Top Consumer Lending IT Initiatives for 2011
Focardi, Craig, Mortgage Banking
There are many external business drivers of lender strategy that also drive information technology (IT) spending. Business drivers impacting consumer lending markets in 2011 include unprecedented changes in regulatory compliance, weak economic recovery, flat to declining loan volume, loan investor information requirements, ongoing depository institution failures, and the operational and financial burden of distressed asset management and lawsuits.
Lenders' IT strategies in 2011 need to respond to these external business drivers and focus on internal strategies to reduce operating costs, improve margins and update loan demand-generation strategies. This Tower on Tech column is excerpted from a TowerGroup Research Note entitled "Consumer Lending: Top 10 Technology Initiatives for 2011," and highlights a number of technology initiatives that will help lenders implement their business strategies in 2011.
New, maintenance and replacement technology for compliance
New federal regulations are the primary business driver of compliance IT spending. However, Basel III is an additional driver for many lenders. Total IT spending to support regulatory compliance, loan investor and rating-agency requirements will continue to increase from 2011 to 2013. Budget will be allocated to maintenance of existing systems, replacement of legacy systems and new IT capabilities to meet new compliance requirements.
TowerGroup believes that lenders need to adjust their philosophy about the business value of compliance IT spending. Many lenders that view compliance as an onerous burden sapping resources away from more important business spend as little as possible. A more beneficial attitude is to recognize that many aspects of compliance are on the critical path of consumer loan selling, account opening and servicing, and could impair those core processes if not automated.
TowerGroup believes that lenders should incorporate compliance spending into their core loan origination and loan servicing technology road maps as core functionality.
Integrated credit, collateral and fraud risk management
High mortgage-default levels, home-price depreciation, weak employment and external investor information requirements are driving demand for credit and collateral risk-management (CCRM) systems. CCRM systems are portfolio risk-management platforms that integrate credit and property risk assessment with multiple credit and collateral data sources and analytic systems. The same business drivers are also causing lenders to enhance credit, collateral and fraud risk-management functionality for new loan origination.
Core lending systems transformation
Weak lending markets and the rapid pace of regulatory change are the most important business drivers of IT spending for core loan origination systems (LOSes) and loan servicing systems. In general, these forces reduced demand for replacement of core loan origination systems, but have increased demand for hosted LOS systems among tier-3 and some tier-2-sized lenders. In recent years, legacy modernization has been the dominant core lending system strategy for many lenders, but new compliance requirements are leading an increasing number of lenders to pursue LOS replacement.
Lenders must of course focus on required system enhancements to conform to new federal consumer-protection regulation, loan investor data and documentation, and risk assessment. They should also increase spend for internally mandated process and risk-control requirements, in loan servicing, tier-1 and tier-2 lenders rarely replace the core system--but they and their core system vendors typically make system changes on a regular basis with small fluctuations in IT spending. However, lenders should increase the pace of spending for data, process, compliance, collections, regulatory reporting and loan investor reporting.
Data management for business intelligence
New data and reporting requirements from asset-backed securities (ABS) and mortgage-backed securities (MBS) investors, regulators and rating agencies are the primary business drivers of new IT spending for data management. …