Lenders Refocus Attention on Automation at the Point of Sale

For the first time in years, mortgage originators are making significant progress in improving efficiencies and reducing costs at the point of sale, where consumers first interact with originators.

Until now, the industry has focused on its internal systems -- improving the speed with which paperwork is handled and reducing the number of people handling it once it reaches the processing offices. In many cases, major nationwide competitors invested heavily in building their own systems, but many never produced the desired productivity and sales results.

Now, however, increasing consumer savvy about the mortgage application process has refocused productivity improvement efforts at the point of initial contact with customers. The key factors in the change are far greater opportunities for consumers to shop around on the Internet, and growing lender reliance on new points of sale such as automated call centers.

Originators and lenders know that mediocre service and delays in obtaining pre-approvals, or in any other part of the application process, will mean lost sales.

Thus, producing and processing the greatest number of applications for the largest number of consumers in the least time has become the rallying cry of almost everyone in the originations business. Helping a growing number of them do so are a plethora of software providers, each servicing specific niches within the business, such as the broker community and the subprime market.

Best of all for the industry, the software is available for prices ranging between $895 on the low end to $50,000 for starters on the high -- far less than larger competitors were paying when they were building their own systems.

The icing on the cake: smaller lenders, working in conjunction with these vendors, can sell their mortgage products nationally through multilender Web sites such as Quicken, LendingTree, and Consumers Financial Network -- opportunities that were never available in the past.

Said Doug Lebda, founder and chief executive of LendingTree in Charlotte, N.C.: "In the off-line world, originators never had to sell competitively; as soon as a consumer applied for a loan, you had him or her, that person was your customer. That's not the case anymore."

"On-line consumers," he continued, "are going to three or four Web sites and they're starting the application process much earlier, just when they're beginning to think about obtaining a mortgage. As a result, those in the business need a top decision sooner on each loan and they need to process a lot more applications to make one sale. So they need to spend more time selling products and services against their competitors, and less on the decisioning process -- who qualifies for what loans. The new software is making those decisions. Ultimately these decisions on loan approvals need to be real time, automatic, and at very low cost."

Richard Beidl, senior analyst with TowerGroup, a research and consulting firm in Needham, Mass., estimates that 80 to 85% of the top 100 originators are using some sort of prepackaged software that can provide a decision on a loan in as little as 30 seconds. "This represents a dramatic shift over the last five or six years," he said.

"They're moving away from in-house systems because there have been some notable failures, packaged solutions costs are coming down, and companies can share risk and knowledge gained through each prepackaged implementation. So there's considerably deeper prepackaged penetration, and it's growing."

Mr. Beidl says nine or 10 companies are selling software to the largest originators -- the Countrywides, Norwests, and Chases; another six or seven are selling to midsize players; and another six serve the broker market. "The remaining 15% who don't have prepackaged solutions are ones that have developed in-house solutions," he said.

"They haven't changed because they're worried about the cost of conversion and disruption to the business process, but penetration will continue to grow because systems are replaced every four or five years and the role of origination systems has changed.

"Today, you're tying in more third-party providers such as mortgage insurance and title companies, legal services, and automated underwriting. And for the larger banks, the origination system has become the same as the production system. So expect continuing change."

Three different companies are representative of the software evolution.

Two focus on exactly what originators seem to want most: automated underwriting. They are Arc Systems in Austin, Tex., and GHR Systems Inc. in Wayne, Pa. "In manual mode, it takes somewhere from 48 hours to three weeks to get pre-approved on a loan," said Ed Jones, president of Arc. "We get pre-approval in 30 seconds. That's our claim to fame, being able to do this for multiple lenders."

Similarly, Cyrus Brinn, chief executive of GHR, said, "The heart of what we do is our automated qualifying and pricing engine. All of those involved in working points of sale -- the vendors and the underwriters -- should have the same objective, which is to efficiently, cost effectively, and consistently deliver loan products, underwriting, and pricing rules to those points of sale. That's one of our primary objectives."

But the two companies differ in their objectives beyond providing the capabilities to pre-approve loans quickly. Arc Systems, for instance, has emphasized its expertise in the subprime market. "There are not many underwriting engines out there for the subprime market," notes Mr. Jones. So it is no surprise that LendingTree's Mr. Lebda says that "Arc's systems do the same thing (as GHR's), with a specialty toward subprime lending as well."

The differences between Arc and GHR go beyond the former's emphasis of the subprime market, however. GHR's products and services are more appropriate for larger clients. "That's because it's a costly investment," said TowerGroup's Mr. Beidl. According to Mr. Brinn, startup fees for applications are "under $50,000," with transaction fees totaling about $75 for closed loans. "What we charge depends on the fees and complexity of the situation."

Arc's fees are significantly different. Startup fees range from $2,500 to $5,000 per product, with lenders paying $15 for loan rejections and $30 for loan approvals -- so it has a greater audience with smaller originators.

Its ties with Fidata, for instance, provide a direct interface with 48 credit unions. "As a service bureau, Arc offers automated on-line decisions to a much wider array of banks and financial institutions than could otherwise afford it," said TowerGroup's Mr. Beidl. "At the same time, Arc's clients have full control over what the underwriting guidelines are and what products the customer might qualify for, given the bank's credit criteria."

For its higher fees, GHR offers a number of services that Arc does not. For instance, the company emphasizes its multiple point-of-sale capabilities. It offers laptops to clients and an automated call center application, launched four months ago.

The company also promotes its electronic capabilities in distributing loan qualification and pricing rules for 74 lenders nationally -- information that can be uploaded by users of its PCs and other systems in real time several times a day. "Traditionally this has been done archaically through faxes from lenders," said Mr. Brinn. "We have clients who have been able to eliminate three-quarters of a million dollars in fax rate-sheet distribution costs a year by working with us."

Mr. Brinn says clients can access updated pricing and qualification information several times a day at the point of sale. "We provide an enormous amount of power to loan officers," he said. "You have to get the latest interest rate information and product rules fed to you if you want the maximum use of technology. That's really what differentiates us from a lot of players out there."

"One of our largest clients is First Franklin," a major subprime lender, said Arc's Mr. Jones. "They do $500 million a month in originations, which equates to about 7,000 to 8,000 applications per month. By contrast, we say we can do 5,000 applications an hour with customers who have the same configuration as Yahoo or other sites. We don't have any competitors. When we implement our current client work, we'll be doing work for a larger number of the top 30 lenders, and a year from now we'll have a large proportion. The question isn't 'Why shouldn't I buy?' but 'Why should I buy?'"

While dismissed by some as a brokers-only system, the Point software system offered by Calyx Software in San Jose, Calif., continues to be a hit with mortgage brokers looking for an easy way to aggregate their own front-end information systems. Currently Calyx is used by about 40,000 brokers.

What does the system do? "Since our inception in 1991, we have been narrowly focused on the front end of the distribution system, not letting anything we do draw us away from that," said Jack Trageser, director of marketing. "We're geared to helping brokers do anything in that regard. He is able to market, originate, process, and manage the pipeline of all originations, submitting loans for underwriting."

Mr. Trageser views the system as a "mortgage information hub, where all your mortgage data is stored. The broker can bring information in through Internet sources, send it to companies like IMX if he wants to have those bid on, or send it to Freddie or Fannie on the Internet. And at the end of the process, you still can get loan approval for your customers, leaving them with nothing other than a checklist of documents than you need."

While Calyx does not have the ties with multilender Web sites or electronic data feed from lenders, the price appears to appeal to brokers and smaller financial institutions. Currently the system costs $895 - "a fourth of what competitors cost," said Mr. Trageser -- and the company offers free 800-number support for the life of the product. "We send them free upgrade announcements and if they don't want to upgrade, they can still use the 800 line free," he said.

Calyx has some "exciting lender-related services coming along," Mr. Trageser said -- a comment suggesting that offering eventually could rival some of those from Arc and GHR. "In the brokerage community, we have the best front-end system and our timing is excellent because everything in the market is now focused on front-end POS," he said. "We will continue to build on that."

While a switch from in-house systems to packaged ones may offer significant cost savings, vendors must overcome significant challenges in dealing with the ability of the front and back offices to speak to one another, TowerGroup's Mr. Beidl said. "This remains the weak link," he says. "Hard copy still needs to be delivered from one portion of these systems to another as they can's talk. This remains one of the greatest challenges."

Mr. Quinn is a writer in Arlington, Va.

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