@Home in the Digital World

By Pamela Babcock

In a world where someone can adjust the temperature of their home with a click of their smartphone and make payments and check account balances with the push of a button, how is digitization changing the mortgage sector?

“Why anyone should have to wait 45 days and deliver six pounds of paper in order to get a mortgage approved in this day and age is just ridiculous and not what customers want or expect,” says David Brennan, SVP and chief residential and consumer lending officer at Cape Cod Five Cents Savings Bank in Orleans, Mass.

To succeed in the competitive and commoditized mortgage lending space, a growing number of banks are looking to fintech to digitize and automate mortgage lending—a process filled with laborious manual procedures—and transform how mortgages are originated, sold and serviced. Whether dealing with applications, underwriting, closing, servicing and selling to the secondary market, one thing is certain: there’s no one-size-fits-all approach.

Banks should have “a roadmap for what a digital mortgage process looks like” that they can tailor to suit their institutions and customers, says ABA VP Audrey Decker. “Our banks recognize that there’s not one solution that will fit every bank. Bankers want to understand where fintech fits into each part of the mortgage life cycle so they can choose among options and develop a longer-term strategy.”

“Really, what banks want to do in this space is to continue what they work hard to do well every day—attract and delight the customer—while also streamlining and shortening the mortgage process,” she adds. “Everyone benefits from faster closings, but bankers know the importance of delivering on their borrowers’ expectations.”

Since the financial crisis and the Dodd-Frank Act, mortgage originators and servicers have been on an uphill climb to implement a torrent of regulations. Until recently, they’ve had to devote much of their resources to absorbing, interpreting and implementing new compliance requirements, but now that the last wave of rule dates has passed, they are shifting focus to the next generation of the customer experience.

“Now is an opportunity for banks to pick up their heads from that regulatory work and redirect energy toward competitive strategies for their mortgage businesses,” Decker notes.

Early steps

But digitizing is not an easy feat. Applying for, obtaining and closing on a mortgage and getting approvals for a loan to be underwritten is a long and complicated process that involves a torrent of documentation from various sources and stakeholders.

Reading Cooperative Bank in Reading, Mass., is in the preliminary stages of mortgage loan digitization, says Julieann Thurlow, the bank’s president and CEO. It accepts applications online and is in the process of offering the ability to apply via a mobile device, but for now it’s just a portal where people input data that’s uploaded into the bank’s internal system.

Likewise, First State Bank of St. Charles in Missouri doesn’t plan to fully digitize its process, but is enhancing it and hopes eventually to reduce application-to-close times from 45 days to 21. President and CEO Luanne Cundiff says her staff is working to improve the user experience and create a more efficient online application process with better communication for all players, including real estate agents, lenders, processors, underwriters and servicers.

One focus, Cundiff says, has been working on what customers see on First State Bank’s website and mobile platform to make sure its mortgage division—First State Bank Mortgage—is front and center. Later this year, it hopes to launch “Home Loan Express” to brand the application process.

Back-end change

It’s not just the consumer-facing experience that matters, too. One reason that mortgage digitization is so complex is the number of internal systems a bank has to tap into, especially if the institution sells to American Bankers Association-endorsed Fannie Mae or Freddie Mac.

The secondary market can be a spur to digitization, notes Brennan. “We’re making a lot of good progress and it’s all changing very, very rapidly.” He credits Fannie Mae, and later Freddie Mac, for setting new standards for how loans are processed with an electronic process to better and more efficiently document loans.

The bank has implemented most components of Fannie Mae’s Day 1 Certainty technologies and is receiving a growing number of property inspection waivers and appraisal certainty. Fannie Mae and Freddie Mac have approved specific vendors, such as the Work Number and FormFree, which capture verification of borrower’s income, employment and assets electronically to integrate into their automated underwriting systems.

Beyond the secondary market, a growing number of regtech companies are checking the data being put into fintech solutions. LoanLogics’ LoanHD is cloud-based software designed to address and monitor regulatory compliance while detecting potential risks. It uses a library of business rules and electronically harvested data from loan documents and third-party data sources to automate many manual tasks associated with checklist-driven audit processes for pre-underwriting, correspondent lending prefunding reviews, due diligence, HMDA, TRID, loan boarding, servicing transfers and quality control.

Brian Fitzpatrick, CEO of LoanLogics—which is endorsed by ABA for mortgage quality control management and performance analytics—says automation of the regtech piece of the puzzle means fewer people, which helps drive human capital costs down while helping ensure “the process is done correctly. And they’re getting responses faster, better and cheaper than traditional ‘stare-and-compare’ methods. It becomes the red light/green light to tell the fintech solutions whether they can actually proceed with the process.”

Beyond paper

Digitizing can mean different things to different institutions. It need not mean a 100 percent paperless process—sometimes paper still has a place. “A lot of the digital innovation surrounding mortgages upends the traditional process, so you’re not merely looking at replacing something that is paper-based with something that is electronic,” Decker explains.

At Reading Cooperative, closings are still conducted at an attorney’s office where documents are scanned into an electronic file. “There are different points in the process where paper comes back to life, which is all of our challenge and keeps the cost of originating a mortgage so high,” Thurlow notes.

But a lot of innovation is taking place after that, in the middle and end of the process. Changes may be daunting for some institutions, particularly if new technology doesn’t “plug and play” into their existing system. For example, when someone applies for a mortgage, after the bank has verified the person’s assets, income and employment and the application is complete, the loan is typically sent to an underwriter.

Today, vendors offer software to automate the verification process. Instead of the applicant logging into all their accounts to get statements from their financial institutions, and requesting income verification from their employer, a vendor system would obtain borrower authorization to reach out and pull that information. For some banks, that raises concerns about data security. “Banks have to determine how comfortable they are about referring their borrowers to such services,” Decker says.

Integration challenges

Customer security and privacy are always big concerns, as is vendors’ ability to “work with and talk to each other,” adds Brennan. Careful vetting and reference checks are a must, because the technology is changing so rapidly and many players in this space are relatively new. Are they financially stable? How quickly can they change and adjust? Smaller institutions also have to grapple with the ever-present challenge of third-party risk management in the mortgage space.

Thurlow and her team are always on the hunt for a truly seamless end-to-end mortgage solution, she says. “Anybody that does do that, if they could white label it for every community bank, would have a home run,” Thurlow notes. Her bank uses Finastra’s ABA-endorsed Mortgagebot on the front end, Caylx as the middleware and a document export before an upload to COCC’s Insight for its end-banking system.

Thurlow works with the ABA Community Bankers Council and Endorsed Solutions Banker Advisory Council to explore new vendors, and she and her team also meet with members of MIT’s Fintech SandBox and frequently attend fintech events, such as Finovate in New York, to see what developers are working on.

“I don’t think there’s an end-to-end solution with one vendor right now,” Decker says. “There are a lot of different players in fintech, and to some extent the innovation is driven by the GSEs, which influence technology based on what processes they will accept as part of their investor requirements,” and also have their own comprehensive digital solutions that they promote to the mortgage industry.

The human touch

New digital solutions “must allow the customer the flexibility to go from point A to point B by themselves or maybe say, ‘I need some help or human intervention right out of the gate,’” Brennan says. That means systems that tell you what a customer is doing, whether they need “a copilot” or someone to work directly with them.

First State Bank uses about seven vendors for its lenders’ website landing pages, online applications, data verification, ability to provide enhanced communication and loan servicing post-closing. Is most of the process digitized? That all depends on your definition. “Digitized from the perspective of seamless integration with our processing system and maximizing back office efficiency, yes,” Cundiff says. “Eliminating human interaction, no.”

She says the bank will continue to have manual intervention on a variety of steps, including underwriting and closing.

“We still will have people sitting in front of the borrower explaining everything—we feel that’s very important,” Cundiff explains. “We’re not just going to send them a massive closing file and say, ‘Hey, good luck. It’s your responsibility to read over it.’”

Pamela Babcock is a freelance writer in the New York City area. Her work has appeared in the Washington Post, the New York Times and numerous other publications.