Fast Food and Compliance

by Jack Trageser of PC Lender

It makes sense to say that automation is one of the keys to compliance in mortgage lending, right? No matter what else is being said. No one is out there arguing that less technology is better. But ‘automation’ is one of those words that means different things to different people, and it’s important that mortgage lenders understand the term in its broadest sense, especially when it comes to compliance. So, of course, we look to the world of fast food.

Huh? Allow me to explain.

In a marketing distribution class in college, I learned the secret to McDonalds’ success. It turns out that - surprise, surprise – it has had less to do with the gourmet fare and ‘special sauce’ and more to do with the utter predictability of the product. In other words, people place value on the fact that whether they walk into a McDonalds in Tacoma, Washington or one in Guam City, Guam, a Quarter Pounder with Cheese will look and taste exactly the same as the McDonalds in their hometown. But predictability is the product of consistency, and a quick look at how McDonalds achieves its consistency provides good insight into how it can be achieved in other industries as well.

McDonalds understood early on that consistency was important to its success, but it also quickly realized that it’s much easier to get a machine to duplicate reliable results than human beings. So they developed machines that, for instance, stopped cooking the fries automatically when the timer went off, rather than relying on a prone-to-distraction worker to hear a buzzer and take action at just the right time. Manufacturing, food processing, pharmaceuticals, agriculture . . . all have embraced automation as a means of not only becoming more efficient, but also as a means to increase quality control, which is often even more critical. And that brings us to the matter of compliance in an industry that no longer tolerates oversight, inconsistency, and ‘human error’.

Our industry has always been chock full of syllable-saving acronyms, but now mention of ECOA, TIL/Reg-Z, GFE, and HMDA invoke a sense of nervous anticipation as we wait to see exactly how regulatory changes look. Plus, we now have a bunch of new ones to consider: MDIA, HVCC, and HOEPA, just to name a few. What technologies do lenders embrace if they want to use the McDonalds automation example to ensure that every loan they originate and fund is fully compliant and saleable on the secondary market? The place to start is to recognize that two separate areas need to be addressed: data integrity (making sure all loan data is accurate) and ensuring the latest (compliant) version of all forms are used at all times. Although they don’t get much press (yet), here are a couple facets of cutting-edge loan origination systems that address both:

Rules-based vs. Template-based Systems

Most LOS’s in use by lenders today use a template-based system. Data fields for the most part in template-based systems will accept any value as long as it is formatted correctly. Rules-based systems are the new kids on the block, and they operate much more intelligently. They allow a lender to build their customized system with their own rules in place, which is a huge advantage when it comes to compliance. For instance, they can (and should) be programmed to automatically inform a lender when an APR has changed so the lender knows to re-disclose. If data is missing or incorrect, or if a required disclosure hasn’t yet been set, a rules-based system rectifies that as well. It’s automation taken to another level. The better rules-based LOS’s have the rules every lender needs built in, then allows further customization for niche and workflow preferences.

Software-as-a-Service

For lenders, the idea of software-as-a-service (SaaS) becomes more and more appealing as they see their competitors employ it with great success. For those unfamiliar with SaaS, in simplest terms it means a software solution where the technology provider hosts not only your entire program (an LOS, for instance) on its servers, but all your data related to that program. Your employees access everything via a secure internet connection, with no need to install the actual program or host the data at your own site. There are many benefits associated with SaaS, with the most obvious being the fact that lenders are relieved of having to support, maintain, protect and back up numerous on-site servers and workstations. IT staffing needs are usually also significantly reduced. But when it comes to compliance, another benefit takes center stage.

Imagine being able to outsource the maintenance of your library of forms required to originate and fund mortgage loans. SaaS technology means you don’t have to keep track of when forms are updated- the new Good Faith Estimate, for instance. Since the software is hosted by your provider, it’s also updated by your provider as well. You don’t have to worry about the vendor shipping an upgrade to you and then having to install it on numerous workstations. Updates are done by the provider, so when employees turn on their workstations, they automatically have the latest and greatest. And some providers, like PCLender.com, go a step further by employing a team dedicated to monitoring compliance issues and ensuring that all forms are always updated prior to compliance deadlines.

With compliance now playing such a prominent role in real estate finance, further automation and outsourcing to specialists just makes sense. The only reason more lenders don’t embrace the solutions above is the fact that they either haven’t heard of them yet, or don’t grasp their full significance. But if you’re a lender and you can make changes that increase compliance while freeing your company up to focus on what it does best, why wouldn’t you?

Jack Trageser is VP of Marketing of PCLender.com, a provider of Web-based loan origination technology. He can be reached at jtrageser@pclender.com or 808-536-6886, extension 509.