When it comes to adopting digital solutions, mortgage lending in particular seems to be playing catch-up compared to other industries. Some lenders have asked me if there is still a need for full-scale digitalization, now that the record levels of origination and forbearance activities of the past several years have somewhat dissipated.
Ironically, we’ve been hearing about the “Year of the eMortgage” since 1999, and it’s taken almost 20 years for digital mortgage lending to gain much traction. Instead, we saw digitalization take off in other lending verticals, but it wasn’t until the global pandemic hit that financial institutions started making any headway toward implementing digital mortgage lending capabilities.
The Paycheck Protection Program was the catalyst for the banking industry. Lenders experienced firsthand how digitalization can help them quickly scale their lending, enabling them to get critical funds into the hands of small business owners at a time when bank branches were shut down. As the ability to conduct lending transactions remotely became increasingly urgent, many financial institutions found themselves throwing out their existing technology roadmaps in favor of fast-tracking digital lending capabilities.
The mortgage industry successfully adopted digital solutions to replace tasks that typically involved face-to-face interactions during the pandemic, such as e-signature and remote online notarization. Now, the focus has shifted to digitalizing other parts of the mortgage lending process that are still slowed by manual, paper-based processes, such as closings. eClose adoption is becoming a must-have for organizations that need to differentiate in the marketplace by moving faster with greater agility — while at the same time reducing costs.
Best practices for a digital lending strategy
There are five stages that every financial institution should consider when developing a digital lending strategy – empathize, define, select, design, and test. The first thing I always encourage financial institutions to do is to think about their digital lending value proposition. Are they pursuing digitalization for the enhanced customer experience and workflow efficiencies gained from eliminating paper? Or is the lender more focused on the capital efficiencies? Before moving forward, lenders need to develop a deep understanding of their challenges and set goals early on.
The second stage, define, helps lenders determine the problems they want digitalization to solve. Doing this early on in their digital journey will help lenders put an actionable plan in place with clearly defined goals and ensure they secure the right resources. Lenders that skip over this step and move forward without a detailed roadmap and a well-articulated vision will likely struggle to be successful.
Having the support of the right technology partner is absolutely essential. During stage three — select — lenders want to ensure that they’re conducting due diligence and choosing the best technology partner to help them meet their digitalization goals. The good news is that there are many different third-party providers to choose from. There’s been tremendous industry growth over the last few years when it comes to digital loan compliance technology and services.
Next, lenders should leverage their selected technology partner to help support and design their digital journey. Does the lender want to focus on the more traditional front-end benefits, such as improving customer experiences, reducing Not-In-Good-Order (NIGO) loan package frequency, ensuring regulatory compliance, or having the same legal enforceability as paper?
Or is the lender more interested in the emerging lifecycle benefits, including eliminating paper, storage, and transportation costs, accelerating capital efficiencies, and seamless secondary market delivery and securitization? There’s too much for lenders to focus on all at once, so establish priorities and be laser-focused on what should be accomplished first.
Finally, testing is critical. Engage in a continuous short-cycle innovation process to continually improve the design. Remember, this is a journey. Every lender will do things a bit differently, and there’s no need to be “all in” on anything. Test, figure out what worked and what didn’t, and then course correct to evolve digital processes along the way.
I always encourage lenders to start small and easy. Many of the processes that lenders might put in place for a less complex asset class to digitalize, such as for auto or small consumer lending, can then be parlayed into larger, more complex digital lending workflows and verticals later, such as for facilitating commercial or mortgage lending.
eClosing: The icing on the cake
Many mortgage lenders have digitalized at least some aspects of their closing process. What should an effective eClosing platform offer? The electronic signature is the easy part of the digital lending process. But once a digital asset is executed, how do you manage and monetize them? This is where a true digital closing platform steps in to help lenders navigate between all of the players in the industry — the originators, warehouse lenders, custodians, investors and servicers. As lenders head down the digital path, it is critical to have a robust tool set that allows them to seamlessly work with all these different constituents.
Once the digital asset is closed, it’s moved into an electronic vault, or eVault, where it will be managed throughout its lifecycle. The process of eVaulting a document within a secure, trusted environment fulfills the legal and regulatory requirements for the uniqueness and negotiability of the document as a digital financial asset. As interaction with the lending document occurs throughout its lifecycle, the eVault also enables the owner or secured party to control the access rights to the asset, and to track all activity regarding the asset from signing, maintenance, sale, pledging, collateralization and securitization through to its ultimate disposition or destruction.
There’s no question that lenders should proactively accelerate their digital transformation. Borrowers now expect a digital lending experience. By eliminating in-person contact and accelerating the speed and convenience of the closing process, end-to-end digital capabilities have become a critical piece of the digital mortgage puzzle.
Simon Moir is vice president, banking compliance solutions for Wolters Kluwer. He is responsible for overseeing the growth and development of the segment’s banking compliance product portfolio and its open digital lending platform and expert solutions ecosystem. He previously was chief product officer at eOriginal, Inc, where he was responsible for the company’s product vision, strategy, design and delivery. He can be reached at [email protected].