As a mortgage lending services company, we have seen big changes lately. Over the past few years, the mortgage industry has faced multiple significant regulatory changes. The Office of the Comptroller of the Currency, the Consumer Finance Protection Bureau, the Federal Reserve, and the Federal Deposit Insurance Corporation, (just to name a few) all have issued new rules and regulations that affect our industry. And like everything else, these changes come with a price.
The overall cost of originating a loan has gone from $2,291 per loan in 2008 to $6,769 in 2014, according to the MBA, with compliance costs being the fastest growing operational costs in our industry. Given the large amount of discussion in the mortgage industry about increased regulations, and the rising costs associated, Fannie Mae’s Economic and Strategic Research Group surveyed senior mortgage executives in August 2014 via its quarterly Mortgage Lender Sentiment Survey to understand how lenders view the impact of new regulations on their business practices.
According to the survey of senior mortgage officials, “Compliance Risk” was voted as the TOP AREA OF FOCUS by the majority of lenders surveyed. 72% of respondents said they paid more for compliance in 2014 than they did in 2013. The median increase in compliance spending was close to 30%. And with TRID and other pending regulations, those compliance costs are expected to increase even more in 2015.
Specific survey findings include:
- 72 percent of the lenders surveyed say the new regulations have had “significant” impact on their business. Mid-sized lenders (84%) are more likely than smaller lenders (62%) to report "significant" impact, with 73 percent of larger lenders reporting "significant" impact.”
- 72 percent of lenders reported spending more on compliance in 2014 than in 2013. Across all lenders surveyed, institutions reported a median increase of nearly 30 percent in compliance spending. Mid-sized lenders reported the largest increase of 50 percent, on average.
- Post-closing QC review and servicing are the business functions most commonly reported as being outsourced as a result of increased regulations and associated costs. In addition, mid-sized lenders are more likely than smaller lenders to outsource compliance/legal functions.
- Compliance risk is reported as the top area of focus by most lenders. In addition, larger lenders are more concerned with operational risk while smaller lenders are more concerned with credit risk and interest rate risk.
Lenders also reported increased reliance on outsourcing due to increased regulations and associated costs, particularly in relation to post-closing Quality Control (QC) review and servicing.
With costs steadily increasing for the majority of lenders, and greater partnering with vendors, the challenge is to figure out how to meet compliance requirements in the most cost-effective, least labor-intensive manner possible. The answer….TECHNOLOGY
Technology is changing the mortgage industry. TRID, of course, is only the most recent compliance challenge that technology is trying to address. 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, the same two choices always 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. However, third-party relationships are closely monitored by the CFPB and will result in fines if not managed responsibly.
Lenders will be held accountable for managing and maintaining their third-party vendors to ensure compliance with CFPB standards. A best practice for outsourcing compliance is to have a mixture of in-house knowledge and solid third-party vendor relationships that cover all of the compliance areas—documentation, fair lending, fraud, reporting, etc. The regulatory environment is changing too rapidly to not cover all of your compliance bases and guarantee your business’s and customers’ safety.
Lenders are finding that using third-party vendors that offer advanced technology and larger staffs can provide economies of scale that result in verifications being completed faster and at less cost than if the lenders did the work themselves. In fact, many lenders have discovered that the technology offered by third-party vendors not only takes tedious verification work off their desks, but they get answers so quickly and the data is so reliable, they are able to make better-informed lending decisions.
New regulations recommend that lenders thoroughly vet, monitor and manage each third-party vendor they use throughout the loan process. Unfortunately, this can be expensive, and more importantly time consuming. Because regulatory guidelines for vetting third-party verification providers run the gamut from “very specific” to “somewhat vague,” many lenders are unsure of the level of due diligence they should undertake when scrutinizing each new vendor.
In this day and age, lenders need to take an extremely thorough approach to be safe –time and money quickly add up when you must vet multiple third-party companies. Then, once all the evaluations are complete and you’ve entered into relationships with various vendors, you must continue to monitor the process at each vendor to manage risk and ensure all are regularly updating procedures to remain in compliance. Whew! Exhausting, time consuming and potentially expensive, right? Well, it doesn’t have to be.
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 it aids in compliance with all industry regulators and lenders.
By effectively blending in-house expertise and qualified third party vendors working together and using technology 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. Now, that’s a good thing!