Mortgages March On Modernity

An Industry Regains Its Privileges

Remote work became a necessity for lenders, loan officers, and fulfillment teams during the COVID-19 pandemic. However, the push for modernizing location-based licensing laws has been underway for years in the mortgage industry. 

Advocates of remote work contend that originating loans has always revolved around outside sales. A successful originator does not sit idly in her office waiting for a borrower to walk through the door. She goes out into the world to find prospective borrowers and drum up future business. Yet, in the run-up to the Great Financial Crisis, it was mortgage companies’ failure to supervise loan originators – and originations, generally – that prompted federal and state regulators to rein in out-of-office operations. 

For example, the National Mortgage Licensing System (NMLS), arose from the Secure and Fair Enforcement for Mortgage Licensing Act, or SAFE Act, passed in 2008. Before the existence of the NMLS, “an originator could lose his license in Ohio on Monday and on Tuesday be re-licensed in Indiana,” quips Robert Niemi, chair of AARMR and director of government affairs at the law firm Weiner Brodsky Kider. States still write and enforce their own sovereign sets of licensing laws, but now state regulators can coordinate oversight through a national registry of licensed loan officers. 

That licensable activities had to be performed from a licensed location was another leash attached to loan officers in the aftermath of the Great Financial Crisis. The standard made such “licensable activities” as discussing the application process with a borrower in a real estate agent’s office or accepting applications from a work device at home punishable through fines. Forced to adapt by the pandemic, the majority of states are now adopting permanent policies that allow licensed activities to occur away from licensed branch locations, so long as certain consumer protection, data privacy, and supervision provisions are met. The specific conditions that need to be met vary from state to state, but adequate cybersecurity protocols, written procedures for supervising out-of-office operations, and restrictions on the maintenance of physical records outside licensed locations are a few requirements shared by most states.

Niemi believes the COVID-19 pandemic presented the industry with an occasion to recognize the opportunities and responsibilities that come with the privilege of working in the mortgage business. These opportunities and responsibilities are facilitated by regulators who, at long last, are acknowledging the necessity for flexibility in location-based licensing laws if mortgage companies are expected to effectively serve borrowers in an evermore digital and evermore unstable origination environment.

For an industry notoriously resistant to change, the codification of remote work policies represents a reversal of restrictive, location-based licensing laws that, though well-intentioned, were backward-looking regulations, experts say, even at the time they were implemented. 

Forging An Alliance 

In July 2020, Robert Broeksmit, president and CEO of the MBA, sent a letter to then president and CEO of the CSBS, John Ryan, outlining the short- and long-term challenges the mortgage industry faces related to “outdated and perhaps even anachronistic” branch licensing laws. Broeksmit requested that the CSBS join the MBA in a collaborative effort to modernize these laws.

Broeksmit’s letter was exhibited at the (ironically, virtual) July 2020 edition of the NMLS Ombudsman meeting, alongside three similarly concerned letters submitted by: Niemi, then a senior advisor for financial services at Bradley Arant Boult Cummings LLP; Danielle Arlowe, senior vice president of the American Financial Services Association (AFSA); and, Charlie Fields, then senior vice president, now executive vice president of mortgage regulatory relations at PennyMac Loan Services. The semi-annual NMLS Ombudsman meeting is an open, themed gathering of assorted industry stakeholders designed to foster dialogue between users of the NMLS and state regulators​. 

The theme for the July 2020 gathering was as relevant then as it is now: “What Happens Next? Remote Work and Supervision in a Post-Pandemic World.” One significant, short-term challenge Broeksmit and others identified in their letters was the unpredictable and uncoordinated shutting down and re-opening of states’ economies on account of COVID-19. “These uncoordinated public policy decisions,” Broeksmit wrote, “are creating confusion and potentially significant regulatory risk for state-regulated independent mortgage bankers (IMBs) that employ licensed mortgage loan originators (MLOs) and servicing personnel.” Nationally licensed companies and loan officers faced the added challenge of balancing individual and team-wide needs against each state’s directives. 

But, for the most part, the temporary remote work guidance that states had issued months prior adequately addressed the immediate impact of the pandemic on companies’ operations. 

Rather, with infection rates rising in the summer of 2020, those assembled focused on the future of mortgages. The letters, excerpted below, show various industry stakeholders highlighting the success of pandemic-required remote work policies, the viability of digital origination technology, and the urgent need for modernized licensing laws that support mortgage companies’ transition to an evermore digital and decentralized lending environment. 

“[Regulations should continue] the discussion of branch licensure requirements, given the advancements made in technology utilized in the mortgage industry and consumer preference to use online technology to conduct their mortgage related transactions.”
–Charlie Fields

“Protection of sensitive information remains a priority for our members, and the pandemic necessitated the opportunity for financial institutions to successfully test the use of technology to ensure data protection and transition to remote work on a large scale. In that time, licensees have demonstrated that nearly all critical operational functions can take place through teleworking.”
–Danielle Marlowe

“Given the industry’s record in recent months in providing remote delivery of consumer service, it is appropriate to move to a regulatory structure that embraces that dynamic on a permanent basis once appropriate safeguards are established and implemented.”
–Robert Broeksmit, President and CEO of the MBA

These last five months have shown the benefits of the advancements in technology and adaptation to quickly empower companies to provide essential services in a new format. Home is now the office as the old office has become problematic and perilous.”
–Robert Niemi

Proof Of Concept

It’s the same cast of characters at these meetings,” smiles Kooper, explaining a central reason why subsequent efforts to update licensing were met with quick success. 

Attendance at NMLS Ombudsman meetings typically include representatives from the MBA, state mortgage banking associations, mortgage regulators affiliated with AARMR, and state banking regulators belonging to the CSBS, among other industry stakeholders. 

Somewhat surprisingly, when the July 2020 meeting had ended, pandemic-triggered regulators were ready to revisit location-based licensing laws. Unsurprisingly, when a majority of stakeholders are aligned, and some of those stakeholders wield commissioner-level influence, the square wheels of government bureaucracy begin to roll. And yet, to achieve the success they have, lobbyists have had to address two specific challenges with regulators. 

Because every state writes and enforces its own set of licensing laws, expanding remote work policies had to happen on a state-by-state basis. The first challenge was helping regulators grow familiar with their suggested frameworks. To do so, the MBA and AFSA, aided by state mortgage banking associations and member partners, drafted and distributed model bills that they hoped would serve as a blueprint for regulators. The MBA’s model bill addressed mortgage specific concerns and compliance with the NMLS, while AFSA’s could be applied to license types outside of mortgage lending.

And, it worked. Regulators proved receptive to the draft bill because “the language in our model bill is based on the kind of guidance regulators gave us back in 2020 when they were giving us temporary permission to do this as an industry,” Kooper explains. The pandemic provided what Niemi called in his July 2020 letter a “regulatory sandbox” for testing remote work policies in a real-world scenario. Modeling permanent policies after temporary frameworks that worked during the pandemic provided regulators with proof of concept, calming their concerns about consumer protection and data privacy. States like Nebraska and Arkansas approved of modernized licensing, but chose to adopt home-brewed bills, instead of the MBA’s language. 

The second challenge for lobbysits to overcome was budgetary. While mortgage companies embrace the cost savings of a distributed workforce, regulators rely on branch licensing revenue for their budgets. Mortgage companies will likely need to maintain fewer licensed branches with more employees working remotely. Niemi says that states have gotten creative to replace the potential loss of revenue. 

Some states are increasing licensing fees for individual loan officers, a cost typically shouldered by employers, while other states are taking the opportunity to adjust and redistribute other licensing costs more equitably along the spectrum of small and large mortgage companies operating in their states. Other regulators expect loosening licensing requirements will increase sales volume, leading to an influx of loan officers in their states, thus licensing revenue, plus revenue collected through taxes. 

Regulation Meets Reality 

Founded in 2018 and headquartered in Lindon, Utah, Canopy Mortgage has for a number of years been licensed in multiple states. Jeff Reeves, president and co-founder of the distributed retail shop, says since their inception, location-based licensing laws have more often been treated like guidance than actual requirements by nationally licensed lenders.

“Anyone who says otherwise is not telling the truth,” he says. Historically, loan officers would claim to be working from licensed branches, but that often never happened. Instead, maintaining licensed branches no one visited became part of lenders’ cost equations. Reeves applauds efforts by the MBA and others “to help states kind of wake up and realize that any regulatory stuff that demanded physical space is really like, so 1980.” 

The reality is, in 2023, most licensed loan officers already work remotely. 

Jeremy Potter, a former senior director of capital markets at Rocket Companies turned technology vendor, says branches and loan officers began pushing the envelope on licensing flexibility around 2015 when top-producing loan officers started pursuing licenses in every state they could, even though their “home” branch may have been located in the state where they had the most success. 

Ten years ago, Potter had the task of explaining to regulators why it makes no difference where companies’ laptops or monitors sit. “When NMLS first happened and licensing first happened, states didn’t understand that somebody wanted to work out of their house half the week, or all week.” Still hungover from the Great Financial Crisis, regulators wanted to know how companies would control loan officers, and Potter would tell them: “When they log into the system, that’s it.”

Instead of offering greater freedom to loan officers, modernized licensing has had a more dramatic impact on Canopy’s fulfillment teams – the processors, underwriters, closers, and funders typically tied to in-office operations. In part to build community and in part to promote productivity, Reeves championed being in-office prior to the pandemic. With the majority of Canopy’s loan officers and fulfillment personnel now working remotely, Reeves admits that the pandemic “sort of” helped shift his thinking in that regard. 

For more than a decade, he says, loan officers have interacted with clients mainly via phone and email. “Now, with the advent of the point of sale systems, the client can do a lot of the uploading with docs and nobody wants to come in.” Reeves worries about employees’ work-life balance, but his fulfillment teams feel more effective working remotely because they experience fewer distractions. “It was really a wake up call to owners of companies to realize that fulfillment teams could be scattered here, there, and everywhere, and things can still work” – so long as procedures exist for holding employees accountable and measuring productivity. 

Flexibility A Necessity

The cyclical nature of the mortgage market makes lower fixed expenses on account of fewer leases especially advantageous in down markets. Economic flexibility born of modernized licensing represents a major benefit for mortgage companies and employees whose attitudes have changed about the very nature of “the workplace.” Independent of geography, even back in 2008, Reeves, a former loan officer, remembers how he rarely saw his clients. 

Developing a premium digital experience for both employees and consumers will not only offer lenders a competitive advantage, but also enhance the efficiency of their remote teams. “To some of the most progressive lenders out there, I think that’s what’s accelerating their plans to have a really solid digital footprint,” observes Brett McCracken, a senior adviser at Stratmor Group. 

Loosening location-based licensing laws offers flexibility and resilience to the industry for reasons independent of the next national shutdown, the MBA’s Kooper says. From wildfires to heat waves to hurricanes, the three largest mortgage markets in the country – California, Texas, and Florida – face direct and constant threats of extreme weather events that are only predicted to increase in frequency and intensity. The October 2021 Dixie Fire burned an area of north-central California larger than Rhode Island. Insurance crises in Florida and California have made closing loans, let alone qualifying for loans, more difficult. 

Some state licensing frameworks, such as Illinois’ Residential Mortgage License Act (RMLA), did offer provisions for remote work prior to the pandemic, though. Accordingly, during the height of the pandemic, significant adjustments were not required for remote work to occur in the mortgage industry in Illinois. Per comments prepared for this story by the Illinois Department of Financial and Professional Regulation, the passage of House Bill 2325 earlier this year expanded on details regarding supervision requirements for which the RMLA already provided, “including procedures for record retention, schedules for conference call meetings with the office, protocols for consumer contact, and ongoing training and work performance evaluation.” 

Other states, like New York, where the push to update licensing laws has not yet succeeded, still enforce controversial “commutable distance” requirements. These laws force licensed loan officers to live within a certain distance of a licensed branch. “Given the remote work flexibilities many states are offering now,” Kooper argues, “it seems we can move past the commutable distance requirement in some states. They’re not a reflection of the contemporary economy or consumers’ expectations.” 

McCracken, for his part, has already experienced how licensing flexibility allows employers to recruit more competitively – and coast-to-coast – for both sales and fulfillment positions. He believes those lenders sticking with strict return-to-work policies will likely find it more difficult to attract loan officers. 

Several months ago, McCracken was approached by the CEO of a high-producing mortgage company who was looking for a processor capable of handling 150 units per month. “I put them in contact and within an hour of that text she started working for him,” McCracken says. “Geography was not a barrier.”

The Digital Veneer

As regulations catch up to reality, Reeves still identifies cost to produce as the single-greatest challenge facing mortgage companies. Technology and remote work provide a range of solutions to that problem, but a one-size-fits-all model does not exist. Rather, building a mortgage company for the future begins with ensuring a company’s human functions and digital functions operate like two-lane highways, not busy intersections.

“It’s still a people and a systems business,” he notes, an advocate of balance. “As proud as we are of our technology, creating the systems that ensure that the right people are doing the right things at the right time is really, really critical for all of our success. It isn’t just tech – it’s how you deploy and maintain systems within the organization that makes the real difference.”

With a laggard market forcing many lenders to continue shedding staff, by loan officer count, Canopy Mortgage has grown in 2023. Reeves attributes his company’s resilience to the cohesion between remote employees and the company’s tech stack, the digital infrastructure for which predates the pandemic. As for many lenders, the pandemic forced Reeves to test his tech to the limits, to see if it could support a fully remote workforce. It could, and did. 

From Zoom to Instacart to BetterHelp, the pandemic stretched many digital platforms to their limits as consumers grew familiar with digital experiences available from anywhere, at any time, not only when applying for mortgages, but also when needing to restock sourdough starters and toilet paper, schedule car maintenance, or “attend” therapy. “The expectation that they’re going to be having a digital experience is table stakes,” says Sue Woodard, a senior advisor and McCracken’s colleague at Stratmor Group. Since the onset of the pandemic, Woodard has helped mortgage companies align their digital strategies with consumers’ changing expectations. Not only do loan officers and borrowers expect a digital experience, but they expect it to be seamless, Woodard observes. 

Yet, borrowers and loan officers do not understand the home buying process on the same terms. Borrowers see applying for a mortgage as a single process: buying a home. Potter holds the mortgage industry responsible for dividing that process into four parts: real estate, title, mortgage, and insurance. “We’ve still not truly embraced that it’s one thing to consumers,” he laments. “We keep trying to make it four things, but feel like one to them.” 

McCracken echoes Potter, saying the industry used to protect the consumer “from how the sausage is made.” But, that hasn’t been the case since 2014, when Rocket Mortgage (then Quicken Loans) put the mortgage application directly into consumers’ hands. Since then, lenders buying off-the-shelf technologies or those developing in-house tech stacks are chasing what McCracken calls “the digital veneer” – a melding of technologies that creates a seemingly seamless, web-based experience that is identical for loan officers and consumers.  

Next-Gen Lending

For almost a decade, Reeves says the industry’s prevailing strategy has been, “if you give this borrower a really great experience and allow them to interact with you upfront in ways that are unique and that allow them to do some of the work, it will drive down the cost. Curiously, it hasn’t. It’s only gotten worse.” Most lenders have not succeeded in adopting technologies that effectively integrate the consumer into the loan process. “Often, those systems are kind-of integrated, and when you’re kind-of integrated, you’re not integrated,” he says.

Companies run into trouble when they cobble together incompatible technologies. Anyone who has opened a Microsoft Word attachment on a computer only equipped with Pages has experienced the frustration of fixing fonts that failed to transfer and adjusting squirrely formatting. Be it an archaic loan operating system (LOS) or a just-built digital closing portal, disparate systems driven by different code bases and databases just don’t communicate well.

Managing the cost to produce has always guided Reeve’s operational approach. His first foray into mortgages was co-founding Box Home Loans in 1998, a consumer-direct business built around a single loan product called the Countrywide Fast and Easy. The loan required no income or asset verification, and the company grew wildly in Utah, from $8 million in monthly originations at the end of 2008 to $100 million of monthly originations by June 2009. 

However, the passage of the Dodd-Frank Act brought a swift end to that hayride for Reeves and other lenders who were bouncing along on easy loans. “I turned to my partner,” Reeves remembers, “and said, ‘if we don’t automate more of what we do, we’re never gonna survive on these margins because the whole model was built on low margin, a targeted customer, easy loans.’ And so, we just began building stuff that didn’t exist at the time.” That “stuff” became Reeves’s golden ticket – called Nano, an in-house tech stack that functions as the LOS, pricing engine, POS, and compliance engine, all driven by one code base and one database. 

To lenders, Nano represents the fast lane to the future of remote origination by facilitating that most delicate of relationships between loan officers and borrowers: trust. Nano achieves this trust by erasing little inefficiencies from the process, like ensuring the fee for a transfer tax is the same when customers see it on the website as when loan officers see it in the LOS. But, perhaps most importantly, Nano facilitates trust without loan officers and borrowers ever having to sit together in a licensed location. 

When the pandemic sent all of Reeves’s employees home in March 2020, employees did not have to install a bunch of extra software on their personal computers because Canopy’s whole ecosystem is web-based. “If you don’t have a unified system driving all of that, and you have to have a bunch of people manipulate, double check, and triple check your data so it’s accurate, you’re going to lose all the efficiency that you gained by giving the borrower the ability to apply online,” he says. What’s more, those inefficiencies drive up costs and increase the likelihood of losing the borrower. 

Most lenders must try to cobble together four different solutions to make it all work, says Reeves. “That has become for many a house of cards. It’s hard to maintain.”