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Another guest blog post from former community banker and mortgage banker, Pat Dalrymple, this one on the folly of the fear of increased compliance risk causing community bankers to forgo the revenue generated by a sensible residential mortgage banking line of business.
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Community bankers are quick to bemoan the touted demise of the home town financial institution, but seem unable to do anything about it. In fact, the majority of small bank CEO’s will probably tell you that, over the next five years or so, the CB side of the business will be acquired and merged out of existence.
Bought by whom? Merged with what?
Very few big banks are expanding; in fact, they’re shrinking as fast as they can, throwing everything but the cannon overboard to lighten the ship. Private capital is extremely wary of getting into banking with a small vehicle. Community bankers may find, possibly to their chagrin, that they’re going to be around for some time.
The smaller banks have generally done a good job of marketing in their trade areas. Indeed, their success in embedding themselves in their communities should be the envy of every marketing professional. This is a significant competitive advantage that, for some reason, they’ve failed to exploit.
Many banks have been strangely, remiss in serving their customers in their major borrowing need : residential mortgages. The traditional community bank attitude, which still clings like a barnacle to the hull of small banking, is that “we don’t do that, we don’t know how to do it, and we don’t really want to do it. Go across the street to the S&L or mortgage company”.
When the Great Meltdown hit in 2008, thousands of mortgage brokers left the business, because the alternative and sub-prime products were no more. A second exodus came with the new restrictive consumer protection and documentation regs; for a lot of practitioners, robust regulation simply wasn’t fun. This did, however create a vacuum that was one of those business opportunities that come along every generation or two. Unaccountably, community banks, even those with mortgage departments, failed to take advantage of it. They were probably too mesmerized by watching the train wreck to think.
Those brokers that remain, unfortunately for bankers, are the cream of the crop. They’re competent, professional and ethical. The robust residential loan business being fed to the conduits by mortgage brokers is a major factor in big banking’s return to profitability.
Yet small banks, especially those in smaller communities or market areas, can beat the brokers hands down, if they choose to do so. Because of its market preeminence, a bank can, almost without trying, quickly become a mortgage broker on steroids.
In addition to “Don’t want to”, and “Don’t know how to”, write down “Afraid to”. Compliance regs, as promulgated by the Consumer Financial Protection Bureau are scaring little banks out of their pants. On one hand, a somewhat puzzling reaction, since compliance has become the business of banking. Still, adding any more rules can be daunting. And, if you’re not afraid of the CFPB, you don’t understand the situation.
A good friend is the CEO of a community bank that’s profitable, growing, actively lending and with virtually no problem loans. It also brokers residential mortgages for its bank customers, so I thought it might be a good example of how to do it..
He addresses the compliance issue by not doing most of it. His bank brokers only to wholesalers that do all of the disclosures.
Are his customers nonplussed when their bank passes their mortgage app along to a wholesaler for funding? That question elicited a polite dumb question answer: “Why would they go across the street when they can get their money through their own bank?”
Is it worth the effort to get into the business? Well, there’s a simple way to find out. Just take the last 12 months of mortgage recordings in your market area and see how many loans your customers got from others. The results could be surprising, even shocking. Figure that you should be able to get a fairly high percentage of those deals. Multiply that number by the lender paid compensation offered by the wholesalers, and you know what may have been left on the table over the past year.
Finally, it’s ridiculously easy to crank up the activity. Many, if not most, small banks are under-utilizing staff right now, and the wholesale lenders love banks. They’ll kiss the proverbial ring for the community bank’s business.
Simply stated, banking is the business of making a profit on the movement of money. Why let somebody else make a profit on that movement, off of your customers, at your expense?
