While a great deal of attention has been given to the flurry of regulatory activity at the federal level, it is important to remember that state legislatures and regulators are also taking a closer look at mortgage lending. As a result, new laws, increased regulation and more intense regulatory scrutiny and enforcement will be the case in most, if not all, of the 50 states – each with its own set of rules, customs, lawsuits and penalties.
In short, do not forget about the state regulators – they have not forgotten about you.
For example, licensing for loan officers and mortgage brokers could become an issue and that would likely be maintained state by state. Similarly, foreclosure remains a real issue in many areas, and this will invite additional legislative or regulatory action. Even long-existent statutes and ordinances could very well see new energy on the enforcement end.
In my home state of Texas, home equity lending is a very different creature than it is in most states – in fact, it was not even legal here until 1997. A lender coming into the state or seeking to expand its product offering into home equity could find itself on dangerous ground if it is not very comfortable with the state's compliance culture.
How should your regional and local service partners be helping you comply? Clearly, lenders should not ‘throw it over the fence’ when it comes to their service partners and compliance at the local and regional levels. Such an approach is inherently risky, even with the best partners. But if your service partner has a strong network of connections and a sharp compliance team, you should not be surprised by the time a rule or law changes in any state.
We will use Texas to provide a few scenarios that could catch a lender unaware or worse. For example, Texas is notoriously stringent when it comes to refinancing, requiring that the borrower have at least 20% equity in the home after taking out a home equity loan or refinancing. The state further limits borrowers from taking out more than one refinancing loan annually.
Furthermore, home equity loans in Texas are governed by the state constitution. Thus, any changes to the law would need to come directly from the electorate. However, these are the kinds of details that can be lost in the shuffle. A good partner can provide a quick, and potentially cost-saving, reminder of these local anomalies.
A good service partner can also remind its lending client about customs and traditions in a local market that have an effect upon mortgage lending. By way of example, Texas is notoriously laissez-faire when it comes to residential zoning. Houston has absolutely no zoning ordinances. The results are easier access for home builders and more stable housing prices (and a smaller likelihood of a housing bubble or shortage).
Your service partner should also be able to advise about things such as vendor's liens, which still exist in Texas. These are assigned to all properties purchased via mortgage and remain on the property until the mortgage is fully paid. When a consumer borrows money to finance property in Texas, the lender always has a vendor's lien on the property. A number of unique subrogation rules can make the property transfer a nightmare, although a service partner familiar with the regulatory maze can make its lending client's life a lot easier.
Continuing with our Texas example, mechanic's liens and assignments, as well as tax lien loans with superior rights, also make for tricky situations for the lender unfamiliar with the way they are handled in the Lone Star State. How such matters are handled in other states can vary dramatically from the way they are done in Texas, and the lender that is caught unaware faces, at a minimum, a delay in its transaction and cost inefficiency.
Every state has its own rules for home closing, and they can vary widely. The increased emphasis on the validity of each mortgage means that lenders need to be sure they are vigilant when it comes to the settlement.
In Texas, for example, it was long required that the mortgage signing be attended by a sworn witness. Although this recently changed, it was another in the long list of local requirements that could cause a lender to stumble if not complied with.
Of course, lenders should never merely hand off their state-by-state compliance program to regional service partners. As is the case with compliance at all levels, oversight, communication, auditing and adjustment are all necessary – and regulators are not shy about scrutinizing how things are being handled.
However, if a service partner understands the unique nature of a state's regulatory environment and is able to bring a lender up to speed quickly and with relevant information as early as possible, then the lender will be able to reap significant operational cost savings without incurring localized headaches.
Jim Hollerbach is president and CEO of Hollerbach & Associates, based in San Antonio, Texas. He can be reached at (800) 580-8485.