Bankers are experiencing margin compression due to the current state of the market. Without refis to process, and new mortgages few and far between, they must rely on other types of loan products. Enter construction loans. Construction lending was once a vital part of a healthy loan product mix. Of course, many bankers will point directly at TRID as their roadblock to originating construction loans. TRID support hasn’t been prevalent in the industry, and some bankers don’t have the information they need to mitigate risk.
So what now? Who is offering support for these regulations? And how can lenders begin construction lending again?
Instead of giving up on construction lending, most community banks have all the resources they need to start and maintain a successful construction lending program; it’s all at their fingertips.
To become successful in construction lending, you need these five components to all work together:
1. Support in and from your organization
Before we look at specific tools, you must have an in-house consensus as to whether or not to even launch the program. Construction lending programs require effort from almost every aspect within your organization: origination, processing, underwriting, post-closing, the accounting department, and marketing team. Everybody within the organization really needs to be on board. Having this consensus helps you put the pieces together and maintain a successful program.
2. Your Loan Origination System (LOS)
It typically comes as a surprise to lenders that the requirements from TRID can usually be met in the LOS already in use at their bank. Talk to your system administrator and start to diagnose and gain information regarding how other lenders have utilized this LOS platform when offering construction loan products. They will be happy to assist you in gaining a better understanding of how to do that.
3. Specialized document service provider
Mitigating risk and keeping all players happy that are involved in a construction loan isn’t easy given how many moving parts are involved in these loans. But it can be done, and done right if you use the proper resources. Document service providers are one of the most important elements to have. The doc provider gives lenders the exact form needed for each step of the project, no matter if the project is down the street or across state lines. Additionally, a doc provider is yet another point of contact if you have questions.
Before you sign on with any document service provider, make sure of three things:
- They are able to produce both the lender’s estimate (LE) and also the closing document (CD)
- They are able to provide the state-specific documents that are going to be needed in the closing package
- They are able to guarantee that their documents will protect your first lien priority in each specific state
4. In-house subject matter expert
Before the financial crash, subject matter expertise was abundant. But today, more than 10 years after the recession, in-house subject matter experts on construction lending are more difficult to find, but they do exist. Finding or recruiting somebody like this on your team really is an amazing resource. They can be great for education and problem-solving loan structuring to benefit the entire company.
5. Post-close draw management and servicing
How do you manage the cost and process involved after you close that construction loan? This process is often called draw management, fund control, or loan servicing. At the end of the day, you need someone to manage the lenders hold back, while simultaneously protecting the physical, financial, and legal interests of your bank. This can be accomplished by a member of your team, and efficiently managed at scale if your team uses a technology provider. No matter how you decide to manage the loan post-close, remember this is an integral step in the construction loan process that must be considered and executed with precision.
This article first appeared in Bank Director.
