The ongoing introduction of new regulations and the fear of non-compliance has permeated the industry to the point where everyone is frozen with fear. Instead of seeking new management methods and operational initiatives to meet the challenges, lenders keep piling on new processes and new reviews on top of the old ones. Is it any wonder that the Quarterly Mortgage Bankers Performance Report for the first quarter of 2015 found that origination costs have increased by nearly $1,000 per loan since last year? It seems that we are headed in the wrong direction when it comes to efficiency and effectiveness.
So why isn’t there any progress in lending? Can we solve our problems by making progress in the way we currently do business, or must we actually transform what we do and how we do it? The idea of transformation is much bigger than simply adding steps to a business process or adding in a new technology filter. In order to transform an organization, it must undergo a radical, fundamental change in how business is done. The days of slow incremental changes developed to try and address the CPFB requirements are no longer up to the challenge.
There is no denying that these new requirements are important, but it is also important that the company be profitable and that management controls are operating as expected. The CFPB recognizes this and even with their maniacal focus on the “Consumer Experience” they have grounded their requirements in solid and proven management practices. To meet the requirements they say, lenders must have a management system in place that evaluates and implements new changes and then monitors the effectiveness of the changes. This monitoring and management action is not a one-time thing, but is an on-going part of the management system. And therein lies the opportunity for lenders.
Recognizing the need for fundamental change. This industry is not known for its willingness to change management style and focus. While CEOs and senior executives have read all the management books and attended numerous seminars, the reality is that they don’t know how to manage change. All too often they continue to be focused on “production, production, production” simply because they matured in an environment that celebrated and rewarded companies that made the most loans or had the largest dollar volume. There were very few companies that didn’t have a yearly celebration for loan officers where trophies were handed out for these very accomplishments. Yet none of these celebrations included processors, underwriter or closers and there were certainly no awards given out for loan quality. Now lenders must focus first on quality and regulatory compliance instead of volume and production. That is a hard change to make and trying to do so in a process with imbedded historic methodologies and achievements makes it nearly impossible. So whether we want to recognize it or not, how management does its job must become the transformation needed by our industry.
If lenders are serious about stopping the outflow of money for multiple unnecessary reviews, additional training programs and new technologies, they must engage the company in a centralized operational process, which focuses not on the number of loans originated, but on the quality and value of the loans as expected by consumers and investors. This change is a fundamental and maybe even a radical change; in other words, a transformation of the entire origination process. So how does one go about creating this transformation in a way that make sense?
Basic steps for a successful transformation. The first step is for management to actively engage in identifying what exactly they want to produce. Although it sounds simple, it really isn’t. For example, just saying “I produce mortgage loans” really doesn’t tell the consumer or the investor anything. How are you going to produce them? How will you interact with the consumer? What can the other stakeholders expect? Will it be profitable? Will it meet consumer needs? Will buyers of the loans see them as the best? All of this needs to be spelled out in the company’s “Statement of Objectives”.
Next you will need to expand on this with specific statements identifying how the objective will be reached. For example,” we will produce loans through the use of technology that meets our customers’ expectations for fairness through continuous communication and compliance with regulations. We will meet the expectations of those that purchase our loans through proven quality and completeness and we will meet our stakeholders expectations through efficient use of the resources provided.” This lays out what the underlying approach will be and defines how management will work. This statement says that management’s focus will not be entirely on just producing loans, but will instead be on producing loans that meet the consumer focused requirements of CFPB, the investor requirements for adherence to guidelines and overall risk standards as well as doing it in a manner that provides for a return on the investment made by other stakeholders.
The second step is to develop an effective risk management program, which includes a monitoring program of the combined operational processes. The individuals responsible for these functions must have a broad understanding of the risks found in the organization. The most critical of these risks is operational risks. If the processes fails to operationally produce products that meet expectations, management must know this. This information can be used to make adjustments or changes to the processes themselves
Today Quality Control acts as this feedback mechanism, but the process is distorted by agency requirements to the point that it is virtually useless to management. Waiting 90 days for information about processes that are not working does nothing to address any operational risk. Although the agencies acknowledge that their prescribed program does not fit every lender, few, if any lenders are willing to develop a program that works for them instead of relying on a methodology and process that does not give them the results they need. This change has to be part of a company transformation.
Transformational Quality Control is about how the process is working and how well it is controlled. It is not a loan file inspection or an audit. It is systemic way of evaluating whether or not a process, any process, is functioning as expected. A variation (or defect using the agencies vernacular) is just that unless you can determine that it will impact the overall output of the process. When it is working as expected, the process is deemed to be under control. This does not mean that there are no variations, but that the variations are random in nature and fall within an acceptable range.
For a management team that is transforming its operation, knowing if the new policies, procedures and technology they have implemented are working correctly is critical. Tracking variances and identifying processes that need to be addressed is what allows the transformation to continue.
Transformational QC also makes the organization more efficient. Because each change, whether it comes from a new regulation or a new process, can be incorporated into the QC program it eliminates duplicative types of reviews. One review process with a solid analysis of what is occurring in a process is much more conducive to correcting errors and managing the operations than what we have today. Furthermore if a lender has the ability to benchmark themselves against others in the industry this comparative analysis will identify where there are competitive issues to address.
The third step that management must undertake is the development of an incentive program for its employees. By replacing the volume rewards with operational effectiveness and efficiency rewards, staff will be motivated to collectively work toward meet the overall company objectives.
Getting help and support. Once the initial steps are taken and the staff alerted to the task, the work of transformation can get underway. Many lenders acknowledge that it is difficult to achieve this on their own and there are many companies ready to help. It is important that any help come from someone that knows the business. Despite protestations to the contrary, this process is unique. This uniqueness must be incorporated into any transformation if it is going to be successful. Company’s such as Transformational Mortgage Solutions, headed by industry expert David Lykken is one such organization. Based on his experience and knowledge of the industry he knows how mortgage origination works and can provide solid guidance in the transformation process. This is the type of support that is needed.
There are emerging technologies that can assist in this transformation as well. One such opportunity is the new quality control program that has been developed to maximize results and minimize cost. This new program, developed by the MarBecca Group, out of Deerfield Beach, Florida and Mortgage True View, based on Salt Lake City, focuses on the operational data collected and identifies through its analyses where there are weaknesses that need to be addressed as well as where the process is working within an acceptable level of control. In addition it has the benefit of utilizing an industry QC Benchmark which was developed with input and guidance by industry QC managers. This benchmark can provide a comparative analysis with the industry as a whole to assist in identifying issues and opportunities.
There is no doubt that members of this industry are bearing the burden of tightened regulations and reform. However for those managers who see this as an opportunity rather than a burden, there is the potential to turn mortgage lending companies into a shining example of how it should and can be done the right way.
About The Author
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.