Cost of Saving FHA. Cost of CFPB Compliance.

THE COST OF SAVING FHA
Earlier this week at a conference put on by the OMBA in Oklahoma, I was asked what I thought about the FHA. Lots of folks want to know, for a variety of reasons. Right or wrong, some view it as the original subprime program; others view it as the new subprime program. Others believe it is the best hope that new home buyers have, and without new homebuyers existing homebuyers have hurdles moving up. Some believe it is on the proverbial ropes; some believe it should be saved at all costs.

And maybe everyone is right. But one thing we know now:

The Obama administration’s budget proposal for fiscal year (FY) 2014 revealed that the Federal Housing Administration (FHA) may require a bailout of up to $943 million to reinforce its capital reserves. In a conference call with reporters, HUD Secretary Shaun Donovan explained the agency has taken steps to ensure safer new business and to increase recoveries on the older, riskier loans that brought its Mutual Mortgage Insurance (MMI) Fund to a negative balance. Mortgage News Daily reported:

Donovan declined to speculate about the likelihood FHA would need to draw on Treasury funds to correct the deficit in its Mortgage Insurance Fund but said that much progress had been made in plugging the hole. The Independent Audit conducted last fall found a $16 billion deficit but if comparisons were made apples to apples it was actually more like $19 billion. Changes FHA has made since then has reduced this to $943 million. These changes have included concentrated efforts to increase recoveries from the 2007 and earlier loans through ramped up modifications and increased loan sales, suspending the bulk draw payment option of the reverse mortgage program, and substantially increasing premiums for both FHA and GNMA loans. No decision will be made on the need for a Treasury draw until October 1, Donovan said.

THE COST OF CFPB COMPLIANCE
The government spends a lot of money, and billions and trillions are thrown around often. The CFPB’s budget and spending are a matter of public record, and here is one note I received on some of the details. “I ran across something today that bother me a surprised/bothered me. The CFPB spent approximately $134 million on employee compensation and benefits for its 970 employees on board as of 9/30/2012. I am no rocket engineer but this amounts to an average cost of $138,144 per employee. Even taking 25% off for benefits leaves the average salary of $103,608. This is only salaries alone as they have a lot of other costs and this doesn’t scratch the surface of what the rest of us are spending on compliance.”

The CFPB’s third semi-annual report came out and, aside from the growing budget and jobs roster ($598m budget, and 1,073 employees), its relevance has been undermined by almost daily press releases by the agency. However, the report has a few notable highlights including:

– the CFPB’s expected ruling on pre-paid credit cards,

– a fair lending-focused component is under development for the automated system (named Compliance Analysis Solution) used by the CFPB’s examiners to conduct risk-based and targeted compliance assessments of loan portfolios, and

– a 2013 list of rules and orders the CFPB plans to propose and adopt and significant initiatives it plans to conduct do not include any items related to overdrafts, payday loans or other short-term credit products, or arbitration.

The CFPB receives its funding from the Federal Reserve but it is currently still on the list of agencies who will be effected by the sequester. According to reports, the CFPB’s funding will be reduced by $23 million. The report indicates that, “as a non-exempt non-defense mandatory program, the sequestration requires a 5.1 percent reduction of the CFPB’s $448 million “budget account.” In an ironic twist, according to the CFPB’s fiscal year 2013 budget justification, the agency claims entitlement to about $598 million in funding from the Federal Reserve (for 2013), but estimates expenses and obligations of approximately $448 million.

Has your cost of compliance gone up? Sure it has. One reader wrote:

Between legal, the cost of lost productivity, underwriters manually checking and re-checking files that are 3-4 inches thick for compliance issues and addressing and reworking investor exceptions, my management team spending time on compliance assurance and reporting rather than helping grow our business, grappling with different systems requiring different data, etc., etc., and the potential cost of penalties if it is not perfect, and resources spent on the auditors while they’re camped in our office, I am really wondering if it is worth originating a loan. This is time that is not going into growing the business.

Ironically, Ellie Mae notes that some of the new rules designed to assure 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 the paperwork is handled to a tee.

“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,” says 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.

John Haring, compliance enablement manager at Ellie Mae, explains:

On the plus side, having comprehensive, accurate data that documents key lending decisions can reduce the hidden cost of compliance. 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.

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 concludes. Here it is for your weekend reading pleasure.