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State Farm adding 3rd-party mortgages to financial services supermarket shelf

Two decades after opening a banking subsidiary, the group led by State Farm Mutual Automobile Insurance Co. is taking a different approach to at least a portion of the consumer lending business.

Agents of the nation's largest private-passenger auto and homeowners insurer will continue to generate residential mortgages, but under a new alliance they will do so on behalf of Quicken Loans Inc.'s Rocket Mortgage instead of State Farm Bank FSB.

The insurer confirmed in a note posted on its website that "all new mortgage loans" produced by State Farm agents "will go through Quicken Loans." The note cautioned, however, that the change "will not be immediate" and in the interim State Farm agents "will continue to help customers with their home financing needs through State Farm Bank."

The announcement represents another in a line of developments whereby insurance companies have refined and, in many cases, retreated from the concept of the financial services supermarket that emerged in the late 1990s. In contrast to the envisioned convergence of internally produced banking, insurance and other financial offerings, a number of insurers have opted to sell or dramatically downsize their banking interests. MetLife Inc., for example, exited its sizable forward residential mortgage business in 2012 as it was in the process of selling the depository business of MetLife Bank NA to General Electric Co.

State Farm was one of several high-profile property and casualty and life insurance companies that obtained federal thrift charters to operate their own banking divisions.

The insurer filed its initial application for a federal savings bank in June 1997, formally opened the institution in May 1999 for customers in select markets, and later expanded to a nationwide footprint. It was envisioned as a branchless bank with agents serving as the primary point of contact with customers, supplemented by electronic forms of communication.

Those agents were trained to produce residential mortgages and the various other banking products the new institution offered — a suite that includes checking, savings, credit cards and various types of vehicle loans in addition to purchase mortgages, refinancings and home equity products.

The idea of State Farm's exclusive agents originating residential mortgages was not without some controversy. Federal court records show the company obtained an opinion in 2004 from the Office of Thrift Supervision that state laws regarding individuals engaged in mortgage lending were preempted by the federal Home Owners' Loan Act since that legislation allows third parties to act on behalf of federal savings associations. It later obtained rulings supportive of that conclusion from separate federal courts in cases involving the state of Ohio and the District of Columbia.

As part of the alliance, the companies indicated that Rocket Mortgage is creating "new technology" that will allow State Farm agents to offer products, including conventional Fannie Mae and Freddie Mac mortgages, as a licensed loan originator.

While historical production data is limited, it appears that retail originations of single-family first-lien and junior-lien mortgages at State Farm Bank (only including loans originated for sale) peaked in the fourth quarter of 2016, according to data reported by the bank on call reports, at $543.5 million. Originations of the kind totaled $5.69 billion for full-year 2016, also the high-water mark in the seven years State Farm Bank has made the disclosure.

After the first quarter of 2017, State Farm Bank posted eight consecutive year-over-year declines in excess of 20% apiece in retail originations for sale of single-family mortgages. The declines topped 56% in the fourth quarter of 2018 and the first quarter of 2019, the two most recent periods for which the data is available. Volume of just $97.9 million in the first quarter represented the bank's slowest period for originations of the kind since at least the start of 2012.

State Farm Bank ranked as the nation's third-largest insurer-owned bank as of March 31, 2019, based on total assets of $16.40 billion, which include $3.61 billion in single-family mortgages. Only the banking units of United Services Automobile Association and TIAA were larger.

Originations of single-family mortgages for sale at both USAA Federal Savings Bank and TIAA FSB of $13.51 billion and $2.57 billion as reported on call reports significantly exceeded State Farm Bank's $787.8 million among the insurer-owned banks in 2018. So, too, did production of single-family mortgages for sale of more than $1 billion at Mutual of Omaha Insurance Co.'s Mutual of Omaha Bank, which bought Synergy One Lending Inc. in July 2018.

A partnership between the nation's largest personal lines insurer and residential mortgage lender, however, could be the start of a new chapter for the mortgage business at State Farm.