Why Every Loan Officer Should Strive for the Perfect Loan File
Before the economic recession of 2008 the average cost to originate a loan came in at roughly $5,985. Flash forward to Q1 of this year and the same cost to originate a loan had skyrocketed to a historic high of $8,887.
In a bit of good news, Q2 showed production costs settling back down to an average of $7,774 per loan.
Even with the drop, this is nearly a 30% increase in less than a decade.
Much of this rise has been attributed to the stringent acceptance guidelines from investors and the GSEs regarding how well documented loans must be if they are to be sold in the secondary market. New regulations such as TRID have also added more fuel to the fire through process changes and delays.
How does it increase production costs by requiring a higher quality of documentation in a loan file?
By changing workflows and demanding perfect documents and information that wasn’t necessarily required before, efficiency has slid and the number of touches on a loan file has increased sharply. When file touches increase, there is a negative correlation to the bottom line.
The negative impact of too many touches
When a loan file gets kicked back from underwriting due to data/documentation issues, it creates a chain reaction of negative impacts. The cornerstone issue is time. Each extra touch on a loan file adds days to the origination process, and requires processors and underwriters to devote additional hours to a loan.
You, or your processor, now needs to go back to your borrower to request additional documentation or information. All the while the other loans that were being processed now come to a temporary halt while the loan nearest to its closing date has to be prioritized.
This becomes a vicious cycle. Now there is more pressure to push other files into underwriting, which makes them more likely to contain errors or omissions.
As your turn times go up, the cost to originate the loan for you and the lender goes up, your borrower may lose their rate-lock (or have to pay for an extension) and when borrowers get frustrated your pull through rate could suffer.
All of this just to get back on the desk of the underwriter.
The exposure and possible expense for the lender doesn’t end there. Lenders are constantly hedging in the secondary market against their rate-lock inventory. When locks don’t fund, their is an expense to the investor that will be passed back to the lender by virtue of less than favorable future pricing.
How to reduce touches on loan files
First and foremost, you must set clear expectations for your borrowers from the start of your relationship. They must know the impact of bad information, and that anything and everything will be found by underwriting. With a firm understanding of that reality, you can begin to orchestrate the collection of documentation.
Second, you need to ensure that your borrowers know exactly what documentation or information is being requested of them. The reason we recommend a web-based document management solution, is because it visually reminds borrowers what was requested, what they’ve submitted, what’s been accepted, and what requests are still outstanding.
Web-based document solutions can be accessed from anywhere there is internet, and can’t be lost like a sheet of paper or a file folder.
Finally, consider the value the automated verifications. While not every lender has jumped to embrace the technology, the security and data-integrity benefits make it safe to assume these services will become the rule in the near-future, and no longer the exception.
As much as half of all issues that arise in underwriting come from data integrity problems. Usually the information that has been input on the 1003 loan application does not match up with the supporting documentation that was submitted.
This issue has created an opportunity for direct-source data to be pre-populated into the 1003, thus avoiding human error that comes when processors have to manually parse tax returns, W2s, pay-stubs, and more.
For example, when Floify customers utilize our dynamic 1003 in combination with the AccountChek and Equifax Trended*Hi-Lite integrations, the assets and liabilities found on those reports can be pre-populated into the 1003 automatically. This eliminates the need for duplicate entry and the possibility of human error in those sections of the application.
A submitted 1003 will always match the supporting documentation in that situation.
The bottom line here is that the simplest way to increase revenue for both yourself, and your lender, is to reduce the touches on a loan file. This could be done by refining your origination process, and making sure that your processors are keyed in on exactly what documentation is needed for different loan types.
There is also technology that can be leveraged to improve efficiency and provide clarity to borrowers so that nothing falls through the cracks.
Reduce touches on loan files and watch as your days to close shrinks, pull through rate increases, and production costs decrease. All of which will put more money in your pocket, and make you look fantastic in the eyes of your lender.