This year undoubtedly marks the beginning of a new era for the U.S. housing market as lenders turn their focus to increased originations. Despite indications the housing finance market is improving, the industry is still faced with numerous challenges related to high origination and servicing costs, low through-put in mortgage approvals, and longer application to funding cycle times. Regulatory compliance continues to be an increasing concern for the industry. In fact, analysts expect compliance-related spending to be a major priority for financial institutions this year.
More than half of compliance rules related to the Dodd-Frank Act have yet to be defined. Moving forward, industry hurdles will not only include maintaining current compliance requirements, but also operating in a tighter regulatory environment than ever before seen while maintaining profitability. The resulting impact will be on lenders’ core business–bringing loan applications through the door–as added resources will be necessary to remain compliant.
Large and small institutions need to be well equipped to handle added compliance guidelines. This is particularly the case for smaller institutions that do not have significant compliance resources on staff to navigate the changing landscape. It is clear that lenders will face complex issues in managing efficient compliance management within their organizations, but hiring more staff is not always the answer, and certainly not always feasible owing to financial restraints.
The growing costs of regulatory compliance: Is there an end in sight?
As Dodd-Frank is further defined and compliance with other federal laws and statutes increase, compliance costs will certainly continue to grow. In fact, the number of U.S. financial institutions has declined by eight percent since 2010, due in part to higher operational costs. Moving forward, lenders will be faced with Dodd-Frank Qualified Mortgage (QM) rules and new appraisal rules, among others.
Industry experts and analysts concur. In fact, Jeanne Capachin, a senior consultant at Graber Associates, explained in the most recent “Bankers as Buyers” report by William Mills Agency, “Engineering regulatory compliance and transparency into corporate, trade and transaction, customer servicing, and reporting will be top priorities for North American banks and investment services firms.”
In the report, Capachin says that financial institutions will need to leverage compliance-aware data management strategies that incorporate the needs of risk, finance and legal/regulatory operating units at both line-of-business and oversight levels to try to manage compliance costs.
Regulatory compliance versus profitability: It doesn’t have to be an either-or scenario
For community lending institutions, remaining complaint can be a challenge and costly. Additionally, we can expect it to be an even greater challenge in the coming months as the lending environment remains in flux.
But staying abreast of today’s regulatory requirements is challenging enough and often requires a dedicated staff. Managing an efficient compliance management team internally is simply not practical for smaller institutions, however, as it typically requires a significant investment in resources and expertise, such as compliance management, sourcing resources and training.
To remain compliant and profitable, outsourcing is key. By partnering with an experienced team, small and mid-sized institutions can better focus on their core business of bringing in and closing loan applications, while a separate team focuses on their core competency–staying informed of regulatory changes.
Furthermore, when evaluating partners, lenders should look for providers that operate as a consultant. Questions lenders should ask include: Do you utilize contracted subject matter experts dedicated to end-to-end compliance? Are you able to provide guidance through risk evaluations and comprehensive loan data analyses? Do you also have a thoughtfully designed, custom compliance and risk advisory service? The answers to these questions should be yes.
Web-based solutions key for small- and mid-sized lenders
In addition to partnering with industry experts, leveraging modern technology and the right loan origination software is key. In doing so, small- and mid-sized lenders have access to complete functionality from point-of-sale to closing and delivery of loans to the secondary market. Investing in software that is built with the latest web application technology, lenders can seamlessly process mortgages anywhere, anytime.
Critical for smaller institutions, the benefits of a web-based loan origination system include:
►Empowering your staff to be more efficient;
►Minimizing IT overhead and costs;
►Streamlining system maintenance and support; and
►Enhancing customer service.
In addition, institutions should implement technology that allows for customization, thus reducing efforts associated with implementation and ongoing maintenance. This is especially important as the government promises to make additional regulatory changes.
Multi-tier architecture is also critical for community institutions, as it allows lenders to scale origination operations and efficiently handle seasonal increases in loan volumes without adding temporary staff or–when that is not an option–negatively impacting customer satisfaction.
In fact, a November 2012 study by CEB TowerGroup revealed that less than 25 percent of mortgage customers return to the same lender when they shop for their next mortgage due to dissatisfaction; therefore, efficiently managing increases in volume to ensure excellent and consistent service is important to a lender’s competiveness and profitability.
Another consideration for lenders is whether to implement the loan origination software in-house or within the service provider’s hosting facility; therefore, institutions should look for solutions that provide for flexibility.
Cost savings: A start to profitability
By implementing Web-based technology and leveraging a dedicated, outsourced team of subject matter experts, small- and mid-sized lenders can not only better maintain regulatory compliance today and in the future, but also benefit from significant cost savings–leading to greater success and profitability.
For instance, the average cost to originate a typical loan increased in 2012 to $5,163, which includes the total loan production expenses, including commissions, compensation, occupancy and equipment, and other production expenses and corporate allocations.
In evaluating several case studies, as an industry, leveraging Web-based technology and partnering with an experienced compliance team has the potential to save nearly $905 million in production costs each year, based on 2012 home sales.
Remaining focused on core competencies is key to success
Many lenders simply cannot afford the increased headcount, but are burdened with tighter regulatory requirements and challenged with being profitable as the housing market improves. In response, these institutions must think strategically about their operations. Lenders must determine what their core competencies are–bringing in loans–and outsource other business components like compliance. In doing so, lenders will be better equipped for success and profitability.
Lisa Weaver, CMB is senior vice president of mortgage solutions for ISGN. Lisa brings more than 25 years of industry experience to the ISGN team. As senior vice president of mortgage solutions, she is responsible for working with ISGN’s sales and solutions architecture on customer deals, as well as expanding the company’s product offerings. She may be reached by phone at (860) 656-7550 or e-mail [email protected]