Trust is imperative in today’s lending environment. However, the adage “trust but verify” promises to dictate the relationship between third-party originators and their wholesale lenders. Brokers need to understand and adapt to the conditions that define this all-important relationship, not by becoming passive, but by becoming better informed.
With consumer confidence at an ebb and investors in a state of extreme caution, and in consideration of the U.S. Department of Housing & Urban Development’s (HUD’s) recent memo regarding third-party originator (TPO) due diligence and management, the onus is on wholesale mortgage bankers to verify beyond a shadow of a doubt their TPO/broker partners’ trustworthiness. It follows, then, that to achieve a competitive advantage and enhance their overall appeal as a mortgage lending partner, brokers need to be acutely aware of the criteria wholesalers are using to evaluate potential TPO partners. They must also be prepared to negotiate additional consideration when the criteria used gives an incomplete or misleading picture.
When determining whether a mortgage professional (i.e. a broker) should, in fact, be trusted, there are several areas of that professional’s background that wholesale lenders typically investigate. Among the most obvious and telling are the broker’s licensing status and loan performance history.
Thanks to the SAFE Act and the creation of the Nationwide Mortgage Licensing System (NMLS), mortgage broker licensing is now the norm rather than the exception. However, everyone knows that a broker’s licensing status can change in the blink of an eye. Many lenders are adopting a policy of conducting ongoing checks of brokers’ license status, knowing that a spotty licensing history could signify big trouble.
Additionally, wholesalers are zeroing in on brokers’ loan performance history. Granted, given the tsunami of foreclosures resulting from the current financial crisis, a couple of blemishes on an otherwise pristine record will not necessarily tank a potential relationship. However, a history of loans with high EPDs, FPDs or fraud is a clear indicator to wholesalers that a broker should not be admitted to their list of trusted mortgage professionals. Therefore, brokers should be especially diligent in executing advanced quality control protocols on their loans to “weed out” the bad loans.
Okay, verifying licenses is reasonable and tracking loan performance makes sense, but what about personal credit history? Should brokers be surprised that some wholesale mortgage bankers view their personal credit problems as a huge red flag? Maybe yes, maybe no. The point is that wholesale lenders are under pressure on several fronts (investors and regulators are particularly inquisitive about wholesalers’ broker relationships) to thoroughly vet and err on the side of caution when considering a broker relationship. A credit report is a treasure trove of insight, to be certain. There is common sense in the notion that a debt-burdened broker is at greater risk than a financially-stable broker, especially if evidence of the debt burden co-exists with recent loan problems. However, counterintuitive as it may sound, basing a partnership decision on a broker’s personal credit history alone could be bad business—for the lender. It is important that brokers understand the wholesaler’s need to know as much as possible, but in the event a broker believes their credit report is working against them, it is advisable to respond proactively with a well-articulated explanation.
Of all the mortgage industry, brokers have been, without a doubt, the most adversely affected personally by the sub-prime meltdown. Both from within and outside of the industry, experts, critics, politicians and the media have all been eager to deposit blame primarily on brokers’ shoulders for a systemic failure. As a result, mortgage broker business channels have all but dried up. Some in the industry were even predicting the end of broker originations less than a year ago. Given an overall economic malaise and the near decimation of their livelihood, it shouldn’t be any wonder that many surviving brokers did not emerge personally unscathed, although their practices and their loan performance stats were high.
Taking these circumstances into account could help persuade a potential wholesale partner that a broker’s personal credit score is not wholly, or even largely, indicative of trustworthiness. In other words, it is incumbent on brokers to come to their own defense, to professionally explain their record and to persuade wholesalers to take a more balanced perspective on subjective trust indicators, such as credit score when, in fact, objective trust indicators such as licensing and loan performance are more reliable measures.
Another useful strategy for countering wholesalers’ reliance on brokers’ personal financial information is for brokers to shift attention instead to their business credit report. Clearly, a broker could contend, a business credit report illustrates the financial stability of the enterprise and is more likely relevant to the wholesale lender’s TPO risk management strategy. Regardless of their personal financial profile, brokers have a vested interest in the standardization of TPO due diligence criteria and need to advocate for fairness. One way to turn the conversation to the broker’s business credit would be to provide wholesalers with their business credit report.
Does this mean suggesting to wholesalers that they completely ignore a broker’s personal credit report? Absolutely not, that is no way to earn credibility. A broker’s strategy to establish trust must include acknowledging personal credit history as a viable source of clues as to a particular broker’s fidelity. However, it must also include making a persuasive argument to wholesale partners that placing too much weight on personal credit history and failing to take business credit into account could prevent lenders from engaging in relationships with reputable brokers.
“Trust but verify” just may be a quality broker’s best advice to wholesale mortgage bankers.
Greg Schroeder is president of Comergence Compliance Monitoring. To learn more about how the Comergence Compliance Trusted Mortgage Professional program can help, call (714) 495-4720.