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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2016

Improving Asset Verification

Automated data collection can remove the hassle and risk

The loan-origination process has undergone many changes over the past few years. Driven by regulatory requirements, rising consumer demand and a need to become more efficient, several of these changes have relied on the adoption of technology. As more steps in the mortgage process become automated, one stage should not get overlooked: asset search and verification.

Loan originators and processors have increasingly found that existing methods for verifying borrower assets create several challenges. First, the need to find and present paper documents is nearly unacceptable to today’s consumers. Second, mortgage companies are spending millions of dollars every year on this resource-intensive process. Third, fraud prevention has become paramount given the sins of the past.

So, how can mortgage professionals tackle these individual challenges and better serve borrowers as well as the government-sponsored enterprises (GSEs)? The answer might sound familiar: technology.

Solving borrower challenges

It goes without saying that today’s manual, paper-based asset verification creates a notoriously arduous and stressful experience for borrowers. Anyone who has ever gotten a mortgage can lament the amount of time spent searching for documents and scanning or mailing off forms — containing sensitive financial information, of course.

In fact, a 2015 J.D. Power survey found that 68 percent of borrowers provided additional documents after completing the application and 49 percent were asked to provide the same document more than once. In today’s era of technology, consumers simply do not understand why they can do nearly everything online, yet still have to locate and submit countless paper documents to secure a mortgage.

In particular, today’s millennial homebuyers demand a better way. According to the National Association of Realtors, millennials make up the largest share of homebuyers, comprising 35 percent of the market. Millennials increasingly prefer to interact with mortgage companies through online channels that offer convenience and maximize efficiency. One of the biggest opportunities for mortgage originators is to remove this burden from the borrower by instituting processes that automatically collect asset information directly from the source — financial institutions.

Reducing verification costs

Asset verification doesn’t just affect the borrower experience. Mortgage companies are coming to realize that the costs associated with searching for and verifying borrower assets — which can run into millions of dollars every year — are eating into their dwindling margins at the same time that technological advances and greater competition are eroding revenues.

As a mortgage company’s business grows, so do the costs of managing large volumes of asset-verification requests. In addition, as the length of the asset-verification process increases, companies risk losing revenue because their capital is tied up in slow processes. According to the Mortgage Bankers Association, inefficiencies related to paper-based processes drove personnel expenses to an average of $5,131 per loan in fourth-quarter 2015, up more than 10 percent from the previous quarter. Personnel costs remained high in first-quarter 2016, at $5,141 per loan. At the same time, however, loan production decreased from 2.5 loans originated per production employee per month to just two loans per production employee per month.

It boils down to a matter of dollars and cents. The resources allocated to this process, although critical, have become too high for many mortgage companies to effectively manage productivity. Companies must consider how a technology investment can reduce the time and costs required to close loans and how freeing resources can translate into an improved borrower experience and loan growth.

Managing fraud risk

As mortgage companies work to balance competing priorities, fraud must be managed and controlled, particularly because of concerns that intensified due to its contribution to the financial crisis. As instances of fraud and financial misrepresentation in the loan-origination process increase, it’s hard not to see the role that outdated asset-verification methods play in this matter.

Collaborative data sharing makes it possible for financial institutions
to pinpoint areas of risk and better understand a borrower’s capacity.

Consider one example reported by the FBI this past March. Using allegedly false sales agreements, false loan applications, false supporting documents, and false settlement and closing documents, a Kansas City, Missouri, homebuilder and various brokers cost local banks and mortgage lenders approximately $4.5 million in losses — because most of the loans funded through the alleged scheme defaulted. This example exhibits what might be the most significant reason for mortgage companies to make the move to automated asset verification: to receive data directly from the source and bypass even the chance that a borrower or other party will provide false bank statements or forged documents.

This inherent risk of fraud also makes it more difficult for investors to determine quality when they purchase a loan. Approximately 85 percent of the 8.7 million loans originated in the U.S. get sold into the secondary market. Without high confidence in the asset data, selling the loan on the secondary market is more difficult and uncertain. When processors obtain their data directly from financial institutions, they can, however, improve the entire loan cycle — ensuring securitizers will not have to revalidate the assets.

Choosing a tech solution

When evaluating solutions to streamline asset verification, mortgage companies should be mindful that incorporating automation alone isn’t enough. Some solutions accelerate the process on the front end through screen scraping or data aggregation. These solutions, however, often require borrowers to provide their online banking credentials — something that banks and other financial institutions warn customers against. In addition, the data gathered by these solutions can be at risk for being breached and is often used by aggregators for other marketing purposes that are not fully understood by the borrower.

Rather than continue to manage this process manually or with solutions that only solve part of the problem, mortgage companies should implement solutions that are capable of systematically verifying liquid asset information for both the origination and securitization phases of a loan life cycle. It’s not just about speed; time frames will ultimately be hindered if the data used is not accurate.

As with many other types of fraud, collaborative data sharing makes it possible for financial institutions to pinpoint areas of risk and better understand a borrower’s capacity. This methodology, combined with automation, is already giving banks the visibility they need to mitigate fraud in other areas. It is time for mortgage companies to apply data sharing and automation to home-loan processes, too.

With the right technology to modernize this phase of the origination process, not only will companies see immediate advantages, they also will create a trickle-down effect benefiting borrowers. With accurate data and automation at their fingertips, originators can complete the origination process more quickly, thus decreasing the loss of revenue their companies currently experience when loan capital is tied up.

Down the line, investors receive a better-quality loan holding less fraud risk based on a more accurate and secure asset-verification process. As important, with new procedures and technology for asset verification, lenders can truly transform the borrower experience and provide a consistent message around online credential security.

•  •  •

Closing strong loans — and closing them faster — is, of course, the ultimate goal. Obtaining borrower data directly from the source is the answer to several issues that impair the quality and accuracy of asset verification. Mortgage companies with access to better and more secure data can make faster and more effective decisions — while creating a superior experience for their borrowers. Although this stage of lending is well-known for creating stress, companies that adopt this approach can distinguish themselves and easily elevate the service they deliver borrowers, and the industry as a whole.


 


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