Driving Innovation And ROI


The term “innovation” isn’t usually applied to the loan origination system (LOS). The LOS is often viewed as the system of record that is a necessary evil when operating in the mortgage industry today. Further, the term “return on investment” is not often used when talking about an LOS. What do I mean exactly? Few lenders are really happy about their LOS, but the prospect of changing to a new LOS can be daunting, so lenders put off the switch until things get critical. However, it doesn’t have to be that way. Things are about to change for the better.

Carmine Cacciavillani recreated the LOS space when he developed Palisades Technology Partners, which served five of the top 10 lenders. He successfully sold that company to IBM. Today, seeing the tumult in the mortgage industry, with the onslaught of new regulation and the drop-off in loan volume, Cacciavillani could not stand idly by. Now is an ideal time to once again recreate the LOS space. As is often said, innovation is born out of necessity and market conditions in the mortgage industry today certainly necessitate innovation. But innovation alone is not enough. The next-generation LOS has to produce results, as well. Lenders looking for increased transparency, efficiency, straight-through processing, ironclad compliance, etc., should be able to get all of that and more from their LOS.

Realizing this need, Cacciavillani has developed a new LOS called Blue Sage Solutions. This new company is focused on leveraging the latest in Web, Cloud and Mobile technologies to help mortgage lenders succeed in a more competitive, more regulated lending market. In 2013, Cacciavillani’s in-depth lending experience allowed Blue Sage Solutions to deliver its new platform in record time for two initial customers and the company is now engaging the mortgage industry in a time of rapid change to provide both a comprehensive and robust LOS.

Right about now you’re probably asking: Does the mortgage industry really need another LOS offering? Why is Blue Sage Solutions so next generation? And how does Cacciavillani see the mortgage market evolving? Well, he sat down with our editors to discuss not only his vision behind starting Blue Sage Solutions, but also where he sees the LOS and the larger mortgage industry going over the next few months and years. His thoughts are very insightful. Here’s what he said:

Q: You have been delivering mortgage solutions for nearly 30 years. How has the industry and technology changed over that time?

CARMINE CACCIAVILLANI: Having been in the mortgage business for 30 years, I have witnessed dramatic change. In the 80’s when I started, interest rates were relatively high. The largest lenders had good market share and borrowers were not nearly as sophisticated as today. Few executives understood the business value of technology-based solutions, but those who did reaped rewards. As an example, while working for a top 5 lender in 1985, we created an application to laser print dynamic commitment letters, replacing clunky error-prone typewriters and pre-printed forms. In a period of one month, this lender was able to reduce its headcount from 40 to 3, redeploying resources elsewhere.

The opportunity to innovate always exists. Lenders need to embrace technology-based solutions as a means of gaining a competitive advantage. Over the following two decades, the emergence of new technologies allowed our teams to design highly automated and interconnected systems that significantly increased productivity across the entire origination supply chain. Today with Cloud delivered solutions, responsive browser-based UI’s, mobile devices and, widespread adoption of MISMO standards, lenders can leapfrog to the next generation. I believe there is an immediate opportunity for lenders to enrich the way they interact with customers as they deliver compliant mortgages, through an intelligent loan manufacturing platform.

Q: How have changing market conditions impacted technology’s role?

CARMINE CACCIAVILLANI: Today lenders struggle to do more business with fewer resources; and quite frankly I believe that is precisely the environment where well-designed and architected technology solutions can shine. Look at how Smartphones and mobile devices have positively affected our personal and professional productivity and the intelligent sensoring of automobiles is delivering superior driving performance, fuel efficiency and safety.

Today’s sluggish economy and rigorous regulatory environment mandate that mortgage lenders innovate or be left behind. The good news is technology innovation can be a strong countermeasure to today’s challenging market conditions. While lenders’ compliance burdens and processing costs have grown steadily, so too have flexible technology solutions available to them.

I believe lenders will require partnership with high-performing providers experienced in both the mortgage business domain and true systems design to transform their business. The technology tools and platforms exist to deliver a lending process capable of attracting new customers, addressing compliance requirements, increasing productivity and providing a full digital audit trail necessary for regulatory and investor inspection. The opportunity to deliver the future is now.

Q: How did the purchase of Palisades Technology by IBM and the eventual creation of Blue Sage Inc., impact your viewpoint of what lenders are looking for from their LOS provider today?

CARMINE CACCIAVILLANI: IBM acquired us for a few key reasons: First, they wanted immediate credibility in the mortgage lending space and they knew we had high performing teams well versed in the business of mortgage lending. Second, 5 of the top 10 lenders used our platform to close tens of thousands of loans per month, proving performance and scalability. The acquisition validated our view of how a lending platform should be architected, designed and used to deliver ROI. One customer of ours with 2,000+ users improved productivity from 11 to 21 loans per FTE, per month. Technology for technology sake is not particularly valuable. What is valuable is how a solution transforms the way lenders do business. For me personally, working at IBM helped shape my view of how to continually add greater value for customers.

Our team is comprised of veteran business leads from large lenders and forward-thinking technologists. Together our people focus on designing intuitive, scalable solutions that drive greater automation through integration and collaboration. We have always done this. To IBM we were proven. Our POS/LOS platform allowed large multi-channel lenders to quickly train new associates, acquire new customers and ultimately establish their brand in a positive light.

Our goal at Blue Sage is to use the next generation technology to deliver this solution on a broader scale and at a lower cost.

Q: Rules changes are happening at an astonishing rate. How does BLUE SAGE’s approach and technology assist lenders in staying ahead of these constantly changing rules and regulations?

CARMINE CACCIAVILLANI: While the regulatory environment is clearly more onerous than ever, we have a long-standing history of delivering the requisite compliance functionality. We deliver system intelligence by injecting the regulatory requirements into our lending platform, accessing the applicable functionality and data to verify and validate throughout the process. Because of our open design we can quickly calculate key values and maintain a complete “digital history” on each loan.

The first step in the process is to align our teams with regulatory bodies, legal entities and partners to clearly understand the legislative requirements and implementation timelines. Then we design and test appropriate rule sets for efficient, rapid execution and maintainability. Where appropriate we integrate to proven third-party compliance providers as well. This approach maximizes compliance capability with business agility into the future.

Q: What are the biggest challenges that mortgage lenders face today and how can technology be used to address those challenges in your opinion?

CARMINE CACCIAVILLANI: Aside from regulatory compliance already mentioned, lenders need to differentiate themselves. As they staff up on the sales side to attract new purchase money customers, they need to simultaneously increase customer satisfaction and close ratios while keeping costs in check. Attracting younger borrowers is the Holy Grail as they represent longer-term relationships with the opportunity for cross selling. Lenders will need to fine-tune their marketing using analytics to attract new prospects and then service the transaction through direct to consumer portals and mobile applications to close the deal and drive the loyalty and referrals desired.

I truly think an intelligent loan manufacturing platform designed for integrated functionality between Consumer Direct Websites, Loan Officer CRM capabilities and a highly automated back office Loan Fulfillment platform can be the right solution to help these lenders win.

For 15 years we have used rules, events and workflow to connect and guide borrowers, loan officers, processors and underwriters through the transaction. For example, at the point-of-sale, the system automatically provides a list of qualified products for borrowers to choose or loan officers to recommend.

Once in process, the system then maintains the list of required data and documents, based on automatically generated conditions, and proactively assigns granular tasks throughout the process to assure productivity. The system expertly guides all parties to actively contribute to the transaction thereby compressing cycle times, increasing customer satisfaction and minimizing the need for costly training. I think system intelligence is key to winning in the future.

Q: You talk about the significant difference between installing and implementing an LOS. Can you explain what you mean by that? In addition, how does that impact a lenders business and their ROI?

CARMINE CACCIAVILLANI: Based on industry observations many lenders seem to be settling for vendors that install outdated software packages delivering an application that requires significant mortgage knowledge to properly execute manual entry. One lender recently indicated his user was forced to refer to a 10-page document, go to 5 external websites to key in data and then wait an extended period for documents to render. These outdated systems are dangerously error prone and very difficult to maintain.

Conversely, our approach has always been to execute an insightful, predictable implementation that configures lender business model preferences for products, pricing, fees, workflow, documents and partner interfaces, allowing the system to be the expert. As the system intelligently automates core functionality, validates data, and distributes tasks, the lender manufactures high quality loans more efficiently with far fewer employees and less training, driving ROI significantly higher.

Q: What should lenders be asking vendors as they do their due diligence when researching a new LOS?

CARMINE CACCIAVILLANI: Lenders should seek to work with partners who have an extensive track record of proven success assuring no failed implementations or legal issues to worry about. If history is a valid predictor of the future, then past experience should count for much in terms of delivering the agreed upon functionality on time and on budget.

Clearly, lenders should investigate how providers deliver compliance today and into the future. Additionally, lenders in growth mode might consider the usability, system performance and scalability of the vendor solution. The industry has seen many vendor platforms falter under the weight of significant loan volumes.

Q: What do you expect the LOS space to look like five years from now?

CARMINE CACCIAVILLANI: Overall, I see some contraction in the space. It feels like the LOS vendors with significant industry experience and willingness to invest will thrive. I think the platforms engineered for the Cloud can deliver the functionality and price performance needed to win. A vendor putting older architecture in the Cloud represents the proverbial lipstick on a pig. Trying to make outdated architecture flexible and scalable is impossible as the foundation was designed for an era gone by.

Further, lenders need more bang for their buck so vendors extending their solutions will inherently extend their value. In addition to Loan Fulfillment functionality, I see leading providers delivering a broader set of capabilities.

Also, as the industry moves to standards across the board, integration capabilities to take advantage of structured data intake will be important. The systems embracing standards to maximize interoperability will lead the way.

Lastly, LOS systems will become a formidable source of digital data for analytics providing a detailed transcript of borrower preferences and the overall transaction. This data will be valuable to lenders seeking an advantage in honing their customer acquisition and processing models as well as investors wanting loan performance assurances.

Q: On a separate, but related note, there have been a lot of mergers and acquisitions. Do you expect that to continue and how do you think it’s impacting the space?

CARMINE CACCIAVILLANI: Acquisitions and mergers are a fact of life. Buyers have different strategies and ways of valuing acquisition targets. Firms seeking LOS functionality need to understand where they fit into their strategy and the true capabilities of the platform they intend to acquire. I am amazed by the number of platforms acquired and then isolated, shelved or divested.

Today, there are vendors attempting to be all things to all lenders, but a look under the covers reveals woefully inadequate and disparate architectures resulting in limited automation and flexibility for their target market. Despite this, I think acquisitions will continue as services firms seek ways to broaden their offerings and deliver greater value for their customers.

Q: What is BLUE SAGE’s biggest differentiator as you see it in the marketplace?

CARMINE CACCIAVILLANI: First and foremost, we have an established team with decades of mortgage process and technology experience and we take pride in delivering intelligently designed platforms that drive true ROI for our clients. Our core group has been working together for over 25 years. Second, our view is the system of record should be an expert in mortgage process execution minimizing manual input. With this in mind, the team purposely took a step back to consider emerging market conditions and technology trends. We met with lender executives, consulting firms, regulatory bodies and current vendors to better understand industry challenges and system shortcomings. Our goal was to develop a vision for how new integrated digital solution sets: Consumer Direct Websites, Smart Mobile Apps, CRM platforms and Loan Fulfillment functionality, designed for the Cloud should support lenders and investors in the future.

As a result, we engineered a new robust consumer centric data model to support all mortgage channels and lines of business. We think this is a game changer as it provides the foundation for our agile, scalable Cloud-Based platform and can support all lending products. On top of the model we layer reusable components across all our solutions, and orchestrate with rules, event triggers and workflow to deliver seamless productivity and transparency. We also invested significant time and effort to optimize usability assuring borrowers, back office users and partners could all actively contribute to the origination process. In the end, our mission is to deliver an intelligent end-to-end loan manufacturing platform to help lenders differentiate and win in this new highly competitive era. We are successfully executing this strategy with customers today.


Carmine Cacciavillani thinks:

1.) The CFPB is here to stay and future regulations will require reporting greater details about the entire lending transaction.

2.) There is no short-term catalyst to return to the loan volumes of the previous 5 years and therefore lender competition will continue to increase and profit margins will continue to tighten.

3.) Younger millennial borrowers want to use lenders that provide a rich online digital experience.


Carmine Cacciavillani is an industry veteran with nearly 30 years experience designing highly automated origination systems. He is currently the CEO of Blue Sage Solutions, focused on corporate strategy and overall operations. Prior to Blue Sage, Carmine founded Palisades Technology Partners, implementing the Impact POS/LOS at 5 of the top 10 lenders. Palisades was sold to IBM in 2006. Carmine’s vision is to deliver a superior integrated digital lending solution to drive value for Borrowers, Lenders, Partners and Investors.

Best Practices Make All The Difference


TME-Binh-DangMany lenders waste time and money implementing a highly configurable Loan Origination System (LOS) because they believe they need a unique loan production process. This article will help lenders understand how an LOS with best practices dramatically reduces technology costs and implementation time.

Lenders pay a price chasing customization. Many lenders feel having a different loan production process is one of the most important drivers for success in the mortgage industry. This perception drives them to select and implement systems that require extensive customization. There are several issues with this approach:

>> The focus is on technology with customization flexibility. To satisfy this demand, most LOS vendors channel their resources to create highly customizable solutions rather than features that work out of the box. The result is lenders spend up to a year customizing their LOS to deploy.

>> Once deployed, additional years are spent making improvements to optimize the loan production process.

>> The entire process from initial investment to the promised ROI can take more than three years.

There are three key reasons why lenders would need different loan production processes:

  1. Sales Channels

Doing business in different channels: Retail is not the same as wholesale. And wholesale is not the same as correspondent. Online Internet lending through lead aggregators is not the same as a branch-based, realtor-focused strategy.

  1. Size

Economy of scale: A 500-employee lender will have a greater number of user roles with fewer activities performed by each employee versus a 50-employee lender who will have the same employee performing more activities. Division of labor and functional specialization is a key strategy in the manufacturing industry and is just as useful in the mortgage production business.

  1. Technology

LOS technology: Loan origination systems have differences in functionality and database architecture, so lenders must adapt their loan production processes to what their LOS will allow them to do.

Lenders who share similar key areas can benefit by sharing the same loan production process. Business context, in this discussion, is a concept that identifies the environment—sales channel, size, and technology—that the lender operates in.

Two lenders operating in the same environment share the same business context. Two lenders operating in different environments have different business contexts.

Lenders who operate in different business contexts need different loan production processes. But if lenders operate in the same business context, why would they need different processes? They don’t. Here’s why:

A mortgage is simply a commodity. A mortgage lender creates profit by creating and selling mortgages in the secondary market. Lenders must create mortgages that are compliant with rules and requirements created and regulated by several entities:

>> The government (e.g., CFPB, state regulators)

>> The pseudo government agencies who purchase and/or insure mortgages (e.g., FNMA, FHLMC)

>> Other investors/buyers of the mortgages (e.g., money center banks, securities firms/markets)

Some lenders’ compliance and quality control departments may require modifications to loan documents, which represent the finished product for mortgage lenders. These modifications are based on each lender’s legal interpretations related to compliance or regulatory requirements. However these loan document modifications are typically very minor.

Some investors may require different minimum FICO scores, maximum LTV, maximum loan amounts, etc., for the mortgage loans they’re willing to buy. But, these requirements do not drive significant differences between the mortgages. The result is that all lenders manufacture mortgages that are similar except for minor differences. In other words, a mortgage is a commodity.

Competition in a commoditized business is mostly about price. Price is the primary differentiation factor in a commoditized business. While customer service is important, the nature of a commoditized business means lenders must be competitive on price for long-term success. This is especially true in today’s market of savvy borrowers who shop online for the best deal.

Lenders need to create a loan production process that allows them to produce mortgages at the lowest cost possible. If the business context for two or more lenders is the same, then only one will qualify as having the most efficient process for that particular business context and will be the lender with the lowest manufacturing costs.

The goal is to create best practices. All lenders are pursuing the same goal to create and implement the best practice loan production process within their organization. The process of creating a best practice is time consuming. The lender must understand their LOS technology inside and out. Then they need to create the best workflow to achieve the promised ROI. This process of trial and error can only be effective if the lender dedicates a full-time team to the project. Lenders within the same business context waste money by not working together to create the best practices for that context.

Don’t lose time and money reinventing the wheel. Lenders who share the same business context can use the same best practices. A best practice, however, is only best for a limited time.

As technology and industry regulations evolve, the practice must be improved to remain a best practice. Most lenders don’t have resources assigned to continuous loan production process improvement. Typically this responsibility is divided among managers who are busy fighting other fires.

Lenders within the same business context need a dedicated team to create and maintain best practices. The LOS vendor is the perfect intermediary to provide this team because they have access to different lenders.

An effective LOS vendor collects data from their customers and with the knowledge of their own technology creates and distributes best practices to their customers. That LOS vendor will also periodically visit customers to help update their loan production practices. Lenders who are unable to dedicate an internal team toward process improvements can rely on their LOS vendor to fulfill that role. This ensures that they are never behind their competitors because their loan production process will always be the best practice for that business context.

Best practices achieve the best solution. Lenders who grasp the concept of business context as identified in this article will understand that it’s to their advantage to select an LOS vendor whose primary goal is to help their customers implement best practices that save time and money rather than create highly customizable systems. These lenders look for the best solution that combines best practices with technology to give the lenders what they really need: the lowest manufacturing costs to produce mortgages.

About The Author


Is Your Appraisal Process Breaking The Law?


Jennifer-MillerLenders are under tremendous compliance scrutiny, from regulators, investors, and even consumers. It seems there’s a new privacy breach at major retailers and financial institutions reported in the news almost daily. At a time when the public regularly engages lawyers in foreclosure, valuation, predatory lending, and privacy breach lawsuits that have class action potential, lenders must take a closer look at how they’re protecting consumer data. Unfortunately, some lenders are discovering that the way they order and receive appraisals is in violation of the GLB (Gramm-Leach-Bliley) Act.

The Gramm-Leach-Bliley Act, effective in 2001, addressed overall financial industry reforms as well as emerging consumer privacy and security issues. It affects the technology policies used by anyone engaged in providing financial services either directly or indirectly to consumers.

The Act regulates how consumer information is handled, and even specifically addresses real estate appraisals. If appraisals are ordered or received using regular unencrypted e-mail, or even via fax machines in an unsecured area, then GLB is being violated, since those contain consumer data that GLB protects. Private data is even more vulnerable in situations where sales contracts are attached to appraisal orders and reports. GLB strictly forbids storage of printouts of those documents in cardboard boxes or unlocked file cabinets. Yet, every day, many lenders are subjected to every one of those vulnerabilities.

As an analogy, everyone has encountered new privacy requirements related to medical information under HIPAA. Medical providers, from dentists to insurance companies, are now required to provide additional disclosures to patients, cannot provide information even to other family members, and must provide checks and balances to ensure that information is protected. HIPAA dramatically changed how privacy of medical information is implemented and it affected every aspect of any medical provider’s daily interaction with the public, from phone calls to e-mails to paper storage.

GLB is effectively the financial counterpart to HIPAA, and its impact on even the most low-level tasks conducted in real property valuation can’t be overstated.

As we’ve all seen in practically every industry, a consumer privacy breach can be incredibly expensive, and everyone in the transaction is vulnerable. From compliance penalties, legal fees, settlements, fines, and reputational risk, the consequences can bring any institution to its knees. With consumers more militant and better armed than ever, most lenders are one non-shredded trash bin or accidentally forwarded e-mail away from a privacy lawsuit.

As an example in our own industry, Nations Title Agency was caught with discarded loan applications in its (unsecured) dumpster in 2005, and was also investigated by the FTC for other alleged privacy violations. The FTC’s complaint against Nations Title is sobering evidence of its expectation that third party vendors in the mortgage loan process — everyone in the “chain of custody” of personally identifiable information — have safeguards and compliant security policies. Nations Title will be required to, among many other things, obtain third-party assessments of its ongoing compliance with GLB standards and submit them to the FTC for the next 20 years.

Obviously, this case and others prove that even if you use an AMC or other third party, you’re not out of the woods. The CFPB and OCC have also made it clear even in recent months that they agree lenders are responsible for the actions of their service providers. Many AMCs use non-secure processes either internally or with the appraiser, loan officer, or real estate agent. Even under the GLB’s “Safeguards Rule,” the lender is specifically responsible for the actions of suppliers to whom the consumer’s private information is entrusted. If they aren’t 100% GLB compliant, then the lender isn’t either, and GLB holds the lender legally liable for not auditing the practices of business partners. Think of it as “SAS-70 with a $100,000 fine per audit violation plus a prison option.” It’s not a pretty picture.

The good news is that technology can help you mitigate these risks. Lenders need a fully GLB-compliant solution, with end-to-end encryption, a secure upload/download container for sales contracts and other sensitive documents, appraisal PDFs that are never directly attached to e-mail messages, and secure paperless storage of transaction documents.

Lenders, appraisers, and mortgage professionals are subject to the GLBA rules. All are required to implement at least the following:

>> Under the Safeguards Rule, secure the transmission, receipt, and storage of data relating to any consumer’s NPI at all times, via passwords, encryption, and physical protection, backed by a written information security plan.

>> Under the Privacy Rule, provide easily understood privacy statements to any consumers who engage the appraiser, lender, or mortgage professional directly, disclosing the gathering, sharing, and security of NPI data, as well as the methods the consumer may use to opt-out of sharing of the data with third parties.

NPI includes loan terms, lender or mortgage broker name, sales concessions, co-borrower, unpublished phone numbers, other contact information, and of course more sensitive information as well. Even the fact that a particular consumer is engaged with a particular lender, at the time of the appraisal, is considered to be NPI if it has not been recorded in the public record yet or disclosed in some other way. To be safe, any borrower or individual’s information, which is not absolutely known to be public at the specific moment you receive the information, should be treated as NPI.

NPI data is potentially received electronically under many scenarios:

>> Receiving an appraisal order via e-mail

>> Receiving sales contracts and other financial documents

>> Transmitting final appraisal reports to a lender (either a lender, appraisal management company, appraisal manager, et al.)

>> Ad hoc e-mails with other service providers – agent, mortgage broker, loan officer, et al.

In addition to unauthorized access, the data must be secured from loss due to environmental hazards such as floods, as well as from technological hazards such as system failures.

Obviously, you must implement secure means of sending and receiving documents containing NPI. Utilizing regular e-mails with NPI data in the message body or attachments, and even with password protected PDFs, is not sufficient. Each institution will adopt different levels of implementation. But at its core, NPI data must be secured at all times.

There may be cases where the institution receives no NPI, and therefore, in hindsight, encryption would not have been necessary. It would be tempting for an institution to decide therefore that security overall is not needed until the presence of NPI is certain. However, the institution would not be aware of the scope of NPI until the data had already been received, which would already be a security breach if NPI was indeed present. The safest route is to assume that NPI is present, so you must secure all communications appropriately.

Any time you receive or handle a document with a credit card number, a bank account number, a loan account number, or an SSN on it, you’re handling the most sensitive data in the consumer’s NPI, and the security and privacy standards go up accordingly. Since you don’t know when you’ll receive data that already contains something sensitive, it’s prudent to employ the strictest security all the time, up front, so that it’s not “too late” by the time you see it.

Regardless of the scope and type of encryption methods and processes used, developing a written security plan describing them is not optional. The law specifically requires that it be written and regularly reviewed. The institution must have it on file, and the privacy statement must refer to its presence.

An important consideration when evaluating your compliance solutions is to scale them to your needs, and remember that it’s not “all or nothing.” Improving security and compliance is a path, not a destination. It will never be “done” because the risks and methods constantly change. Don’t feel like you have to have it all done tomorrow. You don’t. You do need to start, and be educated, however. Security and privacy issues are not going away, ever. Now, more than ever, top-level privacy and security are good business, and those safeguards are appealing to your clients. When you decide to change your policies to enhance your customers’ protections, tell the market about it so you’re leveraging your compliance expenses for your institution’s benefit, too.

About The Author


Clarifying Mortgage Letter 2014-03


KenMoyleMembers of The Electronic Signature and Records Association (ESRA) were very pleased when the Department of Housing and Urban Development (HUD) announced its support of broader adoption and acceptance of electronic signatures and records in January 2014. When the Mortgagee Letter 2014-03 shared HUD’s’ updated policies with the mortgage industry, it represented a big step forward for an industry eager to take 100 percent of its business digital with full assurance of legal force.

Since the Federal Housing Administration’s (FHA) policy change in 2010 to extend the acceptance of e-signatures on third-party loan documents that weren’t created by lenders (purchase and sale agreements), ESRA was encouraged by the intent behind the words of FHA commissioner Carol Galante earlier this year, who stated, “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss-mitigation process.” With the support from the federal department with a strong influence in mortgage lending, we expect every lender to start commonly integrating electronic signature into their processes to accelerate transactions, reduce complexity and eliminate regulatory compliance risks.

While creating new opportunities for efficiency, Mortgage Letter 2014-03 had the unintended side effect of creating new questions about the role of electronic signatures in the mortgage process. There are five areas ESRA hopes will be addressed as a future statement from HUD as well as encourage everyone in the mortgage industry to move with confidence to a paperless future.

Attesting to Accuracy

The Mortgage Letter 2014-03 states that a lender must be able to prove that the signer “certified that the document is true, accurate, and correct at the time signed.” This creates an inconsistency between the responsibilities of people who are electronically or hand-signing mortgage documents. Within a mortgage package, there are many types of documents that require signature for various reasons, such as acknowledgment, agreement, receipt, etc. Certification of the contents is more often not the reason signatures are obtained, and even if it were, we would hope that this additional burden would not be borne on borrowers based solely on the method they used to execute their signature.

Intent to Sign

Wording in Mortgage Letter 2014-03 can be read as requiring every instance of an electronic signature to be accompanied by a notation that states the purpose for signing. Electronic signatures are currently only valid under the ESIGN Act if they are “executed or adopted by a person with the intent to sign the record.” Any lender is aware that many documents are signed electronically by multiple parties in a transaction, and that their purpose for signing varies widely by both the document and the role the party plays in the transaction. Even on a single document, signers may add their signatures for completely different purposes. Surely adding a notation of intent next to every last e-signature could not have been FHA’s motive here.

Authentication and Attribution

Two sections of Mortgage Letter 2014-03 reflect conflicting indications of whether the lists in each section are meant to show examples of, or limits to, measures that can be taken by mortgagees to comply with these sections. For example, knowledge-based authentication is listed as a method of attribution, but can also be used as a method of authentication. It is unclear whether one instance of this method can be used to meet both criteria. In addition, the Letter does not mention whether these lists are meant to be illustrative examples or the complete set of attribution methods for annotating facts and circumstances surrounding the transaction.

Integrity of Records

The concept of Authoritative Copy under ESIGN, UETA and the Uniform Commercial Code (UCC) is unique to specific documents, such as electronic chattel paper and electronic equivalents to negotiable promissory notes. The term “Authoritative Copy” has no legal definition or significance outside of that context. The term is used with “electronic originals” solely because they require special treatment to establish ownership by transfer or assignment—including extensive watermarking of all viewable or printable copies.

The use of an “Authoritative Copy” in the ordinary course of signing other documents is contrary to the provisions of ESIGN and UETA (which provide that except where an “Authoritative Copy” is required, any accurate copy of an electronic record is an “original” for all legal purposes) – the requirement is also unnecessary, unusual and burdensome.

Given that the Letter specifically excludes promissory notes for the moment, it would be helpful to gain clarification on the origin or purpose of the reference to “Authoritative Copy.” Do mortgagee systems need to “be designed so that the signed document is designated as the Authoritative Copy” or does the requirement refer solely to electronic promissory notes or other records subject to an “authoritative copy” requirement under the law?

Records Retention and Inspections Requirements

ESRA members agree that audit log, controls and documentation should be readily available for inspection for the same periods as records signed in ink. It is critical that systems have the ability to “reproduce electronic records as accurately as if they were paper records when printed or viewed.”

Many readers of Mortgage Letter 2014-03 were surprised to find that these requirements were extended to include inspection of computer systems (including hardware and software) and preserving the hardware and software with which contracts are executed. Under current guidelines, systems may not be required to produce reliable records that would otherwise meet record retention and inspection requirements, and given the pace of technological change and the record retention periods already imposed by other regulations, preserving the physical software and hardware used to create the original record will be quite burdensome. We think ultimately this new requirement will only apply if there is no other way of producing reliable and accurate electronic records.

This also intervenes with how electronic signatures are executed—which is from cloud providers whose businesses are based around keeping system hardware and software maintenance out of the purview of their users. Most modern, current security practices and predicate rules at governing lending institutions do not readily accommodate physical inspection of lender hardware and software. If this provision is taken literally, no mortgagee could comply without violating its own security policies, which typically limit physical access to their servers housing sensitive customer data and debt obligations. Based on these factors, we don’t believe it was the intent of the Department to require lenders to allow physical inspections of lender hardware and software, and expect this will be changed in a future Letter.

Overall, ESRA members are thrilled with FHA and HUD’s new active support of electronic signature technology and standards. We think lenders will have a heightened interest in adoption as well; electronic documents not only streamline and ease mortgage processes, but provide significantly limit regulatory compliance risk. We are hopeful that the questions posed here are addressed quickly and represent just small a bump in the road on the way to full industry adoption of electronic signature technology.

About The Author


The Truth About Transaction Risk Management


Chris-AppieHow old are your kids? This should be an easy question, but sometimes it’s not. Like many of you, I have young kids and either out of genuine interest or Midwestern civility, people I meet often ask me their ages. There are, of course, rules for these types of inquiries, unwritten conventions with which we must comply or risk eliciting looks of confusion from the questioner. We all know (or should know, I’m told) that if you have a daughter born 17 months ago, she is not one year old: she is 17 months old. But, if you have a daughter born 37 months ago, she is three years old. No one would describe her as 37 months old. Through trial and error, I’ve concluded that 2 ½ is the magic imaginary line where age should be communicated in years rather than months. Fortunately for us, with its new mortgage disclosures the Consumer Financial Protection Bureau (CFPB) has not allowed so much guesswork in requiring a lender to disclose the age (term) of a loan. In fact, they have been rather forthright:

“Describe the loan term as “years” when the Loan Term is in whole years. For example “1 year” or “30 years.” (comment 37(a)(8)-1.i, -1.ii). For a Loan Term that is more than 24 months but is not whole years, describe using years and months with the abbreviations “yr.” and “mo.,” respectively. For example, a loan term of 185 months is disclosed as “15 yr., 5mo.” For a Loan Term that is less than 24 months and not whole years, use months only with the abbreviation “mo.” For example, “6 mo.” or “16 mo.” (comment 37(a)(8)-2).”

The Bureau has required the presentation of data in a way that makes sense to a consumer and is consistent with how one’s brain measures time, whether it’s a baby’s life or a loan. This example, and there are hundreds like it, does provide some regulatory clarity, but how do you ensure the data actually gets disclosed in this way to a borrower? Having a targeted compliance outcome is great, but how do you guarantee it? Do you rely on procedures or loan officers with checklists? The risks are simply too high for that. Today’s financial industry requires a lender to have an entire solution designed exclusively to manage these types of risks. A transaction risk management solution takes the guesswork out of compliance, lowering your risk in a high-risk environment.

A Changing Landscape

The U.S. financial industry is experiencing rapid evolution. While we are past the trial-by-fire days of the 2008 financial crisis, the consequences of that difficult time continue to impact the way we do business. Increased regulatory oversight from the CFPB and other agencies, as well as the uncertainty of regulatory changes yet to come, have created a hazardous business environment. There is a natural tendency in the industry to address these hazards strictly in terms of compliance: if you think you have a compliance problem, then you look for a compliance solution. But if we take a step back, we can see that this is not simply a matter of fulfilling various compliance mandates. In recent years, the Federal Reserve has increased its focus on enforcing the mandate that financial institutions implement an enterprise risk management solution, one that effectively addresses operational risk, compliance risk, reputation risk, and liquidity risk. These risks exist at the enterprise level for your institution and touch everything that you do as an organization. They carry with them costly consequences when they aren’t managed properly. The only way to address them is at the enterprise level, with an enterprise-wide solution.

Raising the Stakes

These risks are ever present and their management by financial institutions is closely monitored by the CFPB as well as other regulating agencies. In the wake of the market upheaval of 2008, financial institutions are becoming increasingly familiar with the demands of managing these various types of enterprise risks. As a result of the CFPB’s aggressive focus on Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), many financial institutions are struggling to ensure that they can demonstrate that their specific policies, processes, and procedures are fairly and consistently applied across their customer communities.

Violations of UDAAP can expose an institution to millions of dollars in potential civil penalties. In July of 2012, one of the nation’s largest consumer lenders was assessed a total of $60 million in penalties by the CFPB and OCC, who cited: “[The] Bank’s failure to develop and implement a comprehensive and effective enterprise risk-management program to detect and prevent unfair and deceptive practices.”

Risk, Unmanaged

In the absence of a transaction risk management solution, your institution is responsible for maintaining the integrity of the entire transaction data flow. You are responsible for ensuring that your institution’s policy disclosures contain appropriate data based on state and federal regulatory requirements and applicable case law. You are responsible for determining that the data is consistent across all documents required to memorialize the transaction. You are responsible for determining in any given transaction that there is data consistency across all documents. You are responsible for determining complex, state-specific entity types such as limited liability companies and limited partnerships, and for determining the correct organizational authorizations. Failing any of these responsibilities exposes your institution to the risk of unenforceable transactions that impact liquidity, compromise your reputation, and result in legal and regulatory repercussions.

The personnel costs associated with documenting organizational practices—and the potential legal costs and regulatory fines associated with failures to do so—are considerable. The likelihood of employee error is significant, exposing your financial institution to legal challenges and regulatory violations. Training is an ongoing, institution-wide effort requiring resources to develop and deliver updates as they become necessary. While your staff is engaged in this effort, they spend less time with loan applicants and have fewer opportunities to set your institution apart in a mortgage lending industry that suffers from over-commoditization, which forces lenders to win business by competing almost solely on the ability to offer the lowest rates.

Your ability to establish and nurture applicant relationships is as critical to your success as your ability to complete every transaction compliantly with minimal risk. Deployment of a transaction risk management solution allows you not only to successfully manage transaction risk, but maximizes your staff’s availability to effectively service customer relationships.

Content Configuration

Of course certain data is required in transactions by federal and state regulation, and every institution must present that content in the same manner at transaction time. That said, your institution is unique. You have operational procedures and policies that are unique, and you certainly have products that are unique and need to be represented as such. In order to present your products and policies accurately at transaction time, you need to define and control the language you use to describe them.

In the absence of a transaction risk management solution, your institution is responsible for maintaining the language used at transaction time. How many FTEs are tasked with reviewing this content for errors and inconsistencies? What happens if they get it wrong? What untapped value could they be delivering if they did not have to spend time on this?

Data Analytics

The analysis of transaction data is critical for successful risk mitigation. Take a moment to think about how you are pulling together the documents required to create an enforceable loan. You probably have a library, but who is responsible for ensuring that you’re using the correct version of each document? What about state-specific requirements that affect applicable content necessary to perfect security interests, correct determination of ownership types and signers, and properly construct often complex signature sections? Are you leveraging risk management technology to reduce payroll and ensure consistent results across all branches? Even if your staff is trained on how to input months rather than years, there is a misdirection of resources if they are manually recreating analytical processes that can be more reliably delivered through technology.

Beyond those first-round diagnostic analytics, any failure to identify the required output documents for a given transaction can jeopardize the integrity of the entire transaction itself. Compliance officers are often required to determine, set up, and maintain document groups. To complete a transaction, your staff must select documents from these pre-set groups that align with the specific transaction in question. The risks created with such a process are numerous, but they virtually disappear when risk management technology does the heavy lifting for you. By automating the operational processes that determine if loan criteria are valid, the correct quantities of each document needed, and which borrowers are required to receive which documents, a risk management solution creates more bandwidth for your loan application and closing personnel to secure customer relationships.

A Dollar Saved

When your institution is compliant, you avoid the serious financial penalties associated with regulatory fines and legal costs. Compliance is critical to protect the assets of your institution, but it is no more a money-making venture than fire-proofing your building. A TRM (transaction risk management) solution does more than protect you from regulatory hazards. It positions your institution to capitalize on business opportunities and extends the profitability of your mortgage lending products. So don’t worry about figuring out how to disclose how long it will take your loans to mature, there’s TRM system for that—now all we need is a system to tell us how long it will take for our kids to mature.

About The Author


Thinking About Thinking


TME-RGudobbaPROGRESS in Lending started out as a simple idea among great friends five years ago. The thinking was that there was no single place for industry thought leaders to come together and express their ideas on how to change/improve the mortgage industry. A few months after those talks Tony Garritano decided to form the company. In the second half of 2010, I wrote 13 articles under the banner, “Things to Ponder.” In October of 2010, I mentioned to Tony that I could not write the weekly article, as I didn’t’ think I could come up with 52 ideas in the next year. At that point, Tony introduced this monthly magazine, Tomorrow’s Mortgage Executive, and asked me to write a monthly column. When thinking about for this article, I realized that next month would be my 50th Future Trends article. WOW! So, how did I manage to think of 50 things to write about?

I have always been curious. Even when something appears to be the only solution to a problem, I have always believed in looking at alternatives. Even though it may only be to thoughtfully eliminate them. Why do I do this? Sometimes it may bring to mind solutions that you have not considered. In the end, if you stick with your original solution, you can at least rest assured that you have considered all other possibilities. So, the answer to what I would write about each month was actually easy.

I wanted to start with a look at all the future trends, theories and concepts by writing about a new business process or technology that could potentially have an impact on your personal or professional world. My basic objective was to pique the reader’s interest. Hopefully, this would be the one that registered with the reader in some profound way. The one that made you think differently.

That brings me to the title of this article, “Thinking about Thinking.” If we think back for a second, the THINK motto was ubiquitous within IBM offices and factories throughout the world by the 1930s. In 1948, IBM handed out 9,000 signs; by 1960 that number had jumped to 20,000. The concept was simple. Everyone had that desk sign in prominent display. It became ingrained in your way of looking at problems. Think first. Even Apple got on the bandwagon. Apple’s 1997 “Think Different” ad campaign was one of the major turning points in the company’s history, a message to the world that Steve Jobs and his innovative vision had returned to Apple after leaving in 1985.

A recent article in Rotman Magazine stated, “We now understand the basic underlying principles of how our brains work and interact with our environments. The more we can build our awareness of these principles and explore ways to turn that awareness into action, the better. In the end, the extent to which you develop as a thinker will be determined by the amount of time you dedicate to your development, the quality of the intellectual practice you engage in, and the depth of your commitment”.

The brain is divided into two hemispheres that each control specific functions. The left hemisphere of the brain is responsible for logic. When you’re doing mathematical and analytical thinking, for example, you’re utilizing the left side of your brain. The right hemisphere of the brain is responsible for emotions. When you’re creatively thinking or daydreaming, the right side of your brain takes over. Left-brain dominant individuals are usually logical in their approach to problems and situations, serious in nature, knowledgeable about a variety of subjects, linear in thinking, structured and organized in their jobs and lives, and rational in making decisions. Right-brain dominant individuals are usually highly intuitive; have little sense of time; enjoy music, clutter, and creative thinking; make decisions based on hunches and emotions; and use holistic thinking. Critical thinking is the process of thinking that questions assumptions. Creative thinking is a way of looking at situations from a fresh perspective. Creative thinking involves creating something new or original. Most ideas are in fact modifications of something else that exists within your knowledge base. By using imagination, intellect and existing knowledge you can form in your mind a new thought or idea. While critical thinking can be thought of as more left-brain and creative thinking more right brain, they both involve “thinking.”

Are you confused yet? Here is another way to look at this. Divergent thinking allows us to use our imagination to explore all sorts of new possibilities. This is thinking outside the box. Convergent thinking allows us to use our knowledge to examine concepts and see where they fit. This is thinking inside the box. At first glance, divergent thinking might seem to be more creative than convergent thinking, but both are essential. Each of the two thinking processes has an important role to play. Maybe the best way in which convergent thinking may be combined with divergent thinking is to engage in divergent thinking in order to generate many novel ideas, and then to evaluate these ideas by using convergent thinking. An understanding of both of these types of collaborative thinking will have a profound impact on your ultimate success. Hopefully, this will get you thinking!

And don’t for a second think that you’re ever too old to think of something new. Over the past 20 years we have learned that older brains have as much ability to grow new nerve cells and connections as younger brains. Experiments have shown that some brain exercises can make older brains function as well as most 20 year olds. In fact, older brains can reclaim their whole visual field, improve hearing, as well as increase the speed and accuracy of a person’s attention. When you are mind wandering, thinking about things, being introspective about things unrelated to visual and hearing stimuli that are coming at you in the present, your brain is growing. It is more introspective, stimulus independent thought, using more inside parts of our cortex, the downstairs parts of our brains, that keeps us young.

With all of that said, let’s think about what’s on the horizon? The mortgage industry is faced with many challenges. The regulatory changes so far are just the tip of the iceberg as to what we will see over the next few years. Lenders, vendors and service providers alike need to have a detailed project plan with very specific measurable goals, timelines and resource requirements, both internal and external. One weak link can break the entire chain. You must have a sound infrastructure. Simply put, you need to be thinking.

Let’s look at the pending CFPB requirements around the Loan Estimate and Closing Disclosure, for example. I commend the CFPB for collaboratively working with the industry to re-define the initial and closing process with the consumer. On the surface, the changes appear minor, we are only talking about two documents. Below the surface is another story. Data elements have been added and/or changed, but the real story is the process change. There are some very specific time constraints on the interactions with the consumer, but the real change is the process for closing the loan. In the past, the closing or settlement agent was responsible for the final HUD Settlement Statement, sometimes causing angst and anxiety for the lender. Now that the lender is on the hook for any errors or omissions, the lender has control of that. The lender can ensure that everything is in sync, and have control over all the post-closing processes, as well.

So, here’s my final thought: Looking to the future, everyone involved in the mortgage industry needs to be on high alert and in a proactive state-of-mind.

About The Author


You Should Fear The CFPB


John-ListonMany in the industry compare the Consumer Financial Protection Bureau (CFPB) to the boogeyman. However, that is not an altogether accurate point of comparison at all. The term boogeyman is defined as “a mythical creature in many cultures used by adults or older children to frighten bad children into good behavior. This monster has no specific appearance, and perceptions about it can vary drastically from household to household within the same community; in many cases, he has no set appearance in the mind of an adult or child, but is simply a non-specific embodiment of terror.”

The comparison doesn’t hold up because the CFPB is not a “mythical creature,” the CFPB is very real. Where the comparison does hold up is that for many in the mortgage industry today, the CFPB does represent “the embodiment of terror.” But is that an accurate way to view the CFPB? Do lenders have reason to fear the CFPB? I think it is clear that the actions of the CFPB thus far are enough to warrant fear of the CFPB and non-compliance.

Why do I say this? Back in July of 2012, the CFPB announced its first public enforcement action with an order requiring Capital One Bank (U.S.A.), N.A. to refund approximately $140 million to two million customers and pay an additional $25 million penalty. This action results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for “add-on products” such as payment protection and credit monitoring when they activated their credit cards.

More recently, on April 9, 2014, the CFPB ordered Bank of America, N.A. and FIA Card Services, N.A. to provide an estimated $727 million in relief to consumers harmed by practices related to credit card add-on products.

Roughly 1.4 million consumers were affected by Bank of America’s deceptive marketing of their add-on products, according to the CFPB. Bank of America also illegally charged approximately 1.9 million consumer accounts for credit monitoring and credit reporting services that they were not receiving. Bank of America will pay a $20 million civil money penalty to the CFPB.

Also, in June of last year, U.S. Bancorp (USB) and a partner company were ordered to repay about $6.5 million to resolve CFPB claims that they misled military-service members who participated in an auto lending program.

The two companies “failed to properly disclose costs associated with repaying auto loans” made to service members under U.S. Bancorp’s Military Installment Loans and Educational Services program, said CFPB Director Richard Cordray.

It doesn’t end there. The CFPB fined Walpole, Mass.-based Mortgage Master $425,000 after its examiners discovered significant data errors in its 2011 HMDA report. The errors involved 21,000 loan applications processed in 2011. The Massachusetts Division of Banks also reviewed Mortgage Master’s HMDA reporting and found significant errors.

So, when lenders compare the boogeyman to the CFPB, the comparison might not be 100% correct, but the past actions of the CFPB to penalize lenders for non-compliance to the point where the agency was investigating one lender for over a year, is a real cause for concern. Lenders don’t want to get caught in the crosshairs of the CFPB.

Today many lenders are scrambling as they try to come up with a strategy to comply with the new integrated disclosure rule set to go into effect in August of next year. This new rules changes mainstay mortgage documents in a very dramatic way and will represent a huge departure from what most mortgage lenders consider to be business as usual today.

If we go back in time a bit, the CFPB began a lengthy “Know Before You Owe” initiative to gather industry and consumer feedback. In the end, a 1,100-page Preliminary Rule was published in July 2012. Our efforts in developing a solution for our PowerLender LOS began to focus on finding the best way to ensure compliance for our lender clients. In November 2013 a 1,888-page Final Rule was issued. In a nutshell, the CFPB is now requiring lenders to implement the Loan Estimate and Closing Disclosure documents by August 1, 2015.

What does that mean exactly? The Loan Estimate replaces the Good Faith Estimate and the initial Truth-In-Lending disclosure, and the Closing Disclosure replaces the HUD Settlement Statement and the final Truth-In-Lending disclosure. The data requirements have not changed greatly, but the presentation has changed dramatically.

We determined very early on that the Loan Estimate and Closing Disclosure differ from the documents they replace because there is not a single version of the pre-printed document boilerplate. Instead, there are literally thousands of variations of what is normally considered to be pre-printed information. The integrated disclosures “boilerplates” have over 2,000 variations due to loan properties. These include purchase/refinance, fixed/ARM, 1-4 projected payments columns, payment frequency, signatures, etc.

In lay terms, this means that the traditional doc prep approach that relies on boilerplate forms won’t be able to comply. It’s that simple. To prepare these documents correctly, we believe that every loan origination system (LOS) that hopes to be in business after August 2015 has to formulate a strategy to create these documents dynamically. In our case, PowerLender LOS users will update PowerLender setup with a MISMO version 3.3 XML map that expresses the data, which will complete any of the document variations dynamically.

It’s important that LOS vendors, not doc preps, use MISMO version 3.3 because on March 11, 2014, Fannie Mae and Freddie Mac, under the direction of the Federal Housing Finance Agency released a new Uniform Closing Dataset (UCD) specification. The UCD is a new dataset to support the CFPB Closing Disclosure document. The UCD data set is a strict subset of the MISMO v3.3 data set, which expresses the data required to complete the Closing Disclosure.

So, because the GSEs intend, at some future time, to begin to collect the Uniform Closing Dataset data, and because that data set is useful in producing both the Loan Estimate and Closing Disclosure, we have decided that PowerLender will use the UCD data set to prepare the Loan Estimate and Closing Disclosure documents. In so doing, PowerLender users will already be ready to produce the UCD when the time comes.

All of this may seem very technical, but in the end it boils down to dollars and cents. For U.S. Deputy Attorney General Paul McNulty put it this way when he said, “If you think compliance is expensive — try non-compliance.”

Many LOS vendors invested a lot of money in the January QM changes. Several see these changes coming down the pike next year as a doc prep issue. That’s the wrong attitude. A proactive LOS will have the wherewithal to make sure that its lenders are compliant without solely relying on an outside vendor for support.

How do you do that? The proactive LOS that wants to not only prepare its lenders for these new rules, but also wants to ensure that their lenders are prepared for future change will deliver a dynamic document engine that uses the latest MISMO standards. There is no easy way around this for the LOS vendor that is truly committed to mortgage lending. There is no band-aid that can be placed on top of an old wound or in many cases an old LOS, which will magically make that wound heal and ensure ironclad compliance for lenders come August of next year.

About The Author


Fair Lending Analysis Does Not Have to be Complex!


Fair Lending is confusing! The biggest question most lenders have is, how do I prove to an examiner that we do not have pricing disparity?

As a leading pricing engine in this country we heard this loud and clear from our clients and found a way to organize pricing data, equalize the interest rates, demonstrate a strong compliance management system over pricing disparity and recall this information for research or an exam.

Here is how it works:

  1. You pricing engine is configured to standardize your pricing policy. It also houses the reasons why a loan was priced a certain way, based on known variables such as risk adjustments and time-price differential in market shifts.
  2. The unknown or generally undocumented variables come from the borrower decisions. This means that based on the exact same borrower, the decision that they make can result in an interest rate difference of 1%. So it only makes sense that two borrowers who are similar in financial profile could have a different rate not based on pricing disparity, but based on the decision they made. The Optimal Advantage system locks down those decisions at the time of lock in.
  3. The Fair Lending analysis is done at the time of lock in, versus waiting until the loan closes and the mistake is already made or the reasons are a mystery.
  4. The time burden for analysis is very minimal because of the structure of the best practices workflow and the use of automation.
  5. The equivalent rate feature is a patented process that automates the equalization of your borrower rates with a push of a button! As a pricing engine we have the data to mathematically make all loans equal by accounting for risk adjustments and time price differentials.
  6. Finally, the historical database is a “real time” search of what was available for your client or any other scenario during that day in history. The ability to run this search combined with the ability to run a comparable search is a time-saver in an exam.
  7. All of this combined into a best practices workflow, turns fair lending analysis into an easier task for the mortgage company by saving time, personnel, money and increased regulatory scrutiny.

The response so far for Optimal Advantage and the Patent Pending Equivalent Rate has been overwhelmingly positive from our lender clients, their examiners, and consultants. To download a Free copy of our White Paper on Equalizing Rates, which is written by Ivan Darius, PHD and David Skanderson, PHD, please scan the QR Code or go to: ww.optimalblue.com/fair-lending-white-paper.

To speak with Tammy directly please email her at tbutler@optimalblue.com


The Right Tool For The Right Time


TME-DGreenLike many people my age who were raised in the Upper Midwest “Rust Belt” I began wrenching on all sorts of mechanical things at a tender age. You learn a lot — about a lot — when you are half submerged under the hood of a car, covered in grease. The most important lesson, by far, from my gearhead upbringing was that nothing beats having the right tool for the job. Things go faster; quality is higher; the experience for you, the car and its owner is better; and maybe, just maybe, there will be fewer parts left over at the end.

Like most people from that era, I no longer repair cars. The basic components with which I am familiar are still under the hood somewhere, though fixing them is best left to professionals who have — you guessed it —the right tools.

Having the right tools for the job is essential when it comes to anything mechanical; it’s also true when it comes to mortgage lending. While I was busting my knuckles on rusty bolts in the Sixties, mortgage lenders used the best tools then available: Paper, typewriters, adding machines, interest rate and payment tables, maybe even slide rules. All are viewable in today’s museums and roadside antique stands, though it is still possible to find the odd IBM Selectric in daily mortgage lending use.

Paper, both the backbone and bane of this industry’s existence, is far too much in evidence everywhere. How will we know when the right tools are being used? When the entire mortgage process is entirely paperless, and when the cost of production begins to decrease.

Here’s a hypothesis. The same lenders who believe their current tools are totally state of the art are the same mortgagors who complain about today’s high cost of manufacturing loans. The cost of lending is indeed high. It is also on a steep, uphill trajectory. A story appearing in MBA NewsLink on March 27 of this year reported cost-to-close had increased to $6,959 per loan in the fourth quarter of 2013, up from $6,368 the quarter before. On June 24 the MBA issued a press release revealing costs went significantly higher in the first quarter of 2014 growing a whopping $1,066 to $8,025 from the fourth quarter number. Second quarter 2014 results are unlikely to be encouraging.

What these news releases do not talk about is tool cost. Digging into the MBA performance studies provides some insight. Between 2% and 3% of total production costs is technology related, our industry’s version of tools. What these news releases do call out is the labor component of total production expenses. At over 60% of the total cost, staffing is the single largest variable in the cost-to-close equation.

There are two ways to manage the cost-of-labor variable. The first is the old standby: Reducing headcount, which the industry has been doing over the course of this year. In theory, this should lower the cost to close, yet it does not appear to be working. This is financially counterintuitive, and also presents a major problem. Reducing headcount puts lenders in a precarious position, as cutting too far has the potential for eliminating vital expertise. Every lender must maintain minimum staffing levels to cover these functions. This is one of the reasons the cost to close loans continues to rise even though staffing levels are down.

The second way to manage the cost of labor is to increase staff productivity. The way to do this is with new tools – meaning new technology. We have been working with a group of lenders, all of whom are users of our products, on a benchmarking study. Their total loan production expense composition is very different from that reported in the MBA Studies. The labor variable for this group averages about 47% of the total cost to close a loan. Technology costs are slightly higher at between 5% and 7% of the total. These facts are meaningless without this next bit of information: These lenders, on average, produce more loans per mortgage employee than those participating in the MBA Study. Fourth quarter MBA productivity was 2.0 loans per employee per month, but 2013 productivity for our group of lenders averaged 4.4 loans per employee per month.

This is crucially important since productivity has an inverse relationship to total loan production costs. Increase productivity, decrease cost-to-close. When the opposite happens, costs will rise and they will do so at an increasing rate.

What accounts for this productivity difference? It starts with tools. These lenders have better tools for the job of manufacturing mortgage loans. Among them you’ll find a paucity of paper. In place of paper are highly automated electronic processes that rely on comprehensive systems employing automated workflows. The best, most efficient among the benchmarked lenders are fully electronic all the way through closing, funding and delivery.

The benefits from the right tools, in addition to higher productivity, are numerous. Take borrower experience. This group’s borrowers have online, real-time access to their loan throughout the origination lifecycle. This makes for a happier customer and also results in higher productivity. Production staff is nowhere near as likely to be interrupted by phone calls as they were before these new tools were put in place.

These borrowers increasingly self-serve from beginning to end, leaving the mortgage teams free to produce loans. Compliance, or the persistent, nagging fear of non-compliance, is also tool-managed. Regulations are rules. Technology is great at following rules. Unlike human beings, technology will do the same thing the same way every time without making an error. Fewer mistakes equal greater productivity and less worry.

If tools are the answer – and I firmly believe they are — why aren’t all lenders in a mad scramble to put new tools in place, especially while volumes are low and there is time to undertake the project? The usual answer is cost. Tools cost money. New tools cost more than the ones lying in the tool box. Spending even more money while costs are rising is counterintuitive, but it is the only option that really works.

Tools are the answer to the cost/productivity conundrum. Yet it takes more than just a wrench to loosen a bolt. People and process make the wrench work. All the grease monkey kids of my generation had to be taught to use the tools we had at our disposal. We also had to learn the processes necessary to get the car motoring again. So it is with mortgage tools. Buying new tools is the first step. Committing to refining processes and teaching your people to use their new tools are steps two and three. Using new tools the old way and without education will produce neither greater productivity nor lower loan production costs.

I was talking with a lender about this just the other day. This lender, a relatively new user of our technology and one of our benchmarking study participants, is doing fairly well after their first year with new tools in the box. After reviewing the study results he asked the perfect question: How do we increase our productivity to the levels of best-in-class users?

We have mentioned relentless attention to process improvement and ongoing staff education. The third element is time. Mastering any tool takes time and practice. The results, however, are worth the effort. Best-in-class users consistently achieve productivity levels in the range of five to six closed loans per employee per month. Their cost of production is impressively low, too. I shared one last thought with this lender: None of the high performance lenders in our study are satisfied with their results. That’s another characteristic of high-performance lenders. They always expect more.

My son-ln-law, a new homeowner, and I were talking about tools just the other day. He became the lord of his modest suburban manor with nothing but the most basic discount store tools. Fortunately I have my own extensive collection -— as well as a good portion of my father’s — plus access to an entire farm’s worth of implements, from the most basic hammer to the most single-purpose implement imaginable.

My son-in-law, as an Eighties kid, is all about automation. For example, when he uses a new high-power staple gun and not the old-fashioned hand-powered version, he sees that new tools help him finish projects quicker and with better quality. The powered version of the tool costs at least 5 times more than the old-fashioned kind. It gets the job done in a fraction of the time, however, which is what matters to him. It is the same way with new versus old mortgage technology, especially when there is really no choice but to get more done with less.

About The Author


Is Cost Cutting Killing Your Business?


TME-MHammondLenders and vendors are under intense pressure to survive in today’s current mortgage environment. Products and services that were in great demand just a couple of years ago have almost completely evaporated. Lenders have had to dramatically adapt to these market conditions by changing their product mix, origination process, underwriting guidelines, valuations and funding to produce saleable and profitable loans. Servicers have had to shift focus to loss mitigation, loan modifications, short sales, REOs and foreclosures to remain viable. In addition, the current regulatory environment is constantly changing and adding significant pressure to the entire mortgage process.

Lenders and servicers are not alone in feeling the pressure. Vendors are frantically working to respond to these challenging times by rolling out new products, realigning development efforts and creating strategic partnerships to meet the new demands while striving to remain compliant.

They are faced with tough questions, such as: Do our current products have enough flexibility to be modified or do we need to develop new solutions from scratch? Are these new products long-term solutions that have sustainable revenue models or are they just a quick fix that has a short shelf life? What types of products and services will lenders and servicers invest in during these market conditions?

While we would all agree that properly managing costs, having appropriate budgets and being fiscally responsible is vital to the success of an organization, a culture of constantly cutting costs over a prolonged period of time can have a negative impact on your business. These conditions have created a cost cutting environment that is primarily focused on survival. When this takes place, lenders, servicers and vendors are often so focused on cutting cost that they stop innovating, they miss out on current opportunities and often cut the programs that would drive top line growth.

“Many companies think of an economic downturn as a time to tighten belts and safeguard cash reserves. The executive mindset becomes survival, not growth – the bunker mentality. The irony is that this leaves a company in a vulnerable position organizationally and in the marketplace. The path to success in a down-market is to swim upstream,” said Jim Pinto.

The result of all of this the creation of a scarcity mindset that doesn’t benefit anyone. Richard Spoon, the CEO of ArchPoint Consulting put it this way when he pointed out that “organizations try to save their way to prosperity. Take the newspaper industry, for example. Many newspaper companies essentially killed their products through savings. They saved themselves right out of business.

“Think about what allowed Microsoft and Apple to compete. Microsoft wouldn’t share code. Apple would,” he continued. “Microsoft had a scarcity mentality. Apple had an abundance mentality. Which one do you believe put the biggest dent in the universe? The equation of investment versus expense is always there. Ask yourself these questions: When do I spend ahead of the market and when do I manage to cost? Do I believe for every dollar I put into business development that I can garner $2 or more?

A person with a scarcity mentality doesn’t invest in the business. They hoard cash. A person who comes from an abundance mentality believes the pie can get bigger. They don’t believe it’s possible to save their way to prosperity. Instead, they believe in growing the way to prosperity, according to Richard Spoon.

Attempting to save your way to prosperity will ultimately lead to your demise. Continually cutting costs eventually impacts the quality of your product and service. There is a point at which a dollar of savings produces $5 in lost sales. Customers reach a point at which the service just isn’t worth what they’re paying for. In the scarcity mindset, many people believe getting the most value from vendors or employees means paying the lowest price — just as giving the most value to the customer means being the cheapest in the marketplace, but that’s the wrong approach.

How does all of this relate to our industry? When companies need to make important budget cuts, many of them look at marketing as an area to reduce their spending. Many decisions to cut marketing are based on rationale that is flawed such as: “I can maintain my clients or customers I have now.” Or worse yet, marketing budgets are looked as a luxury expense and the logic is “If I have some really profitable months I’ll spend more in marketing later.”

Other logic might suggest that the competition has cut their budgets, so it’s safe for you to do the same. Wrong … in slower economies one of the best ways to gain market share over the competition is by not cutting advertising budgets, defining a clear strategy for the dollar amounts and staying true to your plan. A case can be made for actually increasing marketing budgets in a down economy. An example of this is Proctor and Gamble. During the depression P&G showed incredible resolve and gained market share over competitors, even increasing marketing budgets when others cut back.

Spending more in a down market allows for companies to even push the envelope in emerging advertising technologies and leverage deeper advertising buys when inventory is much more available from media companies.

Marketing budgets should never be considered a negative budget item, prime for the chopping block. In actuality it is fuel to help companies achieve business goals. So if the conversation in the boardroom comes up about cutting the marketing and advertising budgets ask yourself, would you cut off your own head and still be successful?

I know that when the economy starts sinking, it’s tempting to cut any and all expenses. Perhaps revenue has dropped, employee morale has sunk and there’s no sign of a recovery. In this present day, marketing expenses are often the first to go, but in reality they should be the first to stay in the budget.

I know what you’re thinking: That’s easy to say, pal—you’re a marketer! While that’s true, consider that the fulltime job of marketing folks like myself is to get businesses on the map and in front of their ideal clients. Cutting funding to the very strategies that generated clients in the first place seems counter-intuitive at best. Let’s take a look at some other reasons why cutting marketing costs shouldn’t be the first response to economic uncertainty.

  1. Beat the Competition! Because marketing is one of the first line items to get slashed, you’ll likely find that your competitors aren’t spending as much, if anything, on marketing. If you cut marketing costs as well, you won’t get ahead of your competitors…you’ll suffer with them. A recession is one of the best times to solidify your position in the market and set yourself apart as an industry leader.
  2. Sustain Momentum. Although it’s good to be aware of your competition, it’s not all about them. It’s about you and your company. Marketing serves as the momentum underneath many lead-generating aspects of your business—and when it’s cut, the first place it affects is sales. From there, if you’re not selling and closing new business, your sales force begins to lose its confidence. This instability then inevitably trickles down to many other areas of business, including your employees, not only affecting their daily work habits, but also their personal well-being. When employees are worried about losing their jobs, they will naturally begin looking elsewhere, and the last thing any business needs is an inexperienced work force when the economy turns for the better.

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