While technological advancements have allowed for both new entrants into the mortgage space and for veteran lenders to better streamline the consumer experience, mortgage tech innovators are struggling to keep up in other critical areas of the real estate finance sector – notably appraisals and compliance – leaving the industry exposed between a costly rock and a regulatory hard place, say experts.
Attendees at a recent Urban Institute housing finance symposium cited regulation – both the sheer overlapping volume and the current hyper-aggressive enforcement posture – as the primary challenge of doing business in a post-crisis housing market.
“Technology increases productivity and the customer experience but what we have seen over the past couple of years with the onslaught of regulation is that technology and compliance just increases costs,” noted Larry Platt, a mortgage compliance attorney and partner at Mayer Brown.
Regulatory ‘Spider Web’
Panelists throughout the day-long event agreed that within the life cycle of a loan, regulation has had its most profound impact on the appraisal process.
Jordan Petkovski, chief appraiser and senior vice president at CoreLogic, cited the current “spider web” of multiple and overlapping regulations covering the appraisal process as a large part of the problem but it is by no means the only challenge the appraisal space faces today.
“Everyone knows that the appraisal is the long pole in the tent of the mortgage process,” said Petkovski. “Not enough has changed in the ways appraisals are conducted since 1989.”
That was the year Congress passed the Financial Institutions Reform, Recovery and Enforcement Act. FIRREA imposed regulatory oversight on the appraisal space for the first time by requiring valuations for federal-related mortgage lending transactions. Since then, 2010’s Dodd-Frank Act superimposed its own rules onto the appraisal space as mandated by the Consumer Protection Financial Bureau (CFPB).
Some, but by no means all, of the agencies with appraisal oversight include the CFPB, the Federal Deposit Insurance Corp. (FDIC); National Credit Union Association (NCUA); Office the Comptroller of the Currency (OCC); the Federal Housing Finance Agency (FHFA); while the GSEs – Fannie, Freddie and the 12 Federal Home Loan Banks (FHLBs), the FHA, Veterans Administration (VA) and USDA’s Rural Housing Service all have their own separate and distinct appraisal requirements.
Quicken Loans CEO Bill Emerson added that the lender on average will spend a mere three-to-five days working on a loan file in the 30-days it takes to close a loan.
Improving the appraisal process would significantly advance lenders’ ability to close a loan in short order. “There is a lot of time that can be taken out of that process,” said Emerson.
Despite a plethora of available data these days, Petkovski said technology has not kept pace in the appraisal space where more time is spent on data entry than data analysis. With an expected shortage of appraisers forecast in the coming years, he predicted the appraisal bottleneck in the loan life cycle to get worse before it gets better.
The Rock: Compliance Costs
Over the course of the past decade, the much more complicated legal and regulatory environment has resulted in skyrocketing compliance costs for lenders – in money, time and effort – for a smaller pool of loans, according to Debra Still, president and CEO of Pulte Mortgage.
In 2006, Still noted it cost Pulte Mortgage approximately $3,100 to originate a single home loan. Flash forward to 2016 – following five years of Dodd-Frank Act-inspired mortgage regulations – and the Pulte’s cost per loan stands at $6,100.
Pulte’s legal and compliance costs have likewise doubled over the past decade from $2 million in 2006 to an expected $4 million this year. For context, Still noted that Pulte closed 32,100 mortgage loans in 2006 compared to an expected 13,000 loans by the end of 2016.
“We’ve got [to comply with] federal regulation, we’ve got the states that have their own rules, as well as the different agencies and the [government-sponsored enterprises Fannie Mae and Freddie Mac] and [Federal Housing Administration] loans that have their own compliance management programs for us to follow,” explained Still. “There is quite a bit of redundancy and variation between those.”
Consequently, the size of Pulte’s average loan file has ballooned from about 302 pages in 2006 to some 806 pages today, the former chairman of the Mortgage Bankers Association (MBA) noted.
“We do need technology to run this business. It’s very complex,” said Still. “In order to stay compliant, you do need technology to help human beings hit the deadlines and targets and timeframes that they need to hit for certain regulations.”
The Hard Place: CFPB
Attorney Platt warned that that regulators, specifically the CFPB, have been decidedly unsympathetic to the industry’s struggles to comply with regulation.
“There is an inverse relationship between regulatory compliance and efficiency,” said Platt. “You can’t dissociate technology advances with antiquated laws that are still on the books.”
Platt warned that the CFPB has declared that “failed technology” will no longer be an acceptable barrier to regulatory compliance and that mortgage servicers need to update their technology forthwith… or else.
“Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules,” declared CFPB Director Richard Cordray in June. “Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally.”
Just last month, the Bureau turned up the heat by sending letters to some 44 unnamed mortgage lenders and brokers warning them they might not be in compliance with Home Mortgage Disclosure Act (HMDA) requirements.
The CFPB letters urged lenders to ensure that they are right with HMDA’s reporting requirements while also encouraging the institutions to advise the Bureau of steps they took or plan to take to comply with HMDA.
The subtext of the Bureau’s messaging is not hard to read Platt noted – “We’re coming to get you.”
Yet even when the Bureau attempts to assist firms in doing the right thing, it can be tone deaf, Platt said. Case in point: the CFPB’s Project Catalyst, which seeks to encourage financial technology firms to develop mortgage tech to meet regulatory requirements.
Earlier this year, the Bureau began to offer a “no-action letter” designed to let tech providers to apply for CFPB approval to test a product free of adverse agency action.
“The no-action letter says they have ‘no present intention’ to undertake an enforcement action if you engage in this particular activity. However, we can change our mind and revoke this at any time,” Platt explained. “It doesn’t inspire a lot of confidence while there also issues of transparency, confidentially and proprietary information that are less than clear.”
Setting the Agenda
While the post-crisis mortgage market is decidedly more complicated in the wake of the Dodd-Frank Act-mandated changes, Still said the industry is on the upswing.
“We have spent the last five-to-seven years as lenders reacting to needed implementation of federal regulation, working through the legacy issues and so forth,” explained Still. “This year, 2016, is probably the first year that we are starting to set our own agenda and move our businesses forward.”
Still noted that those who make the most of their compliance management systems are those best equipped to thrive in the post-crisis mortgage market, despite the regulatory burden.
“The ability-to-repay rule may need a tweak or two but I think it has absolutely helped limit that race to the bottom in terms of sliding down that credit scale,” said Still. “I think companies that embrace the spirit of all this consumer regulation will ultimately have a competitive edge.”
This article was written exclusively for GoRion.