Riding the Tide of Technology without Wiping Out: Case Study

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Case Study for Chapter 3ELOANDOCS: Riding theTide of Technology withoutWiping OutIntroduction1On a warm summer evening in Northeast Ohio, Albert Michaels, the Chief Technology Officer(CTO) of local software company eLoanDocs, was enjoying his evening drive home. Though hiseyes were on the road in front of him, his mind was stuck on the topic of the day behind him: the“cloud”. How could eLoanDocs take advantage of this emerging and exciting new technologyplatform? Cloud computing held the promise of greatly reduced costs and nearly unlimitedscalability for a company like his and seemed like it might be the wave of the future for hostedsoftware providers. But the barriers to his customers’ adopting the cloud were potentially high.And if those barriers were overcome, the competitive landscape in which eLoanDocs operatedmight shift in unfavorable ways. As a technology professional, adopting the cloud seemed to himto be a forgone conclusion. But his years of experience had shown him that it’s rarely easy to beone of the early adopters.Inefficiencies in the Mortgage IndustryThe home mortgage closing process in the early 1990s was slow, paper intensive, and ripe forinnovation. Realtors, mortgage lenders, title companies, and borrowers met and collaborated inprimarily local marketplaces. The myriad documents required to support the mortgage approvalprocess were exchanged through a combination of fax, mail, courier, and in-person reviews.Realtors, mortgage brokers, and escrow officers worked together to ensure that all of thenecessary documents were generated, supporting services such as appraisals were ordered andperformed, and required documents were signed by the borrower. The average time between aconsumer application for a mortgage loan and the final closing was about 90 days. Closings wereoften delayed or rescheduled when late-breaking changes in the loan terms or associated costsrequired the lender to generate new documents. The majority of documents required for themortgage closing were generated by the mortgage lender, but these documents were traditionallyreviewed and signed by the borrower at the place of settlement (closing), generally at the titlecompany. Mortgage lenders sent documents to the title company and to the borrower throughmail, overnight express delivery, or courier. A successful closing required that the mortgagelender generate final documents and send them to the title company at least one day before thescheduled closing.
Technology to the RescueIn 1994, a Cleveland-based title and settlement services company, Premium Title, wasdetermined to reduce their costs and differentiate their service to the market by addingtechnology to the mortgage-closing process. Premium Title’s owners created a separatecompany, eLoanDocs, to connect the various parties involved in the process by usingtechnology. eLoanDocs’ founders wanted to improve the speed and accuracy of the mortgage-closing process while increasing market share for Premium Title and other connected businesspartners. The founders believed that they could create a company that would grow quickly andthat would generate significant return for their investors.In industries where larger companies with dedicated IT staff existed, standard protocols hadbeen developed to exchange information electronically. For example, in the automotive industry,Electronic Data Interchange (EDI) had been used for years to exchange purchasing and billinginformation between manufacturers andtheir suppliers.2There were no standards for electroniccommunication between business partners in the mortgage industry and, since the Internet wasnot being used broadly for commercial purposes, intercompany data exchange was dependent onproprietary communication networks.eLoanDocs launched a proprietary electronic interchange in 1995 that connected PremiumTitle with several mortgage lenders in the Cleveland area along with a few local serviceproviders such as appraisal vendors and surveyors. Proprietary data formats were defined for titleinsurance and appraisal orders, and mortgage documents were delivered electronically using thecommon HP Printer Command Language (PCL) print stream data format. The PCL3is a pagedescription language (PDL) that allows a document’s appearance to be described at a high level.This allowed Premium Title, using equipment commonly available at the time, to define thedocuments needed in their industry and share them with the necessary business partners.eLoanDocs purchased off-the-shelf communications software and customized it to their needs;they also purchased computer servers, network equipment, and modems to run their electronicinterchange. The computer equipment and telephone lines were hosted in their modest officespace in Cleveland, Ohio. The small network of participating companies each installed modems,standard communication software, and eLoanDocs’ proprietary software application to exchangedocuments that represented orders for services and the delivered real estate products such asappraisals, flood search certificates, and surveys. The electronically delivered documentsreplaced slower, lower-quality, or less-reliable courier and fax deliveries. eLoanDocs wassuccessful in building a network of local mortgage service providers, but struggled to extend thetechnology and business model outside of Northeast Ohio.Right Technology, Right Place, Right TimeIn the late 1990s, eLoanDocs realized that the emergence of the Internet as a driver of commercewould present both a threat to their network and an opportunity to extend their mortgage datainterchange to more parties across the country at a lower cost. In 2000, eLoanDocs re-launchedtheir mortgage industry electronic collaboration network on the Internet with the debut of theirnew software product, Document Posting Service (DPS). DPS used standard communicationprotocols such as HTTPS and SFTP over the Internet, which eliminated the need for modemsand proprietary communications software. DPS also featured HTML Web user interfaces for
settlement agents to avoid the need for software to be installed at each customer location. DPSwas a multi-tenant application (Figure 3.1) that provided software as a service (SaaS) to themortgage industry.SaaS allows customers to use software that is owned, delivered, and managed remotely by one(or more) providers.4This model allows the provider to maintain one set of code and data formany different customers. In essence, SaaS allows customers to rent software rather than buy it.The advantages of SaaS for customers include cost savings, scalability, accessibility, upgradeswithout disruption, and resilience. Some disadvantages also exist, the primary one beingsecurity.5Market acceptance for DPS was tremendous, with several major mortgage lenders signingcontracts to deliver all of their closing documents to settlement agents using eLoanDocs. As asmall company facing growth challenges brought on in part by a boom-or-bust mortgageindustry, eLoanDocs took a pragmatic approach to new product development. Productdevelopment investments were guided by immediate opportunities with existing customers thatwould lead to short-term revenue and possible broader market appeal. Following this model,eLoanDocs extended their product line beyond closing-document delivery to include borrower-disclosure delivery and electronic-signature capability.Supportive Regulatory ChangesFederal and state legislation in 1999 opened the market for electronic signatures in the real estateindustry, and eLoanDocs developed services to take advantage of this legislation. The UniformElectronic Transaction Act (UETA) was first adopted by California and Pennsylvania in1999.6At the time of writing in 2015, 47 of the 50 U.S. states have adopted this act. Theremaining three states (New York, Illinois, and Washington) have not adopted the act, but havestatutes pertaining to electronic transactions. The UETA’s purpose is to bring into line thediffering state laws over such areas as retention of paper records and the validity of electronicsignatures to support the validity of electronic contracts as a viable medium of agreement. TheElectronic Signatures in Global and National Commerce Act (ESIGN) is similar to the UETAwith the exception that it pertains to the validity of electronic signatures on the federal levelinstead of the state level.7It also brings validity to signatures for foreign commerce.The Changing Business TideseLoanDocs’ business was growing fast, but the computers that hosted eLoanDocs’ services werestill run out of a small office computer room. On a hot summer day in late July 2000, Clevelandfaced scattered power outages due to heavy draw on the power grid for air conditioning. Powerwas lost in eLoanDocs’ office for over eight hours, well beyond the two-hour battery backup thatwas in place to support the computer systems. Dave Griffith, data center manager foreLoanDocs, said “we tried to find portable generators for rent but there was nothing available bigenough and we couldn’t even get the generators close enough to our computer room to runextension cords” (personal communication). eLoanDocs’ electronic services were unavailable tocustomers for most of the day. Customers suffered costly business delays due to this extendedsystem outage on one of the busiest days of the month for mortgage closings.
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