NMP - April 2017 - 86
The Real Impact o
Compliance on In
APRIL 2017 n National Mortgage Professional Magazine n
sk any mortgage industry participant to guess why the
cost to originate a mortgage loan grew to in excess of
$8,000 per loan in the post Dodd-Frank era and you'll
get a single answer. Everyone knows that complying
with the many new regulatory and investor
requirements has sent costs through the roof. But
quantifying the real impact of compliance on the lending industry has
been more difficult.
Trade organizations, like the Mortgage Bankers Association
(MBA), routinely survey their members to arrive at benchmark
operating costs. It was the MBA that first revealed overall costs to
originate in excess of $8,000, though now that number has fallen to
just below $7,000 per loan. Even so, with MBA membership skewed
toward the larger institutions, there were many questions about the
impact for compliance on other firms.
To find the answers, National Mortgage Professional Magazine
teamed up with real estate services provider WFG National Title
Company to survey a broader segment of industry players over a
two-year period. Our goal was to gain insight into the real impacts of
compliance, both on costs and lender processes employed.
In all, we asked more than 10,000 mortgage professionals to take
part in an online survey produced and distributed by ColemanWick,
an independent marketing research firm based in Cleveland, Ohio.
Only lenders and originators were eligible to participate-vendors,
service providers and consultants were not provided access to the
survey if they identified themselves as such.
Of the qualified respondents, 58 percent identified themselves as
"lenders" (whether bank or non-bank) with the remainder identifying
themselves as "originators" or with brokerages. As expected given
the general size distribution of firms in the industry, the survey
population leaned to the smaller to mid-sized lending segment with
62 percent of respondents reporting less than $100 million in 2014
loan originations. Only one percent originated more than $100 billion,
while 26 percent did less than $25 million in business in 2014.
All lending channels (warehouse, correspondent, wholesale, retail
and other) were represented in the survey as were lending
institutions of all types (credit union, bank, non-bank lender).
impact on their businesses [see Figure 01]. Nearly 70 percent
responded with a "4" or "5," the two strongest responses indicating
substantial increase to the cost of origination. Nearly 90 percent
chose "3" or above.
As we said, everybody knows compliance is driving costs, but by
how much? So we asked our respondents to estimate the
percentage by which their costs have risen as a result of compliance
requirements, comparing costs post 2013 to those before.
Nearly half (45 percent) estimated cost increases of 11 to 30
percent as a result of new regulatory and compliance requirements,
although many respondents skewed closer to an increase ranging
from 11 to 20 percent [see Figure 02]. Seven percent of those
responding felt their costs had increased between 71 and 100
percent due to compliance demands.
Seeing costs double is a definite warning flag, but we wanted to
find out if these costs might be offset by other revenue. We needed
to understand what the overall impact was on their revenue. To find
out we asked respondents to estimate, as a percentage of their
company's annual gross revenue, the approximate annual costs
expended for the company's combined efforts for compliance,
internal audit and quality control.
The increasing cost of compliance
We wanted to know much regulatory changes and new compliance
requirements had impacted our respondents' cost to originate a
mortgage, focusing primarily on changes made since 2013. We
asked respondents to rate the impact on a scale of "1" to "5" with
"1" representing no increase to the cost of origination from
regulatory changes and "5" representing substantial increase to the
cost of origination because of regulatory changes.
Nearly a quarter (23 percent) of the companies we surveyed
estimated that over four percent of their firm's gross revenues were put
toward the costs of compliance, internal auditing and quality control [see
Figure 03]. Another 30 percent of respondents believed those costs to
fall between two and four percent of their annual gross revenues.
Only 2 percent of respondents felt that, in general, regulatory
changes and requirements to lenders and originators had little to no
The reason everything takes longer
At least some of the increase in compliance-related costs that
lenders are seeing has to do with increasing cycle times.
Compliance slows down the process.