Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
Highlights
- From application to disbursement, a mortgage application typically takes 30-40 days, resulting in stress and frustration among customers.
- The primary reason for the delay is the dependence on multiple vendors and service providers to access the information needed to process mortgage loans.
- Orchestrating a digital ecosystem of all the stakeholders can enable seamless data flow between lenders and other partners, drastically reducing the cycle time.
On this page
A digitally lagging mortgage landscape
The traditional mortgage lending model has been in practice for a very long time.
However, it has not been able to provide a dependable and risk-proof model that delivers faster approvals, frequently compromising customer service and experience. In the current era of economic uncertainty, higher interest rates are adversely impacting mortgage origination volumes while increased cost-per-loan is affecting long term business prospects. Mortgage lenders are therefore searching for a model that is cost-effective, compliant with evolving regulations, and offers higher returns, in turn driving financial soundness and long term survival.
A typical mortgage application takes 30-40 days from initiation to closure as it goes through multiple layers of processing. A major part of the processing spanning document classification, loan data capture, multi-point data verification, document gathering, underwriting, and legal compliance are manual. In addition, lenders are forced to wait for credit reports, property reports, insurance reports, and title reports, among others, from multiple service providers.
While service providers supply the necessary information, the data is often inaccurate. To add to this, most service providers and vendors are not held accountable for the data they supply, putting the onus on mortgage lenders to ensure accurate data and comply with the regulatory requirements around maintaining precise documentary records. This is especially important given that non-compliance can result in mortgage lenders facing regulatory scrutiny that could lead to stiff penalties and discredit them in the marketplace. Compliance, however, demands rigorous processes that are time-consuming and add to the cycle time.
Barriers to smooth mortgage origination
A typical mortgage origination process (see Figure 1) involves multiple dependencies on service providers and vendors.
The additional documents received from external sources demand massive effort to ensure that they meet credit policy requirements and regulatory mandates.
Figure 1: The existing mortgage lending process
Let us examine the inherent obstructions that hinder seamless mortgage origination and speedy credit disbursement.
Manual document procurement and processing
Borrowers manually submit documents related to salary, employment, bank account, and tax, among others to the lender. In addition, lenders have to source several documents such as credit reports, property appraisal reports and so on to verify the authenticity of the information submitted by borrowers. The sourcing process is lengthy and demands effort on the part of lenders to ensure compliance with data integrity, security, and privacy requirements.
Another key challenge is the lack of digital infrastructure at the source institutions which means that all the required reports are shared in physical form. For example, ecosystem partners have to physically visit courthouses to retrieve records, and subsequently share them with title companies to obtain title reports. Likewise, court proceedings are not available through digital mediums. In addition, the information is often shared in the format followed by the institutions from where the reports are sourced, leading to integration issues and rework to consolidate them in the mandated format. All these manual processes cause delay and lengthen the cycle time.
Absence of risk distribution
The data provided by different service providers or organizations is shared with disclaimers on the quality and accuracy of data. The burden of ensuring compliance with regulatory requirements around data falls squarely on the mortgage lenders who have to bear all the risk of regulatory scrutiny and consequent penalties, if any. Consequently, lenders are forced to undertake time-consuming data cleansing and quality check operations, adding to the approval cycle time.
Need to maintain physical records for judicial proceedings
Storing mortgage agreements and records in physical form is a legal requirement in case lenders are subject to judicial proceedings at a future date. This compels lenders to extensively deploy human resources for document intake, classification, sorting, data capture, storing, and retrieval, resulting in huge manual effort and time spends. While this is fundamentally non-core to the loan approval process, it is a statutory prerequisite in mortgage lending.
Inability to access records
Stringent data privacy laws limit financial institutions’ ability to seamlessly pull records of borrowers spanning employment, financial transactions, property, and so on. Lenders are forced to rely on the traditional methods of using intermediaries to access this data, adding time to the process.
A digital ecosystem to the rescue
In our view, overcoming the above challenges will require mortgage lenders to conceptualize a digitally connected ecosystem.
We envisage a self-governing body that brings on board all the stakeholders involved in the mortgage origination process. This will help in speedy and seamless access to the required reports, accelerating the mortgage origination process.
To operationalize the digital ecosystem, mortgage lenders and other ecosystem players must come together and focus on the following actions.
Form a consortium
Mortgage lenders and other essential players such as data aggregators, vendors, service providers, institutions that supply the various reports must come together through a digital ecosystem or platform, which will help eliminate the structural lacunas plaguing the entire mortgage origination system. Such an ecosystem will enable seamless information exchange, initial data digitization and sanitization, and compliance with industry accepted data sharing standards.
Create a risk distribution framework
To ensure a level playing field for all the ecosystem partners, a framework to distribute risk across the different participants is key (see Figure 2). When risk is distributed across all the stakeholders, it promotes accountable and clean business practices. Ecosystem partners operating in silos without accountability puts the onus exclusively on lenders to establish a quality check framework adding to increasing costs as well as the cycle time.
Figure 2: Framework to distribute risk across ecosystem players
Mortgage lenders and ecosystem providers can execute a contract covering aspects like data digitization and accuracy of the data supplied—the consortium must create a secure repository to store these instruments and make them accessible to lenders. Data vendors and other ecosystem partners must partially bear the risks of inaccurate or incomplete data, prepayment, delinquency, default, and recovery of delinquent loans in return for a percentage of the profits. A member committee must be created to ensure that the agreed share of the monthly mortgage payments is accurately distributed among all the stakeholders in a timely manner. In addition, the agreement must include a clause to stop payment to vendors, if the need arises.
For this model to work successfully and become mainstream, wide participation from all the ecosystem players is vital—needless to say, financial incentivization for vendors and service providers will play a critical role in ensuring this. Establishing industry accepted data standards and specifications for information sharing between lenders and other ecosystem players is essential to eliminate data inconsistency. Ensuring format compatibility across different technology platforms is key to preventing data challenges and eventual processing delays. This model will result in a win-win situation for all the stakeholders—vendors, service providers, lenders, as well as borrowers.
Vendors and service providers
- Provides a new source of income through a proportion of the profits as well as a share in the monthly instalment paid by the borrower.
- Enables access to a shared data-sharing infrastructure.
- Offers an opportunity to modernize data sharing platforms and make them future-ready.
Mortgage lenders
- Avoids huge investment on complex data management platforms, releasing funds for higher credit offtake, increasing revenue for lenders as well as driving economic growth.
- Eliminates or minimizes effort involved in document capture and data gathering as these tasks are taken over by vendors.
- Reduces maintenance costs and quality control effort.
- Ensures risk distribution across all stakeholders.
- Ensures faster loan approval through seamless data availability.
Borrowers
- Reduces loan processing costs.
- Brings down monthly mortgage instalments as lenders will likely pass on the benefits of reduced costs to borrowers in the form of lower interest rates.
- Allows borrowers an opportunity to avail loans at the prevailing interest rate—often, interest rates increase during the long cycle time, adversely affecting borrowers.
From theory to action
Operationalizing a futuristic mortgage lending system under the ecosystem model will demand collaboration.
All the stakeholders including lenders, vendors and service providers, and other partners will need to work together to orchestrate the digital platform (see Figure 3).
Figure 3: A future-ready mortgage lending system built on the ecosystem model
Under the ecosystem model, a self-governing consortium is formed. All the stakeholders in the mortgage process such as data aggregators, service providers, title companies, credit bureaus, tax authorities, among others, are part of the digital ecosystem. Participating stakeholders bear the regulatory risk associated with supplying inaccurate or incomplete data in return for a share of the lender’s profit. Lenders must enter into an agreement with ecosystem partners to enforce strict data privacy standards and establish governance controls.
In addition, under the agreement, data vendors must accept accountability for the quality of data supplied and maintain records for regulatory reporting and auditing purposes. Data must be maintained in formats that allow easy transmission across ecosystem partners’ systems. To accomplish this, data vendors and service providers may have to upgrade their hardware and software systems. Seamless connectivity between lenders’ systems and ecosystem partners’ systems will eliminate manual interventions, facilitating faster decision-making and mortgage approvals.
From the borrower’s perspective, we envisage the following steps in the new model:
- Borrower submits the mortgage application through digital channels after completing consent formalities.
- Lender accesses data from ecosystem partners.
- Lender underwrites loan and sends an offer letter to the borrower.
- Borrower review and signs the offer letter electronically, indicating acceptance.
- Lender disburses the mortgage loan amount, crediting the funds to the borrower’s account.
In the ecosystem model, non-core data management tasks are taken over by vendors and service provides under a mutually acceptable risk distribution framework. We believe that this will expedite the mortgage approval process. In our view, the cycle time for a new mortgage origination will reduce from the prevailing 30-40 days to an estimated 15-20 days.
Looking ahead
Customer angst with the mortgage experience is well-known.
To resolve longstanding issues and reduce customer frustration, the industry must adopt a disruptive mindset and look at the challenges from a fresh angle.
Given that the time lag is primarily in accessing myriad data and reports caused by dependencies on multiple players, bringing them all together on a common ecosystem platform is the right way forward. Willingness of all the stakeholders to be part of this self-regulated digital ecosystem will be key to the success and endurance of the model.
A secure, inter-connected, digital ecosystem with minimal human intervention will deliver efficient and speedy mortgage loans, which will go a long way to improve customer service, converting customer pain into customer delight.
