Size-Related Niche Evolving For LOS Platform Providers

In the crowded field of loan origination systems, technology providers have to find a way to stand out. With more than 30 different systems on the market, LOS platforms are not all created equal. The technology demands of a lender originating billions in mortgages every quarter are very different than those of a community lender that takes fewer than 1,000 loan applications a month.
For the LOS providers that specialize in small- to mid-size lenders, there’s a lot of uncertainty. On one hand, the number of mortgage brokers has dropped drastically, and subprime originators are by-and-large extinct, which means there are fewer potential software customers. On the other hand, community lenders and credit unions are in the midst of a mortgage renaissance.
The small financial institutions that have so far survived the recession are putting more of their focus and resources on mortgage lending. Because of their hyper-local customer service business models, most have established relationships with prospective mortgage borrowers, they know whom they’re lending to and have underwriting practices that promote low delinquency and default rates.
These lenders face many of the same challenges as high volume lenders, but to a greater extent. Small lenders are more sensitive to shifts in origination volume. Effective loan origination technology is more effective than constantly adding or subtracting personnel based on current and projected business. Recent regulatory changes are a shock to all operations, but even more so to those using outdated software or paper-based processes. In addition, in the current industry climate, more small lenders are selling loans to the GSEs.
“Typically, most of the small lenders were balance sheet lenders and the requirements weren’t as tight. They were the ultimate investor and they could get away with certain things,” said Niraj Patel, group president of Bensalem, Pa.-based ISGN, which has mortgage LOS, servicing and default management offerings. “Small lenders are now selling to Fannie and Freddie because it’s the best rate in town, even they can’t match it,” he continued. “That’s driving more sophistication down to those lenders and LOS platforms have to build that capability.”
The combination of a bright outlook for growth and the types of challenges that technology is best at solving is an environment LOS providers find appealing.
The Dallas-based Financial Industry Computer Systems’ offerings include a LOS, and residential and commercial mortgage servicing platforms. The firm targets lenders with application volume ranging from as low as 10 per month—anything less than that doesn’t make sense for the lender to spend the money on dedicated software—up to 1,000 or more per month. Once a lender gets to at least 10 apps per month, most are looking to expand their mortgage business and begin selling to the secondary market, FICS president Susan Graham explained. But this segment of the mortgage industry wants different things out of its LOS platform than high volume lenders.
For one, FICS clients typically want more control of their data storage than what’s typically afforded in a software-as-a-service or cloud computing offering, Graham explained. Small financial institutions typically store their core deposit account and credit cards systems onsite, so they expect the same out of their mortgage operation. That’s why the Loan Producer platform comes as a desktop model or a Web-based model that accesses the lender’s in-house databases.. “It’s a function of the security and comfort level of where their data is stored,” he said.
As more lenders have begun selling their mortgages to the GSEs, FICS added functionality to connect with Fannie and Freddie. In addition, the utilization of Mortgage Industry Standards Maintenance Organization data guidelines enables the LOS to relatively easily interface with most third party underwriting and settlement software providers. Even when small- to mid-size lenders sell their mortgages, many hold onto their servicing rights. FICS clients that implement the LOS and the residential servicing platform have built-in connectivity right out of the box. More than half of the company’s LOS customers also use its mortgage servicer system. “It’s a shared database,  Graham said, noting that “that provides for an easy transfer from one department to another.” The prospect of growing LOS market share with small lender clients is the recent catalyst for the LOS providers that have typically served mid- to large lenders to target a new segment of the market. Lenders are pitched on the high-powered functionality of big LOS platforms, not unlike a car salesman pushing a V8 sedan over the V6 model.
ISGN has long provided a large-scale LOS for lenders that demand an enterprise, or highly customized, platform. But it also provides a lower footprint LOS to hundreds of small lenders, which make up a greater share of its business than its large clients. In ISGN’s operation, the selling point of its LOS to small lenders isn’t a function of pushing more horsepower but rather creature comforts—like technology that automates escrow account management and the ability to sell to the GSEs.
“ISGN may look large to some smaller credit unions,” Patel said. “But we straddle both sides and we’re not overly large like the big guys. We’re the best of both worlds.”
One of the latest companies to throw its hat in the LOS ring is SaM Solutions, which is headquartered in Germany and has a U.S. presence in Ocala, Florida. SaM Solutions builds custom software for companies in myriad industries. SaM Solutions was tapped by wholesale lender Taylor, Bean and Whitaker to build an LOS. By the time TBW filed for bankruptcy in August 2009, SaM Solutions already had the LOS in the early stages of development. Instead of scrapping the project, SaM took the knowledge, staff and engineering resources it had allocated for it and began developing a LOS geared toward small lenders. Actual development of the LOS began in January and the product launched in October.
Aaron Cope, SaM Solutions director of business development said his company’s goal is to show the industry that new technology may provide a better option for a lender’s needs. “Some lenders are completely satisfied with what they have,” he said. “Our place and goal is to show there are alternatives and that lenders can do it in a way that’s not going to kill their budgets in an application that can be tailored to their process.”
The new LOS, called Engage, is offered as both a cloud computing platform and hosted software and puts an emphasis on adaptability and customized workflow to adjust to a lender’s specific needs or changing regulatory demands. High-level customization is widely available on the LOS platforms that large lenders use, but is typically a cost prohibitive feature on smaller systems.
“There are lenders that want more control over their systems and workflow and they want something that’s not just an out of the box system,” Cope said.
Aside from the differences in technology, pricing trends are a competitive factor among providers. The traditional model for LOS pricing includes an up-front charge to implement the system and annual maintenance fees that cover tech support and software updates. But the latest trend for larger LOS providers trying to get their products in the hands of small lenders is transaction-based pricing. Lenders pay monthly fees to the LOS provider based on the number of mortgages closed in a month, eliminating the initial burden of the up-front expense.
FICS still sells its LOS through the traditional license and maintenance fee structure. Transaction-based pricing isn’t a feasible business model because FICS serves a specific niche of mortgage lenders with activity ranging from the tens to the hundreds.
But Graham said the volatility of transaction-based pricing is also not in the best interest of small lenders. Most are looking to grow their business and transaction-based pricing forces their monthly costs to increase. “They have the upfront costs for the LOS, but they can reach the 1,000 to 2,000 applications per month and it’s not going to cost them a monthly fee based on their volume,” she said. “If they have per-loan pricing, they could be paying as much as $50,000 in one month just for those 1,000 applications they took.”
Graham added another peril for small lenders using a LOS that’s also sold to large lenders is that the smaller companies don’t get a seat at the table when the developer is considering software updates.
Some lenders will review as many as 15 different providers before ultimately implementing an LOS platform. For many, high touch customer support—the same level of service that community-driven financial institutions rely on to differentiate themselves from the large national banks—is the determining factor in a lender’s LOS selection. “The feedback we get from customers is that with their previous LOS provider, when there’s a problem, you have to open up a ticket,” Graham said. “When you call our office, a receptionist answers the phone and passes the person on to a customer service representative.”
“There have been many cases where that is what makes the sale for us,” she added.
ISGN’s Patel said the company puts an emphasis on customer support for its small lender clients through a variety of methods including traditional call center support and training webinars and classes, with the goal of constantly staying on top of small lender challenges.
As SaM Solutions begins to solicit interest in its LOS, Cope said the company also recognizes the importance of customer support. Given the many variables in the industry that lenders can’t control, technology should be a constant.
“Consolidation of the marketplace scares people. Looming or actual legislation scares people,” Cope said. “Technology is there to solve problems and we’re trying to take away some of that concern.”