Thanks to @susanliza1 I saw a tweet from @ArthurAranda of Hudson City Savings in which he said
The business of a mortgage broker is knowing numerous & complex lending rules, regulations, procedures, & policies. It is not for everyone.
Given what I do – helping companies build decision management systems – this is interesting to me. Is it really the business of a mortgage broker to know the lending rules, regulations and policies?
My first reaction is no – that’s the job of Decision Management systems at the lenders. Lenders can embed these rules and regulations in systems using a Business Rules Management System. Compliance and enforcement, eligibility and documentation can thus be handled by the system. Because rules are being used not programming code, mortgage experts can verify that the rules are correct and can readily change them as markets, regulations or funding rules change. Lenders can further enhance these rules with predictive analytics to predict risk of default or of fraud for instance. The systems can make an accurate decision about the rate, the terms and the deal. The broker uses the system and needs to be able to help the borrower collect the right information. They might also need to arrange for physical inspections of various kinds. But they don’t need to know all the rules.
On the other hand, of course, an understanding of the various rules and lending approaches taken is at the core of a broker’s role. Without an understanding of the basic rules applied by different lenders the broker cannot help a customer navigate the various options involved. They could simply apply with lots of lenders but that would be inefficient and time consuming. They need to be able to talk to a prospective borrower about what they want and about their situation and then prioritize the lenders that are most likely to work for the borrower.
Even with Decision Management systems it is still useful to have experts who understand the business. What the systems do is move the value of their expertise up a notch – away from the micro details that must be validated for compliance (the system will handle these) to more value-add advice.
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Hi James, the topic of mortgage broking has another twist that I think also plays well for analytics. Idiom is currently working with 2 loan intermediaries who acquire and vet potential commercial borrowers for bank lending (so not strictly mortgage lending). Interestingly the commercial lending space is attracting much more bank interest with a global slowdown in mortgage lending.
The key issue is that the banks do NOT disclose their lending criteria, which in any case are presumed to change frequently and abruptly depending on flows of available money etc.
The trick of the intermediary is not to determine the quality of the loan per se, but to determine how well the borrower and loan profile matches the banks appetite on any given day. This allows them to pitch to the right lender, which is critical if they are to hit their target acceptance rate of ~90%. That is, they are attempting to predict that the bank will lend rather than predict the performance of the loan (although one would hope that these are closely aligned!). When assessing the banks likelihood of accepting the borrower’s proposal without any declared criteria, analytics obviously has a significant role to play.
Regards,
Mark
Hello James,
Knowing all the details of the regulations is probably best addressed with tools that can ensure accurate and complete implementation. However, regulations are usually put in place with the intent to provide some protection against past transgressions that have led to serious problems.
I suspect that brokers that have the best interests of their customers in mind would, at a minimum, want to know the intent of the regulations. This would put them in a position to help meet, and perhaps exceed, the intent of the law, particularly for cases where it will help their customers and protect their business.