Furthermore, if you ask most lenders why they decided to purchase a new loan origination system (LOS) they will respond with comments related to the same objectives. “We wanted to become more efficient,” “We needed to improve our productivity,” etc. The irony is that lenders’ personnel cost per loan, which represents two-thirds of their costs, has increased 40% from 2009 to 2012. According to the Mortgage Bankers Association, personnel cost per loan has increased from $2,353 in 2009 to $3,285 in 2012. If you factor in that lenders are spending approximately $81 per loan on technology (according to 2012 estimates), that means that over the past four years lenders are realizing a negative ROI of over 1,000%! Compounding this issue is the fact that increased regulatory scrutiny and requirements primarily driven by the CFPB are increasing the costs of doing business and the severity of loan quality-related requirements.
Companies typically approach improvement initiatives in an ad-hoc manner.
Root cause analysis: Why have lenders been unsuccessful at leveraging technology to lower costs and improve productivity.
Lenders know that personnel costs constitute two-thirds of their controllable costs. Lenders also realize that there are various technology platforms out there that have the functionality to automate manual functions and improve productivity. Lenders have purchased and are widely using these technologies. So why haven’t they realized gains in productivity and cost reduction? The primary causes appear to be:
- Most lenders manage the LOS platform themselves: Lenders typically assume the responsibility of LOS implementation, training, and long-term system management. This creates a burden on the lender’s employees to learn the technology and train other employees, on top of their daily responsibilities. The pressures of their day job may cause employees to cut corners when it comes to LOS implementation, training, and long-term system management, resulting in poor system utilization and reduce productivity benefits.
- Many lenders have to re-invent the wheel: Many lenders have to discover for themselves what the ideal configuration and workflow of their LOS should be. Despite the fact that all lenders are producing the same product under the same regulatory environment and selling, for the most part, to the same buyers, vendors still take a hands-off approach to system deployment and setup. They provide a stock system and expect the lender to configure it on their own. This leads to longer deployment cycles, lower LOS utilization, and higher input costs because every lender has to start from scratch.
- Lack of a continuous improvement culture: Very few lenders have embraced a continuous improvement culture, where lenders and their vendor partners collaborate and implement improvements to processes and the supporting technologies on an on-going basis. At best, vendors implement feature improvements based not on what makes the most sense, but based on which clients complain about the loudest. Instead of a smooth and consistent path to improvement, lenders and vendors tend to meander their way to mediocrity.
The model of lenders having primary ownership for implementing and managing their LOS was spawned out of the days of self-hosting software. Unfortunately, this paradigm has been difficult to break. Even though there have been tremendous strides in the growth of SaaS software functionality and capability, vendors have either been unwilling or unable to take on more ownership implementing and managing software on an on-going basis. The reason is simple: it costs vendors more money to take on greater ownership. The “sell it and leave it for the lender to deal with” approach results in lenders failing to achieve their improvement goals.
Most lenders, and companies across all industries for that matter, lack a true continuous improvement culture. Companies typically approach improvement initiatives in an ad-hoc manner, Which only provides a short-term solution to productivity issues. Furthermore, even though the technology platform is expected to be the primary enabler of productivity improvement, technology vendors are rarely direct participants in the continuous improvement process.
The Solution: Lean Lending
When you go to the multiplex to watch a movie, you’re paying money and time for entertainment, not just to watch a bunch of pictures on a big screen. If you’re not entertained by the movie, you’re not getting what you paid for. The same logic applies to lenders and their LOS. Lenders aren’t buying a LOS for features. They’re buying quality and efficiency improvements. If the lender’s costs are going up or their loan quality is going down, then the lender is not getting what they paid for.
As a LOS technology provider ourselves, we believe that great technology is only a means to an end. A LOS should enable a lender to reduce their costs and increase the quality of their loans. In our case, we’ve even challenged ourselves to hit a target of reducing our clients’ per loan costs by 50 percent. Technology is not even mentioned in our mission statement because technology is an enabler of these objectives that must be integrated into an improvement framework or model. Our mission is not just to create and sell technology. Our mission is to create and deliver actual value.
Lenders aren’t buying an LOS for features. They’re buying quality and efficiency improvements.
In the 1980s, Toyota became widely known for their utilization of a methodology called “lean manufacturing.” Their tremendous success spurred thousands of companies across a broad range of industries to adopt a similar “lean” approach. However, financial services companies have been reluctant to implement a lean methodology because they feel it is a strategy focused on product manufacturing, not the services industries. Our view is that mortgage lending is no different than manufacturing a car or a computer. Lenders are tasked with manufacturing quality loans and therefore lean manufacturing principles can be applied to the lending industry.
Lean Lending is defined as a production practice that produces quality loans at the lowest possible personnel and technology costs. There are three primary elements of Lean Lending.
- The elimination of waste
- Improve loan quality
- Drive continuous improvement
Elimination of waste drives cost reduction
The elimination of waste focuses on eliminating manual labor via automation and the elimination of re-work processes due to loan defects. For example, instead of expecting users to know which services to order and manually placing each order, a lean lending process would automatically order those services once the loan hits the processing stage without anyone lifting a finger. Another example is to automatically generate conditions using a rules-based AUS engine. The elimination of re-work (aka get it right the first time) is accomplished via a combination of business rules, data integrity checks, and a constant QC functionality.
Improve loan quality ensures investor/agency acceptance and regulatory compliance
Improving loan quality utilizes a comprehensive set of processes run in the LOS platform to ensure investor acceptance, agency acceptance, and regulatory compliance. One example is to continuously run compliance audit tests every time loan file data is changed. Another example is to automatically re-decision the loan for eligibility any time a “key” field (e.g., appraised value) is changed.
Continuous improvement is the “glue” of Lean Lending
The implementation of a continuous improvement framework and culture is a cornerstone of Lean Lending because it helps determine how to eliminate waste and improve loan quality on a continuous basis. It is the engine that identifies and implements new improvement opportunities for the lender. It is also the continuous improvement framework that fosters collaboration between the lender and the technology partner. Without this collaboration, continuous improvement is limited in its ability to deliver on its promises.
The key elements of the continuous improvement model are measure, review, plan, and implement. There are two critical “rules of the road” to follow when implementing continuous improvement:
- Measure what matters and manage only what is measured: Avoid having reporting “clutter.” Most managers should only view metrics that they can personally take action on. “FYI” reporting is irrelevant and non-value added.
- Focus on Frequent Incremental Process Improvements versus in-frequent large scale change: Incremental changes to processes and procedures can be accomplished with minimal investment, minimal business disruption, and most importantly, establish a culture of continuous improvement, making it a “way of life” for the company.
The vendor should be able to leverage its experience deploying previous customers to help the lender avoid the mistake of
re-inventing the wheel.
Lean Lending “Enablers”
Not all vendors are positioned to effectively collaborate with lenders to deliver Lean Lending. There are two primary core competencies that a technology vendor needs to embrace and deliver to the lender:
- Shared Management: Implementation and Configuration Ownership – The concept of shared management holds the vendor, not the lender, accountable for managing the system deployment process. The vendor is responsible for analyzing the lender’s business and offering the ideal workflow on their platform. The vendor should be able to leverage its experience deploying previous customers to help the lender avoid the mistake of reinventing the wheel. The vendor also knows their technology better than anyone else and will be the most efficient at configuring it, thus freeing the lender’s employees to focus on their day-to-day activities.
- Continuous Improvement Ownership: The vendor needs to actively monitor the lender’s utilization of their software and provide notice and free training when deficiencies are found. Shared management makes the vendor a true partner with the lender by making them partially accountable for implementing the continuous improvement process.
Lenders have not achieved substantial cost reduction because they lack a holistic approach for driving improvement on a continuous basis. Lean Lending is a holistic approach to drive the dramatic cost per loan reduction while improving loan quality. Vendors today are in a unique position as masters of technology to help lenders implement Lean Lending.