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By Xhevrije West
Though they may not be the household names the big banks are, credit unions are on the rise and much can be learned from their well-positioned growth.
In the heavily-regulated mortgage industry we currently live in, it can be difficult to stay ahead of the competition and maintain compliance. Although it may seem like large lenders are the only ones that are on top of their game, there is another group of institutions that are making their mark in the industry.
Credit unions have long been known to be silent movers in the mortgage industry—but that ends now. These member-owned, nonprofit cooperatives may seem mysterious in nature, but that is only because they have gone unexplored for so long, leaving industry professionals, as well as consumers, to create their own theories about them. In reality, credit unions are dealing with the same issues as larger lenders such as new regulations, compliance matters, and competition. And the ways they are managing these issues could provide a path forward for other institutions, no matter their size.
The Misconception
The misconception surrounding credit unions in the mortgage industry has long been that they are small in comparison to other traditional mortgage lenders. They are often overlooked and thought to serve some function other than their sole purpose—to serve their members.
“The biggest misconception about credit unions is we’re the corner mom-and-pop, where you got your first savings account, your first checking account, but that’s all we offer. People think we’re small and don’t offer the same types of products as the big guys,” said Katie Miller, VP of Mortgage Lending at the nation’s largest credit union—Navy Federal.
Part of Miller’s team is Kevin Parker, AVP of Field Mortgage Operations within the Real Estate Liaison Team, and Loan Officer Paul Garcia—who say that consumers are often unaware of the services that Navy Federal provides.
“I always had a perception of credit unions as being super conservative, or they weren’t really focused on sales,” Parker noted. “We tend to find that members and Realtors just are not quite sure that credit unions offer mortgage products. Most people believe we only serve military members, but we also serve their families.”
Jerry Harmon, Chief Lending Officer at States Employees Credit Union—the second largest credit union in the U.S., with $28.65 billion in assets—thinks that people often confuse credit unions with other financial institutions.
“Even though from the surface we may look like other financial institutions, there is a vast difference in philosophy and purpose,” Harmon explained. “Credit unions themselves vary from each other even though we are all member-owned. It is difficult for some people to understand the member-owned cooperative concept and always see the benefits of being a member and developing the trust that their credit union is always going to have the member’s best interest in mind.”
Another theory about credit unions is that they are a bit out of date in the mortgage lending world. Vince Nowicki, VP of Real Estate Originations at Mission Federal Credit Union sets that record straight noting that “we’re out there buying the same technology and using the same technology that some of the bigger organizations are using. So we’re able to have good Web presence. You’re able to apply for mortgage loans over the Internet and you’re able to make your mortgage payments over the Internet. You can do all of the things at a credit union that you can do at Bank of America or Chase or anything like that. We’re not old school anymore. We’re all kind of doing the same thing.”
The Big “T” Word
Although assets and membership numbers may separate credit unions, there is one topic where the consensus was all the same—the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rule. No matter how much planning and preparation has been done, credit unions are still battling with the new regulation.
Director of Regulatory Affairs for the National Association of Federal Credit Unions Alicia Nealon said, “The CFPB mortgage-related regulations, taken individually and more so in their cumulative effect, have significantly altered the lending market in unintended ways. In particular, the ability-to-repay, qualified mortgage, mortgage servicing, TRID and, most recently HMDA rules have required credit unions of various sizes and complexities to make major investments, and incur significant expenses. Taken all together, these regulations have made credit unions rework nearly every aspect of their mortgage origination and servicing operations.”
Northwest Federal Credit Union President and CEO Chris McDonald said that navigating the regulatory landscape is the biggest challenge facing credit unions today. “In order to succeed going forward, credit unions will need to invest more money and time towards resources such as training, system integrations, and staffing,” he said.
TRID, which went into effect October 3, 2015, shook the mortgage industry, altering the way lenders originate loans. The rules, which are meant to give homebuyers more information with which to vet lenders and compare the cost of mortgages more effectively, require lenders to provide estimates of all the costs of a mortgage to customers three days prior to closing.
A recent report from Moody’s Investors Service said that TRID compliance violations are a widespread epidemic in mortgage originations. According to Moody’s Analysts Yehudah Forster and Lima Ekram, a number of third-party firms reviewed recent residential mortgage loans for TRID compliance and found violations in over 90 percent of the loans. The report showed that many of the TRID violations were only technical, but still proves that lenders are struggling to comply with the new regulation.
“TRID rocked everybody’s world. It was a big change; it was a big change to the forms; it was a big change to the process in the industry; and it was a big change to a lot of our partners in the industry,” Miller stated.
First Technology Federal Credit Union CEO Greg Mitchell found that TRID has not only caused confusion for consumers, but a fair amount of confusion among the mortgage industry as a whole, including title companies, escrow companies, Realtors, and borrowers.
“I think that part of the TRID journey is really about educating all of the people that are involved in the mortgage process about what’s required, what it’s going to require, and what is the standard,” Mitchell noted. “The way to fix that is to spend more time talking. While financial institutions are prepared, or many financial institutions are prepared, others in the mortgage industry are not.”
Mitchell believes that the CFPB is really trying to create a process which provides more transparency and understanding on the part of the American consumer, but he is “not sure they understood the complexity of the [TRID] process and what that really meant.”
“Until the system—and that’s broad from the Realtor all the way through Fannie Mae, Freddie Mac, and investors—run through a few cycles with TRID, it’s going to be difficult and burdensome,” Mitchell stated. “Just like learning a new foreign language, it takes a fair amount of time to begin to speak that language and understand it properly. But once you process your point then you can become quite fluent. We need to learn to speak that foreign language and become fluent on accelerated doses, and TRID is that new language.”
TRID is likely the largest regulatory change in the mortgage industry in several years, but credit unions are confident that they will overcome the new law—but not without paying a price.
“We applaud and agree with any attempt to protect the consumer,” Harmon stated. “Consumer protection is what credit unions are all about. Unfortunately, to do this comes with a cost that will either be absorbed by the lender or passed on to the member. For some credit unions the cost may be so high that they decide to get out of the mortgage business altogether. I think this is unfortunate as it may result in fewer choices for members of those credit unions.”
First Comes TRID, Then Comes Compliance
With new regulations in the mix, compliance is becoming a larger priority at credit unions. Each institution may have its own approach to following the rules, but at the end of the day the goal is the same—stay out of the CFPB’s radar.
“The way to maintain compliance and avoid penalties is to simply know the law and do what it takes to stay compliant with the law,” Harmon said.
Nowicki agreed, “We’re under the gun. We absolutely must comply with these regulations. It just makes life a little bit more challenging from the origination side of the loan process.”
Michael Popp, VP of Home Loans at Golden 1 Credit Union said that credit unions need to have a robust program to ensure regulatory compliance that starts with the member-facing staff and goes up to management. This includes “a knowledgeable team and procedures and policies that encompass quality control, ongoing monitoring, and accurate, timely reporting.”
An Origination Dilemma
Mortgage lending is something that both those in the industry and consumers have a hard time associating with credit unions, but these cooperatives are absolutely working within that realm. Just like larger lenders they are trying to get their products noticed, monitor origination costs, and reach the first-time, millennial homebuyer.
States Employees’ Harmon finds that one of the biggest issues with mortgage lending facing credit unions is getting the opportunity to educate members about what mortgage products and services are available to them through credit unions.
“More and more today, Realtors help guide the homebuyer through the entire process, even assisting them with a mortgage loan through an affiliated lender, often located right down the hall from the Realtor’s office,” Harmon said. “Credit unions may never get a chance to discuss the products that may better fit the member’s needs. One-stop shopping is very appealing to a lot of people and stops them from thinking of their credit union.”
Costs associated with loan processing are also weighing heavy on the minds of credit union executives.
“The biggest challenges we face today are the rising costs associated with originating and processing home loans,” Popp stated. “This includes attracting talent in a competitive marketplace, as well as the growing investments that are necessary to comply with evolving regulations in the mortgage industry. Although it’s improving currently, there are few investor options in the secondary market other than the GSEs.”
Another challenge for credit unions is the elusive millennial generation and first-time homebuyers. According to Realtor.com, millennials, born between 1981 and 2000, occupy about 27 percent of the U.S. population and are the largest share of homebuyers at 32 percent. Millennials make up 68 percent of first-time homebuyers and outnumber baby boomers by 8 million. Still, only 40 percent of the cohort own homes while 60 percent rent.
“It’s about giving millennials the tools—because that’s, in our research, you know the first thing you go out and do is research—and if I’m looking at anything new, I’ll Google it, and read about it, and maybe I’ll go out and call or visit, but the first thing you do is research. So we want to get information out there to be able to educate millennials,” Miller explained.
Miller’s colleague, Garcia finds that many first-time homebuyers require some extra education. “We understand that there’s a lot of stress from their point of view, and we try relieve that stress as much as possible by being their confidante and holding their hands and making them feel like they have a partner throughout the whole process,” he added.
Like everyone else in the mortgage industry, Mission Federal is also trying to understand what Millennials want from a mortgage lender.
“I’m finding it’s really having a good Web presence, being very transparent with your fees and interest rates, and explaining what type of pitfalls you can fall into,” Nowicki noted. “Millennials have to have that transparency, they have to be able to open up an account online, have to be able to make their payments on the Internet, and try to do as much of their research as possible—down to even applying for a loan—from the comfort of their home.”
Staying Ahead of Competition
Competition among financial institutions, or in any industry for that matter, is a healthy way for businesses to maintain a competitive edge. It elevates business, increases bottom lines, and enriches membership.
“As a direct lender, we pride ourselves on being able to stay in control throughout the entire loan process,” McDonald said. “Our members will always know us as the servicer of their loan—even if it’s sold. This level of contact allows us to partner with the member for years.”
Harmon advises credit unions to build a better widget to stay ahead of the game. “Develop simple products based on what members need, instead of trying to place everyone into the same box. Make the application and approval process simple and easy. Most of all, gain the member’s trust that you are always going to do the right thing for the member,” he noted.
Golden 1 Credit Union’s Popp takes a different approach to competition. “We mainly compete with banks and mortgage companies, providing market pricing but our real edge is focusing and educating people on the credit union difference,” he said.
“Credit unions maintain a community base. We’re also able to make changes more quickly if necessary. We can respond to market forces a little bit more quickly because we’re smaller and because we’re more centralized,” Nowicki explained. “To make wholesale changes at a Bank of America or Wells Fargo, you can imagine there is bureaucracy, politics, and red tape. Being agile, a little bit quicker, and being able to make those changes and keep in step with the changing market—that’s our competitive edge.”
Nowicki continued, “We have all the same types of things that every bank and credit union can offer as far as products and our prices are typically a little bit better, rates a little lower, and our fees are a little bit lower than the bigger banks. We do have a lot of give backs because we’re not-for-profit organizations—we have to take any excess capital and the profitability that we make and give back to the members.”
“It’s the service aspect among credit unions, so it’s the fact that you’re not just a number, not just an application, you’re a member,” Miller said. “It’s not just a one-time loan with us, it’s part of your relationship.”
Editor's note: This select print feature appears in the February 2016 edition of MReport magazine, available now.
