3. LendingQB
The five steps to making better technology decisions
More and more lenders According to a recent survey released by QuestSoft,
nearly one in five lenders is looking to change their
are contemplating major entire loan origination software (LOS) in 2012, almost
double the rate of years past. Merely contemplating
technology upgrades in a change in LOS technology involves a considerable
amount of time and resources, so the growing number
the near future, but do of lenders that are putting themselves in a position
to implement a new LOS indicates that a significant
they really know what market shift is taking place. There are several factors
driving lenders to search for new solutions includ-
they want? ing increased regulatory and compliance demands,
shrinking profit margins, vendor consolidation and
Mortgage lending is a complicated, document-inten- the emergence of new technologies.
sive and highly regulated business that lends itself
well to technology. Producing a mortgage note re- Increased Regulatory and Compliance
quires a lot of moving parts, so lenders are constantly Demands
in search of tools that will improve productivity and
lower their costs. For certain, the aftermath of the mortgage meltdown
has forced lenders to scrutinize the capabilities of
In light of drastic regulatory changes and increased their technology to keep pace with regulatory and
scrutiny over the mortgage industry in general, more compliance changes. Technology providers must
lenders than ever are contemplating major technol- incorporate new forms, documentation and calcula-
ogy upgrades as a way to boost their business effi- tions in order to ensure that their systems aren’t ob-
ciencies, even to the extent of rebooting their entire solete.
strategic plan.
But the impact of regulatory and compliance changes
The good news is that the emergence of new tech- go further than just updating documents or calcula-
nologies such as cloud and mobile computing makes tions. Investors and regulators, such as the recently
the prospect of change very appealing. But like a kid developed Consumer Finance Protection Bureau
in a candy store, it can be overwhelming for a lender (CFPB), are demanding greater transparency of a
to know exactly what pieces of technology are going lender’s process, requiring more detailed and better
to have the greatest impact on their business. quality data. As a result, data that was sufficient in
the past is being taken to task, especially for lend-
Given this context, lenders need a better way to ers that rely on integrations between more than one
understand technology and what it means for their system to run their operations. Multiple databases
business. They need to have the insight and objec- and incomplete transfer of data make it difficult for
tivity that allows them to understand the root causes lenders to locate information that is accurate and can
of problems before they begin looking for solutions. be relied upon for critical business decisions. The po-
An Enterprise Process Assessment (EPA) presents tential impact can be catastrophic for a lender given
a model for lenders to evaluate technology and the the increased scrutiny and penalties that can be lev-
process changes it induces, but within a tangible and ied on lenders by agencies such as the CFPB.
measurable framework.
Reduced Profit Margins
Why are lenders contemplating major
technology upgrades? According the Mortgage Banker’s Association
(MBA), secondary marketing profit margins have
There are a number of forces that are motivating declined the past two quarters and this had a substan-
lenders to make major changes to their technology. tial impact on lender profitability. Between the third
4. LendingQB
The five steps to making better technology decisions
and fourth quarters of 2011, average secondary mar- • 2008: ISGN acquired Dynatek, MortgageHub,
keting profits dropped 15 basis points and average Diamond, and LenStar
net production profit fell to 58 basis points, reducing • 2008: Fiserv acquired Portellus
lender profitability by 25%. Therefore, lenders are
looking for new platforms to help them lower their • 2010: Fidelity National Financial acquired Com-
cost per loan and improve profitability to mitigate the merce Velocity
impact of falling secondary marketing gains. • 2010: Wipro acquired Gallagher
Consolidation in the Mortgage • 2011: Lender Processing Services acquired
Technology Space PCLender
• 2011: CoreLogic acquired Dorado
Since 2006, more than 80,000 mortgage brokers have
• 2011: Monitor Clipper Partners Inc. acquired
exited the business as loan volume dropped from a
peak of $3 trillion in 2005 to an expected volume of Mortgage Cadence, Inc
less than $1 trillion in 2012. As the overall industry • 2011: Davis + Henderson Corporation acquired
struggled, so did mortgage technology vendors. Ac- Mortgagebot
cording to industry experts, the mortgage technology • 2011: Ellie Mae acquired Del Mar Datatrac
vendor market shrank from approximately 600 ven-
dors in 2005 to just 300 today. And the contraction • 2012: Davis + Henderson Corporation acquired
continues as merger and acquisition activity heats Avista
up. Already, a number of mortgage technology pro- • 2012: Mortgage Builder acquired GCC Servic-
viders have made some major moves: ing Systems.
Figure 1: With profits under pressure, lenders are looking at technology to increase efficiency.
2011 Mortgage Bankers Performance Report, Q2 to Q4
$1,400.00 400
350
$1,200.00
300
$1,000.00
250
Average Profit Per Loan
$800.00
200 Average Production Profits (bps)
$600.00
150 Net Secondary Marketing Income
(bps)
$400.00
100
$200.00
50
$0.00 0
2011 Q2 2011 Q3 2011 Q4
Source: Mortgage Bankers Association
5. LendingQB
The five steps to making better technology decisions
This consolidation activity is causing lenders to LendingTree.com, one of the pioneers of Internet
question the long-term viability for continued vendor mortgage lending, recently reported that fully 21 per-
support of their platforms, especially if the vendor cent of consumers now use the Internet to shop for
has recently been involved in a merger or acquisi- a home loan. With the concurrent growth of online
tion. As a result, lenders are taking pre-emptive ac- mortgage marketplaces like LendingTree and Zillow,
tions to search for a technology vendor that provides mortgage lenders of any size can look to the Internet
a greater degree of comfort related to a long-term as a legitimate source of loan volume.
commitment to support and enhance their platforms.
These are just a few examples that demonstrate the
Emergence of New Technology transition that is taking place with mortgage lend-
ers. The convergence of compliance, consolidation
In spite of the industry’s struggles, mortgage tech- of providers and new technology are providing the
nology continues to innovate with the rest of the impetus for lenders to consider giving up their legacy
business world. The Internet, cloud computing and systems and establishing a new technology founda-
mobile technology are just three examples of newer tion for their business moving forward.
technology that are beginning to establish themselves
as key drivers of growth. Why do lenders make bad decisions on
technology?
Cloud Computing
When we face a problem, our natural instinct is to
The emergence of cloud computing is by far one of solve it. When we see an opportunity, the instinct is
the biggest advances that is changing mortgage tech- to go after it. So in the fast-paced world of mortgage
nology, especially in the LOS space. The fact that lending, it’s only natural for lenders to have a reac-
lenders are able to reduce their total cost of software tionary response to problems and opportunities.
ownership (TCO) by as much as 70 percent using
a cloud-based or hosted solution, and the ability to However, this type of reactionary behavior can be
scale software more efficiently are factors that are counter-productive and ultimately lead to poor deci-
swaying lenders to change their technology. sion making. Moving quickly to quash a problem or
take advantage of a new opportunity can turn into a
Mobile Technology
game of whack-a-mole: as one problem or opportu-
Although still relatively immature, lenders are also nity is solved, another one appears. Since not every
taking a serious look at mobile technology as a way problem can be solved nor can every opportunity
to drive more efficiency and to attract volume-pro- turn into The Next Big Thing, a reservoir of frustra-
ducing talent to their organization. While completing tion builds into a crisis, at which point the executive
a 1003 application on a smartphone is still a ways off staff calls for a technology makeover.
(at least practically speaking), linking originators to
This reactive model of decision making creates a
information in their LOS and real-time pricing tools
list-driven process of technology evaluation. Lend-
are already here. The direction mobile goes is un-
ers gather all of their identified problems and oppor-
known, but many predict that it’s only a matter of
tunities into a ‘wish list’ and embark on a search for a
time before lenders are expected to have some form
provider that can meet these needs. The provider that
of mobility built into their technology strategy.
is best suited to satisfy their wish list at the lowest
Online Lending cost is the one that is selected. In response, technol-
ogy providers market and sell their products using
It’s been a long time coming, but the Internet has ‘feature lists’ to make it easier for lenders to identify
finally become a legitimate business channel for their value.
lenders. Although the concept of using the Internet
to market home loans is as old as the Internet itself, Why, then, do so many lenders end up having
actual usage by consumers was scant until recently. buyer’s remorse? Although data is scant, one study
6. LendingQB
The five steps to making better technology decisions
showed that only 60 percent of lenders were happy reason why they need it or the actual problem they’re
with their LOS technology investment (Figure 2). trying to solve. Is it because the cost of handling pa-
Many were disappointed with rollout times, cost per is too high? Is it because their staff has a hard
overruns and customer service. But more telling is time finding documents because they’re in different
that in this study, 1 in 4 lenders felt that their provider locations? There are several reasons behind a request
over promised on functionality and ended up deliv- for a feature or tool.
ering vaporware. In fact, almost half of all lenders
believed that vaporware is a common occurrence Therefore, it’s easy to see how a lender’s needs can
in the mortgage technology industry. easily become lost in translation, and how that can
result in dissatisfaction with their technology choices
But what would vendors have to gain by not deliver- buyer’s remorse. Vendors aren’t necessarily guilty of
ing a solution that they promised? And why would delivering vaporware; they’re simply making wrong
lenders continue working with a company that they assumptions about lender expectations.
felt did not follow through on their promises? We
believe that the real cause of dissatisfaction with Lenders need to understand the root
technology outcomes is not dishonesty, but a lack of causes of problems
understanding. A lack of understanding between
lenders and vendors, as well as a lack of under- So how do lenders get beyond this gap in understand-
standing that lenders have about themselves. ing? The first step is to recognize that every problem
or opportunity has a root cause (or goal, in the case of
Lost in Translation opportunities). Asking questions and spending time
tracing where a problem originates from will inform
When a lender goes through their wish list of desired lenders about real solutions, instead of blindly grasp-
functionality and say they need a document imag- ing at features.
ing system, for instance, they don’t communicate the
Figure 2: Lenders feel that vendors over-sell and under-deliver.
Did your new LOS meet expectations? Did your provider deliver vaporware?
No Yes
74% 26%
Did not meet
expectations, 22%
Is vaporware a common occurrence?
Met expectations,
60%
No Yes
55% 45%
Source: Dynatek Customer Satisfaction Survey
7. LendingQB
The five steps to making better technology decisions
For example let’s look at that document imaging Cost per loan can be divided into two categories:
system your operations manager keeps bringing up? hard costs, such as costs paid to third parties, and soft
It turns out that even though all of your documents costs, which can be attributed to labor costs. While
are already in an electronic format, processors keep hard costs are relatively easy to quantify, as most of
printing out documents because the current system it is captured in the LOS database via the HUD-1,
doesn’t allow them to look at a loan file and an elec- soft costs are much more difficult to ascertain. But
tronic document simultaneously. Alternatively, if a according to the Annual Mortgage Bankers Perfor-
lender is unwilling to invest in hardware like multiple mance Report conducted by the Mortgage Bankers
monitors, their staff will resort to inefficient methods Association, labor costs make up as much as two-
such as printing paper documents in order to com- thirds of the cost per loan (Figure 3).
plete their tasks. Without this level of understanding,
chances are that a lender won’t achieve the ROI they With these two viewpoints in mind, LendingQB de-
expect when they buy new technology. veloped Enterprise Process Assessment (EPA), an
objective, well-defined, comprehensive process that
The second step is to look at problems or opportuni- helps overcome the challenges associated with com-
ties in a way that can be measured, so that relative plicated technology evaluations. The EPA is a deep-
value can be established. A lender’s wish list typi- dive analysis of a lender’s workflow process that
cally doesn’t have any rhyme or reason; everything provides a method to model and measure process
is deemed important. But that’s not reality. A prob- improvements using objective standards. The EPA
lem or opportunity will have differing impacts on a gives lenders direct access to know what their labor
lender’s business, so it’s essential to understand ex- costs actually are. The goal is to help lenders make
actly how much that impact is. And when it comes better decisions and achieve a high level of ROI from
to mortgage lending, nothing is more important than their technology investments.
the bottom line, usually expressed in terms of cost
per loan.
Figure 3: Personnel costs account for more than two-thirds of the cost per loan.
Direct Loan Production Expenses
OTHER DIRECT
EXPENSES
23%
TECHNOLOGY-
RELATED EXPENSES
2%
OCCUPANCY AND PERSONNEL
EQUIPMENT 69%
6%
Source: Mortgage Bankers Association
8. LendingQB
The five steps to making better technology decisions
EPA: Five steps to making better work is being performed, the modeled cost per loan
technology decisions is compared with the actual cost per loan using ac-
counting data. A variance analysis reveals any over-
The EPA consists of five steps that help lenders un- sight or inaccuracy in the model and allows lenders
derstand the value of any given technology invest- to identify value-added activity costs.
ment. The EPA uses an objective analytical process
that strips out the influence of opinion or emotion. STEP 3: Identify non-value-added activity costs
The process may reveal new problems or opportuni-
Now, with a clear understanding of value-added ac-
ties, or it may even help the lender reach the conclu-
tivity costs, it becomes easier to see where lenders are
sion that no technology change is necessary at this
potentially wasting resources on activities that don’t
point in time. Whatever the case, the goal is to give
add value to their process. Some examples of non-
lenders a greater understanding of themselves, and
value-added activities are re-keying of data, toggling
to see that technology is but a means to an end, not a
between different applications, spending too much
goal in and of itself.
time answering loan status questions, locating paper
STEP 1: Model workflow activities documents, correcting errors, or even web surfing.
This analysis provides an additional benefit to the
The first step of the EPA is to get a holistic picture of lender because some of the process improvement op-
a lender’s entire workflow process. From origination portunities that will be identified can be solved with-
to delivery, the EPA presents a series of questions to out any changes to technology.
lenders that are designed to literally draw a detailed
picture of current business processes. Within this STEP 4: Discover the causes of problems
workflow visualization, activity costs are derived in
Next, a lender’s wish list is dissected and compared
order to understand the value of each step and calcu-
to the improvement opportunities identified in the
late a net cost per loan based on the aggregate of all
workflow model and activity analysis to prioritize
activities.
the original features list (Figure 4). This compari-
STEP 2: Identify value-added activity costs son, coupled with interviews with different stake
holders, will help determine which features are really
In order to ensure that the workflow model is accu- needed and what problem(s) did the lender envision
rate such that it can clearly identify where necessary the feature would address. During this step, it’s not
Figure 4: Lenders need to understand the root cause that is driving their request for a feature.
Lender Wish List Root Cause of Problem
A single, end-to-end platform. Incomplete or wrong data residing in different
systems.
Business rules engine. People are forgetting to perform specific activities.
Easier custom document creation. Regulatory changes cause forms to be out of date.
A web portal for borrowers. Allow borrowers to help themselves.
Better compliance checks. People are forgetting to perform compliance
checks.
More useful report creation tool. Reports are difficult to create.
More detailed audit logs. Employees are playing the he-said-she-said game.
Streamlined disclosure system. Originators are not complying with RESPA.
9. LendingQB
The five steps to making better technology decisions
uncommon for lenders to discover that the original EPA is key to profit improvement
feature request is no longer relevant, or that the root
cause could have been solved better through an en- The EPA is designed to be a tool that lenders can
tirely different feature or tool. use to empower themselves when making any type
of technology decision. In fact, we encourage lend-
STEP 5: Quantify the impact of solving a ers to incorporate the EPA model into their business
problem development strategy as a way to drive continuous
profit improvement (Figure 5).
Using all of the information that is gathered in the
aforementioned steps, lenders gain a solid under- The EPA should not be treated as a one-time event
standing as to how to improve their processes, what but should be applied again and again, on an annual
those process improvements are worth, and whether basis, in order to identify activities that could be im-
root causes of problems are being addressed. Any proved or eliminated. Using this approach, lenders
given solution - be it a document imaging system, a become truly innovative businesses that lead the
product and pricing engine or an entire loan origina- transformation of the mortgage industry, instead of
tion system - can now be evaluated in terms of ac- falling victim to change.
tual dollar figures to determine the overall cost per
loan savings offered by the solution versus its actual We believe that by focusing on an objective and pro-
cost. Therefore, every potential technology solution cess-oriented approach, lenders can remove the fear,
can be measured in terms of ROI. Lenders can now uncertainty and doubt associated with technology
express their needs and expectations to vendors in a evaluations. By working constructively to find solu-
way that doesn’t need translation. tions and avoiding the lure of features, lenders will
achieve better ROI from their technology and pave a
sustainable road to profitability and success.
Figure 5: Continuous application of the EPA model creates a future-proof strategy for technology.
Enterprise Process
Assessment
Implement
Identify Solutions
Solutions
Make
Problem/Solution
Trade-
10. LendingQB’s goal is to help mortgage lenders win the
lending game.
Finding the competitive edge in mortgage lending requires more than technology and industry know-how. Mortgage
lending is on the verge of major change that will re-shape the way consumers buy homes. Today’s lenders need a part-
ner that will guide them to strong and consistent returns. LendingQB is composed of a team of highly experienced in-
dividuals that blend advanced technology with an analytical, service-oriented philosophy that focuses on real results.
For additional information about LendingQB and the Enterprise Process Assessment,
contact:
Binh Dang (bdang@lendingqb.com)
Linn Cook (lncook@lendingqb.com)
For sales and general information, contact:
Gigi Campbell (gcampbell@lendingqb.com)
John Campbell (jcampbell@lendingqb.com)
Holt Crowder (holtc@lendingqb.com)
For more information, please visit www.lendingqb.com
