Consumer-Direct Lenders Go from Niche Players to Mortgage Leaders

It wasn't long ago that the consumer-direct mortgage channel was a novelty catering to a niche segment of technology aficionados and refinance borrowers. But as consumers have increasingly embraced all manners of electronic commerce, these online lenders have seized on growing expectations for a digitally-focused and interactive experience to firmly establish their place in the industry.

In that context, the naming of Quicken Loans CEO Bill Emerson as chairman of the Mortgage Bankers Association, serves as a (possibly overdue) acknowledgment that the digital channel is transforming the mortgage business, albeit not as rapidly as it has some other retail financial services.

Quicken's tech-savvy approach to mortgage lending will no doubt influence Emerson's work as a spokesman and advocate for the entire industry.

In an interview with National Mortgage News, Emerson, who was sworn in at the trade group's annual convention in San Diego, discussed the ways that digital tools are reshaping the business — and the balancing act associated with migrating a very complex transaction into an online environment.

Make no mistake; online lenders are a major force in the mortgage industry. And with some estimates indicating that more than half of homebuyers complete their mortgage applications online, a growing number of established traditional lenders are looking to reshape their businesses by replicating the most popular features of the consumer-direct channel.

Now, experts say several market factors — including the shift to purchase-driven originations, the growing number of millennial buyers, and new, complex regulations that demand increased technology adoption to maintain compliance — may create a perfect storm for digitally-focused lenders.

The biggest driver of these changes, Emerson said, is consumers' growing desire for online engagement during the origination process.

"A lot of people now exist with what I call their 3-by-5 business card — their phone," he said. "You have an opportunity to gain market share if you interact with people the way they are comfortable interacting."

While Emerson said there will always be a place for face-to-face lending, even those models can benefit from technology improvements, "because all of the back-office work that's done could be more efficient with better technology."

"The more efficient and effective you can be there, the better you will do in the marketplace," he said.

The borrowers who initially gravitated toward the consumer-direct channel were predominately technology early adopters and refinance customers already comfortable with the mortgage process. That helped online lenders capitalize on the tremendous refinance activity seen during the post-crisis housing recovery.

But after years of low interest rates and high refinancing volume, the origination mix across the industry is expected to shift predominately toward purchase lending. The challenge for online lenders will be to demonstrate to borrowers — as well as their real estate agents — that they offer the same, or better, level of customer service that a retail loan officer can provide face-to-face.

Emerson said technology can help bridge the gaps. He said Quicken Loans' origination mix has changed along with the market (though they do not release origination numbers), and to accommodate this change they developed a system that allows real estate agents "unprecedented access to their clients' loan information so they can simply log in to a portal and know exactly where the loan is in the origination process."

This type of transparency is what Keith Luedeman was aiming for when he founded goodmortgage.com in 1999. He said purchases have been increasing "steadily over the past year," and now make up 50% of his business.

"For purchase customers, the key is staying in touch over time and being ready to move quickly to approve when they find a home," he said. "Our technology allows us to do so in a seamless and coordinated way that customers seem to appreciate.

Luedeman worked for IBM before founding his Charlotte, N.C., consumer-direct mortgage company, where he gained a solid understanding of technology's ability to make complicated processes easier.

He's translated that to the mortgage sector, resulting in rapid growth. He's watched his company expand from just three employees to well over 100, and said the top technology powering his site is responsible for the rapid growth. He expects that further technological advances will continue to push the industry forward.

"The evolution — or maybe the revolution — is not over yet," he said, adding that he thinks that the rise of smartphones and tablets will mean even more changes in the near future. "I could even see how the Apple Watch could send alerts out during the process."

Luedeman's goal when starting goodmortgage.com was to take the "mystery" out of mortgage lending from a customer perspective, and make the process more efficient. Now, he said, goodmortgage.com is paperless and allows customers to e-sign documents.

"If you think through those old days, you look through the phonebooks, you call a couple of lenders, you make an appointment with your spouse and you take time off work," he said, adding that his company offers customers a less stressful and time-consuming experience than traditional mortgages.

This ease of lending is exactly what customers are looking for when they turn to online lending, said Emerson. In the fast-moving market, how quickly a lender can move the borrower through an application may be the difference between getting a return customer and losing a sale.

Quicken Loans closes the majority of its loans in 30 days, quicker than traditional retail lenders, particularly given the heightened regulatory environment for mortgage lenders. Quicken is now the second-largest mortgage lender in the United States, closing $140 billion in mortgage volume in 2013-2014 — more than four times its volume from 2011.

David Spector, president and COO of PennyMac Loan Services, said the ability of digitally-savvy companies to move faster is also due to how they are structured. His company, which was founded in 2008, was initially created to do workouts on distressed loans.

Their digital platform supported by call centers was originally set up as a direct-to-consumer platform for these customers, as there was no need for branches or account executives.

Now, he said, PennyMac is trying to grow their online lending platform "akin to other direct-to-consumer lenders like Quicken or Loan Depot."

"In the brick-and-mortar model, consumers need to call the loan officers to get updates, while the officer will call several times for additional documentation," Spector said. "But if you have the technology where you can just send questions out and the customer can send answers and documentation back, it's going to be a much faster, much more nimble process."

Guaranteed Rate, founded in 2000 by Victor Ciardelli, operates a more developed version of this structure. In just 15 years, the company has become one of the top 10 lenders in the country. Ciardelli credits the company's meteoric rise to their innovative online platform.

This year, the company introduced an all-digital mortgage process, which it boasts lets consumers complete the application and initial approval process in less than 30 minutes.

The self-service process guides borrowers as they complete and e-sign their application, review their credit score and evaluate loan rates and products customized to their needs. Rather than have borrowers email or fax verification documents, applicants submit data to a secure cloud storage service via file upload, scanning or taking a picture.

Spector hopes PennyMac's origination process will soon be completely paperless, which will "enhance the customer experience and also help reduce the defects and errors you often see in the loan origination process."

"You dramatically reduce human error in this process," he said, offering the digital scanning of account numbers as an example. "If we can avoid borrowers putting in information or processors typing the information in, you just end up with fewer errors in the process, which brings more efficiency."

Ciardelli said the streamlined nature of online applications has made his loan officers "insanely more efficient."

"We've got 17 loan officers that have already closed over $100 million this year, with almost 100% of that going through online," he said. This wouldn't be possible in a traditional setting, typified by stacks of paperwork and countless phone calls.

Along with the increased productivity on the part of the company, he said customers prefer the efficiency, and say they are more supported and feel "they have more control over the process."

"Customers love it," he said, adding that because customers input all of their own information, "there is more time for the loan officers and the people who are handling the transaction to work on the customer service side."

For Emerson, the ability to provide good customer service is one of the most attractive parts of being a digital mortgage company.

"I think that people think if you are high-tech, you can't be high-touch," he said, adding that his company has won five consecutive J.D. Power awards for customer satisfaction in mortgage origination, as well as two consecutive J.D. Power awards for client satisfaction in mortgage servicing — going back to when Quicken started servicing loans two years ago.

First Internet Bank was opened to the public in 1999 with a similar goal of providing consumers with a solid digital-only banking experience that's backed by quality customer service.

Kevin Quinn, the company's senior vice president of retail lending, said that when the bank first began offering mortgages online, "it was kind of like "Field of Dreams" — build it and they will come." While he anticipated the practice would grow quickly in popularity, it was difficult to plan for the needs and wants of customers in such a new space.

"We built the site so customers could complete a mortgage application without placing a single phone call to our office, but even now, five years later, most don't," he said. "The human element is still a critical component on our end. [Customers] need people to be available. They want the loan officer on the phone with them walking them through the process."

He said such personalized service is necessary, because customers either have never gotten a mortgage before or they've never done a mortgage online, and both parties have a lot of questions. "I personally don't buy cars every other year. I buy them every 10 years, and that experience is different for me each time."

Because home buying isn't a frequent event for most customers, it can be difficult to keep customers coming back. Calling it the "nature of the business," Emerson said that lenders have to be prepared for the fact that good customer service doesn't always translate into repeat business.

"Even if you wanted to have a high-touch, high-loyalty situation, it's easy for them to move on next time," he said.

The habits of millennials seem to have been heavily debated in regard to this type of brand loyalty. It seems like contradictory studies on their buying practices come out almost daily, with some asserting that lending companies should have "stories" behind their brand to attract the mustachioed, ethically-minded 20-something, while others say the brand doesn't matter at all — young folks are just looking for the best deal.

"The boxing in of millennials into a stigma is a bad thing. It comes down to an ability to transact the way they want to transact," Emerson said, adding that they aren't the only ones who prefer the convenience of all-digital services. "People enjoy interacting with us in the company of their own home at their own time — 24/7."

Ciardelli said he was originally "shocked" to find how popular digital lending was among all age groups.

"When we were spending the money and building the technology, we anticipated that it would be the younger generation that would use it, but our demographics are not showing that," he said, adding that the average age of an online user is 47. "We're having grandmothers go on and upload their documents."

While digital lending is convenient for everyone, it's difficult to ignore how much more popular such a model will become as more tech-savvy millennials begin to enter the market. Luedeman of goodmortgage.com said that while there may always be some section of society that wants to sit down with a lender face to face, "that segment is decreasing at a very fast clip."

"I think millennials deserve a lot more credit than people give them. They want to do research, they want to analyze," he said, and they will almost always go online to do it.

The ability to research and compare mortgages side by side has been a large part of the draw behind the new TILSA-RESPA Integrated Disclosures rules enacted by the Consumer Financial Protection Bureau. The rules aim to increase transparency and eliminate confusion for borrowers — something Luedeman said will be easier for digital lenders to adjust to than traditional lenders.

"It's locking in fees from the beginning for the consumer, and we always had that advantage. Our customers were very rarely surprised," he said, adding that his company was able to adjust to the regulations a couple of months before they were required to.

"In terms of safety and security, we always encouraged customers to compare things from the very beginning," he said. "We knew that with our technology platform, we already had great rates and fees, so we were going to win in an honest comparison."

Though quite a bit larger than goodmortgage.com, Emerson said Quicken Loans was also able to accommodate the new regulations quickly because of how nimble an all-digital platform allows companies to be.

"The rules are very complicated because of the web of regulation and how much overlaps between the state governments and the federal government," he said. "There is a myriad of things a lender has to know and understand, and the more capacity you have to build those rules into your technology platform, the more compliant you will be."

Quicken Loans had 350 employees working on the new TRID rules for 18 months, and because of that focus, the company was ready for TRID's original August deadline, which was later pushed back to Oct. 3.

"It wasn't easy," he said. "But I do believe our technology gave us an advantage."

This advantage is something Emerson said he'd like to become more widespread in the industry. As the new chairman of the Mortgage Bankers Association, the digitally-minded approach that Quicken Loans embraces will no doubt influence his broader views on the mortgage industry. Technology, he said, will certainly be among them. "It's something we'll talk about, and it's something we'll advocate for," he said.

But, he said, "At the end of the day, when it comes to the investment in technology, it will be a member decision." The MBA's role will be to increase awareness about the direction of the marketplace so companies can make better decisions by themselves.