Former CFPB Deputy Director Raj Date Goes Non-QM in a QM World
Raj Date was the first-ever Deputy Director of the Consumer Financial Protection Bureau (CFPB). After spending over two years guiding the new agency’s strategic, operational, and policy initiatives, Mr. Date left public service to go into the private sector, forming Fenway Summer, a consumer advisory and venture investment firm that has become a major player in the industry today.
Fenway Summer and Ethos Lending LLC recently announced the combination of their respective mortgage ventures. The combined firm’s goal is to build a national mortgage origination business focusing on agency mortgages and prime non-qualified mortgages (NQM). Ethos Lending anticipates beginning to originate agency mortgages in the second quarter of 2014, and by the end of the year, plans to be one of the first wholesale originators of non-QM mortgages.
We were lucky enough to chat with Mr. Date about the new non-QM loan program, as well as the formation of the CFPB from its infancy.
Can you discuss the early days of the CFPB … the formation of the Bureau, what it was like to be part of this new governmental arm and its early culture? How did your work with the CFPB influence the formation of Fenway Summer?
Raj Date: It was more or less serendipity that I ended up with the CFPB. I left Wall Street in the spring of 2009 after a surreal experience as a senior investment banker covering large-cap banks and the GSEs during the course of the housing and economic crisis. As you can imagine, it was a remarkably fascinating seat to be in.
It just so happened that at the moment I left Wall Street, the intersection of the few disciplines I knew deeply—consumer credit, capital markets, and the law—was more relevant from a public policy perspective than it had ever been before. I realized that this moment was my best shot at making a difference in public service.
Through some random twists, I ended up joining the Treasury Department in October 2010 to help build the CFPB. I was probably the 12th person on the CFPB staff; when I left, we numbered over 1,200.
In the Bureau’s early days, we tried to instill disciplines I’d learned throughout my career in the private sector. For instance, we incorporated the notion of fast-cycle times to developing a point of view on what the right policy answer to any given problem is, knowing you can fix or adjust over time, as you learn more. There’s nothing quite so damaging to a startup’s energy as analysis paralysis. You won’t get everything quite right out of the gate. We tried to develop an initial a point of view of where the world is going and then develop and iterate from there. From the outside, it seems to me that the CFPB still practices this discipline to an extent rare among regulatory agencies.
Can you discuss your recent partnership with Ethos Lending and your non-QM program?
Date: As we’ve discussed since last summer, Fenway Summer’s long-term objective is to build a prime non-qualified mortgage originator. With the Ethos Lending transaction, we wanted to accelerate our advancement into that market. Over the past six or seven months, we considered acquiring a number of mortgage platforms, but when we came across Ethos Lending, it just seemed like the perfect fit. Their team complements the core capabilities of our team. They are deep into the technology and operations sides of the business, while our team is strong in capital markets, regulation, and credit analytics. Bringing those two sides together, there’s no overlap, and there are no gaps. The pieces fit together nicely.
Ethos also started around the same time we did, so, they don’t have any legacy put-back liability. From our point of view, the last thing we wanted to happen was to assemble a talented team and then have them distracted by legacy issues. Our ideal partner would allow us to focus exclusively on the future. The Ethos platform allows us to do exactly that.
You spoke back in March in Washington, D.C. at the 2014 NAMB Legislative & Regulatory Conference, braving some treacherous winter weather in the process. What was your experience like addressing a mortgage industry trade association such as NAMB—The Association of Mortgage Professionals?
Date: It was nice to see so many people gathered together in what was such disastrously-bad weather.
I saw my discussion with the members of NAMB as a chance to engage with individuals who are part of a channel that is going to be very important to our business. Ethos Lending will focus on the wholesale channel in order to build volume in our offering. We think we can manage risk in a disciplined way to the extent that we’ve partnered with the right customer-facing professionals. And, importantly, we think that Ethos can provide brokers with differentiated service and value in both agency-eligible and non-QM products.
What do you feel the value of the mortgage broker is to today’s housing landscape and to the consumer?
Date: I have seen and closely examined the mortgage business from the outside, from the inside, from Wall Street, from every angle you can imagine. My point of view on the independent mortgage broker channel hasn’t changed that much. Whenever you have an independent actor in the sales channel, you need to have a ton of trust in that person. As a lender, you have to make sure you’re not adversely selected, and that the end consumer is being treated right. But if you can work with the right people and calibrate and manage risk well, it can be a terrific channel for a growing business like ours.
The culture at the CFPB has a lot to do with spotting what’s wrong in the private sector, do you feel you were a major influencer on that?
Date: Alongside Sen. Elizabeth Warren, Secretary Tim Geithner, and Director Richard Cordray, I like to think that I was part of instilling the CFPB with a positive, proactive and yet disciplined culture. As I mentioned earlier, achieving this type of culture requires having an agile development approach, where you answer the question, then take the time to refine and re-tune. In my opinion, we’d be better served if this approach was more common across the government.
What’s the future of the U.S. economy? How important will its recovery be based on property values and interest rates in the housing market in general?
Date: The recovery is obviously well under way, but has been considerably less robust than anyone might have wanted. Housing is a huge part of the economy, so a more vibrant housing sector would help. My point of view is that regulatory reform will make it harder for the kind of leverage-fueled asset bubbles that we saw before the crisis to occur in the future. Lenders should take comfort in that. Overall, the inevitable rate-related headwinds will be a challenge as we get to a more normalized curve. But the underlying resilience in housing has, frankly, been better than where I thought we’d be at this point in the cycle, post-crisis. Things aren’t great, but they’re obviously much, much better than they were.
The cost of compliance can truly add up for the smaller mortgage shop looking to remain in compliance under governmental rules and mandates. This obviously impacts the consumer. Do you feel there will ever be a time when the cost of compliance will be more manageable and, as a result, be less of a burden on the consumer?
Date: Compliance costs are real. Every dollar spent on compliance is a dollar not spent on research and development, not spent on developing a better credit algorithm, not spent on streamlining processes, not spent on delighting your customer. So nobody—lenders, brokers, regulators, legislators—nobody likes high compliance costs. That's why we spent so much time worrying about reducing compliance burden in the policy shop at the Bureau.
But this is, in my opinion, quite a necessary consequence of the financial crisis. The old rules obviously didn't work. So we needed new rules of the road, and adapting to these new rules does take some energy, time and financial resources.
I think this is one of the ways where designing processes and technology from scratch can be a real advantage. With our recent partnership with Ethos Lending, we don't have to retrofit old technology to fit new challenges. We can build from scratch, using the best platforms to meet real customer needs, meet real regulatory expectations, and meet real investor demands. I think we will be up to the task.
Robert Ottone is executive editor with National Mortgage Professional Magazine. He may be reached by phone at (516) 409-5555, ext. 314 or by e-mail at email@example.com.
This article originally appeared in the May 2014 issue of National Mortgage Professional Magazine.
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