Home Banking & Finance Bank of England, lenders try out ‘correspondent’ model

Bank of England, lenders try out ‘correspondent’ model

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Bank of England – but not the “Old Lady of Threadneedle Street” central bank that manages the United Kindgom’s monetary policy – is establishing a loan production office in Norwalk.

In doing so, the tiny entity from the Ozarks is stitching a new chapter with a time-tested system for underwriting loans that may get a fresh look by lenders in the era of Dodd-Frank financial oversight.

A century in business with a focus on agricultural finance, today the England, Ark.-based Bank of England is quietly expanding nationally via its ENG Lending affiliate, which offers “correspondent lenders” the opportunity to set up loan production offices outside the purview of most state regulators.

The records of the Connecticut Department of Banking, however, are crammed with citations against correspondent lenders for not maintaining surety bonds covering the loans they underwrite, and Bank of England has sought permission to establish the Norwalk office, as well as others throughout the state.

On its home turf in Arkansas, Bank of England has only a half-dozen branches with barely $240 million in loans on the books as of September – not even matching the size of Bank of New Canaan. But ENG Lending has allowed Bank of England to increase the size of its workforce by half in the past year alone, a remarkable achievement even as small banks nationally have labored under Dodd-Frank compliance requirements.

Last year U.S. Rep. Jim Himes co-authored a bill with a Republican congressman from Arkansas that eased Securities and Exchange reporting requirements for smaller banks.

“One of the fair criticisms of Dodd-Frank is that the new regulatory apparatus, much of which makes sense … has put an undue burden on our smaller banks,” Himes said, speaking in late October at a pre-election forum sponsored by the Stamford Chamber of Commerce. “It’s (smart) to help the smaller institutions compete with the big ones and de-concentrate our system that way rather than saying, ‘OK, we’ve got a great way to break up Citigroup and JPMorgan Chase.’”

Banks use the correspondent lender model to recruit mortgage brokers with a track record of generating big volume, allowing those individuals to essentially reserve credit lines from banks to underwrite their own loans. The model carries little risk for either party, in that the underwriter packages and sells the loan to a wholesale lender after it is processed.

M&T Bank is in the process of acquiring New Jersey-based Hudson City Bancorp, which has been among the biggest buyers of correspondent loans in the tri-state area. Among other companies nationally, PennyMac is swiftly building a big correspondent lending business.

“The correspondent landscape is going through a transformation as most of the big banks who have been the market leaders in the channel for many years are exiting or materially reducing their volumes,” said Doug Jones, head of correspondent lending for PennyMac, in the company’s most recent conference call with investors. “Many of those banks have shifted their focus to the retail channels; this has created an opportunity for non-bank financial intermediaries.”

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