Mortgage Industry Advancement

Published in February 2014 issue of Tomorrow's Mortgage Executive

For years Paperclip has been helping the securities and insurance industries go paperless. Paperclip follows the paper filing metaphor of Cabinet, Drawer, Folder, Document, Page and Annotations. Replacing the paper filing system with an electronic mirror version, training and adoption comes quickly. Projects involving elaborate workflow rules are lengthy deployments, hard to follow especially in the financial services industry and simply the wrong place to focus; workflow belongs in the data system, why, because that’s where all the data is. Now Mike Bridges, President of Paperclip, speaks out about how the mortgage industry can adopt straight through processing in a quick and easy way.

Q: You’ve spent the last 20 years in the electronic document manage business across Life Insurance, Securities and Mortgage industries. How are they the same and how are they different?

MIKE BRIDGES: They are the same because everyone wants to reduce or eliminate paper within their process and company. If paper is your choice to receive, process and store, it’s costing $1.30 per page cradle to grave. The financial services industries in the early nineties knew they wanted to get rid of the paper and those who had the staff and the budgets implemented enterprise wide workflow and document management solutions. Institutions implemented expensive solutions with the promise to stop paper at the mailroom and gain efficiencies by elaborate document workflows. By the early 2000s, the majority of those systems were pushed out of the workflow and took on the role of document archiving. Now in 2014, the trend is overwhelmingly outsourcing to an online provider. SaaS vendors offer application expertise, economy of scale, code maintenance, DR&BC and a path of innovation.

Their differences are not that great. They all have either a captive or independent distribution channels; ninety plus percent execute their process with paper, receive paper from their trading partners and close with paper. Mortgage transactions have the most documents and third-party interactions compared to Life Insurance or Securities. Securities as an industry really solved their problem in the early 1970s with the creation of the “Depository Trust & Clearing Corporation.” New York City before the DTCC would literally messenger around town, stock certificates and checks. The DTCC did two things, stored all the paper certificates securely around warehouses; not much different than how the county maintains the property title, and through computer trading, allowed one net settlement account transfer at the end of the trading day. The Securities industry has made and continues to make progress in transactional business, but when you step outside of trading, they’re right back to paper.

The Mortgage industry over the past few years has found a new respect for electronic documents and their budgets are reflecting it. Still dominated by paper, the new flood of compliance and litigation collecting documentation and using it effectively requires document management.

Q: We hear all the time that it’s not about the technology; it’s about how fast people can change. Over the last decade, what have you seen as some of the most significant adoption or change?

MIKE BRIDGES: In the past 10 years one of the most significant adoptions is probably the fact that we’ve reached the point where organizations will accept an imaged page of paper and allow the shredding of the original paper, clearly making the image page the archived exact copy of record. Working with over 500 financial services companies, electronic document management is a staple. These players understand you convert paper as early as possible and manage image files.

Another example of imaging use is Check21. The Life Insurance industry started accepting check images for payment processing five years ago. Producers have been sending check images for years with the application, which carriers would accept to start the underwriting, but they still required the paper check to be mailed. Today, many carriers will accept the front and back scans of a check and will process the check image as an ACH transaction into their bank account; the sender then returns the check marked void or shreds it.

Technology compliance has dramatically changed the industries. With the movement of computing resources to the cloud or SaaS hosting, this data move has placed more pressure on that Service Provider. In the past the ISV (Independent Software Vendor) developed software and the customer would deploy it (i.e. the data was their responsibility). Now, the data is the Service Providers’ responsibility. Most recent are the new HIPAA regulations clearly defining the Service Provider as a “Business Associate.” This means the Service Provider could be subject to HHS/OCR fining authority. This type of thinking is beginning to show up in new government regulations and will continue.

E-Sign Point-of-Sale solutions have been the big focus for the last decade. The end goal was “Straight Through Processing” (STP), the complete elimination of paper or the need of paper to complete a business transaction. Some have found success when they apply STP to a slice of the process, in other words, just taking a bite of the elephant. Weak adoption continues to plague the effort for several good reasons. Data collection, who’s keying in all the data into an application or worse, a browser, is the main problem. I’m not referring to contact info; I’m talking about the data models (MISMO, LBTC, ACORD, etc.) which require over 200 fields of information to be captured for the most basic transaction. Some of these transactions can require thousands of fields to be completed; let’s remember MISMO has over 3,000 defined terms and ACORD is not that far behind. The fact that this data is typically collected from diverse sources (Appraisals, Credit, Lender, LOS, etc.) which causes their challenge to flip to integration with trading partners. This has suffered because the ISV community could not wait for the Technology Standards groups to produce the best road map. Many times these standards discussions where dominated by the 800-pound gorilla in the room and politics ensued; and the end result was flawed standards.

Q: Given the progress of imaging and STP, why does the use of paper continue to grow every year?

MIKE BRIDGES: It is funny that the use of paper continues to grow given the impact of the Internet. I recently read that the overall growth is one percent every year through 2017- much better than the 6% growth of the 90s. Some experts contribute the increase to the practice of “TransPromo.” This refers to a transaction document that consists of a promotional message that is positioned alongside essential transactional information. I think the financial services industries are seeing the growth in new compliance standards. Remember, each new rule requires some documentation of evidence, more paper.

Q: Will we ever see STP work end to end?

MIKE BRIDGES: No, back to the number one problem. Where is all the data coming from? The Life Insurance industry five years ago turned to “Call Centers.” These centers would call the applicant and ask many reflexive questions to complete term applications and produce an ACORD 103 message and filled in forms. These are not simple solutions, Carriers maintain over 1,000 reflexive questions for call center activity. Again, any sophisticated products that require professional guidance typically end up on paper applications.

The Mortgage industry leverages an ISV community and a process called “Scatter/Gather,” let the subject matter experts collect the data and send it back to the requestor. This of course requires data exchange standards. Today the standards process is fundamentally flawed. This is why successful ISVs continue to develop or acquire technology that builds out the STP or End-to-End process. This approach removes the needs for standards and integration since the ISV is in total control. An effective standards model or vendor can only grow the ISV community and the opposite will produce several large ISVs. Ultimately, the market will choose the winners but unless we get an effective way to exchange data, it’s no contest.

Q: If current standards are flawed, what could be an alternative?

MIKE BRIDGES: What I really mean is that the exercise of Standard Organizations to send everyone home with a standard to develop themselves will result in many different implementations. Twenty five percent of ISV staffs do nothing but work on customer standards integration.

What I learned many years ago in the Power Plant Generation industry is that their data model was the most effective way to exchange and use data. I first introduced this model at an AIIM conference (Association of Image and Information Management) in 1996. Members of NAILBA heard the speech and we began to introduce the concepts into their technology meetings. Their work produced the Electronic Document eXchange (EDX) Standard 1997. Their real work focused on a data dictionary of defined terms. Several vendors implemented EDX and today LBTC Surveys report 80% of their documents exchange as images. My company moves over 4 million documents per month between 500 plus companies.

NAILBA Tech’s next project was to create a data dictionary for their current data messages and end the resource drain of integrating with all the non-standard standards. Before that effort started, NAILBA outsourced its standards to ACORD. Currently, ACORD has started working groups to design a data dictionary model.

Since 2010, MISMO has been focused on building a business Logical Data Dictionary (LDD) and Reference Model to ensure semantic clarity and promote interoperability. If done well, this could be the break ISV’s needed-finally everyone is calling the same thing, the same thing. I know we’re watching this closely. Exchanging data and documents is one of our core businesses.

Q: With great adoption of STP, how will that impact imaging?

MIKE BRIDGES: Demand for imaging, Electronic Document Management (EDM), will continue to grow. Only EDM can accomplish the goal of being paperless. LOS or AMS solutions may store electronic documents commonly called vaulting. The truth is that EDM users need to service all their business operations (e.g. Accounting, Human Resources, Compliance, Legal, Commissions, Marketing, etc.). EDM (SaaS) must meet the requirements to be accepted as their books and records. E-Signed transactions or XML files are just another electronic document to EDM. EDM SaaS providers function as a Disinterested Third Party (D3P), which provides safe harbor from those involved in the transactions, including the point of sale vendor. The Securities industry requires it; one of their many regulations says “if the electronic document is the exclusive document, a copy shall be stored with a D3P.” In addition, the D3P signs an agreement allowing access to the documents and data without the custom’s consent. EDM is more than a vault by an order of magnitude but there is no question, EDM integration and communications are a requirement. EDM SaaS provides the best practices married with technology compliance, disaster recovery and business continuation requirements as well.

Q: Since you mentioned it, how do you see technology compliance changing in the near future?

MIKE BRIDGES: Enforcement is the only thing that’s really going to impact technology compliance. I do know we have the tools today to secure our systems, but unless organizations like FINRA, HHS/OCR, CFPB and State Regulators put it on their checklist, identity thief will continue to grow. The most vulnerable are those DIY people storing electronic documents on their internal file servers to people using free websites for storage or secure their emails and file transfers. When the enforcement arm gets going, it will be quick and the collection of fines will be welcomed by their respective treasuries.

Two-factor authentication is becoming popular for granting access to Non Public Information (NPI), but I don’t think the public will find it user friendly. Many of the regulations today allow the consumer to opt-out of secure transmissions when putting their NPI on the Internet; this waiver does not relieve third parties. The business community storing and exchanging third-party NPI must comply, “vendors must remain above reproach.”

Internet Protocol Lockout Service is another trend some companies are pursuing. This lockout or isolation service provides public access from within a distinct geographic location. I’m a company that only conducts business in the United States or a given State and isolate my inbound/outbound traffic to only the US or my State.  Stop all other traffic before it reaches my firewall. This approach greatly reduces the risk of outsiders trying to do mischief or Denial of Service attacks or worst, a desktop takeover.

Apathy remains our largest challenge. We have the tools and until enforcement arrives, systems will sit there like stacks of money on a park bench with nobody watching.

Industry Predictions

Mike Bridges thinks:

  1. Processing paper cost $1.30 per page, going electronic cost $0.30 per page. We can process electrons better, faster and cheaper than we can process atoms.
  2. A vibrant vendor community is directly related to the quality of their standards.
  3. If you ignore Technology Compliance, either the bad guys or the good guys will find out; either way you’ll regret it.