Magazine article Mortgage Banking

Adopting a New Paradigm for the Mortgage Lending Process

Magazine article Mortgage Banking

Adopting a New Paradigm for the Mortgage Lending Process

Article excerpt

In the beginning, the process involved in acquiring home financing was much simpler than it is today. There was a great deal of time and paper involved back then, but the deal hinged on a committee's decision, usually based on personal knowledge of the borrower.

Today, our process is far more complex--so much so that our business has for some time compared more favorably with that of a product manufacturer than a seller of financial instruments.

Technologists began viewing the lending process under a manufacturing paradigm over a decade ago when developing software. It was necessary to see the entire process as one contiguous whole in order to create tools that would integrate and connect processes quickly to move the deal through to the closing table.

The rise of a multitude of loan products during the subprime lending boom weakened the manufacturing paradigm as each deal became a "story loan" and the enterprise was managed by exception instead of any fixed rule.

As the industry works to recover in the wake of the resulting bust, it is clear that the rigor imposed by a manufacturer's view of the industry would have served everyone better.

Those that continue to resist a shift to that paradigm are receiving frequent and often harsh reminders of the potential repercussions.

The recent bump in originations, for instance, show-cased a potential risk to the lender enterprise--at least to those who view the enterprise through the lens of an industrialist. Capacity is the problem or, as a manufacturer would put it, there is a lack of transparency in the supply chain.

There are at least three good reasons for mortgage lenders to begin thinking about their operations in ways similar to manufacturers, and supply-chain management issues are first on the list. The others deal with customer relationship management (CRM) and regulatory compliance.

As long as bankers have been risk managers, they have had to deal with third parties to supply them with the information and data they use to make decisions. Because much of the risk in the deals mortgage lenders originated in the past was sold off, supply-chain management was largely a matter of getting all of the vendors together and letting them decide who would offer the lowest bid for meeting appropriate service-level agreements. Those days are over.

The Consumer Financial Protection Bureau (CFPB) has made it clear that lenders are ultimately responsible for every aspect of their third-party vendors' businesses, right down to the methods they use to train their people. While all of the rules have not yet been written, the CFPB has already established fines for non-compliance--some as high as $1 million per day.

Lenders can no longer focus on the low-cost bidder if they hope to remain compliant. Add that to the fact that obtaining talent is now more expensive as there are fewer experienced workers to fill more demanding jobs, and supply-chain management becomes nearly as important in the banking enterprise as risk management.

The tools required to effectively recruit, vet, manage and score vendors in the mortgage space are very similar to those that manufacturers use to run their operations. The quality-assurance/quality-control (QA/QC) processes required are also nearly identical.

In the past, many have claimed that there is no true customer relationship management in the mortgage industry. In truth, there is precious little loyalty here, either on the part of borrowers or the loan officers that serve them. …

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