Online Lending: Not Quite 4 Easy Steps
BY LAURI GIESEN
Banks strive to improve the automation of their systems, processes and customer service.
Online loan production has been modest due to customer lack of enthusiasm for systems that still rely on paper and manual processes. But the ebb in mortgage demand finds institutions seeking efficiencies in processing lower volumes. The cost savings possible — an estimated $1,500 to process a mortgage loan through branches versus $500 online — is driving interest and investment in automating processes and customer service. Home equity loans may be a product focus.
The ebb in the demand for mortgage loans finds financial institutions seeking efficiencies in processing lower volumes. Many are focusing on the online channel as a means of streamlining their work, reducing cost and broadening their market reach.
“Consumer loans are very attractive to banks right now and most banks realize that in order to increase their lending volumes, they’re going to have to get more out of their online channels,” says Alenka Grealish, manager of banking for Boston-based Celent Communications.
Yet significant investment in technology and new work processes will be required. The chief hurdle to boosting online loan volume is that the process is far from paperless. Providers can benefit from the reduced cost and improved convenience of online lending only if the process is automated and can be mostly self-serve.
When processes are not automated, customer service becomes an issue. Experts say that many banks have struggled to provide sufficient levels of service to customers who attempted to borrow online. The customer who cannot get his questions answered will abandon the process.
To overcome the issue, institutions are investing in technology to more fully automate the loan process and better align that process with customer service support. Christine Barry, director of research for New York-based Aite Group, expects U.S. banks to spend $250 million over the next two years on technology associated with online mortgage lending. One investment: Online chat (see “Chat Drives Higher Closing Rates,” p. 28), which can be an effective and convenient way for customers to get their questions answered.
Paper Jam
Until recently, lending money over the Internet has been more of a novelty than a steady line of business because it failed to catch on with the mass market to the extent that banks had hoped.
“Online lending has proven to be more elusive to banks than online banking and bill payment,” says Edward Neumann, partner with CC Pace Systems, a Fairfax, Va.-based technology consulting firm. “That’s because online lending, particularly when it comes to mortgages, is a lot more complicated than posting deposit information on the Internet.”
And, Neumann adds, “most banks do not do a good job of automating the online lending process to make it inviting for consumers to use.”
Adoption doubled in the three years between 2001 and 2004, the most recent time frame studied. Still, the percentage of retail mortgage applications submitted through bank online channels was estimated by TowerGroup to be only 7.3% in 2004.
The failure to automate has led to paper jams that have often led to abandoned applications. Since customers can’t retrieve and electronically sign the necessary forms on a secure Web site, most banks still mail the paper documents to the customer. The customer in turn must sign and return the documents via express mail. Such manual handling of documents adds to the cost of closing the loans and often causes customers to give up entirely, experts say. Customers either become frustrated with the length of the process, or the delays provide opportunities for them to seek and find another deal.
The search is on for technology that can streamline the process, according to Grealish. “Some banks still require consumers applying online to print out a lot of the mortgage documents from their home computers, but nobody wants to print out 50 or more pages of documents from their home. The more banks can automate the process, the easier and faster it should be for consumers to close a loan.”
Automation would also reduce bank expenses by reducing the costs of handling paper and dealing with customers in the branches. The cost of processing an online loan is substantially less than handling that same loan in the branches and even less expensive than handling it through call centers. Aite Group’s Barry estimates the cost to banks to process a mortgage loan through the branches to be $1,500, compared to $500 through the online channel. And, sourcing more loan applications directly from the Internet enables banks to avoid paying steep referral commissions to outside brokers.
Now would be a good time to take online lending more seriously. “The mortgage pipeline that banks enjoyed for the last few years from the refinance frenzy is drying up,” notes Celent’s Grealish. As the number of mortgage applications dwindles, banks are seeking to reduce the costs of handling reduced demand. “Banks had not been as active with investing in lending technology in recent years because they were too busy trying to keep up with the volume,” says Aite’s Barry. “But with rates rising now, they have more time to spend looking at how to improve the efficiencies of their systems.”
Home equity loans warrant particular attention. “With huge increases in home values in most parts of the country, there is a great opportunity now for banks to push home equity loans online,” says John Tentula, division president of lending solutions for Fiserv, a Brookfield, Wis.-based processor of bank data. “Consumers who might not qualify for other consumer loans can often qualify for home equity loans because the market increases suddenly provide them with a much higher equity ratio. And the Internet plays well into this, because home equity loans are simpler to do online than conventional mortgages.”
Still, Tentula estimates that only about 5% of home equity loan applications are generated online today. He expects that number to rise to 20% within three years as banks improve their capabilities.
Cleveland-based National City Corp. has been especially aggressive in the online home equity market. The bank estimates that it draws about 10% to 15% of its home equity loans online, according to Lakhbir Lamba, executive vice president of consumer and small business lending. Lamba expects that percentage to grow to between 20% and 30% in five years, as National City improves on its efficiency.
Automating the Back Office
The taking of an online application works fairly well today. Fiserv’s Tentula says that most banks have already done a good job of automating the credit scoring and preliminary approval process. Many can provide a preauthorization within an hour and sometimes in less than 15 minutes after it has been requested.
But back-office processes could stand to be improved. “Most banks are taking 10 to 25 days to complete a home equity loan. With the right tools, they should be able to do it within one day and avoid the risk of losing the applicant,” Tentula says.
National City currently takes two to three days to complete a home equity loan and is currently looking for technology that can reduce that time to within 24 hours, according to Lamba.
Online loan applications also fall victim to the fact that appraisals, title searches, employment verifications and other documents associated with lending — and especially mortgages — generally are handled offline. By getting rid of much of the paper, banks could reduce the cost of processing the loans by as much as 50%, says Phil Huff, president and CEO of eLynx Ltd., a technology company that provides the systems to automate lending. “If you can get rid of all that paper, you can get rid of all those expenses related to express mail services and faxing documents,” he says.
Self-serve functionality that enables consumers to check the status of their loans or view various documents online can also cut back on the time the institution must spend servicing customers. “The simple act of moving information online is a big cost-saver since an unexpected call from a borrower can be disruptive and time-consuming for processors and closers,” says Craig Hughes, vice president of mortgage consulting for CC Pace.
Additionally, the elimination of the paperwork can dramatically reduce the time it takes the loan to close. Rather than wait days for documents to be sent back and forth between the bank and the customer, documents transmitted electronically can be sent, read and signed within minutes.
Specific technologies that can speed up the processing of handling applications include imaging documentation, which enables paper documents to automatically be scanned so they can be transferred via the Web between the bank and the customer instantly, and e-signatures, which use advanced security technology that enables consumers to “sign” documents online. Additionally, banks are expected to spend more on integration software to improve the flow of data from their front-end application systems to the back-end processing. Some projects are working on integrating databases with databases of appraisers, insurance companies and other companies involved in lending.
Among the various products that Cincinnati-based eLynx has developed to automate the creation and consolidation of loan documentations via the Web is eDisclosure. Rather than expect banks to send disclosure documents via express mail and then have customers sign them and send them back, eDisclosure automatically puts them on a secure Web site. Customers gain access to the site by disclosing information they provided on the original loan application. They can then either print the document, sign it and mail it back or apply an electronic signature.
Another eLynx product, simpliFAX, gets around the need to scan and retype documents by employing a system to enable documents to be faxed to a special number. Rather than printing out a fax, the system takes the data and converts it into an electronic document. That document is then automatically consolidated into a Web-based file that contains all the documents for a particular loan.
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Mr. Swift is director of payments and operations for BAI.