Risk Management ‘Key to Safety, Soundness’


LOS ANGELES–Jan Lyn Owen, commissioner of the California Department of Business Oversight, noted her agency–representing the sixth-largest economy in the world–licenses more than 360,000 different entities. For her, sound business practices is critical.

“Risk management is the key to safety and soundness,” Owen said here at the Mortgage Bankers Association’s Risk Management, Quality Assurance and Fraud Prevention Forum.

At the same time, Owen said, the emergence of nonbanks has dramatically changed the landscape of the mortgage market in California, raising alarms for regulators. “Lenders must remain cognizant of the new risk management environment and work with us in developing and maintaining sound business practices,” she said. “The industry sometimes has short-term memory lapses,” she added, citing the S&L crisis of the 1990s and the Great Recession.

“We have learned some hard lessons in the wake of the financial crisis of 2008,” Owen said. “Many banks did not have adequate risk management practices in place and did not have adequate stress-testing and they are no longer around.”

Owen cited recent controversies at Wells Fargo, in which employee incentive plan abuses resulted in a $185 million fine from the Consumer Financial Protection Bureau and termination of more than 5,300 employees, as well as financial penalties to top company personnel. “This gargantuan fraud shows how misguided employee incentives can undermine otherwise good practices,” Owen said.

Owen noted while online lenders have filled a vacuum unmet by traditional lenders, “it also presents significant regulatory challenges,” she said. “California is taking a leadership role in learning more about online lending, not only from a regulatory standpoint, but for the protection of borrowers.”

“Appropriate risk management efforts and due diligence are critical to your company’s responsibilities,” Owen added.

Pete Mills, MBA senior vice president of residential policy and member engagement, said policy challenges persist at the federal level.

“We’re in a market that has great fundamentals,” Mills said. “Interest rates remain low; GDP growth is good; unemployment rates remain low and the housing market is picking up, but challenges remain. The housing market could be better, private capital continues to play an outside role and compliance takes up a great deal of lenders’ efforts…the system is clearly still out of balance, and we have a lot of untangling ahead.”

Mills said TRID 2.0 and new rules governing the Home Mortgage Disclosure Act continue to beg clarification. “Do not expect any delay in the HMDA implementation deadline,” he said. “Don’t come to your vendors six months before the implementation date and say, ‘make me compliant.'”

Mills said MBA remains keen on creating conditions that welcome, and not punish, innovation. “Technology is imperative for reducing compliance costs and improving the customer experience,” he said. “The challenge is to ensure that regulations maintain the level playing field, but don’t hinder development.”

Looking ahead, Mills said the landscape shows slow, incremental progress. “Things are going to get done, but it takes time,” he said. “it’s going to take a long time to untangle some of these regulations.”