Tim Armbruster says it's really hard to be compliant without a good audit trail. Photo: Tom Salyer.
Tim Armbruster says it's really hard to be compliant without a good audit trail. Photo: Tom Salyer.

When asked to name a significant theme in automation, executives participating in a roundtable discussion at the SourceMedia Mortgage Technology Conference in Miami Beach last week singled out the need to keep up with regulatory demands.

Automation has helped the industry keep up with Consumer Financial Protection Bureau regulations, good-faith estimate fee disclosures and single point of contact requirements that have challenged the industry, the executives said.

They noted that the concerns which various forms of automation aim to help the industry address include efforts to get GFE fee estimates in line with required tolerances in an effort to avoid monetary penalties for breaches, and the need to securely document operations and communications in order to mitigate the rising risk of an audit in today’s market.

Participating in the roundtable discussion moderated by editorial director Mark Fogarty and Mortgage Technology managing editor Austin Kilgore were Kelli Himebaugh, vice president, Mortgage Builder; John Guzzo, managing director, Berkery Noyse; and Tim Armbruster, chief technology officer, ClosingCorp. (First of two parts.)

KILGORE: The 4506-T is the last mandatory wet-signed document to go digital and the FHA is working on its own e-sign policy. Is that translating to more interest in e-sign?

HIMEBAUGH: E-delivery is no longer on the wish list; it's on the requirement list. So you have to have that product. And very rapidly, e-signature is following that suit. As time goes on, you can't abandon that market of borrower that is out there very, very remotely that is still going to have to sign documents by paper, but as time goes on I think that you are going to see. But because e-signature provides, what comes with that, all the tools of audit trailing and history when multiple things are signed, it just gives more scrutiny and look-back to the life of that loan. So I think it's going to between the next 18-24 months…become more the norm than we would like to have it. Closing documents are going to go that way as well. That's when the world will really change, as the closing process moves down that road.

KILGORE: How does that affect the discussions you have with industry participants?

GUZZO: That's a good question. With respect to e-signatures and the whole paperless and the…e-documents, what I've heard and what I've seen is a lot of vendors (even back a few years ago) have the technology or are ready to build the technology, but we're hearing that perhaps sometimes the customers—meaning the banks—aren't ready for the technology. And I see we're going to start seeing more changes over the next three to five years as, obviously, the demographics come into play, Generation Y starts getting more involved in buying their first homes perhaps. And also, what we've seen a lot is a move towards more community banks and credit unions where it was the top 100 banks dominating the industry. You are starting to see a lot of local knowledge at the credit unions and community banks today and they are getting more aggressive. And they are able to get more aggressive, because a lot of the vendors, like BankView for example, are really emphasizing and empowering them to do certain things. So that's how we are seeing it here, it certainly something that investors like to look for when we are representing that doesn't' have e-document technology, but it more paper-based, there's certainly more multiples involved in the paper-based systems versus the e-document system and it's a multiple of difference.

KILGORE: So what's a good range?

GUZZO: It can vary. Several multiples…more when you are referring to e-document type technology versus your traditional print and mail or back-office processing, type systems.

KILGORE: So Tim, how are you seeing this issue play out in regards to the new GFE and HUD-1 replacement forms that the CFPB is about to roll out?

ARMBRUSTER: Yeah, we really don't get involved in the disclosures themselves and how those are executed and signed. We really provide the fees for the good-faith estimate and from our perspective we don't, we're not really impacted by that. There's some fee tolerance changes that will be impacted, but we don't provide the actual disclosure. So the CFPB changes don't impact us a lot. There will be a different break down of fees on the HUD, it's more itemized and it's ordered alphabetically, that's really a rendering of the document, so it doesn't impact us as much. Our fees are already itemized; they will roll out very nicely into that format, so it doesn't impact us as much.

HIMEBAUGH: I think it really impacts…escrow the most. There's been months of vendor conversation going on with all the agencies to prepare LOS technology for what's coming. You really have to look ahead—and we have now for many months now, for the next wave of change that is coming—to be able to plan resources that we will put towards that. I think that if many of them wait until they get the deadline and you have to start preparing now and what changes you'll make inside your software even though we don't know what the forms are going to look like you get some early ideas on what is going to be expected and what we have to do internally with changing fields, grid mapping, all those different things that we do. But once you really know that deadline is coming, you have to really look at your overall business and you have to look ahead—once again when those changes come and you have to put all hands on deck to meet the requirements, what happens to your technology as far as moving it forward—what we call the fun things that you can do for customer with the software. And so that's a big push right now to kind of look at that window that we have until final decisions come to get as much as what we see ahead that our customers are going to want from—just more usefulness of the system and get those in place so that we can get those resources and finish on time.

KILGORE: And I guess one thing that I see in this situation is that if e-delivery becomes more universal on those disclosures, it seems like it makes it a little easier to ensure that the fees are accurate, because the gap of time—the timeline to get the disclosures to the borrowers or get the signed and get them back becomes a little bit shorter. So does it make it easier then, from a lender perspective, if they are using a service to get these accurate fees upfront and they are able to get them to the borrower quicker and get them back quicker?

ARMBRUSTER: Absolutely. I think there are some lenders that are a little bit ahead of the curve on this—some of the lenders we are working with—that are able to take an online application, automate all the way through to the initial disclosure. And that requires a service for the fees at least that you can pull—without any loan officer interaction—you can pull the good-faith estimate today. So we have lenders that are actually doing that all the way through to the initial disclosure with no loan officer interaction at all. So the electronic documents or the electronic signature that all helps to facilitate the process. So definitely, the electronic documents and electronic signatures all play into that. As much as possible, we need to get to a point where you can go into a lender's website, you apply for a loan, you see what your fees are going to be, and that doesn't change all the way the closing table. I think we are really close to that—our service helps to provide that so we can provide consistent fees, but it takes more than that—the electronic documents, electronic signatures like you described.

KILGORE: I want to talk a little bit about the landscape for vendors right now. I think when you look at 2010, ’09, ’10, ’11 there were a lot of mergers and acquisitions going on and it seems like that activity slowed down a little bit in 2012. So we'll start with John—can I get your perceptive on how you think 2012 went in investment in mortgage technology vendors and what was different and unique about 2012 and how you think that landscape will play out in 2013.

GUZZO: I actually see a quite a bit of the opposite. I see quite a few deals done in 2012 in the mortgage tech industry. Just to name a few of the more publicized ones Mortgage Cadence acquired Prime Alliance, an LOS acquiring an LOS. Zillow, another company acquired price engine MORTECH, Mortgage Builder acquired Price Engine and CRM, Berkery Noyes was involved in a transaction with a billing technology in the mortgage area. I think the difference is Austin, and there's a difference, I think the main difference is the deals that are getting done over the last 12 to 18 months, those are good deals. Those are deals where premiums have been paid, including with over 24 months ago with Davidson Henderson acquiring Mortgagebot and then Avista for very healthy multiples in the sector. The big difference is you’re not having—they're really not any fire sales these days as there were ’08, ’09 and ’10. What you are seeing today are really strategic mergers and acquisitions that make real good long-term sense. So the real difference is really the buyer-based. We had many private equity groups being very active acquirers prior to ’08 and then after ’08 you had kind of had a hybrid of both looking for value deals. But today you see many strategic buyers and many of the deals we are settling and representing at Berkery Noyes—usually the objectives is to get the highest price and then we found the strategic buyers have been able to do that and the reason is your coming back to more fundamentals in the mergers and acquisitions. It's not about financial engineering with borrowing debt cheaply to get a high price—you are talking about synergies today versus several years ago.

KILGORE: So the deal volume in 2012 was a little bit different in the types of acquisitions. The volume of deals was a little lowers, the gross number of deals vs. 2011, so in 2013 do you think that number will pick up? Will it be a higher number of deals, fewer deals that you saw in 2012? Where do you see it?

GUZZO: I think it will be at least the same as 2012, if not a little higher. As the reason for that is that many vendors in mortgage tech and financial technology, many of these vendors are owned by their private companies and they are owned by people who have been waiting on the sidelines now for five to six years for things to change. Sometimes they think, well we're normal today, ’08 was a down year or ’09 was a down year, but today we're back to what normal is and this is just a new normal.

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