Community Bank Metamorphoses Into National Mortgage Lender

Can a relatively small community bank with limited name recognition outside of its service area grow rapidly to become a nationally known online mortgage lender?

Today, if you have a well-run bank with smart leadership, a strong partner ecosystem and plenty of mortgage experience – plus a healthy budget for deploying advanced new technologies and the drive to be “disruptive” – it’s more than possible, as Darien-Rowayton Bank (DRB), a small community bank with three brick-and-mortar locations in southern Fairfield County, Conn., is showing the banking world.

The bank, which launched a highly successful student-loan-refinancing platform a few years ago, is now looking to go national with an online mortgage platform that bank officials say will rival some of the most advanced platforms currently on the market. Helping DRB develop the new online/mobile platform, which is set to launch later this year, is Tavant Technologies, an IT solutions and services provider recognized globally for its innovative solutions.

To learn more about how the bank is making the transition from small community business to major national marketplace lender – and how its student-loan-refinance platform will complement its planned online mortgage platform – MortgageOrb recently interviewed Robert (Bob) Kettenmann, president and chief operating officer for DRB.

Q: I find it really fascinating that a small community bank would decide to launch a national student-loan-refinancing platform followed by a national online mortgage platform. It just doesn’t seem like something a small community bank would have the resources, let alone the gumption, to do. Can you please tell us how this came about?

Kettenmann: We recently celebrated our 10th anniversary. At the time the bank started, it was a typical community bank start-up, launched by a group of local businessmen. Unfortunately, they picked a really bad time to do it – 2006 was perhaps the worst year ever to start a bank – and a lot of the banks that started in 2006 are no longer with us.

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So, we ran into a lot of headwinds during the recession – we had to achieve scale – and that caused all kinds of problems, but the eventual solution was the sale of the bank to a new investor group that essentially owns 100% of the bank now. That took place in January 2010. At that point, we were an $85 million bank – which was dramatically subscale for this area. Today, we’re a $650 million bank that’s doing well in terms of being the community bank that everyone wanted it to be, as well as doing some interesting niche businesses on a broader scale.

Q: So, how was the bank growing its mortgage business at that time?

Kettenmann: Well, when we got the capital injection in 2010, our first mission was to build the bank to a size where we could pay our bills. And the only way to do that quickly – with the regulators looking over our shoulder – was low loan-to-value, very creditworthy jumbo mortgages. And we were very fortunate that we got to ride the low rate refinance wave at the time – and even more fortunate that we didn’t have many existing loans to refinance.

We did nearly $200 million in jumbo first[-lien mortgages] in the area – and that really got the bank to scale quickly. But, we take a very serious approach to mortgage credit; in fact, we’ve never had a residential first mortgage delinquency. It was post-recession – but we built a very high-quality portfolio. We also built a very high-quality commercial business, as well – as many local lenders do within their footprint. We have a very nice position in that, and in keeping with our credit philosophy, we have not had any nonperforming commercial [loans], either.

Q: So how did the idea to launch a student-loan-refinancing platform come about?

Kettenmann: In 2012, we started looking at getting into some consumer loan business in order to diversify our balance sheet and find new opportunities. And through a logical process, we took note of what was going on in the area of [refinancing] student debt. A number of companies – mostly non-banks, including SoFi – were already refinancing student debt for people who were already out of school, many with advanced degrees. These are people who were already working as professionals, with great credit records and good income, and a reasonable trajectory, professionally. And they had taken out their student debt – for their entire higher education – at rates that were indicative of someone with no credit record, no income and no real guarantee of getting a job.

Once [a borrower] gets past that, it’s a whole different underwriting situation. We wanted something that had the credit characteristics of the rest of our portfolio. At that point, we said, “We can do this – it’s a basic installment loan – and there aren’t that many bells and whistles that would make it difficult from a compliance or operational standpoint.” We also considered the fact that most of our competition was non-bank – which, by definition, meant that they had to borrow money to lend – and they had to warehouse loans until they found their eventual homes.

But, we didn’t have to do either. So, we felt we could be competitive in terms of price – which is important in the consolidation transaction. And we engaged in a series of trial-and-error-type activities to see if we could reach these people. To bring us up to the present, we’ve been very successful at it – so far, we’ve originated $1.1 billion in these loans, and we just completed our fifth securitization. To a certain extent, it has exceeded our expectations. We have about 12,000 loans – and so far, only three delinquencies. So, the credit performance has been outstanding.

Q: So, how did this lead to the idea of launching an online mortgage platform?

Kettenmann: Well, in the course of getting to know these folks [the student loan borrowers] – and in getting comfortable with an online lending platform – we came to the realization that we’ve just acquired the first piece of what could be a fruitful long-term relationship. Our average borrower is 32 years old, makes almost $200,000 a year, and has a credit score of between 750 and 800 – and most of them have not bought homes yet.

So the next logical step for us is, “We’re already a good mortgage lender – having served the local market – what can we do for these folks in terms of meeting their housing finance needs?” That’s the genesis for us getting into the mortgage market on a broader scale than just our local market.

Q: You say the student-loan-refinancing platform has seen the most success in the major cities and that the product was marketed mainly through online channels. Was it the early success of that launch that made you think that launching an online mortgage platform could be equally as successful? Also, how did you handle this launch from a brand awareness perspective?

Kettenmann: Well, first off, let me say that we haven’t changed the bank – if you came in from the Post Road [in downtown Darien], you’d think we are the same bank we were 10 years ago. The only difference is that we’re a lot more successful – and we have a lot more capacity to lend.

The short answer is, we really run these as side-by-side businesses. As you know, traditional community banking in a low-interest-rate environment is a tough slog these days – it’s not that easy to make superior returns. So, this [student-loan-refinancing] business gives us a stream of fee income – that makes us an even better community bank.

In terms of brand, what we did – which would be obvious to any marketing person – is that because Darien-Rowayton Bank is not a brand that would be easy to promote nationally, we changed the identity to DRB. If you go to the student lending website, that’s how we identify ourselves.

Q: Talk about the role that technology plays in these online initiatives – would you say today’s Web-based lending technologies are getting so “turnkey” and are so rapid to deploy that they make it easier, simpler and faster for a bank or other financial entity to quickly go national?

Kettenmann: Yes, technology is an incredible thing. If you think about the community banking model 10 to 20 years ago, in order to provide high-touch service – we had to know your name, let you have free coffee, and sit in the bank all day and talk with us – you had to give up a lot on the technology side. But today, all of the technology [that the big banks use] is available to a community bank – through outsourcers that have the same scale of economies as the large producers. [This allows] a community bank to do anything that [a big bank can do] – at a competitive price. Now, you can get all of the benefits of dealing with a community bank without any trade-offs. I should probably add that most banks need to have online technology today anyway, just to give their customers the ability to use it.

Q: You say the online mortgage platform being provided by Tavant is being built from the ground up based on DRB’s specifications. Can you tell us a little about what might make this platform different from the other ones currently out there?

Kettenmann: We saw the opportunity to take a leadership position in this. The mortgage application process has been the bane of bank customers for some time now – and [with new regulations], it only gets more complicated, not less. We’re focused on making this much easier for the consumers in terms of how they pre-qualify and how they get documents into circulation. It allows us to be faster on the turnaround time, and at the end of the day, it costs less for us to originate, which benefits both us and the customer.

So, we will be rolling this out later this year – it’s not ready yet – and we think it is going to define the state-of-the-art in mortgage processing. How might it be different from the other platforms? Well, one thing I can say is that many of [the other online mortgage platforms in the marketplace] say they are about making it easier to get a mortgage. The difference with us – and it is really a matter of semantics – is that we want to make it easier to apply for a mortgage. We’re trying to make that part of the process easier for the consumer.

Q: What about the compliance aspects of what you’re planning to do? It’s really important to have the right partners involved…

Kettenmann: We’ve always had an emphasis on compliance in our day-to-day business, and we have a good track record with the regulators on that front. We also believe that as you move in any direction, to a certain extent, the regulators are your partners, and you have to talk to them about what you’re doing and how you’re doing it – to be sure there are no surprises.

Needless to say, mortgage is a more complex product [compared with student loans] and has gotten even more complex. We actually think we understand mortgages pretty well – we’ve done them for a number of years, and we understand the compliance around them. There aren’t many community banks that are in the mortgage business today – and I don’t see many of them rushing to start, either.

Q: But are you going to be building up your internal compliance in order to do this?

Kettenmann: Oh we already have – and we take advantage of contract resources, too. We hire people to handle things such as quality control and all of the other things needed to have a compliant environment.

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I don’t know of many community banks that are doing what we’re doing – certainly, there aren’t many involved in student loan refinancing in the way we’re doing it. It’s not a natural go-to for a lot of community banks. That’s why we are building out a channel now to supplement our securitizations where we can sell these loans to community banks. Most community banks these days have no difficulty raising deposits, but creating loans is a challenge for many. So, we think we can be a source of some high-quality balance sheet assets for other community banks, on a one-off basis, that gives them a chance to participate in this.

But I’ve never talked to [a community bank] that was actually interested in starting something like this up. There are certainly easier ways for community banks to be involved. We’re just fortunate in that we have an ownership forgo that is interested in pursuing this – and that is willing to fund it.

Q: How much might you diversify your product suite as a result of going national? I mean, you say you’ve been mostly focused on prime jumbo, but when you launch a national platform like this, the sky is the limit – you can open it up to all kinds of products.

Kettenmann: At this point, it is premature for me to say. But, I think we are looking at a traditional product mix. As you know, in the mortgage market, very often it is all about the end investor – if you can find someone who wants to buy a certain type of loan, you’ll originate it.

Q: But I take it, based on your heritage and credit philosophy, that you are by no means looking to become a subprime lender.

Kettenmann: No, no, no. We’re talking about a tranche of credit that is super prime and very pristine. At this point, that’s where we want to play – which, to a certain extent, dictates the product set. I suspect we’ll have a pretty good product range by the time we’re up and running with the new platform.


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