The phrase above has started to become somewhat of a phenomenon in the mortgage industry since the financial meltdown occurred. A plethora of rules, regulations and regulators have been put in place and life has become very different since the advent of Dodd/Frank and the Consumer Financial Protection Bureau. The cost and implementation of mandated compliance has become very expensive and is frequently left to those with more significant resources or, many times, is simply ignored to a great degree by smaller entities operating as Third Party Originators or Mini-Correspondents.
The phrase simply means that starting with the compliance of the smaller entities on the ground floor is, at best, very basic and they are relying on the entities that approve and fund their third party originations to make sure the loan is compliant. Those entities often rely on those above them and so on until you reach the mega lenders. Unfortunately, each entity above your business is only protecting their interests and not yours.
At the same time, you have the CFPB auditing mortgage entities at the largest level and are now working their way down the food chain. At some point in time, these two processes are going to collide with very negative results and a number of entities will be put out of business.
When I talk about third party originators, I am referring to Community Banks, Credit Unions, Mini Correspondent lenders, Mortgage Brokers and other such enterprises. These are entities who either don’t have a complete understanding of compliance, lack the resources to properly implement compliance and are faced with their own unique challenges depending on who they are and their method of operation. Community Banks have lost market share and have seen the profit margins on their mortgage operations plummet. Many Credit Unions think they are exempt from most compliance rules and, as a result, operate in ignorance. Mini Correspondents and Mortgage Brokers frequently rely on those larger entities that are funding their loans.
I would encourage the above entities to contact a mortgage compliance professional and get an in-house audit performed and then make pragmatic decisions about the future of their mortgage operation. The consequences of noncompliance are not only painful, but can be very expensive. Be proactive and don’t rely on Trickle Down Compliance to run your mortgage operation. Get compliant now before it is too late.