A study by TowerGroup and Frank Eve Consulting suggests that greater website functionality is critical to speeding up the lending process.
When it comes to the internet, most of the headlines have to do with online direct to consumer lending. In 2002 consumer direct web, mail, and phone mortgage lending accounted for approximately 7% of total UK gross lending volume. But business to business mortgage lending accounted for far more.
As can be seen in table 1, in contrast to online consumer lending, online business to business mortgage intermediary lending accounted for 20% of gross lending since the intermediary market was approximately 40% of gross lending and about half of those transactions occurred online. Technology-driven business process reengineering and online intermediary lending was a driver of lender operating efficiency as total gross lending volume increased 82% from £119.9bn in 2000 to £218.6bn in 2002.
Changing the rules: Regulation will have far reaching consequences for lenders, intermediaries and insurers from October next year. This is especially true for those intermediaries who continue to conduct business manually (research suggests that as many as one in four brokers do not yet conduct business online). These firms will have little time to respond to changes in processes and in the structure of the mortgage and insurance markets.
Approximately 13,500 mortgage intermediary firms will be subject to FSA regulation. Estimates are that a quarter will choose direct regulation and three quarters will become appointed representatives of principal firms. An AR in the insurance market will have to be an AR in the mortgage environment as well. A firm cannot be an AR for insurance and directly regulated for mortgages. This means that considerable consolidation will occur in the intermediary market and more broker networks will develop. These will be responsible for the regulation of their appointed representatives at point-of-sale. It is only through technology that these networks and lenders will be able to control and audit product selection and advice in a costefficient manner.
To look further into these issues, TowerGroup and Frank Eve Consulting conducted the 2003 Mortgage Lenders' Intermediary Web Sites Benchmark Study. The results give an insight into the methods available to enhance the point-of-sale monitoring of brokers. The study reports on 12 UK wholesale mortgage lenders' strategies, systems and support for broker lending. Study participants include abbey, Alliance & Leicester, Birmingham Midshires, Chelsea, GMAC-RFC, Halifax, Intelligent Finance, Mortgage Express, Portman, Platform, Skipton and SPML.
Table 2 shows the lending metrics for this year's participants, who accounted for 45% of the £219bn gross lending in 2002 – an estimated three quarters of the UK intermediary mortgage lending market.
The primary objectives of the study were to help lenders validate their online strategies and to provide recommendations for information technology spending for website enhancements to better serve mortgage intermediaries. The study should also assist software vendors in their development of sales and support of systems for intermediaries and lenders.
Broker sites and best practice: In 2003 many intermediary websites matured in terms of systems functionality and usage. The success of leading wholesale lenders in sourcing loans from intermediaries by electronic means has led virtually every top 20 UK lender to set up an intermediary website. The largest bank websites and leading specialist lender sites tend to have the most robust functionality. Some building society sites are newer and lack certain functionalities but they generally represent good initial offerings and point to strong future investment in the wholesale channel by this lender segment.
In the study we identified the scope of website functionality under five main categories:
Logon and overall site design
Loan application submission and processing
Sales and internet strategy
Information technology platform.
To prioritise functional requirements we then sorted website functionality into one of three categories to determine whether it is a basic requirement or will provide the lender with a competitive advantage:
Basic threshold requirements: Minimum functionality that is necessary for the website to provide minimal broker support.
Current best practices: Functionality that provides better than average service to the intermediary compared to other broker websites.
Emerging best practices: The most advanced functionality currently in production or in development – which will be considered best practise in 18 to 24 months.
Table 3 priorities the functional requirements for intermediary website analytical content. These are:
Calculators: The lenders surveyed take varied approaches to providing calculator functionality. Some provide both online and offline calculators on CD. Others provide no calculators at all. The decision to offer an online calculator depends not only on the lender's IT budget but also on brokers' preferences. Some don't mind doing most of their business online and have reliable, high speed internet access but others prefer to work offline for certain mortgage sourcing processes.
Product selection tools: Each website surveyed provided access to complete loan product summary information and loan rates via printable PDF files or web pages.
Most lenders had all loan product guidelines and loan rate tables online. A threshold requirement is to enable unregistered intermediaries to view the standard products even if only registered intermediaries can view the exclusives.
The ideal product selection system matches the loan applicant's profile to the lender's loan products by product type (fixed rate, standard variable, etc), and loan purpose (home purchase, remortgage and refinance), then transfers the data to the AIP request form or loan application.
Loan application: Application completion and submission is a time-consuming process. Online loan applications enable the intermediary to begin work on the loan file more quickly, eliminate re-keying of data and online data editing.
Lenders have different philosophies with respect to online loan applications. The most basic intermediary websites simply have a blank PDF loan application that the intermediary prints out, completes manually and submits via mail or fax. The lender must then re-key the data into its internal processing system. The next level of automation is to provide an offline data capture tool on CD. This option is effective for intermediaries who don't want to pay internet charges while capturing data but don't want to re-enter data either. The most sophisticated online loan application forms pre-populate the loan application from an online acceptance in principle process.
Table 4 shows the functionality for loan application submission and processing.
Acceptance in principle: Nearly all lenders consider automated AIP to be critical for their websites. Others encourage intermediaries to skip the process altogether and submit a loan application. This strategy can be effective if the intermediary is confident of loan approval and the borrower is willing to wait for a firm mortgage offer – and if the lender's underwriting turnaround time is fast. Some lenders have a two-pronged strategy, providing both offline and online AIP solutions.
The predominant strategy however, is to provide an online, real-time AIP form. Following submission, the system checks the borrower's credit rating against a credit bureau, an internal underwriting scorecard, and possibly the lender's internal customer database. In this respect real-time access to the Experian and Equifax credit bureaux and the use of rules-based decision systems from Fair Isaac are critical to providing the intermediary with a fast preliminary underwriting decision.
Case tracking: Case tracking functionality cuts the labour and time required for the lender to respond to repetitive and time consuming enquiries. Case tracking also reduces the intermediary's frustration at having to wait for answers and important information.
Although this self-service approach can push more work back onto the intermediary, case tracking provides greater immediacy for both lender and broker who can devote the time they once spent on the phone to more complex issues.
In most tracking systems intermediaries can track their cases online via personalised, secure web pages that provide the same real-time information as is in lenders' internal case-diary system. The most sophisticated systems enable the intermediary to set up different access levels so that managers can see the cases for each intermediary, automatically display a list of active cases and provide sophisticated search and filter tools to view the loan pipeline by application number, loan status, submission date etc.
Information technology: The technology platform and the systems architecture are the key to functionality. Newer enterprise application integration frameworks separate the end user interface from business application programs and customer and system databases. This three-tier architecture of user interface, business application and database is essential to internal processing efficiency and to developing a website that offers best practise functionality.
Multi-tier systems also make it easier for the IT department to integrate external systems such as credit bureaux and manage systems and process workflow.
Mortgage trading platforms (exchanges): Trading exchanges and platforms are already well established in securities trading and other markets but are relatively new in mortgage lending. The basic concept revolves around aggregating mortgage intermediaries and attracting wholesale lenders that are willing to pay an exchange fee lower than the cost of acquiring brokered loans via wholesale sales representatives.
Key issues this study looked at include how mortgage trading platforms or exchanges compete with or complement individual lender websites for intermediaries and how the platforms are likely to evolve over time. Most lenders would really prefer to maintain their own brand and distribution channel to an increasingly loyal following of intermediaries and not be subjected to greater product and pricing competition on a mortgage trading exchange.
Nonetheless, the Mortgage Brain and Trigold trading platforms can play a role as in automating business to business mortgage lending by providing two-way integration with intermediary websites and lender back office systems.
Their future as dominant mortgage trading platforms is, however, less clear. The trading platforms still need to improve integration to facilitate data transfer between lender and intermediary. They also need to refine the accuracy of their lender mortgage product information and must add functionality to facilitate functions such as property surveys and loan completion activities.
Otherwise they won't grow into true trading exchanges like those for stocks where transaction, settlement and reporting are undertaken via the same facility.
UK vs US wholesale exchanges: In the US, most wholesale mortgage exchanges and trading platforms (IMX Exchange, LoanTrader, MEL, Pedestal Capital, and UltraPrise) have failed while single-lender websites have flourished. The only firm in the first category to survive the dot-com shakeout is Ellie Mae, which is similar to Mortgage Brain and Trigold in that it also provides a mortgage sourcing system.
Table 5 shows that approximately one-third of all US mortgage brokers use Ellie Mae's sourcing systems.
Ellie Mae's platform links mortgage brokers, lenders and third-party service providers. Although the company has yet to control a significant percentage of wholesale loan flow and third-party settlement services orders (credit, title insurance, appraisal, closing documents, mortgage insurance) beyond ordering credit reports and automated underwriting decisions, it has begun to earn significant per loan transaction fees for transmitting loans to lenders.
Conclusions: Intermediary websites have become a mission-critical technology for processing efficiency in the field of mortgage lending.
We feel that this trend will continue until the vast majority of intermediary loans are completed online.
The primary message for intermediaries and lenders is that greater website functionality will lead to increased customer loyalty, site usage, lower processing costs and, ultimately, competitive advantage.
Greater technology use and operational efficiency will play a large part in separating the winning intermediaries and lenders of the future from those whose business and technology models make it more difficult for them to compete in terms of price and service.
Craig Focardi is a senior analyst in the consumer credit practice at TowerGroup.
Frank Eve is director of Frank Eve Consulting.