Starting from Scratch: Reassessing Business Loans

Deposits are up, investors have shown signs of optimism and parts of the country are slowly reopening. But amid these positive signals, banks are only just beginning to see the signs of future trouble that Covid-19 may cause for their loans. Prudent banks are working to plan for the long-tail impacts the crisis will have.

One of the banks gazing into its crystal ball is PNC Financial Services Group. The Pittsburgh-based bank made headlines when it sold its 22% stake in BlackRock last month. Chairman and CEO William Demchack, explained in an early June company presentation that the institution was selling while it could, and preparing for the unknown effects that Covid will likely have on the economy.

“[B]ehind the scenes, what hasn’t played out, and will take some period of time to play out, is the deterioration we’ve seen in small business, commercial and real estate,” he said. Once the stimulus payments and deferrals run out,  “the pain shows up.”

That pain may be especially acute for smaller banks which, Demchack pointed out, tend to carry higher concentrations and exposures to small business and commercial real estate  than their larger counterparts. “[I]t’s the smaller end of our economy that’s really getting crushed here.”

With losses looming on the horizon, some banks are leveraging data and analytics solutions to essentially re-underwrite their entire loan portfolios in light of Covid-19.

Just after announcing the BlackRock sale, PNC was again in the news for a brand new partnership it struck with OakNorth, which licenses an AI-based underwriting platform it incubated within the company’s UK-chartered bank. OakNorth recently announced some of its first partnerships with U.S. banks, including Customers Bancorp, a $12 billion asset institution based in Wyomissing, Pennsylvania.

Customers’ Vice Chairman and Chief Operating Officer, Sam Sidhu, is paying close attention to the unknown outcomes of Covid and the effects the economic crisis will have on the bank’s “core” mid-sized commercial loans.

Sidhu explains that in the first 30 to 60 days of the crisis, banks encountered the known, obvious risks that social distancing and stay-at-home orders posed to businesses like restaurants, hotels and hair salons. “But where banks can become a little complacent is the areas that are unknown risks,” says Sidhu. That’s where it’s important to practice discipline in stress-testing the portfolio.

But how can a bank re-evaluate its loans at scale, in a way that doesn’t throw the baby out with the bathwater?

A generalist might point out that restaurants won’t perform well in this environment. But what about a pizza franchise that earned significant portions of its revenue from deliveries pre-Covid? These types of restaurants may be unaffected by the health crisis; in fact, they may be booming because of it.

To complicate the calculation, it’s not just immediate issues like an absence of demand that lenders need to consider. They also need to understand a business’ ability to restock and recover. To do that effectively, context is key. That’s what the technology that PNC and Customers Bank have licensed from OakNorth is designed to provide.

The OakNorth platform categorizes businesses into 1,600 sub-sectors so that they can be segmented into highly specific groupings. Then, the platform can be used to apply any number of OakNorth’s more than 150 stress testing models, including a new Covid Vulnerability Rating framework, to assess business borrowers.

Customers Bank is working with OakNorth on portfolio management and underwriting. Sidhu says a benefit of using the technology is that it’s “allowing a community bank to be able to have investment banking-type access to data” — an important factor in a world where old models have been rendered irrelevant.

“Everything that you thought when you underwrote a loan is no longer true,” says OakNorth Chief Information Officer Sean Hunter. Banks typically use previous years’ financial statements to underwrite a loan, but 2019 financials cannot predict how a business will perform in the 2020 world. Hunter says “you need to underwrite your whole book again, from scratch.”

OakNorth has been offering banks the opportunity to test drive its Covid Vulnerability Rating, running a forward-looking analysis on bank portfolios using 15 to 20 anonymized data points to identify at-risk loans.

No one knows what risks banks will be battling in the coming months. “Hopefully, these unknown risks will never become an issue,” says Sidhu, “but smart banks can’t really rely on hope. [They] need to be focused on trying to proactively address those risks, and get ahead of problems.”

Leverage Tech to Release HELOC Demand

Even though bank may still have limitations on physical operations due to the Covid-19 pandemic, they can still leverage technology to prepare for what a potential boom in home equity line of credit (HELOC) lending.

Inflation will happen and rates will once again rise, making the market ripe for HELOCs. Community and regional banks need to be savvy enough to compete against larger banks and rising fintech nonbank lenders for this growing market share, and they can do this by using technology to properly harness the data. Data is new currency.

According to a J.D. Power study on HELOC satisfaction, 88% of consumers say they started the HELOC process without being prompted by a bank employee. That percentage is even greater for millennials: 94%. This a trend that is likely to continue.

Fast-paced technology allows consumers online options to do their banking from their smartphone, and many don’t want to speak to a banker unless they cannot get the answer online. They are signing up for loans, transferring funds to another account or opening new accounts — all transactional services that can be done with a few keystrokes and mouse clicks, without having to visit a local branch.

This same technology can be applied to the HELOC application process, which banks can use to greatly improve interactions with consumers. So why aren’t more banks embracing this technology? Why do we keep seeing phone numbers or “email us” prompts under the HELOC section of a bank website? It seems home equity lending is stuck in the 1990s.

This has to change to capture customers’ attention. The rise in home prices means millennials have more equity in their homes, and 59% gather their information online — 50% through smartphones only, according to the J.D. Power study. Banks have not been actively marketing to this group, making it a crucial area for improvement with the use of technology.

For any technology to be successful, banks need to change their approach or mindset regarding their HELOC application process. There are many options that can be used on the front-end of the HELOC experience as more banks streamline their digital processes. Others are using their loan origination system as a robust starting point in this process; one that should be easy, fast and intuitive.

Technology can automatically order the necessary data, like credit, income, flood and instant title reports. If the title data is not readily available, it can use intelligence logic to select the best data property report provider, based on turn time and price. That information is then delivered in one report that is custom-tailored to each lender’s unique loan fulfillment requirements.

Other technology can help with the front end, digital marketing and other aspects of the business, from the top of the funnel to eClosing. The constant change means that systems put in place three years ago were probably more expensive than some banks were willing to invest. Those systems might not have featured all the functionality a bank needed; now, they are outdated. Even if banks previously considered and decided against possible systems for whatever reason, it is paramount that they take another careful look today.

Some banks may be content with their current level of home equity loans; however, as the market starts to ramp up, they risk leaving significant business on the table or losing a customer to a non-bank fintech. Recent advancements mean there are innovative and inexpensive systems available that do not require a total retooling of a bank’s existing technology stack. What is the price on shaving 25 days off the process? What price can your bank can put on saving 25 days in the process? With the right approach, these new tools can help banks be cost neutral, or even save money.

A Small Bank’s Big Bet on AI

Brex.pngBuilding a board with an appetite for innovation can be difficult, but the small group that oversees C3bank is decidedly different.

The institution was originally founded as a quiet community bank serving the Inland Empire region of southern California in 1981.

That same year, Evert “Chooch” Alsenz and Paul Becker, now board members at C3bank, formed an engineering partnership that would go on to fund the development of the world’s first quartz-based solid-state gyroscope, a patented technology used in brake systems for millions of automobiles. Subsequent ventures from the duo produced military communications antennas, lightning diversion strips and surge protection equipment for aircrafts.

Alsenz and Becker are no strangers to invention, a background they brought with them when they joined commercial real estate expert Michael Persall to buy C3bank in a deal that closed in 2014.

Alsenz and Becker’s shared history helps one understand how a four-branch, $356 million institution has been able to remake itself as a tech-savvy commercial bank. From the moment they acquired it, Persall, Alsenz and Becker, who also serve as principals for investment company ABP Capital, worked to transform the bank into an entrepreneurial shop with a specialty in commercial real estate lending. In 2019, the group moved the bank’s headquarters to Encinitas, California, where ABP is based, and changed its name to C3bank.

Understanding the entrepreneurial owners at C3bank also helps explain how the group was able to ink a new partnership to develop an artificial intelligence-based commercial lending tool just a few years after the change in ownership.

To strengthen the bank’s CRE lending program, bank chairman Persall approached technologist Shayne Skaff to develop a custom platform for assessing and monitoring CRE loans. Initially, Skaff wasn’t sold on the idea. When he dug deeper, though, he discovered that commercial lending technology was years behind the solutions for residential loans. That lag presented an opportunity, so he started working with the teams at ABP Capital and C3bank in June 2018 to build a solution that would eventually become known as Blooma.

Skaff brought developers into the institutions to learn about their respective underwriting processes. The goal for the project was to streamline the commercial underwriting process in a way that made it more dependent on science, than on art. Science, the parties believed — in this case, AI —  would lead to thorough, well-researched deals.

Our board and ownership group continues to think AI can have a big impact on banking,” says A.J. Moyer, the CEO of C3bank. “[They] push that thought process and believe a lot of underwriting can be supplemented.”

Traditionally, lenders spend a lot of time manually gathering the data that factors into a potential deal. Blooma allows banks to outsource that process to its AI engines. It taps into third party databases to extract information about local real estate markets and scours the web for other relevant information, such as neighborhood crime statistics and negative news.

Blooma then scores CRE deals on a 100-point scale that measures the probability that it will fit within the bank’s risk profile and portfolio needs. Users can drill down into the score to see exactly what factors influenced the score. As more deals pass through the system, Blooma’s AI gradually learns from the bank’s process to prioritize new opportunities.

The result? The process of onboarding and assessing a potential deal can shrink from weeks to minutes.

“[Q]uick yet accurate decision-making can be a strategic advantage for your institution,” says Moyer. “If I have a toolset that, when a potential deal comes my way, I can quickly confirm what that asset’s worth, [then] I can sign that deal faster than anyone else.”

In addition to the underwriting assist, Blooma provides a digital hub for managing deal documents and workflows. “We’ve gotten out of a spreadsheet environment,” says Moyer. “The world we’re in is more dynamic. Everyone can go [to Blooma] to see what deals we’re working on and what’s mission critical.”

Blooma was a finalist in the Best Business Solution category of this year’s Best of FinXTech Awards. Shield Compliance, a Seattle-based fintech helping institutions bank cannabis-related businesses, was also a finalist. The winner in this category was Brex, which partnered with Bank of the West to launch a small business-focused credit card that’s grown the bank’s revenue by more than 50% from clients using the co-branded card. You can learn more about that partnership here: How Innovative Banks Cards to Grow Revenue, Earn Loyalty.

Coronavirus Underlines Digital Transformation Urgency

The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act means up to $350 billion in loans guaranteed by the Small Business Administration is set to flow to small businesses by the June 30 funding deadline.

Community and regional institutions are, of course, the logical partners for distribution of this capital. But a challenge remains: How will those financial institutions reach out to the market when their lobbies may not be open, and businesses may not be comfortable with face-to-face interactions?

Banks have done little to change the way they interact with their business customers in the digital age. In good times, this lack of transformation allowed large technology companies like Amazon.com, PayPal Holdings and Square to siphon customers away. The current environment complicates efforts for banks that have not already transformed to be responsive to their customers immediate needs.

Customers prioritized convenience — now banks will be forced to. Even prior to social distancing, consumers prioritized speed and convenience, whether it came to new technology or where they banked.

Winning at business banking was always going to require banks to offer business customers a frictionless experience. But the ability to operate business banking functions digitally has taken on new meaning — from defining quality service to becoming a necessity during a pandemic.

Three Critical Points of Friction in Business Banking
Now more than ever, it should be every institution’s goal to make working with businesses as easy as possible, especially when distribution of SBA dollars is at stake.

To meet this moment, banks need to remove three critical friction points from their business banking experience:

  • The Application: Paper applications are long and tedious, and the process is even more difficult for SBA 7(a) loans. To remove friction, institutions need to focus on data and access. They should use available data and technology to pre-fill applications as much as possible, and provide them digitally either for self-service or with banker assistance.
  • The Decisioning: Underwriting loans is a labor-intensive process that can delay decisions for weeks. An influx of Paycheck Protection Program loan applications will only compound the inefficiencies of the underwriting process. Banks need to automate as much of the underwriting and decisioning process as possible, while keeping their risk exposure in mind. It’s critical that banks select companies that allow them to use their own, unique credit policies.
  • The Account Opening: Banks also need to think about long-term relationships with the businesses they serve during this time. That means eliminating common obstacles associated with opening a business deposit account. For example: If a business has already completed a loan application, their bank should have all the information they need for a new account application and shouldn’t ask for it twice. They need to ensure businesses can complete as much of this process remotely as possible.

At Numerated, the sense of urgency we hear from bank leaders is palpable. Our team has been working overtime — remotely — to provide banks with a quick-to-implement CARES Act Lending Automation solution. Banks have been working just as fast to understand the current environment and build strategies that will help them meet their customers’ rapidly shifting needs.

In many ways, the COVID-19 pandemic has forced banks to consider digital transformation as a solution to this problem. Still, many firms have held off for any number of reasons. Institutions that have focused on digital transformation will be the most successful in improving the business banking customer experience and will lead the way during this pandemic as a result.

From Eastern Bank Corp. in Boston that used digital lending to become the No. 1 small to midsized business lender in their competitive market, to First Federal Lakewood, in Lakewood, Ohio, that is using digital experiences to retain and grow strategic relationships, institutions of all sizes have launched new digital capabilities, better positioning them to face what’s ahead.

As the nation’s businesses grapple with this new reality, these financial institutions are examples for others exploring how to serve business customers when they can’t see them face to face. Doing so will require a reimagining of the way we do business banking.

Embracing Frictionless Loans by Eliminating Touch Points


lending-9-13-19.pngTo create a meaningful customer relationship, banks should drive to simplify and streamline the operational process to book a loan.

Automated touchpoints are a natural component of the 21st century customer experience. When properly implemented, technology can create a touch-free, self-service model that simplifies the effort required by both customer and bank to complete transactions. One area ripe for technological innovation is the lending process. Banks should consider how they can remove touch points from these operations as a way to better both customer service and resource allocation.

Frictionless loans can move from origination to fulfillment without requiring human intervention, which can help build or enhance relationships with clients. Your institution may already be working on decreasing touches and increasing automation. But as you long as your bank has an area of tactile, not strategic, contact between your staff and your customer, your bank — and customers — will still have friction.

Bankers looking to decrease this friction and make lending a smooth and seamless process for borrowers and originators alike should ask themselves these four questions:

How many human touchpoints does your bank still have in play to originate and fulfill a loan? Many banks allow customers to start a loan application online and manage their payments in the cloud, but what kind of tactile processes persist between that initial application and the payment? Executives should identify how many steps in their lending process require trained staff to help your customers complete that gap. Knowing where those touchpoints are means your digital strategy can address them.

What value can your bank achieve by reducing and ultimately eliminating the number of touches needed to originate a loan? Every touch has the potential to slow a loan through the application process and potentially introduce human error into the flow. But not all touchpoints are created equal.

Bankers should consider the value of digital data collection, or automating credit score and loan criteria review. They may be able to eliminate the manual review of applications, titles and appraisals, among other things. They could also automate compliant document creation and selection. Banks should assess if their technology enablement efforts produce a faster, simpler customer experience, and what areas they can identify for improvement.

Do you have the right technology in place to reduce those touchpoints? Executives should determine if their bank’s origination systems have the capabilities to support the digital strategy and provide the ideal customer experience. Does the bank’s current solution deliver an integrated data workflow, or is it a collection of separate tools that depend on the manual re-entry of data to push loans through the pipeline?

Does your bank have an organizational culture that supports change management? Does your bank typically plan for change, or does it wait to react after change becomes inevitable? Executives should identify what needs to happen today so they can capitalize quickly on opportunity and minimize disruptions to operations.

Siloed functional areas are prone to operational entrenchment, and well-intentioned staff can inadvertently slow or disrupt change adoption. These factors can be difficult to change, but bankers can moderate their influences by cultivating horizontal communication channels that thread organizational disciplines together, support transparency and allow two-way knowledge exchanges.

For banks, a human touch can be one of the most valuable assets. It can help build long lasting and meaningful relationships with clients and enable mutual success over time. This is precisely why banks should reserve it for business activities that have the greatest potential to add value to a client’s experience. Technology can free your bank’s staff from high-risk, low-return tasks that are done more efficiently through automation while increasing their opportunities to interact with customers, understand their challenges and cross-sell products.

Frictionless loan planning should intersect cleanly with your bank’s overall digital strategy. It could also be an opportunity for your bank to scale up planning efforts, to encompass a wider set of business objectives. In either case, the work you do today to identify and eliminate touch points will establish the foundation necessary to extend your bank’s digital reach and offer a competitive customer experience.

Three Ways Directors Can Solve the 3,000-Year-Old Credit Problem


credit-7-9-19.pngHistory has shown that knowledge is power. One place that could use the benefit of that knowledge is commercial credit.

Banks have been lending to businesses for 3,000 years and has yet to figure out the commercial credit process. But executives and directors have an opportunity to fix this problem using data and digital capabilities to make the process more efficient and faster, and become the lending legends of their institutions.

In 1300 B.C. Egypt, the credit process looked something like this: A seafaring trader would trade bronze bowls with a local bronze merchant for cloth and garments. But to make this transaction, the bronze merchant would need to borrow from multiple merchant lenders. This process required lenders to understand the business plans of the borrower, go “door to door,” have community knowledge and know the value of all those goods. There were a lot of moving pieces—and a great deal of time—involved for that one transaction.

Fast-forward to today. A lot has changed in 3,000 years, but the commercial credit process has actually gone backwards. It can take a lender 60 to 90 days and more than $10,000 per lead to identify potential leads—and that’s before they review the application. After a borrower applies, the lender must look up credit reports, collect and spread financial statements and decide on the terms and conditions. Finally, the application goes through the credit department, which can take another 30 to 45 days and cost $5,000 per application.

Lenders will have spent all that time and effort to process the loan—but may not end up with a new customer to show for it. Meanwhile, borrowers will have spent time and effort to apply and wait—and may not have a loan to show for it.

While this problem has persisted for 3,000 years, the good news is that executives and directors have an opportunity to fix the problem by turning their manual-lending process into a digital-lending one. This evolution entails three steps that transform the current process from weeks of work into days.

First, a bank would use a digital-lending portal to gather applicable demographics to identify prospective borrowers. In researching prospects, they see critical borrower information such as name, address, years in business, legal structure, taxpayer identification number, history, business description and management team. Rather than having to wait until later in the process to uncover this critical information, they can immediately identify whether to pursue this lead and quickly move on.

Second, a bank uses a credit-decision engine to gather and analyze the applicable borrower data. Not only can the engine pull in consumer and credit bureau information, but it can also include automated financial collection, credit score and industry data for comparison. The bank can use data from this tool to determine terms and conditions, credit structure, purpose of credit facility, pricing, relationship models and cross-sell strategies.

Third and finally, the bank’s credit policy and process integrate with its credit-decision engine to enable an automated review of a loan application. This would include compliance checks, terms and conditions and credit structure. Since the data gathering and analysis has already taken place and automatically factored into the decision, there is no need to review all those pieces, as would be required with a manual process.

These three steps of this digital lending process have distilled a weeks-long process into about five days. Executives and directors can not only grow their institution in a shortened time period; they can do so without adding any risk. A bank I worked with that had $250 million in assets was able to add $20 million in loan volume without taking on any additional risk.

By using knowledge to their advantage and implementing a digital lending solution, bankers can save not just time and costs, but their institutions as well as their communities. They can now spend their limited time and resources where they matter most: growing relationships along with their banks. Having fixed the 3,000-year-old credit problem, they can place those challenges firmly in the past and focus on their future.

How Spreadsheets Add Risk to Construction Lending


lending-4-11-19.pngMillennials are entering the housing market with a force, yet low inventory across the country is stalling their dreams of homeownership. Now is the time for lenders to either begin or ramp up their construction loan programs. These niche loan products are a great addition to any book of business, but to be successful you have to be able to manage and service the loan after it closes.

Post close actions have traditionally been done with spreadsheets. This method, while fairly understood, is actually limiting and prone to formula errors. Additionally, spreadsheets naturally reach a tipping point in a team’s ability to scale and share reportable data with management and others in the organization. This puts loan completion in jeopardy and creates more risk to the lender.

The Limits of Spreadsheets to Manage Construction Lending
Spreadsheets can only do what they are designed to do—no more and no less. As your program grows, you are bound to reach the point where a spreadsheet is no longer functionally efficient and becomes a risky way to manage your pipeline.

  • Limited Visibility Into the Life of the Loan: Each loan has many different data points and touches over time, and housing them in a spreadsheet is basically burying important and vital information every time the loan is touched. It’s nearly impossible to see history, anticipate the future—and most importantly, clearly see problems before they arise. Spreadsheets force a reactive instead of a proactive method, which means a lender who is using spreadsheets is always playing catch-up.
  • No Reporting: Can you open up the spreadsheet right now and easily and accurately report on the pipeline, draw reports or consultant reports? The answer is probably no. And what do you do when you need to produce 1098 or 1099 reports? How do spreadsheets support these requirements? Getting your 1098s or 1099s from spreadsheets is a tedious, manual process prone to error. If you have a good quantity of construction loans, this is a large undertaking, and is difficult to scale. As you consider spreadsheets, consider the additional work that those spreadsheets will cost you over time.
  • A Finite Number Of Loans One Person Can Manage: Spreadsheets require a lot of time to properly manage one loan, and we have found that dedicated and experienced construction loan administrators can typically manage 35 to 50 loans using spreadsheets at one time. Any more than this usually adds to poor customer service.
  • Drains In-house Resources: If your program is doing well and your origination volume is growing, team members are limited in scale before a new hire must be acquired to take on more loans. Throwing bodies at the problem is not the best solution.
  • Location, Location, Location: Spreadsheets, no matter if they are stored on the cloud or on desktops, are still accessed by individual devices. You are now limited to these single failure points. What are the implications of losing this data, or the individual that knows how it works?
  • No Tracking: A spreadsheet does not offer tracking, task automation, complaint management, event monitoring, risk analysis and draw validations to ensure that the loan is meeting all of its milestones and risk requirements. As a workaround, lenders turn to the sticky note to help them keep track of important dates and actions. We all know the ineffective nature of this system, especially as key factors such as deadlines for draws, inspections, liens or permit expirations often get lost in the sticky note shuffle.
  • No Compliance Monitoring: Spreadsheets cannot keep you in compliance with government regulations, state statutes, loan program requirements, internal compliance, in-house policies/procedures or industry best practices. In order to maintain strict compliance, spreadsheets require constant vigilance. This may be their biggest limitation.

If Not Spreadsheets, Then What?
Spreadsheets just don’t cut it for construction loan management. Lenders who want to increase revenue while adding fewer additional resources need a digital construction loan management solution. Digital solutions reduce risk, improve efficiencies, allow scale and provide a better customer experience. Not to mention it keeps track of every small, yet critical, part of the construction loan. Never again will you be questioning if you are over-dispersing funds. Digital solutions, especially those that are cloud-based, can alleviate all the limitations of spreadsheets and the tipping point will be a thing of the past. Once you are running on this new level, you can bring more revenue and smart growth to your organization.

The Modern Roadmap To Gold



Today, data helps competitive banks identify key targets and make smarter—and quicker—loan decisions. In this video, Bill Phelan, president of PayNet, explains how data analysis is shifting loan decisioning, and how banks can survive and thrive through the next credit crisis. He also shares his outlook for business lending, and believes that Main Street America is still looking for capital to grow and improve their businesses.

  • Using Data to Make More Profitable Loan Decisions
  • How Credit Risks Analysis is Changing
  • Preparing for the Next Downturn
  • The Outlook for Business Lending

5 Critical Components for Construction Lending Success


lending-12-31-18.pngThe tough reality is that bankers are experiencing margin compression due to the current state of the yield curve and rising interest rates.

Without refinances to process, and new mortgages growing rarer, they must rely on other types of loan products. Enter construction loans.

Construction lending was once a vital part of a healthy loan product mix. Of course, many bankers will point directly at TRID, or the Know Before You Owe mortgage disclosure rules, as their roadblock to originating construction loans. Support for TRID, like many other regulatory rules, hasn’t been prevalent in the industry, and some bankers don’t have the information they need to mitigate risk.

So what now? Who is offering support for these regulations? And how can lenders begin construction lending again?

Instead of giving up on construction lending, most community banks have all the resources they need to start and maintain a successful construction lending program; it’s all at their fingertips.

To become successful in construction lending, you need these five components to all work together:

1. Support in the C-suite and boardroom
Before looking at solutions, your board must have a consensus on whether or not to even launch the program. Construction lending programs require effort from several C-level executives and the board. Everyone in the C-suite and boardroom need to be on the same page. Having this consensus helps assemble and maintain a successful program.

2. Your Loan Origination System (LOS)
Sometimes lenders don’t know where to begin with a construction loan program, particularly with respect to staying compliant with TRID. It can surprise lenders that the fields and forms required to support construction loans may be available through their LOS. Work with your LOS provider to diagnose how other lenders have utilized the LOS platform when offering construction loan products, particularly the production of the lender’s estimate (LE) and closing document (CD). If your LOS solution does not support construction loans, there are other workarounds in order to still reach the end goal, such as using a document service provider.

3. Specialized document service provider
Mitigating risk and pleasing all who are involved in a construction loan isn’t easy given how many moving parts are involved. It can be done with the proper resources. Document service providers are one of the most important elements to have. The provider gives lenders the specific form needed for each step of the project, no matter if the project is down the street or across state lines.

Before you sign on with any document service provider, make sure of three things:

  • They are able to produce both the LE and CD, particularly if your LOS doesn’t provide them. 
  • They are able to provide the state-specific documents that are going to be needed in the closing package.
  • They are able to guarantee that their documents will protect your first lien priority in each state.

4. In-house subject matter expert
Before the financial crash 10 years ago, construction loan expertise was abundant. But a decade after the recession, experts on construction lending can be difficult to find inside the bank. Finding or recruiting somebody like this on your team can be an amazing resource. They can be helpful in educating other lenders and assist in problem-solving loan structuring to benefit the entire company.

5. Post-close draw management and servicing
How do you manage the cost and process involved after you close that construction loan? Loan servicing is an integral piece of construction lending, and it is very hands-on and specific. Once the loan is closed, someone must be servicing this loan to ensure success for the duration of the construction loan: managing first lien priority, draw administration, inspections, and communication with key stakeholders such as the borrower and contractors. At the end of the day, you need someone to manage the lenders’ holdback, while simultaneously protecting the physical, financial, and legal interests of your bank.

What Your Bank Can Learn From McDonald’s


lending-11-29-18.pngIt’s noon. You’re halfway through your road trip, miles of highway behind you and your stomach tells you its lunchtime. Your passenger asks Siri for directions to the nearest McDonald’s. From the restaurant’s mobile app, he orders two No. 3 meals, selects a pick-up time, and pays—all in less than three minutes. You exit the highway, pull up to McDonald’s and in no time are back on the road, eating lunch.

This type of digital experience—what you want when you want it—is quickly becoming the standard for consumer expectations. As a recent digital lending study reported, McDonald’s CEO Steve Easterbrook rolled out the company’s app “to embrace change to offer a better McDonald’s experience” and has also said that “it’s pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones.”

The McDonald’s experience is relevant because that type of experience is what consumers expect from financial institutions as well. In fact, by 2021, half of adults worldwide will use a smartphone, tablet, PC or smartwatch to access financial services—up 53 percent from 2017—according to Juniper Research.

Further, the 2016 MX Consumer Survey finds that 81 percent of consumers prefer to interact with their financial institutions by desktop, laptop and/or mobile device. The same study shows that 38 percent of consumers have reduced how often they bank somewhere due to a poor digital experience.

One of the greatest growth opportunities for community banks is end-to-end digital automation of the lending process, especially for small- and medium-size business loans. Not only do these loans lend themselves to process automation, but the competition—and market potential—is growing rapidly. By 2020, some media reports suggest the market for online business loans could exceed $200 billion.

Why it Works
Today, small business lending is a labor-intensive process for which most community banks see little financial reward. The majority of community banks use the same process to underwrite loans as small as $50,000 as they do for larger multi-million dollar loans, which include paper applications and documentation and multi-level approvals.

This mostly manual process can cost as much as $3,000 per $100,000 loan, according to industry research firms, far outweighing any income to be made. While some banks have continued to make these loans even at a loss to preserve existing customer relationships, many have stopped making them altogether.

The latter is unfortunate. Historically, community financial institutions have dominated this lending space, strengthening their customer relationships through personal attention, decision speed, and loan term flexibility.

In the aftermath of the 2008 financial crisis, many community banks pulled back on small business loan approvals, which gave rise to a plethora of online lenders like OnDeck and LendingTree, that embraced digital advancements. As a result of this convergence of technology, small business lending from community banks has fallen more than 20 percent since 2008.

Digital Changes the Business Case, Customer Experience
Fortunately, the opportunity to win back this business is encouraging. Digital lending technology automates the entire lending process, enabling banks to deliver loans more efficiently, maintain their traditional underwriting, pricing and compliance practices and provide a seamless, 24/7 digital experience.

Here are some benefits to using digital lending technology:

  • Your customer’s loan journey is entirely online, from application to closing. 
  • Borrowers can sign all documentation within the app.
  • Decisions can be made within 48 hours. 
  • Additional documentation (if needed) can be uploaded within the app.
  • Loans are automatically booked and funded to your bank’s core.

Adding this capability does not require expensive development resources either. The technology is often readily available through white-label products. Industry advocacy organizations including the ABA have reported these white-label, cloud-based solutions represent “a very strong option,” that can be implemented quickly, use a pay-per-volume model and have the ability to customize. They also allow the bank to maintain its underwriting criteria and standards, and hold the loans on your own books.

As with other retail experiences, your small-business customers expect ease and convenience in the lending process. If you do not provide it, others will.