Where Should Equity Lending Reside?

A frequent topic of discussion these days is what division should own equity lending: consumer lending or mortgage.  This question comes from our banking clients that offer a wide selection of lending products to their customers, and thus often face organizational design challenges triggered by changing business dynamics.

At one time, the high volume of piggyback loans made the move from consumer to mortgage lending for closed end seconds a common sense decision.  This allowed the loans to be originated and, more importantly, underwritten in tandem, saving time and money in the process.  Coordinated closings were simple, without the need for communication across divisions. But interest in seconds waned with the credit crisis and volume declined, and many organizations moved equities back to consumer lending.

Recently, increasing rates and renewed interest in piggyback lending for affordability has brought focus back to the equity side.  Many banks are re-thinking their production of equity products, and what makes sense about where they are originated.

There is no “right” answer for everyone, but decisions should be based on resources, technology, compliance and other factors, including what the strategic focus for the product is.

• A closed-end second has always been a stepchild in the consumer lending world, taking more time and requiring a more complex skill-set to complete the origination process.  With the parallels between closed-end seconds and first mortgages, the skill-set exists within the mortgage lending division, but a streamlined process may be needed to allow them to co-exist without slowing the origination of seconds.  HELOCs, on the other hand, are more consumer lending friendly and require more skills and knowledge to be added within the mortgage division if responsibility for these products were to shift.
• Most consumer and mortgage loan origination systems are delivered supporting the production of closed-end seconds.  Tasks such as setting up the appropriate products and pricing guidelines, defining new workflow and integrating of new documents will be needed, however.  Note that mortgage loan origination systems are not well suited for the HELOC product, although some vendors are moving in this direction.
• Compliance is a critical part of the equation these days.  The pending CFPB Integrated Disclosure regulations affect both mortgages and closed-end seconds.  Lenders must support new calculations and meet new guidelines to provide the borrower with disclosures and documentation in a timely manner. Lenders have a significant amount of work ahead of them, even if their system vendor is supporting their technology to meet the August 2015 deadline.   The level of effort should not be underestimated, and in many cases aligning first and second mortgages represent a timesaver for both the testing and ongoing compliance oversight activities.  Addressing these regulations is particularly important given the new, higher penalties that CFPB will impose should the regulations not be met.
• Equity products are often considered a bank branch product, and are promoted within the bank as part of the branch’s offerings.  The platform staff support the application and delivery of these products, increasing branch traffic as well as providing them with a revenue stream.  Mortgage lending, on the other hand, may be connected to a branch but is not as intrinsically linked.  A separate mortgage loan officer is involved and responsible for maintaining service levels to the customer.  Each organization must weight their pros and cons to any changes to the status quo, and ensure that all employees are appropriately incentivized for their efforts.
• Ideally, the bank should involve resources knowledgeable about both mortgage and equity products to help guide them towards the right product for their situation. Unfortunately, staff can only promote the products they know.  Mortgage loan officers should have deep knowledge of the mortgage products, pricing and process.  Bank branch personnel have knowledge and experience about consumer lending products, and their role in the process. If equity is under consumer lending, then the mortgage loan officers likely have no incentive, interest or even knowledge about equity products.  Likewise, the bank branch personnel are not well versed in mortgage, and given the current regulatory environment, are often prohibited from discussing too much with a customer for fear they will say the wrong thing or collect too much information.

The mortgage industry is entering a new phase, loan officers need all the tools and information they can get to offer the best solution to their customers.  This doesn’t always require that equity and mortgage be originated within a single division, rather that training is provided across the product spectrum to provide mortgage loan officers with a complete portfolio of knowledge, with opened communication lines between divisions (when needed), access to current pricing and product descriptions, and streamlined workflows established to take and process an application, regardless of whether the customer selected a mortgage or equity product.

Where are you on this issue?