Financial services institutions (FSIs) are always on the prowl for the next big thing in technology that will provide them with a competitive edge and reduce the cost of customer and account servicing. During the last decade, credit scoring and automated underwriting were major technology drivers. But U.S. mortgage lenders still lack a well-synchronized, end-to-end loan origination process that coordinates the movement of both data and documents from the point of sale through loan closing.
So in this decade, what specific technology is most likely to become the next big thing in mortgage lending? Further, will there be one revolutionary mortgage technology, or will multiple technologies revolutionize the mortgage technology landscape? TowerGroup believes that there is no one next big thing in mortgage technology but rather a series of interrelated technology innovations. These big things include further innovations in credit scoring and automated underwriting, as well as end-to-end business process management, enterprise document management and electronic closing systems.
EDM: Not Your Father's Document Imaging System
Document management is difficult in loan origination because the lending process entails many documents created by different parties and added to the transaction over a period of many weeks. The typical mortgage loan file contains between 25 and 50 different documents from multiple sources in multiple data formats. Lenders may collect these different documents from a minimum of ten different external sources, and a typical loan file contains 150 to 250 pages of paper.
To drive down processing costs and timelines further, lenders need more than an image capture and filing system. Leading mortgage lenders are now licensing enterprise document management (EDM) systems, which are a category of enterprise content management (ECM) systems. Document management in mortgage loan origination is moving from post-closing document imaging and archiving toward an end-to-end scanning, imaging, archiving and retrieval process that provides all parties to the loan transaction with customized, real-time electronic access to loan documents. EDM systems will thus reduce the great paper chase in mortgage loan origination. EDM systems provide online access to shared documents for multiple users, shrink loan processing timelines and eliminate labor and expense from photocopying and/or faxing documents between multiple lender departments that need to act on the loan file. Mortgage lenders will increasingly look to document imaging as a major area of cost savings in 2004 and beyond as lending volume declines and operating efficiency becomes more critical to maintaining the bottom line.
Getting Loan Deals Done: Making Loan Closing Simple and Error-Free
Among technologists, the phrase "completing the last mile" refers to delivering telecommunications services connectivity from the street to the home, which is in fact a greater challenge than delivering services from their source to local markets via long-distance cables. Mortgage loan closings are quite similar, in that the borrower, having run the lengthy gauntlet of loan origination, still faces a difficult loan closing process at the finish line.
Further, paper-based mortgage loan closing remains the most technologically fragmented multiparty transaction in loan origination. Electronic mortgage closings will require the integration of document preparation, title insurance underwriting, loan closing and funding, quality control, document recordation with the county recorder, mortgage investor delivery and other functions. Electronic loan closing platform technology capabilities will include loan file imaging, data management, data storage and retrieval capabilities. The documents may be copies, or they may be digitally signed original documents in electronic form.
All parties to the loan closing have customized authority and access levels to review, execute and print loan closing and disclosure documents before, during and after the loan closing. This will reduce closing file errors, reduce time spent at the closing table, and speed up the post-closing loan funding, quality control and mortgage investor delivery processes.
Buy or Build? The Choice Depends on Institution Size.
Electronic loan closing systems will grow in importance in coming years, but it is unclear how the technology product category will be defined. Lenders have two broad choices: either buy and integrate new systems or extend in-house or licensed loan origination and EDM systems to build a customized loan closing platform.
Credit Scoring and Automated Underwriting: More Efficiency on the Way
Credit scoring and mortgage investor automated underwriting systems (AUS) were the largest mortgage technology innovations during the 1990s. Mortgage lenders use the Classic FICO score to underwrite approximately 80 percent of mortgage loan originations, and most loans are underwritten by AUS.
The credit scoring and AUS revolution is continuing in this decade as AUS approves a wider variety of loan products and loan applicants, drives workflow-based loan fulfillment and links collateral assessment more tightly to the AUS credit decision. However, lenders require enhanced methods to evaluate loan applicants with lower credit quality and those with little credit history on record. Alternative credit scoring such as Fair Isaac's NextGen FICO score, along with alternative credit reports for mortgage applicants with less traditional credit experience, will help lenders serve this market segment.
On the Horizon.
AUS enhancements and enhanced credit scoring will lower loan origination costs by $150 per loan during the next three years. The outlook for the NextGen FICO in mortgage lending is very positive given the credit scoring method's increased focus on risk-based pricing and the subprime and "emerging markets" customer segments. The score will also help lenders prescreen and slot loans for different levels of underwriting and processing.
The Final Frontier: Eliminating Process Gaps Through BPM
Mortgage loan origination is in an intermediate stage of technology evolution: Numerous subprocesses are being heavily automated using business rules management (BRM) systems, but incomplete integration and workflow automation reign between subprocesses. The lending process remains a series of human-to-human, human-to-system, system-to-system and system-to-human subprocesses. But lenders are now building on successes in BRM to implement enterprise-level business process management (BPM).
Business Process Management in Mortgage Lending.
Business process management is the specification, implementation and monitoring of a series of defined and interconnected tasks to achieve specific goals. BPM involves process definition and change management in addition to software selection and systems implementation.
From a technology perspective, BPM represents a convergence of EDM systems, BRM systems and workflow tools. It also includes application integration, process modeling and process monitoring tools, combining these technology components into a single platform. BPM requires the creation of a separate process technology layer and a process-centric view of IT where the end-to-end process management is separate from smaller application systems. This separate layer works with existing investments in software applications, databases and data integration tools, and it plays a unifying role for specific subprocesses automated by BRM software.
BPM to Emerge as a Mortgage Technology Product Category in This Decade.
By the end of this decade, business process management will have proven to be the biggest single innovation in mortgage technology. BPM will create a synchronized, end-to-end lending process that electronically tracks both data and documents and provides customized access to different parties to the loan transaction. A key structural decision for lenders regarding information management will be whether a separate end-to-end BPM decision layer will be the primary process manager, and if so, how to coordinate it with the process management functionality in BRM systems, EDM systems and other lending subsystems.
Craig Focardi, CMB, is a senior analyst in the Consumer Lending & Bank Cards practice at TowerGroup, a leading research and consulting firm focused on the global financial services industry. He is a career mortgage banker, with more than 20 years of loan product development, technology marketing, and research experience. He can be reached at [email protected]