Posted by MeridianLink | May 11, 2020

Digital Lending Software: Customization vs. Configuration

Lenders usually pay a price chasing customization. Many lenders feel having a different loan production process is one of the most important drivers for success in the mortgage industry. This perception drives them to select and implement systems that require extensive customization. There are several issues with this approach:

  • The focus is on digital lending technology with customization flexibility. To satisfy this demand, most LOS vendors channel their resources to create highly customizable solutions rather than features that work out of the box. The result is lenders spend up to a year customizing their LOS to deploy.
  • Once deployed, additional time are spent making improvements to optimize the loan production process.
  • The entire process from initial investment to the promised ROI can take more than three years

There are three key reasons why lenders would need different loan production processes:

1. Sales Channels

Doing business in different channels: Retail is not the same as wholesale. And wholesale is not the same as correspondent. Online Internet lending through lead aggregators is not the same as a branch-based, realtor-focused strategy.

2. Size

Economy of scale: A 500-employee lender will have a greater number of user roles with fewer activities performed by each employee versus a 50-employee lender who will have the same employee performing more activities. Division of labor and functional specialization is a key strategy in the manufacturing industry and is just as useful in the mortgage production business.

3. Technology

LOS technology: Loan origination systems have differences in functionality and database architecture, so lenders must adapt their loan production processes to what their LOS will allow them to do.

Lenders who share similar key areas can benefit by sharing the same loan production process. Business context, in this discussion, is a concept that identifies the environment—sales channel, size, and technology—that the lender operates in.

Two lenders operating in the same environment share the same business context. Two lenders operating in different environments have different business contexts.

An effective LOS vendor collects data from their customers and with the knowledge of their own technology creates and distributes best practices to their customers.

Lenders who operate in different business contexts need different loan production processes. But if lenders operate in the same business context, why would they need different processes? They don’t. Here’s why:

A mortgage is simply a commodity. A mortgage lender creates profit by creating and selling mortgages in the secondary market. Lenders must create mortgages that are compliant with rules and requirements created and regulated by several entities:

  • The government (e.g. CFPB, state regulators)
  • The pseudo government agencies who purchase and/or insure mortgages (e.g. FNMA, FHLMC)
  • Other investors/buyers of the mortgages (e.g. money center banks, securities firms/markets)

Some lenders’ compliance and quality control departments may require modifications to loan documents, which represent the finished product for mortgage lenders. These modifications are based on each lender’s legal interpretations related to compliance or regulatory requirements. However these loan document modifications are typically very minor.

Some investors may require different minimum FICO scores, maximum LTV, maximum loan amounts, etc., for the mortgage loans they’re willing to buy. But, these requirements do not drive significant differences between the mortgages. The result is that all lenders manufacture mortgages that are similar except for minor differences. In other words, a mortgage is a commodity.

Competition in a commoditized business is mostly about price. Price is the primary differentiation factor in a commoditized business. While customer service is important, the nature of a commoditized business means lenders must be competitive on price for long-term success. This is especially true in today’s market of savvy borrowers who shop online for the best deal.

Lenders need to create a loan production process that allows them to produce mortgages at the lowest cost possible. If the business context for two or more lenders is the same, then only one will qualify as having the most efficient process for that particular business context and will be the lender with the lowest manufacturing costs.

The goal is to create best lending practices. All lenders are pursuing the same goal to create and implement the best practice loan production process within their organization. The process of creating a best practice is time consuming. The lender must understand their LOS technology inside and out. Then they need to create the best workflow to achieve the promised ROI.

This process of trial and error can only be effective if the lender dedicates a full-time team to the project. Lenders within the same business context waste money by not working together to create the best practices for that context.

Don’t lose time and money reinventing the wheel. Lenders who share the same business context can use the same best practices. A best practice, however, is only best for a limited time.

As technology and industry regulations evolve, the practice must be improved to remain a best practice. Most lenders don’t have resources assigned to continuous loan production process improvement. Typically this responsibility is divided among managers who are busy fighting other fires.

Lenders within the same business context need a dedicated team to create and maintain best practices. The LOS vendor is the perfect intermediary to provide this team because they have access to different lenders.

An effective loan origination system vendor collects data from their customers and with the knowledge of their own technology creates and distributes best practices to their customers. That LOS vendor will also periodically visit customers to help update their loan production practices. Lenders who are unable to dedicate an internal team toward process improvements can rely on their LOS vendor to fulfill that role. This ensures that they are never behind their competitors because their loan production process will always be the best practice for that business context.

Best practices achieve the best solution. Lenders who grasp the concept of business context as identified in this article will understand that it’s to their advantage to select an LOS vendor whose primary goal is to help their customers implement best practices that save time and money rather than create highly customizable systems. These lenders look for the best solution that combines best practices with technology to give the lenders what they really need: the lowest manufacturing costs to produce mortgages.

For additional questions about the use of digital lending technology, reach out to the MeridianLink team at your next opportunity.

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