In a lot of places in the loan origination space, there seems to be a serious lack of commitment towards business process improvement. But it is clearly one of the drivers of increased inefficiency and more profitable operations. What are we not doing today that we need to pay attention to moving forward? This is what Keith Polaski of Radius Financial tackles in this conversation with David Lykken. A process junkie and technology adoption enthusiast, Keith full appreciates the power of process management in allowing loan originators to weed out inefficiencies, reduce loan manufacturing costs, and increase the profitability of their businesses. Join in for a lot of incredibly useful information!
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Driving Efficiency And Reducing Loan Manufacturing Costs Through Process Improvement With Keith Polaski Of Radius Financial Group
Marc Helm, thanks for joining me on this interview. I’m excited to share this with our readers. You and I have an appreciation for the process. Keith Polaski, who has been a guest on the show a number of times before, is one of my favorite people at many levels. One of the reasons is he is a process junkie. He knows the importance of it. I’m excited to have you join this interview.
I’m glad to be here. Thank you.
It’s pleasure to meet you. As David referred to, we have met a couple of times and I have been on his show.
It’s my pleasure to meet you too.
Keith, one of the things that I want to give our audience is a little bit of your background. If you give us an overview of your background. I learn some things that you were a pilot. I love that in the military. There are so many things about you that continue to be amazing.
Thank you for having me on the show. I do appreciate it. It’s been a bit since we had our last discussion. The Radius Financial Group, which is owned by myself and my business partner, Sarah Valentini started many years ago. We are a retail originator. We do not do any TPO or wholesale or any of that. We are feet on the street originated classic, IMB, which has relationships with, realtors, builders, and developers. We all know the story and all that stuff.
One of the things that we have always been known for in the industry is not that we are a giant player or major player, we are a significant player, but process and technology implementation. We have a strong lean towards technology and technology adoption. Sometimes for the good or bad, but I can tell you overall, unequivocally, for the good.
There’s no question about that. You appreciate that. Your base headquartered is about twenty minutes South of Boston, but your footprint is mostly in the Northeast.
Atlantic Seaboard, we have offices in North Carolina, Georgia, Florida, Texas, California, and Washington State. We have expanded. Some of that has been opportunistic. We have had opportunities presented to us. Some of it has been strategic. Florida, North Carolina, and Georgia stuff on the Atlantic Coast are places we wanted to be, then the others were opportunistic and we said, “Let’s do this.”
It’s good to see you growing, and it’s not surprising. One of the things that I want to start the conversation off with is that I celebrate that you have a passion for a process that you said, when we first met, we are doing everything the way we want, but we need to have someone come in here and confirm what we are doing. More importantly, identify and map out what we are doing, and then we want to have a process where we continually do process improvement. I think it’s known as Kaizen over there in Asia.
You have been a champion of this and very passionate about it. It started with Alice Alvey, myself, and you retaining me in our firm, and then I brought in Alice to work with me, as well as another individual. We came in and we were embedded inside your operation. I have got some wonderful pictures from that time. It seems like yesterday. I can’t believe it’s that long. I want to talk about there’s something that many mortgage bankers struggle with, and that is this. They don’t appreciate the importance of having a consistent replicable process and being disciplined about it. What is it that made you passionate about this and have the conviction that you do?
It first started with back to the technology lane. We were on the cusp of automation, whether that be RPA, Robotic Process Automation AI at the sort of forefront of that. The reality is, if you don’t understand your entire workflow and map it out, it’s not possible to ring out the efficiencies that will drive down your manufacturing cost. When you and I met at the MBA conference, we engage your organization and had you come in and start the catalyst of our workflow project.We were on the cusp of automation. If you don't understand your entire workflow and map it out, it's not possible to ring out the efficiencies that will drive down your manufacturing cost. Click To Tweet
That workflow project was arduous. You and your team taught us how to do it. You didn’t stay for the entire time, but it took our team almost 12 to 14 months to get those processes documented and get them workflow, put them in Visio maps, job aids, and all of those things. Without a doubt, that was one of the best investments our company has ever made while it was a process that took a long time, we have reaped, without a doubt the benefits of that process.
One of the best ROIs you have talked about is that investment and a lot of people struggle with that. I want to go fast forward to now and talk about the rewards of doing that. Your cost to originate is less than half of what the MBA average cost to originate is. If I recall correctly, I think it’s even lower than that. It’s close to you a third of what it is if I understand correctly. Could you elaborate on that a little bit? You may not have to get specific numbers, but it’s a lot lower than the industry average.
The MBA publishes its quarterly cost to originate, which includes the loan office of compensation. The last metric was 11,800 or somewhere around that number. Don’t hold me to it. I’m not the subject matter expert on that number. We are a retail shop, so I have to pay my loan officer’s market wages. I can’t be the first penguin in the pool and then I would like LO comp, but it’s not going to happen. That’s roughly half of the expense. The only game you have is to be able to control manufacturing costs. That’s how we look at everything that we do once the originator gives us a loan. It’s about manufacturing.
When we started this process with you, our manufacturing costs were roughly $4,000 prolonged on the operations side. Call it $4,500 or $4,000 to the originator and the MBA stats will support this. It was about $8,000 to $8,500 back in those days. We look like the rest of the market. We did a good job. As we focused on manufacturing, which to me is the only place currently you can drive costs down, we went from about $3,800 manufacturing.
Now we are down on the $350 to $600 on an agency loan and maybe $1,000 to $1,400 on FHA, VA, and USDA loans. Some of that is because of the borrower profile, but it’s also because your underwriters that have to touch those loans are more expensive underwriters. We couldn’t do any of that without the first process of measuring and documenting everything that we do to manufacture a loan through that process that you and your team started us on.
It was an honor to work with you. Celebrate that success. How do you get this message out? It’s almost for the vast majority of readers are going, “That’s not possible.” The answer is it is.
Let me ask you two questions about the process that you explained. When David’s team come in and laid out the roadmap for you and you started looking at the processes that you had been successful with. I’m assuming that the documentation cycle you went through helped you build the roadmap for the future to continue to do a self-assessment of where you were and allow you to continue to have an improvement process on your cost. That’s great to do that, but do you keep that in play and you do a self-assessment, other than when you add a new branch or when a branch manager changes out or whatever?
Do you keep that self-assessment alive all during the year, check out individual offices and processes that you have to make sure they are staying on target and you are reaping the benefits you want out of it? Do you find that those things happen a little bit through osmosis because you got to a pretty fine-tuned machine and then when new things came up, going to improve it, you just add those to the mix? It is the way you do it. Are you continually self-assessing or are you looking at the opportunistic things as they come up to add to the mix of what you are doing?
If you get stuck in, “I will figure it out when someone else identifies it,” you will lose the game. We have two people whose primary job is to assist in technology and operations, synergy every single day. That’s all they do. Most of the technological advances that we do, whether they be robotic process automation are AI, are born from our line-level employees.
We have a formal process for our operations staff to say, “This is stupid that I’m doing this when a robot can do this. Why am I doing this? This doesn’t help my brain power. This does not help the company.” This is what they do. They will boil that up to our IT/ops liaison. They will go through a process of seeing whether this is something that can be automated, improved, etc. Additionally, our workflows are not negotiable.
I want to stress that because you made that clear, “We are committed to doing this.” There’s a lack of commitment. When there’s a lack of success with business process improvement, it’s a lack of commitment to that. I want to underscore what you said. Did you learn that as a result of trial and error or say, “No, I realize that. We have laid down the law?” Have you lost some people over that?
We have lost some people over that, but if anybody’s ever had a military background, operations are not negotiable. You follow operations and the discussion. You have the ability to raise it up to the chain of command, but this is how we do it. When we bring on somebody from a major competitor movement like Wells Fargo. David, you will like this. We have a new word called AWE. Do you know what that means? After Wells Exit
You can’t bring in people from movement or wherever G rate and think that they can bring their platform to your organization. However, that doesn’t mean that you have to be so arrogant that you can’t learn from them. If you do learn from them, then we will change our own workflow to these new realities that make sense. You have to have an open mind and be a listener.
One of the problems I think most people in this business have, especially in the IMB world is that they are not listeners. They are only talkers. They only want to say, “This is the way we do it.” You cannot ever improve your organization if you are not a listener. You have to be a listener, but you also have to recognize that not everybody has the truth.You cannot ever improve your organization if you're not a listener. You have to be a listener, but you also have to recognize that not everybody has the truth. Click To Tweet
You are talking about listening, but sometimes it has some discernment on what are you going to act on because you can listen and have five messages come in as to what the way there is to do that. How do you sort through that as you are listing to the way that it’s going to be?
When I was younger, I thought that I could be the only listener at least on the operations side. My business partner Sarah is on the sales side. As I have gotten older and the company gets more mature, it’s to make sure that you have people surrounded around you that are better listeners than you are.
Listening is probably one of the most important. Keeping yourself open-minded to other ways of seeing it.
There’s a joke in my office, “If Keith says no, it’s a maybe. If Keith says maybe it’s probably a yes.”
That’s coming from the sales side for sure. I can appreciate that.
As you have experienced this growth in your branch scenario since the last time you and David talked about branches and whatnot. How has the adoption process worked for you for the people coming on board? Have they bought into what you are doing? Obviously, you are not going to keep them around if they don’t, but have they bought in, come to bear with the team, and made sure they get their input in to even make the process better if they see something else you can do? How’s that working?
One of the things that we have always had in our DNA of hiring is that we want people to be fully educated about the process and culture. We want either of us to opt-in or out. That means the candidate or candidates opt out prior to hiring, or Radius opts out prior to hiring because it only gets worse 90 days in. My money is being spent at the front end, and I don’t get a return on investment until these guys are producing. We try to be transparent. We don’t hire perfectly every time, but I will give you a stat that, will probably be disputed by those that might be reading this. I have not lost a producing LO who has been with us for over 5 years in 23 years.
That’s a strong statement, not 1 in 23 years. Anyone who’s been with you for five years.
That says volume is about the culture you have created in your company, but you strive to do that. That’s amazing.
Those are top producers that are getting recruited every single day. Here’s why they stay, they believe in the manufacturing plan. They know this is why it’s important to get your back house in order and not your friend’s house in order because your salespeople will not leave you if they know. If they originate alone, they will go to the closing table.
It’s been a long ongoing commitment and journey. You talk about what you have had to go through. What are some of the major hurdles and resistant points that you have had along the way? Was that mostly on the front end and that’s diminished over time or is it something you have to just work through? There are issues that you work through all along the way?
You get tired dogs that don’t want to change their way. On the front end, you don’t get technology adoption where they should get technology adoption. They don’t get it. They don’t educate their consumers, to create a more robust and successful consumer experience. I have some senior originators. they are still on manually face-to-face handwritten apps. It’s like, “Are you kidding me? In this day, you don’t understand what that means to the production costs?” To your readers, we do time and attendance on every single file.
Explain what you mean by that time and attendance.
When the loan comes in from the loan officer, and it’s a pre-loan officer, we do time and attendance at the loan officer assistant level. Every time a loan officer assistant or any other employee in our organization touches your file, we document it to the second and we cross-reference it to the actual employees’ salary and benefits. We have an exact cost of manufacturing for every single loan and at every single LO producer level.
There are conversations that are able to be had that say, “Your cost to manufacture is 20% higher than the average of our entire organization. Why is that?” “We use those for not penalties, but for conversations to try to improve loan manufacturing, quality element queue, and also whether we should price differently to a specific LO because they cost us more money.”
It makes sense when it comes to how you pay the compensation. There are all the regulations that go around some of the fair lending issues that could rise up as a result of that. The most important part is you are being intentional and you are managing to the reducing costs. We have got to do that. I think you raised a good point also. There’s a certain amount of sense that there’s sacredness to the LO compensation. Who goes first is the point that’s probably going to and trying to cut LO comp is the one that’s going to lose their organization, especially in a competitive market like this where it’s so much recruiting going on.
Don’t give me bad PR. I think LOs should get paid more. Have them call me.
There are so many people that are so frustrated by that. That is a good point. I want to come back and say, “Are you serious?”
Think of it. The MBA says, “It cost $11,000 plus and minus what the number is.” The reality is the average loan amount is $400,000 plus and minus. That means LOs are getting paid $4,000 to $4,500. That means for most companies, roughly $6,000 is the manufacturing cost.
You are talking about the operation side to make sure we understand. We are talking about operational origination costs.
It includes secondary marketing. It’s on the other side. We are going to pay. The LOs are going to pay them. I don’t think that that’s a needle that you can move. Especially, if you are a retail originator, that’s a dangerous game to even contemplate. You don’t want to be the first penguin in the pool. There’s the only place that you can create an opportunity for your organization to be successful is in manufacturing costs. We all have the same cost of credit or what I call the cost of goods sold.
We all have the same cost for the most part, depending on your size of warehouse bank lending costs. There are not a lot of differentials there. If you are a pretty solid producer, your execution’s into the agencies or the aggregators, as long as your product performs, if you have historically high delinquencies and you are not going to get good executions. All of those things are pretty equal. There’s not a whole lot of movement there.
It is, “How do I make my organization more efficient?” We call it velocity and efficiency. How do we create more velocity and efficiency in the manufacturing cycle? The only way you can do that is through a combination of the things that your organization helped me do. Map out the workflow. You taught us how to do it, and then you left. You aware you. That took us over a year and a half to get that fully documented.
You talk about commitment. If you want to do this, you need to know every single touch. We all have to do 1,000 things. It’s the analogy I use. If you are going to sell to the agencies and aggregators, we all have to do the same 1,000 things. Some of us do the first 100 in 1 way, and then the next 100 in a different way, but we all have to do 1,000. It doesn’t matter. It is just being dramatic, but we have to do them. The question is how do you do them efficiently, and also, what are those 1,000 things that you don’t have to have a human do? If you don’t have to have a human do, how do you bring in robotic crisis automation or artificial intelligence?
You bring up a good point right there because some people say, “I want to be a high-touch company where we are talking to the consumer and highly we have a high touch.” In other words, they are experiencing more humans than computers. I have heard people say, “We have too many computers involved in this process already.” To those that would say that you are missing opportunities to communicate with the consumer as a result of using the technology you do, you are missing opportunities to communicate with the customer-informed relationship. That’s not what you are saying.
There are two places in there. Post-closing, you want high consumer touch. You want to keep the customer in whatever way you can. We have only been a servicer for the last few years, and that’s been helping us as white-labeled. During the process, customers want immediate gratification, the immediacy of data, and all of those things. In our opinion, they are very well satisfied with the technology of point of sale that we give them.
Maybe your customers track NPS or Net Promoter Score. Maybe they know some history behind that. Our goal as an organization, as a net promoter score of 85, which is world-class, and above 60 is world-class, we are at 79. Our customers are telling us that we are doing a good job. Without a doubt, that doesn’t mean that you want an electronic or digital relationship with the customer, especially in our business.
It’s a relationship business.
Think of the things that these consumers and borrowers tell us. They don’t sit around the Thanksgiving table and talk about what they make on a monthly basis or what their debts are with their families, but they have to talk about that with our LOs and our staff. This is an intimate relationship that I think needs to be balanced by technology and human interaction. I don’t think human interaction will go away. I don’t want to name names, but there was a very large, and remains a very large originator out there, who’s probably not going to survive because everything they were talking about was, “No originators, and only technology.” You may or may not know who that name is. Your readers probably can surmise whom I’m talking about.
Here’s the question I was trying to get to, and I did it in a clumsy way of getting to it. Does technology take away from, getting a high Net Promoter Score or NPS? The reality is you demonstrated that you are at 79 and still maintaining your cost originating to Fannie and Freddie loan on the operational side down to $350 to $600. That is an extraordinary feat. That is amazing, and having the net promoter score. The guy that’s saying out there, “We can do more with computers, less with people,” does not take away or erase the fact that you can get a solid relationship with the consumers.
The thing that I would share with your readers is thinking of this just as an example. Your borrower doesn’t know what the process is to pull a flood cert. They don’t care because it’s not part of them. If it’s an FHA loan, they don’t know what the process is to pull an FHA case number. It is behind the scenes. When you can automate that and make that process with no fault, so there’s never an instance that we forgot to pull the flood cert anybody that’s been in this business that long enough prior to RPA and some automation knows that prior to a close, we forgot to get the flood cert because a human was involved. That doesn’t happen.
There are so many places in the manufacturing process that the consumer borrower is not aware of that happens behind the scenes. If we automate that, they don’t experience any less of a customer focus and customer-centric lending experience that they say, “This is good.” What they do experience is they don’t get sloppy mistakes happening on top of their deal.
We got to wrap this up because every time I get on with you, I get excited about it because we share the same passions. In the beginning, I found out that you are an A-10 Warthog pilot, one of my favorite airplanes, the most amazing airplanes out there. It’s not a surprise that you are committed to a process like the military in your business. Give us some of your thoughts.
Let’s clarify. I did not end up with my commission because of Gramm-Rudman. I was the ROTC commander. I flew Airforce’s T-37 and T-38. I had A-10 flights. I was not in action or engaged. I was reserved. In Gramm-Rudman decommissioning where we lost 30% of the decommissioning, I was pushed out. I want to make that a clarification.
I don’t care if you only took off and landed A-10 it once or twice. Just the fact that you got to fly one of those things at some point in time.
If we were on a 7-37 and it didn’t seem to be going well, I could put it on the ground.
Mark, I would love to get your thoughts on it as we wrap this up.
I will be glad to share my time with you. It’s not all it’s made out to be, but my time in the United States Army made me what I am now. I don’t regret one minute of it. All people doing all jobs. That’s what makes us as strong a country as we are. This has been delightful. I love when I listen to somebody whom I have such kindred spirits with on so many fronts. You built certainly a better mouse trap. I can’t help but let my mind wander and talk about what you could do to concepts like net branches and everything else, grow your company 50 times larger than you have it if you want to because of what you have done.
If you laid out a model, it probably can work for about everything in a retail space because that’s your focus. It’s innovative in the controls, understanding, and success you have. It’s refreshing that people have not only gone back to the basics but they fine tune them and made that statement, “I don’t have to be doing this. Systems and technology can do this for me. AI can do this for me. I don’t have to write on a pad of paper. I don’t have to do calculations anymore.” I love that. It streamlines what you are doing and it’s fascinating. I’d love to have the opportunity some time to visit your operations and see how it works because I think you built something mighty special and I’m sure you are very proud of it because I’m proud of you.
I appreciate the commentary. We would welcome you and David any time for a revisit. Here’s where we are at. I tried to commercialize the technology and I had some big players in the marketplace that were wanting to buy our technology. 2020 and 2021 hit, and we only have so many things we can do. I’m going to originate loans, so I will make more money originating loans than commercializing technology and what we have put together. At the end of the day, my business partner and I, there’s one thing that we are focused on and it’s shared success.
We have committed to our employees to give 25% of our company to our employees based on some criteria. We are not looking to retire. We might sell it to a management team. We are approached every single day to sell our company but there’s only one thing that matters to my business partner and I, is that those that were along for the ride share at some level in the success of that. For some, life-changing numbers, and for others numbers, that matter they are at the lower end of the wage scale or the commitment how long they have been with us.
We map it out. Some of our top people will get $4 million or $5 million checks. All that matters to us right now is shared success. All that Sarah and I have focused on is growing the company so that we can have a shared success exit. Sarah and I have done wonderfully in this business and industry. Many of our folks have been well-paid. At the end of the day, the Lord knows that not every piece of bread is for those that baked it. That’s where we are at.
I’m grateful for you giving us your time. I’m grateful for you, our friendship, and for the opportunity to sit down with you so many years ago and start what turned out to be an amazing success full experience in cutting costs and creating an amazing culture and company. There are many takeaways from this. The origination costs are $350 to $600 per loan on the originations on the operational side for a Fannie and Freddie loan. You have not lost a single loan officer that’s been with you for five years or longer and has not ever left. That’s amazing.
You talk about being open-minded, being a listener, and then creating a culture of listeners around you that are even better listeners than yourself. There are many wonderful takeaways. I hope our audience will take this and pass us around to them. If people want to connect with you, what’s the best way to do so?
My email address is [email protected]. I would be more than happy to talk about how to create manufacturing efficiencies even with my competitors. The more that we take capacity in expense out of the industry, that’s better for our consumers. I will be more than happy to do that. If you want to make personal introductions, that’s okay as well. I don’t do these for ego. I do these to help the industry, our company, and everybody that’s in this business, and hopefully, make it a better place for our consumers that want to own homes.The more that we take capacity in expense out of the industry, the better it will be for our consumers. Click To Tweet
It’s a shared interest and a shared commitment because Mark and I both owned companies and sold them. We are doing this not because it’s ego, but because it’s giving back. I love that about you and Sarah and what you guys do. Thank you for being here. I appreciate it so much.
I want to thank you for the opportunity to speak to you and Mark. Any time that your readers want to ring me up, I’m more than happy to have discussions with them. What you do for the industry is important. Continue your good work. God bless.
Thank you so much. God bless you too.
It’s nice to meet you. I enjoy talking with you.
About Keith Polaski
Keith Polaski of Radius Financial Group has transformed his business, increased morale, and margins, and built a team that creates measurable results by engaging all his stakeholders in developing and revamping business processes.