PERSON OF THE WEEK: At a time of lower profit margins, a growing number of mortgage lenders are looking to lift their balance sheets by offering construction-to-perm loans. This has led to the current boom in construction loan administration software designed to manage and simplify these complex products.
But when it comes to construction lending technology, the options are as vast as they are unique. To learn more about how lenders can determine which construction lending technology is right for their needs, MortgageOrb interviewed Sean Faries, CEO of Land Gorilla.
Q: What hurdles are construction lenders facing in today’s environment?
Faries: One of the biggest hurdles construction lenders face is qualifying borrowers under today’s interest rates. We’re optimistic that rates will eventually come down, maybe later this year or early 2025. That said, if rates drop enough and demand for new housing continues steady, lenders still need the right people and resources to originate and administer their construction loans.
Construction-to-permanent loans are not like other loan programs, where originators, processors and underwriters can pick up the guidelines and get the job done. Successful construction lending programs require individuals with experience, as well as the support of top-level executives. Experience and support from the top of the organization is a recipe for success and a great indicator of whether a construction lender will thrive.
Q: How is technology transforming the construction lending landscape?
Faries: For the past 30 or 40 years, construction loans were managed through spreadsheets, which have gotten the job done, for the most part. However, every construction lender has a story or two where they fell victim to the old “broken formula” issue, which resulted in some sort of financial loss. Additionally, spreadsheets require a massive amount of labor to get the initial loan set up, as well as the ongoing maintenance during the term of construction.
Spreadsheets also have shortfalls when it comes to change management, collaboration of other stakeholders, including an inability to report on the contents within the spreadsheet.
Over the last decade, however, modern technology platforms have helped construction lenders digitize the process and create more efficient loan administration. Technology can now help lenders with everything from securing communications with borrowers and builders to automating complex workflow in the draw process. This has really helped organizations leverage technology to increase profitability, streamline operations, and improve the customer experience.
Q: When it comes to construction lending technology, how would you describe the options that are available to lenders? How have these options evolved over time?
Faries: We’re now seeing the second generation of construction loan administration platforms, in which automation is playing a major role and where lenders are seeing the largest increases in ROI. However, there are major differences among the various technologies available.
Most providers say they offer automation or have some type of automation capability, when in reality they are merely replacing spreadsheets with a digital version of the budget. They don’t automate tasks or processes that create significant process improvements, such as automating engagement with inspectors and title companies, which expedites the payment process and results in greater net interest income. When evaluating platforms, make sure you look for automation that improves your bottom line and customer experience.
Another feature to evaluate is how the platform allows access to data and create reports that are important to the organization. If a lender is looking for a platform, it should make sure the provider can meet its reporting needs by performing a comparison analysis between reportable fields.
Additionally, lenders ask for a demonstration on how they can create custom reports and automate the creation of these reports, and find out what costs the provider may try to charge that would be outside of the sticker price.
Historically, many construction lenders have relied on fragmented systems to manage the construction draw process, which not only complicates workflows but also increases the risk of data errors. Today’s technology should eliminate these inefficiencies by ensuring the data is standardized, available on demand, and expandable to support the use of business intelligence systems and APIs.
Q: What should lenders be looking for in a technology provider?
Faries: Ultimately, determining why a lender needs to invest in construction loan administration technology is as equally important as which technology to choose. If a lender wants to increase net interest income or create a better customer experience, they should pay special attention to the type of technology that will help them achieve these goals.
That said, even with great technology, construction lending is tough to get right. A good provider knows this and is willing to go above and beyond to help their client, especially when it comes to complex issues like regulatory compliance, which can vary greatly among different states and loan programs.
My advice is to look for companies that don’t just have great technology, but those that are willing to share their knowledge and resources and serve as a guide. That’s why we created a state compliance library with an interactive map for lenders to access state lien laws, contractor licensing information, title practices, and forms used in specific states. A large bank might have an army of attorneys who can do this for their customers, which is great. But we felt this information shouldn’t be siloed and written in complicated legalese. It should be readily available to all construction lenders, not just our clients, and easily understood in basic terms. So, we decided to aggregate it and make it accessible to everyone.
Q: How can technology providers help lenders evolve with market changes and new regulatory requirements?
Faries: In a constantly shifting landscape, automation, data accessibility and reporting, and compliance are key areas to focus on. Often when we engage with lenders, they know they need reporting for their construction loan programs, but they don’t know what to ask when evaluating their reporting needs. However, a great indicator of a quality service provider is their transparency and willingness to assist in determining what one should expect when it comes to reporting capabilities.
Some technology providers only provide a handful of standard reports and may leave a lender with the feeling of the old “bait and switch” routine after having signed a contract, only to find out that the reporting falls short of what is actually needed.
For example, a platform should provide on-demand access to data to ensure quick analysis of leadership inquiries, the impact of natural disasters, or simply to identify compliance issues in your portfolio.
We have heard horror stories of some lenders having to submit a service request, have scoping calls, incurring extra fees, and then waiting for the required report to be manually compiled and emailed to them by an account manager. Having control over one’s own data ensures that one can respond swiftly and effectively to audits, market shifts, and regulatory changes, while enhancing overall efficiency and strategic decision-making.
Q: What type of experience matters when choosing a service provider?
Faries: Having a service provider that is deeply committed to construction financing is more important than name recognition or how much investment capital they’re working with. At our firm, we started with a $500 credit card and decades of experience in construction and renovation lending, along with a belief that construction loan administration should be safe and hassle-free.
That’s why I recommend finding a provider that has worked its way up and built its company with experts who know the business inside and out, and have a keen understanding of how and where technology can improve the process.
In a market where lenders have options for technology, they should consider a partner that is focused on creating faster and more profitable businesses and can demonstrate its track record of creating impressive results for its clients. That will tell the lender everything it needs to know.