InsightsTechnology And Regulation: The Mortgage Industry's Balancing Act

This article by Kiran Vattem – EVP and chief digital and technology officer at ServiceLink and Forbes Councils member – was originally published on Forbes.com.

Innovation. It's not a luxury; it's a necessity. It's something that shapes the way we see and experience the world around us. A steady stream of innovative products is what keeps our economy flowing with new and exciting opportunities. It's a widely accepted belief that the mortgage industry has been slower to adopt and implement the types of innovative technologies that are prevalent in other sectors. The slower pace of adoption could be due to many reasons, including supporting legacy technologies or "tech debt" and the need to stay aligned to manual business processes and industry regulations.

The idea that innovative technology is key to remaining relevant in a competitive market is not lost on lenders. They understand that there is an absolute need to incorporate digital solutions into their road map to automate processes and boost consumer satisfaction. Most lenders have spent the past few years investing large amounts of money into upgrading their technology. A recent Fannie Mae Mortgage Lender Sentiment Survey found that lenders ranked "consumer demand" and "operational efficiency (technology)" as two of the top three factors that will drive the largest increase in profit margins over the next three months. On the other end of the spectrum, lenders ranked government regulatory compliance last in terms of helping their bottom line.

As is the case in most traditional industries, there has also been a slight disconnect between regulation and innovation in the mortgage industry. For valid reasons, including the implementation of regulatory requirements, Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac essentially drive what technology gets embraced by key mortgage process participants, including lenders. This is a classic case of innovation and regulation balancing one another. In some cases, though, regulations were put in place before the technology was developed or introduced. Therefore, the efficacy of the tech product is minimized by the lack of opportunity on the open market.

The question becomes: How do we keep regulations and technological advancements in sync? It's a careful balancing act and an area of real opportunity. Regulation is absolutely critical to maintaining public trust within the mortgage landscape. It's a system of checks and balances that ensure standards, compliance and transparency, which all ladder up to maintaining a healthy and fair mortgage market.

Mortgage technology, if used properly, can actually help to achieve regulatory benchmarks through various compliance, security and quality standards. One of the reasons why artificial intelligence (AI) and machine learning (ML) are important to the future of the industry is because they offer increased operational efficiencies. A survey by Fannie Mae found 71% of credit unions are expected to investigate, test or fully implement AI/ML to improve their dispute and fraud management programs. Many lenders are also investing heavily in anti-money laundering (AML) and risk management technologies.

While the cost of implementing AI could be high, it could not only provide efficiencies but also reduce the cost of regulatory compliance if done right. For example, with the current remote work adoption, more and more consumers are finally embracing eClosings. The process of Remote Online Notarization (RON), or eClosings in general, provides greater certainty on loan quality by eliminating simple mistakes such as missed signatures or documents.

The same can be said for eNotes, which allow for the creation, signing and vaulting of notes digitally. These technologies reduce paperwork and help lenders focus more on the borrower experience. There are also new self-inspection valuations products, which are currently being reviewed by the GSEs, that are designed to remove the element of human bias to better comply with fair lending laws. AI could also be leveraged to solve other sticky problems in the property preservation, title, flood and closing components where the workflows are a little more complex. While the adoption of these digital capabilities is accelerating, it will likely take time to cut through some of the red tape.

The transportation and health care industries are two areas where innovation and regulation are working hand in hand. Researchers developing self-driving technology and cancer detection tools are using AI to interpret and improve regulatory compliance. Amazon and FedEx have built autonomous technology to make drone deliveries, and are going through regulatory approvals to get FAA clearance.

Warehouse logistics is another example of innovation and regulation staying in sync as robots are being leveraged to help with picking, sorting and storing merchandise in a safer manner. These types of advancements have given rise to RegTech, which is a booming industry that delivers tech products specifically focused on regulatory monitoring, reporting and compliance. It was relatively unknown until a couple years ago, but, based on certain studies, it is expected to be a $25 billion market by 2027.

In conclusion, the current pandemic has accelerated the need for an infusion of innovation in the mortgage process. Borrowers are savvier than ever, and the need for better technologies will only increase, as more consumers look for a more satisfactory end-to-end digital home buying experience. For this reason and others, the tech-savvy players in the mortgage industry and the GSEs need to collaborate to truly reimagine what is possible. It's important that these conversations stay focused on building and implementing the most promising technologies that are poised to deliver quality, security and cost savings, while enhancing the consumer experience and maintaining public trust. This shared goal will ultimately help the industry innovate and govern at the speed of technology.

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