White Paper

Mortgage Lending in The Digital Era:Smart ways to improve origination, servicing, and transferto the secondary market while reducing costs.

Samuel D. BakerManaging Principal, Xerox Global Services, Inc.August, 2004

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Table of Contents2 Introduction2 Challenges of paper-based mortgage lending3 Benefits of enabling your work processes

with electronic document management3 Quicker application to funding cycle times4 Enhanced loan servicing4 Improved customer satisfaction

and retention4 Faster “unload” to the secondary market5 Process capacity matched to market

conditions5 Reliable, cost-effective information access

and retrieval5 Lower cost of compliance and increased

asset value6 Infrastructure and work process requirements6 Conserve capital for revenue growth8 Conclusion

IntroductionTraditional mortgage lending processes typicallyutilize cumbersome, paper-intensive work processesthat decelerate business—exactly the opposite of whatis needed in a highly competitive and volatile market.

Today, though, many leading banks and mortgagelending institutions are finding that by minimizing oreliminating physical paper handling, they are able to:

• Increase time-to-revenue velocity and reducecosts by accelerating and improving workprocesses.

• Enhance asset quality and increase customerservice levels.

• Mitigate risk with improved regulatoryand investor compliance.

This paper highlights some of the challengesassociated with paper-based mortgage lendingprocesses and the benefits that can be gainedby transitioning to a paper-free mortgage loandocument management environment.

Challenges of paper-basedmortgage lendingMortgage lenders contend with a host of different,complex, multi-page documents and forms, includingapplications, earnings verifications, statements, taxforms, credit reports, appraisals, and contracts—eachof which that needs to be accepted, prepared, andprocessed so they can be put to use.

These documents can be divided into twogeneral categories:

Internal documents, including forms and documentsgenerated within the organization. Internal documentscan be controlled and lend themselves to XMLformatting, standardization and encoding techniquessuch as GLYPHSTM to facilitate recapture, indexingand cataloging by embedding meta-data.

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External documents, including documentscollected from borrowers and other sources outsidethe mortgage lending company. The lender thereforehas no control over the creation of these documents.External documents are much more ‘random’ bydefinition and are more difficult to automaticallyprocess into an electronic domain. Most often, somehuman inspection of the document is necessary tocategorize and extract meta-data accurately.

For many financial institutions, handling externalpaper documents is time-, labor-, and cost-intensive,and pose a large drag on operational efficiency:

• Physical paper forces “serial” work processes,which means task distribution must followthe physical paper distribution. This restrictsaccess to information, increases cycle time,and causes load imbalances across the workforce.

• Making multiple copies and distributing loanfiles between departments increases costs, causesversion control issues, and can be a securityproblem as personal financial information isreplicated, distributed, and stored with veryfew controls.

• Scaling paper-based processes is difficult andlabor intensive. Increasing unit production forceslabor increases, while periods of lower unitvolume must be met with labor force reductions.Meeting this cyclical demand of human resourcesis difficult in a volatile market where rates changeliterally every day.

• Storing and retrieving paper-based informationis laborious and inefficient. Information thatneeds to be instantly accessible can take hoursor even days to retrieve, lengthening originationand securitization cycles. In addition, paperdocuments are easily misfiled, damaged, andare difficult to secure.

• Manually organizing paper documents for reviewby government entities (for activities such as FairLending audits) are costly and time-consuming.

• Paper loan documents take up valuable officespace and/or require costly warehousing. Canceledand denied transactions are especially noticeable,as they represent all cost and no revenue andmust be maintained for two years in most states.

The inefficiencies of handling paper have causedsevere effects on mortgage lending institutions.From an operational perspective, inefficient workprocesses slow mortgage origination and securitizationand cause poor closing ratios. From a cost perspective,paper-caused inefficiencies negatively impact thesale value of assets as well as customer service. Asservice degrades, lenders fail to retain customers throughpayoff—which translates into excessive turnover andwrite-offs. In addition, as service degrades, customersare more likely to re-finance with another lender.

Benefits of enabling your workprocesses with electronicdocument managementBy replacing manual, paper-based processeswith electronic document management, mortgagelenders are able to achieve tangible, measurable,repeatable results:

Quicker application to funding cycle times

Enhancing Loan Origination Systems (LOS) byadding electronic document management canaccelerate origination and underwriting. Simplyput, loan origination and underwriting processesare simplified and streamlined by making the rightdocuments available at the right time for LoanProcessors, Credit Analysts, and Closing Agents.Also, adding electronic document management tothe origination work process improves the ways inwhich borrower information is accepted, processed,and utilized within the electronic loan folder.The results:

• Faster “originate and unload”

• Less drag on warehouse lines of credit

• Lower hedge fund risk

• Reduced cost of operations

• Higher real asset values

• Improved servicing asset values

• Superior regulatory compliance

• Better customer service

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The benefits of electronic document managementcontinue even after loan origination. Automatingverification, matching, and approval decisionsspeeds application-to-loan and sales cycle times.During Re-Fi waves, immediate access to a borrower’sdocuments accelerates and simplifies the processwhile reducing risks, and enhances customer loyaltyby reducing the chance customers will take theirloans to another lender.

An electronic, rules-based, document-centric workprocess can eliminate non-value-added work steps,enabling collaborative and parallel workflows duringloan origination, and proactively managing loan filecompleteness. Rules-based document managementcan also be used to support approval decisions byverifying all required documents are present, andproviding them to the appropriate point in thebusiness process.

Enhanced loan servicing

Traditionally, the handoff from origination toservicing can take up to 90 days—and sometimesmore. Naturally, customer service is slowed andimpeded when the Servicing organization does nothave all the information necessary to assist customers.For instance, data regarding payment and/or statusmay be elusive or non-existent until the loan folderarrives at the Servicing organization. Therefore, allthe information and documents needed to service theloan are not readily available to the Servicing staff.

Conversely, instantaneous access to information enablesfaster and more informative and accurate interactionswith the customer. Reducing NODD (number of daysdelinquent) is enhanced by immediate access to theloan documentation because the servicing organizationcan more accurately manage the delinquency. If theloan forecloses, packaging and selling the loan isfaster and less costly while preserving as much valueas possible in the transaction.

Improved customer satisfaction and retention

Retaining a strong customer base is vital to reducingturnover, avoiding pre-payments and write-offs, andpreserving servicing asset revenue streams. Usingelectronic document management solutions, customerservice can be improved throughout the lending cycle.The origination process is expedited and approvedwhen customers know where they are in the pipeline,which documents have been received, and whichdocuments need to be completed next. At the sametime, customer satisfaction can be significantlyimproved by managing the document collectionprocess with tools specifically designed to trackthe required documents. Proactive documentmanagement alerts the lending staff as customeror vendor documents arrive, and then proactivelysignals which forms and documents are neededto move the transaction forward to completion.Proactively “guiding” the transaction and requireddocuments through the pipeline improves the lendinginstitution’s interactions with customers, enablesfaster response to inquiries, reduces time delays, andminimizes customer frustration. Electronic documentmanagement further reduces the risk of customerfrustration (and lender embarrassment) due to theinability to quickly locate borrower documentation.Operationally, lenders are able to leverage efficienciesto enhance customer retention and increase profitabilityduring the re-finance process. Having the customer’sdocuments on hand and reviewable for the newtransaction saves both the customer and thecompany significant time.

Faster “unload” to the secondary market

The post-closing process and sale to the secondarymarket is characterized by financial reconciliationand extensive document quality checks. The post-closing inventory of documents is greatly enhancedand accelerated when the document managementsystem has insured compliance with the neededinventory of documents. This acceleration canproduce significant savings in warehouse interestcosts and an overall reduction in the hedge fund

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requirements used to offset the warehouse. Aconsistent pattern of high quality and completeloan documentation can enhance the value of acompany’s portfolio—driving unload value aboveface value.

Implementing an electronic document managementsystem has significant advantages:

• With electronic mortgage files and loan books,mortgage lenders can dramatically reduce thetime and costs necessary for post-loan-closingquality control and the pooling and shipping ofloans for delivery to the secondary market.

• Electronic loan books make it easier to audit anddemonstrate the quality of assets during unloadto the secondary market, essentially reducingthe risk for the buyer and, in turn, enabling aquicker sale at a better price.

• Speeding the transfer of the loan to the secondarymarket reduces financial holding costs for lenders.

• Version control, automated routing of documents,and reduced risk of misfiling/loss of documentsprevents costly mistakes.

Process capacity matched to market conditions

Mortgage processing is extremely volatile. Paper-based operations must expand and contract linearlywith cycles of the market. Contributing to the complexityis the fact that different regions in the U.S. exhibitthe volatility at different times. Paper-based systemscan’t ‘follow-the-sun’ or use a geographically dispersedstaff to handle peaks because paper can only effectivelybe in one place at one time. Electronic documentmanagement enables a flexible architecture that canscale up and down seamlessly, move work to whereexcess capacity exists, and ‘follow-the-sun’ to speedthe process, enhance revenues, and shed costs.

Reliable, cost-effective information accessand retrieval

Worldwide electronic search and retrieval capabilitiesprovide fast, reliable, secure access to mortgage filedocuments and information from a central digital

repository. Using Web browser interfaces, branches,brokers, and central operations can search for andeasily access documents on demand, ensuringinformed decision-making while reducing delays,errors, and costly rework. An intuitive indexingsystem utilizing meta-data and a familiar folderstructure maintains the security and integrity of thedocuments contained in the repository, connectionsbetween end users, and repository servers.

• Immediate access to borrower documentationimproves internal operations, responsiveness,and the ability to make timely, accurate decisions.

• Storing electronic mortgage file documentsin a central repository enables lending staffto easily access and work on a loan filesimultaneously, greatly improving theefficiency of the loan process.

• Electronic distribution of digital files eliminatesmany fax, mail, and overnight delivery costs.

• Electronic information distributed on requestimproves loan servicing and increases customersatisfaction and loyalty.

• Comprehensive process controls ensure dataintegrity and eliminate typical workflowmistakes like lost documents, misfiling, andredundant processing.

• Security features protect confidential information,enabling only authorized personnel to accessspecific documents.

Lower cost of compliance and increased asset value

Mortgage lenders are highly regulated. Not onlydo annual state inspections impact productivity,inspections and audits by other agencies, tradingpartners, and litigation events all strain productivityand impact bottom line results. The time, cost, andlabor involved with continually monitoring compliancecan shift an institution’s focus from making loans toresponding to non-productive events. Compliancehas two key benefits:

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First and foremost, compliance with State andFederal regulations can avoid significant fines andincarceration, and eventual loss of reputation. Next,compliance with the secondary market can enhancethe quality of real and servicing assets. Increasedquality leads to higher sell values, better tradingpartner relationships, smoother operations, andlower costs.

Infrastructure and workprocess requirementsObtaining these “digital benefits” requires developingboth work processes and an internal infrastructurecapable of handling high volumes during peakmortgage lending activity. For paper-to-digitalconversion, many institutions utilize central imagingcenters, where hardcopy documents are convertedto the appropriate digital format in bulk. The newlycreated digital files are categorized into logicallynested Mortgage Loan Folders, identified by industrystandard document types, indexed with loan specificmeta-data, and integrated into the loan originationand/or servicing workflow using industry standardWeb services. At the same time, distributed imagingservices located at each individual branch or regionaloffice enable independent brokers to capture mortgagedocuments early in the cycle.

Furthermore, to maximize the ability to accelerateand improve loan origination, servicing, and saleinto the secondary market, mortgage lenders mustimplement a system that:• Allows for early and efficient capture of

paper documents.

• Shares knowledge and customer interactionevents that reside in multiple formats,including image, text, video, and voice.

• Has extensive management tools built-in thatenable users to complete transactions efficiently.

• Enables electronic collaboration betweenlenders, their customers, and the secondarymarket—including document sharing andviewing the status of in-process loans.

• Generates comprehensive reporting thatprovides work-in-process queries, historicalproductivity and quality statistics, and datawarehouse functionality so managers canproactively manage the business.

• Uses Web services and Java Messages toachieve integration with current systems.

• Includes disaster recovery and operationalredundancies to ensure business continuityin the event of a disaster.

Conserve capital forrevenue growthBuilding an infrastructure and re-engineering workprocesses can take focus away from a mortgage lender’score mission. In many cases, using scarce capitalresources to implement an in-house documentmanagement system is not a good strategy for anorganization. It is for this reason that many mortgagelenders find success by partnering with XeroxGlobal Services.

By ensuring the seamless, affordable integrationof document and image management with line-of-business applications, Xerox Global Services helpsmortgage lenders improve loan origination, servicing,and unload without having to spend precious capitalon building an infrastructure and then developing andmaintaining a document management system themselves.

Xerox Global Services has a solution in place—allmortgage lenders have to do is tap into it. XeroxGlobal Services then applies proven Six Sigmamethodologies, metrics-based Service Level Agreements,and best practices learned from many customers inthe banking industry to deliver the Mortgage LoanDocument Management system on a cost effectivesubscription basis.

Expertly trained Xerox Global Services consultantswith significant industry experience work closelywith mortgage lenders to identify, quantify, and

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realize hidden opportunities to save money, find newsources of value, and simplify how work gets done.They combine extensive knowledge of documents,file formats, conversion, business informationdatabases, and over 17 years of digital imagingprocess experience to accelerate mortgage origination,improve loan servicing, and put lenders on the pathto paperless mortgage loan sale into the secondarymarket. Automation and process controls areincorporated to eliminate manual processes andincrease operational efficiency.

• Access to leading-edge technologies withoutlarge investments on non-core businessoperations enables rapid, affordable adoptionof process improvements.

• A flexible, versatile infrastructure enablesorganizations to react to volatile market conditionsby quickly increasing or shedding capacity.

• Over 1,400 document types, pre-configured,in a Mortgage Loan Document ManagementSystem arranged in the typical Mortgage Loanfolder provides for consistent and replicableoperations and document collection.

• Escalation procedures provide process qualitymanagement and attainment of agreed-uponservice levels.

Xerox Global Services helps companies streamlineand digitize their document-intensive businessprocesses— everyday processes like customercommunications, billing, training, or recordsmanagement. Our people work closely with clientsto identify, quantify, and realize hidden opportunitiesto save money, find new sources of value, and simplifyhow work gets done.

For more information on how Xerox Global Servicescan help implement solutions that accelerate andimprove mortgage loan origination, servicing, anddelivery to the secondary market, visitwww.xerox.com/globalservices.

Sam Baker, Managing PrincipalAreas of expertise: Electronic DocumentManagement SystemsIT Industry: 18 yearsXerox Global Services, Inc.: 5 years

Managing Principal – Client Account LifecycleManagement PracticeCurrently Sam leads a team of Principals focused ondelivering Document Management systems to theBanking and Financial sectors. This team is responsiblefor matching document technologies with customerbusiness requirements. Sam’s team is responsible forthe business relationship between Xerox GlobalServices and its clients on a worldwide basis.

Throughout his career, Sam has held managementroles in Fortune 50 and Small Business enterprises.Sam had been implementing document managementsystems since 1989. He has been a field engineerresponsible for installing and maintaining EDMSinfrastructures and for Product / Program developmentof a workflow and document management system fora major European systems integrator. Sam has beenthe MS Director of a Health Care company anddirected the technology integration for an acquisitionand merger between two healthcare services providers.

©2004 XEROX CORPORATION. All rights reserved. Xerox® and The Document Company® are trademarks of Xerox Corporation. 08/04