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How To Increase Margins By Reducing Origination Costs

We can all agree that the cost to originate mortgages continues to climb throughout 2018 and is forcing lenders to deal with margin compression.


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As stated in an article from Kelsey Ramirez of Housing Wire, “The cost of originating a mortgage hit all-time highs back in 2013 and 2014, but now, those costs are up once again and much like before, hitting all-new highs, according to the last Quarterly Mortgage Bankers Performance report from the Mortgage Bankers Association.”


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In the article she mentions a new study from Deloitte Center for Financial Services and LendIt Fintech that shows nonbank online lenders are also struggling with the cost of funding a loan.


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The survey shows a full 77% of respondents listed the cost of funding among their top three concerns, and 38% said it was their top concern. This is compared to just 39% who listed any other issue among their top three concerns.

Today’s mortgage market challenges you and your staff more than ever before. It starts with heightened pressure to reduce loan production costs and the areas that cause those costs to rise:  constantly changing rules and regulations, lack of effective internal controls; communication break downs, poor loan visibility; and getting bog down doing manual rudimentary tasks are all significant factors forcing lenders to rethink their lending operations. 

To survive, brokers, loan officers, and lenders now require an intelligent loan manufacturing solution from a provider that truly understands mortgage banking and its constantly shifting mortgage process. The right digital mortgage platform helps you drastically reduce the chaos in your daily lending processes while improving communication to help you close more loans faster and in a more cost effective manner.  

So where should lenders begin?  If lenders truly want to reduce the cost to originate it starts with automating manual tasks and all of the communication breakdowns between all parties to the mortgage transaction. Each one of those breakdowns delays the time to close and increases the time and resources needed to originate the loan.

When we talk about all the parties to the transaction it is not just the fulfillment staff and borrowers, but realtors, title agents, financial planners, and all other interested parties that need to be accounted for. Keeping all parties in the loop is one thing, but automating that communication in a way to significantly reduce friction points while lowering costs.

To more efficiently manufacture a loan, system-driven processes need to unfold, so that lenders can reduce and/or eliminate manual rudimentary tasks. This way, your production team doesn’t need to think about what needs to be done, when it needs to be done, and by whom it needs to be done. 

For lenders that want to truly drive down the cost to originate, they must realize the importance of automating the entire mortgage process.  Lenders that put forth the energy and resources to automate the entire lending process will be able to cut costs while gaining a competitive advantage over other less efficient originators.

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Your Hero To The Margin Compression Villain

It is said that every hero needs a villain. As a lender it is very easy to identify the villain in today’s mortgage market—declining profitability due to the rising cost to originate a loan leading to margin compression.


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As reported by Kelsey Ramierez, reporter for Housing Wire, “The Cost to Originate a Mortgage Just Got Ridiculous-Again.” She goes on to state, “The cost of originating a mortgage hit all-time highs back in 2013 and 2014, but now, those costs are up once again and much like before, hitting all-new highs.

Lenders continue to struggle in the rising mortgage rate environment, reporting negative profits for the first time since Dodd-Frank compliance brought down profits in 2014.

Back at the Mortgage Bankers Association’s National Secondary conference in New York City, MBA Chief Economist Mike Fratantoni predicted loan loan officers would report negative profits in the first quarter of 2018.


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His prediction was correct.

Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $118 per loan originated in the first quarter of 2018, according to the MBA’s Quarterly Mortgage Bankers Performance report. This is down from a gain of $237 per loan in the fourth quarter of 2017.

“In the first quarter of 2018, falling volume drove net production profitability into the red for only the second time since the inception of our report in the third quarter of 2008,” said Marina Walsh, MBA vice president of industry analysis. “While production revenues per loan actually increased in the first quarter, we also reached a study-high for total production expenses at $8,957 per loan, as volume dropped.”

In this unfortunate story for lenders, while it is easy to identify the villain, who the hero in this story will be is still up for debate.  We can agree that necessity is the mother of invention and if margins were wonderful, we wouldn’t need to rethink how we originate.  But that’s not today’s reality, so we are forced to ask the tough questions in hopes of finding our hero.


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>>How do we reduce costs without the standard seasonal downsizing?

>>How do we increase origination numbers without blindly hiring more LO’s?

>>Is there a better and more efficient way to originate loans?

>>Can we afford to continue doing business as usual?

In starting to ask these tough questions we must first identify costs to see where the actual numbers are coming from.  

>>Are your numbers off and contributing to your rising costs?

>>How many loans does the average LO close a month in your organization?

>>Of those loans, how well are your LO’s growing the referral business?

>>How many loans can a processor per day, month, and year handle in your organization?

>>Ask the same question about your Underwriters? Closers? Funders? Etc.?

>>While you may have these numbers at your disposal, when was the last time you truly checked to see how accurate they are in today’s market?

>>How paperless is your organization really? How much is that costing you?

>>Why is it that the average Underwriter could handle a pipeline of 100 loans pre-crash but can’t handle much more than 30 today?

In reviewing your numbers one thing should be very clear— the villain in this story in the rising cost to originate. So as a lender we must shift our focus to the potential hero in this story if we are going to survive let alone thrive in today’s mortgage market.  The hero is improving your operational efficiency.  The challenge is how we put this into action.

When lenders originate it is typically done from a very loan centric perspective. The average mortgage company does everything from their LOS and prioritizes their loans by status/milestone/pipeline. Don’t blame the LOS, but instead consider this:

>>Is there a better way to prioritize the steps to originate a loan?

>>How can you empower LO’s to do more without them having to spend more time on tedious follow-ups?

A fresh look at the “flow of work” and not just the traditional workflow of origination to underwriting to funding is required.

The devil is in the details. It is critical that if we are going to defeat the villain, we must take the time to not only understand how much we are spending on each task to originate but also truly understand how we can become more efficient.

Lenders are notorious for running tons and tons of reports.  Unfortunately, reports become stale the minute you print them, so you forward thinking lenders have moved to real-time dashboards.  While that is a step in the right direction, that’s only half the battle. The real key is— what do you do with that data?

It is one thing to understand the data, but if you want to truly gain operational efficiency and be the hero, what you do with the data is so much more important.  Is the data telling you where the bottlenecks exist in your origination workflow?  Those bottlenecks/inefficiencies are costing you money and contributing to your rising costs. Once you identify the bottlenecks how can you eliminate these bottlenecks through workflow automation to create consistent processes that streamline and reduce costs?

Let’s take a step back and look at history. When Henry Ford implemented the assembly line, they saw a dramatic increase in productivity, here’s why:

>>Work was prioritized, pushed to the right person at the right time

>>Ford created sub-assemblies to maximize output

>>Technology then automated the items that a system could handle, but people still do a majority of the work today. It’s more of the right person, at the right time, and at the best price.

The good news is that you don’t have to try and figure all of this out by yourself.  Help is on the way.  We know the mortgage process.  A team of lenders and mortgage technologists created Lodasoft. We’ve been on your side of the fence—struggling with the day-to-day challenges of the constantly shifting mortgage process and rising cost to originate. Based on that experience, we strive to make lenders more efficient, scalable and profitable.

We can help you maximize your team by looking at things from a different perspective.  Lodasoft is a Digital Mortgage Platform focused on task and workflow automation. Designed by mortgage veterans, our strength is in maximizing productivity and quality while providing structure and guidance for all members of the process.

Consider this:you’ve been successful thus far. You’re closing loans, and you might be somewhere in the middle when it comes to profitability. Now, if you could only get the most out of every motion in that process.

The first thing we can help you do is Identify. Zooming out of the day-to-day can work wonders, especially when done by a fresh set of eyes. Here’s an example of questions you might ask in identifying key areas for improvement.

>>What is our process for gathering borrower conditions?

>>How do we actually Track, Approve, and Reject documents?

>>How much of this is done via email?

>>Do all interested parties of the transaction have a Real-time Status into each one of these conditions?

For example, say we’re waiting on an item from a third-party. Do we know how long we’ve been waiting for that particular item? Is it stopping someone else from performing an unrelated function? What does the follow-up process look like? Are we just emailing for updates? 

Once we’ve identified the key areas for improvement, you’ll have a better understanding of how you might transfer responsibilities from one employee to another. Think of it like this, a high-cost resource should almost NEVER perform a low-cost function. If it can be handled through automation, even better! 

The next thing to identify is Communication. So much gets lost due to a lack of transparency. Systems were designed so that multiple users can’t have edit rights to the same areas. It makes sense. If someone is reviewing income and someone goes in and changes the income… well…

Think about it. We all have some reporting mechanism we rely on. As mentioned earlier, some work from system pipelines, some from live dashboards. Some (maybe a majority) still use spreadsheets. 

Why? 

For one, spreadsheets can be manipulated very easily. Make a few updates, attach it to an email, and send to management. Communication is key. People need updates so that they can offer guidance and delegate loans. However, this is where things start to really fall apart.

>>What if the key person on a file is out of the office? 

>>Could that lock extension have been avoided?

As you identify these key areas that need to be communicated to multiple people, you will begin to uncover missteps that create vicious cycles of he-said/she-said. A flurry of CC and BCC emails ensue and this leads to, well…a lot of bad. 

We can help you go from “CC and BCC everyone just in case” to pointed communication at the right time to the right person. This way, your team is being communicated to/with on a “need to know” basis.

These are just a couple of examples of things we do every day that happen because they’ve always been done that way. We can change together.

You no longer have to be a victim to the rising cost of originating loans. Allow Lodasoft to help you rethink how you are originating so that you can streamline your processes while reducing the cost to originate. Let operational efficiency become the hero in your organization.

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Borrower Satisfaction & Digital Lending

According to the J.D. Power 2017 U.S. Primary Mortgage Origination Satisfaction Study, a total of 43% of mortgage customers indicate applying digitally in 2017, up from just 28% in 2016. However, satisfaction among customers applying online/via website has declined by 18 points year over year.

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According to that same study, trust is overwhelmingly the difference. Overall satisfaction among mortgage customers with high levels of trust in their loan representatives is 358 points higher than among those with low levels of trust. The top three elements driving that perception of trust are:

>>Representatives always calling back when promised

>>Continuity in working with a single representative throughout the process

>>Representatives proactively providing status updates

Rocket Mortgage is America’s largest mortgage lender based on Rocket Mortgage data in comparison to public data records. Rocket Mortgage is a fast, powerful and completely online way to get a mortgage for refinancing or buying a home, which was developed by Quicken Loans.

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Quicken is a household name. They had trust. They also had resources to be able to provide the transparency. This kind of loan volume doesn’t get closed because of just an amazing digital app. They had continuity and could afford to have a single representative working throughout the process. Someone was there to call back when promised. Etc. Etc. Etc.

To survive and to be able to enhance borrower customer satisfaction, brokers, loan officers, and lenders now require an intelligent loan manufacturing solution from a provider that truly understands mortgage banking and its constantly shifting mortgage process. The right digital mortgage platform helps you drastically reduce the chaos in your daily lending processes while improving communication to help you close more loans faster. This allows you to deliver an enhanced borrower experience giving you more time to do what you do best exceeding your borrowers expectations.

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In 2017, Lodasoft realized that the “Digital” solution wasn’t just in providing a rocket-like experience and incorporated intelligent loan manufacturing as away to give the mid-size lender and broker the best shot at competing with the top-25. We’ve leveled the playing field for our clients by allowing for system-driven and automated transparency and accountability that lenders of any size can afford to ensure that someone is there to call back when promised.

Lodasoft’s digital mortgage platform drastically reduces lending costs, chaos and cycle times to help you build a significantly more efficient mortgage business while providing a truly memorable borrower experience.

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Digital Advances

There is always talk about the digital mortgage. It’s in high demand. Industry data shows that 67 percent of all closed loans by Millennial borrowers were conventional, the highest percentage in two years. Conventional loans continued to be the most popular loan product, although women were slightly more likely to take advantage of FHA loans. So, what does that mean? It means that more lenders need to embrace the digital mortgage to reach this new group of borrowers. How do lenders do that? Adam Batayeh, President of Lodasoft, talked to our editor about how he sees the digital mortgage technology landscape.

Q: How would you describe the state of mortgage origination today?

ADAM BATAYEH: I think we’re in an amazing place in terms of the evolution of the mortgage industry. The mortgage industry had been hit with a significant amount of negative press following the mortgage meltdown. What many people haven’t fully realized is all of the positive changes that have been made in the mortgage space since.

The crash may have pushed the industry into a sort of regulatory confinement period putting everyone behind the proverbial 8-ball, but great progress has been made over the last 10 years. While it may have even stagnated tech innovation, as lenders were busy with TRID, I believe that these 10 years have washed away the pretenders and the best of the best are now advancing the industry, which only leads to what’s best for the consumer.

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You look at the top originators list for example and it is no longer comprised of solely big-box banks with a 50-state brick and mortar footprint. According to Bloomberg, non-banks accounted for more than 70 percent of FHA loans just last year.

You’ve got true innovation that is taking place that has allowed for mortgage companies to come out of obscurity to a predominant role driving the industry forward. The retail space is truly diversified and you have a wholesale market in the midst of a major comeback.

Q: Interesting, can you expand on how technology is actually making its impact?

ADAM BATAYEH: For me, the best part of the innovation that is taking place is that lenders and brokers of all sizes can take advantage of the best technologies available. The strength and ubiquity of APIs is game-changing in and of itself.

Look at Fannie and Freddie for example. They’ve recently come out with products that incorporate features allowing for the automation of income and asset verification. However, those aren’t proprietary solutions. Really what they’re doing is integrating to the same technologies available to all of us.

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These pieces of technology have sort of become commodities that everyone can implement and benefit from. The best originators are using them to enhance speed, efficiency, transparency, etc. Everything that we’ve been trying to do for so long is finally coming to fruition and we really can attribute it to the rapid growth of new and innovative technology.

These new innovations are allowing for a level playing field. We feel this is contributing to the healthiest level of competition we’ve seen. Not to mention, cloud-computing and SaaS-based products are allowing all of us to be everywhere at all times without the need for as much costly brick and mortar and IT expense.

Also, I just want to say that you hear a lot about the “Digital Mortgage” and at first-glance it sounds like the easy button, but it’s not. If you look at DU and LP for example, they both assist in underwriting efforts. They are tools to help us make decisions, but they did not eliminate the Underwriter by any stretch.

Q: Speaking of “Digital Mortgage”, what’s your take on its status?

ADAM BATAYEH: It’s here and it’s here for everyone. Many vendors have been helping lenders deliver electronically signed eMortgages for what, 10 years now? The Digital Mortgage is really an extension of that effort.

The focus thus far has been on borrower experience and rightfully so. However, to truly deliver on the digital mortgage experience, lenders must not only provide a slick and engaging online point-of-sale tool, but they also must automate the backend mortgage process and communication touch points that impede a truly seamless mortgage experience.

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The good news is again, it’s here. There are solutions at every price point and if you do your due diligence and stay current, you can compete with the largest lenders with the biggest bankrolls. Whether you’re retail or wholesale, broker or banker, Community Bank or Credit Union — you can find a solution that will fit (especially if you keep a pulse at tradeshows and with industry sites and publications like this one).

Q: How would you say retailers and wholesalers differ in their need for digital solutions?

ADAM BATAYEH: That’s a great question because it would seem that an originator is an originator right?

One of the big differences is in adoption. If you look at some of the larger consumer-direct players, they have a bit of an advantage as they have more of a captive team. They are more centralized and can distribute and train fairly quickly.

Retail Community Banks and Credit Unions are similar as they are a little more centralized even though they may be branch focused. They are typically cross-selling other internal products and so flexibility and configurability is very key to them. Integration is also high on the list for many reasons especially for servicers.

Wholesale and Distributed Retail shops have some things in common and they’ve got a different set of considerations. For one, a branch model might be providing tools, maybe an LOS, but those branches may be on their own in terms of say lead, contact management, or even borrower experience.

Same goes with Wholesale Brokers as the lender may provide portals that offer pipeline management but may fall short in more front-end activity. Some high-producing teams like to do things their way, and that’s not necessarily a bad thing. Flexibility is needed at a different level here.

The best advice I can give is, try to partner with tech vendors at different levels. For example, consider a solution that comes 75 percent configured and offer your branch or broker some control in taking part of their own configuration. We’re all typically willing to integrate at various levels and have resources to help get your staff trained quickly.

Q: What are you currently solving for that Lenders haven’t addressed yet?

ADAM BATAYEH: For us, it’s really the difference in what we have chosen to focus on. We’re based right outside of Detroit and we all know stories of how Ford implemented the assembly line to drastically reduce costs and increase production. Well, there’s a lot to be said for how far manufacturing has come and it really lies within automating processes.

A great borrower experience is one thing, but if that experience transitions to a back-end process that is not transparent or communicative, that borrower experience may fall short in the end.

We’re incorporating workflow in a way that allows for centralized, automated processes, so that mortgage companies of all sizes can truly compete and enjoy similar reduction in costs and increased production to that of the largest lenders.

Q: What has had the biggest impact on how you develop solutions?

ADAM BATAYEH: Definitely the unique diversity of our team and our client feedback loop.

On the operations side, our team has closed thousands of loans over the span of 20 years. When we talk to mortgage people, they know we’re one of them. They feel it in the questions we ask and the thought around the downstream impact of implementing a certain capability.

On the tech side, our guys have been developing solutions specifically in mortgage either for lenders or vendors for most of their careers. They have also been cloud-computing since, well, before the word cloud-computing was a thing.

We don’t allow ourselves to just go out and create but at the same time our clients understand that they can’t just dictate their needs to us as everyone is different. So, when we add a feature, we look at it from all sides and then look to provide flexibility so that it may be configured for the various types of lending institutions we cater to.

Q: What is the most critical challenge mortgage business are addressing?

ADAM BATAYEH: I don’t want to just give you the “everyone is different” answer so I’ll try my best not to give you a non-answer. If I must choose one challenge, I’ll say, “putting out fires”.

It boggles my mind that we are an industry that still says “it’s the end of the month, don’t talk to me”. If you go to the doctor on the 30th, do they tell you to come back next week? No, you have an appointment and they are just as busy on the 12th as they are the 30th.

The tendency in our industry seems to be to stop the bleeding. If a borrower needs something, we surely don’t want them going anywhere else so we stop the presses and give it to them.

I don’t care how big or small you are, you have fires that tend to creep up and you can identify them. If you can identify them, you can plan for them. If you can plan for them, you can get ahead of them.

It’s what I was referring to around the assembly line. You can use automation for the sake of automation. Or, you can use it create as repeatable a process as possible.

INDUSTRY PREDICTIONS

Adam Batayeh thinks:

4.) Origination numbers will continue to spread as the playing field levels. Wholesale, Retail, Consumer-direct, etc. will all experience slight shifts in portfolio focus.

2.) The “Amazon Effect” will have more of a positive impact on housing supply as millennial and first-time homebuyer awareness shines even brighter.

3.) A greater focus in 2018 from a Digital Mortgage perspective will be on further automating backend processes. This will trend well into funding and servicing.

INSIDER PROFILE

Adam Batayeh is President of Lodasoft, the mortgage industry’s leading solution to help lenders eliminate complexity and automate the manual workflow involved in the everyday loan process. With more than a decade of experience in the mortgage industry, Batayeh has held executive sales, marketing, product and strategic partnership positions with key mortgage technology providers. He is responsible for overseeing the daily operations, growth of organization, strategic partnerships and long-term strategic vision of Lodasoft. You can contact Adam at abatayeh@lodasoft.com or to find out more about Lodasoft visit website www.lodasoft.com

Delivering On The Digital Mortgage Experience

I recently returned from the National Mortgage News Digital Conference in San Francisco. There was a great turnout for the event and a number of discussions regarding what a digital mortgage is and where the industry headed.

“In a live survey conducted during the conference by NMN and Mortgage Cadence, the majority of respondents defined a digital mortgage as a fully end-to-end electronic process, which includes the borrower experience, internal processes, and electronic closings.”

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In addition to defining what a digital mortgage is they went on to state, “almost 14% defined a digital mortgage as having an electronic borrower experience and digital internal processes, and about 10.4% claimed a digital mortgage constituted an online experience for the borrower.”

Most of those surveyed claimed, “they have some, but not all, features available. About 34.4% are still determining the best approach for their specific organization.”

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What I found most telling was “participants cited a number of reasons for not yet reaching their digital mortgage goals, with about 44.1% blaming current internal technology limitations.”

Since Quicken Loans launched that now famous Super Bowl AD for Rocket Mortgage, there has been a great deal of talk, energy, and resources focused on the front end tools and customer experience as it relates to a digital mortgage.

But what many in the industry are missing is that to truly deliver on the digital mortgage experience, companies must automate the entire mortgage process— not just the front end user interface.

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Where companies can gain the greatest ROI when investing in digital is to automate the many manual tasks throughout the mortgage process.

The origination process between originator, processor, borrower, realtor, title agent and all other parties to the transaction is very interactive to say the least. In our highly regulated lending environment, complexity has created additional processes and more room for error. Loan quality takes a hit as more manual checklists have been created, and more data must be validated.

For the vast majority of mortgage lenders, email is the main communication method while the CRM and LOS systems are the central lead and loan repositories. This means leads, preapprovals, loans, business contacts and documents all must be dispositioned in systems that must focus on quality.

The process becomes chaotic with documents in different places, tasks being completed by different people at different times with no real way to manage, track, and communicate properly. This lengthens turn-times by creating bottlenecks at various stages in the loan process.

Communication then becomes reactive rather than proactive. When this happens, even the greatest digital point-of-sale tool will not deliver the digital mortgage experience that today’s borrower is looking for.

The issues are exacerbated with a refi-boom or when purchase season comes along and sometimes we’re forced to throw more people and manual processes at the problem.

So what’s the answer?

To truly deliver on the digital mortgage experience, lenders must not only provide a slick and engaging online point-of-sale tool, but they also must automate the backend mortgage process and communication touch points that impede a truly seamless mortgage experience for the borrower.

That begins with automating manual tasks and communication between parties with a solution that offers mortgage lenders the ability to truly enhance the areas of transparency and accountability that are often overlooked. We must consider automation not only around fulfillment staff and borrowers, but realtors, title agents, financial planners, and all other interested parties involved in a transaction. Keeping all parties in the loop is one thing, but automating that communication in a way that continues well after funding, which will lead to a much higher rate of repeat business.

The Digital Strategy should include ways for system-driven processes to unfold, as we know more about the transaction. This way, team members don’t need to think about what needs to be done, when it needs to be done, and by whom it needs to be done. Leveraging web and mobile ready solutions is key, however anticipation may be even more important.

The more we know up-front, the more we can automate further down the line. With this type of automation, each individual involved in the transaction feels as though a truly personalized service is being provided.

For lenders that want to truly deliver on the digital mortgage experience they must realize the importance of automating the entire mortgage process. Lenders that put forth the energy and resources to automate the entire lending process will be able to overcome the “internal technology limitations” that are holding them back from delivering a truly memorable digital mortgage experience. An experience that delivers enhanced communication throughout the lending process reduces the cost to originate loans and increases lender profitability.

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