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Ethics: a perspective from a mortgage felon

National Mortgage Professional
Sep 25, 2006

Who sells the best point-of-sale technology?John Walshloan origination system, point-of-sale technology In the world of mortgage lending, there are basically two types of core systems. For most mortgage brokers, the technology product that is at the core of their business is their point-of-sale tool. For most mortgage lenders, the core solution is the loan origination system. Point-of-sale tools enable brokers to do everything that they need to do with a loan application, i.e., originate, process and issue disclosures, as well as interface with vendors. Frankly, brokers have limited liability with the loan, so their workflow requirements are not that strict. Mortgage lenders, on the other hand, manage more of the loan process and carry all of the risk when funding a loan. The added responsibility of being the lender introduces a technology gap that needs to be addressed with tools that automate the workflow for closing, funding, shipping, secondary marketing, interim servicing and a variety of other tasks, hence the need for a complete loan origination system. In a purely conceptual world, these descriptions make sense. In the real world, however, there are a myriad of opportunities for lenders to mix and match products that meet their unique business needs. Many mortgage lenders begin as mortgage brokers. They start with their incumbent point-of-sale system and then have to face the decision of how to automate their back-office operations, create a database of records, increase user and data security and handle a number of other issues that are not adequately managed via their point-of-sale technology. A broker becoming a lender or a lender looking to swap out of an existing loan origination system basically has two choices in upgrading his core technology. First, he can replace all of his existing technology with a loan origination system that includes point-of-sale functionality. Until recently, this option included nearly every major loan origination system on the market (there are about 25 available). Alternatively, he could retain his existing point-of-sale and automate his other lending functions with a best-of-breed back-office solution. For the last 15 years, very few vendors have promoted the benefits of this best-of-breed approach. The best-of-breed message, however, has clearly resonated with most lenders. As an example, in 2005, approximately 200 mortgage bankers bought new loan origination systems. Some of these were replacement systems and some of these were to augment existing point-of-sale-based mortgage banking operations. Of those 200 lenders, more than 130 chose a best-of-breed solution, while the remainder chose a solution from one of the other 25 vendors. Despite the clear dominance of best-of-breed solutions, there clearly are advantages to buying a loan origination system that includes integrated point-of-sale functionality (often referred to as an end-to-end solution). So, which is the better option: best-of-breed or end-to-end? The following outlines some of the most critical issues to consider: Cost The simple fact is that the leading point-of-sale technology providers offer very, very inexpensive solutions. Most of us have spent more on our children's video games than what it costs to buy a point-of-sale license. A loan origination system license from any viable loan origination system vendor is much more expensive, and most vendors do not differentiate between originator licenses and back-office licenses. Round 1 - Buy your point-of-sale technology from a point-of-sale vendor. Training Every lender knows that the worst people to train in a lending shop are the originators. Almost every originator in business today knows Calyx Point, and a very sizable minority has experience with one of the Ellie Mae products. Why retrain the un-trainable, especially if introducing a new point-of-sale tool can cause a dip in your production or, worse, can cause some of your top producers to switch to a lender that will let them use the tool they already know? Round 2 - Buy your point-of-sale technology from a point-of-sale vendor. Implementation Most end-to-end loan origination systems take a minimum of nine months to implement. Some systems can literally take years. According to a recent industry survey, 50 percent of all end-to-end loan origination system implementations fail or are seriously delayed. The hard and soft costs associated with a failed implementation can be staggering, putting some lenders out of business altogether. The long roll-outs and high failures of end-to-end systems is due to the breadth of technology required to be implemented and the massive amount of training that goes along with a new system. Furthermore, many lenders make changes to their business model at some time during that long implementation period (start a wholesale division, for example) that causes a restart with the roll-out before they even go live. Implementation of best-of-breed solutions are relatively straightforward, simply bolting a back-office solution to an existing broker point-of-sale. Round 3 - Buy your point-of-sale technology from a point-of-sale vendor. Integration There are limits to how well any software vendor can integrate with a third party software product. Conceptually, a suite of products provided by one vendor can be better integrated than products from multiple vendors, however, there is one important caveat here: In the last few years, several vendors have bought either point-of-sale or back-office technology to support an end-to-end story. Not all of these products have been integrated. Be cautious when buying an end-to-end solution to ensure that the components really are integrated or that there is a clear path to integration. Round 4 - Buy your point-of-sale technology from your point-of-sale vendor. Support For originating and processing loans, point-of-sale tools are simple, easy to use and cost-effective. One of the recurring complaints that we hear from point-of-sale customers, however, is that the point-of-sale vendors do not provide adequate technical and user support for a large lending operation. Although I do not have any personal experience in this arena, economics would seem to limit the amount and quality of support that a vendor can provide at the price levels of the point-of-sale products. Clearly the opposite should be true for the more expensive loan origination systems. Round 5 - Buy your point-of-sale technology from your loan origination system vendor. Vendor management Buying both components from one vendor should be easier. Dealing with one vendor means one contract, one bill and one point of contact in the event there are problems. Round 6 - Buy your point-of-sale technology from your loan origination system vendor. Who wins? Frankly, neither the loan origination system nor the point-of-sale vendor win. Each of the above considerations should be important to every lender, but different ones will be more important to different lenders. Minimizing costs will be the critical factor for some. For others, enhanced integration will be the key. The important issue is to clearly understand what considerations are most important to your business and to accurately align those with the right technology strategy. In general, the most effective way to sell or buy enterprise solutions is as optional, modular applications. A single system with a bunch of functionality that a customer does not need means that the customer has overpaid for the functionality that he does need. Depending on a lender's business model, he may or may not need point-of-sale functionality, document imaging and management, business analytics or product eligibility, etc. Modular, optional components allow lenders to buy what they need, when they need it. They also allow vendors to keep the price of their core application low and accessible for any size lender. Also, this approach forces vendors to bring the best solutions to market. If the vendor's product is not the best in a specific category, the lender should have the freedom and flexibility to purchase those components from another vendor and create his own integrated solution. However, the optional, modular approach does impose challenges on the loan origination system vendor, and not all best-of-breed providers are up for those challenges. For example, from the vendor's perspective, there are a lot of advantages to just selling a lender a core system and then locking clients into mandatory upgrades. Also, providing lenders with the ability to use other vendors' products requires that the loan origination system vendor maintain an open technology architecture. This complicates development and will cost the vendor money. It also means that the vendor's products will continually be evaluated versus other solutions in the market. I would argue that these challenges are ones that a successful vendor must accept and are a benefit to the lender. In the end, there is no perfect solution. As a matter of fact, every software purchase includes a level of compromise from the buyer. The important thing for a lender to do when considering a technology upgrade is to clearly understand why he is making the investment. In other words, what are the most important changes to his business that need to come out of his investment? Then, he should evaluate how those needs are being met by the vendors he is considering. You should never focus purely on the price printed on the contract, as the actual cost of ownership will always be higher. If bringing in a new point-of-sale will lower your production by 20 percent for six months, how much did that software really cost you? What if your production was not impacted at all, but your information technology team needed to support two systems (a point-of-sale and a loan origination system)? Then what is your true cost? John Walsh is president of Del Mar Database, a wholly owned subsidiary of Fiserv Inc. and provider of technology solutions that automate the mortgage process for small and medium mortgage lenders. He may be reached at (858) 526-7108 or e-mail [email protected]
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