On the residential side of mortgage lending, lenders and brokers alike have started to see a more widespread adoption of technology, enjoy the benefits such as a streamlined processes and the efficiency that comes with automation.
In commercial lending, however, a lot of operations still move at glacial pace.
There is a reason for the difference, says Jeff Tesch, CEO of RCN Capital. The credit score model was developed for the residential world to make it easier to fit a consumer into a box that would easily generate the 15- or 30-year mortgage, and that could easily be sold off to the GSEs. Because everything was established to fit within that box, from document aggregation to pulling credit to ordering an appraisal, it can now easily be done with the click of a button without speaking to anyone—all because of the credit score model. When it comes to commercial lending, Tesch said, the model doesn’t lend itself to automation as easily, which is why technology hasn’t been able to infiltrate as easily.
“We're in the business of funding single family bridge loans, single family rental loans, as well as multifamily straight up commercial loans. These loans, because of the nature of the products, are not easily put into a box. So it's extremely difficult to eliminate the human interaction on the lender side,” Tesch said.
That’s not to say that commercial lending is stuck in the past. On the contrary, Tesch says there are many ways that commercial lenders can step up their game.
One of these ways is by developing portals that their brokers can use. RCN has spent “ungodly” amounts of money to develop portals so that their interaction with the consumer is increasingly limited to conversations about the projects in question rather than dealing primarily with document transactions. This has been one way that technology-forward lenders have been empowering their brokers to compete in the space, although brokers have noticed and taken advantage over the last few years, commercial lenders could be just as aggressive as their residential counterparts when it comes to getting the word out about the advances on their side of lending.
Many residential brokers see commercial lending as onerous, and something they don’t have time to learn because they’re busy building their business. They don’t know about some of the strides that commercial lending has made, and that results in missed business for both originators and lenders.
“Many of these residential brokers are very well connected in their communities. Because of the nature of their business, they know lots of people,” Tesch said. “What ends up happening is, opportunities present themselves to the independent broker and oftentimes, they're just thrown in the trash can.”
One on one training is the best way that RCN has found to increase broker awareness of new and improved commercial lending practices, as well as to increase adoption of these new technologies by seasoned investors and mortgage brokers, who have always done things one way. People still send FedEx packages and use fax machines, Tesch said, and they still can (and do) operate in that manner for people who wish to do so, but they’re constantly trying to get them to see how much smoother the process can be.
In the commercial space, Tesch said, they could have algorithms on the front end, but they’re always going to be limited to how much automation and algorithms can do, and that’s okay. He cites their flagship product, the fix and flip, as the perfect example.
“You can put in the address, you can put in what you're buying it for, and you can put in what you think you're selling it for. We have an algorithm for whether or not that makes sense, but at the end of the day, that's only going to take us so far,” he said. “We need to be able to speak to the borrower to talk about the type of renovations and the list goes on and on, on. That human interaction that we need—that just doesn't go away.”