Industry Plays Catch-Up With Data Interchange

The mortgage industry may lag others in adopting a standard for electronic data interchange, but it's trying hard to catch up.

The most influential participants in the industry are supporting the American National Standards Institute's x12 protocol, a technology that automates the exchange of business documents using standard computer formats.

The technology's backers include heavyweights such as the Mortgage Bankers Association of America, Fannie Mae, and Freddie Mac.

Observers agree EDI can help the industry reduce its paper-based processing burdens, but they note the mortgage business has some special obstacles to overcome. It is a highly fragmented industry with thousands of lenders, tens of thousands of appraisers, and countless brokers, realty agents, and insurers.

"The complexity of the transaction makes EDI a little difficult for widespread adoption," said Jay Fitts, executive vice president and a mortgage banker at LaSalle National Corp., Chicago. "There is a lot of legacy resistance, and probably for good reason."

Mortgage participants may believe in electronic commerce, but often will find a stronger business case to develop the proprietary standards used by trading partners.

The technology in question-electronic data interchange-has been around for a dozen years. It has been most successful in industries that are dominated by only a handful of large companies.

Gibbs Moody, an analyst at UBS Securities, New York, estimates there are 130,000 large and middle-market businesses users. Observers said large EDI- capable companies are able to influence their trading partners to adopt the technology.

David Barkley, executive vice president at Freddie Mac and a member of the Mortgage Bankers Association's technology committee, said most lenders were still grappling with Windows-based technology amid year-2000 concerns.

"These companies are saying, 'EDI is nice, but I'll get to it when I can.' Sometimes, to get some of these things implemented, it has to be almost mandated," Mr. Barkley said.

He did not say whether Freddie Mac was contemplating such a move. But the U.S. Department of Housing and Urban Development has mandated that several types of electronic interactions must be in a standard EDI format.

Furthermore, the National Automated Clearing House Association, the rulemaking body for automated clearing house payments, has approved a rule that requires its participants to process financial EDI payments.

But mandating the use of EDI might be a more difficult proposition for a Fannie Mae or a Freddie Mac.

Larry Walker, director of the real estate and mortgage division at Electronic Data Systems Corp., Plano, Tex., said the industry's "800-pound gorillas," whose automated underwriting systems interact with the majority of mortgage lenders, have yet to become x12 compliant.

"They tend to take a nonintrusive approach," Mr. Walker said. "They do not dictate it or mandate it."

Even the Mortgage Electronic Registration System, or Mers, which was built by EDS, was made to be compatible with participants using the most rudimentary systems.

Mers is an all-electronic registry for mortgage servicing rights, was developed in 1996 for the MBA.

The association has been EDI's most avid backer, and is especially supportive of Ansi x12. James Horne, director of technology initiatives at MBA, said there were many examples of the mortgage industry's successfully adopting the technology.

The association is becoming even more focused on specific applications, he said. It has several work groups that are hammering out standards for the transmission of credit approvals and automated underwriting decisions, and for the transfer of mortgage servicing rights.

"People will start to see that our ideas are of great benefit both from a lender and a vendor perspective," he said. But others noted the association has scaled back its unequivocal praise in recent years.

Mr. Walker said the association would "truly see benefits" if the industry adopted common standards. But he added that most early adopters have had mixed results and difficulties in justifying the expense to adopt a single standard.

"Just about anyone you talk to will tell you how disappointed they are," Mr. Walker said. "You can go into some of the most sophisticated companies and find that 40% to 50% of their transactions are still going through manually, or by some means other than EDI."

"It has very limited appeal," said Scott Cooley, president of Contour Software, Concord, Calif., speaking of the adoption of EDI.

The Ansi x12 standard "is not what it was originally envisioned to be, and for a wide variety of reasons," he added. "I do not expect that to change soon."

Mr. Cooley, who sells software to the burgeoning mortgage broker community, has developed an Internet-based proprietary EDI software that he said simplifies the intricate transfers of information from one data base to another.

"You eliminate all the communications software infrastructure that you normally would have to build," he said.

Mr. Fitts at LaSalle said his bank believes in an interim approach toward standardization; outsourcing the communications to intermediaries.

MetroStat Technologies Inc., a Sylva, N.C.-based company, sells forms software to mortgage appraisers, but it is finding itself acting more and more as a provider of value-added network services lately.

LaSalle will fax a request for an appraisal to MetroStat, which converts it into an x12-based electronic transmission and sends it off to an appraiser.

The appraiser in turn will respond in x12, which is then converted back into a word document and faxed to Chicago.

"I think you'll find it an easier electronic ability to move standard data for servicing, for credit reports, and some other smaller transaction sets," Mr. Fitts said.

In addition to its work with LaSalle, MetroStat is testing an EDI system with Fannie Mae.

John Kevlin, co-owner of MetroStat, did not discuss any details, but said x12 would become a familiar term among the 70,000 mortgage appraisers in 1998.

"Ours is a fairly complex transaction set, we have multiple players involved," he said.

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