Recently it seems like startups are disrupting every aspect of our lives — where we stay when we’re on vacation, what we we cook for dinner and how we get around. Even the financial industry — a sector traditionally resistant to change — is being revolutionized by fintech startups. But disrupting some of banking’s more outmoded processes doesn’t mean that we’re trying to skirt industry regulation. Quite the opposite.
In fact, partnering with Mirador can actively help traditional lenders adhere to evolving banking regulation — specifically the new CRA (Community Reinvestment Act) requirements. How so?
With the passing of the CRA in 1977, the Office of the Comptroller of the Currency (a part of the U.S. Department of the Treasury) encourages financial institutions to offer services to all Americans. Specifically, the Act prohibits financial institutions from the practice of redlining: the refusal or increase in cost of banking services (i.e. offering interest-only or other predatory loans) to someone who lives in an area that’s racially and/or financially diverse. It also requires banks to provide services (like opening branches) and to promote available credit to low- and moderate-income individuals “to increase lending to underserved segments of local economies and populations.”
As a result of the 2008 mortgage crisis, federal regulators have recently loosened how banks can earn this CRA compliance. Once such recent change enables lenders to count small business loans of less than $1 million toward their requirement. This makes it easier for banks to meet their CRA obligations, while also widening borrowers’ access to more affordable loans.
Despite this incentive, some lenders still might hesitate to issue more SMB loans since they’re traditionally viewed as not profitable. That’s where Mirador comes in. With an implementation of our platform, your bank can improve its ability to meet CRA requirements and grow a profitable SMB loan business at the same time. Below are three ways we achieve this.
Streamline manual operations
Loan officers certainly offer customers that personal touch. But manual loan origination, underwriting, compliance, and ongoing loan monitoring is costly, time-consuming, and slow. Banks can maintain a personalized feel for less, however, by implementing an online lending platform. Doing so lowers lenders’ loan origination costs, allowing the institution the ability to offer borrowers loans with more attractive terms with the speed and convenience borrowers have come to expect from online marketplace lenders, banks’ chief competitors in SMB lending.
Identify more creditworthy borrowers with enhanced data
A manual loan approval process can cause banks to reject certain small business borrowers because their PAYDEX scores don’t meet their cutoffs. This puts lenders at risk of violating CRA requirements while missing a prime opportunity to originate a profitable SMB loan. Predictive analytics can and take into consideration more data points (such as strong website traffic) when judging a business owner’s loan application — enabling a bank to create a more accurate, real-time profile of a creditworthy SMB borrower. An increase in the number of eligible borrowers means banks approve more loans, achieving CRA compliance more rapidly and easily. (See our previous post, Can Great Yelp Scores Soon Make Up For a Poor Credit Score?)
Reduce approval time
According to Barlow Research, banks require an average of four to six days to respond to a loan request. Time-to-funding takes even longer. But when it comes to accessing capital, small business borrowers demand speed. It’s this slowness by traditional lenders that drives many borrowers to take their business to an alternative lender. In turn, the bank forfeits a customer that could possibly help them achieve their CRA requirements. Implementing a fintech platform can dramatically reduce loan origination time, allowing banks to compete with this new generation of lenders. (Our case study with Excelsior Growth Fund can quantify the value of speed.)
Many traditional lenders believe it’s impossible to adhere to industry regulation and modernize your practices using fintech. But it’s clear that this is not only possible, but profitable, too.