What actually happens to an application after it is lodged with a lender
As the quality of mortgage applications moves to centre stage in the battle over broker commissions, Kate Carr takes a look at what actually happens to an application after it is lodged with a lender
A lender's back office is a critical part of its competitiveness with its peers in the industry. A poorly performing one is costly, both in terms of a lender's bottom line as well as the customer service it is able to deliver.
However, while its importance is often emphasised, there is surprisingly little said on what the back office actually does.
According to managing director of Australian First Mortgage Tanya White, this is because it is relatively simple: checking, re-checking and decision making.
"An application goes through a lot of assessing," she says. "Initially you're doing credit checks on the applicants. Basically this gives you a first look at what the borrowers are like - so if they've had any defaults or unpaid bills or anything more serious like a bankruptcy.
"The application then gets assessed by a credit officer and [from] then you're verifying."
The verification process looks at income, type of job and the financials of a self-employed person. An independent valuation of the property may also be ordered. From there AFM assesses the application against the given funder's policies and guidelines to ensure the borrower can service the loan.
"You really are delving into these people's personals and making sure you aren't putting them into financial hardship or difficulty," White says.
At Homeloans Ltd the process is slightly different, with head of underwriting Les McDonald telling AB the process usually involves three staff members performing different roles.
First the application is screened by sales support to ensure it meets the product criteria, McDonald explains. From there it makes its way to a lending specialist who performs the credit function and deals with the various funders to get the deal approved. The lending specialist also provides conditional and formal approval for the loan, following which he or she packages the deal in preparation for settlement. The settlements department then deals directly with the solicitors and funders involved to settle the deal.
At a major lender such as NAB, the process is very similar. "From our perspective, we've got facilities [to carry out back-office functions] on a national basis," NAB Broker's general manager for loan writing services, Simon Terry, explains.
Terry's team gathers up the application information when it is received to make sure it is all correct, makes sure it is loaded on to the systems, does the necessary verification of any information, makes any necessary credit decisions, puts together the necessary documentation that goes with the loan (if it is approved), and organises and manages any settlement of the facility thereafter.
In terms of IT systems, Terry says NAB uses a combination of proprietary packages and software which has been developed specifically for the bank.
Quality matters
According to Terry, this is where the quality of broker-submitted applications becomes important. "The cost of providing these [back-office] services is a function of quality," he notes. And, because of this, quality is something most lenders appear to be taking a closer look at.
For example, Terry notes that NAB recently established its e-decision capability, which builds quality into the submission process. "Obviously, one of the advantages of an electronic submission process is that built into [it]... is some verification and some process steps to ensure the broker supplies us with all of the necessary information.
"Also with that we've got the ability to make a conditional approval decision using software, so we can get a decision in minutes, and that means there's less work for our credit team at the back end in terms of managing that."
Terry also notes that NAB has just finished re-designing its application forms to make them simpler for brokers to fill in. The new form includes a checklist of the information a broker needs to supply with the application.
The beauty of electronic submissions
Under St.George's new commission structure, brokers who submit their applications electronically are immediately rewarded with a 10 basis point increase in the upfront commission earned.
It is not hard to see why.
As Kathy Cummings, CBA's head of third party explains, the difference between the effort expended on paper applications in comparison to their online counterparts is substantial.
"Loan applications lodged online are immediately credit-decisioned and supporting documents [are] validated," she says. The application then moves to processing for documentation and settlement.
Compare that with CBA's paper applications, which are received by fax, printed and manually entered into the bank's systems for decisioning and processing.
The advantages of electronic processing may be part of the reason why lenders like St.George are turning to both the carrot and the stick to influence broker behaviour.
From the evidence available it appears that St.George will not be the only lender to announce such a move this year, with Terry noting that there is a strong incentive for lenders to reward quality applications.
"There are a range of factors for quality, and I think increasingly lenders will differentiate on quality in both the way they deal with the broker and also in terms of remuneration," Terry tells AB.
According to Terry, electronic submission, ease of settlement and whether the application arrives with all of the applicable information, are important measures of loan quality.
Other majors, like the CBA, have already started down this path. Cummings says the CBA began rewarding quality application in 2005. "In July 2005 Commonwealth Bank aligned broker commissions to reward quality applications, with metrics around submission quality and conversion rate," she says. "A target was set for head groups and the reward forms part of the upfront commission."
Horses for courses
According to McDonald, what makes a good mortgage application from a lender's point of view is a combination of the applicant themselves and the work put in by the broker. He also notes that there is a big difference between prime and non-prime application processes:
"I guess we can break this up into two categories: prime and non-prime borrowers," he says. "A prime borrower falls within normal banking and credit guidelines. This person is gainfully employed as a PAYG income source for more than two years, has resided in the family home for more than two years, limits his borrowings to an LVR of 80% and the servicing of his proposed commitments is within lending guidelines."
In this case, if the broker has provided all of the supporting information from the outset, the application can be approved quickly and with minimum fuss.
For a non-prime borrower, however, things get more complicated. As McDonald explains, such borrowers may fall outside normal banking and credit guidelines for a variety of reasons, for example bad credit history.
"In this category we usually see a lack of supporting documents ... to confirm the bona fides of the applicant," he says. "It's usual for the borrower - or broker for that matter - to provide supporting information/documents on a need-to-know basis rather than to be upfront from the outset with damaging information that will warrant a straight-out decline."
Chasing up missing information can add two hours to a conditional approval for a prime applicant, McDonald says. In the case of a non-prime applicant, it can add anything up to two days to the approval process.
Declining quality?
According to White, the number of loans being submitted without the necessary documentation has been climbing.
"Quite a high percentage [of lodgements] will require more information," she notes. "What we've found in the last six months is that that percentage has increased. I'd probably say it's a third more than it was six to nine months ago."
White says that tighter market conditions may be forcing some brokers to cast their nets further in an attempt to write loans, leading to a fall in the quality of applicants.
Borrowers are also struggling. "Borrowers are probably finding the market a little bit tough and so can't supply some of the additional information we need," White explains. Such borrowers may just be lodging an application in the hope it will go through, rather than having a realistic chance of being approved for a loan, she adds.
If anything, the difficult market conditions are underlining the gap between professional and experienced brokers, and those prepared to throw caution to the wind in an attempt to lure new clients.
"The good brokers and the experienced ones do get it right and know what to ask," White says. "They know what's needed to get an application to approval status.
"But then, of course, there's a minority of brokers who will wing it. They might take an application for one borrower to three lenders, submit it to all three and see who'll bite at it first."
It is the latter who will be hardest hit should a majority of lenders move to tie commissions to the quality of loan submissions.
