Loan processing technology: Internet standard or proprietary?
Because Internet standards are evolving rapidly, vendors and application developers must keep pace with those standards.
THEN IT COMES TO PURCHASING loan processing software or upgrading existing loan origination system (LOS) applications, information technology (IT) managers face a challenge: choosing between traditional client-server software or hosted systems that are built to run on the Internet. The distinction isn't always easy to make, particularly now that LOS vendors are Internet-enabling their client-server systems. Yet the differences between the two computing approaches are profound. This is why the choices lenders make with respect to these two very different approaches will have long-lasting fiscal and functional implications.
e-Process workflow automation
The core issues here are data integration and synchronized intercompany workflow processes throughout the mortgage industry "ecosystem"-from the point of origination to the secondary market. The highly fragmented nature of this environment and the complex requirements of its participants demand true e-process workflow automation. This can only happen when vendors implement open standards-i.e., extensible markup language (XML), hypertext transfer protocol (HTTP), hypertext markup language (HTML)-as the foundation for applications that are built from the ground up to run on the Internet. Open standards deliver two essential qualities that all businesses strive to achieve: greater operating efficiencies and greater economies of scale.
Proprietary LOS systems, on the other hand, do not share these characteristics. Although LOS systems provide customer value, they predate the Internet and therefore rely on "gateways"-protocol and data translatorsto communicate online. This requires users to install, support and maintain software upgrades to keep pace with emerging Internet standards that LOS vendors must implement to stay abreast. However, because the Internet recently became a viable commercial platform for loan processing, the risks and reoccurring costs associated with a client-server LOS implementation may not necessarily be apparent.
Critical issues for LOS
Some of the critical issues for loan origination systems involve the following:
* Performance. When gateways are cobbled with proprietary systems to communicate to the outside world via the Internet, challenges invariably arise. Two that cause particular concern are performance degradation due to translations between proprietary implementations and the Internet and the real possibility of fidelity loss in data transactions.
* Flexibility. Because Internet standards are evolving rapidly, vendors and application developers must keep pace with those standards. While Internet vendors add features and capabilities to their core servers, vendors of proprietary client-server systems perform twice the labor: They must build or re-engineer new standards into both their core productsand make engineering provisions for gateways. Those costs are usually passed on to users.
* Cost. Because of the proprietary nature of client-server-based applications and their deployment across the Internet through gateways, users cannot enjoy the benefits of a single architecture. They must support multiple architectures within their environment, and therefore bear disproportionate costs.
* Functionality. Proprietary clientserver architecture and applications that are tied to a specific platform limit the user's ability to integrate new Web-based services.
* Business risk. Due to the limitations described earlier, LOS vendors may have difficulty delivering new Internet products and services in a timely fashion. Thus, if a lender's business strategy shifts and a vendor cannot respond quickly, the underlying risks of relying on a client-server architecture are exacerbated, as are the costs of switching vendors under duress. The Internet, in contrast, is inherently multivendor and standards-based.
Advantages of hosted services
By contrast, Internet-based, open-architecture loan processing networks provide the following:
* Economies of scale. Web-based applications inherently adhere to open standards. They implement Internet protocols and services natively, utilize a common Internet client and provide ubiquity. Thus, newly developed applications can be deployed universally, regardless of whether there are 1,ooo, io,ooo or loo,ooo users; all benefit immediately. The cost-to-benefit ratio is flat, not incremental.
* Lower maintenance costs. With hosted applications, the notion of software licensing and license upgrades becomes passe. So does the need for IT managers to administer multiple versions of an application across a large geography. Web-based applications can now be managed centrally and serve an entire enterprise. By contrast, proprietary software requires IT personnel to support and administer installations across multiple locations.
* Connectivity. No company wants to be an island. Companies want maximum connectivity to vendors, partners, suppliers and customers. Because online applications are based on open standards and protocols, seamless communication follows easily and inexpensively.
* Investment protection. Networks and applications built from the ground up to run on the Internet can be enhanced without requiring customers to reinstall system software-or worry about data compatibility issues when applications are upgraded. Their investment is protected and not challenged at each upgrade point.
* Expanded functionality. The newest breed of hosted Internet applications, known as electronic partner networks (EPNs), enable a much higher degree of automation and workflow synchronization than LOS systems. They coordinate and synchronize the origination, ordering, aggregation and packaging of the various pieces of a loan package. And they do so in a way that enables lenders to view the progression of events in real time-and extract information that allows them to evaluate third-party vendor performance. Plus, EPNs, by virtue of having built-in intelligence, can now administer work rules and thereby duplicate the decision-making processes typically rendered by loan officers or managers.
Back-end loan processing is a collaborative, business-to-business transaction that is ideally suited to the Internet because of its ability to electronically interconnect diverse constituencies, irrespective of computing platforms or data formats. That capability depends on "open" standards like XML that, for the first time, enable business processes to be automated and synchronized across company boundaries.
This means lenders must make architectural business decisions rather than product decisions. Architectural decisions align squarely with the most important priorities of any business-namely, achieving operational excellence and maximizing return on investment.
Lenders must therefore plan their Internet strategies carefully. They must recognize that mortgage business-tobusiness transactions are moving to the Internet. And they must ask themselves whether it's better to employ client-server technologies or move forward with an Internet strategy that is capable of true intercompany business e-process automation and communication on a global scale.