Risky Business

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The Latest S e c on da r y M a r k e t a na ly t ic s se r v ic i ng or ig i nat ion ORIGINATION Ellie Mae Chimes in on Hidden Costs of Compliance The company offers insight on the long-term effects of the stringent compliance regulations set forth by the CFPB. A s the mortgage finance industry battens down the hatches and prepares for this year's "tidal wave" of regulatory changes to take effect in 2014, Ellie Mae takes a look at "the hidden costs of compliance" in its newest white paper. With origination costs on the rise (Ellie Mae cited data from the Mortgage Bankers Association showing the average cost of origination climbing from $2,291 in 2008 to $3,353 in Q 3 2012) and more than 350 federal, state, and local laws governing 38 | The M Report loans, the cost of doing business the right way is a major concern for those companies trying to turn a profit. However, while many of those costs can be measured and predicted—the yearly salary of a new compliance officer, for instance— Ellie Mae points to a number of factors that some firms may not have thought about. "What is the cost of lost productivity, if underwriters are now spending a significant portion of their time manually checking and rechecking for compliance issues and addressing and reworking investor exceptions?" the company asked. "How much C-level time is now spent on compliance assurance and reporting? This is time that is not going into growing the business." Ironically, Ellie Mae notes that some of the new rules designed to ensure compliance may have the unintended effect of undermining it. For example, the Consumer Financial Protection Bureau's (CFPB) new rules on loan originator (LO) compensation removes originators' incentive to make sure timely disclosures are made and that all paperwork is handled to a T. "Now that their compensation is predetermined by law, we are hearing that LOs have less incentive to recheck their work, since they know they will be paid—regardless of what happens to the loan down the line," said Parvesh Sahi, VP of compliance solutions at Ellie Mae. Another problem area is the issue of data reporting, especially when different agencies can't agree on definitions. When different systems require different data, lenders may have to resort to "mapping," a process by which an individual goes through each required field on each different system and tries to define which data is required. Then there are the costs of data testing and scrubbing as regulators and investors demand thorough reviews of 100 percent of production. "On the plus side, having comprehensive, accurate data that documents key lending decisions can reduce the hidden cost of compliance," explained John Haring, compliance enablement manager at Ellie Mae. "On the most fundamental level, it can reduce fines, penalties, and the need to remediate problems. It can also shorten the length of the exams, which means fewer days and less out-of-pocket costs for the examiners." "As a result, both the hard costs of penalties and the soft costs of the examinations can be tracked back to data integrity," he added. To combat hidden costs, Ellie Mae recommends automated compliance systems, which can help companies address costs and risks—though they're no substitute for trained compliance experts. "In today's zero-tolerance environment, compliance has moved from the back office to become an essential mission-critical function. Given what is at stake, lenders, investors, and regulators are all evaluating automated solutions to take cost, human error, and risk out of the mortgage business," the paper concluded. The full white paper can be found on Ellie Mae's website.

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