The lending industry is highly regulated, and mortgage lending services that assists in compliance take considerable resources. These costs put a strain on lender profits, and can be frustrating and seem unreasonable. Lenders need to take steps to minimize the negative effects of paying for additional compliance procedures before profits take a disastrous hit.
The stakes are too high for lenders to risk their compliance to save a few bucks. Proactively taking steps to meet lending 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 five steps to help come to terms with and ease the burden of the cost of lending compliance.
#1: Accept that compliance costs are here to stay.
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.
#2: Understand these costs are better than the alternative.
Lenders may consider compliance costs as 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 to recover from.
#3: Implement compliance into your budget
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 an option. From new compliance staff to additional software to handle compliance to vendor fees, lending 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.
Vendor management is more important now than ever before. Vet your vendors, and ask in-depth questions about their processes, and how they help you maintain compliance. 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 lender 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. Request documentation on their internal compliance policy as well.
Know what your vendors are doing for you!
In addition to accepting and preparing for the additional cost of lending compliance, smart lenders sharpen their pencils and…
#5: …Pursue efficient processes.
While lending compliance costs 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 too many resources? Are they as productive as possible? How can your vendors help to increase efficiency? By upping your game with more efficient processes, increased compliance costs can be absorbed without cutting too much into profit.
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 five steps 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 of staying within lending industry compliance.