Over the past couple of years, the mortgage industry has seen lenders of all shapes and sizes struggle to accommodate the increasing regulation brought about by Dodd-Frank legislation and TRID. The 2016 presidential campaign saw promises of decreased regulation which have yet to come to fruition. In the next couple of months, as we come up on the two year anniversary of the implementation of TRID, it begs the question will our industry ever see these promised changes to the regulatory environment, how much more will it cost us and what has it cost us already?
The answer to this question is a paradox, both simple and complex. The short answer is that compliance is here to stay, has already cost billions of dollars and millions of paperwork hours and will likely continue to keep operating costs at historical highs for lenders across the board. The long answer is that the true cost is difficult if not impossible to quantify.
What we do know is:
- Pre Dodd-Frank/TRID regulatory environment contributed to the financial crisis of 2008
- According to a PBS article, the financial crisis of 2008 cost:
- $23 trillion in government bailouts and aid programs paid for by the American tax payer
- Estimated losses of $7 trillion in the real estate industry due mainly to loss in property values
- $11 trillion in losses due to the stock market decline
- $3.4 trillion in retirement account losses
The estimated $24 billion spent on Dodd-Frank legislation and TRID changes, pales in comparison to the financial havoc wreaked by the 2008 collapse. It is important to note however that this isn’t to say these changes and costs haven’t been burdensome for lenders and borrowers alike.
The graph below from the Mortgage Banker’s Association illustrates origination costs from 2011 onward.
As the graph illustrates, origination costs have been steadily rising. Production expenses peaked in 2014, which can be attributed to significant upfront investments companies made to prepare for TRID. Although these expenses have since leveled off they have remained historically high at around $6,969 per loan with many researchers and industry experts attributing these high costs to the compliance burden. The primary drivers behind the compliance burden being:
- Need for more staff including compliance personnel, compliance officers, legal counsel, quality control and quality assurance personnel
- Increased need for more technology, better technology, and technology based services and infrastructure
While the brunt of this burden has been borne by lenders, it has trickled down to borrowers as well in the form of increased fees. According to Bankrate.com mortgage fees to borrowers rose 1.6% over the course of 2016, and although this is a relatively small increase it is still reflective of the cost of increased regulation.
It is important to keep in mind that should regulation continue to become increasingly complex and stringent it will continue to become more costly to both lenders and borrowers. As Mortgage Compliance Magazine puts it, “With each new rulemaking comes a new set of complications and costs, triggering a ripple effect as lenders are forced to make the choice between adapting their operations or leaving the space entirely.” That being said although it is always unfortunate to see lenders closing their doors, forced out of the industry due to the cost of increased compliance and regulation, it is necessary to keep in mind that much of the regulation we see today is in place for a reason.
We only have to look back to 2008 to be reminded of what can happen when the necessary controls are not in place. Elizabeth Warren described it best in a letter to congress in 2011 saying, “If there is a lesson from the past five years, it’s this: We all lose when consumers cannot readily determine whether they can afford to pay back their loans. We all lose when lenders routinely sell credit in ways that hide the risks and costs. We all lose when a broken consumer credit system magnifies risks throughout the economy. We can do better.” Current legislation and regulation is an attempt at doing better.
Is current regulation the best we can do? Arguably it is not. There is certainly regulation in place that has had unintended consequences imposing undue financial burdens on lenders who are just trying to play by the rules. As time goes by and CFPB rules are examined, challenged, revised, and revisited, we as an industry will hopefully find some common ground where the necessary controls and regulations are in place to protect consumers without becoming an unmanageable financial burden for lenders.