The mortgage regulatory landscape - The way forward
It definitely appears like the mortgage industry is catching up with technology advancements and innovation. In the previous years, the mortgage divisions of the banks have engaged their resources to comply with the Qualified Mortgage standards (QM), Ability to Repay (ATR) regulations from Consumer Finance Protection Bureau (CFPB) in US and Mortgage Market Review (MMR) regulations in UK. But we can still notice a cautious optimism and enthusiasm in the mortgage players, lying in wait to innovate. The optimism can be attributed to the stabilized default rates along with the steady improvement in the housing index and the rising housing prices.
In UK market, the MMR regulation seems to have an impact on the cycle time taken to close the loan from the time of origination. While MMR mandates the transition from non-advised to the advised sales, there has been some delay in taking this change forward. This is in the terms of engaging sufficient number of mortgage advisors either in the branches or call centers. There has been a study in the market which says that the mortgage sales interview time has increased by a factor of two. If the sales activities are consuming significant pie of the time to offer, it is necessary to optimize the offer process to reduce to save time.The firms have to increase the number of mortgage advisors by optimizing their back office operations and deploying the, thus available personnel in the customer facing advisory roles. If process optimization, platform rationalization, automation of activities and outsourcing certain operations are a part of strategic roadmap, it is the right time for firms to progress towards these goals.
The banks will have to look at making the processes lean to get to the optimum cycle time that would in turn provide customer satisfaction. I recently worked with a large UK bank to optimize their mortgage sales and offer processes. Though the aim of the program was regulatory, we coupled additional features and optimized existing processes to reduce operational costs and bring significant business benefits to the bank. This is in line with the division's strategic roadmap of reducing the cost to income ratio. The consumer self-service is yet to take off in the UK market with the branches, call centers and intermediaries taking the precedence. With technological advancements, the banks should look at migrating their customers to a self-service model of operation. Most of the customers find the mortgage process to be daunting because of the complexities in understanding the terms, nuances of the product, the structure of the product, fees associated with it and the terminology. Most banks have put in features on their online websites to simplify these overwhelming tasks to the customers in the form of mortgage calculators, pre-qualification, e-documentation, mobile document capture to name a few.
According to a recent survey, most firms claim that 90% of the single-family mortgages fall under the category of qualified mortgages. Most of the firms expect to tweak their credit policies and tighten credit standards. But the same firms claim that they are reducing the repurchase risk with quality control activities and credit policy revision. Mortgage loans which have limited points and fees along with certain restrictive features are considered Qualified Mortgages, which may be acknowledged to comply with these new rules. Also, because of increased regulatory requirements, many lenders are looking at strengthening their quality control (QC) reviews. This is to enhance the mortgage quality, prevent fraud and reduce repurchase risk from the investors. Most banks expect their operational costs to increase as a result of QM rules.The banks have to offset the increase in operational costs with solutions that can cater to the need. This can be a BPM solution - a workflow solution along with an independent business rules engine that can make the division react to regulatory and policy changes with less turnaround time and cost. Banks have started embracing the confluence of big data, analytics and social media to improve the efficiency of customer scoring during underwriting. Credit scoring is undergoing changes with these advancements and the results of the ongoing analysis. Several start-ups are relying majorly on social network data to score customers based on their credit quality. This is an apt recommendation for mortgage and other lending divisions to bank on.
Most young buyers remain pessimistic about their ability to get a mortgage in contrast to that, younger home owners have grown more optimistic. Down payment and credit score are considered top obstacles for buyers in getting a mortgage. Better educational resources on credit, personal finance management, gamified tools and features can help existing customers of the bank, make more informed decisions about their housing and plan their finances early and efficiently in order to fulfill their goals.
Next Generation Trends in Trade & Supply Chain
The trade instrument, Letter of Credit has not changed much ever since it's been first used during the 13th Century AD. Trade finance has basically been the business of financing international trade, predominantly through the use of letters of credit, though perhaps the processes and regulations that have increased over time have tightened much more to curb frauds and uncertainties. However, the spread of digital technologies is now transforming all types of global trade flows in terms of goods, services, financial, people and data & communication. The pace of digitization for trade transactions was a bit slow until the past decade but now it has acquired the right momentum especially in the method of communication between partners, product innovation and in the area of mobility. The world is moving towards paperless trade and accepting global standards to communicate in a unique and consistent way. Banks cannot shy away from this deliberate attempt to achieve digitization, perhaps they should be aggressive to fuel their further growth and stay relevant in the market.
Let us understand some of the remarkable innovations that have changed the face of trade and supply chain industry in the past few years, which would revolutionize the business in the near future as well:
1. Introduction of Bank Payment Obligation TSU - BPO; an automated alternative to Letter of Credit
Bank payment obligation (BPO) works like automated Letter of credit where no manual intervention is involved. The trade transactions are electronically matched through a trade service utility (TSU) which is primarily a centralized matching and workflow engine. What this means is that the TSU helps banks and customers interact on a single platform and helps banks create irrevocable payment obligations which can be an alternative for Letter of Credit transactions. As TSU platforms are SWIFT enabled, end-to-end transactions and related communications can be electronically controlled and managed. This mechanism helps banks and customers achieve paperless trade, faster turnaround time and a seamless automated transaction flow. Global banks like CITI, JP Morgan are the frontrunners in implementing this instrument, but now many other tier1 banks across the globe are also implementing BPO aggressively.
2. MT 798 - The Envelope Message Standard from SWIFT
SWIFT has come up with another initiative - automating the current transaction flows through envelope messages (MT79).This message type handles the entire LCs, Guarantees, Standby LCs and Common Group messages by effectively linking importers, banks and exporters - i.e.an end-to-end connection. The result is again - improved process capabilities, paperless trade and reduction of process hassles without compromising on security.
3. Exchange for Receivables - A market place for Hedging Trade Instruments
Receivables exchange is an electronic platform to auction receivables. Companies, especially small and medium segment enterprises can improve their working capital by auctioning invoice(s) to a global network of institutional investors/ buyers who compete to buy invoice(s) in real-time via electronic marketplace. By connecting businesses with factoring agents, financing companies and a community of banks considering to purchase outstanding invoices, the receivables can be liquidated in as little as 24 hours for very marginal discounts. Sellers can use the exchange platform as often or as little as they wish. This online market place offers a lucrative solution for companies starving for adequate working capital.
4. Next Generation Portals, Dashboards and Mobile Banking Revolutions
With the advent of digitization, banks are taking a cautious but aggressive approach towards digitization. Next Generation Portals are offering a collaborative way of managing trade transactions. The new dashboards help customers analyze their positions, predict cash flows, interact with bank SMEs and track and monitor transaction flows online. Mobile banking capabilities are offered with payment facilities, transaction authorization and dashboard views.
Trade Finance has traditionally been an agreement to hold business. The short term nature of trade finance has often made it difficult to liquidate receivables due to excessive documentation and related processes. At this juncture, the need of the hour is to evolve new models of trade with the help of technology and innovation. There is also a growing need to source additional funding for trade flows as studies show that world trade is growing at double the rate of global GDP and soon there would be a liquidity crisis. As a solution to this problem, banks are starting to look towards non-traditional sources to ensure flexibility and consistency in their liquidity. Also from a technology standpoint, we foresee a deeper involvement of analytics, big data and mobility that would play significant role in demystifying the complexity of trade and supply chain transactions.
Technology has improved significantly and many commercial banks now have long term strategy in place to upgrade their trade finance capabilities to stay relevant in the constant dynamics of the market. This technology driven transformation is both an opportunity and threat at the same time, as early birds will have a higher chance of survival whereas those resting on past laurels may face the risk of extinction. Trade & Supply Chain Finance is undergoing a massive makeover, and it will surely catch the attention of many new players, unlike in the past!!!
- co-authored by Amit Lohani, Principal Consultant, Financial Services, Infosys
CIOs of banks face several challenges. On the one hand, they have to meet the requirements of the business and finance departments, which contend with wafer-thin margins and stagnant topline growth after the global financial crisis. On the other, they must address a rapidly changing technology landscape, which can make a dinosaur of the IT architecture, if it is not upgraded. Instinct suggests implementing the latest technology, but the numbers do not stack up. So what is the middle path - a solution that ensures the IT ecosystem is ahead of the curve and delivers optimal business results quickly and at low cost?
The answer lies in Social, Mobile, Analytics, and Cloud (SMAC).
A majority of financial institutions has adopted SMAC, but invariably, the SMAC strategy is an incremental or supplemental activity to Business As Usual (BAU) operations. The marketing department of banks often perceive social and mobile as channels to push their products, and analytics as a source of business intelligence to market products with a high degree of accuracy. The cloud is perceived as a technology that may or may not have a long-term impact on business. Such an approach needs to change fast. Retail financial institutions share customers with online retailers such as Amazon.com. If the rules of the game have changed due to emerging technologies, will the customer do business in the traditional way with financial institutions? Factors that have contributed to the success of online retailing are similar to the success of digital financial enterprises - convenience, speed and customization at a lower cost compared to the traditional business model.
Financial institutions should leverage the social channel not just for soft launch of products and build brands, but to deliver customized variations of the same product. Social networking channels provide institutions with a platform to connect customers at an individual level. Significantly, the platform increases the customer universe through referrals. Customer feedback and course correction can be prompt. Social media channels can mitigate risk and prevent fraudulent activities. The trends on social media platforms provide insights into customer behavior such as the tendency of willful defaulting, thereby providing an efficient risk management tool. Financial institutions should explore risk models that evaluate the 'social score' of potential customers before extending credit. Social networks can be used as crowdsourcing platforms to generate ideas for new products. The Moven mobile app integrates purchase behavior of customers with their social timeline and offers tools to better manage finances. Money managers can provide an app to create a more relevant financial plan for customers. On online platform Lenddo community members can use their reputation on social networks such as Facebook, LinkedIn, Twitter and Yahoo! to obtain life-improving loans, to use for education, healthcare, home improvement or a small business.
Similarly mobility needs to be looked at not just as a channel but also a way to increase the customer base. Internet on smart phones is going to change the Financial Inclusion paradigm. With Google announcing the launch of its new mobile OS Android One (launching on handsets in India this fall), specifically targeted at cheaper smart phone manufacturers, the way that banks need to look at Financial Inclusion changes. Till now an oft quoted statistic was that there are more mobiles in the developing world than there are bank accounts. Within the next decade it will change to "more-smart-phones-than-bank-accounts". The lowering tariffs of mobile internet, coming up of hot-spots across towns and cities and improving speeds with each subsequent generation of technology is going to make it possible. Banks and their vendors will accordingly need to adjust their offerings for the BOP customer. Banks will have to think about their BOP offerings also in terms of visual literacy in order to be relevant to an even bigger segment of customers and encouraging them to bank. The success of Square, which provides a credit card reader for the smartphone, illustrates how a smartphone can transcend a sales channel.
Analytics is leveraged by financial institutions to drive revenue growth and mitigate risks. Analytical tools can be used for customer acquisition and retention, risk management, marketing, customer service, and cross-selling services. We have barely scratched the surface of analytics. More data has been generated in the last two years than in the entire history of humankind. As the Internet of Things and wearable technology become more commonplace, there will be more data to manage. Financial institutions need to prepare themselves to address the tsunami of data.The proliferation of cloud technologies and improved bandwidth make it easier to set up branch outlets. Financial institutions should explore operating paperless service centers using minimal infrastructure with a majority of IT systems in the cloud. It will free up physical infrastructure during non-banking hours. A branch operating IT systems in the cloud, with appropriate security measures, can be used as a customer contact center to serve customers during non-banking hours. In Los Angeles, bank branches are let out as movie sets during non-banking hours, thereby freeing up physical infrastructure for alternative use.
Financial institutions should increasingly use social, mobility, analytics, and cloud technologies to remain competitive. They must explore new technologies to innovate their business models and not as sales or service delivery channels.
Has your financial enterprise been SMAC-ked yet?
This blog is co-authored by Jay Chandrakant Joshi (JayChandrakant_J@infosys.com)
Regulatory compliance has become a buzzword these days, with an increasing number of banks finding it difficult to keep pace with the constantly-evolving nature of the regulatory world (A survey by NICE Actimize, published in June 2014, indicates that only 48% of financial institutions have a strong "Culture of Compliance" 1). Keeping in mind that regulatory spending, strictly speaking, is a non-discretionary expense for financial institutions and does not contribute to revenue generation, the focus should be on developing a common (generic) framework that can cater to similar regulatory requirements, thereby ensuring efficient utilization of regulatory budgets.
The Foreign Account Tax Compliance Act (FATCA), a US regulation applicable to financial institutions across the globe, has certain similarities to anti-money laundering (AML) requirements and makes a good case for developing a common framework. Both regulations require banks to develop a strong Know Your Customer (KYC) culture - while AML-KYC focuses mainly on determining the customers' identity (occupation, country of origin, etc.), FATCA-KYC focuses on separating potential US customers from non-US customers with the aim of preventing offshore tax evasion.
Broad-level similarities between the two can be highlighted as below:
There are, however, some differences between the two as well:
Despite these differences, at a broad level, the data requirements for the two regulations indicate a good amount of overlap.
This commonality makes a very strong case for devising a generic framework that can help a financial institution reap the rewards of synergies. The advantages that a common framework may provide are:
As we can see, the nature of the similarities between AML & FATCA enables synergies in implementation that offers a significant scope for cost savings. However, the decision on whether to implement a common framework for AML and FATCA should be taken only after due deliberation and impact assessment. If the impact of either of these regulations on a financial institution is limited, it may be wiser to keep the frameworks decoupled and implement independent small-scale (in-house) solutions.
As the mortgage industry increasingly embraces technology and digitalization in every sphere of its business, it is witnessing a radical change in the way business is carried out. While this move is partially driven by competition, the transformation is also a proactive initiative on the part of lenders to delight digitally-savvy customers, who expect the ecosystem surrounding them to respond to digitalization, just as they do. When technology enables customers to use online channels to buy anything and everything, customers naturally expect their preferred lender to offer the ability to buy mortgage online as well. When technology enables customers to use their portable mobile devices as an alternative to a scanner, customers expect their preferred lender to offer the ability to use mobile devices to scan loan related documents and transmit them in seconds, rather than waiting for a day to visit the branch.
Digital options are growing slowly but steadily in the mortgage industry. During the initial days, customers were able to use electronic means to just make their mortgage payments using the "bill payment" feature available with their banking facility. Due to the rapid strides in the industry, there has been a prolific change in the mortgage technology landscape in recent years. Technology supports each and every step of the mortgage life cycle, meeting the needs of lenders as well as customers.
Some of the trends gaining traction include:
1. Document verification
Loan processing always includes verification of documents, including paystubs, W2 statements, and tax returns. This is one of the crucial factors that determine mortgage turnaround time, a key metric of an efficient mortgage origination process. Lenders can have world-class technology to capture the loan application but it would mean nothing if the document verification process is lengthy and time-consuming. The InstantSOURC platform, a product launched recently by PointServ, addresses this need specifically. Using this platform, lenders can electronically request and retrieve borrowers' documents including W2's, bank statements and pay-stubs. InstantSOURC sources documents from around 19,000 partnered financial institutions and uses industry-leading secure practices. In addition to helping avoid delays, it also eliminates fraudulent document submissions.
2. Paperless mortgage
Mortgage is synonymous with paper, from disclosures to closing. In the mortgage world, it is not uncommon for mortgage documents to have dozens of signatures and hundreds of initials. However, banks have started realizing the benefits they can reap from paperless mortgage. It's not just the volume of paper that they stand to save but also the ability to strengthen the relationship with customer, who is likely to be delighted to view the closing or disclosure package online and imprint their signature using an e-signature technology. Customer acceptance used to be a roadblock a few years ago despite the availability of technology but times are changing, with statistics pointing out that, in the next four years, more than half of all mortgage loans are likely to originate online. However, the key to success is to establish online collaboration between internal and external stakeholders in the mortgage loan process.
Mobile devices have had a far bigger influence than any other comparable technology in the recent past, with every industry vying to integrate mobility into their business model. Mobile apps around mortgage have increased as well. While there are mobile apps that can help customers track mortgage interest rates, there are dedicated apps that can streamline the mortgage origination process. Quicken Loans offers a mobile app that can enable the customer to apply for a mortgage, scan/fax their mortgage documents and schedule a loan closing.
4. Interfaces with third-party applications
Traditional loan origination systems (LOSs) typically interface with very few third-party applications, such as credit reporting and automated underwriting systems. As such, the ability of such systems to assess credit risk or provide accurate decisioning was minimal. A loan application with a good credit score and positive automated underwriting system (AUS) results alone cannot guarantee negligible credit risk. Imagine a scenario were the LOS interfaces with a market-leading analytics tool, exchanges loan data digitally, and receives the applicant's risk score. Or where the LOS communicates with a tool that enables monitoring of undisclosed debts that are not registered or reported in the credit reports. Such options provide lenders with the ability to better assess credit risk and adds sophistication and convenience to the loan decisioning process.
Digitalization is impacting the mortgage process and it is imperative for lenders to stay tuned to these changes and adopt them proactively. Technology is no more a roadblock and today's customers are very receptive to digitalization efforts. It is therefore crucial for the lender to expend time, money and efforts to identify digitization opportunities and translate them to services that delight customers.
The number of bank branches is gradually reducing in many developed countries. In the U.S. alone, over 3,000 bank branches were closed between 2009 and 2012. In Spain, more than 5,000 branches have been shut since 2008. At the same time, bank branches continue to be the preferred channel for deposit account opening, loan application, high-value transactions, and personalized financial advice. The branch remains the main sales channel for high value added banking products.
Let us examine the factors that are driving changes in branch banking -
Banks must reinvent their branches. A few strategies to get tech-savvy customers to the branch:
Branch transformation should aim at enhancing the customer experience, convenience and engagement. Outsourcing partners help banks in redesigning branches, automation, security enablement, and hardware and software maintenance. First Citizens National Bank is implementing a branch transformation strategy in partnership with Diebold. Self-service and personalized digital interactions are being enabled across the bank's branch network. Deposit and teller automation will transform its branch operations. Is your branch relevant for tomorrow's customers?
This blog is co-authored by Mayank Goel (Mayank_Goel03@infosys.com)
The Foreign Account Tax Compliance Act (FATCA) Model 1 Intergovernmental Agreement (IGA) has been signed between the Australian and United States governments. Several Australian financial institutions have invested in developing a FATCA solution in-house or purchasing third-party FATCA products to meet the July 1, 2014 FATCA deadline.
Enacted in March 2010, as a part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA is effective from July 1, 2014. FATCA aims to combat cross-border tax evasion by US individuals and entities holding investments in offshore accounts. According to FATCA, foreign financial institutions (FFIs) and non-financial intermediaries must adhere to stringent Internal Revenue Service (IRS) disclosure requirements. Non-compliance with FATCA regulation can result in a 30% tax withholding.
Foreign institutions can implement FATCA by adopting the FATCA regulations or adopting the IGA (IGA1 and IGA2) approach. The Australian government has adopted the IGA 1 approach to implement FATCA. It significantly reduces the pressure of implementing regulations by FFIs.
Adopting the IGA1 approach has several advantages:
1. Reduction in the cost of compliance: IGA helps Australian financial institutions reduce the burden of FATCA regulations
2. Reciprocity of information between governments: The US government will also reciprocate by sharing information with the Australian government about accounts of Australian individuals maintained by US financial institutions. It is a win-win situation for both countries as they receive information on people who evade tax by investing in foreign countries.
3. Addressing legal barriers: Several countries have restrictions on the level of information that can be shared with other countries. Signing the IGA provides direction to Australian financial institutions about the kind of information that they must share with the IRS. Financial institutions will share information with the Australian Competent Authority, which will consolidate information shared by financial institutions in the required format and share it with the IRS.
Compliance with FATCA
An Australian financial institution will be deemed as FATCA compliant and not subject to withholding when it complies with statutory requirements. However, if a financial institution does not fulfill the requirements, it will not be subject to withholding unless it is treated as a non-participating financial institution. A financial institution will be treated as a non-participating financial institution if it does not resolve significant non-compliance within 18 months from notification by the IRS.
1. Reports providing information about identified US reportable accounts to the Australian Competent Authority, annually
2. Reports to the Australian Competent Authority about each non-participating financial institution to which it has made payments and aggregate amount of such payments for 2015 and 2016, annually
3. Perform 30% withholding on any US source withholdable payment made to the non-participating financial institution if Australian financial institution has assumed withholding responsibility under Chapter 3. If the Australian financial institution has not assumed withholding responsibility and makes it's US source withhold payments to a non-participating financial institution, then the financial institution must provide information for withholding and reporting to the immediate payer of such payment.
4. The financial institution complies with IRS registration requirements provided on the IRS registration website
The signing of the IGA will benefit the Australian government, financial institutions and citizens. Both Australian and US governments will save millions of dollars from tax evaders based on the information exchanged. Financial institutions will have less pressure to comply with FATCA since IGA compliance is less stringent than FATCA Regulations. IGA also provides a level playing field for individuals which don't have investment opportunities overseas. In the long term, tax evasion will be curbed globally as regulations similar to FATCA will be drafted by governments. Do you have a road map for FATCA compliance and beyond?
1. FATCA IGA Model1 Agreement US Australia - 28.04.2014