New regulations on third-party residential mortgage lenders prompted two local companies to join forces as Huron Valley Financial acquires First Financial Services in a transaction set to close at the end of August.

Requirements that third-party originators use an appraisal management company to evaluated properties led to discussions between the two companies, officials said, and the realization that combining the firms would provide other benefits as well.

Eric Bradley, president and co-founder of Huron Valley Financial, said the combined company will have 34 loan officers and 40 total employees, making it one of the largest in town. Before the merger, Huron Valley had 23 loan officers.

He said that aside from the relief from the appraisal regulations, after the acquisition former First Financial loan offers would have access to Huron Valley’s mortgage platform and pricing engine.

“Since we are a mortgage banker, we have the latitude to internally decide what local appraisers are on our approve list,” he said. “When the guidelines changed May 1, it didn’t materially change anything we were doing.”

Huron Valley Financial has a list of approved appraisers, from which it randomly picks when a deal comes through. An employee with no financial incentives related to mortgage originations manages the system, Bradley said.

But for First Financial, owner and president Dave Arnoldi said, the new rules required its loan officers to go through an appraisal management company, which often results in out-of-town appraisers being mandated. That frequently means untrustworthy valuations, he said, from appraisers unfamiliar with Ann Arbor.

“Even if that appraiser came in with a good appraisal that was lower than the home was sold for, local Realtors are not going to entrust their business to someone who is going to be putting them in that situation,” Arnoldi said.

He predicted a continuing shrinkage of the third-party mortgage brokers under new regulations that he said cast all brokers as unscrupulous, adding that his company never originated a sub-prime loan.

“I think there will be severe contraction of third-party originators,” he said. “There certainly was fraud and misrepresentation and appraisal collusion, but those activities certainly weren’t confined to third-party mortgage brokers and originators … somebody had to take the fall.”

Peter Schork, of Ann Arbor State Bank, said another pressure point on smaller brokers is new requirements from large banks that originators be much more well-capitalized than in the past.

“They don’t want to deal with a broker who doesn’t have the capacity to eat four or five loans,” Schork said.

Schork praised both Arnoldi and Bradley and said the merger would benefit both.

“It helps Arnoldi because he’s too small to compete, and it helps Bradley because Arnoldi has great connections in the community,” Schork said.

The acquisition expands Huron Valley’s footprint into Fenton and Birmingham, where First Financial has offices. As part of the combination, Bradley said, a few First Financial employees will be able to move from part-time to full-time work.

He said branching out from Ann Arbor is a departure for Huron Valley.

First Financial’s staff will move into Huron Valley’s building on Oak Valley Drive, a process that has already begun. First Financial’s current offices are on West Stadium, and are leased through the end of the year. Bradley said he’d explore subleasing possibilities there.

“This combination, it really kind of completes Huron Valley’s goal and five-year plan,” Bradley added.

“When we built this office building we set ourselves up to be the premier residential lender in Washtenaw County. Merging with First Financial puts us head and shoulders toward achieving that goal.”

-Dan Meisler writes about real estate, banking & finance and other topics for Michigan Business Review. He can be reached at (734) 302-1721.

Photo: Eric Bradley,