Lenders in all consumer loan segments should be planning and implementing new analytical processes as well as developing new multi-channel delivery methodologies to positively impact their loan portfolios in 2020 and beyond!
After several years of steady loan growth in most consumer loan segments, most financial institutions have started to see loan originations beginning to level off and slow down. In light of stable and potentially continually decreasing interest rates from the Fed, and with CECL compliance in the wings, financial institutions need to be implementing processes that increase quality loan production with an eye towards being able to weather any potential economic downturn.
The Market is Strong – Why Worry Now?
Currently, both consumer spending and employment are in positive growth modes. The U.S. economy continues to do well. In turn, financial institutions continue to realize strong earnings, benefitting from the economy and jobs market. At the same time, we are seeing many new and innovative entrants in the Fintech lending space, creating competitive gaps in the markets. Traditional financial institutions are falling behind in terms of delivery and service methodologies.
According to the Mortgage Bankers Association, home loan applications increased 21.7 percent in August. 1st TD originations accounted for only 7.6 percent of that increase, and they are forecasting Q3 and Q4 home loan originations to increase 32.4 and 17.6 percent, respectively, with nearly all increases coming from a boost in refinancing. This suggests that while new originations from home sales remain strong, refinances are even stronger. (Regardless of how much business you capture as the initial originator, there are a huge number of entities out there pecking away at your portfolio for refinances, and not just in the Mortgage space.)
Change Is Inevitable
While consumer spending and loan originations are crucial to a strong economy, things can turn on a dime, basically like what happened this year in the first Q 2019 dip in loan production. If any of us could truly and accurately predict and time the economic shifts and subsequent consumer behavior, not only would we be geniuses, but we wouldn’t need to be reading information like this. Financial institutions follow the trends. We always have and likely always will. Why is this important to understand?
Because change happens. Even in the most seemingly stable economic cycles, we are always in a volatile environment where anything can affect almost everything. Since we can’t accurately predict any of these changes, what we can do is plan for and implement structure and processes to alleviate the potential negative effects while maximizing the positives.
The Solution? Multi-Channel Lending Opportunities
Volatility in the market always sends lenders scrambling, especially if their loan portfolios aren’t strong across all segments. One solution for lenders is to be more multi-channel oriented. That means diversifying your portfolios, which also means diversifying your origination methodologies, platforms, sources and even loan types. Multi-channel means being at point-of-sale, where most loans are actually originated (by the seller), while also being an online lender (how many consumers shop for a loan) and being heavily involved with refinance, since no matter how good you are at point-of-sale, you’ll never get them all. Then, you should really be rounding things out portfolio- and liquidity- and ALM-wise by setting yourself up for loan sales and purchases, and especially loan participations.
Essentially, multi-channel means you are everywhere you want to be, where the business you are looking for is being generated, all the time. That takes a multi-channel approach to accomplish. To be where the business is, 24/7/365 means being online, accessible to your consumer base as well as the retail sellers, with easy access and the ability to make and communicate fast, accurate decisions and funding. Which means you’ll need to commit to Fintech, automation, and, in all likelihood, platforms that perhaps don’t yet integrate with your core – with the mindset that you will deal with the operational issues and eventually replace the core or opt for core integration. But if you sit and wait for all of this to just happen for you, you are missing opportunities – opportunities that savvier online lenders are capturing today, tomorrow, and into the future.
Setting yourselves up now to take advantage of multi-channel opportunities is one way to assure that whatever that inevitable change is in the future, you will be ready. Every channel can’t and won’t be as productive as the other channels all the time. That’s where common sense and ongoing management of the channels come in. If you treat each channel as a branch or department, management of the channels becomes easier and more productive as you review data, run reports, and balance your portfolios and yields.
Where are the best opportunities today?
There are still opportunities in channels that you operate in, as well as tremendous opportunities in channels that you are not implementing today. For example: indirect lenders reading this are likely not the dominant player in their markets – so, you have opportunity. Conversely, if you are not in the indirect channel, you have tremendous opportunity to assess the market and come in as a strong, competitive player, and do it right.
The same multi-channel opportunities exist today with the online lending or refinance – If you are there, I guarantee that you have a ton of opportunity to expand. If you aren’t building an on-line and/or Refi channel today, you should be.
There are plenty of multi-channel opportunities to restructure your portfolios, consistently increasing originations, improving asset quality, and improving yields to positively affect overall profitability. Assuming you are properly planning and implementing change (consistent with changes in the marketplace), you won’t get there overnight, but you can allocate resources over time that will get you there and effectively keep you there (everywhere).
There’s an old adage or question that asks: When is the best time to plant a shade tree? The response, 20 years ago! Which begs the follow-up question: When is the second best time to plant that tree – The answer? Now!