Debbie K.Hoffman, CLO, Digital Risk, LLC
Utilization of digital mediums affects all facets of life. Both businesses and the consumers they serve have become reliant and accustomed to leveraging technology in conducting their daily affairs. As a result, the lending industry has had to embrace technology to meet consumer demands and increase efficiency. Due to online and mobile access, companies are no longer restricted to business hours to serve their customers, and they are able to connect with customers anytime and anywhere.
Digital Mediums are a Necessity, Not a Choice
he adoption of digital solutions has become a necessity for companies that wish to remain competitive in the mortgage industry. By streamlining the origination process, technology has allowed lenders to close loans faster and reduce turn-around time. Furthermore, technology reduces the cost of compliance, which is crucial given the spike in compliance costs following the 2008 financial crisis. The Mortgage Bankers Association reports that the cost of originating a loan increased by about $4,500 per loan from 2008 to 2014. Other reports indicate an increase in compliance spending by 30 percent. It is critical for lenders to invest in technology to reduce compliance costs and the overall cost of production.
Over the past several years, lenders have increasingly utilized technology to develop overlays to their loan origination systems, which ensure compliance with these growingly stringent government regulations. In addition, technology is now employed to facilitate more efficient reporting practices, which can ultimately reduce the cost of regulatory compliance. In particular, quality control (“QC”) platforms prepare the lender for audits by providing for documentation and standardization throughout the QC process. QC tools can also reduce human error, which ultimately provides an extra layer of protection for consumers.
Mortgage companies have developed self-service portals and centralized work flow tools that help increase efficiency by streamlining the loan production process. Self-service portals protect consumers by permitting greater transparency throughout the mortgage loan process. These tools enable customers to easily upload documents online so that they can immediately be reviewed by a loan officer for approval. Customers can also access important loan documents and play a more active role in the borrowing process. As a result, borrowers using these electronic platforms gain a sense of empowerment through their involvement in the process.
Costs and Risks of Increased Technology
Despite the many benefits that new technologies have brought to the mortgage industry, the implementation of these technologies also bestow several negative consequences. Given the complexity of the mortgage industry, lenders have attempted to use technology, such as the self-service portals, to simplify the loan process for borrowers. However, borrowers who are not as comfortable with navigating websites and mobile apps may experience difficulty with the online portals as they work to upload important documents and complete key steps of the loan application process. Of course, this hinders the process because customers must be able to navigate on-line portals for the self-service business model to be effective.
Furthermore, automation of the mortgage underwriting process has prevented certain groups of qualified borrowers from obtaining home loans. This is due to the fact that automated underwriting systems operate based upon a series of rules that are used to determine whether a loan applicant is a “safe” borrower, and these standards fail to take into account extenuating circumstances that affect a borrower’s eligibility for a loan. The software will deny a loan to any applicant that falls outside of set parameters, regardless of any countervailing factors that would justify loan approval. Applicants often fall outside the systems parameters if they lack strong credit or have nontraditional sources of income. For instance, automated systems are likely to deny applicants that are self-employed, retired or recent graduates carrying student loans. However, an underwriter performing a manual review of a loan application could consider various factors that are unique to the borrower to determine whether the borrower is qualified for a loan. For example, a self-employed applicant may have several years’ worth of consistent income from his or her freelance or consulting business. Therefore, lenders relying entirely on automated systems could ultimately reduce their customer base by rejecting qualified applicants. This illustrates how relying too heavily on software to ensure compliance can oversimplify a process, making it a matter of checking the box rather than evaluating the more ambiguous grey areas.
An increase in the use of automation in technology may lower the expertise and skills required of employees in any industry. The automation of manual tasks enables less qualified employees to complete the same tasks that previously required more expertise. Ultimately, this could lead to fewer professionals with advanced experience and sophisticated skills and a plethora of entry-level job applicants. Furthermore, while automation reduces the cost of labor, it may also reduce the quality of oversight within operations and delivery units.
The Interplay Between Technology and Regulatory Compliance
While advanced technologies can reduce costs and increase efficiencies, companies must carefully balance the adoption of new technology with regulatory requirements. It is quite clear that the use of automation can aid in implementation of new regulatory requirements – from setting scripts and rules, as well as allowing for program overlays. Nonetheless, regulators have expressed concern over the increasing automation of the mortgage lending process. In fact, the Consumer Finance Protection Bureau recently warned consumers to be wary of technology that rapidly accelerates the mortgage application process in response to Quicken Loans’ Super Bowl advertisement promoting its new Rocket Mortgage mobile app, which flaunts getting a mortgage in eight minutes. Nevertheless, the Rocket Mortgage commercial included some very valuable components of mortgage lending and was one of the first attempts by a large player in the mortgage industry to exemplify to consumers the ease of applying for a mortgage loan.
Integrating the Human Touch
To ensure compliance with stringent regulations, it would be prudent for lenders to adopt hybrid processes that augment digital technologies with human oversight. One example of this would be a fusion valuation approach that utilizes desktop appraisals in addition to local inspections to minimize appraisal risk. The on-site inspection would help verify the accuracy of online data and ensure that the appraisal encompasses site-specific factors that are not readily available online. Lenders can also take a hybrid approach to customer service by allowing customers to connect with customer service representatives through digital mediums, such as online chat features.
“The adoption of digitalsolutions has become a necessity for companies that wish to remain competitive in the mortgage industry”
The human element is necessary to monitor automated underwriting systems due to the risk factors that cannot be detected by computers. Such software may not be able to detect red flags, factors that increase the risk of default, or other potential fraud. These elements may be more easily identified by a skilled professional who has years of experience and human intuition and skill. The human touch can also aid in quality control by a skilled review of the output of automated systems to prevent system errors and ensure regulatory compliance.
If used properly, technology can help the mortgage industry tackle regulatory hurdles by improving accuracy, efficiency and transparency. However, overreliance on automated systems can lead to costly errors for both companies and their customers. Therefore, while lenders should capitalize on the benefits created by incorporating technology into the lending process, it is crucial for them to review their automated processes with an additional layer of human oversight.