GSE Loan Delivery: Interim Analysis and Approach

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1 Cognizant Insights GSE Loan Delivery: Interim Analysis and Approach Executive Summary While the recent housing crisis can be attributed to a number of factors low interest rates, exotic products, lack of audit controls, inadequate credit risk analysis, insatiable investor appetite, predatory lending and irresponsible borrowers one of the key factors was the non-availability of consistent, accurate and detailed origination data. This problem has led to inadequate consideration/evaluation of several of the factors stated above. Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, created the Uniform Mortgage Data Program (UMDP) at the direction of the U.S. Federal Housing Finance Agency (FHFA). UMDP aims at significantly improving the depth, breadth and quality of data throughout the mortgage life cycle to promote transparency, accountability, compliance and better risk management. This white paper discusses the benefits of the UMDP program, as well as the implementation challenges faced by players across the mortgage industry. It concludes with an approach for deploying business and technological improvements that can reduce risk and optimize the entire loan origination process. UMDP Program Overview The GSEs announced the launch of UMDP on May 24, 2010, under the directive of the FHFA. UMDP is aimed at helping organizations implement uniform appraisal and loan delivery data standards, which would facilitate data accuracy and integration of mortgage data across the industry landscape. As depicted in Figure 1, this program comprises three components. While the technical requirements and specification for UAD and are identical, the requirements are not consistent for both GSEs in the case of conditionally independent 2 data points. UMDP at a Glance Component Objectives Data Elements Uniform Appraisal Dataset (UAD) Uniform Loan Delivery Dataset () Uniform Collateral Data Portal () Figure 1 Improving data quality by having uniform standards for capturing appraisal data. Improving data quality by having uniform standards for capturing loan delivery data. Facilitating electronic submission of appraisal data files to the GSEs through the uniform residential appraisal report form. 209 data points. 1 Over 600 data points, approximately half to be implemented in Phase l and the rest over time. UAD includes all the data points required to complete the appraisal report form. cognizant insights april 2012

2 A Step in the Right Direction UMDP represents an attempt to address the various data issues plaguing the industry. Supported by UMDP, the breadth and depth of loan data delivered on a timely basis through a common industry standard will lead to significant improvements in transparency for investors, as well as strengthen risk management capabilities, lender accountability, secondary market pricing and reporting/analytics. This initiative will not only lay out the foundation for future controls, but also be essential in bringing back investors to the secondary market. Timelines and Impact Analysis The GSEs have laid down specific timelines to implement the components of UMDP, which starts with implementation of UAD by September 1, 2011, to implementing by November Key timelines and impact analysis on key players is summarized in Figure 2. Key participants impacted will be loan origination system (LOS) product vendors, originators, GSEs, third-party service providers, rating agencies, investors and servicers. LOS vendors: Numerous banks have installed these platforms to originate thousands of loans per month. LOS vendors will be the key drivers of implementation as they will need to enhance and roll out their products across several banks. Originators: These companies have the ultimate responsibility to be compliant as they will be responsible for submitting loans in prescribed format to the GSEs. GSEs: These organizations will need to enhance several internal systems to incorporate enhanced data into their existing pooling, pricing, trading, investor reporting and analytics systems. Third-Party Service Providers: Appraisal management companies will need to start providing data in the required format to originators through their existing delivery channels and will need to enhance their delivery channels to provide adequate data depth and breadth per UMDP. They will also need to update forms for their vendor network that actually process the orders. Transition Timeline Sept. 1, 2011 Dec. 1, 2011 March 19, 2012 July 23, 2012 November 2012 UAD All appraisers must All loans with application Appraisal report must be Loans with an application complete the appropriate received dates on or after this submitted to the if: received date on or after appraisal forms as date must include the applicable The loan application is December 1, 2011, that are required by the UAD. data points for Phase I. dated on or after delivered to either GSE on or after July 23, 2012, (previously December 1, 2011, and For loans with application March 19, 2012) must meet the An appraisal report received dates on or after this Phase I requirements. is required. date, the appraisal report form, if required, must be submitted Doc File ID ( data Doc File ID ( data point to the prior to delivery, if point Appraisal Identifier) Appraisal Identifier) is the loans are delivered on or is not required at delivery required at delivery on or after March 19, until July 23, after July 23, All loan deliveries on or after this date must include the two additional data points required by the SEC. The exact date is yet to be communicated. IMPACT UAD and process new UAD compliant forms. Enhance systems/forms and train vendors/staff on using the new appraisal form. prepare staff to support and process data per. prepare staff to support. GSE Enhance several internal systems to move from current data breadth and format to new standards. prepare staff to support and process data per. prepare staff to support. prepare staff to make final preparations for mandatory delivery of appraisal forms through the implementation of the. Ensure users are configured in. and process data per. Final preparations for the delivery of Phase I loan data. Originators/Third-party Servicers Upload appraisals to the, working with vendor if applicable, to capture and store the Appraisal Identifier data point (DocFileID) for delivery with the. and process data per final requirements. Ensure that they provide the required data elements to lenders required per SEC. Servicers Enhance systems to process loans with enhanced data requirements and investor reporting. Rating Agencies/Investors Enhance pricing models (data and logic) to include enhanced factors in price determination. Figure 2 cognizant insights 2

3 Rating Agencies/Investors: Both will need to enhance their pricing models in terms of data and logic to include enhanced factors in price determination. Servicers: These companies will need to prepare for boarding and managing loans with enhanced data requirements as well as enhanced and consistent investor reporting. Implementation Challenges implementation across various systems and stakeholders is not without challenges. The challenges include multiple parties and stakeholders with conflicting priorities, extensive customizations, multiple installations, training and change management, coordination and embracing a unified view of these changes. Specific challenges include: Multiple Parties and Stakeholders: Successful and timely implementation of UMDP is possible only through seamless coordination between various stakeholders originators, LOS vendors, third-party service providers and various units within these entities (IT, business, data warehousing (DW), etc.). Given the different priorities of these stakeholders and their business units, this is easier said than done. Product vs. Client-specific Requirements and Customizations: LOS vendors and originators are struggling with identifying, managing and implementing changes to their disparate versions of systems, as considerable custom code has been added on top of base products. For some originators, particularly those that use plain vanilla features, this change might be easier to make and manage, but for those that have customized the platform significantly, identifying and implementing changes will be difficult given the limited availability of LOS vendors professional services teams. Updates to the customized origination products for a variety of clients (as mandated by UMDP) are a daunting task for product vendors. Simultaneously, product vendors will need to make updates to their core products to facilitate new implementations in the future. Simple Field Additions Will Not Help; Role-based Access and Accountability Is Required: LOS vendors and originators who view this simplistically (i.e., just add the fields) will not be able to take true advantage of this opportunity if they do not take into account access controls and accountability for each field. This will be a challenging task given the fact that detailed analysis of hundreds of screens, scores of roles and hundreds of fields will be required to achieve this along with corresponding validations. Training and Change Management: Given the number of parties involved and extent of changes required, training the staff to adapt new fields will be a difficult habit to break. Analyzing the impacts on business processes and swiftly aligning them to go in hand with the changes might turn out to be another complication during the implementation. Changes to Data Warehouse Infrastructure: Any changes to the source systems will have a corresponding impact on the DW. Originators should implement the changes to the DW along with the source systems to avoid inaccuracies in the reports generated and analysis done with the data in the DW. Tight Data Dictionary and Edit Checks: The GSEs have published a very tight data dictionary for loan delivery with several business rules at field level. The XML file will be rejected if the supplied data does not meet the specified guidelines. This would lead to extra programming effort in terms of building these rules up front into the LOS, as well as checking prior to loan delivery. Exception reports and exception analysis and remediation teams may be required for an initial period to overcome these challenges. Suggested Approach A solution approach to implement UMDP requirements comprises a unified plan and governance model across various stakeholders and units within them, GSE data dictionary-driven approach, and a deeper/long-term view of implementation. As depicted in Figure 3, the approach would start with the GSE data dictionary, identification of data gaps, and a determination of how to holistically fill these gaps, followed by an implementation plan. Additionally, the implementation approach should be flexible and extensible to conform to future enhancements with the implementation of an extensible business rule engine to check and compare each data element against documents (images/pdfs) and data point source system information to ensure data accuracy and consistency. An effective audit trail should be generated to track the prefunding reviews and cognizant insights 3

4 An End-to-End UMDP Implementation Plan Figure 3 Identify Data Gaps GSE data dictionary is the starting point. Map current data set to GSE data dictionary. Identify gaps data/depth. Data Gap to Business Function/Role/Screen Mapping Map each data gap to business process/function and role. Map each gap to various applications; start upstream and traverse downstream. Define business rules for each data element. Define document, field and system mappings for comparison. Define and Prioritize Sound change management practices to enhance systems and business process to capture data. Implement through unified governance model. changes to reduce buy-back requests from the GSEs/investors (see Figure 3). As with data submission guidelines for various loss mitigation programs on the servicing side - Home Affordable Modifications Program (HAMP) and Home Affordability Foreclosure Alternative (HAFA) the data dictionary for UMDP is equally tight and could be a cause for concern. These constraints should be handled at the LOS application and data submission/dw stage by building the rules up front in the application as well as downstream (prior to submission). Originations IT/DW should take guidance from their servicing counterparts who have already implemented a process very similar to UMDP for various government programs. As depicted in Figure 4, the ideal architecture should comprise data consolidation and standardization across sources, transformation, edit checks and corresponding exception management and submission. This would provide a single source for data definition management (e.g., data definition repository), access and distribution across the enterprise, while taking into account the UMDP requirements. Conclusion UMDP is a step in the right direction to bring transparency and accountability among various stakeholders. UMDP not only provides transparency and accountability but also lays the foundation for possible restart of the secondary loan market. Delivering high-quality data to investors in a consistent and timely manner will allow investors and rating agencies to effectively evaluate, rate and manage risk associated with mortgage investments. While UMDP will require up-front investment from various participants such as lenders, vendors, servicers, investors and rating agencies, in the long run all parties will benefit from improved data quality and transparency and business processes enabled by a technology refresh and resultant new business opportunities. This industry-wide effort will lead to a more transparent, efficient, consistent and streamlined operations and risk management for all industry participants. Loans supported by UMDP will foster an environment of trust leading to improved participation in the secondary market. UMDP Implementation Data Flow Data Sources Master Data Transform Edit Checks Consolidate all data in single DW for effective control & distribution (Sources will be LOS, POS, Lead, CRM etc.). Up-front implementation of rules in source apps to capture the data points through business rules engine. Maintain in enterprise data definition and control repository. Transform & standardize data. Source of truth across the enterprise. Transform data to UMDP standards. Data comparison across system and documents. Check data rules before submitting. Exception management & resolution. Submit to GSEs. Figure 4 cognizant insights 4

5 Footnotes 1 A data point is the term name that must comply with Mortgage Industry Standards Maintenance Organization (MISMO) naming conventions and end with a MISMO class word to indicate the category of data to which the term name belongs. 2 GSE-specific data points are required for all loan delivery transactions when a defined business condition exists. These conditions are not consistent for GSE delivery applications. About the Authors Ashish Shreni is the Consumer Lending Practice Head with Cognizant Business Consulting and has worked for over 12 years in the banking, brokerage and insurance space on projects spanning business and IT strategy, business process optimization and complex project execution. He can be reached at Ashish.Shreni@cognizant.com. Avishek Bimal is Consulting Manager with Cognizant Business Consulting, and has worked for over 12 years with leading banks across project management, business process optimization and consulting. He can be reached at Avishek.Bimal@cognizant.com. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 137,700 employees as of December 31, 2011, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ USA Phone: Fax: Toll Free: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) Fax: +44 (0) infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, India Phone: +91 (0) Fax: +91 (0) inquiryindia@cognizant.com Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.