In November 2015, about a month after the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rule took effect, the Mortgage Bankers Association (MBA) released a report showing how much mortgage companies saw their profit margins drop due mainly to all of the expense of trying to implement the new rule.
The increased margins that mortgage companies had gained since the financial crisis were decimated by 60%, according to the MBA. Net gains in the third quarter of 2015 were $1,238 per loan – but by the end of the fourth quarter of 2015, they had been reduced drastically to $493 per loan.
Despite the huge decrease in the average profit per loan, mortgage companies stuck it out. More recently, RealtyTrac reported that loan originations had increased to 1.9 million in the second quarter – an increase of 26% compared with a year earlier. By the second quarter of this year, the net profit increased to $1,686 per loan – up from $825 per loan.
From these numbers, it is pretty obvious that profit margins decreased substantially when TRID went into effect. However, during the past six months, profit margins have rebounded – almost back to the original level before the crisis.
So, why is that?
Part of the reason is that mortgage companies have been investing in, and making more effective use of, technology. Management at many mortgage companies has realized that it is better to pay the price for a solid system rather than paying huge fines to the CFPB – or any other federal regulatory body – for noncompliance.
From a risk perspective, noncompliance affects a mortgage company in three different ways. First, there are the fines and the impact those can have on a company’s bottom line. Second, there is the potential damage to a company’s brand. This is hard to measure, as reputation damage affects people’s perceptions of the company and can have an effect on both consumers and business partners. Third, a company’s loans would be deemed riskier, and the secondary market could price these loans at a lower rate. Again, this is hard to measure specifically – but it can take years to recover.
Some larger lenders are using technology to get in front of preparation for the requirements of the next regulatory change: new reporting requirements under the Home Mortgage Disclosure Act (HMDA). Mortgage companies have been collecting HMDA data since 1975. Despite the many updates over the years, the CFPB promises to make sweeping changes to this regulation. The new updated ruling by the CFPB will take effect on Jan. 1, 2017, and excludes low-volume depository institutions. These institutions have until Jan. 1, 2018, to become compliant.
In order to preserve their profits, all lenders, not just the larger ones, should leverage technology to help ensure compliance. Technology is one of the most common tools used by the mortgage companies to help meet regulatory requirements.
Further, mortgage companies should create a strategy now regarding their future approach to managing new compliance requirements. That is, they should build a system in-house or seek a third-party vendor for help.
Mortgage companies have always turned to technology to help create efficiencies and to improve their profit margins.
Preparing for HMDA (or any other regulatory changes, for that matter) early will be the key to insulating profits and surviving in this highly regulated climate.
Pramod Karachur is project manager for Indisoft, a provider of compliance, vendor management and valuation solutions to the mortgage industry. The company is celebrating 10 years of business in the mortgage industry this year.