Banking & Financial Services. White Paper. Digital Transformation of the Mortgage Origination Process

Transcription

1 Bakig & Fiacial Services White Paper Digital Trasformatio of the Mortgage Origiatio Process

2 About the Authors Eswara Swamiatha Eswara Swamiatha is a Domai Cosultat with the Bakig ad Fiacial Services (BFS) busiess uit at Tata Cosultacy Services (TCS). A Chartered Accoutat by qualificatio, he has over 20 years of experiece ad curretly heads the Ledig (Retail, Mortgages ad Commercial) practice withi the group. Swamiatha has previously worked i the areas of commercial ledig ad ivestmet bakig. At TCS, he achors strategic cosultig assigmets for leadig idustry players. Narayaa Seshadri Narayaa Seshadri is a Lead Cosultat with the Bakig ad Fiacial Services (BFS) busiess uit at Tata Cosultacy Services (TCS). A certified associate of the Idia Istitute of Bakers ad a qualified Six Sigma Black Belt professioal, he specializes i mortgage ledig. Seshadri also has deep expertise i areas like retail ledig ad liabilities, as well as cards ad chaels. Over the past 4 years, he has achored several cosultig ad program maagemet egagemets for TCS' leadig cliets i the BFS space. Miesh Mudaliar Miesh Mudaliar is a Domai Cosultat with the Bakig ad Fiacial Services (BFS) busiess uit at Tata Cosultacy Services (TCS). A Post Graduate i Busiess Maagemet from Bagalore Uiversity, he has more tha 12 years of work experiece ad has worked as a retail baker prior to joiig TCS. Havig worked o various projects for North America bakig cliets, Mudaliar has built a strog expertise i the US residetial mortgage space, ad works closely with the various accout teams for thought leadership ad domai related support.

3 Abstract Residetial mortgage loa origiatio is a complicated process for various reasos. These iclude, product complexity, legthy teure, extesive amout of uderwritig required, ivolvemet of multiple exteral parties (like property appraisers, builders, isurace agecies, taxatio authority, muicipal authorities, ad others), ad the volume of documets to be hadled. New regulatios pertaiig to appraisal ad disclosure requiremets, ad the cosequet eed to be able to effectively demostrate compliace, pose additioal challeges. Fiacial eterprises therefore eed to evaluate how techology ca be leveraged to address some of these cocers, ad make the mortgage origiatio process simpler for both borrowers ad leders. Ubiquity of mobile devices, ehaced capabilities of workflow maagemet tools, applicatios for electroic documet hadlig, ad more, offer extesive possibilities for digitizatio of the mortgage origiatio process. This paper examies how digital techologies ca be haressed to simplify the mortgage origiatio fuctio for process optimizatio ad better customer experiece, while proposig a architecture model for a digitized framework.

4 Cotets Itroductio 5 Digitizig ad Simplifyig the Mortgage Origiatio Process 6 Self-service optios 6 Digitized documet maagemet 7 Automated workflow 8 e-sigature 8 Skill-based routig 8 Parallel processig 9 Loa quality compliace 9 Aalytics 9 Vedor portal 9 How the New Mortgage Origiatio Model Will Help 10 Recommedatio 11

5 Itroductio New mortgage origiatio volumes today cotiue to be low as compared to the pre-fiacial crisis era. With the refiace boom taperig off ad the slew of ew regulatios eacted o the mortgage busiess that madate extesive compliace requiremets, origiatio costs are icreasig. The et cost to origiate mortgages has icreased from aroud $3,500¹ per loa i 2011 to $5,171² i Leders are ow lookig at ways to cotai the icreasig cost of origiatio per loa. For most leders, existig back-office operatios for loa origiatio processig are paper-itesive ad require extesive maual itervetio. I additio, the process typically ivolves multiple had-offs before completio, which makes it proe to errors, resultig i sigificat rework. Leders are therefore explorig techology solutios to restructure their origiatio processes to improve efficiecy ad reduce costs. To couter the icreased competitio i the backdrop of dwidlig busiess volumes, leders are also lookig to improve customer experiece by providig guidace o property search ad deployig selfhelp tools that allow customers to evaluate ad select loa products. Such The traditioal mortgage tools reduce the eed for a customer to visit a brach or call up the loa origiatio process eeds officer durig the origiatio process, ad eable faster approval of loas. to chage i the wake of icreasigly demadig Digital techologies offer immese potetial to address these issues. customers ad stiffeig Digitizatio of processes ca help orgaizatios comprehesively gather regulatios. Digitizatio is data from borrowers ad other third parties through various chaels, share clearly the aswer to all iformatio faster with various stakeholders for quicker loa processig, ad our woes. brig greater trasparecy to the etire process. The traditioal mortgage origiatio process eeds to chage i the wake of icreasigly demadig customers ad stiffeig regulatios. Digitizatio is clearly the aswer to all our woes. Table 1 maps the factors drivig a shift toward digital themes ad the correspodig techology eablers ad solutio levers to drive this chage. Busiess driver Digital techology eabler Solutio levers Improve customer experiece Esure regulatory compliace Mobility Deploy mobile solutios for: - Customer iteractio - Electroic disclosures Optimize processes Workflow maagemet Automate workflow ad elimiate movemet of loa file for - Uderwritig - Vedor iteractio Better maagemet of credit risk ad loa quality Aalytics Usig aalytics for appraisal of 'thi credit file' borrower ad customized credit scores Real-time portfolio moitorig Reduce physical documet hadlig e-documet e-sigature Eable submissio ad hadlig of documet images, as well as sigig of documets Table1: Busiess Drivers for Digital Eablemet of Mortgage Origiatio (Source: TCS Iteral) [1] Natioal Mortgage Professioal, Mortgage Bakers More Tha Double Their Profit Per Loa i Q3 (December 2011), accessed May 20, 2015, [2] Origiatio News, Profits Per Loa Plummet to Record Low: MBA (March 2014), accessed May 20, 2015, 5

6 Digitizig ad Simplifyig the Mortgage Origiatio Process Figure 1 builds upo the cocepts laid out i Table 1, to propose a referece model that depicts the fuctioal compoets of the mortgage origiatio busiess ad maps them to the various digital techology led iitiatives that ca be adopted. Mortgage Origiatio Digitizatio ad Process Simplificatio Framework Customer Chaels Iteret Brach 1 Parter Chaels Mobile Call Ceter Broker Correspodet 2 Origiatio Platform BPM Layer Pre-Approval Applicatio processig Uderwritig Closig Fudig & Post Closig PreQualificatio Borrower Verificatio Loa doc Verificatio Closig Documets Preparatio Recordig & Charges Creatio Applicatio Capture Credit Check Fee Trackig & Recociliatio Fudig setup & Release Post Fudig Quality cotrol Workflow Alerts Credit Bureau Compliace Reportig Vedor Status Alerts Notificatio 3rd Party Vedor Services Regulatory Compliace Loa Coveat Fializatio Disclosures & Acceptace UW Package Preparatio Commitmet Letter Geeratio Loa Doc Executio Rules Egie Auto Uder writig Rules Applicatio Checklist Fax Mail Compliace Validatio Automated Uderwritig Pricig Rules 4 Vedor Ivoicig Vedor Iteractio Maagemet Loa Boardig Eterprise Applicatios Property Rules Closig Checklist CRM Loa Quality/ Compliace ECM Watchlist/ Fraud Check BI & Aalytics Paymet System 3 Mobile HUD Preparatio Closig Package Geeratio Product Rules Iteret Credit & Collateral Aalysis Property Verificatio Iteral Quality Compliace Dashboards/ Reportig Vedor Chaels 5 Exteral Iterface Mobile Origiatio Cosumer Self Service Tool Eterprise Documet Maagemet Queue maagemet Workflow Automatio 6 E-Sigature Queue Maagemet Customer Alerts/ Notificatios 7 Vedor Portal 8 Settlemet Services 9 DU/LP 10 Parallel Processig Loa Quality & Compliace Automatio Aalytics * Digital iitiatives assiged to each fuctioal stream (i yellow), apply to all the sub-fuctios uder it Figure 1: Retail Mortgages Origiatio Digitizatio ad Process Simplificatio Referece Model (Source: TCS Iteral) Self-service optios Curret mortgage origiatio processes ivolve several iteractios betwee the customer ad the loa officer. Adoptio of emergig chaels for mortgage origiatio predomiatly olie ad mobile has grow rapidly over the last few years, reducig the eed for physical iteractio. However, most of the leders provide oly basic fuctioality like EMI calculators ad loa applicatio submissio through these olie chaels. Therefore, there is sigificat scope to leverage the capabilities ad coveiece offered by mobile devices, for mortgage origiatio. 6

7 Some origiatio fuctios that ca be effectively carried out over the mobile chael, elimiatig the eed for physical iteractios betwee the mortgage loa applicat ad loa officer, are: Obtaiig product ad advisory iformatio Uderstadig loa optios ad related prerequisites, as well as gettig loa quotes for evaluatio Applyig for loas ad submittig related documets Trackig applicatio status, supported by regular otificatios ad updates Uderstadig the closig schedule ad related activities that eed to be completed Besides elimiatig the eed to have customers visit or coect with the loa officer over phoe, this would substatially elimiate the maual itervetio required at the back-office to aswer customer queries. Potetially, this could completely do away with the mortgage loa applicat havig to visit the leder's office till the closig process ad also esure that disclosure stadards uder the ew regulatory requiremets are effectively met. Miimize process complexity, reduce customer icoveiece, ad avoid procedural delays by digitizig the mortgage origiatio fuctio. Miimize process complexity, reduce customer icoveiece, ad avoid procedural delays by digitizig the mortgage origiatio fuctio. Digitized documet maagemet Most loa files have betwee 500 to 2000 pages each, hece the icreased focus o electroic documet maagemet solutios ad paperless mortgages. Durig the refiace boom post the ecoomic crisis of , a major cocer for large ledig istitutios was hadlig physical documets received from customers, classifyig them correctly, ad placig them i respective loa files. Some potetial beefits of electroic documet hadlig are: Documet processig: Physical or electroic documets structured, ustructured, or semi structured received from customers ad vedors ca be aalyzed ad classified based o the documet type. Iformatio cotaied ca be extracted ad validated. Based o pre-defied busiess rules, the documet maagemet system ca trigger workflows ad route the extracted, validated iformatio to correspodig applicatios. Images of classified documets ca be set to the cotet maagemet system for secure storage ad retrieval. Data verificatio: Validatio of data i supportig documets like Wage ad Tax Statemet (W2) ad pay stub, agaist the data received from IRS ad risk solutio providers ca be automated, leavig exceptios aloe to be processed maually. Other beefits of electroic documet hadlig solutios iclude: the ability to easily retrieve ad view images durig the uderwritig process, automatio of the documet validatio process (by cross-checkig agaist the closig checklist ad creatig tasks for pedig documets), ad automatio of the post-closig process (by validatig documets i the closig file agaist the post-closig checklist), amog others. Besides these beefits, a well-itegrated documet maagemet system is of immese help durig regulatory examiatios. Curretly, some leders are coductig pilot rus for e-closig to improve the closig cycle time ad reduce the associated cost ad complexity for stakeholders. As part of this pilot, CFPB has ivolved techology vedors to provide requisite techology solutios to leders. Whe e-closig matures ad comes ito geeral use, it will eable customers to have a early review of the closig documet, to uderstad the closig process before they sig off. 7

8 Automated workflow A automated workflow will help reduce the eed for maual itervetio ad eable straight through processig to a large extet. I additio, this allows stakeholders to gai icreased visibility ito the whole process by providig a ear real-time view of the request list ad eablig SLA moitorig. Users ca track applicatios right from submissio to closig ad fudig. The automated workflow should also have a i-built otificatio feature that seds alerts ad updates to all stakeholders, at every step. I particular, a automated workflow will help optimize the closig ad fudig processes. Closig checklist automatio, rule-based allocatio to otaries, automated iteractio with the closig agets for fializig HUD1, ad provisioig of a real-time view to the applicat, are some ways i which procedural delays pertaiig to the closig process ca be elimiated. For the fudig process, automatio will sigificatly improve efficiecy by streamliig just-i-time disbursemets to the escrow accout of the closig attorey ad esurig accurate slottig of disbursemets. e-sigature Adoptio of e-sigature i the ledig process is gradually gaiig promiece. The Uiform Electroic Trasactios Act (UETA) ad the Electroic Sigatures i Global ad Natioal Commerce Act (ESIGN), defie the legal requiremets for adoptio of e-sigatures for commercial trasactios. I the area of mortgages, the Federal Housig Admiistratio (FHA) ad the Govermet Sposored Eterprises (GSEs) have laid dow specific guidelies o acceptability of e-sigatures for loas. Cosumer Fiacial Protectio Bureau recetly cocluded a pilot for e-closig. It was ascertaied that borrower ca beefit from e-closig ad that e-sigature is of greater sigificace i the closig process. However, other documets that ca be accepted with e-sigatures durig the origiatio process based o GSE ad FHA guidelies iclude: Mortgage applicatio (it is sufficiet to get a applicatio with a physical sigature durig the closig process to be kept as part of the loa file) Loa Estimate (LE) Closig Disclosures (CD) Autheticated supportig documets Adoptio of e-sigatures would elimiate the eed to submit physical documets ad miimize delays due to trasmissio ad maual hadlig of these documets. Skill-based routig Retail mortgage ivolves complex products like jumbo loas, Adjustable Rate Mortgage (ARM) loas, ad idex or referece rate liked loas, which require specialized assessmet skills ad specific disclosure requiremets. Idetificatio of loas ivolvig such complex products at the applicatio stage, istead of bucketig all applicatios together, ad allocatig them to idetified specialist uderwriters will help avoid udue delays ad esure better compliace. 8

9 Parallel processig Istead of sequecig processes, it would be useful to aalyze idividual process depedecies, ad eable parallel processig. This will also help adopt a factory-lie approach to some activities like property appraisal, ad thereby drive process efficiecy. Parallel processig would also be useful to idetify critical processes that have a impact o the applicatio turaroud time, ad moitor SLAs more efficietly. Loa quality compliace I our experiece of workig with multiple ledig orgaizatios, we have foud that a sigificat part of the quality cotrol fuctio is performed maually. This icreases the possibility of errors, repurchase, ad pealties of loas, i relatio to GSEs ad regulators. With GSE zero defect iitiatives ad regulatory guidace from CFPB comig ito effect recetly, quality cotrol is i the spotlight, makig it oe of the priorities for leders. Olie loa quality moitorig ad cotrol ca be automated ad itegrated with the Loa Origiatio System (LOS) workflow system to: Validate data ad documets at various pre-defied checkpoits like applicatio processig, uderwritig, preclosig, ad pre-fudig Idetify missig or icorrect iformatio or documets Perform regulatory compliace checks such as Qualified Mortgages (QM) check, HUD1 variatios check, ad more Geerate reports ad distribute work items to resolve issues This would brig i greater efficiecy i the quality cotrol process. Aalytics Leders are lookig at techology solutios to target potetial customers who do ot have the perfect credit history. Aalytics ca assist i providig additioal iputs by lookig beyod the traditioal credit-scorig model. It ca iclude structured ad ustructured supplemetal data such as asset iformatio, customer's educatioal details, utility records, ret paymets, fraud data, chages i residetial or official address, ad collectios data, to provide a richer perspective of the customer. This will eable better credit decisio makig for customer segmets that are ot willfully deliquet or geerally do ot have sufficiet credit history for a good credit score. Aalytics ca also be used for portfolio moitorig by usig the same datasets to predict possibility of deliquecy. This will help ledig istitutios to take proactive measures to restructure the loa or provide solutios to the borrower while the loa is still active. Aalytics ca also otably improve the customer acquisitio process. Usig various predictive techiques such as clusterig, propesity, ad collaborative filterig models, it ca provide a 360⁰ view of customer prefereces ad behavior, to cross sell, ad customize products best suited to customers' requiremets. Vedor portal The mortgage origiatio process ivolves iteractig with multiple third party vedors for property appraisal, icome or job verificatio, flood isurace check, ad more. Typically, these iteractios are maual ad beset with problems relatig to vedor relatioship maagemet, SLA trackig, billig iefficiecies, ad so o. Workflow 9

10 eablemet for trasactios with the vedor, itegrated with the loa origiatio system, ad portal or mobile app for exchagig documets with vedors, ca help reduce delays ad brig greater accoutability ad trasparecy to the mortgage process. Some vedor portal related processes that would beefit from automatio are: Orderig of services with the vedor maager Iitiatio ad assigmet of third party services to vedors based o parameters like locatio, preferred vedor, product type, ad appraisal type Reassigmet of work orders, if the vedor fails to accept or complete withi a stipulated timeframe Maagemet of fee egotiatio olie, by havig a fee structure agaist a particular service, ad hadlig exceptios through workflow routig to a staff member maagig the work queue Exchage of electroic documets like reports, pictures, ad ivoices Facilitatio of leder approvals for estimates ad ivoices Defiitio of SLAs for tasks with remiders ad escalatio matrix How the New Mortgage Origiatio Model Will Help Figure 2 depicts the curret mortgage origiatio model ad the target model after digital eablemet, clearly highlightig the resultat simplificatio. Typical Retail Model Origiatio New Simplified Model Origiatio Fulfillmet Fulfillmet 2 X -1 r Customer Mortgage Processor Loa Officer/Aget Applicatio & fulfillmet via brach oly Customer Coordiate with customer via phoe, , mail Collect ad verify loa documet via , mail, fax 2 X -1 r Uderwriter Applicatio & fulfillmet olie E-disclosures E-Sigatures E-doc upload Coordiate with 3rd parties via , mail, fax Prepare paper based UW package Mobile App Self Service Portal Closig Aget I-perso closig Real time visibility ad commuicatio E-vault Uderwriter Mortgage Processor Vedor Portal Doc image capture ad routig to repository Workflow eablemet Queue maagemet Parallel processig Quality cotrol Automatio Easy documet retrieval ad review Closig Aget Queue maagemet Closig documet preparatio with easy retrieval Workflow based commuicatio ad guidace E-delivery of closig documets E-closig Quality cotrol Automatio Quality cotrol Automatio Figure 2: Illustratio of the New Digital ad Simplified Mortgage Origiatio Model (Source: TCS Iteral) 10

11 Here are some processes that ca be smootheed ad simplified usig the proposed digitally eabled model: Poit of Sale (PoS): The ew model, equipped with a seamless user iterface, ca help customers compare ad evaluate mortgage optios, ad buy the oes that are best suited to their eeds, as ad whe they eed. With all tasks beig coducted olie, customers ca beefit from a relatively faster ad smoother applicatio process ad subsequet approval. I additio, they ca ejoy greater visibility ito the etire cycle, thereby improvig the overall trasactio experiece. Processig ad fulfillmet: Automated documet capture ad rule-based routig to busiess applicatios ad queue maagemet for effective work assigmet ad load balacig ca streamlie the process by iroig out iheret glitches. This workflow based system will also provide greater trasparecy ito the audit trail ad help track all actios by iteral ad exteral stakeholders. I additio, a workflow based vedor collaboratio module ca eable third party services ad ca also automatically pull data from parter websites for borrower ad property iformatio. A quality cotrol module ca help leders esure o-time regulatory compliace. Uderwritig: The uderwritig process ca sigificatly beefit from the ew model sice itegratio with the documet maagemet system will make the applicatio review task a lot easier. Effective queue maagemet will esure appropriate work assigmet ad load balacig. I additio, the quality compliace module will improve the overall regulatory compliace mechaism. Closig: Itegratio with the documet maagemet system will help leders to streamlie the closig process ad esure miimal errors. A workflow-based routig mechaism will eable sharig of closure documets with third parties ad provisio of ear real-time, electroic delivery of requisite documets to the customer. Educatioal tools will exted relevat iformatio to customers as ad whe they eed, ad the e-vault feature will allow them to access their mortgage documets with ease. Additioally, the e-sigature feature will shorte the process time immesely, thereby improvig customer satisfactio ad reducig overhead costs for leders. Coclusio & Recommedatio The curret mortgage origiatio ladscape cotiues to udergo a series of chages as leders redefie their loa products, uderwritig requiremets, other operatig policies, ad procedures, to comply with regulatios ad hadle challeges like volatility i busiess volumes ad high customer expectatios. Ability to trasform quickly from the traditioal processig system to a more effective, streamlied ad trasparet operatig model will be of paramout importace for leders i the times to come. Digital iitiatives icludig mobility solutios, digitizatio of processes, digital documet hadlig, e-sigatures, ad more, eed to be appropriately leveraged to moderize mortgage origiatio operatios, ad usher i improved process efficiecies ad ehaced customer experiece. Although it is imperative for leders to embrace the chage ad iitiate proactive adoptio, a icremetal approach would be the best step forward for a digital trasformatio exercise of this magitude. Takig each compoet at a time, keepig i mid curret priorities ad possible itegratio complexities with the curret legacy ifrastructure is vital, as there will be major chages impactig busiess processes ad systems at both the frot-ed ad back-ed. 11

12 About TCS' Bakig ad Fiacial Services Busiess Uit With over four decades of experiece workig with the world s leadig baks ad fiacial istitutios, TCS offers a comprehesive portfolio of domai-focused processes, frameworks, ad solutios that empower orgaizatios to respod to market chages quickly, maage customer relatioships profitably, ad stay ahead of competitio. Our offerigs combie customizable solutio accelerators with expertise gaied from egagig with global baks, regulatory ad developmet istitutios, ad diversified ad specialty fiacial istitutios. TCS helps leadig orgaizatios achieve key operatioal ad strategic objectives across retail ad corporate bakig, capital markets, market ifrastructure, cards, risk maagemet, ad treasury TCS has bee raked #2 i the 2014 FiTech Rakigs Top 100 of global techology providers to the fiacial services idustry, by both - FiTech Forward (a collaboratio of America Baker ad BAI) ad IDC Fiacial Isights. TCS has also bee recogized as a 'Leader' ad a 'Star Performer' i Everest Group's 2014 PEAK Matrix reports for Bakig ad Capital Markets Applicatio Outsourcig (AO). Cotact For more iformatio about TCS Bakig ad Fiacial Services Uit, visit: bfs.marketig@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburer: About Tata Cosultacy Services (TCS) Tata Cosultacy Services is a IT services, cosultig ad busiess solutios orgaizatio that delivers real results to global busiess, esurig a level of certaity o other firm ca match. TCS offers a cosultig-led, itegrated portfolio of IT ad IT-eabled ifrastructure, egieerig ad assurace services. This is delivered through its uique Global Network Delivery ModelTM, recogized as the bechmark of excellece i software developmet. A part of the Tata Group, Idia s largest idustrial coglomerate, TCS has a global footprit ad is listed o the Natioal Stock Exchage ad Bombay Stock Exchage i Idia. IT Services Busiess Solutios Cosultig All cotet / iformatio preset here is the exclusive property of Tata Cosultacy Services Limited (TCS). The cotet / iformatio cotaied here is correct at the time of publishig. No material from here may be copied, modified, reproduced, republished, uploaded, trasmitted, posted or distributed i ay form without prior writte permissio from TCS. Uauthorized use of the cotet / iformatio appearig here may violate copyright, trademark ad other applicable laws, ad could result i crimial or civil pealties. Copyright 2015 Tata Cosultacy Services Limited TCS Desig Services I M I 10 I 15 For more iformatio, visit us at