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Vendor Launches New Tool To Enhance Customer Retention And Risk Mitigation

LRES, a national residential and commercial real estate services company providing valuations, REO asset management, HOA and technology solutions for the mortgage and real estate industry, has launched a complete lien alert solution to enable servicers to continuously stay informed with the latest updates on their loan inventory.

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LRES’ lien solution offers the choice between 10 lien activity alerts that flag servicers with any changes to their loan portfolio which may impact loan or borrower status. The 10 alerts available include information on ARM resets, tax delinquency, bankruptcy notifications, ownership changes, lien status changes, value changes, foreclosure/default activity, involuntary liens and judgments, new recorded loans and MLS listings.

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LRES collaborates with multiple data providers to aggregate and mine data down to the county level to extract the latest property- and consumer-related information across the servicer’s portfolio. This information can be used by servicers as a customer retention tool to trigger any opportunities to re-engage with their borrowers depending on industry changes that would positively influence their specific situation, such as refinancing for better rates or representing them again when they are ready to finance a new property. It can also be used as a risk mitigation tool to arm servicers with the information needed to follow proper protocols during complex situations such as bankruptcies, foreclosures, etc.

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“Our lien alert solution provides servicers with instant access to relevant lien activity on their loan portfolios so they can keep a closer eye on their inventory and react to any changes or updates accordingly,” said Roger Beane, CEO of LRES.

About The Author

Tony Garritano

Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

New Integration Seeks To Stop Fraud And Enhance Risk Mitigation

PathSoftware, a loan origination software (LOS) from CalyxSoftware, has integrated with First American Mortgage Solutions’ FraudGuard, a data-driven decision-support tool that increases the speed and accuracy of application reviews to help mitigate risk and improve loan quality. The tool leverages advanced analytics, reporting, defect trending and audit trails, drawing on public, private and proprietary data sources garnered from over 28 million reviewed loans.

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The DirectConnect integration enables PathSoftware users to seamlessly access FraudGuard without having to leave the LOS and run automated decision support services that provide critical data insights. This helps residential lenders, including credit unions, streamline operations and become more efficient through process and workflow automation, data aggregation and risk analysis. In addition, it gives lenders the confidence that they are originating compliant loans, which in turn allows them to provide homebuyers with a quicker loan approval and a better consumer experience.

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“We’re thrilled to be the first risk mitigation provider to integrate with the PathSoftware LOS,” said Kevin Wall, President of First American Mortgage Solutions. “FraudGuard is designed to improve loan quality, and the more we can do to give lenders the convenience and confidence to quickly produce higher quality loans, the better the experience and outcome for everyone, including consumers.”

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“In today’s highly regulated mortgage environment, lenders need to prove they’re originating loans to the highest quality standards,” said Bob Dougherty, Vice President of Business Development at PathSoftware. “Our integration with First American Mortgage Solutions’ FraudGuard will help lenders identify potential fraud risk in mortgage applications, giving them the confidence that they’re complying with regulations.”

Talking Industry Advancement

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Specialized Data Systems is a software development company that provides lending and risk management solutions to banks and credit unions. The company’s mission is to provide flexible and scalable software solutions to help financial institutions improve efficiency, maintain compliance, and stay current with the most up to date technology. The company’s products are classified as “remote” to emphasize their web-based accessibility, which are housed on the company’s secure servers. We talked to Marc Riccio, the company’s President, about the future of Specialized Data and the mortgage industry as a whole.

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Q: How was the name “Specialized Data Systems” created?

MARC RICCIO: In 1988, I stopped at a restaurant where the only food they sold were hotdogs; no burgers, no fries– just hotdogs. Customers were waiting in line out the door. It made me think: “Now this restaurant gets it…they specialize in one thing and they do it exceptionally well.”

Later that same year I started my own company focusing on that same philosophy. My purpose was to represent software companies that specialized in ONE area and to do it well. I created Specialized Data Systems to be an independent sales organization that represented small software companies that specialized in their space.

Originally, I was one of the first companies to sell a “rules-based” loan origination software, optical disk software and eventually a web-based loan application software. As a result, I have developed a reputation of promoting companies that provide innovative and cutting edge software.

Since that time, we have evolved into an integrator and software development company providing a “rules-based” loan origination software and risk management software. We have since become specialists in the loan and risk management software industry.

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By concentrating on these specific financial applications, we help mortgage companies, banks, and credit unions address both lending risk and operational risk and achieve our goal of effectively providing specialized data systems.

Q: What have been some of the biggest challenges since founding this company in 1989?

MARC RICCIO: The biggest challenge with providing banking software is keeping abreast of regulatory changes and providing timely updates. This requires a commitment of resources and expertise to ensure that we are fully prepared to provide complete and reputable software.

When TILA RESPA Integrated Disclosure requirements were released, we made the executive business decision to support the creation and generation of the Loan Estimate and Closing Disclosure documents head on, independent of a forms provider. This decision allowed us to become experts in the “Know Before You Owe” rule. We now have people in-house capable of citing the regulation, which provides us with a competitive advantage over other loan origination providers.

In a recent correspondence from a client, we learned that their auditor complimented their TRID implementation, calling theirs the cleanest exam they had completed since the introduction of the regulation.

Another challenge is the intensive process third party providers must go through in order to be approved by financial institutions. We recognize the complexity and time involved with implementing new vendors and maintaining existing vendor documentation. The approval process no longer solely relies on providing a contract and list of references; vendors must now provide everything from financials, SOC audit reports, business continuity plans, to security policies and beyond.

We took this opportunity to create a vendor management system designed to easily maintain and track all individual third party providers.

Q: What are the advantages of offering “rules based” loan origination software?

MARC RICCIO: “Rules-based” loan origination software, sometimes referred to as “lending rules” software, is the engine that supports a lender’s unique lending policies and workflow process. If the loan origination system is designed properly, the software engine allows lenders who don’t have programming experience to add or modify “lending-rules” without affecting the underlying code.

The key to delivering an effective “lending rules” based LOS platform is the rules are developed and maintained separately from its underlying codebase. Using this approach enables vendors to always preserve client-specific customization and protects their investment when customizing the loan origination system.

“Lending rules” can be different from one lender to another, and this allows each lender to have their own unique loan types, data field definitions, screens, tables, forms, reports, work queues and workflow process. A completely customized solution is designed to be scalable, which allows the system to grow with your institution as you expand your business model.

For example, as loan volume increases it becomes more and more difficult to manage your pipeline. By adding work ques within the lending platform, specific departmental roles can be broken down and more closely managed to ensure files are being processed as quickly as possible throughout the pipeline. RemoteLender allows the ability to customize these workques to accomplish this goal.

Q: A current survey conducted by Questsoft Corporation has revealed 20 percent of lenders consider switching loan origination software every year. Do you find this to be a high percentage based on your client experience?

MARC RICCIO: Based on our current pipeline and past inquiries, I find this statistic to be quite realistic. We find many of our new prospects in need of switching platforms due to the institution outgrowing their current system and looking for a more sophisticated and customizable platform capable of supporting mortgage, consumer and commercial loan types. We have been able to convert several clients from their original solutions to RemoteLender.

Fortunately, at Specialized Data Systems we find we have an extremely low client turnover. We are lucky to have a loyal client base, many of whom have been with us for over twenty years. We owe this loyalty to our “rules-based” technology, which allows us to quickly make adjustments in order to support new lending requirements including regulatory changes, competitive pressures, and changing workflow. A common sentiment we hear from our clients is that the only limitation of RemoteLender is their own imagination.

Q: What are the biggest challenges of implementing new technology?

MARC RICCIO: Delivering customized lending solutions definitely brings new challenges in regards to implementation of technology. Specifically, in regards to our RemoteLender Loan Origination System, one of the most challenging aspects is obtaining and understanding the lending requirements that are provided to us from the clients.

When I introduce RemoteLender to potential clients, I always tell them “the good news is, we can customize the lending rules to meet your specific lending requirements. However, the bad news is we can customize the lending rules”. I always seem to get a chuckle from the client, because they understand that it is very easy for “scope creep” to kick in.

“Scope creep” is when a project grows beyond its originally anticipated size. Once this process starts, it can be very difficult to recover. Scope creep may cause delays in meeting timeframes, changes in functionality priorities, and in some instances can even affect the budget.

Consequently, it is essential for us to have a solid understanding of what the client wants to achieve. You can’t be afraid to tell the client if they continue to add or change requirements, the schedule will be impacted and the cost may increase. It is imperative to define requirements and obtain an agreement functional to both parties. Once this is achieved, it is then our responsibility to stay on course and deliver on time and on budget.

In regards to RemoteComply, we have found that the most challenging aspect during implementation is managing customer expectations and client training. Both require a vast amount of time and resources on both our side and the client side. The client must be prepared to invest time to fully implement the system without rushing the process.

Project management is important to make sure business distractions do not interfere. Timeframes must be considered at all times and adjusted per the scope of the project. We have seen everything from change in staff, management change, internal personnel disagreements, auditors, and other projects create bumps in the road and create large obstacles. The most important piece of advice I can provide for implementation is always manage your time effectively and efficiently, no matter the situation.

Q: In addition to your loan origination software, you also mentioned your operational risk management suite known as RemoteComply. How does RemoteComply benefit the mortgage industry?

MARC RICCIO: In general, operational risk management affects all companies in the financial industry, not just banks and credit unions. Operational risk is an increasingly popular topic in today’s financial industry, and continues to grow. Operational risk management covers a span of processes including ways to identify, mitigate, and control risk associated with operating tasks. Traditionally, institutions would rely on manual processes to monitor their operational risk but with the growing concern with managing third parties and cybersecurity threats, more and more regulatory requirements are forcing institutions into re-evaluating their current processes and systems.

RemoteComply is our software suite which allows mortgage companies and all financial institutions to centralize operational risk management tasks onto one platform. The suite consists of four systems including vendor management, incident response, disaster recovery, and alert notification. The individual systems within the suite are flexible and scalable, allowing institutions to grow with the system. This eliminates the need to ever add on additional modules or purchase a different system. The suite provides other benefits including the ability to maintain compliance while only having to vet one vendor, reducing the amount of resources needed to manage all processes, and ultimately saving valuable time and money.

Q: What are the advantages of providing business continuity planning, vendor management, incident response, and alert notification on one platform?

MARC RICCIO: We have discovered many major issues in the financial industry due to institutions maintaining a narrow scope on operational risk management programs, resulting in miscommunication and gaps in the process. Instead of consolidating all operational risk management tasks and looking at the big picture, the different areas of risk are delegated amongst a large span of people. Because of this, people don’t communicate and products don’t communicate with each other which leads each individual to rarely maintain a complete focus on operational risk management tasks or they only focus on a small aspect of the larger picture.

Another issue in the financial industry is that operational risk management is often over-looked if the institution isn’t under an auditor’s microscope. Their approach to operational risk management is reactive and defensive, rather than proactive and offensive to auditors and regulations. They look for systems after it is too late, and they don’t have the resources to devote someone entirely to managing all areas of risk. This leads to panic and an impulse purchase of one system covering a small part of the bigger problem. The time and money is devoted into the system and then never used to its full capabilities.

Having business continuity, vendor management, alert notification, and incident response under the same roof allows the financial industry to easily manage all areas of operational risk management on one platform. Instead of spreading the job tasks across departments, the suite allows complete communication throughout the risk management process. The suite is designed for institutions to easily follow best practices and maintain complete compliance in one system. It eliminates the need to delegate different job tasks based on each area of operational risk management which inevitably saves time and resources.

Q: Where do you see Specialized Data Systems within the next five years?

MARC RICCIO: My goal is to leave my legacy within the financial services industry and evolve SDS into a major national technology provider for lending and operational risk management. This company has come a long way from the spare bedroom of my condo to a 5,000 square foot office with a state of the art training space. I have confidence in my staff of mortgage and banking professionals to continually grow this company. Today we have recognition primarily in the New England and east coast areas while in the near future I would like to expand the reach regionally and eventually even nationally. I will continue to focus my efforts on growing the company and succeeding at what we do best, which is providing excellent products and services within a specialized niche market.

Insider Profile

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.

Industry Predictions

Marc Riccio thinks:

  1. As the financial industry is flooded with new operational risk rules and regulations, intuitions will need to switch to automated solutions to adequately mitigate all areas of operational risk.
  2. In order to properly respond to the challenges of new rules and regulations lenders will need to invest in a more robust loan origination system.
  3. With the growing overlap between business continuity, vendor management, and cyber security risk regulations, financial institutions should consider centralizing all operational risk systems onto one integrated platform.

Services Must Adapt Or Risk Extinction

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The number of homes in some stage of foreclosure and the number of seriously delinquent mortgages continued to decline in May, falling to the lowest level since October 2007, according to the latest data from CoreLogic.

CoreLogic’s May 2016 National Foreclosure Report shows the national foreclosure inventory, which is the total number of homes at some stage of the foreclosure process and competed foreclosures, hovers around 390,000 homes.

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In April, the national foreclosure inventory was roughly 406,000 homes, and in March, that figure was 427,000 homes. According to CoreLogic’s report, May’s foreclosure inventory hit the lowest level in nearly nine years.

CoreLogic’s report also showed that in May, the foreclosure inventory declined by 24.5% and completed foreclosures declined by 6.9% compared with May 2015.

The number of completed foreclosures nationwide decreased year after year from 41,000 in May 2015 to 38,000 in May 2016, which represents a decline of 67.9% from the peak of 117,813 in September 2010.

CoreLogic’s report also showed the sustained improvement in the number of mortgages in serious delinquency, defined as loans that are 90 days or more past due, and loans in foreclosure or Real Estate Owned.

According to CoreLogic’s report, the number of mortgages in serious delinquency fell by 21.6% from May 2015 to May 2016, with 1.1 million mortgages, or 2.8% of all mortgages, in this category.

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The May 2016 serious delinquency rate is also the lowest in nearly nine years, reaching the lowest level since October 2007.

Additionally, CoreLogic’s report showed, on a month-by-month basis, completed foreclosures increased by 5.5% to 38,000 in May 2016 from the 36,000 reported for April 2016.

“Delinquency and foreclosure rates continue to drop as we experience the benefits of a combination of tight underwriting, job and income growth and a steady rise in home prices,” said Anand Nallathambi, president and CEO of CoreLogic.

“We expect these factors to remain in place for the remainder of this year and for delinquency and foreclosure rates to decline even further,” Nallathambi said.

Magnifying the challenge, loans serviced on behalf of the GSEs, the FHA, and VA have extensive guidelines, fee schedules, and ever-changing regulatory requirements servicers must adhere to when protecting and preserving properties.

The guidelines, however, do not include provisions to address all of the potential discrepancies that can result in local and municipal code violations. It is impossible for the guidelines to take into account all of these local requirements.

And yet, with the increase in oversight from the CFPB, and OCC, servicers are required to compliantly adhere to all local laws.

So what does this mean for servicers and the default management and field services companies that serve them?

This clearly demonstrates the immediate need to adapt to these rapidly changing market conditions in order to survive. Ed Delgado, President and CEO of the Five Star Institute, a provider of education and training programs for the mortgage industry, told Wall Street Journal writer Joe Light that companies which are slow to adapt to the changing real estate environment may be in trouble.

“There’s a risk of extinction for companies that are either slow to realize the change in the market or simply don’t adapt. You can expect to see both contraction and extinction of some of these organizations,” Delgado said.

Companies that avoid extinction must focus their attention in the following key areas: organizational health, ability to change and adapt, problem solving, leveraging expertise, embracing technology, and the ability to partner with one another to move the industry forward.

Organizational Health

Let’s begin with organizational health. In a book by Patrick Lencioni titled “The Advantage”, Lencioni explains why organizational health trumps everything else in business.

Lencioni states, “The single greatest advantage any company can achieve is organizational health. Yet, it is ignored by most leaders even though it is simple, free, and available to anyone who wants it.” He adds, “the health of an organization provides the context for strategy, finance, marketing, technology and everything else that happens within it, which is why it is the single greatest factor determining an organization’s success.

“Once organizational health is properly understood and placed in the right context, it will surpass all other disciplines in business as the greatest opportunity for improvement and competitive advantage.”

“A good way to recognize health is to look for the signs that indicate an organization has it. These include minimal politics and confusion, high degrees of morale and productivity, and very low turnover among good employees.”

“An organization that is healthy will inevitably get smarter over time. That’s because people in a healthy organization, beginning with the leaders, learn from one another, identify critical issues, and recover quickly from mistakes. Without politics and confusion getting in their way, they cycle through problems and rally around solutions much faster than their dysfunctional and political rivals do.”

Isn’t that what we are forced to do in these challenging market conditions?

“The financial cost of having an unhealthy organization is undeniable: wasted resources and time, decreased productivity, increased employee turnover, and customer attrition. The money an organization loses as a result of these problems, and the money it has to spend to recover from them is staggering.” This is why organizational health is critical to servicers and the default management companies’ long-term survival.

“Turning an unhealthy company into a healthy one will not only create a massive competitive advantage and improved bottom line, it will also make a real difference in the lives of the people who work there.”

Organizational health doesn’t happen overnight, but there are four disciplines that need to be adhered to make the process work.

1.)Build A Cohesive Leadership Team

2.)Create Clarity

3.)Overcommunicate Clarity

4.)Reinforce Clarity

“When an organization’s leaders are cohesive, when they are unambiguously aligned around a common set of answers again and again and again, and when they put effective processes in place to reinforce those answers, they create an environment in which success is almost impossible to prevent,” States Lencioni.

Creating a healthy organization is the foundation that will allow servicers and default management companies to not only survive, but also thrive in today’s challenging market conditions.

Once the foundation is properly built, there are five attributes that will allow a healthy organization to leapfrog the competition and prosper. These are especially true for companies in the financial services industry dealing with constant change.

These include: adaptability, problem solving, leveraging expertise, embracing technology, and the ability to partner with one another to move the industry forward.

Adaptability

The one thing that is certain in today’s market is change. Organizations must be able to adapt and handle constantly changing market conditions, the influx of new rules and regulations, changing investor requirements, heighten scrutiny, new SLA’s and the list goes on and on. Therefore, adaptability is a vital attribute that organizations must exhibit moving forward.

Problem Solving

The status quo is no longer acceptable. Companies can’t continue to do things the way that they always have if they expect to survive. Today companies must be able to proactively analyze market trends, interpret the impact of changing regulations on their clients’ business and constantly solve potential problems before they arise.

Leverage Expertise

Servicing and default management companies that entered the market in the last 5-8 years have limited or no experience in dealing with a declining foreclosure market. To survive, it is critical for companies to leverage the expertise of companies that have the experience and knowledge needed to adapt to these changing market conditions.

Embrace Technology

Technology can be a great enabler, but companies must think outside the box on how to solve today’s most pressing challenges. With the influx of new rules and regulations, property preservation is not just about securing a lock or boarding up a window; it is about preserving the appearance of neighborhoods and maintaining homes as good as the house next door.

Servicers must adapt to this new environment by finding innovative ways to do the important work of protecting and maintaining assets.

Investors today demand transparency, the kind that results from a vast number of data points. To provide this degree of information, field service providers must deliver innovative technology solutions that ease the burden of the field service representative while delivering a robust data set to the investors. The days of a field servicer walking around with a clipboard and an outdated camera are long gone.

The speed at which servicers can get information from their property preservation company is a critical factor in quality control. Mobile technology significantly speeds up this process.

Strategic Partners

Servicers can’t be expected to carry this entire loan themselves. They need to leverage strategic partnerships with default management companies that can effectively help the servicers navigate these challenging market conditions. The partner must understand the importance of continuously monitoring compliance changes, industry changes, and business trends that may impact your organization.

Don’t risk extinction. The time to adapt is now.

About The Author

Nickie Badalamenti-Kalas

Nickie Badalamenti-Kalas is president at Five Brothers. She works directly with Five Brothers CEO, Joe Bada, to oversee the daily operations and long term strategic vision of Five Brothers. A dynamic entrepreneur, business leader, and skilled executive who brings leadership, insight, and new strategies that drive customer satisfaction, revenue growth, and profitability.

Industry Vet Named COO

Green River Capital LLC (GRC), a provider of REO asset management and loss mitigation services for mortgage servicers, investment firms and banking institutions, announced today that Katie Brewer has joined the company as chief operating officer. In this position, she will be responsible for managing all of GRC’s day-to-day operations and will report to Tim Reilly, president of GRC.

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Brewer has had more than a decade of experience in the default servicing industry. Most recently, she was vice president of Collateral Based Solutions at Ocwen Loan Servicing, where she led a team consisting of more than 350 associates across multiple sites in both the U.S. and India. Brewer began her career at GMAC ResCap, where she held various positions, starting as a loss mitigation specialist and eventually becoming vice president of liquidations.

“GRC was formed in 2003 to provide REO asset management services. With our expansion, REO today represents only a third of our growing business,” said Reilly. “Katie’s experience in loss mitigation, regulatory compliance, REO management and corporate strategizing will help us continue to expand and improve our offerings. I am excited to have her join our team as we evolve our company and drive toward future opportunities.”

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Salt Lake City, Utah-based Green River Capital (GRC) is a real estate company, providing a variety of REO asset management, valuation, collateral review and property management services. GRC also offers surveillance programs and supports investors’ single family rental strategies with pre- and post-acquisition services. GRC uses proprietary technology and a nationwide network of attorneys, brokers, appraisers, contractors and title professionals to deliver scalable, customized solutions. GRC is wholly owned by Clayton Holdings LLC, a subsidiary of Radian Group Inc. (NYSE: RDN).

Proactive Response To Change

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TME-RGudobbaThe upcoming August 1, 2015, deadline for the implementation of the Integrated Disclosures is a little over 4 months away. In January, I thought that this was the opportunity for the mortgage industry to embrace change, improve the process, and finally move toward a fully electronic loan. In February, I wrote that I believed that this development might turn out to be a missed opportunity. Why do I say that? I have a feeling that some are approaching this sea change as just another regulatory form update. They are missing the point.

Constant change is a business reality, and organizations must continually adapt to their environments to stay competitive or risk becoming obsolete. Nobody likes change. It can be disruptive. You become comfortable with the way things work. People believe that when they change they instantly become less competent, effective, and efficient. But change is inevitable. How you handle it depends on whether you look at it as a threat or an opportunity.

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If we look through history at the 1960 presidential election, for example, we see how important it is to embrace change. In that election the upstart young Senator from Massachusetts, John F. Kennedy, beat the seated Vice President, Richard Nixon. The key turning points of the campaign were the four Kennedy-Nixon debates; they were the first presidential debates ever and were televised nationally. Much has been made since on Nixon’s preparations, or lack thereof, for what Marshall McLuhan has called the “cool” media of television. Cool media requires users to fill in more missing information than “hot” media based on what they are able to interpret. In this case, Nixon continued campaigning until shortly before the start of the first debate. Despite a recent illness and hospitalization, the Vice President declined makeup. I don’t doubt that these decisions seemed logical, even shrewd to Nixon at the time. Onscreen, however, Nixon looked pale and tired, and in the cool medium of television, many viewers used that visual information to arrive at two conclusions: that Nixon was unprepared and weary, which in contrast made it easy to interpret his opponent as confident, relaxed, and forceful in comparison.

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Historians estimate that 70 million viewers watched the first debate. While Nixon made adjustments in the three subsequent televised debates (which included the decision to wear television makeup), there were approximately 20 million fewer viewers to appreciate the difference.

Why do I tell you this story? It shows how important it is not only to embrace change, but to embrace it as soon as possible. Nixon was not used to appearing on television, so he prepared as if he was running an old-school election operation, where making a few more campaign stops seemed like a better use of his time than televised debate preparation. In the end, we all know the result of that election.

So, how can you succeed in an environment of change? Well, it all boils down to the culture of your organization and how it manages change. A recent article by Eric Feigenbaum at Demand Media stated,Corporate cultures are very powerful things. Many businesses don’t even realize they have a culture because their management has never really thought about it—the attitudes and approaches were just shaped around the founders or core personalities in the business. Other companies’ managements take the time to sit down and strategize their culture in order to promote certain attitudes and values, such as having proactive employees.”

He goes on to say, “In order for employees to be proactive, they have to be empowered. Employees must feel they are trusted to do more, make decisions and take limited risks. The more people feel free to take action, the more likely they will do so. Managers should let their teams know they support an autonomous, empowered team. Cultures of empowerment are proactive cultures. By contrast, employees with very limited scopes and duties in a more bureaucratic or military-style culture tend to stay within their very specific duties and follow only clearly outlined procedures.”

Being proactive is taking initiative in anticipation of future events. Companies that are proactive are often trying to avoid a potential future threat or to capitalize on a potential future opportunity. Being reactive is when the company makes changes after some threat or opportunity has already occurred. Reacting to the past rather than anticipating the future is a very common strategy, or absence of strategy, that is sometimes referred to as fire-fighting. Of course, both proactive and reactive management styles can fail. But proactive management is preferable because success in business requires the willingness to take chances as well as the ability to manage risk appropriately.

The conceptual definition of risk involves change in mind, opinion, actions, places, etc. It involves choice and the uncertainty that choice entails. It concerns future events, both known and unknown, and the constraints of cost, schedule, and resource limitations.

As we continue this conversation we need to take a step back in time. Let’s identify a common problem in our industry and try to solve it using this train of thought. Let’s say the problem was a lost or misplaced original paper note. The solution was an electronic note replacing the paper note. It needed to look like the paper note, but have a data payload for hands-off processing. The challenge was to tie raw and unformatted data to the formatted presentation data that would be presented to the borrower. The concept of the Category 1 SMART Doc for the eNote was a gallant attempt. Its biggest accomplishment was to expose the industry to the concept of combining data and documents. MISMO V3 is a direct result of that effort.

This, in turn, led to the CFPB’s focus on the consumer and its work on the Loan Estimate and Closing Disclosure. The result is aesthetically pleasing documents that the consumer can read and understand, and more importantly, documents that can be compared easily.

Whether your organization is responsible for the solution for TILA/RSPA Integrated Disclosures (TRID), or you are relying on a third party to provide this solution to your organization, you have to ask these key questions.

  1. Is my organization proactive or reactive?
  2. How ingrained is the current culture?
  3. Are the leaders personally committed to the change?
  4. Who are all the critical stakeholders and what are their roles in the project?
  5. Does my organization have the capability and capacity to make the change?
  6. Will the change actually deliver the required documents?
  7. How is this change different, better, or more compelling than other propose changes?
  8. What is your Plan B if it comes to pass that Plan A doesn’t work?

In the end it doesn’t matter if you are building or buying a solution to this problem. The key is to be proactive and to embrace change. If you are using a third party’s solution, you need to know what that organization is doing and how that fits within your business. If you wait around, you’ll be the one left holding the bag. Similarly, if you are building something, you should be testing it now. The old saying goes: change is the only constant. In mortgage, that is so true. We all have to be ready to change on a dime these days. And in the end, how you react to change will make all the difference.

Next month we will tell you how MISMO should be part of your strategy.

About The Author

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Roger Gudobba

Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is an industry thought leader and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at rgudobba@compliancesystems.com.

Addressing Risk

Addressing risks identified as a threat to the achievement of the company’s goals is typically the responsibility of risk management. Options for minimizing or eliminating these risks include transferring the risk to another party (such as using MI or FHA insurance), avoiding the risk (electing not to offer certain products), reducing the likelihood of a threat occurring (such as using technology to calculate APRs), or even accepting some or all of a particular risk. Mortgage lenders most commonly utilize policies, operational processes and technology in the origination and servicing environments to minimize or eliminate risks associated with operations. These policies and processes are designed to minimize risks that will impact the efficiency, effectiveness and profitability of the company.

Finally management must maintain a strong control environment. A control environment is one in which there is a systemic approach by management to compare actual business performance to previously established standards and/or objectives to determine whether they are being met by the organization’s operational processes. Management must then determine if it is necessary to take any remedial action to see whether corrective actions including human and other corporate resources are required or are being used in the most effective and efficient way possible in achieving those objectives. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner. Examples of these controls are financial reporting, quality control and customer feedback.

The complexity of the management system dictates to a great extent, the number of individuals and separate functional units involved, but at the end of the day, executive management of the company should be knowledgeable about the goals of the company, the risks that can impact the ability to meet those goals and the control results which are telling them how well the company is achieving the goals and managing the risks.

Compliance Management System

So what does it mean to have a Compliance Management System? Do lenders have to have another management structure that focuses on nothing but regulatory compliance? Or does compliance in this sense mean conformance to all the company policies and procedures? If it does, does this mean lenders already have a compliance management system in place? There are several answers to these questions and several ways to establish that a lender is meeting this requirement.

First, management must have some type of methodology in place to provide governance, risk management and control of the organization. If this is not clearly defined and documented, it should be done. This documentation must show that management, or the management group, oversees how the organization is operating. While well established companies most likely have some approach to this, many times it is not formal nor the results of decisions documented. Management meetings should be held on a regular basis and the results recorded.

Within these meetings, issues concerning all areas of responsibility should be addressed. These may be organized around the stated goals and objectives of the company and include operational issues, risks to the organization, identification of the controls and the results of these monitoring functions.

Optional approaches

Determining the approach to take in meeting this CFPB requirement most likely depends on the size of the company as well as its complexity. If a lender chooses to incorporate the compliance function into an existing system, it must make sure that the current policy statements include all regulatory requirements. The corresponding processes must clearly show how these regulatory requirements are implemented within the organization. Finally, the control functions, specifically the quality control and if separate, the regulatory review function must be reporting on a regular basis. If they are to be used to meet the regulatory requirements, the report should include more than lists of issues of the overall findings of the review. The results should clearly identify the level of non-compliance while isolating contributing factors if warranted. In other words, it is not enough to say I looked at 10% of the loans and of that 10%, 8% had a problem with disclosures. More specific information is necessary if management is going to address this issue.   Finally, the management team minutes should reflect any decisions about how any unacceptable level of risk is going to be addressed. This issue should then be part of the management meeting discussions until it is resolved.

The management system should also include general regulatory issues, such as Fair Lending, which should be incorporated into the policy, risk and control discussions and updates for the management committee meetings.

If the company decides to implement a separate compliance management system, the same requirements apply. One thing that must be kept in mind is that this system must involve the same people that are involved in the other management system if it is going to be effective. All too often compliance groups involve only legal staff and control units. As a result, the issues identified in this meeting are minimized in the larger management meeting. This management group must also incorporate the governance, risk and control elements that are found in all management systems. The group’s meetings must be documented and issues resolved.

Where we stand today

Since the announcement of the requirement for a compliance management system, lenders have initiated various approaches. One of the most frequent is the development of a separate compliance group to manage all the new requirements. In many cases these groups are implemented at the urging of a consulting group that has been retained to assist companies. Unfortunately many of these have been delegated to “sub-committees” of the larger management committee and their output is no better than what was happening previously.

There are two main causes for this. The first is that the committee is most likely run by an attorney or someone in the organization more familiar with the requirements than the company’s policies and procedures. As a result they tend to focus on “How can I implement this requirement so that everybody does it.” And less on imbedding the requirement into the process. Many times there are no production people involved and the result is something that cannot be implemented.

Also, the control environment has not been updated to accurately determine the level of non-compliance risk. The same type of sampling and reviews are done that produce the same type of data leaving a gap in the level of information available to management. Take for example, Fair Lending. The HMDA data is reported once a year and is tested for accuracy and validity based on FFIEC standards. Once the report is generated, how many management systems include the requirement for the data to be analyzed against the data for other years. How many companies obtain the entire report when it is released and compare themselves to other lenders? Very few if any. As a result, these control findings are not effectively used to update policies and procedures to meet the compliance requirements. Furthermore, there is no evaluation of the entire operational system to determine if the Fair Lending Policy imbedded in the organization’s value system is actually working.

At the end of the day, despite the requirement for a Compliance Management System, the efforts to date have not met that objective. Only when we truly understand how a well-run management system can improve performance will we be focused on meeting the standards. The companies that take this seriously and makes the necessary changes in the functions required will be the ones who succeed and survive any future crises that come our way.

About The Author

[author_bio]

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.

Automate Away Lending Risk

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TME-Becky-BarbaraOne of the less frequently discussed requirements of the CFBP is that companies have in place a Compliance Management System. This has resulted in a lot of concern and confusion about what exactly they are requiring. Typically when discussions involve the term system, most often it is a discussion about technology. Yet it is commonly assumed that this is not a requirement to implement an entire new technology platform focused on meeting all the regulations. In fact, not all the regulations have been finalized. Therefore even though there is great concern about making sure the requirements are met, this requirement can’t be about technology. So what in fact is this requirement all about? Let’s break it down:

When it comes to understanding what the CFPB means when it requires a “management system” lenders must remember that the term system is far broader that just a technology platform. A system is a set of principles according to which something is done. In the business world it is the set of values and possibly a mission statement under which the business operates. Imbedded in this set of principles are the goals and objectives of the company. These typically revolve around the expected results of the company and generally focus on three sets of stakeholders. These include shareholders who are expecting a good return on their investment, customers who expect that the products and/or services promised will be produced and the members of the organization. Turning these principles into the expected results is the “system” under which the company operates.

While some business systems are relatively simplistic, most are very complex, having numerous functions operating together to produce the desired result. This complexity is addressed through operational functions such as marketing, production, financial management, risk management and regulatory compliance. In order to ensure that all functions are working in an effective manner, a coordinated monitoring and feedback system is put in place. Part of this system’s management responsibility is developing the goals and objectives for the organization. Flowing from these goals and objectives are the development of which products and/or services will be produced.

Designing the product/service that the company will produce is typically the responsibility of individuals with significant knowledge about the company’s goals and how such products/services are generated. In most manufacturing companies this is the work of the engineering team. In mortgage banking however, we look to credit policy and secondary marketing experts for this design work. Their work results in the specifications of what is going to be produced and is most frequently seen as policy statements and requirements.

Once the product and/or service policy has been designed, the operational units must produce the corresponding operational functions. For example, if the product policy statement contains requirements which include ensuring the integrity of the data, then the operational staff must incorporate a process to make this happen and document it through a procedure that is given to the operations staff to follow. An integral part of this development process is the identification, selection and implementation of the technology that will be used in conjunction with the production of the products.

In both of the systems involved in mortgage lending (production and servicing), there are numerous overlapping procedures that must also be incorporated into the final product. Operation management must ensure that these overlaps are clarified and consistent among all staff and are grounded in the organization’s policies and procedures. In other words, can management demonstrate how a policy is actually implemented in the procedures across all operational units used by the company? Among these overlapping functions are risk, accounting and regulatory compliance. Because of all these overlapping systems, mortgage lending and servicing is an extremely complex business and requires highly complex systems to make it work. It is also why a management system is an essential part of the business.

All business have some type of management system. They can be as simplistic as having one person deciding the goals of the business and then determining how those goals are to be met. This individual must also determine what risks the organization faces in meeting these objectives and how these risks will be addressed as well as monitor the output of the operational processes and direct any changes that are necessary to meet the goals and objectives. However in a business as complex as mortgage lending, it is impossible for one individual to accomplish this and most frequently there are several key members in the organization with specific responsibilities.

While not always recognized as a “system”, the interaction between these individuals is the leadership that successful companies require. If one of the functions within a leadership system overwhelms all other functions the result is typically an organization that fails to meet its overriding responsibilities for its shareholders, customers, regulators and/or employees.

Management systems have three basic responsibilities that, when effectively executed, assure that the founding principles are followed and goals and objectives met. These functions include governance, risk and control.

Governance refers to the system of structures, duties, and support by which corporations are directed and controlled. Governance provides the structure through which corporations set and pursue their objectives and monitor the actions, policies and decisions of the corporation. In other words, governance involves determining what the company will produce and putting in place all the elements that will ensure the production. This includes oversight of all the processes, people and technology and all facets of these operational requirements.

The second is risk management. Risk is commonly defined as the chance of something happening that will have an impact on the objectives of the company. Every organization contains numerous risks and a management system must have a means of identifying, evaluating and determining how these risks will be addressed. This includes ensuring that there are coordinated, delegated resources to minimize, monitor and control these risks. One such risk is, of course, complying with all regulatory requirements. This includes not just those related specifically to consumers, but comprehensive regulatory risks as well.

Finally management must maintain a strong control environment. A control environment is one in which there is a systemic approach by management to compare actual business performance to previously established standards and/or objectives to determine whether they are being met by the organization’s operational processes. Management must then determine if it is necessary to take any remedial action to see whether corrective actions including human and other corporate resources are required or are being used in the most effective and efficient way possible in achieving those objectives. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in a desired manner.

So what does it mean to have a Compliance Management System? Do lenders have to have another management structure that focuses on nothing but regulatory compliance? Or does compliance in this sense mean conformance to all the company policies and procedures? If it does, does this mean lenders already have a compliance management system in place? There are several answers to these questions and several ways to establish that a lender is meeting this requirement.

First, management must have some type of methodology in place to provide governance, risk management and control of the organization. If this is not clearly defined and documented, it should be done. This documentation must show that management, or the management group, oversees how the organization is operating. While well established companies most likely have some approach to this, many times it is not formal nor the results of decisions documented. Management meetings should be held on a regular basis and the results recorded.

Within these meetings, issues concerning all areas of responsibility should be addressed. These may be organized around the stated goals and objectives of the company and include operational issues, risks to the organization, identification of the controls and the results of these monitoring functions.

Determining the approach to take in meeting this CFPB requirement most likely depends on the size of the company as well as its complexity. If a lender chooses to incorporate the compliance function into an existing system, it must make sure that the current policy statements include all regulatory requirements. The corresponding processes must clearly show how these regulatory requirements are implemented within the organization. Finally, the control functions, specifically the quality control and if separate, the regulatory review function must be reporting on a regular basis. If they are to be used to meet the regulatory requirements, the report should include more than lists of issues of the overall findings of the review. The results should clearly identify the level of non-compliance while isolating contributing factors if warranted. In other words, it is not enough to say I looked at 10% of the loans and of that 10%, 8% had a problem with disclosures. More specific information is necessary if management is going to address this issue.   Finally, the management team minutes should reflect any decisions about how any unacceptable level of risk is going to be addressed. This issue should then be part of the management meeting discussions until it is resolved.

The management system should also include general regulatory issues, such as Fair Lending, which should be incorporated into the policy, risk and control discussions and updates for the management committee meetings.

If the company decides to implement a separate compliance management system, the same requirements apply. One thing that must be kept in mind is that this system must involve the same people that are involved in the other management system if it is going to be effective. All too often compliance groups involve only legal staff and control units. As a result, the issues identified in this meeting are minimized in the larger management meeting. This management group must also incorporate the governance, risk and control elements that are found in all management systems. The group’s meetings must be documented and issues resolved.

Since the announcement of the requirement for a compliance management system, lenders have initiated various approaches. One of the most frequent is the development of a separate compliance group to manage all the new requirements. In many cases these groups are implemented at the urging of a consulting group that has been retained to assist companies. Unfortunately many of these have been delegated to “sub-committees” of the larger management committee and their output is no better than what was happening previously.

There are two main causes for this. The first is that the committee is most likely run by an attorney or someone in the organization more familiar with the requirements than the company’s policies and procedures. As a result they tend to focus on “How can I implement this requirement so that everybody does it.” And less on imbedding the requirement into the process. Many times there are no production people involved and the result is something that cannot be implemented.

Also, the control environment has not been updated to accurately determine the level of non-compliance risk. The same type of sampling and reviews are done that produce the same type of data leaving a gap in the level of information available to management. Take for example, Fair Lending. The HMDA data is reported once a year and is tested for accuracy and validity based on FFIEC standards. Once the report is generated, how many management systems include the requirement for the data to be analyzed against the data for other years. How many companies obtain the entire report when it is released and compare themselves to other lenders? Very few if any. As a result, these control findings are not effectively used to update policies and procedures to meet the compliance requirements. Furthermore, there is no evaluation of the entire operational system to determine if the Fair Lending Policy imbedded in the organization’s value system is actually working.

At the end of the day, despite the requirement for a Compliance Management System, the efforts to date have not met that objective. Only when we truly understand how a well-run management system can improve performance will we be focused on meeting the standards. The companies that take this seriously and makes the necessary changes in the functions required will be the ones who succeed and survive any future crises that come our way.

About The Author

[author_bio]

Rebecca Walzak is a 32 year veteran and Industry Expert on Operational Risk Management and Organizational Control. She is a leader in developing Operational and Control automated assessments for lenders, rating agencies and investors. Walzak has expert knowledge in all areas of the mortgage industry including production, servicing and secondary.
Barbara Perino is a Certified Professional Co-Active Coach guiding her clients who are executive leaders and their staff. Barbara has been trained through The Coach Training Institute (CTI) located in San Rafael, CA. She completed a Coaching Certification Program through CTI and the International Coaching Federation (ICF). Prior to becoming a coach, Barbara was a 16-year veteran of the residential mortgage industry.

AVMs: What You Don’t Know Can Cost You

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TME-PHuffIgnorance is not bliss —especially when it comes to business and the bottom line. Yet day in and day out, lenders are operating in the dark and losing dollars in the process. Last month, I wrote about the most common misconceptions about AVMs, also known as automated valuation models, the most commonly used collateral evaluation tools. AVM are being used over one billion times each month, and I estimate that hundreds of millions of those billions of AVMs are being used by lenders and servicers in the mortgage industry. But even considering these gargantuan proportions, most mortgage folks are surprisingly unaware of how big an impact AVMs can have on their bottom lines.

This month I’m going to cover three of the most common ways AVMs are being used today. And for those of you concerned with your bottom lines, I’ll get into the concrete details about how lenders and servicers are saving — or wasting — thousands of dollars or more each month, simply by the way they approach AVM suitability.

Accuracy Matters

One of the biggest misconceptions about AVMs is that they are inaccurate. Last month, we revealed the fact that standard error rates of AVMs are actually lower than those of traditional appraisals. While my aim is not to rank one form of evaluation above another, it is to point out that AVMs can be quite reliable and highly appropriate for lower risk activities and transactions. I’d also like to remind you that there is no benefit to using an unreliable tool, not where data and decisions are concerned. Accuracy matters.

This is a key point. When financial decisions are being made based on a reported dollar value, businesses need to ensure that the evaluation tools being used are producing the most accurate value possible. While this may seem like common sense, this is not the general practice being exercised in the mortgage industry when it comes to AVMs. Hundreds of millions of times each year, lenders and servicers are running AVMs without much thought as to the accuracy of the reported figures, and this haphazard approach is likely costing them more than they imagine.

The following are three of the most common ways that AVMs are being used by lenders and servicers today:

1) Mortgage Pre-qualifications

A lot of smart lenders are using AVMs in the pre-qualification process. As they’re taking a quick, cursory look at borrowers, they’re also taking a quick review of a property, to see if a deal is worth pursuing. AVMs are well-suited for this review. It takes just minutes to run an AVM, and if the right one is used, the results can be surprisingly accurate. However, if the AVM is not accurate, lenders are likely wasting money and missing valuable opportunities.

If an AVM comes in significantly below the property’s actual current value, lenders are missing opportunities in loans that can’t be made. Let’s say your average gross profit per loan is $4,000; even one lost customer a month can amount to nearly $50,000 in missed opportunities per year. If, however, the value comes in too high, lenders can invest valuable man-hours taking a loan through the process until an appraisal reveals that the transaction won’t go. Even at a pay rate of $25 per hour, a processor spending a mere four hours on a loan that will never fund is costing the company $100 on lost labor.

This situation might be understandable if an AVM returns a value of $200,000 and an appraisal comes in at $194,000, and it’s just enough to kill the deal. In cases like these, hopefully the loan officer informs the borrower that the value is tight and may not come in as needed. If, on the other hand, the appraised value comes in at $186,000, and there was clearly no reason to even run a full appraisal, chances are, you’re going to have a very upset borrower on your hands. Incidentally, in case you’re wondering, yes, there is a way to make sure that you have significantly fewer of those $200,000/$186,000 scenarios. That is absolutely within a lender’s control.  I’ll get to the details of how in a moment.

The Cost of Losing Trust

Back to the $200,000/$186,00 situation. There’s a more significant, long-term financial issue at hand here. Borrowers traditionally cover the cost of the appraisal, which is roughly $350 for the average non-FHA loan. From what I hear, borrowers don’t take very kindly to paying fees for a loan that has no possibility of being funded. While this is important for any lender to remember, credit unions, being the member-driven organizations that they are, might want to be particularly attuned to this.

There have been numerous studies of the costs of losing trust, and consequently losing a customer who feels he or she has been wronged.  Anecdotal evidence shows that a disgruntled customer will tell between eight and 16 people, with 10 percent telling more than 20. When you factor in the ease of communication and the viral nature of social media, the number increases exponentially. Even if they tell no one, 9 out of 10 unhappy customers will never purchase goods and services from you again. Not a good consequence when, according to Gartner Research, the cost of acquiring a customer is five times the rate of retaining existing ones.

2) Home Equity Lending

There are two ways that lenders use AVMs with home equity lending. The first is to value the property for a home equity loan or line of credit. The second is to evaluate the line after it has been issued to determine whether or not the property has enough value to support it. In other words, lenders often determine whether or not to increase, decrease or shut down a line of credit based on the borrower’s home equity.

Home equity lending requires that an evaluation must include a physical inspection of the subject property, but it does not require a full appraisal, so a lot of lenders opt to use AVMs in conjunction with a property inspection report. As with mortgage pre-qualifications, lenders can lose home equity business when they use AVMs that erroneously under-report the true value of a property. That can add up to losing literally thousands of dollars each year over the course of several years, since home equity lending brings a steady income stream for lenders. With variable rates that range from three or four percent to 11 or more percent, and a loan amount of $100,000, the lender stands to lose $2,000 to $10,000 or more each year, over the course of years, for every lost customer. Lose one customer a month and that number can jump up to $100,000 or more each year.

If the lender is using AVMs to evaluate its home equity portfolio, and that AVM erroneously over-values properties, that lender is at risk of losing the additional income generated by higher interest rates charged to borrowers for higher loan to value ratios. However, if an AVM erroneously under-values properties and the lender reduces or revokes a credit line, it could be losing out on the additional income from the increased line. What’s more, if a lender was negligent in selecting the AVM, and revoked a line without just cause — meaning it can’t prove how and why an AVM was deemed suitable — it puts itself at risk of not only noncompliance, but also litigation.

A Public Relations Nightmare

According to numerous news sources, including CBS, Bloomberg, ABC, and the Los Angeles Times, at least two of the country’s top lenders have been named in class action lawsuits for illegally freezing borrowers’ home equity lines, which according to some sources essentially violates part of the banks’ agreement for the bailout. Plaintiffs’ attorneys cite numerous experts who have stated that erroneous AVMs are at the root of the allegedly illegal actions.

While I am not here to deem an organization guilty or not guilty, I would like to point out the repercussions of this type of debacle. In addition to the hundreds of thousands of dollars in legal costs of defending a class action lawsuit, and the tens—if not hundreds—of millions of dollars a settlement could cost, there is the issue of the public relations nightmare that follows a disaster like this. While the big banks have legal teams and large PR firms to handle these types of issues, small shops, midsize lenders, community banks and credit unions do not. A class action lawsuit may or may not drag a lender into failure. At the very least, it can play a major role in the shortened lifespan and immediate profitability of an organization.

3) Portfolio Analysis 

Lenders and servicers are required by law to analyze their portfolios at least once per year. Most servicers conduct this analysis every six months, and most use AVMs for this type of analysis because they’re so cost- and time-efficient. However, there’s more to the story. Any business entity with a servicing portfolio is required by law to hold back anywhere from 20 to 50 – or in the case of home equity loans, 100 – percent of the value of their portfolios in liquid reserves. That figure is traditionally based on values derived from AVMs.

If a company values its portfolio too high, it is unnecessarily tying up valuable liquidity. To put a dollar figure on this, let’s say that the AVM you’re using returns values that are, on average, 15 percent higher than the properties’ actual value. For a portfolio valued at $50 million, you could be tying up an additional $7.5 million of funds that you are perfectly entitled to keep liquid. On the flip side of that coin, if the AVMs you’ve selected undervalue the properties in your portfolio, you are exposing yourself to the fees and fines associated with violating Basel III requirements. Portfolio analysis is a fine line with potentially severe financial consequences on either side. Your AVMs’ accuracy can tip the scale one way or the other, to the tune of anywhere from thousands to millions of dollars.

Accuracy Testing Pitfalls

As these dollar figures indicate, it’s critical to use the most suitable AVM if you want to reduce loss, maximize revenue and maintain existing customers. Most lenders and servicers do some type of accuracy testing, but chances are, they’re not using the most cost efficient means.

Some companies put AVM selection in the hands of the individual ordering the AVM. That’s not a good idea, because it’s virtually impossible for a human to be able to analyze AVMs well enough to rank each AVM sufficiently to build the most suitable cascade for a property. Others rely on their AVM providers to advise them in building their cascades, which is probably a slightly better solution, unless your AVM provider has an interest in one or more of the solutions it provides. Still others opt to use analysis companies that conduct in-depth research and accuracy testing for each of the AVMs that the lender or servicer uses. While this is certainly a better option than a staff member or AVM provider, it can be expensive and time consuming. These reports cost $50,000 to $60,000 a piece and are generally done quarterly, which brings the annual cost to $200,000 to $240,000 or more per year. And because they’re generally produced by actual humans, you can expect a wait time of roughly six weeks.

Your best choice is to use a technology designed specifically to be flexible in determining AVM suitability, like Platinum’s OptiVal, which can determine the most suitable AVM cascade in minutes. Whichever technology you choose, make sure to use a flexible technology, one that can factor in risk factors like loan to value, type of transaction, and borrower’s credit score. Each AVM is going to function differently for different properties.  There’s no such thing as a one size fits all AVM. The difference between using the most suitable AVM and the least could be vast, as can the difference between using the most and least suitable appraiser. An appraiser that specializes in Des Moines properties couldn’t produce an accurate value for a property in Brooklyn the way one who specializes in the area could.

Stop the Loss

It’s easy to underestimate the role that AVMs can play in a company’s profits and loss. With their low cost and speed, a lot of folks jump to the conclusion that AVMs couldn’t possibly have much impact on the bottom line. But they can and they do. It’s time to get out of the dark. AVMs are the mortgage industry’s most commonly used collateral valuation tools, bar none. But, used improperly, AVMs can do more harm than good. In fact, I believe AVMs are slowly, methodically draining profits for virtually every lender and servicer in our industry, to the tune of thousands of dollars each year. And that’s simply because lenders and servicers have a haphazard approach to AVM suitability and selection.

Accuracy certainly matters when using AVMs. In the mortgage industry, virtually every lending decision is hinged on collateral value. We can’t fool ourselves into thinking there are any cases where accuracy is not an issue, when in fact, inaccurate AVMs can lead to losses as subtle as missed opportunities or as dramatic as compliance violations, lawsuits and tied up liquidity.  Public relations disasters and reputational risk are harder to measure, but can end up being extremely expensive for lenders and servicers.

It’s time to stop the loss and start taking AVMs seriously. Unless of course, your organization has tens of thousands of dollars to waste each year.

About The Author

[author_bio]

Phil Huff is CEO at Platinum Data Solutions. Phil is a CEO with a history of growing companies whose technologies revolutionize manual mortgage processes. As co-founder and CEO of eLynx, Phil built the management team, grew recurring revenue to $15 million, and orchestrated the company’s sale to American Capital for $40 million in 2004, five years after the company’s launch.

First American To Acquire Interthinx

We knew the consolidation was going to continue. That means more big mergers and acquisitions. To this end, Bloomberg is reporting that First American Financial Corp., the second-largest U.S. title insurer, agreed to buy Interthinx Inc. from Verisk Analytics Inc. for $155 million to add data that serves the mortgage industry.

The sale will increase 2014 earnings and is expected to be completed by March 31, Santa Ana, California-based First American said today in a statement.

Title insurers, which use their records and public documents to verify a seller is a property’s true owner and that it’s free from liens, have been expanding business with mortgage companies. Fidelity National Financial Inc., the No. 1 title insurer, last month completed the acquisition of Lender Processing Services Inc. for more than $3 billion.

Interthinx will help First American offer real estate customers “further assurances in areas that present risk, including fraud, identity and income validation, collateral adequacy and compliance,” Dennis Gilmore, chief executive officer of the insurer, said in the statement.

Verisk, the supplier of actuarial data to insurers, has been making acquisitions to expand relationships with the health-care and credit-card industries. Exiting Interthinx “will allow us to focus on businesses most closely aligned with our strategy,” Scott Stephenson, CEO of Jersey City, New Jersey-based Verisk, said in a separate statement.

Bank of America Corp. is assisting First American, which got legal advice from McGuireWoods LLP. Verisk is using Morgan Stanley and McCarter & English LLP.

Verisk has rallied 14 percent in the past year through yesterday, while First American has advanced 2.6 percent.

About The Author

[author_bio]

Tony Garritano

Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.