REQUIRED READING: A loan origination system (LOS) is, to many lenders, a bit like the loyal family dog – your best friend, trustworthy, loyal and eager to please whenever possible. The best ones are undemanding, too, thanks to advances in delivery technology and the low costs of gigabytes and terabytes.
Today's LOS technology has become so good that non-mega-lenders can have technology at their fingertips that allows them to outperform the service levels of their largest competitors at phenomenally low prices, with success-based cost structures replacing previously fixed expenditures on the balance sheet. Just as man's best friends can be trained as service dogs that enrich the lives of those who need them, the modern LOS can act as your partner in risk control.
It is a matter of knowing your LOS' capabilities and features, naturally. The chances are good that, like many software applications you use every day, there are features available that you are not aware of. It is also likely that features in use can frequently be easily repurposed to assist in risk control.Â Â
LOS technology is less exclusively focused on creating just a mortgage lending product, and is now designed to manage the entire process of origination. To get a handle on that concept, reflect for a moment on how today's LOS offerings got their start toward becoming the partner they are today for most originators.
Twenty-five years ago, a true LOS was more likely to be found in large mortgage companies and banks than in the offices of the mainstream originator, and were also often built internally to match the prevalent processes of each lender. As the origination function became more distributed through wholesale programs, we began to see disk-based software designed to relieve small originators of repetitive tasks, particularly keystrokes.Â
As the space became more competitive and Windows entered the mainstream, these programs became more complex, more sophisticated and far more useful. Server-based designs could do far more than provide a single data entry point to fill out forms that were ultimately printed out and put in a paper file. They were capable of increasingly sophisticated calculations and numbers crunching, as well as simple rules-based actions and rudimentary decision making.Â
Technology improved, as it always does, bringing us to the systems we know today. The better LOS offerings are digital, smart, very fast and compliant. Just as importantly, they are accessible to companies of virtually all sizes and available even on a per-loan fee basis, giving maximum value without requiring either the ‘big check’ budget allocation or ‘big iron’ hardware of times past.
Technology vs. judgment
One of the refrains frequently heard over the last several years involves the replacement of judgment on loan decisions by the automated underwriting systems we use today. Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector have been both praised and maligned, but they have changed the face of the lending business in many ways.Â
The role of the underwriter has evolved from that of sole risk decision maker to something closer to a referee who is tasked with taking the results of the automated underwriting decision and interpreting what is required to make the loan acceptable to investors. The LOS assists in this practice, but it can also do much more when it is used as a tool to train associates in making the loan process more attuned to identifying risk.
In addition to document management, a core competency of the best LOS technology is smart workflow, enabling loans to move through the process with precision, speed and accuracy. Workflows can be customized to suit specific lender needs and practices with varying degrees of ease, but the results are powerful business tools – and training aids.Â
LOS proxies – or ‘dummy’ files – are highly useful not only to familiarize new loan department team members with how loans are created; they can also be used for advanced training, such as Preparing senior processors to advance to underwriting roles. Newcomers learn the loan stages, from ‘application received’ to ‘submit to underwriters’ to ‘underwriting returned (for conditions)’ to ‘clear to close,’ and so on.
For experienced people, business rules in loan file testing can be set with tighter parameters that will kick cases out of the workflow for closer examination, testing exactitude and review skills. The LOS is flexible, patient and efficient as a training tool USED to understand and reduce underwriting risk.
Reducing investor risk
As the industry debates what it will take to bring investors back to private mortgage-backed securities in significant numbers, the LOS is doing its part. The Uniform Loan Delivery Dataset (ULDD) is redefining and standardizing the data elements required in loan files, and most observers deem this to be a critical step in restoring investor confidence.
Individual data elements mean tremendous improvements in the analytics of loans, enabling investors to make completely informed decisions that are not dependent on a third party's evaluation. Since July 23, loans delivered to Freddie Mac and Fannie Mae have been required to conform to the ULDD standard.Â
Many LOS systems have been ‘speaking’ ULDD for a while now, and variations of it for even longer. In its role as the entry point for loan information, the modern LOS has long been digital at its core, and moving to ULDD was a natural progression for the technology. Digital data has been required for appraisals for some time, delivered at least 24 hours in advance of the loan file, giving the government-sponsored enterprises (GSEs) the opportunity to evaluate the data and probe for problems.Â
With hundreds of data elements now making up the new digital loan, the GSEs have set a standard for the private industry to follow as the government's position as the dominant investor recedes. It is far too early to say whether this will be enough to return residential mortgage-backed securities investors to the fold, but it is certainly a positive step in the right direction for risk control. It would also have been virtually impossible to bring forth had digital loan information not already been part of the modern LOS concept.
The levels of analysis enabled by having all loan files digital are breathtaking when imagined out to their logical extensions. Risk of all types is reduced, whether related to credit, data integrity or fraud, as database comparisons can take place across entire loan pools in seconds.
Parameters can be selected and reports can be instantly produced when the information is digitally available. Extensive reports are already available in the pre- and post-closing capabilities of most LOS offerings, and the investor systems of the not-too-distant future will provide report slicing and dicing opportunities that will make even the most jaded financial analyst's heart race.
Recently, cloud-based systems have become the preferred model for LOS users, with permutations based on individual business needs. There was a time when originators hosted their own software in the well-ventilated storage closet off the communal break room, but those days are long over. Larger companies often prefer to have their sensitive information stored on-site or in their own data center, and that works fine within the flexible business models of top-tier LOS providers.Â
Most companies are opting for the secure hosting environments provided by the LOS companies, complete with redundant operations and detailed disaster-recovery capabilities. Security is always an issue, particularly in today's environment of ravenous data thieves – cybercriminals want data that will allow them to loot balances and create more accounts that can be looted. Since mortgage loan files contain this data, it is understandable as to why they would be prime targets.Â
Estimates on the dollar volume of cybercrime vary, but some believe it surpasses the proceeds of the global drug trade, at over $100 billion annually. The better LOS providers reduce data risk with topnotch facilities, cyber liability insurance coverage and an annual SSAE-16 Type II audit. This independent, on-site evaluation of data security practices and facilities was previously known as the SAS-70 Type II audit, and it is a label that should be looked for by those considering a vendor-hosted solution.Â
The LOS has long been the origination side's business partner. These days, it is a resource for the entire enterprise, providing risk management capabilities that are improving rapidly, release by release. By helping make the mortgage industry better trained, more transparent and more secure, the modern LOS can help reduce risk everywhere in the company, not just in the loan department.
Kelli Himebaugh is corporate vice president for Mortgage Builder Software, based in Southfield, Mich. She can be reached at (248) 208-3223.