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FEATURE ARTICLE

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THE DIGITAL FUTURE OF LENDING

The Game Is ChangingAre You Ready—Or Even Planning— for Imminent, Big Changes in Mortgage Lending?By Tom Burton

Credit unions have seen unprecedented success in mortgage lending since the

Recession of 2008. The share of new-loan originations approached double

digits for the first time and overall loan volume hit record levels. n Some of the

success was due to consumers placing blame on Big Banks and Wall Street for

the economic crash. Some of it was recognition of credit unions’ cooperative

approach, which resonated with new homebuyers, especially younger ones.

Also contributing was historic low interest rates that pushed not

only home purchases, but also tons of refinancing. n Times were

good; the pipeline was bursting. So why should you be worried?

Because huge changes have already begun to impact the financial

services industry in general and mortgage lending in particular.Craig Martin

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To succeed in the future, credit unions must create experiences that truly differentiate them from

competitors, asserts Craig Martin, Senior Director of Financial Services for J.D. Pow-er and Associates.

Martin, who stated his case to an ACUMA fall conference audience last year, said market realities and challenges is already reshap-ing the mortgage industry. As key factors he listed a changing customer base and preferences, rising cost pressures and the growing role of self-service.

Central to each of these factors is the generation of 18-to-34-year-olds known as millennials.

Quoting a survey by the National Association of Realtors, Martin noted that millennials (at about 75 million, the larg-est generation in American history) were the largest group of recent homebuyers for the third straight year in 2015. And in a recent Housing Wire survey, 93% of millennials said they wanted to own a home in the near future, and perhaps more important, 94% of millennials begin their search for a home online.

WHAT SHAPES MILLENNIALS?The first generation that has been

raised on the Internet, millennials have also seen the effects of the 2008 econom-ic crash. In fact A Pew Research study showed 81% of millennials don’t trust people in general. This skepticism has

been emphasized by what Viacom Media Networks identifies as “The Millennial Disruption Index,” which lists the industries most likely to be transformed by millennials.

The Viacom research concluded that millennials are look-ing beyond traditional channels. It found financial services (banking) faces the highest risk of disruption and listed some startling findings about what millennials think:n One in three are open to switching financial institutions in

the next 90 days.

n 53% don’t think their institution offers anything different than other financial institutions.

n Nearly half are counting on tech start-ups to overhaul how financial services work, and further, they believe innova-tion will come from outside the industry.

n 73% would be more excited about a new offering in finan-cial services from Google, Amazon, Apple, PayPal or Square than from their own financial institution.

n And finally, perhaps humorously, 71% would rather go to the dentist than listen to what their financial in-stitution is saying.

These findings point to opportunity but also danger. Most important is the understanding that millennials bring a whole new perspective to how financial services are perceived, and they expect to use them on their own terms.

According to Martin, millennials are the Connected Generation: Smart-phones are a key element of their culture. He noted a J.D. Powers study

“93% of millennials said they wanted to own a home in the near future,

and perhaps more important, 94% of millennials begin

their search for a home online.”

“Millennials bring a whole new

perspective to how financial services

are perceived, and they expect to use them on their own

terms.”

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showed that 92% of millennials used a smartphone to access the Internet (vs. 62% of baby boomers) and spent more than 21 hours a week using their phone (vs. 12 hours for boomers). When add-ing desktop/laptop and tablet usage, millennials spent nearly 53 hours each week online.

Importantly, millennials use online options (website, email, live chat) more than a live phone rep for customer care. By contrast, boomers are five times as likely to talk to a phone rep than go on-line. Millennials, Martin said, use self-service because it’s on their own time.

Further, Martin said J.D. Power re-search showed that millennials want their data to work for them—they are less concerned with privacy issues re-lated to digital tracking, for example. Whereas 61% of boomers “strongly agree” that personalizing ads based on email content invades privacy, 44% of

millennials held this view. Numbers were also one-third to one-half lower for millennials with regard to location trackers and browser cookies.

And while nearly half of boomers strongly agreed that “consumers have lost control over personal information,” only one in four millennials thought the same.

ECONOMIC FACTORS OF CHANGEAdd to the views and growing influence of millennials the

evolving economics of mortgage lending, you can begin to see how—and why—changes are already occurring.

According to the Mortgage Bankers Association, the total production expense of a loan climbed from $6,769 in 2014 to $7,080 in 2015. And about two-thirds of the cost in each case ($4,401 and $4,699, respectively) was for labor. Martin asked: Can the current model be sustained? What premium will cus-tomers pay for human interaction?

Those are great questions for credit union mortgage lend-ers, especially those seeking to help members with a variety of loans, some of them non-conforming. It also calls to mind the cooperative movement and “members first” philosophy.

The answers to those questions become even more impor-tant when viewed through the lens of a changing landscape in which new entrants such as Rocket Mortgage, loanDepot and imortgage are challenging traditional lenders for borrowers’ at-tention.

IMPLICATIONS FOR MORTGAGE INDUSTRYWhat is the future of buying and selling a home? In short,

Martin said, change is coming on all fronts of the real estate industry.

Think about this: Consumers can go online to “take a tour” of a house they wish to buy—each view is just a click away. They can also go to the Internet to compare rates of mortgage lenders—your credit union and everyone else. And, as noted above, they can also apply for a loan online.

From the lender’s perspective, there is now the E-closing and digital end-to-end mortgages. You offer (hopefully) online applications as well as face-to-face and phone opportunities. Likely you have a mix of portfolio and secondary market loans, servicing in-house or subservicing with related compliance and regulatory implications.

While you’re juggling all of it, how do you stay ahead of the curve and make the best decisions to remain competitive?

According to a report in the New York Times, “The newest generation of homebuyers, the so-called millennials born between the early 1980s and late 1990s, wants ‘ease of use and transpar-ency,’ said Jason van den Brand, the chief executive of Lenda in San Francisco, which has auto-mated the entire loan process. ‘They do not want to go through the same methods that their par-ents went through.’ In the same way that buyers increasingly rely on the Internet for house hunt-ing, so too are they looking to se-cure financing online.”

There is no doubt that young-er customers (age 18 to 34) have embraced digital solutions for financial services—more than doubling channel usage by older (age 35 and up) customers. J.D. Powers research showed:

“Can the current model be sustained? What premium will customers pay for

human interaction?”

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n 15% of younger customers make mo-bile deposits (vs. 8% age 35 and up).

n 26% opened a recent account online (12%).

n 21% prefer to receive status of auto insurance claim via text or app (10%).

n 15% check balances and transactions via mobile device (4%).

n 39% had a recent problem resolved online (11%).

n 27% used a mobile device for invest-ing (9%).

Millennials have also embraced so-called robo-advisors, an online wealth management service that provides auto-mated, algorithm-based portfolio man-agement advice without the use of hu-man financial planners.

Wealth management holds clues for the tech future for mortgage, Martin said. Interest in robo-advisors is highest for millennials, he said, noting that J.D. Pow-er research shows 62% of full-service cli-ents and 72% of self-directed clients are interested in whether a company offers robo-advisor services.

Of course, the human touch matters, too. It’s increasingly important as the client’s age increases—and older clients often have more assets to manage. Reasons that customers cite for not using robo-advisors include “It’s impersonal,” “I don’t trust it,” “online tools Can’t understand my needs,” and “I have pri-vacy concerns.”

In short, while younger customers lean heavily toward digital solutions, your older ones may still prefer face-to-face opportunities. Plan for the shift, but don’t shut down channels that are still valuable.

WHERE SHOULD YOU FOCUS?While you shouldn’t fix what’s not broken, you need to

know where your loan process encounters problems. Although your own feedback should give you the best advice on where to make improvements, words that come up repeatedly when borrowers encounter loan-process problems are “slow,” “inef-ficient,” “confusing,” “taxing” and “impersonal.”

When J.D. Power looked at customers who indicated at least one problem with their mortgage loan origination (there can be more than one), these are the ones listed most often:n Process took too long (36%).

n Too many requests for lost documents or information (33%).

n Lack of communication (36%).

n Unresponsive loan representative (26%).

n Missed deadlines (22%).

The theme that runs through these complaints is time, more specifically, response time. The quicker (and more often) you can communicate with the customer—throughout the process—the better marks you will receive … a better word-of-mouth, testimonials, referrals, etc.

J.D. Power also looked at response time and how it affects mortgage originations. It tracked response time on initial online inquiries, then compared the industry av-erage to the top performer:n Same-day response, 33% (top perform-

er), 16% (industry average).

n One-day response 44% (top), 38% (av-erage).

n Two-or-more-day response 23% (top), 46% (average).

The top performer responded within a day to more than three-quarters of its in-quiries; the industry average is just above half.

And for both purchase and refinance processes, overall satisfaction declined substantially as the process moved beyond 30 days, and even more after 60 days.

While that may seems obvious, how-ever, J.D. Power research also showed that effective communi-cation can be even more important than the loan time cycle. Overall satisfaction with the loan cycle did not decline even after 60 days when the time frame was provided and met, and proactive updates were provided.

Lesson learned: provide an honest estimate of the time frame and keep the borrower advised on where you’re at.

THE IMPORTANCE OF EDUCATIONAnother investment credit unions

can make with mortgage-loan custom-ers is education. Taking the time to in-form and educate them will pay off in big ways. Martin said the key behaviors for the loan rep include:n Spending adequate time with cus-

tomers to help them understand loan needs.

n Explaining—completely—loan op-tions, terms, fees and special pro-grams.

n Explaining—again, completely—the entire process, from application to closing.

n Providing a checklist to the custom-er to help explain the process.

“While younger customers lean heavily toward

digital solutions, your older ones may still prefer face-to-face opportunities. Plan for the shift,

but don’t shut down channels that are

still valuable.”

“The quicker (and more often) you

can communicate with the customer—

throughout the [loan] process—the better marks you

will receive.”

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And you can—and should—make it easier for the customer to use your website, mobile app and text messages (in addition to mail and fax) to complete a detailed application, submit documents and receive status updates on the loan closing. This will improve customer satisfaction and limit the need for the customer to contact you, Martin said.

He also said J.D. Power re-search showed that building trust and confidence in the loan rep is crucial to future business success. When a loan rep scores highly on concern for customer needs, honesty and knowledge, the customer in more than half the cas-es (57%) will recommend the lender to friends and family. (For reps who score poorly, this referral falls to 4%.)

OK, ARE YOU READY?According to Google research, much of the mortgage in-

dustry is not ready for the digital age. Nearly three-fourths of respondents to their survey said they are more likely to revisit a mobile-friendly website. And users are five time more likely to abandon the task they are trying to complete if the site isn’t optimized for mobile use.

Eight of the 20 top mortgage lenders failed Google’s “mobile friendliness” test. For example, text was too small to read, links were too close together, mobile view-ports were not set, content was wider than the screen.

Google found that 61% of users move to another website if they don’t see what they’re looking for right away on a mobile site. Google said a mobile site should have:n Speed—a loading time of five seconds

or less.

n Big, mobile-friendly buttons.

n Limited scrolling and pinching.

n Quick access to business contact infor-mation.

n “Click to Call” access to phone support.

n Links to the company’s social media profiles.

In addition, Martin said to be certain your front-line staff is prepared to provide advice—not push your products. They should be sincere, helpful and knowledgeable. They should not be pushy, deceptive or desperate—and probably not urgent or excessively using the customer’s first name, either.

The question you need to ask is, what will it take to fix the problems in our loan process? And then, what will it cost us to make the changes and then, how will it improve our results (return on investment)?

To succeed, you must know what elements of the mortgage loan experience are most important to your customers, Martin said. And you must be prepared to deliver on those cus-tomer demands.

To reduce wasted effort and cost, pri-oritize future investments, he said, and clearly define and demonstrate to cus-tomers the value you provide.

Tom Burton is a freelance writer and editor who worked in the credit union in-dustry for 10 years. Prior to that, he was an editor and manager at a daily news-paper.

“Be certain your front-line staff is

prepared to provide advice—not push your products. They should be

sincere, helpful and knowledgeable.

They should not be pushy, deceptive or

desperate.’

“You can—and should—make

it easier for the customer to use

your website, mobile app and

text messages (in addition to mail and fax) to complete a

detailed application, submit documents and receive status

updates on the loan closing.”