chastened, but happily came to us. 

Believe it or not - and I have said this many times - we choose our clients as much as they choose us. Not every client is a good fit, and just because they have a lot of money or clout does not mean they are right for us. We seek lenders that are serious about implementing compliance, not trying to find a way to twist a regulation into an unrecognizable shape. We'll sometimes modestly push the compliance envelope, but only so much! If you conduct compliance on the basis of a cost/benefit ratio, you're probably not a good fit for us.

I'm proud of what we've accomplished, and it all began with monthly compliance support. In effect, we become an extension of your office!

We now provide the largest range of compliance services - all of it hands-on, personal, and direct! But we will always stick by our vision to provide a safe and sound approach to monthly compliance.

So, what do you get as a monthly mortgage compliance client? This -

Low Monthly Flat Fee

On-going Compliance Support

Supervised by Directors

Subject Matter Experts

Unlimited Questions

Most Policy Documents

Secure Record Storage

Dedicated Team

If you are a lender that needs cost-effective regulatory compliance guidance relating to mortgage acts, rules, regulations, and Best Practices, and you are committed to safety and soundness, you should contact us. We'll provide independent, reliable, low cost, on-going support to your compliance team!

If you miss out on this opportunity for a reduced fee, we'll be providing the offer again later this year. The deadline is March 31st. But why wait? 

Just contact us and we'll send you a one-page presentation, and you can also speak with me or one of our Directors to discuss your compliance needs. 

If you're interested, we'll give you a simple form to complete that lets us know a little about your organization, so that we can send you an engagement proposal with appropriate pricing, staffing, and scope. We're usually able to get started immediately!

Click the sidebar button or feel free to contact us at your convenience via email, phone, or even leaving a voicemail. 

Email: Compliance@LendersComplianceGroup.com
Phone: 866-602-6660
Voicemail: 866-255-6466

Wishing you all the best!

Credit Committees: Central Hub of Mortgage Banking

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Many clients have credit risk management committees, sometimes referred to as loan committees, lending committees, or credit committees. Let’s just call them “credit committees” or, for the purposes of this article, “Committees.” For small mortgage lenders, the Committees wind up consisting of the owner and perhaps a second company official. Howsoever this internal entity is configured, it is very important to ensure continuity between the origination process flow and, where possible, the interaction with a loan committee that sets policy standards and, as needed, makes decisions on whether to approve a risky loan transaction.

When we are retained by a client to review its departments and functions, for instance to conduct an internal audit or a GSE readiness audit – one of the factors we consider is the lending function itself. This activity is in fact actually distributed over many departments. But the loan flow process must come under a set of review criteria which, when challenged, often requires resolution by a committee constituted to manage the loan transaction’s risk.

First and foremost, it is important to emphasize that an institution’s quality control, compliance, and audit procedures should focus on mortgage lending activities that pose high risk. Controls to monitor compliance with underwriting standards and exceptions to those standards are especially important.

To break this down further, the quality control function should regularly review a sample of loans from all origination channels. A representative sample of underwriters should be subject to quality control auditing in order to confirm that policies are being followed. When control systems or operating practices are found deficient, business-line managers should be held accountable for correcting deficiencies in a timely manner. This means, in effect, that the deficiency should be identified, mitigated through system and training solutions, monitored, and periodically tested.

Since some loans permit a borrower to defer principal and, in some cases, interest payments for extended periods, institutions should have strong controls over accruals, customer service and collections. Servicing must be an intrinsic part of the loan committee’s considerations. The exceptions made by servicing and collections personnel should be carefully monitored to confirm that practices such as re-aging, payment deferrals, and loan modifications are not inadvertently increasing risk. One suggestion would be to have servicing and collection personnel involved in the Committee. At the very least, servicing should be informed of credit decisions that affect its purview. Customer service and collections personnel should receive product-specific training on the features and potential customer issues with these products.

Mortgage Regulators Conference – A Synopsis

Alan Cicchetti

Director/Agency Relations

Lenders Compliance Group

Recently, I attended the annual meeting of the American Association of Mortgage Regulators Association (AARMR), held in San Antonio, Texas, on August 1, 2017.

The meeting is an important event in the calendar of state and federal banking regulators, as it is largely devoted to regulatory compliance involving banks and nonbanks.

As the former Deputy Commissioner of the Connecticut Banking Department, I have attended these conferences for many years. Of course, as our Director of Agency Relations, I take a particular interest in this event because it enhances my understanding of key issues that may be facing the mortgage banking community in general and our clients in particular.

I would like to share some of the “take-aways” that I have surmised from this valuable AARMR regulatory conference. 

To be sure, I think that it will be helpful to understand the mission statement of AARMR, which is:

“To promote the exchange of information and education of licensing, supervision and regulation of the residential mortgage industry, ensure the ability to provide effective supervision for a safe and sound industry meeting the needs of the local financial markets and protect the rights of consumers.”

This conference provides an opportunity for regulators and industry to discuss current issues and to come away with a better understanding of regulatory concerns as well as those of the industry. It is worth noting that the meeting attendees include not only regulators from most of the states but also legal and regulatory compliance folks as well as a variety of mortgage lenders and mortgage brokers of all sizes.

One of the most compelling and interesting presentations had to do with the industry’s need for clarity and consistency in mortgage supervision and enforcement.

I am offering the following synopsis with the hope that you may obtain a better understanding of some of these mortgage industry concerns, as presented by certain panel discussions relating to challenges in the areas of licensing, advertising, reporting, disclosures, “desk drawer” policies, and the need for collaboration in producing a standard cybersecurity policy.

Please let us know your thoughts, questions or concerns. 

We welcome your feedback!

Contact Us

Email Us

Some of the challenges and opportunities presented by the industry are summarized below.

Ten Core Competencies in a Compliance Management System

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

In my view, there are ten core competencies to implementing a Compliance Management System, often referred to by its acronym CMS. The Consumer Financial Protection Bureau requires it, state regulators are now asking for it, and investors want assurance of its application.

I have written extensively about the CMS concept and its importance in mortgage risk management. For instance, see my article on Creating a Culture of Compliance. Also, other articles here. When I speak on the subject, it is often the case that some in the audience actually have no idea about what constitutes the CMS. They think it is no more than a compilation of policies and procedures. But, the fact is that a viable CMS is composed of several integral features, each of which contributes to the cohesiveness of the whole compliance function.

Here’s a brief synopsis of the Ten Core Competencies that should inform a CMS:

1)  Loan portfolio, secondary and capital market management processes, mortgage servicing.

2)  Loan flow process, from point of sale to securitization or secondary market transaction.

3)  Internal Audit and Control Plan, including calendrical reviews, reporting protocol, rank and file training in all departments, and testing.

4)  Consumer disclosures, all loan types, federal and state.

5)  Mortgage quality control, not only random sampling, but proactive audits that target criteria.

6)  Record retention and maintenance, securing against unauthorized alteration or destruction.

7)  Marketing and advertising, including use of third-party services.

8)  Vendor, settlement agent, closing agent, and third-party vetting and approvals.

9)  Safeguards for privacy protection of consumer records and information.

10)  Reporting mandates to agencies, both federal and state, investors, and third-party relationships.

The compliance framework is built on the foregoing competencies. Destabilize one of them and it is possible that the others will crash like a tottering stack of cards!

Also, it should be noted that there is a growing expectation amongst regulators for a residential mortgage lender or originator to have a business continuity plan.

It is not necessary to consolidate all compliance policies and procedures into a single document. Nor does it require compliance managers to memorialize every action that must be taken in order to remain in compliance with federal and state banking law. In some cases, it may be enough for the compliance policies and procedures to allocate responsibility within the organization for the timely performance of many obligations, such as the filing or updating of required forms.

However, observed instances in which compliance policies and procedures were not followed or the actual practices were not consistent with the description in the compliance manuals, will likely lead to an adverse banking examination finding. Observed practices in areas that are required to be reviewed in accordance with specific regulations and in areas that include policies and procedures, but are not expressly required to be reviewed by regulations, will come under significant regulatory scrutiny.

What good is a compliance management system if it is not continually reviewed and, where needed, updated? In our work with new clients, we have found the following issues happening often:

·         Critical areas not identified, thus certain compliance policies and procedures were not adopted.

·         Policies were adopted, but were not applicable to the businesses and operations.

·         Critical control procedures were not performed, or not performed as described in the CMS.

·         Annual Review of the compliance function was rarely, if ever, implemented.

During examinations, an examiner may observe certain compliance weaknesses. But examiners review periodically, not continually, in most cases. The rest of the time, the residential mortgage lender or originator should be self-assessing the compliance programs in order to spot weaknesses, particularly with respect to identifying applicable mortgage compliance risks, and thereby ensure that the compliance management system encompasses all relevant business activities.

Compliance Matters - New Broadcast

I would like to introduce you to our new weekly broadcast on Mortgage News Network. 

Today marks the very first of our series of Compliance Matters.

Each week, on Friday, members of Lenders Compliance Group will speak on timely and important regulatory compliance topics.

Mortgage News Network is quickly becoming an important opportunity to stay in touch with current events in the mortgage space. According to MNN's founder, Joel Berman, the network is meant "to offer mortgage industry firms a resource for news and information." This is the first network of its kind, devoted solely to residential mortgage lenders and originators.

You can subscribe to MNN and receive daily updates and news, plus you will learn about forthcoming broadcasts. 

We are honored that MNN has asked us to participate in its series, interviews, specials, and events. 

Today's Compliance Matters broadcast, our first, is about a subject that should be the foundation of every company's business model: building a Culture of Compliance. I have published an article on this concept, which you can download here: Creating a Culture of Compliance.

So, please visit Mortgage News Network and watch our Compliance Matters broadcast. 

This is a fresh, new way to bring you information that supports your mortgage compliance needs.

Jonathan Foxx

President & Managing Director

Compliance Collaborative, Inc.

For some time I have been concerned about the way certain "cooperatives" seem to be crossing the line in providing compliance support services (via selected, alliance vendors) at the same time that they are providing underwriting, processing, loan products, and various operations functions. Although these cooperatives have (yet) to come under the scrutiny of regulators, I think they one day might, since compliance and underwriting (for example) should not occupy the same space.

I am sure that all the legal bases of their way of doing business have been fully explored and satisfied. And I get that lenders want to go to a cooperative and receive all the services they need, including compliance support. However, in my view, when it comes to compliance there should not be such an ostensibly unorthodox configuration. Indeed, in conversations I have had with regulators, they have pointed out to me that this is a concern of theirs.

Therefore, I have decided to start a new and additional way to serve the compliance needs of the mortgage banking community: the Compliance Collaborative, Inc. (CCI).

The Compliance Collaborative has been in the planning for some time and is already building alliances with well-established vendors that offer compliance - and exclusively compliance! - to residential mortgage lenders and originators.

CCI is now the first and only firm in the country exclusively devoted to mortgage banking compliance that provides a collaboration of the best and finest mortgage compliance providers. And the very first firm to join CCI is Lenders Compliance Group!

Many compliance vendors, consultants, risk management professionals, and law firms are joining CCI in order to provide their respective services to CCI clientele. Any member firm may always be retained separately. But member firms may also be individually retained through CCI or as part of a package of compliance solutions, thereby offering cost-effective and reasonable fees.

In the next few weeks, you will be hearing more about CCI's new website and service plans. We recently issued a Press Release about it and our efforts are being picked up by the media, for instance, here and here and here.

In the meantime, if you want me to keep you in mind for a call or email and new information, please let me know.

We will be providing a suite of services soon and would welcome your feedback and requests. I'll be glad to contact you to ensure that you are given an early opportunity to retain the Compliance Collaborative for your compliance needs!

Best wishes,
Jonathan Foxx
President & Managing Director

Creating a Culture of Compliance

Everywhere we turn, there is compliance, compliance,
and more compliance required across the board.[i]
Donald J. Frommeyer, CRMS
President of NAMB

The ancient Greek philosophers knew the fundamental distinction between theory and practice. For them “theory” (or theoria) differed from “practice” (or praxis) in that the former meant examining things and the latter meant doing things! In other words, theory was a sort of spectators’ sport, while practice was playing the sport itself. Advanced mathematics is somewhat similar: there is pure (or theoretical) mathematics and then there is applied mathematics. Some theories remain theories forever, and others are extrapolated into practice. So, as it happens, some cogent theories simply do not need to have applied applications to be cohesive theories. Practical applications, however, must be experimentally valid all of the time.

The requirements of implementing a theory can be daunting, especially when the consequences of its practical applications are not sufficiently understood. To put a fine point on this observation: what may seem perfectly acceptable in theory can be entirely unacceptable in practice. Thus, some things are possible theoretically and other things are not possible practically. In compliance, I have learned to approach the notion of something being ‘theoretically possible’ with extreme caution!

So, given the challenges of regulations (theories) and compliance requirements (practices), (1) how should a financial institution accomplish evaluations of its loan origination risks and, most importantly, (2) how to go about embedding such assessments into a culture of compliance? In this article, I am going to provide ways and means by which the management of a financial institution will be able to create a culture of compliance that serves as the foundation upon which to manage risk associated with mortgage loan originations. I will provide an extensive set of questions, the answers to which should call forth the ways and means to establish compliance solutions.*

If you have ten thousand regulations,
you destroy all respect for the law.
Winston Churchill

So, how to create a culture of compliance?

Begin at the beginning!

When was the last time that a risk assessment was performed to identify all the loan products, which departments were affected in originating them, and what staff are responsible to effectuate the origination? That is where to begin. Residential mortgage lenders and originators may offer some, or all, of the loan products subject to the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule promulgated by the Consumer Financial Protection Bureau (Bureau). But originating those loan products starts with identifying the loan flow process itself.

Furthermore, any new origination requirements will affect a number of parts of business systems and processes. For instance, a very short list of affected areas are the forms and processes used to communicate internally and externally that are subject to verification requirements; systems and processes used to underwrite loans must be considered; secondary marketing and servicing processes and systems need risk evaluation metrics, especially with respect to ATR provisions related to the refinancing of non-standard loans into a standard loans.

Specifically, are the various integrated processes and procedures set up to identify loans on the transaction systems with their definitional status under such regulations as the ATR and QM rule, which may involve creating new data element(s) within those very processing systems? Likewise, if the loan is a QM, is a formal consideration undertaken to determine levels of liability exposure and liability protection that a loan is receiving as it moves through the origination process?

To insure peace of mind
ignore the rules and regulations.  

George Ade

The American humorist, George Ade, may have found a way to peace of mind by ignoring rules and regulations. Perhaps he intuitively knew something about the stress involved in originating residential mortgage loans! If you have problems with rules and regulations, I suggest you choose another line of work, for happiness will forever elude you.

Consider this: the ATR and QM rule is just one component of the Bureau’s Dodd-Frank Act Title XIV rulemakings! Here are a few other rules that are now the law of the land:

• 2013 HOEPA Rule
• ECOA Valuations Rule
• TILA Higher-Priced Mortgage Loans Appraisal Rule
• Loan Originator Rule
• RESPA and TILA Mortgage Servicing Rules
• TILA Higher-Priced Mortgage Loans Escrow Rule

Some of these rules are directly and indirectly intersected, interlocked, overlapped, interfaced, and cross-tabulated; they are correlated, tabularized and re-tabularized, re-ordered, enumerated and re-enumerated, re-codified, and, generally, comprehensively systematized.[ii] Each of these rules affects one or more aspects of the loan origination process, organizational structure, and risk exposure. So maybe the great American humorist was on to something!

Nevertheless, if we are going to play, we will have to play within the rules. This means not only considering the compliance implications internally but also the interaction between the financial institution and third-parties upon which the institution relies for verifications, credit and other borrower information, disclosures, underwriting software, compliance and quality-control systems and processes, records management. Notwithstanding the foregoing third-parties, also to be considered are software providers, various vendors, and business partners. Training may also be necessary for these service providers and agents!

All the starting-point reviews in the world will lead to little or no action throughout an organization where certain training needs are not being met. Therefore, from the outset, it is critical to consider what training will be necessary for loan officers, secondary marketing, processing, compliance, and quality control personnel. Any staff involved at critical junctures in the loan flow process should receive training, certainly anyone who approves, processes, or monitors credit transactions.

For the remainder of this article, I will outline the key questions that should be asked, the answers to which will determine the extent, depth, and integrity of a culture of compliance. I am going to take you through a set of questions that will form the basis of a self-assessment. This type of internal review should be undertaken in order to set a baseline and determine progress towards compliance with mortgage acts and practices, and certainly the new mortgage rules.[iii] During any such evaluation, keep in mind that this is a due diligence process which is subject to an institution’s size, products offered, risk mitigation, complexity, and overall strength of the existing compliance management system.

The Hedgehog and the Fox: A Regulatory Parable

The 7^th century BCE Greek lyric poet, Archilochus, observed: "the fox knows many things, but the hedgehog knows one big thing.”[i] Twenty-two centuries later, Erasmus transliterated Archilochus’s dictum by precisely rendering it into the Latin aphorism: “multa novit vulpes, verum echinus unum magnum.”[ii] When it comes to these two ways of thinking and acting, things didn’t change much between the 7^th century BCE and the 16^th century CE, when Erasmus penned his elucidation.

Isaiah Berlin, the British political philosopher, whose life span stretched nearly the whole 20^th century,[iii] wrote a well-known essay in 1953, inspired by Archilochus’s apothegm. It was entitled “The Hedgehog and the Fox: An Essay on Tolstoy's View of History.”[iv]

Of Berlin’s essay, Arnold Toynbee, one of the great historians of our time, wrote:

“This fragment of verse by the Greek poet Archilochus describes the central thesis of Isaiah Berlin's masterly essay on Tolstoy, in which he underlines a fundamental distinction between those people (foxes) who are fascinated by the infinite variety of things and those (hedgehogs) who relate everything to a central, all embracing system.”[v] 

Since its inception, it seemed clear to me that the Consumer Financial Protection Bureau (the “Bureau”) is a hedgehog. It tends to view the world through the lens of a single defining idea: consumer financial protection. In accordance with this idea, the Bureau exercises this vision through a single, predominant, and coherent framework of regulations. As a hedgehog, the Bureau stays focused on this one foundational principle and repeatedly, unvaryingly, and rigidly seeks to implement that overriding proposition by applying the same methods and solutions, usually to the exclusion of other possible remedies.

This predilection is not simply a matter of judgment or style. Hedgehogs actually have one grand theory which they seek to extend into many domains, furthering their rule through a fervent belief in the guiding principle. They express their views with confidence; assurance; coolness; obstinacy; unrelenting drive; generally rigid adherence to an impliable mission; unwavering obedience and devotion to a regnant objective; a proclivity to roll results up into an aggregate value; and, a tendency to express themselves with such idiomatic phrases as “mission critical,” “the ends justify the means,” “by and large,” “ball-park figure,” “jack-of-all-trades,” “grand strategy,” “seeing the larger picture,” and “the system is the solution.” Usually, hedgehogs have a unique vision that gives rise to the ability to notice complex circumstances and discern the underlying patterns. In effect, their reach exceeds their grasp. Examples of hedgehogs are Plato, Dante, Proust and Nietzsche.

Residential lenders and originators (the “RMLOs”) are, as a group, foxes - they draw on a wide variety of experiences and do not believe for a second that the world can be boiled down to a single idea, evinced through an all-embracing framework, howsoever cogent it appears to be.

Foxes are skeptical about grand theories. They are constrained in their forecasts, and adaptive to actual events. They tend to be more accurate in their predictions than hedgehogs, since they are more agile in assigning probabilities to their expectations. While hedgehogs see the larger picture, thereby missing opportunities, foxes notice each and every pixel contributing to it, and thus quickly find opportunities. Because the fox is acutely aware of each part of the whole, it devises complex strategies to gain an advantage on the hedgehog. Often, it succeeds in its plans due to this advantage.

The kinds of idiomatic expressions that foxes use are “zero in on something,” “devil's in the details,” “under construction,” “mixed feelings,” “barking up the wrong tree,” “at this stage,” “first in class”, “trying something new,” and “let’s get another pair of eyes on this matter.” Foxes are centrifugal: they pursue divergent ends and usually possess a sense of reality, which keeps them from designing a logistical framework that purports to contain all possibilities. They instinctively know that complexity does not conduce to a unitary structure. Although foxes may have a broad vision and much agility in complex interactions, often their grasp exceeds their reach. Examples of foxes are Montaigne, Balzac, Goethe and Shakespeare.

Foxes pursue many ends at the same time, with much energy and cunning. They see the world in all its complexity. Hedgehogs simplify a complex world into a basic principle or concept that unifies and guides everything. Foxes tend to be scattered, diffused, and inconsistent. For hedgehogs, the world is reductive; that is, all challenges and dilemmas are reduced to simple hedgehog ideas, and anything that does not correlate to the hedgehog idea is without relevance. Hedgehogs see what is essential and ignore the rest.

Generally, the fox’s style is often deprived of rigorous models, specific goals, and global metrics. Foxes learn incrementally, over many iterations of experience. The foxy RMLO has a succinct advantage in swaying the hedgehog Bureau, because it nimbly responds to new information, constantly reconfiguring its market knowledge in reaction to changing circumstances. Such vital information leads to greater performance and the ability to provide solutions that open up new ways for the Bureau to fine tune its single overarching vision.

The Bureau has set compliance effective dates in January 2014 for many new rules that will affect RMLOs. As these rules go into effect, we enter the New Year noting a rather obvious example of the hedgehog’s vision and the fox’s hastening to fulfill it. Their relationship is bound by the unwavering path of the Bureau and the serpentine path of the RMLO. The Bureau’s grand vision presents a broad plan of action that must be implemented. In complying with the Bureau’s rules, the RMLO must bestir itself to be particularly attuned to working with the minutiae of details that are a part of the practical experience of actually originating and servicing residential mortgage loans.

In 2014, here are three questions to keep in mind about the relationship between the Bureau and the RMLO:

1) How prepared is your financial institution to comply with the Bureau’s expectations?

2) Are you ready to implement the Bureau’s complex requirements?

3) Does your company act like the visionary hedgehog or the nimble fox?

Foxes are cunning and have the advantage of knowing how reality works, poking holes in the hedgehog’s grand scheme of things, even as the many spindled hedgehog rolls into a big bulky ball. But beware of that ball! The hedgehog and the fox have learned never to underestimate each other. Although the fox is clever, swift, skilled in action, and knows many tricks, the hedgehog knows one big decisive trick: it can roll itself into a ball of sharp and painful spikes!

__________________________________________________________

 Jonathan Foxx
President & Managing Director
Lenders Compliance Group
Brokers Compliance Group

National Mortgage Professional Magazine - December 2013

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[i] Archilochos (c. 680–c. 645 BC) was a Greek lyric poet from the island of Paros in the Archaic period.

[ii] Adagia, ("Erasmus") Desiderius Erasmus Roterodamus (October 27, 1466-July 12, 1536), Paris, 1500, from Robert Bland, Proverbs, Chiefly Taken from the Adagia of Erasmus, with Explanations; and Further Illustrated by Corresponding Examples from the Spanish, Italian, French & English Languages, Volumes 1-2, London, 1814

[iii] Sir Isaiah Berlin, (June 6, 1909-November 5, 1997), British social and political theorist, philosopher and historian of ideas.

[iv] Berlin, Isaiah, The Hedgehog and the Fox: An Essay on Tolstoy's View of History, Weidenfeld & Nicolson, London, 1953.

[v] Idem

Policy, Procedures, and Examinations - Part II: Mortgage Bankers

The most common question my colleagues and I are asked by prospective clients is whether we provide the “full set” of policies and procedures for all of the mortgage acts and practices. Of course we do! But policies and procedures are only one aspect of the many risk management services my firm offers.*

Nevertheless, policy statements seem to be ‘first and foremost’ when it comes to a client’s compliance needs.

Yet we do not often get questions such as the following:

• How can we effectuate policies and procedures?
• What policies are the most important for us to adopt?
• Although we have policy statements, how often should we update them?
• Who would be in charge of maintaining and enforcing policies?
• How do we build policy statements into a Compliance Management System (CMS)?
• Which policy statements are important to our warehouse lenders?
• Which policy statements are important to investors and Regulators?
• Which policy statements are important to our servicing affiliate and subservicers?
• How can we prove that our policies are being adequately implemented?
• What are the key components of policies and procedures?
• What vendor offers the most professionally safe policy statements?
• How do we go about building our own policies and procedures?
• How often should we train our employees on our policies?
• Is there a self-assessment checklist that we can put into our policy statements?
• What is the best way to document our implementation of procedures?
• Is there a core set of policies that we absolutely must have at all times?
• Which policies require testing and auditing, either internally or externally?
• How do we stay up to date on regulatory changes that affect our policies?
• What method is preferred to review, adopt, and update policy statements?
• Do we have a sufficient budget for maintaining policies and procedures?
• What resources should we use to draft comprehensive policy statements?
• What is the best method to retire a policy that is no longer a regulatory requisite?
• Where should we go for guidance in those areas that are not yet fully regulated?

These are but a few of the many questions that a lender should be resolving.

In my view, we ought to get away from the thinking that considers policies and procedures to be a panacea for the effects of improper management, regulatory deficiencies, and trending defects. Policies are a continually changing, dynamic means to an end, but not the end itself. And they are only as good as the accuracy of their content and the efficacy of their implementation.

Just one employee who does not know, or contravenes, the requirements of a policy statement becomes the weakest link in an otherwise strong chain of compliance enforcement. When it comes to acting in compliance with, and according to, a policy and procedure, the financial institution is only and always as strong as its weakest link!

Most mortgage bankers want to be proactive, not reactive, though, often, that is not always achievable, especially when new policies, guidelines, rules, procedures, and actionable implementations seem to arise all the time. This reminds me of Say’s Law in economics, which, when referring to aggregate expenditure in an economy, states that spending rises to the level of income. In the case of policy statements, it seems that policies and procedures rise to the level of demands for them by the spate of regulations requiring them. If this seems like a circular kind of way to get things done, it is!

Still, we must make our way through the thicket of policy statements, hopefully coming oneday to a clearing where, if even for a brief moment, there is some equilibrium between the policies needed and the regulatory demand for them.

Some proactive lenders make it their business to always be ready for a regulatory examination; others drag out the process interminably, waiting to receive an examination letter before they get ready – which, by the way, is usually too late. And, yes, in mortgage compliance, it is certainly possible to be too late to do anything about a violation of law. Compliance leaves traces; it is impossible to obliterate its trail. I have said many times, preparation is protection! Indeed, I have written extensively on this theme.[i]

The US Coast Guard has a famous Latin motto: Semper Paratus, which means “Always Ready”. Let’s use an admonishment, also in Latin! I offer this cautionary advice to mortgage bankers: always stay vigilant; always make sure your policy statements meet regulatory scrutiny; and, to now use my own Latin phrase, never be put in the position of being Ex Abrupto, which means “Without Preparation”.

Elizabeth Warren's Interview

In July 2011, I published my interview of Elizabeth Warren, entitled Opening a Dialogue: Elizabeth Warren and the Mortgage Industry.*

I have been told that this interview is one of the last published interviews of Mrs. Warren prior to President Barack Obama's announcement of the nomination of former Ohio Attorney General Richard Cordray as the first director of the Consumer Financial Protection Bureau (CFPB) on July 18, 2011. Until that point, Mrs. Warren was acting in the capacity of the interim director of the CFPB.

READ WARREN INTERVIEW

In August 2011, Mrs. Warren began to receive substantial political support from many political organizations and private citizens, and on September 14, 2011 she announced her campaign as a candidate for Senator of Massachusetts.

Mrs. Warren is known to be a fierce consumer advocate and is considered by many to be the primary visionary behind the creation of the Consumer Financial Protection Bureau. The CFPB - these days known more and more colloquially as the "Bureau" -  was established by the Dodd–Frank Wall Street Reform and Consumer Protection Act and signed into law by President Obama in July 2010. For the first year after the bill's signing, Mrs. Warren worked tirelessly as the CFPB's Special Assistant to the President to “stand up” the Bureau.

But Warren's nomination for the Director's position was not put forward by Mr. Obama because of his conclusion that her nomination would be too politically contentious.

Notwithstanding the political environment, the CFPB received its enumerated authorities on July 21, 2011.

Due to the partisan resistance to virtually any nomination for Director - some members of Congress wanted to disempower the CFPB or defund it – Mr. Obama felt constrained to appoint former Ohio Attorney General Richard Cordray to be the Director of the CFPB in January 2012, through a "recess appointment", over the objections of Republican Senators.

Last week Mrs. Warren, the 63-year-old Harvard Law School professor, was elected the first female U. S. Senator of Massachusetts by the considerable lead of 54% to 46% over Scott Brown, who had been elected in 2010 to fill out the late Edward M. Kennedy’s term. Her acceptance speech included her promise that she would be "a fighter for the middle class".

Soon, Mrs. Warren will take her oath as the junior Senator of Massachusetts.

With this in mind, I thought it would be informative to consider Mrs. Warren's responses to the questions I posed in my interview, in the context of what the CFPB has accomplished to date and has pledged to accomplish in the future.

READ WARREN INTERVIEW

I have written extensively about the CFPB. If interested, please feel free to view or download these articles, newsletters, and recent papers.

For selected issuances involving the CFPB, visit our library.

Although it is in its infancy, perhaps we can begin to discern the broad outlines of the CFPB’s commitment to the vision of consumer advocacy set forth by Mrs. Warren.

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IN THIS ARTICLE

Organizations that Accepted Participation

Organizations that Declined Participation

Questions

In Her Own Words

Library

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Organizations that Accepted Participation

READ WARREN INTERVIEW

Nearly all major mortgage industry associations responded to my invitation to provide questions to me to ask Mrs. Warren. Many interview questions, though very important, were also very specific, and it was just not possible for Mrs. Warren to answer such questions of detailed specificity, prior to the CFPB being empowered to evaluate rulemaking and policy alternatives.

Nevertheless, I proffered a wide enough scope of questions that we were able to obtain firm and clear replies.

Organizations that Accepted Participation

Association of Residential Mortgage Compliance Professionals (ARMCP)
Jonathan Foxx, President

Community Mortgage Bankers Project (CMBP) Glen Corso, Managing Director

Impact Mortgage Management Advocacy & Advisory Group (IMMAAG)
Bill Kidwell, President

National Association of Independent Housing Professionals (NAIHP) Marc Savitt, President

National Association of Mortgage Brokers (NAMB)
Don Frommeyer, Them President Elect

National Association of Professional Mortgage Women (NAPMW)
Laurie Abshier, National President

National Association of Realtors (NAR)
Lucien Salvant, Managing Director

National Credit Reporting Association (NCRA) Terry Clemens, Executive Director

National Reverse Mortgage Lenders Association (NRMLA)
Daryl Hicks, Vice President, Communications

Real Estate Services Providers Council (RESPRO)
Sue Johnson, Executive Director

_____________________________

Organizations that Declined Participation

American Bankers Association (ABA)
Peter Garuccio, Vice President, Public Relations

Mortgage Bankers Association (MBA) John Mechem, Sr. Director - Public Affairs Communications & Marketing

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Brokers Compliance Group - Risk Management for Mortgage Brokers

I am pleased to announce the launch today of our new mortgage risk management support for mortgage brokers: * 

 

Brokers Compliance Group

 

For quite some time, I have believed that mortgage brokers are an under-served part of the residential mortgage loan industry. Yet, they originate traditionally the largest share of loan transactions.

In the last few years, mortgage brokers have had their integrity questioned and their professionalism pilloried. And there has been an unsettling perception that more regulation of mortgage brokers is required.

I feel that it is time for my firm to step up to the plate and provide the kind of advice and counsel that mortgage brokers must acquire, in order to remain strong and capable of forging their own destinies. Until today's launch of Brokers Compliance Group, there has been no mortgage risk management firm in the country devoted to the unique needs of mortgage brokers. Now there is!

Thus, the Directors of my firm and I have now made a commitment to provide to mortgage brokers the same reliable and supportive mortgage compliance expertise that we have provided to mortgage lenders.

The following are the Press Release and Brokers Compliance Group.

PRESS RELEASE

NEW WEBSITE - BROKERS COMPLIANCE GROUP 

_____________________________________________________

* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group

CFPB: Next Up, Reverse Mortgages!

In a June 28, 2012 Report to Congress, the Consumer Financial Protection Bureau (the CFPB or the Bureau) published its study of reverse mortgage transactions. This study was required by Section 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The Report surmised that reverse mortgages are not being used as Congress originally intended, because, rather than provide income for borrowers during retirement, reverse mortgages are being provided to consumers at younger ages, thereby increasing the risk that these borrowers will go broke later in life. The study found that almost half of reverse mortgage borrowers in fiscal year 2011 were younger than 70 years of age.

Furthermore, the Report concluded that 70% of reverse mortgage borrowers withdrew all the available funds at once in lump-sum payments, which the CFPB claims can be squandered quickly, leaving borrowers with the potential to face foreclosure due to the reduced ability to pay property taxes. According to the study, nearly 10% of reverse mortgagors (as of February 2012) were at risk of foreclosure.

In its 231 page Report, the CFPB stated the following "emerging concerns":

1. Reverse mortgages are complex products and difficult for consumers to understand.

2. Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.

3. Product features, market dynamics, and industry practices also create risks for consumers.

4. Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet these challenges.

5. Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement, while other risks still require regulatory attention.

The study identified four major topics "where additional research would help determine if additional consumer education or regulatory action is needed."

Those topics are:

(a) Factors influencing consumer decisions;
(b) consumer use of reverse mortgage proceeds;
(c) the longer-term outcomes of reverse mortgages; and
(d) the differences in market dynamics and business practices among the broker, correspondent, and retail channels.

On July 2, 2012, the CFPB began the process of investigating the consumer use of reverse mortgages. This procedure begins with a Notice and Request for Information. In effect, that CFPB now seeks comment and information from the public on the aforementioned topics.

In this review of reverse mortgages, the CFPB will undertake, among other things, to identify any practice as unfair, deceptive, or abusive, and may provide for an integrated disclosure standard and model disclosures. Additionally, it will seek detailed information from the public on the factors that influence reverse mortgage consumers' decision-making, consumers' use of reverse mortgage loan proceeds, longer-term consumer outcomes of a decision to obtain a reverse mortgage, and differences in market dynamics and business practices among the broker, correspondent, and retail channels for reverse mortgages.

In this article, I will outline the scope of information that the CFPB is seeking from the public, including consumers, housing counselors, financial institutions, and others, regarding consumer use of reverse mortgages and consumer experiences during the reverse mortgage shopping process.*

Factors Influencing Consumer Decisions

The CFPB asks the following questions regarding the factors that influence consumer decisions:

1. What factors are most important to consumers in deciding whether to get a reverse mortgage?

2. What factors are most important to consumers in choosing among products? Among other things, comments could address the choice between fixed-rate, lump-sum reverse mortgages and adjustable-rate, line-of-credit or monthly disbursement reverse mortgages.

3. What factors are most important to consumers in choosing among potential lenders?

The Rules of Operational Risk

Recently, I spoke with several clients who had attended mortgage industry conferences. Each one of them pointed out the very same fact: operational risk and regulatory compliance are the most prominent subjects being discussed. Thinking of learning more about new loan products and services, they left these conferences wondering about how they would ever be able to implement all the regulatory requirements being placed on them. As an old friend who runs a mid-tier, mortgage banking company said to me, "I came as a mortgage company and left as a compliance company!"

One of them said, "you know, Jonathan, you're sort of in the 'cat-bird seat' now, since you were among the first to predict that mortgage compliance would oneday dominate how we originate loans." I'm not sure if that was a back-handed compliment, but I appreciate the sentiment, nonetheless. At least LCG tries to lift some of the regulatory burden borne by our clients and free up their time to do what they do best: originate loans.

That said, let's acquaint ourselves with operational risk and how to put some structure into risk management.*

IN THIS ARTICLE

Framework
Controlling Credit Risk
Four Basic Rules
Six Even More Basic Rules
Articles and Newsletters

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Framework

First and foremost, compliance decisions should be made not only on the basis of sound policy and regulatory mandates but also on the basis of how compliance procedures are viewed by regulators. Examiners want to see a financial institution enforcing existing regulatory requirements. However, they also are not antagonists on a witch hunt. They honestly want to product the kind of findings - good or bad - that will help a company to thrive. They do not get a thrill out of putting forth adverse findings.

Building a solid framework begins with cataloging the company's people, processes and technology, and continues on into deriving the means by which a stable policy is designed to formalize the way the company tracks operational risk and identifies those risks within the organization's personnel and departments. Tasking, tracking, and managing risk are central features of governance.

Companies large and small should implement operational risk frameworks that formalize their operational risk management. There really is no excuse, in this day and age - especially with ready access to information and guidance - that any size financial institution cannot position operational risk practices into the loan flow process.

Risk can't be managed if there is no framework through which to manage it.

Reviewing and formalizing an operational risk framework does not need to be a complicated exercise. The size, complexity, and risk profile of the financial institution will dictate the ways and means by which risk is managed.

Controlling Credit Risk

At the start of this year, I published an article about Controlling Credit Risk [PDF]. In the article I pointed out that risk is identifiable and measurable - and it can be controlled. To get a sense of how my firm goes about evaluating credit risk and the concurrent role played by risk management, I outlined two features of managing risk: Quantity of Risk and Quality of Risk Management.

And I concluded with a section, entitled Implementing Risk Management, in which I offered some guidance about how to use credit risk information effectively to fortify a financial institution.

I urge you to download and read it. [PDF] In formalizing a framework to manage operational risk, you need to get some idea of how firms like mine work with clients to ensure appropriate risk management strategies.

Four Basic Rules

(1) Analyze Processes. This requires creating a catalogue of the company's operational processes. This is always the first step. It can be presented like a flow chart or nested folders or in any form that makes sense to management, so long as it makes logistical and experiential sense. In effect, the analysis must reflect the way that the company actually conducts its business.

(2) Identify Risks. Now that processes have been analyzed, each process should be considered on the basis of efficiency, data integrity, and potential risks. This is accomplished through an internal audit, external audit, or designating a competent employee to conduct a generic self-assessment. Whatever the choice, be sure to standardize the evaluation method.

(3) Centralize Policies. Bring together all the company's policies and procedures. Take inventory and determine which policy statements are missing, which ones are outdated, and which ones may be redundant. The requirements of disparate policy statements may conflict with one another, so gather them all together and assess them as a group.

(4) Establish a Master Policy. At this point - having analyzed processes, identified risks, and centralized policies - we are able to draft a master policy. Such an approach is reflective of 'best practices' governance. The master policy sets forth the overarching set of policies and rules that govern the company's management of operational risk. It is the "map" that serves as a guide to the operational risk framework. Be sure that the master policy also provides 'track-back' features and identifies the "owners" of each risk area.

Six Even More Basic Rules

I mentioned above that the master policy is the "map" to the operational risk framework. But, as the philosopher Alfred Korzybski noted, the map is not the territory. Working through the four basic rules takes time and resources. Sometimes we can't even get to the Four Basic Rules, because we have not taken into consideration the Six Even More Basic Rules.

Here follows those six rules, without which an operational risk framework is not really attainable.

(1) Assemble the Management Team. Bring together the company's executive and senior management. Start a conversation about operational risk and how to create a top-down approach toward risk management. Do this at least annually.

(2) Make Lists. Before the management meeting, each member of the management team should draft a list - long or short - of not only the known operational risks but the potential or unexpected risks. Assume that "Black Swans" do happen! Managers should offer insights relating to their own operational area as well as any other areas of the company. An unaccounted for risk, actual or potential, could cause massive financial, strategic, legal, and regulatory damage.

(3) Detail the Risk. Specify the risk in as much detail as possible. State the consequences of risk failure. And, where possible, always provide a solution. If a risk is perceived, seek a way to mitigate or remove it. Don't waste time on solutions seeking a risk; concentrate on risks seeking a solution.

(4) Discuss Risk. In an open and conversational way, discuss the lists. Determine if there are coinciding or divergent perceptions of risk. Identify where there are gaps in knowledge or implementation. And encourage a discussion regarding perceived risk, to be sure that there is some general understanding about the levels of risk tolerance.

(5) Draft a Master List. Now build a consensus amongst the assembled management team. Create priorities to the various lists of risks provided by each participant. Determine the mitigation strategies that are acceptable, given the company's risk profile and risk tolerance.

(6) Work the List. Implement the Master List, which may include the Four Basic Rules outlined above, but may just form sufficient guidelines and directives to establish appropriate means to manage operational risk. Appoint a member of the management team to monitor the Master List and update the list for those risks that have been resolved or mitigated.

Articles and Newsletters

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* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group