A Look at the Loan Origination Process
The Mortgage Bankers Association reported that the cost to originate a loan in 2017 hit a peak at $8,887 per loan and costs are expected to increase even further. While there are many factors have contributed to the rise of loan origination costs, regulations have had a large impact. Whether it’s HMDA, CRA, TRID or Fair Lending, the list of rules and regulations that institutions are subjected to is growing.
While regulations often have good intentions for consumers, they have noticeably begun to hamstring financial institutions and create complexity for buyers. For example: “In 2006, the average loan file had 302 pages. Now, the average mortgage file is 806 pages,” according to mortgagereports.com. This is just a small indicator of how regulations have impacted loan origination.
Let’s take a look at the origination process and see why it costs so much to originate a loan.
A lender advertises their products to potential borrowers through print, digital, radio and other channels.
Point of Sale
A loan officer is contacted by a borrower who requests a loan. The loan officer gathers the borrower’s financial information and orders a credit report. After the loan officer determines if a borrower is qualified, they discuss the loan options and terms. A rate is then locked in and the loan file is sent to the processing department.
Next, the processor must verify documentation such as ordering 4506-T forms and determining the creditworthiness of the borrower. The processor then orders a variety of services such as appraisals, flood and title reports and insurance. Then the loan is submitted to the underwriting department.
The underwriting department reviews documentation to determine if the underwriting guidelines and conditions for funding are met. A second credit report is typically ordered and a decision to fund the loan takes place. Once all underwriting requirements have been satisfied, the underwriter will notify the closing department.
Closing and Funding
The loan package is then reviewed by the closing department. They confirm the fees and special requirements and send closing instructions to the settlement agent for preparation and execution of the closing documents. Once the signed documents are reviewed, the funds are disbursed. Then the loan moves to the quality control department.
The lender’s quality control department will review the loan and register it with a central clearing house to facilitate future transfers between investors. The quality control department will set up the loan for servicing prior to potential transfer of the servicing rights to a third party.
Finally, the loan package is shipped out to the borrower.
You can see the time and manpower it takes to process a single loan can be significant. The current breakdown of origination costs are as follows:
Institutions must record each loan application and compile the data to submit to regulators. Failure to submit on time or submitting bad data can result in massive fines from regulators. Nationstar had to pay a $1.75 million civil penalty for failing to provide accurate data about its mortgage transactions.
Due to cost of originating a loan, companies cannot afford to be in violation of regulations. Not only do financial institutions fear being fined, but the inability to sell the loan on the secondary market due to a violation can drastically impact an institution.
Detecting regulatory exceptions prior to funding a loan can save a lender time and money. Automated loan-level reviews can reduce compliance time to as little as 30 seconds per loan. Compliance EAGLE allows lenders to order services and loan reviews, while the loan is being processed — saving time and reducing costs.