TRID Tops Compliance Issues In Busy 2015

LAS VEGAS — This year credit unions were introduced to a new four-letter word: TRID.

TILA/RESPA Integrated Disclosures, less affectionately known by mortgage providers as TRID, represented a sea change for the home loan industry. The new disclosures were mandated by the Consumer Financial Protection Bureau to "streamline" the home loan experience for consumers, but they resulted in a great deal of extra effort by credit unions and their vendor partners.

Dr. Brandi Stankovic, Las Vegas-based credit union consultant with the firm Mitchell, Stankovic & Associates, who also works part-time at $537 million Boulder Dam Credit Union in Boulder City, Nev., said the update to Truth in Lending was "one of the most significant regulatory changes in 2015 in regards to credit union operations."

"The update refined documentation that had been around for 40 years. Credit unions are faced with integrating the disclosures, training staff working with data processors. This regulatory change was felt throughout the institution," she said. "Boulder Dam Credit Union hired an employee in a more sophisticated loan processor position to help the loan officers with the cumbersome demands of this compliance update."

After the new disclosures went into effect Oct. 3, several mortgage professionals told Credit Union Journal their CUs had significant issues with implementation — despite many months of lead-in. The biggest problem: lenders had to abruptly change from disclosure forms they had used for years to the new forms at midnight of Oct. 2. Because they were not allowed to use the new disclosure forms prior to Oct. 3, there was no "live" testing. This led to numerous unpleasant surprises in the weeks that followed.

2015 = $4.5 Billion In Compliance Costs

According to statistics from the Federal Reserve that were examined by New Haven, Conn.-based financial institution compliance advisory firm Continuity, FIs paid $4.5 billion in compliance costs in recent years. That figure represents 22% of net income, 38% of accounting/auditing fees, 20% of legal expenses, 16% of data processing costs, 11% of personnel costs, and 48% of consulting fees.

Pam Perdue, EVP of regulatory insight for Continuity, zeroed in on the latter figure.

"Compliance accounted for 48% of consulting fees paid by financial institutions, which is a staggering sum," she said on a recent webinar. "Keep in mind some rule changes were designed to make things easier, but it doesn't matter if a new rule is stricter or more lenient, there is an expense to deal with the change."

Perdue characterized 2015 as "the year we thought we might not survive." While TRID was the first major issue she named, followed by changes to flood insurance rules, she said there were many costly compliance issues to deal with.

"Financial institutions spent 22% of their net income on compliance, and everybody would like to get back a slice of that 22%," she said. "Even if some of these rules are well-intended, that money is going to allow financial institutions to prove they responded correctly to all the new regulations. It is not going toward loans or other uses."

Continuity tracks the Banking Compliance Index, or BCI, a quarterly index of the impact of new regulations and the overall enforcement climate. It is calculated for the "statistically average" financial institution, which has $350 million in assets.

Perdue said the most recent BCI figures show an average FI had to add between one and two full-time employees to process new regulations. The worst part of that — there are "wild fluctuations" from quarter to quarter, making staffing decisions difficult.

"Because these factors are outside of anyone's control, they cause the most stress at financial institutions," Perdue assessed. "No one wants to spend more on compliance than they have to. The other parts of the financial institution look at compliance as a cost center — it is not making any money for the organization."

In Q3 2015, the BCI showed FIs needed 384 hours to comply. This was down from 653 hours in Q3 2014, and from 582 hours in Q2 2015, but Perdue noted there were 2,231 pages to review, making the respite only a relative one.

Not only are new regulations constantly appearing, Perdue said FIs have to "watch the store" with existing regulations. Since Q3 of 2014, she said there have been 12,993 pages of new regulations, leading to $176,536 in costs incurred by the average FI to implement.

2015 saw fewer pages than 2013 or 2014, but Perdue said that was due to there being more new rules issued in the previous two years — but implementation came to roost in 2015. "The biggest was the new mortgage rules that went into effect this year."

The financial burden of compliance is "staggering," Perdue said. "The cost is close to $1 billion every 12 months. I can think of a lot better ways for our industry to spend $1 billion than the aggravating issue of compliance."

'Banner' Year

With all these new rules and regulations comes not only cost, but the danger of being cited by regulators. Perdue said 2015 is on pace to be a "banner year" for enforcement actions, while quickly adding that the use of "banner" was ironic.

"No one wants to see enforcement actions. I used to be a regulator, and I can tell you regulators are not happy issuing enforcement actions. It is not a feather in anyone's cap. The rules are hard to understand and are multifaceted — they affect more than one area of the institution."

What is worse: "We do not expect a decline in enforcement actions in 2016," she warned. "Financial institutions still will have to document and prove they are doing compliance the right way. Regulators say if something is not documented, it didn't happen."

So what can CUs do going forward? Perdue said they need to standardize their compliance.

"A systematic, standardized approach will ensure compliant outcomes and satisfy examiners," she advised. "It is a myth that every compliance requirement is unique. Really, every compliance requirement follows the same set of rules."

Perdue offered six steps toward improving compliance:

1. Know — understand the risks facing the institution
2. Adapt — be ready, as there are hundreds of changes to deal with annually, each one forcing an FI to modify its practices
3. Delegate — get people throughout the organization thinking in terms of compliance
4. Do — regulatory requirements must be integrated with routine business processes
5. Verify — put inspection steps in place to ensure all regulatory requirements have been met
6. Improve — any issues uncovered must be fixed in a timely and transparent way.