Digitizing the Lending Process for Home Buying

What is Digitization?

Digitization is the process of converting analog information into digital data. This digital data is can then be used and processed by computers and other electronic devices. There are several advantages to digitization. It not only allows you to access your files remotely, but it also simplifies storage, streamlines data processing, and reduces overall operating costs. For all these reasons, digitization is now a must for most modern industries. This includes the loan and mortgage industry, which can enjoy major benefits from digitizing its lending process.

The ability of a lending institution to effectively compete will greatly depend on its ability to digitize its system. A paperless system will open opportunities for greater productivity, cost reduction, and improved customer service. Accordingly, this will eventually lead to increased customer acquisition, satisfaction, and retention.  

Unfortunately, for most loan and mortgage companies, the lending process is far from fully digitized. Paper forms and stuffed file cabinets remain the norm. Although some of these documents do end up being digitized eventually, the number of paper documents which are involved in the lending process will definitely surprise you.  

The Current State of the Digitized Lending Process

As of August 2018, the following milestones in digitizing the lending process have been achieved.

1. Investigation of current income and/or employment status. There are a number of online services which allow lenders to verify the current employment status and possible income stream of potential lenders. The Work Number, for example, is an online service which provides data for employees working with Fortune 500 companies.
2. Credit history and support obligations. Lenders can easily retrieve this information through credit reports; by filing a 4506-T form with the Internal Revenue Service (IRS); or by reviewing the borrower’s Form 1003. The 4506-T is a document used to request copies of prior tax transcripts which the taxpayer filed with the IRS. These tax transcripts provide the lender with valuable insight as to the financial position of the borrower/taxpayer, especially in relation to his level of income. The borrower/taxpayer, however, must still sign and date the 4506-T to allow the lender to retrieve his data. On the other hand, Form 1003, also known as the Uniform Residential Loan Application Form, is a standardized document developed by the Federal National Mortgage Association. This form contains all the necessary information that lenders need to review for mortgage applications. It includes a wide range of information designed to give lenders a bird’s eye view of the borrower’s finances. For example, sources of income, list of assets and liabilities, existing debts, prior foreclosures, and declarations of bankruptcy are all included in Form 1003. Fortunately, with the right software in place, these documents can easily be completed electronically. By doing so, the lender will no longer need printed copies of the 4506-T or Form 1003.
3. Monthly residual income, income-to-debt ratio, etc. Similar to the above, all this information can easily be derived by analyzing the creditor report, 4506-T or Form 1003.

At first glance, it may seem that we’ve come a long way in digitizing the lending process. However, this is far from the truth. There are still several aspects of the lending process which are not fully automated.

1. Appraisal. Unfortunately, there is currently no viable automated substitute for human appraisers. Real people need to go out and evaluate the present condition of the land or object mortgaged.
2. Nonstandard borrowers. Automated systems operate by examining predetermined variables. Although this significantly streamlines the lending process, it also comes with its own limitations. For example, an automated system will probably deny a borrower’s loan application because the income stated in his latest tax return is too low. However, it does not take into consideration the possibility that the borrower may have improved his means between the time he filed his tax return and the time he filed his application. Thus, human intervention is still required to assess nonstandard borrowers.
3. Legal compliance. The intricacies of Federal mortgage laws make paperless compliance extremely difficult. Most of the time, parties will be required to place their signature and/or thumbprint on a stack of documents. This is done so that lawyers and other legal professionals can retain hardcopies.

Craving for Change

Even though the lending process is very complicated and highly regulated, there remains a significant interest in digitization. Lenders can clearly benefit from the improved efficiency, cost savings, and other benefits of a fully digitized system. Borrowers, on the other hand, can benefit through faster approval times, electronic submission of supporting documents, and more.

But despite the advantages of a fully digitized process, the lending process will still benefit from a human touch. Majority of borrowers will still want to discuss their options with a lending officer before committing to a transaction. Meeting a lending officer has several advantages. It assures the borrower that the establishment cares about his business. It also allows the establishment to explain the specifics of the loan and assess nonstandard variables.

Taking the Lending Process from Paper to Electronic Documents

For a long time now, paper documents have dominated the lending process. In fact, one loan and mortgage transaction can generate about 500 pages of documents. These include years of financial records, across several employers, businesses, mortgages, gifts, grants, and personal household expenses. The borrower will have to make several appearances, while the loan officer has to scrutinize and verify stacks of documents. More often than not, additional documents will be needed and requested from buyers. To complicate things even more, borrowers are left in the dark on the progress of the loan application while the loan officer spends hours working on a single transaction. The seemingly inefficient lending process can be vastly improved through digitization.

The Path of Transformation

To automate the lending process is not no easy feat. With that said, however, it is also far from impossible. Some of the more difficult parts of the transformation involve the quality of the software; potential incompatibility of new and old systems; transition costs; and regulatory compliance. But despite the many difficulties, the potential benefits of a fully digitized lending process make the transformation well worth the effort.

Digitizing the lending process will obviously require the creation of new software that is specially designed for the task. This new software must not only answer the present and future needs of the lending establishment but must also intuitive enough to be used with little to no training.

Practical and Functional

In regard to functionality, the software must function as both a storage and analytical tool. Users should be able to save and access data easily through the software’s user-interface. Moreover, it must also be able to analyze the data, so that the critical information relating to the borrower will always be available. For example, if the lending officer needs to view the borrower’s income-to-debt ratio, the software should be able to display this information instantly. If the software is not capable of doing so, then the lending officer will be compelled to either compute the ratio himself or use another piece of software to do it for him. Either way, it will be a massive waste of time and effort. It is much more efficient to have everything in one place.

User-friendly and Intuitive

Additionally, user-friendliness is another important consideration. The software must be intuitive and easy to understand. If it isn’t, the lending establishment will need to incur additional expense in training its staff to use the software. This creates an added financial and technical burden on the establishment, which could have easily been avoided through proper software design.

Flexible and Adaptable

Finally, the software must be designed with the future in mind. It must be designed with future upgrades in mind, so that it can change or adapt readily to the upcoming needs of the establishment.

A fully digitized lending process should allow closed collaboration by all stakeholders: borrowers, lending officers, managers, technical personnel, and the third-parties. It is only when these participants are fully interconnected that the advantages of the software will start to trickle down to the borrowers.

For example, the easier the software is to use, the less time lending officers will spend on encoding or analyzing data. This extra time can be used to entertain other borrowers and thereby increase the profits of the lending establishment. This allows the lending establishment to save on the cost-per-transaction, which empowers the establishment to charge a lower rate for fees, if it so chooses.

The entire lending process normally costs the lender about $7,000 per average-sized loan. A large chunk of that goes to salaries for doing routine work like reading and sending e-mails, monitoring client requests, and receiving and filing paper documents. Most of these costs are passed down as fees to borrowers for the lending establishments to remain profitable.

Investing in digitizing of the lending process can significantly lower these costs by automating routine jobs. Other intangible benefits of digitizing the lending process involve the value-added service that lending officers can further provide to the borrowers. By delegating more of the remedial tasks to the machine, the lending officers can focus on account management, customer acquisition, and other client-focused activities. Hence, productivity can be increased, and costs can be reduced in one fell swoop.

Moreover, the digitalized Lending system can be easily audited. All transactions between the borrower and the lender are automatically filed chronologically, leaving no room for deception and manipulation. This technological ability of the system further paved the way to speed up the lending process. With documented real-time evidences of borrower’s consent and intent to proceed, the loan will go directly into the pipeline for processing. Confusions, miss-understandings and uncertainties are immediately put to end.  

Technical Challenges

Unfortunately, it’s not all sunshine and rainbows. There are also some very serious technical challenges when it comes to digitizing the lending process. The most obvious challenge is data privacy or security.

Data security is a critical concern for any business establishment. However, this issue is doubly true for lending establishments. In fact, one wrong move can spell disaster, especially if it involves a leak of personal or sensitive information, such as the borrower’s social security number.

To address these security concerns, most establishments that intend to digitize their lending process are looking into new technologies like blockchain and advanced security systems. Blockchain, in particular, seems to be gaining increased interest over recent years, especially after it has proven itself in the realm of cryptocurrencies.

Aside from ensuring data security, lenders must also comply with strict banking regulations. One such regulation is the TILA-RESPA Integrated Disclosure (TRID) rule. The TRID rule significantly simplifies the loan process for borrowers. It also requires lenders to strictly track data and to notify borrowers on loan estimates and fees. With the help of modern technology, borrowers are notified promptly and automatically once the lender receives the necessary data. This is a major improvement from the traditional and error-prone system, which relied solely on the technical prowess of the lending officer.

Government Support

Just recently, in early August of 2018, the United States Treasury published a report entitled, “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech and Innovation.” This report promoted digitization of the lending process and stressed the need for a special regulatory structure for the same. They emphasized certain issues that need special attention from rule-makers.

All in all, the Treasury’s outlook on regulations seems very promising. It encouraged rule-makers to draft laws that will encourage the development of new technologies that will increase customer satisfaction, make the lending process more efficient, and improve overall security.

Conclusion

With all that said, it is easy to see why lending establishments need to digitize the lending process. Digitization will not only improve speed and efficiency but will also reduce costs. However, a proper balance must still be observed. While a large portion of the lending process may be digitized, lending officers still need to add a personal touch to these transactions for the sake of client relations.

Several steps must be taken and numerous technical challenges must be overcome before the proper level of digitization can be achieved. While the process may be difficult, it is far from impossible. Nevertheless, if the loan and mortgage industry truly intends to improve itself, there can be no better investment than digitization of the lending process.