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Underwriting Outsourcing – A Trend in the Making?

Kathy GregoryManulife had a big decision to make: how to enter the broker channel as quickly and efficiently as possible.

Part of the challenge was how to scale its underwriting operation to handle the flood of new broker business. That led to a conversation with Paradigm Quest, a firm that processes, funds and services mortgages for third parties. That conversation ultimately resulted in Paradigm handling all of the underwriting for Manulife’s brokered residential mortgages.

It was the second bank announcement of its kind, following First National’s successful underwriting partnership with TD in 2014. For firms like Paradigm, First National and MCAP, 3rd-party underwriting presents a key strategic growth opportunity, and they’ve made material investments to service new lenders.

In our crystal ball, this is just the beginning of underwriting outsourcing. It’s a matter of time before more lenders realize the economics for themselves. In turn, it seems likely we’ll see more lenders enter the broker space in this very same manner. 

For more on this trend, and the Manulife deal in particular, we spoke with Paradigm Quest CEO Kathy Gregory. Here is that interview:


CMT: This is the second household name bank to outsource its broker underwriting. Is this becoming a trend?

Kathy: Outsourcing business services is common practice already…[and it] isn’t new to the Canadian mortgage market…We currently have multiple clients who outsource their underwriting and servicing business too, for both mortgages and lending…If you look back over the past 20 years, closing services, appraisal management, collections, payroll services, call centre activities, credit card processing, etc. were all conducted internally across most lenders. Much of these services are outsourced today…Outsourcing other service elements of the mortgage process can only enhance the evolution and innovation of the mortgage experience for borrowers via new technology. This is what we are solely focused on and [it] will ultimately benefit the entire market, including the originator and borrower.

CMT: What is so appealing to lenders about offloading the key function that mitigates their risk (underwriting)?

Kathy: Outsourcers are specialists in the services they provide. Their focus is to provide their partners with optimal business solutions. We are the domain experts in the mortgage space, both from the borrower and originator experience as well as risk management. It is expected that business process outsourcers (BPOs) will perform much better than corporations who decide to outsource.

BPOs continually strive towards process improvement and these improvements translate to big wins for their corporate partners and their borrowers. Bottom line is, we aren’t competing for IT resources within a larger organization. Paradigm has placed huge emphasis on investing in our technology and processes and this has demonstrated significant value to our corporate partners in enhancing their day-to-day operations and ensuring their portfolio’s consistently outperform the market.

CMT: In general terms, what are the economics that make outsourcing underwriting so attractive?

Kathy: I won’t compare actual cost savings, as they vary significantly by client. It is obvious that when you outsource, you are looking for a lower cost solution. However this isn’t generally the only key driver. There are two other key elements and improvements for organizations looking to outsource. First, speed to market in terms of technology development and process change. Our end-to-end platform is a lending platform and has a rules-based configuration. Thus providing the ability to better execute new initiatives, improve the originator and borrower experience. Second, our key focus and expertise on a single market, along with our domain expertise allows us to singularly focus on mitigating specific risks associated with the [mortgage] business

There are a lot of friction costs associated with revamping internal processes to meet regulatory requirements, or for cost savings. Often there is a learning curve associated with process engineering. [Lenders] typically incur huge costs with hiring consultants, forming internal process engineering committees and training staff. When you outsource to a BPO, much of that friction is taken away…

Paradigm logoCMT: Do you think lenders will ever underwrite offshore, in places like India or the Philippines?

Kathy: It’s one thing to outsource non-customer facing processes outside of Canada, e.g. IT development, but it is much more difficult when you [must] have contact…with both borrowers and originators. There are not only language issues, but cultural issues depending on where overseas you outsource to. Additionally, there are significant offshoring regulatory restrictions when it comes to customer data that make this difficult. When you layer on the unique regulatory requirements of the mortgage business in Canada, I am doubtful that customer facing outsourced processes will become a trend. As for Paradigm, we are very proud of our roots as a Canadian Company, and…as the founding CEO of this company, outsourcing jobs away from Canadians is NOT an option for me.

CMT: How far away are we from fully-automated underwriting for clean AAA deals?

Kathy: I think Canada is very close to seeing the introduction of much more mortgage automation in the very short term, as it relates to the client experience. PQ has emphasized the importance of digitizing our process for the last several years because we understand the importance that technology will play in the upcoming years. This market evolution is evidenced by the recent Quicken Loans launch of the Rocket mortgage. Canada is very close to seeing something similar.

However, fully automated underwriting with little or no touch points in the due diligence process seems unlikely in the short term. After the U.S. crisis where common sense lending took a back seat, risk mitigation is critical across this market and will continue to be…

CMT: Thank you, Kathy.