What's this? The borrower receives a cat when their mortgage closes? What would the CFPB say? Will fleas lead to a class action lawsuit a year down the road? Would the DOJ claim canine disparate treatment? Besides, for many people, not receiving a cat would be a better selling point.

There has been a huge rise in servicing by small and mid-sized lenders, and due to potential liability most turn to a subservicer. LoanCare, part of the Black Knight family of companies, is a leading national provider of full-service, interim, component and back-up subservicing as well as servicing performance solutions to the mortgage industry. With subservicing volumes exceeding 550,000 loans totaling over $110 billion in unpaid principal balance (UPB), "LoanCare has been the smart solution for subservicing since 1991. LoanCare offers award-winning technology to its lender/servicer clients featuring superior data access for full transparency and robust reporting capability. In addition, LoanCare deploys an intuitive borrower-facing website and powerful mobile platform for its customers, providing convenient 24/7 access through their smartphones or tablets, better enabling them to manage their mortgage loans. LoanCare will be at the ACUMA 2014 Annual Conference in Las Vegas the week of September 14-17 and the 20th Annual ABS East Conference in Miami Beach. If you are interested in meeting and speaking with the LoanCare team at the event, please contact Gene Ross.

On the new product front, things are alive and well in the jumbo origination sector. For example, California lender Western Bancorp, noted for its innovative Jumbo ARM offerings and extensive wholesale lending experience, has added another jumbo to its program offerings: the Newport Jumbo loan program, with loan amounts to $2.5 million. This marks the third Jumbo program Western Bancorp has added over the past few months, demonstrating its growing commitment to the Jumbo Market. Learn more at the Newport Jumbo page or contact management through email Western Bancorp.

But all is not peaches and cream for lenders. (If I said Peaches and Herb, I'd be showing my age.) Compass Point Research and Trading reports that Flagstar filed an 8-K disclosing that the bank 'has commenced discussions with the CFPB related to alleged violations of various federal consumer financial laws arising from the bank's loss mitigation practices and defaults servicing operations dating back to 2011.' The bank also disclosed it had received a Civil Investigative Demand (CID) from the CFPB. There have been large mortgage servicers that have received CIDs from the CFPB, albeit not all of them have been disclosed. Considering Flagstar felt it was necessary to mention the company was in discussions with the CFPB, we believe a material settlement may be imminent. We believe FBC has little to no reserves established for this issue. At of the end of 2011, FBC had a $64B servicing portfolio compared to the current portfolio of $25B. Since the end of 2011, we estimate the company sold over $100B of servicing UPB in order to reduce operating risk and increase much needed capital. Most of the recent settlements we have seen between the CFPB and other mortgage servicers have included several other regulators, including the state attorneys general. This regulatory discussion appears to only involve the CFPB which makes it difficult to give an estimate of any future penalty payment."

Since we're on the CFPB, who is Global Client Solutions? It is the latest contributor to the CFPB's Civil Penalty Fund. And no, it is not a mortgage company but instead a debt-settlement payment processor - but the issue does have tidbits to see what the CFPB is up to. In its complaint filed in a California federal court concurrently with the proposed stipulated final judgment and consent order, the CFPB alleged that the defendants had violated the Telemarketing Sales Rule (TSR) by assisting and facilitating the charging of unlawful advance fees by debt-relief companies (DRCs) and that such unlawful conduct also violated the Consumer Financial Protection Act.  The consent order requires the defendants to pay over $6 million in relief to consumers as well as a $1 million civil penalty.  The CFPB alleged that after a consumer enrolled in a debt relief program, the DRC would instruct the consumer to stop making payments to creditors and instead make payments to Global for deposit in a custodial account.  The CFPB claimed that at the time Global transmitted advance fees to DRCs, it knew that it had not yet transmitted any funds from consumers' custodial accounts to creditors.  The CFPB also claimed that Global had received hundreds of complaints from or on behalf of consumers.

The vast majority of the CFPB's settlements involved an administrative proceeding and did not involve the filing of a complaint by the CFPB in a federal court.  The CFPB's filing of a complaint against Global concurrently with the consent order likely reflects the CFPB's desire for the Global defendants to be subject to the more severe consequences that attach to violating a court order than an administrative consent order. Should the Global defendants violate the injunction entered by the court, the CFPB could move to have them held in contempt of court.

Switching gears, merger & acquisition news continues. In Kentucky (where sleek racehorses drink bourbon whiskey and smoke the legendary bluegrass tobacco) Citizens National Bank of Paintsville ($538mm) will acquire the Peoples Security Bank ($49mm), and American National Bankshares Inc. and MainStreet BankShares, Inc. announced the signing of an agreement which calls for MainStreet to merge with American National in a transaction valued at approximately $24.2 million. And Stonegate Bank (NASDAQ: SGBK) announced the signing of a definitive agreement by which Stonegate will acquire all the operations of Community Bank of Broward.  Stonegate Bank's management expects the combination will increase total assets to approximately $2.1 billion and will rank Stonegate Bank as the 10th largest bank headquartered in Florida.

(As opposed to this story from Denver, where Solera Bank lost its entire mortgage division.)

Besides bank mergers and acquisitions, there are plenty of smaller deals being contemplated and explored, especially as smaller mortgage brokers and mortgage bankers join up with larger players. I receive plenty of notes that say things like, "Rob, we are a one-branch operation and are being recruited by numerous companies. In this current mortgage environment making the right decision is more important than ever especially in terms of competitive loan compensation, strong reverse mortgage presence, and diverse product options, all with an operations team that loves their Loan Originators. What do you suggest?" Although the STRATMOR Group tends to focus on whole company transactions and not individual branches, I turned to Jeff Babcock who replied, "Anyone thinking about transitions like this should start with a few basic items.  Prepare a check list (in rank order of importance) of the factors which are most critical in your evaluation process. Assess each prospective company against that check list so that you can compare one against the other on an apples-to-apples basis. Pay close attention to the corporate culture; while culture is very intangible and subjective, cultural compatibility is the key element of a successful new business relationship. For those lenders that represent serious possibilities, talk to existing and recently-recruited branch managers; ask their opinion and if they are candid, you can learn a lot." Thanks Jeff!

The question is whether everyone is thinking the merger or acquisition through strategically, or whether this is more of a fad that will fade as loan demand heats up and profitability jumps for banks of all sizes (already happening). Bankers have heard all the statistics and dire predictions that smaller banks just aren't going to make it. The argument is that costs are too high and every bank under (pick a number) in asset size will have to merge or perish. This generalization is not true. Certainly bank size is one measure, but all markets are different, overhead costs vary dramatically, competition is vastly different and many banks & mortgage banks simply do a great job no matter their size. The success rate for mergers has not been that great - whether looking at banking or other industries. Think of the culture clash between Daimler-Benz and Chrysler, or remember when Quaker bought Snapple for $1.7B and then sold it 27 months later for $300mm. Look also at the time period between 2000 and 2008 when Wells Fargo acquired 19 banks. This was all about gaining market share and geographic coverage and probably little time was spent worrying too much about cultural fit of these acquisitions.

In more recent M&A activity, the data shows the average buying bank has been around $1.5B in assets and the average seller around $300mm. For banks of this size, one could argue cultural fit matters a great deal. Any bank considering a merger should delve deeply into how the merger will build franchise value. There are many elements beyond the purely financial that are critically important, and these cultural and strategic elements must be considered. They are best assessed by the people who truly know the bank - namely, the people within the bank. Merging banks also don't have to be the same, indeed differences between merging parties can complement one another and diversify the business model. When assessing a potential strategic fit, banks must ask and answer a lot of questions. First, assess each market as measured by its population density. Also assess population and economic growth dynamics. Are the economic engines of the merging banks similar or complementary? Also consider the product mix. For instance, if one bank has primarily agriculture lenders and the other bank focuses on commercial real estate, there could be great synergies or a potential clash of cultures. Is this an opportunity for a bank to diversify its income stream, or will it lead to problems? Do the merging banks have similar competitive forces and market share in their respective markets? Do the management teams have a similar outlook and are business customs compatible?

Pacific Coast Bankers Bank reminds us that "if the merger appears to be a good fit after careful consideration of all things financial and cultural, the next hurdle is one of integration. Obviously the customer experience is of paramount priority but so is the handling of important employees and producers in the bank. Management should be decisive about the direction of the new organization and make every effort to integrate the most successful elements from the existing banks into the new organization. The new bank will then grow out of the best of the new and old and should have a good chance for success. For those banks that are doing fine just as they are, our advice is to keep up the good work and stick to a simple business model that feeds off of an expanding economy."

There has been so much activity on the Mergers & Acquisitions front that the MBA is holding a one-day M&A workshop for mortgage executives, to be held on November 6 in Dallas.  The workshop will cover key factors that determine a company's valuation and typical terms in today's market; the due diligence and deal process; and the legal, regulatory, tax and accounting, operational and financial implications of selling and acquiring. The MBA has a stellar line-up of expert speakers (including potential acquirers) from the following firms:  Guild Mortgage, Houlihan Lokey, loanDepot, Mortgage Banking Solutions, MS Capital Advisors, Prospect Mortgage, Richey May, Spiegel Accountancy Corp, Weiner Brodsky Kider PC."

Switching gears again, no one is complaining about rates. But the costs of origination are high, millions of borrowers have lower rates than what is being offered now, every deal is tough, and purchase volume typically wanes heading into autumn. Ugh. It helps our bond prices when prospects of further easing by the ECB (European Central Bank) rise. Remember the chaos surrounding Portugal, Italy, Greece, and Spain? Well, Italian, Spanish, German, and several other countries' bonds are all yielding less than our 10-year T-note.

As desks start to be vacated ahead of the 3-day weekend , the focus will continue to be on European markets and what/when the ECB chooses to do either next week or this fall and geo-political headlines. Also on tap today was Weekly Initial Jobless Claims (-1k), the second look at Q2 GDP (+4.2% up from 4%); later is Kansas City Manufacturing, and Pending Home Sales, along with a $29 billion 7-year note auction. So Wednesday...bonds rally, stocks rally... will the fun never end? The 10-yr closed Wednesday at 2.36% and we're at 2.34% this morning with agency MBS prices better by .125.