At the end of the second quarter we got some good news. Black Knight reported that at $518 billion, Q2 saw the highest volume of 1st lien mortgage originations in a single quarter since Q2 2013. Purchase lending was particularly strong, making up 57% of all lending and seeing a 52% increase in volume from Q1. Purchase originations rose $102 billion from Q1 to a total of $297 billion, hitting their highest level in terms of both volume and dollar amount since 2007. Refinance originations rose by 8% from Q1, but fell slightly below last year’s levels, despite lower rates and a larger population of refinance-able borrowers. In fact, refi lending has risen in each of the past 3 quarters, though primarily in the higher credit segments of the market. The industry was also able to put the burden of complying with TRID behind it. Moving forward, new compliance burdens by the GSEs changing forms and the CFPB changes to HMDA still exist. So, what does all of this mean? There is ample opportunity for success in mortgage lending if the industry adopts a culture that embraces both innovation and change. Roger Gudobba, Vice President, Mortgage Markets at Compliance Systems, talked to our editor about the impact of technology innovation in the mortgage industry. Here is what he said:
Q: Let’s start by talking about your first experience in computers.
ROGER GUDOBBA: In 1961 I was hired as a computer programmer by Dr. Beckett at the Lafayette Clinic, a research and training facility that was part of the Michigan Department of Mental Health. It was a little bit scary, since I had never seen a computer before. That led to 18 years of programming computer applications to facilitate their research endeavors on a Bendix G-15 paper tape computer in machine language. Over the years, there were far-reaching advances in computer hardware and software. I quickly realized that computers were just tools to enable you to do a job faster and easier, but it was paramount to stay abreast of new technology.
Q: So, how did you first get involved in the mortgage industry?
ROGER GUDOBBA: I spent the next eight years developing software for a variety of small businesses, mostly on IBM computers in a variety of programming languages. The last two years of that period I managed a Mortgage Loan Origination System. I believe it was at the MBA Annual in Boston in 1986 where laser printers were the hot topic. The ability to bring an image in and overlay the data, creating an electronic document provided cost and time savings that were substantial over using dot matrix printers with pre-printed forms. At that time, VMP was the premier provider of mortgage forms and they hired me in 1987 to help develop the laser form library. The size of the library was huge and I looked for ways to simplify that. Our compliance officer pointed out that some documents, like notes and security instruments, only had minor differences. I wasn’t thinking about dynamic run-time forms. It was more about defining the creation and maintenance required for the source library. Like any new technology, there were some challenges and adoption was slow. And, for the first time, I was frustrated by the industry’s resistance to change and reluctance to embrace technology.
Q: Over the years the key phrase that most associate with you is that you always said: “It’s all about the data.” How did that come about and what led to your involvement with MISMO?
ROGER GUDOBBA: VMP started looking at other authoring technology. That’s when I discovered XML, which was a subset of SGML. I attended an international conference on XML in Spain in 1997. I had the opportunity to meet a number of leaders, including Charles Goldfarb, the father of SGML. I was convinced that XML was a way to exchange data. The key was you had a start tag, information, and an end tag. Compared to the two solutions in use at that time (fixed record layouts or comma delimited files), XML was very flexible, less prone to errors, and, among other things human readable. I met Gabe Minton at a meeting at the MBA in D.C. Gabe and I were both in agreement about XML. In 1999, our respective companies—VMP and ULTAPRISE—formed a non-profit organization called XML Mortgage Partners to develop an XML data library for mortgage. Even though we had a nice cross-section of industry leaders, including lenders, LOS vendors, and consultants, it created some friction in the industry. Dave Matthews worked with the MBA to create MISMO in 1999 and Gabe was named the director. Both of us are still very active today and very proud of MISMO’s progress in establishing standards for the mortgage industry.
Q: What do you see as the major challenges facing the industry?
ROGER GUDOBBA: 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. Today, there is no doubt: increased regulatory oversight from federal and state agencies, as well as the uncertainty of regulatory changes yet to come, have created a hazardous business environment. The Federal Reserve has increased the imperative for financial institutions to implement an enterprise-wide risk management solution, one that effectively addresses operational risk, legal or compliance risk, reputation risk, and liquidity risk, among other risk types. These risks are ever present and their management by financial institutions is closely monitored by the Consumer Financial Protection Bureau (CFPB) as well as other regulating agencies. The only way to address these problems is with technology that controls and validates your information flow.
Q: How does Compliance Systems Transaction Risk Management Solution address this?
ROGER GUDOBBA: Financial institutions are becoming increasingly familiar with the demands of managing these various types of enterprise risks and 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. In the absence of a transaction risk management (TRM) solution, each institution is responsible for maintaining the integrity of the entire transaction risk system. Institutions are responsible for ensuring that their institution’s policy disclosures contain appropriate data based on state and federal regulatory requirements and applicable case law. They are responsible for determining that data is consistent across all documents required to memorialize the transaction. They are responsible for determining in any given transaction that there is data consistency across all documents. Their staff is responsible for determining complex, state-specific entity types such as limited liability and limited partnerships, and for determining the correct organizational authorizations. Failure to do so exposes institutions to the risk of unenforceable transactions that impact liquidity, compromise their reputation, and result in legal and regulatory repercussions.
It is understood that certain data is required in transactions by federal and state regulation, and every institution must present that content at transaction time. However, because all institutions are unique and offer unique products, they need to have the ability to define and control the language used to represent those products.
The CSi Transaction Risk Management (TRM) Solution allows financial institutions to easily configure language that precisely defines their policy decisions and product definitions. The solution ensures that only compliant, validated language is applied at transaction time, mitigating their ongoing operational and compliance risk. Security features and audit trails help them control and track access to their data.
Q: What is the foundation for TRM?
ROGER GUDOBBA: Throughout its history, Dennis Adama, CEO and Founder, has differentiated CSi from competitors with his willingness to conceive new solutions to the problems surrounding transactions. Starting in 1995, Compliance Logic Systems (CLS) was a standalone wizard application used by financial institutions to create and maintain their own ARM and TIL lending disclosures. That CLS was designed as an intelligent data collection and compliance validation tool proved prescient and reflected Dennis’s focus on the data necessary to document financial transactions, rather than on the physical documents or forms that would ultimately present the data. This foresight to build a software foundation on the data would establish CSi’s development model for the years ahead. Around the same time, initial launch of Document Selection Logic (DSL) was underway. That technology component uses transaction data to determine the documents required to perfect financial transactions and relates entities and collateral with the relevant documents, helping institutions mitigate risk at the root level of the transaction. This was quickly followed by the release of dynamic documents—documents in the sense that they end up rendering in the page format with which we are all familiar, but actually software applications that logically include or omit content based on transaction values.
All of these technological advances established the foundation for Transaction Risk Management. Transaction Risk Management (1) provides a warranted contract with a clearly enforceable promise to pay, (2) ensures the institution has an enforceable interest in any collateral on the transaction, (3) follows all governing law language and regulations specific to the transaction, (4) correctly assembles and associates all relationships on the transaction to appropriate documentation, (5) automatically configures any institution-specific language based on the institution’s very own selection criteria, (6) and clearly identifies any missing information.
I joined Compliance Systems in 2008 primarily because of their technology and their business model, which is based on offering strategic technology partnerships. We interact and exchange thoughts, ideas, and development plans with our partners in order to develop and support the best joint solutions possible.
The CSi Data Schema, launched in 2009, was the first technology component I saw built from the ground up at CSi and is another example of how the organization seeks to support partner integration efforts. Rather than simply working with MISMO data schema in the Mortgage market, CSi envisioned a complete data schema that supported Mortgage, Deposit, Consumer Lending, and Commercial Lending. Since then, CSi has only forged further ahead in developing technology solutions that reduce the risk exposure of financial institutions. We have Configurability, which allows lenders to modify, append, or replace text provisions within documents so that they can adapt to market, business, policy, and regulatory developments while maintaining warranted compliance with CSi. We have Simplicity, which expanded that configurable functionality and allows lenders to designate logos, bar codes, etc., to be applied to standard documents automatically.
When the TILA/RESPA Integrated Disclosures (TRID) Final Rule was announced in the fall of 2013, CSi immediately recognized that this was an excellent fit for dynamic document technology. Early estimates showed it could take potentially hundreds of static templates to produce all the variations, assuming that this was even possible. We communicated throughout the process with our strategic partners so that they would understand what we would deliver, actually a year ahead of the deadline. That allowed them to focus on the changes required from their end.
The Data Collection Logic (DCL) is one of our latest technology components. It provides CSi partners with information regarding the data that must be collected in their platform interface in order to fully document a transaction. That data collection is based on existing business and regulatory rules already integrated into CSi technology. CSi’s partners have traditionally struggled with the problem of data analysis in the development of their own systems, as their own data collection and application user interfaces also depend on an ongoing knowledge and analysis of regulatory compliance and business rules. The DCL can decrease the time and costs required for a business partner to get a quality platform solution on the market and to maintain that solution in the face of ongoing regulatory changes.
Q: When did you become associated with Progress in Lending?
ROGER GUDOBBA: I probably met Tony Garritano sometime in the 1990s when he was at Source Media. I served on the Advisory Board for Mortgage Technology magazine when Tony was the editor. I spoke with Tony on a weekly basis and we lamented on the fact the industry seemed to be slow to change. He wanted to give everyone in the industry a chance to express their concerns. With the encouragement from a number of us, he launched Progress in Lending in 2010. This is a central place for industry participants to have discussions about how technology can improve the process, and it provides a place for thoughts and ideas to flow freely. It’s easier to move things forward when you’re in a group. One of the monthly publications is Tomorrow’s Mortgage Executive and I personally have contributed over 70 articles. There are now over 15,000 followers on the daily posts. A high point of the MBA Technology Conference is the PIL Innovations Awards, with over 150 applications over the last 6 years. Progress in Lending has been a resounding success and I am proud to be on the Executive Committee for Progress in Lending.
Q: Lastly, what is the status of technology innovation in the mortgage industry in your opinion?
ROGER GUDOBBA: The use of technology has had a significant impact on many industries. Certainly, the mortgage industry is no exception to adapting technology. But have we exploited technology to its fullest potential? The answer is: No! I believe the industry has woefully underutilized technology. When you look at the loan process, not much has changed over the last 25 years. It is still a very document-oriented process. Certainly we have introduced technology solutions at certain points in the process, but we still have not seen a dramatic change in the process. The main objective for TRID was Know Before You Owe so that there were no surprises at closing for the borrower and sometimes the lender. It ensured that the CD was within tolerance levels from the LE. It changed that responsibility from the settlement agent to the lender. It certainly provided a great opportunity to modify the way we close loans. Instead, it is another opportunity missed. We are just getting around to standardized fee names. I am constantly both intrigued and mystified about the slow rate of technology adoption in our industry, but I’m also optimistic about the future.
Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is vice president, mortgage markets at Compliance Systems and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at firstname.lastname@example.org.
Roger Gudobba thinks:
1.) Digital mortgages will mandate innovative changes to the loan process and move the industry to focus on data and not documents.
2.) Lenders will need to have an integrated central repository for all their data and have complete control over all their interactions.
3.) Consumers will demand multiple access points to communicate with lenders and it will be different for diverse consumer demographics.