States Cracking Down on Mortgage “Net Branches”
By: Ed Ferrara | March 23rd, 2010
Net branching peaked during the boom, and for the most part crashed with the meltdown, but it has survived. While the term “net branch” is on its way out, branches will always be around. Branches are valuable to mortgage lenders because branch managers use their own money to secure office space, pay for marketing, processing, employees, computers, and phones etc. With the help of the lenders’ resources and support, branch managers operate as a banker/broker, in charge of everything doing business in multiple states without costly surety bonds or a broker license, collecting 75-90% of yield spread premiums and origination fees. It can be a profitable venture for both parties.
But branching can go terribly wrong. In Southern California, Dana Capital Group stiffed dozens of branches on hundreds of thousands of dollars in commissions purposely, using the money start a new brokerage on a different floor of the same office building, named Sage Credit Company (later accused of the same thing). They offered their licensing to trusting talented originators and burned them, bad.
There’s a group of mortgage bankers that do things by the book, offering opportunities for well-qualified originators to operate branches with integrity and honesty — 100% HUD-compliant in every way.
A director of compliance at a big time Dallas, TX mortgage bank told me recently a trend is developing that signals the end of the term “net branch” is near. States don’t want anything resembling a net branch or associated with “net branching” operating within their borders. Branch applications in many states, coming from HUD compliant bankers, that were previously approved 99.9% of the time, are being denied because the mortgage bank itself is associated slightly with term “net branching”.
This is a trend that’s likely to continue. Mortgage bankers who have been in the business and that are in it for the long haul are moving quickly to disassociate themselves with the term. Re-wording the content on their websites, advertisements etc. The term net branching is becoming a real red flag. Bankers are offering an “affiliate mortgage branch”, “partner branch” or “mortgage net branch alternative”, but not a “net branch”. I know this is just a term and not policy-related..
Lenders offering branches not compliant with HUD and/or associated with “net branching” are likely to be blacklisted, unable to open new branches in any state. Could they start suspending branches because the bank is associated with that term? Now that’s scary.
Why the crackdown? HUD has many rules for mortgage bankers to follow when establishing a new branch in any state. These strict guidelines have been abused for years, sometimes just slightly. A few of the simpler rules include having a commercial office space. Many lenders allow branches to operate with a virtual office address, or even out of the house. These are not real branches but individuals operating out of a house.
One of the rules HUD has for branches, which it takes very seriously, and a big part of the reason for the crackdown, is that all branch employees including LOs and Branch Managers are to be paid by W-2. Any company that offers a full or partial 1099 payment is going against HUD rules for branching.
It is clear to me that HUD is now getting serious about net branching — cracking down on abuses and distortions of its branching regulations. I predict operations that aren’t compliant and have no desire to conform will continue to toss the ‘net branch’ label; some will go away. Those playing in the gray area now, and who wish to stick around, will increasingly become compliant with every detail of HUD’s regs. Others currently in compliance will simply dissassociate with term “net branch”.
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