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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2016

Marketplace Lending Works Best With a Human Touch

Originators who learn to leverage new technology can blaze a lucrative path in an evolving mortgage industry

 At a Glance

Whether or not marketplace lenders completely revolutionize the mortgage industry, certain factors do favor their continued expansion:

  • Lenders will look for ways to become more efficient and cut costs in an increasingly regulated industry.
  • Borrowers will demand better and more efficient experiences and will go online to look for them.
  • Innovators will continue to innovate.
  • With these conditions present, market disruption is likely to occur.

To say that the mortgage industry has seen a plethora of changes over the past few years is an understatement. All of these changes, such as the emergence of online marketplace lending, are brewing up the perfect storm for a disruptive transformation of the industry that couples innovative technologies with new business models centered on efficiency and superior consumer experiences.

The driving force behind this perfect storm is the evolving regulatory landscape, as well as important consumer trends that are the byproduct of technological advancements and a new generation of homebuyers — the millennials — coming into the market.

After surviving the worst financial crisis in recent history, we have seen some of the most impactful regulatory changes enacted in the mortgage industry. These new regulations — such as the ability-to-repay and qualified mortgage (QM) standards, new originator compensation regulations and the Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure rules, better known as TRID — are putting great pressure on lenders and originators alike to streamline processes and reduce inefficiencies.

At the same time, the last few years have brought us an unprecedented level of technological innovation in almost every industry. New financial technology companies are reimagining every financial transaction, from the way money is saved to the way it is sent and invested. Even money itself is being disrupted through digital cryptocurrencies like bitcoin.

In addition, consumers today have completely different — and much higher — expectations of where and how they would like to be served. This trend is certainly not bypassing the mortgage industry, where millennials — a younger generation used to doing everything from their smartphones — are coming into the homebuying market in large numbers.

Marketplace lending

With the tides of change in full swing, marketplace lending is quickly emerging as one of the new business models garnering a lot of attention from industry incumbents. Freddie Mac even published a study last year about marketplace lending and the role it might play in the mortgage industry.

For now, at least, Freddie’s position seems to be that it is still too early to tell what the future of marketplace lending will be in the mortgage industry, but that it is something worth keeping an eye on because innovation is difficult to stop. So what exactly is marketplace lending?

In essence, marketplace lenders attempt to remove middlemen from the lending process (called disintermediation) by allowing borrowers to efficiently obtain capital directly from lenders through advanced online platforms. Although marketplace lending primarily started out as peer-to-peer platforms that would allow individuals to invest capital in loans made to other individuals, today’s marketplace lending also includes capital deployed by large institutions.

It also is important to note that marketplace lending is not a complete disintermediation of lending. Although marketplace lenders use sophisticated technologies to streamline and automate processes, there are still many intermediaries involved, such as loan originators, underwriters and other third parties typically involved in a lending transaction — albeit to a lesser extent, or perhaps in somewhat modified roles.

Gaining traction

Marketplace lending has experienced a quick rise in popularity in recent years. Several marketplace lenders have gone public and initially attracted healthy valuations from institutional investors — although there seems to have been a recent decline in valuations for some publicly traded marketplace lenders.

The key to leveraging technology to your advantage is to fully
understand what technology does well and what you do well.

Marketplace lenders have traditionally focused on less-regulated lending, such as small-business loans and personal loans. Some of the larger players in the space, however, have started making inroads into mortgage lending as well. Inevitably, others will follow.

For the most part, the marketplace lenders that have entered the mortgage market have focused on niche segments that are underserved or inefficient, such as non-QM or high-balance loans. As these lenders start to see success in those segments, they will look to expand into more traditional mortgage markets as well. In fact, this is already happening.

Tech-focused disruptors

At the core of marketplace lending is technology. Companies in this space are developing robust and consumer-friendly platforms that, among many other things, collect and validate borrower information, facilitate communications, eliminate the need for paper documents and enhance credit decision-making with new underwriting methodologies based on quickly analyzing large quantities of borrower and general-market data.

More importantly, marketplace lenders and other technology-focused industry disruptors are democratizing mortgages by using technology to shed light on the mortgage process and to help consumers make many important mortgage decisions on their own. Because these are many of the functions traditionally performed by loan originators and processors, it is reasonable to believe that as the industry transforms, so too will the professions that comprise it.

Marketplace lending, however, will not replace human involvement in the mortgage industry. As has been the case in many other industries, technology tends to redefine the role of humans and even creates new types of jobs, rather than completely eliminating them.

Successful lenders and mortgage professionals will find ways to adapt and embrace technology as a tool to deliver their services efficiently and in a user-friendly manner. In fact, the mortgage professionals who do adapt will have the opportunity to become more successful than ever in this industry because of technology.

Finding the balance

The key to leveraging technology to your advantage is to fully understand what technology does well and what you do well. The great news for mortgage professionals is that these are not the same things. There is usually not much overlap between the core competencies of technology and successful originators.

Machines are good at automating repetitive tasks, storing large quantities of information, keeping data organized, minimizing or eliminating human error, and collecting and analyzing data, among other tasks. Humans, especially successful salespeople, are experts at connecting with other human beings and making them feel confident they are making the right decisions. This is something that, at least for now, machines simply cannot accomplish effectively.

Successful originators in this new tech reality will find and partner with technology providers that complement their skills and will help them to offload many mundane job tasks — leaving the originators to focus on building human relationships that lead to more business. These originators will think of technology as another team member, one that works around the clock, can be cost-effective and will help them do more by eliminating inefficiencies from the mortgage process.

•  •  •

The so-called “consumer revolution” that has radically transformed many other industries through technology — such as travel and tax preparation, just to name a couple — is all about empowering consumers to make informed and educated decisions on their own while providing them the option to speak `with a real person at their request.

In other words, consumers today want the best of both worlds: They want great technology and great customer service from a real person when they need it. They also want services provided to them on their terms — in person, over the phone, via a website or text messaging. Tech-forward mortgage professionals — whether part of a marketplace-lending team or otherwise — who are tapped into multiple origination channels are primed to capture these customers.

This is still only the first inning when it comes to technological and business-model innovation, and there is little doubt that this technology-enabled movement will fundamentally alter the way consumers pursue and obtain a mortgage.


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