PERSON OF THE WEEK: Sanjeev Malaney is founder and CEO of Capsilon, a provider of cloud-based document imaging and data capture solutions to the mortgage industry. MortgageOrb recently interviewed Malaney to learn more about how the new focus on loan quality is reshaping the industry and what lenders are doing to automate the loan production process.
Q: The industry has been discussing loan quality for a while now. How do you think the conversation will change in 2015?
Malaney: Most lenders have been focusing on loan quality for years, but few have examined their entire operations to understand how they can improve data integrity. Despite the availability of technology solutions that can greatly increase a lender's ability to ensure the integrity of the data used, many lenders have been reluctant to take advantage of it. Instead, they rely on humans to ‘stare and compare’ across documents as a means of verifying loan information for accuracy and completeness. This approach is time-consuming, error-prone and costly. As a result, lenders are plagued with inaccurate, inconsistent or incomplete data on which they are betting their companies.
The conversation is changing now because, given the increasingly regulated environment, lenders are realizing that the only way to economically ensure loan quality and to achieve compliance is by leveraging technology. Lenders are now moving quality control (QC) to the front of the loan process by employing technology to extract loan data from the appropriate documents for automated review and analysis. Data extraction technology makes it easy to compare data in the system with data on the original documents and alerts the lender of discrepancies as well as missing or incomplete data and/or documents.
This trend toward the adoption of technology to ensure data integrity is positive for the entire mortgage industry because technology can help lenders improve the consistency and quality of loan information throughout the lifecycle of the loan, while ensuring compliance and reducing the cost of validating loan data.
Without leveraging technology, including data extraction, lenders are at risk of making poor lending decisions based on inaccurate and incomplete information. This lack of data integrity increases both financial and compliance risks for the lender. In today's regulated environment, it can even put lenders out of business.
Q: Is the focus on quality a major reason that loan production costs have soared recently? What can be done about it?
Malaney: Because of the recent changes dictated by the Dodd-Frank Act and the Consumer Financial Protection Bureau, lenders have greatly increased their focus on data integrity in order to minimize compliance risk. This focus on data integrity and loan quality, in turn, has dramatically increased total loan production costs. Many lenders I speak with have told me that their loan production costs have soared to $4,000 or $4,500 per loan. As complying with ever-changing regulations drives up production costs, the profits on loan origination are shrinking and, in some cases, loan origination has become unprofitable.
A survey of executives who attended the Mortgage Bankers Association's Annual Convention and Expo this past October which reveals that 95% of the respondents are either ‘very concerned’ or ‘somewhat concerned’ about loan quality and 80% plan to spend more on compliance-related activities in 2015 versus what they spent in 2014. What's more, four out of five respondents who took our survey reported that their 2014 loan production costs were somewhat higher or significantly higher than their loan production costs in 2013. The majority of this increase is because lenders have relied on expanding the labor, whether in house or outsourced, dedicated to QC.
This is not sustainable and forward-thinking lenders are looking for technology solutions that can reduce the labor spent on QC by as much as 80%. Technology is the key to dramatically reducing total loan production costs.
Q: How should lenders rethink their operations to address the key challenges of today's lending environment?
Malaney: As lenders increasingly rely on technology to automate much of the loan lifecycle, they are actually moving toward a straight-through processing (STP) loan production model. The concepts of STP were originally developed to describe debt and equity trading and payment transactions that are conducted electronically without the need for re-keying data or manual intervention. Although the goal of ‘same-day settlement’ promised by the STP model has not been realized, the concepts of STP are now applied in financial markets to minimize operational costs and reduce operational risks.
The mortgage industry can benefit in similar ways by applying the concepts of STP to the loan origination process. When the STP model is applied to mortgage loan origination, manual labor is reduced by up to 80%. In addition, this automation significantly reduces loan turn times and compliance is easily managed at reduced cost.
Q: What role does human labor play when applying the STP model to the loan origination process?
Malaney: As I mentioned, using the STP model, up to 80% of manual labor is eliminated. Human intervention is required only when something is flagged by the automation engine as falling outside standard parameters and needs to be validated by a human.
For example, loan data could be automatically extracted and put through a rules engine to automate many functions, including pre-funding and post-close QC. Only if a data point falls outside of the rules parameters would the loan then be sent to a human for review. This not only saves cost, but increases productivity and minimizes quality risks. As an added benefit, the STP model helps lenders better optimize the time of their most-knowledgeable staff members.