PERSON OF THE WEEK: Brian Lynch is founder and president of Advantage Systems, a provider of accounting software to the mortgage banking industry. MortgageOrb recently interviewed Lynch to learn more about how accounting software has evolved over the years – as well as how new regulations are changing the way mortgage bankers approach accounting.
Q: Accounting software for lenders has come a long way in recent years – especially in terms of capabilities and feature sets. Tell me about the evolution of accounting requirements – as well as how advancements in software have helped lenders keep up.
Lynch: The biggest change has been technological. When I got into this business accounting systems just did not operate at the loan level and they weren't integrated with other systems.
Let's say you had an appraisal invoice that was for five different loans. Back in the day, you could only put it into ‘appraisal expense’ or ‘appraisal fees payable.’ We used to see people try to use job costing systems to take it down to the respective loans using individual sub-accounts within the chart of accounts – but those systems failed because they simply ran out of gas – they would get maxed out. They didn't scale – they weren't designed to handle thousands of loans.
Today, technology has advanced to allow us to do this – and just from a ‘getting it done’ standpoint, in terms of dealing with the sheer volume of transactional data, the efficiencies and the savings have been outstanding.
In the past, just because a client couldn't do it, didn't mean they are absolved from doing it. They had to find a way – and for a long time that was always spreadsheets. Well that, from an audit standpoint, is horrible. Spreadsheets are very labor intensive – from a management standpoint they cost a lot. Not only that, they're also prone to error and very difficult to audit. When you implement a systematic approach that records the transactions at the loan level within the accounting system that then gives you the ability to report on that data, that, in turn, leads to better auditing.
Having the ability to go down to the loan level is one thing, but the ability to import the transactions is really the thing that has made it work. If you had the ability to allocate a FloodCert bill to 1,000 loans, that's great, but you're probably not going to do that if you have to do it manually.
Having the ability to import loan transactions at the loan level is what makes it viable to deal with loan level detail. Now, whether you're doing 10 loans, 100 loans or 1,000 loans, it's the same import. And it's the same number of employees – same head count – doing that work. This is where we were able to achieve a huge savings in headcount within the accounting department.
Historically, what would happen was, if you were growing your mortgage business, you pretty much had to add so many bodies per 100 loans per month. And you couldn't get away from it – because it was such a manual endeavor. Now, it's like, ‘Here are the different transactions we face – here is how we bring them into the system’ – and the body count stays pretty flat.
Q: When it to comes to accounting systems, how many lenders are still back in the spreadsheet age? For a smaller lender, is it really necessary to have specialized accounting software – or are there off-the-shelf solutions that can adequately do the job?
Lynch: I can't begin to tell you how many times we have replaced QuickBooks. If you were going to launch a mortgage company and your CPA told you to go buy QuickBooks, that's great – that works for a lot of small businesses. But as loan volume grows, spreadsheets no longer cut it, because they are so labor intensive. Our metric is that spreadsheets start to become very inefficient at around 100 loans a month. When you're using QuickBooks that means you're pretty much using spreadsheets – and at 100 loans a month, it's going to start getting pretty tedious.
Q: So the key difference is really that the systems designed for mortgage allow you to go down to the loan level?
Lynch: Yes – and even today there are a limited number of systems that do that. There are reasons for that, but the main one is that it's not a very big industry. Keep in mind that there's about 7,000 lenders in the U.S., as per the HMDA list, and only about 1,100 of them are doing more than 100 loans a month. So, we're talking about a pretty narrow population. So you're not getting a lot of focus from the larger system makers out there. Companies like Oracle and SAP, they're not focusing on the mortgage industry at all. We wanted to focus on the mortgage industry and that's why we have developed a lot of applied functionality that others couldn't or wouldn't.
The generic accounting systems are just a huge mistake. Don't get me wrong, they're great systems – but there's not a line of code in them for the mortgage industry. So there's no true benefit to going with one of those systems. The functionality that a company like ours can bring to the table is significant. It can really pay dividends in terms of time saved.
Q: So there are still some small lenders out there using programs like QuickBooks?
Lynch: Not many, at this point – but there are still some. That's because the loan level detail is now pretty much required. For the ones who can spend only a few more bucks, they'll go and start their own, in-house loan level database. This just gives them another place to enter the same data – so there is redundancy. But usually there's no synchronization between that database and the accounting software – well, they can make it work, but it's not a native integration. And, of course, the really big guys develop their own in house systems.
Today, everybody out there has some sort of a cloud solution. Thing is, every ten years you have to completely rewrite the software – so we're completely rewriting our software so that it will be completely browser based.
Q: How are the new regulations affecting the design and development of accounting systems?
Lynch: We were loan level prior to the mortgage meltdown – so we were already providing a lot of the functionality that clients require today, in order to achieve compliance. Pre-recession, some lenders were not able to report at loan level as to what was making up the securities they were selling. That's because loan level accounting was considered fairly difficult. So a lot of people weren't doing it. They were achieving a cost per loan using modeling – using spreadsheets to figure out standard costs to get what it was costing per loan.
I think the industry is now being driven to report at the loan level – and there are a several benefits to doing that. For one thing, you see what it is actually costing you – you get the granularity of the profitability by loan – and management can see what is working for them and what is not working, on a loan-by-loan basis.
From a regulatory standpoint, probably the biggest impact has been on the loan officer commissions. That what we've really been focused on – in terms of Dodd-Frank – is how commissions get calculated. There have been some celebrated cases out there, with pretty big fines assessed, for lenders that weren't doing that properly.
This brings us back to the spreadsheet thing again – there are still lenders out there that are doing their commissions using spreadsheets. That's really hard to manage because, there's what management wants those commission profiles to be – in other words, what the commission programs are – and whether they comply with Dodd-Frank. And then there is the implementation of them. And if a lender is using spreadsheets to pay these loan officers they may, by omission or commission, not get it right. So management is at risk to the extent that those commissions are not being calculated properly or in accordance with what management thought the program was.
I think people initially thought commissions would be easier to do under Dodd-Frank, but they're actually considerably more difficult.
Q: Were there any specific changes that you had to make to your software resulting from the new regulations?
Lynch: Not so much on the general purpose accounting stuff – because that's the tools you use to do things at loan level – but on the commission side, we did have to change some of the loan logic. For example, let's say you're an LO and you have a certain specific commission profile – and then you want to change that policy – say you want you change it on July 15. The way it used to work is we would just take whatever profile you had when we funded the loan, and it would calculate the commission. But you can't do that anymore. You have to use the policy that was in place when the good faith estimate when out.
So, we've always had transactional control on when the policies changed – but we had to modify it because we can no longer just use the funding date – we have to use the profile lock date. That's the date that drives the search for the right profile. That's a big deal – to be able to satisfy that need – and to be able to have the transactional control on these profiles so we know when a profile started, when it ended and when it changed. In the past, most systems really couldn't do that.
In the old days it was all about income – but now we can't be fee-based – we can't base the commission on the terms or conditions of the loan. And having the flexibility to modify for Dodd-Frank – well, we were fortunate in that the way we designed the commission module allowed us to shift gears, to go away from the income side, and focus more on basis points on the loan and unit counts or volume counts.
Q: What about automation's impact on peoples' skills? Are there concerns that the more you automate the accounting processes, the more people's skills will begin to atrophy?
Lynch: When calculators first came out people said, ‘Oh no, people won't be able to add two and two anymore,’ when the reality was they could do much better math and more math – you could do trigonometry in your hand. Twenty years ago people were bogged down in the weeds doing spreadsheets and they weren't able to analyze anything. Today, people want dashboards and they want analytics – so I think the automation is driving a higher level of analysis and a better result. All we've done is get rid of the grunt work. This, in turn, frees up employees to do other things. In a broad brush, I would say we have a higher caliber of accounting personnel today than we had 20 years ago.
Q: Tell me about your company's products – do you have any new ones coming out and which ones would you say are doing well?
Lynch: Sierra is our newest upcoming product – its a browser-based dashboard that gives accounting managers the ability to look at key performance indicators via a dashboard interface.
We also have another product called ApprovalSoft that we released a few years ago. It's a workflow management and approval management system that allows you to capture the transaction, gather the approvals and then flow it into the accounting system. This works well for our clients because if they have branch organization, the individual branches can submit those transactions to ApprovalSoft rather than directly to accounting, therefore they can get the approvals on them prior to sending them to accounting. In addition, it allows the company to push the task of imaging out to the branch level, so they can streamline that process of grabbing the image as part of the transaction approval process.
These are in addition to our flagship Accounting For Mortgage Bankers, or AMB system.
Q: What's driving your company's growth right now?
Lynch: Probably the main thing is our commission module. Resolving that headache has been very important to our clients. The other thing is our Web-based reporting module, which allows branch organizations to have immediate or real time access to their P&L data. They can just log on and accounting management doesn't have to do anything – they're looking at the same database that management is looking at. So management doesn't have to push the data out to another database for the branch managers to look at it. But it's controlled so that Sally in Cleveland doesn't see Bob in Denver's numbers. Not only do they get see P&L, they can see commission reports and what we call the funded loan report, where they can see the loans that are funding or that they have funded.
