technology is the answer for today\'s (and tomorrow\'s) mortgage industry

$: Technology IS The Answer For Today\'s (and Tomorrow\'s) Mortgage Industry$
The Summit Point Group

Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage Industry!

So don’t be deceived by what you have heard or read . . .

I can’t begin to tell you how many conversations I have had over the last few months where some

really smart people with significant positions in the mortgage industry have said roughly the same

thing – “technology got us into the trouble that we are in today!” To be a little more specific, the

technology that they often point to is automated underwriting. Yes, the same technology that

drastically reduced origination cycle times, drove new efficiencies, reduced costs, mitigated risks,

and brought quality and consistency to decision-making is now to blame for the woes of the mortgage

industry. Really?!

At a roundtable discussion sponsored by Origination News during the Mortgage Bankers

Association’s National Secondary Market Conference, participants talked about a

“return to historically handwritten underwriting” and the inability of automation to

assess or pick-up the “fourth ’C’ - character” of a borrower.

A recently published article by Ray Birch in National Mortgage News discussed banks

and credit unions “turning off automated loan decision tools in favor of manual

process” because they were no longer “trusting technology.”

Today’s mortgage industry is moving quickly backwards in the evolutionary cycle for technology and

process innovation . . . but why?

Diving a little deeper into the thoughts and comments of industry managers and executives, the

reasons for the escalating abandonment of automated underwriting and other decision-making

technology appear (at first) to have at least some merit. The reasons include: “The systems are just

too easy to game; loan officers quickly figure out what data to enter to get an approval.” -and-

“Automated underwriting systems ignore the subjective factors that every good lender once used to

assess the reliability of a borrower.” -and- “The current automated decision systems don’t meet all

of my needs.”

Without arguing the value of the capabilities and judgment of an experienced underwriter, let’s take

a look at the issues that now drive (and have driven) executives to abandon decision systems and

other forms of automation in favor of a return to manual processing and underwriting.

The systems are just too easy to game . . .

The first issue often raised is the ability of loan officers to game the technology. If a lender depends

solely upon data manually entered into the technology for final lending decisions - then yes, the

opportunity to game (or more accurately – LIE to) the system to gain the desired outcome is a

problem. Insert human processors and underwriters to verify all sources of documentation and data

used to render the lending decision and the risk of a lying loan officer is eliminated, or at least

mitigated.

Copyright © 2011 The Summit Point Group www.TheSummitPointGroup.com

Next, lenders depending solely upon technology decisions find that they are at a loss to explain how a

lending decision was made – to a consumer, to their investor, and to their regulator. Again, yes – if a

lender abandoned sound credit policy, compliance, process, and other procedures in favor of

accepting “black box” recommendations, then they also likely lacked the process, data and controls

necessary to provide the level of transparency requested or required by investors, regulators, and

securities holders, possibly leading to repurchase requests and adverse regulatory findings. Insert

human processors and underwriters and require full (and sometimes excessive) documentation of

loans, extensive checklists, strict underwriting standards and laborious procedures for all loans, and a

lender may move closer to being able to fulfill later audit requirements.

Automated decision systems don’t meet all of my needs.

Another issue often raised is the inability of the technology to meet current investor requirements

and/or internal requirements, or that the technology is out of step with new regulatory or processing

requirements. Insert paper overlays or full manual processing and underwriting, abandoning

technology as a solution in favor of human-centric solutions and these issues may be solved.

Now, let’s take a look at the “other side of the coin.” While lenders move towards manual processes

and away from automation, what benefits are they giving up and what risks are they possibly

introducing into their processes and their organizations?

Customer service has likely been the first to suffer. As process requirements move back towards

manual operations, borrowers are asked to meet more requirements, deliver more documentation,

pay higher fees, risk rate changes, wait for weeks or months as a paper file moves through multiple

hand-offs, and are more often being refused a loan due to strict underwriting standards or very

conservative eligibility terms. Without automated decision and business process technology,

processing timeframes are expanded. Dependency on a human-centric processes limit scalability and

result in less flexibility and strictly conservative eligibility and underwriting rules.

Customer service . . . the first to suffer.

Lower levels of efficiency and accuracy and escalating costs also come with a higher dependence on

human-centric manual procedures and processes. Without automated decision and business process

technology, dependency on paper checklists, procedural manuals, and human assets take over. The

speed and efficiency of the process are limited by the ability and availability of qualified staff. The

accuracy and completeness of work is determined by the knowledge, skills and thoroughness of staff.

The net results likely include lack of scalability, consistency, and completeness, and increased costs.

Another potentially serious risk introduced in a move back to fully manual underwriting that is not

assisted by decision-making technology is the inconsistent or inappropriate application of

underwriting standards to lending decisions. Without automated business rules-driven technologies in

use, lending decisions are fully delegated to a human, leaving open opportunities to make

unknowingly bad decisions – both approvals and declinations.

With the move to manual processing and underwriting, lenders have had to hire more people, provide

more and more intensive training, and implement manual processes that could, and arguably should,


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be automated. They have given up the ability to centralize and enforce sound decision-making that

can be replicated quickly, efficiently and consistently with technology. Scarce expert resources are

either wasted on repetitive tasks, or stretched thin, supporting inexperienced staff. The quality,

efficiency and speed of a technology-assisted lending process are lost to a process that is costly, slow,

restrictive, and inconsistent.

New industry leaders are beginning to emerge . . .

So what is the right answer?

While many lenders have “solved” their issues with technology through development and

implementation of manual, human-centric processes, new industry leaders are beginning to emerge

that are embracing technology and applying new know-how to avoid or otherwise mitigate past

problems, while further expanding the use of technology to the benefit of their customers and their

companies. Through the use of business rules management systems and business process management

systems they are centralizing and controlling decision-making logic, customizing and streamlining

business processes, gaining access to data and services to mitigate risks and validate transactional

attributes, while gaining visibility and transparency that allows them to better execute their

strategies and manage their business. They are retraining staff to leverage technology, gaining new

efficiencies, mitigating risks, and enhancing customer service.

So what does this look like?

Through development of enterprise-level approaches to business rules management, companies have

been able to institutionalize their business rules for use across their entire value chain. They have

deployed automated underwriting services designed to evaluate all of their business according to their

guidelines and methods, dropping dependency on “black-box” solutions. Eligibility, underwriting,

pricing, and other rules-driven decision services are centrally maintained, ensuring consistency in

application and enabling rapid deployment of new policies and guidelines. These same rules are also

used by their servicing operations for monitoring and quick evaluation of potential refinances,

modifications and workouts. This enterprise-level approach also enables companies to “marry”

business rules with business process, facilitating the efficient use of scarce human resources while

enabling scalability. New know-how and methods help to avoid the pitfalls of past implementations

while allowing nimble responses to changes in rules, regulations and market conditions.

New know-how and methods . . . nimble responses . . .

Integrated access to data and service providers enables these same companies to reduce their

dependency on information provided by borrowers or entered by loan officers, while also further

eliminating paper, and reducing risk. Electronic access to tax returns, employment and asset data,

fraud tools, and other data population and verification sources and services eliminates redundant and

error-prone manual processes while enhancing quality and service and shortening cycle times.

Central data stores provide immediate access to all data associated with a transaction. Further,

business rules-based services are used to rapidly compare, assess and otherwise evaluate the terms

and attributes of all information associated with a transaction or file to flag potential issues or items

requiring further investigation.


About the author: David Coleman is Managing Director of The Summit Point Group, a strategic management

and technology consulting firm with extensive experience in all aspects of the mortgage business and unique

expertise with business process and rules management technologies. He is a financial services and mortgage

banking specialist with over 25 years experience as a Senior IT Executive and Management Consultant. Prior

to founding The Summit Point Group, David served as Vice President of Technology at Fannie Mae, where he

led strategic business and technology initiatives. His accomplishments while at Fannie Mae included the

development and roll-out of Desktop Underwriter. [email protected]

Page 4 Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage Industry

Intelligent business process management approaches and systems have been deployed to facilitate

processing of transactions. Reflecting business processes, business process management systems using

business rules automatically route work to appropriate groups, persons, and systems based upon the

terms and attributes of the file or transaction. Exceptions can be quickly flagged and routed for

exception processing. Management has complete visibility at any time into their entire business.

Additionally, business process analysts and managers have the ability to monitor and analyze work and

flow patterns, using this information to assess effectiveness and propose changes in business

processes that will result in greater quality, reduced risk, and gained efficiencies.

Complete visibility, greater quality, reduced risk, and gained efficiencies

Integrated web-based user interfaces provide access to all information and data associated with a file

or transaction, the status and state of the transaction, and other information related to the file.

Graphic and detailed views enable management to assess how their business is running and quickly

access files, regardless of where the transaction is currently being processed or worked. Some

companies have also provided their customers/borrowers with online access to in-process files,

providing customer visibility into the process and an enhanced customer experience, while reducing

the costs associated with customer management.

Today’s mortgage industry is truly experiencing a period of transition.

Those companies that believe technology has been the source and cause of the industry’s woes (and

their pain), thus abandoning automated rules-based decision technology in favor of manual paper-

based processes, will likely find that technology-embracing competitors will soon surpass them.

Through deployment of business rules-based decision and business process management systems these

competitors will quickly show that they can deliver better quality, more options, reduced risk, and

higher customer service, all while mitigating the risks of the past and reducing the cost of doing

business. Further, they will be able to meet the coming requirements of transparency and visibility

that will be demanded by investors, regulators, and others in the industry.

During this period of transition lenders will be best served by quickly adopting business strategies that

are based upon new know-how, efficient use of human resources, and advanced technologies that

include business rules and business process management systems.

technology is the answer for today\'s (and tomorrow\'s) mortgage industry

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