Tracking The LOS Of The Future

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There are a lot of LOS companies active in the mortgage market, but few LOS companies have the longevity of PCLender. We talked with the company’s CEO, founding partner and chairman Lionel Urban about this technology sector. Here’s how he described the LOS of the future:

Q: You have been in the mortgage industry for over 20 years. How has lending changed over the years?

LIONEL URBAN: There has been an expansion of the utilization of technology in multiple aspects of the process. In the most recent years, the role of compliance and regulatory burden has begun to have a significant influence on financial institutions and the cost of lending. This has specifically impacted the processes for identifying when disclosures are required, the accuracy of how they are prepared, and the delivery method. Additionally, lender’s have raised their expectations on how all of their technology tools work together.

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Q: With the flood of new rules and regulations, is lending becoming too complex for small and mid-sized lenders?

LIONEL URBAN: The complexity of the ever-changing regulatory environment does pose an increased burden on small to mid-size lenders. The challenge for these types of institutions is being able to manage multiple lines of business and liability threats from federal regulators, state regulators, as well as the new abilities for consumers to bring action for perceived wrong-doing. Small to mid-size lenders that need to manage policies and procedures, operations, and technology is what makes the new environment far more challenging, pushing the boundaries of manageability. The solution for lenders is to identify and implement comprehensive “packaged” technology and loan fulfillment solutions that are managed with best practices on their behalf.

Q: How can technology allow small and mid-sized lenders to compete and thrive in today’s current lending environment?

LIONEL URBAN: By leveraging the ability of technology platforms, small to mid-sized lenders can implement business rules and work flow processes to operationalize and automate their compliance. Small to mid-sized lenders can rely upon and leverage the expertise from their technology partners to manage these system configurations and additional burdens, allowing them to focus on their core businesses of lending.

Q: How has lending technology changed over the last 5 years?

LIONEL URBAN: Technology has allowed lenders to expand their market reach and to access consumers outside of their local footprint. Utilization of online marketing, advertising, and online applications not only has allowed them to have a larger presence, but essentially has turned them into a 24/7/365 lender. Self-service portals are now available and allow applicants to apply, see/submit loan conditions, price, and process disclosures online. These integrated processes are now cost effective and easy to implement for smaller lenders.

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Q: What mortgage technology trends do you see for 2016?

LIONEL URBAN: I see the movement towards a paperless process through electronic documentation and more attention on the controlling of data becoming a higher priority for organizations as compliance becomes more of a focus for lenders. Additionally, we see more effective tools for recognizing when disclosures are required, preparing them accurately, delivering them efficiently, and keeping an auditable log. This will streamline a significant source of pain for lenders that are using older technologies.

Q: What should small and mid-sized lenders be looking for in an LOS today?

LIONEL URBAN: They should be looking for an LOS vendor that can be a true partner in their operations, not just a hands-off provider of technology. They need someone that understands their business and can be there not only to help them implement the right technology that best fits their needs, but also can act as an advisor to help them navigate the ever-changing and complex lending environment we see today. The right LOS provider can play multiple roles for lenders from IT and security, to secondary marketing and compliance management. The LOS provider should offer comprehensive solutions from the online application process all the way through secondary marketing delivery. It should have seamless vendor interfaces, paperless support and advanced reporting/dashboard features for managers to have complete transparency into their operations. The LOS provider should also have reliable technology to maximize system uptime, even during significant upgrades and rollouts, as well as enhanced security to ensure protection of critical data.

Q: Does the right LOS level the playing field and ease the regulatory burden for small and mid-sized lenders?

LIONEL URBAN: Absolutely. The right LOS vendor can help reduce regulatory burdens by being a true partner and by bringing the best of breed services to the table in a single solution. Business logic should be built-in to ensure users are immediately aware of workflow and or issues with HMDA, TILA/RESPA, ECOA, Dodd-Frank, High Cost, and of course the new TILA RESPA Integrated Disclosure (TRID) requirements. It is important today to find systems that streamline doing business correctly in addition to providing user training versus solely relying on training and on auditors to find issues.

Q: How does the right lending technology impact the borrower experience?

LIONEL URBAN: A smooth and efficient internal process can easily equate to a smooth and efficient borrower experience, not only by progressing through the transaction efficiently, but also by allowing the lender to be transparent to the borrower and all stake holders by providing clear communication and updates along the way. Online tools need to be intuitive and comprehensive for transparent communication and applicant interaction.

Q: What can we expect to see from PCLender in 2016?

LIONEL URBAN: PCLender is further enhancing integrations with the industry’s best service providers to enhance the automation of when services are ordered. Compliance and fraud solutions will run real time and proactively alert the lender when issues arise. Loan disclosures are automatically prepared and delivered to applicants with enhanced audit trails that ensure compliance.

Additionally, fulfillment service vendors will allow lenders to outsource processing, closing, or other back office services on an a la carte basis with a simple menu request. This removes a lenders need to recruit, train and manage specialized staff for loan volumes that are consistently changing, making PCLender the most user-friendly LOS on the market.

INSIDER PROFILE

Lionel Urban serves as CEO, founding partner and chairman of the board for PCLender, LLC; in this role, he is responsible for the overall strategic direction and the vision behind the technology development of the company. Prior founding PCLender, LLC, Lionel was a co-founder and CEO of Navigator Lending Solutions, Inc. (NavPros) a fulfilment services company specializing in mortgage banking services. Prior to NavPros Lionel was the co-founder, president and CEO of PCLender.com, Inc. from 1997 to 2011. During this time, he supervised the development of a pioneering, Internet-based mortgage technology platform that supports banks, credit unions and mortgage companies across the country. Since 1987 Lionel has acquired mortgage banking experience in management, origination, operations, secondary marketing and compliance roles within banks, credit unions and independent mortgage bankers.

Opinions Are Changing

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TME-TGarritanoI think that the mortgage industry is coming around to the idea that the electronic mortgage is not just the way the industry needs to go, it’s the way the industry has to go right now.

For example, eLynx has determined that there are substantive benefits across all stages of the mortgage cycle to moving towards digital, data-validated loan files. Origination, secondary marketing and servicing all gain from migrating away from paper-based methodologies that restrict accuracy and transparency, according to eLynx’s CEO and president, Sharon Matthews.

“Paperless mortgages will soon reach a tipping point, though not everyone realizes it,” said Matthews. “The entire industry uses loan systems that create electronic files that allow for the electronic movement of documents and data during the mortgage process. As the industry migrates to MISMO standards and the Uniform Closing Dataset, the benefits for all become clear,” she explained.

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“Origination benefits through the electronic delivery of Know Before You Owe (KBYO) disclosures and the better use of mortgage data to enable transparency for borrowers, GSEs and private investors alike. With higher quality data, investors can better evaluate loan portfolios well before commitment and delivery, which will lead to greater private mortgage capital infusions,” she said. “Servicers benefit by leveraging the uniform data when boarding loans, and for ongoing quality control and analytics that protect both lenders and investors, and augment the viability of mortgage investment vehicles,” Matthews continued. “Consumers benefit from lower origination costs using digital processes and delivery, as well as increased online capabilities, which Millennials and other younger borrowers demand today.”

eClosings are the final step and they are coming, said Alec Cheung, eLynx vice president of product management and marketing, who participated closely in the successful CFPB eClosing pilot that concluded this past August. “The pilot made it clear that eClosings can be successfully performed at scale and lead to a positive experience for consumers, as proven by borrower surveys,” said Cheung. “Process, not technology, is the determining factor. Borrowers did embrace electronic closings and technology is not the primary hurdle,” he noted.

“Process is where the last roadblocks remain but those are starting to erode. Investors have long hung on to paper documents. Notaries have yet to solve electronic notarization. Closing are used to paper-based processes dictated by lender and investor requirements,” he said. “We’re working within our very large nationwide network of closing agents and notaries to support the paperless migration.”

Any time a technology offers a process that makes loans better, faster and cheaper to create, the industry will eventually get behind it, Matthews believes. “The digital revolution is here and everyone in the mortgage value chain benefits from data-validated mortgages,” she said. “And that includes consumers and real estate agents. The CFPB and the GSEs are solidly behind going digital, and the Uniform Closing Dataset is the next big requirement looming for lenders now that the KBYO deadline has passed,” Matthews noted. “Starting as early as the second quarter of 2017, the GSEs will only purchase loans that conform to the Uniform Closing Dataset,” she said. “When the data is standardized, everyone will be a winner, both inside and outside the industry.”

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And lenders are starting to move on e-mortgage initiatives. For example, Mid America Mortgage Inc. will utilize DocMagic’s SaaS-based compliance and mortgage loan document engine together with the on-premise solutions of DocMagic’s recently acquired eSignSystems patented eSigning, eNotary, eVaulting, eRegistration and eRetention solutions. This is the first time since the acquisition of eSignSystems in October 2014 that the combination of technologies will be jointly utilized to facilitate a complete eClosing and validate DocMagic’s eMortgage model.

“We made the decision to sign with DocMagic and its subsidiary division eSignSystems because of the unique capabilities of the combined technology components, together with the most powerful eMortgage reputation and expertise in the industry,” said Jeff Bode, president of Mid America Mortgage. “The blend of these technologies integrated with our loan origination system (LOS), Mortgage Machine, establishes the path for us to close our loans electronically. DocMagic’s solutions are ready today for eClosing, and now that the GSE’s are accepting eNotes, their advance readiness for electronic closings is critical to Mid America’s short and long-term eStrategy.”

“The marriage of our SaaS and on-premise solutions delivers a unique value proposition for Mid America,” said Dominic Iannitti, president and CEO of DocMagic. “DocMagic’s SaaS model compliantly delivers dynamic, intelligent, data-driven loan documents and disclosures with a full eClosing for borrowers. eSignSystems’ on-premise platform provides Mid America with internal controls and tools to configure the solution to their specific business processes and the ability to efficiently work with third parties to achieve an eMortgage.”

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In This (Finally) Post-TRID World, What Comes Next?

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Amanda-PhillipsFor over a year, it has been all TRID, all the time. As we pass the TILA RESPA Integrated Disclosures (“TRID”) implementation date, regardless of how prepared lenders are feeling, one thing is certain: TRID is happening. So now the question becomes: What is the “next big thing” for the industry?

Arguably, the next big industry change is the recently published Home Mortgage Disclosure Act (“HMDA”) final rule. The Consumer Financial Protection Bureau (“CFPB”) published a proposed rule amending Regulation C to implement amendments to the HMDA as required by the Dodd-Frank Act in August 2014. The comment period for this proposed rule closed on October 29, 2014, and the final rule was published October 15, 2015.

The current HMDA Loan Application Report (LAR) requires that specific data by specific institutions on specific loans be reported. The data collected and reported includes:

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>> Data on the loan application (application number, application date, loan type, loan purpose and the loan amount requested)

>> Action taken on the application (e.g. originated, approved or denied)

>> Reasons for denial (optional)

>> Date action was taken

>> Loan information (lien position and rate spread in some instances)

>> Property information (property type, occupancy status, property location by MSA, state, county, and census tract)

>> Applicant information (ethnicity, race, sex, and annual qualifying income)

Just as the Dodd-Frank Act mandated that the CFPB promulgate the TILA RESPA Integrated Disclosure rule, Dodd-Frank mandated certain changes to HMDA via Regulation C amendments; however, the CFPB expanded on the mandate requirements when they drafted their final rule. Section 1094 of the Dodd-Frank Act specifically required the CFPB to promulgate their rule to expand HMDA reporting to include total points and fee, rate spread for all loans, “riskier” loan features (for example, prepayment penalty or negative amortization), unique identifiers for loan originators and loans, origination channel (retail or wholesale), property value, more detailed property location information, the borrowers’ age(s), and the borrowers’ credit score(s).

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The CFPB met this obligation by adding data fields to the HMDA LAR as mandated by Dodd Frank, but went above and beyond their minimum obligations by modifying or adding over 30 data points. Some of the new and modified data fields required by the final rule are:

>> Debt-to-income ratio (DTI)

>> Combined loan-to-value (CLTV)

>> Which automated underwriting system (AUS) was used and the recommendation

>> Interest rate

>> Credit score

>> Applicant age

>> Total origination charges

>> Total discount points

>> Total lender credits

>> Property value

>> Units financed

>> Affordable housing/income-restricted housing information

>> Manufactured housing classification and land property interest status

>> Unique identifier for the lender

>> Removal of the option for denial reasons, making that data mandatory

While the additional data fields in the HMDA LAR are arguably the most significant changes imposed by the new HMDA rule, a close second are the changes in institutions obligated to submit that LAR data. Under the current HMDA regime, there are two different standards for institutions that must submit a HMDA LAR: one for depository institutions, and one for non-depository institutions. For depository institutions, several factors come into play when determining their obligation, including asset size and originating at least one home purchase loan or refinancing of a home purchase loan in the prior year. Under the new final rule, the threshold for the number of originated loans is increased to 25 closed-end or 100 open-ended covered loans in the preceding two calendar years for depository institutions.

Currently, for non-depository institutions, the major qualifying factors are whether the institution has a branch or home office in a Metropolitan Statistical Area (MSA), if at least 10% of its total origination dollars are from home purchase or refinanced home purchase loans, and if those home purchases or refinancings total $25 million or more dollars in the prior calendar year. Additionally, non-depositories have an asset threshold of $10 million or 100 or more home purchases or refinancings in the prior calendar year. Under the CFPB’s final rule, in addition to having a branch or home office in an MSA, a non-depository institution must file a HMDA LAR if it originated 25 or more closed-end or 100 or more open-ended covered mortgages in the two preceding calendar years. The definition of “closed-end” mortgages, under the final rule, includes closed-end reverse mortgages and home equity loans secured by a dwelling. This change dramatically expands the number of non-depository institutions that must collect and submit the data on a HMDA LAR each year.

Although most loan origination systems (LOS) collect a vast majority of the new data points already, the obligation to collect and submit this data could be a difficult undertaking for some smaller lenders. Even for those who already collect and store this information in their LOS, the enhanced need for accuracy imposed by the submission of the data to the Bureau is bound to increase costs to the business for personnel and likely technology or even outside legal, quality control, compliance and technology assistance.

The new data collection and reporting obligations will be especially burdensome – and unfamiliar — to those non-depository institutions that are new to the HMDA reporting process. Many of these institutions will not only be new to the process, but will be relatively small, requiring significant “spin up” on the staffing and data integrity responsibilities that come along with being a HMDA reporting lender.

For consumers, the additional data collected, such as FICO score(s) and property address, present privacy issues. The CFPB has indicated that there is sensitivity to this potential issue, but the industry remains concerned about consumer privacy.

It is also not clear what the CFPB will use this additional data in the LAR for, but there is plenty of speculation. The most popular speculation is that the CFPB will use the HMDA LAR data to pre-examine lenders for a Fair Lending exam. That is, the CFPB will analyze the new HMDA LAR for statistical evidence of Fair Lending violations. Combine this speculation with the recent United States Supreme Court ruling that Fair Housing Act claims can utilize the legal theory of disparate impact, and the HMDA stakes rise significantly.

The Court’s opinion regarding the legal theory of disparate impact, as applied to the mortgage industry under the Fair Housing Act in particular, means that lending practices that are not explicitly discriminatory, but that have a negative impact on minorities disproportionately as compared to non-minorities, can be found to have violated the Fair Housing Act. Now, let’s apply that theory now to the analysis of the expanded HMDA LAR data prior to ever setting foot in a lender’s office for a Fair Lending exam. The fear, warranted or not, is that examiners could potentially have a predisposed opinion of a lender based on data alone.

Under the new HMDA rule, establishing a robust Fair Lending Program is going to be essential for all mortgage lenders. This Program and the results of quarterly and annual reviews should be documented and retained. HMDA data should be tested for accuracy and completeness regularly. Analysis of the LAR for outliers should be completed on a quarterly basis and a full regression analysis conducted annually. It is also wise to have an independent third party conduct the annual regression and outlier file review. How much of the Fair Lending review is conducted internally and how much is outsourced will often be a question of pricing and resources.

Lenders may be able to conduct the quarterly self-assessment, minimizing costs to third party vendors, using specialized compliance technology that analyzes and reports on the statistical review of a lender’s HMDA data. Self-correction is as important as self-assessment. Any violations of the law or the company’s own Fair Lending policies and procedures should be self-corrected and documented for possible presentation to a regulator or examiner.

The new HMDA rule is upon us. While we continue to adapt to life with TRID, the industry needs to begin to refocus its attentions on what’s next, and HMDA and Fair Lending are the next candidates affected by reform.

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Dig Deep To Find The Right Tech

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Rey-ManinangThe mortgage industry today is increasingly dependent on technology and the many tools it provides. From prequalification resources to up-to-the-minute data analysis, the Internet offers a wealth of opportunities for mortgage professionals to not only educate themselves about the market, but also to improve their business. In fact, a recent Bloomberg Business piece pinned technology as the fastest-growing spending category for mortgage companies. What are you and your company doing to tap into the technological resources available?

Savvy mortgage professionals must be aware of all the latest news, market indicators, and trends, as well as how to best tap into the various sources for this data. Many sites offer their data and forecasts for free, and others provide tailored services at varying price points. This data is useful not only to provide the best services to your customers, but also to help you shape the direction of your marketing and origination efforts. Here’s a look at some of the plethora of tools available today.

Educate yourself

Everyone working in the mortgage industry keeps up to date on interest rates. It’s often the first question out of borrowers’ mouths, and even small changes in rates can mean a huge shift in business. But do you educate yourself on other data points beyond the fluctuations in interest rates? You should, and there are numerous sources for quality data that will help you better serve your clients.

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Most people working in the mortgage market are familiar with the Mortgage Bankers Association (MBA); it’s a strong advocate and voice for the industry. Mortgage bankers aren’t the only ones who can take advantage of its many resources, however. The organization’s website, mba.org, offers a stunning depth of information, both current and historical, from monthly economic forecasts to quarterly origination estimates.

In fact, according to the most recent report, originations were up to $395 billion this past second quarter, led by $225 billion in purchases. Refinances were down to 43 percent of the overall originations, after hitting 53 percent in the first quarter. If you then look deeper, MBA is forecasting further growth in the purchase sector and anticipates that refinances will represent only 35 percent of originations for the remainder of this year. They also posit that refinances will fall below 30 percent for half of 2016.

Looking at their economic forecasts gives mortgage professionals even deeper insight into the market as well as the economy overall. In its August commentary, the MBA expected gross domestic product (GDP) to pick up in the second half of the year, driven by consumer spending5. They also anticipated a strengthening in residential fixed investment, as household formation grows. MBA looks regularly at mortgage performance, as well, and their National Delinquency Survey results provide insight into how various loans are performing in the market. This past second quarter, overall delinquency rates and the percentage of loans in foreclosure were at their lowest levels since 2007.

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These reports are available for free on the MBA website, or you can sign up to receive them automatically via e-mail. By reading up on the latest research and forecasts regularly, you’ll not only be providing expert advice and knowledge for your clients, but you’ll also be trusted resource within your company.

Analyze the data

Just knowing the numbers and stats isn’t enough, however. Many mortgage professionals are in a position to shape the direction in which their business is headed. But you can’t make such decisions without data and market analysis to help guide your choices. Research like the MBA provides is an excellent start, but there are more offerings to be had, and it’s smart to balance a variety of viewpoints to get the best picture of the industry as a whole.

Mortgage technology giant Ellie Mae offers its Origination Insight Report freely every month, and the data there is particularly useful for anyone originating mortgages, as it offers a snapshot of underwriting standards as they are being employed by various lenders across the country. Data ranges from an overview of the percentage of loans that are purchases versus refinances to more deep data on specific loan types, like Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans. If you or your company specializes in a particular loan type, this information can be invaluable.

For example, this past July, Ellie Mae reported that the overall closing rate for all loans hit 66.2 percent, the highest mark seen since the company began tracking data in August 2011. The closing rate on purchase loans also climbed to an impressive 70.7 percent. In addition, the average FICO score on closed loans declined for the second straight month to 725, the lowest it’s been since February 2014. Looking at these two sets of data combined, it seems as though credit is loosening and availability is broadening for the market at large.

If you’re interested in just the FHA market, however, there’s more information to be had. This type of loan had an overall closing rate of just 58.2 percent, but purchases closed significantly higher than that at 65.3 percent. The average FICO score on a closed FHA purchase loan was 689, with an average loan-to-value ratio (LTV) of 96 and an average debt-to-income ratio (DTI) of 28/41. Denied FHA purchase applications had an average FICO score of 635, an LTV of 96, and a DTI of 30/50. This type of detailed loan profile is available for closed and denied loans for each different type of mortgage (conventional, FHA, VA).

With this kind of data readily available, mortgage professionals can arm themselves with deep knowledge and insight into the mortgage market, as well as specific niche information tailored to your business specializations. By following how the market is actually underwriting and closing loans, mortgage professionals can better track industry standards and can be prepared to shift your business to meet demand accordingly.

Marketing

Once armed with the information and knowledge necessary to move their business in the right direction, mortgage professionals can keep technology working for them by using the right marketing tools. Being well versed in the mortgage market is all well and good, but you still have to spread the word about your knowledge.

Of course, technology is here to help. Marketing is no longer as simple as creating a post card and sending out a direct-mail campaign (although there’s still a place for that, too). Repeat business is often the cornerstone for many mortgage professionals, but new and referral business is critical to succeeding in today’s market. Online marketing should start with the simple and obvious thing: Have an online presence, including a website, a Facebook page, and potentially a Twitter account, as well. But there are other online marketing tools that mortgage professionals may want to utilize in addition to these. These offerings should be streamlined, easy to access, and give mortgage professionals the most return for their time and money.

If you work with various lenders, you should look for a lender that offers excellent marketing support via online marketing portals. If you work with independent brokers and originators, you may want to consider adding such a feature to compete in today’s marketplace. These marketing portals offer a wide range of products, from list services to designed marketing pieces and mail/data services available for purchase. Customizing your marketing materials is quickly and easily done online. Be aware, however, of compliance considerations. Although the marketing portal may be provided by your lender partner for your convenience, you are responsible for the regulatory compliance of any marketing materials you create.

These portals also should offer marketing support that enables you to use your own direct-mail lists or to purchase targeted lists specific to the customers you want to reach. Unlike many of the data tools provided freely, brokers and originators should be aware that certain marketing tools may mean additional costs, depending on usage, value, and the provider.

Online technology has come a long way from simply creating a mailing list and sending out e-mails. Marketing portals and other online marketing tools can help mortgage professionals boost their signal to a wider audience, as well as help you streamline your marketing. These tools also can help reduce the amount of time spent on screening marketing vendors and creating marketing materials, opening up more time to focus on the market, where it’s going, and what it means for your clients.

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With the technology readily available on the internet today, mortgage professionals have all the tools they need to take their business to the next level, if they know how to tap into it. With a plethora of data available from trusted sources like the MBA, Ellie Mae, and more, today’s mortgage professionals can arm themselves with deep knowledge about the market and the industry. By utilizing these resources and other marketing tools, mortgage professionals can shape and grow their business to meet the demands of the market.

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Successful Lenders Will Innovate

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As we all know, it has been a bumpy ride in the mortgage industry. The run up to TRID was very stressful for many. With that behind us, the most successful lenders will now innovate. Here’s an example:

In the eight minutes it takes a space shuttle to reach orbit, Americans will now be able to receive a full mortgage approval online with Rocket Mortgage by Quicken Loans. More than 500 Detroit-based developers, designers, QA technicians and business analysts from QL Labs — Quicken Loans’ technology innovation team — have worked for over three years to completely redesign the highly complex mortgage process. Rocket Mortgage brings the home loan experience to the fingertips of consumers whether they are at their desktops or using a mobile device.

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“We changed the mortgage industry when we created the first 50-state online retail lending platform that has since helped millions of Americans achieve their home financing goals, while experiencing the best client service in the nation,” said Bill Emerson, Quicken Loans Chief Executive Officer. “Today, we took another monumental leap forward with the launch of Rocket Mortgage, which brings simplicity and clarity to the home loan process like never before, while delivering solutions at unimaginable speed.”

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Rocket Mortgage users will:

>> Experience the cleanest, easiest and quickest mortgage application ever created, complete with e-signature.

>> Visually compare and customize interest rate, mortgage term, monthly payment and fees based on individualized financial information and goals and current underwriting guidelines for numerous products with real-time pricing.

>> View their individualized three-bureau credit report, analysis and score in a format that is concise, understandable and digestible.

>> Import and verify asset, property and income information – all online via proprietary interfaces designed by QL Labs with numerous partners and databases throughout the country, eliminating the need for consumers to provide supporting loan documents manually.

>> Receive full approval in minutes on conventional, FHA or VA mortgage products with the click of a button from Quicken Loans’ proprietary interface to agency underwriting engines.

>> Lock their interest rate.

>> Conveniently view all loan documentation and details online, anytime, anywhere. Users no longer need to rely on information relayed over the telephone, email, face-to-face or through the mail.

“Rocket Mortgage simplifies the largest, most complex and important financial transaction most consumers experience in their lifetime,” said Linglong He, Quicken Loans Chief Information Officer. “Our team at QL Labs has worked tirelessly to ensure that Rocket Mortgage users have the same award-winning experience that has made Quicken Loans an eight-time J.D. Power top-rated mortgage lender for client satisfaction.”

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What Gov. Mike Huckabee Got Right

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new-PhilHHow little do the presidential candidates think about housing policy as a major issue? Well, recently there was a forum in New Hampshire designed to spotlight the presidential candidates’ views on housing issues. However, the leading contenders from both parties ignored the forum, with low-polling Martin O’Malley arriving as the sole Democrat on the stage along with a handful of C-list Republicans that are polling in the low single digits.

But one of the candidates on that forum was the surprise star of that event, if only because he displayed a sense of cogent commentary that has not been evident in this campaign: former Arkansas Governor Mike Huckabee, better known for his provocative comments on hot-button social issues like same-sex marriage and using Obamacare to pay for birth control pills, offered a wise insight on housing policy concerns.

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When asked why there has been so little national political attention and mainstream media focus on the lack of affordable housing options, Huckabee broke a taboo by noting the political and the media elite are among the nation’s wealthiest and have no clue on how the low- and middle-income Americans live. Indeed, Huckabee hit a bulls-eye here – especially when one considers how little political and media attention go into serious discussion of poverty or wage stagnation. To his credit, Huckabee connected the struggles faced by many Americans with the lack of serious economic vibrancy.

“Half the people renting in America spend 30 percent or more of their income on their housing costs,” Huckabee said. “Every time someone is marginalized in the economy it affects the rest of the economy.”

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Huckabee, who has been a strong critic of the Consumer Financial Protection Bureau and an advocate of a smaller federal government, called on taking the regulatory oversight of the financial services world out of Washington and returning it to those who “have a better understanding of what’s happening on the ground.” Translated, that means putting the responsibility with the states.

“We need to keep more of the regulation closer to the people being regulated,” he said. “I will always believe that the best government is the most local government that is humanly possible.”

This makes a great deal of sense, considering the multiple layers of regulations that burden companies trying to work with consumers. And maybe it is time to openly question why we need both federal and state regulatory oversight – one or the other makes more sense, rather than the weird mix of duplicate and contradictory rules coming from Washington and the statehouses.

Huckabee also mixed the all-but-ignored question of housing with the anything-but-ignored question of immigration reform.

“If a couple of hundred thousand people come to the United States, isn’t it going to be more difficult to find housing for the people we add?” he asked. “People who are in the country without food and shelter ought to be our highest priority in the country.”

Huckabee broke another taboo with that last statement: he contradicted the prevalent but rather silly idea that immigrants will magically increase the homeownership rate. Indeed, how is that going to happen – especially when we are talking about the millions of illegal immigrants who are lucky enough to have a roof over their head after working long hours for putrid low wages?

Sadly, Huckabee’s remarks were mostly ignored beyond the forum audience. And while his presidential candidacy is getting relatively little attention, his comments on housing affirm that there is at least one presidential candidate who can look beyond the zingers and sound bites and appreciate that there is a major problem that no one wants to acknowledge.

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The Future of Funding

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Alan-HarrisIn the last few years, changes in the real estate finance industry have been fast and furious. Since the Great Recession or meltdown as the period has been affectionately named, guidance from government agencies mandated a ‘New Mortgage Order’. Many of these changes are needed, some are viewed as overkill. While we debate the impact, severity and complexity, at the end of the day, these changes are adding more rigor around our workflow streams and have an adverse impact on loan costs. The Mortgage Bankers Association Quarterly Mortgage Bankers Performance Report, reflected cost on each loan originated was $897 in the fourth quarter of 2014, up from $744 per loan in the third quarter of 2014.

Opportunity knocks. Companies that embrace, innovate and adapt to the New Mortgage Order, will develop new work flows, leverage automation, best practices and stronger operational efficiencies. Likely becoming more successful with both process, people, (be it associates or customers), and management.

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These changes, have positive impacts, the most significant is the wider adoption of ‘e’. ‘e’ has been sitting on the bench for years, carrying the water since 2000, ‘e’ is now on the field and ready to go fourth and long.

We know what benefits ‘e’ brings, they are numerous, verifiable, sustainable, and will redefine the process of mortgage loan origination, from point of sale to securitization. ‘e’ will call into review all the traditional processes and channels currently subscribed to in the industry.

We are already witnessing that impact today with the introduction of ‘e’ closing process. No longer will a lender offering ‘e’ disclosures, be considered innovative or leaders, that all goes away with the implementation of the TILA-RESPA Integrated Disclosure, (TRID) requirements.

What is clear today is that innovators are now looking to the full ‘e’ process and are thinking how can I leverage the necessary process changes to my company’s competitive advantage. The New Mortgage Order is going to require retooling technologies, supply chain vendors and delivery systems to gain higher efficiencies to reduce cost in order to capture the most savings possible. Now the lender can remain profitable, even with spikes in rates, and volumes, given the cost associated with innovation and raising the compliance bar.

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Astute lenders and providers are well on the way of recognizing and deploying solutions to meet the challenge. Leveraging technology to mitigate the cost of compliance and reporting.

This is a good time to revisit funding methodology, specifically Correspondent and Warehouse lending models.

Practices of warehouse and correspondent lending were developed in the eighties and fundamentally have not changed, albeit with the exception of improvements rendered through technology, in 30 years. Simply put:

>> Correspondent lenders have an array of products from different sponsors, and act as an extension for those larger lenders. The correspondent charges a ‘fee’ in terms of basis points on loan amount and will generally receive some amount from the investor for the value of the servicing.

>> Warehouse lenders provide a line of credit to smaller lenders who rely on that credit line to finance their operations.  They pay back the lines when loans are sold, and give a cut to the warehouse lender for each sold loan, based on volume or outstanding balances.

Think about the work stream. The lender originates the loan, runs it through the myriad of fraud, underwriting and compliance engines supplied by the Loan Origination System (LOS) or affiliated providers. Once that is complete, everything is then revalidated by the document providers and then sent to the correspondent. The correspondent then runs the loan through their regime of validation products, (many are the same as the originating lender) ultimately delivering the loan to the investor, In many cases the investor is using the same tools to evaluate risk, fraud and price as a correspondent or warehouse lender. The process exudes redundancy, inefficiency and unnecessary costs. Checking the checker never is a good way to keep cost lower, especially if they all are using the same systems to do the checking. If there is a fundamental flaw in one they are not going to catch it.

In both cases the originating lender incurs cost to deliver the loan to the investor who will service and package the loan for the secondary market. In today’s environment this process is not sustainable. If a lender could deliver loans directly to the end investor how much would cost to originate improve?

What would happen in the New Mortgage Order if the lender was able to send the package directly to investor and eliminate the additional steps, delays and cost associated with the current model? Investor Direct Funding.

When the loan is purchased by the investor on the day of closing, depending on the time of closing the loan; a lender can receive the funds that day. Lenders save money through this direct placement by not having to incur fees or charges put in place by the correspondent or warehouse lender and additional funding delays

How would an ‘Investor Direct’, funding model work?

First the loan has to be ‘e’ from soup to nuts. A full ‘e’ process from origination to funding. The reasons are obvious, delivery will be faster, the documents follow the data, all changes to data is archived for audit purposes and would have considerable less errors or omissions..

Second the data needs to be managed in a standard nonproprietary format. The newest version of MISMO, (v3.3) will map to the Uniform Closing Dataset (UCD), which is required for loan deliveries second quarter 2017. This further integrates the various processes involved with originating a loan.

Third, the model would require a data file from the lender. This data could come from the LOS or the document provider. These files need to be aggregated in order to provide a reliable and efficient delivery process to the investor. The provider of this service would be able to parse out the specific data elements required by the investor for pricing. The delivery could be single loan or bulk transactions. Additionally any required data elements for passing the servicing component on to the investor or servicer would be completed at this point.

A fee would be charged in the aggregation and delivery of these data sets, the model supports a fee based on number of transactions and not loan amount. This allows the lender to manage cost more effectively on a fixed basis as opposed to the variability of basis points.

Last the document and data set needs to be delivered to a secure eVault where all parties involved in the transaction can be authenticated for access. Simultaneously once the loan file is delivered to the eVault the data file would be pushed to the respective investor. The eVault can be ‘owned’ by the lender, the document provider or the investor. Provide the consumer login credentials and the process is complete.

Certainly there will be fallout, this occurs in the existing model, however these loans will be more fully vetted so the repurchase risk is mitigated or possibly eliminated. Further reducing the cost to the lender.

The New Mortgage Order will require obsoleting processes and practices currently based on paper processes and evolving existing work streams to distill out best practices. Embrace and understand the benefits of the ‘Order’, there are efficiencies and cost savings to be reconciled. A full ’e’ process has been recognized by the industry for years and has just sat on the bench. It is time to assess each challenge and opportunity it provides.

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The Headache That Will Be Estimating the Appraisal Fee on the New TRID Loan Estimate

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Matt-BarrWhat are you going to put down as the appraisal fee on the new TRID Loan Estimate form?

The TILA-RESPA Integrated Disclosure rule identifies three types of loan costs. One is origination charges. Another category is expenses the borrower is allowed to shop for, such as a pest inspection fee, a survey fee, or a closing agent fee. Because the borrower has the right to shop around, those charges might change—are allowed to change—from what you put down on the Loan Estimate form. The third type is expenses the borrower can’t shop for, such as a credit report fee, a flood determination fee, or a lender’s title policy. Those costs are fixed once they’re disclosed on the Loan Estimate, which must be provided within three days of application.

Your borrower can’t shop for the appraisal. The appraisal fee (and appraisal management company fee, if applicable) has to be set in stone on the Loan Estimate three days after application.

However, you can’t order the appraisal at least until the Loan Estimate has been finalized and disclosed and the borrower has indicated she wants to move forward. All you’re allowed to charge for before the borrower agrees to the Loan Estimate is a credit report. The appraisal fee will truly have to be an estimate.

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So what are you going to put down as the appraisal fee?

Whatever you put down, you’re stuck with. If the borrower provided you with inaccurate information, or something happened to increase the appraisal fee after the disclosure, or—arguably—if the appraisal turned out to be more complex than anticipated, you might be able to re-issue the Loan Estimate. But the vast majority of the time, you’re sticking with whatever you disclose as the fee.

I don’t have to tell you how much appraisal fees can vary. Your average appraiser can offer upwards of forty different products, each priced uniquely. Even if you’re sure you’re talking about a plain vanilla 1004, complex assignments can raise the cost, as can appraisals on rural properties, appraisals on unique properties, appraisals in areas not covered by a lot of appraisers, appraisals in areas without a lot of recent sales activity, and so on.

According to observed fees for Mercury Network orders, the median fee charged by appraisers in Maricopa County, Arizona is $425. That means half of appraisals will cost more than that and half less. The average fee is $406.87. You can generally count on spending anywhere from $372 to $441 for an appraisal report there. So what will you estimate? $425? You’ll be low half the time. $441?

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There are almost exactly the same number of appraisers covering Gwinnett County, outside Atlanta, Georgia as there are covering Maricopa County. But there the median fee is $365. The average is $374.76. You can generally expect to pay between $336 and $413 there. What will you put down on the Loan Estimate?

What if you don’t do enough business in a certain county, or market area, or state, to have reliable historical appraisal fees to look at? To arrive at our data, we looked at more than a thousand Gwinnett County appraisal transactions over a year’s time, and almost four thousand Maricopa County appraisal transactions. Do you have enough historical data in an area to reliably estimate?

And what if you do have enough raw data? What about the dozens of factors that influence how much an appraisal report will cost? Geography is the big one. Say you have a good handle on appraisal fees in both Kane and McHenry Counties, in suburban Chicago. According to our data, the median fee in Kane County is $375, in McHenry County $325. The range you can expect to pay in Kane is around $310 to $410, the range in McHenry about $300 to $375. Now say your borrower’s property is in Huntley, Illinois, which straddles the border between Kane and McHenry Counties. Where does that leave you?

Then you have to consider area coverage, mileage, recent sales activity, and so many more factors that can influence an appraisal fee. They can turn what was a routine assignment into something more complex, or turn what looked like a run-of-the-mill appraisal into something more expensive. The vast majority of these factors aren’t likely to reveal themselves until after you’ve had to disclose the appraisal fee to the borrower. With the new Loan Estimate form, you simply aren’t going to be able to take all of these factors into account in the three days after an application comes in.

What does the CFPB expect you to do about it? It seems as though it wants you to find out your costs in advance. “Two national consumer advocacy group commenters asserted that the final rule should require the creditor to… obtain pricing information [in advance] from third-party vendors with which the creditor frequently works,” the CFPB said in its commentary to the final rules. “The Bureau believes the…rules…incentivize creditors to” do just that. Do you need to obtain commitments from your vendors on pricing well in advance? Can you? Your vendors, dealing with all the same variables described above, are going to run into the same problems you do in trying to estimate an appraisal fee before getting a close look at the assignment.

Consider too that if you use an AMC, trying to nail down advance pricing is liable to start a tug-of-war between the AMC and its appraisers over who gets saddled with any overage on a particular property. All the rules make clear is that it’s not the borrower who will have to bear that burden.

Say you estimate $400 for an appraisal fee. Your AMC agrees to the $400 charge. After the appraisal is ordered, you find out that unique features of the property, unknown and unknowable in the first three days after the loan application came in, lead the appraiser to charge the AMC $600 for the job.

Can you rescind your Loan Estimate and re-issue another? It depends on the reasons for the fee change. If the complexity of the assignment was not discoverable with due diligence, you may be able to re-do your Loan Estimate to account for the additional $200. However, this is a tough sell. In its Small Entity Compliance Guide, the CFPB gives three examples of “changed circumstances” warranting a change in settlement service fees: a natural disaster, a vendor going out of business, or a neighbor disputing the property boundary. None of those are in the same class as “the appraisal turned out to be more work than we thought.”

Now let’s say you disclosed the appraisal fee as $400. It turns out that in the market where the property resides, appraisers generally charge $600 for standard properties, and you or your AMC can’t find a reliable vendor to do it for less.

Who loses out? Not the borrower. In this case, the appraisal fee the borrower pays cannot exceed $400, once it’s been included on the Loan Estimate.

If you used an AMC, will it hold firm and only pay the appraiser the estimated $400? If so, will the appraisal get done, or at least get done on time? Will the AMC have to eat the extra $200, paying the appraiser his $600 and then receiving only the estimated $400 from the borrower? How many times can your AMC do that before they start getting shy about advance pricing commitments?

With the uncertainty around what appraisal-related “changed circumstances” will allow a Loan Estimate to be re-issued, what we’re likely to see is a lot of over-estimates of the appraisal fee. A service can cost less than the estimate disclosed on the Loan Estimate without getting you in trouble. Beware though of a pattern of overestimating costs on the Loan Estimate. Creditors are required to act in good faith and exercise due diligence in obtaining information necessary to complete the Loan Estimate. Cost estimates must be consistent with the best information reasonably available at the time of disclosure. Constantly building in “cushions” to the appraisal fee might run afoul of the spirit of the disclosure requirements, in the opinion of your regulator.

Remember, too, that your Loan Estimate is a marketing document as much as it’s anything else. If you throw a Hail Mary each time you disclose the appraisal fee and put down, say, $750, your competition down the street might be able to pin the same appraisal down at $600 or less because they have better data and better relationships. Here, data will be worth its weight in gold. A company that estimates lower fees and can deliver at the estimated prices will be more attractive to potential borrowers.

The TRID rules are meant to make costs more transparent and a complicated process easier. They do just that, when it comes to borrowers. But life for lenders who order appraisals is about to get more complicated. And more interesting.

How is your company planning to provide reliable, realistic estimates of the appraisal fee on the Loan Estimate? Let us know at info@MercuryVMP.com. I’m interested in how the industry is approaching this issue.

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Operational Stone Soup

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becky-walzakIn the fable Stone Soup, a destitute woman makes a meal for her children by putting water and a stone in a pot over the fire. As people come by and see her stirring the contents of the pot, they ask what she is cooking and each time she tells them she is making stone soup. Upon hearing this the person inquiring is amazed at the idea of making soup from a stone and offers her a carrot or other item that they have available. This continues until she actually has a soup of sorts. While the story’s moral is the value of joint cooperation in achieving a desired result, no one ever says whether all of these individual add-ins actually make the soup taste good. More than likely the results have a horrid taste and do no one any good.

Operational Risk in this industry is just like stone soup. There are lots of people passing by with no knowledge about Operational Risk or what it takes to make it good, but they are willing to throw in whatever they have available and call it good Operational Risk. Unfortunately for us instead of something good, we have a mess that even the CFPB won’t swallow.

Why is that? When this concept first arrived on the scene as a result of Basel II standards, most people paid little attention to it until 9/11. Then suddenly business continuity was the name of the game. From this perspective implementing Operational Risk was making sure than your business could continue if any disaster befell the organization. Numerous consultants made millions of dollars telling people how to prioritize their processes and make sure they had back-ups to the system. Then the whole idea seemed to hibernate as the wild and crazy years of housing and mortgage lending took hold. Once the industry fell apart, like humpty-dumpty, the operational risk “experts” tried to put it back together again by helping people find the “holes” in their operations. None of these efforts created the focus on a sustainable Operational Risk Management program that is critical for today’s mortgage company.

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So what really is operational risk? Operational risk is the risk of loss from inadequate or failed processes, people and/or systems as well as losses due to external events. The losses can be direct such as selling a loan at a loss due to unacceptable underwriting or they can be indirect such as failing to get waivers on agency guidelines due to poor loan performance.   The most important idea to remember about this risk is that it can be managed.

In order to effectively manage this risk, it is helpful to break it into three distinct areas. Global operational risk impacts the organization as a whole and includes such catastrophic events as total system failures or regulatory sanctions.   The second area of focus is the operational risk focused on the actual product or service provided. Operational issues here are those that relate directly to the revenue stream such as dissatisfied consumers or investors, excessive costs, inefficiencies and unacceptable products as well as the direct regulatory issues such as TRID and QRM.   Finally there should be an area of focus on ancillary and/or support issues. Among these are such items as indirect costs, inadequate and/or dissatisfied staff, inadequate technology, inadequate financial controls and regulatory issues such as Fair Lending. From this list it is easy to understand how the entire operation can be creating risk, impacting results and lowering profits if not effectively managed.

Another way to envision this risk is by looking at what affects the risks we currently focus on; credit risk, interest rate risk and market risk. Each and everyone one of these risks are dependent on processes, people and some type of technology to form an operational system. Therefore operational failures associated with any of these known risks can become catastrophic for an individual lender.

So how does an organization manage these risks? As expected, it starts at the top. Executive management has the responsibility of putting the risk management process in place. This can be accomplished by assigning a specific individual or by taking on the responsibility themselves. Unfortunately all too often, management makes the assignment and unless some disaster befalls the organization, they tend to focus on other business issues. Instead, senior management should approve the specific tools and methods for managing this risk and be updated on a regular basis, preferably monthly, on the level of these risks. It is also senior management’s responsibility to make decisions on what risks are acceptable and how they should be managed. For example, if the production staff wishes to change processes and is not sure that the new procedure is acceptable from an agency or regulator prospective, management has to evaluate the risks associated with this and make a decision as whether to offer the product. A recent example of the cost of failing to consider these risks in the case of the penalties and fines paid by a company for an unacceptable loan officer compensation plan. Management evaluated the program and got legal advice before implementing it but failed to account for the risk that the CFPB would find it unacceptable. It ended up costing the company $20M.

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The second level of an operational risk program are the risk controls (typically credit policy, process design and technology programs), assessments, monitoring and reporting. This is by far the lynchpin of the program because the design (or control) specifies how things are to be done and the assessment and monitoring evaluate whether the product/service expected is what is actually being produced. Without knowing whether or not the people, processes or systems are functioning properly, there can be no effective decision making by senior management. Yet in the majority of companies today, this function is either not in place, inadequately financed or outsourced to companies that are focused on their own efficiencies and not the risks of any particular company.

The most common of these monitoring programs is known as Quality Control. Overwhelmingly this function is based on Fannie Mae, Freddie Mac and FHA requirements. Unfortunately their requirements are based on their risks and not on each individual company’s risk. As a result this vital function does not address the operational risks that the company has designed into its programs and processes. This is evidenced by the sampling programs, which are not based on validating whether the process is working properly but on criteria that are believed to be “risks” by the agencies.

A second issue with the programs as they exist today is the failure to have it grounded in the actual risk faced by organizations; that of unacceptable performance. The recent requirement by these agencies calls for classifying variances in the process at a specific risk level. This has been done without any validation that these issues are related in any way to expected poor performance. If the senior staff and risk management executives want to effectively measure and monitor their operational risk, the program needs to be developed internally and focus on how effectively their operations are producing the products and/or services they have specified.

Reporting is also the responsibility of this level of Operational Risk. Once again, the monitoring process for each risk identified collects the data on the functioning of the process. Each company should ensure that the method for collecting this data actually reflects the risk. For example, there are many Quality Control questionnaires that ask numerous questions on the closing that are actually covered by the insured protection letters so there is little, if any risk. So why spend time and money evaluating these processes.

Once the data is collected it must be analyzed to determine if the process, including the people and the technology are performing as expected. One thing that must be isolated are the random variances that occur in any process. Any report must show the variances that occur are not random and have a high probability of causing loss to the company. When this occurs it is management’s responsibility to address that risk. Addressing the risk does not necessarily mean making changes to the process, but instead may result in deciding to accept the risk or to insure over it in some way. Making changes on issues that are random or ones that do not expose the company to operational risk losses is inefficient and costly.

The final level of an Operational Risk Management program is the design of the process and the company culture in which the processes reside. For way too long management has seen the primary risk of the company as a failure to originate a sufficient number of loans. All else was delegated to a back-end correction process. In other words, enough volume will cover any risk. As we have seen this philosophy does not always work as expected. Therefore it is critical to ensure that the processes, people and technology are in sync and the focus is on producing and/or servicing loans that are in conformance with the company’s expectations.

Of course, just like any effective risk management program, it requires expertise and experience. When looking to implement an operational risk program, organizations should seek out individuals who are trained to work in this area and have experience in building such as operation.

The operational risk management program is designed to provide the organization with a comprehensive look at how it is functioning. As such it can identify where processes are failing and prevent mistakes that can cost the company amounts far in excess of the program cost.

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The Path To Purchase

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Get the stats on how much consumers rely on their friends and family for advice about their purchase decisions.

Here are the highlights from Social Media Link’s survey of its consumer influencer community. It captured data from more than 21,0000 respondents.

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“At least once a month, 83% of respondents hear about new products on social media before they hear from any other source,” states Social Media Link.

Moreover, 67% of respondents say they always or often seek out recommendations from family and close friends when gathering information about a product/brand purchase.

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To find out more about how reviews and recommendations affect the path to purchase, check out this infographic:

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