Business enterprises are constantly on the lookout for the perfect technology solution. The ideal loan origination system (LOS) is one that combines user functionality, business benefits and cost management into a single system.
In the mortgage loan origination system space, lenders are presented with three ways to build the operating system that serves as the backbone for all loan operations: an all-inclusive system built from the ground up, an all-in-one approach of selectively integrated platforms, and a best of breed strategy that offers multiple vendors integrated to a core LOS. Knowing the advantages and disadvantages of each philosophy is crucial to selecting an approach that works best for each lender’s specific needs and helps them grow business.
The LOS has become a comprehensive business management tool that is expected to deliver speed and compliance at a reasonable cost.
The LOS Swiss Army Knife
No one can argue how complex, expensive and risky it is to change out an LOS system. The advance of technology has only made this task even more difficult. The LOS system of today can automatically underwrite loans, generate instant pricing, create an entirely paperless office and connect to literally hundreds of different services.
“The LOS system I’m using today is light years ahead of what I was using twenty years ago,” said Ray Scott, President of Oaktree Funding in Upland, California. “I’m not just talking about the internet or operating systems. The types of things we can do in our LOS today we weren’t even thinking about before.”
With these increased capabilities, lenders are no longer satisfied with an LOS that just generates documents and stores data. They want a veritable electronic Swiss army knife that can do it all. From workflow management to marketing systems, the LOS has become a comprehensive business management tool that is expected to deliver speed and compliance at a reasonable cost.
Path of Least Resistance
When lenders consider an “ideal” loan origination system, they are often thinking of an all-inclusive system built from the ground up. The appeal is a natural one – one software implementation, one vendor, one system to learn.
“With an all-inclusive type of system, you cut out multiple vendors and remove the possibility of multiple failure points,” said Al Ogrodski, Senior Vice President of Solution Strategy at ComplianceEase.
Finding a vendor that offers a true all-inclusive system, however, is rare due to the sheer complexity and cost of LOS development. All-inclusive systems are usually proprietary, built by large institutions that have the resources to develop an entire LOS from scratch and are typically out of reach for most lenders.
And Ogrodski warned that although an all-inclusive system provides more technological uniformity, it puts the onus on the developer to ensure that the entire system is functioning properly. “There is a chance of the whole process being jeopardized by putting your eggs in one basket.”
Building an Integrated Platform More Accessible to Most Lenders
Instead, the majority of lenders partner with LOS providers that take an integration approach, where ancillary systems are bolted on to a core platform. “Integrations provide lenders with an easier way to add needed functionality without the large costs of an all-inclusive system,” said David Colwell, Strategic Business Development at LendingQB.
The traditional knock on integrated systems is that it is difficult to deliver a quality user experience when you rely on two entirely different companies to integrate together. While this may have been true in the past, the rise of web services and data standardization means companies can now build incredibly robust integrations much more easily.
“The internet and development of web services gave software companies the voice to speak to each other,” explained Alan Daughton, Senior Software Development Engineer at MeridianLink and an expert at system integrations. “Data standardization like MISMO goes even further by providing a common language to communicate, further reducing the cost and time to integrate and making it easier to incorporate even more functionality into integrations.”
The rise of web services and data standardization means companies can now build incredibly robust integrations much more easily.
Lowering the barrier to integration opens up the possibilities for LOS companies to easily add enhanced functionality to their platform, but it also puts the LOS company in a position to influence lenders on the vendors they can use by controlling access to their platform. The risk is that LOS companies will leverage vendor integrations to further business strategies that are not necessarily aligned with the lender.
All-In-One Seeks to Buy and Build
One approach to integrated LOS platforms is the all-in-one, where an LOS company acquires vendors that they integrate with in order to provide a complete bundle of services. The primary benefit of acquiring vendors is the potential for discounted pricing and the assumption that integrations are strong.
What makes the all-in-one approach risky is that lenders sacrifice the flexibility to choose their own vendor and relies on the LOS vendor to make the choice for them. As more lenders grow their business by specializing in niche areas of mortgage lending, their choice of vendors and the technology they provide becomes more specialized.
“Technology moves so quickly that it’s easy to lose market share to your competition,” Colwell remarked. “Lenders want to be able to react swiftly and have a system that allows them to target specific segments of the market. The all-in-one approach runs counter to this because it limits a lender’s ability to adapt.”
Whether they happen to focus on traditional retail lending, consumer direct, wholesale lending, FHA lending — mortgage lenders want to have the flexibility to use vendors that best fit their individual strategy. And lenders know that relationships and the business environment can change over time.
“With the all-in-one approach, lenders are starting to see they don’t have the flexibility to manage their business from a vendor standpoint,” said Tony Inskeep, Senior Vice President of Sales at document preparation vendor Docutech. “If that vendor or integration goes south, or if there’s a new product out there, you don’t want to wait on the LOS vendor to get you where you want to go.”
Best of Breed Provides Tools to Build Custom Solutions
Best of breed model is an alternative approach to LOS systems that opens up integrations to multiple vendors. It provides the flexibility to choose the vendors, but also challenges vendors to provide the very best solution. Vendors agree to integrate with an LOS with full knowledge that their direct competitor may already be integrated. Because of this, the best of breed model creates incentives for both the LOS provider and the vendors to deliver maximum value because competition is built into the relationship.
“Best of breed companies are always customer focused,” said Dylan Bruni, Vice President of Business Development at marketing systems provider BNTouch. “We want other companies to come along and test us, push us. If other companies can provide something better, then we know we need to refocus our efforts.”
Perhaps most importantly, the best of breed model encourages the kind of collaboration between companies that drives real innovation, leveraging a wide community of vendors who work together to push the envelope of what mortgage lending could be.
“Best of breed solutions have been developed by companies who have been able to address certain pain points with specific technology solutions and have come up with a better way of solving those problems using a more efficient solution,” Ogrodski remarked. “The best of breed approach opens up options and promotes the power of technology to disrupt for the good of the market.”
The best of breed approach opens up options and promotes the power of technology to disrupt for the good of the market.
There’s no guarantee that any approach to LOS systems – all-inclusive, all-in-one or best of breed – will deliver the performance that a lender wants or expects. Lenders must decide what priorities they place on cost, flexibility, service, features and adaptability. What is certain is that mortgage lending is constantly undergoing change.
Do you choose an LOS system that gives you the freedom to keep pace with this change, or allow your LOS to paint you into a corner with nowhere to go?
The choice is yours to make.