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A digital divide is defined as the chasm between those who have ready access to computers and the internet, and those who do not. This definition fits quite well with the divide in the digital mortgage process. The application phase and the closing process have been the focus of digitization by fintech technologies, focusing on those significant moments of borrower engagement and improving the experience. The gap that is left is the digitization of the actual loan manufacturing process.
The question is: why has this part of the process been left to legacy technology and manual practices?
One answer is that it’s far too complicated to fully digitize. Tools exist, and certainly Fannie Mae and Freddie Mac have been leading that charge, but these tools are primarily focused on verification of eligibility. There is so much more to the process of underwriting and quality control where inconsistencies can cause manufacturing defects and therefore lead to increased risk for mortgage lenders.
Let’s face it, the mortgage manufacturing process is still dominated by people power. What everyone in the industry should be asking is “how long is that really sustainable?”
I believe the next wave of significant disruption in the mortgage industry will come from regtech innovation. From Investopedia, “regtech consists of a group of companies that use technology to help businesses comply with regulations efficiently and inexpensively.”
Where fintech has begun with the advent of smartdocs, edocs and data from the source, regtech must follow to verify and validate the consistency of all this information throughout the loan manufacturing process while ensuring compliance with regulatory and investor specifications and guidelines.
But, there are challenges. Varying degrees of integration and limitations of various API lifelines to legacy technologies create potential points of failure. Paper documentation is still being generated as part of the loan file and must be processed, verified and validated. Interaction of multiple participants in the process can introduce data contamination. And, complexities and dependencies susceptible to the smallest changes in a date or data point can act like dominoes to get even quality conscience lenders in trouble.
Today’s reality is the existence of “single sources of truth.” Regtech advances in loan quality management are making “finding the truth” a more efficient and automated process. Audit rules automation can look at sub-set of data that was used to make certain decisions, verify and validate that information, and enable auditors to perform tasks and calculations in a consistent, structured workflow. With this degree of automation, lenders can scale quality control, driving confidence and continuous process improvement.
Regtech needs to push the envelope even further. Quality should not operate as a separate, parallel workflow, but instead should be real-time and embedded in the workflow, much like “spellcheck” in a word processor enables you to catch your errors before you turn in a finished product. Ultimately, every data element used for every decision should be verified and validated. Through artificial intelligence (AI), machine learning and other advanced rules technology, there should be 100% alignment with investor and regulatory guidelines for 100% of loans.
This will minimize the subjective aspects of underwriting and leverage big data for sound mortgage decisioning. Decisions and the data, rules and calculations used will be fully accessible, auditable and fully transparent. No more will decisions be based on varying levels of subjective interpretation, non-validated data and calculations and policy interpretation that has been figured outside of the technology in someone’s head or on an HP calculator.
The end game of a perfected mortgage loan asset that market participants can have 100% confidence in will be driven by regtech. This will include verified data, real-time change management, digital decisioning, and in-line quality assurance captured in a tamper proof block chain. Make no mistake about it, while not easy, it will be accomplished.
Now is the time to focus on regtech, eliminate the digital divide and make digital mortgage a reality.
