Operationally, large and small firms have many of the same challenges: Everyone needs to do more with less. That is especially true during low points in the mortgage lending cycle, such as what we are currently experiencing.
It seems like everywhere you look right now, you see penny-pinching, travel budgets slashed, funding for outside resources cut, tighter credit policies, lenders closing their doors, good people being laid off and remaining staff trying desperately to carry the increased load. Everyone is busy protecting his or her own interests, and it seems that rather than wanting to actually help with anything, everyone only wants more of what you produce. If it is fraud reviews, they want more of them with portfolio sweeps for potential repurchase opportunities.Â
If you are in quality control, they want to know why your early payment-default process did not catch the issue of the day. All the while, you are thinking, ‘If you had not cut my staff and let me use the tools I need, we might have had a chance to catch it.’ Staff members are stretched thin with more and more fire drills daily; everyone wondering how we will ever come out of the mess.
Make no mistake – while everyone in the industry is working hard now, it is not limited to just originations, sales, quality control and fraud investigations. The people who think about ways to beat your detection systems are burning the midnight oil, too. Whether committed by industry insiders or outsiders, mortgage fraud is harder to perpetrate in a downturn. There are several reasons why it is more difficult, including a flattening property value appreciation curve and significantly tighter credit policies.Â
At the same time, everyone is hungrier for the next deal. The swimming pool payment does not go away just because we happen to be engaged in our own version of ‘Survivor.’ Times like these stimulate the left-brain-thinker's creative side with ever more imaginative and clever schemes to perpetrate fraud.
In addition to fraud, risk management challenges increase as well. If you try to tighten credit policy on stated income deals when applications are down considerably, you are taking food from people's tables. Then, try to tell your managers that they are responsible for ensuring the newly screwed down rules are implemented and followed – when the sales department is breathing down their necks. Challenges abound for everyone, because everyone wants something – from you.
But, do not despair. There are solutions. Some are internal to your organization, like convincing everyone to stop asking you to exercise your firefighting abilities so you can concentrate on what you are supposed to be doing.Â
There are automated business solutions that can help increase your potential for controlling risk management situations while helping you slam the door on fraudsters.
Think you've heard it all before? Is there a magic solution to fix all your problems? Stop for a moment to consider: Mortgage fraud is at epidemic proportions and growing rapidly as evidenced by the recent FBI reports and your internal performance statistics.
The economic systems of entire cities are being thrown out of balance due to the pervasiveness of fraud and the resulting foreclosures. Without automated risk management tools, your organization is a sitting duck.Â
Many solutions are being promoted in the marketplace today. They range from automated quality control systems (designed to replace all or part of your quality control team) to full-spectrum fraud protection with insurance.Â
With so many variables, how do you determine which to pursue actively? You certainly don't want to go the route of testing, analyzing and making a solution operational only to find out it is not able to do what you expected it would (and were told it would).Â
The most important points in considering a risk management solution involve empirical data and experience. Ask the proposed vendor for data to back up their claims. One of the more critical considerations is determining how the solution help you avoid potentially problematic and underperforming loans.
When you ask vendors for information on loan performance, they must be able to provide it. How do their results show rank order regarding loan performance? It is all well and good to say that their model will help you concentrate on those loans believed to be worthy of heavier scrutiny.
However, they must be able to demonstrate this to you. Be sure to challenge them on the results. Believe it or not, there are vendors who will tell you what they think you want to hear and not be able to back it up. If they cannot provide detailed information on this, move on to the next solution.
The battle-tested solutions are the ones that can provide the means and the required results for your risk management challenges. They have the tools and technology to provide the machinery and assist you in designing and implementing the solution within your organization. No two organizations or processes are alike, so flexibility to customize the solution is a key component.Â
Training is also important. The solution will simply not return the expected results if those using it daily are not adequately trained and refreshed on a scheduled plan. Ask vendors if they have the ability to develop customized training and materials for your company.
Also, ask them if they can accommodate on-site training and Web-based refreshers. If they cannot, move on to the next one.
Getting to ‘Yes’
With fewer people, less money, more bases to cover and significantly reduced IT resources, leveraging the right risk management solution is critical. Getting decision-makers to pay close attention and free up resources for testing, analysis and implementation is an incredibly difficult task. Quantifying the benefits very clearly in a way they will understand quickly and thoroughly will make the job much easier. The key to receiving a ‘yes’ in response to your request is to make it a no-brainer.
There are several selling points on which to concentrate your efforts. The first is loss prevention. Clearly this is an absolute necessity in the calculations. One of your top objectives is to keep the bad guys from stealing your organization's money.
How will the proposed solution do that, and what will it mean to the organization? This will be a lot easier and fully supportable if the vendor has the horsepower and experiential data on loan performance. Take the experience of the vendor's solutions and apply it to your production volume, and come up with a formula to relate the two.
Another aspect of loss prevention is tracking after the solutions are put in place. Clearly, those loans discovered and flushed out of the process will not get closed, so there will not be any performance data on them. However, working with your finance people, you should be able to develop a model for calculating the loss avoided on these loans.
A simple place to start is tracking the applied-for loan amount and chalking it up to loss avoided. While you would not lose the entire loan amount if the loan had been made, it is a legitimate number to track and report.
With the right set of solutions, you should also be able to increase efficiencies in your origination shop. Defining and quantifying these gained efficiencies will help make your case stronger.
One example of an efficiency gain is that some automated assessment tools can weed out the less significant cases with which your underwriters are expending great amounts of time (going to the Internet, searching around for answers, discussing with colleagues, etc.). By developing risk tolerance buckets based on your own risk tolerance, the majority of the transactions will flow through your processes quickly by relying on the objective parameters of an automated solution to determine risk levels instead of the more subjective judgment of an underwriter. As a result, your underwriters will be in a position to focus their skills on more potentially problematic issues.Â
Developing hard and fast numbers for these types of savings can be challenging. You may have to buy a couple of stopwatches and conduct the time study yourself, but it will be worth the effort when it helps round out your analysis and proposal for senior management.
The final selling point we will discuss here is consistency. With strained, exhausted and stressed-out staff, consistency can be elusive. Sometimes, on the last day or week of the month, consistency of approach to risk evaluation is the least of the day's concerns, with the operations team busy backfilling the following week with work that should have been done the previous week.
By deploying the right risk assessment tools, you not only generate efficiencies but ensure your risk management philosophies are applied consistently at each and every branch, each and every day of the month (including weekends) with audit trails systemically built-in for tracking and reporting. Few things in our work lives are more difficult than sitting across from an internal auditor questioning why all of the wonderfully developed and written policies and procedures are only applied 15 days out of the month.
The bottom line is that now, more than ever, automated risk management controls are absolutely critical. Convincing senior management of the need is a one-time proposal that needs to be done with all the quantification you can muster.Â
Done correctly, the move to automate will get legs and have the appropriate resources quickly assigned. Done incorrectly, the initiative will die very quickly. So, do it right with the appropriate amount of analysis and creative thinking, and start reaping the economic rewards of automating your risk management activities.
Constance Wilson is the executive vice president of Interthinx. She can be reached at (800) 333-4510.
