Lean Cost per Loan Reduction
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A mortgage company was spending $90 per loan to approve mortgage modifications, above their target of $30. They approved only 20-30% of loans on the first two passes. A Lean Six Sigma project identified key wastes: missing documents, repeated quality checks, and time-consuming income calculations. The solutions were to have a document review team, weekly calibration meetings between quality and underwriting, and an automated income calculation software. These changes reduced costs to $35 per loan and increased first two pass approvals to 75%. However, the company was acquired before long-term impacts could be measured.
Lean Cost per Loan Reduction
- 1. www.theschoolofci.org Simplification brings Mortgage Underwriting team closer to increase of approving HAMP Loans| Case Study Client A privately held company working to approve mortgage modification loans for customers in the United States of America. Challenge Cost per modification was $90/ loan as against a target of $30/ loan. Mortgage modification Approval rates were as below 1. First pass approval – 20% 2. Second pass approval – 20% 3. Third pass approval – 30% 4. Fourth pass approval – 30% Solution The project team used traditional Lean and Six Sigma practices with a focus on reducing/ eliminating wasteful activities in the process and implement plans for continued training, measurement, control and sustenance. Results The company managed to reduce cost per loan modification from $90/ loan to $35/ loan and also increased HAMP approvals until 2nd pass from 40% to 75%. The company got acquired in the 3rd month of sustenance of the project. Identifying and removing hard to see waste in a typical service centre environment to increase opportunities for cost reduction. Identifying wastes in a process is possibly the first thing anyone would do in order to improve their process. In a classical service/ contact/ call centre industry, it is this first step that proves to be a stumbling block for a lot of individuals. When the company’s underwriting unit having a workforce of about 70 underwriters and 2 Quality control specialists experienced high modification costs per loan, resulting in a loss of approximately 30% of their revenues due to Cost of Poor Quality, the consultant C. Vishwanathan, then working as a Lean Six Sigma Black Belt with the company decided to initiate a Lean project. Since the client volume was growing month on month @ 10%, this problem would have had to be fixed with immediate effect to ensure the company was working on optimal cost margins. Step 1 – Formation of team and assigning roles and responsibilities A team was formed and the business case was discussed with all team members. The team composed of 5 people – C. Vishwanathan, the AVP of the business process, the Manager, 2 team leaders and a senior underwriter. After all the team members agreed to their roles, we moved to Step 2, which was to collect data. Step 2 – Data collection Data was collected from available reports on: a. Experience of associates b. Class of loans by geography c. Average cycle time per loan d. Number of passes made by loans A sample period of 6 months was decided as apt for data collection.
- 2. www.theschoolofci.org Step 3 – Current State Map The current state map was created by the team, which identified various points where the loans were getting deviated from the future state version. This was attributed to the loan complexity and the case of missing documents. It was found that about 70% of loans that went through multiple passes had missing documents. Four issues were attributed to the high modification cost and low rate of first and second pass approvals: 1. High instances of missing documents (70% of loans had missing documents) 2. Repeated loops into Quality Control Department. 3. Income calculation from credit statements proving tedious exercise for underwriters (Approximately 80% of the cycle time spent in IC) 4. Errors pointed by Quality Control not rectified even in first and second pass. Step 4 – Future State Map Once the current state recommendations were agreed upon, the team decided to prepare the future state map, which would have little to no wastes identified. Training and educating the associates of the process was important and it was taken care of, by the training manager. A team of 5 associates was formed from the floor, who would review all the loans for documents. They would hit on “All documents ok” on the Loan console, which will lead to loan flowing into the underwriter’s queue. It would take approximately 2 minutes/ loan for these associates to review a loan for documents. On an average day where 500 loans are processed, this totalled to 1,000 minutes of reviewing documents work. Contd.. Next, weekly calibration sessions begun to happen between the Quality Control department and the Underwriting department. Areas of opportunities in terms of knowledge gaps were addressed during these sessions. These calibration sessions also led to a gradual decline in the number of errors being made by the underwriting department. Income calculations which was consuming about 50% of the cycle time for every loan was finally to be considered for improvement. The project team agreed that while fetching entries from the credit report cannot be automated, the basic calculations by the underwriter once the inputs were provided could be automated. The project team formed the logic for calculation and the IT Department was asked to create a software which could be launched on the underwriter’s consoles. The IT Department created the application within a week’s time and it was tested for proof of concept. Initial training was provided to a team of 5 senior underwriters and their performance on the new software was measured and checked. Once the pilot was deemed successful, all the underwriters were trained and got to use the software application within 1 week. Here is a timeline for all waste elimination activities 1. Identification, training and process workflow creation for doc review team – 1 week 2. First round of calibration sessions followed by gap identification and fix – 2 weeks 3. Income calculation software – 2 weeks All of these activities were conducted in parallel with the Managers and the Team leaders working in close cohesion to deliver results. The project leader took stock of all the results and validated them with data. Step 5 – Lean as a way of life “It was extremely important that the pilot gains don’t subside after pilot completion and all concerned stakeholders ensure they understand how to sustain this project in the long term.” --- Vishwanathan The new procedures were drafted into the Standard Operating Procedures of the business unit. All trainers in the process were introduced to the new way of working and recognition platforms were decided upon for sustenance of the project.
- 3. www.theschoolofci.org Step 6 – Measurement of results As the project pilot was completed after the sustenance activities were drafted, the project team decided to measure on a sample of 15 days after completion of the pilot, the effectiveness of the project. The key indicators that were measured are: 1. Time to complete income calculation 2. First pass rates 3. Second pass rates 4. Quality errors (DPU) 5. Knowledge gaps between QC and Underwriting 6. Cost per modification Stage Pre-Lean 15 days after Lean 3 months after Lean Time to complete income calculation 15-20 minutes 2-3 minutes 2-3 minutes First pass rates 20% 32% 45% Second pass rates 20% 35% 30% Quality errors DPU 1.2 0.2 0.09 Knowledge gaps between QC and Underwriting 2 gaps per week 1 gap per week 0 gaps Cost per Modification $90 $45 $35 Step 7 – Plan for future According to the AVP of the business unit, “Underwriting is a technically sensitive subject and we weren’t sure if Lean tools could help us in reducing wastes in our process. For sure, we have an experienced team that has been together for about 5 years, but we were absolutely clueless on what was resulting in such high costs. By doing such simple improvements to our process, we have benefited our customers a lot. Now, we are in a position to take 20% more volume without even having to impact our headcount.” The business unit committed to sustain the results of the project in the long term. 3 months after the pilot project was done, the company was acquired by another company resulting in a complete closure of all process improvement activities. Financial benefits was calculated for a total of 30,000 loans @ a cost savings from $90/ loan to $35/loan resulting in a total realized financial savings of $1,500,000. The estimated cost savings, if the project would have completed a year, would have been $6,000,000. At an upfront cost of doing the project at $20,000 and recurring costs of $40,000, the project generated an ROI of 25:1, and it would have generated an ROI of 100: 1 in the first year.