Bank of the Future

Private- Label Mortgage Operations: Driving Efficiencies and Compliance While Lowering Costs

 
February 1, 2019

Private- Label Mortgage Operations: Driving Efficiencies and Compliance While Lowering Costs 

For the millennial borrowers in the United States, choosing a mortgage lender primarily depends on two things:  the price of the loan and the ability to access innovative offerings such as bundled financial services, flexible credit terms, and faster payback capabilities. This explains why they are increasingly taking their business to alternative lenders even if it means higher interest rates. According to a study by TransUnion, millennials have actually opened auto loans and leases at a rate about 2-3% higher than Gen X.  The changing customer behavior is creating opportunities for new and smaller US mortgage lenders.

In addition, big banks are cutting back on mortgage lending solutions due to the mounting risks in the face of tighter regulations from the CFPB, allowing new entrants to make further inroads into the mortgage market. New players are leveraging private-label mortgage solutions - wherein the technology and operations services of one company are offered under another company’s brand - to improve business outcomes and capture market share. Organizations can offer multiple services through such a solution. The services can be categorized into four broad categories: end-to-end back office operations, settlement services, document services, and compliance solutions. Depending on their reach and resources, organizations can leverage additional services such as attorney management and support, fraud and identity theft solutions, operational consultancy, and quality assurance.

Let’s take a look at three ways a private-label mortgage model can help lenders and banks drive superior results: 

Reduce investment and time to market: The private-label mortgage model offers new entrants a fully established ecosystem comprising advanced technologies and operations services to enable faster time to market at lower costs. How does this work? Establishing one’s own production facilities requires substantial investments in equipment, human resources, and patents. Instead, a private-label mortgage model enables organizations to leverage the services of a specialty services company, and offer it under their own brand. To reduce cannibalization, companies can follow marketing practices such as dedicated distribution channels combined with separate images, pricing, and  regional presence to drive differentiated customer perception of the brands.

Minimize cost of compliance: In today’s evolving regulatory landscape, one of the challenges faced by medium-sized lenders is the increasing cost of compliance.  Per MBA INSIGHTS, for mortgage players in the US, the cost of compliance is approximately 11% to 20% of the total operating costs.  Based on this, the average monthly cost of compliance for a regional bank originating around 150 to 200 loans per month would amount to USD 25,000 to USD 30,000 - considering the cost of appointing compliance officers, and deploying relevant infrastructure and technology.

A private-label solution helps banks and lenders offload a significant portion of the costs to a third-party provider that can easily absorb them - due to the economies of scale resulting from handling multiple clients. The result: considerably lower cost of origination per loan, enabling mid-sized banks to easily scale up or down, with complete insights into associated costs. In addition, the private label model   reduces compliance, operational risks, as well as costs, as the private label services provider takes on the burden of compliance. In a typical private-label scenario, mortgage lenders and banks are protected against compliance infractions - a coverage that is unavailable if their own employees were to commit mistakes. Banks and lenders however have the obligation to maintain comprehensive oversight of vendor’s fulfillment operations, monitor their policies and procedures, and stay alert for consumer complaints.

Consolidate multiple vendors: Managing multiple vendors for processes such as title verification, appraisal, and legal, takes the focus of mortgage lenders away from their core business due to the need for oversight, audits, and data and document exchange requirements. The private-label model helps consolidate vendors into a single touch point, reducing management costs, and increasing efficiencies.

The Private-Label Mortgage Model: The Answer to Competitive Woes

Third party private-label mortgage model is set to play a pivotal role in the US mortgage industry at a time when the industry is plagued by margin pressures, increasing competition, and constantly changing regulations. It has the potential to create exponential value for both lenders and service providers by allowing them to focus on their core competencies.  Banks and lenders with the ability to effectively manage private-label service providers from compliance, operational, and technological perspectives, can gain significant competitive advantage by leveraging the model. The role of technology will unarguably be vital – from mobile app-based transactions and e-signing to analytics engines and robotic process automation – private-label mortgage players must focus on implementing these technology levers to drive maximum business benefit and create value for the end customer.

Sushant Jain is a domain expert with TCS, with over eighteen years of experience in Banking and Financial Services, he is currently the Customer Leader for a leading US mortgage enterprise. Sushant has worked with some of TCS’ leading banking clients across the loan life cycle. He has a Bachelor’s degree in Commerce from Delhi University and is a certified Chartered Financial Analyst®.