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Eyeing technology.

Eyeing Technology

Document custodians as a group have not traditionally attracted much attention in the industry - except in 1988 during the GNMA final certification crunch, and then it was the kind of attention that one always hopes to avoid.

But since then, things seem to have changed. GNMA has certainly focused on the critical role of the document custodian in maintaining the integrity of its mortgage-backed securities programs by producing a document custodian manual (final version pending at the time of this article). And, because of the current overlap of GNMA 12-month and 18-month certification deadlines, issuers are expressing a greater interest in the quality of service provided by their custodians. Add to this scenario the changing landscape of the thrift and banking industries, and you will find custodians in the thick of due diligence reviews and mass portfolio transfers.

Bank management appears to have taken a renewed interest in the fee-based activities of their document custody departments. By all indications, this portion of the business is expanding. And expanding along with it are growing needs for maintaining control, complying with proposed new reporting requirements and providing higher service levels to their customers. Growth in volume for some has already outstripped the ability to manage the business manually. Document custodians as a group are beginning to recognize the value that automation can bring to their firm.

The traditional role of the document


In the context of the GNMA mortgage-backed securities program, the role of the document custodian is "primarily to make required pool certifications and maintain physical control of required pool and loan documents on behalf of issuers, GNMA and investors for the life of the pooled mortgages," according to GNMA Document Custodian Manual, draft copy, October 1990. The above definition similarly applies to the programs of other agencies or investors for privately issued pools.

What is not well understood outside of the document custodian community is the sheer volume of paperwork that custodians must process in order to meet their obligations under this definition.

Until recently, most document custodians performed all of their functions with little or no help from computers.

A medium- to large-scale custodian may have more than of 100,000 loans in custody. Each loan has from three to eight documents (loans in GNMA pools have five standard documents, plus a variable number of intervening assignments placed in custody). The document custodian is required to review every document on each loan. For custodians with this profile, automation is absolutely required in order to properly meet the routine custodial functions of tracking and control, according to Walter Wratchford, executive vice president of America's Trust Services, Inc., Frederick, Maryland. His firm has been fully automated since 1988, and without it, Wratchford says, the growth in business he's experienced would not have been possible.

The operational nature of the custodian

The custodian's primary tasks in the discharge of responsibilities are the review, storage and control of the hundreds of thousands of documents that flow through its operation. A custodian has the responsibility of communicating to each issuer any problems found in the review of each submitted pool. In addition, for initial certifications, the time frame is customarily short due to competitive pressures for quick turnaround. After an initial certification is rendered, additional documents ordinarily need to be obtained. So, the custodian begins to track outstanding documents that, when received and completed, will allow a final certification to be rendered. For GNMA pools issued on or after January 1, 1990, final certification must occur within 12 months of the issue date, or the issuer must post a letter of credit based on 5 percent of the original principal balance of the pool (if the issuer has 10 or more pools uncertified past the deadline). Therefore, the potential financial consequences to the issuer of missing a final certification increases the need for custodians and issuers to maintain accurate and updated records regarding outstanding items.

The custodian is responsible for the storage and safekeeping of all documents on each and every loan in all pools for the life of the pool. However, entire loans or individual documents are routinely removed from the vault and sent back to the issuer for a variety of reasons. An individual loan may pay off before maturity or go into foreclosure. Or a document may have a defect that requires that a correction be made to the original form held in custody. Each release request is made by the issuer to the custodian on a standard release form. The custodian is responsible for processing these requests, finding the loan file or document, forwarding it to the issuer and updating records to reflect the transaction.

Another routine transaction for custodians is the transfer of pools from one issuer to another. Many times, in connection with servicing transfers, the custodian is also changed. This requires both the forwarding and receiving custodians to do work. The receiving custodian must recertify the pool, which requires a new review of all loans and documents.

Levels of tracking

The operational nature of a custodian's responsibilities readily lends itself to the use of technology. The primary functions of pool certification, location tracking, releasing and reinstating items, exception reporting and billing are processes that can be automated quite readily. And most large custodians do track these items with all kinds of computers, from mainframes to PCs. However, industry changes, proposed regulatory changes and competitive pressures are causing custodians of all sizes to gradually rely upon the use of computers to perform more tasks formerly performed manually. More than that, the automation of the custody function impacts on the very nature of how the work is done.

There seems to be general agreement in the custodian community about three levels of tracking. Tracking at the "pool level" appears to be universally done by custodians of all volumes, according to Jeffrey M. Levine, assistant vice president of Miami-based Southeast Bank, N.A., and this includes tracking items such as the issue date, pool status and pool type for each issuer.

Pool-level tracking has traditionally been done manually or by using spreadsheet or other easily implemented database software.

Loan-level tracking adds more detail to each pool and generally provides for grouping of loans by pool, a status code for each loan indicating whether it is completed and a static list of documents, each with a code indicating if the document is "OK" or not.

Document-level tracking allows a custodian the maximum amount of flexibility by individually tracking each document on each loan. Generally, this would include a date-received field, a status flag and a user-defined exception checklist for each document.

Reasons for


An informal survey of a dozen medium and large custodians who either have already automated or are in the process of upgrading their operations suggests some common compelling reasons for going forward with the considerable effort and expense involved.

These custodians view automation of their operation strategically. They see the opportunities in the near future to expand their business significantly, but not without proper controls, and not without the ability to maintain or increase service levels to their customers. Candy Cole, vice president of Midlantic National Bank, Edison, New Jersey, says that they have reached the point where they must upgrade their computer system in order to implement their plans to grow. Cole is a custodian for GNMA as well as numerous privately issued pools, which means she is faced with the need to manage a wide range of custody responsibilities. "Without a tightly controlled and standardized process, not only could we not grow, but we would have a difficult time even maintaining our current service levels."

Another compelling factor guiding these custodians to automate or upgrade is the general view that it is not a luxury, but rather a requirement in order to meet the recent as well as anticipated changes in the custodian's responsibilities under the GNMA mortgage-backed securities program.

Until Southeast Bank automated, it tracked all pools manually, "and one of the driving forces in developing our system was the anticipation of GNMA requiring custodians to accept delivery of individual documents. That requirement got the ball rolling," says Levine. That shift in GNMA policy was specifically cited by all custodians as a key reason they initiated the move toward automating or upgrading their tracking capabilities.

Their decision to automate will be further validated if the current draft of GNMA's document custodian manual is implemented unchanged. The proposed manual calls for extensive reporting and tracking to be done by custodians, and, according to Tom Dawson, vice president of Dallas-based NCNB Mortgage Corporation, many of those new reporting requirements will mandate the use of automation to comply. Dawson says that NCNB is upgrading its tracking and reporting capabilities now to "stay ahead of the custodial curve, rather than to find itself chasing it."

Standardization is another important goal of these firms. Standardization of everything from certification workflow and customer reporting, right down to the verbiage for exception reporting, is high on the list of benefits that custodians seek when automating. Vera Handricks, vice president and operations manager of First Interstate Bank, Los Angeles, points out that one of her primary goals in automating was to achieve consistency in the way things were done, especially when it came to communicating with customers about exceptions. "We wanted a system that could walk an operator through the document review process, and even train the person at the same time," says Handricks. "We wanted standardized procedures and a consistency in the training function, and the best way for us to accomplish that was to build it into a system."

In addition to the strategic rationale mentioned, some of the largest custodians were actually "pushed" into automation as a result of a single large transaction. Houston-based Texas Commerce Bank (TCB) decided to build its system as an alternative to a large customer's requirement that terminals be placed in the custodian's shop, so that the custodian could update the issuer's system. Roger Ferguson, vice president for TCB, says that "we felt that we would rather have our own system and feed them data, rather than be tied directly into their system. What were we supposed to do when the next large issuer wanted to put terminals in our shop?" Walter Wratchford says his operation was motivated to expand its use of automation to accommodate planned business expansion. Neither Wratchford nor Ferguson regrets the move. Both have substantially increased their volume recently; Ferguson, reporting a nearly fivefold increase in inventory in the last four years. Both attributed a large share of their success to being in position to take advantage of the operational leverage that technology can provide.

Other reasons given for automating their shops: * To provide better audit trail of work

done; * To be able to provide more accurate

and detailed billing information; * To be used as a marketing tool; * To better measure employee performance

and increase management

reporting capabilities.

The results

For those custodians surveyed who have already automated, some interesting observations were made. The overwhelming response is that upgrading or increasing the use of computers in their daily operations has had a significant positive impact in the areas of standardization, control, capacity for growth and quality of service that can be provided. For those firms using computers the longest period of time, the positive response was even higher. This may be the result of the maturing process that takes place over time as policies, procedures, people and the computer programs begin operating in sync. But even those custodians with less than three years of experience in an automated environment observed that while the process of making the change is not easy, having made the change was worth it.

TCB's Ferguson, for instance, has been able to use his system to adjust billing levels between "clean" and "dirty" pools based on the number of system updates done for a particular file. "Each time a document status is updated, it is tracked and reflected in the customer bill. This allows us to pass the cost savings of handling clean pools along to the issuer and to charge extra for pools that require more effort on our part," says Ferguson.

Ferguson says that TCB also uses the system to measure daily productivity of employees, send reports electronically to their customers and bill automatically.

Currently in the process of implementing a new system is Norwest Bank in Minneapolis. Bill Wilson, vice president, says he expects that once fully converted, he will be able to increase the ratio of loans per employee, delaying the growth in personnel costs as his business expands. Another primary benefit that he is looking forward to is improving the execution of the billing process. He says that he will be able to do his monthly billing more quickly, more accurately and with fewer people than it now takes.

Herb Nelson, vice president of mortgage warehouse services at San Francisco-based Bank of America, says that the single most important benefit to him is "it simply has made us a more efficient record keeper." He said his first objectives was to automate all manual logs they were using. "Once the logs were online, we were able to take advantage of that. We can easily print status reports and send them regularly to our customers." He also points out that automation has made his entire staff more productive. "Gaining that knowledge of how to use computers has increased the skill level of my entire staff compared to that which existed prior to the system implementation." All of his staff are trained to use word processing software for letters, and they use bar-code wands for loan realeases.

For Levine, the primary benefit he has observed has to do with the shifting of mundane tasks to the system so that Southeast Bank's administrators can spend their time more productively. "It just doesn't make sense to have someone type up an exception report or shipping schedule, when the system can do it in an instant. Instead, that person could best use that time to review documents or respond to a customer call." In addition, Levine believes computer-generated reports project a more professional image to the customer than handwritten ones.

Handricks said that what First Interstate values most about its system are the improvements in the quality of the service provided and the level of tasks her staff can perform. "The online itemized document checklists we use have standardized the document review process, and this uniformity reduces errors. The system also helps us to train new employees by walking them through each document via the online checklist." She also generates timely reports for staff, management and customers for exceptions and pending pool certification deadlines.

Echoing Levine's observation is Mary Anne Ashmore, trust officer and manager/supervisor of mortgage custody at First Trust National Association in St. Paul. "Our people are becoming `knowledge workers,' The machines can do the clerical jobs much better than people, and that allows people to utilize their experience and other skills on activities that our customers value," she says. She expects that the system First Trust is now implementing will substantially increase the speed with substantially increase the speed with which release requests and billing can be handled. Ashmore adds that an interesting side benefit is that once automated, one begins to view everything from the standpoint of how it can be "tied in." "If it isn't tied in, we ask why not, and that usually leads to improved workflow and policy," she adds.

Another major benefit of converting paper-based records into the form of a database concerns disaster planning. According to Ashmore, First Trust stores its entire inventory on diskette and tape backup, which is stored offsite. In the event of any major catastrophe affecting the physical records, First Trust can recreate its entire inventory position from the backup. While that does not address the physical loss of the documents, it gives comfort to know that the key information on all pools and loans can be replaced.

Kathy Raspallo, assistant vice president of Fleet National Bank, Providence, Rhode Island, says that everything Fleet tracks is on a manual basis presently, but that the company is planning the implementation of a computer system this year. She says that in addition to the other benefits mentioned, the company is especially looking forward to improved tracking of the location of items in its vault. Without an online system showing where pools are in the vault, "we spend altogether too much time searching and sorting to find the information we need."

Getting to there from here

Converting is not easy. In fact, converting from a completely manual operation to an automated one requires a great deal of planning, and even more time. For those upgrading from an existing system, the changes are not quite so dramatic. For the custodians who have been up and running for some time, estimates from the company's surveyed as to the amount of time to convert the operation ranged from six months to "call me back in about 30 years." The effort to convert a large portfolio of pools, loans and documents is nothing less than daunting. It requires a strategy that must include cooperation from issuers to send tapes, and it also requires a complete internal pool reconciliation if it is going to be done correctly. Some custodians employed temporary workers to perform the pool reconciliation, while others used existing staff working overtime and weekeneds; even at that, it is not a short-term project. The strategy that many custodians follow to move from a manual operation to an automated one combines the following elements: * Convert pool-level information all at

once - Converting at this level will

give immediate benefit if converting

from manual record keeping, because

many pool exceptions and

deadline reports can be used right

away. In addition, these reports can

be sent to the customer for reconciliation. * Obtain loan-level information from

the largest customers via tape - Normally,

the amount and type of data

stored at the loan level is easily obtained

from the issuer's servicing

system. For smaller issuers, it is

probably practical to key in the loan

information directly. * Implement a cutoff date for all new

business, after which all pool-, loan-and

document-level information is

entered as new pools are submitted.

Custodians also find, as does anyone who automates a "production" type activity, that procedures and policy issuers are raised as people begin to compare new workflows with existing ones. According to Ashmore, "it doesn't make sense to just automate [everything] you are doing manually because automating a process may change how a task is done."

One important factor to consider is the need to plan for changes to the system. "At the time of implementation," says Handricks, "our vendor made numerous changes to the system to meet our specific needs, and that affected the implementation schedule." Herb Nelson agrees. "I must have made 500 changes to the system since we first installed it, to make it better. And we continue to make improvements every month."

It seems that the larger the portfolio to convert, the longer it takes to be completely converted. Raspallo expects that it will be at least two years before Fleet has fully completed its conversion process. Advises Wratchford, "the best time to automate is when you are small enough so that you are not overwhelmed by the process."

What about small


For smaller custodians, the issue of automation may not be an easy one to justify unless there is a strong commitment to expanding the business. Wilma Kuerzi, senior vice president of First National Bank of Louisville, and chair of the Mortgage Bankers Association of America's (MBA) Document Custodian Subcommittee, expressed concern over some of the proposed tracking requirements outlined in GNMA's most recent draft of the document custodian manual. "The large operations may not like the added burden placed on them," she says, "but at least they are equipped to handle it. The smaller operations will simply be unable to comply, and the cost to them to automate as a percentage of their revenue is very high." Kuerzi added that over the past couple of years, MBA, GNMA and the Document Custodian Subcommittee have worked together to develop a uniform approach to develop a uniform approach to document custody requirements, and for the first time, "custodians are going to be reading from the same bible." All custodians surveyed agreed that is a very positive development.

Surprisingly, some of the strongest comments made in support of the interests of the smaller custodians with regard to proposed changes in tracking requirements have come from larger custodians. Says Nelson, "I wouldn't be at all surprised to find the smaller custodians doing a first-rate job on a manual basis, and it may not serve the best interests of the custodian community to require them to automate to meet new reporting requirements." Helen Kinney, MBA staff representative to the Document Custodian Subcommittee, believes that automation could eventually help everyone - issuers, custodians and government agencies - through better reporting capabilities and faster turnaround time. She cautions, however, that too short an implementation time frame for new reporting requirements could exclude many of the non-automated operations' ability to comply, even if they started to automate now.

Future steps

The story of bringing technology to document custodians is not over. There are numerous benefits to be had in an environment where data can be exchange among custodians, issuers and government agencies. It appears that those who have taken the steps to automate are realizing that they are well positioned operationally to expand their business and to meet the changing market and regulatory requirements ahead. While the time, effort and cost to convert to an automated system may be considerable, there may be no real alternative over the long term to remaining competitive and in compliance with agency requirements.

Lisa Barber, mortgage documentation officer at Marine Midland Mortgage Corporation, Buffalo, New York, a large issuer of private securities, may have put it best: "We have a vested interest in our custodians' tracking capabilities. Our investors rely on information from them, and we depend on their records to accurately reflect our follow-up work." Perhaps automating will be the norm in the future.

James E. Kunert is president of MBMS, Inc., a software developer and consulting firm located in Amherst, New York, specializing in mortgage banking applications.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:document custodians look to technology
Author:Kunert, James E.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Mar 1, 1991
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