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Can Online Lending Decrease Risk?

Technological innovation is changing the way the mortgage industry works, and the model followed by lenders who have embraced technology such as end-to-end online mortgage application and approval processes have made lending a less risky prospect, according to a report on Fintech lending by Federal Reserve Bank of New York.

Titled, “The Role of Technology in Mortgage Lending” the report uses market-wide loan-level data on U.S. mortgage applications and originations and defines fintech lenders as those who offer a mortgage application processes online. These lenders have complete end-to-end online mortgage application and approval process that is supported by centralized underwriting operations, rather than the traditional network of local brokers or physical branches.

According to the report, fintech lenders process mortgage applications about 20 percent faster than other lenders, while keeping the default rates low. Fintech lenders have increased their market share in U.S. mortgage lending from 2 percent in 2010 to 8 percent in 2016 with higher growth in refinancing and mortgages issued by the Federal Housing Administration (FHA), which primarily serves lower-income borrowers.

Fintech lenders process mortgages faster than traditional lenders, measured by total days from the submission of a mortgage application until the closing, the report indicated. It used loan-level data of U.S. mortgages from 2010 to 2016 and found that fintech lenders reduced processing time by about 10 days or 20 percent of the average processing time. The effect for refinance mortgages was more with processing times at 14.6 days compared to purchase loans with processing times reduced to 9.2 days.

However, faster processing times do not result in riskier loans, the report found, while measuring loan risk using default rates on FHA mortgages. Default rates on fintech mortgages for this segment were about 25 percent lower than those for traditional lenders, indicating that fintech technologies might be helping to attract and screen for less risky borrowers.

The report used changes in nationwide application volume to determine the correlation of processing times for fintech lending and traditional lending if the size of applications increased. It found that while doubling the application volume raised the loan processing time by 13.5 days for conventional lenders; it took fintech lenders only 7.5 more days to process these volumes.

It also found that fintech lenders mainly focused on mortgages refinances and studied the relationship between fintech lender market share and refinancing across the U.S. and found that U.S. counties with a more significant fintech lender presence were more likely to refinance.

With fintech lending here to stay, don't miss attending the Five Star Fintech Summit, a conference that will cover all aspects of Fintech and its future applications. The two-day conference being held in Nashville, Tennessee on March 21 and 22 features speakers in the technology, operations, and mortgage industry including Tracy Stephan, Director, Enterprise Innovation Team at Fannie Mae. Transparency, accessibility, and ease of use will be highlighted in this two-day meeting along with insights on the latest approaches to bringing financial technology into the forefront of consumers’ experience.

To register for the conference, click here.


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