Editor’s Note: This feature originally appeared in the July issue [1] of MReport.
The mortgage process is broken. Ask anyone in the industry, and they’ll nod in agreement. Mention the phrase “stare and compare,” and people cringe with recognition. Start trying to explain the problem and consumers and lenders alike will finish your sentence with all the reasons why things aren’t working.
Lenders want to make responsible lending decisions based on various documents and pieces of paper. They’ve set up rigorous workflows to catch errors in imperfect information. Consumers are just trying to navigate the dizzying array of requirements that stand between them and their dream of a home.
Today’s lending technology lacks robust data infrastructure to serve the needs of tomorrow. To build a more accessible system that uses verified source data and complete financial profiles, we need to rebuild and rethink. Without reimagining the process as a whole, we won’t get to where we need to go.
Tackling the Homeownership Divide
While technology has led to great strides in democratizing access to information and transportation, the financial services industry, including the mortgage sector, has been somewhat slow to evolve and reach historically underserved populations, including low-income, under-banked, and disabled individuals. According to data from the Federal Deposit Insurance Corporation, 27 percent of U.S. households were unbanked or underbanked in 2015, a fact that can be attributed at least partially to lack of access to financial services.
To address the homeownership divide, we’re seeing an increasing number of lenders take steps to boost accessibility. For instance, Bank of America and CitiMortgage are funding the Wealth Building Home Loan, which will help low- and moderate-income homebuyers secure a new 15-year mortgage with no down payment. Similarly, Luther Burbank Savings is offering three new community-lending programs to make homeownership more accessible in California titled “Grow,” “G2,” and “Bloom.” Grow will offer fixed-rate 30-year loans with down payments as little as 3 percent, while G2 will offer a fixed interest rate of 2 percent over a 15-year term and will allow homebuyers to put 2 percent of the purchase price toward their down payment and 1 percent toward hard closing costs.
Bloom is a home improvement loan that doesn’t require borrowers to verify proposed home improvement plans and offerings loans from $10,000 to $30,000 at a fixed rate of 4 percent for 15 years. Along with these lender led changes, the continued rise of financial technology companies, or fintechs, is helping to further close the gap in financial accessibility, to the benefit of businesses and consumers alike.
Tech to the Rescue
Technology is working to democratize financial services and drive greater inclusion throughout the industry. Here are three key ways borrowers are benefitting from technological advances.
Meeting borrowers where they are: Before the rise of the web, financial services had high barriers to entry that not everyone fully appreciates: requiring customers visit the bank and make appointments with brokers, loan officers, or financial advisors during business hours. For households whose members may be working multiple jobs and juggling schedules to support a family, taking time off work to visit a branch or paying someone for financial advice may be unrealistic. This rift makes it challenging for around one-third of the population (according to the latest census data) to utilize traditional financial resources and, in some cases, make informed decisions around major purchases like home buying.
Now, as financial services become increasingly digitized, users can manage their entire spectrum of financial needs from a desktop or mobile device—mediums that offer a more intuitive user experience. Brands like TurboTax, Robinhood, and Affirm* have made filing taxes, managing a stock portfolio, and raising realtime capital experiences whose automated platforms give users the ultimate advantage. This easy accessibility enables consumers to better track and manage their finances on their own time, as well as connect to valuable financial tools and services.
Improved access to financial services has been proven to “make a substantial positive difference in improving poor people’s lives.” Research shows that the most effective way to improve access for low-income households is through digital connectivity.
Increased transparency through simple, guided workflows: Mortgage lending has long been considered an opaque industry. For years, lagging transaction times; laborious, document-driven processes; unexplained fees; and limited access to account and application status have plagued consumers. Advancements in technology are helping to change this, transforming traditionally confusing, paper-heavy processes into more intuitive and digitally accessible ones, all while maintaining robust compliance.
By streamlining the collection and verification of data, including bank account and credit information, tax forms, pay stubs, and other required figures for the obligatory 1003 form, technology has provided unforeseen benefits and increased loan officers’ bandwidth to work with higher-touch borrowers who need to provide more documentation. Rather than relying solely on paper documentation or desktop software, a handful of fintechs are powering a mobile-first experience for borrowers that provides them with unparalleled ease of use.
This is especially monumental for underserved communities, including low-income and under-banked individuals, who are typically heavier users of mobile according to the Board of Governors of the Federal Reserve “Consumers and Mobile Financial Services” report. Often these groups favor a phone as their primary computing device over an expensive laptop and monthly internet bills.
This increased efficiency can lead to lower costs-to-serve, which can ultimately be passed along to the borrower in the form of lower rates.
Empowering the underserved: The Census Bureau reports that one in 10 people within the U.S. population has a disability, making them a large percentage of the underserved population. Many basic financial services, including traditional and alternative banking, online payment services, and mobile banking are inaccessible to this group. With the advent of accessible technology, including magnifiers, dictation support, hearing aids, and more, people with disabilities are gaining access to the financial services they deserve.
Private financial service websites that do not ensure access for people with disabilities not only do a disservice to growing segment of their potential and current customer base but also open themselves up to litigation risk. But rather than wait to be compelled by litigation or regulators, forward-thinking financial institutions are proactively making changes to increase accessibility by working with ADA-compliant solutions, including ours.
On top of being the right thing to do, becoming more accessible offers opportunities for business growth and increased profitability.
Why Now?
The loan origination process was created decades before online banking—and even the internet—became widespread. In that time, the technology landscape has fundamentally shifted.
Application program interface (API)-driven connectivity now makes it possible to access validated source data. With accessible data, lenders can freely redesign the
lending process to be both more efficient and more delightful for borrowers. People expect a lending experience on par with those of consumer giants like Apple and Netflix; data connectivity now makes it possible.
Budgeting apps like Mint have been helping people better understand their finances by connecting directly to their assets and accounts for a decade. Even the U.S. government is on GitHub, leveraging APIs to connect data sources to tackle issues like voter registration.
Incrementally improving the current process won’t create a more accessible ecosystem. Lenders must rebuild the origination process around a data-powered experience.
Today’s lenders can team with companies to source data to build a consumer’s complete financial profile. It’s hard to understate the impact of removing uncertainty from the loan process by giving lenders the means to quickly understand a borrower’s financial situation. Lenders no longer have
to rely on built-in redundancies to mitigate risk.
Smart tech platforms can leverage insights into consumer behavior to improve efficiency for every application, such as seeing what activities happen manually and detects patterns. The benefit of this data-first approach is clear: Using a combination of rules and machine learning can drive a faster, smarter process.
Forging a more accessible future with innovative lenders and ecosystem partners by leveraging increased access to data and capturing a borrower’s complete financial profile unlocks opportunities to make changes in the lending process.
Editor’s note: Affirm’s founder and CEO Max Levchin is an investor in Blend.