We all know the lending compliance is highly regulated and takes considerable resources. Lender compliance costs put a strain on lender profits, can be frustrating and seem unreasonable.
And they keep increasing.
The Mortgage Bankers Association (MBA) reported in its Annual Mortgage Bankers Performance Report, production expenses reached a study-high, at $7,209 per loan. This is up from $7,046 in 2015, and $6,769 in 2014. A good portion of these costs are mortgage lending services compliance-focused processes that are now required by regulation standards.
The stakes are too high for lenders to risk their compliance to save a few bucks. The key is balancing compliance costs against other expenses, and becoming more efficient in overall processes. Proactively taking steps to meet these compliance standards is smart business, even if it costs a bit more in the short run. Smart lenders must create a strategy for dealing with rising compliance costs without harming their profitability.
Here are 7 compliance tips for lenders. Use these to get the most out of your compliance buck.
#1: Accept that Lending Compliance Costs Are Here to Stay
Wishing that we’d wake up one morning and not need to deal with compliance costs is a pipe dream. As irritating and never-ending as they seem to be, the lending environment is such that compliance is a top, serious priority. Lenders who stick their heads in the sand and ignore compliance are opening themselves up to serious issues. A better, more productive option is to stay educated on the laws and regulations, and proactively adapt processes to secure compliance.
Smart lenders with their eyes on long-range success will reach for out-of-the-box solutions that minimize the impact of compliance costs on the bottom line.
#2: Understand These Costs Are Better than the Alternative
Lenders may consider compliance costs a nuisance, but they are infinitely better than the costs of non-compliance. For example, The CFPB can impose civil money penalties of $5,000 per day per violation for noncompliance, $25,000 per day for reckless violations and $1 million per day for knowing violations. And this is only one of many regulatory bodies. Yikes!
In addition, data breaches from failing to comply with required identity protection standards open lenders up to costly, embarrassing lawsuits that can take years, if ever, to recover.
#3: Implement Compliance into Your Budget
One of the key compliance tips for lenders deals with budgeting. A recent survey found that 45% of community banks indicate compliance costs are 5%-10% of total operating costs and 33% of banks estimate compliance costs are between 11-20% of total operating costs. These costs represent large amounts of money, and can eat into a lending institution’s profit.
Budgeting for compliance is no longer optional. From new compliance staff to additional software to handle compliance to vendor fees, compliance needs to be a line on your annual budget. Planning for the financial outlay ahead of time takes a bit of the sting out of required compliance costs.
#4: Work with Vendor Partners Who Value Compliance
Fortunately, there are several new products on the market that offer a comprehensive solution for Third Party Vendor Management. These solutions will help you maintain compliance in an efficient and cost-effective way. When looking for any new solution, try to look for the most all-inclusive and comprehensive. And most importantly make sure itaids in compliance with all industry regulators and lenders.
By effectively blending in-house expertise and qualified third-party vendors working together to quickly complete tasks that used to be labor-intensive, we can ensure new regulations do what they’re supposed to – protect consumers and lenders from mortgage defaults – without breaking the bank.
Vendor management is more important now than ever.
Vet your vendors:
- Ask in-depth questions about their processes
- Ask how they help you maintain compliance
- Request documentation on their internal compliance policy
Choose vendors that stay abreast of industry regulations, and help keep you up-to-date on current policies and procedures. Vendors that invest in well-trained staff, practice stringent due diligence, and implement internal processes to proactively assist in lending compliance are the ones to select for your vendor partners.
Talk to your current vendors about compliance, and make certain they can specifically explain how they are helping you maintain compliance within your organization.
#5: Evaluate and Implement Technology
With costs steadily increasing for lenders, and greater partnering with vendors, the challenge is to figure out how to meet lender compliance requirements in the most cost-effective, least labor-intensive manner possible. The answer heard more and more often is technology.
Technology is changing the mortgage industry. TRID, of course, is one of the most recent compliance challenges that technology is addressing. One law, Dodd-Frank, created a “cascade” of changes that, by our count, has affected 23 different federal lending laws and regulations.
With all the new requirements, regulations, verifications and more, utilizing technology is the best way to overcome the costs of compliance. Because the reality is that, when it comes to compliance, two choices apply: You pay for it now (by investing in technology) or pay more later (in loan buy backs, fines, and consumer reimbursements).
If lenders are not equipped to handle new compliance processes, outsourcing to a vendor that specifically focuses on these areas will ensure compliance standards, updates and performance are adequate and accurate. Predatory lending and loan documentation are common compliance areas that are outsourced. Technology is key in stretching your compliance buck.
In addition to accepting and preparing for the additional compliance costs in lending, smart lenders need to drill down into the details, sharpen their pencils and…
#6: Pursue Efficient Processes
While compliance costs in lending cannot be avoided, other cost-decreasing measures can be taken to offset the drain the investment in compliance puts on resources. Conduct a thorough audit to identify waste and inefficiency. Are your people using touching documents three times when they could do it all with one touch? Are they as focused and productive as possible? How can your vendors help to increase efficiency? By upping your game with more efficient processes, increased lending compliance costs can be absorbed without cutting too much into profit.
#7: Keep on Top of Industry Changes
A list of compliance tips for lenders wouldn't be complete without mentioning the onslaught of regulation additions and changes. It’s less stressful to turn the radio up and ignore the sounds of upcoming industry changes, because dealing with them is a pain. However, not facing them head-on can end up costing your company in the long run. Get involved with your local Mortgage Bankers Association chapter and subscribe to industry blogs and newsletters. Also, expect your vendors to share information with you to keep you in the loop. Being proactive about lender compliance requirements is a good best practice, and will help you plan your budget to meet upcoming expenditures.
While spending a bunch of money on compliance is nobody’s idea of fun, it’s a necessary step and a foundation of good business. Lenders who proactively understand and commit to these 7 compliance tips for lenders empower their budgets to be ready for compliance costs and provide a more efficient workplace and valuable vendor partners. These all contribute to minimizing the bottom line costs, staying within lending industry compliance, and maximizing the reach of the bucks spent.