BEST PRACTICES FOR THIRD PARTY ORIGINATOR ANNUAL RENEWALS

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2 CONTENTS Executive Overview 3 Annual Renewals 3 Best Practices 5 Realm : An integrated approach 7 Summary 8 PAGE 2

3 EXECUTIVE OVERVIEW Just a few short years ago wholesale lending and the mortgage broker looked to be on the ropes in a prize fight for survival. Fast forward to present and wholesale lending has stabilized and is beginning to increase again as a percentage of origination market share. So what does this mean for the Wholesale and Correspondent lenders that utilize third party originators when it comes to managing these partnerships? What does the regulatory landscape look like today and going forward? What agency responsibilities are lenders that use third party origination now accountable for? What is different today than just a few years ago in how these partnerships are managed? Everyone agrees partnering with third party originators is an efficient and cost effective channel, however the risks associated with this origination channel must also be managed. What is often overlooked is managing these partnerships for performance and profitability. This paper will focus on a key component of managing third party relationships; specifically the annual renewal process. We will look at compliance requirements, how to reduce costs and creating a stronger business foundation to grow on. We wish we could say there was once a time when lenders did not even perform annual renewals on third party originators, however this is true today. There are several reasons for this failure that may include organizational size, compliance culture or risk appetite and lack of resources. Regardless of the reasons, in today s highly regulated and scrutinized lending environment, any lender that fails to perform some measure of renewal does so at its peril. PAGE 3

4 A dilemma that lenders face is if annual renewals are performed on an annual basis, then a lender may have several challenges based on the timing of these renewals. If all third party origination partners are required to renew in a given month for example December then how is that managed? What about the partner that was approved in October? How do we keep track especially over time and as our partner database grows? How do we track who adhered to our renewal requests and who did not? It quickly becomes an overwhelming and daunting task especially for the usually lone individual charged with the task. If a lender sells to agencies such as Fannie Mae, not only does FNMA have requirements of lenders utilizing third party originators, they also hold the lender accountable for third party originator adherence to various requirements. An example of this would be the periodic reverifying of a third party originators compliance with applicable laws. FNMA also requires lenders to have effective management procedures for third party originators. One of these procedures is the annual renewal of various documents. The annual renewal process poses many challenges for lenders: No ability to identify which partner s are qualified for an annual renewal at any given moment Insufficient resources to execute the annual renewals efficiently No defined requirements for renewals Irrational fear of losing a relationship if asked to renew No tools in-house to conduct an annual renewal against requirements Renewal processes are manual and cumbersome Lack of technology to support and manage the process PAGE 4

5 BEST PRACTICES The traditional view looks at renewals as a necessary evil. However, organizations that implement best practices use the renewal process to achieve higher value business outcomes, such as: 1. Eliminating relationships that are not producing 2. Identifying opportunities to grow existing relationships that are producing 3. Building loyalty and forging stronger relationships 4. Reducing carrying costs 5. Assessing internal organizational performance The following steps outline at a high level the best practices approach to third party originator renewals: 1. Effective Policy 2. Identification 3. Termination 4. Communication 5. Follow Up 1. Effective Policy Organizations first need to create and implement a policy that they will use for governance and to audit compliance. Policies should contain the following components Third party originator performance requirements (these can be both qualitative and quantitative) Document requirements Renewal time frame Regulatory compliance checks Internal standards checks PAGE 5

6 2. Identification In your policy you will define a time frame for your annual renewals. It is recommended to use a lean six sigma approach and perform renewals on an anniversary date. This provides a smooth timeline of renewals instead of a once a year all-hands-on-deck event. It allows for a true annual evaluation of the relationship and requirements. You want to be forward looking and identify partners that are candidates for renewal at least 45 days in advance. This gives you the opportunity to review the partner s suitability for renewal. It also allows you to work with internal stakeholders that may be impacted by the relationship status to discuss a renewal plan. 3. Termination The best thing you can do for your business is terminate non-performing partners. Once you have identified third party origination partners that have not submitted loans, or do not meet criteria defined in your policy, you should terminate the relationship instead of requesting the renewal. This eliminates the expense of conducting the renewal process and the costs associated with having a nonproducing partner in your database. Besides keeping a clean database this also allows you to focus your energies on the 20% of your partners that are producing 80% of your volume. Building loyalty by serving these partners better builds a strong foundation of quality and you avoid the trap of constant new partner acquisition and a steady stream of costly one- and-done. 4. Communication Once you have identified the partners that will be invited to renew, you will want to have a communication plan ready. This should include stakeholders such as sales, operations and/or compliance. You will want to communicate to the origination partner in advance about the upcoming renewal process. You will PAGE 6

7 want to explain the reason for the renewal, what the steps are and what the requirements will be. This will give you an opportunity to also market the benefits of working together. 5. Follow Up Almost all third party originators have more than five different wholesale lenders they work with, so your renewal request is one of many. Originators often forget about the renewal or get started and never finish. To avoid these partners being lost in the shuffle you should monitor the status of your renewals. Keep track of how many are outstanding, how many are in process, and how many did not finish within your renewal time frame. For those that do not complete the renewal you will want to have a remediation plan that would include decision points such as a second renewal request, suspension or termination. The key is there should be a procedure in place to prevent originations until the renewal is complete if the decision is not to terminate the relationship for failure to complete the renewal REALM: AN INTEGRATED APPROACH The Comergence Realm technology platform provides Wholesale and Correspondent lenders the ability to not only comply with agency and regulator requirements but also the ability to reduce costs and streamline business processes for third party originator management. Visibility Realm IQ is a dashboard tool from Comergence that gives lenders the ability to see which third party originators are coming up for renewal. It allows lenders to look 30, 60 even 90 days out into the future to prepare for renewals and make a go, no-go decision on an individual basis. Accountability Our powerful workflow engine allows a lender to keep track of the renewal process during every stage of the cycle. Lenders know exactly where their third party origination partners are in the PAGE 7

8 process. Account Executives assigned to the partner are also tracked who can assist in follow up and partner management. Automation Renewals are automated giving lenders the confidence that they are in compliance with policies and agency requirements. Remediation Lenders have the ability to manage partners that fail to complete renewals within the allotted time. Partners can be suspended, terminated or a renewal process can be restarted at the push of a button. SUMMARY Optimizing third party relationships enables organizations to eliminate costs, inefficiencies and risks. The renewal process should be integrated into your business processes and viewed as part of the overall management of the business relationship. Effective policies and procedures that are implemented and followed are what the agencies and regulators require, not just having a policy or procedure written and stuffed in a drawer. As the regulatory environment is constantly changing and oversight of lenders is increasing, going beyond compliance and driving toward organizational performance will result in increased profitability and more loyal partners. Technology makes the antiquated process of renewals an effective business optimization opportunity. Lenders should leverage technology to realize benefits in compliance, operations and revenue. It just makes good business sense. PAGE 8

9 ABOUT COMERGENCE Comergence Compliance is an industry leader in compliance and risk management solutions. Comergence has become the benchmark for third party originator due diligence and surveillance standards in the Wholesale and Correspondent lending space. Comergence provides various technology, data and services that enable organizations to implement best practice business process optimization. PAGE 9