How will lenders cope with increased oversight requirements?
The reaction to recent developments in the mortgage lending world seems to dominate the headlines. Each morning, the front page of Wall Street Journal brings news of yet another lender closing their doors or “suspending” operations. Meanwhile, various opinion pieces are calling for new government regulations.
Whether we see new requirements from the government or simply change to appease frightened stockholders, the coming months and years are sure to add complexity to an already cumbersome process. The companies that remain as lenders will likely see huge volumes of loans even if the overall number of loans decreases simply by taking volume that might have been distributed to those who have left the industry. These volumes are likely to be sustained since it will be very difficult for any new players to raise money to enter the market.
Traditionally, lenders have added headcount to address up ticks in volume. Adding new systems or technology is near impossible to manage when the business is trending up. IT departments can barely keep up with increases in headcount and Management may be overwhelmed with adding new staff and making sure they can report on all loans to be able to even think about adding a new technology to the mix.
While losing some efficiency to training new employees in the lending process may be acceptable, when coupled with new regulation and oversight requirements, overall underwriting productivity will be in a near freefall. It is quite likely that a doubling of volume could lead to a triple or quadruple in staff. Despite all the additional staff, days could be added to the process frustrating brokers and perhaps losing business and certainly adding to the amount of time. Worst of all, loans may have to be carried for longer periods since more prep work and due diligence will be demanded by the secondary market when buying loans.
In some cases, the all out sprint over the last 6-7 years has put off investments in technology, while in other cases investments in technology have not yielded the gains they hoped for. Why have the new underwriting, origination, or imaging systems not paid off the way they initially were supposed to when the ROI analysis was performed? In a lot of cases the systems are well thought out and customized exactly to the way the lender does business. A lot of the failed promise is due to the fact that the bottlenecks start in the very same place they always have: the mailroom.
Automated workflow and conditional routing no matter how elaborate they are can only be as good as the information in the system. While information from the initial 1003 Application is usually in the system, most loans are processed on paper. Watching $60,000 / year (fully loaded) employees thumb through two hundred fifty page loan files to verify information has to be maddening to executives who signed checks for infrastructure improvements. Now imagine adding even more requirements and information needing review.
The reason most companies cite that they don’t scan the loan files when they are received and work from images is that it takes too long. They are already under a great deal of pressure to turn the files around and any additional delay could cost them business. However, what they are really saying is that making the files meaningful takes too long. Scanning a loan file with modern scanners that have 500 page automatic document feeders and rated speeds well over 100 pages a minute is not really the problem. Identifying the various documents in the loan file so that they can be brought up at the exact time in their process that they are needed is what takes the time. It also requires expertise that would make mailroom staff a lot more expensive than usual.
I recently worked with a company that specializes in taking huge amounts of clerical work out of skilled processes. They are a traditional outsourcing model where large financial institutions, insurance companies, manufacturers etc. give them paper (or images) to process and return data that is useable in their systems. They asked me to help design a process that took advantage of their size, expertise and technology for lenders. What we came up with was an innovative process that identifies all of the documents contained in a loan file and returns them to the lender in one hour. The returned files are perfectly set up for a lender’s workflow so that the clerical, menial and repetitive tasks are taken out of the process and the skilled staff spends all of their time performing the task that they were paid and trained for in the first place: processing loans.
The service is provided by FutureVision Technologies usually for less than $10.00 per loan file. The way they sell it is also somewhat refreshing in that they attempt to align their business interests with their customer. There are not big up front fees; they simply make money on the loans they process. If they do not meet the accuracy or turn around guarantees, the lender doesn’t pay. They are in a unique position to offer something like this in that they use a combination of automated form identification technologies for the things that are easy to identify (i.e. standard forms) and good old fashioned human beings for the things that are not. Since they process many hundreds of thousands of transactions a day with longer (24 hour) turn around times in the rest of their business they can balance increased peak workloads on the short turnaround without having to pay for expensive cold seats.
While much talk about the electronic loan file is found in the industry, until it is widely adopted real savings will not be found. There are also many options to automate the submission process. Submission tools should be implemented whenever possible – mandatory in my opinion at the retail level. However they all seem to require change for the broker or for whoever is submitting the loan. Until there is a dominant standard or the loans can all be made electronic, this is a great way to yield real savings and productivity gains.
Organizations that make good decisions on how to weather the coming months and years in lending are likely to reap big returns despite what the prevailing gloom and doom in the media tells us. Those who are not nimble or efficient are likely to suffer a less desirable fate.
How about you? What methods do you plan on using to not only survive the years ahead, but dominate the market? Post your thoughts in the comments section.