An Rx For Bad Loan Files
Most of us "get" the idea of preventive health. Even if we don't always follow the advice of our doctors, we still want to know what is bad for us, so we can modify our behavior.
We also want to know what symptoms to watch for that could indicate a serious health issue, because the sooner we know what's wrong, the better chance we have to fix it.
Until recently, you rarely saw this attitude in mortgage lending, particularly in the area of risk management. Traditionally many financial services companies viewed fraud prevention and risk-management tools such as income verifications as "loan killers," and avoided them if they could. This attitude is changing, of course, due to our new regulatory environment.
Some CUs only address risk management at the beginning of the application process and again at the very end, before the loan closes, creating a huge gulf in the origination process in which the health of a loan file is not monitored at all. This happens even though certain loan information can and frequently does change during the loan process that could impact the outcome of a loan. In fact, it's the little things that happen while the loan is being originated that lead to good loans going bad, resulting in wasted time and staff resources.
Are You Ready For The Surprises?
Originators of all stripes are familiar with the all-too-frequent "surprises" that come to light during the final week and days before closing. For example, the borrower's loan score may have changed significantly due to a recent increase in credit applications or some other factor. Perhaps it was something else that had been submitted but not identified until just before closing. Perhaps the sales terms had changed. Or perhaps the borrowers overestimated their income, and no one knew it until the IRS transcripts that were ordered were actually reviewed. Rarely, yet often enough to draw concern, there may be signs of intentional fraud-false data that was not caught until the last minute.
Left unchecked, all of the above are symptoms of a loan file that is in less than perfect health. Yet due to a lack of tools and processes to catch these discrepancies at their very first sign, we are often unaware that our "patient"-in this case, the loan file-is sick until a week or even days before closing. And then we spend an exorbitant amount of time performing last minute surgery to save the file.
In loan origination, it's better to know these potential problems sooner rather than later. Much like today's automobiles can warn us before a serious problem develops-such as the presence of low tire pressure, an overheating engine or even another car in close proximity-loan origination technology has come a long way in helping originators avert disaster. Right now, technology is available that can monitor loan files for shifting or insufficient data while automatically checking for loan compliance. Age-old problems are suddenly being resolved through this type of innovation. Much like the modern automobile's ability to automatically detect and diagnose problems, we can now monitor fraud and manage risk at the very beginning of the mortgage process and at every point thereafter, in real time, throughout the entire life of the loan.
How Technology Can Help
For example, I know of one lender that was facing an increasing number of repricings and buybacks over a period of several years. One source of trouble was changes to the classification of the loan. A property initially categorized as a single family home would later be corrected to a planned-use development (PUD). That type of change may lead to a delay in purchase or a cut in basis points to the lender. But this lender was using software that could not track the discrepancies, let alone alert someone. After switching to a more modern origination platform, the lender began catching such discrepancies in time to address them. The result: 80% fewer pricing variances than before and it all but eliminated buybacks.
Faster response times and less pain in the form of repricings, buybacks and defaults are the immediate results of preventive medicine when it comes to managing risk in the mortgage process. But the long-term impact of these solutions, I believe, will be untold savings in time and allocation of staff resources, and greater confidence for the holder of the loan as well. Now that this technology is available, there are few excuses not to use it.
Lloyd G. Booth is president, chief operations officer and co-founder of Blueberry Systems, LLC, Greenwood Village, Colo. For more info: www.blueberrysystems.com.