PERSON OF THE WEEK: Lionel Urban is CEO, founding partner and chairman of the board for PCLender, a provider of loan origination technology to the mortgage industry. During his nearly 30 years in the mortgage banking industry, Urban has acquired vast experience in management, origination, operations, secondary marketing and compliance roles within banks, credit unions and independent mortgage bankers. MortgageOrb recently interviewed Urban to get his views on how lenders should be handling due diligence when it comes to selecting loan origination technology, as well as what features and capabilities they should be looking for in a loan origination system (LOS).
Q: What are some deficiencies that you see in the industry as it relates to loan origination software?
Urban: The need for better mortgage technology vendors is clear. Lenders are reviewing their options more than ever before, and most lenders are acutely aware of the issues when they are not aligned with the right technology partner. When lenders are assessing their options, there are very critical areas they need to cover when completing their due diligence.
Q: What areas should lenders cover in their due diligence?
Urban: Does the system tie all of the features and vendors together for a single cohesive system? Additionally, what effort is required to get the products to work together? If the application is not cohesive or the application does not get configured properly, then end users have to re-key data, efficiencies go down and so does loan quality. The key features that need to be integrated are imaging and paperless support, effective consumer direct applications and online communication, seamless integrations with the industries best third-party vendors, and integrated back office features and support.
Lenders should also research if the system configuration requirements are manageable and how heavy the ongoing administration burden is. Most small to midsize lenders have limited IT resources. Often, the LOS administration is left to an overworked team or even a staff member that is responsible for other priorities. If a feature or tool requires a lot of configuration or maintenance, it’s not likely going to be used.
Is the configuration with table changes or system code modifications? Table-based changes can be made by an administrator that understands the business requirements, while a code change must be done by a development and often adds a level of complexity that is more expensive or likely to be wrong.
Are the applications hosted? Hosted applications place all of the effort on the vendor to ensure the application is secure, stable and available. With a vendor that hosts a large number of lenders, this cost is then distributed among the entire customer base.
Does the LOS manage system updates? System updates should include code changes and system configuration updates to support new features, regulatory changes and application refinements. If this support is offered, the updates should be rolled out in a manner that supports the lender’s unique configuration without increasing the lender’s maintenance burden.
An additional consideration should be rules-based tables versus system templates. The business rules in a system define loan data defaults, define what tasks need to be completed and identify what file documentation is necessary. If a checklist is used, it is prone to user error. If a template is used, it’s not likely to be very accurate. Utilizing a rules-based engine ensures that all loan requirements are accurately defined and followed.
Finally, what is the workflow logic? The LOS system must offer and support features that control how a loan is “manufactured.” The bottom line is that mortgage bankers don’t want to fund a loan that is not in compliance or does not make a profit. It starts with ensuring loans are originated correctly, and each subsequent user in that loan record then has the responsibility to complete his objectives accurately and efficiently.
Q: Can you tell me why “best of breed” vendor integrations are so important?
Urban: The industry’s best vendors are easily identifiable because they are the most widely used and have years of experience in refining their product and or service offerings. If a single vendor solution is an “all in one” product, it is not likely to have the subject expertise of a vendor that specifically focuses on documents, pricing, compliance, flood or a long list of other specialized services.
Q: Can you give us a high-level overview of the difference between template-based systems and rules-based systems and why it’s so important?
Urban: Having templates within an application offers some efficiencies for lenders to differentiate the process between how a conventional, Federal Housing Administration or Veterans Affairs loan would be processed, underwritten or closed. But a rules-based system offers substantially more benefits by ensuring loans are accurately documented. It defines exactly what is necessary to complete loan data, documents to gather, tasks to perform and workflow requirements.
A rules-based system can define the difference between documenting a loan with pay stubs and W-2’s for a salaried applicant, tax returns for a self-employed applicant or a rental agreement for rental income. Rules can also identify the special requirements for condominiums, bankruptcies, state/county fee requirements, jumbo loans, etc. Mortgage banking has myriad unique requirements, and having system logic embedded substantially streamlines operations.
Q: What unique requirements do small lenders need from their loan origination solution?
Urban: Small lenders typically have users that wear many hats in the loan process. The LOS should be streamlined and intuitive for those types of users. The application has to be high functioning right “out of the box,” assuring the lender is removed from the burden of administrating the system. The solution needs to have effective training and a support process for typical roles – not just feature functionality. It should have the ability to support all common loan programs – conforming, portfolio, construction and closed end seconds and home equity lines of credit. And of course, it should be affordably priced.
Q: What unique requirements do midsize lenders need from their solution?
Urban: Midsize lenders are leveraging resources to tackle many objectives and look for clearly defined processes and metrics from their LOS. The system needs to work with very little IT administration but be highly configurable. The system needs to support robust data reporting. The system needs to support data integration with other lender applications, such as hedging, servicing and core banking applications. The system needs the ability to support the lenders’ unique requirements, such as what roles are in the organization, what their responsibilities are and workflow that makes each role’s job easier. The application needs to support multiple business channels, including consumer direct, retail, wholesale, joint ventures and correspondent lending.
Q: How do you think the industry should classify the difference between a small and midsize lender?
Urban: We think there is more than one characteristic that identifies if a lender is to be considered a small or midsize lender. It’s a combination of these attributes that better defines how a lender should be classified. These characteristics include monthly funded units, available IT/system administration resources and system customization expectations.
Small lenders are typically funding less than 50 units per month. They do not have a dedicated IT resource because system administration is typically handled by a business team member with other primary responsibilities. Smaller lenders want to re-key as little data as possible, have forms and worksheets accurately generated and manage their workloads as efficiently as possible.
Midsize lenders are typically funding 50 to 1,000 units per month. They have limited IT resources, and these resources are also expected to support desktops; office applications, such as email; reporting requirements; various lending tool integrations; and data security. Midsize lenders want system-based rules to create lending efficiencies for all processes, users and third-party vendors – no duplication of work efforts and accurate and highly compliant processes are integrated and required for users.
Q: What do you see as the biggest technology challenge lenders will face in the future?
Urban: We believe there is no single hurdle lenders need to brace themselves for. It’s really a series of slow-moving objectives that are all happening simultaneously, and their vendor or vendors need to be prepared to face their challenges with them – or else they become the frog in the pot. Lenders need to consider these objectives when doing their assessments. The first is online lending. Borrowers are turning to the Internet more every year to research, shop and apply for their home loan. Additionally, their expectations are rising on what tools the lender uses to streamline the processing and how they communicate or get loan status, workflow automation, e-lending and continued regulatory changes.
Lenders also need to reduce costs and streamline operations with their workflow. Automation is now being implemented to automatically alert applicant, lender and loan contacts with key information; automatically prepare and issue documents; run interfaces in real time or automatically when the loan file is ready; and clearly identify who, when and what needs to be completed based on exceptions or issues within the file.
Lenders also need to look at how “E” lending goes beyond imaging and e-signing. These processes will evolve into more advanced loan recording, transfer and vaulting practices for the entire lifecycle of the loan. And, as far as regulatory changes go – the pace and complexity go well beyond new forms or disclosures now. Lenders are facing increased scrutiny by regulators, and focusing on staff training alone just won’t be enough.
Q: What can lenders do to ensure their LOS due diligence is effective?
Urban: Ask the tough business questions that each role in your organization encounters in its everyday challenges – get into the weeds when reviewing systems – to ensure a subject matter expert participates for each role in your organization. Ask what specific requirements are necessary to configure or support how you need the system to function. Take a test drive on its system and see what its best practices will do to support your needs. Even better is to identify how the vendor might support a “pilot program” for your due diligence process. Ensure your licensing agreement supports the requirements you identify, and establish this during the due diligence process. If you follow all of these steps, and the deliverables meet your expectations, you can be confident in your choice.