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www.pwc.com/consumerfinance
Strategic Cost
Management for
Mortgage Lenders and
Consumer Finance
Companies
Driving competitive
advantage through
addressing the cost base
June 2013

Strategic Cost Management for Mortgage Lenders and Consumer Finance Companies
Contents
Introduction...................................................................................................................... 1
Develop a strong foundation ............................................................................................2
Create breathing space......................................................................................................6
Look at the system as a whole........................................................................................... 7
Embed a cost conscious culture........................................................................................9
Summary..........................................................................................................................11
How can PwC help? ........................................................................................................ 13
Contacts........................................................................................................................... 14

Strategic Cost Management for Mortgage Lenders and Consumer Finance Companies 1
Strategic Cost Management for Mortgage Lenders
and Consumer Finance Companies
Introduction
Cost management remains a significant challenge for mortgage lenders and
consumer finance organizations, with many either starting or already
midway through cost reduction programs with public commitments to
reduce ongoing expenses. The pressure to maintain and grow profitability is
made more challenging by the need to absorb the costs of new regulatory
requirements such as servicing standards and qualified mortgages, and also
potential changes in other consumer lending product lines to address any
perception of unfair or discriminatory lending practices.
Margins are also coming under increasing pressure as rates change and
organizations compete more aggressively to gain share. Additionally, there
is also further regulatory pressure to improve transparency and consistency
of fees, penalties and interest rates. In this environment, getting to the right
cost base, one which is both efficient and flexible, is critical to provide the
basis for sustained profit growth in the future as the economy improves.
While aggressive cost cutting strategies may yield short term results, they
can be very difficult to sustain and, in some cases, reduce important
functions and operations that leave a company at a competitive
disadvantage in the future. Furthermore, too aggressive a focus on cost
reduction could impair operational and quality management practices that
may negatively impact the organization’s ability to meet future regulatory
requirements and evidence appropriate compliance for new lending. To
create sustainable reductions in cost requires a comprehensive review of the
organization, its strategic positioning and the underlying cultural attitudes
to cost management. A positive approach to cost cutting can be a catalyst for
more strategic change, providing companies with the opportunity to truly
transform their business model and strategy, and to position themselves for
future success in the market place.
This focused paper on Consumer Lending will be complemented by a further
PwC Point of View that will be issued shortly that examines broader expense
management techniques across the Financial Services industry as a whole.
This more encompassing paper will also be directly relevant to the cost
management challenges that Consumer Lenders face.
1
Seeking Alpha, October 22, 2012.
2
Pittsburgh Business Times, June 15, 2012.
3
Seeking Alpha, October 22, 2012.
4
The Wall Street Journal, September 20, 2012.
Many banks have resorted to expense
reductions to offset margin
pressures.1
An American financial services
corporation is looking to cut costs
this year by $400 million through
efficiency initiatives.2
A large American bank holding
company completed a cost-cutting
initiative in the third quarter that
lowered expenses by $300 million
annually. “It’s not lost on me or
anyone….. that we still have work to
do,” Chairman and Chief Executive of
the company told investors.3
An American multinational banking
and financial services corporation’s
mortgage costs “are coming down.
That is very important because that
has been a huge drag over the past
three years.”4

There are four critical elements that should be considered if an organization
is to deliver sustainable cost reduction through transforming the
management of its expense base.
The four critical elements in addressing cost in Consumer Lending
Develop a strong foundation
In our experience, the most successful and dramatic cost reductions have
occurred when the executive team has shared the beliefs that the cost base
needs to be transformed and that failure to achieve this goal would be
unpalatable.
The development of a coherent and compelling cost story and the creation of
a road map to deliver this, demands time and commitment from the
executive team (and board).
Context
The foundation of a credible plan rests upon a compelling explanation of
why costs need to be reduced and how that relates to the broader growth
strategy of the organization. It is difficult to build consensus and momentum
for cost reduction in isolation, unless it is only required as a short term
survival tactic. Cost reduction efforts should to be linked with a clear
understanding of what capabilities and strategies will drive success for an
organization in the future. This can provide a credible rationale for why
difficult decisions need to be taken now to ensure growth in the future.
Ultimately, it is important to develop a picture of what will happen to the
organization if cost isn’t addressed effectively, and to clearly link this picture
to the impact it will have on the organization’s longer term strategy and
objectives.
Thinking about cost in this way enables a company to deliver
transformational cost reduction with less risk to the business and to position
the company for future growth once the economic climate improves.
1. Develop a strong
foundation
2. Create
breathing
space
3. Look at the
system as a whole
4. Embed
a cost
conscious
culture
Clearly defining the
cost reduction story
is vital as is buy-in
and collective
accountability
across the executive
table

Framework
Following the establishment of why costs need to be reduced and at what
level, it can be useful to translate the agreed rationale into a clear
framework. This framework should provide the basis for defining how costs
are going to be reduced and for ensuring that decisions are made in a way
which balances other considerations, such as revenue, customer experience,
risk and compliance.
Another important element of the framework are the guidelines through
which costs will be assessed, including identification of any costs which
should remain outside the scope of any cost reduction effort. It is important
that these are made explicit and that the rationale for their exclusion is
made explicit. In practice, this is best achieved through the development of a
clear set of boundaries and principles that will guide cost efforts on a day-to-
day basis and which will eliminate wasted effort on the development of
opportunities that will never be implemented.
Principles should state clearly the criteria that all opportunities must meet
in order to be considered for implementation, and should be directly related
to the strategic intent and targets of the organization (e.g., all cost initiatives
must realize benefits within the year and payback within 12 months from
delivery; only opportunities that support the development of agreed critical
capabilities will be considered; and all initiatives implemented must
evidence a reduction in organization, process or technology complexity).
Principles should also define the way in which decisions will be made (e.g.,
where trade-offs are required, these will be agreed by the executive team; or
tough people-related decisions will be made and communicated as early as
possible to minimize uncertainty).
Leadership and management
Effective leadership is a key determinant of successful cost reduction. A
leader should be able to build and maintain consensus, facilitate difficult
decision making and hold the organization to account. This creates
confidence and belief in the ability to deliver the cost objectives. Effective
leadership needs to be underpinned by a well structured program and
transparent governance which can manage the day to day process of
identifying, gaining agreement to, and delivering cost reduction initiatives.

The positioning of a cost reduction program and the roles of individual
executives are both important components of the plan. Cost reduction
efforts work most effectively when:
• The overall cost target is held collectively;
• Individual targets are allocated to individual executives;
• An executive is nominated to lead the overall cost effort (often COO
or CFO) and a cost “czar” who will also have ongoing responsibility;
• The program supports executives hitting their individual targets
(rather than owns the targets); and
• Governance is set up to enable targets to be reallocated where gaps
occur.
It is important to note that in cost reduction scenarios, individuals often
gain buy-in to the cost reduction strategy and objectives at different speeds
and degrees. The plan itself should account for this and be revisited
regularly. As the reality of identifying and then delivering on cost reduction
initiatives starts to bite, it is important that a balance is maintained between
challenging people and holding them accountable, while also being realistic
about what can be achieved within a given area. It is important that
everyone contributes and that the leader of the cost program ensures that
this is done on an equitable basis.
The “living” baseline
The final element in building a solid foundation for the program is the
development of an objective and “living” baseline of cost-related
information that becomes the basis for benefits tracking and decision
making. Without this, it becomes difficult to understand whether the right
things are being done and whether they are having any impact on the
underlying cost base. Creating a single version of the truth early on
addresses the “I don’t agree with the numbers” issue.
To be successful, the development of the baseline should not be viewed as
inputting numbers into a spreadsheet, but as the mechanism for creating a
clear view of the cost landscape throughout the organization. Drivers of cost
are a vehicle for predicting what will happen because they are leading
indicators of the underlying budget position.
Creating and
managing a “living”
baseline is the
principle tool in cost
management

Cost driver examples
Employee
drivers
Budgeted
headcount
vs. actual
headcount
Recruitment
profile vs.
Actual
Overtime
rates
Attrition
rates
Days lost to
sickness
Number of
temporary /
contractor
resource
Number of
interims
Average
salary per
grade
Operational
drivers
Product
volume
forecasts vs.
actuals
Processing
volumes
Performance
KPIs and
C Sat scores
Peak time vs.
steady state
staffing
ratios
The ultimate objective of this baseline is to help each business unit and
functional area to describe and justify its cost landscape and the ways in
which it changes over time. Only by developing an understanding of cost in
this way can one start to see how, at an individual budget holder level, cost
can be managed.
In practice, this means that the control and validation of costs needs to be a
budget holder’s responsibility, supported by the central finance teams. It is
important that budget holders own their numbers and are accountable for
addressing any issues with accuracy. A common mistake is to wait until a
complete set of data is available, which can take four to five months to
achieve. In practice, it is better to get started on the numbers early and to
refine these over time.
Consumer finance organizations may have particular challenges in
developing an underlying baseline as a result of seasonal nature of some
products that create significant changes in volume profiles during the year
e.g. student lending origination peaks linked to enrolment and term
timelines.

Create breathing space
Showing progress and chalking some wins on the board are important
aspects of building a credible cost program. If an organization is to invest
time and resources delivering large scale transformational cost initiatives,
then the cost program must show how it will get additional benefits along
the way.
These quick wins, which can be implemented with limited organizational
effort, create breathing space and help to balance the flow of benefits
through the lifetime of the program. One of the advantages of this approach
is that it maximizes in year benefits without jeopardizing the ongoing
benefits which arise in future years from larger more complex initiatives.
There are a wide range of quick wins and cost levers that can be pulled to
create immediate benefits:
Tactics
Process and
management
tactics
• Sweep any under-spend against monthly budget
• If under headcount but performance indicators
are on plan, permanently reduce headcount
budget
• Create action plans to systematically review
discretionary budgets and challenge phasing
assumptions
Identified quick wins and one
of cost opportunities that
maximize in year benefit
A range of more
strategic cost
initiative that
permanently lower
operating cost
performance
Time to develop the critical longer
term opportunities that tend to be
more complex in nature
Clarity of investment spread relative to the cost return
“Breathing
space” to develop
longer term cost
initiative
One off cost
opportunities
Quick wins
In Year Future Years
Strategic Cost Opportunities
Permanent
reduction in
operating
cost and
ongoing cost
performance

Tactics
Governance
opportunities
• Centralize discretionary budgets (e.g., training,
consultancy, investment)
• Implement new role and recruitment sign-off
process
• Create portfolio review forum to manage
investment spend across lines of business
Specific short
term
activities
• Challenge suppliers through procurement process
• Cap investment expenditure
• Review membership and license structures
• Vacancy removal
• Review specific policies which drive cost (e.g.,
expense policy)
Look at the system as a whole
Typically, organizations need to identify far more cost opportunities than
they need to deliver, as many initiatives will fail to materialize when
assessed more closely or benefits erode as project initiates and starts to
deliver. If an organization is looking for a $100 million dollars in expense
reduction, a $150 million dollar target provides a higher chance of achieving
the goals.
Within any organization, there are opportunities to deliver cost benefits. A
common challenge we see within many organizations is how to go about
identifying opportunities in a structured way. One element of this is how
organizations go about identifying “horizontal” cross-cutting themes while
also focussing on traditional “vertical” line of business opportunities.
Looking at the system as a whole is an approach that views an organization
from different dimensions focussed on both the strategic opportunities as
well as tactical cost reduction initiatives. A combined top-down and bottom-
up approach helps to identify opportunities and ensures that no stone is left
unturned.
Delivering long
term value from the
cost program
requires alignment
between component
initiatives and
strategic objectives

Line of business opportunities are identified by looking at vertical
accountabilities in business unit and functional areas like origination and
servicing as well as in central functions.
The business and operating model
Cross-cutting themes are then identified that typically impact multiple lines
of business such as procurement, estates, organization design, and
technology rationalization. This combined approach ensures that broader
cross-organization opportunities are not missed. Consumer Finance
organizations commonly run in product based silos with limited operational
or systems integration. Opportunities exist to assess whether some elements
of servicing, data management and reporting, compliance and risk
management could be managed with a greater focus on common
capabilities. Increasingly this may be the most cost efficient way of meeting
multiple regulatory demands across lending asset classes.
Finally, organizations should consider non-traditional cost reduction
opportunities which are often accounted for in other areas rather than the
underlying cost base (i.e., Default losses driven by charge off policies
application of 1099, default management and collections strategies; Escrow
Management; Fraud; Insurance Claims; and Complaints). It is also worth
considering if savings, be it cost of operations or other benefits achieved,
should be reinvested to improve overall performance.
Looking at cost using this multi-lens approach will provide an exhaustive
view of all the opportunities, increasing the scale of potential benefits.
Ensuring that the assessment, selection and prioritization of these
opportunities are linked back to strategic priorities can result in an
accelerated definition of and movement to a transformed future
organization.
Vertical Accountability
Origination, Servicing, Default,
Central Functions etc
HorizontalThemes
Procurement,Estates,OrganizationalDesign,
TechnologyRationalization,MIetc)
Capabilities
Strategy &Vision

Embed a cost conscious culture
One of the major things that underpin sustainable cost reduction is creating
a cost conscious culture. A cost conscious culture is a reflection of how the
organization behaves from target setting and incentivization through to day
to day management of cost issues.
Without a focused effort on addressing how an organization treats costs, any
benefits delivered run the risk of eroding over time with organizations
finding themselves in a cycle of cost cutting.
There are three main factors to consider when addressing the cost culture of
an organization: clear direction, tight business management and a focus on
behavioral change.
The implementation of these factors should be seen as part of the cost
program itself and not left until the initial program has been delivered. The
momentum created by a cost program along with dedicated resources and
governance structures can help create and embed new disciplines and
behaviors across an organization. This approach can provide an opportunity
for a cost conscious culture to develop alongside the implementation of
specific cost initiatives.
3 factors critical to the development of a cost conscious culture
Market and
Commercial
Pressure
Cost
Conscious
Culture
Performance
andReward
Leadership
and
Strategy
Roles and
People
Policyand
Process
Systems
and
Controls

Set direction
Consistent and clear communication cascaded through the organization is
critical in setting tone. The business as a whole and individuals at all levels
should see cost performance as a common challenge to which everyone can
contribute. It is important that message and practice align. Seeing an
executive forgo an expensive car service in favor of a taxi or public transit
can help reinforce that the cost program is a companywide initiative
applicable to all.
All colleagues can be influenced by the degree to which cost goals in the
short term and long term continuous improvement targets are made explicit
at executive, business unit and functional levels. These should be an integral
part of the organization’s objectives on a yearly basis and reflected in
individual objective setting and incentivization.
Tighten business management
Tighter business management has three core components:
1. Making cost and cost efficiency a strategic target: Ensuring that cost
considerations are built into the annual strategy and planning cycle and
reflected within an organization’s performance scorecard. Ensuring that
cost targets are cascaded down to budget owners.
2. Budget setting: Ensuring that budgets reflect the underlying cost position
by booking the full year benefits of cost initiatives and baking in what has
been achieved.
3. Incentivization and consequences: Ensuring that there are meaningful
consequences to budget managers for success or failure to hit cost targets.
Change behavior
Behavioral change is the final component in the cost conscious culture and
the factor which has the greatest impact. In a cost conscious organization,
managers need to have absolute clarity about their responsibility for cost
control and how that links to delivering value.
Depending upon the cost maturity of the leadership team and the budget
owners in an organization, this may require training and education. For
some individuals, this will represent a significant change in focus and will
require them to develop new skills. Making this part of the program
provides a readymade vehicle for budget owners to engage with, learning
cost management disciplines and techniques.
To fully align strategic cost objectives with behavior on the ground,
individual performance objectives need to be linked to the organization’s
corporate targets. Managers and staff must see a positive link between good
cost management performance and their own appraisals and believe that
efforts in this area will improve their career progression.
To make cost
reduction
sustainable,
benefits should be
hard coded into
budgeting and
business planning
cycles

Summary
Every Consumer Finance organization faces its own challenges in the
delivery of sustainable cost reduction. We believe that there are 4
components that are common to successful cost management strategies. It is
the balance of these components which is unique to each organization and
which reflect their maturity, organizational appetite, the size and scale of the
challenge, and the prevailing culture. Irrespective of the approach taken, we
have seen a number of pitfalls which can derail cost efforts or erode cost
benefits.
Potential pitfalls
Program set-
up and
management
• Insufficient funding to run the program and delivery
identified opportunities
• Cost control and planning have no defined stages
• Investment spend does not achieve desired outcome
• Program seen as accountable for achieving cost
targets rather than enabling business leaders to
achieve their cost targets
Quality of
resourcing
• Recycling resources through the different phases of
the project assuming generic skills and experience
• Insufficient subject matter expertise and cross-
functional representation reduces scope of
opportunity identification
• Lack of specialist resource (skills and knowledge)
reduces insight, speed of delivery and credibility
with business leads
Benefits
management
• Benefits tracking process not properly defined
upfront
• Benefits double counted or taken through BAU
activity
• Benefits identified do not materialize as
opportunities move into delivery
• Benefits not embedded within budgets
Governance
and
transparency
• Deals get made outside of committee structures
• Lack of stakeholder engagement in the governance
process
• Cost and benefits are not transparently reported and
issues not openly escalated for review

During implementation, the focus should be placed upon changing the
agenda from cost cutting for its own sake to cost management. This will
deliver a stronger organization for the future. The pain of cost reduction can
be made more palatable through framing the cost issue in relation to the
organization’s future. This can have a huge impact on the people involved
and generate belief that this exercise is different from the past and will
produce stronger long term results.
With a clear sense of purpose and a solid foundation, employee engagement
can improve, leading to tangible and sustainable results. Most importantly,
an organization can be better placed to control future costs more effectively
and to capitalize upon growth opportunities in the marketplace.

How can PwC help?
As an advisor to the majority of the top mortgage banking and consumer
lending companies in the US, we have unique access that allows us to see
firsthand the cost related opportunities that exist across the mortgage
banking and lending value chains and how to embed cost management
disciplines to improve long term performance. PwC’s Consumer Finance
Group has 180 professionals focused on the issues in this market.
We have real experience of designing and implementing cost reduction
initiatives that deliver significant value as a result of working and learning
with clients.
We have a deep understanding of how to set-up, manage and drive cost
reduction programs to unlock value across an organization and can provide
a full range of services from program health checks and remediation to set-
up and delivery.
We have proven methodologies for identifying, assessing and prioritizing
cost opportunities and a track record of working in partnership with
organizations to accelerate the delivery of their cost targets.
Strategic business and cost
reduction review for the
division of a leading global bank
Delivering the benefits from an
acquisition
• We supported our client in
quickly developing and executing
a short term action plan to
improve financial performance
while keeping sight of the longer
term business strategy needed to
create a leading franchise in the
US
• Over a 60 – 90 day period, we
developed the cost reduction
program and detailed
implementation plans for the
delivery of $200 million+ of
benefits
Our client was a large retail bank
making a cross-border acquisition.
The announced synergies totalled
$975m. We helped the client
through:
• Managing the integration
planning and design of the new
business and operating models
• Evaluating and validating
synergy opportunities and
developing plans for their
delivery
• IT integration and synergy
delivery, including program
office, IT architecture and
application selection, finance
and organisational change
PwC has proven methodologies for identifying, assessing and prioritizing
cost opportunities and a track record of working in partnership with
organizations to accelerate the delivery of their cost targets. We have also
published thought leadership on the project methodology and tools to
support cost initiatives.

Contacts
Richard Altham, Bob Ross, Nathan Parry and Nick Tilston are strategic cost
management experts in PwC’s Consumer Finance Group and PwC’s
Advisory practice. They can be contacted using the details provided below.
Richard Altham
Principal
207 502 2347
richard.d.altham@us.pwc.com
Bob Ross
Principal
312 298 2042
robert.m.ross@us.pwc.com
Nathan Parry
Senior Manager
617 530 7112
nathan.e.parry@us.pwc.com
Nick Tilston
Senior Manager
857 383 9057
nicholas.p.tilston@us.pwc.com
Follow us on Twitter @PwC_US_FinSrvcs

© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may
sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC
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