Carlos Sa: Building Your Own Lending System Offers Many Benefits

Written by Patrick Barnard
on April 24, 2017 No Comments

PERSON OF THE WEEK: Although most mortgage lenders use “best of breed” or “out of the box” loan origination systems (LOS) from the top vendors, there are still plenty out there that have developed – and that continue to support – their own proprietary systems. In order to do this, of course, a lender must have a fairly robust IT department and an IT team that possesses the proper skill sets needed to build, integrate and maintain these in-house systems. Although that might sound expensive, so is signing contracts with third-party vendors.

Philosophically, there is one general reason why some lenders insist on building and maintaining their own proprietary systems: freedom. These lenders often feel that having an in-house system is a competitive differentiator – especially when they are adding features and functionality to their systems that maybe the vendors don’t have enough economic justification to add. Another general reason that lenders go with in-house systems is because they don’t want to be “beholden” to a software vendor or ecosystem of vendors for which it’s all “pay to play.”

To learn more about the advantages – and disadvantages – of going with a proprietary lending system and keeping IT operations in-house, MortgageOrb recently interviewed Carlos Sa, head of information technology for Danvers, Mass.-based lender Mortgage Network.

Q: What are some key benefits for lenders that choose to build their own technology systems and keep operations in-house? Also, what are some drawbacks or challenges to overcome with this?

Sa: Building a proprietary system is challenging, but one of the key benefits is control. When the system is yours, you are no longer at the mercy of vendors. Given that a vendor may opt to change its business direction at any time for any reason, this can end up costing you more money in the long run. Even the best-researched LOS vendors can be acquired or go bankrupt, leaving even the most diligent lenders in a difficult position. The bottom line is this: The future is uncertain when you go with a third-party vendor.

Another key benefit when building your own system is the freedom to build a unique system tailored to your specific business needs. Third-party systems are rarely one-size-fits-all. Proprietary systems lend themselves to maximum adaptability and customization, allowing a lender to employ a system that is up to date and fine-tuned to the lender’s specific needs.

Building and maintaining a proprietary system presents its own challenges, however. Having a highly skilled and technically diverse IT group will ensure that a system remains up to date with technological and industry standards. In addition, such a team should be equipped to handle the inevitable systems issues that will occur. With the proper support in place, proprietary systems offer many more rewards than challenges.

Q: Mortgage Network built its own system years ago and has operated successfully with it. What does it take to keep a self-built system operating successfully and compliantly?

Sa: Though we developed our core systems in-house, it’s important to emphasize our collaboration with various vendors. The vendors were key in allowing us to add features that enhance the functionality of our systems. To give an example, doc prep is perhaps the largest component of a lender’s LOS. Many third-party providers build doc prep software into their systems. However, this “pre-packaged” version of doc prep often goes unused by lenders because superior doc prep products are available.

Whether a lender utilizes a third-party vendor or a homegrown system, selecting vendors that provide quality software-as-a-service adds tremendous value and functionality. It’s important to realize that an outside vendor may provide a service that is superior to one created in-house. In this case, the better value may be to purchase this service.

It cannot be stressed enough that the development of a successful in-house system is a gradual process. The most effective systems are developed and rolled out in carefully planned and well-executed stages. As mentioned, a highly skilled and diverse IT team is indispensable for ensuring a system remains up to date and technologically relevant.

Q: Why do most independent lenders still choose to rely on third-party technology providers?

Sa: Many lenders continue to rely on third-party technologies because of the significant investment in time, talent and money that is needed to build an in-house system. There is also a belief that using a third-party LOS will prevent compliance issues. This belief is somewhat misguided, as ultimately, a lender is responsible for compliance with lending requirements, no matter what system is used. One could successfully argue that a well-built and properly maintained homegrown system offers a lender better control over regulatory compliance.

For the majority of lenders, reliance on third-party providers exists somewhere on a spectrum. Lenders that rely on third-party providers to meet most of their system needs must still maintain a highly skilled IT department. Many lenders use multiple third-party providers for various aspects of their LOS systems, including pricing, doc prep and e-signature – and these modules rarely communicate perfectly. It takes a competent IT department to coordinate and support these modules, thus ensuring seamless integration and optimal functionality in a complex system.

On the other hand, a lender that develops its own technology can still integrate third-party services to enhance the features and functionality of its system. Again, a strong IT department ensures the proper integration of third-party services into a homegrown system, thus allowing improved functionality and customization.

Q: Do you think more lenders may look to create their own systems in 2017 and beyond? Why or why not?

Sa: It is my belief that lenders are moving toward proprietary systems, allowing for greater control over their systems and greater independence from outside vendors. Increasingly, there is a realization of the challenges involved in connecting different “pieces” to their systems. In some cases, adding a particular third-party service to an established LOS is costlier than building the entire system from the ground up. I think more lenders will also realize that a homegrown, custom-built system will provide greater functionality and value for their businesses.

On the other hand, some lenders may not have the resources to build certain service modules in-house. For them, it may be a better value to go with a third-party vendor. In our case, for example, it made sense to use an outside doc prep provider.

Overall, it’s important to look at the big picture and assess the strengths and weaknesses of the current system, as well as the skill and ability of the IT department and the needs of the business. Then, it’s easier to make sound decisions on what can be developed in-house versus when acquiring from an outside vendor.

In the end, lenders choosing to build their own systems will face unique and sometimes difficult challenges. For us, the effort has been well worth it.

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