driving regtech with industry and technology … · enote on the mers® eregistry, naming the...
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DRIVING REGTECHWITH INDUSTRY
AND TECHNOLOGY STANDARDS
B r i a n S t u c k y
S e p t e m b e r 1 9 , 2 0 1 8
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CHASE BANK HIT WITH DOWNGRADE OVER JUMBO MORTGAGE UNDERWRITING, FINTECH GAPS
S U B T I T L E G O E S H E R E
Moody's Investors Service downgraded JPMorgan
Chase's prime jumbo mortgage originator assessment
to its second-highest rating, citing the bank's growing
reliance on correspondents with delegated
underwriting authority and shortcomings in its
technology infrastructure. (August 24, 2018)
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AGENDA
• Mortgage Industry Overview
• Technology – Past and Present
• Drivers for Change
• Standards – Technology & Business
• Case Studies
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DecisionX 2018
MORTGAGE INDUSTRY OVERVIEW
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THE MORTGAGE MARKETS
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RULES
• Pre-Qualification / Pre-
Approval
• Loan application threshold
• Qualified Residential Mortgage
(QRM)
• Underwriting
• Product eligibility
• GSE purchase requirements
• Pricing / Fees
REGULATIONS
• Fair Housing Act (FHA)
• Equal Credit Opportunity Act
(ECOA)
• Truth in Lending Act (TILA)
• TILA Integrated Disclosure Rule
(TRID)
• Real Estate Settlement
Procedures Act (RESPA)
• Home Mortgage Disclosure Act
(HMDA)DecisionX 2018 6
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DecisionX 2018 7
Housing Market Stabilized
Restrictive regulations
Origination costs doubled
• More services
• More paperwork
• More time
Getting a Mortgage is Harder
Higher processing costs
More paperwork
Longer waits for approval
Fewer loan products
Stricter lending rules
POST 2008
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DecisionX 2018
TECHNOLOGY – PAST AND PRESENT
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RULES IN THE MORTGAGE INDUSTRY
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• CLUES (1993) – Countrywide Loan Underwriting Expert System
• Expanded to the GSEs and nearly every major financial services institution over the next 15 years
• Applications• Origination, Underwriting, Closing, Pricing, Loan Selection
• Secondary, Loan Administration, Servicing
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TRADITIONAL APPROACHES FAILED*
* o r a t l e a s t f a i l e d t o m e e t a l l e x p e c t a t i o n s
• Only the “richest”
• Platform prices
• Niche expertise to develop
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TRADITIONAL APPROACHES FAILED*
DecisionX 2018 11
60% of BRMS still managed
via regular SDLC
Complexity and variety in
representation of rule logic
Business rules are too often not managed by those who should be
empowered to manage them – i.e., business
owners and stewards…
Those who know the rules!
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FINTECH
• Originally, the term applied to
technology applied to the back-
end of established consumer and
trade financial institutions
• Term has expanded to include any
technological innovation in the
financial sector
• B2B, B2C, Mobile
• In mortgage, a focus on interfaces
and customer interaction
REGTECH
• Technology that was created to
address regulatory challenges in
the financial services sector
through innovative technology
• Help businesses comply with
regulations efficiently and
inexpensively
• Driven by reliance on consumer
data
• Anti-fraud, money laundering
(KYC), personal data management
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KEY EMERGING TECHNOLOGIES FOR MORTGAGE
• Artificial Intelligence (AI)
• Blockchain
• Robotic Process Automation
(RPA)
• APIs
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DecisionX 2018
DRIVERS FOR CHANGE
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NEW: MARKET
• An increase in millennials making
home purchases is a call to the
mortgage industry for a quicker,
more efficient digital process.
• Mortgages made to millennial
borrowers for new-home purchases
comprised 91% of closed loans in
June, up from 81% at the start of the
year and from 90% in May.
• Millennial requirements:
• Technology capable
• No brick-and-mortar
• Require fast and mobile
• Face-to-face … but only digitally!
OLD: REGULATIONS
• Regulatory burden
somewhat lessened but in
some cases only shifted
• Still burdensome given the
velocity of change
• New regulations to handle
new processes (e.g.,
eMortgage)
• New regulations for new
technology (e.g., AI)
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BARRIERS TO REGTECH
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• Bridging the gap between business and technology – the latter must be flexible enough to handle complexities and nuances of compliance
• AI techniques alone won’t satisfy regulators – must explain why decisions were made• Article 22 of the GDPR requires that companies be able to explain to their customers how machine decisions are
made
• See Denis Gagne / Trisotech!
• Uncertain regulatory landscape
• Dealing with legacy systems
• Regulators unwillingness to articulate specific positions and interpretations
• Companies forced into thinking locally when they should be looking globally
• Open, API-based architectures able to rapidly evolve and share are critical
• Need coordinated industry-wide design and collaboration effort to set clear standards
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DecisionX 2018
STANDARDS
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Decision as a service for both commercial and
government services will become a primary delivery
model, allowing decisions (and the automation
enabled by them) to be easily plugged into
applications; this will require more of a business-first,
model-driven approach rather than having decisions
built in code by developers.
Nathaniel Palmer, bpmNEXT 2018
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DMN – DECISION MODEL & NOTATION
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Methodology
Technology
Exchange
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MISMO
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Mortgage Industry Standards and Maintenance OrganizationDeveloper of technology standards for both residential and commercial property
transactions in US markets. By promoting improved data consistency, MISMO aims to reduce costs and increase transparency while promoting confidence in
mortgages as an asset class for investors.
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NEW MISMO MISSION
MISMO’s vision is to standardize how the mortgage industry communicates.
Our mission is to drive standardized data ANDinformation and improved business practices between all mortgage stakeholders through collaborative and innovative initiatives that improve efficiency, reduce costs and facilitate stakeholder success.
NEW STANDARDS
MISMO will announce that DMN and BPMN are the official recommended standards for the mortgage industry and will provide:
• Guidance
• Training
• Support
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MISMO + DMN
L a n g u a g e + S y n t a x
• Import / Create a DMN data
structure based on the MISMO XSD
• Reference these attributes (with all
enumerations and data typing)
directly in decisions
• Export a combined and fully
standardized message
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OPPORTUNITY: MOVING TOWARDS TRUE EXCHANGE
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Deployment
Options
Dissemination
Services (DoD)
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MORTGAGE SERVICE LIBRARY
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DecisionX 2018
CASE STUDIES
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MISMO LIFE OF LOAN: ORIGINATION
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URLA
U n i v e r s a l R e s i d e n t i a l L o a n A p p l i c a t i o n
• Conditionality in URLA spec
• Submission to DU (Fannie Mae
AUS)
• Submission to LAS (Freddie Mac
AUS)
• FHA / VA (loan products)
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URLA RULES URLA DECISION MODEL
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DIGITAL MORTGAGE
eNote
An eNote is an Electronic Record evidencing a debt (also known as a Transferrable Record) under the Electronic Signatures in Global and National Commerce Act (E-SIGN) and the Uniform Electronic Transactions Act (UETA).
It uses the MISMO SMART Doc format, which locks together data and presentation and is tamper evident, so the document can be system-validated to guarantee its integrity.
eNote Process
1. Lender creates the eNote and makes it
available to the system used at closing
2. At Closing, the Borrower affixes their
signature electronically to the eNote
3. Lender’s closing platform tamper seals
the eNote
4. Lender sends a copy of the eNote to
their eVault
5. Lender (or their Agent) registers the
eNote on the MERS® eRegistry, naming
the Lender as Controller and other
required details (this is the Register
eNote)DecisionX 2018 29
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ENOTE ADOPTION SLOW
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• For eNotes created using Version 1.02 SMART Doc specification: • Technical quality has been inconsistent
• Some eNotes would not pass a vigorous validation test
• Concern that flaws in the SMART Doc® could make the eNoteunmarketable or invalid has been a hindrance to adoption of eNotes
• Variability among eNotes makes it more difficult to implement an automated certification process
• No interoperability between eVaults – transfer between them is difficult
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USE DMN TO PROCESSENOTE VALIDATION
E N C O U R A G E A D O P T I O N
• Increase confidence
• Reduce costs
• Improve quality
• Promote consistency
• Facilitate testing
DecisionX 201831
Lenders
eVaults
GSEs
MERS
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DEVELOPING THE ENOTE DECISION MODEL
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CONCLUSIONS
• Combination of industry and technical
standards provide new powerful opportunities
• Decision modeling and emerging technologies
provide powerful tools for new Regtech (and
better Fintech)
• Potential for other industries, e.g, insurance
with ACORD
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THANK YOUB r i a n S t u c k y
Dec is ionX
b k s t u c k y @ d e c i s i o n - x . c o m
w w w . d e c i s i o n - x . c o m
7 0 3 - 6 2 4 - 4 8 7 7
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