When British sailors set sail to dominate the world, they carefully planned and prepared. However, they discovered that challenges could unfurl –- a sudden dark, cold mist could befall their ship or pirates could attack at a moment’s notice.
Bravely departing their homeland for new soil, mortgage companies are following suit, educating themselves on foreign doctrine and tying up loose ends before planting roots overseas. Like the sailors, they face unknown challenges, too.
Where And What
Statistics indicate that most of the top 25 lenders and top 50 servicers are currently handling some if not all business overseas. In many cases this is limited to specific servicing functions.
“Our world is becoming more interconnected, and I only see that continuing,” says James Brody, senior partner at Garris Horn LLP in Irvine, Calif., regulatory compliance counsel for depositories, independent mortgage banks (IMBs) and credit unions.
“When we get involved generally with outsourcing-related issues on the legal end, it’s trying to help our clientele build up safeguards, whether through contractual issues or contractual agreements, navigating what the risks are in the legal environment of the outsourced country, how easy is it or how difficult would it be to address these problems,” Brody says.
Much of the mortgage industry’s servicing now takes place in countries like India, Malaysia and the Philippines. That includes the functions of lending that don’t directly involve communication with the borrower, such as pre-underwriting, onboarding, processing and certain parts of closing.
“We represent the company, but we don’t want to represent the company to the borrower,” says Executive Vice President of lending at Kwik Mortgage Corp. Paul Campbell, founder of Equilibrium Mortgage Solutions and a lender board member of The Mortgage Collaborative (TMC).
“You’ll never see any one of our employees – and no other company for that matter from a fulfillment platform -- communicating directly with the borrower. And I think that’s very important because the borrower needs to know that they’re in a solid position. So communicating with their key point of contact, which is potentially head of processing in the organization in the United States or their loan officer is always preferred.”
Campbell co-founded outsourcing firm Equilibrium Solutions in 2018 to support IMBs alongside Nishith Parikh, the owner of Kwik Mortgage. Offices are in Mumbai, Pune and Ahmedabad, India. Team members have direct access to a customer’s loan origination system (LOS) to support loan flow as prescribed.
Lessons learned during the pandemic have made operations more efficient today.
“We really had to hone in our skillset because employees had to be remote just as they are in the United States to help curtail the spread of COVID,” Campbell explains. “We installed critical accountability technology that allows us to manage our employee base remotely, and lets us know their productivity during the day. But what became apparent was productivity jumped. What we saw is because the fulfillment is performed basically during the nighttime in the U.S., that ability gave our customers the ability to have pretty much instantaneous results.”
Loans could be set up within 24 hours. With that speed to market, what was initially a challenge proved to be a reward.
Campbell and Parikh chose to open Equilibrium Mortgage in India for several reasons.
“The familiarity with our products and process and our management style,” Campbell says. “It’s fully understood. And there’s a lot of folks that are from India that live in the United States as well. So, communicating is really not a challenge. The Indian population is very well educated, has a strong command of English and understands process and flow really well. So you can take a process out in India and replicate it at a pretty high rate with a pretty sound, quality return.”
Other companies have gone to places such as the Philippines, where they’ve found communication to also be strong.
“You’ll find more of those upfront type functions especially ramping up in the Philippines,” Campbell says. “There’s groups in Malaysia as well that do a really good job of understanding the processes with regard to processing pre-underwriting and closing.”
This includes smaller companies that don’t have the funds or resources to insource functions, according to Brody, who represents many of them.
“A lot of what we do is really on the risk management and prevention side of trying to help them insulate their companies against any liabilities,” he says. “There’s no perfect solution. There’s no one agreement that will address these issues in full. And I think that the regulators are having a difficult time with that as well. Trying to come up with a landscape that will adequately protect people, yet allow businesses to have some ability, because if there’s too much risk, there’s too much liability associated with it, then it makes outsourcing less attractive. And then that results in maybe higher costs and fees to consumers one way or another.”
Not every company has jumped onboard to set their windy sails.
One example is Universal Component Lender Services, a vendor based in Connecticut.
“When I’m talking to people about outsourcing services to us, it comes up all the time. Is this offshore servicing? Do you do business out of the country?” says Joseph Amoroso, vice president of business strategy and development. “Just by virtue of the amount of times I’m asked that question, it clearly is something that’s important to people, but we do not outsource anything overseas. I think that there’s a certain element of reputational risk that a lender may have by saying, yes, we outsource overseas. Some Americans take it very seriously and I think that a lot of borrowers take it very seriously.”
Amoroso acknowledges, however, that there is a place for offshoring mortgage services. Oftentimes it’s the most surefire way to cut costs. And that’s important when there are countless other companies providing the same service.
“In the mortgage world, it’s crazy competitive right now,” he says. “Everybody is looking to be a little bit better than the next guy or to offer something a little better than the next guy.”
His customers value the fact that all functions are performed on American soil.
Those that do choose to venture offshore should know that there are risks.
Access to information, audits, different regulations and language barriers are just a few.
“You also have kind of a systemic risk that if too many people put too many of their important functions in outsourced companies and they have a problem,” Brody, the regulatory compliance attorney, points out. “It could be something unique to that country, the political regime, it could just be the fact that they have a bad business or something goes wrong. How do you deal with that when the laws, the political environment and the economic conditions of a different country are much less within your control? Concerns with data privacy and cyber security are associated with outsourcing issues.”
In an industry like mortgage banking, where many regulations govern business, it can be challenging to transfer operations overseas.
“Try to balance that,” Brody says. “The cost savings and the efficiencies against what your risks are, because one big problem could be a challenge that some companies may find insurmountable.”
One of the common issues his firm handles are data breaches. “If there’s a malware attack, normally the first thing you want to do is segregate off the databases and do an audit to figure out how that breach happened, what information was released and who it could have gone to.”
Countries have differing regulations pertaining to who needs to be notified in these cases.
“At the end of the day, I think it’s going to be more about how better to manage those risks internationally from the political side, making it easier to work with other countries and have set standards to allow, for instance, the regulators who have concerns about access to third-party vendors, to oversee them, to run those audits,” Brody says.
“There’s a certain element of reputational risk that a lender may have by saying, yes, we outsource overseas. Some Americans take it very seriously and I think that a lot of borrowers take it very seriously.”
It Comes Down To The Same Issues
A reputation for poor service can be devastating no matter the locale.
“It’s a time when loan officers and companies are searching for ever-creative ways to bring in the dollars and more competition,” Brody says. “Hopefully that would be a race to the top with quality of service, better handling of consumers’ concerns. But when you also have this type of competitive environment and problems, you also have a lot of people come out of the woodwork who don’t care about you.”
When he’s speaking to lenders at conferences about risk management, the reception is cautiously appreciative. “When you have a room of people who have competitors sitting next to them, they don’t always want to share their stories or ask the questions that would belie the problems that they’re facing. But in this industry, everyone’s facing the same challenges in one form or another.”
Groups like The Mortgage Collaborative provide places for mortgage pros to network, problem-solve and trade industry secrets.
“The more that people share, the more you realize that they’re all having the same issues somehow, in some way,” Brody points out. “Just some companies are better able to address those from a financial capital investment perspective.”
This article was originally published in the Mortgage Banker Magazine October 2023 issue.