The Real Costs for Cost Centers
It's nothing new to refer to compliance as a cost center. In fact, it is currently the most popular method for deriding the compliance staff. Compliance is, after all, a group of trouble makers who do nothing but make life hard for people trying to do "real work." So why pay for them? The "real workers" would like nothing better than to be left alone to do things their way.
Unfortunately for them, that is not an option. The fact is that the consumer protection laws and other laws generally referred to as compliance - largely because they don't have a clear connection to safety and soundness - exist. Compliance is not a choice. There may be some latitude to choose the degree of compliance, but there has to be some compliance. In fact there really has to be quite a bit.
Even with this understanding, the profit centers complain that compliance is costing them money. When asked to change procedures or fix problems, the first objection is the inconvenience and cost of doing so. Why can't the cost center fix the problems they find?
This is an interesting concept - transferring the cost of fixing problems to the cost center. If the costs of corrective action are charged to the compliance center, the cost of compliance is inflated and the cost of the compliance function looks worse than ever.
There is another way of looking at this corrective action cost. How about charging the cost to or measuring the cost against the profit center that committed the violations in the first place? After all, if the lenders never violated regulations, the compliance staff wouldn't have to fix the lenders' mistakes.
We all know that compliance has some basic costs. These include the time we spend studying regulations, researching agency interpretations, and checking the grapevine to find out the latest on regulator activity. Then there is the training time - for the compliance professional to learn and for the compliance professional to pass on that knowledge. Next, there are policies and procedures to say nothing of the meetings and edit sessions that go with that. These and some others are unavoidable costs for the compliance department. These are things that simply have to be done and the cost is what it is.
However, many costs measured against the cost center of compliance are avoidable. They are the costs of non-compliance. Now, it is safe to say that compliance people comply. It's the others in the institution who don't comply! Frustrating as it can be when the lenders ignore the latest directions on filling out the HUD-1 (specifically identify each settlement service provider and the cost of that provider) the real issue is that their non-compliance adds to the cost center's costs.
One way to get the non-compliers to listen is to send the costs back to them. Consider the HMDA scrub process. In theory, preparing a HMDA LAR should be relatively easy. If lenders did their job, the information would be in the right place in the file and easy to find. It's called documentation and it is good for compliance as well as safety and soundness.
When was the last time you found all the needed documentation in a loan file? When lenders take shortcuts - to make their profit center seem more profitable - they merely add the work requirement and the cost of the work somewhere else.
The fact is that compliance is part of making a loan. The lender should not skim off certain requirements, dump them on someone else's budget, and claim all the profit. Some of that cost belongs with the making of the loan. In short, some of that cost belongs in the profit center rather than in the cost center. The cost center wouldn't cost as much if the profit centers did their job.
If you have HUD-1s to fix, or HMDA LARs to scrub, or restitution to pay, those costs should be charged to the department that incurred them by not complying. Then they would understand the true cost of compliance. And they would probably try harder!
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 1, 1/05
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