2014 was another extremely challenging year for the mortgage industry. Lenders found themselves in an environment that required them to be competitive and compliant, as well as efficient and profitable. In consequence, while the pressure to produce remains constant, the cost to originate continues to skyrocket, requiring lenders to maintain compliance while trying to contain costs.
The mortgage industry has been overwhelmed with a flood of new rules and regulations while dealing with unpredictable origination volumes. This combination has put intense pressure on mortgage lenders to update compliance processes while producing new business volume. Violations can carry severe financial penalties or possible civil actions. Responsibility now falls squarely on the lenders’ shoulders. With the scope of regulation now reaching into all aspects of mortgage operations the days are long gone when a small to mid-sized mortgage lender can go it alone or with outdated technology. In this lending environment, this is simply too risky.
Increased compliance scrutiny and pain of non-compliance has been a multi-year trend that has continued to a point of exhausting lenders and the trend will likely continue. Lenders have made the easy corrections to their environment and now need to assess more thoughtful ways to meet the increased demands.
At the same time, as lenders are feeling greater scrutiny from CFPB and other agencies – at both the federal and state level, they are also experiencing increased demands on their IT infrastructure (security, cyber threats, hardware requirements etc.) and heightened competition with the need to produce sustainable results. So, not only must they ensure compliance throughout the origination process, they must also ensure their IT demands are met without an increase to their budgets.
These trends are getting worse and while many lenders may have made the simple process changes they must now take a more proactive approach to finding better resolutions if they plan to survive in the future.
Higher Costs Originating Loans
To meet these ever growing challenges, lenders’ overhead has increased significantly to support back-office compliance, which is driving up origination expenses to the point that lenders current practices are too expensive.
That’s on top of the record low production profit of $150 per loan the industry has experienced in 2014 according to Mortgage Bankers Association (MBA) data.
MBA chief economist Michael Fratantoni stated that “The losses are not a result of lenders aggressively pricing mortgages in order to make up for lower volume. Rather, it is due to higher expenses, especially because lenders have had to add back office staff to deal with new compliance requirements put in place after the mortgage crisis.”
These market conditions are putting intense pressure on all lenders, but especially small to mid-sized lenders trying to keep pace with their larger counterparts. With back office costs sky rocketing small and mid-sized lenders must find a way to contain these costs if they want to remain competitive and survive.
So what is the answer?
Can small and mid-sized lenders continue to compete, or are the larger lenders going to continue to throw resources and bodies at the challenges to gain more and more market share? The answer is clear, if small and mid-sized lenders continue to do business as usual and are constantly reacting to changing market conditions with outdated technology, they will not survive.
The good news is there is a way for these lenders to compliantly compete and be able to contain the rising costs to originate.
Automation the Great Equalizer for Small to Mid-sized Lenders
Small and mid-sized lenders need to realize that the right technology and automation can be the great equalizer. That sounds great but how can lenders benefit from automation while also containing their IT costs and infrastructure?
Advanced fully hosted mortgage Software as a Service (SaaS) allows lenders to reduce ownership and costly upgrades, simplify and accelerate system implementation, enjoy worry-free security, and benefit from a centralized data repository. For most lenders, technology ownership is a fixed cost for a resource that rarely reaches its expected return on investment. Further, loan origination systems are notorious for slow implementation and are subject to numerous annual upgrades that can be either expensive, time consuming, or both, to deploy. As a result, the right SaaS solution has become a prime candidate for outsourcing, especially for growing lenders.
Mortgage lenders should consider the following when assessing a SaaS LOS provider:
Does the vendor provide a “test drive” environment that allows access to the platform to validate that it will work for those lenders’ specific needs?
The key, especially for small to mid-sized lenders, is in an out-of-the-box solution with lending best practices already built into the solution versus a system that requires significant configuration and support by the lender just to originate a loan. The out-of-the-box solution minimizes the time needed for implementation and eases the burden for the lender to proactively address today’s most challenging market conditions.
Does the vendor have a transparent and collaborative culture that performs as the lenders IT partner?
Is the system based on the right technical infrastructure for stability and data access?
What is the vendor’s track record of uptime interruptions? Has the provider had costly outages in the past? Does the database run on MS SQL? Does the vendor’s system run on archaic Flat files vs. a truly Relational Database? Will you have easy Data Access? How robust is the network/data center?
Does the vendor support third party vendors in a best of breed model or promote internal inferior products?
Does the system support the industries best vendors with high levels of feature functionality with seamless integration? Does the LOS provider charge vendors with high “click fees that results in the lender paying for higher charges? How much effort is needed to configure the system for the lenders’ specific requirements?
Is the solution competitively priced?
In addition to meeting the IT infrastructure demands, small and mid-sized lenders must address the ever growing burden of compliance. Lenders of this size simply do not have the resources to constantly monitor, proactively address compliance changes, and interpret how these changes will impact their organization. Remember, it is not just the rising costs to comply, but also the significant ramifications for non compliance that lenders must be able to handle.
Therefore, lenders need to strategically partner with a technology provider that can handle these compliance mandates. The provider must have a compliance focus, one that proactively monitors the changing compliance landscape, follows best practice compliance standards, and streamlines application data security. The solution should provide lenders with the ability to ensure that compliance policies and procedures are adhered to while efficiently completing the lending process.
In today’s highly competitive marketplace just having a SaaS lending solution with compliance is no longer enough. It takes the right provider to be able to deliver a cost effective, highly compliant solution with the right IT footprint for small and mid-sized lenders to succeed.
The right solution needs to be delivered from a vendor that has an extensive mortgage banking background. This background is critical for the success of the small to mid-sized lender. Technology is only a great equalizer when it actually solves and adapts to specific market conditions within the mortgage industry, thus requiring extensive mortgage banking expertise from the provider. Providers who are just delivering SaaS technology and hope that the small and mid-sized lender has the staff, resources and knowledge to constantly customize the technology needed to realize that their product will not contain costs, nor level the playing field. That is why the provider’s extensive mortgage banking experience is so very important.
Another key aspect in leveraging the provider’s mortgage banking expertise is on the compliance front. It is not enough to know the new rules and regulations, new disclosure requirements, or the upcoming change to the TIL, but the provider must be able to interpret the new rules, be able to quickly incorporate changes into lending solution, and work with lender as a partner so that the lender understands the potential impact on their business.
In addition to extensive mortgage banking expertise, the provider needs to be nimble and able to quickly and cost effectively change with today’s constantly changing market conditions. It is not enough to just incorporate the latest regulatory change but your vendor must have the foresight to already be working on what’s next. Large, public vendors that have layers upon layers of management and elaborate chains of command often can’t change and adapt with market conditions as quickly as needed.
If small and mid-sized lenders are going to remain competitive and survive in these market conditions they need a vendor who can change direction on a dime and provide them the insight, IT infrastructure, and strict compliance needed. This all must to be done in the most cost effective manner possible if it is truly going to be the great equalizer for small and mid-sized lenders.
Small and mid-sized lenders can compete and succeed in today’s challenging mortgage environment. It comes down to partnering with the right provider to deliver the most advanced SaaS solutions that easily address compliance and contain IT costs. The time to explore all your lending solution options is now.
About The Author
Lionel Urban serves as CEO, founding partner and chairman of the board for PCLender, LLC; in this role, he is responsible for the overall strategic direction and the vision behind the technology development of the company. Prior founding PCLender, LLC, Lionel was a co-founder and CEO of Navigator Lending Solutions, Inc. (NavPros) a fulfilment services company specializing in mortgage banking services. Prior to NavPros Lionel was the co-founder, president and CEO of PCLender.com, Inc. from 1997 to 2011. During this time, he supervised the development of a pioneering, Internet-based mortgage technology platform that supports banks, credit unions and mortgage companies across the country. Since 1987 Lionel has acquired mortgage banking experience in management, origination, operations, secondary marketing and compliance roles within banks, credit unions and independent mortgage bankers.