Why Dodd-Frank Reforms Are Good For Business

On May 24, the first major financial institution bill with substantial bipartisan support in more than ten years was signed into effect by President Donald Trump. Known as The Federal Economic Growth, Regulatory Relief, and Consumer Protection Act (“Act”), it recognized that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) must be amended. 

The passage of Dodd-Frank in 2010 – spearheaded by Congressman Barney Frank and Senator Christopher Dodd – was designed to address the 2008 financial crisis with far-reaching reforms, including the creation of the Bureau of Consumer Financial Protection (CFPB) and tighter supervision of financial markets and institutions. Prior to the CFPB, consumer regulations were the responsibility of federal agencies such as the Federal Reserve Board and the Department of Housing and Urban Development. 

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Under Dodd-Frank, community banks with limited resources and large institutions with significant legal and compliance staffs became subject to a number of new regulations issued by the CFPB. The mandatory time frames for the CFPB to issue regulations resulted in rules that were confusing and misinterpreted. Consequently, mortgage lenders provided fewer loan options to limit their liability associated with noncompliance. 

Compliance departments at large banks rapidly expanded to keep up with the increasing number of new requirements. Banks and mortgage providers located in smaller cities and towns had limited to no compliance talent pool to draw from even if they could afford the staff. To offset the rising cost of managing compliance, local community banks sought acquisitions, closed, or merged with other banks. 

What Reforms Mean For Local Mortgage Providers

The amendments include relief for community banks struggling to maintain profitability and the staffs required to implement CFPB regulations or offer new products due to uncertainty and liabilities. 

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Smaller banks are now exempt from many requirements that previously hindered growth. 

For example, finding certified or licensed appraisers in rural areas can be difficult and often those resources do not exist. Now, banks located in more rural communities are exempt from conducting appraisals of real estate property with a transaction value of less than $400,000. The lenders must also provide proof that certified or licensed appraisers are not readily available. 

For areas with high concentrations of community banks, this could mean the difference between the banks’ survival and closing. Laws and reforms move along a sliding scale. Because of the 2008 financial crisis, the scale shifted towards protecting consumers; a decade later, the lending industry hopes the reforms can find a balance between consumer protection and a thriving housing and financial economy. 

Summary of Mortgage Lending Revisions in the 2018 Dodd-Frank Reform

Although the Act addresses banks, student borrowers and capital formation, we are specifically addressing only mortgage lending revisions and improving consumer access to mortgage credit as well as protections for veterans, consumers and homeowners. 


Truth-in-Lending Act (“TILA”)

Definitions were added to the qualified mortgage (ability to repay) provisions related to “Safe Harbor.” 

“Covered institution” is an insured depository institution or an insured credit union that, together with its affiliates, has less than $10,000,000,000 in total consolidated assets. 

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“Qualified mortgage” includes any residential mortgage loan:

>>That is originated and retained in portfolio by a covered institution; 

>>That is in compliance with the limitations with respect to prepayment penalties; 

>>That complies with any guidelines or regulations established by the CFPB relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the CFPB may determine relevant and consistent with the purposes of the statute;

>>That does not have negative amortization or interest-only features; and

>>For which the covered institution considers and documents the debt, income, and financial resources of the consumer as required.

A residential mortgage loan described above will be deemed to meet the ability to repay requirements. 

A residential mortgage loan described above does not qualify for the safe harbor if the legal title to the residential mortgage loan is sold, assigned, or otherwise transferred to another person unless the residential mortgage loan is sold, assigned, or otherwise transferred:

>>To another person by reason of the bankruptcy or failure of a covered institution; 

>>To a covered institution so long as the loan is retained in portfolio by the covered institution to which the loan is sold, assigned, or otherwise transferred; 

>>Pursuant to a merger of a covered institution with another person or the acquisition of a covered institution by another person or of another person by a covered institution, so long as the loan is retained in portfolio by the person to whom the loan is sold, assigned, or otherwise transferred; or 

>>To a wholly owned subsidiary of a covered institution, provided that, after the sale, assignment, or transfer, the residential mortgage loan is considered to be an asset of the covered institution for regulatory accounting purposes.

Any loan made by an insured depository institution or an insured credit union secured by a first lien on the principal dwelling of a consumer is exempt from TILA higher priced mortgage escrow requirements if:

>>The insured depository institution or insured credit union has assets of $10,000,000,000 or less;

>>During the preceding calendar year, the insured depository institution or insured credit union and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling; and

>>The creditor meets certain other criteria.

Exemption from Appraisals of Real Property Located in Rural Areas

An appraisal in connection with a federally related transaction involving real property or an interest in real property is not required if:

>>The real property or interest in real property is located in a rural area, as defined by Regulation Z; 

>>Not later than 3 days after the date on which the Closing Disclosure is given to the consumer, the mortgage originator, directly or indirectly:

A. Has contacted not fewer than three State certified appraisers or State licensed appraisers, as applicable, on the mortgage originator’s approved appraiser list in the market area; and 

B. Has documented that no State certified appraiser or State licensed appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator; 

>>The transaction value is less than $400,000; and 

>>The mortgage originator is subject to oversight by a Federal financial institution’s regulatory agency.

A mortgage originator that makes a loan without an appraisal as described above may not sell, assign, or otherwise transfer legal title to the loan unless:

>>The loan is sold, assigned, or otherwise transferred to another person by reason of the bankruptcy or failure of the mortgage originator; 

>>The loan is sold, assigned, or otherwise transferred to another person regulated by a Federal financial institution’s regulatory agency, so long as the loan is retained in portfolio by the person; 

>>The sale, assignment, or transfer is pursuant to a merger of the mortgage originator with another person or the acquisition of the mortgage originator by another person or of another person by the mortgage originator; or 

>>The sale, loan, or transfer is to a wholly owned subsidiary of the mortgage originator, provided that, after the sale, assignment, or transfer, the loan is considered to be an asset of the mortgage originator for regulatory accounting purposes. 

A rural loan may not be made without an appraisal if:

>>A Federal financial institution’s regulatory agency requires an appraisal; or 

>>The loan is a high-cost mortgage, as defined by TILA. 

Home Mortgage Disclosure Act (“HMDA”)

An insured depository institution or insured credit union that originated fewer than 500 closed end mortgages or open-end lines of credit is exempt from the requirement to itemize certain loan data under HMDA unless they have received a rating of “needs to improve record of meeting community credit needs” during each of its two most recent examinations of a rating of “substantial noncompliance in meeting community credit needs” on its most recent examination under the Community Reinvestment Act.

Credit Union Residential Loans

A loan secured by a lien on a 1-4 family dwelling that is not the primary residence of a member of a credit union will not be considered a member business loan under the Federal Credit Union Act.

Protecting Access to Manufactured Homes

Retailers of manufactured homes or employees of such retailers are not required to be licensed as mortgage originators unless:

>>They receive compensation or gain for acting as a mortgage originator that is in excess of any compensation or gain received in a comparable cash transaction;

>>They fail to provide certain disclosures to consumers; or

>>They directly negotiate with the consumer or lender on loan terms.

No Wait for Lower Mortgage Rates

If a creditor extends to a consumer a second offer of credit with a lower annual percentage rate, the transaction may be consummated without regard to the 3 day waiting period requirements in the TRID disclosures.

Congress instructed the CFPB to provide clearer, authoritative guidance on:

>>Applicability of TRID to mortgage assumption transactions;

>>Applicability of TRID to construction to permanent home loans and the conditions under which those loans can be properly originated; and

>>The extent to which lenders can rely on model disclosures if the recent TRID changes are not reflected in the TRID forms published by the CFPB.

Identification for Opening an Account

When an individual initiates a request through an online service to open an account with a financial institution or obtain a financial product or service from a financial institution, the financial institution may record personal information from a scan of the driver’s license or personal identification card of the individual, or make a copy or receive an image of the driver’s license or personal identification card of the individual, and store or retain such information in any electronic format for the following purposes:

>>To verify the authenticity of the driver’s license or personal identification card;

>>To verify the identity of the individual; and

>>To comply with a legal requirement to record, retain or transmit the personal information in connection with opening an account or obtaining a financial product or service.

A financial institution that makes a copy or receives an image of a driver’s license or personal identification card of an individual must, after using the image for the purposes described, permanently delete:

>>Any image of the driver’s license or personal identification card, as applicable; and

>>Any copy of any such image.

This provision preempts and supersedes any state law that conflicts with this provision.

Reducing Identity Theft

“Fraud protection data” means a combination of the following information with respect to an individual:

>>The name of the individual (including the first name and any family forename or surname of the individual);

>>The social security number of the individual; and

>>The date of birth (including the month, date, and year) of the individual.

“Permitted entity” means a financial institution or a service provider, subsidiary, affiliate, agent, subcontractor, or assignee of a financial institution.

Before providing confirmation of fraud protection data to a permitted entity, the Commissioner of the Social Security Administration (“Commissioner”) must ensure that the Commissioner has a certification from the permitted entity that is dated not more than two years before the date on which that confirmation is provided that includes the following declarations: 

>>The entity is a permitted entity; 

>>The entity is in compliance with these provisions; 

>>The entity is, and will remain, in compliance with its privacy and data security requirements, as described in the Gramm-Leach-Bliley Act, with respect to information the entity receives from the Commissioner;

>>The entity will retain sufficient records to demonstrate its compliance with its certification and these provisions for a period of not less than two years. 

A permitted entity may submit a request to a database or similar resource only:

>>Pursuant to the written, including electronic, consent received by a permitted entity from the individual who is the subject of the request; and 

>>In connection with a credit transaction or any circumstance described in the Fair Credit Reporting Act. 

For a permitted entity to use the consent of an individual received electronically, the permitted entity must obtain the individual’s electronic signature, as defined by the Electronic Signatures in Global and National Commerce Act. 

No provision of law or requirement will prevent the use of electronic consent for purposes of these provisions or for use in any other consent based verification under the discretion of the Commissioner. 

Protecting Tenants at Foreclosure

Certain notification and eviction requirements for renters living in foreclosed properties have been reinstated with the repeal of sunset provisions of the Protecting Tenants at Foreclosure Act.

Remediating Lead and Asbestos Hazards

The Secretary of the Treasury may now use loan guarantees and credit enhancements to facilitate loan modifications to remediate lead and asbestos hazards in residential properties.

Property Assessed Clean Energy (“PACE”) Financing

“PACE financing” means financing to cover the costs of home improvements that result in a tax assessment on the real property of the consumer.

The CFPB must prescribe regulations that require a creditor to evaluate a consumer’s ability to repay with respect to PACE financing.

Protecting Veterans from Predatory Lending

A loan to a veteran for the refinance of a loan to purchase or construct a house may not be guaranteed or insured unless:

>>The issuer of the refinanced loan provides the Department of Veterans Affairs (“VA”) with a certification of the recoupment period for fees, closing costs, and any expenses (other than taxes, amounts held in escrow, and certain fees) that would be incurred by the borrower in the refinancing of the loan; 

>>All of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance; and 

>>The recoupment is calculated through lower regular monthly payments (other than taxes, amounts held in escrow, and certain fees) as a result of the refinanced loan. 

A loan to a veteran for the refinance of a loan to purchase or construct a house may not be guaranteed or insured unless:

>>The issuer of the refinanced loan provides the borrower with a net tangible benefit test; 

>>In a case in which the original loan had a fixed rate mortgage interest rate and the refinanced loan will have a fixed rate mortgage interest rate, the refinanced loan has a mortgage interest rate that is not less than 50 basis points less than the previous loan; 

>>In a case in which the original loan had a fixed rate mortgage interest rate and the refinanced loan will have an adjustable rate mortgage interest rate, the refinanced loan has a mortgage interest rate that is not less than 200 basis points less than the previous loan; and 

>>The lower interest rate is not produced solely from discount points, unless:

A. Such points are paid at closing; and 

B. Such points are not added to the principal loan amount, unless:

1.) For discount point amounts that are less than or equal to one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 100 percent or less; and 

2.) For discount point amounts that are greater than one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 90 percent or less. 

A loan to a veteran to refinance a loan to purchase or construct a house may not be guaranteed or insured until the date that is the later of:

>>The date that is 210 days after the date on which the first monthly payment is made on the loan; and 

>>The date on which the sixth monthly payment is made on the loan. 

The above provisions do not apply in a case of a refinance loan in which the amount of the principal for the new loan to be guaranteed or insured is larger than the payoff amount of the refinanced loan. 

On May 25, 2018, VA issued a Policy Guidance Update: VA Refinance Loan and the Economic Growth, Regulatory Relief and Consumer Protection Act discussing the Act and its design to protect veterans from predatory lending practices known as “loan churning” or “serial refinancing.”

The Government National Mortgage Association may not guarantee the timely payment of principal and interest on a security that is backed by a refinance mortgage insured or guaranteed by VA and that was refinanced until the later of the date that is 210 days after the date on which the first monthly payment is made on the mortgage being refinanced and the date on which 6 full monthly payments have been made on the mortgage being refinanced. 

Credit Score Competition

Fannie Mae and Freddie Mac are required to evaluate other credit models besides FICO for credit scoring to determine whether they may be used for underwriting decisions.

Foreclosure Relief and Extension for Servicemembers

A legal action to enforce a real estate debt against a servicemember on active duty or active service may be stopped by a court if it occurs within one year from the servicemember’s end of active service. 

Further Reforms?

There is speculation that the Act is not the last reform to Dodd-Frank that we will see. Such speculation became reality with the passage of the “JOBS and Investor Confidence Act of 2018” (S.488) which had strong bi-partisan support. The TRID Improvement Act (S.2490) is pending legislation addressing changes for title insurance premiums which may be discounted as allowed by state regulation. 

With these bills, there will be more reforms to Dodd-Frank; however, future legislative activity may depend upon mid-term elections.

This article provides an overview of part of the Act by Asurity Technologies based on our understanding of the Act and is not intended to and should not be considered legal advice. 

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The Impact Of Fintech

According to a recently published working paper by researchers at the Federal Reserve Bank of New York (FRBNY) and New York University, fintech lenders have quickly expanded their market share since the Financial Crisis, and in the process have developed efficiencies that give them a significant advantage over more traditional lenders. Prominent mortgage industry executives gathered in Washington, DC at the 8th Annual PROGRESS in Lending ENGAGE Event sponsored by Get Credit Healthy, QuestSoft and Optimal Blue, to really drill down on this industry trend. How has fintech impacted mortgage lending? Here’s the scoop:

“Everything has to be relevant,” says Joseph Ludlow, VP at Advantage Systems. “The proliferation of cell phones has driven technology and innovation. Everything has to be real-time, all the time.”

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“We can’t think of innovation as something that happens over night,” noted Luke Wimer, COO at Asurity Technologies. “It’s about changing what a customer usually does. No one person or vendor will bring all the innovation. We have to bring people and systems together.”

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“The average originator is 52 years old,” points out Christine Beckwith, National VP of Realtor and Sales at Annie Mac. “The customer wants to be mobile and so do the new originators, but we have to get the average originator in his or her 50s onboard. It’s a balancing act.”

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“The older originator’s adaptability is challenged,” concluded Ski Swiatkowski, Business Growth/Leadership Specialist at Silver Hill Funding. “However the new originator is a millennial and they want fintech. Rocket by Quicken was good for the industry because now everyone sees the value of using fintech to improve the mortgage process.”

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Expansion Through Acquisition

Today’s vendors and service providers have to offer more. So, how are they doing? Some are going the acquisition route.

For example, Richey May, an accounting and advisory firm serving the financial services and real estate industries, has acquired two IT consulting firms that will enable the company to offer a more robust spectrum of IT consulting services for its financial services clients.

Arrow Partnership, a nationwide provider of management and IT consulting services, and Corporate Blue, a cybersecurity and managed IT services firm, will join the recently launched Richey May Technology Solutions division of Richey May. Both acquisitions will enable Richey May to address the growing IT demands of its mortgage banking clients, which include the needs for cloud-based managed services, strategic technology management consulting and cybersecurity risk assessments.

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“Arrow Partnership and Corporate Blue have excellent reputations for providing a wide range of IT consulting services that span multiple industries,” said Ken Richey, founding partner of Richey May. “As the demand for strategic IT planning and compliance intensifies, these acquisitions will ensure we are able to meet the needs of mortgage lenders for years to come.”

Founded in 2003 and based in Denver, Colorado, Arrow Partnership specializes in technology management, governance, risk, compliance and security consulting services, and digital marketing. Arrow Partnership’s managing partner and co-founder Chan Pollock will join Richey May as executive director of the firm’s technology consulting practice, while senior practice leader Garry Woods will head up the company’s governance, risk and controls practice.

Corporate Blue, based in Southern California, provides IT security, virtual chief information security officer services, cloud security and managed IT services. Mike Wylie, co-founder and CEO of Corporate Blue, will join Richey May as a director in the firm’s cybersecurity practice.

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“In this day and age, strategic IT decisions are a cornerstone of any company’s financial health and potential for growth,” said Wylie. “I am delighted to join Richey May, a company firmly committed to helping companies leverage technology wisely to achieve their goals.”

“I’m thrilled to be joining Richey May and have been extremely impressed with their capabilities and dedication to helping lenders run more efficient, profitable and secure businesses,” said Pollock. “I look forward to leading the firm’s technology management consulting practice and working directly with clients to ensure they receive the highest level of expertise in the mortgage industry.”

Richey May Technology Solutions is a results-driven division of Richey May offering the full spectrum of technology solutions, including cloud services, cyber security, marketing technology, governance, risk, controls, privacy and technology management consulting. Led by technology experts with decades of cumulative experience in executive IT roles, the team is focused on providing pragmatic, real-world solutions that deliver value to their clients’ business.

Also, Sandler, LLC (d/b/a Sandler Law Group), has acquired the business operations of McGlinchey Stafford & Youngblood and Associates PLLC (MSYA), a premier closing and fulfillment services provider for the mortgage lending industry.

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This acquisition further enhances the mortgage compliance and origination ecosystem built by regtech investor and regulatory expert Andy Sandler. Asurity Technologies, a leading provider of compliance management and mortgage loan document technology, expands its operations into mortgage closing and fulfillment. All legal services previously undertaken by MSYA will now be performed at Sandler Law Group.

“With this acquisition, Asurity Technologies and Sandler, LLC have further implemented our strategy to set a new mortgage industry standard for economically efficient and fully compliant software and transaction support services,” says Andy Sandler, CEO of Asurity Technologies and Managing Partner of Sandler, LLC.

“We are excited to join the family of companies Andy Sandler has built to offer our clients expanded mortgage closing services. We are now able to provide mortgage lenders access to a powerful ecosystem with known experts in legal, compliance, services, and technology. This is a great opportunity to provide the marketplace with deeper resources and increased efficiencies,” says Vicki Murphy-Gee, Vice President of Sales, Asurity Services and Executive Director, Sandler Law Group.

Asurity Technologies now provides a full range of compliant mortgage documents and mortgage closing and fulfillment services including outsourced closing functions and CD preparation and legal review, wire orders, funding, and shipping, through a team of over 150 mortgage lending specialists and technologists and affiliated legal experts at Sandler Law Group.

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Tackling Industry Innovation

The PROGRESS in Lending Innovations Award Winners gathered to talk about the future of mortgage lending. Over 100 mortgage executives came together to attend PROGRESS in Lending Association’s Eighth Annual Innovations Awards Event. We named the top innovations of the past twelve months. After that event, we wondered what would happen if we brought together executives from the winning companies to talk about mortgage technology innovation. Where do they see the state of industry innovation right now? And what innovation is it going to take to get our industry really going strong? To get these and other questions answered, we got the winning group together. In the end, here’s what they said:

Q: Some say innovation has to be sweeping change. Others say innovation can be incremental change. How would you define innovation?

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MICHAEL KOLBRENER: At PromonTech we are very careful with the word “innovation”. While we strive to be innovative, whether or not we succeed isn’t our call, but our clients’ and the market’s. At the end of the day, innovation is in the eyes of the user. And innovation can manifest itself differently; it can be a “big bang” like Apple’s iPhone, or it can occur more gradually and quietly like Internet availability. Fannie Mae and FormFree are great examples in our industry of how significant technology opportunities require time in order to be realized. Day 1 Certainty is destined to be a game-changer, but adoption may take time. Just like it took time for the amazing tools in FNMA Desktop Underwriter to be appreciated. As technologists, it’s our job to celebrate the important technology opportunities and help our user communities keep working on adoption.

JOHN PAASONEN: Innovation, especially in our industry, takes many forms. Innovation pushes forward a process, changes a mentality, or reforms the way something is thought about or done. We’re seeing all forms of this in mortgage, whether it is Day 1 Certainty, upfront underwriting, or shared-equity financing. The best kind of commercial innovation sweeps people along with the change in the present, not 10 years from now, bringing actionable ideas to market quickly, iterating those ideas, and ultimately delivering meaningful impact to the experience, P&L or relationships in a business.

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PHIL RASORI: Traditionally, I would say that innovation in our industry has been more of a gradual, step-by-step approach with new products, services and enhancements being launched as vendors identified demand and areas for improvement.  However, the introduction digital mortgage movement, which has been rapidly building over the past few years has been sweeping, with an array of fintechs and new ideas being spawned to build a better overall lending process. The trick now is going to be the rate of borrower and marketplace adoption of these new technologies.  Think about this: even adoption of now comfortable mainstays such as online shopping with Amazon or online trading with Schwab didn’t happen overnight. Adoption took time, and it will in the mortgage space, too.

GARTH GRAHAM: At STRATMOR, we see the innovation as a combination of People, Process and Technology, a variation on the classic 3Ps of People, Process and Product. You can have innovation that applies to any of the three, but it’s best is when it’s applied to all three together.  In fact, that was a key message in my presentation at the most recent MBA Technology Conference — that changing across people, process and technology is what drives big changes.

SANJEEV MALANEY: I would describe innovation as significant positive change resulting from fresh thinking that creates value for its user. It’s a result. It’s an outcome. It’s something one works toward. There are no qualifiers for how groundbreaking or world-shattering that something needs to be, only that it needs to be better than it was before. Innovation is evolutionary, not revolutionary — like Einstein’s theory of relativity.

KELCEY T. BROWN: At WebMax, we believe that innovation means identifying a problem and coming up with a unique solution. Whether it be sweeping or incremental, that unique solution changes things for the better. Innovation, especially in mortgage technology, has been defined by streamlining processes, reducing operating and origination costs, and delivering a better borrowing experience.

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ADAM BATAYEH: For us, it’s all about progress. Almost any amount of progress will do no matter how incremental the change is. If you create something that is cool and trendy but doesn’t necessarily push things forward in a way that betters people/process/industry, that “innovation” was more novelty than anything and will likely find itself extinct.

So in terms of impact, the amount of impact/progress isn’t as important because of all that happens downstream that we may not see immediately. You could make an incremental change that has monumental implications years later. In our space, it’s sort of like the butterfly effect.

LUKE WIMER: Innovation is the achievement of a consistently better outcome for time invested in an activity. I think creative problem solving needs to be encouraged, so we need to think of it as incremental change, and then allow for sweeping change to be the aggregation of persistent innovation. In our industry context, we might refer to the ability to electronically sign a mortgage as an innovation and the ability to digitally process a mortgage end-to-end as the sweeping change we are all driving toward.  Innovation is also often the result of fostering a culture of continuous improvement. In our company, we set long-term aspirations, then we ask everyone to set improvement or innovation goals for the next quarter or half year. We don’t specify how to improve; we don’t want people to be constrained. Then we measure results, talk about what happened, and set goals for the next round, rewarding examination and striving rather than hitting the target itself. The pace of creativity is increasing as people get comfortable taking risks.

NEIL FRASER: Innovation, in most cases brings incremental change. Over time many incremental changes bring about what can appear to be sudden sweeping change. As the mortgage industry moves towards the sweeping change being called the Digital Mortgage, many innovations have been, and continue to be tried and tested. This is the necessary process for moving an entire industry towards a significantly different model.

At Paradatec, we are continuing to innovate in an effort to support the industry’s long term move towards a more efficient and accurate process for originating, servicing, and auditing mortgage loans.

More specifically, we define innovation in our particular niche as “the application of artificial intelligence to the problem of document recognition”. This could mean the creation of a new, more automated, document classification solution for a servicing world where scanned images of documents, that were originally paper, are still key, or it could mean the creation of new recognition capabilities for e-signed documents that never were paper. Regardless of the application, we at Paradatec are committed to an ever-expanding document recognition stack that covers origination, servicing and auditing mortgage loans.

Q: How would you define the state of innovation in the mortgage industry? Is it thriving or in a state of decay?

MICHAEL KOLBRENER: The mortgage industry is in an unprecedented phase of technology adoption. There is no doubt that Rocket Mortgage deserves lots of credit for truly introducing the “Internet” to the mortgage industry. Rocket has shown all lenders that technology is an integral part of the future of mortgage originations. Additionally, we are seeing lots of new technology companies competing in the mortgage space (including PromonTech!) We’re just beginning to realize the many opportunities to improve efficiencies.

JOHN PAASONEN: Twenty four months ago, my answer may have been different. But today, it is a thrill and a privilege to participate in the transformation occuring in the mortgage industry. For nearly a decade — in the wake of the financial crisis, the passage of Dodd-Frank, the creation of the CFPB, and major regulation like TRID — investment dollars were poured into compliance, not advancement. I’m incredibly encouraged by the increasing openness to the work of many innovators, from both inside and outside the industry, to incite progress. Innovation is alive and needs to be spurred forward.

PHIL RASORI: Post the mortgage crash and subsequent introduction of a myriad of new rules and changing regulations with Dodd-Frank and enforcement by the CFPB became a huge concern and instantly drew everyone’s attention to compliance adherence, which arguably distracted from technology innovation. Now more than ever, the mortgage industry is on a fast-track to achieve far-reaching changes via new technology, which is being fueled by anticipated demand for borrower automation and lenders’ positioning themselves to remain competitive, thus driving innovation across the board. We’re not only thriving right now, but some say we’re drinking from a firehouse. Again, adoption will be key to these innovations becoming reality.

SANJEEV MALANEY: The industry is ready for innovation and we’re starting to see major transformation impacting the end-to-end mortgage process. New companies are flush with venture capital. Lenders are funding innovation centers using their own capital investments. People from outside the industry with diverse sets of skills and experience are being hired to drive this transformation. We’re going to see more innovation in the next twelve months than we’ve seen in years.

KELCEY T. BROWN: Innovation in the mortgage industry is thriving thanks to the continuous flow of new ideas and products, and growing interest in technology from lenders. We’re seeing point-of-sale products become more intuitive and borrower-friendly, and financial data retrievers’ rules engines making loan processing faster and more efficient. Lenders’ interest in digital mortgages continues to grow as today’s home buyers lean more and more toward a digital borrowing experience. That said, a great deal of the industry still needs to transition to digital mortgages. Growing interest, paired with a sizable unaddressed market, makes a perfect storm for thriving innovation.

As much blame is put on regulation for technical stagnation, we like to thank it. It put our backs against the wall and forced companies to make major changes that they couldn’t handle or weren’t willing to take on. It led to that consolidation, and most importantly, it led to massive amounts of investment in what we like to call “foundation over feature” and that has helped increase transparency, accountability, and more. It’s what laid the groundwork for all the innovation you are seeing today.

ADAM BATAYEH: Innovation is thriving, thriving, thriving. If this were 2013, the answer would have been massive decay. The thing is, that decay was necessary and led to all of the innovation we are seeing today.

LUKE WIMER: Mortgage is a bit late to the innovation party compared to payments or online banking, so we are still more focused on automation and efficiency and just starting to affect true change to the consumer experience.  But we should not underestimate the potential for change and innovation. The industry has been gearing up over the years with steps toward digitization, creative partnerships, driving new standards, and these will allow a fast pace of change once the scale is tipped. I am thinking of how one of Hemingway’s characters went bankrupt: “Gradually, then suddenly.”

NEIL FRASER: Innovation in the mortgage industry is definitely thriving today. For the last twelve years, we at Paradatec have focused on building our mortgage technology through advanced OCR using artificial intelligence and an ability to learn over time and provide increasingly more significant innovations.

In the last twelve years, we have not only increased our ability to innovate, but have further greatly accelerated this ability to innovate from our partnerships and integrations with others in the industry. This is a trend we expect to continue for years to come.

GARTH GRAHAM: I think that innovation is truly accelerating, but too often people define innovation as simply technology. They think the next software product, the next shiny object will transform their business. At STRATMOR, we often see companies with good people and good process being able to overcome substandard technology, but rarely do we see a company with great technology that can overcome poor people or process. This does not mean tech is not important, in fact I believe that we don’t spend enough on technology — but if you don’t have the people and process lined up to implement change, then the technology alone will not drive the results you seek.

Q: Lastly, if there was one innovation that you would say the mortgage industry desperately needs to happen over the next twelve months, what would it be?

MICHAEL KOLBRENER: All of us, in lending, need to evangelize the potential of technology and encourage our user audiences to understand the role it can play in the future of originations. Over the next 12 months, we need to keep pushing data providers to make applicant data more readily available, particularly around income verification (and tax supporting docs). At PromonTech that’s where we believe that next big breakthroughs will come.

JOHN PAASONEN: We’re just beginning to see the early signs of moving beyond “digital paper.” Over the last 10 years, the mortgage industry has largely taken a paper-bound process and digitized it. A loan application acted much like its paper counterpart, just with the ability to type answers, for example. In the next 12 months, regulators, lenders, investors and innovators need to continue to push forward with initiatives to all-together remove the tremendous burden on borrowers, loan officers, processors, appraisers and others created by our legacy of paper-driven process. The winners will be those who realize first that data availability and fidelity is too rich, and computing power too strong, to be ignored.

SANJEEV MALANEY: While we have witnessed significant innovation over the past year, there remains a series of key friction points that must be addressed for the mortgage process to truly be reinvented.

Perhaps the most critical enabler in our space (not unlike other verticals) is the use of data, and by extension, how to extract insights from that data to make faster and better decisions, which is where Capsilon is focusing its innovation efforts. It is worth noting, however, that while “big data analytics” has suddenly become a go-to catchphrase for many in our industry, our own experience in the space suggests that the challenges associated with implementing and realizing value from big data are more subtle.

For the past 14 years, we’ve been helping clients collect, validate and leverage the data to drive automation and improve productivity in the mortgage process. Those who succeed will master the harvesting and delivery of relevant data at the right time so every user (borrowers, LOs, underwriters, processors, closers) in the loan process are provided the information and tools they need when, where, and how they need it to remove friction in the loan process.

KELCEY T. BROWN: Faster adoption of digital mortgages. The faster lenders adopt digital mortgages, the better off their business will be, from their balance sheet to borrower satisfaction. It is evident that through technology, lenders can close loans faster, with more efficiency, for a better cost. At the same time, that boosted efficiency means borrowers get in their homes faster and are more satisfied with their mortgage experience. Real estate agent satisfaction grows as their listings get filled and closed faster as well, which can boost referrals. Imagine that your company waited to adopt email, how would that have worked out?

ADAM BATAYEH: To use our internal phrase again: foundation over feature. It seems that everyone is racing to be first with the next big thing and it’s very tempting to follow trends. At the same time, it can confuse lenders and can make it harder on them to make a decision. We can create all the new features we want, but if they’re hard to integrate and implement, we’ll find ourselves pigeonholed.

An example I can give is Windows vs. Mac OS and their respective web-browsers. The Operating System was the “foundation” and the web-browsers were built as “features”. Buy the OS, get the browser for free. The browser would work flawlessly with its respective OS.

Google Chrome came out of nowhere as it’s “foundation vs. feature” priority was the reverse. Knowing the future was in the Cloud, they built an agnostic browser, which resulted in Windows and Mac users collaborating in a new way. As Microsoft and Apple built browsers that were feature-focused and complimented their foundational Operating Systems, Google was busy playing the agnostic game and with Chrome has quickly emerged as the leader.

LUKE WIMER: There are so many different needs. I would like to see clarity on where federal regulators are headed. I would like to see some of this mortgage application automation technology make its way further into the loan origination process. We appreciate the need for increased security and rigor in vendor management, and are pushing for increased acceptance of SaaS and the tools many of us are making available to offer plug-in solutions. I believe it will be a collection of innovation and providers, which will be needed to really transform. It is a resilient sector that rolls with the punches, and is complex enough that no single innovation will win or solve the problems of every player. Therefore I am glad there are many of us working on improvement from different angles.

NEIL FRASER: Accurate data which reflects the terms, borrower, lender, and property information from Mortgage loans’ source documents will continue to be a critically important requirement. As a result, there will continue to be a need to audit the accuracy of the data as it relates to the legally definitive required source documents. As loans and their servicing rights are passed from investor to investor and servicer to servicer, a more efficient process for efficiently and accurately onboarding these loans as these transactions occur is desperately needed. At Paradatec, we are continuing to innovate and this need is one of major focus for us in the coming year.

GARTH GRAHAM: So, there certainly has been a significant amount of technology innovation at the point of sale — dynamic applications are more commonplace.  I think it’s what occurs BEFORE the application that is critical for the next year.  The reason is that we are pivoting to a heavy purchase market — only 25 percent refinance — down from roughly 50 percent refinance (or more) for the past 20 years.  This is a MAJOR difference and will really stress originators who are not equipped to handle purchase opportunities.  At STRATMOR we have a methodology of creating a digital roadmap for lenders, and we often find that they are not adequately valuing the tools that are required prior to application. We refer this to Lead Engagement — the ability to interact with purchase consumers across multiple touch points and for longer periods of time.   We also feel that price competition will become more acute going forward.  Thus, we think innovation needs to tackle the functions that typically are considered CRM functionality — managing customer interactions over long periods of time — as well as presentation to clearly show what customers are going to pay for their mortgages.

Also, we think that there is going to be a lot of industry consolidation, both for mortgage origination companies and for the technology vendors that support the lenders it.  At STRATMOR we are active in M&A and have never been busier with lenders looking for strategic alternatives, and with buyers who are well positioned for the future, and are actively looking to acquire other entities to gain market share during this difficult period.  Vendors are finding a similar climate, and some smaller vendors are seeking capital partners. New capital is entering the market to acquire additional technology capabilities.

PHIL RASORI: I hate to use what many feel is an over-used term these days, but acceptance of the “digital mortgage” and what it encompasses will be key to much of what is to follow. We are seeing that successfully be streamlined right now at the point-of-sale for borrowers. Digitization of the secondary market is also picking up speed, which is what we at MCT have been focused on. Technology integrations are essential for lenders to keep systems operating in real-time, while automation is streamlining processes. Digital whole loan trading is revolutionizing the loan sale process. Embracing the digital mortgage at every step in the process is helping lenders to increase efficiency and profits.

And The 2018 Winners Are …

Prominent mortgage executives gathered to see who the Executive Team of PROGRESS in Lending named the top industry innovations of the past year at the Eighth Annual Innovations Awards Event. This honor is the Gold Seal when it comes to recognizing true industry innovation. All applications were scored on a weighted scale. We looked for the innovation’s overall industry significance, the originality of the innovation, the positive change the innovation made possible, the intangible efficiencies gained as a result of the innovation, and the hard cost and time savings that the innovation enables industry participants to achieve. The top innovations winners are:


PROGRESS in Lending has named Lodasoft a top industry innovation. To address the CFPB requirements of improving the borrower experience, the first big wave of innovation has come out of Silicon Valley. Hundreds of millions of dollars have been invested in the consumer facing aspect of the borrower application. The term “digital mortgage” has been coined and a flood of shinny new mortgage websites and apps have been created to deliver borrowers an Amazon type borrower experience. However, the majority of dollars invested, have focused almost solely on the online application for borrowers. The problem is that mortgage lending is significantly more complicated than just a shinny new app. The right digital mortgage platform helps to drastically reduce the chaos in daily lending processes while improving communication to help lenders close more loans faster. Therefore, in 2017 Lodasoft introduced its truly innovative “Digital Mortgage Platform” featuring Intelligent Loan Manufacturing to address these industry challenges head on.


PROGRESS in Lending has named Capsilon a top industry innovation. A truly innovative mortgage process means more than borrower-friendly loan selection and document submission, it is an end-to-end solution that keeps all stakeholders in the loop throughout the process. In 2017, Capsilon introduced Point of Sale Portals (POS), enabling the creation and delivery of quality loan packages that streamline every process step from application to closing. Capsilon’s POS Portals are powered by Intelligent Process Automation to supercharge loan production from intake to delivery of complete and compliant loan packages. This is an industry first, dramatically improving loan quality and speed, while drastically reducing production costs. Lenders are pressed to meet the challenges of production, compliance and profitability, as well as soaring borrower expectations. Instead of simply streamlining the traditional loan process, in 2017, Capsilon launched Point of Sale Portals that are fully integrated with its patented back-end technology to deliver on the promise of a true digital mortgage.


PROGRESS in Lending has named WebMax a top industry innovation. According to Inc. Magazine, Millennials make up 66% of first-time homebuyers and 66% of them plan to buy a home in the next 5 years. Moreover, the same report found that Millennials associate home ownership with the American Dream more than any other generational demographic. The October 2017 composite forecast of Fannie Mae, Freddie Mac, and the Mortgage Bankers Association for 2017 mortgage origination volume is approximately $1.8 trillion. If Millennials compose 50% of this mortgage volume, and two-thirds of them apply online via digital applications, that represents $600 billion in digital mortgage origination. This number is massive. Better yet, it’s conservative. Millennials expect mobile-responsive mortgage lending sites and applications with a responsive layout from their potential lender. They want their mortgage application to be as easy as buying a t-shirt from an online retailer. Therefore, WebMax developed its innovative point-of-sale solution in 2017, called START, to not only meet the demands of borrowers, but to exceed their expectations and revolutionize the entire process. With START, WebMax provides a single location for the loan to exist for both the borrower and loan officer. There’s no shifting documents back and forth or waiting for verifications. START’s integrations to mission-critical third parties allows for the technology to do the work, streamlining workflows, reducing costs, and minimizing frustration.


PROGRESS in Lending has named Paradatec a top industry innovation. Other OCR solutions typically expect relevant data points to consistently appear in the same locations (or ‘zones’) on a document. If the data shifts due to changes in layout (again, think of bank statements), the zone-based approach will fail unless another layout template is created, making for a greater administrative burden with these solutions. A high volume, scalable OCR automation initiative requires the flexibility of Paradatec’s Advanced Mortgage OCR solution to process an unlimited number of document layouts without needing to develop specific templates for each layout variation. This capability is unique to Paradatec and a vital feature for creating an effective unstructured document classification and data capture solution. Paradatec’s Advanced Mortgage OCR solution is designed to make mortgage lending faster and more accurate. In 2017, Paradatec’s Mortgage OCR solution processed over 1,500,000,000 images (representing over 2,500,000 loans), helping lenders and servicers streamline their onboarding and compliance obligations.

Asurity Technologies

PROGRESS in Lending has named Asurity Technologies a top industry innovation. In 2017, MRGDocs was acquired by Asurity Technologies and introduced MRGDocs’ cloud-based platform which revolutionized the security of its dynamic document generation software featuring a secure system infrastructure to increase the protection of consumer data and deliver safer, faster, and more user-friendly systems while maintaining the content and support quality that has long been the hallmark of MRGDocs’ services and document packages. This solves for several mortgage industry challenges: the costs to secure big data, protecting the myriad of personal identification information collected, and managing compliance through a hyper secure platform. In 2017, MRGDocs built a comprehensive data security capability on a robust foundation that allows for the type of growth and expansion needed to serve even the largest of financial institutions, implementing a hyper-converged, virtual server platform with 24/7 SIEM-managed security monitoring.


PROGRESS in Lending has named STRATMOR Group a top industry innovation. MortgageSAT is an online customer satisfaction measurement program that allows consumers to provide direct feedback on their satisfaction with the mortgage process, and provides lenders actionable insights from the results, all available via an online portal. Put simply, it’s Business Intelligence based on consumer insights. Why did STRATMOR create MortgageSAT? For many years, mortgage lenders have struggled to capture actionable feedback from borrowers by means of post-closing email or closing-table-completed surveys. By means of its powerful borrower satisfaction management tool called MortgageSAT, developed in partnership with the CFI Group, STRATMOR has led the way to fundamental change the way lenders manage and apply borrower feedback. MortgageSAT is the first and only borrower satisfaction monitoring tool to score satisfaction at all levels of the organization as regards retail, consumer direct and broker production. As a consequence, many MortgageSAT clients tie their employee reviews and, in some cases, compensation both to these scores and a review of borrower comments. When everyone’s performance review includes a measure of their contribution to borrower satisfaction, a borrower-centric culture is fostered that is aligned with the emerging competitive paradigm of “optimizing the borrower experience.”


PROGRESS in Lending has named Maxwell at top industry innovation. No matter how digital the process, every mortgage is saddled with documents and data, over 500 pages, according to the Mortgage Bankers Association. As a result, an average of 20 days during the mortgage process is consumed by the search, preparation and review of those documents. Maxwell, the leading digital mortgage solution for small and midsize lenders, removes this friction with its platform. Sitting as the digital interface between the lender and their borrowers, Maxwell manages collaboration through the loan process, significantly reducing cycle times and driving delight. Originating teams on Maxwell are able to focus on what they do best, advising and coaching clients through the largest transaction of their lives, while Maxwell’s technology handles the rest. As one head of production attested, “Maxwell allows us to focus on what we love: working with real people. While loans get done faster and my team is happier.”


PROGRESS in Lending has named PromonTech a top industry innovation. The Borrower Wallet is the first offering from Promontory MortgagePath’s technology arm. From a lender’s perspective, the Borrower Wallet captures leads and fosters borrower/lender collaboration to drive enterprise efficiency and improve loan pull-through. In addition, its built-in collaboration tools deliver high-quality data and documents needed to feed and accelerate the downstream underwriting process. As a white-label offering, the Borrower Wallet makes the latest technology accessible and affordable to mid-size and smaller lenders, enabling them to compete with mega lenders. PromonTech’s culture of mutual respect between “techies” and mortgage industry experts made it possible to create a mass-market POS where both consumer and lender needs are equally important. The Borrower Wallet is not the first digital POS, but it’s the first to engage consumers while anticipating lender needs in such a balanced way. It combines creative design, industry analysis and data governance to create a unique user experience.


PROGRESS in Lending has named MCTlive! a top industry innovation. Over the past year, MCTlive! developed a major mortgage technology advancement with the addition of what the company branded its “Bulk Acquisition Manager” (BAM) solution, which is accessible via MCTlive! BAM is a Digital Loan Trading solution. BAM completely automates the process of packaging and transferring bulk loan bids, which benefits investors, lenders and MCT’s team of in-house mortgage loan traders. The result is a much quicker pricing process for bulk bid tapes, greater data security, better communication between counterparties, increased transparency for all parties, process consistency for investors within their existing platform, and centralization of data. BAM helps facilitate digitize loan trading on the secondary market. The effectiveness of the BAM technology has already gained 100% adoption by the ENTIRE investor community on the secondary market — across the board. And the level of transparency it offers between buyer and seller is hugely attractive and makes investors and lenders feel at ease.

Ellie Mae

PROGRESS in Lending has named the Ellie Mae Encompass NG Lending platform a top industry innovation. The Encompass NG Lending Platform allows lenders, service providers, and independent software vendors the ability to build custom applications in the cloud, integrate external systems and data, and extend Encompass in order to meet any and all industry challenges. Mortgage lenders and mortgage service providers can build, integrate, or customize solutions, and get them to their customers and market quickly. Lenders, partners, and third-party providers gain access to data and systems across the mortgage ecosystem. In the end, all participants can easily view and share loan date, sales pipeline, loan events, documents, and order services. A shared system of record allows all parties in the loan process to see the same up-to-to-date information in the same format. Everyone in the ecosystem can easily share, interact, and collaborate without having to create and support new channels.



Security, Profitability, and Compliance In The Cyber-Age

We don’t have to look very far to understand the damage of a data breach to individuals, corporations, and governments. Data breaches have become public relations nightmares; the cost to fix and identify the breach plus the costs to win back business hits the bottom line hard, or worse, leads to shuttered services.

In 2017 alone, 143 million consumers were impacted by the hacking of credit rating agency Equifax; the data of 51 million Uber users was stolen; and Yahoo revealed that all three billion of their accounts were hacked.

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As compliance management costs continue to mount, so do the costs to innovate and match the pace of advancing technology and data breaches. The result: Capital One exited the mortgage and home equity loans business in November of 2017 citing lack of profitability, marking a pattern of decline across the traditional mortgage and financial lending industry. Meanwhile, an uptick in agile digital lenders steadily filled the void, with Quicken Loans taking 4.9% of total market share in 2016.

The urgency to protect terabytes of data with legacy systems in light of the increase in cybersecurity breaches has put incredible pressure on the financial services industry to quickly secure its data, while simultaneously tackling complex compliance regulations and preparing for a new set of HMDA 2018 data requirements.

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How can we help the industry quickly adapt to protect its data, efficiently respond to compliance requirements, and maintain a profitable business?

Users of products and services from Microsoft, Amazon, Apple, and Google recently learned of security vulnerabilities in a wide range of computer chips installed on millions of personal tech devices. While the hardware was the source of the vulnerability, cloud-based software solutions closed the vulnerability. All it took was an automatic update.

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To successfully maintain a competitive edge in the mortgage and lending market during the cyber-age, securing the high volume of sensitive mortgage data is paramount. It needs a system that can immediately close security vulnerabilities and update compliance calculations and requirements through the ease of an automatic update.

Cloud-based platforms have revolutionized the security of dynamic document generation software with system infrastructures that increase the protection of consumer data and deliver safer, faster, and more user-friendly systems. This solves for several mortgage industry challenges: the costs to secure big data, protecting the myriad of personal, and much more.

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The Risks And Rewards Of Artificial Intelligence For Lenders

In looking at this, the recent debut of self-driving cars could transform a stressful commute into an opportunity to tackle emails and reading lists while making suburban long-distance travel great again. Americans are poised to gain more than 100 hours per year in free time by relinquishing the wheel to smart cars. The downside, though, lies in inevitable vulnerabilities like security threats, job loss, and environmental impact. Is the reward of AI worth the risk?

Artificial Intelligence is broadly defined as a computer’s ability to perform tasks normally requiring human intelligence. Ever since Alan Turing developed a test to determine a machine’s ability to exhibit intelligent behavior in 1950, roboticists and scientists have sought to pass it. In 2014, a computer program called “Eugene Goostman” succeeded by convincing 33% of the human judges that it, too, was human. Since then, companies like SAP, General Electric, and MasterCard have utilized machine learning and artificial intelligence (MLAI) to identify trends and insights, make predictions, and influence business decisions.

Artificial intelligence offers new opportunities to revolutionize operations in the financial services industry. Machine learning can process terabytes of data in seconds – volume which a horde of humans with older machines or methods could not process in a lifetime. The sheer power of modern computing in assessing an increasing number of variables with speed and accuracy gives a financial institution the ability to have rapid and strategic insights about customer behavior, reporting errors, and risk patterns. In the area of loan decisioning, this should lead to faster loan origination, fewer compliance problems with regulatory fines, and more inclusive lending overall.

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We wanted to know: What are the risks and rewards of AI in lending, and is it an inevitable next step for compliance management?

Bob Birmingham, CCO of ZestFinance, and Dr. Anurag Agarwal, President of RiskExec at Asurity Technologies, explore.

Which Discrimination Would You Prefer: Human Or Machine?

Anurag Agarwal: With machine learning, the decision-making is supposedly agnostic to overt biases. Humans, by definition, are free thinking but with biases that interfere with decision-making, especially in lending scenarios.

Bob Birmingham: AI is not a product but a solution, another approach to problem solving using advanced mathematics, analytics, and data. It’s not a magic fix but can remove some of the human discretion that leads to discrimination.

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AA: The problem is that computers could reinforce societal disadvantages by relying too heavily on data patterns. When a machine imports data, it creates an algorithm but cannot explain its methodology. It may introduce variations in the mix without understanding the broader implications.

Say you are trying to determine the risk of repayment for a borrower. The machine identifies physical appearance as a decision point. Based on data patterns, it detects that blue eyed individuals are more prone to timely repayment of loans. Noticing a correlation, it elevates that decision point to a higher influence in future lending. By taking an apparently agnostic data element and making a correlation it has in essence created discrimination because it doesn’t understand that blue eyes are mostly representative of Caucasians and the societal implications of making that borrower preference as a result.

BB: We’ve been here before as an industry. When regression modeling first came out it was confusing, flawed, and its accuracy questioned. At the end of the day, it was actually a more accurate process than purely judgmental underwriting because it followed a clear set of instructions to find answers. MLAI creates an opportunity for continued improvement to mitigate and eliminate discriminatory lending practices.

Risk: Machines can learn the wrong lessons from data.

Reward: Machines don’t have overt biases.

Alternative Data

AA: AI is very new. We don’t yet know how to regulate it or what its long-term impact is. As soon as data began generating, we followed this “go forth and multiply” pattern. Now we have more data than we know what to do with. Also, a lot of this data is unstructured.

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BB: Alternative modeling and alternative data are often lumped together, but that shouldn’t always be the case. MLAI alternative modeling may be used on the same data that current regression models run on and provide lift. Alternative data may be used with your existing models too but is more often used in conjunction with alternative modeling due to MLAI’s ability to handle large data sets. MLAI also has the ability to identify missing, erroneous, or wrong data and solve problems related to the inaccuracies.

AA: Alternative data, such as Facebook profiles, Twitter feeds, and LinkedIn pages, are already used in employment. HR departments use this publicly available information to determine if you are a qualified candidate. By knowing this in advance, you can change your online behavior to skew these data points in your favor. That’s the big question with alternative data in the lending space, along with privacy and transparency issues. We don’t know who gets to manipulate the data, where it comes from, or who has access to it. There’s no established system or standardized data points, which means most companies must follow their own proprietary lending rules, making it a regulatory free-for-all.

BB: While there are caveats, the rewards significantly outweigh the risks. There are many underserved individuals, businesses, and micro-borrowers with little or no credit that could benefit from alternative data. If an applicant doesn’t have good credit, or any credit at all, lenders can use MLAI techniques to paint a richer portrait about the borrower’s reliability using nontraditional factors like e-commerce histories, phone bills, and purchasing records. MLAI can open up the credit market, measure patterns, and fill in the data gaps, giving lenders a more holistic view of an applicant. Alternative data doesn’t have to be “creepy” data and doesn’t have to be social media data. Responsible and transparent use of alternative data to expand access should be encouraged.

Risk: The use of alternative data in credit underwriting raises privacy, transparency, and data integrity issues.

Reward: Alternative data can increase financial inclusion by granting access to capital to individuals and businesses with no traditional credit history.

Hackers vs. Trackers

AA: As we saw with Equifax, any time data is automated through the cloud there is the risk of data hacking. Now we are asking: who is responsible for protecting all of this data? Using such a detailed lending profile increases the necessity for data privacy and security.

BB: These are risks but the industry has always been responsible for protecting sensitive data.  The good news is, the more information we have about a borrower, the quicker we can identify errors and anomalous behavior. This is a great consumer benefit. Using the same Equifax example, imagine if we could say “this person was affected, and these actions are very different from their previous activity. This is a red flag that their information was stolen.”

Banks raise red flags when uncharacteristically large payments are made or a card is used in a different country, but imagine how much more effective these alert systems could be with additional insights into an individual’s unique behavior patterns.

Risk: More data in the cloud means a higher risk to consumers in the event of a data hack.

Reward: Additional data can identify unusual behavior quicker, which is a benefit to consumers.

The Regulator’s Dilemma

AA: Regulators have a big job ahead of them figuring out how to regulate companies using this information. Many of these companies aren’t sure how to use it themselves.

BB: Initially, users of MLAI in high stakes applications have an obligation to educate the public, create a set of best practices for their industries, and be transparent. Financial inclusion is something regulators support and this technology can help lower the barriers to entry.

AA: In late 2017,the CFPB issued a no-action letter to Upstart Network, an online lending platform that uses both traditional and alternative data to evaluate consumer loan applications. The terms of the letter required Upstart to share data with the CFPB about its decision-making processes, consumer risk mitigation, and methods for expanding access to credit for traditionally underserved populations.

By studying these companies, regulators can better understand the impact on credit in general, on traditionally underserved populations, and on the application of compliance management systems.

Risk: Regulators are still learning about AI and how to properly monitor it.

Rewards: Regulators support consumers and want to make access to credit more inclusive.

The elephant in the room: Jobs.

BB: Typically, Financial Investigative Units (FIUs) are looking at alerts 24/7, researching a person, tracking where money is going, and determining if they should file a suspicious activity report. It’s the banks biggest compliance cost and their highest area of employee attrition with numbers ranging from 15 – 35% turnover in the FIUs. With AI, FIUs can focus on stopping financial crimes rather than toggling back and forth between 15 screens and parcelling through tons of information. This should free compliance personnel up to do higher value, more rewarding work in addition to driving more efficient outcomes for their organizations.

AA: I prefer a human loan officer over an automated machine-learning system. If something happened six months ago that caused your credit to go down, you can explain that to a loan officer. How can you convey that to an automated system? Those intangibles make human interaction necessary. I believe there is something valuable in interpersonal interactions that can never be captured in a truly automated fashion.

Risk: Headcounts in certain departments that are reliant on manual processes could decrease.

Reward: New and more rewarding job responsibilities will result in less turnover, but ultimately there is no replacement for interpersonal interaction for certain positions.

Closing Arguments

BB: Currently, the industry operates with a “look back” approach for Fair Lending, which doesn’t really work. The whole process of defending and explaining discrimination after a model is put into production feels outdated. Today, we can and should build AI models to proactively remove discrimination before ever putting a model into production.

AA: This technology is still very new. Medium to big size lenders should let the technology emerge and wait to see what the regulatory landscape looks like. Regulators still have a ways to go before any of us will fully understand what the future looks like for AI in the lending space.

4 Ways To Overcome Fair Lending Obsolescence

Regulatory exams and intense scrutiny present challenges for today’s lenders as they work to properly execute fair lending compliance. The intense focus of the regulators, the difficulty of effectively collecting and analyzing the right data in a timely manner, and unclear standards can make fair lending compliance burdensome and complicated.

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In an attempt to minimize this burden while mitigating risks, many lenders have accumulated a variety of fair lending risk analytics tools and services to help them combat these issues, and compliance-related tasks are performed across a wider staff. However, juggling multiple fair lending tools, vendors and consultants has neither simplified nor improved the process. Comprehensive consulting services that provide a full report on the lender’s fair lending risk can take months to complete—which reduces the time that the lender has to enact changes before the CFPB, FDIC, FED or OCC issues and serves them notices.

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Many legacy tools were compliant at founding but are maintained by companies whose primary expertise is in software, not compliance. That lack of genuine understanding of complex and evolving fair lending regulation will ultimately result in functionality that does not adequately keep up with the lenders’ compliance obligations. Further, keeping all necessary staff up to date on the latest techniques can result in significant training, manual work, or additional professional services to keep up.

What are features of an ideal fair lending solution that can help lenders overcome these challenges?

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1: Implement Dynamic Redlining Analysis

Redlining has become a major concern since the CFPB announced that it would be a primary focus of their fair lending investigations. The ideal fair lending solution should make monitoring for redlining risk significantly more efficient, precise and easy to understand.

As this kind of analysis may be new to your team, find a solution developed by compliance experts, which helps automate the process so your team can spend time analyzing results rather than assembling numbers and cleansing data

2: Start with Compliance Expertise, Not Just Software Development

The ideal fair lending solution is maintained by a team steeped in regulatory compliance knowledge and who are actively participating with regulators and industry experts. This provides the best of both worlds—getting the expertise of a team with decades of experience and the speed of a dynamic fair lending solution will help you identify risks quickly so you have more time to focus on correcting potential issues.

3: Use a SaaS-Based Distribution Model

To keep as current as possible, look for Software-as-a-Service solutions, not a downloaded piece of software. This provides you with a number of key benefits, including:

Consistent & Timely Updates. HMDA and CRA peer data should be uploaded immediately following public release. New functionality can be rolled-out overnight to ensure you have the latest data and capabilities to make informed compliance decisions.

Highly Secure Infrastructure. With an ever-increasing bar for third party risk management, look for a solution, which reflects investment in higher standards for information security, control, and resilient infrastructure in which your procurement and technical teams can have confidence.

Maintenance. SaaS architecture means all the functions and software are maintained for you. This means there’s no need to download and install new patches to a local machine, saving time and money on your part. All updates are applied by the provider automatically and are live almost instantaneously.

Protection Against Data Loss. Backups of your most important compliance data are maintained so that a single server malfunction or other issue doesn’t destroy your data. This minimizes the risk of complete data loss from natural disasters, server hacks, and other events outside of a lender’s control.

4: Obtain Unrestricted Usage for Lenders

If you pay a per-seat charge for your software, you might be inclined to save money by restricting users. A solution which provides unlimited seats allows for multiple simultaneous users and collaboration. You can even engage internal and external counsel to look at findings in the same platform. This means you won’t hesitate to give access to the team member, who needs it, and no matter how many users you give access to; your subscription costs will remain the same.

Advanced Fair Lending Solutions Built by Compliance Experts

Isn’t it time that you address fair lending challenges head on by implementing the ideal fair lending solution?

Asurity Technologies began as an automated compliance product development division of Treliant Risk Advisors, a leading financial services consulting firm. It was spun out of Treliant Risk Advisors as Treliant Solutions by its investor, Temerity Capital Partners, in 2015. Following Temerity Capital Partners acquisitions of Risk Management Solutions, Inc. (RMS) and Mortgage Resources Group, LLC (MRG), Asurity Technologies was formed to combine the automated compliance solutions from Treliant Solutions, RMS, and MRG on a secure, cutting-edge technology platform. Asurity works closely with the Buckley Sandler law firm and Treliant Risk Advisors on product development and product enhancement.

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