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According to a survey released by The Electronic Data Interchange Association (EDIA) at year-end 1989, more than 7,000 companies in the U.S. are using some form of electronic data interchange (EDI). EDI has been around, in one form or another, since the early 1960s, but attracted serious interest across industry lines only in the past three years.

EDI essentially is the electronic (computer-to-computer) interchange of data required to complete a business transaction between two companies. Parties on both sides of an EDI transaction ("trading partners") mutually agree on the data necessary to evidence completion of a transaction. EDI then translates into a form of paperless business dealing.

The motivation to implement EDI lies in the precision and speed with which business may be conducted in an electronic medium. Orders, status inquiries, remittances and confirmations nicely lend themselves to EDI applications.

EDI software edits and checks for errors in the content of any transaction entering the system. The error-free data enters into the operational systems of each trading partner for order processing, accounting, management reporting or decision-making. Redundant data and error corrections are eliminated; freeing up labor resources, reducing the non-productive costs associated with exception processing and making transaction data available to management within nano-seconds. The mortgage industry is in the early stages of working with EDI.

Jane Abdunnur, vice president of marketing and business development for CC Pace Systems, a systems consulting firm in Fairfax, Virginia, expects the pace of EDI acceptance to accelerate. "The [mortgage] industry will adopt EDI as a fundamental element in conducting business. EDI is a movement driven by advances in technology that will have affected all the partners with which a mortgage banker trades. In order to communicate in the language of the day, mortgage bankers will be forced to convert to EDI standards," she says.

Abdunnur's point that EDI will become a cultural mandate is strongly supported by the EDIA study. EDIA reports that, "a primary reason companies get involved in EDI is formal or informal coercion by trading partners [usually customers]. Seventy percent of experts interviewed agreed that coercion was a primary motivator."

Abdunnur believes that a mortgage company's passive approach to EDI could be damaging. "EDI should be part of an overall I/S strategy. The rate at which EDI will be adopted will vary with the behavioral traits of each mortgage organization. One way to visualize EDI acceptance is by classifying company objectives. The `initiators' will introduce EDI early in order to improve earnings. A small group, the `facilitators' will streamline transactions in order to increase market share. Finally, the majority of firms, the `reactors,' will convert with the prospect of saving money."

Experts in EDI agree that individual firms need to understand and prepare for EDI. EDI is an industry issue generated through the universal evolution of technology.

Tom Colber, the partner responsible for EDI consulting at Price Waterhouse in Washington, D.C., sees the need for greater action on an industry-wide level. Colber observes, "The underlying question about EDI is how to improve the infrastructure of the industry. Improvement in the operating environment requires an extensive analysis of paper-based and manual procedures that today retard communicating between mortgage companies. The major business objective is to reduce turnaround times and to progressively improve the quality of information available to every firm in the industry. EDI is an important component in managing the total quality of how business is conducted."

Colber continues, "The nature of mortgage banking suggests that the adoption of EDI will develop in tandem with the implementation of image processing systems in the industry. The combination of image processing and EDI looks to be the solution for moving batches of loan files between industry trading partners. If standard data were to reside in a central depository, the problem mortgage bankers now have in handling the mass of servicing transfers would be all but eliminated."

Abdunnur concurs with Colber, "The blitz of servicing transfers has been impossible for operations people to accommodate. A number of boutique consulting firms have grown up around the need to reformat loan servicing data that is incompatible with the differing systems of mortgage trading partners. Adoption of EDI standards would eliminate a large part of the excess costs, lost time and errors experienced in the every day transfer of mortgage and servicing assets. Due diligence and quality control would become a lot easier to execute than what we experience in today's environment."

The MBA mortgage data standards task force has began to take steps to improving communications among mortgage companies. Jane Abdunnur, who serves as the education and public relations chairman reports, "The committee has submitted three transaction sets for adoption as standard: the residential loan application, the private mortgage insurance application and the request for credit reports. It has been the third party providers of services to the industry that have been among the earliest to see the potential importance of EDI in the industry."

EDI is slowly making its way into the thinking of the industry. What might be missing, yet, is a conceptual context for developing and introducing electronic mortgage banking.

In 1986, Gary Kopff now of Heritage Management Corporation, then of Fannie Mae, introduced the idea of a national mortgage exchange. A key component of the exchange was the development of standard mortgage transactions, standard asset quality classification and a nationwide system of depositories for data descriptive of mortgage assets.

The mortgage exchange was shelved then for a combination of economic and political reasons. To better understand the long-term implications and to further the development of EDI, the industry would do well to unearth much of the conceptual thinking which underlies the national mortgage exchange project.
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Title Annotation:electronic data interchange at mortgage companies
Author:Lebowitz, Jeffrey A.
Publication:Mortgage Banking
Date:May 1, 1990
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