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Editor's Note

Challenges for the Lending Industry



The mortgage industry has continued to undergo significant changes in 2014. With the end of the refinancing boom, and the introduction of new regulatory reforms early this year, the industry is facing severe cost pressure and margin compression.  A recent survey by Linedata found that regulatory compliance, extending risk management capabilities and cost cutting are the top three challenges faced by the global lending industry. Below are few of these pressing issues that the industry faces:

Regulatory Challenges

Staying abreast of these regulatory changes is a big challenge for lending and leasing firms. The CFPB’s new mortgage rules have fundamentally changed all aspects of the business, right from origination to loan servicing. Strong compliance systems, coupled with improved efficiencies, are the key for firms to survive and operate in the new lending environment. Market participants have to refine their products, underwriting requirements, and other aspects of their mortgage operations to ensure compliance with the new mortgage regulations.   The new reforms are going to reshape the way lenders do business. The QM rule, HMDA reporting, require firms to streamline their data systems as they need to collect and disclose a lot of additional data.  All these changes, require firms to make significant IT and operational investments. According to some industry experts, this increased cost burden will force many lenders to move out of the lending business.

Slump in Originations

From a peak of $3 trillion of originations in 2006, the industry has witnessed a drastic slump in the volumes of loan originations. The Mortgage Bankers Association projects 2014 mortgage originations to be $ 1.1 trillion, mainly due to the rising interest rates and regulatory reforms. At the same time the refinancing business is also shrinking. As banks have relied heavily on refinancing customers over the past several years, they need to change their focus to attracting customers who are purchasing mortgages. The new QM rules will not only further restrict originations, but, also will result in stringent credit criteria, through which will see lending volumes continue to drop.

IT systems

For the entire industry, the costs of using multiple legacy systems have been increasing. Today, as the industry is faced with high operational pressures to deliver quality loans in a compliant manner, the current system silos are no longer a good fit, as they place severe burden on the lender’s profitability. With the new reforms, lenders of all size need a comprehensive IT framework with standardized workflows, data and processes that can deliver results across the entire lending value chain. Besides, there is a strong need to revamp the present distribution channels in order to better serve customers and improve profitability.

Industry Consolidation

Industry consolidation will continue as many firms will find it hard to survive amid intense competition, increased compliance and operational costs, new capital requirements, as well as shrinking profit margins. Especially small lenders will withdraw from mortgage lending because of the cost of establishing and maintaining a compliance framework as well as the risk that non-compliance penalties will make lending a non-viable business.  Industry experts suggest that banks with AUM lower than $10 billion may find themselves as “Too Small to Survive.”

Although there are several challenges that lenders need to overcome in this brave new world of mortgage lending, the successful companies will be those who can strike the balance of sales, marketing, financial, technical and operational capabilities that generate consistent and profitable mortgage volume.