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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2014

Get a Sense of Technology

Online processes provide mortgage lenders and brokers with a competitive edge

Get a Sense of Technology

When many people think about tech-savvy industries, commercial real estate lending is rarely one that springs to mind. For years, the business of making commercial loans hasn’t changed much, and its processes haven’t either.

The typical process goes something like this: An institution — most likely a bank or investment company — has funds to lend, and a borrower needs access to those funds. So borrowers gather up their paperwork, a sizable stack of various financial and personal documents, and head to the nearest brick-and-mortar financial establishment to meet with a lending officer. There, the officer discusses the pros and cons of the borrower’s request and, if more paperwork is needed — and more paperwork is always needed — the borrower will be sent “back to the well” for it.

But it doesn’t have to be that way. As technology marches on, industries that don’t keep up risk getting left behind. Visionary commercial lenders that embrace the technology now available to speed funding to borrowers and commissions to brokers will prevail in an ever-competitive market.

In the last century, the most notable technological advances to rock the commercial lending world have been the phone, fax machine and e-mail, in that order. Although each in its moment was a much-heralded step forward, in retrospect, all that each technology contributed to commercial real estate lending was the ability to expand the geographic reach of lenders, postage savings for borrowers and a few weeks shaved off the loan process.

Even today, despite the presence of the Internet and e-mail, many commercial lenders still require hard copies of documents to be mailed to their offices to be reviewed for a credit decision. In many parts of the country, commercial real estate lending remains stubbornly antiquated by current business standards, tenaciously hanging on to tried processes that have endured for many decades with very little movement toward high-tech and high-touch processes — until now.

Tech-savvy lenders

It took the Great Recession to force the “old boys’ club” of commercial real estate lending to confront its long-ingrained and sometimes-stodgy ways. A shrewd new class of tech-focused entrepreneurial lenders has crashed the party, and introduced a new paradigm of loan-focused technology that has proven an innovative jolt to the old ways.

The use of powerful Internet-driven and efficient cloud-based systems are gargantuan steps in the advancement of the commercial loan process, and it took dynamic, visionary lenders (often newcomers from other business sectors) not only to take old lending processes and make them new, but to make those procedures — most notably the online application and the closing process — function the way they should have in the first place.

Effective online applications

The online application has been around for a number of years. But although many lenders have placed the newfangled form on their websites, sometimes begrudgingly, or have signed on to aggregator sites that utilize such a form, few commercial real estate lenders have used the online application to the full extent of its potential.

Many lenders request the loan submitter to complete an online application with cursory information, which upon submission is directed to a designated contact at the lending organization, which will review it and then respond to the inquirer with a statement such as, “Thank you for submitting your online application. We’re interested in your loan; now simply fill out this paper application and either mail or e-mail it back to us, along with the following supporting documentation.”

The initial information culled from the online application may help the lender, but it does nothing for loan requesters except pile additional requirements on their plate to get the loan process moving.

With the arrival of a tech-aware generation of commercial lending entrepreneurs, however, online applications are beginning to be utilized the way they were intended to be. These applications request the pertinent details that enable lenders to carry out the necessary due diligence on their end, then proffer a genuine credit decision — all without burdening the broker or borrower with additional rounds of work.

Recent court decisions have recognized online signatures and authorizations as legally binding, so lenders are now able to pull credit reports, perform background checks, order valuations on collateral and pull tax transcripts, all with the borrower’s button-click authorization to do so.

For a fledgling group of lenders, the initial conversation with the borrower based on the online application has evolved. Instead of the previous subtext that the borrower would have to start from scratch after the initial online application submission, the dialogue is changing to one that tells borrowers, post-application submission, that their loans have been approved and their credit, collateral and income have been confirmed, with just a few details left to close the loan.

Approved borrowers don’t need to mail or e-mail all their documentation; they go instead to a secure cloud-based client portal on the lender’s website, designate a login ID and password, then upload and sign the documents required to complete their application.

This technologically efficient online-application model is what borrowers and brokers thought they had been submitting to a lender’s website all along. In truth, it’s been only recently that application submitters’ expectations jibe with reality — but only if the lender sites they are visiting effectively exploit the technology available.

Streamlined processes

Of course, the savvy lenders that are taking full advantage of online-application technology aren’t doing it solely to make life easier on their clients; these tools streamline what was endless administrative labor for them, as well.

Enabling borrowers to submit a comprehensive online application, digitally consent to due diligence and upload documents to a secure portal creates, in effect, an internal hub for the lender, accessible by all approved employees responsible for determining the credit viability of the loan request. In addition, applicants’ online actions trigger the activity of multiple departments responsible for different aspects of the commercial loan underwriting process, often simultaneously initiating their work.

Loan candidates may access their applications at their convenience and can check the status of their loan transactions, watch for updates or underwriting requests, and submit additional required documentation or even pay online for third-party reports. This results in happier applicants and also far less paperwork, reduced e-mail communication, less wasted time and a more efficient loan process for the lender — all of which means better customer service, exceeded expectations and that competitive edge all lenders are looking for.

Less-complex closings

Borrowers and brokers alike have eternally protested the delays and costs associated with the commercial loan process, but there has been an underlying reason for the expense and holdups: Many commercial lenders require their legal counsel to facilitate the closing process, even if it’s not legally required, necessity does not dictate it or borrowers have their own attorneys.

This leads to inflated title costs and heftier courier, filing and document-preparation fees, plus hikes in other fees historically required by lenders to close a commercial deal. Thus, the cost to close a commercial loan may be many times the cost of a residential closing, a revelation that has left many a commercial borrower in shock at the closing table. And those added costs and delays can skyrocket when closing dates are held hostage or timelines become bloated because they are hinged to an attorney’s or lender’s busy schedule.

Yet, even without the often-excessive costs and untethered timelines associated with a commercial loan closing, the process also may be extremely inconvenient on a logistical, practical or personal basis. Multiple parties must coordinate to meet in person at a specific location that is usually more amenable to the closing attorney or the lender than the broker or borrower.

An entire day may have to be set aside and great distances may need to be traveled so that borrowers can be physically seated at a table to be read information they could undoubtedly read themselves, and sign multiple copies of original documentation that legally (in most cases) doesn’t even require a handwritten signature.

When the borrowers depart, the attorney or a staff member goes to city hall to record the new mortgage in person and then mails or couriers the original closing documents to the lender — meaning more costs for the borrowers — so that the lender can confirm that everything is in order before releasing the funds. This scenario has endured for the past two centuries, if not longer.

It took awhile, but smart lenders are finally using technology to reinvent the closing process. They have eliminated the physical closing just described, along with any need for attorneys. E-sign services are utilized to distribute (via e-mail) any loan commitments, closing documents, promissory notes and other paperwork requiring legal signatures of the borrower and/or seller.

As instantly as signatures are submitted, the lender receives an e-mail notification that documents have been executed and are ready for review. The new mortgage also is electronically filed and recorded by the lender, via the state or town website (if available). If not available, third-party companies are employed in a cost-effective and time-efficient manner to do the filing and recording.

Ahead of closing, an in-house closer for the lender handles all due diligence — such as title searches, insurance coverage, flood certifications and more — that, in most cases, is now readily and electronically accessible.

Technologically advanced commercial lenders have created a faster, more seamless and less costly experience for all parties involved by taking advantage of the effective and legally endorsed electronic systems that are available and embedding them in their loan-closing processes.

Leaders and laggards

There are always annoying glitches experienced by early adopters of the latest technological systems, but the bugs inevitably get worked out, and those who didn’t wait tend to reap the greatest benefits, especially in a world where people have become accustomed to shopping with technological ease in the financial marketplace. These consumers now expect a better and more streamlined level of online service from their commercial lenders. As a result, they are moving away from companies with technology that, by comparison, seems mired in the past.

Although the overall technology-adoption rate is more sluggish than it should be for the lending industry, it seems that the commercial sector of private real estate and business lenders has been the most forward-thinking to date, and has done the best job of effectively integrating the latest online and related systems into the loan process.

Banks in general have proven the slowest to incorporate effective online applications into their processes, especially with regard to interactive cloud-based user systems and electronic document pulling and signing. This delay is because of the many layers of hierarchy, processes and “turfdoms” so prevalent in larger institutions, which make even the smallest increments of change a challenge to achieve.

Even the most outmoded lenders eventually will have to embrace technology as more nimble and technologically focused lenders grab market increasing share. The commercial real estate industry’s economic health is continuing to improve and, as new resources for borrowers become available, lenders are once again vying for what may be smaller pieces of the loan pie.

Service speed and efficiency will be a critical motivating factor for brokers and borrowers in choosing their capital sources, and thus it will be a major differentiating factor for lenders in all sectors. The usual line items — rate, term and prepayment penalty — are still important, but the ability to close, and close quickly, trumps all. If lending-industry professionals haven’t learned this much over the challenging past six years, then they’ve learned nothing at all. 


 


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