REQUIRED READING: After Fannie Mae launched Desktop Underwriter (DU) in 1995, technology vendors began developing their own decisioning solutions for use by lenders. The speed in which loans could be underwritten was very attractive to large lenders, and some investors developed their own decisioning platforms. Over the years, a number of mortgage technology vendors announced the commercial availability of their own systems.Â
The arrival of a lender-owned and -operated decisioning platform spawned a wave of lenders rushing to lay claim to their own systems for their own client base. As the mortgage industry came out of its last downturn and approached the subprime tsunami, lenders believed that in order to stay competitive, they needed their own decisioning platform.
This wave of decisioning systems served as the carrot that attracted originators and screened deals. On the whole, these solutions were expensive, required lengthy implementations and needed significant resources to manage. During the refi boom, it was imperative for lenders to select the right decisioning vendor, or they would risk the possibility of major operational slippage and severe disruptions.
Today, things are very different. Lenders that survived the economic crisis are now operating in a precarious marketplace where even the slightest operation slip can mean the difference between failure and success. Technology serves as the backbone and driver behind business process automation.
Unfortunately, some lenders fail to take the appropriate steps to identify their needs and functional requirements to allow them to select the best-fit vendor for their specific business model. Before the crash, these lenders routinely assembled teams to assess technology needs, and began extensive searches and evaluation processes to arrive at the right technology solution and vendor. Â
But now, a surprising number of lenders regularly take the vendor evaluation process lightly, rushing through it without adequate due diligence. As a result, many lenders learn costly lessons as to why it is so important to evaluate and implement the right decisioning platform – the first time.
In today's market, there are three main solutions that offer varying degrees of functionality: a pre-qualification system, a product and pricing engine (PPE) and an automated underwriting system (AUS). Each solution typically accompanies customer-facing Web portals that extend various functionality to the point-of-sale for use by originators in the wholesale, retail and consumer-direct channels.Â
Notably, there is significant confusion over the actual definitions of various decisioning technologies. It is important that we take a moment to define each one. Â
Pre-qualification solutions use rate-sheet-level rules and a minimal amount of user-provided information. The value in these systems largely caters to brokers, not mortgage bankers. Brokers typically use these systems in conjunction with a product finder to address initial borrower-eligibility questions. This solution also provides a basic summary answer to ‘what if’ scenarios.
PPEs use what is called an ‘eligibility matrix’ to decision loans. The eligibility matrix resides in a rules engine and maintains 10 to 20 data points from investor underwriting manuals. At the same time, pricing is returned along with eligibility. PPEs work by using stated borrower information to return eligible products and associated pricing that assumes the loan will be approved in underwriting.
An AUS decisions off of the complete set of investor underwriting guidelines. The system captures the 1003 data, pulls and parses borrower credit, and then uses both data sets to compare against underwriting guidelines to return a risk-based decision. An AUS essentially renders decisions that carry the same weight as a human underwriter's decision. Â
For those who prefer an all-of-the-above approach, it is also possible to combine these three solutions into a single decisioning platform system that decisions off of rate sheets, products, complete underwriting guidelines, credit and risk-based pricing.Â
To decide which solution is right for the individual needs of a specific business, there are a number of key factors that need to be considered. Functionality has to be tailored to meet the overlapping needs of loan officers, brokers underwriters and processors. Some issues to be addressed include the following:
- Do you want to offer a pre-qualification at the point-of-sale using a PPE, or are you more interested in using an AUS to provide customers with a conditional underwriting pre-approval?
- If you decide you want to offer a conditional pre-approval, do you want to automatically generate rules-based conditions?
- Is a tight integration with your back-office loan origination system (LOS) important to you?
- Do you focus on selling loans primarily through best efforts?
- Do you want to allow your originators to be able to price and lock loans at the point of sale?
- Do you have portfolio products, or do you generate your own underwriting manuals?
- Do you have your own overlays and adjustments?
Pick and choose
In selecting a solution, lenders should think about both their short-term and long-term needs. Specifically, what kind of growth rate is predicted for the company in the next one to two years, and would there be a possibility of outgrowing one solution and replacing it with another?
Generally, contracts with decisioning vendors run anywhere from six to 18 months. If there is a spike in business, it is possible to get stuck with an inadequate solution that will require a ‘rip and replace’ approach to keep it viable – while continuing to pay on both the old contract and the new add-ons.
In evaluating vendors, lenders need to keep a number of key factors in place, such as the following:
- Are managed services included in the monthly fee, and what do they entail? Some vendors offer their solutions at a steep discount, only to later ‘nickel and dime’ customers for changes to the off-the-shelf software they bought.
- Can the system handle Federal Housing Administration (FHA) lending? If the lender is heavily involved in FHA loans, then it is important to have access to FHA TOTAL Scorecard via the solution that is being considered.
- Can the solution provide easy integration with DU, FHA and other disparate applications? It is equally important to ask about building new integrations, with a particular focus on specific integration timelines.
- How tight is the vendor's integration with back-office LOS platforms? It is important to know how much data populates from the front-end portal into the back-office LOS. Is it just pricing and minimal data points, or is it the full 1003, loan-level details, conditions, etc.? Furthermore, is the integration seamless, and is it bi-directional, with automatic status updates displayed within the portal?
- Can the solution accommodate customizing a loan origination/broker-facing Web presence? A vendor should be asked if a portal's look and feel can be adjusted to match lender-specific needs. Some vendors are only able to provide a few template-based sites, which makes a customer indistinguishable from the competition. Differentiation is key to projecting a unique portal and company image.
- How can the solution handle custom pricing? Ask your vendor whether this can be accomplished, and for what cost.
- Can the vendor also manage the solution? If a lender wants the vendor to manage the systems, and if the lender is planning on using specific underwriting guidelines or portfolio products, then the vendor should be asked how many custom guidelines are included in its pricing model and how much it would cost to add additional custom programs.
- How much does the total solution cost? If it seems incredibly cheap, that's a major red flag. The old saying applies: You get what you pay for.
- How long will the implementation take? If it is about a week or so, that's another red flag.
- Will the vendor provide at least three current references? If you receive a reference list, prepare tough questions to ask the vendor. Be blunt in seeking out information on the vendor's strengths and deficiencies, and don't be shy about asking how the references feel the vendor could improve. Ask about the level of support and response timelines and if the solution has created clearly visible increases in profitability and decreases in operating costs.
The mortgage banking industry has clearly gone through many changes and experienced significant retrenchment. In many ways, the intelligent use of technology is a strong method to achieve recovery. However, technology can also introduce more problems. Before anything is plugged in or clicked on, make sure it is the best possible solution for your specific business needs.
David Colwell is executive vice president, and Joe Bowerbank is senior vice president for marketing and strategic alliances, at Loan-Score Decisioning Systems, headquartered in Irvine, Calif. They can be reached at dcolwell@loan-score.com and jbowerbank@loan-score.com, respectively.
