TheMReport — News and strategies for the evolving mortgage marketplace.
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cover story By Phil Britt B usiness process outsourcing (BPO) continues to gain traction in the lending business as some lenders look to build market share and others attempt to manage their costs following the most recent slowdown in mortgage lending. Much of the earlier reluctance by lenders and the financial services industry as a whole to embrace BPO solutions and the cloud have largely gone away as even those who were staunchly against going off premises for their mortgage origination, underwriting, processing, compliance, and other needs have started using BPO for at least some of their processes. Still, BPO isn't a panacea. Even large cloud providers have outages, as evidenced by Amazon Web services' outage in August due to a hardware failure in its U.S.-East Data Center. Questions about reliability, access to data, and loss of control tend to be the primary issues cited by those who are slower to embrace BPO services. But for others, those issues are trumped by cost concerns, scalability issues, and what may be better reliability than on-premises systems and personnel. The BPO providers often have redundant systems so that data is still available in the event of an outage, but lenders may fall behind other, larger customers when it comes to customer service. There are also regulatory considerations about how and where data is stored, so some BPO providers aren't appropriate for U.S. lenders. Different Flavors of BPO L enders tend to look at BPO as a full-scale solution for a turnkey business or as a point solution for different parts of the business (e.g., origination), also known as the component approach. The choice for how much to outsource depends on the lender's own business plans and in-house competencies, BPO providers agree. "Lenders who are looking at components are looking to scale in particular areas or for expertise in particular areas," said Rick Seehausen, CEO of Denverbased LenderLive Network, Inc. "For example, a credit union might have a board that prefers underwriting by an independent party. There is a certain quality that comes out of independence." LenderLive offers to tailor each component service to the lender's specific requirements. Seehausen adds that credit unions have a particular need for BPO solutions because they have only a 10 percent penetration in the mortgage market. So if they want to get more involved, they need to make a "build or buy" decision for support systems for origination, underwriting, processing, and closing coordination as well as post-closing services such as various reviews, quality control, and others. The build choice requires significant investments in technology and personnel. "With BPO, they can access technological skill, scale, and expertise," Seehausen said, adding that credit unions and community banks are likely to grow their mortgage market shares now that the mortgage broker community has been basically legislated out of the business. That leaves room for credit unions and community banks to expand. While most lenders that choose the component or fullscale BPO model use those solutions at the provider's locations, there are those lenders that use the "headcount model," which involves the BPO provider using the lender's systems and billing by the hour, Seehausen says. If the lender on the other hand chooses to outsource everything to LenderLive, the company becomes the de facto mortgage department, though all branding such as end customer references are still in the lender's name. "As an advisor, we help the buyer determine their needs," said William Huber, managing director of Dallas-based Alsbridge, who sees the mortgage industry as a growth area for his company, an advisory firm that helps match BPO providers and those needing BPO services across several different industries. "Many of the service providers make the case that by bundling all [several BPO services] together; the lender can get the analytics and get better hit rates and quality of loans that they accept," he said. "And that by combining strong analytics capability with BPO, the providers think that they can bring their clients additional value." Lenders may not have the amount of business to warrant the investment in the technology or personnel for certain parts of the mortgage business, and few have the analytics capabilities that some of the BPO providers can offer, Huber says. Alsbridge helps analyze a lender's business to advise where BPO services might provide the most value. But the right solution for one lender isn't right for another. Additionally, a lender needs to align internal processes in order to get the most advantage from outsourcing, according to Huber. Outsourcing some components won't result in the expected cost savings and return on investment if there are still bottlenecks in house. Even though cost savings is one of the primary selling points for BPO providers, some adopters of BPO don't realize the initial costs of transition from on-premises to BPO solutions, Huber says. Beyond cost and efficiency savings from technology systems that the BPO providers offer, they also provide a resource of "knowledge workers" who specialize in different aspects of the industry, from origination, to servicing, to underwriting, to collections and different compliance issues, says Paul Imura, chief marketing officer for ISGN, a Palm Bay, Florida-based provider of mortgage services and technology. Lenders, especially smaller ones, can't afford to keep all of those specialists on staff. Recent Boost from Downturn T he recent increase in interest rates, and subsequent drop-off in mortgage demand, has also led to an increase in lenders seeking BPO services, according to Seehausen, a sentiment that Imura echoed. "Scale works in both ways. If you were spending $10,000 per month for [internal] mortgage processing and now you're only doing half as many loans, your cost per loan has doubled," Imura said. So retaining personnel to process loans becomes too costly. For example, Wells Fargo announced in late August that it was cutting 2,300 mortgagerelated jobs. Other lenders have The M Report | 17