Oct. 9, 2014–Brinn, Cy
(Cy Brinn is chief operating officer of VirPack, McLean, Va., a provider of document management and delivery technology to the mortgage industry. He has been involved in creating and delivering innovative technology for residential and commercial mortgage origination and servicing since 1986. He can be reached at cy.brinn@virpack.com.)

Lenders are gathering an unprecedented number of required documents to originate mortgage loans and comply with new regulatory requirements. To be sure, the regulatory environment saps efficiency and profitability at the same time that loan volumes are falling.

According to VirPack’s Mortgage Origination Loan File Statistics Report, loan file size and the number of documents have increased at an alarming rate and will do so for several more years. For instance, the report notes 85 percent of all conventional loan files contained between 400 and 2,000 pages as of first-quarter 2014 compared to 73 percent in 2013.

The percentage of loan files containing more than 400 pages increased 12 percentage points in first-quarter 2014 compared to 2013. Also, the research noted that for all loan types 16 percent of all loans contained 800 pages or more compared to 11 percent in 2013.

While members of VirPack’s research team thought loan file page counts would increase, the magnitude of the increase astonished them: the 10 largest loan files had swelled to more than 6,000 pages, with the largest loan file, a conventional jumbo for a self-employed borrower, contained more than 8,000 pages.

When we analyzed loan file sizes between 500 and 900 pages, according to product type, the Department of Agriculture was highest with 79 percent; 77 percent for Veterans Affairs; 53 percent for the Federal Housing Administration; and 52 percent for conventional loans.

One result of the new regulations is that complex transactions require 1,000 to 2,000 pages, a hefty increase from the 150-200 pages prior to the new regulations taking effect. That’s because most lenders now gather several years of tax returns and increased documentation required for assets. Lenders also include new disclosures, sales contracts and fraud analysis results. Moreover, they still collect W-2s, pay stubs, bank statements and automated underwriting findings, as well as credit and appraisal reports that were collected as part of the origination process before the new rules came into existence.

The unrelenting tide of regulations from the Consumer Finance Protection Board does not seem likely to ebb any time soon. As a result, lenders are forced to spend more money and time to deliver more documents and images than ever before. Too often, the result has been increased complexity and costs, such as a cost for every additional page included in a loan file.

Because file sizes are larger, more time is required to back up files for data security, more data must be backed up for business continuity systems and lenders must absorb additional long-term storage costs. To handle their ballooning files, lenders are deploying technology that can support increased document sizes of loan files.

Few mortgage industry professionals would dispute that ballooning loan files increase compliance and cost of doing business. Those costs increases come at a time when lenders’ profit margins are flattening and staff levels have been reduced, so devoting resources to handle the paper influx undermines profitability.

Some costs have increased exponentially. For instance, when a loan is originated, two credit reports are ordered for every loan file–one when the borrower first applies for the loan; and a second the day before closing. To be sure, five years ago, many lenders only ordered and retained one credit report. Lenders ordered these documents and retain copies in their loan files.

There is no way lenders can avoid paying more to collect, review, file and ship loan files, when they range between 400 pages and 2,000 pages. It’s forcing them to review their processes and identify where they can cut overhead and speed the origination process. One approach that some lenders are deploying is to look for overlap in the services they purchase from vendors–and reduce the number of business partners.

For example, lenders can no longer afford the luxury of having two providers perform test to determine if the annual percentage rate is within the tolerance permitted, was not the high-cost mortgage and state regulations were followed.

Nor can they afford to have more than one vendor determine that the waiting periods that TILA [Truth in Lending Act] requires occurred and investor guidelines followed.In the wake of the mortgage bubble, and unprecedented regulatory demands that followed, lenders have taken steps to ensure they comply with the new regulations. But not only did they comply, they are gathering and storing documentation that proves their compliance and that can be produced during an audit. That places pressure on legacy systems that were never meant to handle the paper crunch problem that’s emerged over the past few years. Making the situation worse is that many lenders have fewer employees than they employed a few years ago, so assigning more hands to the problem is not a viable, much less affordable, option.

For the next few years, the paper crunch problem and regulations that drive it will continue to haunt lenders and will become more acute, because new regulations will continue to come out of Washington. However, the mortgage industry can address the tsunami of loan origination documents through adoption of process improvements, improved productivity and innovative technology.

(The views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)