Digital Mortgage Adoption

A lender and I were talking the other day about fully paperless, completely electronic mortgage lending — what we now refer to as the digital mortgage. Digital mortgages live 100% in the virtual world. This is a big departure for our industry and from tradition: A mortgage is, or can be, a large collection of papers, often weighing three to five pounds, surrounded by a rather stiff cardboard carapace. Loans travel slowly and often chaotically through the mortgage manufacturing process with the help of any number of mortgage staffers. The goal is to go from application to closing as quickly as possible. Once closed, the loan is destined to spend eternity with other mortgage files in large, dark storage rooms where no one will ever pay attention to most of them again.

While many lenders are stuck sorting through paper, we’ve worked with one of the very first in the industry to make the move to digital lending. This lender’s willingness to trail blaze the digital mortgage process occurred for a host of practical reasons: efficiency, velocity, borrower communication, space.

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None of this was easy. The transformation took about two years and was not without its difficulties. Not surprisingly, the hardest part of going digital is also the number one reason people don’t switch to e-readers: they do not want to abandon the paper experience.

If you’ve made the leap to an e-reader, this makes perfect sense. Books, like mortgage loans, are physical things. We interact with them in a particular way. How often, for example, do you flip back a few pages or a few chapters when reading a book to re-read a passage or an entire section? You know where in the book to look based on an approximate physical location in the book. Along the way you might stop and look at a few other things, too. This, at least in part, defines the paper experience.

So it is with mortgage loans. Files are constructed in certain ways. While a team member may have specific interest in the appraisal, he or she might take a look at the purchase agreement or the title report along the way, all to provide deeper context for the appraisal and the review. This is easy, because all of these items are in roughly the same place in every mortgage file.

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The experience is different with a digital file, but only at first. Instead of flipping through pages, you click a few times, and you’re there. While this represents a change in the way people interact with the file, ultimately the experience proves to be more efficient.

Given the real and perceived complexities of transitioning your people from a paper-heavy process to a digital format, the question becomes, why go digital? As it turns out, borrowers like it. Loans can close more quickly than ever before, and borrowers appreciate getting their copy of the closing package electronically. Loan delivery takes place more quickly, too.

Then there’s the storage issue. No more paper means no more warehouses full of lonely, dusty mortgage files.

By the way, digital lending is nothing new for my lender friend. Her organization closed its first fully paperless, all-electronic mortgage in late 2008. Any lender with the right technology has the tools to make the switch to digital. The hardest part is giving up our love of paper. Once organizations go digital, however, they enjoy the benefits of a paperless environment. No one ever says, “Let’s go back to the way it used to be.”

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Just Another Government Bureaucracy

In February I attended the Eastern Secondary Conference hosted by the Florida MBA. While there I took the time to visit the Fannie Mae booth that was part of the vendor exhibits. Now, anyone who knows me acknowledges that I am a very strong supporter of Quality Control and that I have obtained a Certification in Quality Management in order to support quality initiatives in the industry. Quality Management discipline is focused on educating its disciples on the hows and whys of “manufacturing quality.” Manufacturing Quality is of course what Fannie Mae has been expounding as they tout the virtues of their new Quality Control programs. The problem is however, they have it wrong!

Manufacturing quality is based on the concept that the process must be controlled in order to produce a product that meets customer specifications. It also recognizes that there will be random variations in the results, but as long as they are just that, random, it is too costly to try and eliminate them. In other words, a process under control provides reliable results. This program abhors rework, which is seen as evidence that the process is in fact, not under control and is an expense that should not occur if the process is working correctly. The resulting products are not necessarily “perfect.” However products that meet manufacturing quality standards don’t have variations that impact how the product performs. Knowing the difference between variations that don’t impact performance and those that do is critical.

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Fannie Mae’s program on the other hand requires excessive inspections and rework based on loan level inspections (i.e. pre-funding reviews). They also require a classification of every variance which are at best artificial “defect” designations without a validated correlation to product performance. In addition their sampling program is based on the risk they perceive in loan files. As a result lenders review these issues rather than the ones they may have identified in their organizations. The fact that Fannie Mae labels variations from guidelines as “defects” when they have no idea whether or not these issues are related to loan performance is an example of their overweening belief that whether or not they are correct, they are, as so eloquently stated “the ones with the gold so they make the rules.”

This attitude is out of line for a government bureaucracy. These entities are supposed to be focused on ensuring that what they do benefits the American people. For years, as a Government Sponsored Enterprise (GSE) Fannie Mae and Freddie Mac established a preferred methodology for how they expected quality control to be done. Now it seems that Fannie Mae has taken the position of the CFPB and is dictating a program that is erroneous at its core and further drives up the cost of QC without validating how it will benefit lenders or the American consumer.

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Interestingly enough another speaker at the conference, Alex Pollock, a Resident Fellow at the American Enterprise Institute discussed the fact that between 2007-2011 Fannie Mae and Freddie Mac suffered $256 Billion in losses. It doesn’t take a genius to figure out that these losses were primarily due to the poor performance of the loans they purchased. And that leads to the question Did they ever know how a quality control program was supposed to be conducted. The fact is that Fannie Mae is just another government bureaucracy that needs to get its own act together before dictating to the industry about what to do and how to do it or for that matter before losing more of the American taxpayers’ money.

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It’s Time To Change Course

For those of you that don’t know, I’m actually an English Major, with a great love of literature and theater. For the past 14 years I’ve been reporting on the mortgage industry, but before that I got my Master’s Degree in English and taught seventh and ninth grade. Covering the mortgage industry has ben an amazing adventure for me that peaked with me creating PROGRESS in Lending.

Why did I start this company? Because I felt at that time, and still do today, that the mortgage industry needs a place for thought leaders to come and express their ideas to encourage the whole industry to innovate, evolve and progress. Today I’m going to merge both the world of great literature and mortgage lending to make what I think is a very important point.

For those you that don’t know, Moby-Dick; or, The Whale (1851) is a novel written by Herman Melville in 1851. It is considered an outstanding work of Romanticism and American Renaissance. In the novel, Ishmael narrates the monomaniacal quest of Ahab, captain of the whaler Pequod, for revenge on Moby Dick, a white whale, which on a previous voyage destroyed Ahab’s ship and severed his leg at the knee. Although the novel was a commercial failure and out of print at the time of the author’s death in 1891, its reputation as a Great American novel grew during the twentieth century.

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D.H. Lawrence called it “one of the strangest and most wonderful books in the world,” and “the greatest book of the sea ever written.” In fact, “Call me Ishmael” is one of world literature’s most famous opening sentences.

The product of a year and a half of writing, the book is dedicated to Nathaniel Hawthorne, “in token of my admiration for his genius,” and draws on Melville’s experience at sea, on his reading in whaling literature, and on literary inspirations such as Shakespeare and the Bible. The detailed and realistic descriptions of whale hunting and of extracting whale oil, as well as life aboard ship among a culturally diverse crew, are mixed with exploration of class and social status, good and evil, and the existence of God.

In addition to narrative prose, Melville uses styles and literary devices ranging from songs, poetry and catalogues to Shakespearean stage directions, soliloquies and asides.

In the end of the story, Ahab plants his harpoon in the whale’s flank. Moby Dick smites the whaleboat, tossing its men into the sea. Only Ishmael survives. The whale now fatally attacks the ship. Ahab then realizes that the destroyed ship is actually the hearse made of American wood in Fedallah’s prophesy that was discovered earlier in the story. The whale returns to Ahab, who stabs at him again. The line loops around Ahab’s neck, and as the stricken whale swims away, the captain is drawn with him out of sight.

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In the words of scholars John Bryant and Haskell S. Springer, “Moby-Dick is a classic because it defies classification.” It is “both drama and meditation: it is a tragedy and comedy, a stage play and a prose poem,” they say, and add that it is “essay, myth, and encyclopedia.”

Now that I’ve probably put you to sleep talking about what others have said about Moby-Dick, I’ll come to the point. This is a tale of a great captain that is so blinded by revenge that in the end he perishes. Why? Because Ahab refuses to change course. I hope mortgage lenders learn a thing or two from this.

What do I mean? Many lenders are preoccupied with compliance. Surely compliance is important. However, if lenders don’t use the burden of compliance as a way to look at their whole process and actually improve it, I fear they will go the way of Ahab.

If we look at the new disclosure rule set to go into effect of August as an example, I fear that too many lenders see this as just a forms issue. It’s not. It’s bigger then that. Lenders need to look at each new rule as a singular rule, but also as a way to improve the way they transact business as a whole. Don’t be so blinded by compliance that you let it get the better of you and ultimately cause your demise.

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Tick, Tock, Time Is Running Out

Tick…Tick…tick…a familiar sound to all of us. A reminder to hurry, a call for action, perhaps, but most definitely, it’s the sound of time running out.

For mortgage lenders, time is speeding by at a rapid rate as the August 1st deadline to comply with the CFPB’s new disclosure requirements swiftly approaches. When asked this question: ‘Is your organization prepared for the CFPB requirements deadline?’ lenders have generally answered in one of two ways. One is: ‘We think we’re going to be fine.’ The second is: ‘We have no idea.’ While the former answer appears to be considerably better than the latter, the truth is that neither answer is very good, especially with the clock running.

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Lenders appear to be ambiguous on the matters of what is required of them and what their options are toward a solution. What most lenders are very clear on are the consequences that would result from non-compliance. No one wants to face costly fines, penalties or suspension of mortgage lending and no one wants to think of the impact these might have on their business reputation.

The lenders who think they are on the right track to compliance should already have seen what their disclosure documents are going to look like. They should know exactly what data is required on the docs and how it is going to get there. They should already have full understanding of what the impact of delivering the new disclosures is going to have on their lending operation. If they are employing a document delivery entity or a web service to generate the docs, they need to know exactly what the preparation, implementation and testing costs will be in both hours and dollars. They need to know if and how these solutions will impact the processing time and the cost of their mortgage loans. By now, lenders should have done at least some preparation toward compliance.

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However, all is not lost, even to those lenders who not certain as to their status on the CFPB. How many games have we witnessed teams revealing their winning fortitude in the last two minutes or during their last at-bat? Much information is available as to the requirements of the CFPB and the differing approaches that are available to delivering the disclosures. A concentrated effort coupled with a measured approach in finding the right solution for August 1st and beyond can be the key to success. Lenders who look can look beyond the deadline and understand that other regulatory requirements are looming may be in a better position to choose a solution that can better prepare them for the changes that may come along.

While it is most definitely ‘go time,’ lenders should fully understand the impact that these new regulations will have on their operation and should apply clear thinking in their approach to finding a solution that allows them to continue their mortgage lending operation and avoid penalties, all while being cost-effective and allow them to embrace future regulations with little additional effort. Time may be running short, but it is not too late.

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A New Era In The Appraisal World

In the appraisal world, the end of January and the beginning of February 2015 marked the beginning of a new era with the introduction of Fannie Mae’s Collateral Underwriter (CU). Since its announcement at MBA’s annual convention and expo this past fall, the blogs and forums were buzzing with stories about how CU will turn the mortgage industry upside down and that endless stipulations and additional requirements will add days if not weeks to closings. Appraisers were also concerned the cost of producing an assignment will increase due to additional software needed to produce regression-based support for every adjustment. Even I went on record and said that in the first 6 months after roll out “it’s going to take a little time before the dust settles.”

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Well, it might be early but with several weeks of CU under our belts, I’m not witnessing all of the doom and gloom predicted. While you may get a few more revision request based on the results of CU, most all of them are legitimate and necessary. I think most appraisers agree if a concern is identified by CU and verified as a mistake, it needs to be corrected. It might take a little extra time to make the correction but I trust most appraisers want to produce good quality and mistake free reports. Also, in the end, correcting or addressing these concerns doesn’t take any longer than most any other revision request appraisers are accustomed to receiving previously.

That said, I also want to point out that I also predicted the following prior to the release of CU – “Implementing CU shouldn’t make much difference to an appraiser making a good faith effort to provide the best comparable properties, who reports accurate and consistent data, and supports adjustments with market data and analysis. Assuming this is accurate, CU will, at a minimum, keep appraisers transparent and consistent in their reporting since this is generally a black and white issue”. That statement was a pretty good prediction on how CU is actually playing out and affecting good appraisers looking to provide quality reports.

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In fact, I’m ready to make my next prediction and state that I feel CU is actually going to change the appraisal industry… for the good. Is CU going to catch some mistakes and concerns that need corrected or addressed? Yes. Is that going to cause more work in the form of revision requests for good honest appraisers? To a degree yes but as stated earlier, the time is nominal and request welcomed in the efforts to provide the best possible report. Is it going to cause less scrupulous actors to shape up or ship out? Absolutely! And for that reason alone, CU is going to make our industry better.

Everyone makes mistakes. Last I checked, appraisers are human and humans make mistakes. If you don’t believe me, ask Seattle Seahawks head coach Pete Carrol. As such, if you make a mistake, don’t sweat it and just make the necessary corrections. However, if your making numbers up, changing actual gross and net adjustments at the bottom of page two, or making all condition ratings C3 so you don’t get caught in a self discrepancy, just be fair warned, Fannie Mae will “see you.”

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The Importance of Adhering to Industry Standards

Ask any lender if he or she would like to increase loan volume while reducing the resources necessary to do so and you will always get the same answer. Improvements in the area of efficiency are always needed and one important place for this is in the tools that are necessary for performing their specific tasks. Software vendors delivering these high-importance tools, ranging from client applications to various niche services, must continue to focus on solving this problem for their customers. Demand for innovative technology required to optimize the processes involved in originating and servicing loans is at an all-time high.

One of the challenges lenders face, while working with numerous vendors, is that many of these vendors require data to be communicated in proprietary formats. As the amount of data transferred increases while lending regulations continue to change, this problem of supporting many different data formats is a real and costly challenge.

Standardizing the Data

To support greater communication between various parties and vendors involved in the loan process, the Mortgage Industry Standards Maintenance Organization (MISMO) has put into place a series of standards designed to more securely, economically and efficiently exchange loan information between different parties.

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Rather than continuing to abide by multiple data formats, adhering to the latest MISMO standards ensure that the entire mortgage industry, as well as technology vendors, are all speaking the same data “language.” The data and technology standards put in place by MISMO have been around for more than 10 years. With the move toward electronic loan files and the constant new industry regulations, the benefits to the mortgage industry of MISMO standards become more apparent in 2015.

Interoperability

A key benefit of adhering to data and technology standards is the simplified exchange of information between disparate applications and companies. From the standpoint of the technology vendor, there should no longer be a need to support a multitude of semi-redundant formats, as any vendor adhering to the standard format will be able to communicate seamlessly with other systems doing the same. For the mortgage industry, this eliminates the added time and money needed to translate incoming data into a specific format or building custom integrations with every vendor that you wish to work with.

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More Choices, More Innovation

A byproduct of an open industry standard is an increased number of choices, in both vendors and technologies. Lenders and servicers will have the opportunity to select from a much larger pool of companies with which to do business, resulting in increased competition among technology vendors, thereby spurring innovation and most importantly greater value.

Less Chance of Lock-In

Programming to any specification, be it an industry standard or a proprietary one, should be viewed as an investment by the software vendor. A proprietary format carries a higher risk, as the company requiring that format could change their specifications at any time, or worse cease operating entirely. This is why many lenders are still stuck with legacy loan origination systems and servicing platforms using outdated technology and data fields. The cost of changing and reformatting years – or decades – of data is prohibitive. Industry standard formats will act as a hedge against this sort of investment risk.

While practices and standards may vary from company to company, the overarching goal across the mortgage industry when it comes to technology is relatively consistent. Overall, technology initiatives should be focused on getting data in and out as easily and cost-effectively as possible. Not only do data and technology standards support this notion, but they additionally promote increased productivity and profitability for those that choose to adhere to the set standards.

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Mixed Results

The CoreLogic Home Price Index (HPI) shows that home prices nationwide, including distressed sales, increased 5.7 percent in January 2015 compared to January 2014. This change represents 35 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, increased by 1.1 percent in January 2015 compared to one month prior.

Including distressed sales, 27 states and the District of Columbia are at or within 10 percent of their peak. Four states, New York (+5.6), Wyoming (+8.3 percent), Texas (+8.3 percent) and Colorado (+9.1 percent), reached new highs in the home price index since January 1976 when the index starts.

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Excluding distressed sales, home prices increased 5.6 percent in January 2015 compared to January 2014 and increased 1.4 percent month over month compared to December 2014. Also excluding distressed sales, all states and the District of Columbia showed year-over-year home price appreciation in January. Distressed sales include short sales and real estate owned (REO) transactions.

Moving forward, The CoreLogic HPI Forecast indicates that home prices, including distressed sales, are projected to increase just slightly, by 0.4 percent month over month from January 2015 to February 2015 and, on a year-over-year basis, by 5.3 percent from January 2015 to January 2016. Excluding distressed sales, home prices are expected to increase 0.3 percent month over month from January 2015 to February 2015 and by 4.9 percent year over year from January 2015 to January 2016. The CoreLogic HPI Forecast is a monthly projection of home prices using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

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What does this mean? “House price appreciation has generally been stronger in the western half of the nation and weakest in the mid-Atlantic and northeast states,” said Dr. Frank Nothaft, chief economist at CoreLogic. “In part, these trends reflect the strength of regional economies. Colorado and Texas have had stronger job creation and have seen 8 to 9 percent price gains over the past 12 months in our combined indexes. In contrast, values were flat or down in Connecticut, Delaware and Maryland in our overall index, including distressed sales.”

So, depending on how you see things, the glass can be half full because home prices are increasing, or half empty because the increases aren’t huge and don’t span all 50 states.

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Are You A Champion?

The strength of the mortgage industry is not a constant anymore. Things are always in a state of flux. According to S&P/Case-Schiller Home Price Indices, the National index was slightly negative in December, while both composite Indices were positive. Both the 10- and 20-City Composites reported slight increases of 0.1%, while the National Index posted a -0.1% change for the month. Miami and Denver led all cities in December with increases of 0.7% and 0.5% respectively. Chicago and Cleveland offset those gains by reporting decreases of -0.9% and -0.5% respectively.

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“The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession,” says David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence.”

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Regardless, you can still be successful. You can be a mortgage industry champion. In his article entitled “5 Ways to Think Like a Champion,” Jon Gordon suggests that “champions think differently than everyone else. They approach their life and work with a different mindset and belief system that separates them from the pack.” Here’s what he means:

  1. Champions Expect to Win – When they walk on the court, on the field, into a meeting or in a classroom they expect to win. In fact they are surprised when they don’t win. They expect success and their positive beliefs often lead to positive actions and outcomes. They win in their mind first and then they win in the hearts and minds of their customers, students or fans.
  2. Champions Celebrate the Small Wins – By celebrating the small wins champions gain the confidence to go after the big wins. Big wins and big success happen through the accumulation of many small victories. This doesn’t mean champions become complacent. Rather, with the right kind of celebration and reinforcement, champions work harder, practice more and believe they can do greater things.
  3. Champions Don’t Make Excuses When They Don’t Win – They don’t focus on the faults of others. They focus on what they can do better. They see their mistakes and defeats as opportunities for growth. As a result they become stronger, wiser and better.
  4. Champions Focus on What They Get To Do, Not What They Have To Do – They see their life and work as a gift not an obligation. They know that if they want to achieve a certain outcome they must commit to and appreciate the process. They may not love every minute of their journey but their attitude and will helps them develop their skill.
  5. Champions Believe They Will Experience More Wins in the Future – Their faith is greater than their fear. Their positive energy is greater than the chorus of negativity. Their certainty is greater than all the doubt. Their passion and purpose are greater than their challenges. In spite of their situation champions believe their best days are ahead of them, not behind them.

If you don’t think you have what it takes to be a champion, think again. Champions aren’t born. They are shaped and molded. And as iron sharpens iron you can develop your mindset and the mindset of your team with the right thinking, beliefs and expectations that lead to powerful actions. So, if you take this advice to heart, I think you can be a mortgage industry champion.

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Afraid of Change? Hold on Tight!

As the industry moves ever close to the August 1 deadline, the TILA-RESPA Integrated Disclosure (TRID – another industry acronym to learn) has been the topic of conversation in hundreds of articles, multiple media outlets and conveyed in a myriad of different ways. Some may even say that it has been a daunting task with the staggering amount of information to sift through, decipher and digest.

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With that being said, let’s take a deeper look into the TRID topic and the massive change it will cause to lenders and vendors alike. The discussion begins with the MISMO 3.3 rewrite as well as a lender changing and choosing a document service provider that will meet the requirements for 2015 head on – change being the operative word and the fear that seems to come along with it. Why is that?

First – MISMO 3.3 Data Standards Change

The days of documents being the most critical element of the loan package are outdated and are no longer the show case. Now the emphasis is on the data, particularly in the eyes of the investor and the regulators which is a big concern for the lending community. The adoption of MISMO 3.3 may not sit well with the industry as it poses a complete rewrite of the MISMO standards that we once knew, but the benefits are numerous. Prior to MISMO 3.3 and with other MISMO 2.x standards, every system handled the format slightly different causing issues with data integrity, data transfer and compatibility between systems, and difficulty in streamlining that process.

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MISMO 3.3 allows for consistent, accurate, and clearly defined data elements and naming conventions. The challenge is that it will require quite the effort to program to MISMO 3.3 even to add the additional elements necessary to MISMO 2.6 to meet the requirements of TRID. This data standards / technology change is the most significant we have seen to date, catapulting lenders and vendors in brand new territory never chartered.

Second – Fear of Change Itself

A direct result of TRID coupled with MISMO 3.3 is the fear of change itself. The days of lenders and vendors succumbing to “that’s the way we’ve always done it” are long gone. It is simply too risky not to change. Those organizations who were resistant to change because of not wanting to re-program, re-train staff members, loan officers or closers or IT unwilling to make the leap and take necessary action to do what was necessary are a thing of the past.

It is now time to change the mindset in those shops, eliminate the fear and embrace change. The decision to choose a document service provider needs to be holistic across the organization and buy in from the top down that will carry them up to, through and beyond August 1st. Once a decision has been made with a provider who can keep that organization in compliance, defend what they do and deliver the necessary technology in tandem with a streamlined process, the onus of risk on the lenders’ part is eliminated. There should be no disparate systems to pull data and documents together – one single document provider is the change and should be embraced, not feared.

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