LendingQB The five steps to making better technology decisionsMore and more lenders According to a recent survey released by QuestSoft, nearly one in five lenders is looking to change theirare contemplating major entire loan origination software (LOS) in 2012, almost double the rate of years past. Merely contemplatingtechnology upgrades in a change in LOS technology involves a considerable amount of time and resources, so the growing numberthe near future, but do of lenders that are putting themselves in a position to implement a new LOS indicates that a significantthey really know what market shift is taking place. There are several factors driving lenders to search for new solutions includ-they want? ing increased regulatory and compliance demands, shrinking profit margins, vendor consolidation andMortgage lending is a complicated, document-inten- the emergence of new technologies.sive and highly regulated business that lends itselfwell to technology. Producing a mortgage note re- Increased Regulatory and Compliancequires a lot of moving parts, so lenders are constantly Demands in search of tools that will improve productivity andlower their costs. For certain, the aftermath of the mortgage meltdown has forced lenders to scrutinize the capabilities ofIn light of drastic regulatory changes and increased their technology to keep pace with regulatory andscrutiny over the mortgage industry in general, more compliance changes. Technology providers mustlenders than ever are contemplating major technol- incorporate new forms, documentation and calcula-ogy upgrades as a way to boost their business effi- tions in order to ensure that their systems aren’t ob-ciencies, even to the extent of rebooting their entire solete.strategic plan. But the impact of regulatory and compliance changesThe good news is that the emergence of new tech- go further than just updating documents or calcula-nologies such as cloud and mobile computing makes tions. Investors and regulators, such as the recentlythe prospect of change very appealing. But like a kid developed Consumer Finance Protection Bureauin a candy store, it can be overwhelming for a lender (CFPB), are demanding greater transparency of ato know exactly what pieces of technology are going lender’s process, requiring more detailed and betterto have the greatest impact on their business. quality data. As a result, data that was sufficient in the past is being taken to task, especially for lend-Given this context, lenders need a better way to ers that rely on integrations between more than oneunderstand technology and what it means for their system to run their operations. Multiple databasesbusiness. They need to have the insight and objec- and incomplete transfer of data make it difficult fortivity that allows them to understand the root causes lenders to locate information that is accurate and canof problems before they begin looking for solutions. be relied upon for critical business decisions. The po-An Enterprise Process Assessment (EPA) presents tential impact can be catastrophic for a lender givena model for lenders to evaluate technology and the the increased scrutiny and penalties that can be lev-process changes it induces, but within a tangible and ied on lenders by agencies such as the CFPB.measurable framework. Reduced Profit MarginsWhy are lenders contemplating majortechnology upgrades? According the Mortgage Banker’s Association (MBA), secondary marketing profit margins haveThere are a number of forces that are motivating declined the past two quarters and this had a substan-lenders to make major changes to their technology. tial impact on lender profitability. Between the third
LendingQB The five steps to making better technology decisions and fourth quarters of 2011, average secondary mar- • 2008: ISGN acquired Dynatek, MortgageHub, keting profits dropped 15 basis points and average Diamond, and LenStar net production profit fell to 58 basis points, reducing • 2008: Fiserv acquired Portellus lender profitability by 25%. Therefore, lenders are looking for new platforms to help them lower their • 2010: Fidelity National Financial acquired Com- cost per loan and improve profitability to mitigate the merce Velocity impact of falling secondary marketing gains. • 2010: Wipro acquired Gallagher Consolidation in the Mortgage • 2011: Lender Processing Services acquired Technology Space PCLender • 2011: CoreLogic acquired Dorado Since 2006, more than 80,000 mortgage brokers have • 2011: Monitor Clipper Partners Inc. acquired exited the business as loan volume dropped from a peak of $3 trillion in 2005 to an expected volume of Mortgage Cadence, Inc less than $1 trillion in 2012. As the overall industry • 2011: Davis + Henderson Corporation acquired struggled, so did mortgage technology vendors. Ac- Mortgagebot cording to industry experts, the mortgage technology • 2011: Ellie Mae acquired Del Mar Datatrac vendor market shrank from approximately 600 ven- dors in 2005 to just 300 today. And the contraction • 2012: Davis + Henderson Corporation acquired continues as merger and acquisition activity heats Avista up. Already, a number of mortgage technology pro- • 2012: Mortgage Builder acquired GCC Servic- viders have made some major moves: ing Systems. Figure 1: With profits under pressure, lenders are looking at technology to increase efficiency. 2011 Mortgage Bankers Performance Report, Q2 to Q4 $1,400.00 400 350 $1,200.00 300 $1,000.00 250 Average Profit Per Loan $800.00 200 Average Production Profits (bps) $600.00 150 Net Secondary Marketing Income (bps) $400.00 100 $200.00 50 $0.00 0 2011 Q2 2011 Q3 2011 Q4 Source: Mortgage Bankers Association
LendingQB The five steps to making better technology decisionsThis consolidation activity is causing lenders to LendingTree.com, one of the pioneers of Internetquestion the long-term viability for continued vendor mortgage lending, recently reported that fully 21 per-support of their platforms, especially if the vendor cent of consumers now use the Internet to shop forhas recently been involved in a merger or acquisi- a home loan. With the concurrent growth of onlinetion. As a result, lenders are taking pre-emptive ac- mortgage marketplaces like LendingTree and Zillow,tions to search for a technology vendor that provides mortgage lenders of any size can look to the Interneta greater degree of comfort related to a long-term as a legitimate source of loan volume.commitment to support and enhance their platforms. These are just a few examples that demonstrate theEmergence of New Technology transition that is taking place with mortgage lend- ers. The convergence of compliance, consolidationIn spite of the industry’s struggles, mortgage tech- of providers and new technology are providing thenology continues to innovate with the rest of the impetus for lenders to consider giving up their legacybusiness world. The Internet, cloud computing and systems and establishing a new technology founda-mobile technology are just three examples of newer tion for their business moving forward.technology that are beginning to establish themselvesas key drivers of growth. Why do lenders make bad decisions on technology?Cloud Computing When we face a problem, our natural instinct is toThe emergence of cloud computing is by far one of solve it. When we see an opportunity, the instinct isthe biggest advances that is changing mortgage tech- to go after it. So in the fast-paced world of mortgagenology, especially in the LOS space. The fact that lending, it’s only natural for lenders to have a reac-lenders are able to reduce their total cost of software tionary response to problems and opportunities.ownership (TCO) by as much as 70 percent usinga cloud-based or hosted solution, and the ability to However, this type of reactionary behavior can bescale software more efficiently are factors that are counter-productive and ultimately lead to poor deci-swaying lenders to change their technology. sion making. Moving quickly to quash a problem or take advantage of a new opportunity can turn into aMobile Technology game of whack-a-mole: as one problem or opportu-Although still relatively immature, lenders are also nity is solved, another one appears. Since not everytaking a serious look at mobile technology as a way problem can be solved nor can every opportunityto drive more efficiency and to attract volume-pro- turn into The Next Big Thing, a reservoir of frustra-ducing talent to their organization. While completing tion builds into a crisis, at which point the executivea 1003 application on a smartphone is still a ways off staff calls for a technology makeover.(at least practically speaking), linking originators to This reactive model of decision making creates ainformation in their LOS and real-time pricing tools list-driven process of technology evaluation. Lend-are already here. The direction mobile goes is un- ers gather all of their identified problems and oppor-known, but many predict that it’s only a matter of tunities into a ‘wish list’ and embark on a search for atime before lenders are expected to have some form provider that can meet these needs. The provider thatof mobility built into their technology strategy. is best suited to satisfy their wish list at the lowestOnline Lending cost is the one that is selected. In response, technol- ogy providers market and sell their products usingIt’s been a long time coming, but the Internet has ‘feature lists’ to make it easier for lenders to identifyfinally become a legitimate business channel for their value.lenders. Although the concept of using the Internetto market home loans is as old as the Internet itself, Why, then, do so many lenders end up havingactual usage by consumers was scant until recently. buyer’s remorse? Although data is scant, one study
LendingQB The five steps to making better technology decisions showed that only 60 percent of lenders were happy reason why they need it or the actual problem they’re with their LOS technology investment (Figure 2). trying to solve. Is it because the cost of handling pa- Many were disappointed with rollout times, cost per is too high? Is it because their staff has a hard overruns and customer service. But more telling is time finding documents because they’re in different that in this study, 1 in 4 lenders felt that their provider locations? There are several reasons behind a request over promised on functionality and ended up deliv- for a feature or tool. ering vaporware. In fact, almost half of all lenders believed that vaporware is a common occurrence Therefore, it’s easy to see how a lender’s needs can in the mortgage technology industry. easily become lost in translation, and how that can result in dissatisfaction with their technology choices But what would vendors have to gain by not deliver- buyer’s remorse. Vendors aren’t necessarily guilty of ing a solution that they promised? And why would delivering vaporware; they’re simply making wrong lenders continue working with a company that they assumptions about lender expectations. felt did not follow through on their promises? We believe that the real cause of dissatisfaction with Lenders need to understand the root technology outcomes is not dishonesty, but a lack of causes of problems understanding. A lack of understanding between lenders and vendors, as well as a lack of under- So how do lenders get beyond this gap in understand- standing that lenders have about themselves. ing? The first step is to recognize that every problem or opportunity has a root cause (or goal, in the case of Lost in Translation opportunities). Asking questions and spending time tracing where a problem originates from will inform When a lender goes through their wish list of desired lenders about real solutions, instead of blindly grasp- functionality and say they need a document imag- ing at features. ing system, for instance, they don’t communicate the Figure 2: Lenders feel that vendors over-sell and under-deliver. Did your new LOS meet expectations? Did your provider deliver vaporware? No Yes 74% 26% Did not meet expectations, 22% Is vaporware a common occurrence? Met expectations, 60% No Yes 55% 45% Source: Dynatek Customer Satisfaction Survey
LendingQB The five steps to making better technology decisionsFor example let’s look at that document imaging Cost per loan can be divided into two categories:system your operations manager keeps bringing up? hard costs, such as costs paid to third parties, and softIt turns out that even though all of your documents costs, which can be attributed to labor costs. Whileare already in an electronic format, processors keep hard costs are relatively easy to quantify, as most ofprinting out documents because the current system it is captured in the LOS database via the HUD-1,doesn’t allow them to look at a loan file and an elec- soft costs are much more difficult to ascertain. Buttronic document simultaneously. Alternatively, if a according to the Annual Mortgage Bankers Perfor-lender is unwilling to invest in hardware like multiple mance Report conducted by the Mortgage Bankersmonitors, their staff will resort to inefficient methods Association, labor costs make up as much as two-such as printing paper documents in order to com- thirds of the cost per loan (Figure 3).plete their tasks. Without this level of understanding,chances are that a lender won’t achieve the ROI they With these two viewpoints in mind, LendingQB de-expect when they buy new technology. veloped Enterprise Process Assessment (EPA), an objective, well-defined, comprehensive process thatThe second step is to look at problems or opportuni- helps overcome the challenges associated with com-ties in a way that can be measured, so that relative plicated technology evaluations. The EPA is a deep-value can be established. A lender’s wish list typi- dive analysis of a lender’s workflow process thatcally doesn’t have any rhyme or reason; everything provides a method to model and measure processis deemed important. But that’s not reality. A prob- improvements using objective standards. The EPAlem or opportunity will have differing impacts on a gives lenders direct access to know what their laborlender’s business, so it’s essential to understand ex- costs actually are. The goal is to help lenders makeactly how much that impact is. And when it comes better decisions and achieve a high level of ROI fromto mortgage lending, nothing is more important than their technology investments.the bottom line, usually expressed in terms of costper loan.Figure 3: Personnel costs account for more than two-thirds of the cost per loan. Direct Loan Production Expenses OTHER DIRECT EXPENSES 23% TECHNOLOGY- RELATED EXPENSES 2% OCCUPANCY AND PERSONNEL EQUIPMENT 69% 6%Source: Mortgage Bankers Association
LendingQB The five steps to making better technology decisions EPA: Five steps to making better work is being performed, the modeled cost per loan technology decisions is compared with the actual cost per loan using ac- counting data. A variance analysis reveals any over- The EPA consists of five steps that help lenders un- sight or inaccuracy in the model and allows lenders derstand the value of any given technology invest- to identify value-added activity costs. ment. The EPA uses an objective analytical process that strips out the influence of opinion or emotion. STEP 3: Identify non-value-added activity costs The process may reveal new problems or opportuni- Now, with a clear understanding of value-added ac- ties, or it may even help the lender reach the conclu- tivity costs, it becomes easier to see where lenders are sion that no technology change is necessary at this potentially wasting resources on activities that don’t point in time. Whatever the case, the goal is to give add value to their process. Some examples of non- lenders a greater understanding of themselves, and value-added activities are re-keying of data, toggling to see that technology is but a means to an end, not a between different applications, spending too much goal in and of itself. time answering loan status questions, locating paper STEP 1: Model workflow activities documents, correcting errors, or even web surfing. This analysis provides an additional benefit to the The first step of the EPA is to get a holistic picture of lender because some of the process improvement op- a lender’s entire workflow process. From origination portunities that will be identified can be solved with- to delivery, the EPA presents a series of questions to out any changes to technology. lenders that are designed to literally draw a detailed picture of current business processes. Within this STEP 4: Discover the causes of problems workflow visualization, activity costs are derived in Next, a lender’s wish list is dissected and compared order to understand the value of each step and calcu- to the improvement opportunities identified in the late a net cost per loan based on the aggregate of all workflow model and activity analysis to prioritize activities. the original features list (Figure 4). This compari- STEP 2: Identify value-added activity costs son, coupled with interviews with different stake holders, will help determine which features are really In order to ensure that the workflow model is accu- needed and what problem(s) did the lender envision rate such that it can clearly identify where necessary the feature would address. During this step, it’s not Figure 4: Lenders need to understand the root cause that is driving their request for a feature. Lender Wish List Root Cause of Problem A single, end-to-end platform. Incomplete or wrong data residing in different systems. Business rules engine. People are forgetting to perform specific activities. Easier custom document creation. Regulatory changes cause forms to be out of date. A web portal for borrowers. Allow borrowers to help themselves. Better compliance checks. People are forgetting to perform compliance checks. More useful report creation tool. Reports are difficult to create. More detailed audit logs. Employees are playing the he-said-she-said game. Streamlined disclosure system. Originators are not complying with RESPA.
LendingQB The five steps to making better technology decisionsuncommon for lenders to discover that the original EPA is key to profit improvementfeature request is no longer relevant, or that the rootcause could have been solved better through an en- The EPA is designed to be a tool that lenders cantirely different feature or tool. use to empower themselves when making any type of technology decision. In fact, we encourage lend-STEP 5: Quantify the impact of solving a ers to incorporate the EPA model into their businessproblem development strategy as a way to drive continuous profit improvement (Figure 5).Using all of the information that is gathered in theaforementioned steps, lenders gain a solid under- The EPA should not be treated as a one-time eventstanding as to how to improve their processes, what but should be applied again and again, on an annualthose process improvements are worth, and whether basis, in order to identify activities that could be im-root causes of problems are being addressed. Any proved or eliminated. Using this approach, lendersgiven solution - be it a document imaging system, a become truly innovative businesses that lead theproduct and pricing engine or an entire loan origina- transformation of the mortgage industry, instead oftion system - can now be evaluated in terms of ac- falling victim to change.tual dollar figures to determine the overall cost perloan savings offered by the solution versus its actual We believe that by focusing on an objective and pro-cost. Therefore, every potential technology solution cess-oriented approach, lenders can remove the fear,can be measured in terms of ROI. Lenders can now uncertainty and doubt associated with technologyexpress their needs and expectations to vendors in a evaluations. By working constructively to find solu-way that doesn’t need translation. tions and avoiding the lure of features, lenders will achieve better ROI from their technology and pave a sustainable road to profitability and success.Figure 5: Continuous application of the EPA model creates a future-proof strategy for technology. Enterprise Process Assessment Implement Identify Solutions Solutions Make Problem/Solution Trade-
LendingQB’s goal is to help mortgage lenders win thelending game.Finding the competitive edge in mortgage lending requires more than technology and industry know-how. Mortgagelending is on the verge of major change that will re-shape the way consumers buy homes. Today’s lenders need a part-ner that will guide them to strong and consistent returns. LendingQB is composed of a team of highly experienced in-dividuals that blend advanced technology with an analytical, service-oriented philosophy that focuses on real results.For additional information about LendingQB and the Enterprise Process Assessment,contact:Binh Dang (email@example.com)Linn Cook (firstname.lastname@example.org)For sales and general information, contact:Gigi Campbell (email@example.com)John Campbell (firstname.lastname@example.org)Holt Crowder (email@example.com)For more information, please visit www.lendingqb.com