Compliance Raining on CUs’ Mortgage Parade
Mortgage demand grows at CUs, but so does the related compliance burden.
This is an era of mixed blessings for credit unions and consumers, with extremely low interest rates on one hand but a sluggish economic recovery on the other.
That description also applies to the credit union mortgage origination market.
“Credit unions are getting lots of repeat business—mostly refis—because they enjoy an established comfort level and bond with their members,” says Tom Pisapia, senior vice president at QR Lending. “Last year was a very good year for our credit union clients. Many saw their mortgage production nearly double what they had done in 2011 without hiring any additional staff.”
The not-so-good news: 2013 will subject credit unions to a slew of new federal regulations and compliance demands, many of them still vaguely defined.
They’re enough to undercut almost any credit union’s enthusiasm for treading more deeply into mortgage originations.
Fortunately there are software vendors whose knack lies in combining user-friendly mortgage software with built-in rules that ensure compliance as credit unions process originations.
Dennis Boggs, executive director of business development at Calyx Software, says mortgage software must comply with an alphabet soup of requirements at each step in the loan origination.
“One example is good- faith estimate numbers, which must be precise—a 10% margin of error is the maximum now permitted.”
Once a good-faith estimate is issued, he explains, it can’t be changed.
Leverage third-party expertise
So while credit unions are happy to originate mortgages, says Boggs, the question is how well they’re managing these originations.
He says Calyx’s PointCentral software is a highly configurable, off-the-shelf product “that you don’t have to build yourself. The product takes care of centralized data and rules, and clients use it as a system of record and origination.”
For Linda Clampitt, the biggest concern often centers on risk.
“We help credit unions manage risk,” says Clampitt, senior vice president at CU Members Mortgage. “There’s a definite concern among credit unions that the risks may be too high and that the regulatory environment may be too difficult. The result is that many are starting to partner with us because they see us as a way through the maze. We can build branded mortgage origination sites for clients and sponsor them as third-parties.”
Pisapia knows that QR Lending’s credit union clients run lean shops, keeping expenses under control as they try to maximize fee income.
“That’s why we preach our philosophy of ‘keep it simple.’ Use our technology to take the mortgage application and we’ll take care of the rest. This gives credit unions the opportunity to build member bonds and cross-sell other services.”
Pisapia thinks the most successful credit unions leverage their internal mortgage resources and expertise with a third-party mortgage partner so they can do more with less.
“They don’t try to be experts in compliance, technology, or the secondary market,” he says. “They have decided that they need more from a mortgage partner than merely providing an outlet for some of their loans.”
Clampitt sees the mortgage opportunity for credit unions as a two-edged sword.
“Thanks to their reputation for relationship marketing, credit unions have seen a dramatic increase in their mortgage market share since 2008,” she says.
But they sometimes need to focus more on fraud prevention and credit risk.
“Credit unions should recognize their need for an online, 24/7 presence for members who have been out house-hunting on the weekend and want to submit a loan application right away,” Clampitt says. “They should also have an overflow plan for handling a surge in loan applications. In the mortgage market, it’s typical to hire up when staff is needed to handle extra volume, and then reduce down.”
Aside from the origination process itself, Clampitt says credit unions often wrongly assume that their communities know they offer mortgages.
“Homebuyer seminars, newsletter and e-mail reminders, and other forms of regular outreach are important in informing and reminding people about this service,” she advises.
From Pisapia’s perspective, the worst decision a credit union can make is to not get involved at all.
“Some smaller credit unions will decide that providing mortgages is just too complicated and simply refer them to local brokers when they get requests. They are missing a great opportunity to serve their members—as well as generate significant income.”
NEXT: Compliance issues loom
Compliance issues loom
Boggs says the greatest concern in 2013 will relate to compliance, driven by new Consumer Financial Protection Bureau (CFPB) requirements.
“The CFPB, which has issued 3,500 pages of proposed mortgage regulations, is unclear on what it wants,” he says. “Vendors and financial institutions can’t get information from it on how we are supposed to comply.”
“Qualified mortgage regulations will affect credit unions heavily,” Clampitt agrees. “New definitions of ability to repay, as determined by income and debt-to-income ratios, will interfere with credit unions’ discretionary ability to lend to members whom they’ve known for a long time.”
She adds that while big banks are tightening the lending reins, making credit unions natural candidates to fill in market gaps, several factors will limit credit unions’ mortgage maneuverability:
- Restrictions on loan officer compensation;
- Mortgage disclosure requirements of the New Real Estate Settlement Procedures Act and Truth in Lending Act;
- Limits on how many loans credit unions can deliver to Fannie Mae and Freddie Mac; and
- New servicing standards.
The mortgage outlook
Compliance issues aside, what’s in store for mortgages in 2013?
“The Fed has clearly stated that we will see low rates through 2013,” says Pisapia. “We should continue to see additional refinance activity and perhaps an expansion of the Home Affordable Refinance Program to include borrowers not currently eligible.
“Continued low rates should help boost the purchase market as well,” he adds. “Once we work through the foreclosure backlog, maybe we can finally find that ‘floor’ and begin to build home equity again.”
Boggs hears talk about the softening of the refinance boom.
“How low can rates go? Still, credit unions are in a good position if they’re willing to consider doing things they haven’t done before, such as working with mortgage bankers or doing Federal Housing Administration or Agriculture Department loans. Those could counter a softening.
“Also, foreclosures are beginning to taper off,” he continues, “which indicates the housing market is doing a slow rebound. The market was up $300 billion in 2012.”
Clampitt is less optimistic.
“We expect rates to go up half a percentage point in 2013, and the market to decline from $1.6 trillion last year to $1.2 trillion” in 2013.
During the first half of 2012, credit unions originated $56.3 billion in first mortgages, according to Mike Schenk, vice president of CUNA’s economics and statistics department (“Housing is staging a comeback,” p.14).
If this continues, full-year credit union originations will be 35% higher than the 2011 total, and will exceed the previous record (from 2009) by nearly 20%.
Mortgages now account for 54% of credit union loans and 32% of credit unions’ total assets, Schenk says. That’s up from 42% of total loans (and 26% of total assets) 10 years ago.
Vendors’ general advice about managing mortgage originations and compliance:
- Don’t get behind the curve on technology or compliance;
- Don’t offer unfamiliar types of loans;
- Find a strong, reliable mortgage partner that shares your values; and
- Focus on the member experience to build strong relationships and cross-sell other products.