24 | THE M REPORT

Lean, Mean Mortgage Machine

Today’s unwieldy, outdated operations need a serious overhaul to improve quality, tame costs.

By Henry Santos, Managing Director, Accenture Credit Services

FEATURE

THE M REPORT | 25

FEATURE

I t may be 2013, but in many ways, the mortgage industry still operates as it did decades ago. Lenders rely heavily on manual processes, ad hoc and non-standardized work

routines, subjective decision-making, and other outdated operating methods.

Clearly, in today’s environ-ment—marked by cost pressures, heightened customer expecta-tions, and intense regulatory scrutiny—the industry can ill afford to follow yesterday’s play-book. What’s needed is a model that applies modern manufactur-ing principles—quality control, industrial engineering, and sys-tems design—initially pioneered by Japanese manufacturers following World War II.

Indeed, Japanese manufactur-ers’ ability to produce high-quali-ty, low-cost electronics, cars, and durable goods in the post-war years was defined by a commit-ment to the principles of con-tinuous quality improvement, as represented by Lean Six Sigma, Kaizen, and other managerial philosophies.

Mortgages and Manufacturing

M ortgage processing and traditional manufacturing

have more in common than one might initially think. The fulfill-ment process—from completion of a loan application through processing, underwriting, closing, and investor delivery—is often referred to as a “factory model.” The term “loan factory” is tied to the concept of industrializing the fulfillment process by introduc-ing Lean Six Sigma methodology. That includes implementing ad-vanced technologies and analyt-ics to drive business intelligence, boosting efficiency through relentlessly consistent processes, and creating a more accountable environment.

Today’s increasingly complex operating environment is creating

a huge challenge for lenders’ “loan factories”: how to lower costs while increasing produc-tivity through more efficient, repeatable processes. Driving out variation and creating standard-ization methods are critical to delivering that efficiency, as it is in manufacturing cars or other consumer goods.

Incorporating Manufacturing Discipline

H ere’s how the re-engineering of a mortgage process can

incorporate the five principles of lean manufacturing:

Value. The loan fulfillment process must only contain activities that result in the

aiding or creation of value for the customer. Thus, each activity can only exist if it creates quality (accuracy and compliance), cost, service (customer experience), or delivery (cycle time and data accuracy) advantages. Any effort that does not contribute directly to these objectives is waste.

Mapping Value Stream. The order and flow of activities have to be designed to en-

able efficient execution. The steps in a given process build and con-tribute value to each subsequent step. Re-work and redundant activities destroy value, waste time and money, and create frus-tration for customers as well as employees engaged in inefficient and poorly designed activities.

Flow. Work should pro-ceed at a consistent and unwavering pace from start

to finish with predictable and constant progress. Barriers such as hold times, work queues, and re-work loops increase complex-ity, interrupt flow, and impede the ability to consistently commit to delivery cycle times, all of which results in higher costs.

Pull Theory. Large pipelines requiring constant manual auditing to sift and find the

next “activity to complete” create obstacles that quickly become unmanageable and unpredictable. With lean manufacturing prin-ciples, however, work is pulled through the system only when the process or the people have capacity to adopt and execute that work. To maintain cycle times and predictable closing rates, mortgage activities should move through the process at scheduled and predictable times, ready to be addressed on arrival at each step in the process.

Perfection (Continuous Improvement). Collecting performance data and ap-

plying analytics allows statis-tics to describe a “voice of the process” that constantly identifies inefficiencies and patterns of inconsistency, enabling real-time re-prioritization and corrections.

Designing the Mortgage Factory

P rocess mapping and failure detection techniques—bor-

rowed from Lean Six Sigma methodology—isolate frequently recurring defects and process constraints that hamper the mortgage loan fulfillment pro-cess. Breaking out the traditional workflow into its value-added sub-components, and asking the following questions, is the launch point for designing a modern factory approach:

• Why is this step relevant? • What outcome will this step achieve?

• How do we know when a task is thoroughly executed?

• How should we measure the success of this task?

• When should this activity occur in the value stream to create logical, efficient flow?

• Can this task be outsourced to a specialty service provider who can perform it with greater ef-ficiency and quality at lower cost?

• Can this task be eliminated or automated?

Next, work activities must be ar-ranged in a lean fashion, with the following principles as guidelines:

• Prioritize the customer experi-ence and service outcomes when designing any activity. Incorporate customer-facing portal technology that enables customers to monitor loan status in real-time and upload documents, without having to engage bank personnel.

• Eliminate activities that don’t add value.

• Reorganize work into parallel or staggered activities that can be completed concurrently, so the output of one activity becomes the logical input for a subsequent activity.

• Balance staffing models based on normative cycle times and time-study measurements, and design the capacity of any single activity in the value chain so it harmonizes with downstream and upstream feeder work stations. This enables work to flow from one active station to another without resting in a “holding bin” until the next process can catch up. Files keep moving with minimal wait time.

• Install in-line meters that moni-tor cycle time compliance and quality compliance to ensure that a loan file is accurate and complete before it proceeds to the next station. The goal is to process the loan file so that it can close without any re-work-ing or re-routing.

• Collect data and monitor trends that identify activities that do not yield intended outcomes so that corrections can be made.

01

04

05

02

03

26 | THE M REPORT

FEATURE

Lean Manufacturing in Action

Among the many challenges lenders face in modernizing

their operations, four areas are most in need of attention:

Communication. Enable borrow-ers to track the real-time status of their loan so that they feel like they are a part of the process, and to specify how and when they want the lender to commu-nicate with them. Rules-driven workflow. Workflow processes should organize and distribute work requirements based on the status of other activities or the introduction of new data into the file. In a rules-driven workflow environment,

underwriters and processors no longer must memorize a checklist or rely on instinct when complet-ing a task. Instead, written rules logic and workflow automates the “pull” process by dropping work into the next available work station. Thus, instead of underwriters reaching randomly for the next file to work on, the system drives the next “most eligible” file to review to the next available underwriter based on his or her skill level and SAFE Act licensing.

Specialization. The roles of under-writing, processing, and closing should each be broken down into subsets of activities that can be far more efficiently managed. For example, the job of processor can be reorganized around five sepa-rate components—income, assets,

appraisals, insurance, and title—with each processor assigned to handle one of those tasks. Placing tasks into discrete buckets en-ables more standardization and higher productivity in fulfilling loan files. Additionally, training subspecialists to handle a single task takes far less time than training an individual for broader job profiles.

Compliance. Compliance and quality audits should be inserted throughout the loan process, from application to funding. This helps ensure that the data in the file is accurate, properly computed, within the boundaries of investor eligibility parameters, and is complete enough for the next process to occur without having to rework or send the file back for inaccuracies. Keeping

the loan compliant, creditworthy, and complete at each milestone eliminates surprises at closing, re-ducing the likelihood of material defects that could result in loan buybacks.

The credit industry lags dramatically behind the auto, aerospace, textile, and electron-ics industries in adopting and customizing Japanese manufac-turing principles. Industrializing the loan fulfillment operation requires rethinking process de-sign, enabling workflow through business rules logic and technol-ogy, and applying analytics to monitor performance. Doing so will create empirical definitions of what is working and what is not, thereby enabling lenders to improve quality, decrease costs, and comply with regulations.

Design processes, services, and products that generate value and differentiate capability in terms of service quality and cost containment.

Eliminate steps from the value stream that can result in increased holding patterns, re-work, delay, or defect. Rework steps to eliminate value erosion.

Create just-in-time delivery model with few or no queues where work stops while waiting for attention; eliminate wasted time and effort. Produce on demand as work is presented.

Use measurement and monitoring tools to identify process constraints, attack constraints, and sources of waste; continue perfecting the value stream.

What is the step action workflow that yields the most efficient production? What are the unnecessary steps that create waste? What are the non-value steps? Create a value stream model that optimizes value in the most efficient manner.

Key Principles of

Lean Design

Source: Accenture