24 minute read
Reducing False Claims Act Risk in FHA Lending
By Bob Broeksmit, MBA
Important aspects of the 2020 housing outlook, in addition to demand, supply, and rates, are the various changes to the regulatory environment that will affect lenders and borrowers.
Improvements to FHA’s defect taxonomy, the method used to identify defects at the loan level and the remedies for such shortcomings, are one of the more positive developments, particularly for first-time homebuyers and low- and moderate-income borrowers.
These changes are part of a larger effort by HUD to revise the loan review process and simplify the certifications that lenders make in connection with the FHA program in order to reduce the risk of False Claims Act enforcement for immaterial loan origination errors.
MBA has championed reforming the taxonomy for some time. Our posture has been that FHA does not need new rules and regulations to govern our industry, but rather more clarity and transparency in the ones that are already on the books.
Since the crisis, the legal and reputational risks associated with originating FHA-insured loans have substantially increased through hyper-technical enforcement of FHA’s lending requirements, driving many lenders –, particularly banks, away from offering FHA loans to their customers.
To address these concerns, the just-released final defect taxonomy includes specific remedies for various tiers of defect severity. This will allow lenders to understand in advance the remedies for different types of loan defects.
Not only did HUD work to make changes to the loan review process, but last October, HUD Secretary Ben Carson announced a joint memorandum of understanding (MOU) between HUD and the Department of Justice (DOJ). This MOU stated that the DOJ would defer primarily to HUD’s administrative proceedings to evaluate and remediate loan origination errors, rather than pursuing the draconian damages allowed in the Civil War-era False Claims Act. It also provided for closer coordination between HUD and the DOJ throughout the investigative process.
In addition, HUD revised the certifications that lenders provide annually and on each loan. The changes to the loan-level and annual certifications more closely link them to relevant regulations, as opposed to every requirement found in the FHA Handbook. They also stress that the underwriting process should allow for judgment and discretion on the part of underwriters. Lastly, the loanlevel certification ties into the defect taxonomy as the remedy for any defects, and thus limits the risk that errors will be adjudicated through the False Claims Act.
Taken together, these changes represent a significant effort by HUD to resolve longstanding concerns about exposure to False Claims Act penalties, and to bring lenders back to the program. HUD took steps to make these changes durable by providing lenders with some certainty that a future administration could not easily return to the indiscriminate use of the False Claims Act to pursue lenders for immaterial defects on FHA loans. While individual lenders must consider when and how to return to FHA lending or increase their participation in the program, these reforms represent very positive progress in restoring clarity and certainty.
Housing market stability is strengthened when key programs like FHA are supported by a deep pool of participating lenders, depository institutions, and independent mortgage banks alike. I commend HUD for these steps and encourage them to continue their efforts in other areas, particularly on FHA servicing reforms. MBM
A Cloud of Certainty for Loan Servicing
By Andy Morrise, LoanPro Software
Loans are popping up everywhere. Whether giving a loan. Don’t get me wrong, choosing and it’s large lenders offering new products, tech attracting the right borrowers is an important step companies looking for a new way to improve of the process, but it’s far from the only step. an old practice, new startups, or known- Companies downplay the importance of loan brands trying to monetize a user base, more and servicing. They put it on the back burner and more companies are moving towards loans. decided they’ll “get to it when they get to it.” But,
And lending is a great business model. A loan after the excitement of acquiring a customer has is more than a single transaction, it is a long-term passed, the reality of collections, loan management, revenue stream. As someone who has worked in and customer service sets in. The reality I’ve seen is the lending industry for over 10 years, I’ve seen that giving a loan in a clever way, while important, lenders come and go. I’ve worked with companies can give a false sense of confidence. But, if your that were a flash in the pan, raising a lot of capital “secret sauce” is optimum loan servicing, your and deploying it quickly, only to fail after a few lending company will be perfectly scalable. A years. I’ve also seen companies base their entire servicing focus will help you establish a linear business on a lending strategy, but change their relationship between the more money you put in fundamentals as they learned through growth. and the more money you get out, turning your
As a lender, it’s tempting to focus on the lending into a cash machine. beginning of the lending process. If you ask most So, how can you increase transparency in lenders, the thing that sets them apart from the loan tracking, streamline your lending processes, others, their “secret sauce,” falls into the customer cut down on personnel costs, and increase your acquisition, underwriting, or decisioning steps of collections? One way that lenders are achieving
these important results is through cloud-based loan servicing software.
Cloud-based software has the ability to make all loan information available anywhere the Internet can be accessed. Data can be consolidated and organized well. A loan account can show the borrowers on a loan, their references, credit score, payments, amortization, uploaded loan documents, communication history, downloadable forms, and more. A loan file should be a one-stop shop for information about that loan. If loans are securitized and sold, all this data should go with them, making them more valuable to boot.
At its core, loan servicing software should accurately calculate, record, and track loans. When done in the Cloud, your software becomes a reliable source of truth. Input to the software can come from any employee or even borrowers themselves, without duplicating work or corrupting files. Because of this, cloud-based loan software tends to add transparency in lending.
One of the biggest questions a lender asks when looking at software is, “How will this fit in to my current processes?” Traditional loan servicing, using a local system, can be difficult. Traditional software has to be installed on each computer where it’s used, or it has to be installed on the company network and accessed remotely, which makes it much harder to make loan servicing a collaborative effort. Instead, loans have to be worked on by one person at a time and coordination between coworkers requires a lot of effort and organization.
Cloud-based loan servicing has become recognized as a better solution because it’s easier for a company to keep existing processes while using software as an organized system of record for loans. A cloud-based system can be used out of the box, without the need to install software.
Most modern loan management systems (LMS) have recognized that lending is a process, not an event. A good LMS will offer customization and workflow automation. If you’ve ever worried about how you would handle and an SCRA interest rate adjustment, a bankruptcy, a write off, or any other scenario that deviates from the happy path of lending, then a good cloud-based LMS could make a marked improvement to your servicing.
One of the biggest advantages to cloud-based servicing is that cloud-based software is connected software. Most cloud-based solutions make it easy to connect with payment processors, data providers, and communication services. Lenders appreciate the ability to take payments, look up bankruptcy status, or follow OFAC compliance rules in the same system where the rest of their servicing is done.
If your employees spend significant time sending email, SMS, or print communications to your borrowers, you should consider the advantage of automating these things using a cloud-based LMS. Most cloud-based servicing software connects to one or more of these services, and will perform tasks like sending loan statements automatically, without any user input.
I worked with a company a few years ago that decided to transition to a cloud-based solution. They had been using a desktop system that was first developed when personal computers had just started to gain traction in the market. This company had been operating for years on a system that provided little transparency. Notifications were routinely ignored because reconciling the work of multiple employees on a single loan often led to small errors that were considered unavoidable.
When this company extracted its data from this old system and imported it to a cloud-based software, they discovered $32,000 in outstanding principal, interest, and fees that they didn’t realize they had, and hadn’t been collecting! Their old way of accepting payments, which had taken 20 hours of employee time each month, now took less than an hour. Everything became visible, and customers were regularly contacted with no ongoing effort.
If you are a lender trying to take your lending to the next level, consider using a modern, cloudbased, loan servicing software platform. Let your vendor worry about uptime, data backups, and software improvements. Get the scalability, transparency, connectivity, and central source of truth that will elevate your servicing and make your business more profitable. MBM
Today’s Mortgage Solutions for Yesterday’s Problems Today’s Mortgage Solutions for Yesterday’s Problems Cloud-Claims CLOUD-CLAIMS Cloud-Claims leverages the information in the host servicing system to insure that the claim Cloud-Claims is a thin-client based, service is complete and filed within the bureau neutral application that captures data specified timeframe. from any mortgage servicing system and feeds a relational database that automates the All Claim Typesclaims preparation process. Open Imports Cloud-Claims leverages the information in the host servicing system to insure that the claim is complete Track Book Loss and filed within the specified timeframe. Reasonable Diligence All Claim Types • Open Imports • Track Book Loss Compliance EngineReasonable Diligence • Compliance Engine EDI Deliverable • Pub & Posting EDI Deliverable Pub & Posting The Cloud-Claims Difference
System Pedigree
Cloud-Claims Cloud-Claims
Complete A-Z Automated Claims Processing Complete A-Z Automated Claims Processing • • FHA (01-07 including Supplementals & Incentives)FHA (01-07 including Supplementals & Incentives) • • VAVA • • USDAUSDA • • • Conventional (571, 1073, 104SF) Electronic gateway to HUD VAN Conventional (571, 1073, 104SF) • Electronic gateway to HUD VAN
Automated Processing Features
• Book Loss Claim Categorization Automated Processing Features • • Reasonable Diligence Timeline Management Book Loss Claim Categorization •• Escrow Balance at Default Reconciliation Reasonable Diligence Timeline Management Claims Pre-Created Upon Data-Load • Escrow Balance at Default Reconciliation • No Data EntryClaims Pre-Created Upon Data-Load •• Exception Base Process No Data Entry Multi Services / Multi Client Design • Exception Base Process • Handle all Claims and Clients in one environment Multi Services / Multi Client Design •• Distributed Work and Client Review Handle all Claims and Clients in one environment •• Distributed Client Reporting Distributed Work and Client Review Claim Intelligence Built into Rules Engine • Distributed Client Reporting • Designed and produced by industry experts • Rules Engine Ensures Compliant Claim Claim Intelligence Built into Rules Engine • • The Cloud-Claims Difference Automated claims process through use of validation rules Provides uniform interpretation of guidelines • • • Exceptions Described in Novice Terms Rules Engine Ensures Compliant Claim Exceptions Described in Novice Terms •System PedigreeProcessor intervention is only necessary when exceptions Providing Lift to the Business • Designed and produced by industry experts are identified by the system One Place for all Processing Providing Lift to the Business • Automated claims process through use of validation rules • Provides uniform interpretation of guidelines • Workflow management allows for appropriate distribution, tracking, resolution and quality control of identified exceptions • Single Data Source • Multi Client One Place for all Processing • Single Data Source • Processor intervention is only necessary when exceptions are identified by the system • Workflow management allows for appropriate distribution, tracking, resolution and quality control of identified • All major claim types electronic filing is supported System Advantages • Multiple Servicing Platforms • Offer Client Distributed Claim Functions • Distributed Reporting Efficiency in Claim Processing • Multi Client • Offer Client Distributed Claim Functions • Distributed Reporting exceptions • All major claim types electronic filing is supported System Advantages • Multiple Servicing Platforms • The most comprehensive Rules Validation engine in the industry today • System is thin, flexible and multi-device enabled • The most comprehensive Rules Validation engine in the industry today • System is thin, flexible and multi-device enabled • Predictive Loss Analysis can forecast the true amount that will be paid in the claim • Dynamic Batch Reporting • Bi-Directional EDI Enabled • Work on Exceptions • Decrease Claims Processing Time • Simple Review vs Claim Creation • Consistent / Common Interface (Resource Load Balancing) • Handling Claims in Process • Eliminate Extensive Training • Significantly Decrease Start Up Time Efficiency in Claim Processing • Work on Exceptions • Decrease Claims Processing Time • Simple Review vs Claim Creation • Consistent / Common Interface (Resource Load Balancing) • Handling Claims in Process • Eliminate Extensive Training • Predictive Loss Analysis can forecast the true amount that will be paid in the claim • Significantly Decrease Start Up Time • • Dynamic Batch Reporting Bi-Directional EDI Enabled 1-844-244-3100 • Expert Level Work with Entry Level People Through System Intelligencewww.vat-ms.com • sales@vat-ms.com
By Jane Mason, Clarifire
I’m increasingly finding mortgage servicers at risk of losing customers and their competitive edge by focusing too intently on applying bandaids to specific issues to manage cost control and regulatory compliance, when they really should be looking to the future and pursuing process innovation. And one of the best ways to achieve this goal is through cloud computing and workflow automation.
Cloud computing has already made its mark on our industry and is currently paving the way for servicers to finally let go of owning and operating legacy infrastructures. At the same time, the digitization of workflow is transforming how servicers do business. It’s the convergence of these two technical innovations, however, that has the greatest potential to lift mortgage servicers to new levels of efficiency in the new decade. THE CLOUD COMPUTING REVOLUTION
Based on a recent survey of financial institutions, cloud computing is number four on the Forbes magazine’s hot technologies list, and approximately 25 percent of those surveyed planned to implement or make further investments in cloud computing in 2020. Of this subset, 40 percent have already embraced cloud computing. The survey also revealed that the current motivation for financial institutions to enhance their cloud computing efforts is driven by three key factors: The ongoing adoption of artificial intelligence (AI), the management of data analytics through “as-a-service” open platforms, and, the desire to improve competitive edge and consumer delivery through integration, coupled with workflow automation.
Mortgage servicers have only scratched the surface in this area. Whether it’s because they have
been held back by restricted budget resources or a lack of executive support, many entities have fallen way behind when it comes to cloud computing. Yet, the benefits are overwhelming. In an industry encumbered by legacy systems, cloud software creates autonomy from antiquated infrastructures by allowing users to pick and choose the services they want and access and pay for them only when needed.
There are three primary “as-a-service” cloud computing models in use today: Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS). All three cloud services are easy to access, maximize data utilization, and support complex business intelligence. SaaS, however, is the most widely used type of cloud service because it alleviates so much of an organization’s internal technology burden by running most applications through its web browser. The independence that SaaS solutions has given mortgage servicers has been revolutionary in our industry because it has allowed organizations to evolve technology and security strategies while maximizing productivity and cost efficiencies. THE DIGITIZATION OF WORKFLOW
While cloud computing is freeing servicers from legacy IT infrastructures, digital workflow automation is helping them automate and transform operational processes far beyond what they have been able to achieve a few short years ago. With the digitization of workflow, mortgage servicers can leverage their data in a sophisticated manner to evolve rules management and decisioning, as well as embrace AI and machine learning, which immediately impacts operational efficiency.
The end result of digital workflows is that servicers no longer must struggle with multiple moving parts. By letting cloud computing and digital workflow automation do the heavy lifting, organizations now have the freedom to do what they do best. The benefits are enormous. Most importantly, these innovations enable servicers to optimize their existing processes and systems in a concise manner while supporting complex automated decisioning that improves productivity, cost efficiency, and the customer experience.
Workflow digitization enabled through cloud computing can strategically reshape business processes and service offerings plus they can be implemented easily and cost-effectively. This distinctive blend of these technologies has the potential to transform a company’s internal
strategies by organizing complex processes, implement straight-through processing, systemically drive data, images and intelligence throughout the organization, and support change management. It can also revolutionize the external customer experience by enabling mortgage borrowers to gain 24/7 access to loan data and processes available in a mobile, self-serve mode through SaaS offerings. However, servicers need to seize this opportunity to leverage these innovations now if they wish to gain a competitive advantage.
THE COMBINATION OF INNOVATIONS IN ACTION
Over the coming decade, the convergence and practical applications of cloud computing and digital workflow automation will be profound for mortgage servicers. From looking at the industry’s current major obstacles, from regulatory change to cybersecurity to borrower satisfaction, one can see very clear examples of how digital workflow in a cloud computing environment can help significantly improve operational efficiency in the following areas. Transfer of Servicing – For many years, the servicing transfer process has been gripped with errors, beginning with the onboarding process. With cloud computing and digital workflows, servicers can better manage the exception process using complex decisioning that identifies issues as they occur and pushes data to identify, notify, and correct errors. Borrower Satisfaction – One of the most talkedabout areas in need of improvement in our industry is the borrower experience. Cloud computing and digital workflows can significantly improve customer satisfaction levels by giving borrowers greater transparency, 24/7 access to information, and the ability to interact and gain real time responses to their needs on their own. In fact, these innovations will transform how servicers and borrowers interact entirely. Disaster Recovery – A never ending roller coaster, disaster recovery and relief have consumed servicing resources over the past several years at huge costs. Trying to stay abreast of unpredictable events and their devastating impacts has made default servicing and modification options for impacted borrowers a constantly moving target. Yet, cloud technology and workflow automation can greatly streamline the delivery of resources to distressed borrowers when they need them most.
As we move into the new decade, digital disruption will continue to impact every aspect of our industry, including the pursuit of a strong, strategic approach to business transformation and greater operational efficiency. There are unprecedented demands for innovation being placed on servicers, amidst constant regulatory change, fluctuating default modification requirements, and rising costs to service. For this reason, the need for digital workflow automation has become crucial for success. Meeting these demands in a SaaS environment ensures servicers can immediately realign their processes as new issues are identified, then implement corrective actions, and streamline operational responses.
For most, the key is to envision workflow done differently using a sophisticated, configurable application, one that includes proven industry processes and features and facilitates the rapid deployment of complex business process management. When delivered in a SaaS environment, organizations can use these applications to select whichever capabilities they need, not just those available through their legacy systems. Servicers will also be able to gain the power to manage fluctuating default events, such as disaster recovery, as well as maximize opportunities to engage borrowers, and significantly improve internal processes from onboarding through payoff.
In order to future-proof their businesses, servicers need to stop applying band-aids and start thinking ahead. Ultimately, leveraging a combination of cloud computing through SaaS and digital workflow automation will allow servicers to focus and improve on their internal areas of expertise, while simultaneously achieving operational efficiency and standing out from the competition. And, they can end their reliance on legacy infrastructures, too.
Greater efficiency, lower costs, and a better customer experience, now that’s a future we can all get behind. MBM
Dream No More: Homeownership with Zero Down
By Todd Colas, VAT Mortgage Services
In the technology world, terms like Blockchain, the Cloud, and Distributed Networks are used as if everyone understands the meaning of them. This article attempts to provide a basic understanding of cloud-based solutions for the mortgage industry and provide some insight into the evolution of mortgage applications utilizing the Cloud.
One of the best ways to understand cloudbased application solutions may be to review the events which led to cloud computing and services. In the early years of mortgage servicing, most mortgage banking and servicing systems were operating on Big Iron, which is commonly referred to as mainframe computing. These large machines operated in large data centers where user terminals were hard-wired into the mainframes and nicknamed green screens. As you can imagine, this was very limiting, but also very secure because there was no external access. Most of these applications were developed in languages like Cobol, Fortran, Assembler, and other old-school technologies.
In the early to mid-80s, the next generation of computing was defined as client-server technology. Unlike mainframe technology, much of the data and calculations were performed on a local machine that connected to much smaller back-end servers. During this period, other technologies and languages began to emerge. The shift to move from mainframe to clientserver technology was slow to gain traction, especially since a major portion of mortgage servicing processing was done on mainframe systems.
Client-server technology did provide remote access accessibility to mortgagebased applications through terminal service solutions, which accommodated the function of green screens without being hardwired into a mainframe.
As advanced as this new technology had began to solidify. The development tools become, the mortgage mainframe servicing and technology to create client-server “like” systems were still pervasive. The reasons these applications on the web moved swiftly; technologies thrived are: (1) it would take an however, even with the dramatic change in overwhelming investment and time to redevelop application development technology, the overall these applications in some other technology, acceptance rate was still relatively low. The and (2) if something worked well for decades, mainframe applications still controlled banking why take the risk and try something new? and mortgage servicing for the same reasons
In the early to mid-90s, the Internet was they always had: stability and cost of migration. introduced. This shift in technology moved The next phase of technology is not applications from single-tier (mainframes) technology at all, it is the outsourcing of and two-tier (client-server) environments to services and software solutions. At this point, a three-tier environment. Now, you may be wondering, what is applications have turned into a “the Cloud?” For the purposes three-tier environment: (1) client The next phase of this article and as it relates to machine running through a web browser, (2) an application web of technology is mortgage servicing, the Cloud would typically be an application server communicating with the web browser, and (3) a database server communicating with the not technology at all, it is the (web-based software) running outside of your current IT framework and infrastructure. This application web server. The data traveled back-and-forth between outsourcing technology only requires a secure connection to the Internet and all three tiers. The limitations of of services capable of running on any secure remote usage and infrastructure costs changed overnight. New and software device enabled (PC/MAC, iPhone, Android, Tablet, etc.), typically computing languages started solutions. requiring some sort of additional popping up and web applications authentication. The Cloud can started to evolve. also run your own custom-built
During the initial phases of this new applications outside the corporate firewall in evolution, it was a whole new learning coordination with your internal IT resources. experience for application programmers. There are various types of cloud These software engineers had to adopt to a environments and techniques, but some of new way of developing software; however, in the most recognizable cloud-based providers the mortgage industry, mainframe technology are companies like Amazon (AWS), Microsoft, remained dominant, but now there was a new Google, IBM, Oracle, Alibaba, and GoDaddy. means of distributing data (mostly read-only There are also applications which run in a mode). private cloud, whereas the web application
In the mortgage servicing and banking is widely available to the Internet, but only industries, there is nothing more critical than accessible to an authorized set of users, like data security and mortgage compliance. The your bank account portal. You can view these new web technology was unfamiliar to most and kinds of services as “boutique applications.” brand-new applications were slow to mature. They are not an end-to-end solution for Some mortgage applications did come out mortgage servicing, but they represent a during this early period, but the mortgage portion of critical solutions which are not readily industry was slow to adopt them. available on the open market and intensive to
As we entered the new millennium, build and maintain. application technologies and databases At this juncture, you may be wondering,
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“What happened to those mortgage mainframe applications?” The answer is not too much. Software developers have written applications to push and pull data from the mainframe and mask it with a web front-end. These mainframes may never go away and are like an old reliable Volkswagen, nothing fancy, but they get the job done.
If your servicing operation utilizes mainframes, consider integrating those rich web boutique (cloud-based) applications with your mainframe database, while using your mainframe as the system of record. These cloud-based solutions can augment mainframe processes without disrupting the integrity of the database or attempting to extend out the mainframe functionality. External data can be captured, manipulated, and imported back into the mainframe at a relatively low cost and effort. It is perfectly normal to have part of your solution running in the Cloud and other parts running inside your servicing operation.
The Cloud is something to embrace; simply think of it as an environment in which applications are hosted and maintained by someone else, typically very technical individuals and state-ofthe-art hardware. There are many degrees of architect providing failover, recovery, up time, level of data security, and overall support, well defined in a Service-Level Agreement (SLA).
Pretty much any application developed in the last decade can run in the Cloud. In terms of cost-savings, the ROI of running it in the Cloud vs. internal solutions can be tremendous once you consider the security, networking, and database management resources required to run applications. I recommend that you proceed cautiously, but absolutely take advantage of both cloud-based applications and consider migrating some of your daily applications to the Cloud. Maybe start with something as simple as migrating one of your MS access applications.
I hope this article has been helpful and informative. There are many resources out there on this subject, and I encourage you to do your research and continually evaluate the pros and cons of cloud-based services, as well as the different types of cloud options. MBM
