Those in the mortgage industry continue to struggle for efficiency and quality. Yet disclosure desks still manually review borrower documents. It’s an antiquated process that produces accurate and timely delivery of required borrower disclosures only most (I.e. not all) — of the time.
What was once a simple borrower communication outlining estimated transaction details (e.g. Good Faith Estimate, Truth in Lending Disclosure) the process now requires expertise in generating detailed compliant documents to inform the borrower and protect the lender and investor.
This evolution added significant cost and complexity to what was an already-cumbersome process. But there are alternatives to this current-day practice – alternatives that can help reduce costs, boost efficiencies, and enhance quality within the process.
Not so long ago, a GFE, TIL, and a handful other state-required documents were automatically assigned and distributed to borrowers based off loan-file data. This process was a simple task for originators and processors since it used only a few data triggers to determine which documents should go where and to whom.
There was little to no risk in sending inaccurate disclosures. The most damaging consequence was most likely to be a temporarily irate borrower and/or realtor upset by surprising changes at the closing table. During this era, more accurate closing figures were usually presented prior to the loan closing, giving borrowers, sellers, and realtors plenty of time to absorb the news and bring the right amount of cash to the closing table.
New disclosure requirements implemented in 2010 were more demanding, requiring accurate fees and imposing penalties for missing tolerances and/or deadlines. Lenders adapted and asked individuals to manage internal inspections or checkpoints to ensure that the data feeding into the disclosures was as accurate as possible.
One problem: The industry didn’t foresee how manual checks would impact process flow, delays, overhead costs, and other measurements of quality and efficiency. Instead, the sole focus was on avoiding penalties from inaccurate disclosures. Mortgage companies built entire teams and processes to ensure the accuracy and efficacy of required loan disclosures. More penalties were implemented in 2011. Then in 2012, Wells Fargo started requiring a complete loan disclosure history. The tone was cemented and the ad-hoc and ill-conceived solution of a manual disclosure desk was firmly implanted in our psyche.
Know Before You Owe
Fast forward to today and the Know Before You Owe integrated disclosures. I recently asked an operations manager at a large mortgage lender if they had ever considered eliminating their disclosure desk process. “There’s no way we could count on the loan officer to do it right. The disclosure desk will never go away,” he said. This is a common thought amongst mortgage bankers today.
Reliance on disclosure desks and resulting time and money crunch is growing exponentially. In this elevated regulatory environment, there’s an extreme focus on fee details and little tolerance for last-minute changes. Because there’s little chance of recovery if data is incorrect – by then, the moving trucks are loaded and on the way to a new home — lenders’ disclosure desk models are even more critical to their success.
The industry hasn’t extensively searched for a low-cost, high-impact solution to the current disclosure desk design. Instead of searching for a highly technical solution to basic information flow and timing challenges, the industry has seemingly abandoned efforts to reduce this costly overhead fraught with waste and inefficiencies. Lenders are settling for this ill-suited process, and with the advent of Know Before You Owe, embracing it even tighter to combat inaccurate and untimely disclosures.
So, who should be doing what? If originators aren’t the appropriate resource to manage this complex and cumbersome process, then what are the alternatives to improve loan disclosure?
We, as an industry, can do better. We have to, in order to compete and succeed in this highly competitive, highly regulated lending environment. Doing better starts with first accurately defining and measuring the problem, then taking care to properly analyze and consider alternatives.
Properly measuring disclosure desk efficiency
To properly assess the ineffectiveness of the disclosure desk and subsequently enhance the overall loan process, measuring the current state of operational process becomes paramount. Only when a lender understands the impact of their current processes, can they provide, deploy and measure improvements. Operational process measurement then, becomes your baseline from which you can will judge success through changes to the process within the area of disclosures.
As part of the process of evaluating current workflows, I engaged five of our larger lender clients and asked them to document the precise steps followed to initiate an initial set of disclosures as well as those required for a change of circumstance. The results were profound.
Improving the process (creating upfront disclosures)
The five lenders I surveyed created initial disclosures in 34-67 individual steps. On average, these lenders created initial disclosures in 49 steps. Sixty percent of these steps could be identified as wasteful – meaning the steps had contributed very little to quality disclosures. The value of any process is measured by meeting the following criteria: 1) The step must materially change something, 2) It must be done right the first time, 3) The lender is willing to pay for it.
We determined waste via the following categories:
- Defects – Missing/incomplete data
- Over Production – Entering data multiple times/extra reporting
- Waiting – Idle time with no work / waiting for email/notifications
- Non-Utilized Talent – Not listening to user feedback / over qualification
- Transportation – Poor workflow requiring unnecessary movement of information/excessive work in process
- Inventory – Stacks of paper/reference documents/pipeline lists/
- Motion – More steps than necessary/Too many authorization points
- Extra Processing – Manually performing a function that could be automated / doing something that doesn’t add value
The majority of waste identifiers fell within Motion, Extra Processing, and Over Production. Many of the individual tasks inspected and validated the presence of data but also the accuracy of the data entered previously users in the loan supply chain.
- Checking for the presence of email addresses in the 1003
- Previewing and completing a checklist for disclosure tracking
- Verifying the presence of eConsent information
- Self-assignment to the loan file under consideration
- Verifying import of liabilities into the 1003
- Inspecting 1003 for the presence of ALL data fields
- Mapping itemization FEES
- Confirming property address through an outside service
- Verifying proper appraisal charge amount
- Changing the authorization code on the client facing portal
Be sure to check back tomorrow for the second part to this blog from Ellie Mae’s Bill Smith. In part two, Smith will the answer the disclosure desk problem, explaining Ellie Mae’s guidelines for making the disclosure process an effective and quality-driven component in the life of the loan.