By Jeff Moyer
— John Wooden, former UCLA head basketball coach
Understandably, doing business in the mortgage industry today can be unsettling. Having worked through the worst part of the crisis over the last five years, we now find ourselves in a world governed by unfamiliar rules. However, by taking steps to understand the known and to be proactive in adapting to a new normal, lenders should be able to achieve greater peace of mind.
Changes brought on by the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB), including Qualified Mortgage, Qualified Residential Mortgage, changes to the Home Ownership Equity and Protection Act, the Real Estate Settlement Procedures Act, and more, have rendered much of mortgage lenders' standard operating procedures obsolete. Adhering to definitive quality guidelines for loan origination has created the need for lenders to restructure their operations and reach out to loan quality experts to ensure compliance.
There is not only a greater need for integrated, enterprisewide risk management systems with specific protocols for compliance, fraud, and servicing, but also there is an underlying requirement without which those protocols are pointless. A "coordinated view" toward data integrity throughout the loan life cycle is now critical to proving loan quality basics have been met.
According to regulations, mortgage lenders and servicers and their third-party service providers must demonstrate that their processes support data integrity and that data management supports the performance of their role, creating an auditable record.
In short, data has taken center stage in risk management and will not budge until everyone under the mortgage-lending tent has accommodated its elemental purpose in the ongoing evolution of the industry. It can be an overwhelming prospect for business models that previously had adopted a more utilitarian posture with data — using it as needed, occasionally disregarding it, tweaking it as deemed expedient, and only rarely having a compelling reason for making data a priority.
Prior to the current era, the last time lenders had to get in the weeds with data was more than a decade ago, when mortgage fraud made its presence irrefutable but problematic to identify, except when its consequences were felt. Fraud appeared early on the risk management horizon. That was long before quality standard acronyms entered the mortgage lending lexicon but at a time when data forensics was a well-established discipline in other industries.
Coping with fraud was one of the first loan quality issues with regulatory ramifications that focused on data integrity, and it came at a time when lender-level data management was largely a manual process. Spreadsheets became important and remain so. Data rekeying was (even more) commonplace a decade ago and itself remains the source of persistent challenge in fraud detection and prevention.
Data quality, integrity, and management are familiar concepts in mortgage lending. But lenders today can find themselves challenged by legacy barriers to advancing their operations toward a quality-centric, data-driven model. Many know they must take on Dodd-Frank, the CFPB, and the Big Bank competition with a system of data input, validation, and verification fine-tuned to satisfy current quality thresholds. The question is how to approach the solution. Which right third-party provider can offer automation and file expertise that will work with the complex Rubik's Cube of regulatory change and truly reduce risk?
Perhaps the challenge of functioning in an environment of continual recalibration can be best addressed through the process of continuous improvement and change management. (I also believe that's not too much to ask of any vendor you do business with. Ask for product road maps and demand responsiveness.) At the heart of managing continuous improvement/change is the commitment to monitor, measure, and conduct analytics on processes as well as outcomes. Lenders that do so and strategically outsource automation and expertise are positioned both to satisfy QC and compliance requirements and to guide their business through continuous change.
Jeff Moyer is president of Interthinx, Agoura Hills, California, a provider of loan risk mitigation tools for the financial services industry. Interthinx is a Verisk Analytics subsidiary.
*This article is reprinted with permission from MBA NewsLink/September 3, 2013.