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Bank survey indicates increased compliance costs

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Banking, Inside the Beltway
Thursday, January 23, 2020

A majority of mortgage lenders have seen an increase in compliance costs related to recent regulatory reforms, according to the American Bankers Association’s (ABA) 26th Real Estate Lending Survey. The results also indicated an uptick in loans sourced through retail channels and insight about fintech investments and non-QM lending activity.

The survey includes feedback from 180 banks, collected from March 6, 2019, to May 6, 2019, reflecting in most cases calendar year or year-end results. Some data reflect banks’ activities and expectations at the time it was gathered.

Approximately 63 percent of survey respondents indicated that their compliance costs were higher in 2018 as a result of recent regulatory reforms. Another 36 percent said their compliance costs “leveled out” in 2018 and only 2 percent reported lower compliance costs than the year before.

Drivers of increased compliance costs

Sixty-nine percent of respondents said their legal/regulatory costs increased because of new regulation, but only a third of respondents (33 percent) said they hired more staff to handle new regulations. Another 10 percent said they planned to hire additional staff to help in that regard. 

The biggest driver of increased compliance costs related to new regulations is education and training, the results indicate, according to 72 percent of respondents. The next three largest expense increases were for technology (66 percent), time allocation (65 percent) loss of efficiency (62 percent). Increased costs related to third-party vendor services (56 percent) and personnel (51 percent) rounded out the top cost drivers cited by more than half of respondents.

Less than a third of respondents (31 percent) indicated that their increased compliance costs stemmed from increased paperwork and/or the complexity of disclosures, and even fewer (19 percent) said they stemmed from increased time between loan application and final loan approval as a result of new regulations. Only 11 percent reported a loss of profitable business lines related to requirements.

Origination stats

Among residential mortgage loans, 1-4 family loans accounted for the highest volume by far among respondents, and indicated a steady increase in the ratio of loan purchases compared with refinances over the past three years examined by the survey. The results indicate that purchases accounted for 62 percent of 1-4 family loan originations versus 38 percent of refinances in 2018, compared with 60 percent purchase originations in 2017 and 53 percent originations in 2016. 

Eighty-eight percent of loan originations were sourced through a retail channel in 2018, up from 83 percent in 2017 and 81 percent in 2016. 

The results indicated a slight drop in the percentage of single-family mortgage loans to first-time home buyers from 2017 to 2018, from 17 percent to 16 percent. 

QM loan takeaways

Qualified Mortgages (QM) made up 91 percent of the average respondent’s 2018 production. At 9 percent, the average production share of non-QM loans for the same year tied with 2016 for the lowest over the six years compared in the survey. The highest average percentage of non-QM loan production listed in the results came in 2013 at 16 percent.

Seventy-two percent of lenders originating non-QM loans hold them as portfolio investments, whereas 4 percent sell them to secondary market investors and 5 percent engage in all manners of non-QM sale activity.

The most common reason respondents gave for non-QM loans failing to meet QM standards is that they exceeded the maximum allowable debt-to-income (DTI) ratio, according to 47 percent of respondents.

Fintech investment

The survey showed that 39 percent of respondents invested in mortgage-related fintech capabilities in 2018, the highest percentage of which indicated application processing (43 percent) and customer acquisition/origination (42 percent) as their primary areas of focus with regard to implementation.

Another 34.2 percent indicated plans to invest in mortgage-related fintech in the next 12 months and 15.8 percent said they planned to do so in the next 12-24 months. Cost is one of the biggest obstacles to implementing fintech according to 77 percent of respondents, followed by the integration of fintech with existing core systems (62 percent).

Forty-one percent said they were concerned about working with third-party fintech providers, in terms of oversight, tracking and other factors. Another 39 percent said regulatory uncertainty was their biggest concern with regard to investing in fintech. 

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