REQUIRED READING: There is a new version of the David and Goliath clash in the residential mortgage marketplace, with community banks attempting to stave off competition from the so-called big-box banks.
On the surface, the situation does not look good for the smaller institutions – since the financial crisis began, hundreds of these community-based institutions have either gone out of business or have been placed on the ‘problem’ list maintained by the Federal Deposit Insurance Corp. This is extremely troubling, considering that local banks are a key source of funds for small businesses (especially home developers working in very specific geographic areas) and potential homeowners.
However, community banks have enjoyed long-standing popularity due to their high level of customer service and commitment to their neighborhoods – and this strength has been reinforced over the past couple of years as the big-box banks face scorn for their roles in the collapse of the financial markets. But being popular is not enough to help smaller lenders survive, especially in today's challenging residential mortgage market. For the mortgage departments at community banks, taking on the larger competition requires adapting the competition's technology know-how and strategies.
In any service-dependent business, response and communication are mission-critical. The mega-banks know this, which is why they have legions of IT people to fine-tune and modify their loan origination software (LOS) to keep pace with changing needs. Many of these systems are proprietary, while others were acquired through costly transactions.
Yet any community bank – even those with bare-bones IT budgets and departments – can possess an LOS strategy that will continually rival and outperform that of their largest competitor. In fact, the playing field is a lot more level than it used to be, and it is actually beginning to tip in favor of community banks.
To understand why, we need a brief review of how technology is changing in favor of the smaller lenders. Improvements to LOS systems started with necessity-driven architectural changes, evolving these tools from desktop PC applications in the 1990s to enterprise-level ones.
Some developers even built in loan document engines that enabled lenders to draw docs as needed without paying a third-party provider, and also incorporated electronic document-management capabilities. Recently, this particular improvement has evolved further to bring digital capabilities to LOS systems, and its importance to community-bank mortgage lenders is highly significant.
Hello, GSEs!
Cost-efficient digital document management can also allow community-bank lenders to match the extensive document-imaging capabilities of the big banks. Without adding any great investments in equipment to the setup already present in the loan department, lenders can become fully paperless and have incoming electronic documents routed automatically into their workflows, ready to be utilized immediately. Paper documents that come into the shop can be scanned using existing digital copiers or an inexpensive desktop scanner and be sent instantly to the appropriate workflow queue without laborious preparatory steps.Â
As a result, loan files need never be copied, and only signing documents need to be papered out – unless the organization decides to go with e-documents and be totally electronic. Paper in the loan department virtually disappears, along with endless copying, storage services and misplaced documents.
This situation also helps the community banks in their secondary marketing, because the delivery of loans to the government-sponsored enterprises is built-in and happens at no extra cost. This expands on the community banks' involvement with Fannie Mae and Freddie Mac.
Because most community banks lack extensive IT departments, another game-changing step for their high-tech needs can be found in the Web-based systems and delivery options that do not require the local installation of sophisticated software on high-capacity servers. The responsibility for updating, maintaining and ensuring uninterrupted service lies with the provider when using the software-as-a-service (SaaS) delivery method or its offshoots. Lenders can access the service using an everyday PC and a high-speed Internet connection, with minimal technical support required.Â
All of this can play into community banks' emphasis on customer service. An LOS that also offers Web portals for customer convenience can be private-labeled for the lender. This, in turn, allows borrowers to check their financial transaction status online, upload requested documents and jettison telephone calls while getting information online.
Thus, community banks will be able to have the same 24/7/365 information capacity that larger competitors enjoy. And because the economies of scale are generous for both the provider and the lender in these models, development costs are spread across a broader audience, leading to constant innovation and improvement.Â
Further, the pricing models can be switched from one to the next as needs change. For example, if the loan department is small but growing, the pure SaaS model charges by the loan. Another variation charges by the number of users, with no limits to the numbers of loans each user handles on the system.Â
If a community bank's mortgage department experiences situations that exceed existing IT capabilities, more conventional licensing arrangements can fill that gap.
In the final analysis, customers vote with their dollars and loan requests. Community banks have the tools available to ensure they can continue to enjoy success in residential mortgage origination. In this case, David can take on Goliath and emerge as a winner.
Keven Smith is president and CEO of Mortgage Builder Software Inc., headquartered in Southfield, Mich. He has also been a member of Freddie Mac's Vendor Advisory Board and the Mortgage Bankers Association's Residential Technology Providers Forum. He can be reached at (248) 208-3223.
