HR 3915: Why Federally-Chartered Banks Get The Pass

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Big banks have a HUGE advantage over mortgage brokerage firms; they have the money. Federally-chartered banks also are regulated differently than mortgage brokers; they are overseen by the Office of Thrift Supervision, a successor regulator to the Federal Home Loan Bank Board. Federally-chartered banks also subscribe to FDIC insurance which imposes another layer of oversight to them. In the interest of simplification, the OTS regulates banking activity while the FDIC monitors the bank’s investments.

Big banks have a lot to lose if they have a rogue originator among their ranks. That’s not to say it doesn’t happen; rogue originators infest every business model, including the big banks. What is apparent, however, is that the big banks have greater systems in place to supervise the actions of their employees than do mortgage brokerage and correspondent lending firms. They also have more stake in the origination process- the authority to borrow and lend money with the legislated blanket of a government guarantee (FDIC insurance).

Banks have exploited this unfair advantage, too. They systematically engaged in a scheme to inflate profits by using mortgage brokers and correspondent lenders to do the dirty work for them. Internal policies at the big banks limit how much “overage” (the bank term for yield spread premium) a bank-employed originator can charge under the guise of “responsible lending”. Their wholesale business channels were able to “bribe” the brokers to originate higher rate product with the temptation of obscene yield spread premiums. They removed themselves from the “dirty retail” work to claim plausible deniability when the shit hit the fan. Today, we have a feces-covered fan. The mortgage brokers have dirty, smelly hands and the big bankers are emerging from the washroom looking like a smartly starched altar boy.

Big banks are always going to have an unfair advantage with regulators because they know the golden rule of finance. A watered-down version of HR 3915 will eventually become law. The political pressures of an election year make it virtually impossible for ambitious politicians to ignore a chance to enable the adolescent nature of America. They will launch this conspiracy against the consumer and the mortgage brokers will have to jump through a few more hoops to stay in business.

What then for the future of mortgage brokerage firms and their originators? Originator licensing, as evil as it is, will most likely materialize. The frog and scorpion relationship between mortgage brokers and big banks will become more pronounced with licensing.

Mortgage brokers offer the best chance for unbiased advice in a loan transaction. If you (an originator for a mortgage brokerage) are conducting your business in a meaningful and ethical way, this eventual law won’t affect you. When this whole thing dies down, the frogs will continue to swim freely with (hopefully) a more wary disposition to the scorpions.

In the end, the way we serve the consumer is the most important thing. HR 3915 is an anti-consumer bill because it limits consumer choices. Screaming about how the scorpions are trying to eliminate the frogs will not engender sympathy from the legislators. A consistent approach, rather, about the inequities this bill will foist upon the CONSUMER will eventually make headlines.

Change is a coming. We can keep swimming with the aimless frogs or find a scorpion that allows us to act like one.

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