Responding to the concerns of regulators and traditional lenders, companies involved in "net branches" are banding together in a trade association.
Net branches are generally regarded as much more independent, entrepreneurial loan branches that receive back officesupport from a central corporate office. The branch managers are employees of the central company, which pays the expenses and provides benefits, but the day-to-day business decisions are left to the manager.
However, some critics say the net-branch strategy does not provide as much accountability or oversight as the traditional mortgage-banking model. And Department of Housing and Urban Development officials remain concerned about net branches and are currently reviewing the sector.
The trade group, called the Innovative Mortgage Origination Council, will focus on educating regulators and the industry about net branching to dispel what its representatives say are misunderstandings about the business. In addition, the group has drafted a statement of principle and a code of conduct and is working on a list of best practice guidelines -- all intended to shore up confidence in the sector, particularly on the issue of accountability.
So far it has signed up six dues-paying members and expects to incorporate this week. The statement of principle and code of conduct are to be released by June 17.
"These firms have come together because they want to stand up and make sure regulators understand that they are fully accountable for the actions of all their employees — including down through their branch operations," said Peter Bell, the executive director of the new group.
A big part of the problem, several representatives said, is that net branching still lacks a universally accepted definition.
" 'Net branch' means a lot of different things to a lot of different people," Mr. Bell said. One focus of the group is to come up with a definition, he said.
HUD acknowledged the lack of such a definition in a May 2000 letter to lenders meant to clarify acceptable "branch office" arrangements for HUD- and Federal Housing Administration-approved lenders. Yet many industry players say HUD’s letter did little to clarify the situation. In the meantime, the number of net branching companies has exploded.
Executives of such companies say their business strategy in no way resembles franchise arrangements. Though branch managers get entrepreneurial freedom to run their offices, they must rigorously follow federal and state lending laws, the executives says.
"These people are employees, the companies are responsible for all their mortgage activities, and impressions to the contrary need to be addressed," said Harvey Weiner, a partner with Weiner, Brodsky, Sidman, & Kider who is one of two attorneys for the group.
Mr. Bell said some regulators mistakenly believe that net branching is a strategy for taking "an aggressive interpretation for what the rules allow."
In fact, he said, the group's members consider compliance vitally important but believe current rules "stifle" innovative arrangements. "The idea of the organization is to create an ongoing dialogue with regulators … to be flexible in accepting alternative business arrangements," Mr. Bell said.
Mr. Weiner acknowledged that some net branching companies do not comply with the rules, but he said the association will provide a foundation of ethics.