Greg Corombos, News Director at Radio America 00:06
Hi, I'm Greg Corombos. Welcome to Banking Compliance Insights, a podcast series from Wolters Kluwer. This series was created to deliver insights on compliance trends and strategies for navigating today's regulatory and risk environments. Today's episode, "Electronic Lending and Participation in the Secondary Market," focuses on the modernization of loan transactions and the diligence required to be successful. Here to lead our discussion on this subject is Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal. He is joined by Spencer Mierzejewski, Senior Legal Counsel at Wolters Kluwer. Samir, let me pass the conversation over to you.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 00:48
Thanks, Greg. The dynamics of lending have always been quite interesting to me. The business is typically made up of banks that make a loan to a borrower, and then they collect interest income. It seems simple, right? But what if you don't have enough reserves to just organically do that? You require loan participants on the rear end, or maybe even the sale of the collateral on the secondary market to complete the transaction. Everything is electronic now. We've invited Spencer to join us in a conversation to discuss how important digital capabilities are in the origination process and the effects that it has on the downstream need to participate in a secondary market. Spencer, welcome. Tell us a little bit about yourself and what you do at Wolters Kluwer.
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 01:31
Hi, Samir. Thanks for having me on. I'm excited to be here to talk to you about this. About me, I'm an attorney. I've been an attorney for about 10 years. I've had a range of experiences going all the way from large publicly traded companies to a two-employee startup. For the past five years or so, I've worked for eOriginal. And then in December, when the Wolters Kluwer team acquired eOriginal, I joined and came on board to work at Wolters Kluwer. My primary role is working with our customers who are trying to transform their digital lending business as seamlessly and compliantly as possible. So, what that means for me, and one of the most fun things I get to do, is work broadly across our customers' organizations to make sure that everyone understands what the requirements are and that they're implemented as correctly as possible.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 02:22
You know, originations are always about speed and getting the loan to completion. But then the rear end is the collateralized part. Tell me a little bit about where the current state of digital lending is.
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 02:34
Currently, what I'm hearing in the digital lending space is a lot of questions about going end-to-end for the digital lending transactions to entirely electronic. And then the other concerns I'm hearing about are speed and reliability. There's always this tension in the banking world of matching up how quickly you can get things done against how compliantly and accurately you can get things done. I think a lot of banks see digital lending as a way to get the best of both worlds. They get the added speed of electronic processing combined with the added reliability of a system that takes the guesswork out.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 03:12
So, let's talk about that a little bit. I know that the front end of it is more like a vanity. I say that lightly because we talked about in today's world, you can do everything from your phone. Folks want to do things fast. We're going to have instant gratification. And it clearly comes with some criteria that's required in order to do so. Can you talk just a little bit about that? How does digital lending play a role and just the front end of that?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 03:40
I think what banks are hearing from their customers is they want to do things completely electronically. They don't want to have to come into an office. They want to start on their phone, move to their computer, and then maybe even finish on their tablet. And banks want to be able to cater to their customers and meet them where their customers are.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 03:58
That makes total sense. And I'm probably going out on a limb, but you know, it curbs a lot of human error. What does it mean when we talk about reliability and being compliant?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 04:08
In terms of mitigating the human error and increasing your compliance and reliability, the electronic process really levels everything out and makes it very easy to follow along. You may have a loan officer that's under a lot of pressure to close out a loan, and some information may be missing. And they might find it easier to just simply file an internal exception to sort of push it through the process. But when you have an electronic system set up, all the fields will be clearly defined. They will be required to be filled in to move to the next one. And you can even set it up with help boxes to say why this is important, and this is how the information should be formatted. So, that by the time it works its way through the process that loan is accurate, complete, and filled out the same way each time.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 04:55
It's a win-win. That sounds awesome. In today's world, we're in a pandemic. And electronic transactions have really accelerated in almost every facet of our lives. Can you talk a little bit about what's been adopted and what hasn't been adopted in digital lending?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 05:12
You can, start to finish, do everything that you would normally in a paper-based world in an electronic or digital process, from the initial loan application to all the credit checks and all that, to filling out the paperwork, and then having the loan funded. Even if you're the originator, you can take that loan that has been electronically created, and you can move it on to the secondary market all electronically without ever using a piece of paper.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 05:45
It's quite impressive. I'm curious how much time is actually cut out of the process on average when you remove the paper from the equation?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 05:54
Well, it depends a lot on a case-by-case basis. And sometimes customers are really willing to share this information with me, sometimes they're not. But I do know that Wolters Kluwer has worked with one of their banking customers who estimated after they had fully implemented their system that they were saving about a week on each transaction, in terms of processing, fixing forms that were filled out incorrectly, or even things that you don't normally initially think about. For example, if you needed to reference the loan, searching for an electronically created loan in an electronic system is much quicker than having to go to a paper file, look through all the files by hand, and then pull out the correct one.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 06:35
Those are real hard costs when we look at it from an operations perspective. How does this also increase compliance?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 06:44
In terms of compliance, we've talked a little bit about kind of removing the human element from it. But there's also some real benefits to automatically and compliantly getting out all the required documentation and assembling that into the completed loan package. A good example is in the auto space. There's a lot of disclosures that must be filed in conjunction with all new loans, and they tend to be government-required disclosures. When you have an electronic process, you can be sure that each time a loan goes through the system, those disclosures are automatically sent to the customer. And then, the customer must acknowledge them electronically to move to the next step. On the back end, if your compliance officer wants to prove to a regulator that this was followed, it's very easy to go in and search those files, and to have the competence to say to that regulator, “I know I've done this 100 percent of the time because my system won't let me do it any other way.” And to then pull that up and get that evidence in front of your regulator.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 07:52
When you were giving us a little bit about your background, you said you had experience working with all the different departments at a financial institution. What I'm curious about is each one of those departments has a stakeholder kind of presence on a transaction, whether they're immediately apparent or really working in the back office. They all have a stake in that transaction being successful and compliant. Can you just talk a little bit about the electronic process? And what does it do for each of the departments? Does it give them comfort? Are they notified when errors happen? What does each one of those department stakeholders think about digital lending? Is it positive or are they skeptical?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 08:36
I think you get a mixed result based on what role somebody is in. For example, I am a lawyer. I speak to a lot of lawyers that represent our customers, and they tend to be very skeptical when they first sit down. They say, “I don't know. I've always done this on paper, and I don't know if I want to move away from that. I know it works and I’d like to keep it.” But then when we start talking about some of the problems they experienced, like what happens when you do have an audit, what happens when a regulator asks to see your records, or even as simple as what happens when you must move all your completed loans from one custodian to another. That's when people start to see the value and then they tend to jump on board very quickly. A good example would be customers who are moving their completed loan portfolios to a custodian. Some of them are paying upward of $800 just to ship boxes. They have to put them on a FedEx truck. It takes a week to get to the custodians' office. In the electronic world, they have one of their operations team members sit down. They select the loans to move. They hit send. The custodian accepts them, and within a matter of minutes, they're transferred.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 09:49
It's pretty amazing. That cuts out a lot of time and a lot of diligence work all done at the same time. Does it make diligence over the portfolio easier?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 09:58
Absolutely. The biggest growth areas right now in digital lending that we are seeing is a lot of companies are saying, “I want to do this digitally because it helps my diligence process.” It could be as simple as just having all the information available to be searched. It could be that you can associate some of the technical details with each loan with that actual transaction. So, if you're trying to say you want to pull your loans and charge them by credit score, in the digital world, it's a lot easier to do that because you know what the credit score is on each of those without having to look at a cover sheet or individually review them. And even then, when you do set up those packages, and a third party wants to come into the verification, it's much easier for them to be able to log into an electronic room, look at the documents, and do that verification. They don't have to travel to your warehouse or your custodian and look at the papers individually.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 10:57
I want to go back to talking about compliance teams and all the different stakeholders. What other ways can the adoption of a completely digital origination process make a compliance team feel really good?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 11:10
One customer I talked with told me that it made their regulatory compliance much cheaper. Every time a government regulator came in and asked to see the records, even as part of a routine audit, they are now able to present those records by logging in from a central location and viewing them electronically. They no longer have to travel to each branch location to see what may be stored there. Another example that really helps our compliance officers sleep well at night is that they know that if a disclosure is required, and its part of the electronic workflow, it will be there 100 percent of the time. That gives them confidence when they meet with their auditors and regulators to know that their ducks are in a row and that they're going to pass with flying colors because they follow the process each time.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 11:56
Are there any increases in the level of security with electronic documents versus physical?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 12:02
This is actually one of my favorite things to talk about. And it's one thing that I think people are very surprised to learn. There's this prevailing notion that we trust in our paper, and we trust in that wet ink signature on a document that your signature is your word. But when we start to really examine what that's based off, there's a lot of ways that electronic signatures and electronic documents are a lot more secure. A great example is if there ever was a catastrophic loss. I worked one time on a case where an Iron Mountain storage facility had actually burned down. And all the paper contracts stored inside were just completely gone. They were either lost in the fire, or they were lost when the firefighters came in and put water on it to extinguish the fire. There was no way to recover those documents. They simply were gone. If they were stored electronically, there would have been a backup system. It probably would have been geographically diverse from the original system, so you can recreate those documents. And believe it or not, the law is really embracing this. The UCC code, for example, supports recovering an authoritative electronic copy from a backup if there is a catastrophic loss of the original.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 13:18
That's interesting in that we can recreate the electronic pieces and they're compliant. How do you end up proving that they're authentic? Is that because the electronic version has an authoritative backup?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 13:30
Again, this is another one of my favorite examples to talk about. When you talk about proving the authenticity of a signature, it essentially comes down to what testimony you can provide in court to reliably say that this is the person who left their signature on this paper. When you have a paper signature, you end up doing things like eyewitness testimony, such as "Oh, I'm the loan officer and I saw this person sit in front of me. I can identify them from my memory." Or you're hiring a handwriting expert who is comparing two signatures and then giving testimony based off that. In the electronic world, though, there's so much more. You might have an IP address. You might have timestamps. You would have the login information entered by that customer who signed it. You would know the email address it was sent to so they could receive that electronic signature if they did it remotely. There are webcam-based online notary services, and a lot of modern electronic signature systems have ways to capture either biometric data or what we call knowledge-based authentication, which are things like sending a pin to a cell phone or having a third-party service call a signatory and ask for something like their zip code or license number or something that would be stored in a publicly available database and confirming their identity that way. So, if you ever were trying to prove that the person whom you think is bound by this loan is the person who applied their signature, I think in the electronic world, you have a lot more ways to prove that than you do in the paper world.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:08
How do we shift the mindset that the electronic world is better? What actually gets people on board?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 15:16
That's the million-dollar question. If I had the single answer to that, I would write a book about it. I would sell it, and I would retire to an island somewhere. But the way that I've solved that problem in my life is by trying to tie it down to a real-world example. I think we talk about a lot of esoteric stuff. It's these theories about what the law says when you apply it to a real-world situation. That's how that executive or that compliance officer understands the risk and the value.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:47
Let's get into an example. Are there any clients or maybe any institutions that you can give an example where you've gotten them on board, and they started seeing the real-world value that it brings?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 16:00
Yes. One that we've talked about a little bit briefly earlier was a customer that was the one who told us that they saved about a week in time by converting to an electronic process. Then, if we talk about on the secondary market, eOriginal had a customer who was originating student loans for profit. One of those colleges lost its accreditation and the loans were mostly forgiven to try and shore up its books. That originator then issued more securities to try and use the new investments to pay their current liabilities. And so, in short, what they essentially did is turned themselves into a kind of Ponzi scheme. The SEC came in and placed them into receivership. What happened is that their secured lender was able to take control over the electronically stored collateral in what essentially amounts to a repossession. By doing so, that pool of collateral never even became a part of the SEC receivership. Therefore, the secured lender was able to retain 100 percent interest in that pool of loans that they had the perfected security interest over. And so, they never even made it into the receivership. The secured lender found that they were able to negotiate those loans, the ones that were still performing or still had value, back onto the secondary market. While they obviously didn't recover their full exposure, they did a lot better than they would have if they just became another creditor trying to get money from the wind-up proceedings.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 17:34
Wow. Wow. Those things take a long time usually. And you're saying that it was within 24 hours of a status change that they were able to take control?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 17:46
Yes, better than 24 hours because it was as simple as sending a notice and then making those changes in the software.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 17:54
How does managing the assets electronically translate into more of a benefit for the secure lender? You're saying that the lender in that situation was then able to decipher performing versus nonperforming (they're not part of the receivership), and then actually apply tactics around the performing portfolio?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 18:14
Yes, absolutely. Like we said, it was a matter of seconds that they were able to take full control. But even then, once they had control, that lender was able to then have their regular loan operations team log in from their regular offices, view the original copies of all those documents, and make sure that they were accurate. They were able to quickly identify which ones still had value, and then to top it all off, because they were already managed electronically it was relatively trivial for that lender to put those back on the secondary market. They never had to fly people to a location. they never had to worry about trying to get keys to turn over a lockbox. It was very easy to pull into essentially Excel files, what they had in that pool, and share them with potential investors on the secondary market.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 19:09
That's really interesting. It just opens the door to what else can I do if I were to have digital capabilities like that? Thank you for all the information. Spencer, tell me, what else can Wolters Kluwer do that helps lenders that are considering entering this space?
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 19:25
I think there are a couple things. One of the biggest benefits of Wolters Kluwer is that there is such a broad base of experience and knowledge at the company as a whole. When we talk about converting to electronic and digital processes, it's very important to have it be 1) end-to-end; and 2) to have all the right people in all the right teams come together and all work on this. You want your legal team involved. You want your financial markets and capital markets teams involved. You want your compliance team involved. You also want your operations team involved, the people who are going to log into the software and manage it. When you bring all that knowledge together, you need a trusted provider that has a broad base and wide experience in the industry, who can put all that information in, and then partner to build an electronic process that not only meets the standards of the paper process, but exceeds it in terms of speed, reliability, and compliance.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 20:29
Thank you, Spencer, for joining today. I definitely enjoyed this conversation and can't wait to have another one.
Spencer Mierzejewski, Senior Legal Counsel, Wolters Kluwer 20:35
Thanks, Samir. I really enjoyed joining the Wolters Kluwer team. I look forward to many more years here working with all the great professionals, including yourself.
Greg Corombos, News Director at Radio America 20:45
That's Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal, joined on this episode by Spencer Mierzejewski, Senior Legal Counsel at Wolters Kluwer. Wolters Kluwer hosts this podcast and is a market-leading provider of advisory services and technology solutions for optimizing compliance and risk management programs. For more information and additional guidance, please visit WoltersKluwer.com or call 1-800-397-2341. We also invite you to subscribe to the Business Compliance Insights podcast at Apple, Spotify, or wherever you get your podcasts. And please join us for future podcasts focused on navigating emerging trends in regulatory compliance.