In the past few years, lending has been reinvented. The demands of regulators in the form of more stringent borrower safeguards and consumers who demand more control during the lending process have drastically increased the cost and complexity of doing business. The cost to originate a mortgage loan, for instance, has tripled from 10 years ago, according to the MBA Quarterly Performance Report.
That said, the opportunities for lenders today are significant. According to a survey conducted by Raddon Financial Group in the spring of 2014 20% of respondents indicated that they'd be in the market for a loan within 12 months. "There is a positive outlook for 2015. This optimism could create demand for a diverse variety of loans mortgage, auto, business and home equity," says Bill Handel, vice president of research, Raddon Financial Group.
Booking lending business now not only means offering products aligned to meet specific borrower needs but also having the technology to support self-service options for loan shopping and application. With the right systems and processes, financial institutions can provide a new lending experience and be prepared for the next round of regulatory dictates.
First and foremost, lenders must implement solutions that ensure compliance and asset quality. In the aftermath of the mortgage crisis, questionable lending decisions and discrepancies in loan servicing files came under unprecedented scrutiny. As a result, the Consumer Financial Protection Bureau (CFPB) has implemented changes to the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) and implemented new mortgage servicing regulations to safeguard consumers and the quality of loan assets. Post-closing, the CFPB now requires loan servicing files to include all borrower-initiated information and documents, security instruments, data about borrower contact and related servicer notes, and all transactions dating from January 10, 2014, until one year after the loan is discharged either by pay off, servicing transfer or through foreclosure or bankruptcy.
TECHNOLOGY TO SUPPORT TRANSPARENCY, SPEED AND ACCURACY
In order to extend the consumer protections it promises, the CFPB demands an accessible and easily audited trail of all loan origination and servicing activities, data and documentation. Borrowers also expect efficient and transparent services throughout the lending lifecycle. This requires lending institutions to effectively manage an entire data ecosystem from origination to servicing.
By implementing technology to synchronize data across all lines of business, lenders and servicers cut costs, reduce errors, achieve higher compliance rates and accelerate loan turnaround times, to the satisfaction of borrowers and regulators.
CATERING TO CUSTOMERS NOW
When it comes to growing loan portfolios, lenders must also consider their target markets. Much has been written about winning the business of Millennialsborn between about 1980 and 2000 who will make up 36% of the U.S. adult population by 2020. Deloitte estimates that by 2022, 40% of new vehicles will be purchased by Millennials. However, age alone is not enough to identify groups worth targeting. The Raddon Financial Group report describes three promising demographics based on financial position.
- Credit Driven (18-34 Years of Age, $50K+ Income): This is a net borrowing market. This segment's income level qualifies members for a wide variety of credit products, making them a key segment for lending.
- Middle Market (35-54 Years of Age, $50-$125K Income): At this stage, consumers have built up enough in household balances to offer the industry good profit potential from both savings and borrowing.
- Upscale (35+ Years of Age, $125K+ Income): The upscale segment provides the highest level of profit potential to the financial services industry. These consumers exhibit the greatest product usage.
REBOOT THE EXPERIENCE
To reach these groups, lenders must create the kind of experience that consumers have come to expect from their other online retail interactions. Lenders must focus on borrower communication and customer engagement. Websites that allow for better two-way communication, billing and payment technology that provides broader interaction, and tools that enable tailored communication are all part of this new equation. A better experience not only helps to retain customers, it increases cross-selling opportunities and drives long-term profitability.
Pete Radike, director of product management for Lending Solutions at Fiserv, makes the important point that these new technologies are not solely for the benefit of Millennials: "Beyond younger groups, the rising use of tablets among retirees and seniors suggests their comfort level with technology and e-commerce is gaining ground. Taken together, the advances in technology suggest consumers of all ages will increasingly expect to view a digitally driven, self-service-style transaction as the norm."
TECHNOLOGY TO SATISFY MULTIPLE GOALS
Fortunately, with the right systems and processes in place, financial institutions can improve the customer experience, increase cross-selling and profitability and meet regulatory requirements all at the same time. For instance, switching to a loan origination system that supports institutional rules and compliance for the origination of mortgage, consumer, home equity and business loans on a single platform will enable lenders to streamline loan offers and loan application processes. In addition, technology to ensure the consistency and completeness of loan files can make loan servicing more profitable while providing transparency into loans for consumers and regulators. For lenders that wish to outsource loan servicing, technology-enriched subservicers offer a cost-effective way to keep customers close while maintaining proper controls.
Digital lending channels and apps facilitate borrower shopping in terms of product comparison and selection. Giving borrowers the option for electronic signatures on loan documents will also enhance customer satisfaction and accelerate the time to close.
"Lending technology that provides an exceptional experience for the borrower not only helps satisfy the CFPB, but also bodes well for an organization's future growth and stability.
Facilitating self-service and engagement through digital channels will help lenders originate more loans and make loan customers more profitable through a reduced cost to service and the cross sales of additional loans and other financial products," says Joe Dombrowski, chief mortgage strategist for the Lending Solutions at Fiserv.