Posted by Gopi Krish | General Manager | Wipro Limited | Date: 2 Oct 2015

Evolution is a difficult concept for most – experienced but not fully understood. The residential lending experience is a telling lesson in Darwinism and the concepts of evolution. Market factors and the lending risk landscape resulted in a very different marketplace for financial institutions. This is Darwinism at its finest; great lending institutions evolve with attributes that help them to survive and grow. The institutions that don’t assimilate these traits will be rendered obsolete and wither away.

What are these risk dimensions? How are organizations evolving in response and in anticipation?

Regulation: The more we see of regulation the less we know about it. Regulation has been prevalent in the mortgage industry ever since the first mortgage loan was produced. The financial crisis escalated things to a new level with Dodd Frank setting the stage. New rules, new guidelines and even a new regulatory entity — the Consumer Financial Protection Bureau (CFPB)—have emerged with the end goal of protecting the consumer and preventing future calamity. Though the crisis is steadily fading away in rear-view, mortgage still accounts for a disproportionate share of financial industry complaints. Actions against lenders, servicers, investors and other mortgage service providers are frequent and debilitating for these participants. Businesses that develop a tough core of compliance and risk management will make the grade. This calls for intensive risk monitoring, dedicated risk, and compliance infrastructure including oversight programs, automated and high availability systems, analytics, robust audit mechanisms and an active knowledge base.
Thanks to pervasiveness of social media, regulatory sanctions/ consent order announcements will instantly make their way across a wide audience. Adverse publicity can come from an angry customer’s Twitter message/ Facebook post that went viral instead of regulatory action, thus triggering attention from regulatory watch dogs. It’s a vicious cycle that can be set in motion by a simple clerical error. The damage to your reputation can be lasting if you don’t manage this proactively. Organizations evolve by building well-defined, informed and compliant solutions for complaint and issue management. Social media listening, cognitive intelligence/ machine learning, and a single customer view are few of attributes that they will need to develop.

Quality: It is the survival of the fittest out there in the mortgage jungle. This is the universal paradigm for every single participant in the mortgage industry – whether you are the borrower, broker, lender, servicer, issuer, or investor. The rules apply at the portfolio level or right down to a single loan. Marketability of a loan and portfolio is at risk in post crisis era with the lack of appetite for private label and high regulatory risk. There is a flight to quality and lower tolerance for risk across the board. Finding borrowers with the proper risk profile to issue credit is no simpler than finding institutions with the right risk tolerance to partner with. Add in the market's low tolerance for loan defects discovered post-close, and you have major implications for your company's bottom line. Finally, the ambiguity on interpretation of new regulations confounds the process even more and decreases certainty. The SEC’s new Reg AB II rules establish a higher standard and all participants need increased levels of internal controls, more efficient and automated solutions, and refined process models to deliver quality results. Quality maketh the new order.

Marketing: Previously, the way mortgage products were marketed and sold wouldn't even register as an afterthought. In the wake of expanded regulation over the last several years, this has taken a dramatic turn. The myriad of new regulations have provisions impacting mortgage marketing, including TRID, ECOA, Safe Act and FCRA. From the tight timelines by which lenders must deliver disclosures to the borrower to the collection and storage of a borrower’s Personally Identifiable Information (PII), every type of business in the mortgage industry must deliver to the industry playbook.  Proactively flagging operational risk will ensure that lenders are meeting regulatory requirements and building trusted relationships. Automation, training and quality control are essential factors for limiting errors in marketing.   

Darwinism expounds on the evolution of species through natural selection.  The mortgage industry is clearly no stranger to this concept. Recent history is littered with examples of the casualties from the mortgage crisis and its aftermath. Very few of the top 20 originators in 2006 still remain in business and 5 of the top financial institutions in 2006 exist only in the history books. Financial institutions that continue to learn and evolve in the face of ever-changing risk have the best chance of emerging successful in the battle for “Survival of the Fittest.”