REQUIRED READING: In today's environment, too many lenders feel like they've been thrust into the middle of a circus act. With all of the new restrictions they're facing, they are not far off the mark.
The regulatory three-ring circus in the mortgage arena might be a thrill-a-minute for regulators, but lenders are getting weary of the nonstop juggling. Few lenders appear to be entertained by being turned into circus performers in the ‘compliance and regulations’ sideshow, particularly without the right technology to make sure the i's are dotted and t's are crossed.
But without the right technology, more bodies will be thrown into the proverbial lion's den – and that higher body count means the price of the ticket goes up for both the surviving lenders and the borrowers.
In addition, lenders still have concerns about the proverbial elephant in the room: the qualified residential mortgage (QRM) and how that regulation will transform itself within the Dodd-Frank Act. And for the small to midsize lenders, affordability is a primary concern. How much is this regulatory burden going to cost community banks, credit unions and midsize mortgage lenders? Â
For small- to midsize lenders, in particular, regulatory burdens and their related costs represent the lion's share of the problems that need to be tamed. In a circus, a number of people could enter the cage with sophisticated equipment that would simply kill or tranquilize the lion rather than tame it. But that, of course, would ruin the show.
In the mortgage ring, that beast is generally a 30-year, fixed-rate mortgage. Errors, fraud and other issues that impair compliance and quality are that beast's teeth and claws. The trick is finding a solution that isn't going to bite too far into profit margins. Adding more staff, technology applications and infrastructure may be realistic for a mega-lender, but that's not as viable an option for smaller financial institutions.
For community banks and credit unions trying to tame this regulatory beast, an affordable strategy might be software as a service (SaaS), which provides a basic, uncomplicated approach that helps to alleviate the pressure on smaller financial institutions.
SaaS offers comprehensive control on compliance changes without large investments and up-front costs. With SaaS, compliance solutions are updated on a monthly basis without lenders having to add extra IT talent or new infrastructure. Think of it as the technology partner that can do the heavy lifting with limited infrastructure, as opposed to one who needs to be ‘managed’ by a team of experts with each changing mood of the lions that stepped into the ring.
Plus, some SaaS technology partners make costs even more affordable by charging on a per-loan basis for use of the technology – and only after the loan is funded. A good SaaS technology partner will offer enhanced compliance-promoting services from beginning to end of the loan origination process, all the way through post-closing and secondary sale, and will make sure that the loan has consistent and accurate data throughout the entire process.
The bottom line is that when it comes to pricing, SaaS technologies that charge only for closed loans create a perfect value proposition for small and midsize mortgage banks, community banks and credit unions, because they allow lenders to align loan compliance with loan costs.
The lion sleeps tonight
Let's go back to our circus act for a minute. Can you imagine what it would feel like to enter the ring if no one fed the lion before the act? Hunger has a way of fueling wild animals' aggression.
Come to think of it, wild animals aren't the only ones with that response. After the subprime crisis and years of deregulation, regulatory enforcement has become much more aggressive now than it has been in the past, particularly with the Consumer Federal Protection Bureau established as a functioning agency.
It's almost like regulators have also gone without food, which, in their case, is the equivalent of control, consistency and more conservative terms. With regulators anxious to take a bite out of lenders that make even the smallest infractions, it is more important than ever to use a compliance-promoting solution that consistently checks for federal, state and local rules, and ensures that a good-faith estimate aligns properly from point-of-sale to the closing table.
Just as lion tamers use separate tools interactively at different times, all compliance services need to function interactively through the workflow. It's a good idea to find a solution that offers not only per-funded-loan pricing, but also multiple document and fraud-detection solutions integrated into one operational system. The more streamlined and direct, the better. After all, using the wrong equipment could be as bad as not using any protection at all.Â
When it comes to loans, reducing mistakes early in the process will bring the best results in the end. Find a technology that keeps data consistent and on track for high quality and full compliance through alerts and notifications on an automated basis, and make sure that process starts early.Â
Mortgage lenders may not need to deal with lions and tigers and bears, but they do have to provide strong customer service for their borrowers while adhering to compliance and squeezing out a profit margin. That is not an easy task, and mistakes in any one of these areas come at a cost.Â
The reason SaaS – and, specifically, per-funded-loan pricing models – is great for these issues is because it can roll other purchased pieces – disclosures, closing documents, appraisals, product and pricing services and interaction – all into one offering, and it can maintain those integrations without the user ever having to make adjustments to its technology systems. From the technology integration itself, to the industry's many changing regulations and guidelines, users can be confident of consistent and accurate information. The end result is a smoother process and overall better service for the borrower.
The mortgage industry is not a circus, and the last thing investors need from lenders are greater risks. And the last thing lenders need from their technology providers is higher costs in reducing those risks. Borrowers certainly don't want their fees increased because lenders need to widen their margins. They want a safe, comforting and cost-appropriate experience when transacting their mortgages. And unlike with a circus, they don't want any unnecessary danger or excitement.
The compliance circus, however, is not going away, and lenders will need to operate effectively in the future while managing software upgrades and costs. For this reason, lenders are wise to consider moving forward with a pre-funded-loan SaaS model rather than making a big investment and, in essence, going backward.
Like circus owners who understand performance liabilities and risks behind the scenes, lenders also realize risk management measures exist in the back office. In both cases, however, the one important thing is that paying customers need to enjoy the show, because that's what keeps them coming back.
Jonathan Corr is chief operating officer at Ellie Mae, based in Pleasanton, Calif. He can be reached at (877) 355-4362.
