*The Modern LOS*
**By Lester Dominick**
***Today’s modern loan origination systems (LOS) are evolving into more than just loan processing systems. This evolution is driven by lenders’ needs to respond effectively to ever increasing demands from investors, regulators, and consumers. The complexity of the mortgage business today is at an all time high and still peaking. Compounding the intricacies are new regulatory enforcement risks and fines that could significantly impact a lender’s net worth.
Every LOS in the marketplace today is functionally capable of processing and closing loans; however, lenders today are demanding that their systems do much more. A line has been drawn and now vendors have to step up and over that line for them to succeed and for their clients (lenders) to prosper.
****Just as the financial meltdown has been difficult for lenders, it has been equally challenging for LOS vendors. Vendors are facing historically high costs maintaining system compliance as regulators continue to add new and complex reporting requirements.
****The new Consumer Financial Protection Bureau promises to be extremely active in addressing the mortgage industry. They have taken responsibility for several laws that directly affect mortgage originations including the Home Mortgage Disclosure Act (HMDA), the Truth-in-Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Ownership and Equity Protection Act (HOEPA), the Equal Credit Opportunity Act (ECOA), the Alternative Mortgage Transaction Parity Act (AMTPA), the Community Reinvestment Act (CRA), and the SAFE Mortgage Licensing Act (SAFE). And let’s not forget the Dodd-Frank Act. The industry can certainly expect more requirements as additional rules are written.
****Beyond New Regs
****In addition to the regulatory activity, there are new requirements from the Government Sponsored Enterprises (GSEs) that require a LOS to support the Uniform Mortgage Data Program (UMDP) which consists of the Uniform Collateral Data Portal (UCDP), the Uniform Appraisal Dataset (UAD), and the Uniform Loan Delivery Dataset (ULDD). LOS systems also need to add support for MISMO’s V3.1 Reference and Data Dictionary in the near future. The costs of implementing these significant, time-consuming projects and dealing with normal day-to-day compliance issues are normally fully absorbed by the LOS vendor.
****Lenders receive the benefits of these efforts at no additional cost as they are typically included in the maintenance or transaction costs lenders pay LOS vendors for support.
****Vendors Are Stressed
****LOS vendors not only face a constant barrage of compliance and technology challenges but are operating in an environment where there is a smaller revenue pool due to lower loan volumes and fewer potential customers.
****With this tremendous work load and challenging market not every LOS vendor is going to be able to step up to the line and meet all these requirements. Some vendors have already withdrawn from the market while others are providing minimal amounts of effort to stay in compliance for their existing customers. There have been reports of vendors missing regulatory due dates and problems with system updates meeting the requirements.
****With such a significant regulatory workload, system innovation has taken a back seat the last several years. The vast majority of the loan origination systems in the market today were built prior to 2006. Software development technology changed significantly at end of 2006 when Microsoft released its .NET 3.0 Framework. This wasn’t just an upgrade, it was a substantially new and better way to build and run software.
****The newer technologies offered by Microsoft and others offer significant improvements in all areas of development including the graphical user presentation layer, business rule engine, workflow system, communications layer, imaging capabilities, and business intelligence tools.
****These technologies are being used to build more efficient electronic loan delivery systems, compliance engines, product and pricing engines, integration services and data services to support business intelligence gathering.
****For vendors and lenders to remain competitive, all loan origination systems will need to be redesigned and upgraded to take advantage of the many benefits that the newer software architectures provide.
****And it’s not just the applications that need to be upgraded, the data base schemas must follow suit. The schemas were developed many years ago and as those schemas have been modified over the years to accommodate changes to MISMO formats, GSE interfaces and regulatory requirements, they have become inefficient. Even if they started out as a well normalized data model, over time they have lost many of the benefits of normalization.
****Some vendors have taken small steps by putting new User Interfaces on top of old technology. This face lift does not provide the benefits of the new development and runtime technologies; it’s merely a cosmetic improvement that will quickly lose its luster. Only a few vendors have made the deep-pocket financial commitment to redesign their products in the new technologies build a new data schema.
****There are four important areas that lenders using new technology LOS can make a significant difference over previous generations.
****>> Compliance – provides a systematic approach to compliance with the use of the rule engine and strong interfaces with third party compliance tools.
****>> Loan Quality – simplifies and promotes the implementation of processes and services that improve loan quality through the use of the rules engine to enforce policies, identify potential risks and problems, and via the use of integration services to validate data integrity with independent third party data.
****>> Task Automation – accomplished by automating duties/steps through the use of the workflow system in conjunction with the rules engine and imaging center to reduce costs by the use of less employee labor while also improving quality.
****>> Business Intelligence (BI) – supports business decisions and provides constant feedback to monitor performance all the way down to the individual performing tasks.
****The first three difference makers are fairly obvious and success is directly related to managements’ ability to get the best use out of these tools. The fourth, the use of Business Intelligence tools, is less obvious and requires more creativity.
****BI involves determining what data is important and how to analyze that data to learn more about the business. This leads to the discovery of new opportunities in all areas of the business enterprise. BI allows a business to enhance visibility of organizational strategy and align actions with that strategy.
****BI is an enterprise wide system that makes use of timely data from not just the LOS but other important systems such as accounting, servicing, and secondary marketing. The data can be organized to provide measurements of performance against defined benchmarks. It can be used to understand what factors are driving performance in many areas – sales, customer interaction, third party vendor performance, staffing requirements, operating costs and many more. BI provides personalized and interactive dashboards that can improve business performance at all levels of a company.
****Take BI Further
****Dashboards allow users to track key performance indicators, assign goals, and collaborate and share knowledge across the business. Complex data can be communicated effectively through a visual presentation that users can understand more easily than looking at reports. Dashboards also let users drill into the visual data to better understand what the dashboard is illustrating.
****What does all this new technology really mean for the lending industry? It means lenders will be better equipped to compete effectively in a market that is becoming increasingly complex, with more and more risks.
****The Way Forward
Lenders will improve their ability to compete with companies that have greater resources by being better informed about their business and customers. They will gain a better understanding of where process improvements can be made that will improve bottom lines. They will understand what is working and not working for their customers.
****And lastly, risks can be identified sooner and mitigated easier. Proper use of these new technologies is a difference maker.
****ABOUT THE AUTHOR: Lester Dominick founded MortgageFlex Systems, Inc. in 1980 as a consulting firm to specialize in the mortgage banking industry. He has served as President and Chief Product Architect since inception. Dominick’s initial work at MortgageFlex Systems focused on systems evaluation, systems design and strategic data processing planning for commercial banks, savings institutions and mortgage companies. He quickly identified the need for lower cost solutions for mortgage loan origination, and LoanQuest, the first microcomputer based loan origination system, was introduced in 1984.