E-Lending Boosts Operating Efficiency

CU360
December 17, 2009 | COMMENTS

Financial institutions are looking at electronic-lending technology as a more efficient way of documenting loans. The trend is especially evident in mortgages and commercial loans, according to the Bank Administration Institute's Banking Strategies magazine. New regulatory requirements, the modification of trillions of dollars worth of mortgage loans, and an emerging commercial loan crisis have amplified the call for increased lending transparency.

Institutions that electronically originate mortgage loans can expect savings of nearly $249 per loan from initial application all the way through post-closing, according to an earlier report from the Mortgage Banking Association. While paper-based processing is lengthy and expensive, automating those processes makes for faster workflow, lower risk, and greater information transparency.

Despite these benefits, the number of electronically processed loans is still relatively small compared to the total number of mortgages originated since 2007. This slow adoption can be partially attributed to widespread chaos during the credit crisis. Other obstacles include tightened IT budgets which, are on track to fall 6% below 2008 spending, according to a recent Gartner report.

Even so, paperless initiatives are starting to gain traction in the current market, where institutions are willing to invest in projects that realize significant cost savings.

Cost effective and transparent

With paper mortgage files, disclosures must be drafted, shipped to the borrower, signed by the borrower, and shipped back to the originator. Once the loan is finally closed, this process repeats itself, with the closing agent responsible for packaging and shipping the loan. And, each time the loan is sold to new investors, the entire package of paper documents must be packaged and shipped again.

Electronic lending automates all of these processes: disclosures are electronically sent to borrowers, documents are electronically sent to corresponding lenders and investors for review and purchase, and documents are securely stored in electronic vaults where they can be transmitted to purchasers' electronic vaults once they're sold. Automating these processes alleviates the need for data re-entry, eliminates review steps, and cuts the time required for error-correction cycles.

Electronic documentation of loans, whether for mortgages, commercial loans, or consumer loans, also offers the greater transparency now sought by government-sponsored enterprises, regulators, and secondary market investors. These parties are exceptionally intolerant of the inconsistencies, poor risk management, and shortage of reporting associated with paper-documented loans.

Electronic lending replaces paper with a data stream that can be read by computer, providing complete transparency. Electronically documented loans can be examined automatically and viewed online in formats including PDF, the mortgage industry standard SMART Document, and others. Not only does this save time, it gives investors a true sense of what they are purchasing.

Electronic lending's growing popularity in the mortgage industry was highlighted in March 2009, when 60,000 e-notes were registered on the MERS electronic mortgage registry, compared to only 500 loans registered 14 months prior. MERS reports that the organization is now seeing 400 to 500 new e-notes being registered every day. One contributing factor is the use of electronic lending to expedite loss mitigation, helping to quickly and efficiently modify loans of at-risk borrowers.

The technology exists today to fully automate lending and provide complete transparency through electronic lending, say industry analysts. As institutions that have yet to begin their switch to electronic lending grow increasingly frustrated with paper loans—and as demands increase for transparency—widespread adoption of electronic lending is inevitable.