It’s The End Of The World As We Know It

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“It’s the end of the world as we know it.” — R.E.M., 1987

How many times has that thought run across the minds of those of us in the mortgage industry since 2008? That line seems to capture how a lot of people feel about the recent presidential election. Whether you’re keeping an open mind or you fear we’re headed for disaster, one thing is for sure: change is upon us. We don’t know what the coming changes will look like, but whether or not they’ll be regarded as positive depends largely on how we handle them. It would be foolish to speculate broadly or too specifically about what the new President will do once in office – just ask the pollsters and pundits who woke up with their heads spinning on November 9th. But both candidates spoke loudly of policies that need to be updated, redesigned or completely dismantled.

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The widespread election of Republicans at the national and state levels signals that the Dodd-Frank Wall Street Reform and Consumer Protection Act will be a target; it’s been on the (now) ruling party’s radar practically since the drafting phase. The mortgage industry may be in for changes TO the changes we’re still mastering and adjusting for. Lawmakers aren’t the only ones the mortgage industry must obey, for the consuming public is our ultimate boss. The industry must brace itself not only for what regulators may do, but what the public is demanding. Change is inevitable in business, but profitability and survival really depend on how those changes evolve.

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It took years to enact aspects of Dodd-Frank, like the TILA-RESPA Integrated Disclosure Rule (TRID), and whatever changes may come are likely far in the distance, meaning that widespread lender relaxation of compliance policy and procedure is not advised for obvious reasons. Companies and originators have been experimenting with all sorts of technology for marketing and compliance with varying degrees of success. The fear of Consumer Finance Protection Bureau wrath has mellowed of late and doesn’t dominate the industry dialogue as it once did. But canvass the nation and you’ll find a veritable mélange of systems and tools in use at different companies and branches to manage compliance and marketing. Companies must take a realistic approach to compliance and the diverse needs, attitudes and willingness of MLOs to adopt mandated technologies. Communication and leadership is as important as the technology choice itself, and implementation won’t be successful without buy-in from those affected.

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The need for new technology to manage business is well understood, however the entrepreneurial nature of the humans who originate loans must be understood as well. Management can’t assume that change – even if necessary – will be embraced. One size doesn’t fit all for top, mid and lower-range producers, and neither does one announcement or approach to getting the rank and file in line with what needs to be done. Dodd-Frank is still on the books for now and regulators have been nipping at our heels for years, but another key to our success and survival is also hard for lawmakers to keep up with: the digital age.

“The digital mortgage” has displaced “compliance” as the top of mind concern in virtually every area of the mortgage industry – and the public is clearly ready for it:

>> 89% used some form of online technology to help them with the homebuying process

>> 76% feel technology made them a smarter homebuyer

>> 69% said technology made them feel more confident

These figures were compiled by Versta Research in a survey of homebuyers commissioned by Discover Home Loans, and the Federal Reserve Bank recently released its 2016 Consumer and Mobile Financial Services report showing that 87% of adults are using mobile technology and 43% are using their devices for banking services.  The public is comfortable managing day-to-day household finances on mobile devices, and those transactions and records tie directly to the larger, more occasional act of getting a home loan. Since big and small lenders alike can execute digital mortgages, the fears that jobs will disappear and that the need for loan officer expertise will diminish are real. But there’s consolation in the Discover survey for the humans working in mortgage:

>> 67% of homebuyers said after using apps and the internet to explore real estate and financing, they still preferred to work with a professional

>> 33% of respondents found the financing process difficult

>> 31% of respondents found the financing process confusing

Feelings of panic over the rise of the digital mortgage are really the result of thinking that it’s “all about us” in the industry versus the borrowers we serve. As bosses go, consumers are tough:

>> Have you ever applied for a job where you were abundantly qualified, aced all the interviews, jumped through every hoop and still didn’t get it – like when you incubate a prospect through credit repair, mortgage planning and pre-approval, but they close with another lender?

>> Have you ever worked for someone who’s tough to please – like a borrower who took personal offense at what’s required to get a mortgage and was convinced their experience would have been different with another lender?

>> Have you ever completed a difficult task only to have the way you approached it dissected and criticized – like getting a loan closed against all odds and getting attitude instead of gratitude from the client?

Consumers don’t always know what they want, but they easily and eagerly opine about what they don’t. And unfortunately, we usually find out what those things are after a transaction is closed. Being the best has always been a challenge, but how do companies and MLOs win in a supercharged regulatory and increasingly digital environment? The Federal Reserve Bank and Discover reports reveal an attachment to the human element in addition to a growing appetite and demand for digital services and 24/7 access. Success in the next era of lending will require an understanding of how to deliver what consumers want – and deploying technology to deliver it when and how they want it. As professionals, companies and MLOs need to self-examine:

Automate. What’s your process from contact to close?  What tasks can be handled by automation – or “digitized” – keeping in mind that quality still counts? For example, a lot of marketing can be set on autopilot, but the messages must be current, relevant and motivate prospects to action.

After taking a thorough, honest inventory, update your process – and your thinking. Next, figure out how much time and manpower you will save by deploying technology when it makes sense. There’s a bright side beyond surviving in this increasingly digital world: we can generate analytics and derive crucial insight on the things consumers need and find important that we previously never dreamed of. Around the clock access to their transaction and the metrics on usage will reveal how often borrowers feel the need to check in on their loan’s progress…they’ll log in a lot more than they would otherwise call. Digital access also means answers will be delivered without MLOs having to take calls or answer emails. Decide how you’ll use your freed-up time to elevate your service.

Elevate. Decide what’s important and be there for it “live.” Whether it’s a call or face-to-face meeting, MLOs can spend the time to do what online mortgage calculators and websites can’t. Things like offering specific, expert advice on what a borrower can afford – not just qualify for, calming nerves over credit dings, reassurance about the benefits of homeownership, and counseling on reserves, household finances and how to manage the massive, multi-year commitment of a mortgage.

Change brings opportunity. We don’t know if a new presidential administration will declaw or dismantle Dodd-Frank, but we do know that innovation and technology are juggernauts that don’t care who the President of the United States is – or what political party is in control. The mortgage industry must never lose touch with the borrowing public, even if it feels like the digital trend is depersonalizing the service we provide or diminishing our importance. Companies and MLOs who embrace this progress will evolve and thrive in the next era of lending. When we acknowledge the things we can’t control, and carefully consider and respond to the signals and needs of the consumers we serve, the concept of “making it up as we go along” manifests as real, positive evolution.

There’s a lot going on in the mortgage industry and our country. With open minds and a connection to why we got into and stay in this business, we just might reach the conclusion that R.E.M. did in the last line of their ’87 hit: “I feel fine.”

About The Author

Sue Woodard
Sue Woodard is president and CEO of Vantage Production, an advanced CRM technology provider based in Red Bank, New Jersey. An award-winning 20-year mortgage originator, Sue is a renowned speaker, trainer and writer for the mortgage origination community.

How Mortgage Tech Innovation Has Evolved

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Clayton Christensen, the Harvard Business School expert who coined the phrase “Disruptive Innovation,” has written what is sure to be one of this year’s hottest business books, “Competing Against Luck.” Christensen postulates the key to successful innovation is understanding the “job” your customers are hiring your product or technology to solve. Over the course of the book, he cites examples of how the “Jobs Theory” (in one form or another) has been applied successfully by leading companies, such as Intuit, Ikea and Airbnb.

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This created pause for me, and I began thinking about the “job” mortgage lenders and bankers are “hiring” loan origination systems (LOSs) and other technology products to perform. The job has always been: increase productivity, prevent errors, and take time and cost out of the origination process – from the 50,000-foot view. Many of us realize the sands have shifted and over the years and the issues customers have used LOSs to resolve have dramatically changed.

The Evolution of LOSs

When CalyxSoftware was launched 25 years ago and Point 1.0 was introduced, the mortgage origination process was completely form-driven. Most loan originators (LOs) were filling out loan applications with typewriters using pre-printed forms and carbon paper. Make a mistake and you could not just use “Wite-Out.” (Remember those little bottles?) You had to retype the entire form. Even if you were careful, aligning the typewriter or word processor with the fields on the pre-printed forms was a painstaking and painful process.

When you stop and think about it, the first job was to simply fill out the forms. The technology matched the need, and made the lives of the LO and processor easier. The software came in a shrink-wrapped box and resided on a floppy disc (it was totally rigid and contained less than 0.0008% of the computing power of today’s average smart phone). Updates came by snail mail, not miraculously from a “cloud.”

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In the early 1990s, our industry saw the first of a series of $1 trillion origination years—milestones that would have been unattainable without technology. The timing for innovation could not have been better.

Over the next two decades, LOSs were hired to do other jobs within the mortgage origination process. These jobs included connecting various parts of the process (production, underwriting, closing, QC, pricing/secondary marketing, etc.) and participants (originators, investors, GSEs, vendors, etc.).

Until the mortgage industry crash, speed and ease of use were the benefits users valued most. Post-crash, the wave of new regulations and fear of “buybacks” and penalties created a new job for LOS and tech vendors: automated compliance.

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The focus on compliance for the past few years has siphoned resources away from innovation—except for enhancements focused on compliance. Rules on ATR, QM, LO Comp, and TRID (which clocked in at 1,888 pages), and the updated HMDA and upcoming TRID 2.0, have highlighted the importance of tracking and retaining data to stay compliant. This has led to the development of data-driven LOSs.

A data-driven LOS allows originators to input all borrower and property information once, in a logical progression; then uses those data fields to populate multiple forms—simplifying the application process, as well as compliance with new regulations. Additionally, when a new form is mandated, a data-driven LOS only needs to add the new data fields and map them to the correct lines on the new form.

The current landscape dictates the LOS to be the system of record. Smart integrations between the LOS and document vendors now serve greater purposes. The integrations not only provide the resource to create the documents, record changes and chronicle why, but also store the documents, so they are easily accessible to lenders and regulators. This is a compliance-centric enhancement.

Going forward, compliance, accuracy, and transparency will still remain the priorities; however, the balance between compliance and innovation will ideally be a 50/50 split.

Jobs for LOSs

The advent of non-traditional FinTech lenders and imagination-capturing products such as Quicken’s Rocket Mortgage, have prompted some observers to question the future of LOSs. These new players and products will create new expectations from consumers, and raise the bar for traditional technology providers to provide enhanced offerings. However, when you look behind the curtain, these innovations handle only a portion of the process in the loan life cycle.

FinTech lenders appeal to Millennials due to ease of use at the beginning life cycle of a loan but the playing field evens up quickly at the underwriting stage. FinTech firms may experiment with new ways to qualify and underwrite loans but loans still need to be funded. At the end of the day, everyone (to and including the FinTech lenders) must still meet GSE underwriting standards.

Early adopters may be willing to give new players unfettered access to their personal accounts in return for less paperwork; however, the vast majority of homebuyers and owners are not there yet. By the time they are, these capabilities will be integrated into LOSs and into the consumer direct channels of traditional lenders.

Despite what the TV and online ads promise, many borrowers, based on their FICO scores and the complexity of their financial situations, will simply not qualify to utilize a Rocket Mortgage-type technology. Juggling early adopters and traditional borrowers will create challenges for FinTech lenders. They will need to offer two separate sales experiences: one for pristine, tech-savvy borrowers and one for everyone else.

Industry surveys continue to show a large percentage of homebuyers are more comfortable working with a LO rather than going alone online. The 2015 National Survey of Mortgage Originations, jointly sponsored by the Federal Housing Finance Agency and the Consumer Financial Protection Bureau, found that 70 percent of mortgage borrowers in 2013 used lenders/brokers “a lot” as a source of information. In addition, 77 percent of borrowers applied for a mortgage with a single lender or broker, instead of completing applications with multiple lenders or brokers.

Will this change over time? Probably. For the foreseeable future, the job of the LO and the mortgage broker appears to be safe. This is particularly true providing the LO continues to offer a high-level of customer service and differentiates themselves by focusing on non-perfect borrowers and non-vanilla lending programs/products.

As originators focus on these opportunities, this will create new jobs for LOSs and tech providers to complete. For example, they will look to product and pricing engines to source non-agency products allowing them to match these programs with their customers.

New technology for non-agency wholesale lenders already allows brokers to provide conditional approvals to their borrowers without having to send an entire package to the lender. This saves several days in the loan life cycle. Additionally, these loans are often more profitable for both lenders and brokers. Best of all, the LO is providing an opportunity for homeownership for unique borrowers that otherwise would have been denied.

The borrower experience, as we have seen, will take on greater importance. Younger borrowers will want to engage with their lenders throughout the origination process using their device of choice. Technological developments will play a major part in enabling this scenario.

The LO will need to ensure they are utilizing technology such as mobile applications, mobile pricing, and software allowing them to share updates with their borrowers or realtors at any given time. The LO will also want to focus on utilizing LOSs that are fully integrated with instantaneous verifications providers, such as The Work Number or FormFree, allowing reduction of time in the loan life cycle.

As vendors become more closely integrated in the LOSs, data integrity will continue to improve and advance the prospect of movement to truly paperless mortgages. This in turn will further enhance the customer experience, particularly the disclosure and closing processes.

LOSs are and will continue to be the hub of the mortgage origination process—connecting lenders with not just borrowers and vendors, but also regulators. True cloud-based computing (think: Microsoft Azure and Amazon AWS), not just today’s web-based solutions, will significantly expand end-to-end origination capabilities as well as workflow, loan review, and delivery options.

Over the past 25 years, the challenges and jobs within the mortgage industry have transformed dramatically. What has not transformed is our industry’s ability to resolve and respond with innovation to tackle the ever changing landscape of the mortgage industry.

About The Author

Bob Dougherty
Bob Dougherty is Vice President of Business Development at CalyxSoftware, a leading provider of comprehensive mortgage software solutions for banks, credit unions, mortgage bankers, wholesale and correspondent lenders and brokers. He can be reached at dougherty@calyxsoftware.com.

Producing Reliable Results

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I started running again. Again, because I used to run every day and competed in numerous races. Everything from 5Ks, which is a 3.1 mile run, to marathons which are 26 miles, 385 yards. While I certainly don’t run as fast as I used to, or as far, one thing hasn’t changed, the need to track my times in order to find out how to make myself better. If you are a runner or have ever known one, you know that this is one thing we have in common. We know every data point about our running process. We can tell you how many miles we run a day, a week, a month or a year. We can tell you our average minutes per mile, our best times and even how many seconds we took off our time for every race we run. All of this data is important because it helps us get better, as well as, better prepare for the next race. We use our last achievement as the benchmark for the next and we are obsessed with making sure we have a reliable methodology for meeting those times. More than anything we want to know what to expect when we sign up for the next race or focus on beating our own benchmark.

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While those of you who are not runners may think those of us that are as overly focused on this need to develop a high level of reliability in our results. However, we are not alone. More and more companies, especially those that provide direct consumer services have the same passion. Companies that are in the business of providing call center support are a perfect example. These companies, such as the country’s most outstanding global “customer experience management” provider, track numerous data points on an on-going basis. Each of these data points has an acceptable level of performance which must be met on a quarterly basis. These results then become a critical part of their ability to attract new clients. The reliability of the company to continuously provide service at the expected level is what allows them to charge a higher price for their services. In other words, reliability generates profitability.

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Direct customer contact services are not the only entities that profit from the utilization of a “reliable process” approach. This concept is observable in manufacturing as well. In fact, most of the people reading this article have more than likely benefitted from it. Think about the products you buy. Clothes, cars, food and just about every other purchase you make. Most people will buy multiple times from the same manufacturer if they are pleased with the product they originally bought. For example, my daughter bought a Volvo over 10 years ago. The car has over 150,000 miles on it and is still the one she takes on long distance drives because she knows it will get her to wherever she is going and back. If fact, she is planning to give it to her son when he starts to drive so that she has excuse to buy another one. This is where reliability really pays off. Why? Although a new Volvo has not yet proven it can perform the same, the confidence built up from the steady performance of her old one is the determining factor in her decision to get another, regardless of the cost.

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So what brings about this level of reliability? Is it a special plan or a “secret” approach that some companies have developed? The answer of course is no. It is simply the ability of any company to make sure their operations, the processes which produce their product and/or service are performed consistently. How do they do that you may ask. They do it in the same way a runner manages the consistency of his or her performance. By measuring, benchmarking and comparing.

Whether you are originating loans, purchasing them, warehousing them or servicing them, every function within every organization has a process for doing what they do. Much of this process may be technology driven or may depend entirely on human involvement. It doesn’t really matter.  Where there is an operational process there is an expectation of what will occur as a result of that process. Once that output is identified and the results tracked, you can begin to develop operational reliability.

The term “operational reliability” has become well-known to most industries as the foundation of producing quality products. It means that a company whose products repeatedly perform as expected is much more likely to provide a product that meets your expectations the next time you buy it. In other words, it you contract with the call center company mentioned above, you can expect that your customers will receive the level of service that has been promised and is documented through their data results.

All well and good you say, but I have at least two, if not three customers. There is the consumer who expects strong and consistent support from my production staff as well as providing the information necessary to choose the best loan. There is also the investor who expects that the loans they buy will repay based on the credit risk identified in the credit policies. Both the investor and consumer expect that servicing operations will effectively handle payment processing, the associated activities and, if necessary, manage the foreclosure and REO process. Finally, there is the warehouse lender who expects that the loans will be purchased in a timely manner and will not stagnate on the line or have to be repurchased.

Developing operational reliability.

Most companies have more than one customer with different needs and expectations. However, when we drill down into what each of their differing customers want, the answers are all consistent. All of these customers expect to receive what you have committed to provide. In order to do so you must ensure the operational reliability of your entire operation. So based on these expectations, how does one go about The most logical place to begin is with the operations themselves. Start by identifying all the processes that go into “manufacturing” the mortgage loan. Of course the first operation is the contact between the consumer and the loan officer. What is your process for making this happen? When the loan officer meets with a potential customer, what is supposed to be the result? What are the inputs the loan officer provides? What are the expectations from the consumer? What is the final output supposed to be?   What actions and/or activities produce that result? Are these expectations documented and measured for at least a sample of loans originated for each loan officer? Once you have collected the data you can use it to identify where the process is working and where it is not. Unfortunately, many times lenders fall prey to the belief that these activities cannot be measured and use this as excuse for not attempting to monitor this piece of the process. However, this can be done. Other industries, such as call centers have done it.

The next set of operational activities include the decision-making and closing steps. Here, the actions taken are many times reviewed by others, such as QC or senior managers. Unfortunately, these measurements are not focused on whether or not the operations we perform actually support the customers’ expectations. For example, let’s look at the credit underwriting guidelines. Nowhere in these guidelines are there statement regarding how the loans produced using them will perform. We recognize that there are many different standards for underwriting, based on the risk appetite of the organization. The operational reliability of this process is making sure those are guidelines are followed and if an exception to them is warranted, it is properly documented and tracked. Tracking exceptions to guidelines is much more important than just having documented them. Imagine if an exception to a guideline occurred 35% of the time and this exception was tracked and found to have no impact on the performance of the loans. What could that mean to the purchaser of those loans? How could that impact the guidelines and streamline the operations of underwriting loans in the future?

Servicing, with its multi-faceted process is ripe for reaping the rewards of operational reliability. Since the mortgage crisis they have been inundated with new consumer requirements, especially when it involves interacting with the borrower. These actions, both on a service provider level and a collection process operational standard could use the operational reliability measurements that have been developed by numerous call center operations. In addition, the CFPB has developed a set of standards that are expected to be met by servicers. Yet how often does any specific servicer meet them? We don’t really know because there is no benchmark that covers servicers. Maybe the operational reliability standards set by CFPB are excessive? Maybe with the level that can be reached is lower due to the associated operational processes? How can any servicer demonstrate that the operational reliability of their processes actually meets consumer demand? None of these questions can be answered because unlike other industries, this benchmark is absent.

A recent item in one of the industry trade journals suggested that servicers are at the breaking point; that if they are required to continue to meet all these requirements their operations will implode. The writer of this article basically blamed it on the outdated technology. However, If this is in fact the case, why haven’t servicing managers identified operational practices that are failing, measured the failure rate and looked internally to change the operations. Instead many have implement manual reviews that are too little and way too late. These reviews tend to identify specific loan issues rather than the operational failures that produce unreliable results. The results should also provide more than just a dump of data but instead should provide an in-depth understanding of what a process is supposed to produce and the rate it actually produces that result.

Most lenders pay close attention to their warehouse lines but not to measure operational reliability. Instead they are reviewing the number of loans and the days these loans have been on the line in order to avoid interest penalties. Imagine however, if the origination operation was so reliable that the concern over excessive interest payments was not an issue. If the reliability of the product was such that the loans were always purchased timely. Could that result in lower interest rates from the warehouse lender? Now we will never know because the operational focus on this process is on a lack of reliability rather than on how consistently the operation works.

Managing for reliability

The CFPB requires in its statement of expected organizational management, that every company will have a “CMS” or compliance management system. Too frequently organizations see this as a mandate to ensure compliance with regulatory requirements. What it is really saying is that lending companies must have a system in place to ensure that what they say they are providing is what is actually occurring. This involves having data that updates all operational activities on a regular basis and in a meaningful format. If, because the data is not collected or not collected accurately, the results could lack the reliability necessary to make management decisions.

Unfortunately, most senior managers do not have the information they need to make effective decisions. While they get reports on volume, profit and/or problem areas, they have nothing to allow them to reconcile this issues with the overall operation of the organization. Getting a QC report that says a total of 1% of the loans had a “significant default” does nothing to help them understand the underlying operational process that caused the problem, the severity or impact of the issue and the priority of making management decisions on addressing the problem. Most of the time these reports rather than providing assurance to managers, make “mountains out of molehills” and result in wasted time and energy trying to fix random problems. In the desperate attempt to really understand what is going on in their organizations they demand more and more reviews and reports which only succeed in confusing issues and increasing operational costs. Despite the fact that attorneys at recent conferences pushed the need for companies to know more about their organizations than the regulators do this cannot happen if the data collection is focused on the wrong issues or is not statistically sound.  In particular managers must know not just such things as production counts or the turn times for handling complaints, but how likely they are to have the issues that are seen as a problem reoccur. This information comes from reliability measurements.

At the end of the day, organizations that want to produce reliable products and services, must identify, measure and report all facets of their operations. This means not only including every activity focused on the outcome, but having a means to measure its effectiveness and analyzing these results in a way that not only makes the operation efficient, but also ensures that the products/services produced are worth the highest possible price. This is what operational reliability is all about.

About The Author

Rebecca Walzak
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.

Sustained Winds Of Change To Continue

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We’re all conditioned to think about change coming in waves with ample time in between to recover before the next wave hits. This is true in both our personal and our professional lives; we see it within a year and within a lifetime. But what happens when the waves of change become so frequent that it’s hard to tell where one ends and the next begins?

Since 2009, the US mortgage industry has experienced back-to-back changes. Not only have we seen typical purchase/refinance cycles, but we’ve also had countless compliance changes: RESPA, ATR/QM, KBYO, and so on. It’s not just the mortgage industry, either. Across seemingly all aspects of modern life, largely thanks to technology, the pace of change is quickening. For example, the VHS was introduced in the US in 1977, followed by the DVD 20 years later in 1997. However, Blu-ray entered the scene just 6 years later in 2003, and now we have the 4K revolution quickly setting in – something YouTube adopted in 2010. Now, with the election of a new kind of presidential administration, there is no reason (on top of all others) to think that the pace of change in the US mortgage industry will ease. There will be considerable uncertainty around regulation and interest rates. Add in innovations like those for borrower experience now further fueled by Fannie Mae’s Day 1 Certainty program and industry movement towards eClosing and the overall view can be daunting. Our new normal is nearly constant change. The question becomes: How is this constant change impacting your staff, and what can you do to support their needs in order to best serve your customers?

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It’s in our nature as humans to react to, and then absorb, a wave of change. We also expect that the dust will settle before the next wave of disruption hits. However, when change continues unabated, it can be stressful. As managers, it can be equally stressful to help your staff adapt to these times. One way to simplify the impacts change has on us is to think of change similar to the well-known stages of grief: denial, fear, acceptance, commitment:

>>Denial. With change often comes an unwillingness to accept what lies ahead. Fortunately, there are steps you can take to help your staff overcome this make-or-break stage. First, get buy-in from staff early on. By communicating what the change means to each team member long-term, you are more likely to advance through the four stages without as much resistance or push-back.

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>>Fear. Denial and fear often go hand-in-hand. Again, communicating regularly about what this change means for each employee and how you seek to make the transition as smooth as possible for everyone can make all the difference. Most important for this stage is establishing an action plan for addressing the changes. This step can significantly help your staff see the big picture and the “light at the end of the tunnel”.

>>Acceptance. By now, you should have buy-in from your team that the change is happening but is manageable thanks to the plan you’ve put in place. At this stage, you should encourage that acceptance and continue keeping the lines of communication open. Without ongoing communication, staff could very well revert back to the previous stages, thinking the plan established is not, in fact, being acted upon.

>>Commitment. Because the waves of change are sure to be constant going forward, the four steps can become cumbersome and hard to constantly manage. In order to gain true commitment from your staff, ensure you have a nimble “change-enabled” origination process in place. By creating systems and processes that can easily adapt to meet change, you can significantly reduce the impact of future changes on your staff and your customers.

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By better understanding how we, as humans, process change, while also taking our own advice by going through the 4 steps to accept that we now live in constant change, we can begin to best position our organizations for long-term success. The next step in riding the winds of change is to establish the processes and systems that will lead your staff towards long-term commitment.

While as an industry, we can’t avoid or ignore external change like required security or compliance updates, lenders and vendors alike can build vetting and prioritization processes to make sure that only the best changes/improvements are put in place to truly support where your business needs to go. If you have too much “self-introduced” or discretionary change, then you might add unacceptable levels of risk. On the flip side, if you have too little self-introduced change, then you’re sure to be exclusively reactionary and passed by competitors.

So what are common criteria for vetting and prioritizing change in the mortgage industry? Compliance risk, financial risk, impact to borrowers, impact to staff efficiency, level of effort and/or expense all are great starting points. For a given proposed change, many of those categories might be mixed (positive in some areas, negative in others). Some will be easier to quantify than others, but this should not mean that subjective measures can’t be used. For those that might fear bureaucracy, you can introduce a lightweight and flexible process. The point is that you collect additional facts only when appropriate to the size/impact of the decision. Frequently, you will decide based only on readily available information but still will take the time to capture it in a structured way. Having a transparent and fact-based process helps get the right discussions going between the right people and will make difficult decisions easier.

So a process around vetting and prioritizing change is essential. In addition to that, what aspects of an origination platform will help manage change? True flexibility is required, but what specifically in a technology platform provides flexibility? An open architecture that is extensible means having a developer’s toolkit and an API surface. An exposed rules engine is also important so that you can easily configure workflow, drive efficiency like automatically ordering services, kicking off exception processes, etc. Last but not least, delivering all this in a SaaS product model is critical to stay current on the latest releases. This is no longer optional thanks to regulatory changes and ongoing security enhancements to keep your borrowers’ data secure. Custom or quasi-product models allow for the customer to lag on an out-of-date version. When this happens, you’re not only missing the latest security and compliance updates, but you’re also limiting your ability to effect change because of the friction of moving your enacted change through multiple version upgrades.

As John F. Kennedy once said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” By working with your staff, updating your processes, and advancing your technology, your daily concern will be less about adapting to change and more about anticipating the change. Let your focus turn towards the future, which is sure to look brighter than ever before.

About The Author

Paul Wetzel
Paul Wetzel has led Product Development and Product Management activities through most of his 20-year enterprise software career – over the last 10 serving the Financial Services industry. In his current role, Paul manages both customer and industry requirements to drive product enhancements while also ensuring Mortgage Cadence leads the way in innovative loan origination technology. Paul began his career with Accenture in software development where he rose to the level of Director, Business Development for an Accenture subsidiary. Before joining Mortgage Cadence in 2009, Paul spent several years with FICO in product marketing and corporate strategy roles.

Not All Marketing Tech Is Equal

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Today’s demanding lending environment challenges lenders to find creative ways to consistently engage potential new borrowers, maximize LO’s efficiency, and drive new business to the point of sale. Marketing automation is a powerful tool in meeting these challenges, but not all-marketing automation is created equal.

Many lenders are fed up with increases in pricing for their marketing automation technology, especially when the technology lacks new features, is deficient in delivering current and relevant mortgage specific content, is difficult to customize, and most importantly has low LO utilization rates.

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Lenders don’t want to pay a per user fee (at increased cost) with continued low LO utilization rates. Centralized Corporate Control differentiates marketing automation solutions by utilizing “Set it and forget it” technology which allows corporate marketing managers to consistently drive high quality business to the LO without the LO having to directly launch marketing campaigns.

In the mortgage industry, where loan officers find themselves operating in an increasingly complex and regulated environment, “set it and forget it” Marketing Automation is more urgently needed than ever. After all, you want your LOs to focus 100% on what they do best: originating and closing loans.

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Raise Productivity To A New Level

Roller coaster interest rates … constantly changing rules and regulations … heightened competition for borrowers … extreme pressure to produce results …

How will your company continue to thrive in such a demanding environment? It wont be by using overpriced and outdated marketing automation.

Beyond CRM & Generic Marketing Automation

The right marketing automation solution delivers lenders a reduction in the cost per lead, increases the ROI from marketing campaigns and significantly improves borrower acquisition rates. In today’s highly competitive and highly regulated lending environment, lenders must not only be able to quickly and effectively generate new business, they must also do it in a compliant manner. This is the promise on which enterprise-level mortgage-specific marketing automation delivers where traditional CRM and many generic marketing automation couldn’t.

Compliance And Control

These days we’re all operating in a stringently regulated environment. Communications with leads, customers and even referral partners – whether driven from the center or by loan originators – must be controlled, but without inhibiting genuine creativity and individual initiative.

One of the most distinctive features from advanced marketing automation is that it establishes a controlled environment in which ingenuity and enterprise are able to flourish. It does this by providing five levels of management control – including outright prohibition, online alerts, real-time oversight and comprehensive reporting. A unique built-in authorization loop ensures that your nominated managers approve all marketing materials – for example: compliance officer, brand supervisor – before being made available for use. When anything is created, copied or changed, these managers are notified by system-generated e-mail. They are free to approve, amend or even delete the item.

Analytics and reporting

Revealing Mission-Critical Metrics.

In the end it’s all about results. That’s why advanced marketing automation delivers a wide-ranging analysis of your company’s and originators’ production and tracks marketing activity driven through the system. The solution intelligently delivers essential information – including the value of your clients, referral partners and other sources of business – and readily reveals opportunities for incremental sales.

Predefined reports include:

>>Production Analysis

>>Mailing Activity

>>Source of Business

>>Branch Productivity

>>Loan Officer Productivity

>>Realtor Referrals

Post-Close Marketing Automation

Foundation For Your Long-Term Success.

Automated Programs maximize the retention of current clients and the revival of past clients. These pre-determined sequences of strategically timed marketing communications typically run for up to three years (or more) and can be extended at any time. Experience over many years has demonstrated that a well-configured Automated Program lays the firmest possible foundation for long-term success – not only by generating a steady flow of referrals, repeat sales and cross-sales from a loyal audience, but also by ensuring maximum response to on-demand Custom Campaigns.

What Is Advanced Marketing Automation? 

According to Gartner: “Marketing Automation will remain the highest growth sales and marketing software sector with a 10.7% CAGR through 2016, thereby reaching just under $4.7 billion market value.” Why this upsurge of interest in Marketing Automation? It’s because, for the first time, there’s robust technology that frees your loan officers to focus on what they do best: originating and closing loans.

Gartner (www.gartner.com) identifies three distinct segments within the broad category of “sales and marketing” software:

>>Marketing Automation

>>Customer service and support

>>Sales (including CRM products)

Marketing Automation is an enterprise-wide application. Driven by central marketing, the system does the work so that your loan officers don’t have to. Outbound communications addressed to new leads, applicant’s in-process, closed customers and referral partners are precisely targeted, highly personalized and compliantly fulfilled via print and electronic media.

Unleash Your Company’s Marketing Genius

It’s time to unleash your company’s marketing genius with a truly unique Marketing Automation platform. Marketing managers are empowered to drive “set it and forget it” programs across the enterprise, while maintaining regulatory compliance and brand consistency. C-level executives are presented with sophisticated and easy to use tools for more effective oversight and management. Loan officers are freed up to originate and close more loans.

Unleash a marketing solution that brings your creative genius to life, one that provides the power to quickly and consistently execute your marketing objectives while compliantly meeting the ever-changing demands of the mortgage industry. Energize your marketing with mortgage specific marketing automation that is both easy for you to use and extremely powerful. Mobilize a partner who delivers you 15 years of experience in driving growth in the mortgage industry, a trusted advisor that is a difference maker in your business.

At TTP, we bring you the mortgage industry’s most advanced marketing automation solutions that compliantly address every aspect of your lending business from prospect, to in-process, applicant, and closed loan marketing programs. Since 1995, TTP has developed an industry leading reputation for setting the pace, and solving the marketing and communication challenges of lenders to consistently deliver results.

TTP’s MACH3 is a proven enterprise-wide marketing automation solution that supports you and your specific initiatives to address these market conditions. Each person in your organization that is involved with driving growth is empowered to focus on what they do best.

For example, Loan Officers are free to close more loans, instead of trying to create marketing materials. C-level executives are presented with sophisticated, yet easy to use tools for more effective oversight and management, while marketing managers can demonstrate their marketing genius and compliantly maintain brand consistency across the organization.

“Set it and forget it” technology drives high-quality business to the point-of-sale and accelerates long-term profitability. Not all marketing automation is created equal.

About The Author

Brandon Perry
Brandon Perry is President at The Turning Point. Brandon oversees all operational and administrative activities of TTP. Brandon brings over 16 years of experience in various financial services industries to TTP which enhances the Company’s ability to maintain it’s position as industry leader in providing customers with an advanced marketing solution.

Keep Your Eye On The FinTech Firms

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The fintech industry witnessed an enormous growth in 2015. Around $7.6 billion were invested in fintech companies last year, a substantial increase from the $4.7 billion in 2014. There is no doubt that this momentum will continue this year. The growth of capital being invested in fintech companies illustrates how technology and the web are changing the very nature of financial services and how money is being handled.

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Below are three fintech trends to be on the look out for:

Trend 1: The Impact of Millennials

Millennials, those born between 1980 and 2000, is the largest generation in American history and is shaping the fintech industry as we know it. According the Millennial Disruption Index, banking show that 68% of respondents say they see the way one accesses their money will change in the next five years, while nearly half are counting on tech start-ups to overhaul the way banks work. They believe that innovation to banking will not come from within, but from outside. Millennials are looking towards fintech start-ups to disrupt the banking industry.

These companies are sitting up and taking notice. Many of these fintech startups emerging on the scene are relying on millennials for their success and are leveraging technologies popular among young adults, such as mobile apps and social media. Since 2010, startups in the digital banking sector have attracted more than $10 billion. Many of these hottest fintech startups geared towards this demographic are mobile-app only – to include Acorn (an investment platform), Robinhood (analyzes stock information), and Earnest (offers merit-based loans). There is no question that it is an exciting time to be a financial start-up.

Trend 2: The Role of Digital Transformation

Digital transformation goes well beyond providing simple technological solutions; it requires a deep understanding and analysis of an organization’s culture and business model. More importantly, going digital requires customer first thinking. Banks are facing a new reality where the ever changing consumer preferences and rapidly evolving financial technologies are dictating how business should be conducted. If properly implemented, digitization is one way for banks to remain relevant in an increasing competitive and fast-changing industry.

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According to a study on digitization by A.T. Kearney, there are three areas that separates digital banking leaders from the rest of the pack: they understand the importance of mobile in a digital strategy, they are developing models that are more agile, and they have handled the need for internal cultural shifts. A number of fintech players are paving the way when it comes to digital banking. Instead of focusing solely on financial services and products, these companies are offering enhanced user experiences by leveraging technology and design.

Trend 3: InsureTech

There has been a massive outpouring of innovation and investment spread throughout the financial sector – from mobile banking to business lending. However, there is one glaring area ripe for innovation and that’s insurance. The insurance industry, one of the largest in terms of revenue, is a bit tricky to break into as it is heavily regulated. Nonetheless, it presents a huge opportunity for financial disruption.

There have been a few players that have attempted to take a crack at the insurance market, such as Lemonade, Oscar, and Metromile. Lemonade wants to offer insurance via a peer-to-peer platform, effectively acting as a middleman. Oscar aims to revolutionize health insurance and improve the customer experience through technology, data, and design. Metromile, on the other hand, sells pay-per-mile car insurance. These organizations offer an accessible user interface as well as consumer-friendly business models.

In essence, blockchain is a public record of every bitcoin transaction that has ever happened and it is believed that blockchain technology will significantly alter the financial services infrastructure. Earlier this year, NASDAQ claimed it documented a private security transaction that was successful via its ledger platform Linq. This apparently was the first real use case of blockchain technology.

Last year was considered as the year of the blockchain app; this year will usher in further innovation and rapidly evolving technology. One company that is capitalizing on the growing interest in blockchain technology is San Francisco-based Blockstack.io. Their platform offers four functions: 1) asset insurance to represent real-world assets; 2) a private ledge that is optimized for high transaction volume; 3) transaction management allowing users to describe transaction flows between parties; and 4) multi-signature wallet security. Blockstack.io is just one in a new wave of blockchain-first tech firms looking to partner with various financial institutions to utilize blockchain technology.

The rise of fintech companies will continue going forward.

About The Author

Joya Scarlata
Joya Scarlata is a senior analyst at InterraIT, a San Jose-based technology solutions and services company, working in the areas of market research and marketing. She loves tracking current technology and marketing trends.

The Mortgage Technology Revolution

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In a not-so-distant past, lenders were pushing paper around on carts, hoping their intern or temp staffer was properly classifying files, and wishing there was a better way. Crazy to think this was reality just before the turn of the century – with some riding far into the 2000s with this approach. Now, it’s almost expected that our entire world be digital. Not just digital, but truly advanced in a way that supports even the industry’s leading lenders’ competitive goals. In our world, we call this “enterprise-grade” technology. The definition has changed throughout the ages; let’s travel through time to take a look back at enterprise-grade and what is required now to earn the title.

As early as the late 80s and early 90s, we started to see traction from Application Service Providers (ASPs) who would host custom applications on behalf of customers. At the time, customers understood that ASPs could offer improved efficiencies in hosting these applications, so that they could focus on subsets of their technology portfolio that were more difficult to outsource and those that were more critical to daily operations.

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Still, with new technology, came skepticism, leading many financial institutions to insist on hosting their own proprietary solutions to maintain control and security. The dominant thinking over the subsequent 10-15 years among the largest financial institutions (including those in the mortgage industry) was that the benefits of having their own, in-house solution outweighed the benefits of ASPs.

However, during this period, something notable started to happen in smaller and more nimble organizations. They chose to embrace Software as a Service (SaaS), which is widely considered the successor to the ASP trend of 20+ years ago. Similar to ASP, the provider hosts the software, but under a pure product model: one version of the code for all customers.

The acceptance of SaaS trended as one would expect. Driven by the high visibility and success of Salesforce.com, organizations first used SaaS in non-mission-critical and non-sensitive applications like Customer Relationship Management tools. As customers with mixed technology portfolios experienced more and more success with SaaS, the contrast grew between this and the reality of the costs, risks, and distraction of maintaining and hosting their own applications, further accelerating the adoption of SaaS.

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Fast-forward to today and SaaS is the new standard for all applications (even mission-critical) for all mortgage organizations (yes, including top-tier lenders!).

SaaS is only part of the answer, however. Top-tier lenders need the benefit of SaaS without giving up the flexibility and extensibility that they’ve come to expect with one-off solutions. This means that the solution must be highly configurable, allowing the lender to remain adaptive to changing business pressures and objectives – also known as enterprise-grade technology.

So what does enterprise-grade mean in 2016?

Compliant. Aside from all the expected, cross-industry benefits of SaaS, when applied to the US mortgage industry, the model gives customers assurance that they can remain compliant. Due to the frequency and breadth of regulatory changes, providers can only apply the changes to the latest release of the platform, and non-SaaS models make it far too easy to fall behind. PC-based software, multiplied by the hundreds or thousands, is a needless hurdle in this fight to stay current. Each version that is delayed increases the risk of non-compliance.

Current. When customers stay current on the latest release, they benefit from all the latest enhancements, not just those required for compliance. As lenders know better than anyone, every advantage in the mortgage market makes a difference. True enterprise-grade providers publish a release schedule, make training and documentation accessible, and are available at every step to make sure even the largest organizations can reach, and stay, in a cadence of change. Ask your current or potential platform provider for a list showing the number of active versions of their software and the number of customers on each version. If the list contains more than one active software version, it should be a big red flag that the provider lacks the processes and rigor to keep their customers current, and the next customer that falls behind at their peril may be you.

Scalable. If you are truly partnering with an enterprise-grade solution, your provider is likely growing their customer base at a quick pace. You shouldn’t experience any growing pains, however, thanks to the provider’s multiple tiers that scale quickly and efficiently, both out and up, as required.

Secure. With increased reliance on web-based solutions, providers that offer enterprise-grade technology stand above the rest by backing their solutions with global best practices and standards related to security.

Reliable. When designed properly, cloud technologies are the perfect building blocks for mission-critical solutions. Enterprise-grade technologies have maximum uptime to ensure users experience fast and reliable service. Multiple datacenters with independent backups are essential in order to guarantee uptime in case of server failure.

Integrated. For ease-of-use, lenders are seeking fewer integration points that are theirs to manage and control. An enterprise-grade system includes a combination of the needed third-party integrations and a wide range of web-based and API connectivity points that allow lenders to make the required connections to back-end systems.

Enterprise-grade technology, regardless of size and business model, reduces risk, provides configurability to avoid a one-size-fits-all approach, stays current with industry expectations, and is always available. When enterprise-grade technology is obtained, previous obstacles are removed. Removing obstacles empowers people and allows businesses to thrive.

About The Author

Paul Wetzel
Paul Wetzel has led Product Development and Product Management activities through most of his 20-year enterprise software career – over the last 10 serving the Financial Services industry. In his current role, Paul manages both customer and industry requirements to drive product enhancements while also ensuring Mortgage Cadence leads the way in innovative loan origination technology. Paul began his career with Accenture in software development where he rose to the level of Director, Business Development for an Accenture subsidiary. Before joining Mortgage Cadence in 2009, Paul spent several years with FICO in product marketing and corporate strategy roles.

6 Trends That Small Business Should Follow

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2016 is a promising year for small business owners and entrepreneurs. The development of modern business technology gives small businesses the opportunity to develop low-cost, enterprise-quality products and services.

Social media, Internet marketing and ecommerce empower your business to reach potential customers in untapped markets all over the world. Staying informed on the latest trends in small business is crucial to maintaining relevance in the ever-evolving world of commerce.

Here are six small business trends you should be aware of in 2016.

1) Millennials

With its oldest members now entering their early 30s, the millennial generation is reinventing the way businesses manage the workplace and its employees. A report published by the U.S. Chamber of Commerce describes the social and economic impact posed by the people born between 1982 and 1999.

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Millennials demand comprehensive leadership and opportunities for growth within every position they fulfill. Transparency, collaboration and a seamless work-life balance are vital not only to their comfort, but also to their success within the workplace. Millennials also effortlessly adopt new technologies as they’re announced, therefore erasing the awkward adjustment phase every previous generation of offices has endured after a computer and equipment update.

In regards to millennials’ relationship with technology, brands and services —”what used to be a one-way conversation is now multifaceted, 24-hour-a-day, seven-day-a-week dialogue between brands and their customers.” In return for improved products and services, 86% of millennials are willing to provide insight on their consumer habits and decision-making processes, often through the use of online surveys.

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For entrepreneurs from the millennial generation, the ability to rapidly spread information is key to successful marketing. Millennials are also more conscious about the social responsibility exhibited by their employees or employers. In an effort to maintain that impeccable work-life balance, they actively seek workers and workplaces with shared ethics and ideals.

And because millennials place so much value on quality and ethics, they prefer to use technology to take care of the busywork — online meeting and web conferencing services such as ClickMeeting and Huddle (both virtual communication platforms), as well as workflow optimization and project management platforms such as Memit and WorkflowMax are just a few tools millennials rely on for collaboration and productivity in the workplace.

2) Web presence

The availability of Internet-based technology gives small businesses more control over brand development, marketing and customer engagement. While tech start-ups traditionally benefit most from these services, Internet tools provide affordable and attainable solutions for small businesses in every industry.

The Independent We Stand (IWS) campaign reports that 97% of Internet users conduct online research on local products and services before committing to a purchase. Reviews and testimonials, a business’s website and other public information play important roles not only in a customer’s decision to buy a product but also in whether they share that product with others online.

Despite this, Local Search Association Insider (LSA Insider) reports that nearly half of small business owners’ websites are not accessible via mobile, and Hibu reports that 45 percent of small businesses don’t have a website at all.

Now is the best time to make a change. Small business owners on a budget can build clean websites with programs like Wix and Squarespace, which even support online storefronts and integrated messaging services. Various social-media platforms, discounted print-out shipping label services and other valuable online resources are available to Internet users for free or for minimal cost.

Business owners can also choose to outsource labor they struggle with or don’t have time for. 99 Dollar Social posts fresh content to a business’s social-media pages daily, and Hootsuite delivers advanced social-media optimization tools like the ability to schedule posts across multiple platforms within one unified dashboard.

All-in-one services like Infusionsoft, which generates personalized marketing software for small businesses, and Yodle, which which maintains a business’s online presence, help small businesses with everything from appointment-setting to social media.

3) Ecommerce

Online storefronts, which allow for the movement of electronic commerce, draw Internet users to the Web in masses. Retail spending is on the rise in the U.S., and shipping fees are driving factors in customers’ decision processes.

When presented with offers for free shipping, 58% of consumers say they are willing to add items to their virtual shopping carts to meet the free-shipping threshold. Simply offering a perk for shopping at your online store can mean more money in your pocket.

You can create and develop your business’s ecommerce platform with a vast selection of Internet tools, such as Magneto and Shopify. 3dcart is a great solution for small business owners who need to develop an online storefront on a tight budget. Vend, a leading point of sale system, generates a cloud-based mobile optimized online store for your business in a matter of minutes.

Other developing areas of ecommerce include mobile commerce — or mcommerce — as well as social ecommerce. Because many consumers can now make secure purchases using their smartphones, mobile devices are becoming the most used platform for looking up information on goods and services. According to a report conducted by Forrester, mobile payments in the U.S. alone will generate $142 billion.

4) EMV payment security

EMV, or “Europay, MasterCard, and Visa,” is vital to business security in 2016. The national migration to EMV payment standards (popularly recognized as microchip debit and credit cards) is virtually guaranteed to safeguard small businesses and their customers against fraud over the next year. As of October 2015, merchants in the U.S. are liable for any fraudulent transactions processed without EMV-enabled terminals. The government-mandated requirement was expedited as a result of large-scale data breaches and an influx of counterfeit cards in the U.S.

Protecting the security of your business and its customers should be your number-one priority. According to Creditcards.com, while only 25 percent of U.S. debit cards are currently chip-equipped, and an estimated 12 million point-of-sale terminals still need to be upgraded to support EMV, small businesses accepting antiquated swipe and sign payments are “held 100% liable for claims of fraud or wrong-doing” according to Finance Magnets.

If your business still accepts face-to-face transactions without EMV, not only are losing credibility among your customers, but you’re facing some serious financial risk as well.

5) Online lending

A Harvard Business School paper titled “The State of Small-Business Lending” analyzes one of the most significant trends for small businesses — online lending. This innovative trend in small-business lending is driven by the “simplicity and convenience of the application process, speed of delivery of capital and a greater focus on customer service.” While traditional banks view small business lending as high-risk, many online lenders award funding exclusively to small-business startups.

A few different online lending models are available for small businesses. Peer-to-peer lending platforms connect institutional investors to your small business through services such as Lending Club and Prosper. Fundera and Biz2Credit connect borrowers with alternative and traditional lenders through comprehensive online marketplaces.

As a result of the Jumpstart Our Business Startups (JOBS) Act of 2012, the trend in online lending has shifted toward investment crowdfunding opportunities. You can launch your own campaign through a variety of popular crowdfunding websites, including AngelList, Indiegogo, Kickstarter and Fundable.

6) Business Intelligence

Business intelligence (BI) software gathers fragmented data sets and translates it into information you can use to improve your business. BI has historically been used by large enterprises to curate, store and visualize what’s known as big data. The growth of Internet technology and big-data solutions make it possible for small businesses to take advantage of BI solutions.

Leading business dashboards like Cyfe deliver advanced analytics, monitoring and tracking your business’s data in real-time, through a dashboard which integrate with almost every platform. This includes marketing automation, sales, search engine optimization and even a dashboard for social media analytics. Small businesses require more simplified solutions to BI than those required by large enterprises.

With so many changes coming to the entrepreneurial world in 2016, standing apart from other small businesses can be both exciting and challenging. Most of the services listed in this article offer free trials and tiered pricing plans to help your business get its foot in the door.

About The Author

Adam Toren
Adam Toren is a serial entrepreneur, mentor, investor and co-founder of YoungEntrepreneur.com. He is co-author, with his brother Matthew, of “Kidpreneurs” and “Small Business, BIG Vision: Lessons of How to Dominate Your Market from Self-Made Entrepreneurs Who Did It Right” (Wiley). He’s based in Phoenix, Ariz.

Multigenerational Housing

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Recently my daughter, who lives in a very expensive area of the country, was bemoaning the fact that with two growing children, two dogs and one cat, they really needed a bigger house. Unfortunately, everyone they looked at was over their budget. So she asked if there was a way for her father and I to come and live with them and help with the payments. “No way” I said thinking of all the entanglements that situation carried with it. But after thinking about it for a while, I started to investigate the idea and found that multigenerational living is happening more and more frequently these days. While the primary reason may be economic, there are a number of drivers and benefits that are increasing the probability that many households may become multigenerational before too long.

So what is a multigenerational household?

According to the Pew Research Center, a multigenerational household is a household that includes at least two (2) adult generations or two non-sequential generations. For example, it can be parents and adult children or parents and grandparent(s). A non-sequential multigenerational household is adult children and their grandparents living in the same household. Adult children are those age 25 to 34.

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Living arrangements can range from simply having an aging parent occupying a bedroom in the home and sharing all other daily activities with the other household members, to the home having an entirely separate living unit with living, kitchen, bedroom and bath along with a separate entrance. Some even have their own separate garage space.

The frequency of multigenerational housing

PEW Research Center also investigated this aspect of the trend and found that in 2012 there were 57 million or18.1% of the population living in multigenerational housing. While many may assume that this is primarily older adults caring for aging parents, the reality is that 23.6% of the 25 to 34 age group are included; the largest percentage of multigenerational housing. The second highest percentage were those age 85 and greater which comprised 22.7% of the population. However, over the past 30 years, the percentages increased across all age groups, with the exception of the 85+, which remained rather stable.

The distributions across gender found that of the 25-34 age group the largest percentage were males which represented 26% of the population. Females on the other hand made up 21%. There were also distinct groupings by race and ethnicity. With the large immigration experienced in the country over the past 30 years, the number of immigrant households comprised of multiple generations has increased significantly. At the time of the study 37% of the U.S. population were minorities. Distribution of multigenerational minorities indicated that 25% of these households were Hispanic, 27% were Asian and 14% were non-Hispanic whites.

Looking at this from a slightly different viewpoint, AARP conducted a study of multigenerational households and found that 9.4% of Asian, 9.5% of African American households, and 10.3% of Latino households were multigenerational. This trend is expected to increase as continued immigration is expected in the coming years. Projections by the U.S. government Census Bureau show that non-Hispanic whites will no longer be the majority by 2043 and the 65+ population will more than double to 92 million by 2060. All this portends an increasing number of multigenerational household formations.

Why Multigenerational Living

A study by the National Association of Realtors looked at the reasons families were living together in multigenerational households. They found that although the reasons were similar among all groups, the percentage did vary based on age. The chart provided below gives an overview of the various reasons for this type of household formation by age.

A survey of multigenerational household dwellers conducted by Generations United in 2011, found that 82% said the set-up brought them closer as a family and that they enjoyed the living arrangement. In addition, 72% indicated that they found that their finances improved while 75% saw an improvement in overall care benefits. An AARP report in April of that same year found that of the 24-35 years olds that had moved in with parents more than half were satisfied with the arrangement. In fact, John Graham, emeritus professor of marketing and international business at the University of California, Irvine summed the move toward multigenerational living this way, “…what’s really happening is the realization that the best way to get along in life is interdependence with the extended family. We’ve had a 50-year experiment with the notion of the nuclear family and it is sort of a stupid way to live.”

What does this mean to the housing market?

Because this trend toward multi-generations living together as one household is growing, builders are beginning to respond. While some are building larger homes with more bedrooms and baths or two separate master suites, builders like Lennar have designed and built homes specifically for multigenerational living. These are homes with separate living sections for the additional generation of family members and are becoming more popular since they offer separate entrances and living areas where each family unit can have their own space. Standard Pacific Homes in California is also building homes to accommodate three generations. These homes typically include a two-story design that have a lock-out rental unit which can accommodate a separate generation of the family or can eventually become a small rental unit. There is a two-car garage for the family and a separate one for the smaller unit which also has a private yard. Needless to say with the growing immigrant and aging baby-boom population this type of housing will have more appeal to home buyers.

What about financing?

Multigenerational housing is becoming more popular and the trend is focused on separate and independent living arrangements, yet buying the home is still expensive. These homes are typically larger than a standard single family home and in most cases, the price reflects that additional square footage. This means that financing is more important than ever.

To address this emerging trend, Fannie Mae has included in their HomeReady program the extended-household income flexibility option. While not a separate program, it does allow a potential borrower to include the income from the various multigenerational family members as a compensating factor if the DTI including just the primary family exceeds 45%. Since these extended households are more common among underserved populations such as low to moderate, minority and immigrant populations, this offers a way for these families to purchase a home in a way that is affordable and allows them to retain the consistent with their lifestyle.

Of course, this financing approach may not be acceptable to all potential buyers. For one thing this type of financing would not lend itself to allowing both generations to be listed as owners of the property. For older individuals who are accustomed to being homeowners and want to continue to enjoy the associated tax benefits, this may be a problem.

There are of course other options. Combining incomes from all borrowers would allow larger loans to be approved as this additional income would support a lower DTI. There are complications to this approach as well. For one thing all members of the household contributing income would have to be on the note and mortgage. This could prove complicated in the case where one of these generations wants to or has to move. Since the borrowers were approved with a combined application, it is unlikely that the remaining family would have sufficient income to bear the monthly payment. In such cases, the extra living unit could easily become a rental, generating income needed for making the payments. But will this be acceptable to investors or regulators?

Other issues that may arise and need to be addressed is what happens if the generation that is buying the property decide to divorce or if one should pass away. What will happen to the older generation living in the separate unit? To address these issues both generations may wish to place the property in a trust or hold title some other way. Once again this changing title structure may cause problems and concerns for investors.

What about servicing these loans?

Will servicing these loans become another issue for servicers to address? How will servicers address the receipt of a payment when it comes from another member of the household? Will it be treated as if the borrower sent it in or will it be rejected because it is not received from the primary borrower? In addition, there is always the possibility of increased defaults since it is likely that when one of the individuals passes away a resulting reduction in income will impact the ability to meet the debt. Will servicers need to develop new loss mitigation strategies to address these issues? Furthermore, in this era of protecting the consumer will servicers be pressured to change their default management for these situations? And what about REO issues. If the servicer is forced to foreclose on one of these properties will there be sufficient buyers interested in this type of housing?

Living in a multigenerational household

While all of these issues are of interest and concern to both lenders and borrowers, the reality is that most people moving into these households are used to living independently and with this change of residence comes other issues that can derail the best of intentions. Having a multigenerational household that has problems living with each other or failing to set realistic expectations can dissolve the benefits of this living arrangement. Ultimately a separation of family members can have an impact on the viability of these loans. So what should potential borrowers consider before agreeing to become a multigenerational family. Both the AARP and an article by Marcie Geffner for Bankrate.com have some suggestions.

1.) Discuss expectations and responsibilities before making the move. Decide who is going to pay what bills, which areas of the home are communal and which are private. If there are areas, such as laundry that are used jointly, decide on when each generation will have use of it. If you are buying a home with a separate apartment, discuss whether or not the utilities will be joint or separate. This may also be impacted by zoning restrictions so check them out as well.

2.) Older parents with multiple children should discuss the situation with them and with all families together. This will avoid hard feelings of some kids getting “stuck” with all the responsibility and others feeling that one of the siblings is getting an advantage in a potential inheritance situation. In other words, be careful when mixing assets and families.

3.) When determining where you will live make sure that the home accommodates physical issues such as grab bars, brighter lightening and other items that are or may become necessitates as individuals age.

4.) Bring patience and acceptance from all parties. People’s personalities and habits are unlikely to change. Every member of the family must be willing to accept them.

Time magazine for the week of February 22nd has an extended article focused entirely on the frontiers of longevity and the creation of an American culture that supports it. There is no doubt that the upward trend we are seeing in multigenerational housing is just the tip of the iceberg and this move to multigenerational housing is one solution that home builders, buyers and mortgage lenders should welcome with open arms.

About The Author

Rebecca Walzak
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.

Manage Your Risk Before Auditors Come Knocking

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Research has shown that the financial industry outsources over 85% of their information technology. Outsourced technology can include your basic products such as the phone system, alarm system, network, servers, or computers. Your more critical outsourced technology might include lending technology, online banking system, secondary marketing system, payment solutions, core solution or ATM processing. From basic to critical technologies, all types of third parties play a key role in business operations proving that outsourcing technology directly effects your institution every day. Outsourcing technology has major benefits if managed correctly. If an effective third party risk management system is not in place, auditors will be waiting to knock down your door. Institutions rely heavily on outsourced technology to perform business functions resulting in an increased overall operational risk. If an outsourced vendor unsuccessfully delivers services then the institution relying on that vendor runs the possibility of failure. The risk associated with your outsourced technology providers directly effects the overall internal operational risk of your institution. If you are effectively managing your entire operational risk management program, you are ensuring you will always be able to perform everyday business functions, which are critical to survival.

One of the biggest struggles of managing third parties is the amount of time and effort it takes to complete the tasks required by the FFIEC and FDIC. The regulations stress the importance of maintaining a strong selection and monitoring process. This process includes qualifying and assessing the risk of each vendor, communicating with the vendor to obtain the necessary due diligence criteria, receiving the authorized review of the due diligence documentation, and continual monitoring of each vendor to update their documentation. Since each vendor provides something different to your institution, the process is extremely complicated. Each vendor must be assessed based on the risk they could bring to your institution, and all due diligence must be properly performed based on the level of risk. As a result of this, there are large amounts of resources, people, and time invested in properly managing your third parties.

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Typically, institutions require their Vendor Manager, Vendor Owner, Legal department, Financial advisor, and CFO to be involved in the entire process. There are many hands involved in vendor management, and this is not accounting for external vendor cooperation. The Vendor Manager has the role of overseeing the entire vendor management program and ensures that all tasks and procedures are completed correctly and timely. The Vendor Owner has the role of obtaining all due diligence documentation and screening the vendor. The Vendor Manager begins this process by requesting for the vendor to be reviewed by the Vendor Owner. The Vendor Owner is then required to communicate with their vendor to obtain the proper due diligence information. Often times this point in the process gets delayed by the vendor because the due diligence documentation is viewed as a low priority and burden. This consequently makes an already lengthy process even longer. The difficulty of involving internal company-wide efforts and external vendor participation likely leads to miscommunication and lack of collaboration. Your institution needs to have a uniform process, ensuring interdependencies across your institution are effectively controlled.

If this process is completed manually, the implementation becomes increasingly complicated. Financial institutions often rely on multiple documents and lists which are all managed by different people and could contain duplicate information. One of our current clients previously managed three different vendor lists; contact information, accounts receivable and critical vendors. The departmental contact list was utilized by department personnel and contained contact information needed to communicate with each vendor. The accounts receivable list was utilized by the accounting personnel and contained billing information related to products and services as well as contract renewals. The critical vendors list was created by the IT department to track which vendors provide the most critical services and what due diligence needed to be performed based on the assigned criticality. The three lists each contained important information needed by multiple personnel. It would be impractical to eliminate any of the lists and would also cause chaos to simply combine. The vast amount of documentation and acknowledgements needed on an individual vendor basis essentially takes up more time and effort to maintain separately than it would with a centralized repository. This particular institution and many others have experienced the agony of maintaining a manual vendor management process and have therefore invested in an automated solution.

Simply automating might not be the answer to all prayers. The key is to invest in an automated solution that can easily maintain all vendor information as well as the management process from acquiring a new vendor and vetting an existing vendor to monitoring their relationship. Current systems are often difficult to use and lack the ability to delegate tasks to specific personnel. Since the vendor management process is so lengthy, it requires many hands to get involved to perform due diligence activities. This leaves room for miscommunication, error, and missed deadlines. The ideal automated solution would include user access roles, built in alerts, and a complete document repository. User access roles would allow all involved internal personnel the ability to manage their specific functions and keep track of their individual vendors. Built in alerts would ensure that all review dates and contracts are being reviewed and managed on time and monitored correctly. A complete repository would centralize all vendor due diligence documentation in one area to ensure that each vendor is being properly evaluated and controlled. The overall goal is to mitigate all outsourced technology risk by centralizing all tasks into one system. To achieve this goal, you must anticipate the risks before the auditors.

Unfortunately, institutions tend to maintain a defensive “band aid” approach to auditors and regulations. They panic after a visit from the auditors and find a quick fix to the problem. Usually the quick fix is to purchase a system to cover the area that the auditor scrutinized. Sometimes that system is only covering just a small part of the bigger problem and the institution falls in to a vicious cycle to constantly require more band aids. They might devote the time and money into a vendor management system but then still manage the other areas of risk manually. Instead, the approach should be proactive to eliminate the “band aid” cycle because eventually those band aids will run out and your institution will suffer. The newest FFIEC IT Examination update guides the way to a proactive strategy.

Appendix J in the FFIEC IT Examination handbook explains the importance of strengthening the resilience of outsourced technology by stressing the need to identify, measure, monitor, and mitigate all areas of risk associated with outsourcing. It is no longer practical to invest in several solutions to separately maintain all areas of risk management because of this regulation. In order to stay ahead of the game, it is better to have a solution that ties all areas of risk management under one umbrella. A complete risk management system is the solution to the worries that Appendix J has brought upon the industry. An all-encompassing risk management solution will identify which vendors are correlated to your critical business functions. The vendor must allow you to complete your critical functions or you will be in jeopardy of financial loss or loss of business. You should maintain your institution’s business continuity plan and incident response policy and also monitor the BCP and incident response policies of your third parties. This will ensure that if a disaster affects your vendor, they will be able to continue to provide their product or service to your institution.

Your risk management solution should incorporate vendor management, BCP, and incident response under one solution to ensure that all involved personnel can work together, eliminate further short term solutions, and anticipate future regulatory requirements. An all-encompassing operational risk management solution will ultimately make your institution prosperous.

About The Author

Marc Riccio
Marc Riccio, President of Specialized Data Systems, Inc., has over thirty years of experience providing software solutions to the financial industry. Marc is known for his forward thinking and vision of introducing new and innovative technologies including “rules-based” Loan Origination software, COLD/Document Image Systems, Internet Security Services on Demand, Cloud Computing and now Operational Risk Management software. Prior to founding Specialized Data Systems in 1989, Marc worked for several technology companies as a Systems Analyst, Account Manager and Sales Manager. Among his significant previous positions, Marc served as Senior Marketing Representative for FiServ-Connecticut and worked in the Retail Banking and Systems group for Bank of America.