Lenders find themselves in a very different world from just two or three years ago. Interest rates and loan delinquencies are on the rise, the refinance boom has petered out in the face of a declining housing market, and regulators are slowly turning up the heat as they examine questionable lending practices. As a result, lenders are challenged to find ways to grow revenue in a more risk-averse climate. As always, technology is playing a key role in their efforts to adapt to the new market conditions.
According to J. Brian King, senior vice president and practice manager with Atlanta-based Benchmark Consulting, the changing business climate, including the bursting of the re-fi bubble, isn't necessarily a bad thing since it's allowing lenders to take a step back and reevaluate their processes and products. "There's more of a focus on portfolios now," he says. "With the significant growth we saw over the last few years, lenders were not watching their portfolios closely because of the huge volumes they were dealing with. Now they have some breathing room to do so."
TowerGroup research area director Craig Focardi says that in light of the rising loan delinquencies -- both in the prime and subprime areas -- lenders are now reviewing their underwriting guidelines and implementing changes to their systems. "The speed with which a lender can do this is a source of competitive advantage," he explains. As such, lenders are looking to improve their core loan origination systems, Focardi adds. "They're moving away from mainframe/client-server systems to more Web-based, componentized systems," he continues.
Although the older systems are tried and true, lenders are hindered in their innovation efforts by legacy infrastructures, contends New York-based Mercer Oliver Wyman's (MOW) Andrew Dresner, director, strategic IT practice. "Most lending platforms use mainframe technology and are designed to be efficient," he says. "But once you start to truly innovate, there's the problem of not being able to roll out new functionality in less than 10 or 18 months. It's not just the legacy platforms either, but the compliance and training issues that go around implementing something new."
Moving away from traditional IT infrastructure will afford lenders the ability to be more flexible and streamlined, Benchmark Consulting's King adds. This becomes especially important as lenders push for greater speed on decisions and loan closings, he says. "The focus now is on automated decision capabilities with no human intervention," King relates. "This functionality is important, and some loan origination systems (LOS) have this built in. Lenders want to reduce the days it takes to close a loan. The quicker you can close a loan, the less likely you are to lose it."
While part of banks' efforts to become more nimble is deciding whether to replace legacy systems, Ted Landis, a senior executive with Accenture (Chicago), points out that banks can better use what they already have in place. "How do you maximize the investments you have today and allow yourself to move into the newer opportunities to better exploit loan processing?" Landis poses. "You can create great efficiencies with business content management and imaging technology" by placing this atop existing lending core systems, he asserts.
Systems Integration: The Road to STP
Straight-through processing (STP) is a fundamental element in an automated lending environment. Banks and other financial services firms have been striving for this fully automated, paperless ideal for years and have found some success. However, experts disagree on the degree to which STP is possible in lending today.
TowerGroup's Focardi sees STP as more of a long-term goal. "STP is analogous to putting all the pieces of a large puzzle together," he explains. "Imaging and content management is being integrated into lending and workflow systems to improve parts of the lending process. Some portions of the lending process are very automated, such as underwriting and the collection of loan applications. But connecting the data and the documents is the most important thing." Focardi says the industry is just starting to understand these concepts.
Still, banks are approaching automation in lending in a variety of ways. "We're working toward STP," relates Ron Klatt, SVP of Jefferson City, Mo.-based Central Mortgage Company/Central Bancompany ($8 billion in assets). "We're trying to provide as many [electronic] interfaces with customers and vendors as we can. We're using e-statements wherever possible, and we offer online applications."
Klatt says a large part of the process involves eliminating redundant processing and rekeying of information by providing as much connectivity among systems as possible. He explains that Central Mortgage's Web site, which is run by MortgageBot (Mequon, Wis.), interfaces with the lender's Harland (Lake Mary, Fla.) loan origination system. The Harland system then interfaces with the servicing system. Central Mortgage images a portion of its loan files and plans to invest more in this kind of technology in the near future, Klatt adds.