The impact of COVID -19 is a serious shock to the Indian economy. A prolonged nationwide lockdown has led to the disruption of demand and supply chains which will further lead to loss of income/employment. With the crisis unfolding further, its fast-moving and unknown variables will threaten the way the entire retail lending industry operates, especially mortgage loans.  

The impact on the retail mortgage lending industry is almost immediate. Increasing the affordable housing footprint, stabilizing market position, sizing the market potential in tier 2, 3 & 4 cities, and designing product implementation strategies was a work in progress for most of the lending companies when the crisis hit. The public-health-turned-economic crisis is threatening to take us back to the 2010–12 period which may have a bigger impact on loan processes and may restrict thinking behind ‘credit box expansion’ in these times.

The mortgage lending process has some inherent challenges which are important to list down to understand the problem at hand in detail. 

1. Manual Processing: The mortgage lending process is a culmination of 2-3 processes right from data entry, and underwriting – which often involves face-to-face discussion with the client at the business premises, vendor report management, approval process, collateral appraisal, and then finally onboarding of client. This is followed by the property registration process with high dependence on registrar offices. In this entire process, the customer is touch-based almost 6-7 times which will get impacted to a large extent due to this crisis. This is further going to impact both cost and time.
2. Fragmented Systems: Technology introduction in the overall mortgage lending process has been late, as a result, the approach has been fragmented with too much reliance on single loan origination systems (LOS). The complete end-to-end process has not been integrated through technology, most of the parts are still manual. With the current crisis with an emphasis on no physical contact, the time taken for these activities will increase. More process /product policy deviations are bound to happen which will further test the systems’ agility.  
3. Standardized Approach: In mortgage underwriting, local teams often operate in silos and end up adopting a specific approach – keeping in mind the geographical area, team size, team experience, and local real estate regulation nuances. With the crisis hitting almost all industry segments alike these approaches will be challenged. A standardized approach is required to have a far lesser impact on service delivery and better turnaround.  
4. Traditional Operating Models: Most lender institutions operate with linear processes where more efforts are required in aligning sales channels across geographies. This involves supporting the customer with doorstep services. With the changing environment, this will be a huge challenge and needs a significant behavioural shift on both the sales channel and customer side.

Looking at the challenges the current Covid-19 pandemic has certainly brought into question the mortgage lending industry’s readiness for the adoption of a digital process. With an eye on future business needs, customer requirements, competitive advantage, and market differentiation, the current crisis has allowed us to bring about change. The starting point to this change should be ‘changing the approach. Mortgage lenders across the globe are in process of implementing reforms that will be long-lasting in terms of how to operate and where to build capacities that have a direct impact on capabilities. The focus needs to be shifted to customer-centricity and adapting an online strategy. 

This approach will require an evolution in three broad aspects:  

Digitization: Every organisation will require a specific approach based on its digital maturity. A thorough digital assessment includes a focus on all areas including customer experience, efficiency, underwriting, risk, and compliance. The self-service experience should move more towards a collaborative and engaging model including active participation of all stakeholders (customers, internal departments, bureaus, vendors, process owners) in the transaction. There is a well-established ecosystem in the country today to enable this. Fintech organisations’ partnership should be considered which can give access to new lending approaches, such as alternate but important data sources, leveraging workflow automation while retaining complete control of decisioning logic.  

Managing People’s Behaviour: There are still several back-office processes across all stages of the loan cycle, including underwriting, compliance, risk, and others, which require paperwork. Lenders should act decisively to digitize the paperwork. As a starting point, this can be adopted for at least formal customer segments which still constitute a majority of the loans sourced., This would help to cut down large dependence on physical interactions saving time and cost. This change needs a significant shift in employee behaviour, requiring continuous training, feedback mechanism to fix things quickly, upskilling some sections of employees, and most importantly shifting employees’ behaviour to adapt to a new approach.

Data Security & System Integration: With more digital solutions and higher levels of automation, data security will become even more important post-digitization. Data privacy concerns spring from the potential misuse of customer information. The financial service sector has been particularly attractive for cyber criminals over the years, making it vulnerable to breaches. As the scale of digitization expands, the magnitude of security and privacy needs to be more stringent. Further, with ever-evolving regulations in this, space, the cost of compliance will also go up till the time this new ecosystem matures and reach stability. System integration is the key in terms of automation systems integrating with legacy software systems. The integration of any automation/digitization is convoluted by factors such as technology integration, change control and others which should be overcome by a matured and all-inclusive approach.

Looking Ahead: Digital transformation is no more a fad; it will personalize customer experience which is the need of the hour and encourage innovation in products. These solutions must be adapted to remain relevant. Remember this is not just a box to be checked anymore but a whole lot more than that. 

Straight Through Processing (STP)- MORTGAGES

Digitization in mortgage lending is still at a nascent stage; lending institutions have started realizing the value of data, which has the potential of transforming the industry in terms of asset quality and risk assessment, regulatory compliance, and cost containment. Traditional process controls and legacy loan origination (LOSs) are still in place, which is no more attractive, considering the current traction in the industry with the increase in demand and competition.

The challenge set before mortgage lending institutions is to bridge the gap between current systems and platforms and the easy-to-use customer-centric systems and features that are already the norm in other industries.

The mortgage banking industry needs to invest in digital offerings and technologies to improve the loan origination process and customer experience.

Straight-through processing in mortgages has assumed a space of paramount importance. Before moving ahead, we need to understand the meaning of STP in mortgage parlance.

STP Mortgage Parlance

A new process supported by a policy that allows a mortgage lending institution to enter elements of loan requests along with all supporting data and, for credit-decision life cycle and to reuse information for the credit-decision life cycle. It is a digitized process using various technology solutions and doing away with document-based handwriting.

The other important point here to note is that lending institutions do not have the luxury of implementing digital technologies with the existing traditional mindset of planning months and years in advance. In the era of Netflix, Google, and Amazon the consumers are not ready to wait and are more demanding, which is the biggest push factor for the lending institutions to quickly adapt to digitization, which is picking up at a rapid pace, requiring the adaption on an ongoing basis to be seamless.

To bring the industry into the digital future state, an understanding of the current state is a prerequisite. The gaps need to be quickly identified basis which an approach to digitize the process for lending institutions can be developed.

TRADITIONAL APPROACH

The traditional model has grown from necessity or from being reactive to market demands rather than proactively looking at future business needs. Customers today need competitive advantages and market differentiation.

SETBACKS OF THE TRADITIONAL APPROACH

• Standardized product
• Limited scope of process innovation
• High-touch operating model
• High per-unit cost
• Low on customer experience
• Low operational productivity
• Low accuracy
• Higher Turnaround Time
• Manual Workflow

WHY STP?

“UNDERWRITING HAS BEEN AN ART, IT’S TIME TO EXPLORE SCIENCE NOW”

Mortgage as an industry has a huge number of variables impacting the performance (both internal and external) of a loan. Envisaging the risks at the right time is of paramount importance.

Human tendency is, when things are going well, risk assessment takes a backseat, which may often lead to poor risk management.

One of the effective ways to identify risk in a volatile mortgage climate is to check existing data recording quality, for it should be of the highest standard.

Often analysing the existing data which gives new insights into the upcoming risks coupled with recent market changes (Economical, Political, etc.).

Apart from this, keeping a close tab on intellectual processes and policies and making them more dynamic to adjust to any changing scenarios in the real world is the need of the hour.

STP brings various value additions to the table, which further confirms the impact it is going to bring, the efficiencies in the model are well depicted by the following image:

With every new change, a whole lot of new challenges come up, both external and internal to the organisation. To combat this, organisations need to work as a close-knit, cohesive unit. Some of the key challenges to this are:

1. Slow Start and piecemeal results- The journey should begin with the long-term view in mind and the business value that can be achieved with digital capabilities and offerings.
2. Legacy IT systems.
3. Lack of coordination (Risk, It, Operations)- Several stakeholders need to align and remain constantly aligned over a prolonged period.
4. Lack of trust in automated decision-making- It is best to use new technologies on existing data/cases which assists in providing a comparative approach.
5. Limited data access

Lending Institutions must adopt digital solutions to remain relevant. Moving from a traditional mortgage model to a digital solution-based mortgage model will require dedicated organisational alignment. The cultural shift should be managed, and the road map should be defined to follow steps wise approach.

An Ideal Road map should look like this

CONCLUSION

A common misconception is that technology can salvage the business. A holistic approach involves an enterprise-wide, unified path to process management, focusing on the policy process and people before investing in technology.

While the challenges in digital lending transformations are daunting and the path to ultimate success can be bumpy, experience proves that the efforts expended are fully repaid in competitiveness and profitability. Success means much faster credit decisions, with the customer getting loans up to 80 percent sooner, lower cost with 30 to 50% less time spent on decision making, and better risk decisions which translate into greater profitability down the road.

Author: Anuj Sharma, Chief Operations Officer, IMGC