eUnderwriting: The act of underwriting a loan through electronic means. Today, automated underwriting tools allow the credit package of a loan to be underwritten and electronically scored.

"Vendors place too much of a premium on the hard sell of their products. The lender does not want to hear about how ‘great’ their new products are and why they should spend more capital buying them. Instead, lenders want to know how vendors can help them become more efficient and how their products can better affect their bottom lines." --Cary Burch, president of Lender Support Systems Inc., Poway, Calif.

Courts Support Defendants in Security Breaches, but New Laws Loom
Sorohan, Mike
Recent incidents involving data security breaches have led to lawsuits seeking class action status as well as damages for negligence, breach of contract and other charges. But a recent ruling by a court in Ohio puts a damper on such class action claims and bolsters the defense for companies that experience such breaches.

The U.S. District Court for the Southern District of Ohio recently ruled in favor of Litton Loan Servicing, Houston, granting Litton a summary judgment against claims that it was liable for damages as a result of a 2005 security breach.

In this particular case, Kahle v. Litton Loan Servicing LP, case 1:05cv576, the plaintiff, Patricia Kahle, attempted to collect damages despite no hard evidence that she had been a victim of identity fraud as a result of the breach. The court, in its ruling, said that “the cost of obtaining credit monitoring services does not count as damages without evidence of identity fraud.”

The case originated after an August 2005 break-in at Litton in which more than $60,000 in computer equipment was stolen. The theft included six hard drives, of which four contained personal data on nearly 230,000 people, including Kahle.

Houston police and Litton conducted investigations; a month after the break-in, Litton sent a notice of the theft to each person whose data existed in the stolen hard drives. Per standard procedures, the notice contained details of the type of information stolen; a list of phone numbers and web sites that customers could use as resources; and a recommendation that customers place a “fraud alert” on their credit files.

Kahle filed suit seeking class action, claiming that those in the class action had suffered “emotional distress, costs of credit monitoring and loss of identity” stemming from the break-in. She also asserted that Litton should pay for the costs of credit monitoring that she said she would need for “years to come” as a result of the break-in.

Litton, in its defense, criticized the “theory of negligence” argument touted by Kahle’s attorneys. Litton cited earlier cases, Key v. DSW Inc. and Forbes v. Wells Fargo Bank N.A. Litton noted that Kahle admitted that she did not place a fraud alert on her credit reports following the theft; nor could she provide any evidence that she had experienced a known unauthorized use of her personal information of that her personal information had even been accessed in an unauthorized manner.

In the Key and Forbes cases, courts dismissed plaintiffs’ claims, noting that in each case, the plaintiffs had not presented any evidence that they had suffered actual damages and that “theoretical” or “future” financial damages could not be considered.

Kahle’s attorneys argued that her case differed from both Key and Forbes, asserting that DSW and Wells Fargo had both offered free credit monitoring services and that Litton had shown negligence in waiting four weeks before notifying customers of the breach, whereas Wells Fargo notified affected customers immediately following the breach.

However, the Court rejected all of Kahle’s arguments. Like Key and Forbes, the court said that Kahle failed to present evidence that the breach had caused immediate or future harm.  

“Any injury of Plaintiff is purely speculative,” the court wrote in granting summary judgment. “It is Plaintiff’s choice to obtain credit monitoring in this situation; however, without direct evidence that the information was accessed or specific evidence of identity fraud this Court can not find the cost of obtaining that credit monitoring to amount to damages in a negligence claim.”

For now, the ruling means that victims of identity theft must prove actual financial (or in some cases, medical) hardship as a result of the breach. However, many states are now considering legislation that would enable victims of security breaches to collect damages for what some call the “costs of reasonable actions.”

Minnesota has already passed such a law, which went into effect on August 1 for data breaches that occur after August 1, 2008. The law prohibits “any person or entity conducting business” in Minnesota from retaining certain data after authorization of a transaction using credit cards, debit cards or other types of cards issued by a financial institution. These data would include the security code on the back of a card (known as a CVV2) and PIN verification code numbers.

The law requires institutions that experience security breaches to reimburse the financial institution for “costs of reasonable actions” to protect consumers whose data was breached. Such costs could include notification of consumers; cancellation and reissuance of cards, closing accounts and stopping payments and refunds for unauthorized transactions.

That law is expected to face legal challenges, which could open a whole new chapter in identity theft liability.
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Document Management a Cost-Cutting Imperative
Murray, Michael
With document management costs averaging $86 million last year for the top 10 mortgage lenders—and $27 million for the top 50 lenders—finding methods to reduce costs per loan has become a necessity to remain competitive.  

The typical top 10 mortgage lender had an average of 420,000 loans last year costing $202 per loan, or $86 million in document management costs, according to estimates from Tower Group Inc., Needham, Mass. Top 50 lenders averaged 22,000 loans each at $202 per loan for the $27 million total. Overall, document management cost the mortgage industry $3.7 billion for 15.7 million loans.

The bulk of IT spending has been in post-closing, but a larger share will be coming into origination, according to Tower Group. From 2007 to 2012, Tower Group estimates a 21 percent increase in compound annual growth rate for IT spending in post closing; a 41 percent CAGR for loan originations and a 27 percent increase overall.

Tower Group also forecasts that total industry expenditure in document management will fall to $2.7 billion from $3.7 billion from 2007 to 2012, also accounting for changes in industry volume. However, on a per loan basis, it will drop from $202 per loan to $140 per loan.

“In the past, the mismatch between data and systems and paper has been a large cause of high loan origination costs and manual processes,” said  Craig Focardi, CMB, research area director of banking practice at Tower Group, speaking at a webinar. “The document imaging is going to help reduce a lot of those labor-related costs. The challenge will be in automating document movement in a more dynamic environment versus the static loan file that we have in post-closing, but the technology tools for integration and workflow have improved to make that happen.”

Lenders could take imaging and content management systems onto their data-centric origination systems to synchronize the data and document flow and speed the origination process, with the goal of a single-image repository to simplify the process of pushing documents out to various parties for review, according to Focardi. He said that the origination chain can bring automated complexities more than in post-closing, but an enterprise content management strategy can sink “the paper mountain” and reduce compliance problems in the process.

“Those documents are arriving at different times in the lending process, from different people in different formats,” Focardi noted. “When a loan amount changes and underwriters have to rework documents or ask for more documentation, the lender is going to receive duplicate versions of many different types of documents. Keeping track of these is necessary in order to tell investors later what was used for the underwriting decision as well as for lenders that are originating loans for their own portfolio. It also avoids the compliance problems that keep lenders up at night as well.”

Focardi said lenders working on remodeling processes for core loan origination systems should also look into enterprise content management for integration and workflow issues and in their choice of loan origination system. Also, lenders need to determine whether installation will be in-house, hosted or implemented on a piecemeal basis in different areas of the origination process.

Rekeying errors continues to be a major sticking point in documentation management during the loan origination process because errors on the front end add time and costs in moving the loan through post-closing and into the secondary market.

“Major version control issues and errors are introduced at this point,” Focardi said. “If those data changes occur, the lack of synchronization with the document and automated workflow can generate new loan document information [and it] can result in a significant amount of errors. A lot of rekeying will need to happen, too, if new versions of documents are received…At this point in the process, if those errors are not caught until post closing, this can delay or prevent the actual closing of the loan or the selling of the loan to the end consumer.

Without sharing documents as they ship to the closing table and print in the closing agent’s office also keeps all parties from being on the same page, according to Focardi.

“There is still an inability to collaboratively share those documents in many cases with the mortgage borrower, the loan officer or real estate agent,” he said. “The industry is working actively as well to improve things in the post-closing area. The IT-spend in this area and the automation and cost benefits will still be realized.”

As for the bottom line, Focardi said lenders need to insure from a return-on-investment analysis that the benefits they will receive are “far in excess of the costs they need to invest” in order to make a worthwhile investment.

“If competitors are lowering their costs by [$30 to $70] or more per loan, that is going to translate into greater ability to adjust price and improve service, and that is certainly going to affect customer attitudes in who they send their business to,” Focardi said.
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Electronic Loan Finder, Library Mitigate Risk
Palaparty, Vijay
As underwriting guidelines change, loan officers need access to the most current loan information. Such information, said Rob Pommier, senior vice president of sales and marketing at Lender E-Source, Vista, Calif., would allow loan officers to mitigate risk for both lenders and borrowers and increase the likelihood of closing loans, while providing the best fit loans to borrowers.

“Mortgage bankers today faces a lot of risk, and screening loans and processes borrowers go through are critical,” Pommier said. “Using technology allows loan officers to closely match borrowers’ criteria to find a matching loan in the first step in the process.”

Lender E-Source provides guidelines and automated loan pricing to mortgage professionals through its Loan Library and Electronic Loan Finder products. The company’s products are based off of a frequently updated customizable loan database. The web-based ELF allows loan officers to search for loans based on a number of specific borrower criteria.

Additionally, the system provides loan officers with updated qualifications and underwriting information through its searchable loan library—aiming to increase time efficiency and provide cost-savings for processes that are otherwise done by staff.

“Guideline changes by lenders in the past six months show that manual monitoring of updates isn’t efficient—there are so many and they are so frequent,” Pommier said. “What we do is take all the investors’ guidelines and implement them into our system and update them as changes come about—and our customers are able to search for the information they require.”

Underwriting guidelines tend to come in different file formats; to make them searchable, Lender E-Source reformats files so that they are searchable from one database. The company also tracks which loan products are being used the most.

“We archive old guidelines as well,” Pommier said. “Investors will most likely not give you guidelines from the past when you need them. In our case, the burden of proof is on the lender and the system can generate guidelines from the past as necessary. “It’s necessary should problems arise down the road and when they are needed to see what the guidelines were during the closing of a loan.”

Compliance features are also built into the system—to give loan officers ability to track and have access to changes in even basic investor policies. They are electronically alerted of all changes.

“We want to provide loan officers with greater control of the pipeline,” Pommier said. “Ultimately, it’s about giving loan officers as much as information as possible and letting them choose from it based on the individual needs of the borrower and then to ensure the success of the loan.”
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Tech Case Study: Home Capital Funding Adopts Underwriting, Pricing Technology
MBA Staff
WHO:
Home Capital Funding, is a national mortgage banking firm headquartered in San Diego. Home Capital operates both a retail mortgage lending division with more than 90 affiliated branches and five company-owned locations in Southern California, and a traditional wholesale lending operation.

PriceMyLoan, Costa Mesa, Calif., a provider of automated underwriting and loan pricing technology to the mortgage industry. 

CHALLENGE:
Like many mid-sized lenders, Home Capital was operating off of manual rate sheets and faxed-in loan applications. This process, while helping to fund more than $845 million of loans in 2005, was prone to errors and contributed to lower profitability and wasted productivity. Loans submitted for underwriting were declined due to simple mistakes in pricing and improper loan pre-approvals at an average fallout rate of 60 percent.

SOLUTION:
Home Capital recognized the need for improvement, and sought various options for automated underwriting and loan pricing technology, eventually selecting PriceMyLoan. PriceMyLoan provides correspondent lenders with a web-based tool that generates accurate approvals of loan eligibility and pricing. 

PriceMyLoan was introduced in 2004. It focuses on providing Software-as-a-Service, a technology delivery model where system maintenance and updates are managed entirely by PriceMyLoan, allowing for faster deployment and higher rates of decisioning accuracy.

RESULTS:
From the speed of system deployment through recent market volatility, PML has had a positive impact on Home Capital Funding. “We made the decision to contract with PriceMyLoan in late February 2006,” says Buck Hawkins, managing director of capital markets at Home Capital. “By April 1, we were ready to roll. We were surprised that deployment took less than 30 days.”

Home Capital released a private-label version of PML, dubbed HALO (Home Capital Automated Loan Options), and the impact on submissions was immediate. “While the market was still hot, we saw our submissions increase by well over 50 percent,” Hawkins said.

Originators quickly adopted the new online channel for loan qualification, pricing and submission. “HALO took us from 600 units to 800 units within the first two months. And then we went from 800 units to well over 1,000 units in 90 days,” Hawkins said.

The process not only improved submission volumes, but the use of automated underwriting technology allowed Home Capital to enhance its image to originators. “PriceMyLoan allowed us to project a much larger image as a company,” Hawkins said. “As a full service ASP solution, all system maintenance and hosting are handled by PML, reducing IT costs and minimizing errors…We don’t need to keep an entire IT staff on-site. We don’t have to build and maintain our own investor guidelines. That’s all taken care of for us.”

The automation of product guidelines and matrices allowed Home Capital to broaden its portfolio of offerings and adapt to changing market conditions, especially important in today’s mortgage environment. “Our wholesale AEs and retail loan officers are able to obtain accurate pricing and programs — even if they aren’t experts in each different type of loan product,” Hawkins said.

As nonprime lending has diminished, Home Capital was able to quickly add conforming, government and Alt-A products to make up the difference. “We’re much more nimble,” Hawkins said. “In a matter of days we adjusted our product mix to reflect what is currently in demand. Before, it would have taken us weeks or months to make the transition.”

Hawkins said Home Capital is convinced that PML has transformed its business and allowed them to be more competitive, both in the short term and the long term. “How can we offer higher quality loans with less overhead? I think that’s the bottom line,” says Hawkins.

Since deploying PML, Home Capital has reduced production costs by more than 35 percent per loan. “We’re always trying to achieve more efficiency, and that’s what we have been able to do,” concludes Hawkins.

(Has your company solved a work challenge through technology? MBA Tech NewsLink accepts case studies that document challenges, steps taken to address those challenges and documented results. Submit inquiries to Mike Sorohan, editor, at msorohan@mortgagebankers.org. Case studies published in MBA Tech NewsLink do not connote endorsement of any particular product, technology or process and are presented for information purposes as a benefit to MBA members.)
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MISMO Trimester Workgroup Meeting Hotel Deadline Aug. 29
Morrison, Carrie
The next MISMO Trimester Workgroup Meeting, sponsored in part by Midland Loan Services, Mortgage Cadence and Stewart Title Guaranty, will take place Sept. 17-20 in Houston. The deadline for hotel reservations is next Wednesday, August 29.

To view the daily meeting schedule, visit http://www.mismo.org/files/mismo/MISMOSeptember2007DailySchedule.pdf. To view the schedule as a grid, go to http://www.mismo.org/files/mismo/MISMOSeptember2007ScheduleGridView.pdf.

Meeting Registration
To register for the meeting, go to the MISMO Online Store (http://store.mortgagebankers.org/shome.aspx?SKIN=MX) and click on MISMO September 2007 Trimester Meeting under Upcoming Events. On the following page, click Register. If you have registered for MBA events before, you will need to enter your username and password previously provided to you. If you are a new online store user, you will have to set-up an account to register.

After logging in and selecting the meetings you would like to attend, press Finish at the bottom of the page. The next page will list the meetings for which you are registering and will give you the opportunity to make any updates to your selection. After verifying your choices, check out. You will once again be asked to confirm your order and you must press SUBMIT at the bottom of the page to complete the registration process. If you do not finish this last step your registration will not be captured. After your registration is complete, you will then receive a confirmation e-mail. Please verify all information is correct and contact Carrie Morrison at cmorrison@mortgagebankers.org if anything is incorrect or if you do not receive an e-mail confirmation.

If you plan on registering multiple attendees at once, contact Carrie Morrison directly before doing so. The system will error out if one or more of the attendees are not already in the MISMO database.

MISMO Non-Subscriber Meeting Fee
for MISMO non-subscribers there is a $395 per person meeting fee. You can consider becoming a MISMO subscriber. By joining MISMO, your organization is entitled to full subscriber benefits, including free registration for all MISMO trimester meetings. To join MISMO, download the subscription application at http://www.mismo.org/files/mismo/MISMOApplication.pdf.

Meeting Facility:
Hotel Derek (http://www.hotelderek.com/index.cfm)
2525 West Loop South
Houston, Texas 77027
Telephone: (713) 961-3000
Fax: (713) 297-4393

Room Rate
The room rate is $154/night for a single or double. You may make your reservation by calling (866) 292-4100. Please specify you are with the MISMO trimester workgroup meeting to get the group rate. To make hotel reservations online, please go to the MISMO reservation page (http://www.hotelderek.com/reservations/reservations_frame.cfm?hotelid=1433), click on Group Reservations (a hyperlink under the Check Availability button) and then enter the group password MISMOT. The room block is closing earlier than usual on August 29th, so please make your reservations as soon as possible.

Reservations must be canceled 48 hours in advance of your scheduled arrival day to avoid a one night's stay penalty.Please note, meeting registration does not reserve hotel accommodations (and vice versa).

Hotel Amenities
The hotel offers the following amenities:

  Complimentary high-speed Internet access
  500 miles on United Airlines for each stay
  Free local and 800 access phone calls
  Business center
  In-room FedEx supplies
  24-hour fitness center
  Relaxation outdoor pool
  Spa treatment suite
  Complimentary transportation within a three-mile radius

The hotel also houses world-renowned restaurant bistro moderne, which serves contemporary French bistro creations with a local Texas touch presented by star chef Philippe Schmit.

Nearby Attractions
The Hotel Derek offers easy access to a full-range of Houston attractions, the central business district, museums and restaurants. The hotel is adjacent to the upscale neighborhoods of River Oaks, Tanglewood and the trendy Uptown area. It is only seven miles west of Minute Maid Park and the Toyota Arena.

Among sites located in Houston include:
 
  The Galleria
  Johnson Space Center
  Bayou Place
  Houston Arboretum
  Houston Zoo
  Houston Downtown Aquarium
  Contemporary Arts Museum
  Museum of Fine Arts
  Bayou Bend Collection and Gardens

Parking
The hotel does not offer self-parking. Day valet parking is $6 and overnight valet parking is $15.

Airport Transportation
You have two options flying into Houston. The Hotel Derek is located 26 miles (30 minutes) from George Bush Intercontinental Airport (IAH) and 16 miles (20 minutes) from William P. Hobby Airport (HOU). Cab rides from Bush are estimated to cost $45/one-way and from Hobby $35/one-way. For driving directions to and from the above airports, visit http://www.mismo.org/files/mismo/DrivingDirectionsHoustonSeptember2007.pdf.

If you have any questions regarding this meeting, please contact Carrie Morrison at cmorrison@mortgagebankers.org or (202) 557-2797.
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Tech Briefs
Palaparty, Vijay
Zenta Provides Business Support for Appraisal Execution Platform
Zenta, New York, a business and knowledge process outsourcing company, will provide business support for New York-based Cushman & Wakefield’s Appraisal Execution Platform. Zenta will support the real estate cash flow process that integrates with Cushman & Wakefield’s web-based property valuation application, Appraisal Builder.

The system will enable employees to build reports and store data in a central data warehouse, while integrating third party data into a single platform. Cushman & Wakefield appraisers will collect source information and the Zenta team will prepare an initial cash flow model. The Cushman & Wakefield appraiser will conduct a second cash flow audit to overlay additional assumptions and cash flow parameters, a process that takes three days to complete. The new system aims to increase appraiser productivity and ensures quality by incorporating two levels of review.

Cross County Federal Savings Bank Implements OnBase Online
New York-based Cross County Federal Savings Bank, a mutual savings bank with $359 million in assets, has implemented Cleveland, Ohio-based Hyland Software Inc.’s OnBase OnLine and its software as a service product. Cross County implemented OnBase in its seven branches in Brooklyn and Queens to automate internal reporting processes, control data access and security and provide connectivity between branches.

OnBase is an electronic content management software suite with applications that include document imaging, workflow, electronic document management, COLD/ERM and records management. OnBase allows financial institutions to manage all digital content, including scanned paper documents, e-mails, faxes, print streams, application files, e-forms, web content and multimedia files.

Platinum Home Mortgage Upgrades Mortgage Origination System
Platinum Home Mortgage, Rolling Meadows, Ill., upgraded its mortgage origination system to Milwaukee-based Metavante Corp.’s Mortgage Loan Origination Studio software. Platinum will use the MLOS system for origination, processing, underwriting and closing functions. The web-based technology will be available to Platinum users, delivering access from anywhere using an internet connection.

The MLOS software aims to help companies eliminate the cost of distributing and maintaining desktop software on its originators computers and helps reduce risk associated with applications installed on laptops.

Online Financial Group