During the loan origination process, when a lender makes a decision on whether or not to lend money to a potential borrower, there are a whole host of steps the lender must take and decisions they must make before the final loan can be approved and closed. Some of these steps are taken to ensure the lender properly assesses the risk of lending to an individual or group, while others ensure compliance with government regulations. Increasingly lenders must be able to make these determinations faster, with more accuracy, and at a level of sophistication where their current legacy system struggles to keep up.
Complying with Alphabet Soup
A big part of where legacy systems struggle is in the area of compliance. Anyone who has recently bought or refinanced a home knows the process and rules have gotten a lot more complex. The number of regulations that have been put in place as a result of the Great Recession puts a bowl of alphabet soup to shame.
We already had HUD, FHA, ARM, TILA, GFE and their associated measures like DTI, LTV, to name a few. With Dodd Frank, we’ve added a few more including CFPB, RESPA and QM. With each of these comes an array of documents and stipulations that need to be created, reviewed and ultimately signed. Now don’t get me wrong, some of these measure are likely necessary and prudent but it puts a great burden on the borrower to understand it all and those in the lending industry to ensure that they comply with it all.
Where a Business Rule Management System (BRMS) Can Help
From complex paper-based processes to less-than-agile legacy systems, a BRMS can be applied to multiple parts of the loan origination process to help automate decisions, streamline the workflow, and comply with regulations – all while future-proofing the application.
Validating the Information
A lot of data is collected for a loan, especially a home loan. Not only does the application take in information about the home being purchased, but it also pulls in the credit history of the borrower, the proposed loan amount, information about the home being sold, etc. Much of this data must be validated before it can go to the next step. Ensuring that a borrower’s birthday or a loan amount falls within an acceptable range saves time and money. In some cases these rules may not be known before a system goes live. See some examples here. With a BRMS, an analyst can make the change quickly without programming.
Calculating the Inputs
Once the data is collected and validated, it needs to be massaged into measures that can be acted upon. The calculation of some of those measures, like the Debt-To-Income (DTI) ratio and Loan-To-Value ratio, can be complex and involve multiple steps. For DTI, your proposed mortgage, credit card, and other monthly payments need to be aggregated and divided by your cumulative monthly income. This can get complex as each active trade line needs to be inspected and evaluated for suitability. With a BRMS, the business rule engine can apply the analyst-driven rules and provide a detailed output of how it arrived at the result. If a new measure comes along that is required by regulation or a borrower’s internal scoring mechanism, it can be added with ease.
Many lenders offer up numerous products. Determining which products a borrower is eligible for can involve thousands, if not tens of thousands, of rules. Having rule constructs like reusable vocabulary templates, decision tables, and business language rules makes the effort much more manageable.
Pricing the Loan
A number of factors go into the rate you receive for a loan. For example, a lender establishes a base rate for a 30-year fixed mortgage. The rate increases or decreases based on your credit score, type of housing, secondary loan, loan-to-value, etc. These rules are well-suited for a BRMS.
Once a loan is selected, the process of providing the proper disclosures (as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act) puts serious pressure on the lender to ensure they are in compliance. At certain points between the agreement to take the loan and the closing of the loan, the lender must provide a number of documents that contain specific assessments and calculations to safeguard the borrower against unfair lending practice and their ability to pay back the loan. Since many of these disclosures are state-specific, a BRMS can be used to generate the proper list and timing of mailings by geographic location.
Finally, during the application process, the lender makes stipulations of the borrower to ensure that they meet the criteria or profile of the loan agreement. For example, things like “Borrower needs to provide 3 months of income history” or “At the time of closing borrow must present 2 forms of identification” are common stipulations lenders put forth. Again, a BRMS can generate these kinds of messages with ease based on rules derived from the lenders policy.
It’s not hard to see where a lender can benefit from rule technology. If history is a guide, there will likely be more regulation before there is less. Either way, having a Business Rule Management System plugged into a lender’s loan origination process gives the business users the ability to “adjust the levers” of the organization’s policy to best suit their needs and the market’s needs.