As we move from an unprecedented year to one of unclear mortgage rates and lending requirements, many lenders will be looking for new opportunities to better meet their clients’ needs. Evaluating this year’s challenges and trends indicate that we are likely to notice an even greater shift toward digitalization. This means a comprehensive lending process from the initial application to the closure of the loan. Here are a few trends and opportunities lenders should pay attention to in 2021.
Artificial intelligence (AI) has made its way into many aspects of our daily lives, so it is not a stretch to expect it to become a trend in regards to lending. AI can offer a few advantages to the lending industry including convenience, efficiency, a more organized application process, and the ability to make lending decisions fairer. Using pre-programmed artificial intelligence, lenders can leave certain tasks up to the intuitive program, while still relying on the final approval of a real underwriter. Instead, the AI gives lenders the tools they need to make an informed decision faster.
Imagine the ease of a process in which an interested home buyer is able to log on, apply for lending, submit all documentation, and then receive a pre-approval. On the other side of things, the lender can increase their client list, without spending time screening applicants or tracking down information, instead, leaving it to the technology of AI.
In an attempt to make the lending process even more convenient, the ability to fully automate this process is approaching in the coming years. A fully automated lending experience challenges the following barriers:
- Borrowers who give up on the process.
- Borrowers who are too busy to handle multiple phone calls.
- Loans falling through because of missing information.
- A lengthy process as many of these barriers can lead to a lengthy pre-approval process.
All types of lenders can take advantage of AI when offering loans. This includes credit unions, community banks, and other financial institutions. Credit unions can offer an automated lending process as an additional member perk.
Examples of Artificial Intelligence in the Lending Industry
Artificial intelligence in lending has already proven to be successful. Some top-name lenders have implemented it successfully to not only reduce human error but to also identify borrower habits. Artificial intelligence is able to indicate when borrowers may have trouble making payments, while also giving suggestions so they can maintain their credit rating. Others have used it to track market changes and even estimate upcoming trends.
With an estimated 15% of venture funds raising capital for AI in the banking industry, it’s clear that artificial intelligence is an important part of the future of the lending industry.
Much of the world has moved online in the last decade. In addition to banking institutions allowing customers to deposit checks and transfer funds online, many larger institutions also allow consumers to apply for loans digitally. In today’s current landscape, however, borrowers still have to interact with lenders to obtain a pre-approval. They may have to discuss their credit, income, and other application criteria with lenders and underwriters. Based on numerous studies that indicate people prefer not to visit their bank in person, they are also more likely to complete the lending process in an online setting.
Additionally, lenders are required to work with different individuals throughout the process. Navigating various communication channels with other lenders and realtors can slow down the process. An online system that is streamlined can give multiple parties the organization they need to work more efficiently.
The typical mortgage loan approval today takes 30-60 days. That 60-day timeline is only if everything goes right. Minor miscommunications or a lack of necessary information can slow down that process even further. In 2021, with a record number of refinances and an expectation of more buyers, many potential borrowers are awaiting the opportunity to obtain a loan.
With this timeline, lenders are limited by the number of sales they can handle at once. Faster lending, with an automated timeline, in an online setting, can help lenders increase their earnings and close sales faster, which allows them to take on even more clients. In addition to streamlining the borrower’s experience, this comprehensive experience also makes it easier for lending officers to keep track of numerous applications. No longer will they have to repeatedly contact borrowers to request additional information because it will all be done, right in the system.
Users can upload all required documents, including credit application, income statements, W-2s, Social Security number, bank statements, proof of down payment, photo ID, and 1040s, with an online checklist.
Examples of Online Lending
Online lending isn’t new. We first noticed online lending in the form of peer-to-peer lending (P2P). With P2P lending, personal lenders can invest in large portfolios, which are used to provide lending to higher-risk borrowers. While this type of lending can be riskier for both parties, it does demonstrate the convenience that comes with the online application process. Borrowers can access the funds they need, without ever having to meet their lender or go through lengthy application processes.
Online lending with reputable lenders offers many of the same perks as P2P lending, but with the same risks. In fact, online lending tends to be a more secure option with the use of artificial intelligence.
Because customers prefer to conduct their banking tasks online through smartphones, studies show that mobile check deposits have increased. Whereas many banks and lenders have some digital presence, not all offer mobile lending opportunities. When mobile opportunities are applied to the lending process, it can significantly speed up the process, providing borrowers with alerts when additional documents are needed.
The mobile opportunity also provides borrowers with a better experience. It is not just the lending experience that can be frustrating and lengthy to a borrower. Consider a traditional home buyer. Once they have chosen a lender, then they have to find a realtor, appraiser, inspector, and title company. If the sale falls through or there are additional questions about the borrower’s credit history, it can slow down the process and in some cases, require them to start over.
In addition to the long list of required documents, the process can also be especially confusing to buyers. They are not always informed of when to obtain insurance, submit income documents, schedule an inspection, or when they can expect to close. With an automated system, they are given updates throughout the process. If we have learned anything in 2020, it is that consumers, including borrowers, want convenience, especially in the banking industry.
People spend hours each day on their phones. With mobile lending, they can come across their dream house while browsing, wonder what their financing options are, apply for a loan, and they are well on their way to buying property.
Examples of Mobile Lending
An estimated 31% of people use their banking app more than any other app on their phone. Mobile convenience also significantly increases demand in the lending industry. An estimated $2.4 million in loan requests is received from credit unions daily, using mobile lending. Millennials make up a big percentage of this number.
With many loan companies shifting to the mobile lending platform, borrowers are able to access the funds they need for projects, sometimes within minutes. While the mortgage application process does take longer than that, it shows that we are on the right trend for speeding up the process. It also expands the opportunity for lending to under-reached areas. Businesses like Tala are reaching mobile lending customers in areas that have been traditionally harder to reach.
Cybersecurity threats have become a real problem over the last few years, and the majority of customers express some concern over their personal information. Before offering a digital lending process, including mobile lending, it is important that lending institutions have a secure method available. This requires the ability to detect fraudulent applications, as well as ensuring that the borrower’s information is secure.
Partner bank models are also trending and can be a solution to this problem. This is when multiple businesses within the financial industry work together to enhance the borrower’s experience by offering them tools they don’t currently have. An example of this is how LendSmart Mortgage works with numerous lenders to offer an automated and secure lending process.
Examples of Cybersecurity Threats to the Lending Industry
It is estimated that the banking industry loses $10 million each year to cybersecurity threats. A lot of people recall the Equifax breach of 2017 or the Heartland Payment Systems breach of 2014. Both resulted in hundreds of millions of dollars of losses, as well as the loss of thousands of borrowers who no longer trust those companies. All it takes is one large-scale data breach to ruin a company, regardless of how small or large they are.
Implementing digital processes to meet shifting customer expectations and the changing lending landscape will be a priority for institutions in 2021. Mobile and online banking allows borrowers to obtain the funds they need in a more convenient and organized process, and lenders should consider these opportunities to meet increasing customer demand. Cybersecurity will also become a necessary priority as the lending process becomes digital.