Mortgage lenders rarely view compliance as a competitive advantage. But banks and institutions that maximize the efficiency of their reporting and regulatory efforts stand to gain a clear edge over companies that stick to a lowest-common-denominator, "tick-the-box" approach to compliance.
This latter approach, which has been the industry default, is typically slower, more error-prone and therefore more expensive. By contrast, lenders that take a forward-looking perspective on compliance may even look to use new or changed regulatory requirements as a springboard for transformation to improve business performance in ways that go beyond strict compliance. There's no reason to let new regulatory pressures go to waste.
Take the Consumer Financial Protection Bureau's new mortgage disclosure rule, known as the TILA-RESPA Integrated Disclosures rule, slated to go into effect in August 2015. The rule consolidates cost estimates and disclosures, replacing the good faith estimate, HUD-1 and Truth-in-Lending Act disclosures.
The impact of the rule goes way beyond new forms. New timing requirements for delivery of the loan estimate and closing disclosure forms to consumers, regulatory tolerance levels for cost estimates, and pre-disclosure restrictions will cause lenders to retool the entire loan origination process. There are 200 new requirements in nearly 2,000 pages of rules. Some leaders have already mapped the impact on job roles and functions ranging from sales and underwriting to closing and fee governance to the contact center and help desk.
That may sound like a huge headache. But it's also an impetus to improve business performance, whether through a broad-based transformation effort or more targeted enhancements.
Consider how a smoother loan origination process and sharing of disclosure information earlier in the process might improve the borrowing experience for buyers and help lenders differentiate their offerings. Similarly, centralizing the data collection process could eliminate the inefficiency of asking borrowers to submit the same information about themselves and the properties they hope to purchase multiple times. Such automation also reduces the risk of lost personal information.
These improvements would be a net benefit to lenders, whether it's regulators or market forces that drive their adoption. It's not hard to imagine marketing campaigns where lenders highlight the clarity, simplicity and security of their consumer-facing processes.
Lenders' increased responsibility for accuracy and timing of disclosures will also change their relationships with third-party service providers. Lenders will be required to collaborate earlier in the process with settlement agents to determine fees and other content for the closing disclosures. Today, these processes are usually manual and paper-based. By digitizing and automating access to information, these processes could become more efficient and accurate. The pay-off here would also come in the form of easier and more accurate reporting, better relationships with closing agents and a more seamless and timely experience for borrowers.
As daunting as the integrated disclosures rule might seem at first glance, it's important to remember that this isn't the first time regulation has disrupted an industry and it won't be the last. Consider the automobile industry. Corporate average fuel-economy regulations were first enacted by the U.S. Congress in 1975. Automakers have faced increasing fuel-economy standards ever since. U.S. automobile manufacturers were understandably concerned about the law. But between active debate on the effectiveness of the regulations and several lawsuits, some interesting and unintended things happened that have benefited consumers.
First, the sport utility vehicle was born. Recognizing that CAFE standards for trucks were less stringent than they were for cars, Chrysler marketed minivans as alternatives to station wagons while certifying them in the truck category. Eventually, this same idea led to the promotion of the SUV. Later, manufacturers like General Motors advertised fuel economy improvements and developed corporate branding for their fuel-efficient technologies, effectively turning the CAFE regulations to their advantage. In 2007, the fuel-efficient Toyota Prius outsold the top-selling SUV, the Ford Explorer.
The integrated disclosures rule is a fact of life. Thus, compliance investments should be directed so that they both please consumers and satisfy regulators. That's where the real return on investment is. And that's why the strategic choices lenders make regarding the rule will impact not just their compliance but their competitiveness.