The mortgage industry, driven by the COVID-19 pandemic, is advancing more rapidly than ever before toward making the complete digital mortgage a reality. The acceleration to the digital world, however, brings big risks with it. Companies can face future regulatory issues if they don’t incorporate rigorous compliance oversight every step of the way — from the conceptual stages, to pilot testing, to launch and continuous monitoring for improvement.
Some major players began advancing their technologies, systems and processes four or more years ago. They saw the potential for greater operating efficiencies, competitive advantages and improved communications with borrowers (and future borrowers) while reducing risks of regulatory and compliance issues. High costs and unclear benefits kept many mortgage companies cruising along and enjoying business as usual. Many were happy to wait for some magical moment or regulatory mandate that could launch them into the future.
The transcendent moment came in March 2020 when the world began shutting down and isolating due to COVID-19. Mortgage companies of all sizes were forced to shift to remote work and to reinvent the ways they served clients. So did their business partners in real estate sales, appraisals and title insurance, to name a few.
The mortgage industry, however, had a piece of economic magic: Business continued strong into the second and third quarters of this year due to record-low interest rates, as well as high demand for home-purchase and refinance loans. This gave many companies the confidence and capital to invest in the necessary technological changes and internal training programs to not only survive but grow in this new digital era.
Face the hurdles
Today, mortgage companies are winding down a tumultuous year and launching plans for 2021 and beyond. When it comes to adopting compliance for digital technology, these companies need to address a number of challenges.
The first is a lack of nationwide standards and regulations. This means that originators and lenders must navigate the various county, state and federal regulations, as well as investor guidelines, throughout the many steps required to close a digital mortgage (appraisals; electronic eligibility and signatures; electronic verification of employment or assets; remote online notary; title; and video closings).
Some companies are working successfully to build new internal systems, or secure outside providers for software applications and services to speed up the process. For those relying on aging legacy systems, they may find it impossible to integrate frequently disparate programs and platforms into a kludged system without creating a technological quagmire that drains money and energy from the organization.
Other companies deal with the advancing transition to digital in piecemeal fashion rather than strategically — adding a platform here, another there, all with different processes, procedures and checkpoints. In addition to the integration challenges, this can result in future management and legal issues, such as increased regulatory scrutiny, or difficulty in accurate reporting when compliance requirements and deadlines are missed or not properly recorded.
Training programs need to include the traditional areas of loan origination, underwriting and servicing. To enhance the benefits of the rapid move to digital, lenders need to rely more on artificial intelligence (AI), machine learning and other automation tactics. (Think of AI as the broader field of computers that do tasks normally requiring human intelligence. Machine learning is a subset of this field that allows computers to study past algorithms and automatically improve future experience.) Plan to incorporate compliance-monitoring tools, and automated alerts or controls, wherever possible in the loan origination process.
These challenges can be overcome by creating a compliance-focused plan with intelligent budgeting and realistic timetables for implementation. Develop an executive strategy to select the best software, third-party providers and proven digital processes that can work nationally while complementing your business model and adjusting for many state-level variables. A growing trend is the use of cloud-based programs and software-as-a-service companies, which can essentially provide plug-and-play functionality while often reducing the need to build a large internal IT staff for daily management of proprietary systems.
These challenges can be overcome by creating a compliance-focused plan with intelligent budgeting and realistic timetables for implementation.
Forge a plan
Envision a future where it is as simple as possible for the client to advance through the lending process. Then create a playbook for development, monitoring and testing according to your timetable. Your comprehensive, integrated array of internal processes, procedures and checkpoints should be invisible to your clients.
Manage the flow of data, relationships, compliance monitoring and attention to detail in a comprehensive way. Applying for a mortgage and advancing to closing should roll along so smoothly that it enhances client satisfaction and creates a new advocate for the company.
As your plan unfolds, establish a program of regular and thorough testing, and start with beta testing using a limited number of transactions. The product design may be good and thorough, but the actual execution may have gaps and conflicts.
Challenge and test all assumptions. One approach is to identify alternative routes a transaction could travel, and the ways the technology would address these variables and exceptions. Using AI and machine learning can automate this decisionmaking. There is a caveat, however, as technology can hide problems. If there is an error in the process, calculation or algorithm for determining pricing, for example, there can be a systemic issue affecting all transactions with the potential for higher costs and greater risks.
With manual processing, errors occur and can vary greatly in type and significance. Process automation has the benefit of reducing human error, but if it isn’t properly designed, tested, or monitored, it can hide potentially significant systemic issues. AI and machine learning also can simplify many tasks while generating faster, more efficient and profitable loans.
Trust the professionals
It’s not all about technology, of course. A 2018 Fannie Mae survey showed that recent homebuyers preferred personal interaction at key points in the mortgage process but are open to going digital when it can expedite the steps toward closing.
- 72% preferred to fill out an application online
- 70% preferred to submit documents online
- 65% preferred a person to explain terms and options
- 58% preferred a person to help them review final documents
In advancing toward the digital mortgage, find ways to engage your skilled professionals in making personal connections at key junctures in the process. Interactions with your trusted experts should enhance the loan process by providing transparency while ensuring the client experience is consistent and positive. Originators should have the authority to do what they do best: answer questions about the loan process and build relationships with clients. Maintaining human interaction helps solve problems quickly and avoids going through a convoluted approval process.
Monitor borrower satisfaction with the lending and servicing processes through ongoing surveys and analyses of complaints. This data will be critical to solving short-term issues, finding procedural gaps or errors, and getting new ideas for continuous improvement of the borrower experience.
For rigorous compliance oversight, ensure that you set up checkpoints, automated alerts, monitoring programs and similar controls with third-party providers. AI and machine learning can be used to identify exceptions, including critical timing issues for meeting regulatory deadlines. Monitor the changing regulations with agencies at every level. Educate consumers about the processes involved in a digital loan closing. Include insights into the many data sources used in the process. Highlight key milestones or regulatory requirements that must be met to close on time as another way of showing clients you are on their side.
For risk management, ensure that your models don’t incorporate any rules that could be considered biased. Be clear about criteria used for analyzing creditworthiness. This solves compliance issues and gives the client a better understanding of what needs to happen to be successful with their next mortgage application.
In advancing toward the digital mortgage, find ways to engage your skilled professionals in making personal connections at key junctures in the process.
Establish the culture
The mortgage industry is moving more rapidly now toward the true digital mortgage than at any time in its history. Companies should develop plans to move quickly and safely by looking at best practices in the industry, then adopting these systems and tools.
The transition can involve many internal and external strategies and investments, but not all of them may be compatible or easily integrated. Compliance issues and risks can multiply without proper controls and checkpoints, both human and automated. Develop a master plan for rolling out your transitional program, then seek potential support and counsel from outside service providers with proven track records in advancing the digital mortgage. Organize a compliance and IT rapid-response team that is able to convene on short notice and is authorized to quickly solve any emerging issues.
Update your plan regularly according to ongoing research, operational results and client feedback, as well as changes driven by regulators, the economy and market conditions. With a strong compliance culture, smart planning and strategic integration of the many entities involved in delivering the digital mortgage, your company will be well on its way to improved client service, greater operating efficiencies and reduced regulatory risk. ●