This is the penultimate post in a five-part series explaining that, at Blend, we work on mortgages because they’re HARD: Human, Astronomically Large, Regulated and Data-rich (Insight-poor). Check out our first, second and third posts.
Imagine an industry that receives close to 10 million consumer applications each year—or about 27,000 each day—with a price tag that can range anywhere from less than a hundred thousand dollars to several million dollars. These applications represent nothing less than the American Dream. Tragically, some 4 million homes that were used as collateral during the Great Recession from December 2007 to June 2009 were foreclosed on each year.
Due to the housing industry’s size relative to the rest of the economy, as well as its broader social implications, there has been a renewed emphasis on responsible lending and timely, accurate disclosures. To be successful in this post-recession environment, mortgage lenders must leverage modern technology to achieve compliance while still being efficient and thoughtful about the borrower experience.
In the aftermath of the financial crisis, the Consumer Financial Protection Bureau (CFPB) was established in part to curb unfair, deceptive and abusive lending practices and provide consumers with “the information and stepstools that they need to make smart financial decisions.” Even though regulation is not new to the mortgage industry, new requirements introduced after the financial crisis have required changes in business operations and technological advancement, presenting new challenges to many lenders and their legacy technology providers.
The Know Before You Owe (KBYO) disclosure rule that took effect in October 2015 is a prime example of a regulatory change that necessitated adaptation on the part of lenders and their technology providers. Its core objective is to provide consumers with integrated disclosures that are accurate and easy to understand and enable consumers to shop for mortgages that meet their financial needs early on in the loan process. Fines for failing to provide consumers the new disclosures in a timely manner can range from $5,000 to $1 million per day per loan. Moreover, what may seem like a trivial change took much of the industry over two years and billions of dollars to implement, requiring new data fields, forms, business logic and reporting. Yet, this represents just one discrete piece of the many regulations at the federal level.
After layering on impending regulatory updates to the the new Uniform Residential Loan Application and the Home Mortgage Disclosure Act and state-by-state and municipal compliance obligations, lenders have no choice but to seek out scalable and robust technology solutions. To comply with KBYO alone, most small- and medium-sized lenders tended to rely on outside technology providers while larger lenders chose to build their own technology solutions. Regardless of the path, the solutions weren’t perfect. Moody’s Investors Service reported that there were errors in over 90 percent of files in the first batch of loans after KBYO. Even though many of these errors were technical in nature, we firmly believe that enhancements and widespread adoption in digital mortgage technology could have prevented these errors. As we were developing our platform, we were reminded of one chief compliance officer’s comment about building automated rules to prevent errors: “Our employees are our most valuable asset, but humans are not perfect. Compliance is about perfection.” This is not to say humans don’t add value; it’s just that we believe they can be exponentially more productive and error-free when equipped with the right tools so that lenders can minimize the risks of fines and damage to their reputation.
A Blend audit log tracking every single touchpoint between lender and borrower, complete with timestamps.
Modern Compliance: Digital, Robust
At Blend, we think about these challenges every day as we build out our online mortgage application platform. Our team of San Francisco-based engineers, product managers and designers have partnered with some of the most innovative lenders in the country to build robust digital compliance into our mortgage application platform:
- It all starts with the digitization of data, strategic tracking of that data and intelligent workflows throughout the mortgage process from point-of-sale to loan closing.
- Automated rules and workflows allow lending operations to run 24/7 and track and perform actions to meet disclosure delivery requirements.
- Audit logs track every action by every user, including borrowers and lenders, and allow executives to gain insight into how their business is performing in real-time and keep a permanent record for audit purposes.
- Similarly, rigorous data collection and analysis is performed to track key events on a granular level and provide integrated notifications.
- Key events such as application start date, e-consent opt-in, borrower delivery and review of loan disclosures are seamlessly captured, recorded and passed on to loan origination systems harmoniously without the need for spreadsheets and manual intervention. This level of transparency incentivizes accountability and allows lenders to monitor compliance to respond and correct problematic behavior before it turns systemic. Furthermore, automated task generation and built-in intelligence that eliminate room for error are completed in milliseconds or queued up and sent to an individual with the appropriate authority and training to complete the task.
All of this automation frees up resources and empowers compliance teams to excel in an environment where the bar to avoid regulatory fines and reputational damage is unprecedented. As we all know, data on every loan is massive. Existing ways of collecting data in paper format is not scalable and won’t meet regulatory requirements to digitize data and reporting in the future. Moreover, we are working on connecting lenders to direct-to-source data from traditional sources such as banking institutions, payroll providers and tax providers. This simplifies the borrower experience but also meets regulatory priorities that have encouraged lenders to make “reasonable” efforts to determine if a borrower has the ability to repay his or her mortgage through “reliable” data sources.
We believe modern technology not only fits within the paradigm laid out in existing regulation, but enhances the goal and spirit of the regulations. Safer regulations that increase transparency and disclosure to the consumer do not have to result in a slower and suboptimal experience. Indeed, a properly effectuated compliance regime in a digital environment can and should be viewed as part of a compelling experience for both borrowers and lenders.