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Software On Purpose: A Case Study in Breaking Bottlenecks

*A Case Study: Breaking Bottlenecks*
**By William DiPaolo**

***“It’s easily two hours per file, maybe longer”, the processor said, looking around the room with her head nodded rapidly up and down to let anyone who didn’t agree know they’d better think again. Other heads began nodding in unison. The president of the fast growing California lender looked over at me, expressionless. “Two hours. Every file. There’s got to be a better way.”

****The rapid deterioration of the mortgage broker model had propelled his company to a seven fold increase in originations over the past fifteen months. Scores of talented brokers, many with good numbers of employees, shuttered their businesses and flocked to the security of the well capitalized lender. Yet as originations increased, so did the problems. And this particularly thorny “two-hour-per-file” problem threatened his ability to continue growing. Could enterprise software eliminate the bottleneck?

****To answer the question we should review an important characteristic of enterprise software; the software should do actual work for you. This means, that in order to eliminate the bottleneck, the software must fully automate the task and remove the human work involved. Would that be possible?

****The bottleneck developed as originations increased from his newly acquired branches. In the past all loans originated internally, from loan officers trained in the lender’s fee structure and processes. This all changed the moment originations started flowing in from the new branches. It seemed each branch (each loan officer, even) had their own way of entering fees. Consequently every externally originated loan had to be manually reviewed to ensure correct fees.

****Processors spent more and more time poring over submitted files. What fees were being disclosed? How were the fees labeled? Where did the fees appear on the GFE? Before a loan could be disclosed, all these questions had to be answered. Errors and omissions needed to be communicated back to the loan officer. More than occasionally this “review and reject” process occurred more than once per file. To ensure compliance, every file had to be evaluated – even those which ultimately contained no errors. The processor wasn’t kidding; a two hour bottleneck occurred on every file. And more originations meant more processors had to be hired. In order to scale his business, the president needed software to automate the work.

****Turns out, this is exactly the type of thing enterprise software does exceptionally well. To understand, think of enterprise software as a network of digital pipes moving loan data through your operation. At strategic locations the software monitors the data flowing through it and determines proper routing. Keeping with the analogy, the software uses intelligent valves and filters to ensure loan data moves through the output end of your pipeline free of defects. With this in mind, we can see just how software eliminates the bottleneck, and fully automates what used to be a two hour manual task.

****First, the software eliminated the need for brokers to e-mail loan files or GFEs directly to processors for review. Instead, branches submitted files directly into the network (the pipeline) so the software could examine every fee. If all was correct and fell within the lender’s tolerances, the software moved the loan data into the lender’s workflow and notified the loan officer that origination was underway. On the other hand, any errors were immediately presented back to the loan officer. Almost immediately, the loan officer knew exactly what was wrong, and how to fix it. Within minutes the loan officer was able to resubmit the file and try again. The solution provided faster loan submissions and better response times – all without any human intervention.

****As you consider enterprise software for your organization, remember the analogy of your loan data flowing through a network of pipes. Think of different places in your organization where software, rather than people, can analyze loan data and perform an appropriate action. This is true enterprise resource planning. Yes, you will gain faster, more accurate processes with enterprise software. But more importantly, you will gain an ability to scale what you do today into what you dream of becoming tomorrow.

William DiPaolo is Chief Executive Officer and Co-Founder of Cogent Road. William brings more than a dozen years experience running enterprise Software as a Service businesses that manage confidential data. Prior to Cogent Road, William was the President and CEO of venture backed ThoughtWare Technologies, Inc., a provider of enterprise human resource software used by Fortune 500 companies such as Hilton Hotels and FedEx. At Cogent Road, William leads the company in its goal to become the benchmark for software services in the mortgage industry by creating new ways in which software can automate processes, reduce costs and increase knowledge sharing. William can be reached via e-mail at william.dipaolo@cogentroad.com.

New Media Strategies: A Question Of Ethics

*A Question Of Ethics*
**By Rick Grant**

***So far in this column, we’ve talked about using social networking and blogging as tools that will not only advance your thought leadership within the industry but also help you build better business relationships. But I would be remiss if I did not take at least one column to talk about ethics.

****Every good journalist and marketer knows about ethics, and just because we’ve moved into the do-it-yourself online world doesn’t mean that we can ignore professionalism and ethical standards.

****By definition, a blog is a tool you use to publish your own thoughts—where you can share what you think, what you’ve found, and what you think about what you’ve found. By all means, go wild. That’s what the tool is for. But keep in mind that as you become recognized as a valuable and reputable voice in your industry, the chances that people are going to come knocking on your door asking for your endorsement will increase.

****Now, there’s nothing wrong with this, on the surface. People hire spokespeople all the time. If you use some discretion, there’s nothing wrong with building your business this way. After all, every business is built on relationships. In the case of social networking, these business relationships have become somewhat more important to some government agents.

****The government knows that your thoughts can be bought. If you’re a paid spokesman doing the Billy Mays in an advertisement, that’s one thing, but when you act as though you are just another consumer endorsing a product you use and love, the government has decided that this poses a risk to consumers. According to the government, consumers deserve to know whether what they’re reading in your blog is something you’ve thought up on your own or something you’ve been paid to think.

****To ensure that readers know what they’re in for, the Federal Trade Commission last year updated their Guides Concerning the Use of Endorsements and Testimonials in Advertising, requiring the disclosure of “material connections” between the advertiser and those that endorse them. And this requirement absolutely extends to bloggers.

****So, if a company contacts you to provide an endorsement of their product in your blog and compensates you for it, you cannot keep that relationship a secret. Hiding that information from your readers is unethical and can result in serious trouble for you and your client.

****Relationships are what drive your business. There’s no way around that, and neither is there anything wrong with it. But as a matter of professionalism and integrity—and as a matter of regulatory compliance—you must be sure to disclose all of your relationships when you use social media to endorse a company or its products.

Rick Grant has been an editor, writer and new media advocate for nearly 20 years and has focused on various facets of the mortgage industry for the last decade. Prior to starting his own company, Rick Grant & Associates, he served as the special reports editor for National Mortgage News and was the launch editor for Origination News Magazine, Broker magazine and Home Equity Wire, as well as managing editor of Mortgage Technology magazine while employed with SourceMedia, formerly Thomson Media. Rick then served as editor of Real Estate Technology Insight, an October Research Corp. publication. A successful freelance writer, Rick continues to write for the industry in addition to running his own consulting company. He is a proponent of new media communication tools, such as blogs, podcasts, video blogs and online presentations. He can be reached via e-mail at rick@rga-pr.com.

Powering Today’s Lenders: Loan Quality, Your LOS Could Be The Difference

*Loan Quality: Your LOS Could Be The Difference*
**By Daniel Liggett**

***In today’s market, quality and compliance are major concerns for lenders. They need to comply with a flood of new regulations, avoid potential fines and minimize buyback risk while ensuring loan quality. Lenders understand that investors will not purchase loans that do not meet their strict quality requirements. Lenders are facing these challenges with fewer staff and in an extremely competitive marketplace.

****Loan officers are struggling with the speed and frequency at which these rules and regulations are changing and diligently looking for guidance on how to implement effective solutions that address these concerns. They are looking for automation that addresses investor loan quality requirements and the flood of new rules and regulations.

****Want better loans? Then start with your LOS. The typical system of record for the majority of your loan data is your LOS. To assure investors that your loans are of high quality and saleable, lenders must look for ways to improve the loan process within their LOS. Lenders need to accept that bad data = bad loans = buybacks = loss of profit. Inefficiencies within your lending process cause errors, and increase costs.

****To stay competitive in today’s market, lenders can no longer afford to deal with inefficient and outdated LOS technology. The stakes are simply too high. Regulatory penalties and costly buybacks will significantly cut into profits and overall sustainability of the lending organization.

****A powerful LOS, especially one that delivers automated data validation, can improve loan quality. These systems can provide data edit checks and hard stops within the system to prevent bad data from being introduced into the loan process. Advanced business rules can address and enforce regulatory changes and new investor guidelines, while streamlining the lending process to improve loan quality.

****In addition, tight integration of the LOS with other key third party service providers is critical in improving data and loan quality. Two-way auto data integration avoids rekeying of information, eliminates omission errors and reduces the time and cost of data entry mistakes. Lenders simply cannot accept simple interfaces that do not address or eliminate these challenges.

****If you want to improve loan quality, avoid costly fines and minimize buyback risk then one of the first places you need to look is your LOS. Advanced LOS offerings that utilize the latest technology solutions and also constantly monitor regulatory changes can deliver the type of solution that you need.

****Loan quality can no longer be wishful thinking if you hope to prosper in the lending environment of the future.

Daniel Liggett serves as Director of Client Services for Associated Software Consultants’ PowerLender Loan Origination & Processing System. He has more than 20 years experience in mortgage lending and loan automation systems. Danny oversees the configuration, training, support and project management efforts for loan origination and secondary marketing at ASC and serves as a development and marketing advisor.

Default Management: Innovation At Work: New Challenges

*Field Services: New Challenges Test Old Models*
**By Joseph Badalamenti**

***For today’s servicer, success in the face of relentless change is an ongoing battle. The right field services provider can be an important resource for the expertise, specialized technology and in-depth field resources needed to win.

****Without question, effective field service providers can enhance curb appeal, maximize asset value and shorten disposition cycles. However, more robust solutions – incorporating new processes, systems and metrics – are needed to meet evolving cost and compliance challenges.

****Virtually all field service companies provide landscape maintenance, as well as services like winterization, securing, and related corrective/maintenance work. However, in today’s fast-evolving, highly regulated marketplace, there’s much more to the job than simply keeping the grass cut or the snow cleared.

****The Right Information at the Right Time

****For starters, your field service provider must be able to continuously monitor FHA, VA, Fannie Mae, Freddie Mac, and other investor and insurer information sources, as well as those of independent third-parties, to insure that field services are compliant with the most current guidelines. All investor/insurer guidelines, as well as client requirements, should be integrated into the provider’s solution, with appropriate tracking and reporting to provide a record of compliance. Ideally, servicers should be able to view all requirements and implementation results 24/7 through their field services workflow management system.

****Speed is crucial. The sooner the servicer and field service personnel become aware of a change, the less likely costly compliance missteps become. With the right combination of expertise, reporting structure and technology in place, full implementation of compliance-related changes should average 24 hours or less.

****To get the right information into the right hands – including all appropriate internal and field personnel – a variety of redundant communication channels must be employed.

****Central to effective information flow and process integration is the field services workflow management system. These systems need to provide secure 24/7 online access enabling efficient ordering, tracking and management of asset preservation services. If well designed, such a system is capable of streamlining order placement and invoicing, providing on-demand retrieval of documents and photos, and instantly generating work status updates and property condition reports.

****Advanced systems, however, go considerably beyond those basics, providing integration and management of everything from vacant property registration to HUD bid processing, while delivering detailed management reports that enable tracking of performance and costs over time.

****Quality Control

****Rigorous qualification standards are the foundation of strong field service teams – inspectors/contractors must be carefully screened and tested to establish their suitability to become field team members. In the best of these systems, applicants can qualify for specialized training by demonstrating knowledge of local building codes and passing a preliminary test. Those who complete such training should be required to pass knowledge and competency tests before being accepted as part of the field service network.

****For each work order, the field services provider should assign a contractor and provide an inspection/preservation order ? including all instructions and related documents needed to complete the work.

****Performance Metrics

****As part of the quality control process, all inspectors/contractors should be rated on every work order relative to work quality, turn-around time, communications, compliance and other performance variables. The most effective rating systems measure 60 or more variables on each work order.

****Performance metrics, including adherence to compliance standards, should be incorporated into detailed management reports. For maximum consistency and timeliness, these reports can be automatically generated as part of the overall workflow management system. Reporting format, content and frequency should be customized to mirror the servicer’s particular business circumstances, as well as relevant investor and insurer compliance requirements.
At the end of the day, for servicers to be successful, partnering with the right field services provider can make all the difference.

Joseph Badalamenti (Joe Bada) got his start in the default management industry in 1967 as a HUD contractor. Now, 43 years and over 5 million inspections later, Joe has built Five Brothers into a highly successful and respected industry leader offering a full range of default management services and technology solutions. His strong belief in client-centered partnering has spawned a nationwide network of highly effective customer and field service professionals. Advanced technology solutions created under his leadership the industry’s first web-based workflow management system, FiveOnline, a complete document management and processing system (MARS), state-of-the-art loss mitigation software (MOTZ), which allows quick and efficient loan modifications according to FDIC and HAMP guidelines, automated document storage/workflow management software (IntelliStorage) and HUD claims processing system (ClaimSys). Joe remains an advocate of client-specific business solutions, an approach he believes is Five Brothers’ most important competitive advantage.

Our POINT Of View: Turning Negatives Into Positives

*Turning Negatives Into Positives*
**By Ted Hicks**

***Last week I talked about two hurdles that lenders face today, namely the task of keeping compliant with new rules and also the task of attracting new business in a down market. People in the mortgage industry today have been in the mortgage industry for a long time. The bad players or the part-time players have gone away. Those that were trying to get a quick buck aren’t here anymore. Yes, the market isn’t ideal. Yes, there are still challenges. Those that are left have the experience and know the technology.  You are the survivors and you have the ability to turn those challenges into opportunities by seeking out new business channels.

****How do you do that? There are opportunities in the jumbo market, for starters.  Although there a few investors who are offering these types of loans, it does not mean that you should shy away from them. Also think about the possibilities of focusing on the Baby Boomer generation.  As they enter retirement with minimal or no retirement benefits, they are often cash strapped, so the reverse market might be something else to consider.  The point I’m trying to make is the if you’re only originating certain types of loans, especially since you are a specialist in a particular type, it can’t hurt to explore outside your typical origination stream.

****There are benefits in going outside your comfort zone, whether it is in the type of loan you originate, or how you use your technology.  As you are considering other opportunities, it’s important to realize that tapping into these new avenues might entail learning new skills and using your features of your technology you probably did not know existed. Ultimately, making that leap into new business channels may not be as hard as you think; you just need to look at your technology in a new light. Here’s what I mean:

****If you look at a simple Web browser, there is a ton of functionality there, but you may just use the search feature. There are also a lot of drop boxes with functionality that you may not know exist in your typical Web browser.  Maybe you use Microsoft® Word every day, but if you’re like me, you only use it to type letters or articles.  Did you know that Word can do tables and charts, and even lets you compare two documents side-by-side? Do you read the technical guide on your software? In actuality very few people do. It’s simply human nature to use what is second nature to you and just run with that. We all do it in many aspects of our lives.

****What’s my point? The same is true of your mortgage technology. There may be business opportunities there that you may not know about because you don’t know all that your software offers.  When I visit customers, I am often asked, “Does your software do this because I need this now?” Time and again I can show them that the feature they’re looking for is already there! These conversations are meaningful and they are eye-openers for the lender.  So how do you, as a lender, explore new business opportunities using unexplored features of your technology?

****The answer in part is for vendors to step up their training and client outreach. The overall knowledge level has increased because of attrition. That makes it easier for vendors to talk to lenders about business opportunities that may exist within their technology. So, we need to have those conversations.

****As I said before, it’s typical to just use the parts of the technology that you feel comfortable with and disregard other feature descriptions as sales pitches or unnecessary.   It’s our job as a vendor to be more proactive in teaching what may be the “uncomfortable” parts—the unknown parts. We all have to do our part to ensure that lenders are successful in extending the American Dream of homeownership, even in a struggling market.  Understanding your technology and how it can facilitate new opportunities is a tremendous first step.

Ted Hicks is the Director of Product Management at Calyx Software. He started working for Calyx over 4 years ago and is responsible for the research and design of all Calyx products including all issues related to compliance and forms. Ted has spent the last 14 years working as a product management professional in small and large firms providing enterprise software solutions across a variety of industries including Siebel Systems (now Oracle), Aspect Telecommunications, and Epiphany.

Point-Of-Sale Trend Watch: Thinking About An Online POS Solution? Don’t Let Misconceptions Stop You

*Thinking About An Online POS Solution? Don’t Let Misconceptions Stop You*
**By Scott Happ**

***In our four previous columns for Progress in Lending, we’ve told you about how Mortgagebot engaged Lieberman Research Group (LRG) to survey banks and credit unions from coast to coast. LRG’s primary goal was to determine lenders’ plans to adopt  “smart,” fully transactional, online mortgage-point-of-sale (POS) technology (refer to our previous articles for more details about the LRG study).

****Also as noted in our previous articles, LRG was able to survey 330 mortgage decision-makers, and their research confirms that the majority of financial institutions foresee solid, near-term growth in loan volume from the online channel. The study’s other key findings reveal that most lenders now consider smart, online POS technology as a “must-have;” that lenders go online primarily to serve borrowers better; and that they believe POS channel integration will play a key role in their future business success.

****Trend #5: Misconceptions are still keeping some lenders away from the Internet

****Smart, online mortgage-application technology is not new—it has been available to banks and credit unions nationwide since 1997. But despite the fact that more than 1,000 lenders across America have implemented a smart, online mortgage-application solution, others continue to resist the technology. The LRG survey reveals that for lenders that do not currently provide a smart, online mortgage application and do not intend to do so, three primary issues stand in their way (Figure 1):

  • ****>> Security concerns
  • ****>> Regulatory challenges
  • ****>> Cost issues

****But are those concerns truly valid? Viewed from another perspective, the question could be more appropriately asked: “Do lenders that adopt smart, online mortgage-application solutions find themselves struggling with security concerns, regulatory challenges, and cost overruns?”

****To get another perspective, Lieberman turned to the survey sponsor. Mortgagebot has been the mar­ket leader in online-lending technology since 1997, and has a client base of about 1,000 banks and credit un­ions. Our company closely tracks how organizations are addressing issues of online-lending security, regulatory compliance, and costs. According to Mortgagebot, a more balanced view of the “top three objections” can be gained by carefully examining each concern in the light of real-world experience:

****Security concerns

****Are you concerned about data-security breaches? You should be; and you should ask detailed questions about any solutions provider you consider. The truth of the matter, however, is more positive than you might expect. Although it seems that the media reports data-security breaches every week, such failures are actually not common—and certainly not inevitable. Advanced security strategies (such as those maintained by Mortgagebot) can dramatically reduce risk.

****While no technology provider can guarantee that a security breach will never occur, Mortgagebot has a reputation for working exceptionally hard to ensure that all lender and borrower data are extremely well protected. We aggressively secure all sensitive information by using cutting-edge technology that includes multiple, disaster-proof remote servers; redundant data back-ups; stringent, multi-level security protocols; extensive data encryption; and rigorous independent audits.

****Regulatory challenges

****A properly designed mortgage-application solution does not create regulatory problems; instead it helps a lender to more effectively manage regulatory compliance.

****An example is Cashmere Valley Bank, a billion-dollar institution based in Cashmere, Wash. “Our compliance used to be all manual,” said Ken Martin, Cashmere Valley President and Chief Executive Officer.

****Martin said that when his organization decided to implement an online lending solution, compliance was his top concern. “Even with skilled people,” he noted, “things can get sloppy when you get busy. But now our automated solution enables us to do everything correctly—it gives us the control we need.”

****Cost issues

****As with any business tool, there are costs associated with a technology implementation. However, a lender’s real concern must be with managing overall costs—which is where online lending technology typically generates a solid return on investment (ROI).

****An example is NCB, FSB of Hillsboro, Ohio. NCB has more than $1.6 billion in assets, is a mortgage lender in 17 states, and uses mortgage point-of-sale automation to gain impressive overall cost savings. NCB Product Administrator Rachel Green said that after adopting a smart, online application solution, the bank’s origination costs declined 57 percent for applications submitted through its mortgage Web site.

****NCB has also seen a 38 percent drop in origination costs for mortgage applications taken by its loan officers, who are also equipped with automated tools designed specifically for them.

****Key business considerations

****As I normally do, I leave you with questions to consider:

****>> How thorough is your organization’s due diligence? Survey findings indicate that the majority of banks and credit unions are currently evaluating or planning to evaluate smart, online mortgage-application technology solutions? To ensure proper due diligence and maintain a balanced business perspective, how many lenders have you spoken with that have successfully implemented a smart, online lending solution?

****>> At what stage are you in evaluating smart, online lending technology? From coast to coast, in urban, suburban, and rural communities, mortgage shoppers now prefer the Internet channel—which means that lenders must maintain a rich online presence to remain competitive. How far along is your organization in evaluating, selecting, and implementing a smart, online mortgage-application solution?

Mortgagebot (www.Mortgagebot.com), a D+H company, is a provider of the award-winning PowerSite family of integrated point-of-sale (IPOS) solutions for taking mortgage applications through every business channel: Internet, branch, call center, or loan officer. Since 1997 Mortgagebot has blended deep mortgage expertise with innovative “cloud-computing” technology to create scalable, secure, and affordable websites for nearly 1,000 banks and credit unions nationwide. Scott Happ, President and CEO of Mortgagebot, has over 25 years of financial services and technology experience. He holds a bachelor’s degree in economics from the University of Wisconsin at Madison. Scott can be reached by e-mail at scott.happ@mortgagebot.com

Lykken On Lending: Psst… You Need Some Money?

*Psst… You Need Some Money?*
**By David Lykken**

***Hey, did you hear about the wildly successful LinkedIn IPO story that happened on May 19th? This should be one of the most encouraging events in the mind of everyone in the mortgage industry. Just in case you missed it, LinkedIn’s IPO opened May 19 at $45 per share and rose to over $100 per share before closing out at $94.25 per share, a gain of 109.4 percent… a $9 billion entry into the market.

****You might be thinking, “Okay Dave, that was an IPO in the sizzling hot “social media” sector, quite different from the mortgage industry.” Well yes, but consider this… On April 15th, Ellie Mae had a successful public offering and raised $45 million… another encouraging data-point.

****So back to my question, “Why should this be encouraging to everyone in the mortgage industry?” Think about it… capital is KING… more so today than ever before. Let me explain.

****I’m sure you are well aware that for mortgage bankers, capital requirements are up tenfold. It used to be that almost any mortgage company with a net worth of $250,000 could obtain a Fannie Mae, Freddie Mac, Ginnie Mae or HUD approval. Today, however, you have to have $2,500,000 to get approved with those same entities. Cash is KING.

****For many, these higher capital requirements have seemed like a death sentence. Why? Because many industry execs have no idea how to raise money much less know how to connect with the capital investors. Be assured, capital is out there and there has never been a better time than NOW to invest in anything mortgage related… mortgage companies, mortgage technology, etc.

****We are presently consulting to a number of companies advising them through the process of raising significant amounts of capital… and having success! And what is most encouraging is that the investors that are doing due diligence on our industry are invariably coming back and saying, “We haven’t seen an investment opportunity like this in years.” More than one investor has used this expression to describe their take on the industry, “We see the opportunity of investing in the mortgage industry as ‘all the shrimp boats have been destroyed’” an obvious reference to the movie “Forrest Gump.” I am sure you remember the part in the movie where a hurricane hit the Gulf while Forrest Gump and his partner were out at sea, and that storm ended up destroying all the shrimp boats except for Forrest Gump’s boat.

****I have been in the mortgage industry for 37 years and have never seen so many companies destroyed and out of business. Last month I wrote about the coming “capacity crisis” because of the fact that 80+% of all licensed loan originators are leaving the industry or unable to get their license renewed because they fail the NMLS test or fail to meet the new minimum credit standards now required. Metaphorically speaking, a large number of the “shrimp boats” have been destroyed. What an amazing time to be out raising capital to position your business to be poised to capitalize on the vast market opportunities when the market turns. An IPO may not be your path to investment capital, but be assured there is money out there looking to be invested in the mortgage industry. Call me if you want to learn more. E-mail me at DLykken@MortgageBankingSolutions.com.

David Lykken has garnered a national reputation as a visionary, entrepreneur and business leader within the mortgage industry. He has also become a regular guest on the FOX Business News with Neil Cavuto, Stuart Varney, Liz Claman, Dave Asman and others. He has been a special guest of Governor Mike Huckabee on FOX News’ #1 weekend rated program “Huckabee”. He has appeared several times on the CBS Evening News, Bloomberg TV & radio, NPR and many radio shows. On matters related to the economy, housing and mortgage lending, David is frequently quoted in leading newspapers across the country as well as the Wall Street Journal and the New York Post. Additionally, David has his own national weekly radio program called “Lykken On Lending” that can be heard each Monday at Noon Central time by going to www.LykkenOnLending.com . As co-founder and Managing Partner of KLS Consulting doing business as Mortgage Banking Solutions, David Lykken has over 37 years of management experience as an owner/operator with in depth expertise in real estate finance and housing. His knowledge and skills comprise a unique blend of technology and business strategy. Above all else, David loves helping business owners and executives navigate through extremely difficult business circumstances helping them overcome seemingly insurmountable obstacles while rediscovering themselves and their passion for life and living. Dave is married, has two daughters and currently resides in the beautiful Hill Country of Central Texas near Austin, Texas. David received a bachelor's degree in 1973 year from Pacific Lutheran University in Tacoma, Washington.

Compliance Commentary: A Deeper Meaning In The Forms?

*A Deeper Meaning In The Forms?*
**By Chris Appie**

***The CFPB asks for your opinion of combined GFE and TIL disclosure forms; but what does their question tell us about them? For any of you who have seen the movie The Social Network, you’ll recall that Facebook founder Mark Zukerburg was nearly thrown out of Harvard for hacking into a series of databases and posting pictures of students to a website whereby the students would click on the ‘hotter’ of the two pictures; results were to be compiled so the ‘hottest’ student at Harvard would be crowned.

****Not to be left out of the action, on May 18th the Consumer Financial Protection Bureau (CFBB) published via its website two documents and asked the public to vote for the form they consider ‘hotter.’ It’s a tough decision; one has nice circles enclosing answers to questions while the other maintains a more traditional, almost dignified look. You can vote for which form you prefer at the Bureau’s new website, http://www.consumerfinance.gov/, but by merely voting you may be missing the bigger point. Here’s what I mean:

****Putting aside the fact that two of the most substantive and familiar documents in a mortgage transaction are going away and being merged into a combined, all-inclusive document does the publication of these forms give us any insight into the future actions of the Bureau? I believe it does.

****Throughout the legislative fight surrounding Dodd-Frank one of the major concerns advanced by financial institutions was the ability of one agency to almost universally regulate all consumer financial products in the United States. While Republican’s in the House have introduced numerous bills to strip the Bureau of various powers (including funding) it appears that these bills are dead on arrival in the Democratic-controlled Senate; the big question has moved from whether the CFPB should have this authority to how the CFPB will exercise the authority they have been granted.  So what does the publication of these forms do to inform our understanding of the Bureau and how it will exercise its powers? Are they doing what is required by law?

****Here’s what Frank-Dodd actually requires:

****(f) COMBINED MORTGAGE LOAN DISCLOSURE.—Not later than 1 year after the designated transfer date, the Bureau shall propose for public comment rules and model disclosures that combine the disclosures required under the Truth in Lending Act and sections 4 and 5 of the Real Estate Settlement Procedures Act of 1974, into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the Bureau determines that any proposal issued by the Board of Governors and the Secretary of Housing and Urban Development carries out the same purpose.

****The law does not require the CFPB to propose a model form until July 21, 2012. On its face and based on the pace of past major changes this seems like a reasonable deadline—and  look at what actually happened—over a full month before the powers of the Bureau even exist they have not only created one model form but two distinct model forms and submitted them for comments from consumers and the industry. The CFBP is well over a year ahead of what Dodd-Frank requires.

****One need not read too much into the tea leaves here. The CFPB is already progressing quickly towards reforming consumer financial markets. In a recent Article http://www.treasury.gov/connect/blog/Pages/Five-Questions-with-Elizabeth-Warren.aspx the Treasury Department interviewed Elizabeth Warren and she had this to say about the priorities of the CFPB: “Mortgages are the other top priority because they are the single most important financial decision that most families will make. We have learned from recent history that a bad mortgage can not only destabilize an entire family, but that enough of them can destabilize the entire economy.” It’s tough to say where the CFPB will lead us but if current behavior is in any way indicative of future behavior, the industry is going to be changing—rapidly.

****Which form do you like better? What are your concerns? Have some ideas to make them better? Shoot me an email: cappie@compliancesystems.com or give me a call: 800-968-8522 ext. 230. I’ll compile the results and share with you in a future column.

Chris Appie is an attorney and Vice President of Products at Compliance Systems, Inc. (CSi). CSi is a provider of financial transaction technology and expertise serving over 1400 financial institutions across the United States. When he’s not keeping up with the CFPB he’s trying to keep his four kids under control in grocery stores and other public places. He can be reached via email at cappie@compliancesystems.com.

Level Flight: Servicing’s Secret Sauce

*Servicing Is Catching Up Fast*
**By E.J. Kite**

***After twenty-six years in mortgage technology, I have seen revolutionary change in its capabilities. Mortgages have gone from being almost completely analog products to being virtually paperless from origination all the way through to boarding on servicing systems. Servicing itself, however, has historically not been the beneficiary of technology’s march of progress, but something interesting is happening as you read this: servicing technology is showing startling advances in process sophistication. It could be said that the servicing sector is gaining technology at a rate that surpasses that of the origination sector, even in its boom years before the bust.

****They are closely related. Origination’s go-go years fueled innovation in workflow automation and document management that are now being turned toward servicing, where help was sorely needed. It is not surprising that the front end saw all the good stuff first. Spending over twenty years at Freddie Mac gave me the chance to witness tremendous technology development aimed at the point of greatest need, and that was finding better, faster and less costly ways to make loans. Servicing was certainly not an afterthought — there just was not much pain in the post-closing side up until things hit the (supersized) fan a few years ago. When servicing was a fairly simple matter of keeping track of payments and creating payment histories, things like sophisticated default management simply weren’t a priority.

****With all respect to primary servicing platforms, the bulk of the innovation today is coming from third party providers and the special servicing sector. Our role as a special servicer requires very different tools from the servicing mainstream; we deal with the most difficult loans out there and our approach is radically different. For example, instead of having associates manage great numbers of cases, our resolution specialists handle fewer cases, but dive deeply into their particulars. So while customer-facing people in the primary servicing shop might be graded on how many calls they can make in an hour, our specialists are monitored to encourage them to spend more time with each borrower. For this kind of focus on each case, special servicers need strong workflow and process management tools, and we customize them for the specifics of what we do. Our DRI OFFICE-based platform gives us the lift we need to make our business model work and build the scale that has enabled our dramatic growth. At the same time, the reporting and transparency we offer stakeholders in our transactions are granted by web portals. Our investor portal was a collaborative effort with our own technologists and third party providers, and it has brought an essential new dimension of efficiency and utility.

****Being a serious golfer, I liken the special servicing business to the game. To make a good golf shot you need finesse and skill – it’s not something that is improved by including more bodies in the effort. It also takes technology, not only in the manufacture and metallurgy of the tools, but also in the training of the player, using video to break down the complex physical components that must work in harmony to achieve a successful result. The phenomenal reporting capabilities special servicers have today are a direct product of technology, as are the rules-based workflows, automated services ordering and web-enabled transparency we provide investors and other stakeholders.  These features keep our highly specialized people from getting bogged down and focused on the tasks that matter most.

****Is it fair to say that without technology the industry’s servicing effort would be in worse shape? Without a doubt, especially when asking a technologist, and no place is it more evident than in the special servicing segment. Technology makes our recipe for success possible, saving thousands of homes from foreclosure and dramatically reducing loss severity. Technology is the “secret sauce” that makes it all work.

E.J. Kite is SVP for Information Management at Wingspan Portfolio Advisors, LLC, and leads the company’s award-winning technology effort. He has over 26 years of experience as a mortgage technologist, predominantly with the Freddie Mac and Fannie Mae.

Nothing But Net: Data Security [Part One]

*Data Security (Part One)*
**By Randy Schmidt**

***As a provider of cloud-based applications, I am often asked about data security. Government regulations such as Sarbanes-Oxley and Gramm-Leach-Bliley require many financial institutions and public companies to evaluate the security measures of their outsourced data service providers. The question that I am most often asked is: “Do you have a SAS 70?” While this is certainly an important question to ask, an affirmative response to this question is no guarantee that your data is being properly protected.

****To understand how this is possible, it is important to first understand what a SAS 70, or its upcoming replacement the SSAE 16, really is. A SAS 70 does not rate a service organization’s policies and procedures against a predefined list of controls. Instead, each service organization prepares a written description of the controls and objections that they wish to have audited. The auditor then verifies that those controls are stated correctly, are designed to achieve their objective, are properly in place, and finally whether they are operating effectively. The problem is that since the audit only measures the effectiveness of the controls provided by the organization, an auditor cannot mention missing controls or recommend replacements for existing controls. So if an organization knows that they have a weak or missing control, they just conveniently omit that control from their audit description. Here’s the problem:

****Unfortunately, some financial institutions are treating the fact that a service provider has a SAS 70 as a de facto certificate of data security without really looking at the individual controls and procedures that were audited. Many vendors count on this fact and only provide a minimum list of controls to be audited. In fact, some technology companies don’t even perform their own SAS 70 audit, but instead rely on the audit of the co-location or data center that houses the data. While these audits may show that the data center has proper physical security and the latest in hardware, firewalls and intrusion detection they don’t address whether the technology vendor itself has other policies and procedures in place. Policies like segregation of duties, data access controls, business continuity plans, data destruction policies, change control procedures and many others are just as important to review as the physical security of the data center.

****To properly determine whether a vendor is properly protecting your data, each financial institution needs to do their own risk assessment and determine which controls and procedures are important to them. A vendor review then needs to be performed to make sure that the vendor has all of those controls and procedures in place. A SAS 70 should not be used as a replacement for due diligence, but rather as a tool to make due diligence faster and easier. By cross referencing an institution’s desired controls and objectives against those provided by the vendor, you can quickly determine what follow up questions need to be asked.

****What should you look for when reviewing a SAS 70 or SSAE 16? Although each institution’s list of desired controls and objectives may differ based on the level of risk and type of data involved, there are certain items that should be considered as part of any vendor due diligence process. I’ll discuss these items in my next article, Data Security – Part 2.

Randy Schmidt is President of Data-Vision, Inc. and is responsible for overall operation and strategic planning for the company. Randy became involved in the IT side of mortgage banking almost 30 years ago and has been involved in numerous projects on both the origination and servicing side of the business. In 1993, Randy co-founded Data-Vision, Inc., in Mishawaka, Indiana as a Web design company. He then combined his previous mortgage experience with Internet knowledge to bring the speed, power and availability of the internet to the Mortgage industry. He can be reached at rschmidt@d-vision.com