Tuesday, August 14, 2012

The Future of Lending: Mortgage Manufacturing

Over the years, I have promoted the manufacturing of mortgages mindset. The need for consistent, repeatable processes has only been amplified with the strict regulations directly impacting lenders today. I invite you to read my article from August's issue of Mortgage Banking Magazine, and let me know your thoughts on this paradigm. What do lenders think of this mindset? What will it take for the industry to focus in on this trend and take steps towards this goal? Or are we already there? 

Adopting a New Paradigm for the Mortgage Lending Process
Mortgage Banking Magazine

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, showcased 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. 

There is “a churn and burn” business mentality where borrowers matter when they’re in the buy zone and then disappear completely when they do not qualify for our programs. CRM tools that have been offered to lenders have largely been ignored.

Consumers also have had little interest in hearing from mortgage lenders when not in the market for a new loan--but that may be changing. As part of its mandate to serve and protect American consumers, the CFPB has launched an Office of Financial Education and hired an executive in charge of “financial empowerment.” With a better understanding of the process, borrowers might learn from the government a new set of standards that they may one day apply to all lenders. As it is, CFPB has already made it very simple for a consumer to file a complaint against a mortgage lender for any reason.

To mitigate the potential risk of borrower ill will and the resulting and as yet undefined penalties the CFPB may apply to it, lenders must approach CRM in a new manner--a methodical manner in which the borrower experience is treated as one more quality of the finished product (the loan), subject to the same quality controls applied to the rest of the lending process. The ultimate outcome will be significantly higher levels of customer service, resulting in increased consumer satisfaction.

But borrower sentiment is only one of many factors that CFPB will monitor in an effort to bring to life the letter of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In fact, there are so many rules that will come out of this law that lenders will have no choice but to consider compliance with each of them as one more discrete unit of resource that must be built into every loan that comes off the line. Managing the lending process by exception no longer makes any sense.

On the other hand, leveraging the mature tools our industry has developed to ensure quality, such as enterprise resource planning (ERP) and Six Sigma, can be an invaluable source of previously unknown benefit to lenders. Even as American manufacturers have made great strides in creating enterprises capable of zero-defect value creation, so will lenders learn to use the same tools to create mortgages that are fully compliant.

There are those looking to revolutionize the industry and who wholeheartedly believe in the concept of manufacturing mortgages. Dan Green, previous executive vice president of Prime Alliance Solutions Inc., Edina, Minnesota who assumed the position of executive vice president of marketing for Mortgage Cadence post-acquisition, said at the time of the acquisition, “I expect to quickly combine our already strong companies together and create one brand and extensive product suite that continues to revolutionize the lending landscape by taking a manufacturing approach to the process and creating zero-defect mortgages.” A strong statement, if I do say so myself.

Today, our industry finds itself in a position to start over. By learning from other industries and adopting a new paradigm for mortgage lending and servicing, we can guarantee success for consumers, regulators and our own industry.


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