Time for Originators to Take a Second Look at Outsourcing

This piece originally appeared in the October 2023 edition of MortgagePoint magazine, online now.

The year 2022 was one of the toughest years the mortgage industry has experienced in a long while, with the average cost to originate leaving lenders at a loss on each funded loan. This year has been just as challenging.

As we begin preparing for 2024, mortgage originators should once again look across the Pacific Ocean to countries that have long been used for offshore banking operations.

Financial services companies have utilized offshore resources to great success for more than two decades. As we know, with the continued development of information technology (IT) and advanced communication technology, our world has become a global village. As a consequence, cheaper, task-based work jump-started the offshoring/outsourcing evolution, and has evolved into global partnerships revolutionizing entire industries. With that in mind, offshoring certain functions of mortgage operations to a third-party service provider located in another country still provides several benefits that should not be overlooked during a tumultuous time in the mortgage finance and real estate sector.

Cost Savings
One of the most significant benefits of offshoring mortgage operations is cost savings. Companies can leverage lower labor costs in countries such as India or the Philippines to reduce operational expenses and increase profitability–and, most importantly, lower the cost of services and pass these benefits onto their customers. By reducing charges and the overall costs of processing a loan, lenders become far more competitive while increasing profitability and sustainability in a volatile market. Companies can also take advantage of tax holidays provided by different governments at specific locations, such as special economic zones or software technology parks, thus further reducing operational costs.

Increased Efficiency
Offshoring can also help increase efficiency by allowing companies to focus on their core competencies while outsourcing non-core functions. This capability helps reduce operational complexity, streamline processes, and assign experienced and expert workers to more productive tasks. Companies we work with that pursue this route routinely utilize and promote best-in-class processes and procedures, having the benefit of working with multiple clients and platforms across the mortgage industry.

Offshoring also provides efficiencies through their hours of operation. After all, time is money. Hours of operations can be set depending on each client’s need either, be it working U.S. business hours or overnight U.S. hours–providing originators with practically 24 hour-a-day operation. This “follow the sun” approach reduces cycle time for loans, which leads to an enhanced customer experience.

In some cases, offshoring providers are also able to provide consultancy work for their clients. The consultants review process flows, workflows, tools, and reports in an effort to create a more efficient and robust workflow.

Many companies also use in-house patented technologies to streamline workflows to improve pipeline management. This robust reporting and pipeline management not only benefits the outsourcing provider, but also the originator as the information presented is often far more in-depth and utility-based, allowing clients to identify internal roadblocks and create more accurate forecasting. Add it all up, and these efficiency gains help to reduce the cost to originate a loan.

Access to Specialized Skills
In a still-tight labor market, offshoring can provide access to a pool of specialized skills that may not be readily available in-house. Companies routinely provide language skills, technical expertise, and specialized knowledge in areas such as underwriting or loan servicing. Companies providing niche skills like underwriting have internal mortgage underwriting academies that provide in-depth training and certifications for the U.S. mortgage sector. Those certified underwriters receive sign-off authorizations and can approve loans using the supervisory and branch licenses wherever regulations of such states permit them to do so.

Originators outsourcing certain operations can also be provided with skilled experts who can perform compliance reviews of loans pre- and post-closing, which are intended to be sold in the secondary markets or onto institutional investors. Such due diligence activities, which are a high-cost initiative onshore, can be completed by offshore at a fraction of their costs.

Scalability
Originators often need to quickly ramp up or down their operations based on changing market conditions or business needs. With that in mind, it makes perfect sense to try and reduce the stress and legal requirements of hiring by using certain offshore resources. This type of workforce management can be left to offshoring companies who can move resources across the spectrum, all while scaling operations as required by their clients.

Improved Customer Experience
By leveraging specialized skills and expertise, offshoring improves the quality of service and overall customer experience. This naturally leads to increased customer satisfaction and loyalty, especially by helping originators reduce cycle times. Customers are more likely to conduct business with organizations with strong customer experiences, leading to more revenue opportunities and a lower customer acquisition cost. Not to mention, the lender is also able to create specialized workflows and teams to fulfill rush requests, ensuring borrowers meet their closing dates. This results in higher customer satisfaction, increased loyalty, and trust from customers.

Value Adds
Offshoring companies are not only providing next-generation services, but are also providing various value-adds to existing services using improvement and automation tools.

Within the mortgage space, there are many examples of companies providing automation services in Automatic Document Recognition (ADR)/Optical Character Recognition (OCR) for document classification, versioning, and data extraction. All of these services ultimately limit manual intervention in the processing of loan files. Top-tier firms also provide in-house workflow tools to ensure seamless pipeline management and facilitate the movement of loans in a more streamlined workflow. In addition, firms that have multiple secure work sites ensure business continuity should any onshore or offshore location go down.

While there are many advantages to offshoring mortgage operations, it is important to note that there are potential risks and challenges, including language barriers, cultural differences, regulatory requirements, and security concerns.

When considering these challenges, it is very important to work with an offshore company who has already addressed these risks.

Evaluating Risk #1: Physical Security Concerns
Top-tier offshoring companies have their offices in software technology parks, special economic zones, or specially designated information technology (IT) cities. Access to such locations is restricted and includes multiple layers of security, including physical security posted at entry/exit, restricted badge access, and mandatory identification/access cards.

Only authorized personnel are allowed to access buildings and premises.

In addition, offshoring companies offer additional access restrictions for client-specific needs, such as white rooms or Offshore Development Centers (ODCs). Background verifications are an important part of the offshoring process, and verifications include identification, education, address, and criminal checks.

This helps to ensure that outsourcing providers are hiring and aligning only those resources who have a clear background verification check.

Evaluating Risk #2: Digital Security Concerns
Prominent offshoring companies have also implemented information security management systems that ensure they are in compliance with international privacy laws, including FTC, HIPAA, GLBA, FCRA, CPRA (in the US), and GDPR and IT Act 2000 (in Europe and India).

Data privacy is paramount, with processes implemented to ensure the data is neither stored locally nor transferred out of client environments. To protect data, outsourcers have controls in place for physical equipment, system access for personnel, and data movement. They also require annual privacy training, and computers can only be accessed by authorized personnel.

Many organizations have implemented data loss prevention, which does not allow data to be moved, and triggers an alarm if there is an attempt to move said data. In some cases, personnel are not even allowed to carry their phones into restricted areas to avoid any potential breaches.

To ensure that their systems are safe from potential external attacks, offshoring companies have implemented the latest antivirus and cybersecurity controls.

That includes all personnel routinely completing training on information security, such as modules on phishing attacks, management of data, classification of data, social engineering breaches, cyberattacks, phone/voice phishing and frauds conducted using artificial intelligence such as deepfake scams.

Not to mention, if required by an originator client, offshoring companies can participate in audits conducted by external auditors who visit, review, and validate the offshoring company’s operations and their adherence to client and regulatory requirements.

Evaluating Risk #3: Business Continuity
Most offshoring companies have business continuity processes built into their organizations which allow them to restore critical functions and rapidly return to “business as usual” operations in the case of a disruption. Having multiple sites across geographies helps offshoring companies spread operational risks, an option not always available to the originator.

These business continuity plans help save lives in case of a disaster and maintain a seamless experience for the end customer. All employees and processes normally go through an annual business continuity test to validate existing plans and make improvements as necessary.

The benefits of partnering with an experienced outsourcing provider can improve a client’s bottom line while maintaining a positive customer experience. In the current mortgage sector environment, which we expect to continue for the next several quarters, a strong offshore presence can help offset lower production volume with lower costs while building scalability to get ready for the next cycle. Risks cannot be completely removed, but an experienced BPO can reduce the risk through their experience and knowledge.