Encompass dominates the loan origination software market but allegiances vary among competing institutions of various sizes.
The LOS is a lender's key piece of technology, often exceeding core origination tasks by housing product and pricing engines and other closing technology, according to a new report by National Mortgage News parent company Arizent.
"Everybody has their own unique way of creating that assembly line for that manufacturing process," said JP Kelly, senior vice president of mortgage at Meridianlink, a leading LOS provider. "And not one customer does the exact same workflow."
Half of the over 100 professionals surveyed by National Mortgage News this summer from depositories, credit unions, and independent mortgage banks primarily used Intercontinental Exchange's
Leaders at larger LOS providers explain that those financial institutions have different needs despite pursuing the same home loan customers. Nimble originators may also be more willing to switch systems. The market at-large also remains competitive two years
What's the difference in LOS types used by banks, credit unions and IMBs?
While Encompass was the most-used LOS for all lender types in NMN's research, some competitors had stronger footholds in bank and credit union categories.
If you're a depository institution, you typically prioritize security and compliance due to stricter regulatory oversight," he said. "Additionally, you serve a broad customer base relying on you for products like checking, savings, and other financial services."
Credit unions don't usually compete with larger firms, serve specific geographic areas and prioritize member experience. MeridianLink was the second-most used primary LOS among credit unions, after Encompass.
"We create interactivity with their products," said Kelly. "That can really improve the member experience for credit unions, because they don't have to share the data every time. If (customers) want to apply for a car loan, that information is already in their system."
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IMBs focus on efficient mortgage sales and are generally more willing to invest in innovation in banks, which face approval hurdles such as larger governance boards. Nikolaus Pavlou, product marketing at Blend Labs, said IMBs seek flexibility for loan officers to engage optimally with borrowers.
"When we sell into banks, it's more about being able to enable the bank to operate more efficiently, to be able to manage their operations more holistically from a corporate or enterprise perspective," said Pavlou.
Blend offers solutions in the point of sale space and beyond, and is widely used by financial institutions of all types and sizes. Pavlou stressed the importance of tightly integrated POS and LOS systems for IMBs.
Why there's more variety of LOS types used by smaller lenders
Competition for primary LOS was broader among lenders originating 1,000 loans or less annually, according to NMN's survey.
"They may be able to make the switch a little bit more easily from an internal standpoint and thus may in some cases be a little bit more agile," said Dan Smith, vice president of strategy and sales at LendingPad.
The McLean, Virginia-based LOS was one of nine prominent systems cited by the 1,000-loans or less group as their primary software. Twelve percent used "other" software, which could span
Vendor integrations are also crucial. Most mortgage companies surveyed by Arizent can incorporate new software via application programming interfaces, or APIs, though a quarter said they're still working on such upgrades.
Kelly said larger customers often dictate the vendor roadmap for some LOS.
"We built our APIs and our vendor marketplace so vendors can build to us," he said of Meridianlink's products. "We have one of the largest vendor marketplaces in the industry because of that."
Switching LOS is difficult and timing is key
Larger originators may struggle to unwind customizations, business rules or integrations around their LOS, said LendingPad's Smith. Switching an LOS in the past could be a multiyear process, or sometimes never be successfully implemented.
"It is far less daunting than it used to be," said Smith. "... With modern systems like LendingPad, that switching cost is less than maybe the market perceives or imagines."
Lenders switch LOS for a variety of reasons, including regulatory requirements. Hooper noted a major driver of new LOS sales was in 2014-15 when Truth in Lending Act and Real Estate Settlement Procedures Act rules
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"Lenders that have proprietary systems decided we no longer want to support this ourselves, we want to go find another LOS system" added Hooper. "Or there were providers that said we don't like the timeline to implement this. So compliance can be a big driver."
Technology advancements also drive change. The Mortgage Cadence executive suggested
Hooper also emphasized the need for good change managers and executive buy-in for a switch. LOS providers can also ease the process by highlighting their increased efficiency and customization, experts said.
Timing is also important. Lenders couldn't switch LOS during the rapidfire refi boom and kept checkbooks closed during the subsequent market doldrums, said Kelly.
"I would submit now is the perfect time for you to invest in mortgage technology, because we are out of the trough," he said.
How LOS providers view the competition
Nearly a quarter of nonbank lenders used systems other than leading LOS, according to NMN's survey. Industry tech professionals told NMN they don't view proprietary LOS as significant competition. Building a system is labor and cost-intensive, and Blend's Pavlou said proprietary systems can become
"We're in this right now with a customer that has built a proprietary system," Pavlou said, referring to a bank. "They are now behind in certain features and capabilities because to then innovate and maintain … we're not only talking about a very expensive proposition but also a resource-intensive and time-intensive sort of project."
Regulators may scrutinize proprietary systems more, said Hooper. Companies can mitigate some of that risk by using an LOS system that has had multiple lenders go through a federal exam.
Experts also believe healthy competition in the LOS space persists two years after ICE's Black Knight acquisition. Encompass remains a battle-tested platform with a ton of customizations and configurations, Pavlou said.
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ICE, asked about its leading LOS share and LOS competition, touted its platform helping lenders of all types and sizes to manage risk and drive efficiency.
"What sets Encompass apart is its ability to flex and scale to adapt to the needs of any business model," said Tim Bowler, president of ICE Mortgage Technology in a statement.
Regardless of LOS choice, experts advised weighing a company's culture and customer approach.
"In my opinion, the way you can best serve your customers is to really invest in an LOS that has spent the time and energy to completely build out a mature administration module within the system," said Kelly.
- This analysis is one of a multipart research series on mortgage technology disruption. Check back tomorrow for more analysis.
