Technology Transforms Property Due Diligence

A key theme of the 2014 Annual EDR Client Summit was how technology tools are enabling efficiencies in property assessments and risk management. Technology and data management are becoming increasingly important for efficient and effective risk management in today’s property investment and lending industry. Yet the prospect of adopting new technologies or shaking up old processes can be unnerving. If the adoption of new technology tools is pushing you out of your comfort zone, you’re certainly not alone.

 ComfortZone
Top Lender Challenges

During the summit, a panel of risk managers from financial institutions shared their insights into the top challenges they face today.  The biggest pain points they raised were:

  • An increase in the resources that need to be devoted to compliance efforts:

“What used to take someone part-time now takes multiple people full-time.”
“Just within the past year, we’ve had 4 or 5 different types of audits coming in, internal or external, that we have to prepare for.”
“I used to be in charge. Now I have 3-4 people behind me making sure I’m doing what I need to do.”

  • All four of the major bank regulators are taking vendor risk management more seriously than ever before:

“Just in the past 12 months, compliance obligations for 3rd party vendors has gone through the roof. Not fun. Not easy.”
“You basically have to treat any 3rd party person like you do your own employees.”
“Our bank may have to hire someone just to handle 3rd party vendor management.”

  •  Business pressures:

“Pressure is on us big-time to make new loans.”
“The competitive environment is definitely increasing.”

  • The challenge of managing/tracking data:

“We are spectacular at using Excel spreadsheets.”
“There seems to be more focus by regulators on operational risk, meaning there’s an emphasis not only on having policies in place but being able to show that they’re being followed.” 

As one panelist famously commented, “If I had a platform to manage all this data, I’d be out there playing golf right now.”

Leveraging Technology and Data

One of the top challenges facing risk managers of all types is “how to help their organizations produce and use high-quality risk information in a fast, reliable and insightful way,” according to a recent study by Ernst & Young titled “Leveraging Technology and Data for Cost Effective Risk Management.” As the demands being placed on banks by regulators ramps up, technology tools are enabling institutions to meet their compliance obligations in ways that were not possible just a few years ago.

Out of sheer necessity, institutions are looking to new ways of embracing technology and managing procurement and compliance requirements in more efficient ways. Property risk information is increasingly becoming digitized and able to be reviewed more efficiently than ever. Tools for accessing, storing, managing and analyzing property risk data are improving every day. Together, these two forces provide ways for risk managers to improve efficiency at a time when the market is demanding that due diligence be conducted at breakneck speed, and banks are competing aggressively for new loan originations. As one panelist said, “There is more stealing of loans from other banks than true organize growth in lending going on.” Earlier this year, JPMorgan Chase, a bank that dominates multifamily lending, came out with very aggressive loan targets. Their competitive edge, the bank said, lies in short turnaround times of 45 days or less, compared to the 65 to 90 days it takes other banks to fund a loan. The bank uses standardized loan documents to reduce its operating costs and stress to borrowers.

In a challenging business and regulatory environment, technology can enable improved insight, efficiency and effectiveness in risk management activities, including internal and external reporting. Greater automation of reporting can free up time for risk management resources to spend on other functions.

Technology Opportunities

Although the focus of the Ernst & Young piece was on risk management in the insurance industry, the findings are extremely relevant to the lending sector.

Technology
Areas where technology advancements have the potential to help financial institutions deal with today’s challenges include:

1.    DATA-Access to consistent and comprehensive data is fundamental to effective risk identification, assessment, control and monitoring.

2.    MODELING-Modeling tools should be cost-effective enablers of risk management activity, and thus aligned to the basic intention of risk assessment. For some banks, spreadsheet simplification could be enough to reduce cost and inefficiencies, while others need more sophisticated models.

3.    REPORTING-Technology should make it easy the right people to access the right data at the right time. Replacing paper-based reporting processes can in itself be time-consuming and involve significant change from current practice but ultimately result in significant efficiency improvements and better compliance tracking.

4.    DOCUMENT AND DISCLOSURE MANAGEMENT-It is not uncommon for multiple departments within a bank to be accessing the same information. Document and disclosure management applications can facilitate data updates and ensure consistency across department. They also create an “audit trail” that makes it easier to track compliance efforts from a centralized location.

5.    WORKFLOW TOOLS-Cross-department workflows can be productively used to support a bank’s risk reporting. Various solutions have features like pre-set “red flags” that may trigger a need for further investigation, and review processes that give the bank a way to demonstrate to regulators that internal risk management policies are being followed.

6.    RISK AND COMPLIANCE TOOLS-Increasingly, tools are being created that allow for a more holistic way of managing multiple risks (e.g., environmental and appraisal) in a unified way rather than handling each independently. Bringing multiple functions together allows the bank to mitigate a particular risk through proper underwriting without duplicating efforts.

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What we heard from the lender panelists at the EDR client summit was that their biggest pain points are pressure to lend more, constraints on time and cost, and added compliance chores, particularly third party vendor management. Fortunately, at the same time that challenges are growing, so too are technological developments that open up new ways to make risk management functions more efficient and consistent across an institution. The summit panelist’s humorous–and candid–quote about a platform allowing him to golf more illustrates that technology is a tool risk managers can harness to free up their time for other endeavors—golf or otherwise. That alone makes them worth paying attention to.