Quicken Loans Inc. says it is converting to a depository mainly to increase brand awareness in the Midwest, get better funding for mortgages, and add customers in the Detroit area, where it has three branches.
But the Livonia, Mich., mortgage bank, which lends in all 50 states through its Web site, would clearly gain an extra benefit: the greater flexibility that comes with federal oversight.
By folding itself into Rock Bank, the federal thrift it is creating, Quicken Loans would get federal preemption courtesy of the Office of Thrift Supervision from the growing patchwork of state and local predatory-lending laws.
Rock Holdings Inc., the holding company of Quicken Loans, applied for a federal thrift charter with the OTS on June 2 after the agency had declared the institutions under its watch - including the giant Seattle thrift company Washington Mutual Inc. - exempt from state and local laws against predatory lending.
Wright Andrews, a partner at the Washington law firm Butera & Andrews, said that with a tough law on predatory lending set to take effect in New Jersey in November and another already in effect in New York, he would not be surprised to see other mortgage banks become depositories.
"If there isn't relief, I think you will see more people leaning in [Quicken Loans'] direction," Mr. Andrews said.
Rock Bank president Mark Allio said in an interview that preemption aside, becoming a federal thrift would do a lot for Quicken Loans.
The move would help it extend the brand equity of its southeast Michigan retail lender, Rock Financial, the state's largest mortgage lender, he said. And the proposed thrift would gather deposits from the $70 billion Detroit market, helping Quicken Loans better manage its funding for mortgages because borrowers leave their deposits in banks for an average 30 months, whereas warehouse lenders typically require contract renewals every six months.
Mr. Allio said Rock's strategy is to build deposits - with each customer contributing an average of $30,000 - to $500 million within three years of its entering the business. Rock could then cross-sell home equity loans and other products to its depository customers.
With an OTS charter, Mr. Allio said, the bank could open branches in all 50 states. With a Michigan charter it could only open branches in 17 states because of reciprocal agreements between the states, said John Ryan, the senior vice president for policy with the Conference of State Bank Supervisors in Washington.
And of course there's the matter of federal preemption of state predatory-lending laws, which have put the entire industry in a bind.
Angelo Vitale, Quicken Loans' vice president of government relations and senior counsel, said that without the preemption "companies like Quicken Loans and other state-licensed lenders are going to suffer increased costs and an undue regulatory burden."
The OTS began preempting federal thrifts and their operating units from state predatory-lending laws in January. The Office of the Comptroller of the Currency preempted Georgia's law last week - leaving only those without federal charters to comply.
To comply with the laws in Georgia and New York and prepare for New Jersey's, Quicken Loans and others have had to "reprogram their systems, put all the necessary compliance tools in place, and not make loans" that are tightly regulated, Mr. Vitale said. The process has taken months.
If and when it gets its federal charter, Rock Holdings would fold Quicken Loans under Rock Bank, making sure it is protected. It chose to seek a thrift charter rather than one for a national bank because the OTS "is the most familiar with our business" of making residential mortgages and home equity lines of credit, Mr. Allio said.
Mr. Ryan said he was worried that the Comptroller's Office and the thrift agency have "created an incentive," especially for state-licensed mortgage lenders like Quicken Loans, to apply for federal charters for the predatory lending law exemptions, which is problematic especially because "the states have been responding to a [real] problem," he said.
And he said that in preempting the state laws the two agencies are remaking law in the states concerned, and in his group's view only Congress should have that power.
Of course, being a federally regulated thrift or national bank is no easy undertaking. Mr. Vitale said the application and approval process has already taken several months and that he does not expect the company to be approved before next year.
In addition, companies regulated by the OTS and the Comptroller's Office are assessed millions of dollars a year by the agencies depending on their asset size to pay for the agencies' work.
And there are other reasons keeping lenders from getting involved in the depository business.
Adam J. Bass, senior executive vice president for Ameriquest Mortgage Co. of Orange, Calif., one of the strongest backers of a coalition pushing Congress to pass a federal bill that would put an end to the disparate state measures, said his company is still seeking the federal legislative solution. Though he would not rule out seeking a federal charter if all else fails, he said that adding deposits is a major change he would rather avoid.
Nonetheless, a senior lobbyist in Washington for a major subprime lender said getting a federal charter is now "an option" for companies that want to move into the depository business and operate in the mortgage market with minimal regulatory interference.
Unlike other states, Michigan does not have a "wild card" law giving state-chartered depositories the same powers within its borders as federally chartered ones. But several lawyers said such laws only apply in the states that enact them, which would be of little help anyway to Quicken Loans, which does the bulk of its business outside Michigan using the Internet.
