If you were asked to name the biggest players in the mortgage industry 10 years ago, you probably would have answered Wells Fargo, Chase, and Bank of America. These three banks were once collectively responsible for 50% of all mortgage loan originations. However, their market share has dipped in recent years, with originations declining by 13% or more in 2018 alone. Quick to take over the mantles include fintech upstarts like Quicken Loans and LoanDepot, which have seen their mortgage originations increase by as much as 30% annually by comparison.
In a recent article, we reviewed a study from the New York Federal Reserve that investigated the impact of fintech on mortgage lending. But how does the fintech approach to mortgage lending actually impact the borrower experience? We break down key differences with the application, document collection, and verification and compliance process.
Having a truly automated lending process isn’t dictated by a web presence. If that were the case, any bank that allows borrowers to initiate a loan application from its website could claim to be a “fintech lender.” Rather, the New York Federal Reserve defines true fintech lenders as those who offer an “end-to-end electronic application platform.” That means the lender can cross-reference application data electronically, and pre approve the applicant for a loan using automated electronic processing. In short, if you can apply online, get rates online, and get pre-approved online without ever having to speak to a lender, you’ve likely found yourself a bonafide fintech firm.
Compare this process to the traditional approach, in which the website will generally require you to contact a loan officer before completing your pre approval form. The applicant is guided towards submitting their information online, while a loan officer is required to physically review and sign off on the pre approval. This serves less as a digital application and more as a glorified forwarding service. The key differentiator of fintech applications, therefore, rests in the electronic automated pre approval process.
Despite decades of technological advancement, many lenders still choose to send and receive forms via fax. To be fair, a few of the more technologically adept loan officers might allow you to submit scans via email. But generally, some form of physical submission requirement bottlenecks the process.
To automate the process, fintech lenders allow you to link your online bank accounts to your mortgage application, completely eliminating the need for you to submit your own bank statements for processing. In fact, in an article published by the American Banker, Lenda CEO Jason van den Brand says consumers can either link their bank accounts or provide statements from other sources such as Dropbox. Lenda’s algorithms scan the linked data, process the information and render an approval/rejection decision within minutes.
Verification and Compliance
Fintech is even automating document verification, cutting down another banal task dreaded by loan officers. Both income and employment verification can be automated by linking out to secure websites like Intuit’s TurboTax. This means users can securely link their tax forms online, and underwriters won’t have to manually check records.
Backend processes enable lenders to not only streamline the mortgage process from beginning to end, but also provide legally enforceable electronic documentation. Lenders can have borrowers sign promissory notes electronically, which hold the same weight as legal documents. These transitions into electronic verification have been endorsed by both the U.S. Treasury and Fannie Mae.
Some electronic platforms are specially designed to streamline the borrower verification process for lenders. Taking a leaf out of the fintech lending playbook, this enables borrowers to centralize their employment, asset, and income data in one place. It also allows lenders to access all this information from a single source, rather than having to compile it piecemeal. This can reduce instances of mortgage fraud, which helps assuage fears from critics who believe that fintech lenders might contribute to an increase in mortgage defaults similar to 2008.
Increased regulations and a scarce-credit environment opened the door for fintech companies to fill the void left by banks. In that time, they’ve grown substantially thanks to their streamlined closings and accelerated loan approval processes. Fintechs managed to identify the weaknesses in the mortgage lending process and capitalized on those points to provide borrowers with a seamless loan experience.
Nevertheless, it’s likely that these advantages won’t last forever. Even now, major banks like Wells Fargo and SunTrust have begun unveiling their own digital mortgage platforms, and they likely have the stones and financial backing to outspend most fintech competitors. With interest rates once again on the rise and housing supply drying up, the industry is only likely to get more competitive. Will fintechs continue to innovate and stay ahead of the game, or will banks level the playing field?
Commentary By: Kenny Zhu- Research Analyst at ValuePenguin