In the years following the mortgage crisis, many lenders – particularly small and mid-size financial institutions and originators – have had difficulty keeping up with the changing regulatory landscape.
Regulatory compliance continues to be an increasing concern for the industry, with analysts expecting compliance-related spending to be a priority for financial institutions this year. But the industry hurdles will not only be maintaining compliance, but also increasing and retaining membership.
While credit unions have collectively increased assets by more than 30% over the past five years, focus on their core business may be at risk as the financial burden and focus of added resources needed to remain compliant threaten to interfere with continued growth.
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Many larger institutions are fairly well equipped to handle added compliance guidelines, but smaller, community institutions will likely face complex issues in managing efficient compliance management within their organizations throughout 2013 and beyond. Hiring more staff, however, is not always the answer.
Credit unions can find their solution in outsourcing compliance functions to an experienced team, reducing the high costs and burden of managing internally. In doing so, credit unions can better focus on driving member satisfaction and loyalty while a separate team focus on its core competency of staying abreast of regulatory changes.
The Consumer Financial Protection Bureau, for example, has introduced significant rule changes in an effort to protect consumers from abusive lending practices. While these well-intended rules establish guardrails for a post-crisis lending era, failure to maintain compliance with these guidelines can stall growth, undermine acquisition plans, hinder profitability and even damage a credit union's reputation.
In order to adhere to regulatory guidelines and avoid penalties – up to $5,000 per day for a violation, $25,000 for a known violation and $1 million for a reckless violation – credit unions should consider leveraging an outsourced mock audit solution to conduct a "dry run" of a CFPB audit to discover and cure potential violations prior to the actual regulatory review.
But outsourcing is not the cure-all. Credit unions should also leverage modern technology and Web-based loan origination software, gaining access to complete functionality from point-of-sale to closing and delivery of loans to the secondary market. By utilizing Web application technology, credit unions can not only seamlessly process mortgages anywhere, anytime, but benefit by empowering staff to be more efficient; significantly minimizing IT overhead and costs; streamlining system maintenance and support; and enhancing member service.
With additional regulatory changes undoubtedly on the horizon, credit unions should also invest in technology that allows for customization to effectively and efficiently manage ongoing maintenance.
Credit unions originated a record amount of loans in 2012, with more than $330 billion nationwide. The lending landscape is beginning to slow down and transition from a refinance to purchase market. To effectively handle this increase in loan production, credit unions should consider implementing a multi-tier architecture to scale operations, which addresses staffing variability.
A case in point – a small community financial institution recently increased volume output without expanding internal resources, generating an average of $8 million a month in loan production.
The institution's process began with the loan officer, who originated the loan and obtained the credit report and borrower documents. The institution then leveraged an outsourced team of experts to support and speed up the document review process, performing nightly checks of pending loan applications and verifying documents for accuracy and compliance. The financial institution monitored the process by viewing dashboard style reporting.
As a result, the institution increased production by taking a manufacturing approach in which loans were underwritten and closed using a compartmentalization process, similar to cars on an assembly line. The flexibility and scalability of Web-based technology allowed the institution to close loans in as little as 15 days. Now, its average monthly sales have reached more than $8 million and continue to increase, expecting to hit $20 million per month by the end of 2013 – all while improving member satisfaction.
The community institution also realized significant cost savings. 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. As an industry, leveraging technology and partnering with an experienced mortgage team has the potential to save nearly $905 million in production costs each year, based on 2012 home sales.
As the government promises to further tighten regulatory guidelines and the industry returns to a purchase market, many small, community financial institutions are asking themselves how to efficiently manage increases in loan production cost-effectively and without adding temporary staff – all while maintaining superior member satisfaction.
When credit unions focus on their core competencies and outsource other business operations like compliance and component processes, they are ultimately able to better navigate the changing regulatory landscape, increase lending and improve member service.
Lisa M. Weaver is senior vice president of mortgage solutions for ISGN in Palm Bay, Fla.
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