Magazine Feature Story

*The Modern LOS*

**By Lester Dominick**

***Today’s modern loan origination systems (LOS) are evolving into more than just loan processing systems. This evolution is driven by lenders’ needs to respond effectively to ever increasing demands from investors, regulators, and consumers. The complexity of the mortgage business today is at an all time high and still peaking. Compounding the intricacies are new regulatory enforcement risks and fines that could significantly impact a lender’s net worth.
Every LOS in the marketplace today is functionally capable of processing and closing loans; however, lenders today are demanding that their systems do much more. A line has been drawn and now vendors have to step up and over that line for them to succeed and for their clients (lenders) to prosper.

****Just as the financial meltdown has been difficult for lenders, it has been equally challenging for LOS vendors. Vendors are facing historically high costs maintaining system compliance as regulators continue to add new and complex reporting requirements.

****The new Consumer Financial Protection Bureau promises to be extremely active in addressing the mortgage industry. They have taken responsibility for several laws that directly affect mortgage originations including the Home Mortgage Disclosure Act (HMDA), the Truth-in-Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Ownership and Equity Protection Act (HOEPA), the Equal Credit Opportunity Act (ECOA), the Alternative Mortgage Transaction Parity Act (AMTPA), the Community Reinvestment Act (CRA), and the SAFE Mortgage Licensing Act (SAFE). And let’s not forget the Dodd-Frank Act. The industry can certainly expect more requirements as additional rules are written.

****Beyond New Regs

****In addition to the regulatory activity, there are new requirements from the Government Sponsored Enterprises (GSEs) that require a LOS to support the Uniform Mortgage Data Program (UMDP) which consists of the Uniform Collateral Data Portal (UCDP), the Uniform Appraisal Dataset (UAD), and the Uniform Loan Delivery Dataset (ULDD). LOS systems also need to add support for MISMO’s V3.1 Reference and Data Dictionary in the near future. The costs of implementing these significant, time-consuming projects and dealing with normal day-to-day compliance issues are normally fully absorbed by the LOS vendor.

****Lenders receive the benefits of these efforts at no additional cost as they are typically included in the maintenance or transaction costs lenders pay LOS vendors for support.
****Vendors Are Stressed

****LOS vendors not only face a constant barrage of compliance and technology challenges but are operating in an environment where there is a smaller revenue pool due to lower loan volumes and fewer potential customers.

****With this tremendous work load and challenging market not every LOS vendor is going to be able to step up to the line and meet all these requirements. Some vendors have already withdrawn from the market while others are providing minimal amounts of effort to stay in compliance for their existing customers. There have been reports of vendors missing regulatory due dates and problems with system updates meeting the requirements.
****With such a significant regulatory workload, system innovation has taken a back seat the last several years. The vast majority of the loan origination systems in the market today were built prior to 2006. Software development technology changed significantly at end of 2006 when Microsoft released its .NET 3.0 Framework. This wasn’t just an upgrade, it was a substantially new and better way to build and run software. 

****The newer technologies offered by Microsoft and others offer significant improvements in all areas of development including the  graphical user presentation layer, business rule engine, workflow system, communications layer, imaging capabilities, and business intelligence tools.

****These technologies are being used to build more efficient electronic loan delivery systems, compliance engines, product and pricing engines, integration services and data services to support business intelligence gathering.

****Stay Competitive

****For vendors and lenders to remain competitive, all loan origination systems will need to be redesigned and upgraded to take advantage of the many benefits that the newer software architectures provide.

****And it’s not just the applications that need to be upgraded, the data base schemas must follow suit. The schemas were developed many years ago and as those schemas have been modified over the years to accommodate changes to MISMO formats, GSE interfaces and regulatory requirements, they have become inefficient. Even if they started out as a well normalized data model, over time they have lost many of the benefits of normalization.

****Real Change

****Some vendors have taken small steps by putting new User Interfaces on top of old technology. This face lift does not provide the benefits of the new development and runtime technologies; it’s merely a cosmetic improvement that will quickly lose its luster. Only a few vendors have made the deep-pocket financial commitment to redesign their products in the new technologies build a new data schema.
****There are four important areas that lenders using new technology LOS can make a significant difference over previous generations.

****>> Compliance – provides a systematic approach to compliance with the use of the rule engine and strong interfaces with third party compliance tools. 

****>> Loan Quality – simplifies and promotes the implementation of processes and services that improve loan quality through the use of the rules engine to enforce policies, identify potential risks and problems, and via the use of integration services to validate data integrity with independent third party data. 

****>> Task Automation – accomplished by automating duties/steps through the use of the workflow system in conjunction with the rules engine and imaging center to reduce costs by the use of less employee labor while also improving quality. 

****>> Business Intelligence (BI) – supports business decisions and provides constant feedback to monitor performance all the way down to the individual performing tasks.

****The first three difference makers are fairly obvious and success is directly related to managements’ ability to get the best use out of these tools. The fourth, the use of Business Intelligence tools, is less obvious and requires more creativity. 

****BI involves determining what data is important and how to analyze that data to learn more about the business. This leads to the discovery of new opportunities in all areas of the business enterprise. BI allows a business to enhance visibility of organizational strategy and align actions with that strategy.

****BI is an enterprise wide system that makes use of timely data from not just the LOS but other important systems such as accounting, servicing, and secondary marketing. The data can be organized to provide measurements of performance against defined benchmarks. It can be used to understand what factors are driving performance in many areas – sales, customer interaction, third party vendor performance, staffing requirements, operating costs and many more. BI provides personalized and interactive dashboards that can improve business performance at all levels of a company.

****Take BI Further

****Dashboards allow users to track key performance indicators, assign goals, and collaborate and share knowledge across the business. Complex data can be communicated effectively through a visual presentation that users can understand more easily than looking at reports. Dashboards also let users drill into the visual data to better understand what the dashboard is illustrating.

****What does all this new technology really mean for the lending industry? It means lenders will be better equipped to compete effectively in a market that is becoming increasingly complex, with more and more risks.

****The Way Forward

Lenders will improve their ability to compete with companies that have greater resources by being better informed about their business and customers. They will gain a better understanding of where process improvements can be made that will improve bottom lines. They will understand what is working and not working for their customers. 

****And lastly, risks can be identified sooner and mitigated easier. Proper use of these new technologies is a difference maker.

****ABOUT THE AUTHOR: Lester Dominick founded MortgageFlex Systems, Inc. in 1980 as a consulting firm to specialize in the mortgage banking industry. He has served as President and Chief Product Architect since inception. Dominick’s initial work at MortgageFlex Systems focused on systems evaluation, systems design and strategic data processing planning for commercial banks, savings institutions and mortgage companies. He quickly identified the need for lower cost solutions for mortgage loan origination, and LoanQuest, the first microcomputer based loan origination system, was introduced in 1984.



Progress In Lending

The Place For Thought Leaders And Visionaries

Magazine Cover Story

*Trend Setting

**Executive Interview**

***Mark Phlieger was among the first to evangelize on behalf of Web-based computing when he launched Avista Solutions. Now his thinking has gone mainstream. The trendsetting company celebrates its 10th anniversary. Avista celebrated other milestones and added a record 37 new customers in 2010, comprising 20 community banks, totaling $12 billion in assets, 10 credit unions and seven independent mortgage bankers. On March 25, 2011 there were 63,000 active B2B user accounts across Avista’s customer base.

****Other milestones include Avista relocating its corporate headquarters to Charleston, South Carolina in July 2010, a city that Phlieger said offers much support for the technology industry and cultivates high quality talent. Since signing on its first customer in 2001, Avista Solutions has: processed more than 100,000 loan applications in one month, reached a 28-day implementation time record. Mark Phlieger talked to us about what happens next now that the Web has gone mainstream.

****Q: As we see more institutions with depositories like community banks and credit unions enter the mortgage space, are you noticing that the bulk of your new clients are these types of institutions?

****MARK PHLIEGER: Yes, absolutely. We signed five banks this month. The market has shifted to depositories doing lending. What we’re seeing is mortgage bankers combining with these depositories. Also, it’s important to remember that banks are heavily audited, so when we talk about the differences between a bank and a mortgage banker, the banks are heavily accustomed to regulation. That is not an insult to the mortgage banker, it’s just that the banks are more used to being under regulatory scrutiny.

In terms of the sales cycle, they are longer these days. How long? Credit unions have the longest cycle, banks are in the middle and the mortgage banker is the shortest. We love dealing with community banks and credit unions.

****Q: Recently the MBA revised down its origination volume projection for next year. Originations are expected to be at their lowest point in 15 years. How do lenders and vendors survive this market?

****MARK PHLIEGER: Less volume means that we have to sign more customers. We are signing four or five a month, but hope to move that up to seven or eight as volume falls. Right now our largest customer is only 4% of our revenue. Our goal is to have a lot of customers in the small and mistier market.

There’s a general attitude that there is rapid change going on that we have to deal with. Banks know that they have to generate fee income to make up for other revenue that they’re losing, which is driving them into the mortgage market. They also don’t want to invest in legacy technology where they have to invest in a heavy IT staff, servers, Citrix, etc. They want to plug and play. They want to go out and find their people and just turn on the technology. We’ve grown a lot in this down market because of our cloud-based model. They also like the all-in-one solution. They don’t want to deal with 10 different solutions.

****Q: Avista celebrated its 10th anniversary this year. How has the mortgage industry changed in 10 years?

****MARK PHLIEGER: I had more hair and I weighed a lot less when we started Avista. Honestly, it used to be more go-go. It was all about volume, but now it’s about quality and compliance. It’s changed a good bit. There is a lot of opportunity for vendors that are interested in innovation and offering a top-quality tool. You want leading-edge technology so you are where the client wants to go. These days we talk about mobile and cloud-based solutions. Your technology has to solve the problems of your client. For technology like that, I think there will always be opportunity.

****Q: Avista was among the first, if not the first, company to come out with a completely Web-based solution. Now it seems like the market is where you were 10 years ago. How does that feel?

****MARK PHLIEGER: It’s nice to see. We were cloud-based before cloud-based was cool. We’ve been Web-based on Day One. Over the years it has gotten easier with Google and Amazon setting the bar for cloud-based products. We don’t have to evangelize as much. On the downside, there is more competition, but that’s ok because mortgage bankers are going to pick the product that best fits their needs. They want anytime, anywhere access. Just like we made the transition to everything Web, the next transition is to everything mobile. The reality is that I read and consume all my information on my iPad. That’s where we’re going next.

****Q: What does it mean to be cloud based?

****MARK PHLIEGER: Simply put, it’s about delivery as a service instead of selling a product. Think about it this way, you don’t care where the power plant is as long as you plug in your iPhone and it gets charged. We handle infrastructure, platform, etc. Once you sign with us we take you through implementation and set everything up for the client instead of giving them a box and saying: Here you go. It’s a different model. We charge based on the closed loan instead of by the license. When the model is more like a lease instead of a license, there is an incentive for everyone to work together to make the business a success. You have to care.

****Q: There has been a lot of consolidation in the LOS space and that is likely to continue. Most recently we saw Ellie Mae acquire DataTrac. What do you think about LOS consolidation?

****MARK PHLIEGER: This was predicted and it will continue. The players that ran a desktop or client-server model will get consumed. This acquisition validates the cloud model. Speaking of Ellie Mae, you see in their quarterly reports that most of their revenue is coming from cloud-based products.

I believe there is a lot of opportunity to be independent and have a leading-edge platform. Avista is end-to-end and we’ve built everything. So we can compete well with any other LOS. You need a solid infrastructure to support banks and credit unions. You can also be more nimble when you’re independent.

****Q: Avista also made headlines with its FHA Connection link earlier this year. How is that going?

****MARK PHLIEGER: We’ve always had clients that were heavy in FHA. We wanted to build a piece so that lenders doing FHA didn’t have to leave the platform. We’re committed to FHA and customers told us that this was important. FHA share remains substantial so we need to do everything we can to make it easier for our clients to originate an FHA loan. We’ve had a great response. We also enjoy working with FHA. FHA is very professional.

****Q: Continuing to talk about integrations, last year you did integrations with Kroll, Wolters Kluwer and Fannie Mae’s EarlyCheck. What is your integration strategy?

****MARK PHLIEGER: It’s based on what is required from a regulatory or delivery point of view. We also look to where we can get efficiency for customers. Lastly, it’s based on customer feedback. They tell us what companies they like to do business with. We put all that on the roadmap and partner with those companies. We will be live with UCDP within a month. It’s important to make sure that customers have what they need. Integrations are also almost done with Genworth and LogicEase from ComplianceEase. You touched on Wolters Kluwer. We were the first end-to-end product to offer their Expere product. You’ll see more closing doc integrations.

****Q: You talked about signing a record number of new clients last year. How is this year shaping up?

****MARK PHLIEGER: It’s solid. We will best last year in terms of the total overall number of customers signed up and the total value of the contracts signed this year is larger as compared to last year. It is competitive, but we’re seeing opportunity. It’s important to understand what banks and credit unions have to do from a compliance standpoint. It’s intense because they will make sure the vendor complies, but that’s ok for us. We do well up against due diligence scrutiny.

****Q: So, what does the next-generation LOS look like to you?

****MARK PHLIEGER: It’s about more access. People may be coming in from desktops, laptops, tablets, etc. In my opinion, the system also needs to be end-to-end and all-in-one. There is a focus on data quality. You need a common database and consistent process flow. It also has to be quick. The services also have to be baked in like credit, flood, compliance, fraud checks. Everything has to be based on Web services and MISMO XML to get that efficiency. We are a big MISMO supporter. It has been huge for us to reuse code to connect to more services. It’s about technology and customer service coming together. You also need 24/7 access, redundant data centers and thinking through the whole mortgage model.

****Q: How would you define the state of innovation in the mortgage space today?

****MARK PHLIEGER: I like change, but across the industry I’m not sure that’s the case. If the vendor wants to be relevant you have to innovate to solve real business problems. You also need to have an A team to go in and consult with customers. In a transactional model you want to help your clients adopt the technology. You have to go into every client shop to make sure that they are using every feature. You can’t rest on your laurels. In a cloud model we’re not shipping disks so we can roll out new features instantaneously, but we have to educate our clients about all that’s possible. In this market, that’s a big deal.


****Mark Phlieger thinks:

****1. You will continue to see expansion in vendors providing a cloud-based, all-in-one model.

****2. Mobile applications will continue to explode. People want information anywhere, anytime.

****3. Compliance and data quality will continue to be a focus, as it should, in mortgage lending going forward.

****ABOUT MAK PHLIEGER: Mark Phlieger is president and CEO of Avista Solutions, the Charleston, South Carolina- based creator of all-channel, Web-based loan origination systems. Co-founding the company in 2001, Mark has led Avista since its inception and has an impressive record of achievement in pioneering and development in the mortgage technology space. Mark was a team member on the Fannie Mae project that developed the groundbreaking technologies of Desktop Underwriter and Desktop Originator and later became responsible for their implementation and adoption as the industry standard among Fannie Mae lenders.



Progress In Lending

The Place For Thought Leaders And Visionaries

Powering Today’s Lenders: Loan Quality, Your LOS Could Be The Difference

*Loan Quality: Your LOS Could Be The Difference*
**By Daniel Liggett**

***In today’s market, quality and compliance are major concerns for lenders. They need to comply with a flood of new regulations, avoid potential fines and minimize buyback risk while ensuring loan quality. Lenders understand that investors will not purchase loans that do not meet their strict quality requirements. Lenders are facing these challenges with fewer staff and in an extremely competitive marketplace.

****Loan officers are struggling with the speed and frequency at which these rules and regulations are changing and diligently looking for guidance on how to implement effective solutions that address these concerns. They are looking for automation that addresses investor loan quality requirements and the flood of new rules and regulations.

****Want better loans? Then start with your LOS. The typical system of record for the majority of your loan data is your LOS. To assure investors that your loans are of high quality and saleable, lenders must look for ways to improve the loan process within their LOS. Lenders need to accept that bad data = bad loans = buybacks = loss of profit. Inefficiencies within your lending process cause errors, and increase costs.

****To stay competitive in today’s market, lenders can no longer afford to deal with inefficient and outdated LOS technology. The stakes are simply too high. Regulatory penalties and costly buybacks will significantly cut into profits and overall sustainability of the lending organization.

****A powerful LOS, especially one that delivers automated data validation, can improve loan quality. These systems can provide data edit checks and hard stops within the system to prevent bad data from being introduced into the loan process. Advanced business rules can address and enforce regulatory changes and new investor guidelines, while streamlining the lending process to improve loan quality.

****In addition, tight integration of the LOS with other key third party service providers is critical in improving data and loan quality. Two-way auto data integration avoids rekeying of information, eliminates omission errors and reduces the time and cost of data entry mistakes. Lenders simply cannot accept simple interfaces that do not address or eliminate these challenges.

****If you want to improve loan quality, avoid costly fines and minimize buyback risk then one of the first places you need to look is your LOS. Advanced LOS offerings that utilize the latest technology solutions and also constantly monitor regulatory changes can deliver the type of solution that you need.

****Loan quality can no longer be wishful thinking if you hope to prosper in the lending environment of the future.

Daniel Liggett serves as Director of Client Services for Associated Software Consultants’ PowerLender Loan Origination & Processing System. He has more than 20 years experience in mortgage lending and loan automation systems. Danny oversees the configuration, training, support and project management efforts for loan origination and secondary marketing at ASC and serves as a development and marketing advisor.

Mortgage Builder

Mortgage Builder has been providing industry leading loan origination solutions to credit unions, CUSOS, community banks, mortgage bankers and other financial institutions since 1998.  Mortgage Builder is an end-to-end, “everything’s integrated” lending solution for retail, correspondent and wholesale loan production that automates origination, closing, post-closing, delivery, tracking and reporting functions.  Essential enhancements like pricing and product eligibility, electronic loan delivery and electronic document management functionality are built-in and available on demand, while complaint loan documents are provided at no additional cost.  Mortgage Builder offers over 70 interfaces including Credit, MI, Flood, AUS, Compliance, Fraud, and FHA Connection.  Investment options include purchase, ASP and SaaS.  Mortgage Builder has been named by Mortgage Technology Magazine as one of the industry’s Top 50 Service Providers for the fifth consecutive year, and was the winner of the magazine’s prestigious Help Desk Award for outstanding customer service and the industry’s best technical support. Learn more about Mortgage Builder HERE.

Progress In Lending

The Place For Thought Leaders And Visionaries