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THE EVOLUTION IN THE FINANCIAL SERVICES AND PRODUCTS MARKETPLACE presents enormous challenges for lending institutions. The consolidation of existing players accompanied by new entrants continues at a rapid pace. Increased margin pressures, Wall Street scrutiny, changing technology and the challenges of finding affordable technical talent dramatically affect credit business economics. Revenues vary as well because of the extreme volatility in mortgage origination. The credit industry is working to improve the entire spectrum of credit decision making, including the customer's ability to find, understand and execute documentation to gain loan approval.

Lenders must offer customers rich tool sets, good product selection, security, stable environments, competitive rates and "24-by-7" access. They are increasingly turning to technology vendors and outsource solution providers to remain competitive.

Nonconforming lenders, especially, are working to develop the ability to offer accurate credit and/or loan decisions as quickly as possible. In this age of immediate response and fast turnaround, borrowers want rapid and accurate decisions, and lenders that offer this valuable service will certainly succeed in the increasingly competitive mortgage industry. However, many fall short in their offerings by not using the technology readily available in the marketplace today, such as automated underwriting.

So how can nonconforming lenders use automated underwriting to meet their competitive needs? The answer is simple: by implementing an automated underwriting system (AUS) that is user friendly, fully automated, fast, flexible and comprehensive. The system must capture the necessary borrower information, retrieve preferred credit reports, review and analyze all data using lender-specified guidelines and automatically recommend approval, denial or referral to a human underwriter for evaluation. In addition, the system should also be able to recommend multiple loan options to the applicant. The resulting AUS must also support a sound business and technology strategy.

It is imperative for nonconforming lenders to control the quality of their lending portfolios, and the most efficient and reliable method to do so is through auto-decisioning technology. Many nonconforming lenders are turning toward proprietary and packaged systems to receive only a sampling of the underwriting features and flexibility that this particular niche demands. The Virginia Housing Development Authority (VHDA), SolunaFirst Mortgage and First Franklin Financial Corporation, among others, are using an application service provider (ASP) to maximize the benefits of an automated underwriting engine that is designed to serve all their specialized lending needs.

Housing finance moves onto the FasTrack[R]

It used to take up to 30 days for lenders to obtain approvals for financing single-family home loans from the Virginia Housing Development Authority, Richmond, Virginia.

Today, because of VHDA's forward-thinking and innovative technology, lenders can now use the Internet to obtain approvals for VHDA's pilot high loan-to-value (LTV) Flex Alt program in as little as 30 seconds. The new automated system is named FasTrack.

VHDA is a nonprofit, $7 billion housing finance agency that is entirely self-supporting and receives no funds from the state for any of its lending programs or operations. Created by the Virginia General Assembly in 1972 as a quasi-governmental entity; VHDA's mission is to provide low-interest loans to low- to moderate-income Virginians. VHDA holds the highest general obligation bond rating awarded any housing finance organization in the nation. All funds that support VHDA's lending programs are provided by the private sector through the purchase of the authority's bonds. The bonds do not constitute a debt or obligation of the commonwealth.

The authority sells taxable and nontaxable bonds and securitizes mortgage loans with approved lenders with the bond moneys. VHDA has signed 120 lenders across the state to offer the authority's lending products.

VHDA funds only mortgages that qualify for its proprietary lending programs. These programs do not fit within the traditional underwriting criteria set forth by Fannie Mae and Freddie Mac, so GSEs' automated underwriting engines would not suit the authority's program offering. Before automation was introduced to the authority, approved lenders manually underwrote each loan application.

Manually reviewing cumbersome loan packages proved a daunting task to VHDA. In 1998, applications were handwritten, ratios were calculated manually and underwriters reviewed all loan packages for conditional approval or denial.

Automating origination and credit evaluation appeared to be the solution to VHDA's problem, but with its unique lending guidelines, finding a fully automated system to support all its proprietary mortgage products presented a challenge.

"Finding the mortgage origination technology was not the tricky part, but rather it was finding a technology solution that would take into account our underwriting guidelines and decision applications based on VHDA's lending parameters," says Michele Watson, VHDA assistant director of single-family programs. "And if we could find one-stop shopping and have full origination-through-closing capabilities in one system, then that would certainly be our No. 1 choice."

VHDA selected Austin, Texas-based ASP ARC Systems in 1999 to be the authority's origination and automated underwriting solution provider. "Once we saw ARC Systems' technology capabilities, it was an easy decision," Watson says. "Not only does the technology support specialized lenders, but decisions are based on our own lending guidelines, and they are fast and accurate."

During the implementation phase, ARC Systems set up the connections between its technology and VHDA to submit applications via the Internet, as well as developing the code for its specific lending parameters for each of the Authority's unique loan products.

The 60-day beta test began in February 2000, and the system was tested with two of the Authority's more "vanilla" high-LTV loan products. VHDA's 97 and 100 percent LTV mortgages were used in the testing of ARC Systems' technology because the Authority does not require mortgage insurance on these two products and it was important to introduce loan officers to and familiarize them with the new technology as easily and quickly as possible. The two high-LTV products were a good fit for training users on the system, according to VHDA.

Now finished with the initial testing of ARC Systems' technology, VHDA has rolled out the AUS to all its 120 approved lenders. More than 900 loan officers are empowered to offer Virginians decisions on VHDA mortgage loans within a matter of seconds after submitting applications via the Internet to ARC Systems' technology for credit evaluation and pricing. Any VHDA-approved lender can submit completed applications via the Internet to ARC Systems' technology and receive credit evaluation, pricing information and approval within 30 to 60 seconds.

According to Janice Burgess, VHDA single-family loan programs manager, training VHDA-approved lenders and loan officers on this technology has progressed very quickly. Only weeks out of beta testing, VHDA has taught numerous lenders and more than 400 loan officers how to use ARC Systems' technology. "The response from both lenders and loan officers has been very positive," Burgess says. "In the first few weeks, more than 100 loans from five lenders were auto-decisioned and priced through ARC Systems."

As part of the Authority's mission to provide affordable housing for as many low- to moderate-income Virginians as possible, VHDA has identified the need to bring better lending services to rural parts of the state. VHDA is using this Internet-based technology to offer financing options to these regions of Virginia by way of its new loans-on-wheels service, the Mobile Mortgage Van.

VHDA-approved lending officers will drive this mobile lending office to various areas in Virginia not represented by the Authority's network of approved lenders to offer available loan options to all state citizens. The Mobile Mortgage Van is equipped with telephone lines and computers so that loan officers can take loan applications, submit applications and receive approval, all at the point of sale (POS).

"It's really quite an original setup we have," Watson says. "Various lenders across the nation equip their loan officers with laptop computers to go out in the field for loans. In the most rural areas of Virginia, our field originators are literally out in the field working with borrowers who often are not aware of the multitude of lending options available to them. The Mobile Mortgage Van concept is a reality because of the types of products we offer and the technology we employ."

Internet-based wholesale lending

Atlanta-based SolunaFirst Mortgage deployed ARC Systems' technology throughout its operations. As a wholesale, nonconforming lender, SolunaFirst competes with a multitude of new and established lenders all vying for the same business. Some differentiate themselves by offering unique products, others with enticing POS packages.

SolunaFirst is a wholesale mortgage company committed to building strong and lasting business relationships with its brokers by providing them with unparalleled customer service coupled with competitive pricing and a broad range of loan products. The mortgage company operates in 20 states and has originated more than $12 million in loans per month.

Although the company offers several innovative products and solutions, that is not what attracts brokers to SolunaFirst, according to the company's president and founder, Peter Knap. "In this market, where everyone is using the latest and greatest technology and nonconforming rates are as competitive as we've ever seen them, it's not products and rates that close deals. It's customer service," Knap says. "And that is precisely where we will beat the competition every time."

ARC Systems' technology is traditionally thought of as an underwriter's tool; however, it serves multiple purposes in SolunaFirst's operations, including improving the efficiency and quality of customer service. Knap says that borrowers in this market are more likely to shop their loans because rates are so competitive--that is, unless the service they receive is top-notch. "Who would you rather receive a mortgage from-- a lender who cannot make a decision in less than 12 hours, or one that provides accurate decisions immediately? It's a no-brainer," Knap says.

With ARC Systems as its ASP for automated decision making, SolunaFirst gives its preferred brokers--those who have a closing rate greater than 40 percent--a strategic advantage over other brokers in the market. ARC's technology can render a decision on SolunaFirst loans submitted via the Internet in less than 30 seconds and provide the broker with approval conditions at the point of sale.

The process that used to take 24 to 48 hours to complete has been reduced to less than one eight-hour business day's worth of work for SolunaFirst underwriters. "As a lender, we have committed to improving the efficiency of underwriting loan packages for rapid closing," says Knap.

Many brokers still submit applications to SolunaFirst the old-fashioned way--a paper file of various documents. Once SolunaFirst has all the paperwork needed, it has committed to having the loan package underwritten and ready for the broker within one business day. "If we receive it by 10:00 a.m., we'll have it ready by 5:00 p.m," says Knap. SolunaFirst underwriters can review loan packages so quickly because ARC's technology autodecisions the vast majority of applications, so the company's staff is only underwriting the packages that truly need human intervention.

Because much of the burden is taken off the underwriters, and technology is driving a multitude of credit and pricing decisions, rapid responses and the highest-quality service is now in place, according to Knap. The mortgage lender has always taken an active approach to improving service, and this technology helps SolunaFirst take service one step further.

"We were wowed by the various technological advances that have occurred over the past five to 10 years to improve our capabilities on the front end; but the auto-decisioning tool really is a core component within our operations," Knap says. "It's the difference between good service and great service. Why settle for good when you can have great?"

Licensed in 20 states, SolunaFirst plans to expand its lending capabilities throughout the United States in the near future, and "ARC Systems technology is a tool that will certainly make that plan a reality," Knap says.

Internet technology, paper-based lender

Most lenders work with an array of retail and correspondent originators who tend to have the latest and greatest POS origination system. The loan officers can dazzle borrowers with fancy input screens that offer smart boxes and pop-up menus. Credit reports, titles and appraisals can be ordered directly through the POS system, and the process is already simplified.

The POS origination systems have certainly helped on the front end, but human underwriters still must carry out the most labor-intensive part of the mortgage process. Many of today's nonconforming lenders face the challenge of manually underwriting all their submitted loans.

San Jose, California-based First Franklin Financial Corporation was founded in 1981 to serve the conforming credit market. In 1994, the company made a strategic move to serve the nonconforming lending market, and in 1995, First Franklin introduced a proprietary credit-risk lending solution called Direct Access. The wholesale lender currently works with more than 11,000 mortgage brokers nationwide and operates 24 wholesale centers throughout the United States to originate first-and second-lien mortgage loans.

First Franklin is the nation's No. 1 nonconforming wholesale lender, according to National Mortgage News, and a subsidiary of Cleveland-based National City Corporation. The lending company served the prime market before breaking into the nonconforming market in 1994. Always a believer in using technological advances to the benefit of its customers, First Franklin has selected ARC Systems' technology to auto-decision and price its entire suite of loan products.

Before using ARC Systems' technology, First Franklin operated in a DOS-based environment that imposed limits on what it could achieve and placed time constraints that hindered efficiency. To remain a leading nonconforming wholesale lender and prosper in the competitive market, First Franklin needed to move beyond its DOS limitations and embrace a technology that could better handle its current operations, accommodate future growth and provide a high level of security and data transfer confidentiality.

"It was a relatively easy decision to make," says Bill Dallas, chief executive officer of First Franklin. "We either needed to automate our decisioning process or risk losing our competitive edge." First Franklin, originating $4.5 billion in loans in 1999, automated its decision making and pricing processes with ARC Systems' technology beginning in April 1999 and tested the system for the remainder of the year.

First Franklin uses automated underwriting for all its products, including combo loans. Borrowers may apply for a combination of a first and second mortgage, closed back-to-back, that allows them to receive up to 100 percent financing. Under these combo loans, borrowers are qualified based on the LTV of the full amount to be mortgaged; however, two separate loans are originated, documented and funded. First Franklin brokers who originate combo loans can receive 14 possible loan combinations, including approval conditions in less than 90 seconds. "This rapid turnaround on approvals and conditions on such complex loans like the combo loan is unprecedented, especially in the nonconforming lending market," Dallas says.

Loan application packages arrive in First Franklin's 26 offices across the United States from 47 states and are input into the system for auto-decisioning and pricing. "We've reduced our processing time from 24 hours to eight or less," Dallas says. By using ARC System's technology, First Franklin's underwriters can now concentrate their efforts on examining assets, collateral and property appraisals instead of having to ensure that a borrower meets a certain program's criteria.

"The bottom line is that in our current operations, ARC Systems' technology improves our underwriting efficiency--but just as important, it maintains consistent quality of our lending portfolio," Dallas says.

Ed Jones is president and chief executive officer of Austin, Texas-based ARC Systems, an application service provider that offers nonconforming lenders the decision power for better business practices, giving them the ability to provide answers at the point of sale. The company's proprietary, patent-pending, rulesbased system is used by more than 100 credit unions and 15 lenders nationwide.
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Author:JONES, ED
Publication:Mortgage Banking
Geographic Code:1USA
Date:Aug 1, 2000
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