Settlements -- The final hurdle

Achieving efficiency and maintaining the quality of the settlements process will be a dominant issue for lenders for 2008, who face increasing competition in the areas of cost, service and innovation.

Adelaide Bank is one lender that has identified its settlements process as core to its service offering.

The bank has been faced with the significant challenge of servicing a national market without having a national settlements system. Instead, it has adopted a dual system, where all South Australian loans originated through broker and retail channels use the bank’s in-house settlements team, and those outside the state select from a panel of solicitors.

”It’s a system that works,” according to Adelaide Bank’s chief general manager Tim Piper. “We’re able to cope with volume variances by smoothing work across a larger base of providers.”

Rollercoaster ride

Loan volumes ebbed and flowed last year thanks to affordability issues as well as the credit crunch. ABS’ research recently revealed month by month differentiations of 2.2 per cent rises to 4.4 per cent falls for owner-occupier commitments.

For lenders who manage the settlements process in-house, inconsistent loan volumes can affect service levels and profitability considerably.

A surge in borrower activity can strain internal resources and systems and put service capabilities at risk, while a downturn can be equally problematic – leaving lenders with declining revenues but the same costly overheads.

The decision to outsource the settlements process is not without its perils either. The desired return on investment may not materialise, leaving lenders with a loss of internal expertise, innovation and control.

MacGillivrays Solicitors Chairman of partners Craig Green has witnessed the full spectrum of market fluctuations in his thirty years in practice. And he says the market can expect another choppy year for volume in 2008 – predicting a slowdown in lending transactions of five or 10 per cent.

“Lenders might find they have a lot of staff with available time on their hands,” he says, stressing the importance for lenders to make the most of their available resources while keeping a close eye on costs.

Play to your strengths

According to Mortgage Settlements Australia’s national compliance and risk management director Paul Agnew, a good survival strategy considering market predictions for 2008 is to identify the strengths and weaknesses of your business – and focus on the former.

The ideal step is to decide what you are good at, and outsource everything else so you can focus on your core competencies,” Mr Agnew says.

For Queensland-based Heritage Building Society, deciding what it’s good at comes down to constantly reviewing its settlements process to ensure it is up to the mark.

“We have service standards in place for each stage of the loan process and these are reviewed annually to ensure they meet the needs of our brokers and borrowers,” says Paul Francis, general manager of Heritage’s retail service.

As a mutual building society, Heritage has decided to focus on providing better rates and service rather than maximising profit. It sends its complex settlements tasks such as trusts and company files to its panel of solicitors, who also create the mortgage documentation. The rest of its needs are serviced by an in-house team. “We can manage the process requirements as we need, allowing us to exceed our members’ expectations,” says Mr Francis.

Mortgage manager Mortgage House recently made a similar decision to re-visit its settlements options.

The group relies on its panel solicitors to create Mortgage House’s loan documentation, freeing up the business to focus on the areas where its knowledge and experience can be put to best use.

It’s this strategic approach to settlements which Mortgage House managing director Ken Sayer says has led the business down its own path to build stronger relationships with both its borrowers and distribution networks. But the business is not resting on its laurels.

“Over the next twelve months we’ll be improving automation in parts of the process, which will help us to achieve better efficiencies and cost reductions,” says Mr Sayer.

Getting technical

Technology is expected to be the dominating driver for change in the settlement process over the next 12 months. But any innovations will need to show bottom line benefits.

According to Rosanne Burkhart of LegalStream, lenders will need efficient processes that protect their legal and financial interests – at minimal cost.

For lenders like Adelaide Bank, this is where the decision to outsource parts of the process will provide its managers with an extra boost.

By selecting national firms, Adelaide Bank’s mortgage managers will be able to leverage off the very latest cost effective technology to manage their operations.

“Our mortgage manager partners are able to select which provider they utilise from our panel and negotiate their own fee structures based on volume and relationship – which in turn strengthens the competitive advantage of our partners,” says Mr Piper.

For lenders considering outsourcing in the next few months, advances in middleware technology will make it particularly easy.

Middleware technology essentially converts lenders’ instructions to fit a service provider’s system using XML and LIXI compliant hybrid data. Says Chris Evans, senior manager, business development at Perpetual’s lenders mortgage services: “In essence it is about being able to provide a more consistent service and lowering IT costs.”

The actual management of the technology has also changed significantly. Updating whole systems is a thing of the past. Most providers will now use a rolling system to make the process easier, as MacGillivrays Solicitors Mr Green explains.

“Updating technology has become far more integrated. As it evolves it is gradually massaged through – making it far more manageable,” says Mr Green.

Mr Agnew says correcting a bad decision with settlements can take up to two years. In the current lending environment, this means it is even more vital to have a strategy for handling documentation that is both cost effective and flexible.

What’s clear is that lenders that manage the settlement process well stand to only strengthen their relationships with their business partners. Those who don’t risk their brand reputation – and bottom line.

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Outsource or in-house?

Outsourcing the settlements process comes with its own set of pros and cons

Pros

• You only pay for what you need

• Higher level of experience

• An additional and more objective perspective

• Cost effective way to increase your resources

• The impossible triangle “faster, better, cheaper” can be achieved

Cons

• Long-term risk of higher costs

• Liability for product or service failures

• May develop a reliance on the provider

• Potentially poor use of existing resources

• Return on investment could fall short

Source: Paul Agnew, Mortgage Settlements Australia