In 2015, industry observers might have thought that CFPB’s “Know Before You Owe” rule, colloquially known as the TILA RESPA Integrated Disclosure (TRID), was the single most important issue facing mortgage lenders. To be sure, TRID dominated the headlines and the discussions over the course of the year. But TRID also exposed a crucial issue that has been percolating over the last seven or eight years, and it is one the industry must solve: How do we assure investors and regulators that the content of the loan file is exactly as it is represented?
What is required is a new approach to accessing the specific data points that support each mortgage loan. Think of the new approach as one in which every data element is standardized and understood within an industry-wide context: a “Data-validated Mortgage.”
What is a data-validated mortgage?
A Data-validated Mortgage is one that has escaped the bonds of paper that have constrained mortgages since the 19th century. Paper wasn’t a problem back in the days when it was the highest-tech medium available, but today’s electronic world requires that mortgage information be accessible outside of the paper document.
A mortgage can be described as “data-validated” when information within the loan documents and from the mortgage process flow is utilized to do four things:
- Substantiate that an approved loan is consistent with the loan sent by the lender to the closing table, signed by the borrower and sold to investors
- Demonstrate loan quality to investors by providing greater transparency to the process, the data, and the compliance of the loan data and the documents in advance of a post-close review and audit
- Monitor regulatory requirements throughout the mortgage workflow, from pre-close to close to post-close, and highlight potential investor or regulatory errors
- Document evidence of compliance throughout each phase of the loan lifecycle
There are many implications to this simple description, and a number of things have to happen before the Data-validated Mortgage becomes possible. First, there is the matter of the information being locked in the paper documents the industry uses. It may seem like a simple matter to turn printed information into data, but it is not as easy as it sounds.
The mortgage business has evolved technologically, particularly over the last 15 or so years. But due in part to the legacy systems involved, it remains largely a document-centric industry. Printed or electronic print-formatted documents that have loan data embedded within them (think PDF or fax) are exchanged throughout the loan process, yet this data is not easy to manage. Lenders use loan origination systems to enter data and create documents; but once created, the data is unstructured and is no longer accessible outside of the document. For the data to become validated, it must be accessible independently of the document itself—and yet still follow the document through the loan process. For example, in a Data-validated Mortgage, while there is a loan document like the Form 1003 that can be printed, the document also exists in an electronic state as a digital, data-rich companion.
Portability and Siloes
Next, there is the matter of data portability. Data becomes portable when it can be shared, analyzed and put to good use by authorized participants to the process. In the Data-validated Mortgage, this is where the concepts of structure and standardization become tremendously important.
A Data-validated Mortgage requires data to be passed from one system (or person) to the next in the loan workflow. To do this properly, the data must have a structure that identifies the data’s context. So in addition to the raw data, each data element must also have a label. For example, “$350,000” isn’t very useful all by itself. Label it “Loan Amount,” and the recipient instantly understands its meaning. Structured data enables lenders, settlement agents, regulators and business partners to access and analyze the data to help improve quality, business processes, compliance and efficiency. However, structured data is only useful when everyone uses the same standards. Unfortunately, there is a basic problem that arises at this point, owing to a lack of standardization.
It took over 20 years for automobiles to develop standardized controls, with the clutch, brake and accelerator in the modern layout still used today. Early Model T drivers used a hand throttle, for example, and brake controls were located wherever the builder felt like putting them. Cars became far more useful in the 1920s when drivers could operate most of them pretty much in the same way.
The mortgage industry is going through a similar evolution. Problems have arisen when lenders use systems with proprietary, independently developed structures for data. As a result, mortgage data is generally “siloed” and accessible only by systems that can talk to one another. Even systems that have undergone integrations to become somewhat compatible with each other are seldom fully aligned. For example, servicers routinely must manually go through loans originated by others in order to board them from an origination system to a servicing platform. All this incompatibility makes data portability difficult, if not impossible – which is why data standards are critical to achieving the Data-validated Mortgage.
MISMO and the Uniform Data Reference Model
Thankfully, progress toward mortgage data standards is improving. The Mortgage Industry Standards Maintenance Organization (MISMO), a not-for-profit subsidiary of the Mortgage Bankers Association, has spent years working with lenders to create a standardized data format for mortgage lending. Instead of having every lender using its own method of handling loan information, MISMO enables all to be on the same page.
For a bit of reference, the mortgage crisis came at a time when about 100 data elements per loan were available to investors and rating agencies to evaluate risk. None of those data points could be digitally validated, by the way. Using MISMO, up to 10,000 individual fields of loan information can now be detailed, enabling very fine analysis to satisfy risk control and record keeping requirements for investors and other stakeholders.
After years of work and untold hours invested by committed industry professionals, MISMO has created a reference model that has become the de facto standard for residential and commercial real estate transactions, enabling data portability between systems that adhere to it. MISMO has also established both company-level and professional-level certification programs that help identify technology vendors and service providers that follow the MISMO standards.
One impactful example of the move towards standardized data portability is the GSEs’ Uniform Mortgage Data Program. The Uniform Closing Dataset (UCD) is the latest in a series of standards set by the GSEs, each focusing on a different part of the loan process. (In 2011, the GSEs released the Uniform Appraisal Dataset (UAD). That was followed in 2012 by the Uniform Loan Delivery Dataset (ULDD).) The UCD, which is based on the MISMO reference model, addresses data from the new Closing Disclosure. Lenders wanting to sell loans to Freddie Mac and Fannie Mae need to adhere to the UCD, which gives the GSEs the ability to use the data submitted with the loan to evaluate the integrity and quality of the loan prior to loan purchase. By basing the UCD on the MISMO reference model, the GSEs helped drive acceptance of the MISMO reference model and established it as the industry standard to follow.
In addition to data portability, a true Data-validated Mortgage requires connections for exchanging data between the various parties and systems associated with the loan. This allows lenders and partners to exchange data quickly and accurately. Ideally the connections are in the form of a network that links multiple lenders and partners. eLynx offers such a network now in the form of the electronic Closing Network (eCN). This enables all lenders and partners who connect to eCN to be connected to all of the member lenders and partners, seamlessly and instantaneously.
Long lasting benefits
Just as interchangeable parts and the assembly line revolutionized manufacturing in during the Industrial Revolution, the Data-validated Mortgage brings numerous benefits to mortgage lending.
First and foremost, it improves the integrity of the loan package and enables granular evaluations that ensure loan quality. Nothing is lost in translation due to systems’ inabilities to understand one another’s “language.”
Second, Data-validated Mortgages allow lenders to vastly reduce exposure in compliance issues by ensuring loans are within regulatory tolerances, including the UCD validation for loans submitted to the GSEs and the upcoming HMDA reporting requirements. These and other analyses can be readily automated during all phases of the loan process, from TRID through delivery, thanks to the Data-validated Mortgage.
Third, it supports greater and more efficient interaction with the borrower, which is a focus of the CFPB and a clear preference of today’s consumer.
Lastly (and perhaps the most important long-term benefit) is the transparency the Data-validated Mortgage brings to the loan process. As the investor community regains confidence in the integrity of mortgage information and its own ability to assess risk, there is a far greater future beyond today’s government-centric environment for the return of private capital in a large scale.
In addition to these tremendous benefits, the Data-validated Mortgage gives lenders the unprecedented ability to leverage the information they collect to understand market trends for business opportunities and improve their internal processes to boost service levels to consumers. They can also gain much greater ability to monitor vendor performance as mandated by the CFPB.
Are we in the midst of a data revolution in lending? Without question. While the overarching potential of achieving data mastery has yet to be fully revealed, the Data-validated Mortgage is emerging as a revelation unto itself – and one with unprecedented potential to transform the mortgage industry in numerous positive ways.
About The Author
Alec Cheung is Vice President of Marketing at eLynx where he is responsible for product management, corporate marketing and corporate communications. Alec is a seasoned B2B marketer with 14 years experience in software and outsourced business services. He is passionate about customer experience and service delivery. Alec earned a BA in Economics and an MBA degree from UCLA.