MBA Vice-Chair Motley: Change Continues to Shape Industry

LOS ANGELES–Mortgage Bankers Association Vice Chairman J. David Motley, CMB, said sound risk management practices provide the best defense for mortgage lenders and servicers in a changing environment.

“For my company, Colonial Savings, risk management has become a key component to not only our operations, but our strategic vision,” Motley said here at the MBA Risk Management, Quality Assurance and Fraud Prevention Forum. “Looking around the room today, I can see we’re not alone. In attendance at our event, we have underwriters, quality assurance professionals, risk managers, and experts on fraud prevention. I applaud your efforts to help keep your companies and our industry on a safer path through your risk management efforts.”

Motley noted change was “inevitable and crucial” after the Great Recession: Congress enacted sweeping real estate finance reform legislation and accompanying regulations. “In the years since, we’ve been working non-stop on compliance, figuring out ways to implement those new regulations, while continually striving to provide excellent customer service,” he said. “Many of those regulations shifted the way we process loans, which has dramatically reduced fraud within the industry and eliminated some of the most dangerous mortgage products. But remember, change was necessary.”

Motley said his company (Colonial Savings FA, Fort Worth, Texas) now spend nearly 80 percent of its time discussing, arguing, debating and worrying about risk–how to mitigate it, how to anticipate the impact of new regulation, and how to avoid possible enforcement actions.

“That’s the biggest change we’ve experienced as an organization–contributing 80 percent of our time to an area that doesn’t actually generate ANY top line revenue, but, hopefully, will protect us from some unknown regulatory enforcement expense down the road,” Motley said.

Motley noted while big chunks of regulation have taken place–“and we acknowledge they have resulted in some improved lending practices,” he said–not all change was positive. “Implementation of the rules unmasked a host of unintended consequences for lenders as well as consumers,” he said.

For example, Motley said current Dodd-Frank regulations impede low-income, working families from entering the market. “Loan-to-value ratio requirements coupled with the agencies refusing to purchase loans from borrowers that have credit scores lower than 620 completely leaves out a significant segment of potentially qualified borrowers,” he said. “And, Millennials who want to leave mom and dad’s basement or be rescued from soaring rental costs, are challenged to comply with the 43 percent DTI ratio if the loan is not destined for the GSEs.”

Although the MBA Mortgage Credit Availability Index suggests that credit is becoming more available, this is primarily in the jumbo loan space. “The greatest impact of tight credit still falls on families who can least absorb it, forcing them to make difficult trade-offs with other necessities,” Motley said. “And the people most impacted by these constraints are people of color.”

Motley said MBA’s concern is that the rules that force lenders to be more selective, potentially create fair lending complications. “On one hand the government tells us not to lend outside a very prescriptive box,” he said. “On the other hand, lenders are chastised for being too selective. This regulatory confusion significantly increases litigation risk. Through your risk management efforts, you balance these mandates, which are crucial to the health and longevity of our businesses and our industry.”

Add to this mix a new Home Mortgage Disclosure Act rule that adds 25 data points, modifies 14 others and maintains an additional nine data points required by the existing HMDA rule. “The new HMDA rule changes the focus of HMDA away from simply reporting a loan’s purpose of purchase, refinance or home improvement,” Motley said. “The new rule doesn’t discriminate by purpose. Instead we are required to report all 1st and 2nd lien loans secured by a dwelling regardless of the purpose. So now a new, more rigorous omission testing program will be required to ensure that all dwelling secured loan applications, including small business loans, are being reported.”

Motley reiterated MBA’s call for the next Administration to have a top-level national housing policy coordinator. “The housing system desperately needs someone at the top of the Executive Branch, working across all housing related government agencies,” he said. “This would help ensure that both consumers and lenders are protected and can participate fairly in the market without getting tangled in a web of confusing regulation and unforeseen penalties. Housing used to be an economic driver to a more robust economy. With the current regulations creating so much risk, housing feels like it has become a drag on our economy. We are not living up to our full potential and action must be taken.”

Motley said risks the industry faces from data security breaches and various forms of cyber liability are especially acute because of the sheer number of customers lenders and servicers deal with. “These risky situations often position risk managers in direct opposition to originators,” he said. “Sales and risk already have a tenuous relationship. Now add ambiguous and sometimes contradictory Dodd-Frank regulations to our cyber security risk and this business has become even harder.”

“Continued change is coming whether we like it or not,” Motley added. “You can either guide it or be guided by it.”