Privately held vendors Aklero and NYLX have agreed to a merger with undisclosed terms, forming a new company called LoanLogics Inc. to provide what they describe as unprecedented quality assurance and analytics for a broad range of secondary mortgage market participants.
NYLX founder and CEO Howard Conyack will be the founder and chairman of the new Fort Washington, Pa.-based company and Aklero Risk Analystics Inc. CEO
The aim of the merger as Fitzpatrick described it is to provide data-based third-party assurance of loan quality from origination through sale and servicing, as well as broader market analysis of loan data. “Nobody likes paying for quality assurance, but more and more, they need to,” he said, noting that regulatory and investor requirements demand it. Repurchases are still driving QA demand despite agency efforts to add a sunset provision to limit such claims, Fitzpatrick said. He said the concern persists due to “nebulous” language requiring repurchases of loans with “misstatements and misrepresentations.” These are not covered by the sunset period.
Concern about CFPB scrutiny also is a catalyst for QA demand, as is scrutiny of lien integrity in the secondary market and servicing, Fitzpatrick said. “It is no longer good enough to trust and rely on the production process to catch errors,” he said, noting that he believes this creates demand for the new offering, which is integrated with industry systems but is an objective third-party playing a role akin to that of a watchdog or traffic cop.
Automation and analytics in the offering can help identify where larger problems lie by noting common factors in errors, Fitzpatrick said. Analytics available include ones that show how a loan pool might perform under different economic scenarios and how these might affect, for example, MSR values and prepayments, he added.
When asked why he believes a platform like this has not been offered before, Fitzpatrick said, “There is a very high barrier to entry.”
“It’s not easy working with loan files to quickly and efficiently identify each and every loan document, [develop] the ability to get the data out of there and then the ability to run all the right rules [to verify and/or analyze it],” he said.
Fitzpatrick said that among the catalysts for the merger and the creation of the new platform were the result of years of discussion between himself and Conyack aimed at answering the question, “What does the industry need next?” when it comes to quality in the capital markets.
In line with regulatory and industry research, they determined that the answer lay in the ability to track loans from inception. The new platform aims to move “all loan quality processes all the way up to the front of the process” as well as provide presale checks at closing, “so that we are not just shipping and hoping,” he said.
“At closing something can happen, and a lot of times it does not make way backward into the LOS,” creating a data mismatch as the loan changes hands, Fitzpatrick said. The Aklero executive said data suggest if checks just prior to closing are done, 42% of errors can be avoided, and if earlier checks for the kind of errors that can impact the salability of agency loans are done, the percentage rises to 80%. With selective automation, the checks are not time-consuming, he said. The new offering aims to cut rather than add to QA costs by selectively automating quantifiable data checks where possible, and supporting more manual reviews in new ways. About 60%-80% of the QA process can be automated and Fitzpatrick said staffing can be more efficient with the support of the new technology, allowing auditors to double the loans they can handle in a given period. The secure system helps companies comply with privacy law as they transmit or check what can be sensitive borrower information, he said.
While the new platform aims to be comprehensive, clients can pay for services and technology piecemeal, with some priced on a transactional basis and others via subscription.
The two vendors have previously had a marketing agreement. Combined they will have 450 clients and 20,000 users. Aklero provides QA/risk management services with a focus on loan data integrity. NYLX provides loan pricing information, performance analytics and monitoring.
