The unintended victim of regulatory reform.

Author:Ryan, Leonard

COMPLIANCE. LENDERS CAN'T GO A DAY without hearing about a new regulation, updated guidance on existing rules or more conflicting information on the interpretation of newly announced rules. Thousands of words have been written about helping lenders understand what the rules mean, when they will impact lending and how to manage the changes.

But lost in the shuffle of trying to comply with the Consumer Financial Protection Bureau's (CFPB's) deadlines is an unintended victim: innovation.

Already, there are two areas where the impact that the CFPB has had on innovation is evident--a lack of innovation in any area outside of compliance and the impact of the vendor-management policies on new entrants to the industry.

Compliance--the 800-pound gorilla

The very nature of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed into law in 2010 meant that compliance was going to be a major and ongoing concern for all lenders moving forward. The law--which covered not just the mortgage industry, but also banking, auto finance, student loans and credit cards--outlined 398 rules that had to be written or revised.

According to New York-based law firm Davis Polk & Wardwell LLP's monthly DavisPolk Regulatory 'TrackerT1A, as of Oct. 1, 2013, 161 (40.5 percent) of the rulemakings had been finalized, while 121 (30.4 percent) had not yet been proposed.

The natural result of this significant level of change is that the industry has shifted its focus almost exclusively to compliance issues.

For example, in the July to September issues of Mortgage Banking, nearly half (45 percent) of the feature articles dealt with compliance issues--exploring new technologies to help with compliance, sharing strategies for dealing with compliance or publicizing the impact of compliance issues on operations.

And lenders are spending more on compliance than ever before. In an annual survey of mortgage executives conducted in May 2013 by Tom LaMalfa, president of TSL Consulting; and Tom Millon, CMB, president, chief executive officer and founder of Capital Markets Cooperative, it was found the average lender spent 21 percent of its costs on regulatory compliance.

This raises the question: With lenders putting so much focus on merely keeping up with regulatory change, where will the impetus come for innovation in other areas of the business?

The mortgage industry has fallen behind other financial services sectors in embracing mobile technology, electronic commerce and...

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