Completing a thorough review of each loan application is a critical component of a mortgage lifecycle. However, several challenges limit lenders’ ability to perform reviews with the accuracy, efficiency, and impartiality that this task requires, and can also raise loan review unit cost. These challenges can prevent loan originators from taking on additional business and therefore restrict growth. This article lists the specific factors that lead to higher mortgage review costs, and then offers three options for addressing these issues.
The High Cost of Regulation
Ever since the Dodd-Frank Act came into effect in 2010, lenders (especially small and mid-size community banks) have been burdened with much higher compliance costs. Increasingly complex and frequently-changing mortgage regulations continue to increase the time and effort required to perform essential loan review activities. Since smaller institutions typically aren’t prepared to cope with additional regulatory requirements, these changes have had a major impact on their profitability. Over one third of banks have hired additional compliance personnel, and the results have been devastating; hiring two additional personnel reduces median profitability by 45 basis points. One-third of small lenders become unprofitable, and are nearly always bought by other community banks.
In addition to regulatory complexity, other challenges also increase review costs. Compared to ten years ago when loan packages usually consisted of less than one hundred pages, it is now commonplace to encounter loan packages in excess of five hundred pages. However, it isn’t just the sheer volume of these packages that increases the cost per review: the documents contained in each package can vary significantly, and they aren’t even arranged in a standard sequence. Poring over the contents of these loan packages and manually verifying every detail has become a daunting prospect.
The increase in business risk that these changes create is tremendous. There is much greater chance of human error, which could result in high-risk loans. Manual review is also susceptible to unconscious human bias, which can have similar consequences. Failing to catch transcription errors and other problems in the accuracy and completeness of documentation can result in dozens of hours wasted to rework, which has a significant impact on cycle times and customer satisfaction.
Instead of increasing your workforce, which quickly becomes prohibitively expensive, we recommend that small and mid-size lenders adopt productivity-enhancing digital technologies to counter the effects of increased compliance requirements. Here are three digitally driven techniques for easing your compliance team’s workload and improving turn times:
Automatically classify loan documents
Manually splitting huge loan packages into their constituent documents is a losing strategy. It makes much more sense to partner with a service provider that offers auto-indexing services. These digital process management firms use machine-learning technology to automatically identify and separate the different types of documents in each loan package in just a few minutes. Each document can then be sent to different document management systems, vendors or other parties for further processing. Leading business process management firms also offer “white-glove” human verification services that drive error rates down to almost zero.
Convert document images into searchable information
Auto-indexing services can identify documents and sort them into different groups, but each page in these documents is still just a digital image. For your LOS and other computer systems, there is no difference between these images and any other digital photograph – they’re just grids of dots. In this form, your compliance team or external vendors will still have to view and compare each digitized page.
To truly transform your loan review process, use optical character recognition (OCR) technology, which changes these images into text that can be copied, searched, compared, validated, and fed directly into your LOS and other mortgage software. High-speed OCR software can extract information from dozens or even hundreds of documents per minute. After extraction, you can use loan document review solutions to simplify the review process. These solutions use configurable compliance checklists to verify that each document conforms to federal, state, regional, and lender-specific requirements. Automated compliance checks take minutes to execute, and leading solution providers also offer fully integrated white-glove validation services.
Use dynamic workflows to eliminate delays
Lenders that rely on email and spreadsheet software to track loan review progress experiences longer turn times because of unnecessary delays between each step of the process. Documents and other information can sometimes sit in workers’ inboxes for hours or days. A mortgage review solution moves the review process smoothly using automated dynamic process workflows. As soon as one task is completed, the solution automatically determines the outcome and immediately initiates the most appropriate next steps, such as sending documents to various stakeholders, seeking approval from the correct parties, or reminding team members to contact the borrower. Automating these steps reduces delays while keeping manual follow-up activities to a minimum, giving you the cost advantage over your competitors.
Different digital technologies can have a significant positive impact on lenders’ bottom line and competitive pricing. While looking for a loan review solution, look for technology partners that offer a complete range of technology solutions and related review services for optimal effect.
Learn more about how meeting compliance in a cost-effective method can give you a competitive advantage.
Lux, M., & Greene, R. (2015). The state and fate of community banking. M-RCBG Associate Working Paper, 37.