DRIVING REGTECHWITH INDUSTRY

AND TECHNOLOGY STANDARDS

B r i a n S t u c k y

S e p t e m b e r 1 9 , 2 0 1 8

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CHASE BANK HIT WITH DOWNGRADE OVER JUMBO MORTGAGE UNDERWRITING, FINTECH GAPS

S U B T I T L E G O E S H E R E

Moody's Investors Service downgraded JPMorgan

Chase's prime jumbo mortgage originator assessment

to its second-highest rating, citing the bank's growing

reliance on correspondents with delegated

underwriting authority and shortcomings in its

technology infrastructure. (August 24, 2018)

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AGENDA

• Mortgage Industry Overview

• Technology – Past and Present

• Drivers for Change

• Standards – Technology & Business

• Case Studies

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MORTGAGE INDUSTRY OVERVIEW

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THE MORTGAGE MARKETS

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RULES

• Pre-Qualification / Pre-

Approval

• Loan application threshold

• Qualified Residential Mortgage

(QRM)

• Underwriting

• Product eligibility

• GSE purchase requirements

• Pricing / Fees

REGULATIONS

• Fair Housing Act (FHA)

• Equal Credit Opportunity Act

(ECOA)

• Truth in Lending Act (TILA)

• TILA Integrated Disclosure Rule

(TRID)

• Real Estate Settlement

Procedures Act (RESPA)

• Home Mortgage Disclosure Act

(HMDA)DecisionX 2018 6

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Housing Market Stabilized

Restrictive regulations

Origination costs doubled

• More services

• More paperwork

• More time

Getting a Mortgage is Harder

Higher processing costs

More paperwork

Longer waits for approval

Fewer loan products

Stricter lending rules

POST 2008

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TECHNOLOGY – PAST AND PRESENT

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RULES IN THE MORTGAGE INDUSTRY

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• CLUES (1993) – Countrywide Loan Underwriting Expert System

• Expanded to the GSEs and nearly every major financial services institution over the next 15 years

• Applications• Origination, Underwriting, Closing, Pricing, Loan Selection

• Secondary, Loan Administration, Servicing

TRADITIONAL APPROACHES FAILED*

* o r a t l e a s t f a i l e d t o m e e t a l l e x p e c t a t i o n s

• Only the “richest”

• Platform prices

• Niche expertise to develop

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TRADITIONAL APPROACHES FAILED*

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60% of BRMS still managed

via regular SDLC

Complexity and variety in

representation of rule logic

Business rules are too often not managed by those who should be

empowered to manage them – i.e., business

owners and stewards…

Those who know the rules!

FINTECH

• Originally, the term applied to

technology applied to the back-

end of established consumer and

trade financial institutions

• Term has expanded to include any

technological innovation in the

financial sector

• B2B, B2C, Mobile

• In mortgage, a focus on interfaces

and customer interaction

REGTECH

• Technology that was created to

address regulatory challenges in

the financial services sector

through innovative technology

• Help businesses comply with

regulations efficiently and

inexpensively

• Driven by reliance on consumer

data

• Anti-fraud, money laundering

(KYC), personal data management

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KEY EMERGING TECHNOLOGIES FOR MORTGAGE

• Artificial Intelligence (AI)

• Blockchain

• Robotic Process Automation

(RPA)

• APIs

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DecisionX 2018

DRIVERS FOR CHANGE

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NEW: MARKET

• An increase in millennials making

home purchases is a call to the

mortgage industry for a quicker,

more efficient digital process.

• Mortgages made to millennial

borrowers for new-home purchases

comprised 91% of closed loans in

June, up from 81% at the start of the

year and from 90% in May.

• Millennial requirements:

• Technology capable

• No brick-and-mortar

• Require fast and mobile

• Face-to-face … but only digitally!

OLD: REGULATIONS

• Regulatory burden

somewhat lessened but in

some cases only shifted

• Still burdensome given the

velocity of change

• New regulations to handle

new processes (e.g.,

eMortgage)

• New regulations for new

technology (e.g., AI)

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BARRIERS TO REGTECH

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• Bridging the gap between business and technology – the latter must be flexible enough to handle complexities and nuances of compliance

• AI techniques alone won’t satisfy regulators – must explain why decisions were made• Article 22 of the GDPR requires that companies be able to explain to their customers how machine decisions are

made

• See Denis Gagne / Trisotech!

• Uncertain regulatory landscape

• Dealing with legacy systems

• Regulators unwillingness to articulate specific positions and interpretations

• Companies forced into thinking locally when they should be looking globally

• Open, API-based architectures able to rapidly evolve and share are critical

• Need coordinated industry-wide design and collaboration effort to set clear standards

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STANDARDS

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Decision as a service for both commercial and

government services will become a primary delivery

model, allowing decisions (and the automation

enabled by them) to be easily plugged into

applications; this will require more of a business-first,

model-driven approach rather than having decisions

built in code by developers.

Nathaniel Palmer, bpmNEXT 2018

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DMN – DECISION MODEL & NOTATION

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Methodology

Technology

Exchange

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MISMO

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Mortgage Industry Standards and Maintenance OrganizationDeveloper of technology standards for both residential and commercial property

transactions in US markets. By promoting improved data consistency, MISMO aims to reduce costs and increase transparency while promoting confidence in

mortgages as an asset class for investors.

NEW MISMO MISSION

MISMO’s vision is to standardize how the mortgage industry communicates.

Our mission is to drive standardized data ANDinformation and improved business practices between all mortgage stakeholders through collaborative and innovative initiatives that improve efficiency, reduce costs and facilitate stakeholder success.

NEW STANDARDS

MISMO will announce that DMN and BPMN are the official recommended standards for the mortgage industry and will provide:

• Guidance

• Training

• Support

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MISMO + DMN

L a n g u a g e + S y n t a x

• Import / Create a DMN data

structure based on the MISMO XSD

• Reference these attributes (with all

enumerations and data typing)

directly in decisions

• Export a combined and fully

standardized message

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OPPORTUNITY: MOVING TOWARDS TRUE EXCHANGE

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Deployment

Options

Dissemination

Services (DoD)

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MORTGAGE SERVICE LIBRARY

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CASE STUDIES

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MISMO LIFE OF LOAN: ORIGINATION

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URLA

U n i v e r s a l R e s i d e n t i a l L o a n A p p l i c a t i o n

• Conditionality in URLA spec

• Submission to DU (Fannie Mae

AUS)

• Submission to LAS (Freddie Mac

AUS)

• FHA / VA (loan products)

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URLA RULES URLA DECISION MODEL

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DIGITAL MORTGAGE

eNote

An eNote is an Electronic Record evidencing a debt (also known as a Transferrable Record) under the Electronic Signatures in Global and National Commerce Act (E-SIGN) and the Uniform Electronic Transactions Act (UETA).

It uses the MISMO SMART Doc format, which locks together data and presentation and is tamper evident, so the document can be system-validated to guarantee its integrity.

eNote Process

1. Lender creates the eNote and makes it

available to the system used at closing

2. At Closing, the Borrower affixes their

signature electronically to the eNote

3. Lender’s closing platform tamper seals

the eNote

4. Lender sends a copy of the eNote to

their eVault

5. Lender (or their Agent) registers the

eNote on the MERS® eRegistry, naming

the Lender as Controller and other

required details (this is the Register

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ENOTE ADOPTION SLOW

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• For eNotes created using Version 1.02 SMART Doc specification: • Technical quality has been inconsistent

• Some eNotes would not pass a vigorous validation test

• Concern that flaws in the SMART Doc® could make the eNoteunmarketable or invalid has been a hindrance to adoption of eNotes

• Variability among eNotes makes it more difficult to implement an automated certification process

• No interoperability between eVaults – transfer between them is difficult

USE DMN TO PROCESSENOTE VALIDATION

E N C O U R A G E A D O P T I O N

• Increase confidence

• Reduce costs

• Improve quality

• Promote consistency

• Facilitate testing

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Lenders

eVaults

GSEs

MERS

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DEVELOPING THE ENOTE DECISION MODEL

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CONCLUSIONS

• Combination of industry and technical

standards provide new powerful opportunities

• Decision modeling and emerging technologies

provide powerful tools for new Regtech (and

better Fintech)

• Potential for other industries, e.g, insurance

with ACORD

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THANK YOUB r i a n S t u c k y

Dec is ionX

b k s t u c k y @ d e c i s i o n - x . c o m

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