Commercial loan originations have experienced steady growth over the past 10 years. The Mortgage Bankers Association now forecasts record loan volume in 2019 and continued growth in 2020 driven by the low interest rates and strong demand for commercial and multifamily assets. In addition, fluctuating property values have created a significant strategy shift for commercial real estate investors from equity investments to financing commercial real estate loans. The shift has created more demand for commercial property loans than banks can handle, and a vibrant market for non-bank lenders such as agency/multifamily lenders, private equity and hedge funds, insurance companies, mortgage REITs, and peer-to-peer/marketplace lenders competing with traditional lenders.
Non-bank lenders rarely have the back-office infrastructure or expertise to support the servicing process. Their core competencies are asset management and client relationships—not back-office technology and services. Business Process Outsourcing (BPO) provides these firms with a variable cost model that can be scaled up and down in near lockstep with their loan portfolio. Outsourcing also allows them to enjoy the tax advantages of an OPEX model as opposed to CAPEX.
Shifting Investment from Cost Center Processes to Revenue Generation Processes
Increasing competition is also driving traditional commercial lenders and servicers to focus more attention on creative products and better customer service, rather than on back-office processes like data entry, reconciliation or payment processing. Even the onboarding process has become more laborious at a time when borrowers are looking for speed and simplicity. As the portfolios of these traditional lenders continue to grow, their back-office processes need to scale accordingly. But how much are they willing to invest in cost center overhead as opposed to revenue-generating personnel, expertise and technology?
More competition can also mean thinner margins. Business Process Outsourcing, whether full or partial, enables firms to reduce operating costs, enjoy OPEX tax advantages and squeeze more profit from top-line revenue. Outsourcing service providers with wide domain expertise can give lenders the agility to offer new, more creative products faster than competitors that are limited by in-house personnel and technology resources. The outsourcing service provider can offer a highly controlled operating environment to ensure the timeliness and accuracy of data and offer an independent review of the loan servicing book of records, thereby reducing audit scrutiny.
Innovative New Technology Will be Necessary to Successfully Compete
Perhaps the biggest advantage of outsourcing back-office systems and processes is the opportunity to take advantage of the latest technology. Many commercial lenders are saddled with legacy systems that lack the flexibility to handle new, more complex commercial loan products. They require expensive and time-consuming custom development. Construction loans with complex budget allocations, loans with multiple investors/participants, multicurrency loans and loans with complex covenants are examples of products that create barriers to entry for lenders and servicers with legacy systems. Outsourcing service providers that invest in new technology can offer the advantage of innovative new technologies that will make them more competitive – without the huge investment in additional IT infrastructure and resources. The competitive advantage will widen as the evolution of artificial intelligence (AI) exponentially increases efficiency.
AI technologies like Machine Learning, Robotic Process Automation and Natural Language Processing can achieve levels of efficiency in back-office operations that cannot be attained by traditional technologies. Lenders and servicers that don’t have the time or resources to invest in these technologies will need to leverage a Business Process Outsourcing model from a single service provider that offers a broad range of services.
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