Sharp Credit – Credit News – Credit Information
Construction lending has never bounced back to pre-crisis levels, but some fintechs are trying to convince skittish bankers that it’s safe to return.
Problem construction loans were a big contributor to the Great Recession and many bank failures. Some banks have dived back in, but many have remained cautious.
In the first quarter of 2008, banks held $631 billion in construction loans, according to the Federal Deposit Insurance Corp. In the fourth quarter of 2018, they had just $349 billion.
The fintech companies say their software tools can help banks reduce credit risk.
Digitally focused firms that have assisted banks with their construction loan platform follow the same path of other fintechs targeting banks’ back-end processing. They say that going digital and automating tasks makes risk analysis easier, and that bringing borrowers, builders and lenders onto one platform can reduce errors and create an audit trail.
“There are tons of financial institutions that have the clients and the capital but don’t know how to do construction lending,” said Lionel Urban, vice president of product management for Fiserv’s bank solutions team. “With the right tools, they can get into a market they historically weren’t comfortable with.”
Davis Butler, co-founder and senior commercial group leader at International Bank in Raton, N.M., said the benefit to his institution in switching to construction lending software could be counted in hours of labor.
“We were taking time away from our loan assistants to recreate the budget in a spreadsheet,” Butler said. “As draws came in, we would physically update the numbers to reconcile draws to the budget, and on larger complex projects we were seeing a lot of errors. It’s nothing against our loan assistants. It’s data and mindless work — it just produces errors.”
International Bank has improved on that method with an artificial intelligence-powered tool from Rabbet. The construction finance startup is backed by Goldman Sachs’ Principal Strategic Investments group.
The $355 million-asset International has reduced the time it takes to fulfill a draw — an advance request for more funding as a property is being built — by several hours in some cases, but Butler said his bank and other lenders may still not be ready to eliminate the departments and processes they’ve developed for construction loans.
Will Mitchell, Rabbet’s CEO and co-founder, said the software can ultimately stand in for a bank’s back-office operation.
“Construction and banking are both highly regulated,” he said. “But we’re classified as a low-risk vendor.”
When the financial crisis hit, Pinnacle Financial Partners in Nashville, Tenn., suffered millions of dollars in construction loan losses. Since then, the $24 billion-asset company has adopted construction lending software to avoid a repeat of that scenario, said Dale Floyd, a senior vice president with Pinnacle.
In addition to reducing risk and errors, construction lenders say software platforms give them a competitive advantage.
“Our customers can do what they need to do on their desktop or mobile device,” said Ethan Elzen, president of Colorado Federal Savings Bank in Greenwood Village. “It’s so much more efficient for them that our contractors are more likely to come back to us.”
During the three years that Colorado Federal has used software from Built Technologies, the $1.8 billion-asset bank has gotten fewer questions from regulators during exams, Elzen said.
Floyd said Pinnacle has seen similar benefits from being able to give regulators temporary access to the software so that they can review its data all in one place. “Our examiners really love it.”
Software companies are also getting requests from bank customers to provide more predictive analytics on the loan data being recorded in their systems.
Rabbet already uses machine learning to pull data from Excel sheets and PDFs. The company is now working with several banking clients to allow them to bring historical data onto the platform so they can create predictive analytics.
Last year, Built Technologies released Built Insights in beta form, said Chase Gilbert, the company’s CEO. In addition to helping banks understand how their construction loan portfolio is performing, the insights tool will give them alerts when a loan is not performing well or a construction project likely won’t be completed before the loan matures. The product will also handle less central tasks, like alerting bankers when a builder’s risk insurance is about to expire.
“We’re structuring data that has never been structured before,” Gilbert said. “Most lending technology is designed to originate or service the loan. Neither of those can handle a construction loan and all the moving parts.”
In the future, Built hopes to add market data to the analytics it already provides. Currently, bankers on the company’s platform can see how their loans are performing compared to benchmarks based on the company’s other banking clients.
After Pinnacle’s adoption of the technology and its 2017 acquisition of BNC Bancorp, its construction loan volume has tripled in the past two years. “We have about $900 million in commitments, averaging 1,000 draws a month,” Floyd said. “With this tech, I can compare loans outstanding, one month to another. I can get reports about geography of loans and days to maturity for different loans. If something is 100% complete, I can see how long the project ran.”
Software companies in the construction lending space also offer documentation with geographic location.
“When you’re a smaller community bank, regulators like to see diversity within your construction portfolio,” said Jerry McNabb, chief lending officer at the $421 million-asset Valliance Bank in Oklahoma City. “To demonstrate that we can show them geographically where our loans are, this software has a map, and I can go into any house being built in this city or look for any particular price point, so we don’t get loaded up on smaller or larger loan products.”
Around 30% of Valliance’s loan portfolio is made up of construction loans, and the bank uses construction lending software from BankLabs.
Fiserv offers banking clients a construction lending software suite from a company formerly known as PC Lender. The software company is working on integrating optical character recognition that validates documents and intelligent character recognition that reads the data on documents and then inputs that into its software. The company has been with Fiserv for 18 months, and a small portion of Fiserv’s customer base has adopted it.
“There are some folks who are married to current processes,” Urban said. “When you consider the document review process, the imaging process, data validation tools, exchanging data with third parties with application programming interfaces — it’s only a matter of time before the lenders embrace that tech.”