When will fintech infiltrate the mortgage industry the way it has other financial services?
It already has and is creating a problem, warned Andy Pollock, senior managing director of the consulting arm of Clayton Holdings in Shelton, Conn., who quickly jumped on that question during a question-and-answer session at National Mortgage News' Mortgage Servicing conference in Dallas last week.
That discussion focused on urgent issues facing servicers including ownership of servicing rights, marketplace lending and Consumer Financial Protection Bureau exams.
What worries Pollock is that the newest crop of innovative mortgage technology architects is too focused on building fast, attractive front-end user experiences and are generally neglecting the backend operations required for compliance and reporting — much less the customer service for the life of the loan.
"They've spent tons of money on the front end, on attracting millennials" and on developing point-of-sale capabilities, he said, while "the back end is typically 12 to 24 months behind. The infrastructure, staff and management are not there."
Pollock told a story about working with one such firm in San Francisco that secured venture capital funding after creating the front end of its product. It was a proverbial startup scene, complete with office dogs and kale salad offerings.
"What a difference $100 million can make," he joked, recalling the firm's first office in a seedy part of the city.
However, the firm's founders remained broadly unfamiliar with the level of detail necessary for mortgage servicing. The same was true of servicing operations starting out years ago, and it is a piece that many current startup fintech outfits are missing, Pollock said. Part of this stems from unfamiliarity with mortgage servicing regulation, he said.
"We used to say, operate like the Office of the Comptroller of the Currency is on one shoulder and a financial reporter from The Wall Street Journal is on the other — fintech isn't there yet," he said.
When Clayton, which is owned by Radian Group, is called in to help fintech companies streamline their origination process, its consultants ask about mortgage servicing infrastructure, such as how payments are collected and where the trailing documents necessary for reporting and auditing are stored.
Clayton's clients often offer some version of "it's all digital now — we don't have to deal with that," Pollock said.
Just as it is no longer acceptable to rely on trailing documents to fill in missing gaps in servicing data, it is also unacceptable to assume digital documents are robust enough to fulfill compliance requirements, he said.
Regulators "have their hands in many pots" right now and are "all over" fintech especially, he said.
He fears startup fintech companies are allowing loans with defects to remain on their balance sheets.
"You should have barbed wire around your balance sheet, with someone with a machine gun sitting on it," Pollock said. "It should be a privilege to be on your balance sheet."
However, industry executives should not to be too wary of fintech companies, citing PayPal and Apple as innovative companies whose financial products consumers have widely adopted. He added not to count big banks out as innovators.
"People think [big banks] are dinosaurs, but I think they're going to come to current times before anyone expects," Pollock concluded.