PERSON OF THE WEEK: J.P. Kelly is president of loan origination system (LOS) and pricing engine provider OpenClose. MortgageOrb recently interviewed Kelly to learn more about the changes and challenges currently facing LOS providers.
Q: The LOS space has seen a significant shift in the past couple of years toward lenders investing in end-to-end platforms. Why is this?
Kelly: The old end-to-end versus best-of-breed debate has been going on for years, and you'll get a hard stance position from respective vendors operating on each side of the fence. Best-of-breed vendors will always state that that no end-to-end vendor can do everything as well as they can. End-to-end vendors will say that they handle the entire lending process efficiently and that the best-of-breed approach muddies the waters. There are degrees of merit to both.
Our position is that there are some best-of-breed vendors that are so specialized at what they do, that an end-to-end LOS provider would be remiss if they attempted to engineer and support certain functions of the lending process that are completely out of their wheelhouse. A couple examples are disclosure compliance, valuation management and fraud protection, to name a few. These types of functions assume huge amounts of responsibility and liability. The sheer compliance risk involved in these areas and needed robustness of the solutions is better suited for a partnership and integration. In this regard, end-to-end LOS providers need to be very selective about the specialized vendors they integrate with and must ensure that it is a truly seamless interface that does not disrupt workflows.
Another notable difference is a best-of-breed vendor's cost and time factor to develop and maintain integrations. A really good integration is no easy undertaking. And maintaining it is a whole other challenge. New software versions and updates are rolled out all the time. Developing too many integrations raises the possibility that something will break.
One trend that emerged in recent years is technology firms that simply acquire other technologies in an effort to create an end-to-end platform. But at the end of the day, these are still disparate technologies that are pieced together by multiple solutions to establish an all-in-one solution as opposed to actually engineering it from the ground up. That said, the solution may technically qualify as an ‘end-to-end;’ however, it isn't designed by a single vendor, and it oftentimes uses multiple databases, and has feeble pairings of technology and rough workflows.
Q: There is a lot of ongoing talk about what truly defines a Software-as-a-Service (SaaS)-based LOS platform. Can you weigh in?
Kelly: By definition, SaaS is a software distribution model in which applications and associated data are centrally hosted by a vendor, typically in the cloud. With SaaS, there is nothing for an organization to install in terms of software applications or data hosting.
As it relates to LOS platforms, once the mortgage industry no longer had an appetite for self-hosted and self-managed applications (which were expensive), had lengthy installs, required significant IT resources, and were onerous to maintain, the use of SaaS terminology became popular among mortgage technology vendors.
Many vendors that claim to be SaaS term their systems ‘Web-based’ or ‘Web-enabled.’ This generally translates to there being some sort of an install on the client's side. A truly SaaS-based LOS platform, however, is 100% accessible via a Web browser – from any computer, anywhere, and without installed software. Web-based/enabled (non-SaaS vendors) must rely on installed applications to extend their applications to the Web, such as Citrix.
There are a lot of LOS platforms in the mortgage industry that do not have a true SaaS model but lay claim to it anyway for the sake of sales and marketing purposes. There aren't very many true SaaS LOS vendors for lenders to choose from. True SaaS offers faster implementation, reduced costs through little to no upfront investment for new servers and infrastructure, seamless automated updating, virtualization and reduced need for internal support.
Q: How are LOS vendors working with other vendors and lender clients to address the sea of ever-changing compliance rules and regulations in today's highly fluid marketplace?
Kelly: It's very hard for LOS vendors that developed an end-end-end platform using different code bases to produce a seamless workflow and offer lenders full control over their data, and hence compliance. Once you have too many code types, databases and/or integrations involved you're going to encounter issues. When it comes to compliance in today's market, it's like a mish-mash of poorly paired food groups and wrong ingredients – a recipe for disaster.
An end-to-end LOS vendor has the ability to better control data across a seamless workflow. At our company, we developed automated compliance monitoring functionality. This enables us to track things such as, for example, potential ability-to-repay/qualified mortgage (ATR/QM) compliance issues where we provide instant change of circumstance notifications to our clients. With the best-of-breed approach, you often have a lot of chefs in the kitchen all doing things a bit differently. Our approach is streamlined compliance monitoring across our clients' specific workflows within our LOS.
Q: When selecting a new LOS platform, what steps should lenders take to perform adequate due diligence before engaging with an LOS vendor?
Kelly: After the crash, many lenders bought just enough technology to ‘get by,’ as they didn't know if they would be in business for the long haul. But in today's market, smart lenders are looking five-plus years out. An LOS implementation is a big deal and can be very disruptive to operations – if the wrong vendor is selected. Different LOS platforms are suited for different types of lenders and their specific workflows.
In general, I recommend that lenders do not just let one or two functional areas make the buying decision. Involve all areas. How will the new LOS affect production? Underwriting? Processors? Secondary marketing? Servicing? IT and support? How does it function within each business channel from retail to wholesale, correspondent, consumer direct? What is the bottom line return on investment from the chief financial officer's perspective?
Involving all functional areas is key to making the right decision – the first time. You should approach buying and LOS using a committee-level decision-making process. Look for a long-term LOS partner, not a vendor with which you'll potentially become ‘just another number.’
We all know the usual request for information/request for proposal-type questions to ask. But other ‘above and beyond’ questions to ask include:
- Look at how long the vendor has been in business. Longevity is a good sign. How long has its core application been in use? Is it contemporary or elderly? Too old of an application could mean that there are issues with antiquated code bases. On the other hand, too young means the application probably isn't mature and may not be fully proven.
- Is the vendor a continual innovator? How many new solutions has it recently launched? What is on its product development and enhancement road map? This will give you an idea as to what's to come if you were to engage. Many are just working to stay abreast of new compliance rules, which stifles innovation.
- Does the LOS use multiple code bases that have been married together by way of acquisitions? How many integrations does the LOS have? If it partnered with too many other vendors, it probably isn't a very good interface. And it can make your LOS provider resource challenged to successfully support it.
- How scalable is the software and how flexible? The application needs to be proven to handle an increase in volume given lender growth. And, it needs to have the flexibility and configurability to morph to a lender's unique business model and workflow. What are is customer sizes and profiles like – and how does scalability and flexibility apply?
- A good, mature, robust LOS should address all business channels. Make sure the system does this and does it well. You don't want to be a wholesale and/or retail lender, as an example, and later decide to perhaps launch a correspondent or consumer direct channel, only to find that the system wasn't built for it.
- It's also important to look at the length of tenure and experience of the vendor's developers, architects and support staff. Are they loaded with technical experience and do they possess a deep understanding of the mortgage process, having worked at multiple organizations? It counts.
- What is its customer support like? What are its average response and resolution time frames?
- What's their average implementation time frame, specifically for a company similar to your size?
- Corporate structure and management is important. Ask for the vendor's organizational chart and management team experience. Does it have well-established functional areas? It's indicative of how well it operates internally. Some vendors are run by just a few owners that don't take input from other senior executives, and thus do not employ any. This should send up a red flag.
- Are there any lawsuits pending? If so, why? What is the nature of the litigation?
It goes without saying, but don't just let a vendor give you a canned sales-centric solution demo. Watch its team run a loan through the system from start to finish. Put yourself in the driver's seat.
Q: What do you see on the horizon in the next 12 to 18 months in the LOS space?
Kelly: That's an easy one. First, we'll clearly have more compliance rules and regulations to implement. Not just for LOS vendors, but all mortgage technology providers. Second, we're going to start to see some consolidation. Profits are pinched for lenders – and consequently they will also be for vendors. Those providers that aren't well-capitalized will look at selling options. There is money sitting on the sidelines awaiting bargain-buying opportunities.