The current battlefield is personal loans; home equity loans and lines of credit will be next.
Over the last 18 months, I’ve written about the impact that fintech lenders have had on bank and credit union lending. Here at Ent, we saw signs back in 2012 that personal loans were going to be the battleground where we’d fight with fintechs for our members’ loans. Personal loans are easy to underwrite, process and fund. The need was there, whether a fintech was promoting a credit card consolidation or the refinance of a high-cost student loan.
We got serious right away about winning this battle. We sharpened our pencils on loan pricing. What traditionally had been a product priced in the double-digit range was being offered in the 5-6% range to the strongest borrowers by Lending Club and SoFi. Even after a few Fed rate increases and a rate reduction, unless you’re offering loans in the 7% range to your best borrowers, you’re probably not seeing a lot of growth in your personal loan portfolio.
We also got aggressive with pre-qualified loans. Ent typically does two or three pre-qualified offers to members a year and, ultimately, we want an offer in a member’s hand 365 days a year. Yet direct mail is not our method of choice; we do digital delivery, complemented by branch support.
With a large percentage of our members on electronic statements, we include the offer as part of the member’s e-statement. We also promote the loan offers when members log into home banking. We support the digital effort through our front-line staff as well. Every member service representative can determine, in a matter of seconds, if the member they’re talking to has an active, pre-qualified loan. Our reps can offer the loan and accept the offer for the member if desired, starting the process to funding.
More recently, we’ve started measuring how many unsecured loans we can fund inside of two hours. These loans have our first priority. With the use of electronic signatures, we can close loans faster than most members need the money. Speed is critical in the battle with the fintech lenders!
I think home equity loans and lines of credit will be the next area of lending the fintechs attack over the next few years for a variety of reasons:
- They’re a part of the loan portfolio that has played second fiddle (even third or worse) for many lenders since the financial crisis. The worst portfolio losses for most lenders came from their home equity loans. As a result, most lenders have resisted returning to 100% loan-to-value loans (as we have), even though that decision exposed a critical weakness for many banks and credit unions, and that’s how poor they are at making the home equity loan a fairly simple process.
- Even though most lenders have not returned to the policies that contributed to the huge losses in home equity loans, they’re still looking at home equity loans more like mortgages than consumer loans, including having the same people handle home equity loans as home loans. Sadly, home equity loans are likely to again play that second fiddle to the larger mortgage loans.
- Home values are up! Equity is abundant, and consumers are spending more money improving their homes than ever before. The opportunity is there!
We can look to a fairly new fintech, Figure, for signs of the upcoming competition for home equity loans. Started by the former CEO and co-founder of SoFi (which should provide a high level of validation to my concerns), Figure is using a variety of tools to make the home equity loan delivery process extremely efficient, including:
- Automated valuation models to determine home value. While I don’t know this for a fact, I’m guessing if they can’t support your claimed value by one of their models, they’re probably not going to order an appraisal. It’s fairly “messy” to the process and slows down the closing. They’ll approve the loan for what they can based on their models.
- E-notaries in states that have adopted this technology. It’s a lot easier for members to schedule—and “attend” a closing—when they can do so from their desktop machine or mobile device.
However, Figure has some downsides that give us room to compete. For example, the small print in their advertisement says that their best rates are available to borrowers with an 800 FICO score or higher. That’s an ultra-super prime borrower, and that offers opportunity for us to lend to borrowers in the high 700 range. Figure also charges a 3% loan origination fee. Seeing that the average life of our home equity loan portfolio is about 30-32 months, that origination cost significantly increases the cost to the consumer. Notably, that type of origination fee is fairly unusual for the marketplace as a whole.
What Figure and many fintechs have though—and what many of us don’t—is a sense of urgency. There is no room for complacency in the lending business. Remember my comment about how Ent can close most loans faster than the member needs the money? We can’t be focused on that, because it’s a hurdle to ultimately being ready to close every loan as fast as possible. As more consumers demand that their financial service providers offer the immediate response that the mobile device has given them in other aspects of their life, the banks and credit unions that lack that sense of urgency will be left behind in the race.
CUES member Bill Vogeney is chief revenue officer and self-professed lending geek for $5.8 billion Ent Credit Union, Colorado Springs.