As the mortgage market starts to rebound, mortgage lenders may want to reflect on recent loan volume inconsistencies that have resulted from fewer loan applications, fluctuating interest rates, unemployment and financial market volatility, to name just a few. Loan volume variation can negatively impact a lender's quality, consistency and profitability in underwriting. So, what are the best options available to lenders to deal with today's ever-changing loan volumes while maintaining loan performance?
As volumes shift, lenders have tended to either centralize or offshore core underwriting processes—both with the intention of driving efficiencies and reducing costs. Today, outsourcing certain processes to an independent third party provider (a specialist) must also be considered given the emphasis on regulatory compliance and the need to retain loan profitability. Either way, lenders should examine core functions to see where it makes sense to keep in-house staff operating under a fixed-cost model, as it can be difficult and expensive to scale to meet volume fluctuations in either direction.
Some larger financial institutions have experimented with offshoring part of their underwriting department in an attempt to have a more cost effective, fixed-cost operation. Many have found that offshoring introduces its own set of issues that often offset the cost benefit. For example, language barriers with customers or time zone differences with standard U.S. business hours can result in paying a premium for offshore resources who are capable of meeting a lender's needs.
Other lenders have centralized core functions in an attempt to control both cost and loan quality. This approach can prove a dramatic increase in consistency and continuity, as shown by The Prieston Group research where lenders with decentralized underwriting functions showed a 250% increase in incidence of repurchase claims vs. lenders with centralized underwriting. While a centralized department can streamline processes and provide more management oversight, those resources still remain a fixed cost and can negatively impact profitability when loan volumes fluctuate. And, lenders who centralize find they assume additional fixed costs in training and automating workflow procedures, as well as for additional management.
For one core function in particular—verification requirements—moving to an outsourced, variable cost, model can make real sense. The increased call by Freddie Mac, Fannie Mae and the U.S. Treasury for independent verification of borrower information to ensure "ability to pay" (verification of employment, income, tax transcripts, identity, etc.) has put a significant strain on originators' profits. Having all the newly required verifications done by one specialized vendor who manages the entire process can reduce expenses, improve quality and increase compliance, while enabling lenders to more successfully withstand future market fluctuations. Rather than have full-time persons performing all of those verifications, outsourcing provides lenders with a variable cost per loan that allows them to improve pull-through performance. It also produces and sustains an improved level of loan quality and policy compliance that can be difficult to achieve in a centralized or offshore environment when loan volumes fluctuate.
Outsourcing also eliminates the host of fixed costs associated with hiring, training and, when necessary, laying off employees. Just this month, for example, The Wall Street Journal reported that a large lender cut approximately 3,800 jobs after the industry added 440 full time employees just the previous month. Using a third party can represent a tremendous savings for lenders struggling to respond to loan volume ups and downs.
What is also often not considered is that in-house operations can open lenders to the risk of insider fraud (FBI reports show that 80% of mortgage fraud involves collaboration or collusion by industry insiders). Cost considerations to audit for risk of fraud (and for compliance) should include creating an audit trail or standardized report in order to enforce, monitor or audit loan files for risk and policy compliance.
Frankly, gathering all of the required information needed to make a qualified lending decision is not a lender's core competency. Its core competency is customer service, loan qualification and risk mitigation—evaluating the data gathered to map a borrower to the appropriate loan product. This is not unlike the employment screening industry. In that industry, more than 80% of employers outsource the data gathering to third party providers (specialists) when evaluating a new candidate for hire, whether it is a drug screen, or an employment history, or a reference check. Once all the necessary pieces of information have been gathered in the candidate file, the employer does what it does best—evaluates a best-fit employee for the job.
Utilizing a third party for independent verification mitigates fraud and helps to ensure consistent quality, industry compliance and variable cost flexibility. This, in turn, enables financial institutions to achieve predictable resource and training expenditures so they remain profitable in a volatile economy.
Janet Ford is senior vice president of The Work Number, a service of Equifax. She oversees several aspects of this service line including strategy, operations, revenue and client relationships. Ford also supplies product direction for The Work Number employment and income solutions and guides new products and enhancements.
