Executive Conversations is a HousingWire web series that profiles powerful people in the financial industry, highlighting the operations and the people that make this sector tick. In the latest installment, we sit down with John Ralston, director of Title Solutions at eLynx.
Why has “post-close” become such a hot topic among lenders recently?
Using outside vendors can pose additional risks for a lender. The CFPB has made it clear that financial institutions will be held responsible for the actions of the companies whom they do business with. Post-close is one area where lenders can, and must, apply stronger vendor management practices. How quickly are outside vendors getting documents back to the lender? How many errors do those documents contain? Currently most lenders utilize a manual process to perform these checks.
Unfortunately, that manual process check is itself susceptible to human error, which makes it very difficult to determine whether the service provider is complying with the law. Strong vendor management requires a transition from a manual process to an automated process that is better suited to maintaining effective and consistent quality monitoring across the lender’s organization.
Is vendor management the primary reason for lenders to automate post-close?
Vendor management is probably the catalyst that will compel change, but I think most lenders also recognize that there are other valuable benefits. One is timeliness. Being able to quickly identify discrepancies and take corrective action is so beneficial. The resolution of errors identified during post-close is exponentially less expensive and faster to resolve the sooner it is caught. Should an error affecting the enforceability of the lien position be identified years later, the financial intuition may be put in a loan buy back or litigation position in order to resolve the situation, assuming the parties involved are even still available or amenable for resolution.
A second huge benefit is cost. Manual processing can take anywhere from 30-45 minutes per loan package to review, and high-volume lenders have to employ significant numbers of staff to support the process. Lenders can utilize offshoring to combat costs, but the labor arbitrage for the quality of work needed (i.e. reviewers skilled in the language of the mortgage industry) is usually not high enough to deliver full cost savings. Also, I think everyone realizes that the cost of compliance is a going to increase in 2015. Post-Close is no exception to this trend and lenders need to start preparing for this now. Process automation is an excellent response because it both improves quality and reduces cost.
What about data? What impact does automation have on data-based initiatives?
This is certainly another valuable outcome of process automation — the generation of data for insight and analysis. The beauty of data is it allows for process improvement. One problem that plagues any manual process is that feedback tends to be anecdotal. A data-driven process allows you to identify common errors made at the closing table and rectify them by modifying documents and training your vendors. Better monitoring and training of service providers directly leads to improved quality of service to the consumer. Providing training as well as enforceable consequences for violating any compliance related responsibilities is now squarely the responsibility of the lender. Data gives lenders the ability to spot where training is needed, which in turn leads right back to more effective vendor management.
Does post-close remain relevant with the new Loan Estimate and Closing Disclosure?
More than ever. Maintaining the integrity of the data across the life of the transaction becomes critical for the lender. Proper version control of the Closing Disclosure is no trivial task. To see a consistent process across the industry is unlikely. Settlement Service Providers are going to have to maintain vigilance in keeping track of the authoritative copy of the Closing Disclosure as well as the proper execution, delivery and disbursement against that copy.
This is a process with many moving parts which increases the chances of error. Automated pre-funding audits will identify such discrepancies before the loan process can proceed, thus eliminating the possibility of improper disbursement of loan proceeds. Our position allows us to get a baseline of the data provided to the borrower in the Loan Estimate and flag any discrepancies through the creation and execution of the Closing Disclosure. Post-close audits ensure that the final version of the Closing Disclosure matches the version that was approved by the lender.
What should lenders look for in a post-close audit solution?
Before looking at any vendor solutions, lenders should first ensure they have a good understanding of their own internal control processes, as well as those of their settlement service providers, in order to know where they need the most help That may sound obvious but it truly does help to look carefully at where your existing processes have gaps. This helps you focus on the most important factors when reviewing solution options because there is a large variation in the services available.
A few of the top questions I recommend asking are whether the post-close solution also supports a pre-funding audit. These two are very similar in nature and doing pre-funding well can actually help in post-close. I think you also want to make sure to understand how deficiencies are recorded and presented back to you; what level of manual processing is utilized, if any; and what kind of audit capabilities are provided. These are key questions that deal directly with the quality control process. Finally, I would also want to know how well the post-close solution can support specific secondary market/investor requirements and easily it interacts with other service provider solutions. This ensures that it will fit easily into your existing environment and IT ecosystem.