In any business, companies can only move as fast as the slowest part of the process. For mortgage lenders, the slowest part of the loan process – outside of regulatory mandated waiting periods – has often been the limitations of physical paper. Whether it is the printing, delivery and fulfillment of paper-based disclosures and closing packages or the transfer of data from a paper application to an underwriting system, manually completing any task dramatically slows down a lender’s efficiency.
Along with the rest of the nation’s industries, mortgage lenders have spent the past two decades transitioning to a digital economy. In its truest form, digital lending refers to a lending process in which all parties conduct all steps of the loan process electronically. This encompasses everything from the initial application submitted by the borrower to delivery and servicing by the investor.
With the rise in consumer interest around conducting financial business digitally, it’s vital for lenders to embrace as much of the digital mortgage as possible. This paradigm shift requires that all documents undergo an entirely paperless closing process—or in other words, are signed, notarized, registered, delivered and stored electronically.
With the rise in consumer interest around conducting financial business digitally, it’s vital for lenders to embrace as much of the digital mortgage as possible.
While the mortgage industry is better positioned than ever to accomplish this feat, there are many other factors impeding fully-realized electronic mortgages from becoming the industry-wide standard. One of the biggest challenges is getting all the technology tools needed to process loans electronically working together. One approach that is helping lenders build the system of their dreams is leveraging an open API to simplify the task of integrating many excellent vendors into one efficient system.
Bridging to the Future with API
The foundation for a successful digital lending strategy is having the appropriate technological infrastructure. With the proper technology in place, borrower data seamlessly moves through each phase of the origination process, along with reducing the risk of human error.
Lenders need three main tools to build a fully digital lending workflow: an intuitive and responsive point of sale (POS) where borrowers can initially complete loan applications and manage their loan status; a loan origination system (LOS) to address all necessary verification and underwriting; and a document and eSignature provider for closing, delivery and servicing.
Of these tools, the LOS is the foundation into which all other tools must integrate into. While some LOS providers try to offer every tool in one system, most lenders find that they prefer to build a custom tech environment that leverages the expertise and functionality of several different software providers.
This is where an open API becomes essential for the evolution to digital lending. When lenders select an LOS with an open API, they gain access to more resources that can enable them to streamline their lending process. Instead of waiting months or years for two vendors to reach an integration contract, build and code a proprietary integration, test and finally roll out the solution, vendors can instead use the API to build integrations more quickly and accurately using data standards provided by the LOS.
When lenders select an LOS with an open API, they gain access to more resources that can enable them to streamline their lending process.
This choice creates an environment of competition where vendors are increasingly challenged to continue refining and improving their solutions to provide the best value for lenders. Lenders are also able to continue configuring their LOS’ long after the initial implementation, which is beneficial during period of growth or changes within the lenders organizations that promote new ways to lend.
This is vital for lenders as they move toward the primary goal of a complete end-to-end digital mortgage. An open Application Programming Interface (API) provides a more efficient and streamlined experience for both lenders and borrowers alike. Lenders will also have singular, standardized proof of compliance and be able to maintain a higher level of data integrity by significantly reducing manual data processing.
Along with time-efficiency, improved data integrity and transparency are additional benefits found in leveraging the appropriate technological tools. The increase in data integrity not only helps expedite the origination process, but also provides clarity on the secondary market. This technology helps both lenders and investor mitigate risk and ensures the loans initially meet the standards required for origination and servicing.
The bottom line is that electronic lending affords all parties involved a wealth of benefits. Lenders and investors who manage their loans electronically will be able to cut down significantly on the time it takes to originate and service these loans, enabling them to handle a greater volume and thus drive greater profits. Not only that, but they’ll be able to show their borrowers a better experience, making it more likely that these borrowers will return for future lending needs.
It’s a great system, but in reality it’s been around for many years. The problem is, lenders are shopping for these consumer portals through the wrong lens. The popularity of these POS systems today is just a consequence of something much larger: the total digitization of the mortgage industry and the extensibility required to survive it.
When paper began to turn to 1’s and 0’s, all sorts of new systems needed to be developed to pass that data from one place to the other without the help of human hands.
The digital transition of the mortgage industry changed the way lenders interact with borrowers and how technology interacts with both parties. The popularity of the POS falls heavily behind the foundation that can reinforce it. The POS is just the tip of a massive iceberg.
Mortgage lending now relies so much less on paper, both literally and figuratively. Paper has been turned into pure data that can be passed through the hands of all lending parties intact and instantaneously. When the digitization of the mortgage industry began, POS was a human being that could assist the borrower in the process. When paper began to turn to 1’s and 0’s, all sorts of new systems needed to be developed to pass that data from one place to the other without the help of human hands.
Today, we have loan origination software that is entirely responsible for maintaining and passing data through the loan process. If POS is the tip of the iceberg, the LOS is the behemoth under the surface. Because an LOS can ship data instantly and seamlessly, it centers a stronger focus on the importance of data. It’s because of this that the LOS became more than just the shipping and receiving department of the digital lending process. It became a system of record.
In the 1990s, the LOS was no more than a typewriter, just a simple tool that made the loan process a little quicker. Today, it’s integrated into every service required for the loan process.
It’s these integrations and the centralized management of loan data that allowed the LOS to transition from typewriter to system of record. Now it’s used to perfectly store vital data for reference. If an auditor or warehouse bank or any other external party demands to see a loan for integrity purposes, sure enough it will always be snugly secured in the LOS.
Treating the LOS as an archival system was a first step toward achieving a longer lifespan. However, although technology accelerates in power and capacity exponentially every year, LOS technology is weighed down by legacy systems that don’t have the ability to keep pace. The majority of lenders are using technology that was originally developed in the 1990s or earlier.
By making the decision to update their LOS to successfully meet the needs of today’s technology, lenders can not only create the digital lending environment required for the consumer of the present, but address their needs for years to come.
It’s becoming more difficult for these legacy systems to integrate well with systems and services that utilize modern technology standards, such as web-service APIs. As a result, lenders using legacy LOS platforms have to bear the cost of bridging the technology divide, both in terms of money and opportunity. These costs only grow over time, as they continually have to keep up with changes, enhancements and new product offerings.
Migrating to LOS platforms built on modern technology standards allows lenders to future-proof their businesses. By utilizing an advanced database architecture that is designed to support a true SaaS model and an API framework that is open and easily accessible to integration, lenders can leverage a technology foundation with virtually unlimited extensibility and scalability, one that can adapt to a digital mortgage that is yet to be fully realized.
The mortgage industry is experiencing a paradigm shift involving consumer behavior, regulatory reform and a convergence of technological change on a scale that has never been seen in the industry. By making the decision to update their LOS to successfully meet the needs of today’s technology, lenders can not only create the digital lending environment required for the consumer of the present, but address their needs for years to come.
That means lenders are increasingly investing in new technologies – for example, many now have online portals through which borrowers can learn about the mortgage process, shop for the best loan, submit an application and, in most cases, learn whether they are pre-approved in just a matter of minutes or hours. Facilitating this “instant” pre-approval process are advanced technologies, including automated underwriting and automated income and asset verification.
The idea is to allow lenders to become omnipresent, in a way, while providing services consumers expect 24 hours a day, seven days a week.
Mortgage lenders are investing in these new technologies because they know that today’s younger home buyers want a fast and simple online mortgage experience, regardless of which device they are using.
To learn more about how lenders are making the transition to digital mortgage channels and consumer-direct lending, MortgageOrb recently interviewed Linn Cook, director of sales and marketing for LendingQB, a provider of loan origination software.
Q: Online loan programs, such as Quicken Loans’ Rocket Mortgage and BeSmartee, have garnered a lot of attention for moving loans from application to underwriting in a matter of hours. Why are these programs resonating with lenders – and how receptive have consumers been to them?
Cook: For lenders, the key to profitability and market share is being able to minimize the time from when a borrower expresses interest in a loan to locking the customer in with an approval and offer. Digital mortgage channels such as Quicken’s Rocket Mortgage and BeSmartee represent the transformation in mortgage we are witnessing. With these channels, lenders have the opportunity to meet borrowers where they are located – meaning, a customer can sit in a Realtor’s office or wait for a brew at his or her coffee shop and apply for a loan rather than sit at a desktop at home after the excitement of the property has waned. The idea is to allow lenders to become omnipresent, in a way, while providing services consumers expect 24 hours a day, seven days a week.
Q: Once a borrower applies for a loan via a consumer-direct point-of-sale (POS), how do the POS software and the loan origination system (LOS) work together to expedite the processing, underwriting and verification process?
Cook: The POS and LOS work together to expedite the processing, underwriting and verification through the automation of data. With Fannie Mae’s Day 1 Certainty program driving incentive at the investor level, lenders are able to eliminate a significant amount of manual processes using automated data verification services, allowing underwriting decisions to be made much faster and with greater reliability.
By enabling data verification services to be initiated and completed by the borrower on his or her own, the POS transfers efficiency directly into the LOS by way of tight integration with these verification services.
Q: What should lenders look for when building an online consumer-direct loan channel?
Cook: Lenders must be sure that the integrity of the data flowing between the POS and the LOS is airtight. There cannot be any discrepancy in the loan application, data verification, loan pricing, and especially, closing cost fees between the POS and the LOS, or a lender is going to be in a whole lot of compliance pain.
Closing costs are, by far, the most finicky and troublesome aspect of data integrity, so lenders need to pay more attention in this area. The other aspect of consumer-direct lending is maintaining a focus on borrower and loan officer expectations. They are the primary consumers of POS systems – and their feedback is essential to the success of any consumer-direct or digital lending effort.
Our role as the LOS platform provider is to provide technology that makes it easier and less expensive for lenders to carry out their POS strategy.
Q: What is LendingQB doing to help lenders implement consumer-direct lending?
Cook: LendingQB’s API model provides lenders with the flexibility to select the POS solution that works best for them. That is the notion behind our best-of-breed approach. We’re not in a position to tell lenders what POS solution to use because the consumer-direct business proposition is still unproven. No one has it figured out yet.
In our view, the most prudent thing to do is give our lenders the opportunity to be creative and try what works best for them right now. It may be one of the vendors we have integrated with, it may be building one completely from scratch, or it may be something that hasn’t even been invented yet. Our role as the LOS platform provider is to provide technology that makes it easier and less expensive for lenders to carry out their POS strategy. An open architecture API provides fertile ground for lenders to be as innovative as they want to be.
In the mortgage LOS space, lenders are presented with three ways to build the operating system that serves as the backbone for all loan operations: an all-inclusive system built from the ground up, an all-in-one approach of selectively integrated platforms, and a best of breed strategy that offers multiple vendors integrated to a core LOS. Knowing the advantages and disadvantages of each philosophy is crucial to selecting an approach that works best for each lender’s specific needs and helps them grow business.
The LOS has become a comprehensive business management tool that is expected to deliver speed and compliance at a reasonable cost.
The LOS Swiss Army Knife
No one can argue how complex, expensive and risky it is to change out an LOS system. The advance of technology has only made this task even more difficult. The LOS system of today can automatically underwrite loans, generate instant pricing, create an entirely paperless office and connect to literally hundreds of different services.
“The LOS system I’m using today is light years ahead of what I was using twenty years ago,” said Ray Scott, President of Oaktree Funding in Upland, California. “I’m not just talking about the internet or operating systems. The types of things we can do in our LOS today we weren’t even thinking about before.”
With these increased capabilities, lenders are no longer satisfied with an LOS that just generates documents and stores data. They want a veritable electronic Swiss army knife that can do it all. From workflow management to marketing systems, the LOS has become a comprehensive business management tool that is expected to deliver speed and compliance at a reasonable cost.
Path of Least Resistance
When lenders consider an “ideal” loan origination system, they are often thinking of an all-inclusive system built from the ground up. The appeal is a natural one – one software implementation, one vendor, one system to learn.
“With an all-inclusive type of system, you cut out multiple vendors and remove the possibility of multiple failure points,” said Al Ogrodski, Senior Vice President of Solution Strategy at ComplianceEase.
Finding a vendor that offers a true all-inclusive system, however, is rare due to the sheer complexity and cost of LOS development. All-inclusive systems are usually proprietary, built by large institutions that have the resources to develop an entire LOS from scratch and are typically out of reach for most lenders.
And Ogrodski warned that although an all-inclusive system provides more technological uniformity, it puts the onus on the developer to ensure that the entire system is functioning properly. “There is a chance of the whole process being jeopardized by putting your eggs in one basket.”
Building an Integrated Platform More Accessible to Most Lenders
Instead, the majority of lenders partner with LOS providers that take an integration approach, where ancillary systems are bolted on to a core platform. “Integrations provide lenders with an easier way to add needed functionality without the large costs of an all-inclusive system,” said David Colwell, Strategic Business Development at LendingQB.
The traditional knock on integrated systems is that it is difficult to deliver a quality user experience when you rely on two entirely different companies to integrate together. While this may have been true in the past, the rise of web services and data standardization means companies can now build incredibly robust integrations much more easily.
“The internet and development of web services gave software companies the voice to speak to each other,” explained Alan Daughton, Senior Software Development Engineer at MeridianLink and an expert at system integrations. “Data standardization like MISMO goes even further by providing a common language to communicate, further reducing the cost and time to integrate and making it easier to incorporate even more functionality into integrations.”
The rise of web services and data standardization means companies can now build incredibly robust integrations much more easily.
Lowering the barrier to integration opens up the possibilities for LOS companies to easily add enhanced functionality to their platform, but it also puts the LOS company in a position to influence lenders on the vendors they can use by controlling access to their platform. The risk is that LOS companies will leverage vendor integrations to further business strategies that are not necessarily aligned with the lender.
All-In-One Seeks to Buy and Build
One approach to integrated LOS platforms is the all-in-one, where an LOS company acquires vendors that they integrate with in order to provide a complete bundle of services. The primary benefit of acquiring vendors is the potential for discounted pricing and the assumption that integrations are strong.
What makes the all-in-one approach risky is that lenders sacrifice the flexibility to choose their own vendor and relies on the LOS vendor to make the choice for them. As more lenders grow their business by specializing in niche areas of mortgage lending, their choice of vendors and the technology they provide becomes more specialized.
“Technology moves so quickly that it’s easy to lose market share to your competition,” Colwell remarked. “Lenders want to be able to react swiftly and have a system that allows them to target specific segments of the market. The all-in-one approach runs counter to this because it limits a lender’s ability to adapt.”
Whether they happen to focus on traditional retail lending, consumer direct, wholesale lending, FHA lending — mortgage lenders want to have the flexibility to use vendors that best fit their individual strategy. And lenders know that relationships and the business environment can change over time.
“With the all-in-one approach, lenders are starting to see they don’t have the flexibility to manage their business from a vendor standpoint,” said Tony Inskeep, Senior Vice President of Sales at document preparation vendor Docutech. “If that vendor or integration goes south, or if there’s a new product out there, you don’t want to wait on the LOS vendor to get you where you want to go.”
Best of Breed Provides Tools to Build Custom Solutions
Best of breed model is an alternative approach to LOS systems that opens up integrations to multiple vendors. It provides the flexibility to choose the vendors, but also challenges vendors to provide the very best solution. Vendors agree to integrate with an LOS with full knowledge that their direct competitor may already be integrated. Because of this, the best of breed model creates incentives for both the LOS provider and the vendors to deliver maximum value because competition is built into the relationship.
“Best of breed companies are always customer focused,” said Dylan Bruni, Vice President of Business Development at marketing systems provider BNTouch. “We want other companies to come along and test us, push us. If other companies can provide something better, then we know we need to refocus our efforts.”
Perhaps most importantly, the best of breed model encourages the kind of collaboration between companies that drives real innovation, leveraging a wide community of vendors who work together to push the envelope of what mortgage lending could be.
“Best of breed solutions have been developed by companies who have been able to address certain pain points with specific technology solutions and have come up with a better way of solving those problems using a more efficient solution,” Ogrodski remarked. “The best of breed approach opens up options and promotes the power of technology to disrupt for the good of the market.”
The best of breed approach opens up options and promotes the power of technology to disrupt for the good of the market.
There’s no guarantee that any approach to LOS systems – all-inclusive, all-in-one or best of breed – will deliver the performance that a lender wants or expects. Lenders must decide what priorities they place on cost, flexibility, service, features and adaptability. What is certain is that mortgage lending is constantly undergoing change.
Do you choose an LOS system that gives you the freedom to keep pace with this change, or allow your LOS to paint you into a corner with nowhere to go?
The choice is yours to make.
Data gathered by the Mortgage Bankers Association over the past several years shows how hard it is to be a successful mortgage lender. Since 2012, profits per loan have been down by almost 70%, while production costs have risen more than 50%. The Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule has undoubtedly made the process more complex, but productivity was dropping well before the rule took effect in October 2015.
It’s hard not to point the finger at LOS technology for the decline in lender effectiveness. After all, the LOS is the central operating system for mortgage lending and is explicitly designed to make the process more efficient and easier to manage. But according to the STRATMOR Group LOS Technology Insight report, only one in four lenders feels that its LOS is successful in achieving this goal. The rest are either middling along with a system that barely meets their needs or, even worse, are so dissatisfied that they are considering a replacement. Nearly 30% of lenders are in some stage of switching out their LOS – a last-resort option that is painful from both a cost and labor standpoint.
Nearly 30% of lenders are in some stage of switching out their LOS – a last-resort option that is painful from both a cost and labor standpoint.
However, after more than a decade of working in the LOS technology space, we found that poor technology is only one side of the issue. In our view, technology adoption is just as important in determining whether a lender can realize the benefits of LOS technology. By raising the awareness of technology adoption and evaluating the capabilities of LOS vendors to encourage better utilization of their systems, lenders give themselves the best chance to reverse the productivity decline and find the elusive return on investment (ROI) of mortgage LOS technology.
Why technology adoption matters
The LOS is a software system filled to the brim with technology tools. Whether it’s a pricing engine, processing tools, document generation or hundreds of other components, an LOS is a collection of technologies that must be able to support a lender’s entire loan manufacturing process.
When lenders embark on a search for a new LOS, their evaluation usually follows a common script: develop a list of functional requirements, talk to a salesperson, view a demonstration of the system, and discuss financials. Department heads then gather together to compare notes, and eventually, everyone agrees on a winner.
In our view, the key problem with this process is that most of the attention is focused on functionality (i.e., technology) without enough consideration given to how the technology will actually be used (i.e., adoption).
Statistics show that one in five lenders has experienced a failed LOS implementation. With upfront costs ranging from $20,000 to $2 million, the pressure to deliver a successful LOS is enormous. It’s easy to see why lenders and their consultants create exhaustive requests for proposals that attempt to capture the minutiae of LOS functionality but only give a cursory nod toward technology adoption.
But LOS technology adoption is critical because it goes beyond short-term technology needs. When lenders are able to fully realize the potential of their LOS, they create additional value by reducing the cost of implementation and raising the overall effectiveness of their employees. Technology adoption addresses long-term business challenges that have a more lasting impact on a lender’s efficiency and ROI.
The STRATMOR data bears out the influence of technology and technology adoption on overall vendor satisfaction. In Chart 4, we combined the satisfaction scores for technology attributes, end user experience and customer support in order to provide a rough approximation of lender views on technology and technology adoption.
Not surprisingly, the one vendor with the highest ratings in all three satisfaction areas, “LOS A,” correlated to a 100% overall LOS vendor satisfaction rating. What is interesting, however, is that even though “LOS E” had a lower combined satisfaction score than “LOS D,” it scored almost 20 points higher in overall satisfaction ratings.
When one takes apart the satisfaction score, it shows that “LOS E” scored higher in end user experience and customer support (162 vs. 141) but lower in technology attributes (50 vs. 74). This suggests that technology adoption might have a bigger influence than technology itself when it comes to overall LOS satisfaction.
Defining technology adoption
The goal of technology adoption is to have all users optimally utilize the functions of an LOS system so that they can perform their activities as efficiently as possible. It involves proper implementation of the system and configuration of workflow to meet different operational scenarios. Robust training is necessary to ensure that users understand how to properly operate functions, and responsive technical support helps answer questions when users get stuck.
Achieving a state of ideal technology adoption requires the efforts of both the lender and LOS vendor, but to varying degrees. Very large lenders with enormous IT resources are capable of managing their own technology adoption with little to no expectation of assistance from their vendors.
Other lenders with more limited IT resources need to find LOS vendors that have the best technology adoption capabilities – one that can demonstrate a real commitment to helping lenders maximize the value of their LOS. Providing a high level of technology adoption services goes above and beyond a few hours of training or a user’s guide. It’s a strategic investment by the vendor to build a long-term relationship with a lender that it hopes will grow over time.
So how does a lender evaluate a vendor for technology adoption capabilities? Remember, there are four primary areas of technology adoption: implementation, configuration, training and support. In each of these areas, an LOS vendor must be able to demonstrate the organizational structure, detailed processes and subject matter expertise that support a technology adoption strategy.
Technology adoption addresses long-term business challenges that have a more lasting impact on a lender’s efficiency and ROI.
Finding a trusted implementation manager
From an implementation perspective, a vendor should provide more than just a sample implementation project plan. One of the biggest influencers of implementation project success is the vendor’s project manager. Understanding his or her skill sets and how he or she operates will provide insight into what you can expect from the implementation.
Open Mortgage, a mortgage lender based in Austin, Texas, recently had a unique LOS implementation experience. After six months of struggling with an LOS implementation that ultimately failed, it immediately switched vendors and dove head first into a second implementation that proved extremely successful.
Because failure is a better teacher than success, the company’s experience showed how two different approaches to implementation can lead to completely opposite results.
“In our failed implementation, the project manager funneled information to others within the vendor organization,” explains Jim Howard, chief technology officer at Open Mortgage and the man responsible for both implementation projects. “She didn’t have the skills to make changes directly to our system. And because we were only allowed to work with her, it became a bottleneck for the entire process.
“In our successful implementation, the project manager was much more experienced with the system and could make immediate changes to it, even in the middle of our meetings,” he adds. “When she couldn’t make a change, other implementation teams were available to us. This allowed me to delegate tasks more effectively, and I was able to have multiple implementation tracks run simultaneously. It allowed the process to move much faster and more efficiently.”
Configuring best practices instead of old practices
System configuration is an aspect of implementation that has a big influence on technology adoption. It largely determines how users will operate within the LOS environment and how much efficiency can be gained by automating certain steps. However, configuration can be tricky because lenders tend to stick with their legacy processes when moving to new LOS, which doesn’t always translate well.
Ideally, vendors should approach configuration using a best practice model. Vendors know the capabilities of their LOS better than anyone else, and they have seen all of the different ways their clients configure the systems, both good and bad. From this, an LOS vendor that is strategically focused on technology adoption should be able to present its clients with optimal configuration recommendations (best practices) that fit a lender’s business model.
Howard notes that the availability of best practices was a major factor in his company’s LOS implementation success.
“Our vendor presented us with a giant workflow diagram that laid out all of their best practices from start to finish,” he says. “We compared our old workflow with their recommended best practices workflow and identified four points where we had to decide whether to change the system or change our internal practices.
“We ended up adopting the vendor’s best practice for three of the processes,” he adds. “It simplified implementation because less customization had to be built into the system. With our previous vendor, they didn’t have any best practices and, instead, asked us how we wanted to configure workflow. There is nothing worse than asking a committee of 12 people how they want an LOS to work. It felt like [it took] forever [to] reach a consensus.”
Learning is a continuous process
Training has an obvious impact on end user technology adoption. How well a vendor performs in this area really depends on the quality of the trainers and documentation. But what is important to remember is that technology adoption is not a static, one-time process. LOS vendors are constantly releasing updates with new functions, some of which might have an impact on a lender’s performance with the system. If a vendor doesn’t notify the lender or provide training on a new function, then both the lender and vendor lose.
Many hands offering support
Technical support is an easily overlooked aspect of technology adoption most likely because it is so commonplace across all industries. But it would be a mistake not to evaluate LOS vendors very closely on the structure, size and process of their technical support teams.
LOS vendors that are serious about technology adoption (and customer satisfaction) will dedicate sizable resources to their technical support in terms of both the number of staff and their training. Lenders will also invest in technology to make it easier for lenders and support team members to communicate with each other and track requests efficiently.
By distributing the support workload and connecting us to staff that are knowledgeable about our issues, we get faster, more effective support.
Josh Rosendahl, IT officer at Atlanta-based Mortgage Assurance Inc., saw the technical support provided by his LOS vendor as an opportunity to expand his company’s capabilities.
“We came from a world where a previous LOS vendor charged us $20,000 a year for technical support, and another vendor would take days to respond to our support requests,” Rosendahl says. “Our current vendor doesn’t charge us for technical support, and we wait maybe five minutes to an hour for a response. It’s a world of difference.
“What makes their support so useful is that they segmented it into different functional areas,” he adds. “When we need help with workflow rules, they send us to the workflow support team. When we have issues with the pricing engine, they send us to the pricing engine team.” By distributing the support workload and connecting us to staff that are knowledgeable about our issues, we get faster, more effective support.
The path to an efficient mortgage lending process starts with an evaluation of both technology and technology adoption – regardless of whether a company is satisfied with its LOS. By examining technology and the four elements of technology adoption – implementation, configuration, training and support – one will learn a lot about an LOS vendor’s strategy and whether it is truly committed to a long-term relationship with a lender.
Lenders pay a price chasing customization. Many lenders feel having a different loan production process is one of the most important drivers for success in the mortgage industry. This perception drives them to select and implement systems that require extensive customization. There are several issues with this approach:
- The focus is on technology with customization flexibility. To satisfy this demand, most LOS vendors channel their resources to create highly customizable solutions rather than features that work out of the box. The result is Lenders spend up to a year customizing their LOS to deploy.
- Once deployed, additional years are spent making improvements to optimize the loan production process.
- The entire process from initial investment to the promised ROI can take more than three years. There are three key reasons why lenders would need different loan production processes:
1. Sales Channels
Doing business in different channels: Retail is not the same as wholesale. And wholesale is not the same as correspondent. Online Internet lending through lead aggregators is not the same as a branch-based, realtor-focused strategy.
Economy of scale: A 500-employee lender will have a greater number of user roles with fewer activities performed by each employee versus a 50-employee lender who will have the same employee performing more activities. Division of labor and functional specialization is a key strategy in the manufacturing industry and is just as useful in the mortgage production business.
LOS technology: Loan origination systems have differences in functionality and database architecture, so lenders must adapt their loan production processes to what their LOS will allow them to do.
Lenders who share similar key areas can benefit by sharing the same loan production process. Business context, in this discussion, is a concept that identifies the environment—sales channel, size, and technology—that the lender operates in.
Two lenders operating in the same environment share the same business context. Two lenders operating in different environments have different business contexts.
An effective LOS vendor collects data from their customers and with the knowledge of their own technology creates and distributes best practices to their customers.
Lenders who operate in different business contexts need different loan production processes. But if lenders operate in the same business context, why would they need different processes? They don’t. Here’s why:
A mortgage is simply a commodity. A mortgage lender creates profit by creating and selling mortgages in the secondary market. Lenders must create mortgages that are compliant with rules and requirements created and regulated by several entities:
- The government (e.g., CFPB, state regulators)
- The pseudo government agencies who purchase and/or insure mortgages (e.g., FNMA, FHLMC)
- Other investors/buyers of the mortgages (e.g., money center banks, securities firms/markets)
Some lenders’ compliance and quality control departments may require modifications to loan documents, which represent the finished product for mortgage lenders. These modifications are based on each lender’s legal interpretations related to compliance or regulatory requirements. However these loan document modifications are typically very minor.
Some investors may require different minimum FICO scores, maximum LTV, maximum loan amounts, etc., for the mortgage loans they’re willing to buy. But, these requirements do not drive significant differences between the mortgages. The result is that all lenders manufacture mortgages that are similar except for minor differences. In other words, a mortgage is a commodity.
Competition in a commoditized business is mostly about price. Price is the primary differentiation factor in a commoditized business. While customer service is important, the nature of a commoditized business means lenders must be competitive on price for long-term success. This is especially true in today’s market of savvy borrowers who shop online for the best deal.
Lenders need to create a loan production process that allows them to produce mortgages at the lowest cost possible. If the business context for two or more lenders is the same, then only one will qualify as having the most efficient process for that particular business context and will be the lender with the lowest manufacturing costs.
The goal is to create best practices. All lenders are pursuing the same goal to create and implement the best practice loan production process within their organization. The process of creating a best practice is time consuming. The lender must understand their LOS technology inside and out. Then they need to create the best workflow to achieve the promised ROI.
This process of trial and error can only be effective if the lender dedicates a full-time team to the project. Lenders within the same business context waste money by not working together to create the best practices for that context.
Don’t lose time and money reinventing the wheel. Lenders who share the same business context can use the same best practices. A best practice, however, is only best for a limited time.
As technology and industry regulations evolve, the practice must be improved to remain a best practice. Most lenders don’t have resources assigned to continuous loan production process improvement. Typically this responsibility is divided among managers who are busy fighting other fires.
Lenders within the same business context need a dedicated team to create and maintain best practices. The LOS vendor is the perfect interme-diary to provide this team because they have access to different lenders.
An effective LOS vendor collects data from their customers and with the knowledge of their own technology creates and distributes best practices to their customers. That LOS vendor will also periodically visit customers to help update their loan production practices. Lenders who are unable to dedicate an internal team toward process improvements can rely on their LOS vendor to fulfill that role. This ensures that they are never behind their competitors because their loan production process will always be the best practice for that business context.
Best practices achieve the best solution. Lenders who grasp the concept of business context as identified in this article will understand that it’s to their advantage to select an LOS vendor whose primary goal is to help their customers implement best practices that save time and money rather than create highly customizable systems. These lenders look for the best solution that combines best practices with technology to give the lenders what they really need: the lowest manufacturing costs to produce mortgages.
Furthermore, if you ask most lenders why they decided to purchase a new 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 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 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 functional- ity 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 an 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 an LOS technology provider ourselves, we believe that great technology is only a means to an end. An 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 be cause 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 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 re-inventing 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 that holistic approach to drive 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.
What is so scary about changing a LOS? Although there are no definitive statistics for the mortgage lending industry specifically, it is widely known that 65% of complex software implementations result in delays and cost overruns, and as much as 35% end up in failure. Ask mortgage lenders and they can all recount stories of nightmare implementations that left deep scars on their organizations.
Are you a mortgage lender with a software division, or a software company with a mortgage-lending division?
Why do these delays and failures happen? There are two possible answers: Lenders either choose a system that does not work, or they have the right system but cannot get it set up properly.
Lenders spend a lot of time and effort making sure they know what a LOS can do. They ask vendors to complete exhaustive requests for proposals that cover a broad range of functionality topics in order to narrow down the most suitable choices. Qualifying vendors are then invited to demonstrate their wares and explain why theirs delivers the best value for the organization.
The problem with this type of evaluation process is that lenders tend to concentrate on system features and not enough on nontechnical issues, such as customer service quality or implementation support. It is almost as if lenders are looking beyond the implementation process and assuming that the LOS will behave as it was sold.
But this is precisely where lenders should be asking the most questions. Once lenders decide that a LOS can satisfy their technical demands, they need to know exactly how they can get the system to operate as expected.
Lenders should also ask for a blow-by-blow explanation of what will happen once the contract is signed. Who is responsible for the system setup, business rules configuration, project milestones and training? How long will this take? How many people are needed for the project? The answers to these questions will tell them a lot about their vendor and the likelihood of implementation success.
The funny thing is that most lenders already know who is responsible for implementation: themselves. Many lenders operate under an assumption that they would shoulder the majority of the implementation tasks. In fact, the larger the lender, the more they are willing to take on.
An ideal scenario
In a traditional software world, this makes total sense. The vendor would mail a box of disks and a user’s guide, and the rest was up to the lender. It was understood that LOS vendors are responsible for developing the software, but lenders are responsible for setting it up, including getting the hardware, network infrastructure, security and redundancy put in place. But with the “You Configure” approach, technical demands are so large and complex that lenders needed a team of IT experts just to get it installed.
And that is exactly what lenders did. They hired entire IT staffs dedicated to not only installing the LOS, but to keeping the system running on a day-to-day basis. Some lenders even customized their LOS to the extent that they needed experienced programmers on their staff. It is almost a badge of honor to have a small software team because it demonstrates a higher level of technical sophistication. This leads one to ask: Are you a mortgage lender with a software division, or a software company with a mortgage-lending division?
Given the size and scope of implementation responsibility that the lender has, it is not surprising that implementation projects get delayed or fail. There are so many moving parts that can break at any given time. Servers can crash, databases can get corrupted or hundreds of terminal clients may need to be updated. User accounts need to be set up, security protocols need to be defined, business rules need to be developed, templates need to be created – the list goes on, and it falls on the IT staff to get it all set up.
Businesses that switch from client-installed software to hosted, browser-based software end up saving at least 40% in IT costs.
However, the IT staff are primarily technical people with little understanding of the complexities of the mortgage-lending process. This is not to say that IT staff are not capable of implementing LOS systems. On the contrary, these are talented individuals that bear an enormous responsibility for the organization. But while lenders are spending millions of dollars on this “You Configure” business model, other industries have evolved and embraced a newer, more cost-effective and efficient way of utilizing technology.
Software delivered through a Web browser, also known as Software-as-a-Service (SaaS), has grown from an experimental novelty to a full-fledged, $12-billion-a-year industry. No longer considered early adopter technology, Web-based applications now rival installed software both in terms of performance and functionality, with the added benefit of streamlining IT costs that save companies billions of dollars every year. Global corporations from Oracle to IBM to Google have embraced SaaS technology and are using it to streamline their operations.
It is estimated that Businesses that switch from client-installed software to hosted, browser-based software end up saving at least 40% in IT costs. Any portion of these cost savings can be reallocated into IT initiatives that enable lenders to generate revenue, such as online marketing or data analytics. In this way, lenders can move IT from a cost center to a revenue center, a concept that is rapidly spreading across other industries.
However, aside from just the cost savings that the SaaS model has to offer, there is an opportunity to redefine the relationship between a lender and their LOS vendor in a way that is truly revolutionary.
A hosted, SaaS-based LOS gives vendors direct access to the data and software code for all of their clients. There are no restrictions on when or how often SaaS vendors can update their software, be it for one client or all of them. Instead of accumulating enhancements and bug fixes over a period of three, six or 12 months like traditional software vendors, SaaS vendors can trickle out updates every couple of weeks or perform instant hot fixes.
This type of vendor responsiveness can even extend into LOS implementation and maintenance. With SaaS, IT staff are largely relieved from the burden of maintaining servers and complicated network infrastructure. But SaaS vendors can shoulder more of the responsibility of actually setting up and configuring the LOS platform in coordination with lenders’ operations staff.
In fact, vendors are perfectly situated to help lenders implement the LOS faster and with greater effectiveness because they already know how to manipulate the system – they built it, after all – and they can leverage prior implementations with other lenders by offering best practices.
Instead of the traditional “You Configure” approach, SaaS providers offer a “We Configure” approach, where lenders and vendors work together to ensure optimal utilization of the LOS.
And this type of support does not end when the LOS is launched. SaaS vendors remain actively engaged with their lender clients, constantly communicating with them to manage updates and general platform maintenance tasks.
Service is fundamental to a SaaS provider’s business model.
The traditional “You Configure” LOS implementation can take between six and 18 months to complete, with the added costs of project managers, trainers and capital expenditures. The SaaS-based “We Configure” LOS implementations can be completed in as few as 30 to 90 days and reduce lender implementation costs by up to 75%.
There is a reason this model is called Software-as-a-Service. Service is fundamental to a SaaS provider’s business model. Being able to communicate directly with end-users allows SaaS providers to accelerate their development process and deliver technology that is more relevant, more effective and more successful for lenders.
It is the 21st century, but the majority of LOS vendors are still operating as if it is 1999. Why should lenders have to bear the burden of technology maintenance or customization? Why should lenders be solely responsible for the cost of delayed or failed implementations? They should not and neither should you. It is time for lenders to demand more out of their LOS vendors.